Indicting a “Foreign Official”
Yesterday, the DOJ announced (see here) the unsealing of an indictment (see here) against Joel Esquenazi, Carlos Rodriguez, and Marguerite Grandison which charges (among other things) conspiracy to violate the FCPA and substantive FCPA violations for an alleged scheme to bribe two former employees of Haiti Teleco, the alleged “state-owned national telecommunications company.”
Esquenazi and Rodriguez are former executives of a privately owned, Florida-based telecommunications company and Grandison was the President of Telecom Consulting Services Corp., a Florida based company which served as an intermediary.
The unsealed indictment is the latest chapter in this matter; in May 2009, the DOJ announced (see here) the guilty pleas of Juan Diaz and Antonio Perez in connection with the same scheme.
This matter is also yet another example of an FCPA enforcement action in which the “foreign official” is an employee of an alleged state-owned or state-controlled entity.
That, however, is not why this enforcement action is noteworthy.
It is noteworthy because DOJ also indicted Robert Antoine and Jean Rene Duperval – the alleged “foreign officials.” According to the indictment, Antoine and Duperval both served as the “Director of International Relations of Haiti Teleco” and were responsible for negotiating contracts with international telecommunications companies on behalf of Haiti Teleco.
Of course, the charges were not FCPA charges, because the FCPA only covers “bribe-payers” not “bribe-takers” (see here, here, for prior posts on this subject).
Rather the charges against Antoine and Duperval were money laundering conspiracy and/or substantive money laundering charges.
According to the DOJ release, Antoine is from “Miami and Haiti” and Duperval is from “Miramar, Fla. and Haiti.” Further, according to the indictment, both individuals had bank accounts in the U.S. and these accounts were used in connection with the bribery scheme. (I wonder if Washington Mutual, Wachovia, or Miami Federal Credit Union were aware that Haitian “foreign officials” were among its customers!)
To my knowledge this is the first time “foreign officials” have been specifically charged as defendants in connection with an FCPA enforcement action. This indictment of “foreign officials” comes on the heels of AG Holder’s recent speech (see here) in which he stated that the U.S. government was committed to recovering funds obtained by “foreign officials” through bribery.
Dubai “Foreign Officials”?
Financial news the last two weeks or so has been dominated by news that the Dubai government apparently will not back the debt of Dubai World, Dubai’s wholly-owned investment vehicle.
Because I tend to view news with “FCPA goggles on,” the Dubai story got me thinking again about a critical FCPA topic and that is the DOJ/SEC’s untested and unchallenged theory that all employees (regardless of rank or title) of alleged state-owned or state-controlled entities are “foreign officials” under the FCPA. See here for my prior posts on this subject. This theory has been applied not just to business entities wholly or majority owned by a foreign government, but also minority owned entities as well (see the KBR / Halliburton matters involving Nigeria).
So just who are Dubai “foreign officials”?
Dubai World owns a host of real estate, leisure and financial service assets both inside and outside of Dubai. In fact “the sun never sets on Dubai World” (at least that is what it says on its website see here) and its investment portfolio extends across 100 different cities in the world.
Many of Dubai World’s entities bear all the resemblences of a private sector business, such as public stock offerings, loan agreements from private banks, etc.
Are such entities, which in theory are suppose to advance the public sector goal of their government “owners or controllers,” state-owned or state-controlled entities even though another purpose of these entities is to maximize profit for the benefit of private investors?
Consider also that “westerners” run some of Dubai World’s main holdings. Under the Dubai World umbrella is Nakheel (“the world’s largest privately held real estate company”) (see here). The CEO of Nakheel is an Australian (see here). Same with Istithmar World (an investment house 100% owned by Dubai World, which is in turn wholly owned by the Government of Dubai) (see here). The CEO of Istithmar is an American (see here).
Would DOJ/SEC consider an Australian and an American to be Dubai “foreign officials” under the FCPA simply because they work for Dubai World?
If DOJ/SEC prosecution theories in other FCPA enforcement actions were to be consistently applied, the answer (it seems) would have to be yes.
This result would seem to be at odds with common sense and, more importantly, the intent of Congress in enacting the FCPA (as reflected in the FCPA’s extensive legislative history).
The Dubai World example is not unique, there are countless other examples that could also be discussed.
With foreign government owned sovereign wealth funds making investments around the world (including in U.S. companies) and with alleged “state-owned or state-controlled” entities listing public shares on various exchanges and otherwise doing business around the world, there has never been a more opportune (and critical) time for the government to make clear its reasoning and support for its prosecuting theory on this issue.
This is not merely a side issue.
Most FCPA enforcement actions in recent years (i.e. the time period during which FCPA enforcement has escalated) involve not core government officials, but rather “foreign officials” only under this untested and unchallenged theory. Case in point, the FCPA enforcement action announced late this afternoon (see here) involving employees of Haiti’s alleged state-owned national telecommunications company – a matter I will post on shortly.
Of Course It’s Because of the Oil
“Bribe takers” get a free pass under the FCPA as the statute only applies to “bribe givers.”
However, in 2004, President Bush signed Proclamation 7750 “To Suspend Entry As Immigrants or Nonimmigrants of Persons Engaged In or Benefiting From Corruption” (see here). The Proclamation states:
“…that it is in the interests of the United States to take action to restrict the international travel and to suspend the entry into the United States, as immigrants or nonimmigrants, of certain persons who have committed, participated in, or are beneficiaries of corruption in the performance of public functions where that corruption has serious adverse effects on international activity of U.S. businesses, U.S. foreign assistance goals, the security of the United States against transnational crime and terrorism, or the stability of democratic institutions and nations.”
Section 2 of the Proclamation says that its prohibitions “shall not apply with respect to any person otherwise covered […] where entry of the person into the United States would not be contrary to the interests of the United States.”
So what happens when the Forest and Agriculture Minister of Equatorial Guinea and the son of Equatorial Guinea’s president shows up at the U.S. “doorstep” on his way to his $35 million Malibu estate?
To find out, here is the article from today’s NY Times.
Short answer, he is let in. Despite the fact that federal law enforcement officials believe that “most if not all” of his wealth came from corruption related to oil and gas reserves in his home country. Despite the fact that the DOJ believes that he “may be receiving bribes or extortion payments” from oil companies operating in the country.
Why is he allowed in the U.S. in seeming contradiction to Proclamation 7750?
Well, at least according to the former U.S. ambassador to Equatorial Guinea it is “of course because of oil.”
A former State Department official says that the State Department (which is responsible for enforcing the proclamation) “seem[s] to lack the backbone to use this prohibition.”
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Interesting side note – in contrast to the FCPA’s “foreign official” definition, Proclamation 7750 applies to “public officials or former public officials.”
A Few Questions From the Back Row
Today, Assistant Attorney General Lanny Breuer gave a keynote address to the 10th Annual Pharmaceutical Regulatory and Compliance Congress and Best Practices Forum (see here for his address).
In addition, to talking about the unique FCPA compliance risks facing the pharmaceutical industry, Breuer also discussed general FCPA topics such as compliance and voluntary disclosure. Whether you are in the pharma industry or not, you probably want to take a look at what he had to say.
Here is what Breuer had to say about the “foreign official” element of an FCPA anti-bribery violation.
“…who exactly qualifies as a ‘foreign official’ in the context of a public health system, and what constitutes a corrupt offer or payment that violates the FCPA? Of course, the answers to those questions depend on the facts and circumstances of every case, and I can’t give you binding guidance from the podium today.”
Breuer also said:
“…consider the possible range of ‘foreign officials’ who are covered by the FCPA: Some are obvious, like health ministry and customs officials of other countries. But some others may not be, such as the doctors, pharmacists, lab technicians and other health professionals who are employed by state-owned facilities. Indeed, it is entirely possible, under certain circumstances and in certain countries, that nearly every aspect of the approval, manufacture, import, export, pricing, sale and marketing of a drug product in a foreign country will involve a ‘foreign official’ within the meaning of the FCPA.”
If I had attended the address, I would have raised my hand and asked these questions (perhaps someone did).
Why can’t the DOJ give binding guidance (or even just guidance) on the meaning of the “foreign official” element?”
You say that “doctors, pharmacists, lab technicians and other health professionals who are employed by state-owned facilities” are included in the range of “foreign officials who are covered by the FCPA.” However, isn’t that merely the DOJ’s interpretation of the statute, and an untested and unchallenged interpretation at that? Before companies are subject to an FCPA enforcement action based on this theory, shouldn’t there at least be some judicial acceptance of this theory? If you believe there has been, can you please provide the case cites? Is DOJ willing to make public its legal analysis and rationale for this theory?
In the News
Some interesting news articles to pass along.
The first piece is from today’s New York Times and is titled “Blackwater Said to Pursue Bribes to Iraq After 17 Died” (see here).
The article suggests, based on former company sources, that Blackwater (and its executives) could … well … be in some murky FCPA water in connection with alleged secret payments to Iraqi officials.
According to former company officials, the payments were intended to silence the officials’ “criticism and buy their support after a September 2007 episode in which Blackwater security guards fatally shot 17 Iraqi civilians” an event which generated much media coverage and congressional interest (see here among other sources).
The specific recipients of the payments? According to sources, officials in the Iraqi Interior Ministry who demanded that Blackwater secure an operating license after the September 2007 incident in order to continue doing business in the country.
The FCPA anti-bribery provisions contain an obtain or retain business element.
You ask, does making payments to foreign officials to secure a license satisfy that important element?
This general issue was addressed by the Fifth Circuit in U.S. v. Kay, 359 F.3d 738 (5th Cir. 2004) (one of the few instances in which a court has rendered a substantive FCPA decision).
The issue in Kay was whether payments to Haitian officials for the purpose of avoiding custom duties and sales taxes in Haiti could satisfy the FCPA’s obtain or retain business element.
Concluding that the obtain or retain business element was vague, the court analyzed the FCPA’s legislative history and concluded that such payments (even though they do not lead to specific government contracts) could nevertheless provide an unfair advantage to the payor over competitors and thereby assist the payor in obtaining and retaining business.
The court did not hold that ALL such payments could satisfy the FCPA’s obtain or retain business element, only that such payments COULD satisfy this key element if, for instance (as in the Kay case), the payments were intended to lower the company’s cost of doing business in the foreign country.
Post-Kay there has been an explosion in FCPA enforcement actions involving payments made to secure foreign government licenses, permits, and certifications or otherwise involving custom duties and the like. Because these enforcement actions have not been contested, it remains an open question as to whether all such payments can indeed satisfy the FCPA’s obtain or retain business element and under what circumstances.
Blackwater (now called Xe Services), through a spokeswomen, dismissed the allegations as baseless.
Nevertheless, some juicy stuff here – the U.S. military’s then prime security contractor in Iraq (and a company which did classified work for the CIA) making bribe payments in a war zone.
One wonders who knew what within official Washington.
Will this alleged conduct be pursued by the DOJ or put on the backshelf due to national security / foreign policy issues?
To my knowledge, this angle of Blackwater’s activities in Iraq has never been disclosed and, if so, the piece would seem to represent a dandy piece of investigative journalism.
The second article, titled “A Morgan Stanley Star Falls In China,” is from Reuters (see here).
The piece examines the rise and fall of Garth Peterson, a U.S. citizen, who joined Morgan Stanley’s Hong Kong office earlier this decade and quickly rose through the ranks of V.P., executive director, and ultimately managing director of Morgan Stanley’s real estate investment operation in China.
Peterson was fired by Morgan Stanley last December over concerns that he may have violated the FCPA.
Morgan Stanley disclosed the results of its internal investigation into Peterson’s conduct to both the DOJ and the SEC. Here is the company’s February 2009 8-K filing.
What did Peterson do that may have violated the FCPA?
The article suggests that Peterson’s relationship with Shanghai Yongye Group (a real estate developer) and its former Chairman, Wu Yonghua, and his daughter, Linda Wu, are at issue. Also relevant, it appears, is Shanghai Dragon Investment Co.
I hate to be the one always bringing up this issue, but if employees of Shanghai Yongye Group and Shanghai Dragon Investment Co., are somehow being considered “foreign officials” under the FCPA, I would sure love to see that legal analysis.
Anyway, back to the story.
The article is an interesting read on a number of fronts and provides an insight into one company’s handling of an FCPA issue.
First, the article notes that Morgan Stanley sent Peterson to an FCPA workshop. Given that this occured in 2008, it is debatable whether this was “too little too late.”
Second, comes an internal review, which from the article, appears to have been done in the ordinary course of business. The ordinary internal review uncovers some extraordinary issues.
Next, the company initiates an internal investigation to look into the suspicious issues. And what an internal investigation it was. According to the article, more than 7.4 million pages of e-mails were reviewed. According to the article, the investigation “found that in a discrete number of instances, investment assets were used for improper purposes not authorized by senior management” an occurrence which would seem to violate, at the very least, the FCPA’s internal control provisions which require, among other things, that an issuer like Morgan Stanley devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management’s general or specific authorization; and (ii) access to assets is permitted only in accordance with management’s general or specific authorization.
Next, comes the corrective measures, in this case, Peterson was fired.
Next, comes the disclosure (see above).
The article closes by saying that even if found guilty Peterson is “unlikely to be jailed as he and the firm are expected to pay damages and fees, possibly through a deferred prosecution agreement.”
Spot-on with the company likely entering into a deferred prosecution agreement.
However, the authors (and their sources) apparently have never heard the names of Frederic Bourke, Albert Jack Stanley, Steven Ott, Roger Michael Young (and many others) who are currently living in a federal prison (or waiting to check in) for violating or conspiring to violate the FCPA.
According to article, Peterson currently lives in Singapore.