Archive for the ‘Guest Posts’ Category

The Challenges Of Pursuing Foreign Bribe-Takers

Tuesday, November 25th, 2014

Today’s post is from Mike Dearington, an associate at Arent Fox LLP in Washington, DC. Dearington has previously authored several FCPA Professor guest posts on the Siriwan matter (see here).

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Last week, Leslie Caldwell (Assistant Attorney General for the DOJ Criminal Division) spoke at the American Conference Institute’s International Conference on the Foreign Corrupt Practices Act. Caldwell discussed the Criminal Division’s approach to combatting global corruption, warning that corrupt foreign officials are also in the government’s crosshairs.  “And now we also are prosecuting the bribe takers, using our money laundering and other laws,” Caldwell stated. “[O]ur efforts to hold bribe takers as well as bribe payors accountable for their criminal conduct are greatly aided by our foreign partners.”

Meanwhile, the very same day, federal prosecutors in the Central District of California requested that a court postpone an extradition status hearing in United States v. Siriwan, the government’s bellwether case against a foreign official who allegedly accepted bribes.  In the filing, DOJ prosecutors revealed that the foreign official, Juthamas Siriwan, former governor of the Tourism Authority of Thailand, has been indicted on domestic bribery charges at home in Thailand.  Thailand’s indictment reduces the possibility that it will extradite the former official to the United States to face money-laundering charges.

Prosecutors charged Siriwan in 2009 with violations of the Money Laundering Control Act, alleging that Siriwan used the US financial system to promote or conceal violations of the FCPA and Thai law.  A jury convicted the alleged bribe payers, Hollywood film executives Gerald and Patricia Green, of FCPA violations in 2010 for allegedly paying Siriwan $1.8 million in bribes in exchange for lucrative film festival contracts.  But prosecutors’ case against Siriwan has stalled due to the government’s inability to obtain Siriwan’s extradition from Thailand.  The court has deferred ruling on the government’s somewhat novel legal theory in Siriwan until such time as Siriwan is extradited to the United States to stand trial.  Now that Thailand is contemporaneously prosecuting Siriwan at home, extradition seems even more unlikely, and prosecutors may be unable to convince the court to further stay the case, which has been pending for nearly six years.

The government’s extradition challenges in Siriwan suggest that the Criminal Division’s tactic of pursuing bribe-taking foreign officials can be fraught with diplomatic challenges and uncertainty.  Enforcement agencies in a corrupt official’s home country have a significant interest in holding officials accountable at home.  And a country’s unwillingness to communicate and coordinate with prosecutors in the United States can further complicate an already‑complicated case.  Thailand has been less than clear about whether it intends to extradite Siriwan.  Indeed, prosecutors seem to have learned of Thailand’s decision to indict Siriwan only after finding an article in the Bangkok Post.  In the DOJ’s filing, prosecutors explained, “On November 13, 2014, the Bangkok Post published a report that ‘a joint panel of the Office of the Attorney-General (OAG) and National Anti-Corruption Commission (NACC) has agreed to indict former Tourism Authority of Thailand (TAT) governor Juthamas Siriwan in a film festival bribery case.’  The parties are each gathering more information regarding the development.”

Thailand’s unilateralism with respect to Siriwan has posed problems for prosecutors in the past.  Back in July 2012, after requesting Siriwan’s extradition, prosecutors admitted to the court that the government “has not yet received a response from Thailand regarding extradition,” only to learn from Thailand four months later that, “[Thailand is] in the process of gathering further evidences [sic] before completing the investigation in order to bring both offenders to court to be formally charged.  Hence, we must postpone the extradition . . . as requested by the U.S. Government, according to the Extradition Act . . . .”

Although the Criminal Division has obtained guilty pleas from foreign officials in other enforcement actions since indicting Siriwan in 2009—including in Haiti Teleco (Robert Antoine) and Direct Access Partners/BANDES (Maria de los Angeles Gonzalez de Hernandez)—Siriwan remains an important test case.  Prosecutors will likely encounter extradition challenges in future cases against bribe-taking foreign officials, whose home countries have significant interests in prosecuting the officials domestically.  And while the court in Siriwan awaits further information from the government about whether Thailand plans to extradite Siriwan, prosecutors’ legal theory remains untested.

The views expressed in this post are personal views and do not represent the views of Arent Fox LLP, its partners, employees or clients. Furthermore, the information provided is not intended to be legal advice and does not create an attorney-client relationship.

Actionable Intelligence On The Risk Of Bribery Internationally

Wednesday, November 19th, 2014

Today’s post is from Alexandra Wrage (President of TRACE International).

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Compliance officers and in-house counsel for multi-national companies are well aware of the risks and consequences of bribery schemes. What to do about it is the challenging part. Companies have long relied on Transparency International’s authoritative country-by country corruption risk ratings to prioritize their limited resources. But knowing what specific steps are necessary to mitigate your risks is not something that can be gleaned from an overall country risk rating.  Because two countries with the same overall risk rating can present very different types of corruption risk, the ratings alone don’t provide actionable intelligence. A compliance officer needs to know how corruption in a particular country will confront their business. Last week, another tool in the compliance and risk assessment arsenal was launched to meet this need: the TRACE Matrix.

We at TRACE have long heard the laments from compliance officers and general counsel that they need the actionable information that would come from more granular country risk ratings.  One general counsel noted after looking at other indices, “once you get past the first 30 – 40 countries, all those lower countries start to look the same. If you are comparing Angola to Romania, the ranking isn’t useful, but if you are able to give guidance as to what types of corruption you might see, that would be extremely helpful.”

Enforcement officials have also recognized the limitations of country level risk ratings. “Multinational companies need additional tools beyond those currently available to more effectively measure country risk.”  Charles Duross, Partner at Morrison & Foerster LLP and the former deputy chief in the fraud section in the criminal division of the U.S. Department of Justice.

And so, working in collaboration with RAND Corporation, TRACE set out to develop an actionable business bribery index for the compliance community.  This project involved more than a year of research and benchmarking.  We asked companies what features they would like to see in a business bribery index and asked them to identify information that would assist their assessment of business bribery risk.   As part of our research, we also conducted interviews with regulators and enforcement officials to understand their views of country risk assessments.

The resulting TRACE Matrix provides not only a country level risk-rating but also four different domain risk ratings and nine different sub-domains of risk.  Although the TRACE Matrix can be used to rank countries by their composite scores, it is also possible to view the results for specific risk factors included in the composite score to identify what drives the overall score. This allows firms to identify not only where a country falls in terms of overall business bribery risk, but also to use the domain and subdomain scores to tailor compliance practices further.   For example, if the business is one that has to have many interactions across many government offices, then a country with a high risk in this domain would be of particular concern.

In the 1990s, Transparency International gave the world the Corruption Perception Index (CPI). TI gets great credit for raising awareness of this issue and putting countries on notice that levels of corruption were being monitored.  The CPI is a valuable instrument for addressing overall levels of perceived corruption in a particular country.  It combines numerous surveys about perceived levels of corruption across government functions:  judiciary, health, education, etc. These country level ratings are informative, but they also obscure important and actionable differences among countries with similar ratings. The business community’s needs are more specific.

The World Bank’s Worldwide Governance Indicators also aggregates corruption-related data, but as the Governance and Social Development Resource Centre states, “the main use of the indicators by international organization [sic] and donors is to incentivize developing nations to improve their governance and to improve the allocation of aid.”   Another valuable tool, this alone does not meet the needs of the business community.

Companies that use existing indices to measure threats associated with business corruption risk developing either overly aggressive or inadequate compliance and due diligence procedures. They need more nuanced data to tailor their compliance processes appropriately.

So, after hearing from the business community for years that a tailored tool to gauge levels of commercial bribery was needed we set out to explore just what should be measured.   Most respondents cited “touches” with the government as the most important indicator for commercial bribery.   In a great assessment of ports in Nigeria, the Maritime Anti-Corruption Network (MACN) determined that 142 signatures were needed to clear cargo in the port of Lagos.  That’s a powerful indicator of the likelihood of a bribe demand.

At the same time, as one participant noted, the compliance community needs “something that is more targeted, more precise than the CPI, [but] the more complicated it gets, the less likely people will be to use it.”

And so, leveraging our own experience and tapping our stakeholders all over the world, we identified four domains relevant to companies

(1)   business interactions with government,

(2)   anti-bribery laws and enforcement,

(3)   government transparency and civil service, and

(4)   capacity for civil society oversight.

RAND further refined this by including nine sub-domains. For example, when it came to business interactions with government, the Matrix addresses the nature of contact with local governments, expectations of paying bribes and regulatory burdens. Likewise, in examining capacity for civil society oversight, the Matrix addresses the quality and freedom of media, as well as human capital and social development.

Ultimately, by offering a clear, actionable snapshot of the risk of commercial bribery in a country, the TRACE Matrix should help multinational companies make better decisions about foreign investments, bolster compliance and reduce the likelihood of violating anti-bribery laws.  No approach is perfect and we expect a lot of debate about the weighting of the data and about scores or rankings that people find surprising. But we hope it will provide a practical and effective tool to help assess bribery risk and thereby enable in-house counsel and compliance professionals to allocate their limited resources with more confidence.

Alexandra Wrage is the president of TRACE International, a nonprofit antibribery compliance organization offering practical tools and services to multinational companies, including the TRACE Matrix. 

A Compliance Professional Speaks

Wednesday, November 12th, 2014

myster person2Today’s post is from a compliance professional who wishes to remain anonymous.

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When you’re the Chief Compliance Officer (“CCO”) of a company that ends up in the middle of one of “those” all-encompassing FCPA investigations (as if there’s any other kind), people often want to know . . . what is it like?  How does it feel to be at ground zero of pure FCPA adrenaline?   This is my answer,  based on my repeated experiences.  I wish I could say it just happened once.  This is also based on my discussions with other CCOs.

It’s a rollercoaster with few ups and a lot of downs.

There’s that moment at the beginning when you know something is wrong.  Usually you know it’s not going to be trivial.  So you dig a bit more. Or have someone else dig a bit more.  Somewhere along the line, it strikes you.  This is going to be big.  Very big.  We can just call that the “oh crap” moment.  Every CCO I know has had at least one.

You feel a rush.  An excitement.  It’s what you’ve trained for, and read about.  And now it’s happening.  But there is invariably, immediately, a sense of dread.  Depending on the size of the issue and the seniority of the people involved, that sense of dread can range from a knot in the stomach to downright nausea.  Will the C-suite management understand it?  (Do you even have the ear of the C-suite management?) Will they do the “right thing”?

You know exactly what should happen next.  You should get on the phone with your favorite skilled, independent investigations counsel.  But before you can do that, you have to be a salesman.  You need to convince someone (sometimes the CEO, sometimes the General Counsel, sometimes a non-executive director) that this is something.  Or at the very least, it’s not nothing.  With any luck, you can make them see sense.  Most of the time, they’ve never been through this.  The education process can be slow and tedious.

You know who the right counsel are . .  . but not so fast.  You don’t have the budget.  Many times, you don’t even have the ability to hire outside counsel  without the approval of your General Counsel.  Do you have the GC’s backing?  Do they see compliance as a help or as a nuisance?  Do they believe you when you say this needs independent investigation?  Or do they think you’re just being alarmist?  What if the GC (or someone else) wants to investigate themselves?  Or hire the go-to corporate counsel?  Or hire their buddy, the jovial law school classmate of the GC who has never actually done an investigation but, really, how hard can it be?  You have to explain – calmly, rationally and often repeatedly – why that just isn’t the right thing to do.

In the meantime, a clock may be ticking. The company may be facing a quarterly SEC filing or the signing of a deal contract or the receipt of monies on the deal.  All of these have implications.  All of your powers of (gentle) persuasion are brought to bear.

And your reward for all of this?  If you’re lucky, they listen to you. The right outside counsel walks in the door and the matter rests in their capable hands. It’s a leap of faith to put something this sensitive in the hands of outside counsel.  Or, more specifically, outside counsel’s judgment of when enough is enough.   These issues always reach higher than you think.

More often than not, the legal group squeezes you out.  Compliance, after all, is not generally part of legal.  You may be kept in the loop, or you may be completely excluded.  If you’re very lucky, you are kept abreast of what is happening and people seek out your guidance and opinion.  But honestly?  Don’t hold your breath.  Particularly if this all results in a report to a regulator, you’ll definitely be pushed to the side.  Privilege is held in a tight circle that doesn’t generally include you.  So just go back to your office and keep the compliance program moving along.

What if you’re not lucky?  What if you can’t get anyone to understand? What if the issue is too subtle, or involves too senior a salesperson (they bring in the revenue, after all) or too important a client?  Not many can just stake out the moral (and legal) high ground and resign.  Sometimes the situation is that bad, or you have regulatory obligations, and you’re forced into that decision.  I know a brave few who have actually done that.  Put yourself in their shoes.  Think what it would mean for yourself and your family to walk away from a steady (and often healthy) paycheck.  What a price to pay for your convictions.

It’s far more common that you hold your tongue and bide your time. You find a way to rationalize the situation.  You compromise.  Being a CCO is, above all else, about compromise.  Does that surprise or appall lawyers in private practice or working for the government?  It shouldn’t.  Good CCOs are always “commercial” (whatever that is supposed to mean). As a CCO,  you’re being “business friendly.”  Or, to be less cynical, you’re doing your job.  You’re there to balance the company’s interests with the legal requirements.

But mostly you hope and pray that you’ve done the right thing.  And that a regulator never second guesses your actions.  That seems to be happening more and more.  I know too many CCOs  who are being subpoenaed to give testimony and defend their actions in front of regulators.  Sometimes as witnesses, but sometimes (rarely) as suspects.  So much for regulators seeing CCOs as the guys in the white hats.

Even if the  (right) lawyers do come in and they investigate, you hope that you didn’t raise a false alarm.  Then you hope none of your friends in the business were involved (CCOs always have friends in the business).   And when it turns out you were exactly right, and it really was worse than what you thought, it’s a hollow victory.  People lose their jobs.  People that you know and sometimes people that you like and who weren’t malicious or evil.  They were just doing their jobs and got caught up in the tide.  Sometimes they are sued or brought up on criminal charges.  The rest of the company is left in a state of shock.  You may have been trained to spot a FCPA issue when it arises, but there’s very little training on how to deal with the human element.  It is far and away the worst part of the job.

Supreme Court Asked To Review Crime-Fraud Exception To The Attorney-Client Privilege In The Context Of An FCPA Inquiry

Monday, November 3rd, 2014

This previous post highlighted a Third Circuit decision that Foreign Corrupt Practices Act practitioners should have reviewed regarding the crime-fraud exception to the attorney client privilege.  The litigant in the case has petitioned the Supreme Court to review the decision and in this post Mara Senn (Arnold Porter) highlights the amicus brief she filed in the case on behalf of the National Association of Defense Lawyers (NACDL).

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The issue the Supreme Court is being asked to address is a fascinating, and frightening, crime-fraud issue coming out of the Third Circuit.  Basically, a client approaches a lawyer stating that he is planning to give a bonus to someone at a multilateral bank for helping him get financing and to help speed up a transaction and wants to know whether there is any issue with the payment.  The lawyer comes across something called the FCPA.  He goes back to the client, hands him a copy of the statute, and asks the client whether the banker is a foreign official.  The lawyer says that he is not sure whether the payment is illegal but thinks that the client shouldn’t make it.  The client says that the payment would not violate the FCPA and that he is thinks he is going to make the payment.  The client proceeds to make the payment to the banker’s sister a month later.

The district court ruled that the government could subpoena the attorney to testify because the crime-fraud exception applied and used a “a reasonable basis to suspect” standard of proof.  The district court found that the client had the intent to commit the crime at the time he sought the advice and that he used the legal advice in furtherance of the crime.  The Third Circuit affirmed.  The company is now trying to appeal to the Supreme Court.  In the amicus, we argued that the Supreme Court should take the case because there is a circuit split about the standard of proof to use for the determination of the crime-fraud exception, that the standard of proof needs to be at least probable cause, and that the Third Circuit case sets a dangerous precedent.

Takeaway: As I am sure that most of you would agree, this sounds like a typical situation we all face with our clients.  Our clients are not sure what to do, but may be leaning in one direction or another.  They come to ask us our advice.  We provide some sort of legal advice.  Considering the advice, our clients make a decision about what to do.  This sort of interaction falls within the core of the attorney-client privilege.  However, under the reasoning of the Third Circuit, if there is some suspicion that a client committed a crime after receiving advice, there appears to be a retroactive inference that the client intended to commit the crime at the time he sought the advice, and therefore the government may question the attorney about previous conversations with his client under the theory of the crime-fraud exception.  This of course undermines the purpose of the attorney-client privilege.  The general rule would become that merely having the government suspect you of committing a crime is enough of a justification to allow them to talk to your lawyer about what you said.

Timing:  This case is set for conference at the Supreme Court on November 7, where they will decide whether to hear the case.  Given the corrosive influence this could have on the attorney-client privilege, let’s hope the Court takes the case.

Is There Successor Liability For FCPA Violations?

Monday, October 20th, 2014

A guest post today from Taylor Phillips (an attorney with Bass Berry & Sims in Washington, D.C.).

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Imagine you deliver pizza for a living.  You are good at your job, but there is another deliveryman who is the best in the business – Hiro Protagonist.  Thanks to a remarkably fast car, Hiro always makes his deliveries on time.

One day, however, Hiro asks if you are interested in buying the car.  He tells you that he had a “near miss” with a pedestrian and, shaken, he has decided to hang up his insulated pizza bag for good.  Because he offers you a good price on the car, you accept.

A few months later, the police show up at your door.  They inform you that Hiro did not have a “near miss” – he hit a pedestrian while making a delivery.  Worse, they say that because you bought substantially all of Hiro’s business assets, you are criminally culpable for the hit-and-run.  Moreover, because pizza delivery is a highly regulated industry, the Sicilian Edibles Commission brings an administrative action against your business based on Hiro’s failure to properly account for expenses related to the hit-and-run.

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Obviously, this hypothetical is grossly oversimplified, but its patent injustice highlights the problems with expansive successor liability.  As FCPA practitioners know, successor liability is a key part of the government’s enforcement of the FCPA.  Consequently, as the FCPA Professor put it recently, “the FCPA is a fundamental skill set for all business lawyers and advisers, including in the mergers and acquisitions context.”

Of course, many attorneys who are not well-versed in the FCPA will look first to the DOJ and SEC’s Resource Guide to the U.S. Foreign Corrupt Practices Act.  It emphasizes that “[a]s a general legal matter, when a company merges with or acquires another company, the successor company assumes the predecessor company’s liabilities. . . . Successor liability applies to all kinds of civil and criminal liabilities, and FCPA violations are no exception.”  But is that right?

To assess the statement in the Resource Guide, it’s worth stepping back and considering how companies are purchased by other companies.  The most common acquisition structures are mergers, stock purchases, and asset purchases.  In a statutory merger, the resulting company assumes all the civil and criminal liability of its predecessor companies.  Thus, no transactional lawyer should be surprised that FCPA liabilities will transfer in a merger.  Conversely, in a stock purchase, there is no “successor”—the purchased company still exists, with all its existing liabilities.

Thus, asset purchases typically are the only cases in which “successor liability” is meaningfully analyzed by courts.  Interestingly, the rule is different from that stated in the Resource Guide: as a general legal matter, when a company acquires substantially all of another company’s assets, it does not assume the seller’s liabilities – even when it continues the seller’s business, brand, and contracts.

Of course, most rules have their exceptions, and there are four commonly recognized exceptions to the general rule of nonliability for asset purchasers.  The first exception—express or implied assumption of liabilities—simply states that where an acquirer intends to assume the liabilities of the seller, the law will enforce that intent.  The second exception—fraud—applies when the sale of assets would work a fraud on the seller’s creditors.  Finally, the third and fourth traditional exceptions—“mere continuation” and de facto merger—commonly are considered to be a single exception which can involve a number factors, depending on the idiosyncrasies of state law.  Critically, however, continuity of ownership between the buyer and seller typically is considered to be an indispensable factor for these two exceptions.  Thus, in accordance with traditional common law, an arms-length buyer that does not intentionally assume the seller’s liabilities nor engage in fraud will not be liable for the seller’s legal violations.  In other words, if only these exceptions applied to the hypothetical, the police would be wrong, and you would not have any successor liability, civil or criminal, for Hiro’s hit-and-run (even if you were well aware of it prior to the transaction).

Given this fairly clear answer, what explains the government’s silence regarding asset purchasers in the Resource Guide?  One potential answer is the “substantial continuity” exception.  In addition to the four traditional exceptions to successor nonliability referenced above, some federal courts have applied federal common law to find arms-length asset purchasers liable for violations of the seller where the asset purchaser (1) knew of the liability prior to the acquisition and (2) continued the enterprise of the seller.  Thus, unlike the traditional exceptions of “mere continuation” and “de facto merger,” the “substantial continuity” exception does not require continuity of ownership – merely continuity of enterprise.  Thus, if the substantial continuity exception applied to FCPA violations, there would be a plausible argument that China Valves had successor liability for Watts Waters’ FCPA violations (and that you would be at least civilly liable for Hiro’s hit-and-run).

Supreme Court precedent, however, strongly suggests that federal courts should incorporate state law rather than expand federal common law.  In particular, the Supreme Court’s decisions in United States v. Kimbell Foods, 440 U.S. 715 (1979), and United States v. Bestfoods, 524 U.S. 51 (1998), indicate that federal courts should adopt state law, rather than create a federal law of corporate liability.  Accordingly—as many circuit courts have found in other contexts—state successor liability law is applicable to many federal causes of action.  Because most states do not recognize the federal substantial continuity exception, several circuits do not apply the exception except in environmental, labor, and employment cases.

In short, there is a compelling argument that arms-length asset purchasers—even asset purchasers who continue the business of the seller and know about the seller’s FCPA violations—do not, as a matter of law, have successor liability for the FCPA violations of the seller.  For additional development of this argument see The Federal Common Law of Successor Liability and the Foreign Corrupt Practices Act, ___ William & Mary Business Law Review ___ (forthcoming).

Despite the general rule of successor nonliability, the Resource Guide does not squarely address FCPA liability for asset purchasers.  If only there was some way to ask the government for guidance on its present enforcement position with respect to successor liability…