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Will There Be Any Daimler-Related Prosecutions?

Wednesday, September 7th, 2011

Bribery schemes are often facilitated, aided and abetted, and enabled by third parties and with increasing frequency the DOJ targets such enablers. In November 2009, Assistant Attorney General Lanny Breuer stated as follows. “The use of intermediaries to pay bribes will not escape prosecution under the FCPA. The Department will continue to hold accountable all the players in an FCPA scheme – from the companies and their executives who hatch the scheme, to the consultant they retain to carry it out.“ Recent FCPA enforcement actions that have targeted such enablers include: Jeffrey Tesler and Wojciech Chodan (in connection with the Bonny Island, Nigeria cases); the Aquilars (in connection with the Lindsey Manufacturing enforcement action); Ousama Naaman (in connection with the Innospec enforcement action); and Paul Novak (in connection with the Willsbro enforcement action).

The March 2010 FCPA enforcement action against Daimler and its related entities (see here for the prior post) contained unusually detailed allegations concerning the conduct of various enablers in Daimler’s bribery scheme. Thus, back in March 2010, I observed as follows. “The alleged improper payments involved dozens and dozens of third parties, including several located in the U.S., which were allegedly utilized by Daimler and its affiliates to bribe foreign officials. Given Daimler’s use of numerous U.S. based entities, it will be interesting to see if any of these U.S. entities and/or entity employees will be prosecuted for their role in the respective bribery schemes.”

A year and a half has passed, there have been no related prosecutions, and it is appropriate to again ask the question – will any U.S. enablers of Daimler’s bribery scheme be held accountable?

Based on the DOJ’s allegations in the Daimler enforcement action, the following entities would seem to be the most logical candidates.

M.F. Mechanical & Electrical, Inc. (Daimler payment to the entity for the benefit of Chinese “foreign officials” – para 50 of Daimler AG information);

Shores International, a Texas corporation (Daimler payment to the entity for the benefit of the wife of a Chinese government official – para 51 of Daimler AG information);

Lily Energy Services, Inc., a Texas corporation (Daimler payment to the entity for the benefit of Chinese “foreign officials” – para 52 of Daimler AG information);

King Jack Inc., a California corporation (Daimler payment to the entity for the benefit of Chinese “foreign officials” – para 53 of Daimler AG information);

Oldenburgh Financial Corporation, incorporated in Delaware, and United Petrol Group LLP, incorporated in Oregon (Daimler payments to the entities for the benefit of Latvian government officials – para 106 of Daimler AG information);

Biotop Group, Inc., a Delaware corporation, and Marketing Research and Consultants LLC, a Wyoming corporation (Daimler payments to the entities for the benefit of Croatian government officials – para 123-128 of Daimler AG information)

Survey Says …

Thursday, June 2nd, 2011

KPMG Forensic recently released (here) its 2011 “Global Anti-Bribery and Corruption Survey.” KPMG “surveyed 214 executives in the U.S. and U.K. to identify their most vexing anti-bribery and corruption (“AB&C”) compliance challenges and to understand how companies are preventing, detecting and responding to AB&C risk.” In summary form, the KPMG survey found that “despite a greater awareness of the business and legal imperatives for well-developed AB&C compliance programs among survey respondents, many compliance programs lack sufficient depth and breadth to effectively mitigate AB&C risk around the world.”

According to the survey, “the three most significant AB&C compliance challenges cited by both U.S. and U.K. respondents are auditing third parties for compliance, difficulty in performing effective due diligence on foreign agents/third parties, and variations in country requirements and local laws on issues such as data privacy and facilitating payments.”

Some survey results that caught my eye.

Nearly 60% of survey respondents said it was “not at all challenging” to “continue to run business while managing investigations.”

Even though third-party (agent, distributor, joint venture partner, etc) risk ranked high in the survey results, only approximately 60% of respondents actually distribute AB&C policies and procedures to third parties and 60% of respondents said that most third party agents are not required to take AB&C training (in 2008 the U.S. response was 93%). Of further interest regarding third-parties, nearly 60% of respondents have “right to audit” clauses in contracts with third parties, but approximately 65% of respondents indicated that they have not exercised their “right to audit.”

Even though facilitating payments are exempted under the FCPA (they are not under the U.K. Bribery Act or the OECD Convention) only 13% of U.S. respondents allow such payments (in 2008, 24% of U.S. respondents said they allowed such payments).

“More than 70% or respondents (73% in the U.K. and 70% in the U.S.) agreed there are places in the world where business cannot be done without engaging in bribery and corruption.”

“To mitigate the risk of doing business in countries in which bribery and corruption is perceived to be endemic, respondents’ favored strategy was to provide additional training (43% of UK and 49% of US respondents), with enhanced internal controls, more closely monitoring operations, conducting due diligence on third parties, and obtaining compliance certifications all following closely.”

“An additional risk mitigation strategy – selected by 32% of U.K. and 25% of U.S. respondents – was to not do business in certain countries.” The survey results do not breakdown this response in any detail, but it would be interesting to know which countries the 25% of U.S. respondents were not willing to do business in because of corruption concerns. My guess is that these countries are not high-growth, high-potential markets.

The KPMG survey was conducted via telephone between October-November 2010 and included 214 executives (106 in the U.S., 108 in the U.K.) who identified themselves as “one of the most senior persons in charge of day-to-day AB&C matters at their company.”

KPMG Forensic assists “clients in achieving the highest levels of business integrity through the prevention, detection, and investigation of fraud and misconduct …”.

Tenaris Resolves FCPA Enforcement – SEC Uses a DPA For the First Time

Wednesday, May 18th, 2011

Once upon a time there was a law enforcement system in this country where companies that committed crimes or engaged in other wrongdoing were prosecuted criminally and/or civilly and where companies that did not commit crimes or did not engage in other wrongdoing were not prosecuted. That system has to a large extent been abandoned by the DOJ years ago – particularly in the FCPA context – and now that system appears to be crumbling at the SEC as well.

In December 2010, the SEC entered into its first non-prosecution agreement – albeit not in the FCPA context (see here for the prior post) and yesterday the SEC announced its first deferred prosecution agreement – of any kind – against Tenaris to resolve an FCPA enforcement action.

As has generally happened with the DOJ’s enforcement of the FCPA, the SEC’s enforcement of the FCPA will now be even further removed from judicial scrutiny and resolutions will now more frequently be negotiated over private conference room tables.

This is a troubling development on many fronts and it gives the public little confidence that our laws are enforced in a consistent and transparent manner or that regulators and companies are being held accountable.

With that introduction, let’s take a look at the Tenaris enforcement action.

Tenaris (here) “is a leading supplier of tubes and related services for the world’s energy industry and certain other industrial applications.” Tenaris is headquartered in Luxembourg and its American Depository Receipts (“ADRs”) are listed on the New York Stock Exchange. In FCPA-speak, that makes Tenaris an “issuer.”

The enforcement action involved both a DOJ and SEC component. Total settlement amount was $8.9 million ($3.5 million criminal penalty via a DOJ non prosecution agreement; $5.4 million in disgorgement and prejudgment interest via a SEC deferred prosecution agreement … its feels odd just writing that).

Both enforcement actions involve commission payments to an Uzbekistan agent to receive confidential bidding documents in connection with tenders conducted by alleged Uzbekistan state-owned or state-controlled companies. The enforcement actions state that Tenaris employees “were aware or substantially certain that all or a portion” of the commission payments would be offered by the Agent to employees at the SOEs and that certain of the payments were paid via a wire transfer through a New York bank account.

DOJ

The NPA (here – dated March 14, 2011) begins as follows.

The DOJ “will not criminally prosecute” Tenaris and its subsidiaries and affiliates for any crimes “related to Tenaris’s knowing violations of the anti-bribery and books and records provisions of the FCPA … arising from and related to the making of improper payments by employees and agents of Tenaris to officials of OJSC O’ztashqineftgaz (“OAO”), an Uzbekistan state-controlled oil and gas production company, and the accounting and record-keeping associated with these improper payments.”

The NPA has a term of two years and Tenaris admitted, accepted, and acknowledged responsibility for the below described conduct. As is typical in FCPA NPAs or DPAs, Tenaris agreed “not to make any public statement contradicting” the described conduct.

According to the NPA, Tenaris has more than 24,000 employees around the world and it conducts operations in 12 countries and its customers include the world’s leading oil and gas companies. The NPA states that Tenaris’s operations included supplying steel pipe and related servics in the Caspian Sea region, including Uzbekistan. This region accounted for approximately 1% of Tenaris’s total global sales and services from 2003 to 2008. Tenaris’s Caspian Sea business was run from offices in Azerbaijan and Kazakhstan.

According to the NPA, “Tenaris obtained oilfeld services business in the Caspian Sea region in part by bidding on contracts solicited by state-owned companies or governmental agencies to provide pipeline used in the development and production of oil and natural gas. Tenaris often used agents to assist in biddig on government contracts in the Caspian Sea region.”

The conduct at issue focused on OAO contracts between 2006 and 2007. According to the NPA, OAO “was a wholly owned subsidiary of Uzbekneftegaz, the state holding company of Uzbekistan’s oil and gas industry” and during the relevant time period “Uzbekneftegaz and OAO were wholly owned by the Government Uzbekistan.” The NPA then states, “OAO was an agency and instrumentality of the Government of Uzbekistan and its employees were foreign officials within the meaning of the FCPA.”

According to its website (here) the current ownership of OAO is as follows: “government’s share – 51%; foreign investors’ share – 37.27%; free market trade share – 11.73%.”

According to the NPA, in December 2006, Tenaris “was introduced to a potential agent (“OAO Agent”) to help Tenaris bid on additional contracts with OAO” and “as an incentive to retain the OAO Agent, the OAO Agent offered Tenaris access to confidential bidding information of competitors obtained from officials in OAO’s tender department, who would allow Tenaris to submit revised bids after reviewing the confidential information.” The NPA states that “Tenaris would use the confidential competitor bid information to submit revised bids in order to increase the likelihood of Tenaris being awarded the underlying contract.”

According to the NPA, Tenaris “agreed to pay the OAO Agent a fee of 3.5% for these services” and that Employees A, B, C, and D (non-U.S. citizens but “employees and agents” of Tenaris) “were aware or substantially certain that all or a portion of such money would be offered by the OAO Agent to one or more OAO employees.”

The NPA then lists approximately $19.4 million in contracts Tenaris obtained using this system and states that certain of the commission payments to the OAO Agent were paid via wire transfer through a New York bank account.

Under the heading “Additional Improper Conduct to Avoid Detection,” the NPA states that in November 2007 the above referenced employees learned of complaints from company competitors as to the bidding process on certain of the contracts and that an investigation by Uzbekekspertiza JSC (a Uzbekistani government agency) might commence. According to the NPA, “in an effort to avert the potential investigation of the bidding process, the OAO Agent recommended to Tenaris that the OAO Agent make an improper payment to Uzbekekspertiza officials to refrain from recommending the investigation against Tenaris or re-opening the bidding process to Tenaris’s competitors” and that the employees “agreed to pay the recommended payment” to the officials to avert the investigation. However, the NPA states as follows: “the investigation did not uncover evidence that any such payment was made.”

As to books and records, the NPA states that “the books, records and accounts reflecting Tenaris’s transactions … were incorporated into Tenaris’s consolidated year-end financial statements” and that “Tenaris knowingly failed to make and keep books, records, and accounts that accurately and fairly reflected Tenaris’s transactions … and the payments to the OAO Agent.”

Based on the above conduct, Tenaris agreed to pay a $3.5 million criminal penalty. The NPA states as follows. “This substantially reduced monetary penalty reflects the DOJ’s determination to meaningfully credit Tenaris for its extraordinary cooperation with the Department, including its timely and voluntary disclosure, its subsequent investigation, and the effective manner in which Tenaris conveyed information to the [DOJ and the SEC].”

Inquiring minds want to know – how much was the penalty “substantially reduced?”

According to the NPA, the DOJ agreed to resolve the action via an NPA based, in part, on the following factors.

(a) Tenaris’s timely, voluntary, and complete disclosure of the conduct at issue;

(b) Tenaris’s extensive, thorough, real-time cooperation with the DOJ and the SEC;

(c) subsequent to its voluntary disclosure of certain conduct unrelated to Uzbekistan, but prior to discovery of the unlawful conduct related to Uzbekistan, Tenaris’s voluntary investigation of the Company’s business operations throughout the world, specifically including the thorough and effective manner in which this investigation was carried out and information was disclosed to the DOJ and SEC;

(d) Tenaris’s remedial efforts already undertaken and to be undertaken, including voluntary enhancements to its compliance program; and

(e) Tenaris’s commitment to implement enchanced compliance measures described in the NPA.

Based on (c) above, inquiring minds want to know – what did Tenaris originally voluntarily disclose?

Under the heading, “Disclosure and Investigation of Improper Activity,” the NPA states as follows.

“In or about March 2009, a third party disclosed to Tenaris information indicating that certain sales agency payments were made by Tenaris in relation to business in a country other than Uzbekistan. These payments appeared to be for an improper purpose. In response to this information, Tenaris’s Audit Committee retained outside counsel to investigate the allegations. Thereafter, in a Form 20-F filed with the SEC on or about June 30, 2009, Tenaris disclosed information related to these allegations. Tenaris also made a prompt, full disclosure of the information to the [DOJ] and the [SEC] concerning the allegations. In or around July 2009, counsel for Tenaris met with the [DOJ and SEC] and disclosed preliminary findings of the internal investigation. Such disclosure was related to facts known to Tenaris at the time but was not related to transactions in Uzbekistan. Tenaris’s counsel also informed the [DOJ and the SEC] that it would conduct a thorough, world-wide investigation of its business operations and internal controls and would report the findings to the [DOJ and SEC]. Tenaris’s investigation plan included significant collection and review of a substantial quantity of electronic and paper records from the company and third parties from multiple locations around the world, translation of all relevant materials into English, subsequent interviews of relevant personnel including senior executives and third parties, and review and testing of internal controls and compliance procedures. In or around June 2010, Tenaris disclosed the factual findings from its internal investigation in a thorough, complete and useful manner to the [DOJ and SEC]. As a result of its internal investigation, Tenaris discovered facts and transactions in Uzbekistan that constitute the violations set forth above. Tenaris voluntaly engaged in certain remediation efforts to include termination and disciplinary measures of the persons involved. Tenaris also thoroughly reviewed its pre-existing compliance program and applicable internal controls, and undertook voluntary, affirmative steps to update and improve its compliance program and to implement enhanced compliance measures and controls. Tenaris also agreed to provide real and meaningful cooperation with the [DOJ and SEC] and any law enforcement agency in connection with this matter.”

Again, inquiring minds want to know – what did Tenaris originally voluntarily disclose?

See here for the DOJ’s release announcing the enforcement action.

SEC

The SEC DPA (here) is based on the same core conduct described above.

As to internal controls, the SEC DPA states as follows.

“… Tenaris’s system of internal controls failed to detect or prevent payments to OAO officials in an effort to obtain and retain business in Uzbekistan, including a failure to ensure that proper and effective due diligence was conducted on the Agent for the OAO contracts, and that the review process for authorization or approval of payments to the Agent failed to detect or prevent the illegal payments to OAO officials. Tenaris’s policies, procedures and training related to anticorruption and the Foreign Corrupt Practices Act (“FCPA”) compliance in place at that time warranted further strengthening to ensure effective compliance with the related laws.”

One of the undertakings Tenaris agreed to in the DPA was the following.

“To conduct effective training regarding anticorruption and compliance with the FCPA for (1) all current officers and managers, (2) all employees working in Finance, Accounting, Internal Audit, Sales, and Government Relations, (3) all other employees working in positions Tenaris deems to involve activities implicated by Tenaris’s policies regarding anticorruption and compliance with the FCPA, on or before December 31, 2011, and (4) all such future employees within 90 days oftheir affiliation with Tenaris.”

Under the terms of the two-year DPA, Tenaris, without admitting or denying the SEC’s allegations (the same way defendants are ordinarly allowed to resolve SEC enforcement actions), agreed to pay $5.4 million in disgorgement and prejudgment interest.

Pursuant to the DPA, Tenaris agreed “not to contest or contradict the factual statements” supporting the Statement of Facts. As noted in this prior post when the SEC announced its intention to make use of NPAs and DPAs, “[a]n admission or an agreement not to contest the relevant facts underlying the alleged offenses” is a key factor the SEC will consider in determining whether a company should receive a deferred prosecution agreement.

Like the SEC’s prior NPA, the Tenaris DPA is very similar to DOJ DPAs and NPAs.

In a release (here) the SEC touted its first use of a DPA.

Robert Khuzami (Director of the SEC’s Division of Enforcement) stated as follows. “The Tenaris foreign bribery scheme was unacceptable and unlawful, but the company’s response demonstrated high levels of corporate accountability and cooperation. The company’s immediate self-reporting, thorough internal investigation, full cooperation with SEC staff, enhanced anti-corruption procedures, and enhanced training made it an appropriate candidate for the Enforcement Division’s first Deferred Prosecution Agreement. Effective enforcement of the securities laws includes acknowledging and providing credit to those who fully and completely support our investigations and who display an exemplary commitment to compliance, cooperation, and remediation.”‬

Cheryl Scarboro (Chief of the SEC’s FCPA Unit) stated as follows. “Tenaris’s conduct was clearly in violation of the FCPA. The company’s employees bribed government officials in Uzbekistan to obtain government contracts. But when Tenaris discovered the illegal conduct, it took noteworthy steps to address the violations and significantly enhance its anti-corruption policies and practices to remediate weaknesses in its internal controls.”

Robert Giuffra, Jr. of Sullivan & Cromwell (here) represented Tenaris.

Comverse Technology … Is It Really That Simple?

Tuesday, April 12th, 2011

Question: “If you did not have the choice of deferred or non prosecution agreements, what would happen to the number of FCPA settlements every year.

Answer by Mark Mendelsohn, former FCPA chief DOJ: “If the Department only had the option of bringing a criminal charge or declining to bring a case, you would certainly bring fewer cases.”

Mark Mendelsohn on the Rise of FCPA Enforcement, 24 Corporate Crime Reporter 35, September 10, 2010.

“… [T]he S.E.C.’s practice of permitting defendants to neither admit nor deny the charges against them remains pervasive, presumably for no better reason than that it makes the settling of cases easier.”

U.S. District Court Judge Jed Rakoff (S.D.N.Y.) in SEC v. Vitesse Semiconducter Corp., March 21, 2010.

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A U.S. company has a subsidiary A.

Subsidiary A has a subsidiary – subsidiary B.

Subsidiary B engaged an agent who made improper payments partially facilitated by subsidiary’s B’s inflated commission payments to him.

There is no allegation that Subsidiary A knew about the payments.

There is no allegation that the U.S. company knew about the payments.

But subsidiary B’s books, records and accounts are incorporated into the books, records and accounts of the U.S. company for purposes of financial reporting.

These are the essential facts from last week’s FCPA enforcement action against Comverse Technology Inc. – “a world leader in multimedia telecommunications applications”.

The enforcement action involved both a DOJ and SEC component. Total settlement amount was $2.8 million ($1.2 million criminal fine via a DOJ non prosecution agreement; $1.6 million in disgorgement and prejudgment interest via a SEC settled complaint).

Is it really that simple?

Some have suggested that Comverse received “lenient” treatment (see here). Yet, it is questionable whether Comverse would have faced any criminal liability should the DOJ have been required to satisfy its high burden of proof in court.

Yet, FCPA enforcement actions like Comverse seem to be becoming norm.

DOJ

The DOJ enforcement action was resolved via a non-prosecution agreement, meaning there was not, and will never, be judiciary scrutiny of the DOJ’s enforcement theory.

The NPA (here) begins as follows.

The DOJ “will not criminally prosecute Comverse Technology, Inc. (“CTI”), Comverse Inc., a wholly owned subsidiary of CTI (“Comverse Inc.”), and the subsidiaries of Comverse Inc., including Comverse Ltd. (collectively referred to as Comverse) for any crimes … related to Comverse’s knowing violation of the books and records provisions of the Foreign Corrupt Practices Act … arising from and related to Comverse’s failure accurately to record certain improper payments made by employees of Comverse Ltd. and certain subsidiaries of Comverse Ltd. and a third party agent from 2003 to 2006.”

According to the NPA, Comverse Inc. was wholly-owned subsidiary of CTI and Comverse Ltd., an Israeli company based in Tel Aviv, was a wholly owned subsidiary of Comverse Inc.

The NPA has a term of two years and Comverse admitted, accepted, and acknowledged responsibility for the below described conduct. As is typical in FCPA NPAs or DPAs, Comverse agreed “not to make any public statement contradicting” the information below.

The conduct at issue focuses on monthly retainer fees paid by Comverse Ltd. to Agent G (an Israeli citizen engaged by Comverse Ltd. as an independent consultant with a particular focus on Greece) and commissions paid to Agent G on purchase orders. According to the NPA, “Agent G would keep 15% of the total commission, and the remaining 85% was used to make improper payments.”

According to the NPA, “between 2003 and 2006, Comverse Ltd. made approximately $536,000 in cash payments to Corporation H [a Cyprus-based company created by Agent G at the direction of Comverse Ltd. employees to facilitate the payment of cash to representatives of certain Comverse Ltd. customers in exchange for securing purchase orders] with the intent that the money woudl be passed on to individuals connected to OTE, including employees of OTE’s subsidiaries Cosmote, Cosmofon, and Cosmorom, in order to obtain purchase orders from those companies for Comverse Ltd. products and services, resulting in approximately $1.25 million in adjusted operating income.”

OTE?

That would be the “Hellenic Telecommunications Organization S.A. – a telecommunications provider controlled and partially owned by the Greek Government.” According to the NPA, “the Greek Government was OTE’s largest single shareholder and maintained an interest in over one-third of OTE’s issued share capital.”

The DOJ agreed to resolve the enforcement action via a NPA “based, in part, on the following factors: (a) Comverse’s timely, voluntary, and complete disclosure of the facts” [described above]; (b) Comverse’s full cooperation with the Department and the [SEC]; and (c) the remedial efforts already undertaken and to be undertaken by Comverse.”

The DOJ release (here) states as follows. “The [NPA] recognizes the company’s thorough self-investigation and the results of its investigation, voluntary disclosure of the underlying conduct, and full cooperation with the department. CTI has also undertaken extensive remedial efforts and overhauled its overall compliance culture, including through the implementation of mandatory training programs focused on anti-corruption and the use of third-party agents and intermediaries, as well as more rigorous accounting controls for the approval of third-party payments. As a result of these mitigating factors, the department has agreed not to prosecute CTI or its subsidiaries for failing to maintain accurate books and records, provided that CTI satisfies its obligations under the agreement for a period of two years. Those obligations include ongoing cooperation, payment of the $1.2 million penalty, and the continued implementation of rigorous internal controls.”

SEC

The SEC’s civil complaint (here) is based on the same core conduct described above.

The complaint alleges, in summary fashion, as follows.

“Between 2003 and 2006, Comverse Technology, Inc. (“Comverse”) violated the books and records and internal controls provisions of the Foreign Corrupt Practices Act (the “FCPA”) when its Israeli operating subsidiary, Comverse Limited (“Comverse Limited”), engaged in a scheme to make improper payments to obtain or retain business.”

“In order to facilitate and conceal the payments, Comverse Limited employed a third-party agent (the “Agent”) to establish an offshore entity in Cyprus which, in turn, funneled the improper payments to Comverse Limited’s customers. Employees of Comverse Limited made payments to the Cyprus entity and, after taking 15% off the top of these payments, the Agent paid or facilitated the payment of the remaining 85% to Comverse Limited’s customers in the form of cash bribes.”

“Comverse Limited did not accurately record these improper payments in its books and records, which, in turn, caused them to be improperly classified in Comverse’s consolidated financial statements. Comverse failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions at all levels of the organization were recorded properly.”

Specifically, the SEC alleged as follows.

“Between 2003 and 2006, Comverse Limited made improper payments to employees connected to OTE in order to obtain or retain business with OTE. The scheme originated in Comverse Limited’s EMEA (Europe, Middle East, and Africa) sales division and the improper payments were inaccurately recorded on Comverse Limited’s books and records, which, in turn, were consolidated with Comverse’s financial results.”

“Between 2003 and 2006, Comverse Limited, using [Corporation H], made improper payments totaling approximately $536,000 to individuals connected to OTE, including employees of OTE’s subsidiaries Cosmote, Cosmofon, and Cosmorom to obtain or retain OTE’s business. The improper payments resulted in $1.2 million of improper benefit to Comverse Limited, which flowed through to Comverse.”

As to internal controls, the SEC alleged as follows. “During the relevant time period, neither Comverse nor Comverse Limited had a process, formal or otherwise, for conducting due diligence of third-party agents or for the independent review of third-party agent contracts outside of the sales departments.” The SEC further alleged as follows. “At the time of the conduct, while Comverse did have an omnibus anti-corruption policy that prohibited improper payments to government-affiliated third parties and others, Comverse did not widely circulate this policy and provided no training on it to any employees.”

As to books and records, the SEC alleged as follows. “Comverse Limited falsified its books and records by characterizing and recording the bribes as legitimate sales commissions, thereby failing accurately to reflect the payments and their purpose. These improper expenses, in turn, were consolidated into Comverse’s financial records.”

Based on the above conduct, the SEC charged Comverse with FCPA books and records and internal control violations.

As noted in the SEC release (here) without admitting or denying the SEC’s allegations, Comverse consented “to a conduct-based injunction that prohibits Comverse from having books and records that do not accurately reflect, or from having internal controls that do not prevent or detect, any illegal payments made to obtain or retain business.” In addition, Comverse consented to pay $1,249,614 in disgorgement and $358,887 in prejudgment interest.

Daniel Horwitz (Lankler and Carragher – see here) represented Comverse.

The company’s 8-K filing on April 7th stated as follows. ” As originally disclosed by the Company on March 16, 2009, the Audit Committee of the Board of Directors of the Company conducted its own internal investigation into such payments. The Audit Committee found that the conduct at issue did not involve the Company’s executive officers.”

The company’s 10-K filing on January 25, 2011 suggests that the company’s internal investigation was prompted by a whistleblower complaint and the filing details the company’s remedial actions in connection with the investigation. According to the filing “the Company recorded charges of $2.9 million associated with [the FCPA matter] during the fiscal year ended January 31, 2009.” The company has not yet disclosed what its fees and expenses were during the fiscal year ended January 31, 2010.

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Another interesting item from Comverse’s SEC filings. “For the fiscal year ended January 31, 2010, approximately one quarter of Verint’s [Comverse's majority-owned publicly traded subsidiary] business was generated from contracts with various governments around the world, including federal, state, and local government agencies.”

Robert Amaee on U.K. Bribery Act Guidance

Thursday, March 31st, 2011

Yesterday, in a much anticipated development, the United Kingdom Ministry of Justice released (here) its long awaited guidance (here) as to the U.K. Bribery Act – a delayed law now set to go live on July 1, 2011.

The U.K. Serious Fraud Office, the U.K. law enforcement agency tasked with enforcing the Bribery Act, also issued a release (here) and prosecuting guidance (here).

In this guest post, Robert Amaee (the former Head of Anti-Corruption and Proceeds of Crime Unit at the U.K. Serious Fraud Office and current counsel with Covington & Burling LLP in London – see here) provides insight and analysis of the U.K. developments.

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The Bribery Act: Countdown to Implementation

The UK Ministry of Justice yesterday published its long awaited Bribery Act 2010 (the “Bribery Act”) guidance entitled “Guidance about procedures which relevant commercial organisations can put in place to prevent persons associated with them from bribing (section 9 of the Bribery Act 2010).” This publication marks the official start of a ninety day countdown to the implementation of the Bribery Act which will now be brought into force on 1 July 2011.

Companies that already have reviewed and updated their anti-bribery and corruption procedures will be ahead of the game but will still need to study the new guidance to see what, if any, further amendments may be required. Those who have yet to complete the process of updating their procedures to ensure compliance no doubt will draw a modicum of comfort from the fact that they have a further ninety days in which to digest and absorb the guidance and implement the necessary policies and procedures.

The comments made by the Minister of Justice, Ken Clarke QC MP, and the guidance itself aim to reassure companies that the Bribery Act will be enforced with common sense and pragmatism.

The Minister of Justice ushered in the guidance by saying that “[t]he ultimate aim of [the Bribery Act] is to make life difficult for the minority of organizations responsible for corruption, not to burden the vast majority of decent and law-abiding businesses.”

That is a message that prosecutors at the UK Serious Fraud Office (“SFO”) — the organisation tasked with leading enforcement efforts under the Bribery Act — have espoused for some time. What is less clear is whether the guidance provides any tangible assistance on some of the Bribery Act’s thorniest issues such as the UK’s jurisdiction over non-UK registered companies, the extent of liability for the actions of third parties and the boundary between acceptable corporate hospitality and a prosecutable bribe, particularly when foreign officials are concerned.

Government Policy and the Section 7 Corporate Offence

The guidance, as expected, focuses on six high level principles which companies will need to familiarise themselves with and which are supported by 11 case studies. It also sets out the Government policy in relation to the section 7 corporate offence stating that “[t]he objective of the [Bribery] Act is not to bring the full force of the criminal law to bear upon well run commercial organisations that experience an isolated incident of bribery on their behalf” and recognises that “no bribery prevention regime will be capable of preventing bribery at all times.” This part of the guidance already has attracted criticism from some respected quarters. (See here).

The guidance deals with the section 1 offences of bribing another person but the most noteworthy commentary relates to the section 6 offence (Bribery of foreign public officials). This section highlights the fact that bribery of a foreign public official could be prosecuted under the section 1 offence but that evidential difficulties in proving that a bribe was paid to a foreign public official with the intention to induce him or her to perform his or her role “improperly”, something the guidance calls “a mischief”, means that prosecutors would seek to rely on the section 6 offence which needs no such proof. The guidance goes on to make a number of assertions in relation to the interpretation of section 6 which bear closer scrutiny. The guidance says “…it is not the Government’s intention to criminalise behaviour where no such mischief occurs…” In other words it appears that the guidance may be advocating that the concept of “improper performance” be read into section 6. What is clear is that Parliament did not include any such wording in section 6 in clear contrast to section 1.

Corporate Hospitality and other Business Expenditure

In addressing the topic of corporate hospitality and other business expenditures, the guidance adopts what can only be described as a permissive tone. It codifies the comments that the Minister of Justice has made over the last few weeks and states that “[b]ona fide hospitality and promotional, or other business expenditure which seeks to improve the image of a commercial organisation, better to present products and services, or establish cordial relations, is recognised as an established and important part of doing business and it is not the intention of the Act to criminalise such behaviour” and goes on to endorse “reasonable” and “proportionate” hospitality and business expenditure.

In determining what is reasonable and proportionate, the guidance proposes taking into account “all of the surrounding circumstances” which include matters such as “the type and level of advantage offered, the manner and form in which the advantage is provide, and the level of influence the particular foreign public official has over awarding business”. It states that “the more lavish the hospitality or the higher the expenditure in relation to travel, accommodation or other similar business expenditure provided to a foreign public official, then, generally, the greater the inference that it is intended to influence the official to grant business or a business advantage in return.”

Much of this is elementary and already part of the mantra of compliance departments but the guidance goes further and appears to give the green light to certain interactions with foreign public officials which would, today, be closely and critically scrutinised by those responsible for compliance. As an example, the guidance envisages that the provision of flights, airport to hotel transfers, hotel accommodation, “fine dining” and tickets to an event for a foreign public official and his or her spouse are “unlikely to raise the necessary inference” to engage section 6 and therefore unlikely to violate the Act so long as there is a business rational for the trip.

A Question of Jurisdiction

The guidance makes it clear that “the courts will be the final arbiter as to whether an organisation ‘carries on a business’ in the UK taking into account of the particular facts in individual cases” and sets out the “Government’s intention” in relation to the phrase “carries on a business, or part of a business in the United Kingdom.” The thrust of the approach appears to be a reliance on a “common sense approach.”

In cases where there may be dispute, the guidance again defers to the courts as the final arbiter but says that “… the Government anticipates that applying a common sense approach would mean that organisations that do not have a demonstrable business presence in the United Kingdom would not be caught.” That much is uncontroversial but what follows has elicited a great deal of comment. The guidance states that “[t]he Government would not expect, for example, the mere fact that a company’s securities have been admitted to the UK Listing Authority’s Official list and therefore admitted to trading on the London Stock Exchange, in itself, to qualify that company as carrying on a business or part of a business in the UK and therefore falling within the definition of a ‘relevant commercial organisation’ for the purposes of section 7.” This commentary has been welcomed in some quarters but has been criticised by some as undermining the concept of a level playing field. (See here).

In the vast majority of cases, it will be clear whether a company is or is not carrying on a business or part of a business in the UK. There will, however, be cases where there is room for debate. If, for example, a non-UK registered company sets up a joint venture with a UK company and the joint venture is not registered in the UK, is the non-UK registered company carrying on a business or part of a business in the UK? What if the non-UK registered company then seconds an employee to work at the UK partner’s offices in London looking after the joint venture – is the non-UK registered company carrying on a business or part of a business in the UK? What if it sends 5 employees? Those are the type of intricacies that need to be worked through by company advisors and in the worst case prosecutors and the courts.

Associated Persons

When considering the potential liability imposed on a company by virtue of its supply chains or its involvement in a joint venture, the guidance introduces the concept of “the level of control”– a concept that does not appear in the Bribery Act — as one of the “relevant circumstances” that would be taken into account when seeking to determine if the person creating liability can be deemed to be an “associated person” i.e. someone who is performing services for or on behalf of a company that falls within the UK’s jurisdiction. The guidance states that “[t]he question of adequacy of bribery prevention procedures will depend in the final analysis on the facts of each case, including matters such as the level of control over the activities of the associated person and the degree of risk that requires mitigation.”

Facilitation Payments

In the run up to the publication of the guidance, there had been some suggestion that there may an attempt to ‘soften’ the approach to facilitation payments. This is not at all the case. While the Government has recognised the problems faced by commercial organisations in some parts of the world and in certain sectors, the guidance reiterates that there are no exemptions in the Act and sets out the OECD position that facilitation payments are corrosive and that exemptions create artificial distinctions that are “difficult to enforce, undermine corporate anti-bribery procedures, confuse anti-bribery communication with employees and other associated person, perpetuate an existing ‘culture’ of bribery and have the potential to be abused.” In circumstances where an individual has no alternative but to make a facilitation payment in order to “protect against loss of life, limb or liberty”, the guidance states that “the common law defence of duress is very likely to be available”. It stresses that it is a matter for prosecutorial discretion whether to prosecute an offence and defers to the Joint Prosecution Guidance when it comes to the “prosecution of facilitation payments.”

Conclusion

Companies will of course be pleased to have more guidance and will look to draw as much comfort as they can from the more ‘permissive’ tone of the MoJ guidance but global companies will not be looking at their UK exposure in isolation and will certainly not be rushing to relax their anti-bribery and corruption policies and procedures. It is not much comfort for a company to avoid prosecution in the UK for interactions with foreign government officials for example but to be in violation of their industry codes of conduct or be called to account in a US court for that same conduct. Global companies will continue to be mindful of their global exposure.