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United Technologies Corp. Resolves $13.9 Million Enforcement Action

UTC

Yesterday, the SEC announced that United Technologies Corporation resolved a $13.9 million Foreign Corrupt Practices Act enforcement action.

The conduct at issue concerned Otis Elevator Co. (a wholly-owned subsidiary of UTC), Pratt & Whitney (an operating division of UTC), and International Aero Engines (a joint venture of five aerospace companies including Pratt & Whitney) regarding a Russian and Azerbaijani improper payment scheme, a China aviation scheme, improper payments for Otis Elevator sales in China, and leisure travel for foreign officials from several countries including China, Kuwait, South Korea, Pakistan, Thailand, and Indonesia.

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

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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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Friday Roundup

Scrutiny alert, potential fallout, act like a cop be treated like a cop, and for the reading stack.  It’s all here in the Friday Roundup.

Scrutiny Alert

Leighton Holdings Limited (an Australia-based holding company with ADRs registered in the U.S.) has been the focus of much recent media attention concerning business conduct in Iraq, Indonesia, Malaysia, as well as other Asian and Middle Eastern countries (see here and here for instance).  In response, the company issued statements here and here.

Potential Fallout?

As noted here, earlier this week South Korea criminally charged “100 people, including senior executives at state-run energy companies, on corruption charges.”  According to the article, “parts suppliers are suspected of bribing officials to accept their products with faked certification.”  Among the companies mentioned is Korea Hydro and Nuclear Power Co.  This company, along with other alleged state-owned or state-controlled energy companies, was mentioned in the 2009 Foreign Corrupt Practices Act enforcement action against Control Components Inc.

Time will tell if the South Korea charges might implicate various part suppliers subject to the FCPA.

Cop-Like

In this recent speech, SEC Chair Mary Jo White stated:

“The SEC is, in very important part, a law enforcement agency, and should be seen by investors to be ‘their cop.’  And, the SEC must continue to be the tough cop because in many cases, particularly when there is no criminal violation, it is the only agency that can play that role.”

White’s comment reminded me of this excellent guest post by Russell Ryan (King & Spalding and previously an Assistant Director of the SEC Enforcement Division) in which he notes, among other things, that “if the SEC’s enforcement role is more like that of a criminal prosecutor than a private plaintiff, why shouldn’t the SEC be held to some of the same procedural and evidentiary burdens of a prosecutor rather than benefitting from the more relaxed standards accorded to private plaintiffs?”

Reading Stack

An interesting Q&A with Andreas Pohlmann (Chief Compliance Officer at SNC-Lavalin Group Inc) including the following spot-on statement.

“[W]e need one global compliance program.  That means that what we are doing at the time being is not establishing a Canadian compliance program, or a North American compliance program, but we are establishing a global compliance program for all of our associates all over the world, and that’s the challenge. To get out a compliance program in Montreal at the headquarters of SNC-Lavalin is still easy. It becomes challenging when we go to the more difficult regions of this world, like Latin and South America, Africa, Eastern Europe and Southeast Asia. We have to get to the hearts and minds of our people and have them live up to our worldwide standards; otherwise, the compliance program would not be credible.”

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A good weekend to all.

First Case Under Korea’s Version Of The FCPA Tests The Limits Of Defining “Foreign Official”

This previous guest post discussed “Korea’s FCPA” and a recent case in which a trial court held that the prosecution failed to meet its burden of proof that China Eastern Airlines was a state owned enterprise, and, therefore, that the president of China Eastern’s Korean subsidiary was a foreign public official sufficient to state a claim under the law.

The prosecution appealed the ruling and in this guest post Alston & Bird attorneys Edward Kang and Christopher Lucas discuss the appellate court ruling.

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An appeals court in Korea affirmed a lower court decision to reject a prosecution’s theory of what it means to be a “foreign official” under Korea’s version of the Foreign Corrupt Practices Act, called the Act on Preventing Bribery of Foreign Public Officials (“FBPA”). This was the first case brought by prosecutors under the FBPA with allegations that an executive of a state-controlled company was a “foreign official.” Prosecutors have appealed to the Korean Supreme Court, and the high court’s decision could be an important signal as to how aggressively prosecutors can pursue future cases under the FBPA.

In 2011, Korean prosecutors brought FBPA charges against two individuals – executives at a shipping company and a travel agency – for allegedly bribing the president of the Korean subsidiary of China Eastern Airlines to secure improper business advantages. Prosecutors argued that the Korean president of China Eastern Airlines was a “foreign official” and pointed to documents that allegedly linked the company to the Chinese government.

The lower court acknowledged the evidence suggesting a connection with the Chinese government, but found that prosecutors had not met their burden in proving that the China Eastern executive was a “foreign official” under the FBPA. The Korean prosecutors appealed and directed the appellate court to additional pieces of evidence to support its theory, including the facts that the Chinese government: (1) through a wholly-owned subsidiary, owned more than 50% of China Eastern’s capital; (2) had appointment and dismissal power over China Eastern’s CEO; (3) was in charge of certain business decisions of China Eastern, including mergers and spin-off decisions; and (4) provides China Eastern with large amounts of government subsidies.

Despite that evidence, the appellate court affirmed the lower court’s decision without further elaboration. The case has been appealed to the Korean Supreme Court. We will continue to monitor developments and provide an update once this decision has been announced.

The Korean FBPA defines “foreign official” to include employees of certain state-owned or state-controlled companies. Under Article 2(2)(c) of the FBPA, the term “foreign official” includes:

“[A]n executive or employee of a company in which a foreign government contributed more than 50% of the paid-in-capital or with respect to which a foreign government exercises de facto control over its overall management including major business decisions and the appointment or dismissal of its executives.”

Interestingly, at the same time the Korean Supreme Court wrestles with the limits of defining “foreign official” when it comes to state-owned or controlled companies, the U.S. Court of Appeals for the Eleventh Circuit is currently considering a similar issue in U.S. v. Esquenazi, a case that is slated for oral arguments in October.

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Similar to the issue raised in this recent post concerning Canada’s FCPA-like law, Korea’s FBPA defines the targeted recipient category to include state-owned enterprise (“SOE”) definitions and concepts.  As noted in my “foreign official” declaration (which has been cited by the defense in the pending 11th Circuit “foreign official” appeal), despite being aware of state-owned enterprises (SOEs) during the FCPA’s legislative process, despite exhibiting a capability for drafting a foreign official definition that expressly included SOEs in other bills, and despite being provided a more precise way to describe SOEs during the legislative process, Congress chose not to include such definitions or concepts in FCPA.

As noted in this prior post regarding the DOJ’s response brief in the 11th Circuit challenge, among other arguments the DOJ is making is the alarmist argument that “Defendants’ construction of the statute to exclude employees of SOEs … means that the United States is out of compliance with its treaty obligations under the [OECD] Convention.”

Like the U.S., Korea is also a member of the OECD Convention.

[Disclosure – I am providing pro bono expert services to defendants’ counsel relevant to the “foreign official” issue].

A Focus on Korea

Today’s post is from Nathan McMurray (an attorney with Barun Law in Seoul, South Korea).  In the post, McMurray discusses “Korea’s FCPA” and an important recent case in which the court held that the prosecution failed to meet its burden and prove beyond a reasonable doubt that China Eastern Airlines was a state owned enterprise, and, therefore, the president of the Korean subsidiary was a foreign public official.  McMurray previously touched upon these issues on his Korea Law Today website (see here).

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Korea’s FCPA

In 1999, the Republic of Korea (South Korea) enacted the Act on Preventing Bribery of Foreign Public Officials in International Business (FPBA) (see here for the English translation).  It is Korea’s version of the Foreign Corrupt Practices Act (FCPA). But unlike the FCPA, not many people gave much attention to the FPBA, at least until recently.

As Korea has taken steps to increase transparency and stamp out corruption, Korean prosecutors have started pursuing those who have allegedly violated the FPBA. In particular, in May, the Incheon District Court (Incheon is an important port city close to Seoul) heard a case involving two men who were charged with violating the FBPA. This was the first trial ever under the FPBA, but it is not likely to be the last.

Because of the sudden interest in the FPBA and the passage of the U.S. – Korea Free Trade Agreement, it seems like this is the right time to take a closer look at the act and at this recent case. Focusing first on the text of the act, you may notice that its long name belies its brevity. The FBPA is only a short five articles long (two pages).

What’s in the FPBA.

Article 1 summarizes the purpose of the act, namely “the establishment of sound practice in international business transactions” and “criminalizing the act of bribery of foreign public officials.” In other words, the act prevents you from bribing foreign public officials to gain an improper business advantage.

Article 2 defines the term “foreign public official.” Specifically, a foreign public official is any person who:

  1. is engaged in a legislative, administrative, or judicial work for a foreign government (including local government);
  2. conducts official business on authority delegated by a foreign government;
  3. conducts the business of a public organization or agency established by a foreign government to engage in a specific business;
  4. is an executive or employee of an enterprise into which a foreign government has contributed more than 50% of the paid-in-capital or a foreign government exercises substantial control over the management (not including enterprises that operate on a competitive basis in the private economy without preferential treatment); or
  5. conducts the business of a public international organization.

Article 3 specifically defines the crime under the FBPA. It says that any person (meaning a natural person) may be liable for offering a bribe to a foreign official in relation to their official business to gain an improper advantage for the conduct of international business. The penalty for the crime may be up to 5 years’ imprisonment and a fine of up to 20 million Korean Won (KRW). If the profit obtained through the offense exceeds 10 million KRW, the penalty may be higher: up to five years’ imprisonment and a fine of up to twice the amount of profit.

There are a few exceptions in Article 3, which are similar to the FCPA exceptions. Payments that are lawful under the law of the foreign public official’s home country are permitted as well as facilitation or grease payments used to speed up the process of obtaining something from a foreign official that a person is already entitled to receive, such as (depending on the circumstances) getting a utility turned on.

Article 4 addresses the responsibility of the company (legal person) for which the person offering the bribe either works or represents. The company may be subject to a fine of up to 1 billion KRW. If the profit obtained through the offence exceeds 500 million KRW, the fine may be up to twice the amount of the profit. But there is another exception, if a company has “paid due attention or exercised proper supervision to prevent the offence” (i.e., reasonable care), it can escape liability.

Article 5 says that the authorities can confiscate any bribe amount still in the possession of the person who committed an offence. There is also a short addendum to the FBPA that says it came into force at the same time as Korea’s OECD obligations under the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, which indicates when and how the FBPA was originally enacted.

What the Recent Case Teaches About the FPBA.

As referred to above, last year the Incheon Prosecutor’s Office charged two individuals with bribing a foreign public official under the FBPA. The president of the Korean subsidiary of China Eastern Airlines was offered the bribes. The two men charged were the president of a shipping company and the president of a travel agency. The shipping company president wanted more favorable rates, and the travel company president wanted China Eastern Airlines to assign it more tickets for sale.

A key issue in the case was whether the Korean president of China Eastern Airlines was a “foreign official” under Article 2 of the FBPA. The prosecution argued the government of the People’s Republic of China controls China Eastern Airlines. Apparently, the key evidence it offered for this claim was certain documents linking China Eastern Airlines to the Chinese government. The defense used employee testimony to challenge the truth, accuracy, and relevance of the documents.

The court held that the prosecution failed to meet its burden and prove beyond a reasonable doubt (or more precisely the Korean equivalent, which is the relevant standard in criminal trials in Korea) that China Eastern Airlines was a state owned enterprise, and, therefore, the president of the Korean subsidiary was a foreign public official. The court based its reasoning in part on the exception in Article 2 of the FBPA regarding enterprises that operate on a competitive basis in the private economy without preferential treatment.

The Ruling and Its Aftermath.

Because the prosecution was unable to prove that the president of China Eastern Airlines was a foreign public official, the two men were found not guilty under the FBPA. But unfortunately for all three men, they were found guilty of bribery under Article 357 of the Korean Criminal Code. The prosecutors, perhaps looking to establish a precedent, have appealed the court’s ruling on the FBPA charges.

This was a test case involving small companies and a prosecution team that seemed unprepared to prove a key element of the crime. But as we await the appeal and anticipate additional cases, what seems clear is that this once overlooked law is not going vanish into obscurity once again.

Many in the business community here are uncomfortable about where this may eventually lead. Korea is an exporting nation with limited natural resources. Major Korean companies (chaebols) have invested in nearly every corner of the world. You cannot help but wonder if Korean prosecutors are contemplating eventually applying the FPBA to these big fish, rather than smalltime operators looking for petty favors and extra tickets.

Also, it is unclear why in the China Eastern Airlines case the prosecution decided to focus on the individuals only and not the companies involved. Does their decision mean that the reasonable care exception for company liability applied, that the two companies were simply too small to focus on, or that the prosecution was concerned that the applying the FBPA to the companies would not withstand court scrutiny for some other reason? We can only speculate.

About Korean Court Precedents.

This post was produced with the help of my Korean colleagues, and the information about the court case summarized above was obtained from publically available sources. The case, however, was never officially published by the court, so we cannot verify all of the facts. Indeed, only Supreme Court cases are regular published in Korea. Lower court cases are sometimes published, but not always. This is in part because Korea is a civil law country. So although court precedent is an important source of law, it is still not treated the same way as it is in the U.S or other common law countries.

Still, court precedents are increasingly important to lawyers trying to understand the application of law. The courts have an internal record keeping system, and there are legal databases like West Law or Lexis Nexis in Korean. The website www.scourt.gov.kr is run by the Korean Supreme Court and is considered official. The site www.lawnb.com is a commercial reporter that provides more data than the official site. You can read more about this and many other issues in English on my blog at www.korealawtoday.com.

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