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The Chiquita Enforcement Action – A Bunch Of Bananas With A Slippery Origin

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[This post is part of a periodic series regarding “old” FCPA enforcement actions]

If you think strict liability enforcement of the FCPA books and records and internal controls provisions is a recent invention, think again.

If you think off-the-rails FCPA enforcement (that is enforcement theories seemingly in conflict with actual legal authority) is a recent invention, think again.

A dubious FCPA enforcement action occurred in 2001 when the SEC announced this administrative cease and desist order finding that Chiquita Brands International Inc. violated the books and records and internal controls provisions of the Foreign Corrupt Practices Act.

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A Case Study In Risk Aversion Or What Happens When Defendants Fight Back

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[This post is part of a periodic series regarding “old” FCPA enforcement actions]

Previous posts here and here highlighted the 2001 DOJ/SEC FCPA enforcement action against KPMG Siddharta Siddharta & Harsono (KPMG-SSH) and Sonny Harsono and Baker Hughes regarding alleged improper payments in connection with an Indonesia tax assessment. All of the defendants resolved the enforcement actions without putting the DOJ/SEC to its burden of proof (the risk aversion portion of this post).

However, also in 2001 the SEC charged Eric Mattson (the former CFO of Baker Hughes) and James Harris (the former Controller of Baker Hughes) with Foreign Corrupt Practices Act offenses based on the same substantive allegations. Unlike the other defendants, as highlighted in this post, Mattson and Harris fought back – a process that resulted in a federal court judge dismissing the FCPA charges against them.

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A Unique FCPA Enforcement Action Then And Still Unique Now

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[This post is part of a periodic series regarding “old” FCPA enforcement actions]

As highlighted in this prior post, the DOJ used to civilly enforce the Foreign Corrupt Practices Act. One of enforcement actions highlighted, indeed the last time the DOJ used this express statutory provision, was a 2001 enforcement action against KPMG Siddharta Siddharta & Harsono and Sonny Harsono.

It was a unique FCPA enforcement action at the time (believed to be the first time the DOJ/SEC had ever brought an FCPA action against a professional services firm – i.e. a law firm or accounting firm) and still remains unique in that the DOJ/SEC are believed to have never again brought an FCPA enforcement action against a professional services firm.

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The First Travel And Entertainment Enforcement Action

[This post is part of a periodic series regarding “old” FCPA enforcement actions]

In 1999, the DOJ brought this civil complaint for a permanent injunction against Metcalf & Eddy Inc., the successor by merger of Metcalf & Eddy International Inc. (M&E International – a U.S. environmental engineering firm).  It was a notable case – the first Foreign Corrupt Practices Act enforcement action based solely on travel and entertainment issues.

The conduct at issue focused on sewage and wastewater treatment facility projects in Alexandria, Egypt sponsored by the United States Agency for International Development (“USAID”) for the benefit of the Alexandria General Organization for Sanitary Drainage (“AGOSD”), an alleged instrumentality of the Government of Egypt.

The complaint alleged that Metcalf & Eddy and M&E International provided excessive travel and entertainment expenses to the Chairman of AGOSD “to induce the official to use his influence to effect and influence an act of the Government of Egypt” in connection with two contracts (1) an approximate $11 million wastewater treatment facility project and (2) an approximate $25 million architectural and engineering services project.

The complaint alleged:

“Although the [contracts] were awarded by USAID, the prospective contractors and their bids were subject to review by a Technical Review Board comprised of five voting members.  AGOSD held a voting position on each of the boards, which position was shared by two AGOSD representatives.  As members of the Technical Review Boards, the AGOSD representatives participated in the evaluation and scoring of bidders.  Although the AGOSD Chairman himself did not participate in the evaluation and scoring of bidders in the selection process, officials at M&E International knew that we was capable of exerting influence upon his subordinates, including the AGOSD officials who sat on the Technical Review Boards.  […]  In addition, M&E International officers knew that the Chairman could influence the selection process through direct communications with USAID regarding his preferences and that he could directly or indirectly impede the ability of M&E International to successfully complete its obligations under the contracts.”

The complaint focused on two trips the AGOSD Chairman made to the United States at the invitation of M&E International during time periods in which the awarding of the contracts were under consideration by USAID.  According to the complaint “the Chairman’s wife and two children accompanied him on both trips at M&E International’s expense.”

According to the complaint, the first trip (approximately 20 days) included travel to Boston, Washington, D.C., Chicago and Orlando.  The complaint stated that during this trip “the AGOSD Chairman was invited to a water conference in Chicago.” According to the complaint, the second trip (approximately 13 days) involved travel to Paris, Boston and San Diego.

The complaint alleged that both of the contracts at issue required that travel associated with the contracts be in accord with Federal Travel Regulations (FTRs) and that under the regulations the Chairman was entitled to receive, in advance, a cash per diem payment to cover certain travel-related expenses.  The complaint alleged that the Chairman received 150% of his estimated per diem expenses and that USAID authorized the amount based upon M&E International’s representation that no accommodations were available within the per diem amount.

The complaint alleged:

“In each case, the payment of 150% of per diem was not a necessary expense, and in neither case was the payment of the extra 50% justified or documented by M&E International as required by the FTRs.”

The complaint also alleged that once the Chairman and his family were in the U.S. “M&E International paid for most of the travel and entertainment expenses incurred by and on behalf of the Chairman and his family, despite the fact that the Chairman had already received funds for his own per diem expenses.”  According to the complaint, “under these circumstances, the advance per diem payments were, in effect, unrestricted cash payments to the Chairman.”

The complaint also alleged that M&E International “paid to upgrade the Chairman’s airline tickets to first class for both of his trips to the United States” and that “M&E International’s provision of the first class tickets was a payment of a thing of value to the Chairman.”  The complaint also alleged that M&E International’s payment of the first class tickets for the Chairman’s wife and children were also “a payment of a thing of value to the Chairman.”

The complaint also alleged that during the relevant time period, “M&E International failed to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflected the payment of money and things of value to or for the benefit of the Chairman.”  It is interesting to note that the complaint contains these allegations even though Metcalf & Eddy and M&E International were “domestic concerns” under the FCPA and thus the books and records and internal controls provisions did not even apply.

Finally, the complaint stated that M&E International did not “have any training or compliance program that educated its employees concerning the conduct prescribed by the FCPA.”

It is further interesting to note that the “means and instrumentality of interstate commerce” alleged in the complaint was a “commercial aircraft.”

Without admitting or denying the allegations in the DOJ’s civil complaint, in this Consent and Undertaking M&E agreed to “maintain a compliance and ethics program designed to detect and prevent violations of the FCPA and other applicable foreign bribery laws.”  The consent and undertaken set forth the minimum standards of such a program.  In the consent and undertaking M&E also agreed to implement various financial and accounting procedures consistent with the FCPA’s books and records and internal controls provisions.

Finally, in the consent and undertaking, M&E agreed to pay a civil fine in the amount of $400,000 and reimburse the U.S. for the costs of the investigation in the amount of $50,000.

Bribery Of A Foreign Official On U.S. Soil

[This post is part of a periodic series regarding “old” FCPA enforcement actions]

The core enforcement action described below highlights a rare instance of FCPA violations being charged along with violations of the U.S. domestic bribery statute.  The enforcement action is also a rare instance of the United States being the location where the foreign official was allegedly bribed.

Control Systems Specialist / Darrold Crites

In this 1998 criminal information, the DOJ alleged that Control Systems Specialist, Inc. (“Control Systems” a company engaged in the purchase, repair, and resale of surplus military equipment) and its President Darrold Crites made improper payments to a Brazilian Air Force Lt. Colonel (“Col. Z”) stationed at Wright Patterson Air Force Based in Ohio.  The information describes Col. Z  as follows.

“Col. Z was the Foreign Liaison Officer for the Air Force of the Republic of Brazil … and was authorized to make purchases of military equipment on behalf of the Brazilian Aeronautical Commission (“BAC”), the purchasing agent of the Brazilian Air Force.  The BAC was an “instrumentality” of the Government of Brazil.”

The DOJ alleged that Crites met with a civilian employee of the United States Air Force who worked at Wright Patterson Air Force Base as the Command Country Manager (“Country Manager”) for Brazil and was responsible for representing the United States Air Force in dealings with Col. Z.

According to the DOJ, “Country Manager agreed to provide Crites with surplus part numbers, model numbers, and U.S. military sources of surplus parts in exchange for the promise of payments of money, using information he would obtain through his position as a civilian employee of the United States Air Force.”

In turn, the DOJ alleged that “Crites would thereafter purchase the surplus equipment identified by the Country Manager, recondition it, and resell the same to the BAC.”  According to the DOJ, Col. Z would approve the BAC’s purchase from Control Systems in exchange for payments of money.  Specifically, the DOJ alleged that Crites paid Col. Z “a series of bribes, disguised as ‘consultant fees,’ for each bid accepted by Col. Z on behalf of the BAC.”

The DOJ also alleged that Crites formed a separate company (“Company Y”) with the assistance of an Ohio businessman (“Businessman X”) to pay bribes to Col. Z “in exchange for his approval of Company Y’s bids to sell surplus U.S. military equipment to the BAC.”

According to the DOJ, Crites and Businessman X, as officers of Company Y “arranged not less than forty-four purchases of surplus U.S. military equipment for repair and resale to the BAC.”  The DOJ alleged as follows.

“Some of the surplus equipment was obtained by the BAC through the Defense Reutilization and Marketing Service (DRMS) under the Foreign Military Sales (FMS) program and then provided to Control Systems for repair.  Other equipment was purchased directly by Control Systems or Company Y, repaired, and then sold to the BAC.  In all cases, after each purchase was effected, Col. Z was paid for his approval of the transactions.”

According to the DOJ, Crites, Control Systems and others “paid a total of $99,000 to the Country Manager and a total of $257,139 to Col. Z.”

Based on the above allegations, the DOJ charged Control Systems and Crites with conspiracy to violate the FCPA’s anti-bribery provisions and a substantive violation of the FCPA’s anti-bribery provision.  Based on the allegations involving the Country Manager, the DOJ also charged Control Systems and Crites with violating 18 USC 201, the domestic bribery statute.

Pursuant to this plea agreement, Crites pleaded guilty to the three charges described above.  In the plea agreement, Crites agreed to cooperate with the DOJ.  According to the statement of facts in the plea agreement, “Crites and Control Systems received approximately $672,298 as a result of the contracts received from the government of Brazil.”  According to a docket entry, Crites was sentenced to three years probation (with the first six months of probation to be spent in home confinement with electronic monitoring with work release privileges) and 150 hours of community service.

Pursuant to this plea agreement, Control Systems also pleaded guilty to the three charges described above.  According to a docket entry, Control Systems was ordered to pay a $1,500 fine and was sentenced to one year probation.

International Materials Solutions Corp. / Thomas Qualey

Based on the same core allegations in the Control Systems / Crites enforcement action, in 1999 the DOJ also alleged in this criminal information that International Materials Solutions Corporation (“IMS” – like Control Systems an Ohio company that engaged in the purchase, repair, and resale of surplus military equipment) and Thomas Qualey (the President of IMS) conspired to violate the FCPA’s anti-bribery provisions and violated the FCPA’s anti-bribery provisions.  According to the information, IMS and Qualey paid a total of $67,563 to Col. Z to induce the approval by Col. Z of a bid by IMS for the acquisition and repair of ten fork lift trucks.

Pursuant to this plea agreement, Qualey pleaded guilty to the two charges described above.  According to the Statement of Facts in the plea agreement, Qualey and IMS “received approximately $392,250 as a result of the contracts received from the Government of Brazil.”  According to this judgment, Qualey was sentenced to three years probation ((with the first four months of probation to be spent in home confinement with electronic monitoring with work release privileges) and 150 hours of community service and ordered to pay a $5,000 fine.

Pursuant to this plea agreement, IMS pleaded guilty to the two charges described above.  According to this judgment, IMS was ordered to pay a $1,000 fine plus and was sentenced to one year probation.

See this prior post for another FCPA enforcement in connection with the U.S. Foreign Military Sales program.

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