Scrutiny alerts and updates, reminder, OECD Article 5, ripple, and for the reading stack.
It’s all here in the Friday roundup.
Scrutiny Alerts and Updates
Deutsche Bank
The company has been under scrutiny since 2013 and recently disclosed in its annual report:
If bribery is not a victimless crime, as many including the DOJ frequently state, then why do FCPA fines and penalties simply go directly into the U.S. Treasury with no apparent effort to identify the victims of FCPA violations and to compensate those victims? A judicial challenge in 2011 that dragged into this year and resulted in a per curiam 11th Circuit decision last week (see here) raised this interesting and legitimate issue.
Before turning to the 11th Circuit decision, a bit of background.
In May 2011, Instituto Constarricense de Electricidad of Costa Rica (“ICE”) petitioned for victim status of Alcatel-Lucent’s wide-ranging bribery scheme. (See here for the prior post). The petition followed the December 2010 announcement that Alcatel-Lucent and certain subsidiaries agreed to resolve a wide-ranging FCPA enforcement action, including conduct in Costa Rica involving payments to ICE officials. (See here for the prior post). Even though ICE acknowledged that “three disloyal and corrupt [ICE] Directors and two disloyal and corrupt employees” were the recipients of Alcatel Lucent’s bribe payments, it nevertheless claimed it was a victim because the corrupt activities of Alcatel-Lucent caused the company “massive losses” and “catastrophic harm.” ICE argued that it was universally recognized that a victim includes an entity whose employees accept improper benefits to affect corporate decisions and that it was “nonsense” for an entity to be considered an active participant in a bribery scheme just because five of its 16,500 employees were implicated. In opposition, the DOJ argued that given the “profound and pervasive corruption at the highest levels of ICE, the government does not believe it is appropriate to consider ICE a victim” and that “it does not follow that the state-owned entity at which corruption was so pervasive in the tender process should now be permitted status as a victim or awarded restitution …”.
ICE’s petition was factually difficult from the start and it is not surprising that ICE did not prevail at the trial court level or in its writ of mandamus to the 11th Circuit. (See here for the prior post). In June 2011, a two judge panel of the 11th Circuit held that “the district court did not clearly err in finding that [ICE] actually functioned as the offenders’ coconspirator” and that the district court did not “err in finding that ICE failed to establish that it was directly and proximately harmed by the offenders’ criminal conduct.”
ICE continued to fight and the per curiam opinion considered whether ICE may appeal a district court’s denial of victim status under the Crime Victims Rights Act. The opinion noted that it was not a matter of first impression in the 11th Circuit whether the court has jurisdiction to hear an appeal from a victim in a criminal case. After reviewing prior cases, the per curiam opinion noted that the “default rule in this circuit is that crime victims have no standing to appeal a defendant’s sentence in a criminal proceeding.” Accordingly, the opinion concludes as follows. “Because we lack jurisdiction to hear ICE’s direct appeal under the Crime Victims’ Rights Act, we dismiss the appeal.”
ICE’s petition did however succeed in raising victim issues in Foreign Corrupt Practices Act enforcement actions and caused those interested in bribery and corruption issues to ponder the valid and legitimate questions of victims a bit more closely. For other recent posts on victims issues, see here and here.
In case you missed it, the Foreign Corrupt Practices Act made another appearance on the Wall Street Journal’s editorial page earlier this week. In a column about the “Return of ‘Honest Services’ Fraud” the column states as follows. “Prosecutors are also expanding the reach of older statutes to cover behavior that businesses have long believed to be legal. Take the Foreign Corrupt Practices Act, whose vague definition of foreign official has ballooned to include nearly everyone in a foreign country, whether or not the individuals control government procurement.”
On to today’s post.
How long do FCPA inquiries last? How does the government learn of FCPA issues in the first place? What specifically does company cooperation include? What can turn the course of an investigation? How many countries are included in a review? How many witnesses? What about senior management? What about agents?
Answers to these questions can be found in the DOJ’s “Memorandum in Support of the Proposed Plea Agreements and Deferred Prosecution Agreement” (here) filed on May 23rd in response to the ICE Victim petition (see here for the prior post). The December 2010 Alcatel-Lucent enforcement action (see here for the prior post) is a top-ten enforcement action of all time in terms of fine and penalty amount, thus what is set forth below may not be a typical case, but interesting nevertheless to see how expansive FCPA inquiries can become.
Portions of the DOJ’s brief are excerpted below.
The Government’s Investigation and the Company’s Cooperation
“The investigation that gave rise to the instant case began in the fall of 2004. In late September 2004, press reports surfaced in Costa Rica alleging that a consultant of Alcatel had bribed Costa Rican officials. In early October 2004, the Fraud Section of the Criminal Division of the Department of Justice and the SEC made inquiries of Alcatel, and Alcatel through its counsel agreed to cooperate with the government’s investigations. Between October 2004 and November 2006, Alcatel and its outside counsel conducted an internal investigation, which was slow, plagued with problems, and was non-responsive to many repeated inquiries by the government.”
“In late 2006, however, two significant events occurred that changed the course of the investigation. First, on November 0, 2006, a former Alcatel CIT executive, Christian Sapsizian, was detained on a material witness warrant during a layover at the Miami International Airport. […] Sapsizian agreed to plead guilty in early 2007, and he began cooperating against his former employer.”
“Second, in December 2006, Alcatel and Lucent Technologies merged. Following this merger, the leadership of the combined new entity, Alcatel-Lucent, changed, and the company changed outside counsel. In the ensuing three years, at the request of the government, the new company undertook a ‘Global Review’ to evaluate its relationship with agents, interactions with government officials, and gifts, travel and entertainment provided in countries around the world. Through this process, Alcatel-Lucent discovered it had serious problems. It uncovered improper payments, inaccurate books and records, and violations of its internal controls on a number of continents, and the new management embraced the need to fully investigate the corrupt conduct. In the end, the new company of Alcatel-Lucent conducted a credible investigation, dramatically improved its compliance program, embraced a culture of compliance at the highest levels within the company, and made significant remediation efforts, which are detailed below. In particular, Alcatel-Lucent and its outside counsel conducted investigations of 34 countries around the world to uncover potential misconduct. The internal investigation examined Alcatel-Lucent’s agent and consultant approval, review, and termination processes, the activities of a number of terminated agents, and the knowledge and involvement of senior management in any potential wrongdoing. This effort was closely coordinated with the government. At the same time, Alcatel-Lucent has cooperated with investigations conducted by government authorities in other countries regarding the matters that have been under investigation by the government in the United States.”
“After Alcatel-Lucent retained new outside counsel, substantially larger resources were used to complete – and in some instances re-do – the internal investigation. Alcatel-Lucent’s investigation was subsequently expanded a number of times. For example, the ‘Global Review’ mentioned above was expanded to ten countries. Later in 2007, the investigation expanded again when the government requested that Alcatel-Lucent conduct a detailed investigation into the company’s conduct in Nigeria and any country for which Sapsizian had responsibility or in which he had dealings, which amount to a total of 17 additional countries. Alcatel-Lucent and its outside counsel presented a series of reports on their findings with respect to each country.”
“Separately, Alcatel-Lucent voluntarily undertook a lengthy review of its agent and consultant approval process in 2007. As part of this review, Alcatel-Lucent retained an independent investigative firm to review all of Alcatel-Lucent’s 300 then-existing agents and consultants. Based on reports from the investigative firm, Alcatel-Lucent decided to terminate certain agents immediately and to cease working with other agents in the future. Alcatel-Lucent also undertook a detailed Terminated Agents Review to review the activities of 11 former agents for evidence of potential bribery or other wrongdoing. Alcatel-Lucent reported to the government on its findings related to these agents …”.
“Additionally, in June 2008, Alcatel-Lucent commenced a review of its Board of Directors’ and other senior management’s knowledge of, and involvement in, any of the wrongdoing. As part of this review, interviews were conducted of 26 individuals who were either current high-ranking members of Alcatel-Lucent’s management, former high-ranking members of Alcatel’s management, or were in a position to provide information relevant to the review. Alcatel-Lucent and its counsel also reviewed documents collected from these individuals. Alcatel-Lucent and its counsel reported to the government on their findings regarding the Senior Management Review in March 2009.”
Overall, Alcatel-Lucent’s outside counsel interviewed over 330 witnesses as part of these investigations, collected data from 201 individuals, and reviewed over 2 million documents, of which over 200,000 documents were produced to the government.”
It is one of the FCPA’s most bizarre issues.
If bribery is not a victimless crime, then why do Foreign Corrupt Practices Act fines and penalties simply go directly into the U.S. Treasury? Why are there no efforts to identify the victims of FCPA violations and to compensate those victims?
As detailed in this prior post, in May Instituto Constarricense de Electricidad (“ICE”) of Costa Rica petitioned “for protection of its rights as a victim” of Alcatel-Lucent’s bribery scheme. (See here for a prior analysis of the December 2010 enforcement action).
In early June, Judge Marcia Cooke (Southern District of Florida) denied ICE’s petition.
On June 15th, ICE filed this petition in the 11th Circuit for a writ of mandamus “directing the District Court to recognize ICE is a ‘crime victim’ under the Crime Victims’ Rights Act of [Alcatel-Lucent’s] crimes and to afford it all rights the CVRA guarantees to crime victims, including restitution.”
The two issues presented on appeal were: (i) whether the district court erred by denying ICE victim status under the CVRA; and (ii) whether the district court erred in denying ICE restitution.
Last Friday, in a short 3-page decision (here), the 11th Circuit denied ICE’s petition.
After noting the clearly erroneous standard of review, the 11th Circuit held that “the district court did not clearly err in finding that [ICE] actually functioned as the offenders’ coconspirator” and that the district court did not “err in finding that ICE failed to establish that it was directly and proximately harmed by the offenders’ criminal conduct.”
The petition for victim status was factually difficult from the start and it is not surprising that ICE did not prevail. Yet, the ICE petition did succeed in raising the victim issue and causing those interested in bribery and corruption issues to ponder the valid and legitimate question of victims a bit more closely.
“Bribery is not a victimless crime.”
It is a common sentence in DOJ FCPA talking points (see here for instance).
If bribery is not a victimless crime, then why do FCPA fines and penalties simply go directly into the U.S. Treasury? Why are there no efforts to identify the victims of FCPA violations and to compensate those victims? Bigger picture, who are the victims when FCPA violations occur?
Alexandra Wrage, President of Trace, observed in this piece that “compensating the victims of corruption is a hot new topic” and that “restitution to victims is hard not to like.” However, as Wrage noted, “the U.S. Department of Justice does not attempt to compensate victims of bribery.”
The topic has never been hotter.
Instituto Constarricense de Electricidad (“ICE”) of Costa Rica recently petitioned a Court (see here and here) “for protection of its rights as a victim” of Alcatel-Lucent’s bribey scheme.
In December 2010, it was announced that Alcatel-Lucent and certain subsidiaries agreed to resolve a wide-ranging FCPA enforcement action involving both a DOJ and SEC component. Total settlement amount was approximately $137.4 million ($92 million criminal fine via DOJ plea agreements and a deferred prosecution agreement; $45.4 million in disgorgement via a SEC settled complaint). (See here for the prior post). In addition to Costa Rica, the conduct at issue also involved conduct in at least eight other countries.
ICE also objected to the plea agreements and deferred prosecution agreement agreed to between the DOJ and Alcatel-Lucent to resolve the enforcement action. Among other things, ICE argued that the agreements “are inconsistent with the interests of justice, with the public’s interests, and with public policy.”
This post summarizes ICE’s arguments, as well as the arguments of the DOJ and Alcatel-Lucent in opposition filings earlier this week.
Finally, this post identifies an open question (as least as to the Costa Rica conduct at issue in the enforcement action) that ought to give Judge Marcia Cooke (Southern District of Florida) pause during the June 1st hearing.
ICE is petitioning the Court “for protection of its rights as a victim of the Alcatel-Lucent Defendants and for appropriate sanctions resulting from the [DOJ’s] failure to protect those rights…”.
Even though ICE acknowledges that “three disloyal and corrupt Directors and two disloyal and corrupt employees” were the recipients of Alcatel-Lucent’s bribe payments, ICE nevertheless claims it is a victim because the “corrupt activities” of Alcatel-Lucent has caused the company “massive losses” and caused “ICE catastrophic harm.”
ICE argued that “it is universally recognized, in a scheme for bribery, that an entity whose employees accept improper benefits to affect corporate decisions is a victim.” ICE states that “the notion that acceptance of bribes by five of ICE’s more than 16,500 employees, managers, and directors necessarily renders ICE an active participant in Alcatel’s admitted bribery scheme is nonsense.”
As noted in this media report, Judge Cooke allowed ICE to argue that it should be considered a corruption victim and thus receive restitution. However, Judge Cooke reportedly stated that ICE “would not be at the top of the hit parade.”
Earlier this week, both the DOJ and Alcatel filed opposition briefs to ICE’s request for victim status and restitution.
In its response (here), the DOJ argued that “under the facts and circumstances in the instant matter, which reflect profound and pervasive corruption at the highest levels of ICE, the government does not believe it is appropriate to consider ICE a victim in these cases.”
Elsewhere, the DOJ stated that “it does not follow tht the state-owned entity at which corruption was so pervasive in the tender process should now be permitted status as a victim or awarded restitution under the facts and circumstances in these cases.”
The DOJ then reviewed “facts and circumstances” that has “led the government to conclude that not just the corrupt ICE officials are to blame for the corruption that existed at ICE, but ICE itself as an organization is also responsible.” (emphasis in original).
The DOJ stated as follows. “In short, ICE as an organization appears to have had a deeply ingrained culture of corruption. First, it appears clear that corruption at ICE existed for many years – if not decades – according to [a DOJ cooperator who previously plead guilty]. Second, this corrupt conduct did not just involve some low-level employees. Here, nearly half of the Board of Directors of ICE received bribes in just this case alone. It is hard to conceive of a component of a business organization more in control of and responsible for an organization than the board of directors, which in this case appears to have been profoundly corrupt. Third, the corruption at ICE as an organization was pervasive in the tender process.” (emphasis in original).
In a separate section of its brief, the DOJ argued that “while the government does not believe ICE is a victim under the facts and circumstances present here, the Court need not decide this issue to dispose of this matter” because “regardless of whether ICE is a victim, this Court, the U.S. Probation Office, and the government have afforded ICE the rights of a crime victim contained in the Crime Victims’ Rights Act.”
The DOJ’s brief was authored by Charles Duross (DOJ FCPA Unit Chief) and Andrew Gentin (Fraud Section Trial Attorney from D.C.).
In a separate DOJ brief (here) filed in support of the proposed plea agreements and DPA, the DOJ argued that the resolutions “reflect the seriousness of the conduct, promotes respect for the law, and provides for just punishment for the offenses committed.” The DOJ argued that even if ICE is considered a victim, it does not have “veto power over prosecutorial decisions, strategies, or tactics” and that “it is unclear what standing, if any, ICE has to object to the DPA.”
In its response brief (here) the Alcatel entities [represented by Martin Weinstein and Robert Meyer of Willkie Farr & Gallagher – see here and here – and Jon Sale of Sale & Weintraub] argued as follows. “ICE’s Motion for restitution should be denied for two independent reasons. First, ICE is not entitled to restitution because it was a participant in the conduct underlying the offense to which Defendants will be pleading guilty. […] Second, the Court should reject ICE’s Motion because a determination of restitution would unduly complicate and prolong the sentencing process. [Note – although not separately highlighted above, a similar argument was made by the DOJ in its brief]. Alcatel argued that “just as Alcatel is responsible, ICE itself is responsible for the ICE-Alcatel bribery scheme because its top management, including several members of its board of directors and senior officers, actively participated in the bribery.”
Compensating the victims of bribery is a valid and legitimate issue, even if the ICE petition presents an unusual situation in that bribe recipients were officers, directors, or employees of the entity claiming victim status. I am not sure where criminal fines should go when a French company bribes Costa Rican “foreign officials,” but I am pretty sure than the answer should not be 100% to the U.S. Treasury.
Judge Cooke will hold a hearing on the issue on June 1st.
*****
But wait, were those even Costa Rican “foreign officials” Alcatel-Lucent bribed?
And now to the open question and an issue Judge Cooke ought to probe closely during the June 1st hearing.
According to the applicable DOJ plea agreement (here) “Instituto Costarricense de Electricidad S.A. (“ICE”) was a wholly state-owned telecommunications authority in Costa Rica responsible for awarding and administering public tenders for telecommunications contracts. ICE was governed by a seven-member board of directors that evaluated and approved, on behalf of the government of Costa Rica, all bid proposals submitted by telecommunications companies. The Board of Directors was led by an Executive President, who was appointed by the President of Costa Rica. The other members of the Board of Directors were appointed by the President of Costa Rica and the Costa Rican governing cabinet. Accordingly, officers, directors and employees of ICE were ‘foreign officials’ within the meaning of the FCPA …”.
Nonsense says ICE.
In its brief, under a heading titled “ICE is an autonomous entity with an independent board of directors and management”, ICE stated as follows. “ICE is an autonomous legal entity responsible for providing electrical power and telecommunications services in Costa Rica. The organizational statute and subsequent decrees provides for the absolute autonomy of ICE. This includes a seven-member, independent Board of Directors appointed by the Costa Rican Government who serve six-year terms. They cannot be removed absent malfeasance. These Directors include engineers, accountants, and lawyers with distinct areas of expertise. None of the Directors are affiliated with the Costa Rican Government. The Board of Directors appoints and oversees the management and operation of ICE in a manner similar to other large corporations.”
Based on ICE’s self-description, it would not seem to be a FCPA victim because a crime never took place because the elements of an FCPA violation – namely the existence of a “foreign official” was absent. [Note – Alcatel-Lucent was not charged with FCPA anti-bribery violations, yet the relevant subsidiary was charged with conspiracy to violate the FCPA’s anti-bribery provisions and a conspiracy charge requires the existence of a “foreign official”].
As the DOJ has stated in the recent “foreign official” challenges, “for a court to accept a plea of guilty a district court must have a basis to believe that a crime has been committed.”
Judge Cooke ought to do just that on June 1st given that stark differences in DOJ’s description of ICE and ICE’s description of itself.
