Category: Foreign Non-Issuer Company

Just When You Think You’ve Seen It All – Along Comes The Nordion (Canada) Inc. Enforcement Action

There have been several Foreign Corrupt Practices Act enforcement actions in the past 30 days or so.

But, just when you think you’ve seen it all in FCPA enforcement-land, along comes the Nordion (Canada) Inc. enforcement action announced yesterday by the SEC.

The basic findings, as set forth in this administrative order, were as follows.

Approximately 16 years ago, Mikhail Gourevitch (a dual Canadian and Israeli citizen who was fired years ago by Nordion) represented to the company that “his purported childhood friend from Russia” could help the company’s business in Russia.

Gourevitch and this eventual agent “conspired to use a portion of the funds Nordion paid the Agent to bribe Russian government officials to obtain approval for TheraSphere” a liver cancer therapy.

Gourevitch also received kickbacks from the Agent and otherwise “hid the scheme from Nordion” through, among other things, misrepresentations to his employer. In the words of the SEC, through his conduct Gourevitch “secretly enrich[ed] himself” and received “at least $100,000 for his role in the arrangement which was not disclosed to Nordion.”

In August 2014, Nordion was acquired by Nordion (Canada) Inc., a privately held company. The SEC’s order finds that Nordion (not the actual Respondent in the action Nordion (Canada) Inc.) violated the FCPA’s books and records and internal controls provisions and Nordion (Canada) Inc. agreed, without admitting or denying the SEC’s findings, agreed to pay $375,000.

Issues To Consider From The VimpelCom Enforcement Action

This prior post went in-depth into the recent Foreign Corrupt Practices Act enforcement action against VimpelCom (and a related entity) that resulted in a net $397.5 million FCPA settlement – the 5th largest FCPA settlement amount of all-time (see here for the current top-ten list).

This post highlights additional issues to consider.

Did VimpelCom Get Off Too Lightly?

The resolution documents contain numerous allegations about VimpelCom executive officers as well as various VimpelCom corporate committees that were engaged in the improper conduct. The allegations in the VimpelCom action are egregious and paint a picture of a culture of corruption at VimpelCom with high-level executives seeking legal cover at nearly every turn to facilitate the alleged bribery scheme.

Yet VimpelCom was offered a DPA, notwithstanding the fact that it did not voluntarily disclosure.

During last week’s conference call announcing the VimpelCom enforcement action (see here for the transcript), Assistant Attorney General Leslie Caldwell was asked why VimpelCom was offered a DPA while Unitel LLC, a business entity headquartered and incorporated in Uzbekistan, was required to plead guilty. Caldwell generally stated that this resulted from the fact that most of the alleged improper conduct was engaged in Unitel, not VimpelCom.

Having read the DOJ’s resolution documents, I question how Ms. Cadlwell could have made this statement as the documents contain numerous allegations about VimpelCom executive officers as well as various VimpelCom corporate committees that were engaged in the improper conduct. Again, the allegations in this case are egregious and paint a picture of a culture of corruption at VimpelCom with high-level executives seeking legal cover at nearly every turn to facilitate the alleged bribery scheme.

The 2010 article “The Facade of FCPA Enforcement” highlights various pillars that contribute to the facade of FCPA enforcement including how seemingly clear-cut instances of corporate bribery, per the government’s own allegations, are resolved without actual prosecuted anti-bribery violations.

VimpelCom joins other corporate FCPA enforcement actions such as BizJet International, Daimler AG and Siemens AG that also involved egregious instances of corporate bribery, yet did not result in actual prosecuted anti-bribery violations.

Was the Unitel Criminal Charge Even Viable?

An analysis of root causes in FCPA enforcement actions is not meant to excuse the conduct at issue, but rather to better understand why the conduct took place.

The root cause of the VimpelCom enforcement action appears to be that pursuant to local law, or at the very least local practice, VimpelCom needed a local partner in Uzbekistan in order to enter that market. The rest, as they say, is set forth in the resolution documents.

This again demonstrates that trade barriers and distortions are often the root causes of bribery and a reduction in bribery will not be achieved without a reduction in trade barriers and distortions.

Issues To Consider From The PTC Enforcement Action

This post went in-depth regarding this week’s $28 million Foreign Corrupt Practices Act enforcement action against PTC Inc. and related entities.

This post continues the analysis by highlighting various issues to consider.

Timeline

As highlighted in this previous post, the company first disclosed its FCPA scrutiny in August 2011. Thus, the timeline was approximately 4.5 years.

Pre and Post – Enforcement Action Professional Fees and Expenses

Unlike some issuers under FCPA scrutiny, PTC does not appear to have disclosed its pre-enforcement action professional fees and expenses over the past 4.5 years. If the company’s scrutiny followed a typical path, those pre-enforcement action professional fees and expenses likely were equal to or exceeded the $28 million settlement amount.

Given that PTC did not disclose its pre-enforcement action professional fees and expenses, it is unlikely that the company will disclose its post-enforcement action professional fees and expenses either. However, there will be plenty because, as a condition of settlement, the company is required to report to the DOJ for a three year term.

Let’s pause to consider whether this is truly necessary or simply another government required transfer of shareholder wealth to FCPA Inc. (see here, here and here for prior posts).

In the words of the DOJ:

“The [PTC Entities] engaged in extensive remedial measures, including a review and enhancement of the Companies’ and PTC Inc.’s compliance program, the establishment of a dedicated compliance team at the corporate level and at PTC China and enhanced policies for business partners, the termination of the business partners involved in the misconduct described in the Statement of Facts …, and the implementation of new customer travel policies and additional controls around expense reimbursement.”

In the words of the SEC:

“As part of its internal review and investigation, PTC undertook significant remedial measures including terminating the senior staff at PTC-China implicated in the FCPA violations. PTC also revised its pre-existing compliance program, updated and enhanced its financial accounting controls and its compliance protocols and policies worldwide, and implemented additional specific enhancements in China. These steps included: (1) reviewing and enhancing its anti-bribery policy, code of ethics, and gifts and entertainment policies to correct previous deficiencies; (2) establishing a dedicated compliance team, including a chief compliance officer and a new compliance director in China; (3) expanding its other compliance resources in China, including hiring a new vice president of finance for Asia and adding additional legal staff in China; (4) hiring a new management team in China, including a new China President; (5) enhancing its FCPA training for employees; (6) severing its relationships with the business partners that were implicated in the FCPA violations and discontinuing the use of COD partners or business referral partners generally; (7) implementing a comprehensive due diligence program for all other business partners that includes a risk-scoring system operated by a third party vendor and that includes FCPA training as part of the onboarding process; (8) obtaining quarterly anti-corruption certifications from sales staff; and (9) undertaking periodic compliance audits.”

Against this backdrop, is it truly necessary for PTC to report to the government for three years regarding its “remediation efforts to date, their proposals reasonably designed to improve the Companies’ internal controls, policies, and procedures for ensuring compliance with the FCPA and other applicable anti-corruption laws, and the proposed scope of the subsequent reviews”?

One Core Enforcement Action

Certain FCPA Inc. participants have adopted creative counting methods when it comes to keeping FCPA enforcement statistics.

No doubt, some will count the PTC enforcement action as three separate enforcement actions (the DOJ component, the SEC component as to the company, and the SEC component as to the individual) even though each action was based on the same core conduct. Counting FCPA enforcement actions this way distorts FCPA enforcement statistics because this week’s action was one core action.

First Individual DPA by the SEC

The Yu Kai Yuan DPA, which the SEC termed the first DPA with an individual in an FCPA case, might be the most inconsequential legal document you will ever read.

Based on the same core conduct in the DOJ NPA and the SEC administrative order, the SEC alleged that Yuan (a Chinese citizen who resides in Shanghai and was last a sales executive for PTC entities in China in 2011) caused violations of the FCPA’s books and records and internal controls provisions.

The only specific allegation as to Yuan in the DPA is the first paragraph which merely identifies him. There is no other specific allegation regarding him including how he caused violations of the FCPA’s books and records and internal controls provisions.

Without admitting or denying the SEC’s allegations, Yuan agreed to refrain from violating the “federal and state securities law” and to “refrain from violating the applicable rules promulgated by any self-regulatory organization or professional licensing board.”

If what the SEC is seeking is more individual enforcement actions in connection with corporate FCPA actions, the Yuan DPA represents one way to juice the statistics.

Additional Sloppy or Incomplete Pleading

The recipients of the travel and entertainment alleged were employees of alleged Chinese state-owned entities.

That is all the DOJ and SEC state in the resolution documents.

Even though the two-factor control and function test set forth in Esquenazi is flawed (see pgs. 24-43 in this article for a detailed discussion of why), it would seem incumbent on the enforcement agencies to include allegations or findings relevant to this two-factor test as the business community (at least one intended audience of FCPA resolution documents) remains confused regarding the contours of the “foreign official” element.

Assumed Causation

Like many, many other FCPA enforcement actions, the PTC action assumes causation.

In other words, it is assumed that the only reason the Chinese SOEs purchased PTC products and services is because certain of the SOE employees engaged in non-business travel and received other things of value such as iPods, wine and clothing from PTC entities.

Such assumed causation, very much relevant to disgorgement issues, would seem to speculative at best.

Just Plain Silly

Speaking of assumed causation, some have asserted that the Yuan individual DPA by the SEC was “inspired in part by the Yates memo issued over at the Justice Department.”

My own two cents is that suggesting such a connection is just plain silly. The Yuan DPA signatures began in November 2015 and as stated by the SEC the DPA was the “result of significant cooperation [Yuan] provided during the SEC’s investigation” – an investigation which began in 2011.

Application of DD-3

One often overlooked reason for the general increase in FCPA enforcement in the modern era is that in 1998 the statute was expanded through the dd-3 portion of the FCPA which applies to, generally speaking, non-issuer foreign companies and foreign nationals, to the extent the “while in the territory of the U.S.” jurisdictional prong has been satisfied.

The DOJ’s NPA was against PTC China entities, not PTC Inc., and invoked dd-3. While not explicit in the resolution documents, the “while in territory of the U.S.” jurisdictional prong was presumably met given that certain PTC China employees accompanied the alleged Chinese “foreign officials” on their travels to the U.S.

The DOJ Gets Benchslapped In Foreign Bribery Case

In recent FCPA year in reviews (see here for 2014 and here for 2013) topics have included judicial scrutiny of non-FCPA cases because the decisions (mostly concerning jurisdictional issues relevant to foreign actors) should cause pause as to certain Foreign Corrupt Practices Act enforcement theories against foreign actors.

The 2015 year in review is sure to include mention of U.S. v. Vassilieve et al. (a recent case highlighted here) in which U.S. District Court Judge Charles Breyer (N.D. Cal.)(pictured) delivered a major benchslap to the DOJ.

The case involved conduct in the same general sphere of the Foreign Corrupt Practices Act.

Namely, the DOJ alleged in this indictment that:

Yuri Sidorenko (a citizen of Ukraine and St. Kitts & Nevis who resided in Dubai and the Chairman of the EDAPS Consortium Advisory Counsel – a Ukrainian conglomerate of various companies that manufactured and supplied a variety of identification and security products, including passports, drivers licenses and other such products) and

Alexander Vassiliev (also a citizen of Ukraine and St. Kitts & Nevis who resided in Dubai and the Chairman of the Board of EDAPS)

provided money and other things of value to Mauricio Siciliano (an executive of the International Civil Aviation Organization (“ICAO”),  a United Nations specialized agency, responsible for, among other things, standardizing machined-readable passports, including biometric passports) so that Siciliano would use his official position as an Executive of ICAO to benefit EDAPS’s business as well as Sidorenko and Vassiliev personally.  According to the indictment Siciliano (a Venezuelan national who primarily resided in Canada where ICAO is headquartered and had a Canadian passport) was an executive at ICAO who was specifically assigned to work in ICAO’s Machine Readable Travel Documents Programme.

Siciliano would likely be a “foreign official” under the FCPA given the “public international organization” prong of the “foreign official” element. However, as it relates to foreign nationals like Sidorenko and Vassiliev the FCPA’s anti-bribery provisions contain the following jurisdictional element:  “while in the territory of the United States, corruptly to make use of the mails or any means or instrumentality of interstate commerce or to do any other act in furtherance” of a bribery scheme.

The DOJ’s indictment did not contain any U.S. jurisdictional allegations, and likely because of this, the bribery scheme was not charged as an FCPA offense.

Rather, the indictment alleged that the U.S. was a member of ICAO and provided support to ICAO by, among other things, annual monetary contributions.  According to the indictment, during the relevant time period, U.S. contributions to ICAO constituted approximately 25% of its annual budget.

Presumably on the basis of this allegation, the DOJ charged the defendants with: (i) conspiracy to commit honest services fraud; (ii) honest services fraud; (iii) conspiracy to solicit and to give bribes involving a federal program; (iv) soliciting bribes involving a federal program; (v) giving bribes involving a federal program; and (vi) aiding and abetting offenses.

Vassiliev and Siciliano filed similar motions to dismiss (here and here) with Vassiliev’s motion to dismiss stating in pertinent part:

“This is a most unusual indictment. It levels charges against foreign nationals and is based solely on foreign conduct. The indictment candidly states that the alleged offenses were committed in their entirety outside the United States—they were “begun and committed outside the jurisdiction” of any State or district.

All three defendants are foreign citizens and foreign residents. […] The indictment contains no allegation that any of them committed any criminal act in the United States. In fact, the indictment contains no allegation that any of them ever entered the United States for any reason whatsoever, let alone in connection with the crime charged in the indictment. The gist of the indictment is that Vassiliev and Sidorenko sought to pay bribes and/or gratuities to Siciliano, who worked for an agency of the United Nations based in Canada, in order to influence contracts awarded by other foreign agencies. […]

These criminal counts are fundamentally flawed. Neither statute has extraterritorial application, so the indictment fails to state an offense under United States law. Even if the statutes were found to apply extraterritorially, the alleged facts in this case fail to allege minimum contacts or sufficient nexus between the defendants and the United States, so the Due Process Clause forbids this prosecution.”

Judge Breyer granted the motion to dismiss and his comments in this transcript make for an interesting read.

“What I’m going to do is read the facts as I have gleaned them from the indictment and I’d like the Government to — if  the Government believes that I’ve misstated it, I would like you to make note.

The International Civil Aviation Organization has been a United Nations specialized agency since 1944. The United States has been a member of this agency since its formation. One of the agency’s responsibilities is standardizing machine readable passports. The standards that this agency established were used to determine which features would be utilized in passports in a variety of countries, including the United States.

The time period relevant to the indictment is 2005, 2010. And during this time, the United States made annual monetary contributions to the agencies exceeding $10,000 per year. Throughout this time period contributions from the United States constituted 25 percent of the agency’s annual budget.

Mr. Siciliano was an employee of this agency and was specifically assigned to work in the Machine Readable Travel Documents Program. Mr. Siciliano worked and resided in Canada, where the agency that we’ve just discussed is headquartered. He held a Canadian passport, but is actually a Venezuelan national.

Mr. Sidorenko and Mr. Vassiliev were chairmen of a Ukrainian conglomerate of companies that manufactured and supplied security and identity products and their consortium, how they acted, was called EDAPS. It’s called the EDAPS Consortium.

Mr. Sidorenko is a citizen of Ukraine, Switzerland and St. Kitts and Nevis. Not of the United States. But he primarily resided in Dubai during the relevant time period.

Mr. Vassiliev also resided in Dubai, but he is a citizen of Ukraine and St. Kitts and Nevis. He’s not an American citizen either.

And, of course, the company is not — I mean, the agency is not an American agency.

The indictment alleges that Mr. Sidorenko and Mr. Vassiliev provided money and other things of value to Mr. Siciliano in exchange for Mr. Siciliano using his position at this agency to benefit EDAPS, as well as Sidorenko and Vassiliev personally. That is to say, the allegation is that the — that Mr. Sidorenko and Vassiliev, Ukrainians, provided things of value to Mr. Siciliano in Canada in exchange for Mr. Siciliano using his position at a place in Canada to benefit an Ukrainian company, as well as these — Mr. Sidorenko and Mr. Vassiliev personally, these Ukrainians personally.

Mr. Siciliano sought to benefit the Ukrainian consortium by introducing and publicizing EDAPS to Government officials and entities, by arranging EDAPS to appear at the agency’s conferences, and by endorsing the Ukrainian consortium to other organizations and contacts.

The indictment also alleges that Mr. Siciliano assisted Mr. Vassiliev’s girlfriend in obtaining a visa to travel to Canada in 2007.

Around the same time Mr. Siciliano also considered arranging to obtain a visa for Mr. Sidorenko by hiring Mr. Sidorenko as a consultant for this agency.

Additionally, the three defendants arranged to have Mr. Siciliano’s son sent to Ukraine to work for Mr. Sidorenko.

During there time period, Mr. Siciliano wrote an email message to Mr. Vassiliev seeking payment of dues via wire transfer to a Swiss bank account.

A few years later, Mr. Siciliano sent an email advising Mr. Vassiliev and Mr. Sidorenko that they owed him three months payment. A few weeks after this email, Mr. Siciliano sent another email to Mr. Vassiliev referencing future projects, receiving the fruits of their marketing agreement, and inquiring about picking up his dues.

All of those activities, everything that I have said, occurred outside the United States of America between these three defendants, who, by the way, aren’t United States citizens, who never worked in the United States and whose use of the wires did not reach or pass through the United States.

[…]

[M]y first reaction in reading this indictment is that your office is to be congratulated because, apparently, you have reduced crime in the Northern District of California, and indeed in the United States of America, to such a point that you are using resources of your office to go after criminal activity that occurs in foreign countries and for that — that’s a rather interesting concept that, apparently, you thought this is a good use of assets and resources of the United States Attorney’s Office for the Northern District of California.

So it occurred to me: Is this statute or statutes, the honest services statute and the bribery statute, extraterritorial? And, fortunately, the Supreme Court has addressed this issue. As recently as 2010, they have said — Justice Scalia writing the opinion for a unanimous court, I might add, said that you just look at the statute. See what Congress said. Did Congress say it should be applied extraterritorial?

And you would concede, wouldn’t you, [DOJ attorney], there is nothing in the statute that talks about extraterritorial application, is there?

DOJ: There is nothing in the text of [the charged statutes]. I would submit that the legislative history of [a relevant statute] suggests that it was meant to be applied extraterritorially.

THE COURT: But you know there are those people, like judges, who look first to the statute. There is nothing in the statute.

DOJ: That is correct, your Honor.

THE COURT: Okay. So then if there is nothing in the statute, that doesn’t preclude necessarily the application of the statute extraterritorial, but we have to see whether or not that’s consistent with the general purpose of the statute.

DOJ: Correct, your Honor.

THE COURT: And it’s your view that since the Government contributes some funds to this agency, which is involved in national security — I guess we can talk about it in open court, can’t we?

DOJ: Yes, your Honor.

THE COURT: Okay. I didn’t want to clear the Court because of this strong national security interests that apparently are at issue here. But because they give money to this agency which is engaged in activities, some of which may impact national and international security arrangements, that’s the nexus for the United States Government to apply the statute in an extraterritorial way, is that correct?

DOJ: That’s certainly one of the key —

THE COURT: That’s your first point. We’ll get to the other points, but let’s deal with this first point first.

And so it occurred to me by that logic, the United States being a very generous country, gives a lot of money to a lot of foreign countries. They give over a billion dollars to Egypt. They give vast sums of money to Mexico. They give sums of money to many, many countries all over the world.

And then I wonder by their giving some money to a foreign country, does that then give them jurisdiction to apply statutes, such as the honest services statute, to individuals who are operating in that country or outside the United States?

For example, can you prosecute — you give some money, let’s say, to Mexico and — for programs involving security in Mexico, the border. Let’s make it right down your alley. And it turns out that somebody who is running one aspect of that program in Mexico, a Mexican national, favors his brother-in-law and takes a bribe from his brother-in-law to get his brother-in-law’s children a job somewhere.

Are you suggesting that the United States of America under an honest services theory could prosecute the individual in Mexico?

DOJ: Under honest services, there would have to be the use of a mailing or wire. Under [a relevant statute] I believe those facts would support a prosecution, if the funding were made pursuant to a federal program.

THE COURT: So, in other words, if I — it’s your view, your view, that the United States of America can police foreign companies in the exercise of their operation involving foreign citizens on matters unrelated to the program which the United States gave money for — that is, for the specific purpose of the program — and that they then have jurisdiction to act in that regard.

DOJ: It is, your Honor, if it is pursuant to a federal program.

THE COURT: And do you have one case that says that?

DOJ: We have Campbell, your Honor, which was a District of Columbia case in which an Australian national was charged with bribery under 666 for conduct in Afghanistan relating to his work with a private contractor that received aid from the US AID.

THE COURT: And the program involved was a program for the benefit of the United States, is that correct, in that case?

DOJ: It was a program through which the United States policy interests were advanced, your Honor.

THE COURT: So if there is ever, ever a policy interest of the United States of America in anything a foreign country — that occurs in a foreign country, the United States Attorney’s Office for the Northern District of California will vindicate the way the laws apply — the honest services law applies. You’re going to wipe out bribery and honest services throughout the world. I want to congratulate you for that.

And I never in my life, in 50 years of criminal practice, seen a more misguided prosecution as the one that you’ve brought. I just don’t even get it. I don’t get it, how you can — how you can use resources of the United States Attorney’s Office to prosecute some foreign nationals involved in a foreign company, engaged in conduct which was foreign, on doing things that weren’t directly related to the contribution of the United States to that entity.

DOJ: Your Honor —

THE COURT: Who did you get permission from to bring this prosecution? Anybody in Washington?

DOJ: We — this was a Northern District of California prosecution, your Honor.

THE COURT: Did you get permission from anyone in the Department of Justice in Washington DC to bring this prosecution?

DOJ: It was not required. We coordinated —

THE COURT: It implicates foreign countries, doesn’t it?

DOJ: It does, your Honor.

THE COURT: And you didn’t choose fit to ask the Department of Justice whether in their smarter sentencing, smarter criminal law enforcement program this is a good use of your resources?

DOJ: We received office approval. We also coordinated with the State Department, your Honor.

THE COURT: Pardon?

DOJ: We also coordinated with the State Department.

THE COURT: In other words, it was the State Department, and that was whether or not this person had diplomatic immunity. I’m not even going to address that. That’s another issue entirely.

But you’re telling me this was a decision of the United States Attorney to bring this prosecution without the knowledge of the Department of Justice.

DOJ: It was a duly authorized decision by this office to do so.

THE COURT: My suggestion, since I’m dismissing this indictment, is that you bring an appeal, right away. I would be very interested in what the Ninth Circuit has to say about this, whether they think that there is enough of a nexus to apply statutes, such as the bribery statute and the honest services statute, to the conduct that’s alleged in this particular case.”

Elsewhere in the transcript, Judge Breyer stated:

“They actually have law enforcement in Canada. If you’re so concerned about the way some Canadians are operating with a Canadian-based company in dealing with Ukrainians, you can always phone the Mounties and they will investigate it if they think it’s appropriate.”

[…]

This program, this program — there is no allegation here that somehow the program failed or was in jeopardy by virtue of — by virtue of this purportedly allegedly corrupt person giving a contract or favoring somebody in Ukraine. That’s not — that’s not what’s alleged here.”

Judge Breyer followed up his oral decision granting the motions to dismiss with this written opinion.  In it, Judge Breyer states, among others things, as follows:

“Of course, the United States has some interest in eradicating bribery, mismanagement, and petty thuggery the world over. But under the government’s theory, there is no limit to the United States’s ability to police foreign individuals, in foreign governments or in foreign organizations, on matters completely unrelated to the United States’s investment, so long as the foreign governments or organizations receive at least $10,000 of federal funding. This is not sound foreign policy, it is not a wise use of scarce federal resources, and it is not, in the Court’s view, the law.”

[…]

“There is no allegation that even one dollar of the millions of dollars the United States presumably sent to ICAO was squandered.”

Although outside the FCPA context, Judge Breyer’s decision and reasoning is nevertheless relevant to FCPA enforcement actions against foreign actors that are frequently brought on sparse jurisdictional allegations.

Moreover, Judge Breyer’s comment that there was no allegation that the alleged bribery compromised the integrity of the program at issue is relevant to causation issues discussed in prior posts (see here).

Non-FCPA Legal Developments Should Cause Pause As To Certain FCPA Enforcement Theories

The substance of this post is the same as this August 2013 post regarding the civil RICO action involving Pemex and Siemens.  The only difference is that instead of a S.D. of New York decision that should cause pause as to certain FCPA enforcement theories, it is now a Second Circuit decision that should cause pause.

By way of background, the FCPA is explicit as to the jurisdictional scope of the anti-bribery provisions and states as follows as to foreign companies.

• As to foreign issuers subject to 78dd-1 of the FCPA (i.e. foreign companies with shares registered on U.S. exchanges or otherwise required to file periodic reports with the SEC), the jurisdictional prong is “use of the mails or any means of instrumentality of interstate commerce corruptly in furtherance” of a bribery scheme.
• As to persons other than U.S. persons (legal or natural) or foreign issuers, the FCPA was amended in 1998 to create an entire new category of “person” subject to the FCPA’s anti-bribery provisions.  See 78dd-3.  This category applies to non-U.S. actors and non-foreign issuers such as foreign private companies and foreign nationals and contains the following jurisdictional prong – ”while in the territory of the United States, corruptly to make use of the mails or any means or instrumentality of interstate commerce or to do any other act in furtherance [of a bribery scheme.”

In  short, as to foreign actors, the FCPA’s anti-bribery provisions contain explicit territorial requirements.

Several FCPA enforcement actions have been brought against foreign companies based on sparse U.S. jurisdiction allegations. For instance:

• The Total enforcement action (the third largest in FCPA history in terms of fine and penalty amount) was based on a 1995 wire transfer of $500,000 (representing less than 1% of the alleged bribe payments at issue) from a New York based account.
• The JGC Corp. enforcement action was based on the jurisdictional theory that certain alleged bribe payments flowed through U.S. bank accounts and that co-conspirators faxed or e-mailed information into the U.S. in furtherance of the bribery scheme.
• The Magyar Telekom enforcement action was based on allegations that a company executive sent two e-mails to a foreign official from his U.S. based e-mail address that passed through, was stored on, and transmitted from servers located in the U.S. and that certain electronic communications made in furtherance of the alleged bribery scheme and the concealment of payments, including drafts of certain agreements and copies of certain contracts with intermediaries, were transmitted by company employees and others through U.S. interstate commerce or stored on computer servers located in the U.S.
• The Bridgestone enforcement action was based on allegations that employees sent and received e-mail and fax communications to/from the U.S. in connection with the bribery scheme.
• The Tenaris enforcement action was based on allegations that a payment to an agent in connection with the alleged bribery scheme was wired through an intermediary bank located in New York.

The above background is important in understanding why a recent Second Circuit decision should cause pause as to the above FCPA enforcement theories.

The decision involved a civil RICO action in which PEMEX alleged that Siemens, among others, violated RICO and engaged in common law fraud by bribing PEMEX officials to approve overrun and expense payments to to CONPROCA, a Mexican corporation completing an oil refinery rehabilitation project in Mexico.  According to the complaint, CONPROCA would receive payment from PEMEX’s Project Funding Master Trust (the “Master Trust”), organized under Delaware law, and managed by its then-trustee Bank of New York.  According to the complaint, The Master Trust paid each invoiced amount from its New York account to CONPROCA’s account at Citibank in New York.  The complaint further alleged that CONPROCA financed the project at issue ”through the issuance of bonds registered with the SEC, and through institutional credit, a substantial amount of which were issued by U.S. financial institutions and guaranteed by the Export Import Bank of the United States.”

The DOJ would surely take the position that the above U.S. jurisdictional allegations would be sufficient to bring a criminal FCPA enforcement action against a foreign company for bribing foreign officials.

Not so in a civil RICO action subjected to actual judicial scrutiny.

As noted in the prior August 2013 post, in ruling on the defendants’ motion to dismiss based on the argument that the RICO claims were extraterritorial, the S.D. of N.Y. first noted that because RICO is silent as to any extraterritorial application, the RICO statutes do not apply extraterritorially.  The court then observed that “when foreign actors were the primary operators, victims, and structure of a RICO claim” courts have properly concluded that the claims were extraterritoritial.  The S.D. of N.Y. then held that PEMEX’S RICO claims were extraterritorial because “they allege a foreign conspiracy against a foreign victim conducted by foreign defendants participating in foreign enterprises.”

As to those U.S. jurisdictional allegations, the S.D. of N.Y. stated:

“They fail to shift the weight of the fraudulent scheme away from Mexico. Seen simply, as a result of the claimed conspiracy PEMEX, the Mexican Plaintiff for whom the work was done in Mexico, paid fraudulent overcharges to CONPROCA, the Mexican corporation which did the work.  PEMEX officials in Mexico granted the challenged approvals to pay CONPROCA. The American trustee merely transferred the payments through two banks in New York.  The defendants’ bribery of PEMEX officials, and CONPROCA’s underbidding and submitting false claims under Mexican public works contracts, all occurred in Mexico. Thus, ‘it is implausible to accept that the thrust of the pattern of racketeering activity was directed at’ the United States.  The RICO claims are accordingly dismissed.”

PEMEX appealed the S.D. of N.Y. dismissal and last week the Second Circuit (see here) affirmed the dismissal.  In pertinent part, the Second Circuit’s order states:

“To the extent Pemex relies on several allegations of domestic activity to support its RICO claim, these, too, are insufficient.  “[S]imply alleging that some domestic conduct occurred cannot support a claim of domestic application.” […]

The scheme alleged by Pemex possesses three minimal contacts with the United States: the financing was obtained here, the invoices were sent to the bank for payment, and the bank issued payment. Absent from the pleadings are any allegations that the scheme was directed from (or to) the United States. The activities involved in the alleged scheme–falsifying the invoices, the bribes, the approval of the false invoices–took place outside of the United States. The allegations of domestic conduct are simply insufficient to sustain RICO jurisdiction.”

Because of the general absence of substantive FCPA case law, one must often reference non-FCPA case law involving similar legal issues to best appreciate the many controversial aspects of FCPA enforcement.

As the above Second Circuit highlights, such case law should cause pause as to certain FCPA enforcement theories.