September 11th, 2014

When The Government Does Not Pay

Reading the news with FCPA goggles on is an occupational hazard.

So it was when reading this recent Wall Street Journal concerning the dysfunctional Venezuelan government and the impact on air travel in the country.  According to the article”the cash-strapped government [is] holding back on releasing $3.8 billion in airline-ticket revenue because of strict currency controls,” and because of this, international airlines “have slashed service to Venezuela by half since January, adding another layer of frustration to daily life” in Venezuela.  The article further states that “despite several months of talks over the money Venezuela owes to airlines, little progress has been made” and that “about two-thirds of the 24 airlines that are affected, including those with the most money tied up in Venezuela, haven’t reached a payment agreement with the state.”  The article adds that those airlines “that have reached deals lack guarantees that the funds will be released.”

The question is posed:  can Foreign Corrupt Practices Act issues arise if a company makes payments to a foreign official who refuses, in the absence of such payments, to release funds legitimately owed to the company?

Your mind is probably wondering through the statutory elements.

Corrupt intent.

Congress tells us in the FCPA’s legislative history that “the word ‘corruptly’ connotes and evil motive or purpose.” How can seeking what one is legally entitled to receive evil?

Obtain or retain business.

In U.S. v. Kay, the 5th Circuit did conclude that payments outside the context of foreign government procurement “could” violate the FCPA, but only if payments were intended to lower a company’s cost of doing business enough to assist the company in “obtaining or retaining” business.  Specifically, the court stated:

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

Thus, how can seeking what one is legally entitled to receive satisfy the “obtain or retain business” element?

Facilitating payments.

The FCPA expressly excludes from the anti-bribery provisions payments made “to expedite or to secure the performance of a routine government action by a foreign official.”

How can seeking what one is legally entitled to receive not fit within the exception for “secur[ing] the performance of a routine government action”?

Despite the above legal authority, there have been at least three – what can only be called dubious – FCPA enforcement actions based on companies or individuals seeking what they are legally entitled to receive.

In 2013, the DOJ and SEC extracted $54 million from Archer Daniels Midland Co. and related entities.  As explained in the article “Why You Should Be Alarmed by the ADM FCPA Enforcement Action,” the principal feature of the enforcement action was that ADM and its shareholders were victims of a corrupt Ukraine government which refused to release value-added tax refunds legitimately owed to the company.  In the words of the DOJ, “the Ukrainian government did not have the money to pay VAT refunds that it owed to companies that sold Ukrainian goods outside of Ukraine.”  Likewise, the SEC acknowledged that the “Ukrainian government determined to delay paying the VAT refunds owed or did not make any refunds payments at all.”

Prior to the ADM action, there was a 2010 SEC action against Joe Summers concerning conduct in Venezuela.  The title of this previous post was “Paying to Secure Receivables Is Now Bribery?” and it began as follows.

“Attention to companies (and employees) operating around the world. If you are party to a contract, and a mid-level employee at the entity receiving services under the contract holds up payment of money the company is legitimately entitled to receive, but the mid-level employee requests payment in order to release the funds, and you make the requested payment, you are violating the Foreign Corrupt Practices Act.”

As highlighted in the previous post, part of the SEC’s allegations included the following.

“Following widespread strikes and civil unrest in Venezuela in late 2002, Pride [...] and other companies performing work for PDVSA (PDVSA is the Venezuela state-owned oil company) had difficulty collecting outstanding receivables from PDVSA. By early 2003, Pride [...] had significant unpaid receivables for services that it had provided to PDVSA. In or around March or April 2003, Pride [...] received information that a mid-level PDVSA accounts payable employee was holding up the payment of funds owed to Pride [...] and wanted a payment of approximately $30,000 in order to release the funds due. In or around March or April 2003, Summers authorized a payment of approximately $30,000 to a third party, believing that all or a portion of the funds would be offered or given by the third party to an employee of PDVSA for purposes of securing an improper advantage in receiving payment from PDVSA. Shortly thereafter, in or around April 2003, Pride [...] received overdue payments from PDVSA for work that Pride [...] had performed.”

A third example of an FCPA enforcement action being based on a dysfunctional government not paying a company money it was legitimately owed was highlighted in this previous titled “One of the More Dubious FCPA Enforcement Actions of All-Time” concerning a 1994 DOJ enforcement action against Vitusa Corporation and its President Denny Herzberg.

As highlighted in the previous post, the DOJ alleged that Vitusa (a New Jersey corporation engaged in the business of selling commodities and other goods) “entered into a lawful contract to sell milk powder to the Government of the Dominican Republic.”

The DOJ then alleged as follows.

“Although Vitusa delivered the milk powder to the Government of the Dominican Republic, the Dominican government did not pay Vitusa promptly for the milk powder received and, in fact, maintained an outstanding balance due for an extended period of time.  Vitusa, therefore, made various efforts to collect the outstanding balance due, including contacting officials of the United States and Dominican Governments to obtain their assistance in securing payment in full.”

According to the DOJ, “during the pendency of the contract, Servio Tulio Mancebo (a citizen of the Dominican Republic) communicated to Herzberg a demand made by a foreign official [a senior official of the Government of the Dominican Republic] which called for the payment of a ‘service fee’ to that official in return for the official using that official’s influence to obtain the balance due to Vitusa for the milk powder contract from the Dominican Government.” According to the DOJ, “Herzberg agreed to Mancebo’s proposal that Vitusa would pay a ‘service fee’ indirectly to the foreign official.”  Thereafter, the DOJ alleged that the Government of the Dominican Republic made payment of $63,905.12 to Vitusa on the contract, but that following Herzberg’s instruction, “Mancebo retained $20,000 from that payment.” According to the DOJ, Vitusa and Herberg knew “that all or a portion of the money would be given to the foreign official for the purpose of inducing the official to use that official’s position and influence with the Government of the Dominican Republic in order to obtain and retain business, that is, full payment of the balance due for Vitusa’s prior sale of milk powder to the Government of the Dominican Republic.” Based on the above allegations, the DOJ charged Vitusa with violating the FCPA’s anti-bribery provisions.

In recent years, it has become popular to talk about the “victims” of FCPA enforcement actions and feel good proposals have even been made suggesting that “victims” (you know, the citizens of country x  which served as the locus of an FCPA enforcement action) are deserving of compensation from the FCPA settlement amount.

As the above examples highlight however, sometimes the “victims” of FCPA enforcement actions are the companies or related individuals resolving the actions because they were legitimately owed money by a dysfunctional government that refused to pay.

Posted by Mike Koehler at 12:04 am. Post Categories: Non-Payment of Legal ObligationsVictims




September 10th, 2014

“The FCPA In A New Era” Continues To Generate A Buzz

New EraMy new book “The Foreign Corrupt Practices Act in a New Era” has been in the marketplace for a few months and I am grateful that it continues to generate a buzz.

Thomas Fox over at the FCPA Compliance and Ethics Blog says:

“[The book] should become one of the standard texts for any FCPA compliance practitioner, law student studying the FCPA or anyone else interested in anti-bribery and anti-corruption. It should be on your FCPA library bookshelf.”

In addition, I recently chatted with Fox about the book during a two-part Q&A podcast on FCPA Compliance and Ethics Report. See here for Part I and here for Part II.  (As noted in the introduction of both parts, a technical glitch makes it difficult to hear Fox, but you can hear my responses just fine).

Over at thebriberyact.com, the headline reads “buy it” and the review states:

“Mike Koehler’s new book is probably the best book we’ve read about the FCPA. [...] For those wanting a pair of ‘FCPA goggles’ no book is, in our opinion, better.”

As previously noted in this post, here is what others are saying as well about the book.

Michael Mukasey (Former U.S. Attorney General – Partner, Debevoise & Plimpton)

“Professor Mike Koehler has brought to this volume the clear-eyed perspective that has made his FCPA Professor website the most authoritative source for those seeking to understand and apply the FCPA.  This is a uniquely useful book, laying out systematically the history and rationale of the FCPA, as well as its evolution into a structure governed as much by lore as by law.  It will be valuable both to those who counsel international corporations, whether in connection with immediate crises or long-term strategies; and to those who contemplate what the FCPA has become, and how it can be improved.”

Richard Alderman (Former Director of the UK Serious Fraud Office)

“An excellent and thought-provoking book by a great expert. Backed up by rigorous analysis of cases, Professor Koehler constantly challenges those involved in anti-corruption work by asking the question “why?” He puts forward many constructive and well-argued suggestions for improvements that need to be considered. I have learned a lot from Professor Koehler over the years and I can thoroughly recommend this book.”

Daniel Chow (Professor of Law, The Ohio State University Moritz College of Law)

“This is the single most comprehensive academic treatment of the Foreign Corrupt Practices available. Professor Koehler’s book will become the authoritative standard for the field. The book not only treats the history of the FCPA, but analyzes the statute’s elements in detail, discusses current cases, and makes proposals for reforms where the current law is deficient. The book is written in a clear, accessible style and I will use it often as a resource for my own scholarly work.”

For media coverage of the book including Q&A’s, see here from Corporate Counsel, here from Global Investigations Review; here from Corporate Counsel Weekly; here from Corporate Crime Reporter; and here from Thomson Reuters. (Note, I have no input as to the title of the articles).

To order a hard copy of the book, see here and here; to order an e-copy of the book, see here and here.

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




September 9th, 2014

The Gray Cloud Of FCPA Scrutiny Simply Lasts Too Long

Gray CloudLegal scrutiny – whether in the FCPA context or otherwise – is a cloud hanging over a business organization.  When that legal scrutiny can result in potential criminal liability, the cloud is black or at the very least gray.

For many companies, the gray cloud of FCPA scrutiny simply lasts too long.

If you dig into the details of most corporate FCPA enforcement actions you quickly discover that the alleged conduct at issue occurred 5-7 years, 7-10 years, and in some instances, 10-15 years prior to the enforcement action.

For instance, in a 2012 enforcement action against pharmaceutical company Biomet the conduct at issue went back to 2000; in a 2012 enforcement action against pharmaceutical company Pfizer the conduct at issue went back to 1997; and in a 2012 enforcement action against trading and investment firm Marubeni the conduct at issue went back to 1995.   Likewise, in a 2013 enforcement action against oil and gas company Total, the conduct at issue went back to 1995.   So old was the conduct giving rise to the Total enforcement action that the DOJ made the unusual statement in the DPA that “evidentiary challenges” were present for both parties given that “most of the underlying conduct occurred in the 1990s and early 2000s.”

Statute of limitations are ordinarily the remedy the law provides for legal gray clouds.

In 2013, in Gabelli v. SEC (an SEC enforcement action outside the FCPA context) the Supreme Court stated:

“Statute of limitations are intended to ‘promote justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared.  They provide ‘security and stability to human affairs.  [They] are ‘vital to the welfare of society [and] ‘even wrongdoers are entitled to assume that their sins may be forgotten.’ […] It ‘would be utterly repugnant to the genius of our laws if actions for penalties could ‘be brought at any distance of time.’”

The Supreme Court further stated that statute of limitations are even more important in a government enforcement action compared to a case brought by a private plaintiff.

“There are good reasons why the fraud discovery rule has not been extended to Government enforcement actions for civil penalties. […]  The SEC, for example, is not like an individual victim who relies on apparent injury to learn of a wrong. Rather, a central ‘mission’ of the Commission is to ‘investigate potential violations of the federal securities laws.’ Unlike the private party who has no reason to suspect fraud, the SEC’s very purpose is to root it out, and it has many legal tools at hand to aid in that pursuit. […]  Charged with this mission and armed with these weapons, the SEC as enforcer is a far cry from the defrauded victim the discovery rule evolved to protect.  In a civil penalty action, the Government is not only a different kind of plaintiff, it seeks a different kind of relief. The discovery rule helps to ensure that the injured receive recompense. But this case involves penalties, which go beyond compensation, and are intended to punish, and label defendants wrongdoers.”

Why, despite the importance of statute of limitations to our legal system and Supreme Court recognition that it “would be utterly repugnant to the genius of our laws if actions for penalties could be brought at any distance of time,” do most corporate FCPA enforcement actions concern conduct well beyond the statute of limitations?

Simply put, because in corporate FCPA enforcement actions the fundamental black-letter legal principle of statute of limitations seems not to matter.  Granted counsel for a company under FCPA scrutiny based on conduct beyond the limitations period can argue about statute of limitation defenses around conference room tables behind closed doors in Washington, D.C.  However, like with other FCPA issues, to truly challenge the enforcement agencies first requires that the company be criminally or civilly charged, something few corporate leaders are willing to let happen.

In short, cooperation is the name of the game in corporate FCPA inquiries and to raise bona fide legal arguments such as statute of limitations is not cooperating in an investigation.  Given the “carrots” and “sticks” relevant to resolving corporate FCPA enforcement actions, one of the first steps a company the subject of FCPA scrutiny often does to demonstrate its cooperation is agree to toll the statute of limitations or waive any statute of limitations defenses.

A former DOJ enforcement attorney noted:

“As a practical matter, companies, especially publicly held companies […], typically make a strategic decision to fully cooperate with a DOJ investigation. Despite the potential success of a statute of limitations defense, a company will often make the judgment that the negative press of a protracted investigation and the uncertainty of the outcome at trial make cooperation the more prudent business judgment. The company’s hope is that it will be given credit for the cooperation and it will achieve a better outcome than if it went to trial (i.e., avoid charges, a DPA, or a reduced fine).”

Given this dynamic, the enforcement agencies face little or no time pressure in bringing corporate FCPA enforcement actions.  The end result is that the gray cloud of FCPA scrutiny often hangs over a company far too long.  For instance, Pfizer’s FCPA scrutiny began in 2004 but was not resolved until a 2012 enforcement action.  Likewise, Total’s FCPA scrutiny began in 2003 but was not resolved until a 2013 enforcement action.

Regarding the typical long periods of corporate FCPA scrutiny, an FCPA commentator stated:

“[Companies under FCPA scrutiny are] routinely asked to waive the statute of limitations. They could refuse but none do; refusal might trigger an instant enforcement action against the company or its people. So the waiver gives the feds limitless time to investigate, deliberate, or procrastinate. And no one can force the DOJ or SEC to move on, either with an enforcement action or a declination. The result? Companies [under FCPA scrutiny] get stuck in FCPA limbo.  […] But the DOJ and SEC should always keep one eye on the calendar. The threat of FCPA enforcement […] casts a long shadow. It darkens the future for management, shareholders, lenders, customers, and suppliers. Exactly the problem the statute of limitations was supposed to fix.”

Another FCPA commentator stated:

“The Justice Department and the SEC attorneys have a duty to manage caseloads and move cases responsibly. I called it “cut and run.”  Either the government has the evidence or it does not – and they now fairly early on what direction a case is heading.”

All of the above comments are of course spot-on.

Yet when black letter legal principles matter little, the end result is that the gray cloud of FCPA scrutiny simply lasts too long and the DOJ and SEC are part of the problem.

Posted by Mike Koehler at 12:04 am. Post Categories: Statute of Limitations




September 8th, 2014

Four-Time Ironman

IronmanMy annual second Monday of September off-topic post.

Yesterday, I competed in Ironman Wisconsin for the fourth-straight year and became a four-time Ironman.  I completed the event (a 2.4 mile swim, a 112 mile bike and a 26.2 mile run) in 12 hours and 5 minutes.  A podium finish it was not, but it was my second best time in the event.

Why Ironman?

To those who have done it, you know, but it is hard to explain.

For me the answer is as follows.

There are currently people who are physically unable, or practically unable given their circumstances in life – to do an Ironman. But I am capable at the present moment.

Moreover, there will come a day in which I will be unable to do an Ironman, but that day has not yet arrived and god-willing will not arrive for some time.  But I am capable at the present moment.

Ironman is obviously a physical test, but a mental and emotional journey just the same.  It takes determination to get to the finish line as well as courage to put yourself at the starting line.  For me, Ironman is a place to channel my competitive juices and accomplish a cathartic cleanse each year.  Each year, during the physical, mental and emotional journey that is Ironman, I learn something new about myself, my life, and those around me that I might not have learned but for putting myself through the journey.

Thanks for listening and tomorrow we will return to the regularly-scheduled program.

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




September 5th, 2014

Friday Roundup

Knox to FCPA Inc., DOJ response brief filed, SFO speeches, and asset recovery.  It’s all here in the Friday roundup.

Knox to FCPA Inc.

As highlighted in this prior post, over the summer Jeffrey Knox (DOJ Fraud Section Chief) followed the same tired script on a number of FCPA issues.  It will be interesting to hear / read of Knox’s positions in the future as – following a well-traveled career path for DOJ FCPA enforcement attorneys – he is leaving government service for the private sector to provide FCPA investigative and compliance services to business organizations subject to the current era of FCPA enforcement.  (See here from the Washington Post, here from the Wall Street Journal, and here from the New York Times).

Knox is headed to Simpson Thatcher (also home to former SEC FCPA Unit Chief Cheryl Scarboro – see here for the prior post). This Simpson Thatcher release states in pertinent part:

“Mr. Knox will be a partner based in the Firm’s Washington, D.C. office and a member of the Firm’s Government and Internal Investigations Practice. During his tenure at the DOJ, Mr. Knox served as the Chief and, before then, the second-ranking official of the Criminal Division’s Fraud Section, which has responsibility for some of the nation’s most significant fraud cases, including … Foreign Corrupt Practices Act (FCPA) criminal investigations and prosecutions in the United States.”

[...]

“We are pleased to welcome Jeff back to the Firm,” said Bill Dougherty, Chairman of Simpson Thacher’s Executive Committee. “His deep experience in overseeing high-stakes government investigations and enforcement actions will be a significant asset to our clients as they navigate an increasingly complex enforcement landscape.” “We are very excited that Jeff is joining our Government and Internal Investigations team here at Simpson Thacher. As Chief of the Fraud Section, Jeff has presided over many of the most significant financial fraud, healthcare fraud, and FCPA investigations in recent years, and we know that he is greatly respected within both the DOJ and the white collar bar. His experience and insight will provide substantial value to our clients,” added Mark J. Stein, Head of the Firm’s Government and Internal Investigations Practice.”

The release further states: “[Knox] was a contributor to the DOJ and SEC’s A Resource Guide to the FCPA, published in 2012.”

As I have done in all previous instances of high-ranking DOJ or SEC FCPA enforcement attorneys leaving government services for lucrative FCPA related jobs in the private sector (see here for instance), I will restate my position.

As to DOJ and SEC FCPA enforcement attorneys who have supervisory and discretionary positions and articulate government FCPA policies, it is in the public interest that such individuals be prohibited, upon leaving government service, from providing FCPA defense or compliance services in the private sector for a five-year period.

DOJ Response Brief Filed

This previous post highlighted the motion to dismiss filed by former Alstom executive Lawrence Hoskins in the criminal FCPA action against him.  In short, the motion to dismiss stated that the DOJ’s indictment “charges stale and time-barred conduct that occurred more than a decade ago; it asserts violations of U.S. law by a British citizen who never stepped foot on U.S. soil during the relevant time period; and, it distorts the definition of the time-worn legal concept of agency beyond recognition.”  As noted in the prior post, much of Hoskins’s brief focuses on the issue of whether he withdrew from the alleged criminal conspiracy involving alleged improper payments at the Tarahan power plant project in Indonesia.

Earlier this week, the DOJ filed this response brief.  In pertinent part, the DOJ’s brief states:

“The defendant seeks to have the Court take the extraordinary step of dismissing the Indictment against him at this pretrial phase based on his interpretation of the legal import of  certain allegations contained in the Indictment, supplemented by his own selective version of events contained in an affidavit attached to his motion. The Indictment, however, sets forth more than sufficient facts to support the charged crimes. Moreover, at trial the Government expects to present substantial additional evidence supporting the charges, including facts that bear directly on the arguments raised by the defendant in his motion. The defendant’s motion thus represents a novel effort to – in effect – invent and obtain summary judgment in the criminal process based on the claim that he has established the factual basis for his defenses. For good reason, the law provides that only after the Government has presented its case should a judge and jury grapple with the legal and factual sufficiency of that evidence. Thus, the defendant’s motion should be denied. Even addressing the merits of his arguments at this premature stage, however, the defendant’s motion should fail.

In particular, the defendant’s motion fails because: (1) the issue of withdrawal is necessarily a factual one to be decided by a jury and, nonetheless, the defendant did not withdraw from the charged conspiracies; (2) the Indictment has adequately alleged, and the Government will prove at trial, that the defendant was an “agent” of a domestic concern under the Foreign Corrupt Practices Act (“FCPA”), the charged conduct is domestic (not extraterritorial), and Congress has not specially excepted the defendant from prosecution under the FCPA and, thus, he can be liable for causing, aiding and abetting, or conspiring to commit an FCPA violation even if he is not guilty as a principal; and (3) the Indictment alleges continuing transactions (the bribe payments) that were initiated from Connecticut and alleges that the defendant aided and abetted the transactions through acts in Connecticut, and thus the money laundering charges are properly venued in the District of Connecticut.”

SFO Speeches

David Green’s (Director of the U.K. Serious Fraud Office) recent speech regarding a “cross-section of SFO cases” included the following in the foreign bribery space:

  • Barclays/Qatar: is an investigation, begun in 2012, into the circumstances surrounding Barclays’ £8bn recapitalisation in 2008.
  • Rolls Royce: concerns allegations of bribery carried out by local agents in return for orders in various markets, touching several divisions of Rolls Royce business activity.
  • GlaxoSmithKline: this is an investigation into allegations that bribes were paid in order to increase business in several jurisdictions.
  • GPT: this investigation concerns a subsidiary’s business relationship with the Saudi National Guard.
  • Alstom: this is an ongoing investigation into the use of British subsidiaries of a major French multinational to dispense bribes in several jurisdictions in order to secure large infrastructure contracts. Charges have already been laid against a subsidiary.
  • The Sweett Group: this investigation concerns allegations of bribes paid in return for building contracts in North Africa.

For another recent speech by Alun Milford (General Counsel of the SFO) on cooperation and disclosure, see here.

Asset Recovery

In news related to the DOJ’s Kleptocracy Asset Recovery Initiative (under which prosecutors in the DOJ Asset Forfeiture and Money Laundering Section work in partnership with federal law enforcement agencies to forfeit the proceeds of foreign official corruption – see this 2009 post highlighting Attorney General Holder’s announcement of the program), the DOJ announced:

“The Department of Justice has seized approximately $500,000 in assets traceable to corruption proceeds accumulated by Chun Doo Hwan, the former president of the Republic of Korea.   This seizure brings the total value of seized corruption proceeds of President Chun to more than $1.2 million.  [...] Chun Doo Hwan orchestrated a vast campaign of corruption while serving as Korea’s president,” said Assistant Attorney General Caldwell.   “President Chun amassed more than $200 million in bribes while in office, and he and his relatives systematically laundered these funds through a complex web of transactions in the United States and Korea.   Today’s seizure underscores how the Criminal Division’s Kleptocracy Initiative – working in close collaboration with our law enforcement partners across the globe – will use every available means to deny corrupt foreign officials and their relatives safe haven for their assets in the United States.”

*****

A good weekend to all.

 

Posted by Mike Koehler at 12:04 am. Post Categories: Asset RecoveryEnforcement Agency PolicyEnforcement Agency SpeechesFCPA Inc.Lawrence HoskinsSerious Fraud OfficeUnited Kingdom