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China, China and More China

China.

It is a country often talked about on these pages.

Not surprising given the extent to which companies subject to the FCPA have flocked to this growth market in recent years.

Not surprising given that most companies operating in China do so through joint ventures or third parties. Even if a company does business in China through a subsidiary, oversight and control of the subsidiary’s employees and agents is often difficult.

Not surprising given the number of Chinese “foreign officials” because the enforcement agencies deem all employees of state-owned or state-controlled enterprises to be “foreign officials.” [On this issue, an in-house attorney recently shared with me that during training sessions the attorney tells company employees that there are 1.3 billion “foreign officials” that could be the recipient of a bribe in China. A bit of an exaggeration, but no doubt you get the point.]

I’ve written about China specific issues, including this guest post for the China Law Blog and more extensively here “The Unique Foreign Corrupt Practices Act Challenges of Doing Business in China.”

With many FCPA enforcement inquiries focused on China and with no expected slowdown in China business activity, China issues remain at the forefront of much of what is covered on these pages.

Against this backdrop, two recent practitioner pieces caught my eye.

The first piece (here) is titled “FCPA Compliance in China and the Gifts and Hospitality Challenge” and is authored by Gibson, Dunn & Crutcher attorneys Joseph Warin, Michael Diamant and Jill M. Pfenning.

Below is a short summary of the article.

“This Article discusses the anti-corruption enforcement trends confronting business practices in China, addresses the legal risks posed by the Chinese gift and hospitality culture, and presents suggestions for structuring corporate anti-corruption compliance programs to mitigate these risks. To contextualize law enforcement’s current focus on bribery and other economic crime in China, Part I provides an introduction to the country’s pervasive corruption climate, with a brief summary of recent enforcement actions by both Chinese and U.S. authorities. Turning to the problem of business courtesies, Part II provides background on the unique Chinese gift-giving culture and briefly discusses the FCPA, exploring within the statute’s anti-bribery framework the issue of business courtesy expenditures. Finally, Part III gives advice on how to tailor the gifts and hospitality component of an organization’s compliance program to address this risk in China.”

The second piece (here) is titled “The Chinese Puzzle Box: the Conundrum of
Distinguishing a Permissible Gift from an Illegal Bribe” and is authored by Paul, Hastings, Janofsky & Walker attorneys Leslie Ligorner and Barbara Tsai.

Of particular interest is the section on Chinese state-owned entities and China corruption laws. Among other things, the article notes that many SOE employees “behave like private players in commercial playing fields and not in the manner traditionally associated with the behavior of government officials” and that China law “does not specifically include employees of SOEs within the definition of public officials.”

Also catching my eye was this recent Businessweek piece by Dexter Roberts titled “The Higher Costs of Bribery in China.”

Some China reading material to keep you occupied until the next China-related post.

Former SEC FCPA Enforcement Attorney Critical of SEC’s Recent Veraz Networks Inc. Enforcement Action

Richard Grime is a former high-ranking SEC FCPA enforcement attorney. While at the SEC, Grime “played a prominent role in the Commission’s FCPA program, spoke at FCPA conferences, and participated or supervised many of the Commission’s FCPA cases. He also worked closely with the Department of Justice on countless parallel investigations.” (See here).

Grime is currently a partner at O’Melveny & Myers LLP and is listed as the lead author of this recent release regarding the SEC’s recent enforcement action against Veraz Networks Inc.

The Veraz enforcement action was discussed in this prior post. Among other things, I noted in the post that the Veraz enforcement action contributes to several pillars of what I have been calling the facade of FCPA enforcement. In short, one pillar is the frequency in which FCPA enforcement actions are resolved based on uninformative, bare-bones, and legal conclusory statements of facts or allegations. Check as to the Veraz enforcement action, I stated. Another pillar discussed is the increasing and alarming trend of FCPA enforcement actions being resolved based on tenuous, dubious and untested legal theories. Check as to the Veraz enforcement action, I stated given that the enforcement action (like so many) is based on the SEC’s theory, never accepted by a court, that employees of state-owned or state-controlled enterprises are “foreign officials” under the FCPA.

Grime and his co-authors strike the same themes in the release.

Among other things, Grime and his co-authors state that the SEC “complaint discloses little information about the specifics of the alleged misconduct” and “the complaint is remarkably ambiguous about the substance of the alleged violations.”

According to Grime and his co-authors:

“The complaint refers to ‘gifts,’ ‘illicit payments,’ and ‘questionable expenses,’ but provides little useful insight as to the surrounding circumstances or even the value of some of the alleged gifts and payments. Similarly, the complaint does not state how the company recorded the payments or how the records were inaccurate.”

Why does this matter?

As Grime and his co-authors note: “given that there are few FCPA court opinions, the SEC should seek through these settled complaints to fully explain the facts underlying its actions and how those facts violate the law.”

As to the enforcement agencies’ interpretation of the key “foreign official” element, Grime and his co-authors state as follows:

“Like numerous prior cases, the SEC alleges that employees of foreign government-controlled companies are foreign ‘government officials.’ Until a court decides otherwise, the SEC and the Department of Justice will continue to broadly interpret the FCPA and companies will need to diligence the ownership and control of commercial organizations across the world to avoid running afoul of the FCPA.”

Grime and his co-authors also dish up this criticism of the Veraz enforcement action:

“By punishing Veraz for such conduct, the SEC provides little incentive for a company to voluntarily disclose misconduct, cooperate, and thereby seek leniency. It is unstated whether Veraz cooperated with the SEC investigation, but the company did disclose that it spent $3 million on the investigation. For that sum, the company presumably assisted the SEC’s investigation, but no credit (or explanation for a lack of credit) is given. The specter that even small payments will be prosecuted may drive companies to conclude that remediation without the government’s involvement is the wiser approach.”

Nigeria … A Challenging Market

Nigeria.

It is one of Africa’s largest markets. It is also one of the largest oil and gas producing nations in the world.

No surprise then that many companies subject to the FCPA do business in Nigeria.

Problem is, Nigeria is also an incredibly challenging and complex market to do business in from an FCPA perspective.

The recent Bonny Island bribery enforcement actions (see here and here), and Panalpina’s pending FCPA enforcement action (see here), which is largely focused on Nigeria, all highlight this point.

Just how challenging and complex is the Nigerian market?

Based on a report (see here) released earlier this month, incredibly so.

The report, jointly commissioned by the European Union (EU), the UN Office on Drugs and Crime, Nigeria’s Economic and Financial Crimes Commission (EFCC), and the National Bureau of Statistics (NBS), was carried out in 2007 and funded by the EU at a cost of 25 million euro (US$31.2 million). It is the aggregation of results from a survey of 2,200 companies doing business across Nigeria.

Among the findings of the report, 71% of respondents answered that corruption presents a serious risk for doing business in Nigeria and the payment of bribes affects most companies operating in the country. According to the report, one in three companies reported paying a bribe to public officials in undertaking administrative tasks. According to the report, in dealing with police or clearing goods through customs, the payment of bribes is common.

Payment of bribes in connection with custom clearances is at the heart of the pending Panalpina enforcement action (as well as numerous other recent FCPA enforcement actions such as Helmerich & Payne, Inc. (see here) and Nature’s Sunshine Products, Inc. (see here).

The recent Nigeria report, specifically its finding that the payment of bribes is common in clearing goods through customs, begs the questions – is this exactly the reason why Congress included a facilitation payment exception to the FCPA? If the answer if yes, then what does it say about the pending Panalpina enforcement action, the recent Helmerich & Payne and Nature’s Sunshine Products enforcement actions, and the numerous other enforcement actions based in whole or in part on customs issues.

For a prior post on facilitating payments, see here.

The G-20 On Corruption

Prior to reading this post, you no doubt have already come to your own conclusions about whether declarations released when international political leaders get together are: meaningful and significant, political posturing with little practical significance, or something in between.

Whatever your views, it should be noted that paragraph 40 of the declaration released in connection with the recent G-20 Summit in Toronto (see here) contained this statement:

“We agree that corruption threatens the integrity of markets, undermines fair competition, distorts resource allocation, destroys public trust and undermines the rule of law. We call for the ratification and full implementation by all G-20 members of the United Nations Convention against Corruption (UNCAC) and encourage others to do the same. We will fully implement the reviews in accordance with the provisions of UNCAC. Building on the progress made since Pittsburgh to address corruption, we agree to establish a Working Group to make comprehensive recommendations for consideration by Leaders in Korea on how the G-20 could continue to make practical and valuable contributions to international efforts to combat corruption and lead by example, in key areas that include, but are not limited to, adopting and enforcing strong and effective anti-bribery rules, fighting corruption in the public and private sectors, preventing access of corrupt persons to global financial systems, cooperation in visa denial, extradition and asset recovery, and protecting whistleblowers who stand-up against corruption.”

The White House released this statement by President Obama on the issue which states, among other things, as follows:

“Preventing and tackling corruption must be a key part of [the G-20’s] efforts to shape an international economic architecture that is rules-based and transparent; that promotes trade and fair competition among businesses; and that fosters prosperity and development, by recognizing the fact that corruption, illicit outflows of capital, and their absorption in the global financial system represent impediments to economic growth.”

Talking about rules-based, transparent enforcement and establishing a working group to make comprehensive recommendations on how to adopt and enforce strong and effective anti-bribery rules is good.

However, the big picture issue will remain – what level of committment will there be to adopting and enforcing strong and effective anti-bribery rules when doing so threatens a key supplier or vendor of a key product valued by the prosecuting government?

*****

What is the G-20?

As described here, it is “The Group of Twenty (G-20) Finance Ministers and Central Bank Governors […] established in 1999 to bring together systemically important industrialized and developing economies to discuss key issues in the global economy.”

Friday Roundup

Some FCPA developments and news to pass along this Friday.

Additional Prosecutor Joins DOJ FCPA Unit

As reported earlier this week in the New York Times (see here), Jeffrey Knox, a current federal prosecutor in the Eastern District of New York, will soon assume a new position in the DOJ’s FCPA unit. Knox, a prosecutor with extensive terrorism and foreign intelligence gathering experience, describes himself in the NY Times article “as a traditional law-and-order Republican.” Prior to becoming a DOJ prosecutor, Knox was an attorney at Simpson Thacher & Bartlett in New York. For additional coverage, see here from Christopher Matthews at Main Justice.

Flavio Ricotti Extradition

As detailed in this DOJ release, “Flavio Ricotti, a former executive of Rancho Santa Margarita, Calif.-based valve company Control Components Inc. (CCI), has been extradited to the United States from Germany in connection with his alleged participation in a conspiracy to secure contracts by paying bribes to officials of foreign state-owned companies as well as officers and employees of foreign and domestic private companies.” According to the release, “Ricotti, 49, of Bientina, Italy, was arrested on Feb. 14, 2010, in Frankfurt, Germany, and arrived in the United States on July 2, 2010.”

As noted in the release:

“Ricotti and five other former executives of CCI were charged on April 8, 2009, in a 16-count indictment (see here) for their alleged roles in the foreign bribery scheme. According to the indictment, Ricotti, who served as CCI’s vice president and head of sales for Europe, Africa and the Middle East from 2001 through 2007, allegedly caused CCI employees and agents to make corrupt payments totaling approximately $750,000 to officers and employees of state-owned companies, and corrupt payments totaling approximately $380,000 to officers and employees of private companies. According to the indictment, these corrupt payments occurred in connection with CCI projects in various countries around the world, including in the United Arab Emirates, Kazakhstan, India and Qatar.”

For more on the CCI matter, see here.

Other foreign nationals facing extradition to the U.S. to face FCPA charges include Jeffrey Tesler, the U.K. agent at the center of the Bonny Island bribery scheme, and Wojciech Chodan, also a U.K. citizen and a former salesperson and consultant of a U.K. subsidiary of Kellogg, Brown & Root. (See here). British judges have ruled that Tesler and Chodan can be extradited to the U.S. and these individuals are appealing that decision. And then of course there is Viktor Kozeny (see here).

A good weekend to all.

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