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Friday Roundup

Friday, December 7th, 2012

A prosecutorial common law defeat, the SEC repeats its prior positions, better but not good, document issues, and recent scrutiny news.

Prosecutorial Common Law Defeat

One of the best guest posts in FCPA Professor history was this 2011 post from Michael Levy in which he described the concept of prosecutorial common law. Prosecutorial common law is all around us. Take a look at the footnotes of the recent FCPA Guidance - most of the “authority” cited for “legal” propositions is DOJ or SEC settlements.

For obvious reasons, prosecutorial common law does not sit well with federal court judges. For instance, in U.S. v. Bodmer, Judge Shira Scheindlin of the Southern District of New York, in rejecting the DOJ’s position that the FCPA’s criminal penalty provisions applied to a foreign national prior to the 1998 FCPA amendments, noted as follows – “the Government’s charging decision, standing alone, does not establish the applicability of the statute.” Likewise as noted in this previous post about the Giffen enforcement action, Judge William Pauley of the Southern District of New York stated that prosecutorial common law ”is not the kind or quality of precedent this Court need consider.”

Prosecutorial common law recently suffered a major defeat when the Second Circuit, in a non-FCPA case, rejected (see here for the opinion) a DOJ theory of prosecution concerning off-label promotion of drugs that it has previously used to secure billions (yes that is a “b”) in recent settlements with pharmaceutical companies.

Commenting on this recent development, Levy stated as follows. “It is amazing to me how consistently this pattern seems to repeat but, given the incentives on both sides, I don’t really see any structural solutions that would change it.”

For additional reading, see this client alert from Debevoise & Plimpton, this client alert from Arnold & Porter, and this client alert from Gibson Dunn.

SEC Responds to Magyar Telekom Execs Motion to Dismiss

Given the SEC’s positions in its recent response to Herbert Steffen’s motion to dismiss (see here for the prior post), it comes as little surprise that the SEC is taking the same positions in its response to the motion to dismiss filed by former Magyar Telecom executives Elek Straub, Andras Balogh and Tamas Morvai.

In its response brief (here), the SEC states, in summary form, as follows.

“The defendants move to dismiss the complaint, arguing that (1) the Court lacks personal jurisdiction; (2) the SEC’s claims are time-barred; (3) the complaint fails to allege facts supporting the SEC’s anti-bribery claims; and (4) the complaint fails to allege facts supporting the SEC’s lying to auditors claims. The Court should deny the motion on all four grounds.

First, the defendants are subject to personal jurisdiction because their conduct caused foreseeable consequences in the United States. The complaint alleges that the defendants orchestrated a bribery scheme in Macedonia; that they concealed their bribes through the use of sham contracts and falsified books and records; that they lied to Magyar’s auditors by signing false annual and quarterly certifications; and that their actions caused Magyar to file annual and quarterly reports with the SEC in the United States that misrepresented the company’s financial statements and included false Sarbanes-Oxley certifications.

Second, the complaint was timely filed within the statute of limitations set forth at 28 U.S.C. § 2462. That provision expressly states that the limitations period does not begin to run until the defendants are “found within the United States.” The defendants acknowledge in their brief that they have remained outside of the United States since their commission of this scheme. Thus, the statute of limitations period has not begun to run as to them. In any event, claims for equitable relief are not subject to the limitations period of Section 2462, which by its terms applies only to “penalties.”

Third, the complaint pleads all facts necessary to support every element of every claim against the defendants. The defendants met the “interstate commerce” prong of Exchange Act Section 30A, 15 U.S.C. § 78dd-1, by sending, in furtherance of their bribery scheme, electronic mail messages that were routed through servers located in the United States. Because the use of interstate commerce is a jurisdictional element, the Exchange Act does not require that defendants know, let alone “corruptly” intend, that their messages would reach the United States. The complaint sufficiently identifies the foreign officials whom the defendants bribed; Section 30A does not require that the officials be expressly named. And the complaint sufficiently identifies the specific false statements made by each defendant to Magyar’s auditors and why those statements were material.”

Of particular note as to “foreign official,” the SEC makes the sweeping statement that “there is no requirement under the FCPA or in the case law interpreting it that the SEC’s complaint [needs to] identify bribed foreign officials by name.” The SEC then states in a footnote as follows. “Any such requirement would be completely at odds with the FCPA’s statutory scheme. [...] By its very structure, [the anti-bribery provisions were] drafted to prohibit corrupt transactions in which the precise identity of a government official might not be known even to the payor.”

As noted in this previous post, the SEC is asserting the same “foreign official” position in the Mark Jackson / James Ruehlen challenge. Oral arguments are to take place today on that motion in Houston.

It should be noted that in the DOJ’s unsuccessful prosecution of John O’Shea, Judge Hughes stated as follows. “[W]hile the Government does not have to trace a particular dollar to a particular pocket of a particular official, it has to connect the payment to a particular official, that the funds made under his authority to a foreign official, who can be identified in some reasonable way, that is, with no reasonable doubt.” Judge Hughes also stated as follows. “You can’t convict a man promising to pay unless you have a particular promise to a particular person for a particular benefit. If you call up the [intermediary] and say, look, I’m going to send you 50 grand, bribe somebody, that does not meet the statute.”

Corruption Perception Index

Transparency International (“TI”) recently released its annual Corruption Perceptions Index (“CPI”) (see here). The CPI ranks countries/territories based on how corrupt their public sector is perceived to be and is a composite index drawing on corruption-related data collected by a variety of reputable institutions and reflecting the views of observers from around the world including experts living and working in the countries/territories evaluated.

The top three (very clean) countries in the CPI were Denmark, Finland and New Zealand. The bottom three (highly corrupt) countries were Afghanistan, North Korea and Somalia.

The United States placed 19th on the list of 176 countries. While this is better than last year’s 24th place finish, as noted in this prior post it’s a bit ironic that as the U.S. aggressively expands its Foreign Corrupt Practices Act enforcement theories, the U.S. remains far from the top of the CPI.

Assistant Attorney General Lanny Breuer recently spoke of the U.S. FCPA enforcement effort in religious terms (“we in the United States are in a unique position to spread the gospel of anti-corruption, because there is no country that enforces its anti-bribery laws more vigorously than we do”), yet CPI’s rankings should again cause pause as to our claimed moral superiority.

Document Issues

I am not one to usually highlight FCPA Inc. marketing material, but I thought this video clip from e-discovery firm H5 was instructive as to many of the document issues involved in an FCPA investigation. The enforcement agencies have commented from time to time that FCPA Inc. has a tendency to sometimes over do it in this area, but be that as it may – data collection, data storage, data analysis, etc. are among the reasons why FCPA investigations often soar into the millions.

Recent Scrutiny News

Rolls-Royce

Reuters reports (here) that Rolls-Royce, the world’s second-largest maker of aircraft engines “said the [U.K. Serious Fraud Office] had asked it to conduct an internal inquiry into dealings involving intermediaries in China, Indonesia and other overseas markets.” According to the report, ”a source close to the investigation said the allegations relate to events in the “distant past” and Rolls-Royce had told the U.S. Department of Justice about the inquiry.”

As noted in this previous post, in June, Data Systems & Solutions, LLC, a wholly-owned subsidiary of Rolls-Royce Holdings, resolved an FCPA enforcement action.

Barclays

Reuters also reports (here) that a previously disclosed DOJ and SEC “investigation into whether Barclays Plc paid bribes to win a banking license in Saudi Arabia has spread to other banks that operate in the region.”

Net 1

Earlier this week, Net 1 UEPS Technologies Inc. disclosed in an SEC filing (here) as follows.

“On November 30, 2012, we received a letter from the U.S. Department of Justice, Criminal Division (the “DOJ”) informing us that the DOJ and the Federal Bureau of Investigation have begun an investigation into whether Net 1 UEPS Technologies, Inc. and its subsidiaries, including their officers, directors, employees, and agents (collectively, “Net 1”) and other persons and entities possibly affiliated with Net 1 violated provisions of the Foreign Corrupt Practices Act and other U.S. federal criminal laws by engaging in a scheme to make corrupt payments to officials of the Government of South Africa in connection with securing a contract with the South African Social Security Agency to provide social welfare and benefits payments and also engaged in violations of the federal securities laws in connection with statements made by Net 1 in its SEC filings regarding this contract. On the same date, we received a letter from the Division of Enforcement of the Securities and Exchange Commission (the “SEC”) advising us that it is also conducting an investigation concerning our company. The SEC letter states that the investigation is a non-public, fact-finding inquiry.”

In this additional release, the company states as follows.

“These investigations appear to be directed at matters which are similar to those that were the subject of articles which appeared in various South African newspapers after AllPay Consolidated Investment Holdings (Pty) Limited (“AllPay”) instituted legal proceeding in the South African courts to set aside the contract awarded to us in January 2012 by SASSA. AllPay was an unsuccessful bidder for the SASSA contract.”

News of the company’s FCPA scrutiny caused the company’s U.S. listed shares to plunge approximately 58%. This of course caused several plaintiff law firms to announce investigations of their own. See here, here, and here. In the meantime, the company’s shares have risen 46%.

It’s an FCPA world.

*****

A good weekend to all.

Worth Reading

Wednesday, March 7th, 2012

Transparency International – UK (“TI-UK”) recently published “Deterring and Punishing Corporate Bribery” (here) and it is worth reading. A meaty 93 pages, the document is full of useful information, from U.K. charging issues, corporate criminal liability principles under U.K. law, a list of SFO and FSA bribery or related enforcement actions and much more.

As noted in the foreword, the “paper seeks to identify the problems faced by prosecutors and companies in trying to settle cases of overseas bribery against the background of the current legal system and practice, and to make some recommendations to improve transparency, recognising that bribery is a serious criminal offence and there is a strong public interest in seeing offenders prosecuted.”

Several of the recommendations in the report I agree with such as the following.

“all settlements should be subject to judicial scrutiny independent from the prosecutor’s office” [that clearly does not happen in the U.S. given frequent use of non-prosecution and deferred prosecution agreements]
“victim countries should receive restitution and prosecutors should work with development agencies … to manage this process” [although figuring out just how to do this is the difficult issue]
“prosecutors should properly label bribery offenses and not select alternative charges in order to avoid mandatory debarment, which is a logical and fair outcome in certain cases as it provides a very strong deterrent to corporate offending” [this frequently happens in the U.S., for instance, Siemens, Daimler, BAE - none of these companies were charged with FCPA anti-bribery violations because of potential debarment concerns]

The recommendation from the TI-UK report that I disagree with (and I am grateful for the citations and mentions in the report) is the following. “[The U.K.] government should consider the introduction of DPAs or some similar sentencing procedure after a thorough assessment of the alternatives. DPAs have proved to be a useful procedure to settle FCPA cases in the USA but the process has also been criticized with little judicial oversight.” Elsewhere, the report states as follows. “The reason that this [high level of U.S. enforcement of the FCPA] is possible with relatively few resources is that in the US most FCPA cases are settled through either [DPAs or NPAs] both of which avoid the preparation of casework for a trial by jury.”

How is a resolution vehicle that avoids the preparation of casework for a trial by jury a good thing? Requiring an enforcement agency to meet its burden of proof in an adversarial proceeding before independent observers who consider mitigating facts and weigh viable defenses is central to the rule of law and how law best advances. Allowing enforcement agencies a third option (the first two options being prosecute vs. not prosecute) facilitates both the under-prosecution of egregious instances of corporate conduct as well as the over-prosecution of corporate conduct and contributes to a facade of enforcement.

Moreover, as I noted in this previous post, why does the U.K. need alternative resolution vehicles when the U.K. Bribery Act has an adequate procedures defense. If a corporate has adequate procedures, but an isolated act of bribery nevertheless occurs within its organization, the corporate presumably would not face prosecution under the Bribery Act. Seems like a reasonable result. In other words, no need for the third option in such a case. On the other hand, if a corporate does not have adequate procedures (i.e. has no committment to anti-bribery compliance) and an act of bribery occurs within its organization, it presumably would face prosecution under the Bribery Act. Seems like a reasonable result. Does a third option really need to be created for corporates who do not implement adequate procedures? Also relevant to the analysis and further suggesting that alternative resolution vehicles are not needed in the U.K. is the notion that (Section 7 of the Bribery Act aside) corporate criminal liability in the U.K. requires evidence that a so-called controlling mind of the corporate was involved in the improper conduct.

Surveys And Such

Wednesday, December 28th, 2011

Corruption Perceptions Index

Earlier this month, Transparency International (“TI”) released its annual Corruption Perceptions Index (“CPI”) (see here). The CPI ranks countries/territories based on how corrupt their public sector is perceived to be and is a composite index drawing on corruption-related data collected by a variety of reputable institutions and reflecting the views of observers from around the world including experts living and working in the countries/territories evaluated. The CPI scored 183 countries and territories from 0 (highly corrupt) to 10 (very clean) based on perceived levels of public sector corruption.

In a release (here), TI noted that “corruption continues to plague too many countries around the world” and that two-thirds of ranked countries scored less than 5. The top five (very clean) countries in the CPI were New Zealand, Finland, Denmark, Sweden and Singapore, the bottom four (highly corrupt) countries were Afghanistan, Myanmar, Somalia and North Korea.

The United States scored 7.1 in the CPI (the same score the U.S. received in the 2010 CPI – see here for the prior post) a number which placed it 24th out of 183 countries and below several other countries such as Canada, Germany, Japan, and the U.K.

The relative low ranking of the U.S. has again caused some (see here) to ask “can or should the U.S. continue to lead the fight against international graft?” Related to this topic, for some time I have been highlighting a double-standard between U.S. enforcement of the FCPA and U.S. enforcement of the domestic bribery statute (18 USC 201). See here for prior posts on the double standard. It is concerning that corporate interaction with a “foreign official” appears to be subject to greater scrutiny and different standards of enforcement than corporate interaction with a U.S. official.

While the CPI may just seem like a bunch of numbers, and while it is not the only risk assessment tool (see here and here) available, the index has real-world application as many companies and FCPA compliance professionals calibrate FCPA risk assessment to the CPI.

BRIBEline U.S. Report

Also earlier this month, Trace International released (see here) its BRIBEline U.S. Report which summarizes and analyzes 73 bribery demands in the U.S. reported anonymously to Trace’s online Business Registry for International Bribery and Extortion (BRIBEline – see here) between July 2007 and November 2011.

According to the report: ”the majority of bribe demands, nearly 60%, are made by a person associated with a government, whether at the federal, state or local level, including government officials (16%), the police (14%), officials of the party in office (8%), employees of state-owned entities (7%), members of the military (5%), city officials (4%), state officials (1%) and judges and judicial representatives (1%).” The report also found that “seven of the bribes demanded by government officials were reported as originating from the Office of the U.S. President or the Office of the U.S. Vice President.” According to the anonymous bribe reporters, demands from these offices occurred between 2002 and 2007.

Most companies spend considerable time and money training employees and associated parties on foreign bribery issues, but Alexandra Wrage (TRACE President) said that “the U.S. BRIBEline data indicates that companies doing business in the United States should consider training their employees to appropriately respond to a bribe demand made by a powerful government official or business executive.”

Previous BRIBEline reports (see here) analyzed patterns of bribe demands in Brazil, Mexico, Ukraine, Russia, India and China.

Bribery Perceptions

Wednesday, November 9th, 2011

Last week Transparency International (“TI”) released its Bribe Payers Index (see here). The index “ranks 28 of the world’s largest economies according to perceived likelihood of companies from these countries to pay bribe’s abroad.” TI’s data is derived from a survey of approximately 3,000 business executives worldwide. The executives were asked for each of the 28 countries with which they have a business relationship with (for example as supplier, client, partner or competitor) “how often do firms headquartered in that country engage in bribery in this country.”

Among the key findings in the index are that “companies from China and Russia were viewed as the most likely to pay bribes” and that “perceptions of the frequency of foreign bribery by country and business sector have on average seen no improvement since the last Bribe Payers Index published in 2008.”

As to China and Russia, the TI report states “it is of particular concern that China and Russia are at the bottom of the index.” The report states as follows. “Given the increasing global presence of businesses from these countries, bribery and corruption are likely to have a substantial impact on the societies in which they operate and on the ability of companies to compete fairly in these markets.”

As noted in this prior post, China recently passed an “FCPA-like” law, as did Russia as noted in this post.

In terms of perception of bribery by companies, the U.S. ranked a rather dismal 10th, behind Netherlands, Switzerland, Belgium, Germany, Japan, Australia, Canada, Singapore and the United Kingdom. Even though the U.S. clearly leads the world in enforcement of its anti-bribery law, the survey seems to suggest that ad hoc enforcement action of the FCPA is not having – at least in the minds of the survey participants – a meaningful deterrent effect in reducing instances of improper payments.

Report Cards

Thursday, June 30th, 2011

Imagine I give a test to the 37 students in my class. However, because of reasons uniquely relevant to many of the students, not all students are equally capable of passing the test.

I hope all would view this test to be a bit empty.

This post summarizes the OECD Working Group on Bribery Annual Report and Transparency International’s Annual Progress Report of the OECD Anti-Bribery Convention.

For reasons discussed below, these two report cards suffer from the same dynamic described in the above hypothetical.

In many OECD member countries there is no such thing as corporate criminal liability – or even if there is – such corporate liability can only be based on the actions of high-ranking executives or officers. This of course is materially different than in the U.S. where, under respondeat superior principles, a business organization can face legal liability (civil and criminal) based on the actions of any employee to the extent the employee was acting within the scope of his or her duties and to the extent the conduct was intended to benefit, at least in part, the organization.

In most OECD member countries prosecuting authorities have two choices – to prosecute or not to prosecute – there is no such thing as non-prosecution or deferred prosecution agreements (NPAs/DPAs). Not so in the U.S. where the majority of these alternative resolution vehicles are used to resolve FCPA enforcement actions. As the OECD itself stated in its Phase 3 Report of U.S. enforcement of the FCPA – “it seems quite clear that the use of these agreements is one of the reasons for the impressive FCPA enforcement record in the U.S.” (See here for the prior post). Former DOJ FCPA enforcement chief Mark Mendelsohn was asked directly – if the DOJ “did not have the choice of deferred or non prosecution agreements, what would happen to the number of FCPA settlements every year,” and he stated as follows: “if the Department only had the option of bringing a criminal case or declining to bring a case, you would certainly bring fewer cases.”

In certain other OECD member countries, there is a compliance defense relevant to the prosecution of bribery and corruption offenses. (See here for the prior post).

Given these differing dynamics (among others), it is fairly obvious why OECD member countries have varying degrees of enforcement of bribery and corruption offenses.

With that in mind, on to the report cards.

Transparency International Progress Report 2011 – Enforcement of the OECD Anti-Bribery Convention

On May 24th, Transparency International (TI) released (here) its seventh annual Progress Report on Enforcement of the OECD Convention.

The report “shows no improvement in the enforcement of the OECD Anti-Bribery Convention in the past year and warns that this could signal a dangerous loss of momentum in the fight against corruption.”

The report covers 37 countries and “shows that there are still only seven countries with active enforcement, nine with moderate enforcement, and 21 with little or no enforcement.” Huguette Labelle, Chair of TI, stated that “the collective commitment to stamp out foreign bribery made by all OECD parties is undermined when a large number of countries have inadequate enforcement.”

The introduction of the report includes the following statement.

“Continued lack of enforcement in 21 countries a decade after the Convention entered into force, notwithstanding repeated OECD reviews, clearly indicates lack of political commitment by their governments. And in some of those with moderate enforcement, the level of commitment is also uncertain. This is a danger signal because the OECD Convention depends on the collective commitment of all parties to ending foreign bribery.”

The reports “major conclusions” include the following: “risk of loss of momentum” and “lack of political commitment.”

As to the former, the report states as follows. “The Convention has not yet reached the point at which the prohibition of foreign bribery is consistently enforced. With little or no enforcement by half of the signatory governments, backsliding by enforcing governments is a serious threat. This concern is aggravated in a troubled global economy in which companies are scrambling for business. Business organisations have increasingly criticised anti-bribery enforcement as a competitive obstacle. The present position of the Convention is unstable, and unless forward momentum is recovered, the progress made in the past decade could unravel.”

As to the “lack of political commitment”, the report states as follows. “Reviews conducted by TI experts indicate that the principal cause of lagging enforcement is lack of political commitment by government leaders. In countries where there is committed political leadership, the OECD’s rigorous monitoring programme has helped improve laws and enforcement programmes. However, in the absence of political will, even repeated OECD reviews have little effect.”

Once again, Canada received a public lashing from TI.

Under the heading “lack of progress in Canada,” the report states as follows. “Canada is the only G7 country in the little or no enforcement category, and has been in this category since the first edition of this report in 2005. It is also the only OECD member that does not provide nationality jurisdiction, which presents a serious obstacle to enforcement. [...] TI welcomes that the government of Canada has publicly reported the number of investigations for the first time. It is promising that 23 foreign bribery investigations are under way. If these investigations lead to prosecutions, Canada may finally move out of the little or no enforcement category.” (A future post will summarize the recent Canadian enforcement action against Niko Resources).

TI’s 2010 report (see here for the prior post) included reference to many big picture enforcement issues such as the use of negotiated settlements (NPAs and DPAs), judicial scrutiny of enforcement actions, and the proper amount of fines and penalties. However, TI’s 2011 report was silent as to many big picture issues.

OECD Working Group on Bribery Annual Report

On April 20th, the OECD Working Group on Bribery released its annual report (here). The release (here) states as follows. “Most governments are not meeting their international commitments to clamp down on bribery and corruption in international business, with only five signatories to the OECD Anti-Bribery Convention having sanctioned individuals or companies in the past year.”