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BizJet FCPA Enforcement Action Involves Executive Conduct

By on March 15, 2012 in 2012 Enforcement Actions, Airline Industry, BizJet International, Deferred Prosecution Agreements, DOJ Enforcement Action, Lufthansa Technik, Mexico, Panama, Voluntary Disclosure

Yesterday the DOJ announced (see here) that BizJet International Sales and Support Inc. (see here – a Tulsa, OK based provider of aircraft maintenance, repair and overhaul services (MRO)) agreed to pay an $11.8 million criminal penalty “for bribing government officials in Latin America to secure contracts to perform aircraft MRO services for government agencies.”

The enforcement action involved a criminal information (here) against BizJet resolved through a deferred prosecution agreement (here).  The DOJ release states that BizJet’s “indirect parent company, Lufthansa Technik AG” (see here – a German provider of aircraft-related services) also “entered into an agreement with the DOJ in connection with the unlawful payments by BizJet and its directors, officers, employees and agents.”  The release states as follows.  “The DOJ has agreed not to prosecute Lufthansa Technik provides that Lufthansa Technik satisfies its obligations under the agreement for a period of three years.  Those obligations include ongoing cooperation and the continued implementation of rigorous internal controls.”  There is no mention of Lufthansa Technik in the below described BizJet information.

Criminal Information

The information alleges that between 2004 – 2010 BizJet and others conspired “to obtain and retain MRO service contracts and other business for BizJet from foreign government customers, including the Mexican Federal Police, the Mexican President’s Fleet [the air fleet for the President of Mexico], Sinaola [the air fleet for the Governor of the Mexican State of Sinaloa], the Panama Aviation Authority, and other customers, by paying bribes to foreign officials employed by such customers.

The foreign officials included:  Official 1 – “a Captain in the Mexican Federal Police,”  Official 2 – “a Colonel in the Mexican President’s Fleet,” Official 3 – “a Captain in the Mexican President’s Fleet,” Official 4 – “employed by the Mexican President’s Fleet,” Official 5 – “a Director of Air Services at Sinaloa,” and Official 6 – “a chief mechanic at the Panama Aviation Authority.”  According to the information, all of the above officials “had broad decision-making authority and influence over the award of contracts to MRO service providers.”

The information alleges conduct by several executives including:  Executive A (a senior executive at BizJet from 2004 to 2010 who “was responsible for the operations and finances of BizJet”); Executive B (a senior executive at BizJet from 2005 to 2010 whose duties included “oversight of BizJet’s efforts to obtain business from new customers and to maintain and increase business with existing customers”); Executive C (a senior finance executive at BizJet from 2004 to 2010 who “was responsible for overseeing BizJet’s accounts and finances and the approval of payment of invoices and of wire and check requests”); and Sales Manager A (a regional sales manager at BizJet from 2004 to 2010 who “interacted with potential and existing customers and was responsible for obtaining business from new customers and maintaining and increasing business with existing customers”).

The information alleges that the purpose of the conspiracy – which BizJet accomplished through its employees including Executive A, Executive B, Executive C, and Sales Manager A – was to make bribe payments “which they called ‘commissions,’ ‘incentives’ or ‘referral fees’ to employees of customers, including foreign government customers, in order to obtain and retain for BizJet contracts to perform MRO services.”  The information further alleges that these individuals attempted to conceal the payments to foreign officials by using Shell Company A (owned by Sales Manager A and run out of this personal residence) to funnel the payments from BizJet to the foreign officials and by making payments in cash delivered by hand to the foreign officials.

The overt acts section of the information begins as follows.  In November 2005, “at a Board of Directors meeting of the BizJet Board, Executive A and Executive B discussed with the Board that the decision of where an aircraft is sent for maintenance work is generally made by the potential customer’s director of maintenance or chief pilot, that these individuals are demanding $30,000 to $40,000 in commissions, and that BizJet would pay referral fees in order to gain market share.”

The information then alleges various payments made to the above officials in return for the official’s help in securing contracts.

Based on the above conduct, the information charges one count of conspiracy to violate the FCPA.

DPA

The DOJ’s charges against BizJet were resolved via a deferred prosecution agreement.  Pursuant to the DPA, BizJet admitted, accepted, and acknowledged that it was responsible for the acts of its officers, directors, employees and agents as charged in the Information.

The term of the DPA is three years and its states that the DOJ entered into the agreement based on the following facts:  “(a) following discovery of the FCPA violations during the course of an internal audit of the implementation of enhanced compliance related to third-party consultants, BizJet initiated an internal investigation and voluntarily disclosed to the DOJ the misconduct …; (b) BizJet’s cooperation has been extraordinary, including conducting an extensive internal investigation, voluntarily making U.S. and foreign employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the DOJ; (c) BizJet has engaged in extensive remediation, including terminating the officers and employees responsible for the corrupt payments, enhancing its due diligence protocol for third-party agents and consultants, and instituting heightened review of proposals and other transactional documents for all BizJet contracts; (d) BizJet has committed to continue to enhance its compliance program and internal controls, including ensuring that its compliance program satisfies the minimum elements set forth in the” corporate compliance program set forth in an attachment to the DPA; and (e) “BizJet has agreed to continue to cooperate with the DOJ in any ongoing investigation of the conduct of BizJet and its officers, directors, employees, agents, and consultants relating to violations of the FCPA.”  With so many executives generically identified in the information as being involved in the improper conduct, it will be interesting to see whether individual FCPA prosecutions are forthcoming.

As detailed in the DPA, the advisory Sentencing Guidelines range for the criminal charge was $17.1 million – $34.2 million.  Pursuant to the DPA, BizJet agreed to pay $11.8 million (30% below the minimum amount suggested by the Guidelines).  The DPA states as follows.  “BizJet and the DOJ agree that this fine is appropriate given the facts and circumstances of this case, including the nature and extent of BizJet’s voluntary disclosure, extraordinary cooperation, and extensive remediation in this matter.”

Interestingly, the DPA was signed by the DOJ, BizJet and BizJet’s counsel – Jay Holtmeier (here – Wilmer Cutler Pickering Hale and Dorr) in late December 2011, but only made public yesterday.

Will The SEC Be Put To Its Burden Of Proof In The Jackson And Ruehlen Enforcement Action?

By on February 28, 2012 in 2012 Enforcement Actions, Compliance Defense, Control Person, CustomsGate, Eric Mattson, Executive Enforcement Action, Facilitating Payments, FCPA Jurisprudence, Individual Enforcement Action, James Harris, James Ruehlen, Mark Jackson, Nigeria, Noble Corporation, Obtain or Retain Business, Permits / Licenses / Customs / Tax, SEC Enforcement Action, Thomas O’Rourke

As discussed in this previous post, in November 2010, Noble Corporation was one of several companies to resolve FCPA enforcement actions in what I called CustomsGate – enforcement actions largely focused on alleged payments to Nigerian customs officials to receive various permits.  The Noble enforcement action involved both a DOJ and SEC component. Total settlement amount was approximately $8.2 million ($2.6 million criminal fine via a non-prosecution agreement; $5.6 million in disgorgement and interest via a SEC complaint).

As noted in the previous post, in the Noble Corporation enforcement action it was stated, not once but twice, that the payments at issue “would not constitute facilitation payments for routine governmental actions within the meaning of the FCPA.”  I noted then that one can reasonably conclude that if the DOJ felt the need to express such a statement twice, that the FCPA’s facilitating payment exception should probably be on the minds of many in connection with the CustomsGate enforcement  actions.

Against the backdrop of recent and well-deserved scrutiny of the DOJ’s FCPA enforcement program, the SEC reminds us all that it too can enforce the FCPA.  [As an aside, Professor Barbara Black (University of Cincinnati College of Law) recently released her forthcoming scholarship – see here – “The SEC and the Foreign Corrupt Practices Act:  Fighting Global Corruption is Not Part of the SEC’s Mission].

Last Friday, the SEC announced here charges against “three oil services executives with violating the FCPA by participating in a bribery scheme to obtain illicit permits for oil rigs in Nigeria in order to retain business under lucrative drilling contracts.”

In this complaint filed in the S.D. of Texas, the SEC charged Mark Jackson (former Noble Corporation CEO) and James Ruehlen (current Director and Division Manager of Noble’s subsidiary in Nigeria) based on the same core set of facts relevant to the prior corporate enforcement action – namely that Noble and its wholly-owned subsidiary (Noble-Nigeria) “authorized its customs agent to pay bribes” on the companies behalf “to Nigerian government officials to influence or induce them to (1) favorably process false paperwork, (2) grant temporary import permits (TIPs) based on the false paperwork, and (3) favorably exercise or abuse their discretion in granting extensions to these illicit TIPs.”

The complaint (a meaty 46 pages) next states, in summary fashion, as follows.

“Defendants approved payment of the bribes.  Defendant Ruehlen also assisted the customs agent in preparing false documents, processed the customs agent’s invoices for the bribes, and signed the checks reimbursing the customs agent for the bribes he paid to Nigerian government officials.  Defendants acted in this way to obtain TIPs and TIP extensions and retain business under drilling contracts in Nigeria.  As a consequence, Defendants violated the anti-bribery provisions [of the FCPA.]  Defendants also took steps to circumvent Noble’s internal controls and to falsely record these bribes as legitimate operating expenses on Noble’s books.  Defendant Jackson failed to implement internal accounting controls to prevent the bribery and false recording of the bribes.  As a consequence, Defendants violated the records falsification and internal control provisions of the Exchange Act and aided and abetted Noble’s violations of the books and records and internal control provisions [of the FCPA].  Defendant Jackson misled Noble’s auditors about the bribes and signed certifications required by the Sarbanes-Oxley Act of 2002 falsely stating that he had created and maintained effective internal controls, and that there were no internal control weaknesses, fraud or FCPA violations.  As a consequence, Jackson violated Rules 13b2-2 and 13a-14 of the Exchange Act.  During the violations, Jackson was Noble’s Chief Financial Officer, Chief Operating Officer, and ultimately President and Chief Executive Officer, and Chairman of the Board of Directors.  Jackson directly or indirectly controlled Noble, Defendant Ruehlen, and others, and therefore is liable as a control person under Section 20(a) of the Exchange Act for all of their violations.”

[For previous Section 20(a) control person (or similar) FCPA enforcement actions – see here and here.]

Unlike the vast majority of FCPA defendants (corporate and individual) charged in an SEC enforcement action, Jackson and Ruehlen appear poised to launch a defense.

Jackson’s lawyer, David Krakoff (here – BuckleySandler) stated as follows.  “We unequivocally deny the SEC’s baseless allegations. Mr. Jackson will vigorously defend himself in court where the evidence will show what the SEC already knows, that at all times Mr. Jackson acted in good faith at Noble. He looks forward to clearing his good name in this proceeding.”

Ruehlen’s lawyer F. Joseph Warin (here – Gibson Dunn & Crutcher) told the Wall Street Journal  that his client was the one who initially raised concerns about the payments and that Ruehlen “fully cooperated throughout the investigation and always acted in an ethical and transparent manner.”  Warin stated that “the claims against Mr. Ruehlen are wrong and they will be proven so at trial.”

This will be most interesting to follow as the SEC is rarely put to its burden of proof in FCPA enforcement actions (or any of its actions for that matter).  This is due to the SEC’s long-standing policy of allowing defendants to settle SEC complaints without admitting or denying the SEC’s allegations.  For recent judicial scrutiny of this settlement device, see this prior post.

The last time the SEC is believed to have been put to its burden of proof in an FCPA enforcement action was in the Eric Mattson and James Harris enforcement action also filed in the S.D. of Texas.  Like the Jackson and Ruehlen enforcement action, the Mattson and Harris enforcement action involved conduct outside the context of foreign government procurement.  As detailed in this Memorandum and Order, the SEC had its FCPA anti-bribery charges dismissed in that case.  The case involved alleged goodwill payments to an Indonesian tax official for a reduction in a tax assessment.  The SEC claimed that the FCPA’s unambiguous language plainly encompassed the goodwill payment and the issue before the Court was whether the plain language of the FCPA prohibited goodwill payments for the purpose of reducing a tax assessment.  When Mattson and Harris was decided, the S.D. of Texas in U.S. v. Kay case had already dismissed that case finding that the plain language of the FCPA does not prohibit goodwill payments to foreign government officials to reduce a tax obligation.  The SEC attempted to distinguish the trial court’s Kay ruling by arguing that in the civil enforcement context, the Court should interpret the FCPA’s language more liberally than in criminal cases.  The Court rejected the SEC’s arguments and followed the trial court’s analysis in Kay that the payments at issue to the Indonesian tax official did not violate the FCPA because it did not help Mattson’s and Harris’s employer (Baker Hughes) “obtain or retain business.”

Of course, the 5th Circuit overturned the Kay trial court ruling and held that making payments to a “foreign official” to lower
taxes and custom duties in a foreign country can provide an unfair advantage to the payer over competitors and thereby assist the payer in obtaining and retaining business.  However, the Kay court emphatically stated that not all such payments to a “foreign official” outside the context of directly securing a foreign government contract violate the FCPA; it merely held that such payments “could” violate the FCPA. The 5th Circuit then listed several hypothetical examples of how a reduction in custom and tax liabilities could assist a company in obtaining or retaining business in a foreign country. On the other hand, the court also recognized that “there are bound to be circumstances” in which a custom or tax reduction merely increases the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business.  The court specifically stated:  “[i]f the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”

The point of this extended discussion in the context of Jackson and Ruehlen is two-fold:  (1) that the SEC has already lost a non-government procurement FCPA case in the S.D. of Texas; and (2) even with the 5th Circuit precedent in Kay, and even taking the SEC’s allegations as true, payments in connection with TIPs would seem to be only to increase the profitability of an existing profitable company and thus – following the logic of the Fifth Circuit – fall outside of the FCPA’s anti-bribery provisions.

It will be interesting to see how this plays out should the SEC’s FCPA anti-bribery charges be fully litigated in the Jackson and Ruehlen enforcement action.

As noted in the SEC’s release last week, the Noble executive enforcement action also involved a separate complaint (here) against Thomas O’Rourke (the former controller and head of internal audit at Noble).  The complaint alleged that O’Rourke: (1) aided and abetted Noble’s violations of the FCPA anti-bribery provisions, books and records and internal controls provisions; and (2) directly violated the FCPA’s internal controls provisions and false records provisions of the Exchange Act.

Under the heading “defendants’ violations” the SEC alleged, among other things, that O’Rourke: (1) “understood that Noble-Nigeria had used false paperwork to obtain TIPs, and that Noble-Nigeria paid its customs agent for ‘special handling charges’ that were passed through to Nigerian officials; (2) “knew that the ‘special handling charges’ were entered into Noble-Nigeria’s books as legitimate operating expenses, and he knew or was reckless in not knowing that those entries were improper”;  (3) “knowingly allowed TIP-related payments to government officials to be improperly accounted for as legitimate operating expenses.

Like the vast majority of FCPA defendants in SEC enforcement actions, O’Rourke chose to settle the SEC’s complaint without admitting or denying the SEC allegations.  According to the SEC release, O’Rourke consented to entry of a court order requiring him to pay a $35,000 civil penalty and permanently enjoining him from future violations.

*****

Last week I participated in a discussion with Howard Sklar regarding a potential FCPA compliance defense (see here for the webcast.)  In the aftermath of the SEC’s charges against the Noble executives, Sklar penned a Forbes blog (here) and stated as follows.  “One example Mike brings to prove his point [that the FCPA should be amended to include a compliance defense] is the Panalpina line of cases, including Noble.  I don’t think he’ll be able to use the Noble case as an example after today.  These complaints are against the CEO (who formerly held the CFO spot) and the country leader for Nigeria.  Plus, there’s Thomas O’Rourke. Thomas O’Rourke was Noble’s Director of Internal Audit, Controller, and VP of Internal Audit.”

Nice try Howard, but you are off-target.

Sklar is correct that I discuss the Noble Corp. enforcement action (and other related CustomsGate enforcement actions) in my “Revisiting a Foreign Corrupt Practices Act Compliance Defense” article (see here at pgs. 9-12 ).  However, that discussion is focused on specific reasons warranting an FCPA compliance defense, including that in many markets, companies subject to the FCPA must navigate challenging environments replete with barriers and other conditions that serve as breeding grounds for payments implicating (at least in the eyes of the enforcement agencies) the FCPA.

In discussing harassment bribes, I then talk about the notoriously corrupt Nigerian Customs Service (“NSC”) and how business interactions with NSC officials have been the basis for several FCPA enforcement actions including the coordinated enforcement actions from November 2010 involving Noble Corp. and others.  Anticipating the counter-argument that the FCPA does not need a compliance defense due to the harassment bribery conditions many companies face in foreign markets because the FCPA already contains a facilitating payments exception, I then stated that so long as the DOJ refuses to recognize a facilitating payments exception to the FCPA, that Congressional intent on the facilitating payments issue is best advanced through an FCPA compliance defense in which a company can assert, as a matter of law, that its pre-existing FCPA policies and procedures sought to prevent such payments in foreign markets.

In short, I was using the Noble Corporation enforcement action in connection with a discussion of facilitating payments, not using that particular enforcement action to support an FCPA compliance defense because it somehow was based on low-level employee conduct.  Indeed, in the DOJ’s non-prosecution agreement (here) which I discussed in this previous post, “Senior Executive,” “Executive A” and “Executive B” are all specifically mentioned as participating in the alleged improper conduct and an FCPA compliance defense would not apply to corporate conduct engaged in by executive officers.

The point of the Noble Corp. reference in my article was that the company should not have been the subject of an FCPA enforcement action based on the alleged conduct because Congress intended to exempt such payments from the FCPA’s anti-bribery provisions (regardless of who made, directed, or authorized the payments).

Friday Roundup

By on February 24, 2012 in 2012 Enforcement Actions, Angola, Cecilia Zurita, Cinergy Telecommunications, Cobalt International Energy, Compliance Defense, Congressional Activity, Debarment, FCPA Reform, FCPA Trials, Haiti, Haiti Teleco Enforcement Actions, Individual Enforcement Action, Multimedia, Oil and Gas Industry, World Bank, Zambia

The Chamber and others weigh in on the DOJ’s promised FCPA guidance, a re-run worth watching, the DOJ dismisses its FCPA case against defunct Cinergy Telecommunications, this week’s FCPA disclosure, a World Bank debarment, and reflecting on this “new era” of FCPA enforcement.  It’s all here in a souped-up version of the Friday roundup.

Guidance

The conventional wisdom is that when the DOJ announced in November 2011 (see here for the prior post) that it would be issuing FCPA guidance in 2012, that this stalled introduction of an FCPA reform bill.  The current conversation thus seems to be focused on DOJ’s promised guidance.

This prior post highlighted how Senator Charles Grassley is curious about DOJ’s guidance and this prior post highlighted how Senators Amy Klobuchar and Chris Coons are as well.

Earlier this week, the Chamber of Commerce (and approximately 30 other trade associations or councils ranging from the American Gaming Association, the Financial Services Roundtable, the Poultry Federation, and the West Virginia Bankers Association) sent a letter (here) to Assistant Attorney General Lanny Breuer and SEC Director of Enforcement Robert Khuzami titled “Guidance Concerning the Foreign Corrupt Practices Act.”

The letter begins as follows.  “On behalf of the more than three million businesses and organizations whose interests we represent, we the undersigned organizations, write to request that this guidance address several issues and questions of significant concern to businesses seeking in good faith to comply with the FCPA. Detailed, authoritative guidance on these matters will enhance companies’ compliance with the FCPA by clarifying the “rules of the road” and by mitigating the significant interpretive challenges that companies face when applying the text of the statute to complex real-world circumstances.”

Topics addressed in the letter include:  “definitions of ‘foreign official’ and ‘instrumentality'”; “consideration of compliance programs in enforcement decisions”; “parent-subsidiary liability”; “successor liability”; “de minimis gifts and hospitality”; “mens rea standard for corporate criminal liability”; and “declination issues.”

In this previous post regarding the DOJ’s promised guidance I commented that while a welcome development, DOJ’s promise of FCPA guidance in 2012 will not cure many of the issues that are being debated in good faith during this new era of FCPA enforcement.  Furthermore, I expect DOJ’s guidance to be little more than a compilation in one document of information that is already in the public  domain for those who know where to look.  The Chamber letter similarly states as follows concerning compliance programs.  “If the forthcoming guidance on this issue consists merely of a recitation in summary form of specific corporate compliance programs that have been adopted pursuant to deferred prosecution agreements, non-prosecution agreements or SEC settlements, the marginal utility of such guidance to the cause of FCPA compliance in the business community will be limited.”

Whenever released and whatever it says, the DOJ’s guidance will be merely that – guidance.  What the FCPA needs is not guidance, but limited structural reforms  (such as a compliance defense) as well as a change in DOJ policy (such as  elimination of non-prosecution and deferred prosecution agreements).

A Re-Run Worth Watching

If you missed “The FCPA Compliance: Yes Or No” debate between Howard Sklar and I earlier this week on Securities Docket, here is the audio replay (approximately 70 minutes) along with the presentation slides.  At the end of the presentation participants were asked to vote “yes” or “no” and the vote tally was 68% “yes” 32% “no.”  Many thanks to Bruce Carton at Securities Docket for hosting.

Cinergy Telecommunications

In July 2011, Cinergy Telecommunications was added to the Haiti Teleco enforcement action (see here for the prior post).  In a superceding indictment, the privately-held telecommunications company incorporated in Florida was charged
with one count of conspiracy to violate the FCPA and to commit wire fraud, six counts of FCPA violations, one count of conspiracy to commit money laundering and 19 counts of money laundering.  In addition, Washington Vasconez Cruz (the president of Cinergy) was also charged as was Amadeus Richers (a former director of Cinergy).  As noted in this January post by Samuel Rubenfeld (Wall Street Journal Corruption Currents) in a second superceding indictment Cecilia Zurita (a former vice president of Cinergy as well as Cruz’s wife) was also added to the case.

Earlier this week, the DOJ moved to dismiss (see here) its case against Cinergy.  The motion states as follows.  “The government has recently learned that defendant Cinergy Telecommunications, Inc. is a non-operational entity that effectively exists only on paper for the benefit of two fugitive defendants, Washington Vasconez Cruz and Cecilia Zurita.  For several years, these defendants took actions making it appear as though Cinergy was an on-going operational company.”  The motion states that “defense counsel recently confirmed that Cinergy is in fact now non-operational, has no employees, and has no assets of any real value.”  The motion concludes as follows.  “In light of persuasive information the government has developed that Cinergy no longer exists in any real sense and that it was portrayed as existing at least in part to further fugitive defendants’ litigation strategy, the government in its discretion and under the circumstances presented has elected not to proceed with a trial against Cinergy.”

Joel Hirschhorn (here – Hirschhorn & Bieber P.A.) represents Cinergy as well as certain individual defendants in the case.

This Week’s FCPA Disclosure

In this prior post, I commented (somewhat tongue-in-cheek) that every week another company seems to be disclosing FCPA scrutiny.  So far so good.  This week’s disclosure is from Cobalt International Energy which disclosed as follows in its recent annual report.

“In connection with entering into our RSAs for Blocks 9 and 21 offshore Angola, two Angolan-based E&P companies were assigned as part of the contractor group by the Angolan government. We had not worked with either of these companies in the past, and, therefore, our familiarity with these companies was limited. In the fall of 2010, we were made aware of allegations of a connection between senior Angolan government officials and one of these companies, Nazaki Oil and Gáz, S.A. (“Nazaki”), which is a full paying member of the contractor group. Nazaki has repeatedly denied the allegations in writing. In March 2011, the SEC commenced an informal inquiry into these allegations. To avoid non-overlapping information requests, we voluntarily contacted the U.S. Department of Justice (“DOJ”) with respect to the SEC’s informal request and offered to respond to any requests the DOJ may have. Since such time, we have been complying with all requests from the SEC and DOJ with respect to their inquiry. In November 2011, a formal order of investigation was issued by the SEC related to our operations in Angola. We are fully cooperating with the SEC and DOJ investigations, have conducted an extensive investigation into these allegations and believe that our activities in Angola have complied with all laws, including the FCPA. We cannot provide any assurance regarding the duration, scope, developments in, results of or consequences of these investigations.”

World Bank Debarment

Earlier this week, the World Bank announced (here) “debarment of Alstom Hydro France and Alstom Network Schweiz AG (Switzerland) – in addition to their affiliates – for a period of three years following Alstom’s  acknowledgment of misconduct in relation to a Bank-financed hydropower  project.”  According to the release, “in 2002, Alstom made an improper payment of €110,000, to an entity controlled by a  former senior government official for consultancy services in relation to the  World Bank-financed Zambia Power Rehabilitation Project.”  The release further states as follows. “The  debarment is part of a Negotiated Resolution Agreement between Alstom and the  World Bank which also includes a restitution payment by the two companies  totaling approximately $9.5 million. The debarment can be reduced to 21 months –  with enhanced oversight – if the companies comply with all conditions of the  agreement.”

What to make of the debarment based on conduct 10 years ago is a bit difficult.  This Wall Street Journal Story by Dionne Searcey and David Crawford states as follows.  “There was some confusion about the company’s official response. Early Wednesday, Alstom spokesman Patrick Bessy said Alstom didn’t admit guilt in its settlement with the World Bank. “The World Bank made assumptions which were not proved,” he said, adding that because the matter was so old, “Alstom was unable to find evidence it could present in its own defense so we decided to settle.”  Mr. Bessy said the blacklisting won’t affect Alstom Group, which has had only one project that involved World Bank funding since 2007. He said the company has several other subsidiaries engaged in hydroelectric projects that aren’t affected by the ban and will be eligible for World Bank funding of their projects. In all only about 5% of Alstom sales are in the hydroelectric field, Mr. Bessy said. In a later statement, the company rejected Mr. Bessy’s comments: “Alstom’s general counsel … stated that any comments that were previously made by Alstom are not valid.”

Reflecting On The New Era of FCPA Enforcement

As discussed in this previous post, in November 2010 Assistant Attorney General Lanny Breuer declared as follows.  “We are in a new era of FCPA enforcement’ and we are here to stay.”  Thomas Gorman (Dorsey Whitney) runs the always informative SEC Actions blog – see here.  In this post, titled “The New Era of FCPA Enforcement:  A Time For Reflection” Gorman hit the ball out of the park when he states as follows.

“Perhaps now is a good time to stop and reflect on what the courts and jurors have said about the “new era” of FCPA enforcement. Surely that era should be more than a dazzling array of ever increasing monetary payments by corporations or actions against individuals built on questionable blue collar tactics. Surely it should be more than business organizations spending ever increasing sums to conduct far reaching and perhaps at times unnecessary investigations at huge expense in a effort to win cooperation credit. Surely it should be more than brining increasing numbers of charges against individuals and demanding longer and longer prison terms. Perhaps now is the time to craft meaningful reform to the Act and enforcement policy to ensure clearer guidance and a more balanced application of the statutes to ensure that the laudable goals of the statute in a fair and balanced manner in the future. That would truly be a “new era” of FCPA enforcement.”

For additional reflections on this “new era” of FCPA enforcement, see this piece I published with the ABA Global Anti-Corruption Task Force.

*****

A good weekend to all.

Next Up – Smith & Nephew

By on February 8, 2012 in 2012 Enforcement Actions, Deferred Prosecution Agreements, DOJ Enforcement Action, Foreign Issuers, Foreign Official, Greece, Medical Device Industry, SEC Enforcement Action, Smith & Nephew

[A new job has been posted to the Jobs Board – see here.  Both job seekers and organizations seeking to hire individuals with FCPA or related experience will benefit from a wide selection of job listings, so please spread the word and send the job link to your HR department and professional contacts]

When Johnson & Johnson resolved its $70 million FCPA enforcement action in April 2011 (see here for the prior post) focused on foreign health care providers as “foreign officials”, I said (here) stay tuned for more as several more health care providers as “foreign official” enforcement actions were likely in the pipeline.

On the heels of the DOJ’s likely worst week ever enforcing the FCPA in individual enforcement actions, the DOJ and SEC announced parallel enforcement actions against medical devices maker Smith & Nephew Inc. (“S&N”) and Smith & Nephew plc. (“PLC”).  PLC is a U.K. company with ADR shares traded on the New York Stock Exchange and S&N is a wholly-owned subsidiary of PLC headquartered in Memphis, TN.

Total fines and penalties were approximately $22.2 million ($16.8 million against S&N via a DOJ deferred prosecution agreement, and $$5.4 million against PLC via a settled SEC civil complaint).

DOJ

The DOJ enforcement action involved a criminal information (here) against S&N resolved through a deferred prosecution agreement (here).

Criminal Information

The information begins as follows.  “Greece has a national healthcare system wherein most Greek hospitals are publily owned and operated.  Health care providers who work at publicly-owned hospitals (“HCPs”) are government employees, providing health care services in their officials capacities.  Therefore, such HCPs in Greece are “foreign officials” as that term in defined in the FCPA …”.

The conduct at issue focuses on S&N’s and Smith & Nephew Orthopaedics GmbH’s (“GmbH”) (a German company “reporting to S&N) relationship with the entities of the Greek Distributor (an “agent and distributor for S&N and GmbH in Greece”).  According to the information, S&N and GmbH sold products to the entities “at a discount to the ‘list’ price and the Greek Distributor would re-selll to Greek HCPs and government hospitals at a profit.”  The information also alleges that S&N and GmbH “would cover marketing expenses for [the] Greek Distributor, up to ten percent of sales.”

The information charges one count of conspiracy to violate the FCPA’s anti-bribery provisions and alleges that “the purpose of the conspiracy was to secure lucrative business with hospitals in the Greek public health care system by making and promising to make corrupt payments of money and things of value to publicly-employeed Greek HCPs.”  According to the information, “S&N, certain of its executives, employees, and affiliates agreed to sell to [the] Greek Distributor at full list price, then pay the amount of the distributor discount – between 25 and 40 percent of the sales made by [the] Greek Distributor – to an off-shore shell company controlled by [the] Greek Distributor, in order to provide off-the-books funds for [the] Greek Distributor to pay cash incentives and other things of value to publicly-employed Greek HCPs to induce the purchase of S&N products, while concealing the payments.”  According to the information, S&N “falsely recorded or otherwise accounted for the payments to the shell companies on its books and records as ‘marketing services’ in order to conceal the true nature of the payments in the consolidated books and records of S&N and GmbH.”

According to the information, “[i]n total, from 1998 to 2008, S&N, and its affiliates and employees, authorized the payment, directly or indirectly, of approximately $9.4 million to [the] Greek Distributor’s shell companies, some or all of which was used to pay cash incentives to publicly-employeed Greek HCPs to induce the purchase of S&N products.”

According to the information, in 1999 “the S&N Chief Financial Officer raised with S&N Legal questions from internal auditors about the payments to the Greek Distributor’s shell companies.”  The information states that the Greece Sales Manager (a U.S. citizen based in Memphis who oversaw S&N sales in Greece) met with Legal Advisor (a U.S. citizen based in Memphis who was Senior Corporate Counsel for S&N) “to discuss issues with GmbH’s relationship with [the] Greek Distributor, during which the fact that surgeons in Greece were being paid to use medical devices products was discussed …”.  The information states that thereafter, the Legal Advisor “briefed a more senior S&N lawyer on the issue …”.

Based on the allegations in the information and the SEC complaint discussed below, the Greek Distributor seems to be the same distributor/agent at issue in the previous Johnson & Johnson enforcement action.

The S&N information alleges that the “Greek Distributor traveled to Memphis, Tennessee and met with VP International (a U.S. citizen based in Memphis who served as Vice President for International Sales for S&N) and others regarding reductions in Greek government reimbursement rates for S&N products sold by [the] Greek Distributor” and that “during the meeting, [the] Greek Distributor proposed that the discount to [the] Greek Distributor be increased to account for the reimbursement reduction, without any reduction in the ‘marketing’ payments to the Shell Company.”  According to the information, the Greek Distributor communicated with VP International and the Greece Sales Manager that his commission could not be reduced because he was “paying cash incentives right after each surgery.”  According to the information, “S&N terminated all relationships with [the] Greek Distributor and related entities in June 2008.”

Based on the same core set of conduct, the information also charges one count of FCPA anti-bribery violations and one count of FCPA books and records violations.

DPA

The DOJ’s charges against S&N were resolved via a deferred  prosecution agreement.  Pursuant to the DPA, S&N admitted, accepted  and acknowledged “that it is responsible for the acts of its officers, employees and agent, and wholly-owned subsidiaries.”

The term of the DPA is three years and it states that the DOJ entered into the agreement based on the following factors: (a) S&N investigated and disclosed to the DOJ and SEC the misconduct at issue; (b) S&N reported its findings to the DOJ and SEC; (c) S&N cooperated fully with the DOJ’s and SEC’s investigation; (d) S&N undertook remedial measures, including the implementation of an enhanced compliance program and agreed to undertake further remedial measures; (e)-(f) S&N agreed to continue to cooperate with the DOJ, and with foreign authorities, in any investigation of its directors, officers, employees, agents, consultants, subsidiaries, contractors and subcontractors relating to violations of the FCPA or other corrupt payments; (g) S&N “has cooperated and agreed to continue to cooperate with the DOJ in the DOJ’s investigations of other companies and individuals in connection with business practices overseas in various markets;” and (h) “were the DOJ to initiate a prosecution of S&N and obtain a conviction, instead of entering into this Agreement to defer prosecution, S&N would potentially be subject to exclusion from participation in federal health care programs pursuant to 42 USC 1320a-7(a).”

Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $21 – $42 million.  The DPA states as follows.  “S&N agrees to pay a monetary penalty in the amount of $16.8 million, a 20 percent reduction off the bottom of the fine range.  S&N and the DOJ agree that this fine is appropriate given S&N’s internal investigation, the nature and extent of S&N’s cooperation in this matter, and S&N’s extensive remediation.”

Pursuant to the DPA, S&N agreed to engage an independent compliance monitor “for a period of not less than 18 months” and to provide periodic reports to the DOJ regarding remediation and implementation of the enhanced compliance measures set forth by the monitor as described in an attachment to the DPA.  As is customary in FCPA DPA’s, S&N agreed that it shall not make any public statement contradicting its acceptance of responsibility.

See here for the DOJ’s release. The DOJ release states as follows.  “The matter is part of an investigation into bribery by medical device companies of physicians employed by government institutions.”

SEC

The SEC’s settled civil complaint (here) against PLC is based on the same core conduct as described above and “concerns violations of the [FCPA] by PLC through its subsidiaries to obtain sales for their medical device business.”  In summary fashion, the SEC complaint alleges as follows.  “From 1997 to June 2008, two of PLC’s subsidiaries engaged in a scheme with a distributor who made illicit payments to public doctors employed by government hospitals or agencies in Greece.”  The complaint further alleges that PLC failed to “have an adequate internal control system in place to detect and prevent the illicit payments” and that PLC “improperly recorded these payments in its accounting books and records.”  The complaint specifically alleges that PLC “failed to act on numerous red flags of bribery.”  The complaint states as follows.  “Among other things, even though PLC was aware that S&N and GmbH were conducting business in Greece and was aware of the heightened risks of the Greek market, PLC did not require proof of services rendered by Company A and B [entities associated with the Greek Distributor].  PLC failed to question the reasons for paying the Greek Distributor for Greek sales to accounts in the names of entities located outside of Greece.  PLC failed to conduct due diligence on Company A and Company B.  PLC also failed to conduct any audits of the transactions.”

Based on the above allegations, the SEC complaint charges FCPA anti-bribery, books and records and internal controls violations.

As stated in the SEC’s release (here), without admitting or denying the SEC’s allegations, PLC consented to entry of a court order permanently enjoining it from future FCPA violations and ordering it to pay $4,028,000 in disgorgement and $1,398,799 in prejudgment interest.

The SEC’s release states as follows.  “The SEC’s investigation into the medical device industry is continuing.”  In the release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated as follows.  “Smith & Nephew’s subsidiaries chose a path of corruption rather than fair and honest competition.  The SEC will continue to hold companies liable as we investigate the medical device industry for this type of illegal behavior.”

In this release, Smith & Nephew stated as follows.  “Smith & Nephew and other medical device companies were asked by the SEC and DOJ in late 2007 to look into possible improper payments to government-employed doctors and voluntarily report any issues. Smith & Nephew found and reported evidence of improper payments by a distributor in  Greece that had been appointed by Smith & Nephew subsidiaries and was terminated in 2008. The individuals implicated are no longer associated with the Group.  In the release, Olivier Bohuon (CEO of Smith & Nephew) states as follows.  “We have what I believe to be a world-class compliance programme, having enhanced it significantly since this investigation began in 2007.  These legacy issues do not reflect Smith & Nephew today. But they underscore that we must remain vigilant every place we do business and let nothing compromise our
commitment to integrity.”

Paul Gerlach (here – Sidley & Austin, the former Associate Director of the SEC’s Enforcement Division) and Angela Burgess (here – Davis Polk & Wardwell) represented Smith & Nephew.

U.S. Bonny Island Bribery Bounty Grows

By on January 19, 2012 in 2012 Enforcement Actions, Bonny Island Bribery, Deferred Prosecution Agreements, DOJ Enforcement Action, Foreign Non-Issuer Company, Marubeni Corp., Monitor, Nigeria

Few question the U.S. foreign bribery surplus, but it should be asked:  is the US Treasury the best place for fines and penalties when a foreign company bribes a foreign official?

In April 2011, JGC Corp. of Japan formally joined the Bonny Island (Nigeria) bribery club – see here for the prior post.  Some predicted this was the end of the Bonny Island enforcement actions, but I ended the post as follows.  “This may not be the last we hear of Bonny Island bribery. Consulting Company B (based in Japan) was a key participant in the bribery scheme. Does anyone know anything about Consulting Company B and whether it might be next to resolve its Bonny Island exposure? If so, please share.”

Yesterday, the DOJ shared as it announced (here) that Marubeni Corporation (a Japanese trading company headquartered in Tokyo) resolved an FCPA enforcement action  by agreeing to pay a $54.6 million criminal penalty.

As the DOJ trumpets in the headline of its release, the U.S. Bonny Island bribery intake now stands at $1.7 billion.  Previous enforcement actions were brought against the four TSKJ joint venture partners:  Kellogg Brown & Root LLC / Halliburton Co. / KBR Inc.  ($579 million in combined DOJ/SEC fines and penalties); Technip S.A. ($338 million in combined DOJ/SEC fines and penalties); Snamprogetti Netherlands BV / ENI S.p.A. ($365 million in combined DOJ/SEC fines and penalties); and JGC Corp. of Japan ($219 million in DOJ fines). In addition, as the DOJ notes in its release, is Jeffrey Tesler’s $149 million forfeiture, Wojciech Chodan’s $700,000 forfeiture, and Albert Jack Stanley’s guilty plea.

This post summarizes the Marubeni enforcement action, the first FCPA enforcement action of 2012.

The DOJ enforcement action involved a criminal information (here) against Marubeni Corporation resolved through a deferred prosecution agreement (here)

Criminal Information

The information focuses on the same Bonny Island (Nigeria) conduct at issue in the above referenced enforcement actions.  According to the information, Marubeni is a “major Japanese trading company headquartered in Tokyo, Japan, with operations around the world, including in Nigeria.”  The company’s shares are listed in Japan and the U.K.

According to the information, the TSKJ joint venture, in addition to hiring Jeffrey Tesler, “also hired Marubeni to help it obtain and retain business in Nigeria, including by offering to pay and paying bribes to Nigerian government officials.”  The information further states as follows.  “By the time TSKJ had stopped paying Marubeni in June 2005, TSKJ had paid Marubeni $51 million in part for use in bribing Nigerian government officials.  Marubeni was an agent within the meaning of the FCPA of TSKJ and of each of the joint venture companies, including KBR and Technip.  Thus, Marubeni was an agent of a “domestic concern” within the meaning of the FCPA and an agent of an “issuer” within the meaning of the FCPA.”

Based on the above allegations, the information charges one count of conspiracy and one count of aiding and abetting FCPA anti-bribery provisions.  The information contains the following  U.S. jurisdictional allegations.  (1) “Marubeni met with Stanley and others in Houston, Texas to discuss Marubeni’s contracts with TSKJ and its fees;” (2) “Marubeni’s co-conspirators caused wire transfers totaling approximately $132 million to be sent from Maderia Company’s 3’s bank account in Amsterdam, The Netherlands, to bank accounts in New York, New York, to be further credited to bank accounts in Switzerland and Monaco controlled by Tesler for Tesler to use to bribe Nigerian government officials;” (3) “on or about April 7, 1999 Marubeni faxed a letter to Stanley in Houston, Texas, regarding Marubeni’s fee for Train 3.”  The aiding and abetting charge is based on the following allegation:  “Marubeni aided and abetted KBR in causing the following corrupt payments to be wire transferred from Madeira Company 3’s bank account in Amsterdam, The Netherlands, to Marunbeni’s bank accounts in Japan intending for Marubeni to use such funds in part to bribe Nigerian government officials:  $17 million in payments between August 2002 and June 2004 “payments to Marubeni pursuant to Agreement for Trains 4 & 5.”

As in prior Bonny Island bribery enforcement actions, the “foreign officials” identified were Nigeria LNG Limited (“NLNG”) officers and employees,  NLNG is majority owned by multinational oil companies and Nigerian National Petroleum Corporation (“NNPC”) owns 49% of NLNG and “through the NLNG board members appointed by NNPC, among other means, the Nigerian government exercised control over NLNG, including but not limited to the ability to block the award of EPC contracts.”  In addition, the Marubeni enforcement action (like the prior enforcement actions) generically refer to the other Nigerian government officials.

Deferred Prosecution Agreement

The DOJ’s charges against Marubeni were resolved via a deferred prosecution agreement.  Pursuant to the DPA, Marubeni admitted, accepted, and acknowledged “that it is responsible under U.S. law for acts of its employees and agents” as set forth in the information.

The term of the DPA is two years and it states that the DOJ entered into the agreement based “on the individual facts and circumstances presented by this case” and that “among the facts considered were that Marubeni has agreed to undertake remedial measures as contemplated by [the DPA], and the impact on Marubeni, including collateral consequences, of a guilty plea or criminal conviction.”  When the DOJ cites the facts considered in resolving a matter via a DPA or NPA typically the facts are much more extensive than above.

As detailed in the DPA, the advisory Sentencing Guidelines range for the charges at issue was $54.6 million – $109.2 million.  Pursuant to the DPA, Marubeni agreed to pay $54.6 million – a rare instance in which the fine amount is within the guidelines range.

Pursuant to the DPA, Marubeni represented that it “has implemented and will continue to implement a compliance and ethics program designed to prevent and detect violations of the FCPA, the anti-corruption provisions of Japanese law, and other applicable anti-corruption laws throughout its operations …”.  The specifics of such a program are set forth in an attachment to the DPA.  In the DPA, Marubeni agreed to annual reporting obligations to the DOJ regarding its compliance program and internal controls.  In addition, Marubeni also agreed to engage a “corporate compliance consultant” for a two-year period.

As is common in FCPA DPA’s Marubeni expressly agreed that it shall not, directly or indirectly, “make any public statement … contradicting the acceptance of responsibility by Marubeni” set forth in the DPA.

In the DOJ’s release, Mythili Raman (Principal Deputy Assistant Attorney General, Criminal Division) stated as follows.  “With today’s resolution, the department has held accountable all five of the corporations that participated in the massive, decade-long scheme to bribe Nigerian government officials in connection with the so-called Bonny Island project.  As a result of this extensive investigation, the department and our partners have obtained more than $1.7 billion in penalties and forfeiture orders from the joint venture partners, their agents and individuals who sought illegally to obtain the Bonny Island contracts. Several individuals also have pleaded guilty for their roles in the scheme. Our FCPA enforcement efforts are an essential part of our comprehensive approach to rooting out corruption across the globe.”

In this company release, Marubeni said that the effects of the enforcement action on its business forecasts “will not be material.”  One interesting aside is that Marubeni states in its most recent annual report (here) as follows.  “FTSE4Good Global Index:  The FTSE4Good Global Index is a stock price indicator developed and established by the Financial Times Stock Exchange (FTSE), a joint venture between the Financial Times Ltd. of the U.K. and the London Stock Exchange. Companies are evaluated on their environmental sustainability efforts, relationships with stakeholders, protection of human rights, safeguarding of labor standards in their supply chains, and commitment to preventing corruption. Marubeni has been consistently selected for inclusion in the index since 2001, when the index was initially established.” (emphasis added).

Derek Adler (here) and Marc Weinstein (here) of Hughes Hubbard & Reed LLP represented Marubeni.

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