Archive for the ‘Foreign Official’ Category

Friday Roundup

Friday, December 27th, 2013

“Scurrilous and hypocritical,” scrutiny alerts and updates, a foreign official brain teaser, quotable, and for the reading stack.  It’s all here in the Friday roundup.

“Scurrilous and Hypocritical”

As I have highlighted for years (see approximately 25 separate posts under the subject matter heading double standard), there is a double standard concerning corporate interaction with “foreign officials” under the FCPA and corporate interaction with U.S. officials under other U.S. laws – specifically 18 U.S.C. 201.

Commenting on JPMorgan’s current FCPA scrutiny concerning its alleged hiring practices in China, former SEC Commissioner Arthur Levitt writes, in pertinent part, in this Wall Street Journal opinion piece as follows.

“[A]ccording to financial regulators now looking into the hiring practices of major U.S. banks and multinationals in China—some of which have employed members of influential Chinese families—anyone who once hired me [Levitt's father was the New York state comptroller] might have been violating ethical and legal standards. Securities and Exchange Commission regulators now suggest that such hiring overseas is a form of untoward influence, akin to bribing foreign officials to win business.

The accusation is scurrilous and hypocritical. If you walk the halls of any institution in the U.S.—Congress, federal courthouses, large corporations, the White House, American embassies and even the offices of the SEC—you are likely to run into friends and family members of powerful and wealthy people.

[...]

Whether this is right or wrong, unfair or fair, is not the point. It is hypocritical of financial regulators to criticize—even penalize—practices abroad that are commonplace in Washington, New York and other seats of political and economic power.

Were the SEC to be completely consistent in its approach, it would have to come down hard on the same practices here in the U.S. And the agency would have a field day. Members of Congress and the executive branch regularly hire the children of major donors. Regulators would find scores of examples of men and women, occupying internships and entry-level positions in U.S. corporations, who were hired on the say-so of someone much higher up in the organization.

[...]

[I]f we were to deny multinational companies the ability to hire locally recommended talent, where do we draw the line? Are spouses of influential officials off-limits, but not their children? What about siblings? If not siblings, what about cousins, uncles, nephews? And then there is the issue of friends: How can a financial regulator know whether a friend of someone in power received a job offer in good faith or as a form of influence peddling?

I would hate to imagine what would happen if we applied the same kind of sliding scale to the many people who have received job offers by way of their familial relationships. If that happened, there aren’t many people in finance who would escape the accusation that their hiring was the byproduct of influence peddling.”

Scrutiny Alerts and Updates

This Macau Business Daily report notes the timing of a $10 million pledge by Nasdaq-listed Melco Crown Entertainment for a cultural project in collaboration with the Tokyo University of the Arts.  As noted in the article, the company needs various government permissions to increase its presence in Japan.  As noted in this prior post, among others, casino operators including Wynn Resorts have been the subject of FCPA scrutiny based on similar charitable contributions.

This previous post highlighted how Transparency International urged the DOJ to investigate the conduct of Walters Power International  (an Oklahoma based company that supplies, develops, services and manages electrical generation power plants around the world) in connection with power plant projects in Pakistan.  This recent article in The News International reports that Walters Power has “been cleared of any misconduct by the US Department of Justice.”  The article notes:

“Following [TI's] complaint, the US Department of Justice launched a lengthy inquiry against WPIL [...]. On Oct 31, 2012, it informed WPIL’s [...] lawyers in the US that the inquiry was being closed as no evidence of wrongdoing could be found against the companies. The clearance letter, a copy of which is available with The News, said: “Over the past several months, your client, Walters Power International Ltd., has responded to a number of inquires by the Department of Justice, Criminal Division, Fraud Section, into possible violations of the Foreign Corrupt Practices Act. You have also responded to inquiries on behalf of Pakistan Power Resources, LLC, and Walters Power International, LLC.  As you are aware, the Supreme Court of Pakistan issued an order on March 30, 2012, that declared the country’s rental power plant contracts void ab initio. Our review of that order and related pleadings has revealed no allegations of bribery in connection with those contracts. In addition, on July 24, 2012, Pakistan’s National Accountability Bureau closed its case regarding Walters Power noting that “there remains no basis for further proceedings about the Company.”  Finally, Transparency International Pakistan, which publicly referred this matter to the US Department of Justice, has provided no evidence of bribery in connection with the RPP contracts in response to our request for further information.  Based upon our investigation and the information that has been made available to us to date, we presently do not intend to take any enforcement action and are closing our inquiry into this matter.  If, however, additional information or evidence should be made available to us in the future, we may reopen our inquiry.”

The article concludes as follows.

“Interestingly, WPIL [...] sat on this letter issued by the US Department of Justice for over a year. When asked why this letter had not been made public for so long, a spokesman for WPIL said: “We cooperated unreservedly with the impartial and unimpeachable investigation of the US Department of Justice and are satisfied with the results. The findings of the US Department of Justice were shared with all shareholders and financial institutions but not made public for fear that this might be misconstrued as a rebuke by the now former chief justice of Pakistan.” He added that the Washington inquiry found no evidence of wrongdoing on the part of either company, contrary to popular misconceptions within Pakistan.”

“Foreign Official” Brain Teaser

As noted in this recent Wall Street Journal article, China State Construction Engineering Corp. (the largest home builder in the world), “is making its first acquisition in the U.S. market through its American subsidiary, as the company continues its aggressive push into overseas markets. China Construction America, the U.S. subsidiary, … agreed to acquire Manhattan-based Plaza Construction for an undisclosed sum.”  As noted in the article, “Plaza Construction mainly provides construction management and consulting services in places including New York, Florida, California and Washington, D.C.”

Congress never intended for employees of state-owned or state-controlled enterprises (SOEs) to be “foreign officials” under the FCPA – see here for my “foreign official” declaration – but given the DOJ and SEC’s “foreign official” interpretations, post-acquisition are Plaza Construction employees now Chinese “foreign officials?”

Quotable

World Bank Group President Jim Yong Kim recently stated as follows:

“I’d like to make clear why fighting corruption is a critical priority for me personally, and for the entire World Bank Group:  Every dollar that a corrupt official or a corrupt business person puts in their pocket is a dollar stolen from a pregnant woman who needs health care; or from a girl or a boy who deserves an education; or from communities that need water, roads, and schools. Every dollar is critical if we are to reach our goals to end extreme poverty by 2030 and to boost shared prosperity.  Let’s not mince words: In the developing world, corruption is public enemy number one. We will never tolerate corruption, and I pledge to do all in our power to build upon our strong fight against it.”

Reading Stack

The most recent edition of the always-informative Debevoise & Plimpton FCPA Update is here.  As to the recent Weatherford settlement, the Update states as follows.

“The $152 million in fines and penalties paid by Weatherford make it the eighth largest FCPA settlement in history. Although the monetary resolution is objectively large, comparing it to the monetary resolution in another recent enforcement action points to the difficulty of ascertainting the logic of penalty determinations.

[...]

Beyond the lack of transparency in the calculations that led to the financial resolution – a recurring feature of settled FCPA matters – the Weatherford settlement, like other recent settlements, is a disposition in which facts are included in the allegations or information without an explanation as to why they are relevant, potentially creating even more confusion as to what is or is not acceptable from the enforcement agencies’ point of view.”

For the recent post titled “FCPA Settlements Have Come a Long Way In a Short Amount of Time,” see here.

As to the recent Corruption Perception Index scores recently released by Transparency International (see here for the prior post), the FCPA Update rightly notes as follows.

“[W]hile companies subject to the FCPA, the UKBA, or other transnational anti-bribery regimes should continue to pay heed to the CPI, those seeking most efficiently to assess compliance risks also need to assess such matters as: (1) sector risk; (2) business model risk (including the degree to which the firm relies on third parties and the nature of controls over their activities); and (3) the nature and scope of government interactions, not only in connection with winning sales from government customers but also in obtaining zoning and building permits, tax clearances, customs rulings, currency transaction permissions, investment and financing approvals, and a range of other daily decisions from government actors. Firms with business risks associated with non-compliance such as expiring patents, excess capacity, disproportionate sales-based compensation, and limited oversight over sales and supply chain personnel, may well have significant corruption risks even in nations ranked highly in the CPI.”

*****

A good weekend to all.

 

Oral Arguments Heard In Historic “Foreign Official” Challenge

Monday, October 14th, 2013

Last Friday in Miami, the 11th Circuit Court of Appeals heard oral argument in U.S. v. Joel Esquenazi & Carlos Rodriguez.  (See here for the audio recording of the arguments).  The issues on appeal did not just relate to the FCPA’s ”foreign official” element, but as to this important element, the appeal is a historic occasion – the first time in FCPA history when an appellate court has the opportunity to weigh in on the prominent enforcement theory that employees of alleged state-owned or state-controlled entities are “foreign officials” under the FCPA.

The defense relied, in part, on my foreign official declaration previously used in other cases and as previously disclosed in prior posts I have served as a pro-bono expert to the defense in this case.  For additional background reading on the case (in chronological order), as well as links to the underlying briefs, see here, here, here, here, here, here, and here.

The below guest post is from Paul Calli (Carlton Fields) who was present in the courtroom for the oral arguments.  The 11th Circuit does not post audio recordings of oral arguments.  When such a recording or transcript becomes available, it will be posted.

*****

The panel consisted of Eleventh Circuit Judges Beverly B. Martin and Adalberto Jordan and Sixth Circuit Senior Judge Richard F. Suhrheinrich.  The argument was a homecoming of sorts for Judge Jordan, a favorite son and Judge adored by all who appear before him and who served as an Assistant United States Attorney and United States District Court Judge in the Southern District of Florida.  I understand that this was his first oral argument back in Miami since he ascended to the Court of Appeals.

What I endeavor to do in this post is not engage in an analysis of where things might come out in an ultimate decision by the 11th Circuit, but to provide a recap of the arguments for those who could not attend the hearing but are following this case closely.

T. Markus Funk (Perkins Coie) argued on behalf of Joel Esquenazi and David Simon (Foley & Lardner) argued the FCPA foreign official / instrumentality issue on behalf of Carlos Rodriguez.  (Pamela Johnston (Foley & Larder) argued the money laundering and wire fraud issues which were more generalized issues of criminal law (including a plain error analysis) that did not really implicate FCPA issues, are not issues of first impression, and with which the panel seemed less interested).

The courtroom was filled to capacity and unfortunately I was relegated to the attorney overflow room, which was also packed, to listen to the oral argument.

All members of the panel peppered the lawyers to varying degrees with questions primarily focused on defining “instrumentality” generally and in jury instructions.  As reflected below, Judge Jordan and Senior Judge Suhrheinreich were relentless on this issue and despite the best efforts of the three lawyers arguing the FCPA issues, remained seemingly unsettled with either side’s position or definition.

I missed the beginning of Funk’s argument due to delay entering the courthouse, but when I picked up he was hammering the jury instructions in this regard, referring to the jury instructions in the case as “exceptional” and observing that “they went beyond what the government wanted.”  He deemed the jury instructions the “…greatest flaw and most unfair thing in the case….”  Funk stayed true to his brief, in arguing that the “instrumentality” must perform a “governmental function” and thus the rubber meets the road in his view, on what constitutes a “governmental function.”

Funk was effective in trying to focus the panel on the flaws in the government’s definition of instrumentality as overly broad, while at the same time promoting his position that the definition should hinge on whether the entity performs “traditional government functions.”  He pounded his view of the government’s definition as so overly broad as to render any entity merely owned or controlled to some degree by the government, an instrumentality regardless of what function it discharged.

Funk drew a compelling analogy to demonstrate the flaw in the government’s definition of “instrumentality” as applied to Haiti Teleco by suggesting that since his law firm collects federal income tax from his salary and pays it to the Department of the Treasury, under the government’s definition of instrumentality, his law firm qualifies a state entity.   Others in the room apparently felt different than me.  The panel began to warm up with Judge Jordan asking several questions regarding Funk’s framing of the definitional issue.

David Simon stepped into a hot panel and he was ready to go.  He picked up nicely where Funk left off, attacking “the jury instructions as error which requires reversal.”  Simon proposed that to qualify as an entity of the government, it needs to be part of/a “unit of government.”  Senior Judge Suhrheinrich stopped him early with this question – “unit of government:  what does that mean?  Ownership?”  Simon unequivocally answered in the negative and when Judge Suhrheinrich shot back, “why?”, Simon responded that ownership merely makes it an “asset” of the government.  At which point Judge Suhrheinrich drew some laughter by stating that if it looks or quacks “like a duck, it’s a duck.”  But he got serious and asked if national parks are just an asset.  Simon was teed up on the hot seat and impressed me.  He seemed quick and well prepared.  He responded in the negative again, and indicated that parks are created by statute and are “not merely a commercial entity that happens to be owned by a government.”

Judge Jordan stated generally that in other countries a state owned enterprise may be or have a commercial function … “so how do you make the distinction?  You can just tell it or you just know it?” ( I wondered if anyone else in attendance was reminded of Justice Stewart’s famous statement “I know it when I see it” in Jacobellis…).  But then Judge Jordan really defined the issues:  “We can’t give that in a jury instruction.”  Simon shot back – “nor can we give the one given in this case,” and he certainly stimulated questions from the bench.

At this point Judge Martin asked: “isn’t that what juries do?,”  meaning apply the facts to the law.  Simon responded that the defendants’ approach to the definitional issues was a “much cleaner and easier” undertaking, generally taking the position that it would present a workable paradigm for the jury to in fact apply the facts to the law, and not be forced – or allowed – to speculate.

Judge Suhrheinrich took the baton from Judge Martin and pressed, stating “I’ve been practicing law for 50 years and I’m not sure a jury would understand because I don’t.”  Simon suggested it was an easy call – is it a municipality, is it created by statute, is it in the constitution…

Judge Suhreinrich wasn’t letting him off the hook: “Well in the case of a foreign government, do we go to their constitution ?  Or do we look to how the entity functions?  Do we have to go to the constitutions and statutes of that country?  Because those constitutions may be difficult, different or murky?”

My thought was doesn’t that question expose the flaw in the FCPA on “instrumentality?”  Apparently I wasn’t alone.  Simon responded “these questions invite a constitutional problem in criminal cases.”

Judge Jordan jumped in – “ what about a state created entity providing commercial services – like the U.S. Olympic Committee?”  Simon, not missing a beat, stated – “that does not qualify.  It needs to be a “unit of government.”  I thought I heard Judge Suhrheinrich grumble…

Simon drew the analogy between government employees – when the government shuts down, the employees are furloughed.  “That is one indicator of an instrumentality of government.”

Judge Martin jumped in by observing the language “…department, agency or instrumentality…” and stating “you focus on the first two.  What’s an example of instrumentality, that’s not a department or agency?”  Simon responded – “the FDIC” and cited to the Edison case.  Whether she expected it or was satisfied is unclear, but Judge Martin asked no follow-up and Simon’s argument ended.

Kirby A. Heller from the Appellate Section of DOJ in Washington argued for the government.  Heller countered that the defendants’ definition of instrumentality was too narrow in that isolating the crux of the definition to performance of a “government function” disregards other factors the government deems sufficiently indicative of being an instrumentality of government.

Ms. Heller was probably less than two minutes into her presentation when Judge Martin tossed a softball:  “Give me a one sentence definition of instrumentality.  What is it?”  Long pause, some stumbling, followed by “dominion and control over the entity.”  Judge Suhrheinrich asked, “what’s the government function though?”  As to Haiti Teleco, Heller responded that Haiti Teleco had a  “monopoly on phone service and just because that’s a commercial service, does not mean it can’t be an instrumentality.  In Haiti, they obviously define it by the fact that the government took over, profits flowed to the government, and the government would have to cover if costs needed to be advanced and Teleco could not do so.  The government of Haiti seized this as a foreign instrumentality.”

Judge Jordan pursued one logical extension/problem with Heller’s point:  “Isn’t notice a problem?  If you are letting juries analyze and decide these issues, don’t you run into vagueness problems?”  Heller replied “Maybe.  But not on the facts of this case.  We’re talking bribes!  Everyone knew it was illegal and was on notice!”

Judge Jordan pressed.  “But there is a fair amount of criminal conduct not covered by the U.S. Code.  To give a bribe does not mean you are on notice that you are committing a federal criminal offense in violation of the FCPA  because it is not clear if it’s a state-owned entity.”  Heller didn’t deviate from her position and in the process, failed to respond to the point Judge Jordan was making.  Heller:  “This was not a marginal, fringe case in which vagueness would be implicated.  Not even close.  Everyone knew bribes and grease payments were flowing…”

Judge Jordan asked if a plurality ownership would satisfy the government’s definition.  “Possibly,” replied Heller.  “That’s not a good answer,”  Jordan responded.  “What about 25% ownership?  15% ?  10% ?”  Heller stood her ground – “yes, that would satisfy our definition.”  Judge Jordan asked “How far does the control principle go?  We don’t have the luxury of not worrying about writing a definition ….”

Heller admitted having a problem answering that question, and that it is not simply and ownership issue.  She went on to call the General Motors example in the defense brief “absurd,” saying the government would not consider that an instrumentality.

Judge Jordan then went all temporal:  “ so you’ve got to look at how long the government has been in the market/entity?”  Heller started to say “ permanent or temporary is …,”  but Judge Jordan cut her off: “ so if they acted [the defendants] a week after the entity was seized, would that be difficult for the government to prove?”  Heller unfortunately could only say “I believe we could defend it on a rule 29.”  Judge Jordan would have none of it:  “No, no:  would you charge it?”

Judge Jordan asked “What if the government barely gets in and then there is a bribe?”  Heller responded that she would look at other factors, like control, profits, board of director appointments and if those all reflected government control then yes, the government definition fits.  She spent a few minutes discussing the 1998 amendment as “clear evidence” that the FCPA statute was meant to apply to foreign officials like those at Teleco.

Funk’s rebuttal was strong.  He challenged the panel to try to think of an entity that would not qualify under the government’s definition if it was owned or controlled by the government, regardless of its function.  He looped back to the jury instructions and stated that the government’s definition at oral argument was not what was given in the jury instruction.

Funk spent a minute or so on the Brady issue and the dueling declarations of Haitian Prime Minister Jean Max Bellerive.  Judge Martin asked how he could meet a Brady analysis since the initial declaration was obtained by a co-defendant and thus was not suppressed by the government.  Funk did real well here.  He said it is not the declaration but the content memorialized in it and “the answer to your question lies in the second Bellarive declaration the U.S. government obtained”  which indicates “at least circumstantially that the U.S. government knew or should have known” that the by-laws were recently changed and the resultant problems with its expert’s testimony at trial.”

Simon again played off of Funk well, hitting on his rebuttal the irrefutable private ownership of Teleco and the subsequent murky ownership issues, noting the government’s own expert witness testified generally that “we don’t really know how the government came to own…maybe it was from debt…”  “There is a level of confusion on the issue that should give us all pause.”

Judge Suhrheinrich ended by asking if the argument is not that the statute is vague?  Simon responded “No, we choose our definition – a unit of government.”

How is the court going to formulate “the” definition of instrumentality, when the statute contains no definition, and there is as much ambiguity as reflected by the court’s questions?

[Paul Calli represented Patrick Joseph, a co-defendant in the Haiti Teleco case, after the government unsealed the indictment against him.   Calli presented the Department of Justice with the first declaration from Haitian Prime Minister Jean Max Bellerive, in which Bellerive represented that Haiti Teleco “…had never been and until now is not a state enterprise.  Since its formation to date, it has and remains a Company under common law.”  After Calli  provided the declaration, Joseph hired another lawyer.   A review of the docket reflects that upon this lawyer entering the case, Calli withdrew virtually immediately from representing Joseph and that the other lawyer's motion for admission pro hac vice into the United States District Court for the Southern District of Florida was denied. According to media reports, Joseph was then represented by a local Miami attorney and struck a cooperation deal.  Media reports reflect that days after a local Miami paper leaked Joseph’s cooperation with U.S. authorities, his father, a former president of Haiti's central bank under former Haitian President Jean-Bertrand Aristide, was shot and killed in the Haitian capital, Port-au-Prince.  Joseph was subsequently sentenced to a year and a day in federal prison.]

First Case Under Korea’s Version Of The FCPA Tests The Limits Of Defining “Foreign Official”

Thursday, September 5th, 2013

This previous guest post discussed “Korea’s FCPA” and a recent case in which a trial court held that the prosecution failed to meet its burden of proof that China Eastern Airlines was a state owned enterprise, and, therefore, that the president of China Eastern’s Korean subsidiary was a foreign public official sufficient to state a claim under the law.

The prosecution appealed the ruling and in this guest post Alston & Bird attorneys Edward Kang and Christopher Lucas discuss the appellate court ruling.

*****

An appeals court in Korea affirmed a lower court decision to reject a prosecution’s theory of what it means to be a “foreign official” under Korea’s version of the Foreign Corrupt Practices Act, called the Act on Preventing Bribery of Foreign Public Officials (“FBPA”). This was the first case brought by prosecutors under the FBPA with allegations that an executive of a state-controlled company was a “foreign official.” Prosecutors have appealed to the Korean Supreme Court, and the high court’s decision could be an important signal as to how aggressively prosecutors can pursue future cases under the FBPA.

In 2011, Korean prosecutors brought FBPA charges against two individuals – executives at a shipping company and a travel agency – for allegedly bribing the president of the Korean subsidiary of China Eastern Airlines to secure improper business advantages. Prosecutors argued that the Korean president of China Eastern Airlines was a “foreign official” and pointed to documents that allegedly linked the company to the Chinese government.

The lower court acknowledged the evidence suggesting a connection with the Chinese government, but found that prosecutors had not met their burden in proving that the China Eastern executive was a “foreign official” under the FBPA. The Korean prosecutors appealed and directed the appellate court to additional pieces of evidence to support its theory, including the facts that the Chinese government: (1) through a wholly-owned subsidiary, owned more than 50% of China Eastern’s capital; (2) had appointment and dismissal power over China Eastern’s CEO; (3) was in charge of certain business decisions of China Eastern, including mergers and spin-off decisions; and (4) provides China Eastern with large amounts of government subsidies.

Despite that evidence, the appellate court affirmed the lower court’s decision without further elaboration. The case has been appealed to the Korean Supreme Court. We will continue to monitor developments and provide an update once this decision has been announced.

The Korean FBPA defines “foreign official” to include employees of certain state-owned or state-controlled companies. Under Article 2(2)(c) of the FBPA, the term “foreign official” includes:

“[A]n executive or employee of a company in which a foreign government contributed more than 50% of the paid-in-capital or with respect to which a foreign government exercises de facto control over its overall management including major business decisions and the appointment or dismissal of its executives.”

Interestingly, at the same time the Korean Supreme Court wrestles with the limits of defining “foreign official” when it comes to state-owned or controlled companies, the U.S. Court of Appeals for the Eleventh Circuit is currently considering a similar issue in U.S. v. Esquenazi, a case that is slated for oral arguments in October.

*****

Similar to the issue raised in this recent post concerning Canada’s FCPA-like law, Korea’s FBPA defines the targeted recipient category to include state-owned enterprise (“SOE”) definitions and concepts.  As noted in my “foreign official” declaration (which has been cited by the defense in the pending 11th Circuit “foreign official” appeal), despite being aware of state-owned enterprises (SOEs) during the FCPA’s legislative process, despite exhibiting a capability for drafting a foreign official definition that expressly included SOEs in other bills, and despite being provided a more precise way to describe SOEs during the legislative process, Congress chose not to include such definitions or concepts in FCPA.

As noted in this prior post regarding the DOJ’s response brief in the 11th Circuit challenge, among other arguments the DOJ is making is the alarmist argument that ”Defendants’ construction of the statute to exclude employees of SOEs … means that the United States is out of compliance with its treaty obligations under the [OECD] Convention.”

Like the U.S., Korea is also a member of the OECD Convention.

[Disclosure - I am providing pro bono expert services to defendants' counsel relevant to the "foreign official" issue].

Worth Noting From Canada’s First CFPOA Decision

Thursday, August 29th, 2013

This previous guest post highlighted Canada’s first individual conviction for a bribery offense under the Corruption of Foreign Public Officials Act (“CFPOA”), including the specific facts in the action against Nazir Karigar.

Given the general dearth of Foreign Corrupt Practices Act case law, you ought to have the urge to digest any form of judicial scrutiny of “FCPA-like” cases and the judicial opinion in the Nazir Karigar case makes for an interesting and worthwhile read.

For starters, the judge found that Air India officials were “foreign public officials” under the CFPOA.

This is hardly surprising.

Why?

Because the CFPOA, unlike the FCPA, defines the targeted recipient category, in pertinent part, as follows.

“a person who performs public duties or functions for a foreign state, including a person employed by a board, commission, corporation or other body or authority that is established to perform a duty or function on behalf of the foreign state, or is performing such a duty or function”

As noted in my “foreign official” declaration (which has been cited by the defense in the pending 11th Circuit “foreign official” appeal in the Joel Esquenazi and Carlos Rodriguez action), despite being aware of state-owned enterprises (SOEs) during the FCPA’s legislative process, despite exhibiting a capability for drafting a foreign official definition that expressly included SOEs in other bills, and despite being provided a more precise way to describe SOEs during the legislative process, Congress chose not to include such definitions or concepts in FCPA.

Back to the Karigar decision.

The first take-away point is that the bribery attempt was unsuccessful in that the contract at issue was never awarded.  There have been FCPA enforcement actions consistent with this theory as well.  (See, among other actions, the 2005 FCPA enforcement action against Monsanto – here and here).

A disputed legal issue in Karigar was whether the prosecution needed to prove that the actual bribes were paid and the specific identity of the foreign public officials allegedly bribed.  Summarizing the argument of defense counsel, the opinion states:

“[I]n the submission of counsel for the accused, [counsel argues] that the court cannot know whether any foreign public official was actually offered or received a bribe or other inducement, whether any such official was induced to use his or her position to influence any act or decision and whether any such official had any duties or functions which could be influenced by any such inducement.  In short, in the absence of any evidence that a bribe was actually offered or paid to any official, how can the Crown have proven the requisites of the offense charged beyond a reasonable doubt?”

The opinion then states:

“I agree that there was no evidence as to what became of the two payments … after the amounts were transferred from the bank account of Cryptometrics Inc. in New York to the accused’s account in India.  It is correct so say that there was no evidence as to what subsequently became of those two sums of money and in particular whether these funds were offered or paid to anyone who qualified as a foreign public official under the Act.”

“The position of the Crown is that no evidence of what actually became of the money is necessary to establish a violation of the CFPOA.  The Crown argues that incoate offenses, in particular a conspiracy to pay bribes, as exists here, constitutes a violation of the Act.  [...]

[...]

“There would appear to be no jurisprudence interpreting the CFPOA.  This is the first prosecution under this Act which has proceeded to trial.”

“In any event, I am satisfied that a conspiracy or agreement to bribe foreign public officials is a violation of the Act.  The actus reus of this offense is the agreement to pursue an unlawful object.  [...]

[...]

“I also reject the accused’s submission on a policy basis.  In my opinion if the word ‘agrees’ in the Act is restricted to the act of essentially two parties, ‘one to pay the bribe and one to receive the bribe,’ the scope of the Act would be unduly restricted and its objectives defeated.  Moreover, to require proof of the offer of or receipt of a bribe and the identity of a particular recipient would require evidence from a foreign jurisdiction, possibly putting foreign nationals at risk and would the legislation difficult if not impossible to enforce and possibly offend international comity.”

If the above sounds familiar to you, it should.  Similar issues have been contested in recent FCPA enforcement actions.

In U.S. v. O’Shea, the DOJ alleged that the defendant violated the FCPA by making payments to officials at a Mexican utility allegedly owned or controlled by the Mexican government.  The judge granted a motion for acquittal after the DOJ’s evidence.  In doing so, and as relevant to the identity of a “foreign official” issue, the judge stated:

“You can’t convict a man promising to pay unless you have a particular promise to a particular person for a particular benefit. If you call up [somebody] and say, look, I’m going to send you 50 grand, bribe somebody, that does not meet the statute.”

However, the notion that the specific identity of a “foreign official” must be proven by the enforcement agencies has been rejected by two other trial courts in individual FCPA enforcement actions.  In SEC v. Jackson, the court concluded, in ruling on a pre-trial motion to dismiss, that the “government does not have to connect the payment to a particular official.”  The court stated:

“The language of the statute does not appear to require that the identity of the foreign official involved be pled with specificity. […] Nothing in the legislative history of the FCPA suggests that Congress intended to limit the application of [the FCPA] to those cases where the government could show that a defendant knew, either by name or job description, precisely which foreign officials would be receiving the illicit payments he had authorized. […] It would be perverse to read into the statute a requirement that a defendant know precisely which government official, or which level of government official, would be targeted by his agent; a defendant could simply avoid liability by ensuring that his agent never told him which official was being targeted and what precise action the official took in exchange for the bribe.”

Likewise in SEC v. Straub, the court agreed with the above Jackson decision in the context of a pre-trial motion to dismiss and stated that “the language of the [FCPA] does not appear to require that the identity of the foreign official involved be pled with specificity.”  The court stated:

“Such a requirement would be at odds with the statutory scheme, which targets actions (such as making an ‘offer’ or ‘promise’) without requiring that the ‘foreign official’ accept the offer or reveal his specific identity to the payer.  Indeed, the fact that the FCPA prohibits using ‘any person’ or an intermediary to facilitate the bribe to any ‘foreign official’ or ‘any foreign political party’ suggests that the statute contemplates situations in which the payer knows that a ‘foreign official’ will ultimately receive a bribe but only the intermediary knows the foreign official’s specific identity.”

Another interesting aspect of the Karigar is asking the obvious question – will there be a related FCPA enforcement action(s)?

Karigar was a paid agent for Cryptometrics Canada and acted on behalf of related entities including Cryptometrics USA.  According to the opinion, $200,000, was transferred from Cryptometrics USA to Karigar’s bank account in furtherance of the bribery scheme.  The opinion further references a relevant letter agreement between Kairgar and the CEO of Cryptometrics USA as well as specific conduct in furtherance of the bribery scheme that took place at Cryptometrics’s office in New York.  In addition, the opinion references an additional $650,000 that was transferred from Crytometrics USA’s bank account in furtherance of the scheme.

Moreover, as noted in the opinion, Karigar corresponded with the DOJ regarding the conduct at issue.  Specifically, the opinion states “that on August 13, 2007, Karigar  – using an alias – “sent an e-mail to the Fraud Section (FCPA) of the U.S. Department of Justice stating that he had information about U.S. citizens paying bribes to foreign officers and inquired about reporting the matter.”  The opinion also references two other e-mails Karigar sent to the DOJ.

At The 11th Hour

Monday, August 12th, 2013

[This post is part of a periodic series regarding "old" Foreign Corrupt Practices Act enforcement actions]

The 1989 Foreign Corrupt Practices Act enforcement action against advertising agency Young & Rubicam, Inc. (“Y&R”) and its executives Arthur Klein, Thomas Spangenberg and others is one of the more interesting enforcement actions of all-time.

For starters, the enforcement action had an unusual origin.  According to media reports, in connection with an unrelated tax fraud case against Robin Moore (the author of the “French Connection” and “The Green Berets”), law enforcement officials confiscated his diaries.  Moore was a friend of Jamaican Prime Minister Edward Seaga and the diaries led to the investigation of Y&R and its executives.

The indictment alleges a conspiracy between Y&R, Klein, Spangenberg and others to induce Eric Abrahams and Arnold Foote “in their official capacities with respect to the selection and retention of an advertising agency for the Jamaica Tourist Board” and to induce Abrahams and Foote “to use their influence with the Jamaica Tourist Board to affect and influence the decisions of the Board with respect to the selection and retention of an advertising agency.”

Eric Abrahams is described in the indictment as the Minister of Tourism of the Government of Jamaica and Arnold Foote is described as “a prominent Jamaican citizen with close political ties to the Jamaican Labor Party and to the Administration of Prime Minister Edward Seaga”.  As to Foote, the indictment further alleges as follows.  “Foote served as executive chairman of Martin’s Travel, an instrumentality of the Government of Jamaica, and he also acted in an official capacity on behalf of the Minister of Tourism and the Jamaica Tourist Board as an advisor to the Government of Jamaica with respect to tourism, advertising and public relations matters, including the selection and retention of an advertising agency for the Jamaica Tourist Board.

According to the indictment, the defendants “would and did arrange for and pay kickbacks” to Foote and through Foote, to Abrahams.  The indictment alleges that the “kickbacks and the manner in which they were paid would and did cause the Jamaica Tourist Board to make unnecessary and excessive expenditures for advertising services and deprived the Board of economically material information in its business dealings” with Y&R.

According to the indictment, as part of the conspiracy Robin Moore (described as a well-known author residing in Connecticut who had longstanding ties to the Island of Jamaica and was a close friend of Foote and Jamaican Prime Minister Seaga) and Frederick Sturges (described as a resident of Connecticut and an associate of Moore and Foote) “would and did act as middlemen and ‘go betweens’ for the communication of information and monies between and among the conspirators, and that certain kickback payments would be and were funnelled through bank accounts established and controlled by them.”

According to the indictment, “in order to disguise and conceal their unlawful activities, the conspirators would and did cause Y&R to enter into a contract with Ad Ventures, Ltd. a Cayman Island corporation created for the purposes of funneling kickbacks to Foote and Abrahams and affording Y&R an ostensibly legitimate reason for making such payments.”  According to the indictment, various means and devices were used to conceal the unlawful activities including: false statements to government investigators; testifying falsely before the Grand Jury; making some kickback payments in cash and others to a Cayman Islands bank account so as to make the tracing of funds more difficult; and Y&R failed to reflect the kickback payments on reports it filed with the DOJ pursuant to the Foreign Agents Registration Act.

In addition to the conspiracy charge, Y&R, Klein, Spangenberg - along with the “foreign officials” Abrahams and Foote – were also charged with violating RICO.  The predicate offenses alleged were multiple violations of the Travel Act.

The indictment further alleged that the defendants sought to buy the silence of various individuals who had threatened to expose the unlawful conduct.

Y&R, Klein and Spangenberg all pleaded not guilty and the case resulted in extensive media coverage.  In a statement, Y&R said that the criminal charges were “based on speculation and innuendo and [were] without substance or merit.”  A Y&R attorney (Thomas Barr of Cravath, Swaine and Moore) stated at the courthouse as follows.  “This is a lawsuit that involves characterization.  If you pull the characterization out, you haven’t got anything.”  Referring to the labeling of Foote in the indictment as a foreign official, Barr is quoted as follows.  “The reality is this.  Y&R makes very simple, conventional business arrangements in Jamaica.  By calling an advertising man a foreign official the prosecution has converted these charges into one of the most bizarre criminal allegations.”

According to media reports, many were shocked that Klein and Spangenberg were criminally charged.  Quotes to the media included the following.

“[Klein] is the straightest guy in the world.  I was absolutely shocked at the charges.  Of all the people I know in advertising, I don’t know anyone I’d least expect this to happen to.”

“Of all the people I’ve worked with, I’d rank them in the upper 10 percent for their ethical conduct.”

Y&R and Klein moved to dismiss the RICO charge.  Among other things, the defendants argued that the FCPA ”cannot serve as a basis for a Travel Act violation, nor in turn as a predicate for a RICO violation.”  The court denied the motion to dismiss the RICO charge.  (See here for the decision).

The defendants also moved to dismiss the conspiracy charge concerning payments to Abrahams on the ground that prosecution of that aspect was time-barred.  The defendants argued that “Abrahams ceased to be Jamaica’s Minister of Tourism more than five years prior to the return of the indictment.”  The court noted that a conspiracy charge is timely if it alleges the commission of at least one overt act in furtherance of the conspiracy within the applicable five-year statute of limitations and rejected the defendants’ arguments.  The court stated as follows.

“Whether Abrahams withdrew from the conspiracy is a question of fact for the jury.  Nor does Abrahams’ resignation as Minister of Tourism necessarily end the alleged conspiracy or his participation in it.  The indictment charges overt acts committed in furtherance of a single conspiracy from 1984 until 1989.  The allegation of overt acts committed within five years meets the requirements of the statute of limitations.”

The defendants also moved for a bill of particulars requesting specific information as to particular allegations including: the facts which supported the allegations that Mr. Foote was a foreign official within the meaning of the FCPA.  The court stated that “adequate notice of the manner in which Mr. Foote obtained his status as a foreign official” was provided in the indictment.  [See the above description of Foote's status]. 

Of further interest from the pre-trial proceedings, the DOJ moved to make an opening statement at trial.  The opinion states as follows.

“The government claims that the complexity of this case, both factually and legally, as well as the nature of the evidence to be presented warrant the need for opening statements.  First, the government argues that the term ‘foreign official’ as defined in the FCPA has a meaning broader than the ordinary meaning of the phrase.  Without categorizing the evidence for the jury, the government claims that the jury might misinterpret the significance of the evidence.  This amounts to a request to make a legal argument during opening statement which is precisely what should be avoided in opening statements.  Second, the government contends that a substantial portion of its case depends on ‘a complex confluence of circumstantial evidence’ which a jury may not understand if it is not allowed to make an opening statement.  However, ‘a mere recitation’ of what evidence is going to be presented does not necessarily ‘help jurors better understand the evidence when it is introduced.’  To go beyond that would risk stepping into the realm of legal argument which is not allowed.”

Shortly before the trial was to begin in February 1990, Y&R pleaded guilty (see here for the plea agreement).  Pursuant to the plea agreement, Y&R agreed to pay a $500,000 criminal fine.  Although not apparent from the plea agreement, Y&R pleaded guilty to one count of conspiracy to violate the FCPA.

If your only source of FCPA information is the DOJ’s FCPA website, this is where the story stops.  But the story does indeed continue.

The company issued the following press release on February 9, 1990.

“Young &  Rubicam Inc., announced today that it had reached an agreement with  the U.S. Attorney for the District of Connecticut under which the  government agreed to drop all RICO charges against the agency that had been brought in indictments on Oct. 6, 1989.  The charges were  made in connection with the agency’s successful attempts to obtain the advertising account of the Jamaica Tourist Board in 1981.

Further, the government dropped all the indictments charging that the agency was guilty of bribery of Arnold Foote, a Jamaican advertising executive, for the purposes of his bribing the Minister of Tourism, Eric Anthony Abrahams.  In addition, all  charges against Arthur Klein, an executive vice president of Young & Rubicam, and Thomas  Spangenberg, a former senior vice president of the agency  were dismissed.

The company, in order to put the case entirely behind it, agreed to plead guilty to conspiring to violate a section of the Foreign Corrupt Practices Act (FCPA) and accepted a fine of  $500,000.  The section of the Act under which the plea is made has been a controversial part of the law because it requires organizations and people who are placed in positions where criminal  activities may be taking place in a “reason to know” relationship with those activities, whether or not they, in fact, did know or if the events did or didn’t occur.  This section of the Act is no longer in the statute, having been removed by Congress in 1988.  Y&R was charged with events that allegedly took place in 1981 when this portion of the statute was in effect.  Ironically, if the case were brought today there would have been no such charge.

A Young & Rubicam spokesperson said, ‘We are particularly  pleased that one of Y&R’s finest individuals, Arthur Klein, has been cleared completely of all charges made against him.  The failed indictments caused Klein and his family extraordinary grief, and to  us this was the worst part of this entire procedure.  His complete exoneration is a cause for major celebration around Y&R.

The government no longer claims that the agency won the competition for the account on anything but the merits of its  presentation, or that Arnold Foote was a public official, as had  been charged.  To the best of Y&R’s knowledge, there is no  evidence that any monies were given to Abrahams.

For  its part, Young & Rubicam did agree that beginning in late 1981, some of its employees did on occasions hear reports of alleged  bribery efforts.  These rumors alleged that Foote, who had been  retained by Y&R to represent the agency in Jamaica, was using  money paid to him by the agency to bribe Abrahams.  Young &  Rubicam itself is not charged with paying bribes.  In fact, an  investigation by the agency in 1986 could find no evidence to support those rumors, and the government has conducted a four-year  investigation, and it has never proved that such bribes occurred.  Both of the individuals deny that any bribes were paid.  There is now no charge that any Young & Rubicam employee, past or present, knew enough ‘individually’ about these rumors to cause a violation.  Thus the agency agreed that because of that knowledge by ‘some’ of its employees it can be construed that it ‘technically’ entered into a “conspiracy.”

The  spokesperson stated, ‘In hindsight, we agree that an early investigation should have been carried out sometime during 1982 when these rumors began surfacing.  We did complete an investigation in 1986 and discovered no evidence of bribery.  The government in its four-year investigation has also not made such a discovery.  So, in  fact, we would have looked and found nothing.  But looking back, we agree that we should have done it in 1982; hence our guilty plea to that violation. ‘In fact we have been pressing since early October for an early decision so that the agency can put the matter  behind us and get on with our business.  This certainly allows us to  do just that.’”

[For on the FCPA' original knowledge standard applicable to third-party payments, see this prior post.]

As to the “reason to know” standard, media reports quote U.S. Attorney Stanley Twardy as follows.  “The ‘reason to know’ plea meant that while no individual within Y&R knew enough to understand that a law was being violated, the cumulative knowledge of the group working on the account, who should have been in touch with each other, would have given the agency the requisite information.”

According to media reports, the DOJ’s case “fell apart” on the eve of trial “when Y&R’s attorneys submitted to the [DOJ] a document that had been subpoenaed two years ago and that made clear, in the words of U.S. Attorney Twardy, “that Arthur Klein was not aware of what was going on.”  Twardy further stated that the document “suggested quite strongly that Spangenberg did not have criminal intent.”  Twardy further stated:  “We got a transcript of a tape of a phone conversation that made it obvious that the accusations against Mr. Klein were totally without merit.  Ironically, we’d been trying for two years to get a hold of that tape.”  Another media report quoted Twardy as follows.  “The transcript of the conversation was extremely exculpatory, meaning it gave evidence that Klein and in turn Spangenberg were not knowledgeable of the illegal aspects of the payments …”.