Significant dd-3 Development in Africa Sting Case
When listing reasons why FCPA enforcement has increased, the 78dd-3 prong of the FCPA’s anti-bribery provisions should be on the list.
The FCPA, since its inception in 1977, always applied to “issuers” and “domestic concerns”, but the 1998 amendments added a third prong providing jurisdiction as to “persons other than issuers or domestic concerns.”
As to this class of persons, the FCPA provides the following jurisdictional requirement: “while in the territory of the United States, corruptly to make use of the mails or any means or instrumentality of interstate commerce or to do any other act in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value …”. (emphasis added).
Several recent FCPA enforcement actions have been based on the dd-3 prong of the statute including the actions against the Daimler subsidiaries (see here, here, and here); SSI International Far East (see here); and others.
In the Daimler actions, the jurisdictional statements in the charging documents are as follows. “wire transfers … sent from Daimler accounts in Germany to financial institutions in the United States and elsewhere, via international and interstate wires, in furtherance of corrupt payments to Russian government officials;” “payments to third party agents, including shell companies established in the United States knowing that such payments would be passed on in whole or in part to Russian government officials;” ” “wire transfers … sent from Daimler accounts in Germany to financial institutions in the United States and elsewhere, via international and interstate wires, in furtherance of corrupt payments to Chinese government officials;” and “enter[ing] into sham consulting contracts with shell companies incorporated in Delaware and Wyoming for the purpose of making improper payments to Croatian government officials.”
In SSI, the jurisdictional statement in the charging document is as follows. SSI ” transmitted requests to the United States for approval and wire transfer of funds for payment to managers of Schnitzer Steel’s customers in South Korea and China in connection with sales of scrap metal to those customers. Accordingly, defendant SSI acted within the territorial jurisdiction of the United States.”
In my recent Q&A with Homer Moyer (here) he stated as follow: “To be sure, in enforcing the FCPA, the government tries to overreach from time to time — exercising anti-bribery jurisdiction over foreign subsidiaries and aggressive applications of dd-3 jurisdictional on the grounds that some step in the process took place “in the territory of the United States” come to mind as occasional examples. When enforcement agencies overreach, they should be challenged.”
Yet, as with most things FCPA related, these aggressive jurisdictional theories have generally escaped judicial scrutiny.
Until now.
In what is believed to be the first judicial ruling on the jurisdictional prong of the dd-3 prong of the FCPA, earlier this week, Judge Richard Leon (presiding judge in the Africa Sting cases) granted defendant Pankesh Patel’s Rule 29 acquittal motion at the end of the DOJ’s as to an FCPA substantive charge premised on his sending a DHL package – containing a purchase agreement in furtherance of the alleged corrupt scheme – from the U.K. to the U.S.
Pankesh Patel is among the first group of four defendants currently on trial and he is described in the indictment as follows. “[A] citizen of the United Kingdom and […] a “person” other than an issuer or a domestic concern as that term was defined in the FCPA. 15 U.S.C. § 78dd-3(f)(1). Patel was the Managing Director of Company A, a United Kingdom company that acted as a sales agent for companies in the law enforcement and military products industries. As a company that maintained its place of business in the United Kingdom, Company A was a “person” other than an issuer or domestic concern as that term was defined in the FCPA. 15 U.S.C. § 78dd-3(f)(1).”
Among the charges against Patel was Count 3 – that Patel violated the FCPA’s anti-bribery provisions by sending, on October 13, 2009, a DHL package from the U.K. to Washington D.C. “containing one original copy of the purchase agreements for the corrupt Phase Two deal.”
At the close of the DOJ’s case earlier this week, Patel’s attorney, Eric Bruce (Kobre & Kim LLP – see here) moved, as did the other defendants as to other charges, pursuant to Rule 29 for a judgement of acquittal.
Judge Leon did not request briefing as to the Rule 29 motions and his decision and reasoning was not reduced to writing – thus what follows are quotes from the hearing transcript.
As to Count 3, Bruce stated that the DOJ “charged Mr. Patel in Count 3 with something that cannot be a crime under U.S. law. And here’s what I mean by that. As we saw in the FCPA statute with which he’s charged, 78dd-3, because he’s a U.K. citizen, operating a U.K. company, he’s not a domestic concern under the statute, he can only be liable under the FCPA statute for conduct “while in the territory of the United States.” And that’s required by statute. That’s their sort of jurisdictional hook on him. And what they’ve done in Count 3, if you look at the language, if you go back to the indictment, Your Honor –.”
At this point, the following exchange occurred.
“Judge Leon: Sending it DHL?
Bruce: Yeah from London. So in Count 3 it says on the face of the indictment, DHL from the United Kingdom to Washington, D.C., containing one original copy of the purchase agreement for the corrupt phase 2 deal. So literally they’ve charged him with being in London and dropping a DHL package in the mail as a substantive FCPA violation, while the statute very clearly requires that he can only be liable for something while in the territory of the United States.”
Joey Lipton, on behalf of the DOJ, then stated as follow. “And under the FCPA, as long as he’s taking an act as someone who’s not a domestic concern, as Mr. Patel is a U.K. citizen, he falls under section 78dd-3, which Mr. Bruce said. He actually has to do less than a U.S. citizen really, because a U.S. citizen has to make use of the mails or interstate commerce. And Mr. Patel just has to take an act, any act, while he’s in the United States. Doesn’t have to be an illegal act, doesn’t have to be anything related to the deal going forward. He has to take any act in the United States, which he clearly does. First of all, he flies over from the U.K. to the United States, which we established through his travel records. And then he meets with the fictitious official and receives a purchase agreement. He then later takes that purchase agreement and sends it back. So the deal’s not done at that point, contrary to what Mr. Bruce said. But he’s already taken the act, he’s here in the United States, he sends it. With regard to Count 3 — and you don’t have to prove all of the elements of the offense while he’s in the United States. Doesn’t have to be counts or elements 1 through 6 of the FCPA while he actually travels here and does all that stuff. He just has to take an act while he’s in the United States. He did take an act. In Count 3 he then sends back the purchase agreement that he gets from the official, from Mahmadou, and he’s able — and that falls under the FCPA because he’s already taken an act here when he’s done that. So that independently can be its own act. It doesn’t have to be that each substantive count is an act while he’s in the United States, as long as he takes an act while he’s here. So his burden actually as a U.K. citizen is even less than what the other defendants have to do in terms of using the mail or traveling and the like.”
The following exchange then occurred between Lipton and Judge Leon.
“Judge Leon: Help me understand why it doesn’t have to be an act while in the territory of the United States for Count 3, whereas Count 2 [a substantive FCPA offense against Patel based on his attendance at a Washington D.C. meeting to discuss the allegedly corrupt deal], sounds like you admit that that’s the case in Count 2. In Count 3, I think your rationale is since he’s already taken one act within the United States, the subsequent act of mailing doesn’t have to be within the United States, right?
Lipton: Correct, Judge.
Judge Leon: All right. So what’s the rationale for that? Why doesn’t the second act have to be within the United States too? I’m not sure I understand that.
Lipton: Well, as long as he takes an act here, then we’re allowed to charge him with other acts, like a mailing or a travel that goes to the FCPA substantive offense. So it doesn’t have to be that each individual act is the one act while he’s in the United States that he’s taking. As long as he’s taking one act, he can have multiple substantive violations for other acts he’s taking as long as —
Judge Leon: Outside the United States?
Lipton: Outside the United States. Correct, Judge.
Judge Leon: Has the Supreme Court said that?
Lipton: Judge, no.
Judge Leon: Has the D.C. Circuit said that?
Lipton: No.
Judge Leon: How about the 2nd Circuit, where you used to prosecute?
Lipton: Judge, there’s not a lot of case law on the FCPA, as Your Honor I think is well aware.
Judge Leon: So is this a novel interpretation you want me to take?
Lipton: I don’t know if it’s a novel interpretation. I think it’s an interpretation that’s grounded in the law that’s out there.
Judge Leon: Is it grounded in the legislative record?
Lipton: We can go back and we can get Your Honor more particulars about the legislative history if Your Honor wants that.
Judge Leon: I would think the more cautious, conservative interpretation would be that each act has to be while in the territory of the United States, wouldn’t it?
Lipton: Well, Judge, if you read the statute, the way that I understand it and the way it’s been interpreted is that you just have to take an act. And if he’s traveling or if he’s mailing something from outside that comes into the United States, that that on its own would be sufficient. And I also believe Mr. Patel’s charged with an aiding and abetting theory as well, so, I haven’t fleshed that out, but there may be an argument to be made that even less has to be done on an aiding and abetting theory. Also, there’s a Pinkerton theory, which if he knows as a conspirator that acts are being taken by his codefendants or himself in furtherance of the conspiracy, then anything that’s reasonably foreseeable can also be an act, a substantive count. But, Your Honor, I can go back and we can get more details and particulars. Frankly, I don’t have the case law or the legislative history to the extent that that’s going to be helpful. That goes to that point.”
In reply, Bruce stated as follows. “I heard Mr. Lipton say that Mr. Patel only has to do an act in the United States, it doesn’t even have to be illegal. If that’s the government’s position, I’m happy to take that to the D.C. Circuit if there’s a conviction on these points. That is absurd, with all due respect to Mr. Lipton. The statute plainly requires, Your Honor, that while in the territory of the United States he has to corruptly make use of the mails or any means or instrumentality of interstate commerce or do any act in furtherance of an offer, payment, promise to pay or authorization. It’s clear as day.”
After a recess, Judge Leon dismissed Count 3 against Patel.
Judge Leon also dismissed Count 8 (a substantive FCPA violation charge) as to defendant Lee Allen Tolleson; and dismissed Count 10 (money laundering) as to all four defendants. In all other respects, Judge Leon denied the Rule 29 motion.
Judge Leon’s ruling is a significant FCPA development as many FCPA charges (as demonstrated by the above cases) are based on similar “novel” jurisdictional theories under the dd-3 prong of the FCPA.
Africa Sting – Year Two
One year ago today, the DOJ announced (here) the unsealing of 16 indictments (here) charging 22 “executives and employees of companies in the military and law enforcement products industry” for engaging in a scheme to “pay bribes to the minister of defense for a country in Africa.”
It was not the first time the DOJ had used undercover tactics in an FCPA enforcement action (see here), but it was certainly the most dramatic as nearly all the defendants were arrested while attending a trade show (here) in Las Vegas.
I provided an overview of the allegations (here) in what I called the Africa Sting case – a case involving: individuals employed by large companies and small companies; private companies and publicy-trade companies; chief executives, sales managers, and even a general counsel; U.S. citizens, U.K. citizens, an Israeli citizen, and a pair of siblings.
A lot has happened in the Africa Sting cases over the past year.
What has occured?
For starters, we learned that there was never a real “foreign official” looking to do business with the defendants. Rather, FBI agents posed as representatives of an imaginery Minister of Defense of an African country – later identified as Gabon. (See here for analysis).
Assisting the FBI was “Individual 1” a person described as a business associate of certain of the defendants and a “former Vice President of International Sales for a company that manufactured and supplied law enforcement and military equipment to law enforcement and military customers around the world.”
Individual 1 was soon identified as Richard Bistrong, a former employee of Armor Holdings. (See here). Bistong was soon criminally charged, but in a separate case (see here) – one largely involving United Nations body armor contracts and conduct in the Netherlands and Nigeria.
When Bistong was assisting the FBI in its undercover operations of the Africa Sting defendants, we learned that he had already pleaded guilty to the charges against him. (See here).
Given these circumstances, the defendants are likely to eventually assert entrapment – among other legal defenses. (See here).
In February, the defendants pleaded not guilty.
Judge Richard Leon (Federal District Court – Washington D.C.) appeared skeptical of the government’s assertion that all 22 defendants were in one grand conspiracy. Defense lawyers were troubled by the lack of evidence turned over by the government concerning Bistrong. (See here).
With so many individual defendants indicted, and the motivations for pleading under the Sentencing Guidelines, it seemed inevitable that one or more defendants would “flip” and cooperate with the government.
In March, the DOJ filed a superceding information (here) against defendant Daniel Alvirez and speculation was that Alvirez would soon plead guilty. (See here). The superceding information contained allegations not found in the orignal charges concerning the Republic of Georgia – allegations that did not mention any involvement by FBI agents.
Judge Leon indicated that it was highly unlikely that the cases would go to trial in 2010 and the DOJ and defense counsel soon battled as to discovery and evidentiary issues – particularly as to the FBI’s relationship with and use of Bistrong.
In April, the DOJ filed a superceding indictment (here) charging the individual defendants in one big conspiracy to violate the FCPA. Judge Leon said that he would not try 22 individuals together in one case, and in response, the DOJ proposed tried the defendants in 4 groups.
The documents began to pile up: “615 audio and video recordings of more than 150 meetings;” “5,287 recorded telephone calls between the defendants and [Bistrong], and between the defendants and undercover FBI agents;” “recordings of telephone calls between [Bistrong] and FBI agents;” “in excess of 5,000 pages of documents relating to [Bistrong], including reports, expense paperwork, bank statements, quotes, emails, notes, drug tests results, payment receipts, and Skype text messages, among others;” “emails from the accounts of [Bistrong] and the undercover FBI agents;” “nearly 3,000 pages of text messages from the telephone [Bistrong] used in connection with the undercover operation;” and “materials seized during the 13 search warrants executed in connection with the undercover investigation relating to the defendants.” (See here).
The companies impacted by their employee’s conduct began to lawyer up and over the summer Smith & Wesson and Allied Defense Group – the two public companies indirectly implicated made disclosures in connection with the case. (See here and here).
In December, certain defendants filed a motion “for an evidentiary hearing requiring the testimony of Richard Bistrong and federal law enforcement agents responsible for managing him in connection with the investigation resulting in the indictment.”
The defense claims that Bistrong assured various defendants that the fake Gabon deal had been approved by the U.S. State Department, was not illegal, was not in violation of the FCPA, and that Bistrong “angrily admonished one Defendant who indicated that he was going to tell other defendants that his lawyer had advised that the Gabon deals might be illegal.”
The DOJ says that the defense has “presented the Court with selective and misleading facts about this case” and that many of the defendants, wholly apart from the Gabon deal, were involved in paying bribes to foreign officials in other countries. Further, the DOJ argues, pretrial resolution of factual issues is not warranted. (See here for additional analysis).
That brings one to the present, year 2 of the Africa Sting case.
On the one hand much has happened.
On the other hand, much is still yet to occur and the defendants are presumed innocent until proven otherwise.
Africa Sting Update
The Africa Sting case is surely one to watch in 2011.
Recently, certain defendants filed a motion (here) “for an evidentiary hearing requiring the testimony of Richard Bistrong and federal law enforcement agents responsible for managing him in connection with the investigation resulting in the indictment.” The defense claims that Bistrong (see here for a prior post) assured various defendants that the fake Gabon deal had been approved by the U.S. State Department, was not illegal, was not in violation of the FCPA, and that Bistrong “angrily admonished one Defendant who indicated that he was going to tell other defendants that his lawyer had advised that the Gabon deals might be illegal.”
The DOJ response brief is here. The DOJ says that the defense has “presented the Court with selective and misleading facts about this case” and that many of the defendants, wholly apart from the Gabon deal, were involved in paying bribes to foreign officials in other countries. Further, the DOJ argues, pretrial resolution of factual issues is not warranted.
So what does this all mean for the defendants’ entrapment defense?
As entrapment issues are a bit outside my strike zone, I once again go to the bullpen and call upon Dru Stevenson (here) a Professor of Law at South Texas College of Law.
In this guest post, Professor Stevenson analyzes the issues presented in the above briefs.
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“The defendants in the pending FCPA “Africa Sting” case have moved for a pretrial evidentiary hearing, insisting that the government has refused to produce – or perhaps destroyed – potentially exculpatory evidence in the case. The defendant’s allegations of Brady violations (failure to turn over evidence) are serious, but seems based on serious misunderstandings of federal entrapment law.
All of the items alleged to be missing relate to the FBI’s instructions to Bistrong, its undercover informant in the sting operation – a turncoat FCPA violator who offered to set up others as part of his “deal” with the government. The problem is that such information could not be exculpatory under the federal rules for the entrapment defense, which appears to be the defendants’ only theory of the case. Federal courts use only the “subjective test” for entrapment claims, a test that focuses exclusively on the defendant’s own predisposition to commit the crime, NOT the government’s conduct or intentions in the sting operation. It may strike us as upsetting to read about FBI handlers coaching their field operative on lying and deception of the potential felons, but this is legally immaterial for the entrapment defense, because it does not relate to the defendant’s predisposition to commit the crime. If the missing evidence is not “material evidence” for the defense, there is no Brady violation.
Surprisingly, the government’s response brief does not emphasize this issue, but focuses instead on the inappropriateness of a pre-trial hearing when the issues will get full airing at trial. This is probably true, but a court might feel there is no harm in allowing evidentiary hearings before trial, which is rather commonplace.
The defendants advance two points in their brief that, if successful, would dramatically change the law of entrapment in the United States. First, there is a recurring theme throughout the brief that evidence of outright lying by the undercover operative in a sting operation is exculpatory. It is not. All entrapment claims involve sting operations; all sting operations involve some deception and lying to ensnare the defendant; and nearly all entrapment claims fail. Deceiving the defendant may reach a level where it negates the required mens rea for the crime – but this is a mistake of fact defense, a derivative defense that refutes an element of the crime charged, not entrapment, which is an affirmative defense. The defendants in this case do not appear to be raising a derivative defense related to the scienter requirement for FCPA – their case centers on claims of entrapment. Intentional deception is immaterial for the defendant’s predisposition, which is the issue at stake for entrapment in the federal system. Nor does it matter that the undercover operate gave false assurances that the proposed transaction was legal (which the defendants allege happened, and the government denies). This is presumably a common feature of sting operations as well – blithe reassurances that the deal is “completely legal” – just as it is a common feature of conspiracies and recruitment by real criminals, not just undercover agents. In the United States, ignorance of the law is no excuse. There is a seldom-used, and even more seldom-successful, defense of “entrapment by estoppel,” not at issue in this case, for instances where the defendant receives official assurances of legality directly from a government authority, such as an opinion letter from the Attorney General. Yet this would not apply to situations where the co-conspirator merely asserts that he “checked it out” or got “clearance” from the State Department.
A second innovation in the defendant’s brief, which would mark a sea change in entrapment law if successful, is the assertion that dismissal of the charges is an appropriate remedy for “entrapment as a matter of law.” There is no such thing as “entrapment as a matter of law” in the federal system – no Supreme Court cases have ever recognized an entrapment scenario that would need no adjudication or factual determinations. The Supreme Court has been very clear, in every entrapment case, that federal courts should use the “subjective test” for entrapment, which requires a full factual inquiry into the defendant’s predisposition to commit the crime. This is really a two-pronged innovation – one part focused on changing the test used, and the other focused on the procedural juncture for rendering a decision on such claims. “Entrapment as a matter of law” is really another name for the rival version of the entrapment test, usually called the “objective test” (which evaluates what the outrageousness of the government’s conduct rather than the defendant’s subjective predisposition) – a test that the Supreme Court has rejected every time it decided an entrapment case. Essentially, the defendants are asking the court to change the entrapment test used in the federal system from the subjective to the objective test, contrary to long-settled precedent. Further, positioning this decision within a Motion to Dismiss is particularly unprecedented, even for the objective test. Entrapment cases are heavily fact-specific under either test, because they all involve sting operations that included some inducement – and usually a fair amount of false reassurances and even badgering by the agents. Dismissal is generally a remedy for legal problems with the prosecution’s case, not factual problems. Again, it may be troubling to read of the FBI’s undercover operative lying, badgering, and bribing a defendant to commit a crime, but this is a matter for the jury to decide – and, from a policy standpoint, is no different from what would happen in a “true” criminal enterprise. In other words, a defendant who falls for halfhearted, unsupported reassurances by the undercover – or who succumbs to a monetary inducement or mild badgering – would presumably also fall for the same tactics by a criminal organizer.”
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For Professor Stevenson’s other guest posts on the Africa Sting case see here and here.
Interesting, Significant and Bold
Last week I had the pleasure of participating in Securities Docket’s Year in Review webcast (see here for viewing – the FCPA portion begins at about 51 minutes).
For those of you who missed the event, below are my thoughts on four significant events from 2010, three interesting events from 2010, and two bold predictions for 2011.
The FCPA in 2010 was interesting, significant, and bold all at once. Among other things, it was a year in which Assistant Attorney General Lanny Breuer declared a “new era of FCPA enforcement.” (see here).
Significant Events
The Foreign Corrupt Practices Act
If anyone out there still believes that the FCPA is a law that only applies to U.S. companies, you clearly have been living under a rock.
2010 was the year of non-U.S. companies resolving FCPA exposure.
BAE (here)(I am hesitant to call this matter an FCPA enforcement action because it wasn’t, but everyone seems to be doing so), Daimler (here), Technip (here), Eni/Snamprogetti (here), ABB (here), Panalpina (here), and most recently Alcatel-Lucent (more in a future post).
It has been reported that approximately 90% of 2010 FCPA fines and penalties were paid by foreign companies.
I expect this trend to continue – albeit perhaps not at the level seen in 2010. The 4th member of the JV involved in Bonny Island bribery – JGC of Japan – has yet to settle, certain of the medical device and pharma companies that have disclosed FCPA issues are non-U.S. companies, and an emerging trend I see is an increased focus on China-based issuers. For instance, last year, 25% of the IPOs were China based issuers and last month, Rino International (see here) disclosed an FCPA inquiry, the first time I believe a China-based issuer has been the focus of an FCPA inquiry.
Two Tiers of Justice
Under basic rule of law principles, the law is to be equally and consistently applied to all subject to the law, regardless of how big or small the company is and regardless of what type of company is involved.
In a troubling trend, two tiers of justice have emerged from FCPA enforcement.
If the company is a large multinational company, the company will end up paying large fine, but chances are the company will not be charged with FCPA anti-bribery violations.
For instance, the DOJ’s allegations against BAE (see here) included that the company provided various benefits – through U.S. payment mechanisms – to influence Saudi officials through and through other conduct that clearly had a U.S. nexus. Yet, BAE, one of the world’s largest defense contractors, was not charged with any FCPA anti-bribery violation.
Daimler, according to the DOJ (see here), had a corporate culture that tolerated and/or encouraged bribery and its numerous bribery schemes involved various high-ranking executives. Yet, Daimler, was not charged with any FCPA anti-bribery violations.
It’s bribery yet no bribery, and it contributes to what I’ve called the façade of FCPA enforcement (see here).
While certain companies in certain industries appear immune from FCPA anti-bribery charges, in other instances, instances generally involving small companies such as Nexus Technologies (here) or Lindsey Manufacturing (here), the DOJ seems to come out with guns a blazing and criminally indicts the company for violating the FCPA. One can legitimately ask what did these companies do that BAE, Daimler, and some other companies didn’t do?
The two tiers of justice is also present when it comes to individual enforcement actions. As was highlighted in the recent Senate hearing, one odd aspect of the most high-profile, egregious instances of corporate bribery is that, for the most part, no individuals are charged. Yet in cases that can only be called minor in comparison, Nexus Technologies, Lindsey Manufacturing and the Haiti Teleco cases come to mind, the DOJ again seems to come out with guns a blazing and criminally indicts multiple individuals.
Companies that commit bribery on a major scale, involving hundreds of millions dollars, are still able to secure multi-million dollar U.S. government contracts (see here and here). On the other hand, individuals like Charles Jumet are sent to prison for nearly 7 years for making a $200,000 payment to secure a lighthouse and buoy contract and conspiring to violate the same law that major companies are apparently immune from violating. (See here).
DOJ officials frequently talk about the rule of law (here), and the importance of consistency and transparency in charging decisions (here), but these examples raise the issue of whether such principles are followed when it comes to FCPA enforcement.
Is the Facilitating Payments Exception Meaningless?
When Congress passed the FCPA in 1977 and amended it in 1988 it clearly understood and accepted that the statute was not going to cover every conceivable unethical payment made in transacting overseas business. (See here). The legislative history is clear on this point and that is why the FCPA contains an express exception for so-called facilitating or grease payments.
Yet one can legitimately ask whether this exception intended by Congress has any meaning.
In November, a group of companies collectively paid approximately $235 million to settle FCPA enforcement actions principally involving import permits for oil rigs, other customs and duty payments to Nigerian officials, and payments to expedite shipment of product in Nigeria and some other jurisdictions. (See here for a summary of the CustomsGate enforcement actions).
It seems a bit silly when several major companies settle an FCPA enforcement action for this amount of money to ask the question – did the conduct at issue even violate the FCPA, but this question should be asked in connection with the CustomsGate enforcement actions. It is also a question that can legitimately be asked as to several other recent FCPA enforcement actions that involve permits, licenses, certifications and other administrative tasks that have nothing to do with obtaining or retaining government contracts.
The issue as I see it is not whether such payments are ethical, but whether such payments violate the narrow anti-bribery provisions Congress intended and whether, once again, the DOJ and the SEC are actually enforcing the FCPA as Congress intended or whether the FCPA has morphed into a broader corporate ethics statute.
If the FCPA should become a broader corporate ethics statute, let Congress make that decision – not the DOJ or the SEC.
Emergence of a Plaintiff’s Bar
The FCPA, it has been held by some courts, does not contain a private right of action – yet there are other legal avenues available to plaintiffs to hold companies that violate the FCPA accountable. (See here).
Common causes of action include derivative claims against officers and directors, securities fraud claims by investors, RICO claims, unfair competition claims and antitrust claims such as last year when one of Innospec’s competitors sued it in Virginia state court in connection with its recently settled FCPA enforcement action. (See here).
Such causes of action have been pursued before 2010, but 2010 witnessed an explosion in such claims and so-called investigations by plaintiff firms representing investors.
The most noteworthy example is what I called the feeding frenzy surrounding SciClone Pharamaceutials. (See here). Last August, the company simply made an FCPA disclosure – that it was contacted by the SEC and the DOJ in connection with the government’s pharma industry sweep. The company’s stock dropped about 30%. Within weeks about a dozen plaintiff firms announced “investigations” and/or filed securities fraud cases – never mind the company’s stock price regained all that value within about a month.
When a company’s FCPA violations are found to be condoned or encouraged by the board or officers, such plaintiff causes of action would seem to be warranted.
However, these types of FCPA violations are rare – the more typical situation is where, because of respondeant superior, a company faces FCPA exposure because of the actions of a single or small group of employees whose conduct was in violation of the company’s FCPA policies and procedures. In these typical situations, I question what value these so-called “investigations” by plaintiff firms have or what purpose these derivative or securities fraud claims serve.
Interesting Events
Giffen Enforcement Action
When an enforcement action begins with allegations (here) that James Giffen made more than $78 million in unlawful payments to two senior Kazakhstan officials in connection with oil transactions for major American oil companies and abruptly ends with a one-paragraph superceding information (here) charging a misdemeanor tax violation and the company he worked for settling an FCPA enforcement action focused solely on two snowmobiles (here) – I call that interesting.
Even more interesting is that part of Giffen’s defense was that his actions were taken with the knowledge and support of the CIA, the National Security Council, the Department of State and the White House. (See here for a prior post).
A few years ago George Clooney and Matt Damon starred in Syriana (here) a movie about the FCPA.
The Giffen enforcement action presents a superb Hollywood script – it is the most mysterious conclusion to an FCPA enforcement action ever – made even more interesting given that the presiding judge called Giffen a cold war hero and stated that the case should never have been brought in the first place. (See here for the prior post).
Africa Sting Cases
In January 2010, the DOJ arrested 22 defendants – most while attending a gun show in Las Vegas – in connection with a major undercover sting operation in which the government, utilizing an individual who had already pleaded guilty to separate FCPA violations, assisted the government in manufacturing a case involving a fake foreign official from Gabon. (See here, here and here for prior posts).
The defendants (see here) are principally owners or employees of small gun and weapons companies.
I would put this case in the interesting category.
Contrary to media reports and even DOJ statements, it is not the first time undercover tactics were used in connection with an FCPA investigation (see here), but the magnitude and breadth of the tactics were indeed unprecedented.
This case is far from over and the remaining defendants are sure to raise entrapment, among other legal issues, and this will be an interesting case to follow in 2011.
The Africa Sting case has draw the attention of an industry that probably had never thought much about FCPA compliance. Thus, regardless of the ultimate outcome of the case, it has likely resulted in an industry and small enterprises thinking more proactively about FCPA compliance and risk assessment.
Greater Scrutiny and Why Questions
2010 also saw greater scrutiny and why questions about the FCPA, FCPA enforcement and what I have called FCPA Inc.
For the time time in nearly a decade, Congress held hearings (see here) on the FCPA in which some basic why questions were asked.
The U.S. Chamber sponsored a paper (here) titled “Restoring Balance – Proposed Amendments to the FCPA” that was widely covered and, in some circles, railed.
Several members of Congress are legitimately scratching their heads as to why companies that settle fraud, bribery and corruption cases continue to secure lucrative U.S. government contracts and the House passed a bill (here) that seeks to debar companies found to be in violation of the FCPA from receiving U.S. government contracts. Problem is, because of the façade of FCPA enforcement (see here), it will be an impotent bill.
In May 2010, Congressman Towns, chairman of the House Committee on Oversight and Government Reform, sent a letter to Attorney General Holder expressing concern that settlements of civil and criminal cases, including FCPA cases, by the DOJ are being used as a shield to foreclose other appropriate remedies such as suspension and debarment. (See here for the prior post).
And in Spring 2010, Forbes ran a front-page story titled “The Bribery Racket,” an article, notwithstanding some of its flamboyant language, raised several valid and legitimate questions and issues when it comes to FCPA enforcement. (See here for the prior post).
This scrutiny in 2010 raised valid and legitimate public policy questions that hopefully will be picked up on in 2011.
Bold Predictions
After a year in which (1) the largest individual prosecutions involved a fake “foreign official” (2) the most egregious cases of corporate bribery were prosecuted without FCPA anti-bribery charges; and (3) a signature case abruptly ended with a misdeamenor tax violation and a corporate prosecution involving two snowmobiles, I wonder what bold will look like in 2011.
Here are two bold predictions for 2011.
The Dodd-Frank Whistleblower Provisions Will Have a Negligible Impact on FCPA Enforcement
My (what seems) contrarian thoughts are the same as when I first made this post in July.
Enforcement of the U.K. Bribery Act Will Be Disciplined and Measured
The U.K. Bribery Act, already delayed, and with implementation slated for April 2011, has been the subject of much discussion and much over-hype in my opinion.
It has been called the FCPA “on steroids” (here) and if one subscribes to the industry marketing material, you might be left with the impression that the end of the world is near.
True, the Bribery Act is broader than the FCPA. For starters, it is an all-purpose bribery and corruption statute and addresses bribery and corruption in the private sector – not just bribery to “foreign officials” like the FCPA.
True, the Bribery Act has potentially a very broad reach – so does the FCPA.
True, the Bribery Act has no exception for facilitating payments – the FCPA does – although as highlighted above, query whether this exception means anything.
However, the Bribery Act has the “adequate procedures” defense – something the FCPA does not have – but query whether it should.
Thus, while the Bribery Act is indeed more broad than the FCPA, because of this defense, it is at the same time more narrow than the FCPA.
Public statements by U.K. officials suggest that this adequate procedures defense is a meaningful defense. For instance, in September at the World Corruption and Compliance Forum, an event I chaired in London, the U.K. Attorney General (Dominic Grieve) stated (see here) that “any company small or large” that puts into place a system of adequate procedures “has nothing to fear” when an employee or agent “goes off the rails” and makes a bribe payment. Attorney Grieve said that a company should have nothing to fear if it is “walking the walk, and talking the talk” when a rogue employee makes an improper payment. On the other hand, Attorney Grieve stated that that “those who don’t heed the warnings and don’t take the necessary steps have something to fear.” Richard Alderman, the Director of the U.K. Serious Fraud Office, stated in October (see here) as follows. “I have heard some people say that this offence is one of strict liability. I do not agree. No offence will have been committed if there were adequate procedures. I have also heard people say that the fact of bribery might mean that there were inadequate procedures by definition and so the defence can never be made out. Again, I do not agree. In the real world there may be occasional lapses despite adequate procedures rigorously enforced. The issue ultimately for the Judge and jury (and for the SFO in deciding on a prosecution) will be – were those procedures adequate?” As to the adequate procedures defense, Vivian Robinson (General Counsel of the Serious Fraud Office) said in an October webcast (here) that because of the defense “there is every reason to be optimistic that we won’t get as a result of the Act and this particular section a huge expanse in the number of prosecutions of corporates.”
As demonstrated by the Innospec matter (see here), the U.K. courts are playing, and rightfully so, a much greater role than U.S. courts in reviewing bribery and corruption cases. I’ve been told that even if the SFO prosecutes a corporate bribery case with an NPA or DPA, the U.K. courts will still play a meaningful oversight role – a role that is unfortunately not true here in the U.S.
In sum, I don’t see how companies already subject to the FCPA and already thinking about compliance in a pro-active manner, have much to worry about when it comes to the U.K. Bribery Act because of the adequate procedures defense.
I will be surprised if U.K. enforcement of the Bribery Act reaches the level of U.S. enforcement of the FCPA and I will be surprised if the U.K. Bribery Act develops outside of the judicial system as has generally been true with U.S. enforcement of the FCPA.
Will Bistrong’s Plea Impact The Africa Sting Cases?
Last week Richard Bistrong’s plea agreement was made public.
Who is Richard Bistrong?
He is “Individual 1” – the person who worked with FBI agents as alleged in the Africa Sting indictments. (See here). (See here for the superseding indictment).
Bistrong was soon identified as Individual 1 and criminally charged.
Not in connection with the Africa Sting case, but a completely different matter. (See here). The criminal information (here) charges Bistrong with conspiracy to violate the Foreign Corrupt Practices Act’s antibribery provisions, books and records provisions, and the International Emergency Economic Powers Act and related Export Administration Regulations.
The conspiracy was broad in scope and included charges that Bistrong conspired with others: (i) to obtain for his employer [Armor Holdings, a former publicly-traded company, currently a subsidiary of BAE Systems] United Nations body armor contracts (valued at $6 million) by causing his employer to pay $200,000 in commissions to an agent while knowing that the agent would pass along a portion of that money to a United Nations procurement officer (a “foreign official” per the FCPA) to cause the officer to award the contracts; (ii) to obtain for his employer, a $2.4 million pepper spray contract with the National Police Services Agency of the Netherlands by paying a Dutch agent approximately $15,000 while knowing that the agent would pass along some of that money to a procurement officer with the Police Services Agency to influence the contract; and (iii) to obtain for his employer (although it was never obtained), a contract to sell fingerprint ink pads to the Independent National Elections Commission of Nigeria by making kickback payments to a commission official indirectly through an intermediary company.
Bistrong’s criminal information was filed on January 21, 2010.
It turns out that Bistrong agreed to plead guilty nearly a year before that – in February 2009, as indicated in the Bistrong plea agreement (see here).
So what did Bistrong agree to when he signed the plea agreement in February 2009?
To cooperate fully with with the government, including:
“whenever requested by the Government, working in an undercover role to record meetings and telephone calls under the supervision of United States law enforcement;” and
“attending all meetings at which the Government requests his presence.”
Per the Bistrong plea agreement, Bistrong “and the Department of Justice agree that the [Sentencing Guidelines] sentence is five years’ imprisonment.” Even so, the plea agreement states: “if in the sole and unreviewable judgment of the Government the defendant’s cooperation is of such quality and significance to the investigation or prosecution of other criminal matters as to warrant the Court’s downward departure from the sentence calculated by the Sentencing Guidelines, the Government may at or before sentencing make a motion pursuant to Section 5K1.1 of the Sentencing Guidelines reflecting that the defendant has provided substantial assistance and recommending a downward departure from the applicable guideline range.”
Brady Toensing (diGenova & Toensing, LLP) (see here) represents Bistrong.
What impact will Bistrong’s plea have in the Africa Sting case – particularly the defendants’ expected entrapment defense?
Per the superseding indictment, the earliest conduct forming the basis of the criminal charges against the Africa Sting defendants occurred in May 2009. In other words, Bistrong had already agreed to plead guilty to separate criminal charges prior to introducing the Africa Sting defendants to the undercover “foreign official” or the “foreign official’s” undercover representative.
Will this matter?
Unlikely says Dru Stevenson, a Professor of Law at South Texas College of Law (see here). Professor Stevenson previously offered his thoughts on the entrapment issue (here) and offered these thoughts in light of Bistrong’s plea.
“The incentives of the informant or undercover agent have never mattered in an entrapment defense, under either of the tests that courts use. For the subjective test (used in federal court), entrapment analysis focuses entirely on the defendant’s predisposition to commit the crime. The incentives of the agent provocateur are irrelevant. For the objective test (used in a minority of states, but never in the federal courts), entrapment analysis focuses on the actual conduct of the undercover agents – how outrageous it was – but not on the agent’s incentives or motives. It would be a completely novel approach if a court gives any weight to the fact that the agent provocateur had made a plea bargain. And it is not clear why this should matter any more than an undercover police officer who is paid to trick criminals into committing crimes as part of a sting operation.”