Category: Foreign Official

O’Shea “Foreign Official” Challenge Fully Briefed

Earlier this week, lawyers for John Joseph O’Shea filed a replly brief (here) in the “foreign official” challenge pending in the Southern District of Texas. The “foreign officials” at issue in the O’Shea matter are alleged to be officials of Comision Federal de Electricidad (“CFE”), a Mexican utility, the same entity at issue in the Lindsey matter currently in trial in the Central District of California. See here for the prior post.

O’Shea’s argument begins as follows.

“The Government Relies on ‘Prosecutorial Common Law’ and Rulings from Cases That Did Not Consider or Inadequately Considered the Meaning of Foreign Official.”

The reply brief then states as follows. “As long as FCPA defendants – both individuals and corporations – enter into non-prosecution agreements, deferred prosecution agreements, and plea agreements, the government will continue to build its arsenal of ‘prosecutorial common law’ to supports its aggressive and slanted interpretation of the FCPA. Yet court acceptance of plea agreements does not convert the government’s pronunciations on the law into sources of legal authority. Indeed, the government’s strategy of creating its own would-be common law threatens to strip the federal courts of their judicial power to interpret the FCPA.”

See here for the prior post on O’Shea’s motion to dismiss.

See here for the prior post on the DOJ’s response brief.

Along with the reply brief, O’Shea’s lawyers also filed (here) a motion to strike the Declaration of Clifton Johnson ((Assistant Legal Adviser for Law Enforcement and Intelligence in the Legal Adviser’s Office of the United States Department of State). Johnson’s declaration was ordered stricken in the Lindsey challenge (see here) and was also filed earlier this week in the Carson “foreign official” challenge pending in the Central District of California. (See here).

DOJ Files Opposition Brief in Carson “Foreign Official” Challenge

On February 21st, various defendants in the U.S. v. Carson case pending in the Central District of California filed a historic challenge to the DOJ’s interpretation that employees of alleged state-owned or state-controlled enterprises are “foreign officials” under the FCPA. (See here for the prior post).

Yesterday, the DOJ filed its opposition brief (see here).

The DOJ brief is supported by the same declaration from Clifton Johnson (Assistant Legal Adviser for Law Enforcement and Intelligence in the Legal Adviser’s Office of the United States Department of State) ordered stricken in the Lindsey “foreign official” challenge (see here and here) and also filed in the O’Shea “foreign official” challenge (see here).

The DOJ brief is also supported by a declaration from FBI Special Agent Brian Smith (here) as to “some facts related to certain of the entities involved” in the case and “information pertaining to state-owned enterprises in China” and “certain portions of legislative history related” to the FCPA.

Also yesterday, Nathaniel Edmonds (Assistant Chief, DOJ Fraud Section) filed a notice of appearance in the case.

“Foreign Official” Limbo – The Bar Has Been Lowered

It’s Friday, so let’s get this started with some music.

The previous “limbo low” for an otherwise commercial enterprise to be deemed an “instrumentality” of a foreign government, and thus employees of the enterprise to be deemed “foreign officials” by the DOJ and SEC was 43%. See this prior post regarding the Alcatel-Lucent enforcement action and Telekom Malaysia Berhad – a commercial enterprise with a shareholder base of approximately 35,000 institutional and private/retail shareholders.

The limbo bar apparently has been lowered.

The recent Comverse enforcement (here) focused on “individuals connected to” “Hellenic Telecommunications Organization S.A. [“OTE”] – a telecommunications provider controlled and partially owned by the Greek Government” including “employees of OTE’s subsidiaries Cosmote, Cosmofon, and Cosmorom, in order to obtain purchase orders from those companies.”

According to the NPA, “the Greek Government was OTE’s largest single shareholder and maintained an interest in over one-third of OTE’s issued share capital.”

Although the NPA only referenced knowing violations of the FCPA’s books and records provisions (i.e. a “charge” that does not have a “foreign official” element) you can be sure that this enforcement action, notwithstanding the manner of resolution, was still very much about the “foreign officials” allegedly at issue. See, e.g., Miller & Chevalier FCPA Review Spring 2011 (here) (“Neither the SEC nor the DOJ identifies OTE as a government instrumentality, although the language used (identifying the Greek government as the largest single shareholder but not majority owner) suggests that they would have brought anti-bribery charges if there was evidence that CTI had knowledge of the payments or that Comverse Limited engaged in improper activity in the United States.”).

The conduct at issue in the Comverse enforcement took place between 2003-2006.

Just what type of entity was OTE during this time period?

OTE’s 2003 Annual Report (here) notes that the “Greek State” stake of total share capital was approximately 33.7%. The report notes that OTE’s shares have traded on the New York Stock Exchange since 1998. The report states as follows. “The Greek State may no longer control OTE in a way different from that of any other Societe Anonyme company or telecom services provider. The Greek State may – only as a shareholder – monitor the operation and administration of the corporate affairs. The Greek State is represented by the Minister of Finance who is entitled to intervene according to the Articles of Association and the legal procedures as any other shareholder can do.

OTE’s 2004 Annual Report (here) contains information similar to that noted above and states as follows. “The Greek State may no longer control OTE in a way different from that of any other Societe Anonyme and telecom services provider company. The Greek State may – only as a shareholder – monitor the operation and administration of the corporate affairs. The Greek State is represented by the Minister of Finance who is exercising its control through the established bodies as any other shareholder can do.”

OTE’s 2005 Annual Report (here) describes a shareholder structure as follows. International institutional shareholders 40%; Hellenic Republic 38.7%; Greek institutional shareholders 12.1%; Rest shareholders 9.2%.

OTE’s 2006 Annual Report (here)describes a shareholder structure as follows. International institutional shareholders 45%; Hellenic Republic 38.7%; Greek institutional shareholders 9.5%; Rest shareholders 6.8%.

According to OTE’s current website (here), it shares trade on the Athens Stock Exchange, the London Stock Exchange and OTE’s ADRs trade on the OTC (over the counter) market in the U.S. and OTE continues to report to the SEC.

According to OTE’s current website (here), its current shareholder base is as follows. Hellenic Republic: 20.0%; Deutsche Telekom: 30.0%; Greek Institutional Shareholders: 30.2%; International Institutional Shareholders: 9.7%; and Rest Shareholders: 10.1%.

Step aside 43%, the new limbo low is between 33% – 38%.

How long can it go?

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A good weekend to all.

No – The Consistent Answer In DOJ Responses to Senator Questions Regarding FCPA Reform

On November 30, 2010, the Senate Subcommittee on Crime and Drugs (chaired by then Senator Arlen Specter) held a hearing titled “Examining Enforcement of the Foreign Corrupt Practices Act.” (See here for the prior post).

Following the hearing, Senator Christopher Coons and Senator Amy Klobuchar submitted written questions to Greg Andres (DOJ) – one of the witnesses who testified at the hearing.

The DOJ responses are here.

As evident from the DOJ responses, certain of which are highlighted below, the consistent DOJ response to FCPA-related reform proposals is no.

Profiled below are DOJ’s substantive responses to Senator questions regarding mandatory debarment for egregious FCPA violators; a potential FCPA compliance defense; a potential FCPA amnesty program; whether businesses face FCPA uncertainty; whether clarification of the “foreign official” element is needed; and whether the statute’s corporate intent element needs revising.

Mandatory Debarment

Does the DOJ favor a “mandatory, conduct-based, debarment remedy for companies that engage in egregious bribery”?

No.

The DOJ says that such “mandatory debarment would likely be counterproductive, as it would reduce the number of voluntary disclosures and concomitantly limit corporate remediation and the implementation of enhanced compliance programs.”

In a related question, the DOJ adds that “a mandatory conduct-based debarment for companies could well have a negative impact on the Government’s ability to investigate and prosecute transnational corruption effectively.” “Linking mandatory debarment to a criminal resolution would fundamentally alter the incentives of a contractor-company to reach an FCPA resolution because such a resolution would likely lead to the cessation of revenues for a government contractor – a virtual death knell for the contractor-company. Similarly, mandatory debarment would impinge negatively on prosecutorial discretion. If every criminal FCPA resolution were to carry with it mandatory debarment consequences, then prosecutors would lose the necessary flexibility to tailor an appropriate resolution given the facts and circumstances of each individual case.”

Boiled down to one sentence, the DOJ’s opposition to mandatory debarment for egregious FCPA violators seems to be this – it would lessen our FCPA caseload, it would make our jobs more difficult, and it would take away our flexibility and leverage.

This is hardly a convincing argument to the position I articulated at the Senate hearing (see here) that “egregious instances of corporate bribery that legitimately satisfy the elements of an FCPA anti-bribery violation involving high-level executives and/or board participation should be followed with debarment proceedings against the offender.”

As I noted in this previous post, H.R. 5366 (which passed the House in September 2010) is not the answer. However, the issue of mandatory debarment, in certain instances, remains a valid and legitimate issue notwithstanding the DOJ’s responses.

Compliance Defense

Does the DOJ favor exploring a “formal compliance defense” to the FCPA?

No.

The DOJ “opposes the adoption of a formal compliance defense.”

According to the DOJ, it “already considers a company’s compliance efforts in making appropriate prosecutorial decisions, and the United States Sentencing Guidelines also appropriately credits a company’s compliance efforts in any sentencing determination.” “Among other things” the DOJ states, “the creation of such a defense would transform criminal FCPA trials into a battle of experts over whether the company had established a sufficient compliance mechanism.” “Against this backdrop, companies may feel the need to implement a purely paper compliance program that could be defended by an ‘expert,’ even if the measures are not effective in stopping bribery.” “If the FCPA were amended to permit companies to hide behind such programs, it would erect an additional hurdle for prosecutors in what are already difficult and complex cases to prove.”

As readers likely know, the U.K. Bribery Act, set to go live on July 1st, contains a so-called adequate procedures defense and such a defense should be considered under the FCPA as well.

Amending the FCPA to include a compliance defense is not a new idea. In the mid-1980’s numerous FCPA reform bills included such a defense and provided that a company would not be held vicariously liable for a violation of the FCPA’s anti-bribery provisions by its employees or agents, who were not an officer or director, if the company established procedures reasonably designed to prevent and detect FCPA violations by employees and agents. In fact, an FCPA reform bill containing such a provision did pass the U.S. House.

A compliance defense is not about hiding behind “paper programs” as the DOJ asserts. Rather a so-called compliance defense, one that would be inapplicable in cases such as Siemens, it is about properly incentivizing corporate FCPA compliance and not putting a company at risk of FCPA scrutiny, costly FCPA internal investigations, and the growing collateral consequences of FCPA inquiries should a non-executive employee engage in conduct contrary to a company’s pre-existing, published, and trained on FCPA compliance policies and procedures.

Amnesty Program

Is the DOJ in favor of a so-called “amnesty program” as recently advocated by some?

No.

The DOJ says it “does not support the idea of an FCPA amnesty program.” Among other things, the DOJ says that “as the beneficiary of [several established sources of information such as voluntary disclosures] the Department does not presently face difficulty in identifying sources of information of FCPA criminal violations.” “Consequently, an amnesty program would provide protection for corporations who violate the law without providing accompanying meaningful benefits to law enforcement.” “Finally, consistent with the United States Sentencing Guidelines and the Department’s Principles of Federal Prosecution of Business Organizations, the Department already provides meaningful credit for voluntary self-disclosures, extraordinary cooperation, and substantial remediation by corporations where appropriate and deserved.”

Uncertainty?

Does the DOJ believe that “well-meaning businesses are faced with significant uncertainty as to their potential exposure to civil and criminal penalties under the FCPA?”

No.

The DOJ says that “it provides clear guidance to companies with respect to FCPA enforcement through a variety of means.” It lists the DOJ’s Lay Person Guide to the FCPA, various charging documents, plea agreements, non-prosecution and deferred prosecution agreements [see here for a recent guest post on prosecutorial common law] and the DOJ’s FCPA Opinion Procedure Releases.

The DOJ concludes its response by saying “in the end, a review of the Department’s FCPA enforcement actions makes clear that companies have never been charged for minor or incidental issues.” “By contrast, the Department’s prosecutions involved extensive and often widespread corruption over significant periods of time.”

As explored in this prior guest post, in the FCPA’s 1988 amendments, Congress directed the DOJ to consider providing formal guidance. However, in 1990 the DOJ declined to issue guidelines and stated as follows. “After consideration of the comments received, and after consultation with the appropriate agencies, the Attorney General has determined that no guidelines are necessary…. [C]ompliance with the [anti-bribery provisions] would not be enhanced nor would the business community be assisted by further clarification of these provisions through the issuance of guidelines.”

“Foreign Official”

Does the DOJ agree that statutory clarification of “foreign official” would help clarify to businesses which of their transactions could be subject to the FCPA?”

No.

The DOJ response begins as follows. “The term ‘foreign official’ has been defined in relevant case law and opinion releases. Some defense attorneys have attempted to argue that the definition of ‘foreign official’ does not extend to the employees of state-owned or state-controlled enterprises.”

For the record, I am not a “defense attorney.” See here for my declaration as to the legislative history on “foreign official.”

In a related question, the DOJ further stated that it “has provided significant guidance regarding the definition of ‘foreign official.'”

Intent

Should the FCPA be amended to “bring the intent standard for corporations in line with the current ‘willfulness” standard that applies to individuals?”

No.

The DOJ responded that it “does not believe that it is necessary or appropriate to amend the FCPA’s intent standard with respect to corporations.” “The Principles of Federal Prosecution of Business Organizations already governs the Department’s decisions regarding whether to charge corporations for federal crimes, including under the FCPA.” “Furthermore, the Department is not prosecuting FCPA matters where a corporation engaged in something less than willful criminal conduct.”

Comverse Technology … Is It Really That Simple?

Question: “If you did not have the choice of deferred or non prosecution agreements, what would happen to the number of FCPA settlements every year.

U.S. District Court Judge Jed Rakoff (S.D.N.Y.) in SEC v. Vitesse Semiconducter Corp., March 21, 2010.

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A U.S. company has a subsidiary A.

Subsidiary A has a subsidiary – subsidiary B.

Subsidiary B engaged an agent who made improper payments partially facilitated by subsidiary’s B’s inflated commission payments to him.

There is no allegation that Subsidiary A knew about the payments.

There is no allegation that the U.S. company knew about the payments.

But subsidiary B’s books, records and accounts are incorporated into the books, records and accounts of the U.S. company for purposes of financial reporting.

These are the essential facts from last week’s FCPA enforcement action against Comverse Technology Inc. – “a world leader in multimedia telecommunications applications”.

The enforcement action involved both a DOJ and SEC component. Total settlement amount was $2.8 million ($1.2 million criminal fine via a DOJ non prosecution agreement; $1.6 million in disgorgement and prejudgment interest via a SEC settled complaint).

Is it really that simple?

Some have suggested that Comverse received “lenient” treatment (see here). Yet, it is questionable whether Comverse would have faced any criminal liability should the DOJ have been required to satisfy its high burden of proof in court.

Yet, FCPA enforcement actions like Comverse seem to be becoming norm.

DOJ

The DOJ enforcement action was resolved via a non-prosecution agreement, meaning there was not, and will never, be judiciary scrutiny of the DOJ’s enforcement theory.

The NPA (here) begins as follows.

The DOJ “will not criminally prosecute Comverse Technology, Inc. (“CTI”), Comverse Inc., a wholly owned subsidiary of CTI (“Comverse Inc.”), and the subsidiaries of Comverse Inc., including Comverse Ltd. (collectively referred to as Comverse) for any crimes … related to Comverse’s knowing violation of the books and records provisions of the Foreign Corrupt Practices Act … arising from and related to Comverse’s failure accurately to record certain improper payments made by employees of Comverse Ltd. and certain subsidiaries of Comverse Ltd. and a third party agent from 2003 to 2006.”

According to the NPA, Comverse Inc. was wholly-owned subsidiary of CTI and Comverse Ltd., an Israeli company based in Tel Aviv, was a wholly owned subsidiary of Comverse Inc.

The NPA has a term of two years and Comverse admitted, accepted, and acknowledged responsibility for the below described conduct. As is typical in FCPA NPAs or DPAs, Comverse agreed “not to make any public statement contradicting” the information below.

The conduct at issue focuses on monthly retainer fees paid by Comverse Ltd. to Agent G (an Israeli citizen engaged by Comverse Ltd. as an independent consultant with a particular focus on Greece) and commissions paid to Agent G on purchase orders. According to the NPA, “Agent G would keep 15% of the total commission, and the remaining 85% was used to make improper payments.”

According to the NPA, “between 2003 and 2006, Comverse Ltd. made approximately $536,000 in cash payments to Corporation H [a Cyprus-based company created by Agent G at the direction of Comverse Ltd. employees to facilitate the payment of cash to representatives of certain Comverse Ltd. customers in exchange for securing purchase orders] with the intent that the money woudl be passed on to individuals connected to OTE, including employees of OTE’s subsidiaries Cosmote, Cosmofon, and Cosmorom, in order to obtain purchase orders from those companies for Comverse Ltd. products and services, resulting in approximately $1.25 million in adjusted operating income.”

OTE?

That would be the “Hellenic Telecommunications Organization S.A. – a telecommunications provider controlled and partially owned by the Greek Government.” According to the NPA, “the Greek Government was OTE’s largest single shareholder and maintained an interest in over one-third of OTE’s issued share capital.”

The DOJ agreed to resolve the enforcement action via a NPA “based, in part, on the following factors: (a) Comverse’s timely, voluntary, and complete disclosure of the facts” [described above]; (b) Comverse’s full cooperation with the Department and the [SEC]; and (c) the remedial efforts already undertaken and to be undertaken by Comverse.”

The DOJ release (here) states as follows. “The [NPA] recognizes the company’s thorough self-investigation and the results of its investigation, voluntary disclosure of the underlying conduct, and full cooperation with the department. CTI has also undertaken extensive remedial efforts and overhauled its overall compliance culture, including through the implementation of mandatory training programs focused on anti-corruption and the use of third-party agents and intermediaries, as well as more rigorous accounting controls for the approval of third-party payments. As a result of these mitigating factors, the department has agreed not to prosecute CTI or its subsidiaries for failing to maintain accurate books and records, provided that CTI satisfies its obligations under the agreement for a period of two years. Those obligations include ongoing cooperation, payment of the $1.2 million penalty, and the continued implementation of rigorous internal controls.”

SEC

The SEC’s civil complaint (here) is based on the same core conduct described above.

The complaint alleges, in summary fashion, as follows.

“Between 2003 and 2006, Comverse Technology, Inc. (“Comverse”) violated the books and records and internal controls provisions of the Foreign Corrupt Practices Act (the “FCPA”) when its Israeli operating subsidiary, Comverse Limited (“Comverse Limited”), engaged in a scheme to make improper payments to obtain or retain business.”

“In order to facilitate and conceal the payments, Comverse Limited employed a third-party agent (the “Agent”) to establish an offshore entity in Cyprus which, in turn, funneled the improper payments to Comverse Limited’s customers. Employees of Comverse Limited made payments to the Cyprus entity and, after taking 15% off the top of these payments, the Agent paid or facilitated the payment of the remaining 85% to Comverse Limited’s customers in the form of cash bribes.”

“Comverse Limited did not accurately record these improper payments in its books and records, which, in turn, caused them to be improperly classified in Comverse’s consolidated financial statements. Comverse failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions at all levels of the organization were recorded properly.”

Specifically, the SEC alleged as follows.

“Between 2003 and 2006, Comverse Limited made improper payments to employees connected to OTE in order to obtain or retain business with OTE. The scheme originated in Comverse Limited’s EMEA (Europe, Middle East, and Africa) sales division and the improper payments were inaccurately recorded on Comverse Limited’s books and records, which, in turn, were consolidated with Comverse’s financial results.”

“Between 2003 and 2006, Comverse Limited, using [Corporation H], made improper payments totaling approximately $536,000 to individuals connected to OTE, including employees of OTE’s subsidiaries Cosmote, Cosmofon, and Cosmorom to obtain or retain OTE’s business. The improper payments resulted in $1.2 million of improper benefit to Comverse Limited, which flowed through to Comverse.”

As to internal controls, the SEC alleged as follows. “During the relevant time period, neither Comverse nor Comverse Limited had a process, formal or otherwise, for conducting due diligence of third-party agents or for the independent review of third-party agent contracts outside of the sales departments.” The SEC further alleged as follows. “At the time of the conduct, while Comverse did have an omnibus anti-corruption policy that prohibited improper payments to government-affiliated third parties and others, Comverse did not widely circulate this policy and provided no training on it to any employees.”

As to books and records, the SEC alleged as follows. “Comverse Limited falsified its books and records by characterizing and recording the bribes as legitimate sales commissions, thereby failing accurately to reflect the payments and their purpose. These improper expenses, in turn, were consolidated into Comverse’s financial records.”

Based on the above conduct, the SEC charged Comverse with FCPA books and records and internal control violations.

As noted in the SEC release (here) without admitting or denying the SEC’s allegations, Comverse consented “to a conduct-based injunction that prohibits Comverse from having books and records that do not accurately reflect, or from having internal controls that do not prevent or detect, any illegal payments made to obtain or retain business.” In addition, Comverse consented to pay $1,249,614 in disgorgement and $358,887 in prejudgment interest.

Daniel Horwitz (Lankler and Carragher – see here) represented Comverse.

The company’s 8-K filing on April 7th stated as follows. ” As originally disclosed by the Company on March 16, 2009, the Audit Committee of the Board of Directors of the Company conducted its own internal investigation into such payments. The Audit Committee found that the conduct at issue did not involve the Company’s executive officers.”

The company’s 10-K filing on January 25, 2011 suggests that the company’s internal investigation was prompted by a whistleblower complaint and the filing details the company’s remedial actions in connection with the investigation. According to the filing “the Company recorded charges of $2.9 million associated with [the FCPA matter] during the fiscal year ended January 31, 2009.” The company has not yet disclosed what its fees and expenses were during the fiscal year ended January 31, 2010.

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Another interesting item from Comverse’s SEC filings. “For the fiscal year ended January 31, 2010, approximately one quarter of Verint’s [Comverse’s majority-owned publicly traded subsidiary] business was generated from contracts with various governments around the world, including federal, state, and local government agencies.”