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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).

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.

FCPA Violations Can Occur Even in Low-Risk Countries

The Department of Justice announced today (see here) that Leo Winston Smith pleaded guilty to conspiracy to violate the FCPA. According to the plea agreement, Smith (the former Director of Sales and Marketing for Pacific Consolidated Industries), along with Martin Eric self (a partial owner and former president of the company), created a sham marketing agreement with a relative of a United Kingdom Ministry of Defense official to facilitate the payment of approximately $70,000 to the official in exchange for Pacific Consolidated receiving contracts.

In May 2008, Self pleaded guilty to violating the FCPA for his role in the scheme and he is currently serving a probation sentence (see here). The DOJ release notes that the U.K. official pleaded guilty in the U.K. to receiving the bribes and he was sentenced to two years in prison.

FCPA violations in the U.K. – such things only happen in places like China and Nigeria right?

Wrong.

Companies need to be diligent about FCPA compliance no matter where they do business, not just traditional FCPA high-risk countries.

In announcing the plea, Assistant Attorney General Lanny Breuer warned, “[b]ribery cannot be viewed as standard operating procedure when representatives from U.S. companies seek contracts abroad,” and a FBI official warned “[t]he FBI, with its partners, will continue to actively search for – and counter – these corrupting influences.”

Smith is to be sentenced this December.

Authorizing Improper Payments … You Can’t Do That Either!

The FCPA’s anti-bribery provisions prohibit one from offering to pay, paying, or promising to pay “anything of value” to a “foreign official” to “obtain or retain business.”

As highlighted by the SEC’s recent settled enforcement action against Oscar Meza (the former Director of Asia-Pacific Sales for Faro Technologies, Inc.), the anti-bribery provisions also prohibit one from “authorizing” such payments or offer of payments as well.

According to an SEC complaint (see here), this is exactly what Meza did when the company’s new China Country Manager requested permission to “do business the Chinese way,” a term, the SEC alleges, Meza understood to mean that the Country Manager was requesting permission to pay kickbacks and other things of value to potential Chinese customers in order to obtain sales contracts.

The SEC’s complaint alleges that Meza’s authorizations resulted in Faro-China’s payment of approximately $450,000 in improper payments to … you guessed it …”employees of Chinese state-owned companies.” (see para. 12). According to the complaint, not only did Meza authorize these payments, but he also instructed Faro-China’s staff to alter account entries to conceal the true nature of the payments. (see paras 15-16). Further, in language sure to make any defense lawyer cringe, Meza allegedly sent an e-mail to the Country Manager lamenting that “someone will notice [the payments] one day and we may all be in trouble.” (para 14).

Based on the above conduct, the SEC charged Meza with violating the FCPA’s anti-bribery provisions and books and records and internal control provisions, and aiding and abetting Faro’s violations of these same provisions.

Without admitting or denying the SEC’s allegations, Meza consented to entry of a final judgment enjoining him from violating the FCPA and aiding and abetting such violations. According to the SEC release (see here) Meza was ordered to pay a $30,000 civil penalty as well as approximately $27,000 in disgorgement and pre-judgment interest (a figure no doubt attributed to the fact that Meza received, in addition to a base salary, a sales commission based on the value of sales contracts awarded to Faro-China – including contracts with Chinese government-owned companies).

This is not the first time FCPA followers have heard about Faro Technologies or the above factual scenario. In June 2008, the company (based on the same core set of facts as above) (i) agreed to a DOJ non-prosecution agreement and paid a $1.1 criminal penalty (see here); and (ii) consented to the entry of an SEC cease and desist order and agreed to pay $1.85 million in disgorgement and pre-judgment interest (see here).

FCPA Enforcement … It’s More Than Just Suitcases Full of Cash to Government Officials

When conducting FCPA training, one of the first things I like to do is immediately dispel the notion that the FCPA only applies to suitcase full of cash to a government official types of situations. While the FCPA does indeed apply to such egregious situations, the FCPA (and certainly DOJ/SEC’s interpretation of the statute) applies to a wide range of other – seemingly less culpable – conduct as well.

My future FCPA training slides will certainly include the recent Control Components Inc. (“CCI”) FCPA enforcement action as it clearly demonstrates the broadness of FCPA enforcement.

First, the big picture.

As described in a recent DOJ release (see here), CCI pleaded guilty to a three-count criminal information charging two counts of violating the FCPA and one count of violating the Travel Act in connection with a “decade-long scheme to secure contracts in approximately 36 countries by paying bribes to officials and employees of various foreign state-owned companies as well as foreign and domestic private companies.”

Pursuant to the plea agreement, CCI agreed to pay a criminal fine of $18.2 million, serve a three-year term of organizational probation and adopt a host of other measures common in FCPA settlements such as create, implement and maintain an anti-bribery compliance program and retain an independent compliance monitor.

The CCI enforcement action demonstrates the broadness of FCPA enforcement in at least two respects: (i) the “foreign official” element; and (ii) the “anything of value” element.

“Foreign Official”

As to the “foreign official” element, para 5 of the Indictment is the key paragraph. It states as follows:

“Defendant CCI’s state-owned customers included, but were not limited to, Jiangsu Nuclear Power Corporation (China), Guohua Electric Power (China), China Petroleum Materials and Equipment Corporation, PetroChina, Dongfang Electric Corporation (China), China National Offshore Oil Company, Korea Hydro and Nuclear Power, Petronas (Malaysia), and National Petroleum Construction Company (United Arab Emirates). Each of these state-owned entities was a department, agency, or instrumentality of a foreign government, within the meaning of the FCPA, Title 15, United States Code, Section 78dd-2(h)(2)(A). The officers and employees of these entities, including but not limited to the Vice-Presidents, Engineering Managers, General Managers, Procurement Managers, and Purchasing Officers, were “foreign officials” within the meaning of the FCPA, Title 15, United States Code, Section 78dd-2(h)(2)(A).

As I’ve stated before in this forum (see here) and likely will in the future until this legal issue is decided by a court, DOJ’s position that employees of state-owned companies, regardless of position, are “foreign officials” under the FCPA is an unchallenged and untested legal theory – and one I believe is ripe for challenge.

Even if DOJ’s position were to be upheld by a court, those subject to the FCPA could certainly benefit from some clarity as to what DOJ considers to be a state-owned entity. Instead, in the CCI Information (and countless others) all that is there is a mere conclusory statement that each of the relevant companies are “state-owned entities” (see para 5).

What attributes of, for instance, Guohua Electric Power, make it a state-owned entity? I’ve long been curious as to what extent of investigation or discovery DOJ undertakes before it concludes that a company is a state-owned entity? If anyone has insight into this issue, please do share.

Also interesting to note is that even though para 6 of the Information states that CCI, through its former officers and employees, made corrupt payments to officers and employees of “numerous state-owned” customers around the world for the purpose of assisting in obtaining or retaining business for CCI, the Information charges only two FCPA violations.

Count two concerns payments to secure a contract with China National Offshore Oil Company and Count three concerns payments to secure a contract with Korean Hydro and Nuclear Power.

Presumably DOJ did not have sufficient evidence to support other FCPA counts as to CCI’s alleged payments to the other “numerous state-owned” customers, including the others specifically listed in para. 5 of the Information.

So why would a company such as CCI plead guilty to violating the FCPA when the “foreign officials” it allegedly bribed are “foreign officials” only under DOJ’s untested and unchallenged legal theory?

That is a good question, but I suspect it has to do with the fact that companies are in the business of making money and not in the business of setting legal precedent. With a settlement comes certainty, whereas with litigation comes uncertainty.

“Anything of Value”

As to the “anything of value” element, the Information lists the following “things of value” given by CCI, directly or indirectly to “foreign officials” – “overseas holidays to places such as Disneyland and Las Vegas” (para 19); “extravagant vacations” with the following expenses “first-class airfare to destinations such as Hawaii, five-star hotel accommodations, charter boat trips, and similar luxuries” (para 20); “college tuition” [for] the children of at least two executives” at CCI’s state-owned customers (para 20); “lavish sales events” including CCI payment of “hotel costs, meals, green fees for golf, and travel expenses” (para 21); and “expensive gifts” (para 21).

What do all these things have in common? They are not “suitcases full of cash” yet still “things of value” under the FCPA.

This is not the first time FCPA followers have heard of CCI and it is likely not the last time either. As described in the DOJ release, two former CCI executives (Mario Covino and Richard Morlok) have already pleaded guilty to conspiracy to violate the FCPA (see here and here). In addition, six former CCI executives (Stuart Carson, Hong (Rose) Carson, Paul Cosgrove, David Edmonds, Flavio Ricotti, and Han Yong Kim) were criminally indicted in April 2009 on charges of, among other things, violating the FCPA (see here).

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