Category: Debarment

Potpourri

AG Holder On Corruption

Last week Attorney General Eric Holder was in Slovenia to speak at The Balkans Justice Ministerial. In his speech (here) AG Holder focused on the “global fight against corruption.”

Holder stated as follows.

“Corruption strikes hardest at the most vulnerable among us, siphoning scarce resources away from those most in need. It advances the selfish desires of a dishonest few over the best interests of those who work hard and obey the law. In countries rich and poor, large and small – corruption erodes trust in government and private institutions alike. It undermines confidence in the fairness of free and open markets. It stifles competition and repels foreign investment. It hinders progress, and it breeds contempt for the rule of law.”

“And yet corruption continues to flourish.”

Holder stressed that “all nations struggle against corruption” and that the U.S “is no exception.”

Holder called on all nations “to ratify – and to fully implement – the UN Convention Against Corruption.” (See here).

As to asset recovery, Holder repeated his call first made in Qatar (see here for the prior post) that asset recovery (i.e. ensuring that corrupt officials do not retain illicit proceeds) “isn’t just a global necessity – it’s a moral imperative.”

U.K. Oil for Food Sentence

With its approximately twenty corporate enforcement actions connected to the U.N. Iraq Oil for Food Program, the U.S. is clearly the leader in collecting corporate fines connected to this scandal plagued, defunct program.

The U.K. however has clearly emerged as the leader in holding individuals (not just corporations) to account for illegal behavior in connection with the program.

Last week, the U.K. Serious Fraud Office announced (here) that Mark Jessop admitted to breaking U.N. sanctions during the Oil For Food Program by making illegal payments to Saddam Hussein’s government. The release states that Jessop was sentenced to 24 weeks’ imprisonment. According to the release, Jessop was ordered to pay £150,000 to the Development Fund for Iraq and pay prosecution costs of £25,000. Jessop sold medical goods to Iraq, initially as an employee of a British surgical instruments company, but later through his own companies – JJ Bureau Ltd and Opthalmedex Ltd, of which he was sole director.

For other recent U.K. Oil for Food sentences, see here for the prior post.

Resource Extraction Disclosures

Remember Section 1504 of the Dodd-Frank Act? (See here for the prior post).

The Huffington Post reports (here) that the April 15th deadline for the SEC to issue final implementing regulations has passed. According to the SEC (see here) the new target date for final implementing rules is between August and December.

I guess this is what happens when an ill-conceived, poorly drafted law is inserted into a massive piece of legislation as a miscellaneous provision at the last moment without any meaningful debate or analysis.

World Bank News

Last week, the World Bank released (here) a “Declaration of Agreed Principles for Effective Global Enforcement to Counter Corruption.” See here for the press release.

The release also notes that the World Bank’s Integrity office’s (“INT”) FY10 results include “117 investigations in FY10, with 45 debarments of firms and individuals for engaging in wrongdoing.” For INT’s FY2010 Annual Report, see here.

No – The Consistent Answer In DOJ Responses to Senator Questions Regarding FCPA Reform

On November 30, 2010, the Senate Subcommittee on Crime and Drugs (chaired by then Senator Arlen Specter) held a hearing titled “Examining Enforcement of the Foreign Corrupt Practices Act.” (See here for the prior post).

Following the hearing, Senator Christopher Coons and Senator Amy Klobuchar submitted written questions to Greg Andres (DOJ) – one of the witnesses who testified at the hearing.

The DOJ responses are here.

As evident from the DOJ responses, certain of which are highlighted below, the consistent DOJ response to FCPA-related reform proposals is no.

Profiled below are DOJ’s substantive responses to Senator questions regarding mandatory debarment for egregious FCPA violators; a potential FCPA compliance defense; a potential FCPA amnesty program; whether businesses face FCPA uncertainty; whether clarification of the “foreign official” element is needed; and whether the statute’s corporate intent element needs revising.

Mandatory Debarment

Does the DOJ favor a “mandatory, conduct-based, debarment remedy for companies that engage in egregious bribery”?

No.

The DOJ says that such “mandatory debarment would likely be counterproductive, as it would reduce the number of voluntary disclosures and concomitantly limit corporate remediation and the implementation of enhanced compliance programs.”

In a related question, the DOJ adds that “a mandatory conduct-based debarment for companies could well have a negative impact on the Government’s ability to investigate and prosecute transnational corruption effectively.” “Linking mandatory debarment to a criminal resolution would fundamentally alter the incentives of a contractor-company to reach an FCPA resolution because such a resolution would likely lead to the cessation of revenues for a government contractor – a virtual death knell for the contractor-company. Similarly, mandatory debarment would impinge negatively on prosecutorial discretion. If every criminal FCPA resolution were to carry with it mandatory debarment consequences, then prosecutors would lose the necessary flexibility to tailor an appropriate resolution given the facts and circumstances of each individual case.”

Boiled down to one sentence, the DOJ’s opposition to mandatory debarment for egregious FCPA violators seems to be this – it would lessen our FCPA caseload, it would make our jobs more difficult, and it would take away our flexibility and leverage.

This is hardly a convincing argument to the position I articulated at the Senate hearing (see here) that “egregious instances of corporate bribery that legitimately satisfy the elements of an FCPA anti-bribery violation involving high-level executives and/or board participation should be followed with debarment proceedings against the offender.”

As I noted in this previous post, H.R. 5366 (which passed the House in September 2010) is not the answer. However, the issue of mandatory debarment, in certain instances, remains a valid and legitimate issue notwithstanding the DOJ’s responses.

Compliance Defense

Does the DOJ favor exploring a “formal compliance defense” to the FCPA?

No.

The DOJ “opposes the adoption of a formal compliance defense.”

According to the DOJ, it “already considers a company’s compliance efforts in making appropriate prosecutorial decisions, and the United States Sentencing Guidelines also appropriately credits a company’s compliance efforts in any sentencing determination.” “Among other things” the DOJ states, “the creation of such a defense would transform criminal FCPA trials into a battle of experts over whether the company had established a sufficient compliance mechanism.” “Against this backdrop, companies may feel the need to implement a purely paper compliance program that could be defended by an ‘expert,’ even if the measures are not effective in stopping bribery.” “If the FCPA were amended to permit companies to hide behind such programs, it would erect an additional hurdle for prosecutors in what are already difficult and complex cases to prove.”

As readers likely know, the U.K. Bribery Act, set to go live on July 1st, contains a so-called adequate procedures defense and such a defense should be considered under the FCPA as well.

Amending the FCPA to include a compliance defense is not a new idea. In the mid-1980’s numerous FCPA reform bills included such a defense and provided that a company would not be held vicariously liable for a violation of the FCPA’s anti-bribery provisions by its employees or agents, who were not an officer or director, if the company established procedures reasonably designed to prevent and detect FCPA violations by employees and agents. In fact, an FCPA reform bill containing such a provision did pass the U.S. House.

A compliance defense is not about hiding behind “paper programs” as the DOJ asserts. Rather a so-called compliance defense, one that would be inapplicable in cases such as Siemens, it is about properly incentivizing corporate FCPA compliance and not putting a company at risk of FCPA scrutiny, costly FCPA internal investigations, and the growing collateral consequences of FCPA inquiries should a non-executive employee engage in conduct contrary to a company’s pre-existing, published, and trained on FCPA compliance policies and procedures.

Amnesty Program

Is the DOJ in favor of a so-called “amnesty program” as recently advocated by some?

No.

The DOJ says it “does not support the idea of an FCPA amnesty program.” Among other things, the DOJ says that “as the beneficiary of [several established sources of information such as voluntary disclosures] the Department does not presently face difficulty in identifying sources of information of FCPA criminal violations.” “Consequently, an amnesty program would provide protection for corporations who violate the law without providing accompanying meaningful benefits to law enforcement.” “Finally, consistent with the United States Sentencing Guidelines and the Department’s Principles of Federal Prosecution of Business Organizations, the Department already provides meaningful credit for voluntary self-disclosures, extraordinary cooperation, and substantial remediation by corporations where appropriate and deserved.”

Uncertainty?

Does the DOJ believe that “well-meaning businesses are faced with significant uncertainty as to their potential exposure to civil and criminal penalties under the FCPA?”

No.

The DOJ says that “it provides clear guidance to companies with respect to FCPA enforcement through a variety of means.” It lists the DOJ’s Lay Person Guide to the FCPA, various charging documents, plea agreements, non-prosecution and deferred prosecution agreements [see here for a recent guest post on prosecutorial common law] and the DOJ’s FCPA Opinion Procedure Releases.

The DOJ concludes its response by saying “in the end, a review of the Department’s FCPA enforcement actions makes clear that companies have never been charged for minor or incidental issues.” “By contrast, the Department’s prosecutions involved extensive and often widespread corruption over significant periods of time.”

As explored in this prior guest post, in the FCPA’s 1988 amendments, Congress directed the DOJ to consider providing formal guidance. However, in 1990 the DOJ declined to issue guidelines and stated as follows. “After consideration of the comments received, and after consultation with the appropriate agencies, the Attorney General has determined that no guidelines are necessary…. [C]ompliance with the [anti-bribery provisions] would not be enhanced nor would the business community be assisted by further clarification of these provisions through the issuance of guidelines.”

“Foreign Official”

Does the DOJ agree that statutory clarification of “foreign official” would help clarify to businesses which of their transactions could be subject to the FCPA?”

No.

The DOJ response begins as follows. “The term ‘foreign official’ has been defined in relevant case law and opinion releases. Some defense attorneys have attempted to argue that the definition of ‘foreign official’ does not extend to the employees of state-owned or state-controlled enterprises.”

For the record, I am not a “defense attorney.” See here for my declaration as to the legislative history on “foreign official.”

In a related question, the DOJ further stated that it “has provided significant guidance regarding the definition of ‘foreign official.'”

Intent

Should the FCPA be amended to “bring the intent standard for corporations in line with the current ‘willfulness” standard that applies to individuals?”

No.

The DOJ responded that it “does not believe that it is necessary or appropriate to amend the FCPA’s intent standard with respect to corporations.” “The Principles of Federal Prosecution of Business Organizations already governs the Department’s decisions regarding whether to charge corporations for federal crimes, including under the FCPA.” “Furthermore, the Department is not prosecuting FCPA matters where a corporation engaged in something less than willful criminal conduct.”

Questions Abound In IBM Enforcement Action

Last week, the SEC announced (here) a settled FCPA enforcement action against International Business Machines Corporation (“IBM”).

This post summarizes the enforcement action and then addresses the many questions raised by the enforcement action.

Summary of Enforcement Action

According to the SEC complaint (here): “During the period from 1998 through 2009, in violation of the Foreign Corrupt Practices Act of 1977, employees of certain of [IBM’s] subsidiaries and a majority-owned joint venture provided cash payments, improper gifts, as well as improper travel and entertainment to government officials in South Korea and China.”

The conduct at issue focused on:

IBM-Korea, Inc. (“IBM-Korea”), a South Korean corporation “wholly-owned indirectly by IBM International Group B.V, which, in turn is wholly-owned by IBM;”

LG IBM PC Co. Ltd. (“LG-IBM”), a South Korean joint venture formed in 1996 by IBM-Korea (51% owner of the JV) and LG Electronics (“LG”) (49% owners of the JV); and

IBM (China) Investment Company Limited and IBM Global Services (China) Co. Ltd. (collectively “IBM-China”) – entities “owned by IBM China/Hong Kong Limited, a Hong Kong company that is ultimately owned by IBM.”

In summary fashion, the SEC alleged as follows.

“From 1998 to 2003, employees of [IBM-Korea] and [LG-IBM] made payments to various government officials in South Korea. The purpose of these payments was to secure the sale of IBM products through IBM-Korea and LG-IBM’s business partners. During the relevant period, these managers paid approximately KRW 216,832,500 (South Korean Won), or $207,000, in cash bribes to South Korean government officials, including providing improper·gifts and payments of travel and entertainment expenses.”

“From at least 2004 to early 2009, employees of [IBM-China] engaged in a widespread practice of providing overseas trips, entertainment, and improper gifts to Chinese government officials. The misconduct in China involved several key IBM-China employees and more than 100 IBM China employees overall.”

As to IBM, the parent-company issuer, the SEC alleged as follows.

“Despite its extensive international operations, IBM lacked sufficient internal
controls designed to prevent or detect these violations of the FCPA. During the period 1998 to 2009, IBM had corporate policies prohibiting bribery and procedures relating to compliance with the FCPA; however, deficient internal controls allowed employees of IBM’s subsidiaries and joint venture to use local business partners and travel agencies as conduits for bribes or other improper payments to South Korean and Chinese government officials over long periods of time.”

“During the period 1998 to 2009, IBM failed to make and keep books and records that accurately reflected the improper payments made in South Korea and China. Instead, these payments were recorded as legitimate business expenses.”

The body of the SEC’s complaint alleges various “things of value” provided to alleged South Korean “foreign officials” including shopping bags filled with thousands of dollars, cash-filled envelopes exchanged in parking lots and free personal computers, and travel and entertainment expenses.

According to the SEC, such “things of value” were: “in exchange for designating IBM-Korea a preferred supplier of mainframe computers to [an alleged government entity] and for placing orders with IBM-Korea at higher prices;” “in exchange for (1) maintaining IBM-Korea as the supplier of mainframe computers to [an alleged government entity]; and (2) for helping an IBM-Korea business partner win bids to supply mainframe computers and storage equipment to [an alleged government entity] worth more than [$21 million]; “in exchange for [an alleged “foreign official’s] assistance to IBM-Korea in obtaining a contract with [an alleged government entity] worth approximately [$13 million] for the installation of a mainframe computer in 2002;” “to entice [foreign official’s] to purchase IBM products:” “to win a contract to supply 657 (later increased to 825) personal computers valued at [approximately $1.4 million]; “in exchange for providing LG-IBM with certain confidential information regarding the product specifications on [an alleged government entity’s] request for procurement;” “to persuade employees of [an alleged government entity] to purchase IBM products;” and to entice alleged foreign officials “to purchase IBM products or to provide information to assist LG-IBM in the bidding process.”

The body of the SEC’s complaint as to China conduct alleges as follows.

“From at least 2004 to early 2009, IBM-China employees created slush funds at local travel agencies in China that were then used to pay for overseas and other travel expenses incurred by Chinese government officials. In addition, IBM-China employees created slush funds at its business partners to provide a cash payment and improper gifts, such as cameras and laptop computers, to Chinese government officials. IBM failed to record accurately these payments in its books and records.”

Specifically, the SEC alleged as follows:

“Between 2004 and 2009, IBM’s internal controls failed to detect at least 114
instances in which (1) IBM-China employees and its local travel agency worked together to create fake invoices to match approved [Delegation Trip Requests] DTRs; (2) trips were not connected to any DTRs; (3) trips involved unapproved sightseeing itineraries for Chinese government employees; (4) trips had little or no business content; (5) trips involved one or more deviations from the approved DTR; and (6) trips where per diem payments and gifts were provided to Chinese government officials.”

Based on the above allegations, the SEC charged IBM with violating the FCPA’s books and records and internal control provisions. As noted in the SEC release, IBM, without admitting or denying the SEC’s allegations, consented to the entry of a final judgment permanently enjoining the company from future FCPA violations. IBM agreed to pay $10 million (disgorgement of $5.3 million, $2.7 million in prejudgment interest, and a $2 million civil penalty).

Peter Barbur and Evan Chessler (Cravath, Swaine & Moore – here and here) represented IBM.

Questions Abound

For starters, this is not the first time IBM has been the focus of an FCPA enforcement action.

In December 2000 (see here), the SEC found, in a cease and desist proceeding, that IBM violated the FCPA books and records provisions in connection with a $250 million contract to integrate and modernize computer systems in Argentina. As part of the settlement, “IBM consented to the entry of an Order that requires IBM to cease and desist from committing or causing any future violation of [the FCPA’s books and records provisions].

Given that IBM was charged last week with FCPA books and records violations, IBM has clearly violated this 2000 court order.

In my recent “Facade of FCPA Enforcement” article (here), I highlight various pillars that contribute to the facade of FCPA enforcement.

Pillars include, unsupported legal conclusions serving as the foundation for an enforcement action, including as to “foreign official” and disgorgement issues; the tendency of factually similar cases being resolved materially different ways; and bribery, yet no bribery.

These pillars are present in the IBM enforcement action.

For starters, who were the “government officials in South Korea and China.” Were they traditional bona-fide government officials or employees of alleged state-owned or state-controlled enterprises and thus “foreign officials” under the enforcement agencies’ interpretation – an interpretation currently the subject of judicial challenges?

As to the South Korean officials, the complaint merely alleges that the “foreign government officials involved worked for sixteen South Korean government entities.” These officials included the “Chief of Operations for the Electronic Operations Division” of an entity; an employee of the same entity; a “manager of the government-controlled entity”; the “Director of Planning” of another entity; employees of an entity; an employee of a “state-owned agency of the South Korean government;” a “Director of Information Technology” at another entity; employees of another entity; and “key decision makers at ten other” entities.

As to the Chinese officials, the complaint merely alleges that the individuals were associated with “government-owned or controlled customers in China for hardware, software, and other services.”

Based on the descriptions in the complaint, it seems as if the “foreign officials” were all employees of SOE entities. If so, two out of three corporate FCPA enforcement actions in 2011 (IBM and Maxwell Technologies – see here) involve SOE employees.

Why no FCPA anti-bribery charges against IBM or the relevant subsidiaries (accepting of course the SEC’s “foreign official” interpretation)?

According to the SEC, the conduct at issue took place between 1998 and 2009. Further, according to the SEC, “in connection with the conduct described herein, IBM, directly or indirectly, made use of the mails or the means or instrumentalities of interstate commerce in connection with the acts, transactions, practices and courses of business alleged in this Complaint.”

Why no DOJ involvement?

It is very common for the DOJ and SEC to announce FCPA enforcement actions on the same day. Thus, one can assume (perhaps future events will prove otherwise) that the DOJ elected to sit this one out.

Why?

The SEC’s complaint alleges vivid instances of bribery (not always seen in FCPA enforcement actions) in connection with multi-million dollar contracts.

Yet, no bribery – not even civil FCPA anti-bribery charges.

Is this another instance where the U.S. enforcement agencies look first at the corporate offender, its customers, and its products, and then craft a resolution that will hurt the least?

After all, one of IBM’s largest customer segments is the government (federal, state, etc.) see here.

Did this play any role in how the enforcement action was resolved?

The SEC charged IBM only with FCPA books and records and internal controls violations. Yet, as in several other cases, the SEC pursued a disgorgement remedy. As noted in my Facade article (pages 981-984) non-FCPA disgorgement case law clearly holds that disgorgement may not be used punitively. It is difficult to see how mis-recording of a payment (a payment the SEC does not allege violated the FCPA’s anti-bribery provisions) can properly give rise to a disgorgement remedy. See also here from Philip Urofsky and Danforth Newcomb on this issue.

In a transparent legal system, similar facts are supposed to be resolved with similar charges. However, it is questionable whether this fundamental principle (one that inspires trust and confidence in a legal system) is followed in many FCPA enforcement actions.

The China-related charges against IBM regarding excessive travel and entertainment expenses are nearly identical to two previous FCPA enforcement actions – the December 2007 enforcement action against Lucent Technologies and the December 2009 enforcement action against UTStarcom, Inc.

Lucent was resolved via a DOJ non-prosecution agreement (here) and an SEC enforcement action charging only FCPA books and records violations (here).

UTStarcom was resolved via a DOJ non-prosecution agreement (here) and an SEC enforcement action charging FCPA anti-bribery as well as books and records and internal controls violations (here).

IBM, as detailed above, is presumably being resolved without any DOJ involvement and an SEC enforcement action charging only FCPA books and records violations.

Three cases – all involving in whole or in part allegations of providing excessive travel and entertainment expenses to Chinese “foreign officials” – resolved in three different ways.

*****

And now, as one reader put it, the question all FCPA Professor blog readers (at least this particular reader) are dying to know.

Butler or Wisconsin?

I am a born and raised cheesehead and graduate of the University of Wisconsin Law School.

However, my allegiance is to my employer – Butler University. Let’s face it, Butler is an awesome, feel-good story. Student-athletes in every sense of the word, home games at historic Hinkle Fieldhouse, a coach who, a few years ago, left his job selling pharmaceuticals to become a volunteer coach (since promoted), and a small, cozy campus to top it off.

BU-TLE- R U a Bulldog – hell ya!

Charlie Monteith on U.K. Bribery Act Issues

In case you were sleeping last week …

The U.K. Bribery Act, originally scheduled to “go live” in Fall 2010 and then pushed back to April 2011, has been further delayed so that guidance on the Act can be developed. A week ago, the U.K. Ministry of Justice confirmed the delay and a spokesperson said: “We are working on the guidance to make it practical and comprehensive for business. We will come forward with further details in due course. When the guidance is published it will be followed by a three month notice period before implementation of the Act.”‪

What does Charlie Monteith, the former Head of Assurance at the SFO and currently counsel at White & Case in London, think about the delay.

He writes as follows:

“As the former Head of Legal Assurance at the SFO, and the lead drafter of the AG’s guidance on what constitutes the legal elements of the offences under the Bribery Act plus public interest factors for and against prosecution, as well as contributing to the drafting of the Ministry of Justice’s guidance on adequate procedures, I find it perplexing why neither were published at the end of January.

It is frankly difficult to see how there can be any changes now to an Act of Parliament that Parliament (albeit the last one) has approved. That would entail amending the Act and debating and approving the amendments through this Parliament for which there does not appear to be time in this current session due to end in the summer.”

Monteith recently published this piece in the Criminal Law Review.

In it, he notes, among other things as follows.

That the Bribery Act’s failure to prevent bribery offense “is a big stick, but with it comes an enormous carrot of a defence of having ‘adequate procedures’ designed to prevent bribery. (Unlike the FCPA). It may seem an odd thing for a prosecutor to say, but the defence is actually the most important aspect of the whole Act because it gives business the incentive to do something about preventing bribery.”

Other topics covered in Monteith’s article include: the SFO’s approach to enforcement, debarment, disgorgement, and sentencing issues under the Bribery Act.

Maxwell Technologies is the First Corporate Enforcement Action of 2011

In early January, Maxwell Technologies Inc. (“Maxwell”), announced that the U.S. Department of Defense awarded the company a $1.7 million contract (here), “for the initial phase of a multi-phase program to develop a lighter, longer-lasting, energy source for field radios and other portable electronic equipment carried by military personnel.”

On January 31st, Maxwell became the first company in 2011 to settle an FCPA enforcement action.

The Maxwell enforcement action involved both a DOJ and SEC component. Total settlement amount was approximately $14.4 million ($8 million criminal fine via a DOJ deferred prosecution agreement; $6.4 million in disgorgement and prejudgment interest via a SEC settled complaint).

Maxwell previously disclosed (see here) that “discussions with the SEC and DOJ have resulted in an estimate of potential settlement of up to $20.0 million – representing the combined first offer of settlement put forth by the SEC and DOJ.” Presumably, the company’s disclosure of the government’s settlement offer did not sit well with the DOJ and on July 30, 2009, Maxwell issued this strange press release.

As set forth more fully below, the alleged recipients of the bribe payments at issue were all employees of alleged Chinese state-owned or state-controlled enterprises. Also of note, the SEC’s charges include disclosure violations not often seen in FCPA enforcement actions, based on allegation that Maxwell’s bribe payments allowed the company to offset losses and fund product expansions that are now a source of revenue for the company.

DOJ

The DOJ enforcement action involved a criminal information (here) against Maxwell resolved through a deferred prosecution agreement (here).

Criminal Information

The criminal information, a short eight pages, alleges that “from at least July 2002 through in or about May 2009, Maxwell and its subsidiaries paid approximately $2,789,131 to Agent 1 [a Chinese national, third-party agent responsible for Maxwell S.A.’s (a wholly-owned subsidiary of Maxwell) high voltage capacitor sales to Chinese customers] to be distributed to Chinese foreign officials, in return for securing contracts that profited Maxwell.”

The Chinese foreign officials?

You guessed it, employees of alleged state-owned entities such as:

“Pinggao Group Co. Ltd. [formerly Pingdingshan High Voltage Switchgear Works) … a state owned manufacturer of electric-utility infrastructure in Henan Province, China” (see here for the company’s website)

“New Northeast Electric Shenyang HV Switchgear Co., Ltd. … a state-owned manufacturer of electric-utility infrastructure in Liaoning Province, China” (see here for company information) and

“Xi-an XD High Voltage Apparatus Co., Ltd., … a state-owned manufacturer of electric-utility infrastructure in Shaanxi Province, China” (see here for the company’s website).

According to the information, “Maxwell and its subsidiaries accomplished [the bribe] payments by using Agent 1 to market and sell Maxwell’s high voltage capacitors to Chinese consumers … substantially all of which were Chinese state-owned entities.” The information alleges that Agent 1 “requested quotes from Maxwell S.A. on behalf of prospective Chinese state-owned entities” and that “upon Agent 1’s instruction, Maxwell S.A. added an extra 20 percent to the quoted amounts to arrive at a higher price for Maxwell S.A.’s high-voltage equipment.” The information alleges that Agent 1 then distributed the extra amount “to officials at the Chinese state-owned entities” including employees of the above referenced companies.

Under the heading, “Knowledge Within Maxwell’s U.S. Management,” the information alleges that “Maxwell’s management within the United States discovered, tactitly approved, concealed and caused to be concealed the bribery scheme.” According to the information, following discovery of the payments by Maxwell senior management in the U.S. including by Executive A, Executive B, and Executive C (all U.S. citizens), under Executive E’s (a Swiss citizen and Maxwell S.A’s Vice President and General Manager) oversight and supervision, the payments at issue to Agent 1 actually increased from approximately $165,000 in 2002 to nearly $1.1 million in 2008.

According to the information, Maxwell’s financial statements and reports described the bribe payments as “sales-commission expenses.”

Based on the above allegations, the information charges Maxwell with FCPA anti-bribery violations and knowingly violating the FCPA’s books and records provisions.

DPA

The DOJ’s charges against Maxwell were resolved via a deferred prosecution agreement.

Pursuant to the DPA, Maxwell admitted, accepted and acknowledged that it was responsible for the acts of its officers, employees, subsidiaries, and agents as set forth above.

The term of the DPA is three years and it states that the DOJ entered into the agreement “based on the individual facts and circumstances” of the case and Maxwell.

Among the factors stated are the following.

(a) Maxwell voluntarily disclosed its FCPA violations to both the DOJ and the SEC;

(b) Maxwell cooperated with the Department’s investigation of Maxwell and others;

(c) Maxwell undertook remedial measures, including the implementation of an enhanced compliance program, and agreed to undertake further remedial measures …;

(d) Maxwell agreed to cooperate with the Department in any ongoing investigation of the conduct of Maxwell and its employees, agents, consultants, contractors, subcontractors, subsidiaries, and others relating to violations of the FCPA; and

(e) the impact on Maxwell, including collateral consequences, of a guilty plea or criminal conviction.

As stated in the DPA, the fine range for the above described conduct under the U.S. Sentencing Guidelines was $10.5 million to $21 million. Pursuant to the DPA, Maxwell agreed to pay a monetary penalty of $8 million (25% below the minimum amount suggested by the guidelines).

Pursuant to the DPA, Maxwell agreed to self-report to the DOJ “periodically, at no less than 12-month intervals” during the term of the DPA “regarding remediation and implementation of the compliance program and internal controls, policies, and procedures” described in the DPA.

As is standard in FCPA DPAs, Maxwell agreed not to make any public statement “contradicting the acceptance of responsibility” by Maxwell as set forth in the DPA and Maxwell further agreed to only issue a press release in connection with the DPA if the DOJ does not object to the release.

As to debarment issues, paragraph 22 of the DPA states as follows:

“The Department agrees to bring to the attention of governmental and other debarment authorities the facts and circumstances relating to the nature of the conduct underlying this Agreement, including the nature and quality of Maxwell’s cooperation and remediation. By agreeing to provide this information to debarment authorities, the Department is not agreeing to advocate on Maxwell’s behalf, but rather is providing facts to be evaluated independently by the debarment authorities.”

See here for the DOJ release.

SEC

The SEC’s civil complaint (here) alleges, in summary, as follows.

“From 2002 through May 2009, Maxwell violated the anti-bribery, books and records and internal control provisions of the Foreign Corrupt Practices Act (“FCPA”) when it repeatedly paid bribes to Chinese officials in order to obtain and retain sales contracts for high voltage capacitors from several Chinese state-owned entities. Maxwell engaged in bribery to maintain its high-voltage capacitor business in China, which accounted for material revenue and profits during the relevant time period.”

According to the complaint, “the illicit payments were made with the knowledge and tacit approval of certain former Maxwell officers and Maxwell failed to accurately record these payments on its books and records, and failed to implement or maintain a system of effective internal accounting controls to detect or prevent the payments.”

The complaint alleges that “the improper payments generated nearly $15.4 million in sales contracts, from which Maxwell realized profits ofover $5.6 million.”

According to the SEC:

“Maxwell violated [the FCPA’s anti-bribery provisions] by engaging in widespread bribery of government officials in China in order to sell its high-voltage capacitors to several Chinese state-owned enterprises. Maxwell violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-l, and 13a13 thereunder by failing to disclose in its annual and periodic filings that the material revenues and profits associated with its long-standing bribery scheme enabled Maxwell to better financially position itself until new products could be commercially developed and sold. Maxwell violated [the FCPA’s internal control provisions] by failing to maintain internal controls to prevent or detect the bribes paid to officials at Chinese state owned-entities. Finally, Maxwell violated [the FCPA’s books and records provisions] by failing to accurately reflect the nature of the improper payments in Maxwell’s books, records, and accounts.”

The SEC’s complaint contains an allegation not often seen in FCPA enforcement actions about how the company’s alleged bribery scheme helped offset losses in other areas and helped fund future product development.

According to the SEC:

“Maxwell greatly depended on the revenue from Maxwell SA’s high-voltage capacitor sales to China in order to help fund Maxwell’s expansion into new product lines that are now expected to become Maxwell’s future source of revenue. Maxwell engaged in the bribery scheme because it enabled the company to obtain material revenue needed to financially position itself to help fund the very products that today are sustaining Maxwell’s future growth.”

As to “Discovery of the Illicit Payments” the complaint states as follows.

“Potential FCPA and accounting concerns came to the attention of Maxwell’s finance department in September 2008, during an internal review of Maxwell SA’s commission expenses involving the Chinese Agent. Maxwell’s management team asked about these commission payments after learning of the unusually high Chinese Agent commissions, which included the Extra Amounts. During this review, Executive A informed Maxwell’s finance department that the payments made to the Chinese Agent were recorded as sales commissions. Maxwell’s finance department then sought and obtained a signed FCPA certificate from the Chinese Agent in which he represented that he was familiar with the U.S. FCPA and local laws and regulations regarding corrupt payments” and that he had not in the past and will not in the future make any improper payments.

However, according to the SEC, “after obtaining the representations, Maxwell’s finance department took no further corrective action regarding the commissions and Extra Amounts paid to the Chinese Agent …”.

In February 2009, Maxwell’s new CEO, became aware of the issues with the Chinese Agent and he “immediately notified Maxwell’s audit committee and outside counsel.”

According to the SEC:

“During the relevant period, Maxwell’s controls designed to prevent illicit payments to foreign officials were wholly inadequate. At the time, Maxwell’s Code of Conduct contained a brief section on FCPA issues, but there is no evidence that employees received any FCPA training prior to the company’s remedial steps.”

As to Maxwell’s internal controls failures, the complaint states as follows:

“Maxwell (1) failed to question why the contract prices were artificially inflated by 20% above the bid prices; (2) did not request supporting documentation for the invoices or track where the commission payments ultimately were distributed; (3) performed no due diligence on the agent; (4) did not require FCPA training for all relevant employees; and (5) failed to take any action even though it appears that certain former officers and senior managers of Maxwell had knowledge of the bribes paid by Maxwell SA and its agent since at least November 2002.”

Without admitting or denying the SEC’s allegations, Maxwell agreed to an injunction prohibiting future FCPA violations and agreed to $5,654,576 in disgorgement and $696,314 in prejudgment interest.

In the SEC release (here) Cheryl Scarboro (Chief of the SEC’s FCPA Unit) stated as follows: “Maxwell’s bribery allowed the company to obtain revenue and better financially position itself until new products were commercially developed and sold. This enforcement action shows that corruption can constitute disclosure violations as well as violations of other securities laws.”

Jeffrey Higgins (here) of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian LLP and Jerome Roth (here) of Munger Tolles & Olson LLP represented Maxwell.

Since announcement of the January 31st enforcement action, Maxwell’s shares are up approximately 6%.

As I explored in this recent post, 60% of 2010 corporate FCPA enforcement actions involved (in whole or in part) employees of alleged state-owned or state-controlled enterprises (“SOE”). In these cases, the enforcement agencies generally allege that such enterprises are “instrumentalities” of a foreign government and that such employees are therefore “foreign officials” under the FCPA.

So far in 2011, it’s 100%.