A Focus on Russia
In this guest post, I am pleased to turn it over to Robert Wieck (a high school classmate – Elkhart Lake (WI) Class of ’93 – Go Resorters!).
Robert is currently the Forensic Audit Senior Manager (Europe, Middle East and Africa) for Oracle Corporation and is based in Bucharest, Romania. He has thirteen years of experience in both “Big 4” and US listed multi-national companies. Twelve of these years have been focused on emerging markets including countries in the former Soviet Union, former Yugoslavia, and the Balkan region.
Robert participated as a panelist at the “3rd Annual Anti-Corruption Summit for Russia & CIS” held on March 16-17th in Moscow. See here for the prior post regarding Assistant Attorney General Lanny Breuer’s comments at the event.
Below is Robert’s guest post and the opinions expressed below are his own and do not necessarily reflect the opinion of his employer, Oracle Corporation.
*****
“I think it is clear to most people that the current business climate in Russia is troublesome for multi-national companies trying to do business legitimately. Presentations and discussions held at the conference seemed to confirm that companies are becoming increasingly concerned about being able to do business successfully in Russia and at the same time maintaining compliance with the FCPA.
One interesting point which I believe set the tone for the conference was that while the DoJ accepted the invitation for two senior officials (Mr. Breuer and Mr. Andres) to travel to Moscow to address the conference attendees, there were no Russian counterparts from the Russian Ministry of Justice present to advise on what they are doing to address the corruption problems on the ground in Russia.
While the transcript for Mr. Breuer’s speech is linked above, Mr. Andres’s comments are summarized below:
• Russia is clearly not the only place in the world where corruption is a problem. There have been a considerable number of prosecutions of US Citizens under the FCPA.
• There have been a record number of prosecutions under the FCPA in 2010, and more than 1 Billion USD in fines collected as a result. According to Mr. Andres, none of these cases involved a single, low level act of corruption or bribery, but systematic corruption involving hundreds of thousands of dollars, and involving dozens of people.
• While there were a record number of prosecutions in 2010, there were also a record number of cases that the DoJ declined to prosecute. Decisions to decline to prosecute a case were made based on a company’s ability to demonstrate that they have sound internal procedures and compliance programs. Andres believed this also highlights the benefits of companies self-reporting potential FCPA violations, and further mentioned that self-disclosure was an important factor in how many of those cases were resolved.
• There has been an uptick in the number of individuals being prosecuted under the FCPA, which totaled 50 for 2009 and 2010. This is up from 2 individuals prosecuted in 2004.
• In terms of FCPA trends for the future, Andres noted that it appears more companies are cooperating with the DoJ. More industry-wide prosecutions are being undertaken where they find that activities that violate the FCPA are not confined to one company within an industry, but represent an industry practice that multiple companies within the industry are all engaging in. The DoJ has noted increased cooperation with national law enforcement agencies and international organizations (including the OECD).
• Companies continue to criticize the DoJ for not providing enough guidance regarding their approach to FCPA prosecutions. However, Mr. Andres stated that the DoJ does a good job in maintaining the FCPA compliance website where a wealth of case information is published and available for review.
• Currently there is much debate ongoing about the definition of a public sector official, and the DOJ continues to see an increasing number of litigations surrounding the interpretation of who is a “foreign official” under the provisions of the FCPA.
• Andres believes the trend of increasing prosecutions under the FCPA will continue, and that the DoJ has added resources to address this trend.
Among the most interesting comments made by Mr. Andres, from my point of view, were his final comments in which he stated that the DoJ is demanding the same level of compliance with the FCPA from Russia as it does from other countries. He further stated that there would not be any “Russia-specific exception” when pursuing prosecutions under the FCPA.
One other interesting presentation was delivered by the General Director for Transparency International, Ms. Elena Panfilova. In what I consider a brutally honest way, she confirmed that based on research conducted by her team on the ground in Moscow, the fraud and corruptions problems in Russia are indeed getting worse, despite information that might suggest otherwise. The schemes used by these perpetrators are becoming more and more complex and they no longer appear to be shy about engaging in corruption. This has resulted in a diminished sense of public trust and led to a very cynical environment in Russia in regards to corruption. Ms. Panfilova believes that one of the barriers to reversing this trend is the lack of whistleblower protection for people reporting alleged cases of corruption. Whistleblowers currently have no guarantees of support from anyone when they raise concerns. And usually when people do report instances, whistleblowers become targets of unfounded prosecution. To demonstrate her point, she made reference to statistics which suggest that while corruption is on the rise, the number of whistleblowers making claims is decreasing. It is understood that the role of the whistleblower is critical in the fight against corruption. Thus, legal protection from prosecution (both civil and criminal), protection of property and labor rights (anti-retaliation legislation) is required in order to allow whistleblowers to come forward and voice their concerns regarding corrupt activities they might have witnessed or been a victim of.
My participation in the panel discussion covered best practices in conducting investigations in Russia. Over my twelve years of experience working in emerging markets in Europe (including Russia and CIS), I have noted common themes that should be considered while trying to conduct an audit or investigate potential misconduct in Russia (and any emerging market, for that matter). One aspect would be the high risk of document falsification in the Russian environment. In Russia, a “form over substance” approach is taking to maintain supporting documentation for transactions. Thus, in the context of an audit or investigation, the audit objectives should be managed carefully in order to ensure documentation is not “custom” prepared. Another aspect is the sometimes difficult task of getting complete/honest answers to questions or queries. It is common to receive conflicting stories and different versions of answers to the same question, sometimes for no apparent reason. A Russian celebrity summed it up in a Russian newspaper article I read recently by saying “For some reason, it’s not the custom to tell the truth in our country, even when it is clear to everyone”. Lastly, I would say that securing full cooperation from auditees can be a tedious and exhausting process. It can only be recommended that companies use legal resources (both internal and external) when necessary, in order to ensure that they receive cooperation which might be required in the form of an employment agreement, internal code of conduct or other type of contract (in the case of third parties).”
“FCPA Sanctions: Too Big To Debar?”
Debarment (or lack thereof) is a periodic topic on this site.
Previously, I covered “Siemens … The Year After” (here), a post that highlighted in the year after resolution of the Siemens record-setting December 2008 FCPA matter, the U.S. government continued to do substantial business with the company it charged with engaging in a pattern of bribery “unprecedented in scale and geographic scope.”
In September 2010, I highlighted (here) the FBI’s $40 million contract with BAE – months after the FBI participated in resolution of the $400 million FCPA related enforcement action against the company.
In my November 2010 testimony (here) before the U.S. Senate, I stated as follows. “In order for the DOJ’s deterrence message to be completely heard and understood 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.”
This testimony prompted then Senator Arlen Specter (who chaired the hearing) to ask me several follow-up questions for the record relating to debarment. (See here for the Q&A’s). Senator Christopher Coons (who also participated in the November 2010 hearing) also asked debarment follow-up questions of the DOJ.
As highlighted last week (here), the DOJ is opposed to a “mandatory, conduct-based, debarment remedy for companies that engage in egregious bribery.” As noted in the prior post, the DOJ’s responses seemed anchored in self-interest in that such a remedy would lessen its FCPA caseload, would make its job more difficult, and would take away it flexibility and leverage and resolving FCPA enforcement actions.
Enter Dru Stevenson (Professor of Law, South Texas College of Law – here and a past contributor to the site) and Nick Wagoner (a law student at South Texas College of Law).
Stevenson and Wagoner recently released a yet to be published article titled “FCPA Sanctions: Too Big to Debar?” (See here).
The authors (who can be reached at dstevenson@stcl.edu and nicholas.wagoner@gmail.com) provide this article summary.
“Despite the dramatic escalation in corporate fines and imprisonment imposed under the FCPA in recent years, a particularly lethal sanction for combating foreign corruption remains unused—suspension or debarment of prosecuted entities from future contracts with the U.S. Many of the firms caught bribing foreign officials have extensive contracts with a number of domestic federal agencies; meaning debarment may be a particularly devastating penalty both for the government contractor and the agency it transacts business with.
This begs the question: are certain private contractors too big to debar? As this Article demonstrates, it appears so. Certain federal agencies have become highly dependent on a handful of private firms responsible for satisfying the vast majority of government contracts. Because of the potential “collateral consequences” that may result from the collapse of a debarred contractor, these firms have enjoyed bailouts from agency officials who refuse to sanction corrupt practices through suspension or debarment. If ridding foreign markets of corruption truly is a top priority of the U.S., it seems both unfair and imprudent for federal agencies to continue awarding lucrative, multibillion-dollar contracts to firms recently prosecuted for fraudulently obtaining such contracts overseas.
This situation leads to the jaded viewpoint that paying fines when caught bribing foreign officials has “simply become a cost of doing business.” To help illuminate these concerns and lend support to the thesis, this Article examines the third largest FCPA-related enforcement actions to date: the BAE Systems case. On March 1, 2010, BAE Systems paid approximately $400 million in fines for its corrupt practices abroad. In the 365 days that followed however, BAE was awarded U.S. contracts in excess of $58 billion dollars. The U.S.’s refusal to debar BAE because of the risk of “collateral consequences” provides a case study of the benefits and drawbacks to deterring foreign corruption through suspension and debarment. This Article concludes that the U.S. must begin to diversify its portfolio of federal contractors so that prosecutors may leverage the legitimate threat of suspension and debarment to more effectively deter foreign corruption.”
A Blast From the Past
Proud to be a Butler Bulldog. It was a fun ride!
*****
It is always enjoyable hearing from readers.
Richard Tarlton of California recently contacted me about an apparent bribery demand from the past …. the way past.
In the 1930’s, Richard started a stamp collection. One of the stamps, given to him by his father, was still attached to an envelope received from Venezuela with the correspondence inside.
As you can see here, the January 6, 1911 letter is hard to read, but as Richard said, my occupation has been pharmacy, thus I am good at reading bad handwriting.
The context of the letter is as follows.
Richard’s grandfather, P.E. Tarlton, was an inventor and very much into applications of electricty for new uses. In 1911, P.E. Tarlton owned the American Magnetic Firm Alarm Company in Ada, Ohio. P.E. Tarlton’s first big invention was an electric fire alarm system that could be installed in a large city, and when someone turned on the fire alarm, it would indicate which fire area in the city was in need of help. P.E. Tarlton’s first patent is here.
American Magnetic Fire Alarm Company, Richard explains, evidently advertised or was listed in a trade publication called the “Thomas Register of American Manufacturers and First Hands.”
Apparently, Dr. C.A. Bosi of Caracas, Venezuela and a friend, Dr. Pensa, were studying, with the agreement of local authorities, the installation of a fire extinction service in Caracas and evidently saw the listing. Dr. Bosi, in the letter, is requesting a catalogue and pictures of the equipment.
In the letter, Dr. Bosi wants to know the conditions P.E. Tarlton would make to him if he were to get the order. Dr. Bosi emphatically states, “in this country, it is always necessary for succeeding in business to leave some benefit to the authorities who pass the order.”
According to Richard, he has never seen any evidence that his grandfather secured the Caracas order.
Let’s assume P.E. Tarlton and American Magnetic Firm Alarm did “leave some benefit to the authorities” in securing the order.
Assuming the FCPA was on the books in 1911, what issues would the company have faced?
Voluntary disclosure? Related civil litigation such as derivative suits? Would American Magnetic Fire Alarm Company been required to engage a compliance monitor? How much money would the company have spent on investigating the conduct at issue? Would the company have expanded its investigation and compliance review to other countries?
What about Dr. Bosi, would there be jurisdiction over him? What about the local Venezuelan authorities – any proceeds laundered through U.S. accounts?
Of course none of these were issues in 1911.
But they are some of the issues in 2011.
What will the issues be in 2111?
Lindsey “Foreign Official” Motion Denied
Mike McCollum (Foley & Lardner – here), who was present for today’s hearing, and Jaime Guerrero (Foley & Lardner – here) provide this guest post.
*****
This afternoon, United States District Judge Howard Matz issued an oral ruling in the Lindsey case that is scheduled to begin trial on April 5 in the Central District of California. The Court denied defendants’ motion to dismiss the indictment on the “foreign official” issue. The issue presented was whether the officials of Mexico’s state-owned utility company, CFE, were “foreign officials” under the FCPA. Giving his ruling orally from the bench, and emphasizing that his precise reasoning will be spelled out in a written ruling to follow, District Judge Matz held that they were foreign officials, giving some insight into his thinking.
District Judge Matz noted several undisputed facts, including that CFE supplies electricity to all of Mexico except for Mexico City, that the Mexican Constitution provides that the supply of electricity in Mexico is solely a government function, that Mexican statutory law defines CFE as a “decentralized public entity with legal personality and its own patrimony,” that CFE’s Governing Board is composed of Mexican government officials and its Director General is appointed by the President of Mexico, and that CFE’s English language website describes it as an agency of the Federal Government. District Judge Matz further confirmed that it was the defendants’ position, as stated in their briefs, that the issue presented was one of “pristine” undisputed facts and issues of law, and thus no further facts that might be introduced at trial could bear on the issue.
District Judge Matz then presented to counsel for the moving defendants a two-page written hypothetical. Because he only distributed the hypothetical to the attorneys, we can only go from the summary described in open court, which was essentially this: Exxon and Occidental bid for a large oil contract from Pemex, Mexico’s state-owned oil company. It is a public bid, and Occidental offers to pay more than Exxon. At the publicly televised contract award ceremony, however, Exxon hands a $10 million check to Pemex, which thanks Exxon publicly, and then Pemex awards the contract to Exxon instead. Question put to the defense: Is it the case that Congress, in enacting the FCPA, would have said that the FCPA would not have applied to these circumstances? Counsel for the moving defendants argued that what was important was not what Congress would have wanted to say, but what they did say, and Congress did not say that the statute should apply to state-owned-enterprises. In an era (1970s) when states owned large sectors of industry around the world, Congress chose not to include state-owned-enterprises within the reach of the FCPA.
District Judge Matz responded, in essence, that what was most convincing to him, in combination with the undisputed facts regarding CFE noted above, was the definition of the word “instrumentality.” He noted the defendants’ Webster Dictionary definitions (“serving as a means or agency: implemental” and “of, relating to, or done with an instrument or tool”) and American Heritage Dictionary definition (“[a] subsidiary branch, as of a government, by means of which functions or policies are carried out”). Based on this definition of “instrumentality” and on the undisputed facts regarding CFE, District Judge Matz noted that it was unnecessary to delve into the legislative history because it could be determined as a matter of statutory construction that the officials of CFE were “foreign officials.”
Opening statements are set for Tuesday morning, and the trial is expected to go until the end of April.
*****
For additional coverage see here from the FCPA Blog.
For briefing on the “foreign official” issue, see prior posts here, here, and here.
Robert Amaee on U.K. Bribery Act Guidance
Yesterday, in a much anticipated development, the United Kingdom Ministry of Justice released (here) its long awaited guidance (here) as to the U.K. Bribery Act – a delayed law now set to go live on July 1, 2011.
The U.K. Serious Fraud Office, the U.K. law enforcement agency tasked with enforcing the Bribery Act, also issued a release (here) and prosecuting guidance (here).
In this guest post, Robert Amaee (the former Head of Anti-Corruption and Proceeds of Crime Unit at the U.K. Serious Fraud Office and current counsel with Covington & Burling LLP in London – see here) provides insight and analysis of the U.K. developments.
*****
The Bribery Act: Countdown to Implementation
The UK Ministry of Justice yesterday published its long awaited Bribery Act 2010 (the “Bribery Act”) guidance entitled “Guidance about procedures which relevant commercial organisations can put in place to prevent persons associated with them from bribing (section 9 of the Bribery Act 2010).” This publication marks the official start of a ninety day countdown to the implementation of the Bribery Act which will now be brought into force on 1 July 2011.
Companies that already have reviewed and updated their anti-bribery and corruption procedures will be ahead of the game but will still need to study the new guidance to see what, if any, further amendments may be required. Those who have yet to complete the process of updating their procedures to ensure compliance no doubt will draw a modicum of comfort from the fact that they have a further ninety days in which to digest and absorb the guidance and implement the necessary policies and procedures.
The comments made by the Minister of Justice, Ken Clarke QC MP, and the guidance itself aim to reassure companies that the Bribery Act will be enforced with common sense and pragmatism.
The Minister of Justice ushered in the guidance by saying that “[t]he ultimate aim of [the Bribery Act] is to make life difficult for the minority of organizations responsible for corruption, not to burden the vast majority of decent and law-abiding businesses.”
That is a message that prosecutors at the UK Serious Fraud Office (“SFO”) — the organisation tasked with leading enforcement efforts under the Bribery Act — have espoused for some time. What is less clear is whether the guidance provides any tangible assistance on some of the Bribery Act’s thorniest issues such as the UK’s jurisdiction over non-UK registered companies, the extent of liability for the actions of third parties and the boundary between acceptable corporate hospitality and a prosecutable bribe, particularly when foreign officials are concerned.
Government Policy and the Section 7 Corporate Offence
The guidance, as expected, focuses on six high level principles which companies will need to familiarise themselves with and which are supported by 11 case studies. It also sets out the Government policy in relation to the section 7 corporate offence stating that “[t]he objective of the [Bribery] Act is not to bring the full force of the criminal law to bear upon well run commercial organisations that experience an isolated incident of bribery on their behalf” and recognises that “no bribery prevention regime will be capable of preventing bribery at all times.” This part of the guidance already has attracted criticism from some respected quarters. (See here).
The guidance deals with the section 1 offences of bribing another person but the most noteworthy commentary relates to the section 6 offence (Bribery of foreign public officials). This section highlights the fact that bribery of a foreign public official could be prosecuted under the section 1 offence but that evidential difficulties in proving that a bribe was paid to a foreign public official with the intention to induce him or her to perform his or her role “improperly”, something the guidance calls “a mischief”, means that prosecutors would seek to rely on the section 6 offence which needs no such proof. The guidance goes on to make a number of assertions in relation to the interpretation of section 6 which bear closer scrutiny. The guidance says “…it is not the Government’s intention to criminalise behaviour where no such mischief occurs…” In other words it appears that the guidance may be advocating that the concept of “improper performance” be read into section 6. What is clear is that Parliament did not include any such wording in section 6 in clear contrast to section 1.
Corporate Hospitality and other Business Expenditure
In addressing the topic of corporate hospitality and other business expenditures, the guidance adopts what can only be described as a permissive tone. It codifies the comments that the Minister of Justice has made over the last few weeks and states that “[b]ona fide hospitality and promotional, or other business expenditure which seeks to improve the image of a commercial organisation, better to present products and services, or establish cordial relations, is recognised as an established and important part of doing business and it is not the intention of the Act to criminalise such behaviour” and goes on to endorse “reasonable” and “proportionate” hospitality and business expenditure.
In determining what is reasonable and proportionate, the guidance proposes taking into account “all of the surrounding circumstances” which include matters such as “the type and level of advantage offered, the manner and form in which the advantage is provide, and the level of influence the particular foreign public official has over awarding business”. It states that “the more lavish the hospitality or the higher the expenditure in relation to travel, accommodation or other similar business expenditure provided to a foreign public official, then, generally, the greater the inference that it is intended to influence the official to grant business or a business advantage in return.”
Much of this is elementary and already part of the mantra of compliance departments but the guidance goes further and appears to give the green light to certain interactions with foreign public officials which would, today, be closely and critically scrutinised by those responsible for compliance. As an example, the guidance envisages that the provision of flights, airport to hotel transfers, hotel accommodation, “fine dining” and tickets to an event for a foreign public official and his or her spouse are “unlikely to raise the necessary inference” to engage section 6 and therefore unlikely to violate the Act so long as there is a business rational for the trip.
A Question of Jurisdiction
The guidance makes it clear that “the courts will be the final arbiter as to whether an organisation ‘carries on a business’ in the UK taking into account of the particular facts in individual cases” and sets out the “Government’s intention” in relation to the phrase “carries on a business, or part of a business in the United Kingdom.” The thrust of the approach appears to be a reliance on a “common sense approach.”
In cases where there may be dispute, the guidance again defers to the courts as the final arbiter but says that “… the Government anticipates that applying a common sense approach would mean that organisations that do not have a demonstrable business presence in the United Kingdom would not be caught.” That much is uncontroversial but what follows has elicited a great deal of comment. The guidance states that “[t]he Government would not expect, for example, the mere fact that a company’s securities have been admitted to the UK Listing Authority’s Official list and therefore admitted to trading on the London Stock Exchange, in itself, to qualify that company as carrying on a business or part of a business in the UK and therefore falling within the definition of a ‘relevant commercial organisation’ for the purposes of section 7.” This commentary has been welcomed in some quarters but has been criticised by some as undermining the concept of a level playing field. (See here).
In the vast majority of cases, it will be clear whether a company is or is not carrying on a business or part of a business in the UK. There will, however, be cases where there is room for debate. If, for example, a non-UK registered company sets up a joint venture with a UK company and the joint venture is not registered in the UK, is the non-UK registered company carrying on a business or part of a business in the UK? What if the non-UK registered company then seconds an employee to work at the UK partner’s offices in London looking after the joint venture – is the non-UK registered company carrying on a business or part of a business in the UK? What if it sends 5 employees? Those are the type of intricacies that need to be worked through by company advisors and in the worst case prosecutors and the courts.
Associated Persons
When considering the potential liability imposed on a company by virtue of its supply chains or its involvement in a joint venture, the guidance introduces the concept of “the level of control”– a concept that does not appear in the Bribery Act — as one of the “relevant circumstances” that would be taken into account when seeking to determine if the person creating liability can be deemed to be an “associated person” i.e. someone who is performing services for or on behalf of a company that falls within the UK’s jurisdiction. The guidance states that “[t]he question of adequacy of bribery prevention procedures will depend in the final analysis on the facts of each case, including matters such as the level of control over the activities of the associated person and the degree of risk that requires mitigation.”
Facilitation Payments
In the run up to the publication of the guidance, there had been some suggestion that there may an attempt to ‘soften’ the approach to facilitation payments. This is not at all the case. While the Government has recognised the problems faced by commercial organisations in some parts of the world and in certain sectors, the guidance reiterates that there are no exemptions in the Act and sets out the OECD position that facilitation payments are corrosive and that exemptions create artificial distinctions that are “difficult to enforce, undermine corporate anti-bribery procedures, confuse anti-bribery communication with employees and other associated person, perpetuate an existing ‘culture’ of bribery and have the potential to be abused.” In circumstances where an individual has no alternative but to make a facilitation payment in order to “protect against loss of life, limb or liberty”, the guidance states that “the common law defence of duress is very likely to be available”. It stresses that it is a matter for prosecutorial discretion whether to prosecute an offence and defers to the Joint Prosecution Guidance when it comes to the “prosecution of facilitation payments.”
Conclusion
Companies will of course be pleased to have more guidance and will look to draw as much comfort as they can from the more ‘permissive’ tone of the MoJ guidance but global companies will not be looking at their UK exposure in isolation and will certainly not be rushing to relax their anti-bribery and corruption policies and procedures. It is not much comfort for a company to avoid prosecution in the UK for interactions with foreign government officials for example but to be in violation of their industry codes of conduct or be called to account in a US court for that same conduct. Global companies will continue to be mindful of their global exposure.