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Africa Sting Updates

It’s been a while since the last post on the Africa Sting cases.

Below is a summary of recent activity.

Last week, the DOJ filed a routine discovery notice (see here) that perhaps hints at a much broader case.

In relevant part, the DOJ stated:

“The government has produced to each defendant and his or her co-defendant documents regarding the defendant’s participation in the Country A deal charged in the indictments and historic deals, including emails, invoices and quotes. Documents related to other co-conspirators’ participation in the Country A deal and historic deals have been made available to the defendants upon request.” (emphasis added).

Time will tell what is meant by “historic deals.”

However this case is already wider than the case charged in January (see here). In March, the DOJ filed a superseding indictment (see here) against Daniel Alvirez, the President of ALS Technologies, Inc. The superseding indictment contains charges against Alvirez not found in the original indictment, specifically charges related to the Republic of Georgia. Alvirez is expected to plead guilty to charges of conspiracy to violate the FCPA as set forth in the superseding indictment and cooperate in the government’s investigation.

For more on the DOJ’s discovery filing (see here) from Christopher Matthews at Main Justice.

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When the Africa Sting case was first announced, I raised the issue (see here) of whether the defendants could even be found guilty of violating the FCPA’s antibribery provisions given that the “foreign official” was not real.

At the time, it was yet known whether the “foreign official” was purely fictitious or an actual, yet non-participating person.

I suspected the later and Main Justice (see here) recently reported that the FBI agents involved in the sting operation were posing as representatives of Ali Ben Bongo – the current president of Gabon and the Minister of Defense of that country from 1999 to 2009.

Because the FCPA’s relevant provisions include terms such as influence and induce, it remains an open question whether one can seek to induce or influence an actual, yet non-participating “foreign official.”

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Finally, during a status hearing yesterday, Judge Leon indicated (see here) that it was highly unlikely that the cases would go to trial in 2010.

Also at the status conference, defense lawyers continued to argue that the DOJ has not produced sufficient information concerning Richard Bistrong – a key participant in the government undercover sting operation – yet a person who was also recently criminally charged in connection with a separate bribery scheme (see here for the prior post).

Judge Leon reportedly said that the FBI’s relationship with Bistrong is “likely relevant to the case” and that DOJ is going to have produce documents and information concerning this issue.

The next status hearing is April 21st.

Lord Justice Thomas’s Innospec Sentencing Remarks

Given the frequency in which U.S. judges seem to be rubber-stamping FCPA settlements – including plea deals agreed to by the DOJ under circumstances which arguably violate the DOJ’s own policy as set forth in the US Attorneys’ Manual (see here for a prior post), it is refreshing to read Lord Justice Thomas’s stern rebuke of the DOJ-SFO’s joint settlement in the Innospec matter (see here for more on the Innospec matter).

Lord Justice Thomas (Britain’s second most senior criminal judge) concluded that the Director of the SFO “had no power to enter into the arrangements made” to settle the matter and he warned that “no such arrangements should be made again.” (See here for Lord Justice Thomas’s sentencing remarks).

With the SFO publicly stating on numerous occasions that it seeks to adopt DOJ-like enforcement strategies and procedures and given that the SFO’s conduct in the Innospec mater was very “DOJ-like”, Lord Justice Thomas’s remarks, while heavy on English law, should be more broadly viewed as an indictment of DOJ enforcement strategies as well.

The sentencing remarks begin by providing an interesting glimpse into the “negotiations” between the DOJ and SFO in the Innospec matter – the “first case where a ‘global settlement’ had been sought in respect of concurrent criminal proceedings in the UK and the US.”

The conduct at issue largely centered on Indonesia and Iraq. The sentencing remarks note that “both the SFO and DOJ agreed that the fines and other penalties which might be imposed in the US and the UK might exceed $400m in the US and $150m in the UK.”

However because any such amount “would exceed by many times the ability of Innospec to pay” “both the SFO and the DOJ agreed that, in light of Innospec’s full admission and full co-operation, they should not seek to impose a penalty which would drive the company out of business.”

The sentencing remarks then state:

“In September 2009, when it was anticipated that an acceptable settlement would be reached, discussions began between the SFO and the DOJ about the manner in which the authorities in the US and the SFO should proceed to implement any settlement and divide up the monetary amount to be paid. The discussions took place against the background that it had been agreed that the SFO would have primacy in respect to the Indonesian corruption and the DOJ in respect of the Iraq corruption.”

The sentencing remarks note that “the SFO began by suggesting a 50:50 split based upon the fact that the criminality had been orchestrated and arranged from the UK in respect of the corruption in both Iraq and Indonesia.”

However, the “DOJ would not accept this,” but rather proposed a “methodology that in the result produced a split which was approximately one third to the DOJ, one third to the SFO and one third to the SEC and the OFAC.”

As noted in the sentencing remarks, “after much further discussion on 28 January 2010 the SFO agreed to a split that was approximately one third to the DOJ, one third to the SEC and OFAC and one third to the SFO. It was agreed that the DOJ would ask the court to approve a fine of $14.1m with the balance of the US proportion going to the SEC ($11.2m) and OFAC ($2.2m); $12.7m would be the SFO’s share.”

Lord Justice Thomas next turns to the Innospec-SFO plea (see here) and states that “it became quickly apparent … that a number of difficult issues was raised by the process adopted.”

In his remarks, Lord Justice Thomas cites a paper delivered by Nicholas Purnell QC “The Risk of Abusing A Dominant Position” delivered to the International Bar Association at its New York Conference in June 2009 (see here) which notes, among other things, that newly enacted SFO guidance on “alternative methods to the disposal of criminal investigations by way of negotiated pleas or other resolutions by corporate defendants” may “introduce some unintended risks of abuse.”

Lord Justice Thomas next touches upon such issues.

Among other things, he notes that the “question has arisen as to the extent of [the SFO’s Director’s] powers and duties in the light of the constitutional position of a prosecutor, the role of the courts in the UK and the rules relating to plea agreements in the U.K.” Lord Justice Thomas specifically notes that “it is clear” that the “SFO cannot enter into an agreement … with an offender as to the penalty in respect of the offence charged,” but that a reading of the papers submitted in connection with Innospec-SFO plea “suggests that a penalty had in fact been agreed.”

In language that all U.S. judges who have rubber-stamped DOJ FCPA settlements (without inquiring into the factual and legal basis for the settlement including whether other charges more accurately fit the crime – see here) should read, Lord Justice Thomas states:

“Principles of transparent and open justice require a court sitting in public itself first to determine by a hearing in open court the extent of the criminal conduct on which the offender has entered the plea and then, on the basis of its determination as to the conduct, the appropriate sentence. It is in the public interest, particularly in relation to the crime of corruption, that … there may be discussion and agreement as to the basis of plea” and that a court “must rigorously scrutinise in open court in the interests of transparency and good governance the basis of that plea and to see whether it reflects the public interest.”

Lord Justice Thomas then states that “those who commit such serious crimes as corruption of senior government officials must not be viewed or treated in any different way to other criminals.” (See here, here and here for my prior posts on the increasing and alarming trend of bribery, yet no bribery FCPA prosecutions).

Lord Justice Thomas states that the $12.7m SFO fine is “wholly inadequate as a fine to reflect the criminality displayed by Innospec” and that if it were up to him the fine would have measured in the “tens of millions.” Nevertheless, because of Innospec’s apparent inability to pay a larger fine, he “reluctantly concluded that, on this occasion, it would neither be just nor fair in the unusual circumstances of this case for this court to impose a penalty greater than the amount allocated to the UK.”

Even so, Lord Justice Thomas is stinging in his final remarks.

He notes:

“The court was faced with an agreement made between the DOJ, the SEC, the OFAC and SFO as to the division of the sum these bodies had considered Innospec was able to pay. This was not a matter that received judicial determination in either the UK or the US (save that inherent in the Federal District Court’s approval of the plea agreement). As it is the position in both the US and the UK that it is for the court ultimately to determine the sanction to be imposed for the criminal conduct, an agreement between prosecutors as to the division, even if it had been within the power of the Director of the SFO (which as I have explained it was not), cannot be accordance with basic constitutional principles.”

Lord Justice Thomas concludes that “the Director of the SFO had no power to enter into the arrangements made and no such arrangements should be made again.”

He notes that “it is essential for the future that, unless any change is made to the rule of procedure or to the practice direction, it is appreciated this court must and will sentence in the way set out in the law, as that is what the rule of law requires” and that “this applies as much to companies as to individual defendants.”

A couple of other interesting tidbits from Lord Justice Thomas’s sentencing remarks.

With cross-border investigations and global corruption settlements seemingly becoming a new norm, Lord Justice Thomas’s comments on uniform financial penalties also bear mention. He states, “there is every reason for states to adopt a uniform approach to financial penalties for corruption of foreign government officials so that the penalties in each country do not discriminate either favourably or unfavourably against a company in a particular state.” He notes that “if the penalties in one state are lower than in another, business in the state with lower penalties will not be deterred so effectively from engaging in corruption in foreign states, whilst businesses in states where the penalties are higher may complain that they are disadvantaged in foreign states.”

Lord Justice Thomas concludes his sentencing remarks with one final dig, a dig aimed at a common feature in all DOJ FCPA pleas, non-prosecution agreements and deferred prosecution agreements – and that is the “don’t issue a press release about this unless you first approve it with us” clause.

Lord Justice Thomas notes: “It would be inconceivable for a prosecutor to approve a press statement to be made by a person convicted of burglary or rape; companies who are guilty of corruption should be treated no differently to others who commit serious crimes.”

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A couple of final notes about the SFO’s enforcement action against Innospec. Unlike a typical DOJ FCPA charging document, the SFO “names names.” In its previous Mabey & Johnson prosecution (see here for a prior post), the SFO specifically named the foreign official recipients of the bribe payments. That trend continues in the SFO’s charging documents against Innospec (see here).

Finally, in many cases, FCPA fines and penalties are just one “cost” to a company. While I disagree with the notion that the “costs of getting caught” should somehow factor into the final penalty amount (see here for a prior post), this is a cost that can not be ignored by companies. On this issue, para. 32 of the SFO charging document notes that “at this stage … Innospec’s internal investigation and cooperation with the SFO, DOJ, and SEC globally has cost the Company in excess of US$32 million in costs …”

A Happy Ending

It’s a happy morning on a happy campus!

Playing in the national championship game, as the Butler Bulldogs will be doing tonight, tends to make people happy. I put myself in that category. As a former college basketball player, I certainly never made it to the “big game” so “getting there” as a faculty member of a participating school … well, let’s just say it puts an extra spring in my step.

So, it’s with much institutional pride that I say “Go Butler.”

Let’s stick with the theme, but return “on topic.”

From time to time, the DOJ comments that some voluntary disclosure cases never lead to an actual enforcement action. Analyzing the extent to which this may or may not be true is difficult, particularly as to non-public companies.

Nevertheless, a recent “no action” disclosure caught my eye.

It involves Global Industries Ltd., a publicly-traded provider of “offshore construction, engineering, project management and support services…” (see here).

“In June 2007, the Company announced that it was conducting an internal investigation of its West Africa operations, focusing on the legality, under the U.S. Foreign Corrupt Practices Act (FCPA) and local laws, of one of its subsidiary’s reimbursement of certain expenses incurred by a customs agent in connection with shipments of materials and the temporary importation of vessels into West African waters.” (see here). As noted in this linked filing, the Global Industries investigation was not a pure voluntary disclosure in that the investigation was motivated, at least in part, on “the settlement of the FCPA proceedings involving certain Vetco Gray entities” and the fact that “Company’s management and the Audit Committee were aware of press releases by three other companies disclosing that they are conducting internal investigations into the FCPA implications of certain actions by a customs agent in connection with the temporary importation of their vessels into Nigeria.” As noted in the filing, against this backdrop, the “Company’s management considered it prudent to review the Company’s operations since it uses customs agents and the Company’s vessels that have operated in Nigeria do so under temporary importation permits.”

Fast forward to February 2010 when the company disclosed in this press release as follows:

“We are pleased to also announce that our and the Government’s investigation of our activities in West Africa have concluded without any fines or penalties being imposed upon the Company. Both the DOJ and SEC have concluded their investigations and are not recommending any enforcement actions against the Company.”

In other words, a happy ending to an FCPA investigation and disclosure.

Daimler – “That’s All Folks”

Growing up, I was fond of the Looney Tunes cartoons. These episodes ended with a character saying, “that’s all folks” (see here).

Today, April Fools Day, marked the end of the Daimler enforcement action as Judge Richard Leon concluded that the settlement between the DOJ and Daimler AG and certain of its subsidiaries (described in more detail in this post) “is an appropriate and just resolution” of the matter. See here for Christopher Matthews first-hand account at Main Justice.

In other words, “that’s all folks.”

The DOJ release (here) states that Daimler (and three of its subsidiaries) “brazenly offered bribes in exchange for business around the world” and that Daimler “saw foreign bribery as a way of doing business.”

Yet, despite such statements, the DOJ (as described in more detail in the above linked post) did not charge Daimler with violating the FCPA’s antibribery provisions. Thus, yet another bribery, yet no bribery case.

In fact, by resolving the case via a deferred prosecution agreement, Daimler will not have to plead guilty to anything.

The message sent by DOJ in this case, and the other recent bribery, yet no bribery cases (i.e. BAE and Siemens) is that corporate criminals (per the DOJ’s own evidence) can simply escape the most severe consequences of criminal conduct (see here for what that would have been in the Daimler case) by cooperating with the DOJ, paying several millions into the U.S. treasury, and offering up a few indirect, insignificant subsidiaries as sacrificial corporate lambs.

This is troubling and it is an alarming feature of FCPA enforcement in an increasing number of cases. It also smacks of hypocrisy from a DOJ that extols the virtues of the rule of law at every available opportunity.

The final tally, as noted in the DOJ release, is $93.6 million in criminal fines and penalties, a deferred prosecution agreement against Dailmer (but not as to FCPA antibribery charges), criminal pleas by a finance division (Export and Trade Finance GmbH) and a spare parts subsidiary (DaimlerChrysler Automotive Russia), and another deferred prosecution agreement against a Chinese subsidiary.

Before turning to the SEC component of the case, a settlement Judge Leon also blessed today, a bit more about the “independent corporate monitor” appointed in this matter.

As discussed in this post, that monitor is Louis Freeh.

The deferred prosecution agreement (here) states, at Appendix D, that the monitor should have “sufficient independence from Daimler to ensure effective and impartial performance.”

Approximately two years ago, in the wake of much criticism over the selection and role of monitors in DOJ enforcement actions, the DOJ released the so-called Morford Memo (see here). Among other things, the memo states that “the Government should decline to accept a monitor if he or she has an interest in, or relationship with, the corporation or its employees, officers or directors that would cause a reasonable person to question the monitor’s impartiality.”

As confirmed in this Daimler release, Freeh has been associated with Daimler since 2006.

SEC

Today, the SEC announced (here) the filing of a civil complaint (here) against Daimler charging violations of the FCPA antibribery, books and records and internal control provisions.

The SEC’s charges add little to the picture already painted in the DOJ’s various charging and resolution documents. Further, because a company in an SEC enforcement action of this nature, is allowed to settle the SEC’s allegations “without admitting or denying” the allegations, the SEC’s charges do not change the above described dynamics and troubling features of this enforcement action.

For the the record, Daimler agreed to settle the SEC matter by, among other things, paying $91.4 million in disgorgement.

The SEC’s Director of the Division of Enforcement stated, “it is no exaggeration to describe corruption and bribe-paying at Daimler as a standard business practice.”

Point – Counterpoint With Billy Jacobson

A few weeks ago, I took issue with Mark Mendelsohn’s (DOJ Deputy Chief, Fraud Section and the DOJ’s FCPA “top cop”) recent defense of the 2008 Siemens enforcement action. (see here).

In response, I heard from William Jacobson.

I am always grateful for reader feedback, especially when its comes from someone the caliber of Jacobson – the former Assistant Chief for FCPA Enforcement at the Fraud Section, Criminal Division, U.S. Department of Justice. While at DOJ, Jacobson worked closely with Mendelsohn, including on the Siemens matter. For more on Jacobson’s role at DOJ see this recent profile in Main Justice. Jacobson is currently the Vice President, Co-General Counsel, and Chief Compliance Officer at Weatherford International, Ltd. (see here).

With Jacobson’s permission, I set forth our e-mail exchange below.

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WJ – I have to take issue with your recent post regarding the Siemens settlement. As a recent émigré to the world of in-house counsel, I can assure you that the staggering monetary settlement made a tremendous impact in boardrooms across the U.S. and the world. One can certainly argue that the government should have kept investigating Siemens until it uncovered every scrap of evidence against the company. One can also argue that the fine and disgorgement amounts could have been greater. However, the government’s goal was not to destroy the company and thereby cause untold damage to its shareholders. In fact, I think it is fair to say that the government’s goal was to sufficiently punish the company without destroying the company. An investigation lasting several more years and a fine of several billion dollars could well have done that – not to mention debarment, the lack of which you have also criticized.

Since at least 2001, the Fraud Section has been trying to bring “real-time” prosecutions as often as possible. This often means focusing on the one or two most egregious transactions at issue in a case, bringing a case based upon those transactions and moving on. An important component of this strategy in FCPA cases has been ensuring that companies improve their compliance departments to mitigate the chances of bad conduct recurring. This is precisely what the Fraud Section (as well as the SEC and the Munich Prosecutor) did with Siemens and, in my opinion, it was the correct approach.

MK – Nice to hear from you and thanks for reading the blog. I am not suggesting that in a case that apparently involved hundreds, if not thousands, of separate bribe payments, that the DOJ/SEC need to fully investigate each and every instance, perhaps focusing on six, ten (I don’t know what the magical number is or should be) is desirable. Even so, is it too much to ask that, as to those six or ten instances, that the criminal charges actually fit the facts? In other words, is it too much to ask of the DOJ to actually charge a company that clearly committed FCPA antibribery violations with FCPA antibribery charges?

Point taken that the “government’s goal was not to destroy the company and thereby cause untold damage to its shareholders.” Indeed, that is a legitimate policy issue present in any corporate criminal matter, FCPA or not. However, is agreeing to an overall penalty LESS than the amount of the alleged payments and LESS than the amount of the business allegedly obtain or retained – is that “sufficiently punishing” the company. Siemens net income between 2004-2008 (a time period that does not even cover the full range of the relevant time period) was approximately $28.3 billion. Thus, the worldwide fines and penalties accounted for approximately 5% of its net income, how does this “sufficiently punish” the company? Is not one justified, when viewing the amounts at issue, to conclude that this whole episode was a net positive for Siemens?

You raise the debarment issue, which I have discussed on my blog as well. My opinion is that the message DOJ says it wants to send in these cases, will not be sent until a company is debarred for a specific time period. If the DOJ is looking for deterrence it has the tools at its disposal.

If “real-time” prosecutions are indeed the goal of the DOJ (a dubious assertion given that many, many disclosed FCPA cases have languished for years and years) that is a good goal. However, the rush to get things settled and put a nice shiny bow around a case so that the enforcement agencies can conserve resources and focus elsewhere, and so that the company can move on, should not result in a situation, which I think is reflected in the Siemens and BAE enforcement actions, that certain companies in certain industries which sell to certain customers are essentially immune from FCPA antibribery violations.

WJ: While I agree that debarment would send an even stronger deterrent message than non-debarment, it is hard to see how a $1.6B penalty equates with immunity as you suggest. There is always more punishment that is possible, but the maximum does not have to be applied for DOJ to be effective.

Another factor that should be considered is jurisdiction. If I remember correctly, the Siemens charging papers state that its Venezuelan and Bangladeshi subsidiaries used U.S bank accounts to further their bribe schemes. The papers do not make similar US-nexus allegations for either the parent company or the Argentine subsidiary. Thus, it may be that DOJ felt it didn’t have jurisdiction over the parent company for a bribery charge. As for BAE, I can only say what press reports make clear – the case was enormously challenging for many different reasons. I think the folks at DOJ would agree that their settlement was not perfect, but I think they did an admirable job of not having perfect be the enemy of good.

MK – I am clearly not suggesting that Siemens escaped liability for its “egregious,” “staggering,” and “brazen” corrupt conduct (those are the enforcement agencies’ words – not mine). However, it sure seems that certain companies have come to be immune from FCPA antibribery charges. Any time a particular company is immune from particular aspects of a law, respect for that law and indeed the rule of law suffers.

As to Siemens and whether there was a U.S. nexus sufficient to charge an antibribery violation, the DOJ’s information clearly states that Siemens Power Generation (with offices in Florida), Siemens Power Transmission and Distribution (with offices in North Carolina) and Siemens Transportation Systems (with offices in California) were key players in the overall bribery scheme – presumably DOJ included the “with offices” in the U.S. part for a reason.

In any event, where does this leave the future of FCPA enforcement. I teach the FCPA to my students, should I now conclude my FCPA section with “FCPA enforcement – an area of law where perfect should not be the enemy of good.” If you are an individual sitting in prison today because you violated the FCPA’s antibribery provisions, how do you explain to such an individual that certain companies are immune from the same conduct for which they are sitting in prison?

WJ: Those of your students that aspire to prosecution, especially white collar prosecution, would be well served to learn that concept, yes. Prosecutorial discretion is a wonderful feature of our judicial system which often leads to imperfect solutions, but, on balance, usually – though certainly not all the time — works out just about right.

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