Interesting, Significant and Bold
Last week I had the pleasure of participating in Securities Docket’s Year in Review webcast (see here for viewing – the FCPA portion begins at about 51 minutes).
For those of you who missed the event, below are my thoughts on four significant events from 2010, three interesting events from 2010, and two bold predictions for 2011.
The FCPA in 2010 was interesting, significant, and bold all at once. Among other things, it was a year in which Assistant Attorney General Lanny Breuer declared a “new era of FCPA enforcement.” (see here).
Significant Events
The Foreign Corrupt Practices Act
If anyone out there still believes that the FCPA is a law that only applies to U.S. companies, you clearly have been living under a rock.
2010 was the year of non-U.S. companies resolving FCPA exposure.
BAE (here)(I am hesitant to call this matter an FCPA enforcement action because it wasn’t, but everyone seems to be doing so), Daimler (here), Technip (here), Eni/Snamprogetti (here), ABB (here), Panalpina (here), and most recently Alcatel-Lucent (more in a future post).
It has been reported that approximately 90% of 2010 FCPA fines and penalties were paid by foreign companies.
I expect this trend to continue – albeit perhaps not at the level seen in 2010. The 4th member of the JV involved in Bonny Island bribery – JGC of Japan – has yet to settle, certain of the medical device and pharma companies that have disclosed FCPA issues are non-U.S. companies, and an emerging trend I see is an increased focus on China-based issuers. For instance, last year, 25% of the IPOs were China based issuers and last month, Rino International (see here) disclosed an FCPA inquiry, the first time I believe a China-based issuer has been the focus of an FCPA inquiry.
Two Tiers of Justice
Under basic rule of law principles, the law is to be equally and consistently applied to all subject to the law, regardless of how big or small the company is and regardless of what type of company is involved.
In a troubling trend, two tiers of justice have emerged from FCPA enforcement.
If the company is a large multinational company, the company will end up paying large fine, but chances are the company will not be charged with FCPA anti-bribery violations.
For instance, the DOJ’s allegations against BAE (see here) included that the company provided various benefits – through U.S. payment mechanisms – to influence Saudi officials through and through other conduct that clearly had a U.S. nexus. Yet, BAE, one of the world’s largest defense contractors, was not charged with any FCPA anti-bribery violation.
Daimler, according to the DOJ (see here), had a corporate culture that tolerated and/or encouraged bribery and its numerous bribery schemes involved various high-ranking executives. Yet, Daimler, was not charged with any FCPA anti-bribery violations.
It’s bribery yet no bribery, and it contributes to what I’ve called the façade of FCPA enforcement (see here).
While certain companies in certain industries appear immune from FCPA anti-bribery charges, in other instances, instances generally involving small companies such as Nexus Technologies (here) or Lindsey Manufacturing (here), the DOJ seems to come out with guns a blazing and criminally indicts the company for violating the FCPA. One can legitimately ask what did these companies do that BAE, Daimler, and some other companies didn’t do?
The two tiers of justice is also present when it comes to individual enforcement actions. As was highlighted in the recent Senate hearing, one odd aspect of the most high-profile, egregious instances of corporate bribery is that, for the most part, no individuals are charged. Yet in cases that can only be called minor in comparison, Nexus Technologies, Lindsey Manufacturing and the Haiti Teleco cases come to mind, the DOJ again seems to come out with guns a blazing and criminally indicts multiple individuals.
Companies that commit bribery on a major scale, involving hundreds of millions dollars, are still able to secure multi-million dollar U.S. government contracts (see here and here). On the other hand, individuals like Charles Jumet are sent to prison for nearly 7 years for making a $200,000 payment to secure a lighthouse and buoy contract and conspiring to violate the same law that major companies are apparently immune from violating. (See here).
DOJ officials frequently talk about the rule of law (here), and the importance of consistency and transparency in charging decisions (here), but these examples raise the issue of whether such principles are followed when it comes to FCPA enforcement.
Is the Facilitating Payments Exception Meaningless?
When Congress passed the FCPA in 1977 and amended it in 1988 it clearly understood and accepted that the statute was not going to cover every conceivable unethical payment made in transacting overseas business. (See here). The legislative history is clear on this point and that is why the FCPA contains an express exception for so-called facilitating or grease payments.
Yet one can legitimately ask whether this exception intended by Congress has any meaning.
In November, a group of companies collectively paid approximately $235 million to settle FCPA enforcement actions principally involving import permits for oil rigs, other customs and duty payments to Nigerian officials, and payments to expedite shipment of product in Nigeria and some other jurisdictions. (See here for a summary of the CustomsGate enforcement actions).
It seems a bit silly when several major companies settle an FCPA enforcement action for this amount of money to ask the question – did the conduct at issue even violate the FCPA, but this question should be asked in connection with the CustomsGate enforcement actions. It is also a question that can legitimately be asked as to several other recent FCPA enforcement actions that involve permits, licenses, certifications and other administrative tasks that have nothing to do with obtaining or retaining government contracts.
The issue as I see it is not whether such payments are ethical, but whether such payments violate the narrow anti-bribery provisions Congress intended and whether, once again, the DOJ and the SEC are actually enforcing the FCPA as Congress intended or whether the FCPA has morphed into a broader corporate ethics statute.
If the FCPA should become a broader corporate ethics statute, let Congress make that decision – not the DOJ or the SEC.
Emergence of a Plaintiff’s Bar
The FCPA, it has been held by some courts, does not contain a private right of action – yet there are other legal avenues available to plaintiffs to hold companies that violate the FCPA accountable. (See here).
Common causes of action include derivative claims against officers and directors, securities fraud claims by investors, RICO claims, unfair competition claims and antitrust claims such as last year when one of Innospec’s competitors sued it in Virginia state court in connection with its recently settled FCPA enforcement action. (See here).
Such causes of action have been pursued before 2010, but 2010 witnessed an explosion in such claims and so-called investigations by plaintiff firms representing investors.
The most noteworthy example is what I called the feeding frenzy surrounding SciClone Pharamaceutials. (See here). Last August, the company simply made an FCPA disclosure – that it was contacted by the SEC and the DOJ in connection with the government’s pharma industry sweep. The company’s stock dropped about 30%. Within weeks about a dozen plaintiff firms announced “investigations” and/or filed securities fraud cases – never mind the company’s stock price regained all that value within about a month.
When a company’s FCPA violations are found to be condoned or encouraged by the board or officers, such plaintiff causes of action would seem to be warranted.
However, these types of FCPA violations are rare – the more typical situation is where, because of respondeant superior, a company faces FCPA exposure because of the actions of a single or small group of employees whose conduct was in violation of the company’s FCPA policies and procedures. In these typical situations, I question what value these so-called “investigations” by plaintiff firms have or what purpose these derivative or securities fraud claims serve.
Interesting Events
Giffen Enforcement Action
When an enforcement action begins with allegations (here) that James Giffen made more than $78 million in unlawful payments to two senior Kazakhstan officials in connection with oil transactions for major American oil companies and abruptly ends with a one-paragraph superceding information (here) charging a misdemeanor tax violation and the company he worked for settling an FCPA enforcement action focused solely on two snowmobiles (here) – I call that interesting.
Even more interesting is that part of Giffen’s defense was that his actions were taken with the knowledge and support of the CIA, the National Security Council, the Department of State and the White House. (See here for a prior post).
A few years ago George Clooney and Matt Damon starred in Syriana (here) a movie about the FCPA.
The Giffen enforcement action presents a superb Hollywood script – it is the most mysterious conclusion to an FCPA enforcement action ever – made even more interesting given that the presiding judge called Giffen a cold war hero and stated that the case should never have been brought in the first place. (See here for the prior post).
Africa Sting Cases
In January 2010, the DOJ arrested 22 defendants – most while attending a gun show in Las Vegas – in connection with a major undercover sting operation in which the government, utilizing an individual who had already pleaded guilty to separate FCPA violations, assisted the government in manufacturing a case involving a fake foreign official from Gabon. (See here, here and here for prior posts).
The defendants (see here) are principally owners or employees of small gun and weapons companies.
I would put this case in the interesting category.
Contrary to media reports and even DOJ statements, it is not the first time undercover tactics were used in connection with an FCPA investigation (see here), but the magnitude and breadth of the tactics were indeed unprecedented.
This case is far from over and the remaining defendants are sure to raise entrapment, among other legal issues, and this will be an interesting case to follow in 2011.
The Africa Sting case has draw the attention of an industry that probably had never thought much about FCPA compliance. Thus, regardless of the ultimate outcome of the case, it has likely resulted in an industry and small enterprises thinking more proactively about FCPA compliance and risk assessment.
Greater Scrutiny and Why Questions
2010 also saw greater scrutiny and why questions about the FCPA, FCPA enforcement and what I have called FCPA Inc.
For the time time in nearly a decade, Congress held hearings (see here) on the FCPA in which some basic why questions were asked.
The U.S. Chamber sponsored a paper (here) titled “Restoring Balance – Proposed Amendments to the FCPA” that was widely covered and, in some circles, railed.
Several members of Congress are legitimately scratching their heads as to why companies that settle fraud, bribery and corruption cases continue to secure lucrative U.S. government contracts and the House passed a bill (here) that seeks to debar companies found to be in violation of the FCPA from receiving U.S. government contracts. Problem is, because of the façade of FCPA enforcement (see here), it will be an impotent bill.
In May 2010, Congressman Towns, chairman of the House Committee on Oversight and Government Reform, sent a letter to Attorney General Holder expressing concern that settlements of civil and criminal cases, including FCPA cases, by the DOJ are being used as a shield to foreclose other appropriate remedies such as suspension and debarment. (See here for the prior post).
And in Spring 2010, Forbes ran a front-page story titled “The Bribery Racket,” an article, notwithstanding some of its flamboyant language, raised several valid and legitimate questions and issues when it comes to FCPA enforcement. (See here for the prior post).
This scrutiny in 2010 raised valid and legitimate public policy questions that hopefully will be picked up on in 2011.
Bold Predictions
After a year in which (1) the largest individual prosecutions involved a fake “foreign official” (2) the most egregious cases of corporate bribery were prosecuted without FCPA anti-bribery charges; and (3) a signature case abruptly ended with a misdeamenor tax violation and a corporate prosecution involving two snowmobiles, I wonder what bold will look like in 2011.
Here are two bold predictions for 2011.
The Dodd-Frank Whistleblower Provisions Will Have a Negligible Impact on FCPA Enforcement
My (what seems) contrarian thoughts are the same as when I first made this post in July.
Enforcement of the U.K. Bribery Act Will Be Disciplined and Measured
The U.K. Bribery Act, already delayed, and with implementation slated for April 2011, has been the subject of much discussion and much over-hype in my opinion.
It has been called the FCPA “on steroids” (here) and if one subscribes to the industry marketing material, you might be left with the impression that the end of the world is near.
True, the Bribery Act is broader than the FCPA. For starters, it is an all-purpose bribery and corruption statute and addresses bribery and corruption in the private sector – not just bribery to “foreign officials” like the FCPA.
True, the Bribery Act has potentially a very broad reach – so does the FCPA.
True, the Bribery Act has no exception for facilitating payments – the FCPA does – although as highlighted above, query whether this exception means anything.
However, the Bribery Act has the “adequate procedures” defense – something the FCPA does not have – but query whether it should.
Thus, while the Bribery Act is indeed more broad than the FCPA, because of this defense, it is at the same time more narrow than the FCPA.
Public statements by U.K. officials suggest that this adequate procedures defense is a meaningful defense. For instance, in September at the World Corruption and Compliance Forum, an event I chaired in London, the U.K. Attorney General (Dominic Grieve) stated (see here) that “any company small or large” that puts into place a system of adequate procedures “has nothing to fear” when an employee or agent “goes off the rails” and makes a bribe payment. Attorney Grieve said that a company should have nothing to fear if it is “walking the walk, and talking the talk” when a rogue employee makes an improper payment. On the other hand, Attorney Grieve stated that that “those who don’t heed the warnings and don’t take the necessary steps have something to fear.” Richard Alderman, the Director of the U.K. Serious Fraud Office, stated in October (see here) as follows. “I have heard some people say that this offence is one of strict liability. I do not agree. No offence will have been committed if there were adequate procedures. I have also heard people say that the fact of bribery might mean that there were inadequate procedures by definition and so the defence can never be made out. Again, I do not agree. In the real world there may be occasional lapses despite adequate procedures rigorously enforced. The issue ultimately for the Judge and jury (and for the SFO in deciding on a prosecution) will be – were those procedures adequate?” As to the adequate procedures defense, Vivian Robinson (General Counsel of the Serious Fraud Office) said in an October webcast (here) that because of the defense “there is every reason to be optimistic that we won’t get as a result of the Act and this particular section a huge expanse in the number of prosecutions of corporates.”
As demonstrated by the Innospec matter (see here), the U.K. courts are playing, and rightfully so, a much greater role than U.S. courts in reviewing bribery and corruption cases. I’ve been told that even if the SFO prosecutes a corporate bribery case with an NPA or DPA, the U.K. courts will still play a meaningful oversight role – a role that is unfortunately not true here in the U.S.
In sum, I don’t see how companies already subject to the FCPA and already thinking about compliance in a pro-active manner, have much to worry about when it comes to the U.K. Bribery Act because of the adequate procedures defense.
I will be surprised if U.K. enforcement of the Bribery Act reaches the level of U.S. enforcement of the FCPA and I will be surprised if the U.K. Bribery Act develops outside of the judicial system as has generally been true with U.S. enforcement of the FCPA.
Its All About Pancourier Services in Shell
The Nigerian customs services has a reputation for being notoriously corrupt. According to this recent report (jointly commissioned by the European Union, the UN Office on Drugs and Crime, Nigeria’s Economic and Financial Crimes Commission, and the National Bureau of Statistics) “in the case of clearance of goods through customs [in Nigeria], the percentage of business who were requested to pay a bribe is considerable.”
So, what happens when ….
A Nigerian company uses two United Kingdom contractors in connection with a Nigerian project. The U.K. contractors utilize a Swiss company that provides freight forwarding and logistics services. The Swiss company makes payments to Nigerian customs officials to “expedite the delivery of goods and equipment into Nigeria.” The U.K. contractors seek reimbursement from the Nigerian company. The Nigerian company records the payments as “local processing fees” and “administrative / transport charges” on its books and records. The Nigerian company is wholly-owned by a U.K. company based in the Netherlands. The U.K. company based in the Netherlands has ADRs traded on a U.S. exchange. A few low-ranking employees or contract employees located in the U.S. of another subsidiary of the U.K. company based in the Netherlands receive letters or e-mails regarding the payments.
Why of course, $48 million into the U.S. treasury via an FCPA enforcement action even though the FCPA specifically states that the anti-bribery provisions “shall not apply to any facilitating or expediting payment to a foreign official … the purpose of which is to expedite or to secure the performance of a routine governmental action …”
Next up in the analysis of CustomsGate enforcement actions is Shell.
See here for the prior post on the Transocean enforcement action, here for the prior post on the Tidewater enforcement action here for the prior post on the Noble enforcement action and here for the prior post on the GlobalSantaFe enforcement action.
The Shell enforcement action involved both a DOJ and SEC component. Total settlement amount was approximately $48.1 million ($30 million criminal fine via a DOJ deferred prosecution agreement; $18.1 million in disgorgement and prejudgment interest via a SEC administrative order).
DOJ
Criminal Information
The DOJ enforcement action included a criminal information (here) filed against Shell Nigeria Exploration and Production Company Ltd. (“SNEPCO”), a Nigerian wholly-owned subsidiary of Royal Dutch Shell (“RDS”) with headquarters in Nigeria. RDS is a U.K. company based in The Hague, The Netherlands, with ADRs traded on the New York Stock Exchange.
The information alleges that “SNEPCO’s agents, including employees of its U.S. affiliates, while in the territory of the United States, used and caused the use of the mails and means and instrumentalities of interstate commerce and performed other acts for SNEPCO’s benefit in furtherance of the payment of bribes to foreign government officials for the purpose of assisting in obtaining or retaining business for, or directing business, to SNEPCO and others.”
The criminal information relates to “an express door-to-door courier service” called “Pancourier” provided by Panalpina “that expedited the delivery of goods and equipment into Nigeria.” [The Transocean enforcement action here also involved, in part, Pancourier services]. According to the information, “the Pancourier service involved the payment of bribes by [Panalpina] to [Nigerian Customs Service] officials to expedite the delivery of materials by inducing the officials to circumvent the official Nigerian customs clearance process and to provide an improper advantage with respect to the importation of certain tools and materials that were imported into Nigeria.” The information states: “as a result of the payment of bribes, SNEPCO employees knew that official Nigerian duties, taxes, and penalties would not [be] paid when the items were imported.”
According to the information, Panalpina invoiced the “Subsea EPIC Contractor” (a U.K. corporation and SNEPCO’s engineering, procurement, installation and commissioning contractor for subsea services) and the “Topsides EPIC Contractor (a U.K. corporation that provided project management, engineering design, and fabrication services) “for the bribes that it paid to the NCS officials and characterized the payments as, among other things, ‘local processing fees’ or ‘administrative/transport charges.'” The contractors, in turn sought reimbursement from SNEPCO for these charges.
According to the information:
(i) in approximately March 2004 “SNEPCO and SIEP [Shell International Exploration and Production Inc. – a wholly-owned subsidiary of RDS based in Houston] employees … knew, or were substantially certain, that all or a portion of the money paid by the Subsea EPIC Contractor and the Topsides EPIC Contractor to [Panalpina] for the Pancourier service was being paid as bribes to NCS officials to secure an improper advantage with respects to the importation of certain tools and materials that were imported into Nigeria. SNEPCO and SIEP employees were aware that as a result of the payment of bribes, official Nigerian duties, taxes, and penalties were not paid when the items were imported;
(ii) in approximately March 2004 to approximately March 2006 “certain other SNEPCO employees repeatedly authorized the Subsea EPIC Contractor and the Topsides EPIC Contractor to use the Pancourier service. This resulted in the payment of over $2 million to reimburse the subcontractors for charges submitted by [Panalpina]. SNEPCO intended that some or all of this money was to reimburse the subcontractors for the bribes made to NCS officials. The benefit to SNEPCO resulting from the bribes exceeded $7 million.”
(iii) “throughout the relevant time period, SNEPCO recorded the reimbursements for the improper payments to the NCS officials in its books, records, and accounts as ‘local processing fees’ and ‘administrative/transport charges’ among other terms.”
(iv) “at the end of SNEPCO’s fiscal years 2004 through 2006, the books and accounts of SNEPCO containing the false characterizations of the payments to the NCS officials, were incorporated into the books, records and accounts of RDS for purposes of preparing RDS’s consolidated year-end financial statements filed with the SEC.”
Based on the above conduct, the DOJ charged SNEPCO with conspiracy to violate the FCPA’s anti-bribery provisions and to knowingly falsify books and records; and aiding and abetting false books and records violation.
In terms of a U.S. nexus, the information charges as follows:
(i) “the Subsea Contract Manager [a U.S. citizen and employee of SIEP] located in Houston, Texas, sent an email to SNEPCO employees in Nigeria authorizing the Subsea EPIC Contractor to use Pancourier to transport electrical equipment, with knowledge of facts indicating that a bribe would be paid through [Panalpina] to the NCS officials to expedite the delivery of materials by inducing the officials to circumvent the Nigerian customs clearance process and which resulted in the non-payment of official Nigerian duties, taxes, and penalties.”
(ii) “the Subsea Contract Engineer [a SIEP contract employee] located in Houston, Texas sent an e-mail to SNEPCO employees in Nigeria authorizing the Subsea EPIC Contractor to use Pancourier to transport miscellaneous parts, with knowledge of facts indicating that a bribe would be paid through [Panalpina] to the NCS officials to expedite the delivery of materials by inducing the officials to circumvent the Nigerian customs clearance process and which resulted in the non-payment of official Nigerian duties, taxes, and penalties.”
(iii) “a Subsea EPIC Contractor employee drafted and sent an e-mail from Nigeria to … the Subsea Contract Manager and Subsea Contract Engineer, in Houston, Texas advising that Pancourier was ‘illegal.'”.
The criminal charges against SNEPCO were resolved via a deferred prosecution agreement (here) between the DOJ, SNEPCO and RDS “on behalf of its wholly-owned subsidiary SNEPCO.”
Deferred Prosecution Agreement
Pursuant to the DPA, SNEPCO 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 seven months and it states that the DOJ entered into the agreement “based on the individual facts and circumstances” of the case and SNEPCO. Among the factors stated are the following.
(a) SNEPCO and RDS cooperated with the Department’s investigation of SNEPCO and RDS entities; (b) SNEPCO and RDS undertook remedial measures, including the implementation of an enhanced compliance program, and agreed to undertake further remedial measures …; (c) SNEPCO and RDS agreed to continue to cooperate with the Department in any ongoing investigation …; and (d) the impact on SNEPCO and other RDS entities, including collateral consequences, of a guilty plea or criminal conviction.”
As stated in the DPA, the fine range for the above describe conduct under the U.S. Sentencing Guidelines was $34.2 million to $68.4 million. Pursuant to the DPA, SNEPCO and RDS agreed that SNEPCO shall pay a monetary penalty of $30 million – approximately 15% below the minimum guideline amount.
Pursuant to the DPA, SNEPCO and RDS agreed to a host of compliance undertakings and to report to the DOJ on an annual basis (during the term of the DPA) “on its progress and experience in maintaining and, as appropriate, enhancing its compliance policies and procedures.”
As is standard in FCPA DPAs, SNEPCO and RDS agreed not to make any public statement “contradicting the acceptance of responsibility by SNEPCO as set forth” in the DPA and SNEPCO and RDS further agreed to only issue a press release in connection with the DPA if the DOJ does not object to the release.
SEC
The SEC’s administrative order against RDS and SIEP (here) concerns “violations of the anti-bribery provisions of the FCPA” by SIEP and “the record keeping and internal controls provisions of the FCPA” by RDS.
Both violations concern the same core set of facts as set forth in the DOJ’s DPA. The SEC order states as follows.
“From September 2002 through November 2005, SIEP, on behalf of Shell, authorized the reimbursement or continued use of services provided by a company acting as a customs broker that involved suspicious payments of approximately $3.5 million to officials of the Nigerian Customs Service in order to obtain preferential treatment during the customs process for the purpose of assisting Shell in obtaining or retaining business in Nigeria on Shell’s Bonga Project. As a result of these payments, Shell profited in the amount of approximately $14 million. None of the improper payments was accurately reflected in Shell’s books and records, nor was Shell’s system of internal accounting controls adequate at the time to detect and prevent these suspicious payments.”
According to the SEC, “the Nigerian customs clearance process was routinely delayed, often taking weeks or even months to clear equipment through customs.” Use of the Pancourier service “expedited shipments into Nigeria by about 20 to 39 days.” “A shipment that would take 30 days to clear Nigerian customs using regular air freight could clear customs in as quickly as 10 days using” the Pancourier service.
In summary fashion, the SEC’s order states as follows:
“Shell benefitted through these payments by bypassing the normal customs process and importing equipment into Nigeria faster than Shell would have had the payments not been made. Ultimately, this accelerated Shell’s ability to reach First Oil and provided Shell with the value of its oil production profits sooner than it would have had it not made the payments. By avoiding the payment of certain customs duties through these payments, Shell also benefited by having the use of those funds when Shell would have otherwise had to wait to be reimbursed from the proceeds of oil production. As a result of these payments, Shell profited in the amount of $14,153,536.”
The SEC’s administrative order requires, among other things, the payment of $14,153,536 in disgorgment and $3,995,923 in prejudgment interest.
Ralph Ferrara (here) and Christopher Clark, a former DOJ attorney, (here), both at Dewey & LeBoeuf, represented Shell.
The FCPA’s New Frontier
China-based entities have previously been involved in FCPA enforcement actions.
For example, in March 2010, DaimlerChrysler China Ltd. was charged in connection with the Daimler enforcement action and agreed to a deferred prosecution agreement. (See here). In May 2005, DPC (Tianjin) Co. Ltd., a Chinese subsidiary of U.S. based Diagnostic Products Corporation (“DPC”), was charged in connection with the DPC enforcement action. (See here).
However, to my knowledge, a China-based issuer has never been the focus of an FCPA inquiry.
I’ve noted for a few years now that it is only a matter of time. See here – “Why Compliance with the U.S. Foreign Corrupt Practices Act Matters in China” and here “Welcome to the Club”.
The time has come.
Last week, as first reported by Joe Palazzolo (Wall Street Journal – Corruption Currents), Rino International Corp., a Dalian, China-based issuer (here), disclosed in an SEC filing (here) as follows:
“The Company has been notified by the Staff of the Securities and Exchange Commission (the “SEC”) that it is conducting a formal investigation relating to the Company’s financial reporting and compliance with the Foreign Corrupt Practices Act for the period January 1, 2008 through the present. The Company is cooperating with the SEC’s investigation. It is not possible to predict the outcome of the investigation, including whether or when any proceedings might be initiated, when these matters may be resolved or what if any penalties or other remedies may be imposed.”
The same day, Rino announced (here) that its shares have been delisted from the NASDAQ exchange.
The SEC’s inquiry and Rino’s delisting appear to be a result of a scathing November research report by Muddy Waters LLC Research Report on the company (see here).
Whether the SEC’s FCPA inquiry is focused on books and records and internal controls issues, or anti-bribery issues as well, with more China-based companies listing shares on U.S. exchanges, and thus becoming subject to the FCPA, the Rino inquiry may represent a new frontier of FCPA enforcement.
ABB
Earlier this week the DOJ and SEC announced a wide ranging enforcement action against ABB Ltd. and its subsidiaries ABB Inc., and ABB Ltd. – Jordan.
Swiss-based ABB Ltd. (here) is a provider of power and automation technologies with American Depositary Shares publicly traded on the New York Stock Exchange.
This post summarizes the various aspects of the enforcement action in which ABB Ltd. and ABB Inc. agreed to pay a total of $58.3 million ($19 million in DOJ criminal penalties and $39.3 million in SEC disgorgement and civil penalties).
DOJ
ABB Ltd. Deferred Prosecution Agreement
As noted in this DOJ release, ABB Ltd. agreed to enter into a deferred prosecution agreement (DPA). ABB’s press release (here) states that the DPA “includes provisions related to the involvement of a subsidiary in Jordan in the Oil for Food Program” and that “in lieu of an external compliance monitor, the DOJ and SEC have agreed to allow ABB to report on its continuing compliance efforts and the results of the review of its internal processes for a three-year period going forward.”
In other words, the DPA appears limited to the conduct of ABB Ltd. – Jordan (summarized below) and not the conduct of ABB Inc. (summarized below).
[Note – to my knowledge the DPA has yet to be publicly released. Here is a request for DOJ readers of this blog. Under the DOJ’s “old” website, the charging documents were released and linked along with the press release. With the revamped website, the charging documents are nowhere to be found requiring interested persons to go to Pacer or other sources. The charging documents ultimately end up on the DOJ’s FCPA specific website, but in many cases it takes weeks. DOJ may want to consider the old system which provided real-time access to these important charging documents]
ABB Ltd. – Jordan Criminal Information
The information charges ABB Ltd. – Jordan (“ABB-Jordan”) with one count of conspiracy to commit wire fraud and to violate the FCPA’s books and records provisions.
According to the information (here), ABB-Jordan was a wholly-owned subsidiary of ABB Ltd. ABB-Jordan, through its 95% owned subsidiary ABB Near East Trading Ltd. (“ABB Near East”) provided equipment and services to electrical utilities, including control measurement and protection systems, transducers, and metering equipment.
The information charges that ABB Near East “had three principle customers under the United Nations Oil-for-Food Program (“OFFP”) … the General Company for Electricity Energy Production, the Baghdad Mayoralty, and State Company Baghdad Electricity Distribution all of which were regional companies of the Iraqi Electricity Commission, an Iraqi government agency” (collectively the “Iraqi Electricity Companies”).
The information charges that “from in or about April 2000 through in or about April 2004, ABB Near East, received eleven purchase orders for electrical equipment and services worth over $5.9 million with the Iraqi Electricity Companies, pursuant to the OFFP.” According to the information, “to obtain these purchase orders, ABB Near East caused over $300,000 in kickbacks to be paid to the government of Iraq” and that “in order to generate the funds to pay the kickbacks to the Iraqi government and conceal those payments, ABB Near East would inflate the price of its contracts with the Iraqi government by approximately 10% before submitting the contracts to the U.N. for approval.”
According to the information, the kickback payments were falsely characterized on ABB-Jordan’s or ABB Near East’s books and records which were “incorporated into the books and records of ABB Ltd. for purposes of preparing ABB Ltd’s year-end financial statements.”
According to the DOJ release, “ABB Ltd. admitted that [ABB-Jordan] agreed to pay kickback payments to the former Iraqi government” in connection with OFFP contracts and “agreed to pay a criminal penalty of $1.9 million.”
ABB Inc. Criminal Information
According to the information (here) ABB Inc. is an “indirect subsidiary” of ABB Ltd. incorporated under Delaware law. The information charges that ABB Inc. “conducted business, in part, through a business unit called ABB Network Management (“ABB NM”) that had its principal place of business in Sugar Land, Texas and was acquired by ABB Inc. in or around January 1999.”
According to the information, “ABB NM’s primary business was to provide products and services to electrical utilities for network management in power generation, transmission, and distribution.” The information charges that “many of ABB NM’s clients were foreign state-owned utilities” and that “ABB NM conducted business in a number of its foreign markets through sales representatives.”
The information largely centers on the conduct of John Joseph O’Shea and Fernando Maya Basurto and business with Comision Federal de Electricidad (“CFE”) – a Mexican electrical company. According to the information, O’Shea was the “General Manager of ABB NM” who “oversaw its operations both before and after its acquisition by ABB Inc.” and was “responsible for approving payments to sales representatives.” According to the information, Basurto was a “citizen of Mexico” who “performed work for ABB NM on its contracts with CFE.”
O’Shea was criminally charged in November 2009 (see here). Basurto has pleaded guilty (see here). For more, see this prior post.
For additional FCPA enforcements involving CFE see this recent post.
The information details an elaborate scheme that is summarized in the DOJ release as the payment of bribes “from 1997 to 2004 that totaled approximately $1.9 million” to various officials at CFE and that “in exchange for the bribe payments … ABB NM received contracts worth more than $81 million in revenue.”
As noted in the DOJ release, “ABB Inc. pleaded guilty to a criminal information charging it with one count of violating the anti-bribery provisions of the FCPA and one count of conspiracy to violating these provisions of the FCPA.” According to the release, the court “imposed a sentence that included a criminal fine of $17.1 million.”
The information specifically states that “ABB Inc. terminated O’Shea in November 2004 and thereafter conducted a thorough internal investigation of the improper payments. It voluntarily disclosed the conduct to the DOJ and the SEC in April 2005.”
SEC
The SEC’s civil complaint against ABB Ltd. (see here) picks up both the Iraq and Mexico conduct mentioned above and charges ABB Ltd. with violating the FCPA’s anti-bribery, books and records, and internal control provisions.
The complaint alleges in summary fashion as follows:
“From 1999 to 2004, ABB, through a U.S. subsidiary and six foreign-based subsidiaries, offered and paid bribes to government officials in Mexico to obtain and retain business with government owned power companies, and paid kickbacks to Iraq to obtain contracts under the United Nations Oil for Food Program. In all, ABB’s subsidiaries made at least $2.7 million in illicit payments in these schemes to obtain contracts that generated more than $100 million in revenues for ABB.”
The complaint describes numerous payments, including payments to “pay for the Mediteranean cruise vacation for two CFE officials and their wives” and “tuition for the son of a CFE official” at a “private military school in Wisconsin.”
As to the “Mexican bribery scheme”, the SEC alleges that “ABB, which failed to conduct any due diligence on the use or payments to [a Mexican agent] and other companies, improperly recorded the illicit payments on its books as payments for commission and services on the projects.”
As to the OFFP, the complaint alleges that “from approximately 2000 to 2004, ABB participated in the Oil for Food program through six of its subsidiaries” and that the “six subsidiaries developed various schemes to pay secret kickbacks to Iraq in order to obtain contracts. The kickbacks were characterized as after sales service fees but in reality they were nothing more than bribes paid to the Iraqi regime.” According to the SEC, “kickbacks of approximately $810,793 were paid in connection with the subsidiaries’ sales of goods on twenty-seven contracts with promises to pay additional kickbacks of $239,501 on three other contracts. The total revenues on the contracts were approximately $13,577,727 and profits were $3,801,367. ABB improperly disguised the [after sales service fees] on its books and records by mischaracterizing them as legitimate after sales services, consultation costs or commissions.”
Further the SEC alleged as follows:
“as evidenced by the extent and duration of the illicit payments to foreign officials, the large number of ABB subsidiaries involved in these bribery and kickback schemes, ABB’s knowledge from the prior Commission action of illicit payments by other ABB subsidiaries, the improper recording of millions of dollars of illicit payments in ABB’s books and records, ABB’s failure to detect these irregularities, and ABB’s failure to conduct sufficient due diligence on local agents and others, ABB failed to devise and maintain an effective system of internal controls to prevent or detect these anti-bribery and books and records violations.”
In an SEC release (see here) SEC officials stated: “as the sanctions in this case demonstrate, there are significant consequences for public companies that fail to implement strong compliance programs and prevent corrupt payments to government officials” and that “multi-national companies that make illicit payments through layers of subsidiaries will be held accountable.”
Without admitting or denying the SEC’s allegations, ABB Ltd. consented to the entry of a final judgment that permanently enjoins the company from future FCPA violations, orders the company to pay $17,141,474 in disgorgement, $5,662,788 in prejudgment interest, and a $16,510,000 penalty. According to the SEC release, “the order also requires the company to comply with certain undertakings regarding its FCPA compliance program.”
In a press release (here), ABB noted that it “initiated these matters in a voluntary disclosure to the DOJ and SEC beginning in 2005.” The company stated that it “cooperated fully with the DOJ and SEC and has put in place a global comprehensive compliance and integrity program the DOJ has said ‘may become a benchmark for the industry.'”
Laurence Urgenson (here) and others from Kirkland & Ellis LLP represent the ABB entities.
Offices of Deutsche Telekom Searched
According to this September 3rd Dow Jones Newswire story “a German public prosecutor’s office based in Bonn [recently] searched German telecommunications company Deutsche Telekom AG offices as part of an initial inquiry into bribery allegations involving eight people, in response to a request from U.S. authorities.”
Deutsche Telekom holds a 59% stake in Magyar Telekom (see here) and the article suggests that the search is in connection with Magyar Telekom’s previously disclosed FCPA inquiry.
As the article notes, Hungary-based Magyar Telekom (see here), a company with ADRs listed on the New York Stock Exchange, disclosed suspicious payments and in December 2009 the company released this detailed press release.
In its Presentation of Second Quarter Results 2010 (see here) Magyar Telekom stated as follows:
“As previously announced, the DOJ, the SEC and the Ministry of Interior of the Republic of Macedonia have commenced investigations into certain of the Company’s activities that were the subject of the internal investigation. Further, in relation to certain activities that were the subject of the internal investigation, the Hungarian Central Investigating Chief Prosecutor’s Office has commenced a criminal investigation into alleged corruption with the intention of violating obligations in international relations and other alleged criminal offenses. Also, as previously announced, the Hungarian National Bureau of Investigation (“NBI”) has begun a criminal investigation into alleged misappropriation of funds relating to payments made in connection with the Company’s ongoing internal investigation and the possible misuse of personal data of employees in the context of the internal investigation. These governmental investigations are continuing, and the Company continues to cooperate with those investigations.
The Company, through its external legal counsel, has recently engaged in discussions with the DOJ and the SEC regarding the possibility of resolving their respective investigations as to the Company through negotiated settlements. The Company has not reached any agreement with either the DOJ or the SEC regarding resolution of their respective investigations, and discussions with both agencies are continuing. We may be unable to reach a negotiated settlement with either agency. Any resolution of the investigations could result in criminal or civil sanctions, including monetary penalties and/or disgorgement, against the Company or its affiliates, which could have a material effect on the Company’s financial position, results of operations or cash flows, as well as require additional changes to its business practices and compliance programs. The Company cannot predict or estimate whether or when a resolution of the DOJ or SEC investigations will occur, or the terms, conditions, or other parameters of any such resolution, including the size of any monetary penalties or disgorgement, the final outcome of these investigations, or any impact such resolution may have on its financial statements or results of operations. Consequently, the Company has not made any provisions in its financial statements as of June 30, 2010 with respect to the investigations.
Magyar Telekom incurred HUF 1.4 bn expenses [approximately $6.3 million] relating to the investigations in the first half of 2010, which are included in other operating expenses of Group Headquarters.”