Africa Sting – The Big Question
There is a big question raised by the Africa Sting indictments.
As explained in the indictments, one FBI special agent posed “as a representative of the Minister of Defense of a country in Africa (Country A)” and another FBI special agent posed “as a procurement officer for Country A’s Ministry of Defense who purportedly reported directly to the Minister of Defense.”
The DOJ release (here) notes that there was “no actual involvement from any minister of defense.”
According to an individual who attended the DOJ press conference announcing the charges, DOJ officials: did not identify the African country; did say (as indicated in the release) that the African country was not involved in the investigation; but would not say whether the African country had knowledge or was aware of the investigation.
Given the above, two scenarios seem possible.
The first is that the Minister of Defense was purely fictitious (for instance John Doe, the Minister of Defense of Uganda, when in reality there is no John Doe Minister of Defense of Uganda). This would seem unlikely as the indicted individuals could have easily figured out that John Doe was not the Minister of Defense of Uganda – thereby compromising the entire sting operation.
The second, and more plausible scenario, is that John Doe was indeed the Minister of Defense of Uganda, but (as noted in the DOJ release) he was not involved, did not participate, and was not actually seeking bribe payments. It would seem though that to avoid compromising the entire sting operation, John Doe may have known that his name was being used.
Why is this a big question?
Because a key element of an FCPA violation is the existence of a “foreign official.”
Whether a fictitious “foreign official” (the first scenario) or a real, but non-participating “foreign official” (the second scenario) the big question is: can offering to bribe or paying a bribe to such a “foreign official” constitute a substantive FCPA violation?
One can only assume that DOJ thought through this obvious legal issue before seeking the indictments and that it presumably concluded that the answer is yes.
But is that the right answer? What does the FCPA actually say?
The key statutory language is the FCPA’s so-called “third-party payment provisions” because, as alleged in the indictments, the bribe payments were paid not directly to the “foreign official,” but rather to the FBI agent the defendants believed to be the sales agent representative of the “foreign official.”
In pertinent part, these provisions prohibit the payment, offer of payment, etc.
to “any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official […] for purposes of —
(A) (i) influencing any act or decision of such foreign official in his official capacity, (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such foreign official, or (iii) securing any improper advantage; or
(B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality.” (emphasis added).
On this issue, the U.S. Attorneys Manual (here) says:
“The payment must be intended to induce the recipient to misuse his official position to direct business wrongfully to the payer or to any other person. The FCPA prohibits any corrupt payment intended to influence any act or decision of a foreign official in his or her official capacity, to induce the official to do or omit to do any act in violation of his or her lawful duty, to obtain any improper advantage, or to induce a foreign official improperly to use his or her influence with other government officials or agencies to affect or influence any act or decision.” (emphasis added).
Thus, the key statutory language (as indicated in the US Attorneys Manual) requires that the payment or offer of payment influence or induce the “foreign official” to do something.
It’s an open question whether one can or seek to influence or induce a fictitious “foreign official” or a real, but non-participating “foreign official.”
Could the “securing any improper advantage” be the hook the DOJ is “hanging its hat on?”
That clause was added to the FCPA in 1998. The legislative history of the 1998 amendments (see here) is not illuminating as to what precisely that clause means. It is clear though that this clause was added to the FCPA to conform the statute to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, specifically Art. 1, para. 1.
Art. 1, Par. 1 of the OECD Convention(see here) would seem to hinge on a foreign official “acting or refraining from acting in relation to the performance of official duties, in order to obtain or retain business or other improper advantage in the conduct of international business.”
Thus, it would still seem to be an open question whether a fictitious “foreign official” or a real, but non-participating “foreign official” can act or refrain from acting in relation to the performance of official duties in order to obtain or retain business or other improper advantage.
Of course this big question is only relevant to the FCPA charges in the indictment and of course the indictments contain non-FCPA charges as well.
A Look Back (and Forward)
This week marks not only the end of a year, but also a decade.
So let’s take a look back at FCPA enforcement circa 2000.
In 2000, the FCPA was indeed “on the books” (the statute was enacted in 1977), yet there was little in terms of FCPA news or enforcement actions.
A “U.S. newspapers and wires” search for the FCPA in the 2000 picks up 64 “hits” and among the more noteworthy stories from that year were the following:
(1) BellSouth corporation disclosed that the SEC launched a probe into whether one of its Latin American subsidiaries violated the FCPA and the company also disclosed that its outside counsel had already investigated the conduct and found that no violations had occurred; and
(2) BF Goodrich Company announced that it was using a web-enabled training system to educate its employees about work-related legal issues including the FCPA.
One could even attend a few FCPA training sessions in 2000 as the search picked up programs sponsored by both the City of New York Bar and the Washington DC Bar.
There was even one FCPA enforcement action in 2000!
In December 2000, the SEC announced (here) the filing of a settled cease-and-desist proceeding against International Business Machines Corporation (“IBM”).
According to the SEC order (here), IBM violated the books and records provisions of the FCPA based on the conduct of its indirect, wholly-owned subsidiary, IBM-Argentina, S.A. The conduct involved “presumed illicit payments to foreign officials” in connection with a “$250 million systems integration contract” between Banco de la Nacion Argentina (“BNA”) (an apparent “government-owned commercial bank in Argentina) and IBM-Argentina.
The SEC order finds that, in connection with the contract, IBM-Argentina’s Former Senior Management (without the knowledge or approval of any IBM employee in the U.S.) caused IBM-Argentina to enter into a subcontract with an Argentine corporation (“CCR”) and that “money paid to CCR by IBM-Argentina in connection with the subcontract was apparently subsequently paid by CCR to certain BNA officials.”
According to the Order, IBM-Argentina paid CCR approximately $22 million under the subcontract and “at least $4.5 million was transferred to several BNA directors by CCR.”
According to the Order, the former Senior Management “overrode IBM procurement and contracting procedures, and hid the details of the subcontract from the technical and financial review personnel assigned to the Contract.” The Order finds that IBM-Argentina “recorded the payments to CCR in its books and records as third-party subcontractor expenses” and that IBM-Argentina’s financial results were incorporated into IBM’s financial results filed with the Commission.
Based on the above conduct, the SEC concluded that “IBM violated [the FCPA’s books and records provisions] by failing to ensure that IBM-Argentina maintained books and records which accurately reflected IBM-Argentina’s transactions and dispositions of assets with respect to the Subcontract.” IBM consented to a cease and desist order and consented to entry of a judgment ordering it to pay a $300,000 penalty.
A Washington Post article about the IBM action notes that it “is the SEC’s first in three years involving overseas bribery.”
In 2000, there were no DOJ FCPA prosecutions (against corporations or individuals).
The first DOJ corporate FCPA prosecution of this decade did not occur until 2002.
In that action (here) Syncor Taiwan, Inc. (a wholly-owned, indirect subsidiary of Syncor International Corporation) pleaded guilty to a one-count criminal information charging violations of the FCPA. According to the DOJ release, “[t]he company admitted making improper payments [approximately $344,110] to physicians employed by hospitals owned by the legal authorities in Taiwan for the purpose of obtaining and retaining business from those hospitals and in connection with the purchase and sale of unit dosages of certain radiopharmaceuticals.”
The release further notes that the company “made payments [approximately $113,000] to physicians employed by hospitals owned by the legal authorities in Taiwan in exchange for their referrals of patients to medial imaging centers owned and operated by the defendant.”
Based on this conduct, the release notes that the company agreed to a $2 million criminal fine – “the maximum criminal fine for a corporation under the FCPA” (as noted in the release). The release also notes that “Syncor International has consented to the entry of a judgment requiring it to pay a $500,000 civil penalty, the largest penalty ever obtained by the SEC in an FCPA case.”.
From this retrospective, two issues jump out.
First, as demonstrated by the IBM action, the notion that an issuer may be strictly liable for a subsidiary’s (even if indirect) violations of the FCPA books and records is nothing new. (See here for a prior post on this issue).
Second, as demonstrated by the Syncor action, DOJ’s interpretation of the “foreign official” element to include non-government employees employed by state-owned or state-controlled entities stretches back to earlier this decade. (See here for prior posts on this issue).
This retrospective also highlights just how significantly FCPA enforcement has changed this decade.
For starters, the same “U.S. newspapers and wires” search for the FCPA (year to date) picks up nearly 700 “hits” (a ten-fold increase from ten years ago). In addition, if one wanted to, one could attend (it seems) an FCPA seminar, training session, bar event, etc. every week in a different state.
Further, I bet my Jack LaLanne Power Juicer received this holiday season that if the IBM enforcement action were to have recently occurred, the SEC would have also charged FCPA internal control violations as well as sought a significant disgorgement penalty given that the alleged improper payments in that matter helped secure a $250 million contract.
Moreover, the $2 million “maximum criminal fine for a corporation under the FCPA” (as noted in the Syncor DOJ release) seems laughable when viewed in the context of the $450 million Siemens criminal fine (Dec. 2008) or the $402 million Kellogg Brown & Root criminal fine (Feb. 2009). Also laughable is the $500,000 “largest penalty ever obtained by the SEC in an FCPA case” (as noted in the Syncor release) when viewed in the context of the $350 million Siemens penalty or the $177 million KBR/Halliburton penalty.
Has the conduct become more egregious during this decade or have enforcement theories and strategies simply changed? I doubt it is the former.
Why have enforcement theories and strategies changed? One of the best, candid explanations I’ve heard recently is that FCPA enforcement for the government “is lucrative.” (See here).
One of the great legal “head-scratchers” of this decade is how DOJ and SEC’s enforcement of the FCPA against business entities has taken place almost entirely outside of the normal judicial process due to the fact that corporate FCPA prosecutions are resolved through non-prosecution or deferred prosecution agreements, settled through SEC cease and desist orders, or otherwise resolved informally. The end result is that in many cases, the FCPA means what DOJ and SEC says it means.
My hope for the New Year and decade is that many of the untested and unchallenged legal theories which are now common in FCPA enforcement will actually be subject to judicial scrutiny and interpretation.
Lighthouses and Buoys – Part II
Earlier this week, the DOJ announced (see here) the indictment of John Warwick, the former President of Ports Engineering Consultants Corporation. Warwick is charged (see here) with conspiracy to pay bribes to former Panamanian officials to obtain contracts to maintain lighthouses and buoys along Panama’s waterways. The substance of the allegations against Warwick are substantively similar to the previous charges against Warwick’s co-conspirator Charles Jumet (see here for the prior post). As noted in that post, Jumet pleaded guilty.
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I hate to be a Grinch this time of year, but why does DOJ continually use the term “foreign government official” in its charging documents when that term/element doesn’t even appear in the FCPA? (see para. 1 of the indictment). For more on the incorrect/inconsistent use of this key FCPA term see here.
A Double Standard?
A government official (and his wife) tour a foreign vineyard and castle and spend an afternoon at a ski resort in the Alps. A company can’t foot the bill directly, so it funds a group that then picks up the tab.
Another government official is flown across the world to help close a business deal for a large corporate financial backer (and friend).
Sounds like some potential FCPA issues, right?
Wrong.
Why?
Because the government officials involved are not “foreign officials,” but rather U.S. government officials. (See here for the recent story in the NY Times. The WSJ also recently ran a similar story here – although less focused on privately funded travel).
For those interested in other examples, you will want to visit LegiStorm.com (here) a web site that allows one to search such trips by U.S. official, sponsor, most active sponsor, most expensive trips, etc.
This raises the question of whether there is a double standard.
Will a U.S. company’s interaction with a “foreign official” (however that term is interpreted) be subject to more scrutiny and different standards than its interaction with a U.S. official?
Do we reflexively label a “foreign official” who receives “things of value” from private business interests as corrupt, yet when a U.S. official similarly receives “things of value” from private business interests we merely say “well, no one said our system is perfect”?
The U.S. has a domestic bribery statute (18 USC 201) (see here) which has similar (yet not identical) elements to the FCPA. Should not there at least be some level of intellectual and enforcement consistency with these statutes?
No doubt many of the trips identified by LegiStorm had a core, legitimate purpose. However, often times payment of a “foreign official’s” travel expenses also have a core, legitimate purpose. The FCPA enforcement action most “on-point” is the 2007 action against Lucent (see here and here).
It’s just not payment of a “foreign official’s” travel expenses which seem to be subject to a double standard, but also corporate donations as well. It’s common knowledge in this country that corporate interests donate, either directly or indirectly, to political campaigns, political action groups, or other causes to curry favor with politicians (or shall I say “participate in the political process”).
Yet, if a company makes even a bona fide charitable contribution abroad, they will be subject to FCPA scrutiny. The FCPA enforcement action most “on-point” is the 2004 action against Schering-Plough (see here) involving a donation to a legitimate Polish castle restoration foundation where the founder/president of the foundation was also the director of a government health fund which provided money to hospitals throughout Poland for the purchase of pharmaceutical products.
All interesting issues/questions to ponder in what seems to be another example of how FCPA enforcement has indeed because the unique creature that it is. (See here for a prior post on this issue).
Lack of Pride (And That CITGO Sign Too)
If the SEC were to put titles on its complaints, the above may be fitting for the complaint released (see here) earlier this week against Bobby Benton (the former Vice President, Western Hemisphere Operations for Pride International, Inc.).
In its complaint (see here), the SEC alleges that “Benton was responsible for, among other things, ensuring that Pride conducted its Western Hemisphere operations in compliance with the FCPA, that adequate controls were in place to prevent illegal payments, and that the company’s books and records were accurate.”
Despite this position, the SEC alleges that: (i) “Benton authorized the payment of $10,000 to a third party, believing that all or a portion of the funds would be given by the third party to a Mexican customs official in return for favorable treatment by the official regarding certain customs deficiencies identified during a customs inspection of a Pride supply boat; (ii) “Benton learned that a customs agent engaged by Pride’s Mexican subsidiaries paid approximately $15,000 to a Mexican customs official to ensure that the export of a rig would not be delayed due to customs violations; and (iii) Benton concealed the bribe payments made by the manager of the Venezuelan branch of a French subsidiary of Pride from Pride’s internal and external auditors by “redact[ing] references to the Venezuelan payments in an action plan responding to an internal audit report.”
The SEC further alleges that “[d]espite his knowledge, and in one instance authorization, of the Venezuelan and Mexican bribes, Benton signed two false certifications in connection with audits and reviews of Pride’s financial statements denying any knowledge of bribery.” The financial results of the Mexican and Venezuelan entities were consolidated with Pride’s for purposes of financial reporting.
The “foreign officials” involved are Mexican customs officials / customs agents and an official of Petroleos de Venezuela S.A. (PDVSA), the Venezuelan state-owned oil company.
Based on the above conduct, the SEC charged Benton with violating the FCPA’s antibribery provisions, aiding and abetting FCPA violations, and aiding and abetting violations of the FCPA’s books and records and internal control provisions.
Most SEC FCPA enforcement actions (whether against a company or an individual) are settled on the same day the civil complaint is filed. Not so in this case and the SEC complaint notes that Benton asserted his 5th amendment privilege against self-incrimination when subpoenaed to testify by the SEC. Will the SEC actually be put to its burden of proof in an FCPA case?
Pride International’s most recent disclosure on this issue is in its 10-Q filed on November 2, 2009 (see here – pgs. 17-18). As noted in the disclosure, what began as an inquiry into Latin America operations has spawned into a substantial worldwide review of the company’s operations.
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The Benton complaint mentions Petroleos de Venezuela S.A. (PDVSA), the Venezuelan state-owned oil company.
The DOJ/SEC’s interpretation of the “foreign official” element of an FCPA anti-bribery violation is well known by now – all employees of state-owned or state-controlled entities (SOEs), such as PDVSA, are “foreign officials” regardless of title or position.
Further, all employees of SOE wholly-owned subsidiaries are considered “foreign officials” under this interpretation. In fact, a business entity does not even need to be majority owned by a SOE for its employees to be considered “foreign officials” by DOJ/SEC (see the KBR/Halliburton enforcement action (see here paras 13-14) where officers and employees of Nigeria LNG Limited (NLNG) are deemed “foreign officials” despite the fact that NLNG is owned 51% by a consortium of private multinational oil companies (see here).
Applying DOJ/SEC’s untested and unchallenged interpretation to PDVSA can, well, let’s just say it can lead to some rather weird results.
Why?
One of PDVSA’s wholly-owned subsidiaries is Citgo Petroleum Corporation (“CITGO”) (see here).
Thus, under DOJ/SEC’s view, all CITGO employees are “foreign officials” under the FCPA regardless of title or position.
This despite the fact that CITGO is a Delaware corporation based in Houston.
In other words, CITGO is both subject to the FCPA and all of its employees (under the DOJ/SEC interpretation) are “foreign officials.” How’s that for a little mental gymnastics.
At the very least, this gives readers something to think about the next time they attend a ball game at Fenway Park (see here).