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Securency International Probe Heats Up

According to this U.K. Serious Fraud Office (SFO) release, “a coordinated search and arrest operation” involving U.K., Spanish, and Australian authorities focused on Securency International PTY Ltd. has taken place. According to the release, the action involves the “activities of employees and agents of Securency International and their alleged corrupt role in securing international polymer banknote contracts.”

Securency International (here) is a joint venture between the Reserve Bank of Australia, the country’s central bank, and Innovia Films (here), a Cumbria, England-based company that makes cellulose films for packaging and labels.

According to this article in the Sydney Morning Herald the “Reserve Bank is reeling after Federal Police and overseas law-enforcement agencies staged co-ordinated global raids yesterday to uncover evidence of corruption and bribery involving the bank note firm Securency.” Bribery is suspected to have occurred in several countries, including Vietnam, Nigeria, Malaysia and Indonesia. As the article notes, if criminal charges are filed, it would be Australia’s first foreign bribery prosecution.

The above linked Sydney Morning Herald article also has an informative five minute audio clip about the raid and the allegations against Securency International.

Will the U.S. get involved?

That depends if there is even jurisdiction.

Neither Securency or Innovia appear to be an “issuer” or “domestic concern.” But there is still the 78dd-3 prong of the FCPA which applies to “any person” (corporate or individual) that generally performs any act in furtherance of an improper payment scheme while in the territory of the U.S. Like most FCPA issues, the DOJ takes an expansive view of this jurisdictional element and prior enforcement actions have been based on use of the U.S. bank accounts, U.S. dollar-denominated financial transactions, and use of the U.S. mail and wires (such as e-mail) in connection with the improper payment scheme.

For more on expansive FCPA jurisdiction over non-U.S. companies, see this July 2010 Shearman & Sterling publication.

A Conversation With Richard Alderman – Director of the U.K. Serious Fraud Office

While in London recently to chair the World Bribery & Corruption Compliance Forum (see here, here and here for previous posts), I was pleased to accept the invitation of the U.K. Serious Fraud Office to visit its offices and meet top-level SFO personnel to discuss Bribery Act and other anti-corruption issues and topics. As part of the invitation, Richard Alderman (here), the Director of the SFO, invited me to submit questions to him on any topic of my choosing.

I submitted approximately thirty detailed questions covering a broad range of topics, including the role and policies of the SFO, the Bribery Act, the BAE and Innospec cases, Bribery Inc., and other questions of general interest. Except for certain questions regarding the BAE case, which is still pending in the U.K. courts, Mr. Alderman provided answers to every question, including on topics I have been critical of the SFO in the past.

In his answers, Mr. Alderman, among other things:

(i) compares and contrasts the SFO’s role with the DOJ’s role in enforcing the Foreign Corrupt Practices Act, including the more active and independent role U.K. courts have in reviewing SFO charging decisions;

(ii) talks about voluntary disclosure, and the role of non-prosecution and deferred prosecution agreements;

(iii) discusses reputational harm, debarment, and reparations; and

(iv) talks specifically about the Bribery Act which is to be implemented in April 2011.

I thank Mr. Alderman and other SFO personnel for taking a keen interest in my work and commend the “active engagement” approach the SFO has taken in going about its work.

My complete “conversation” with Mr. Alderman can be downloaded here.

“A Tip A Day”

According to Joe Palazzolo’s recent post in Corruption Currents (a Wall Street Journal blog), “a person familiar with the matter” said the SEC “has been receiving at least one tip a day about potential foreign bribery violations” pursuant to Dodd-Frank’s new whistleblower provisions.

Whether those tips turn into enforcement actions will be the question.

As I noted in this prior post, my guess is that the new whistleblower provisions will have a negligible impact on FCPA enforcement.

Speaking generally on Dodd-Frank’s whistleblower provisions (i.e., not just in terms of the FCPA) SEC Chairman Mary Schapiro had this to say (see here) in September 30th testimony before the Senate Committee on Banking, Housing, and Urban Affairs:

“Staff in the Division of Enforcement, with assistance from other divisions and offices, is actively working to draft implementing regulations for the whistleblower program. Pending the issuance of these regulations (due no later than 270 days after the date of enactment of the Act), the staff has been and will continue to be able to receive whistleblower complaints. Also, information for potential whistleblowers has been posted on our website. Already, since the passage of the Act, we have seen a slight uptick in the number of tips and complaints received, and, more importantly, an uptick in the quality of complaints.”

As noted in Schapiro’s testimony, “the first report to Congress on the whistleblower program will be provided on October 30, 2010.”

For more on Dodd-Frank’s whistleblower provisions see here.

ABB

Earlier this week the DOJ and SEC announced a wide ranging enforcement action against ABB Ltd. and its subsidiaries ABB Inc., and ABB Ltd. – Jordan.

Swiss-based ABB Ltd. (here) is a provider of power and automation technologies with American Depositary Shares publicly traded on the New York Stock Exchange.

This post summarizes the various aspects of the enforcement action in which ABB Ltd. and ABB Inc. agreed to pay a total of $58.3 million ($19 million in DOJ criminal penalties and $39.3 million in SEC disgorgement and civil penalties).

DOJ

ABB Ltd. Deferred Prosecution Agreement

As noted in this DOJ release, ABB Ltd. agreed to enter into a deferred prosecution agreement (DPA). ABB’s press release (here) states that the DPA “includes provisions related to the involvement of a subsidiary in Jordan in the Oil for Food Program” and that “in lieu of an external compliance monitor, the DOJ and SEC have agreed to allow ABB to report on its continuing compliance efforts and the results of the review of its internal processes for a three-year period going forward.”

In other words, the DPA appears limited to the conduct of ABB Ltd. – Jordan (summarized below) and not the conduct of ABB Inc. (summarized below).

[Note – to my knowledge the DPA has yet to be publicly released. Here is a request for DOJ readers of this blog. Under the DOJ’s “old” website, the charging documents were released and linked along with the press release. With the revamped website, the charging documents are nowhere to be found requiring interested persons to go to Pacer or other sources. The charging documents ultimately end up on the DOJ’s FCPA specific website, but in many cases it takes weeks. DOJ may want to consider the old system which provided real-time access to these important charging documents]

ABB Ltd. – Jordan Criminal Information

The information charges ABB Ltd. – Jordan (“ABB-Jordan”) with one count of conspiracy to commit wire fraud and to violate the FCPA’s books and records provisions.

According to the information (here), ABB-Jordan was a wholly-owned subsidiary of ABB Ltd. ABB-Jordan, through its 95% owned subsidiary ABB Near East Trading Ltd. (“ABB Near East”) provided equipment and services to electrical utilities, including control measurement and protection systems, transducers, and metering equipment.

The information charges that ABB Near East “had three principle customers under the United Nations Oil-for-Food Program (“OFFP”) … the General Company for Electricity Energy Production, the Baghdad Mayoralty, and State Company Baghdad Electricity Distribution all of which were regional companies of the Iraqi Electricity Commission, an Iraqi government agency” (collectively the “Iraqi Electricity Companies”).

The information charges that “from in or about April 2000 through in or about April 2004, ABB Near East, received eleven purchase orders for electrical equipment and services worth over $5.9 million with the Iraqi Electricity Companies, pursuant to the OFFP.” According to the information, “to obtain these purchase orders, ABB Near East caused over $300,000 in kickbacks to be paid to the government of Iraq” and that “in order to generate the funds to pay the kickbacks to the Iraqi government and conceal those payments, ABB Near East would inflate the price of its contracts with the Iraqi government by approximately 10% before submitting the contracts to the U.N. for approval.”

According to the information, the kickback payments were falsely characterized on ABB-Jordan’s or ABB Near East’s books and records which were “incorporated into the books and records of ABB Ltd. for purposes of preparing ABB Ltd’s year-end financial statements.”

According to the DOJ release, “ABB Ltd. admitted that [ABB-Jordan] agreed to pay kickback payments to the former Iraqi government” in connection with OFFP contracts and “agreed to pay a criminal penalty of $1.9 million.”

ABB Inc. Criminal Information

According to the information (here) ABB Inc. is an “indirect subsidiary” of ABB Ltd. incorporated under Delaware law. The information charges that ABB Inc. “conducted business, in part, through a business unit called ABB Network Management (“ABB NM”) that had its principal place of business in Sugar Land, Texas and was acquired by ABB Inc. in or around January 1999.”

According to the information, “ABB NM’s primary business was to provide products and services to electrical utilities for network management in power generation, transmission, and distribution.” The information charges that “many of ABB NM’s clients were foreign state-owned utilities” and that “ABB NM conducted business in a number of its foreign markets through sales representatives.”

The information largely centers on the conduct of John Joseph O’Shea and Fernando Maya Basurto and business with Comision Federal de Electricidad (“CFE”) – a Mexican electrical company. According to the information, O’Shea was the “General Manager of ABB NM” who “oversaw its operations both before and after its acquisition by ABB Inc.” and was “responsible for approving payments to sales representatives.” According to the information, Basurto was a “citizen of Mexico” who “performed work for ABB NM on its contracts with CFE.”

O’Shea was criminally charged in November 2009 (see here). Basurto has pleaded guilty (see here). For more, see this prior post.

For additional FCPA enforcements involving CFE see this recent post.

The information details an elaborate scheme that is summarized in the DOJ release as the payment of bribes “from 1997 to 2004 that totaled approximately $1.9 million” to various officials at CFE and that “in exchange for the bribe payments … ABB NM received contracts worth more than $81 million in revenue.”

As noted in the DOJ release, “ABB Inc. pleaded guilty to a criminal information charging it with one count of violating the anti-bribery provisions of the FCPA and one count of conspiracy to violating these provisions of the FCPA.” According to the release, the court “imposed a sentence that included a criminal fine of $17.1 million.”

The information specifically states that “ABB Inc. terminated O’Shea in November 2004 and thereafter conducted a thorough internal investigation of the improper payments. It voluntarily disclosed the conduct to the DOJ and the SEC in April 2005.”

SEC

The SEC’s civil complaint against ABB Ltd. (see here) picks up both the Iraq and Mexico conduct mentioned above and charges ABB Ltd. with violating the FCPA’s anti-bribery, books and records, and internal control provisions.

The complaint alleges in summary fashion as follows:

“From 1999 to 2004, ABB, through a U.S. subsidiary and six foreign-based subsidiaries, offered and paid bribes to government officials in Mexico to obtain and retain business with government owned power companies, and paid kickbacks to Iraq to obtain contracts under the United Nations Oil for Food Program. In all, ABB’s subsidiaries made at least $2.7 million in illicit payments in these schemes to obtain contracts that generated more than $100 million in revenues for ABB.”

The complaint describes numerous payments, including payments to “pay for the Mediteranean cruise vacation for two CFE officials and their wives” and “tuition for the son of a CFE official” at a “private military school in Wisconsin.”

As to the “Mexican bribery scheme”, the SEC alleges that “ABB, which failed to conduct any due diligence on the use or payments to [a Mexican agent] and other companies, improperly recorded the illicit payments on its books as payments for commission and services on the projects.”

As to the OFFP, the complaint alleges that “from approximately 2000 to 2004, ABB participated in the Oil for Food program through six of its subsidiaries” and that the “six subsidiaries developed various schemes to pay secret kickbacks to Iraq in order to obtain contracts. The kickbacks were characterized as after sales service fees but in reality they were nothing more than bribes paid to the Iraqi regime.” According to the SEC, “kickbacks of approximately $810,793 were paid in connection with the subsidiaries’ sales of goods on twenty-seven contracts with promises to pay additional kickbacks of $239,501 on three other contracts. The total revenues on the contracts were approximately $13,577,727 and profits were $3,801,367. ABB improperly disguised the [after sales service fees] on its books and records by mischaracterizing them as legitimate after sales services, consultation costs or commissions.”

Further the SEC alleged as follows:

“as evidenced by the extent and duration of the illicit payments to foreign officials, the large number of ABB subsidiaries involved in these bribery and kickback schemes, ABB’s knowledge from the prior Commission action of illicit payments by other ABB subsidiaries, the improper recording of millions of dollars of illicit payments in ABB’s books and records, ABB’s failure to detect these irregularities, and ABB’s failure to conduct sufficient due diligence on local agents and others, ABB failed to devise and maintain an effective system of internal controls to prevent or detect these anti-bribery and books and records violations.”

In an SEC release (see here) SEC officials stated: “as the sanctions in this case demonstrate, there are significant consequences for public companies that fail to implement strong compliance programs and prevent corrupt payments to government officials” and that “multi-national companies that make illicit payments through layers of subsidiaries will be held accountable.”

Without admitting or denying the SEC’s allegations, ABB Ltd. consented to the entry of a final judgment that permanently enjoins the company from future FCPA violations, orders the company to pay $17,141,474 in disgorgement, $5,662,788 in prejudgment interest, and a $16,510,000 penalty. According to the SEC release, “the order also requires the company to comply with certain undertakings regarding its FCPA compliance program.”

In a press release (here), ABB noted that it “initiated these matters in a voluntary disclosure to the DOJ and SEC beginning in 2005.” The company stated that it “cooperated fully with the DOJ and SEC and has put in place a global comprehensive compliance and integrity program the DOJ has said ‘may become a benchmark for the industry.'”

Laurence Urgenson (here) and others from Kirkland & Ellis LLP represent the ABB entities.

A Double Standard? Part III

A government official sets up a foundation to aid local organizations. It is funded by business entities that often turn to the government official for help – and usually succeed in getting such help.

Over a six week period, a company sends at least $45,000 in donations to four charitable programs founded by government officials – just as the companies were seeking approval of favorable legislation.

Another company supports a fundraiser for the scholarship fund of a government official.

Another company sponsors a sport competition to help the favorite food bank of a government official.

Another company subsidizes a spa outing in a popular tourist destination to aid the charity of a government official.

Another company helps sponsor a golf tournament benefiting the foundation of a government official.

Another company acknowledges that it participates in government officials’ charitable events to get access to the officials to push the company’s agenda.

*****

“Google” Foreign Corrupt Practices Act and charitable giving and you will have enough reading material to keep you busy the rest of the day.

This material will likely reference the 2004 FCPA enforcement action against Schering-Plough (see here).

In that action, the SEC alleged (here) that Schering-Plough violated the FCPA when its wholly-owned Polish subsidiary (“S-P Poland”) improperly recorded a bona fide charitable donation to a Polish foundation where the founder/president of the foundation was also the director of a government health fund (the “Director”) that provided money to hospitals throughout Poland for the purchase of pharmaceutical products.

Although the SEC and Schering-Plough ultimately resolved the matter based only on violations of the FCPA’s books and records and internal control provisions, the enforcement action is commonly viewed as broadening the “anything of value” element of an FCPA anti-bribery violation. (See here).

The SEC’s tacit interpretation of the “anything of value” element in the Schering-Plough matter is significant because there was no allegation or indication that any tangible monetary benefit accrued to the Director, an individual deemed by the SEC to be a “foreign official” under the FCPA.

Rather, the SEC brought the enforcement action on the basis of its apparent conclusion that S-P Poland’s bona fide charitable donations constituted a “thing of value” to the “foreign official” because the donations were subjectively valued by the official and provided him with an intangible benefit of enhanced self-worth or
prestige.

*****

So will the above donations to government official charities result in FCPA scrutiny?

Nope!

Why not?

Because the government officials are U.S. government officials. See here for the recent New York Times story.

The U.S. has a domestic bribery statute (18 USC 201) (see here) which has similar elements to the FCPA. Yet, I would not hold your breath waiting for domestic bribery prosecutions.

This all begs the question – is there a double standard?

Will a U.S. company’s interaction with a “foreign official” (however that term is interpreted) be subject to more scrutiny and different standards than its interaction with a U.S. official?

Do we reflexively label a “foreign official” who receives “things of value” from private business interests as corrupt, yet when a U.S. official similarly receives “things of value” from private business interests we merely say “well, no one said our system is perfect”?

For more on the FCPA’s double standard (see here and here).

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