Archive for the ‘Facilitating Payments’ Category

Is The Current “Foreign Official” Enforcement Theory Unconstitutional?

Wednesday, February 18th, 2015

UnconstitutionalAs readers no doubt know, in May 2014 the 11th Circuit issued a decision of first impression for an appellate court on the issue of whether employees of alleged state-owned or state-controlled entities are “foreign officials” under the FCPA.

This prior post contains numerous links to other posts regarding the decision.

In short, in U.S. v. Esquenazi, the 11th Circuit concluded as follows.

“An ‘instrumentality’ [under the FCPA] is an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own. Certainly, what constitutes control and what constitutes a function the government treats as its own are fact-bound questions. It would be unwise and likely impossible to exhaustively answer them in the abstract. [...] [W]e do not purport to list all of the factors that might prove relevant to deciding whether an entity is an instrumentality of a foreign government. For today, we provide a list of some factors that may be relevant to deciding the issue.

To decide if the government ‘controls’ an entity, courts and juries should look to the foreign government’s formal designation of that entity; whether the government has a majority interest in the entity; the government’s ability to hire and fire the entity’s principals; the extent to which the entity’s profits, if any, go directly into the governmental fisc, and, by the same token, the extent to which the government funds the entity if it fails to break even; and the length of time these indicia have existed.

[...]

We then turn to the second element relevant to deciding if an entity is an instrumentality of a foreign government under the FCPA — deciding if the entity performs a function the government treats as its own. Courts and juries should examine whether the entity has a monopoly over the function it exists to carry out; whether the government subsidizes the costs associated with the entity providing services; whether the entity provides services to the public at large in the foreign country; and whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function.”

As evident from the 11th Circuit’s ruling, a key element of a U.S. federal law will often be dependent on foreign law or foreign government circumstances or characterization of an alleged SOE.

Indeed, as noted in this prior post, the meaning of foreign official thus can have 193 meanings (by most measures, the number of countries in the world).  As noted in the prior post, a significant irony of the 11th Circuit’s resort to foreign characterization and treatment of a seemingly commercial enterprise is that the DOJ itself has rejected this approach in issuing opinions under the FCPA Opinion Procedure program. (See Release 94-01).

The 11th Circuit itself recognized that its control and function test could raise constitutional vagueness concerns.  As stated by the court, it can be a “difficult task – involving divining subjective intentions of a foreign sovereign, parsing history, and interpreting significant amounts of foreign law – to decide what functions a foreign government considers core and traditional.”  Moreover, the 11th Circuit recognized ”there may be entities near the definitional line for ‘instrumentality’ that may raise a vagueness concern.”

The above is relevant background in discussing a recent article – outside the FCPA context – but with clear FCPA implications given the above background.

In “The Dynamic Incorporation of Foreign Law and the Constitutional Regulation of Federal Lawmaking,” Paul Larkin argues that “the prospect that the United States would grant a foreign government the legal authority to govern the people of this nation is absurd.”  Stated differently, Larkin notes:

“Congress’s decision to authorize foreign government and foreign officials to define the content of a domestic law raises legal issues residing at the core of any analysis of how the federal government may govern [...]“

According to Larkin, such circumstances are unconstitutional “because it vests domestic federal lawmaking in foreign governments and their officials.”

Larkin then discusses several “problems posed by vesting absolute lawmaking power to define federal criminal law in the hands of foreign officials who may be used to governing in a foreign system for people who may live in a culture with vastly different legal and social expectations.”

Among the problems are the following:

“It is wholly unrealistic to assume that Americans know foreign law.  Foreign codes may not always reflect American law or morals, so there is no justification for presuming that domestic residents will know foreign laws by heart.”

“Finding foreign law may also be difficult.  Foreign nations may not make all of their laws public, whether in printed code accessible in a domestic library or via the Internet.”

“Other nations may grant their departments similar rulemaking power [to U.S. agencies] but their agencies may not publish regulations in their version of the Federal Register or Code of Federal Regulations (assuming that they have one at all).”

“A foreign law must be identifiable as a ‘law.’  Yet, foreign nations may define their ‘law’ to embrace edicts with no parallel or counterpart in our legal system.”

Larkin’s article raises interesting parallel issues concerning the current “foreign official” enforcement theory.

Moreover, the issues raised in Larkin’s article are not merely hypothetical in the FCPA context.  As noted in this prior post, several of the issues Larkin identified were disputed in the SEC’s failed case against Mark Jackson and James Ruehlen regarding Nigerian law relevant to temporary importation permits.

Friday Roundup

Friday, February 13th, 2015

Roundup2Scrutiny alert and for the reading stack.  It’s all here in the Friday roundup.

Scrutiny Alert

In August 2012, the Israel-based Teva Pharmaceuticals first disclosed its FCPA scrutiny and in its most recent annual report the company disclosed as follows.

“For several years, we have been conducting a voluntary worldwide investigation into business practices that may have implications under the FCPA. We have engaged outside counsel to assist in the investigation, which was prompted by the receipt, beginning in 2012, of subpoenas and informal document requests from the SEC and the Department of Justice (“DOJ”) to produce documents with respect to compliance with the FCPA in certain countries. We have provided, and will continue to provide, documents and other information to the SEC and the DOJ, and are cooperating with these agencies in their investigations of these matters. In the course of our investigation, which is continuing, we have identified certain business practices and transactions in Russia, certain Eastern European countries, certain Latin American countries and other countries in which we conduct business, which likely constitute violations of the FCPA and/or local law. In connection with our investigation, we have also become aware that affiliates in certain countries under investigation provided to local authorities inaccurate or altered information relating to marketing or promotional practices. We have brought and continue to bring these issues to the attention of the SEC and the DOJ. Our internal investigation is not complete and additional issues or facts could become known to management as the investigation continues, which may expand the scope or severity of the potential violations and/or extend to additional jurisdictions. Our investigation is expected to continue through the end of 2015, and may continue beyond that date.”

Reading Stack

From Shearman & Sterling attorneys in the New York Law Journal “A Bribe Is a Bribe: FCPA’s Influence on International Arbitration.”

“Although bribery investigations conducted under the auspices of the U.S. Department of Justice (DOJ) and Securities and Exchange Commission (SEC) may appear, at first glance, detached from the world of international arbitration, BSG Resources v. Guinea highlights an issue that practitioners should understand when advising their clients on the potential repercussions of FCPA liability. While practitioners are generally aware of the litigation risks associated with FCPA investigations in the U.S. courts, they would also be well advised in considering the implications that FCPA liability may have on their clients’ recourse to foreign investment protections and bilateral investment treaties, and related international arbitration.”

For additional information on this topic, see this prior guest post.

*****

The attorneys who represented Mark Jackson in SEC. v. Jackson (the SEC’s failed case against Noble executives in connection with Nigerian permits – see herehere, and here for prior posts) ask whether the SEC has written the facilitating payments exception out of the FCPA?  The article states:

“Last summer, a lawsuit brought by the Securities and Exchange Commission (SEC) alleging Foreign Corrupt Practices Act (FCPA) violations against two individuals related to Noble Corporation, a global oil and gas drilling services company, nearly went to trial in federal court in Texas. SEC v. Jackson and Ruehlen, No. 12-cv-563 (S.D. Tex.). [...] As one of the only civil FCPA cases to proceed to that stage of litigation, the case provided unique insights into the SEC’s interpretation of key provisions of the FCPA. The case ultimately settled on very favorable terms for the individuals, but the SEC’s position on the facilitating payments exception to the FCPA was a notable departure from its own stated guidance and may herald a renewed attempt by the SEC to further narrow the exception to the point of irrelevance.”

[...]

“Due to the settlement [in the case], the court never had the opportunity to rule on the fate of the FCPA’s facilitating-payments exception under the SEC’s newfound interpretation. But the SEC’s position on this issue signals a shift in policy toward the practical elimination of the exception. If the SEC continues down the road established in this case, it will be interesting to examine whether courts accept the SEC’s position eliminating the exception. However, since most FCPA cases are not litigated, the SEC may seek to push its novel interpretation into law, without approval by the courts, by including it in settlement agreements going forward. Counsel should be aware of this effort and, where possible and appropriate, resist the SEC’s efforts to rewrite the law.”

My own two cents on the issue is consistent with other observations, and that is yes, the enforcement agencies have largely read facilitating payments out of the FCPA, along with the corrupt intent element in many cases.

*****

Much has been written about the recently leaked records from HSBC, including this piece regarding Jeffrey Tesler’s role in the Bonny Island, Nigeria bribery cases (4 out of 10 cases in the top ten in terms of FCPA settlements).  According to the article:

“Leaked records from HSBC, a huge global bank based in London, reveal new details about the bank’s role as a conduit for the bribes — and new details about how Tesler operated. The files, obtained by the French newspaper Le Monde and the International Consortium of Investigative Journalists, show ties between Tesler and high-ranking Nigerians not previously named publicly in connection with the scandal, raising the possibility of renewed questions about Nigeria’s handling of the affair.”

[...]

The files obtained by Le Monde and ICIJ show that nine people, including members of the Tesler family and Nigerian nationals, held a variety of roles with accounts  at HSBC Private Bank (Suisse) between 1990 and 2003 — months before the completion of the gas plant. Nine of the 12 accounts instructed HSBC to keep all correspondence under lock and key in a bank safe.

Despite Tesler being under investigation since 2003, HSBC continued to offer advice, services and cash withdrawals to Tesler and his family, whose accounts with the bank totaled tens of millions of dollars at one point in 2006/2007. HSBC advised the family even though its individual files for Tesler and those close to him include references to “criminal cases” and “the Tesler affair.”

*****

A good weekend to all.

11th Circuit Discusses “Routine Governmental Action” Prong Of The FCPA’s Facilitation Payments Exception

Wednesday, February 11th, 2015

11th Cir.This February 2013 post highlighted the criminal appeal of Jean Rene Duperval, the alleged “foreign official” at the center of the various Haiti Teleco enforcement actions, including U.S. v. Esquenazi, the recent 11th Circuit decision concerning the “foreign official” element.

In connection with the Haiti Teleco cases, Duperval was found guilty by a jury on various money laundering charges. As highlighted in the prior post, Duperval appealed his conviction to the 11th Circuit and among the issues appealed were:

  • whether the evidence was “insufficient to prove beyond a reasonable doubt that Haiti Teleco was a government instrumentality and that Duperval was a foreign official as required to prove that a violation of the Foreign Corrupt Practices Act generated proceeds of a specified unlawful activity – a necessary predicate for the convictions on the money laundering conspiracy and substantive money laundering charges.”
  • various due process challenges concerning the declaration of the Haitian Prime Minister; and
  • whether the “trial court erred in not charging the jury in accordance with Duperval’s proffered theory of defense instruction” as to whether the FCPA’s facilitation payments exception applied.

Earlier this week, the 11th Circuit issues this opinion.  The opinion begins as follows.

“This appeal of criminal convictions involving money laundering and foreign bribery presents issues of exposure of jurors to publicity; the sufficiency of the evidence that a telephone company was an “instrumentality” of a foreign government, 15 U.S.C. § 78dd-2(h)(2)(A); whether the administration of a multimillion dollar contract is “routine governmental action,” id. § 78dd-2(h)(4)(A); whether the government interfered with a witness when it obtained a clarifying declaration from that witness; and four issues about the application of the United States Sentencing Guidelines. Jean Rene Duperval appeals both his convictions of two counts of conspiring to commit money laundering, 18 U.S.C. § 1956(h), and 19 counts of concealment of money laundering, id. § 1956(a)(1)(B)(i), and his sentence of imprisonment of 108 months followed by three years of supervised release. Duperval worked as the Director of International Affairs at Telecommunications D’Haiti, a company owned by the government of Haiti. Duperval participated in two schemes in which international companies gave him bribes in exchange for favors from Teleco. Duperval’s arguments fail. We affirm.”

As relevant to “foreign official,” the 11th Circuit’s discussion of this issue in Duperval mirrors the 11th Circuit’s conclusion in U.S. v. Esquenazi.  In short, in Duperval the court stated: “[i]n Esquenazi and this appeal, the government introduced almost identical evidence about Teleco. [...] As in Esquenazi, the jury could have reasonably found that Teleco was an instrumentality of Haiti.”

As relevant to the “routine government action” portion of the facilitation payments exception, the 11th Circuit stated:

“Duperval admitted that he received money from Cinergy and Terra, but he asserted that the money was for doing a good job in the administration of the contracts. Duperval’s counsel requested a jury instruction based on an exception to the Act for routine governmental action, id. § 78dd-2(b), but the district court denied this request.”

[...]

“Duperval argues that the district court erred when it refused his proffered jury instruction. Duperval requested that the district court instruct the jury on the exception to the Foreign Corrupt Practices Act for routine governmental action, 15 U.S.C. § 78dd-2(b). Duperval argues that he was entitled to an instruction on this defense because he introduced evidence that he was paid only for administering the contracts within their terms. But we conclude that the district court did not err when it refused Duperval’s instruction.

A defendant has the right to have the jury instructed on a theory of defense only if “the proposed instruction presents a valid defense and [if] there has been some evidence adduced at trial relevant to that defense.” United States v. Ruiz, 59 F.3d 1151, 1154 (11th Cir. 1995). When we review the refusal to give an instruction for abuse of discretion, we ask whether “the requested instruction is correct, not adequately covered by the charge given, and involves a point so important that failure to give the instruction seriously impaired the party’s ability to present an effective case.” Svete, 556 F.3d at 1161 (internal quotation marks omitted). But we need not engage in this inquiry if the defendant failed to introduce evidence relevant to the jury instruction.

The Act allows “any facilitating or expediting payment to a foreign official . . . the purpose of which is to expedite or to secure the performance of a routine governmental action.” 15 U.S.C. § 78dd-2(b). Routine governmental action includes actions such as “obtaining permits . . . to do business[;] . . . processing governmental papers, such as visas and work orders; providing police protection, mail pick-up and delivery, or scheduling inspections[; and] . . . providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products.” Id. § 78dd-2(h)(4)(A). Other actions are routine governmental action only if they are “actions of a similar nature” to those listed in the statute. Id. § 78dd-2(h)(4)(A)(v). But routine governmental action “does not include . . . any action taken by a foreign official involved in the decision-making process to encourage a decision to award new business to or continue business with a particular party.” Id. § 78dd-2(h)(4)(B).

Duperval argues that he performed a routine governmental action when he administered the contracts, but he misunderstands this exception to the Act. As the Fifth Circuit explained, “[a] brief review of the types of routine governmental actions enumerated by Congress shows how limited Congress wanted to make the . . . exception[].” United States v. Kay, 359 F.3d 738, 750 (5th Cir. 2004). These actions are “largely non-discretionary, ministerial activities performed by mid- or low-level foreign functionaries,” id. at 751, and the payments allowed under this exception are “grease payments” to expedite the receipt of routine services, id. at 747. The administration of a multi-million dollar telecommunication contract is not an “action[] of a similar nature” to the actions enumerated in the Act. 15 U.S.C. § 78dd-2(h)(4)(A)(v). Duperval was not a low-level employee who provided a routine service; he was a high ranking official who administered international contracts. And, when Terra and Cinergy paid Duperval, their “grease payment” was not to expedite the receipt of a routine service. Duperval was not “providing phone service” as the Act uses that term, id. § 78dd-2(h)(4)(A)(iv). “[P]hone service” appears along with “providing . . . power and water supply, loading and unloading cargo, or protecting perishable products.” Id. The text of the statute refers to the government providing a service to a person or business, not to the government administering contracts with companies that provide telephone service.

Duperval’s interpretation also is in tension with the section of the Act that describes what is not routine governmental action, id. § 78dd-2(h)(4)(B). A party cannot pay a decision-maker to continue a contract with the government, id., but under Duperval’s interpretation, a party could circumvent this limitation by “rewarding” the decision-maker for doing a good job in administering the current contract. This interpretation, which would provide an end-run around the provisions of the Act, finds no support in the text of the Act. Duperval presented evidence that he administered multi-million dollar contracts. He failed to prove that he performed a routine governmental action. Without any evidence to support his defense, Duperval was not entitled to his requested jury instruction.”

The 11th Circuit’s conclusion as to “routine governmental action,” was hardly surprising given the facts at issue in Duperval and Duperval’s argument.

Nevertheless, the 11th Circuit’s discussion of facilitation payments in Duperval is believed to be the first time an appellate court has squarely  addressed this prong of the FCPA (as the Fifth Circuit’s discussion of facilitation payments in Kay was dicta).

“I Have Such Trouble Understanding The Facilitating Payment Exception”

Tuesday, December 9th, 2014

Southern District of Texas Judge Keith P. Ellison.  HANDOUT.

In the minds of some, the Foreign Corrupt Practices Act is a clear statute with no ambiguity whatsoever (see here for a prior post on the same subject).  To such commentators, it’s easy –  just don’t bribe.  (The irony of course is that if it was so easy, then why do many of these same commentators devote their practice to FCPA compliance?).

To suggest that the FCPA is an ambiguous statute has been met by claims that such statements are nothing more than pandering to a particular audience.

Well, federal court judges are apparently pandering to a particular audience because if there is one common thread in many FCPA judicial decisions, it is judges finding various FCPA provisions vague or ambiguous.  (See the above prior post for numerous examples).

The latest example occurred in SEC v. Jackson & Ruehlen (the individual enforcement action the SEC settled on the eve of trial this past summer in what could only credibly be called an SEC defeat – see here and here for prior posts).

As to relevant background, in a pre-trial ruling (see here for the prior post), Judge Keith Ellisson (S.D.Tex.) ruled that the SEC had the burden of negating application of the FCPA’s facilitating payment exception.  As noted in this prior post, the enforcement action focused on alleged payments in connection with temporary importation permits in Nigeria for oil rigs.

Deep within the pre-trial transcript (see here), one will find Judge Ellison engage in the following exchange with SEC counsel.

JUDGE:  I have such trouble understanding the facilitating payment exception.  [...] I mean, it almost swallows the rest of the statute.  And I know it’s in the legislative history that these, I think reference is made to grease payments, somehow to grease the skids.  How do I separate those payments, which do seem to be contemplated, from the payments that [the SEC] alleges were made in this case, which you think are squarely within the FCPA’s prohibition?  [...] And I don’t understand it.  Whether we make the distinction based on size of payments, regularity of payments, purpose of payments, nature of the — of the favorable conduct elicited.  I just really struggle with it.”

SEC:  [...] For the — for the exception to apply, the SEC’s position is that two elements must be met.  There must be a purpose to expedite an act and the act must be a routine government action within the meaning of the statute.

JUDGE:  Both those could apply to the temporary — to the temporary import, though, couldn’t it?

SEC:  Well, in what way, Your Honor?

JUDGE: Well, because it purpose was to expedite an act and it was a routine government action.  These import permits were granted all the time.

Elsewhere in the transcript, one will find Judge Ellison expressing concern about the SEC’s position that the defendants violated the FCPA’s books and records provisions because Noble Corp. booked the alleged bribe payments in a special facilitating payments account based on the good faith belief that they were indeed facilitating payments.  The following exchange occurred.

JUDGE:  You also argue that recording the payments as facilitating payments in the company’s book is essentially duplicative or duplicitous.  Would payments to government officials, just say to that, like so, would that be accessible?

SEC:  Your honor, these payments were recorded as a particular kind of payment, a lawful payment.  A payment that meets a legal exception to liability under the FCPA.  As this Court recognized in the motion to dismiss opinion, calling a payment something that it is not is false.

JUDGE: What would they have needed to call it?  That’s what I am asking?

SEC:  Payments to government official — I can’t speculate all the things that it possibly could have been called, but payments to government officials may have been – may have been adequate.  However, they weren’t designated payments to government officials in this case …

Elsewhere in the transcript, the SEC acknowledged that the facilitating payments exception is “a difficult area to understand, largely because of the wording of the exception and the statute overall.”  The following exchange occurred.

SEC: This is how we conceptualize it.  And I think it’s — and it’s clearly evidenced and its manifest in the words of the statute and the exception.  Now, the facilitating payment exception is exactly that. It’s an exception for government actions that are routinely or ordinarily carried out. And you’ll see in the — in the exception itself, a number of examples that Congress set out as — as possible facilitating payment – facilitating payments and government — routine government actions. [...]

JUDGE: In your mind, does “routine” mean frequent or does “routine” mean automatic or does “routine” mean both?

SEC: I think that’s a fact issue, Your Honor. I think there could be situations where a routine governmental action can be something automatic. I think there can be situations where a — a routine governmental action is something that is issued or granted by a government entity or official routinely, so frequently, or without exception.

JUDGE: Well, I’m trying to identify which of the those things.  I mean, what if it were routine but not consistent; or automatic but not routine, it only happened once every five years?

SEC:  [...] Now, what’s important here is that the SEC posits whether a particular action is a routine governmental action is an objective inquiry.  You just take a look at the Nigerian law that governs this particular action.  If the Nigerian law says that it’s nondiscretionary, that’s the end of the inquiry.

JUDGE: Well, that’s what I trying to identify.  The fact that it’s nondiscretionary.  Do you think — do you agree with that?

SEC: No, Your Honor.

JUDGE:  Tell me what the lynchpin is?

SEC: The lynchpin is, again, it’s a fact-intensive inquiry.  What did the defendants – all right – what did the defendants believe was the action here?  And the action here was in — again, tying to the specific — specific facts of this case, the action was applying for temporary import authorizations that had, prior to the relevant period in this case, had been routinely granted.

JUDGE: Meaning — meaning consistently?

SEC: Consistently, to our — to our knowledge, without exception.

JUDGE:  Consistently and frequently?

SEC:  Yes

JUDGE:  Okay.

SEC:  Every — every time an application was put in, they received the authorization.

JUDGE: And those — to the best of your knowledge were those applications put in without — without any further monetary inducement or were they accompanied by monetary inducement?

SEC:  Accompanied by monetary inducement; hence, the payment itself, the facilitating payment, for a government action that was routinely rendered.

JUDGE: So the government would grant these routinely if it was paid?

SEC:  Well, Your Honor, we don’t know whether — we don’t necessarily know whether they were — whether they would have been granted if — if a payment had — payment had not been made, but what — what matters here is the payments were made –

JUDGE:  Isn’t that a big difference, though?  If it would have been granted anyway, without a payment being made, isn’t that signficant?

SEC:  I don’t think so, Your Honor.

In short, while many FCPA commentators continue to believe that the FCPA is a simple, straight-forward statute (and that claims of vagueness and ambiguity are the stuff of sugar plums and tinkerbells), the above example is just the latest of many (and please do visit this prior post for the numerous other examples) where federal court judges remain confused about various aspects of the FCPA.

Items Of Interest From The Layne Christensen Company Enforcement Action

Wednesday, October 29th, 2014

Yesterday’s post dived deep into the Layne Christensen Company SEC FCPA enforcement action.

This post continues the analysis by highlighting various issues associated with the enforcement action.

4 for 4

In 2014, there have been four SEC corporate FCPA enforcement actions (Layne Christensen, Smith & Wesson, Alcoa, and HP).  All have been resolved via the SEC’s administrative process.

My recent article, “A Foreign Corrupt Practices Act Narrative,” (see pgs. 991-995) discusses this trend and how it is troubling as it places the SEC in the role of regulator, prosecutor, judge and jury all at the same time.  As Judge Rakoff recently observed, “from where does the constitutional warrant for such unchecked and unbalanced administrative power derive?”

Another noticeable feature of the Layne Christensen action was that the company resolved the SEC’s action without admitting or denying the SEC’s findings.  Smith & Wesson likewise resolved its FCPA enforcement action in this way.

$4

It is reasonable to assume that the SEC included findings in its order for a specific reason (and not just to practice its typing skills).

It is therefore noteworthy that the SEC’s order includes this finding:

“Layne Christensen made more than $10,000 in small payments to foreign officials through various customs and clearing agents that it used in Tanzania, Burkina Faso, Mali, Mauritania, and the DRC. These payments ranged from $4 to $1,700 and were characterized in invoices submitted by the agents as, among other things, “intervention,” “honoraires,” “commissions,” and “service fees.”

Stay tuned for (I predict) coming law firm client alerts and memos on this $4 payment.

As highlighted in this prior post, if the DOJ and SEC are genuine in their message that they are only “focused on bribes of consequence,” on payments of “real and substantial value” and in companies spending compliance dollars in the “most sensible way,” there is something very easy and practical for the enforcement agencies to do.

Only allege conduct that actually determines the ultimate outcome of the enforcement action.

Same Process, Different Results

Does voluntary disclosure and cooperation result in:

An SEC administrative cease and desist order?  Yes, see Layne Christensen.

An SEC non-prosecution agreement?  Yes, see Ralph Lauren.

An SEC deferred prosecution agreement?  Yes, see Tenaris.

An SEC civil complaint?  Yes, see Archer Daniels Midland Company.

Granted, the facts of each FCPA enforcement action are unique, but what drives FCPA practitioners and their clients crazy about the FCPA enforcement process is a lack of transparency and predictability of outcomes.

What Would Have Happened Had The SEC Been Put To Its Burden Of Proof?

Pardon me for being “that guy,” but what would have happened had the SEC been put to its burden of proof on its finding that Layne Christensen violated the FCPA’s anti-bribery provisions?  The SEC’s allegations all concerned payments outside the context of government procurement but rather to allegedly secure favorable tax treatment, customs clearance, work permits, relief from regulatory inspections, etc.

It is a matter of fact, that the SEC has been put to its ultimate burden of proof only once concerning alleged payments outside the context of government procurement and it lost that case.  (See here for the discussion of SEC v. Mattson and Harris). For a broader discussion of this issue, including DOJ actions, see this article.

Moreover, many of the SEC’s findings would seem to potentially implicate the FCPA’s facilitating payments exception.  On that score, in SEC v. Jackson & Ruehlen, a court ruled that the SEC has the burden of negating this statutory exception, something the SEC was unable to do in that case (based on certain similar facts as alleged in the Layne Christensen action) which resulted in a defendant-friendly settlement on the eve of trial.  (See here).

Finally, no doubt Layne Christensen as part of its cooperation likely agreed to toll statute of limitations or waive statute of limitations defenses altogether.  Yet it is worth highlighting that the bulk of the SEC’s findings concern conduct that allegedly occurred between 2005 and July 2009; in other words, beyond the FCPA’s typical 5 year statute of limitations.

Timeline

As highlighted in this 2010 post, Layne Christensen initially disclosed its FCPA scrutiny in Fall 2010.  The company’s first disclosure stated, in pertinent part:

“In connection with the Company updating its Foreign Corrupt Practices Act (“FCPA”) policy, questions were raised internally in late September 2010 about, among other things, the legality of certain payments to customs clearing agents in connection with importing equipment into the Democratic Republic of Congo (“DRC”) and other countries in Africa.  [...] Although the Company has had a long-standing published policy requiring compliance with the FCPA and broadly prohibiting any improper payments by the Company to foreign or U.S. officials, the Company has adopted additional policies and procedures to enhance compliance with the FCPA and related books and records requirements. Further measures may be required once the investigation is concluded.”

In short, Layne Christensen’s FCPA scrutiny – from point of first public disclosure to resolution – lasted approximately 4 years.

The “Three Buckets” 

In my article, “Foreign Corrupt Practices Act Ripples,” I coin the term “three buckets” of FCPA financial exposure and demonstrate how settlement amounts in an actual FCPA enforcement action (“bucket #1) are often not the most expensive aspect of FCPA scrutiny and enforcement.

In nearly every case in which a comparison can be made, “bucket #1″ (pre-enforcement action professional fees and expenses) is the most expensive aspect of FCPA scrutiny.

The numbers in Layne Christensen serve as another instructive reminder.

Bucket #1 = in excess of $10 million (based on the company’s disclosures)

Bucket #12 = $5.1 million

Bukcet #3 (post enforcement action professional fees and expenses) are to be determined.  A noticeable aspect of the Layne Christensen action (one based on a voluntary disclosure and cooperation) is that the company has a reporting obligation imposed upon it.  As stated in the SEC’s order, Layne Christensen shall “report to the Commission periodically, at no less than nine-month internals during a two-year term, the status of its FCPA and anti-corruption related remediation and implementation of compliance measures.”

Compliance Enhancements, Etc.

During its period of FCPA scrutiny, Layne Christensen previously disclosed the following compliance enhancements.

  • contracted with a third party forensics accounting team to conduct an in-depth review of the operations in Africa and to make recommendations for improvement to the internal control systems;
  • reviewing existing arrangements with third parties interacting with government officials in international locations in an effort to assure that contracts and agreements include anti-corruption terms and conditions;
  • performing due diligence on third parties interacting with government officials in international locations and implementing a process to assess potential new third parties;
  • terminated certain agency and business relationships;
  •  established a separate position of, and appointed, a chief compliance officer, effective March 30, 2011, under the supervision of our Senior Vice President, General Counsel and Secretary to facilitate implementation and maintenance of compliance policies, procedures, training, reporting and internal reviews, with indirect reporting responsibility to the audit committee;
  • developed new procedures to improve the controls over cash handling and record retention;
  • conducting a company-wide risk assessment, including an employee survey, to ascertain whether similar issues may exist elsewhere in the Company;
  • initiated an enhanced company-wide, comprehensive training of Company personnel in the requirements of the FCPA, including training with respect to those areas of the Company’s operations that are most likely to raise FCPA compliance concerns; and
  • continued to enhance our training of management, including our operations managers, to emphasize further the importance of setting the proper tone within their organization to instill an attitude of integrity and control awareness and the use of a thorough and proper analysis of proposed transactions.