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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).

Mixed FCPA Verdict (It Would Seem) in Former Congressman Jefferson Trial

You may have forgotten his name, but you likely have not forgotten the headline grabbing “cash in the freezer” allegations against former Congressman William Jefferson (Louisiana), the first member of Congress ever charged with FCPA violations.

This week, a federal jury delivered a split-verdict on the FCPA charges – or so it would seem (see below).

While Jefferson was found guilty of a variety of other charges (solicitation of bribes, honest services wire fraud, money laundering, racketeering, and conspiracy)(see here for the DOJ release), he was acquitted on the substantive FCPA antibribery charge. That charge, according to the indictment (see here), was principally based on allegations that Jefferson attempted to bribe Nigerian officials (including the former Nigerian Vice President) to assist himself and others obtain or retain business for a Nigerian telecommunications joint venture. The famous “cash in the freezer” was allegedly part of the bribery scheme.

However, the jury did convict Jefferson on a conspiracy count that the indictment charged as conspiracy to solicit bribes, to commit honest services wire fraud, and to violate the FCPA. As reported by Jefferson’s home-state newspaper, the Times-Picayune (see here), “the law only require[d][that] the jury find [Jefferson] guilty on two out of three of those counts — solicit bribes, deprive honest services and violate the Foreign Corrupt Practices Act– and in announcing the verdict, the deputy clerk did not specify which counts the jury agreed on. It may or may not have included conspiracy to violate the Foreign Corrupt Practices Act.”

Perhaps the FCPA portion of the Jefferson verdict will become more clear in the days to come.

The FCPA … It’s Not Just For Americans

In 1998, the FCPA’s antibribery provisions were amended to, among other things, broaden the jurisdictional reach of the statute to prohibit “any person” “while in the territory of the U.S.” from making improper payments through “use of the mails or any means or instrumentality of interstate commerce” or from doing “any other act in furtherance” of an improper payment. (see 15 USC 78dd-3(a)). “Any person” is generally defined to include any person other than a U.S. national or any business organization organized under the laws of a foreign nation. (see 15 USC 78dd-3(f)).

Thus, since 1998, and contrary to a still widely-held misperception, foreign nationals can be subject to the FCPA.

Ousama Naaman apparently did not get the memo as the DOJ recently unsealed a criminal indictment charging him with violating the FCPA and conspiracy to violate the FCPA and commit wire fraud. According to a DOJ release (see here) Naaman (a Canadian citizen), acting on behalf of a U.S. public chemical company and its subsidiary, allegedly offered and paid kickbacks to the Iraqi government on five contracts under the United Nations Oil for Food Program. In addition, the indictment alleges that Naaman paid $150,000 on behalf of a U.S. company to Iraqi Ministry of Oil officials to keep a competing product out of the Iraqi market.

This is certainly not the first time a foreign national has been subject to an FCPA enforcement action. Other recent examples include Jeffrey Tesler and Wojciech Chodan (both U.K. citizens criminally indicted for their roles in the KBR / Halliburton bribery scheme)(see here) and Chrisitan Sapsizian (a French citizen who pleaded guilty to violating the FCPA for his role in a scheme to bribe Costa Rican foreign officials) (see here).

The Bourke Jury Instructions

As those who follow the FCPA are already aware, Frederic Bourke, Jr. was recently found guilty by a federal jury of (among other charges) conspiracy to violate the FCPA for his role in a scheme to bribe “foreign officials” in Azerbaijan in connection with the privatization of the State Oil Company of Azerbaijan. See here for the DOJ News Release.

Contrary to numerous media reports, Bourke was not on trial for “violating the FCPA” (the original indictment against Bourke contained substantive FCPA charges, however the superseding indictment removed the substantive FCPA charges in favor of conspiracy charges).

Regardless, the Bourke trial was closely followed by the FCPA bar as FCPA trials are very rare. Because FCPA trials are rare, so too are FCPA jury instructions. The Bourke jury instructions (see here) provide for an interesting, albeit frustrating, read. In instructing the jury on the conspiracy counts, the jury was instructed on the seven elements of an FCPA violation.

“Big picture” these FCPA instructions (which begin on Pg. 23 and which the jury was duty-bound to accept) are a mess.

The problem starts with the second element “interstate commerce” and contains a fundamental misstatement of the law. The instructions say (on pg. 24) that a “domestic concern” (as Bourke is under FCPA-speak) “must have intended to make use of the mails or a means or instrumentality of interstate commerce” in order to violate the FCPA. This is the so-called “territorial” jurisdictional provision found at 78dd-2. However, the 1998 amendments to the FCPA expanded the jurisdictional reach of the FCPA, as applied to “domestic concerns,” by adding an alternative “nationality” jurisdictional provision found at 78dd-2(i) which removes the interstate commerce / U.S. territorial nexus requirements. Thus, a “domestic concern” can be charged and found liable for a substantive FCPA violation even if the prohibited activity took place entirely outside of the U.S. The jury instruction that the “domestic concern” “must have intended to make use of the mails or a means or instrumentality of interstate commerce” is thus just plain wrong.

The second problem is found in what the instructions say is the fifth element of a substantive FCPA violation – the knowledge of payment to a foreign official. The instructions say (on pg. 26-27) that a “foreign official” is: (1) an officer or employee of a foreign government; (2) any department, agency, or instrumentality of such foreign government, or (3) any person acting in an official capacity for or on behalf of such government or department, agency, or instrumentality. So far so good as the instruction merely tracks the language of 78dd-2(h)(2). The problem is the next sentence of the instruction – “[a]n ‘instrumentality’ of a foreign government includes government-owned or government-controlled companies” (see pg. 27).

Where did that come from? Certainly not the text of the FCPA, as the statute does not define the term “instrumentality.” While it is true the the Department of Justice and the Securities and Exchange Commission take the position that government-owned or government-controlled companies are “instrumentalities” of a foreign government and that all employees of such companies (regardless of rank or title) are thus “foreign officials” under the FCPA, this is an unchallenged and untested legal theory.

As I am exploring in a current work-in-progress, DOJ/SEC’s aggressive interpretation of the “foreign official” element – to include employees of government-owned or government-controlled companies – is ripe for challenge in that it is, among other things, not supported by the FCPA’s extensive legislative history and is undermined by reference to other U.S. statutes which cover foreign or domestic government instrumentalities. Another way to look at it is this way – if the DOJ/SEC’s interpretation were to be applied in an intellectually honest fashion, would not all GM or AIG employees be considered U.S. “foreign officials” because the U.S. government owns or controls those companies?

A further problem with the instructions, is that even accepting the broadness by which the instructions define “foreign official” that term is not used consistently throughout the instructions. For instance, in discussing the sixth element of an FCPA violation – purpose of payment, the instructions interchangeably use the terms “foreign official” and “foreign public official.” (see Pg. 28). Even more confusing is that the instructions, when discussing that solicitation of a bribe is not a defense, (see Pg. 29) say that “[i]t is not a defense that the payment was demanded by a government official as a price for gaining entry into a market or to obtain a contract or other beneift.” Thus, literally in the span of three pages, the instructions refer to the key “foreign official” element of an FCPA violation three different ways – “foreign official,” “foreign public official,” and “government official” even though the later two terms appear nowhere in the statute.

What a mess!

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