Archive for the ‘Foreign Issuers’ Category

The DOJ Gets Benchslapped In Foreign Bribery Case

Thursday, April 23rd, 2015

Charles B.In recent FCPA year in reviews (see here for 2014 and here for 2013) topics have included judicial scrutiny of non-FCPA cases because the decisions (mostly concerning jurisdictional issues relevant to foreign actors) should cause pause as to certain Foreign Corrupt Practices Act enforcement theories against foreign actors.

The 2015 year in review is sure to include mention of U.S. v. Vassilieve et al. (a recent case highlighted here) in which U.S. District Court Judge Charles Breyer (N.D. Cal.)(pictured) delivered a major benchslap to the DOJ.

The case involved conduct in the same general sphere of the Foreign Corrupt Practices Act.

Namely, the DOJ alleged in this indictment that:

Yuri Sidorenko (a citizen of Ukraine and St. Kitts & Nevis who resided in Dubai and the Chairman of the EDAPS Consortium Advisory Counsel – a Ukrainian conglomerate of various companies that manufactured and supplied a variety of identification and security products, including passports, drivers licenses and other such products) and

Alexander Vassiliev (also a citizen of Ukraine and St. Kitts & Nevis who resided in Dubai and the Chairman of the Board of EDAPS)

provided money and other things of value to Mauricio Siciliano (an executive of the International Civil Aviation Organization (“ICAO”),  a United Nations specialized agency, responsible for, among other things, standardizing machined-readable passports, including biometric passports) so that Siciliano would use his official position as an Executive of ICAO to benefit EDAPS’s business as well as Sidorenko and Vassiliev personally.  According to the indictment Siciliano (a Venezuelan national who primarily resided in Canada where ICAO is headquartered and had a Canadian passport) was an executive at ICAO who was specifically assigned to work in ICAO’s Machine Readable Travel Documents Programme.

Siciliano would likely be a “foreign official” under the FCPA given the “public international organization” prong of the “foreign official” element. However, as it relates to foreign nationals like Sidorenko and Vassiliev the FCPA’s anti-bribery provisions contain the following jurisdictional element:  ”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.

The DOJ’s indictment did not contain any U.S. jurisdictional allegations, and likely because of this, the bribery scheme was not charged as an FCPA offense.

Rather, the indictment alleged that the U.S. was a member of ICAO and provided support to ICAO by, among other things, annual monetary contributions.  According to the indictment, during the relevant time period, U.S. contributions to ICAO constituted approximately 25% of its annual budget.

Presumably on the basis of this allegation, the DOJ charged the defendants with: (i) conspiracy to commit honest services fraud; (ii) honest services fraud; (iii) conspiracy to solicit and to give bribes involving a federal program; (iv) soliciting bribes involving a federal program; (v) giving bribes involving a federal program; and (vi) aiding and abetting offenses.

Vassiliev and Siciliano filed similar motions to dismiss (here and here) with Vassiliev’s motion to dismiss stating in pertinent part:

“This is a most unusual indictment. It levels charges against foreign nationals and is based solely on foreign conduct. The indictment candidly states that the alleged offenses were committed in their entirety outside the United States—they were “begun and committed outside the jurisdiction” of any State or district.

All three defendants are foreign citizens and foreign residents. [...] The indictment contains no allegation that any of them committed any criminal act in the United States. In fact, the indictment contains no allegation that any of them ever entered the United States for any reason whatsoever, let alone in connection with the crime charged in the indictment. The gist of the indictment is that Vassiliev and Sidorenko sought to pay bribes and/or gratuities to Siciliano, who worked for an agency of the United Nations based in Canada, in order to influence contracts awarded by other foreign agencies. [...]

These criminal counts are fundamentally flawed. Neither statute has extraterritorial application, so the indictment fails to state an offense under United States law. Even if the statutes were found to apply extraterritorially, the alleged facts in this case fail to allege minimum contacts or sufficient nexus between the defendants and the United States, so the Due Process Clause forbids this prosecution.”

Judge Breyer granted the motion to dismiss and his comments in this transcript make for an interesting read.

“What I’m going to do is read the facts as I have gleaned them from the indictment and I’d like the Government to — if  the Government believes that I’ve misstated it, I would like you to make note.

The International Civil Aviation Organization has been a United Nations specialized agency since 1944. The United States has been a member of this agency since its formation. One of the agency’s responsibilities is standardizing machine readable passports. The standards that this agency established were used to determine which features would be utilized in passports in a variety of countries, including the United States.

The time period relevant to the indictment is 2005, 2010. And during this time, the United States made annual monetary contributions to the agencies exceeding $10,000 per year. Throughout this time period contributions from the United States constituted 25 percent of the agency’s annual budget.

Mr. Siciliano was an employee of this agency and was specifically assigned to work in the Machine Readable Travel Documents Program. Mr. Siciliano worked and resided in Canada, where the agency that we’ve just discussed is headquartered. He held a Canadian passport, but is actually a Venezuelan national.

Mr. Sidorenko and Mr. Vassiliev were chairmen of a Ukrainian conglomerate of companies that manufactured and supplied security and identity products and their consortium, how they acted, was called EDAPS. It’s called the EDAPS Consortium.

Mr. Sidorenko is a citizen of Ukraine, Switzerland and St. Kitts and Nevis. Not of the United States. But he primarily resided in Dubai during the relevant time period.

Mr. Vassiliev also resided in Dubai, but he is a citizen of Ukraine and St. Kitts and Nevis. He’s not an American citizen either.

And, of course, the company is not — I mean, the agency is not an American agency.

The indictment alleges that Mr. Sidorenko and Mr. Vassiliev provided money and other things of value to Mr. Siciliano in exchange for Mr. Siciliano using his position at this agency to benefit EDAPS, as well as Sidorenko and Vassiliev personally. That is to say, the allegation is that the — that Mr. Sidorenko and Vassiliev, Ukrainians, provided things of value to Mr. Siciliano in Canada in exchange for Mr. Siciliano using his position at a place in Canada to benefit an Ukrainian company, as well as these — Mr. Sidorenko and Mr. Vassiliev personally, these Ukrainians personally.

Mr. Siciliano sought to benefit the Ukrainian consortium by introducing and publicizing EDAPS to Government officials and entities, by arranging EDAPS to appear at the agency’s conferences, and by endorsing the Ukrainian consortium to other organizations and contacts.

The indictment also alleges that Mr. Siciliano assisted Mr. Vassiliev’s girlfriend in obtaining a visa to travel to Canada in 2007.

Around the same time Mr. Siciliano also considered arranging to obtain a visa for Mr. Sidorenko by hiring Mr. Sidorenko as a consultant for this agency.

Additionally, the three defendants arranged to have Mr. Siciliano’s son sent to Ukraine to work for Mr. Sidorenko.

During there time period, Mr. Siciliano wrote an email message to Mr. Vassiliev seeking payment of dues via wire transfer to a Swiss bank account.

A few years later, Mr. Siciliano sent an email advising Mr. Vassiliev and Mr. Sidorenko that they owed him three months payment. A few weeks after this email, Mr. Siciliano sent another email to Mr. Vassiliev referencing future projects, receiving the fruits of their marketing agreement, and inquiring about picking up his dues.

All of those activities, everything that I have said, occurred outside the United States of America between these three defendants, who, by the way, aren’t United States citizens, who never worked in the United States and whose use of the wires did not reach or pass through the United States.

[...]

[M]y first reaction in reading this indictment is that your office is to be congratulated because, apparently, you have reduced crime in the Northern District of California, and indeed in the United States of America, to such a point that you are using resources of your office to go after criminal activity that occurs in foreign countries and for that — that’s a rather interesting concept that, apparently, you thought this is a good use of assets and resources of the United States Attorney’s Office for the Northern District of California.

So it occurred to me: Is this statute or statutes, the honest services statute and the bribery statute, extraterritorial? And, fortunately, the Supreme Court has addressed this issue. As recently as 2010, they have said — Justice Scalia writing the opinion for a unanimous court, I might add, said that you just look at the statute. See what Congress said. Did Congress say it should be applied extraterritorial?

And you would concede, wouldn’t you, [DOJ attorney], there is nothing in the statute that talks about extraterritorial application, is there?

DOJ: There is nothing in the text of [the charged statutes]. I would submit that the legislative history of [a relevant statute] suggests that it was meant to be applied extraterritorially.

THE COURT: But you know there are those people, like judges, who look first to the statute. There is nothing in the statute.

DOJ: That is correct, your Honor.

THE COURT: Okay. So then if there is nothing in the statute, that doesn’t preclude necessarily the application of the statute extraterritorial, but we have to see whether or not that’s consistent with the general purpose of the statute.

DOJ: Correct, your Honor.

THE COURT: And it’s your view that since the Government contributes some funds to this agency, which is involved in national security — I guess we can talk about it in open court, can’t we?

DOJ: Yes, your Honor.

THE COURT: Okay. I didn’t want to clear the Court because of this strong national security interests that apparently are at issue here. But because they give money to this agency which is engaged in activities, some of which may impact national and international security arrangements, that’s the nexus for the United States Government to apply the statute in an extraterritorial way, is that correct?

DOJ: That’s certainly one of the key –

THE COURT: That’s your first point. We’ll get to the other points, but let’s deal with this first point first.

And so it occurred to me by that logic, the United States being a very generous country, gives a lot of money to a lot of foreign countries. They give over a billion dollars to Egypt. They give vast sums of money to Mexico. They give sums of money to many, many countries all over the world.

And then I wonder by their giving some money to a foreign country, does that then give them jurisdiction to apply statutes, such as the honest services statute, to individuals who are operating in that country or outside the United States?

For example, can you prosecute — you give some money, let’s say, to Mexico and — for programs involving security in Mexico, the border. Let’s make it right down your alley. And it turns out that somebody who is running one aspect of that program in Mexico, a Mexican national, favors his brother-in-law and takes a bribe from his brother-in-law to get his brother-in-law’s children a job somewhere.

Are you suggesting that the United States of America under an honest services theory could prosecute the individual in Mexico?

DOJ: Under honest services, there would have to be the use of a mailing or wire. Under [a relevant statute] I believe those facts would support a prosecution, if the funding were made pursuant to a federal program.

THE COURT: So, in other words, if I — it’s your view, your view, that the United States of America can police foreign companies in the exercise of their operation involving foreign citizens on matters unrelated to the program which the United States gave money for — that is, for the specific purpose of the program — and that they then have jurisdiction to act in that regard.

DOJ: It is, your Honor, if it is pursuant to a federal program.

THE COURT: And do you have one case that says that?

DOJ: We have Campbell, your Honor, which was a District of Columbia case in which an Australian national was charged with bribery under 666 for conduct in Afghanistan relating to his work with a private contractor that received aid from the US AID.

THE COURT: And the program involved was a program for the benefit of the United States, is that correct, in that case?

DOJ: It was a program through which the United States policy interests were advanced, your Honor.

THE COURT: So if there is ever, ever a policy interest of the United States of America in anything a foreign country — that occurs in a foreign country, the United States Attorney’s Office for the Northern District of California will vindicate the way the laws apply — the honest services law applies. You’re going to wipe out bribery and honest services throughout the world. I want to congratulate you for that.

And I never in my life, in 50 years of criminal practice, seen a more misguided prosecution as the one that you’ve brought. I just don’t even get it. I don’t get it, how you can — how you can use resources of the United States Attorney’s Office to prosecute some foreign nationals involved in a foreign company, engaged in conduct which was foreign, on doing things that weren’t directly related to the contribution of the United States to that entity.

DOJ: Your Honor –

THE COURT: Who did you get permission from to bring this prosecution? Anybody in Washington?

DOJ: We — this was a Northern District of California prosecution, your Honor.

THE COURT: Did you get permission from anyone in the Department of Justice in Washington DC to bring this prosecution?

DOJ: It was not required. We coordinated –

THE COURT: It implicates foreign countries, doesn’t it?

DOJ: It does, your Honor.

THE COURT: And you didn’t choose fit to ask the Department of Justice whether in their smarter sentencing, smarter criminal law enforcement program this is a good use of your resources?

DOJ: We received office approval. We also coordinated with the State Department, your Honor.

THE COURT: Pardon?

DOJ: We also coordinated with the State Department.

THE COURT: In other words, it was the State Department, and that was whether or not this person had diplomatic immunity. I’m not even going to address that. That’s another issue entirely.

But you’re telling me this was a decision of the United States Attorney to bring this prosecution without the knowledge of the Department of Justice.

DOJ: It was a duly authorized decision by this office to do so.

THE COURT: My suggestion, since I’m dismissing this indictment, is that you bring an appeal, right away. I would be very interested in what the Ninth Circuit has to say about this, whether they think that there is enough of a nexus to apply statutes, such as the bribery statute and the honest services statute, to the conduct that’s alleged in this particular case.”

Elsewhere in the transcript, Judge Breyer stated:

“They actually have law enforcement in Canada. If you’re so concerned about the way some Canadians are operating with a Canadian-based company in dealing with Ukrainians, you can always phone the Mounties and they will investigate it if they think it’s appropriate.”

[...]

This program, this program — there is no allegation here that somehow the program failed or was in jeopardy by virtue of — by virtue of this purportedly allegedly corrupt person giving a contract or favoring somebody in Ukraine. That’s not — that’s not what’s alleged here.”

Judge Breyer followed up his oral decision granting the motions to dismiss with this written opinion.  In it, Judge Breyer states, among others things, as follows:

“Of course, the United States has some interest in eradicating bribery, mismanagement, and petty thuggery the world over. But under the government’s theory, there is no limit to the United States’s ability to police foreign individuals, in foreign governments or in foreign organizations, on matters completely unrelated to the United States’s investment, so long as the foreign governments or organizations receive at least $10,000 of federal funding. This is not sound foreign policy, it is not a wise use of scarce federal resources, and it is not, in the Court’s view, the law.”

[...]

“There is no allegation that even one dollar of the millions of dollars the United States presumably sent to ICAO was squandered.”

Although outside the FCPA context, Judge Breyer’s decision and reasoning is nevertheless relevant to FCPA enforcement actions against foreign actors that are frequently brought on sparse jurisdictional allegations.

Moreover, Judge Breyer’s comment that there was no allegation that the alleged bribery compromised the integrity of the program at issue is relevant to causation issues discussed in prior posts (see here).

Friday Roundup

Friday, September 19th, 2014

GSK announces verdict in China, the silly season, interesting read, Alibaba, and get it right!  It’s all here in the Friday roundup.

GSK Verdict in China

Earlier today, GlaxoSmithKline announced:

“[T]he Changsha Intermediate People’s Court in Hunan Province, China ruled that GSK China Investment Co. Ltd (GSKCI) has, according to Chinese law, offered money or property to non-government personnel in order to obtain improper commercial gains, and been found guilty of bribing non-government personnel. The verdict follows investigations initiated by China’s Ministry of Public Security in June 2013.  As a result of the Court’s verdict, GSKCI will pay a fine of £297 million [approximately $490 million USD] to the Chinese government. [...] The illegal activities of GSKCI are a clear breach of GSK’s governance and compliance procedures; and are wholly contrary to the values and standards expected from GSK employees. GSK has published a statement of apology to the Chinese government and its people on its website (www.gsk-china.com).  GSK has co-operated fully with the authorities and has taken steps to comprehensively rectify the issues identified at the operations of GSKCI. This includes fundamentally changing the incentive program for its salesforces (decoupling sales targets from compensation); significantly reducing and changing engagement activities with healthcare professionals; and expanding processes for review and monitoring of invoicing and payments. GSK Chief Executive Officer, Sir Andrew Witty said: “Reaching a conclusion in the investigation of our Chinese business is important, but this has been a deeply disappointing matter for GSK. We have and will continue to learn from this. GSK has been in China for close to a hundred years and we remain fully committed to the country and its people. We will continue to expand access to innovative medicines and vaccines to improve their health and well-being. We will also continue to invest directly in the country to support the government’s health care reform agenda and long-term plans for economic growth.”

For more, see here from the BBC.

“The court gave GSK’s former head of Chinese operations, Mark Reilly, a suspended three-year prison sentence and he is set to be deported. Other GSK executives have also been given suspended jail sentences. The guilty verdict was delivered after a one-day trial at a court in Changsha, according to the Xinhua news agency.”

The GSK penalty was described as the biggest fine in Chinese history.  The $490 million fine is also believed to be one of the largest bribery/corruption fines ever.  For instance, a $490 million settlement would rank third on the top ten list of FCPA settlements.

Perhaps the most interesting aspect of the GSK development is reference in the company’s release to the charges involving “non-government personnel.”  In the U.S., it is a prominent enforcement theory that employees of various state-run health care systems – including in China – are “foreign officials” under the FCPA.  (See here).

Another interesting aspect of the GSK development – and one foreshadowed in this 2013 post – is how the Chinese verdict will impact GSK’s scrutiny in its home country (United Kingdom).  As highlighted in the post, the U.K. has a unique double jeopardy principle and, as explained by former SFO Director Richard Alderman, the U.K. “double jeopardy law looks at the facts in issue in the other jurisdiction and not the precise offense.  Our law does not allow someone to be prosecuted here in relation to a set of facts if that person has been in jeopardy of a conviction in relation to those facts in another jurisdiction.”

GSK remains under investigation for conduct outside of China as well.

The U.S. does not have a similar double jeopardy principle, relevant to the extent GSK has shares listed on a U.S. exchange and its conduct in China and elsewhere has been under FCPA scrutiny.

As indicated in the prior post, GSK’s scrutiny – and now liability – in China makes for an interesting case study in enforcement competition.

The Silly Season

Offensive use of the FCPA to accomplish a business objective or advance a litigating position is an observable trend highlighted in my article “Foreign Corrupt Practices Act Ripples.”  As noted here, the FCPA has also been used offensively to score (or at least attempt to score) political points.

The election season is upon us and during this “silly season” perhaps the silliest use of the FCPA ever is happening – not once – but twice.

As noted in this article:

“Michigan Democrat Gary Peters profited from a French oil company [Total S.A.] that admitted to bribing Iranian officials for access to their oil fields.  [...] The Peters campaign did not return requests for comment about whether he was aware of the bribery scandal. [...] Republican Senate nominee Terri Lynn Land called on him to divest from the company, but the three-term congressman refused. [...] “Gary Peters will do anything to make a dollar and say anything to win an election,” Land spokesman Heather Swift said in a statement. “The more Michigan voters learn about Gary Peters the more they know they can’t trust him to put Michigan first.”

Silly.  And there is more.

As noted in this separate article from the same source:

“Sen. Jeanne Shaheen has invested tens of thousands of dollars in a French oil company that admitted to bribing Iranian officials.  [...]  Shaheen’s family owns between $50,000 and $100,000 of stock in Total S.A., the fourth-largest oil company in the world, through a mutual fund.”

Two scoops of silly.

And now for some facts.

Per the DOJ/SEC’s own allegations in the 2013 Total FCPA enforcement action, the vast majority of the alleged improper conduct took place between 1995 and 1997 (that is 17 to 19 years ago).  So old was the conduct giving rise to the Total enforcement action, that the DOJ made the unusual statement in the resolution document that “evidentiary challenges” were present for both parties given that “most of the underlying conduct occurred in the 1990s and early 2000s.”

Interesting Read

Speaking of those FCPA ripples, Hyperdynamics Corporation has been under FCPA scrutiny since 2013 and its recent annual report makes for an interesting read as to the wide-ranging business effects of FCPA scrutiny.  Among other things, the company disclosed approximately $7.5 million in the prior FY for legal and other professional fees associated with its FCPA scrutiny.  Not all issuers disclose pre-enforcement action professional fees and expenses, so when a company does, it provides an interesting data-point.

Chinese Issuers

I began writing about Chinese companies and the FCPA in this 2008 article at the beginning of the trend of Chinese companies listing shares on U.S. exchanges.  This 2009 post returned to the issue and noted that with the IPO market showing signs of life again, and with foreign companies increasingly turning to U.S. capital markets, and with many of these companies doing business in FCPA high-risk countries, the number of FCPA enforcement actions against foreign issuers is likely to increase.  That, of course, has turned out to be true.

Today, of course, is the IPO of Chinese company Alibaba, expected to be largest U.S. IPO ever.  The company’s business model does not exactly rank high in terms of FCPA risk, but recall that the FCPA has always been a law much broader than its name suggests because of the books and records and internal control provisions.

Even as to the anti-bribery provisions, it is at least worth noting, as highlighted in this recent New York Times article:

“Alibaba’s [recent acquisition of a company] provides an example of how the rapid growth of the private sector is also benefiting the country’s political elite, the so-called princelings, or relatives of high-ranking officials.  [...]  Although Alibaba declined to comment for this article, citing regulatory restrictions on public statements ahead of a public offering, the company has said it relies on the market — not political connections — to drive its business. “To those outsiders who stress companies’ various ‘backgrounds,’ we didn’t have them before, we don’t have them now, and in the future we won’t need them!” the company said in a statement in July after a report that several investment companies tied to the sons and grandsons of senior Communist Party leaders owned stakes in Alibaba, including New Horizon Capital, whose founders include the son of former Prime Minister Wen Jiabao.”

As noted in the article, over the past year JPMorgan and several other financial services companies have come under FCPA scrutiny for alleged relationships with princelings.

Get It Right!

It’s a basic issue.

If you are writing about the Foreign Corrupt Practices as a paid journalist you have an obligation to get it right and engage in due diligence before hitting the publish button.

This Corporate Counsel article states:

“It’s already been a big year for enforcement activity under the U.S. Foreign Corrupt Practices Act. In the first half of 2014 alone, the U.S. Department of Justice and the U.S. Securities and Exchange Commission initiated 15 actions against companies alleged to have violated the international corruption law.”

For the record, in the first half of 2014, there have been three corporate FCPA enforcement actions: HP, Alcoa and Marubeni.

*****

A good weekend to all.

 

Non-FCPA Legal Developments Should Cause Pause As To Certain FCPA Enforcement Theories

Thursday, July 31st, 2014

The substance of this post is the same as this August 2013 post regarding the civil RICO action involving Pemex and Siemens.  The only difference is that instead of a S.D. of New York decision that should cause pause as to certain FCPA enforcement theories, it is now a Second Circuit decision that should cause pause.

By way of background, the FCPA is explicit as to the jurisdictional scope of the anti-bribery provisions and states as follows as to foreign companies.

  • As to foreign issuers subject to 78dd-1 of the FCPA (i.e. foreign companies with shares registered on U.S. exchanges or otherwise required to file periodic reports with the SEC), the jurisdictional prong is “use of the mails or any means of instrumentality of interstate commerce corruptly in furtherance” of a bribery scheme.
  • As to persons other than U.S. persons (legal or natural) or foreign issuers, the FCPA was amended in 1998 to create an entire new category of “person” subject to the FCPA’s anti-bribery provisions.  See 78dd-3.  This category applies to non-U.S. actors and non-foreign issuers such as foreign private companies and foreign nationals and contains the following jurisdictional prong – ”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.”

In  short, as to foreign actors, the FCPA’s anti-bribery provisions contain explicit territorial requirements.

Several FCPA enforcement actions have been brought against foreign companies based on sparse U.S. jurisdiction allegations. For instance:

  • The Total enforcement action (the third largest in FCPA history in terms of fine and penalty amount) was based on a 1995 wire transfer of $500,000 (representing less than 1% of the alleged bribe payments at issue) from a New York based account.
  • The JGC Corp. enforcement action was based on the jurisdictional theory that certain alleged bribe payments flowed through U.S. bank accounts and that co-conspirators faxed or e-mailed information into the U.S. in furtherance of the bribery scheme.
  • The Magyar Telekom enforcement action was based on allegations that a company executive sent two e-mails to a foreign official from his U.S. based e-mail address that passed through, was stored on, and transmitted from servers located in the U.S. and that certain electronic communications made in furtherance of the alleged bribery scheme and the concealment of payments, including drafts of certain agreements and copies of certain contracts with intermediaries, were transmitted by company employees and others through U.S. interstate commerce or stored on computer servers located in the U.S.
  • The Bridgestone enforcement action was based on allegations that employees sent and received e-mail and fax communications to/from the U.S. in connection with the bribery scheme.
  • The Tenaris enforcement action was based on allegations that a payment to an agent in connection with the alleged bribery scheme was wired through an intermediary bank located in New York.

The above background is important in understanding why a recent Second Circuit decision should cause pause as to the above FCPA enforcement theories.

The decision involved a civil RICO action in which PEMEX alleged that Siemens, among others, violated RICO and engaged in common law fraud by bribing PEMEX officials to approve overrun and expense payments to to CONPROCA, a Mexican corporation completing an oil refinery rehabilitation project in Mexico.  According to the complaint, CONPROCA would receive payment from PEMEX’s Project Funding Master Trust (the “Master Trust”), organized under Delaware law, and managed by its then-trustee Bank of New York.  According to the complaint, The Master Trust paid each invoiced amount from its New York account to CONPROCA’s account at Citibank in New York.  The complaint further alleged that CONPROCA financed the project at issue ”through the issuance of bonds registered with the SEC, and through institutional credit, a substantial amount of which were issued by U.S. financial institutions and guaranteed by the Export Import Bank of the United States.”

The DOJ would surely take the position that the above U.S. jurisdictional allegations would be sufficient to bring a criminal FCPA enforcement action against a foreign company for bribing foreign officials.

Not so in a civil RICO action subjected to actual judicial scrutiny.

As noted in the prior August 2013 post, in ruling on the defendants’ motion to dismiss based on the argument that the RICO claims were extraterritorial, the S.D. of N.Y. first noted that because RICO is silent as to any extraterritorial application, the RICO statutes do not apply extraterritorially.  The court then observed that “when foreign actors were the primary operators, victims, and structure of a RICO claim” courts have properly concluded that the claims were extraterritoritial.  The S.D. of N.Y. then held that PEMEX’S RICO claims were extraterritorial because “they allege a foreign conspiracy against a foreign victim conducted by foreign defendants participating in foreign enterprises.”

As to those U.S. jurisdictional allegations, the S.D. of N.Y. stated:

“They fail to shift the weight of the fraudulent scheme away from Mexico. Seen simply, as a result of the claimed conspiracy PEMEX, the Mexican Plaintiff for whom the work was done in Mexico, paid fraudulent overcharges to CONPROCA, the Mexican corporation which did the work.  PEMEX officials in Mexico granted the challenged approvals to pay CONPROCA. The American trustee merely transferred the payments through two banks in New York.  The defendants’ bribery of PEMEX officials, and CONPROCA’s underbidding and submitting false claims under Mexican public works contracts, all occurred in Mexico. Thus, ‘it is implausible to accept that the thrust of the pattern of racketeering activity was directed at’ the United States.  The RICO claims are accordingly dismissed.”

PEMEX appealed the S.D. of N.Y. dismissal and last week the Second Circuit (see here) affirmed the dismissal.  In pertinent part, the Second Circuit’s order states:

“To the extent Pemex relies on several allegations of domestic activity to support its RICO claim, these, too, are insufficient.  “[S]imply alleging that some domestic conduct occurred cannot support a claim of domestic application.” [...]

The scheme alleged by Pemex possesses three minimal contacts with the United States: the financing was obtained here, the invoices were sent to the bank for payment, and the bank issued payment. Absent from the pleadings are any allegations that the scheme was directed from (or to) the United States. The activities involved in the alleged scheme–falsifying the invoices, the bribes, the approval of the false invoices–took place outside of the United States. The allegations of domestic conduct are simply insufficient to sustain RICO jurisdiction.”

Because of the general absence of substantive FCPA case law, one must often reference non-FCPA case law involving similar legal issues to best appreciate the many controversial aspects of FCPA enforcement.

As the above Second Circuit highlights, such case law should cause pause as to certain FCPA enforcement theories.

Is The DOJ Picking on Non-U.S. Companies and Individuals?

Wednesday, June 18th, 2014

Today’s post is from David Simon (Foley & Lardner).

*****

The debate over whether the United States should impose its values on the rest of the world through enforcement of the Foreign Corrupt Practices Act (“FCPA”) is over.

Almost everyone now rejects the cultural relativist argument—that there are different business cultures in different parts of the world, and that the United States should respect those differences and refrain from imposing our standards of doing business on U.S. companies operating abroad.  Rather, the rise of anti-corruption legislation, the proliferation of OECD standards, and increased enforcement—not only by the United States, but by many countries enforcing their own anticorruption laws—all show an emerging consensus that corruption of this nature is objectively bad.  The United States should be commended for leading the way on this.

Yet the recent enforcement activity of the Department of Justice[i] (“DOJ”) raises questions as to whether it is enforcing the FCPA in a manner consistent with the statute’s purpose (and the overarching purpose of domestic criminal law).  According to Deputy Assistant Attorney General James Cole, whose remarks are available here, that purpose is U.S.-centric:

“In enacting the FCPA … Congress recognized that foreign bribery had tarnished the image of U.S. businesses, impaired public confidence in the financial integrity of U.S. companies, and had hampered the functioning of markets, resulting in market inefficiencies, market instability, sub-standard products and services, and an unfair playing field.”

True enough, but it is hard to dispute that the focus of FCPA enforcement has to some extent shifted away from U.S. businesses and citizens.  As noted on FCPA Professor, eight of the top ten corporate FCPA settlements have involved non-U.S. businesses.

Likewise, the number of individual FCPA prosecutions against non-U.S. citizens has been increasing.  In recent years, individual criminal prosecutions have been brought against citizens of the Ukraine, Hungary, Slovakia, Switzerland, Venezuela, and Sri Lanka—and some involve very tenuous connections to the United States.

For example, as previously highlighted on this blog, in December 2011 the DOJ charged, among others, former Siemens executive and German national Stephan Signer under the FCPA based on conduct concerning the Argentine prong of the 2008 Siemens enforcement action.  The jurisdictional allegation against Signer was that he caused Siemens to transfer two wires to bank accounts in the United States in furtherance of a scheme to bribe Argentine government officials.[ii]

I do not argue that the FCPA does not permit the DOJ to charge non-U.S. citizens or companies.  Indeed, the 1998 amendments make it clear that Congress intended to give the DOJ that power, providing it with jurisdiction over several categories of non-U.S. entities and individuals.  It should be noted, however, that the DOJ has adopted a markedly broad interpretation of the FCPA’s territorial jurisdiction provisions, resulting in increasingly attenuated connections between the United States and individual defendants like Mr. Signer.  These connections may include merely “placing a telephone call or sending an e-mail, text message, or fax from, to, or through the United States.”[iii]  The legal significance of these increasingly tenuous jurisdictional justifications, previously referred to on FCPA Professor as “de facto extraterritorial jurisdiction,” remains a contentious, and related, issue.

The question I raise here is not whether the DOJ’s policy of enforcement is legal, but whether such a focus (or, at least, the perception of such a focus) on non-U.S. persons and companies is prudent and appropriate.  In describing the principles underlying the jurisdiction to prescribe, the American Law Institute (“ALI”) notes that the United States has “generally refrained from exercising jurisdiction where it would be unreasonable to do so.”[iv]  But “[a]ttempts by some states—notably the United States, to apply their law on the basis of very broad conceptions of territoriality or nationality [has bred] resentment and brought forth conflicting assertions of the rules of international law.”[v]  Indeed.

The concerns I have about this are not confined to FCPA enforcement.  The same trend is apparent in other areas of the law, such as economic sanctions and export controls.  The pattern of enforcement being concentrated against non-U.S. companies is shown just as sharply under those laws, with the recent economic sanctions against such firms as ING Bank ($619 million against Netherlands financial institution), Royal Bank of Scotland ($100 million against UK financial institution), and Credit Suisse ($536 million against Swiss financial institution).  With the U.S. Government reportedly considering the first $10 billion penalty for violations of U.S. economic sanctions laws against BNP Paribas (a French financial institution), French President Francois Hollande reportedly has personally lobbied against what is perceived as an unfair singling out of an EU financial institution for payment of such a large fine.  To the French Government, at least, the inequity of the U.S. Government assessing a fine that surpasses the entire yearly profits of one of the largest French financial institutions is plain.

The pattern of enforcement described above, should it be allowed to continue, sends a message to the rest of the world that the DOJ is mostly interested in big dollar settlements and soft foreign targets.  Is this the message we wish to send to our foreign allies in the fight against corruption?

Although the DOJ’s application of the FCPA (and other laws governing international business conduct)  to prosecute increasing numbers of foreign persons may be legal, and technically “reasonable” at international law, that does not necessarily make it appropriate or advisable.  Rather, these attempts to apply a broad conception of territoriality in pursuit of greater numbers of prosecutions and larger settlements may be more damaging than DOJ perceives.  This has the potential to undermine the U.S. position that anti-corruption is a global issue, and counteracts the progress the U.S. has made in altering its image from that of an overreaching imperialist power to a competent and moderate leader in the creation and enforcement of global anti-corruption norms.

*****

This article in today’s New York Times DealBook discusses many of the same issues highlighted in the above post.


[i] I focus here principally on the DOJ, not the SEC.  The DOJ, of course, is a law enforcement agency charged with enforcing criminal laws.  The SEC is a regulatory agency, and the companies and individuals subject to its jurisdiction essentially opt in by taking advantage of the U.S.’s financial markets.

[ii] Indictment at 40, United States v. Uriel Sharef, et. al., 11CR-1-56 (S.D.N.Y 2011), available at http://www.justice.gov/criminal/fraud/fcpa/cases/sharef-uriel/2011-12-12-siemens-ndictment.pdf.

[iii] See U.S. Dep’t of Justice & U.S. Sec. Exch. Comm’n, A Resource Guide to the U.S. Foreign Corrupt Practices Act, 11 (Nov. 14, 2012), available at http://www.justice.gov/criminal/fraud/fcpa/guide.pdf.

[iv] Restatement (Third) of the Foreign Relations Law of the United States, § 403 cmt. a. (1986).

[v] Id. at Chapter One: Jurisdiction to Prescribe, Subchapter A.: Principles of Jurisdiction to Prescribe, Introductory Note.

The First FCPA Enforcement Action Against A Foreign Issuer, Plus An Interesting Issue

Tuesday, May 13th, 2014

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

In 1996, the SEC brought this civil complaint against Montedison, an Italian corporation with headquarters in Milan that had interests in the agro-industry, chemical, energy and engineering sectors.  The enforcement action was principally a financial fraud case as the SEC alleged that the company committed “financial fraud by falsifying documents to inflate artificially the company’s financial statements.”  (See here for the SEC’s release).

However, the enforcement action also included allegations that Montedison violated the FCPA’s books and records and internal control provisions based on allegations that the company concealed “hundreds of million of dollars of payments that, among other things, were used to bribe politicians in Italy and other persons.”

As described in the SEC’s complaint, Montedison wanted to enter into a joint venture with an Italian state energy agency and “determined to secure political backing” to change the terms of the underlying joint venture agreement as well as overturn a judge’s decision that had the effect of making the proposed transaction more difficult.  According to the complaint, “Montedison determined that to achieve these ends, the company would need to pay extensive bribes.”

The complaint then states:

“In an attempt to do so, Montedison management entered into an arrangement with a Rome real estate developer (the “Developer”), who was developing real estate complexes in Rome for Montedison at that time.  Under their agreement, Montedison, directly or through companies it controlled, effected numerous real estate purchases and sales at artificially high prices.  The artificial prices had the effect of transferring hundreds of million of dollars to the Developer.  On information and belief, the Developer used this money to bribe politicians in Italy and other persons on Montedison’s behalf.”

For example, the complaint alleges that Montedison, through a wholly-owned subsidiary, overpaid the Developer approximately $95 million and agreed to pay an additional $123 million “for properties that were either owned by, or had connections to, various politicians.

As noted in the SEC’s complaint, “despite these efforts, Montedison’s management was ultimately unsuccessful” in its bribery scheme.

According to the complaint:

“The fraudulent conduct … continued undetected for several years because of a seriously deficient internal control environment at Montedison.  In fact, Montedison’s internal controls were so deficient that, according to Montedison, neither the company itself, nor its auditors, have been able to reconstruct previously what occurred and who was responsible.”

The Montedison enforcement action was the first SEC Foreign Corrupt Practices Act enforcement action against a foreign issuer and was based on the company having American Depository Receipts ADRs listed on the New York Stock Exchange.

Montedison did not immediately resolve the SEC’s complaint as is the norm today.  Rather, the 1996 complaint was resolved in 2001.   As noted in the SEC’s release Montedison was ordered to pay a civil penalty of $300,000 and resolved the enforcement action without admitting nor denying liability for the allegations in the complaint.  According to the release, “the fraudulent conduct was disclosed only after new management was appointed when Montedison disclosed it was unable to service its bank debt.  Virtually all of the former senior management at Montedison responsible for the fraud were convicted by Italian criminal authorities and were sued by the company.”

The release notes as follows.

“Montedison was acquired by Compart, S.p.A., in late 2000 and its ADRs were delisted. Compart then changed its name to Montedison. No securities of Compart are listed for sale by U.S. stock exchanges. Compart, which agreed to the settlement on behalf of the former Montedison, was not a defendant in the Commission’s complaint.”

In original source media reports, Paul Gerlach (SEC Associate Enforcement Director at the time) stated:

“The case’s message is if you are a foreign company wanting to trade stock here, you are going to have to adhere to the same reporting, accounting and internal control standards followed by U.S. companies.”

Of interest, a 1996 Washington Post article about the enforcement action noted:

“The commission has been locked in debate with the NYSE for years over whether foreign companies that raise money from U.S. investors should be held to the same reporting standards as U.S. companies. SEC officials have argued that loosening the standards would hurt U.S. investors. The exchange has responded that overly stringent rules will discourage foreign companies from raising capital in the United States and erode the preeminent position of U.S. securities markets.”

Why, despite the SEC’s allegations, was Montedison not charged with FCPA anti-bribery violations?  Jurisdictional issues aside, according to a knowledgeable source at the SEC at the time, there was a belief that there were no “foreign” officials involved because Montedison, an Italian company, allegedly bribed Italian officials.

It’s an interesting question.

Does the “foreign” in official mean as it relates to the specific company at issue or as to the U.S.?

I believe that the legislative history supports the later, but will also add that Congress likely never understood that it was legislating as to foreign issuers when the FCPA was passed in 1977 because there were few foreign issuers.  Today, there are approximately 1,000 foreign issuers.  (See here and here).

In most FCPA enforcement actions against foreign issuers (Siemens, Daimler, Total, Technip, Alcatel-Lucent, etc.) the question is not relevant as, for example, German or French officials were not among the officials allegedly bribed.