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BAE – The Non-Bribery Bribery Allegations

Back in law school, a professor was fond of the phrase ““if it walks like a duck, quacks like a duck, looks like a duck, it must be a duck.”

Among other allegations, DOJ’s criminal information (here) against BAE alleges that BAE served as the “prime contractor to the U.K. government following the conclusion of a Formal Understanding between the U.K. and the Kingdom of Saudi Arabia (“KSA”)” in which BAE sold to the U.K. government, which then in turn sold to the Saudi government several Tornado and Hawk aircraft, “along with other military hardware, training and services.” The information refers to these frequent arrangements as the “KSA Fighter Deals.”

In connection these deals, the information alleges that “BAE provided substantial benefits to one KSA public official, who was in a position of influence regarding the KSA Fighter Deals (the “KSA Official”), and to the KSA Official’s associates.” The indictment alleges that BAE “provided these benefits through various payment mechanisms both in the territorial jurisdiction of the U.S. and elsewhere.”

WALKS LIKE A DUCK!

This allegation is important from an FCPA perspective because the FCPA only applies to a company like BAE (a foreign company with no shares listed on a U.S. exchange) if conduct in furtherance of a bribery scheme has a U.S. nexus. See 78dd-3. [BAE does have a wholly-owned U.S. subsidiary – a “domestic concern” under the FCPA – but the information states that this entity was not involved in the conduct alleged in the information].

In addition, the information contains additional allegations which clearly demonstrate that BAE’s bribery scheme had a U.S. nexus. For instance, the information alleges that BAE “provided support services to [the] KSA Official while in the territory of the U.S.” and that these benefits “included the purchase of travel and accommodations, security services, real estate, automobiles and personal items.” The information alleges that over $5 million in invoices for benefits provided to the KSA Official were submitted by just one BAE employee during a one year period.

QUACKS LIKE A DUCK!

The information also alleges that BAE “used intermediaries and shell entities to conceal payments to certain advisers who were assisting in the solicitation, promotion and otherwise endeavoring to secure the conclusion or maintenance of the KSA Fighter Deals.”

Specifically, the information alleges that “in connection with the KSA Fighter Deals, BAE agreed to transfer sums totaling more than £10,000,00 and more than $9,000,000 to a bank account in Switzerland controlled by an intermediary. BAE was aware that there was a high probability that the intermediary would transfer part of these payments to the KSA Official.”

Such “high probability” language is a direct quote from the FCPA’s so-called third party payment provisions which prohibit making improper payments to any person “while knowing that all or a portion” of the money will be given to a foreign official in order to obtain or retain business. The FCPA specifically provides that “[w]hen knowledge of the existence of a particular circumstance is required for an offense, such knowledge is established if a person is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist.”

In order words, the “high probability” language used in the BAE criminal information is no mere coincidence. In fact, that language (i.e. a company was aware that there was a high probability that the intermediary would transfer part of its payments to a foreign official) is frequently used by the DOJ in resolving FCPA antibribery actions.

For instance, in the InVision FCPA enforcement action, the “investigations by the DOJ and SEC revealed that InVision, through the conduct of certain employees, was aware of a high probability that its agents or distributors” in Thailand, China and the Philippines “had paid or offered to pay money to foreign officials or political parties in connection with transactions or proposed transactions for the sale by InVision of its airport security screening machines.” (See here). Specifically, the non-prosecution agreement (here) notes that: (i) InVision “was aware of a high probability that part of the source of funds” to an agent was to be used by the agent “to fund an offer to promise to make payments” to Thai officials; (ii) InVision authorized a payment to an agent “with awareness of a high probability” that the agent “intended to use part of that payment to influence” Chinese officials; and (iii) InVision sought authorization for a payment to an agent “with awareness of a high probability that” the agent “intended to use part of that payment to influence officials of the government of the Philippines” – all in an effort to obtain or retain business for InVision.

LOOKS LIKE A DUCK!

Yet, the DOJ’s criminal information merely charges one count of conspiracy and it lacks any FCPA antibribery charges. Moreover, the conspiracy charge relates only to “making certain false, inaccurate and incomplete statements to the U.S. government and failing to honor certain undertakings given to the U.S. government, thereby defrauding the United States” and “caus[ing] to be filed export license applications with [various U.S. government entities] that omitted a material fact” concerning fee and commission payments.” Among the false statements BAE is alleged to have made to the U.S. government is its commitment to not knowingly violate the FCPA.

This is the only mention of the FCPA in the information despite the above allegations concerning the KSA Fighter Deals – facts which clearly implicate the FCPA’s antibribery provisions.

In other words, NO DUCK!

For a prior post on BAE (see here).

NPAs, DPAs, and the FCPA

Too many acronyms? For the uninitiated, this post is about non-prosecution agreements (NPAs) and deferred prosecution agreements (DPAs) in the context of the Foreign Corrupt Practices Act (FCPA).

The Government Accountability Office (GAO) recently released a report (here) regarding DOJ’s use of NPAs/DPAs. The report follows a prior GAO report on the use of corporate monitors in NPAs/DPAs (see here for the prior post).

The recent GAO report is not FCPA specific, although it does mention the FCPA as being one area where NPAs and DPAs are frequently utilized, and as readers well know, most FCPA enforcement actions against companies are resolved through DPAs or NPAs (see here for the UTStarcom, Inc. NPA, here for the Helmerich & Payne NPA etc.).

Thus, the GAO report is very much “on-point.”

While the report talks about other issues, this post will focus on judicial review of NPAs / DPAs – or more accurately the lack of judicial review.

GAO identified 152 NPAs/DPAs that DOJ prosecutors negotiated between 1993 (when the first two were signed) and September 2009.

Because NPAs are not filed with a court, there is absolutely no judicial review of NPAs. Thus, there is no independent review of whether factual evidence actually exists to support the essential elements of the crime “alleged” or whether valid and legitimate defenses exist. Thus, GAO had nothing to analyze in terms of judicial review of NPAs.

DPAs though are filed with a court, and as stated in the report, “the Speedy Trial Act grants a court the authority to approve the deferral of a prosecution pursuant to a written agreement between the government and the defendant.” (See 18 USC 3161(h)(2)).

“To assess what role the courts have played in the DPA process,” GAO “obtained written responses to structured interview questions from 12 of the 14 judges who had overseen DPAs in federal courts.”

The judicial responses were anonymous and safeguards were put in place to protect the confidentiality of the judges’ answers.

What did the responses reveal?

According to the GAO, “judges reported they were generally not involved” in the DPA process.

Specifcally, the GAO found that:

“Nine of the 12 judges stated that they did not hold a hearing to review the DPA or its terms, while the 3 remaining judges held hearings. One of these judges did so in the context of a plea hearing. Another judge held a hearing to arraign the company; at which time, the company and DOJ informed the judge to enter into a DPA. The judge then had a second hearing to approve the DPA. The third judge conducted a hearing to arraign the company and verify that the company’s decision to enter into the DPA was informed and voluntary. Ten of the 12 judges reported that they relayed their decision approving the DPA through a written order. One judge relayed the decisions orally at a hearing, and one judge did both.”

The GAO also interviewed DOJ officials about the role courts should play in the DPA process. Not one DOJ prosecutor who spoke to the GAO on this issue described any advantage to having a greater court role in reviewing DPAs. The report notes that “[a]ccording to DOJ officials, DOJ does not have a position on whether greater judicial involvement in the DPA process creates separation of powers issues; however, DOJ believes that judicial involvement in the NPA process would create concerns related to the separation of powers because no judicial review is involved for NPAs, as they typically do not involve court filings.”

It is clear from the above judicial responses (however limited they may be) that judges are routinely rubber-stamping DPAs without inquiring whether factual evidence actually exists to support the essential elements of the crime “alleged” or whether valid and legitimate defenses exist.

Why would a company agree to enter into an NPA/DPA if factual evidence did not exist to support the essential elements of the crime “alleged” or if valid and legitimate defenses did exist?

Quite simply, negotiating an NPA/DPA with the DOJ behind closed doors is easier, more cost effective, and provides more certainty to a company than mounting a defense based on the facts and the law.

Moreover, when a company agrees to resolve a potential criminal matter through a privately-negotiated NPA/DPA, it is a sign of cooperation and an acknowledgment of wrongdoing – both key factors the DOJ will consider when deciding how to resolve the matter and on what terms. See here for the DOJ’s Princplies of Federal Prosecution of Business Entities, here for the U.S. Sentencing Guidelines.

Why does this all matter, particularly in the FCPA context?

For the simple reason that law should not develop through privately negotiated agreements that are subject to little or no judicial review.

Yet that is exactly what is occuring in the FCPA context.

It is common knowledge within the FCPA bar and compliance community that FCPA NPAs/DPAs (and I will throw in settled SEC civil complaints as well) represent de facto case law and fill a void that exists because of the general lack of substantive FCPA case law, including case law to support many current enforcement theories.

Even worse, DOJ urges lawyers and companies to look to NPAs/DPAs as evidence of improper conduct and to act accordingly.

For instance, the GAO report includes a DOJ letter which explains, in DOJ’s view, why NPAs/DPAs “are beneficial.” Included in the DOJ’s response is this:

“DPAs and NPAs benefit the public and industries by providing guidance on what constitutes improper conduct.”

Wait a minute.

Is DOJ seriously suggesting that NPAs/DPAs evidence improper conduct?

While that may be true in some situations, the fact of the matter is that many NPAs/DPAs are agreed to by companies only after private negotiations with the DOJ. These negotiations covers a wide range of topics – from the facts which will be alleged in the NPA/DPA, to the actual charges alleged, to the form of the resolution.

Rather than evidence improper conduct, these NPAs/DPAs (and settled SEC civil complaints) in the FCPA context represent nothing more, in most instances, than a prviately negotiated agreement subject to no judicial review executed under circumstances in which one of the signatories wields a massive and sharp stick.

What would happen if an FCPA NPA/DPA (or settled SEC civil complaint) were actually subjected to judicial review?

How would a judge react to the uninformative, bare-bones nature of these privately negotiated agreements?

What legal authority would the enforcement agencies cite to support the assertion that employees of state-owned or state-controlled entities are “foreign officials” under the FCPA?

What would the enforcement agencies’ arguments be as to why the numerous post-Kay enforcement actions concerning foreign licenses, permits, applications etc. fit within the equivocal ruling in that case, but not the facilitating payment exception to the FCPA (an exception debated and passed by Congress)?

These are just some of the many unanswered FCPA questions which currently exist and these questions are the direct result of an area of law largely developing through privately negotiated agreements subject to little or no judicial scrutiny.

If the above is disconcerting to you, just wait, it is about to get worse as the SEC has announced (see here) plans to also utilize NPAs/DPAs in its enforcement of the securities laws – including the FCPA.

BAE

In a joint enforcement action that is sure to generate much discussion and controversy, the U.K. Serious Fraud Office (SFO) and the U.S. DOJ announced today resolution of an enforcement action against BAE Systems.

The SFO announced (here) that it has “reached an agreement with BAE systems that the company will plead guilty” to the offense of “failing to keep reasonably accurate accounting records in relation to its activities in Tanzania.”

BAE’s press release (here) notes that “[i]n connection with the sale of a radar system by the Company to Tanzania in 1999, the Company made commission payments to a marketing adviser and failed to accurately record such payments in its accounting records. The Company failed to scrutinise these records adequately to ensure that they were reasonably accurate and permitted them to remain uncorrected. The Company very much regrets and accepts full responsibility for these past shortcomings.”

The SFO and company release note that BAE will pay a £30 million penalty “comprising a fine to be determined by the Court with the balance paid as a charitable payment for the benefit of Tanzania.”

In a strange turn of events, the SFO also announced (here) that it has withdrawn charges filed last week (see here) against a former agent charged with “conspiracy to corrupt” and for “conspiring with others to give or agree to give corrupt payments […] to unknown officials and other agents of certain Eastern and Central European governments, including the Czech Republic, Hungary and Austria as inducements to secure, or as rewards for having secured, contracts from those governments for the supply of goods to them, namely SAAB/Gripen fighter jets, by BAE Systems Plc.”

The SFO release notes that “[t]his decision brings to an end the SFO’s investigations into BAE’s defence contracts.”

So what happened to the charges and allegations involving certain Eastern and Central European governments, including the Czech Republic, Hungary, and Austria?

Good question.

Much like the wave of magician’s wand, they have simply disappeared.

Closer to home, the DOJ announced that it:

“filed a criminal charge (here) in the U.S. District Court for the District of Columbia against BAE Systems plc charging that the multinational defense contractor conspired to impede the lawful functions of the Departments of Defense and State, made false statements to the Departments of Defense and Justice about establishing an effective anti-corruption compliance program to ensure conformance with the Foreign Corrupt Practices Act and paid hundreds of millions of dollars in undisclosed commission payments in violation of U.S. export control laws.”

The DOJ and BAE release note that the company “will pay a fine of $400 million and make additional commitments concerning its ongoing compliance.”

According to the DOJ release (which is available through the DOJ Office of Public Affairs, but not yet publicly posted on DOJ’s website) “BAE Systems is charged with intentionally failing to put appropriate, anti-bribery preventative measures in place, contrary to the representations it made to the United States government, and then making hundreds of millions of dollars in payments to third parties, while knowing of a high probability that money would be passed on to foreign government decision makers to favor BAE in the award of defense contracts. BAE Systems allegedly failed to disclose these payments to the State Department, as it was required to do so under U.S. laws and regulations in order to get necessary export licenses.”

The bold language above would expose most companies to an FCPA enforcement action, but BAE is no ordinary company. It is a major defense contractor on both sides of the Atlantic (as noted in the criminal information “in 2008, BAE was the largest defense contractor in Europe and the fifth largest in the U.S. as measured by sales”).

You can bet that these charges were the subject of much negotiation so as to not upset current or future government contracts as well as foreign policy issues and concerns.

The BAE charges and thus similar to those against Siemens in December 2008. In that case, despite the company engaging in bribery “unprecedented in scale and geographic scope” and despite the company being one in which “bribery was nothing less than standard operating procedure” (both direct DOJ quotes), the company avoided FCPA antibribery charges. (See here for prior posts about Siemens).

These two cases seriously raise the issue of whether certain companies in certain industries are simply “above” the FCPA.

Can the enforcement agencies on both sides of the Atlantic say with a straight face that this case was merely about improper record keeping, making false statements to the government, and export licenses?

Transparency, corporate accountability, and indeed a criminal justice system all suffered setbacks today.

The FCPA suffered a black-eye as well and one would be right to ask, “what the heck is going on here!”

Africa Sting – Not Guilty Pleas

Today was arraignment day for the Africa Sting defendants in Judge Richard Leon’s courtroom in the Federal District Court in Washington D.C.

During the arraignment, the defendants pleaded not guilty.

For a first hand account of what transpired in Judge Leon’s courtroom, see here for Christopher Matthew’s piece at Main Justice.

Beefing Up the Budget

DOJ recently announced (here) its FY 2011 budget request. The budget request includes a $235 million increase over the FY 2010 enacted appropriation, “including 708 new positions (143 agents and 157 attorneys) to restore confidence in our markets, protect the federal treasury and defend the interests of the U.S. Government.”

Included in the $235 million figure (see here) is “$550,000 and 5 positions (3 attorneys) to increase [the Criminal Division’s] capacity prosecute crimes of financial and mortgage fraud, procurement and grant fraud, and violations of the Foreign Corrupt Practices Act.”

Not exactly a figure that “knocks one’s socks off,” but nevertheless consistent with repeated DOJ statements about a ramp-up in FCPA resources and enforcement.

The SEC’s budget justification (here) does contain any FCPA specific language.

*****

Perhaps it’s because my favorite show, Mike Rowe’s Dirty Jobs on the Discovery Channel, recently profiled this company (see here). In any event, PBS&J continues to make news and continues to intrigue even though the whole issue, at least it seems, involves a relatively minor potential FCPA issue. This week, Florida media (here) reports that the company’s CEO, John Zumwalt, has resigned. The article notes that up until summer 2009, Zumwalt was also the President of PBS&J International, the subsidiary that has become the focus of an FCPA internal investigation. See here for prior posts. According to the article, Zumwalt will continue as Chairman of the company’s board. Should PBS&J become the focus of an enforcement action, it will be interesting to follow as the company has millions of public sector contracts.

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