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Innospec Gets Hit on Both Sides of the Atlantic

Last month (see here) Innospec, Inc. disclosed that it accured $40.2 million for potential settlement of corruption investigations on both sides of the Atlantic. Yesterday, on both sides of the Atlantic, it was announced that Innospec agreed to resolve these enforcement actions by, among other things, paying $40.2 million in combined fines and penalties. How’s that for an accurate corporate disclosure!

See here for the DOJ release and criminal information, here for the SEC release and complaint, and here for the SFO release and supporting documents.

If you are looking for additional evidence / validation that the DOJ and SFO cooperate in enforcement actions, this would be it!

As explained more fully below, the Innospec enforcement action is part Iraqi Oil for Food, part payment of excessive travel and entertainmet expenses, part Cuba, part Indonesia and it involves U.S. companies, U.K. entities, Swiss entities, U.S. citizens, British citizens, German citizens, South African citizens, and Iraqi citizens.

Innospec manufacturers and sells speciality chemicals and is apparently the “world’s only manufacturer of the anti-knock compound tetraethyl lead, used in leaded gasoline.”

DOJ

According to the DOJ criminal information (here), Innospec, Innospec Limited (a wholly-owned U.K. subsidiary), Alcor Chemie Vertriebs GmbH (a wholly-owned Swiss subsidiary), Ousama Naaman (an agent for Innospec and Alcor in Iraq and elsewhere), and others, knowingly conspired: (i) to defraud the U.N. Oil for Food Program; (ii) to violate the FCPA’s antibribery provisions; and (iii) to violate the FCPA’s books and records provisions.

According to the information, the primary purpose of the conspiracy was to “obtain and retain lucrative business with the government of Iraq through payment and promise of payment of kickbacks and bribes to the Iraqi government and its officials.

In addition to the “standard” Oil for Food allegations found in previous enforcement actions (i.e. inflated commission payments to an agent which were then used to pay kickbacks to the government of Iraq), the information further alleges that “Naaman, on behalf of Innospec, paid approximately $150,000 in bribes to officials of the [Ministry of Oil (“MoO”)] to ensure” that a competitor’s product “failed a field trial test and therefore would not be used by the [MoO]…”

In addition, the information alleges that “Innospec and Naaman agreed to pay and promise to pay bribes, including but not limited to money, travel, gifts, and entertainment, to officials of the MoO to obtain and retain contracts.”

Among other overt acts, the information details an e-mail Naaman sent to, among others, Executive B (a U.S. citizen and former senior Innospec executive) that indicates “with [Director’s (a U.K. citizen and former Innospec Division Managing Director)] instructions, we proceeded, as we don’t want to discuss this issue in writing any further because it is so delicate, and as per [Director’s] instructions that we don’t elaborate in writing, for which I agree.”

According to the information, Innospec paid Naaman over $700,000 to reimburse him for payments to Iraqi officials.

The information also contains “travel” allegations including: that Innospec paid approximately $35,000 for eight Iraqi officials to travel to Switzerland for a morning meeting and “four days of sightseeing” complete with “9,000 in pocket money” for the officials;” that Naaman arranged for cash filled envelopes to be given to Iraqi officials visiting the U.K.; that Innospec paid for an Iraqi official’s “vacation with his wife in Thailand” a trip with cost approximately $13,000 including “pocket money” for the official; and that Alcor reimbursed Naaman $35,000 “to cover the cost of the travel of the three Iraqi MoO officials to Lebanon for the half-day meeting to finalize the 2008 Long Term Purchase Agreement, including hotel accomodations for six days, $1,800 for ‘entertainment, lunches, & dinners in Lebanon,’ $1,650 for ‘mobile phone cards for international calling + 3 cameras’ and $15,000 in ‘pocket money.'”

According to the information, all of these payments were improperly recorded on Alcor’s books and records (which were consolidatd with Innospec’s for purposes of financial reporting) as “commissions” or “sales promotion expenditures.”

In addition to the above described conspiracy charge, the information also charges five counts of wire fraud, five counts of FCPA antibribery violations and an FCPA books and records violation.

The DOJ release notes that, pursuant to a yet to be released plea agreement, “Innospec also admitted to selling chemicals to Cuban power plants in violation of the U.S. embargo against Cuba.” The DOJ release further notes that Innospec acknowledged paying “approximately $2.9 million in bribes to officials of the Indonesian government to secure sales.”

According to the DOJ release, as part of the plea agreement, “Innospec agreed to pay a $14.1 million criminal fine and to retain an independent compliance monitor for a minimum of three years to oversee the implementation of a robust anti-corruption and export control compliance program and report periodically to the DOJ.” According to the release, “Innospec also agreed to fully cooperate with the DOJ and other U.S. and foreign authorities in ongoing investigations of corrupt payments by Innospec employees and agents.”

In other words, stayed tuned for more. Previously, Naaman (the agent) was indicted (see here).

In annoucing the charges, Assistant Attorney General Lanny Breuer noted that “[t]oday’s case is a win for law-abiding companies trying to compete fairly in the marketplace” and that “fraud and corruption cannot be viewed simply as a cost of doing business.”

For more on the Innospec plea hearing, including Judge Ellen Segal Huvelle’s concern about the compliance monitor, see here for Christopher Matthew’s piece from Main Justice. For more on compliance monitors, and the controversy often associated with them, see here.

SEC

In its complaint (here), the SEC alleges that “[f]rom 2000 to 2007, Innospec violated the anti-bribery, books and records and internal control provisions of the FCPA when it routinely paid bribes in order to sell Tetra Ethyl Lead (“TEL”) … to government owned refineries and oil companies in Iraq and Indonesia.”

According to the SEC, “Innospec’s former management did nothing to stop the bribery activity, and in fact authorized and encouraged it.” The SEC alleges that “Innospec’s internal controls failed to detect the illicit conduct, which continued for nearly a decade.”

According to the SEC, “[i]n all, Innospec made illicit payments of approximately $6,347,588 and promised an additional $2,870,377 in illicit payments to Iraqi ministries, Iraqi government officials, and Indonesian government officials in exchange for contracts worth $176,717,341 in revenues and profits of $60,071,613.”

The SEC’s charges relating to Iraqi are substantively similar to the DOJ’s allegations in the criminal information and include both Iraqi Oil for Food conduct as well as additional improper conduct after the Oil for Food Program was terminated in late 2003.

The SEC’s complaint has more detail than the DOJ’s criminal information concerning Indonesia and alleges: (i) that “[f]rom 2000 until approximately 2005, Innospec used [a] Indonesian Agent [an Indonesian citizen] and his company to pay bribes of approximately $1,323,507 to Official X [a senior official at BP Migas, an Indonesian state owned oil and gas company … who previously was a senior official at the Ministry of Energy and Mineral Resources]”; (ii) that “in 2000 and 2001, Innospec also made payments [totaling $700,000] to government officials at Pertamina, another state owned oil compay related to BP Migas” through a “privately owned bank in Geneva, Switzerland;” and (iii) that Innospec “also bribed other officials at Pertamina in order to influence their decisions regarding TEL purchases.”

The SEC charged that “at least one U.S. person and officer was complicit in the scheme” and that “[m]any of the bribes were mischaracterized as legitimate commissions, travel and legal fees in Innospec’s books and records.”

According to the SEC, “as evidenced by the extent and duration of the improper payments to foreign officials made by Innospec, the improper recording of these payments in Innospec’s books and records, and the significant involvement of certain members of management at the highest levels of the company, Innospec failed to devise and maintain an effective system of internal controls to prevent or detect these anti-bribery and books and records violations.

The SEC release (here) notes that Innospec, without admitting or denying the SEC’s allegations, was ordered to pay $60,071,613 in disgorgement, but because of Innospec’s “sworn Statement of Financial Condition” all but $11,200,000 of that disgorgement will be waived. The release states that “[b]ased on its financial condition, Innospec offered to pay a reduced criminal fine of $14.1 million to the DOJ and a criminal fine of $12.7 million to the SFO. Innospec will pay $2.2 million to OFAC for unrelated conduct concerning allegations of violations of the Cuban Assets Control Regulations.

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Stay tuned for additional analysis of the SFO – U.K. prong of this enforcement action.

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.

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