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Friday Roundup

From the dockets, an FCPA compliance defense – yes or no, hiring a woman closely associated with a foreign official, and a focus on the FCPA’s “red-haired stepchild” – it’s all here in the Friday Roundup.

From the Dockets

Last month when Judge Lynn Hughes dismissed, at the close of the DOJ’s case, the FCPA charges against John Joseph O’Shea (see here for the prior post), it was only a partial victory as O’Shea still faced non-FCPA charges.  Complete victory is imminent as yesterday the DOJ filed a motion to dismiss (here) the remaining charges (conspiracy, money laundering and obstruction) against O’Shea.

In July 2011, Patrick Joseph (a former general director for telecommunications at Haiti Teleco and thus a “foreign official” according to the DOJ) was added to the extensive Haiti Teleco case.  (See here for the prior post).  Because the FCPA does not apply to bribe recipients, the DOJ charged Joseph with a non-FCPA offense: one count of conspiracy to commit money laundering.  Earlier this week, Joseph pleaded guilty to the charges (see here).  Pursuant to the plea agreement, Joseph agreed to forfeit approximately $956,000.  It is clear from the plea agreement that Joseph was likely an early cooperator in the Haiti Teleco case as the plea agreement refers to a June 2009 proffer agreement with the DOJ.  Many of the other individual defendants in the Haiti Teleco case were charged in December 2009 (see here).  The plea agreement requires Joseph’s continued cooperation and later this month a trial is to begin as to other defendants in the wide-ranging Haiti Teleco case.

FCPA Compliance Defense – Yes or No?

That is the title of a free webcast on February 21st to be hosted by Bruce Carton’s Securities Docket (see here to sign up and for more information).  I will be discussing my  paper “Revisiting a Foreign Corrupt Practices Act Compliance Defense”and will argue in favor of Congress creating an FCPA compliance defense.  On the other side of the issue, Howard Sklar (Senior Counsel, Recommind and a frequent commentator on FCPA issues at, among other places, his Open Air Blog) will argue that Congress should not include a compliance defense to violations of the FCPA.

Former Employee Alleges FCPA Issues at GE

As previously reported by Chris Matthews at Wall Street Journal Corruption Currents (see here) Khaled Asadi (a dual U.S. and Iraqi citizen) who was previously employed by G.E. Energy (USA) LLC (“GE Energy”) as its Country Executive for Iraq, located in Amman, Jordan, has filed a civil complaint (here) in the Southern District of Texas against G.E. Energy.   GE Energy is a wholly-owned subsidiary of General Electric Company (“GE”).

The complaint alleges that G.E. harassed, pressured Asadi to vacate his position, and ultimately terminated him after he informed his supervisor and G.E.’s Ombudsperson “regarding potential violations of the Foreign Corrupt Practices Act committed by G.E. during negotiations for a lucractive, multi-year deal with the Iraqi Ministry of Electricity.”  The substance of Asadi’s complaint is that “on or about June of 2010 Mr. Asadi was alerted by a source in the Iraqi Government that GE had hired a woman closely associated with the Senior Deputy Minister of Electricty (Iraq) to curry favor with the Ministry while in negotiation for a Sole Source Joint Venture Contract with the Ministry of Electricity. (According to the complaint, the Joint Venture Agreement between GE and the Ministry of Electricity was signed in Baghdad on December 30, 2010 and that the exclusive materials and repairs provision is estimated to be valued at $250,000,000 for the seven year agreement.)

Hiring friends, family members, etc. of a “foreign official” at the request of the ‘foreign official” has been the basis, in part, for previous FCPA enforcement actions – particularly if the hired individual was not qualified for the position, did not engage in any meaningful work, or was paid an unreasonably high salary.  For instance, the 2011 FCPA enforcement action against Tyson Foods (see here for the prior post) involved, in part, allegations that a company subsidiary placed the wives of Mexican “foreign officials” on its payroll and provided them with “a salary and benefits, knowing that the wives did not actually perform any
services” for the company.

In the WSJ Corruption Currents article, a GE spokesman stated as follows.  “Mr. Asadi’s termination had absolutely nothing to do with any allegations he is making.  Regarding our contracts in Iraq, GE followed all requirements and his allegations are false.”

Travel Act Readings

A few informative Travel Act readings to pass along.

In this article from Thomson Reuters News & Insight, Mike Emmick (Sheppard Mullin Richter & Hampton) calls the Travel Act the “FCPA’s red-haired stepchild” and says that in conducting an internal investigation “there are some additional rocks to flip over” before celebrating findings of no payments to “foreign officials.”

In this article from Bloomberg Law Reports, John Rupp and David Fink (Covington & Burling) note that a “move by U.S. authorities to target commercial bribery robustly is a distinct possibility.”  The piece discusses the laws that could be used by U.S. authorities to prosecute foreign commercial bribery.”

*****

A good weekend to all.

General Electric Settles Iraqi Oil For Food Matter

Just when you think Iraqi Oil for Food Program FCPA-related enforcement actions have run their course, along comes another.

The SEC announced this morning (see here) that General Electric Company (GE) agreed to resolve an FCPA books and records and internal controls enforcement action based on allegations that “two GE subsidiaries – along with two other subsidiaries of public companies that have seen been acquired by GE – made illegal kickback payments in the form of cash, computer equipment, medical supplies, and services to the Iraqi Health Ministry or the Iraqi Oil Ministry in order to obtain valuable contracts under the U.N. Oil for Food Program.”

As noted in the SEC release, “the SEC has now taken 15 FCPA enforcement actions against companies involved in the Oil for Food-related kickback schemes with Iraq, recovering more than $204 million.”

The GE enforcement action, like other Iraqi Oil for Food enforcement actions with a few exceptions, does not allege FCPA anti-bribery violations presumably because the alleged payments were made directly to the Iraqi government or government ministries – not to specific “foreign officials” as prohibited by the FCPA’s anti-bribery provisions.

The GE enforcement action is also an outlier of sorts in that it is merely a SEC enforcement action with no parallel DOJ enforcement action – a fact mentioned in GE’s press release detailed below.

For instance, the March 2010 enforcement action against Innospec (which was part Iraqi Oil For Food) involved a DOJ criminal information as to those allegations (see here); the September 2009 enforcement action against AGCO Corporation involved a DOJ criminal information and deferred prosecution agreement (see here); and the May 2009 enforcement action against Novo Nordisk A/S involved a DOJ criminal information and deferred prosecution agreement (see here).

So much for substantively similar conduct being resolved in a similar fashion.

Without admitting or denying the SEC’s allegations (detailed below), GE, GE Ionics Inc. and GE Healthcare Ltd. consented to a court order permanently enjoining future violations of the FCPA books and records and internal control provisions. GE agreed to pay $23.4 million to settle the matter – including approximately $18.4 million in disgorgement of profits on the alleged contracts at issue.

The SEC complaint (see here) alleges as follows:

“From approximately 2000 to 2003, two subsidiaries of the General Electric Company (“GE”) — Marquette-Hellige (“Marquette”) and OEC-Medical Systems (Europa) AG (“OEC-Medical”) — made approximately $2.04 million in kickback payments in the form of computer equipment, medical supplies, and services to the Iraqi Health Ministry under the Program. Prior to GE’s acquisition of their parent companies, two other current GE subsidiaries –Ionics Italba. S.r.L. (“Ionics Italba”), and Nycomed Imaging AS, currently GE Healthcare AS (”Nycomed”) – made approximately $1.55 million in cash kickback payments under the Program. Nycomed was a subsidiary of publicly-registered Amersham plc, which was acquired by GE after the conduct at issue in this Complaint and is currently known as GE Healthcare Ltd. Ionics Italba was a subsidiary of publicly-registered Ionics, Inc., which was acquired by GE after the conduct at issue in this Complaint and is currently known as GE Ionics, Inc.”

According to the complaint:

“Marquette, OEC-Medical, Ionics Italba, and Nycomed each authorized and paid kickbacks to Iraqi government ministries through agents in the form of ‘aftersales service fees’ (ASSF) on sales of products to Iraq. All four subsidiaries knew that such kickbacks were prohibited by the Oil for Food Program and U.S. and international trade sanctions on Iraq.”

According to the complaint, the above subsidaries, “only two of which were GE subsidiaries during the relevant time period,” “working through third-party agents, made ASSF kickback payments of approximately $3,584,842. The four subsidiaries earned profits of approximately $18,397,949 as a result oftheir illegal kickbacks.”

As to the acquired subsidiaries, the SEC simply alleges, without any elaboration, that GE acquired the liabilities of Amersham and Ionic, along with assets, in the acquisitions and that “GE Ionics, Inc. and GE Healthcare Ltd., both subsidiaries of GE, are the respective successors to the liability of Ionics and Amersham.”

Cheryl Scarboro, the Chief of the SEC’s newly formed FCPA Unit, stated as follows:

“GE failed to maintain adequate internal controls to detect and prevent these illicit payments by its two subsidiaries to win Oil for Food contracts, and it failed to properly record the true nature of the payments in its accounting records. Furthermore, corporate acquisitions do not provide GE immunity from FCPA enforcement of the other two subsidiaries involved.”

In a press release (see here) GE stated that the enforcement action “concludes the SEC’s investigation and related Department of Justice review of GE regarding the Oil-for-Food Program.” The release notes that the company “has received confirmation from the U.S. Department of Justice that the Department has closed its investigation and will take no action relating to these matters.”

As to the merits of the SEC’s allegations, the company stated as follows:

“In this case, the SEC has identified 18 contracts under the Oil-for-Food Program that it alleges were not accounted for or controlled properly. Fourteen of these transactions involve businesses that were not owned by GE at the time of the transactions. The SEC alleges that, in acquiring these companies, GE acquired their liabilities as well as their assets. The other four transactions relate to GE Healthcare units in Europe. These units declined to make cash payments to the Iraqi Ministry of Health, but they acquiesced when their agent offered instead to make in-kind payments of computer equipment, medical supplies, and services to the Iraqi Health Ministry, and then failed to reflect the transactions accurately in their books and records. This conduct did not meet our standards, and we believe that it is in the best interests of GE and its shareholders to resolve this matter now, without admitting or denying the allegations, and put the matter behind us.”

No matter how flimsy the SEC’s legal theory of liability, the agency continues to extract multi-million dollar FCPA settlements from the companies it oversees. These companies view settlement as easier and more cost efficient than engaging in a protracted legal dispute with a principal government regulator.

The end result, in such cases, is a continuation of the facade of FCPA enforcement.

General Electric Settles Iraqi Oil For Food Matter

Just when you think Iraqi Oil for Food Program FCPA-related enforcement actions have run their course, along comes another.

The SEC announced this morning (see here) that General Electric Company (GE) agreed to resolve an FCPA books and records and internal controls enforcement action based on allegations that “two GE subsidiaries – along with two other subsidiaries of public companies that have seen been acquired by GE – made illegal kickback payments in the form of cash, computer equipment, medical supplies, and services to the Iraqi Health Ministry or the Iraqi Oil Ministry in order to obtain valuable contracts under the U.N. Oil for Food Program.”

As noted in the SEC release, “the SEC has now taken 15 FCPA enforcement actions against companies involved in the Oil for Food-related kickback schemes with Iraq, recovering more than $204 million.”

The GE enforcement action, like other Iraqi Oil for Food enforcement actions with a few exceptions, does not allege FCPA anti-bribery violations presumably because the alleged payments were made directly to the Iraqi government or government ministries – not to specific “foreign officials” as prohibited by the FCPA’s anti-bribery provisions.

The GE enforcement action is also an outlier of sorts in that it is merely a SEC enforcement action with no parallel DOJ enforcement action – a fact mentioned in GE’s press release detailed below.

For instance, the March 2010 enforcement action against Innospec (which was part Iraqi Oil For Food) involved a DOJ criminal information as to those allegations (see here); the September 2009 enforcement action against AGCO Corporation involved a DOJ criminal information and deferred prosecution agreement (see here); and the May 2009 enforcement action against Novo Nordisk A/S involved a DOJ criminal information and deferred prosecution agreement (see here).

So much for substantively similar conduct being resolved in a similar fashion.

Without admitting or denying the SEC’s allegations (detailed below), GE, GE Ionics Inc. and GE Healthcare Ltd. consented to a court order permanently enjoining future violations of the FCPA books and records and internal control provisions. GE agreed to pay $23.4 million to settle the matter – including approximately $18.4 million in disgorgement of profits on the alleged contracts at issue.

The SEC complaint (see here) alleges as follows:

“From approximately 2000 to 2003, two subsidiaries of the General Electric Company (“GE”) — Marquette-Hellige (“Marquette”) and OEC-Medical Systems (Europa) AG (“OEC-Medical”) — made approximately $2.04 million in kickback payments in the form of computer equipment, medical supplies, and services to the Iraqi Health Ministry under the Program. Prior to GE’s acquisition of their parent companies, two other current GE subsidiaries –Ionics Italba. S.r.L. (“Ionics Italba”), and Nycomed Imaging AS, currently GE Healthcare AS (”Nycomed”) – made approximately $1.55 million in cash kickback payments under the Program. Nycomed was a subsidiary of publicly-registered Amersham plc, which was acquired by GE after the conduct at issue in this Complaint and is currently known as GE Healthcare Ltd. Ionics Italba was a subsidiary of publicly-registered Ionics, Inc., which was acquired by GE after the conduct at issue in this Complaint and is currently known as GE Ionics, Inc.”

According to the complaint:

“Marquette, OEC-Medical, Ionics Italba, and Nycomed each authorized and paid kickbacks to Iraqi government ministries through agents in the form of ‘aftersales service fees’ (ASSF) on sales of products to Iraq. All four subsidiaries knew that such kickbacks were prohibited by the Oil for Food Program and U.S. and international trade sanctions on Iraq.”

According to the complaint, the above subsidaries, “only two of which were GE subsidiaries during the relevant time period,” “working through third-party agents, made ASSF kickback payments of approximately $3,584,842. The four subsidiaries earned profits of approximately $18,397,949 as a result oftheir illegal kickbacks.”

As to the acquired subsidiaries, the SEC simply alleges, without any elaboration, that GE acquired the liabilities of Amersham and Ionic, along with assets, in the acquisitions and that “GE Ionics, Inc. and GE Healthcare Ltd., both subsidiaries of GE, are the respective successors to the liability of Ionics and Amersham.”

Cheryl Scarboro, the Chief of the SEC’s newly formed FCPA Unit, stated as follows:

“GE failed to maintain adequate internal controls to detect and prevent these illicit payments by its two subsidiaries to win Oil for Food contracts, and it failed to properly record the true nature of the payments in its accounting records. Furthermore, corporate acquisitions do not provide GE immunity from FCPA enforcement of the other two subsidiaries involved.”

In a press release (see here) GE stated that the enforcement action “concludes the SEC’s investigation and related Department of Justice review of GE regarding the Oil-for-Food Program.” The release notes that the company “has received confirmation from the U.S. Department of Justice that the Department has closed its investigation and will take no action relating to these matters.”

As to the merits of the SEC’s allegations, the company stated as follows:

“In this case, the SEC has identified 18 contracts under the Oil-for-Food Program that it alleges were not accounted for or controlled properly. Fourteen of these transactions involve businesses that were not owned by GE at the time of the transactions. The SEC alleges that, in acquiring these companies, GE acquired their liabilities as well as their assets. The other four transactions relate to GE Healthcare units in Europe. These units declined to make cash payments to the Iraqi Ministry of Health, but they acquiesced when their agent offered instead to make in-kind payments of computer equipment, medical supplies, and services to the Iraqi Health Ministry, and then failed to reflect the transactions accurately in their books and records. This conduct did not meet our standards, and we believe that it is in the best interests of GE and its shareholders to resolve this matter now, without admitting or denying the allegations, and put the matter behind us.”

No matter how flimsy the SEC’s legal theory of liability, the agency continues to extract multi-million dollar FCPA settlements from the companies it oversees. These companies view settlement as easier and more cost efficient than engaging in a protracted legal dispute with a principal government regulator.

The end result, in such cases, is a continuation of the facade of FCPA enforcement.

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