Archive for the ‘Foreign Official’ Category

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

Wednesday, February 11th, 2015

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

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

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

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

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

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

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

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

[...]

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

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

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

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

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

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

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

Friday Roundup

Friday, January 16th, 2015

Roundup2Hollywood film studios, more FBI agents, asset recovery, quotable, and for the reading stack.  It’s all here in the Friday roundup.

Hollywood Film Studios

A recent Wall Street Journal article went in-depth regarding the FCPA scrutiny of Hollywood film studios doing business in China. According to the article, Sony received a subpoena from the SEC in June 2013 regarding possible violations of the U.S. Foreign Corrupt Practices Act.  The article states:

“The SEC’s questions to Sony dealt primarily with potential bribery related to the release of “Resident Evil: Afterlife” in China in 2010, according to email communication between Sony’s in-house and outside legal counsel. A Sony-led investigation that followed the SEC subpoena examined the company’s distribution efforts more broadly, the emails show. The subpoena indicates an escalation of an inquiry that began in 2012 when the SEC requested that every major studio voluntarily provide information about their movie-distribution practices in China, a request that was publicly reported at the time. However the SEC’s specific concerns weren’t disclosed nor was it previously known that the agency had stepped up its probe with a subpoena. Sony documents show that the SEC refers to its probe as “In the Matter of Lions Gate Entertainment Corp,” indicating that the rival Hollywood studio behind “The Hunger Games” has been asked questions as well.”

Many FCPA enforcement actions have, as a root cause, a foreign trade barrier or distortion.  This appears to be true in the case of the Hollywood film studios.  As stated in the article, the companies ran into “China’s quota and censorship systems to secure distribution for their films in that country.”  According to the article:

“Hollywood studios are barred from distributing films on their own in China, but instead work with the state-owned China Film Group to secure one of the 34 highly coveted spots offered each year for imported movies. [Third party distribution firms] help studios navigate the bureaucracy.”

More FBI Agents

The Wall Street Journal reports:

“The Federal Bureau of Investigation’s foreign corruption program will more than triple the number of agents focused on overseas bribery this year to more than 30 from around 10, according to bureau officials. The agents will focus on both sides of corruption, hunting down executives that pay off foreign officials, while also helping other nations recoup funds stolen by corrupt leaders. The FBI usually can’t directly arrest corrupt foreign leaders, but at the request of foreign law enforcement the bureau can help locate funds stolen by kleptocrats. [...]  “With the growing global economy and the growing nature of international commerce with globalization of more companies and economies, it’s creating more opportunities for the potential of FCPA and corruption,” said Joseph Campbell, assistant director of the bureau’s criminal division, in an interview. The newly assigned agents will work out of field offices in New York, Washington, D.C., San Francisco, Los Angeles, Miami and Boston, with backup from forensic analysts and other specialists in headquarters, which is also located in the capital. Currently, the bureau’s foreign anti-corruption field agents are managed out of a field office in Washington, D.C. and split their time while pursuing other white collar crimes, bureau officials said.”

Asset Recovery

As part of its Kleptocracy Asset Recovery Initiative, the DOJ recently announced the filing of a “civil forfeiture complaint seeking the forfeiture of nine properties worth approximately $1,528,000 that were allegedly purchased with funds traceable to a $2 million bribe paid by a Honduran information-technology company to the former Executive Director of the Honduran Institute of Social Security.”

According to the DOJ:

“From 2010 to 2014, Dr. Mario Roberto Zelaya Rojas, 46, of Tegucigalpa, Honduras, served as the Executive Director of the Honduran Institute of Social Security (HISS), a Honduran Government agency that provides social security services, including workers’ compensation, retirement, maternity, and death benefits.  According to allegations in the forfeiture complaint, Zelaya solicited and accepted $2.08 million in bribes from Compania De Servicios Multiples, S. de R. L. (COSEM) in exchange for prioritizing and expediting payments owed to COSEM under a $19 million contract with HISS.  Zelaya also allegedly instructed COSEM to make bribe payments to two members of the Board of Directors of HISS charged with overseeing the COSEM contract.  To conceal the illicit payments, COSEM allegedly sent the bribes through its affiliate company, CA Technologies.  As further alleged in the complaint, the bribe proceeds were then laundered into the United States and used by Zelaya and his brother, Carlos Alberto Zelaya Rojas, to acquire real estate in the New Orleans area.  Certain properties were titled in the name of companies nominally controlled by Zelaya’s brother in an effort to conceal the illicit source of the funds as well as the beneficial owner.  The current action seeks forfeiture of nine properties acquired with the proceeds of Zelaya’s alleged bribery scheme.”

In the DOJ’s release, Assistant Attorney General Leslie Caldwell stated:

“Our action today highlights how the Criminal Division’s Kleptocracy Initiative, with our network of law enforcement partners around the globe, will trace and recover the ill-gotten gains of corrupt officials.  Criminals should make no mistake:  the United States is not a safe haven for the proceeds of your crimes.  If you hide or invest your stolen money here, we will use all the legal tools we have to find it and seize it.”

Quotable

In this Global Investigations Review article, Timothy Dickinson (Paul Hastings and a veteran of the FCPA bar) states:

“Ten years ago, I would have been happy to bet anyone a doughnut that I could accurately define what a foreign official is. Now, with various court definitions and a lack of clarity from the DoJ, I fear I might actually lose my doughnut.”

In this piece about the SEC’s internal controls enforcement theories, Michael Shepard (Hogan Lovells) states:

“Beneath the surface of these developments [the increased use of the internal controls provisions] is a disconnect about what the internal controls provisions actually require. The government — and especially the SEC — has settled on an interpretation of the internal controls provision that is at odds with the understanding of many in-house finance professionals about what internal controls are intended to address. Ask corporate finance professionals about internal controls at their companies and you will likely get an answer about processes designed to protect the company’s assets at a level that would materially impact the company’s financial statements. Ask your friendly neighborhood SEC investigator about internal controls and you will instead get inquiries about the exponentially smaller level of amounts of money that would be enough to influence a low-paid public official in a poor third-world country. Not only is the SEC looking at controls on a more microscopic level, but its predilection to pursue internal controls charges sometimes seems based on an interpretation of the FCPA that borders on strict liability. Circumstantial evidence of a bribery violation — such as evidence that some money may have left the company without proper authorization or accounting records — translates for the SEC into proof that the company’s controls were inadequate. Statutory elements of reasonableness and scienter get short shrift in a world in which the SEC aggressively pushes internal controls charges, and the vast majority of companies remain predisposed to settle.”

Reading Stack

Paul Barrett at Bloomberg BusinessWeek goes in-depth about the FCPA charges pending against Joseph Sigelman in an article titled “Does This Man Look Like a Felon to You?”

From the New Yorker, “Can Corruption Be Erradicated?”

“[C]orruption has always permeated so many fields of human endeavor that it may be not a corruption of anything—but, rather, a regrettable feature of our natural condition. Accountable government is an ideal, to be sure. It may also be an aberration.”

[O]ur conceptual vocabulary for understanding [corruption], let alone combatting it, remains conspicuously meagre. The very term “corruption” is so inclusive as to be almost meaningless, encompassing bribery, nepotism, bid-rigging, embezzlement, extortion, vote-buying, price-fixing, protection rackets, and a hundred other varieties of fraud.”

From Bloomberg BNA “As FCPA Complexity Increase, Corporate Interest in Self-Disclosure Wanes.”

*****

A good weekend to all.

The “Foreign Officials” Of 2014

Wednesday, January 14th, 2015

foreign official2A “foreign official.”

Without one, there can be no FCPA anti-bribery violation (civil or criminal).  Who were the alleged “foreign officials” of 2014?

This post, describes the alleged “foreign officials” from 2014 corporate DOJ and SEC FCPA enforcement actions.

There were 10 core corporate enforcement actions in 2014.  Of the 10 enforcement actions, 6 (60%) involved, in whole or in part, employees of alleged state-owned or state-controlled entities (“SOEs”).  These entities ranged from power and electric companies, hospitals and labs, an oil and gas company, and an aluminium smelter.

By way of comparison, in 2013, 55% of corporate enforcement actions involved, in whole or in part, employees of alleged SOEs (see here). In 2012, 42% of corporate enforcement actions involved, in whole or in part, employees of alleged SOEs (see here at pages 348-353).  In 2011, 81% of corporate enforcement actions involved, in whole or in part, employees of alleged SOEs (see here at pages 29-41).  In 2010, 60% of corporate FCPA enforcement actions involved, in whole or in part, employees of alleged SOEs (see here at pages 108-119).  In 2009, 66% of corporate FCPA enforcement actions involved, in whole or in part, employees of alleged SOEs (see here at pages 410-44).

In 2014, in an issue of first impression for an appellate court, the 11th Circuit set forth a control and function test for whether an alleged SOE can be “instrumentality” under the FCPA such that its employees are “foreign officials” under the FCPA.  As highlighted here and more extensively in my Supreme Court amicus brief supporting the cert petition, there were many flaws in the 11th Circuit’s reasoning.  The Supreme Court declined to hear the case.  As to whether Congress intended employees of SOEs to be “foreign officials” under the FCPA, see here for my “foreign official” declaration.

The remainder of this post describes (as per DOJ/SEC allegations) the “foreign officials” of 2014.  As is apparent from the specific descriptions below, in certain instances the enforcement agencies describe the “foreign official” with reasonable specificity; in other instances with virtually no specificity.

[Note:  certain of the enforcement actions below technically only involved FCPA books and records and internal control charges.  As most readers know, actual charges in most FCPA enforcement actions hinge on voluntary disclosure, cooperation, collateral consequences, and other non-legal issues.  Thus, even if an FCPA enforcement action is resolved without FCPA anti-bribery charges, the actions remain very much about the "foreign officials" involved.]

Alstom Entities

DOJ

Individuals associated with Indonesia’s alleged state-owned and state-controlled electricity company, Perusahaan Listrik Negara (“PLN”).  The alleged “foreign officials” are described as follows.

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

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

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

Individuals associated with Saudi Electric Company (“SEC”), Saudi Arabia’s alleged state-owned and state-controlled electricity company.

Individuals assocaited with the Egyptian Electricity Holding Company, the alleged state-owned and state-controlled electricity company in Egypt. Individuals associated with the Egyptian Electricity Transmission Company, the alleged state-owned and state-controlled electricity transmission company. Asem Elgawhart (an employee of Bechtel Corporation a U.S. company) who was assigned by Bechtel to be the General Manager of Power Generation Engineering and Services Company (PGESCo), a joint venture between Bechtel and the Egyptian Electricity Holding Company.

Individuals associated with the Bahamas Electricity Corporation, the alleged state-owned and state-controlled power company.

Individuals associated with Taipei’s Department of Rapid Transit System.

Avon Entities

DOJ

Government officials in China including officials from the Guandong Food and Drug Administration.

SEC

Same as above.

Various Chinese government officials, including government officials responsible for awarding a test license, and subsequently a direct sales business license, that would allow a company to utilize direct door-to-door selling in China. Certain of the Chinese “foreign officials” are alleged to be individuals associated with the Ministry of Commerce and the State Administration for Industry and Commerce.

Dallas Airmotive

DOJ

Official 1 (a Sub-Officer in the Brazilian Air Force – BAF), Official 2 (a Sergeant in the BAF), Official 3 (a Captain for the Governor of the Brazilian state of Roraima).

Officials of the Peruvian Air Force and the office of the Governor of the Argentinean State of San Juan.

Bio-Rad

DOJ

Individuals associated with government customers in Russia, including the Russian Ministry of Health

SEC

Same as above.

Officials at government-owned hospitals and laboratories in Vietnam.

Government officials in Thailand.

Bruker

SEC

Individuals employed by state owned entities (“SOEs”) in China.

Layne Christensen

SEC

Tax officials in Mali, Guinea, and the Democratic Republic of the Congo.

Customs officials in Burkina Faso and the Democratic Republic of Congo.

Police, border patrol, immigration officials, and labor inspectors in Burkina Faso, Guinea, Tanzania, and the Democratic Republic of Congo.

Smith & Wesson

SEC

Pakistani police officials.

Indonesian police officials.

Attempts to make improper payments to Turkish police and Turkish military officials, as well as foreign officials in Nepal and Bangladesh.

HP Entities

DOJ

Individuals associated with the Russian Office of the Prosecutor General of Russia (“GPO” or “GP”).  As alleged, the Russian government used a state-owned entity organized under the Department of Affairs of the President of the Russian Federation, to manage the GPO project tender and execution. “Russian Official A,” a director of a Russian government agency who assumed responsibility for the GPO Project as well as “Individual A,” an associate of Russian Official A.

A Polish Official (the Director of Information and Communications Technology within the Polish National Police Agency (“KGP”) which was part of the Polish Ministry of the Interior and Administration.

Individuals associated with Pemex, Mexico’s alleged state-owned petroleum company.  Official A is described as Pemex’s Chief Operating Officer and Official B is described as Pemex’s Chief Information Officer.

SEC

Same as above.

Marubeni

DOJ

Individuals associated with Indonesia’s alleged state-owned and state-controlled electricity company, Perusahaan Listrik Negara (“PLN”).  The alleged “foreign officials” are described as follows.

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

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

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

Alcoa

DOJ

Individuals associated with Aluminium Bahrain B.S.C. (Alba), an aluminium smelter operating in Bahrain.  Alba is described as follows.

“The state holding company of the Kingdom of Bahrain, the Mumtalakat, which was controlled by the Ministry of Finance, held 77% of the shares of Alba.  The Saudi Basic Industries Corp. (SABIC), which was majority-owned and controlled by the government of the Kingdom of Saudi Arabia, held a 20 percent minority stake in Alba, and three percent of Alba’s shares were held by a German investment group.  The majority of profits earned by Alba belonged to the Mumtalakat, through part of the profit was permitted to be used by Alba for its operations.  The Ministry of Finance had to approve any change in Alba’s capital structure and had to be consulted on any major capital projects or contracts material to Alba’s operations.  Members of the Royal Family of Bahrain and representatives of the government sat on the Board of Directors of Alba, controlled its board, and had primary authority in selecting its chief executive and chief financial officer.”

The alleged “foreign officials” are described as follows.

“Official A was a member of Bahrain’s Royal Family and served as a member of the board of directors of Alba from 1982 to 1997.  From 1988 to 1990, Official A was also a member of Alba’s tender committee, which was responsible in part for awarding major contracts to Alba’s suppliers, such as Alcoa entities supplying alumina to Alba.”

“Official B served on Alba’s board from at least 1986 to 2000 as a representative of SABIC.  From 1988 to 1990, Official B also served on Alba’s tender committee with Official A.”

“Official C was a senior member of Bahrain’s Royal Family, a senior government official of Bahrain from at least 1995 to 2005, and served as a high-ranking officer of Alba from 1995 to 2005.  As a high-ranking officer of Alba, Official C was extremely influential over the assignment of contracts to Alba’s suppliers.  Official C relied on Consultant A to assist him in opening international bank accounts using various aliases or shell entities for the purpose of receiving corrupt funds from kickbacks from Alba’s suppliers.”

“Official D was a senior member of Bahrain’s Royal Family and a senior government official of Bahrain for many decades.  Official C was a close associate of Official D.  Official D’s office was required to be consulted before Alba could commit to a long term alumina supply contract with Alcoa.”

SEC

Same as above.

Issues To Consider From The Alstom Action

Friday, January 2nd, 2015

IssuesThis recent post dived deep into the Alstom FCPA enforcement action.

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

 

A Real Head-Scratcher

Alstom entities engaged in conduct in violation of the FCPA.  This is clear from the DOJ’s allegations and consistent with DOJ enforcement theories.  Yet, if the DOJ’s FCPA enforcement program is to be viewed as legitimate and credible, the charged conduct must fit (for lack of a better term) the crime.

The charges against Alstom S.A. are a real head-scratcher.

The conventional wisdom for why the Alstom action involved only a DOJ (and not SEC) component is that Alstom ceased being an issuer in 2004 (in other words 10 years prior to the enforcement action).

Yet, the actual criminal charges Alstom pleaded guilty to – violations of the FCPA’s books and records and internal controls provisions –  were based on Alstom’s status as an issuer (as only issuers are subject to these substantive provisions).

In other words, Alstom pleaded guilty to substantive legal provisions in 2014 that last applied to the company in 2004.

This free-for-all, anything goes, as long as the enforcement agencies collect the money nature of FCPA enforcement undermines the legitimacy and credibility of FCPA enforcement.

Enforcement Action Origins

What were the origins of the Alstom enforcement action?

It appears to be a 2011 Swiss enforcement action that began in October 2007.  (See here, here and here).

Indeed, in briefing in an individual enforcement action (Lawrence Hoskins) connected to the Alstom Indonesia conduct, the DOJ stated:

“When the Government began investigating this case, it sought evidence from various countries including Switzerland [...].  The Government obtained orders pursuant to 18 USC 3292, tolling the statute of limitations in this case for the shorter of three years or the time it took to receive the evidence sought.  The first request, to Switzerland, was transmitted on September 22, 2010, and the tolling order reflects tolling beginning on that date.  Switzerland provided responses to the request on December 23, 2013.”

In the Swiss action, “Alstom Network Schweiz AG … was fined CHF2.5 million for negligence in implementing proper controls to prevent bribery by company officials in Latvia, Tunisia and Malaysia, and it was ordered to pay an additional CHF36 million for profits connected to the negligence.”

The foreign law enforcement origins of the Alstom action are typical of other enforcement actions in the Top Ten List of FCPA settlements (Siemens and the Bonny Island, Nigeria enforcement actions – KBR/Halliburton, Snamprogetti/ENI, Technip, and JGC Corp).

No Monitor

On one level, it seems odd that the Alstom enforcement action did not involve a corporate monitor as a condition of settlement. After all, the $772 million enforcement action was the largest DOJ FCPA enforcement action of all-time and per the DOJ “Alstom’s corruption scheme was sustained over more than a decade and across several continents. It was astounding in its breadth, its brazenness and its worldwide consequences.”

However, the resolution documents note “that Alstom is already subject to monitoring requirements pursuant to a February 2012 World Bank Resolution.” (See here).  As stated in the DOJ resolution documents: “in the event that the Integrity Compliance Office [of the World Bank] does not certify that the Company has satisfied the monitoring requirements contained in the World Bank Resolution, the Company shall be required to retain an Independent Compliance Monitor.”

Moreover, the vast majority of the alleged improper conduct in the DOJ enforcement action resided in business units that will soon be part of General Electric in 2015.  Thus, to impose a monitor on Alstom would, in effect, have been to impose a monitor on General Electric.

Third Party Red Flags

Most FCPA enforcement actions result from the conduct of third parties and ineffective corporate controls over third parties.

In this regard, the following paragraph from the Alstom enforcement is a dandy regarding third party red flags.

“A number of consultants that Alstom hired raised a number of “red flags” under Alstom’s own internal policies.  Certain consultants proposed for retention had no expertise or experience in the industry sector in which Alstom was attempting to secure or execute the project.  Other consultants were located in a country different than the project country.  At other times, the consultants asked to be paid in a currency or in a bank account located in a country different than where the consultant and the project were located.  In multiple instances, more than one consultant was retained on the same project, ostensibly to perform the very same services.  Despite, these “red flags,” the consultants were nevertheless retained without meaningful scrutiny.”

FCPA enforcement actions of course are no laughing matter, but the following specific allegations sort of make one chuckle.

“Alstom did not perform any due diligence on the consultant even though the consultant had no knowledge about, or experience in, the power industry.  Rather, the information alleges, the consultant “sold furniture and leather products, and exported chemical products and spare parts.”

“An Alstom entity formally retained a consultant on a [rapid transit] project even thought the consultant did not have the requisite expertise in the transport sector.  According to the information, the consultant’s expertise was as a “wholesaler of cigarettes, wines and pianos.”

More Information Needed As to Lack of Cooperation

Repeatedly in the resolution documents, the DOJ states that Alstom did not “cooperate.”

“The Defendant initially failed to cooperate with the Department’s investigation, responding only to the Department’s subpoenas to the Defendant’s subsidiaries.  Approximately one year into the investigation, the Defendant provided limited cooperation, but still did not fully cooperate with the Department’s investigation.”

“The Company and its parent initially failed to cooperate with the Department’s investigation, responding only to the Department’s subpoena.  Approximately one year into the investigation, the Company and its parent provided limited cooperation, but still did not fully cooperate with the Department’s investigation.”

Likewise, at the DOJ press conference, Assistant Attorney General Caldwell stated:

“The guilty pleas and resolutions announced today also highlight what can happen when corporations refuse to disclose wrongdoing and refuse to cooperate with the department’s efforts to identify and prosecute culpable individuals.”

[...]

“Alstom did not voluntarily disclose the misconduct to law enforcement authorities, and Alstom refused to cooperate in a meaningful way during the first several years of the investigation.”

If the DOJ wants its cooperation message to be fully absorbed by the corporate community, the DOJ should have been more specific about Alstom’s lack of “cooperation.”

Moreover, if “responding only to the DOJ’s subpoena” is considered lack of cooperation by the DOJ, this is troubling.  (See here for the prior post “Does DOJ Expect FCPA Counsel to Role Over and Play Dead?”).

A “Foreign Official” Stretch?

It was a relatively minor allegation in the context of the overall Alstom enforcement action, but one which caught my eye because of its extraordinarily broad implication.

As highlighted in this previous post, Asem Elgawhart was employed by Bechtel Corporation (a U.S. company) and was assigned by Bechtel to be the General Manager of Power Generation Engineering and Services Company (PGESCo), a joint venture between Bechtel and Egyptian Electricity Holding Company (the alleged “state-owned and state-controlled electricity company in Egypt”). According to the DOJ, Elgawhart “used his position and authority as the General Manager of a power generation company to solicit and obtain millions of dollars of kickbacks for his personal benefit from U.S. and foreign power companies that were attempting to secure lucrative contracts to perform power-related services.” “In total,” the DOJ alleged, “Elgawhart received more than $5 million in kickbacks to help secure more than $2 billion in contracts for the kickback-paying companies, all of which he concealed from his employer, from bidding companies that did not pay kickbacks and from the U.S. Internal Revenue Service.” Based on these allegations, and as indicated in this DOJ release, Elgawhart was charged in a 8-count indictment with mail and wire fraud, money laundering and various tax offenses.

In the Alstom enforcement action, PGESCo and Elgawhart are described as follows:

As to Egypt, the information concerns bidding on various projects with the Egyptian Electricity Holding Company (“EEHC”), the state-owned and state-controlled electricity company in Egypt.  According to the information, “EEHC was not itself responsible for conducting the bidding [on projects], and instead relied on Power Generation Engineering & Services Co. (“PGESCo”), which was controlled by an acted on behalf of EEHC.”

PGESCo was controlled by and acted on behalf of EEHC. PGESCo worked “for or on behalf of’ EEHC, within the meaning of the FCPA, Title 15, United States Code, Section 78dd-l (f)( 1) [the FCPA's "foreign official" definition].

According to the DOJ, Alstom used a consultant whose primary purpose “was not to provide legitimate consulting services to Alstom and its subsidiaries but was instead to make payments to Egyptian officials, including Asem Elgawhary who oversaw the bidding process.”

In short, in the Alstom action the DOJ alleged that Elgawhary, a Bechtel Corporation employee, was an Egyptian “foreign official.” This is an extraordinarily broad “foreign official” interpretation with implications for any person (privately employed) working on foreign projects with participation by a foreign government department, agency or instrumentality.

Rhetoric Undermined

As highlighted in this post, Assistant Attorney General Leslie Caldwell recently defended the DOJ’s frequent use of NPAs and DPAs by stating that the DOJ is able to achieve through such negotiated settlements reforms, compliance controls, and all sorts of behavioral change compared to what it could achieve without use of NPAs and DPAs.

As highlighted in the prior post, the notion that the DOJ is powerless to effect corporate change through old-fashion law enforcement (that is enforcing the FCPA without use of NPAs and DPAs) is plainly false.

Indeed, the Alstom and Alstom Network Schweiz AG plea agreements contain substantively the same corporate compliance program and reporting obligations as the Alstom Power and Alstom Grid DPAs.

False Certification

A likely overlooked allegation in the Alstom enforcement action concerns bidding on various grid projects with alleged state-owned and state-controlled entities in Egypt. According to the charging documents, certain of these projects were “funded, at least in part, by the United States Agency for International Development (“USAID”)” and “an Alstom entity “repeatedly submitted false certifications to USAID in connection with these projects, and did not disclose that consultants were being used, that commissions were being paid, or that unlawful payments were being made.”

These allegations are similar to DOJ allegations in the BAE enforcement action (an enforcement action that alleged conduct that could have served as the basis for FCPA violations, but resulted in no actual FCPA charges).  As noted in this previous post, in the BAE action, the DOJ “filed a criminal charge against BAE Systems charging that the multinational defense contractor conspired to impede the lawful functions of the Departments of Defense and State, made false statements to the Departments of Defense and Justice about establishing an effective anti-corruption compliance program to ensure conformance with the Foreign Corrupt Practices Act and paid hundreds of millions of dollars in undisclosed commission payments in violation of U.S. export control laws.”

How to Count FCPA Enforcement Actions

It is a basic issue:  how to count FCPA enforcement actions.

I use the “core” approach to counting FCPA enforcement actions (see here), an approach endorsed by the DOJ, but many in FCPA Inc. use various different creative counting methods that significantly distort FCPA enforcement statistics (see here).

Pursuant to the “core” approach, the Alstom action was one core enforcement action even though it involved the following components all based, in whole or in part, on the same core conduct.

  • Alstom S.A.
  • Alstom Network Schweiz AG
  • Alstom Power Inc.
  • Alstom Grid Inc.
  • Individual enforcement actions against Frederic Pierucci, David Rothschild, William Pomponi, and Lawrence Hoskins.

Counting the above as 8 FCPA enforcement actions instead of 1 core action highly distorts FCPA enforcement statistics and impacts the denominator of just about any FCPA enforcement statistic imaginable.

With several 2014 FCPA Year in Reviews to be published in January, one needs to be cognizant of these creative counting methods.

Sigelman Challenges DOJ’s “Foreign Official” Interpretation And Application

Friday, November 21st, 2014

EcopetrolIn January 2014, the DOJ announced FCPA and related charges against former executives of PetroTiger Ltd., a British Virgin Islands oil and gas company with operations in Colombia and offices in New Jersey, “for their alleged participation in a scheme to pay bribes to foreign government officials in violation of the FCPA, to defraud PetroTiger, and to launder proceeds of those crimes.” The individuals charged were former co-CEOs of PetroTiger Joseph Sigelman and Knut Hammarskjold, and former general counsel Gregory Weisman.

As detailed in this prior post, the alleged foreign official was “an official at Ecopetrol [who] had influence over the approval and award of contracts by Ecopetrol.”  Ecopetrol was alleged to be “the state-owned and state-controlled petroleum company in Colombia.”

Unlike his co-defendants Hammarskjold and Weisman who previously pleaded guilty, Sigelman is challenging various aspects of the DOJ’s case, including its interpretation and application of the “foreign official” element.

The introduction of this October 29th motion to dismiss states (internal citations omitted) as follows:

“The indictment alleges that Joseph Sigelman violated the FCPA by authorizing a set of payments in 2010 to David Duran, who the Government claims was an employee of a Colombian corporation called Ecopetrol S.A. (Ecopetrol). Sigelman can be liable only if Duran was a “foreign official,” a term defined to include “any officer or employee of a foreign government or any . . . agency, or instrumentality thereof.” To be an “agency” or “instrumentality,” an entity must perform a governmental function.

The indictment is correct that Ecopetrol used to fit this description. Colombia created Ecopetrol in 1951 to be the official state body in charge of regulating the nation’s hydrocarbon resources. At the same time, Ecopetrol held a mandate to explore and extract oil and gas to sell in the open market. For decades, it carried out these dual functions, albeit lethargically. Being a government regulator stifled Ecopetrol’s ability to compete with private oil-and-gas companies. Its access to credit markets was limited. The Colombian government’s budget, rather than business judgment, guided decisionmaking.

Colombia grew fed up with the lack of commercial success. So in 2003, it split Ecopetrol in two. All of Ecopetrol’s regulatory and other governmental functions as well as its public interest mandate were assigned to a new state entity, the National Hydrocarbon Agency. Once divested of its government authority and functions, Ecopetrol became solely a commercial enterprise, its exclusive mission being to thrive in the highly competitive energy market. To further this mission and encourage Ecopetrol to be more competitive, Colombia amended its laws to treat Ecopetrol like Chevron, ExxonMobil, Royal Dutch Shell, or any other private oil-and-gas company. Ecopetrol became a corporation with shares of stock that could trade on public markets. It lost its privileged access to Colombian oil fields and stopped receiving any special benefits from the Colombian government, such as subsidies, dispensations, and tax exemptions. It became subject to private commercial law. Thus, Colombia’s Commercial Code (which applies to private companies) rather than Colombia’s General Contract Law for the Public Administration (which applies to public establishments) would govern Ecopetrol’s contracts. The labor code applicable to private companies would regulate Ecopetrol’s relations with its employees.

In short, as of 2010, when the events in this case took place, Ecopetrol was, as a matter of Colombian law, an ordinary market participant bereft of any governmental function. As the Government conceded in United States v. Esquenazi, an entity devoid of a governmental function is not an “agency” or “instrumentality” of a foreign government under the FCPA, regardless of whether a foreign government owns a majority of the stock of that entity.2 So even if the factual allegations in the indictment were true, the payments to David Duran would, as a matter of law, not violate the FCPA because they were not made to a “foreign official.” Thus, the FCPA charges must be dismissed.

Any contrary interpretation that stretches the definition of “foreign official” to cover employees of entities that exercise no public function, like Duran, would render the FCPA void for vagueness as applied to Sigelman. Nowhere in the statute’s provisions is there fair notice that it is unlawful to authorize payments to an employee of a corporation that does not perform any governmental functions. Permitting the Government to use the FCPA—a statute whose purpose is to penalize and discourage corruption of government officials—to prosecute payments made to employees of corporations with no governmental functions would leave charging decisions to the whims and personal views of prosecutors, with no reasonable foundation in the words of the statute or the intent of Congress. Thus, if the Government’s reading of the statute is correct, the charges against Sigelman under the FCPAmust also be dismissed on vagueness grounds.

Accordingly, Sigelman respectfully requests dismissal of all charges against him under the FCPA: namely, Counts Two, Three, and Four in their entirety, plus the portions of Counts One and Five alleging that Sigelman conspired to violate, and conspired to transfer money with the intent to violate, the FCPA. Sigelman further requests that this Court hold a hearing on issues of Colombian law pursuant to Federal Rule of Criminal Procedure 26.1.”

Sigeman’s motion is supported by an expert declaration from Carlos Gustavo Arrieta Padilla who, among other previous positions, was the Attorney Inspector General of Colombia and a Justice of the State Council  (the Colombian Supreme Court for administrative and certain constitutional matters).

Sigelman is represented by Patrick Egan (Fox Rothschild) and William Burck (Quinn Emanuel).

In this November 12th opposition memorandum, the DOJ states under the heading “Introduction” as follows.

“Defendant’s latest motion seeks the dismissal of counts corresponding to the FCPA charges in this case. Defendant claims that although the Government included well-pled allegations in the Indictment that the bribe recipient was a “foreign official,” as that term is defined in the FCPA, and was employed by an “instrumentality,” as that term is defined in the FCPA, the Court should look to facts outside the Indictment – including, among other things, a 22-page declaration by an individual who Defendant deems an “expert” – to remove this issue from the purview of the jury and dismiss the counts pretrial. Defendant is incorrect. As every single other court which has addressed this very issue has concluded, this is an issue of fact for the jury to decide after the presentation of all of the evidence. Indeed, the Government intends to submit substantial evidence at trial to establish beyond a reasonable doubt that the bribe recipient was a foreign official under the FCPA.

Moreover, and also as every other court to confront this very issue has found, the FCPA is not unconstitutionally vague as applied to Defendant. Importantly, the FCPA requires the Government to prove that Defendant acted corruptly and willfully, which is wholly inconsistent with the notion that Defendant did not have fair notice.

Defendant’s most recent motion to dismiss should be denied.”

In its brief, the DOJ states, in pertinent part, that “some of the facts about Ecopetrol that the Government may rely on at trial, and that clearly demonstrate that Ecopetrol is an “instrumentality” under the FCPA, include:

Ecopetrol was created by the government of Colombia;

The Colombian government is required to maintain at least an 80% interest in Ecopetrol, and during the relevant time period Ecopetrol was 89.9% owned by the Colombian government;

The Colombian government has the ability to select a majority of Ecopetrol’s board of directors, and during the relevant time period the board of directors included the Minister of Mines and Energy, the Minister of Finance, and the Director of the National Planning Agency;

The Colombian government has the right and ability to “undertake projects which may not be in [Ecopetrol’s] best interest” but are instead in the government’s interest;

Ecopetrol “reserve[s] the right to plead sovereign immunity under the United States Foreign Sovereign Immunities Act of 1976 with respect to actions brought against [it] under United States federal securities laws or any state securities laws” by any of Ecopetrol’s minority shareholders;

Ecopetrol prepares its “financial statements in accordance with Colombian Government Entity GAAP”;

Before Ecopetrol “can issue any debt in the international and local capital markets or incur any other type of indebtedness, the Government [of Colombia], through the Ministry of Finance and Public Credit, must authorize the issuance of such debt and [Ecopetrol] must register external debt with the Colombian Central Bank”;

The Colombian government “may require [Ecopetrol’s] Board of Directors to declare dividends in an amount that result in [Ecopetrol] having to reduce [its] capital expenditures thereby negatively affecting [its] prospects, results of operations and financial condition”;

Prior to 2004, any oil company wishing to engage in oil-related services in Colombia had to enter into an agreement with Ecopetrol. Ecopetrol remains, to this day, “as counterparty to the contracts which [it] signed prior to January 1, 2004” which include the Mansarovar contract. “The contracts on which [Ecopetrol is] the counterparty all have clauses which provide, at [Ecopetrol’s] sole option, for extensions. If [Ecopetrol] do[es] not extend the contracts, the right to exploit the hydrocarbon reserves which are the subject of the contract revert to [Ecopetrol], and [Ecopetrol] ha[s] the right to exploit them for an indefinite period at no additional cost to [Ecopetrol].” For example, as recently as June 2010 (in the middle of the charged FCPA conspiracy), “the ‘Santiago de las Atalayas Contract’, one of the most important exploration and production contracts due to its amount of crude oil and natural gas reserves, terminated and the right to exploit the hydrocarbon reserves subject to this Contract reverted back to [Ecopetrol].”; and

Employees of Ecopetrol, to this day, are treated as public officials for purposes of Colombia’s public corruption laws, and in fact have been prosecuted for such actions in recent years.”

As stated in the DOJ’s brief, “these are not attributes of a private commercial enterprise – they are the attributes of a foreign government instrumentality.”

In this November 14th reply letter to the court, Sigelman’s lawyers write.

“The validity of the government’s FCPA charges rests upon its assertion that Ecopetrol was an “instrumentality.”  It is undisputed that performing a governmental function is a sine qua non of being an “instrumentality” under the FCPA.  Yet nowhere in the indictment or its 28 pages of briefing responsive to Mr. Sigelman’s instant motion does the United States identify any Colombian governmental function performed by Ecopetrol in 2010.”

For more on “foreign official” issues, see my “foreign official” declaration and my amicus brief in the recent cert petition to the Supreme Court in U.S. v. Esquenazi (a petition the court denied).