Recent DOJ Statements At Issue In Carson “Foreign Official” Challenge
On Tuesday, Nathaniel Edmonds (Assistant Chief, DOJ Fraud Section who is specifically involved in the Carson “foreign official” challenge) participated in a webcast sponsored by the Conference Board titled “Enforcement of The Foreign Corrupt Practices Act: A Dialogue with Regulators” (see here).
According to a May 4th article authored by Christopher Matthews and published on the Just Anti-Corruption page of the website Main Justice, during the webcast Edmonds “warned defendants facing charges under the foreign bribery law against contesting that definition.”
The article states as follows.
[“It’s not necessarily the wisest move for a company,” Assistant Chief Nathaniel Edmonds said Tuesday during a webcast on the FCPA sponsored by The Conference Board. Edmonds reiterated the Justice Department’s belief that employees of state-owned or controlled companies can be considered foreign officials under the FCPA, which prohibits bribes to foreign officials to obtain or retain business. “Quibbling over the percentage ownership or control of a company is not going to be particularly helpful as a defense,” Edmonds said.]
Yesterday, in a supplement to its reply brief (here) the Carson defendants brought the article to the attention of the court and stated as follows.
“Defendants respectfully submit that Mr. Edmonds’ comments supplement at
least two important points made in Defendants’ Motion and Reply. First, there is a reason the Government’s maximalist position on the definition of “foreign official” has avoided serious judicial scrutiny for so long, and the reason is that individuals and companies are reluctant to challenge the Government’s interpretation for fear of the consequences. Second, the Government does not have a definition of “instrumentality” that can withstand judicial scrutiny because, among other things, it is unable to say what would make one state-owned enterprise, but not another, an “instrumentality” under the FCPA.”
A Focus on Russia
In this guest post, I am pleased to turn it over to Robert Wieck (a high school classmate – Elkhart Lake (WI) Class of ’93 – Go Resorters!).
Robert is currently the Forensic Audit Senior Manager (Europe, Middle East and Africa) for Oracle Corporation and is based in Bucharest, Romania. He has thirteen years of experience in both “Big 4” and US listed multi-national companies. Twelve of these years have been focused on emerging markets including countries in the former Soviet Union, former Yugoslavia, and the Balkan region.
Robert participated as a panelist at the “3rd Annual Anti-Corruption Summit for Russia & CIS” held on March 16-17th in Moscow. See here for the prior post regarding Assistant Attorney General Lanny Breuer’s comments at the event.
Below is Robert’s guest post and the opinions expressed below are his own and do not necessarily reflect the opinion of his employer, Oracle Corporation.
*****
“I think it is clear to most people that the current business climate in Russia is troublesome for multi-national companies trying to do business legitimately. Presentations and discussions held at the conference seemed to confirm that companies are becoming increasingly concerned about being able to do business successfully in Russia and at the same time maintaining compliance with the FCPA.
One interesting point which I believe set the tone for the conference was that while the DoJ accepted the invitation for two senior officials (Mr. Breuer and Mr. Andres) to travel to Moscow to address the conference attendees, there were no Russian counterparts from the Russian Ministry of Justice present to advise on what they are doing to address the corruption problems on the ground in Russia.
While the transcript for Mr. Breuer’s speech is linked above, Mr. Andres’s comments are summarized below:
• Russia is clearly not the only place in the world where corruption is a problem. There have been a considerable number of prosecutions of US Citizens under the FCPA.
• There have been a record number of prosecutions under the FCPA in 2010, and more than 1 Billion USD in fines collected as a result. According to Mr. Andres, none of these cases involved a single, low level act of corruption or bribery, but systematic corruption involving hundreds of thousands of dollars, and involving dozens of people.
• While there were a record number of prosecutions in 2010, there were also a record number of cases that the DoJ declined to prosecute. Decisions to decline to prosecute a case were made based on a company’s ability to demonstrate that they have sound internal procedures and compliance programs. Andres believed this also highlights the benefits of companies self-reporting potential FCPA violations, and further mentioned that self-disclosure was an important factor in how many of those cases were resolved.
• There has been an uptick in the number of individuals being prosecuted under the FCPA, which totaled 50 for 2009 and 2010. This is up from 2 individuals prosecuted in 2004.
• In terms of FCPA trends for the future, Andres noted that it appears more companies are cooperating with the DoJ. More industry-wide prosecutions are being undertaken where they find that activities that violate the FCPA are not confined to one company within an industry, but represent an industry practice that multiple companies within the industry are all engaging in. The DoJ has noted increased cooperation with national law enforcement agencies and international organizations (including the OECD).
• Companies continue to criticize the DoJ for not providing enough guidance regarding their approach to FCPA prosecutions. However, Mr. Andres stated that the DoJ does a good job in maintaining the FCPA compliance website where a wealth of case information is published and available for review.
• Currently there is much debate ongoing about the definition of a public sector official, and the DOJ continues to see an increasing number of litigations surrounding the interpretation of who is a “foreign official” under the provisions of the FCPA.
• Andres believes the trend of increasing prosecutions under the FCPA will continue, and that the DoJ has added resources to address this trend.
Among the most interesting comments made by Mr. Andres, from my point of view, were his final comments in which he stated that the DoJ is demanding the same level of compliance with the FCPA from Russia as it does from other countries. He further stated that there would not be any “Russia-specific exception” when pursuing prosecutions under the FCPA.
One other interesting presentation was delivered by the General Director for Transparency International, Ms. Elena Panfilova. In what I consider a brutally honest way, she confirmed that based on research conducted by her team on the ground in Moscow, the fraud and corruptions problems in Russia are indeed getting worse, despite information that might suggest otherwise. The schemes used by these perpetrators are becoming more and more complex and they no longer appear to be shy about engaging in corruption. This has resulted in a diminished sense of public trust and led to a very cynical environment in Russia in regards to corruption. Ms. Panfilova believes that one of the barriers to reversing this trend is the lack of whistleblower protection for people reporting alleged cases of corruption. Whistleblowers currently have no guarantees of support from anyone when they raise concerns. And usually when people do report instances, whistleblowers become targets of unfounded prosecution. To demonstrate her point, she made reference to statistics which suggest that while corruption is on the rise, the number of whistleblowers making claims is decreasing. It is understood that the role of the whistleblower is critical in the fight against corruption. Thus, legal protection from prosecution (both civil and criminal), protection of property and labor rights (anti-retaliation legislation) is required in order to allow whistleblowers to come forward and voice their concerns regarding corrupt activities they might have witnessed or been a victim of.
My participation in the panel discussion covered best practices in conducting investigations in Russia. Over my twelve years of experience working in emerging markets in Europe (including Russia and CIS), I have noted common themes that should be considered while trying to conduct an audit or investigate potential misconduct in Russia (and any emerging market, for that matter). One aspect would be the high risk of document falsification in the Russian environment. In Russia, a “form over substance” approach is taking to maintain supporting documentation for transactions. Thus, in the context of an audit or investigation, the audit objectives should be managed carefully in order to ensure documentation is not “custom” prepared. Another aspect is the sometimes difficult task of getting complete/honest answers to questions or queries. It is common to receive conflicting stories and different versions of answers to the same question, sometimes for no apparent reason. A Russian celebrity summed it up in a Russian newspaper article I read recently by saying “For some reason, it’s not the custom to tell the truth in our country, even when it is clear to everyone”. Lastly, I would say that securing full cooperation from auditees can be a tedious and exhausting process. It can only be recommended that companies use legal resources (both internal and external) when necessary, in order to ensure that they receive cooperation which might be required in the form of an employment agreement, internal code of conduct or other type of contract (in the case of third parties).”
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.
Assistant Attorney General Lanny Breuer On ….
Earlier this week, Assistant Attorney General Lanny Breuer spoke at the 3rd Russia and Commonwealth of Independent States Summit on Anti-Corruption. See here for his remarks.
Breuer’s remarks touched upon a number of topics including the following as excerpted below.
On Corruption Generally
“Corruption affects countries rich and poor, large and small, and it has particularly harmful effects on emerging economies. When a developing country’s public officials routinely abuse their power for personal gain, its people suffer. Roads are not built, schools lie in ruin, and basic public services go unprovided. And when corruption takes hold in any nation, its political institutions tend to lose legitimacy, threatening democratic stability and the rule of law. Corruption undermines the health of international markets, stifling competition and repelling foreign investment. Moreover, corruption is a ‘gateway crime, allowing money laundering, gang violence, terrorism and other crimes to thrive.”
On the FCPA’s Legislative History
“The FCPA was the first effort of any nation to specifically criminalize the act of bribing foreign officials. The statute was enacted in the wake of the “Watergate” scandal in the United States, which led to the resignation of President Richard Nixon in 1974 and resulted in a dramatic plunge in Americans’ overall trust in government. In 1976, following certain prosecutions for illegal use of corporate funds arising out of the Watergate scandal, the U.S. Securities and Exchange Commission, or S.E.C., which regulates the securities industry in the United States, issued a “Report on Questionable and Illegal Corporate Payments and Practices.” In its report, the S.E.C. determined that foreign bribery by U.S. corporations was “serious and sufficiently widespread to be a cause for deep concern.” S.E.C. investigations revealed that hundreds of U.S. companies had made corrupt foreign payments involving hundreds of millions of dollars. With this background, the U.S. Senate Banking Committee concluded that there was a strong need for anti-bribery legislation in the United States. “Corporate bribery is bad business,” the committee said in its Report. “In our free market system it is basic that the sale of products should take place on the basis of price, quality, and service. Corporate bribery is fundamentally destructive of this basic tenet.””
“As the U.S. House of Representatives’ Report on the FCPA put it, a strong anti-bribery law can “help U.S. corporations resist corrupt demands.” In the words of the former chairman of a major oil company, quoted in the report, “If we could cite our law which says we just may not do it, we would be in a better position to resist” the pressure that sometimes comes from foreign officials. That was true in 1977, and it’s true now.”
On FCPA Enforcement
“The passage of the FCPA was a milestone. But the Act did not become a strong enforcement mechanism overnight. Indeed, in the first decades immediately following the law’s enactment, many saw the FCPA as a slumbering statute. That is no longer the case. In recent years, the Criminal Division has dramatically increased its FCPA enforcement efforts. To give you a sense: in 2004, we charged two individuals under the FCPA and collected around $11 million in criminal fines. In 2005, we charged five individuals and collected around $16.5 million. By contrast, in 2009 and 2010 combined, we charged over 50 individuals and collected nearly $2 billion.”
“The FCPA is a strong enforcement mechanism, and we are not shy about using it.”
On Holding Non-U.S. Actors Accountable
“We have traditionally also pursued foreign executives who work for U.S. corporations or for foreign corporations that trade on U.S. exchanges, as well as the foreign corporations themselves. For example, in 2007, Christian Sapsizian, a French citizen and former executive at Alcatel, pleaded guilty to two counts of violating the FCPA, and in 2008 he was sentenced to 30 months in prison on those charges. In addition, we recently resolved a wide-ranging investigation against the Swiss-based freight-forwarding company Panalpina World Transport (Holding) Ltd., its U.S. subsidiary, and several foreign and domestic oil and gas service providers. Thus, as the Sapsizian and Panalpina cases show, any Russian citizen working for an American company in Russia or for a Russian company that trades on an American exchange, as well as any Russian company that trades on such an exchange, are also within our reach.”
“We have on more than one occasion brought charges against foreign officials under U.S. money laundering statutes, alleging that those officials laundered the proceeds of foreign bribery through U.S. financial institutions. In 2009, for example, we indicted two former Haitian government officials on money laundering charges for their alleged roles in a scheme to bribe officials of Haiti’s state-owned national telecommunications company. Thus, as the Haiti Teleco case shows, Russian officials who launder the proceeds of foreign bribes through U.S. financial institutions could also be liable for FCPA-related offenses.”
On the Kleptocracy Asset Recovery Initiative
“… Last year our Asset Forfeiture and Money Laundering Section initiated a Kleptocracy Asset Recovery Initiative, which is designed to target and recover the proceeds of foreign official corruption that have been laundered into or through the United States. In November of 2009, at the Global Forum on Fighting Corruption and Safeguarding Integrity, in Qatar, Attorney General Holder pledged to redouble the United States’ commitment to recovering foreign corruption proceeds. The Kleptocracy Initiative represents a concrete step toward fulfilling that commitment; and once the initiative is fully implemented, it will allow the Justice Department to recover assets on behalf of countries victimized by high-level corruption.”
Without Admitting or Denying
It’s not an FCPA specific issue, but it’s certainly an FCPA enforcement issue.
A company is the subject of a SEC FCPA enforcement inquiry.
A civil complaint is generally filed, and then, on the same day, the company “without admitting or denying” the SEC’s allegations agrees to resolve the case.
See here for the recent SEC FCPA enforcement action against Maxwell Technologies.
At PLI’s “SEC Speaks” event last week, SEC Commissioner Luis Aguilar shared (see here) his “wishes for 2011” including “the Enforcement Division must bring cases with obvious deterrent effect.”
Commissioner Aguilar stated as follows:
“As we work to build a pro-active regulator, my second wish is that the SEC Division of Enforcement brings cases that have obvious deterrence value. I know that this is a wish that is shared by our Enforcement staff. This means that when the Commission announces the resolution of a matter we would notice a reaction that we haven’t always witnessed.
I envision a world where when the SEC announces a settlement in a high profile case, its impact is clearly noted — and leaves little doubt that it will make people that are engaged in similar activities think twice. An enforcement action by the SEC should be serious business, and it should cause an organization to seriously review how it has been operating. Moreover, our enforcement actions should have market-wide impact, and there should be sanctions that are significant enough to stop similar conduct in its tracks. The possibility of being sanctioned by the Commission should not be considered part of the cost of doing business.
I envision a world where our remedies are calibrated to be meaningful, not merely routine – and where federal judges can clearly see that the SEC understands its mission and seeks to protect investors and deter wrongdoers by obtaining appropriate sanctions and meaningful deterrence.
An additional wish for 2011 is to see defendants take accountability for their violations and issue mea culpas to the public. I hope that 2011 brings an end to the press release issued by a defendant after a settlement explaining how the conduct was really not that bad or that the regulator over-reacted. I hope that this revisionist history in press releases will be a relic of the past. If not, it may be worth revisiting the Commission’s practice of routinely accepting settlements from defendants who agree to sanctions “without admitting or denying” the misconduct.” (emphasis added).
I agree. It is worth revisiting this central feature of SEC settlements.
The policy was first adopted in 1972 (see here) and states as follows.
“The Commission has adopted the policy that in any civil lawsuit brought by it or in any administrative proceeding of an accusatory nature pending before it, it is important to avoid creating, or permitting to be created, an impression that a decree is being entered or a sanction imposed, when the conduct alleged did not, in fact, occur. Accordingly, it hereby announces its policy not to permit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegations in the complaint or order for proceedings. In this regard, the Commission believes that a refusal to admit the allegations is equivalent to a denial, unless the defendant or respondent states that he neither admits nor denies the allegations.”
The resolution policy can lead to absurd results (see here).
In the FCPA context, I submit this SEC resolution policy contributes to a “facade of enforcement” and results in companies resolving an SEC FCPA enforcement action notwithstanding dubious or untested legal theories and regardless of valid and legitimate defenses.
Why?
It is simply easier and more cost efficient to settle an enforcement action “without admitting or denying” the SEC’s allegations than to engage in long protracted litigation with a primary regulator.
My recent “Facade of FCPA Enforcement” piece (here) contains a discussion of the SEC v. Bank of America case. Although not an FCPA case, the party’s briefs provide valuable insight into the same SEC enforcement procedures used in FCPA enforcement actions and the motivations of settling parties in a government enforcement action. Even the SEC noted in that case that “the terms of a reasonable settlement do not necessarily reflect the triumph of one party’s position over the other.”
Thus, I agree with Commissioner Aguilar that it is worth revisiting the Commission’s practice of routinely accepting settlements from defendants who agree to sanctions “without admitting or denying” the misconduct.
This policy contributes to a “facade of enforcement,” including in the FCPA context, and the starting analysis should be – why did the Commission adopt this policy in the first place?