November 14th, 2014

In the Words Of Roderick Hills

Roderik HillsRecently, the SEC noted the passing of Roderick Hills (Chairman of the Securities and Exchange Commission from 1975 to 1977).  It was during this time period in which Congress was engaged in its multi-year investigation and deliberation of the so-called foreign corporate payments problem.

As told in “The Story of the Foreign Corrupt Practices Act,” Hills was a prominent voice during this process and he testified at several Congressional hearings.

While the SEC (compared to the DOJ and other government departments) played the most prominent and trusted role during Congress’s consideration of the foreign corporate payments problem, the SEC’s role was also the most curious as the Commission was a reluctant actor in Congress’s quest for a new and direct legislative remedy to the problem.

It is clear from the legislative record that the SEC wanted no part in policing the morality of American business or in determining what was an improper foreign corporate payment. Rather, the SEC – true to its then mission – was focused on ensuring disclosure of material foreign corporate payments to investors by companies subject to its jurisdiction. In other words, the SEC wanted no part in enforcing the FCPA’s anti-bribery provisions.

Fast forward to the present when the SEC has a specific FCPA Unit and views enforcement of the FCPA’s anti-bribery provisions as central to its mission of investor protection.

Below are excerpts from Congressional testimony given by Hills relevant to the above issue.

“We don’t have the skill to say should we, can we, enforce the laws of the rest of the world? I’m sure the West Digest that reports these decisions would be full of cases trying to decide whether a given payment is or is not legal. The legal profession has enough business without going to all the countries of the world to try to establish whether a given transaction is right or wrong. We are concerned with the materiality of these practices.”

Prohibiting Bribes to Foreign Officials: Hearing Before the S. Comm. on Banking, Hous., and Urban Affairs, 94th Cong. 19 (1976)

“[Congress] has asked for our views as to the adequacy and effectiveness of the present laws and regulations and any recommendations we may have for improving them. As [Congress] knows, a primary purpose of the Federal securities law and the Commission’s regulations is to protect investors by requiring issuers of securities to make full and fair disclosure of material facts. In my opinion, these statutes provide the Commission adequate authority to require appropriate disclosure about the matters I have been discussing in order to protect stockholders.”

Abuses of Corporate Power: Hearings Before the Subcomm. on Priorities and Econ. in Gov’t of the Joint Econ. Comm., 94th Cong. 13 (1976)

“The Commission does not oppose direct prohibitions against these payments, but we have previously stated that, as a matter of principle, we would prefer not to be involved even in the civil enforcement of such prohibitions. As a matter of long experience, it is our collective judgment that disclosure is a sufficient deterrent to the improper activities with which we are concerned.”

“[A]s a matter of longstanding tradition and practice, the [SEC] has been a disclosure agency. Causing questionable conduct to be revealed to the public has a deterrent effect. Consistent with our past tradition, we would rather not get into the business, however, we think get involved in prohibiting particular payments. It is a different thing entirely to try to prohibit something, to try to make a decision as to whether it is legal or illegal, or proper or improper. Under present law, if it is material, we cause its disclosure, and we need not get into the finer points of whether it is or is not legal.”

Foreign Payments Disclosure: Hearings Before the Subcomm. on Consumer Prot. and Fin. of the H. Comm. on Interstate and Foreign Commerce, 94th Cong. 2 (1976)

“[The SEC] would prefer not to be involved in civil enforcement of such [anti-bribery] prohibitions since they embody separate and distinct policies from those underlying the federal securities laws. The securities laws are designed primarily to insure disclosure to investors of all of the relevant facts concerning corporations which seek to raise their capital from the public at large. The [anti-bribery provisions], on the other hand, would impose substantive regulation on a particular aspect of corporate behavior. The Commission recognizes the congressional interest in enacting these prohibitions, but the enforcement of such provisions does not easily fit within the Commission’s mandate.”

Foreign Corrupt Practices and Domestic and Foreign Investment Disclosure: Hearing Before the S. Comm on Banking, Hous., and Urban Affairs, 95th Cong. 98–99 (1977)

The following statement by Senator Proxmire to Hills best captures the SEC’s reluctant role in seeking a new and direct legislative remedy to the foreign corporate payments problem:

“[Y]ou were responsible for about the only action we have taken with respect to foreign bribery and your agreements, your work, with various corporations to persuade them to cleanse their operation have been a fine example of how an agency can work to get this job done even without legislation. Because of that, you see, we would like to have you involved at least on the investigative disclosure basis. And perhaps we can work something out that would protect you from not pushing you into something you think you wouldn’t want to do.”

Foreign Corrupt Practices and Domestic and Foreign Investment Disclosure: Hearing Before the S. Comm on Banking, Hous., and Urban Affairs, 95th Cong. 98–99 (1977)

Posted by Mike Koehler at 12:02 am. Post Categories: Legislative HistorySEC




November 13th, 2014

FCPA Institute – Miami (January 12-13, 2015)

FCPA InstituteBegin 2015 by elevating your Foreign Corrupt Practices Act knowledge and practical skills in Miami, Florida at the FCPA Institute on January 12th-13th.  The FCPA Institute – Miami also provides participants the opportunity to earn CLE credit as well as a value-added professional credential.

The FCPA Institute is different than a typical FCPA conference.  At the FCPA Institute, information is presented in an integrated and cohesive manner by an expert instructor with FCPA practice and teaching experience.

Moreover, the FCPA Institute promotes active learning by participants through issue-spotting video exercises, skills exercises, small-group discussions and the sharing of real-world practices and experiences. To best facilitate the unique learning experience that the FCPA Institute represents, attendance at each FCPA Institute is capped at 30 participants.

In short, the FCPA Institute elevates the FCPA learning experience for a diverse group of professionals and is offered as a refreshing and cost-effective alternative to a typical FCPA conference. The goal of the FCPA Institute is simple: to develop and enhance fundamental skills relevant to the FCPA, FCPA enforcement, and FCPA compliance best practices in a stimulating and professional environment with a focus on learning.

The FCPA Institute presents the FCPA not merely as a legal issue, but also as a business, finance, accounting, and auditing issue. The FCPA Institute is thus ideal for a diverse group of professionals such as in-house and outside counsel; compliance professionals; finance, accounting, and auditing professionals; and others seeking sophisticated knowledge and enhanced skills relevant to the FCPA.

Click here to see what these diverse professionals are saying about the FCPA Institute.

FCPA Institute participants not only gain knowledge, practical skills and peer insight, but will also have their knowledge assessed and can earn a certificate of completion upon passing a written assessment tool. In this way, successful completion of the FCPA Institute represents a value-added credential for professional development.  In addition, attorneys who complete the FCPA Institute are also eligible to receive Continuing Legal Education (“CLE”) credits.  (The FCPA Institute – Miami has been approved for 15 general CLE credits in Florida and 13.5 general CLE credits in Georgia.  Attorneys may be eligible to receive CLE credit through reciprocity or attorney self-submission in other states as well).

Join other firm lawyers, in-house counsel, auditing professionals and others already registered for the FCPA Institute – Miami by clicking here to register.

Posted by Mike Koehler at 12:06 am. Post Categories: Uncategorized




November 12th, 2014

A Compliance Professional Speaks

myster person2Today’s post is from a compliance professional who wishes to remain anonymous.

*****

When you’re the Chief Compliance Officer (“CCO”) of a company that ends up in the middle of one of “those” all-encompassing FCPA investigations (as if there’s any other kind), people often want to know . . . what is it like?  How does it feel to be at ground zero of pure FCPA adrenaline?   This is my answer,  based on my repeated experiences.  I wish I could say it just happened once.  This is also based on my discussions with other CCOs.

It’s a rollercoaster with few ups and a lot of downs.

There’s that moment at the beginning when you know something is wrong.  Usually you know it’s not going to be trivial.  So you dig a bit more. Or have someone else dig a bit more.  Somewhere along the line, it strikes you.  This is going to be big.  Very big.  We can just call that the “oh crap” moment.  Every CCO I know has had at least one.

You feel a rush.  An excitement.  It’s what you’ve trained for, and read about.  And now it’s happening.  But there is invariably, immediately, a sense of dread.  Depending on the size of the issue and the seniority of the people involved, that sense of dread can range from a knot in the stomach to downright nausea.  Will the C-suite management understand it?  (Do you even have the ear of the C-suite management?) Will they do the “right thing”?

You know exactly what should happen next.  You should get on the phone with your favorite skilled, independent investigations counsel.  But before you can do that, you have to be a salesman.  You need to convince someone (sometimes the CEO, sometimes the General Counsel, sometimes a non-executive director) that this is something.  Or at the very least, it’s not nothing.  With any luck, you can make them see sense.  Most of the time, they’ve never been through this.  The education process can be slow and tedious.

You know who the right counsel are . .  . but not so fast.  You don’t have the budget.  Many times, you don’t even have the ability to hire outside counsel  without the approval of your General Counsel.  Do you have the GC’s backing?  Do they see compliance as a help or as a nuisance?  Do they believe you when you say this needs independent investigation?  Or do they think you’re just being alarmist?  What if the GC (or someone else) wants to investigate themselves?  Or hire the go-to corporate counsel?  Or hire their buddy, the jovial law school classmate of the GC who has never actually done an investigation but, really, how hard can it be?  You have to explain – calmly, rationally and often repeatedly – why that just isn’t the right thing to do.

In the meantime, a clock may be ticking. The company may be facing a quarterly SEC filing or the signing of a deal contract or the receipt of monies on the deal.  All of these have implications.  All of your powers of (gentle) persuasion are brought to bear.

And your reward for all of this?  If you’re lucky, they listen to you. The right outside counsel walks in the door and the matter rests in their capable hands. It’s a leap of faith to put something this sensitive in the hands of outside counsel.  Or, more specifically, outside counsel’s judgment of when enough is enough.   These issues always reach higher than you think.

More often than not, the legal group squeezes you out.  Compliance, after all, is not generally part of legal.  You may be kept in the loop, or you may be completely excluded.  If you’re very lucky, you are kept abreast of what is happening and people seek out your guidance and opinion.  But honestly?  Don’t hold your breath.  Particularly if this all results in a report to a regulator, you’ll definitely be pushed to the side.  Privilege is held in a tight circle that doesn’t generally include you.  So just go back to your office and keep the compliance program moving along.

What if you’re not lucky?  What if you can’t get anyone to understand? What if the issue is too subtle, or involves too senior a salesperson (they bring in the revenue, after all) or too important a client?  Not many can just stake out the moral (and legal) high ground and resign.  Sometimes the situation is that bad, or you have regulatory obligations, and you’re forced into that decision.  I know a brave few who have actually done that.  Put yourself in their shoes.  Think what it would mean for yourself and your family to walk away from a steady (and often healthy) paycheck.  What a price to pay for your convictions.

It’s far more common that you hold your tongue and bide your time. You find a way to rationalize the situation.  You compromise.  Being a CCO is, above all else, about compromise.  Does that surprise or appall lawyers in private practice or working for the government?  It shouldn’t.  Good CCOs are always “commercial” (whatever that is supposed to mean). As a CCO,  you’re being “business friendly.”  Or, to be less cynical, you’re doing your job.  You’re there to balance the company’s interests with the legal requirements.

But mostly you hope and pray that you’ve done the right thing.  And that a regulator never second guesses your actions.  That seems to be happening more and more.  I know too many CCOs  who are being subpoenaed to give testimony and defend their actions in front of regulators.  Sometimes as witnesses, but sometimes (rarely) as suspects.  So much for regulators seeing CCOs as the guys in the white hats.

Even if the  (right) lawyers do come in and they investigate, you hope that you didn’t raise a false alarm.  Then you hope none of your friends in the business were involved (CCOs always have friends in the business).   And when it turns out you were exactly right, and it really was worse than what you thought, it’s a hollow victory.  People lose their jobs.  People that you know and sometimes people that you like and who weren’t malicious or evil.  They were just doing their jobs and got caught up in the tide.  Sometimes they are sued or brought up on criminal charges.  The rest of the company is left in a state of shock.  You may have been trained to spot a FCPA issue when it arises, but there’s very little training on how to deal with the human element.  It is far and away the worst part of the job.

Posted by Mike Koehler at 12:03 am. Post Categories: ComplianceGuest PostsInternal Investigation Issues




November 11th, 2014

In The Words Of Loretta Lynch

LynchRecently President Obama nominated Loretta Lynch (U.S. Attorney, Eastern District of New York) to be the next Attorney General.

This post highlights Lynch’s responses to various Foreign Corrupt Practices Act or FCPA related questions originally posed in this September/October 2013 Q&A with the Society of Corporate Compliance and Ethics’ magazine Compliance & Ethics Professional and posted on the DOJ’s website.

In the Q&A, Lynch speaks generally about corruption and compliance and specifically about Morgan Stanley’s so-called “declination” and the FCPA enforcement action against Ralph Lauren.  For additional information on Morgan Stanley’s so-called “declination” (see here and here) and for additional information on the Ralph Lauren enforcement action (see herehere and here).

Q: What did you learn about compliance programs, good and bad, in your [prior private] practice?

A: The most important thing I learned about compliance programs is also the most basic thing—the tone at the top truly sets the
parameters for whether one has an effective or ineffective compliance program. And by effective, I don’t mean a program in a company where there is never any wrongdoing, because that company does not exist. If there is one message I’d like to leave with corporate America, it is that the government actually does understand that things can and will go wrong, even where there is a strong compliance program. Every company develops issues. It’s how you deal with them that defines your corporate culture and informs me if you are serious about fixing the problem and preventing it from recurring going forward.

Q: One of the things that strikes me about your career in the U.S. Attorney’s Office is that fighting corruption has been an ongoing focus. And, it’s notable to point out that we’re not just talking about the Foreign Corrupt Practices Act (FCPA), but also corruption here in the U.S. Are there common threads that you see among government corruption cases everywhere?

A: Corruption, whether here in Brooklyn or on the other side of the globe, has real and far-reaching consequences. The common
thread is that someone in power loses their connection to the constituency they are supposed to serve, whether citizens or shareholders. When government officials engage in self-dealing, when they abdicate their responsibility, when they succumb to greed, the average citizen pays for it dearly and on many levels. Constituents everywhere end up spending more for services—infrastructure, healthcare, education—and sometimes have to go without these vital services, when government officials line their own pockets with public funds. Law-abiding companies here in the U.S. and abroad are placed at a competitive disadvantage when business is won or lost based on bribes, not the quality of a company’s products and services.

And because corruption involves, at its heart, the breaking of a trust relationship, its ramifications often go far beyond the financial. Corruption infects society as a whole, increasing the level of cynicism and distrust that constituents have about their elected officials and government processes. In this way, corruption also impacts those government officials who are truly trying to do the right thing. They get tarred with the same brush. We all deserve honest and effective representation, and my office is committed to investigating and prosecuting those who trade on the trust we place in them to enrich themselves, who let greed get in the way of helping the people that they represent.

Q: The Morgan Stanley FCPA case was a very high-profile declination by main Justice and your U.S. Attorney’s Office. They don’t come that often, and it’s very rare to see compliance efforts cited so widely as the reason why. Can you give a brief description of the case for those who are not familiar with it?

A: Absolutely. In April of 2012, my office and the Department of Justice’s (DOJ) fraud section prosecuted Garth Peterson, the former Managing Director in charge of the Morgan Stanley’s real estate group in Shanghai, China. Peterson had engaged in a conspiracy to sell an ownership interest in a Shanghai building owned by Morgan Stanley to a local government official who had provided assistance to Peterson in securing business for Morgan Stanley in China. During the conspiracy, Peterson repeatedly and falsely told Morgan Stanley that the corporation buying the ownership interest in the building was owned by the Shanghai government when, in fact, it was owned by Peterson and the local government official, among others. By lying and providing false information to Morgan Stanley, Peterson was circumventing the company’s internal controls, which were created and intended to prevent FCPA violations. Peterson was charged with one count of conspiring to circumvent Morgan Stanley’s internal controls, and after pleading guilty, he was ultimately was sentenced to a period of incarceration. We declined to take any action against Morgan Stanley in that case.

Q: Again, what’s notable is that it was the first major FCPA case I can recall in which there was a public declination, and just as importantly, the compliance program was cited so publicly as a major part of the reason why. In fact, it’s hard to remember many cases of any type in which the compliance program’s effectiveness was cited so publicly, which suggests to me that even people without FCPA risks should take note. What made this case so different?

A: You’re right. This was an unusual case. Morgan Stanley self-reported Peterson’s conduct, and cooperated fully and extensively
with the government’s investigation. But that’s not what made the case different. What set Morgan Stanley apart was that, after considering all the available facts and circumstances, the government concluded that Morgan Stanley was a company that had done all that it could. It had a compliance program specifically tailored to its business risks, with commitment to compliance from the very top of the company, that itself did not tolerate wrongdoing. The bank acted to fire Peterson before any of the facts became
public. We concluded that Peterson was the quintessential “rogue employee” who schemed to affirmatively sidestep compliance because he knew his behavior would  not be countenanced. Every company says its bad actors are “rogues,” and that they do not promote corruption, but at Morgan Stanley we could see it. There was a stark contrast between the bank’s corporate culture and Peterson’s actions.

This presented a fundamentally different situation from companies that say they don’t tolerate wrongdoing, yet push employees to meet goals and quotas overseas with little to no guidance on the risks and consequences. It was fundamentally different from companies who distance themselves from their agents and consultants overseas, and then argue that they have to “go along” to avoid being disadvantaged in overseas markets. And it was fundamentally different from companies that say “That’s not who we are,” yet have nothing on record that informs me otherwise.

What we saw was that Morgan Stanley conducted extensive due diligence with respect to the sale that Peterson orchestrated.
We saw that Peterson had circumvented a compliance program that was an active component of the company’s business—Peterson himself was trained on FCPA compliance seven times and reminded about FCPA compliance at least 35 times. Compliance
at Morgan Stanley was also proactive, with the bank routinely adjusting and updating its compliance program to address new
issues and problems as they arose. It was not simply a program that was put in place 10 years ago, set apart from the business, and
left unchanged over time, without regard to changes in the company’s business or the increasing complexity of transactions. When we looked at Morgan Stanley, we also saw a bank that invested resources, that had internal controls in place to ensure accountability, that regularly monitored transactions, and that randomly audited employees, transactions, and business units.

This case stands out because it also touched on a common complaint in the FCPA world, and that is the supposed lack of transparency regarding the government’s consideration of a company’s compliance efforts in making charging decisions. The lengthy description of Morgan Stanley’s compliance program in the Peterson charging document was a deliberate response to that criticism. The Peterson case was even cited for that purpose in the FCPA Resource Guide prepared by DOJ and the Securities and Exchange Commission (SEC) in November 2012.

Q: What should compliance professionals take away as key learning from that case?

A: There are actually two “takeaways” in this case. The first is that the government will aggressively pursue those who engage in criminal conduct involving corporate corruption. The second is that companies that employ robust and effective compliance programs are not only better able to detect and identify potential compliance issues that may negatively affect the company’s business and reputation, but also those unusual instances where an employee is intent on circumventing a company’s internal controls. An added benefit for a company that employs a robust compliance program is that the company will be in a better position to address concerns raised by regulators or the government, if the company’s conduct ever comes under scrutiny. Morgan Stanley was able to demonstrate that Peterson truly was a “rogue,” that he had betrayed them, and he had rejected their culture of compliance.

Q: More recently we had the declination in the Ralph Lauren case. In that case, Ralph Lauren discovered questionable payments by a third party working on their behalf in Argentina. You were the US attorney on that case as well. What were some of the factors that led to the decision not to prosecute?

A: Actually we did not decline prosecution in that case. Rather, we entered into a non-prosecution agreement with Ralph Lauren. The agreement is for a two-year term and requires the implementation of various corporate reforms. Ralph Lauren also paid an $882,000 penalty to the DOJ and disgorged $700,000 in ill-gotten gains and interest to the SEC. There were several reasons for that outcome. Ralph Lauren discovered criminal conduct involving violations of the FCPA while it was in the midst of trying to improve its internal controls and compliance worldwide. Our investigation revealed that, over the course of five years, the manager of Ralph Lauren’s subsidiary in Argentina had made roughly $580,000 in corrupt payments to customs officials for unwarranted benefits, like obtaining entry for its products into the country without the necessary paperwork or without any inspection at all. The bribes were funneled through a customs broker who, at the manager’s direction, created fictitious invoices that were paid by Ralph Lauren in order to cover up the scheme.

Several factors compelled our decision to enter into a non-prosecution agreement with Ralph Lauren. First, there was the detection
of the wrongdoing by the corporation itself, as part of an effort to improve global compliance standards. Following the discovery of the corruption, the company also undertook an exceedingly thorough internal investigation of the misconduct and cooperated fully with our investigation. They made foreign witnesses available for government interviews; they provided real-time translation
of foreign documents.

It was also very significant that Ralph Lauren implemented a host of extensive, remedial measures, including the termination of employees engaged in the wrongdoing, and improvements in internal controls and compliance programs. Finally, we took into account that they swiftly and voluntarily disclosed the conduct to the government and the SEC. The company first self-reported the misconduct to the government within two weeks of discovering it. They basically did everything that a company that finds itself in that unfortunate situation can possibly do.

Q: This was the first time the SEC publicly stated it would not proceed. What got their attention and led to the decision?

A: I cannot speak for the SEC, but we do typically have parallel investigations of FCPA violations, and I believe that they were swayed by the same factors that we were. Although Ralph Lauren did not have an anti-corruption program and did not provide any anticorruption training or oversight during the five-year span of the conspiracy, all of the government agencies investigating the case were impressed with their resulting commitment to compliance in this area globally, as well as their self-disclosure and full cooperation.

Q: Finally, are we seeing the start of a new era in which compliance programs are going to be looked at more closely by prosecutors? And, just as importantly, will good programs earn organizations public credit for their efforts?

A: Absolutely. Compliance is the lens through which we view your company. A robust compliance program demonstrates to us that the company “gets it.” Making your compliance program a top priority is an investment a company can’t afford not to make. To put it more bluntly, by the time you have a problem that has drawn the government’s attention, under our principles and guidelines that govern corporate prosecutions, the existence of a robust compliance program can save you, as in the Morgan Stanley case.

Posted by Mike Koehler at 12:04 am. Post Categories: ComplianceEnforcement Agency PolicyEnforcement Agency SpeechesMorgan StanleyRalph Lauren Corp.




November 10th, 2014

A Suggested Read On A Variety Of Topics

Read ThisSeveral prior posts (here, here, and here) have focused on basic causation issues in connection with many Foreign Corrupt Practices Act enforcement actions.

The lack of causation between an alleged bribe payment and any alleged business obtained or retained is not a legal defense because the FCPA’s anti-bribery provisions prohibit the offer, payment, promise to pay or authorization of the payment of any money or thing of value.  Indeed, several FCPA enforcement actions have alleged unsuccessful bribery attempts in which no business was actually obtained or retained.

Nevertheless, causation ought to be relevant when calculating FCPA settlement amounts, specifically disgorgement.  However, the prevailing FCPA enforcement theory often seems to be that because Company A made improper payments to allegedly obtain or retain Contract A, then all of Company A’s net profits associated with Contract A are subject to disgorgement.

Call it the “but for” theory. “But for” the alleged improper payments, Company A would not have obtained or retained the business.

However, this basic enforcement theory ignores the fact that Company A (as is often the case in FCPA enforcement actions) is generally viewed as selling the best product for the best price and because of this, or a host of other reasons, probably would have obtained or retained the business in the absence of any alleged improper payments.

If this general issue is of any interest to you (and it ought to be because it is instructive on many levels) you should read a recent U.K. decision in a civil case arising out of the same core facts alleged in the 2010 FCPA enforcement action against Innospec (see here for the prior post).

In addition, if the so-called “victim” issue in FCPA enforcement actions is of interest to you (i.e. because the FCPA involves bribery and corruption, when there is an FCPA enforcement action, there must be a victim) , you also should read the recent U.K. decision because it is instructive on this issue as well.

Prior to discussing the recent U.K. decision, a bit of background is necessary.

In 2010, Innospec agreed to pay approximately $26 million to resolve DOJ and SEC enforcement actions (see here).  The conduct was wide-ranging in that the enforcement action involved alleged violations of U.S. sanctions regarding doing business in Cuba in addition to alleged conduct in violation of the FCPA.  Even as to the FCPA conduct, the enforcement action was wide-ranging and included “standard” Iraq Oil-for-Food allegations found in a number of previous enforcement actions (i.e. inflated commission payments to an agent which were then used to pay kickbacks to the government of Iraq) as well as alleged conduct in Indonesia.

The bulk of the enforcement action though concerned DOJ allegations that Ousama Naaman (Innospec’s agent in Iraq) paid various bribes to officials in Iraq’s Ministry of Oil (“MoO”) to “ensure” that a competitor’s product “failed a field trial test and therefore would not be used by the MoO” as well as other allegations that Naaman paid other bribes to officials of the MoO to obtain and retain contracts with MoO on Innospec’s behalf.

The DOJ’s criminal information alleged (or perhaps merely assumed) a casual connection between the alleged bribes and the failed field test, as well as two specific contracts: a 2004 Long Term Purchase Agreement (“LTPA”) and a 2008 Long Term Purchase Agreement.

As often happens in this day and age, an Innospec competitor used the core conduct alleged in the DOJ’s enforcement action “offensively” in bringing civil claims against Innospec and various individuals in a U.K. court.

As highlighted in the U.K. decision, the claims were brought by a Jordanian company which alleged that Innospec “conspired to injure the claimants by engaging in corrupt practices, in particular the bribery of officials within the [MoO] with the intention of inducing its refineries to buy TEL rather than MMT …”.

TEL refers to a lead based fuel additive called tetraethyl lead and MMT refers to methylcyclopentadienyl manganese tricarbonyl, a product developed as a manganese based octane boosting and antiknock additive which was less toxic than TEL.

The U.K. decision is extremely dense as to the facts and circumstances surrounding the MoO’s decision to use TEL vs. MMT.

Relevant to the “but for” causation topic of this post, and as described by the U.K. court, the claimants “claim damages for the losses they allege they have suffered as a consequence of the conspiracy on the basis that, but for the bribery and corruption, the MoO would have started to purchase MMT ….”.  As further described by the U.K. court, ”the claimants also allege that between 2002 and 2008 payments were authorized by Innospec for travel and other expenses, including pocket money for Iraqi officials to incur goodwill and ensure continued orders of TEL.”

In the words of the U.K. court, in order for the claims to succeed, the claimants had to establish, among other things, that the decision to replace TEL with MMT “was not implemented because the promise of bribes by Mr. Naaaman procured the MoO to enter into the 2004 LTPA and that prevented sales of MMT” and “that, but for the promise of bribes, the decision would have been implemented and the MoO would have replaced TEL with MMT from early 2004 onwards, so that the counterfactual scenario on which the claim is based would have occurred.”  (Confusing verbiage to be sure, but that is what the decision says).

As noted in the U.K. decision, Innospec denied that bribes or the promise of bribes induced the 2004 LTPA, lead to the requirement of the field test or its result, or induced the 2008 LTPA.  Innospec argued that despite its admissions in the FCPA enforcement actions, the “court must look carefully and analytically at the evidence there is as to what bribes were paid and promised and when and whether any bribes paid or promised actually led to a decision different from that which would have been made anyway.”

In short, instead of merely alleging or assuming causation between alleged bribe payments and business or other benefits like the U.S. did in the FCPA enforcement action, the U.K. court held approximately 15 days of hearings with multiple witnesses to actually determine if there was a casual link between the alleged bribe payments or other benefits that Innospec obtained.

The end result of this process is that the U.K. court did not find any casual links and indeed found false certain allegations in the DOJ’s FCPA enforcement action.

For instance, as to the DOJ’s allegations that “Naaman, on behalf of Innospec, paid approximately $150,000 in bribes to officials of the MoO to ensure that MMT … failed a field trial test and therefore would not be used by the MoO as a replacement for TEL,” the U.K. court concluded that Naaman never made such payments.  Indeed, the U.K. court noted Naaman’s admission (which occurred after resolution of Innospec’s FCPA enforcement action) ”that he had never in fact paid the U.S. $150,000 in bribes to MoO officials to fail the field test, but had simply pocketed the money himself.”

In the words of the court, ”this has an important impact on the issue of causation.”

Regarding Innospec’s admission in the FCPA enforcement action that Naaman did indeed make such payments, the U.K. court stated:

“Unbeknownst to Innospec at the time they admitted these allegations, Mr. Naaman never in fact paid any of these monies to Iraqi officials, but notwithstanding that, Innospec had committed the relevant offense under the Foreign Corrupt Practices Act by making payments to him, believing they were reimbursing him for bribes paid, even though in truth they were not.”

In the words of the U.K. court, Naaman became upset that Innospec was not reimbursing him for certain expenses he viewed as being owed to him and that Naaman “saw the field test on MMT as an opportunity to recoup those expenses and informed Innospec that he proposed bribing the Iraqi engineers to fail the field test.  Innospec readily agreed and paid him some U.S. $150,000, expecting it would be used for bribes.  He kept the funds himself, believing that MMT would fail the field test [...]  On the material before the court, this was the first time it had emerged (some 10 months after Innospec signed the [U.S.] Plea Agreement) that money Innospec had paid to Mr. Naaman believing he had paid or promised to pay bribes was not so paid but simply pocketed by him.”

Regarding the 2004 LTPA that the DOJ alleged was a result of alleged improper payments to Iraqi officials, the U.K. court first noted the following about the U.S. invasion of Iraqi:

“[T]he U.S. authorities put Kellogg, Brown & Root in charge of procurement for the requirements of the Iraqi refineries, effectively replacing the finance department within the MoO.  All spending had to be approved by KBR which was the only entity which could actually conclude contracts and purchase products.”

“It seems to me that claimants’ case overlooks the fact that any switch to MMT would have had to be approved by KBR, and the weight of evidence at this time in August 2003 and thereafter is that KBR was not particularly enamoured of MMT, pointing strongly to the likelihood that, even if the claimants were right that there was a decision to continue with TEL and not to switch to MMT, which was in some way induced by bribery, the MoO may well have been driven to the same decision irrespective of bribery, because of the attitude of KBR.”

Elsewhere, the U.K. court termed it “fanciful in the extreme” certain of claimants’ evidence which sought to establish causation between the alleged bribes and business to Innospec.

In short, the U.K. court concluded that the 2004 LTPA was not procured by bribery.  Further the U.K. court stated:

“[T]he decision to enter the LTPA had to be and was endorsed by the American authorities .  Since there is no basis for saying that they were corrupted by the payment or promise of bribes, that is further demonstration that the LTPA was not procured by bribery.”

Indeed, in the words of the U.K. court, “bribery [was] the least likely explanation” for certain MoO decisions regarding the conduct at issue.  Elsewhere, the court stated that any suggestion that considerations made by the MoO “was induced or influenced by bribery by Innospec would be frankly ridiculous” and a “logical non-sequitur and a step too far.”

In closing, the U.K. court stated that even if it were wrong – and that the 2004 LTPA was procured by bribery ” that the MOO would always have followed the course they did, of continuing to use TEL given the octane boost they needed …”.

In terms of the 2008 LTPA, the U.K. court found that “no orders were ever placed under the LTPA, since the investigations by the U.S. authorities intervened.”

In short, what happened in the U.K. action was rather remarkable.

Certain facts alleged in a DOJ FCPA enforcement were subjected to an adversarial process and the resulting judicial scrutiny found certain facts false.  Moreover, instead of merely alleging or assuming causation, as if often the case in FCPA enforcement actions as relevant to determining settlement amounts, the U.K. court analyzed causation and found it lacking.

The U.K. action is also instructive when it comes to analyzing whether there are so-called “victims” in all FCPA enforcement actions.  In the past several years, there has been calls by some for portions of FCPA settlement amounts to be paid out to “victims” of the conduct alleged in the FCPA enforcement action.  (See here and here for prior posts). The general theory seems to be – for example – that if an FCPA enforcement action alleges bribes paid in Nigeria, Nigerian citizens must therefore be the “victims” of the conduct and thus somehow entitled to compensation.

As highlighted in prior posts, while this proposal “feels good,” it is not warranted for many different reasons.  In short, this proposal assumes two things:  (i) that FCPA enforcement actions always represent provable FCPA violations; and (ii) that there is a always a casual connection between the alleged bribes influencing “foreign official” conduct, that then always causes harm to the citizens of the “foreign official’s” country.

As to the first issue, such an assumption is not always warranted given that the vast majority of FCPA enforcement actions are resolved via non-prosecution agreements, deferred prosecution agreements, neither admit nor deny SEC settlements, or SEC administrative orders.  These resolution vehicles often represent the end result of a risk adverse business decision, not necessarily provable FCPA violations.  For instance, in the words of the Second Circuit, SEC neither admit nor deny settlements are not about the truth, but pragmatism.  For this reason, a typical FCPA resolution vehicle should not automatically trigger other actions or issues (whether plaintiff litigation, whistleblower bounties, or payments to an ill-defined group of alleged victims).

As to the second issue, such an assumption is also not always warranted.  Several FCPA enforcement actions fit into one of the following categories: (i) unsuccessful bribery attempts; (ii) payments to receive what the company was otherwise legitimately owed by a foreign government; or (iii) other situations where – for a variety of reasons – there would seem to be a lack of causation between the alleged bribes influencing “foreign official” conduct, that then causes harm to the citizens of the “foreign official’s” country. Indeed, most corporate FCPA enforcement actions involve companies that are otherwise viewed as selling the best product for the best price.  Moreover, as highlighted in this prior post, in one FCPA enforcement action a court found that an alleged bribery scheme benefited a foreign country.

Despite the above observations which I have long held, the failed field test allegations in the Innospec FCPA enforcement action legitimately caused me to ponder victim issues in FCPA enforcement actions.  After all, the DOJ alleged that Iraqi MoO officials were induced to sabotage a field test of a competitor product that resulted in the more harmful product, from a public health standpoint, to stay on the market.

It was a relatively convincing casual connection between an FCPA enforcement action and potential victims.

However, as highlighted above, the U.K. court found the failed field test allegation false and otherwise found deficient other causal links between other alleged conduct and actual business or benefits obtained or retained.

In short, the U.K. action should instruct the proponents of “victim” compensation that hinging a policy proposal on FCPA resolution documents is not always sound or warranted.

Posted by Mike Koehler at 12:06 am. Post Categories: DisgorgementFine / Penalty IssuesInnospecUnited KingdomVictims