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Bonny Island Bribery Developments

As reported elsewhere earlier this week (see here among other places), JGC Corporation of Japan (here) is close to resolving an FCPA enforcement action. JGC is the fourth joint venture partner along with KBR, Technip and Snamprogetti in the TSKJ consortium (a consortium originally formed by M.W. Kellogg) involved in the Bonny Island, Nigeria project.

In a disclosure earlier this week (here) the company stated:

“JGC and DOJ have been engaged in discussions about a potential resolution of the investigation relating to JGC. It was confirmed at the meeting of JGC’s board of directors held on January 31, 2011 that the Board has approved a potential resolution of the investigation. Based on this approval, JGC recognized a provision for the cost estimated for such a resolution, which will be appropriated as a financial loss in the 3rd Quarter Financial Result. The amount of such loss is 17.8 billion Japanese yen [approximately $218 million]”.

The expected JGC settlement would thus fall in the Top Ten FCPA enforcement actions of all time (see here for the FCPA Blog’s current list) and would bump the total amount of corporate fines and penalties U.S. authorities have collected in Bonny Island bribery cases to approximately $1.52 billion.

See here for my current Bonny Island bribery statistics.

How will JGC’s expected settlement affect KBR (a company, along with its current or former affiliated entities, that has already paid $579 million in U.S. fines and penalties in connection with Bonny Island)?

In early January, KBR announced (here) that it “completed the acquisition of the 44.94 percent share interest in M.W. Kellogg Limited (MWKL) previously held by JGC Corporation. With the completion of the transaction, MWKL, which was previously an affiliate of both companies since 1992, is again a wholly-owned KBR subsidiary.”

During a January 13th earnings call, Sue Carter (KBR – Senior VP and CFO) stated as follows:

“Also in regards to MWKL, included in the transaction is an estimate of JGC’s share of the ongoing [Serious Fraud Office] investigation. Any potential liabilities at this point are only estimated. Therefore any financial impact pending an actual outcome in the investigation will be trued up positive or negative.”

During the Q&A, William Utt (KBR – Chairman, President and CEO) was asked “can you tell us what kind of risks are structured in the MWKL deal? I mean, you have indemnification clauses for FCPA from Halliburton on your original stake. Do you have a similar clause with JGC?” He responded as follows: “Well I think the indemnification from Halliburton goes towards any financial penalties associated with the SFO investigation and as Sue commented, we’ve already factored that into the purchase price with JGC subject to a true-up.”

As Halliburton disclosed in its Oct. 22, 2010 10-Q filing, its indemnification obligations to KBR in connection with the SFO investigation “is limited to 55% of such penalties, which is KBR’s beneficial ownership interest in MWKL.”

Maxwell Technologies is the First Corporate Enforcement Action of 2011

In early January, Maxwell Technologies Inc. (“Maxwell”), announced that the U.S. Department of Defense awarded the company a $1.7 million contract (here), “for the initial phase of a multi-phase program to develop a lighter, longer-lasting, energy source for field radios and other portable electronic equipment carried by military personnel.”

On January 31st, Maxwell became the first company in 2011 to settle an FCPA enforcement action.

The Maxwell enforcement action involved both a DOJ and SEC component. Total settlement amount was approximately $14.4 million ($8 million criminal fine via a DOJ deferred prosecution agreement; $6.4 million in disgorgement and prejudgment interest via a SEC settled complaint).

Maxwell previously disclosed (see here) that “discussions with the SEC and DOJ have resulted in an estimate of potential settlement of up to $20.0 million – representing the combined first offer of settlement put forth by the SEC and DOJ.” Presumably, the company’s disclosure of the government’s settlement offer did not sit well with the DOJ and on July 30, 2009, Maxwell issued this strange press release.

As set forth more fully below, the alleged recipients of the bribe payments at issue were all employees of alleged Chinese state-owned or state-controlled enterprises. Also of note, the SEC’s charges include disclosure violations not often seen in FCPA enforcement actions, based on allegation that Maxwell’s bribe payments allowed the company to offset losses and fund product expansions that are now a source of revenue for the company.

DOJ

The DOJ enforcement action involved a criminal information (here) against Maxwell resolved through a deferred prosecution agreement (here).

Criminal Information

The criminal information, a short eight pages, alleges that “from at least July 2002 through in or about May 2009, Maxwell and its subsidiaries paid approximately $2,789,131 to Agent 1 [a Chinese national, third-party agent responsible for Maxwell S.A.’s (a wholly-owned subsidiary of Maxwell) high voltage capacitor sales to Chinese customers] to be distributed to Chinese foreign officials, in return for securing contracts that profited Maxwell.”

The Chinese foreign officials?

You guessed it, employees of alleged state-owned entities such as:

“Pinggao Group Co. Ltd. [formerly Pingdingshan High Voltage Switchgear Works) … a state owned manufacturer of electric-utility infrastructure in Henan Province, China” (see here for the company’s website)

“New Northeast Electric Shenyang HV Switchgear Co., Ltd. … a state-owned manufacturer of electric-utility infrastructure in Liaoning Province, China” (see here for company information) and

“Xi-an XD High Voltage Apparatus Co., Ltd., … a state-owned manufacturer of electric-utility infrastructure in Shaanxi Province, China” (see here for the company’s website).

According to the information, “Maxwell and its subsidiaries accomplished [the bribe] payments by using Agent 1 to market and sell Maxwell’s high voltage capacitors to Chinese consumers … substantially all of which were Chinese state-owned entities.” The information alleges that Agent 1 “requested quotes from Maxwell S.A. on behalf of prospective Chinese state-owned entities” and that “upon Agent 1’s instruction, Maxwell S.A. added an extra 20 percent to the quoted amounts to arrive at a higher price for Maxwell S.A.’s high-voltage equipment.” The information alleges that Agent 1 then distributed the extra amount “to officials at the Chinese state-owned entities” including employees of the above referenced companies.

Under the heading, “Knowledge Within Maxwell’s U.S. Management,” the information alleges that “Maxwell’s management within the United States discovered, tactitly approved, concealed and caused to be concealed the bribery scheme.” According to the information, following discovery of the payments by Maxwell senior management in the U.S. including by Executive A, Executive B, and Executive C (all U.S. citizens), under Executive E’s (a Swiss citizen and Maxwell S.A’s Vice President and General Manager) oversight and supervision, the payments at issue to Agent 1 actually increased from approximately $165,000 in 2002 to nearly $1.1 million in 2008.

According to the information, Maxwell’s financial statements and reports described the bribe payments as “sales-commission expenses.”

Based on the above allegations, the information charges Maxwell with FCPA anti-bribery violations and knowingly violating the FCPA’s books and records provisions.

DPA

The DOJ’s charges against Maxwell were resolved via a deferred prosecution agreement.

Pursuant to the DPA, Maxwell admitted, accepted and acknowledged that it was responsible for the acts of its officers, employees, subsidiaries, and agents as set forth above.

The term of the DPA is three years and it states that the DOJ entered into the agreement “based on the individual facts and circumstances” of the case and Maxwell.

Among the factors stated are the following.

(a) Maxwell voluntarily disclosed its FCPA violations to both the DOJ and the SEC;

(b) Maxwell cooperated with the Department’s investigation of Maxwell and others;

(c) Maxwell undertook remedial measures, including the implementation of an enhanced compliance program, and agreed to undertake further remedial measures …;

(d) Maxwell agreed to cooperate with the Department in any ongoing investigation of the conduct of Maxwell and its employees, agents, consultants, contractors, subcontractors, subsidiaries, and others relating to violations of the FCPA; and

(e) the impact on Maxwell, including collateral consequences, of a guilty plea or criminal conviction.

As stated in the DPA, the fine range for the above described conduct under the U.S. Sentencing Guidelines was $10.5 million to $21 million. Pursuant to the DPA, Maxwell agreed to pay a monetary penalty of $8 million (25% below the minimum amount suggested by the guidelines).

Pursuant to the DPA, Maxwell agreed to self-report to the DOJ “periodically, at no less than 12-month intervals” during the term of the DPA “regarding remediation and implementation of the compliance program and internal controls, policies, and procedures” described in the DPA.

As is standard in FCPA DPAs, Maxwell agreed not to make any public statement “contradicting the acceptance of responsibility” by Maxwell as set forth in the DPA and Maxwell further agreed to only issue a press release in connection with the DPA if the DOJ does not object to the release.

As to debarment issues, paragraph 22 of the DPA states as follows:

“The Department agrees to bring to the attention of governmental and other debarment authorities the facts and circumstances relating to the nature of the conduct underlying this Agreement, including the nature and quality of Maxwell’s cooperation and remediation. By agreeing to provide this information to debarment authorities, the Department is not agreeing to advocate on Maxwell’s behalf, but rather is providing facts to be evaluated independently by the debarment authorities.”

See here for the DOJ release.

SEC

The SEC’s civil complaint (here) alleges, in summary, as follows.

“From 2002 through May 2009, Maxwell violated the anti-bribery, books and records and internal control provisions of the Foreign Corrupt Practices Act (“FCPA”) when it repeatedly paid bribes to Chinese officials in order to obtain and retain sales contracts for high voltage capacitors from several Chinese state-owned entities. Maxwell engaged in bribery to maintain its high-voltage capacitor business in China, which accounted for material revenue and profits during the relevant time period.”

According to the complaint, “the illicit payments were made with the knowledge and tacit approval of certain former Maxwell officers and Maxwell failed to accurately record these payments on its books and records, and failed to implement or maintain a system of effective internal accounting controls to detect or prevent the payments.”

The complaint alleges that “the improper payments generated nearly $15.4 million in sales contracts, from which Maxwell realized profits ofover $5.6 million.”

According to the SEC:

“Maxwell violated [the FCPA’s anti-bribery provisions] by engaging in widespread bribery of government officials in China in order to sell its high-voltage capacitors to several Chinese state-owned enterprises. Maxwell violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-l, and 13a13 thereunder by failing to disclose in its annual and periodic filings that the material revenues and profits associated with its long-standing bribery scheme enabled Maxwell to better financially position itself until new products could be commercially developed and sold. Maxwell violated [the FCPA’s internal control provisions] by failing to maintain internal controls to prevent or detect the bribes paid to officials at Chinese state owned-entities. Finally, Maxwell violated [the FCPA’s books and records provisions] by failing to accurately reflect the nature of the improper payments in Maxwell’s books, records, and accounts.”

The SEC’s complaint contains an allegation not often seen in FCPA enforcement actions about how the company’s alleged bribery scheme helped offset losses in other areas and helped fund future product development.

According to the SEC:

“Maxwell greatly depended on the revenue from Maxwell SA’s high-voltage capacitor sales to China in order to help fund Maxwell’s expansion into new product lines that are now expected to become Maxwell’s future source of revenue. Maxwell engaged in the bribery scheme because it enabled the company to obtain material revenue needed to financially position itself to help fund the very products that today are sustaining Maxwell’s future growth.”

As to “Discovery of the Illicit Payments” the complaint states as follows.

“Potential FCPA and accounting concerns came to the attention of Maxwell’s finance department in September 2008, during an internal review of Maxwell SA’s commission expenses involving the Chinese Agent. Maxwell’s management team asked about these commission payments after learning of the unusually high Chinese Agent commissions, which included the Extra Amounts. During this review, Executive A informed Maxwell’s finance department that the payments made to the Chinese Agent were recorded as sales commissions. Maxwell’s finance department then sought and obtained a signed FCPA certificate from the Chinese Agent in which he represented that he was familiar with the U.S. FCPA and local laws and regulations regarding corrupt payments” and that he had not in the past and will not in the future make any improper payments.

However, according to the SEC, “after obtaining the representations, Maxwell’s finance department took no further corrective action regarding the commissions and Extra Amounts paid to the Chinese Agent …”.

In February 2009, Maxwell’s new CEO, became aware of the issues with the Chinese Agent and he “immediately notified Maxwell’s audit committee and outside counsel.”

According to the SEC:

“During the relevant period, Maxwell’s controls designed to prevent illicit payments to foreign officials were wholly inadequate. At the time, Maxwell’s Code of Conduct contained a brief section on FCPA issues, but there is no evidence that employees received any FCPA training prior to the company’s remedial steps.”

As to Maxwell’s internal controls failures, the complaint states as follows:

“Maxwell (1) failed to question why the contract prices were artificially inflated by 20% above the bid prices; (2) did not request supporting documentation for the invoices or track where the commission payments ultimately were distributed; (3) performed no due diligence on the agent; (4) did not require FCPA training for all relevant employees; and (5) failed to take any action even though it appears that certain former officers and senior managers of Maxwell had knowledge of the bribes paid by Maxwell SA and its agent since at least November 2002.”

Without admitting or denying the SEC’s allegations, Maxwell agreed to an injunction prohibiting future FCPA violations and agreed to $5,654,576 in disgorgement and $696,314 in prejudgment interest.

In the SEC release (here) Cheryl Scarboro (Chief of the SEC’s FCPA Unit) stated as follows: “Maxwell’s bribery allowed the company to obtain revenue and better financially position itself until new products were commercially developed and sold. This enforcement action shows that corruption can constitute disclosure violations as well as violations of other securities laws.”

Jeffrey Higgins (here) of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian LLP and Jerome Roth (here) of Munger Tolles & Olson LLP represented Maxwell.

Since announcement of the January 31st enforcement action, Maxwell’s shares are up approximately 6%.

As I explored in this recent post, 60% of 2010 corporate FCPA enforcement actions involved (in whole or in part) employees of alleged state-owned or state-controlled enterprises (“SOE”). In these cases, the enforcement agencies generally allege that such enterprises are “instrumentalities” of a foreign government and that such employees are therefore “foreign officials” under the FCPA.

So far in 2011, it’s 100%.

Picking and Choosing?

The sentencing memos in the Ousama Naaman matter are interesting reads. Naaman’s memo (here), submitted by Abbe Lowell of McDermott Will & Emery (here), provides a glimpse into cooperation by an individual FCPA defendant.

The DOJ’s memo (here), while requesting a downward departure, details how Naaman’s cooperation was not great at all and how Naaman is seemingly contesting various facts and issues he agreed to in pleading guilty.

The DOJ seeks a recommended sentence of 90 months (7.5 years) which would result in 79 months of additional incarceration given that Naaman has already 11 months of time served.

As previously reported (here), Naaman’s sentencing has been delayed until April 18th.

One aspect of the DOJ’s sentencing memo I found interesting is where the DOJ warns the judge that a “minimal sentence could not only possible be construed as a violation of U.S. treaty obligations […] but could do much to undermine the efforts by the United States Departments of Commerce and State to educate U.S. businesses about the harm caused by and risk of engaging in transnational bribery.” (See pgs. 34-36).

The treaty reference is to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (see here) and the DOJ specifically cites Art. 3 Sec. 1 – “The bribery of a foreign public official shall be punishable by effective, proportionate and dissuasive criminal penalties. The range of penalties shall be comparable to that applicable to the bribery of the Party’s own public officials.”

Is the DOJ picking and choosing which articles of the OECD Convention it wants to abide by?

Article 5 of the same OECD Convention, under the heading “Enforcement,” states that investigation and prosecution of bribery offenses “shall not be influenced by considerations of national economic interest, the potential effect upon relations with another State or the identity of the natural or legal persons involved.”

Are we to believe that the Giffen prosecution (see here for prior posts) was not influenced by considerations on the “potential effect upon relations with another state.”?

Are we to believe that the BAE prosecution and the lack of FCPA charges (see here for the prior post) was not influenced by “considerations of national economic interest” or the “identity of the natural or legal persons involved.”

It would seem that every time the DOJ specifically states in a sentencing memo (i.e. Siemens, BAE, Daimler, etc.) that, in deciding how to resolve a case, it considered the collateral consequences – including the risk of debarment and exclusion from government contracts – that prosecution of the offense is being “influenced by considerations of national economic interest” or the “identity of the natural or legal persons involved.”

In an effort to avoid yet another rejection of its FCPA sentencing recommendation, the DOJ is now warning a judge that a “minimal sentence” could be “construed as a violation of U.S. treaty obligations.”

In doing so, is the DOJ picking and choosing which articles of the OECD Convention it will abide by?

Troubling Trends and Problematic Patterns

That is the alternate title I’ve given to Shearman & Sterling’s “Recent Trends and Patterns in FCPA Enforcement” (here).

The periodic publication is always in my “must-read” category. The author group is first-rate and includes noted FCPA practitioners Philip Urofsky (former Assistant Chief of the DOJ Fraud Section responsible for FCPA enforcement) and Danforth Newcomb (a dean of the FCPA bar).

The Shearman & Sterling piece raises particularly pointed questions as to the Panalpina-related enforcement actions and the seemingly vanishing “obtain or retain business” element of an FCPA anti-bribery violation.

I have covered these issues extensively as well – see here for several posts on the Panalpina-related enforcement actions and here (pg. 971 “Just How Was that Business Obtained or Retained”) as to questions about the enforcement agencies’ “obtain or retain business” allegations or interpretations.

The Shearman & Sterling piece states that “some of the government’s cases appear to blur the lines or muddy the waters when it comes to the limits of the statute.” The authors state as follows:

“In several cases, such as Pride International, Panalpina, and Royal Dutch Shell, the theories used to hold parents accountable for the acts of subsidiaries and vice versa appear to be unclear. In others, such as Pride International and Tidewater, the connection of the alleged conduct to “obtaining or retaining business,” a critical element of the statute was not pleaded or, worse, was pled in a way that suggests that virtually any bribe that improves a company’s profitability is sufficient – a result that is not consistent with established precedent and the language of the statute.”

Under the heading “Enforcement Strategies” the authors state:

“As in years past, the enforcement actions brought in 2010 provide insight, albeit sometimes clouded, into the DOJ’s and the SEC’s views of the scope and meaning of certain aspects of the statute, as well as their enforcement priorities and strategies. In doing so they are at times helpful and at other times opaque or, even worse, disturbing. As always, however, it is important to remember that although these agreements may have been hotly negotiated, in the end each of the companies and individuals settled. Thus, none of the government’s interpretations, or its view of how the law applied to the facts, has been subjected to a searching judicial examination in the context of a contested adversary proceeding.”

Under the heading “The Business Nexus” the author state:

“The Panalpina cases and certain allegations in other cases are likely to reopen the debate as to the meaning of the “obtain or retain business” element. This element is recognized as a critical factor in narrowing the scope of the FCPA. How much it does so, however, has long been a matter of debate. In its 2004 decision in U.S. v. Kay, the Fifth Circuit appeared to have ended the debate, holding that the FCPA was not limited to bribes to obtain business from a foreign government or even to bribes that led “directly to the award or renewal of contracts.” Analyzing the indictment in that case, the court held that “bribes paid to foreign officials in consideration for unlawful evasion of customs duties and sales taxes could fall within the purview of the FCPA’s proscription.” (emphasis in original). The court warned, however, that the scope of the statute was not limitless, stating, “We hasten to add, however, that this conduct does not automatically constitute a violation of the FCPA: It still must be shown that the bribery was intended to produce an effect – here, through tax savings – that would ‘assist in obtaining or retaining business.’”

Although some of the bribes in the Panalpina cases were made to obtain contracts and other specific business advantages, most of the payments were made to customs or tax officials to reduce duties and taxes, to expedite customs clearances, or to evade import regulations. In the latter cases, the government made very little effort to link such payments to obtaining or retaining business. For example, in Pride International, the DOJ alleged a number of what it termed “bribery schemes,” including payments to a Mexican Customs Official “to avoid taxes and penalties for alleged violations of Mexican customs regulations relating to a vessel leased by Pride International.” Similarly, in GlobalSantaFe, the SEC alleged that through a number of “suspicious payments” the company “avoided costs and gained revenue.” Without more explanation, such barebones allegations create the impression that the government equates gaining revenue or reducing costs generally with “obtaining or retaining business.” That, however, is the very opposite of the holding in Kay […].”

“Reading between the lines of the pleadings, we can, in many cases, construct some theory of how certain of the payments might have fallen within the Kay rule, e.g., some payments appear to have allowed the importers to bring in equipment and rigs without which they could not perform new or existing contracts. It is even possible that, similar to the facts in Kay, the importers could not have competed for existing or new business had they paid the full duties or taxes or complied with other local requirements. The pleadings, however, for the most part only hint at such an underlying rationale, leaving us to wonder exactly what does the government think the business nexus means today?”

When an author group including a former DOJ official responsible for enforcing the FCPA (in a more measured and disciplined era) uses words such as “disturbing” and phrases such as “not consistent with established precedent and the language of the statute” – well, I think we all should take notice.

Once Slumbering FCPA is “Alive and Well”

Slumbering to alive and well is a good way describe it when a law, one that has not changed during a decade, goes from zero DOJ enforcement actions (2000) to the DOJ collecting approximately $1 billion in fines in enforcement actions (2010) during that same decade.

Earlier this week, Assistant Attorney General (Criminal Division) Lanny Breuer spoke before the Annual Meeting of the Washington Metropolitan Area Corporate Counsel Association (see here for his remarks). The focus of the meeting was individual liability for corporate executives and in-house counsel.

Breuer posted the following questions and then stated the following regarding the FCPA.

“So what kind of federal criminal liability might a corporation have to worry about? How might the Criminal Division’s enforcement efforts affect you?”

“As an initial matter, in the Criminal Division we have dramatically increased our enforcement of the Foreign Corrupt Practices Act in recent years. That statute, which was once seen as slumbering, is now very much alive and well. In fact, over the last two years, we have charged more than 50 individuals with FCPA-related offenses and collected nearly $2 billion in FCPA-related fines and penalties – by far the most people charged and penalties imposed in any similar period. We have brought these cases against some of the largest corporations in the world. As just one example, in November we resolved a wide-ranging FCPA investigation involving the freight forwarding company Panalpina World Transport, its U.S. subsidiary, and five oil and gas service providers. They agreed to pay combined criminal penalties of $156 million.

Just as important as the collection of fines and penalties, we have aggressively pursued individual executives under the FCPA. For example, we recently charged the president and the CFO of Lindsey Manufacturing Company with FCPA violations for participating in a scheme to bribe officials of the state-owned electrical utility in Mexico. We also recently arrested the former CEO and the former vice president of business development of LatiNode, a Miami-based telecommunications company, and charged them in connection with bribes made by LatiNode employees to officials of the state-owned telecommunications company in Honduras.

The Fraud Section of the Criminal Division has primary responsibility within the Department for enforcing the FCPA. We recently promoted a new head of the Section’s FCPA Unit and two assistant chiefs, and we have also increased the number of line prosecutors in the Unit, attracting high caliber attorneys with extensive experience – including Assistant U.S. Attorneys with significant trial and prosecutorial experience and attorneys from private practice with defense-side knowledge and experience. These changes have significantly increased our FCPA enforcement capabilities.”

*****

A good weekend to all.

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