A Narrow Opinion Procedure Release
The DOJ recently issued FCPA Opinion Procedure Release No. 10-03 (see here).
As I discuss in this post, the disclosed facts suggest a broad range of potential issues, but the DOJ’s analysis is strangely narrow and would appear to contain a key acknowledgment (in contrast to prior opinion procedure releases) that local law does indeed matter when determining who is a “foreign official” under the FCPA.
The disclosed facts are as follows.
The “Requestor” is a “limited partnership established under U.S. law,” “headquartered in the U.S.,” and “engaged in development of natural resources trading and infrastructure.”
As described in the release:
“The Requestor is pursuing an initiative with a foreign government regarding a novel approach to particular natural resource infrastructure development. Because the approach is relatively novel and the market is dominated by a consortium of established companies, the Requestor determined that it required assistance in entering into discussions with the foreign government.”
The solution?
According to the release, the Requestor plans to contract with a consultant (a U.S. partnership whose sole owner is a U.S. citizen) who just so happens to have “extensive contacts in the business community and the government in the foreign country” and who “previously and currently holds contracts to represent the foreign government and act on its behalf, including performing marketing on behalf of the Ministry of Finance, and lobbying efforts in the U.S.”
In other words, to get things done in the foreign country, the Requestor would like to turn to someone who knows how to get things done in the foreign country and indeed someone who appears to have a track record of getting things done for the foreign government itself as the consultant is a “registered agent of the foreign government” and has “represented ministries of the foreign government that will play a role in the discussions of the Requestor’s initiative.”
Sounds like plenty of red flags.
In addition, according to the release, “the Consultant will be paid a signing bonus by the Requestor at the time the consulting contract is signed.” Further, the release notes that the “bulk of any payment by the Requestor to the Consultant under the contract will come in the form of success fees, should the Consultant’s efforts result in the foreign government entering into a business relationship with the Requestor.”
Ordinarily, the DOJ views third-party success fees in connection with foreign government business with a high-degree of suspicion.
But not so when it comes to the Requestor’s proposed consultant.
The release contains several “safeguards” the Requestor put in place to “ensure that no conflict of interest would arise between the Consultant’s representation of the Requestor and the Consultant’s separate and unrelated representation of the foreign government.”
Most FCPA enforcement actions involve allegations that a company paid something of value – such as a success fee – to a third-party, such as a consultant, who then provides a portion of the money to a “foreign official” in violation of the FCPA.
The analysis is often whether the company provided the thing of value to the third-party under circumstances that suggest the company was “aware of a high probability” that the thing of value would be passed along to the “foreign official.”
Although the Requestor’s disclosed facts do not suggest a perfect analogy, it is interesting to note that the DOJ’s analysis is not focused on the broad range of potential issues suggested by the disclosed facts.
Rather, in the words of the DOJ, “its opinion is limited to the narrow question of whether the Consultant would be a ‘foreign official’ for purposes of the payments under the consulting contract.”
On this issue, the DOJ stated that because the Consultant is ordinarily “an agent of the foreign government” the Consultant and its employees could be “foreign officials” for purposes of the FCPA “in certain circumstances.”
However, the DOJ was “satisfied that for purposes of the contract with the Requestor” the Consultant will “not be acting on behalf of the foreign government” and that therefore the Consultant is not a “foreign official.”
In its “foreign official” analysis, the DOJ cites local law – a reference to the Requestors disclosure that: “[a]s a matter of law local, the Consultant and its employees are not employees or otherwise officials of the foreign government, and the Requestor has secured a local law opinion that it is permissible for the Consultant to represent both the foreign government and the Requestor at the same time.”
The DOJ’s apparent acknowledgment that local law is indeed relevant in determining who is a “foreign official” under the FCPA is encouraging – even though it stands in contrast to the DOJ’s prior statements in opinion procedure releases.
For instance, in Opinion Procedure Release No. 94-01 (see here) the DOJ opined that a general director of a state-owned enterprise being transformed into a joint stock company is a “foreign official” under the FCPA despite a local law opinion that the individual would not be regarded as either a government employee or a public official in the foreign country.
Similarly, in Opinion Procedure Release No. 08-01 (see here) the DOJ opined that the “Foreign Private Company Owner” at issue was a “foreign official” for purposes of the FCPA notwithstanding the fact that other government officials in the country at issue concluded that the relevant privatization regulations did not apply to the “Foreign Private Company Owner” because he was not a government official for purposes of the regulations.
Even though the DOJ’s analysis in Opinion Procedure Release 10-03 is limited to the narrow question of whether the Consultant “would be a ‘foreign official’ for purposes of the payments under the consulting contract” it does seem to recognize that Requestor’s proposed relationship with the Consultant could perhaps pose some problems.
The substance of DOJ’s analysis ends as follows:
“The Department does not opine on any other aspect of the proposed contract or any other prospective conduct involved in the Request. Indeed, while the Consultant is not a foreign official for FCPA purposes under the limited facts and circumstances described by the Requestor, the proposed relationship increases the risk of potential FCPA violations. This opinion does not foreclose the Department from taking enforcement action should an FCPA violation occur during the execution of the consultancy.”
Requestors are usually able to gain some level of comfort from a DOJ “no enforcement action” opinion in an FCPA Opinion Procedure Release. However, given this last paragraph, the Requestor in Opinion Procedure Release 10-03 may still have some sleepless nights ahead.
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As to an oft heard criticism of the FCPA Opinion Procedure Release system – that it takes too long and thus is of little value in a world where business decisions must be made in days or weeks, not months – the release notes that materials were submitted by the Requestor on March 9th, supplemental materials were submitted by the Requestor on August 2nd, and the DOJ release was issued on September 1st.
This & That
A bit of catch up with today’s post which discusses the recent sentence of Juan Diaz in the continuing Haiti Teleco saga (including an interesting post-enforcement action twist) and a DOJ release that flew under the radar.
Juan Diaz
Juan Diaz was recently sentenced to 57 months in prison after previously pleading guilty to a one-count information charging him with conspiracy to violate the Foreign Corrupt Practices Act and money laundering. (See here for the DOJ release). As noted in the release, Diaz was also ordered to: (i) serve three years of supervised release following his prison term; (ii) pay $73,824 in restitution; and (iii) forfeit $1,028,851.
In May 2009, (see here) Diaz pleaded guilty for his role in an improper payment scheme involving employees of Haiti Teleco, an alleged state-owned national telecommunications company. In the DOJ’s view, that would make the Director of International Relations and the General Director of Haiti Teleco, persons Diaz and others allegedly bribed, Haitian “foreign officials” under the FCPA.
The interesting twist is this.
If Diaz bribed these same employees today, he would be bribing (presumably in the DOJ’s view) not Haitian “foreign officials” but Vietnamese “foreign officials.”
Why?
Because in May, Viettel, a telecommunications company run by Vietnam’s military, purchased a 60% stake in Haiti Teleco. (See here).
The 57 month sentence Diaz received is similar to the 60 month FCPA sentence Charles Jumet received in April (see here). Jumet was sentenced to 87 months after pleading guilty to a two-count criminal information charging conspiracy to violate the FCPA and making false statements to federal agents. The false statements portion of the sentence was 20 months.
Civil Forfeiture Action Against Properties Owned by Former President of Taiwan
In July, the DOJ issued a release (see here) about a civil forfeiture complaint it filed against certain U.S. properties “that represent a portion of illegal bribes paid to the former president of Taiwan and his wife.”
With Attorney General Eric Holder’s recent announcement of the Kleptocracy Asset Recovery Initiative (see here), the release should be of interest to those who follow this initiative and the general issue of asset recovery.
Bribe recipients can not be prosecuted under the Foreign Corrupt Practices Act, but U.S. based assets (or other assets that flow through U.S. financial institutions) of bribe recipients can be subject to U.S. legal proceedings under other laws.
As noted in this post from November 2009, Attorney General Holder has called asset recovery a “global imperative” and announced a “redoubled commitment on behalf of the United States Department of Justice to recover” funds obtained by foreign officials through bribery.
The prior post discussed the January 2009 civil forfeiture action the DOJ filed in the aftermath of the Siemens enforcement action against bank accounts located in Singapore in the names of Zulfikar Ali, Fazel Selim, and ZASZ Trading and Consulting Pte Ltd. (“ZASZ”) (see here). According to the DOJ’s complaint (see here), these accounts were used by Siemens and another company to bribe foreign officials in violation of the FCPA, specifically Arafat Rahman (“Koko”), the son of former Bangladeshi Prime Minister Khaleda Zia. The DOJ alleges that the illicit funds in these accounts flowed through U.S. financial institutions thereby subjecting them to U.S. jurisdiction.
Similarly, in January 2010, the DOJ unsealed a criminal indictment against Juthamas Siriwan and Jittisopa Siriwan, the foreign official bribe recipient of the Green’s improper payments and her daughter. See here. Among other things, the indictment seeks forfeiture of approximately $1.7 million.
Thus, the DOJ’s July announcement that it is pursuing U.S. based assets of the former president of Taiwan and his wife very much continues a trend.
According to the DOJ release:
“The former president and his wife were convicted in Taiwan on Sept. 11, 2009, for bribery, embezzlement and money laundering. They are currently sentenced to 20 years in prison. Their convictions were upheld on appeal and are now pending before the Supreme Court in Taiwan. […] The former president and his wife are also currently under indictment in Taiwan for additional alleged acts of graft and money laundering.”
Director John Morton of U.S. Immigration and Customs Enforcement (ICE) stated that the enforcement action “serves as a warning to those corrupt foreign officials who abuse their power for personal financial gain and then attempt to place those funds in the U.S. financial system” and that “ICE’s Homeland Security Investigations agents will continue to work with our law enforcement partners both here and abroad to investigate and prosecute those involved in such illicit activities and hold corrupt foreign officials accountable by denying them the enjoyment of their ill ?gotten gains.”
What appears to make this recent civil forfeiture action different than the previously filed Siemens-related forfeiture action and the previously filed Siriwan enforcement action is that the bribe payor may be beyond the reach of the FCPA.
According to the DOJ release, the entity paying the bribes to the president of Taiwan and his wife was Yuanta Securities Co. Ltd. (YSC). The release notes that YSC “was attempting to increase its ownership share of Fuhwa Financial Holding Company Limited” and that “YSC paid a bribe of 200 million New Taiwan dollars, or approximately $6 million U.S. dollars, […] to ensure that the authorities on Taiwan would not interfere with its acquisition of additional shares and to attempt to establish a relationship with the head of the authorities on Taiwan.”
Neither YSC (here), nor its parent company, Yuanta Financial Holdings, appear to be U.S. issuers. Under 78dd-3 of the FCPA, foreign companies can be subject to the FCPA’s jurisdiction. However, this prong of the FCPA requires a U.S. nexus. A quick scan of the forfeiture complaint does not suggest a U.S. nexus in terms of making the bribe payments – although the complaint clearly does allege a U.S. nexus once the payments were received and used by the former president of Taiwan and his wife.
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Curious as to what happened in the above referenced Siemens-related enforcement action? In April 2010, U.S. District Court Judge John Bates granted the DOJ’s motion for default judgment and judgment of forfeiture against the subject properties.
What’s happening in the Siriwan enforcement action? According to the docket, nothing since the indictment was unsealed in January 2010.
China, China and More China
China.
It is a country often talked about on these pages.
Not surprising given the extent to which companies subject to the FCPA have flocked to this growth market in recent years.
Not surprising given that most companies operating in China do so through joint ventures or third parties. Even if a company does business in China through a subsidiary, oversight and control of the subsidiary’s employees and agents is often difficult.
Not surprising given the number of Chinese “foreign officials” because the enforcement agencies deem all employees of state-owned or state-controlled enterprises to be “foreign officials.” [On this issue, an in-house attorney recently shared with me that during training sessions the attorney tells company employees that there are 1.3 billion “foreign officials” that could be the recipient of a bribe in China. A bit of an exaggeration, but no doubt you get the point.]
I’ve written about China specific issues, including this guest post for the China Law Blog and more extensively here “The Unique Foreign Corrupt Practices Act Challenges of Doing Business in China.”
With many FCPA enforcement inquiries focused on China and with no expected slowdown in China business activity, China issues remain at the forefront of much of what is covered on these pages.
Against this backdrop, two recent practitioner pieces caught my eye.
The first piece (here) is titled “FCPA Compliance in China and the Gifts and Hospitality Challenge” and is authored by Gibson, Dunn & Crutcher attorneys Joseph Warin, Michael Diamant and Jill M. Pfenning.
Below is a short summary of the article.
“This Article discusses the anti-corruption enforcement trends confronting business practices in China, addresses the legal risks posed by the Chinese gift and hospitality culture, and presents suggestions for structuring corporate anti-corruption compliance programs to mitigate these risks. To contextualize law enforcement’s current focus on bribery and other economic crime in China, Part I provides an introduction to the country’s pervasive corruption climate, with a brief summary of recent enforcement actions by both Chinese and U.S. authorities. Turning to the problem of business courtesies, Part II provides background on the unique Chinese gift-giving culture and briefly discusses the FCPA, exploring within the statute’s anti-bribery framework the issue of business courtesy expenditures. Finally, Part III gives advice on how to tailor the gifts and hospitality component of an organization’s compliance program to address this risk in China.”
The second piece (here) is titled “The Chinese Puzzle Box: the Conundrum of
Distinguishing a Permissible Gift from an Illegal Bribe” and is authored by Paul, Hastings, Janofsky & Walker attorneys Leslie Ligorner and Barbara Tsai.
Of particular interest is the section on Chinese state-owned entities and China corruption laws. Among other things, the article notes that many SOE employees “behave like private players in commercial playing fields and not in the manner traditionally associated with the behavior of government officials” and that China law “does not specifically include employees of SOEs within the definition of public officials.”
Also catching my eye was this recent Businessweek piece by Dexter Roberts titled “The Higher Costs of Bribery in China.”
Some China reading material to keep you occupied until the next China-related post.
Former SEC FCPA Enforcement Attorney Critical of SEC’s Recent Veraz Networks Inc. Enforcement Action
Richard Grime is a former high-ranking SEC FCPA enforcement attorney. While at the SEC, Grime “played a prominent role in the Commission’s FCPA program, spoke at FCPA conferences, and participated or supervised many of the Commission’s FCPA cases. He also worked closely with the Department of Justice on countless parallel investigations.” (See here).
Grime is currently a partner at O’Melveny & Myers LLP and is listed as the lead author of this recent release regarding the SEC’s recent enforcement action against Veraz Networks Inc.
The Veraz enforcement action was discussed in this prior post. Among other things, I noted in the post that the Veraz enforcement action contributes to several pillars of what I have been calling the facade of FCPA enforcement. In short, one pillar is the frequency in which FCPA enforcement actions are resolved based on uninformative, bare-bones, and legal conclusory statements of facts or allegations. Check as to the Veraz enforcement action, I stated. Another pillar discussed is the increasing and alarming trend of FCPA enforcement actions being resolved based on tenuous, dubious and untested legal theories. Check as to the Veraz enforcement action, I stated given that the enforcement action (like so many) is based on the SEC’s theory, never accepted by a court, that employees of state-owned or state-controlled enterprises are “foreign officials” under the FCPA.
Grime and his co-authors strike the same themes in the release.
Among other things, Grime and his co-authors state that the SEC “complaint discloses little information about the specifics of the alleged misconduct” and “the complaint is remarkably ambiguous about the substance of the alleged violations.”
According to Grime and his co-authors:
“The complaint refers to ‘gifts,’ ‘illicit payments,’ and ‘questionable expenses,’ but provides little useful insight as to the surrounding circumstances or even the value of some of the alleged gifts and payments. Similarly, the complaint does not state how the company recorded the payments or how the records were inaccurate.”
Why does this matter?
As Grime and his co-authors note: “given that there are few FCPA court opinions, the SEC should seek through these settled complaints to fully explain the facts underlying its actions and how those facts violate the law.”
As to the enforcement agencies’ interpretation of the key “foreign official” element, Grime and his co-authors state as follows:
“Like numerous prior cases, the SEC alleges that employees of foreign government-controlled companies are foreign ‘government officials.’ Until a court decides otherwise, the SEC and the Department of Justice will continue to broadly interpret the FCPA and companies will need to diligence the ownership and control of commercial organizations across the world to avoid running afoul of the FCPA.”
Grime and his co-authors also dish up this criticism of the Veraz enforcement action:
“By punishing Veraz for such conduct, the SEC provides little incentive for a company to voluntarily disclose misconduct, cooperate, and thereby seek leniency. It is unstated whether Veraz cooperated with the SEC investigation, but the company did disclose that it spent $3 million on the investigation. For that sum, the company presumably assisted the SEC’s investigation, but no credit (or explanation for a lack of credit) is given. The specter that even small payments will be prosecuted may drive companies to conclude that remediation without the government’s involvement is the wiser approach.”
Disconnected … Another Telecommunications Company Settles An FCPA Enforcement Action
Yesterday, Veraz Networks, Inc. (see here) joined a long list of telecommunications companies to recently settle an FCPA enforcement action. Veraz, a California-based telecommunications provider, went public in April 2007 and sells its telecommunication products through both direct and indirect sales channels with a majority of its revenue coming from sales outside of the U.S.
Other telecommunications companies, or individuals employed in that industry, to recently resolve FCPA enforcement actions include: UTStarcom (see here and here for the enforcement action), Latin Node, Inc. (see here for the enforcement action), Lucent Technologies (see here and here for the enforcement action), Siemens (in part, see here for the enforcement action), various individuals in connection with the Haiti Teleco matter (see here for the enforcement action), and various employees of ITXC Corporation (see here for the enforcement action). Pending FCPA enforcement actions against telecommunications companies presumably include: Magygar Telekom (see here) and Global Crossing Limited (see here).
That’s a long list.
Back to Veraz.
According to the SEC release (see here), Veraz violated the FCPA’s books and records and internal control provisions in connection with “improper payments made by Veraz to foreign officials in China and Vietnam after the company went public in 2007.”
The SEC complaint (see here) alleges that “from 2007 to 2008, Veraz resellers, consultants, and employees made and offered payments to employees of government-controlled telecommunications companies in China and Vietnam with the purpose and effect of improperly influencing these foreign officials to award or continue to do business with Veraz.” According to the complaint, a Veraz supervisor referred to certain of these payments as the “gift scheme.” The complaint further alleges that “Veraz failed to accurately record these improper payments on the Company’s books and records, and failed to implement or maintain a system of effective internal accounting controls to prevent them in violation of the FCPA […] and to put in place internal controls that are reasonably designed to ensure that their books and records are accurate.”
The SEC’s sparse factual allegations fall under two headings: “Veraz Made Improper Payments to Chinese Government Officials” and “Veraz Made Improper Payments to Vietnamese Government Officials.”
As to payments to “Chinese Government Officials,” the SEC alleges that Veraz engaged a consultant in China to assist Veraz sell products “to a telecommunications company controlled by the government of China.” The complaint further alleges that the consultant “provided approximately $4,500 worth of gifts to officials” of the telecommunications company “in an attempt to secure a business deal for Veraz.” The complaint further alleges that the consultant “also offered a separate improper payment to officials” at the telecommunications company “to secure a deal for Veraz valued at approximately $233,000.” According to the complaint, “Veraz discovered this improper offer of payment prior to receiving any money from the transaction and cancelled the sale.”
As to payments to “Vietnamese Government Officials,” the SEC alleges that “Veraz sold products to a telecommunications company controlled by the government of Vietnam through a Singapore-based reseller.” According to the complaint, a “Veraz employee, through the Singapore-based reseller, at times made or offered illicit payments to the CEO” of the telecommunications company “in order to win business for Veraz.” The complaint further alleges that Veraz “approved of and reimbursed its employee for questionable expenses related” to the telecommunications company “including gifts and entertainment” for employees of the company and “flowers for the wife of the CEO” of the company.
In both instances, according to the complaint: (i) Veraz did not make or keep books, records, and accounts which, in reasonable detail, accurately and fairly reflected the improper gifts or payments provided by Veraz; and (ii) Veraz failed to devise and maintain an effective system of internal controls to prevent or detect violations of the FCPA.
Based on these allegations, the SEC charged Veraz with violating the FCPA’s books and records and internal control provisions.
According to the SEC’s release, Veraz, without admitting or denying the SEC’s allegations, consented to entry of a final judgment permanently enjoining Veraz from future FCPA violations and ordering Veraz to pay a $300,000 civil penalty.
In an article to be published later this summer titled “The Facade of FCPA Enforcement,” I highlight four pillars which contribute to the facade of FCPA enforcement.
The first pillar highlights the frequency in which FCPA enforcement actions are resolved based on uninformative, bare-bones, and legal conclusory statements of facts or allegations. Check as to the Veraz enforcement action. Just who were those Chinese and Vietnamese Government officials? The SEC complaint contains these wonderfully descriptive allegations: “a telecommunications company controlled by the government of China” and a “telecommunications company controlled by the government of Vietnam.” What was the nature of the “illicit payments” made or offered to the CEO of the Vietnamese telecommunications company and what were the “questionable expenses” related to the same company? The complaint does not elaborate.
The second pillar highlights the increasing and alarming trend of FCPA enforcement actions being resolved based on tenuous, dubious and untested legal theories. Check as to the Veraz enforcement action. True, the enforcement action does not allege antibribery violations, but let’s face it, if Veraz’s books and records did not adequately reflect sales and marketing expenses associated with domestic customers and if Veraz did not have sufficient internal controls to prevent and detect such expenses, we would not be reading about this case as an “FCPA enforcement action” even though such conduct would similarly violate the FCPA’s books and records and internal control provisions. Rather, this is an FCPA enforcement action (in the traditional sense) because the improperly recorded payments were directed at “foreign officials” – so alleges the SEC under the theory, never accepted by a court, that employees of state-owned or state-controlled enterprises are “foreign officials” under the FCPA.
The third pillar highlights highlights the opaque nature of FCPA enforcement and how similar enforcement actions, based on the government’s own allegations, are resolved with materially different charges and penalties. Check as to the Veraz enforcement action. If ever there were carbon copy FCPA enforcement actions, it would seem to be Veraz, UTStarcom and Lucent. All principally involved providing things of value to Chinese “foreign officials” (employees of alleged state-owned enterprises). One would expect then that the charges would be similar as well. Wrong. Veraz appears to be only an SEC enforcement action charging only FCPA books and records and internal control violations. UTStarcom involved a DOJ non-prosecution agreement and an SEC enforcement action charging FCPA antibribery as well as books and records and internal control violations. Lucent also involved a DOJ non-prosecution agreement and an SEC enforcement action charging only FCPA books and records and internal control violations. Thus, three similar cases resolved three distinct ways.
[The fourth pillar highlights how seemingly clear-cut instances of corporate bribery and corruption (per the government’s own allegations) are resolved without FCPA antibribery charges. Veraz is not BAE, Siemens, or Daimler – and thus this pillar is of little significance here].
One final point demonstrated by the Veraz enforcement action: resolution fines/penalties represent merely the “tip of the iceberg” in terms of the costs associated with an FCPA inquiry.
The final fine amount, $300,000, is 1/10 the amount of expenses incurred by the company in connection with the SEC investigation. As stated in the company’s most recent 10-Q filing (May 2010) (see here) “as of March 31, 2010, the Company has incurred expenses relating to the SEC investigation of approximately $3 million.”
No wonder Forbes (see here) recently termed the increase in FCPA enforcement the “bribery racket.” No wonder the Wall Street Journal Law Blog (see here) recently posed the question – “is the FCPA Just a Full-Employment Act for the Private Bar?”