Archive for the ‘Foreign Issuers’ Category

Issues To Consider From The Recent BHP Billiton Enforcement Action

Wednesday, May 27th, 2015

IssuesThis recent post highlighted the SEC FCPA enforcement action against BHP Billiton.

This post continues the analysis by highlighting various issues to consider from the enforcement action.

Record-Setting SEC Civil Penalty

At $25 million, the BHP Billiton enforcement action clearly did not set any records in terms of overall settlement amount. (See here for the current top ten FCPA enforcement actions in terms of overall settlement amount).

In most SEC FCPA enforcement actions, the settlement amount comprises (in any given year 95%+) of disgorgement and prejudgment interest.

However, the BHP Billiton comprised solely a $25 million civil penalty.

This is believed to be, by a large margin, the largest-ever SEC civil penalty in an FCPA enforcement action.  Number 2 on this list is believed to be against ABB in 2010 (settlement amount included a $16.5 million civil penalty).

Moreover, the BHP Billiton enforcement action is the second-largest SEC only FCPA enforcement action of all-time behind the $29 million SEC only FCPA enforcement action against Eli Lilly in 2012 (see here for the prior post). (Note: an SEC only FCPA enforcement action means an enforcement action that involved only an SEC component, not an SEC settlement amount in an enforcement action that also involved a DOJ component).

That the BHP Billiton enforcement action – a travel and entertainment action – represents the largest SEC FCPA penalty ever and the second largest SEC only FCPA enforcement action of all-time is nothing short of remarkable and further to the point that FCPA settlement amounts (and components thereof) seem to be getting bigger each year … just because.  (See here for the prior post).

The Absurdity of Just Don’t Bribe

In the minds of some, the FCPA is simple.  Just don’t bribe.

More sophisticated observers recognize the absurdity of such an absolutist position.

In short, a company can do things with customer or prospective customer x and it is generally just fine.  But when the same company does the same thing with customer or prospective customer y, the U.S. government just might call it bribery.

The BHP Billiton enforcement action highlights this dynamic.

To recap, BHP Billiton was an official sponsor of the 2008 Summer Olympics in Beijing, China.  As such, the company received priority access to tickets, hospitality suites, and accommodations for the games.  Not surprisingly, the company invited 650 people (customers, suppliers, etc.) to attend the Olympic Games with three to four day hospitality packages.

According to the SEC’s findings, approximately 75% of these invitees were not alleged “foreign officials.”  Thus no problem.

But lo and behold, approximately 25% of these people invited were alleged “foreign officials” primarily from Africa and Asia and an even smaller percentage of these invited “foreign officials” actually attended the Olympic Games.

The end result, according to the SEC, bribery.

Sure, BHP Billiton was not charged with FCPA anti-bribery violations, but does anyone seriously question whether this enforcement action was regarding anything but the alleged “foreign officials.”?

Avoiding the “D” Word

BHP Billiton was not the subject of a DOJ enforcement action.

To those who overuse the “D” word, this is yet another example of a DOJ “declination.”

However, consider this.

As a foreign issuer, the only way BHP Billiton could have been found to be in violation of the FCPA’s anti-bribery provisions is to the extent “[U.S.] mails or any means or instrumentality of interstate commerce” was used in furtherance of the alleged travel and entertainment expenditures.  The SEC’s enforcement action contained no such findings.

Sure, the DOJ also can bring criminal enforcement actions – including against foreign issuers – for willful violations of the FCPA’s books and records and internal controls provisions, but the SEC’s findings surely did not warrant such treatment.

Time-Line

Like most FCPA inquiries by the DOJ/SEC, BHP Billiton’s FCPA scrutiny followed a glacial pace.

As the company previously disclosed, it received requests for information in August 2009 from the SEC.

Thus, from start to finish it took approximately six years.

BHP Billiton Becomes The Most Recent Foreign Company To Pay Uncle Sam

Thursday, May 21st, 2015

Uncle Sam3BHP Billiton, a company based in Australia and the United Kingdom, was an official sponsor of the 2008 Summer Olympics in Beijing, China.  As such, the company received priority access to tickets, hospitality suites, and accommodations for the games.  Not surprisingly, the company invited 650 people (customers, suppliers, etc.) to attend the Olympic Games with three to four day hospitality packages.

But lo and behold, approximately 25% of these people invited were alleged “foreign officials” primarily from Africa and Asia and an even smaller percentage of these invited “foreign officials” actually attended the Olympic Games.

The end result seven years later?

Why of course $25 million to the U.S. Treasury because BHP Billiton had American Depositary Shares that trade on a U.S. exchange.

Yesterday the SEC released this administrative cease and desist order concerning BHP Billiton Ltd. and BHP Billiton Plc.

In summary fashion, the SEC order states:

“This matter concerns BHPB’s failure to devise and maintain sufficient internal controls over a global hospitality program that the company hosted in connection with its sponsorship of the 2008 Beijing Summer Olympic Games. BHPB invited approximately 176 government officials and employees of state-owned enterprises (collectively, “government officials”) to attend the Olympics at BHPB’s expense. The majority of these invitations were extended to government officials from countries in Africa and Asia that had well-known histories of corruption. The three to four day hospitality packages included event tickets, luxury hotel accommodations, meals, other hospitality, and, in many instances, offers of business-class airfare for government officials and their guests. BHPB informed its employees that “[o]ne of the core objectives [of the Olympic sponsorship] is to maximize the commercial investment made in the Games through assisting [BHPB] to strengthen relationships with key local and global stakeholders, e.g.: Government Ministers, Suppliers and Customers,” and that the hospitality program was “a primary vehicle to ensure this goal is achieved.”

BHPB recognized that inviting government officials to the Olympics created a heightened risk of violating anti-corruption laws and the company’s own Guide to Business Conduct, but the internal controls it developed and relied upon in an effort to address this risk were insufficient. As a result, BHPB invited government officials who were directly involved in, or in a position to influence, pending contract negotiations, efforts to obtain access rights, regulatory actions, or business dealings affecting BHPB in multiple countries. In addition, BHPB’s books and records, namely certain internal forms that employees prepared in order to invite a government official to the Olympics, did not, in reasonable detail, accurately and fairly reflect BHPB’s pending negotiations or business dealings with the government official at the time of the invitation.

As a result of this conduct, BHPB violated the internal controls and books and records provisions of the Foreign Corrupt Practices Act (“FCPA”).”

Under the heading “BHPB’s Hospitality Program for the 2008 Beijing Summer Olympic Games,” the order states:

“In December 2005, BHPB and the Beijing Organizing Committee announced their agreement for BHPB to become an official sponsor of the 2008 Beijing Olympic Games. Under this agreement, BHPB paid a sponsorship fee and supplied the raw materials used to make the Olympic medals. In exchange, BHPB received the rights to use the Olympic trademark and other intellectual property in public announcements and advertisements, as well as priority access to tickets, hospitality suites, and accommodations in Beijing during the August 2008 Games.

BHPB established an Olympic Sponsorship Steering Committee (“OSSC”) to plan, oversee, and implement its sponsorship program, which involved multiple different branding, promotion, and relationship-building initiatives. The chair of the OSSC, who also was the chair of the Ethics Panel, reported directly to BHPB’s CEO.

One of BHPB’s objectives for the sponsorship was “to reinforce and develop relationships with key stakeholders” in China and in “product and investor markets, and regions where we have or would like to have operations.” BHPB’s strategy for accomplishing its objectives included “[u]tiliz[ing] Olympic hospitality to motivate China-based stakeholders, including customers, suppliers, government and media, to enhance business opportunities for BHP Billiton in China” and “[u]tiliz[ing] Olympic hospitality to build relationships with stakeholders from product and investor markets, and regions where we have or would like to have operations.”

One of the company’s sponsorship-related initiatives was a global hospitality program under which BHPB invited guests from around the world, including foreign government officials and representatives of state-owned enterprises, to attend the Beijing Olympics on three to four day hospitality packages. The hospitality packages included luxury hotel accommodations, meals, event tickets, and sightseeing excursions, at a cost of approximately $12,000 to $16,000 per package. In addition, BHPB executives approved the offer of round trip business class airfare to approximately 51 foreign government officials, as well as the airfares for 35 of these government officials’ spouses or guests. Apart from BHPB’s desire to enhance business opportunities by strengthening relationships with its guests, these trips had no other business purpose.

An internal e-mail to CSG presidents and other senior BHPB business managers emphasized the importance of the hospitality program to the success of BHPB’s sponsorship, stating, “[a]s you know we have made a commitment to support the Beijing Olympic Games in 2008. One of the core objectives is to maximise the commercial investment made in the Games through assisting [BHPB] to strengthen relationships with key local and global stakeholders, e.g.: Government Ministers, Suppliers and Customers. The BHP Billiton Hospitality Program is a primary vehicle to ensure this goal is achieved.”

In early 2007, BHPB employees prepared country-specific Olympic Leverage Plans, which summarized BHPB’s business and Olympic-related objectives. In a number of instances, these plans discussed inviting key stakeholders, including government officials, to help BHPB develop relationships with a view to increasing or maintaining its business opportunities. For example, the Olympic Leverage Plan prepared for one country stated that BHPB’s business objectives in that country included “gaining access to regions that will provide growth for [BHPB’s] business” and “gaining port access.” The plan further stated that the hospitality program would “provide useful relationship building opportunity for . . . stakeholders” and that the invitees would include the country’s Minister of Mines and Minister of Transport. The Olympic Leverage Plan for another country, while not specifically addressing the hospitality program, stated that one of the goals for the sponsorship was “us[ing] Olympics program to strengthen and build the govt’s confidence and relationship with [BHPB], to help facilitate approvals for future projects.”

After Olympic Leverage Plans were prepared for each country, BHPB business managers submitted lists of potential invitees and were instructed to rank them in order of importance, with “Category A” being those “most critical to the business.” Internal BHPB presentations discussed the need to establish “the business benefit” of an Olympic invitation.

Eventually, BHPB invited approximately 650 people to attend the Beijing Olympics, including 176 government officials, 98 of whom were representatives of state-owned enterprises that were BHPB customers or suppliers. BHPB also invited the spouses of 102 of these government officials. Most of the invited government officials were from countries in Africa and Asia where there was a known risk of corruption. Sixty of these government officials ultimately attended, 24 of them with their spouses or guests. A number of other invited government officials accepted their invitations, but then cancelled before the Olympics began.”

Under the heading “BHPB’s Insufficient Internal Controls over the Olympic Hospitality Program,” the order states:

“Early in its planning for the Olympics, BHPB identified the risk that inviting government officials to the Olympics could potentially violate anti-corruption laws and the company’s own Guide to Business Conduct. The company relied on its existing operating model and an Olympic-specific internal approval process to address this risk. However, these internal controls, and BHPB’s implementation of them, were insufficient.

BHPB developed a hospitality application which business managers were required to complete for any individuals, including government officials, whom they wished to invite. These applications included the following questions:

9. What business obligation exists or is expected to develop between the proposed invitee and BHP Billiton?

10. Is BHP Billiton negotiating or considering any contract, license agreement or seeking access rights with a third party where the proposed invitee is in a position to influence the outcome of that negotiation?

11. Do you believe that the offer of the proposed hospitality would be likely to create an impression that there is an improper connection between the provision of the hospitality and the business that is being negotiated, considered or conducted, or in any way might be perceived as breaching the Company’s Guide to Business Conduct?

If yes, please provide details.

12. Are there other matters relating to the relationship between BHP Billiton and the proposed invitee that you believe should be considered in relation to the provision of hospitality having regard to BHP Billiton’s Guide to Business Conduct?

BHPB required each such application to be filled out and signed by an employee with knowledge of the invitee’s relationship with the company, and approved in writing by the president of the relevant CSG or the BHPB country president. A cover sheet that accompanied the blank forms included a short description of anti-bribery provisions in the Guide to Business Conduct and urged employees to re-read the section of the Guide concerning travel, entertainment, and gifts before completing the form. However, the controls did not adequately address the antibribery risks associated with offering expensive travel and entertainment packages to government officials.

First, BHPB did not require independent legal or compliance review of hospitality applications by someone outside the CSG that was submitting the application, and did not clearly communicate to its employees the fact that the Ethics Panel was not reviewing and approving each invitation to a government official. On the one hand, BHPB’s internal website stated that the hospitality applications were subject to “scrutiny by the Ethics Panel [steering committee],” and the hospitality applications themselves stated that, “[r]equests for travel and accompanying spouses will be approved by the Olympic Sponsorship Steering Committee and the Global Ethics Panel Sub-Committee.” E-mails sent to some BHPB business managers by a member of the OSSC staff stated that the Ethics Panel had “approved” their applications.

However, other than reviewing approximately 10 hospitality applications for government officials in mid-2007 in order to assess the invitation process, the OSSC and the Ethics Panel subcommittee did not review the appropriateness of individual hospitality applications or airfare requests. The Ethics Panel’s charter stated that its role simply was to provide advice on ethical and compliance matters, and that “accountability rest[ed] with business leaders.” Members of the Ethics Panel understood that, consistent with their charter, their role with respect to implementation of the hospitality program was purely advisory. As a result, business managers had sole responsibility for reconciling the competing goals of inviting guests – including government officials – who would “maximize [BHPB’s] commercial investment made in the Olympic Games” without violating anti-bribery laws.

Second, some hospitality applications were not accurate or complete. Many applications identified an employee of a state-owned enterprise as a “Customer,” but failed to identify the invitee as a “Representative of Government.” In addition, a number of applications contained “No” responses to Question 10, even when BHPB had pending negotiations, efforts to obtain access rights, regulatory actions, or other business dealings in which the government official was directly involved or in a position to influence. Furthermore, in a number of instances, BHPB business people were provided with examples of language that had been used by other employees when responding to Questions 10 and 11 in order to explain why an invitation was appropriate, even when there was a “Yes” response to Questions 10-12. As a result, many hospitality applications contained the exact same statements in response to Questions 10 and 11, rather than a description of the specific facts and circumstances relating to that government official.

Third, while BHPB had an annual Guide to Business Conduct review and certification process, and generalized training, it did not provide its employees and executives with any specific training on how to fill out the hospitality forms or how to evaluate whether an invitation to a government official complied with the Guide. During the relevant period, this portion of the Guide included a case example concerning a negotiation between BHPB and a Ministry for Planning in a particular country, in which the Minister indicated that it would help his consideration of the company’s application if the Minister and his wife could visit BHPB’s operations in Australia. The example stated that “this kind of situation requires the utmost caution and you must consult senior management. You must not offer to provide anything that could be reasonably regarded as an attempt to unduly influence the Minister’s decision. This means that you must not pay for travel by the Minister’s wife.” However, BHPB did not provide any guidance to its senior managers on how they should apply this portion of the Guide when determining whether to approve invitations and airfares for government officials’ spouses.

Fourth, although the form asked whether any business was “expected to develop” with the invitee, BHPB did not institute a process for updating hospitality applications or reassessing the appropriateness of invitations to government officials if conditions changed. Almost all of the hospitality applications relating to government officials were approved and submitted in mid-2007. However, BHPB did not require hospitality forms to be updated, or invitations to be reconsidered, in those situations when government officials subsequently became involved in negotiations, attempts by BHPB to obtain access rights, or other pending matters.

Fifth, hospitality applications were submitted by individual CSGs, and generally only reflected negotiations between the government official and that CSG. While lists of invitees were circulated among senior BHPB business managers, BHPB had no process in place to determine whether the invited government official also was involved in other CSGs’ negotiations, efforts to obtain access rights, or other business dealings.”

The order next states, under the heading “As a Result of its Insufficient Internal Controls, BHPB Invited Government Officials who were Directly Involved in, or in a Position to Influence, Pending Negotiations, Regulatory Actions, or Business Dealings with BHPB,” as follows:

“As a result of its failure to design and maintain sufficient internal controls over the Olympic global hospitality program, BHPB invited a number of government officials who were directly involved with, or in a position to influence, pending negotiations, efforts by BHPB to obtain access rights, or other pending matters.”

Republic of Burundi

In mid-2007, BHPB’s MinEx group submitted a hospitality application form to invite the as-yet-unidentified Burundi Minister of Mines and spouse to the Olympics, with airfare included. Because BHPB was not currently in negotiations with the Minister of Mines at the time, the hospitality application form contained a “No” response to Question 10. However, BHPB had a joint venture (“JV”) in Burundi with an entity that was in danger of losing a nickel exploration permit unless it made a substantial near-term financial investment in the project or negotiated a renewal or amendment of the permit. Under Burundi law, the Minister of Mines was responsible for reviewing an application to renew or amend a mining permit and presenting the application to the country’s Council of Ministers for final approval.

In late 2007 and early 2008, BHPB began to negotiate directly with the newly appointed Minister of Mines to extend and modify the JV’s nickel exploration permit. However, BHPB employees did not update the hospitality application or take steps to re-review the appropriateness of the invitation after these negotiations began. As noted above, no such re-review was required by the internal controls that BHPB relied upon for the Olympic hospitality program. The Minister of Mines and his wife attended the Olympics as BHPB’s guests for four days.

Republic of the Philippines

In July 2007, BHPB became embroiled in a dispute with a local JV partner concerning a prospective nickel mining operation in the Philippines. The JV partner sued BHPB in local court and filed requests with the country’s Secretary of Department of Environment and Resources (“DENR”), requesting reversion of the mining rights that the JV partner had assigned to the JV.

In October 2007, a BHPB employee from the Stainless Steel Materials CSG submitted a hospitality application to invite the Secretary and his spouse to attend the Olympics, with airfare included. The completed application contained a “Yes” response to Question 10, but only described a technical services agreement that BHPB was considering submitting to the DENR for the Secretary’s approval. Question 10 of the hospitality form did not explicitly require, and the employee’s response did not provide, any information about the Secretary’s role in reviewing the JV partner’s reversion request or the fact that the President of the Philippines had designated the Secretary to mediate the dispute between BHPB and its JV partner. The form included a “No” response to Question 11.

The Secretary accepted BHPB’s invitation in December 2007. In March 2008, he issued a decision denying the JV partner’s reversion request and continued during the ensuing months to mediate the parties’ dispute. In late July, BHPB became concerned that the company’s JV partner had learned about the Olympics invitation. As a result, BHPB withdrew the invitation shortly before the Olympics began.

Democratic Republic of the Congo

In mid-2007, MinEx submitted a hospitality application form to invite the Governor of the Katanga Province in the Democratic Republic of the Congo (the “DRC”) and his spouse, with airfare included. Following its June 2007 review of 10 invitations to government officials, the Ethics Panel subcommittee advised MinEx to provide more detail about whether the invitation involved Gecamines, a state-owned entity with which BHPB was attempting to negotiate a copper exploration deal. In response, MinEx submitted a revised application that contained a “No” response to Question 10, stating, “[t]he issuing and management of mineral titles and negotiations with third parties in DRC have nothing to do with the Governor’s roles and responsibilities. Although [BHPB] are currently engaged in negotiations with State copper company, Gecamines, the Governor of Katanga will have no influence in these dealings.”

Later in 2007, however, BHPB employees held several meetings with the Governor. Internal summaries of these meetings noted that the Governor was “a close ally of [the DRC] President” and that having the Governor as BHPB’s ally “could be the key to unlock a successful entry in a deal with Gecamines.” In spite of obtaining this information after making the initial decision to invite the Governor of Katanga and his wife to the Olympics, BHPB employees did not update the hospitality application form or take steps to re-review the appropriateness of the invitation. No such re-review was required under the internal controls that BHPB relied upon for the Olympic hospitality program. The Governor accepted the invitation, but then cancelled before the Olympics.

Republic of Guinea

In May 2007, MinEx submitted a hospitality application to invite the Guinea Minister of Mines and his spouse to the Olympics, with airfare included. The application contained a “No” response to Question 10, and in response to Question 11 it stated, “No. A sound professional relationship with the Guinea Ministry of Mines is key for the success of the [BHPB] exploration and mining business in this country.” Following its June 2007 review of 10 invitations to government officials, the Ethics Panel subcommittee advised MinEx to provide additional information concerning this invitation. The MinEx employee who had prepared the original form asked BHPB’s Guinea country president to respond to the request for information concerning any pending negotiations with the Minister. The country president replied that “of course” there would be “further negotiations” regarding the upcoming renewal of a bauxite mining concession held by BHPB and the government’s intention to review all existing mining concessions, but that the response to Question 11 was “key in that regard.”

This information was not passed along to the Ethics Panel subcommittee, however, and the form was not updated to accurately reflect the pending negotiations across all of the CSGs operating in Guinea. Because they received no response to the Guinea country president’s email, MinEx officials mistakenly understood that the Ethics Panel had approved the invitation. The Minister accepted the invitation on behalf of himself and his wife in January 2008, but cancelled shortly before the Olympics began.”

Based on the above findings, the order states:

“As a result of the conduct described above, BHPB violated [the FCPA's books and records provisions] because its books and records, namely certain Olympic hospitality applications, did not, in reasonable detail, accurately and fairly reflect pending negotiations or business dealings between BHPB and government officials invited to the Olympics. BHPB violated [the FCPA's internal controls provisions] because it did not devise and maintain internal accounting controls over the Olympic hospitality program that were sufficient to provide reasonable assurances that access to assets and transactions were in executed in accordance with management’s authorization.”

Under the heading “BHPB’s Cooperation and Remedial Efforts,” the order states:

“In response to the Commission’s investigation, BHPB retained outside counsel to assist it with conducting an extensive internal investigation into potential improper conduct in the jurisdictions that were the subject of the staff’s inquiry. BHPB provided significant cooperation with the Commission’s investigation by voluntarily producing large volumes of business, financial, and accounting documents from around the world in response to the staff’s requests, and by voluntarily producing translations of key documents. BHPB’s counsel conducted scores of interviews and provided the staff with regular reports on the findings of its internal investigation.

BHPB also has undertaken significant remedial actions. BHPB has created a compliance group within its legal department that is independent from the business units. This compliance group is responsible for FCPA compliance, among other things, and reports directly to BHPB’s general counsel and Audit Committee. In addition, it has reviewed its existing anticorruption compliance program and implemented other changes. These include embedding independent anti-corruption managers into its businesses and further enhancing its policies and procedures concerning hospitality, gift giving, use of third party agents, business partners, and other high-risk compliance areas. BHPB also has enhanced its financial and auditing controls, including policies to specifically address conducting business in high-risk markets. BHPB has conducted extensive employee training on anti-corruption issues and overhauled its processes for conducting internal investigations of potential violations of anti-corruption laws.”

The order further states:

“During a one-year term …, Respondents [BHP Billiton] shall report to the Commission staff on the operation of BHPB’s FCPA and anti-corruption compliance program. If Respondents discover credible evidence, not already reported to the Commission staff, that: (1) questionable or corrupt payments or questionable or corrupt transfers of property or interests may have been offered, promised, paid, or authorized by Respondents, or any entity or person while working directly for Respondents, to any government official; (2) that related false books and records have been maintained; or (3) that Respondents’ internal controls failed to detect and prevent such conduct, Respondents shall promptly report such conduct to the Commission staff.”

During the one-year period, BHP Billiton shall also report to the SEC “on the operation of [its] FCPA and anti-corruption compliance program” and “shall undertaken one follow-up review.”

In this SEC release, Andrew Ceresney (Director of the SEC’s Enforcement Division) stated:

“BHP Billiton footed the bill for foreign government officials to attend the Olympics while they were in a position to help the company with its business or regulatory endeavors. BHP Billiton recognized that inviting government officials to the Olympics created a heightened risk of violating anti-corruption laws, yet the company failed to implement sufficient internal controls to address that heightened risk.”

Antonia Chion (Associate Director of the SEC’s Enforcement Division) added:

“A ‘check the box’ compliance approach of forms over substance is not enough to comply with the FCPA. Although BHP Billiton put some internal controls in place around its Olympic hospitality program, the company failed to provide adequate training to its employees and did not implement procedures to ensure meaningful preparation, review, and approval of the invitations.”

As noted in the SEC release:

“The SEC’s order finds that BHP Billiton violated [the FCPA's books and records and internal controls provions].  The settlement, in which the company neither admits nor denies the SEC’s findings, reflects BHP Billiton’s remedial efforts and cooperation with the SEC’s investigation and requires the company to report to the SEC on the operation of its FCPA and anti-corruption compliance program for a one-year period.”

BHP Billiton agreed to pay a $25 million penalty to settle the SEC’s charges.

This BHP Billiton release states in full as follows.

  • U.S. Department of Justice (DoJ) to take no action
  • U.S. Securities and Exchange Commission (SEC) investigation that commenced in 2009 resolved on all matters
  • No findings of bribery or corrupt intent
  • DOJ’s ‘no action’ and SEC resolution conclude the U.S. investigations
  • SEC imposes a civil penalty relating to accounting provisions of the FCPA
  • SEC notes BHP Billiton’s “significant cooperation” and “significant remedial actions”
  • SEC findings relate to BHP Billiton’s internal controls and books and records governing its hospitality program at the 2008 Beijing Olympic Games

BHP Billiton today announced the resolution of the previously disclosed investigation by the SEC into potential breaches of the United States Foreign Corrupt Practices Act (FCPA). The DOJ has also completed its investigation into BHP Billiton without taking any action.

The investigations related primarily to previously terminated minerals exploration and development efforts as well as hospitality provided by the Company at the 2008 Beijing Olympic Games. This concludes the US investigations on all matters.

BHP Billiton will continue to cooperate with the Australian Federal Police investigation, which was announced in 2013.

The matter is being resolved with the SEC pursuant to an administrative order which imposes a US$25 million civil penalty. The SEC Order makes no findings of corrupt intent or bribery by BHP Billiton.

The findings announced today by the SEC relate to a hospitality program hosted by BHP Billiton which supported its sponsorship of the 2008 Beijing Olympic Games. As part of this program, the Company invited customers, suppliers, business partners, and government officials, along with Company employees, to the Olympic Games. While BHP Billiton made efforts at the time to address the risks related to inviting government officials to the Olympics, the controls it relied upon were insufficient to satisfy the civil books and records and internal accounting controls requirements of the U.S. statute.

The SEC noted the “significant cooperation” BHP Billiton provided during the extensive investigation, which commenced in 2009. It also noted the “significant remedial actions” the Company has taken over the past five years to enhance its compliance program.

At the time of its sponsorship of the 2008 Beijing Olympics and Paralympics, BHP Billiton had no independent compliance function. Instead, accountability for complying with the Company’s anti-corruption policies, which were set out in the Company’s Guide to Business Conduct, was vested in its operating business units. The Company has since created an independent compliance function that reports to the head of the legal function and the Risk & Audit Committee of the BHP Billiton Board. Today this function would be required to approve any offer of hospitality of this kind to a government official. Under the SEC Order, BHP Billiton will self-report on its compliance program for twelve months.

BHP Billiton CEO Andrew Mackenzie said, “We have fully cooperated with the SEC throughout this process. We have taken the appropriate remedial actions and developed a world class compliance program that builds on the strong policies we have had in place. BHP Billiton operates a global resources business and recognises that the highest standards of business conduct are an essential part of our operations. Our Company has learned from this experience and is better and stronger as a result.”

Scott Muller (Davis Polk & Wardwell) represented BHP Billiton.  See here for Davis Polk’s press release. According to the release, 8 attorneys worked on the matter.

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.