The DOJ Uses Its Full Toolbox
The Foreign Corrupt Practices Act Guidance rightly notes that “the FCPA does not cover every type of bribe paid around the world for every purpose.”
Among other limitations, the FCPA’s anti-bribery provisions require the existence of a “foreign official” and the FCPA’s books and records and internal control provisions apply only to issuers.
Moreover, the FCPA is a supply-side statute and does not capture the demand-side of bribery (i.e. the foreign officials who received the bribes, see U.S. v. Castle).
Two enforcement actions announced by the DOJ earlier this week demonstrate these points and how the U.S. government’s fight against bribery and corruption is broader than just the FCPA.
PDVSA Petition Seeking “Victim” Status Is An Uphill Climb
Last week, Bariven S.A. (a subsidiary of Petroleos de Venezuela, S.A. (“PDVSA”) – the state-owned oil company of the Venezuela) made this filing in the DOJ’s Foreign Corrupt Practices Act prosecution against Enrique Rincon Fernandez, Abraham Jose Shiera Bastidas, Moises Abraham Millan Escobar and related prosecution against others moving “the Court to recognize Bariven’s rights as a victim and enter an order of restitution requiring [the defendants] jointly and severally, to make restitution [to the tune of $600 million] to Bariven as a victim of the offenses to which these Defendants have plead guilty.”
If this general issue sounds familiar, congratulations you have a good memory.
As highlighted in prior posts here, here, and here, Instituto Constarricense de Electricidad (“ICE”) of Costa Rica tried the same thing in connection with the Alcatel-Lucent FCPA enforcement action and its petition received a chilly reception by both the trial court the 11th Circuit.
PDVSA’s petition likewise faces an uphill climb.
Olympus Latin America Pays $22.8 Million In Latest FCPA Enforcement Action To Allege That Health Care Professionals Are “Foreign Officials”
Earlier this week, the DOJ announced (as part of a much larger enforcement action) a Foreign Corrupt Practices Act action against Olympus Latin American Inc. (OLA), a Miami-headquartered company that distributes medical imaging equipment in the Caribbean, Central America, and South America for Olympus Corporation (a Japanese company).
This post highlights the OLA enforcement action (the latest FCPA enforcement based on the theory that certain health care professionals are “foreign officials” under the FCPA) in which the DOJ charged the company in this criminal complaint with conspiring to violate the FCPA’s anti-bribery provisions and violating the FCPA’s anti-bribery provisions. The charges were resolved via this deferred prosecution agreement in which OLA agreed to pay $22.8 million.
According to the charging documents, from 2006 to 2011 OLA provided approximately $3 million in “hundreds of unlawful payments” to publicly employed healthcare professionals in Brazil, Bolivia, Colombia, Argentina, Mexico, and Costa Rica to “induce the purchase of Olympus products, influence public tenders, or prevent public institutions from purchasing or converting to the technology of competitors.” According to the charging documents, OLA recognized approximately $7.5 million in profits as a result of the alleged unlawful payments.
Supreme Court To Address The Meaning Of “Official Action”
The core of the FCPA’s anti-bribery provisions prohibit the direct or indirect payment or offering of money or anything of value to a “foreign official” for purposes of: (A) (i) influencing any act or decision of such foreign official in his official capacity, (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage; or (B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality in order to assist the payor in obtaining or retaining business for or with, or directing business to, any person. (emphasis added).
While not a Foreign Corrupt Practices Act case, in a related development the U.S. Supreme Court recently agreed to hear former Virginia Governor Robert McDonnell’s criminal appeal.
The Supreme Court agreed to hear the following question presented as stated in the petition.
“The question presented is whether ‘official action’ is limited to exercising actual governmental power, threatening to exercise such power, or pressuring others to exercise such power, and whether the jury must be so instructed.”
As stated elsewhere in the petition:
“[McDonnell] was convicted on federal corruption charges based on the theory that he accepted otherwise-lawful gifts and loans in exchange for taking five supposedly “official acts.” Yet those five acts—as alleged in the indictment, argued to the jury, and relied on by the courts below—were limited to routine political courtesies: arranging meetings, asking questions, and attending events. There is no dispute that Gov. McDonnell never exercised any governmental power on behalf of his benefactor, promised to do so, or pressured others to do so.
[…]
The courts below nonetheless reasoned that arranging a meeting to discuss a policy issue, or inquiring about it, is itself “official” action “on” that issue—even if the official never directs any substantive decision.
[…]
This is the first time in our history that a public official has been convicted of corruption despite never agreeing to put a thumb on the scales of any government decision. Officials routinely arrange meetings for donors, take their calls, and politely listen to their ideas. By affirming the convictions and endorsing the instructions below, the Fourth Circuit construed “official action” so broadly that it made these commonplace actions federal felonies whenever a jury infers a link to the donor’s contributions.”
In recent years the Supreme Court has issued several opinions in non-FCPA cases, yet in those opinions addressed issues that touch upon FCPA enforcement. (See here for discussion of McCutcheon v. FEC and Daimler A.G. v. Bauman. See here for discussion of SEC v. Gabelli and Kiobel v. Royal Dutch Shell Petroleum).
Thus, the McDonnell case is one to keep an eye on.
The SEC Gets Creative In Also Bringing An Enforcement Action Against Standard Bank
Previous posts here, here, and here have highlighted and analyzed the U.K. enforcement action against Standard Bank (SB) based on allegations that a former “sister company” inserted a local partner into a private placement bond offering on behalf of the Government of Tanzania that was used to facilitate improper payments to government officials.
The end result of this was that SB’s fee in the $600 million offering was not 1.4% but 2.4% (with the additional 1% being paid to the local partner).
The Judge in the U.K. matter concluded that there was insufficient evidence to suggest that any SB employees committed a bribery offense and that were was no evidence “that anyone within Standard Bank knew that two senior executives [at the former sister company] intended the payment to constitute a bribe, or so intended it themselves.”
Elsewhere the Judge repeated: “the evidence does not reveal that executives or employees of Standard Bank intended or knew of an intention to bribe.”
Nevertheless, SB was charged with a Sec. 7 violation of the Bribery Act for failing to prevent bribery (a first in the U.K. in connection with foreign bribery) and agreed to pay approximately $33 million to resolve the matter via a deferred prosecution agreement (also a first in the U.K.).
The SEC also got in on the action by announcing a $4.2 million enforcement action (via an administrative action) against Standard Bank for violating Section 17(a)(2) of the Securities Act of 1933 (’33 Act) based on the same core conduct alleged in the U.K. action.
The SEC’s release states: “The SEC did not have jurisdiction to bring charges under the FCPA because Standard was not an “issuer” as defined by that Act.”
Not to suggest that an FCPA enforcement action against SB was warranted, but truth be told the SEC has previously brought Foreign Corrupt Practices Act enforcement actions against non-issuers.
For instance, in 2010 the SEC brought a $11.3 million FCPA enforcement action against Panalpina Inc. even though the SEC acknowledged in its complaint that the company was not “an issuer for purposes of the FCPA.” Rather, the enforcement action was premised on allegations that Panalpina “while acting as an agent of its issuer customers” violated the FCPA and that Panalpina “also aided and abetted its issuer customers’ violations.” Similarly, in a $125 million FCPA enforcement action in 2010 in connection with Bribery Island, Nigeria conduct the SEC included as a defendant Snamprogetti Netherlands B.V.
Back to the SEC’s enforcement action against SB.
Unlike the FCPA which is part of the Securities Exchange Act of 1934, as indicated above, Section 17(a)(2) is the part of the ’33 Act, a statutory scheme that broadly governs the offering of securities.
Specifically, Section 17(a)(2) states, under the heading “Fraudulent Interstate Transactions,” as follows.
“It shall be unlawful for any person in the offer or sale of any securities (including security-based swaps) or any security-based swap agreement … by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly—
(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.”
Key elements of a Section 17(a)(2) violation are thus materiality and use of U.S. interstate commerce or mail. (For an informative article about Section 17(a)(2) see here).
As mentioned above, the SEC’s administrative order was based on the same core conduct alleged in the U.K. action. In summary fashion, the order states:
“This case involves Standard Bank Plc’s (“Standard”) failure to disclose payments made by Standard’s affiliate, Stanbic Bank Tanzania, Limited (“Stanbic”), in connection with $600 million of sovereign debt securities issued by the Government of Tanzania (“GoT”) in 2013. Standard (an international investment bank located in London) was aware that its affiliate, Stanbic, paid $6 million of the proceeds of the offering to an entity called Enterprise Growth Markets Advisors Limited (“EGMA”). Standard failed to disclose the existence of EGMA and the fees it was to receive. At all relevant times, EGMA’s chairman and one of its three shareholders and directors was a representative of the GoT. Several red flags indicated the risk that the portion of the offering proceeds paid to EGMA by Stanbic was intended to induce the GoT to grant the mandate for the transaction to Standard and Stanbic. Standard acted as joint Lead Manager in the offering of Tanzanian sovereign debt securities without disclosing that EGMA was involved in the transaction and would receive a substantial fee in connection with the transaction.”
Under the heading “Standard’s Failure to Disclose,” the order states:
“Standard was negligent in not taking any steps to understand what role EGMA would be playing in the transaction in return for its $6 million fee and there are no records of contemporaneous communications among Standard and Stanbic personnel concerning the ownership of EGMA, its relationship to the GoT, or why it was being made part of the transaction.
[…]
The investor representation letter failed to include material facts about the transactions namely any mention of EGMA, its shareholders’ ties to the GoT, its lack of a substantive role in the transaction, and that it was to receive a $6 million fee.
[…]
Standard did not disclose the involvement of EGMA and the fee EGMA was to receive.”
As to the jurisdictional nexus in Section 17(a)(2), the order states:
“On February 27, 2013, the GoT issued its floating-rate amortizing, unrated, unlisted, sovereign bonds through a Regulation S private placement. As set forth in the transaction documents, the gross proceeds of $600 million were transferred by the facility agent to the GoT’s account in New York, on March 8, the GoT then transferred the total 2.4% fee of $14.4 million to Stanbic in Tanzania. Stanbic deposited EGMA’s 1% fee, or $6 million, into an account EGMA had previously opened at Stanbic. After EGMA made payments of the legal costs related to the transaction, approximately $5.2 million of its $6 million was withdrawn in cash between March 18 and 27, 2013. Standard did not become aware of those cash withdrawals until after they were made, and does not have knowledge as to the ultimate disposition of those withdrawn funds.”
In conclusion, the SEC order states:
“By offering the Tanzanian sovereign bonds, Standard had a duty to disclose to investors material facts that it knew or should have known concerning the transaction.
As a result of the conduct in failing to disclose the material facts described above, Respondent committed violations of Sections 17(a)(2) of the Securities Act.”
Other than mentioning the conclusory legal term “material” three times, the SEC’s order contains no specifics regarding this required legal element. The standard definition of material is whether there is a substantial likelihood that the information would be viewed by the reasonable investor as having significantly altered the total mix of information made available concerning the security.
It is a highly dubious proposition that the 116 sophisticated, institutional investors that participated in the $600 million private placement offering would have viewed the participation of EGMA and its 1% fee as being material.
As noted in the SEC’s release:
“The SEC’s order requires Standard to cease and desist from committing or causing any violations and any future violations of Section 17(a)(2) of the Securities Act of 1933 that prohibits obtaining money by any materially untrue statement or omission, and to pay a $4.2 million civil penalty. The order also requires Standard to pay disgorgement of $8.4 million, which the Commission has deemed satisfied by a payment of equal amount in the U.K. matter.”
In the SEC release, Gerald Hodgkins (Associate Director of the SEC’s Division of Enforcement) states:
“Standard failed to disclose EGMA’s involvement in the bond offering to investors despite red flags suggesting some of the proceeds of the offering were going to EGMA for the purpose of influencing the Tanzanian Government’s selection of bankers for the transaction. This action against Standard demonstrates that when suspicious payments made anywhere in the world result in tainted securities offerings in the United States, the SEC is fully committed to taking action against the responsible parties.”