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Wal-Mart’s Recent Disclosures

Wal-Mart

Last week, Wal-Mart made several disclosures that touched upon its Foreign Corrupt Practices Act scrutiny and compliance enhancements.

This post highlights FCPA and related information in Wal-Mart’s Annual Report, Proxy Statement, Global Ethics and Compliance Report, and Global Responsibility Report.

The Global Ethics and Compliance Report in particular will be of interest to compliance practitioners.

In short, regardless of what may (or may not) have happened at Wal-Mart approximately 5-10 years ago, it is clear that Wal-Mart has become an industry-leader in FCPA compliance best practices. Anyone who fails to acknowledge this is simply not credible.

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In-Depth On VimpelCom

VimpelComThis post goes in-depth regarding yesterday’s FCPA enforcement action against VimpelCom (and a related entity) and summarizes the approximate 120 pages of resolution documents.

As highlighted in this previous post, The net $397.5 million U.S. portion of the settlement is the 5th largest FCPA settlement amount of all-time (see here for the current top-ten list).

The resolution documents contain numerous allegations about VimpelCom executive officers as well as various VimpelCom corporate committees that were engaged in the improper conduct. The allegations in the VimpelCom action are egregious and paint a picture of a culture of corruption at VimpelCom with high-level executives seeking legal cover at nearly every turn to facilitate the alleged bribery scheme.

DOJ

Unitel Criminal Information

The conduct at issue centers on  the Uzbek Agency for Communications and Information (“UzACI”), described as an Uzbek governmental entity authorized to regulate operations and formulate state policy in the sphere of communication, information, and the use of radio spectrum in Uzbekistan. According to the information,UzACI was a “department,” “agency,” and “instrumentality” of a foreign government under the FCPA.

The “foreign official” is described as follows: an individual whose identity is known to the United States, who was an Uzbek government official and a close relative of a high-ranking Uzbek government official. Foreign Official had influence over decisions made by UzACI.

Under the heading “Overview of the Corruption Scheme,” the information alleges:

“VimpelCom and UNITEL conspired with others to provide over $114 million in bribes in exchange for Foreign Official’s understood influence over decisions made by UzACI concerning Uzbekistan’s telecommunications market. VimpelCom and UNITEL officials understood that they had to regularly pay Foreign Official millions of dollars in order to continue to obtain necessary UzACI approvals and be allowed to obtain and retain Uzbek telecommunications business.

The conspiracy to make corrupt payments to Foreign Official occurred in stages:

a. First, before entering the Uzbek market, certain VimpelCom management understood that they were required to have Foreign Official as a “local partner” to conduct business in Uzbekistan. As part of its efforts to enter the market, VimpelCom paid $60 million to acquire Buztel, a company in which certain VimpelCom management knew that Foreign Official held an indirect interest via Shell Company [described as a company incorporated in Gibraltar that was beneficially owned by Foreign Official] because certain VimpelCom management knew that the acquisition of Buztel likely would facilitate VimpelCom’s acquisition of Unitel LLC and enable the company to conduct business in Uzbekistan.

b. Second, in 2006, VimpelCom and UNITEL corruptly entered into a lucrative partnership agreement with Foreign Official’s front company, Shell Company, in which Shell Company would obtain an indirect ownership interest in UNITEL that VimpelCom would later repurchase at a guaranteed profit. The true purpose of this agreement was to pay a $37.5 million bribe to Foreign Official in exchange for Foreign Official permitting VimpelCom and UNITEL to conduct business in Uzbekistan.

c. Third, VimpelCom, through a subsidiary, corruptly entered into a contract with Shell Company purportedly to obtain 3G frequencies in 2007. Certain VimpelCom management caused a $25 million bribe to be paid to Foreign Official via Shell Company so that Foreign Official would help UNITEL obtain these valuable telecommunications assets and permit it to conduct business in Uzbekistan.

d. Fourth, VimpelCom, directly or through a subsidiary, knowingly entered into fake consulting contracts with Shell Company for $2 million in 2008 and $30 million in 2011; in both cases, Shell Company did no real work to justify the large consulting fees. The corrupt purpose of these contracts was to provide Foreign Official with approximately $32 million in exchange for valuable telecommunications assets and to allow UNITEL to continue to conduct business in Uzbekistan.

e. Finally, VimpelCom and UNITEL made $20 million in bribe payments to Foreign Official in 2011 and 2012 through purposefully non-transparent transactions with purported “reseller” companies. Through these transactions with reseller companies, VimpelCom and UNITEL made and concealed corrupt payments to Foreign Official through Shell Company, which allowed UNITEL to continue to conduct business in Uzbekistan.

Certain VimpelCom and UNITEL management used U.S.-based email accounts to communicate with others and effectuate the scheme. In addition, VimpelCom and UNITEL each made numerous corrupt payments that were executed through transactions into and out of correspondent bank accounts at financial institutions in New York, New York.”

Next the information alleges how VimpelCom entered the Uzbek market and how company leaders sought legal cover in doing so. Specifically, the information alleges:

“In 2005, as part of a plan of expansion into the CIS region, VimpelCom sought to acquire an Uzbek telecommunications company. Two companies under consideration for acquisition were Unitel LLC, the second largest operator in Uzbekistan with approximately 300,000 subscribers, and Buztel, which was a much smaller operator with only 2,500 subscribers. Although there was a sound business case for purchasing Unitel LLC alone, VimpelCom ultimately purchased Buztel, as well. Certain VimpelCom management knew that Foreign Official held an indirect interest in Buztel, and that purchasing Buztel would ensure Foreign Official’s support for VimpelCom’s entry into the Uzbek telecommunications market.

As reflected in the minutes of a December 13, 2005 VimpelCom Finance Committee meeting, certain VimpelCom management explained that “due to certain political reasons (and this message should be taken by us as is), Buztel should be considered as an entry ticket into [the] Uzbekistan market and the buyer of Buztel would be considered a preferred buyer of Unitel.” Certain VimpelCom management explained that it was “more important to follow the political requirements suggested for entry into the market versus [the] questionable risk of acquisition of Unitel as [a] standalone” and VimpelCom would be “in opposition to a very powerful opponent and bring [the] threat of revocation of licenses after the acquisition of Unitel [as a] stand-alone.”

According to minutes of the meeting, a VimpelCom Finance Committee member questioned the wisdom of purchasing Buztel when Unitel LLC was of a size sufficient for nation-wide coverage and when the $60 million purchase price for Buztel could be better spent developing Unitel LLC’s network. The minutes reflect that same member also “expressed concern on the structure of the deal and FCPA issues” and noted “that if [VimpelCom] goes into this deal under this structure and if the structure violates the FCPA picture, [VimpelCom’s] name could be damaged.”

The Finance Committee voted to move forward with the acquisition process with the understanding that VimpelCom’s board should consider whether to “enter Uzbekistan through acquisitions of both Buztel (as a condition of entry into the market) and Unitel, . . . provided, however, that all issues related to FCPA should be resolved” or “to bid for Unitel only with understanding that potentially it may be more expensive and is connected with risks of business development without [the] local partner.”

During a December 14, 2005 VimpelCom board meeting, the likelihood of corruption was further discussed. For example, certain VimpelCom management explained that Foreign Official was actively influencing and interfering with Buztel’s operations because of Foreign Official’s ownership interest in the company. Certain VimpelCom management added that Foreign Official appeared to have control and influence over the purchase price for Unitel LLC. Certain VimpelCom management also warned that there could be a falling out with the local partner if VimpelCom only purchased Unitel LLC that would make it difficult, if not impossible, to operate in Uzbekistan. Concerns were raised about doing business with Foreign Official and the dangers associated with the Buztel transaction, and there was a recognition that a thorough analysis was needed to ensure that the Buztel payment was not merely a corrupt pretext for other services and favors. There were also numerous requests to ensure that the deal complied with the FCPA. Ultimately, VimpelCom’s board approved the acquisitions of Buztel and Unitel LLC, with a condition that FCPA analysis from an international law firm be provided to VimpelCom.

VimpelCom’s management then sought FCPA advice that could be used to satisfy the board’s requirement while allowing VimpelCom to proceed with a knowingly corrupt deal. Despite the known risks of Foreign Official’s involvement in Buztel, certain VimpelCom management obtained FCPA legal opinions from an international law firm supporting the acquisition of Unitel LLC and Buztel; however, certain VimpelCom management did not disclose to the law firm Foreign Official’s known association with Buztel. As a result, the legal opinion did not address the critical issue identified by the VimpelCom board as a prerequisite to the acquisition. Certain VimpelCom management limited the law firm’s FCPA review of the transaction to ensure that the legal opinion would be favorable.

Having obtained a limited FCPA legal opinion designed to ostensibly satisfy the board’s requirement, certain VimpelCom management then proceeded with the Buztel acquisition and corrupt entry into the Uzbek market. VimpelCom, through subsidiaries, purchased Buztel for approximately $60 million on or about January 18, 2006 and Unitel LLC for approximately $200 million on or about February 10, 2006, along with the assumption of some debt.”

Next, the information alleges how VimpelCom again sought legal cover in entering a local partnership with the Shell Company controlled by the “foreign official.”

“As VimpelCom entered the Uzbek market through the acquisitions of Unitel LLC and Buztel, certain VimpelCom management learned that VimpelCom would be required to enter into a partnership with Shell Company, which was ultimately controlled by Foreign Official, in order to conceal corrupt payments to Foreign Official in exchange for Foreign Official’s support to allow VimpelCom and UNITEL to do business in Uzbekistan.

VimpelCom structured the partnership agreement to hide the bribe payments to Foreign Official. Under the deal, Shell Company obtained an indirect interest of approximately 9 7% in UNITEL for $20 million, and Shell Company received an option to sell its shares back to UNITEL in 2009 for between $57.5 million and $60 million for a guaranteed net profit of at least $37.5 million. In proposing the partnership, VimpelCom justified it in part by explaining that the partner would provide the “[r]evision of the licensing agreement for the major licenses” and “transfer of frequencies,” while also noting that the direct transfer of frequencies was not allowed in Uzbekistan.

VimpelCom’s board approved the partnership on or about April 7, 2006, but its approval again was conditioned on “FCPA analysis by an international law firm” and required that the “the identity of the Partner . . . [be] presented to and approved by the Finance Committee.” VimpelCom received an FCPA opinion on the sale of the indirect interest in UNITEL to Shell Company on or about August 30, 2006. The FCPA advice VimpelCom received was not based on important details that were known to certain VimpelCom management and that certain VimpelCom management failed to provide to outside counsel, including Foreign Official’s control of Shell Company. In addition, documents, including minutes from the Finance Committee’s meeting on August 28, 2006, failed to identify the true identity of the local partner by name while noting the “extremely sensitive” nature of the issue.

On or about March 28, 2007, VimpelCom’s board unanimously approved the partnership agreement with Shell Company, and the deal progressed as planned. Associate A [the information alleges that Associate A was Foreign Official’s close associate and that when Shell Company was incorporated in 2004, Associate A was twenty years old and became Shell Company’s purported sole owner and director] signed the agreement on behalf of Shell Company as the “Director,” and on or about June 12, 2007, Shell Company transferred $20 million from its Latvian bank account to VimpelCom’s bank account. Less than three years later, in or around September 2009, Shell Company exercised its guaranteed option to have VimpelCom’s subsidiary repurchase Shell Company’s shares, and VimpelCom transferred $57,500,000 from its bank account to Shell Company’s bank 10 account in Hong Kong. Both transfers were executed through transactions into and out of correspondent bank accounts at financial institutions in New York, New York.

As a result of VimpelCom’s partnership agreement and transfer of funds to Shell Company, Foreign Official made a net profit of approximately $37.5 million and VimpelCom and UNITEL were able to continue to conduct business in Uzbekistan.”

The information next alleges how various VimpelCom executives and management used “contracts for fake consulting services with Shell Company in order to provide Foreign Official with approximately $32 million in exchange for valuable telecommunications assets and to allow UNITEL to continue to conduct business in Uzbekistan.” According to the indictment:

“VimpelCom did not conduct any FCPA analysis concerning this purported consulting services agreement with Shell Company. This was despite the fact that certain VimpelCom management had received a prior FCPA opinion concerning Shell Company, which explicitly excluded any FCPA analysis associated with consulting services provided by Shell Company. Moreover, during the earlier due diligence process, Shell Company had represented that “[Shell Company] does not contemplate entering into consultancy or similar agreement with VimpelCom . . . .”

The information further alleges:

“In 2011, Executive 1 [described as a high-ranking VimpelCom executive with responsibilities in the Commonwealth of Independent States (“CIS”) region, including oversight of UNITEL in Uzbekistan] conspired with Executive 2 [described as a person who worked with Executive 1 relating to VimpelCom’s business in the CIS region, including oversight of UNITEL in Uzbekistan] and others to direct an additional $30 million payment to Foreign Official through Shell Company. This $30 million bribe payment was made specifically to acquire 4G mobile communication frequencies for UNITEL, but was also part of the broader effort to enable UNITEL to continue to operate in the Uzbek telecommunications market without interference by Foreign Official.”

Regarding the 4G consulting agreement with Shell Company, the information alleges that it “caused substantial internal criticism by some VimpelCom executives, including those who were charged with approving the transaction.” According to the information:

“Certain VimpelCom management again sought an FCPA opinion from outside counsel to provide a plausible cover to go forward with the transaction. Certain VimpelCom management then failed to provide outside counsel with important information, most notably that Shell Company was known to be owned by Foreign Official, because certain VimpelCom management were willing to accept an opinion that focused on Shell Company as a third party without analyzing or addressing the nature of the transaction itself or its high dollar value.

Furthermore, the purported FCPA due diligence on Shell Company was flawed in design and execution. No in-house or outside lawyer ever directly contacted Shell Company’s purported owner, Associate A, and instead, the FCPA questionnaires purportedly designed to uncover beneficial owners and potential corruption risks were sent to intermediaries to respond. For example, on or about August 5, 2011, a VimpelCom in-house lawyer emailed FCPA questionnaires to Executive 1 to pass along “to the [Shell Company] representative to fill out.” On or about August 6, 2011, Executive 1 forwarded the FCPA questionnaires both to Executive 1’s personal email account and the personal email account of Associate B. Executive 1 also forwarded the email with the FCPA questionnaires to Executive 2 who replied: “Hardcore, of course . . . But in my opinion with the exception of the first and last names they can answer everything else.”

The information contains several allegations concerning “Witness” (a consultant functioning as a senior VimpelCom executive who was among the chief critics of the 4G consulting agreement with Shell Company). The information alleges:

“In or around August and September 2011, Witness continued to raise concerns. On or about September 2, 2011, Witness emailed a then in-house VimpelCom attorney to explain that Witness was “very concerned about this way of structuring the payment,” and Witness asked whether VimpelCom had received “any official ‘ok’ from US Governmental body/SEC . . . .” On or about September 5, 2011, Witness received a response from VimpelCom’s then in-house counsel that acknowledged that, “[t]his transaction deserves caution but on the legal side the 17 question boils down to whether there is a reasonable basis to believe that our counter-party will make illegal payments. We cannot establish conclusively that there will not be any illegal payments . . . .” VimpelCom’s then in-house counsel added, “. . . . our due diligence is our defense in the event that there is a claim against us so we have to ask ourselves whether the situation warrants additional due diligence. [We are] comfortable that additional due diligence is not warranted. We are going to monitor the process and ensure that real work is being done by the counter-party.” However, VimpelCom, including its in-house attorneys, did not thoroughly monitor the process to ensure that Shell Company performed any services. Once the FCPA opinion was obtained, VimpelCom proceeded with the deal.

The 4G consulting agreement required approvals from certain senior VimpelCom executives reviewing the transaction from their areas of expertise. After receiving repeated assurances from VimpelCom’s then in-house lawyers, in or around mid-September 2011, Witness eventually provided the sign-off for Witness’s expert area for the proposed 4G consulting agreement with Shell Company. However, Witness handwrote an unusual caveat below Witness’s signature: “This sign off is solely related to [my expert area]. My sign off confirm[s] that I have reviewed the technical [] position and approved with it.” Notably, certain other VimpelCom executives specifically limited their approval or expressed reservations before signing off on their expert areas. Executive 2 expressed no reservations before providing the necessary approval on behalf of the business unit.

Soon after providing the limited sign-off on the deal, Witness escalated the matter to the highest levels within VimpelCom management, with whom Witness met on or about September 30, 2011. However, certain VimpelCom management failed to act on Witness’s concerns and the 4G deal remained in place after the meeting.”

The information also alleges how the “reselling” process was used to facilitate the bribery scheme.  According to the information:

“Because of significant currency conversion restrictions in Uzbekistan and the inability to use Uzbek som (the Uzbek unit of currency) to obtain necessary foreign goods, UNITEL frequently entered into non-transparent transactions with purported “reseller” companies to pay foreign vendors in hard currency for the provision of goods in Uzbekistan. Typically, UNITEL would contract with a local Uzbek company in Uzbek som, and that Uzbek company’s related companies located outside of Uzbekistan would agree to pay an end supplier using the hard currency (usually, U.S. dollars). In February and March 2011, Executive 1 conspired with Executive 2 and others to take advantage of the murky reseller process to conceal a $10 million bribe to Foreign Official via Shell Company through various purported reseller transactions to Shell Company.

[…]

By using the reseller scheme, certain VimpelCom and UNITEL executives avoided additional scrutiny, including FCPA analysis, of the transactions and payments.”

Based on the above core conduct, the information charges one count of conspiracy to violate the FCPA’s anti-bribery provisions.

Unitel Plea Agreement

The plea agreements sets forth the advisory sentencing guidelines fine range of $732 million to $1.46 billion. The agreement then states:

“The parties agree that, in light of (a) the complexity of the overall dispositions with Unitel and its parent company, VimpelCom Ltd., and (b) the interrelationship among the charges and conduct underlying those dispositions, an application of the Alternative Fines Act, Title 18, United States Code, Section 3571(d), to this case would unduly complicate or prolong the sentencing process, so that the maximum fine under the Sentencing Guidelines is $500,000 as provided in Title 18, United States Code Section 3571(c)(3). The parties agree that, in light of the VimpelCom DPA, which requires VimpelCom to pay a total monetary penalty of $460,326,398.40 as a result of the misconduct committed by both VimpelCom Ltd. and the defendant, as well as the factors cited in the VimpelCom DPA, no fine should be imposed on the defendant.”

VimpelCom Information

Based on the same core conduct alleged above, VimpelCom was also charged with conspiracy to violate the FCPA’s anti-bribery and books and records provisions and a separate count of violating the FCPA’s internal controls provisions.

Under the heading “VimpelCom’s Failure to Implement and Enforce Internal Accounting Controls,” the information alleges:

“Throughout the time period of VIMPELCOM’s bribery of Foreign Official, VIMPELCOM failed to implement adequate internal accounting controls and failed to enforce the internal accounting controls it did have in place, which permitted the above-referenced bribe payments to occur without detection or remediation.

VIMPELCOM failed to implement a system for conducting, recording, and verifying due diligence on third parties, including joint venture partners, consultants, reseller companies, and suppliers to uncover their true nature, beneficial ownership, and possible corruption risks. Time and again, board members, executives, and employees of VIMPELCOM identified serious concerns with third parties, and VIMPELCOM still failed to undertake adequate due diligence.

Further, VIMPELCOM knowingly failed to require that all consulting agreements be for bona fide services, that agreed-upon payments were commensurate with the services to be performed, and that services paid for were, in fact, performed. VIMPELCOM knowingly failed to conduct meaningful auditing or testing of its consultant agreements, invoices, and payments, including those with Shell Company and, as demonstrated above, failed to conduct adequate investigations of corruption complaints. VIMPELCOM also had no policy regarding payments to bank accounts located in places where the contractual partner neither performed work nor had operations.

In 2011 and 2012, VIMPELCOM paid $20 million in bribes through singlesource decisions with reseller companies that allowed certain executives to structure nontransparent transactions. VIMPELCOM knowingly failed to implement and maintain adequate controls for approving and transacting with reseller companies and intermediaries to ensure that reseller companies were scrutinized and that single-source contracting decisions were justified. Certain VIMPELCOM and Unitel executives took advantage of these control failures to engage in transactions designed to obfuscate the actual purpose of the payments, which was to corruptly influence Foreign Official.

As a result of the facts described herein and the failures of VIMPELCOM’s management, VIMPELCOM also knowingly lacked a sufficient internal audit function to provide reasonable assurances that corporate assets were not used to make bribery payments to foreign officials and failed to enforce audit protocols or conduct adequate internal audits to detect and prevent criminal activity. As discussed above, VIMPELCOM knowingly failed to implement and enforce internal controls to keep a 2012 reseller transaction within a regularly conducted audit after Executive 2 intervened to cause its removal, thereby allowing a bribe payment to Foreign Official, through Shell Company, to go undetected.

VIMPELCOM management also knowingly failed to implement and maintain adequate controls governing processes concerning conflicts of interest. For example, certain VIMPELCOM management knew of a conflict with Associate B’s representation of Shell Company, because at the time Associate B was a chief executive of one of Unitel’s primary competitors in Uzbekistan. Moreover, Associate B requested to be contacted about work matters on a personal email account and through a pseudonym. VIMPELCOM failed to implement or enforce any meaningful policy to adequately scrutinize business deals with representatives who had such conflicts of interest or otherwise engaged in non-transparent activities.

Other failures that contributed to VIMPELCOM’s lax control environment were VIMPELCOM’s failure to enforce price thresholds that determined the required level of approval authority, failure to retain documentation of deliverables for contracts, and failure to adequately classify and obtain approvals for purported charitable contributions that were made in exchange for state-provided assets.

VIMPELCOM’s failures to implement and enforce adequate internal controls contributed to an environment where it was possible for VIMPELCOM and Unitel executives to pay Foreign Official through Shell Company over $114 million in bribes.

VIMPELCOM also had particularly severe deficiencies in its general compliance function and its anticorruption compliance policies and procedures. When VIMPELCOM entered the Uzbek market, it had no Chief Compliance Officer (“CCO”). To the extent that compliance was considered by VIMPELCOM, it was the responsibility of the legal department and was thought of as a “completeness check” that legal formalities were followed. When VIMPELCOM later did designate a CCO, whose formal title was the Head of Department of Compliance with Obligations and Disclosure of Information and Corporate Law, the junior executive selected had no background in compliance and was given no staff or support. Furthermore, all of VIMPELCOM’s compliance duties were expected to take a small fraction of the executive’s time. In fact, there was no dedicated compliance function at VIMPELCOM until 2013, and CCO was not a senior management group position until 2014.

During the duration of the conspiracy, certain high-level VIMPELCOM management knew of the FCPA, yet VIMPELCOM had little to no anticorruption compliance program, much less a program that was regularly and appropriately evaluated for effectiveness and provided appropriate incentives. VIMPELCOM’s only anticorruption policy was encapsulated in two, high-level paragraphs in VIMPELCOM’s code of conduct, which required consultation with the legal department “before providing anything of value to a government official.” In fact, VIMPELCOM’s legal department did no internal FCPA review of transactions. When corruption issues were identified in the above-mentioned cases, the subsequent “FCPA review” was seen as a “check list and a confirmation from [outside counsel].” As demonstrated above, certain VIMPELCOM management withheld crucial information in such situations in Uzbekistan from outside counsel and overly restricted the scope of FCPA opinions such that the advice given was of no value. Indeed, VIMPELCOM did not have a specific anti-corruption policy until February 2013. Training on the FCPA during the course of the corruption conspiracy, to the extent it existed at all, was inadequate and ad hoc. In short, rather than implement and enforce a strong anti-corruption ethic, VIMPELCOM sought ways to give itself plausible deniability of illegality while proceeding with business transactions known to be corrupt.”

Under the heading “Scheme to Falsify Books and Records,” the information alleges:

“Due to VIMPELCOM’s failure to implement effective internal accounting controls, VIMPELCOM, acting through certain executives and others, disguised on its books and records over $114 million in bribe payments made for the benefit of Foreign Official in exchange for VIMPELCOM and Unitel’s ability to enter and conduct business in the Uzbek telecommunications market.

Although all of VIMPELCOM’s and Unitel’s bribes to Foreign Official were funneled through Shell Company, it was part of the scheme that certain VIMPELCOM management and others used a variety of non-transparent transactions with different purported business purposes, described above, so that the payments would be inaccurately recorded as legitimate transactions. a. The bribe related to the partnership agreement in which Shell Company first purchased and then sold an indirect equity interest in Unitel was falsely recorded in VIMPELCOM’s consolidated books and records as the receipt of loan proceeds in 2007 to be repaid in 2009 and secured by shares in a VIMPELCOM subsidiary. b. The bribe related to the acquisition of 3G frequencies in 2007 was falsely recorded in VIMPELCOM’s consolidated books and records as the acquisition of an intangible asset, namely 3G frequencies, and as consulting expenses. c. The bribe in 2008 was falsely recorded in VIMPELCOM’s consolidated books and records as “submission and support documentation packages seeking assignment of 24 channels to Unitel” and treated as an acquisition of an intangible asset and consulting services. d. The bribe related to consultancy services associated with the acquisition of 4G frequencies in 2011 was falsely recorded in VIMPELCOM’s consolidated books and records as “consulting services” and treated as consulting services and as an acquisition of an intangible asset, namely 4G frequencies.

The bribes made through purported reseller transactions in 2011 and 2012 were falsely recorded in VIMPELCOM’s consolidated books and records as “professional services” expenses. VIMPELCOM also created, and caused to be created, false and backdated records to further conceal these improper payments. For example, each bribe payment was concealed by false contracts that were intended to create the appearance of legitimacy. Some of these contracts included provisions prohibiting unlawful payments, including payments that would violate the FCPA, even though certain VIMPELCOM and Unitel executives knew that the payments called for by the contracts were, in fact, bribes to Foreign Official in violation of the FCPA. At times, VIMPELCOM and Unitel executives also created false service acceptance acts, invoices, and other back-up documentation to justify supposedly legitimate business services when, in truth and in fact, those executives knew that no such work was actually performed to justify the generous payments made to Shell Company. Certain VIMPELCOM and Unitel executives also accepted plagiarized work product to falsely substantiate consulting work that was never performed.”

VimpelCom DPA

The criminal charges against VimpelCom were resolved through a DPA with a term of three years.

Under the heading “Relevant Considerations,” the DPA states:

The Offices enter into this Agreement based on the individual facts and circumstances presented by this case and the Company. Among the factors considered were the following: (a) the Company failed to self-disclose voluntarily its misconduct to the Offices after an internal investigation had been initiated and uncovered wrongdoing, and as a result the Company was not eligible for a more significant discount on the fine amount or the form of resolution; (b) the Company has provided to the Offices all relevant facts known to the Company, including information about individuals involved in the FCPA misconduct; (c) the Company received full cooperation and remediation credit of 25% for its substantial cooperation with the Offices, including-providing evidence (where not prohibited by relevant foreign data privacy and national security laws and regulations) uncovered during a previously conducted internal investigation; undertaking significant efforts to provide foreign evidence to the Offices (again where not prohibited by relevant foreign data privacy law and national security laws or regulations); conducting additional investigation independently, proactively, and as requested; voluntarily making foreign employees available for interviews; assisting with interviews of former employees; and collecting, analyzing, translating, and organizing voluminous evidence and information for the Offices (again where not prohibited by relevant foreign data privacy law and national security laws or regulations); (d) the Company received additional credit of 20% for its prompt acknowledgement of wrongdoing by Company personnel after being informed by the Offices of their criminal investigation, and the Company’s willingness to resolve promptly its criminal liability on an expedited basis; (e) the Company has engaged in extensive remediation, including terminating the employment of officers and employees when the Company determined that they were complicit in the unlawful payments or otherwise failed their responsibilities in connection with such payments; has been substantially upgrading its anti-corruption compliance program; has retained new leaders of its legal, compliance, and financial gatekeeper functions; and has committed to continue to enhance its compliance program and internal controls, including ensuring that its compliance program satisfies the minimum elements set forth in Attachment C to this Agreement; (f) despite these remedial efforts, the Company recognized the need for, and agreed to, the imposition of an independent compliance monitor, as set forth in Attachment D to this Agreement; (g) the Company has no prior criminal history; and (h) the Company has agreed to continue to cooperate with the Offices as provided below in any investigation of the Company and its officers, directors, employees, agents, and consultants relating to possible violations under investigation-by-the Offices …”.

The DPA sets forth the advisory sentencing guidelines fine range of $836 million to $1.67 billion. The DPA then states:

“The Company agrees to pay total monetary penalties in the amount of $460,326,398.40 (the “Total Criminal Penalty”), $40,000,000 of which will be paid as forfeiture … This Total Criminal Penalty is 45% below the bottom of the applicable Sentencing Guidelines fine range, which reflects a reduction of 25% for the Company’s full cooperation as permitted by relevant foreign data privacy and national security laws and regulations and a reduction of 20% for the Company’s prompt acknowledgement of wrongdoing and willingness to resolve its criminal liability on an expedited basis. The Company will pay $190,163,199.20 of-the-Total Criminal Penalty to the United States Treasury within ten (10)  business days of the sentencing by the Court of VimpelCom’s subsidiary Unitel LLC in connection with its guilty plea and plea agreement entered into simultaneously herewith, except that the parties agree that any criminal penalties that might be imposed by the Court on VimpelCom’s subsidiary Unitel LLC in connection with its guilty plea and plea agreement will be deducted from the $190,163,199.20. The Total Criminal Penalty will be offset by up to $230,163,199.20 for any criminal penalties paid to the Organization of the Public Prosecution Service of the Netherlands (“Dutch Prosecution Service”) in connection with the settlement of the Company’s potential prosecution in the Netherlands. Should any amount of such payment to the Dutch Prosecution Service be returned to the Company or any affiliated entity for any reason, then the remaining balance of the Total Criminal Penalty will be paid to the U.S. Treasury within ten (10) business days of such event. The Company and the Offices agree that this penalty is appropriate given the facts and circumstances of this case, including the Company’s prompt acknowledgment of wrongdoing, willingness to resolve its criminal liability on an expedited basis, full cooperation, and extensive remediation in this matter.”

SEC

The SEC’s settled civil complaint is based on the same core conduct alleged in the above DOJ action.

In summary fashion, the complaint alleges:

“From 2006 to at least 2012, VimpelCom offered and paid bribes to a government official in Uzbekistan in connection with its Uzbek operations. During the course of the bribery scheme, VimpelCom made or caused to be made at least $114 million in improper payments in order to obtain and retain business that generated more than $2.5 billion in revenues for VimpelCom.

These payments were primarily made through sham contracts, but were also, in certain instances, made under the guise of legitimate charitable contributions or sponsorships. These payments were improperly characterized in the books of records of VimpelCom’s subsidiaries as legitimate expenses, and consolidated in VimpelCom’s financial statements which were filed with the Commission throughout the relevant period.”

Unlike the DOJ resolution documents, the SEC complaint alleges under the heading “Payments to Charities” as follows.

“VimpelCom also made what were ostensibly charitable payments in order to improperly influence Local Partner A. In connection with corruptly influencing Local Partner A, representatives of Local Partner A directed VimpelCom to make at least $502,000 in payments to charities directly affiliated with Local Partner A.

Unitel had insufficient internal accounting controls and maintained inaccurate books and records regarding its charitable contributions. From 2009 and through 2013, Unitel provided approximately $38 million in sponsorships or charitable contributions in Uzbekistan. Despite the presence ofred flags, these transactions were not vetted to ensure that they were not improperly benefitting government officials.”

The complaint charges VimpelCom with violating the FCPA’s anti-bribery provisions, books and records provisions, and internal controls provisions.

Friday Roundup

Roundup2

Scrutiny alerts, compliance defense, be a scholar, industry news, and for the reading stack.  It’s all here in the Friday roundup.

Scrutiny Alerts

The Bank of New York Mellon Corp (BNY Mellon) recently disclosed:

“In January 2011, the Enforcement Division of the U.S. Securities and Exchange Commission (the “SEC Staff”) informed several financial institutions, including BNY Mellon, that it had commenced an inquiry into certain of their business practices and relationships with sovereign wealth fund clients.  BNY Mellon has fully cooperated with the SEC Staff’s investigation.  In the third quarter of 2014, the SEC Staff issued Wells notices to certain current and former employees of BNY Mellon, informing them that the SEC Staff has made a preliminary determination to recommend enforcement action against them for alleged violations of the U.S. Foreign Corrupt Practices Act in connection with the provision of a limited number of internships to relatives of sovereign wealth fund officials.  BNY Mellon received a similar Wells notice in the fourth quarter of 2014.  Although it is not possible to predict the ultimate resolution or financial liability with respect to this matter, BNY Mellon is currently of the opinion that the outcome of this matter will not have a material effect on BNY Mellon’s business, financial condition or results of operations.”

A Wells Notice is not common in the FCPA context.  As highlighted earlier this week regarding Cobalt, just because the SEC issues a Wells Notice does not mean there will be an enforcement action.

Compliance Defense

Singapore, a country hardly viewed as a slouch on law and order issues, is in the process of reviewing its Prevention of Corruption Act (PCA).  As noted in this Norton Rose Fulbright update, among the areas for potential reform is corporate liability and a compliance defense.  As noted in the update:

Corporate Liability

Prosecutions in Singapore for bribery-related offences have primarily focused on individuals. While Singapore law allows corporations to be prosecuted, and international obligations under the OECD Anti-Bribery Convention require corporations to be legally liable for corrupt practices, the reality is that it is evidentially difficult to prove that a corporation had the requisite intent and carried out the relevant corrupt conduct. This is usually proven by showing the individual who committed the crime can be regarded as the “embodiment of the company” or its “directing mind and will” – not an easy task in an era of large multinational corporations with complex decision-making trees.

Any reform to the PCA may do well to take a leaf out of the pages of Singapore’s own anti-money laundering law – the Corruption, Drug-Trafficking and Serious Crimes (Confiscation of Benefits) Act (CDSA). The CDSA renders money-laundering by a corporation a criminal offence that can be proven through the state of mind as well as the conduct of any “director, employee or agent” who was acting within the scope of his or her actual or apparent authority. In other words, the evidential threshold is significantly lowered and the outdated “directing mind and will” test is done away with.

Compliance Defense

If the threshold for proving corporate liability is lowered, some balance can be restored by introducing a compliance defence. A corporation that is found liable for bribes paid by its “director, employee or agent” can be absolved of legal liability if it can show that it took reasonable steps to prevent such corrupt practices from taking place. Such a compliance defence provides a legal impetus for companies to adopt prudent business practices and foster ethical corporate cultures through the implementation of anti-corruption compliance programs.

This notion of a compliance defence finds support in the form of the “adequate procedures” defence enshrined in the recent UK Bribery Act 2010, and has been the subject of a movement in the US to introduce a similar affirmative defence in the context of the reform of the Foreign Corrupt Practices Act (FCPA).

Be a Scholar

Trace International has announced that “applications for the 2015-2016 TRACE Scholar Program at the University of Washington School of Law are being accepted now until February 28, 2015.”  Click here and here to learn more.

Industry News

King & Spalding recently announced that Jason Jones (the Assistant Chief of the DOJ’s FCPA Unit) is returning to the firm.

As stated in the release:  “As a supervisor in the Justice Department’s FCPA unit, Jones oversaw investigations and prosecutions of corporations and their employees for making improper payments to foreign officials in business transactions. He is well versed in the Justice Department’s increasing enforcement in this area.”

In the release, Christopher Wray, leader of King & Spalding’s Special Matters and Government Investigations practice, states: “We are pleased to welcome Jason back to the firm. Jason is well-known by many lawyers in the firm – and highly respected. His FCPA oversight experience at a national level and his strong trial skills provide added bench strength to the broad range of defense work we offer our clients. Jason is a natural fit for our team.“

*****

Debevoise & Plimpton recently announced that “David A. O’Neil, former Acting Assistant Attorney General for the Criminal Division and former Deputy Assistant Attorney General for the Fraud Section at the Department of Justice, has joined the firm as a partner in Washington, D.C.”  As noted in the release, O’Neil “has experience across a broad range of high-profile matters, including the most significant FCPA prosecutions …”.

In this recent Corporate Crime Reporter interview, O’Neil talks about the shift of the corporate crime universe from New York City to Washington, D.C. and states:

“I have witnessed in my time in the Department a significant growth in the work that Main Justice is doing. It is not that the Southern District [of New York] is doing less. It’s that Main Justice is doing more. There are a number of reasons for that. Some are the result of the U.S. Attorney’s Manual, which requires that the Fraud Section have a role in every Foreign Corrupt Practices Act (FCPA) case. Much of it is FCPA driven.”

“When I started out, I actually worked some FCPA cases in private practice. But at that time, it was more of a niche practice. It was not the same kind of focus that it is now.”

“Today, in some ways, white collar practice is synonymous with FCPA practice. As a result, in every FCPA case, Main Justice’s Fraud Section is going to be an active player.”

Asked whether “the FCPA pipeline is still loaded,” O’Neil states:

“The FCPA is going to continue to be an active area. I don’t think we are anywhere near the end of the pipeline. In fact, you see the Department devoting greater resources, including through the creation of a dedicated FCPA unit at the FBI. My prediction would be that FCPA cases continue at their current pace or increase.”

For the Reading Stack

Reagan Demas (Baker & McKenzie) “Biting the Hands That Feed:  Corporate Charity and the U.S. Foreign Corrupt Practices Act.”

A Texas-sized double standard?  See here from the Texas Tribune in an article that begins as follows.  “It is illegal to bribe a public official in Texas, of course. But you might be surprised with what you can get away with if that public official is a state lawmaker.”

*****

A good weekend to all.

All About The Alstom Enforcement Action

Alstom

As mentioned in this previous post, last week the DOJ announced a $772 million FCPA enforcement action against Alstom and related entities.

While the Alstom enforcement action is the largest DOJ FCPA enforcement action of all-time, it is the second largest overall FCPA enforcement action of all-time behind the 2008 Siemens enforcement action ($450 million DOJ component and a $350 million SEC component).  To see the current FCPA top-ten settlement list, click here.

The Alstom resolution documents total approximately 400 pages and this post summarizes these documents.

At its core, the Alstom enforcement action involved alleged conduct in Indonesia, Saudi Arabia, Egypt, the Bahamas, and Taiwan. All of this conduct is alleged in the Alstom S.A. information as the basis for the company’s FCPA books and records and internal controls violations between 1998 and 2004.  The charges were resolved through a plea agreement.  (A future post will explore, among other issues, the irony of Alstom pleading guilty in 2014 to substantive legal provisions that last applied to the company in 2004 when it ceased to be an “issuer.”).  From there the conduct was apportioned to the following Alstom-related entities in related enforcement actions.

  • Alstom Network Schweiz AG (conspiracy to violate the FCPA’s anti-bribery provisions based on the Indonesia, Saudi Arabia, Egypt and Bahamas conduct and resolved through a plea agreement);
  • Alstom Power Inc. (conspiracy to violate the FCPA’s anti-bribery provisions based on the Indonesia, Saudi Arabia and Egypt conduct and resolved through a DPA);
  • Alstom Grid Inc. (conspiracy to violate the FCPA’s anti-bribery provisions based on the Egypt conduct and resolved through a DPA)

Alstom S.A. Information

According to the information, during the relevant time period, Alstom employed approximately 110,000 employees in over 70 countries.  The information contains specific allegations as to 9 individuals associated with Alstom and 9 consultants associated with Alstom.  As highlighted below, at its core, the Alstom enforcement action involved inadequate controls concerning the engagement, monitoring and supervision of the consultants.

The information alleges that “Alstom had direct and indirect subsidiaries in various countries around the world through which it bid on projects to secure contracts to perform power-related, grid-related, and transportation-related services, including for state-owned entities.”  According to the information, “Alstom’s subsidiaries worked exclusively on behalf of Alstom and for its benefit” and that Alstom “maintained a department called International Network that supported its subsidiaries’ efforts to secure contracts around the world.”  In addition, the information alleges that “within Alstom’s power sector, the company also maintained a department called Global Power Sales (“GPS”), which performed functions similar to International Network, in that GPS assisted Alstom entities or businesses in their efforts to secure contracts.”

The information contains a section titled “Overview of the Unlawful Scheme” that has two substantive sections “False Books and Records” and “Internal Accounting Controls.”

Under the heading “False Books and Records,” the information states.

“Alstom, acting through executives, employees, and others, disguised on its books and records millions of dollars in payments and other things of value given to foreign officials in exchange for those officials’ assistance in securing projects, keeping projects, and otherwise gaining other improper advantages in various countries around the world for Alstom and its subsidiaries.

In a number of instances, Alstom hired consultants to conceal and disguise improper payments to foreign officials. Alstom paid the consultants purportedly for performing legitimate services in connection with bidding on and executing various projects.  In reality, the Alstom personnel knew that the consultants were not performing legitimate services and that all or a portion of the payments were to be used to bribe foreign officials.  Alstom executives and employees falsely recorded these payments in its books and records as “commissions” or “consultancy fees.”

Alstom also created, and caused to be created, false records to further conceal these improper payments.  Alstom created consultancy agreements that provided for legitimate services to be rendered by the consultant, and included a provision prohibiting unlawful payments, even though the Alstom executives and employees involved knew that at times the consultants were using all or a portion of their consultancy fees to bribe foreign officials.  Moreover certain Alstom employees instructed the consultants to submit false invoices and other back-up documentation reflecting purported legitimate services rendered that those employees knew were not actually performed, so that Alstom could justify the payments to the consultants.

In other instances, Alstom paid bribes directly to foreign officials by providing gifts and petty cash, by hiring their family members, and in one instance by paying over two million dollars to a charity associated with a foreign official, all in exchange for those officials’ assistance in obtaining or retaining business in connection with projects for Alstom and its subsidiaries.  As with the consultant payments, Alstom knowingly and falsely recorded these payments in its books and records as consultant expenses, as “donations,” or other purportedly legitimate expenses.

Alstom employees, some of whom were located in Connecticut, knowingly falsified Alstom’s books and records in order to conceal the bribe payments that they knew were illegal and were contrary to Alstom’s written policy.  Alstom also submitted false certifications to USAID and other regulatory entities, falsely asserting that Alstom was not using consultants on particular projects when, in fact, consultants were being used, and asserting that no unlawful payments were being made in connection with projects when, in fact, they were.  Various other acts, including e-mail communications, passed through Connecticut.”

Under the heading “Internal Accounting Controls,” the information states:

 “Although Alstom had policies in place prohibiting unlawful payments to foreign officials, including through consultants, Alstom knowingly failed to implement and maintain adequate controls to ensure compliance with those policies.

Alstom knowingly failed to implement and maintain adequate controls to ensure meaningful due diligence for the retention of third-party consultants. A number of consultants that Alstom hired raised a number of “red flags” under Alstom’s own internal policies.  Certain consultants proposed for retention had no expertise or experience in the industry sector in which Alstom was attempting to secure or execute the project.  Other consultants were located in a country different than the project country.  At other times, the consultants asked to be paid in a currency or in a bank account located in a country different than where the consultant and the project were located.  In multiple instances, more than one consultant was retained on the same project, ostensibly to perform the very same services.  Despite, these “red flags,” the consultants were nevertheless retained without meaningful scrutiny.  To the contrary, those submitting consultants for possible retention at times did not make explicit the true reason for the consultants’ retention, as well as other relevant facts.  And certain executives who had the ability to ensure appropriate controls surrounding the due diligence process themselves know, or knowingly failed to take action that would have allowed them to discover, that the purpose of hiring the consultant was to conceal payments to foreign officials in connection with securing projects and other favorable treatment in various countries around the world for Alstom and its subsidiaries.

Alstom also knowingly failed to implement and maintain adequate controls for the approval of consultancy agreements.  During the relevant time period, Alstom’s consultancy agreements provided that payments to the consultants would only be made on a pro rata basis tied to project milestones or as Alstom was paid by the customer.  In certain instances, Alstom employees changed the amount and terms of payment for the consultants, in violation of the company’s own internal policies, so that Alstom could pay the consultants more money and make the payment sooner in order to generate cash available to bribe the foreign officials.  The Alstom executives and employees responsible for approving consultancy agreements did not adequately scrutinize these changes, and in certain instances were copied on e-mails in which the true purpose for the change was discussed.  During the relevant time period, Alstom also maintained an unwritten policy to discourage, where possible, consultancy agreements that would subject Alstom to the jurisdiction of the United States. To effectuate this policy, Alstom typically used consultants who were not based in the United States, and intentionally paid consultants in bank accounts outside of the United States and in currencies other than U.S. dollars.  The Alstom executives and employees responsible for approving consultancy agreements attempted to enforce this unwritten policy even when it meant that the consultant had to open an offshore bank account solely for the purpose of receiving payments from Alstom.

Alstom also knowingly failed to implement and maintain adequate controls for payments to consultants. In multiple instances, Alstom paid the consultants without adequate, or timely, documentation of the services they purported to perform.  At times, consultants sought help from Alstom to create false documentation necessary for payment approval.  In other instances, the consultants created false “proofs of service” long after the purported services were rendered.  In certain cases … a consultant sought assistance from an Alstom employee responsible for approving payment because, as the consultant explained to the Alstom employee, he did not want to include on his invoices the fact that his services included making unlawful payments.  During the relevant time period, Alstom did not engage in auditing or testing of consultant invoices or payments.  In many instances, requests for payments to consultants were approved without adequate review by Alstom knowing that the payments were being used, at least in part, to bribe foreign officials to obtain or retain business in connection with projects in various countries around the world for Alstom and its subsidiaries.”

Next, the information contains the following summary allegation.

“Alstom paid approximately $75 million in consultancy fees knowing that this money would be used, in whole or in part, to bribe or provide something of value to foreign officials to secure approximately $4 billion in projects in multiple countries, with a gain to Alstom of approximately $296 million.”

The information next contains specific allegations regarding Indonesia, Saudi Arabia, Egypt, the Bahamas, and Taiwan.

Indonesia

As to Indonesia, the information concerns various power projects in Indonesia through Indonesia’s state-owned and state-controlled electricity company, Perusahann Listrik Negara (“PLN”).  One such project was the Tarahan Project, a project to provide power-related services to the citizens of Indonesia at approximately $118 million and another such project was the Muara Tawar Block 5 Project, a project to expand the existing Muara Tawar power plant and provide additional power-related services to the citizens of Indonesia at approximately $260 million.  According to the information, Alstom subsidiaries bid on but were not awarded contracts related to other expansions of the Muara Tawar power plant.  In summary fashion, the information alleges as follows.

“In connection with these projects, Alstom disguised on its books and records millions of dollars and other things of value provided to Indonesian officials in exchange for those officials’ assistance in securing the power projects for Alstom and its subsidiaries.  Alstom also knowingly failed to implement and maintain adequate controls to ensure that no unlawful payments were being made through consultants to foreign officials in connection with these projects.”

The Indonesia allegations in the Alstom information are substantively similar to the allegations in the prior FCPA enforcement action against various individuals associated with Alstom Power.  (See here for the prior post and summary).

Saudi Arabia

As to Saudi Arabia, the information concerns bids for power projects with Saudi Electric Company (“SEC”), Saudi Arabia’s state-owned and state-controlled electricity company, and its predecessor entities.  According to the information, in connection with one project:

“Alstom disguised on its books and records tens of millions of dollars in payments and other things of value provided to Saudi officials to obtain or retain business in connection with the projects.  Alstom knowingly failed to implement and maintain adequate controls to ensure that no unlawful payments were being made to these officials.  The arrangements for these consulting agreements originated with [a separate international power company with which Alstom operated as a joint venture in 1999 and acquired in 2000]. Subsequently, Alstom honored, continued, and in certain instances renewed these consulting agreements without adequate diligence on what services were ostensibly being provided by these consultants, whether the consultants were capable of providing such services, whether the agreed upon consultancy fees were commensurate with such legitimate services, and despite the lack of documentation regarding what legitimate services were provided.”

In one instance, the information alleges that a consultant “was the brother of a high-level official at the SEC who had the ability to influence the award” of a project, “which certain Alstom employees knew.”  According to the information, this consultant was paid “approximately $5 million, with no documentation of any legitimate services having been performed [by the Consultant] commensurate with a $5 million fee and with no documentation of any technical or other expertise to justify such a fee.”  In another instance, the information alleges that another consultant “was a close relative of another high-level official at SEC who had the ability to influence the aware” of a project” which certain Alstom employees knew.”  According to the information, this consultant was paid at least $4 million under similar circumstances to those referenced above.

The information states as follows.

“In addition to paying consultants as a means of bribing key decision makers at the SEC, Alstom and its subsidiaries paid $2.2 million to a U.S.-based Islamic education foundation associated with [an SEC official believed to have 70% of the decision-making responsibility for SEC matters].  The payments were made in three installments, and internal records at Alstom reflect that these payments were included as expenses related [to the projects] rather than as a separate and independent charitable contribution.”

Egypt

As to Egypt, the information concerns bidding on various projects with the Egyptian Electricity Holding Company (“EEHC”), the state-owned and state-controlled electricity company in Egypt.  According to the information, “EEHC was not itself responsible for conducting the bidding [on projects], and instead relied on Power Generation Engineering & Services Co. (“PGESCo”), which was controlled by an acted on behalf of EEHC.”  According to the information, in connection with various projects, “Alstom disguised on its books and records millions of dollars and other things of value provided to Egyptian officials to obtain or retain business in connection with power projects for Alstom and its subsidiaries.  Alstom also knowingly failed to implement and maintain adequate controls to ensure that no unlawful payments were being made to these officials.  According to the information, Alstom used a consultant whose primary purpose “was not to provide legitimate consulting services to Alstom and its subsidiaries but was instead to make payments to Egyptian officials, including Asem Elgawhary who oversaw the bidding process.”  (See here for the prior post regarding the Elgawhary enforcement action).

The information also contains allegations concerning bidding on various grid projects with EEHC and the Egyptian Electricity Transmission Company (“EETC”), the state-owned and state-controlled electricity transmission company in Egypt.  According to the information, certain of these projects were “funded, at least in part, by the United States Agency for International Development (“USAID”).  According to the information:

“In connection with [these projects], Alstom disguised on its books and records payments and other things of value it provided to Egyptian officials in exchange for those officials’ assistance in securing and executing the transmission and distribution projects for Alstom and its subsidiaries.  Alstom also knowingly failed to implement and maintain adequate controls to ensure that no unlawful payments were being made to these officials.”

According to the information, an Alstom entity “repeatedly submitted false certifications to USAID in connection with these projects, and did not disclose that consultants were being used, that commissions were being paid, or that unlawful payments were being made.”

According to the information, “in addition to falsifying records in connection with the retention of consultants and their commission payments,” Alstom employees also “paid for entertainment and travel for [a high-level official] and other key decision-makers at EETC and EEHC, and provided those officials with envelopes of cash and other gifts during such travel.”

Bahamas

As to the Bahamas, the information concerns power projects with the Bahamas Electricity Corporation (“BEC”), the state-owned and state-controlled power company.  According to the information, “Alstom disguised in its books and records payments to Bahamian officials to obtain or retain business in connection with power projects for Alstom and its subsidiaries.  Alstom also knowingly failed to implement and maintain adequate controls to ensure that no unlawful payments were being made to these officials.

According to the information, Alstom retained a consultant “who, as certain Alstom employees knew, was a close personal friend” of a board member of BEC and that the primary purpose of the consultant was not to provide legitimate consulting services but instead to pay bribes to the official who had the ability to influence the award of the power contracts.  According to the information, Alstom did not perform any due diligence on the consultant even though the consultant had no knowledge about, or experience in, the power industry.  Rather, the information alleges, the consultant “sold furniture and leather products, and exported chemical products and spare parts.”

Taiwan

As to Taiwan, the information alleges that between 2001 and 2008, Alstom and its subsidiaries “began bidding on transport-related projects with various entities responsible for the construction and operation of the metro-rail system in Taipei, Taiwan, including Taipei’s Department of Rapid Transit System, known as “DORTS.”  According to the information, an Alstom entity formally retained a consultant on a DORTS project even thought the consultant did not have the requisite expertise in the transport sector.  According to the information, the consultant’s expertise was as a “wholesaler of cigarettes, wines and pianos.”

According to the information, “Alstom’s system of internal controls was inadequate as they related to the Taiwan projects.  Despite numerous red flags, Alstom personnel knowingly failed to conduct further diligence to ensure that payments to its consultants in Taiwan could not be used to make improper payments to Taiwanese officials after the projects were secured.”

Based on the above allegations, Alstom was charged with one count of violating the FCPA’s books and records provisions from 1998 to 2004 and one count of violating the FCPA’s internal controls provisions from 1998 to 2004.

Alstom S.A. Plea Agreement

In the plea agreement, Alstom admitted that it was an “issuer” during the relevant time period and admitted, agreed, and stipulated that the factual allegations set forth in the information were true and correct.

In the plea agreement, the parties agreed that the gross pecuniary gain resulting from the offense was $296 million.  The plea agreement sets forth an advisory sentencing guidelines range of $532.8 million to $1.065 billion.

Under the heading “failure to self-report,” the plea agreement states:

“The Defendant failed to voluntarily disclose the conduct even though it was aware of related misconduct at Alstom Power, Inc., a U.S. subsidiary, which entered into a resolution for corrupt conduct in connection with a power project in Italy several years prior to the Department reaching out to Alstom regarding its investigation.”

Under the heading “cooperation,” the plea agreement states:

“The Defendant initially failed to cooperate with the Department’s investigation, responding only to the Department’s subpoenas to the Defendant’s subsidiaries.  Approximately one year into the investigation, the Defendant provided limited cooperation, but still did not fully cooperate with the Department’s investigation.  The Defendant’s initial failure to cooperate impeded the Department’s investigation of individuals involved in the bribery scheme.  At a later stage in the investigation, the Defendant began providing thorough cooperation, including assisting in the Department’s investigation and prosecution of individuals and other companies that had partnered with the Defendant on certain projects.  The Defendant’s thorough cooperation did not occur until after the Department had publicly charged multiple Alstom executives and employees.”

Under the heading, “compliance and remediation,” the plea agreement states:

“The Defendant lacked an effective compliance and ethics program at the time of the offense.  Since that time, the Defendant has undertaken substantial efforts to enhance its compliance program and to remediate the prior inadequacies, including complying with undertakings contained in resolutions with the World Bank (including an ongoing monitorship) and the government of Switzerland, substantially increasing its compliance staff, improving its alert procedures, increasing training and auditing/testing, and cease the use of external success fee-based consultants.”

In the plea agreement, Alstom agreed to a so-called “muzzle clause” in which it agreed not, directly or indirectly through others, to make any public statement contradicting the acceptance of responsibility set forth in the plea agreement.

Pursuant to the plea agreement, Alstom agreed to a corporate compliance program with elements typically part of other FCPA settlements.

Pursuant to the plea agreement, Alstom agreed to report to the DOJ, at no less than 12 month intervals, for a three-year term, regarding remediation and implementation of the compliance program and internal controls, policies, and procedures.  The plea agreement references that Alstom is already subject to monitoring requirements pursuant to a February 2012 World Bank Resolution but states that “in the event that the Integrity Compliance Office [of the World Bank] does not certify that the Company has satisfied the monitoring requirements contained in the World Bank Resolution, the Company shall be required to retain an Independent Compliance Monitor.”

Alstom Network Schweiz AG Information

The information against Alstom Network Schweiz AG (formerly known as Alstom Prom AG), a subsidiary of Alstom headquartered in Switzerland and responsible for overseeing compliance as it related to Alstom’s consultancy agreements for many of Alstom’s power sector subsidiaries, is based upon the same Indonesia, Saudi Arabia, Egypt, and Bahamas conduct alleged in the Alstom information.

The Alstom entity is charged with conspiracy to violate the FCPA’s anti-bribery provisions under the dd-3 prong of the statute. According to the information, the “purpose of the conspiracy was to make corrupt payments to foreign officials in Indonesia, Saudi Arabia, Egypt, and the Bahamas in order to obtain and retain business related to power projects in those countries for and on behalf of Alstom and its subsidiaries.”

Alstom Network Schweiz AG Plea Agreement

In the plea agreement, the Alstom entity admitted, agreed, and stipulated that the factual allegations set forth in the information were true and correct.

Pursuant to the plea agreement, “the parties agree[d] that any monetary penalty in this case will be paid pursuant to the plea agreement between the DOJ and Alstom, S.A., the parent company of the Defendant, relating to the same conduct …”.

In the plea agreement, the Alstom entity agreed to a so-called “muzzle clause” in which it agreed not, directly or indirectly through others, to make any public statement contradicting the acceptance of responsibility set forth in the plea agreement.

The plea agreement contains the same corporate compliance program, reporting obligations, and monitor conditions as described in the Alstom plea agreement above.

Alstom Power Inc. Information

The information against Alstom Power Inc., a subsidiary of Alstom headquartered in Connecticut in the business of providing power generation-related services around the world, is based upon the same Indonesia, Saudi Arabia, and Egypt conduct alleged in the Alstom information.

Alstom Power is charged with conspiracy to violate the FCPA’s anti-bribery provisions under the dd-2 prong of the statute. According to the information, the “purpose of the conspiracy was to make corrupt payments to foreign officials in Indonesia, Saudi Arabia, and Egypt in order to obtain and retain business related to power projects in those countries for and on behalf of Alstom Power and its subsidiaries.”

Alstom Power Inc. DPA

In the DPA, Alstom Power admitted, accepted, and acknowledged that it was responsible for the conduct charged in the information.

The DPA has a term of three years and under the heading “relevant considerations” states as follows.

“The [DOJ] enters into this Agreement based on the individual facts and circumstances presented by this case and the Company.  Among the factors considered were the following:  (a) the company failed to voluntarily disclosed the conduct even though it had previously entered into a resolution for corrupt conduct in connection with a power project in Italy several years prior to the [DOJ] reaching out to Alstom regarding their investigation; (b) the Company and its parent initially failed to cooperate with the Department’s investigation, responding only to the Department’s subpoena.  Approximately one year into the investigation, the Company and its parent provided limited cooperation, but still did not fully cooperate with the Department’s investigation. The Company’s and its parent’s initial failure to cooperate impeded the Department’s investigation of individuals involved in the bribery scheme.  At a later stage in the investigation, the Company and its parent began providing thorough cooperation, including assisting in the Department’s investigation and prosecution of individuals and other companies that had partnered with the Company and its parent on certain projects.  The Company’s and its parent’s thorough cooperation did not occur until after the Department had publicly charged multiple current and former Alstom executives and employees; (c) the Company and its parent have undertaken substantial efforts to enhance its compliance program as part of the significant compliance and remediation improvements to Alstom S.A’s program, and has committed to continue to enhance their compliance program and internal controls, ensuring that its program satisfies the minimum elements set forth [in the DPA]; (d) General Electric Company, which intends to acquire the Company, has represented that it will implement its compliance program and internal controls at the Company within a reasonable time after the acquisition closes; and (e) the Company has agreed to continue to cooperate with the [DOJ] in any ongoing investigation …”.

In the DPA, the DOJ and the Company agreed that no monetary penalty will be paid by the Company because Alstom S.A., the parent company of the Company, has agreed to pay a fine of $772,290,000 related to the same underlying conduct.

In the DPA, Alstom Power agreed to a so-called “muzzle clause” in which it agreed not, directly or indirectly through others, to make any public statement contradicting the acceptance of responsibility set forth in the plea agreement.

The DPA contains the same corporate compliance program, reporting obligations, and monitor conditions as described in the Alstom plea agreement above.

Alstom Grid Inc. Information

The information against Alstom Grid, Inc. (formerly known as Alstom T&D, Inc.), a subsidiary of Alstom headquartered in New Jersey in the business of providing power grid-related services around the world, is based upon the same Egypt conduct alleged in the Alstom information.

Alstom Grid is charged with conspiracy to violate the FCPA’s anti-bribery provisions under the dd-2 prong of the statute. According to the information, the “purpose of the conspiracy was to make corrupt payments to foreign officials in Egypt in order to obtain and retain business related to power grid projects for and on behalf of Alstom Grid and Alstom and its subsidiaries.”

Alstom Grid Inc. DPA

In the DPA, Alstom Grid admitted, accepted, and acknowledged that it was responsible for the conduct charged in the information.

The DPA has a term of three years and contains the same relevant considerations described in the Alstom Power DPA above.

In the DPA, the DOJ and the Company agreed that no monetary penalty will be paid by the Company because Alstom S.A., the parent company of the Company, has agreed to pay a fine of $772,290,000 related to the same underlying conduct.

In the DPA, Alstom Power agreed to a so-called “muzzle clause” in which it agreed not, directly or indirectly through others, to make any public statement contradicting the acceptance of responsibility set forth in the plea agreement.

The DPA contains the same corporate compliance program, reporting obligations, and monitor conditions as described in the Alstom plea agreement above.

In this DOJ release, Deputy Attorney General James Cole stated:

“Alstom’s corruption scheme was sustained over more than a decade and across several continents. It was astounding in its breadth, its brazenness and its worldwide consequences. And it is both my expectation – and my intention – that the comprehensive resolution we are announcing today will send an unmistakable message to other companies around the world: that this Department of Justice will be relentless in rooting out and punishing corruption to the fullest extent of the law, no matter how sweeping its scale or how daunting its prosecution.”

Assistant Attorney General Leslie Caldwell stated:

“This case is emblematic of how the Department of Justice will investigate and prosecute FCPA cases – and other corporate crimes. We encourage companies to maintain robust compliance programs, to voluntarily disclose and eradicate misconduct when it is detected, and to cooperate in the government’s investigation. But we will not wait for companies to act responsibly. With cooperation or without it, the department will identify criminal activity at corporations and investigate the conduct ourselves, using all of our resources, employing every law enforcement tool, and considering all possible actions, including charges against both corporations and individuals.”

First Assistant U.S. Attorney Michael Gustafson of the District of Connecticut stated:

“Today’s historic resolution is an important reminder that our moral and legal mandate to stamp out corruption does not stop at any border, whether city, state or national. A significant part of this illicit work was unfortunately carried out from Alstom Power’s offices in Windsor, Connecticut. I am hopeful that this resolution, and in particular the deferred prosecution agreement with Alstom Power, will provide the company an opportunity to reshape its culture and restore its place as a respected corporate citizen.”

FBI Executive Assistant Director Robert Anderson Jr. stated:

“This investigation spanned years and crossed continents, as agents from the FBI Washington and New Haven field offices conducted interviews and collected evidence in every corner of the globe. The record dollar amount of the fine is a clear deterrent to companies who would engage in foreign bribery, but an even better deterrent is that we are sending executives who commit these crimes to prison.”

As noted in the DOJ release:

“To date, the department has announced charges against five individuals, including four corporate executives of Alstom and its subsidiaries, for alleged corrupt conduct involving Alstom. Frederic Pierucci, Alstom’s former vice president of global boiler sales, pleaded guilty on July 29, 2013, to conspiring to violate the FCPA and a charge of violating the FCPA for his role in the Indonesia bribery scheme. David Rothschild, Alstom Power’s former vice president of regional sales, pleaded guilty on Nov. 2, 2012, to conspiracy to violate the FCPA. William Pomponi, Alstom Power’s former vice president of regional sales, pleaded guilty on July 17, 2014, to conspiracy to violate the FCPA. Lawrence Hoskins, Alstom’s former senior vice president for the Asia region, was charged in a second superseding indictment on July 30, 2013, and is pending trial in the District of Connecticut in June 2015. The charges against Hoskins are merely allegations, and he is presumed innocent unless and until proven guilty. The high-ranking member of Indonesian Parliament was also convicted in Indonesia of accepting bribes from Alstom, and is currently serving a three-year term of imprisonment.

In connection with a corrupt scheme in Egypt, Asem Elgawhary, the general manager of an entity working on behalf of the Egyptian Electricity Holding Company, a state-owned electricity company, pleaded guilty on Dec. 4, 2014, in federal court in the District of Maryland to mail fraud, conspiring to launder money, and tax fraud for accepting kickbacks from Alstom and other companies. In his plea agreement, Elgawhary agreed to serve 42 months in prison and forfeit approximately $5.2 million in proceeds.”

In addition to the above DOJ press release, the DOJ also held a press conference, a rare event in connection with an FCPA enforcement action.  In this speech, Cole stated:

“We are here to announce a historic law enforcement action that marks the end of a decade-long transnational bribery scheme – a scheme that was both concocted and concealed by Alstom, a multinational French company, and its subsidiaries in Switzerland, Connecticut, and New Jersey.

Today, those companies admit that, from at least 2000 to 2011, they bribed government officials and falsified accounting records in connection with lucrative power and transportation projects for state-owned entities across the globe.  They used bribes to secure contracts in Indonesia, Egypt, Saudi Arabia, and the Bahamas.  Altogether, Alstom paid tens of millions of dollars in bribes to win $4 billion in projects – and to secure approximately $300 million in profit for themselves.

Such rampant and flagrant wrongdoing demands an appropriately strong law enforcement response.  Today, I can announce that the Justice Department has filed a two-count criminal information in the U.S. District Court for the District of Connecticut, charging Alstom with violating the Foreign Corrupt Practices Act, or FCPA, by falsifying its books and records and failing to implement adequate internal controls.  Alstom has agreed to plead guilty to these charges, to admit its criminal conduct, and to pay a criminal penalty of more than $772 million.  If approved by the court next year, this will be the largest foreign bribery penalty in the history of the United States Department of Justice.

In addition, I can announce that Alstom’s Swiss subsidiary is pleading guilty to conspiring to violate the FCPA.  And the company’s two American subsidiaries have entered into deferred prosecution agreements and admitted that they conspired to violate the FCPA.

Alstom’s corruption scheme was sustained over more than a decade and across several continents.  It was breathtaking in its breadth, its brazenness, and its worldwide consequences.  And it is both my expectation – and my intention – that the comprehensive resolution we are announcing today will send an unmistakable message to other companies around the world: that this Department of Justice will be relentless in rooting out and punishing corruption to the fullest extent of the law, no matter how sweeping its scale or how daunting its prosecution.  Let me be very clear: corruption has no place in the global marketplace.  And today’s resolution signals that the United States will continue to play a leading role in its eradication.

The investigation and prosecution of Alstom and its subsidiaries have been exceedingly complex – and they have required the utmost skill and tenacity on the part of a wide consortium of law enforcement officials throughout the country and across the globe.  I want to thank the Criminal Division’s Fraud Section and Office of International Affairs; the U.S. Attorney’s Offices in Connecticut, Maryland, and New Jersey; the FBI’s Washington Field Office and its Resident Agency in Meriden, Connecticut; the Corruption Eradication Commission in Indonesia; the Office of the Attorney General in Switzerland; the Serious Fraud Office in the United Kingdom; as well as authorities in Germany, Italy, Singapore, Saudi Arabia, Cyprus, and Taiwan, for their tireless efforts to advance this matter.  The remarkable cross-border collaboration that these agencies made possible has led directly to today’s historic resolution.  And this outcome demonstrates our unwavering commitment to ending corporate bribery and international corruption.  Our hope is that this announcement will serve as an inspiration – and a model – for future efforts.”

In this speech at the press conference, Caldwell stated:

“Today represents a significant milestone in the global fight against corruption.  It demonstrates the Department of Justice’s strong commitment to fighting foreign bribery and ensuring that both companies and individuals are held accountable when they violate the FCPA.  The guilty pleas and resolutions announced today also highlight what can happen when corporations refuse to disclose wrongdoing and refuse to cooperate with the department’s efforts to identify and prosecute culpable individuals.

Let me first explain how the scheme worked.  To conceal that it was the source of payments to government officials, Alstom funneled the bribes through third-party consultants who did little more than serve as conduits for corruption.  Alstom then dummied up its books and records to cover up the scheme.

Alstom’s corruption spanned the globe, and was its way of winning business.  For example, in Indonesia, Alstom and certain of its subsidiaries used consultants to bribe government officials – including high-ranking members of the Indonesian Parliament and the state-owned and state-controlled electricity company – to win several contracts to provide power-related services.  According to internal documents, when certain officials expressed displeasure that a particular consultant had provided only “pocket money,” Alstom retained a second consultant to ensure that the officials were satisfied.

In Saudi Arabia, Alstom retained at least six consultants, including two close family members of high-ranking government officials, to bribe officials at a state-owned and state-controlled electricity company to win two projects valued at approximately $3 billion.  As evidence that Alstom employees recognized that their conduct was criminal, internal company documents refer to the consultants only by code name.

Alstom similarly used consultants to bribe officials in Egypt and the Bahamas, and again Alstom employees clearly knew that the conduct violated the law.  In connection with a project in Egypt, a member of Alstom’s finance department sent an email questioning an invoice for consultant services and, in response, was advised that her inquiry could have “several people put in jail” and was further instructed to delete all prior emails regarding the consultant.

If approved by the court, Alstom’s criminal penalty of $772 million represents the largest penalty ever assessed by department in a FCPA case.  Through Alstom’s parent-level guilty plea and record-breaking criminal penalty, Alstom is paying a historic price for its criminal conduct — and for its efforts to insulate culpable corporate employees and other corporate entities.  Alstom did not voluntarily disclose the misconduct to law enforcement authorities, and Alstom refused to cooperate in a meaningful way during the first several years of the investigation.  Indeed, it was only after the department publicly charged several Alstom executives – three years after the investigation began – that the company finally cooperated.

One important message of this case is this:  While we hope that companies that find themselves in these situations will cooperate with the Department of Justice, we do not wait for or depend on that cooperation. When Alstom refused to cooperate with the investigation, we persisted with our own investigation.  We built cases against the various corporate entities and against culpable individuals.  To date, the department publicly has charged four Alstom corporate executives in connection with the corrupt scheme in Indonesia, which also chose not to cooperate, and another company’s executive in connection with the scheme in Egypt.  Four of these individuals already have pleaded guilty.  In addition, Marubeni Corporation, a Japanese trading company that partnered with Alstom in Indonesia, pleaded guilty to conspiracy to violate the anti-bribery provisions of the FCPA and substantive violations of the FCPA, and paid an $88 million criminal penalty.

Another important message from this case is that the U.S. increasingly is not alone in the fight against transnational corruption.  Earlier this year, Indonesia’s Corruption Eradication Commission, the KPK, assisted the department in its investigation.  And, in turn, the department shared with the KPK information that federal investigators had obtained, which the KPK used in its prosecution of a former member of the Indonesian Parliament for accepting bribes from Alstom-funded consultants.  This past spring, that Indonesian official was found guilty and sentenced to three years in an Indonesian prison.  Our partnership with Indonesian law enforcement authorities in this case means that both the bribe payors and bribe takers have been prosecuted.  And our investigation is not over yet.

This case is emblematic of how the Department of Justice will investigate and prosecute FCPA cases – and other corporate crimes.  We encourage companies to maintain robust compliance programs, to voluntarily disclose and eradicate misconduct when it is detected, and to cooperate in the government’s investigation.  But we will not wait for companies to act responsibly.  With cooperation or without it, the department will identify criminal activity at corporations and investigate the conduct ourselves, using all of our resources, employing every law enforcement tool, and considering all possible actions, including charges against both corporations and individuals.”

See here for an additional DOJ statement at the press conference.

In this Alstom release, Alstom CEO Patrick Kron stated:

“There were a number of problems in the past and we deeply regret that. However, this resolution with the DOJ allows Alstom to put this issue behind us and to continue our efforts to ensure that business is conducted in a responsible way, consistent with the highest ethical standards.”

The release further states:

“Alstom has made significant progress in the area of compliance over the last several years. The conduct referred to in the agreement mainly arose from the use of external success fee based Sales Consultants hired by Alstom to support its commercial teams. In order to ensure that Alstom strives for the best compliance procedures, Alstom has discontinued the hiring of such Sales Consultants. Further, pursuant to a negotiated resolution agreement with the World Bank, Alstom committed in Feb 2012 to continue to improve its internal compliance programme, including by retaining a monitor to oversee its efforts in this regard. To date, the work of the Monitor has confirmed that Alstom has put in place a Corporate Compliance Programme that reflects the principles embedded in the WBG’s Integrity Compliance Guidelines.”

[…]

“The DOJ has also stipulated that no part of the fine can be passed on to General Electric as part of the projected sale of Alstom’s energy businesses.”

Robert Luskin and Jay Darden of Squire Patton Boggs represented the Alstom entities.

When Red Flags Turn Into Green Lights

Anyone with a pair of reasonably well-fitted FCPA goggles would recognize the risk.

A company makes a $71,000 charitable donation to an organization in which a public official in its jurisdiction is a longtime board member.

The same company – for each of the past five years – has given $25,000 to an Institute named for the late mother of another public official who just so happens to chair a key governmental committee overseeing the company’s industry.

In the aggregate and over the past two years, the same company has given approximately $1.6 million to charities affiliated with lawmakers or executive-branch officials.  It is not just one company, but other companies in the same industry have also given in the aggregate and over the past two years approximately $1.35 million to the same public officials.

Each of these donations present obvious red flags under the Foreign Corrupt Practices Act.

Indeed, skilled practitioners no doubt will make comparisons to the Schering-Plough and Eli Lilly enforcement actions (here and here) involving the same alleged Polish “foreign official” who chaired a bona fide Polish castle restoration foundation, yet also was in a position of influence concerning drug purchases in a region of Poland.

But wait, the above-described donations do not present any red flags.  Scrap those internal investigation plans, forget about voluntary disclosure, and slim chance there will be an enforcement action.

The public officials are not “foreign officials,” they are U.S. officials!

See here for the recent article in the Philadelphia Inquirer regarding the charitable giving practices of Comcast and other telecom companies.

Nobody said our system was perfect, but that is just how our system works some will say.  Recall, the U.S. Supreme Court recently stated that “ingratiation and access are not corruption” (see here for the prior post).

But why should corporate interaction with a “foreign official” be subject to greater scrutiny and different standards of enforcement than corporate interaction with a U.S. official? After all, there is a U.S. domestic bribery statute (18 USC 201) with elements very similar to the FCPA.  Why do we reflexively label a “foreign official” who receives “things of value” from private business interests as corrupt, yet generally turn a blind eye when it happens here at home?

As you contemplate these questions, just remember – as a former DOJ Assistant Attorney General of the Criminal Division stated in an FCPA speech (see here) – “we in the United States are in a unique position to spread the gospel of anti-corruption.”

For numerous other prior posts on the “double standard,” see this tag.

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