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A Narrow Opinion Procedure Release

The DOJ recently issued FCPA Opinion Procedure Release No. 10-03 (see here).

As I discuss in this post, the disclosed facts suggest a broad range of potential issues, but the DOJ’s analysis is strangely narrow and would appear to contain a key acknowledgment (in contrast to prior opinion procedure releases) that local law does indeed matter when determining who is a “foreign official” under the FCPA.

The disclosed facts are as follows.

The “Requestor” is a “limited partnership established under U.S. law,” “headquartered in the U.S.,” and “engaged in development of natural resources trading and infrastructure.”

As described in the release:

“The Requestor is pursuing an initiative with a foreign government regarding a novel approach to particular natural resource infrastructure development. Because the approach is relatively novel and the market is dominated by a consortium of established companies, the Requestor determined that it required assistance in entering into discussions with the foreign government.”

The solution?

According to the release, the Requestor plans to contract with a consultant (a U.S. partnership whose sole owner is a U.S. citizen) who just so happens to have “extensive contacts in the business community and the government in the foreign country” and who “previously and currently holds contracts to represent the foreign government and act on its behalf, including performing marketing on behalf of the Ministry of Finance, and lobbying efforts in the U.S.”

In other words, to get things done in the foreign country, the Requestor would like to turn to someone who knows how to get things done in the foreign country and indeed someone who appears to have a track record of getting things done for the foreign government itself as the consultant is a “registered agent of the foreign government” and has “represented ministries of the foreign government that will play a role in the discussions of the Requestor’s initiative.”

Sounds like plenty of red flags.

In addition, according to the release, “the Consultant will be paid a signing bonus by the Requestor at the time the consulting contract is signed.” Further, the release notes that the “bulk of any payment by the Requestor to the Consultant under the contract will come in the form of success fees, should the Consultant’s efforts result in the foreign government entering into a business relationship with the Requestor.”

Ordinarily, the DOJ views third-party success fees in connection with foreign government business with a high-degree of suspicion.

But not so when it comes to the Requestor’s proposed consultant.

The release contains several “safeguards” the Requestor put in place to “ensure that no conflict of interest would arise between the Consultant’s representation of the Requestor and the Consultant’s separate and unrelated representation of the foreign government.”

Most FCPA enforcement actions involve allegations that a company paid something of value – such as a success fee – to a third-party, such as a consultant, who then provides a portion of the money to a “foreign official” in violation of the FCPA.

The analysis is often whether the company provided the thing of value to the third-party under circumstances that suggest the company was “aware of a high probability” that the thing of value would be passed along to the “foreign official.”

Although the Requestor’s disclosed facts do not suggest a perfect analogy, it is interesting to note that the DOJ’s analysis is not focused on the broad range of potential issues suggested by the disclosed facts.

Rather, in the words of the DOJ, “its opinion is limited to the narrow question of whether the Consultant would be a ‘foreign official’ for purposes of the payments under the consulting contract.”

On this issue, the DOJ stated that because the Consultant is ordinarily “an agent of the foreign government” the Consultant and its employees could be “foreign officials” for purposes of the FCPA “in certain circumstances.”

However, the DOJ was “satisfied that for purposes of the contract with the Requestor” the Consultant will “not be acting on behalf of the foreign government” and that therefore the Consultant is not a “foreign official.”

In its “foreign official” analysis, the DOJ cites local law – a reference to the Requestors disclosure that: “[a]s a matter of law local, the Consultant and its employees are not employees or otherwise officials of the foreign government, and the Requestor has secured a local law opinion that it is permissible for the Consultant to represent both the foreign government and the Requestor at the same time.”

The DOJ’s apparent acknowledgment that local law is indeed relevant in determining who is a “foreign official” under the FCPA is encouraging – even though it stands in contrast to the DOJ’s prior statements in opinion procedure releases.

For instance, in Opinion Procedure Release No. 94-01 (see here) the DOJ opined that a general director of a state-owned enterprise being transformed into a joint stock company is a “foreign official” under the FCPA despite a local law opinion that the individual would not be regarded as either a government employee or a public official in the foreign country.

Similarly, in Opinion Procedure Release No. 08-01 (see here) the DOJ opined that the “Foreign Private Company Owner” at issue was a “foreign official” for purposes of the FCPA notwithstanding the fact that other government officials in the country at issue concluded that the relevant privatization regulations did not apply to the “Foreign Private Company Owner” because he was not a government official for purposes of the regulations.

Even though the DOJ’s analysis in Opinion Procedure Release 10-03 is limited to the narrow question of whether the Consultant “would be a ‘foreign official’ for purposes of the payments under the consulting contract” it does seem to recognize that Requestor’s proposed relationship with the Consultant could perhaps pose some problems.

The substance of DOJ’s analysis ends as follows:

“The Department does not opine on any other aspect of the proposed contract or any other prospective conduct involved in the Request. Indeed, while the Consultant is not a foreign official for FCPA purposes under the limited facts and circumstances described by the Requestor, the proposed relationship increases the risk of potential FCPA violations. This opinion does not foreclose the Department from taking enforcement action should an FCPA violation occur during the execution of the consultancy.”

Requestors are usually able to gain some level of comfort from a DOJ “no enforcement action” opinion in an FCPA Opinion Procedure Release. However, given this last paragraph, the Requestor in Opinion Procedure Release 10-03 may still have some sleepless nights ahead.

*****

As to an oft heard criticism of the FCPA Opinion Procedure Release system – that it takes too long and thus is of little value in a world where business decisions must be made in days or weeks, not months – the release notes that materials were submitted by the Requestor on March 9th, supplemental materials were submitted by the Requestor on August 2nd, and the DOJ release was issued on September 1st.

Offices of Deutsche Telekom Searched

According to this September 3rd Dow Jones Newswire story “a German public prosecutor’s office based in Bonn [recently] searched German telecommunications company Deutsche Telekom AG offices as part of an initial inquiry into bribery allegations involving eight people, in response to a request from U.S. authorities.”

Deutsche Telekom holds a 59% stake in Magyar Telekom (see here) and the article suggests that the search is in connection with Magyar Telekom’s previously disclosed FCPA inquiry.

As the article notes, Hungary-based Magyar Telekom (see here), a company with ADRs listed on the New York Stock Exchange, disclosed suspicious payments and in December 2009 the company released this detailed press release.

In its Presentation of Second Quarter Results 2010 (see here) Magyar Telekom stated as follows:

“As previously announced, the DOJ, the SEC and the Ministry of Interior of the Republic of Macedonia have commenced investigations into certain of the Company’s activities that were the subject of the internal investigation. Further, in relation to certain activities that were the subject of the internal investigation, the Hungarian Central Investigating Chief Prosecutor’s Office has commenced a criminal investigation into alleged corruption with the intention of violating obligations in international relations and other alleged criminal offenses. Also, as previously announced, the Hungarian National Bureau of Investigation (“NBI”) has begun a criminal investigation into alleged misappropriation of funds relating to payments made in connection with the Company’s ongoing internal investigation and the possible misuse of personal data of employees in the context of the internal investigation. These governmental investigations are continuing, and the Company continues to cooperate with those investigations.

The Company, through its external legal counsel, has recently engaged in discussions with the DOJ and the SEC regarding the possibility of resolving their respective investigations as to the Company through negotiated settlements. The Company has not reached any agreement with either the DOJ or the SEC regarding resolution of their respective investigations, and discussions with both agencies are continuing. We may be unable to reach a negotiated settlement with either agency. Any resolution of the investigations could result in criminal or civil sanctions, including monetary penalties and/or disgorgement, against the Company or its affiliates, which could have a material effect on the Company’s financial position, results of operations or cash flows, as well as require additional changes to its business practices and compliance programs. The Company cannot predict or estimate whether or when a resolution of the DOJ or SEC investigations will occur, or the terms, conditions, or other parameters of any such resolution, including the size of any monetary penalties or disgorgement, the final outcome of these investigations, or any impact such resolution may have on its financial statements or results of operations. Consequently, the Company has not made any provisions in its financial statements as of June 30, 2010 with respect to the investigations.

Magyar Telekom incurred HUF 1.4 bn expenses [approximately $6.3 million] relating to the investigations in the first half of 2010, which are included in other operating expenses of Group Headquarters.”

Friday Roundup

The DOJ appears not interested in Anadarko’s allegations and more disclosure news … its all here in the Friday roundup.

DOJ Appears Not Interested in Anadarko’s Allegations

The Jubilee field is located off the coast of Ghana.

Participants in the West Cape Three Points Block include: Kosmos Energy LLC; Anadarko Petroleum Corporation; Tullow Oil PLC; Ghana National Petroleum Corporation; E.O. Group Ltd.; and Sabre Oil and Gas Limited.

Anadarko (here) apparently reported Kosmos (here) to U.S. authorities for possible violations of the FCPA “in connection with securing licensing and exploration and production agreements.”

Anadarko apparently made similar allegations against EO Group.

Apparently, the DOJ is not interested – according to this Bloomberg article by David Wethe and and Jason McClure.

The article, which cites to a May 12 letter from the DOJ to Kosmos and June 2 letter from the DOJ to EO Group, states that the DOJ does not intend to “take any enforcement action” or pursue charges against either company and that the DOJ closed its inquiry into the matter.

According to the article, “Ghana is pressing ahead with its own criminal inquiry into alleged corruption in the development of the field.”

Disclosure News

From Orthofix International N.V.’s Form 8-K filed August 31 (see here):

“During a recent internal management review of Promeca S.A. DE C.V. (“Promeca”), one of its Mexican subsidiaries, the Company received allegations of improper payments, allegedly made by certain of Promeca’s local employees in Mexico, to employees of a Mexican governmental health care entity. The Company has engaged Hogan Lovells US LLP and Deloitte Financial Advisory Services LLP to conduct an internal investigation focusing on compliance with the Foreign Corrupt Practices Act (“FCPA”) and voluntarily contacted the U.S. Securities and Exchange Commission and the United States Department of Justice to advise both agencies that an internal investigation is underway. During 2009, Promeca accounted for approximately one percent of the Company’s consolidated net sales and consolidated total assets. The internal investigation is in its early stages and no conclusions can be drawn at this time as to its outcome; however, the FCPA and related statutes and regulations provide for potential criminal and civil sanctions in connection with FCPA violations, including criminal fines, civil penalties, and disgorgement of past profits.”

From Diageo PLC’s 2010 Preliminary Results Release, dated August 26th (see here)

“SEC investigation: As previously reported, Diageo Korea and several of its current and former employees have been subject to investigations by Korean authorities regarding various regulatory and control matters. Convictions for improper payments to a Korean customs official have been handed down against two former Diageo Korea employees, and a former and two current Diageo Korea employees have been convicted on various counts of tax evasion. Diageo had previously voluntarily reported the allegations relating to the convictions for improper payments to the US Department of Justice and the US Securities and Exchange Commission (SEC). The SEC has commenced an investigation into these and other matters, and Diageo is in the process of responding to the regulators‟ enquiries regarding activities in Korea, Thailand, India and elsewhere. Diageo‟s own internal investigation in Korea, Thailand, India and elsewhere remains ongoing. The US Foreign Corrupt Practices Act (FCPA) and related statutes and regulations provide for potential monetary penalties, criminal sanctions and may result in some cases in debarment from doing business with governmental entities in connection with FCPA violations. Diageo is unable to quantify meaningfully the possible loss or range of loss to which these matters may give rise.”

*****

A good Labor Day weekend to all.

Friday Roundup

The DOJ appears not interested in Anadarko’s allegations and more disclosure news … its all here in the Friday roundup.

DOJ Appears Not Interested in Anadarko’s Allegations

The Jubilee field is located off the coast of Ghana.

Participants in the West Cape Three Points Block include: Kosmos Energy LLC; Anadarko Petroleum Corporation; Tullow Oil PLC; Ghana National Petroleum Corporation; E.O. Group Ltd.; and Sabre Oil and Gas Limited.

Anadarko (here) apparently reported Kosmos (here) to U.S. authorities for possible violations of the FCPA “in connection with securing licensing and exploration and production agreements.”

Anadarko apparently made similar allegations against EO Group.

Apparently, the DOJ is not interested – according to this Bloomberg article by David Wethe and and Jason McClure.

The article, which cites to a May 12 letter from the DOJ to Kosmos and June 2 letter from the DOJ to EO Group, states that the DOJ does not intend to “take any enforcement action” or pursue charges against either company and that the DOJ closed its inquiry into the matter.

According to the article, “Ghana is pressing ahead with its own criminal inquiry into alleged corruption in the development of the field.”

Disclosure News

From Orthofix International N.V.’s Form 8-K filed August 31 (see here):

“During a recent internal management review of Promeca S.A. DE C.V. (“Promeca”), one of its Mexican subsidiaries, the Company received allegations of improper payments, allegedly made by certain of Promeca’s local employees in Mexico, to employees of a Mexican governmental health care entity. The Company has engaged Hogan Lovells US LLP and Deloitte Financial Advisory Services LLP to conduct an internal investigation focusing on compliance with the Foreign Corrupt Practices Act (“FCPA”) and voluntarily contacted the U.S. Securities and Exchange Commission and the United States Department of Justice to advise both agencies that an internal investigation is underway. During 2009, Promeca accounted for approximately one percent of the Company’s consolidated net sales and consolidated total assets. The internal investigation is in its early stages and no conclusions can be drawn at this time as to its outcome; however, the FCPA and related statutes and regulations provide for potential criminal and civil sanctions in connection with FCPA violations, including criminal fines, civil penalties, and disgorgement of past profits.”

From Diageo PLC’s 2010 Preliminary Results Release, dated August 26th (see here)

“SEC investigation: As previously reported, Diageo Korea and several of its current and former employees have been subject to investigations by Korean authorities regarding various regulatory and control matters. Convictions for improper payments to a Korean customs official have been handed down against two former Diageo Korea employees, and a former and two current Diageo Korea employees have been convicted on various counts of tax evasion. Diageo had previously voluntarily reported the allegations relating to the convictions for improper payments to the US Department of Justice and the US Securities and Exchange Commission (SEC). The SEC has commenced an investigation into these and other matters, and Diageo is in the process of responding to the regulators‟ enquiries regarding activities in Korea, Thailand, India and elsewhere. Diageo‟s own internal investigation in Korea, Thailand, India and elsewhere remains ongoing. The US Foreign Corrupt Practices Act (FCPA) and related statutes and regulations provide for potential monetary penalties, criminal sanctions and may result in some cases in debarment from doing business with governmental entities in connection with FCPA violations. Diageo is unable to quantify meaningfully the possible loss or range of loss to which these matters may give rise.”

*****

A good Labor Day weekend to all.

Is BAE’s Monitor Independent?

As has been widely reported (see here and here among other places) David Gold has been appointed to be BAE’s corporate monitor.

Gold (here) is a partner at Herbert Smith LLP, a leading U.K. based law firm, a firm Gold has been associated with for 37 years and will continue to be associated with until his retirement on April 30, 2011.

BAE is a client of Herbert Smith, as the firm candidly acknowledged in this release announcing Gold’s appointment.

In the release, Herbert Smith states:

“This appointment is a mark of some distinction not only for David, reflecting as it does his international standing as one of the City’s leading lawyers, but also for Herbert Smith.”

Herbert Smith should have plenty of institutional knowledge as to many of the facts prompting the need for BAE’s monitor in the first place.

Why?

Because Herbert Smith previously represented Saudi Prince Bandar – the person at the epicenter of BAE’s alleged Saudi bribery scheme – the same bribery scheme that makes up the bulk of the DOJ’s bribery, yet no bribery allegations against BAE (see here).

A June 8, 2007 article in The Guardian (London) details how “Prince Bandar released a statement through his London solicitors Herbert Smith” the same day an article appeared in the Guardian titled “BAE accused of secretly paying £1 billion to Saudi Prince”.

On June 9, 2007, The Guardian detailed how “lawyers for Prince Bandar, the Saudi royal who received £1bn from BAE, accepted last night that he had spent $17m (£8.6m) on refurbishing one of his palaces, using cash from the US accounts concerned.” The article states, “[b]ut his lawyers, Herbert Smith, said that as the palace in Riyadh was an official residence, there was nothing illegal or untoward spending money out of a Saudi official defence ministry account held at Riggs Banks in Washington DC.”

In a June 13, 2007 article, The Guardian further notes how “the multi-milllionaire prince has hired for his defence the city lawyers Herbert Smith.”

So it turns out that BAE’s monitor is a lawyer who has been with Herbert Smith for 3 years – and will continue to be with Herbert Smith until his retirement – the same firm that represents BAE and the same firm that represented Saudi Prince Bandar the unnamed, yet widely reported, recipient of certain of BAE’s payments as set forth in the DOJ’s bribery, yet no bribery criminal information (see here).

Why does this matter?

Because the DOJ-BAE plea agreement (see here – Appendix C) requires an “independent corporate monitor.” The plea agreement states that this individual shall have “sufficient independence from [BAE] to ensure effective and impartial performance of the Monitor’s duties …”

Not only did the DOJ approve of David Gold as BAE’s monitor, but so too did the U.K. government – at least that is what the plea agreement requires.

So, what do you think? Is BAE’s monitor independent?

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