Archive for the ‘Thailand’ Category

In Depth On The Tyco Enforcement Action

Wednesday, September 26th, 2012

Earlier this week, the DOJ and SEC announced a Foreign Corrupt Practices Act enforcement action against Tyco International Ltd. (“Tyco”) and a subsidiary company.  Total fines and penalties in the enforcement action were approximately $26.8 million (approximately $13.7 million in the DOJ enforcement action and approximately $13.1 million in the SEC enforcement action).

This post goes long and deep as to the DOJ’s and SEC’s allegations and resolution documents (approximately 85 pages in total).  Tomorrow’s post will discuss various items of note from the enforcement actions.

DOJ

The DOJ enforcement action involved a criminal information (here) against Tyco Valves & Controls Middle East Inc., (an indirect subsidiary of Tyco) resolved through a plea agreement (here) and a non-prosecution agreement (here) entered into between the DOJ and Tyco.

Criminal Information

The criminal information begins by identifying Tyco Valves & Controls Middle East Inc. (TVC ME) as a Delaware company headquartered in Dubai that “sells and markets valves and actuators manufactured by other entities throughout the Middle East for the oil, gas, petrochemical, commercial construction, water treatment,and desalination industries.”

According to the information, Tyco Flow Control Inc. (“TFC) was TVC ME’s direct parent company and TFC was a wholly-owned indirect subsidiary of Tyco.  According to the information, “TVC ME’s financials were consolidated into the books and records of TFC for the purposes of preparing TFC’s year-end financial statements, and in turn, TFC’s financials were consolidated into the books and records of Tyco for the purposes of preparing Tyco’s year-end financial results.”

The information alleges a conspiracy as follows.

Between 2003 and 2006 TVC ME conspired with others to ”obtain and retain business from foreign government customers, including Aramco, ENOC, Vopak, NIGC, and other customers by paying bribes to foreign officials employed by such customers.”

The information alleges: that Saudi Aramco (“Aramco”) was a Saudi Arabian oil and gas company that was wholly-owned, controlled, and managed by the government, and an ”agency” and “instrumentality” of a foreign government; that Emirates National Oil Company (“ENOC”) was a state-owned entity in Dubai and an “agency” and “instrumentality” of a foreign government; that Vopak Horizon Fujairah (“Vopak”) was a subsidiary of ENOC based in the U.A.E. and an “agency” and “instrumentality” of a foreign government; and that the National Iranian Gas Company (“NIGC”) was a state-owned entity in Iran and an “agency” and “instrumentality” of a foreign government.

Under the heading “manner and means of the conspiracy” the information alleges in pertinent part as follows.

“TVC ME, together with others, decided to pay bribes to employees of end-customers in Saudi Arabia, the U.A.E., and Iran, including to employees at Aramco, ENOC, Vopak, and NIGC, in order to obtain or retain business.  TVE ME, together with others, found ways to obtain cash in order to make the bribe payments.  TVE ME, together with others, made payments through Local Sponsor [a company in Saudi Arabia that acted as a distributor for TVC ME in Saudi Arabia].  Local Sponsor provided TVC ME with false documentation, such as fictitious invoices for consultancy costs, bills for fictitious commissions, or ‘unanticipated costs for equipment,’ to justify the payments to Local Sponsor that were intended to be used for bribes.  TVE ME, together with others, approved and made payments to Local Sponsor for the purpose of paying bribes.  TVC ME, together with others, paid bribes to employees of foreign government customers in order to remove TVC manufacturing plans from various Aramco ‘blacklists’ or ‘holds’; win specific bids; and/or obtain specific product approval.  TVC ME, together with others, improperly recorded the bribe payments in TVC ME’s books, records, and accounts, and instead falsely described the payments, including as consultancy costs, commissions, or equipment costs.  TVC ME earned approximately $1.153,500 in gross margin as a result of the bribe payments.”

Based on the above conduct, the information charges conspiracy to violate the FCPA’s anti-bribery provisions.

Plea Agreement

The plea agreements sets forth a Sentencing Guidelines range of $2.1 million – $4.2 million.  In the plea agreement, the parties agreed that $2.1 million was “appropriate.”  Pursuant to the plea agreement, TVC ME agreed “to work with its parent company in fulfilling the obligations” described in Corporate Compliance Program attached to the plea agreement.

NPA

The DOJ also entered into an NPA with Tyco in which the DOJ agreed “not to criminally prosecute [Tyco] related to violations of the books and records provisions of the FCPA … arising from and related to the knowing and willful falsification of books, records, and accounts by a number of the Company’s subsidiaries and affiliates …”.

The NPA contains a Statement of Facts.

Under the heading, “details of the illegal conduct” the NPA states as follows.

“[From 1999 through 2009] certain Tyco subsidiaries falsified books, records, and accounts in connection with transactions involving customers of Tyco’s subsidiaries, including government customers, in order to secure business in various countries, including China, India, Thailand, Laos, Indonesia, Bosnia, Croatia, Serbia, Slovenia, Slovakia, Iran, Saudia Arabia, Libya, Syria, the United Arab Emirates, Mauritania, Congo, Niger, Madagascar, and Turkey.  During that time period, certain Tyco subsidiaries made payments, both directly and indirectly, to government officials and falsely described the payments to government officials in Tyco’s corporate books, records, and accounts as legitimate charges, including as ‘consulting fees,’ ‘commissions,’ ‘unanticipated costs for equipment,’ ‘technical consultation and marketing promotion expenses,’ ‘conveyance expenses,’ ‘cost of goods sold,’ ‘promotional expenses,’ and ‘sales development’ expenses.  As early as 2004, Tyco alerted the Securities and Exchange Commission to payments at certain of Tyco’s subsidiaries that could violate the FCPA.  In 2006, Tyco acknowledged that ‘prior to 2003 Tyco did not have a uniform, company-wide FCPA compliance program in place or a system of internal controls sufficient to detect and prevent FCPA misconduct at is globally dispersed business units’ and that ‘employees at two Tyco subsidiaries in Brazil and South Korea did not receive adequate instruction regarding compliance with the FCPA, despite Tyco’s knowledge and awareness that illicit payments to government officials were a common practice in the Brazilian and South Korean construction and contracting industries.’  However, despite Tyco’s knowing of a high probability of the existence of improper payments and false books, records, and accounts, the improper payments and falsification of books, records, and accounts continued until 2009.”

As to Thailand, the Statement of Facts states a follows.

“[Between 2004 and 2005] ET Thailand [Earth Tech (Thailand) Ltd. - a Thai corporation that was approximately 49% indirectly owned by Tyco] made payments in the amount of approximately $292,286 to a consultant and recorded those amounts as fictitious disbursements related to the NBIA project [New Bangkok International Airport].  In connection with these improper payments, ET Thailand earned approximately $879,258 in gross profit.”

“[Between 2000 to 2006] ADT Thailand [ADT Sensormatic Thailand an indirect wholly owned subsidiary of Tyco] recorded payments in the amount of approximately $78,000 to one of its subcontractors as payments for site surveys for a government traffic project in Laos, but the payments instead were channeled to other recipients in connection with ADT Thailand’s business in Laos.  During the same time period, ADT Thailand made payments to one of its consultants related to a contract for the installation of a CCTV system in the Thai Parliament House, and ADT Thailand and the consultant created invoices that stated that the payments were for ‘renovation work’ when no renovation work was actually performed.  During that same time period, ADT Thailand made three payments in connection with a design and traffic survey that ADT Thailand provided from the city of Pattaya, in Southern Thailand, but the payments were issued pursuant to falsified invoices without any evidence that work was ever performed.  In connection with these improper transactions, ADT Thailand earned approximately $473,262 in gross profit.”

As to China, the Statement of Facts state as follows.

“[Between 2003 and 2005] TTC Huzhou [Tyco Thermal Controls (Shanghai) Co. Ltd. an indirect wholly owned subsidiary of Tyco] authorized approximately 112 payments in the amount of $196,267 to designers at design institutes owned or controlled by the Chinese government, and falsely described the payments in company books, records, and accounts as ‘technical consultation’ or ‘marketing promotion’ expenses.  In 2005, in connection with a contract with China’s Ministry of Public Security, TTC Huzhou paid a commission to one of its sales agents that was used, in part, to pay the ‘site project team’ of a state-owned corporation, and that was improperly recorded in the company’s books and records.  In connection with these improper transactions, TTC Huzhou earned approximately $3,470,180 in gross profit.”

“TFCT Shanghai [Tyco Flow Control Trading (Shanghai) Ltd. an indirect wholly owned subsidiary of Tyco] made approximately eleven payments in the amount of approximately $24,000 to employees of design institutes, engineering companies, subcontractors and distributors which were inaccurately described in its books and records.  In connection with these improper transaction, TFCT Shanghai earned approximately $59,412 in gross profit.”

“[Between 2005 and 2006] TFC HK  [Tyco Flow Control Hong Kong Limited] and Keystone [Beijing Valve Co. Ltd.] [both indirect wholly owned subsidiaries of Tyco] made payments in the amount of approximately $137,000 to agencies owned by approximately eight Keystone employees, who in turn gave cash or gifts to employees of design institutes or commercial customers, and then improperly recorded these payments.  [From 2005 to 2006] Keystone made payments to one of its sales agents in connection with sales to Sinopec, for which no legitimate services were actually provided, and then improperly recorded the payments as ‘commissions.’  In connection with these improper transactions, Keystone earned approximately $378,088 in gross profits.”

“[Between 2001 to 2002] THC China [Tyco Healthcare International Trading (Shanghai) Co. Ltd. an indirect wholly owned subsidiary of Tyco] gave publicly-employed healthcare professionals (HCPs) approximately $250,00o in meals, entertainment, domestic travel, gifts and sponsorships.  [Between 2004 to 2007] employees of THC China submitted expenses claims related to entertaining HCPs that were supported by fictitious receipts, including references to a non-existent company, in order to circumvent Tyco’s internal guidelines.  In connection with medical conferences involving HCPs, THC China employees submitted false itineraries and other documentation that did not properly identify trip expenses in order to circumvent internal controls and policies.  Approximately $353,800 in expenses was improperly recorded as a result of the false documentation relating to these improper expenditures.”

As to Slovakia, the Statement of Facts state as follows.

“[Between 2004 to 2006] Tatra [a Slovakian joint venture that was approximately 90 percent indirectly owned by Tyco] made payments in the amount of approximately $96,000 to one of its sales agents in exchange for the sale agent’s attempt to have Tatra products included in the specifications for tenders to a government customer, while at the same time the sales agent was getting paid by the government customer to draw up the technical specifications for the tenders.  Tatra improperly recorded the payments to the sales agent as ‘commissions’ in Tatra’s books and records.  In connection with these improper transactions, Tatra earned approximately $226,863 in gross profit.”

As to Indonesia, the Statement of Facts state as follows.

“[Between 2003 and 2005] Eurapipe [Tyco Eurapipe Indonesia Pt. an indirect wholly owned subsidiary of Tyco] made approximately eleven payments in the amount of approximately $358,000 to a former employee of Banjarmasin provincial level public water company (PDAM) and two payments to the project manager for PDAM Banjarmasin in connection with the Banjarmasin Project.  During the same time period, Eurapipe made payments in the amount of approximately $23,000 to sales agents who then passed some or all of the payments on to employees of government entities in connection withe projects other than the Banjarmasin Project.  Eurapipe improperly recorded the payments as ‘commissions payable’ in Eurapipe’s books and records. In connection with these improper transactions, Eurapipe earned approximately $1,298,453 in gross profit.”

“[Between 2002 and 2005] PT Dulmision Indonesia [an Indonesia corporation 99% indirectly owned by Tyco] made payments to third parties, a portion of which went to employees of PLN [a state-owned electricity company in Indonesia], including approximately seven payments one of PT Dulmison’s sales agents, who in turn passed money on to the PLN employees.  PT Dulmison Indonesia improperly recorded the payments in PT Dulmison Indonesia’s books, records and accounts.  In addition, PT Dulmison Indonesia improperly recorded travel expenses in company books and records, including payments for non-business entertainment in connection with visits by PLN employees to TE Dulmision Thailand’s factory and paid hotel costs incurred as part of a social trip to Paris for PLN employees following a factory visit to Germany, as ‘cost of goods sold’ in PT Dulmison Indonesia’s and TE Dulmison Thailand’s records.  In connection with these improper transactions, PT Dulmision Indonesia and TE Dulmison Thailand earned approximately $109,259 in gross profit.”

As to Vietnam, the Statement of Facts state as follows.

“[Between 2001 and 2005] TE Dulmison Thailand [a Thai corporation approximately 66% indirectly owned by Tyco] made nine payments in the amount of approximately $68,426, either directly or through intermediaries, to employees of a public utility owned by the Government of Vietnam and recorded these payments in the books and records of the relevant subsidiaries as ‘cost of goods sold.’”

As to Mauritania, Congo, Niger and Madagascar, the Statement of Facts state as follows.

“[Between 2002 to 2007] Isogard [a branch of Tyco Fire & Integrated Solutions France (TFIS France0, an indrect wholly owned subsidiary of Tyco] made payments to a security officer employed by a government-owned mining company in Mauritania involved in the technical aspects of sales projects for the purpose of introducing Isogard to local buyers in Africa.  Isogard made the payments to the security officer’s personal bank account in France without any written contract or invoice and improperly recorded the payments in Isogard’s books and records.  Isogard paid sham ‘commissions’ to approximately twelve other intermediaries in Mauritania, Congo, Niger and Madagascar, half of which were to employees, or family members of employees, of Isogard customers.  In total, TFIS France made paments in the amount of approximately $363,839 since 2005.”

As to Saudi Arabia, in addition to the conduct at issue in TVC ME’s criminal information, the Statement of Facts state as follows.

“[Between 2004 through 2006] Saudi Distributor maintained a ‘control account’ from which a number of payments were made at THC Saudi Arabia’s [an operational entity within Tyco Healthcare AG, a indirect wholly owned subsidiary of Tyco] direction to Saudi hospitals and doctors, some of whom were publicly employed HCPs.  Several expenses from the control account were booked improperly as ‘promotional expenses’ and ‘sales development’ expenses.  In connection with these improper transactions, THC Saudi earned approximately $1,960,000 in gross profit.”

As to Turkey, the Statement of Facts state as follows.

“[Between 2001 and 2006] SigInt [a division of M/A-Com, an indirect, wholly owned subsidiary of Tyco] products were sold through a sales representative to government entities in Turkey.  The sales representatives sold the SigInt equipment in Turkey at an approximately twelve to forty percent mark-up over the price at which he purchased the equipment from M/A-Com and also received a commission on one of the sales.  The sales representative transferred part of his commission and part of his mark-up to a government official in Turkey to obtain orders.  In connection with these improper transactions, M/A-Com earned approximately $71,770 in gross proft.”

The Statement of Facts also states as follows.

“[Between 2004 and 2009] Erhard [a subsidiary of Tyco Waterworks Deutschland GmBH (TWW Germany), an indirect wholly owned subsidiary of Tyco] made payments in the amount of approximately $2,371,094 to at least thirteen of its sales agents in China, Croatia, India, Libya, Saudi Arabia, Serbia, Syria, and the United Arab Emirates for the purpose of making payments to employees of government customers, and improperly booked the payments as ‘commissions.’  In connection with these improper transactions, TWW Germany earned approximately $4,684,966 in gross profits.”

In the NPA, Tyco admitted, accepted and acknowledged responsiblity for the above conduct and agreed not to make any public statement contradicting the above conduct.

The NPA has a term of three years and states as follows.

“The Department enters into this Non-Prosecution Agreement based, in part, on the following factors:  (a) the Company’s timely, voluntary, and complete disclosure of the conduct; (b) the Company’s global internal investigation concerning bribery and related misconduct; (c) the Company’s extensive remediation, including the implementation of an enhanced compliance program, the termination of employees responsible for the improper payments and falsification of books and records, severing contracts with the responsible third-party agents, the closing of subsidiaries due to compliance failures, and the agreement to undertake further compliance enhancements ….; and (d) the Company’s agreement to provide annual, written reports to the Department on its progress and experience in monitoring and enhancing its compliance policies and procedures …”.

Pursuant to the NPA, the company agreed to pay a penalty of $13.68 million (the $2.1 million TVC ME agreed to pay pursuant to the plea agreement is included in this figure).  Pursuant to the NPA, Tyco also agreed to a host of compliance undertakings and agreed to report to the DOJ (at no less than 12 month intervals) during the three year term of the NPA regarding “remediation and implementation of the compliance program and internal controls, policies, and procedures” required pursuant to the NPA.

In this DOJ release, Assistant Attorney General Lanny Breuer stated as follows.  “Together with the SEC, we are leading a fight against corruption around the globe.”

SEC

In a related enforcement action, the SEC brought a civil complaint (here) against Tyco.

The introductory paragraph of the complaint states as follows.  “This matter concerns violations by Tyco of the books and records, internal controls, and anti-bribery provisions of the FCPA.”

The complaint then states as follows.

“In April 2006, the Commission filed a settled accounting fraud, disclosure, and FCPA injunctive action against Tyco, pursuant to which the company consented to entry of a final judgment enjoining it from violations of the anti-fraud, periodic reporting, books and records, internal controls, proxy disclosure, and anti-bribery provisions of the federal securities laws and ordering it to pay $1 in disgorgement and a $50 million civil penalty. The U.S. District Court for the Southern District of New York entered the settled Final Judgment against Tyco on May 1, 2006. At the time of settlement, Tyco had already committed to and commenced a review of its FCPA compliance and a global, comprehensive internal investigation of possible additional FCPA violations. As a result of that review and investigation, certain FCPA violations have come to light for which the misconduct occurred, or the benefit to Tyco continued, after the 2006 injunction. Those are the violations that are alleged in this Complaint.  [...]  The FCPA misconduct reported by Tyco showed that Tyco’s books and records were misstated as a result of at least twelve different, post-injunction illicit payment schemes occurring at Tyco subsidiaries across the globe. The schemes frequently entailed illicit payments to foreign officials that were inaccurately recorded so as to conceal the nature of the payments. Those inaccurate entries were incorporated into Tyco’ s books and records.   Tyco also failed to devise and maintain internal controls sufficient to provide reasonable assurances that all transactions were properly recorded in the company’s books, records, and accounts. [...] As reflected in this Complaint, numerous Tyco subsidiaries engaged in violative conduct, the conduct was carried out by several different methods, and the conduct occurred over a lengthy period of time and continued even after the 2006 injunction.  Through one of the illicit payment schemes, Tyco violated the FCPA anti-bribery provisions. Specifically, through the acts of its then-subsidiary and agent, TE M/A-Com, Inc. Tyco violated [the FCPA's anti-bribery provisions] by corruptly making illicit payments to foreign government officials to obtain or retain business.”

As to the SEC’s anti-bribery charge based on the conduct of TE M/A-Com, Inc. the complaint alleges that M/A Com retained a New York sales agent who made illicit payments in connection with a 2006 sale of microwave equipment to an instrumentality of the Turkish government.  The complaint alleges that “employees of M/A-Com were aware that the agent was paying foreign government customers to obtain orders” and cites an internal e-mail which states as follows – “hell, everyone knows you have to bribe somebody to do business in Turkey.”  The complaint then alleges as follows.  “Tyco exerted control over M/A-COM in part by utilizing dual roles for its officers. At the time of the September 2006 transaction, four high-level Tyco officers were also officers of M/A-COM, including one who was M/A-COM’s president. Additionally, one of those Tyco officers served as one of five members of M/A-COM’s board of directors. While there is no indication that any of these individuals knew of the illegal conduct described herein, through the corporate structure used to hold M/ A-COM and through the dual roles of these officers, Tyco controlled M/A-COM. As a result, M/A-COM was Tyco’s agent for purposes of the September 2006 transaction, and the transaction was squarely within the scope of M/ACOM’s agency.  The benefit obtained by Tyco as a result of the September 2006 deal was $44,513.”

The SEC’s complaint contains substantially similar allegations compared to the NPA Statement of Facts.  In addition, the SEC complaint alleges additional improper conduct in Malaysia, Egypt, and Poland.

As to Malaysia, the complaint alleges as follows.

“[Between 2000 to 2007] TFS Malaysia [an indirect wholly owned subsidiary of Tyco] used intermediaries to pay the employees of its customers when bidding on contracts.  Payments were made to approximately twenty-six employees of customers, and one of those payees was an employee of a government-controlled entity.  TFS Malaysia inaccurately described these expenses as ‘commissions’ and failed to maintain policies sufficient to prohibit such payments.  As a result, Tyco’s books and records were misstated.  Tyco’s benefit as a result of these illicit payments was $45,972.”

As to Egypt, the complaint alleges as follows.

“[Between 2004 to 2008] an Egyptian agent of TFIS UK [a indirect wholly owned subsidiary] wired approximately $282,022 to a former employee’s personal bank account with the understanding that the money would be used in connection with entertainment expenses for representatives of a company majority-owned by the Egyptian government.  A portion of the funds was used to pay for lodging, meals, transportation, spending money, and entertainment expenses for that company’s officials on two trips to the United Kingdom and two trips to the U.S.  TFIS UK made payments pursuant to inflated invoices submitted by the company’s Egyptian agent, who wired funds to the former employees to be used to entertain foreign officials.  TFIS U.K. books and records did not accurately reflect TFIS’s U.K.’s understanding that the funds would be used for entertainment of government officials, and TFIS UK did not maintain sufficient internal controls over its payments to agents.  As a result, Tyco’s books and records were misstated.  Tyco’s benefits as a result of these illicit payments was $1,589,374.”

As to Poland, the complaint alleges as follows.

“[Between 2005 to 2007] THC Polska [an indirect wholly owned subsidiary] used ‘service contracts’ to hire public healthcare professionals in Poland for various purposes, including conducting training sessions, performing clinical studies, and distributing marketing materials.  Approximately five such service contracts involved falsified records and approximately twenty-six other service contracts involved incomplete and inaccurate records, including some related expenses paid by THC Polska to family members of healthcare professionals.  As a result, Tyco’s books and records were misstated.  In connection with the transactions related to these inaccurate books and records, Tyco’s benefit was approximately $14,673.

As to the SEC’s internal controls charge, the complaint contains the following allegation.  “Tyco failed to devise and maintain … a system of internal controls and was therefore unable to detect the violations …  Numerous Tyco subsidiaries engaged in violative conduct, the conduct was carried out by several different methods, and the conduct occurred over a lengthy period of time, and it continued even after the 2006 injunction.”

The SEC complaint contains the following paragraph.

“As its global review and investigation progressed, Tyco voluntarily disclosed this conduct to the Commission and took significant, broad-spectrum remedial measures. Those remedial measures include: the initial FCPA review of every Tyco legal operating entity ultimately including 454 entities in 50 separate countries; active monitoring and evaluation of all of Tyco’s agents and other relevant third-party relationships; quarterly ethics and compliance training by over 4,000 middle-managers; FCPA-focused on-site reviews of higher risk entities; creation of a corporate Ombudsman’s office and numerous segment-specific compliance counsel positions; exit from several business operations in high-risk areas; and the termination of over 90 employees, including supervisors, because of FCPA compliance concerns.”

As noted in this SEC release, Tyco consented to a final judgment that orders the company to pay approximately $10.5 million in disgorgement and approximately $2.6 million in prejudgment interest.  Tyco also agreed to be permanently enjoined from violating the FCPA.

In this release, SEC Associate Director of Enforcement Scott Friestad stated as follows.  “Tyco’s subsidiaries operating in Asia and the Middle East saw illicit payment schemes as a typical way of doing business in some countries, and the company illictly reaped substantial financial benefits as a result.”

Martin Weinstin (Willkie Farr & Gallagher - here) represented the Tyco entities.

From the Dockets

Thursday, September 15th, 2011

This post details developments as to FCPA or related litigation previously reported.

Haiti Teleco Case

Previous posts (here and here)  detailed Joe Esquenazi’s and Carlos Rodriguez’s motion for acquittal or a new trial based on statements made (and then seemingly retracted) by Jean Max Bellerive (Prime Minister of Haiti) concerning the ownership of Haiti Teleco – the entity at the middle of the bribery scheme.  In the DOJ’s response (here) to the defendants’ motion, the DOJ argues, among other things, that “the Government did not seek the first Bellerive declaration from the Republic of Haiti, and there is no need for an evidentiary hearing as to when or how the Government obtained it.”  As to the second Bellerive declaration, the DOJ stated that “the Government assisted Mr. Bellerive in preparing the declaration” in which Bellerive, as noted in the prior post, stated that the first declaration was strictly for internal purposes and he did not know it was going to be used in criminal legal proceedings in the U.S. or that it was going to be used in support of the argument that Teleco was not part of Public Administration of Haiti.

Substantively, the DOJ argues that the first Bellerive declaration does not “contain newly discovered evidence” because the jury “heard most of” the points addressed in the first Bellerive declaration from Garry Lissade, the DOJ’s expert witness, who testified as to the legal status of Haiti Teleco after “he conducted extensive research, including legal research and interviews, in reaching his conclusions.”

The DOJ’s position in many FCPA enforcement actions concerning state-owned or state-controlled entities seems to be that the ownership structure of the entity at issue should be obvious and easily ascertainable to defendants.  If so, why did Lissade (Haiti’s former Minister of Justice) have to “conduct extensive research, including legal research and interviews, in reaching his conclusion” that Teleco was a Haitian public entity?

Africa Sting Case

The second Africa Sting trial involving defendants John Mushriqui, Jeana Mushriqui, R. Patrick Caldwell, Stephen Giordanella, John Godsey, and Marc Morales is set to begin on September 22nd.  The second trial will be more narrowly focused than the first Africa Sting trial that resulted in a mistrial (as well as dismissal of certain counts including money laundering conspiracy charges).

Why?  Because the DOJ did not oppose defendants’ motion to dismiss the money laundering conspiracy charges.  In pre-trial briefing, the DOJ stated as follows.  “At the conclusion of the government’s case-in-chief in the first trial, the Court granted a motion for judgment of acquittal on Count Forty-Four of the Superseding Indictment with respect to the defendants in the first trial. The government continues to believe that the Court should not have granted the motion and that Count Forty-Four should have been submitted to the jury. But the government understands the Court’s ruling and will not object to the Defendant’s motion. The government’s position in this filing recognizes the Court’s past ruling, and in no way suggests that the government will not seek to bring similar charges in future cases.”

Siriwan “Foreign Official” Case

A previous post (here) detailed how Juthamas Siriwan and Jittisopa Siriwan (the “foreign officials” in the Green FCPA enforcement action) were fighting back against DOJ criminal charges.  As noted in the post, the Siriwans argued as follows.  “This is the first judicial challenge to a novel prosecutorial approach the Government recently developed to charge foreign officials allegedly involved in corruption.  That approach is aimed at overcoming a fundamental FCPA limitation.  The FCPA does not criminalize a foreign public official’s receipt of a bribe.  Nor can the Government employ an FCPA conspiracy charge against a foreign public official.  Accordingly, these new enforcement initiatives require expansive interpretations [of] “promotion money laundering” [under the Money Laundering Control Act].”  The Siriwans further argued as follows.  “Congress has extensively amended the FCPA, yet it deliberately has not extended FCPA liability to foreign officials.  If the Government wishes to extend U.S. criminal penalties to foreign officials accepting a bribe, it must go back to Congress, rather than employ dubious charging tactics to evade the direct and repeated congressional choice not to apply FCPA criminal liability to such officials.”

In its opposition brief (here) filed last week, the DOJ stated as follows.  “Upon analysis of defendants’ arguments, it is quickly evident that, in support of their positions, defendants routinely conflate and confuse multiple statutes, interpret and argue the elements of uncharged statutes, and ignore case law relevant to the statutes actually charged.”  Among other things, the DOJ stated as follows.  “That foreign officials cannot face liability for FCPA offenses does not give foreign officials a free pass to commit other, entirely separate, crimes.”  The DOJ noted that the Siriwans are not charged with accepting a bribe, or conspiring to violate the FCPA, but rather with “the separate, and entirely analytically distinct, crime of international transportation money laundering to promote the Greens’ violation of the FCPA.”  The DOJ noted that just because Siriwan ”was a foreign official at the time of these offenses, and therefore, not charged under the FCPA does not change the analysis.”

As reported by Samuel Rubenfeld at Wall Street Journal Corruption Currents, a hearing on Siriwans’ motion to dismiss is scheduled for Oct. 20.

A “Foreign Official” Fights Back

Thursday, August 25th, 2011

The Foreign Corrupt Practices Act addresses the payment of bribes, not the receipt of bribes.

For instance, in U.S. v. Castle, 925 F.2d 831 (5th Cir. 1991), the court was called upon to consider whether “foreign officials” who are excluded from prosecution under the FCPA itself, could nevertheless be prosecuted under the general conspiracy statute (18 USC 371) for conspiring to violate the FCPA.  The court held that “foreign officials”  could not be prosecuted for conspiring to violate the FCPA and adopted the rationale set forth in the trial court opinion (see 741 F.Supp. 116).   That rationale was that Congress, in passing the FCPA, only chose to punish one party to the bribe agreement and the DOJ could not therefore  ”override the Congressional intent not to prosecute foreign officials for their participation in the prohibited acts” through use of the conspiracy statute.  The trial court stated as follows.  “The drafters of the [FCPA] knew that they could, consistently with international law, reach foreign officials in certain circumstances. But they were equally well aware of, and actively considered, the ‘inherent jurisdictional, enforcement, and diplomatic difficulties’ raised by the application of the bill to non-citizens of the United States.”  The trial court observed that prosecution and punishment of “foreign officials” (in the Castle case alleged Canadian “foreign officials”) ”will be accomplished by the government which most directly suffered the abuses allegedly perpetrated by its own officials, and there is no need to contravene Congress’ desire to avoid such prosecutions by the United States.”  For those of you scoring at home, Castle represents a DOJ loss in a contested FCPA matter.

In recent years, however, the DOJ has used other laws in an attempt to reach “foreign officials.”  This trend has been profiled here and here.  For instance, in January 2010, in connection with the Gerald and Patricia Green FCPA enforcement action, a criminal indictment was unsealed against Juthamas Siriwan and Jittisopa Siriwan.  According to the indictment, Juthamas “was the senior government officer of the Tourism Authority of Thailand (TAT)” and she is the “foreign official” the Greens were convicted of bribing.  Jittisopa is the daughter of the “foreign official” and also alleged to be an “employee of Thailand Privilege Card Co. Ltd.” an entity controlled by TAT and an alleged “instrumentality of the Thai government.”  The charges against the Siriwans were not FCPA charges, but largely conspiracy to money launder and “transporting funds to promote unlawful activity.”

As detailed in this Wall Street Journal Corruption Currents story by Joe Palazzolo, the Siriwans are fighting back.  On behalf of the Siriwans, lawyers at Kelley Drye & Warren LLP recently field this motion to dismiss to the indictment.

In summary, the Siriwans state as follows.  “This is the first judicial challenge to a novel prosecutorial approach the Government recently developed to charge foreign officials allegedly involved in corruption.  That approach is aimed at overcoming a fundamental FCPA limitation.  The FCPA does not criminalize a foreign public official’s receipt of a bribe.  Nor can the Government employ an FCPA conspiracy charge against a foreign public official.  Accordingly, these new enforcement initiatives require expansive interpretations [of] “promotion money laundering” [under the Money Laundering Control Act].”  The Siriwans state as follows.  “Congress has extensively amended the FCPA, yet it deliberately has not extended FCPA liability to foreign officials.  If the Government wishes to extend U.S. criminal penalties to foreign officials accepting a bribe, it must go back to Congress, rather than employ dubious charging tactics to evade the direct and repeated congressional choice not to apply FCPA criminal liability to such officials.”

As noted in Palazzolo’s article, the DOJ has yet to respond to Siriwans’ motion and U.S. District Judge George Wu (C.D. of California) has scheduled a hearing on the motion for October 20th.

In a development that goes straight to a point raised by the Castle court, Thailand’s National Counter-Corruption Commission (NCCC) has reportedly found sufficient grounds to believe that Juthamas Siriwan received money from the Greens and that Jittisopa Siriwan was an accomplice in the bribery case.  The NCCC has reportedly forwarded its conclusion to the Thai Attorney-General for legal action against the Siriwans.  For more, see here from the Bangkok Post.

The Siriwan’s challenge is the latest in “this year of FCPA judicial scrutiny.”  Previously this year, there was the first judicial challenge to the DOJ’s “foreign official” interpretation that made extensive use of the FCPA’s legislative history (see here); the first dd-3 judicial challenge (see here); the first victim petition under the FCPA (see here); and the first Travel Act judicial challenge (see here).

*****

In a related development (see here), the DOJ has dropped its appeal of Gerald and Patricia Green’s sentence.  As detailed in this prior post, in September 2009, Gerald and Patricia Green were found guilty by a federal jury of substantive FCPA violations, conspiracy to violate the FCPA, and other charges.  After several sentencing delays, in August 2010 (see here), Judge Wu rejected the DOJ’s 10 year sentencing request for both Gerald and Patricia Green and sentenced the Greens to six months in prison, followed by three years probation.  In its sentencing brief, the DOJ urged the court to “disregard defendants’ efforts to obscure the landscape of FCPA sentencing, which generally reflects significant prison terms for convicted individuals.”  I asked at the time whether the “landscape of FCPA sentencing” truly reflected “significant prison terms” as stated by the DOJ – a statement even more true now (see the FCPA Sentences tab under the Search page).

I was surprised to learn that the DOJ was appealing the Green sentences and I am thus not surprised to learn that the DOJ has dropped its appeal.  In short, do you think the DOJ wants anything FCPA related before the 9th Circuit?

 

“Rapid Multinational Expansion Through Mergers and Acquisitions” Leads to FCPA Enforcement Action Against Diageo

Thursday, July 28th, 2011

The Foreign Corrupt Practices Act is of course no laughing matter. Yet if an FCPA joke book is ever written there is surely to be an entry about the Indian and Korean military officials, a Thai lobbyist, and a Korean Customs official, who while on a purely recreational side-trip to Budapest, stopped in a bar, nibbled on some rice cakes, downed a Guinness and talked about product labeling, excise taxes, and transfer pricing.

Yesterday, the SEC announced (here) an FCPA books and records and internal controls enforcement action against Diageo PLC via an administrative cease and desist order. Diageo, headquartered in London, has American Depository Shares registered with the SEC and traded on the New York Stock Exchange and is thus an “issuer” under the FCPA.

In summary fashion, the Order (here) stated as follows.

“This matter concerns multiple violations of the Foreign Corrupt Practices Act (“FCPA”) by Respondent Diageo, one of the world’s largest producers of premium alcoholic beverages. Over more than six years, Diageo, through its subsidiaries, paid over $2.7 million to various government officials in India, Thailand, and South Korea in separate efforts to obtain lucrative sales and tax benefits.”

“In India, from 2003 through mid-2009 Diageo made over $1.7 million in illicit payments to hundreds of Indian government officials responsible for purchasing or authorizing the sale of its beverages. Increased sales from these payments yielded more than $11 million in ill-gotten gains. In Thailand, from 2004 through mid-2008, Diageo paid approximately $12,000 per month – totaling nearly $600,000 – to retain the consulting services of a Thai government and political party official. This official lobbied extensively on Diageo’s behalf in connection with multi-million dollar pending tax and customs disputes, contributing to Diageo’s receipt of certain favorable dispositions by the Thai government. With respect to South Korea, in 2004, Diageo paid 100 million won (KRW) (over $86,000) to a customs official as a reward for his role in the government’s decision to grant Diageo significant tax rebates. Diageo also paid over $100,000 in travel and entertainment expenses for South Korean customs and other government officials involved in these tax negotiations. Separately, Diageo made hundreds of gift payments totaling over $230,000 to South Korean military officials in order to obtain and retain liquor business.”

“Diageo and its subsidiaries failed to account accurately for these illicit payments in their books and records. Exercising lax oversight, Diageo also failed to devise and maintain internal accounting controls sufficient to detect and prevent the payments.”

As set forth in the SEC’s order, “Diageo’s history of rapid multinational expansion through mergers and acquisitions contributed to defects in its FCPA compliance programs.” Indeed, the conduct at issue focused on Diageo India Pvt. Ltd. (“DI”) (a wholly-owned indirect subsidiary acquired as a result of a merger); Diageo Moet Hennessy Thailand (“DT”) (a joint venture Diageo acquired an indirect majority interest in as a result of a merger) and Diageo Korea Co. Ltd. (“DK”) (a wholly-owned indirect subsidiary acquired during an acquisition). According to the SEC, “at the times of these acquisitions, Diageo recognized that its new subsidiaries had weak compliance policies, procedures, and controls” but “nevertheless, Diageo failed to make sufficient improvements to these programs until mid-2008 in response to the discovery of illicit payments.”

India

As to India, the SEC stated as follows. “From at least 2003 through June 2009, DI paid an estimated $792,310 in improper cash payments through its third-party distributors to 900 or more employees of government liquor stores in and around New Delhi. DI also paid an estimated $186,299 (representing 23% of the payments) in “cash service fees” to the distributors as compensation for advancing the funds. DI made the payments to increase government sales orders of its products, and to secure favorable product placement and promotion within the stores.”

The SEC further stated as follows. “During the same six-year period (2003 – 2009), Diageo, through DI, also reimbursed an estimated $530,955, and made plans to reimburse an additional $79,364, in improper cash payments made by third-party sales promoters to government employees of the Indian military’s Canteen Stores Department (“CSD”). The payments, made with DI’s knowledge and authorization, were designed to: (i) foster the promotion of Diageo products in the CSD’s canteen stores (analogous to the U.S. military’s post exchanges); (ii) obtain initial listings and annual label registrations for Diageo brands, price revision approvals, and favorable factory inspection reports; (iii) secure the release of seized shipments of Diageo products; and (iv) promote good will through the distribution of Diwali and New Year’s holiday gifts to CSD employees.”

The SEC also stated as to India as follows. “Diageo failed to ensure that DI properly accounted for a number of additional, improper payments to government officials who controlled administrative functions vital to DI’s business. From at least 2003 through 2008, Diageo, through DI, reimbursed an estimated $98,310 in cash payments made by its third-party promoters and distributors to government officials in the North Region of India and in the State of Assam for the purpose of securing label registrations for Diageo products.” In addition, the SEC Order stated as follows. “… [F]rom at least 2003 through June 2009, Diageo, through DI, paid an estimated $78,622 in extra commissions to its distributors in the North Region to reimburse them for payments made to Excise officials to secure import permits and other administrative approvals.”

Thailand

As to Thailand, the SEC Order stated as follows. “From April 2004 through July 2008, Diageo, through DT, retained the services of a Thai government and foreign political party official (the “Thai Official”) to lobby other Thai officials to adopt Diageo’s position in several multi-million dollar tax and customs disputes. For this retainer DT paid approximately $12,000 per month for 49 months, for a total of $599,322. DT compensated the Thai Official through 49 direct payments to a political consulting firm (the “Consulting Firm”) for which the Thai Official acted as a principal. Most, if not all, of the $599,322 paid to the Consulting Firm was for the Thai Official’s services and accrued to his benefit. The Thai Official served as a Thai government and/or political party official throughout the relevant period (April 2004 – July 2008) in which he received compensation from DT. At various times the Thai Official served as Deputy Secretary to the Prime Minister, Advisor to the Deputy Prime Minister, and Advisor to the Ministry of Agriculture and Cooperatives. The Thai Official also served on a committee of the ruling Thai Rak Thai political party, and as a member and/or advisor to several state-owned or state-controlled industrial and utility boards. DT’s senior management knew that the Thai Official was a government officer during its engagement of the Consulting Firm. The Thai Official was the brother of one of DT’s senior officers at that time. Several members of Diageo’s global and regional management attended meetings with the Thai Official and senior members of the Thai government. The Thai Official provided extensive lobbying services on behalf of Diageo and DT in connection with several important tax and customs disputes that were pending between Diageo and the Thai government. For example, with respect to excise taxes, the Thai Official coordinated and attended numerous meetings between senior Thai government officials and senior Diageo and DT management, including two meetings in April and May 2005 with Thailand’s then Prime Minister. In May 2005, shortly following the meetings arranged by the Thai Official, the Prime Minister made a radio address publicly endorsing Diageo’s position in favor of a “specific” approach (based on quantity) rather than an “ad valorem” approach (based on price) to calculating excise taxes. On Diageo’s behalf, the Thai Official also met repeatedly with senior commerce, finance, and customs authorities in charge of the transfer pricing and import tax disputes, as well as with members of the Thai parliament. The Thai Official’s services contributed to Diageo’s successful resolution of several components of these disputes. For example, during 2004 and 2005 Diageo and DT were actively engaged in a dispute with the Thai government over the appropriate transfer pricing formula applied to One Liter bottles of Johnnie Walker Red Label and Black Label Scotch whiskey. Based in part on the Thai Official’s lobbying efforts, the Thai government accepted important aspects of DT’s transfer pricing method and released over $7 million in bank guarantees that DT had been required to post while the tax dispute was pending.”

South Korea

As to Korea, the SEC Order stated as follows. “Diageo had significant tax and customs issues in South Korea. In April 2003, DK, under Diageo’s direction, requested from South Korea a more advantageous formula for calculating the transfer pricing, for tax purposes, of Windsor Scotch whiskey that DK was importing into South Korea. As part of those negotiations, DK also sought tens of millions of dollars in tax rebates based on a claim that DK had overpaid under the then existing transfer pricing formula. In April 2004, following a year of intense negotiations and lobbying by DK, the South Korean government granted DK a rebate of approximately $50 million. In July 2004, three months after DK received the tax rebates, a DK manager (the “Manager”) paid an apparent reward of 100 million KRW ($86,339) to a Korean Customs Service official (the “Customs Official”) who had played a key role in the transfer pricing negotiations. With the approval of DK’s then chief financial officer, the Manager generated 60 million KRW ($51,802) of the payment by means of a surreptitious cash kickback scheme. The Manager solicited an inflated invoice from DK’s third-party customs brokerage firm (the “Customs Broker”), which had provided DK with consulting services during the transfer pricing negotiations. As orchestrated, DK paid an inflated invoice amount to the Customs Broker, which then gave 60 million KRW ($51,802) in cash back to the Manager. The Manager funded the remaining 40 million KRW ($34,537) of the total reward amount from personal sources. The Manager then provided the Customs Official with 100 million KRW ($86,339) in the form of ten bank checks of approximately 10 million KRW ($8,634) each.”

The SEC Order further stated as follows. “During the course of the transfer pricing negotiations in 2003 and 2004, DK also paid $109,253 in travel and entertainment costs for Korean customs and other government officials. Some of these expenses were unapproved and constituted improper inducements of the South Korean officials. For example, in December 2003, the Customs Official and several official colleagues traveled to Scotland with DK employees. The purported reason for the trip was to inspect Diageo’s Windsor Scotch production facilities as part of the transfer pricing negotiations. During the course of this apparently legitimate trip, DK’s chief financial officer and the Manager took the South Korean officials on a purely recreational side-trip to Prague and Budapest.”

In addition, the SEC Order stated as follows regarding gifts to Korean military officers. “From at least 2002 through at least 2006, Diageo, through DK, routinely made hundreds of small payments to South Korean military officers for the purpose of obtaining or maintaining business and securing a competitive business advantage. The payments assumed two forms: (i) holiday and vacation gifts known as “rice cake” payments; and (ii) business development gifts, called “Mokjuksaupbi” payments. Rice cake payments were customary and traditional presents that Diageo, through DK, provided to scores of military officers – many of whom were responsible for procuring liquor – several times each year during holidays and vacations. From 2002 through 2006, DK made approximately 400 rice cake payments, totaling at least $64,184, in the form of cash or gift certificates ranging in value between $100 and $300 per recipient. In October 2004, a senior officer within Diageo’s global compliance department explicitly approved the practice of making rice cake payments after a DK employee explained that the company would face a competitive disadvantage if it refrained. Over the same four-year period, Diageo, through DK, also spent approximately $165,287 on hundreds of non-traditional, non-seasonal gifts and entertainment for the military. Of these so-called “Mokjuksaupbi” payments (a term that was broadly intended by DK to refer to “payments for relationships with customers”), approximately $106,051 were for the purpose of influencing specific purchasing decisions. For example, in 2003, DK personnel requested approval of approximately $2,600 to entertain army personnel “for their cooperation” in connection with the re-selection of Windsor Scotch.”

Based on the above conduct, the SEC found FCPA violations, but only FCPA books and records and internal control violations. The absence of FCPA anti-bribery violations against Diageo and the referenced entities would seem to be the result of a lack of a U.S. nexus as to the payments. Even though the FCPA was amended in 1998 to provide an alternative nationality jurisdiction test as to U.S. issuers and domestic concerns, the FCPA retains a territorial U.S. nexus jurisdictional test as to non-U.S. issuers such as Diageo that are nevertheless subject to the FCPA.

As to the FCPA violations, the SEC order states as follows. “Diageo’s books and records did not accurately reflect illicit payments that it made, through its subsidiaries, to Indian, Thai, and South Korean government and military officials. Instead, Diageo, through DI, DT, and DK, disguised the improper payments as legitimate vendor expenses or recorded them under misleading rubrics such as “factory expenses,” “telephone expenses,” “shareholder stake,” and “sales support.” In several instances, the illicit payments were not recorded at all.” The SEC Order further states as follows. “As evidenced by the extent and duration of the wrongful payments and their improper recordation, Diageo failed to devise and maintain sufficient internal accounting controls.”

The SEC Order mentions Diageo’s cooperation and “certain remedial measures undertaken by Diageo, including employee termination and significant enhancements to its compliance program.”

As is common in all SEC FCPA enforcement actions, Diageo settled the matter without admitting or denying the SEC’s findings. Per the SEC Order, Diageo shall pay disgorgement of $11,306,081, prejudgment interest of $2,067,739, and a civil monetary penalty of $3,000,000.

In a press release (here) Diageo stated as follows. “Diageo takes the SEC’s findings seriously and regrets this matter. Systems and controls have been enhanced in an effort to prevent the future occurrence of such issues and to reinforce, everywhere the Company operates, a culture of compliance and commitment to the principles embodied in Diageo’s Code of Business Conduct.”

Diageo’s most recent Annual Report (Sept. 2010) stated as follows.

“As previously reported, Diageo Korea and several of its current and former employees have been subject to investigations by Korean authorities regarding various regulatory and control matters. Convictions for improper payments to a Korean customs official have been handed down against two former Diageo Korea employees, and a former and two current Diageo Korea employees have been convicted on various counts of tax evasion. Diageo had previously voluntarily reported the allegations relating to the convictions for improper payments to the US Department of Justice and the US Securities and Exchange Commission (SEC). The SEC has commenced an investigation into these and other matters, and Diageo is in the process of responding to the regulators’ enquiries regarding activities in Korea, Thailand, India and elsewhere. Diageo’s own internal investigation in Korea, Thailand, India and elsewhere remains ongoing. The US Foreign Corrupt Practices Act (FCPA) and related statutes and regulations provide for potential monetary penalties, criminal sanctions and may result in some cases in debarment from doing business with governmental entities in connection with FCPA violations.”

More On Alliance One and Universal

Wednesday, August 25th, 2010

Earlier this month (see here) the DOJ and SEC announced FCPA enforcement actions against tobacco companies – Alliance One International, Inc. and Universal Corporation.

Both the DOJ (here) and the SEC (here) issued a consolidated press release – the first time (to my knowledge) the agencies have consolidated an enforcement action against two unrelated companies in such a fashion. Perhaps the reason was, as explained below, a significant part of the improper conduct at both companies involved the same entity – The Thailand Tobacco Monopoly (“TTM”) – an alleged agency and instrumentality of the Thai government.

This is a long post, but then again, at nearly 300 pages, there was much in the DOJ and SEC resolution documents.

For instance, Alliance One’s entire exposure was based, not on anything it did, but rather successor liability theories.

Both the Alliance One and Universal enforcement actions were the product of voluntary disclosure. In fact, the Universal inquiry began when a former employee contacted the company’s internal compliance hotline. Query whether that individual today would do the same thing given Dodd-Frank’s whistlblower provisions – provisions which, if applicable, would make him / her a millionaire.

The Universal enforcement action is an FCPA first, in that it concerns conduct in Mozambique and Malawi.

There are also many remedial measures / compliance nuggets waiting to be digested from these enforcement actions.

The Alliance One enforcement action has already spawned a related individual enforcement action against Bobby Elkins (see here) and the Universal enforcement action may do the same as the DOJ’s Statement of Facts contains an alphabet soup of employees, including U.S. citizens, allegedly involved in the improper conduct.

This post describes the DOJ and SEC’s enforcement actions against Alliance One as well as the DOJ and SEC’s enforcement actions against Universal Corp.

Alliance One

The Alliance One enforcement action included a non-prosecution agreement between the DOJ and Alliance One, criminal pleas by Alliance One International AG and Alliance One Tobacco OSH, LLC, as well as an SEC enforcement action against Alliance One.

Edward Fuhr, Hunton & Williams LLP (see here), represented Alliance One entities. Colleen Mahoney, Skadden (see here), the former Deputy Director of the SEC’s Division of Enforcement, represented Alliance One’s Board of Directors and Audit Committee.

DOJ

Pursuant to a non-prosecution agreement (see here), the DOJ agreed not to prosecute Alliance One related to:

1. “improper payments (or agreements to make improper payments) made by employees and agents of its subsidiary or predecessor corporations in the form of:

a. corrupt payments made to foreign officials in Kyrgyzstan including (i) bribes paid to officials of the Kyrgyz Tamekisi; (ii) bribes paid to Akims; and (iii) bribes paid to Kyrgyz tax officials, which payments were made for the purpose of obtaining and retaining business with Kyrgyzstan government entities; and

b. corrupt payments made to foreign officials in Thailand in the form of
kickbacks paid to officials of the Thailand Tobacco Monopoly, which payments were made for the purpose of obtaining and retaining business with Thailand government entities; and

2. The accounting and record-keeping practices associated with these improper
payments.”

Pursuant to the NPA, Alliance One “admitted, accepted, and acknowledged successor corporate responsibility for the conduct of its corporate predecessors” as set forth in a Statement of Facts attached to the NPA.

In summary fashion, the Statement of Facts are as follows:

Prior to 2005, Dimon, Inc. (“Dimon”) was a publicly traded leaf tobacco merchant subject to the FCPA. Dimon also had an obligation to ensure that its wholly owned subsidiaries, including Dimon International Kyrgyzstan, Inc. (“DIK”) and Dimon International AG (“DIAG”), maintained accurate books and records.

Prior to 2005, Standard Commercial Corp. (“Standard”) was a publicly traded leaf tobacco merchant subject to the FCPA. Standard also had an obligation to ensure that its wholly owned subsidiaries, including Standard Brazil Ltd., maintained accurate books and records.

In 2005, Dimon and Standard merged to form Alliance One.

Kyrgyzstan

Dimon maintained a wholly owned subsidiary, DIK, that was organized under Kyrgyzstan law. During the relevant time period, DIK purchased and processed tobacco grown in Kyrgyzstan and shipped processed tobacco to Dimon’s customers throughout the world.

According to the Statement of Facts, “DIK maintained its principal place of business in Osh, Kyrgyzstan and made regular reports of its business operations and financial accounts to officers of Dimon located at its headquarters in Danville, Virginia. DIK regularly sought approval for management decisions from Dimon managemeut and worked with and communicated with individuals acting as DIK’s agents in Danville, Virginia, and Farmville, North Carolina, who undertook certain acts within the territory of the United States such that DIK was a “person” within the meaning ofthe FCPA.

After the merger of Dimon and Standard in 2005, Alliance changed the name of DIK to Alliance One Tobacco Osh, LLC (“Osh”) which continued to operate in Kyrgyzstan as a wholly owned subsidiary of Alliance One.

According to the Statement of Facts, “Osh is the corporate successor to DIK, and is legally accountable for the criminal acts of its predecessor corporation.

Like the DOJ and SEC’s prior enforcement action against Bobby Elkins (see here and here), the Statement of Facts focus on improper payments to “Kyrgyz Official A,” “the Akims” and the “Kyrgyz Tax Inspection Police.”

Kyrgyz Official A served as the “General Director of the Tamekisi” “an agency and instrumentality of the [Kyrgyz] government [established] to manage and control the government-controlled shares of the tobacco processing facilities throughout Kyrgyzstan.” According to the Statement of Facts, the Tamekisi agreed to issue a license to Dimon to process and export tobacco and that from October 1996 through at least February 2004, DIK delivered approximately $2.6 million in cash payments to the official. According to the Statement of Facts, these payments were intended to “influence acts or decisions” of the official in his official capacity and to secure DIK’s “continued access to the tobacco processing facilities controlled by the Tamekisi.”

According to the Statement of Facts, an Akim is a head of Kyrgyz local government with “authority over the sale of tobacco by the growers” within a specific municipality or geographic area. The Statement of Facts indicate that beginning in 1996 “it became necessary for DIK to obtain permission from local Akims to purchase tobacco from the growers in each area” and “several of the Akims demanded payment of a “commission” from DIK “in order to secure the relevant Akim’s approval” for DIK to purchase tobacco from local growers. According to the Statement of Facts, from January 1996 to at least March 2004 DIK made cash payments “to the Akims of five different municipalities totaling approximately $283,762 in order to influence the acts and decisions of the Akims and to secure DIK’s continued ability to purchase tobacco from growers in the muncipalities controlled by the Akims.”

As to the Kyrgyz Tax Inspection Police, the Statement of Facts indicate that “during periodic audits” of DIK, the police assessed penalties and threatened to shut down DIK. According to the Statement of Facts, from March 2000 to March 2003 DIK “made approximately nine cash payments to officers of the Kyrgyz Tax Inspection Police totaling approximately $82,850 in order to influence the acts and decisions” of the police and to secure DIK’s “continued ability to conduct its business in Kyrgyzstan.”

According to the Statement of Facts, DIK maintained a company bank account in Kyrgyzstan, known as the “special account” to make the above described improper payments and when a DIK employee “needed to replenish money in the special account, he sent requests for funds by electronic mail or facsimile transmission to other employees and officers of Dimon or its affiliates in the U.S.” accompanied by a wire transfer request to Dimon’s Financial Accounting Department in Virginia.

According to the Statement of Facts, “the financial reporting on the special account from DIK and all other Dimon subsidiaries went directly to Dimon’s corporate headquarters in the U.S.” and in July 2002 “an internal audit report to Dimon headquarters stated that DIK management continued to be challenged by a ‘cash environment’ and cited corruption in Kyrgyzstan as a financial risk because of the potential control issue with cash payments.”

According to the Statement of Facts, between January 1996 and December 2004, “the Kyrgyzstan business operations of DIK generated profits of approximately $4.8 million for its parent corporation, Dimon.”

Thailand

Prior to 2005, Dimon maintained a wholly owned subsidiary, DIAG, which was organized under Swiss law and conducted business in the U.K., Brazil, Thailand, the U.S. and elsewhere. According to the Statement of Facts, “during the relevant time period, DIAG provided financial, accounting and management services to other Dimon subsidiaries that purchased tobacco grown in Brazil, and sold it to Dimon’s customers including the [TTM].” According to the Statement of Facts, DIAG, which maintained its principal place of business in the U.K., “made regular reports of its business operations and financial accounts to officers of Dimon located at its headquarters in Danville, Virginia” and DIAG “regularly sought approval for management decisions from Dimon management and worked with and communicated with individuals acting as DIAG’s agents” in Virginia and North Carolina “who undertook certain acts while in the territory of the United States such that DIAG was a “person” within the meaning ofthe FCPA.

Prior to 2005, Standard maintained a wholly owned subsidiary, Standard Brazil Ltd (“Standard Brazil”), which was organized under the laws of the Isle of Jersey, Channel Islands, and conducted business in Brazil, Thailand, and elsewhere. During the relevant period, Standard Brazil provided financial, accounting and management services to other Standard subsidiaries that purchased tobacco grown in Brazil, and sold it to Standard’s customers including the TTM. Standard Brazil regularly sought approval for management decisions from Standard management and worked with and communicated with individuals at Standard, acting as Standard Brazil’s agents in the United States and undertaking certain acts within the territory of the United States such that Standard Brazil was a “person” within the meaning of the FCPA.

The Statement of Facts concern improper payments to TTM (see here) “an agency and instrumentality” of the Thai government established to “manage and control the government-owned tobacco industry in Thailand.” According to the Statement of Facts, the TTM “supervised the cultivation of domestic tobacco crops, purchased imported tobacco and manufactured cigarettes and other tobacco products in Thailand.”

According to the Statement of Facts, the TTM was headed by a Managing Director (“Thai Official A”), appointed by the Finance Ministry, who reported through a Board of Directors directly to the Minister of Finance of Thailand and, as such, was a “foreign official” within the meaning of the FCPA. (See here for TTM’s current organizational chart).

According to the Statement of Facts, during the relevant time period, Dimon purchased tobacco from growers in Brazil and sold the Brazilian tobacco to the TTM through DIAG and Standard sold the Brazilian tobacco to the TTM through Standard Brazil. To help facilitate these sales, Dimon and Standard Brazil retained sales agents in Thailand and the companies paid sales commissions to the agents in varying amounts as a percentage of its tobacco sales to the TTM.

According to the Statement of Facts:

“Beginning in or around 2000 and continuing through at least in or around 2004, Dimon and Standard, through their agents, subsidiaries and affiliates, collaborated together and with a competing tobacco merchant, Company A, [presumably Universal Corp.] to apportion tobacco sales to the TTM among themselves and to coordinate their sales prices in order to ensure that each company would share in the Thai tobacco market. Beginning in or around 2000 and continuing through at least in or around 2004, Dimon, Standard and Company A agreed among themselves to pay bribes to officials of the TTM in exchange for their purchase of tobacco. The three companies agreed to pay ‘special expenses,’ calculated at an agreed rate per kilogram of tobacco sold to the TTM, that were paid as kickbacks to Thai Official A and other TTM officials to induce the TTM to purchase tobacco and to secure an improper advantage for Dimon, Standard and Company A.”

According to the Statement of Facts, between 2000 and 2004 “Dimon realized net profits of approximately $4.3 million from the sale of Brazilian tobacco to the TTM” and paid “special expenses totaling approximately $542,950 as kickbacks to Thai Official A and other TTM officials…” According the Statement of Facts, during the same time period, “Standard realized net profits of approximately $2.7 million from the sale of Brazilian tobacco to the TTM” and paid “special expenses totaling approximately $696,160 as kickbacks to Thai Official A and other TTM officials…”

According to the Statement of Facts, the companies and individuals involved “knew and intended that the corrupt special expenses paid to Thai Official A and other TTM officials” would “secure an improper advantage for Dimon and Standard by influencing the TTM’s decision to purchase Brazilian tobacco from Dimono and Standard.”

According to the Statement of Facts:

“After the merger of Dimon and Standard in 2005, Alliance One consolidated the assets, liabilities, and business affairs of Standard Brazil with DIAG and renamed the subsidiary corporation Alliance One International AG” (“Alliance One AG”). According to the Statement of Facts, as the successor corporation, Alliance One AG “is legally accountable for the criminal acts of both DIAG and Standard Brazil” and Alliance One AG “continued to operate in the U.K. and elsewhere as a wholly owned subsidiary” of Alliance One and accordingly is a “person” within the meaning of the FCPA.”

The Statement of Facts then lists several acts in furtherance of the improper payments that had a U.S. nexus such as e-mail messages and wire transfers to or from the U.S.

According to the DOJ, it agreed to enter into the NPA with Alliance One based, in part, on the following factors: “(a) Alliance’s timely, voluntary and complete disclosure of the conduct and events at issue; (b) Alliance’s thorough, real-time cooperation with the Department and the Securities and Exchange Commission, including its voluntary production of documents; (c) the remedial compliance efforts undertaken and to be undertaken by Alliance; and (d) no further criminal conduct has occurred since the merger that created Alliance.”

During the three-year NPA, Alliance One shall, among other things, cooperate in any related DOJ or SEC investigation. Pursuant the NPA, Alliance One must also strenghen its internal controls and retain an independent corporate monitor.

The criminal informations against Alliance One AG (here) and Osh (here) concern the same core conduct described above.

The criminal information against Alliance One AG concerns Thailand conduct and charges: (i) conspiracy to violate the FCPA and to knowingly falsify books, record and accounts of Dimon and Standard; (ii) substantive FCPA anti-bribery violations; and (iii) aiding and abetting FCPA books and records violations.

The Alliance One AG Plea Agreement (here) notes that the benefit received from the improper conduct was approximately $7 million. The company received a “culpability score” credit for “self-reporting, cooperation, acceptance of responsibility.” The fine range, per the U.S. Sentencing Guidelines was $4.2 – $8.4 million. The DOJ and Alliance One AG agreed that the appropriate sentence should be $5.25 million. The plea agreement notes that the plea was “the result of the voluntary disclosure made by [Alliance One AG] and its parent [Alliance One] to the Department beginning in May 2004, and the disclosure of evidence obtained as a result of the extensive investigation subsequently conducted by [Alliance One] into the operations of [Alliance One AG], its parent, affiliates, and subsidiaries.” The agreement states that “at the time of the initial disclosure, the conduct was unknown to the Department.”

The criminal information against Osh concerns Kyrgyzstan conduct and charges: (i) conspiracy to violate the FCPA and to knowingly falsify books, record and accounts of Dimon; (ii) substantive FCPA anti-bribery violations; and (iii) aiding and abetting FCPA books and records violations.

The Osh Plea Agreement (here) notes that the benefit received from the improper conduct was approximately $4.8 million. The company received a “culpability score” credit for “self-reporting, cooperation, acceptance of responsibility.” The fine range, per the U.S. Sentencing Guidelines was $4.2 – $8.4 million. The DOJ and Osh agreed that the appropriate sentence should be $4.2 million. The plea agreement notes that the plea was “the result of the voluntary disclosure made by [Osh] and its parent [Alliance One] to the Department beginning in May 2004, and the disclosure of evidence obtained as a result of the extensive investigation subsequently conducted by [Alliance One] into the operations of [Osh], its parent, affiliates, and subsidiaries.” The agreement states that “at the time of the initial disclosure, the conduct was unknown to the Department.”

In the DOJ’s Consolidated Sentencing Memorandum (here), it notes that the “corporations have executed a tolling agreement that provides that the statute of limitations was tolled on May 24, 2004, the date on which the corporation first notified the Department that they were undertaking an internal investigation.”

As to the ultimate fine amounts, the DOJ states that it “and the defendant corporations have negotiated a fine that is at or above the minimum fine in the range.”

As to Osh’s $4.2 million fine, the DOJ states:

“The Department submits that a fine at the low end of the Guidelines range is
appropriate in this case given the company’s prompt and timely self-disclosure of the potentially corrupt payments as soon as they were discovered, the remedial measures taken and the nature and extent of the company’s cooperation throughout the
government’s investigation. The company retained outside counsel to conduct an extensive internal investigation and voluntarily produced thousands of pages of documents and memoranda of witness interviews. The company’s remedial measures, outlined below, included the termination of all employees found to have authorized or participated in the improper payments.”

As to Alliance One AG’s $5.25 million fine, the DOJ states:

“This fine is above the minimum of the range partly to account for the fact
that two subsidiaries (DIAG and Standard Brazil) participated in the commission of the offense, along with a third unrelated company, although they were subsidiaries of different parent corporations at the time. Further, because DIAG, Standard Brazil and Company A collaborated to fix prices and pay bribes to the Thai officials, the conduct was not limited to a few employees or confined to a single business unit.”

The Government’s Sentencing Memorandum concludes as follows:

“Alliance’s cooperation was both timely and thorough. During the course of the government’s investigation, Alliance and its outside counsel fully cooperated in good faith with the Department, and produced thousands of pages of documents and financial records. Alliance tenninated or sought resignations from all employees who were found to have knowledge of or participated in the improper payments. Alliance voluntarily produced memoranda of employee interviews conducted by counsel. Alliance and their counsel have been available to meet with Department attorneys to brief them on the progress and findings of their internal investigation. The agreed dispositions, described above, reflect the Department’s recognition of Alliance’s timely and thorough cooperation.”

“Alliance took remedial actions including enhancement of its corporate compliance program, replacement of responsible management, and discipline or termination of wrongdoers. Specifically, Alliance took the following remedial actions:

• The Special Account maintained in the name of employees was closed.

• On May 24, 2004, the Audit Committee directed management to deliver a “clear and proactive message” that:

o “Illegal acts will not be tolerated in Dimon;”

o “any potentially illegal act should be brought to the attention of the CLO prior to execution of the transaction;” and

o “any individual that believes that an illegal act may have occurred should contact the CLO immediately.”

• Management issued a directive to regional executives and all accounting personnel that any questionable expenses or payments and expenses without adequate
explanation or documentation must be reported to the Corporate Compliance Officer.

• The Audit Committee implemented a new policy requiring CFO or Controller pre-approval of any material payment in cash.

• Management issued a direction to employees that “[n]o payments to public officials or political parties are to be made in any form without the express advance approval of the Corporate Compliance Officer.”

• Compliance Officer required all personnel to re-take an online training course covering the FCPA provided by Integrity Interactive.

• Responsible personnel, including senior management in Europe and Kyrgyzstan were terminated or left company voluntarily. Other employees were reprimanded.

• Corporate Accounting required supporting information for all payments made in cash from any entity where such payments exceed $2500 annually, and issued a directive to minimize cash payments for anything other than incidental expenses.

• All cash accounts must be maintained in the company’s name.

• All cash transactions are required to be documented by receipts and signed by the recipient and they established a periodic review and approval process for all
non-incidental types of expenses paid in cash to ensure payments would comply with Company policy and the law.

A sentencing hearing is scheduled for October 21, 2010.

SEC

The SEC’s settled civil complaint (see here) alleges the same core Kyrgyzstan and Thailand conduct as the DOJ’s enforcement action.

As to books and records and internal controls, the SEC alleges that “Dimon’s Country Manager authorized, directed, and made” the improper payments in Kyrgyzstan through a DIK bank account held under his name (the above mentioned special account), that “Dimon’s Regional Financial Director authorized all fund transfers from a Dimon subsidiary’s bank account to the Special Account” and that “Dimon’s International Controller formalized the accounting methodology used to record the payments made from the Special Account for purposes of internal reporting by Dimon.”

In summary fashion, the SEC also alleged as follows:

“Despite their extensive international operations, Dimon and Standard lacked sufficient internal controls designed to prevent or detect violations of the FCPA. During the 2000-2004 period, Dimon and Standard each had a policy manual prohibiting bribery, but the training and guidance provided to their employees regarding compliance with the FCPA were not adequate or effective. Dimon and Standard each also failed to establish a program to monitor compliance with the FCPA by its employees, agents, and subsidiaries.”

As I’ve indicated in prior posts, before a company settles an FCPA enforcement action, it usually has to answer the enforcement agencies’ “where else” question – as in, if you engaged in improper conduct or had internal control problems in Kyrgyzstan and Thailand, where else did you engage in improper conduct or have internal control problems. To answer this broad question, the company is forced to conduct a world-wide review of its operations and that is why one sees, as in the SEC’s complaint against Alliance One, a laundry list of other alleged improper conduct.

In summary fashion, the SEC’s complaint also alleges as follows:

“By at least May 2005, Standard provided gifts, travel, and entertainment expenses to foreign government officials in the Asian Region, including China and Thailand.” “For example, in 2002 and 2003, contemporaneous documents show that Standard employees provided watches, cameras, laptop computers, and other gifts to Chinese and Thailand tobacco officials. Standard also paid for dinner and sightseeing expenses during non-business related travel to Alaska, Los Angeles, and Las Vegas for Chinese and Thailand government delegations.”

“In 2004, Standard made a $50,000 payment to a political candidate who was also Standard’s agent for tobacco sales in Thailand.” “The $50,000 payment was falsely recorded in Standard’s books as payment for consulting work.”

“In April 2003, Dimon’s subsidiary in Greece made a payment of $96,000 to a Greek tax official in exchange for the tax official’s agreement not to pursue certain irregularities discovered during an audit, thus significantly reducing Greece’s tax liability. Separately, the controller of Dimon’s subsidiary in Indonesia made a $44,000 cash payment to an Indonesian tax official in exchange for receiving a tax refund.”

The SEC complaint charges Alliance One with violations of the FCPA’s anti-bribery provisions, books and records and internal control provisions.

The SEC release (here) notes that Alliance One, without admitting or denying the SEC’s allegations, consented to entry of a permanent injunction enjoining future FCPA violations and agreed to pay a disgorgement penalty of $10 million.

In an Alliance One press release (see here) R. E. Harrison, the Company’s Chairman and Chief Executive Officer, stated:

“Our Company is committed to the highest standards of conduct in all transactions in all jurisdictions where we do business throughout the world. In these cases, although occurring prior to our merger in May, 2005, the conduct by those predecessor companies did not meet our standards and we believe it to be in the best interest of the Company, our shareholders and our other stakeholders to put these issues behind us by means of these negotiated agreements. As indicated in our agreement with the DOJ, we have cooperated fully throughout the course of this investigation and believe that since our merger we have demonstrated our complete commitment to conducting our business in accordance with the highest standards of legal and ethical conduct.”

Universal

The Universal enforcement action included a non-prosecution agreement between the DOJ and Universal, a criminal plea by Universal Leaf Tabacos Ltda. (“Universal Brazil”), as well as an SEC enforcement action against Univeral.

Patrick Hanes, Williams Mullen (see here) represented Univeral.

DOJ

Pursuant to a non-prosecution agreement (see here) the DOJ agreed not to prosecute Univeral Corp. related to:

“the making of improper payments, by employees and agents of Universal and/or its subsidiaries to officials of the Government of Thailand in connection with Universal Brazil’s efforts to secure business, namely, to secure the improper sale of leaf tobacco to the Thailand Tobacco Monopoly, from 2000 to 2004, and the accounting and record-keeping associated with these improper payments.”

Pursuant to the NPA, Universal Corp. “admitted, accepted, and acknowledged responsibility for the conduct of its subsidiaries” as set forth in a Statement of Facts attached to the NPA.

In summary fashion, the Statement of Facts are as follows:

Universal is a publicly traded company headquartered in Richmond, Virginia which, through its subsidiaries, is a worldwide purchaser and supplier of processed leaf tobacco. As an issuer, Universal was required to make and keep accurate books, records and accounts reflecting its transactions and disposition of assets of Universal and its subsidiaries including Universal Brazil.

Universal Brazil, a wholly owned subsidiary of Universal, was a Brazilian corporation, headquartered in Santa Cruz do Sul, Brazil. Universal Brazil was a “person” under the FCPA, and individuals and entities affiliated with and acting on behalf of Universal Brazil while in the territory of the United States, used and caused the use of the mails and means and instrumentalities of interstate commerce and performed other acts in furtherance of an offer, promise, authorization, or payment of money or anything of value to foreign government officials for the purpose of assisting in obtaining or retaining business.

The Statement of Facts refers to the same general kickback scheme involving TTM officials as alleged in the Alliance One enforcement action. The Statement of Facts indicate that “from in or around March 2000 to in or around July 2004, the TTM awarded Universal Brazil five orders for the sale of Brazilian leaf tobacco. To obtain these orders, between June and December 2004, Universal Brazil paid approximately $697,800 in kickbacks to representatives of the TTM through Agent X (a Thai national).”

The Statement of Facts then details the kickback scheme including the involvement of Employee A (a U.S. citizen who was the President of Universal Brazil); Employee B (a Brazilian citizen who was the Commercial Director for Universal Brazil); Employee C (a Brazilian citizen who was a Sales Manager for Universal Brazil); Employee D (a Zimbabwean citizen who was a Sales Director for Universal Brazil); Employee E (a Brazilian citizen who was the Finance Director for Universal Brazil); Employee F (a Brazilian citizen who was the Export Superintendent for Universal Brazil); Employee G (a Brazilian citizen who was a Sales Manager for Universal Brazil); Employee H (a Zimbabwean citizen who was the Sales Director for Universal Leaf Asia); Employee I (a Brazilian citizen who was an account manager in Brazil); Employee J (a U.S. citizen who was a Vice President of Universal Leaf Tobacco – a wholly owned subsidiary of Universal Corp. – who approved wiring instructions for payments to Agent X); Employee K (a U.S. citizen who was the Controller of Universal who approved wiring instructions for payment to Agent X); and Employee L (a U.S. citizen who was the Director of Financial Accounting for Universal Leaf Tobacco who approved wiring instructions for payments to Agent X).

Given the alleged involvement of others, including U.S. citizens, it will be interesting to see if additional DOJ or SEC enforcement actions against such individuals are forthcoming.

According to the Statement of Facts:

“The scheme ended in or about April 2005 when the TTM switched to an ‘electronic auction’ process to award orders. The electronic auction process increased the transparency of all of the bids received by the TTM, allowed for more open competition, and prevented Universal Brazil [and others] from including additional amounts in the price of their tobacco sales, thereby eliminating the ability of the companies to mask kickback payments used to secure sales orders.”

According to the Statement of Facts – “from in or around 2000 through in or around 2004, Employee E and others falsely characterized Universal Brazil’s kickback payments to TTM representatives in Universal Brazil’s books, records and accounts (which were incorporated into the books, records and acconts of Universal Corp. for purposes of preparing year-end financial statements) as “commission payments” to Agent X.”

As to Universal’s internal controls, the Statement of Facts indicates as follows:

“Universal Brazil’s employees, including Employees E and F, directed that
kickback payments be paid through LATCO, a wholly owned Universal subsidiary. The financial records of LATCO were maintained with insufficient oversight or review by Universal’s legal, finance, or compliance departments and were never audited by Universal during the period from 2000 to 2004. Universal Brazil’s Finance Department and executives and employees from either Universal Corp. or Universal Leaf Tobacco, including Employee J, Employee K, and Employee L approved or directed the transfer of the multiple ‘commission’ payments to Agent X even though: (a) some of the payments were described as ‘special expense’ payments; (b) there was no contractual basis for the payment of the additional commission amounts; (c) the payments were to accounts unassociated with the Agent; (d) the instructions that were provided when wiring the money indicated that Universal Corp. should not identify the agent or that the amounts were for ‘special expenses;’ and (e) the payments were above the standard five (5) percent commission typically paid by Universal Brazil to its agents.

The Statement of Facts also indicate that “Universal Brazil did not conduct sufficient due diligence prior to engaging Agent X.”

According to the DOJ, it agreed to enter into the NPA with Universal based, in part, on the following factors: “(a) Universal’s discovery of the violations through its own internal hotline process; (b) timely, voluntary, and complete disclosure of the facts; (c) Universal’s extensive, thorough, real-time cooperation with the Department and the SEC; and (d) the remedial efforts already undertaken and to be undertaken by Universal.”

During the approximate three-year NPA, Universal Corp. shall, among other things, cooperate in any related DOJ or SEC investigation. Pursuant the NPA, Universal Corp. must also strenghen its internal controls and retain an independent corporate monitor.

The criminal informations against Universal Brazil (see here) concerns the same core conduct described above.

The criminal information against Univeral Brazil charges: (i) conspiracy to violate the FCPA and to knowingly falsify books, record and accounts of Universal; and (ii) substantive FCPA anti-bribery violations.

The Universal Brazil Plea Agreement (here) notes that the benefit received from the improper conduct was between $1 million – $2.5 million. The company received a “culpability score” credit for “self-reporting, cooperation, and acceptance of responsibility.” The fine range, per the U.S. Sentencing Guidelines was $$6.3 million – $12.6 million. The DOJ and Univeral Brazil agreed that the appropriate sentence should be $4.4 million. The plea agreement states that the fine amount (30% below the bottom of the sentencing guidelines range) “was appropriate” based on the following factors:

“Universal Corporation and Universal Brazil’s extensive cooperation
during the course of the investigation, including the provision of relevant documents and information; Universal Corporation and Universal Brazil’s substantial assistance with other related Department investigations regarding the bribery of foreign government officials; and Universal Corporation and Universal Brazil’s remedial efforts, including enhancing the companies’ compliance resources and compliance policies, procedures, and internal controls.”

The plea agreement further states that the investigation was “a result of the voluntary disclosure made by Universal Brazil and its parent corporation Universal Corporation, through their counsel, to the Department and the disclosure of evidence obtained as a result of the investigation subsequently conducted through their counsel and the extraordinary cooperation by Universal Brazil and its parent Universal Corporation throughout the Department’s investigation” and that “at the time of the initial disclosure, the conduct was unknown to the Department.”

The Agreed Sentencing Memorandum (here) sheds light on how the facts at issue were first uncovered. The memo states:

“The government’s investigation began with a self-disclosure by counsel for Universal in 2006. In 2006, a former Univeral Brazil employee with knowledge of the bribery scheme in Brazil reported the conduct to Universal through Universal’s website. Based on the tip provided by the former employee, Universal’s counsel and outside auditors investigated the matter, identified a series of suspicious payments, and reported this information to the Department. Thereafter, Universal and Univeral Brazil cooperated in the Department’s and the U.S. Securities and Exchange Commission’s joint investigation of this matter.”

In footnotes, the DOJ states as follows:

“The Department encourages companies to disclose evidence of potential FCPA violations promptly. The agreed disposition with Universal Brazil and its parent Universal partly reflect credit given for Universal’s timely self-disclosure, thorough investigation, and ongoing cooperation.”

“Pursuant to Universal’s internal compliance program, Universal maintained on its website an employee ‘hotline’ that allowed current and former employees to report improper conduct. It is because of this useful compliance initiative that the improper conduct came to light. The agreed upon disposition partly reflects credit given for Universal’s pre-existing compliance program.”

According to the sentencing memo, Universal Brazil realized net profits of approximately $2.3 million on four contracts secured through the $697,800 in kickbacks to TTM officials.

As to the $4.4 million fine amount, the DOJ stated “that a fine below the Guidelines range is appropriate in this case given the company’s prompt and timely self-disclosure of the potentially corrupt payments as soon as they were reported, the nature and extent of the company’s cooperation throughout the government’s investigation, and the remedial measures taken.”

The sentencing memo details timely disclosure and cooperation as follows:

“Universal and Univeral Brazil’s cooperation was both timely and thorough. The company retained outside counsel to conduct an extensive internal investigation. Universal, Universal Brazil, and their counsel were consistently available to meet with Department attorneys to brief them on the progress and findings of their internal investigation. During the course of the government’s investigation, Universal and Univeral Brazil and its outside counsel fully cooperated in good faith with the Department and produced thousands of pages of documents and financial records and made employees available for interviews. Further, Universal and Univeral Brazil terminated or reprimanded employees who were determined to have authorized and facilitated the improper payments.”

As to remedial measures, the sentencing memo states:

“The company’s remedial measures, outlined below, included the implementation of an enhanced compliance program. Further, Universal Brazil, pursuant to the plea agreement, and its parent, Universal, pursuant to an Non-Prosecution Agreement (NPA), have agreed to further strengthen their internal controls, implement a rigorous compliance program and engage an independent corporate monitor (“monitor”) who will conduct a comprehensive review of the Universal and Univeral Brazil’s compliance standards and procedures and its internal controls. The monitor will prepare an initial report and two follow-up reports of his or her findings and make recornmendations for improvements in the companies’ compliance programs over the three-year term. Universal and Univeral Brazil took remedial actions including enhancement of the corporate compliance program, replacement of responsible management, and discipline of wrongdoers.

Specifically, Universal and Univeral Brazil took the following remedial
actions:

• Management established a Compliance Committee comprised of the Chief Financial Officer, the General Counsel, the Head of Internal Audit, the Treasurer, the Controller, and the Principle Sales Director. The Compliance Committee meets on a monthly basis to review and evaluate Universal’s compliance programs and training.

• Management established a Chief Compliance Officer who is responsible for the day-today operations of Universal’s compliance program and Chairs the Compliance Committee.

• Management issued a revised and updated Code of Conduct and translated the Code into fourteen (14) languages.

• Management required sales, finance, and executive-level personnel to attend a day long in-person training session devoted to FCPA and local anti-bribery laws.

• Management revised and enhanced its payment approval policy which now requires an ‘approving officer’ to review all supporting documentation for a payment and to understand the purpose of the payment prior to approval. The ‘approving officer’ must certify that he or she has reviewed the existing documentation and obtained an understanding of the legitimate business purpose of the payment. The policy also requires that employees investigate any questionable payments and determine that they
are legal, legitimate, and appropriate prior to approving the payment.

• Management revised and enhanced its due diligence process for agents. Initially, Universal suspended all commission payments to agents worldwide subject to legal department confirmation that each requested payment was adequately supported. Thereafter, Universal instituted a formal and standardized process for the assessment and approval of existing and proposed sales agents, which is coordinated by Universal’s Legal Department. As part of this policy, an officer of Universal, known as a ‘Relationship Officer,’ must complete a ‘Sales Agent Due Diligence Checklist’ for each prospective sales agent. This detailed checklist includes disclosure of relationships with foreign governments by owners, officers, directors and employees of the third-party agent or their family members, reference checks, and a list of potential red flags.

• Management conducted, and has pledged to continue to conduct, compliance and/or FCPA training at every global conference held for Universal employees.

• Management terminated and reprimanded certain employees involved in the improper
conduct.”

SEC

The SEC’s settled civil complaint (see here) alleges the same core Thailand conduct as the DOJ’s enforcement action.

Further to the “where else” issue discussed above, the SEC’s complaint also alleges conduct related to Mozambique and Malawi business.

In summary fashion, the SEC’s complaint alleges:

“From 2000 through 2007, Universal Corporation violated the Foreign Corrupt Practices Act of 1977 (the “FCPA”) by paying, through its subsidiaries, over $900,000 to govemment officials in Thailand and Mozambique to influence acts and decisions by those foreign officials to obtain or retain business for Universal. Those payments were directed by employees at multiple levels of the company, including management in its corporate offices and at its wholly-or majority-owned and controlled foreign subsidiaries. The Company had inadequate internal controls to prevent or detect any of these improper payments, and improperly recorded the payments in its books and records.”

“Between 2000 and 2004, Universal subsidiaries paid approximately $800,000 to bribe officials of the government-owned Thailand Tobacco Monopoly (“TTM”) in exchange for securing approximately $11.5 million in sales contracts for its subsidiaries in Brazil and Europe. From 2004 through 2007, Universal subsidiaries made a series ofpayments in excess of $165,000 to government officials in Mozambique, through corporate subsidiaries in Belgium and Africa. Among other things, the payments were made to secure an exclusive right to purchase tobacco from regional growers and to procure legislation beneficial to the Company’s business.”

“In addition, between 2002 and 2003, Universal, subsidiaries paid $850,000 to high ranking Malawian government officials. Those payments were authorized by, among others, two successive regional heads for Universal’s African operations. Universal did not accurately. record these payments in its books and records.”

As to the Mozambique payments, the complaint alleges:

(i) that two $10,000 payments were made to the “wife of an official in Mozambique’s Ministry of Agriculture and Fisheries” to obtain the official’s “assistance in revising legislation to impose a 20% export tax on unprocessed tobacco” – legislation that would have “benefited Universal over competitors because Universal was building a tobacco processing plant in the country;

(ii) that “Universal Leaf Africa directed that Universal’s Belgian subsidiary pay $50,000 to the brother of an official of in Mozambique’s Ministry of Agriculture and Fisheries” to “enable the Company’s Mozambican subsidiary to avoid incurring an export tax that it otherwise would have incurred for shipping unprocessed tobacco out of Mozambique;”

(iii) that “Univeral Leaf Africa made a series of payments totaling $86,830 from its own account and the account of the Mozambican subsidiary to secure a land concession given the subsidiary exclusive rights to purchase tobacco from growers on that land from the 2006 growing season.” According to the complaint Universal Leaf made “cash payments to a Governor in Mozambique; and gave gifts including supplies for a bathroom renovation, and personal travel on a Company jet.” and

(iv) that “Universal Leaf Africa forgave a debt and directed an additional series of payments from its own accounts and the account of the Mozambican subsidiary totaling $19,061″ – according to the complaint the “debt forgiveness and payments were provided to Mozambican government officials and their family members in exchange for continued business favors.”

As to the Malawi payments, the complaint alleges as follows:

“Between approximately October 2002 and November 2003, Universal Leaf Africa made payments totaling $500,000 to one high-ranking Malawian government official; $250,000 to a second high-ranking government official; and $100,000 to a political opposition leader.”

As to Universal’s books and records and internal controls, the SEC alleges in summary fashion that Universal made payments under circumstances in which the Company lacked adequate internal controls to ensure that such payments were not being transmitted to government officials in order to obtain or retain business and that Universal’s books and records falsely characterized the payments.

The SEC complaint charges Universal with violations of the FCPA’s anti-bribery provisions, books and records and internal control provisions.

The SEC release (here) notes that Universal, without admitting or denying the SEC’s allegations, consented to entry of a permanent injunction enjoining future FCPA violations and agreed to pay a disgorgement penalty of approximately $4.6 million.

In a Universal press release (see here) George C. Freeman, III, Universal’s Chairman, President, and Chief Executive Officer, states:

“Universal prides itself on conducting business with honesty and integrity. These past payments were – and are – contrary to the policies and standards of Universal and its subsidiaries. We have absolutely no tolerance for this type of activity. Our Audit Committee conducted a rigorous and thorough investigation, we voluntarily reported this matter to federal authorities, and we have fully cooperated with federal authorities at each step of the investigation. We have since taken steps to strengthen our culture of ethical and legal compliance, and our efforts are supported by our operations around the world. Our regional management is fully committed to our culture.”