Understanding Wal-Mart
Prior posts here and here discussed and analyzed the New York Times April 21st article regarding Wal-Mart and its potential FCPA exposure. As noted in the prior posts, the New York Times article was both unremarkable and remarkable at the same time. Wal-Mart has dominated the news cycle not because it is under FCPA scrutiny (this was known since December 2011 when Wal-Mart disclosed its FCPA scrutiny joining a list of approximately 100 companies known to be under FCPA investigation). Rather, Wal-Mart has dominated the news cycle because of how the company acted, or failed to act, since learning of potential FCPA issues in approximately 2005. Thus, Wal-Mart is mostly a corporate governance story.
Even so, there are some core and fundamental FCPA issues worthy of exploration. This post discusses many of the same issues I’ve discussed with journalists and others over the past week. Given the space constraints of media outlets, the below was understandably reduced to one or two sentences. It is in instances like this when I particularly enjoy having my own website and having the ability to go long and deep.
So long and deep we shall go and the issues discussed below are informed by, among other things, my review of the FCPA’s entire legislative history and my years as an FCPA practitioner. Although focused on the FCPA’s “foreign official” element, a thorough and comprehensive review of the FCPA’s legislative history can be found here (my “foreign official” declaration used in connection with several recent judicial challenges). My article “The Story of the Foreign Corrupt Practices Act” is forthcoming in the Ohio State Law Journal.
Do the Wal-Mart Mexico payments at issue violate the FCPA’s anti-bribery provisions? From a practical standpoint, does it even matter?
The FCPA’s Anti-Bribery Provisions
Two distinct and important questions can be asked about many instances of FCPA scrutiny, including Wal-Mart’s, in this new era of FCPA enforcement.
The first question is whether, given the DOJ and SEC’s current enforcement theories, the Mexican payments at issue – allegedly in connection with permitting, licensing and inspection issues – can expose Wal-Mart to an FCPA enforcement action? The answer is likely yes and in the past several years the enforcement agencies have brought several FCPA enforcement actions premised on payments to obtain foreign licenses, permits and the like. For instance see here (and embedded posts therein) for the numerous Panalpina related enforcement actions in 2010. See here at pages 972-975 for a listing of such cases 2007-2009.
The second (and from my perspective more important) question is whether Congress, in passing the FCPA, intended the law to capture payments occurring outside the context of foreign government procurement and involving ministerial and clerical acts by foreign officials. The answer from the FCPA’s legislative history is no.
In the mid-1970’s Congress learned of a variety of foreign corporate payments to a variety of recipients and for a variety of reasons. Congress accepted and acknowledged in passing the FCPA that it was capturing only a narrow range of foreign payments. For instance the relevant Senate Report in May 1977 specifically notes that “the committee has recognized that the bill would not reach all corrupt overseas payments.” Likewise, the relevant House Report in September 1977 also states that “the proposed law will not reach all corrupt payments overseas.”
Of note, in November 1977 (a month prior to passage of the FCPA in December 1977), Representative Robert Eckhardt (D-TX, a Congressional leader on the foreign payments issue) stated on the House floor as follows. “Payments to a [foreign official with ministerial or clerical duties] for instance, to complete a form that ought, in equity, to be completed, to give everybody equal treatment, to move the goods off a dock which he will not move without a tip, a mordida, I think, as they call it in the Spanish language, a facilitating payment, or a grease payment would not constitute a bribe.”
Thus, when the FCPA was passed in December 1977 it specifically excluded from the definition of “foreign official” “any employee of a foreign government or any department, agency, or instrumentality thereof whose duties are essentially ministerial or clerical.” This was the FCPA’s original (albeit indirect) facilitating payment or grease exception. The relevant House Report states in pertinent part as follows: “… a gratuity paid to a customs official to speed the processing of a customs document would not be reached by this bill. Nor would it reach payments made to secure permits, licenses, or the expeditious performance of similar duties of an essentially ministerial or clerical nature which must be performed in any event.”
When Congress amended the FCPA in 1988 it, among other things, amended the definition of foreign official by removing this indirect facilitating payment exception from the “foreign official” definition by creating a stand-alone facilitating payment exception currently found in the statute. The relevant House Report indicates that Congress did not seek to disturb Congress’s original intent. “The policy adopted by Congress in 1977 remains valid, in terms of both U.S. law enforcement and foreign relations considerations. Any prohibition under U.S. law against this type of petty corruption would be exceedingly difficult to enforce, not only by U.S. prosecutors but by company officials themselves. Thus while such payments should not be condoned, they may appropriately be excluded from the reach of the FCPA. U.S. enforcement resources should be devoted to activities have much greater impact on foreign policy.”
Even if a payment does not meet the FCPA’s facilitation payments exception, in order for there to be a violation of the FCPA’s anti-bribery provisions, all statutory elements must be met including the “obtain or retain business” element.
To my knowledge, the enforcement theory that payments outside the context of foreign government procurement fall under the FCPA’s anti-bribery provisions has been subjected to judicial scrutiny three times. These three judicial decisions are summarized below.
Kay Trial Court
In 2001, David Kay and Douglas Murphy (“Defendants”), the president and vice president of Houston-based American Rice, Inc. (“ARI”), were criminally indicted. The indictment charged FCPA anti-bribery violations and alleged that the defendants made improper payments to Haitian “foreign officials” for the purpose of reducing customs duties and sales taxes owed by ARI to the Haitian government. The indictment, while specific as to other items, merely tracked the FCPA’s “obtain or retain business” language and did not specifically allege how the alleged payments assisted ARI in obtaining or retaining business in Haiti or what business was obtained or retained. As stated by the court: “In other words, the indictment recite[d] no facts that could demonstrate an actual or intended cause-and-effect nexus between reduced taxes and obtaining identified business or retaining identified business opportunities.”
In a case of first impression in the federal courts, the court granted Defendants’ motion to dismiss the indictment and held, as a matter of law based on the FCPA’s legislative history, that the alleged payments were not payments made to “obtain or retain business” and thus did not fall within the scope of the FCPA’s anti-bribery provisions. See 200 F.Supp.2d 681 (S.D. Tex. 2002).
Mattson / Harris
A few months after the trial court decision in Kay, the Southern District of Texas again considered whether payments made outside the context of foreign government procurement fall under the FCPA’s anti-bribery provisions. As noted in this previous post, the Mattson and Harris enforcement action (a civil enforcement action brought by the SEC) involved alleged goodwill payments to an Indonesian tax official for a reduction in a tax assessment. The SEC claimed that the FCPA’s unambiguous language plainly encompassed the goodwill payment and the issue before the court was whether the plain language of the FCPA prohibited goodwill payments for the purpose of reducing a tax assessment. The court noted that U.S. v. Kay had already dismissed that case finding that the plain language of the FCPA does not prohibit goodwill payments to foreign government officials to reduce a tax obligation. However, the SEC attempted to distinguish the trial court’s Kay ruling by arguing that in the civil enforcement context, the Court should interpret the FCPA’s language more liberally than in criminal cases. The court rejected the SEC’s arguments and followed the trial court’s analysis in Kay that the payments at issue to the Indonesian tax official did not violate the FCPA because it did not help Mattson’s and Harris’s employer (Baker Hughes) “obtain or retain business.” See this Memorandum and Order (Sept. 9, 2002). As noted in this release, the SEC dropped its appeal in July 2004.
Of interest is that Mattson’s lawyers, Martin Weinstein and Robert Meyer of Willkie Farr & Gallagher, were the lawyers identified in the New York Times articles who advised Wal-Mart in 2005 on an investigative work plan that was apparently rejected by Wal-Mart.
Kay Fifth Circuit Ruling
The DOJ appealed the 2002 decision of the Southern District of Texas dismissing the indictment and one issue on appeal was whether payments to “foreign officials” to obtain favorable tax and customs treatment can come within the scope of the FCPA’s anti-bribery provisions.
The Fifth Circuit, like the trial court, concluded that the FCPA’s “obtain or retain business” element was ambiguous and it thus analyzed the FCPA’s legislative history. See 359 F.3d 738 (5th Cir. 2004). The Fifth Circuit focused specifically on the U.S. Senate’s 1977 sponsored bill and the SEC report on which the Senate’s proposal was based. According to the court, the SEC report “exhibited concern about a wide range of questionable payments [including those at issue in Kay] that were resulting in millions of dollars being recorded falsely in corporate books and records.” Although the Fifth Circuit recognized that the Senate’s proposal did not expressly cover payments that seek to influence the administration of tax laws or seek a favorable tax treatment, the Senate, in the words of the court, “was mindful of bribes that influence legislative or regulatory actions, and those that maintain established business opportunities.”
In short, the Fifth Circuit was convinced that Congress intended to prohibit a range of payments wider than those that only directly influence the acquisition or retention of government contracts or similar arrangements. The Fifth Circuit held that making payments to a “foreign official” to lower taxes and custom duties in a foreign country can provide an unfair advantage to the payer over competitors and thereby assist the payer in obtaining and retaining business. The court concluded that there was “little difference” between these type of payments and traditional FCPA violations in which a company makes payments to a “foreign official” to influence or induce the official to award a government contract.
However, the Kay court empathically stated that not all such payments to a “foreign official” outside the context of directly securing a foreign government contract violate the FCPA; it merely held that such payments “could” violate the FCPA. According to the court, the key question of whether Defendants’ alleged payments constituted an FCPA violation depended on whether the payments were intended to lower ARI’s costs of doing business in Haiti enough to assist ARI in obtaining or retaining business in Haiti. The court then listed several hypothetical examples of how a reduction in custom and tax liabilities could assist a company in obtaining or retaining business in a foreign country. On the other hand, the court also recognized that “there are bound to be circumstances” in which a custom or tax reduction merely increases the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business.
The court specifically stated: “[I]f the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”
In short, the enforcement theory that payments outside the context of foreign government procurement satisfy the FCPA’s “obtain or retain business” has been subjected to judicial scrutiny three times.
The scorecard: US – 1; Defendants – 2; or if you prefer US – .5; Defendants – 2.5 (recognizing that the 5th Circuit decision is equivocal).
Contrary to popular misperception, Kay thus does not hold that all payments to a “foreign official” outside the context of foreign government procurement fall within the FCPA’s scope. Rather, the decision merely holds that Congress intended for the FCPA to apply broadly to payments intended to assist the payer, directly or indirectly, in obtaining or retaining business and that payments to a “foreign official” outside the context of foreign government procurement can, under appropriate circumstances, fall within the statute. Given the facts and circumstances the Kay court found relevant, it is highly fact-dependant analysis whether a payment to a “foreign official” satisfies the “obtain or retain business” element outside of the context of foreign government procurement.
A key portion from the Kay ruling likely relevant in Wal-Mart is the following: “there are bound to be circumstances” in which payments outside the context of foreign government procurement merely increase the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business.
Despite the equivocal nature of the Kay holding, (and the enforcement agencies overall losing record on the issue) the decision clearly energized the enforcement agencies and post-Kay there has been a significant increase in FCPA enforcement actions where the alleged improper payments involve customs duties and tax payments or are otherwise alleged to have assisted the payer in securing foreign government licenses, permits, and certifications which assisted the payer in generally doing business in a foreign country. For a listing of many such cases, see my scholarship, “The Facade of FCPA Enforcement” – here. None of the enforcement actions profiled therein were challenged or subjected to judicial scrutiny.
It thus remains an open question whether payments outside the context of foreign government procurement, in any particular case if subjected to judicial scrutiny, (i) would satisfy the FCPA’s “obtain or retain business” element; or (ii) are too attenuated to obtaining or retaining business (such as merely increasing the profitability of an existing profitable business) and thus, per the Kay holding, not a violation of this key FCPA anti-bribery element.
Does It Even Matter?
A logical and practical question then becomes, does it even matter? As in most FCPA enforcement actions, the answer in any future Wal-Mart FCPA enforcement action is likely no. At the end of the day it will not matter if Wal-Mart’s payments, if subjected to judicial scrutiny, would result in FCPA violations.
The short reason is that while Wal-Mart’s counsel can make valid and legitimate legal and factual arguments around conference room tables behind closed doors in Washington D.C., to truly challenge the DOJ in an instance of FCPA scrutiny, and to put the DOJ to its high burden of proof at trial, first requires that the company be criminally indicted, something few corporate leaders are willing to let happen. It is simply easier, more cost-efficient, and more certain to resolve FCPA scrutiny notwithstanding aggressive (and dubious) enforcement theories or the existence of valid and legitimate defenses. Also relevant to this issue is the existence of the “carrots” and “sticks” relevant to resolving FCPA enforcement actions. To learn more about these “carrots” and “sticks” please read my article “The Facade of FCPA Enforcement” – here.
To my knowledge, in the FCPA’s 35 year history, only two corporate defendants have put the DOJ to its high burden of proof in trial. Wal-Mart will not become the third. Even so, it is instructive to learn about the two instances in which corporate defendants have put the DOJ to its high burden of proof at trial.
The DOJ’s ultimate record? 0-2.
As noted in this prior post, in 1990, Harris Corporation (“Harris” – a publicly traded telecom provider), along with certain of its executives, were charged in a criminal indictment concerning conduct in Colombia. In 1991, the court, after hearing the prosecution’s case, granted a defense motion for a verdict of acquittal. The San Francisco Chronicle stated as follows. “Shortly after the government rested its case, U.S. District Judge Charles Legge of San Francisco ruled from the bench that ‘no reasonable jury’ could convict the company nor its executives on any of the five bribery-related counts for which they were indicted. Citing insufficient evidence, Legge said the government had failed to show any intent by the defendants to enter into a criminal conspiracy. Legge also said it was the first time in his six years on the federal bench that he had dismissed a criminal case at mid-trial for lack of evidence.”
As noted in this prior post, in December 2011 (after the DOJ had secured trial court jury verdicts convicting privately held Lindsey Manufacturing Company and its CEO and CFO of FCPA offenses), Judge Howard Matz (C.D. Cal). vacated the convictions and dismissed the indictment based on numerous prosecutorial misconduct issues that together added “up to an unusual and extreme picture of a prosecution gone badly awry.” In addition to prosecutorial misconduct, Judge Matz noted the “weakness of the Government’s case” and that the “case against the Lindsey Defendants was far from compelling.”
Will The SEC Be Put To Its Burden Of Proof In The Jackson And Ruehlen Enforcement Action?
As discussed in this previous post, in November 2010, Noble Corporation was one of several companies to resolve FCPA enforcement actions in what I called CustomsGate – enforcement actions largely focused on alleged payments to Nigerian customs officials to receive various permits. The Noble enforcement action involved both a DOJ and SEC component. Total settlement amount was approximately $8.2 million ($2.6 million criminal fine via a non-prosecution agreement; $5.6 million in disgorgement and interest via a SEC complaint).
As noted in the previous post, in the Noble Corporation enforcement action it was stated, not once but twice, that the payments at issue “would not constitute facilitation payments for routine governmental actions within the meaning of the FCPA.” I noted then that one can reasonably conclude that if the DOJ felt the need to express such a statement twice, that the FCPA’s facilitating payment exception should probably be on the minds of many in connection with the CustomsGate enforcement actions.
Against the backdrop of recent and well-deserved scrutiny of the DOJ’s FCPA enforcement program, the SEC reminds us all that it too can enforce the FCPA. [As an aside, Professor Barbara Black (University of Cincinnati College of Law) recently released her forthcoming scholarship – see here – “The SEC and the Foreign Corrupt Practices Act: Fighting Global Corruption is Not Part of the SEC’s Mission].
Last Friday, the SEC announced here charges against “three oil services executives with violating the FCPA by participating in a bribery scheme to obtain illicit permits for oil rigs in Nigeria in order to retain business under lucrative drilling contracts.”
In this complaint filed in the S.D. of Texas, the SEC charged Mark Jackson (former Noble Corporation CEO) and James Ruehlen (current Director and Division Manager of Noble’s subsidiary in Nigeria) based on the same core set of facts relevant to the prior corporate enforcement action – namely that Noble and its wholly-owned subsidiary (Noble-Nigeria) “authorized its customs agent to pay bribes” on the companies behalf “to Nigerian government officials to influence or induce them to (1) favorably process false paperwork, (2) grant temporary import permits (TIPs) based on the false paperwork, and (3) favorably exercise or abuse their discretion in granting extensions to these illicit TIPs.”
The complaint (a meaty 46 pages) next states, in summary fashion, as follows.
“Defendants approved payment of the bribes. Defendant Ruehlen also assisted the customs agent in preparing false documents, processed the customs agent’s invoices for the bribes, and signed the checks reimbursing the customs agent for the bribes he paid to Nigerian government officials. Defendants acted in this way to obtain TIPs and TIP extensions and retain business under drilling contracts in Nigeria. As a consequence, Defendants violated the anti-bribery provisions [of the FCPA.] Defendants also took steps to circumvent Noble’s internal controls and to falsely record these bribes as legitimate operating expenses on Noble’s books. Defendant Jackson failed to implement internal accounting controls to prevent the bribery and false recording of the bribes. As a consequence, Defendants violated the records falsification and internal control provisions of the Exchange Act and aided and abetted Noble’s violations of the books and records and internal control provisions [of the FCPA]. Defendant Jackson misled Noble’s auditors about the bribes and signed certifications required by the Sarbanes-Oxley Act of 2002 falsely stating that he had created and maintained effective internal controls, and that there were no internal control weaknesses, fraud or FCPA violations. As a consequence, Jackson violated Rules 13b2-2 and 13a-14 of the Exchange Act. During the violations, Jackson was Noble’s Chief Financial Officer, Chief Operating Officer, and ultimately President and Chief Executive Officer, and Chairman of the Board of Directors. Jackson directly or indirectly controlled Noble, Defendant Ruehlen, and others, and therefore is liable as a control person under Section 20(a) of the Exchange Act for all of their violations.”
[For previous Section 20(a) control person (or similar) FCPA enforcement actions – see here and here.]
Unlike the vast majority of FCPA defendants (corporate and individual) charged in an SEC enforcement action, Jackson and Ruehlen appear poised to launch a defense.
Jackson’s lawyer, David Krakoff (here – BuckleySandler) stated as follows. “We unequivocally deny the SEC’s baseless allegations. Mr. Jackson will vigorously defend himself in court where the evidence will show what the SEC already knows, that at all times Mr. Jackson acted in good faith at Noble. He looks forward to clearing his good name in this proceeding.”
Ruehlen’s lawyer F. Joseph Warin (here – Gibson Dunn & Crutcher) told the Wall Street Journal that his client was the one who initially raised concerns about the payments and that Ruehlen “fully cooperated throughout the investigation and always acted in an ethical and transparent manner.” Warin stated that “the claims against Mr. Ruehlen are wrong and they will be proven so at trial.”
This will be most interesting to follow as the SEC is rarely put to its burden of proof in FCPA enforcement actions (or any of its actions for that matter). This is due to the SEC’s long-standing policy of allowing defendants to settle SEC complaints without admitting or denying the SEC’s allegations. For recent judicial scrutiny of this settlement device, see this prior post.
The last time the SEC is believed to have been put to its burden of proof in an FCPA enforcement action was in the Eric Mattson and James Harris enforcement action also filed in the S.D. of Texas. Like the Jackson and Ruehlen enforcement action, the Mattson and Harris enforcement action involved conduct outside the context of foreign government procurement. As detailed in this Memorandum and Order, the SEC had its FCPA anti-bribery charges dismissed in that case. The case involved alleged goodwill payments to an Indonesian tax official for a reduction in a tax assessment. The SEC claimed that the FCPA’s unambiguous language plainly encompassed the goodwill payment and the issue before the Court was whether the plain language of the FCPA prohibited goodwill payments for the purpose of reducing a tax assessment. When Mattson and Harris was decided, the S.D. of Texas in U.S. v. Kay case had already dismissed that case finding that the plain language of the FCPA does not prohibit goodwill payments to foreign government officials to reduce a tax obligation. The SEC attempted to distinguish the trial court’s Kay ruling by arguing that in the civil enforcement context, the Court should interpret the FCPA’s language more liberally than in criminal cases. The Court rejected the SEC’s arguments and followed the trial court’s analysis in Kay that the payments at issue to the Indonesian tax official did not violate the FCPA because it did not help Mattson’s and Harris’s employer (Baker Hughes) “obtain or retain business.”
Of course, the 5th Circuit overturned the Kay trial court ruling and held that making payments to a “foreign official” to lower
taxes and custom duties in a foreign country can provide an unfair advantage to the payer over competitors and thereby assist the payer in obtaining and retaining business. However, the Kay court emphatically stated that not all such payments to a “foreign official” outside the context of directly securing a foreign government contract violate the FCPA; it merely held that such payments “could” violate the FCPA. The 5th Circuit then listed several hypothetical examples of how a reduction in custom and tax liabilities could assist a company in obtaining or retaining business in a foreign country. On the other hand, the court also recognized that “there are bound to be circumstances” in which a custom or tax reduction merely increases the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business. The court specifically stated: “[i]f the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”
The point of this extended discussion in the context of Jackson and Ruehlen is two-fold: (1) that the SEC has already lost a non-government procurement FCPA case in the S.D. of Texas; and (2) even with the 5th Circuit precedent in Kay, and even taking the SEC’s allegations as true, payments in connection with TIPs would seem to be only to increase the profitability of an existing profitable company and thus – following the logic of the Fifth Circuit – fall outside of the FCPA’s anti-bribery provisions.
It will be interesting to see how this plays out should the SEC’s FCPA anti-bribery charges be fully litigated in the Jackson and Ruehlen enforcement action.
As noted in the SEC’s release last week, the Noble executive enforcement action also involved a separate complaint (here) against Thomas O’Rourke (the former controller and head of internal audit at Noble). The complaint alleged that O’Rourke: (1) aided and abetted Noble’s violations of the FCPA anti-bribery provisions, books and records and internal controls provisions; and (2) directly violated the FCPA’s internal controls provisions and false records provisions of the Exchange Act.
Under the heading “defendants’ violations” the SEC alleged, among other things, that O’Rourke: (1) “understood that Noble-Nigeria had used false paperwork to obtain TIPs, and that Noble-Nigeria paid its customs agent for ‘special handling charges’ that were passed through to Nigerian officials; (2) “knew that the ‘special handling charges’ were entered into Noble-Nigeria’s books as legitimate operating expenses, and he knew or was reckless in not knowing that those entries were improper”; (3) “knowingly allowed TIP-related payments to government officials to be improperly accounted for as legitimate operating expenses.
Like the vast majority of FCPA defendants in SEC enforcement actions, O’Rourke chose to settle the SEC’s complaint without admitting or denying the SEC allegations. According to the SEC release, O’Rourke consented to entry of a court order requiring him to pay a $35,000 civil penalty and permanently enjoining him from future violations.
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Last week I participated in a discussion with Howard Sklar regarding a potential FCPA compliance defense (see here for the webcast.) In the aftermath of the SEC’s charges against the Noble executives, Sklar penned a Forbes blog (here) and stated as follows. “One example Mike brings to prove his point [that the FCPA should be amended to include a compliance defense] is the Panalpina line of cases, including Noble. I don’t think he’ll be able to use the Noble case as an example after today. These complaints are against the CEO (who formerly held the CFO spot) and the country leader for Nigeria. Plus, there’s Thomas O’Rourke. Thomas O’Rourke was Noble’s Director of Internal Audit, Controller, and VP of Internal Audit.”
Nice try Howard, but you are off-target.
Sklar is correct that I discuss the Noble Corp. enforcement action (and other related CustomsGate enforcement actions) in my “Revisiting a Foreign Corrupt Practices Act Compliance Defense” article (see here at pgs. 9-12 ). However, that discussion is focused on specific reasons warranting an FCPA compliance defense, including that in many markets, companies subject to the FCPA must navigate challenging environments replete with barriers and other conditions that serve as breeding grounds for payments implicating (at least in the eyes of the enforcement agencies) the FCPA.
In discussing harassment bribes, I then talk about the notoriously corrupt Nigerian Customs Service (“NSC”) and how business interactions with NSC officials have been the basis for several FCPA enforcement actions including the coordinated enforcement actions from November 2010 involving Noble Corp. and others. Anticipating the counter-argument that the FCPA does not need a compliance defense due to the harassment bribery conditions many companies face in foreign markets because the FCPA already contains a facilitating payments exception, I then stated that so long as the DOJ refuses to recognize a facilitating payments exception to the FCPA, that Congressional intent on the facilitating payments issue is best advanced through an FCPA compliance defense in which a company can assert, as a matter of law, that its pre-existing FCPA policies and procedures sought to prevent such payments in foreign markets.
In short, I was using the Noble Corporation enforcement action in connection with a discussion of facilitating payments, not using that particular enforcement action to support an FCPA compliance defense because it somehow was based on low-level employee conduct. Indeed, in the DOJ’s non-prosecution agreement (here) which I discussed in this previous post, “Senior Executive,” “Executive A” and “Executive B” are all specifically mentioned as participating in the alleged improper conduct and an FCPA compliance defense would not apply to corporate conduct engaged in by executive officers.
The point of the Noble Corp. reference in my article was that the company should not have been the subject of an FCPA enforcement action based on the alleged conduct because Congress intended to exempt such payments from the FCPA’s anti-bribery provisions (regardless of who made, directed, or authorized the payments).
Friday Roundup
Another “foreign official” challenge is denied, the DOJ’s FCPA door continues to revolve, and one DOJ official is probably glad he is off the hot seat … it’s all here in the Friday roundup.
O’Shea “Foreign Official” Challenge Denied
The remaining “foreign official” challenge of 2011 (brought by John Joseph O’Shea in his case pending in the Southern District of Texas) has been denied. (See here for the previous post including links to the briefing on the issue). Without issuing a written decision, Judge Lynn Hughes (S.D. Tex.) denied O’Shea’s motion to dismiss the indictment based on O’Shea’s argument that employees of Comision Federal de Electricidad (“CFE”), a Mexican utility and the same entity that was at issue in the Lindsey Manufacturing “foreign official” challenge, are not “foreign officials” under the FCPA.
O’Shea’s “foreign official” challenge was the fifth such challenge in FCPA history and the second (Nguyen / Nexus Technologies being the other) to end without a written decision. The other three challenges Haiti Teleco related case (here), Lindsey Manufacturing (here) and Carson et al. (here) resulted in written decisions.
Revolving Door
Hank Walther, the former Assistant Chief of the DOJ’s FCPA Unit (and most recently the former Deputy Chief of the DOJ’s Health Care Fraud Unit) recently joined the law firm Jones Day as a partner. Walther joins a long-list of former DOJ FCPA enforcement attorneys who will now be providing FCPA defense and compliance services in the private sector. In a release (here) Greg Shumaker (Partner-In-Charge of Jones Day’s Washington office) said as follows. “Hank Walther brings a wealth of experience and insight from his years in government. The unique perspective he has gained from prosecuting hundreds of health care fraud and FCPA cases on behalf of the federal government will add tremendously to our Corporate Criminal Investigations Practice. We’re delighted he’s chosen Jones Day for his return to the private sector.”
I agree that Walther likely has unique insight and perspectives from his years of enforcing the FCPA. I also believe that DOJ enforcement attorneys who aggressively enforce a niche law have the potential ability to increase private-sector demand for their post-government services. That is why I continue to believe it is in the public interest (recognizing the niched nature of both the DOJ and SEC FCPA units) that all FCPA enforcement attorneys should be prohibited when leaving the government from providing FCPA defense or compliance services for a five-year time period. For additional reading see this piece I co-authored.
Off The Hot Seat
Lisa Brennan (Main Justice) reports (here) that Greg Andres (a former Deputy Assistant Attorney General in the Fraud Section) is returning to the U.S. Attorneys Office – Eastern District of New York. In certain respects, during the past year, Andres was the DOJ’s voice on FCPA enforcement and reform issues. Andres testified on behalf of the DOJ at the November 2010 Senate FCPA hearing (see here and here for more) as well as the June 2011 House Hearing (see here for more).
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A good weekend to all.
Africa Sting Development – “Mr. Giordanella, You Are Excused … You Are Free To Go”
In the first Africa Sting trial this past summer, Judge Richard Leon granted defendant Pankesh Patel’s Rule 29 acquittal motion at the end of the DOJ’s case as to a substantive FCPA charge. (See here for the prior post). Judge Leon also dismissed a substantive FCPA violation as to defendant Lee Allen Tolleson and dismissed a money laundering charge as to all four defendants (Patel, Tolleson, Andrew Bigelow, and John Benson Weir). Thereafter, Judge Leon declared a mistrial as to the remaining charges against the defendants. (See here for the prior post). In short, the DOJ’s “turning point” prosecution did not go so well.
Undeterred, the DOJ plowed ahead with the second (of four) trials in its manufactured case against defendants John Mushriqui, Jeana Mushriqui, Patrick Caldwell, Stephen Giordanella, John Godsey, and Mark Morales. Opening arguments were held in September – see here for the prior post. The DOJ’s case is not going so well.
Earlier today, Judge Leon ruled on defendants’ Rule 29 acquittal motions. In a significant rebuke to the DOJ’s conspiracy charge against all defendants, Judge Leon granted defendants’ motion. Judge Leon stated as follows. “[V]iewing the evidence in the light most favorable to the Government, the Court does not believe the Government has produced sufficient evidence to enable a rational trier of fact to conclude beyond a reasonable doubt that each of these six defendants participated in the overarching conspiracy charged in the superseding indictment in this case.
The only charge against Giordanella was the conspiracy charge, thus Judge Leon stated as follows. “Mr. Giordanella, you are excused […] you are free to go.” Giordanella was represented by Paul Calli and Stephen Bronis of Carlton Fields (see here and here). In a firm release, Bronis stated as follows. “The Court found that government had not presented sufficient evidence to establish the existence of the charged crime. We are grateful the Court made the correct and just ruling. Mr. Giordanella is grateful to be exonerated, and can now begin to put this unnecessary and unfortunate experience behind him.” Calli stated as follows. “Mr. Giordanella was innocent and should never have been accused in the conspiracy. In many respects, Mr. Giordanella’s indictment in the DOJ’s fake Gabon sting operation conspiracy represents a prosecution at its most dangerous.”
In addition, Judge Leon granted acquittal motions as to substantive FCPA charges against defendants John and Jeana Mushriqui (counts 5 and 6 of the superseding indictment – see here). Judge Leon stated as follows. “Neither John nor Jeana Mushriqui had, according to the evidence in this case, the requisite knowledge of the corrupt nature of the Gabon deal that would be necessary with regard to the events on May 22nd of ’09 when Ms. Mushriqui had traveled to Washington, D.C. for the pitch meeting and when a call was placed by Mr. Bistrong to Ms. Mushriqui during that meeting to discuss the deal when he was in the Middle East.”
The Mushriqui’s and the other remaining defendants still face certain other FCPA substantive charges and the defense began presenting its case this afternoon.
The Siemens Argentina Individual Enforcement Actions Are A Step Forward, But Issues Remain
Last week (see here for the prior post) the DOJ and SEC brought FCPA enforcement actions against several former executives and agents of Siemens. As noted in this initial post, the enforcement action comes nearly three years after the Siemens corporate enforcement action, a portion of which concerned improper conduct in Argentina and allegations that Siemens S.A. (Argentina), and those acting on its behalf, engaged in a bribery scheme in connection with an Argentine government contract to produce national identity cards.
The Siemens Argentina individual enforcement actions were brought after the DOJ faced scrutiny for not bringing any individual enforcement action in connection with a bribery scheme “unprecedented in scale and geographic reach” in which there existed at Siemens a “corporate culture in which bribery was tolerated and even rewarded at the highest levels of the company.”
Thus, the Siemens Argentina individual enforcement actions with allegations (and that is all they are at this point) of individual improper conduct are a welcome development and the DOJ ought to be recognized for bringing what will likely be a difficult case to prosecute. Among other things, extradition issues loom, and many of the defendants are likely to aggressively mount a defense.
While a welcome development, two facts remain unchanged by last week’s development.
First, Siemens itself was never charged with FCPA anti-bribery violations for the same conduct its former employees and agents are now facing FCPA anti-bribery charges. The reason is that FCPA anti-bribery charges would have hurt Siemens too much. In its sentencing memorandum (here), the DOJ in explaining its charging decisions specifically stated as follows. “The Department’s analysis of collateral consequences included the consideration of the risk of debarment and exclusion from government contracts.” As noted last week in a Wall Street Journal article by Vanessa Fuhrmans “Shrugging Off Bribery Case, Siemens Gains Favor in the U.S.” (here), “three years after Siemens AG reached a record foreign-bribery settlement with U.S. authorities, the German industrial conglomerate is capitalizing on business from an unexpected place—the U.S. government.” Among things, the article notes that “Siemens today isn’t just benefitting from its ongoing business with the government. It’s made capturing more business and influence in Washington a central part of its U.S. strategy.”
In short, the notion that certain companies selling certain products to certain customers are essentially immune from FCPA anti-bribery scrutiny remains a troubling issue, notwithstanding last week’s development.
[Incidentally, under the FCPA’s former so-called Eckhardt amendment, the lack of FCPA anti-bribery charges against Siemens would have precluded the FCPA anti-bribery charges the individuals now face. See U.S. v. McLean, 738 F.2d 655 (5th Cir. 1984) (“[B]oth the language of the Act and its legislative history reveal a clear intent to impose criminal sanctions against the employee who acts at the behest of and for the benefit of his employer only where his employer has been convicted of similar FCPA violations. […] We hold that in order to convict an employee under the FCPA for acts committed for the benefit of his employer, the government must first convict the employer.”]
Second, even with last week’s development, the fact remains that the DOJ and SEC have addressed – through individual enforcement actions – only a sliver of the conduct at issue in the 2008 enforcement action. As alleged by the enforcement agencies, the corruption at Siemens involved more than $1.4 billion in bribes to government officials in Asia, Africa, Europe and the Americas. As alleged (see here) “among the transactions on which Siemens paid bribes were those to design and build metro transit lines in Venezuela; metro trains and signaling devices in China; power plants in Israel; high voltage transmission lines in China; mobile telephone networks in Bangladesh; telecommunications projects in Nigeria; national identity cards in Argentina; medical devices in Vietnam, China, and Russia; traffic control systems in Russia; refineries in Mexico; and mobile communications networks in Vietnam.”
Some individual or individuals presumably paid or authorized these numerous non-Argentina bribes. If last week’s development is the only individual enforcement actions resulting from the 2008 Siemens enforcement action, continued scrutiny and asking of the why questions is warranted.
What other egregious corporate FCPA enforcement action might yield future individual enforcement actions? Based on the DOJ’s allegations, Daimler would seem like a good bet. See here for the prior post.