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In the Words of Theodore Sorensen

Theodore Sorensen recently passed away (see here).

Sorensen’s career included several notable accomplishments and, as President Kennedy’s speechwriter, he had a way with words.

Buried deep in the thousands of pages of FCPA legislative history, one will find a July 1976 article Sorensen, a lawyer who spent a substantial portion of his career with Paul Weiss, authored for Foreign Affairs titled “Improper Payments Abroad: Perspective and Proposals” (abstract available here).

July 1976 was a mid-point of sorts in the nearly three year journey of Congress in investigating and addressing the foreign payments problem. President Ford, whose administration favored a disclosure regime, would soon lose the November 1976 election to Jimmy Carter and Carter’s administration favored a prohibition regime, which came to be embodied in the FCPA signed by President Carter in December 1977.

Sorensen’s article begans as follows:

“Like motherhood and apple pie (zero population growth? food additives?), corporate bribery abroad is not the simple, safe issue it seems at first blush. Sharp division and delay have characterized its consideration by the U.S. Securities and Exchange Commission, Department of Justice and Internal Revenue Service, and by several Committees of the U.S. Congress, the Organization for Economic Cooperation and Development (OECD), and the International Chamber of Commerce. In the United States, a Presidential Cabinet-level Task Force-and in the United Nations, the Committee on Transnational Corporations-have been asked to untangle the problem; but no solution is yet agreed upon.

The practice of exporters and investors offering special inducements to host country officials is at least as old as Marco Polo. But in the United States a post-Watergate climate of pitiless exposure for all suspect practices connected with government has intensified both the investigations of these payments and the oversimplified publicity given to them. Indeed the seeds of the present furor were sown in Watergate. When the Special Prosecutor traced some of the “cover-up” financing to unreported corporate campaign contributions, often transmitted through foreign “slush funds,” the SEC initiated a major check on all undisclosed payments to governments and politicians, both domestic and foreign, by the publicly owned companies subject to its jurisdiction.

As a result, U.S. corporate officials have engaged in the most painful rush to public “voluntary” confession since China’s Cultural Revolution. Scores of U.S.-based companies have been investigated by one or more arms of the U.S. executive branch, legislative branch, and news media-or by their own directors. Many foreign officials of varying prominence have been forced to resign, deny, or both. The going rate for bribery has reportedly fallen in some countries as fear of disclosure increases, and risen in others as officials discover the full potential of their position. Debates between businessmen asserting that only they live in the “real world” (“Of course, I’m against bribery, but . . . .”) and bureaucrats asserting that only they are without sin (“No payment of any kind or size for any reason should escape . . . .”) have thus far produced more heat than light. It is hoped that a calmer, more long-range perspective can soon prevail. Otherwise, genuinely legitimate business practices will be inhibited by an atmosphere of fear and suspicion, generated by sweeping and hasty reactions, while those truly intent on corruption will merely wait for the emotional storm to pass.”

In the article, Sorensen makes several insightful and valid points. Among those are the following.

“The [issue of how to remedy foreign payments] has been further distorted by an outpouring of self-serving, self-righteous hypocrisy on both sides. Among the biggest hypocrites have been the following: (i) those foreign governments which since time immemorial have closed their eyes and held out their hands, but which now denounce the United States for introducing corruption to their shores; (ii) those U.S. politicians who professed ignorance of the illegality of corporate campaign contributions they received (or knew others received) in cash in sealed envelopes behind a barn or men’s room door, but who now insist that various company executives be prosecuted because they should have known of their subordinates’ improper activities abroad; (iii) those agencies of the U.S. government which long knew of and even approved of barely concealed payoffs by companies engaged in favored overseas sales and investments, but which now wring their hands at the unbelievable shame of it all; and (iv) those U.S. and foreign newspaper commentators who long winked at free junkets and passes for newsmen, even a little extra income doing public relations for the organizations they were covering, but who now condemn the ethical standards of the business community.”

Sorensen noted that “there will be countless situations in which a fair-minded investigator or judge will be hard-put to determine whether a particular payment or practice is a legitimate and permissible business activity or a means of improper influence.”

He offered the following examples.

“Example 1. The best lawyer in a foreign town is the London-educated son of the Minister of Commerce. Should he be prevented from accepting clients who need permits from the Ministry? Should a U.S. corporation be prevented from retaining him? Would it make any difference if he were a consultant or agent instead of a lawyer? The opportunities for abuse here are undeniable but not inevitable.”

“Example 2. A U.S. corporation is asked by the Provincial Governor to contribute to the local Health and Welfare Fund, his favorite charity. Is this the obligation of a public-spirited company or an opportunity for covert graft?”

“Example 3. A U.S. corporation, already doing substantial business in a foreign country, wishes to invest as well in one of its local suppliers. The Prime Minister is the latter’s principal stockholder. Would it make any difference if it were another U.S. company in which they would be investors together?”

“Example 4. A U.S. corporation’s valuable inventory abroad is stored in a remote warehouse. The nearest police are willing to act as after-hours guards if they are paid by the corporation for their overtime services. Must a less effective and more expensive alternative be found?”

“Example 5. A U.S. corporation wishes to form a joint venture with a local firm owned by a member of the ruling family (not unusual or considered unethical in small countries with small elites). But see Example 1.”

“Example 6. A U.S. corporation, seeking to locate its plant in an improverished land, invites the improverished Minister of Environmental Affairs to fly to the United States at its expense for a tour of its domestic installations, reportedly to demonstrate that its proposed plant will not pollute the local air and water. At what point does its hospitality become excessive; and should this expensive trip be more permissible than contributing the cash equivalent thereof?”

“Example 7. A U.S. corporation is informed that the government permit for which it was bidding has already been issued to a local corporation of unknown ownership which is willing to sell it to the U.S. bidder at the bid price. If no extra payment is thus involved, does the additional step render the transaction improper?”

As to these examples, Sorensen noted that “reasonable men and even angels will differ on the answers to these and similar questions. At the very least such distinctions should make us less sweeping in our judgments and less confident of our solutions.”

Sorensen’s words, written nearly 35 years ago, remain relevant today.

I became aware of Sorensen’s Foreign Affairs article a few years ago.

Against the current backdrop of aggressive FCPA enforcement and FCPA enforcement actions fitting the exact hypotheticals Sorensen posed, it was on my to-do list to contact him to probe his reaction to the current state of FCPA enforcement, and whether, more broadly, any of the issues and questions have changed much since 1976.

Regrettably, I never got to this item.

Another Noisy Exit

Steven Jacobs was the President of Macau Operations for Las Vegas Sands Corp. (“LVSC”), a company with shares traded on the New York Stock Exchange (see here).

That is, until his termination on July 23, 2010.

In an October 20th complaint filed against LVSC in District Court, Clark County, Nevada (see here) alleging breach of contract and tort-based causes of action, Jacobs alleges, among other things, that LVSC’s “notoriously bellicose” Chief Executive Officer and majority shareholder made several “outrageous demands” upon him including, but not limited to the following:

“demands that Jacobs use improper ‘leverage’ against senior government officials of Macau in order to obtain Strata-Title for the Four Seasons Apartments in Macau;”

“demands that Jacobs threaten to withhold Sands China business from prominent Chinese banks unless they agreed to use influence with newly-elected senior government officials of Macau in order to obtain Strata-Title for the Four Seasons Apartments and favorable treatment with regards to labor quotas and table limits;”

“demands that secret investigations be performed regarding the business and financial affairs of various high-ranking members of the Macau government so that any negative information obtained could be used to exert ‘leverage’ in order to thwart government regulations/initiatives viewed as adverse to LVSC’s interests;” and

“demands that Sands China continue to use the legal services of a Macau attorney […][an individual media is reporting as a member of a Chinese local government executive council] despite concerns that [the individual’s] retention posed serious risks under the criminal provisions of the United States code commonly known as the Foreign Corrupt Practices Act (‘FCPA’).”

A LVSC spokesperson has been quoted as saying “While Las Vegas Sands normally does not comment on legal matters, we categorically deny these baseless and inflammatory allegations.”

For other examples of recent noisy exists that may implicate the FCPA see this prior post.

The FCPA and Potential Reforms

Last week’s U.S. Chamber of Commerce Annual Legal Reform Summit included a panel titled: “Navigating a Global Marketplace — Foreign Corrupt Practices Act and Potential Reforms.”

Amanda Ulrich (here), an associate in the New York office of Debevoise & Plimpton, LLP, provides a summary in this guest post.

*****

The recent expansion of FCPA enforcement and new FCPA-related bounty provisions in the Dodd Frank Act had audience members thoroughly engaged as an impressive assembly of speakers from the public and private sectors gathered to discuss these issues at the United States Chamber of Commerce’s Annual Legal Reform Summit last week.

Michael B. Mukasey, former Attorney General of the United States and current partner at Debevoise & Plimpton LLP, introduced and moderated a panel that also included John S. Darden, former Assistant Chief of the Fraud Section of the Department of Justice (“DOJ”) and currently a partner at Patton Boggs, LLP, Cheryl J. Scarboro, Chief of the FCPA Unit within the Division of Enforcement at the U.S. Securities and Exchange Commission (“SEC”), George J. Terwilliger III, former DOJ Deputy Attorney General and currently global head of the White Collar Practice Group of White & Case LLP, and Andrew Weissmann, former Chief of the Criminal Division of the U.S. Attorney’s Office for the Eastern District of New York and Co-Chair of the White Collar Practice at Jenner & Block LLP. The audience was treated to a vigorous debate on FCPA enforcement between representatives of the private sector who called for more clarity and predictability in enforcement, and individuals arguing the federal government’s perspective, looking to level the playing field for business through increased enforcement and increased cooperation among foreign and domestic agencies.

The discussion opened with remarks by Judge Mukasey, who commented that the rapid expansion of FCPA enforcement in the United States since 2004 has brought increased anxiety to companies, which are concerned about competitive disadvantages in the global business environment. Judge Mukasey suggested, however, that this anxiety should be tempered by the fact that 34 countries have signed on to the Organization of Economic Cooperation and Development’s Convention on Combating Bribery of Foreign Public Officials in International Transactions. He noted further that although the United States remains in the forefront of enforcement, with the UK’s Anti-Bribery Bill coming into effect next year, there is a global trend towards more vigorous enforcement of anti-bribery laws.

Expanding Views on Jurisdiction have led to Global Enforcement by the DOJ

Mr. Darden presented the DOJ’s perspective on the expansion of FCPA enforcement, and explained that, since 2005, the DOJ’s Fraud Section has concluded more than 40 criminal FCPA matters and collected over $2 billion in criminal fines. He noted that the six largest FCPA investigations have been resolved in the past 22 months, that more than 75 individuals have been criminally charged with FCPA violations since 2005, and that more than 45 of those individual prosecutions have taken place in the past two years. These statistics dwarf those of the first thirty years of FCPA enforcement.

According to Mr. Darden, the recent surge in enforcement is the result of an expanding view of jurisdiction by the government, as applied to both corporations and individuals. For corporations, the FCPA applies not only to U.S. corporations and foreign companies whose shares are traded on U.S. exchanges and regulated by the SEC, but also individuals and companies that take any action in the United States in furtherance of a bribery scheme. As a result of a more expansive jurisdictional reach, Mr. Darden argued that the idea that U.S. companies are disadvantaged by stringent FCPA provisions has been turned on its head; he noted that five of the six largest FCPA actions have involved foreign corporations.

Mr. Darden pointed out that the expanding fight against bribery has extended beyond the scope of the FCPA itself. Although the FCPA punishes only the payor (as opposed to the Federal Anti-Kick Back Law, which punishes both the payor and the payee), at least two FCPA-related cases in the last few months have involved charges against foreign officials under other statutes.

SEC stepping up enforcement, increasing cooperation with other agencies, but approaching remedies with more flexibility

Ms. Scarboro described the FCPA program at the SEC, where, she noted, FCPA enforcement has been a high priority for quite some time. In 2010 alone, with several cases still ongoing, the SEC has settled with 11 corporations and 7 individuals, recovering over $400 million in disgorgement and civil penalties.

Ms. Scarboro reminded the audience that the SEC has reorganized its efforts and now has a dedicated unit focused exclusively on combating foreign bribery. She said that the division has become smarter, more proactive, and more internally coordinated; the unit has also increased the SEC’s coordination with the DOJ. In addition, there have been more coordinated efforts with investigative authorities in other countries, including in connection with the Siemens investigation and this year’s Innospec case. Ms. Scarboro said that the SEC and the DOJ have been at the forefront of enforcing this country’s OECD obligations and have begun encouraging and engaging international counterparts in the pursuit of anti-bribery enforcement.

Ms. Scarboro emphasized that the SEC will continue to pursue disgorgement of profits in its FCPA investigations, and also explained that the SEC has begun to focus on industry-wide corruption, taking individual instances of bribery and investigating whether patterns emerge within a given industry. The SEC has stepped up its pursuit of individuals, she said, viewing enforcement against individuals as a better deterrent than enforcing sanctions against a company.

The SEC has pursued a more flexible approach to remedies in its investigations. To encourage cooperation by businesses under scrutiny by federal agencies, Ms. Scarboro explained, the SEC has begun pursuing deferred prosecution and cooperation agreements with companies that voluntarily report and cooperate with the SEC. She said that the SEC fashions relief on a case-by-case basis, given that the facts and circumstances of each case, as well as the level of cooperation, differ significantly, and the SEC considers a broad range of factors in determining the relief in each case.

Calls for Reform from the Private Sector

Andrew Weissman has written critically about the statute in the past, and recently released an article, sponsored by the U.S. Chamber of Commerce’s Institute for Legal Reform, calling for specific reforms to the statute. Mr. Weissmann expressed concern that, because the vast majority of FCPA-related cases against corporations, like those involving allegations of other criminal law violations, are settled without trial, the DOJ and the SEC serve as the judge and jury; thus, there is no meaningful way to question their interpretation of the FCPA’s grey areas.

Mr. Weissman’s second major stated concern was that, due to the lack of clarity in enforcement, companies are less likely to pursue business opportunities in countries seen as highly corrupt, such as China, where the risks of running afoul of the FCPA are high. The potential for FCPA enforcement hangs over such business ventures, and Mr. Weissman characterized this as a tax on companies looking to do business abroad.

Mr. Weissman encouraged the United States to adopt a provision similar to one contained in the UK’s Anti-Bribery Bill, which, when it becomes effective in April 2011, will provide a defense to enforcement actions for companies that devote “adequate” resources to creating and enforcing anti-bribery procedures. Mr. Weissman suggested that the British statute recognizes the limitations of what a corporation can do about the actions of its individual employees.

Mr. Weissman also called for more clarity with respect to what constitutes an “instrumentality” of a foreign government, light-heartedly suggesting that almost everyone in China is an instrumentality of the government. Mr. Weissman fears that, without more clarity, a business would not know whether it could take someone employed at General Motors out to dinner (as the U.S. government is now a shareholder). Similar arguments might apply to hospitality provided to an employee of Bloomberg (as New York Mayor Michael Bloomberg owns 85% of that company), or a Professor at Columbia (a school that receives public grants).

Judge Mukasey noted that the United States has a facilitation payment exception that the UK statute does not have, but Mr. Weissman described the facilitation payment exception as very narrow, and limited to grease payments that expedite inevitable occurrences. Judge Mukasey characterized this exception as applying to payments that help a company to “move up the list” toward an approval it would obtain in any event as opposed to helping a company “get on the list.” Mr. Weissman also noted that there is no de-minimis exception in the FCPA, putting companies at risk of FCPA violations even for very minor favors or transactions.

Although the new UK statute goes beyond the FCPA in some ways – including its extension to commercial bribery – Mr. Weissmann believes that the availability of the “adequate procedures” defense makes that statute more reasonable than the FCPA.

The intent standard applied in FCPA enforcement actions also concerns Mr. Weissman. For individual prosecutions under the FCPA, he explained, the intent standard is “willfulness,” which is considerably more stringent than the “knowing” standard applied to corporations. The “knowing” standard, Mr. Weissman argued, makes doing business in certain countries very risky, as the act in furtherance of the bribery needs to be only an intentional act, that is, not one that is a mistake.

Anomalies Resulting from Increased Enforcement

Mr. Terwilliger began his discussion of anomalies in increased enforcement by noting that U.S. companies are devoted to free market principles, and that corrupt markets are not free – a principle sufficient to justify anti-bribery enforcement but not necessarily sufficient to justify uneven enforcement.

Mr. Terwilliger outlined problems with what he described as the great leverage held by the DOJ and the SEC in FCPA enforcement: few trials (almost no trials involving corporate defendants) and no body of jurisprudence governing the field, which results in no real opportunity for corporations to contest the government’s decision to pursue an FCPA enforcement action.

Although prosecutors stress the benefits of self-reporting and internal investigations, Mr. Terwilliger expressed an ongoing concern of many corporations that plaintiff’s lawyers representing shareholders and sometimes competitors have begun to latch on to those self-reports in pursuing litigation against companies who report bribery activities.

Similarly, Mr. Terwilliger explained that, in his view, the new bounty provisions of the Dodd Frank Act, which provide for recoveries of up to 30% of settlements with the SEC in excess of $1 million, misalign incentives that are crucial for successful self-reporting. The best source for self policing bribery issues are a company’s employees, and as such, companies are now required to rely on people who have financial incentive to go directly to the government to report these issues. Mr. Terwilliger said he viewed this as a major concern given that a company’s willingness to self-report is often a consideration in the remedies pursued by government agencies.

Incentives for Self-Reporting

Mr. Terwilliger argued that the incentives for companies faced with potential FCPA violations are also skewed in the self-reporting context. The better the procedures to detect bribery, the more likely the company will be to uncover bribery and face the decision of whether or not to self-report. Rather than being rewarded for voluntarily rooting out bribery problems, companies are often faced with costly punishment, an anomaly that weighs heavily in the board room when determining whether to self-report. Mr. Terwilliger called for the creation of a presumption of non-criminal disposition and reduced penalties for companies voluntarily reporting FCPA violations. Judge Mukasey added that such an approach could help lawyers in advising their clients on FCPA compliance policies.

Mr. Darden responded that the DOJ would see this as an unnecessary step, because the program is working well without such a “carrot.” Characterizing Mr. Terwilliger’s suggestion as amnesty and comparing it to the anti-trust division’s amnesty program, Mr. Darden said that the DOJ does not need companies to come forward and voluntarily report, whereas the anti-trust division’s amnesty policy is justified by the fact that it is impossible to investigate a cartel without one member of that cartel coming forward. Mr. Darden said that additional carrots are not needed in anti-bribery enforcement, as companies have shown that there is enough incentive to come forward.

Mr. Terwilliger argued that, in his experience with certain long-running voluntary FCPA investigations, it would have been impossible for the DOJ to gather the same evidence as was gathered in a voluntary investigation, and said that the anti-trust program is a very good analogy to the DOJ’s program. He also noted that he was not discussing amnesty, but rather a reduced penalty that would give the company better incentives to self-report.

Mr. Darden and Ms. Scarboro both stated that only about one-third of FCPA investigations are voluntarily reported to the DOJ or the SEC, but the proportion of cases that are resolved with cooperation of the companies being investigated is much higher than one-third, and in those cases that cooperation factors significantly into the remedies the agencies seek.

Ms. Scarboro noted that the U.S. Sentencing Guidelines, which the DOJ uses (and courts apply) in assessing fines for FCPA violations, provide for downward departures, and the availability of non-prosecution agreements gives the DOJ added flexibility. While other enforcement models, like the UK’s, provide for the negotiation of remedies prior to the investigation, the U.S. model gives federal agencies discretion to account for a variety of facts and circumstances after an investigation to assess the proper penalty. The SEC, for example, in determining whether to bring an action against a corporation, considers the corporation’s cooperation in the investigation and its remediation efforts in determining what remedies the SEC will seek, if any.

Ms. Scarboro noted that, in many cases, the level of cooperation is sufficient that the SEC will not initiate a full investigation. Those cases are generally not publicized in order to avoid unwanted publicity or embarrassment for the cooperating companies. Mr. Darden echoed that sentiment, and said that, while some companies affirmatively publicize their avoidance of FCPA charges, in many cases when the DOJ determines not to pursue charges, companies do not want the publicity of the DOJ’s decision not to prosecute or investigate, because that publicity could give rise to the need to issue a new 8-K.

During a Q&A period, Mr. Darden stated that the Federal Prosecution Principles, which were supposed to add clarity, have in some cases raised more questions than answers. In an attempt to give more clarity, especially in the area of compliance, the Prosecution Principles fail to give guidance about the type of cases the DOJ seeks to pursue. For example, the DOJ cares less about a company with some far flung employee who did not “get the memo” on the company’s anti-bribery compliance policy, than it does about a higher level corporate employee generating phony documents. Mr. Darden said that the failure to distinguish these schemes is a weakness in the Federal Prosecution Principles and is driving a need for more clarity.

Conclusion

Although the private sector has called for reform, the federal agencies responsible for FCPA enforcement have signaled no reversal of the trend of increased enforcement of the FCPA against companies and individuals at home and abroad.

Friday Roundup

It has been a few weeks since my last Friday Roundup.

As a result this is a souped-up edition.

Is paying an FCPA fine merely a cost of business, are FCPA internal investigations getting just a bit out-of-hand, have you heard that a new cottage industry of FCPA experts has emerged, quit picking on Canada, will Julian Messent (or others) be prosecuted for FCPA violations, Assistant Attorney General Breuer on the Kleptocracy Asset Recovery Initiative, Proclamation 7750 news, and a son who wants to keep the New York condo … it’s all here in the Friday roundup.

Is Paying an FCPA Fine Merely a Cost of Business?

One may wonder, and legitimately so, whether getting caught for violating the FCPA is simply a cost of doing business whereby the company pays a fine and then continues to do business, including with, in many cases, the U.S. government. See here for my post on Siemens – The Year After, here for my post on BAE’s recent $40 million contract with the FBI (note because of the facade of FCPA enforcement, BAE was not charged with violating the FCPA – see here).

Denis McInerney, Chief of the DOJ’s Fraud Section, rejected such an assertion during an October 21st speech before the American Bar Association.

According to Inside U.S. Trade, McInerney “sought to rebut charges that FCPA enforcement relies too heavily on settlement agreements and that it is therefore like a licensing regime under which ‘companies are allowed to bribe, but if caught they have to pay a fee.'” According to Inside U.S. Trade, McInerney said that in the past two years, DOJ has imposed fines of $59 million, $19 million, $365 million, $338 million, $400 million, $376 million, $579 million and $800 million and he “emphasized that the companies paying these penalties are subject to monitoring which can lead to criminal prosecution if new offenses occur.” According to Inside U.S. Trade, McInerney said “I guarantee you that these firms do not view these are mere licensing fees.”

Is This Getting a Bit Out of Hand?

Avon previously disclosed the existence of an internal investigation focused on potential FCPA issues (see here for the prior post).

Here is what the company said in its 10-Q filing (here) yesterday:

“As previously reported, we have engaged outside counsel to conduct an internal investigation and compliance reviews focused on compliance with the Foreign Corrupt Practices Act (“FCPA”) and related U.S. and foreign laws in China and additional countries. The internal investigation, which is being conducted under the oversight of our Audit Committee, began in June 2008. As we reported in October 2008, we voluntarily contacted the United States Securities and Exchange Commission and the United States Department of Justice to advise both agencies of our internal investigation. We are continuing to cooperate with both agencies and inquiries by them, including but not limited to, signing tolling agreements, translating and producing documents and assisting with interviews.

As previously reported in July 2009, in connection with the internal investigation, we commenced compliance reviews regarding the FCPA and related U.S. and foreign laws in additional countries in order to evaluate our compliance efforts. We are conducting these compliance reviews in a number of other countries selected to represent each of the Company’s four other international geographic segments. The internal investigation and compliance reviews are focused on reviewing certain expenses and books and records processes, including, but not limited to, travel, entertainment, gifts, and payments to third−party agents and others, in connection with our business dealings, directly or indirectly, with foreign governments and their employees. The internal investigation and compliance reviews of these matters are ongoing, and we continue to cooperate with both agencies with respect to these matters. At this point we are unable to predict the duration, scope, developments in, results of, or consequences of the internal investigation and compliance reviews.”

Here is what Avon had to say in the fling about its net global expenses:

“The increase in Net Global expenses for both the three and nine months ended September 30, 2010, was primarily attributable to significant professional and related fees associated with the FCPA investigation and compliance reviews described in Note 5 to the consolidated financial statements included herein of approximately $24 (up approximately $17 from the three months ended September 30, 2009) and approximately $72 (up approximately $49 from the nine months ended September 30, 2009), respectively. The increase in Net Global expenses for the nine months ended September 30, 2010 was also due to higher costs associated with global initiatives and costs associated with business acquisitions. Professional and related fees associated with the FCPA investigation and compliance reviews, while difficult to predict, are expected to continue during the course of this investigation.”

Those figures are not mere dollars, but millions of dollars. And, as noted in the disclosure, the expenses are expected to increase.

On a much smaller (yet still meaningful) scale, on August 31st, Orthofix disclosed (here) the existence of an internal investigation relating to FCPA issues focused on its Mexican subsidiaries, an entity that accounts “for approximately one percent of the Company’s consolidated net sales and consolidated total assets.”

Recently, Orthofix provided this update in an 8-K filing (here):

“Operating income in the third quarter of 2010 included the impact of $3.7 million in legal expenses associated with the DOJ investigation of the bone growth stimulation industry and the Company’s internal investigation into its compliance with the Foreign Corrupt Practices Act in its subsidiary in Mexico.”

Newsweek Notices FCPA Inc.

Newsweek recently carried a short blurb (here) titled “Going After Graft.” Among other things, the piece states:

“With prosecutions likely to continue—the FBI has doubled the number of agents tasked to FCPA cases—business is responding in kind. Law firms are competing for top FCPA talent, banks financing international deals are insisting on anti-bribery stipulations in contracts, and a new cottage industry of experts has emerged, offering country-by-country advice on gifts and local laws. In the words of an FBI spokesperson, FCPA are ‘four letters you need to be aware of if you’re doing business in the international marketplace.'”

Quit Picking On Canada

What if, in the U.S., there was no fallback FCPA books and records and internal control charges, there was no voluntary disclosure culture, there were no “overzealous prosecutions,” and there were no prosecutions undertaken as “publicity stunts.”

According to Cyndee Todgham Cherniak (here), FCPA enforcement would likely resemble the sparse enforcement of Canada’s Corruption of Foreign Public Officials Act.

At least that is my take-away from her recent post (here) on the Trade Lawyers Blog.

For more on Canada’s Corruption of Foreign Public Officials Act (see here and here).

Will Julian Messent (Or Others) Be Prosecuted For FCPA Violations?

Earlier this week, the U.K. Serious Fraud Office (SFO) announced (here) that Julian Messent was sentenced to 21 months in prison “after admitting making or authorizing corrupt payments of almost US $2 million to Costan Rican officials in the state insurance company, Instituto Nacional de Seguros (INS) and the national electricity provider Instituto Costarricense de Electricidad.”

Messent, a former director of London-based insurance business PWS International Ltd. (PWS), was the head of the Property (Americas) Divison at PWS in which role “he was responsible for securing and maintaining contracts for reinsurance in the Central and South America regions.”

According to the SFO release, “Messent authorized 41 corrupt payments” “to be paid to Costa Rican officials, their wives and associated companies, as inducements or rewards for assisting in the appointment or retention of PWS as broker of the lucrative reinsurance policy for INS.”

The SFO release also indicates that Messent was ordered to pay £100,000 in compensation to the Republic of Costa Rica. (In the U.S., FCPA fines flow solely into the U.S. Treasury).

Messent was charged under the U.K.’s Prevention of Corruption Act 1906 (see here).

According to this report in the Guardian, “the SFO decided not to prosecute PWS because the firm, which has been sold, had a substantial deficit in its pension fund.”

According to the Guardian, “the covert payments were routed through bank accounts in the names of the wives of the Costa Rican officials and through accounts in Panama and the US, and a travel agency in Florida.”

Under the 78dd-3 prong of the Foreign Corrupt Practices Act, persons other than an issuer or domestic concern (i.e. in this case foreign nationals) can be subject to the FCPA if the improper payments have a U.S. nexus.

Will FCPA prosecutions of Messent (and perhaps others) follow?

Breuer on the Kleptocracy Asset Recovery Initiative

As highlighted in this prior post, in November 2009, Attorney General Eric Holder called asset recovery from corrupt officials a “global imperative” and he announced a “redoubled commitment on behalf of the United States Department of Justice to recover” funds obtained by foreign officials through bribery.

In July 2010, Holder announced (here) the Kleptocracy Asset Recovery Initiative “aimed at combating large-scale foreign official corruption and recovering public funds for their intended – and proper – use: for the people of our nations.” Holder announced that the DOJ is “assembling a team of prosecutors who will focus exclusively on this work and build upon efforts already underway to deter corruption, hold offenders accountable, and protect public resources.”

In a recent keynote address at the Money Laundering Enforcement Conference (here), Assistant Attoney General Lanny Breuer had this to say about the initaitive:

“This Initiative represents a concrete step toward fulfilling that commitment. The Kleptocracy Initiative will involve three key sections in the Criminal Division: the Asset Forfeiture and Money Laundering Section, which will lead it, and the Office of International Affairs and the Fraud Section, which will provide critical support. Once fully implemented, this Initiative will allow the Department to recover assets on behalf of countries victimized by high-level corruption, building on the Justice Department’s already robust enforcement of the Foreign Corrupt Practices Act. Through the Kleptocracy Initiative, the Department will ensure that corrupt leaders cannot seek safe haven in the United States for their stolen wealth. And, if we uncover such wealth, the Justice Department will forfeit and return this stolen money to its rightful owners – the people and governments from whom it was taken.”

In his speech, Breuer also discussed (in a non-FCPA context) how the DOJ wants “companies that uncover illegal conduct to come forward voluntarily.”

Proclamation 7750 News

In 2004, President Bush signed Proclamation 7750 “To Suspend Entry As Immigrants or Nonimmigrants of Persons Engaged In or Benefiting From Corruption” (see here).

Proclamation 7750 basically says the U.S. can suspend entry into the country “of certain persons who have committed, participated in, or are beneficiaries of corruption in the performance of public functions where that corruption has serious adverse effects on international activity” subject to an exception where denying such entry would be “contrary to the interests” of the U.S.

Last year, the New York Times (here) ran an article quoting a former State Department official as saying the State Department(which is responsible for enforcing the proclamation) “seem[s] to lack the backbone to use this prohibition.”

Earlier this month, David Johnson (Assistant Secretary, Bureau International Narcotics and Law Enforcement Affairs, U.S. Department of State) stated at the Third Committee of the 65th Session of the UN General Assembly (see here) as follows:

“The United States continues to broaden its efforts to deny entry into our own country of public officials who receive bribes as well as those who supply them. Corrupt officials are not welcome in the United States.”

Joe Palazzolo (Wall Street Journal – Corruption Currents) followed up with Johnson and noted in a recent article that the “State Department is stepping up its game” in seeking to enforce Proclamation 7750. As Palazzolo reports, it is not hard to “step up the game” when “for a long time, one part-official […] handled 7750 matters.”

Palazzolo reports that the State Department recently hired two new employees and is “processing paperwork for two additional hires, who will focus the majority of their time on 7750 issues.” The article quotes a State Department official as saying, “it is our hope and intention that the new hires will result in greater capacity.”

Son Fights to Keep New York Condo

This prior post discussed the DOJ’s civil forfeiture complaint filed in July against certain U.S. properties “that represent a portion of illegal bribes paid to the former president of Taiwan and his wife.”

Joe Palazzolo (Wall Street Journal – Corruption Currents) recently reported that “the son of former Taiwanese President Chen Shui-bian has quietly hired legal counsel to prevent a Manhattan condominium, which prosecutors say was purchased with bribes, from falling into the hands of the government.”

According to Palazzolo, the son, Chen Chih-chung, has retained Jonathan Harris (see here) to defend against the forfeiture action and Harris is quoted as saying he will be filing a motion to dismiss “shortly.”

*****

A good weekend to all.

Friday Roundup

It has been a few weeks since my last Friday Roundup.

As a result this is a souped-up edition.

Is paying an FCPA fine merely a cost of business, are FCPA internal investigations getting just a bit out-of-hand, have you heard that a new cottage industry of FCPA experts has emerged, quit picking on Canada, will Julian Messent (or others) be prosecuted for FCPA violations, Assistant Attorney General Breuer on the Kleptocracy Asset Recovery Initiative, Proclamation 7750 news, and a son who wants to keep the New York condo … it’s all here in the Friday roundup.

Is Paying an FCPA Fine Merely a Cost of Business?

One may wonder, and legitimately so, whether getting caught for violating the FCPA is simply a cost of doing business whereby the company pays a fine and then continues to do business, including with, in many cases, the U.S. government. See here for my post on Siemens – The Year After, here for my post on BAE’s recent $40 million contract with the FBI (note because of the facade of FCPA enforcement, BAE was not charged with violating the FCPA – see here).

Denis McInerney, Chief of the DOJ’s Fraud Section, rejected such an assertion during an October 21st speech before the American Bar Association.

According to Inside U.S. Trade, McInerney “sought to rebut charges that FCPA enforcement relies too heavily on settlement agreements and that it is therefore like a licensing regime under which ‘companies are allowed to bribe, but if caught they have to pay a fee.'” According to Inside U.S. Trade, McInerney said that in the past two years, DOJ has imposed fines of $59 million, $19 million, $365 million, $338 million, $400 million, $376 million, $579 million and $800 million and he “emphasized that the companies paying these penalties are subject to monitoring which can lead to criminal prosecution if new offenses occur.” According to Inside U.S. Trade, McInerney said “I guarantee you that these firms do not view these are mere licensing fees.”

Is This Getting a Bit Out of Hand?

Avon previously disclosed the existence of an internal investigation focused on potential FCPA issues (see here for the prior post).

Here is what the company said in its 10-Q filing (here) yesterday:

“As previously reported, we have engaged outside counsel to conduct an internal investigation and compliance reviews focused on compliance with the Foreign Corrupt Practices Act (“FCPA”) and related U.S. and foreign laws in China and additional countries. The internal investigation, which is being conducted under the oversight of our Audit Committee, began in June 2008. As we reported in October 2008, we voluntarily contacted the United States Securities and Exchange Commission and the United States Department of Justice to advise both agencies of our internal investigation. We are continuing to cooperate with both agencies and inquiries by them, including but not limited to, signing tolling agreements, translating and producing documents and assisting with interviews.

As previously reported in July 2009, in connection with the internal investigation, we commenced compliance reviews regarding the FCPA and related U.S. and foreign laws in additional countries in order to evaluate our compliance efforts. We are conducting these compliance reviews in a number of other countries selected to represent each of the Company’s four other international geographic segments. The internal investigation and compliance reviews are focused on reviewing certain expenses and books and records processes, including, but not limited to, travel, entertainment, gifts, and payments to third−party agents and others, in connection with our business dealings, directly or indirectly, with foreign governments and their employees. The internal investigation and compliance reviews of these matters are ongoing, and we continue to cooperate with both agencies with respect to these matters. At this point we are unable to predict the duration, scope, developments in, results of, or consequences of the internal investigation and compliance reviews.”

Here is what Avon had to say in the fling about its net global expenses:

“The increase in Net Global expenses for both the three and nine months ended September 30, 2010, was primarily attributable to significant professional and related fees associated with the FCPA investigation and compliance reviews described in Note 5 to the consolidated financial statements included herein of approximately $24 (up approximately $17 from the three months ended September 30, 2009) and approximately $72 (up approximately $49 from the nine months ended September 30, 2009), respectively. The increase in Net Global expenses for the nine months ended September 30, 2010 was also due to higher costs associated with global initiatives and costs associated with business acquisitions. Professional and related fees associated with the FCPA investigation and compliance reviews, while difficult to predict, are expected to continue during the course of this investigation.”

Those figures are not mere dollars, but millions of dollars. And, as noted in the disclosure, the expenses are expected to increase.

On a much smaller (yet still meaningful) scale, on August 31st, Orthofix disclosed (here) the existence of an internal investigation relating to FCPA issues focused on its Mexican subsidiaries, an entity that accounts “for approximately one percent of the Company’s consolidated net sales and consolidated total assets.”

Recently, Orthofix provided this update in an 8-K filing (here):

“Operating income in the third quarter of 2010 included the impact of $3.7 million in legal expenses associated with the DOJ investigation of the bone growth stimulation industry and the Company’s internal investigation into its compliance with the Foreign Corrupt Practices Act in its subsidiary in Mexico.”

Newsweek Notices FCPA Inc.

Newsweek recently carried a short blurb (here) titled “Going After Graft.” Among other things, the piece states:

“With prosecutions likely to continue—the FBI has doubled the number of agents tasked to FCPA cases—business is responding in kind. Law firms are competing for top FCPA talent, banks financing international deals are insisting on anti-bribery stipulations in contracts, and a new cottage industry of experts has emerged, offering country-by-country advice on gifts and local laws. In the words of an FBI spokesperson, FCPA are ‘four letters you need to be aware of if you’re doing business in the international marketplace.'”

Quit Picking On Canada

What if, in the U.S., there was no fallback FCPA books and records and internal control charges, there was no voluntary disclosure culture, there were no “overzealous prosecutions,” and there were no prosecutions undertaken as “publicity stunts.”

According to Cyndee Todgham Cherniak (here), FCPA enforcement would likely resemble the sparse enforcement of Canada’s Corruption of Foreign Public Officials Act.

At least that is my take-away from her recent post (here) on the Trade Lawyers Blog.

For more on Canada’s Corruption of Foreign Public Officials Act (see here and here).

Will Julian Messent (Or Others) Be Prosecuted For FCPA Violations?

Earlier this week, the U.K. Serious Fraud Office (SFO) announced (here) that Julian Messent was sentenced to 21 months in prison “after admitting making or authorizing corrupt payments of almost US $2 million to Costan Rican officials in the state insurance company, Instituto Nacional de Seguros (INS) and the national electricity provider Instituto Costarricense de Electricidad.”

Messent, a former director of London-based insurance business PWS International Ltd. (PWS), was the head of the Property (Americas) Divison at PWS in which role “he was responsible for securing and maintaining contracts for reinsurance in the Central and South America regions.”

According to the SFO release, “Messent authorized 41 corrupt payments” “to be paid to Costa Rican officials, their wives and associated companies, as inducements or rewards for assisting in the appointment or retention of PWS as broker of the lucrative reinsurance policy for INS.”

The SFO release also indicates that Messent was ordered to pay £100,000 in compensation to the Republic of Costa Rica. (In the U.S., FCPA fines flow solely into the U.S. Treasury).

Messent was charged under the U.K.’s Prevention of Corruption Act 1906 (see here).

According to this report in the Guardian, “the SFO decided not to prosecute PWS because the firm, which has been sold, had a substantial deficit in its pension fund.”

According to the Guardian, “the covert payments were routed through bank accounts in the names of the wives of the Costa Rican officials and through accounts in Panama and the US, and a travel agency in Florida.”

Under the 78dd-3 prong of the Foreign Corrupt Practices Act, persons other than an issuer or domestic concern (i.e. in this case foreign nationals) can be subject to the FCPA if the improper payments have a U.S. nexus.

Will FCPA prosecutions of Messent (and perhaps others) follow?

Breuer on the Kleptocracy Asset Recovery Initiative

As highlighted in this prior post, in November 2009, Attorney General Eric Holder called asset recovery from corrupt officials a “global imperative” and he announced a “redoubled commitment on behalf of the United States Department of Justice to recover” funds obtained by foreign officials through bribery.

In July 2010, Holder announced (here) the Kleptocracy Asset Recovery Initiative “aimed at combating large-scale foreign official corruption and recovering public funds for their intended – and proper – use: for the people of our nations.” Holder announced that the DOJ is “assembling a team of prosecutors who will focus exclusively on this work and build upon efforts already underway to deter corruption, hold offenders accountable, and protect public resources.”

In a recent keynote address at the Money Laundering Enforcement Conference (here), Assistant Attoney General Lanny Breuer had this to say about the initaitive:

“This Initiative represents a concrete step toward fulfilling that commitment. The Kleptocracy Initiative will involve three key sections in the Criminal Division: the Asset Forfeiture and Money Laundering Section, which will lead it, and the Office of International Affairs and the Fraud Section, which will provide critical support. Once fully implemented, this Initiative will allow the Department to recover assets on behalf of countries victimized by high-level corruption, building on the Justice Department’s already robust enforcement of the Foreign Corrupt Practices Act. Through the Kleptocracy Initiative, the Department will ensure that corrupt leaders cannot seek safe haven in the United States for their stolen wealth. And, if we uncover such wealth, the Justice Department will forfeit and return this stolen money to its rightful owners – the people and governments from whom it was taken.”

In his speech, Breuer also discussed (in a non-FCPA context) how the DOJ wants “companies that uncover illegal conduct to come forward voluntarily.”

Proclamation 7750 News

In 2004, President Bush signed Proclamation 7750 “To Suspend Entry As Immigrants or Nonimmigrants of Persons Engaged In or Benefiting From Corruption” (see here).

Proclamation 7750 basically says the U.S. can suspend entry into the country “of certain persons who have committed, participated in, or are beneficiaries of corruption in the performance of public functions where that corruption has serious adverse effects on international activity” subject to an exception where denying such entry would be “contrary to the interests” of the U.S.

Last year, the New York Times (here) ran an article quoting a former State Department official as saying the State Department(which is responsible for enforcing the proclamation) “seem[s] to lack the backbone to use this prohibition.”

Earlier this month, David Johnson (Assistant Secretary, Bureau International Narcotics and Law Enforcement Affairs, U.S. Department of State) stated at the Third Committee of the 65th Session of the UN General Assembly (see here) as follows:

“The United States continues to broaden its efforts to deny entry into our own country of public officials who receive bribes as well as those who supply them. Corrupt officials are not welcome in the United States.”

Joe Palazzolo (Wall Street Journal – Corruption Currents) followed up with Johnson and noted in a recent article that the “State Department is stepping up its game” in seeking to enforce Proclamation 7750. As Palazzolo reports, it is not hard to “step up the game” when “for a long time, one part-official […] handled 7750 matters.”

Palazzolo reports that the State Department recently hired two new employees and is “processing paperwork for two additional hires, who will focus the majority of their time on 7750 issues.” The article quotes a State Department official as saying, “it is our hope and intention that the new hires will result in greater capacity.”

Son Fights to Keep New York Condo

This prior post discussed the DOJ’s civil forfeiture complaint filed in July against certain U.S. properties “that represent a portion of illegal bribes paid to the former president of Taiwan and his wife.”

Joe Palazzolo (Wall Street Journal – Corruption Currents) recently reported that “the son of former Taiwanese President Chen Shui-bian has quietly hired legal counsel to prevent a Manhattan condominium, which prosecutors say was purchased with bribes, from falling into the hands of the government.”

According to Palazzolo, the son, Chen Chih-chung, has retained Jonathan Harris (see here) to defend against the forfeiture action and Harris is quoted as saying he will be filing a motion to dismiss “shortly.”

*****

A good weekend to all.

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