Archive for the ‘Guest Posts’ Category

Misconceptions About India’s Anti-Corruption Framework

Tuesday, June 10th, 2014

This post is from Sherbir Panag (MZM Legal Advocates & Legal Consultants in Mumbai, India).

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In April 2014, the Department of Justice indicted six defendants’ in an alleged conspiracy to bribe government officials in India to mine titanium minerals. A sitting member of the Indian Parliament, Mr. K.V.P. Ramachandra Rao, was one of the six defendants charged with one count of racketeering conspiracy and money laundering conspiracy, and two counts of interstate travel in aid of racketeering.  While Mr. Rao is currently battling the FBI’s request to provisionally arrest him before the Andhra Pradesh High Court, the recent events highlight just one of several instances of bribery allegations in India that see foreign companies at the forefront.

In some cases, if not all, a lack of understanding of the Indian anti corruption framework clearly exists.  This post highlights various misconceptions of Indian anti corruption legislation and discusses the direction of several proposed bills pending in Parliament.[1]

India’s anti corruption law does not target the bribe giver

It is often misconstrued that India’s principal anti-corruption legislation – the Prevention of Corruption Act, 1988 (PCA)-  does not create an offence of bribery on the part of the bribe giver but merely attacks the demand side i.e., the bribe taker.

This is an incorrect position as under the PCA (Chapter III: Offences and Penalties) the offence of bribe giving is created as one of abetment of bribe taking by the public servant. Therefore, while the substantive text establishes the offence for a “Public servant accepting illegal gratification other than legal remuneration for an official act” or “Public servant obtaining valuable thing, without consideration from person concerned in proceeding or business transacted by such public servant” – the bribe giver comes under the ambit of the law by way of abetting this offence (Section 12 – Punishment for abetment of offences defined in section 7 or 11). Thus, the punishment for bribe giving is attune to that which a public servant convicted of accepting bribes would receive, which is imprisonment for a minimum term of 6 months extending to five years and would also be liable to pay a fine.

However, a direct offence is created for bribe giving in instances where individuals accept payments / gratification from others in order to influence a public servant by corrupt or illegal means or to exercise personal influence over a public servant (Section 8 and 9). Hence, third party agents who accept bribes from commercial organisations to be passed on to public servants or consultants who offer to exercise personal influence over public servants to win contracts – would fall within the ambit of these offences.

The above position of law will undergo a major change with the Prevention of Corruption (Amendment) Bill, 2013. The Bill which has been introduced in the Indian Parliament in August 2013, seeks to establish a substantive offence for bribe giving which is to includes not just constructively paying a bribe but the mere offer or promise to bribe a public servant as well. The punishment has been enhanced as well taking the minimum imprisonment to 3 years extendable up to 7 years along with a fine. The Bill further establishes a substantive offence for bribery by commercial organisation, which also provides that when a commercial organisation is found guilty of the offence of bribery, all such persons who at the time at which the offence was committed were responsible or in charge of conducting the business of the organisation will also be guilty of the offence – and liable to a minimum imprisonment of three years – extendable to seven years, as well as a fine. Similarly, where the offence has been committed due to the consent or connivance or neglect of any director, manager, secretary or officer of the company, such person will also be held guilty of the offence.

India does not recognise corporate criminal liability

It is amply clear from the proposed amendment in the Prevention of Corruption (Amendment) Bill, 2013 that India is on its way to expressly recognising corporate criminal liability in the substantive law.

It is to be noted that this is already an admitted position in Indian law.  The Supreme Court of India in the ‘Standard Chartered vs. Directorate of Enforcement’ and the ‘Iridium India Telecom Ltd vs. Motorola Inc’  has taken the view that companies can be prosecuted for criminal acts and the criminal liability of a corporation arises when an offence is committed in relation to the business of the corporation by a person or body of persons in control of its affairs.

Gifts are a cultural requirement hence acceptable

Gifts are again a commonly misconstrued area, wherein threshold values of gifts that public servants are entitled to receive are rarely adhered to. This is a complex problem as even gifts at levels that corporate compliance programs envisage of USD. 50-100 may at times not correspond to the laid down threshold values.

In this regard, it would be imperative to understand that the PCA’s ambit for bribes is extremely wide and includes any gratification that a public servant receives other than legal remuneration. The PCA further prevents public servants from obtaining anything of value without consideration from persons such public servant is likely to engage in business with.

Broadly speaking with regards to gifts two classes of public servants emerge:

The Central Civil Services (Conduct) Rules apply to four classes of officials and the individual threshold value of the gifts each class of officials can accept is clearly laid down. Rule 13 of the same does not allow any Government servant to accept, or permit any member of his family or any other person acting on his behalf to accept, any gift. The expression “gift” shall include free transport, boarding, lodging or other service or any other pecuniary advantage when provided by any person other than a near relative or personal friend having no official dealings with the Government servant.  With regards to foreign firms the scrutiny is higher and the Rules provide that a Government servant shall not accept any gifts from any foreign firm which is either contracting with the Government of India or is one with which the Government servant had, has or is likely to have official dealings.

The Code of Conduct for Ministers lays down that Ministers of both the Union and the State should not accept valuable gifts except from close relatives, and that members of their families should not accept any gifts at all from any person with whom such Minister may have official dealings. When Indian Ministers are travelling abroad they are entitled to receive symbolic gifts and gifts beyond Rs. 5000 (USD. 85) may not be retained by the Minister.

Facilitation payments are acceptable

The PCA does not recognise facilitation payments or any exception to the gratification other than legal remuneration concept. The gratification which if not legal remuneration is deemed illegal whether given for a lawful or unlawful purpose. Hence any speed, grease or facilitation payments would be considered to be bribes under the PCA.

Private Sector Bribery is not punishable in India

There exists no offence for private sector bribery as the PCA is focussed on the bribery of public servants. The Ministry of Home Affairs is at this juncture working on amending the Indian Penal Code to introduce two sections that deal with private sector bribery.

The lack of legislation however would not stop a company whose employee has accepted a bribe in the course of business, from bringing an action of cheating or breach of trust along with other penal provisions against the said employee. This would essentially be a criminal proceeding as both cheating and breach of trust are penal provisions. A similar action of cheating could be also be instituted by the aggrieved company against the individual / company that bribed its employee – as a dishonest intention clearly appears.

India does not criminalise bribery of foreign public officials

At present the bribery of foreign public official or officials of public international organisations is not an offence. A Bill titled the ‘The Prevention of Bribery of Foreign Public Officials and Officials of Public International Organizations Bill, 2011’ has been introduced in the Indian Parliament. The Bill penalises the offer or promise to bribe foreign public officials and will also allow the Government of India to enter into agreements with other countries for enforcing this law and for exchange of investigative information.  Further, extradition treaties that India has with other countries who have signed and ratified the United Nations Convention against Corruption will be deemed to stand amended to include the offences envisaged under this Bill when it is passed by Parliament. The punishment under this Bill is imprisonment for a minimum term of 6 months extendable to 7 years and a fine.

On the flip side India has entered into Mutual Legal Assistance Treaties in Criminal Matters with 34 countries, is a member of the Interpol, has Extradition Treaties with 37 countries and Extradition Arrangements with 8 countries. Hence with growing cooperation between investigative and prosecution authorities, it is to be noted that the legal framework in India is provisionally competent to offer assistance if the need so arises.

Administrative action will not be taken in case of bribery

The FCPA Professor’s post in January 2014 highlighted pre-contract integrity pacts that have become a mandatory requirement for public sector contracts and the ensuing action that could be taken against a company for the failure to comply with the pact or engage in bribery. Administrative action in the form of contract termination, forfeiture of bid amounts, encashing bank guarantees, and blacklisting have proven to be swifter attacking the commercial viability of bribery by putting the stipulated business on hold. Examples of administrative action which has impacted commercial organisations can be seen with the  Ministry of Defence unilaterally terminating  a Euro 556 Million contract with the Anglo-Italian helicopter manufacturing company AgustaWestland on the 1st of January 2014 for breach of the pre-contract integrity pact and earlier in 2012 blacklisting six companies from doing business in India for ten years.

A Bill titled the ‘Public Procurement Bill, 2012’ has also been introduced in the Indian Parliament that further seeks to regulate public sector procurement and provides for a debarment from all public procurements for a period of three years if a bidder has been convicted for an offence under the Indian Penal Code or the IPC. The Bill also creates an offence for interfering or influencing with the debarment process in an unlawful manner.

Conclusion

The last 5 years have seen various efforts being made to reform the Indian anti corruption legal framework and various examples of these proposed legislations that have been introduced in the Indian Parliament have been touched upon above. The Indian legal framework most definitely has various gaps just like every other legal system does, but where India takes a beating is on the execution of its legislative intent and enforcement actions.

The inherently weak enforcement mechanism coupled with compromised political will – is reluctantly faced with reform in the face of a strong public sentiment against corruption and proactive media houses. The business of bribery has been hit as media reporting and public awareness has mandated that demonstrable action is taken, which has resulted in more matters being investigated and finally prosecuted. This notwithstanding, bribery is unfortunately treated as an opportunity cost in India and the number of corruption scandals and global watchdog reports would only go on to re-affirm this point.

The Indian legal system is provisionally sound enough to deal with corruption when the will to implement the same exists. The risk for companies therefore lies in when the system works and thus the only question that companies doing business in India have to ask themselves is whether in the cross winds of whistleblowers, enhanced public scrutiny and media trials they would like to be the rare or growing subjects of this system working.


[1] With respect to the analysis on the proposed Bills’ discussed, it is to be noted that these Bills are pending before the Indian Parliament and may be amended / modified before being finally passed. The analysis is based on public drafts of these Bills and nothing in the post should construe finality of the provisions of the same.

Navigating The Arcane World of Mutual Legal Assistance Treaties, Letters Rogatory and Evidence-Gathering From Abroad

Wednesday, May 21st, 2014

A Q&A today with T. Markus Funk (a partner at Perkins Coie) regarding his recent work “Mutual Legal Assistance Treaties and Letters Rogatory:  A Guide for Judges” published by the Federal Judicial Center (the education and research agency of the federal courts – copies of the Guide go to all federal judges in the US).  As pertinent to his work, prior to entering private practice, Funk was a federal prosecutor in Chicago for ten years and for two years led the efforts of the U.S. Department of Justice (DOJ) and U.S. State Department to establish the rule of law in post-conflict Kosovo.

Among other things, what sparked my interest in Funk’s work is that the FCPA’s legislative history evidences a genuine concern by many that individual defendants in FCPA enforcement actions would be disadvantaged in mounting a defense because of the inability or difficulty of obtaining evidence abroad.  Indeed, in the FCPA enforcement action against various individuals associated with Control Components Inc. (the so-called Carson enforcement action) there were pre-trial defense motions concerning the disparity between the DOJ’s ability to gather evidence abroad vs the defendants’ ability to do the same.

In short, navigating the arcane process of collecting evidence abroad is an important skill set for FCPA practitioners.

Q:  Collection of evidence abroad – whether done by prosecutors or defense counsel – is increasingly a hallmark of FCPA and US Travel Act cases.  Your publication discusses in detail the real-world do’s and don’ts for civil and criminal litigants seeking evidence and assistance from foreign jurisdictions.  While one audience for the publication is obviously federal judges, the publication also has value to prosecutors, defense counsel and other attorneys. How and why did the government approach you about writing this guide?

A:  I was not part of the FJC’s internal decision-making, but my understanding is that they consider – accurately, in my view – transnational evidence gathering a central challenge in today’s criminal and civil litigation environment.

True, Mutual Legal Assistance Treaties (MLATs) and letters rogatory (also known as “letters of request” when presented by a nonparty “interested person”) have been around for a long time and are the two primary vehicles for obtaining this evidence.   And while most lawyers and judges, including those handling multi-national bribery and corruption cases, have certainly heard about these two primary vehicles for foreign evidence-gathering, the nuances and practical realities of their use are still a mystery to many.  This publication, therefore, is intended to be a practical, how-to desk reference that anyone can consult to find immediate answers and to otherwise remove the red tape often associated with the process.

By the time the FJC sought to publish a guide for judges on this topic, I was already in private practice with Perkins Coie.  But a former AUSA and DOJ colleague of mine generously proposed me as an author because of my first-hand experience as a prosecutor handling incoming and outbound requests for transnational evidence gathering assistance, and my time abroad assisting courts overseas in their efforts to facilitate US requests.  When the FJC staff extended me an invitation to “write the book” on this subject, I was of course flattered and quickly accepted.

Q: How does a litigant go about obtaining evidence from overseas?

A: There are two primary means of obtaining evidence located in, or assistance from, a foreign jurisdiction: MLATs and letters rogatory.

MLATs are treaty-based mechanisms for seeking foreign law enforcement cooperation and assistance in support of an ongoing criminal investigation or proceeding.  Governments intentionally restrict access to assistance through MLATs to prosecutors, government agencies that investigate criminal conduct, and government agencies that are responsible for matters ancillary to criminal conduct, including civil forfeiture.

Letters rogatory, in contrast, have a considerably broader reach than MLATs:  They can be issued by U.S. federal and state courts as part of criminal, civil, and administrative proceedings, can be requested by anyone, and can be sent to U.S. federal and state courts by any foreign or international tribunal or “interested person.”  One major drawback, however, is that letters rogatory are only available once formal proceedings have commenced; they, therefore, typically cannot issue during the investigative, pre-charging stage of criminal proceedings.

So if you are counsel representing a company or individual in an FCPA case, the ability to use an MLAT is a non-starter.  You are (1) restricted to using letters rogatory to gather evidence from a foreign jurisdiction, and those letters rogatory (2) can only be issued after charges have been filed.

In the chart below I have tried to sketch out some of the key differences between MLATs and letters rogatory:

 Issue

 MLAT

 Letter Rogatory

Nature of instrument? Bilateral cooperation treaty Issued by state and federal courts as a matter of comity (and with the expectation of reciprocity)
Scope of use? For the government, this is the primary method of obtaining foreign evidence and other assistance Available to the government and private civil and criminal litigants alike
Nature of judicial involvement? U.S. district courts supervise issuance and execution only of incoming requests Federal and state judiciaries supervise issuance and execution of outgoing and incoming requests
Available to criminal defendants? No (except pursuant to the first three MLATS the United States signed) Yes; in fact, letters rogatory are the primary formal means through which defendants can obtain foreign evidence
Available to civil litigants? No Yes
Available to prosecutors? Yes Yes
Must a case have been filed for assistance to be available? No Yes
Available pre-indictment (during investigative phase)? Yes No
Efficient method of obtaining evidence? Relatively speaking, yes No, generally slow and cumbersome
Processed through diplomatic channels? Always Almost always

 

Q: Are MLATs and letters rogatory the only way to obtain foreign evidence?

A: No.  Experienced practitioners know that diplomacy, executive agreements, and information exchange through informal communications also play an important role in transnational criminal investigations and civil litigation.  Nevertheless, MLATs and letters rogatory do most of the heavy lifting.

Remember also that, in order for federal prosecutors to introduce evidence in court at trial, typically the foreign evidence must have been obtained through a formal MLAT.  As a practical matter, that means that, when the option is available, prosecutors will often first request and receive foreign evidence informally.  Only if and when the prosecutor determines the evidence or assistance is needed for a formal court proceeding (that is, once the prosecutor has determined that the evidence is “the good stuff”), will the prosecutor typically follow up with a formal MLAT request.

Q: As a practical matter, what is the biggest problem with letters rogatory?

A: The process for letters rogatory is without question more time-consuming and less predictable than the process for seeking action through MLATs. The reason for this significant difference is that the enforcement of letters rogatory is a matter of comity between courts, rather than treaty-based.  In other words, when a foreign court receives an MLAT request that request has been vetted and is being presented by US law enforcement because the two countries entered into a formal and binding treaty.  In contrast, when a court receives a letter rogatory the court knows that this is simply an informal request that relies on the good will of the receiving court and law enforcement authorities for its proper execution.  It, therefore, should come as no surprise that MLATs are typically given priority and are handled in a manner that reflects the understanding that the US government will review performance, whereas efforts are in the main more lax when it comes to acting on a letter rogatory request.

Q: How do MLATs differ from extradition treaties?

A: First, MLATs are broader in scope than extradition treaties, in that they can seek any number of types of assistance from abroad – not just the extradition of an individual.

In addition, unlike extradition treaties enforced in U.S. courts, MLATs for efficiency reasons do not require “dual criminality” – that is, they do not require that the offense for which the US seeks assistance also constitute a crime in the requested state.  The net result is that US authorities can use an MLAT request to receive assistance from County A in the investigation of a certain type of bribery that may not even be a crime in Country A.

Q: Do prosecutors ever use letters rogatory?

A: Prosecutors understandably consider letters rogatory an option of last resort for accessing evidence abroad.  They use them only when MLATs are not available, because, as we already discussed, foreign action on MLATs is almost always the most predictable and quickest way to go.

On the flip side, defense counsel and civil litigants are left to rely on the more slow-moving and erratic letters rogatory process when it comes to their efforts to gather evidence located abroad.

Q: Is there a reason that MLATs are not available to the defense?

A: Here is a little-known fact:  The first three MLATs signed by the United States – those with Switzerland, Turkey, and the Netherlands – included explicit provisions granting defense counsel permission to access evidence pursuant to an MLAT.  Subsequent MLATs, however, do not include such provisions.

In fact, the vast majority of MLATs signed by the United States explicitly exclude non-government access to U.S. processes.

Q: Is it fair that the more efficient MLAT process is reserved only for the prosecution?  Doesn’t this raise due process issues?

A: I would say that there can be no real dispute that the defense’s more limited access to evidence frequently results in an uneven playing field and delayed proceedings –  in fact, experience teaches that defense requests are on occasion completely ignored by the foreign authorities, or are only partially complied with.  The net result is that the letters rogatory process can result in very real due process/ access to justice issues for defendants seeking what they hope will be exculpatory evidence from abroad.

That said, the unwritten reality is that, in certain instances, and particularly when the defense team and prosecutors have a sound working relationship with each other, prosecutors might be willing to issue an MLAT on behalf of a defense request.  In these instances, where the prosecutor believes that defense claims of exculpatory evidence aboard is legitimate and not exaggerated, prosecutors might be willing to invoke the MLAT process in the interests of justice.

Of course, you won’t see this on-the-ground reality included in any treatise on the topic or enshrined as part of quasi-enforceable DOJ guidance or treaty.  And remember also that the defense cannot force prosecutors to issue MLATs if they do not want to.  If the government refuses to play ball, defense counsel can always complain to the court in an attempt to recruit the court as an ally in the defense’s effort to persuade the prosecutor to change course – but, again, this is not something the court can formally force the prosecution to do.

Q: Is this evidence-gathering imbalance of power a particular issue in FCPA cases?  What is the real-world impact?

A: As you know, federal prosecutors these days are more and more relying on extraterritoriality provisions in federal law (that is, provisions granting the government the ability to exercise authority beyond its normal jurisdictional boundaries), such as those incorporated into the FCPA.  They, as a consequence, are bringing cases in which much of the physical evidence and most potential witnesses are located overseas.  Because the MLAT process is only available to the prosecution, the defendant’s ability to efficiently collect and present countervailing, exculpatory evidence is sharply limited.

In addition, and as we discussed, even when properly executed, the letter rogatory process may take as long as a year, if not more, presenting courts and litigants with very real case management challenges.  Although delays can be mitigated by transmitting a copy of the request through INTERPOL or some other more direct route, even in urgent cases, such requests almost always take months to execute.  And such delays are of course a particular problem when defendants are detained, or when time is at a premium because the case is set for trial.

Q: Going back to my earlier question, and taking into consideration what you just said, is this lack of parity fair?

A: On balance, the defense almost always gets the short end of the fairness stick.  The lack of compulsion parity between prosecutors and the defense in obtaining foreign evidence without question has very real due process implications.  In most cases, foreign courts honor defense requests issued pursuant to letters rogatory.  However, as we have discussed, international judicial assistance is discretionary, based upon principles of comity rather than treaty, and is also subject to legal procedures in the requested country.  Compliance with a letter rogatory request, therefore, is left to the discretion of the court or tribunal in the “requested” jurisdiction (that is, the court or tribunal to which the letter rogatory is addressed), and is consequently often slow and left to the whim of the particular foreign personnel providing the assistance.

This process is complicated all the more when FCPA charges are involved.  After all, in those cases the underlying allegations involve foreign officials accepting or demanding bribes – allegations that, if true, may well prove quite embarrassing to the host nation that is the recipient of the letter rogatory request.  So don’t be too surprised if the typical heel-dragging phenomenon is even more exaggerated when official bribery and corruption in Country X are driving the requests for assistance from County X.

But this is the way the system is set up – and, as practitioners will confirm, it creates an undeniable power imbalance favoring the government.

Q: So what are defense counsel’s options to get the government to “assist” in gathering potentially exculpatory evidence?

A: As we discussed, defense counsel may argue to the government or the court that a vital piece of exculpatory evidence is located overseas, and that the MLAT process is the only realistic way of obtaining it.  This is why having a solid and mutually respectful working relationship with the prosecution can be helpful to the defense; no ethical prosecutor, after all, will want to employ procedural barriers and attendant delays as a tool to hide or prevent the admission of legitimate exculpatory evidence.

Counsel, in short, should always consider asking the government to voluntarily provide assistance with accessing potentially exculpatory evidence through the MLAT process.  And if the prosecution refuses, counsel is certainly free to petition the court for relief.   However, few, if any, courts have been receptive to such petitions in the absence of language in the MLAT that provides for defense access to evidence abroad (and, as we already determined, only the first three MLATs the US government executed contain such provisions).

Despite the formal prohibition on defense MLAT requests when a client’s liberty hangs in the balance competent defense counsel will do their best to use whatever means they can to explore and secure exculpatory evidence.  This is particularly true  in front of a sympathetic court that is able and willing to put pressure on the prosecution to “do the right thing,” even if the MLAT in question does not compel assistance to the defense.

Q: When evaluating a defendant’s request for letters rogatory to secure evidence located abroad, are there particular factors courts consider most important?

A: In my experience, the three core questions courts wants answers for are:  Exactly how and why is the sought-after evidence exculpatory?  Is the evidence sought abroad cumulative of evidence more readily available in the United States? Was the request for evidence made in a timely manner?

Q: How does having this MLAT and letter rogatory expertise assist your clients?

A:  Frequently, our firm’s individual and company clients face government investigations or civil disputes implicating numerous jurisdictions.  Knowing the procedure and practical challenges involved in collecting potentially game-changing evidence from abroad is a major litigation advantage.

What is more, the formal rules governing this evidence-gathering, as we discussed, do not displace the unwritten reality that credibility and experience can go a long way in persuading prosecutors, US courts, adverse parties, or foreign tribunals to act in a responsive and professional manner.  Having dealt with these issues as a federal prosecutor, as a lawyer serving overseas in post-conflict Kosovo for the State Department, and as private-practice counsel to companies, I believe clients benefit from the experience we gained and the personal insights we can provide.  These insights, in turn, translate into opportunities to protect clients’ rights, gain a more equal playing field, have a client’s charges dropped or reduced, reach a fair negotiated resolution, or at a minimum maintain litigation parity.  

Checking In Down Under

Wednesday, April 23rd, 2014

Today’s post is from Robert Wyld (Partner, Johnson Winter & Slattery).  Wyld is the Australia Expert for FCPA Professor.

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This update covers a range of important developments in Australia and overseas in the area of foreign bribery policy, investigations and regulation in the first quarter of 2014.

The key issues that are covered in this Update include:

  • Australia’s address to the G20 Anti-Corruption Roundtable
  • The Australian Securities and Investment Commission (ASIC) and whistleblower protections
  • ASIC and civil penalties
  • Australian foreign bribery investigations and prosecutions – media updates
  • Asia Pacific developments

Australia and the G20 Anti-Corruption Roundtable

The Australian Government has been remarkably quiet in the foreign bribery space. A Consultation Paper into whether facilitation payments should be abolished (published in November 2011) appears to have died an unfortunate death by inertia.

It was refreshing to read that the Attorney General, George Brandis QC, in delivering his opening address to the G20 Anti-Corruption Roundtable, made it clear that corruption is and remains one of the greatest barriers to global growth and that all governments must address the systemic problems flowing from corruption.

The Attorney General highlighted three specific issues that warranted close attention by the Roundtable group – judicial integrity, foreign bribery and the transparency of legal structures, and the identity of beneficial owners. While little was said on the detail, it is encouraging to see the topic of foreign bribery (whatever that entails) is firmly on the agenda while Australia chairs the G20 in 2014.

ASIC and Whistleblower Protections

On 18 February 2014, ASIC published its Information Sheet No. 52 entitled ‘Whistleblowers and whistleblower protection’. ASIC’s responsibilities are to regulate companies acting in contravention of the Corporations Act 2001 (Cth) (Act). ASIC’s focus is on conduct which is disclosed to it which involves a potential contravention of the Act. The Act provides a statutory framework to protect whistleblowers (see Pt9.4AAA, sections 1317AA to 1317AE).

The key elements under the statutory whistleblower protection regime that must be satisfied are:

  • the whistleblower must be an officer or an employee of the company or a contractor or employee of a contractor which has a current contract to supply goods or services to the company the disclosure is about;
  • the disclosure must be to the company’s auditor, a director, secretary or senior manager within the company, a person authorised by the company to receive whistleblower disclosures or ASIC;
  • the whistleblower must identify himself when making the disclosure;
  • the whistleblower must have reasonable grounds to suspect that the information disclosed indicates the company or company officers may have breached the Act (or ASIC’s Act); and
  • the whistleblower must make the disclosure in good faith.

The tenor of ASIC’s approach is that it still has limited resources, it prefers to focus on the disclosed conduct and it keeps emphasising that a whistleblower should seek independent legal advice. ASIC has been criticised in the past for responding very slowly at times to significant complaints. ASIC will now appoint a dedicated Liaison Officer to be in regular contact with the whistleblower. While a whistleblower may have protection from victimisation, any complaint about how a whistleblower is treated is a private matter between the whistleblower and the company.

In an Ethics Conversation hosted by the St James Ethics Centre in Sydney on 8 April 2014, the ASIC Chairman, Greg Medcraft indicated that while the protection of whistleblowers was important, he appeared less enamoured of the US whistleblower bounty scheme established under the US Securities Exchange Act. Mr Medcraft felt that such a scheme sat uncomfortably with the Australian culture of “not dobbing in a mate”. At the same event, Rod Sims, the Chairman of the Australian Competition & Consumer Commission, was concerned about how Australian courts might treat an individual who had a financial interest in a prosecution and the impact that might have on a whistleblower’s overall credibility. Perhaps the pioneering research work of Prof AJ Brown at Griffith University might help to debunk the myth of not dobbing in a mate – and encourage regulators to realise that the vast majority of Australians consider that whistleblowers who report serious misconduct should be both praised and protected. It remains to be seen how ASIC will act in the future towards whistleblowers.

ASIC and Civil Penalties

In March 2014, ASIC published its Report No. 387 entitled ‘Penalties for corporate wrongdoing’ which considered the penalties available to ASIC and whether they were proportionate and consistent with those for comparable wrongdoing in selected overseas jurisdictions. The key findings of the Report were as follows:

  • ASIC rated effective enforcement as critical to achieving its strategic priorities of fair and efficient financial markets with a range of penalties designed to deter contravention and promote greater compliance;
  • in relation to imprisonment and fines open to ASIC to seek through litigation: the maximum fines are broadly consistent with other comparable jurisdictions save for the US; other jurisdictions have greater flexibility to impose higher non-criminal fines; other jurisdictions can seek the disgorgement of profit generated by the wrongdoing,
  • within Australian legislation, there are examples where non-criminal fines can be imposed at a much higher amount than those available to ASIC.

ASIC has called for greater penalties to be available to it for corporate wrongdoing. While ASIC made it clear that it will pursue the sanctions and remedies best suited to each case on its merits, Mr Medcraft made it clear at the St James Ethic Centre Conversation that he wanted to target individuals as it was only through “scaring the hell out of people” faced with imprisonment, that he believed commercial behaviour might, in fact, change.

Australian Foreign Bribery Investigations and Prosecutions – Media Updates

The Securency banknote printing corruption prosecution continues to roll on slowly in Victoria. While the whole process is subject to suppression orders in Victoria, it is hoped significant public progress in the case occurs during 2014.

The Australian media has continued to follow the saga of an AFP investigation into the Middle East business activities of Leighton Holdings, its various entities and senior officers. While no criminal prosecution has occurred, the opening salvos in a securities class action in Victoria concerning non-disclosure to the market between aggrieved Leighton shareholders and the company suggests the case will continue to affect the company, currently under new Spanish management.

Asia Pacific Developments

The Asia Pacific region is home to both many of the world’s most active economies and to those where the perception of systemic corruption is the greatest.

Developments in China, as one of Australia’s most significant trading partners, must be followed. From mid-2013, the Chinese Government started to target multinational companies in the pharmaceutical sector, in the “supply side” of corruption rather than its traditional focus on the “demand side” of corruption, being the local Chinese public official. This must ring warnings to all Australian business that they are not immune from Chinese Government investigation.

In addition, the role of the US – China Joint Liaison Group on Law Enforcement, may yet see an increase in parallel US and China investigations, although human rights issues may see such investigations undertaken only in limited cases.

In the Asia-Pacific Economic Cooperation (APEC) Bali Declaration in late 2013, APEC called for greater regional cooperation on corruption and collaboration between regulators. A new regional authority is to be established, called the APEC Network of Anti-Corruption Authorities & Law Enforcement Agencies (ACT-NET). The goal of this agency is to, in part, “encouraging private sector stakeholders to implement APEC’s high standard principles for codes of business ethics”.

At the meeting of the APEC Anti-Corruption and Transparency Working Group held in Ningbo in China in February 2014, members agreed to further discuss ACT-NET’s development and implementation during 2014. The goal of the ACT-NET was said to advance greater collaboration among law enforcement authorities in combating corruption, bribery, money laundering, and illicit trade.. Future meetings of ACT-NET will take place during 2014.

Richard Bistrong … In His Own Words

Monday, April 14th, 2014

Richard Bistrong.

Most people likely associate his name with the manufactured Africa Sting FCPA enforcement action. The Africa Sting action involved a purported deal to purchase equipment for the presidential guard of an African Government with FBI agents posing as African Government officials and Bistrong working as an undercover informant.

The Africa Sting enforcement action resulted in criminal charges against 22 individuals.  After extensive motions practice and two trials, all charges against all defendants were ultimately dismissed by the DOJ and the action ended with Judge Richard Leon (D.D.C.) calling the entire case a “long and sad chapter in the annals of white collar criminal enforcement.” (See here).

Bistrong was not charged in the Africa Sting case, but previously pleaded guilty to “real-world” Foreign Corrupt Practices Act conduct, including conspiring with others to bribe United Nations officials, Dutch officials, and Nigeria officials.  (See here and here). This charge stemmed from Bistrong’s work as the international sales vice president for a large, successful and publicly traded multi-national corporation.  Bistrong started to cooperate with the DOJ in June 2007 and Judge Leon ultimately credited Bistrong’s extensive cooperation at sentencing.  (See here).

FCPA Professor seeks to highlight a wide range of voices on FCPA issues.  With this goal in mind, I requested to communicate with Bistrong with the permission of his attorney.  Bistrong’s attorney, Brady Toensing (diGenova & Toensing) would not allow his client to discuss questions about the Africa Sting case.

At present, Bistrong is out of prison but still serving the supervised release portion of his sentence.

In this detailed Q&A, Bistrong describes: the circumstances that put him in a position to violate the FCPA; what made him think he could get away with it; his thought process when he realized he was caught; and how he spent his time in federal prison. In the Q&A Bistrong not only looks back, but forward as well and shares what he learned from his experience and what he hopes to accomplish in the future, including through his recently launched blog.

U.K. Sentencing Guidelines For Organizations: Implications For Violators Of The U.K. Anti-Bribery Regime

Tuesday, February 25th, 2014

Today’s post is from Karlos Seeger, Matthew Getz and Robin Lööf (all from the London office of Debevoise & Plimpton).

As regular readers of FCPA Professor will no doubt be aware, the UK legislative regime in relation to bribery and corruption, foreign as well as domestic, has changed dramatically in recent years, both in terms of substance and procedure.  These changes are particularly important for commercial organisations and, what is more, are all linked.  To re-cap:

  • The Bribery Act 2010 (“the Bribery Act”) did away with the patch-work of late 19th and early 20th century statutes which until recently, with some amendments and complemented by the common law, constituted the UK’s substantive anti-bribery laws.  It criminalises active and passive bribery both in the private and public sectors, and also creates a new, specific “FCPA offence” of bribing a foreign public official.  The most revolutionary aspect of the Bribery Act, however, is that in relation to activities on or after 1 July 2011, organisations will be held criminally liable for failing to prevent bribery by their employees, or other persons associated with them, unless they can prove that they had an effective compliance programme in place (the so-called “corporate offence”).
  • The Crime and Courts Act 2013 introduced Deferred Prosecution Agreements (“DPAs”) into UK law.  Previously, although plea agreements were possible and covered by specific guidance, attempts by prosecutors and defendants to present courts with agreed sentences had been deprecated by the judiciary on the basis that for an English prosecutor to agree on a sentence with a defendant would be contrary to “the constitutional principle that … the imposition of a sentence is a matter for the judiciary.” (Lord Justice Thomas [since appointed Lord Chief Justice] in R v Innospec Limited; see below)  DPAs will make this possible and will be available to organisations suspected of, inter alia, offences under the Bribery Act.  DPAs come into force on 24 February 2014.
  • On 31 January 2014, the Sentencing Council, the independent body responsible for developing guidelines for courts in England & Wales to use when passing sentence, issued a definitive guideline for sentencing organisations convicted of, inter alia, offences under the Bribery Act (“the Guideline”).  The Guideline will also constitute the basis for calculating the financial penalties levied under a DPA.

In this post, we look first at previous English practice in relation to sentencing for organisations convicted of bribery offences.  We then describe the new Guideline, draw comparisons with US practice, and attempt to assess what changes, if any, it will bring for organisations convicted of bribery.  Finally, we seek to predict how the Guideline will be used to calculate the financial penalties due under a DPA, with particular focus on the corporate offence.

Analysis of the Current State of the Law

Unlike in the US where the application of the principle of respondeat superior makes organisations vicariously liable for many criminal acts of their employees, English prosecutors seeking to hold organisations responsible for most criminal offences, including bribery, have had to prove that some part of the organisation’s “directing mind” – a director or senior executive, was involved in the wrongdoing.  As a result, few prosecutions have been brought and there are, consequently, very few examples of criminal fines imposed on organisations guilty of foreign corruption.  In addition, as a likely consequence of the uncertainty surrounding agreements between prosecutors and offending organisations, particularly as regards sentencing, a number of instances of corporate foreign corruption were dealt with civilly with Civil Recovery Orders which can be agreed between the investigating body and the corporate concerned.  With the introduction of DPAs, however, similar certainty of outcome can now be achieved through the criminal process which should reduce the need to resort to civil procedures to deal with criminal behaviour.

The Existing Case Law

In September 2009, engineering company Mabey & Johnson Ltd was sentenced for having sought to influence decision makers in relation to the award of public contracts in Ghana, Jamaica, and Iraq.  The company had paid some £832,000 in bribes in return for contracts worth approximately £44 million.  It was agreed between the Serious Fraud Office (“SFO”) and the company that there was a maximum of £4.65 million (ca. $7.4 million) available for confiscation and/or fines.  On its guilty pleas, the company was sentenced to pay confiscation of £1.1 million, and fines of £3.5 million.  The company also committed to paying reparations to the three countries concerned of, in total, £1,415,000.  There was a joint submission by the SFO and the company that the £4.65 million maximum was the most the company could afford to pay and still stay in business.  His Honour Judge Rivlin QC endorsed this sum, stating that he found it “realistic and just”.

In March 2010, Innospec Ltd was sentenced by Lord Justice Thomas (since appointed Lord Chief Justice) in respect of “systematic and large-scale corruption of senior Government officials” in Indonesia.  Innospec manufactured a fuel additive (TEL) which had been banned in most countries on environmental grounds and in order to preserve one of the few remaining markets for TEL, it had paid an estimated $8 million in bribes in order, as Thomas LJ found, to “block legislative moves to ban or enforce the ban of TEL on environmental grounds in Indonesia.”  As part of a global settlement between the company, on the one hand, and the SFO, as well as the US DoJ, SEC, and OFAC, on the other, a figured had been arrived at which represented the maximum the company could afford to pay and stay in business.  Before Thomas LJ, it was submitted that there was only $12.7 million available for confiscation and/or fines in the UK if the company was to survive.  This represented roughly one third of the global settlement sum.  Thomas LJ noted that the benefit from this campaign may have been as high as $160 million and that the US Federal Sentencing Guidelines indicated a sentencing range in respect of the company’s offending in Iraq (“no more serious than the Indonesian corruption”) would have been between $101.5 and $203 million.  In terms of what the appropriate UK fine would have been, Thomas LJ confined himself to indicating that it “would have been measured in the tens of millions.”  However, “with considerable reluctance”, Thomas LJ ordered that the sterling equivalent of $12.7 million be paid as a fine.  His Lordship explained his decision: “in all the circumstances and given the protracted period of time in which the agreement had been hammered out, I do not think it would have been fair to impose a penalty greater than that.”  Importantly, Thomas LJ made it clear that “the circumstances of this case are unique.  There will be no reason for any such limitation in any other case and the court will not consider itself in any way restricted in its powers by any such agreement.”  In fact, in His Lordship’s view, the division of the global sum between the UK and the US was not “one which on the facts of the case accorded with principle.” 

Finally, in December 2010, as part of a global settlement with the SFO and the US DoJ, BAE Systems plc pleaded guilty to a failure to keep adequate accounting records in relation to a contract worth $39.97 million for the provision of a radar system to Tanzania.  BAE accepted that there was a high probability that part of $12.4 million paid to a local adviser, Mr. Vithlani, had been used to favour BAE in the contract negotiations.

An agreement between the SFO and BAE was presented to the court under which BAE undertook to pay £30m to Tanzania, less any financial orders imposed by the court.  In his sentencing remarks, Mr. Justice Bean made no reference to this agreement.  His Lordship did however state that he was “astonished” at the SFO’s approach to the evidence and, in particular, branded the SFO’s preparedness to accept that Mr. Vithlani was simply a well-paid lobbyist as “naïve in the extreme”.  Whilst refusing to accept this interpretation of the evidence, Mr. Justice Bean pointed out that “I … cannot sentence for an offence which the prosecution has chosen not to charge.  There is no charge of conspiracy to corrupt …”  Noting that there were no relevant sentencing precedents for the offence charged, Mr. Justice Bean fined BAE £500,000.

Assessment of the Existing Case Law

Two things are noteworthy from the above sentences:

First, the recognised lack of precedent for UK sentences in foreign bribery cases.  In only one of the cases (Mabey & Johnson) did the sentencing judge indicate that the sentence passed was appropriate.  Having no doubt carefully studied the “success” of the approach in that case, the lawyers involved in Innospec approached the sentencing exercise in a structurally very similar manner only to be faced with the ire of one of the most senior judges in the country.  Disapproving of every aspect of the situation in which the sentencing court found itself, Thomas LJ made it very clear that the result in Innospec was in no way to be seen as a precedent for the future.

Second, the comparison with the US is instructive.  In Innospec, US prosecutors obtained $26.7 million compared to the SFO’s $12.7 million.  As far as BAE is concerned, however, in March 2010, prior to being fined £500,000 in the UK, BAE had agreed a settlement with the US DoJ including a $400 million criminal fine in respect of virtually identical conduct as that charged in the UK, albeit in a different jurisdiction.

This disparity in relation to BAE led to criticisms of the UK sentencing regime for organisations.  Notably, the UK Labour party included it in its Policy Review on Serious Fraud and White Collar Crime as an example of the apparent comparative laxity of the UK regime.  However, in the most authoritative ruling on these matters we have, Lord Justice Thomas’s sentencing of Innospec Ltd, there is the following statement of principle: “there is every reason for states to adopt a uniform approach to financial penalties for corruption of foreign government officials so that the penalties in each country do not discriminate either favourably or unfavourably against a company in a particular state.

In any event, whatever the theoretical position might be under existing English case law, from 1 October 2014, courts will sentence organisations convicted of bribery offences under the Guideline which puts in place a sentencing system which should feel familiar to US lawyers.

The New Guideline:  Background and Context

Offences under the Bribery Act are covered by the new DPA regime.  This is seen as particularly significant in relation to the corporate offence which, with its lower evidential threshold for conviction, is expected to make prosecutions of organisations for bribery offences easier and therefore, potentially, more common.  The Act introducing DPAs provides that the financial penalty agreed under a DPA “must be broadly comparable to” the fine the organisation would have received had it pleaded guilty and been convicted.  However, as is apparent from the review of the authorities above, there is not much by way of guidance in this regard, in case law or otherwise.

Recognising this lack of guidance which risked introducing unnecessary but critical additional uncertainty into initial DPA negotiations, the Sentencing Council, which had been working on it for years, expedited its work on sentencing guidelines for corporates convicted of fraud, bribery, and money laundering.

The Basic Fine Calculation

The basic principle of the Guideline for calculating the fine is that the “[a]mount obtained or intended to be obtained (or loss avoided or intended to be avoided)” from the offence (the “harm figure”) is multiplied by a figure based on the corporate offender’s culpability (the “harm figure multiplier”).

For bribery offences, the harm figure “will normally be the gross profit from the contract obtained, retained or sought as a result of the offending.”  For the corporate offence, an alternative measure is suggested, namely “the likely cost avoided by failing to put in place appropriate measures to prevent bribery.

Culpability is assessed with reference to the offender’s “role and motivation” in the offence(s) and categorised as “high”, “medium”, or “lesser”, depending on the characteristics and circumstances of the offending.  Characteristics indicating high culpability include the corruption of governmental or law enforcement officials, and factors indicating lesser culpability include the existence of some, but insufficient, bribery prevention measures.

Each culpability level has both a starting point for the harm figure multiplier (100% for lesser, 200% for medium, and 300% for high culpability) and a range: 20-150% for lesser, 100-300% for medium, and 250-400% for high.  The presence of aggravating and mitigating factors (of which the Guideline provides non-exhaustive lists) will determine where within the relevant range a defendant organisation falls.  Listed factors increasing seriousness, and thus raising the harm figure multiplier, include corporate structures set up to commit offences and cross-border offending.  Mitigating factors that lower the harm figure multiplier include co-operation with the investigation, self-reporting and early admissions.

Having applied the relevant multiplier to the harm figure, a sentencing court would have to take into account further factors such as discounts due on account of guilty pleas (up to one third, according to the current guidance), particularly valuable co-operation, and the consequences on third parties of the proposed totality of the financial orders.  The court could then adjust as appropriate.

In setting out this basis for the calculation of fines, the Sentencing Council acknowledged having considered Chapter 8 of the US Federal Sentencing Guidelines.  US lawyers will recognise in the harm figure the UK equivalent of the “base fine” in §8C2.4, and in the harm figure multiplier the equivalent of the “culpability score” multipliers pursuant to §§8C2.5 to 8C2.8.

The Guideline – What Likely Changes in Practice?

Although a highly hypothetical exercise, it may be illustrative to seek to predict what fines would be imposed under the Guideline on the facts of some of the cases discussed above.

On the facts of Mabey & Johnson, the following can be deduced:

  • The contracts obtained as a result of the offending were said to be worth some £44 million.  Included in that figure was the £2.56 million Iraqi contract for which the “gross margin” was said to be approximately £700,000.  If the same rate of gross profit to contract value (approximately 27%) is applied to the totality of the offending, the harm figure would be approximately £12 million.
  • In terms of culpability, the company’s accepted behaviour included the organised and planned corruption of government officials over a sustained period of time.  Therefore the culpability level under the Guideline would likely be deemed “high”, establishing the range for the harm figure multiplier of 250-400%.
  • In terms of the appropriate harm figure multiplier within that range, account would have to be taken of the many facts presented to the court and not disputed which, under the Guideline, would constitute factors increasing seriousness: The company had set up the “Ghana Development Fund” in order to make corrupt payments; fraudulent activity could be said to have been endemic within the company; the revelations caused considerable political fall-out in both Ghana and Jamaica; the offences were committed across borders in that many of the payments were made to officials while they were in the UK.  In terms of factors reducing seriousness, the main one would be that the offending was committed under the previous management.  Taken together, a harm figure towards the top end of the range would be likely.

If the harm figure multiplier chosen had been, say, 350%, the starting point for the appropriate fine for offending like that in Mabey & Johnson would be £42 million.  Even if a court had found that a reduction of the maximum of one third for the company’s guilty plea was due, as well as some further reduction on account of its co-operation, on the facts in Mabey & Johnson, the resulting fine of £20-25 million would be many times higher than the fine (£3.5) the court found “realistic and just”.

Taking the facts of Innospec and applying them to the Guideline the result is staggering: If it a court had found that the benefit to the company was indeed $160 million, and that the conduct was as serious as in Mabey & Johnson, the resulting fine under the Guideline could very well be upwards of £190 million; considerably more than the “tens of millions” Thomas LJ indicated would have been appropriate, and even higher than the top of the US range in that case.  Even so, however, it needs to be borne in mind that in both Mabey & Johnson and Innospec the sentencing courts took into account the fact that if higher fines had been imposed, the companies concerned would have been made bankrupt to the detriment of current employees and other third parties.  Such considerations along with the resulting adjustments remain possible under the Guideline.

Likely Approach to Financial Penalties Under a DPA – Focus on the Corporate Offence

A UK-based organisation faced with evidence of bribes paid by, for example, one of its agents after 1 July 2011 will have some difficult decisions to make.  On the assumption that it reports this evidence to the SFO, it would risk being charged with the corporate offence.  If charged the organisation could seek to rely on the defence, created by the Bribery Act, of adequate procedures to prevent bribery and even if those procedures are ultimately found insufficient to shield the organisation from liability, their presence would still be an indicator of “lesser” culpability for the purposes of the Guideline.  However, having run an unsuccessful defence on the merits, the organisation would not benefit from the substantial reduction in fines it would have been due had it pleaded guilty.

Assuming, however, that the organisation indicated a willingness to admit to not having adequate anti-bribery procedures in place, and entered into negotiations with the SFO to conclude a DPA, how would the Guideline be used to calculate the financial penalty?

The assessment of the organisation’s culpability would not be affected by being conducted in the context of the negotiation of a DPA.  However, the presence of some, albeit insufficient, anti-bribery procedures would be an indicator of “lesser” culpability.  Further, the very fact that the organisation was considered for a DPA would imply that a number of factors tending to lower the reference fine under the Guideline were present:

First, among the mitigating factors lowering the harm figure multiplier is co-operation with the investigation, the making of early admissions and/or voluntary self-reporting.  Under the DPA Code of Practice (published on 14 February 2014), pro-active and early co-operation with the authorities is one of the public interest factors weighing in favour of entering into a DPA (and against a full prosecution) in the first place.  There will therefore be a strong mitigating factor already assumed.  Consequently, absent extraordinary circumstances, the tops of the ranges for the harm figure multiplier ought not to be applied in the context of DPAs.

Second, as already mentioned, the final figure could be adjusted with reference not only to the totality of the various financial orders, but also on account of the nature and extent of the organisation’s overall assistance to the authorities and admissions of offending.  Applying the Sentencing Council overarching guideline on reductions in sentence for guilty pleas, an organisation that co-operates with the authorities and is convicted on its guilty plea can expect a reduction of a third.  In Innospec, Thomas LJ held that the company was entitled to a reduction in sentence of “well in excess of 50%” on account of its guilty plea and cooperation with the authorities.  Following this logic, organisations negotiating a DPA might be able to persuade prosecutors (and the courts) that a further “DPA discount” should apply on account of the substantial cost savings their co-operation has entailed, and the good faith they have shown.

All in all, it is not unreasonable to assume that an organisation facing charges under the corporate offence could benefit from a reduction of any financial penalties of between 50-75% under a DPA compared to the fine it would face if it lost a trial on the adequacy of its anti-bribery programme.  Add to that the legal costs avoided and the greater ability to manage the outcome and we entertain some doubt whether many conscientious organisations that discover bribery in its business would risk a trial.

Conclusion

No organisation has yet been prosecuted under the new corporate offence in the Bribery Act but the SFO has publicly indicated that several organisations are being investigated in circumstances where – the SFO hopes – such prosecutions may well result.  If that were to happen, the first applications of the Guideline may take place sooner rather than later.

The director of the SFO, David Green QC, is a vocal advocate of extending the principle of the corporate offence in the Bribery Act to other corporate offending such as fraud and market manipulation.  The government is understood to be consulting internally on such a reform.  If enacted, prosecutions and convictions of organisations can be expected to cease to be a curiosity and potentially become as common as in the US and under the Guideline, the resulting fines could well equal those in the US.