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Multilateral Development Banks Sign Cross-Debarment Agreement

In April, five multilateral development banks (MDB’s) – the World Bank, the African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, and the Inter-American Development Bank Group – signed an agreement to “cross-debar firms and individuals found to have engaged in wrongdoing in MDB-financed development projects. (See here for more information).

World Bank Group President Robert Zoellick noted that with the “cross-debarment agreement among development banks, a clear message on anticorruption is being delivered: steal and cheat from one, get punished by all.”

Under the agreement (here), each participating institution “will enforce debarment decisions made by another participating institution” to the extent the debarment exceeds one year. However, as is often the case, notwithstanding such a commitment, the agreement also states that a “participating institution may decide not to enforce a debarment by the sanctioning institution where such enforcement would be inconsistent with its legal or other institutional considerations …”

It remains to been seen whether the cross-debarment agreement will have any deterrant effect by raising the “cost” of engaging in bribery and corruption.

For a World Bank list of debarred firms and individuals (see here).

In July 2009, the World Bank announced (here) “an agreement of up to a four-year debarment for Siemens’ Russian subsidiary, and a voluntary two-year shut-out from bidding on Bank business for Siemens AG and all of its consolidated subsidiaries and affiliates.” In November 2009, the World Bank announced (here) that it “debarred [for four years] Limited Liability Company Siemens (OOO Siemens), a Russian subsidiary of Siemens AG, for having engaged in fraudulent and corrupt practices in relation to a World Bank-financed project – Moscow Urban Transport Project.” For more information on what was and was not included in that debarment proceeding, see here.

It Can Be Done

This post is about a non-FCPA case.

Yet, the attributes of this case apply to many FCPA cases.

A large corporate entity allegedly engages in criminal conduct.

The corporate entity agrees to a plea agreement, one that does not adequately reflect the seriousness of the conduct at issue.

Nevertheless, pursuant to the plea agreement, the corporate entity agrees to pay an eye-popping fine.

The DOJ issues a press release peppered with get-tough, accountability, wake-up call type of language.

The plea agreement gets filed with the court and the court rubber stamps the plea agreement.

Case closed.

This is what happened is the BAE bribery, yet no bribery case. That is what happened in the Siemens bribery, yet no bribery case. (Daimler was offered a deferred prosecution agreement, thus, it didn’t even have to plead to anything).

But that is not what happened in this case.

Rather, a federal court judge rolled up his sleeves, used the tools at his disposal, and rejected a plea agreement hashed out between the DOJ and the corporate entity because it was not “in the best interests of justice” and did “not serve the public’s interest” because it did not adequately address the “criminal conduct at issue.”

Kudos to Judge Donovan Frank (D. Minn.).

Judges assigned to future FCPA cases would be wise to follow his example.

*****

On February 25, 2010, medical device manufacturer Guidant LLC, a wholly-owned subsidiary of Boston Scientific Corporation, was charged with criminal violations of the Federal Food, Drug, and Cosmetic Act (see here). According to the information, “Guidant concealed information from the U.S. Food and Drug Administration regarding catastrophic failures in some of its lifesaving devices.”

The DOJ release states, in part, “our message is clear: we will vigorously prosecute individuals and organizations who put profit over public health and safety by violating the law.”

On April 5, 2010, Guidant LLC (an entity that was formed two weeks before the DOJ filed the information) entered pleas of guilty to criminal violations of the Food, Drug, and Cosmetic Act (see here). Pursuant to the plea agreement, Guidant agreed to pay $296 million in criminal penalties.

The DOJ’s release states, in part, “Guidant’s guilty plea […] is about accountability,” “This successful prosecution serves as an important wake up call…,” and “The guilty plea […] should serve as a reminder and deterrent to those who would break the laws …”.

Enter Judge Frank.

The “type” of plea agreement at issue in the Guidant case was a Rule 11(c)(1)(C) agreement – the same “type” of plea agreements at issue in Siemens and BAE cases. In a Rule 11(c)(1)(C) plea agreement, the DOJ agrees that a specific sentence or sentencing range is the appropriate disposition of the case and such a recommendation is binding on the court once the court accepts the plea agreement.

Judge Frank noted that “normally, a court accepts or rejects a plea agreement at a plea hearing” (see here for his Memorandum Opinion and Order).

However, as reflected in Frank’s order, “whether to approve or reject a plea agreement is a matter confided to the sound discretion of the trial court” and a plea agreement can be rejected if the agreed upon sentence is inappropriate or if the resulting agreement is not in the best interest of justice.

Among other things, Judge Frank noted that the victims of Guidant’s conduct contend “that Guidant, as a company, does not respect the criminal justice system and should be required to do more than simply pay fines as a consequences for its criminal behavior.”

Judge Frank was also troubled by the lack of a presentence investigation report – he noted that the plea agreement “specifically states that a presentence investigation report is not necessary because the plea and sentencing hearings, together with the record and the Plea Agreement, ‘will provide the Court with sufficient information concerning Guidant, the crime charged in this case, and Guidant’s role in the crime to enable the meaningful exercise of sentencing authority by the Court…” However, Judge Frank noted that a presentence investigation report would have be useful in determining the appropriate sentence.

[A presentence report was waived in both the Siemens (here) and BAE (here) agreements]

Judge Frank is not the only federal court judge to recently reject a plea agreement or SEC settlement.

Judge Jed Rakoff (S.D.N.Y.) did it last September in the SEC v. Bank of America case. Among other things, Judge Rakoff noted that the SEC – BofA settlement left the distinct impression that it was a “contrivance designed to provide the SEC with the façade of enforcement and the management of [BofA] with a quick resolution of an embarrassing inquiry…” He further noted that the settlement “suggests a rather cynical relationship between the parties” in that “the SEC gets to claim that it is exposing wrongdoing on the part of [BofA] in a high-profile merger” and “[BofA’s] management gets to claim that they have been coerced into an onerous settlement by overzealous regulators.” According to Judge Rakoff, “all this is done at the expense, not only of shareholders, but also of the truth.” [In February 2010, Judge Rakoff did “reluctantly” approve a revised SEC – BofA settlement yet stated that the settlement, “[w]hile better than nothing,” was still “half-baked justice at best.”

Judge Cormac Carney (C.D.Cal.) did it last September in the case of Dr. Henry Samueli, the co-founder and former chief technical officer of Broadcom, who pleaded guilty to criminal charges for making false statements in testimony before the SEC relating to its investigation of the alleged stock-options backdating at Broadcom. Under a grant of immunity, Samueli testified as a government witness at the trial of another Broadcom executive and after hearing Samueli testify Judge Carney vacated Samueli’s prior guilty plea and dismissed the criminal charges against him. Judge Carney noted that there was “no evidence … to suggest that Dr. Samueli did anything wrong, let alone criminal.” “Yet,” Judge Carney noted, “the government embarked on a campaign of intimidation and other misconduct to embarrass him and bring him down” including crafting “an unconscionable plea agreement pursuant to which Dr. Samueli would plead guilty to a crime he did not commit and pay a ridiculous sum of $12 million to the United States Treasury.”

As the above (and other) examples demonstrate, plea agreements can be rejected by trial court judges either because they are “too soft” or “too hard.”

Yet, to my knowledge, no FCPA plea agreement has ever been rejected by a trial court judge.

Some probably should not.

Some probably should.

Judges assigned to future FCPA cases would be wise to follow the above examples, roll up their sleeves, use the tools at their disposal, and critically analyze whether the plea agreement, given the allegations in the charging documents, serve the “public’s interest” and adequately address the “criminal conduct at issue.”

Some FCPA plea agreements (not to mention, non and deferred prosecution agreements) are “too hard” in that it is debatable whether the conduct at issue even violates the FCPA. Some FCPA plea agreement – most notably the BAE and Siemens plea agreements – are “too soft.”

Both contribute to the facade of FCPA enforcement and, in many cases, federal court judges have tools at their disposal to expose the facade of FCPA enforcement.

It can be done.

BAE … Inside the SFO

Several prior posts (here) have been devoted to the BAE case, both the U.K. – Serious Fraud Office component (and challenges to the plea agreement) and the DOJ’s bribery, yet no bribery allegations and charges.

This post returns to the SFO component of the BAE matter.

Widespread allegations that BAE was involved in bribery and corruption on a grand and global scale are detailed in Black Money – a PBS Frontline documentary from April 2009 (here).

In 2004 the SFO began investigating whether BAE made bribe payments to secure Saudi fighter jet contracts. However, in late 2006, the SFO was forced to halt its investigation under pressure from the U.K. government, which cited national security concerns should the investigation go forward.

However, because BAE also allegedly made bribe payments in numerous other countries to secure business, the SFO, under a new Director, revived its investigation of BAE, at least as to non-Saudi issues, including whether the company paid bribes to secure contracts in various European and African countries. After settlement talks stalled – the conventional wisdom is that BAE was unwilling to plead guilty to bribery related offenses given the collateral effect of the mandatory European Union debarment provisions – the SFO pressed ahead with the case.

The SFO Director stated in late January 2010 that “BAE is clearly a very important case” and that “it is very important that we get it right.”

In late January 2010, the SFO issued a release (here) stating that Count Mensdorff, a former BAE agent, was criminally charged with “conspiracy to corrupt” and for “conspiring with others to give or agree to give corrupt payments […] to 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.”

Then, in early February 2010, the SFO announced (here) its long-awaited resolution of the BAE matter. Despite allegations of wide-spread bribery on a global scale, and despite BAE’s agent being criminally indicated a few days earlier in connection with bribe payments in “certain Eastern and Central European government” (presumably on evidence that such payments did indeed occur), the SFO resolution related solely to the company’s failure “to keep reasonable and accurate accounting records in relation to its activities in Tanzania.” The SFO release notes 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.”

Most dramatic, and in a strange turn of events, the SFO announced that it had withdrawn the criminal charges filed days earlier against Count Mensdorff. The same release also notes that “[t]his decision brings to an end the SFO’s investigations into BAE’s defense contracts.”

In the face of widespread criticism, the SFO defended its handling of the BAE matter and noted that “the public interest lay in drawing a line under the whole investigation.”

Documents filed in connection with the SFO-BAE plea agreement challenge shed additional light on the SFO’s abrupt end to the BAE investigation.

In the SFO’s “Grounds for Contesting the Claim” (here) the SFO details the history of its investigation.

Highlights include:

“From the beginning of March 2009, the SFO had been involved in plea discussions with BAE. The position of the SFO was that it would be satisfied with pleas to charges in respect to some, but not necessarily all, the strands of its investigation.”

By September 30, 2009 (“the SFO imposed deadline”) no agreement had been reached and “discussions in England were discontinued.” “By that time, it was known that plea discussions between the DOJ and BAE in the U.S. had also failed to produce any agreement.”

“In late January – early February 2010 there was a material change in circumstances. First on January 29, the DOJ contacted the SFO and indicated that a plea agreement with BAE was imminent. The agreement involved BAE entering pleas of guilty with respect of offenses in connection to the investigations concerning Eastern Europe and Saudi Arabia and a payment of $400 million.”

The SFO “received advice from counsel that the Eastern Europe aspect of the proposed U.S. agreement was highly likely to have the effect of preventing prosecution for the offenses under consideration in respect of the Eastern European investigation in England, on the basis of the application of the principle of double jeopardy. This represented an additional, potentially serious difficulty in respect of the evidential test. Additionally, the [SFO] re-assessed the effect of the agreement on public interest considerations. He concluded that it was not in the public interest to pursue BAE in England in respect of matters to which the company was to plead guilty in the U.S.”

[Note – BAE pleaded guilty in the U.S. to “conspiring to defraud the United States by impairing and impeding its lawful functions, to make false statements about its Foreign Corrupt Practices Act compliance program, and to violate the Arms Export Control Act, and International Traffic in Arms Regulations.” It is difficult to see how this plea would raise double jeopardy issues for a corruption / bribery offense.]

“On February 4, 2010 […] BAE indicated that it was prepared to plead guilty […] in respect of the Tanzanian transaction, and pay a sum of £30 million. The [SFO] concluded than an agreement on such a basis was in the public interest.”

“…a serious evidential difficulty had been identified in respect of potential corruption charges, namely the difficulty of proving the involvement of a ‘controlling mind’ in the offending. In the absence of a plea agreement, this raised the prospect that the [SFO], having gained no admission of criminal liability or any financial payment, would (a) nevertheless be forced to conclude that there was no realistic prospect of conviction in respect of corruption offenses or (b) end up prosecuting a weak and vulnerable case.”

[Note – the above assertion would seem to differ significantly from the assertions of former SFO prosecutors Robert Wardle and Helen Garlick made in the above referenced Black Money documentary]

“By virtue of Article 45 of the European Union Public Sector Procurement Directive 2004, a conviction for an offense of corruption would have had the effect of debarring BAE for tendering for public contracts in the EU. This could have been a disproportionate outcome, having regard to the fact that the relevant conduct took place many years ago and the company had taken substantial steps to transform itself as an organization since then.”

“The plea agreements in England and the US were entered into on February 5, 2010 and brought to an end the investigation of BAE.”

Thus, over the course of six days, the multi-year investigation of BAE was swiftly resolved and, as in the U.S., a driving force behind the ultimate charges was to avoid application of the European Union debarment provisions.

So why did the SFO abruptly drop the criminal charges against Count Mensdorff?

The short answer is that BAE would not agree to the SFO plea (as watered down as it was) without the SFO agreeing to drop the charges against Count Mensdorff.

The SFO notes that a “particular problem arose in Count Mensdorff’s case which led to him being charged sooner than had initially evisaged.”

“Count Mendsdorff is an Austrian citizen. As of January 2010, he was in the United Kingdom on police bail. In discussions with the SFO, the Austrian authorities made clear that, as a matter of Austrian law, if he returned to Austria there would be no jurisdiction to extradite Count Mensdorff in respect of the offense which the SFO was considering charging, namely conspiracy to corrupt.”

The “SFO concluded that, in the absence of effective extradition arrangements, there was a strong likelihood that, if not charged on January 29th, Count Mensdorff would go to Austria and not re-enter the jurisdiction to face criminal proceedings.”

The SFO “decided that the appropriate course of action was to charge Count Mensdorff on January 29th, ensuring that he then became subject to court bail conditions sufficient to ensure he remained within, or came back to, the jurisdiction. Count Mensdorff was duly charged.”

“As it transpired, on February 4th, during plea discussions, BAE requested an undertaking from the SFO that in any future prosecutions (to which BAE was not a party) the prosecution could not allege that the company was guilty of corruption. The [SFO] concluded that without such an undertaking, a plea agreement could not be achieved. The [SFO] received advice from counsel to the effect that in a prosecution of Count Mensdorff, or any of the individuals under investigation in connection with the Eastern European transactions, it would not be possible to proceed without making an allegation of corruption against BAE. In short, the SFO concluded that Count Mensdorff could not be prosecuted consistent with the terms of the undertaking sought. In the circumstances, the [SFO] took the view that it was in the public interest to give the undertaking to BAE, thereby enabling the plea agreement to be achieved, and, consequently, to withdraw the charge against Count Mensdroff.”

In a recent April 20th Financial Times article, the SFO said “we do not accept that we acted hastily – these were considered negotiations and were not rushed decisions.”

The same article noted that because the SFO dropped the charges against Count Mensdroff, he is able to “claim his legal costs from taxpayer funds.” According to the article, Mensdorff, who assets include a castle, has made such a claim.

Kyrgyzstan, Thailand, Tobacco, and Piranha Fishing

The SEC announced today (see here) an FCPA enforcement action involving “multiple payments of bribes to foreign officials in Kyrgyzstan and Thailand by senior executives and employees of Dimon, Inc. (“Dimon”) and Standard Commercial Corporation (“Standard”), predecessor companies of Alliance One International, Inc. (“Alliance One”), during the period from 1996 through 2004 in violation of the Foreign Corrupt Practices Act…”

In 2005, Dimon and Standard merged to form Alliance One (see here) and its stock is listed on the New York Stock Exchange.

Kyrgyzstan

According to the SEC complaint (see here), “from 1996 through 2004, Dimon International Kyrgyzstan (“DIK”), a wholly-owned subsidiary of Dimon, paid more than $3 million in bribes to Kyrgyzstan government officials in order to purchase Kyrgyz tobacco for resale to Dimon’s largest customers.”

The complaint alleges that “these payments were made to various government officials, including officials of the JSC GAK Kyrgyztamekisi (“Tamekisi”) [an entity established by the Kyrgyz government that had authority to issue and control licenses for the fermentation and export of tobacco] and local public official (“Akims”)” and “DIK also made improper payments to Kyrgyzstan tax officials.”

According to the compliant: (i) defendant Bobby Elkin Jr., Dimon’s country manager, “authorized, directed, and made these bribes in Kyrgyzstan through a DIK bank account under his name (the “Special Account);” (ii) defendant Baxter Myers, Dimon’s Regional Financial Director, “authorized all fund transfers from a Dimon subsidiary’s bank account to the Special Account;” and (iii) defendant Thomas Reynolds, Dimon’s International Controller, “formalized the accounting methodology used to record the payments made from the Special Account for purposes of internal reporting by Dimon.”

The complaint alleges that in September 1996 “the Kyrgyzstan government imposed a requirement that all exporters of fermented tobacco have an export license,” and that “Tamekisi acted as the issuing authorize and controlled the issuance of export licenses, thus effectively controlling all tobacco purchases in Kyrgyzstan.”

According to the complaint, Elkin “periodically delivered bags filled with $100 bills to a high-ranking Tamekisi official” and that from 1996 to 2004, Elkin, on behalf of Dimon, “paid more than $2.6 million to a high-ranking Tamekisi official…” The complaint also alleges that Elkin “also paid bribes to local government officials in Kyrgyzstan known as the Akims, who controlled the tobacco regions.” The complaint says that “DIK needed the support and consent from each local Akim in order to continue to purchase tobacco from local growers or agricultural collectives” and that “as governors, Akims had the power and influence to prevent the purchase of tobacco in the region, even if a company had an export license.” The complaint also states that “Akims could also send the police to block the entrance to buying stations or install a lock box to prevent the transfer of tobacco.” According to the complaint, “Elkin authorized and paid more than $260,000 to the Akims…”

Finally (at least as to Kyrgyzstan), the complaint details how DIK was “frequently subjected to audits by Kyrgyz tax officials” and that “during one audit, the tax officials determined that DIK failed to submit two reports to the tax office.” Accordingly, the complaint states that the tax officials imposed an approximate $172,000 fine against DIK and the “tax authorities also threatened to seize DIK’s bank accounts and tobacco inventory for tax violations.” However, according to the complaint, “the tax authorities later offered to reduce the tax penalties levied against DIK in exchange for a cash payment.” The complaint then alleges that Elkin “made a cash payment to the tax authorities” and that from 1996 through 2004 Elkin, on behalf of Dimon, “paid approximately $82,850 to Kyrgyz tax officials.”

According to the complaint, although the Special Account used to make the above-described payments “was funded by a Dimon subsidiary in the United Kingdom, the financial reporting on the Special Account by that subsidiary, and all other consolidated subsidiaries, went directly to Dimon’s corporate headquarters in the United States…”

Thailand

The complaint also alleges that “from 2000 to 2003, Dimon paid bribes of approximately $542,590 to government officials of the Thailand Tobacco Monopoly (“TPM”) in exchange for obtaining approximately $9.4 million in sales contracts.” According to the complaint, defendant Tommy Williams, Dimon’s Senior Vice President of Sales, “directed the sales of tobacco from Brazil and Malawi to the TTM through Dimon’s agent in Thailand” and that he “authorized the payment of bribes to TTM officials and characterized the payments as commissions paid to Dimon’s agent in Thailand.”

The complaint alleges that a “portion of Dimon’s selling price to the TTM” included “kickbacks paid as commissions through Dimon’s agent to certain members of the TTM in exchange for the sales contracts.” The complaint alleges that these bribes to the TTM were authorized “by Dimon’s U.S. and Brazilian personnel,” in particular Williams.

The complaint also alleges that “Williams also knew about a purported business trip to Brazil that actually was a sightseeing trip arranged by Dimon and others for TTM officials.” According to the complaint, the “sightseeing trip occurred in May 2000 and included, among other things, trekking in the Amazon jungle, piranha fishing, and visits to Argentina and various Brazilian waterfalls.” The complaint also alleges that in 2002 Williams arranged a trip for a TTM delegation to travel from Bangkok to Brazil “purportedly to look at tobacco blends and samples.” According to the complaint, “the return portion of the TTM delegation’s trip included a one-week stay in Madrid and Rome that was unrelated to the inspection and purchase of tobacco by the TTM.”

Based on the above conduct, the SEC charged Elkin, Myers, Reynolds, and Williams for violating the SEC’s antibribery provisions and for aiding and abetting violations of the FCPA’s internal controls and books and records provisions.

According to the SEC release, “without admitting or denying the allegations” in the complaint, Elkin, Myers, Reynolds, and Williams consented to the entry of final judgments permanently enjoining violations of the FCPA. Myers and Reynolds also agreed to pay a civil monetary penalty of $40,000 each.

The SEC release notes that the settlement with Elkin “takes into account his cooperation” with the SEC’s investigation and “acknowledges of the assistance” of the DOJ and the FBI.

*****

This is the second SEC FCPA enforcement action of the year which seems, according to the facts, to be based, in whole or in part, on extortion or something close to it. For a previous post on the NATCO enforcement action (see here). In addition, earlier this week I had a post “Facilitating Payments or Bribes” (see here). The Kyrgyzstan facts would seem relevant to that issue.

The FCPA, as part of the securities laws, has a statute of limitations of five years. The conduct at issue occured between 1996 and 2004. Perhaps there was a tolling agreement in place or perhaps this is another example where it is difficult to square black-letter law concepts with an FCPA enforcement action.

Daimler Under Investigation in Russia

Earlier this month, Damiler AG and certain of its subsidiaries resolved DOJ and SEC FCPA enforcement actions (see here for prior posts).

While Daimler escaped FCPA antibribery charges and did not have to plead guilty to anything (it was offered a deferred prosecution agreement), DaimlerChrysler Automotive Russia SAO (“DCAR”)(now known as Mercedes-Benz Russia SAO) pleaded guilty to a criminal information charging conspiracy and FCPA antibribery violations.

The charged conduct focused on Daimler’s and DCAR’s relationships with: “the Russian Ministry of Internal Affairs (“MVD”) a department and agency of the Russian government principally responsible for police, militia, immigration and other functions” including supervising the “Russian traffic police; “the Special Purpose Garage (“SPG”) an ‘instrumenality’ of the Russian government”; “Machinoimport a Russian government-owned and controlled purchasing agent for the City of Moscow,” an “instrumentality of the Russian government”; and “Dorinvest a Russian government-owned and controlled purchasing agent for the City of Moscow,” an “instrumentality of the Russian government.”

It used to be that companies could largely put the issues to bed after resolving DOJ and/or SEC enforcement actions. However, “tag-a-long” FCPA-like enforcement actions or inquiries in other countries are becoming a new norm.

Case in point – Daimler.

And we’re not talking Germany here.

We’re talking Russia.

Earlier this month, The Moscow Times (here) noted that the Daimler case, because of the Russia conduct at issue, presented a test for President Dmitry Medvedev to see “just how determined he is to fight corruption.”

Yesterday, The Moscow Times (here) reported that Russia’s Interior Ministry opened an internal investigation “after a personal order” from President Medvedev. According to the article, Russia’s Prosecutor General has “sent a request to the U.S. Justice Department for information on bribes given by carmaker Daimler.” For additional information (see here).

Daimler is not the only company under scrutiny in Russia.

As previously posted (here) H-P’s Moscow headquarters were recently raided by Russian authorities in connection with a bribery investigation.

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