Additional Alstom-Related Charges

This prior post highlighted the recently unsealed criminal charges against Frederic Pierucci (a current Alstom employee) and David Rothschild (a former Alstom employee) concerning alleged conduct in connection with the Tarahan coal-fired steam power plant project in Indonesia.  The post highlighted several other individuals generically referred to in the charging documents.

Earlier this week, the DOJ announced (here) that William Pomponi (a former executive of Alstom Power Inc., a Connecticut-based subsidiary of Alstom) was charged for his alleged participation in the same scheme.   Pomponi, previously identified as “Employee A,” is now described as “a Vice President of Regional Sales” at Alstom Power Inc. and “was one of the people responsible for approving the actions of, and authorizing payments to, Consultants A and B, knowing that a portion of the payments [to the consultants] was intended for Indonesian officials in exchange for their influence and assistance in awarding the Tarahan Project …”.

Like the original Pierucci indictment, all of the alleged overt acts in the superseding indictment against Pomponi allegedly occured between 2002 and 2004, although the information does allege wire transfers from Alstom Power Inc.’s bank account to the bank account of Consultant A until 2009.

Like Pierucci, Pomponi is also charged with one count of conspiracy to violate the FCPA, four substantive counts of FCPA anti-bribery violations, money laundering conspiracy and four substantive counts of money laundering.

Kudos to the DOJ for including a link to the charging document in the release.  This used to be DOJ’s practice, but when its new site launched a few years ago, it stopped doing this.  Let’s hope this is a new practice!

Avon’s FCPA Expenses

Nearly five years ago – in June 2008 – Avon launched an internal investigation concerning FCPA compliance in China and other countries.  In many respects, the most notable aspect of Avon’s FCPA scrutiny has been its pre-enforcement action professional and expenses – approaching $350 million (see here for instance).

In its most recent quarterly filing, Avon stated as follows.  “Professional and related fees associated with the FCPA investigations and compliance reviews … amounted to approximately $7 during the three months ended March 31, 2013.”

Headlines read “Avon FCPA Costs Down to $7 Million for Q1″ and “Avon Slows Spending on Bribery Probe.”

Both accurate headlines, but it is amazing to note nevertheless that – five years into Avon’s FCPA scrutiny – the company is still spending approximately $110,000 per working day on its FCPA issues.  (See this prior post concerning Wal-Mart’s pre-enforcement action professional fees and expenses and asking “does it really need to cost this much?”).

International Philanthropy

FCPA material pops up in a variety of places.  Such as this article in www.wealthmanagement.com concerning the perils of global giving.  With two FCPA enforcement actions (Schering-Plough and Eli Lilly) based, in whole or in part, on donations made to a Polish castle foundation and with Wynn Resorts under FCPA scrutiny for a donation to the University of Macau (see here), FCPA scrutiny based on international charitable giving is no mere hypothetical.

Scrutiny Alerts

Scrutiny alerts concerning IBM, ADM, Total, and ENRC.

IBM

This recent post highlighted a ProPublica report regarding the relationship between various tech companies including H-P, IBM and Oracle with a ”senior technology officer for Poland’s national police and, later, the nation’s Interior Ministry, [who] set the terms for hundreds of millions of dollars in technology contracts and decided which ones should be awarded without competitive bidding.”

In a recent quarterly filing, IBM disclosed as follows.

“In early 2012, IBM notified the SEC of an investigation by the Polish Central Anti-Corruption Bureau involving allegations of illegal activity by a former IBM Poland employee in connection with sales to the Polish government. IBM is cooperating with the SEC and Polish authorities in this matter. In April 2013, IBM learned that the U.S. Department of Justice (DOJ) is also investigating allegations related to the Poland matter, as well as allegations relating to transactions in Argentina, Bangladesh and Ukraine. The DOJ is also seeking information regarding the company’s global FCPA compliance program and its public sector business. The company is cooperating with the DOJ in this matter.”

In 2011, IBM resolved an FCPA enforcement action concerning alleged conduct in South Korea and China.  (See here).  The settlement is still pending the approval of Judge Richard Leon (D.D.C.).  In 2000, IBM resolved an FCPA enforcement action concerning alleged conduct in Argentina. (See here).

ADM

Archer Daniels Midland Company recently stated as follows in this release.

“ADM is in discussions with the U.S. Department of Justice and the U.S. Securities and Exchange Commission regarding a previously disclosed FCPA matter dating back to 2008 and earlier, and expects a resolution sometime this year. Based upon recent discussions, ADM believes it is appropriate to establish a provision of $25 million ($0.04 per share) to cover the potential assessments that may be imposed by these government agencies.”

Total

France-based Total recently stated as follows (here) concerning its long-running FCPA scrutiny concerning business conduct in Iran.

“In 2003, the United States Securities and Exchange Commission (SEC) followed by the Department of Justice (DoJ) issued a formal order directing an investigation in connection with the pursuit of business in Iran by certain oil companies including, among others, TOTAL.  The inquiry concerns an agreement concluded by the Company with consultants concerning gas fields in Iran and aims to verify whether certain payments made under this agreement would have benefited Iranian officials in violation of the Foreign Corrupt Practices Act (FCPA) and the Company’s accounting obligations. The Company fully cooperates with these investigations.  Since 2010, the Company has been in discussions with U.S. authorities (DoJ and SEC) to consider, as it is often the case in these kinds of proceedings, an out-of-court settlement, which would terminate the investigation in exchange for TOTAL respecting a number of obligations, including the payment of a fine and civil compensation, without admission of guilt.  U.S. authorities have proposed draft agreements that could be accepted by TOTAL. Consequently, and although discussions have not yet been finalized, a provision of $398 million, unchanged since its booking as of June 30, 2012 and reflecting the best estimate of potential costs associated with the resolution of these proceedings, remains booked in the Group’s consolidated financial statements as of March 31, 2013.  In this same affair, TOTAL and its Chief Executive Officer, President of the Middle East at the time of the facts, have been placed under formal investigation, following a judicial inquiry initiated in France in 2006. At this point, the Company considers that the resolution of these cases is not expected to have a significant impact on the Group’s financial situation or consequences on its future planned operations.”

A $398 million FCPA enforcement action would be the third-highest of all-time.

ENRC

Last week the U.K. Serious Fraud Office announced here as follows.

“The Director of the SFO has accepted [Eurasian Natural Resources Corp.] ENRC Plc. for criminal investigation.  The focus of the investigation will be allegations of fraud, bribery and corruption relating to the activities of the company or its subsidiaries in Kazakhstan and Africa.”

In a statement, the U.K. company,  stated as follows.

“The Board of Directors (the ‘Board’) of Eurasian Natural Resources Corporation PLC (‘ENRC’ or, together with its subsidiaries, the ‘Group’) today notes that the SFO has moved to a formal investigation. ENRC confirms that it is assisting and cooperating fully with the SFO. ENRC is committed to a full and transparent investigation of its procedures and conduct.

ENRC has ADRs listed with the SEC and thus could also be subject to the FCPA.

This recent article in the Wall Street Journal states as follows.

“U.K.-listed Eurasian Natural Resources Corp. PLC said … allegations of wrongdoing over minerals sales conducted through a Russian network of agents were thoroughly investigated and dismissed” in 2007.

Reading Stack

Tom Fox (FCPA Compliance and Ethics Blog) has penned a new book – “Best Practices Under the FCPA and Bribery Act: How to Create a First Class Compliance Program.”  I was pleased to contribute the foreword to the book and noted that Tom’s “use of real events as learning devices to demonstrate compliance best practices make [the] book an engaging and informative read.”

Inside the NY Times Wal-Mart investigation (here) from the perspective of the Mexican journalist who assisted in the investigative reporting.

The Foreign Corrupt Practices Act Under The Microscope

Academic publishing is seldom quick. Yet before the calendar flips into another year, I am pleased to share my article concerning 2011 FCPA enforcement.  The abstract of ”The Foreign Corrupt Practices Act Under The Microscope” (see here to download) recently published in the University of Pennsylvania Journal of Business Law is as follows.  Information in the article is current as of January 16, 2012.

For most of the Foreign Corrupt Practices Act’s history, key decisions concerning its scope and enforcement were made behind closed doors around conference room tables in Washington, D.C. The FCPA took on a life of its own and, in many instances, the statute came to mean whatever the DOJ or SEC could get putative corporate FCPA defendants (mindful of the consequences of actual prosecuted charges) to agree to behind those closed doors. However, as the enforcement agencies continued to push the envelope on enforcement theories and practices, and as the DOJ brought more individual FCPA enforcement actions, including through manufactured sting operations, business entities and individuals alike began to openly fight back. While many FCPA enforcement decisions and procedures remain opaque, 2011 witnessed the most intense year of public scrutiny in the FCPA’s history. This Article (i) provides an overview of 2011 FCPA enforcement and discusses certain problematic enforcement trends, and (ii) highlights how in 2011 the FCPA was subjected to the most meaningful public scrutiny in its history. FCPA enforcement trends and scrutiny demonstrate that as the FCPA nears its thirty-fifth year, basic legal and policy questions remain as to the purpose, scope, and effectiveness of the FCPA.

Start your collection of FCPA Year in Reviews.  For my 2011 (short version), see here.  For 2010, see here (short version), here (long version).  For 2009, see here (long version).

Judge Leon Pulls a Judge Rakoff

My post concerning the SEC’s March 2011 enforcement action against IBM was titled “Questions Abound in IBM Enforcement Action.”  (See here).  Among the issues I discussed were the following.  That in December 2000, IBM resolved an FCPA enforcement action and consented, as part of the settlement, to the entry of an Order that requires IBM to cease and desist from committing or causing any future violation of [the FCPA's books and records provisions].  I noted that because the March 2011 enforcement action alleged FCPA books and records charges, that IBM was thus in clear violation of the 2000 court order.

The case was assigned to Judge Richard Leon (of Africa Sting fame) and lingered for a long time.  This Wall Street Journal Corruption Currents post and this Bloomberg article report that Judge Leon has refused to approve the settlement.

As stated by Bloomberg – “The heart of the dispute is that Leon, who has had the case under review for 22 months, wants reporting on a broader range of possible wrongdoing than the company is willing to turn over.  Leon, who spoke loudly and angrily, asked why the regulator would agree to limit such requirements for a company with a history of books-and-records violations. [...]   “I guess you want that $10 million judgment on your list of achievements this year,” Leon told [the SEC lawyer]. “Well, it’s not going to happen.”  He scheduled a hearing for Feb. 4.”

As stated by Wall Street Journal Corruption Current – “Leon also questioned broader SEC settlement policies and warned that he was among “a growing number of district judges who are increasingly concerned” by those policies.”

In not ”rubber stamping” the SEC – IBM settlement, Judge Leon pulled a Judge Rakoff.  Judge Rakoff of the S.D. of N.Y. has been a frequent focus on this site – see here, here, here and here.  See also, the discussion of Judge Rakoff in my 2010 article “The Facade of FCPA Enforcement.”

Edmonds Sentence

This past June, David Edmonds, a defendant in the long-running “Carson” enforcement action involving former employees of Control Components Inc., agreed to plead guilty on the eve of trial to substantially reduced charges. (See here for the prior post).  Earlier this week, Judge James Selna sentenced Edmonds to four months in prison and four months of home confinement.  (See here for Judge Selna’s sentencing memo).  As noted in the DOJ’s sentencing memo (here), the DOJ sought a 14 month prison sentence.

Other defendants previously sentenced in the case are Stuart Carson (4 months in prison followed by 8 months of home detention), Hong Carson (3 years probation to include 6 months of home detention) and Paul Cosgrove (13 months home detention).

It’s Official

Imagine a foreign country in which the president is actively seeking and accepting corporate money to fund inaugural festivities.  All sorts of red flags right?

But wait, this describes the United States and President Obama’s upcoming inauguration.  As detailed in this prior post, President Obama’s fundraising advisers “have urged the White House to accept corporate donations for his January 2013 inaugural celebration rather than rely exclusively on weary donors who underwrote his $1 billion re-election effort.”

It’s now official.  As noted by this recent New York Times article “President Obama’s finance team is offering corporations and other institutions that contribute $1 million exclusive access to an array of inaugural festivities.”  As noted in the article, Obama’s finance team is offering four different packages “with differing levels of access depending on the level of contribution.”

Our FCPA enforcement agencies are bringing enforcement actions against companies for conduct that includes providing $600 bottles of wine, Cartier watches, cameras, kitchen appliances, business suits, and executive education classes to individuals employed by foreign companies that are allegedly state-owned or state-controlled.  (These are all allegations found in recent FCPA enforcement actions).

But remember, as Assistant Attorney General Lanny Breuer recently declared (see here), “we in the United States are in a unique position to spread the gospel of anti-corruption.”

Whistleblower Statistics

The Dodd-Frank Act enacted in July 2010 contained whistleblower provisions applicable to all securities law violations including the Foreign Corrupt Practices Act.  In this prior post from July 2010, I predicted that the new whistleblower provisions would have a negligible impact on FCPA enforcement.  As noted in this prior post, my prediction was an outlier (so it seemed) compared to the flurry of law firm client alerts that predicted that the whistleblower provisions would have a significant impact on FCPA enforcement.

So far, there have not been any whistleblower awards in connection with FCPA enforcement actions.  Given that enforcement actions (from point of first disclosure to resolution) typically take between 2-4 years, it still may be too early to effectively analyze the impact of the whistleblower provisions on FCPA enforcement.

Whatever your view, I previously noted that the best part of the new whistleblower provisions were that its impact on FCPA enforcement can be monitored and analyzed because the SEC is required to submit annual reports to Congress.  Last month, the SEC released (here) its annual report for FY2012.

Of the 3,001 whisteblower tips received by the SEC in FY2012, 3.8% (115) related to the FCPA.  As noted in this similar post from last year, in FY2011 (a partial reporting year)  3.9% of the 334 tips received by the SEC related to the FCPA.

It Ought to Stop Marketing

In this previous post titled “It Ought to Stop” I focused on the FCPA conference industry and how conference firms drive attendance to their events by touting the public servants who will speak at the event.

Here is how conference firm C5 touts its upcoming conference in a press release (here).

Ask the U.S. DOJ and U.S. SEC directly how your company can remain compliant

Hear the latest on the newly released FCPA guidance. Along with the U.S. Securities & Exchange Commission’s, Charles E. Cain, the Deputy Chief of the FCPA Unit, Enforcement Division, we will have Matthew S. Queler, from the Criminal Division at the U.S. Department of Justice, presenting comprehensive, insightful and practical details of the U.S. government’s interpretation of the guidance, and highlight recent examples designed to help prevent future violations.  Their session at 14:00 on Day 1, will help you navigate the ever evolving markets and recognize the current enforcement trends; giving you the tools to reanalyse risk profiles and minimize areas of exposure. Finally, to top off the hour you will be given an exclusive opportunity to have your FCPA questions answered. The only way to obtain answers directly from the U.S. DOJ and U.S. SEC is to register for this forum!

The event, depending when you register and which package you select, costs between €4341 – €1795.

It ought to stop.

China Related Issues

An occassional topic of discussion on this site is Chinese state-owned enterprises (SOEs) and how such companies are frequently doing business outside its borders, including here in the U.S. (See here, here, and here for prior posts).

Wall Street Journal Columnist Dennis Berman “hit the nail on the head” in his recent column when he noted that one of “the most intriguing business stories of the past month has been taking place in San Francisco, where a group of U.S. developers is planning the biggest real-estate expansion there since the 1906 earthquake. The group—which includes Lennar Corp., Ross Perot Jr. and others —isn’t getting financing from an American bank or pension fund. No, the money, some $1.7 billion of it, is coming from the China Development Bank, a policy arm of the Chinese state.  As Berman further notes, a financing contingency is that China Railway Construction Corp. – a state-owned infrastructure builder with roots in the People’s Liberation Army—take part in the projects, which will develop up to 20,000 new homes.

Another occasional topic of discussion on this site is how Chinese companies are listing shares on U.S. exchanges and thus becoming “issuers” for purposes of the FCPA.  (See here for a prior post).  A core FCPA enforcement action of a Chinese issues has never occurred, but I predict it will some day – diplomatic and foreign policy issues aside.  Only now, the universe of potential targets is shrinking.  As noted in this recent Wall Street Journal article, several Chinese companies have delisted from U.S. exchanges.  The article provides the following information.  “At the peak, at year-end 2010, 167 Chinese companies were listed on Nasdaq and 99 on the NYSE. That compares with 84 China-based companies on NYSE and 129 on Nasdaq as of Nov. 30, 2012, according to the exchanges.”  For more, see this recent article from the New York Times.

ICE Melted Quickly

This recent post highlighted the cert petition of Instituto Constarricense de Electricidad of Costa Rica (“ICE”) to the Supreme Court related to victim issues in connection with the December 2010 Alcatel-Lucent FCPA enforcement action.  After several unsuccessful 11th Circuit appeals, ICE petitioned the Supreme Court to hears it case (see here).  The question presented for review is as follows.  “Whether a crime victim who is denied rights conferred by the federal Crime Victims’ Rights Act has a right to directly appeal the denial of those rights.”

The ice melted quickly as recently the Supreme Court denied ICE’s petition.

U.K. Enforcement Action

Earlier this week, the U.K. Serious Fraud Office announced (here) charges against former employees of Swift Group (an oil and gas services provider) following “a two-year investigation into allegations of corruption in relation to the tax affairs of Swift Technical Energy Solutions Ltd, a Nigerian subsidiary of the Swift Group of companies.”  According to the SFO release,  ”the value of the bribes alleged to have been paid is approximately£180,000.”

The SFO release notes that Paul Jacobs (the former Chief Financial Officer of Swift), Bharat Sodha (the former Tax Manager of Swift), Nidhi Vyas (the former Financial Controller of Swift), and Trevor Bruce (the former Area Director for Nigeria of Swift) were charged in relation to “bribes to tax officials to avoid, reduce or delay paying tax on behalf of workers placed by Swift.  The charges relate to payments said to have been made to agents of the Rivers State Board of Internal Revenue and the Lagos State Board of Internal Revenue, both in Nigeria. The payments were made in 2008 and 2009.”

*****

A happy holiday season to all.

First Her Majesty’s Crown Prosecution Service Inspectorate, the independent Inspectorate for the U.K. Crown Prosecution Service, recently released (see here) a “Report to the Attorney General On The Inspection of the Serious Fraud Office.”  The report focuses mostly on general issues, but readers may be most interested in Chapter 8 dealing with “Asset Recovery and Alternative Resolution.”

Second, the Crown Office (the agency responsible for prosecution of crime in Scotland) recently announced (here) a £5.6 million civil recovery enforcement action against Aberdeen, Scotland based drilling company Abbot Group Limited.  According to the release, Abbot “admitted that it had benefited from corrupt payments made in connection with a [2006] contract entered into by one of its overseas subsidiaries and an overseas oil and gas company.”  According to the release, ”the sum to be paid by Abbot represents the profit made by the company under the contract.” Two things to note.  First, the release makes much of the fact that Abbot “self-reported” the conduct at issue.  Yet, the release itself states that ”the corrupt payments were brought to light in May 2011 following enquiries by an overseas tax authority which resulted in an investigation by a firm of solicitors and a firm of accountants instructed by Abbot itself.”  Second, the release notes that the enforcement proceeds “will be invested in the Scottish Government’s hugely successful CashBack for Communities Programme which takes cash from the Proceeds of Crime and invests it in a range of sporting, cultural, community mentoring projects and sports facilities for the benefit of our young people and their communities.”

Third, David Green (Director of the U.K. Serious Fraud Office) recently answered questions before a House of Commons Justice Committee.  (See here for the transcript).  In his comments, Green: (i) says FCPA / Bribery Act Inc. created unnecessary “spin” regarding the SFO’s recent policy revisions; (ii) discusses the role of the SFO; (iii) makes an apt analogy to early enforcement of the FCPA; and (iv) talks about the prospect of DPAs in the U.K.

Below are excerpts from the Q&A’s that touch upon bribery and corruption issues.

“Q24 Steve Brine: [...] I want to ask you about the notes that I have been reading about facilitating payments, business expenditure and corporate self-reporting. What is your intention behind the revision of policies on those three areas? Are they really a radical departure from the previous guidance, or is there a bit of spin there?

David Green: It is not my spin. What you might call the bribery and corruption industry-by which, I suppose, if I was being unkind, I might mean lawyers who make an enormous amount of money out of it, advising corporates-wants to put it that way. In fact, it is not that. What I have done, as you know, is to withdraw policies in relation to bribery and corruption, and they have been replaced with a statement that we are subject to the joint guidance agreed with the Crown Prosecution Service. In other words, all I have done is to remove what is actually a unilateral gloss placed on that joint guidance by my predecessor at the SFO. It was also done in order to comply with the recommendations of the OECD which, as you will know, are about being careful how a self-report is defined.

What I have done most specifically, which certainly excited some-perhaps they are easily excited-is to withdraw the exclusive pledge that the SFO would not prosecute if you self-report. Why did I do that? In my view, it is not something that a responsible prosecutor should be saying, simply because you have no idea what kind of facts or combination of facts you might be presented with when somebody comes through your door with an expensive lawyer. You have no idea, so you cannot cater for it in advance. What you can say, without question, is that the fact of a genuine self-report-by a genuine self-report I mean, in its purest form, telling us something that we did not know already, and the corporate acting proactively to investigate it-must be very significant as a factor in weighing up the public interest limb of the decision to prosecute; that is the code test. That is what I am about. That is why I did that.

There is one other thing. I have said that I wanted to restate the SFO’s role as a crime-fighting agency. In addition, frankly, so far as I am concerned, we are not there to give advice to people. They can get their advice from their lawyers and their other experts, which they have in spades. I am not there, nor are my staff there, to give advice. We are there to investigate and prosecute serious fraud, bribery and corruption.”

[...]

Q26 Steve Brine:  [...] “Without specifying details, would you give us some indication of how many investigations you are currently undertaking into potential offences under the Act?

David Green: Under the new Act?

Q27 Steve Brine: Yes, because you are also bringing cases under old bribery legislation, are you not? Let us just look at the new Act. It is not retrospective, if I am correct.

David Green: That is exactly right. We are just concerned with stuff after July 2011. It is important to understand that section 2A of the Criminal Justice Act 1988 added a pre-investigation power in relation to bribery and corruption, which enables us basically to look at the facts and assess them, and to see whether there is material that would justify, in law, my launching a full-scale investigation. If I may, for the sake of clarity, I shall call those pre-investigation investigations “projects”.

From recollection, we have seven cases that are in the project phase. What will come of them I cannot tell you; I really do not know, but if we can we will turn them into investigations if we are justified in doing so. We have another half dozen cases that relate to pre-Bribery Act law; again, they are in the same phase.

Understandably, legislators, journalists and, indeed, members of the public may say, “Well, you have this marvellous new Bribery Act. What are you doing about it?” As a kind of private project, I have been looking at the fortunes of the FCPA-the Foreign Corrupt Practices Act of the United States. That was enacted in the late 1970s, and the first prosecution was in 1981. It did not get any teeth, in a really meaningful way, until the penalties were enhanced, and so forth, in the 1990s. I am not saying for a moment that you are going to have to wait 20 years for your first Bribery Act prosecution, but things are in hand and no one would be keener than I would to see a good, solid Bribery Act prosecution. We are working on it.”

[...]

“Q30 Mr Buckland: May I move on to the question of deferred prosecution agreements? I have read very carefully the memorandum and evidence that you have submitted to the Committee, and it is clear that the SFO supports the Government’s proposals to amend the current Crime and Courts Bill and to bring in DPAs. I do not know whether you or your office have troubled yourselves with the potential impact assessment, in terms of financial benefit and whether the SFO directly would receive either a share or the entirety of any receipts from financial settlements pursuant to DPAs.

David Green: As I understand it, all funds from DPAs will go directly to the Treasury, to avoid concerns over conflicts of interest.

Q31 Mr Buckland: So there is no hypothecation. Would it be fair to say that the SFO would have a legitimate expectation that, even though the moneys were not hypothecated, you could end up receiving some additional funding to help deal with the work that you are doing?

David Green: It has always been my view, Mr Buckland, that the SFO is here to stay, but that it needs to prove itself. Assuming that it proves itself-I hope fervently that it does-I would be the first to join any negotiation on an enhanced budget to get us more resources to do more good work. But I would say that, wouldn’t I?

Q32 Mr Buckland: I would expect you to, and I am glad to hear it. Having looked at the impact assessment prepared by the MoJ on DPAs, I was a little concerned. My reading of it is that there was an assumption in the document that there would not be an overall increase in the number of cases dealt with. In other words, there would potentially be a shift from early guilty pleas to DPAs, meaning no overall increase in the number of cases dealt with. Would that be your expectation, or would you hope for something more ambitious?

David Green: I would be far more ambitious. I would expect our case load-including cases dealt with under DPAs-to increase significantly once they kick off. I hope, as I am sure you do, that we will have our first DPA in place in early 2014.

Q33 Mr Buckland: Obviously, public perception is very important. Two aspects of DPAs as currently proposed may cause some concern. The first is having the preliminary hearings in private, as opposed to having all hearings in public. Does the SFO have a view on the reasons for that proposal?

David Green: I do not, as I sit here, have a particular view on that. What I would say is that later on, as the process develops, it does of course become public. Obviously a big difference between our DPAs and the US model is judicial involvement from day one. I would not be happy in expressing a particular view on that. It is something that I would have to think about, but I would be happy to let you know in due course.

Q34 Mr Buckland: I would be very grateful, Mr Green. Thank you. Again, public perception is important. The idea that you are doing some sort of niche job is wholly wrong, I think. The public are genuinely concerned about a culture of impunity that is perceived to have grown up around corporate and serious fraud. Is there a danger, with DPAs, that we could end up with white-collar crime somehow being seen as less serious than other types of crime?

David Green: That is obviously something that I have thought about a lot-indeed, it has troubled me-and I think that the answer is this. It is important that DPAs are seen as just one additional tool in the prosecutor’s toolkit. They are certainly not, in any sense, a universal panacea for corporate misconduct. They will be used in the right circumstances only. An example of what I think would be the right circumstance is where an incoming board chooses to self-report past misconduct by a previous board, which it has unearthed and proactively investigated. That would be just the sort of challenge to be met, in my view, by a DPA. It would certainly not be appropriate if, for instance, the corporate had been set up and used as a vehicle for fraud. That would be quite wrong. Obviously our first principle, as I hope I have made clear, is that serious fraud, bribery and corruption must always be prosecuted where that is possible-always.

Q35 Mr Buckland: Do you see this as having the potential to deal with the common scenario of when a legitimate business becomes dishonest? I am sure that, like me, you have had plenty of experience of that sort of scenario.

David Green: Of course, we would only be dealing with the corporate itself, under a DPA.

Q36 Mr Buckland: Not the individual.

David Green: Indeed. If there was a case against individuals, we would obviously prosecute if we could.

Q37 Mr Buckland: One concern that has been put to me about DPAs is that we have looked to the United States as an example, but that the US has a very big stick in terms of how they-I won’t say aggressively, but certainly robustly-police their free market, and the penalties available under the criminal justice system in the various US states to deal with wrongdoers. Do you think that the British scenario, where the stick is much less potent, is a good parallel to draw with the United States?

David Green: Just as we have adapted the US model for our circumstances, so we have adapted the carrot and stick equation. I have touched on this twice, but I cannot overemphasize the importance of our decision to enhance our intelligence capability. I really mean business on that. At the moment, our intelligence capability-the one I inherited-is really a sort of vetting process. I want to be far more aggressive in our intelligence activities, not to run it ourselves but to buy it in from, say, the City of London police or external agencies, going up to all sorts of exotic intelligence. The intelligence capability being built up-that is the stick. These people may well be found out, and they need to understand that. The carrot, of course, is often said to be certainty. Actually, it is not really certainty, because when they come along to self-report, they are not sure how they are going to end up. What they mean, I think, is finality. In other words, a line will be drawn in the sand under previous corporate misconduct, under certain conditions, and a company can then move on. Having thought about it quite a lot, I think that that is really what a corporate wants.”

Thanks

Many thanks for making FCPA Professor a part of your day.  October readership was an all-time record in the history of FCPA Professor (this site launched in July 2009) and two posts earlier this week “Stop Drinking the Kool-Aid” and “It Ought to Stop” were among the most read posts in FCPA Professor history.  As to these posts, I received many positive and supportive comments.

Should you have ideas for how FCPA Professor can be improved, please let me know at fcpaprofessor@gmail.com.

The “Foreign Officials” of Medicine Bow

Given the enforcement agencies’ untethered and boundless views on who is a “foreign official” under the FCPA, one never knows where a “foreign official” will pop up.

Such as Medicine Bow, Wyoming – population 300.

As noted in this recent Wall Street Journal article, “an arm of [China] state-controlled Sinopec Group, also known as China Petrochemical Corp., is planning to build an advanced facility [in Medicine Bow] that will convert coal into gasoline.”  According to the article, the project will create approximately 400 full-time jobs when the facility goes into operation.

In this 2010 article, I noted that with foreign government owned sovereign wealth funds making investments around the world (including in U.S. companies) and with SOEs listing public shares on various exchanges and otherwise doing business around the world, there has never been a more critical time for the enforcement agencies to make clear their legal and policy reasoning on “foreign official.”

Far from adding clarity on this issue, the recent “foreign official” trial court decisions (see here and here), as well as the DOJ’s recent “foreign official” reversal (see here), has only muddied the waters.

Are You Sure the Company Is Compliant?

Subject to a few observable exceptions, investors seem to care very little about FCPA scrutiny and enforcement actions.  All the more reason the below exchange from the recent Novartis AG earnings conference call caught my eye.

ANDREW BAUM (Citigroup Analyst):  One trend would notice with some of you peers is where there is a sudden acceleration in the growth in China, it is often closely followed by scrutiny under the Foreign Corrupt Practices Act. Could you just give us an update on what you’re doing to ensure compliance in Novartis in China, is held in check, so that doesn’t become a risk?

DAVID EPSTEIN (Novartis, Head of Pharmaceuticals): “You asked about compliance. And just — I would just say rest assured our Company does everything that is in the power to be done, on a worldwide basis, to teach our people to be compliant. Both in terms of training and coming from the top and everything else. So I’m quite pleased with where our Chinese business is going. And leave it at that.”

Quotable

The U.K. Independent recently ran (here) a profile of David Green (who became Director of the U.K. Serious Fraud Office this past spring).

Below are some notable Green quotes.

• “I would like the SFO to have a hard-edged, tough reputation. It should be something which is feared. You don’t want to be investigated by the SFO.”
• On the issue of guidance.  “I am sceptical of guidance notes. I suspect the motives of those that want absolutely precise guidance, because I suspect they want to wait round the corner and hit you over the head with it, and say, you are acting contrary to your guidance. The criminal law covers an endless multitude of possibilities and possible sets of facts. It is very hard to be specific. On corporate hospitality, it rather depends on the motive and the context and the timing and the value. You can’t just say, Wimbledon tickets are OK. They’ll say that you said, ‘Wimbledon tickets are all right.’”
• On the issue of criminal law enforcement as a funding source.  “It is a good source of income, and as a matter of principle I see nothing wrong with prosecutors being in part funded by money taken from criminals. I am all for that.”

Matthew Jacobs, a former DOJ prosecutor who now heads the San Francisco offices of Vinson & Elkins LLP, stated as follows in a recent Law360 article (“FCPA Enforcement Will Stay Robust Beyond Obama’s 2nd Term”):  “The Department of Justice has figured out that conducting investigations of corporations is a lucrative business.  This is the one area of government activity that actually brings money in rather than shoots money out. We’re talking about literally billions of dollars that the government is able to collect … as long as there’s a budget issue it’s not too cynical to say that … generating revenue is a factor in bringing these cases.”

Matt Kelly at Compliance Week recently stated (here) as follows concerning the DOJ’s promise of upcoming FCPA guidance and the role of Assistant Attorney General Lanny Breuer.  “We’d be foolish to ignore the profit motive, too [in addressing the why FCPA guidance now question]: Breuer will be in the private sector again soon enough, representing companies ensnared in FCPA probes. He’ll be able to command quite a premium if he can legitimately say, ‘I know how the Justice Department will interpret its FCPA guidance, because I wrote it. I don’t believe that career advancement is why Breuer is pushing for this guidance, but the fact remains that he stands to reap more money because of it.”

Brazil Developments

If Latin America is an area of your interest and concern, you should be reading the FCPAmericas blog (here) run by Matteson Ellis.  This recent post tracks developments of Brazil’s draft bribery bill.

Interesting Read

See here for a write-up of an article examining the differences between a tip and a bribe.  From the article. “It is generally considered a good-natured prosocial thing to tip, but bribing is considered to be antisocial and negative. [...] Tips and bribes can possess striking similarities that may lead to their positive association.  In a sense, both are gifts intended to strengthen social bonds and each is offered in conjunction with advantageous service. One could even argue that the main difference between the two acts is merely the timing of the gift: Tips follow the rendering of a service, whereas bribes precede it.”

*****

A good weekend to all.

• restate the SFO’s primary role as an investigator and prosecutor of serious or complex fraud, including corruption;
• ensure there is consistency with other prosecuting bodies; and
• meet certain OECD recommendations.

For the most part, although much ink is likely to be spilled by FCPA Inc. / Bribery Act Inc. in the coming days, the SFO’s “revised policies” are a yawner.

As to facilitation payments (here) and business expenditures (here), the SFO notes as follows.  Whether or not the SFO will prosecute in respect of a facilitation payment or payments or in respect of a bribe presented as hospitality or some other business expenditure will be governed by the Full Code Test in the Code for Crown Prosecutors and the Joint Prosecution Guidance of the Director of the SFO and the Director of Public Prosecutions on the Bribery Act 2010.

The Full Code Test (see here at Section 4) is essentially a realistic prospect of conviction plus in the public interest standard for bringing prosecutions.

As to facilitation payments, the SFO stated that “facilitation payments were illegal before the Bribery Act came into force and they are illegal under the Bribery Act, regardless of their size or frequency.”

Treatment of facilitation payments under the Bribery Act has been analyzed to death since enactment of the Bribery Act, however I have yet to see any reference to a pre-Bribery Act prosecution even though such payments were illegal prior to the Bribery Act.  That would seem to answer the public interest prong of the Full Code Test the SFO refers to regarding facilitation payments.

The Joint Prosecution Guidance of the Director of the SFO and the Director of Public Prosecutions on the Bribery Act 2010 (here) that the SFO refers to in its “revised policies,” and that it reaffirms, states as follows concerning facilitation payments and hospitality expenditures.

“Facilitation payments

Facilitation payments are unofficial payments made to public officials in order to secure or expedite the performance of a routine or necessary action. They are sometimes referred to as ‘speed’ or ‘grease’ payments. The payer of the facilitation payment usually already has a legal or other entitlement to the relevant action.  There is no exemption in respect of facilitation payments. They were illegal under the previous legislation and the common law and remain so under the Act.

Public Interest Considerations

Prevention of bribery of foreign public officials is a significant policy aspect of the Act. In the context of facilitation payments, the following public interest factors tending in favour of and against prosecution may be relevant. A prosecution will usually take place unless the prosecutor is sure that there are public interest factors tending against prosecution which outweigh those tending in favour.

Factors tending in favour of prosecution:

• Large or repeated payments are more likely to attract a significant sentence;
• Facilitation payments that are planned for or accepted as part of a standard way of conducting business may indicate the offence was premeditated;
• Payments may indicate an element of active corruption of the official in the way the offence was committed;
• Where a commercial organisation has a clear and appropriate policy setting out procedures an individual should follow if facilitation payments are requested and these have not been correctly followed.

Factors tending against prosecution:

• A single small payment likely to result in only a nominal penalty;
• The payment(s) came to light as a result of a genuinely proactive approach involving self-reporting and remedial action;
• Where a commercial organisation has a clear and appropriate policy setting out procedures an individual should follow if facilitation payments are requested and these have been correctly followed;
• The payer was in a vulnerable position arising from the circumstances in which the payment was demanded.

Hospitality and promotional expenditure

Hospitality or promotional expenditure which is reasonable, proportionate and made in good faith is an established and important part of doing business. The Act does not seek to penalise such activity.

Hospitality and promotional expenditure could, however, form the basis of offences under s1 (bribing another person) or s6 (bribing a foreign public official) and constitute a bribe for the purpose of s7 (failure to prevent bribery). Under section 1 there must be an element of “improper performance”. Under section 6, it will be necessary to show that the provision of hospitality or promotional expenditure was intended to influence the foreign public official so as to obtain or retain business, or an advantage in the conduct of business.

The more lavish the hospitality or expenditure (beyond what may be reasonable standards in the particular circumstances) the greater the inference that it is intended to encourage or reward improper performance or influence an official. Lavishness is just one factor that may be taken into account in determining whether an offence has been committed. The full circumstances of each case would need to be considered. Other factors might include that the hospitality or expenditure was not clearly connected with legitimate business activity or was concealed.

Public Interest Considerations

Prevention of bribery of foreign public officials is a significant policy aspect of the Act. When considering the public interest stage, the factors tending in favour of and against prosecution referred to in respect of “active bribery” (section 1) are likely to be relevant. A prosecution will usually take place unless the prosecutor is sure that there are public interest factors tending against prosecution which outweigh those tending in favour.”

As noted in this March 2011 post, U.K. guidance on facilitation payments and hospitality expenditures pretty much aligns the Bribery Act and the FCPA despite the obvious statutory differences.  I predicted in January 2011 (see here) that enforcement of the Bribery Act will be disciplined and measured and this belief is further strengthened by yesterday’s SFO release of its “revised policies.”

As the SFO indicates in this Q&A regarding its “revised policies,” the only change “is that reference in the joint prosecution guidance to the SFO’s former policy on self-reporting has been removed.”  (See here for that policy which explained that ”the benefit to the corporate [in self-reporting] will be the prospect (in appropriate cases) of a civil rather than a criminal outcome as well as the opportunity to manage, with us, the issues and any publicity proactively.”

The Joint Prosecution Guidance, which the SFO reaffirms in its “revised policies,” stated as follows regarding self-reporting.

“The SFO encourages corporate self-reporting, but offers no guarantee that a prosecution will not follow any such report.”

The remainder of the “revised policy” on self-reporting (here) states as follows.

“If on the evidence there is a realistic prospect of conviction, the SFO will prosecute if it is in the public interest to do so. The fact that a corporate body has reported itself will be a relevant consideration to the extent set out in the Guidance on Corporate Prosecutions. That Guidance explains that, for a self-report to be taken into consideration as a public interest factor tending against prosecution, it must form part of a “genuinely proactive approach adopted by the corporate management team when the offending is brought to their notice”. Self-reporting is no guarantee that a prosecution will not follow. Each case will turn on its own facts.”

There is nothing revolutionary about any of this.

It substantively aligns with the DOJ’s Principles of Prosecution of Business Organizations (here) which states that a company’s ”timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents” is one factor the DOJ will consider in deciding whether to criminally charge a business organization.”

In short, although much ink is likely to be spilled in the coming days, the SFO’s revised policies are a yawner.  Speaking of the ink, before the clock struck midnight on the SFO’s “revised policies” the industry was cranking out the marketing material.

This industry participant stated as follows regarding the “revised policies” and the DOJ’s promised forthcoming guidance.  “Given this activity from government regulators, it is more important than ever that companies develop a meaningful compliance program that can be adapted if needed to meet changing government expectations. A successful compliance system must adequately educate employees and create a framework that can prevent violations before they occur. [Company] has the expertise to implement a truly functional FCPA or UK Bribery Act compliance program. We can help companies protect themselves in the face of strict enforcement of these laws and constantly changing government guidance.”

This industry participant stated as follows.  “Given the new [Bribery] Act’s tough penalties and the apparent ambiguity surrounding the consequences of self-disclosure, businesses may want to take extra care to comply with its provisions. Accordingly, businesses should consider seeking the advice of legal counsel in navigating this statute and its attendant revisions.”

Recent Disclosures

As noted in this Wall Street Journal Corruption Currents post “German healthcare firm Fresenius Medical Care AG has opened an internal investigation into potential violations” of the FCPA.  The company’s recent SEC filing (here) states as follows.

“The Company has received communications alleging certain conduct that may violate the U.S. Foreign Corrupt Practices Act (“FCPA”) and other anti-bribery laws. In response to the allegations, the Audit and Corporate Governance Committee of the Company’s Supervisory Board is conducting an internal review with the assistance of counsel retained for such purpose. The Company has voluntarily advised the U.S. Securities and Exchange Commission and the U.S. Department of Justice that allegations have been made and of the Company’s internal review. The Company is fully committed to FCPA compliance. It cannot predict the outcome of its review.”

In addition, as noted in this Wall Street Journal Corruption Currents post, “the Securities and Exchange Commission is investigating Teva Pharmaceutical Industries Ltd, the world’s largest manufacturer of generic drugs, for possible violations” of the FCPA.   The Israel based company recently stated in an SEC filing (here) as follows.

“Teva received a subpoena dated July 9, 2012 from the SEC to produce documents with respect to compliance with the Foreign Corrupt Practice Act (“FCPA”) in Latin America. Teva is cooperating with the government. Teva is also conducting a voluntary investigation into certain business practices which may have FCPA implications and has engaged independent counsel to assist in its investigation. These matters are in their early stages and no conclusion can be drawn at this time as to any likely outcomes.”

U.K. DPAs

In this previous post, I discussed my letter to the U.K. Ministry of Justice urging the MoJ to just say no to deferred prosecution agreements.  Over at thebriberyact.com (a site that has lead discussion of the issue) the authors disagree with me (see here).  That’s all fine and dandy and healthy to the discussion, but the substance of the retort is not persuasive.

The retort is  basically that the SFO “frequently has to fight its corner in court” and that “sometimes it loses” whereas in the U.S. “the accepted wisdom [is] that an FCPA investigation would result in a corporate settlement” and the “DOJ simply [does] not have to test its legal theories in court.”  In short, the authors state “statistically in the US corporates and their counsel often fold in the face of a DOJ investigation” but “in the UK this is not so.”

Contrary to the suggestion in the retort, I did not ignore the Bribery Act’s Section 7 offense – rather it is all the more reason to reject DPAs.

The retort closes as follows.  “Sadly, as it stands, the UK enforcement agencies do not have equality of arms when it comes to their enforcement toolkit.  Put another way the DOJ can end run UK enforcement agencies because it does have the potential to enter into DPA’s.  This reason alone is justification enough for putting in place a system which delivers a similar result to the US system.”

This confirms in my mind that the UK’s desire for DPAs has little to do with justice and deterring improper conduct, but more to do with enforcement statistics and posturing in an emerging “global arms race” when it comes to “prosecuting” corruption and bribery offenses.

Avon Developments

Avon was in the news quite a bit this week.

On Monday, the Wall Street Journal reported (here) that “federal prosecutors looking into possible bribery of foreign officials by Avon have asked to speak to Andrea Jung, the former chief executive and current full-time chairman.”

On Wednesday, the company filed its quarterly report and stated, among other things, as follows.  “We are in discussions with the SEC and DOJ regarding mutually resolving the government investigations. There can be no assurance that a settlement will be reached or, if a settlement is reached, the timing of any such settlement or that the terms of any such settlement would not have a material adverse effect on us.”  During the Q2 earnings call, company CEO Sheri McCoy stated as follows.   “We are in discussion with the SEC and DOJ regarding mutually resolving the government investigations.”

On Thursday, the Wall Street Journal reported (here) that McCoy “frustrated with the pace of Avon’s internal probe, has pushed to bring in a second law firm for advice on the progress of the investigation.   The company has held discussions with law firm Allen & Overy LLP for that role.”  Arnold & Porter has been leading Avon’s investigation.  According to the article, Avon’s “probe has turned up millions of dollars of payments in Brazil and France made to consultants hired to assist with Avon’s tax bills in those countries.”

What to make of the above information?

It is unusual for the enforcement agencies to want to speak to a former CEO and current chairman in connection with an FCPA inquiry.  But then again, prosecutors have reportedly spoken to several other Avon executives in connection with the probe.  Given Avon’s disclosure that it has begun settlement discussions, this would suggest that the factual portion of the enforcement agencies investigation is over.

Avon’s FCPA scrutiny has perhaps been most notable for the amount of pre-enforcement action professional fees and expenses – approximately $280 million.  Thus, yesterday’s report that the company is considering bringing in a second law firm nearly four years into the investigation is interesting and unusual.

Even though Avon has disclosed it is in settlement talks, an enforcement action in 2012 is not certain.  In many cases, companies have disclosed the existence of FCPA settlement discussions, but the actual enforcement action did not happen for 6-12 months (or longer).

Whenever the enforcement action occurs, and whatever the ultimate fine and penalty is, Avon’s greatest financial hit  has likely already occured - its pre-enforcement action professional fees and expenses.  For instance, assuming a settlement amount would match the $280 million, this would be the sixth largest FCPA settlement of all time, and none of the enforcement actions in the top 5 were outside the context of foreign “government” procurement.

Total Settlement Near?

For some time, there has been speculation that Total S.A. (you better sit down for this) would actually mount a defense and put the DOJ and SEC to its burden of proof in an enforcement action.  Information in a recent company press release suggests that this is unlikely to occur.  In this recent release, Total stated as follows.  “Total has been cooperating with the … SEC and DOJ in connection with an investigation concerning gas contracts awarded in Iran in the 1990′s.  Total, the SEC, and the DOJ have conducted discussions to resolve issues arising from the investigation.  In light of recent progess in these discussions, Total has provisioned 316 million euros [$389 million]  in its accounts in the second quarter of 2012.”

A $389 million settlement would be a top five FCPA settlement in terms of fine and penalty amounts.  For additional coverage, see here from Reuters.

Empty Olympic Seats

A reason, perhaps, for those empty Olympic seats?  According to a recent study (see here) by the Society for Corporate Compliance and Ethics  “tighter than anticipated corporate entertainment and gift policies.”

Smith & Wesson Derivative Action Dismissed

Even against the backdrop of generally frivolous plaintiff derivative claims in the FCPA context, the action against Smith & Wesson (“S&W”) stood out.  After S&W employee Amaro Goncalves was criminally indicted in the manufactured Africa Sting case, certain investors filed a derivative claim in U.S. District Court in Massachusetts suing members of the board of S&W and company officers derivatively on behalf of the corporation for failing to have effective FCPA controls and oversight, thereby breaching their duty of care.

In dismissing the complaint (see here for the decision) Judge Michael Ponsor characterized the complaint as follows. “[I]n essence, that the company enjoyed an increase in international sales and then had an employee indicted for FCPA violations. This indictment, later dropped, supposedly evidenced a failure to implement proper controls.”

For another recent dismissal of an FCPA inspired derivative claim against Tidewater, see this prior post.  See also this recent post from Kevin LaCroix at The D&O Diary blog.

Sensata Technologies

In October 2010, Sensata Technologies disclosed in a quarterly report (here) as follows.

“An internal investigation has been conducted under the direction of the Audit Committee of the Company’s Board of Directors to determine whether any laws, including the Foreign Corrupt Practices Act (“FCPA”), may have been violated in connection with a certain business relationship entered into by one of the Company’s operating subsidiaries involving business in China. The Company believes the amount of payments and the business involved was immaterial. The Company discontinued the specific business relationship and its investigation has not identified any other suspect transactions. The Company has contacted the United States Department of Justice and the Securities and Exchange Commission to begin the process of making a voluntary disclosure of the possible violations, the investigation, and the initial findings. The Company will cooperate fully with their review.”

In its most recent quarterly report (here), the company disclosed as follows.

“During 2012, the DOJ informed us that it has closed its inquiry into the matter but indicated that it could reopen its inquiry in the future in the event it were to receive additional information or evidence. We have not received an update from the SEC concerning the status of its inquiry.”

Did Sensata ”win a declination” as the FCPA Blog suggested here?

Since August 2010 (see here for the prior post) I have proposed that when a company voluntarily discloses an FCPA internal investigation to the DOJ and the SEC, and when the DOJ and/or SEC decline enforcement, the DOJ and/or the SEC should publicly state, in a thorough and transparent manner, the facts the company disclosed to the agencies and why the agencies declined enforcement on those facts.

Perhaps then we would know if the DOJ concluded it could prove beyond a reasonable doubt all the necessary elements of an FCPA charge, yet decided not to pursue Sensata – which is my definition of declination as noted in this prior post.  Anything else, is what the law commands, not a declination.

Favorite Read

One of my favorite reads is always Shearman & Sterling’s “Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act.”  See here for the most recent edition.

As to “foreign official,” the report states as follows. ”[T]he government does not appear to have been deterred by the [foreign official] debate. In most of the cases brought in 2012, the relevant government officials were employed by “instrumentalities” such as state health insurance plans (Orthofix), a state-owned nuclear plant (Data Systems & Solutions), government hospitals (Biomet and Smith & Nephew), a state-owned real estate development company (Peterson) a state-owned oil company (Marubeni), and state-owned airlines (NORDAM).”

As to FCPA guidance, the report states as follows. ”We understand that this guidance will be issued before October, when the US is scheduled to issue a written progress report on its implementation of the OECD Working Group on Bribery’s recommendations.”

A final kudos – Shearman & Sterling keeps its FCPA enforcement statistics the best way.  As it explains – “we count all actions against a corporate “family” as one action. Thus, if the DOJ charges a subsidiary and the SEC charges a parent issuer, that counts as one action.”  This is consistent with my “core” approach (see here), but unlike many others in the industry.

Weekend Reading Stack

An interesting and informative article (here) in Fortune about the Alba-Alcoa tussle and the role of Victor Dahdaleh.  For more on the underlying civil suit between Alba and Alcoa see this recent Wall Street Journal Corruption Currents post.

SOX’s executive certification requirements were supposed to be a panacea for corporate fraud.  It has not happened.  See here from Alison Frankel (Reuters) and here from Michael Rapoport (Wall Street Journal).  As noted in this prior post concerning the Paul Jennings (former CFO and CEO of Innospec) enforcement action, SOX certification charges were among the charges the SEC filed against Jennings.  Then SEC FCPA Unit Chief Cheryl Scarboro stated, “we will vigorously hold accountable those who approve such bribery and who sign false SOX certifications and other documents to cover up the wrongdoing.”  Speaking of Jennings, as noted in this recent U.K. Serious Fraud Office, Jennings recently pleaded guilty to one charge of conspiracy to corrupt Iraqi public officials and other agents of the Government of Iraq.

*****

A good weekend to all.

Yesterday the U.K. Serious Fraud Office announced (here) an enforcement action against OPL regarding “unlawful conduct related to subsidiaries incorporated in Tanzania and Kenya.”  The conduct at issue included “participating in public tenders for contracts to supply governments with text books and other educational materials for the school curricula.”

Pursuant to a civil recovery order under the Proceeds of Crime Act, OPL agreed to pay £1,895,435.

Under the heading “self referral” the SFO release states as follows.

“In 2011, OUP became aware of the possibility of irregular tendering practices involving its education business in East Africa.  OUP acted immediately to investigate the matter, instructing independent lawyers and forensic accountants to undertake a detailed investigation. As a result of the investigation, in November 2011 OUP voluntarily reported certain concerns in relation to contracts arising from a number of tenders which its Kenyan and Tanzanian subsidiaries … entered into between the years 2007 and 2010. [...] The investigation was thorough – involving numerous interviews and an extensive review of documents and electronic data – and completed to the satisfaction of the SFO. The substantial product of those investigations was presented to the SFO [...]  The product of that work led the SFO … to believe that [OPL subsidiaries] had offered and made payments, directly and through agents, intended to induce the recipients to award competitive tenders and/or publishing contracts for schoolbooks.”

The SFO release states that “a number of relevant features … led to the decision to pursue a civil recovery order in place of a criminal prosecution.”  Those factors include the following:  “OUP has conducted itself in a manner which fully meets the criteria set out in the SFO guidance on self reporting matters of overseas corruption” and “there is no evidence of Board level (or the equivalent) knowledge or connivance within OUP in relation to the business practices which led to the case being referred to the SFO.”  The SFO release also states as follows.  “The products supplied were of a good standard and provided at ‘open market’ values.  This means that the jurisdictions involved have not been victims as a result of overpaying for the goods or as a result being supplied goods which were unsuitable or not required.”

The SFO release further states as follows.

“Since the occurrence of the conduct that is the subject matter of the civil recovery order, OUP has introduced enhanced compliance procedures intended to significantly reduce the risk of recurrence of such conduct within OUP.  These procedures will be subject to review by a monitor who will report to the Director of the SFO within twelve months …”.

As noted in the SEC release, OUP also “unilaterally offered to contribute £2,000,000 to not-for-profit organisations for teacher training and other educational purposes in sub-Saharan Africa.  This was a reflection of the seriousness with which OUP views the course of events that were subject to the investigation and a wish to acknowledge that the conduct of [its subsidiaries] fell short of that expected within its wider organisation.”  As to this contribution, the SFO releases states that it “decided that the offer should not be included in the terms of the court order as the SFO considers it is not its function to become involved in voluntary payments of this kind.”

In the release, SFO Director David Green states as follows.  “This settlement demonstrates that there are, in appropriate cases, clear and sensible solutions available to those who self report issues of this kind to the authorities.  The use of Civil Recovery powers has been exercised in accordance with the Attorney General’s guidelines.  The company will be adopting new business practices to prevent a recurrence of these issues and these new procedures will be subject to an extensive and detailed review.”

Finally, the SFO release notes that it ”has previously been subject to criticism in relation to the transparency of the processes and proceedings in civil recovery matters.”  Thus the SFO release links to a number of documents including this Claim Form which sets forth specific claim details.

Based on the same core conduct, the World Bank also announced yesterday (here) that “OUP has agreed to make a payment of US$500,000 to the World Bank.”  In addition, as part of a negotiated resolution, the World Bank “announced the debarment of two wholly-owned subsidiaries of OUP, namely: Oxford University Press East Africa Limited (OUPEA) and Oxford University Press Tanzania Limited (OUPT) – for a period of three years following OUP’s acknowledgment of misconduct by its two subsidiaries in relation to two Bank-financed education projects in East Africa.”

In a statement (here) OUP Chief Executive Nigel Portwood stated as follows.

“OUP is committed to maintaining the highest ethical standards, and we have been deeply concerned to discover evidence of wrongdoing in two of our African subsidiaries. We do not tolerate such behaviour. As soon as these matters came to light we acted immediately to investigate thoroughly and report to the relevant authorities. We have strengthened our management in the region and are taking appropriate disciplinary action in respect of those involved in this conduct.”

*****

UK Bribery Act – Year One

The UK Serious Fraud Office is yet to take enforcement action under the UK Bribery Act (“Bribery Act”).  This is hardly a surprise to those familiar with the demands of an investigation into complex economic crime.  The type of bribery cases that the SFO is duty bound to investigate and prosecute are precisely those that involve a heavy commitment of resource and time.   The SFO is reported to currently spend an average of three and a half years and £1.5 million ($2.25 million) investigating each bribery case.  These are not the Munir Patel type of bribery prosecutions that are typically handled by the UK Crown Prosecution Service (“CPS”).

Some commentators had set unrealistic expectations for the speed at which enforcement actions would appear, predicting a swift procession of dawn raids and arrests.  This sense of anticipation and the inevitable anti-climax may well, at least in part, explain the findings of recent surveys, including a poll conducted by Deloitte.   The poll found that fewer than one in ten of the 1200 compliance professionals polled expressed any concern about the possibility of a Bribery Act enforcement action being brought against their organisation.  There appears to be little to fear from the SFO for the vast majority of those polled.  In spite of the undoubted challenges that confront the SFO in the year ahead, it is important for companies and senior individuals to guard against complacency.

In the year since the Bribery Act came into force, David Green CB QC has taken over as Director of the SFO and the UK government has made tangible strides towards the adoption of a UK version of the US Deferred Prosecution Agreement (“DPA”).  The new director will have little choice but to continue the SFO’s policy of guiding, assisting and engaging with responsible corporates and senior individuals, but there is no doubt that he will instil a more hard edged prosecutorial approach at the SFO than has been the case in the past.   Green is a seasoned barrister who has defended and prosecuted serious economic crime cases during his 25 year career at the criminal bar.  He also has prior experience of leading two prosecutions agencies. He was appointed the first director of the Revenue and Customs Prosecutions Office (“RCPO”) in April 2005, and served as director of the CPS Central Fraud Group from January 2010 until his return to the bar in April 2011.

Green began his four year term at the SFO on 23 April 2012.  Since then, he has started to articulate his plans for the SFO in interviews with the Financial Times and most recently in a keynote address he delivered at an anti-corruption conference held in London on 26 June.   At the conference, Green described this as a “challenging but exciting time” for the SFO.  In a likely reference to the Tchenguiz case, he accepted that some of the recent “trenchant” criticism of the SFO has been justified, but stated that the SFO was “here to stay.”  He warned against the “dilution” of the SFO brand by chasing “eye-catching quick results or taking short cuts” and said that he will not “sacrifice solid prosecutorial demands for easy headlines.”  Green will focus the SFO’s “blood and treasures” on only the “most important cases *** that undermine confidence in UK Plc. and the City of London” and those that “undermine a level playing field.”   He said that the SFO would not pursue cases of “crooks overcharging” but would look to use its “unique set up and capabilities to do what others cannot do.”

Green made no reference to the CPS Inspectorate-led review of the SFO that is currently underway, but explained that he has set about re-organising the SFO into four operational divisions; two dedicated to bribery and two to fraud.  He is in the process of recruiting four senior civil servants into the “divisional head” roles.  In addition, he is seeking to appoint a General Counsel to “shape and critique” cases, and a “Specialist Advisor” to “sharpen cases” and advise him on DPAs and civil settlements.  Green made it clear that he is looking to bring external expertise into the organisation.  He said that he wants to “foster and encourage a revolving door between private practice and the SFO” and extended an invitation to members of the junior bar, solicitors, investigators and accountants to join the SFO, either on a permanent basis or on secondment.

Green reiterated his support for the introduction of a UK DPA mechanism, stating that prosecutors should have “access to the broadest possible range of prosecutorial tools” so that they are not “outdone by the opposition.”   He talked about strengthening his intelligence unit and made it clear that he would welcome a debate on whether UK whistle-blowers should be financially rewarded.  He would like to “extend the reach” of the SFO and “encourage and increase self-reporting.”  He expressed the view that the “advantages of self-reporting need to be articulated” so that companies are “inclined” to self-report.  While he cannot give guarantees, he said that “self-reporting is a strong factor in deciding whether to prosecute or not.”  If a prosecution is not in the public interest he said that the SFO is “likely to seek a civil settlement.”  It is clear that the civil recovery mechanism, afforded by the UK Proceeds of Crime Act 2002, will continue to play a major role in future SFO enforcement actions.

Anti-corruption enforcement remains a priority for Green’s SFO which will continue to bring cases under the old UK bribery laws as well as the Bribery Act.  Green confirmed that the SFO is currently handling four self-referrals and that eleven further cases are “being developed.”  He said that most of these involve allegations of corruption.  In relation to the Bribery Act, Green expressed his desire to bring cases that would help clarify the boundaries of the “adequate procedures” defence.  In respect of the term “carries on business or part of a business in the UK” he warned that, in any court case, the SFO would “argue against an overly technical interpretation.”

The SFO’s priorities in relation to enforcement under the Bribery Act will become clearer in the year ahead.  However, companies must not expect early answers on some of the thornier issues under the Bribery Act, such as the extent of the UK’s jurisdiction over non-UK companies; the extremities of third party liability; and the borderline between acceptable corporate hospitality and a prosecutable bribe.  The SFO is likely to begin enforcement under the Bribery Act by seeking prosecutions or settlements in cases where there is clear criminal culpability, before it ventures on to tackle cases that test the boundaries of the Bribery Act.  As we await further clarity from the UK, the recent US Department of Justice declination in the Morgan Stanley case provides companies with valuable insights into considerations that can successfully persuade a prosecutor not to prosecute.  The relevance of this guidance to an assessment of the adequacy of a company’s policies and controls in the context of the Bribery Act will not be lost on readers of this publication.  The DoJ is set to provide further assistance to us all when it launches its much anticipated FCPA guidance.  This is expected in the next few weeks.

In “A Conversation with Richard Alderman” (here), Alderman responded to approximately thirty detailed questions I submitted covering a broad range of topics and he:  (i) compares and contrasts the SFO’s role with the DOJ’s role in enforcing the Foreign Corrupt Practices Act, including the more active and independent role U.K. courts have in reviewing SFO charging decisions; (ii) talks about voluntary disclosure, and the role of non-prosecution and deferred prosecution agreements; (iii) discusses reputational harm, debarment, and reparations; and (iv) talks specifically about the Bribery Act.

In this follow-up after BAE’s settlement, Alderman responsed to six pointed questions I submitted concerning the BAE case and his responses address the following topics. (i) how the U.K. law on double jeopardy significantly affected the SFO’s investigation of BAE and how the “current system [in the U.K.] for dealing with parallel criminal investigations conducted in a number of different countries does not work effectively and needs change;” (ii) whether the U.K. government was faithful to its OECD obligations in its handling of the BAE matter; (iii) criticism of the SFO-BAE plea agreement by the U.K. sentencing judge; and (iv) “shortcomings” in the U.K. system and how Alderman would like a system that “is far more transparent [...] that commands public confidence, together with a much stronger role for the judiciary.”

In this guest post, Mr. Alderman discusses engagement with companies and compliance effects in the aftermath of the Bribery Act.

Active engagement was a hallmark of Alderman’s tenure at the SFO – and his willingness to engage with me on topics we occassionaly sparred has been one of the highlights of my young academic career.

So on this, your last day at the SFO, here’s to you Mr. Alderman.

What’s next for Alderman?  He told me in a recent e-mail (published with his permission) the following – all the more reason for me to tip my hat to him.

“When I leave here at the end of this week I shall not be going through the revolving door into some well paid job in a legal firm. Nor will I be taking on anything that will bring me into any contact with the SFO. My successor needs to get on with the job himself. What I shall be looking for instead are opportunities to work on anti-corruption initiatives that make a real difference in other countries. This will not be by way of a job or a consultancy. There are very many interesting people in this area that I admire very much and who do so much to fight corruption and the damage it causes. I shall obtain real satisfaction if I can find ways of helping them as I move on.”

It is a thorny question with no easy answer.  Where should the money go when a company resolves an FCPA enforcement action?  It was addressed last year in connection with the Alcatel-Lucent enforcement action.  (See here, and here for prior posts).  Two recent events raise the issue again.

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Earlier this month, it was announced (here) that the U.K. “Serious Fraud Office, the Government of Tanzania, BAE Systems and the Department for International Development (DFID) … signed a Memorandum of Understanding enabling the payment of £29.5 million [$47 million USD] plus accrued interest to be paid by BAE Systems for educational projects in Tanzania.”  As noted in the release, “textbooks will be purchased for all 16,000 primary schools in the country and as a result 8.3 million children will benefit” in subjects such as Kiswahli, English, Maths and Science.  The release further notes that funds will also be used to ”provide all 175,000 primary school teachers with teachers’ guides, syllabi and syllabi guides to help improve their teaching skills” as well as the purchase of desks.  In the release, SFO Director Richard Alderman stated as follows.  “This agreement is a first for the SFO which piloted it through the UK legal system. It provides a satisfactory outcome for all concerned but most of all for the Tanzanian people and I am personally delighted that SFO staff were able to achieve this.”

In this release, BAE stated as follows.  “We are glad to finally be able to make the payment to the Government of Tanzania and bring this matter to a close. We are grateful to DFID for their work in agreeing the Memorandum of Understanding with the Government of Tanzania.”  The BAE release states that the “payment follows the settlement agreed between BAE Systems and the SFO.”  For a prior post on the settlement, see here.

To be sure, BAE’s payment to Tanzania, and the role of the SFO in brokering the payment, feels good.  What is not to like about children receiving textbooks?

However, the feel good nature of this most recent BAE development should not mask the significant problems with the BAE enforcement action (on both sides of the Atlantic).  As noted in this prior post, even the U.K. judge who accepted the SFO-BAE plea agreement called it “loosely and hastily drafted” and said the fine he levied reflected that he couldn’t “sentence for an offense which the prosecution failed to charge.”

And let’s not forgot how this story began.  In 2004, the SFO began investigating whether BAE made bribe payments to secure Saudi fighter jet contracts. However, in late 2006, the SFO was forced to halt its investigation under pressure from the U.K. government, which cited national security concerns should the investigation go forward.  However, because BAE also allegedly made bribe payments in numerous other countries to secure business, the SFO, under a new Director, revived its  investigation of BAE, at least as to non-Saudi issues, including whether the  company paid bribes to secure contracts in various European and African countries. After settlement talks stalled – the conventional wisdom is that BAE was unwilling to plead guilty to bribery related offenses given the collateral effect of the mandatory European Union debarment provisions – the SFO pressed ahead with the case.  In late January 2010, the SFO issued a release (here) stating that Count Mensdorff, a former BAE agent, was criminally charged with “conspiracy to corrupt” and for “conspiring with others to give or agree to give corrupt payments […] to officials and other agents of certain Eastern and Central European governments, including the Czech Republic, Hungary and Austria as inducements to secure, or as rewards for having secured, contracts from those governments for the supply of goods to them, namely SAAB/Gripen fighter jets, by BAE Systems Plc.” Then, in early February 2010, the SFO announced (here) its long-awaited resolution of the BAE matter. Despite allegations of wide-spread bribery on a global scale, and despite BAE’s agent being criminally indicted a few days earlier in connection with bribe payments in “certain Eastern and Central European countries” (presumably on evidence that such payments did indeed occur), the SFO resolution related solely to the company’s failure “to keep reasonable and accurate accounting records in relation to its activities in Tanzania.”  Most dramatic, and in a strange turn of events, the SFO announced that it had withdrawn the criminal charges filed days earlier against Count Mensdorff. The same release also noted that “[t]his decision brings to an end the SFO’s investigations into BAE’s defense contracts.”  For more on “BAE – Inside the SFO”, see this prior post.

In any event, at least some children in Tanzania received some textbooks from BAE as a result.

*****

As previously highlighted on the FCPA Blog (here), Socio-Economic Rights and Accountability Project (“SERAP”) (a non-governmental civil society organization in Nigeria) recently wrote a letter (here) to SEC Enforcement Division Director Robert Khuzami (with a copy to Assistant Attorney General Lanny Breuer and Deputy Chief, Fraud Section Charles Duross)  regarding “FCPA civil penalty and disgorgement proceeds that companies agree to pay to resolve US Foreign Corrupt Practices Act investigations.”  As the letter notes, “currently such proceeds, once paid, are retained by the U.S. government.”

In summary, the SERAP letter requests “that the Enforcement Division establish a case-by-case policy or process that would enable foreign governmental entities that have been victims of corruptly-procured contracts to apply for, subject to appropriate anti-corruption safeguards, some or all of the civil penalty and disgorgement proceeds that would eventually be paid by companies alleged to have violated the U.S. Foreign Corrupt Practices Act.”  SERAP also suggests that “civil society groups in the home country, or U.S. non-profit organizations serving that country, be eligible within a short time-period to apply for such proceeds as well, or instead, for use for ‘public benefits projects’ in the affected foreign country, again subject to anti-corruption safeguards.”

The SERAP letter notes, among other things, as follows.  “… Many citizens in a country where such bribery has occurred might consider FCPA civil penalties and disgorgement payments imposed by the US, and then kept by the US, as in fact representing funds that rightfully ‘belong’ to the victim.”

Stating that “corruptly procured contracts ‘cost’ the victim at least 10 percent extra” the SERAP letter says that “this figure ought to be a presumed measure of possible funds available for third-party application in the context of a civil FCPA settlement, particularly since the Enforcement Division typically settles an investigation before extensive evidence of damages, as opposed to liability, is placed in the public realm.”

The specific SERAP proposal is as follows.  “…[A]fter, and ony after, public notice of an FCPA settlement agreement, the victim foreign government entity and any applicant NGO would have 60 days to file a request that the Enforcement Division pay some or all of the agreed payment proceeds to or for the benefit of the victim government entity or to a home country-based or US based NGO that would present a proposal [to] spend the proceeds for public purposes (e.g. on public health programs) in the country of the victim entity.  Thereafter, the Enforcement Division would have 60 days to act upon the request, favorably or not in its discretion; in this context the Enforcement Division should provide a brief statement of its reasons for its decisions.  In reaching its decisions the Enforcement Division would have the inherent authority to consult with Executive Branch agencies of the US government.

The SERAP letter raises some interesting issues regarding alleged victims of FCPA enforcement actions.  The SERAP letter also raises some interesting questions, including the following.

If the SEC would be required to relinquish a certain portion of money recovered in an FCPA enforcement action, what impact would this have on FCPA enforcement?  Would the SEC be less aggressive in bringing enforcement actions or perhaps more aggressive because more enforcement actions would be needed to sustain the current FCPA ”revenue stream”?  For instance, 10% of SEC FCPA “revenue” in 2011 was approximately $15 million, in 2010 approximately $53 million.

The SERAP proposal appears to assume that all FCPA enforcement actions involve foreign government procurement.  This is not the case.  Approximately 50% of recent  FCPA enforcement actions (i.e. in the past five years) do not involve foreign government procurement, but rather issues relating to foreign taxes, customs duties, or foreign licenses, permits, certifications and the like.  Is the victim analysis the same in these FCPA enforcement actions compared to foreign government procurement enforcement actions?

Are individuals or organizations located in the country giving rise to the FCPA enforcement action really the most direct victims of the conduct at issue?  In the procurement context, what about a competitor who may have lost out on the foreign business because it was unwilling to make an improper payment?  With victim issues attracting new attention, should an FCPA private right of action receive new attention?

Last, but certainly not least, companies settling SEC FCPA enforcement actions are allowed to settle without admitting or denying the SEC’s allegations.  Even the SEC itself has stated that this settlement device often leads to settlements that ”do not necessarily reflect the triumph of one party’s position over the other.”  Given this dynamic, would SERAP’s proposal lead to undeserved “windfalls” for civil society organizations?  [In this prior post, I asked the same question as to Dodd-Frank Act whistleblowers.]