Archive for the ‘U.S. v. Kay’ Category

News Corp And The FCPA

Monday, July 18th, 2011

On July 7th the U.K. Guardian reported (here) that “up to five [U.K. police] officers were paid between them a total of at least £100,000 in cash from the News of the World.” The next day, Dominic Rushe and Jill Treanor of the U.K. Guardian made the link (see here) between these payments and the Foreign Corrupt Practices Act.

What followed over the next 10 days was the most intense worldwide media coverage of the FCPA in its nearly 35 year history.

Last Wednesday, in a development seldom – if ever – seen in the FCPA context, Senator Barbara Boxer (D-CA) and John Rockefeller (D-WV) wrote Attorney General Eric Holder and SEC Chairman Mary Schapiro (see here) requesting “that the U.S. Department of Justice and the Securities and Exchange Commission investigate whether News Corporation, a U.S.-based corporation, has violated United States law – specifically the Foreign Corrupt Practices Act of 1977.” Separately, Senator Frank Lautenberg (D-NJ) wrote Holder and Schapiro (see here). Senator Lautenberg stated as follows. “The limited information already reported in this case raises serious questions about the legality of the conduct of News Corporation and its subsidiaries under the FCPA. Further investigation may reveal that current reports only scratch the surface of the problem at News Corporation. Accordingly, I am requesting that DOJ and the SEC examine these circumstances and determine whether U.S. laws have been violated.”

Public interest groups (see here for one example) also began demanding an FCPA inquiry into the News of the World scandal.

Soon thereafter, it was reported that the FBI (an agency that investigates allegations of criminal violations of the FCPA under the supervision of the Fraud Section of the DOJ Criminal Division) opened an investigation of News Corp. Among others, Congressmen John Conyers “applaud[ed] Attorney General Eric Holder’s announcement that the Justice Department has opened a formal investigation into allegations that News Corp. may have violated both federal wiretapping statutes and the Foreign Corrupt Practices Act.” (See here).

The News Corp. scandal is wide in scope potentially implicating several laws both here in the U.S. and the U.K. This post focuses on News Corp.’s potential FCPA exposure.

Can the FCPA apply to News Corp. even if the improper conduct took place outside of the U.S.?

Yes. News Corp. is a U.S. company and as such the FCPA has extraterritorial application meaning it can face FCPA liability even if the conduct at issue takes places entirely outside of the U.S. Indeed, in most FCPA enforcement actions the conduct at issue takes place outside of the U.S. Further, it is very common in FCPA enforcement actions for parent companies to be held legally responsible for the acts of subsidiary employees on the theory that such employees acted as “agents” of the parent company and that the parent company ultimately derived the financial benefit from the improper conduct at issue.

Indeed, even News Corp.’s FCPA policies and procedures (here) states as follows. “The Foreign Corrupt Practices Act (FCPA) is a U.S. law that forbids bribery of foreign (meaning non-U.S.) government officials, whether elected or appointed, even if the bribe takes place outside the United States. Because News Corporation is a U.S. corporation, the FCPA may apply to all Company employees everywhere in the world, regardless of their nationality or where they reside or do business.”

Why do the London police payments implicate the FCPA’s anti-bribery provisions?

As a general matter, the FCPA’s anti-bribery provisions prohibit the payment of money or anything of value to a “foreign official” to “obtain or retain business.” London police officers are “foreign officials” under the FCPA. For instance, in this 2006 FCPA enforcement action the DOJ asserted that an Iraqi police officer was a “foreign official” under the FCPA.

As to “obtain or retain business,” for most of its history FCPA enforcement actions focused on payments to “foreign officials” to “obtain or retain business” with a foreign government. However, during the past decade, the DOJ has brought numerous FCPA enforcement actions premised on payments to customs officials, tax officials, immigration officials and the like where the payments have nothing to do with “obtaining or retaining business” with a foreign government. Rather, the payments were alleged to have assisted the payor in “obtaining or retaining” business in the general sense.

The leading court decision on this issue is U.S. v. Kay. 359 F.3d 738, 740 (5th Cir. 2004). As further explained in this piece (pages 917-921), in Kay, a U.S. circuit court (one step below the U.S. Supreme Court) concluded that payments to a “foreign official” to lower taxes and custom duties in a foreign country can provide an unfair advantage to the payer over competitors and thereby assist the payer in obtaining and retaining business. The court concluded that there was “little difference” between these type of payments and traditional FCPA violations in which a company makes payments to a “foreign official” to influence or induce the official to award a government contract. Even so, the court stated that not all such payments to a “foreign official” outside the context of directly securing a foreign government contract violate the FCPA; it merely held that such payments “could” violate the FCPA. The court recognized that “there are bound to be circumstances” in which a custom or tax reduction merely increases the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business.

Despite Kay’s equivocal holding, there has been a significant increase in FCPA enforcement actions since the decision concerning payments to “foreign officials” that better position the payor to “obtain or retain business” in the general sense. (See for instance the “CustomsGate” category under the Search page of this site).

Thus, payments to London police officers that allowed News of the World to obtain non-public information to write sensational news stories – and thus sell more newspapers – would seem to fit the type of FCPA enforcement common post-Kay. Given that News Corp. is a media company and its product is information, such payments are similar to an oil and gas company making payments to a “foreign official” to obtain non-public information concerning the location of oil and gas deposits.

What about the FCPA’s books and records and internal control provisions?

In addition to its anti-bribery provisions, the FCPA also contains books and records and internal control provisions applicable to U.S. listed companies such as News Corp. The books and records provision requires that “issuers” (the statutory term for U.S. listed companies) “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.” The internal controls provision require that “issuers” “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that:” among other things, “transactions are executed in accordance with management’s general or specific authorization;” “access to assets is permitted only in accordance with management’s general or specific authorization;” and “transactions are recorded as necessary to permit a preparation of financial statements in conformity with generally accepted accounting principles … and to maintain accountability for assets.”

These provisions, despite being part of the FCPA, are generic in scope. Thus, if other payments part of News Corp.’s wide-ranging scandal – such as “hush” settlement payments to phone hacking victims are misrecorded on the company’s books and records, such entries would provide the basis for independent FCPA books and records violations – even if such conduct does not directly implicate the FCPA’s anti-bribery provisions. As to the London police payments, such payments, if not recorded accurately on the company’s books and records, would of course also give rise to an independent FCPA books and records violation. Both the DOJ and the SEC (which also has FCPA jurisdiction over U.S. listed companies) frequently hold parent companies liable for the books and records violations of subsidiaries on the theory that subsidiary books and records are consolidated with the parent company’s books and records for purposes of financial reporting.

As to the FCPA’s internal control provisions, the enforcement agencies often take the rather simplistic position that because the payments were made or because corporate expenses were not accurately recorded, the company did not have effective internal controls.

If News Corp. faces FCPA liability does that mean that executive officers will as well?

Not necessarily. Under U.S. legal principles, a corporate entity such as News Corp. can face legal liability based on the conduct of any employee or agent to the extent the employee or agent was acting within the scope of their authority and the conduct was intended to benefit, at least in part, the organization. Many FCPA enforcement actions against corporate entities result from the improper conduct of low to mid-ranking employees in the absence of any allegation that executive officers or board members knew about the conduct at issue or participated in the conduct at issue. Thus, just because News Corp. may face FCPA liability under these principles does not necessarily mean that executive officers will as well.

As to individuals (whether high-ranking executives or otherwise) there needs to be some evidence of culpable conduct – which in the FCPA criminal context – often means participating in the improper conduct, authorizing the improper conduct, or knowing of the improper conduct but failing to put a stop to it.

Will U.S. authorities defer to British authorities in investigating the London police payments?

Some have suggested that U.S. authorities are unlikely to bring an enforcement action because the U.K. has strong anti-corruption laws and is capable of handling this matter domestically. I disagree. The U.K. Bribery Act went live on July 1st, but it only covers conduct that occurs after that date. Prior to the Bribery Act, the U.K. had a hodgepodge of antiquated bribery and corruption statutes. However, the problem with those statutes is they required a “controlling mind” of the corporate to be involved in the conduct at issue in order to prosecute the entity. The weakness of these pre-Bribery Act laws was clearly evident in the U.K. BAE enforcement action from 2010. As the Serious Fraud Office stated in court papers “a serious evidential difficulty had been identified in respect of potential corruption charges, namely the difficulty of proving the involvement of a ‘controlling mind’ in the offending.” Thus, if there is no evidence of “controlling minds” being involved in the London police payments, pre-Bribery Act laws will be insufficient to bring bribery charges as occurred in the BAE matter. This evidentiary difficulty is one of the reasons the U.K. passed the Bribery Act.

U.S. enforcement agencies have a good relationship with their U.K. counterparts and cooperation between the agencies is likely to occur, but there is little reason to believe that the U.S. will stand down and not bring an enforcement action if that is what the evidence warrants. In fact, there have been several FCPA enforcement actions concerning U.K. business entities, based on conduct occurring in the U.K.,and/or involving U.K. citizens. See here for the 2010 FCPA enforcement action relating to Innospec, here for the FCPA enforcement action concerning employees of Pacific Consolidated Industries and here for the FCPA enforcement action against U.K. citizen Jeffrey Tesler.

What is likely to happen next?

There are multiple reasons why News Corp. will cooperate, if it is not already, in the DOJ’s FCPA investigation. The DOJ has substantial discretion (some would argue too much) in resolving corporate criminal matters. Under the DOJ’s Principles of Prosecution of Business Organizations (see here), one of the factors DOJ will consider in deciding how to resolve any potential action is the company’s cooperation. Cooperation in the FCPA context often means conducting an internal, independent review of the conduct at issue and sharing the results, witness statements, key documents, etc. with the enforcement agencies on a near real-time basis. Cooperation is also a mitigating factor under the advisory U.S. Sentencing Guidelines which provide a monetary penalty range for all FCPA criminal actions.

How long is this FCPA gray cloud likely to hang over News Corp?

Likely for a few years. It is typical for an FCPA enforcement inquiry to begin based on a certain set of limited and discrete facts – here the London police payments. However, before the enforcement agencies (DOJ or SEC) will agree to resolve an FCPA matter, it is typical for the agencies to ask the “where else” question. In other words, the question will be – if News Corp. employees (broadly speaking) made the London police payments, did other News Corp. employees around the world make similar payments to “foreign officials” to “obtain or retain business.” To answer this question, and because News Corp. is likely in cooperation mode and because the company has an incentive to learn this information itself, News Corp. will likely conduct a targeted world-wide review of its operations. Such a review takes time and often costs tens of millions of dollars in professional fees and expenses. Because of these dynamics, it is typical for FCPA scrutiny – from the point of investigation to the point of enforcement action – to last between 2-4 years.

Troubling Trends and Problematic Patterns

Monday, January 31st, 2011

That is the alternate title I’ve given to Shearman & Sterling’s “Recent Trends and Patterns in FCPA Enforcement” (here).

The periodic publication is always in my “must-read” category. The author group is first-rate and includes noted FCPA practitioners Philip Urofsky (former Assistant Chief of the DOJ Fraud Section responsible for FCPA enforcement) and Danforth Newcomb (a dean of the FCPA bar).

The Shearman & Sterling piece raises particularly pointed questions as to the Panalpina-related enforcement actions and the seemingly vanishing “obtain or retain business” element of an FCPA anti-bribery violation.

I have covered these issues extensively as well – see here for several posts on the Panalpina-related enforcement actions and here (pg. 971 “Just How Was that Business Obtained or Retained”) as to questions about the enforcement agencies’ “obtain or retain business” allegations or interpretations.

The Shearman & Sterling piece states that “some of the government’s cases appear to blur the lines or muddy the waters when it comes to the limits of the statute.” The authors state as follows:

“In several cases, such as Pride International, Panalpina, and Royal Dutch Shell, the theories used to hold parents accountable for the acts of subsidiaries and vice versa appear to be unclear. In others, such as Pride International and Tidewater, the connection of the alleged conduct to “obtaining or retaining business,” a critical element of the statute was not pleaded or, worse, was pled in a way that suggests that virtually any bribe that improves a company’s profitability is sufficient – a result that is not consistent with established precedent and the language of the statute.”

Under the heading “Enforcement Strategies” the authors state:

“As in years past, the enforcement actions brought in 2010 provide insight, albeit sometimes clouded, into the DOJ’s and the SEC’s views of the scope and meaning of certain aspects of the statute, as well as their enforcement priorities and strategies. In doing so they are at times helpful and at other times opaque or, even worse, disturbing. As always, however, it is important to remember that although these agreements may have been hotly negotiated, in the end each of the companies and individuals settled. Thus, none of the government’s interpretations, or its view of how the law applied to the facts, has been subjected to a searching judicial examination in the context of a contested adversary proceeding.”

Under the heading “The Business Nexus” the author state:

“The Panalpina cases and certain allegations in other cases are likely to reopen the debate as to the meaning of the “obtain or retain business” element. This element is recognized as a critical factor in narrowing the scope of the FCPA. How much it does so, however, has long been a matter of debate. In its 2004 decision in U.S. v. Kay, the Fifth Circuit appeared to have ended the debate, holding that the FCPA was not limited to bribes to obtain business from a foreign government or even to bribes that led “directly to the award or renewal of contracts.” Analyzing the indictment in that case, the court held that “bribes paid to foreign officials in consideration for unlawful evasion of customs duties and sales taxes could fall within the purview of the FCPA’s proscription.” (emphasis in original). The court warned, however, that the scope of the statute was not limitless, stating, “We hasten to add, however, that this conduct does not automatically constitute a violation of the FCPA: It still must be shown that the bribery was intended to produce an effect – here, through tax savings – that would ‘assist in obtaining or retaining business.’”

Although some of the bribes in the Panalpina cases were made to obtain contracts and other specific business advantages, most of the payments were made to customs or tax officials to reduce duties and taxes, to expedite customs clearances, or to evade import regulations. In the latter cases, the government made very little effort to link such payments to obtaining or retaining business. For example, in Pride International, the DOJ alleged a number of what it termed “bribery schemes,” including payments to a Mexican Customs Official “to avoid taxes and penalties for alleged violations of Mexican customs regulations relating to a vessel leased by Pride International.” Similarly, in GlobalSantaFe, the SEC alleged that through a number of “suspicious payments” the company “avoided costs and gained revenue.” Without more explanation, such barebones allegations create the impression that the government equates gaining revenue or reducing costs generally with “obtaining or retaining business.” That, however, is the very opposite of the holding in Kay [...].”

“Reading between the lines of the pleadings, we can, in many cases, construct some theory of how certain of the payments might have fallen within the Kay rule, e.g., some payments appear to have allowed the importers to bring in equipment and rigs without which they could not perform new or existing contracts. It is even possible that, similar to the facts in Kay, the importers could not have competed for existing or new business had they paid the full duties or taxes or complied with other local requirements. The pleadings, however, for the most part only hint at such an underlying rationale, leaving us to wonder exactly what does the government think the business nexus means today?”

When an author group including a former DOJ official responsible for enforcing the FCPA (in a more measured and disciplined era) uses words such as “disturbing” and phrases such as “not consistent with established precedent and the language of the statute” – well, I think we all should take notice.

The OECD Report – Initial Observations

Thursday, October 21st, 2010

Yesterday, the OECD released its much anticipated “Phase 3″ report (here) on the U.S. implementation and enforcement of the “Convention of Combating Bribery of Foreign Public Officials in International Business Transactions.” In other words, the OECD Report (“Report”) comments on U.S. enforcement of the FCPA, a statute which (at least in theory) is supposed to model the OECD Convention.

As noted in this OECD release:

“The Working Group commended the United States for its engagement with the private sector, substantial enforcement, and commitment from the highest levels of the U.S. Government. In addition to the recommendation on facilitation payments, it also made recommendations that include the following on ways to improve U.S. enforcement:

- Consolidating publicly available information on the application of the FCPA, including the affirmative defence for reasonable and bona fide expenses;

- To increase transparency, making public, where appropriate, more information on the use of Non-Prosecution Agreements (NPAs) and Deferred Prosecution Agreements (DPAs) in specific cases; and

- Ensure that the overall limitation period applicable to the foreign bribery offence is sufficient to allow adequate investigation and prosecution.

The Working Group also highlighted good practices developed within the U.S. legal and policy framework that helped it achieve such a high level of enforcement, including the creation of specialised enforcement units dedicated to foreign bribery, and the use of plea agreements, DPAs and NPAs and the appointment of corporate monitors. These efforts have also encouraged the establishment of robust compliance programmes and measures among companies subject to U.S. anti-bribery law. The Working Group also welcomed the United States’ efforts to encourage close co-operation between the United States and foreign authorities.”

The Report is perhaps the single largest collection of FCPA related information and statistics ever in one document. This post will be the first of several posts in the coming days on the information and views contained in the Report.

This post highlights the “Executive Summary,” “Introduction” and “Recent Trends in Investigation and Prosecuting FCPA Violations” sections of Report. In addition, this post discusses specific sections of the Report dealing with the FCPA’s “obtain or retain business” and “foreign official” elements as well as the use of NPAs or DPAs to resolve FCPA matters.

Before turning to the Report’s Executive Summary, let me provide one of my own. [For ease of reading, my observations in this post are in italics].

There is no question that the U.S. is a world leader in enforcing its domestic foreign bribery statute (the FCPA) and the Report rightfully commends the U.S. for this. However, quantity does not always mean quality and U.S. enforcement of the FCPA is not without criticism and questions, including in the Report. One would hardly realize this if all one did was read this joint statement of the Departments of Justice, Commerce and State, and the Securities and Exchange Commission issued yesterday in connection with the Report’s release.

But the criticisms and questions are in the Report and the Report contains this contradiction: while loudly praising the U.S. for its “high level” of enforcement, the Report quitely criticizes and questions many of the policies and enforcement theories which yield the “high level” of enforcement. For instance, the Report notes that the FCPA’s language “does not specifically convey” that cases concerning “an operating license or permit to operate a business, or a reduction in tax or import duty” are in violation of the statute. Yet, many FCPA enforcement actions are based on this theory. Further, the Report notes that “due to an absence of explicit language in the definition of foreign official” it is an open question whether employees of so-called state-owned or state controlled enterprises are “foreign officials” under the FCPA. Yet, numerous FCPA enforcement actions are based on this theory. The Report notes that the increase in NPAs and DPAs “are one of the reasons for the impressive FCPA enforcement record in the U.S.” yet also notes that these agreements are subject to little or no judicial scrutiny.

Perhaps the message for other OECD member nations reading the Report is this – enforce your domestic bribery law in questionable ways, seemingly inconsistent with the intent of the legislature in passing the law, and figure out a way to resolve the enforcement actions without judicial scrutiny. If so, perhaps your nation will one day be praised in an OECD Report for its “high level” of enforcement activity.

The “Executive Summary” of the Report states, among things:

That, since Phase 2 (see here and here) “U.S. enforcement has increased steadily and resulted in increasingly significant prison sentences, monetary penalties and disgorgement. Increased enforcement was enabled by the good practices developed within the U.S. legal and policy framework, including the dedication of resources to specialised units in the Department of Justice (DOJ), the Federal Bureau of Investigation (FBI) and the Securities and Exchange Commission (SEC).”

[...]

“The U.S. has investigated and prosecuted cases involving various business sectors and various modes of bribing foreign public officials. In addition, it has been conducting proactive investigations, using information from a variety of sources and innovative methods like plea agreements (PAs), Deferred Prosecution Agreements (DPAs), Non-Prosecution Agreements (NPAs), and the appointment of corporate monitors. Vigorous enforcement and record penalties, alongside increased private sector engagement, has encouraged the establishment of robust compliance programmes and measures, particularly in large companies, which are verified by the accounting and auditing profession and monitored by senior management. Less is known of the effect increased FCPA enforcement has had on small- to medium-sized enterprises (SMEs), which is an issue shared by all Parties to the Convention.”

“Ways in which implementation of the Convention could be made more effective have also been identified. For instance, the Working Group recommends that the U.S., in its periodic review of its policies and approach on facilitation payments, consider the views of the private sector and civil society… The evaluation also recommended the consolidation and summarisation of publicly available information on the application of the FCPA, including information regarding the affirmative defence for reasonable and bona fide expenses. This could be especially useful for SMEs. Similarly, given that the U.S. authorities are increasingly enforcing the FCPA by using DPAs and NPAs, the Working Group believes that transparency and public awareness of these measures could be enhanced if the U.S. made public, where appropriate, more detailed reasons on issues such as why a particular type of agreement is used, the choice of an agreement‘s terms and duration, and how a company has met the agreement‘s terms. The Working Group also recommends that the U.S. ensure that the overall limitation period applicable to the foreign bribery offence is sufficient to allow adequate investigation and prosecution.”

The Introduction to the Report, under the heading “Cases involving the bribery of foreign public officials,” states:

“The United States has investigated and prosecuted the most foreign bribery cases among the Parties to the Anti-Bribery Convention. From 1998 to 16 September 2010, 50 individuals and 28 companies have been criminally convicted of foreign bribery, while 69 individuals and companies have been held civilly liable for foreign bribery. In addition, 26 companies have been sanctioned (without being convicted) for foreign bribery under non-prosecution agreements (NPAs) and deferred prosecution agreements (DPAs). Sanctions have also been imposed for accounting misconduct and money laundering related to foreign bribery.”

“These cases have resulted in increasingly significant penalties. From 1998 to 2003, the maximum monetary sanctions levelled against a company in an FCPA case were USD 2.5 million. Since then, 23 companies have received monetary sanctions in excess of USD 10 million. In one case, monetary sanctions totalling USD 800 million were ordered against a single company. In 2010, an 87-month sentence was imposed against an individual in an FCPA case. Since 2004, over USD 1 billion in foreign bribery proceeds have been recovered through disgorgement actions. The SEC also obtains civil penalties in addition to DOJ criminal fines. In the first 9 months of 2010 alone, the SEC obtained over USD 404 million in disgorgement, interest and civil penalties from thirteen companies and eight individuals. Representatives of the private sector told the evaluators that these increasingly heavy sanctions combined with the increased number of prosecutions against companies and individuals have significantly raised the FCPA‘s profile. They are also felt to be the main reason why many companies have taken steps to improve their anti-bribery measures, internal controls, books and records, and compliance systems.”

[Note - the above referenced 87-month sentence of Charles Jumet is misleading. Elsewhere in the Report it states: "In a recent case, a defendant was sentenced to 87 months in prison for FCPA violations." Fact check - Jumet pleaded guilty to two counts - conspiracy to violate the FCPA and making false statements to federal agents. The false statements portion of his sentence was 20 months. Thus, Jumet's "FCPA" sentence was 60 months - not 87 months]

“These cases come to the authorities‘ attention through a myriad of means. A significant number (but not the majority) of investigations result from voluntary self-reporting by companies. Other sources include corporate securities filings; suspicious activity reports from financial institutions; the media, including keyword searches of the Internet; whistleblowers, employees, customers, competitors, and agents; qui tam and civil complaints; referral from other U.S. government agencies, including overseas embassies; international financial institutions such as the World Bank; reports through a “hotline” email address and website; and information from foreign states, including requests for mutual legal assistance (MLA). A recent case resulted from an undercover sting operation. Investigations also originate from research and traditional law enforcement operations to determine where corruption may exist. The U.S. utilizes statistics that it compiles and information obtained in prior and current FCPA cases to identify trends and patterns of behaviour that warrant investigation. The U.S. also conducts industry sweeps, which are targeted investigations focusing on a particular industry or market. The U.S. believes that the use of such proactive tools keeps its regulators ahead of trends and allows them to combat corruption in a timely fashion. The U.S. did not provide statistics on the sources of investigations, due to the need to protect investigative sources and methods, but confirms that no one source accounted for a majority.”

“These FCPA enforcement figures are expected to increase in the near future. Presently, the United States has more than 150 criminal and 80 civil ongoing FCPA investigations. [a footnote states "many are parallel criminal and civil investigations of the same alleged conduct"] The U.S. authorities recently announced new initiatives including investigations of specific industries (“targeted sweeps” or “industry-wide sweeps”) and an increased emphasis of prosecuting natural persons in addition to companies. These efforts will likely lead to more prosecutions and convictions.”

Under the heading “Recent trends in investigating and prosecuting FCPA violations,” the Report states, among other things, as follows:

“Allegations of FCPA violations come from a variety of sources. This part of the report canvasses a few of the most important sources. According to the DOJ, voluntary disclosures are the source of a significant proportion of investigations, although not the majority.”

[...]

“… companies consider it in their interest to be co-operative, and seem willing to settle more often than not when they have voluntarily disclosed. While some companies self-report violations of the FCPA, some companies do not. Representatives of companies in the extractive industry explained that it is very common for a company to uncover one discrete violation of the FCPA and voluntarily disclose it, following which the DOJ or SEC asks the company to look further to see if the conduct is pervasive and occurring in other places. In some cases, the conduct is pervasive and is fully investigated by the DOJ and SEC. In other cases, the conduct is limited in scope and no additional violations are uncovered. Some companies may find this very cumbersome and expensive, and try to settle the case without a full investigation. However, the DOJ and SEC advise that they require companies to complete their investigations before finalising settlement discussions.”

[...]

“Proactive investigative steps by the DOJ and SEC, such as industry-wide sweeps, can also produce information that leads to enforcement actions. In November 2009, an industry-wide investigation into the pharmaceutical industry was announced by Assistant Attorney General, Lanny Breuer. An investigation into the medical device industry has also been discussed publicly. The Oil-for-Food cases involved a sweep of companies that paid kickbacks to the Iraqi Government during the United Nations Oil-for-Food Programme. The sweep was very effective and more than fifteen companies have been charged to date.”

“Such investigations may be commenced by sending “sweep letters” requesting co-operation from industry members on a voluntary basis. If a company chooses to not respond to such a letter, the DOJ and SEC consider whether a subpoena should be issued to compel the production of relevant documents and the testimony of individuals. Recently, the SEC announced that it will be conducting more industry-wide sweeps. Investigations of this kind enable the DOJ and SEC to develop specialised expertise identifying illegal conduct and conducting prosecutions involving various industries. In addition, due to the cross-connections between various members of the same industry, an investigation into one company can produce leads about other companies, including those in the supply-chain.”

“More traditional sources of allegations also continue to be useful, such as anonymous whistleblower reports. Such reports are often received from current and former employees, competitors, and others, and are analysed by the FBI to ensure their veracity. The DOJ provides a “hotline” to report anonymously directly to the FCPA Unit. The SEC also has a hotline and a detailed process for analysing tips, complaints and reports of FCPA violations.”

[...]

“[Mutual Legal Assistance] requests from foreign jurisdictions also provide a basis for allegations, although to a lesser extent than other sources.”

“United States embassy staff are also important sources of information about FCPA violations. The DOJ cited examples of full-blown investigations that were launched due to information provided by an embassy and referrals from State Department and Commercial Services branches. In one of these investigations, the embassy stayed involved throughout.”

As to Dodd-Frank’s whistleblower provisions, the Report states:

“The U.S. authorities believe that in light of this new legislation, reporting violations of the FCPA is likely to increase.”

FCPA Elements

Among other elements, the Report discusses the “obtain or retain business” and “foreign official” elements of the FCPA.

“Obtain or Retain Business”

The Report states:

“One important aspect of the foreign bribery offence in the FCPA is different from the description of the offence in Article 1 of the Convention. Under the FCPA, the bribery of a foreign public official must be committed in order to assist the briber “in obtaining or retaining business for or with, or directing business to, any person‘ (known as the “business nexus test‘). In Article 1 of the Convention, the corresponding formulation is: “in order to obtain or retain business or other improper advantage in the conduct of international business.”

“Thus, unlike Article 1 of the Convention, the FCPA language does not specifically convey that the case is covered where the purpose of the bribe is to obtain or retain other improper advantage in the conduct of international business, such as obtaining an operating license or permit to operate a business, or a reduction in tax or import duty. In other words, the FCPA language might be read to only address bribes for the purpose of obtaining or retaining business per se. Reference is made to “improper advantage” elsewhere in the FCPA, but in a different context – i.e., the offences in the FCPA inter alia cover the case where the purpose of a bribe to a foreign public official is to secure “any improper advantage…in order to assist such [person/issuer/domestic concern] in obtaining or retaining business for or with, or directing business to, any person‘.”

“However, it has been the position of the United States Government throughout that the FCPA formulation is very broadly interpreted and covers in practice the kinds of advantages required to be covered by the Convention. The evaluation team notes that this position has been largely confirmed by jurisprudence, in the 2007 decision of the United States Court of Appeals in United States v. Kay.”

“In U.S. v. Kay, the Court of Appeals held that a payment to customs officials to reduce import duties on rice falls within the parameters of the “business nexus” test because when Congress enacted the FCPA it was concerned about: (1.) Bribery that leads to discrete business contract arrangements; and (2.) Payments that even indirectly assist in obtaining business or maintaining existing business operations in a foreign country. The Court of Appeals also stated that:

…bribes paid to foreign officials in consideration for unlawful evasion of customs duties and sales taxes could fall within the purview of the FCPA‘s proscription. We hasten to add, however, that this conduct does not automatically constitute a violation of the FCPA: It must be shown that the bribery was intended to produce an effect – here through tax savings – that would “assist in obtaining or retaining business”.”

“The decision of the Court of Appeals in U.S. v. Kay is therefore helpful, in that it clarifies that payments to, for instance, reduce import duty “could” satisfy the “business nexus test”. The United States has also successfully enforced the FCPA in cases involving similar advantages, such as payments to customs officials to import goods and materials (Helmerich & Payne; and Natures Sunshine), and payments to tax officials to reduce tax obligations, and to judicial officials for favourable treatment in pending litigation (Willbros Group). On the other hand, the clarification by the Court of Appeals leaves open the possibility that there might be cases where a bribe to a foreign public official to facilitate international business does not violate the FCPA, although it does meet the test of “other improper advantage in the conduct of international business” in Article 1 of the Convention.”

For more on U.S. v. Kay (see here and here).

The Report’s discussion of the “obtain or retain business” is noteworthy.

Why?

Because on the one hand, the Report praises the U.S.’s high level of FCPA enforcement, yet on the other hand, the Report candidly acknowledges that “the FCPA language might be read to only address bribes for the purpose of obtaining or retaining business per se.” Connecting the dots, the Report seems to suggest that the numerous FCPA enforcement actions premised on improper payments to secure foreign licenses, permits, etc. may not even be FCPA violations.

In my forthcoming article “The Facade of FCPA Enforcement” to be published soon in the Georgetown Journal of International Law, I highlight the increase in FCPA enforcement actions where the improper payments are alleged not to obtain or retain any particular business, but rather, involve customs duties and tax payments, or payments alleged to have assisted the payer in securing foreign government licenses, permits, and certifications.

I must also take issue with the sentence in the Report that suggests when the DOJ enters into a NPA (such as in Helmerich & Payne) or DPA that this is evidence of the U.S. “successfully enforcing the FCPA.” This is one of the many reasons why the “facade of FCPA enforcement” matters – because it fosters the absurd notion that privately negotiated settlements, subject to little or no judicial scrutiny, entered into in the context of the enforcement agencies possessing substantial “carrots” and “sticks” should serve as de facto case law or otherwise represent “successful” enforcement of the FCPA.

“Foreign Official”

As to the definition of “foreign official,” the Report states:

“Due to an absence of explicit language in the definition of “foreign official” in the FCPA, two questions arise concerning the scope of the definition: (1.) Whether, in compliance with the Convention, it covers a person holding a judicial office of a foreign country‘; and (2.) Whether it covers a person exercising a public function for a foreign country, including for a…public enterprise‘ (i.e. a state-owned or controlled enterprise).”

Readers know that this second question is a frequent topic on these pages and deservingly so. It is no small matter. As I highlight in this recent article in the Indiana Law Review (here), this dubious interpretation of the “foreign official” element was at the core of 66% of 2009 FCPA enforcement actions against business entities as well as numerous individuals. And that was just in 2009. Several pre-2009 enforcement actions as well were based on the theory that employees of state-owned or state-controlled enterprises are “foreign officials” under the FCPA.

So again, on the one hand the Report praises the U.S.’s high level of FCPA enforcement, yet on the other hand, the Report openly questions the definition of “foreign official” that was used in a significant percentage of recent FCPA enforcement actions.

The Report then contains a discussion of the Nexus Technologies case and advances the DOJ’s curious assertion that resolution of this matter (see here) validates its interpretation that employees of so-called state-owned or state-controlled enterprises are “foreign officials” under the FCPA.

The Report states:

“Since Phase 2, there have been positive legal developments regarding the second question on the bribery of employees of state-owned or controlled enterprises, in U.S. v. Nam Quoc Nguyen, et al. (E.D. Pa., September 4, 2008), in which the District Court recently held in favour of the United States Government in a case involving allegations that the defendants bribed employees of a foreign state-owned company. The defendants argued that the definition of “foreign official” in the FCPA does not include employees of state-owned enterprises, because in order for an organisation to be considered an “agency or instrumentality” of a foreign government, it must serve a “purely public purpose”. The United States Government, citing the legislative history of the FCPA, responded by arguing that “public purpose” is only one of the many factors in determining that an organisation is an “agency or instrumentality” of a foreign government, and that Congress expressly intended to include employees of state-owned enterprises in the definition of “foreign official”.”

As I highlighted in this prior post, in its briefing in the Nexus case the DOJ specifically urged the judge, on a number of occassions, not to consider the defendant’s substantive “foreign official” argument because they were premature. The following are snippets from the DOJ’s brief: (i) “the Court need not address any of these faulty arguments at this time:” (ii) “although styled as a motion to dismiss, Defendants’ submission is instead a premature request for a ruling on the sufficiency of the Government’s evidence before any of that evidence has been presented. These arguments, which are premature at best, will be moot after presentation of the Government’s case.” (iii) “because Defendants’ arguments turn entirely on issues of fact, they are premature.”

Continuing on this issue, the Report states:

“Although the Court ruled in favour of the United States, it did not issue a written opinion, and the defendants did not file an appeal. In addition, District Court opinions are not binding on higher courts or courts of other U.S. jurisdictions. The DOJ informed the evaluators that this means the Government interpretation could be disputed again. However, the DOJ believes the argument would fail again given the FCPA‘s legislative history, and because numerous cases have been brought by the DOJ and SEC in which the definition of “foreign official” has been broadly interpreted.” This last sentence has a footnote which states: “For instance Willbros Group involved the bribery of foreign judicial officials, Siemens AG involved payments to various persons from state-owned companies, and Diagnostic Products, involved payments to doctors of state-owned hospitals. The United States explains that in each of these cases, pursuant to Federal Rule of Criminal Procedure 11, a court had to determine whether all the elements of the offence have been proven including that the receiving individual was a foreign public official.”

On this issue, the Report concludes with this “commentary”

“The evaluators welcome positive legal developments concerning the application of the definition of ‘foreign official’ in the FCPA to members of the judiciary and employees of state-owned or controlled enterprises.”

In the “Recommendations” section, the Report notes that the “Working Group will follow up the issues below, as the case-law continues to develop, to examine: [...] whether amendments are required to the FCPA to supplement or clarify the existing language defining the elements of the offense of foreign bribery with regard to [...] (ii) the scope of the definition of a ‘foreign public official,’ in particular with respect to [...] the directors, officers, and employees of state-controlled enterprises or instrumentalties.”

NPAs / DPAs

The Report states:

“Due to their increasing importance in law enforcement actions by the DOJ, the evaluators sought information about the deterrent effect of DPAs and NPAs. The evaluators were also conscious that the SEC intends to also begin using DPAs and NPAs to encourage companies and individuals to co-operate with SEC investigators.”

“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. However, their actual deterrent effect has not been quantified; although the DOJ hears anecdotally from companies that their use has made FCPA compliance high priority.”

The Report states:

“DPAs are technically subject to judicial review and approval, but most judges do not appear to scrutinise DPAs. Unlike a DPA, an NPA does not involve the court.”

“Although DPAs and NPAs have existed since 1993, their use has grown dramatically in recent years. Since 2004, the annual average number of DPAs and NPAs entered into by the DOJ has grown from less than 5 to over 20 and a high of 38 in 2007. In FCPA cases, DPAs and NPAs were not used until 2004. Since then, they have been used in 30 out of 39 concluded criminal enforcement actions against companies.”

“Explanations for this phenomenon vary. The dramatic increase occurred shortly after the prosecution and collapse of the accounting firm Arthur Andersen which led to thousands of jobs lost. Avoiding such collateral consequences of prosecution is generally cited as why DPAs and NPAs are used. In FCPA cases, factors such as the protection of employees and shareholders also play a role, according to U.S authorities. The U.S. authorities also believe that companies often prefer to resolve matters through DPAs and NPAs in lieu of going to court and undergoing a potentially lengthy process and resulting press scrutiny. As well, the DPAs and NPAs in FCPA cases generally cite factors such as the defendants‘ co-operation and self-reporting of the crime as the reasons for the agreement. These agreements are thus used as an incentive for voluntary disclosure and co-operation. The U.S. authorities also use DPAs and NPAs to resolve cases quickly. Finally, FCPA cases usually involve obtaining evidence from foreign countries, which can be time-consuming and unsuccessful. DPAs and NPAs can be used to secure a company‘s co-operation and obtain overseas evidence where the MLA process is cumbersome or unavailable.”

“In January 2010, the SEC announced that it would begin using co-operation agreements, DPAs and NPAs in FCPA cases. A co-operation agreement is similar to a plea agreement in criminal proceedings. An individual or company must provide substantial assistance to an SEC investigation and co-operate fully and truthfully. In return, the SEC Enforcement Division agrees to make certain recommendations to the Commission, such as the individual or company should receive credit for co-operating. DPAs and NPAs require the company or individual to co-operate fully and truthfully, and to agree to comply with prohibitions and/or undertakings. DPAs also require the company or individual to admit to or not contest certain alleged facts. NPAs are available only in “limited and appropriate circumstances”. All three types of agreements require the company or individual to agree to toll the statute of limitations. The SEC has not yet used one of these agreements, given that the policy to use them was adopted only recently.”

In the “commentary section” the Report states:

“The evaluators note that PAs, DPAs, NPAs and the appointment of corporate monitors are an innovative method for resolving cases, and has evolved into an important feature of the U.S. criminal justice system, which has helped to enable a high level of enforcement activity. These measures have been used extensively in FCPA cases, especially in recent years. Guidance exists on the use of these agreements. Some private sector representatives would like more guidance but the U.S authorities disagree.”

“A useful compromise may be for the DOJ and the SEC, where appropriate, to make public in each case in which a DPA or NPA is used, more detailed reasons on the choice of a particular type of agreement, and the choice of the agreement’s terms and duration; and the basis for imposing monitors. The DOJ already does so for PAs through sentencing memoranda. Greater transparency on these issues would add accountability and enhance public confidence in the DOJ’s and SEC’s enforcement of the FCPA. Making public this information would also raise awareness of how these agreements enhance foreign bribery enforcement efforts.”

As to “recommendations” the Report states:

“Regarding the use of NPAs and DPAs, the Working Group recommends that the United States:

a. Make public any information about the impact of NPAs and DPAs on deterring the bribery of foreign public officials [..]; and

b. Where appropriate, make public in each case in which a DPA or NPA is used, more detailed reasons on the choice of a particular type of agreement; the choice of the agreement‘s terms and duration; and the basis for imposing monitors [...]“.

As noted in the OECD release:

“The United States will make an oral follow-up report on its actions to implement certain key recommendations of the Working Group after one year. The United States will further submit a written report to the Working Group within two years, which will be the basis of a publicly available evaluation by the Working Group of the United States’ implementation of the recommendations.”

Stay tuned for more.

The Other Leaf Drops

Thursday, August 5th, 2010

The other tobacco leaf dropped for Bobby Jay Elkin Jr. this week.

In April (see here), the SEC charged Elkin, and others, with civil FCPA anti-bribery violations for authorizing, directing and making improper payments to various Kyrgyzstan officials in connection with tobacco business in that country.

This week, Elkin pleaded guilty to a one count criminal information charging him with conspiracy to violate the FCPA. The allegations in the information largely mirror the SEC’s allegations in the April enforcement action. See here for the DOJ release, here for the criminal information, and here for the plea agreement.

Elkin was Country Manager for Dimon International Kyrgyzstan (DIK), a wholly-owned subsidiary of Dimon Inc. Dimon and Standard Commercial Corporation merged to form Alliance One International in 2005. Dimon, Standard Commercial and Alliance One are referred to as Companies A, B, and C in the criminal information and DIK is referred to as the Kyrgyz Subsidiary.

According to the information, Elkin conspired and agreed with Dimon, DIK, and others to pay and authorize payment of bribes to “officials of state-owned enterprises and other public officials in Kyrgyzstan in order to secure business for” Dimon and DIK.

The officials included “Kyrgyz Official A,” “the Akims” and the “Kyrgyz Tax Inspection Police.”

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

According to the information, an Akim is a head of Kyrgyz local government with “authority over the sale of tobacco by the growers” within a specific municipality or geographic area. The information charges that beginning in 1996 “it became necessary for [DIK and Elkin] to obtain approval from local Akims to purchase tobacco from the growers in each area. According to the information, several of the Akims demanded payment of a “commission” from Elkin “in order to secure the relevant Akim’s approval” for DIK to purchase tobacco from local growers. The information charges that from January 1996 to at least March 2004 Elkin and others personally delivered “numerous cash payments” on behalf of Dimon and DIK “to the Akims of five different municipalities totaling approximately $254,262.” According to the information, “the payments to the Akims were bribes, intended to influence the acts and decisions of the Akims and to secure [DIK's] continued ability to purchase tobacco from growers in the muncipalities controlled by the Akims.”

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

What about Alliance One?

The company stated in its recent annual report (here) that it has reached an agreement in principle with the DOJ and the SEC and that its estimated “probable loss” in an enforcement action will be $19.45 million in disgorgement, fines and penalties.

The tobacco industry is proving to be fertile ground for FCPA enforcement.

See here for what Universal Corporation, a Richmond, Virgina based tobacco producer, had to say about its discussions with the DOJ and SEC as to its previously disclosed FCPA matters.

*****

As portrayed in the DOJ’s criminal information and the SEC’s prior enforcement action, carrying on a tobacco business in Kyrgyzstan appears to have a wild-west component to it.

Extortionate payments, facilitating payments, and payments made to obtain or retain business. These are all points on the same continuum. The first two do not violate the FCPA, payments made to obtain or retain business do.

What does the FCPA’s “obtain or retain business” element mean?

The only circuit court decision on this key FCPA element is U.S. v. Kay, 359 F.3d 738, 740 (5th Cir. 2004). The Fifth Circuit, like the trial court, concluded that the FCPA’s “obtain or retain business” language was ambiguous and it thus analyzed the FCPA’s legislative history.

After reviewing the legislative history, the Fifth Circuit was convinced that Congress intended to prohibit a range of payments wider than only those that directly influence the acquisition or retention of government contracts. The Fifth Circuit held that making payments to a “foreign official” to lower taxes and custom duties in a foreign country can provide an unfair advantage to the payer over competitors and thereby assist the payer in obtaining and retaining business. The court concluded that there was “little difference” between these type of payments and traditional FCPA violations in which a company makes payments to a “foreign official” to influence or induce the official to award a government contract.

However, the Fifth court emphatically stated that not all such payments to a “foreign official” outside the context of directly securing a foreign government contract violate the FCPA; it merely held that such payments “could” violate the FCPA. The court recognized that “there are bound to be circumstances” in which a custom or tax reduction merely increases the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business.

The court specifically stated:

“…if the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”

Did the payments at issue in the Elkin enforcement action “merely increase the profitability of an existing profitable company.”?

Facilitating Payments or Bribes?

Tuesday, April 27th, 2010

In Greece, it’s the “little envelopes” that affect everyone from “hospital patients to fishmongers.” (see here for the Wall Street Journal story).

In India, it’s needing to “string up some wire and get licenses from the government” to start a “tiny business delivering telephone and Internet service” but “getting those things done without hassles require[s] a bribe.” (see here for the story from National Public Radio).

In July 2009, Nature’s Sunshine Products found out that it’s about payments to Brazilian customs agents to import certain unregistered products into Brazil (see here).

Also in July 2009, Helmerich & Payne found out that it’s about payments to various officials and representatives of the Argentine and Venezuelan customs services in connection with importation and exportation of goods and equipment (see here).

Numerous other examples abound.

Facilitating payments or bribes?

The FCPA has a specific exception for “facilitating or expediting payment[s] to a foreign official … the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official.”

Where a facilitating payment ends and where a payment to “obtain or retain business” begins is a difficult question.

U.S. v. Kay, 359 F.3d 738 (5th Cir. 2004) is commonly viewed as answering that question.

However, Kay merely holds that Congress intended for the FCPA to apply broadly to payments intended to assist the payor, directly or indirectly, in obtaining or retaining business and that payments to a “foreign official” to reduce custom and tax liabilities can, under appropriate circumstances, fall within the statute. The Kay court empathically stated that not all such payments to a “foreign official” outside the context of directly securing a foreign government contract violate the FCPA; it merely held that such payments “could” violate the FCPA. The key question, according to Kay, is whether the payments at issue were intended to lower the company’s costs of doing business enough to assist the company in obtaining or retaining business. The Kay court recognized that “there are bound to be circumstances” in which such attenuated payments merely increase the profitability of an existing profitable company and thus, presumably, do not assist the payer in obtaining or retaining business. In fact, the court specifically stated: “…if the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”

Post-Kay none of the above seems to matter much.

Because the Nature’s Sunshine Products and Helmerich & Payne enforcement actions (as well as numerous other similar enforcement actions) were not challenged, it remains an open question whether the payments at issue in these cases, if subjected to judicial scrutiny, would satisfy the “obtain or retain business” element as interpreted in Kay or would be excepted as facilitating payments.

Many of these payments would appear attenuated to any specific cause-and-effect business nexus or otherwise would appear to have merely increased the profitability of an existing profitable business and, per the Kay holding, would presumably not satisfy this key FCPA antibribery element.

While some find facilitating payments to be a corrupt payment under a different name, the fact remains that the FCPA passed by Congress and signed by the President contains an express exception for facilitating payments.

It is this statute that the enforcement agencies are obligated to enforce and this express exception would certainly appear relevant to the above-described actions. Because these enforcement actions were not challenged, this obviously relevant defense was not explored in these cases and these post-Kay cases stand as de facto FCPA case law, notwithstanding the fact that the alleged conduct in these cases may have been excused because of the FCPA’s facilitating payment exception.

It’s a complex world.

Congress recognized that when it passed the FCPA, including the facilitating payment exception.

The Kay court recognized that when concluding that not all such attenuated payments violate the FCPA.