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Plaintiffs Allege Harm At The Hands Of Terrorist Group Funded In Part By Corrupt Sales Practices Of Various Multinational Companies

Various courts have held that the Foreign Corrupt Practices Act does not confer a private right of action. However, as highlighted in “FCPA Ripples [1]” and several other posts on this website, private plaintiffs with increasing frequency are using allegations of corruption to allege other substantive causes of action in what amounts to “offensive use” of the FCPA and related topics.

Recently, American service members and civilians and their families who were killed or wounded while serving in Iraq filed this 203 page civil complaint [2] against AstraZeneca, General Electric, Johnson & Johnson, Pfizer and Roche claiming that the companies’ alleged acts of corruption in Iraq present viable civil claims under the federal Anti-Terrorism Act and for intentional infliction of emotional distress. Specifically, the plaintiffs allege that they or their family members were attacked by a terrorist group (Jaysh al-Mahdi) funded in part by the defendants’ corrupt sales practices.

The claims would seem to have little chance of succeeding on the merits, but often the goal of such suits is simply to get past the motion to dismiss stage in the hopes of motivating settlement.

In summary fashion, the complaint alleges:

“This lawsuit seeks damages under the federal Anti-Terrorism Act on behalf of American service members and civilians, and their families, who were killed or wounded while serving their country in Iraq between 2005 and 2009. While these men and women worked to rebuild post-war Iraq, they were attacked by a terrorist group funded in part by Defendants’ corrupt sales practices. The terrorist-finance mechanism was straightforward: the terrorists openly controlled the Iraqi ministry in charge of importing medical goods, and Defendants – all of which are large Western medical-supply companies – obtained lucrative contracts from that ministry by making corrupt payments to the terrorists who ran it. Those payments aided and abetted terrorism in Iraq by directly financing an Iran-backed, Hezbollah-trained militia that killed or injured thousands of Americans. The allegations below are based on 12 Confidential Witnesses with direct and indirect knowledge of the alleged facts; public and non-public reports, contracts, and emails; U.S. diplomatic and military cables (as published by WikiLeaks); Iraqi market data and regulations; public statements by U.S. and Iraqi government officials; Englishand Arabic-language press reports; and Plaintiffs’ own recollections.

[3]

In pertinent part, the complaint alleges:

Defendants’ transactions were part of a pattern and practice of corrupt business dealings in Iraq dating back to Saddam Hussein. During Saddam’s rule and ever since, Iraq has maintained a government-run healthcare system that in theory offers free medical care to all Iraqis. That system of socialized medicine has long given the Iraqi Ministry of Health (“MOH” or “Ministry”) and Kimadia (MOH’s state-owned import subsidiary) significant leverage over medical-goods suppliers seeking to do business in Iraq. It also has been a recipe for pervasive corruption in the medical-goods procurement process. Under Saddam from 2000-2003, Kimadia officials used their leverage over foreign suppliers to extract sizable kickbacks on medical-goods contracts awarded under the U.N. Oil-for-Food Program. Most Defendants (or their predecessors or affiliates) made such corrupt payments to Saddam’s regime. In doing so, they supplied Saddam’s regime with illicit funding in direct contravention of Oil-for-Food Program restrictions designed to prevent Saddam from raising money to finance terrorism abroad.

By late 2004, after the collapse of Saddam’s government, MOH fell under the control of a Shiite terrorist group known as Jaysh al-Mahdi (Arabic for “The Mahdi Army”)1 whose members swore fealty to anti-American cleric Muqtada al-Sadr. The Jaysh al-Mahdi controlled MOH functioned more as a terrorist apparatus than a health organization. Public hospitals were converted into terrorist bases where Sunnis were abducted, tortured, and murdered. MOH ambulances transported Jaysh al-Mahdi death squads around Baghdad. Armed terrorists openly patrolled the halls of MOH headquarters in downtown Baghdad, which became too dangerous for Americans to enter and which one percipient witness described as a “Mahdi Army camp.” And the Deputy Minister of Health – who conducted Ministry business while surrounded by Jaysh al-Mahdi fighters and weapons – tortured and killed Sadr’s enemies with the help of the Ministry’s Facilities Protection Service (itself a notorious Jaysh al-Mahdi division). At the same time, Jaysh al-Mahdi nearly destroyed the Iraqi healthcare system by systematically purging secular doctors, commandeering MOH facilities, and looting MOH’s inventory for profit. After late 2004, companies selling medical goods to MOH were dealing with a counterparty that was not a genuine medical institution; it was a de facto terrorist group.

Despite Jaysh al-Mahdi’s open control of MOH, Defendants continued their Saddam-era practice of making corrupt payments to officials inside the Ministry. In or about late 2004, Jaysh al-Mahdi implemented a requirement that medical-goods suppliers seeking access to Iraq’s lucrative healthcare market pay Jaysh al-Mahdi agents a Khums, which is an Islamic concept translating roughly to a 20% religious tax. Companies seeking to win sales contracts from MOH after late 2004 had to pay that tax by providing Jaysh al-Mahdi agents with so-called “commissions” (an Iraqi euphemism for bribes) worth at least one-fifth the contract’s value. During this time period, as explained in a contemporaneous memorandum by U.S. government investigators documenting an interview of an MOH source, “official corruption [was] tolerated at the MOH because it ha[d] become the ministry occupied by the Mahdi Army.”

One common way that Defendants made corrupt payments to Jaysh al-Mahdi agents involved the transfer of “free goods.” Under the “free goods” scheme, which was carried over from Oil-for-Food, medical-goods suppliers structured their transactions to provide MOH officials with additional batches of in-kind drugs and equipment, free of charge, on top of the quantities for which MOH had actually paid. Suppliers included those extra goods in the same shipments as the purchased goods and packaged them in a manner conducive to street resale, which ensured that MOH officials could efficiently take the extra goods and monetize them on the black market. Because of the way the contracts were structured, MOH officials did not have to account for such free goods in the national inventory. Jaysh al-Mahdi agents working at MOH were thus able to divert the extra goods and re-sell them for cash at sizeable mark-ups.

Another common way that Defendants made corrupt payments to Jaysh al-Mahdi agents was through commercially unreasonable clauses drafted into MOH contracts. Under this scheme, also carried over from Oil-for-Food, suppliers bribed MOH officials by funneling cash payments through their corrupt local agents. In theory, companies promised to provide MOH with after-sales support and other services ostensibly related to the product they sold, and they funded those ostensible services by giving money to their local agents. In reality, such services were illusory and functioned merely to create a slush fund the local agents could use to pass on “commissions” to corrupt MOH officials.

Defendants used both techniques to finance Jaysh al-Mahdi throughout the period between 2004 and 2013, much as they had previously used them to finance Saddam’s regime under Oil-for-Food. Plaintiffs have obtained specific evidence of many of Defendants’ corrupt payments in connection with their MOH contracts, including documents memorializing such payments; contract numbers corresponding to Defendants’ corrupt transactions; and particular percentages of “free goods” that Defendants delivered to MOH officials.

Defendants’ corrupt transactions aided and abetted Jaysh al-Mahdi’s terrorist operations against Americans in Iraq. Control of MOH, and the illicit revenue that came with it, was essential to Jaysh al-Mahdi’s terrorist machine: in the words of one MOH insider, Kimadia was Sadr’s “gold mine” that Jaysh al-Mahdi used to “finance their empire” in Iraq. Cash bribes provided to Jaysh al-Mahdi agents within MOH flowed directly into Jaysh al-Mahdi’s coffers and helped the militia buy weapons, training, and logistical support for its terrorist attacks. Similarly, Defendants’ provision of “free goods” to MOH officials gave Jaysh al-Mahdi agents valuable cash equivalents they used to fund attacks. Regional and local black markets provided ample opportunities to re-sell such drugs and devices; as the U.S. Embassy in Baghdad explained in a sensitive-but-unclassified 2006 report, Jaysh al-Mahdi relied on those black markets to “finance[] operations from diverted medicines.” Indeed, concerns about Jaysh al-Mahdi’s use of MOH to finance terrorist attacks prompted Coalition forces to raid MOH headquarters in February 2007 and arrest the Deputy Minister of Health for “orchestrat[ing] several kickback schemes” to “funnel[] millions of U.S. dollars to militia elements.”

Defendants’ corrupt transactions with MOH also aided and abetted terrorism by supplying Jaysh al-Mahdi with the means to pay its rank-and-file terrorist fighters. Some U.S. government personnel in Iraq called Jaysh al-Mahdi “The Pill Army,” because Sadr and his Jaysh al-Mahdi commanders were notorious for paying their terrorist fighters in diverted pharmaceuticals, rather than cash. Those fighters – most of whom were poor, uneducated, young Shi’a men – accepted such payment because they could re-sell the free drugs on the street or could consume the pills themselves as a form of intoxication. This payment-in-pills scheme, which helped Jaysh al-Mahdi retain its legion of impoverished terrorist fighters, depended on the large volumes of divertible drugs that Defendants delivered to the terrorist-run MOH.

Defendants knew or recklessly disregarded that their corrupt transactions helped finance Jaysh al-Mahdi’s terrorist attacks on Americans. Defendants’ agents negotiated and memorialized those transactions at in-person meetings inside the Ministry’s headquarters building in Baghdad, where their physical surroundings made clear that they were dealing with terrorists. Beginning in late 2004, the MOH headquarters building was decorated with hundreds of pictures of known terrorist Muqtada al-Sadr (often joined by his famous, martyred Grand Ayatollah father) alongside Shi’a terrorist slogans declaring “Death to America.” The entrance to the building also contained a large mural paying homage to the Sadr family next to the unmistakable, all-black terrorist flag of Jaysh al-Mahdi. As USA Today reported in 2008, such Sadrist terrorist propaganda throughout the Ministry “remove[d] any doubts about who runs the place.” Companies whose agents memorialized their corrupt transactions in the shadow of jihadist propaganda paying homage to Jaysh al-Mahdi’s world-famous terrorist leader assuredly knew (or at least consciously overlooked) whom their transactions were benefiting.

Jaysh al-Mahdi’s control of MOH also received extensive press coverage that Defendants knew about or recklessly disregarded. Beginning in 2005, public reports repeatedly documented the link between Sadr’s terrorist militia and the MOH procurement process: major newspapers reported that MOH had fallen “under the control of the Shia cleric Moqtada alSadr”; that Sadrist MOH officials oversaw “the diversion of millions of dollars to a Shiite Muslim militia”; and that medical supplies were routinely “siphoned off and sold elsewhere for profit because of corruption in the Iraqi Ministry of Health,” which was “in the ‘grip’ of the Mahdi Army.” Those reported facts led to the highly publicized arrest and trial of the Deputy Minister of Health (himself a famously corrupt and violent Jaysh al-Mahdi commander), who was acquitted only after Jaysh al-Mahdi intimidated the witnesses into recanting. All of this was major, international news that Defendants could not have overlooked in good faith.

Defendants’ contacts with the United States were essential to their financing of Jaysh al-Mahdi. Each Defendant is part of a globally integrated company with a significant presence in the United States, and all but AstraZeneca and Roche maintain their worldwide headquarters in the United States. In some cases, Defendants contracted with MOH through American companies, with those American companies negotiating with Kimadia and executing the corrupt transactions. Because Kimadia insisted on doing business in U.S. dollars, Defendants also generally used the New York banking system to pay for letters of credit guaranteeing their corrupt transactions. And, in all cases, Defendants’ corrupt transactions relied at least in part on goods sourced from U.S. facilities that they touted as a key component of their global supply networks. Indeed, many of Defendants’ most valuable goods – and thus the goods most attractive to Jaysh al-Mahdi agents looking to profit on the black market – were manufactured by American affiliates in the United States. Because the terrorists placed a premium on obtaining (and re-selling) such American-made goods, they demanded that Defendants memorialize their goods’ country of origin in the contracting documents. Defendants thus often had to certify their connection to the United States as a condition of obtaining the corrupt sales contracts at issue.

The Jaysh al-Mahdi attacks that Defendants’ corrupt payments aided and abetted were acts of “international terrorism.” 18 U.S.C. § 2333(a). Sadr, working with Lebanese Hezbollah, founded Jaysh al-Mahdi in 2003 as an Islamic militia whose primary goal was to expel Americans from Iraq. In furtherance of that goal, Jaysh al-Mahdi waged a violent campaign that involved an array of asymmetrical terrorist tactics: Jaysh al-Mahdi fighters attacked civilians and service members indiscriminately; engaged in mass sectarian cleansing; targeted medics in attacks; conducted kidnappings, torture, and executions; and hid from U.S. troops in mosques, schools, ambulances, and hospitals. In reaction to such tactics, the Pentagon’s press service referred to Sadr’s militia as “the Jaysh al-Mahdi terrorist organization.”

In total, Jaysh al-Mahdi’s terrorist attacks throughout Iraq likely killed more than 500 Americans and wounded thousands more – likely making it responsible for more American casualties in Iraq than any other terrorist group. That prompted the U.S. military leadership to observe in 2007 that Jaysh al-Mahdi was “more of a hindrance to long-term security in Iraq than [Al-Qaeda in Iraq],” the Sunni terrorist group that became ISIS.

Jaysh al-Mahdi’s terrorist attacks against Americans in Iraq were “planned” and “authorized” by Hezbollah, 18 U.S.C. § 2333(d), the militant Lebanese terrorist group that the U.S. State Department has designated as a Foreign Terrorist Organization since 1997. In April 2003, Hezbollah dispatched to Iraq its chief terrorist mastermind, Imad Mugniyeh, to help Sadr found Jaysh al-Mahdi. Mugniyeh and other Hezbollah operatives subsequently recruited, trained, and equipped Jaysh al-Mahdi soldiers to carry out attacks against Americans in Iraq. At the same time, both Hezbollah’s Secretary-General and its Grand Ayatollah spiritual leader took to the airwaves to call on Iraqi Shi’a to join Jaysh al-Mahdi in its attacks against Americans in Iraq. Hezbollah’s training, weapons, and personnel – along with the moral and religious authority provided by Hezbollah’s incitement of Shiite religious violence – were essential to Jaysh al-Mahdi’s terrorist campaign. As a prominent embedded war correspondent reported in 2007: “The Mahdi Army is Iran’s proxy in Iraq. It is, in effect, the Iraqi branch of Hezbollah.”

Plaintiffs are U.S. citizens, and their family members, who served their country in Iraq between 2005 and 2009 and who were killed or wounded in terrorist attacks for which Jaysh al-Mahdi was responsible. As alleged below, Plaintiffs are entitled to recover for their injuries under the federal Anti-Terrorism Act (“ATA”) and state law. Defendants violated the ATA by structuring their transactions with MOH to make payments to Jaysh al-Mahdi members who they knew or recklessly disregarded would use such payments to help fund terrorist attacks on Americans in Iraq. Specifically, Defendants are liable under the ATA, 18 U.S.C. § 2333(d), for aiding and abetting Jaysh al-Mahdi’s campaign to commit terrorist attacks in Iraq that were planned and authorized by Hezbollah, a designated Foreign Terrorist Organization. Additionally, Defendants are liable under the ATA, 18 U.S.C. § 2333(a), as courts have construed it, for providing material support to Jaysh al-Mahdi in violation of U.S. criminal law.”

Informed readers no doubt recognize that all of the named defendants (with the exception of Roche) have previously resolved FCPA enforcement actions. In this regard the complaint contains a section for each company generally alleging how the company’s corrupt commercial transactions in Iraq “comport with its historical sales practices in international markets.”

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