BHP Billiton Enforcement Action Generates Much Critical Commentary
FCPA Inc. is an active group of writers.
Thus it was no surprise that the recent BHP Billiton enforcement action generated much commentary.
The May 20th enforcement action was previously highlighted here and here and this post highlights other commentary regarding the BHP Billiton enforcement action.
Prior to highlighting the commentary – much of it is consistent with my prior criticisms of the enforcement action linked above – a few observations.
While the BHP Billiton action is problematic on a number of levels, it does not dilute FCPA enforcement as much as the even more problematic 2012 Oracle enforcement action.
A general theme in much of the below commentary is that the enforcement action lacked anti-bribery charges because there was no quid pro quo relationship between the hospitality payments or offers of payments and BHP Billition’s business.
In the minds of some, this lack of quid pro quo is the reason for the lack of SEC anti-bribery charges.
I disagree.
For starters, as noted in certain of the commentary, the SEC did allege “payments to foreign officials to support their attendance at Olympic events at the very time BHPB had pending business before those officials or others over whom they may have had influence.”
More importantly, the lack of anti-bribery charges against BHP Billiton (a foreign issuer) would seem to be based on the fact that the required U.S. jurisdictional nexus for such charges was lacking.
Another general theme in much of the below commentary is that the BHP action is somehow unique in charging (or finding as the case may be since it was an SEC administrative action) books and records and internal controls violations in the absence of anti-bribery violations.
As will be highlighted in a future post, the enforcement approach in BHP Billiton was hardly unique. The SEC often charges or finds books and records and internal controls violations in the absence of anti-bribery charges or findings. Point taken that often the reasons are opaque, but the charges or findings in BHP are hardly unique.
To the commentary.
*****
The always informative Debevoise & Plimpton FCPA Update stated in pertinent part:
“Although the BHPB settlement involves a smaller penalty than some other recent resolutions, it may well turn out to be one of the more notable FCPA resolutions in several years. This is because the case addresses issues of recurring concern to multinational corporations that have long been sought out as sponsors of – or, at least, purchasers of hospitality packages for – marquee sporting events.
As good corporate citizens, these firms have come to view the purchase of tickets and hospitality packages as part of the collaboration with host entities managing such events, including national governments. This is an integral element of brand management and corporate strategy. In the course of such collaboration, these companies also receive due credit for making the event a successful interlude during which governments, business, and society at large, pause to celebrate the endeavor of sport. Yet the very process of supporting such an event leads to the inevitable question of “whom may we invite?” From there, the issue of anti-bribery compliance becomes a central issue for in-house compliance personnel.
The BHPB resolution likely will lead U.S. issuers choosing to provide hospitality of this kind to expend significant additional time, resources, and money devising and maintaining controls suggested by the resolution. Even though the settlement lacks the force of law, it will no doubt raise considerable pressure on companies to exercise even greater care if inviting foreign officials to such events, and may cause some firms subject to the books and records and internal controls provisions of the FCPA, i.e., those subject to SEC jurisdiction, to reconsider altogether this practice.
[…]
The bottom line for compliance professionals and in-house counsel is that – despite statements by enforcement officials that the issues of greatest concern to them are those arising out of the “big bribe” – travel, hospitality, and entertainment remain front and center in many cases and, particularly for the SEC, can provide the basis for substantial settlements.”
[…]
As in all settled FCPA matters, the terms of the BHPB resolution are the product of negotiation designed to serve the immediate interests of the parties in resolving a pending matter, and not the broader interest in definitively clarifying the law. And, at the end of the day, and after years of investigation, this particular resolution appeared to have yielded, at most, violations of lower severity than those that have led to larger settlements. It is notable that the Cease-and-Desist Order identified only four individuals out of 176 “foreign officials” invited to the Olympics who were involved with or in a position to influence pending matters involving BHPB. Of those four, only one official attended the Olympics. In these circumstances, it is no surprise that the DOJ did not take action.
But even for one of the smaller FCPA cases on its docket, the SEC could have provided more useful guidance in a compliance area where government officials and the courts alike (the latter at least in domestic bribery cases) have long stated that companies should have substantial leeway – provided that no quid pro quo arrangements inhere. Because of the ambiguities in the BHPB settlement, issuers will now inevitably need to exercise even greater caution when inviting “foreign officials” (including employees of state-owned enterprises) to events like this one.
The Cease-and-Desist Order may not have found this practice to violate the FCPA’s anti-bribery provisions. But the SEC has set a high bar for any company extending hospitality to foreign officials in terms of necessary internal controls, requiring independent review of almost every decision, potentially exacting accuracy and specificity for documentation, special training, and other procedures.”
*****
This Steptoe & Johnson publication is titled “Does SEC’s Enforcement Action Against BHP Billiton Take the FCPA’s Accounting Provisions To Far?” In pertinent part it states:
“This settlement … represents one of the most aggressive uses by the SEC to date of its accounting, and particularly its internal controls, authorities in an FCPA context. Instead of being predicated on specific questionable payments, the factual basis of the charges was that the company recognized the risk that improper quid pro quo arrangements could develop in connection with the hospitality program, and that such risks were not appropriately managed by the company’s program, including through the manner in which they were documented in company compliance approval tracking forms.
This settlement raises significant questions regarding the manner in which SEC enforcement of the FCPA’s accounting provisions continues to evolve. As regular consumers of SEC FCPA enforcement actions will know, in recent years, leadership of the SEC’s FCPA Unit has consistently asserted that it views an effective FCPA compliance program as essential to satisfying the FCPA’s legal requirement to “devise and maintain a system of internal accounting controls sufficient …” to ensure that “transactions are executed in accordance with management’s general or specific authorization”, and related tracking requirements.
The charges in this settlement take that position – which has not been litigated – a step further. They appear to raise the prospect that companies could be charged with violations of the FCPA’s accounting provisions where their compliance programs do not maintain all elements of what the SEC would deem an effective compliance program – even where no underlying bribery (or at least payment arrangements suggesting some kind of improper quid pro quo, for example), has taken place.
The case also suggests that programs in the areas of hospitality and sponsorship – common and recurring areas of activity for many companies – may face enhanced scrutiny for systemic adequacy from a regulatory point of view, at least where larger amounts are involved. Such a position – if the SEC indeed intends to pursue enforcement actions on this basis as a matter of enforcement policy – would significantly expand the scope of risks facing US issuers with appreciable FCPA/anti-corruption risks to their business.
[….]
This settlement represents one of the most expansive assertions of the SEC’s authority under the FCPA’s accounting provisions in its enforcement practice to date. While the elements of both books-and-records and internal control violations do not require an underlying anti-bribery provision violation, as noted above, the SEC has typically brought books-and-records and internal controls charges against companies where there has been at least some suggestion of specific improper quid pro quo arrangements in connection with the payments in question. Consequently, the second-guessing of the adequacy of the company’s compliance procedures for BHP Billiton’s hospitality program is stunning: it imposes legal liability, a $25 million civil penalty, and ongoing compliance obligations on a company simply for the failure to address and manage risks in a way the SEC deems adequate. In addition to straying even further from the text of 15 U.S.C. 78m(b)(2)(A) and (B) than the SEC already had, this settlement represents some of the most prescriptive statements regarding specific compliance program practices SEC has made in the FCPA context.
As a result, many companies will understandably be very uneasy about the direction of the SEC’s enforcement program after this settlement and the sufficiency of their efforts to meet it. Very few companies’ compliance programs comprehensively address all anti-corruption risks that a company faces, and most companies’ programs will have process or procedure gaps of which they may or may not be aware. This settlement thus raises the question whether simply the existence of FCPA risks not effectively eliminated by a company’s compliance program – but not necessarily resulting in anti-bribery provision violations either – may nevertheless be subject to enforcement action. Specific to the sponsorship, hospitality and gifts and entertainment area, it also raises the question of whether business entertainment for the purposes of relationship building – a necessary activity in most, if not all businesses – will raise enforcement risks when it nevertheless does not rise to the level of a specific, prohibited quid pro quo arrangement and is not undertaken in connection with other business activities. Companies that engage in event sponsorships for other than purely altruistic reasons may be particularly challenged to manage these “group events” – even those that treat state enterprises and government officials on the same footing as private customers – in a way that meets enforcement expectations. But if significant benefits are involved, then the message from this settlement is clearly that such differential risk management is expected.
As with many SEC resolutions, the settlement documents provide no insight into how the fine was calculated. The settlement also continues a recent trend of the SEC to require post-settlement compliance reporting on the part of the company.
Whether this settlement represents the beginning of a trend, or an isolated occurrence representing a negotiated resolution in connection with difficult facts, remains to be seen. This settlement highlights in particular, however, that companies should consider whether their compliance programs effectively address their most significant risks and review their associated processes and procedures accordingly.”
*****
This Paul Weiss alert states in pertinent part:
“In addition to the record-setting civil fine, BHPB is notable as a significant expansion of the SEC’s use of the FCPA’s accounting provisions in cases where the SEC believes an issuer’s compliance program creates the potential for bribery, even if bribery has not actually occurred or cannot be established. BHPB raises the very real prospect that issuers may face charges under the FCPA’s accounting provisions—even when there is no evidence of a quid pro quo, corrupt intent, or any improperly awarded business or government action—if the SEC is not satisfied that the issuer’s internal accounting controls and anti-corruption compliance program are sufficient to adequately manage corruption risks.”
[…]
“The SEC’s enforcement action against BHPB is significant for at least four reasons.
First, this settlement represents a rare example of the SEC bringing internal accounting controls and books and records charges in a case where it neither alleges actual bribery of a foreign official, nor suggests that such bribery took place but could not be charged for jurisdictional or other reasons.
Historically, the SEC has tended to charge issuers with violating the accounting provisions of the FCPA as a supplement to—rather than a substitute for—a bribery charge. In the exceptional cases where the accounting provisions alone have been charged, there is ordinarily some indication that improper payments were offered in exchange for a business benefit—in other words, that bribery had in fact occurred even if not charged. SEC precedent for bringing charges under the accounting provisions without an indication of actual underlying bribery seems to have its roots in a 2012 settled enforcement action against Oracle Corporation (“Oracle”). In Oracle, the SEC alleged that employees of an Oracle subsidiary in India secretly “parked” proceeds from sales to the Indian government for potential future use. The SEC did not claim that the Oracle subsidiary made corrupt payments to government officials, but did allege that the parked proceeds created “the potential for bribery or embezzlement,” and that Oracle lacked proper internal controls in light of that potential.
Here, it appears that the SEC was unable to show that BHPB’s business hospitality entertainment program was accompanied by any corrupt motive or involved a quid pro quo. This outcome is consistent with the proposition—well established in the domestic bribery context—that giving things of value to government officials for the purpose of building relationships or buying generalized goodwill is permissible. The BHPB enforcement action thus suggests that the Oracle case may not be an outlier in charging FCPA violations in the absence of an allegation of actual bribery, as some expert commentators have suggested, but perhaps the beginning of a new frontier in FCPA enforcement.
Second, even if it is tenable as a general legal matter to charge a standalone internal accounting controls violation based solely on the SEC’s subjective assessment of the adequacy of an issuer’s anti-corruption compliance program, the BHPB settlement represents an expansive application of the accounting provisions.6 Indeed, the SEC’s Order acknowledges that BHPB devised and maintained multiple internal controls to prevent corruption. For example, BHPB adopted a written Guide to Business Conduct; the President of each business line was given responsibility for ensuring compliance with that Guide; all business line Presidents certified annually that they had read and understood the Guide, confirmed that their direct reports did the same, and discussed compliance with their direct reports; BHPB established a Global Ethics Panel whose remit involved advising business leaders on compliance with the Guide and other business ethics issues; and BHPB’s compliance was overseen by a centralized Legal Department. In addition, BHPB instituted internal controls intended to address the particular corruption risks arising from the Olympics Hospitality Program, including creating detailed internal application forms aimed at addressing corruption risk, a senior business manager approval process, and a role for the Global Ethics Panel in assessing the invitation process that included reviewing a sample of the hospitality application forms.
To be sure, the SEC’s Order notes the absence of a centralized compliance group, and BHPB confirmed that it had “no independent compliance function” in its release announcing the end of the U.S. government investigations. However, more than any objective deficiency with BHPB’s compliance structure, the SEC’s internal accounting controls charge appears to rest on highly specific criticisms of the internal forms used to evaluate individual hospitality applications and the related compliance process. While giving things of value for purposes of relationship building is permissible and does not constitute bribery, it appears that the SEC may intend to use the FCPA’s internal accounting controls provisions to penalize any perceived shortcomings in companies’ efforts to scrutinize such activities.
Third, the SEC’s books and records charge reflects an aggressive, but not necessarily new, interpretation of Section 13(b)(2)(A), which requires issuers to make and keep books and records that “accurately and fairly reflect the transactions and dispositions of the assets of the issuer.” The SEC’s position raises important questions of statutory interpretation and public policy. There is nothing in the language of the books and records provision to suggest that it encompasses purely internal application forms completed for the purpose of approving gifts and entertainment expenditures. If the SEC can charge a books and records violation for any alleged inaccuracy in any internal paperwork, it will impose an enormous compliance burden that even the most sophisticated and well-resourced companies may struggle to satisfy.
Finally, the imposition of a $25 million civil fine and year of compliance reporting to the SEC is remarkable for a case in which there was no actual bribery, much less a bribery charge, no allegation of any quid pro quo or improper business benefit, and complete cooperation and full remediation. It is also noteworthy that the SEC has consistently reaffirmed its authority to seek disgorgement in enforcement actions brought under the internal controls or books and records provisions, but did not seek any disgorgement here. And despite the record-setting fine against BHPB, the SEC’s Order sheds no light on how such a fine was calculated. Moreover, although the SEC’s press release acknowledged the assistance of the Department of Justice’s Fraud Section, the Federal Bureau of Investigation, and the Australian Federal Police, no criminal charges to date have been brought.”
*****
This Willkie Farr alert states in pertinent part:
“The BHPB settlement represents an aggressive stance by U.S. regulators with regard to providing entertainment and hospitality to government officials. As part of BHPB’s 2008 Summer Olympic Games sponsorship activities, the company invited people from all around the world. BHPB recognized the anticorruption risks potentially associated with such entertainment and tried to take precautions in advance of inviting government officials to the Summer Games by using a specifically designed “Olympic-specific internal approval process” to vet the company’s invitations. However, the SEC determined BHPB’s efforts fell short. In particular, the SEC noted that (1) BHPB did not require an independent legal or compliance review of hospitality applications; (2) some hospitality applications were not accurate or complete; (3) although BHPB had an annual Guide to Business Conduct review and certification process, as well as general compliance training, it did not have specific training on how to fill out the hospitality forms for the Olympic entertainment or evaluate applications under the company’s existing policies; (4) BHPB did not institute a process to update or reassess the appropriateness of invitations if conditions changed; and (5) the review process did not coordinate or assess whether an invitee from one CSG was involved in the business dealings of other CSGs. The SEC order does not allege that BHBP provided entertainment as part of a quid pro quo arrangement or allege a violation of the FCPA’s antibribery provisions. The order does not state how the SEC arrived at the civil monetary penalty of $25 million, a seemingly harsh penalty based on the facts alleged in the order.”
Issues To Consider From The Alstom Action
recent post dived deep into the Alstom FCPA enforcement action.
This post continues the analysis by highlighting various issues to consider associated with the enforcement action.
A Real Head-Scratcher
Alstom entities engaged in conduct in violation of the FCPA. This is clear from the DOJ’s allegations and consistent with DOJ enforcement theories. Yet, if the DOJ’s FCPA enforcement program is to be viewed as legitimate and credible, the charged conduct must fit (for lack of a better term) the crime.
The charges against Alstom S.A. are a real head-scratcher.
The conventional wisdom for why the Alstom action involved only a DOJ (and not SEC) component is that Alstom ceased being an issuer in 2004 (in other words 10 years prior to the enforcement action).
Yet, the actual criminal charges Alstom pleaded guilty to – violations of the FCPA’s books and records and internal controls provisions – were based on Alstom’s status as an issuer (as only issuers are subject to these substantive provisions).
In other words, Alstom pleaded guilty to substantive legal provisions in 2014 that last applied to the company in 2004.
This free-for-all, anything goes, as long as the enforcement agencies collect the money nature of FCPA enforcement undermines the legitimacy and credibility of FCPA enforcement.
Enforcement Action Origins
What were the origins of the Alstom enforcement action?
It appears to be a 2011 Swiss enforcement action that began in October 2007. (See here, here and here).
Indeed, in briefing in an individual enforcement action (Lawrence Hoskins) connected to the Alstom Indonesia conduct, the DOJ stated:
“When the Government began investigating this case, it sought evidence from various countries including Switzerland […]. The Government obtained orders pursuant to 18 USC 3292, tolling the statute of limitations in this case for the shorter of three years or the time it took to receive the evidence sought. The first request, to Switzerland, was transmitted on September 22, 2010, and the tolling order reflects tolling beginning on that date. Switzerland provided responses to the request on December 23, 2013.”
In the Swiss action, “Alstom Network Schweiz AG … was fined CHF2.5 million for negligence in implementing proper controls to prevent bribery by company officials in Latvia, Tunisia and Malaysia, and it was ordered to pay an additional CHF36 million for profits connected to the negligence.”
The foreign law enforcement origins of the Alstom action are typical of other enforcement actions in the Top Ten List of FCPA settlements (Siemens and the Bonny Island, Nigeria enforcement actions – KBR/Halliburton, Snamprogetti/ENI, Technip, and JGC Corp).
No Monitor
On one level, it seems odd that the Alstom enforcement action did not involve a corporate monitor as a condition of settlement. After all, the $772 million enforcement action was the largest DOJ FCPA enforcement action of all-time and per the DOJ “Alstom’s corruption scheme was sustained over more than a decade and across several continents. It was astounding in its breadth, its brazenness and its worldwide consequences.”
However, the resolution documents note “that Alstom is already subject to monitoring requirements pursuant to a February 2012 World Bank Resolution.” (See here). As stated in the DOJ resolution documents: “in the event that the Integrity Compliance Office [of the World Bank] does not certify that the Company has satisfied the monitoring requirements contained in the World Bank Resolution, the Company shall be required to retain an Independent Compliance Monitor.”
Moreover, the vast majority of the alleged improper conduct in the DOJ enforcement action resided in business units that will soon be part of General Electric in 2015. Thus, to impose a monitor on Alstom would, in effect, have been to impose a monitor on General Electric.
Third Party Red Flags
Most FCPA enforcement actions result from the conduct of third parties and ineffective corporate controls over third parties.
In this regard, the following paragraph from the Alstom enforcement is a dandy regarding third party red flags.
“A number of consultants that Alstom hired raised a number of “red flags” under Alstom’s own internal policies. Certain consultants proposed for retention had no expertise or experience in the industry sector in which Alstom was attempting to secure or execute the project. Other consultants were located in a country different than the project country. At other times, the consultants asked to be paid in a currency or in a bank account located in a country different than where the consultant and the project were located. In multiple instances, more than one consultant was retained on the same project, ostensibly to perform the very same services. Despite, these “red flags,” the consultants were nevertheless retained without meaningful scrutiny.”
FCPA enforcement actions of course are no laughing matter, but the following specific allegations sort of make one chuckle.
“Alstom did not perform any due diligence on the consultant even though the consultant had no knowledge about, or experience in, the power industry. Rather, the information alleges, the consultant “sold furniture and leather products, and exported chemical products and spare parts.”
“An Alstom entity formally retained a consultant on a [rapid transit] project even thought the consultant did not have the requisite expertise in the transport sector. According to the information, the consultant’s expertise was as a “wholesaler of cigarettes, wines and pianos.”
More Information Needed As to Lack of Cooperation
Repeatedly in the resolution documents, the DOJ states that Alstom did not “cooperate.”
“The Defendant initially failed to cooperate with the Department’s investigation, responding only to the Department’s subpoenas to the Defendant’s subsidiaries. Approximately one year into the investigation, the Defendant provided limited cooperation, but still did not fully cooperate with the Department’s investigation.”
“The Company and its parent initially failed to cooperate with the Department’s investigation, responding only to the Department’s subpoena. Approximately one year into the investigation, the Company and its parent provided limited cooperation, but still did not fully cooperate with the Department’s investigation.”
Likewise, at the DOJ press conference, Assistant Attorney General Caldwell stated:
“The guilty pleas and resolutions announced today also highlight what can happen when corporations refuse to disclose wrongdoing and refuse to cooperate with the department’s efforts to identify and prosecute culpable individuals.”
[…]
“Alstom did not voluntarily disclose the misconduct to law enforcement authorities, and Alstom refused to cooperate in a meaningful way during the first several years of the investigation.”
If the DOJ wants its cooperation message to be fully absorbed by the corporate community, the DOJ should have been more specific about Alstom’s lack of “cooperation.”
Moreover, if “responding only to the DOJ’s subpoena” is considered lack of cooperation by the DOJ, this is troubling. (See here for the prior post “Does DOJ Expect FCPA Counsel to Role Over and Play Dead?”).
A “Foreign Official” Stretch?
It was a relatively minor allegation in the context of the overall Alstom enforcement action, but one which caught my eye because of its extraordinarily broad implication.
As highlighted in this previous post, Asem Elgawhart was employed by Bechtel Corporation (a U.S. company) and was assigned by Bechtel to be the General Manager of Power Generation Engineering and Services Company (PGESCo), a joint venture between Bechtel and Egyptian Electricity Holding Company (the alleged “state-owned and state-controlled electricity company in Egypt”). According to the DOJ, Elgawhart “used his position and authority as the General Manager of a power generation company to solicit and obtain millions of dollars of kickbacks for his personal benefit from U.S. and foreign power companies that were attempting to secure lucrative contracts to perform power-related services.” “In total,” the DOJ alleged, “Elgawhart received more than $5 million in kickbacks to help secure more than $2 billion in contracts for the kickback-paying companies, all of which he concealed from his employer, from bidding companies that did not pay kickbacks and from the U.S. Internal Revenue Service.” Based on these allegations, and as indicated in this DOJ release, Elgawhart was charged in a 8-count indictment with mail and wire fraud, money laundering and various tax offenses.
In the Alstom enforcement action, PGESCo and Elgawhart are described as follows:
As to Egypt, the information concerns bidding on various projects with the Egyptian Electricity Holding Company (“EEHC”), the state-owned and state-controlled electricity company in Egypt. According to the information, “EEHC was not itself responsible for conducting the bidding [on projects], and instead relied on Power Generation Engineering & Services Co. (“PGESCo”), which was controlled by an acted on behalf of EEHC.”
PGESCo was controlled by and acted on behalf of EEHC. PGESCo worked “for or on behalf of’ EEHC, within the meaning of the FCPA, Title 15, United States Code, Section 78dd-l (f)( 1) [the FCPA’s “foreign official” definition].
According to the DOJ, Alstom used a consultant whose primary purpose “was not to provide legitimate consulting services to Alstom and its subsidiaries but was instead to make payments to Egyptian officials, including Asem Elgawhary who oversaw the bidding process.”
In short, in the Alstom action the DOJ alleged that Elgawhary, a Bechtel Corporation employee, was an Egyptian “foreign official.” This is an extraordinarily broad “foreign official” interpretation with implications for any person (privately employed) working on foreign projects with participation by a foreign government department, agency or instrumentality.
Rhetoric Undermined
As highlighted in this post, Assistant Attorney General Leslie Caldwell recently defended the DOJ’s frequent use of NPAs and DPAs by stating that the DOJ is able to achieve through such negotiated settlements reforms, compliance controls, and all sorts of behavioral change compared to what it could achieve without use of NPAs and DPAs.
As highlighted in the prior post, the notion that the DOJ is powerless to effect corporate change through old-fashion law enforcement (that is enforcing the FCPA without use of NPAs and DPAs) is plainly false.
Indeed, the Alstom and Alstom Network Schweiz AG plea agreements contain substantively the same corporate compliance program and reporting obligations as the Alstom Power and Alstom Grid DPAs.
False Certification
A likely overlooked allegation in the Alstom enforcement action concerns bidding on various grid projects with alleged state-owned and state-controlled entities in Egypt. According to the charging documents, certain of these projects were “funded, at least in part, by the United States Agency for International Development (“USAID”)” and “an Alstom entity “repeatedly submitted false certifications to USAID in connection with these projects, and did not disclose that consultants were being used, that commissions were being paid, or that unlawful payments were being made.”
These allegations are similar to DOJ allegations in the BAE enforcement action (an enforcement action that alleged conduct that could have served as the basis for FCPA violations, but resulted in no actual FCPA charges). As noted in this previous post, in the BAE action, the DOJ “filed a criminal charge against BAE Systems charging that the multinational defense contractor conspired to impede the lawful functions of the Departments of Defense and State, made false statements to the Departments of Defense and Justice about establishing an effective anti-corruption compliance program to ensure conformance with the Foreign Corrupt Practices Act and paid hundreds of millions of dollars in undisclosed commission payments in violation of U.S. export control laws.”
How to Count FCPA Enforcement Actions
It is a basic issue: how to count FCPA enforcement actions.
I use the “core” approach to counting FCPA enforcement actions (see here), an approach endorsed by the DOJ, but many in FCPA Inc. use various different creative counting methods that significantly distort FCPA enforcement statistics (see here).
Pursuant to the “core” approach, the Alstom action was one core enforcement action even though it involved the following components all based, in whole or in part, on the same core conduct.
- Alstom S.A.
- Alstom Network Schweiz AG
- Alstom Power Inc.
- Alstom Grid Inc.
- Individual enforcement actions against Frederic Pierucci, David Rothschild, William Pomponi, and Lawrence Hoskins.
Counting the above as 8 FCPA enforcement actions instead of 1 core action highly distorts FCPA enforcement statistics and impacts the denominator of just about any FCPA enforcement statistic imaginable.
With several 2014 FCPA Year in Reviews to be published in January, one needs to be cognizant of these creative counting methods.
HP Enforcement Action – Where To Begin?
Where to begin?
That is the question when analyzing last week’s $108 million Foreign Corrupt Practices Act enforcement action against HP and related entities. (See here).
Should the title of this post have been “The FCPA’s Free-For-All Continues”?
Should the title have been “HP = Hocus Pocus” (as in look what the enforcement agencies pulled out their hats this time)?
Should the title have been “Warning In-House and Compliance Professionals: This Post Will Induce Mental Anguish”?
Unable to arrive at the best specific title for this post, I simply picked the generic “Where to Begin?”
In short, if the HP enforcement action does not leave you troubled as to various aspects of FCPA enforcement you: (i) may not be well-versed in actual FCPA legal authority; (ii) don’t care about the rule of law; or (iii) somehow derive satisfaction from government required transfers of shareholder money to the U.S. treasury regardless of theory.
Least there be any misunderstanding, let me begin this post by stating that the enforcement actions against HP Poland, HP Russia and HP Mexico allege bad conduct by certain individuals – a “small fraction of HP’s global workforce” to use the exact words of the DOJ. As to that “small fraction,” those individuals should be held accountable for their actions by relevant law enforcement authorities.
However, as to the actual defendants charged in the enforcement actions – HP Russia, HP Poland and HP Mexico in the DOJ actions – and HP in the SEC administrative proceeding – there are actual legal elements that must be met and there is also prior enforcement agency guidance that ought to be followed. The entire credibility and legitimacy of the DOJ and SEC’s FCPA enforcement programs depend on these two basics points.
For instance, in what is believed to be an FCPA first, the DOJ charged two non-issuers (HP-Russia and HP-Poland) with substantive violations of the FCPA’s books and records and internal controls provisions – provisions which only apply to issuers. This is concerning in and of itself.
Yet the resulting landscape from the HP enforcement action is of more concern and it should induce mental anguish for many for the following reasons.
Issuers have an obligation under the FCPA to “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that,” among other things, transactions are executed in accordance with management’s general or specific authorization. Failure to adopt such internal controls is a violation of law.
Conversely, and here is where the “hocus pocus” part comes in, if an issuer does adopt such internal controls and a “small fraction” of employees at certain foreign subsidiaries engage in covert means to willfully circumvent those internal controls, well, that is a violation of law as well in the eyes of the enforcement agencies.
The DOJ’s and SEC’s own allegations paint a picture of HP establishing, particularly given the time periods relevant to the enforcement actions, a system of internal accounting controls sufficient to provide reasonable assurances as to the conduct at issue. yet being a victim of the willful and deceptive conduct of a “small fraction” of employees who designed covert means to circumvent HP’s internal controls.
For instance, as to HP Poland, the criminal information alleges, in pertinent part as to the relevant time period (2006 to 2010):
“At all times relevant to this Information, HP policies prohibited corruption, self-dealing, and other misconduct. HP’s Standards of Business Conduct (“SBC”) in effect during the relevant time period specified company rules and regulations governing legal and ethical practices, preparation of accurate books and records, contracting, and approvals and engagements of third parties. The SBC applied to all HP Co. business divisions and subsidiaries, including HP Poland. HP Poland employees, including HP Poland Executive, received mandatory SBC training annually, among other training.”
“The SBC manuals specifically referenced the FCPA, and prohibited, among other items, bribes, corrupt practices, ‘side letter,’ ‘off-the-books’ arrangements,’ and ‘other express or implied agreements outside standard HP contracting processes.’ The SBC manuals in effect during this period further instructed employees of HP that they were not to ‘commit [the relevant HP business] to undertake any performance, payment or other obligation unless [the employee was] authorized under the appropriate HP [business] delegation of authority policies,’ and further required accurate accounting records and proper finance practices.”
Notwithstanding these controls, the information alleges that an HP Poland Executive caused falsification of HP’s books and records and circumvented HP existing internal controls. Among other things, the information alleges that the gifts to the Polish Official “violated HP internal controls relating to gift-giving, and were not properly reflected in HP’s books and records.” The information alleges that the HP Poland Executive “willfully circumvented HP’s internal controls, and falsified corporate books and records relied on by HP’s officers and external auditors to authorize transactions and prepare HP’s consolidated financial statements.” The information alleges that HP Poland Executive devised covert means – such as communicating through anonymous e-mail accounts and prepaid mobile telephones – in connection with his bribery scheme. The information even alleges that the HP Poland Executive and the Polish Official drove around in vehicles in “remote locations” and “would type messages in a text file, passing the computer between themselves.” According to the information, “communications were made in this fashion to avoid possible audio recording of the discussions by hidden devices, and to circumvent HP’s internal controls.”
Nevertheless, the DOJ alleges:
“Although HP had certain anti-corruption policies and controls in place during the relevant time period, those policies and controls were not adequate to prevent the conduct described herein and were insufficiently implemented at HP Poland.”
As discussed in this prior post, what is the source for this dramatic conclusory allegation? Nothing more than ipse dixit and subjective say-so.
The same holds true for the DOJ’s allegations concerning HP Mexico. The non-prosecution agreement contains the same two substantive allegations concerning HP’s internal controls set forth above relevant to HP Poland, plus the following as to the relevant time period (2006 to 2009):
“HP’s policies permitted legitimate commission payments to channel partners. These policies required that the recipient of commissions enter into a written channel partner contract with an addendum permitting the payment of commissions be pre-approved, subjected to due diligence, and registered in HP’s partner system. HP Mexico’s policy also required channel partner commissions to follow an approval matrix, with commissions exceeding a particular percentage of the transaction’s total volume regarding additional approvals.”
Notwithstanding these controls, the information alleges that certain HP Mexico sales managers on one deal deceived HP. The NPA states:
“[The Consultant at issue] was not an approved HP Mexico channel partner and had not entered into a written channel partner agreement as required by HP’s internal controls and policies. In circumvention of these internal controls and policies, HP Mexico executives pursuing the BTO Deal arranged for another entity (“Intermediary”), which was already an approved HP Mexico channel partner, to join in the transaction. HP Mexico’s sales managers arranged for the Intermediary to receive commissions from HP Mexico and then pass those monies along to Consultant, after deducting a portion as a fee. Although Intermediary played no role in negotiating the BTO Deal, HP Mexico executives recorded Intermediary as the deal partner in its internal tracking system.”
“By arranging payments to be made through the Intermediary to Consultant, HP Mexico was able to circumvent HP’s policies requiring pre-approval of channel partners and written agreement for third-party payments. HP Mexico further circumvented HP’s controls by failing to identify the role of Intermediary in the BTO Deal … In addition, HP Mexico’s books and records falsely reflected that the Intermediary was the deal partner and principal recipient of the commission on the BTO Deal, which ultimately caused certain HP books and records to be falsified.”
Nevertheless, the DOJ alleges:
“Although HP had certain anti-corruption policies and controls in place during the relevant period, those policies and controls were not adequate to prevent the conduct described herein and were insufficiently implemented at HP Mexico. This allowed HP Mexico to circumvent HP’s internal accounting controls and falsify its books and records as described herein.”
What is the source for this dramatic conclusory allegation? Nothing more than ipse dixit and subjective say-so.
The same holds true for the DOJ’s allegations concerning HP Russia. The information contains the same two substantive allegations concerning HP’s internal controls set forth above relevant to HP Poland and HP Mexico, plus the following as to the relevant time period (2000 to 2007).
“HP’s policies placed restrictions and due diligence requirements on contracts with third parties, including ‘HP customers, channel partners, suppliers, other business partners or outside parties.’ They required credit checks and approvals for certain third parties, and required the preparation of ‘Subcontractor Qualification Worksheets’ and ‘Pre-Bid Risk Identification & Assessment Questionnaires’ that related to qualifications and financial capabilities of certain third parties. Among other due diligence requirements, the policies required telephonic interview of certain third parties regarding experience, references, checks to determine whether the third party had the capacity and geographic coverage for the project, and an overall evaluation of doubts, reservations, and ‘risks/weaknesses’ of the third party.”
“HP’s Solution Opportunity Approval and Review (‘SOAR’) process applies to all service-related projects valued at greater than $500,000 anywhere in the world, including Russia. Among other things, the SOAR process was designed to provide HP’s senior company management visibility into pricing, discounts, and profit margins for transactions. It required review of relationships with third parties, including scope of work, contract terms, qualifications, and necessity of services. Business, legal, finance, credit, tax, and other units participated in the SOAR review. No services-related transaction greater than $500,000 could proceed without SOAR approval.”
“Pursuant to the Sarbanes-Oxley Act of 2002, HP management was required to certify the accuracy of HP’s financial statements and the adequacy of its related internal controls to develop those statements. In supporting these certifications, HP executive management required senior and regional management of HP’s business units to sign sub-certifications certifying that HP’s financial statements were accurate and that their internal controls provided assurances that transactions were properly authorized and recorded, and assets were safeguarded from improper use.”
Notwithstanding these controls, the information alleges that five HP Russia employees deceived HP. For instance, the information specifically alleges that the individuals created a secret slush fund and to “execute and hide the scheme … willfully circumvented existing internal controls, and falsified corporate books and records relied upon by HP officers and external auditors to authorize the transaction and prepare HP’s consolidated financial statements.”
According to the information, the slush fund “was concealed in the project’s financials” and “HP Russia maintained two sets of project pricing records: off-the-books versions, known only to the conspirators, which identified slush fund recipients, and sanitized versions of the same documents which were provided to HP credit, finance, and legal officers outside of HP Russia.”
According to the information, “one example of an off-the-books document was an encrypted, password-protected spreadsheet” which contained different information than the “on-the-books version.” According to the information, a Pricing Worksheet “provided to management outside of HP Russia omit[ed] all references to the slush fund payments, instead inflating hardware prices to create margin for the payments.”
In addition, the information alleges “concealment of [the] slush fund during SOAR Review.” According to the information, “in early August 2003, HP management in Europe pressed HP Russia to begin the SOAR process for the GPO contract so that it could be executed. In circumvention of company policy, however, HP Russia Executive 1 had already [signed the relevant contract and executed it] with no authorization and no power of attorney.”
According to the information, “the HP credit officer assigned to the SOAR review initially denied credit approval to proceed with the contract …”. The information then alleges that the HP Russia Manager provided false information to the HP Credit Officer. The information further alleges that when the HP Credit Officer asked other questions regarding the relevant transaction, the HP Russia Manager provided other false information.
Regarding an actual SOAR meeting in 2003, the information alleges that the day before this meeting, the HP Russia Manager emailed relevant management with false information and thereafter provided additional false information to the HP Credit Officer in connection with relevant transaction.
According to the information, when it came time for the HP Russia Executive to certify the accuracy of the company’s financial statements and adequacy of internal controls pursuant to SOX, the HP Russia Executive falsely certified the requested information and that such certification was relied upon by other HP managers.
According to the information, members of the Russian conspiracy “structured bribe payments to individuals associated with [the Russian government] through a “off-the-books contract” and specifically alleges as follows:
“In circumvention of HP internal controls, including third party due diligence requirements and prohibitions against ‘side letters,’ ‘off-the-books’ arrangements, or other express or implied agreements outside standard HP contracting process,’ HP Russia never disclosed the existence of the [off-the-books contract] to internal or external auditors or management outside of HP Russia, and conduct no due diligence of [the relevant entity]”
The information alleges that the purpose of the conspiracy was to “conceal[] and disguise[] the payments by falsifying HP Russia’s and HP’s books and records; and evading and failing to implement internal controls meant to detect and deter such payments.” Specifically, the information alleges:
“HP Russia, through its executives and employees, together with others, knowingly and deliberately failed to implement internal accounting controls and circumvented existing internal accounting controls designed to detect and prevent such improper conduct. HP Russia entered into off-the-books contracts, maintained two sets of accounting records, failed to conduct appropriate due diligence of third parties, concealed the existence of third-party relationship from HP management, executed contracts without authorization, and made misrepresentations to HP audit, compliance, credit and legal officers.”
Among other things, the information alleges that HP Russia employees “avoided controls over third-party vendors and off-the-books contracts,” “created and used certain mechanisms for making and concealing payments to third parties,” and “secretly executed certain contracts without proper authority.”
Nevertheless, the DOJ alleges:
“While the SBC prohibited corrupt payments, required due diligence of third-parties, and included other control requirements to maintain accountability for assets, the policies were not adequate to detect and prevent the misconduct described herein, and in practice certain HP business divisions and subsidiaries failed to implement and enforce the policies consistently, and on occasion circumvented or disregard the policies entirely.”
What is the source for this dramatic conclusory allegation? Nothing more than ipse dixit and subjective say-so.
Unlike the DOJ enforcement actions (in which HP was not an actual defendant but merely guaranteed payment of fine and penalty amounts and had compliance obligations imposed upon it), in the SEC’s enforcement action HP is the sole defendant (technically a respondent since the enforcement action was an administrative proceeding not subjected to one ounce of judicial scrutiny). The SEC’s action is based on the same HP Poland, HP Russia, and HP Mexico conduct alleged in the DOJ enforcement actions.
Prior to the stating the SEC’s conclusory statement as it relates to HP itself, it is useful to review the DOJ’s allegations HP-specific allegations because there is little logical consistency between those allegations and the SEC’s conclusory statement.
Again, the DOJ alleged that HP:
- Had existing FCPA and related policies and procedures in place and that all relevant employees received training on the policies;
- Had existing policies and procedures in place related to commission payments to channel partners, due diligence of channel partners, and other tracking policies regarding channel partners;
- Had an existing approval process in place that applied to all service-related projects valued at greater than $500,000 anywhere in the world and as part of that process HP managers questioned relevant subsidiary employees at questionable information;
- Had an existing SOX certification and sub-certification process in place as relevant to the referenced subsidiaries.
Yet, and here comes the “hocus pocus” moment, the SEC states against the backdrop of the same covert means, concealment, and misrepresentations and deception alleged in the DOJ actions that:
“[A]lthough HP had certain anti-corruption policies and controls in place during the relevant time period, those policies and controls were insufficiently implemented on the regional or country level. Further, HP failed to devise and maintain an adequate system of internal accounting controls sufficient to provide reasonable assurance that (i) access to assets was permitted only in accordance with management’s authorization; (2) transactions were recorded as necessary to maintain accountability of assets; and (3) transactions were executed in accordance with management’s authorization.”
It is difficult to reconcile the SEC’s HP allegations against actual legal authority in that the internal-controls provisions are specifically qualified through concepts of reasonableness and good faith. The only judicial decision to directly address the substance of the internal-controls provisions states, in pertinent part, as follows:
“It does not appear that either the SEC or Congress, which adopted the SEC’s recommendations, intended that the statute should require that each affected issuer install a fail-safe accounting control system at all costs.”
In addition, various courts have held—in the context of civil derivative actions in which shareholders seek to hold company directors liable for breach of fiduciary duties due to the company’s alleged FCPA violations— that just because improper conduct allegedly occurred somewhere within a corporate hierarchy does not mean that internal controls must have been deficient.
The SEC’s allegations against HP are further difficult to reconcile with SEC guidance concerning the internal controls provisions. This guidance states, among other things:
“Inherent in this concept [of reasonableness] is a toleration of deviations from the absolute.”
“The test of a company’s internal control system is not whether occasional failings can occur. Those will happen in the most ideally managed company.”
The critical point in assessing an issuer’s internal controls is at the time of the alleged conduct and whether – at that time – the issuer had internal controls sufficient to provide various reasonable assurances. In other words, the critical point is not 5 or 10 years later and the issue is not – with the benefit of perfect hindsight – whether the issuer could have done more.
Further problematic in the SEC’s enforcement action against HP is that it is yet another example of “non-charged bribery disgorgment” and among the most vocal critics of this SEC theory is a former high-ranking SEC enforcement attorney (see here).
Whether the proper title should have been “The FCPA’s Free-For-All Continues,” “HP = Hocus Pocus” or how the HP enforcement action, with reason, should induce mental anguish among many, there is much to analyze and critique in the DOJ’s and SEC’s enforcement actions against HP and related entities.
The same applies to much recent FCPA enforcement activity.
To recap, since December 2013 the FCPA enforcement agencies have extracted approximately $546 million against risk averse corporations:
- (i) based on enforcement agency allegations that the parent company issuer was a victim of deceptive conduct and actions by a “small fraction” of its global workforce;
- (ii) based on enforcement agency allegations that the corporate entities were victims of a corrupt Ukraine government that refused to pay VAT refunds that the companies were legitimately owed (see here); and
- (iii) in a case concerning alleged conduct (approximately 10 to 15 years ago) by a consultant who was criminally charged by another law enforcement agency, put the law enforcement agency to its burden of proof at trial, and the law enforcement agency dismissed the case because there was no ”realistic prospect of conviction” (see here).
Much Activity In SEC Enforcement Action Against Jackson & Ruehlen
If you enjoy reading pleadings in Foreign Corrupt Practices Act enforcement actions, then your week is already off to a great start as there is much to read.
In advance of a scheduled July 9th trial in SEC v. Mark Jackson & James Ruehlen (an enforcement action filed in the S.D. of Tex. in February 2012 and highlighted in last Friday’s post), both parties filed numerous motions last Friday.
The SEC filed: (1) a motion for partial summary judgment on the inapplicability of the facilitating payment exception, and (2) a motion for a determination of foreign law pursuant to Federal Rule of Civil Procedure 44.1. The SEC also filed 5 motions seeking to exclude defendants’ expert witnesses. Both Jackson and Ruehlen filed separate motions for summary judgment as well as 3 motions seeking to exclude the SEC’s expert witnesses.
This post provides an overview of the motions.
SEC Motion for a Determination of Foreign Law
In pertinent part, the SEC states as follows:
“Questions of Nigerian law pervade this bribery case for two reasons. First, findings on threshold questions of Nigerian law are necessary for the jury to determine whether Defendants induced foreign officials “to do or omit to do any act in violation of the lawful duty of such foreign official[s]” in violation of Section 30A of the Securities Exchange Act of 1934 (the “Exchange Act”), an element of the SEC’s bribery claims. 15 U.S.C. §78dd-1(a)(3)(A)(ii) (emphasis added). Questions of Nigerian law are also necessary to determine whether the payments at issue in this case fit within the narrow “facilitating payment” exception under the
Foreign Corrupt Practices Act (the “FCPA”).These questions of Nigerian law include: (i) whether the grant of a Temporary Import Permit (“TIP”) – a concession that allows an importer to avoid the payment of import duties – was discretionary; (ii) what was the permissible duration of a TIP and whether and to what extent a TIP may be extended; and (iii) whether Nigerian customs officials could lawfully accept payments to approve a TIP based on false paperwork showing that Noble’s rigs in Nigeria had been exported and re-imported, when the rigs in fact had never moved out of Nigerian waters. These questions of Nigerian law are, like questions of U.S. law, questions of law for the Court to decide, and each defines the scope of Nigerian customs officials’ “lawful duty” in connection with granting the TIPs and TIP extensions at issue in this case.
Second, rulings on these issues of Nigerian law are necessary in light of the Defendants’ purported expert evidence. Defendants intend to introduce expert evidence asserting that, among other things, the payment of bribes to civil servants in Nigeria “is common – and even expected”; the submission of falsified documents to Nigerian governmental agencies is “satisfactory” or “acceptable” from the Nigerian government’s perspective; that laws governing the issuance of temporary import permits are not laws but “internal rules or policies”; and that compliance with Nigerian law is unclear. Thus, the Defendants’ experts intend to opine directly or indirectly on what is allegedly “permissible” in Nigeria notwithstanding clear and undisputed provisions of Nigerian law to the contrary. Because foreign law is for the Court, not the jury, these issues of Nigerian law should be resolved by the Court.”
SEC Motion Regarding Inapplicability of Facilitating Payment Exception
As noted in this prior post, in December 2012 Judge Ellison concluded, in what was believed to be an issue of first impression, that the SEC must bear the burden of negating the facilitation payments exception.
In its motion, the SEC states as follows.
“The SEC seeks partial summary judgment on the limited question of whether the payments to Nigerian government officials that Defendants authorized to secure Temporary Import Permits (“TIPs”) and TIP extensions fit within the narrow “facilitating payment” exception under the Foreign Corrupt Practices Act (the “FCPA”).
The SEC alleges that the Defendants violated the anti-bribery and accounting provisions of the FCPA by authorizing the payment of bribes on behalf of their employer – Noble Corporation – to Nigerian government officials to influence or induce these officials to grant Noble TIPs and TIP extensions. These TIPs allowed Noble to avoid paying import duties on oil drilling rigs that it operated in Nigeria. Because TIPs provide only a temporary exemption from import duties, at the expiration of a TIP and its allowable extension, Noble had an obligation to either pay the import duties due on the drilling rigs or export them out of Nigeria. Using bribes and other means, Defendants secured serial TIPs and TIP extensions, which enabled Noble to keep its rigs operating continuously in Nigeria well beyond the time period allowed under Nigerian law.
The FCPA broadly prohibits corrupt payments to foreign officials to influence any official act or induce any official to violate a lawful duty. See 15 U.S.C. § 78dd-1(a). But there is a narrow exception to that broad prohibition: Under subsection 78dd-1(b), the FCPA permits certain “facilitating or expediting payments” made “to expedite or to secure the performance of a routine governmental action.” 15 U.S.C. § 78dd-1(b). This so-called facilitating payment exception does not apply in this case, as a matter of law.
Summary judgment is appropriate for three reasons:
First, the law of decision is clear and binding. This Court previously held that payments to government officials for discretionary or illegal TIPs and TIP extensions are not permissible facilitating payments.
Second, the applicable foreign law is clear and undisputed. As demonstrated in the SEC’s Motion for a Determination of Foreign Law Pursuant to Federal Rule of Civil Procedure 44.1 (“Rule 44.1 Motion”), the relevant provisions of Nigerian law are clear and undisputed. First, under Nigerian law, customs officials have discretion to grant or deny TIPs and TIP extensions; these TIPs and extensions are a discretionary exemption from import duties, not an entitlement. Second, Nigerian law prohibits both the use of false paperwork to secure TIPs and payments to government officials to secure TIPs and TIP extensions. Third, Nigerian law provides that an initial TIP may not exceed twelve months and may only be extended once for up to an additional twelve months. These provisions of Nigerian law are clear and undisputed, and must be determined as a matter of law by the Court.
Third, the material facts are not in genuine dispute. The payments to Nigerian government officials at issue in this case were themselves illegal in Nigeria and were authorized to obtain import duty exemptions that were (i) discretionary and (ii) in certain cases, illegal under Nigerian law. Specifically, each of the payments to Nigerian government officials at issue was authorized in connection with obtaining a valuable and discretionary government benefit – i.e., import duty exemptions for Noble’s rigs. Certain of the payments were made to obtain TIPs on false pretenses, in violation of Nigerian law. And, some of the payments were authorized to obtain TIP extensions that exceeded the number and duration of TIP extensions allowed under Nigerian law.
For these reasons, the SEC respectfully requests that the Court grant its motion for partial summary judgment that the facilitating payment exception is not applicable in this case.”
SEC Expert Motions
In addition to the above motions, the SEC also filed 5 motions seeking to exclude defendants’ experts: (1) Alan Bell (CPA – regarding internal controls and books and records issues); (2) Gary Goolsby (CPA – regarding corporate governance and internal controls issues; (3) John Campbell (former U.S. ambassador to Nigeria – regarding Nigeria specific issues; (4) Professor Ronald Gilson (regarding various corporate governance and internal controls issues); and (5) H. Lowell Brown (regarding various FCPA compliance issues).
Jackson’s Motion for Summary Judgment
The motion, signed by David Krakoff (BuckeySandler) , states as follows.
“This case is entirely about Mr. Jackson’s state of mind: Did he act “corruptly” in violation of the FCPA when he approved certain payments to Nigerian customs officials? In denying the Defendants’ Motions to Dismiss, the Court held that an act is done corruptly when it is “done with an evil motive or wrongful purpose of influencing a foreign official to misuse his position.” It is the SEC’s burden to prove that “Defendants acted corruptly.”
The SEC failed to come close to carrying that burden. Put simply, discovery revealed only one thing: Undisputed evidence that Mr. Jackson acted with the “good faith” belief that Noble’s payments facilitated getting temporary import permits and extensions to which Noble was entitled. But as the Court observed regarding permit extensions, to establish corrupt intent the SEC must show “that Defendants knew they were not entitled to extensions as a matter of right upon satisfying certain basic threshold requirements.”
Mr. Jackson was repeatedly advised by Noble management that Noble was entitled to those permits and extensions. He was advised by management and PricewaterhouseCoopers that as long as the rigs had contracts to drill oil for the benefit of the Nigerian government, the rigs could stay in the country to perform those contracts. He was advised and observed that legal and audit experts were reviewing Noble’s FCPA compliance and, specifically, compliance in its Nigerian operations. And he was advised that Noble’s Nigerian lawyer had counseled that the use of the so-called “paper process,” where rigs obtained new permits without leaving the country, was legal in Nigeria.
The SEC has no evidence to prove Mr. Jackson’s state of mind was anything different. Despite many promises in the SEC’s pleadings, promises proved false by discovery, there was no evidence that Mr. Jackson believed Nigerian officials had discretion to deny Noble these permits and extensions. There was no evidence that he knew the “paper process” was illegal in Nigeria, so that any payments related to it had to be corrupt. And there was no evidence that he misled anyone – not the Audit Committee, not auditors, not anyone – about any of Noble’s facilitating payments. Instead, what he knew was that Noble’s legal counsel and internal auditors did not question the propriety of payments to Nigerian customs officials. No reasonable jury could conclude that Mark Jackson acted with the state of mind requisite for a violation of the FCPA. The SEC has not met its burden and the Court should grant summary judgment on all claims.”
Ruehlen’s Motion for Summary Judgment
The motion, signed by Nicola Hanna and Joseph Warin (Gibson Dunn), states as follows.
“The Complaint portrays Jim Ruehlen as a “rogue” employee who, shortly after being promoted to the first management-level position of his career, embarked on an intricate scheme to bribe Nigerian officials to obtain illegal temporary import permits for Noble’s rigs; routinely flouted company policy; ignored directions from Noble’s Audit Committee; and concealed illicit payments in Noble’s books and records. At the motion to dismiss stage, the Court was required to accept those allegations as true. Since then, 15 months of discovery have laid bare the utter falsity of the SEC’s narrative.
The undisputed evidence establishes that Mr. Ruehlen—a diligent and hardworking operations employee with an impeccable reputation for honesty and integrity—at all times acted in good faith and under the close supervision of Noble’s most senior executives. At no point did he attempt to conceal any conduct or circumvent controls or company processes. To the contrary, it was Mr. Ruehlen who in 2004 first reported Noble’s use of the so-called “paper process”—the central focus of the SEC’s claims in this matter. And it was Mr. Ruehlen who received approval for every one of the payments at issue from Noble’s senior management, executives who had access to experts to assess the nature and propriety of those payments. It is undisputed that none of those executives or experts ever raised concerns to Mr. Ruehlen about the payments. The evidence also shows that Mr. Ruehlen, who had no accounting or legal training, had no role in determining how the payments—which were well known within Noble’s corporate hierarchy—were recorded in Noble’s books. And to compound the irony of the SEC’s charges against Mr. Ruehlen, it was Mr. Ruehlen who independently raised new concerns regarding the temporary import process in early 2007, prompting Noble’s internal investigation and voluntary disclosure to the U.S. government.
Notwithstanding this evidence—much of which was known to the SEC well before it filed this action—the SEC charged Mr. Ruehlen with violating the FCPA’s books and records and internal accounting control provisions (collectively, the “accounting provisions”) “under every stretched legal theory imaginable.” Purportedly to “streamline the presentation of evidence to the jury,” the SEC—on the eve of summary judgment—voluntarily dismissed two of those claims (that Mr. Ruehlen failed to “implement” a system of internal accounting controls and aided and abetted Noble’s alleged failure to “devise and maintain” such a system). But the SEC’s remaining FCPA accounting provision claims fail for the same reasons as the claims it now tacitly admits lacked merit—Mr. Ruehlen simply had no responsibility for or authority over the accounting function at Noble, and had no role in determining how the payments at issue were recorded. Moreover, the SEC failed to develop any evidence during discovery to support the numerous—and illogical—ways that Mr. Ruehlen allegedly “circumvented” Noble’s system of internal accounting controls. The Court should grant summary judgment on these claims in light of the undisputed evidence.
The Court should also grant summary judgment on the SEC’s claims for violations of the FCPA’s anti-bribery provisions. Whether the SEC can prove these claims turns entirely on Mr. Ruehlen’s state of mind—i.e., whether he acted “corruptly.” The undisputed evidence shows that Mr. Ruehlen, like many others within the company, believed in good faith that the payments were to secure or expedite temporary import permits to which Noble was entitled.”
In addition to the above motions, the defendants also jointly filed 3 motions seeking to exclude SEC experts: (1) Jeffrey Harfenist (CPA – as to various internal controls issues); (2) Wayne Kelley (as to various customs and practices in the oil and gas industry); and (3) Kofo Olugbesan (a former official of the Nigerian Customs Service).
FCPA Readings
If your idea of a good time is cuddling up with an entire law journal volume devoted to the Foreign Corrupt Practices Act, then this post is for you.
Even if that is not your idea of a good time, if you are the least bit interested in the FCPA and its evolution, then you owe it to yourself to get your hands on the Fall 1982 edition of the Syracuse Journal of International Law and Commerce, a symposium volume titled “The Foreign Corrupt Practices Act: Domestic and International Implications.”
This post previously highlighted the speech by Richard Shine (Chief, Multinational Fraud Branch, Criminal Division, U.S. Department of Justice – the name given to the DOJ’s then de facto FCPA Unit) in the volume.
This recent post highlighted the speech by Frederick Wade (Chief Counsel, SEC Enforcement Division) in the volume.
The remainder of this post highlights notable aspects of other articles found in the Fall 1982 edition of the Syracuse Journal of International Law and Commerce.
In “An Overview of the FCPA,” Wallace Timmeny (the former Deputy Director, SEC Division of Enforcement and at the time a lawyer in private practice) rightly identified the foreign policy concerns which motivated Congress to pass the FCPA:
“Concerns were expressed that our government was faced with foreign policy determinations and decisions made by American corporations. In other words, some of our corporations were affecting foreign policy and there was also the overriding concern that the whole idea of foreign payments or corruption in business was really putting an arrow in the bow of the countries that oppose our system.”
For more on this primary motivation of Congress in enacting the FCPA, and how the FCPA was thus not a purely altruistic act, see my article “The Story of the Foreign Corrupt Practices Act.”
In “An Examination of the Accounting Provisions of the FCPA,” Lloyd Feller (the former Associate Director of the SEC’s Division of Market Regulation and at the time a lawyer in private practice) nicely touched upon the FCPA’s books and records and internal controls provisions and how they created much controversy at the time.
“Let me try to put into context the controversy surrounding the accounting provisions. First, it is important to understand that the accounting provisions are part of the Securities Exchange Act of 1934, and apply to all issuers which register securities with the SEC. The provisions apply to all such issuers, whether or not they do business overseas. The Act, as it is applied through the accounting provisions, has absolutely nothing to do with foreign corrupt practices; it has to do with accounting, including the maintenance of books and records, and the establishment and maintenance of a system of internal accounting controls.”
“I think it is important to start with the understanding of how the Act was presented to the corporate community at the time it was passed, because the context in which the words were used and the purpose for which the accounting provisions were intended create the great controversy. It is important to understand that people who never heard of the bribery of foreign officials woke up one day and found that an Act had just been passed which applied to them in very significant ways. This was an Act which they had never heard of, had never thought involved them, had never paid any attention to, and had never understood. They listened to the lawyers and accountants explain it to them and still did not understand.”
In “The SEC Interpretative and Enforcement Program Under the FCPA,” John Sweeny (former Assistant General Counsel of the SEC and at the time a lawyer in private practice) rightly noted:
“The SEC did not actively support the bribery provisions of the Foreign Corrupt Practices Act. Indeed, it’s not entirely clear that they have any interest in prohibiting bribery per se.”
Sweeny also nicely touched upon a prosecutorial common law issue that remains today.
“The corporate community cannot sit back and wait to see how the law develops. Because it makes sound business sense to comply with federal regulatory authorities without a public clamor, corporations must confirm their activity in ways which the agency requires. To do otherwise would mean that the corporations would be risking substantial litigation expenses and adverse publicity.”
In “International Aspects of the Control of Illicit Payments,” Professor Seymour Rubin assessed the then current state of the FCPA.
“The course of events in this particular area has been long, but it has not yielded much in the way of result. Whether the FCPA has yielded a great deal in the way of results, I leave to all of you who have considered the matter. Certainly it has yielded much in the way of instruction to people in various corporations. I am somewhat impressed by the amount of paper which has been produced on this subject. It reminds me again of the old saying to the effect that when the weight of the paper equals the weight of the airplane, the airplane will fly.”
Professor Rubin also rightly identified bribery and corruption as a trade issue and particularly how Senate Resolution 265 sponsored by Senator Ribicoff during the FCPA’s legislative debate was the most promising way to deal with the bribery and corruption problem. For more on Senate Resolution 265, see the Story of the Foreign Corrupt Practices Act (pgs. 982-984).
“[Senator Ribicoff’s proposal – Senate Resolution 265] was more realistic than some of the other proposals. In particular, Senator Ribicoff argued that bribes, as well as similar practices, represent distortions of proper trade practices. Under this premise, the members of the General Agreement on Tariffs and Trade would be the appropriate group to consider the question of illicit payments and bribes that distort the fair competition desirable in the field of international trade. In other words, just as dumping and subsidization distort normal competition, so too does the practice of making illicit payments. This premise served as the basis upon which the issue was to be presented at the GATT conference. But when a special trade representative presented Senator Ribicoff’s proposal before the GATT conference, he was greeted with polite silence. The GATT, in 1979, concluded a multilateral trade negotiation. Among other things, this multilateral trade negotiation dealt with trade-distorting practices such as nontariff barriers, the question of government procurement, dumping codes, and the anti-subsidy or subsidies and countervailing duties. It would seem that the multilateral trade negotiation would have been a legitimate arena in which to discuss the subject, as being one more example of a trade distortion which ought to be regulated.”
“I think if one were to rexamine the idea presented in Senate Resolution 265 and adopt this in the area of trade, one would be addressing the problem of illicit payments in more meaningful and significant terms. When a large contract is lost by an American corporation because somebody else paid a bribe, a trade distortion results. Clearly, if one were really serious about achieving a meaningful agreement in the area of international control of illicit payments, the peg on which to hang it would be trade policy and not morality.”
In “The Foreign Corrupt Practices Act: Implications for the Private Practitioner,” Robert Primoff (a lawyer in private practice) called the FCPA a “prosecutor’s paradise” and observed:
“The target is always guilty of the violation. The government has the option of deciding whether or not to prosecute. For practitioners, however, the situation is intolerable. We must be able to advise our clients as to whether their conduct violates the law, not whether this year’s crop of administrators is likely to enforce a particular alleged violation. That would produce, in effect, a government of men and women rather than a government of law.”
If the Fall 1982 edition of the Syracuse Journal of International Law and Commerce does not completely fill your FCPA belly, you might also want to check out Volume 18, Number 2 of the Northwestern Journal of International Business (Winter 1998).
It is a symposium edition titled “A Review of the Foreign Corrupt Practices Act on Its Twentieth Anniversary: Its Application, Defense and International Aftermath.” The articles are rather pedestrian, but Stanley Sporkin’s (the former Director of the SEC’s Enforcement Division during Congress’s consideration and deliberation of the FCPA) article “The Worldwide Banning of Schmiergeld: A Look at the Foreign Corrupt Practices Act On Its Twenieth Birthday” is worth a read as he provides a first-person account of the origins of the FCPA. [In case you are wondering Schmiergeld is the German word for bribe].
See here for a prior post detailing articles in a 2012 symposium edition of the Ohio State Law Journal “The FCPA At Thirty-Five and Its Impact on Global Business.”