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Some items of interest to pass along.

The Business Case for Fighting Bribery and Corruption

Principles for Responsible Investment, a coalition of investor groups that collectively manage over $1.7 trillion in assets, recently wrote to “21 major companies in 14 countries asking them to improve their disclosure of bribery and corruption risks and avoidance measures.” For more information see here.

Upcoming Events

Hungry for more information on the FCPA and related topics? Mark your calendar for these upcoming events.

“Foreign Corrupt Practices Act (FCPA) Overview 2010: Enforcement and Compliance Strategies” – May 18th – Winston & Strawn (see here).

“The Role of HR in FCPA Compliance and Ethics” – May 18th – Thomas Fox (see here).

“The Implications of the UK Bribery Bill: Preparing for a New Era of Enforcement” – May 18th – Steptoe & Johnson (see here).

“A Focus on FCPA Investigations” – May 25th – Morgan Lewis (see here).

“Corruption: The New Global Landscape” – June 10th, June 25th – Venable and Field Fisher Waterhouse (see here).

“The Bribery Racket” – Additional Commentary

A previous post (see here) covers Nathan Vardi’s “The Bribery Racket” piece in the current issue of Forbes. For additional commentary see here from Mary Jacoby at Main Justice.

SEC Seeking “Corporate Intelligence Specialist”

Have what it takes to join the SEC’s new FCPA unit? See here to find out.

Africa Sting – Will Economic Realities Result in Additional Pleas?

The Africa Sting case (see here for numerous prior posts) is best known as the largest undercover sting operation in FCPA history.

The sting operation resulted in lots of video recordings, telephone recordings, documents and search warrant material.

According to a recent DOJ discovery filing (see here) the following, among other things, have been turned over to defense counsel:

“615 audio and video recordings of more than 150 meetings;”

“5,287 recorded telephone calls between the defendants and the cooperating witness, identified as Individual 1 in the indictments, and between the defendants and undercover FBI agents;”

“recordings of telephone calls between Individual 1 and FBI agents;”

“certain calls, approximately a minute or less in length, recorded in connection with the undercover investigation;”

“in excess of 5,000 pages of documents relating to Individual 1, including reports, expense paperwork, bank statements, quotes, emails, notes, drug tests results, payment receipts, and Skype text messages, among others;”

“emails from the accounts of Individual 1 and the undercover FBI agents;”

“nearly 3,000 pages of text messages from the telephone Individual 1 used in connection with the undercover operation;”

“documents related to the undercover investigation that are not directly related to Individual 1, including case administration documents, FBI reports, bank records, product information, and search warrant materials;” and

“materials seized during the 13 search warrants executed in connection with the undercover investigation relating to the defendants” including a total of “approximately 242,000 pages of documents,” “electronic media, including desktop computers, laptop computers, USB drives, zip discs, memory cards and DVDs, among other items, seized during the searches,” and “photographs taken in connection with the search warrants and logs of those photographs, as well as search diagrams and seizure inventories.”

The government had vast resources at its disposal in conducting the sting and continues to have vast resources at its disposal in prosecuting the case.

The defendants do not.

Another distinguishing feature of the Africa Sting case is that it involves many small-business owners.

The lawyers for the Africa Sting defendants have a duty to competently represent their clients.

That means the lawyers will have to review all of the above-referenced material (as well as other material) to better understand the facts of the case and their client’s exposure.

That is going to be very expensive. And all this is required before “active” lawyering (i.e. motions to dismiss, etc.) even begins.

Some will say, well, the Africa Sting defendants should have thought about this before (allegedly) violating the law.

Others will say, this case points out the difficulties of litigating against a DOJ with vast resources.

Will the economic realities of this situation lead to more plea deals over the summer?

Will the cost of testing an innocence claim simply be too high such that additional defendants may raise the “white flag” of surrender? If so, is it because the defendants are guilty of the crimes charged, or because of the economic realities of the situation?

*****

For the latest Main Justice update on the Africa Sting case (see here).

Breuer – Siemens Investigation (As to Individuals) Remains Open

Last week, Lanny Breuer (Assistant Attorney General – Criminal Division) testified before The Criminal Law Subcommittee of the Senate Judiciary Committee. During his Q&A exchange with Senator Arlen Specter, Breuer stated that “individuals, executives and others who were involved [in the Siemens bribery scandal], remain exposed and the matter is not closed.”

Why was Specter asking Breuer about the Siemens enforcement action?

A bit of background.

In December 2008, right in time for the holidays, the DOJ put a nice “bribery, yet no bribery” bow on the Siemens enforcement action.

According to the DOJ, for much of Siemens operations around the world “bribery was nothing less than standard operating procedure.” The egregious nature of Siemens conduct is set forth in the criminal information (see here).

Among other allegations, the information details how Siemens paid out, through various mechanisms, $805.5 million in “corrupt payments to foreign officials” including: (i) payments made by various subsidiaries, including those with offices in the U.S., to “purported business consultants, knowing that at least some or all of those funds would be passed along to foreign government officials;” (ii) money withdraw from “cash desks within Siemens’ offices” for “corrupt payments;” and (iii) “slush funds to generate cash for corrupt payments.”

As to the amount of business Siemens obtained or retained through these corrupt payments, the DOJ’s sentencing memorandum (see here) states that calculating a traditional loss figure under the Sentencing Guidelines “would be overly burdensome, if not impossible” given the “literally thousands of contracts over many years.”

Yet, Siemens was not charged with violating the FCPA’s anti-bribery provisions.

That would have hurt too much, a point made in the DOJ’s sentencing memorandum which notes that a key factor the DOJ considered in resolving the case against Siemens in the way it did was the “collateral consequences” that could have resulted from criminal antibribery charges including the “risk of debarment and exclusion from government contracts.”

All of this troubled Senator Specter who has “long been concerned about the acceptance of fines instead of jail sentences in egregious cases.” (see here). In a release, Senator Specter notes that “there are many illustrative cases but three will suffice to make the point. In each of these cases, I registered my complaint with the Department of Justice.”

One such case was the Siemens enforcement action.

As Senator Specter’s release notes:

“On December 15, 2008, Siemens AG entered guilty pleas to violations of the Foreign Corrupt Practices Act and agreed to pay $1.6 billion in fines, penalties and disgorgements with no jail sentences. Again, that amounts to a calculation as part of the cost of doing business for a company which had revenues of $104 billion and a net income of $2.5 billion in fiscal year 2008 after the penalty.”

Thus, the reason Senator Specter questioned Breuer about the Siemens enforcement action during last week’s hearing.

Set forth below is the exchange.

*****

SPECTER: Are you familiar with the Siemens prosecution, Mr. Breuer?

BREUER: I am, Senator, to a degree, I am familiar with the Siemens prosecution.

SPECTER: Well, that’s a — that’s a case where Siemens, according to the information provided to me, agreed to pay a total criminal fine of $450 million and a disgorgement of $350 million in profits. And nobody went to jail. Siemens’ income, according to the information I have, was $104 billion, and income in excess or approximately $2.5 billion in fiscal year 2008. Did that conviction arise during the course of the current administration?

BREUER: It did, Senator. It was in — it did, Mr. Chairman. It was an ongoing investigation. And you’re right. Let me just add a little to what you say. First, Siemens, its total monetary penalties were actually $1.6 billion. That would include both from the U.S. and in Germany. The company was incredibly cooperative and very, very — very, very helpful in the information it provided over an extensive period. In making Siemens’ plea, we made it as an absolute explicit provision that there was absolutely no protection for any of the individuals of Siemens, and therefore the individuals, executives and others who were involved, remain exposed and the matter is not closed. The matter — simply all that we have done is have a plea against the corporation, we have not closed out nor have we claimed to have closed out investigations with respect to individuals. They’re ongoing. And, Mr. Chairman, I agree with you, I think the hallmark of an effective criminal justice plan must be that we will prosecute individuals when appropriate and ongoing. And I should say in that vein, Mr. Chairman, just two weeks ago we received the longest sentence in an FCPA case in the history of the FCPA when we attained an 87-month sentence against a fellow who had violated and was convicted of the FCPA. So we will continue to pursue that.

SPECTER: Well, you are saying that even though the case was concluded against the corporation that the matter is ongoing as to the individuals. Ordinarily a case is wrapped up once and for all and that before a corporation will pay a fine they want to know that that’s the limit of their liability.

BREUER: Right.

SPECTER: And there’s obviously a motivation to not have a jail sentence, for the corporation to pay a fine. And this morning we heard very extensive testimony — not that it was surprising — that fines are added into the cost of doing business. One testimony related to one defendant who paid $50 million and said if it had been a criminal prosecution he would have fought it to the teeth — tooth and nail. But you are saying that you’re really going to go after some people in this Siemens matter?

BREUER: Well, Mr. Chairman, what I’m saying is that I don’t want to say whether we are or not, for the reasons that I know you understand well. But I will say is the following. We’re not willing — and you’re absolutely right. Corporations do want to settle these cases. They do want to pay money, and they do want the assurance that the matters will be closed against the individuals of their company. We’re not — we’re not going to — we didn’t allow that to happen in that case, and we won’t let it happen, for the reasons you said. Now, in the Siemens case, I do want companies to feel an enormous incentive to come in and to disclose. And in Siemens, they did come in — they did come in. They did disclose. And they provided us with an enormous amount of information. And so there was a real judgment that there was a real merit to having closure with respect to that and for the company to be rewarded for providing us with almost unparalleled cooperation.

SPECTER: Did you (inaudible) the prosecution before they made the disclosures?

BREUER: I don’t think so, in that case. I think, Senator, I’ll have to go back. That’s a good question. So my — my colleague is right. In this case, of course, one of the challenges that I was going to go into is, in this particular case, the prosecution began in Germany. And then we, of course, as we try now, more and more, to deal with the challenges we have, are working closely with our international colleagues and partners. That was the case where it began with the German prosecutors. And, of course, many of the individuals involved are in Europe. But there — nonetheless, it began in Germany. The company — we reached out, I believe. The company provided us with an enormous amount of information.

SPECTER: Mr. Breuer, what I’m getting at is, did they provide you with information after you already had the case?

BREUER: No. I mean, Mr. Chairman, in a case like this, these are very complicated cases. And this, of course, was a massive example of — of violations of the FCPA in different countries. And so, there, there’s no question that the law firm providing us, and Siemens providing us with information, were able to provide us with information that we would not have had but for them giving us the information. It was all over the world. Frankly, we would not have had the resources to have investigated to the degree that the company provided us the information. And so they did get a benefit for that. The benefit they got was certainty in their — in the resolution of the corporate deal. What they did not get was closure for the individuals.

*****

As the above exchange demonstrates, Senator Specter also seems troubled that Siemens received cooperation credit even though the credit came after the company was busted.

The DOJ’s release (see here) states:

“The resolution of the U.S. criminal investigation of Siemens AG and its subsidiaries reflects, in large part, the actions of Siemens AG and its audit committee in disclosing potential FCPA violations to the Department after the Munich Public Prosecutor’s Office initiated searches of multiple Siemens AG offices and homes of Siemens AG employees.” (emphasis added).

If Senator Specter is troubled by this aspect of the Siemens enforcement action, he may want to take a close look at the Daimler enforcement action as well.

Daimler, like Siemens, was another “bribery, yet no bribery” case as to the parent entity that orchestrated the bribery scheme (per the DOJ’s own allegations). However, unlike Siemens, Daimler was not required to plead guilty to anything – it received a deferred prosecution agreement.

In arriving at a fine amount, Daimler, like Siemens, also received cooperation credit.

The DOJ’s sentencing memorandum (see here) notes that Daimler received a sentencing credit (a credit which reduces the overall fine amount) because the “organization fully cooperated in the investigation and clearly demonstrated recognition and affirmative acceptance of responsibility for its criminal conduct.”

This despite the fact that elsewhere in the sentencing memo the DOJ notes that the entire investigation started in March 2004 when a “former Daimler employee filed a whistleblower complaint with the U.S. Department of Labor Occupational Safety & Health Administration … allege[ing] that he was terminated for voicing concerns about Daimler’s practice of maintaining secret accounts, including accounts in its own books and records, for the purpose of bribing foreign government officials.”

In other words, even though the Daimler enforcement action was hatched by an internal whistleblower, the company still received a sentencing credit for cooperating in the eventual investigation.

The sentencing range set forth in the DOJ memo is $116 – $232 million.

The ultimate $93.6 million DOJ penalty was 20% below the bottom fine range of $116 million.

DOJ justified this reduction by stating that such a “reduction is appropriate given the nature and extent of Daimler’s cooperation in this matter, including sharing information with the Department regarding evidence obtained as a result of Daimler’s extensive investigation of corrupt payments around the world.”

The DOJ further stated, “indeed, because Daimler did not voluntarily disclose its conduct prior to the filing of the whistleblower lawsuit, it only receives a two-point reduction in its culpability.” However, in a rather odd statement, DOJ then said that it “respectfully submits that such reduction is incongruent with the level of cooperation and assistance provided by the company in the Department’s investigation.”

In other words, Daimler, like Siemens, received cooperation credit even though disclosure of the conduct at issue was involuntarily. Also, the DOJ gave Daimler cooperation credit greater than that allowed under the guidelines.

In conclusion, the DOJ noted that the disposition “promotes respect for the law, provides just punishment, and affords adequate deterrence to criminal conduct for Daimler and the marketplace generally.”

*****

Mr. Breuer had a busy week last week (see here for a prior post). During his Council of Foreign Relations speech, Breuer was asked about some of the DOJ’s “old cases.” See here for the Main Justice story and his response.

In The News

The SEC Goes Searching

Last August (see here) when Robert Khuzami, the SEC’s Director of the Division of Enforcement, announced that the SEC would be creating a specialized FCPA unit he said, among other things, that:

“The Foreign Corrupt Practices Act unit will focus on new and proactive approaches to identifying violations of the Foreign Corrupt Practice Act…”

In February, Cheryl Scarboro (the head of the SEC’s FCPA Unit) similarly stated (here) that “the new unit will give us the resources and the ability to do even more going forward,” that the new unit will allow the SEC to do more industry investigations, and that one industry the SEC is focusing on is the pharmaceutical industry.

Given these comments, it should come as no surprise that a recent Wall Street Journal article notes that the SEC enforcement division sent letters “within the past two months” to several companies in the pharmaceutical and energy industries” “as part of an investigation by the SEC division that looks into potential violations of the FCPA.” According to the article, the letters ask the companies “about their internal controls to guard against bribery” specifically in terrorism-sponsor states such as Cuba, Iran, Sudan, and Syria. According to the article, “it isn’t clear which companies received the letters.” The article also notes that “the SEC probe, which is in its early stages, comes as the Justice Department’s criminal fraud section has sent letters in recent weeks to a number of pharmaceutical companies asking about payments made to foreign officials in several nations…” Both the SEC and DOJ declined to comment for the article.

Bribes for Books

A post earlier this week talked about the World Bank and other multilateral development banks (see here).

Fitting because recently the World Bank (see here) “debarred Macmillan Limited, a U.K. company, declaring the company ineligible to be awarded Bank-financed contracts for a period of six years in the wake of the company’s admission of bribery payments relating to a Trust Fund-supported education project in Southern Sudan.” According to the release, “the debarment can be reduced to three years subject to continued cooperation.”

In a press release yesterday (see here), the company said “the international publishing business, Macmillan Publishers Ltd UK (“Macmillan”), has today confirmed that it has voluntarily referred to the Serious Fraud Office its concerns over historic payments made by a subsidiary of its education business, Macmillan Education, to secure a contract in Southern Sudan.”

The Bribery Racket

Those are the words on the cover of the current issue of Forbes Magazine.

The feature article (here) by Nathan Vardi is “How Federal Crackdown on Bribery Hurts Business And Enriches Insiders.”

Given my soon to be published piece, “The Facade of FCPA Enforcement” and my other comments on FCPA Inc., the FCPA’s revolving door, voluntary disclosure and the role of FCPA counsel, etc. (see here, here, here and here), Vardi’s article resonates with me, and perhaps with you as well.

Below are a few snippets from Vardi’s article:

“[FCPA is” nice work if you can get it–and to the tune of billions of dollars, lawyers, accountants and consultants, many with past ties to the Justice Department, are getting it. In the last few years, as the feds cranked up enforcement of the 33-year-old Foreign Corrupt Practices Act, a thriving and lucrative anti-bribery complex has emerged. Whether it’s having any impact on reducing bribery is another matter. Instead, companies can find themselves getting extorted in foreign lands, only to get extorted again by Washington. It works generally like this: A company that suspects bribery overseas hires a battery of lawyers, accountants and investigators who may then report any findings to Justice in hopes of some undefined leniency. More likely, the company pays out huge fines and then hires more lawyers as government-mandated compliance monitors, a job that can stretch into years of legal billing.”

“This is good business for law firms,” says Joseph Covington, who headed the Justice Department’s FCPA efforts in the 1980s and is now codirector of white-collar defense at Jenner & Block. “This is good business for accounting firms, it’s good business for consulting firms, the media–and Justice Department lawyers who create the marketplace and then get yourself a job.”

“[Mark] Mendelsohn declines to comment on his new job other than to note that it is routine for lawyers who leave the Justice Department to do white-collar defense work for corporations.” (For more on Mendelsohn see here and here)

“What are these prosecutors accomplishing? Maybe they are fighting for truth and justice. Maybe, that is, it makes sense for the U.S. to hold its corporations to a higher standard of integrity than the French or Chinese outfits they compete against when trying to win business abroad. The prosecutors, though, are doing something else at the same time. They are creating a lucrative industry–FCPA defense work–in which they will someday be prime candidates for the cushy assignments. A former prosecutor, to be sure, does not work on the defense of the same case he had as a government lawyer. But there is nothing to stop prosecutors from ginning up cases that will feed the lawyers who used to have their jobs or from looking forward to a payday in the private sector that will be made possible by their busy successors at Justice.”

“Many of the 150 pending cases will probably end with so-called deferred prosecution agreements. These involve the government threatening to bring an indictment against a company–which could effectively put the firm out of business–unless it agrees to adhere to certain practices. This hammer gives the feds immense power–for one thing, they don’t have to prove their legal theories of bribery in court.” (For more on non-prosecution and deferred prosecution agreements and the FCPA see here).

“The scope of things companies have to worry about is enlarging all the time as the government asserts violations in circumstances where it’s unclear if they would prevail in court,” says Lucinda Low, who has helped companies deal with the FCPA for years. “You don’t have the checks and balances you would normally have if you had more litigation.”

“The FCPA provides moneymaking opportunities even after a case is resolved. Following settlements the Justice Department often requires companies to hire a compliance monitor, whose job is to review a company’s continuing anti-bribery efforts. It seems that an important qualification for these gigs is having previously worked at the Justice Department–as 7 of the 13 FCPA monitors have done. When it came time for Daimler to pick a government-mandated compliance monitor for three years, the company hired former fbi director Louis Freeh.” (For more see here and here).

Vardi also discusses the recent NATCO matter (see here) – a case that resulted in a $65,000 SEC civil monetary penalty. Vardi states, “Natco reported the issue to the government and paid outside lawyers and accountants $11 million to investigate, causing Natco cash-flow problems.” (For additional voluntary disclosure cases that have seemingly gotten out-of-hand see here).

There’s alot in Vardi’s article.

So, what do you think?

As always, comments (even if anonymous) are welcome.

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