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You Don’t Need To Look Far For The Location Resulting In Several Individual FCPA Enforcement Actions

Haiti2

This prior post highlighted the DOJ’s recently announced Foreign Corrupt Practices Act enforcement action against Joseph Baptiste for alleged bribery in Haiti.

The Baptiste enforcement action is just the latest in a long list of FCPA enforcement actions (all of the criminal actions were against individuals associated with small, privately-held companies) alleging improper business conduct in Haiti (a country located a short distance from the U.S.).

What makes this unusual is that Haiti attracts (relatively speaking compared to many other countries) little business activity by those subject to the FCPA. But then again, perhaps one of the reasons for this lack of business activity is the FCPA itself. As highlighted in this 2010 post, some called for the FCPA not to apply to doing business in Haiti arguing: “one of the best way to help Haiti” is to “pass a law stating that the FCPA 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.”

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

chiquita

[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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In Depth On The ADM Enforcement Action

On December 20th, the DOJ and SEC announced (here and here) that Archer Daniels Midland Company (“ADM”) agreed to resolve a Foreign Corrupt Practices Act based on the conduct of an indirect subsidiary in Ukraine and a joint venture partner in Venezuela.  The enforcement action had been expected for some time (as noted in this prior post, in November the company disclosed that it had agreed in principle to the settlement).

[Although announced on December 20th, original source documents relevant to the enforcement action did not become publicly available until December 24th and the documents are still not on the DOJ’s FCPA website].

The enforcement action involved a DOJ criminal information against Alfred C. Toepfer International Ukraine Ltd. resolved via a plea agreement, a non-prosecution agreement involving ADM, and a SEC settled civil complaint against ADM.

ADM entities agreed to pay approximately $54 million to resolve alleged FCPA scrutiny ($17.7 million in criminal fines to resolve the DOJ enforcement action and $36.5 million to resolve the SEC enforcement action).

This post summarizes both the DOJ and SEC enforcement actions.

DOJ

Alfred C. Toepfer International Ukraine Ltd. (ACTI Ukraine)

The criminal information begins as follows.

“At certain times between in or around 2002 and in or around 2008, the Ukrainian government did not have the money to pay value-added tax (“VAT”) refunds that it owed to companies that sold Ukrainian goods outside of Ukraine.” (emphasis added).

Thereafter, the information alleges, in pertinent part, as follows.

“In order to obtain VAT refunds from the Ukrainian government, ACTI-Ukraine [an indirect 80%-owned subsidiary of ADM], with the help of its affiliate, Alfred C. Toepfer International GmbH (ACTI Hamburg) [an indirect 80%-owned subsidiary of ADM], paid third-party vendors to pass on nearly all of that money as bribes to government officials.”

“In order to disguise the bribes, ACTI Ukraine and ACTI Hamburg devised several schemes involving the use of Vendor 1 [a U.K. export company that used both truck and rail services for the export of goods from Ukraine] and Vendor 2 [a Ukrainian insurance company that provided insurance policies for commodities].  In some instances, ACTI Ukraine and ACTI Hamburg paid Vendor 1, a vendor that provided export-related services for ACTI Ukraine, to pass on nearly all the money they paid it as bribes to Ukrainian government officials in exchange for those officials’ assistance in obtaining VAT refunds for and on behalf of ACTI Ukraine.  In addition, ACTI Ukraine purchased unnecessary insurance policies from Vendor 2 so that Vendor 2 could use nearly all of that money to pay bribes to Ukranian government officials in exchange for those officials’ assistance in obtaining VAT refunds for and on behalf of ACTI Ukraine.”

“In total, ACTI Ukraine, ACTI Hamburg, and their executives, employees, and agents paid roughly $22 million to Vendor 1 and Vendor 2 to pass on nearly all of that money to Ukrainian government officials to obtain over $100 million in VAT refunds.  These VAT refunds gave ACTI Ukraine a business advantage resulting in a benefit to ACTI Ukraine and ACTI Hamburg of roughly $41 million.”

“In furtherance of the bribery scheme, employees from ACTI Ukraine and its co-conspirators, while in the territory of the United States, and specifically in the Central District of Illinois, communicated in-person, via telephone, and via electronic mail with employees of ACTI Ukraine’s and ACTI Hamburg’s parent company, Archer Daniels Midland Company (ADM), which owned an 80% share of the ACTI entities, about the accounting treatment of VAT refunds in Ukraine.  During those communications, the ACTI employees mischaracterized the bribe payments as “charitable donations” and “depreciation.”

Based on the above allegations, the DOJ charged ACTI Ukraine with conspiracy to violate the FCPA’s anti-bribery provisions under 78dd-3.  This prong of the FCPA has the following jurisdictional element.

“while in the territory of the United States, corruptly to make use of the mails or any means or instrumentality of interstate commerce or to do any other act in furtherance” of a bribery scheme.

There is no allegation in the criminal information that anyone associated with ACTI Ukraine “while in the territory of the U.S.” made use of the mails or any means or instrumentality of interstate commerce.”

Rather, the information alleges, as to overt acts, as follows.

“[In July 2002 – 11 years prior to the enforcement action] executives from ACTI Hamburg [not the defendant ACTI Ukraine] traveled to ADM’s headquarters in Decatur, Illinois for business meetings.  In one of those meetings, these ACTI executives met with executives from ADM’s tax department and discussed ACTI Ukraine’s ability to recover VAT refunds and the way in which ACTI Ukraine was accounting for the write-down of those refunds.  During this discussion, the ACTI Hamburg executives stated that the way in which ACTI Ukraine was recovering its VAT refunds was by making charitable donations.  ACTI Ukraine was not making such donations in conjunction with VAT recovery.  In fact, ACTI Ukraine was writing down its VAT receivable based upon anticipated payments to Vendor 1.”

The other overt acts alleged in the information all concern e-mail traffic, none of which fits the jurisdictional element of “while in the territory of the U.S.”

The above charge against ACTI Ukraine was resolved via a plea agreement in which the company admitted, agreed, and stipulated that the factual allegations in the information are true and correct and accurately reflects the company’s “criminal conduct.”

As set forth in the plea agreement, the advisory Sentencing Guidelines calculation for the conduct at issue was between $27.3 million and $54.6 million and ACTI Ukraine agreed to a $17,711,613 criminal fine.  The plea agreement states as follows.

“The parties have agreed that a fine of $17,771,613 reflects an approximately thirty-percent reduction off the bottom of the fine range as well as a deduction of $1,338,387 commensurate with the fine imposed by German authorities on ACTI Hamburg.”

The plea agreement further states that this fine amount is the “appropriate disposition based on the following factors”:

“(a) Defendant’s timely, voluntary, and thorough disclosure of the conduct; (b) the Defendant’s extensive cooperation with the Department; and (c) the Defendant’s early, extensive, and unsolicited remedial efforts already undertaken and those still to be undertaken.”

As is common in corporate FCPA enforcement actions, the plea agreement contains a “muzzle clause” prohibiting ACTI Ukraine or anyone on its behalf from making public statements “contradicting the acceptance of responsiblity” of ACTI Ukraine

ADM

The NPA between the DOJ and ADM concerns the above Ukraine conduct as well as alleged conduct in Venezuela.  Only the Venezuela conduct is highlighted below.

The Statement of Facts attached to the NPA states as follows regarding “conduct relating to Venezuela.”

“From at least in or around 2004 to in or around 2009, when customers in Venezuela purchased commodities through ADM Venezuela [a joint venture between ADM Latin America (ADM Latin – a wholly owned subsidiary of ADM) and several individuals in Venezuela], the customers paid for the commodities via payment to ADM Latin.  During this time period, a number of customers overpaid ADM Latin for the commodities by including a brokerage commission in the cost of the commodities.  At the instruction of ADM Venezuela, including Executive A [a high-level executive at ADM Venezuela] and ADM’s Latin’s customers, rather than repaying these excess amounts to the customer directly, ADM Latin made payments to third-party bank account outside of Venezuela, which, in many instances, were used to funnel payments to accounts owned by employees or principles of the customer.  In addition, ADM Venezuela personnel prepared invoices to ADM Latin’s customers that violated Venezuelan laws and regulations regarding foreign currency exchanges.”

The NPA states that in approximately 1998, “ADM identified the customer “commission” practice as a business risk and recognized that customers may attempt to engage in such transactions with ADM Latin through the prospective joint venture, and instituted a policy that prohibited the repayment of excess funds to any account other than that originally used by the customer to make the payment.  However, although this policy was made known to Executive A and some ADM Venezuela employees, it was initially not formalized and from in or around 1999 until in or around 2004 the same practices continued.  The customers submitted excess payments to ADM Latin, claiming that the overpayment was attributable to deferred credit expenses (“DCE”).”

The NPA further states as follows.

“In or around 2004, ADM conducted an audit of ADM Venezuela due to an issue pertaining to Executive A and uncovered the payments to third-party bank accounts being made through DCE.  Although ADM took some remedial measures, including terminating the employment of the credit employee who had signed off on the refunds, conducting limited training on compliance for its joint venture partners, and instituting a written policy prohibiting refund payments of DCE to bank account different than the accounts from which the money came, the policy was narrowly drawn only to cover DCE payments.  ADM did not train ADM Latin employees and did not take adequate steps to monitor ADM Latin and ADM Venezuela to prevent such payments in forms other than DCE.  From in or around 2004 to in or around 2009, various customers, with the help of ADM Venezuela, including Executive A, began classifying these additional expenses as “commissions” or “commissions K,” rather than DCE, which were processed by the accounting department at ADM Latin, rather than the credit department.  Therefore, when the customers instructed that the excess “commissions” be paid to third-party entities at third-party bank accounts, ADM Latin authorized and made the payments.”

The NPA further states that “in or around 2008, Executive A, and others at ADM Venezuela negotiated the sale of soybean oil from ADM Latin to Industrias Diana [an oil company headquartered in Venezuela that was wholly owned by Petroleos de Venezuela, Venezuela’s state-owned and controlled national oil company].”  According to the NPA, in connection with this sale, “Broker 1 [a third-party agent that purportedly performed brokerage services for customers of ADM Latin, including Industrias Diana, in connection with the purchase of commodities] submitted an invoice to ADM Latin for the $1,735,157 commission amount, which ADM Latin paid to Broker 1’s bank account.  Broker 1 then transferred this amount, in large part, to an account in the name of an employee of Industrias Diana.”

The NPA states as follows.

“On a number of other occasions, ADM Latin made payments to Broker 1’s bank account in connection with the purchase of commodities by other customers.  Broker 1 then transferred those amounts, in large part, to bank accounts outside of Venezuela in the name of the principals of those customers.  In total, ADM Latin transferred roughly $5 million to Broker 1.”

According to the NPA, certain of Broker 1’s transfers were to “accounts owned and controlled by Executive A, as well as numerous transfers to a company in which Executive A had ownership interests.”

The NPA states that the DOJ will “not criminally prosecute ADM … for any crimes … related to violations of the internal controls provisions of the FCPA arising from or related to improper payments by the Company’s subsidiaries, affiliates or joint ventures in Ukraine and Venezuela … and any other conduct relating to internal controls, books and records, or improper payments disclosed by the Company to the Department prior to the date on which this Agreement is signed.”

The NPA has a term of three years and ADM “agreed to pay a monetary penalty of $9,450,000 provided, however, that any criminal penalties that might be imposed by the Court on ACTI Ukraine in connection with its guilty plea and plea agreement … will be deducted from the $9,450,000 penalty agreed to under this Agreement.”

Pursuant to the NPA, ADM agreed to “report to the Department periodically regarding remediation and implementation of the compliance program and internal controls, policies, and procedures, as described in Attachment C” to the NPA.

In the DOJ release, Acting Assistant Attorney General Mythili Raman stated:

“As today’s guilty plea shows, paying bribes to reap business benefits corrupts markets and undermines the rule of law.  ADM’s subsidiaries sought to gain a tax benefit by bribing government officials, and then attempted to deliberately conceal their conduct by funneling payments through local vendors.  ADM, in turn, failed to implement sufficient policies and procedures to prevent the bribe payments, although ultimately ADM disclosed the conduct, cooperated with the government, and instituted extensive remedial efforts.  Today’s corporate guilty plea demonstrates that combating bribery is and will remain a mainstay of the Criminal Division’s mission.  We are committed to working closely with our foreign and domestic law enforcement partners to fight global corruption.”

The release further states:

“The agreements acknowledge ADM’s timely, voluntary and thorough disclosure of the conduct; ADM’s extensive cooperation with the department, including conducting a world-wide risk assessment and corresponding global internal investigation, making numerous presentations to the department on the status and findings of the internal investigation, voluntarily making current and former employees available for interviews, and compiling relevant documents by category for the department; and ADM’s early and extensive remedial efforts.”

SEC

The SEC’s complaint (here) is based on the same Ukraine allegations set forth in the above DOJ action.

In summary fashion, the complaint alleges:

“This matter involves violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by ADM. At certain times between 2002 and 2008, Alfred C. Toepfer, International G.m.b.H. (“ACTI Hamburg”) and its affiliate, Alfred C. Toepfer, International (Ukraine) Ltd. (“ACTI Ukraine”) paid approximately $22 million to two third-party vendors so that they could pass on nearly all of that money as bribes to Ukrainian government officials to obtain over $100 million in accumulated value added tax (“VAT”) refunds. These payments were recorded by ACTI Hamburg and ACTI Ukraine in their books and records as insurance premiums and other business expenses. ADM indirectly owns a majority of ACTI Hamburg and ACTI Ukraine through its 80% interest in Alfred C. Toepfer International B.V. (“ACTI”), and in 2002, ADM began consolidating ACTI’s financial results into its financial statements.

In order to disguise the purpose of these improper payments, ACTI Hamburg and ACTI Ukraine made certain payments for export-related services and insurance premiums to third parties, but, in fact, nearly all of these payments were intended to be passed on through these third parties as bribes to Ukrainian government officials in exchange for obtaining VAT refunds for and on behalf of ACTI Ukraine.

ACTI’s conduct went unchecked by ADM, and ACTI continued to make these improper payments for several years. ADM’s anti-bribery compliance controls in existence at the time were insufficient in that they did not deter and detect these payments. ACTI Hamburg and ACTI Ukraine created inaccurately described reserves in their books and records, manipulated commodities contracts that were kept open for an extended period of time, structured payments to avoid detection, and created fictitious insurance contracts to hide from ADM and others the payments to third-parties to secure VAT refunds in Ukraine.

Due to the consolidation of ACTI’s financial results, which included these inaccurately characterized payments, into ADM’s books and records, ADM violated [the FCPA’s books and records provisions]. ADM violated [the FCPA’s internal controls provisions] by failing to maintain an adequate system of internal controls to detect and prevent the illicit payments.”

Under the heading “ADM’s Violations,” the complaint states:

“ACTI Hamburg and ACTI Ukraine characterized their improper payments to the Shipping Company and the Insurance Company as insurance premiums and other business expenses even though nearly all of those payments were intended to be used for payment to Ukrainian government officials. Due to the consolidation of ACTI’s financial results into ADM’s, ADM’s financial records also failed to reflect the true nature of the payments.

Between 2002 and 2008, ADM’s anti-corruption policies and procedures relating to ACTI were decentralized and did not prevent improper payments by ACTI to third-party vendors in the Ukraine or ensure that these transactions were properly recorded by ACTI. In this respect, ADM failed to implement sufficient anti-bribery compliance policies and procedures, including oversight of third-party vendor transactions, to prevent these payments at ACTI Hamburg and ACTI Ukraine.

Through its various schemes, ACTI Ukraine and ACTI Hamburg paid roughly $22 million in improper payments to obtain more than $100 million in VAT refunds earlier than they otherwise would have. Getting these VAT refunds earlier—before the Ukraine endured a brief period of hyperinflation—gave ACTI Ukraine a business advantage resulting in a benefit to ADM of roughly $33 million.”

Under the heading “ADM’s Discovery and Subsequent Remedial Measures,” the complaint states:

“In mid-2008, after becoming aware of these insurance expenses, ADM controllers questioned ACTI executives regarding these expenses, particularly the basis for the accounting treatment of these expenses. An ACTI Ukraine employee disclosed to its outside auditors that the insurance payments were, in fact, made to secure VAT refunds. After ADM controllers received this information, ADM’s legal and compliance departments took action, which led to an immediate investigation in which ADM ultimately uncovered ACTI’s various schemes to secure VAT refunds.

Following discovery of these payments, ADM immediately retained outside counsel to conduct an internal investigation. As a result of the investigation, using its authority as majority shareholder through the ACTI supervisory board, ADM terminated certain ACTI executives. ADM then voluntarily conducted a world-wide risk assessment and corresponding global internal investigation, made numerous presentations to the Department of Justice and Securities and Exchange Commission, made current and former employees available for interviews, produced documents without subpoena, and implemented early and extensive remedial measures.”

As noted in the SEC’s release, ADM agreed to pay approximately $36.5 million to resolve the action (disgorgement of $33,342,012 plus prejudgment interest of $3,125,354), consented to the entry of a final judgment permanently enjoining it from future violations of the FCPA books and records and internal control provisions, and to report on its FCPA compliance efforts for a three year period.  The release states:

“The SEC took into account ADM’s cooperation and significant remedial measures, including self-reporting the matter, implementing a comprehensive new compliance program throughout its operations, and terminating employees involved in the misconduct.”

In the release, Gerald Hodgkins (Associated Director in the SEC’s enforcement division) stated:

“ADM’s lackluster anti-bribery controls enabled its subsidiaries to get preferential refund treatment by paying off foreign government officials.  Companies with worldwide operations must ensure their compliance is vigilant across the globe and their transactions are recorded truthfully.”

William Bachman and Jon Fetterolf (Williams Connolly) represented ADM.

Robin Bergen (Clearly Gottlieb Steen & Hamilton) represented ATCI Ukraine.

In this press release, ADM’s Chairman and CEO stated:

“In 2008, soon after we became aware of some questionable transactions by a non-U.S. subsidiary, we engaged an outside law firm and an accounting firm to undertake a comprehensive internal investigation.  In early 2009, we voluntarily disclosed the matter to appropriate U.S. and foreign government agencies and undertook a comprehensive anti-corruption global risk analysis and compliance assessment. We have also implemented internal-control enhancements, and taken disciplinary action, including termination, with a number of employees. The conduct that led to this settlement was regrettable, but I believe we handled our response in the right way, and that the steps we took, including self-reporting, underscore our commitment to conducting business ethically and responsibly.”

One Of The More Dubious FCPA Enforcement Actions Of All-Time

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

If one were to compile a list of the most dubious Foreign Corrupt Practices Act enforcement actions of all-time, near the top of the list would be the DOJ’s 1994 enforcement action against Vitusa Corporation and its President Denny Herzberg.

In this criminal information, the DOJ alleged that Vitusa (a New Jersey corporation engaged in the business of selling commodities and other goods) “entered into a lawful contract to sell milk powder to the Government of the Dominican Republic.”

The DOJ then alleged as follows.

“Although Vitusa delivered the milk powder to the Government of the Dominican Republic, the Dominican government did not pay Vitusa promptly for the milk powder received and, in fact, maintained an outstanding balance due for an extended period of time.  Vitusa, therefore, made various efforts to collect the outstanding balance due, including contacting officials of the United States and Dominican Governments to obtain their assistance in securing payment in full.”

According to the DOJ, “during the pendency of the contract, Servio Tulio Mancebo (a citizen of the Dominican Republic) communicated to Herzberg a demand made by a foreign official [a senior official of the Government of the Dominican Republic] which called for the payment of a ‘service fee’ to that official in return for the official using that official’s influence to obtain the balance due to Vitusa for the milk powder contract from the Dominican Government.”

According to the DOJ, “Herzberg agreed to Mancebo’s proposal that Vitusa would pay a ‘service fee’ indirectly to the foreign official.”  Thereafter, the DOJ alleged that the Government of the Dominican Republic made payment of $63,905.12 to Vitusa on the contract, but that following Herzberg’s instruction, “Mancebo retained $20,000 from that payment.”

According to the DOJ, Vitusa and Herberg knew “that all or a portion of the money would be given to the foreign official for the purpose of inducing the official to use that official’s position and influence with the Government of the Dominican Republic in order to obtain and retain business, that is, full payment of the balance due for Vitusa’s prior sale of milk powder to the Government of the Dominican Republic.”

Based on the above allegations, the DOJ charged Vitusa with violating the FCPA’s anti-bribery provisions.

Based on the same allegations, the DOJ also charged Herzberg with violating the FCPA’s anti-bribery provisions.  (See here for the DOJ’s Statement of Facts).

Vitusa pleaded guilty and agreed to pay a $20,000 criminal fine (see here).

Herzberg also pleaded guilty and was placed on two years probation (see here).  Herzberg was also ordered to pay a $5,000 criminal fine, but the judgment notes that “this fine shall be applied to the $20,000 fine to be paid by Vitusa Corp.”

In the DOJ’s sentencing document (as to both Vitusa and Herberg – see here and here) the DOJ stated:

“The unlawful payments to the foreign official were made in order to obtain payment of a legitimate and lawful obligation owed by the Government of the Dominican Republic to Vitusa.  There was no loss to any party and no individual victim exists.”

See here Vitusa Corp.’s current website.

FCPA aficionados know that the Vitusa / Herzberg action is not the only FCPA enforcement action in which an enforcement agency alleged that payments in connection with securing a bona fide receivable violated the anti-bribery provisions.  See here for the prior post on the SEC’s 2010 FCPA enforcement action against Joe Summers.

Support For FCPA Reform In An Unlikely Place

If one were to list the industries likely in favor of FCPA reform, the top of the list would likely include oil and gas, pharmaceutical, telecommunication, defense, and poultry.

Poultry?  That’s right.  In this November 1o, 2011 letter to U.S. Senator Mark Pryor (D-Ark) the Arkansas Poultry Growers Association advocates in favor of FCPA reform.  The copy quality of the letter is poor and below is what the letter appears to say.

*****

Senator Pryor:

We were pleased to read media accounts of your press conference last Friday in Little Rock when you touted agriculture and reducing burdensome regulation as primary components of your job package as well as helping the U.S. regain some economic footing.  Those words ring true to anyone in agriculture, such as us.

As much as the success of U.S. agriculture depends on exports to foreign market, it is critical that you understand what an impediment the Foreign Corrupt Practices Act has become to this end.  The FCPA was passed over 30 years ago yet has not had meaningful legislative amendments since.  Meanwhile, the global economy has and continues to rapidly change.  Clearly the FCPA has not kept up, it is now archaic, and most troubling the administration of this Act is now left to un-elected federal bureaucrats. 

Unfortunately these government attorneys use their interpretation to carry out significant decisions, some of which have resulted in fines and even criminal charges against U.S. interests.  Arkansas agriculture needs clarity on the FCPA and we shouldn’t have to wait any longer for that to occur.  It is true the Administration can make changes to this that would help, but the fact is it hasn’t, nor did the last Administration.  We respectfully urge you to carry this matter forward in the U.S. Senate and lead the way to clarify consistency in the implementation of the FCPA. 

By reforming the FCPA as soon as possible you will be taking proactive steps perfectly aligned with the tenants you presented in your jobs program.  We hope we can count on you to do just that, and without waiting on the Administration or anyone else to perform this responsibility.

Thank you in advance.

Roy Casares (Fayetteville, Ar.) Guy Pavey (Springdale, Ar.), James Pepples (Springdale, AR).

[Incidentally, Springdale, Ar. is home to Tyson Foods.  As detailed in this prior post, in February 2011, Tyson resolved an FCPA enforcement action]

*****

That’s democracy in action and more companies, trade groups, etc. ought to make their voice heard on FCPA reform issues.

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