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With Chi Guilty Verdict, Focus Shifts To Kinemetrics And Guralp Systems

focus

The DOJ recently announced that Heon-Cheol Chi (Chi) of South Korea, “the Director of South Korea’s Earthquake Research Center at the Korea Institute of Geoscience and Mineral Resources (KIGAM) was convicted … following a four-day jury trial of laundering bribes that he received from two seismological companies based in California and England through the U.S. banking system.”

As noted here, according to court documents the companies are Kinemetrics (a California company that designs technologies, products, and solutions for monitoring earthquakes and their effects on people and structures) and Guralp Systems Ltd. (a U.K. company that designs, manufactures and delivers products, services, systems and solutions for a wide range of applications for the seismological research community as well as the the oil & gas, civil engineering and energy sectors.)

With the Chi guilty verdict, focus shifts to Kinemetrics and Guralp Systems and when asked if there would be an FCPA enforcement action against these companies a DOJ spokesperson informed me via e-mail that “the investigation is ongoing.”

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Across The Pond, Rolls-Royce Also Resolves A $625 Million U.K. Enforcement Action

Rolls

This recent post went in-depth into the $170 million Foreign Corrupt Practices Act enforcement action against Rolls-Royce. As mentioned in the post, the FCPA enforcement action against Rolls-Royce was part of a broader $800 million global resolution that also included a U.K. Serious Fraud Office component as well as Brazil law enforcement action.

The approximate $625 million U.K. enforcement action comprised the bulk of $800 million global resolution (that would seem to make sense, Rolls-Royce is after all a U.K. company) and is summarized below including the several failure to prevent bribery counts under the Bribery Act.

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“Corporate Bribery Is Not The Simple, Safe Issue It Seems At First Blush”

I tend to read the news with Foreign Corrupt Practices Act goggles on.  It’s an occupational hazard that sometimes is annoying, but often rewarding.

Although the FCPA was not mentioned in a recent Wall Street Journal article “Can Moguls Untangle Nigeria’s Power Lines?,” the article is interesting from so many angles relevant to the issues discussed on this website and highlights that FCPA issues are multi-faceted legal and policy issues involving multiple actors and are often not as simple as some seem to suggest.

Indeed, the article reminded me of one of my favorite statements from the FCPA’s legislative history by Theodore Sorensen:

“Corporate bribery abroad is not the simple, safe issue it seems at first blush. […]  [T]here will be countless situations in which a fair-minded investigator or judge will be hard-put to determine whether a particular payment or practice is a legitimate and permissible business activity or a means of improper influence […]  Reasonable [persons] and even angels will differ on the answers to these and similar questions. At the very least such distinctions should make us less sweeping in our judgments and less confident of our solutions.”

(See here for the “Story of the Foreign Corrupt Practices Act”)

Prior to discussing the article, I want to make crystal clear that the recent Wall Street Journal article does not accuse any companies or individuals of any wrongdoing, nor am I. Rather, I am merely using the general issues discussed in the article to highlight various issues relevant to the FCPA and related issues.

The article highlights how Nigeria’s electrical system is dismal and in disrepair.  According to the article, “the result:  Nigeria produces less than half as much electricity as North Dakota for 249 times more people.  Blackouts strike 320 days a year.”  If the electrical system is modernized, the article notes, “airlines will be able to land after sunset” and “schoolchildren will do their homework after dark.”

Let’s assume for purpose of this post, that in connection with the modernization of Nigeria’s electrical system, Company A involved in the project (a company that is otherwise viewed as selling the best product for the best price) makes an improper payment to a Nigerian “foreign official” to motivate the “foreign official” to select the company’s product for the modernization. This conduct leads to an FCPA enforcement action against Company A and those who claim all FCPA enforcement actions must involve a “victim” will say that the Nigerian people have been victimized, their human rights violated, and some will even request that the FCPA settlement amount be diverted to the Nigerian “victims.”

Without in any way countenancing the above hypothetical payments, I struggle to find any “victims” from a modernized Nigerian electrical system.

Some will say, but wait, because of the improper payment, inferior product will be incorporated into Nigeria’s electrical system (the lines will crumble, electrical fires will ensure, people will be injured).  At least so goes the conventional rhetoric surrounding bribery issues.  Yet recall that Company A is otherwise viewed as selling the best product for the best price and its goods are used the world over because they are the best.

Some will still say, but wait, because of the improper payment, the Nigerian government ended up paying more for the electrical upgrade then it would have paid but for the hypothetical improper payment.  But what if the Nigerian government selected Company A’s product because it was actually cheaper because, by selecting Company A, the Nigerian government availed itself of low interest loans from the Export-Import Bank of the U.S. which titled the balance in favor of Company A?

Again, without in any way countenancing the above hypothetical payments, I struggle to find any “victims” when a foreign government pays a lower price for a better product and indeed is incentivized to choose the product by the U.S. government.

What about the role of the U.S. government?

Is the U.S. government not seeking to influence an act or decision of a foreign official to favor a U.S. company through low interest loans?  After all, the Export-Import Bank low interest loans in Nigeria are in furtherance of President Obama’s $7 billion “Power Africa” initiative.  (See here).

As noted in this prior post, the U.S. government bears some responsibility when it comes to certain circumstances that result in FCPA scrutiny.  Indeed, several FCPA enforcement actions (see herehere and here for instance) have involved conduct in connection with U.S. government financing programs.  There is an irony of course in the U.S. government encouraging companies to do business in certain countries because it serves U.S. interests.  Then when the company does business in that country and encounters business conditions that the U.S. government no doubt knew it was going to encounter, the company then becomes the subject of a U.S. law enforcement inquiry.

Reading the recent Wall Street Journal article about transforming Nigeria’s electrical system with FCPA goggles on was rewarding in that it reminded me of the multi-faceted legal and policy issues involving multiple actors that are often relevant to the issues discussed on this website.

As Theodore Sorensen said “corporate bribery abroad is not the simple, safe issue it seems at first blush.”

Friday Roundup

It’s a complex world, you ask – I answer, scrutiny alerts and updates, quotable, and for the reading stack.  It’s all here in the Friday Roundup.

It’s a Complex World

The world in which we live in is seldom simple and straight-forward.  This includes the so-called “fight” against corruption and bribery.  Regarding China’s “crackdown” on bribery, the BBC China Blog reports:

“Much has been written about China’s ongoing crackdown on corruption, but now one of the world’s biggest banks has put a price on it.  According to a report published by Bank of America Merrill Lynch this week, the Chinese government’s anti-graft campaign could cost the economy more than $100bn this year alone. […]  Many of the micro effects of Xi Jingping’s anti-corruption drive have already been well documented of course; a slowdown in the restaurant trade for example, and a big dip in sales of luxury goods.  Over the past year or so, in Shanghai’s posh malls and boutique designer shops – once at the centre of the happy merry-go-round of official largesse and gift giving – you’ve almost been able to hear the sound of the weeping and gnashing of teeth. But the BofAML report suggests that the campaign is also having a significant and troubling macroeconomic effect.  Since early last year, it says, government bank deposits have been soaring, up almost 30% year on year. Even honest officials, the report suggests, are now so terrified of starting new projects, for fear of being seen as corrupt, that they’re simply keeping public funds in the bank.  […] The report’s authors admit their calculations are a “back-of-the-envelope estimate of fiscal contraction”, but even if they are only half right it is an extraordinary amount of money and it highlights some of the challenges facing China’s anti-corruption crusader-in-chief, President Xi Jinping.”

Some-what related to the above topic, as noted in this Washington Times article:

“A key player in Nigeria’s emergence as Africa’s largest economy says U.S. companies are ceding investment opportunities to China and the Obama administration should do more to reverse the trend.  “The Obama administration has to focus more on Nigeria, said Prince Adetokunbo Sijuwade, whose family holds royal status in a vital corner of southern Nigeria and is invested heavily in transportation and oil infrastructures. “We feel that we can learn from the U.S. in terms of expertise. […]  Prince Sijuwade speculated that several factors may have deterred U.S. investors in recent years, from concerns about government corruption to security. But he argued that allegations of widespread corruption in Nigeria are “overstated.”“Corruption is all over the world,” he said, noting potential U.S. investors’ fears of violating the Justice Department’s anti-corruption laws as an inhibiting factor on Nigerian investment.”

You Ask – I Answer

This op-ed poses the question “what’s driving pharma’s international bribery scandals?”

You ask – I answer.

A dubious and untested enforcement theory + extreme risk aversion because of potential exclusion from government sponsored healthcare programs + other typical reasons for why other companies face FCPA scrutiny, such as employees and third parties acting contrary to a company’s good-faith compliance policies and procedures = several FCPA enforcement actions against pharma and healthcare related companies.

Scrutiny Alerts and Updates

The Wall Street Journal reported earlier this week:

“GlaxoSmithKline PLC is investigating allegations of bribery by employees in the Middle East, according to emails reviewed by The Wall Street Journal, opening a new front for the company as it manages a separate corruption probe in China.  A person familiar with Glaxo’s Mideast operations emailed the U.K. drug company late last year and earlier this year to report what the person said were corrupt practices in Iraq, including continuing issues and alleged misconduct dating from last year and 2012. The emails cite behavior similar to Glaxo’s alleged misconduct in China, including alleged bribery of physicians. […]  In an email, the person said Glaxo hired 16 government-employed physicians and pharmacists in Iraq as paid sales representatives for the company while they continued to work for the government. A government-employed Iraqi emergency-room physician has prescribed Glaxo products, even when they weren’t in the hospital’s pharmacy and a competitor’s brand was in stock, an email from the person said. Glaxo has been hiring government-employed Iraqi doctors as medical representatives and paying their expenses to attend international conferences, the person alleged in the emails. Glaxo pays other doctors high fees to give lectures in exchange for promoting and prescribing its drugs, the allegations continued. After Glaxo won a contract with the Iraqi Ministry of Health in 2012 to supply the company’s Rotarix vaccine, Glaxo paid for a workshop in Lebanon for Iraqi Ministry of Health officials, the email said. That included paying for a doctor’s family to travel to Lebanon “so it would be a family vacation for him at the hotel.”

As noted in the article, GSK has been under FCPA scrutiny since 2011 and GSK’s scrutiny China was the frequent focus of media attention last summer (see here for the prior post).

Quotable

Russel Ryan (King & Spalding and former high-ranking SEC enforcement attorney) hits a home run with this recent Wall Street Journal editorial titled:  “When Regulators Think They Are Prosecutors.”  It states, in pertinent part:

“[A]dministrative agencies like the SEC were never intended to become arms of law enforcement. They were created to regulate, not prosecute. […]  There are good constitutional reasons why agencies like the SEC were not born with this power to prosecute and punish. Prosecuting private citizens and companies is serious business. It’s a core executive branch function historically entrusted to the attorney general, a “principal Officer” subject to unfettered presidential control under Article II of the Constitution. […]   [I]f policy makers insist on transforming the commission and similar agencies into quasi-criminal prosecutors with ever-increasing power to seek harsh punitive sanctions, those agencies should be brought under the stewardship of the attorney general or given cabinet rank with leaders who are removable at the president’s pleasure. Even that wouldn’t cure a second level of constitutional infirmity. Based mostly on precedent established before the SEC had any power to punish, courts have exempted SEC prosecutions from many bedrock due-process protections taken for granted in criminal cases. The presumption of innocence, for example, is largely meaningless because the SEC can win by a mere “preponderance of the evidence” rather than proof beyond reasonable doubt. The right to remain silent is equally hollow because courts let the SEC treat silence as evidence of guilt. For SEC defendants who can’t afford a good lawyer, tough luck, because there’s no right to have counsel appointed at government expense as there would be in a criminal prosecution. And even when the SEC loses after trial, double jeopardy doesn’t prevent it from trying to reverse the verdict or force a retrial, as it would a criminal prosecutor.  Dodd-Frank made things even worse by expanding the SEC’s ability to impose draconian financial penalties in administrative proceedings that have lax evidentiary rules, no jury trial, and limited judicial oversight.Basic constitutional safeguards should protect American citizens and businesses whenever a law-enforcement agency seeks to punish them for alleged wrongdoing, even in nominally civil proceedings. It’s time to incorporate those safeguards into an increasingly penal administrative prosecution system that is quickly sliding down a slick and constitutionally hazardous slope.”

For Ryan’s previous guest post on similar issues, see here.

Reading Stack

Certain of the conduct at issue in this week’s FCPA enforcement action against HP and related entities concerned alleged conduct in Poland.  This article from a Polish news service looks at what happens “when the dust settles.”

An insightful post on the Trace Blog from a former DOJ FCPA enforcement attorney who oversaw several monitors titled “Five Questions That can Keep Your Monitor From Running Away.”  Perhaps the best question though is: are monitors truly needed in many FCPA resolutions?  (See here and here for prior posts).

For your viewing enjoyment here, recently indicted Ukrainian businessman Dmytro Firtash (see here) has released a video which insists he is an innocent party caught at the center of a “battlefield for the two biggest global players of Russia and the USA”.

*****

A good weekend to all.

Of Note From The Bilfinger Enforcement Action

This previous post went long and deep as to the Bilfinger enforcement action.  This post continues the analysis by highlighting additional notable issues.

Comprehensive “Core” Enforcement Action

The Bilfinger enforcement action of course was not a new action (although it is likely to be counted as such in FCPA Inc. statistics).

Rather, the enforcement action is directly related to several other previous enforcement actions and thus part of one “core” enforcement action.  As alluded to in the previous post, the core conduct at issue in the Bilfinger enforcement action – involving the Eastern Gas Gathering System (EGGS) project in Nigeria – has also been the focus, in whole or in part, in the following enforcement actions: Willbros Group (2008), James Tillery and Paul Novak (2008), Jason Steph (2007), and Jim Brown (2006).

This makes the “core” EGGS FCPA enforcement action stand out in terms of its comprehensive nature in that the action targeted two joint venture participants (Bilfinger and Willbros), Willbros employees (Tillery, Brown and Steph) and Willbros’s consultant (Novak).  Another FCPA enforcement action involving conduct in connection with the Bonny Island, Nigeria project was similarly broad in its scope (see here), but few FCPA enforcement actions are.

The question remains, why did it take approximately 5.5 years from the 2008 Willbros enforcement action for the Bilfinger enforcement action to occur?  After all, Bilfinger was mentioned in the Willbros enforcement action as “a German construction company, a subsidiary or affiliate of a multinational construction services company based in Mannheim, Germany.”

Repeat – FCPA Settlements Have Come a Long Way in a Short Amount of Time

This recent post highlighted how FCPA settlement amounts have come a long way in a short amount of time and posed the question – have FCPA settlement amounts increased … just because?

Consider that the Bilfinger and 2008 Willbros enforcement action involved the same EGGS project.

The DOJ’s DPA in Willbros does not set forth a detailed advisory Sentencing Guidelines calculation as is the norm in most current FCPA DPAs, including the Bilfinger DPA, but the DOJ settlement amount in Willbros was $22 million.  This $22 million settlement amount was in connection with not only the EGGS project, but also DOJ allegations that “certain Willbros employees based in South America agreed to make approximately $300,000 in corrupt payments to Ecuadoran government officials of the state-owned oil company PetroEcuador and its subsidiary, PetroComercial, to assist in obtaining the Santo Domingo project, which involved the rehabilitation of approximately sixteen kilometers of a gas pipeline in Ecuador, running from Santo Domingo to El Beaterio.”

The DOJ settlement amount in Bilfinger was $32 million and this action involved only the EGGS project.

Misc.

As a foreign company, the FCPA’s anti-bribery provisions apply to Bilfinger only to the extent a “means or instrumentality of interstate commerce” is used in connection with a bribery scheme.  Of note, in the Bilfinger information, the “means and instrumentality” used to support one substantive FCPA anti-bribery charge was a “flight from Houston, TX, to Boston, MA to discuss promised bribe payments.”

As a foreign non-issuer company, the most logical section of the FCPA anti-bribery provisions that Bilfinger would be subject to is dd-3 – “prohibited trade practices by persons other than issuers or domestic concerns.”

Yet, the DOJ information charges Bilfinger under dd-1 applicable to issuers and dd-2 applicable to domestic concerns.

For more on this aspect of the Bilfinger enforcement action, see here.

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