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Bio-Rad Laboratories Agrees To Pay $55 Million To Resolve FCPA Enforcement Action

Tuesday, November 4th, 2014

Yesterday the DOJ and SEC announced (here and here) a coordinated FCPA enforcement action against Bio-Rad Laboratories Inc. based on alleged conduct in Russia, Thailand and Vietnam.

The enforcement action involved a DOJ non-prosecution agreement and an SEC administrative order.  Bio-Rad agreed to pay approximately $55 million to resolve the alleged FCPA scrutiny ($14.35 million in the DOJ action; and $40.7 million in the SEC action).

This post summarizes both the DOJ and SEC enforcement actions based on a review of the original source documents.

DOJ Enforcement Action

The enforcement action focused on the conduct of Bio-Rad Laboratorii OOO (“Bio-Rad Russia”) and Bio-Rad SNC as well as the alleged knowledge of certain Bio-Rad managers concerning various Russian business practices.

According to the NPA, Bio-Rad Russia is:

“[A] wholly owned subsidiary of BIO-RAD located in Moscow, Russia. Bio-Rad Russia primarily sold BIO-RAD clinical diagnostic products, such as HIV testing kits. Approximately 90% of its clientele were government customers, most notably the Russian Ministry of Health. In order to obtain certain Russian government contracts, Bio-Rad Russia was required to participate in public tender processes.”

According to the NPA, Bio-Rad SNC is:

“[A]n indirectly wholly-owned subsidiary of Bio-Rad headquartered in Marnes-la-Coquette, France.  Bio-Rad SNC manufactured, sold, and distributed Bio-Rad products worldwide.”

According to the NPA, Agent 1 (described as an agent retained by Bio-Rad SNC with respect to sales in Russia) assisted Bio-Rad Russia in connection with certain governmental sales in Russia and established Intermediary Companies (described as Agent 1 affiliated companies in Panama, the United Kingdom, and Belize) which Bio-Rad SNC retained “purportedly to perform extensive services on its behalf in Russia.”  However, according to the NPA, Intermediary Companies “were located offshore and had no employees aside from Agent 1.”  Moreover, according to the NPA, “Intermediary Companies used a phony address on its invoices that belonged to a Russian government agency.”

According to the NPA, Manager 1 (described as a high-level manager of Bio-Rad’s Emerging Markets sales region, which included Rusia, from 2004 to 2010 and based in Bio-Rad’s corporate offices in California) “authorized Bio-Rad SNC’ agreements with the Intermediary Companies without conducting any due diligence on the Intermediary Companies.”

According to the NPA,

“Bio-Rad SNC paid the Intermediary Companies a commission of 15-30% purportedly in exchange for various services outlined in the agency contracts, including acquiring new business by creating and disseminating promotional materials to prospective  customers, installing Bio-Rad products and related equipment, training customers on the installation and use of Bio-Rad products, and delivering Bio-Rad products.

The Intermediary Companies, however, lacked the capabilities to perform these contractually defined services. In some instances, the Intermediary Companies submitted invoices suggesting that they performed distribution services in connection with certain contracts. The Intermediary Companies did not perform these services, and would have been significantly overpaid even had they performed such services.”

According to the NPA:

“Manager 1, Manager 2 [described as a high-level accounting manager of Bio-Rad's Emerging Markets sales region, which included Russia, from around 2004 to 2010 and based in Bio-Rad's corporate offices in California] and Manager 3 [described as a high-level manager of Bio-Rad Russia from 2007 to 2011 and based in Moscow] reviewed and approved commission payments to Intermediary Companies, despite knowing that Intermediary Companies and Agent 1 were not performing the services from which they were being paid.”

The NPA further states that Manager 1, Manager 2, and Manager 3 used the code word “bad debt” when communicating with each other to refer to the Intermediary Companies’ commission payments.  According to the NPA, Manager 2 “instructed lower-level Bio-Rad SNC finance employees to ‘talk with codes’ when communicating about the Intermediary Companies’ invoices and that Manager 3 requested that Intermediary Company invoices be paid in installments of less than $200,000 each so as to avoid additional approvals required by Bio-Rad policy for payment over $200,000.

According to the NPA,

“The payments to the Intermediary Companies were made by Bio-Rad SNC and falsely recorded as “commission payments” in its books. Moreover, Manager 1 and Manager 2, who falsely described the commission payments as “bad debt” in e-mails, knew that Bio-Rad SNC maintained the bogus contracts with the Intermediary Companies, as well as the numerous associated false invoices Bio-Rad SNC had paid, as part of its books and records. Bio-Rad SNC’s books, records, and financial accounts were consolidated into Bio-Rad’s books and records and reported by Bio-Rad in its financial statements. Thus, Manager 1 and Manager 2 knowingly caused BIO-RAD to falsify its books and records.”

The NPA further states:

“Bio-Rad maintained a set of corporate policies, but Bio-Rad’s international offices were given autonomy by the company to implement and maintain adequate controls. However, Manager 1 and Manager 2 failed to implement adequate controls for Bio-Rad’s Emerging Markets sales region, including controls related to its operations in Russia where those managers knew that the failure to implement these controls allowed Agent 1 and the Intermediary Companies to be paid significantly above-market commissions for little or no services that were supported by false contracts and invoices. For example, Manager 1 and Manager 2 did not put in place a system of controls to conduct due diligence on third party agents, such as the Intermediary Companies, to ensure documentation supporting payments to third parties, or to monitor such payments. Nor did the company implement adequate testing of the controls that should have been in place.

Manager 1 and Manager 2′s knowing failure to implement adequate internal accounting controls with respect to Russia was due, at least in part, to their desire to continue to obtain and retain contracts with the Russian government. Bio-Rad Russia won 100% of its government contracts when Agent 1 was involved and lost its first major Russian government  contract after terminating Agent 1 in or around 2010.”

According to the NPA:

“In addition to the knowing failure to implement an adequate system of internal accounting controls, prior to the discovery of the misconduct in Bio-Rad did not maintain an adequate compliance program. The company did not provide any FCPA training to its employees and, although Bio-Rad had a business ethics policy and code of conduct that prohibited bribery and was posted on the company’s intranet site, many employees of Bio-Rad and its subsidiaries were unaware of its existence. Moreover, the code was only available in English despite the fact that a significant number of employees working for Bio-Rad’ss overseas subsidiaries did not speak or understand English well enough to understand the code.”

“Bio-Rad also decentralized its compliance program such that its international offices were responsible for ensuring adequate compliance with its business ethics policy and code of conduct. However, Manager 1 and Manager 2 did not take steps to ensure such compliance in Emerging Markets, and Bio-Rad did not take sufficient steps to monitor its international offices. As a result, Bio-Rad’s international offices did not undertake appropriate risk-based due diligence in connection with the retention of agents and business partners and, further, did not have distribution and agency agreements with appropriate anti-corruption terms. Bio-Rad also did not undertake periodic risk assessments of its compliance program. Bio-Rad’s failure to maintain an adequate compliance program significantly contributed to the company’s inability to prevent the misconduct in Russia, as well as improper payments to government officials in Vietnam and Thailand.”

The NPA states as follows.

“The [DOJ] enters into this Non-Prosecution Agreement based on the individual facts and circumstances presented by this case and the Company. Among the facts considered were the following: (a) following discovery of potential FCPA violations during the course of an internal audit, the Company’s audit committee retained independent counsel to conduct an internal investigation and voluntarily disclosed to the [DOJ] the misconduct described in the Statement of Facts; (b) the Company has fully cooperated with the [DOJ's] investigation, including conducting an extensive internal investigation in several countries, voluntarily making U.S. and foreign employees available for interviews, voluntarily producing documents from overseas, summarizing its findings, translating numerous documents, and providing timely reports on witness interviews for the [DOJ]; (c) the Company has engaged in significant remedial actions, including enhancing its anti-corruption policies globally, improving its internal controls and compliance functions, developing and implementing additional FCPA compliance procedures, including due diligence and contracting procedures for intermediaries, instituting heightened review of proposals and other transactional documents for all Company contracts, closing its Vietnam office after learning of improper payments by its Vietnam subsidiary, and conducting extensive anti-corruption training throughout the global organization; (d) the Company has committed to continue to enhance its compliance program and internal controls, including ensuring that its compliance program satisfies the minimum elements set forth in Attachment B to this Agreement; and (e) the Company has agreed to continue to cooperate with the [DOJ] in any ongoing investigation of the conduct of the Company and its officers, directors, employees, agents, and consultants relating to possible violations of the FCPA …”.

Pursuant to the NPA, which has a term of two years, Bio-Rad admitted, accepted and acknowledged that it was responsible for the acts of its employees and agents as set forth in the Statement of Facts.  The NPA also contains a “muzzle clause” in which Bio-Rad expressly agree[d] that it shall not, through present or future attorneys, officers, directors, employees, agents or any other person authorized to speak for the Company make any public statement, in litigation or otherwise, contradicting the acceptance of responsibility by the Company …”.

In the NPA, Bio-Rad also agreed to undertake a host of compliance enhancements and report to the DOJ during the two-year term of the NPA “regarding mediation and implementation of the compliance program and internal controls, policies and procedures” described in the NPA.

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

“Public companies that cook their books and hide improper payments foster corruption.  The department pursues corruption from all angles, including the falsification of records and failure to implement adequate internal controls.   The department also gives credit to companies, like Bio-Rad, who self-disclose, cooperate and remediate their violations of the FCPA.”

Special Agent in Charge David Johnson of the FBI’s San Francisco Field Office stated:

“The FBI remains committed to identifying and investigating violations of the Foreign Corrupt Practices Act. This action demonstrates the benefits of self-disclosure, cooperation, and subsequent remediation by companies.”

The release further states:

“The department entered into a non-prosecution agreement with the company due, in large part, to Bio-Rad’s self-disclosure of the misconduct and full cooperation with the department’s investigation.  That cooperation included voluntarily making U.S. and foreign employees available for interviews, voluntarily producing documents from overseas, and summarizing the findings of its internal investigation.  In addition, Bio-Rad has engaged in significant remedial actions, including enhancing its anti-corruption policies globally, improving its internal controls and compliance functions, developing and implementing additional due diligence and contracting procedures for intermediaries, and conducting extensive anti-corruption training throughout the organization.”

SEC Enforcement Action

The SEC’s order is based on the same core conduct alleged in the DOJ action as relevant to Russia business and also contains allegations concerning conduct in Vietnam and Thailand.

In summary fashion, the SEC’s order states:

“From approximately 2005 to 2010, subsidiaries of Bio-Rad made unlawful payments in Vietnam and Thailand to obtain or retain business. During the same period, Bio-Rad’s subsidiary paid certain Russian third parties, disregarding the high probability that at least some of the money would be used to make unlawful payments to government officials in Russia. With respect to Russia, one of Bio-Rad’s foreign subsidiaries paid three off-shore agents (the“Russian Agents”) for alleged services in connection with sales of its medical diagnostic and life science equipment to government agencies. These agents were not legitimate businesses, and despite receiving large commissions, they did not provide the contracted-for services. In paying these agents, Bio-Rad’s foreign subsidiary demonstrated a conscious disregard for the high probability that the Russian Agents were using at least a portion of the commissions to pay foreign officials to obtain profitable government contracts. The General Manager (“GM”) of Bio-Rad’s Emerging Markets sub-division and the Emerging Markets Controller, both employees of the parent company (collectively, “the Emerging Markets managers”) ignored red flags, which permitted the scheme to continue for years. In Vietnam and Thailand, Bio-Rad’s foreign subsidiaries used agents and distributors to funnel money to government officials. In total, Bio-Rad made $35.1 million in illicit profits from these improper payments.

In violation of Bio-Rad’s policies, Bio-Rad’s foreign subsidiaries did not record the payments in their own books in a manner that would accurately or fairly reflect the transactions. Instead they booked them as commissions, advertising, and training fees. These subsidiaries’ books were consolidated into the parent company’s books and records. During the relevant period, Bio-Rad also failed to devise and maintain adequate internal accounting controls.”

As to the Vietnam and Thailand conduct, the SEC’s order focuses on Bio-Rad Laboratories (Singapore) Pte. Limited (“Bio-Rad Singapore”) described as a wholly-owned subsidiary located in Singapore and Diamed South East Asia Ltd. (“Diamed Thailand”) described as  a 49%-owned subsidiary of Diamed AG (Switzerland) that was acquired by Bio-Rad in October 2007.  According to the order, local majority owners ran Diamed Thailand’s operations until 2011, when Bio-Rad bought out their interest in the company.

Under the heading “Facts in Vietnam,” the order states:

“From at least 2005 to the end of 2009, Bio-Rad maintained a sales representative office in Vietnam. A country manager supervised the Vietnam Office’s sales activities, and was authorized to approve contracts up to $100,000 and sales commissions up to $20,000. Vietnam’s country manager reported to Bio-Rad Singapore’s Southeast Asia regional sales manager (“RSM”), who in turn reported to the Asia Pacific GM.

From 2005 through 2009, the country manager of the Vietnam office authorized the payment of bribes to government officials to obtain their business. At the direction of the country manager, the sales representatives made cash payments to officials at government-owned hospitals and laboratories in exchange for their agreement to buy Bio-Rad’s products.

In 2006, the RSM first learned of this practice from a finance employee. She raised concerns about it to the Vietnam Office’s country manager, who informed her that paying bribes was a customary practice in Vietnam. On or about May 18, 2006, the Vietnamese country manager wrote in an email to the RSM and the Bio-Rad Singapore finance employee that paying third party fees “[wa]s outlawed in the Bio-Rad Business Ethics Policy,” but that Bio-Rad would lose 80% of its Vietnam sales without continuing the practice. In that same email, the country manager proposed a solution that entailed employing a middleman to pay the bribes to Vietnamese government officials as a means of insulating Bio-Rad from liability. Under the proposed scheme, Bio-Rad Singapore would sell Bio-Rad products to a Vietnamese distributor at a deep discount, which the distributor would then resell to government customers at full price, and pass through a portion of it as bribes.

The RSM and the Asia Pacific GM were aware of and allowed the payments to continue. Between 2005 and the end of 2009, the Vietnam office made improper payments of $2.2 million to agents or distributors, which was funneled to Vietnamese government officials. These bribes, recorded as “commissions,” “advertising fees,” and “training fees,” generated gross sales revenues of $23.7 million to Bio-Rad Singapore. The payment scheme did not involve the use of interstate commerce, and no United States national was involved in the misconduct.”

Under the heading “Facts in Thailand,” the order states:

“Bio-Rad acquired a 49% interest in Diamed Thailand as part of its acquisition of Diamed AG (Switzerland) in October 2007. Bio-Rad performed very little due diligence on Diamed Thailand prior to the acquisition.

Diamed Thailand’s local majority owners managed the subsidiary. Bio-Rad’s Asia Pacific GM was responsible for working and communicating with Diamed Thailand’s majority owners and distributors.

Prior to the October 2007 acquisition, Diamed Thailand had an established bribery scheme, whereby Diamed Thailand used a Thai agent to sell diagnostic products to government customers. The agent received an inflated 13% commission, of which it retained 4%, and paid 9% to Thai government officials in exchange for profitable business contracts.

The scheme continued even after Bio-Rad acquired Diamed Thailand. Diamed Thailand renewed the contract with the distributor in June 2008, but unbeknownst to Bio-Rad, the distributor was partially owned by one of Diamed Thailand’s local Thai owners.

Bio-Rad’s Asia Pacific GM learned of Diamed Thailand’s bribery scheme while attending a distributor’s conference in Bangkok in March 2008. At the conference, Diamed Thailand’s local manager informed him that some of Diamed Thailand’s customers received payments, which the Asia Pacific GM understood to mean kickbacks. The Asia Pacific GM instructed Bio-Rad Singapore’s controller to investigate the matter. The controller confirmed to the Asia Pacific GM that Diamed Thailand was bribing government officials through the distributor. Despite these findings, the Asia Pacific GM did not instruct Diamed Thailand to stop making the improper payments to the distributor.

From 2007 to early 2010, Diamed Thailand improperly paid a total of $708,608 to the distributor, generating gross sales revenues of $5.5 million to Diamed Thailand. These  payments were recorded as sales commissions. The payment scheme did not involve the use of interstate commerce, and no United States national was involved in the misconduct.”

The SEC’s order found that:

“Bio-Rad violated [the FCPA's anti-bribery provisions] because Bio-Rad’s Emerging Markets managers demonstrated a conscious disregard for the high probability that the Russian Agents were using at least a portion of Bio-Rad Russia’s sales commission payments to bribe Russian government officials in exchange for awarding the company profitable government contracts. These managers knew the Russian Agents operated as mere shell entities. They also knew that, among other things, the commissions were large, and that the Russian Agents did not have the resources to perform any of the contracted-for services set forth in their agreements. Nevertheless, the managers approved all of their agreements, and authorized $4.6 million in payments to the Russian Agents’ off-shore accounts even though many of the payment requests and invoices raised substantial questions as to their legitimacy. Finally, the same Emerging Markets managers communicated about the Russian Agents under cover of secrecy, which further calls in question their legitimacy. These red flags surfaced repeatedly over a five year period.”

The SEC’s order also found violations of the books and records and internal controls provisions based on the Russia, Vietnam, and Thailand conduct.  As to internal controls, the order states:

“[A]lthough [Bio-Rad] had an ethics policy prohibiting the payment of bribes and various policies and procedures requiring accurate books and records, its systems of internal controls proved insufficient to provide reasonable assurances that such payments would be detected and prevented.”

Under the heading, “Self-Disclosure, Cooperation and Remedial Efforts,” the order states:

“Bio-Rad made an initial voluntary self-disclosure of potential FCPA violations to the Commission staff and the Department of Justice in May 2010, and immediately thereafter Bio-Rad’s audit committee retained independent counsel to conduct an investigation of the alleged violations. The audit committee conducted a thorough internal investigation, and subsequently expanded it voluntarily to cover a large number of additional potentially high-risk countries. The investigation included over 100 in-person interviews, the collection of millions of documents, the production of tens of thousands of documents, and forensic auditing. Bio-Rad’s cooperation was extensive, including voluntarily producing documents from overseas, summarizing its findings, translating numerous key documents, producing witnesses from foreign jurisdictions, providing timely reports on witness interviews, and making employees available to the Commission staff to interview.

Bio-Rad also undertook significant and extensive remedial actions including: terminating problematic practices; terminating Bio-Rad employees who were involved in the misconduct; comprehensively re-evaluating and supplementing its anticorruption policies and procedures on a world-wide basis, including its relationship with intermediaries; enhancing its internal controls and compliance functions; developing and implementing FCPA compliance procedures, including the further development and implementation of policies and procedures such as the due diligence and contracting procedure for intermediaries and policies concerning hospitality, entertainment, travel, and other business courtesies; and conducting extensive anticorruption training throughout the organization world-wide.”

As noted in the SEC’s release:

“[Bio-Rad] agreed to pay $40.7 million in disgorgement and prejudgment interest to the SEC … The company also must report its FCPA compliance efforts to the SEC for a period of two years.”

In the SEC release, Andrew Ceresney, Director of the SEC’s Division of Enforcement, stated:

“Bio-Rad Laboratories failed to detect a bribery scheme and did not properly address red flags that such a scheme was underway. “This enforcement action, which reflects credit for Bio-Rad’s cooperation in our investigation, reiterates the importance of all companies ensuring they have the proper internal controls to prevent FCPA violations.”

Bio-Rad was represented by Douglas Greenburg (Latham & Watkins).

In this release, Norman Schwartz (Bio-Rad President and Chief Executive Officer) stated:

“The actions that we discovered were completely contrary to Bio-Rad’s culture and values and ethical standards for conducting business. We took strong, decisive action to end the problematic practices and prevent anything like this from happening in the future, including terminating involved employees and committing substantial resources to strengthening our compliance functions and financial controls. Bio-Rad prides itself on operating with the highest levels of integrity, and I am pleased that this settlement fully resolves the government’s FCPA investigation and puts this matter behind us.”

The release further states:

“Bio-Rad discovered the potential FCPA violations and self-reported them to the DOJ and SEC in May 2010. The Company subsequently conducted a thorough global investigation with the assistance of independent legal and forensic specialists, terminated involved employees and third party agents, and significantly enhanced its internal controls, procedures, training and compliance functions designed to prevent future violations. The settlement fully resolves all outstanding issues related to these investigations.”

On the day the FCPA enforcement action was announced Bio-Rad’s stock closed up .5%.

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.”