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Report Cards

The start of school is just around the corner, but summer is report card time for various groups focused on reducing bribery and corruption.

This post highlights two such report cards: Transparency International’s Annual Progress Report of the OECD Anti-Bribery Convention and The OECD Working Group on Bribery Annual Report.

Transparency International 2010 Progress Report of the OECD Anti-Bribery Convention

On July 28th, Transprancy International (TI) (see here) released its sixth annual Progress Report on Enforcement of the OECD Convention.

“The 2010 report covers 36 of the 38 parties to the Convention, all except Iceland and Luxembourg. It covers enforcement data for the period ending 2009 unless otherwise stated and includes reports on recent case developments through June 2010. Like prior reports, this report is based on information provided by TI experts in each reporting country selected by TI national chapters.”

According to Appendix A of the report, the U.S. experts responding to the TI questionnaire were Lucinda Low (here) and Tom Best (here) of Steptoe & Johnson LLP.

In summary fashion, the report states:

“The increase in the number of countries with active enforcement from four to seven is a very positive development, because active enforcement is considered a substantial deterrent to foreign bribery. With the addition of Denmark, Italy and the United Kingdom, which previously were in the moderate category, there is now active enforcement in countries representing about 30 per cent of world exports, 8 per cent more than in the prior year.”

“The number of countries in the moderate category has changed from 11 to 9 countries, because three countries have moved up to the active category and one country, Argentina have moved up from the lowest category. The risk of prosecution in the nine countries with moderate enforcement – representing about 21 per cent of world exports – is considered an insufficient deterrent. Among this group are G8 members France and Japan.”

“The most disappointing finding is that there are still 20 countries – including G8 member Canada – with little or no enforcement, representing about 15 per cent of world exports. That number has shown little change in the last five years. This is deeply disturbing because companies in these countries will feel little or no constraint about foreign bribery, and many are not even aware of the OECD Convention. Governments in these countries have failed to meet the Convention’s commitment for collective action against foreign bribery.”

The report contains the following conclusions.

Current Levels of Enforcement are too Low to Enable the Convention to Succeed

“With active enforcement in only seven of the 38 parties to the Convention, the Convention’s goal of effectively curbing foreign bribery in international business transactions is still far from being achieved. The current situation is unstable because the Convention is predicated on the collective commitment of all the parties to end foreign bribery. Unless enforcement is sharply increased, existing support could well erode. Danger signals include efforts in some countries to limit the role of investigative magistrates, shorten statutes of limitations and extend immunities from prosecution. The risk of backsliding is particularly acute during a time of recession, when competition for limited orders is intense.”

Cause of Lagging Enforcement: Lack of Political Will

“The principal cause of lagging enforcement is lack of political will. This can take a passive form, such as failure to provide adequate funding and staffing for enforcement. It can also take an active form, through political obstruction of investigations and prosecutions. The lack of political will must be forcefully confronted not only by the Working Group on Bribery but also by the active involvement of the OECD Secretary-General, as well as high-level pressure on the laggards from governments committed to enforcement.”

Although the TI Report probably did not have the U.S. and U.K. in mind when making the above statement, many have questioned whether both the U.S. and U.K. governments lacked the political will to charge BAE, a large defense contractor to both governments, with bribery offenses. The U.S. enforcement action (see here) was not an FCPA enforcement action and the U.K. enforcement action (here) merely concerned a book keeping issue in Tanzania. And of course, TI’s statement about lack of political will was made before the Giffen Gaffe (see here).

Positive developments noted in the TI Report include:

“During the last year prosecutors in the US, Germany and the UK announced a number of settlements of important foreign bribery cases in which the defendants agreed to pay fines amounting to many hundreds of millions of dollars. These settlements demonstrate the ability of prosecutors to resolve cases without interminable litigation. The settlement levels provide a sharp wake-up call to international business regarding the gravity of foreign bribery.”

In seeming recognition of how aggresive enforcement of bribery laws can become a cash cow (see here for more) for the enforcing government, the report then states: “[The settlements] should also make clear to laggard governments that investing in adequate enforcement can have substantial returns.”

Other snippets from the TI Report.

As to the U.K.’s delay of the Bribery Act (see here for more) the report states:

“… it is regrettable that the entry into force of the law has been delayed until April 2011. There should be no further delay. It is also important that the consultation on the publication of official government guidance on compliance will not result in weakening any provision of the law.”

As to the use of alternative resolution vehicles such as non-prosecution and deferred prosecution agreements – a common way corporate FCPA enforcement actions are resolved (see here and here for more) and a model the U.K. SFO seeks to follow – the report contains this recommendation:

“The Working Group should undertake a study on the use of negotiated settlements to resolve foreign bribery cases. There are strong reasons for negotiated settlements, most importantly to avoid the high costs, long delays and unpredictable outcomes of litigation. However, there is concern that these settlements could be questionable deals between prosecutors and politically influential companies. Therefore, procedures should be adopted to make settlement terms public and subject to judicial approval. This should follow a public hearing where representatives of the country where the bribes were paid, competitors and other interested stakeholders such as public interest groups should be given an opportunity to present their views.”

The report also states as follows:

“TI considers that all settlements should be submitted to judicial review independent from the Prosecutor’s Office. This review should include a public hearing with representatives of the country where the bribe was paid, competitiors and civil society organisations before the settlement becomes final and published detailed conclusions.”

In a section of the report discussing current cases and trends, the report notes that some fines and penalties are based on the amount of the bribe while in other cases the fines and penalties are based on the amount of profit or gain from the transaction.

In apparent recognition that many FCPA fines and penalties (even eye-popping ones such as Siemens) still result in the company seemingly emerging from the prosecution with a net profit from the improper activity, the report states:

“TI considers that corporate fines should exceed the amount of profit from the wrongdoing.”

Further, the TI report questions whether the increase in enforcement and the penalties imposed are actually making any difference as it states: “[w]hile the amounts paid by companies are rising steadily in some jurisdictions, the question remains whether there is adequate deterrence.”

Continuing the dialogue on the question of “where should fines and penalties” go (see here and here for more) the report states:

“It would be desirable for the OECD Working Group on Bribery to conduct a study on corporate liability and penalties. TI considers that part of the fines paid or profits reimbursed should be made available for the benefit of the country that suffered from the offence.”

In addition to Transparency International, the OECD itself issued a summer report card.

OECD Working Group on Bribery Annual Report

On June 15th, the OECD Working Group on Bribery issued its annual report (see here).

As stated in the report, “the OECD has been at the forefront of international efforts to combat corruption in business, taking a multi-disciplinary approach, via its Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, as well as through its work in the areas of taxation, development aid, and governance.”

The Anti-Bribery Convention (here) has been implemented by 38 countries (see here) and these countries comprise the OECD Working Group on Bribery.

Among recent achievements noted by OECD Secretary General Angel Gurría are:

“Israel—the Working Group’s newest member— […] underwent a series of intense
evaluations and implemented significant anti-bribery legislative changes to the anti-bribery standards expected of candidates for membership of the OECD;” and

“Chile, which recently became a member of the OECD, also passed legislation that holds Chilean companies liable for bribing foreign public officials when doing business abroad;”.

Secretary General Gurria also noted that “in 2009, Russia officially asked to join the Anti-Bribery Convention as part of its OECD membership drive” and that the OECD is also deepening relations on anti-bribery issues with China, India, Indonesia and Thailand, and hopes to bring other countries on board.”

As the report notes, 2009 “marked the completion of ten years of monitoring Parties’ implementation and enforcement of the Anti-Bribery Convention.”

This is the first year that official data on enforcement efforts by Parties
to the Anti-Bribery Convention is publicly available. The data (see here) is from “Decisions on Foreign Bribery Cases from 1999 to December 2009.”

According to the report, “the data has been compiled and published by the OECD Secretariat on the basis of statistics, data and information provided by the Parties to Convention in order to provide a realistic picture of the level of enforcement in the jurisdiction of each of the Parties. However, the responsibility for the provision and accuracy of information rests solely with the individual Parties.”

Further, in a seeming reference to U.S. enforcement of the FCPA and the frequency by which FCPA enforcement actions are resolved through non-prosecution agreements, the report notes that the data includes information “provided on a voluntary basis by certain countries concerning the number of foreign bribery cases that have been resolved through an agreement between the law enforcement authorities and the accused person or entity, with or without court approval.”

Interested in how many individuals and business entities have been criminally sanctioned by OECD signatory nations for bribery? Curious as to how many investigations are currently pending by signatory nations? Want to compare Hungary to Iceland or the U.S. to Germany?

It is all possible with OECD data.

Outlining Bourke’s Appeal

The DOJ recently filed its reply brief (here) in Frederic Bourke’s appeal.

A prior post (here) summarized the FCPA related issues in Bourke’s brief and this post summarizes the DOJ’s reply brief.

The DOJ begins with this paragraph:

“The evidence at trial established that Bourke, a successful entrepreneur and multi-millionaire, knowingly backed rogue investor Viktor Kozeny in a corrupt plan to purchase the state-owned Azerbaijani oil industry, in secret partnership with the president of Azerbaijan, Heydar Aliyev, and his family. The corrupt plan included the payment of bribes to Aliyev and other officials.”

The DOJ states – “[a]t some point, Bourke learned about Kozeny’s business success and strategies from a December 1996 Fortune magazine article.” The brief states that the article “detailed Kozeny’s insider trading, purchase of state secrets from a government official, and other fraudulent activity.” According to the DOJ, “[h]aving read the article and discussed it with his lawyers, Bourke was aware of Kozeny’s questionable business practices; but Bourke was impressed by the outsized profits Kozeny generated in this scheme, and, as Bourke would later tell a prospective investor, Kozeny had not actually been convicted of a crime.”

Bourke’s trial principally focused on his investments in Oily Rock, a vehicle the government maintains was used to funnel bribe payments to Azerbaijan officials to ensure that the officials would privatize the State Oil Company of the Azerbaijan Republic (SOCAR) in a rigged auction that only the investors, including Bourke, Kozeny and others could win.

The DOJ states that “Bourke made his initial investment in Oily Rock without directing any of his many lawyers to conduct due diligence.”

According to the DOJ:

“Bourke’s interest in the investment was motivated by his knowledge of the corrupt arrangement. Because Bourke knew of the payments to Azerbaijani officials, Bourke demonstrated an assured confidence in the success of the privatization, even though most of the investors who were not privy to the details of the conspiracy viewed it as extremely risky. The inherent risk in the investment arose from the fact that the privatization of SOCAR required a presidential decree.”

The DOJ nevertheless acknowledges that many others invested, directly or indirectly, in Oily Rock including former U.S. Senator George Mitchell and other individuals, institutional investors and hedge funds, AIG and Columbia University.

Bourke’s appellate brief argued that the district court “committed a series of errors that crippled Bourke’s mens rea defense.”

Below is a summary of Bourke’s arguments along with the DOJ’s response as set forth in its reply brief.

Bourke

“The district court improperly instructed on conscious avoidance, despite the absence of evidence that Bourke deliberately avoided knowledge of Kozeny’s bribes.” According to Bourke, this instruction was error “because there was no evidence that Bourke deliberately avoided learning about Kozeny’s bribery.” Bourke states that the conscious avoidance instruction “was particularly damaging because the government presented evidence and argued that Bourke failed to exercise adequate due diligence, thus exacerbating the risk inherent in the conscious avoidance instruction that the jury would convict for negligence or recklessness.

DOJ

“There was an ample factual basis for a conscious avoidance charge in this case. To be sure, the Government’s principal theory at trial was that Bourke had actual knowledge of the bribery scheme. But the jury easily could have found, in the alternative, that Bourke was aware of a high probability of the existence of corrupt arrangements, yet deliberately avoided confirming that fact. Such a finding would have been supported, by, among other things, the following evidence:

• Bourke was aware of the high level of corruption in Azerbaijan generally.

• Bourke had read a Fortune magazine article that described Kozeny’s reliance on illegal business practices, such as insider trading, purchase of state secrets from a government official, and fraud, to accomplish the goals of a privatization scheme. This article alerted Bourke that there was a high probability that Kozeny’s latest scheme involving Azerbaijan also included corrupt arrangements, such as bribe payments or offers to pay bribes.

• Bourke defended Kozeny by stating that he had not actually been convicted of a crime.

• Bourke expressed concern to other investors and their attorneys that Kozeny and his employees were paying bribes.

• Bourke proposed the formation of separate companies affiliated with Oily Rock and Minaret to shield Bourke and other American investors from liability from any corrupt payments.

• Bourke played a role in coordinating United States medical treatments, combined with tourism and shopping excursions, for Azerbaijani officials.

From these facts, among others, a rational juror could have concluded that Bourke was aware of a high probability of the existence of corrupt arrangements, yet deliberately avoided confirming that fact. Accordingly, Bourke is wrong when he suggests that a conscious avoidance was inappropriate because ‘the trial record contains no evidence that Bourke ‘decided not to learn’ about Kozeny’s bribery.’ In fact, a conscious avoidance instruction was particularly appropriate in this case, because Bourke’s corporate attorney had actually cautioned him that, if he thought there might be bribes paid, he could not just look the other way.”

“Bourke’s assertion that the conscious avoidance instruction allowed the jury to convict on a negligence theory is mistaken. To the contrary, the District Court told the jury that it could not find Bourke guilty merely because he was negligent. The Government did not argue that the jury should convict because Bourke was negligent in failing to ask his lawyers to conduct due diligence. Rather, the Government argued that Bourke refrained from asking his lawyers to conduct due diligence either because he was consciously avoiding learning about the bribes or because he did not want his lawyers to learn the true facts of his corrupt investment.”

“In sum, a rational juror could have concluded based on, among other things, Bourke’s close relationship to Kozeny and other co-conspirators, Bourke’s understanding of the Azerbaijan investment and the Azerbaijani government, and Bourke’s previously expressed concerns about Kozeny’s paying of bribes, that Bourke was aware of a high probability that Kozeny was paying bribes but deliberately avoided confirming that fact. Accordingly, the District Court properly instructed the jury on the doctrine of conscious avoidance.”

“Even if the District Court erred in instructing the jury on the doctrine of conscious avoidance (and it did not), the error would provide no basis for vacating Bourke’s conviction. This Court has repeatedly ruled that a conscious avoidance instruction is harmless in cases where, as here, there was sufficient evidence of the defendant’s actual knowledge to support the jury’s verdict.”

“Moreover, conscious avoidance was not a prominent feature of the Government’s arguments to the jury. Although the Government did refer to evidence of Bourke’s conscious avoidance, the Government’s primary argument was that Bourke had actual knowledge of the bribes.”

Bourke

The district court erred in admitting testimony about the due diligence performed by Texas Pacific Group (“TPG”), an investment fund that did not make the same investment as Bourke, because its lawyers advised of the FCPA risk.

According to Bourke, because he knew nothing about their work, their testimony was irrelevant to his state of mind particularly since the results were never shared or communicated with him.

Bourke states that “the government offered the testimony […] solely as a contrast with the comparatively skimpy inquiry that Bourke and his lawyers performed” and that this testimony “increased the risk, created by the conscious avoidance instruction and heightened by the government’s closing, that the jury would convict Bourke based on his negligence or recklessness — what he should have known, rather than what he actually knew.”

Bourke further argues that having admitted the TPG testimony, “the district court should at least have permitted Bourke to present the contrasting testimony” of the head of investments for Columbia University that would have established that “Columbia invested $15 million with Kozeny in Azeri privatization after due diligence comparable to Bourke’s.”

According to Bourke, this excluded testimony “would have rebutted the government’s claim that his lack of due diligence compared to TPG established his culpability.”

Bourke argues that “once the district court permitted the government to present TPG’s due diligence as a benchmark for measuring [his] inquiry, fairness demanded that [he] be allowed to present the contrasting picture of Columbia’s due diligence, which resembled his own.”

DOJ

“The testimony of Wheeler and Rossman [individuals who conducted due diligence for potential Oily Rock investor David Bonderman of TPG] was not offered to show Bourke was negligent; the purpose was to show that Kozeny had not concealed evidence of the corrupt arrangements from potential investors in Oily Rock. Given that Bourke was much closer to Kozeny than Bonderman was, this was important circumstantial evidence of Bourke’s knowledge. As such, the testimony was relevant and appropriately admitted by the District Court.”

“To conduct due diligence on the Oily Rock investment, at Kozeny’s invitation, Wheeler traveled to Baku with Bourke and several other potential investors; together, they toured Kozeny’s operations and were introduced to Azerbaijani government officials. Based on what she saw during her visit and her assessment that the investment was “risky [in] nature”, Wheeler and Bonderman brought in TPG’s outside counsel, Cleary Gottlieb, to perform due diligence. Rossman testified that, in 1998, he was a Cleary Gottlieb attorney. During that time, he was asked to conduct due diligence on the Oily Rock investment for TPG. As a part of due diligence, Rossman met with Bodmer at Bodmer’s law offices. During this meeting, Bodmer provided Rossman with various documents related to the Oily Rock investment, and Bodmer and Rossman discussed various details regarding the investment, including the involvement of Azerbaijani investors. Based on his review of documents, his understanding of the investment thesis, and Kozeny’s reputation, which he researched from news coverage, Rossman concluded that this proposed investment could violate the FCPA, and he advised his client not to make the investment. TPG did not invest in Oily Rock.”

“… Wheeler and Rossman’s testimony was appropriately admitted, because Bourke was exposed at minimum to the same sources of information as Wheeler and Rossman — Wheeler and Bourke took the same factfinding trip to Baku in January 1998, and Rossman, like Bourke, learned of the investment structure from Bodmer. Accordingly, this testimony was probative of Bourke’s knowledge.”

“… the District Court’s decision to admit Wheeler and Rossman’s testimony was entirely appropriate. Moreover, given the volume of direct and circumstantial evidence of Bourke’s knowledge of the conspiracy’s objectives, any conceivable error was harmless.”

“Bourke also contends that the District Court erred in barring the testimony of Bruce Dresner, who served as Columbia University’s Vice President for Investments in 1998, and, in that capacity, based on representations by Omega’s Clayton Lewis and Leon Cooperman, recommended that Columbia invest $15 million in privatization vouchers through Omega. Bourke complains that, although the Government was permitted to call Wheeler and Rossman to contrast their due diligence with Bourke’s, he was not permitted to contrast his due diligence with Columbia’s. The comparison is inapt. Unlike Wheeler and Rossman, who testified about a potential investment in Oily Rock itself, Columbia University was a potential investor in Omega, which was merely planning to invest alongside Oily Rock. The District Court did not abuse its discretion in excluding this proposed testimony.”

“The District Court properly precluded Dresner’s testimony because it was not relevant. As the District Court stated, Dresner’s state of mind “has nothing to do with the defendant on trial.” Unlike other defense witnesses and Government witnesses who were present in Baku with Bourke to consider an investment in Oily Rock and therefore possessed relevant information regarding Bourke’s knowledge, Dresner had no contact with Bourke and was considering investing in Omega, not Oily Rock. Dresner never traveled to Azerbaijan to investigate the investment opportunity, relying instead on the recommendation of Omega. Dresner never met Kozeny, Farrell, or Bodmer — the individuals who discussed the FCPA violations with Bourke.”

“In addition, Dresner’s testimony would not have been particularly helpful to Bourke, and therefore any error in excluding the testimony would have been harmless. Notwithstanding Dresner’s exclusion, Bourke offered evidence through several Government and defense witnesses that Columbia University had invested in the same project, and there was no suggestion in any of that testimony or in arguments that Columbia University was aware of bribes or was prosecuted. Thus, Bourke was able to establish that some investors in the Azerbaijani vouchers were not aware of the bribes. Had Dresner actually testified, he would have revealed that Columbia and Bourke were not similarly situated and that Columbia had much less information about the investment than Bourke did.”

“In sum, the District Court acted within its discretion in excluding Dresner’s testimony, and this ruling does not warrant a new trial.”

Bourke

The district court “refused to instruct that conviction for conspiracy requires the same mens rea as the underlying FCPA offense — meaning (among other things) a bad purpose to disobey or disregard the law.”

According to Bourke, “the district court compounded its error in giving the conscious avoidance instruction by rejecting [his] requested instruction [as to the conspiracy charge] that the government had to prove that he acted corruptly and willfully.”

Bourke argued that “when the district court turned to the mens rea required for the conspiracy offense, rather than for a substantive FCPA offense, it omitted the requirement that the defendant act corruptly” and that this “watering-down of the mens rea requirement for the conspiracy charged […] undermined [his] defense, which rested on his state of mind.”

DOJ

“Bourke did not lodge this objection in this District Court, and therefore, this part of the charge is reviewed for plain error. The District Court’s mens rea instruction was correct and was certainly not plainly erroneous.”

“The District Court instructed the jury on all the elements of a substantive FCPA violation, including the requirement that the defendant act “willfully” and “corruptly,” terms which the Court defined for the jury.”

“The District Court’s charge encompassed the mens rea elements of the FCPA and was not plainly erroneous. The “word ‘corruptly’ in the FCPA signifies . . . a bad or wrongful purpose and an intent to influence a foreign official to misuse his official position. But there is nothing in the word or any thing else in the FCPA that indicates that the government must establish that the defendant in fact knew that his or her conduct violated the FCPA to be guilty.”

“The District Court’s extensive instructions on mens rea included the instruction that Bourke had to act “with the specific intention of furthering [the conspiracy’s] business or objective” and “for the purpose of furthering the illegal undertaking.” It is simply not possible to conspire to act corruptly without acting corruptly.”

“Finally, Bourke failed to raise this highly abstract objection during any of the several conferences on the jury charge.”

“Accordingly, the charge is subject to review only for plain error. There was no error, much less plain error, in this case.”

Bourke

The district court “rejected Bourke’s proposed good faith instructions, even though [he] produced ample evidence to warrant the instructions and no other instruction covered the point.”

Bourke argued that his proposed instruction “accurately reflected the principle that a defendant’s good faith belief that he acted lawfully negates the mens rea for specific intent offenses.”

While Bourke concedes that his efforts to investigate the investment “were not as extensive” as others, his efforts “suffice for a good faith instruction.” Because the case turned on his state of mind, Bourke states that “there is no doubt that the good faith defense, if accepted by the jury, would have produced an acquittal.”

DOJ

“Bourke’s contention is without merit. A separate good faith instruction was not necessary in this case, as the relevant jury instructions effectively communicated the essence of a good faith defense in its discussion of the elements of knowledge and willfulness.”

“Indeed, the District Court’s instructions that an FCPA violation required a defendant to act “with a bad purpose to disobey or disregard the law” and that the Government could not meet its burden of proof by showing that the defendant’s actions were the result of “mere negligence or some other innocent explanation” captured the concepts identified in Bourke’s proposed charge — that Bourke could not be convicted of Count One if he believed he “was acting properly in connection with the matters alleged in [Count One], even if he was mistaken in that belief, and even if others were injured by his conduct.” […] Thus, the good faith instructions Bourke requested were “effectively presented elsewhere in the charge.” Accordingly, the District Court’s decision not to deliver a separate good faith charge was appropriate and does not provide a basis for a new trial.”

Bourke

“Any one of the errors concerning [his] knowledge of Kozeny’s bribes and his specific criminal intent, standing alone, warrants reversal” and if any one error is harmless in isolation, then their “cumulative effect profoundly damaged [his] defense.”

DOJ

“Bourke contends correctly that the cumulative effect of errors that are individually harmless can cast doubt upon the fairness of a conviction. For the reasons set forth above, there were no such errors. Accordingly, Bourke’s “cumulative effect” argument provides no basis for granting a new trial.”

Innospec Related News

In March, Innospec (a global chemical company) settled bribery enforcement actions on both sides of the Atlantic (see here).

This post discusses recent Innospec news – the SEC enforcement action against an Innospec agent (an individual who previously plead guilty to a DOJ enforcement action – see here) and a former Business Director at the company; a civil suit filed by an Innospec competitor in U.S. District Court in Richmond, Virginia; and how Innospec continues to grow its cash coffers despite receiving a pass on $50 million in fines and penalties in the March enforcement action based on inability to pay.

SEC Enforcement Action Against Turner and Naaman

Last week, the SEC added to Ousama Naaman’s legal woes charging him (see here) with civil FCPA anti-bribery violations, knowingly circumventing or knowingly falsifying books and records, and aiding and abetting Innospec’s FCPA books and records and internal control violations. According to the SEC release (see here) Naaman, Innospec’s agent in Iraq, agreed to disgorge $810,076 plus prejudgment interest of $67,030 and pay a penalty of $438,038 that will be deemed satisfied by his criminal fine. The disgorgement amount represents commissions Naaman received from Innospec “for his role in funneling bribe payments.” To my knowledge, the approximate $877,000 the SEC will recover from Naaman is the largest SEC recovery against an individual FCPA defendant.

In the same complaint, the SEC also charged David Turner, the Business Director of Innospec’s TEL Group, with the same substantive charges as Naaman. According to the complaint, Turner (a U.K. citizen who left Innospec in June 2009) “actively participated” in Innospec’s bribery and kickback schemes in Iraq and “actively participated” in Innospec’s bribery scheme in Indonesia.

According to the complaint:

“Turner was aware of the kickback scheme in connection with the Oil for Food Program. At some point in late 2002 or early 2003 Innospec’s internal auditors questioned Turner about the nature of the commission payments that were made to Naaman under the U.N. Oil for Food Program. Turner made false statements to the auditors and concealed the fact that the commission payments to Naaman included kickbacks to the Iraqi government in return for Oil for Food contracts. Turner also made false statements when he signed annual-certifications that were provided to auditors up until 2008 where Turner falsely stated that he had complied with Innospec’s Code of Ethics incorporating the company’s Foreign Corrupt Practices Act policy prohibiting kickbacks and bribery, and that he was unaware of any violations of the Code of Ethics by anyone at Innospec.”

Even after the Oil for Food Program was terminated in late 2003, the complaint alleges that “Turner, along with senior officials at Innospec, directed and approved” additional bribe payments to Iraqi officials. In addition, the complaint alleges that “Turner and other Innospec officials directed and authorized payments, through Naaman, to fund lavish trips for Iraqi officials.”

As to Indonesia, the complaint alleges that “Turner, along with senior officials at Innospec, authorized and directed the payment of bribes to Indonesian government officials from at least 2000 through 2005, in order to win contracts for Innospec for the sale of TEL to state owned oil and gas companies in Indonesia.” According to the complaint, Turner and other Innospec officials and employees used various “euphemisms” in e-mail communications and in discussions to refer to the bribery scheme.

According to the complaint, Turner “obtained $40,000 in bonuses that were tied to the success of the TEL sales, which were procured through bribery.”

According to the SEC release, Turner, without admitting or denying the SEC’s allegations, consented to entry of a final judgment requiring him to disgorge $40,000. The release states that no civil penalty will be imposed on Turner “based on, among other things, Turner’s extensive and ongoing cooperation in the investigation.”

Competitor Sues Innospec

The FCPA does not have a private right of action (although as I explored in this post it would be interesting if a court were faced with this issue today).

However, a company that settles an FCPA enforcement action increasingly faces collateral litigation, most often shareholder derivative claims. If a plaintiff does craft a direct cause of action against the company, it is usually a RICO claim.

As noted in this Richmond Times-Dispatch story, NewMarket Corp.’s civil case against Innospec does not fit the above mold, rather it alleges that Innospec’s conduct, as set forth in the DOJ and SEC enforcement actions, violated the Robinson-Patman Act and the Virginia Antitrust Act as well as the Virginia Business Conspiracy Act.

The article quotes NewMarket’s principal financial officer as saying that the company learned of Innospec’s actions after reading the documents released in connection with the March enforcement action. Among other things, the DOJ and SEC alleged that Innospec’s bribe payments in Iraq ensured that a field test of a competitor’s fuel additive failed. NewMarket claims that the competitor was a subsidiary company Ethyl Petroleum Additives Inc. which now goes by the name Afton Chemical Corp.

Innospec Continues to Be In the Money

In this prior post I highlighted how Innospec was ordered to pay $60,071,613 in disgorgement in the SEC’s enforcement action, but because of Innospec’s “sworn Statement of Financial Condition” all but $11,200,000 of that disgorgement was waived.

In other words, Innospec got a pass on approximately $50 million in March.

I then noted that Innospec’s first quarter financial results were positive and that
“as of March 31, 2010, Innospec had $67.5 million in cash and cash equivalents, $22.5million more than its total debt of $45.0 million.”

Innospec recently reported its second quarter financial results and it continues to be in the money. As noted in this company release:

“As of June 30, 2010, Innospec had $77.0 million in cash and cash equivalents, $30.0 million more than its total debt of $47.0 million.”

The company’s President and Chief Executive Officer stated that “Innospec’s second quarter operating results were very strong, with impressive double-digit increases in sales and operating income across all three business segments.”

The Giffen Gaffe

Perhaps one day the true story will be told about the DOJ’s prosecution of James Giffen.

I don’t pretend to know what happened behind the scene other than to know that something significant occurred behind the scene.

That conclusion is compelled when an original indictment (see here) charging “Giffen with making more than $78 million in unlawful payments to two senior officials of the Republic of Kazakhstan in connection with six separate oil transactions, in which the American oil companies Mobil Oil, Amoco, Texaco and Phillips Petroleum acquired valuable oil and gas rights in Kazakhstan” is resolved via a one-paragraph superseding information (see here) charging a misdemeanor tax violation.

Sure, DOJ can say that it prosecuted a functionally defunct entity, The Mercator Corporation – in which Giffen was the principal shareholder, board chairman, and chief executive officer – with violating the FCPA’s anti-bribery provisions. Yet that criminal information (see here) merely alleges that “Mercator caused the purchase of two snowmobiles that were shipped to Kazakhstan for delivery to KO-2” (a senior official of the Kazakh Government).

You read that correctly.

From an FCPA perspective this entire, nearly decade-long prosecution, was reduced to allegations about two snowmobiles for a Kazakh official.

So what was that something significant that occurred behind the scene?

I don’t know.

But I do know this.

Part of Giffen’s defense was that his actions were taken with the knowledge and support of the Central Intelligence Agency, the National Security Council, the Department of State and the White House. The DOJ did not dispute the fact that Giffen had frequent contacts with senior U.S. intelligence officials or that he used his ties within the Kazakh government to assist the United States. With the court’s approval, Giffen sought discovery from the government to support such a public authority defense and much of the delay in the case was due to the government’s resistance to such discovery and who was entitled to see such discovery.

Perhaps it was that public airing of the information in these documents would be embarrassing to the U.S. government or impact U.S. foreign relations with a key oil and gas producing country.

If so, it is troubling to think that our government condones bribery, when done with the approval or the wink and nod of government officials, while aggressively prosecuting commercial actors – often times based on untested and dubious legal theories.

For the record, Giffen pleaded guilty (see here) last Friday to a one-count criminal information charging him with willfully failing to supply information on tax returns regarding foreign bank accounts in violation of 26 USC 7203. The information charges, and Giffen pleaded guilty to, filing a U.S. individual income tax return which failed to report that he maintained an interest in, and signature and other authority over, a bank account in Switzerland in the name of Condor Capital Management, a British Virgin Islands corporation he controlled. In pleading guilty, Giffen also relinquished right, title and interest he may have had, directly or indirectly, in several named Swiss bank accounts.

Pursuant to the plea agreement, Giffen’s sentencing range will be 0 to 6 months and the applicable fine range will be $250 to $5,000.

For the record, Mercator also pleaded guilty (see here) last Friday to a one-count criminal information charging it with violating the FCPA’s anti-bribery provisions. According to the information, Mercator “advised Kazakhstan in connection with various transactions related to the sale by Kazakhstan of portions of its oil and gas wealth.” The information alleges that between 1995 and 2000 Mercator was paid approximately $67 million in success fees for its work in assisting the Kazakh Ministry of Oil and Gas Industries develop a strategy for foreign investment in the oil and gas sector and coordinating the negotiation of numerous oil and gas transactions. The information charges that certain senior officials of the Kazakh government (including KO-2) had the authority to hire and pay Mercator and that Mercator was therefore “dependant upon the goodwill” of the officials. The one-paragraph statutory allegation merely states that Mercator “caused the purchase of two snowmobiles that were shipped to Kazakhstan for delivery to KO-2.”

As indicated in the plea agreement, the DOJ and Mercator could not agree on whether the 1998 Sentencing Guidelines or the 2009 Sentencing Guidelines apply – an issue that will be left for the court to decide. If the 2009 guidelines apply, the plea agreement sets forth a fine range of $650,000 to $1.3 million. If the 1998 guidelines apply, the plea agreement sets forth a fine range of $30,000 to $60,000.

Whether Mercator’s and/or Giffen’s actions were indeed taken with the knowledge and support of the Central Intelligence Agency, the National Security Council, the Department of State and the White House, the following paragraph from the Mercator plea agreement would seem relevant:

“Because the offense involved an elected official or a public official in a high-level decision-making or sensitive position, the offense level is increased 4 levels pursuant to U.S.S.G. 2C1.1(b)(3).”

That provision (see here) defines “public official” to include, among other categories, an individual “in a position of public trust with official responsibility for carrying out a government program or policy; acts under color of law or official right; or participates so substantially in government operations as to possess de facto authority to make governmental decisions.”

DOJ releases in FCPA enforcement actions are typically peppered with get-tough, this sends a message type of language. The release (see here) in the Giffen / Mercator enforcement action does not contain any quotes from DOJ officials.

William Schwartz of Cooley Godward Kronish LLP (here), a former Assistant United States Attorney in the United States Attorney’s Office for the Southern District of New York where he was Deputy Chief of the Criminal Division, represented both Giffen and Mercator.

So, what to make of the Giffen Gaffe.

It seems that Giffen prevailed not because of the facts or the law, but because he possessed significant leverage over the government in that he asserted his actions were taken with the knowledge and support of the Central Intelligence Agency, the National Security Council, the State Department and the White House.

Few FCPA defendants can make a similar claim. Thus, resolution of the Giffen case would seem to have little or no effect on the nuts and bolts of future FCPA enforcement actions.

Yet, resolution of the Giffen case does raise some troubling issues as to the DOJ’s enforcement of the Foreign Corrupt Practices Act.

For starters, the Giffen case and the Frederick Bourke case (see here for prior posts) generally marked the beginning of the FCPA’s resurgence. Regardless of the outcome of Bourke’s Second Circuit appeal, the trial phase ended with the sentencing judge saying:

“After years of supervising this case, it’s still not entirely clear to me whether Mr. Bourke is a victim or a crook or a little bit of both.”

In both the Giffen and Bourke cases, the DOJ made spectacular allegations only to see these enforcement actions end with a whimper.

The Giffen resolution would also seem embarrassing for the Justice Department which actively preaches the transparency and anti-corruption gospel message around the world while calling on other countries to increase enforcement of their own bribery laws.

However, what does it say about transparency in our country when a case that begins with criminal allegations of more than $78 million in unlawful payments to senior Kazakh officials ends with a misdemeanor tax violation and a largely meaningless FCPA enforcement action against a functionally defunct entity focused merely on two snowmobiles?

The Giffen resolution should further enrage segments of the business community that justifiably see a double standard in that certain business practices seem tolerated when done in connection with government business or policy, yet aggressively prosecuted, often times based on untested and dubious legal theories, when done in connection with a purely commercial transaction.

The Giffen Gaffe is troubling enough in isolation.

Coupled with another bribery blunder from approximately six months ago, it is an open question whether the government’s enforcement of the FCPA, to borrow a parliamentary phrase, would survive a no-confidence vote.

In February, the DOJ alleged (see here) that BAE, the largest defense contractor in Europe and the fifth largest in the U.S. as measured by sales, “provided substantial benefits” “through various payment mechanisms both in the territorial jurisdiction of the U.S. and elsewhere” to a Saudi official “in a position of influence” to award fighter jet deals. The DOJ stated that BAE “provided support services to the [Saudi official] while in the territory of the U.S.” and that these benefits “included the purchase of travel and accommodations, security services, real estate, automobiles and personal items.” The DOJ alleged that over $5 million in invoices for benefits provided to the Saudi official were submitted by just one BAE employee during a one year period. Yet resolution of the BAE enforcement action contained no FCPA charges.

Sure the U.S. may prosecute the most bribery cases in terms of shear numbers compared to other countries.

Yet, as is becoming increasingly obvious, many of those cases are settled via privately negotiated resolution vehicles that are not subjected to any meaningful judicial scrutiny and are based on dubious and untested legal theories.

On the flip side, when allegations of egregious or widespread bribery are alleged, the charges are not even FCPA anti-bribery violations.

Before another U.S. government official goes abroad to spread the anti-corruption gospel, preach transparency, and question other countries commitment to prosecuting bribery, it would seem that our government and Justice Department first need to examine its own enforcement of the FCPA.

Holy Smokes

It’s a Friday in August, but a busy day for FCPA enforcement.

The DOJ and SEC announced today enforcement actions against two major tobacco companies, Universal Corporation, Inc. and Alliance One International, Inc.

“The DOJ filed criminal actions against a Universal subsidiary and two Alliance One subsidiaries charging each of them with one count of conspiring to violate the FCPA and one count of violating the anti-bribery provisions of the FCPA. Universal and Alliance One entered into non-prosecution agreements with the DOJ and agreed to pay criminal penalties of $4,400,000 and $9,450,000, respectively, and retain independent monitors for a period of three years.”

The SEC charged Universal and Alliance One with violating, among other things, the anti-bribery provisions of the FCPA for their “involvement in a multi-million dollar bribery scheme with government officials in Thailand to obtain nearly $30 million in sales contracts to supply tobacco. The SEC also charged Alliance One with paying bribes in Kyrgyzstan and making improper payments in China, Greece, and Indonesia and Universal with making improper payments in Malawi and Mozambique. Moreover, the SEC’s complaints alleged Universal and Alliance One engaged in books and records and internal control violations.”

More analysis to follow next week.

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