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Lord Justice Thomas’s Innospec Sentencing Remarks

Given the frequency in which U.S. judges seem to be rubber-stamping FCPA settlements – including plea deals agreed to by the DOJ under circumstances which arguably violate the DOJ’s own policy as set forth in the US Attorneys’ Manual (see here for a prior post), it is refreshing to read Lord Justice Thomas’s stern rebuke of the DOJ-SFO’s joint settlement in the Innospec matter (see here for more on the Innospec matter).

Lord Justice Thomas (Britain’s second most senior criminal judge) concluded that the Director of the SFO “had no power to enter into the arrangements made” to settle the matter and he warned that “no such arrangements should be made again.” (See here for Lord Justice Thomas’s sentencing remarks).

With the SFO publicly stating on numerous occasions that it seeks to adopt DOJ-like enforcement strategies and procedures and given that the SFO’s conduct in the Innospec mater was very “DOJ-like”, Lord Justice Thomas’s remarks, while heavy on English law, should be more broadly viewed as an indictment of DOJ enforcement strategies as well.

The sentencing remarks begin by providing an interesting glimpse into the “negotiations” between the DOJ and SFO in the Innospec matter – the “first case where a ‘global settlement’ had been sought in respect of concurrent criminal proceedings in the UK and the US.”

The conduct at issue largely centered on Indonesia and Iraq. The sentencing remarks note that “both the SFO and DOJ agreed that the fines and other penalties which might be imposed in the US and the UK might exceed $400m in the US and $150m in the UK.”

However because any such amount “would exceed by many times the ability of Innospec to pay” “both the SFO and the DOJ agreed that, in light of Innospec’s full admission and full co-operation, they should not seek to impose a penalty which would drive the company out of business.”

The sentencing remarks then state:

“In September 2009, when it was anticipated that an acceptable settlement would be reached, discussions began between the SFO and the DOJ about the manner in which the authorities in the US and the SFO should proceed to implement any settlement and divide up the monetary amount to be paid. The discussions took place against the background that it had been agreed that the SFO would have primacy in respect to the Indonesian corruption and the DOJ in respect of the Iraq corruption.”

The sentencing remarks note that “the SFO began by suggesting a 50:50 split based upon the fact that the criminality had been orchestrated and arranged from the UK in respect of the corruption in both Iraq and Indonesia.”

However, the “DOJ would not accept this,” but rather proposed a “methodology that in the result produced a split which was approximately one third to the DOJ, one third to the SFO and one third to the SEC and the OFAC.”

As noted in the sentencing remarks, “after much further discussion on 28 January 2010 the SFO agreed to a split that was approximately one third to the DOJ, one third to the SEC and OFAC and one third to the SFO. It was agreed that the DOJ would ask the court to approve a fine of $14.1m with the balance of the US proportion going to the SEC ($11.2m) and OFAC ($2.2m); $12.7m would be the SFO’s share.”

Lord Justice Thomas next turns to the Innospec-SFO plea (see here) and states that “it became quickly apparent … that a number of difficult issues was raised by the process adopted.”

In his remarks, Lord Justice Thomas cites a paper delivered by Nicholas Purnell QC “The Risk of Abusing A Dominant Position” delivered to the International Bar Association at its New York Conference in June 2009 (see here) which notes, among other things, that newly enacted SFO guidance on “alternative methods to the disposal of criminal investigations by way of negotiated pleas or other resolutions by corporate defendants” may “introduce some unintended risks of abuse.”

Lord Justice Thomas next touches upon such issues.

Among other things, he notes that the “question has arisen as to the extent of [the SFO’s Director’s] powers and duties in the light of the constitutional position of a prosecutor, the role of the courts in the UK and the rules relating to plea agreements in the U.K.” Lord Justice Thomas specifically notes that “it is clear” that the “SFO cannot enter into an agreement … with an offender as to the penalty in respect of the offence charged,” but that a reading of the papers submitted in connection with Innospec-SFO plea “suggests that a penalty had in fact been agreed.”

In language that all U.S. judges who have rubber-stamped DOJ FCPA settlements (without inquiring into the factual and legal basis for the settlement including whether other charges more accurately fit the crime – see here) should read, Lord Justice Thomas states:

“Principles of transparent and open justice require a court sitting in public itself first to determine by a hearing in open court the extent of the criminal conduct on which the offender has entered the plea and then, on the basis of its determination as to the conduct, the appropriate sentence. It is in the public interest, particularly in relation to the crime of corruption, that … there may be discussion and agreement as to the basis of plea” and that a court “must rigorously scrutinise in open court in the interests of transparency and good governance the basis of that plea and to see whether it reflects the public interest.”

Lord Justice Thomas then states that “those who commit such serious crimes as corruption of senior government officials must not be viewed or treated in any different way to other criminals.” (See here, here and here for my prior posts on the increasing and alarming trend of bribery, yet no bribery FCPA prosecutions).

Lord Justice Thomas states that the $12.7m SFO fine is “wholly inadequate as a fine to reflect the criminality displayed by Innospec” and that if it were up to him the fine would have measured in the “tens of millions.” Nevertheless, because of Innospec’s apparent inability to pay a larger fine, he “reluctantly concluded that, on this occasion, it would neither be just nor fair in the unusual circumstances of this case for this court to impose a penalty greater than the amount allocated to the UK.”

Even so, Lord Justice Thomas is stinging in his final remarks.

He notes:

“The court was faced with an agreement made between the DOJ, the SEC, the OFAC and SFO as to the division of the sum these bodies had considered Innospec was able to pay. This was not a matter that received judicial determination in either the UK or the US (save that inherent in the Federal District Court’s approval of the plea agreement). As it is the position in both the US and the UK that it is for the court ultimately to determine the sanction to be imposed for the criminal conduct, an agreement between prosecutors as to the division, even if it had been within the power of the Director of the SFO (which as I have explained it was not), cannot be accordance with basic constitutional principles.”

Lord Justice Thomas concludes that “the Director of the SFO had no power to enter into the arrangements made and no such arrangements should be made again.”

He notes that “it is essential for the future that, unless any change is made to the rule of procedure or to the practice direction, it is appreciated this court must and will sentence in the way set out in the law, as that is what the rule of law requires” and that “this applies as much to companies as to individual defendants.”

A couple of other interesting tidbits from Lord Justice Thomas’s sentencing remarks.

With cross-border investigations and global corruption settlements seemingly becoming a new norm, Lord Justice Thomas’s comments on uniform financial penalties also bear mention. He states, “there is every reason for states to adopt a uniform approach to financial penalties for corruption of foreign government officials so that the penalties in each country do not discriminate either favourably or unfavourably against a company in a particular state.” He notes that “if the penalties in one state are lower than in another, business in the state with lower penalties will not be deterred so effectively from engaging in corruption in foreign states, whilst businesses in states where the penalties are higher may complain that they are disadvantaged in foreign states.”

Lord Justice Thomas concludes his sentencing remarks with one final dig, a dig aimed at a common feature in all DOJ FCPA pleas, non-prosecution agreements and deferred prosecution agreements – and that is the “don’t issue a press release about this unless you first approve it with us” clause.

Lord Justice Thomas notes: “It would be inconceivable for a prosecutor to approve a press statement to be made by a person convicted of burglary or rape; companies who are guilty of corruption should be treated no differently to others who commit serious crimes.”

*****

A couple of final notes about the SFO’s enforcement action against Innospec. Unlike a typical DOJ FCPA charging document, the SFO “names names.” In its previous Mabey & Johnson prosecution (see here for a prior post), the SFO specifically named the foreign official recipients of the bribe payments. That trend continues in the SFO’s charging documents against Innospec (see here).

Finally, in many cases, FCPA fines and penalties are just one “cost” to a company. While I disagree with the notion that the “costs of getting caught” should somehow factor into the final penalty amount (see here for a prior post), this is a cost that can not be ignored by companies. On this issue, para. 32 of the SFO charging document notes that “at this stage … Innospec’s internal investigation and cooperation with the SFO, DOJ, and SEC globally has cost the Company in excess of US$32 million in costs …”

Mendelsohn’s Defense of the Siemens Enforcement Action … A Contrarian View

Mark Mendelsohn (DOJ Deputy Chief, Fraud Section and the DOJ’s FCPA “top cop”)recently defended the 2008 Siemens enforcement action.

Given that Mendelsohn signed the Siemens charging documents and plea agreement, this is a rather unremarkable event and is sort of like me saying I defend the substantive content on this blog.

In any event, and in the interest of sparking thought within the FCPA community, this post takes issue with Mendelsohn’s defense of the Siemens enforcement action.

In an “exclusive interview with the International Bar Association towards the end of 2009,” (see here) Mendelsohn stated that the Siemens enforcement action sends a “very, very strong message” and a “strong deterrent message.”

Among other things, Mendelsohn notes that the overall total of $1.6 billion that Siemens paid to U.S. (DOJ and SEC) and German authorities is “only a fraction of the costs that Siemens incurred as a result of the bribery conduct.” Mendelsohn legitimately notes that Siemens also was subject to a debarment proceeding at the World Bank which required Siemens to pay $100 million to help fight corruption over a period of time. Mendelsohn points out that “the cost of the investigation for the company and the remediation” “probably exceeded the fines that were assessed” and he also cites the “costs of disruption to Siemens’ business,” the replacement of members of Siemens’ board, and the discipline of “lots of sales people.”

Based on the Siemens’ resolution documents, the DOJ’s own statements about the case, and other information in the public domain, I strongly disagree that the Siemens enforcement action sends a “strong deterrent message.”

For starters, since when is the cost of getting caught, the legal and professional fees associated with getting caught, and the remediation associated with getting caught in a bribery scheme “unprecedented in scale and geographic scope” (those are DOJ’s words – not mine) part of the deterrence conversation?

I think every company in the world probably already assumed prior to the Siemens enforcement action that engaging in a bribery scheme “unprecedented in scale and geographic scope” would no doubt entail substantial legal and professional fees, employee terminations and other internal remediation costs upon getting caught. Thus, it is difficult to see how these pieces of the Siemens enforcement action send a “very strong message” or a “deterrent message.”

In a prior post (see here), I took a look at some of the Siemens numbers per the DOJ’s resolution documents. Looking at these numbers again is instructive in light of Mendelsohn’s comments.

The criminal information (see here) describes approximately $1.36 billion in payments Siemens made through various mechanisms, including approximately $555 million paid for unknown purposes (including approximately $341 million in direct payments to business consultants for unknown purposes) and approximately $806 million intended, in whole or in part, as corrupt payments to foreign officials. The criminal information, of course, does not charge Siemens with FCPA antibribery violations, so from the outset it is difficult to see how this case sends a “very strong message” or a “strong deterrent message.”

The Siemens resolution also included charges against certain of Siemens’ subsidiaries.

For instance, Siemens Argentina (see here) agreed to pay a $500,000 fine based on allegations that it made over $31 million in corrupt payments in exchange for favorable business treatment in connection with a $1 billion project in Argentina. Siemens Venezuela (see here) also agreed to pay a $500,000 fine based on allegations of making over $18 million in corrupt payments in exchange for favorable business treatment in connection with two major metropolitan mass transit projects in Venezuela. Likewise, Siemens Bangladesh (see here) agreed to pay a $500,000 fine based on allegations of making over $5 million in corrupt payments in exchange for favorable treatment during the bidding process on a mobile telephone project in Bangladesh?

When a fine amounts to a sliver of the improper payments allegedly made, and a sliver of a sliver of the business allegedly obtained or retained, since when does that send a “very strong message” or a “strong deterrent message?”

Finally, what sort of “very strong message” or “strong deterrent message” is sent when, on the same day a company settles a case for engaging in a bribery scheme “unprecedented in scale and geographic scope” the company also announces that it will be allowed to keep its coveted “responsible contractor” status with the U.S. government. It is further difficult to see the deterrence achieved by the Siemens enforcement action when, in the year since resolution, various U.S. government agencies, including the DOJ, continue to do substantial amounts of business with Siemens and its affiliate companies (see here for a prior post on this subject).

Far from sending a “very strong message” or a “strong deterrent message,” the Siemens enforcement action sends the message that corporate bribery, even if caught, can still result in a net positive.

Step Up to the Podium Friday

Today’s post includes FCPA excerpts from various speeches/comments made by enforcement officials over the past couple of days.

Stepping to the podium will be Assistant Attorney General Lanny Breuer; Mark Mendelsohn – Deputy Chief of the DOJ Fraud Section; and Cheryl Scarboro – the head of the SEC’s newly formed FCPA unit.

Lanny Breuer

Breuer spoke at the ABA National Institute on White Collar Crime in Miami. See here for his comments.

As to the FCPA, here is what Breuer had to say.

“… As I’m sure many of you are aware, in a recent FCPA investigation, the Criminal Division’s Fraud Section used undercover law enforcement techniques to uncover what we allege to be widespread fraud and corruption. As a result, 22 executives and employees of companies in the military and law enforcement products industry were indicted for their involvement in schemes to bribe foreign government officials. This investigation involved the most expansive use ever of undercover techniques to uncover FCPA violations.”

Note – per the DOJ, there was no actual involvement by any real “foreign government official.” This dynamic raises some legal issues – see here.

Back to Breuer’s comments.

“Let me say a few more words about our very robust FCPA program, because it, in many ways, typifies how we are approaching crime in corporate America.”

“The FCPA investigation I just referenced is the largest single prosecution of individuals in the history of DOJ’s enforcement of the FCPA. It thus vividly illustrates one cornerstone of our FCPA enforcement policy: the aggressive prosecution of individuals. Put simply, the prospect of significant prison sentences for individuals should make clear to every corporate executive, every board member, and every sales agent that we will seek to hold you personally accountable for FCPA violations. As we focus on the prosecution of individuals, we will not shy away from tough prosecutions, and we will not shy away from trials. We are ready, willing, and able to try FCPA cases in any district in the country—as we demonstrated with our three FCPA trial victories just last year.”
Note – In one of the trials, William Jefferson was acquitted of FCPA substantive charges. He was convicted of, among things, conspiracy, a verdict that may or may not have, included conspiracy to violate the FCPA. See here. In another trial, Frederic Bourke was convicted of conspiracy to violate the FCPA. He was sentenced to 366 days in prison. At sentencing, Judge Shira Scheindin said – “After years of supervising this case, it’s still not entirely clear to me whether Mr. Bourke is a victim or a crook or a little bit of both.” See here.

Back to Breuer’s comments.

“To be sure, we are not focusing on individuals to the exclusion of corporations. We will continue to insist on corporate guilty pleas or to bring criminal charges against corporations in appropriate cases – when the criminal conduct is egregious, pervasive and systemic, or when the corporation fails to implement compliance reforms, changes to its corporate culture, and undertake other measures designed to prevent a recurrence of the criminal conduct. We will continue to insist on appropriately stiff corporate fines, applying a consistent, principled approach that considers the facts and circumstances within the Department’s established framework and that is guided by the Sentencing Guidelines in arriving at an appropriate sanction.”

“I also want to assure you that the Department’s commitment to meaningfully reward voluntary disclosures and full and complete corporate cooperation will continue to be honored in both letter and spirit. I know that many of you often grapple with the difficult question of whether to advise your client to make a voluntary disclosure. I strongly urge any corporation that discovers an FCPA violation – or any other criminal violation, for that matter – to seriously consider making a voluntary disclosure and to cooperate with the Department. The Sentencing Guidelines and the Principles of Federal Prosecution of Business Organizations obviously encourage such conduct, and your clients will receive meaningful credit for that disclosure and cooperation.”

Mark Mendelsohn

Mendelsohn recently spoke at the Dow Jones Global Ethics Summit in New York City. DOJ has not released a transcript of his remarks, but a collection of media sources covered his comments.

See here, here, and here.

As to the Africa Sting case, Main Justice reports the following from Mendelsohn:

That the government is “in a strong position because of the massive volumes of information it has collected. “That should give you an idea of the strength of our case,” he said. Specifically, Mendelsohn said that a simple meeting in a New York hotel to discuss a bribery scheme would fall under the FCPA, even if the rest of the scheme took place entirely outside the U.S. Money and, potentially, e-mails, electronically transferred through the U.S. could bring a bribery scheme under the jurisdiction of the FCPA, he said.”

Cheryl Scarboro

Scarboro, an SEC veteran, was recently appointed to lead the SEC’s new FCPA unit (see here). Jesse Sunenblick at Main Justice recently sat down with Scarboro for a Q&A (see here).

As to the new FCPA unit Scarboro said:

“… [T]he new unit will give us the resources and the ability to do even more going forward. People on the ground will be focusing exclusively [on FCPA investigations], making them smarter about industry practices problem areas. We will be able to leverage resources and leads we get from others. There are ongoing investigations exactly like oil for food: not just concerning one company, but looking beyond into widespread practice in particular areas. I would expect filed cases in the short term, in a matter of months. These cases will be an illustration of what we’ve already been doing. But the new unit will allow us to do even more of it. We have areas and industries we are focusing on—pharmaceutical is one.”

“Game-Changing” Day at the SEC

In August 2009, Robert Khuzami, the SEC’s Director of the Division of Enforcement, announced that the SEC will be creating five “national specialized units dedicated to particular highly specialized and complex areas of securities law” – including an FCPA unit. (see here).

Khuzami also announced that the SEC was working on other initiatives of interest to FCPA followers including creation of “a public policy statement that will set forth standards to evaluate cooperation by individuals in enforcement actions” as well as “recommend[ation] to the Commission that the SEC enter into Deferred Prosecution Agreements, in which the [Division of Enforcement] agree[s] in the appropriate case to forego an enforcement action against an individual or entity subject to certain terms, including full cooperation, a waiver of statutes of limitations, and compliance with certain undertakings.”

Yesterday, there were developments on each of these issues.

First, the SEC (see here) announced that Cheryl J. Scarboro will lead the FCPA unit. As indicated in the release, Scarboro is an SEC veteran having served as Associate Director, Assistant Director, Deputy Assistant Director, and Staff Attorney in the Division of Enforcement. For many years, Scarboro has been a primary SEC voice on FCPA issues and an active participant at many FCPA conferences.

Second, the SEC (see here) announced a series of measures “to further strengthen its enforcement program by encouraging greater cooperation from individuals and companies in the agency’s investigations and enforcement actions.”

“New cooperation tools” not previously available to the SEC, will now include, among other things:

* “Cooperation Agreements — Formal written agreements in which the Enforcement Division agrees to recommend to the Commission that a cooperator receive credit for cooperating in investigations or related enforcement actions if the cooperator provides substantial assistance such as full and truthful information and testimony.”

* “Deferred Prosecution Agreements — Formal written agreements in which the Commission agrees to forego an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate fully and truthfully and to comply with express prohibitions and undertakings during a period of deferred prosecution.”

and

* “Non-prosecution Agreements — Formal written agreements, entered into under limited and appropriate circumstances, in which the Commission agrees not to pursue an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate fully and truthfully and comply with express undertakings.”

The SEC release notes that “similar cooperation tools have been regularly and successfully used by the Justice Department in its criminal investigations and prosecutions.”

More details about these measures can be found in a revised and newly issued version of the SEC’s enforcement manual beginning at pg. 119 (see here).

The SEC news conference announcing these appointments and initiatives is available on the SEC’s website.

While not FCPA specific, these measures as applied to FCPA enforcement are likely to lead to even less judicial scrutiny (not that there is much judicial scrutiny at present) as to SEC interpretations of the FCPA and as to whether factual evidence actually exists to support each element of an FCPA charge.

In fact, as set forth in the manual (p. 130) “[a]n admission or an agreement not to contest the relevant facts underlying the alleged offenses” is a key factor the SEC will consider in determining whether a company should receive a deferred prosecution agreement.

For those anxious to see FCPA enforcement actions contested in an open, transparent, and adversary proceeding, yesterday’s announcements will be a blow as I expect FCPA enforcement to become even more opaque in the future.

Stay tuned as much is surely to be written about these new measures in the coming weeks and months.

The Investigative Agency That Prefers Not to Investigate

The Serious Fraud Office (“SFO”) in the United Kingdom is similar to the U.S. DOJ.

According to the SFO’s website (here), it “investigates fraud and corruption.” Elsewhere on the website (here) it notes that the SFO is the “lead agency” in the U.K. “for investigating and prosecuting cases of domestic and overseas corruption.” Elsewhere on the website (here) is a specific page as to how the SFO “investigates and prosecutes” and the page notes that a thorough investigation “often includes examining vast quantities of documents which have often been left in a deliberately obscure and fragmented form.”

All sounds rather intense from an investigative standpoint.

Problem is, the SFO recently stated that it would prefer not to investigate bribery and corruption cases!

As discussed elsewhere (see here), the SFO recently made public additional guidance as to its July 2009 memo titled “Approach of the Serious Fraud Office to Dealing with Overseas Corruption.” (See here for my prior post on this memo).

While it is commendable for a government agency to provide more guidance to those subject to a law, the following sentence in the SFO letter (see here) caused me to pause (let alone read multiple times):

“Our very strong preference is that all investigative work should be carried out by the professional advisers [of the company disclosing a potential issue] and that it is not necessary for the SFO to conduct any investigation itself.”

Have we seriously come to the point (on both sides of the Atlantic) where the government agencies tasked with investigating and prosecuting bribery and corruption cases no longer view it as their responsibility to investigate the factual circumstances supporting the charges?

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