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Listening in, for the reading stack, and time served.  It’s all here in the Friday Roundup.

Listening In

This previous post about the $75,000 FCPA enforcement action against Hyperdynamics highlighted that the company spent approximately $12.7 million in pre-enforcement action professional fees and expenses (a shocking 170:1 ratio).

In this recent investor conference call, company executives stated:

“The FCPA investigations restricted our available opportunities to raise capital and significantly increased our legal bills.

[…]

Speaking of legal fees I do want to address the fees we incurred during the FCPA investigation.  As you know, we spent $12 MM from inception to closure of that investigation.  We were unhappily aware that FCPA investigations can take years to conclude but that we only had until September 2016 because of the date for the conclusion of the concession.  We therefore determined that our only option was to do everything in our power to facilitate a resolution of the investigation, and ultimately were able to close the investigations in 20 months. This came at a very heavy legal cost to say the least, but again it was the best option we saw to move forward on the path to drilling the well.”

Dear Hyperdynamics executives and shareholders, you ought to be asking some serious questions about the extent of your pre-enforcement action professional fees and expenses.

To learn more how settlement amounts in an FCPA enforcement action are often only a relatively minor component of the overall financial consequences of FCPA scrutiny and enforcement, see here for “Foreign Corrupt Practices Act Ripples.”

Reading Stack

In 2015, the UC-Davis Law Review and Fordham Law Review both held events focused on bribery and corruption topics. The articles from those events were recently published and are available below.

UC-Davis Law Review

Fordham Law Review

Time Served

In 2013 and 2014 the DOJ brought FCPA and related charges against various individuals associated with broker dealer Direct Access Partners in connection with alleged improper payments to Maria Gonzalez (V.P. of Finance / Executive Manager of Finance and Funds Administration at Bandes, an alleged Venezuelan state-owned banking entity that acted as the financial agent of the state to finance economic development projects).

As recently noted here by Reuters:

“Gonzalez “avoided prison time beyond the 16-1/2 months she already served after admitting that she accepted millions of dollars in bribes from a Wall Street brokerage to which she steered business. Maria de los Angeles Gonzalez de Hernandez, who was a senior official at Caracas-based Banco de Desarrollo Económico y Social de Venezuela, also known as Bandes, was further ordered by U.S. District Judge Denise Cote to forfeit the roughly $5 million she garnered from the scheme. Cote said she was “affected by the degree of remorse” Gonzalez showed in a statement she read to the court through an interpreter. “We’re enormously grateful for the court’s compassion and understanding,” said Jane Moscowitz, Gonzalez’s attorney, after the sentencing.”

Previously in connection with the same core action:

  • Jose Hurtado was sentenced to three years in prison, followed by three years of supervised release, and consented to a $11.9 million forfeiture.
  • Ernesto Lujan was sentenced to two years in prison, followed by three years of supervised release, and consented to a $18.5 million forfeiture.
  • Tomas Clarke was  sentenced to two years in prison, followed by three years of supervised release, and consented to a $5.8 million forfeiture.
  • Benito Chinea was sentenced to four years in prison, followed by three years of supervised release, and consented to a $3.6 million forfeiture; and
  • Joseph DeMeneses was sentenced to four years in prison, followed by three years of supervised release, and consented to a $2.7 million forfeiture.

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A good weekend to all.

 

Friday Roundup

Another acknowledgment of the logic, whistleblower statistics, a guilty plea, and for the reading stack.  It’s all here in the Friday roundup.

Another Acknowledgment of the Logic

Previous posts here and here have highlighted recent speeches by top SEC officials in which they acknowledge the underlying logic supporting a compliance defense.  Deputy Attorney General James Cole did the same in this recent speech before a bank compliance officer crowd.

“At the Department of Justice, we know that compliance officers within financial institutions, and the lawyers, bankers, and others who work with them, are the first line of defense against abuse within these institutions.  Compliance officers are critical to protecting both a bank’s reputation and its bottom line.  They’re essential when it comes to preventing criminal activity – and if that effort is not entirely successful, detecting and reporting such conduct.  It is not an exaggeration to say that compliance is fundamental to protecting the security of our financial institutions and is essential to the integrity of our entire financial system. Despite, and in some ways because of, this crucial role, I know that working in compliance is often difficult.  Compliance is seldom thought of as a ‘money-maker’ for any bank, and it may be challenging to get sufficient resources and authority to do the job well.  To some, compliance may not seem to fit within the culture of a fast-moving, cutting-edge institution.  And at times, certain business units or managers may seem downright hostile toward the compliance function. We at the Department of Justice understand this reality.  And we appreciate that, despite these challenges, you and your colleagues are fully committed to helping protect the integrity of your institutions and our financial system.”

[…]

The notion that compliance must be firmly embedded in a corporation’s culture has been raised before, including at this conference, by many government officials.  You’ve heard a great deal about the importance of ‘tone at the top.’  Indeed, companies regularly argue during negotiations that they have taken various steps to set the right tone at the highest levels of their institutions.  But based on what we have seen, we cannot help but feel that the message is not getting through often enough or clearly enough. Despite years of admonitions by government officials that compliance must be an important part of a corporation’s culture, we continue to see significant violations of law at banks, inadequate compliance programs, and missed opportunities to prevent and detect crimes.”

In “Revisiting a Foreign Corrupt Practices Act Compliance Defense,” I argue, among other things, that a compliance defense will better incentivize corporate compliance and reduce improper conduct.  Compliance is a cost center within business organizations and expenditure of finite resources on FCPA compliance is an investment best sold if it can reduce legal exposure, not merely lessen the impact of legal exposure.

In short, an FCPA compliance defense will best allow compliance professionals in the FCPA context to – in the words of Cole – “get sufficient resources and authority to do the job well.”

Will the DOJ and SEC ever be capable of realizing that a compliance defense is a race to the top, not a race to the bottom?  (See here for the prior post).  Will the DOJ and SEC ever have the courage to realize that a compliance defense can best help the enforcement agencies accomplish its laudable goals? (See here for the prior post).

Whistleblower Statistics

The Dodd-Frank Act enacted in July 2010 contained whistleblower provisions applicable to all securities law violations including the Foreign Corrupt Practices Act.  In this prior post from July 2010, I predicted that the new whistleblower provisions would have a negligible impact on FCPA enforcement.  As noted in this prior post, my prediction was an outlier (so it seemed) compared to the flurry of law firm client alerts that predicted that the whistleblower provisions would have a significant impact on FCPA enforcement.  So anxious was FCPA Inc. for a marketing opportunity to sell its compliance services, some even called the generic whistleblower provision the FCPA’s “new” whistleblower provisions.

So far, there have not been any whistleblower awards in connection with FCPA enforcement actions.  Given that enforcement actions (from point of first disclosure to resolution) typically take between 2-4 years, it still may be too early to effectively analyze the impact of the whistleblower provisions on FCPA enforcement.

Whatever your view, I previously noted that the best part of the new whistleblower provisions were that its impact on FCPA enforcement can be monitored and analyzed because the SEC is required to submit annual reports to Congress.  Recently, the SEC released (here) its annual report for FY2013.

Of the 3,238 whisteblower tips received by the SEC in FY2013, 4.6% (149) related to the FCPA.  As noted in this similar post from last year, of the 3,001 whisteblower tips received by the SEC in FY2012, 3.8% (115) related to the FCPA.  In FY2011 (a partial reporting year)  3.9% of the 334 tips received by the SEC related to the FCPA.

Yes, there will be in the future a whistleblower award made in the context of an FCPA enforcement action.  Yes, there will be much ink spilled on this occasion and wild predictions about this “new trend.”  Yet, I stand by my prediction – now 3.5 years old, that Dodd-Frank’s whistleblower provisions will have a negligible impact on FCPA enforcement.

“Foreign Official” Pleads Guilty

Earlier this week, the DOJ announced that Maria Gonzalez, the alleged “foreign official” at the center of the FCPA enforcement actions against individuals associated with broker-dealer Direct Access Partners LLC, pleaded guilty to “conspiring to violate the Travel Act and to commit money laundering, as well as substantive counts of these offenses.”  Gonzalez (V.P. of Finance / Executive Manager of Finance and Funds Administration at Bandes – an alleged state-run economic development bank in Venezuela) is to be sentenced on August 15, 2014.

As noted in the DOJ’s release:

“Previously, three former employees of the Broker-Dealer – Ernesto Lujan, Jose Alejandro Hurtado, and Tomas Alberto Clarke Bethancourt – each pleaded guilty in New York federal court to conspiring to violate the Foreign Corrupt Practices Act (FCPA), to violate the Travel Act and to commit money laundering, as well as substantive counts of these offenses, relating, among other things, to the scheme involving bribe payments to Gonzalez.  Sentencing for Lujan and Clarke is scheduled for Feb. 11, 2014, before U.S. District Judge Paul G. Gardephe.  Hurtado is scheduled for sentencing before U.S. District Judge Harold Baer Jr. on March 6, 2014.”

Reading Stack

An interesting read from a Vietnam media source regarding the notion that – just like in tango – it takes two in a bribery scheme and that many instances of bribery are the result of harassment by foreign officials and extortion-like demands.  When passing the FCPA in 1977, Congress fully recognized and understood this reality and that is why it did not seek to capture facilitation payments in the FCPA.  (See here for more reading).

*****

A good weekend to all.

From Siriwan To Gonzalez: Why The DOJ Altered The Way It Charges Alleged Corrupt Foreign Officials

Today’s post is from Mike Dearington, a 2013 Vanderbilt law grad who will soon start his practice career.  Dearington has previously authored several FCPA Professor guest posts on the Siriwan matter.

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As the Wall Street Journal reported in March, the court in United States v. Siriwan has issued a stay of the case in order to await resolution of the Thai government’s prosecution of defendant Juthamas Siriwan. A recently released transcript of the March hearing, which details the court’s reasons for the stay, suggests a strategic shortcoming in the DOJ’s charging tactics in the case. The shortcoming may explain why the DOJ, after Siriwan, altered the way it charged an allegedly corrupt foreign official in a similar case, Gonzalez.

Siriwan Background

In 2009, prosecutors charged Juthamas Siriwan, former governor of Tourism Authority of Thailand, as well as her daughter Jittisopa, with awarding lucrative contracts to two Hollywood movie executives in exchange for kickbacks.  (See here for the prior post). Because foreign officials are outside the scope of the FCPA, prosecutors charged Juthamas Siriwan under the MLCA (Money Laundering Control Act). The indictment cited two theories of specified unlawful activity: promotion of (i) violations of the US Foreign Corrupt Practices Act and (ii) violations of Thai law. Under the MLCA, FCPA violations expressly constitute specified unlawful activity, 18 U.S.C. § 1956(c)(7)(D), and violations of Thai law may constitute specified unlawful activity by virtue of being an “offense against a foreign nation involving . . . bribery of a public official, or the misappropriation, theft, or embezzlement of public funds by or for the benefit of a public official,” 18 U.S.C. § 1956(c)(7)(B)(iv). But when the defendant is the foreign official, as in Siriwan, neither theory is well settled under federal law.

Questions about the FCPA theory of money laundering predominated a January 2012 hearing in Siriwan. At that hearing, the court suggested preliminary disapproval of the theory, noting the FCPA’s affirmative legislative policy of exempting foreign officials from its reach. See, e.g., Castle; Gebardi. The government countered that it had not charged the defendant under the FCPA statute and instead was charging money laundering in promotion of FCPA violations, a distinct crime (citing Bodmer).

During the March 2013 hearing, however, discussion shifted to the prosecution’s second theory of money laundering, where an “offense against a foreign nation” is the purported specified unlawful activity.

March 2013 Siriwan Hearing: Court Continues Stay Until Resolution of Thai Prosecution

During the March 2013 hearing on defendants’ motion to dismiss, the court was conspicuously reluctant to decide questions of Thai law, when it could instead wait until Thailand decides those questions itself: “I don’t understand how I could attempt to discover what Thai law is, the ins and outs of Thai law to make that type of determination.” The court opined:

“[E]specially when there are very serious issues, it behooves the court to be somewhat cautious in this regard. And, again, it seems to me that what will happen in Thailand will inform this court as to what this court’s proper response should be to the motion to dismiss. And I do not feel that it is my obligation to do that which can be done through a prosecution in Thailand as to Thai law. [I]t behooves me to wait and see even for no other reason that I can say, at least, they are experts in Thailand as to what Thai law is.”

Additionally, the court averred that an acquittal in Thailand would weaken the government’s money-laundering charge based on promotion of crimes against Thailand. The court speculated that, in the event Thailand acquits the defendant of the very conduct that constitutes specified unlawful activity under the MLCA charge, the government is “going to be precluded from making that argument because the Thai government will have said they haven’t violated Thai law . . . .”

The government did not concede this point, instead cautioning that, in the event of an acquittal in Thailand, the government “would want to reevaluate” its position. The government added that the MLCA charges would still stand under the FCPA theory of money laundering.

Gonzalez: The DOJ Alters Its Charging Tactics After Siriwan

The Siriwan court’s reluctance to decide questions of Thai law before resolution of Thailand’s domestic enforcement means a concomitant delay of the government’s case in the United States. And if prosecutors continue to charge money laundering in promotion of an offense against a foreign nation, thereby implicating foreign law, district courts may repeatedly decide to stay the cases until the foreign nation has resolved its charges against the official. In practice, charging a foreign official with money laundering where the specified unlawful activity is a violation of another country’s law can pose a “trial within a trial” problem; that is, the district court may decide to cautiously await that country’s direct prosecution of the offense before adjudicating a money-laundering charge in the United States predicated on that offense. The latter complication seems to have occurred in Siriwan.

In addition to the delay, when a court awaits the foreign nation’s prosecution, it renders ineffective the government’s prosecution for money laundering predicated on the foreign offense. For instance, if Thailand acquits Siriwan, it will be difficult for prosecutors in the United States to then prove that Siriwan intended to promote an offense against Thailand. On the other hand, if Thailand convicts Siriwan, imprisonment in Thailand may further delay extradition to the United States.

But the government seems to have learned all this from Siriwan. In March 2013, prosecutors in United States v. Gonzalez charged Venezuelan “foreign official” Maria Gonzalez with money laundering in a kickback scheme similar to the one in Siriwan. Specified unlawful activity charged in the criminal complaint consisted of violations of the FCPA, like in Siriwan, but did not include an offense against Venezuela. Thus, the court will not need to defer to resolution of a foreign prosecution of Gonzalez to decide the merits of the government’s case on a motion to dismiss.

Furthermore, prosecutors departed from Siriwan by adding a new charge: violations of the Travel Act. The Travel Act prohibits travelling or using the mail in interstate or foreign commerce with intent to promote unlawful activity. See 18 U.S.C. § 1952(a)(3)(A). Such unlawful activity, defined in § 1952(b), includes bribery under the laws of the United States or any state thereof in which it is committed. The Gonzalez criminal complaint cites New York State Penal Law sections 180.00 and 180.05, which criminalize commercial bribery. Based on the facts alleged in Siriwan, prosecutors could probably have charged Juthamas Siriwan with violating the Travel Act, based on California Penal Code section 641.3, which criminalizes commercial bribery. Naturally, these predicate unlawful activities raise no difficulties of interpreting foreign law, and federal courts are competent at deciding questions of state law.

Attorney General Holder’s Personal Stake in Siriwan and Gonzalez

Attorney General Holder has a personal stake in seeing money-laundering cases predicated on “an offense against a foreign nation involving . . . bribery of a public official” succeed. This is because Holder, as Deputy Attorney General in the Clinton administration, was instrumental in amending the MLCA so that it included this provision in its list of specified unlawful activity.

During the Clinton administration, Holder co-chaired the Money Laundering Steering Committee. As co-chair, Holder oversaw implementation of the National Money Laundering Strategy of 2000, one of five annual strategies mandated by the “Money Laundering and Financial Crimes Strategy Act of 1998.” The 2000 Strategy Report urged passage of the Money Laundering Act of 2000, a bill that would have added bribery of a public official to the MLCA’s list of specified unlawful activity. (The addition would have satisfied Article 7 of the OECD Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions.) Although the bill failed to pass, Congress resurrected the provision in 2001 under section 315 of Title III of the USA PATRIOT Act (codified at 18 U.S.C. § 1956(c)(7)(B)(iv)).

Presciently, the provision was intended to fill the very “loophole” at issue in Siriwan and Gonzalez. The 2000 report observed that:

“At present, . . . a foreign public official who accepts bribes or embezzles money and then launders the proceeds through a U.S. bank is not subject to a U.S. money laundering prosecution. The new provision will close that loophole, which severely limits the ability of the United States to investigate and prosecute the laundering of foreign criminal proceeds through financial institutions in the United States.”

Fast forward to 2009, and it is unsurprising that the DOJ, under Holder’s leadership, pursued Siriwan under the “offense against a foreign nation involving . . . bribery of a public official” provision that he helped develop.

But after the provision has caused substantial delays in Siriwan, it is equally unsurprising that the DOJ sidelined the provision in Gonzalez. That decision underscores the inefficacy of charging a specified unlawful activity that turns on a foreign offense, which can be better analyzed in a foreign court. Moreover, Gonzalez undoubtedly put the DOJ in the uncomfortable position of abandoning a strategy Holder helped develop earlier in his career at the DOJ.

SEC Examination Leads To Criminal FCPA Charges Against Bond Traders

It is one of the more unusual origins of a Foreign Corrupt Practices Act enforcement action.

In November 2010, the SEC conducted a periodic examination of Direct Access Partners LLC (“DAP”), a broker-dealer registered with the SEC.  DAP’s Global Markets Group (“DAP Global”) primarily executed fixed income trades for customers in foreign sovereign debt.  One of its customers was Bandes, an alleged Venezuelan state-owned banking entity that acts as the financial agent of the state to finance economic development projects.

According to the DOJ and SEC, the SEC examination lead to the discovery of a “fraud that was staggering in audacity and scope” (see here for the SEC release).  A component of the alleged fraud included payments by Tomas Clarke (a DAP Executive Vice President who worked out of the company’s Miami office) and Alejandro Hurtado (a back-office employee of DAP in Miami) to Maria Gonzalez (V.P. of Finance / Executive Manager of Finance and Funds Administration at Bandes).  According to this DOJ criminal complaint, Gonzalez oversaw Bande’s trading by DAP.

According to the criminal complaint, Clarke, Hurtado and others “directed kickback payments” to Gonzalez “in exchange for Gonzalez steering Bandes business to [DAP] and authorizing Bandes to execute bond trades with [DAP].  According to the complaint, between 2008 and 2010 “Gonzalez received at least $3.6 million in payments through insiders and affiliates of [DAP].  According to the complaint, during this time period, “with Gonzalez both acting as the authorized trading contact in regard to [DAP] and managing the relationship between Bandes and [DAP], Bandes directed substantial business to [DAP] and carried out bond transactions that resulted in [DAP] generating tens of millions of dollars in revenue.”  The criminal complaint alleges various payments made or authorized by Clarke and Hurtado to an account in Switzerland held in the name of Gonzalez and/or a company owned in part by Gonzalez.

Based on the above core set of conduct, the criminal complaint charges Clarke and Hurtado with the following offenses:  conspiracy to violate the FCPA, substantive FCPA violations, conspiracy to violate the Travel Act, substantive Travel Act violations, conspiracy to commit money laundering, and substantive money laundering violations.

Gonzalez, the alleged “foreign official,” was charged with conspiracy to violate the Travel Act, substantive Travel Act violations, conspiracy to commit money laundering, and substantive money laundering violations.  (For other examples of “foreign officials” being criminally charged with non-FCPA offenses in connection with an FCPA enforcement action, see here and here).

In this DOJ release, Acting Assistant Attorney General Mythili Raman stated as follows.  “Today’s announcement is a wake-up call to anyone in the financial services industry who thinks bribery is the way to get ahead.  The defendants in this case allegedly paid huge bribes so that foreign business would flow to their firm.  Their return on investment now comes in the form of criminal charges carrying the prospect of prison time.  We will not stand by while brokers or others try rig the system to line their pockets, and will continue to vigorously enforce the FCPA and money laundering statutes across all industries.”

As noted in the DOJ release, “the government [also] filed a civil forfeiture action … seeking the forfeiture of assets held in a number of bank accounts associated with the scheme, including several bank accounts located in Switzerland.  The forfeiture complaint also seeks the forfeiture of several properties in the Miami area related to Hurtado that were purchased with his proceeds from the scheme.”

The above core conduct also resulted in this SEC civil complaint against Clarke and Hurtado (and others) charging a variety of non-FCPA securities law violations.

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