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The Work Of A Monitor And Checking In On Siemens

Tuesday, January 22nd, 2013

The 2008 Foreign Corrupt Practices Act enforcement action against Siemens remains the largest in FCPA history in terms of resolution amount – $800 million ($450 million DOJ, $350 million SEC). The DOJ stated in this release that “for much of its operations across the globe, bribery was nothing less than standard operating procedure for Siemens.” The SEC stated in the release that the “pattern of bribery by Siemens was unprecedented in scale and geographic reach” and the “corruption involved more than $1.4 billion in bribes to government officials in Asia, Africa, Europe, the Middle East and the Americas.”

Not surprisingly, given the nature and extent of the conduct at issue, as part of its plea agreement (here), Siemens was required to engage a corporate monitor for a three year period.

Time passes quickly, and on December 18, 2012, the DOJ filed this ”Notice Regarding Corporate Monitorship” notifying the court that Siemens has “satisfied its obligations under the plea agreement with respect to the corporate compliance monitor engaged by the company.”

This post details the monitor’s work and then highlights the difficulties of anti-corruption compliance in a large, multinational company.

The Work of a Monitor

The recent DOJ filing details the work of the monitor and states as follows.

“In accordance with the plea agreement, the Monitor conducted an initial review and three subsequent reviews of Siemens’s anti-corruption compliance program, and documented the Monitor’s findings and recommendations in four annual reports dated October 5, 2009, October 13, 2010, October 7, 2011, and October 12, 2012. Over the course of those four years, the Monitor conducted on-site or remote reviews of Siemens’ activities in 20 countries; conducted limited or issue-specific reviews in or relating to an additional 19 countries; reviewed over 51,000 documents totaling more than 973,000 pages in 11 languages; conducted interviews of or meetings with over 2,300 Siemens employees; observed over 180 regularly scheduled company events; and spent the equivalent of over 3,000 auditor days conducting financial studies and testing.

During that time, the Monitor made a total of 152 recommendations in over a dozen topic areas, such as third-party risks, financial controls, and compliance policies and training that, pursuant to the plea agreement, were “reasonably designed to improve the effectiveness of Siemens’ program for ensuring compliance with the anti-corruption laws.” Without objection, Siemens AG adopted and implemented all 152 recommendations. Thereafter, the Monitor confirmed that all of the recommendations had been fully implemented.

Those recommendations and the other remedial measures and internal control improvements undertaken by Siemens have included enhanced policies and a revised code of conduct directed at prohibiting corruption; additional and more frequent training for employees, agents, and business partners on the enhanced anti-corruption policies and procedures; additional staffing and resources dedicated to coordinating and overseeing the implementation and enforcement of the anti-corruption program; improved hotline for reporting potential violations of the code of conduct; improved accounting system controls designed to ensure the maintenance of accurate books and records; and improved due diligence and review processes for agreements with agents and business partners, including an express clause related to anti-corruption.

Pursuant to the terms of the plea agreement, the Monitor has met with representatives from the government and the SEC on an annual basis to review the findings and recommendations in the Monitor’s annual reports. In accordance with the terms of the plea agreement, the Monitor certified on October 13, 2010, October 7, 2011, and October 12, 2012, that “Siemens’ compliance program is reasonably designed and implemented to detect and prevent violations within Siemens of anti-corruption laws . . . .”

Based on the monitor’s work, the filing then states as follows.

“[T]he government concludes that Siemens AG has satisfied its obligations under the plea agreement with respect to the corporate compliance monitorship. The government has conferred with the staff of the SEC and the staff of the SEC concludes that Siemens AG has also complied with the terms of the Final Judgment in the civil action with respect to the corporate compliance monitorship.”

As highlighted in my article “Revisiting an FCPA Compliance Defense” (here), even before the Siemens monitor began its work, Siemens had – in the words of the DOJ – “already implemented substantial compliance changes” and was setting “a high standard for multi-nationals to follow.” According to the DOJ, Siemens’ total external costs for this pre-monitor remediation exceeded $150 million. Although Siemens has not, to my knowledge, disclosed its costs associated with its post-enforcement action monitor, one can safely assume that the monitor costs easily exceeded this $150 million figure and perhaps reached as high as the $800 million amount announced on enforcement action day.

I noted in my Compliance Defense article that “there is likely no other company in the world today … that has devoted as many corporate resources towards compliance” and that “likewise, there is likely no other company in the world today .. that faces as many negative consequences should its compliance efforts fail.”

Difficulties of Anti-Corruption Compliance

The discussion of Siemens in my article, and here, demonstrates that not even a company that has “set a high standard for multi-national companies to follow” (again, in the words of the DOJ) can insulate itself from FCPA and related exposure.

This fact (and a fact I submit makes a compelling case for an FCPA compliance defense as outlined in my article) is clear from a review of Siemens most recent annual report (here), filed with the SEC on Nov. 28, 2012. The filing contains a separate section titled “public corruption proceedings.” To be sure, the section lists various proceedings that pre-date 2008 and that may have been indicative of the corporate culture at Siemens that gave rise to the 2008 FCPA enforcement action in the first place. However, certain proceedings in listed in the filing are post 2008, including the following.

“As previously reported, in May 2011 Siemens AG voluntarily reported a case of attempted public corruption in connection with a project in Kuwait in calendar 2010 to the U.S. Department of Justice, the SEC, and the Munich public prosecutor. The Munich public prosecutor discontinued the investigations, which related to certain former employees, but imposed conditions on them. Siemens is cooperating with the U.S. authorities in their ongoing investigations.”

“As previously reported, in July 2011 the Munich public prosecutor notified Siemens AG of an investigation against an employee in connection with payments to a supplier related to the oil and gas business in Central Asia from calendar 2000 to 2009. Siemens is cooperating with the public prosecutor.”

Add to this list a Dodd-Frank whistleblower retaliation complaint (here) recently filed against Siemens in federal court by Meng-Lin Liu, a former compliance officer for Siemens AG in China. As highlighted by this Reuters report, Liu alleges that Siemens fired him after he tried to expose a kickback scheme involving medical equipment sales to hospitals in China.

In pertinent part, the complaint alleges as follows.

“Shortly after he started at [Siemens China Ltd. (SLC)] in March 2008, Liu began encountering and confronting a culture within Siemens’ Chinese healthcare business of evading and circumventing the anti-corruption due diligence systems and controls required by the FCPA and Siemens’ 2008 Plea Agreement.”

” … Liu consistently objected to and tried to remedy systemic evasion of Siemens’ due diligence systems in circumstances where there were major ‘red flags’ indicating extremely high risks of corruption. Ultimately, Liu uncovered incontrovertible evidence that Siemens was submitting inflated bids for many of the multi-million-dollar medical diagnostic and scanning equipment sales it made to public hospitals in China, and then selling the equipment at substantially lower prices to intermediaries designated by the hospital’s procurement officials. In other words, Liu discovered that Siemens itself was complicit in a scheme whereby the end-user hospitals paid amounts to third-party intermediaries that were between 20% and 130% higher than the price Siemens received for the equipment, which was resold by these intermediaries to the end-user hospital at the original Siemens’ inflated bid price. This had all the hallmarks of a classic bribery or ‘kickback’ scheme and there was no legitimate explanation for the huge price differential that existed between prices at which Siemens sold the equipment and the prices paid by the end-user hospitals.”

“Within a week of presenting this evidence to SLC’s CFO for Healthcare, Liu was summarily removed from his position as Compliance Officer, instructed not to report to the office for the remaining four months of his employment contract and given ‘early notice’ that his contract would not be renewed upon its expiration. Four months later his employment was terminated.”

Friday Roundup

Friday, December 21st, 2012

Better late than never, Judge Leon pulls a Judge Rakoff, Edmonds sentenced, it’s official, whistleblower statistics, it ought to stop marketing, China related issues, ICE melted quickly, and a U.K. enforcement action. It’s all here in the Friday roundup.

The Foreign Corrupt Practices Act Under The Microscope

Academic publishing is seldom quick. Yet before the calendar flips into another year, I am pleased to share my article concerning 2011 FCPA enforcement. The abstract of ”The Foreign Corrupt Practices Act Under The Microscope” (see here to download) recently published in the University of Pennsylvania Journal of Business Law is as follows. Information in the article is current as of January 16, 2012.

For most of the Foreign Corrupt Practices Act’s history, key decisions concerning its scope and enforcement were made behind closed doors around conference room tables in Washington, D.C. The FCPA took on a life of its own and, in many instances, the statute came to mean whatever the DOJ or SEC could get putative corporate FCPA defendants (mindful of the consequences of actual prosecuted charges) to agree to behind those closed doors. However, as the enforcement agencies continued to push the envelope on enforcement theories and practices, and as the DOJ brought more individual FCPA enforcement actions, including through manufactured sting operations, business entities and individuals alike began to openly fight back. While many FCPA enforcement decisions and procedures remain opaque, 2011 witnessed the most intense year of public scrutiny in the FCPA’s history. This Article (i) provides an overview of 2011 FCPA enforcement and discusses certain problematic enforcement trends, and (ii) highlights how in 2011 the FCPA was subjected to the most meaningful public scrutiny in its history. FCPA enforcement trends and scrutiny demonstrate that as the FCPA nears its thirty-fifth year, basic legal and policy questions remain as to the purpose, scope, and effectiveness of the FCPA.

Start your collection of FCPA Year in Reviews. For my 2011 (short version), see here. For 2010, see here (short version), here (long version). For 2009, see here (long version).

Judge Leon Pulls a Judge Rakoff

My post concerning the SEC’s March 2011 enforcement action against IBM was titled “Questions Abound in IBM Enforcement Action.” (See here). Among the issues I discussed were the following. That in December 2000, IBM resolved an FCPA enforcement action and consented, as part of the settlement, to the entry of an Order that requires IBM to cease and desist from committing or causing any future violation of [the FCPA's books and records provisions]. I noted that because the March 2011 enforcement action alleged FCPA books and records charges, that IBM was thus in clear violation of the 2000 court order.

The case was assigned to Judge Richard Leon (of Africa Sting fame) and lingered for a long time. This Wall Street Journal Corruption Currents post and this Bloomberg article report that Judge Leon has refused to approve the settlement.

As stated by Bloomberg – “The heart of the dispute is that Leon, who has had the case under review for 22 months, wants reporting on a broader range of possible wrongdoing than the company is willing to turn over. Leon, who spoke loudly and angrily, asked why the regulator would agree to limit such requirements for a company with a history of books-and-records violations. [...] “I guess you want that $10 million judgment on your list of achievements this year,” Leon told [the SEC lawyer]. “Well, it’s not going to happen.” He scheduled a hearing for Feb. 4.”

As stated by Wall Street Journal Corruption Current – “Leon also questioned broader SEC settlement policies and warned that he was among “a growing number of district judges who are increasingly concerned” by those policies.”

In not ”rubber stamping” the SEC – IBM settlement, Judge Leon pulled a Judge Rakoff. Judge Rakoff of the S.D. of N.Y. has been a frequent focus on this site – see here, here, here and here. See also, the discussion of Judge Rakoff in my 2010 article “The Facade of FCPA Enforcement.”

Edmonds Sentence

This past June, David Edmonds, a defendant in the long-running “Carson” enforcement action involving former employees of Control Components Inc., agreed to plead guilty on the eve of trial to substantially reduced charges. (See here for the prior post). Earlier this week, Judge James Selna sentenced Edmonds to four months in prison and four months of home confinement. (See here for Judge Selna’s sentencing memo). As noted in the DOJ’s sentencing memo (here), the DOJ sought a 14 month prison sentence.

Other defendants previously sentenced in the case are Stuart Carson (4 months in prison followed by 8 months of home detention), Hong Carson (3 years probation to include 6 months of home detention) and Paul Cosgrove (13 months home detention).

It’s Official

Imagine a foreign country in which the president is actively seeking and accepting corporate money to fund inaugural festivities. All sorts of red flags right?

But wait, this describes the United States and President Obama’s upcoming inauguration. As detailed in this prior post, President Obama’s fundraising advisers “have urged the White House to accept corporate donations for his January 2013 inaugural celebration rather than rely exclusively on weary donors who underwrote his $1 billion re-election effort.”

It’s now official. As noted by this recent New York Times article “President Obama’s finance team is offering corporations and other institutions that contribute $1 million exclusive access to an array of inaugural festivities.” As noted in the article, Obama’s finance team is offering four different packages “with differing levels of access depending on the level of contribution.”

Our FCPA enforcement agencies are bringing enforcement actions against companies for conduct that includes providing $600 bottles of wine, Cartier watches, cameras, kitchen appliances, business suits, and executive education classes to individuals employed by foreign companies that are allegedly state-owned or state-controlled. (These are all allegations found in recent FCPA enforcement actions).

But remember, as Assistant Attorney General Lanny Breuer recently declared (see here), “we in the United States are in a unique position to spread the gospel of anti-corruption.”

Whistleblower Statistics

The Dodd-Frank Act enacted in July 2010 contained whistleblower provisions applicable to all securities law violations including the Foreign Corrupt Practices Act. In this prior post from July 2010, I predicted that the new whistleblower provisions would have a negligible impact on FCPA enforcement. As noted in this prior post, my prediction was an outlier (so it seemed) compared to the flurry of law firm client alerts that predicted that the whistleblower provisions would have a significant impact on FCPA enforcement.

So far, there have not been any whistleblower awards in connection with FCPA enforcement actions. Given that enforcement actions (from point of first disclosure to resolution) typically take between 2-4 years, it still may be too early to effectively analyze the impact of the whistleblower provisions on FCPA enforcement.

Whatever your view, I previously noted that the best part of the new whistleblower provisions were that its impact on FCPA enforcement can be monitored and analyzed because the SEC is required to submit annual reports to Congress. Last month, the SEC released (here) its annual report for FY2012.

Of the 3,001 whisteblower tips received by the SEC in FY2012, 3.8% (115) related to the FCPA. As noted in this similar post from last year, in FY2011 (a partial reporting year) 3.9% of the 334 tips received by the SEC related to the FCPA.

It Ought to Stop Marketing

In this previous post titled “It Ought to Stop” I focused on the FCPA conference industry and how conference firms drive attendance to their events by touting the public servants who will speak at the event.

Here is how conference firm C5 touts its upcoming conference in a press release (here).

Ask the U.S. DOJ and U.S. SEC directly how your company can remain compliant

Hear the latest on the newly released FCPA guidance. Along with the U.S. Securities & Exchange Commission’s, Charles E. Cain, the Deputy Chief of the FCPA Unit, Enforcement Division, we will have Matthew S. Queler, from the Criminal Division at the U.S. Department of Justice, presenting comprehensive, insightful and practical details of the U.S. government’s interpretation of the guidance, and highlight recent examples designed to help prevent future violations. Their session at 14:00 on Day 1, will help you navigate the ever evolving markets and recognize the current enforcement trends; giving you the tools to reanalyse risk profiles and minimize areas of exposure. Finally, to top off the hour you will be given an exclusive opportunity to have your FCPA questions answered. The only way to obtain answers directly from the U.S. DOJ and U.S. SEC is to register for this forum!

The event, depending when you register and which package you select, costs between €4341 – €1795.

It ought to stop.

China Related Issues

An occassional topic of discussion on this site is Chinese state-owned enterprises (SOEs) and how such companies are frequently doing business outside its borders, including here in the U.S. (See here, here, and here for prior posts).

Wall Street Journal Columnist Dennis Berman “hit the nail on the head” in his recent column when he noted that one of “the most intriguing business stories of the past month has been taking place in San Francisco, where a group of U.S. developers is planning the biggest real-estate expansion there since the 1906 earthquake. The group—which includes Lennar Corp., Ross Perot Jr. and others —isn’t getting financing from an American bank or pension fund. No, the money, some $1.7 billion of it, is coming from the China Development Bank, a policy arm of the Chinese state. As Berman further notes, a financing contingency is that China Railway Construction Corp. – a state-owned infrastructure builder with roots in the People’s Liberation Army—take part in the projects, which will develop up to 20,000 new homes.

Another occasional topic of discussion on this site is how Chinese companies are listing shares on U.S. exchanges and thus becoming “issuers” for purposes of the FCPA. (See here for a prior post). A core FCPA enforcement action of a Chinese issues has never occurred, but I predict it will some day – diplomatic and foreign policy issues aside. Only now, the universe of potential targets is shrinking. As noted in this recent Wall Street Journal article, several Chinese companies have delisted from U.S. exchanges. The article provides the following information. “At the peak, at year-end 2010, 167 Chinese companies were listed on Nasdaq and 99 on the NYSE. That compares with 84 China-based companies on NYSE and 129 on Nasdaq as of Nov. 30, 2012, according to the exchanges.” For more, see this recent article from the New York Times.

ICE Melted Quickly

This recent post highlighted the cert petition of Instituto Constarricense de Electricidad of Costa Rica (“ICE”) to the Supreme Court related to victim issues in connection with the December 2010 Alcatel-Lucent FCPA enforcement action. After several unsuccessful 11th Circuit appeals, ICE petitioned the Supreme Court to hears it case (see here). The question presented for review is as follows. “Whether a crime victim who is denied rights conferred by the federal Crime Victims’ Rights Act has a right to directly appeal the denial of those rights.”

The ice melted quickly as recently the Supreme Court denied ICE’s petition.

U.K. Enforcement Action

Earlier this week, the U.K. Serious Fraud Office announced (here) charges against former employees of Swift Group (an oil and gas services provider) following “a two-year investigation into allegations of corruption in relation to the tax affairs of Swift Technical Energy Solutions Ltd, a Nigerian subsidiary of the Swift Group of companies.” According to the SFO release, ”the value of the bribes alleged to have been paid is approximately£180,000.”

The SFO release notes that Paul Jacobs (the former Chief Financial Officer of Swift), Bharat Sodha (the former Tax Manager of Swift), Nidhi Vyas (the former Financial Controller of Swift), and Trevor Bruce (the former Area Director for Nigeria of Swift) were charged in relation to “bribes to tax officials to avoid, reduce or delay paying tax on behalf of workers placed by Swift. The charges relate to payments said to have been made to agents of the Rivers State Board of Internal Revenue and the Lagos State Board of Internal Revenue, both in Nigeria. The payments were made in 2008 and 2009.”

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A happy holiday season to all.

Decision In GE Whistleblower Case Creates An Odd Dynamic

Thursday, July 5th, 2012

As noted in this prior post, in February Khaled Asadi (previously employed by G.E. Energy (USA) LLC (“GE Energy”) as its Country Executive for Iraq, located in Amman, Jordan) filed a civil complaint (here) in the Southern District of Texas against G.E. Energy. GE Energy is a wholly-owned subsidiary of General Electric Company (“GE”).

The complaint alleged that G.E. harassed and pressured Asadi to vacate his position, and ultimately terminated him after he informed his supervisor and G.E.’s Ombudsperson “regarding potential violations of the Foreign Corrupt Practices Act committed by G.E. during negotiations for a lucrative, multi-year deal with the Iraqi Ministry of Electricity.” The substance of Asadi’s complaint was that “on or about June of 2010 Mr. Asadi was alerted by a source in the Iraqi Government that GE had hired a woman closely associated with the Senior Deputy Minister of Electricity (Iraq) to curry favor with the Ministry while in negotiation for a Sole Source Joint Venture Contract with the Ministry of Electricity. (According to the complaint, the Joint Venture Agreement between GE and the Ministry of Electricity was signed in Baghdad on December 30, 2010 and the exclusive materials and repairs provision was estimated to be valued at $250,000,000 for the seven year agreement.)

Asaid asserted a claim for whistleblower retaliation under Dodd-Frank which created a private cause of action for whistleblowers subject to retaliatory discharge and permits relief including reinstatement and back pay for a whistleblower who prevails in federal court.

Recently, U.S. District Court Judge Nancy Atlas granted GE’s motion to dismiss Asadi’s amended complaint (see here for the memorandum and order). In short, Judge Atlas noted that the definition of “whistleblower” under Dodd-Frank is an individual who provides information “to the SEC” and that because Asadi did not claim to report GE’s alleged FCPA violations to the SEC, but rather to his supervisor and to GE’s ombudsperson, Asadi ”does not fit within Dodd-Frank’s definition of a whistleblower.”

As to Asadi’s claim that he could still qualify as a whistleblower ”even if he did not make a report directly to the SEC … because his disclosures were ‘required’ or ‘protected’ under SOX and the FCPA,” Judge Atlas did not reach the issue of whether he could qualify as a whistleblower on these grounds because his “claims fails on other grounds.” Specifically, Judge Atlas found, relying on the Supreme Court’s 2010 decision in Morrison v. National Australia Bank Ltd., that “the language of the Dodd-Frank Anti-Retaliation Provision is silent regarding whether it applies extraterritorially” and that therefore there is a “presumption that the Provision does not govern conduct outside the United States.” Judge Atlas then concluded that Dodd-Frank’s Anti-Retaliation Provision does not extend to or protect Asadi’s extraterritorial whistleblowing activity.

In dicta, Judge Atlas noted that Asadi argued that because the FCPA ”is clearly intended to apply extraterritorially, the [Anti-Retaliation] Provision also must extraterritorially.” However, Judge Atlas stated that “because the facts alleged by Asadi do not fit within the Anti-Retailation Provision, the Court need not, and does not, address Asadi’s argument that the FCPA extends the territorial reach of the Provision.” Nevertheless, Judge Atlas did note that “although Asadi has alleged that his internal disclosures at GE pertained to bribery of foreign officials, he has cited the Court to no provision of the FCPA that ‘protects’ or ‘requires’ his internal report of the alleged bribery.”

For more on Judge Atlas’s decision, see here from Reuters.

Although not a case of precedent, if the reasoning of Asadi is followed by other courts, the odd result could be that Dodd-Frank’s Anti-Retailiation Provisions do not apply extraterritorially, even though foreign nationals can potentially be awarded whistleblower bounties under the law. I guess this is what can happen when Congress passes provisions which apply generically to any securities law violations without thinking through, on a micro level, the intersection of such provisions.

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The Asadi decision is believed to be just the second judicial decision concerning the intersection between D0dd-Frank’s whistleblower provisions and the FCPA. See this prior post for the decision in Nollner v. Southern Baptist Convention, Inc. (M.D. Tenn., April 3, 2012).

A Focus On Australia

Tuesday, June 26th, 2012

Today’s post is from Robert Wyld (Partner, Johnson Winter & Slattery – here). Wyld is the Australia Expert for FCPA Professor. Jasmine Forde (Senior Associate, Johnson Winter & Slattery) also contributed to this post.

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A FOCUS ON AUSTRALIA

For many years, bribery and corruption in Australia has taken a back seat to profitable enterprise. It was all considered a bit too foreign and something Australian companies simply did not do. All of a sudden, that changed in 2006 when the Australian Wheat Board (AWB) wheat sales to Iraq, corrupting the UN Oil-for-Food program, blazed across Australia’s public awareness. Since then, the media has treated us to a never-ending procession of allegations and sagas involving companies of the stature of Rio Tinto (with the corruption prosecution and imprisonment of former Rio Tinto executive Stern Hu in China), BHP and its now abandoned bauxite mining ventures in Cambodia, Leighton Holdings in the Middle East and as a standout, subsidiaries of Australia’s central bank, the Reserve Bank of Australia, engaged in potentially illegal conduct to secure lucrative polymer banknote printing contracts.

So what has been happening over the last few years? In short, a much more focused awareness of the risks that foreign corruption brings to corporations and individual liability and a legislative push to increase investigative powers and penalties to deter errant behaviour.

Legislative Developments Post AWB Wheat Saga in 2005

In 2007, the Australian government tightened up the weaknesses in Australian foreign corruption laws highlighted by the Cole Inquiry and AWB’s conduct. (The Cole Inquiry was a Royal Commission headed by a retired appellate Judge, The Hon Terence RH Cole AO, RFD, QC, who investigated AWB’s conduct and who formed the opinion that the company and various senior executives may have committed criminal and/or civil offences in connection with their wheat sales to Iraq under the UN Oil-For-Food Program.) Those involved:

ensuring the foreign law defence to bribery was reflected in a written foreign law; and
criminalising conduct in contravention of United Nations’ sanctions.

Between 2007 and 2010, the Australian Government established a Taskforce to investigate whether any of the identified AWB executives should be prosecuted. The Australian Federal Police (AFP), as the Australian federal investigative policy agency responsible for investigating contraventions of Australian laws, ultimately abandoned any criminal prosecution due to insufficient evidence to warrant a criminal case. The Australian Securities and Investments Commission (ASIC), the Australian corporate regulator, commenced civil penalty proceedings against 6 former AWB directors and officers alleging breach by those persons of their common law and/or statutory duties in connection with the AWB wheat sales and the payment of monies to Iraq and to third parties. The individuals are defending the cases, although in June 2012, both the former AWB Managing Director Andrew Lindberg and the CFO, Paul Ingolby, agreed to a settlement with ASIC and their penalties will be imposed by the Victorian Supreme Court in the future.

In 2010, primarily as a result of increasing focus on Australia’s inadequate penalties by the OECD and Transparency International, the Australian Government revised the applicable penalties for foreign corrupt offences. Those penalties were now set, for conduct post February 2010, as follows:

for an individual – imprisonment for up to 10 years, a fine of up to 10,000 penalty units (one penalty unit being AU$110, with the maximum fine, AU$1,100,000) or both; and
for a corporation – a fine being up to the greatest of 100,000 penalty units (or AU$11,000,000), 3 times the value of the benefit obtained directly or indirectly from the conduct or if the benefit cannot be determined, 10% of the corporation’s annual turnover during the period of 12 months ending at the end of the month in which the offending conduct occurred.

Section 70.2(6) of the Criminal Code defines “annual turnover” to be the sum of the value of all supplies that the corporation or any related corporation has made or are likely to make during the 12 month period subject to limited statutory exceptions.

These penalties are similar to the penalty regime which applies to the criminalisation of Australia’s cartel or anti-trust offences. It remains to be seen how they will be applied to a foreign bribery prosecution by an Australian Court.

In 2011, the Australian Government published a Consultation Paper reviewing a number of aspects of Australia’s foreign bribery laws. In particular, the Paper asked:

whether facilitation payments should remain as a defence to foreign bribery; and
whether a particular foreign official had to be identified in respect of which the alleged bribe was either paid, offered or promised to be paid.

It is unclear which way the Government will go, but the authors understand that the Government has received conflicting views on both abolishing and retaining the defence.

In April 2012, the Crimes Legislation Amendment (Powers and Offences) Act 2012 amended the Australian Crime Commission Act (ACC Act) to enable Australian statutory and secretive crime agency, the Australian Crime Commission (ACC) to share information with corporations for a ‘permissible purpose’. Features of this new regime include the following:

section 59AB of the ACC Act enables the CEO of the ACC to disclose information to a prescribed body corporate, but only in circumstances where it would not prejudice the safety, or the fair trial, of a person who has been charged with an offence;
the ACC can impose conditions on the body corporate to ensure that the information is not used, and further disclosed, in a way that might prejudice the reputation of a person; and
the overriding purpose of the amendments is to facilitate cooperation between the private sector and the ACC to enable the ACC to combat serious and organised crime, which includes foreign bribery and corruption.

Aside from the privacy issues in connection with the use and disclosure of information, there are a number of practical challenges that arise, and present obvious risks, for a corporation in circumstances where one of its employees is the subject of an ACC investigation and subsequent disclosure, which include:

whether the information should be disclosed in the first place just to the corporation CEO, Chairman, or a wider group including General Counsel and, if applicable, any Head of Security;
if a person directly or indirectly makes a record of the information or discloses it to another person (other than for a specified purpose), that person has committed an offence with a potential penalty of up to 12 months’ imprisonment;
care must be taken to manage the storage of material constituting the disclosed information;
whether and if so, how the disclosed information interacts with a corporation’s continuous disclosure obligations to the market; and
whether the corporation should conduct its own internal investigation and if so, the impact that may have on any external official (or covert) investigation.

It remains to be seen how the ACC will handle this new power. It is hoped that the ACC will adopt a sensible and flexible approach, ensuring that any disclosure is undertaken co-operatively with a relevant corporation and the corporation is informed of whether any internal investigation may or may not impact on an official investigation.

Prosecutions

Since Australia criminalised foreign bribery in December 1999, until July 2011, there had been but a few investigations, no prosecutions and no convictions.

In July 2011, the Commonwealth Director of Public Prosecutions (CDPP) laid the first criminal charges against Securency International Pty Ltd and Note Printing Australia Pty Ltd, two subsidiaries of the Reserve Bank of Australia and various individuals, alleged to be involved in corrupt conduct to secure valuable polymer banknote printing contracts. Allegations suggested the Central Bank subsidiaries used foreign agents or intermediaries in various countries to pay or offer to pay bribes to foreign officials to secure the contracts to replace national paper currency with polymer (plastic) banknotes. These proceedings are continuing and are subject to suppression orders by the Courts in Victoria hearing the charges.

The AFP has a number of current referrals involving potential foreign bribing. Whether prosecutions occur in the future remains to be seen.

Current issues under review in Australia

The current anti-bribery regime in Australia still has many practical difficulties which are of concern, particularly in terms of advising and educating corporations on compliance with local and international laws.

The main issues of concern are:

1 Regulatory Body

The AFP investigates foreign bribery. Any prosecution is conducted by the (CDPP).

There is no one identified organisation or agency which can be approached if a corporation wishes to self-report a potential offence. While a potential offence can be reported to the AFP, the present structure simply requires the AFP to investigate and then determine if a brief should be presented to the CDPP. It is only the CDPP who is authorised to offer any inducement to a potential defendant to cooperate.

A regulator modelled on the US DOJ or UK SFO would be better positioned to educate, enforce, facilitate and provide guidance to corporations. Presently, that does not exist in Australia.

2 Facilitation Payments

This is regarded as one of the biggest risk areas. There is confusion in understanding any real distinction between a facilitation payment and a bribe, particularly in relation to hospitality, travel and education allowances. There is very little guidance regarding when these are acceptable commercial relationship activities and when they are considered to be a bribe. This is exacerbated by virtue of the fact that there are differences in the foreign bribery laws around the world where the US permit facilitation payments and offer official “guidance opinions’ while in the UK, facilitation payments do not exist.

The authors consider that facilitation payments should be abolished but until that time, the best advice is to look to the UK Bribery Act as the ‘gold standard’ and as far as possible, ban them from within your organisation.

3 Awareness of Foreign Bribery and Training

Awareness of the foreign bribery regimes outside of Australian Stock Exchange listed corporations is patchy at best. There is a great need for corporations to continually educate their employees and third party service providers so that they can put in place robust procedure and processes. Whilst some global companies now insist on anti-corruption clauses being included in contractual arrangements, it is by no means standard practice.

One need only look to the features of the recent investigation into Morgan Stanley in the US and the non-prosecution of the company in light of the rogue conduct of Mr Petersen in Chinese real estate speculation, to understand what a corporation must be able to demonstrate if it is to satisfy a regulator that it did all it could, in the circumstances, to prevent foreign bribery.

4 Lack of Prosecutions

To date, there has been no judicial enforcement in Australia which has had the effect of sending a message to the market that non-compliance is not an option.

The first prosecution under the legislation has taken 12 years and is still ongoing. The lack of prosecutions in Australia is not likely to be because Australian companies are compliant; rather, the better explanation appears to be that corporations:

(a) are simply not recording facilitation payments in accordance with the law (to do so would essentially be a self- admission with no protection and/or may expose relevant individuals to prosecution if the country they are dealing with does not allow for such payments);

(b) are failing to self-report any potential foreign bribery;

(c) are prepared to take a risk against prosecution, given the inherent complexity and cost associated with foreign bribery investigations; and

(d) accept that such controversial payments (either as a bribe or a facilitation payment) are simply the reality of doing business in some ‘risky’ jurisdictions.

5 Whistleblower Protection

Arguably, it is not considered culturally acceptable in Australia to ‘dob’ in a friend or colleague. However, recent research pioneered by Professor AJ Brown from Griffith University Queensland in conjunction with the University of Melbourne, suggests that over 80% of his sample considered it was more important to support whistleblowers for revealing serious wrongdoing than to punish them. The overall findings, released on 6 June 2012 (see www.newsroommelbourne.edu), suggest Australia is not a country where hostility to whistle blowers is the norm.

Currently, there is no incentive to be a whistleblower; monetary or otherwise and indeed, there can be severe, even criminal sanctions applied to certain individuals (Commonwealth employees) who blow the whistle. There is a need for legislative reform around whistleblower protection as the Australian Public Interest Disclosure Bill presently being considered by the Australian Parliament offers limited protection.

Case Law Of Note

Tuesday, April 17th, 2012

Last week, the DOJ got dinged on both coasts in criminal appeals. Although neither case involved the FCPA, the reasoning of the courts touch upon issues relevant to the recent “foreign official” challenges. For more on those challenges, the DOJ and defense positions, and the trial court rulings, see here, here, here and here (as well as the embedded links in those posts).

In addition to discussing the two cases with similarities to “foreign official” challenges, this post also discusses a decision from the U.S. District Court in the Middle District of Tennessee that is believed to be the first decision concerning the intersection of D0dd-Frank’s whistleblower provisions and the FCPA.

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In U.S. v. David Nosal, the Ninth Circuit, sitting en banc, affirmed a lower court dismissal of criminal charges under the Computer Fraud and Abuse Act (“CFAA”) filed against David Nosal who used to work for Korn/Ferry, an executive search firm. (See here for the decision). The issue before the court was how broadly to read the CFAA, particularly its provisions which defines “exceeds authorized access” as “to access a computer with authorization and to use such access to obtain or alter information in the computer that the accesser is not entitled so to obtain or alter.”

Without getting into the specific facts of the case here, the court stated that “the government’s interpretation would transform the CFAA from an anti-hacking statute into an expansive misappropriation statute” and that “if Congress meant to expand the scope of criminal liability to everyone who uses a computer in violation of computer use restrictions … we would expect it to use language better suited to that purpose.” In a footnote, the court noted that Congress did just that in other federal statutes where the key terms were broader.

Thereafter, the court stated as follows. “The government’s construction of the statute would expand its scope far beyond computer hacking to criminalize any unauthorized use of information obtained from a computer. This would make criminals of large groups of people who would have little reason to suspect they are committing a federal crime. While ignorance of the law is no excuse, we can properly be skeptical as to whether Congress, in 1984, meant to criminalize conduct beyond that which is inherently wrongful, such as breaking into a computer.”

The DOJ urged the court to consider the CFAA’s legislative history and pointed to an earlier version of the statute that was more favorable to its position. However, the court stated that “that language was removed and replaced by the current phrase and definition” (emphasis in original).

The court then stated as follows. “The government assures us that, whatever the scope of the CFAA, it won’t prosecute minor violations. But we shouldn’t have to live at the mercy of our local prosecutor. [...] And it’s not clear we can trust the government when a tempting target comes along.” (citations omitted, emphasis in original).

In conclusion, the court stated as follows. “We need not decide today whether Congress could base criminal liability on violations of a company or website’s computer use restrictions. Instead, we hold that the phrase ‘exceeds authorized access’ in the CFAA does not extend to violations of use restrictions. If Congress wants to incorporate misappropriation liability into the CFAA, it must speak more clearly. The rule of lenity requires penal laws to construed strictly. When choice has to be made between two readings of what conduct Congress has made a crime, it is appropriate, before we choose the harsher alternative, to require that Congress should have spoken in language that is clear and definite.” (citations omitted, emphasis in original).

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In U.S. v. Sergey Aleynikov, the Second Circuit reversed the criminal conviction of Sergey Aleynikov, a former computer programmer employed by Goldman Sach who was found guilty by a jury of violating the National Stolen Property Act (“NSPA”) and the Economic Espionage Act of 1996 (“EEA”). As noted in the opinion (here), Aleynikov argued on appeal that his conduct did not constitute an offense under either statute – namely that the source code at issue was not a “stolen good” within the meaning of the NSPA and that the source code was not “related to or included in a product that is produced for or placed in interstate or foreign commerce” within the meaning of the EEA.

Without getting in to the specific facts of the case here, the Second Circuit began its discussion by noting that “Aleynikov’s challenge requires us to determine the scope of the two federal statutes” and that “federal crimes are solely creatures of statute.” The court stated that “due respect for the prerogatives of Congress in defining federal crimes prompts restraint in this area, where we typically find a narrow interpretation appropriate” and held that Aleynikov’s conduct did not constitute an offense under either the NSPA or the EEA.

As to the EEA, and of note, the Court looked to the statute’s legislative history and found that a key provision did not appear in various draft of the bill and that therefore the words of the final bill that was enacted into law “were deliberately chosen.” As to the DOJ’s argument that the EEA had a broad sweep, the Court stated that one would expect to see such wording in the statute. Citing a prior Supreme Court decision, the Court stated as follows. “And ‘when choice has to be made between two readings of what conduct Congress has made a crime, it is appropriate, before we choose the harsher alternative, to require that Congress should have spoken in language that is clear and definite.”

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Recently, Judge Aleta Trauger (M.D. Tenn.) issued a decision (here) in Nollner v. Southern Baptist Convention Inc. that is believed to be the first judicial decision concerning the intersection of D0dd-Frank’s whistleblower provisions and the FCPA.

The basic facts are as follows. Ron and Beverly Nollner responded to a job post by The International Mission Board of the Southern Baptist Convention Inc. (“IMB”) (a wholly-owned subsidiary of Southern Baptist Convention Inc.) to perform missionary related work on the church’s behalf in New Delhi, India – specifically to manage construction of a new office building. After accepting the positions and arriving in New Delhi, the Nollners allege that the “situation was not what had been promised.” Among other things, the Nollners allege that they “became aware of a host of troubling information” including that “the contractor and architect were paying bribes to local Indian officials with money furnished by the defendants for that purpose.” The Nollners alleged that “Mr. Nolnner reported his grave concerns about potential bribery to the defendants’ employees, [but] that they seemed unbothered, if not complicit.” Thereafter, two of Mr. Nollner’s superiors allegedly asked him to resign and when he refused he was terminated.

Among other things, the Nollners brought a retaliatory discharge claim under Dodd-Frank claiming that they were terminated for, among other things, reporting and/or refusing to participate in bribes and other illegal payments. As to the Dodd-Frank claim, the Nollners allege that its whistleblower anti-retaliation provisions protected them against retaliation for reporting the defendants’ violations of the FCPA.

The court began by noting that Dodd-Frank “only protects [an] employee against retaliation if the federal violation falls within the SEC’s jurisdiction.” The court then stated that “the jurisdiction of the SEC with respect to FCPA violations is limited only to civil actions to enforce violations by issuers, but does not encompass FCPA violations by domestic concerns, which are subject to exclusive DOJ enforcement.” (emphasis in original). The court then stated as follows. “Here, because the defendants are not issuers, only the DOJ – not the SEC – has jurisdiction over them with respect to FCPA violations.” Accordingly, the court held, even assuming the allegations to be true, that the “Nollners may not maintain [Dodd-Frank] retaliation claims premised on their reporting of potential FCPA violations by the defendants.”

In addition, the court stated that the “FCPA does not itself protect whistleblowers; it contains no anti-retaliation provisions and affords no private cause of action” (relying on Lamb v. Philip Morris, Inc. 915 F.2d 1024 (6th Circ. 1990)). The court stated that “it falls on Congress to protect individual FCPA whistleblowers who are not otherwise protected from retaliation under state or federal law for disclosing FCPA violations.”

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In regards to the reference in Nollner that the jurisdiction of the SEC with respect to FCPA violations is limited only to civil actions to enforce violations by issuers, this is generally true, although in recent years the SEC has brought FCPA enforcement actions against non-issuers (see here for the Panalpina enforcement action and here for the Snamprogetti enforcement action).