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As We Say, Not Necessarily As We Do

Yesterday Lanny Breuer (Assistant Attorney General – Criminal Division) spoke before the Council on Foreign Relations. The title of his speech (see here) was “International Criminal Law Enforcement: Rule of Law, Anti-Corruption and Beyond.”

Breuer begins, “I am pleased to be able to share with you today how the Criminal Division seeks to promote the Rule of Law in our increasingly global society.” Breuer notes that “perhaps in no area has the Criminal Division’s” approach “had more dramatic results for the international Rule of Law than in that of corruption.”

Breuer then sketches a brief history of the FCPA and notes that “when the U.S. enacted the [FCPA] in 1977, and as recently as the 1990’s, some developed countries continued to argue that a certain amount of corruption might be desirable in developing nations; and it has been only in the last decade that some developed countries have eliminated tax deductions for foreign corrupt practices.”

On this point, I fully agree that the DOJ is the undeniable leader in prosecuting bribery and corruption, and for this, it deserves credit.

Breuer then “spreads the FCPA gospel” (as Christopher Matthews at Main Justice recently termed it – see here).

Verses included: the “increased emphasis on charging individuals is part of a deliberate enforcement strategy to deter and prevent corrupt practices in the future;” “gone are the days when we relied solely on tips from whistle-blowers to build cases – instead we are now bringing the tools of organized crime investigations to white collar investigations.”

The speech ends – “I would welcome any questions you might have.”

I’ve got some questions.

During Breuer’s tenure, two signature enforcement actions were the BAE and Daimler bribery, yet no bribery enforcement actions (see here and here for prior posts).

In both actions, the DOJ alleged facts sufficient to charge the companies with FCPA anti-bribery violations. Yet in both cases, no anti-bribery violations were charged.

Included in the Rule of Law is the notion that the law is to be applied equally to all subject to the law. Under the Rule of Law, certain companies in certain industries who may sell certain products to certain customers are not immune from the law.

Yet, in the eyes of many, the BAE and Daimler enforcement actions stand for the proposition that certain companies are indeed “above” the FCPA and essentially immune from FCPA anti-bribery charges.

So, my questions are:

How was the Rule of Law advanced in the BAE and Daimler enforcement actions?

How was the Rule of Law advanced when a company (BAE) that “provided support services to [a Saudi official] while in the territory of the U.S.” including “ the purchase of travel and accommodations, security services, real estate, automobiles and personal items” (these are the DOJ’s words) is not charged with FCPA anti-violations? [Particularly when the DOJ alleges that over $5 million in invoices for benefits provided to the Saudi official were submitted by just one BAE employee during a one year period.]

How was the Rule of Law advanced when a company (Daimler) that “engaged in a long-standing practice of paying bribes to ‘foreign officials'” (these are the DOJ’s words) is not required to plead guilty to anything?

As noted above, the DOJ is the undeniable leader in prosecuting bribery and corruption, and for this, it deserves credit. However, with leadership comes responsibility and accountability.

When preaching, the preacher is subject to criticism, particularly when urging his parishioners to do as he says, not necessarily as he does.

The DOJ did some FCPA / Rule of Law preaching yesterday.

For extolling the virtues of the Rule of Law in the face of several recent high-profile examples where Rule of Law principles were seemingly ignored, the DOJ has set itself up for criticism.

BAE … Inside the SFO

Several prior posts (here) have been devoted to the BAE case, both the U.K. – Serious Fraud Office component (and challenges to the plea agreement) and the DOJ’s bribery, yet no bribery allegations and charges.

This post returns to the SFO component of the BAE matter.

Widespread allegations that BAE was involved in bribery and corruption on a grand and global scale are detailed in Black Money – a PBS Frontline documentary from April 2009 (here).

In 2004 the SFO began investigating whether BAE made bribe payments to secure Saudi fighter jet contracts. However, in late 2006, the SFO was forced to halt its investigation under pressure from the U.K. government, which cited national security concerns should the investigation go forward.

However, because BAE also allegedly made bribe payments in numerous other countries to secure business, the SFO, under a new Director, revived its investigation of BAE, at least as to non-Saudi issues, including whether the company paid bribes to secure contracts in various European and African countries. After settlement talks stalled – the conventional wisdom is that BAE was unwilling to plead guilty to bribery related offenses given the collateral effect of the mandatory European Union debarment provisions – the SFO pressed ahead with the case.

The SFO Director stated in late January 2010 that “BAE is clearly a very important case” and that “it is very important that we get it right.”

In late January 2010, the SFO issued a release (here) stating that Count Mensdorff, a former BAE agent, was criminally charged with “conspiracy to corrupt” and for “conspiring with others to give or agree to give corrupt payments […] to officials and other agents of certain Eastern and Central European governments, including the Czech Republic, Hungary and Austria as inducements to secure, or as rewards for having secured, contracts from those governments for the supply of goods to them, namely SAAB/Gripen fighter jets, by BAE Systems Plc.”

Then, in early February 2010, the SFO announced (here) its long-awaited resolution of the BAE matter. Despite allegations of wide-spread bribery on a global scale, and despite BAE’s agent being criminally indicated a few days earlier in connection with bribe payments in “certain Eastern and Central European government” (presumably on evidence that such payments did indeed occur), the SFO resolution related solely to the company’s failure “to keep reasonable and accurate accounting records in relation to its activities in Tanzania.” The SFO release notes that BAE will pay a £30 million penalty “comprising a fine to be determined by the Court with the balance paid as a charitable payment for the benefit of Tanzania.”

Most dramatic, and in a strange turn of events, the SFO announced that it had withdrawn the criminal charges filed days earlier against Count Mensdorff. The same release also notes that “[t]his decision brings to an end the SFO’s investigations into BAE’s defense contracts.”

In the face of widespread criticism, the SFO defended its handling of the BAE matter and noted that “the public interest lay in drawing a line under the whole investigation.”

Documents filed in connection with the SFO-BAE plea agreement challenge shed additional light on the SFO’s abrupt end to the BAE investigation.

In the SFO’s “Grounds for Contesting the Claim” (here) the SFO details the history of its investigation.

Highlights include:

“From the beginning of March 2009, the SFO had been involved in plea discussions with BAE. The position of the SFO was that it would be satisfied with pleas to charges in respect to some, but not necessarily all, the strands of its investigation.”

By September 30, 2009 (“the SFO imposed deadline”) no agreement had been reached and “discussions in England were discontinued.” “By that time, it was known that plea discussions between the DOJ and BAE in the U.S. had also failed to produce any agreement.”

“In late January – early February 2010 there was a material change in circumstances. First on January 29, the DOJ contacted the SFO and indicated that a plea agreement with BAE was imminent. The agreement involved BAE entering pleas of guilty with respect of offenses in connection to the investigations concerning Eastern Europe and Saudi Arabia and a payment of $400 million.”

The SFO “received advice from counsel that the Eastern Europe aspect of the proposed U.S. agreement was highly likely to have the effect of preventing prosecution for the offenses under consideration in respect of the Eastern European investigation in England, on the basis of the application of the principle of double jeopardy. This represented an additional, potentially serious difficulty in respect of the evidential test. Additionally, the [SFO] re-assessed the effect of the agreement on public interest considerations. He concluded that it was not in the public interest to pursue BAE in England in respect of matters to which the company was to plead guilty in the U.S.”

[Note – BAE pleaded guilty in the U.S. to “conspiring to defraud the United States by impairing and impeding its lawful functions, to make false statements about its Foreign Corrupt Practices Act compliance program, and to violate the Arms Export Control Act, and International Traffic in Arms Regulations.” It is difficult to see how this plea would raise double jeopardy issues for a corruption / bribery offense.]

“On February 4, 2010 […] BAE indicated that it was prepared to plead guilty […] in respect of the Tanzanian transaction, and pay a sum of £30 million. The [SFO] concluded than an agreement on such a basis was in the public interest.”

“…a serious evidential difficulty had been identified in respect of potential corruption charges, namely the difficulty of proving the involvement of a ‘controlling mind’ in the offending. In the absence of a plea agreement, this raised the prospect that the [SFO], having gained no admission of criminal liability or any financial payment, would (a) nevertheless be forced to conclude that there was no realistic prospect of conviction in respect of corruption offenses or (b) end up prosecuting a weak and vulnerable case.”

[Note – the above assertion would seem to differ significantly from the assertions of former SFO prosecutors Robert Wardle and Helen Garlick made in the above referenced Black Money documentary]

“By virtue of Article 45 of the European Union Public Sector Procurement Directive 2004, a conviction for an offense of corruption would have had the effect of debarring BAE for tendering for public contracts in the EU. This could have been a disproportionate outcome, having regard to the fact that the relevant conduct took place many years ago and the company had taken substantial steps to transform itself as an organization since then.”

“The plea agreements in England and the US were entered into on February 5, 2010 and brought to an end the investigation of BAE.”

Thus, over the course of six days, the multi-year investigation of BAE was swiftly resolved and, as in the U.S., a driving force behind the ultimate charges was to avoid application of the European Union debarment provisions.

So why did the SFO abruptly drop the criminal charges against Count Mensdorff?

The short answer is that BAE would not agree to the SFO plea (as watered down as it was) without the SFO agreeing to drop the charges against Count Mensdorff.

The SFO notes that a “particular problem arose in Count Mensdorff’s case which led to him being charged sooner than had initially evisaged.”

“Count Mendsdorff is an Austrian citizen. As of January 2010, he was in the United Kingdom on police bail. In discussions with the SFO, the Austrian authorities made clear that, as a matter of Austrian law, if he returned to Austria there would be no jurisdiction to extradite Count Mensdorff in respect of the offense which the SFO was considering charging, namely conspiracy to corrupt.”

The “SFO concluded that, in the absence of effective extradition arrangements, there was a strong likelihood that, if not charged on January 29th, Count Mensdorff would go to Austria and not re-enter the jurisdiction to face criminal proceedings.”

The SFO “decided that the appropriate course of action was to charge Count Mensdorff on January 29th, ensuring that he then became subject to court bail conditions sufficient to ensure he remained within, or came back to, the jurisdiction. Count Mensdorff was duly charged.”

“As it transpired, on February 4th, during plea discussions, BAE requested an undertaking from the SFO that in any future prosecutions (to which BAE was not a party) the prosecution could not allege that the company was guilty of corruption. The [SFO] concluded that without such an undertaking, a plea agreement could not be achieved. The [SFO] received advice from counsel to the effect that in a prosecution of Count Mensdorff, or any of the individuals under investigation in connection with the Eastern European transactions, it would not be possible to proceed without making an allegation of corruption against BAE. In short, the SFO concluded that Count Mensdorff could not be prosecuted consistent with the terms of the undertaking sought. In the circumstances, the [SFO] took the view that it was in the public interest to give the undertaking to BAE, thereby enabling the plea agreement to be achieved, and, consequently, to withdraw the charge against Count Mensdroff.”

In a recent April 20th Financial Times article, the SFO said “we do not accept that we acted hastily – these were considered negotiations and were not rushed decisions.”

The same article noted that because the SFO dropped the charges against Count Mensdroff, he is able to “claim his legal costs from taxpayer funds.” According to the article, Mensdorff, who assets include a castle, has made such a claim.

BAE Plea Agreement Challenge Dropped

Yesterday, the Campaign Against Arms Trade (“CAAT”) and The Corner House, two British non-profits, announced (see here) “with regret that they are witdrawing their application for a judicial review of the 5 February 2010 decision by the Serious Fraud Office (SFO) to enter into a controversial plea bargain settlement with BAE Systems and to drop ‘conspiracy to corrupt’ charges against a BAE former agent, Count Alfons Mensdorff-Pouilly.”

For more on this challenge and the BAE bribery, yet no bribery case see here and here.

While CAAT and The Corner House have withdrawn their application for judicial review, the groups do intend to “ask questions inside BAE’s AGM on May 5th” and otherwise voice “the people’s judgment” on BAE’s corporate ethics.

Should you want to make your voice heard on this issue, see here.

Random Musings

A recent Main Justice article by Christopher Matthews (see here) talked about Mark Mendelsohn (DOJ FCPA Top Cop) and Cheryl Scarboro (Head of the SEC’s New FCPA Team) “spreading the FCPA gospel” at the recent National Forum on the Foreign Corrupt Practices Act.

Two items in the article caught my eye.

First, Mendelsohn is reported to have said, in response to a question, that the DOJ “does consider collateral consequences when structuring settlement agreements” and that “there is a growing recognition that the European Union debarment requirement presents particular challenges for companies trying to settle cases.”

That European debarment is the engineer driving the FCPA locomotive in certain cases is clear upon reviewing the DOJ’s sentencing memoranda in the Siemens, BAE, and Daimler bribery, yet no bribery enforcement actions.

The Siemens memo (here) states:

“The Department’s analysis of collateral consequences included the consideration of the risk of debarment and exclusion from government contracts.”

The BAE memo (here) has a separate section on debarment and states:

– “European Union Directive 2004/18/EC, which has recently been enacted in all EU countries through implementing legislation, provides that companies convicted of corruption offenses shall (emphasis in original) be mandatorily excluded from government contracts.”

– “BAES’s business is primarily from government contracts, including with several EU customers.”

– “Mandatory exclusion under EU debarment regulations is unlikely in light of the nature of the charge to which BAES is pleading. Discretionary debarment will presumably be considered and determined by various suspension and debarment officials.”

– “The Department will communicate with U.S. debarment and regulatory authorities, and relevant foreign authorities, if requested to do so, regarding the nature of the offense of which BAES has been convicted, the conduct engaged in by BAES, its remediation efforts, and the facts relevant to an assessment of whether BAES is presently a responsible government contractor.”

The Daimler memo (here) states:

The DOJ’s “analysis of collateral consequences included the consideration of the risk of debarment and exclusion from government contracts, and in particular European Union Directive 2004/18/EC, which provides that companies convicted of corruption offenses shall be mandatorily excluded from government contracts in all EU countries.”

The way around these debarment provisions appears to be simple, yet troubling.

Despite clear evidence of FCPA antibribery violations, don’t charge FCPA antibribery violations!

Second, Scarboro indicated that the SEC’s “FCPA Team” will be up and running “in the next two weeks” and that “the dedicated staff involved in these cases will have a chance to learn the nuts and bolts.”

Perhaps in learning the FCPA’s “nut and bolts,” the SEC enforcement attorneys will learn that many features of its FCPA enforcement program have no legal support such as: (i) employees of state-owned or state-controlled enterprises being deemed “foreign officials”; (ii) parent companies being strictly liable for subsidiary or affiliate books and records and internal control violations; (iii) seeking disgorgement remedies in the absence of antibribery charges.

Chertoff Joins BAE Board

BAE announced yesterday (see here) that Michael Chertoff, President Bush’s former Secretary of Homeland Security, has joined its board. Chertoff (see here) is also senior counsel at Covington & Burling, the law firm current DOJ Assistant Attorney General – Criminal Division, Lanny Breuer (see here) practiced at before his current position.

According to this story, BAE received $7.1 billion in U.S. government contracts in 2009, “making it the government’s eighth-biggest contractor.” According to the same story, BAE has received over $200 million in Department of Homeland Security contracts since 2005.

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