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No, We Don’t Need to Suspend the FCPA In Haiti or Any Other Country!

A topic in the blogosphere this week has been whether the FCPA needs to be suspended so that more U.S. companies will invest in Haiti.

The spark igniting this discussion was an opinion piece on Monday by Wall Street Journal editorial board member Mary Anastasia O’Grady titled “Democrats and Haiti Telecom” (see here).

[Although O’Grady’s article is titled “Democrats and Haiti Telecom” and although she focuses mostly on Josepth P. Kennedy II and former President Clinton, it should be noted that John Sununu (President Bush’s former Chief of Staff and Counselor) currently is the Chairman of Fusion’s advisory board (see here).]

The article focused on a 1999 contract between Fusion Telecommunications and Haiti Teleco – an entity in the news recently given that certain former employees have been connected to a wide-ranging FCPA enforcement action (see here for prior posts). The article discusses Joseph P. Kennedy II’s role at Fusion as a former member of the board “and the still-unanswered question about why Fusion had access to the Teleco network at a 75% discount to the official rate on file at the Federal Communications Commission.” Incidentally, the FCPA enforcement action involving Haiti Teleco that has been in the news since May 2009 includes allegations that the individuals and companies involved received “preferred telecommunications rates” based on improper payments made to Haiti Teleco officials (see here at pages 7-8). Indeed, O’Grady’s article notes that a civil action in a Florida federal court alleges that certain U.S. telecom carriers were granted “significantly reduced rates for services provided by Teleco in exchange for kickbacks” and that one of the companies that made payments “to certain off-shore companies” was Fusion.

O’Grady’s article concludes with this statement from “an American entrepreneur who does business in the Caribbean” who “recently explained the Haitian landscape” to O’Grady this way – “We did not bother with Haiti as the Foreign Corrupt Practices Act precludes legitimate U.S. entities from entering the Haitian market. Haiti is pure pay to play. The benefit of competitive submarine cables would be transformative for the Haitians. Instead, they were stuck with Clinton cronies taxing the poor.”

This unattributed statement by one person (a statement which exhibits misunderstanding of the FCPA) then prompted George Mason University Economics Professor Tyler Cowen to write at the Marginal Revolution Blog (see here) that “one of the best way to help Haiti” is to “pass a law stating that the Foreign Corrupt Practices Act does not apply to dealings in Haiti. As it stands right now, U.S. businesses are unwilling to take on this legal risk and the result is similar to an embargo. You can’t do business in Haiti without paying bribes.”

This then prompted Eric Lipman at the Legal Blog Watch (see here) to ask – “[i]t should not be necessary to suspend enforcement of an anti-corruption law to enable U.S. companies to participate, but, realistically speaking, is it justified in this case to look the other way for a time?”

This then prompted Ashby Jones at the Wall Street Journal’s Law Blog (see here) to ask:

“It’s an interesting question posed by Lipman, we think. Let’s assume, for now, that suspension of the FCPA would, in fact, lead to more badly needed U.S. investment in Haiti — a country in desperate need of every last dollar. Would it make sense to pull back on the law for the time being — say 1-2 years? Or would this send a counterproductive message from the Justice Department — that foreign bribery is okay in some countries but not in others? And is that any way to get a country like Haiti back on its feet — by perpetuating a culture of corruption?”

Here is my two cents – NO, WE DON”T NEED TO SUSPEND THE FCPA IN HAITI OR ANY OTHER COUNTRY!

My initial reaction was something like this – gee if the FCPA can, in effect, be suspended for certain companies selling certain products to certain customers (i.e. BAE), why shouldn’t it be suspended to help an impoverished country recover from a natural disaster.

However, the misguided suspension suggestion / argument would seem to rest on certain false assumptions about the FCPA.

First, (Travel Act considerations aside) not all business dealings in Haiti are subject to the FCPA – only those with the Haitian government are (as well as, potentially, those with state-owned or state-controlled entities giving credence, just this once for purposes of this post, to the enforcement agencies’ dubious “foreign official” interpretation). In other words, even if suspension of the FCPA would “open up” a portion of the Haitian market, it remains the case that only a portion of the Haiti market is affected by the FCPA.

Second, the misguided suspenson suggestion / argument assumes empirical evidence suggesting that businesses shun markets with high FCPA risk. I remain suspect to such claims, notwithstanding the prevalence of such claims by others including my friend Andy Spalding (see here). For instance, Venezuela, Angola, Russia, Philippines, Nigeria, Vietnam, Indonesia, Jamaica, Brazil, China, India, Thailand, and Mexico all fare (although not as poorly as Haiti) poor in Transparency International’s Corruption Perceptions Index (see here) (the index is far from perfect, but it is commonly viewed as a leading barometer). Yet foreign investment in these countries is generally vibrant and generally continues to grow notwithstanding the corruption perceptions. Why? Because these are lucrative markets for companies and when a market is lucrative companies will gravitate to those markets, notwithstanding the FCPA risks involved. Haiti has a rather small population and the purchasing power of its citizens is among the lowest in the world. FCPA risks aside, it is perfectly rational for companies to avoid a country like Haiti in favor of doing business in other more populated, lucrative markets. In other words, suspending the FCPA in Haiti is not likely to change this dynamic.

Further, despite my frequent criticism of HOW the FCPA is ENFORCED by the enforcement agencies, I firmly believe that the FCPA, if enforced consistent with its statutory terms and consistent with legislative intent, is a fundamentally sound statute. Suspending enforcement of a necessary and fundamentally sound statute based on false and misguided assumptions is irresponsible and not sound public policy.

What can be done about Haiti?

For starters, how about removing economically inefficient U.S. import quotas that negatively affect Haitian businesses (see here for the recent broadcast from National Public Radio)? An economist like Cowen, as well as others, should pursue this solution rather than advocating suspension of a fundamentally sound and important law.

Nexus Technologies Inc. et al. – Part I

Unfortunately, the FCPA enforcement action against Nexus Technologies Inc., a Philadelphia-based export company (“Nexus”), Nam Nguyen (Nexus’s President and Owner), and his siblings and fellow Nexus employees, Kim Nguyen and An Nguyen came to an end yesterday.

As noted in this DOJ release, Nexus pleaded guilty to “a conspiracy to bribe officials of the Vietnamese government in exchange for lucrative contracts to supply equipment and technology to Vietnamese government agencies in violation of the FCPA.” The release also notes that Nam and An Nguyen “pleaded guilty to conspiracy, a substantive FCPA violation, a violation of the Travel Act and money laundering” and that Kim Nguyen “pleaded guilty to conspiracy, a substantive FCPA violation and money laundering.” In June 2009, Joseph Lukas (a former Nexus partner) pleaded guilty to conspiracy and to violating the FCPA (see here).

The DOJ release notes that “in connection with the guilty pleas, Nexus and the Nguyens admitted that from 1999 to 2008 they agreed to pay, and knowingly paid, bribes in excess of $250,000 to Vietnamese government officials in exchange for contracts with the agencies and companies for which the bribe recipients worked” and that the defendants “admitted that the bribes were falsely described as ‘commissions’ in the company’s records.”

The DOJ release further notes that in pleading guilty, “Nexus also acknowledged that, as a company, it operated primarily through criminal means and agreed to cease operations as a condition of the guilty plea.”

Why did this post start with “unfortunately?”

Because, unlike most FCPA defendants (corporate or individual) Nexus and the Nguyens actually mounted a legal defense based on FCPA’s elements, including the key “foreign official” element.

You wouldn’t know it just by reading the above DOJ release, but this enforcement action centered on payments to employees of various commerical arms of Vietnam’s Ministry of Transport, Ministry of Industry, and Ministry of Public Safety.

While the case may not have been the strongest “test case,” Nexus and the Nguyens, in what is believed to be an FCPA first, challenged the DOJ’s interpretation that employees of state-owned or state-controlled enterprises (“SOES”) are “foreign official” under the FCPA. As readers likely know, this issue is a frequent topic of discussion on this blog (see here for prior “foreign official” posts).

The “foreign official” issue was fully briefed and I will explore in a future post (Nexus Technologies Inc. et al. – Part II) the issues raised by the briefs, including the DOJ’s surprising argument that it does not even need to identify specific “foreign officials” to charge an FCPA antibribery violation as well as the DOJ’s thin and misguided justification for its legal theory that employees of SOEs are “foreign officials” under the FCPA.

For the record, the judge in the case, without any comment or analysis, denied the motion to dismiss. Thus, DOJ may claim victory on its “foreign official” interpretation; however, in its brief DOJ specifically argued that a decision on the “foreign official” element was premature and ultimately a jury issue.

For all the talk, including on this blog, about the Africa Sting Case, BAE, Siemens, etc., this little noticed FCPA enforcement action in Philadelphia had the potential to shape the future of FCPA enforcement like no other – considering that over 50% of recent FCPA enforcement actions involve “foreign officials” only under DOJ’s dubious legal interpretation – which still, notwithstanding this resolution, has no judicial support.

Stay tuned for more.

A Canadian Corruption Scandal?

A coalition of NGOs recently requested that Blackfire Exploration, a privately owned Canadian exploration and mining company headquartered in Calgary (here), be investigated for potential violations of Canada’s Corruption of Foreign Public Officials Act (CFPOA) based on alleged improper payments made to the Mayor of Chicomueselo in the State of Chiapas, Mexico.

For more on the NGOs claims, including its letter to the Royal Canadian Mounted Police and documents the NGOs claim support its allegations, see here.

Among other things, the NGOs state in the letter that Blackfire “provided the mayor with […] benefits including airline tickets for himself, his family and his associates. These payments and other benefits were apparently made in response to the Mayor’s demands for ‘favours'”. According to this report in The Calgary Herald, Blackfire “decided to stop the ‘ridiculous propositions’ after the mayor asked for Blackfire to set up a sexual affair with a Playboy model.”

For more about the CFPOA, see here for a prior post.

“It’s Not Easy Being Under Investigation for Two Years …”

Panalpina is dealing with some FCPA issues (see here for the prior post).

Now, the company’s shareholders are getting a bit testy.

According to this report, during the company’s annual meeting last week, a shareholder demanded that someone “step up and take responsibility” for the company’s poor performance over the last two years.

According to the report, CEO Monika Ribar said, “[i]t is not easy being under investigation for two years, and [the FCPA investigation] is not making the situation any easier.”

According to the report, COO Karl Weyeneth added: “You can say the whole FCPA and Nigeria situation reflects badly on the management, but the fact is that as long as we are still involved in the investigation we will continue to lose market share, because our customers have internal regulations which prevent them from doing business with companies which are under investigation by the DoJ.” “As soon as this investigation is over, we will win some of this business back. Customers have told us ‘as soon as you have settled the FCPA, we will do business with you again’.”

Time will no doubt tell whether the FCPA investigation is a convenient excuse for company management for poor performance or whether this instance demonstrates the difficulty of running a company and maintaining customer relationships during the lifespan (often times several years) of an FCPA investigation / enforcement action.

*****

The seemingly minor case involving Telecommunications D’Haiti (“Haiti Teleco”) (see here) keeps on giving.

Last Friday, the DOJ announced (here) that Robert Antoine, one of the “foreign officials” (at least according to the DOJ given that Antoine served as the “Director of International Relations of Haiti Teleco” – an alleged state-owned entity), in the far-reaching case pleaded guilty to a money laundering conspiracy charge.

U.S. Attorney Jeffrey Solman (S.D. of Florida) is quoted as saying, “[t]oday’s conviction should be a warning to corrupt government officials everywhere that neither they nor their money will find any safe haven in the United States.”

Such get-tough language is difficult to reconcile with the BAE bribery, yet not bribery circus in which an identifiable Saudi official was widely alleged to have received from BAE over a billion dollars in a U.S. bank account (see here) and in light of this situation.

Mendelsohn’s Defense of the Siemens Enforcement Action … A Contrarian View

Mark Mendelsohn (DOJ Deputy Chief, Fraud Section and the DOJ’s FCPA “top cop”)recently defended the 2008 Siemens enforcement action.

Given that Mendelsohn signed the Siemens charging documents and plea agreement, this is a rather unremarkable event and is sort of like me saying I defend the substantive content on this blog.

In any event, and in the interest of sparking thought within the FCPA community, this post takes issue with Mendelsohn’s defense of the Siemens enforcement action.

In an “exclusive interview with the International Bar Association towards the end of 2009,” (see here) Mendelsohn stated that the Siemens enforcement action sends a “very, very strong message” and a “strong deterrent message.”

Among other things, Mendelsohn notes that the overall total of $1.6 billion that Siemens paid to U.S. (DOJ and SEC) and German authorities is “only a fraction of the costs that Siemens incurred as a result of the bribery conduct.” Mendelsohn legitimately notes that Siemens also was subject to a debarment proceeding at the World Bank which required Siemens to pay $100 million to help fight corruption over a period of time. Mendelsohn points out that “the cost of the investigation for the company and the remediation” “probably exceeded the fines that were assessed” and he also cites the “costs of disruption to Siemens’ business,” the replacement of members of Siemens’ board, and the discipline of “lots of sales people.”

Based on the Siemens’ resolution documents, the DOJ’s own statements about the case, and other information in the public domain, I strongly disagree that the Siemens enforcement action sends a “strong deterrent message.”

For starters, since when is the cost of getting caught, the legal and professional fees associated with getting caught, and the remediation associated with getting caught in a bribery scheme “unprecedented in scale and geographic scope” (those are DOJ’s words – not mine) part of the deterrence conversation?

I think every company in the world probably already assumed prior to the Siemens enforcement action that engaging in a bribery scheme “unprecedented in scale and geographic scope” would no doubt entail substantial legal and professional fees, employee terminations and other internal remediation costs upon getting caught. Thus, it is difficult to see how these pieces of the Siemens enforcement action send a “very strong message” or a “deterrent message.”

In a prior post (see here), I took a look at some of the Siemens numbers per the DOJ’s resolution documents. Looking at these numbers again is instructive in light of Mendelsohn’s comments.

The criminal information (see here) describes approximately $1.36 billion in payments Siemens made through various mechanisms, including approximately $555 million paid for unknown purposes (including approximately $341 million in direct payments to business consultants for unknown purposes) and approximately $806 million intended, in whole or in part, as corrupt payments to foreign officials. The criminal information, of course, does not charge Siemens with FCPA antibribery violations, so from the outset it is difficult to see how this case sends a “very strong message” or a “strong deterrent message.”

The Siemens resolution also included charges against certain of Siemens’ subsidiaries.

For instance, Siemens Argentina (see here) agreed to pay a $500,000 fine based on allegations that it made over $31 million in corrupt payments in exchange for favorable business treatment in connection with a $1 billion project in Argentina. Siemens Venezuela (see here) also agreed to pay a $500,000 fine based on allegations of making over $18 million in corrupt payments in exchange for favorable business treatment in connection with two major metropolitan mass transit projects in Venezuela. Likewise, Siemens Bangladesh (see here) agreed to pay a $500,000 fine based on allegations of making over $5 million in corrupt payments in exchange for favorable treatment during the bidding process on a mobile telephone project in Bangladesh?

When a fine amounts to a sliver of the improper payments allegedly made, and a sliver of a sliver of the business allegedly obtained or retained, since when does that send a “very strong message” or a “strong deterrent message?”

Finally, what sort of “very strong message” or “strong deterrent message” is sent when, on the same day a company settles a case for engaging in a bribery scheme “unprecedented in scale and geographic scope” the company also announces that it will be allowed to keep its coveted “responsible contractor” status with the U.S. government. It is further difficult to see the deterrence achieved by the Siemens enforcement action when, in the year since resolution, various U.S. government agencies, including the DOJ, continue to do substantial amounts of business with Siemens and its affiliate companies (see here for a prior post on this subject).

Far from sending a “very strong message” or a “strong deterrent message,” the Siemens enforcement action sends the message that corporate bribery, even if caught, can still result in a net positive.

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