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DOJ Gets It Right In Recent FCPA Opinion Procedure Release

i found you!

In this November 2010 post regarding the FCPA guidance, I flagged the below statement as one of the ten most meaningful statements in the Guidance.

“Successor liability does not […] create liability where none existed before. For example, if an issuer were to acquire a foreign company that was not previously subject to the FCPA’s jurisdiction, the mere acquisition of that foreign company would not retroactively create FCPA liability for the acquiring issuer.” (Pg. 28)

I flagged the statement because … well … it was an accurate statement of black-letter law, but one often overlooked when analyzing Foreign Corrupt Practices Act issues in the connection with merger and acquisition activity.

Last Friday, the DOJ released this FCPA opinion release dated November 7th.  The Requester was a U.S. issuer in the consumer products industry and contemplating an acquisition of a foreign target.  In pertinent part, the opinion release states:

“Requestor is a multinational company headquartered in the United States. Requestor intends to acquire a foreign consumer products company and its wholly owned subsidiary (collectively, the “Target Company”), both of which are incorporated and operate in a foreign country (“Foreign Country”). In the course of its pre-acquisition due diligence of the Target Company, Requestor identified a number of likely improper payments – none of which had a discernible jurisdictional nexus to the United States – by the Target Company to government officials of Foreign Country, as well as substantial weaknesses in accounting and recordkeeping. In light of the bribery and other concerns identified in the due diligence process, Requestor has set forth a plan that includes remedial pre-acquisition measures and detailed post-acquisition integration steps.

Requestor seeks an Opinion as to whether the Department, based on the facts and representations provided by Requestor that the pre-acquisition due diligence process did not bring to light any potentially improper payments that were subject to the jurisdiction of the United States, would presently intend to bring an FCPA enforcement action against Requestor for the Target Company’s pre-acquisition conduct. Requestor does not seek an Opinion from the Department as to Requestor’s criminal liability for any post-acquisition conduct by the Target Company.

Requestor intends to acquire 100% of the Target Company’s shares beginning in 2015. The Target Company’s shares are currently held almost exclusively by another foreign corporation (“Seller”), which is listed on the stock exchange of Foreign Country. Seller is a prominent consumer products manufacturer and distributor in Foreign Country, with more than 5,000 full-time employees and annual gross sales in excess of $100 million. The Target Company represents part of Seller’s consumer products business in Foreign Country and sells its products through several related brands.

Seller and the Target Company largely confine their operations to Foreign Country, have never been issuers of securities in the United States, and have had negligible business contacts, including no direct sale or distribution of their products, in the United States.

In preparing for the acquisition, Requestor undertook due diligence aimed at identifying, among other things, potential legal and compliance concerns at the Target Company. Requestor retained an experienced forensic accounting firm (“the Accounting Firm”) to carry out the due diligence review. This review brought to light evidence of apparent improper payments, as well as substantial accounting weaknesses and poor recordkeeping. On the basis of a risk profile analysis of the Target Company, the Accounting Firm reviewed approximately 1,300 transactions with a total value of approximately $12.9 million. The Accounting Firm identified over $100,000 in transactions that raised compliance issues. The vast majority of these transactions involved payments to government officials related to obtaining permits and licenses. Other transactions involved gifts and cash donations to government officials, charitable contributions and sponsorships, and payments to members of the state-controlled media to minimize negative publicity. None of the payments, gifts, donations, contributions, or sponsorships occurred in the United States and none was made by or through a U.S. person or issuer.

The due diligence showed that the Target Company has significant recordkeeping deficiencies. The vast majority of the cash payments and gifts to government officials and the charitable contributions were not supported by documentary records. Expenses were improperly and inaccurately classified in the Target Company’s books. In fact, the Target Company’s accounting records were so disorganized that the Accounting Firm was unable to physically locate or identify many of the underlying records for the tested transactions. Finally, the Target Company has not developed or implemented a written code of conduct or other compliance policies and procedures, nor have the Target Company’s employees, according to the Accounting Firm, shown adequate understanding or awareness of anti-bribery laws and regulations. In light of the Target Company’s glaring compliance, accounting, and recordkeeping deficiencies, Requestor has taken several pre-closing steps to begin to remediate the Target Company’s weaknesses prior to the planned closing in 2015.

Requestor anticipates completing the full integration of the Target Company into Requestor’s compliance and reporting structure within one year of the closing. Requestor has set forth an integration schedule of the Target Company that encompasses risk mitigation, dissemination and training with regard to compliance procedures and policies, standardization of business relationships with third parties, and formalization of the Target Company’s accounting and recordkeeping in accordance with Requestor’s policies and applicable law.”

Under the heading “Analysis” the opinion release states:

“Based upon all of the facts and circumstances, as represented by Requestor, the Department does not presently intend to take any enforcement action with respect to preacquisition bribery Seller or the Target Company may have committed.

It is a basic principle of corporate law that a company assumes certain liabilities when merging with or acquiring another company. In a situation such as this, where a purchaser acquires the stock of a seller and integrates the target into its operations, successor liability may be conferred upon the purchaser for the acquired entity’s pre-existing criminal and civil liabilities, including, for example, for FCPA violations of the target.

“Successor liability does not, however, create liability where none existed before. For example, if an issuer were to acquire a foreign company that was not previously subject to the FCPA’s jurisdiction, the mere acquisition of that foreign company would not retroactively create FCPA liability for the acquiring issuer.” FCPA – A Resource Guide to the U.S. Foreign Corrupt Practices Act, at 28 (“FCPA Guide”). This principle, illustrated by hypothetical successor liability “Scenario 1” in the FCPA Guide, squarely addresses the situation at hand. See FCPA Guide, at 31 (“Although DOJ and SEC have jurisdiction over Company A because it is an issuer, neither could pursue Company A for conduct that occurred prior to the acquisition of Foreign Company. As Foreign Company was neither an issuer nor a domestic concern and was not subject to U.S. territorial jurisdiction, DOJ and SEC have no jurisdiction over its pre-acquisition misconduct.”).

Assuming the accuracy of Requestor’s representations, none of the potentially improper pre-acquisition payments by Seller or the Target Company was subject to the jurisdiction of the United States. For example, none of the payments occurred in the United States, and Requestor has not identified participation by any U.S. person or issuer in the payments. Requestor also represents that, based on its due diligence, no contracts or other assets were determined to have been acquired through bribery that would remain in operation and from which Requestor would derive financial benefit following the acquisition. The Department would thus lack jurisdiction under the FCPA to prosecute Requestor (or for that matter, Seller or the Target Company) for improper payments made by Seller or the Target Company prior to the acquisition. See 15 U.S.C. §§ 78dd-1, et seq. (setting forth statutory jurisdictional bases for anti-bribery provisions).

The Department expresses no view as to the adequacy or reasonableness of Requestor’s integration of the Target Company. The circumstances of each corporate merger or acquisition are unique and require specifically tailored due diligence and integration processes. Hence, the exact timeline and appropriateness of particular aspects of Requestor’s integration of the Target Company are not necessarily suitable to other situations.

To be sure, the Department encourages companies engaging in mergers and acquisitions to (1) conduct thorough risk-based FCPA and anti-corruption due diligence; (2) implement the acquiring company’s code of conduct and anti-corruption policies as quickly as practicable; (3) conduct FCPA and other relevant training for the acquired entity’s directors and employees, as well as third-party agents and partners; (4) conduct an FCPA-specific audit of the acquired entity  as quickly as practicable; and (5) disclose to the Department any corrupt payments discovered during the due diligence process. See FCPA Guide at 29. Adherence to these elements by Requestor may, among several other factors, determine whether and how the Department would seek to impose post-acquisition successor liability in case of a putative violation.”

In the release, the DOJ got it right.

Not all bribery that allegedly occurs in the world is subject to the DOJ’s jurisdiction and just because a company that is subject to the FCPA acquires a foreign company, such an acquisition does not magically create FCPA liability where there was none before.  In layman’s terms, what happened is similar to the following:  a foreign person – not subject to U.S. law – was speeding in a foreign country and just because a U.S. company then purchases the car does not create liability under U.S. law for speeding.

The DOJ also got it right as a matter of policy.  By its opinion, the contemplated transaction is likely to close whereas a contrary opinion might have caused the Requestor to abandon the transaction.  If the transaction indeed closes, a previously compromised foreign company is going to be brought within the corporate family of a U.S. company subject to the FCPA with an existing internal controls system.

On this score, I am reminded of Richard Alderman’s (former Director of the UK Serious Fraud Office) comment “that society benefits if an ethical corporation takes over and sorts out a corporation that has corruption problems.”

*****

The DOJ’s FCPA Opinion Procedure program is often criticized because of the length of time it takes to obtain an opinion.  On this issue, the opinion release highlights the following dates.  The request was initially submitted on April 30th, the Requestor provided supplemental information on May 12th, July 30th, and October 9, 2014, and the release was issued on November 7th.  Thus, from start to finish, the process took approximately six months.

*****

As to background information of the DOJ’s FCPA Opinion Procedure program:

The FCPA, when enacted, directed the DOJ Attorney General to establish a procedure to provide responses to specific inquiries by those subject to the FCPA concerning conformance of their conduct with the DOJ’s “present enforcement policy.  Pursuant to the governing regulations of the so-called DOJ Opinion Procedure Release Program, only “specified, prospective—not hypothetical—conduct” is subject to a DOJ opinion.  While the DOJ’s opinion has no precedential value, its opinion that contemplated conduct conforms with the FCPA is entitled to a rebuttable presumption should an FCPA enforcement action be brought as a result of the contemplated conduct.  Since the program went live in 1980, the DOJ has issued approximately sixty releases on a wide range of issues from charitable contributions to gifts, travel and entertainment, to third parties.

The 193 Meanings of “Foreign Official”

By most measures, there are 193 countries in the world.

According to the 11th Circuit’s recent “foreign official” ruling (see here), the FCPA’s key “foreign official” element can have 193 different meanings.

As previously highlighted, the key language from the opinion is as follows.

“An ‘instrumentality’ [under the FCPA] is an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own. Certainly, what constitutes control and what constitutes a function the government treats as its own are fact-bound questions. It would be unwise and likely impossible to exhaustively answer them in the abstract. […] [W]e do not purport to list all of the factors that might prove relevant to deciding whether an entity is an instrumentality of a foreign government. For today, we provide a list of some factors that may be relevant to deciding the issue.

To decide if the government ‘controls’ an entity, courts and juries should look to the foreign government’s formal designation of that entity; whether the government has a majority interest in the entity; the government’s ability to hire and fire the entity’s principals; the extent to which the entity’s profits, if any, go directly into the governmental fisc, and, by the same token, the extent to which the government funds the entity if it fails to break even; and the length of time these indicia have existed.

[…]

We then turn to the second element relevant to deciding if an entity is an instrumentality of a foreign government under the FCPA — deciding if the entity performs a function the government treats as its own. Courts and juries should examine whether the entity has a monopoly over the function it exists to carry out; whether the government subsidizes the costs associated with the entity providing services; whether the entity provides services to the public at large in the foreign country; and whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function.”

In sum, the key concepts according to the 11th Circuit in analyzing whether a seemingly commercial enterprise is in fact an “instrumentality” of a foreign government such that its employees are “foreign officials” are control and function.

Yet how is a business organization competing in good-faith in the global marketplace supposed to find answers to these concepts?

The 11th Circuit thinks it will be easy as the court stated:

“We think it will be relatively easy to decide what functions a government treats as its own in the present tense by resort to objective factors, like control, exclusivity, governmental authority to hire and fire, subsidization, and whether an entity finances are treated as part of the public fisc.  Both courts and businesses subject to the FCPA have readily at hand the tools to conduct that inquiry (especially because the statute contains a mechanism by which the Attorney General will render opinions on requests about what foreign entities constitute instrumentalities.”

However, is it really that easy?

I trouble to envision a general counsel or chief compliance officer of a company charged with approving expenditures of things of value in connection with a business purpose (and let’s face it, companies do this all the time in the global marketplace as to certain customers and prospective customers) ever finding answers to certain issues identified by the 11th Circuit as being relevant.

The 11th Circuit’s suggestion to the contrary is somewhat comical.  Does the 11th Circuit envision the following?

  • General Counsel / Chief Compliance Officer:  Pardon me Company A, can you tell me how your principals are hired and fired?
  • General Counsel / Chief Compliance Officer:  Excuse me Company B, but do your profits go directly into the government fisc?  A follow-up if I may – does the government subsidize your operations?  And if so, for how long?

As to the FCPA’s Opinion Procedure program, seemingly lost on the 11th Circuit is that it often takes months for a business organization to receive an answer from the DOJ.  For this reason, among others, the FCPA Opinion Procedure program has been routinely criticized.  As noted in the OECD’s 2010 review of FCPA enforcement:

“So far, the FCPA Opinion Procedure has been used very little by the private sector to obtain DOJ advice on prospective transactions. […] The non-governmental participants in the on-site meetings cited several reasons for the infrequent use of the Opinion Procedure. For instance, legal and private sector representatives felt that the Opinion Procedure is only useful in limited situations where the prospective fact situation is narrow and not going to change. They also find that the response time, which is 30 days after the request is complete, is too long in certain situations, such as entering joint ventures and mergers and acquisitions, where a company normally needs to make decisions relatively quickly. […] The most pervasive concern of the private sector representatives was that availing themselves of the Opinion Procedure could expose them to potential enforcement actions by the DOJ, as well as provide competitors with information about their prospective international business activities.”

Moreover, a significant irony of the 11th Circuit’s resort to foreign characterization and treatment of a seemingly commercial enterprise is that the DOJ itself has rejected this approach in issuing opinions under the FCPA Opinion Procedure program.

For instance in Release 94-01 the Requestor disclosed that its “foreign attorney has advised that under the nation’s law, the individual [at issue] would not be regarded as either a government employee or a public official.”  However, the DOJ stated that “the foreign attorney’s opinion is not dispositive” and the DOJ “considered the foreign individual to be a ‘foreign official’ under the FCPA.”

Even the 11th Circuit noted that it will be a “difficult task – involving divining subjective intentions of a foreign sovereign, parsing history, and interpreting significant amounts of foreign law – to decide what functions a foreign government considers core and traditional.”  Moreover, the 11th Circuit recognized “there may be entities near the definitional line for ‘instrumentality’ that may raise a vagueness concern.”

Yet, the end-result of the 11th Circuit’s decision is that “foreign official” – a key element of the FCPA – may mean 193 different things.

Some may be thinking that this entire post has been wasted ink because the meaning of “foreign official” matters only to those intent on engaging bribery. Such a position is off-base as the meaning of “foreign official” matters for a number of reasons as will be explored in a future post.

Friday Roundup

Contorted, interesting, deserving?, scrutiny alerts and updates, and for the reading stack.  It’s all here in the Friday Roundup.

Contorted

One of the most contorted words in the FCPA vocabulary is “declination” (see here among other posts).

This K&L Gates report contains a useful summary of DOJ and SEC comments at a recent conference.  It states:

“Mr. Knox [DOJ Criminal Division Fraud Section Chief] stated that companies continue to request specific information regarding the Department’s declinations, but that it is the Department’s long-standing practice not to publish details of declinations without a company’s permission, which is rarely given.  According to Mr. Knox, however, over the last two years, the Department has declined to prosecute dozens of cases.  Notably, Mr. Knox stated that, aside from finding no evidence of criminal conduct, the Department may issue a declination when a case involves an isolated incident, the company had a strong compliance program, and the problem was remediated.”

Newsflash.

If the DOJ does not find evidence of criminal conduct and therefore does not bring a case, this is not a “declination,” it is what the law commands.

On the topic of voluntary disclosure, the K&L Gates report states:

“Mr. Cain [SEC FCPA Unit Deputy Chief] started by stating “there is no perfect compliance program;” therefore, companies will always have some “background issues” which need to be addressed, especially as business and risk profiles change.  Mr. Cain does not expect companies to disclose these “normative” problems; however, companies should disclose “significant problems.”  These “significant problems” are the types of issues which may end up being enforcement actions if the SEC learns of them through means other than self-disclosure.”

“Mr. Knox took the position that it would be “very reckless and foolish” for him “to try and draw a line between matters which should be self-disclosed and matters which shouldn’t.”  In making the decision of whether to self-disclose, he advised companies and counsel to apply “common sense” and ask whether this is “something that [the Department] would be interested in hearing about?”  According to Mr. Knox, if the answer to that question is “yes,” then the Department would “probably want [a company] to self-disclose it.”  Nonetheless, there are instances which are not worthy of self-disclosure because the conduct is “minor” and “isolated” or the allegation of wrongdoing is “much too vague.”  Mr. Knox advised companies to “be thoughtful” when making disclosure decisions and carefully document any decision not to disclose.”

If the above leaves you scratching your head, join the club.

Interesting

My article “Why You Should Be Alarmed by the ADM FCPA Enforcement Action” highlights how ADM and its shareholders were victims of a corrupt Ukrainian government in that the government refused to give ADM something even the DOJ and SEC acknowledged ADM was owed – VAT refunds.  Among other things, the article discusses how VAT refund refusals were well-known and frequently criticized prior to the ADM enforcement action in late 2013.

Fast forward to the present day and VAT refund refusals remain a problem in Ukraine.  Recently the International Monetary Fund issued this release concerning a potential aid package for Ukraine.  Among the conditions is that Ukraine  adopt “reforms to strengthen governance, enhance transparency, and improve the business climate” such as taking “measures to facilitate VAT refunds to businesses.”

Deserving?

Earlier this week, the African Development Bank Group (AfDB) released this statement

“Kellogg Brown & Root LLC, Technip S.A. and JGC Corp. agree to pay the equivalent of US $17 million in financial penalties as part of Negotiated Resolution Agreements with the African Development Bank following admission of corrupt practices by affiliated companies in relation to the award of services contracts for liquefied natural gas production plants on Bonny Island, Nigeria, from 1995 until 2004.”

The Director of the AfDB’s Integrity and Anti-Corruption Department stated:

“This settlement demonstrates a strong commitment from the African Development Bank to ensure that development funds are used for their intended purpose.  At the same time, it is a clear signal to multinational companies that corrupt practices in Bank-financed projects will be aggressively investigated and severely sanctioned. These ground-breaking Negotiated Resolution Agreements substantially advance the Bank’s anti-corruption and governance agenda, a strategic priority of our institution.”

Pardon me for interrupting this feel good moment (i.e. a corporation paying money to a development bank), but why is AfDB deserving of any money from the companies?  As noted here, AfDB’s role in the Bonny Island project was relatively minor as numerous banks provided financing in connection with the project.  Moreover, as noted here, the AfDB “invested in the oil and gas sector through a USD 100 million loan to NLNG [Nigeria LNG Limited] to finance the expansion of a gas liquefaction plant located on Bonny Island.”

As alleged in the U.S. Bonny Island FCPA enforcement actions, the above-mentioned companies allegedly made corrupt payments to, among others, NLNG officials.  And for this, the specific companies paid $579 million (KBR, et al), $338 million Technip, and $219 million (JGC).

Why is the bank that loaned money to NLNG deserving of anything?  Is there any evidence to suggest that the $100 million given to NLNG was not used for its “intended purpose” of building the Bonny Island project?

Scrutiny Alerts and Updates

SBM Offshore, Sweett Group, Citigroup, Cisco, and Societe Generale.

SBM Offshore

The Netherlands-based company (with ADRs traded in the U.S. that provides floating production solutions to the offshore energy industry) has been under FCPA scrutiny for approximately two years.  It recently issued this statement which states, in summary, as follows.

“SBM Offshore presents the findings of its internal investigation, which it started in the first quarter of 2012, as the investigators have completed their investigative activities. The investigation, which was carried out by independent external counsel and forensic accountants, focused on the use of agents over the period 2007 through 2011. In summary, the main findings are:

  • The Company paid approximately US$200 million in commissions to agents during that period of which the majority relate to three countries: US$18.8 million to Equatorial Guinea, US$22.7 million to Angola and US$139.1 million to Brazil;
  • In respect of Angola and Equatorial Guinea there is some evidence that payments may have been made directly or indirectly to government officials;
  • In respect of Brazil there were certain red flags but the investigation did not find any credible evidence that the Company or the Company’s agent made improper payments to government officials (including state company employees). Rather, the agent provided substantial and legitimate services in a market which is by far the largest for the Company;
  • The Company voluntarily reported its internal investigation to the Dutch Openbaar Ministerie and the US Department of Justice in April 2012. It is presently discussing the disclosure of its definitive findings with the Openbaar Ministerie, whilst simultaneously continuing its engagement with the US Department of Justice. New information could surface in the context of the review by these authorities or otherwise which has not come up in the internal investigation to date;
  • At this time, the Company is still not in a position to estimate the ultimate consequences, financial or otherwise, if any, of that review;
  • Since its appointment in the course of 2012 the Company’s new Management Board has taken extensive remedial measures in respect of people, procedures, compliance programs and organization in order to prevent any potential violations of applicable anti-corruption laws and regulations. Both it and the Company’s Supervisory Board remain committed to the Company conducting its business activities in an honest, ethical, respectful and professional manner.”

The SBM Offshore release contains a detailed description of the scope and methodology of its review, as well as remedial measures the company has undertaken.  For this reason, the full release is an instructive read.

Sweett Group

As noted in this prior post, in June 2013 Sweett Group Ltd. (a U.K. based construction company) was the subject of a Wall Street Journal article titled “Inside U.S. Firm’s Bribery Probe.” The focus of the article concerned the construction of a hospital in Morocco and allegations that the company would get the contract if money was paid to “an official inside the United Arab Emirates President’s personal foundation, which was funding the project.”

Earlier this week, the company issued this release which stated:

“[T]here have been further discussions with the Serious Fraud Office (SFO) in the UK and initial discussions with the Department of Justice (DOJ) in the USA.  The Group is cooperating with both bodies and no proceedings have so far been issued by either of them.  The Group has commissioned a further independent investigation which is being undertaken on its behalf by Mayer Brown LLP.  Whilst this investigation is at an early stage and is ongoing, to date still no conclusive evidence to support the original allegation has been found.  However, evidence has come to light that suggests that material instances of deception may have been perpetrated by a former employee or employees of the Group during the period 2009 – 2011.  These findings are being investigated further.”

Citigroup

When first discussing Citigroup’s “FCPA scrutiny” I noted the importance of understanding that the FCPA contains generic books and records and internal controls provisions that can be implicated in the absence of any FCPA anti-bribery issues. (See here for a prior post on this subject).  As highlighted in this recent New York Times Dealbook article, this appears to be what Citigroup’s scrutiny involves.  According to the article:

“Federal authorities have opened a criminal investigation into a recent $400 million fraud involving Citigroup’s Mexican unit, according to people briefed on the matter …  The investigation, overseen by the FBI and prosecutors from the United States attorney’s office in Manhattan, is focusing in part on whether holes in the bank’s internal controls contributed to the fraud in Mexico. The question for investigators is whether Citigroup — as other banks have been accused of doing in the context of money laundering — ignored warning signs.”

Cisco

BuzzFeed goes in-depth as to Cisco’s alleged conduct in Russia that has resulted in FCPA scrutiny for the company. The article states, in pertinent part:

“[T]he iconic American firm is facing a federal investigation for possible bribery violations on a massive scale in Russia. At the heart of the probe by the Department of Justice and the Securities and Exchange Commission, sources tell BuzzFeed, are allegations that for years Cisco, after selling billions of dollars worth of routers, communications equipment, and networks to Russian companies and government entities, routed what may have amounted to tens of millions of dollars to offshore havens including Cyprus, Tortola, and Bermuda.”

“Two former Cisco insiders have described to BuzzFeed what they say was an elaborate kickback scheme that used intermediary companies and went on until 2011. And, they said, Cisco employees deliberately looked the other way.”

“No one is suggesting that Cisco bribed Russia’s top leaders. Instead, the investigation is centered on day-to-day kickbacks to officials who ran or helped run major state agencies or companies. Such kickbacks, according to the allegations, enabled the firm to dominate Russia’s market for IT infrastructure.”

“Last year, according to sources close to the investigation, a whistleblower came forward to the SEC, sketching out a vast otkat [kickback] scheme and providing documents as evidence.”

“The two former Cisco executives laid out for BuzzFeed how the alleged scheme worked:  In Cisco’s Russia operations, funds for kickbacks were built into the large discounts Cisco gave certain middleman distributors that were well-connected in Russia. The size of the discounts are head-turning, usually 35% to 40%, but sometimes as high as 68% percent off the list price.  And there was a catch: Instead of discounting equipment in the normal way, by lowering the price, parts of the discounts were often structured as rebates: Cisco sent money back to the middlemen after a sale. Some intermediaries were so close to the Russian companies and government agencies — Cisco’s end customers — that these intermediaries functioned as their agents. These middleman companies would direct the rebate money to be sent to bank accounts in offshore havens such as Cyprus, the British Virgin Islands, or Bermuda.”

According to the article, WilmerHale is conducting the internal investigation.

Societe Generale

Like other financial services company, Societe Generale has come under FCPA scrutiny for business dealings in Libya.  (See here for the prior post).  As noted in this recent article in the Wall Street Journal, in a U.K. lawsuit the Libyan Investment Authority has alleged that the company “paid a middleman $58 million in alleged bribes to secure almost $2 billion in business … during the final years of dictator Moammar Gadhafi’s rule.”

Reading Stack

The most recent issue of the always informative FCPA Update from Debevoise & Plimpton contains a useful analysis of the DOJ’s recent opinion procedure release (see here for the prior post).  Among other things, the Update states:

“[W]hy did it take eight months for the DOJ to issue an Opinion which could have simply cited [a prior Opinion Release]? The delay does not appear to be related to the DOJ’s heavy workload or bureaucratic inertia, as “significant backup documentation” was provided and “several follow up discussions” took place during the eight months.”

*****

A good weekend to all.  On Wisconsin!

Company Receives DOJ Green Light To Purchase Foreign Businessman’s (Turned “Foreign Official”) Minority Interest In A Company For Fair Market Value

Earlier this week, the DOJ released Foreign Corrupt Practices Act Opinion Procedure Release 14-01.  It is the DOJ’s first Opinion Procedure Release of 2014 and only the second such release since October 2012.   This post provides a summary of Release 14-01.

The Requestor (an issuer) was a financial services company and investment bank that was the majority shareholder of a foreign financial services company (“Foreign Company A”) and had contracted to purchase the remaining minority interest in Foreign Company A from a foreign businessman (“Foreign Shareholder”).

It would appear that the Requestor grew skittish about this mundane, routine transaction for two reasons.

First, approximately 4.5 years after Requestor purchased a majority interest in Foreign Company A (a company founded and owned by Foreign Shareholder), the Foreign Shareholder “was appointed to serve as a high-level official at Foreign Country’s central monetary and banking agency” (“Foreign Agency”).

Second, although the original agreement between the Requestor and the Foreign Shareholder contained a formula for the purchase price of Foreign Shareholder’s shares (the formula was based on a multiple of Foreign Company A’s average net income for the two years preceding the buyout), the parties “agreed not to use the valuation formula” set forth in the original agreement.  According to the release, because Foreign Company A experienced yearly operating  losses from 2008 to 2011 (an event the Requestor attributed to the 2008 global financial crisis) the original formula dictated that Foreign Shareholder’s shares “had no value.”

According to the release, “Requestor contends that any attempt to enforce the [original] Agreement as written would likely have led to litigation or Foreign Shareholder selling the Shares to a third party” – an event Requestor explained would carry substantial risks to Foreign Company A’s operations and profitability.

According to the release, the Requestor and Foreign Shareholder thus agreed “that they would instead ask an accounting firm to make an independent and binding determination of the Share’s value” and according to the release “a leading, highly regarded, global accounting firm” was engaged to do that.

Against this backdrop, the Requestor sought “an opinion that the DOJ will not initiate any enforcement action if Requestor consummates the purchase of the Shares for the appraised value.”  As noted in the Release, the Requestor made several representations and warranties relating to the purchase of the Shares, including the following:

“Foreign Shareholder has represented and warranted that, since his appointment at Foreign Agency, he has recused himself from, and has not influenced or sought to influence, any decisions by Foreign Agency, Foreign Country’s government, or any third party with respect to the Recusal Entities ([the Requestor, Foreign Company A, or their affiliates]). Foreign Shareholder also has recused himself from, and has not influenced or sought to influence, any supervisory or regulatory matters with respect to any of the Recusal Entities. Foreign Shareholder will continue to so recuse himself until after completion of the buyout of the Shares.”

“Requestor obtained a representation from Foreign Shareholder that he has disclosed his ownership interest and the proposed sale of the Shares in Foreign Company A to the relevant government authorities of Foreign Country and the relevant department at Foreign Agency, and the relevant government authorities have informed him that they approve or do not object to the sale of the Shares.”

In the “Analysis” section of the Release, the DOJ stated:

“Based upon all of the facts and circumstances, as represented by the Requestor, the Department does not presently intend to take any enforcement action with respect to the proposed buyout arrangement described in the Request.”

In pertinent part, the DOJ opined as follows.

“[T]he FCPA does not per se prohibit business relationships with, or payments to, foreign officials.” Opinion Release 2010-03, at 3 (Sept. 1, 2010). Where such an arrangement exists, “the Department typically looks to determine whether there are any indicia of corrupt intent, whether the arrangement is transparent to the foreign government and the general public, whether the arrangement is in conformity with local law, and whether there are safeguards to prevent the foreign official from improperly using his or her position to steer business to or otherwise assist the company, for example through a policy of recusal.” Id.

With respect to indicia of corrupt intent, the proffered purpose of the payment is to sever the parties’ existing financial relationship, which began before the Foreign Shareholder held an official position. Doing so would also avoid what would otherwise be an ongoing conflict of interest. The decision by the parties to employ an alternative valuation formula appears reasonable given the facts presently known. Requestor has represented that unforeseen market circumstances, as well as legitimate business considerations, prompted and justified the renegotiation of the buyout formula contained in the [original] Agreement.  […]  [A]ttempting to hold Foreign Shareholder to the terms of the [original] Agreement and pay little or nothing for the Shares presents commercial and legal risks to Requestor. Foreign Shareholder could institute litigation, and Requestor would face litigation costs and bear the risk of having to pay an even greater amount to Foreign Shareholder. Alternatively, Foreign Shareholder is not obligated to sell the Shares back to the Subsidiary and could sell them to a third party, potentially resulting in an undesirable or disadvantageous partnership.”

[R]equestor’s decision to engage the Firm to serve as the independent and binding arbiter of the value of the Shares provides additional assurance that the payment reflects the fair market value of the Shares, rather than an attempt to overpay Foreign Shareholder for a corrupt purpose.

[…]

Accordingly, because the facts, representations, and warranties described in the Request demonstrate at present that the only purpose of the payment to Foreign Shareholder is consideration for the Shares, the Department does not presently intend to take any enforcement action. The Department notes, however, this Opinion does not foreclose future enforcement action should facts indicative of corrupt intent (such as an implied understanding that Foreign Shareholder would direct business to Requestor or inflated earnings projections being used to induce Foreign Shareholder to act on Requestor’s behalf) later become known.”

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One frequent criticism of DOJ FCPA releases – including as noted in the OECD’s 2010 Report – is that it simply takes too long for the Requestor to receive an answer.

On this issue, the following is relevant to Release 14-01.  The Requestor submitted the request on July 8, 2013.  On July 25, 2013 the DOJ sent Requestor a letter seeking additional information.  According to the DOJ, on September 19, 2013 the Requestor provided a partial response which was accompanied by significant backup documentation.  According to the DOJ, thereafter the DOJ and counsel for the Requestor had several follow up discussions to clarify certain issues.  On February 13, 2014, the Requestor provided a final submission that addressed the last outstanding issues raised by the DOJ.  On March 17, 2014 the DOJ issued the release.

In short, from start to finish the process took approximately 8 months.

Congress Remains Interested In FCPA Issues

Foreign Corrupt Practices reform may not be the hot issue it was circa 2011 (political posturing by the DOJ in connection with the FCPA Guidance as well as certain headlines caused the issue to simmer), but Congress remains interested in FCPA issues.

For instance, in connection with a recent confirmation hearing for Leslie Caldwell to be the DOJ’s Assistant Attorney General of the Criminal Division, Senator Charles Grassley (R-IA), Ranking Member of the Senate Judiciary Committee, asked Caldwell several FCPA-related questions for the record.

Caldwell punted on every question (perhaps not surprising given that Caldwell is not currently at the DOJ), but the questions posed nevertheless highlight specific FCPA issues on the minds of certain members of Congress.

Set forth in full below are the FCPA-related questions by Senator Grassley and Caldwell’s responses.

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“I recently asked Attorney General Holder these questions and have not yet received response.  As the FCPA falls within the Criminal Division, would you please respond to the following questions.

What are the Department’s current enforcement priorities under the FCPA?

Answer:  I am not in the Department; therefore, I am not in a position to address this question.  If I am confirmed as the Assistant Attorney General of the Criminal Division, I assure you that I will be vigilant in pursuing cases under the FCPA.

What particular industries, markets or practices is the Department focusing on, and why?

Answer:  I am not in the Department; therefore, I am not in a position to address this question.  As noted above, if I am confirmed as the Assistant Attorney General of the Criminal Division, I assure you that I will be vigilant in pursuing cases under the FCPA.

What proportion of the Department’s enforcement activity during 2013 involved non-U.S. companies?

Answer:  I am not in the Department; therefore, I am not in a position to address this question.  If I am confirmed as the Assistant Attorney General of the Criminal Division, I assure you that I will be vigilant in pursuing cases against U.S. and non-U.S. companies that violate the FCPA.

Has the Department seen a recent increase in whistleblower claims of FCPA violations?  If so, to what would you attribute that?  How has the Department responded?

Answer:  I am not in the Department; therefore, I am not in a position to address these questions.

Although the Department does not publicize each particular instance in which it declines prosecution despite evidence of an FCPA violation, what characterized the Department’s declinations during 2013?  Did the number increase from 2012?  What factors were most important in leading the Department to decline prosecution?

Answer:  I am not in the Department; therefore, I am not in a position to address these questions.  While I have not been privy to the internal deliberations surrounding the Department’s declination decisions, if confirmed as the Assistant Attorney General of the Criminal Division, I assure you that declination decisions will be based on the law and the evidence presented.

In November 2012, the Department and SEC issued the FCPA “Resource Guide,” which reflected guidance from your agencies regarding the interpretation and enforcement of the FCPA.  Does the Department anticipate updating, supplementing or amending the “Resource Guide” in the foreseeable future?

Answer:  I am not in the Department; therefore, I am not in a position to address this question.

In 2013, the Department issued only one Opinion Release concerning the FCPA.  Does the Department consider the “Resource Guide” a substitute for its opinion release program?

Answer:  I am not in the Department; therefore, I am not in a position to address this question.

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