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A Bribery Scheme Hatched at the “Eggs Benedict Place”

The DOJ announced today (see here) that John Joseph O’Shea was recently arrested for his alleged role in a conspiracy to bribe Mexican foreign officials to secure contracts with the Comision Federal de Electridad (“CFE”), an apparent Mexican state-owned utility company (see here). In addition to charging conspiracy to violate the FCPA, the indictment contains twelve substantive FCPA charges (among other charges).

According to the unsealed indictment (see here), O’Shea was the General Manager of Texas Business A, a business that provides products and services to electrical utilities in a number of foreign markets. According to the indictment, one of O’Shea’s responsibilities was approving payments to sales representatives.

According to the indictment, Texas Business A is a business unit of Subsidiary A (a company with its principal place of business in Sugar Land, Texas) and Subsidiary A, in turn, is a subsidiary of Corporation A (a company headquartered and incorporated in Switzerland with publicly-traded American Depositary Shares on the NYSE).

In other words, both Subsidiary A and Corporation A are subject to the FCPA and may be the focus of a forthcoming enforcement action. Also of note is that Mexican Company X, Intermediary Company O (a company incorporated in and headquartered in Mexico) and Intermediary Company S (a company incorporated in Panama and headquartered in Mexico) are all alleged to be “an agent of a domestic concern” under 78dd-2(h)(1). DOJ recently noted (see here) that it is willing to go after agents and intermediaries which facilitate bribe payments and the “agent of a domestic concern” designation would seem to be setting the table for a possible enforcement action against such companies as well.

According to the indictment, one customer Texas Business A did business with is CFE and officials N,J,C and G at CFE had influence over decisions concerning Texas Business A’s contracts with CFE

(Sorry for the alphabet soup, but this is how the indictment reads).

According to the indictment, Texas Business A obtained multiple contracts with CFE while using Mexican Company X (including its principal, Fernando Maya Basurto) as its sales representative under several commission-based agreements.

The indictment alleges that O’Shea conspired and agreed with Basurto, Subsidiary A, Texas Business A, and the intermediary companies and others to make improper payments to Mexican “foreign officials” to obtain or retain business for Subsidiary A and Texas Business A in violation of the FCPA and that O’Shea did indeed offer, authorize, or make the improper payments indirectly through others to the CFE officials in violation of the FCPA.

According to the indictment, the payments assisted Texas Business A secure two contracts with CFE worth approximately $81 million in revenue.

According to the indictment, the improper payments were concealed through a series of financial transactions, first to U.S. bank accounts in the name of Basurto and certain of his family members, then through false invoices received from Basurto in the names of the intermediary companies, and then to the “foreign officials.”

According to the indictment, after O’Shea was terminated from Texas Business A, he, Basurto, and others tried to cover up their conduct after learning that Corporation A had disclosed the suspected payments to the DOJ, SEC and Mexican authorities.

In describing O’Shea’s cover up, the indictment states, “On or about April 27, 2005, O’Shea sent Basurto an e-mail that read, in part, “It seems my lawyer thinks it is OK to use a private e-mail such as yahoo, as it would seem much more difficult for anyone to get the exchanges – if it is a company email it belongs to them. I believe [sic] we should alter opur [sic] normal routine; meaning not meet at the ‘eggs benedict’ place.”

Consistent with DOJ’s recent statements on this issue, the indictment seeks from O’Shea forfeiture of approximately $3 million in proceeds derived from his improper conduct.

As noted in the DOJ’s release, Basurto recently pleaded guilty to a one-count criminal information (see here) charging him with conspiracy to violate the FCPA. The DOJ news release also notes that a Mexican citizen had pleaded guilty for his role in the bribery scheme.

Lighthouses and Buoys

Every so often, things sort of appear out of “left field.”

This is not the only blog which covers the FCPA and several law firms keep rolling statistics as to FCPA enforcement actions, indictments, pleas, etc.

Even so, has anyone ever heard of Charles Paul Edward Jumet or Ports Engineering Consultants Corporation?

Forget the indictment (that was apparently filed on November 10th – see here), Jumet pleaded guilty today to conspiring to violate the FCPA (among other charges). See here for the DOJ release.

Get ready to a make flow chart, because the facts are rather confusing.

The big picture, according to the indictment and plea, is that Jumet and others conspired to “pay money secretly to Panamanian government officials in return for awarding Ports Engineering Consultants Corporation (“PECC” – a company organized under the laws of Panama with an office in Virginia) contracts to maintain lighthouses and buoys along Panama’s waterways…” (see indictment p. 4). Jumet, a U.S. citizen, was the VP of PECC and later its President.

The “foreign officials” were: Government Official A (the Administrator of Panama’s National Maritime Ports Authority) (“APN”); Government Official B (a Deputy Administrator and Administrator of APN); and Government Official C (“a very high-ranking executive official of the Republic of Panama”).

According to the indictment, Jumet and others designated “Warmspell Holding Company” and “Soderville Corporation” as shareholders of PECC as a means of giving corrupt payments to the officials in the form of “dividend” payments or “bearer” shares.

According to indictment, Soderville “belonged to Government Official A” and Warmspell “corporate officers were relatives of Government Official B.”

According to the DOJ release, “[a]s part of his plea agreement, Jumet has agreed to cooperate with the Department of Justice in its ongoing investigation.”

Also out of “left-field,” since when did the Department of Homeland Security, Immigration and Customs Enforcement begin to enforce the FCPA?

Para. 3 of the indictment says that “[i]nvestigation of violations of the FCPA … fall within the jurisdiction of both the [FBI] and the United States Department of Homeland Security, Immigration and Customs Enforcement.”

An FCPA Triangle

First it was the company – Willsbros Group Inc. (see here).

Then, it was the company’s employees – Jim Bob Brown (see here) and Jason Steph (see here).

Finally, it is the company’s consultant – Paul Novak (see here).

An FCPA triangle of sorts.

Don’t hold your breath waiting for an FCPA square because, as has been noted in previous posts, the final piece of the puzzle … the “foreign official” will not be happening anytime soon as the FCPA only applies to the “briber-giver” not the “bribe-taker.”

As noted in the DOJ release, Novak (a former consultant for Willbros International Inc. – a subsidiary of Willbros Group Inc.) pleaded guilty to one count of conspiracy to violate the FCPA and one substantive count of violating the FCPA in connection with payments to Nigerian “foreign officials.”

Assistant Attorney General Breuer (the blog’s “person of the week” given his frequent mention here in the last few days) had this to say:

“The use of intermediaries to pay bribes will not escape prosecution under the FCPA. The Department will continue to hold accountable all the players in an FCPA scheme – from the companies and their executives who hatch the scheme, to the consultant they retain to carry it out.”

Of course, there still must be jurisdiction over the consultant, but this was not a problem in the Novak matter as he is a U.S. citizen and thus subject both to territorial jurisdiction (i.e. U.S. nexus – see 78dd-2(a)) or nationality jurisdiction (see 78dd-2(i)).

This isn’t the first time the DOJ has gone after consultants or agents. In March 2009, the DOJ unsealed indictments against U.K. citizens Jeffrey Tesler and Wojciech Chodan for their alleged roles in the KBR/Halliburton Nigeria bribery scheme. (see here for the DOJ release, here for the indictment).

“We Don’t Want The Auditors Raising Any Questions on Iraq Business”

Yet another Iraqi Oil-For-Food enforcement action.

Yesterday, the DOJ and SEC announced resolution of an enforcement action against AGCO Corp. (a Georgia-based manufacturer and supplier of agricultural machinery and equipment) as well as AGCO Limited (AGCO’s a wholly-owned subsidiary headquartered in the United Kingdom responsible for AGCO’s business in Europe, Africa, and the Middle East)(see here, here, here, here, and here).

Big picture, AGCO acknowledged responsibility for improper payments made by its subsidiaries and agents to the former government of Iraq in order to obtain contracts with the Iraqi Ministry of Agriculture under the United Nations Oil-For-Food program.

DOJ filed a criminal information against AGCO Limited charging one count of conspiracy to commit wire fraud and to violate the FCPA’s books and records provisions.

According to the DOJ, AGCO Limited paid approximately $550,000 to the former government of Iraq to secure three contracts. DOJ and AGCO entered into a three-year deferred prosecution agreement under which DOJ will defer prosecution upon, among other things, AGCO’s payment of a $1.6 million penalty. According to the DOJ, the basis for the deferred prosecution agreement was, among other things, AGCO’s cooperation in the DOJ’s investigation, its implementation of remedial measures, and its settlement with the SEC (see below).

Why no substantive FCPA anti-bribery charges in this case and other Iraqi Oil-For-Food cases (Novo Nordisk, Fiat, AB Volvo, etc.)? The anti-bribery provisions apply to payments to “foreign officials,” not foreign governments. Thus, in this and the other cases, conspiracy to commit wire fraud and to violate the FCPA books and records provisions were charged.

Because AGCO is an issuer, the SEC also played a role in the enforcement action. The SEC filed a settled civil complaint charging AGCO with violating the FCPA’s books and records and internal control provisions.

According to the SEC, certain AGCO subsidiaries made – through a Jordanian agent – approximately $5.9 million in kickback payments to Iraq in the form of “after-sales service fees” to secure contracts worth approximately $14 million. These payments were disguised or improperly recorded in the subsidiaries’ books and records which were consolidated with AGCO’s for SEC filing purposes. According to the SEC, “AGCO knew or was reckless in not knowing that kickbacks were paid in connection with its subsidiaries’ transactions.”

The SEC ordered AGCO to pay $18.3 million in combined disgorgement, interest, and penalties.

In a previous post (see here), it was noted that FCPA compliance is a task that not just company lawyers need to be concerned with, but rather a task that internal audit and finance should also be concerned with and actively involved in as well. It was noted that internal audit and finance personnel must be specifically trained to approach their specific job functions with “FCPA goggles” on.

Reading the SEC complaint against AGCO, it is clear that various AGCO personnel could have used a pair of “FCPA goggles” as the complaint is an indictment of the entire company’s control function.

In para 23, the SEC charges, among other things, that:

the “accrual account [where the kickback payments were recorded] was created by AGCO Ltd.’s marketing staff with virtually no oversight from AGCO Ltd.s’ finance department;”

“no one questioned the existence of the dual accounts;”

“no one questioned why the [accrual account] contained approximately ten percent of the contract value despite the fact that there was no contract in place requiring that such ten percent be paid to the ministry or anyone else;”

“when the finance department authorized payments from the [accrual account], it did not ask for or receive any proof of service to warrant the payments;” and

an employee cautioned the business manager for Iraq and his supervisor that “we don’t want the auditors raising any questions on Iraq Business!”

Further, in para 25, the SEC charges, among other things, that:

“Sales and marketing personnel were able to enter into contracts without review from the legal or finance departments;”

“an accounting employee described the Finance Department employees as ‘blind loaders’ who input information into AGCO’s books without any adequate oversight role;” and

“marketing personnel were able to create accrual accounts […] without any oversight and caused accounts to be created and payments to be made without proper documentation.”

In para. 26, the SEC charges, among other things, that:

“AGCO Ltd.’s structure at the time allocated inappropriate accounting and finance responsibilities to the marketing department;” and

“turnover in the marketing department […] was high and employees were forced to shoulder a great deal of the accounting burden.”

AGCO’s management and legal department did not fare much better.

In para. 27, the SEC charges, among other things, that:

“AGCO did not conduct any due diligence on the [Jordanian] agent or require that the agent undergo FCPA training;” and

the “agent’s contract with AGCO did not accurately explain the agent’s services and payments, and lacked any FCPA language.”

What would the results look like if your company or your client’s company was “put under the internal controls microscope” in an FCPA enforcement action?

Verdict In … Greens Found Guilty

The third FCPA trial of the summer has concluded and Gerald and Patricia Green (two Los Angeles area film executives) have been found guilty by a federal jury of conspiracy to violate the FCPA, substantive FCPA violations, and other charges (see here for the DOJ New Release).

According to the DOJ release, evidence introduced at trial showed that “beginning in 2002 and continuing into 2007, the Greens conspired with others to bribe the former governor of the [Tourism Authority of Thailand] in order to get lucrative film festival contracts as well as other TAT contracts.” According to the release, the evidence also established that the Green’s attempted to disguise the bribe payments by labeling them “sale commissions” and by making the payments “for the benefit of the former governor through the foreign bank accounts of intermediaries, including bank accounts in the name of the former governor’s daughter and friend.”

Reacting to the verdict, Assistant Attorney General Breuer stated that the DOJ “will not waiver in its fight against corruption, whether perpetrated within our borders or abroad” and that the FCPA “is a powerful tool that the [DOJ] will continue to use in an effort to stop individuals like the Greens who seek to further their own business interests through bribes paid to foreign officials.”

The Greens are to be sentenced in December and the conspiracy and FCPA charges each carry a maximum penalty of five years in prison.

As mentioned, the Green trial was the third FCPA trial of the summer.

The other two were the Bourke matter (see here) and the Jefferson matter (see here).

Leading up to these trials, the FCPA bar and the enforcement officials themselves, predicted that one result of these trials would be greater clarity of some of the FCPA’s murky elements.

While the verdicts were, on balance, pro-DOJ verdicts, the verdicts reached in these trials were not exactly uniform.

Bourke was convicted of conspiracy to violate the FCPA (the case did not proceed to trial on a substantive FCPA violation).

Jefferson was also convicted of conspiracy (although it is not entirely clear if the jury found him guilty of conspiracy to violate the FCPA). However, Jefferson was found not guilty on the substantive FCPA charge (the charge predicated on the “cash in the freezer” allegations).

Have these trials provided any greater clarity as to various FCPA elements as widely predicted?

I think it is far to say that as a result of the Bourke verdict (even though it was not a substantive FCPA trial), the FCPA’s knowledge standard has never been broader, and can be satisfied even when an investor, like Bourke, does not actually pay a bribe, but is merely aware that others may be making bribe payments in a widely viewed corrupt country for the potential benefit of an entity in which he is an investor (see here and here).

Beyond this, I’m not sure that any further clarity as to substantive FCPA elements has resulted from these trials, but I would be interested to hear what others have to say.

Will these trials and the largely pro-DOJ verdicts send a “proceed with caution” message to any individual or corporation faced with an FCPA enforcement action and stiffle legitimate defense theories based on the FCPA’s elements?

I expect so, yet that is indeed unfortunate as a significant portion of FCPA enforcements are based largely on DOJ/SEC’s untested and unchallenged interpretations of the law.

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