Archive for the ‘Individual Enforcement Action’ Category

The SEC Gets Creative In Bringing Its First FCPA Enforcement Action Of 2015

Monday, January 26th, 2015

CreativityIn its first Foreign Corrupt Practices Act enforcement action of 2015, the SEC got creative by agreeing to a deferred prosecution agreement with a legal entity that has not existed since April 2011 and bringing a related administrative action against an individual who agreed to resolve the action without admitting or denying the SEC’s findings.  Never before has FCPA enforcement seen such a combination.

While the DOJ frequently uses NPA and DPAs to resolve corporate FCPA enforcement actions, last week’s enforcement action is only the third time the SEC has used an NPA or DPA to resolve an FCPA enforcement action.  The other two instances are Tenaris (DPA in 2011) and Ralph Lauren (NPA in 2013).

The enforcement action was against PBSJ Corporation (PBSJ), an entity acquired in October 1, 2010 by WS Atkins plc (“Atkins”) as well as Walid Hatoum, a former executive of PBS&J International, Inc. (“PBS&J Int’l, a wholly-owned subsidiary of PBSJ) concerning a relationship with an alleged Qatari official in connection with projects in Qatar and Morocco.

As highlighted in this prior post, PBSJ voluntarily disclosed its FCPA scrutiny in December 2009.

Post-acquisition, PBSJ became an indirect wholly-owned subsidiary of Atkins and in April 2011, PBSJ changed its name to The Atkins North America Holdings Corporation.

In summary fashion, the two-year DPA “alleges” that:

“The PBSJ Corporation … on or about 2009, violated [the FCPA's anti-bribery provisions, books and records and internal controls provisions] by making offers and promises of payment and other benefits to certain Qatari government officials in order to secure two multi-million dollar development contracts in Qatar and Morocco and by failing to keep accurate books and records relating to those transactions, and by failing to maintain internal accounting controls to ensure the transactions were recorded accurately and that financial statements were prepared in conformity with generally accepted accounting principles.”

According to the DPA:

“PBS&J International, Inc. (“PBS&J Int’l”) was a wholly-owned subsidiary of PBSJ headquartered and incorporated in Florida. PBS&J Int’l was a provider of engineering, architectural and planning services in international markets, including the Middle East. PBS&J Int’l currently is a subsidiary of Atkins.

The former President of PBS&J lnt’l, Walid Hatoum (“Hatoum”), is a United States citizen who initially worked for PBSJ as an engineer from 1986 until 1990. In February 2009, Hatoum was rehired to join PBS&J Int’l as its Director of lnternational Marketing, even though his prior employment file at PBSJ had been marked “Ineligible for Rehire .” Although Hatoum did not formally join PBS&J Int’l until April 2009, he assisted PBS&J lnt’l with identifying projects as early as November 2008. Hatoum was promoted to President ofPBS&J Int’l in mid-June 2009, and became an officer of PBSJ at the same time.

During 2009, PBS&J Int’l won two multi-million dollar development contracts. One contract was for work in Qatar and the other was for work in Morocco. Both were competitively solicited and approved by the Qatari Diar Real Estate Investment Company (“Qatari Diar”). Qatari Diar was established by the Qatari government to coordinate the country’s real estate development.

PBSJ and PBS&J Int’l, through Hatoum, offered bribes to the then-Director of International Projects at Qatari Diar (“Foreign Official”), to secure Qatari government contracts by planning to funnel funds to a local company the Foreign Official owned and, controlled (“Local Partner”). Foreign Official, a former business colleague of Hatoum’s at another U.S. engineering firm, worked for Qatari Diar throughout 2009, until his resignation from Qatari Diar on December 21, 2009. Prior to joining PBSJ, Hatoum and Foreign Official discussed directing business in the Middle East to Local Partner.

In return, Foreign Official provided PBS&J Int’l with access to confidential sealed-bid information and pricing information on the two government contracts that helped PBS&J Int’l tender bids that had a greater likelihood of being awarded, including a government contract for which the Foreign Official was the project manager.”

Under the heading “Offers and Promises Made to Foreign Officials,” the DPA contains two subsections: “LRT Project in Qatar” and “Design Contract in Morocco.”

As to Qatar, the DPA states:

“In November and December 2008, Hatoum began discussing potential employment with PBSJ. Even before he received a formal employment contract, Hatoum met with PBS&J Int’l to discuss opportunities to grow PBS&J Int’l business in the Middle East. Hatoum discussed projects involving Qatari Diar, including a light rail transit project in Qatar (“the LRT Project”).

In January 2009, Hatoum arranged for Foreign Official’s brother, through Local Partner, to introduce PBS&J Int’l to Qatari Diar senior executives involved in the LRT Project. Soon after that meeting, PBS&J Int’l decided to bid on the LRT Project. PBS&J Int’l added Foreign Official’s company, Local Partner, on its proposal team as a subcontractor to handle local operations such as hiring local labor, as well as complying with bonding and insurance requirements. In return, Hatoum and PBS&J Int’l agreed to pay the Foreign Official, through Local Partner, 40% of the profits realized from any LRT Project contract as well as reimburse its direct costs. The remaining profits were to be split between PBS&J Int’l (40%) and another U.S.-based subcontractor (20%), which
would perform all of the planning and engineering services for the LRT project.

At that time, Hatoum was the only person at PBS&J Int’l who had any knowledge about Foreign Official’s ownership interest in Local Partner. Had PBSJ conducted meaningful due diligence at that time, it would have discovered Foreign Official’s dual role as both government official and third-party owner/operator of Local Partner.

During the bidding process, Foreign Official gave confidential sealed bid information to PBS&J Int’l to assist it in winning the LRT Project in return for promised payments. Foreign Official also made strategic and technical decisions on many aspects of the LRT Project that favored PBS&J Int’l with Hatoum’s knowledge.

Foreign Official used a Local Partner alias to communicate that information to Hatoum and other PBSJ and PBS&J Int’l employees while disguising his involvement on multiple conference calls and in dozens of emails to the United States. Hatoum was aware that Foreign Official was using the alias in communications with PBSJ employees, officers, and directors and with Qatari Diar. Hatoum flew to the Middle East to meet with Qatari Diar officials, including Foreign Official, to discuss PBS&J Int’l’ s qualifications for the LRT Project. At the meeting, neither Foreign Official nor Hatoum informed Qatari Diar that Foreign Official was working for Local Partner and providing confidential information and other assistance to help PBS&J Int’l win the contracts.

Following its initial submission, PBS&J Int’l revised its bid, based on information and guidance provided by the Foreign Official, to best position itself to win the LRT Project and to withstand possible challenges from competitors. On or about August 3, 2009, Qatari Diar awarded the LRT Project contract worth approximately $35.6 million to PBS&J Int’l.

After the award, PBS&J Int’l opened a joint account with Local Partner that was accessible to Foreign Official’s wife. PBS&J Int’l also authorized a four-year letter of credit relating to a bank guarantee in Qatar. The letter of credit was a precondition for receipt of the first contract payment by Qatari Diar to PBS&J Int’l, an up front, 10% (approximately $3.6 million) payment, which was deposited into the joint account.

Once the award was received, Hatoum offered Foreign Official an “agency fee” to Local Partner for 1.8% of the LRT Project contract amount (equivalent to approximately $640,000). Additionally, PBS&J Int’l agreed to pay half of the salary of Foreign Official’s wife, who worked for Local Partner.”

Under the sub-heading “Design Contract in Morocco” the DPA states:

“In addition to the LRT Project, Qatari Diar opened a Morocco hotel resort development (“Morocco Project”) for competitive bid. On August 7, 2009, PBS&J Int’l emailed its Statement of Qualifications for the design contract to Foreign Official, the Qatari Diar project manager for the Morocco Project.

In October 2009, Hatoum offered payment to Foreign Official in the form of an agency fee to Local Partner to secure the Morocco Project. The Morocco Project was worth approximately $25 million to PBS&J Int’l, of which the Foreign Official was offered an agency fee of 3% of the contract amount, which equates to approximately $750,000. Hatoum instructed a PBS&J Int’l employee to hide the agency fee within the company’s bid proposal by inflating other components of the offer for the Morocco Project.

Foreign Official attended meetings with PBS&J Int’l employees to discuss the project but neither Foreign Official nor Hatoum told the employees that he was working for Local Partner. At the same time, Foreign Official, using his Local Partner alias, reviewed and made changes to PBS&J Int’l’ s original bid offer via email and phone. He also made key technical and strategic proposal decisions throughout the bidding process and instructed PBS&J Int’ l to lower its offer to a specific dollar amount. By doing so, he ensured PBS&J Int’l's final bid had a greater likelihood of being approved by Qatari Diar. On or around October 19, 2009, Qatari Diar informed PBS&J Int’l that it was awarded the Morocco Project.”

Under the heading “Red Flags,” the DPA states:

“PBSJ and PBS&J Int’l officers and employees ignored multiple red flags that should have led them to uncover the payment scheme. For example, PBS&J Int’l and PBSJ employees knew that Local Partner was providing them with confidential sealed bid information. Hatoum also informed the employees that he was obtaining information from someone that Hatoum described as a “good friend” and “top executive” at Qatari Diar. Before PBS&J Int’l submitted its bid for the Morocco Project, a PBS&J Int’l officer learned that the husband of one of the Local Partner employees was a government official working on the Morocco Project. The PBSJ Int’l officer learned of Foreign Official’s role while attending dinner with Hatoum, Foreign Official and the Foreign Official’s wife. In addition, a PBSJ employee knew that “agency fees” to Local Partner were disguised as legitimate costs within the Morocco Project bid.”

Under the heading “Discovery of the Payment Scheme,” the DPA states:

“Shortly after PBSJ Int’l was awarded the Morocco Project contract, PBSJ’ s former Chief Operating Officer commented to PBSJ’s then-general counsel that PBS&J Int’l was successful in winning two contracts in the Middle East within a fairly short period of time. PBSJ’s then-general counsel asked Hatoum how he was able to win the LRT and Morocco Project contracts over companies with far more international experience. Hatoum told PBSJ’s then-general counsel PBSJ offered “agency fees” in order to win the projects and, when asked, admitted there “would be a problem” if the agency fees were not paid. PBSJ’ s then-general counsel immediately launched an investigation of this issue.

Three weeks later, in November 2009, a Qatari government official informed Hatoum and the then-President of PBSJ that Qatari Diar had discovered Foreign Official’s involvement in Local Partner and was rescinding PBS&J Int’l's contract for the Morocco Project. Hatoum then secretly made an offer of employment to a second Qatari foreign official in return for influencing Qatari Diar to reinstate the contract. However, Qatari Diar refused to reinstate the contract and did not provide PBS&J Int’l any proceeds for the project. PBSJ suspended Hatoum in December 2009. Hatoum also began deleting emails and other records.

PBS&J Int’l and Qatari Diar negotiated a termination of the LRT Project contract effective December 31,2009. In January 2010, Qatari Diar entered into a bridge contract with PBS&J Int’l to continue work on the LRT Project (the “Bridge Contract”) until a replacement company could be found. Ultimately, the period of performance on the Bridge Contract was 16  months . PBS&J Int’l earned $2,892,504 in profits on the Bridge Contract.

PBSJ and Qatari Diar caught Hatoum’s scheme before any of the offered and authorized amounts were paid.”

Under the heading “Failure to Maintain Adequate Internal Controls,” the DPA states:

“PBSJ failed to devise and maintain an adequate system of internal accounting controls. The violations involved conduct orchestrated by a high level manager at PBS&J Int’l and numerous red flags were overlooked by PBSJ and PBS&J Int’l managers and employees. Employees were aware that they were receiving confidential information in a sealed-bid process from a foreign official and that their bids were inflated to conceal payments to Local Partner. Over a million dollars in payments were offered and authorized to Foreign Official through Local Partner without a system of internal accounting controls to identify and detect the improper transactions. PBS&J Int’l agreed to pay Local Partner 40% of the LRT Project profits without subjecting Local Partner or its employees to any meaningful due diligence. PBS&J Int’l did not request a due diligence questionnaire from Local Partner before it initiated its investigation into the matter, and asked no questions about Local Partner’s purported financial statements, work experience, ability to perform the work it was supposed to do under the contract, external auditors, or owners, despite knowing that a Local Partner employee was married to a government official at Qatari Diar. In fact, during the period, PBSJ considered but declined adopting due diligence controls over its contractors and joint venture partners.

As a result, PBS&J Int’l, through Hatoum, offered and authorized bribes to Foreign Official through Local Partner totaling approximately $1,390,000 to secure the LRT and Morocco Projects, plus a portion of any profits Local Partner realized from the LRT Project and partial salary to Foreign Official ‘s wife.

Although PBSJ offered FCPA training at PBSJ and PBS&J Int’l, the company did not ensure that its employees take the training prior to working on international matters. As a result, key PBS&J Int’l personnel on the LRT and Morocco Projects received little, if any, FCPA training during the relevant period. Hatoum received annual FCPA training from his previous employer. Hatoum was offered FCPA training by PBSJ on his first day of official employment in April 2009, but did not take it. Hatoum did not receive training from PBSJ until after Qatari Diar cancelled the Morocco Project in November 2009.”

Under the heading “Failure to Maintain Books and Records,” the DPA states:

“PBSJ, directly and through PBS&J Int’l, failed to make and keep books, records, and accounts which accurately and fairly reflected PBS&J Int’l's transactions with Local Partner intended for Foreign Official. Some of the payments offered and authorized to Foreign Official were concealed within other, legitimate categories of costs within bids, while others were improperly described in the books and records as legitimate transaction costs. PBSJ failed to accurately disclose in its books and records that the joint account entered into with Local Partner would benefit Foreign Official.”

Under the heading “Self-Report, Remediation, and Cooperation,” the DPA states:

“PBSJ conducted an internal investigation. PBSJ self-reported its preliminary findings of the conduct to staff of the Division of Enforcement (“Division”) and the Department of Justice (“DOJ”).

PBSJ also took immediate steps to end the misconduct. PBSJ suspended Hatoum in December 2009 and later reprimanded four other employees that missed red flags that should have alerted them to the illegal activity. PBSJ also withdrew all proposals in the Middle East initiated during Hatoum’s tenure with PBS&J Int’l. PBSJ reviewed its preexisting compliance program and revised and enhanced its compliance program, including, in part, adoption of: (1) a detailed due diligence questionnaire for contractors, sponsors, and agents; (2) an enhanced FCP A compliance program with mandatory annual training for employees and third-party agents; (3) an international compliance oversight committee at the corporate level; and (4) an annual FCPA compliance audit.

PBSJ ultimately provided substantial cooperation to the staff of the Division, including: voluntarily producing documents and disclosing information to the staff; voluntarily making witnesses available for interviews; and allowing its then-general counsel to interview with staff; and providing factual chronologies, timelines, internal interview summaries, and full forensic images of data.”

The DPA contains a so-called muzzle clause in which PBSJ and Atkins is prohibited from “denying, directly or indirectly, any aspect of [DPA] or creating the impression that the statements [in the DPA] are without factual basis.

In this release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated:

“Hatoum offered and authorized nearly $1.4 million in bribes disguised as ‘agency fees’ intended for a foreign official who used an alias to communicate confidential information that assisted PBSJ. PBSJ ignored multiple red flags that should have enabled other officers and employees to uncover the bribery scheme at an earlier stage.  But once discovered, the company self-reported the potential FCPA violations and cooperated substantially.”

As noted in the release:

“Under the DPA, PBSJ agreed to pay disgorgement and interest of $3,032,875 and a penalty of $375,000.  PBSJ took quick steps to end the misconduct after self-reporting to the SEC, and the company voluntarily made witnesses available for interviews and provided factual chronologies, timelines, internal summaries, and full forensic images to cooperate with the SEC’s investigation.”

Based on the same core conduct “alleged” in the DPA, the SEC also brought an administrative action against Hatoum.

In summary, the Administrative Order states under the heading “Hatoum Caused PBSJ’s Inaccurate Books and Records” as follows.

“Hatoum authorized illicit payments to Foreign Official that were not accurately and fairly reflected on PBSJ’s books and records. Hatoum directed subordinates to conceal some of the payments he offered and authorized to Foreign Official within bids. Other offers and promises to pay authorized by Hatoum to Foreign Official were improperly described in the books and records as legitimate transaction costs with his knowledge.”

Under the heading “Hatoum Caused PBSJ’s Internal Accounting Control Failure,” the order states:

“On April 22, 2009, Hatoum signed a “Business Conduct Standards” agreement for PBSJ employees in which he agreed that “I will neither accept nor give bribes or kickbacks of any value for services or favorable treatment for contracts.” As a high level manager at PBS&J Int’l and later as an officer of PBSJ, Hatoum was responsible for maintaining and ensuring compliance with PBSJ’s internal accounting controls at PBS&J Int’l. Hatoum, however, repeatedly exploited the company’s internal accounting control deficiencies to offer and authorize payments to Foreign Official through Local Partner totaling approximately $1,390,000 to secure the LRT and Morocco Projects, plus 40% of any profits realized from the LRT Project and partial salary to Foreign Official’s wife. Hatoum instructed subordinates to inflate PBS&J Int’l bids by concealing payments to Local Partner intended for Foreign Official. Hatoum took advantage of PBSJ’s accounting controls system by introducing Local Partner as a “legitimate” potential partner for the LRT Project and authorized a subordinate to execute an agreement to pay Local Partner 40% of the LRT Project profits without subjecting Local Partner or its employees to any meaningful due diligence. Hatoum also knowingly executed – and caused a PBS&J Int’l employee to send a questionnaire requesting advocacy assistance from the United States Department of Commerce that included false representations about Local Partner and PBS&J Int’l. Although Hatoum did not participate in PBSJ’s FCPA training until after the scheme was uncovered, Hatoum was aware of the prohibitions of the FCPA from annual FCPA training that he received from his former employer.”

As noted in the SEC’s release:

“The SEC’s order against Hatoum finds that he violated the anti-bribery, internal accounting controls, books and records, and false records provisions of the Securities Exchange Act of 1934.  Without admitting or denying the findings, Hatoum agreed to pay a penalty of $50,000.”

PBSJ and Atkins were represented by Mark Schnapp (Greenberg Traurig).  Hatoum was represented by Michael Lamont of Wiand Guerra King.

DOJ Prosecution of Individuals – Then vs. Now

Thursday, January 22nd, 2015

Thenvs.Yesterday’s post highlighted the following statistics concerning Foreign Corrupt Practices Act individual criminal prosecutions by the DOJ.

Since NPAs and DPAs were first introduced to the FCPA context in December 2004 (see here), there have been 83 corporate DOJ FCPA criminal enforcement actions. 53 of these corporate enforcement actions were resolved solely with an NPA or DPA. In only 5 of these actions – 9% – was there related criminal charges of company employees.

More broadly, other statistics recently published on this site highlighted how in this new era of FCPA enforcement approximately 75% of corporate DOJ FCPA enforcement actions have not (at least yet) resulted in any DOJ charges against company employees.

Prior posts proposed, based on these statistics, that instead of asking the “but why was nobody charged” question in connection with most corporate DOJ FCPA criminal enforcement actions, the more appropriate question is asking whether NPAs and DPAs necessarily represent provable FCPA violations.

To best highlight how NPAs and DPAs have transformed the nature and quality of FCPA enforcement, it is useful to analyze FCPA enforcement statistics prior to the introduction of NPAs and DPAs to the FCPA context in 2004.

For starters, it must be recognized that few meaningful conclusions can be drawn when comparing early FCPA enforcement (lets say 1977 – 2004) to FCPA enforcement 2005 to the present.

Growing pains associated with a new law, and a pioneering one at that, were understandable as both business organizations and enforcement agencies alike were absorbing the law and its new expectations and challenges.  More substantively, for much of the FCPA’s history there were material differences in the law, enforcement agency policies, and the global business environment that all impacted early FCPA enforcement.  

Nor can any meaningful conclusions be drawn from comparing fine and penalty amounts in early FCPA enforcement actions to fine and penalty amounts in this new era.  For starters, the FCPA’s statutory fine and penalty amounts have changed over time.  Perhaps more significantly, criminal fine amounts in FCPA enforcement actions are rarely based on the statutory amounts, but rather based on the Alternative Fines Act, a statute passed in 2006, which can result in a fine amount up to twice the benefit the payer sought to obtain through the improper payment. Moreover, for much of the FCPA’s history, the SEC did not have authority to assess civil monetary penalties in a wide variety of securities law enforcement actions including FCPA enforcement actions, and disgorgement, a central feature of most SEC FCPA enforcement actions in this new era, was not used for most of the FCPA’s history.

Although certain historical comparisons of FCPA enforcement lack meaningful value, other comparisons are noteworthy.

For instances, while one can question how the DOJ held individuals accountable (i.e whether the criminal fines and sentences were too lenient) for most of the FCPA’s history, the DOJ did frequently hold individuals accountable when a company resolved an FCPA enforcement action.

Indeed, from 1977 to 2004, approximately 90% of DOJ criminal corporate FCPA enforcement actions RESULTED in related charges against company employees.

Compare that to FCPA enforcement in this new era when approximately 75% of DOJ criminal corporate FCPA enforcement actions HAVE NOT RESULTED (at least yet) in related charges against company employees. 

Consider also that when a DOJ criminal corporate FCPA enforcement action is resolved solely with an NPA or DPA, approximatley 90% of such actions HAVE NOT RESULTED (at least yet) in related charges against company employees.

In other words, NPAs and DPAs have significantly distorted the nature and quality of FCPA enforcement and if the statistics recently published on this site do not convince you of this, no statistics ever will.

DOJ Prosecution Of Individuals – Are Other Factors At Play?

Wednesday, January 21st, 2015

What woudl you doYesterday’s post (here) focused on DOJ FCPA individual prosecutions and highlighted the following facts and figures.

  • Since 2008, the DOJ has charged 99 individuals with FCPA criminal offenses.
  • 58% of the individuals charged by the DOJ with FCPA criminal offenses since 2008 have been in just five cases and 78% of the individuals charged by the DOJ since 2008 have been in just eleven cases.
  • There have been 67 corporate DOJ FCPA enforcement actions since 2008 and of these actions, 50 (or 75%) have not (at least yet) resulted in any DOJ charges against company employees.

These statistics should cause alarm, including at the DOJ as it has long recognized that a corporate-fine only enforcement program is not effective and does not adequately deter future FCPA violations.   For instance, in 1986 John Keeney (Deputy Assistant Attorney General, Criminal Division, DOJ) submitted written responses in the context of Senate hearings concerning a bill to amend the FCPA. He stated as follows:

“If the risk of conduct in violation of the statute becomes merely monetary, the fine will simply become a cost of doing business, payable only upon being caught and in many instances, it will be only a fraction of the profit acquired from the corrupt activity. Absent the threat of incarceration, there may no longer be any compelling need to resist the urge to acquire business in any way possible.”

In 2010 Hank Walther (Deputy Chief Fraud Section) stated that a corporate fine-only FCPA enforcement program allows companies to calculate FCPA settlements as the cost of doing business.

In 2013 Daniel Suleiman (DOJ Deputy Chief of Staff, Criminal division) stated that “there is no greater deterrent to corporate crime that the prospect of prison time … if people don’t go to prison, then enforcement can come to be seen as merely the cost of doing business.”

More recently, Patrick Stokes (DOJ FCPA Unit Chief) stated that DOJ is “very focused” on prosecuting individuals as well as companies and that “going after one or the other is not sufficient for deterrence purposes.”

Earlier this week, Deputy Assistant Attorney General Sung-Hee Suh rightly acknowledged that “corporations do not act criminally, but for the actions of individuals.”

In my 2010 Senate FCPA testimony (here), I noted that the absence of individual FCPA charges in most corporate FCPA enforcement actions causes one to legitimately wonder whether the conduct giving rise to the corporate enforcement action was engaged in by ghosts.

Others have rightly asked the “but nobody was charged” question, including James Stewart in a New York Times column highlighted in this previous post.

However, as I stated in my Senate testimony, there is an equally plausible reason why no individuals have been charged in connection with many corporate FCPA enforcement actions.  The reason has to do with the quality and legitimacy of the corporate enforcement action in the first place.

Readers know well of the prevalence of non-prosecution and deferred prosecution agreements (NPAs / DPAs)  in the FCPA context. As highlighted in this recent post, since 2010, 86% of corporate DOJ enforcement actions have involved either an NPA or DPA.

Informed observers also understand how NPAs and DPAs, not subject to any meaningful judicial scrutiny, are often agreed to by companies for reasons of ease and efficiency, and not necessarily because the conduct at issue violates the FCPA.

Indeed, prior to becoming SEC Chair, Mary Jo White stated a “fear [that] the deferred prosecution [agreement] is becoming a vehicle to show results” (here) and former Attorney General Alberto Gonzales has stated as follows.

“It is “easy, much easier quite frankly” for the DOJ to resolve FCPA inquiries with NPAs and DPAs; such resolution vehicles have “less of a toll” on the DOJ’s budget and such agreements “provide revenue” to the DOJ.  It is all “unfortunate”

“In an ironic twist, the more that American companies elect to settle and not force the DOJ to defend its aggressive interpretation of the [FCPA], the more aggressive DOJ has become in its interpretation of the law and its prosecution decisions.”

Moreover, Mark Mendelsohn (former chief of the DOJ’s FCPA Unit), has talked about the “danger” of NPAs and DPAs and how “it is tempting for the [Justice Department] or the SEC…to seek to resolve cases through DPAs or NPAs that don’t actually constitute violations of the law.” (See “Mark Mendelsohn on the Rise of FCPA Enforcement,” 24 Corporate Crime Reporter 35, September 10, 2010).

For more on the above dynamics, see my article “The Facade of FCPA Enforcement.”

Individuals, on the other hand, face a deprivation of personal liberty, and are more likely to force the DOJ to satisfy its high burden of proof as to all FCPA elements.

In other words, perhaps the more appropriate question is not “but nobody was charged,” but rather do corporate NPAs and DPAs always represent provable FCPA violations?  For a recent excellent article asking the same general question, see here.

I set out to test this with the following working hypothesis.

  • Instances in which the DOJ brings actual criminal charges against a company or otherwise insists in the resolution that the corporate entity pleads guilty to FCPA violations, represent a higher quality FCPA enforcement action (in the eyes of the DOJ) and is thus more likely to result in related FCPA criminal charges against company employees.
  • Instances in which the DOJ resolves an FCPA enforcement action solely with an NPA or DPA, represent a lower quality FCPA enforcement action and is thus less likely to result in related FCPA criminal charges against company employees given that an individual is more likely to put the DOJ to its high burden of proof.

The below statistics provide a compelling datapoint concerning the quality and legitimacy of many corporate DOJ FCPA enforcement actions.

Since NPAs and DPAs were first introduced to the FCPA context in December 2004 (see here), there have been 83 corporate DOJ FCPA enforcement actions.

  • 14 of these corporate enforcement actions were the result of a criminal indictment or resulted in a guilty plea by the corporate entity to FCPA violations.  10 of these corporate enforcement actions – 71% – resulted in related criminal charges of company employees.
  • 53 of these corporate enforcement actions were resolved solely with an NPA or DPA.  In only 5 instances – 9% – was there related criminal charges of company employees.
  • A third type of corporate FCPA enforcement action is what I will call a hybrid action in which the resolution includes a guilty plea by some entity in the corporate family – usually a foreign subsidiary – and an NPA or DPA against the parent company.  Since the introduction of NPAs and DPAs in the FCPA context, there have been 16 such corporate enforcement actions.  In 5 of these actions – 31% -  there was related criminal charges of company employees. This percentage is what one might expect compared to the two types of corporate FCPA enforcement actions discussed above, although it is interesting to note the following regarding 3 of these 5 instances.  The DOJ ended up dismissing the charges against Si Chan Wooh (Schnitzer Steel), John O’Shea (ABB) was not found not guilty, and Bobby Elkin (Alliance One) received a probation sentence after the sentencing judge questioned many aspects of the enforcement action (see here for the prior post).

Although NPAs and DPAs were first introduced to the FCPA context in 2004, their use by the DOJ was sporadic at first and such alternative resolution vehicles did not become a fixture of FCPA enforcement until approximately 2007.

Thus, in testing the above hypothesis, 2007 is perhaps the best starting point.  Since 2007, there have been 77 corporate DOJ FCPA enforcement actions.

  • 12 of these corporate enforcement actions were the result of a criminal indictment or resulted in a guilty plea by the corporate entity to FCPA violations.  9 of these corporate enforcement actions – 75% – resulted in related criminal charges of company employees.
  • 50 of these corporate enforcement actions were resolved solely with an NPA or DPA.  In only 5 instances – 10% – was there related criminal charges of company employees.
  • A third type of corporate FCPA enforcement action is what I will call a hybrid action in which the resolution includes a guilty plea by some entity in the corporate family – usually a foreign subsidiary – and an NPA or DPA against the parent company.  Since 2007, there have been 15 such corporate enforcement actions.  In 4 of these actions – 26% -  there was related criminal charges of company employees. This percentage is what one might expect compared to the two types of corporate FCPA enforcement actions discussed above.

If the above statistics do not cause one to question the quality and legitimacy of many corporate FCPA enforcement actions, no empirical data ever will.  For those who believe NPAs and DPAs always represent provable FCPA violations, the ball is now in your court to offer credible explanations for following datapoints.

Since NPAs and DPAs were introduced to the FCPA context in 2004, if a corporate DOJ FCPA enforcement action is the result of a criminal indictment or resulted in a guilty plea by the corporate entity to FCPA violations, there is a 71% chance that related criminal charges will be brought against a company employee.  If a corporate DOJ FCPA enforcement action is resolved solely with an NPA or DPA, there is a 9% chance that criminal charges will be brought against a company employee.

Since 2007, when NPAs and DPAs become a fixture of DOJ FCPA enforcement, if a corporate DOJ FCPA enforcement action is the result of a criminal indictment or resulted in a guilty plea by the corporate entity to FCPA violations, there is a 75% chance that related criminal charges will be brought against a company employee.  If a corporate DOJ FCPA enforcement action is resolved solely with an NPA or DPA, there is a 10% chance that criminal charges will be brought against a company employee.

[Note – the above data was assembled using the “core” approach as well as the definition of an FCPA enforcement action described in this prior post]

A Focus On DOJ FCPA Individual Prosecutions

Tuesday, January 20th, 2015

Criminal LawThis post highlights certain facts and figures concerning the DOJ’s prosecution of individuals for FCPA offenses in 2014 and historically.

As highlighted in recent posts herehere, and here, the DOJ frequently talks about the importance of individual FCPA prosecutions. Assistant Attorney General Leslie Caldwell has stated that “certainly…there has been an increased emphasis on, let’s get some individuals” and that it is “very important for [the DOJ] to hold accountable individuals who engage in criminal misconduct in white-collar (cases), as we do in every other kind of crime.” DOJ FCPA Unit Chief Patrick Stokes has said that the DOJ is “very focused” on prosecuting individuals as well as companies and that “going after one or the other is not sufficient for deterrence purposes.”

Against this backdrop, what do the facts actually show?

Since 2000, the DOJ has charged 133 individuals with FCPA criminal offenses.  The breakdown is as follows.

  • 2000 – 0 individuals
  • 2001 – 8 individuals
  • 2002 – 4 individuals
  • 2003 – 4 individuals
  • 2004 – 2 individuals
  • 2005 – 3 individuals
  • 2006 – 6 individuals
  • 2007 – 7 individuals
  • 2008 – 14 individuals
  • 2009 – 18 individuals
  • 2010 – 33 individuals (including 22 in the Africa Sting case)
  • 2011 – 10 individuals
  • 2012 – 2 individuals
  • 2013 – 12 individuals
  • 2014 – 10 individuals

An analysis of the numbers reveals some interesting points.

Most of the individuals – 99 (or 74%) were charged since 2008.  Thus, on one level the DOJ is correct when it states that there has been an “increased emphasis” on individual prosecutions – at least as measured against the historical average given that between 1978 and 1999, the DOJ charged 38 individuals with FCPA criminal offenses.

Yet on another level, a more meaningful level given that there was much less overall enforcement of the FCPA between 1978 and 1999, the DOJ’s statements about its focus on individuals represents hollow rhetoric as demonstrated by the below figures.

Of the 99 individuals criminally charged with FCPA offenses by the DOJ since 2008:

  • 22 individuals were in the Africa Sting case;
  • 9 individuals (minus the “foreign officials” charged) were in the Haiti Teleco case;
  • 8 individuals were in connection with the Control Components case;
  • 8 individuals were in connection with the Siemens case;
  • 5 individuals were associated with DF Group in the Indian mining licenses case;
  • 5 individuals were associated with Direct Access Partners;
  • 4 individuals were in connection with the Lindsey Manufacturing case;
  • 4 individuals were  in connection with the LatinNode / Hondutel case;
  • 4 individuals were in connection with the Nexus Technologies case;
  • 4 individuals were in connection with the BizJet case; and
  • 4 individuals were in connection with the Alstom case.

In other words, 58% of the individuals charged by the DOJ with FCPA criminal offenses since 2008 have been in just five cases and 78% of the individuals charged by the DOJ since 2008 have been in just eleven cases.

Considering that there has been 67 corporate DOJ FCPA enforcement actions since 2008, this is a rather remarkable statistic.  Of the 67 corporate DOJ FCPA enforcement actions, 50 (or 75%) have not (at least yet) resulted in any DOJ charges against company employees.  (See here for the chart with details – current when published in October 2014).

In short, and as demonstrated by the statistics, DOJ FCPA individual enforcement actions are significantly skewed by a small handful of enforcement actions and the reality is that 75% of DOJ corporate enforcement actions since 2008 have not (at least yet) resulted in any DOJ charges against company employees.

Another very interesting and significant picture emerges when analyzing DOJ individual prosecution data based on whether the corporate entity employing or otherwise involved with the individual charged was a public or private entity.

Of the 99 individuals charged by the DOJ with FCPA criminal offenses since 2008, 71 of the individuals (72%) were employees or otherwise affiliated with private business entities.  This is a striking statistic given that 53 of the 67 corporate DOJ FCPA enforcement actions since 2008 (79%) were against publicly traded corporations.

In the 14 private entity DOJ FCPA enforcement actions since 2008, individuals were charged in connection with 7 of those actions (50%).  In contrast, in the 53 public entity DOJ FCPA enforcement actions since 2008, individuals were charged in connection with 10 of those cases (19%).  In short, and based on the data, a private entity DOJ FCPA enforcement is approximately three times more likely to have a related DOJ FCPA criminal prosecution of an individual than a public entity DOJ FCPA enforcement action.

Are other factors at play when it comes to the fact that 75% of DOJ corporate enforcement actions since 2008 have not (at least yet) resulted in any DOJ charges against company employees?  A future post will highlight a relevant datapoint.

[Notes – the above data was assembled using the “core” approach – see this prior post for an explanation.  The term “public entity”  is not limited to “issuers” under the FCPA, but rather a public entity regardless of which market it shares trade on.  Thus, for instance, JGC Corp. of Japan and Bridgestone are both public entities even though its shares are not traded on a U.S. exchange.]

DOJ Brings First FCPA Enforcement Action Of 2015

Wednesday, January 7th, 2015

European BankThis February 2014 post foreshadowed a future FCPA enforcement action against Dmitrij Harder in connection with a notable Third Circuit grand jury proceeding.

Yesterday, the DOJ announced the enforcement action against Harder, the former owner and President of Chestnut Consulting Group Inc. and Chestnut Consulting Group Co. (together “Chestnut Group”), for allegedly bribing an official with the European Bank for Reconstruction and Development.

The enforcement action is notable in that it invokes the rarely used “public international organization” prong of the FCPA’s “foreign official” element.

In the indictment, Harder is described as “Russian national, naturalized German citizen and permanent resident alien of the United States” who purportedly used the Chestnut Group entities to “provide, among other things, consulting services to companies seeking financing from multilateral development banks.”

According to the indictment:

“Between in or around 2007 through in or around 2009, Harder engaged in a scheme to pay approximately $3.5 million in bribe payments for the benefit of a foreign official to corruptly influence the foreign official’s actions on applications for financing submitted to the European Bank for Reconstruction and Development (“EBRD”) by the clients of Harder and the Chestnut Group, and to corruptly influence the foreign official to direct business to Harder and the Chestnut Group, and others.”

The EBRD is described as follows.

“The EBRD was a multilateral development bank headquartered in London, England, and was owned by over 60 sovereign nations. Among other things, the EBRD provided debt and equity financing for development projects in emerging economies, primarily in Eastern  Europe. On or about June 18, 1991, the President of the United States signed Executive Order 12766 designating the EBRD as a “public international organization.” The EBRD was thus a “public international organization,” as that term is defined in the FCPA.”

The EBRD Official is described as follows.

“EBRD Official” was a Russian and United Kingdom national residing in or around London, England, and was a senior banker working in the Natural Resources Group at the EBRD. As a senior banker, EBRD Official served as an Operations Leader in the Natural Resources Group and was responsible for leading the review of applications submitted to the EBRD for project financing, including loans and equity investments. EBRD Official thus had the authority to influence the process for approving project financing, and setting the terms and conditions for that financing. EBRD Official was a “foreign official,” as that term is used in the FCPA.  [...] Harder  knew EBRD Official from business associations dating back to at least 1999.”

The indictment also described the EBRD Official’s Sister as follows.

“EBRD Official’s Sister” was a Russian and United Kingdom national residing in or around London, England, and was the sister of EBRD Official. EBRD Official’s Sister purportedly provided consulting and other business services for the Chestnut Group. In reality, however, EBRD Official’s Sister provided no such services to the Chestnut Group or Harder.”

According to the indictment:

“Between in or about 2007 and in or about 2009, Harder, through the Chestnut Group, worked as a financial consultant to companies seeking project financing from the EBRD. For at least four of these applications, including those of Company A [a Russian independent oil and gas company] and Company B [an oil and gas company incorporated in the United Kingdom with operations in Russia] EBRD Official was the Operations Leader responsible for leading the management of the application process and negotiating the terms and conditions of any financing provided by the EBRD. Chestnut Inc. was retained by Company A and Company B despite its relatively small size, distant location from the EBRD, and unproven track record as a financial advisor. [...] [T]he EBRD ultimately approved the applications for project financing for Company A and Company B.”

[...]

In all, Chestnut Inc. received payments from Company A totaling approximately $2.9 million, and Harder caused payments to be made to EBRD Official’s Sister totaling approximately $1.06 million. While EBRD Official’s Sister purportedly received these payments as a result of providing consulting and other business services to the Chestnut Group, in reality, EBRD Official’s Sister provided no such services. Instead, EBRD Official’s Sister received these payments for the benefit of EBRD Official, to corruptly influence the foreign official’s actions on applications for financing by the clients of Harder and the Chestnut Group, and to corruptly influence the foreign official to direct business to Harder and the Chestnut Group.”

[...]

“[A]fter Chestnut Inc. received the success fees from Company B, Harder caused a payment of approximately $2,478,580.89 to be made to EBRD Official’s Sister. Although EBRD Official’s Sister purportedly received these payments as a result of providing consulting and other business services to the Chestnut Group, in reality, EBRD Official’s Sister provided no such services. Instead, EBRD Official’s Sister received these payments for the benefit of EBRD Official, to corruptly influence the foreign official’s actions on applications for financing by the clients of Harder and the Chestnut Group, and to corruptly influence the foreign official to
direct business to Harder and the Chestnut Group.”

Under the heading “concealment of the bribe payments,” the indictment alleges:

“Through the Chestnut Group, Harder paid EBRD Official’s Sister approximately $3.5 million in bribe payments for the benefit of EBRD Official. To conceal and cover up these bribe payments, Harder and EBRD Official’s Sister created false paperwork to make it appear that EBRD Official’s Sister had provided services to the Chestnut Group for these payments, when in fact no such services were provided.”

Based on the above allegations, the indictment charges Harder with one count of conspiracy to violate the FCPA and Travel Act, five counts of violating the FCPA, five counts of violating the Travel Act, one count of conspiracy to commit international money laundering, and two counts of money laundering.

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

“We are committed to combating foreign corruption, across the globe and across all industries, through enforcement actions and prosecutions of companies and the individuals who run those companies. As alleged, in this case, the owner and chief executive of a Pennsylvania financial consulting firm secured hundreds of millions of dollars in business by bribing a European banking official. He now faces an indictment for corruption in federal court.  Bribery of foreign officials undermines the public trust in government and fair competition in business.  The charges returned today reflect the clear message that we will root out corruption and prosecute individuals who violate the Foreign Corrupt Practices Act.”

U.S. Attorney Zane Memeger of the Eastern District of Pennsylvania stated:

“We will aggressively investigate and prosecute individuals in our district who use corrupt means like bribery to influence foreign officials.  Our criminal statutes in this arena must be enforced to ensure fair dealing in a competitive global marketplace where foreign officials often hold significant decision-making authority.  The alleged conduct here was particularly reprehensible because it undermined the legitimacy of a process designed to support businesses for the citizens of developing nations.”

Special Agent in Charge Edward Hanko of the FBI’s Philadelphia Division stated:

“This is a great example of the FBI’s ability to successfully coordinate with our international law enforcement partners to tackle corruption. Bribery – foreign or domestic – cripples the notion of fair competition in the marketplace.”

For more information on the conduct alleged in the enforcement action, see this 2012 Bloomberg article.