Archive for the ‘Individual Enforcement Action’ Category

2 Enforcement Theories, 17 DOJ Corporate Enforcement Actions, 0 Individual Prosecutions

Thursday, September 24th, 2015

zeroThe subject matter of this post is certainly nothing new.

For over five years, I have been highlighting the low percentage of DOJ corporate Foreign Corrupt Practices Act enforcement actions that result in related individual prosecutions.

In 2010, I was asked to testify at the Senate FCPA hearing – specifically about the above issue – and offered the following explanation in my testimony.

“[A] reason no individuals have been charged in [many FCPA] enforcement actions may have more to do with the quality of the corporate enforcement action than any other factor. As previously described, given the prevalence of NPAs and DPAs in the FCPA context and the ease in which DOJ offers these alternative resolution vehicles to companies subject to an FCPA inquiry, companies agree to enter into such resolution vehicles regardless of the DOJ’s legal theories or the existence of valid and legitimate defenses.”

Yesterday’s post awarded an FCPA Professor apple award to Matthew Fishbein (Debevoise & Plimpton - who previously served in the U.S. Attorney’s Office for the Southern District of New York as Chief Assistant U.S. Attorney and Chief of the Criminal Division, among other DOJ positions) for his recent excellent article which touches upon the same subject. In pertinent part, Fishbein observed:

“[T]he lack of individual prosecutions [in most DOJ corporate enforcement actions] is the inevitable consequence of making a potential criminal case out of every news story where something bad occurs. While the needs and interests of companies often lead them to enter into settlements even where there is little evidence that a crime actually was committed, individuals are more likely to test the government’s case – especially if that case rests on questionable footing.”

In light of yesterday’s post, and more broadly the general discussion of individual accountability in the aftermath of the recent “Yates Memo,” it is useful to analyze some specific examples in the hopes of making the abstract more concrete.

The remainder of this post highlights 2 DOJ FCPA enforcement theories that have resulted in 17 DOJ corporate FCPA enforcement actions yielding approximately $350 million in settlements but have resulted in 0 individual prosecutions.

The first enforcement theory that has resulted in 7 DOJ FCPA enforcement actions (Panalpina, Noble, Shell, Pride International, Tidewater Marine, Transocean, and Parker Drilling) was based on the core theory that payments allegedly made to notoriously corrupt Nigerian Customs Services (“NCS”) employees in connection with securing or renewing temporary importation permits (“TIPS”) so that oil rigs could remain in Nigerian waters, as well as other allegations that payments were made to NCS officials to expedite the delivery of goods and equipment into Nigeria, consisted FCPA violations.

The enforcement theory was aggressive because the FCPA’s anti-bribery provisions specifically exempt so-called facilitation payments.  Perhaps in a sign of how obvious the facilitating payments exception was to the conduct at issue, the DOJ twice stated in resolution documents that “the payments [at issue] … would not constitute facilitation payments for routine governmental actions within the meaning of the FCPA.”

All of the so-called CustomsGate enforcement actions involved either an NPA or a DPA in which the DOJ extracted approximately $175 million in corporate settlements. However, none of the CustomsGate enforcement actions involved any related criminal prosecution of individuals associated with the companies resolving the enforcement actions.

With is perhaps most notable about the CustomsGate enforcement actions is that the SEC (which also brought 8 FCPA enforcement actions against business organizations based on the same core theory and extracted approximately $85 million in corporate settlements) brought only one related prosecution of individuals associated with the companies resolving the enforcement action.  However, Mark Jackson and James Ruehlen (both associated with Noble Corp.) put the SEC to its burden of proof as to whether the payments violated the FCPA. In an ironic twist, two years after the enforcement agencies collected approximately $260 million in the corporate CustomsGate enforcement actions, a federal trial court judge ruled that the SEC has the burden of proof to negate the facilitating payments exception. Despite the SEC merely have a civil burden of proof of preponderance of the evidence (as opposed to the DOJ’s higher burden of proof in criminal actions of beyond a reasonable doubt), the SEC was unable to carry its burden and on the eve of trial the SEC offered to settle the Jackson & Ruehlen matter on terms very favorable to the defendants.

The second enforcement theory that has yielded 10 DOJ FCPA enforcement actions (Syncor Taiwan, DPC (Tianjin Co), Micrus, AGA Medical, Johnson & Johnson, Pfizer, Orthofix International, Biomet, Smith & Nephew, and Bio-Rad ) was based on the core theory that various employees of alleged foreign health care systems such as physicians, nurses, mid-wives and lab personnel are “foreign officials” under the FCPA. This enforcement theory was first used by the DOJ in 2002 (before NPAs and DPAs became the dominate way for the DOJ to resolve FCPA enforcement actions against business organizations) and since 2005 has yielded 8 DOJ enforcement actions.

The enforcement theory was aggressive because the FCPA’s legislative history is clear that the main reason motivating Congress to enact the FCPA was the foreign policy implications of discovered corporate payments to foreign government officials such as the Prime Minister of Japan, the President of Korea, the President of Gabon, and Italian political parties. In other words, in passing the FCPA Congress was concerned with corporate payments to bona fide foreign government officials.

All of the “healthcare workers as foreign officials” enforcement actions since 2005 were resolved through an NPA or DPA in which the DOJ extracted approximately $90 million in corporate settlements. However, none of the enforcement actions against business organizations involved any related criminal prosecution of individuals associated with the companies resolving the enforcement actions.

In short, 2 DOJ FCPA enforcement theories that have yielded 17 corporate DOJ enforcement actions in which the DOJ extracted approximately $350 million in corporate settlements have not resulted in any related criminal prosecution of individuals.

Zero. Zilch. Nada.

And The Apple Goes To …

Wednesday, September 23rd, 2015

applepicFall.  The colors are changing and the apples are crisp.

Fitting of the season, the FCPA Professor apple award goes to Matthew Fishbein (Debevoise & Plimpton).

Since the release of the Yates Memo, I’ve commented more than once that those who think the Yates Memo represented something new are misinformed.

Fishbein (who previously served in the U.S. Attorney’s Office for the Southern District of New York as Chief Assistant U.S. Attorney and Chief of the Criminal Division, among other DOJ positions) surely is not among this category.

Indeed, three weeks prior to release of the Yates Memo, Fishbein wrote this article and picks an orchard.

“[T]he lack of individual prosecutions [in most DOJ corporate enforcement actions] is the inevitable consequence of making a potential criminal case out of every news story where something bad occurs. While the needs and interests of companies often lead them to enter into settlements even where there is little evidence that a crime actually was committed, individuals are more likely to test the government’s case – especially if that case rests on questionable footing. This article discusses the context in which corporations cooperate with the government and suggests that the DOJ’s increased emphasis on cooperation against individuals may undermine corporate defense counsel’s ability to obtain or recommend their client’s cooperation in the many marginal cases where evidence of criminal conduct is lacking.

A number of recent statements by top DOJ officials suggest that their explanation for the lack of individual prosecutions is that companies are largely to blame. The DOJ has suggested that by dragging their feet instead of actively cooperating – for example, by hiding behind over-expansive interpretations of foreign data privacy laws or allowing culpable employees to leave the country – companies effectively have put up roadblocks to the prosecution of individuals.

While there may be some examples of companies holding back in their cooperation, a corporation’s conduct during the course of a government investigation is rarely the reason that individuals are not prosecuted. Rather, individuals are not prosecuted for the conduct companies admit because, in many marginal cases, there is insufficient evidence that a crime actually occurred. Why would a company enter into a criminal settlement where the underlying conduct does not give rise to a crime? The answer is simple: companies frequently determine that a “bad” settlement may be a better resolution than a drawn out, litigated victory. And as prosecutors have grown to appreciate the great leverage they hold over corporate entities, they have exercised this leverage in the pursuit of increasingly marginal cases. They do so, in part, because the risk is minimal (the prosecutor’s case is unlikely to be challenged in court) and the reward is great (the corporations pay enormous penalties).

Prosecutors have considerably less leverage over individuals, who, facing the possibility of incarceration and financial devastation in the event of a criminal conviction, are more likely to test the government’s case and put the government at risk of a high-profile loss. Given the extreme public pressure to bring charges against individuals in connection with the financial crisis, it stands to reason that if prosecutors could prove cases against corporate executives, they would bring those cases in a heartbeat. Indeed, Attorney General Holder recently acknowledged that the lack of individual prosecutions in the wake of the financial crisis was “not for lack of trying.”

Faced with a largely unsuccessful record in the pursuit of individual prosecutions after the financial crisis, it appears that, going forward, the DOJ is going to try even harder. According to a senior DOJ official, “[t]he prosecution of individuals – including corporate executives – for white-collar crimes is at the very top of the Criminal Division’s priority list.” Consistent with this goal, a number of DOJ officials have explained that “true cooperation” with a government investigation requires that the corporation identify culpable individuals and provide the government with evidence that implicates them. Without such evidence of individual culpability, corporations will not receive full cooperation credit, even if they do all of the things that traditionally have been viewed as the hallmarks of robust cooperation such as volunteering information not otherwise known to the government, providing documents and witnesses outside the government’s subpoena power, and making productions and disclosures in a timely manner.


The DOJ’s corporate cooperation policy is in some ways a double-edged sword. In cases where there is clear-cut evidence of wrongdoing, the DOJ’s policy on cooperation makes good sense and should be relatively straightforward in its application: in order to obtain full cooperation credit, it makes sense that companies should have to identify and disclose the information relevant to individual misconduct. This requirement is consistent with the government’s policy on providing cooperation credit for individuals who substantially assist in the prosecution of others. However, the policy presents a real dilemma for companies responding to the marginal, gray-area cases described above, where the company may for business reasons want to reach a settlement even where it has strong defenses, but the absence of evidence of individual culpability may preclude it from receiving the benefits of “full cooperation.”

In these kinds of cases, defense counsel is left facing a host of difficult questions. If a company should make “securing evidence of individual culpability the focus of [its] investigative efforts,” what is it to do when that evidence does not exist? If a company targets its internal investigation toward developing cases against individuals, should individuals be provided with counsel at the outset? If true cooperation “requires identifying the individuals actually responsible for the misconduct,” can a company “truly cooperate” when there are no such responsible individuals? If, in order to receive “full cooperation credit,” a company should emphasize its efforts to obtain evidence of individual culpability, can it still receive “full credit” when those efforts are fruitless? And if securing evidence of individual culpability is a “primary focus” when the government weighs the Filip Factors, will a company be subject to harsher charging decisions or settlement terms simply because no such evidence exists?

Taken together, these questions suggest that a policy designed to incentivize cooperation may have the perverse effect of deterring it: if a company knows that it cannot receive full cooperation credit, it may decide that it is not worth the effort to try; and if individuals know that companies are incentivized to obtain evidence against them, they may be far less willing to cooperate during internal investigations.

Moreover, under the DOJ’s cooperation policy, companies seeking to resolve criminal investigations in marginal cases may actually be penalized when their individual employees did not engage in criminal conduct. In such cases, defense counsel may consider challenging prosecutors to identify what aspect of their investigation was lacking or what evidence of individual culpability should have been uncovered. DOJ officials have said that the government will conduct its own investigations to “pressure test” a company’s internal investigation. If the government’s test reveals no flaws in the company’s investigation, will the government still not provide full cooperation credit?

The DOJ’s policy on cooperation is unlikely to solve the problem that it was likely designed to address, i.e., the lack of individual prosecutions. Although there may be an increase in individual prosecutions in cases of clear wrongdoing, the DOJ’s policy is unlikely to have an impact on the marginal cases, where companies often settle in spite of the evidence – not because of it.

While the needs and interests of companies in reaching settlements have allowed the government to obtain larger and larger settlements in cases where the facts and law likely would not permit them to succeed with a jury, the government must live with the fact that no amount of company cooperation will turn facts that do not provide a basis for individual prosecutions into facts that do. The government either has to accept this – and continue along the path of corporate settlements without individual prosecutions – or stop pursuing investigations and accepting settlements where there are no individuals who have actually committed crimes.”

[The FCPA Apple Award recognizes informed, candid, and fresh thought-leadership on the Foreign Corrupt Practices Act or related topics. There is no prize, medal or plaque awarded to the FCPA Professor Apple Award recipient. Just recognition by a leading FCPA website visited by a diverse group of readers around the world. There is no nomination procedure for the Apple Award. If you are writing something informed, candid and fresh about the FCPA or related topics, chances are high that I will find your work during my daily searches for FCPA content.]

Friday Roundup

Friday, September 18th, 2015

Roundup2DOJ compliance counsel identified, additional lenient PetroTiger exec sentences, scrutiny alerts and updates, and for the reading stack. It’s all here in the Friday roundup.

DOJ Compliance Counsel

As highlighted in this previous post, last month word spread that “the [DOJ] is hiring a compliance counsel who will help prosecutors determine whether companies facing corruption allegations are victims of rogue employees or willfully blind.”

According to this Global Investigations Review article:

“According to two people familiar with the matter, the US Department of Justice (DoJ) has hired Hui Chen, Standard Chartered’s former head of anti-bribery and corruption compliance, as its new compliance counsel. [...] Before joining Standard Chartered, Chen served as an assistant general counsel at US pharmaceutical company Pfizer between June 2010 and September 2013. In this position, she oversaw the drug-maker’s internal investigations in the Asia-Pacific region, and also led compliance reviews in Latin America, Europe and the Middle East. Chen previously worked for Microsoft for 13 years, serving first in the intellectual property litigation team and later as a compliance officer in China. During the 1990s, Chen worked as a DoJ trial lawyer in Washington, DC, and as an assistant US attorney in Brooklyn.”

PetroTiger Exec Sentences

The DOJ’s FCPA enforcement action against former PetroTiger executives has concluded with additional thuds.

By way of background, the DOJ’s prosecution of Joseph Sigelman fell apart after a key cooperating witness acknowledged giving false testimony. The DOJ effectively pulled its case although Sigelman did plead guilty to substantially reduced charges.  In sentencing Sigelman to probation, Judge Joseph Irenas (D.N.J.) blasted the DOJ.  (See here for the prior post).

Recently, Judge Irenas sentenced the two remaining defendants in the case: Gregory Weisman and Knut Hammarskjold.

Weisman was sentenced to two years probation and ordered to pay a $30,000 fine.  Hammarskjold was likewise sentenced to two years probation and ordered to pay a $15,000 fine as well as approximately $106,000 in restitution for the benefit of PetroTiger.

According to a media source: “before pronouncing the sentence[s], Judge Irenas said he had to reflect the reality that the ultimate sentence here is influenced by the Sigelman case.”

Scrutiny Alerts and Updates

NextEra Energy

In the “you don’t see this everyday” category, as indicated in this press release, it appears someone hired a public relations company to issue a release stating:

“[C]omplaints were [recently] filed with the United States Department of Justice regarding the conduct of NextEra Energy Inc. and RES Americas subsidiaries under the Foreign Corrupt Practices Act related to each company’s attempts to win renewable energy contracts in Addington Highlands, Ontario and North Frontenac, Ontario, from the Government of Ontario through the Independent Electricity System Operator.”


The company which has been under FCPA scrutiny since 2011 recently disclosed:

“As initially disclosed in our Annual Report on Form 10-K for the fiscal year ended July 31, 2011, we identified certain transactions involving our Danish subsidiary BK Medical ApS, or BK Medical, and certain of its foreign distributors, with respect to which we have raised questions concerning compliance with law, including Danish law and the U.S. Foreign Corrupt Practices Act, and our business policies. We have commenced discussions with the Securities and Exchange Commission concerning the resolution of the SEC inquiry into the matter and have proposed a payment of $1.6 million in settlement of such inquiry. During the three months ended July 31, 2015, we accrued a $1.6 million charge in connection with our settlement proposal. We are uncertain whether the U.S. Department of Justice or the Danish Government will seek to impose any sanctions or penalties against us and have not engaged in settlement discussions with either of these entities. There can be no assurance that we will enter into any settlement with the SEC, the DOJ or the Danish Government, and the cost of any settlements or other resolutions of these matters could materially exceed our accruals.”

Listening In

A fruitful source of unscripted, “real-person” talk about FCPA issues is earnings conference calls and other investor calls.  A recent Expeditors (a global logistics company headquartered in Seattle, Washington) investor day conference call caught me eye.

During the call, an analyst asked:  ”Do you see any limits to, whether it’s Europe or Africa or any other geographies, where maybe that’s a difficult – that’s a barrier that kind of prevents as much growth or marketplace capture as you would like, that there’s maybe less receptivity to that?”

Jeff Musser, Senior V.P. and CFO stated:

“When we look at other markets [besides Europe], some of the challenges that we have seen in other markets really have nothing to do with our model and how we roll out our model. The bigger concerns are compliance in some of those markets.So you look at places like Africa, you look at places like Russia. There’s tremendous pressure on us and on our customers to deal with things like the Foreign Corrupt Practices Act. We may — as we decide to go into those markets, we may have to do it in a little bit different way that incentivizes the right behavior and drives the right thing, so those are things that are in the back of our mind as we start thinking about these markets. We don’t think that we are limited in these markets. It just may take a little bit different approach.”

For the Reading Stack

Consistent with my own observations in “The Facade of FCPA Enforcement” (2010) and numerous articles and posts thereafter, Brian Whisler (Baker & McKenzie) writes in “Why DOJ Struggles to Convict Individuals in FCPA Cases” as follows.

“Given the enormous litigation and reputational risk, companies are generally averse to contesting criminal charges at trial. As a result, the FCPA practice has primarily evolved through a series of corporate settlement agreements, over which courts have little to no supervision and in which the burden of proof for evidentiary purposes has less impact. The relative absence of case law in the field has meant that the Justice Department has been able to advance expansive views regarding the scope and applicability of the FCPA, largely unhindered by skeptical juries and contrary case law. However, these settlements carry little to no precedential value, and if individual prosecutions multiply as the Justice Department has promised, then prosecutors will increasingly be held to the high burden of proof and forced to defend their theories before judges. It is already clear that the Justice Department will face difficulties in advancing some of its more aggressive theories in court. Last month, a federal judge rejected the Justice Department’s contention that a nonresident foreign national who worked for a U.S. company’s foreign affiliate could be convicted of conspiracy to violate the FCPA based on traditional accomplice liability theories. See United States v. Lawrence Hoskins, 3:12cr238 (D. Conn. Aug. 13, 2015). Instead, the Justice Department must show that the defendant acted as an agent for the U.S. company itself, a harder task given the defendant’s lack of a direct relationship to the U.S. company. Over the last few years, the Justice Department has used increasingly expansive views of conspiracy and accomplice liability to assert jurisdiction over potentially improper payments paid by employees and agents of foreign subsidiaries and affiliates of U.S.-listed companies. As a result, companies have routinely entered into massive FCPA settlements regarding conduct that has only minimal connections to the United States, U.S. citizens or even U.S. companies. The court’s ruling may ultimately encourage other nonresident foreign nationals, and corporations that only face exposure due to the conduct of their foreign affiliates’ employees, to resist settling future charges with the government. Hoskins is likely to be one of a number of adverse legal rulings regarding the scope of the FCPA if the Justice Department maintains its commitment to increase individual FCPA prosecutions. Adverse case law seems to beget more adverse case law for the DOJ; Hoskins heavily relied on the reasoning of one of the other rare FCPA cases to go to trial, United States v. Castle, 925 F.2d 831 (5th Cir. 1991), which rejected prosecutors’ efforts to charge officials who accept bribes under the FCPA.”


A good weekend to all.

DOJ Announces FCPA And Related Actions In Connection With Russian Nuclear Industry Bribe Scheme – Additional Actions Likely

Wednesday, September 2nd, 2015

TENEXIt’s not often the DOJ announces a Foreign Corrupt Practices Act enforcement action via a one sentence statement in a press release about another enforcement action.

But that is what the DOJ did earlier this week when it announced in this press release that Daren Condrey (50, of Glenwood, Maryland) pleaded guilty on June 17, 2015, to conspiring to violate the FCPA and conspiring to commit wire fraud.

This June 2015 criminal information sets forth the DOJ’s allegations.

According to the information, Condrey was an owner and executive of Transportation Corporation A (a Maryland headquartered company in the business of providing logistical support services for the transportation of nuclear materials to customers in the United States and to foreign customers) from August 1998 through in or about October 2014.

According to this Wall Street Journal, Transportation Corporation A is Transport Logistics International (TLI).  In November 2014, TLI released this statement concerning the DOJ’s investigation.

The Condrey information alleges various bribe payments made to “Foreign Official One” to secure business with TENEX.

JSC Techsnabexport (“TENEX”) is described as a supplier of “uranium and uranium enrichment services to nuclear power companies throughout the world on behalf of the government of the Russian Federation.”  According to the information, “TENEX was indirectly owned and controlled by, and performed functions of, the government of the Russian Federation, and thus was an “agency” and “instrumentality” of a foreign government, as those terms are used in the FCPA.”  The information further states:

“TENEX established a wholly-owned subsidiary company located in the United States in or about October 2010, TENAM Corporation (“TENAM”). TENAM was TENEX’s official representative office in the United States. TENAM was indirectly owned and controlled by, and performed functions of, the government of the Russian Federation, and thus was an ”agency” and “instrumentality” of a foreign government, as those terms are used in the FCPA.”

“Foreign Official One”[Vadim Mikerin - see below] is described in the information as follows:

“[A] national of the Russian Federation, was a Director of TENEX from at least 2004 through in or about October 2010, and was the President of TENAM from in or about October 2010 through in or about October 2014. Foreign Official One was a”foreign official,” as that term is used in the FCPA. From in or about December 2011 through in or about October 2014, Foreign Official One was a resident of Maryland.”

According to the information, Condrey and others:

“with the knowledge of Foreign Official One, caused Transportation Corporation A to provide quotations and invoices to TENEX hiding the cost of the bribe payments promised to Foreign Official One within Transportation Corporation A’s pricing”;

“at the direction of Foreign Official One, attempted to conceal the payments to Foreign Official One by making the bribe payments to bank accounts in Cyprus, Latvia, and Switzerland”;

“sent email communications and used other forms of communication in which they used terms like ”lucky figure,” “LF,” “cake,” and “remuneration” as code words to conceal the true nature of the bribe payments, and utilized fraudulent invoices which did not truthfully describe the services provided or the purpose of the payments”;

“caused Transportation Corporation A to act as a conduit for a bribe payment another company made to Foreign Official One in order to conceal that bribe payment;” and

“wired, and caused to be wired, payments from Transportation Corporation A’s bank account in Maryland to bank accounts in Cyprus, Latvia, and Switzerland for the purpose of making bribe payments to Foreign Official One.”

Based on the above allegations, Condrey was charged with conspiracy to violate the FCPA and to commit wire fraud.

In this June plea agreement, Condrey pleaded guilty. The statement of facts attached to the Condrey plea agreement also refers to the following company:

“Cylinder Corporation A was a company, based in Ohio, which engaged in the manufacture of tanks and vessels for the oil and gas, nuclear, and marine markets. Cylinder Corporation A secured contracts with TENEX to supply storage and transportation cylinders. In or about September 2012, Cylinder Corporation A was acquired by another company headquartered in Ohio (“Ohio Corporation”).”

According to this Wall Street Journal article:

“People familiar with the investigation identified that company as Westerman Cos., which was acquired by [publicly traded] Worthington Industries, Inc. in 2012 and now operates as Worthington Cylinders. Court records refer to the company as Cylinder Corporation A and identify its location as Bremen, Ohio.”

According to the DOJ’s release, Condrey will be sentenced on Nov. 2, 2015. Condrey is represented by Robert Bonsib.

Back to the DOJ’s press release earlier this week which made brief mention of the above FCPA enforcement action.  As noted in the release:

“[Vadim Mikerin] a Russian official residing in Maryland pleaded guilty today to conspiracy to commit money laundering in connection with his role in arranging over $2 million in corrupt payments to influence the awarding of contracts with the Russian state-owned nuclear energy corporation. According to court documents, Mikerin was the president of TENAM Corporation and a director of the Pan American Department of JSC Techsnabexport (TENEX).  TENAM, based in Bethesda, Maryland, is a wholly-owned subsidiary and the official representative of TENEX in the United States.  TENEX, based in Moscow, acts as the sole supplier and exporter of Russian Federation uranium and uranium enrichment services to nuclear power companies worldwide.  TENEX is a subsidiary of Russia’s State Atomic Energy Corporation.”

According to the release, Mikerin is to be sentenced on Dec. 8, 2015.  See here for the Mikerin plea agreement.  Mikerin is represented by former FCPA Unit Assistant Chief William Jacobson and Jonathan Lopez (both with Orrick, Herrington & Sutcliffe).

As noted in the release, “Boris Rubizhevsky, 64, of Closter, New Jersey, pleaded guilty on June 15, 2015, to conspiracy to commit money laundering and will be sentenced on Oct. 19, 2015.” Rubinzhevsky is described in the Mikerin plea agreement as the owner and sole employee of “Consulting Corporation Two,” which was based in New Jersey.

DOJ / SEC Bring FCPA Enforcement Action Against Former SAP Sales Exec

Thursday, August 13th, 2015

GarciaYesterday the DOJ and SEC announced (see here and here) a rare joint Foreign Corrupt Practices Act enforcement action against an individual – Vicente Garcia (a U.S. citizen and former head of Latin American sales for SAP – see here for Garcia’s SAP biography).

SEC Action

The SEC brought this administrative cease and desist order against Garcia.

In summary fashion, the order states:

“This matter concerns violations of the anti-bribery, books and records and internal controls provisions of the Foreign Corrupt Practices Act of 1977 (“FCPA”) by Vicente E. Garcia (“Garcia”), a U.S. citizen and the head of Latin American sales for SAP SE (“SAP”), a European Union corporation headquartered in Waldorf, Germany. SAP provides technology solutions and services in approximately 188 countries and has more than 68,000 employees. Garcia and others offered to pay bribes to two government officials, and paid bribes of at least $145,000 to another senior government official of the Republic of Panama in order to secure software license sales of approximately $3.7 million to various government agencies; the sales were recorded initially in the books and records of SAP Mexico and subsequently consolidated into the financial statements of SAP. Garcia circumvented SAP’s internal controls by falsely justifying the discount amount offered to its local partner. In doing so Garcia helped to facilitate the local partner’s ability to generate excess earnings on the final, end-user sale, which earnings were then used to create a slush fund to finance the bribes paid to government officials.”

The order finds as follows.

“From at least June 2009 through November 2013, Garcia, along with others, planned and executed a scheme to offer and pay bribes to three senior government officials of the Republic of Panama in order to obtain approximately $3.7 million worth of software sales by SAP to the Panamanian government. Garcia, in concert with others, paid bribes to one Panamanian government official in the amount of $145,000, and promised to pay bribes to two other government officials, all in contravention of the Foreign Corrupt Practices Act of 1977 (the “FCPA”).

Garcia was SAP’s Vice-President of Global and Strategic Accounts, responsible for sales in Latin America from February 2008 until April 2014, when SAP requested that he resign for his misconduct discussed herein. Garcia was employed by SAPI and worked on large deals all over Latin America using resources and personnel from other SAP subsidiaries including SAP Mexico.

SAP, through its 272 subsidiaries, sells software licenses and related services to 263,000 customers in 188 countries. SAP’s global business is directed and operated from its headquarters in Waldorf, Germany and executed through its numerous subsidiaries. Approximately 15% of SAP’s sales are directly to the customer. The remainder of SAP’s business is conducted through a network of more than 11,500 partners worldwide that provide an additional workforce of 380,000 individuals skilled in SAP software solutions and technology. SAP’s sales using a partner can be either (i) a direct sale to a customer with a sales commission paid to a partner that provides assistance, (ii) an indirect sale through a partner that purchases the software license and resells it to a customer at an independently determined increased price, or (iii) a direct sale to the partner, which acts as a distributor and independently resells the software licenses to customers in the future.

In June 2009, Garcia’s business associate, a Panamanian lobbyist (the “Lobbyist”), informed Garcia about potential software sales opportunities with the government of Panama and that he had an existing relationship with the newly elected government, including a high ranking Government Official A, who was tasked with improving technology solutions across multiple government agencies in Panama and had significant influence over Panama’s software purchasing decisions. Thereafter, SAP began investigating possible software sales to the Panamanian government. Initially this endeavor was led by local SAP sales employees in Mexico. Garcia, however, took over the business opportunity by recommending that SAP designate the Panama government as part of the Premier Customer Network – a group of large, strategically important, regional customers – which Garcia headed.

On February 9, 2010, Government Official A asked in an e-mail whether SAP could send him a letter inviting him to Mexico for “some fictional meetings in order to justify a trip there on Monday and Tuesday of Carnival.” The same day, Garcia acceded to the request and sent an e-mail to Government Official A with an attached fictitious letter on SAP letterhead inviting him “to Mexico City so that you can directly and personally evaluate the benefits that the Government of Mexico has obtained by adopting our products and services.” The letter also included a fictitious itinerary of proposed meetings that never occurred. The next day, on February 10, Garcia sent an e-mail from his personal Yahoo! e-mail account inquiring about possible business opportunities from Government Official A stating: “Any news . . . ? Was the document OK for him? Can you ask him to finalize a deal for us in Feb-March, I need between $5 and $10 million.”

In late February 2010, Garcia and another SAP employee traveled from Miami, Florida to Panama and met with Government Official A and others to discuss business opportunities. Thereafter, in April 2010, Garcia began preparing a proposal to sell approximately $29 million worth of software licenses to the Panamanian social security agency, anticipating that this sale would be the first of multiple deals with various ministries and agencies of the Panamanian government totaling over $100 million. Ultimately, some of these additional sales never materialized and others were smaller than expected.

Garcia and others were informed by the Lobbyist that in order to obtain these contracts from the government of Panama, they needed to bribe three Panamanian government officials that had significant influence in the Panamanian government’s award of contracts to purchase software.

In anticipation of the sales to the government of Panama, Garcia and others began planning the details of the bribery scheme. On June 9 and 10, 2010, Garcia discussed with others, including via e-mail, their plans to pay bribes to Government Official A (2% of the value of the contract) and Government Official B (10%), and receive kickbacks for themselves (2%). Also, on October 26, 2010, e-mails were exchanged with two attached spreadsheets referencing planned payments to Government Officials A and C of approximately $100,000 and $300,000, respectively.

To facilitate payments to Government Official B, the Lobbyist proposed using a sham contract for fictitious services to be provided by Government Official B’s brother-in-law’s company. On June 17, 2010, Government Official A received two draft sham contracts with the stated purpose of having these two back-to-back contracts so that “no trace remains if SAP conducts an audit . . . . I made it as simple as possible and made it look like a real contract.” On June 18, 2010, the Lobbyist e-mailed Garcia an unsigned corrected copy of the proposed consulting agreement, which provided that Government Official B’s brother-in-law’s company would receive “10% (ten percent) for performance of its Services and Consulting duties” relating to all “business opportunities” with the Panamanian government.

On October 19, 2011, the Lobbyist e-mailed a spreadsheet to Government Official C indicating that they would share $274,000 in 2011 and $226,000 in 2012. On January 9, 2013, another business associate of Garcia e-mailed Government Official A stating that Garcia and his business associate had agreed to give Government Official A some of their kickback so that Government Official A could receive a larger “commission” of $150,000. In addition, the business associate confirmed that Government Official A already had been paid $45,000 and acknowledged that $105,000 was still outstanding.

As a result of Garcia’s conduct in the bribery scheme, SAP, with its local partner, was able to sell software to the Panamanian government through four contracts from 2010 to 2013. These contracts generated revenues of $3.7 million to SAP.

One of the four contracts was a software license sale to the Panamanian social security agency, which was initially proposed to be a direct sale with the assistance of local partners. In order to facilitate the bribery scheme, the existing partners were replaced with a new local Panamanian partner. Because SAP refused to pay additional commission to this new Panamanian company, Garcia and others began looking for other ways to advance the bribery scheme. Finally, in the fall of 2010, Garcia finalized an indirect sale of the software license to the agency through the local partner, which, with Garcia’s assistance, ultimately sought and obtained an 82% discount on the sale price. Garcia caused various approval forms to be submitted that misstated the reasons for the large discount. Garcia stated that the discounts were necessary to compete with other software companies in establishing a relationship with the government of Panama when, in fact, the discounts were necessary to pay bribes to government officials. Garcia and others planned to sell SAP software to the intermediary at an 82% discount, who in turn would sell them at significantly higher prices to the Panamanian government and use part of the profits from the sale to pay bribes.

SAP agreed to sell the software licenses for the Panamanian social security agency to the local partner for approximately $2.1 million. In November 2010, the local partner successfully bid $14.5 million for the contract, which was awarded by the Panamanian government on January 31, 2011. Garcia, along with others, planned to pay bribes to Panamanian government officials from the proceeds of the software sale to the government of Panama.

Thereafter, as noted above, between June 2012 and December 2013, the Panamanian government awarded three additional contracts that included SAP software products valued at approximately $13.5 million, which were also sold at deep discounts by SAP to its local partner. For these contracts also, Garcia and others agreed to pay bribes to Panamanian officials from the proceeds of the software sales.

Between April 11, 2012 and August 13, 2013, Garcia and his business associate paid at least $145,000 in bribes to Government Official A. Between December 27, 2011 and October 29, 2012, another Garcia business associate paid Garcia a kickback of approximately $85,965 in his bank account in Florida from the proceeds of the sale of SAP software licenses to the Panamanian government. Thus, Garcia, with the assistance of others, bribed one government official and promised to pay bribes to two other government officials to obtain contracts to sell software to Panamanian government, all in violation of the FCPA.”

Based on the above, the order finds:

“By engaging in the conduct described above, Garcia, as an agent of SAP, violated [the anti-bribery provisions] in connection with the sale of software licenses and other related services to the government of Panama. On behalf of SAP, Garcia participated in structuring the deal as an indirect sale through the local partner, with the understanding that it would act as a conduit to send corrupt payments to several government officials. Garcia, along with others, promised to make bribe payments to two senior government officials and made bribe payments to another government official, all in violation of the FCPA. Garcia used the mails and other means and instrumentalities of interstate commerce to bribe government officials. Garcia used his SAP email account and his personal Yahoo! e-mail account to plan and execute the bribery scheme. In addition, as part of the bribery scheme, Garcia flew from Miami to Panama to meet with government officials and others, and Garcia received $85,965 in “kickbacks” into his bank account in Florida.”

“Garcia knowingly falsified SAP Mexico’s books and records by engaging in a scheme to create a slush fund at the local partner, which was used to pay bribes to Panamanian government officials. Garcia also knowingly circumvented the company’s internal controls to change the sale of the software licenses from a direct sale to the government of Panama to an indirect sale through intermediaries at deep discounts in order to facilitate payments to government officials. Specifically, Garcia justified the deep discounts by falsely claiming in approval forms that the discounts were necessary to beat competitors and obtain entry into the Panamanian market when, in fact, the discounts were necessary to generate funds to pay bribes to government officials. With respect to the leisure trip for Government Official A, Garcia prepared a fictitious letter and itinerary, and even used a personal e-mail account to avoid detection of his corrupt activities. Finally, despite signing SAP’s Code of Conduct prohibiting bribery, he engaged in an elaborate bribery scheme. Accordingly, Garcia violated Section 13(b)(5) of the Exchange Act, and Rule 13b2-1.”

In the SEC release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated: “Garcia attempted to avoid detection by arranging large, illegitimate discounts to a corporate partner in order to generate a cash pot to bribe government officials and win business for SAP.”

As noted in the SEC’s release,  the order “finds that Garcia violated the anti-bribery and internal controls provisions of the Securities Exchange Act of 1934.  Garcia consented to the entry of the cease-and-desist order and agreed to pay disgorgement of $85,965, which is the total amount of kickbacks he received, plus prejudgment interest of $6,430 for a total of $92,395.”

DOJ Action

Based on the same core conduct described above, in July the DOJ filed this criminal information against Garcia charging conspiracy to violate the FCPA’s anti-bribery provisions. As noted in the DOJ’s release, Garcia pleaded guilty and sentencing is to occur on Dec. 16, 2015.

Note – the plea agreement was filed with the court yesterday but is not publicly available.  This post will be updated when the plea agreement is made public.