Archive for the ‘DOJ Enforcement Action’ Category

Bribery Of A Foreign Official On U.S. Soil

Thursday, April 17th, 2014

[This post is part of a periodic series regarding "old" FCPA enforcement actions]

The core enforcement action described below highlights a rare instance of FCPA violations being charged along with violations of the U.S. domestic bribery statute.  The enforcement action is also a rare instance of the United States being the location where the foreign official was allegedly bribed.

Control Systems Specialist / Darrold Crites

In this 1998 criminal information, the DOJ alleged that Control Systems Specialist, Inc. (“Control Systems” a company engaged in the purchase, repair, and resale of surplus military equipment) and its President Darrold Crites made improper payments to a Brazilian Air Force Lt. Colonel (“Col. Z”) stationed at Wright Patterson Air Force Based in Ohio.  The information describes Col. Z  as follows.

“Col. Z was the Foreign Liaison Officer for the Air Force of the Republic of Brazil … and was authorized to make purchases of military equipment on behalf of the Brazilian Aeronautical Commission (“BAC”), the purchasing agent of the Brazilian Air Force.  The BAC was an “instrumentality” of the Government of Brazil.”

The DOJ alleged that Crites met with a civilian employee of the United States Air Force who worked at Wright Patterson Air Force Base as the Command Country Manager (“Country Manager”) for Brazil and was responsible for representing the United States Air Force in dealings with Col. Z.

According to the DOJ, “Country Manager agreed to provide Crites with surplus part numbers, model numbers, and U.S. military sources of surplus parts in exchange for the promise of payments of money, using information he would obtain through his position as a civilian employee of the United States Air Force.”

In turn, the DOJ alleged that “Crites would thereafter purchase the surplus equipment identified by the Country Manager, recondition it, and resell the same to the BAC.”  According to the DOJ, Col. Z would approve the BAC’s purchase from Control Systems in exchange for payments of money.  Specifically, the DOJ alleged that Crites paid Col. Z “a series of bribes, disguised as ‘consultant fees,’ for each bid accepted by Col. Z on behalf of the BAC.”

The DOJ also alleged that Crites formed a separate company (“Company Y”) with the assistance of an Ohio businessman (“Businessman X”) to pay bribes to Col. Z “in exchange for his approval of Company Y’s bids to sell surplus U.S. military equipment to the BAC.”

According to the DOJ, Crites and Businessman X, as officers of Company Y “arranged not less than forty-four purchases of surplus U.S. military equipment for repair and resale to the BAC.”  The DOJ alleged as follows.

“Some of the surplus equipment was obtained by the BAC through the Defense Reutilization and Marketing Service (DRMS) under the Foreign Military Sales (FMS) program and then provided to Control Systems for repair.  Other equipment was purchased directly by Control Systems or Company Y, repaired, and then sold to the BAC.  In all cases, after each purchase was effected, Col. Z was paid for his approval of the transactions.”

According to the DOJ, Crites, Control Systems and others “paid a total of $99,000 to the Country Manager and a total of $257,139 to Col. Z.”

Based on the above allegations, the DOJ charged Control Systems and Crites with conspiracy to violate the FCPA’s anti-bribery provisions and a substantive violation of the FCPA’s anti-bribery provision.  Based on the allegations involving the Country Manager, the DOJ also charged Control Systems and Crites with violating 18 USC 201, the domestic bribery statute.

Pursuant to this plea agreement, Crites pleaded guilty to the three charges described above.  In the plea agreement, Crites agreed to cooperate with the DOJ.  According to the statement of facts in the plea agreement, “Crites and Control Systems received approximately $672,298 as a result of the contracts received from the government of Brazil.”  According to a docket entry, Crites was sentenced to three years probation (with the first six months of probation to be spent in home confinement with electronic monitoring with work release privileges) and 150 hours of community service.

Pursuant to this plea agreement, Control Systems also pleaded guilty to the three charges described above.  According to a docket entry, Control Systems was ordered to pay a $1,500 fine and was sentenced to one year probation.

International Materials Solutions Corp. / Thomas Qualey

Based on the same core allegations in the Control Systems / Crites enforcement action, in 1999 the DOJ also alleged in this criminal information that International Materials Solutions Corporation (“IMS” – like Control Systems an Ohio company that engaged in the purchase, repair, and resale of surplus military equipment) and Thomas Qualey (the President of IMS) conspired to violate the FCPA’s anti-bribery provisions and violated the FCPA’s anti-bribery provisions.  According to the information, IMS and Qualey paid a total of $67,563 to Col. Z to induce the approval by Col. Z of a bid by IMS for the acquisition and repair of ten fork lift trucks.

Pursuant to this plea agreement, Qualey pleaded guilty to the two charges described above.  According to the Statement of Facts in the plea agreement, Qualey and IMS “received approximately $392,250 as a result of the contracts received from the Government of Brazil.”  According to this judgment, Qualey was sentenced to three years probation ((with the first four months of probation to be spent in home confinement with electronic monitoring with work release privileges) and 150 hours of community service and ordered to pay a $5,000 fine.

Pursuant to this plea agreement, IMS pleaded guilty to the two charges described above.  According to this judgment, IMS was ordered to pay a $1,000 fine plus and was sentenced to one year probation.

See this prior post for another FCPA enforcement in connection with the U.S. Foreign Military Sales program.

Further To The Clustering Phenomenon

Wednesday, April 16th, 2014

Earlier this week, the DOJ announced that two additional individual defendants have been added to the Foreign Corrupt Practices Act (and related) enforcement action against individuals associated with broker dealer Direct Access Partners.  (See here for the original May 2013 enforcement action against Jose Hurtado and Tomas Clarke and here for an additional individual, Ernesto Lujan, being added to the enforcement action in June 2013).

Like in the previous enforcement actions, the additional defendants (Benito Chinea and Joseph DeMeneses, the Chief Executive Officer and a managing partner, respectively of Direct Access Partners) were criminally charged in connection with alleged improper payments to Maria Gonzalez (V.P. of Finance / Executive Manager of Finance and Funds Administration at Bandes, an alleged Venezuelan state-owned banking entity that acted as the financial agent of the state to finance economic development projects).

As noted in the DOJ’s release, Chinea and DeMeneses were each charged with one count of conspiracy to violate the FCPA and the Travel Act, five counts of violating the FCPA, and five counts of violating of the Travel Act. Chinea and DeMeneses were also charged with one count of conspiracy to commit money laundering and three counts of money laundering. DeMeneses was further charged with one count of conspiracy to obstruct justice.  (See here for the SEC’s announcement of a related enforcement action against Chinea and DeMeneses.  Like the SEC’s prior enforcement actions against the other individuals, Chinea and DeMeneses are charged with various securities law violations, but not FCPA offenses as the individuals – while associated with a broker dealer –  are not associated with an issuer).

As noted in the DOJ’s release, in August 2013 Lujan, Hurtado and Clarke each pleaded guilty to conspiring to violate the FCPA, to violate the Travel Act and to commit money laundering, as well as substantive counts of these offenses.

The DOJ’s enforcement action against Chinea and DeMeneses is further to the curious clustering phenomenon clearly observable in FCPA enforcement.

As highlighted in this previous post (with statistics calculated through the end of 2013), 53% of the individuals charged by the DOJ with FCPA criminal offenses since 2008 have been in just four cases and 75% of the individuals charged by the DOJ since 2008 have been in just nine cases.

Of further note (and again with statistics calculated through the end of 2013), of the 89 individuals charged by the DOJ with FCPA criminal offenses since 2008, 61 of the individuals (69%) were employees or otherwise affiliated with private business entities (for instance – Haiti Teleco related enforcement actions, Control Components Inc. Latin Node, Nexus Technologies, BizJet, not to mention failed prosecutions against various Africa Sting defendants and individuals associated with Lindsey Manufacturing).

This is a striking statistic given that 48 of the 60 corporate DOJ FCPA enforcement actions since 2008 (80%) (again using statistics calculated through the end of 2013) were against publicly traded corporations.  In short, a private entity DOJ FCPA enforcement is approximately three times more likely to have a related DOJ FCPA criminal prosecution of an individual than a public entity DOJ FCPA enforcement action.

Thus far in 2014, the trends have been further magnified.  In addition to this week’s action:

  • 5 individuals associated with private company Group DF were charged with FCPA offenses (see here); and
  • 3 individuals associated with private company PetroTiger Ltd. were charged with FCPA offenses (see here)

HP And Related Entities Resolve $108 Million FCPA Enforcement Action

Thursday, April 10th, 2014

Hewlett-Packard Co. (“HP”) has over 300,000 employees worldwide.

Among the employees during a certain relevant time period, were 5 individuals in Russia employed by a subsidiary, 1 individual in Poland employed by a subsidiary, and a vaguely defined group of individuals in Mexico employed by a subsidiary that worked on one sales deal.

The above individuals engaged in conduct largely occurring 7-14 years ago.

The government alleges that all of these individuals were specifically trained on the FCPA by HP and that HP had other internal controls in place as relevant to these individuals.

Notwithstanding these controls, the government alleges that the individuals willfully circumvented HP’s controls to make alleged improper payments to alleged “foreign officials” by, among other things, creating secret slush funds, concealing certain other information, making false representations, and engaging in other covert means such as anonymous e-mail accounts and pre-paid mobile telephones.

So reads the latest Foreign Corrupt Practices Act enforcement action.

Yesterday the DOJ and SEC announced (here and here) a coordinated FCPA enforcement action against various HP and related entities based on alleged conduct in Russia, Poland and Mexico.  As noted in this previous post, HP has been under FCPA scrutiny since early 2010.

The enforcement action involved:

HP and related entities agreed to pay approximately $108.2 million (all guaranteed by HP) to resolve the alleged FCPA scrutiny (approximately $76.7 million in the DOJ actions; and approximately $31.5 million in the SEC action).

The enforcement action, in terms of settlement amount, is the 11th largest of all-time and the 2nd largest of all-time against a U.S. company (recognizing of course that HP’s foreign subsidiaries were a large focus of the enforcement actions).

This post summarizes both the DOJ and SEC enforcement actions based on a review of the original source documents (comprising approximately 175 pages in total).

DOJ Enforcement Action

The enforcement action involved a criminal information against HP Russia resolved via a plea agreement; a criminal information against HP Poland resolved via a DPA; and an NPA concerning HP Mexico.

HP Russia

According to the information, HP Russia is a wholly owned subsidiary of HP and was principally responsible for transacting business in Russia and the Commonwealth of Independent States (“CIS”).  During the relevant time period, the information alleges that HP Russia had approximately 315 and 55o employees and that HP Russia “was subject to HP’s internal accounting controls, and HP Russia’s financial results were included in the consolidated financial statements that HP filed with the SEC.”

The alleged conduct concerns five employees at HP Russia.

  • HP Russia Executive 1
  • HP Russia Executive 2
  • HP Russia Manager 1
  • HP Russia Manager 2
  • HP Russia Manager 3

The conduct at issue concerns “a project to automate the telecommunications and computing infrastructure of the Office of the Prosecutor General of Russia (“GPO” or “GP”),” a project valued at approximately $100 million.  According to the information, the Russian government used a state-owned entity organized under the Department of Affairs of the President of the Russian Federation, to manage the GPO project tender and execution.”

In pertinent part, the information alleges as follows.

“Between in or about 2000 and 2007, HP Russia and co-conspirators agreed to make and did make improper payments to secure, retain and implement the GPO project.  Members of the conspiracy structured the deal to create a secret slush fund, which by 2003 totaled approximately ($10 million at then-prevailing exchange rates), at least part of which was intended for bribes, kickbacks, and other improper payments.  To execute and hide the scheme, members of the conspiracy failed to implement internal controls intended to maintain accountability over HP’s assets, willfully circumvented existing internal controls, and falsified corporate books and records relied on by HP officers and external auditors to authorize the transaction and prepare HP’s consolidated financial statements.”

Regarding the slush fund, the information alleges that HP Russia “created million of dollars in excess margin for use as a slush fund” by selling product to an “often-used channel partner of HP” which in turn sold product to an intermediary at a mark-up. According to the information, “To keep track of the fund, which was concealed in the project’s financials, HP Russia maintained two sets of project pricing records:  off-the-books versions, known only to conspirators, which identified slush fund recipients, and sanitized versions of the same documents which were provided to HP credit, finance, and legal officers outside of HP Russia.” According to the information, “one example of an off-the-books document was an encrypted, password-protected spreadsheet.”

According to the information, various HP Russia employees concealed the slush fund during HP’s Solution Opportunity Approval and Review (“SOAR”) process which applied to “all-service related projects valued at greater than $500,000 anywhere in the world, including Russia.”  Among other things, the information alleges that HP Russia employees made false representations and falsely certified the adequacy of HP Russia’s internal controls, a certification the information alleges that “was relied upon by HP’s EMEA business to certify to HP’s headquarters in the United States that EMEA’s financial statements were accurate.”

According to the information, the alleged improper payments (approximately €8 million) were made through various intermediaries to “Russian Official A,” a director of a Russian government agency who assumed responsibility for the GPO Project as well as “Individual A,” an associate of Russian Official A, for things such as:

  • “expensive jewelry, luxury automobiles, travel, and other items typically associated with gifts”
  • “travel services, vehicles, tuition, electronic equipment, cotton, textiles, and various other items”
  • a “hotel bill: and “other luxury purchases” such as “expensive watches, swimming pool technology, and other items”
  • “furniture, vehicles, clothing, travel services, household appliances, hotel stays, and other items”

Based on the above alleged conduct, the information charges (i) conspiracy to violate the FCPA’s anti-bribery provisions and books and records and internal controls provisions; (ii) one count of violating the FCPA’s anti-bribery provisions; (iii) one count of violating the FCPA’s internal controls provisions; and (iv) one count of violating the FCPA’s books and records provisions.

The conduct alleged in the information allegedly occurred between December 2000 and February 2007.  As to U.S. jurisdictional allegations, the information alleges a 2001 meeting in Rockville, Maryland regarding the GPO project; a 2003 e-mail “which was routed through the United States;” and a 2003 certification “transmitted to HP’s offices in California.”

The above charges were resolved via a plea agreement in which HP Russia agreed to plead guilty to the four charges described above.  Pursuant to the plea agreement, HP Russia agreed to pay a criminal fine of approximately $58.8 million.  In the plea agreement, HP agreed to guarantee HP Russia’s payment as well as other conditions imposed upon HP Russia such as cooperation, and compliance obligations typical in corporate FCPA enforcement actions.  Among other things, the plea agreement imposed upon HP a three year reporting obligation to the DOJ regarding remediation and implementation of various compliance measures. As pertinent to the above allegations, in the plea agreement HP Russia and HP waived any and all statute of limitation defenses.

According to the plea agreement, the advisory fine range based on the alleged conduct at issue was $87 million to $174 million.   The plea agreement states that the approximate $58.8 million fine was appropriate based on the following factors:

“(a) monetary assessments that HP has agreed to pay to the SEC and is expected to pay to law enforcement authorities in Germany relating to the same conduct at issue …; (b) HP Russia’s and HP’s cooperation has been, on the whole, extraordinary, including conducting an extensive internal investigation, voluntarily making U.S. and foreign employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the Department; (c) HP Russia and HP have engaged in extensive remediation, including by taking appropriate disciplinary action against culpable employees of HP and enhancing their internal accounting, reporting, and compliance functions; (d) HP has committed to continue enhancing its compliance program and internal accounting controls … (e) the misconduct identified … was largely undertaken by employees associated with HP Russia, which employed a small fraction of HP global workforce during the relevant period; (f) neither HP nor HP Russia has previously been subject of any criminal enforcement action by the Department or law enforcement authority in Russia or elsewhere; (g) HP Russia and HP have agreed to continue to cooperate with the Department and other U.S. and foreign law enforcement authorities, if requested by the Department …”

HP Poland

According to the information, HP Poland is a wholly owned subsidiary of HP and, among other functional responsibilities, HP Poland managed most of HP’s activities in Poland and had more than 200 employees during the relevant time period.   According to the information, HP Poland ”was subject to HP’s internal accounting controls, and HP Poland’s financial results were included in the consolidated financial statements that HP filed with the SEC.”

The specific alleged conduct concerned “HP Poland Executive” (a citizen of Poland who was the District Manager of Public Sector Sales and Public Sector Sales Lead).

According to the information, HP Poland “(i) caused the falsification of HP’s books and records; and (ii) circumvented HP’s existing internal controls, in connection with a scheme to make corrupt payments to one or more foreign officials in Poland, including the Polish Official [the Director of Information and Communications Technology within the Polish National Police Agency ("KGP") which was part of the Polish Ministry of the Interior and Administration].”

According to the information, “the conduct was related to HP Poland’s efforts to secure and maintain millions of dollars in technology contracts with the Polish government.”  The information alleges that HP Poland “resorted to corruption to foster a relationship with the Polish Official.”

Specifically, the information alleges that in 2006 the Polish Official attended a technology-industry conference in San Francisco and that the “weekend before the conference” HP Poland “paid for dinners, gifts, and sightseeing by the Polish Official in San Francisco.”  The information also alleges that HP Poland took the Polish Official on a side trip to Las Vegas “with no legitimate business purpose” and that while in Las Vegas HP Poland paid for the Polish Official’s “transportation and expenses … including lodging, drinks, dining, shows, other events on or near the Las Vegas Strip, and a private tour flight over the Grand Canyon.”  As to the above travel and entertainment allegations, the information also alleges that “another global technology company” (“Company A”) also wined and dined the Polish Official and paid for his expenses.

The information also alleges that “beginning in late 2006, HP Poland started providing technology products to the Polish Official for personal use.”  The information states:

“Early gifts included HP products, such as desktop and laptop computers, and later expanded to include additional HP computers, HP-branded mobile devices, an HP printer, iPods, flat screen televisions, cameras, a home theater system, and other items.”

According to the information, the above things of value were provided to the Polish Official “in circumvention of HP’s internal controls” and were not “properly reflected in HP’s books and records.”

The information also alleges that in early 2007, “shortly after receiving the first of these gifts, Polish Official signed a contract with HP Poland on behalf of the Polish government, valued at approximately $4.3 million.  A month later, the Polish Official signed another contract with HP Poland, valued at approximately $5.8 million.”

According to the information, “around the date of the second contract award, HP Poland expanded the bribes to include large cash payments to Polish Official from off-the-books accounts.  HP Poland agreed to pay Polish Official 1.2% of HP Poland’s net revenue on any contract awarded by KGP.”

The information then specifically alleges that in 2007 “Polish Official signed a KGP contract with HP Poland valued at approximately $15.8 million” and that “HP Poland Executive delivered to Polish Official’s personal residence a bag filled with approximately $150,000 in cash.”  The information also alleges another instance in which HP Poland Executive met Polish Official in a Warsaw parking lot and gave Polish Official another bag filled with approximately $100,000 in cash.  Further, the information alleges that in 2008, on at least four separate occasions, HP Poland Executive gave Polish Official bags of cash totaling at least $360,000.  According to the information, in 2008, Polish Official signed three contracts on behalf of KGP with HP Poland for approximately $32 million.

As to the above payments, the information alleges that HP Poland willfully circumvented HP’s internal controls and falsified corporate books and records relied on by HP’s officers and external auditors to prepare HP’s financial statements.  Moreover, the information alleges that HP Poland facilitated the corrupt relationship with Polish Official through covert means such an anonymous e-mail accounts, pre-paid mobile telephones, and other means to circumvent HP’s internal controls.

In total, the information alleges between 2006 and 2010 HP Poland “provided Polish Official cash worth the equivalent of approximately $600,000, gifts valued in excess of $30,000, and several thousand dollars in improper travel and entertainment benefits.” According to the information, “during this same time span, the Polish government awarded to HP Poland at least seven contracts for KGP-related information technology products and services, with a total value of approximately $60 million.

Based on the above conduct, the information charges HP Poland with violating the FCPA’s books and records and internal controls provisions.

The above charges were resolved via a DPA in which HP Poland admitted and accepted responsibility for the above conduct.  The DPA has a term of three years and it lists the following relevant considerations considered by the DOJ;

“(a) HP Poland’s cooperation with the Department’s investigation; (b) HP Poland’s ultimate parent corporation, HP, has committed to maintain and continue enhancing its compliance program and internal accounting controls …; and (c) HP Poland and HP have agreed to continue with the Department and other U.S. and foreign law enforcement authorities in any ongoing investigation …”

Based on the advisory guidelines calculation in the DPA, the fine range for the alleged conduct at issue was $19.3 million to $38.6 million.  Pursuant to the DPA, HP Poland agreed to pay approximately $15.5 million, an amount deemed “appropriate” given the “nature and extent of HP Poland’s and HP’s cooperation and their extensive remediation in this matter.”

Like the HP Russia plea agreement, in the HP Poland DPA, HP agrees to guarantee the payment of HP Poland and to implement various compliance measures and report to the DOJ for a three year period.  As is typical in FCPA DPAs, the HP Poland DPA contains a so-called “muzzle clause.”

HP Mexico

The NPA with HP Mexico (a wholly-owned subsidiary of HP based in Mexico) states that beginning in 2008 “HP Mexico began presales activities and discussions with Pemex (Mexico’s alleged state-owned petroleum company) to sell to Pemex a suit of business technology optimization (“BTO”) software, hardware, and licenses.”  According to the NPA, BTO is a niche product that requires sophisticated knowledge to integrate with other software products and the contracts for this software sale were for approximately $6 million.

According to the NPA, “HP Mexico sales managers on the BTO Deal ultimately decided that they could not win the business without working with, and making payments to, a Mexican information-technology consulting company. (“Consultant”)”  According to the information, “HP Mexico sales managers knew that Pemex’s Chief Operating Officer (“Official A”) was a former principal of Consultant” and that “HP Mexico employees also knew that Official A supervised Pemex’s Chief Information Officer (“Official B”), who was a key signatory on behalf of Pemex for the BTO Deal.”

According to the NPA, while the Consultant had prior technical experience, “HP Mexico ultimately retained Consultant in connection with HP Mexico’s bid for the sale to Pemex primarily because of Consultant’s connections to Official A, Official B, and other senior Pemex officials.”  According to the information, as part of its agreement with Consultant, HP Mexico agree to pay Consulant a commission, “which HP Mexico also called an ‘influencer fee,’ equal to 25% of the licensing and support components of the BTO Deal.”

To circumvent HP’s internal controls regarding channel partners, the NPA states that “HP Mexico executives pursuing the BTO Deal arranged for another entity (“Intermediary”), which was already an approved HP Mexico channel partner, to join in the transactions” and that “HP Mexico executives recorded Intermediary as the deal partner in its internal tracking system.”

The NPA states “HP Mexico through the Intermediary, Consultant made a cash payment of approximately $30,000 to an entity controlled by Official B” and that “Consultant made three additional cash payments totaling approximately $95,000 to the Official B controlled entity.”

According to the NPA, “in total, HP Mexico received approximately $2,527,750 as its net benefit on the BTO Deal.”

According to the NPA, the DOJ agreed to enter it based on the following factors:

“(a) HP Mexico and HP’s cooperation, including conducting an extensive internal investigation, voluntarily making U.S. and foreign employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the DOJ; (b) HP Mexico and HP have engaged in extensive remediation, including taking appropriate disciplinary action against culpable employees, enhancing their due diligence protocol for third-party agents and consultants, and enhancing their controls for payments of sales commissions to channel partners in Mexico; (c) HP Mexico’s and HP’s continued commitment to enhancing their compliance programs and internal controls; and (d) HP Mexico’s and HP’s agreement to continue to cooperate with the DOJ in any ongoing investigation.”

In the NPA HP Mexico admitted and acknowledged responsibility for the above conduct.  Pursuant to the NPA, HP Mexico agreed to pay a forfeiture of approximately $2.5 million.  Pursuant to the NPA, which has a term of 3 years, HP Mexico and HP agreed to various compliance obligations.  As is typical in FCPA NPAs, the NPA contains a so-called muzzle clause.

In the DOJ release, Deputy Assistant Attorney General Bruce Swartz states:

“Hewlett-Packard subsidiaries created a slush fund for bribe payments, set up an intricate web of shell companies and bank accounts to launder money, employed two sets of books to track bribe recipients, and used anonymous email accounts and prepaid mobile telephones to arrange covert meetings to hand over bags of cash.  Even as the tradecraft of corruption becomes more sophisticated, the department is staying a step ahead of those who choose to violate our laws, thanks to the diligent efforts of U.S. prosecutors and agents and our colleagues at the SEC, as well as the tremendous cooperation of our law enforcement partners in Germany, Poland and Mexico.”

Melinda Haag (U.S. Attorney for the N.D. of California) states:

“The United States Attorney’s Office, working alongside our colleagues in the Criminal Division, will vigorously police any efforts by companies in our district to illegally sell products to foreign governments using bribes or kickbacks in violation of the FCPA,  Today’s resolution with HP reinforces the fact that there is no double standard: U.S. businesses must respect the same ethics and compliance standards whether they are selling products to foreign governments or to the United States government.”

Valerie Parlave (Assistant Director in Charge of the FBI’s Washington Field Office) states:

“This case demonstrates the FBI’s ability to successfully coordinate with our foreign law enforcement partners to investigate and bring to justice corporations that choose to do business through bribery and off-the-book dealings.  I want to thank the agents who worked on this case in Washington, New York and in our Legal Attaché offices in Mexico City, Moscow, Berlin and Warsaw as well as the prosecutors.  Their work ensures a level playing field for businesses seeking lucrative overseas government contracts.”

Richard Weber (Chief of the Internal Revenue Service – Criminal Investigation) states:

“This agreement is the result of untangling a global labyrinth of complex financial transactions used by HP to facilitate bribes to foreign officials.  IRS-CI has become a trusted leader in pursuit of corporations and executives who use hidden offshore assets and shell companies to circumvent the law.  CI is committed to maintaining fair competition, free of corrupt practices, through a potent synthesis of global teamwork and our dynamic financial investigative talents.”

SEC Enforcement Action

The enforcement action involved an administrative cease and desist order against HP and is based on the same Russia, Poland and Mexico conduct described above.

Under the heading “Summary,” the order states:

“From approximately 2003 to 2010 (the “relevant period”), HP Co.’s indirect, wholly-owned subsidiaries in Russia, Mexico and Poland, by and through their employees, agents and intermediaries, made unlawful payments to various foreign government officials to obtain business. These payments were also falsely recorded in the subsidiaries’ books and records and, ultimately, in HP Co.’s books and records. In Russia, HP Co.’s subsidiary (“HP Russia”) made payments through HP Russia’s agents to a Russian government official to retain a multi-million dollar contract with the federal prosecutor’s office. The payments were made through shell companies engaged by the agents to perform purported services under the contract. In Poland, certain agents or employees of HP Co.’s Polish subsidiary (“HP Poland”) provided gifts and cash bribes to a Polish government official to obtain contracts with Poland’s national police agency. In Mexico, HP Co.’s Mexican subsidiary (“HP Mexico”) made improper payments to a third party in connection with a sale of software to Mexico’s state-owned petroleum agency. HP Co. and its consolidated subsidiaries (collectively, “HP”) earned approximately $29 million in illicit profits as a result of this improper conduct.

The payments and improper gifts to government officials made directly or through intermediaries were falsely recorded in the relevant HP subsidiaries’ books and records as legitimate consulting and service contracts, commissions, or travel expenses. In fact, the true purpose of the payments and gifts was to make improper payments to foreign government officials to obtain lucrative government contracts for HP. During the relevant period, HP lacked sufficient internal controls to detect and prevent the improper payments and gifts made by executives and representatives of certain of its foreign subsidiaries.”

As to HP Russia, the order also states under the heading “Additional Conduct,” as follows.

“In June and July 2006, several European HP subsidiaries, including HP Russia, arranged for a high-profile customer marketing event in connection with the FIFA World Cup soccer tournament in Germany. Despite managerial directives not to invite representatives of government customers, certain HP sales employees arranged for a number of government or state-owned customers to attend the event. In all, HP Russia and other European subsidiaries of HP paid tens of thousands of dollars in travel and entertainment expenses for these government customers, and HP Co.’s internal controls failed to detect or prevent the conduct.

Finally, in June 2005, HP Russia paid more than $2.5 million to a third party distributor for the supply of software and implementation services to a Russian state-owned enterprise. HP Russia’s records do not reflect what, if any, work was actually performed by the distributor for these payments, and communications among HP Russia employees suggest that the distributor may have played an influential role in connection with obtaining the contract. The payments to the distributor were recorded in HP Russia’s books and records as a payment for providing software and services, even though there was minimal evidence concerning what was actually provided for these payments.”

Based on the above, the order finds violations of the FCPA’s books and records and internal controls provisions.  Specifically, the order states:

“HP’s global operations are organized by geographic regions and sub-regions, as well as business units. Employees in HP’s foreign subsidiaries may report to a supervisor in both their geographic region and their business unit. During the relevant period, HP’s foreign subsidiaries operated pursuant to compliance policies and directives developed by HP and implemented at the local subsidiary level by the country or regional management. Although HP had certain anti-corruption policies and controls in place during the relevant period, those policies and controls were not adequate to prevent the conduct described herein and were insufficiently implemented on the regional or country level. Further, HP failed to devise and maintain an adequate system of internal accounting controls sufficient to provide reasonable assurance that: (1) access to assets was permitted only in accordance with management’s authorization; (2) transactions were recorded as necessary to maintain accountability for assets; and (3) transactions were executed in accordance with management’s authorization.

[...]

As described above, HP Co. violated Section 13(b)(2)(A) of the Exchange Act. Its subsidiaries in Russia, Poland and Mexico falsely recorded the payments made to agents as payments for legitimate services or commissions, when the true purpose of these payments was to make corrupt payments to government officials to obtain business. The false entries were then consolidated and reported by HP in its consolidated financial statements. HP Co. also violated Section 13(b)(2)(B) by failing to devise and maintain sufficient accounting controls to detect and prevent the making of improper payments to foreign officials and ensure that payments were made only to approved channel partners.”

Under the heading “Remedial Efforts,” the order states:

“In response to the Commission’s investigation, HP retained outside counsel to assist it in conducting an internal investigation into improper conduct in the jurisdictions that were the subject of the staff’s inquiry, as well as in other jurisdictions where HP identified additional issues. HP cooperated with the Commission’s investigation by voluntarily producing reports and other materials to the Commission staff summarizing the findings of its internal investigation. HP also cooperated by, among other things, voluntarily producing translations of numerous documents, providing timely reports on witness interviews, and by making foreign employees available to the Commission staff to interview.

HP has also undertaken significant remedial actions over the course of the Commission’s investigation, including by implementing a firm-wide screening process for its channel partners, training its public sector sales staff on its policies for dealing with business intermediaries, increasing compliance-related training for its global work force, and implementing additional enhancements to its internal controls and compliance functions. In addition, HP took disciplinary actions against certain of its employees in response to the conduct identified by the Commission staff and by the company through its internal investigation.”

In resolving the matter, the SEC ordered HP to cease and desist from committing future violations of the FCPA’s books and records and internal controls provisions and to pay disgorgement of $29 million and prejudgment interest of $5 million. According to the order, approximately $2.5 million of the disgorgement amount will be satisfied by HP’s payment of $2.5 million in forfeiture in connection with the HP Mexico DOJ action.  The order also requires HP to report to the SEC for a three year period regarding the status of its remediation and implementation of various compliance measures.

In the SEC release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) states:

“Hewlett-Packard lacked the internal controls to stop a pattern of illegal payments to win business in Mexico and Eastern Europe. The company’s books and records reflected the payments as legitimate commissions and expenses.  Companies have a fundamental obligation to ensure that their internal controls are both reasonably designed and appropriately implemented across their entire business operations, and they should take a hard look at the agents conducting business on their behalf.”

Gibson Dunn attorneys Joseph Warin and John Chesley represented the HP entities.

In this release (a release HP had to consult with the DOJ before issuing) HP Executive Vice President and General Counsel John Schultz states:

“The misconduct described in the settlement was limited to a small number of people who are no longer employed by the company.  HP fully cooperated with both the Department of Justice and the Securities and Exchange Commission in the investigation of these matters and will continue to provide customers around the world with top quality products and services without interruption.”

HP’s stock closed yesterday up approximately .8%

DOJ Alleges Wide-Ranging Conspiracy To Bribe Indian Officials To Secure Mining Licenses

Thursday, April 3rd, 2014

Yesterday the DOJ announced the unsealing of a criminal indictment charging six individuals “with participating in an alleged international racketeering conspiracy involving bribes of state and central government officials in India to allow the mining of titanium minerals.”

According to the indictment, Dmitry Firtash, a Ukrainian businessman who was arrested in March in Austria (see here for the DOJ’s prior release), was the leader of a criminal enterprise, through his group of companies Group DF, that included:

  • Andras Knopp (a Hungarian businessman)
  • Suren Gevorgyan (of Ukraine)
  • Gajendra Lal (an Indian national and permanent resident of the U.S.)
  • Periyasamy Sunderalingam (of Sri Lanka)
  • K.V.P. Ramachandra Rao (a Member of the Parliament in India who was an official of the state government of Andra Pradesh and a close advisor to the now-deceased chief minister of the State of Andhra Pradesh, Y.S. Rajasekhara Reddy)

According to the indictment, the illegal activities of the enterprise included, but were not limited to: “utilizing United States financial institutions to engage in the international transmission of dollars for the purpose of bribing Indian public officials in connection with obtaining approval of the necessary licenses for [a mining project within Andhra Pradesh], which project was forecast to generate more than $500 million in revenues per year …”

According to the indictment:

“Licenses were required for the project before mining could begin.  These licenses required the approval of both the State Government of Andhra Pradesh and the Central Government prior to their issuance.  The approval and issuance of such licenses were discretionary, non-routine governmental actions.”

The indictment charges all defendants with racketeering conspiracy; money laundering conspiracy; and two counts of interstate travel in aid of racketeering.

In addition, all defendants except Rao (the alleged Indian “foreign official”) were charged with conspiracy to violate the FCPA’s anti-bribery provisions.

The absence of Rao from this charge is, no doubt, a result of U.S. v. Castle, 925 F.2d 831 (5th Cir. 1991). In that case involving Canadian “foreign officials,” the DOJ acknowledged that it could not charge the officials with direct FCPA violations since the FCPA did not criminalize the receipt of bribes by a foreign official.  However, the DOJ charged the Canadian officials with conspiring to violate the FCPA.  The court dismissed this charge and rejected the DOJ’s position that a “foreign official” could be charged with conspiring to violate the FCPA.  Based on the language and legislative history of the FCPA, the court found a “legislative policy to leave unpunished a well-defined group of persons [i.e., “foreign officials] who were necessary parties to the acts constituting a violation of the substantive law.”

As to the FCPA conspiracy charge, Lal is charged as a domestic concern and the other defendants are charged as “persons” under the 78dd-3 prong of the statute which contains the following jurisdictional element – “while in the territory of the U.S., corruptly … make[s] use of the mails or any means or instrumentality of interstate commerce or to do any act in furtherance” of an improper payment. The indictment contains various allegations relevant to this jurisdictional prong including use of U.S. bank accounts, travel in the U.S., use of e-mail accounts hosted on computer servers located within the U.S., and use of cell phones operating on interstate networks.

Among other things, the indictment seeks forfeiture of approximately $10.6 million from the defendants.

In the DOJ’s release, Acting Assistant Attorney General David O’Neil states:

“Fighting global corruption is part of the fabric of the Department of Justice.  The charges against six foreign nationals announced today send the unmistakable message that we will root out and attack foreign bribery and bring to justice those who improperly influence foreign officials, wherever we find them.”

U.S. Attorney for the N.D. of Illinois Zachary Fardon states:

“Criminal conspiracies that extend beyond our borders are not beyond our reach.  We will use all of the tools and resources available to us to ensure the integrity of global business transactions that involve U.S. commerce.”

Special Agent in Charge of the FBI’s Chicago Office Robert Holley states:

“This case is another example of the FBI’s willingness to aggressively investigate corrupt conduct around the globe.  With the assistance of our law enforcement partners, both foreign and domestic, we will continue to pursue those who allegedly bribe foreign officials in return for lucrative business contracts.”

As noted in the release, other than Firtash, all other defendants remain at large.  When Firtash was arrested in March, he released this statement through Group DF.  As highlighted here, Firtash paid approximately $172 million to be released on bail.

For more on the enforcement action, see here from the Chicago Tribune, here from Reuters and here from Bloomberg.

As noted in this article, while several FCPA enforcement actions have been brought in connection with foreign license and permitting issues, the government has an overall losing record when put to its burden of proof in FCPA enforcement actions outside the context of foreign government procurement.

Marubeni Enforcement Action Specifics

Monday, March 24th, 2014

A post last week mentioned the $88 million Foreign Corrupt Practices Act enforcement action (the 12th largest of all-time in terms of settlement amount) against Marubeni (a Japanese company).  In 2012, Marubeni resolved a $55 million FCPA enforcement action (see here for the prior post) involving Bonny Island, Nigeria conduct.

This post highlights specifics from the enforcement action in the original source documents – the criminal information and plea agreement.  [Previously, the DOJ released original source documents relevant to an FCPA enforcement action at the same time as announcing the enforcement action.  However, according to a knowledgeable source, the DOJ has a new policy of releasing original source documents only when those documents have been filed-stamped by the relevant court.  While an understandable policy, the end result will likely be that the majority of reporting of FCPA enforcement actions will be reporting exclusively from DOJ press releases, not original source documents.  Not on this website] 

The Marubeni enforcement action is a virtual carbon copy of the April 2013 FCPA enforcement action against various current and former employees of Alstom concerning the Tarahan power project in Indonesia.  Indeed, as highlighted in the previous post, Marubeni is the “Consortium Partner” in the prior enforcement action and those associated with Alstom previously charged (Lawrence Hoskins, Frederic Pierucci, William Pomponi and David Rothschild) are mentioned prominently in the Marubeni enforcement action.

Information

The information alleges that Marubeni and its subsidiaries, including Marubeni Power Systems Corporation (“MPSC”), partnered with Alstom (simply referred to in the Information as Power Company) and its subsidiaries in bidding and carrying out of the Tarahan Project in Indonesia, a $118 project to provide power-related services to the citizens of Indonesia that was bid and contracted through Indonesia’s state-owned and state-controlled electricity company, Perusahaan Listrik Negara (“PLN”). According to the information, Marubeni managed all work on the project, including auxiliary equipment and civil building and installation work.

According to the information, Marubeni and Alstom retained two consultants (the same consultants as in the prior 2013 enforcement action) and the “consultant’s primary purpose was not to provide legitimate consulting services to Marubeni and Alstom but was instead to pay bribes to Indonesian officials who had the ability to influence the award of the Tarahan Project contract.”  The Indonesian officials are the same as the officials in the prior enforcement action.

“Official 1 … a member of Parliament in Indonesia [who] had influence over the award of contracts by PLN, including on the Tarahan Project”

“Official 2 … a high-ranking official at PLN [who] had broad decision-making authority and influence over the award of contracts by PLN, including on the Tarahan Project”

“Official 3 … an official at PLN [who] was a high-ranking member of the evaluation committee for the Tarahan Project. Official 3 had broad decision-making authority and influence over the award of the Tarahan contract.”

According to the information, Marubeni, through its employees and agents made payments to a consultant’s bank account in Maryland, knowing that a portion of the payments to the consultant was intended for Indonesian officials in exchange for their influence and assistance in awarding the Tarahan Project to Marubeni and Alstom.  In addition, the information alleges that Marubeni, through its employees and agents, attended meetings in Connecticut in connection with the Tarahan Project.

There are no specifics in the information concerning the Marbueni employees such as rank, title or position of the employees (as noted in the information, Marubeni has approximately 24,000 employees in over 70 countries).

Based on the above allegations, the information charges Marubeni with conspiracy to violate the FCPA’s anti-bribery provisions. As to jurisdiction, the information alleges that Marubeni, through its employees, together with others, while in Connecticut discussed in person, via telephone and via e-mail the need to obtain the Tarahan Project and making bribe payments to various alleged foreign officials in order to obtain the contract, and offered to pay, promised to pay, and authorized the payment of bribes to obtain the contract.  The information alleges approximately 60 separate overt acts in furtherance in the conspiracy and the vast majority of these allegations concerning the alleged co-conspirators associated with Alstom.  There are relatively few specific overt acts allegations concerning Marubeni employees other than the following.

In 2002 and 2004 employees of Marubeni traveled to Connecticut “to attend meetings … in connection with the Tarahan Project”

Between 2002 – 2004, e-mails were sent to Marubeni employees from co-conspirators or from Marubeni employees to co-conspirators in connection with the project and bribery scheme

Twice in 2005 and once in 2008 “Marubeni caused” wire transfers from a bank account in New York to a consultant’s bank account in Maryland in furtherance of the bribery scheme

The “most recent” allegation supporting Marubeni’s conspiracy charge allegedly occurred in November 2008.

In addition to the conspiracy charge, the information also alleges 7 substantive FCPA anti-bribery violations under the 78dd-3 prong of the statute.  The jurisdictional element of 78dd-3 is “while in the territory of the United States, corruptly to make use of the mails or any means or instrumentality of interstate commerce or to do any other act in furtherance …” of a bribery scheme.

Two of the 7 FCPA anti-bribery charges are Marubeni specific (the above mentioned 2005 and 2008 wire transfers).  The other 5 FCPA anti-bribery charges are based on the conduct of Alstom employees.

Plea Agreement

In the plea agreement, Marubeni admitted to the factual allegations in the information and agreed that it was responsible for the acts of its present and former employees described in the information.

As set forth in the plea agreement, the advisory sentencing guidelines range for the conduct at issue was $63.7 million to $127.4 million.  Pursuant to the plea agreement, Marubeni agreed to pay $88 million.  This is a relatively rare situation of an FCPA corporate defendant paying a criminal fine amount within the guidelines range.

The plea agreement states that the DOJ believes that the fine amount was the appropriate disposition based on:  ”(1) the nature and seriousness of the offense; (2) the Defendant’s failure to voluntarily disclose the conduct; (3) the Defendants refusal to cooperate with the Department’s investigation when given the opportunity to do so; (4) the lack of an effective compliance and ethics program at the time of the offense; (5) the Defendant’s failure to properly remediate: and (6) the Defendant’s history of prior criminal misconduct.”

As is typical in corporate FCPA resolutions, Marubeni agreed to a host of compliance requirements and the plea agreement also contains a muzzle clause.

DOJ Release

In this release, Acting Assistant Attorney General Raman stated:

“Marubeni pleaded guilty to engaging in a seven-year scheme to pay – and conceal – bribes to a high-ranking member of Parliament and other foreign officials in Indonesia.  The company refused to play by the rules, then refused to cooperate with the government’s investigation.  Now Marubeni faces the consequences for its crooked business practices in Indonesia .”

Acting U.S. Attorney Michael Gustafson (D. Conn.) stated:

“For several years, the Marubeni Corporation worked in concert with a Connecticut company, among others, to bribe Indonesian officials in order to secure a contract to provide power-related services in Indonesia.  Today’s guilty plea by Marubeni Corporation is an important reminder to the business community of the significant consequences of participating in schemes to bribe government officials, whether at home or abroad.”

FBI Assistant Director in Charge of the Washington Field Office Valerie Parlave stated:

“Companies that wish to do business in the United States or with U.S. companies must adhere to U.S. law, and that means bribery is unacceptable.  The FBI continues to work with our international law enforcement partners as demonstrated in this case to ensure that companies are held accountable for their criminal conduct.  I want to thank the agents, analysts and prosecutors who brought this case to today’s conclusion.”

Marubeni’s Release

In this release, Marubeni stated:

“[The enforcement action follows the successful completion by Marubeni of its obligations under a January 2012 Deferred Prosecution Agreement entered with the DOJ relating to the liquid natural gas project in Nigeria. That Agreement required Marubeni to retain a corporate compliance consultant for two years to review and enhance its anticorruption compliance program to ensure that it satisfies standards specified by the DOJ, and to report to the DOJ regarding the results of this review. This was completed in January 2014, and at the request of the DOJ the related proceeding was dismissed on February 26, 2014.

The Tarahan conduct pre-dates the execution of Marubeni’s 2012 Deferred Prosecution Agreement with the DOJ. Marubeni has undertaken extensive efforts to enhance its anti-corruption compliance program, and believes that its current program is robust and effective. Although the agreement reached with DOJ today does not require Marubeni to further engage a compliance consultant, Marubeni is taking this matter seriously and commits to continue to thoroughly implement and enhance its anti-corruption compliance program.”

Marc Weinstein (Hughes Hubbard & Reed) represented Marubeni.  Weinstein also represented Marubeni in connection with the 2012 FCPA enforcement action.