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Friday Roundup

The sting may be over but it effects are not, Orthofix information unsealed, checking in on Wal-Mart, a pipeline report, a safe assumption, and the alternative reality.   It’s all here in the Friday roundup.

Stung By The Sting

The manufactured Africa Sting case may be over, but it effects are still being felt.

Allied Defense Group (“ADG”) employed Mark Frederick Morales, one of the individuals charged in the case.  The company stated in its recent quarterly filing (here) as follows.

“In February and March, 2012, the DOJ dismissed charges against all individuals indicted in the FCPA sting operation, including the former employee of MECAR USA. Since this time, the Company’s FCPA counsel has had several discussions with the DOJ and SEC regarding the agencies’ respective inquiries. Based upon these discussions, it appears likely that resolution of these inquiries will involve a payment by the Company to at least one of these government agencies in connection with at least one transaction involving the former employee of Mecar USA. At this point, the amount of this payment is undeterminable.”

As noted in this previous post, in January 2010, ADG agreed to be acquired by Chemring Group PLC.

Another publicly traded company that employed an Africa Sting defendant, Amaro Goncalves, is Smith & Wesson.  The company disclosed in its most recent quarterly filing (here) as follows.

“On February 21, 2012, the DOJ filed a motion to dismiss with prejudice the indictments of the remaining defendants who are pending trial, including our former Vice President-Sales, International & U.S. Law Enforcement. On February 24, 2012, the district court granted the motion to dismiss. We cannot predict, however, when the investigation will be completed or its final outcome. There could be additional indictments of our company, our officers, or our employees. If the DOJ determines that we violated FCPA laws, we may face sanctions, including significant civil and criminal penalties. In addition, we could be prevented from bidding on domestic military and government contracts and could risk debarment by the U.S. Department of State. We also face increased legal expenses and could see an increase in the cost of doing international business. We could also see private civil litigation arising as a result of the outcome of the investigation. In addition, responding to the investigation may divert the time and attention of our management from normal business operations. Regardless of the outcome of the investigation, the publicity surrounding the investigation and the potential risks associated with the investigation could negatively impact the perception of our company by investors, customers, and others.”

Even though the individual Africa Sting cases are over, the case provided a point of entry into several companies and an entire industry and its effects are still being felt as demonstrated by the above disclosures.

Orthofix

This previous post discussed the July enforcement action against Orthofix International.  As noted in the post, the specifics of the DOJ’s allegations were not known as the information against Orthofix was filed under seal.  The information (here) was recently unsealed.  In summary fashion, the DOJ alleged as follows under the heading “corrupt conduct.”  “From [2003 through March 2010], with the knowledge of Orthofix Executive A [a citizen of Peru and legal permanent resident in the U.S. who was a senior manager of Orthofix Inc. (an indirectly wholly owned subsidiary) and responsible for sales operations in Latin America], Promeca [an entity incorporated and headquartered in Mexico and an indirectly wholly owned subsidiary of Orthofix International] and its employees paid approximately $300,000 to Mexican officials, in return for agreements with IMSS and its hospitals to purchase millions of dollars in Orthofix International products.”

IMSS is a social service agency of the Mexican government that provided public services to Mexican workers and their families and the Mexican Officials identified in the information are as follows.

Mexican Official 1 – a deputy administrator of Magdelena de las Salinas (a hospital in Mexico City that IMSS owned and controlled)

Mexican Official 2 – the purchasing director of Magdelena de las Salinas

Mexican Official 3  – the purchasing director of Lomas Verdes (a hospital in the State of Mexico that IMSS owned and controlled)

Mexican Official 4 – a sub-director of IMSS

According to the information, “Executive A knew of the payments and things of value [provided to the Mexican Officials] but failed to stop the scheme or report the scheme to Orthofix Interntional or Orthofix’s Inc.’s compliance department.”

Under the heading “Internal Controls” the information alleges, among other things, as follows.  “Orthofix International,which grew its direct distribution footprint in part by purchasing existing companies, often in high-risk markets, failed to engage in any serious form of corruption-related diligence before it purchased Promeca.  Although Orthofix International promulgated its own anti-corruption policy, that policy was neither translated into Spanish nor implemented at Promeca.  Orthofix International failed to provide any FCPA-related traning to many of its personnel, including Executive A.  Orthofix also failed to train Promeca personnel for years on the FCPA, to test regularly or audit particular transactions, or to ensure that subsidiary maintained controls sufficient to detect, deter or prevent illicit payments to government officials.”

The information charges one count of violating the FCPA’s internal control provisions.

Checking In On Wal-Mart

During the media feeding frenzy after the New York Times Wal-Mart article (see here for the prior post), I had the pleasure to appear on Eliot Spitzer’s Viewpoint program on Current TV.  At the end of the segment, after the substantive issues were discussed, Spitzer offered that he has several contacts in the FCPA bar and that, regardless of the substantive issues involved in Wal-Mart’s FCPA scrutiny or the ultimate outcome, lots of lawyers were poised to make lots of money.

Spitzer of course was right.

During its second quarter earnings call (see here for the transcript) Wal-Mart executives stated as follows.   “Within core corporate, we incurred approximately $34 million in expenses related to third-party advisors reviewing matters involving the Foreign Corrupt Practices Act and we expect these expenses to continue through the rest of the year.”  Later in the call, the following was said.  “We also expect to incur approximately $35 to $40 million in expenses for the review of matters relating to the Foreign Corrupt Practices Act during each of the remaining quarters for this fiscal year.”

In other news, on the civil litigation front, as noted in this Reuters article “an Indiana union pension fund that owns shares in Wal-Mart Stores Inc has sued the company to gain access to thousands of internal documents related to allegations that a Wal-Mart subsidiary bribed Mexican government officials.”  According to the report, the lawsuit, filed in Delaware’s Chancery Court, alleges the “company had made a ‘woefully deficient’ production of documents following an earlier out-of-court demand and that hat documents were produced were ‘so heavily redacted,’ or blacked out, they were nearly worthless.”

Turning to Capital Hill, several prior posts have chronicled efforts by Representative Elijah Cummings and Henry Waxman to conduct a shadow investigation of Wal-Mart in the aftermath of the New York Times article (see here for the previous post).  As indicated in this recent press release and this recent letter the lawmakers are growing impatient.  In pertinent part, the letter to Wal-Mart CEO Michael Duke stated as follows.

“We are writing to give you a final opportunity to respond to our requests for information about allegations that your company violated the Foreign Corrupt Practices Act. Although you have stated on multiple occasions that you intend to cooperate with our investigation, you have failed to provide the documents we requested, and you continue to deny us access to key witnesses. Your actions are preventing us from assessing the thoroughness of your internal investigation and from identifying potential remedial actions.

During the course of our investigation, we have learned that Wal-Mart’s concerns about potential violations of the Foreign Corrupt Practices Act are not limited to operations in Mexico, but are global in nature. Your outside counsel informed us that, before allegations of bribery in Mexico became public, Wal-Mart retained attorneys to conduct a broad review of the company’s anti-corruption policies. This review identified five “first tier” countries “where risk was the greatest.” Wal-Mart then conducted a worldwide assessment of the company’s anti-corruption policies, culminating in a series of recommendations and policy changes based on those findings.

In addition, we have obtained internal company documents, including internal audit reports, from other sources suggesting that Wal-Mart may have had compliance issues relating not only to bribery, but also to “questionable financial behavior” including tax evasion and money laundering in Mexico.”

Pipeline Report

Add NCR Corporation and Expro International to the list of companies under FCPA scrutiny.

NCR

Global technology company NCR Corp. recently disclosed here as follows.

“NCR has received anonymous allegations from a purported whistleblower regarding certain aspects of the Company’s business practices in China, the Middle East and Africa, including allegations which, if true, might constitute violations of the Foreign Corrupt Practices Act.  NCR has certain concerns about the motivation of the purported whistleblower and the accuracy of the allegations it received, some of which appear to be untrue.  NCR takes all allegations of this sort seriously and promptly retained experienced outside counsel and began an internal investigation that is ongoing. NCR does not comment on ongoing internal investigations.  Certain of the allegations relate to NCR’s business in Syria. NCR has ceased operations in Syria, which were commercially insignificant, notified the U.S. Treasury Department, Office of Foreign Assets Control (OFAC) of potential apparent violations and is taking other measures consistent with OFAC guidelines.”
Based on the disclosure, an analyst downgraded NCR stock (see here) causing shares to drop approximately 10%.
Expro
As reported in this Wall Street Journal Corruption Currents post, Expro International (an oil field management company owned by a Goldman Sachs-backed private equity consortium) “is re-investigating claims that its employees paid bribes in Kazakhstan.”  The report states as follows.  “Expro International and the consortium, Umbrellastream, received allegations from an anonymous tipster in May that two of Expro’s former operations coordinators in Western Kazakhstan oversaw and approved bribes to customs officials there from 2006 until summer 2009, according to an email reviewed by Corruption Currents. The alleged bribes were paid to clear Expro’s equipment through customs to avoid costly delays, the tipster said.  The allegations have sparked an internal investigation by Expro’s lawyers at Gibson, Dunn & Crutcher LLP into the claims, according to another email. But it appears the investigation is not the first time Expro has scrutinized its operations in Kazakhstan.”
Add a few, but take one off.
As noted in this recent Friday roundup, Academi, Inc., formerly known as Xe Services, formerly known as Blackwater recently resolved a non-FCPA case and the DPA specifically stated that the agreement “does not apply to the Foreign Corrupt Practices Act investigation independently under investigation by the DOJ.”  As noted in this previous post, Blackwater has been under investigation for FCPA violations in Iraq and as noted in this previous post, its FCPA scrutiny in Iraq inspired Representative Peter Welch to introduce H.R. 5366, the “Overseas Contractor Reform Act,” an impotent debarment bill that passed the House in September 2010 (see here).
However, as on-line news agency Main Justice reports here, reference to the FCPA investigation in the recent DPA appears to have been a drafting error.  Citing a July 19th letter to the company, Main Justice reports that the DOJ has closed its “foreign bribery inquiry” of the company.  Main Justice cites the following portion of the declination letter.  “[The DOJ has closed its inquiry] based on a number of factors, including but not limited to, the investigation undertaken by Academi and the steps taken by the company to enhance its anti-corruption compliance program.”
A Safe Assumption

This previous post regarding the recent Pfizer enforcement action raised the following question(s).

Does anyone truly believe that the only reason Chinese doctors prescribed Pfizer products was because under the “point programs” the physician would receive a tea set?  Does anyone truly believe that the only reason Czech doctors prescribed Pfizer products was because the company sponsored educational weekend took place at an Austrian ski resort?  Does anyone truly believe that the only reason Pakistani doctors offered Wyeth nutritional products to new mothers was because the company provided office equipment to the physicians?

The questions were asked in the context of disgorgement remedies, but can also be asked in the context of product safety.  One can safely assume that if the enforcement agencies had any evidence to suggest that the products at issue jeopardized public safety, the enforcement agencies would have alleged such facts, as they occasionally do in FCPA enforcement actions (see Innospec for instance).

The absence of such allegations make this recent article by Online Pharmacy Safety foolishly speculative.  The article states as follows.

“[The conduct at issue in the enforcement action] puts the safety of consumers at risk.   If large companies are able to bribe their way to getting more business, and anticipate government officials to turn a blind eye, the wrong products could be getting into the hands of consumers worldwide.  The Pfizer products approved by foreign governments and prescribed by doctors may not have been the best product available, which could endanger consumers. Doctors put selfishness at the expense of patients, and the company was putting profits ahead of its public safety.”

Alternative Reality

Harvey Silverglate (author of Three Felonies a Day: How the Feds Target the Innocent) hit the ball out of the park with this recent Wall Street Jouranl op-ed.  Referring to the recent Gibson Guitar Lacey Act enforcement action and how the resolution documents muzzle the company (as is typical in FCPA NPAs and DPAs), Silverglate wrote as follows.

“Through these and myriad other techniques, federal investigator and prosecutors create an alternative reality that favors their own institutional interests, regardless of the truth or of justce.  All citizens and companies become subject to the Justice Department’s essentially unfettered power.  Remedying this problem cannot be left to the victims of this governmental extortion, because their risks are too high if they fight; nor will their lawyers likely blow the whistle, since the bar makes a tidy living by playing the game.  It is up to the rest of civil society to let the Justice Department emperor know that we see he is not wearing clothes.”

*****

A good weekend to all.

Friday Roundup

Add a few to the list, take a few off, a word on guest posts, take a deep breath, whose fault is it, once again nobody was charged.  It’s all here in the Friday roundup.

Add Another

Most companies bury FCPA disclosures deep in SEC filings.  Not so with Nordion Inc. (here – a Canadian based health sciences company with shares traded in the U.S).  It took the open and direct route by issuing a release (here) specifically devoted to the topic.  The release states as follows.

“[The company] disclosed that it is conducting an internal inquiry and investigation of a foreign supplier and related parties focusing on compliance with the Canadian Corruption of Foreign Public Officials Act (CFPOA) and the U.S. Foreign Corrupt Practices Act (FCPA). Through the Company’s own internal review as part of its CFPOA compliance program, Nordion discovered potential compliance irregularities. As a result, the Company recently commenced an internal investigation of the possible compliance issues.  These issues relate to potential improper payments and other related financial irregularities in connection with the supply of materials and services to the Company.  The investigation is being conducted by outside legal counsel and external forensic and accounting firms who are experts in such compliance. These external advisors are reporting regularly to a special Committee of the Board constituted to deal with this matter.  Nordion has voluntarily contacted the regulatory and enforcement authorities, including the Canadian and U.S. Department of Justice, the Royal Canadian Mounted Police (RCMP), the U.S. Securities and Exchange Commission (SEC) and the Public Prosecution Service of Canada, to provide details of the matter and advise that an internal investigation is underway. The internal investigation is in its early stages and the Company’s external advisors have met with these authorities and will continue to provide reports to them as the investigation progresses.Nordion is committed to the highest standards of integrity and diligence in its business dealings and to the ethical and legally compliant business conduct by its employees, representatives and suppliers. The Company reviews its compliance programs on a regular basis to assess and align them with emerging trends and business practices.  Corrupt or fraudulent business conduct is in direct conflict with the Company’s Global Business Practice Standards and corporate policies. The Company will continue to investigate this matter and cooperate with regulatory and enforcement authorities with a view to an expedient resolution.”

By my estimation, in the past four months, approximately twenty companies have become subject to FCPA scrutiny (whether through disclosures or FCPA-related civil complaints).  In addition, industry sweeps as to the Hollywood movie industry and retail industry have reportedly been launched.  See here for a prior post titled “The Sun Rose, A Dog Barked, and a Company Disclosed FCPA Scrutiny.”

Academi, Inc., formerly known as Xe Services, formerly known as Blackwater was also in the news this week.  As noted in this FBI release, pursuant to a deferred prosecution agreement (here) the company admitted to certain facts and agreed to a $7.5 million fine in connection with certain export controls and firearms law violations.  As noted in the release, the DPA “also acknowledges and references a $42 million settlement between the company and the Department of State as part of a settlement of violations of the Arms Export Control Act and the International Trafficking in Arms Regulations.”  As noted in this previous post, Blackwater has been under investigation for FCPA violations in Iraq (and Sudan as noted in the FBI release).  The above DPA specifically states however that “this agreement does not apply to the Foreign Corrupt Practices Act investigation independently under investigation by the DOJ.”  As noted in this previous post, Blackwater’s FCPA scrutiny in Iraq inspired Representative Peter Welch to introduce H.R. 5366, the “Overseas Contractor Reform Act,” an impotent debarment bill that passed the House in September 2010 (see here).

There are also developments to report on the other side of the Atlantic as the U.K. Serious Fraud Office announced hereas follows.  “The Director of the Serious Fraud Office has decided to open a criminal investigation into allegations concerning GPT and aspects of the conduct of their business in the Kingdom of Saudi Arabia.”  As noted in this Bloomberg piece, GPT is a unit of European Aeronautic Defence & Space Co. (EADS), and the investigation involved suspected payments to win a telecommunications deal with Saudi Arabia’s royal family.  The Financial Times stated that the “Serious Fraud Office’s criminal inquiry is a step-change for the agency  after it said in March that it was happy with an internal investigation the company was conducting.”

Although he is no longer in Congress, former Representative Todd Tiahrt is probably delighted by this news.  See here for the prior post.

Take a Few Off

Huntsman Corporation recently disclosed as follows in a SEC filing (here).

“During the third quarter of 2010, we completed an internal investigation of the operations of Petro Araldite Pvt. Ltd. (“PAPL”), our majority owned joint venture in India. PAPL manufactures base liquid resins, base solid resins and formulated products in India. The investigation initially focused on allegations of illegal disposal of hazardous waste and waste water discharge and related reporting irregularities. Based upon preliminary findings, the investigation was expanded to include a review of the production and off-book sales of certain products and waste products. The investigation included the legality under Indian law and U.S. law, including the U.S. Foreign Corrupt Practices Act, of certain payments made by employees of the joint venture to government officials in India. Records at the facility covering nine months in 2009 and early 2010 show that less than $11,000 in payments were made to officials for that period; in addition, payments in unknown amounts may have been made by individuals from the facility in previous years.  […] Also in May 2010, we voluntarily contacted the U.S. Securities and Exchange Commission (“SEC”) and the U.S. Department of Justice (“DOJ”) to advise them of our investigation and that we intend to cooperate fully with each of them. We met with the SEC and the DOJ in October 2010 to discuss this matter and we continue to cooperate with these agencies. Steps have been taken to halt all known illegal or improper activity, including the termination of employment of management employees as appropriate. In May 2012, the SEC and DOJ notified us that they would not recommend any enforcement action be taken against our Company in this matter.”

Since August 2010 (see here for the prior post), I have proposed that when a company voluntarily discloses an FCPA internal investigation to the DOJ and the SEC, and when the DOJ and/or SEC decline enforcement, the DOJ and/or the SEC should publicly state, in a thorough and transparent manner, the facts the company disclosed to the agencies and why the agencies declined enforcement on those facts.

In the meantime, we can only speculate as to why the enforcement agencies did not bring an enforcement action against Hunstman.  Of note, in the DOJ’s written declination responses after the June 2011 House hearing (see here), the DOJ stated that it has declined matters when, among other circumstances, “the improper payments involved minimal funds compared to the overall business revenue.”

As noted in this previous post, in April Hercules Offshore disclosed as follows.  “On April 4, 2011, the Company received a subpoena issued by the Securities and Exchange Commission (“SEC”) requesting the delivery of certain documents to the SEC in connection with its investigation into possible violations of the securities laws, including possible violations of the Foreign Corrupt Practices Act (“FCPA”) in certain international jurisdictions where the Company conducts operations. The Company was also notified by the Department of Justice (“DOJ”) on April 5, 2011, that certain of the Company’s activities were under review by the DOJ. On April 24, 2012, the Company received a letter from the DOJ notifying the Company that the DOJ has closed its inquiry into the Company regarding possible violations of the FCPA and does not intend to pursue enforcement action against the Company. The DOJ indicated that its decision to close the matter was based on, among other factors, the thorough investigation conducted by the Company’s special counsel and the Company’s compliance program. The Company, through the Audit Committee of the Board of Directors, intends to continue to cooperate with the SEC in its investigation. At this time, it is not possible to predict the outcome of the SEC’s investigation, the expenses the Company will incur associated with this matter, or the impact on the price of the Company’s common stock or other securities as a result of this investigation.”

Earlier this week, the company updated its disclosure as follows.  “On August 7, 2012, Hercules Offshore, Inc. (the “Company”) received a letter from the Securities and Exchange Commission (“SEC”) notifying the Company that the SEC staff has completed its investigation into the Company regarding possible violations of the Foreign Corrupt Practices Act (“FCPA”) and does not intend to pursue enforcement action against the Company. As previously disclosed, the Company was notified by the SEC and the Department of Justice (“DOJ”) in April 2011, that certain of the Company’s activities were under review by the SEC and DOJ with respect to possible violations of the FCPA in certain international jurisdictions where the Company conducts operations. The Company previously disclosed that it received a letter from the DOJ on April 24, 2012, notifying the Company that the DOJ has closed its inquiry into the Company regarding possible violations of the FCPA and does not intend to pursue enforcement action against the Company. The DOJ noted that it terminated its investigation ‘…based on a number of factors, including, but not limited to, the thorough investigation undertaken by Hercules and the steps that Hercules has taken in the past and continues to take to enhance its compliance program, including efforts to ensure compliance with the FCPA.’ As a result of the termination by the SEC and the prior termination by the DOJ, there are no open FCPA investigations against the Company.”

As evident from the disclosures, unlike Huntsman, the FCPA scrutiny of Hercules was not based on a voluntary disclosure, but inquiries from the SEC and DOJ.  Whether this represents a declination or a dud is the question.

Guest Posts

Part of the mission of FCPA Professor is to facilitate a forum for discussion and analysis of FCPA and related issues among FCPA practitioners, business and compliance professionals, scholars and students, and other interested persons.  Given this mission, I frequently publish guest posts (see here for approximately 60 such posts).  In publishing guest posts, it should not be assumed in all cases that I agree in whole or in part with the content of such posts.  Rather, providing the forum for delivery into the marketplace of ideas is what I hope to facilitate and I encourage all who want to make their voice heard on the issues to consider submitting a guest post.

A Deep Breath

The FCPA is a unique statute, with unique and difficult to manage risks.

Nevertheless , it was refreshing to see this piece by Pamela Marple (Chabourne & Park – here) in the NACD Director Advisory titled “The FCPA: A New Bear in the Woods?”  Marple begins as follows.  “Over the past five years, the Foreign Corrupt Practices Act has solidified itself as an industry brimming with expert forums, company departments and substantial news coverage.  Is this statute really the bear in the woods some say it is?”  Marple states as follows.  “The existence of the FCPA industry (and professionals who are available to conduct internal investigations at a high price) does not mean that this reaction is what is always required. What is required first and foremost is reasonable judgment exercised by directors and professionals who seek both compliance and solutions—without assuming a bear is present at every turn.”

As I previously commented (here) to Corporate Board Member, corporate directors need to keep a proper perspective.  There’s a whole industry out there that’s trying to sell the steroids version of FCPA compliance.  But directors should not get their undies in a bundle over this.  This is an issue, just like any other risk area, that directors need to have on their radar screen.  Corporate directors should not panic when it comes to FCPA compliance.

Whose Fault is It?

Do FCPA violations occur because companies subject to the law go into foreign markets intent on engaging in bribery or because the companies are confronted by corrupt foreign officials seeking to line their own pockets?

Circumstances vary of course, but this recent article in the African Globe includes comments from human rights lawyer and Senior Advocate of Nigeria Femi Falana who focused on the former.  The article stated as follows.   “In order to cover up the involvement of western governments and corporations in the promotion of corruption, terrorism and drug abuse in Africa, the impression is often created by top public officials of some foreign governments that Africans are the most corrupt people in the world,” Falana observed noting that only last week, the US Secretary of State, Mrs. Hillary Clinton, kicked off her 11-day tour of some African states in Senegal by condemning corruption in Africa and urging African leaders to fight it in order to get good governance in the continent. He said it was also the kernel of President Barack Obama’s message to Africans when he made a brief stopover in Ghana three years ago. “While we do not condone corruption, it is high time the Obama administration was told to stop blaming the victims of grand corruption promoted and fuelled by western countries led by Switzerland, France, United Kingdom and United States,” Falana said.”

Nobody Was Charged

A recent New York Times article (here) once again raises the issue of why few corporate fraud enforcement actions result in individual charges.  The article states as follows.  “The Justice Department has collected $8.6 billion over the last three years, more than in any similar period in history, but relatively few prosecutions of individuals have come from the biggest settlements.”

A reason?

In the FCPA context, I submit and stated during my 2010 Senate testimony (here), involves the quality of the corporate enforcement action.  Given the prevalence of NPAs and DPAs in the FCPA context and the ease in which DOJ offers these alternative resolution vehicles to companies subject to an FCPA inquiry, companies often agree to enter into such resolution vehicles regardless of the DOJ’s legal theories or the existence of valid and legitimate defenses. It is simply easier, more cost efficient, and more certain for a company to agree to a NPA or DPA than it is to be criminally indicted and mount a valid legal defense  even if the DOJ theory of prosecution is questionable.  (See here for my scholarship “The Facade of FCPA Enforcement).  Individuals, on the other hand, face a deprivation of personal liberty, and are more likely to force the DOJ  to satisfy its high burden of proof as to all FCPA elements.

A telling statistic?

As noted in this prior post, since alternative resolution vehicles were first used in the FCPA context (December 2004) there have been 61 “core” corporate DOJ FCPA enforcement actions.  47 of the 61  ”core” corporate DOJ FCPA enforcement actions (77%)  have been resolved via an NPA (19 instances) or a DPA (28 instances).  In these 47 “core” corporate DOJ FCPA enforcement actions, only 7 enforcement actions (15%) have resulted in any individual FCPA criminal charges against company employees. In other words, when the DOJ resolves an FCPA enforcement action via a NPA or DPA, there is only a 15% likelihood that individual criminal charges will be filed against any company employee or those affiliated with the company. [Note: the above statistics were calculated in Sept. 2011]

For previous posts on this very same issue see here.

*****

A good weekend to all.

FCPA Debarment Bill Takes Step Forward … Related Bill Also Introduced

Last week, the House Committee on Oversight and Government Reform “favorably forwarded several pieces of good government legislation” to the House of Representatives. (see here).

One bill taking the next step is H.R. 5366 – the “Overseas Contractor Reform Act.”

As I discussed in this May post when H.R. 5366 was introduced, the bill states that “any person found to be in violation of the Foreign Corrupt Practices Act of 1977 shall be proposed for debarment from any contract or grant awarded by the Federal Government within 30 days after a final judgment of such violation.”

In the prior post (here) I noted that the bill is a step in the right direction, but pointed out several shortcomings and said that the bill, if enacted, could become a “toothless tiger” because it assumes all FCPA enforcement actions are resolved through judicial proceedings and it assumes all FCPA enforcement actions are resolved with charges that actually fit the facts.

As noted in this release from the bill’s sponsor, Representative Peter Welch (D-VT), the bill was drafted “in response to an ongoing investigation into whether Xe Services – formerly known as Blackwater Worldwide – bribed Iraqi officials following a 2007 Baghdad shooting that left 17 Iraqis dead.” (See here for more).

Yet if enacted the bill could, if drafted with an understanding of how FCPA actions are resolved, have far-reaching implications as several major government suppliers have recently resolved FCPA enforcement actions (whether anti-bribery or books or records and internal controls) or are currently under investigation for potential FCPA violations.

For video footage of H.R. 5366’s passage by the House Committee (see here – the first video).

*****

H.R. 5366 is not the only FCPA-related bill to keep on your radar screen.

On July 22nd, Representative Raymond Green (D-TX) (here) introduced H.R. 5837 (see here).

The bill states that an “Executive Agency” “may not enter into a contract for the procurement of goods or services with any person or entity unless that person or entity has certified that the person or entity, and each of its officers, employees, and agents, have not violated [the FCPA’s anti-bribery provisions] or any comparable law of any other country.” Further, under the bill, an “Executive Agency” “may not allow any contractor awarded a contract by the agency to enter into a subcontract (at any tier) under the contract with any person or entity that has not made the certification …”

My critique of this well-intentioned bill is the same as H.R. 5366.

Most FCPA enforcement actions are settled through non-prosecution or deferred prosecution agreements. Thus, if a company settles an FCPA enforcement through such a vehicle, the company likely will not be found to have “violated” the FCPA making H.R. 5837 a “toothless tiger.”

Further, the bill assumes that facts implicating the FCPA’s anti-bribery provisions are actually resolved with FCPA anti-bribery charges. As demonstrated by the all too frequent “bribery, yet no bribery” FCPA enforcement actions, that is simply not the case as companies are frequently allowed to settle egregious instances of bribery without being charged with anti-bribery violations.

So great is the facade of FCPA enforcement in many cases that H.R. 5366 and H.R. 5837, if enacted as currently drafted, are unlikely to have any effect.

Blackwater In Hot Water

The New York Times (here) reports that the DOJ “is investigating whether officials of Blackwater Worldwide tried to bribe Iraqi government officials in hopes of retaining the firm’s security work in Iraq.”

According to the Times, the DOJ’s fraud section open an investigation “late last year” to determine whether Blackwater employees violated the FCPA. The investigation follows a November 2009 times article (here) which first raised questions about Blackwater’s (now known as Xe Services) conduct in Iraq. That article suggested that the alleged payments at issue were made to Iraqi “foreign officials” to help secure an operating license the company needed to continue doing business in Iraq.

As noted in a prior post (here), this case is interesting on several levels.

First, the case (from an FCPA antibribery perspective) would seem to hinge on the FCPA’s “obtain or retain” business element, and is another example of the post-Kay explosion in enforcement actions in which alleged improper payments were made to help secure foreign government licenses, permits, etc. An interesting wrinkle to this analysis is that the Iraqi license was apparently needed so that Blackwater could retain its contract with the U.S. State Department – not with a foreign entity as is usually the case.

Second, rarely if perhaps ever, has an FCPA inquiry focused on the conduct of a company so intertwined with U.S. government agencies (State Department and CIA) operating in a war zone.

In the News

Some interesting news articles to pass along.

The first piece is from today’s New York Times and is titled “Blackwater Said to Pursue Bribes to Iraq After 17 Died” (see here).

The article suggests, based on former company sources, that Blackwater (and its executives) could … well … be in some murky FCPA water in connection with alleged secret payments to Iraqi officials.

According to former company officials, the payments were intended to silence the officials’ “criticism and buy their support after a September 2007 episode in which Blackwater security guards fatally shot 17 Iraqi civilians” an event which generated much media coverage and congressional interest (see here among other sources).

The specific recipients of the payments? According to sources, officials in the Iraqi Interior Ministry who demanded that Blackwater secure an operating license after the September 2007 incident in order to continue doing business in the country.

The FCPA anti-bribery provisions contain an obtain or retain business element.

You ask, does making payments to foreign officials to secure a license satisfy that important element?

This general issue was addressed by the Fifth Circuit in U.S. v. Kay, 359 F.3d 738 (5th Cir. 2004) (one of the few instances in which a court has rendered a substantive FCPA decision).

The issue in Kay was whether payments to Haitian officials for the purpose of avoiding custom duties and sales taxes in Haiti could satisfy the FCPA’s obtain or retain business element.

Concluding that the obtain or retain business element was vague, the court analyzed the FCPA’s legislative history and concluded that such payments (even though they do not lead to specific government contracts) could nevertheless provide an unfair advantage to the payor over competitors and thereby assist the payor in obtaining and retaining business.

The court did not hold that ALL such payments could satisfy the FCPA’s obtain or retain business element, only that such payments COULD satisfy this key element if, for instance (as in the Kay case), the payments were intended to lower the company’s cost of doing business in the foreign country.

Post-Kay there has been an explosion in FCPA enforcement actions involving payments made to secure foreign government licenses, permits, and certifications or otherwise involving custom duties and the like. Because these enforcement actions have not been contested, it remains an open question as to whether all such payments can indeed satisfy the FCPA’s obtain or retain business element and under what circumstances.

Blackwater (now called Xe Services), through a spokeswomen, dismissed the allegations as baseless.

Nevertheless, some juicy stuff here – the U.S. military’s then prime security contractor in Iraq (and a company which did classified work for the CIA) making bribe payments in a war zone.

One wonders who knew what within official Washington.

Will this alleged conduct be pursued by the DOJ or put on the backshelf due to national security / foreign policy issues?

To my knowledge, this angle of Blackwater’s activities in Iraq has never been disclosed and, if so, the piece would seem to represent a dandy piece of investigative journalism.

The second article, titled “A Morgan Stanley Star Falls In China,” is from Reuters (see here).

The piece examines the rise and fall of Garth Peterson, a U.S. citizen, who joined Morgan Stanley’s Hong Kong office earlier this decade and quickly rose through the ranks of V.P., executive director, and ultimately managing director of Morgan Stanley’s real estate investment operation in China.

Peterson was fired by Morgan Stanley last December over concerns that he may have violated the FCPA.

Morgan Stanley disclosed the results of its internal investigation into Peterson’s conduct to both the DOJ and the SEC. Here is the company’s February 2009 8-K filing.

What did Peterson do that may have violated the FCPA?

The article suggests that Peterson’s relationship with Shanghai Yongye Group (a real estate developer) and its former Chairman, Wu Yonghua, and his daughter, Linda Wu, are at issue. Also relevant, it appears, is Shanghai Dragon Investment Co.

I hate to be the one always bringing up this issue, but if employees of Shanghai Yongye Group and Shanghai Dragon Investment Co., are somehow being considered “foreign officials” under the FCPA, I would sure love to see that legal analysis.

Anyway, back to the story.

The article is an interesting read on a number of fronts and provides an insight into one company’s handling of an FCPA issue.

First, the article notes that Morgan Stanley sent Peterson to an FCPA workshop. Given that this occured in 2008, it is debatable whether this was “too little too late.”

Second, comes an internal review, which from the article, appears to have been done in the ordinary course of business. The ordinary internal review uncovers some extraordinary issues.

Next, the company initiates an internal investigation to look into the suspicious issues. And what an internal investigation it was. According to the article, more than 7.4 million pages of e-mails were reviewed. According to the article, the investigation “found that in a discrete number of instances, investment assets were used for improper purposes not authorized by senior management” an occurrence which would seem to violate, at the very least, the FCPA’s internal control provisions which require, among other things, that an issuer like Morgan Stanley devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management’s general or specific authorization; and (ii) access to assets is permitted only in accordance with management’s general or specific authorization.

Next, comes the corrective measures, in this case, Peterson was fired.

Next, comes the disclosure (see above).

The article closes by saying that even if found guilty Peterson is “unlikely to be jailed as he and the firm are expected to pay damages and fees, possibly through a deferred prosecution agreement.”

Spot-on with the company likely entering into a deferred prosecution agreement.

However, the authors (and their sources) apparently have never heard the names of Frederic Bourke, Albert Jack Stanley, Steven Ott, Roger Michael Young (and many others) who are currently living in a federal prison (or waiting to check in) for violating or conspiring to violate the FCPA.

According to article, Peterson currently lives in Singapore.

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