May 6th, 2015

New Article – Ten Seldom Discussed FCPA Facts That You Need To Know

FactsBloomberg BNA’s White Collar Crime Report recently published my article “Ten Seldom Discussed FCPA Facts That You Need To Know.”

If you want to develop a sophisticated understanding of the Foreign Corrupt Practices Act and related topics, you should read the article.

The article can be downloaded here and it begins as follows.

“Much is written about the Foreign Corrupt Practices Act. However, amid the clutter of enforcement agency rhetoric and resolution documents not subjected to any meaningful judicial scrutiny as well as the mountains of FCPA Inc. marketing material touting the next compliance risk, there are certain FCPA facts that are seldom discussed.

Yet such facts, covering the entire span of the FCPA (from the statute’s enactment, to its statutory provisions, to FCPA enforcement, to FCPA reform, to the FCPA industry itself) occasionally bear repeating.

This article does that by highlighting ten seldom discussed FCPA facts that you need to know.”

 

Posted by Mike Koehler at 12:03 am. Post Categories: FCPA Scholarship




May 5th, 2015

Wall Street Firms Push Back Against FCPA Scrutiny

Push BackFor the past several years, a number of banks have been under FCPA scrutiny based on alleged hiring practices in China and elsewhere.  (See here among other prior posts).

Among the banks under scrutiny are the following: JP Morgan, Bank of New York Mellon Corp., Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, Goldman Sach Group Inc., Morgan Stanley, and UBS AG.

The Wall Street Journal reports:

“Wall Street banks are embroiled in an intense dispute with the U.S. government over its “aggressive” interpretation of foreign-bribery laws, a flurry of legal wrangling in a probe with broad implications for how corporations do business overseas, according to people familiar with the matter.

The previously unreported campaign by banks goes to the heart of a wide-ranging inquiry into whether they ran afoul of U.S. antibribery laws by giving jobs to relatives of managers of state-owned companies and other well-connected officials, including the kin of high-ranking Chinese government officials known as “princelings,” allegedly to curry favor in getting deals.

In a series of meetings, calls and letters to regulators and federal prosecutors, banks have accused the government of overreaching by threatening to criminalize standard business practices in some countries, according to people close to the firms. The pushback differs from the normal squabbling over settlement terms, in part because the outcome is likely to set a blueprint for future cases, according to people familiar with the matter.

The government maintains its approach, which the banks have privately called “aggressive,” is within the confines of the law.”

According to the article, JP Morgan “is preparing a white paper to submit to the Securities and Exchange Commission and Justice Department, setting out the bank’s concerns about their approach.”  The white paper is being written by Mark Mendelsohn.

Mendelsohn’s assignment is most interesting as the former DOJ FCPA Unit Chief describes himself on his law firm bio as the “architect and key enforcement official of DOJ’s modern Foreign Corrupt Practices Act (FCPA) enforcement program.” As highlighted in prior posts here and here, when Mendelsohn left the DOJ in April 2010 others stated as follows.

  • “Mr. Mendelsohn has overseen a hot field in prosecution in recent years” and that “it has been up to the Justice Department – and specifically to Mr. Mendelsohn – to interpret the law.”
  • “Mark Mendelsohn transformed the FCPA from a legal backwater to a headline practice” and during his “term, no corporations mounted a courtroom defense against FCPA charges; instead all made deals with the DOJ to settle their cases.” “That gave Mendelsohn extraordinary power — in the FCPA realm, he and the DOJ became prosecutor, judge, and jury.”

His own law firm, which is now representing a major Wall Street firm in the midst of FCPA scrutiny, issued a release at the time stating Mendelsohn “built the DOJ’s modern FCPA program.”

In certain respects, the FCPA scrutiny of JP Morgan and other Wall Street banks is a reflection of the DOJ (and SEC’s) modern FCPA enforcement program.

According to the Wall Street Journal article, Bank of New York Mellon Corp. “is expected in coming months to settle an SEC inquiry that includes allegations the firm gave internships to relatives of officials at a Middle Eastern sovereign-wealth fund.”

As I told the Wall Street Journal in the article, in FCPA history only one public company has forced the DOJ to carry its burden of proof as to the elements of an FCPA anti-bribery violation and the government will likely get away with pushing the envelope on the legal boundaries in the hiring probe. When push comes to shove, these banks are not going to risk a criminal indictment to litigate a disputed legal issue.

Chalk it up to another potential example of the “facade of FCPA enforcement.”

Indeed, in many instances of FCPA scrutiny in this new era two distinct questions can be asked.

The first is whether, given the DOJ’s and SEC’s enforcement theories, the conduct at issue can expose a company to FCPA scrutiny and an FCPA enforcement action?  The second is whether Congress in passing the FCPA intended to capture the alleged conduct at issue and whether a court would find the alleged conduct to be in violation of the FCPA?

As a practical matter, risk-averse corporations care more about the first question than the second.

However, those who value the rule of law should care more about the second question. As former Attorney General Alberto Gonzales rightly noted:

“In an ironic twist, the more that American companies elect to settle and not force the DOJ to defend its aggressive interpretation of the [FCPA], the more aggressive DOJ has become in its interpretation of the law and its prosecution decisions.”

Corporations often complain about the expansive enforcement theories that have come to define this new era of enforcement.  However, the business community itself is, at least in part, responsible for the current aggressive FCPA enforcement climate.  Indeed, as Homer Moyer, a dean of the FCPA bar rightly observed:

“One reality is the enforcement agencies’ [FCPA] views on issues and enforcement policies, positions on which they are rarely challenged in court. The other is what knowledgeable counsel believe the government could sustain in court, should their interpretations or positions be challenged. The two may not be the same. The operative rules of the game are the agencies’ views unless a company is prepared to go to court or to mount a serious challenge within the agencies.”

Posted by Mike Koehler at 12:03 am. Post Categories: Bank of New York MellonFinancial Services IndustryHiring Family Members of Foreign OfficialsJPMorgan




May 4th, 2015

Austrian Judge Denies Extradition Request, Calls DOJ’s Case Against Firtash “Politically Motivated” And Lacking “Sufficient Proof”

DeniedIn the DOJ’s self-declared “new era of FCPA enforcement,” it has been very successful in exercising its leverage against risk averse corporate defendants to secure settlements largely resolved through resolution vehicles not subjected to any meaningful judicial scrutiny.

Yet, when the DOJ actually is put in a position to prove an FCPA case to someone other than itself or to defend other aspects of its case, the DOJ has generally struggled.  (See here for “What Percentage of DOJ FCPA Losses is Acceptable?”).

As highlighted in this prior post, in April 2014 the DOJ criminally charged Dmitry Firtash, a high-profile Ukrainian businessman, and several others  “with participating in an alleged international racketeering conspiracy involving bribes of state and central government officials in India to allow the mining of titanium minerals.”

Prior to the April 2014 unsealed indictment, Firtash was arrested in Austria and thereafter paid $174 million to post bail.

Responding to the U.S. criminal charges, as noted in this prior post, Firtash released a video which insisted he is an innocent party caught at the center of a “battlefield for the two biggest global players of Russia and the USA”.

As highlighted last week prior to an Austrian court ruling on the U.S.’s request to extradite Firtash, “Firtash’s lawyers will argue that his arrest — on charges of bribing officials in India to secure a titanium mining deal that never materialized — was really an effort by the United States to remove him from public life in Ukraine, where he controls major business interests and still holds considerable clout” (quoting from the New York Times article).

As reported by the New York Times, an Austrian judge refused last week to order the extradition of Firtash “siding with defense lawyers who said the American request was politically motivated.”

According to the article:

“The ruling, by Judge Christoph Bauer of the Landesgerichtsstrasse Regional Court in Vienna, amounted to a scathing rebuke of the Justice and State Departments, and reflected the diminished credibility of the United States authorities, even in the eyes of a European ally.

Judge Bauer said that he did not doubt the veracity of two witnesses cited by American prosecutors in their filings, “but whether these witnesses even existed,” because the Justice Department repeatedly refused to provide requested information or respond to questions.

At a hearing that stretched late into the evening, Mr. Firtash’s defense team sought to demolish the American case and discredit the Justice Department’s extradition request.

The main thrust of the team’s arguments, and the issue that clearly dominated the attention of Judge Bauer, was that the case was directed by the State Department in pursuit of larger American foreign policy goals.

[...]

In perhaps their most electrifying argument, Mr. Firtash’s lawyers asserted that an initial request by the United States for his arrest, on Oct. 30, 2013, was directly tied to a trip to Ukraine by an assistant secretary of state, Victoria Nuland, in which she sought to prevent Mr. Yanukovych from backing out of a promise to sign sweeping political and trade agreements with Europe.

Ms. Nuland left Washington on the day the arrest request was submitted toAustria. The request was rescinded four days later, said a lawyer, Christian Hausmaninger, after Ms. Nuland came to believe she had received assurances from Mr. Yanukovych that he would sign the accords.

From that point, nothing happened in the Indian bribery case, Mr. Hausmaninger said, until Feb. 26 — four days after Mr. Yanukovych was ousted after months of street protests.

The arrest request was renewed then, and the Austrian authorities detained Mr. Firtash two weeks later, the same day the new Ukrainian prime minister, Arseniy P. Yatsenyuk, was visiting President Obama at the White House.

The Justice Department has denied any political motivation in the case.

In a statement issued by the State and Justice Departments, the government said it was “disappointed” by the ruling and hoped for an appeal.

[...]

Judge Bauer said he had concluded that the American authorities had been after Mr. Firtash since at least 2006 and he noted that a finding of political motivation was sufficient to reject extradition even if a crime had occurred.

“America obviously saw Firtash as somebody who was threatening their economic interests,” Judge Bauer said, explaining his decision from the bench. But he also said the United States had not provided coherent evidence of a crime either: “There just wasn’t sufficient proof.”

The Firtash enforcement action is certainly not the first Foreign Corrupt Practices Act enforcement action against a foreign national in which the DOJ has suffered extradition defeats.  (See here for a prior guest post regarding Victor Kozeny).

 

Posted by Mike Koehler at 12:03 am. Post Categories: Dmitry FirtashExtradition




May 1st, 2015

Friday Roundup

Roundup2Exasperated, skittish, checking in, scrutiny alerts and updates, and for the reading stack.  It’s all here in the Friday roundup.

Exasperated

This recent post highlighted Assistant Attorney General Leslie Caldwell’s recent speech in which she stated – in reference to FCPA internal investigations – “we do not except companies to aimlessly boil the oil.”

This recent Law360 article notes that some attorneys are exasperated by Caldwell’s remarks.  The article states:

“[D]efense attorneys have balked at the idea that they’re spending too much time or money on investigations they’re conducting in large part for the government’s sake, saying they’re not willfully adding unnecessary work to an FCPA probe.

Many companies still feel like they’re being forced to walk the fine line between investigating problems thoroughly enough to satisfy the government without making it seem like they’re holding something back or impeding an investigation, according to Day Pitney LLP partner Bob Appleton.

“On the one hand they’re saying, ‘Be fast and don’t do an over-thorough job,’ but on the other hand, they’re saying, ‘If you only partially disclose you’ll get in trouble,’” said Appleton, a former assistant U.S. attorney.

And the costs of an investigation aren’t just limited to what a company self-reports, since the government will often then ask how the company can be sure the problem isn’t popping up anywhere else, according to Colleen P. Mahoney, partner at Skadden Arps Slate Meagher & Flom LLP.

“One of the biggest challenges is the expense after it starts,” Mahoney said about FCPA investigations at a Practicing Law Institute event Friday.

At the PLI event, SEC enforcement chief Andrew Ceresney said it was up to a company to decide what law firm to retain and how deep to investigate a potential bribery matter.

“We’re not micromanaging your internal investigation,” he said.”

Numerous posts on FCPA Professor have highlighted the staggering amount of pre-enforcement action professional fees and expenses (see also “FCPA Ripples“).

Speaking of which, Key Energy Services disclosed yesterday $18 million in expenses – for the first quarter of 2015 -”related to the previously disclosed Foreign Corrupt Practices Act (“FCPA”) investigations.”

I’ve had several conversations with FCPA practitioners about this issue.  For what it is worth, the common response is something along the following lines: FCPA practitioner agrees that pre-enforcement action professional fees and expenses have spun out of control in many instances, but FCPA practitioner insists that his/her firm is not part of the problem.

Other practitioners are also pushing back as to other aspects of Caldwell’s recent speech – namely “what cooperation looks like”.  In this recent post on the FCPA Blog an anonymous contributor states:

 ”When client companies and I have opted to cooperate early on and open up all information and records to the DOJ investigative units, I have seen the FCPA investigative team to be less interested in whether facts or evidence show violations or point to evidence raising red flags, as to how the client (and lawyer also) is bowing and mewling in anguish and sorrow before the government.

Provided the client is willing to genuflect and cry out mea culpa and beg for mercy (all three are required) there can be a happy and acceptable outcome in correcting corporate deficiencies and reaching an early valid resolution.

Executives who have somewhat less capacity to grovel underfoot are punished with the promise of crippling expansions of the process including raids and countless subpoenas to uninvolved officers, employees, consultants and accountants.

My experience is that this is not based on early findings of probable cause, but rather a haughty outrage that there was insufficient willingness to self-immolate.”

Skittish

Much has been written about whether the FCPA and its enforcement deters foreign investment.  (See here for instance).

Companies obviously make foreign investment decisions based on a host of legal and non-legal risks and thus empirically separating and measuring the impact of FCPA enforcement on foreign investment decisions is difficult.  Moreover, despite the general rise in FCPA enforcement concerning conduct in certain high risk jurisdictions such as China, India, and Brazil, there continues to be vast amounts of foreign direct investment in those countries by companies subject to the FCPA prohibitions.

Any “evidence” that the FCPA and its enforcement deters foreign investment thus tends to be anecdotal.

Following up on this prior post regarding Cambodia, the Phnom Penh Post reports:

“Despite high-profile US companies like Coca-Cola announcing plans to expand their footprint in the Kingdom, foreign investment from the US remains low compared to regional heavyweights. Large US businesses appear reluctant in setting up in the Kingdom due to corruption concerns, an unpredictable regulatory environment, and a lack of economic attractiveness that allows US interests to thrive.

[...]

Corruption remains one of the major factors keeping US companies away. According to an American Chamber of Commerce survey for 2015, 82 per cent of American businesses in Cambodia were dissatisfied with corruption – the second highest in the region after Laos.”

Checking In

Way back in 2010, Steven Jacobs, the former President of Macau Operations for Las Vegas Sands Corp., filed a civil lawsuit against Las Vegas Sands (LVS) in which Jacobs alleged various improprieties at LVS including in the FCPA context.

As noted in this Bloomberg article, Sheldon Adelson, the billionaire founder and chairman of LVS, recently testified in open court about the case and stated, among other things, that “after four years of investigating, they [the DOJ and SEC]  haven’t found a shred of evidence yet.”

Scrutiny Alerts and Updates

CSC / ServiceMesh

CSC is a Virginia-based IT company and in October 2013 it acquired acquire ServiceMesh, a cloud management company.  Various reports note that Eric Pulier, the former CEO of ServiceMesh, and head of the ServiceMesh division within CSC since ServiceMesh was acquired by that company, has left the company.

CSC sent the following statement to media about Pulier’s departure:

“On March 26, 2015 Eric Pulier was notified that his actions involving payments from the ACE Foundation—an organization founded by Mr. Pulier and not related to CSC—to former IT executives of Commonwealth Bank of Australia, a CSC client, violated CSC’s code of conduct related to conflicts of interests and appearance of improprieties. Mr. Pulier was further notified that these violations were grounds for termination of his employment.”

PTC

In this release, PTC stated:

“We have, since making a voluntary disclosure to the U.S. Securities and Exchange Commission and the Department of Justice, been cooperating to provide information to those agencies concerning expenditures by certain of our business partners in China and by our China business, including for travel and entertainment, that apparently benefitted employees of customers regarded as state owned enterprises in China. This matter involves issues regarding compliance with laws, including the U.S. Foreign Corrupt Practices Act. Negotiations with the SEC to reach a resolution of its investigation have begun but have not been concluded. We expect to begin negotiations with the Department of Justice to resolve its investigation in the near future. Resolution of this matter is likely to include fines and penalties. Given the uncertainty regarding whether settlements can be reached and, if reached, on what terms, we are not able to estimate a range of reasonably possible loss with regard to any such settlements and have not recorded any liability in connection with this matter. If settlements are reached, we believe that the associated financial liability could be material to our results of operations for the fiscal period in which the liability is recorded. Further, any settlement or other resolution of this matter could have collateral effects on our business in China, the United States and elsewhere.”

Braskem SA

Brazil-based Braskem recently disclosed in an SEC filing:

“In the context of anti-corruption allegations against certain individuals and entities in Brazil, including Petrobras, we were mentioned in allegations of improper payments made in order to receive favorable treatment in connection with certain contracts that we are party to with Petrobras. We have not received notice of any proceeding or investigation involving us that has been commenced in Brazil or the United States in connection with these allegations.

Although we have certain procedures in place, we have implemented additional procedures and controls to monitor our compliance with applicable anti-corruption laws and as a result of the recent allegations against us, have engaged Brazilian and U.S. legal counsel to conduct a voluntary internal investigation of this matter.  If any of these allegations prove to be true, or if we or any of our subsidiaries, or joint venture partners fails to comply with any of these laws, we could be subject to applicable civil or criminal penalties, which could adversely affect our overall performance.”

[…]

In early March 2015, declarations made by defendants in lawsuits filed against third parties were made public, in which Braskem and two of its former executive officers were cited in allegations of supposed improper payments between 2006 and 2012 to benefit the Company in raw-material supply agreements entered into with Petrobras. As of April 24, 2015, to the knowledge of the management, Braskem has not received any notification of the filing of any proceeding or investigation by Brazilian or U.S. authorities.

In light of such facts, the Company’s Management and Board of Directors approved in April the internal plan for investigation into the allegations (“Investigation”) to be carried out by law firms experienced in similar cases in the United States and in Brazil.  The law firms will work under the coordination of an ad hoc committee formed by members of its Board of Directors, specially created for this purpose.

In addition, the following measures have already been taken:

i)    Voluntary announcement about the Investigation and periodical updates sent to regulatory agencies of capital markets in Brazil (Securities and Exchange Commission of Brazil – CVM) and the United States (Securities and Exchange Commission – SEC, and the Department of Justice – DOJ);

ii)    Publication of two Material Fact notices and one Notice to the Market to clarify the news reports and to keep shareholders and the market informed of actions taken by the Company;

iii)   Updating the Audit Board and external auditors about the progress of the Investigation and of the actions already taken.

Braskem and its subsidiaries are subject to a series of anticorruption and anti-bribery laws in the countries where they operate. To reduce the likelihood of infringement of such laws, a series of procedures and controls were implemented and are continuously being improved.

On the other hand, if any of the allegations proves to be true, the Company may be subject to material penalties envisaged in law. At this moment, the Company Management believes that it is not possible to estimate the duration or outcome of the Investigation and, consequently, whether it will have any impact on future financial statements.

The Management is committed to taking all the necessary measures to clarify the facts and will keep the market informed of any progress on this matter.”

United Technologies

Recently, the company disclosed:

“As previously disclosed, in December 2013 and January 2014, UTC made voluntary disclosures to the United States Department of Justice (DOJ), the Securities and Exchange Commission (SEC) Division of Enforcement and the United Kingdom’s Serious Fraud Office to report the status of its internal investigation regarding a non-employee sales representative retained by United Technologies International Operations, Inc. (UTIO) and IAE for the sale of Pratt & Whitney and IAE engines and aftermarket services, respectively, in China.  On April 7, 2014, the SEC notified UTC that it was conducting a formal investigation and issued a subpoena to UTC.  UTC continues to cooperate fully with the investigations and has responded to requests for documents and information.  The DOJ and SEC also continue to request information, and the SEC issued a second subpoena on March 9, 2015 seeking documents related to internal allegations of alleged violations of anti-bribery laws from UTC’s aerospace and commercial businesses, including but not limited to Otis businesses in China.  Because the investigations are ongoing, we cannot predict the outcome or the consequences thereof at this time.”

For the Reading Stack

The NY Times goes in depth regarding the U.S’s attempt to extradite Dmitry Firtash, a Ukrainian national criminally indicted in April 2014 along with others (see here for the prior post).  According to the article:

“An Austrian judge will issue a crucial ruling in the case on Thursday at an extradition hearing here, where Mr. Firtash’s lawyers will argue that his arrest — on charges of bribing officials in India to secure a titanium mining deal that never materialized — was really an effort by the United States to remove him from public life in Ukraine, where he controls major business interests and still holds considerable clout. The Justice Department has repeatedly declined to discuss the case because it is an active prosecution, but the United States attorney’s office in Chicago, which led the investigation, has flatly denied any political motivations.

[...]

Andras Knopp, a Hungarian businessman and longtime associate of Mr. Firtash’s who is also charged in the case, said that the United States authorities had made no effort to extradite him, or even to talk to him about the case, even though he was at the center of the Indian titanium deal …”.

*****

The most recent edition of the always informative Debevoise & Plimpton FCPA Update is here.  Among the topics discussed are developments in India including potential amendments to the Prevention of Corruption Act providing for liability for a commercial organizations whose employees bribe but also creating a defense for a commercial organization commercial organization if it can prove it had “adequate procedures” in place to prevent bribery.

*****

This Bloomberg article (“The Dinner Proposal That Led United Into Corruption Probe”) begins:

“United Airlines Inc. was seeking hundreds of millions of dollars in public investment for the airport in Newark when its chief executive dined with New Jersey Governor Chris Christie’s top Port Authority official in September 2011.

Jeffery Smisek, United’s chief executive officer, wanted funding for several projects, including an estimated $600 million extension of the PATH train from downtown Newark to the airport, as the airline worked through its merger with Continental Airlines.

Halfway through dinner at Novita, an Italian restaurant in Manhattan, Port Authority Chairman David Samson surprised the group with a request of his own. He complained that he and his wife had grown weary of the trip to their weekend home in Aiken, South Carolina, because the best flight out of Newark was to Charlotte, North Carolina, 150 miles away. Until 2009, Continental had run direct service from Newark to Columbia, South Carolina, 100 miles closer.

In a tone described by one observer as “playful, but not joking,” Samson asked: Could United revive that route? An awkward silence fell over the table.

Though the United CEO didn’t agree to the request at the dinner, according to the accounts of some who attended, the airline ultimately added the money-losing route that became known as “the chairman’s flight.” Now federal prosecutors are looking into whether its genesis crossed the line from legitimate bargaining into illegal activity.”

*****

A good weekend to all.





April 30th, 2015

The Coming Battle Over The Status Of Ecopetrol

EcopetrolAs recently highlighted here by the Wall Street Journal, the Foreign Corrupt Practices Act criminal trial of former PetroTiger CEO Joseph Sigelman, originally scheduled to begin this week, was “pushed back for two months to allow him assistance from an unlikely ally: the former Colombian official he is accused of bribing.”  As noted in the article, “Mr. Sigelman is accused of paying David Duran, a former official at Colombia’s Ecopetrol SA to win business for his oil services company, PetroTiger.”

This November 2014 post highlighted how Sigelman is challenging various aspects of the DOJ’s case, including its interpretation and application of the “foreign official” element to Ecopetrol. Similar to previous “foreign official” challenges, the DOJ argued that the dispute is an issue of fact inappropriate for pre-trial disposition.  Accordingly, as in the previous “foreign official” challenges, the “foreign official” issue is moving to other phases of the case.

Recently the DOJ and Sigelman filed motions foreshadowing the evidence the parties intend to offer to prove or disprove whether Ecopetrol is an “instrumentality” of the Colombian government and thus whether Duran is a “foreign official” under the FCPA.

Although not binding in the Sigelman case pending in federal court in New Jersey, approximately one year ago in U.S. v. Esquenazi, the 11th Circuit concluded, in a case of first impression at the appellate level, that “an ‘instrumentality’ [under the FCPA] is an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.” (emphasis added).

In this letter the DOJ provides notice that it may call (1) Alejandro Linares Cantillo and (2) Carlos Mantilla McCormick to provide expert testimony.  In pertinent part, the letter states:

Alejandro Linares Cantillo

Mr. Linares is the Vice President for Legal Affairs and General Counsel of Ecopetrol S.A., and he has been in this position since October 2014. Mr. Linares’s testimony is based on his training, education, and experience as described in his curriculum vitae, including his experience at Ecopetrol S.A. (“Ecopetrol”), as well as his review of relevant material including, but not limited to, Ecopetrol’s Forms 20-F filed with the U.S. Securities and Exchange Commission, Colombian laws and regulations, scholarly articles and books, and Ecopetrol company materials. If called as a witness, Mr. Linares would generally testify about the history, business, and structure of Ecopetrol over time. Mr. Linares would also testify about the Colombian government’s control of Ecopetrol and the company’s functions as a government-controlled entity, particularly as it relates to the Mansarovar contract at issue in this case. More specifically, if called as a witness, we anticipate Mr. Linares would testify to the following:

In Colombia, the state owns all hydrocarbon reserves. To ensure proper management and supply of hydrocarbon resources to the nation, the Colombian government has adopted laws, regulations, and policies to ensure an appropriate supply of energy to the nation while responsibly maintaining the nation’s hydrocarbon resources. It effectuates these goals through various agencies and state-controlled entities, including Ecopetrol.

Ecopetrol was originally incorporated by the Colombian government on August 25, 1951, as the Empresa Colombiana de Petróleos S.A. It functioned as a governmental industrial and commercial company responsible for administering Colombia’s hydrocarbon resources.

The company’s legal form has evolved since its inception. For example, in 1970, the company adopted its first by-laws, ratifying its nature as a stateowned industrial and commercial company linked to the Ministry of Mines and Energy and fiscally supervised by the Office of the General Controllership.

In 2003 the government restructured Empresa Colombiana de Petróleos into a 100% state-owned corporation by shares linked to the Ministry of Mines and Energy and renamed the company Ecopetrol S.A. (hereinafter referred to as “Ecopetrol” regardless of time period).

In 2006 the legal nature of Ecopetrol was changed to one of a mixed economy corporation, linked with the Ministry of Mines and Energy and funded by Colombian government and private capital.

The Republic of Colombia is required by law to own at least 80% of the outstanding voting shares of Ecopetrol. In 2009 and 2010 the government owned roughly 90% of the outstanding voting shares, and it currently owns roughly 88.5% of Ecopetrol’s outstanding voting shares. Ecopetrol has had American Depository Shares trading on the New York Stock Exchange since 2008.

In 2003 the Colombia government created the National Hydrocarbons Agency (NHA), and the government granted the NHA authority over, among other things, the design, promotion, negotiation, conclusion, tracking, and management of new exploration and exploitation of Colombian hydrocarbon resources. The Ministry of Mines and Energy continues to administer the overall oil policy and planning coordination, and together with the Oil and Gas Regulation Commission it also regulates the downstream sector.

Prior to December 31, 2003, Ecopetrol exercised administrative, industrial, and commercial powers over Colombian hydrocarbon resources owned by the Republic of Colombia.

After December 31, 2003, as a mixed economy company, Ecopetrol retained authority to engage in industrial and commercial activities, under the indirect control of the Colombian government, with respect to, among other things, the exploration, exploitation, transportation, and supply and marketing of Colombian hydrocarbon resources, as well as related concessions, assets, and real estate. It does so as an association contracts administrator in the commercial sphere on behalf of the Colombian government.

Ecopetrol has also retained certain administrative functions with regard to association contracts it entered into prior to December 31, 2003, including the Mansarovar contract at issue in this case. Administrative functions retained by Ecopetrol after December 31, 2003, with respect to association contracts include, but are not limited to, the following:  management, development, and negotiation of exploration and exploitation rights in connection with hydrocarbon resources; overseeing the advancement of programs that benefit the communities in the areas of influence of the contracts; managing the Colombian government’s share of moneys and in-kind resources obtained from the exploitation of hydrocarbon resources; and managing and disposing of the assets and real estate associated with exploration and exploitation of hydrocarbon resources at the end of the Association contracts.

Ecopetrol may extend association contracts, at its sole discretion, which is an administrative function. If Ecopetrol refuses to extend an association contract, the right to exploit the hydrocarbon reserves that are the subject of the contract would revert to Ecopetrol, and Ecopetrol would have the right to exploit those reserves for an indefinite period at no additional cost to it.

Ecopetrol is the largest company in Colombia as measured by revenue, assets, and shareholder’s equity. It is also the main producer and supplier of fuel and refined products in Colombia. In recent years it has contributed approximately 15% of the Colombian government’s annual revenues through royalties, taxes and dividends, and it remains the single largest source of revenue for the government. Oil production and exports account for a significant part of Colombia’s economy. Ecopetrol accounts for a significant percentage of Colombia’s oil production, exports of crude oil, imports of refined oil products, and refining capacity.

Ecopetrol owns outright 42% of the total crude oil pipeline shipping capacity in Colombia, and in conjunction with partners 99% of the total product pipeline shipping capacity in Colombia. The Colombian government controls and regulates the pipelines through the Ministry of Mines and Energy by establishing hydrocarbon transportation tariffs and transportation regulations.

Ecopetrol is the only producer of asphalt in the country and accounts for nearly all domestic consumption.

Ecopetrol owns and manages nearly all oil refining capacity in Colombia. Because domestic demand outstrips domestic refining capacity, Ecopetrol also imports refined oil products, including gasoline. The Colombian government, by means of The Oil Prices Stabilization Fund, may control the price of gasoline and other fuels by setting prices for them domestically through the Ministry of Mines and Energy below prices in the international market. The government makes payments to refiners and importers, principally Ecopetrol, to account for any fuel price differential, in favor of Ecopetrol, caused by these domestic fuel price subsidies. The government controls the timing of such payouts to Ecopetrol and other refiners and importers.

While the Colombian government enjoys the advantages of a natural monopoly over many aspects of the management, development, and supply of hydrocarbon resources in Colombia through its control of Ecopetrol, it also restricts Ecopetrol’s market share in other areas. For example, the government prohibits Ecopetrol from owning more than 25% of any natural gas transportation company.

The Colombian government’s budget is set in part based on expected revenues from Ecopetrol. As a result of falling world prices of crude oil, it is anticipated that Ecopetrol’s revenues and profits will decline in 2015, and the Colombian government has had to cut its budget for 2015.

In addition to exerting control over Ecopetrol through law, regulation, and policy, Colombia controls Ecopetrol through its majority shareholding position, through which it directly appoints a majority of the board of directors and indirectly the chief executive officer. The board consists of nine members. As the majority shareholder, the Colombian government has the right to elect the majority of the directors. Ecopetrol’s by-laws establish that three of its directors will be the Minister of Mines and Energy, the Minister of Finance, and the Director of the National Planning Agency. The board also has the authority to hire and fire the chief executive officer of the company.

As the majority shareholder in Ecopetrol, the Colombian government may propose and approve decisions that are in furtherance of its own economic and political interests that do not necessarily benefit minority shareholders and may not be in the interest of Ecopetrol. It may also approve dividends at the ordinary general shareholders’ meeting, notwithstanding the interest of minority shareholders, in an amount that results in Ecopetrol having to reduce its capital expenditures, thereby negatively affecting Ecopetrol’s prospects, results of operations and financial condition.

In order for Ecopetrol to issue debt in international or Colombian markets with a tenor greater than one year, or incur any other form of indebtedness, the Ministry of Finance and Public Credit must first authorize the issuance of such debt and register any external debt with the Colombian Central Bank. The Colombian government has the authority to refuse to approve such issuances. These restrictions do not apply to private companies.

Ecopetrol reserves the right to plead sovereign immunity under the U.S. Foreign Sovereign Immunities Act of 1976 with respect to actions brought against it under U.S. or state securities laws.

The Office of the Controller General (“OCG”) is a government institution that acts as the highest form of fiscal control in Colombia. It is charged with ensuring the proper management of public resources and funds. The OCG has oversight responsibility for various public entities in Colombia, including Ecopetrol. As a state-controlled entity, Ecopetrol is subject to review by the OCG and has reporting requirements to it regarding the management of public funds or resources. OCG may bring actions against Ecopetrol’s employees for mismanagement of public funds or resources.

The Office of the Inspector General of Colombia (“OIG”) is an independent public institution with authority over public conduct of those in authority or exercising a public function. The OIG is charged with overseeing public officials’ performance, intervening in defense of the legal order, public funds, and fundamental rights, and instituting disciplinary actions against public officials. Ecopetrol employees are subject to the purview of the OIG.

The National Accounting Office of the Colombian government adopted accounting principles for state-owned entities in 2007 known as the Regime of Public Accounting (“RCP”). RCP differs in some regards from the accounting principles required for private enterprises. Ecopetrol has been required to prepare its financial statements in accordance with RCP since 2008. In its Form 20-F, Ecopetrol refers to this accounting regime as Colombian Government Entity GAAP.

Ecopetrol is subject to the jurisdiction of Colombia’s administrative court system. Disputes between Ecopetrol and private companies must be addressed within the administrative court system, whereas disputes between private parties are handled within Colombia’s ordinary court system.

Ecopetrol’s employees are subject to prosecution under Colombia’s laws against public corruption.

Ecopetrol is subject to Colombia’s Transparency Law, which applies to entities that exercise a public function. This law is similar to the Freedom of Information Act in the U.S.

As a government-controlled entity, Ecopetrol is required to unilaterally terminate contracts with contractors who finance terrorist activities. Private companies are not subject to this requirement.

Ecopetrol is controlled by the Colombian government. Ecopetrol functions as an instrumentality of the state, including as an industrial and commercial operator with respect to exploring, exploiting, transporting, and supplying hydrocarbon resources for the Colombian state. Ecopetrol also functions as an instrumentality of the state through its administrative functions in connection with association contracts entered into prior to December 31, 2003, including the Mansarovar contract at issue in this case. Ecopetrol also manages public resources.

Carlos Mantilla McCormick

Mr. Mantilla is the Vice President of Hydrocarbon Contracts of the NHA, and he has been in this position since 2014. Mr. Mantilla’s testimony is based on his training, education, and experience as described in his curriculum vitae, including his experience at NHA, as well as his review of relevant material including, but not limited to, Colombian laws and regulations and NHA materials. If called as a witness, Mr. Mantilla would generally testify about the history and structure of the NHA since its inception in 2003 to present, as well as the history and background of Ecopetrol as further described above in the description of Mr. Linares’s anticipated testimony. Mr. Mantilla would also testify about the Colombian government’s control of Ecopetrol and the functions that Ecopetrol and the NHA have performed and continue to perform, as described in greater detail above. More specifically, if called as a witness, we anticipate Mr. Mantilla would testify to the following:

In 2003, Colombia created the NHA and granted the NHA authority over, among other things, the design, promotion, negotiation, conclusion, tracking, and management of new exploration and exploitation of Colombian hydrocarbon resources.

After December 31, 2003, Ecopetrol continued to administer substantial hydrocarbon resources covered by association contracts with third parties, and it remained the government’s principal instrument of engaging in commercial and industrial activity in the hydrocarbon market. The NHA took over certain administrative and regulatory functions from Ecopetrol in the upstream sector, except as to those resources covered by Ecopetrol’s association contracts entered into prior to December 31, 2003. Ecopetrol has retained certain administrative functions with regard to association contracts it entered into prior to December 31, 2003, including the Mansarovar contract at issue in this case.

As a state-controlled entity, Ecopetrol is charged with exploring, extracting, processing, transporting, and marketing Colombia’s hydrocarbon resources. It is also charged with the administration of hydrocarbon resources related to association contracts entered into prior to December 31, 2003, as well as exploiting those resources and others administered by other agencies as an operator in the commercial sphere as an instrumentality of the Colombian government.

Ecopetrol is still a counterparty to the contracts that it signed before January 1, 2004, including the Mansarovar contract at issue in this case. Those contracts have clauses providing, at Ecopetrol’s sole option, for extensions. If Ecopetrol were to refuse to extend one of those contracts, the right to exploit the hydrocarbon reserves that are the subject of the contract would revert to Ecopetrol, and Ecopetrol would have the right to exploit those reserves for an indefinite period at no additional cost to it.

After NHA was created, Ecopetrol continued to perform administrative functions with regard to association contracts and performed many of the same governmental functions with respect to those contracts after NHA was created that it had performed before NHA was created.

NHA sets oil prices for exploration and production contracts that it controls, but has no role in setting prices for association contracts controlled by Ecopetrol. With regard to exploration and production contracts, NHA establishes plans related to drilling, budget, extraction, general rules, and contracting. In association contracts maintained by Ecopetrol, Ecopetrol carries out those functions, and NHA has no role in those decisions.

NHA plays no part in approving contracts with service providers with respect to association contracts, and it has no role in ensuring that private companies that sign association contracts with Ecopetrol adhere to their agreements. Ecopetrol had that responsibility before NHA was created and has retained that responsibility. NHA has certain authority over all oil fields, and thus has limited functions with respect to association contracts, including: NHA conducts technical inspections of all oil fields in Colombia. Once an association contract ends, Ecopetrol may continue to maintain the oil fields that the contract covered. To do so, Ecopetrol must submit a petition for NHA’s approval to continue to administer the oil fields covered by the contract. Ecopetrol is the only company that may submit such a petition. Royalties that are paid for oil extraction are set by NHA.

NHA has significant authority over exploration and production contracts signed after December 31, 2003.

In this letter, Sigelman’s defense counsel provides notice of the expert testimony it intends to offer.  In pertinent part, the letter states:

Justice Carlos G. Arrieta

We anticipate that Justice Arrieta will offer testimony regarding Ecopetrol, including the functions it performed between 2009 and 2010 and its relationship with the Republic of Colombia (“Colombia”) during that period. This testimony is expected to include Ecopetrol’s history, the laws and regulations bearing on its functions and its relationship with Colombia, Ecopetrol’s internal governance and operations, and the role of Ecopetrol’s employees. Justice Arrieta has already provided one declaration in this matter, [...]  and we expect that his testimony at trial will be consistent with and supplemental to that declaration.

Justice Arrieta is qualified to offer this testimony on the basis of his education, professional training, academic research, and experience in administrative law. His extensive judicial experience includes terms as Justice on Colombia’s State Council (Colombia’s highest court for administrative law disputes) and as adjunct Justice on Colombia’s Constitutional Court (Colombia’s highest court for constitutional law matters). In addition, he served for four years as Colombia’s Attorney Inspector General. Justice Arrieta’s private practice experience includes litigation and client advisory services related to administrative law issues prevalent in the oil and gas industry. He also acts as an arbitrator in disputes arising from public and commercial contracts. Additionally, Justice Arrieta was a professor of law at the Los Andes School of Law in Bogota, Colombia, for many years and served as the school’s Dean from 1986-89.

Professor David R. Mares

We anticipate that Professor Mares will offer testimony regarding the characteristics and relative autonomy of various nationally-owned and private oil and gas companies, including Ecopetrol. Professor Mares is also expected to provide testimony regarding the political, social, and economic factors influencing the creation and/or privatization of national oil companies. Professor Mares is qualified to offer this testimony on the basis of his extensive academic research of Latin American energy issues. In addition to his current teaching position at the University of California, San Diego, Professor Mares is the Baker Institute Scholar for Latin American Energy Studies at Rice University. Professor Mares has also held teaching posts at El Colegio de Mexico; the Universidad de Chile; FLACSO Ecuador; Harvard University; Stanford University; and a fellowship at the Oxford Institute for Energy Studies. In the course of his scholarship, Professor Mares has written or edited nine books, as well as hundred journal articles, book chapters, and reports. Professor Mares’s teaching includes classes on energy politics.

Justice Jorge A. Gomez

We anticipate that Justice Gomez will offer testimony regarding Colombia’s criminal laws and procedure, including the effects of certain criminal penalties. Justice Gomez is expected to provide testimony as to the penalty of debarment from performing public functions as well as to the effect of such penalty on crimes against the public administration of Colombia, such as bribery. Justice Gomez is qualified to offer this testimony on the basis of his education, professional training, academic research, and experience. His professional background includes extensive judicial experience, including terms on the Criminal Section of Colombia’s Supreme Court of Justice (Colombia’s highest court for criminal matters) as well as appellate and trial courts with jurisdiction over criminal matters. In addition, Justice Gomez’s private practice experience focuses on criminal law matters. He has taught Colombian criminal law at several universities and published academic articles in Colombian legal journals.

*****

Sigelman’s trial in U.S. District Court, District of New Jersey – Camden, is scheduled to begin on June 1st.

Posted by Mike Koehler at 12:03 am. Post Categories: FCPA TrialsForeign OfficialJoseph SigelmanPetroTiger