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By on November 10, 2014 in Disgorgement, Fine / Penalty Issues, Innospec, United Kingdom, Victims
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Several prior posts (here, here, and here) have focused on basic causation issues in connection with many Foreign Corrupt Practices Act enforcement actions.

The lack of causation between an alleged bribe payment and any alleged business obtained or retained is not a legal defense because the FCPA’s anti-bribery provisions prohibit the offer, payment, promise to pay or authorization of the payment of any money or thing of value.  Indeed, several FCPA enforcement actions have alleged unsuccessful bribery attempts in which no business was actually obtained or retained.

Nevertheless, causation ought to be relevant when calculating FCPA settlement amounts, specifically disgorgement.  However, the prevailing FCPA enforcement theory often seems to be that because Company A made improper payments to allegedly obtain or retain Contract A, then all of Company A’s net profits associated with Contract A are subject to disgorgement.

Call it the “but for” theory. “But for” the alleged improper payments, Company A would not have obtained or retained the business.

However, this basic enforcement theory ignores the fact that Company A (as is often the case in FCPA enforcement actions) is generally viewed as selling the best product for the best price and because of this, or a host of other reasons, probably would have obtained or retained the business in the absence of any alleged improper payments.

If this general issue is of any interest to you (and it ought to be because it is instructive on many levels) you should read a recent U.K. decision in a civil case arising out of the same core facts alleged in the 2010 FCPA enforcement action against Innospec (see here for the prior post).

In addition, if the so-called “victim” issue in FCPA enforcement actions is of interest to you (i.e. because the FCPA involves bribery and corruption, when there is an FCPA enforcement action, there must be a victim) , you also should read the recent U.K. decision because it is instructive on this issue as well.

Prior to discussing the recent U.K. decision, a bit of background is necessary.

In 2010, Innospec agreed to pay approximately $26 million to resolve DOJ and SEC enforcement actions (see here).  The conduct was wide-ranging in that the enforcement action involved alleged violations of U.S. sanctions regarding doing business in Cuba in addition to alleged conduct in violation of the FCPA.  Even as to the FCPA conduct, the enforcement action was wide-ranging and included “standard” Iraq Oil-for-Food allegations found in a number of previous enforcement actions (i.e. inflated commission payments to an agent which were then used to pay kickbacks to the government of Iraq) as well as alleged conduct in Indonesia.

The bulk of the enforcement action though concerned DOJ allegations that Ousama Naaman (Innospec’s agent in Iraq) paid various bribes to officials in Iraq’s Ministry of Oil (“MoO”) to “ensure” that a competitor’s product “failed a field trial test and therefore would not be used by the MoO” as well as other allegations that Naaman paid other bribes to officials of the MoO to obtain and retain contracts with MoO on Innospec’s behalf.

The DOJ’s criminal information alleged (or perhaps merely assumed) a casual connection between the alleged bribes and the failed field test, as well as two specific contracts: a 2004 Long Term Purchase Agreement (“LTPA”) and a 2008 Long Term Purchase Agreement.

As often happens in this day and age, an Innospec competitor used the core conduct alleged in the DOJ’s enforcement action “offensively” in bringing civil claims against Innospec and various individuals in a U.K. court.

As highlighted in the U.K. decision, the claims were brought by a Jordanian company which alleged that Innospec “conspired to injure the claimants by engaging in corrupt practices, in particular the bribery of officials within the [MoO] with the intention of inducing its refineries to buy TEL rather than MMT …”.

TEL refers to a lead based fuel additive called tetraethyl lead and MMT refers to methylcyclopentadienyl manganese tricarbonyl, a product developed as a manganese based octane boosting and antiknock additive which was less toxic than TEL.

The U.K. decision is extremely dense as to the facts and circumstances surrounding the MoO’s decision to use TEL vs. MMT.

Relevant to the “but for” causation topic of this post, and as described by the U.K. court, the claimants “claim damages for the losses they allege they have suffered as a consequence of the conspiracy on the basis that, but for the bribery and corruption, the MoO would have started to purchase MMT ….”.  As further described by the U.K. court, “the claimants also allege that between 2002 and 2008 payments were authorized by Innospec for travel and other expenses, including pocket money for Iraqi officials to incur goodwill and ensure continued orders of TEL.”

In the words of the U.K. court, in order for the claims to succeed, the claimants had to establish, among other things, that the decision to replace TEL with MMT “was not implemented because the promise of bribes by Mr. Naaaman procured the MoO to enter into the 2004 LTPA and that prevented sales of MMT” and “that, but for the promise of bribes, the decision would have been implemented and the MoO would have replaced TEL with MMT from early 2004 onwards, so that the counterfactual scenario on which the claim is based would have occurred.”  (Confusing verbiage to be sure, but that is what the decision says).

As noted in the U.K. decision, Innospec denied that bribes or the promise of bribes induced the 2004 LTPA, lead to the requirement of the field test or its result, or induced the 2008 LTPA.  Innospec argued that despite its admissions in the FCPA enforcement actions, the “court must look carefully and analytically at the evidence there is as to what bribes were paid and promised and when and whether any bribes paid or promised actually led to a decision different from that which would have been made anyway.”

In short, instead of merely alleging or assuming causation between alleged bribe payments and business or other benefits like the U.S. did in the FCPA enforcement action, the U.K. court held approximately 15 days of hearings with multiple witnesses to actually determine if there was a casual link between the alleged bribe payments or other benefits that Innospec obtained.

The end result of this process is that the U.K. court did not find any casual links and indeed found false certain allegations in the DOJ’s FCPA enforcement action.

For instance, as to the DOJ’s allegations that “Naaman, on behalf of Innospec, paid approximately $150,000 in bribes to officials of the MoO to ensure that MMT … failed a field trial test and therefore would not be used by the MoO as a replacement for TEL,” the U.K. court concluded that Naaman never made such payments.  Indeed, the U.K. court noted Naaman’s admission (which occurred after resolution of Innospec’s FCPA enforcement action) “that he had never in fact paid the U.S. $150,000 in bribes to MoO officials to fail the field test, but had simply pocketed the money himself.”

In the words of the court, “this has an important impact on the issue of causation.”

Regarding Innospec’s admission in the FCPA enforcement action that Naaman did indeed make such payments, the U.K. court stated:

“Unbeknownst to Innospec at the time they admitted these allegations, Mr. Naaman never in fact paid any of these monies to Iraqi officials, but notwithstanding that, Innospec had committed the relevant offense under the Foreign Corrupt Practices Act by making payments to him, believing they were reimbursing him for bribes paid, even though in truth they were not.”

In the words of the U.K. court, Naaman became upset that Innospec was not reimbursing him for certain expenses he viewed as being owed to him and that Naaman “saw the field test on MMT as an opportunity to recoup those expenses and informed Innospec that he proposed bribing the Iraqi engineers to fail the field test.  Innospec readily agreed and paid him some U.S. $150,000, expecting it would be used for bribes.  He kept the funds himself, believing that MMT would fail the field test […]  On the material before the court, this was the first time it had emerged (some 10 months after Innospec signed the [U.S.] Plea Agreement) that money Innospec had paid to Mr. Naaman believing he had paid or promised to pay bribes was not so paid but simply pocketed by him.”

Regarding the 2004 LTPA that the DOJ alleged was a result of alleged improper payments to Iraqi officials, the U.K. court first noted the following about the U.S. invasion of Iraqi:

“[T]he U.S. authorities put Kellogg, Brown & Root in charge of procurement for the requirements of the Iraqi refineries, effectively replacing the finance department within the MoO.  All spending had to be approved by KBR which was the only entity which could actually conclude contracts and purchase products.”

“It seems to me that claimants’ case overlooks the fact that any switch to MMT would have had to be approved by KBR, and the weight of evidence at this time in August 2003 and thereafter is that KBR was not particularly enamoured of MMT, pointing strongly to the likelihood that, even if the claimants were right that there was a decision to continue with TEL and not to switch to MMT, which was in some way induced by bribery, the MoO may well have been driven to the same decision irrespective of bribery, because of the attitude of KBR.”

Elsewhere, the U.K. court termed it “fanciful in the extreme” certain of claimants’ evidence which sought to establish causation between the alleged bribes and business to Innospec.

In short, the U.K. court concluded that the 2004 LTPA was not procured by bribery.  Further the U.K. court stated:

“[T]he decision to enter the LTPA had to be and was endorsed by the American authorities .  Since there is no basis for saying that they were corrupted by the payment or promise of bribes, that is further demonstration that the LTPA was not procured by bribery.”

Indeed, in the words of the U.K. court, “bribery [was] the least likely explanation” for certain MoO decisions regarding the conduct at issue.  Elsewhere, the court stated that any suggestion that considerations made by the MoO “was induced or influenced by bribery by Innospec would be frankly ridiculous” and a “logical non-sequitur and a step too far.”

In closing, the U.K. court stated that even if it were wrong – and that the 2004 LTPA was procured by bribery ” that the MOO would always have followed the course they did, of continuing to use TEL given the octane boost they needed …”.

In terms of the 2008 LTPA, the U.K. court found that “no orders were ever placed under the LTPA, since the investigations by the U.S. authorities intervened.”

In short, what happened in the U.K. action was rather remarkable.

Certain facts alleged in a DOJ FCPA enforcement were subjected to an adversarial process and the resulting judicial scrutiny found certain facts false.  Moreover, instead of merely alleging or assuming causation, as if often the case in FCPA enforcement actions as relevant to determining settlement amounts, the U.K. court analyzed causation and found it lacking.

The U.K. action is also instructive when it comes to analyzing whether there are so-called “victims” in all FCPA enforcement actions.  In the past several years, there has been calls by some for portions of FCPA settlement amounts to be paid out to “victims” of the conduct alleged in the FCPA enforcement action.  (See here and here for prior posts). The general theory seems to be – for example – that if an FCPA enforcement action alleges bribes paid in Nigeria, Nigerian citizens must therefore be the “victims” of the conduct and thus somehow entitled to compensation.

As highlighted in prior posts, while this proposal “feels good,” it is not warranted for many different reasons.  In short, this proposal assumes two things:  (i) that FCPA enforcement actions always represent provable FCPA violations; and (ii) that there is a always a casual connection between the alleged bribes influencing “foreign official” conduct, that then always causes harm to the citizens of the “foreign official’s” country.

As to the first issue, such an assumption is not always warranted given that the vast majority of FCPA enforcement actions are resolved via non-prosecution agreements, deferred prosecution agreements, neither admit nor deny SEC settlements, or SEC administrative orders.  These resolution vehicles often represent the end result of a risk adverse business decision, not necessarily provable FCPA violations.  For instance, in the words of the Second Circuit, SEC neither admit nor deny settlements are not about the truth, but pragmatism.  For this reason, a typical FCPA resolution vehicle should not automatically trigger other actions or issues (whether plaintiff litigation, whistleblower bounties, or payments to an ill-defined group of alleged victims).

As to the second issue, such an assumption is also not always warranted.  Several FCPA enforcement actions fit into one of the following categories: (i) unsuccessful bribery attempts; (ii) payments to receive what the company was otherwise legitimately owed by a foreign government; or (iii) other situations where – for a variety of reasons – there would seem to be a lack of causation between the alleged bribes influencing “foreign official” conduct, that then causes harm to the citizens of the “foreign official’s” country. Indeed, most corporate FCPA enforcement actions involve companies that are otherwise viewed as selling the best product for the best price.  Moreover, as highlighted in this prior post, in one FCPA enforcement action a court found that an alleged bribery scheme benefited a foreign country.

Despite the above observations which I have long held, the failed field test allegations in the Innospec FCPA enforcement action legitimately caused me to ponder victim issues in FCPA enforcement actions.  After all, the DOJ alleged that Iraqi MoO officials were induced to sabotage a field test of a competitor product that resulted in the more harmful product, from a public health standpoint, to stay on the market.

It was a relatively convincing casual connection between an FCPA enforcement action and potential victims.

However, as highlighted above, the U.K. court found the failed field test allegation false and otherwise found deficient other causal links between other alleged conduct and actual business or benefits obtained or retained.

In short, the U.K. action should instruct the proponents of “victim” compensation that hinging a policy proposal on FCPA resolution documents is not always sound or warranted.

Friday Roundup

By on August 8, 2014 in Angola, Cobalt International Energy, David Turner, Dennis Kerrison, Double Standard, Innospec, Miltiades Papachristos, Paul Jennings, SBM Offshore, Serious Fraud Office, United Kingdom, Wal-Mart

Scrutiny alerts and updates, an FCPA fumble, checking in with the SFO, and for the reading stack.  It’s all here in the Friday roundup.

Scrutiny Alerts and Updates

Cobalt International Energy

Cobalt has been under FCPA scrutiny since 2011 for its alleged business relationships in Angola.  (See here and here for prior posts).

In this recent SEC filing, the company states:

“As previously disclosed, the Company is currently subject to a formal order of investigation issued in 2011 by the SEC related to its operations in Angola.  […] In connection with such investigation, on the evening of August 4, 2014, the Company received a “Wells Notice” from the Staff of the SEC stating that the Staff has made a preliminary determination to recommend that the SEC institute an enforcement action against the Company, alleging violations of certain federal securities laws. In connection with the contemplated action, the Staff may recommend that the SEC seek remedies that could include an injunction, a cease-and-desist order, disgorgement, pre-judgment interest and civil money penalties. The Wells Notice is neither a formal allegation nor a finding of wrongdoing. It allows the Company the opportunity to provide its reasons of law, policy or fact as to why the proposed enforcement action should not be filed and to address the issues raised by the Staff before any decision is made by the SEC on whether to authorize the commencement of an enforcement proceeding. The Company intends to respond to the Wells Notice in the form of a “Wells Submission” in due course.

The Company has fully cooperated with the SEC in this matter and intends to continue to do so. The Company has conducted an extensive investigation into these allegations and the receipt of the Wells Notice does not change the Company’s belief that its activities in Angola have complied with all laws, including the U.S. Foreign Corrupt Practices Act. The Company is unable to predict the outcome of the SEC’s investigation or any action that the SEC may decide to pursue.”

Rare are so-called Wells Notices in the FCPA context for the simple reason that few issuers actually publicly push back against the SEC.  However, this is the second instance in the past four months of the SEC sending an issuer a Wells notice in connection with an FCPA inquiry. (See here for the prior post regarding Qualcomm).

As highlighted by the below excerpts, the Wells notice was a hot topic during Cobalt’s most recent quarterly earnings call.  The below excerpts also capture the candid statements of Cobalt’s CEO concerning the SEC’s position.

Joseph Bryant – Chairman and Chief Executive Officer

Before we get into the Q&A, let me say a few words about our 8-K disclosure from earlier this morning. As it noted, last evening, less than 24 hours ago, we received a Wells Notice from the Securities and Exchange Commission related to the investigation the agency has been conducting relating to Cobalt’s operations in Angola and the allegations of Angolan government official ownership of Nazaki Oil and Gas, one of the other working interest owners in Blocks 9 and 21 offshore Angola. In the notice, the staff of the SEC stated that it had made a preliminary and, in our view erroneous, determination to recommend that the SEC move forward with an enforcement action against the company. I think it’s important to point out that the Wells Notice is neither a formal allegation nor a finding of wrongdoing. It merely allows Cobalt the opportunity to provide its reasons of law, policy and fact as to why the proposed enforcement action should not be filed before any enforcement decision is made by the SEC. As you know, we have fully cooperated with the SEC and the investigation since it began nearly 3.5 years ago. And we will continue to do so. In the same vein, we will, of course, take this opportunity and respond to the SEC as part of the Wells process. But let me be very clear. This Wells Notice does nothing to change our prior conclusion that our activity in Angola have fully complied with all laws, including the Foreign Corrupt Practices Act, and Cobalt continues to strongly refute any allegation of any wrongdoing.”

[…]

Evan Calio – Morgan Stanley, Research Division

I appreciate your comments on the Wells Notice and underlying FCPA claims. Is there any — can you comment if there’s any potential collateral effect in a negative outcome scenario, meaning other than a potential fine? Could it affect your career or anything in your leases?

Bryant

Well, good question, Evan. We obviously disagree with the staff’s position in the Wells Notice and we’ll respond to the notice in due course. As we’ve stated repeatedly over the past several years, Cobalt has and always will conduct all aspects of our business to the highest ethical standards and in full compliance with all laws and regulations in all jurisdictions, not just Angola, where we operate. This is the case of all of our Angolan operations. We fully plan and expect to pursue the exploration, appraisal and development of all of our Angolan assets, including Cameia development in a timely manner as we’ve previously discussed. And that’s about all I can say, Evan.

Calio

Okay, that’s great. And do you have a hearing date on the Wells Notice? Or is that — just not at this time?

Bryant

No. There’s a process, but to be honest, it’s just like some other things, it can just wander on.

[…]

Joseph Allman – JP Morgan Chase & Co, Research Division

So just back to the Wells Notice for a few minutes, John. Are you planning on taking a reserve? I assume it’s not estimable at this point if there is any fine, so I assume the answer is no. And then just — could you just describe the next steps a little bit? I think you guys have to write a response. If I’m not mistaken, you’ve got about 2 weeks to file that response. Is that correct? Could you just give us some more details on that?

John Wilkerson – Chief Financial Officer, Principal Accounting Officer and Executive Vice President

We are not planning on taking a reserve.

Bryant

And yes, there is a formal process that we respond to. Our view of the facts — and of course, we know the facts incredibly well since we’ve been investigating this for a very long time, and so we will submit our facts to the SEC here in the next several weeks.

[…]

Edward Westlake – Crédit Suisse AG, Research Division

Let’s then get into the Wells Notice as well. So I mean, my understanding, which may be incorrect, of the FCPA is that one aspect of it is doing due diligence, which is the standard of reasonable inquiries, and then the other aspect of it is if some exchange took place in order to get access to the block. It seems from the outside to me that perhaps some disagreements with you and the SEC on how much due diligence was needed could be a civil sort of issue whereas if there was some exchange, that seem to me would be more criminal. So I’m just trying to get a sense of what it is that the SEC, if you know, disagree with you on in terms of their assessment as to why they’d want to go towards an enforcement.

Bryant

Well, the way the process works is it’s somewhat opaque, to be honest with you, on one side, but it’s fully transparent on our side. So we know all the facts, we know them very well. And I’ve said many times that we built Cobalt the right way from day 1 before we ever considered leases in Angola. All of our FCPA, all of our compliance, all of our due diligence systems were built into the company from day 1. I didn’t fall off the turnip truck yesterday and neither did any of these guys around the table. We know all about FCPA and we weren’t about to wander into anything there unknowingly. So all I can say for sure is we know what we’ve done. We know what compliance is required. We’ve gone above and beyond that and we’ll stand firm on our actions.

Westlake

Okay. And all of the due diligence which I’ve done also suggests that your staff has done a very good job in terms of doing their due diligence. But maybe a different way of asking the question, do you think it’s just the level of due diligence which the SEC disagree with you on? Or do you think that there has been some exchange? I understand that Nazaki is a full paying member of the consortium, in fact, was imposed on you rather than something that you chose. But I’m just trying to get some understanding as to what it is you think they disagree with you on.

Bryant

Ed, I appreciate your probing nature, but I really can’t answer that. Again, what I can tell you is, again, we understand the requirements. We understand the law, we understand compliance, we understand due diligence. And we have gone above and beyond in every case. And we sit here today confident in our position, and I cannot and will not speculate on what the SEC’s views are.

Westlake

Okay. And then have there been any inquiries from the DOJ?

Bryant

We have — at every step of the last 3.5 years, we have managed both the SEC and the DOJ simultaneously to make sure that both of those federal agencies are fully up to speed on what we’ve done and what we know about. So I would say constant communication with both agencies has been a routine over the past 3 years.

[…]

Westlake

Right. And maybe just a follow-up on the Wells Notice. Will we ever see the actual SEC letter? Is that a public domain or is it private in terms of their allegations, when eventually they make them.

Bryant

It’s currently private, and we’ll — I hope we’re demonstrating how transparent we are. When we know something, we’ll tell you. And when we have something we can release, we’ll release it. That’s about all really I can say about it.

Westlake

I mean, it would be helpful, I think, for investors to see what the allegation specifics are to be able to make a judgment call but, obviously, I leave that up to you.

Bryant

Got it.

[…]

Al Stanton – RBC Capital Markets, LLC, Research Division

[J]ust back to the Wells notice. Can I ask whether the letters are addressed to the company or do they actually name specific individuals?

Bryant

The company.

Staying with Cobalt-related issues, Global Witness recently issued this press release stating:

“BP and its partners including Houston-based Cobalt have contributed US$175 million over the past two-and-a-half years to fund a project in Angola known as the Sonangol Research and Technology Center (SRTC), with another US$175 million due to be paid by January 2016. Global Witness asked BP and Cobalt to provide any information that confirms the SRTC exists. The companies did not provide this information in their responses. BP stated that Sonangol, Angola’s state-owned oil company, “has informed BP that the SRTC is still in planning stage.” Cobalt said they “monitor the progress of our social contributions in Angola, including the Research and Technology Center” but did not provide any further information about the project. Global Witness asked Sonangol for information to confirm the existence of the SRTC, but the company did not respond. We commissioned interviews with well-placed industry insiders, but none of them could confirm that the SRTC exists.  Global Witness is calling on the Angolan authorities to disclose where this money has gone.”

SBM Offshore

The company has been under FCPA (and related scrutiny) since 2012 concerning allegations primarily in Equatorial Guinea and Angola and disclosed in this press release as follows.

“As previously disclosed in various press releases, SBM Offshore voluntarily reported in April 2012 an internal investigation into potentially improper sales practices involving third parties to the relevant authorities, and has since been in dialogue with these authorities. SBM Offshore is discussing a potential settlement of the issues arising from the investigation. While these discussions are ongoing, it is sufficiently clear that a resolution of the issues will have a financial component, and consequently SBM Offshore has recorded a non-recurring charge of US$240 million in the first half of 2014, reflecting the information currently available to the Company. Until the matter is concluded, SBM Offshore cannot provide further details regarding a possible resolution of the issues arising from the investigation, and no assurance can be given that a settlement will actually be reached. As always, the Company will inform the market as soon as further information can be provided.”

FCPA Fumble

U.S. Senator Roger Wicker (R-MS) is not the first member of Congress to fumble an FCPA issue, just the latest.  As noted in this Radio Free Europe article:

“A U.S. senator has asked federal authorities to investigate whether a powerful Russian media mogul seen as the mastermind behind the Kremlin-funded RT network used dirty money to purchase pricey California real estate.   U.S. Senator Roger Wicker (Republican-Mississippi) has asked the Justice Department to investigate whether Mikhail Lesin, Russian President Vladimir Putin’s former press minister, violated the Foreign Corrupt Practices Act or laundered money by acquiring multimillion-dollar homes in the Los Angeles area.”  [See here for Senator Wicker’s letter to the DOJ].

Dear Senator Wicker, alleged “foreign officials” are not subject to the FCPA.  See U.S. v. Castle, 925 F.2d 831 (5th Cir. 1991).

Checking In With the SFO

The U.K. Serious Fraud Office recently announced the following sentences of individuals in connection with the Innospec prosecution.

Dennis Kerrison, 69, of Chertsey, Surrey, was sentenced to 4 years in prison. Paul Jennings, 57, of Neston, Cheshire, was sentenced to 2 years in prison. Miltiades Papachristos, 51 of Thessaloniki, Greece, was sentenced to 18 months in prison. David Turner, 59, of Newmarket, Suffolk, was sentenced to a 16 month suspended sentence with 300 hours unpaid work

Mr Kerrison and Dr Papachristos were convicted of conspiracy to commit corruption in June 2014 in relation to Indonesia only. Mr Jennings pleaded guilty in June 2012 to two charges of conspiracy to commit corruption and in July 2012 to a further charge of conspiracy to commit corruption in relation to Indonesia and Iraq. Dr Turner pleaded guilty to three charges of conspiracy to commit corruption in January 2012 in relation to Indonesia and Iraq.

Further information on the guilty verdict delivered in the trial of Mr Kerrison and Dr Papachristos can be found here, while information on the guilty pleas entered into by Dr Turner and Mr Jennings can be found here and here.

Upon sentencing the defendants, HHJ Goymer said:

“Corruption in this company was endemic, institutionalised and ingrained… but despite being a separate legal entity it is not an automated machine; decisions are made by human minds.

“None of these defendants would consider themselves in the same category as common criminals who commit crimes of dishonesty or violence….. but the real harm lies in the effect on public life, the effect on community and in particular with this corruption, its effect on the environment.  If a company registered or based in the UK engages in bribery of foreign officials it tarnishes the reputation of this country in the international arena.”

Concerning the sentencing of Dr Turner, the Judge also said:

“It is necessary to give encouragement to those involved in serious crime to cooperate with authorities.  You [Dr Turner] very narrowly indeed escaped going to prison.”

David Green CB QC, Director of the SFO said:

“This successful conclusion to a long-running investigation demonstrates the SFO’s ability and determination to bring corporate criminals to justice.”

Innospec itself pleaded guilty in March 2010 to bribing state officials in Indonesia and was fined $12.7 million in England with additional penalties being imposed in the USA.

Dr Turner was also ordered to pay £10,000 towards prosecution costs and Mr Jennings was ordered to pay £5000 towards these costs.  Dr Turner and Mr Jennings have already been subject to disgorgement of benefit by the US Securities and Exchange Commission.  The matter of costs for Mr Kerrison and Dr Papachristos has been adjourned pending the hearing of confiscation proceedings against them.”

For more on the sentences, see here from thebriberyact.com.

Reading Stack

Professor Stephen Bainbridge knows Delaware corporate law and related corporate governance issues as well as anyone.  In regards to the Wal-Mart Delaware action (see here for the prior post noting that despite the hype, the decision was much to do about little), Professor Bainbridge writes:

“There’s been a fair bit of blawgosphere chatter about [the Wal-Mart Delaware action].”  […]  Personally, it just doesn’t seem that big a deal. Somebody want to explain to me why I should care more?”

Spot-on.

*****

Sometimes a suitable proxy for potential red flags may be whether, upon reading a certain set of facts and circumstances, one becomes dizzy.  This recent New York Times article regarding former U.K. Prime Minister Tony Blair may make you dizzy.

*****

A good weekend to all.

Friday Roundup

By on June 20, 2014 in Barrick Gold Corp., Dennis Kerrison, FedEx, Fine / Penalty Issues, Innospec, Miltiades Papachristos, Sentencing Guidelines, Serious Fraud Office, Smith and Wesson, United Kingdom

Scrutiny alerts, across the pond, for the reading stack, and congrats.  It’s all here in the Friday Roundup.

Scrutiny Alerts And Updates

FedEx

The Wall Street Journal reports here:

“FedEx Corp. told U.S. authorities that it received allegations that its Kenya operation paid bribes to government officials, according to a statement the company issued to The Wall Street Journal. The shipping company has told the U.S. Department of Justice and Securities and Exchange Commission about the allegations it potentially violated the Foreign Corrupt Practices Act, the statement said. FedEx also said it is investigating the allegations, and has “not found anything to substantiate the allegations.” The anonymous person contacted the firm through email in December 2013 with allegations of bribery in Kenya, according to an email reviewed by the Journal. […] FedEx told the Journal it approached the SEC and DOJ “shortly after” receiving the December allegations, but didn’t say when specifically it went to authorities. The firm also said it has brought in a U.S. law firm and an external audit team in East Africa as a part of its investigation. The person alleged that FedEx’s Kenya operation bribed government officials in the country between 2010 and 2013, according to the email. FedEx operates through a so-called nominated service contractor in Kenya and other countries in the region, according to the allegations and the company’s website. The alleged bribes went to customs officials to clear shipments without inspection, as well as to government vehicle inspectors and others, the person alleged, according to the email.  The person also wrote that the same notification would go to the DOJ and SEC, according to the email …  FedEx said in its statement that it has been “engaged in a cooperative dialogue with both agencies” since it approached them about the allegations.”

Barrick Gold

Barrick Gold Corp. (a Toronto-based company with shares traded on the New York Stock Exchange) and African Barrick Gold (and entity Barrick Gold holds an approximate 65% ownership interest in) were the focus of this recent Wall Street Journal article.  The article states, in pertinent part:

“As part of a process to buy land near [a Tanzania] mine starting last year, African Barrick paid more than $400,000 in cash mostly to Tanzanian government officials and consultants responsible for valuing the land, according to company invoices and copies of checks reviewed by The Wall Street Journal. An anonymous person said the payments were bribes to officials in position to influence African Barrick’s business interests, according to an email sent to the company last year and reviewed by the Journal. The person didn’t describe any quid pro quo behind the payments. African Barrick and Toronto-based Barrick Gold said payments they made weren’t bribes and were legitimate payments for expenses and allowances tied to an agreement with the Tanzanian government.”

In response to the WSJ article, African Barrick Gold released this statement.

Smith & Wesson

The company disclosed in its most recent annual report:.

“On January 19, 2010, the DOJ unsealed indictments of 22 individuals from the law enforcement and military equipment industries, one of whom [Amaro Goncalves] was our former Vice President-Sales, International & U.S. Law Enforcement. We were not charged in the indictment. We also were served with a Grand Jury subpoena for the production of documents. Since that time, the DOJ has been conducting an investigation to determine whether we have violated the FCPA and we have continued to cooperate fully with the DOJ in this matter. On February 21, 2012, the DOJ filed a motion to dismiss with prejudice the indictments of the remaining defendants who are pending trial, including our former Vice President-Sales, International & U.S. Law Enforcement. On February 24, 2012, the district court granted the motion to dismiss. Following extensive investigation and evaluation, the DOJ declined to pursue any FCPA charges against us and closed its investigation. The DOJ has noted our “thorough cooperation” in correspondence to the company.

In May 2010, we received a letter from the staff of the SEC giving notice that the SEC was conducting a non-public, fact-finding inquiry to determine whether there have been any violations of the federal securities laws. It appears this civil inquiry was triggered in part by the DOJ investigation into potential FCPA violations. We have always taken, and continue to take seriously, our obligation as an industry leader to foster a responsible and ethical culture, which includes adherence to laws and industry regulations in the United States and abroad. We are cooperating fully with the SEC in this matter and have undertaken a comprehensive review of company policies and procedures. We are in the final stages of discussions with the SEC staff that have brought us close to a resolution. Any future agreement is subject to final review and approval by the SEC Commissioners. Based upon the status of current discussions, we have estimated and accrued an expense of approximately $2.0 million in fiscal 2014.”

Across The Pond

Earlier this week, the U.K. Serious Fraud Office announced:

“[That a jury convicted] Dennis Kerrison and Miltiades Papachristos of conspiracy to commit corruption, following an investigation conducted by the Serious Fraud Office.  The convictions of Mr Kerrison, a former CEO of Associated Octel Corporation (subsequently renamed Innospec Limited) and Dr Papachristos, former Regional Sales Director for the Asia Pacific region, complete the SFO’s six year investigation into Innospec, which led to two other individuals and Innospec entering guilty pleas.

Innospec itself pleaded guilty in March 2010 to bribing state officials in Indonesia and was fined $12.7 million. The bribes were intended to secure, or serve as rewards for having secured, contracts from the Government of Indonesia for the supply of Innospec products including Tetraethyl Lead, also known as TEL, a highly dangerous organo-lead compound that was created as an octane booster to be added to engine fuel. Leaded fuel, i.e. fuel that contains TEL, was banned in the UK in 2000 due to links between the compound and severe neurological damage.”

As noted in the SFO release, the Kerrison and Papachristos matter was the “first contested overseas corruption case brought by the SFO concerning the bribery of foreign public officials.”

As further noted in the SFO release:

“Another former Innospec CEO, Paul Jennings, pleaded guilty in June 2012 to two charges of conspiracy to commit corruption and a further charge of conspiracy to commit corruption in July 2012. David Turner, former Innospec Sales and Marketing Director pleaded guilty to three charges of conspiracy to commit corruption in January 2012.”

The Innospec enforcement action also had a U.S. prong involving both the company and individuals (see here, here, and here for prior posts).

For The Reading Stack

An informative read here from Trevor McFadden (Baker & McKenzie) titled “The U.S. Sentencing Guidelines in FCPA Matters:  Understanding the True Impact on Settlement Discussions.”

Congrats

Congrats to Thomas Fox for his 1,000th post on the FCPA Compliance and Ethics Blog.  I second many of the big-picture observations he makes.  Over the years, Tom has become a good friend and trusted colleague and his “long strange trip” (as he puts it) is a testament that out of adversity can come opportunity.

*****

A good weekend to all.

U.K. Sentencing Guidelines For Organizations: Implications For Violators Of The U.K. Anti-Bribery Regime

By on February 25, 2014 in BAE, Fine / Penalty Issues, Guest Posts, Innospec, Mabey Johnson, Sentencing Guidelines, Serious Fraud Office, United Kingdom

Today’s post is from Karlos Seeger, Matthew Getz and Robin Lööf (all from the London office of Debevoise & Plimpton).

As regular readers of FCPA Professor will no doubt be aware, the UK legislative regime in relation to bribery and corruption, foreign as well as domestic, has changed dramatically in recent years, both in terms of substance and procedure.  These changes are particularly important for commercial organisations and, what is more, are all linked.  To re-cap:

  • The Bribery Act 2010 (“the Bribery Act”) did away with the patch-work of late 19th and early 20th century statutes which until recently, with some amendments and complemented by the common law, constituted the UK’s substantive anti-bribery laws.  It criminalises active and passive bribery both in the private and public sectors, and also creates a new, specific “FCPA offence” of bribing a foreign public official.  The most revolutionary aspect of the Bribery Act, however, is that in relation to activities on or after 1 July 2011, organisations will be held criminally liable for failing to prevent bribery by their employees, or other persons associated with them, unless they can prove that they had an effective compliance programme in place (the so-called “corporate offence”).
  • The Crime and Courts Act 2013 introduced Deferred Prosecution Agreements (“DPAs”) into UK law.  Previously, although plea agreements were possible and covered by specific guidance, attempts by prosecutors and defendants to present courts with agreed sentences had been deprecated by the judiciary on the basis that for an English prosecutor to agree on a sentence with a defendant would be contrary to “the constitutional principle that … the imposition of a sentence is a matter for the judiciary.” (Lord Justice Thomas [since appointed Lord Chief Justice] in R v Innospec Limited; see below)  DPAs will make this possible and will be available to organisations suspected of, inter alia, offences under the Bribery Act.  DPAs come into force on 24 February 2014.
  • On 31 January 2014, the Sentencing Council, the independent body responsible for developing guidelines for courts in England & Wales to use when passing sentence, issued a definitive guideline for sentencing organisations convicted of, inter alia, offences under the Bribery Act (“the Guideline”).  The Guideline will also constitute the basis for calculating the financial penalties levied under a DPA.

In this post, we look first at previous English practice in relation to sentencing for organisations convicted of bribery offences.  We then describe the new Guideline, draw comparisons with US practice, and attempt to assess what changes, if any, it will bring for organisations convicted of bribery.  Finally, we seek to predict how the Guideline will be used to calculate the financial penalties due under a DPA, with particular focus on the corporate offence.

Analysis of the Current State of the Law

Unlike in the US where the application of the principle of respondeat superior makes organisations vicariously liable for many criminal acts of their employees, English prosecutors seeking to hold organisations responsible for most criminal offences, including bribery, have had to prove that some part of the organisation’s “directing mind” – a director or senior executive, was involved in the wrongdoing.  As a result, few prosecutions have been brought and there are, consequently, very few examples of criminal fines imposed on organisations guilty of foreign corruption.  In addition, as a likely consequence of the uncertainty surrounding agreements between prosecutors and offending organisations, particularly as regards sentencing, a number of instances of corporate foreign corruption were dealt with civilly with Civil Recovery Orders which can be agreed between the investigating body and the corporate concerned.  With the introduction of DPAs, however, similar certainty of outcome can now be achieved through the criminal process which should reduce the need to resort to civil procedures to deal with criminal behaviour.

The Existing Case Law

In September 2009, engineering company Mabey & Johnson Ltd was sentenced for having sought to influence decision makers in relation to the award of public contracts in Ghana, Jamaica, and Iraq.  The company had paid some £832,000 in bribes in return for contracts worth approximately £44 million.  It was agreed between the Serious Fraud Office (“SFO”) and the company that there was a maximum of £4.65 million (ca. $7.4 million) available for confiscation and/or fines.  On its guilty pleas, the company was sentenced to pay confiscation of £1.1 million, and fines of £3.5 million.  The company also committed to paying reparations to the three countries concerned of, in total, £1,415,000.  There was a joint submission by the SFO and the company that the £4.65 million maximum was the most the company could afford to pay and still stay in business.  His Honour Judge Rivlin QC endorsed this sum, stating that he found it “realistic and just”.

In March 2010, Innospec Ltd was sentenced by Lord Justice Thomas (since appointed Lord Chief Justice) in respect of “systematic and large-scale corruption of senior Government officials” in Indonesia.  Innospec manufactured a fuel additive (TEL) which had been banned in most countries on environmental grounds and in order to preserve one of the few remaining markets for TEL, it had paid an estimated $8 million in bribes in order, as Thomas LJ found, to “block legislative moves to ban or enforce the ban of TEL on environmental grounds in Indonesia.”  As part of a global settlement between the company, on the one hand, and the SFO, as well as the US DoJ, SEC, and OFAC, on the other, a figured had been arrived at which represented the maximum the company could afford to pay and stay in business.  Before Thomas LJ, it was submitted that there was only $12.7 million available for confiscation and/or fines in the UK if the company was to survive.  This represented roughly one third of the global settlement sum.  Thomas LJ noted that the benefit from this campaign may have been as high as $160 million and that the US Federal Sentencing Guidelines indicated a sentencing range in respect of the company’s offending in Iraq (“no more serious than the Indonesian corruption”) would have been between $101.5 and $203 million.  In terms of what the appropriate UK fine would have been, Thomas LJ confined himself to indicating that it “would have been measured in the tens of millions.”  However, “with considerable reluctance”, Thomas LJ ordered that the sterling equivalent of $12.7 million be paid as a fine.  His Lordship explained his decision: “in all the circumstances and given the protracted period of time in which the agreement had been hammered out, I do not think it would have been fair to impose a penalty greater than that.”  Importantly, Thomas LJ made it clear that “the circumstances of this case are unique.  There will be no reason for any such limitation in any other case and the court will not consider itself in any way restricted in its powers by any such agreement.”  In fact, in His Lordship’s view, the division of the global sum between the UK and the US was not “one which on the facts of the case accorded with principle.” 

Finally, in December 2010, as part of a global settlement with the SFO and the US DoJ, BAE Systems plc pleaded guilty to a failure to keep adequate accounting records in relation to a contract worth $39.97 million for the provision of a radar system to Tanzania.  BAE accepted that there was a high probability that part of $12.4 million paid to a local adviser, Mr. Vithlani, had been used to favour BAE in the contract negotiations.

An agreement between the SFO and BAE was presented to the court under which BAE undertook to pay £30m to Tanzania, less any financial orders imposed by the court.  In his sentencing remarks, Mr. Justice Bean made no reference to this agreement.  His Lordship did however state that he was “astonished” at the SFO’s approach to the evidence and, in particular, branded the SFO’s preparedness to accept that Mr. Vithlani was simply a well-paid lobbyist as “naïve in the extreme”.  Whilst refusing to accept this interpretation of the evidence, Mr. Justice Bean pointed out that “I … cannot sentence for an offence which the prosecution has chosen not to charge.  There is no charge of conspiracy to corrupt …”  Noting that there were no relevant sentencing precedents for the offence charged, Mr. Justice Bean fined BAE £500,000.

Assessment of the Existing Case Law

Two things are noteworthy from the above sentences:

First, the recognised lack of precedent for UK sentences in foreign bribery cases.  In only one of the cases (Mabey & Johnson) did the sentencing judge indicate that the sentence passed was appropriate.  Having no doubt carefully studied the “success” of the approach in that case, the lawyers involved in Innospec approached the sentencing exercise in a structurally very similar manner only to be faced with the ire of one of the most senior judges in the country.  Disapproving of every aspect of the situation in which the sentencing court found itself, Thomas LJ made it very clear that the result in Innospec was in no way to be seen as a precedent for the future.

Second, the comparison with the US is instructive.  In Innospec, US prosecutors obtained $26.7 million compared to the SFO’s $12.7 million.  As far as BAE is concerned, however, in March 2010, prior to being fined £500,000 in the UK, BAE had agreed a settlement with the US DoJ including a $400 million criminal fine in respect of virtually identical conduct as that charged in the UK, albeit in a different jurisdiction.

This disparity in relation to BAE led to criticisms of the UK sentencing regime for organisations.  Notably, the UK Labour party included it in its Policy Review on Serious Fraud and White Collar Crime as an example of the apparent comparative laxity of the UK regime.  However, in the most authoritative ruling on these matters we have, Lord Justice Thomas’s sentencing of Innospec Ltd, there is the following statement of principle: “there is every reason for states to adopt a uniform approach to financial penalties for corruption of foreign government officials so that the penalties in each country do not discriminate either favourably or unfavourably against a company in a particular state.”

In any event, whatever the theoretical position might be under existing English case law, from 1 October 2014, courts will sentence organisations convicted of bribery offences under the Guideline which puts in place a sentencing system which should feel familiar to US lawyers.

The New Guideline:  Background and Context

Offences under the Bribery Act are covered by the new DPA regime.  This is seen as particularly significant in relation to the corporate offence which, with its lower evidential threshold for conviction, is expected to make prosecutions of organisations for bribery offences easier and therefore, potentially, more common.  The Act introducing DPAs provides that the financial penalty agreed under a DPA “must be broadly comparable to” the fine the organisation would have received had it pleaded guilty and been convicted.  However, as is apparent from the review of the authorities above, there is not much by way of guidance in this regard, in case law or otherwise.

Recognising this lack of guidance which risked introducing unnecessary but critical additional uncertainty into initial DPA negotiations, the Sentencing Council, which had been working on it for years, expedited its work on sentencing guidelines for corporates convicted of fraud, bribery, and money laundering.

The Basic Fine Calculation

The basic principle of the Guideline for calculating the fine is that the “[a]mount obtained or intended to be obtained (or loss avoided or intended to be avoided)” from the offence (the “harm figure”) is multiplied by a figure based on the corporate offender’s culpability (the “harm figure multiplier”).

For bribery offences, the harm figure “will normally be the gross profit from the contract obtained, retained or sought as a result of the offending.”  For the corporate offence, an alternative measure is suggested, namely “the likely cost avoided by failing to put in place appropriate measures to prevent bribery.”

Culpability is assessed with reference to the offender’s “role and motivation” in the offence(s) and categorised as “high”, “medium”, or “lesser”, depending on the characteristics and circumstances of the offending.  Characteristics indicating high culpability include the corruption of governmental or law enforcement officials, and factors indicating lesser culpability include the existence of some, but insufficient, bribery prevention measures.

Each culpability level has both a starting point for the harm figure multiplier (100% for lesser, 200% for medium, and 300% for high culpability) and a range: 20-150% for lesser, 100-300% for medium, and 250-400% for high.  The presence of aggravating and mitigating factors (of which the Guideline provides non-exhaustive lists) will determine where within the relevant range a defendant organisation falls.  Listed factors increasing seriousness, and thus raising the harm figure multiplier, include corporate structures set up to commit offences and cross-border offending.  Mitigating factors that lower the harm figure multiplier include co-operation with the investigation, self-reporting and early admissions.

Having applied the relevant multiplier to the harm figure, a sentencing court would have to take into account further factors such as discounts due on account of guilty pleas (up to one third, according to the current guidance), particularly valuable co-operation, and the consequences on third parties of the proposed totality of the financial orders.  The court could then adjust as appropriate.

In setting out this basis for the calculation of fines, the Sentencing Council acknowledged having considered Chapter 8 of the US Federal Sentencing Guidelines.  US lawyers will recognise in the harm figure the UK equivalent of the “base fine” in §8C2.4, and in the harm figure multiplier the equivalent of the “culpability score” multipliers pursuant to §§8C2.5 to 8C2.8.

The Guideline – What Likely Changes in Practice?

Although a highly hypothetical exercise, it may be illustrative to seek to predict what fines would be imposed under the Guideline on the facts of some of the cases discussed above.

On the facts of Mabey & Johnson, the following can be deduced:

  • The contracts obtained as a result of the offending were said to be worth some £44 million.  Included in that figure was the £2.56 million Iraqi contract for which the “gross margin” was said to be approximately £700,000.  If the same rate of gross profit to contract value (approximately 27%) is applied to the totality of the offending, the harm figure would be approximately £12 million.
  • In terms of culpability, the company’s accepted behaviour included the organised and planned corruption of government officials over a sustained period of time.  Therefore the culpability level under the Guideline would likely be deemed “high”, establishing the range for the harm figure multiplier of 250-400%.
  • In terms of the appropriate harm figure multiplier within that range, account would have to be taken of the many facts presented to the court and not disputed which, under the Guideline, would constitute factors increasing seriousness: The company had set up the “Ghana Development Fund” in order to make corrupt payments; fraudulent activity could be said to have been endemic within the company; the revelations caused considerable political fall-out in both Ghana and Jamaica; the offences were committed across borders in that many of the payments were made to officials while they were in the UK.  In terms of factors reducing seriousness, the main one would be that the offending was committed under the previous management.  Taken together, a harm figure towards the top end of the range would be likely.

If the harm figure multiplier chosen had been, say, 350%, the starting point for the appropriate fine for offending like that in Mabey & Johnson would be £42 million.  Even if a court had found that a reduction of the maximum of one third for the company’s guilty plea was due, as well as some further reduction on account of its co-operation, on the facts in Mabey & Johnson, the resulting fine of £20-25 million would be many times higher than the fine (£3.5) the court found “realistic and just”.

Taking the facts of Innospec and applying them to the Guideline the result is staggering: If it a court had found that the benefit to the company was indeed $160 million, and that the conduct was as serious as in Mabey & Johnson, the resulting fine under the Guideline could very well be upwards of £190 million; considerably more than the “tens of millions” Thomas LJ indicated would have been appropriate, and even higher than the top of the US range in that case.  Even so, however, it needs to be borne in mind that in both Mabey & Johnson and Innospec the sentencing courts took into account the fact that if higher fines had been imposed, the companies concerned would have been made bankrupt to the detriment of current employees and other third parties.  Such considerations along with the resulting adjustments remain possible under the Guideline.

Likely Approach to Financial Penalties Under a DPA – Focus on the Corporate Offence

A UK-based organisation faced with evidence of bribes paid by, for example, one of its agents after 1 July 2011 will have some difficult decisions to make.  On the assumption that it reports this evidence to the SFO, it would risk being charged with the corporate offence.  If charged the organisation could seek to rely on the defence, created by the Bribery Act, of adequate procedures to prevent bribery and even if those procedures are ultimately found insufficient to shield the organisation from liability, their presence would still be an indicator of “lesser” culpability for the purposes of the Guideline.  However, having run an unsuccessful defence on the merits, the organisation would not benefit from the substantial reduction in fines it would have been due had it pleaded guilty.

Assuming, however, that the organisation indicated a willingness to admit to not having adequate anti-bribery procedures in place, and entered into negotiations with the SFO to conclude a DPA, how would the Guideline be used to calculate the financial penalty?

The assessment of the organisation’s culpability would not be affected by being conducted in the context of the negotiation of a DPA.  However, the presence of some, albeit insufficient, anti-bribery procedures would be an indicator of “lesser” culpability.  Further, the very fact that the organisation was considered for a DPA would imply that a number of factors tending to lower the reference fine under the Guideline were present:

First, among the mitigating factors lowering the harm figure multiplier is co-operation with the investigation, the making of early admissions and/or voluntary self-reporting.  Under the DPA Code of Practice (published on 14 February 2014), pro-active and early co-operation with the authorities is one of the public interest factors weighing in favour of entering into a DPA (and against a full prosecution) in the first place.  There will therefore be a strong mitigating factor already assumed.  Consequently, absent extraordinary circumstances, the tops of the ranges for the harm figure multiplier ought not to be applied in the context of DPAs.

Second, as already mentioned, the final figure could be adjusted with reference not only to the totality of the various financial orders, but also on account of the nature and extent of the organisation’s overall assistance to the authorities and admissions of offending.  Applying the Sentencing Council overarching guideline on reductions in sentence for guilty pleas, an organisation that co-operates with the authorities and is convicted on its guilty plea can expect a reduction of a third.  In Innospec, Thomas LJ held that the company was entitled to a reduction in sentence of “well in excess of 50%” on account of its guilty plea and cooperation with the authorities.  Following this logic, organisations negotiating a DPA might be able to persuade prosecutors (and the courts) that a further “DPA discount” should apply on account of the substantial cost savings their co-operation has entailed, and the good faith they have shown.

All in all, it is not unreasonable to assume that an organisation facing charges under the corporate offence could benefit from a reduction of any financial penalties of between 50-75% under a DPA compared to the fine it would face if it lost a trial on the adequacy of its anti-bribery programme.  Add to that the legal costs avoided and the greater ability to manage the outcome and we entertain some doubt whether many conscientious organisations that discover bribery in its business would risk a trial.

Conclusion

No organisation has yet been prosecuted under the new corporate offence in the Bribery Act but the SFO has publicly indicated that several organisations are being investigated in circumstances where – the SFO hopes – such prosecutions may well result.  If that were to happen, the first applications of the Guideline may take place sooner rather than later.

The director of the SFO, David Green QC, is a vocal advocate of extending the principle of the corporate offence in the Bribery Act to other corporate offending such as fraud and market manipulation.  The government is understood to be consulting internally on such a reform.  If enacted, prosecutions and convictions of organisations can be expected to cease to be a curiosity and potentially become as common as in the US and under the Guideline, the resulting fines could well equal those in the US.

Friday Roundup

By on August 3, 2012 in Alba, Alcoa, Avon, Brazil, Declination Decisions, Deferred Prosecution Agreements, Foreign Issuers, Fresenius Medical Care, Innospec, Iraq, Paul Jennings, Related Civil Litigation, Sensata Technologies, Serious Fraud Office, Smith and Wesson, SOX Certification Issues, Teva Pharmaceuticals, Total S.A., Travel and Entertainment, United Kingdom, Victor Dahdaleh

Add two more companies to the list, a reply to a retort, Avon developments, Total S.A. perhaps nears a top-5 settlement, the reason for those empty Olympic seats, another FCPA-inspired derivative action is dismissed, Sensata Technologies and more on the meaning of “declination,” one of my favorite reads and additional material for the weekend reading stack.  It’s all here in the Friday roundup.

Recent Disclosures

As noted in this Wall Street Journal Corruption Currents post “German healthcare firm Fresenius Medical Care AG has opened an internal investigation into potential violations” of the FCPA.  The company’s recent SEC filing (here) states as follows.

“The Company has received communications alleging certain conduct that may violate the U.S. Foreign Corrupt Practices Act (“FCPA”) and other anti-bribery laws. In response to the allegations, the Audit and Corporate Governance Committee of the Company’s Supervisory Board is conducting an internal review with the assistance of counsel retained for such purpose. The Company has voluntarily advised the U.S. Securities and Exchange Commission and the U.S. Department of Justice that allegations have been made and of the Company’s internal review. The Company is fully committed to FCPA compliance. It cannot predict the outcome of its review.”

In addition, as noted in this Wall Street Journal Corruption Currents post, “the Securities and Exchange Commission is investigating Teva Pharmaceutical Industries Ltd, the world’s largest manufacturer of generic drugs, for possible violations” of the FCPA.   The Israel based company recently stated in an SEC filing (here) as follows.

“Teva received a subpoena dated July 9, 2012 from the SEC to produce documents with respect to compliance with the Foreign Corrupt Practice Act (“FCPA”) in Latin America. Teva is cooperating with the government. Teva is also conducting a voluntary investigation into certain business practices which may have FCPA implications and has engaged independent counsel to assist in its investigation. These matters are in their early stages and no conclusion can be drawn at this time as to any likely outcomes.”

U.K. DPAs

In this previous post, I discussed my letter to the U.K. Ministry of Justice urging the MoJ to just say no to deferred prosecution agreements.  Over at thebriberyact.com (a site that has lead discussion of the issue) the authors disagree with me (see here).  That’s all fine and dandy and healthy to the discussion, but the substance of the retort is not persuasive.

The retort is  basically that the SFO “frequently has to fight its corner in court” and that “sometimes it loses” whereas in the U.S. “the accepted wisdom [is] that an FCPA investigation would result in a corporate settlement” and the “DOJ simply [does] not have to test its legal theories in court.”  In short, the authors state “statistically in the US corporates and their counsel often fold in the face of a DOJ investigation” but “in the UK this is not so.”

Contrary to the suggestion in the retort, I did not ignore the Bribery Act’s Section 7 offense – rather it is all the more reason to reject DPAs.

The retort closes as follows.  “Sadly, as it stands, the UK enforcement agencies do not have equality of arms when it comes to their enforcement toolkit.  Put another way the DOJ can end run UK enforcement agencies because it does have the potential to enter into DPA’s.  This reason alone is justification enough for putting in place a system which delivers a similar result to the US system.”

This confirms in my mind that the UK’s desire for DPAs has little to do with justice and deterring improper conduct, but more to do with enforcement statistics and posturing in an emerging “global arms race” when it comes to “prosecuting” corruption and bribery offenses.

Avon Developments

Avon was in the news quite a bit this week.

On Monday, the Wall Street Journal reported (here) that “federal prosecutors looking into possible bribery of foreign officials by Avon have asked to speak to Andrea Jung, the former chief executive and current full-time chairman.”

On Wednesday, the company filed its quarterly report and stated, among other things, as follows.  “We are in discussions with the SEC and DOJ regarding mutually resolving the government investigations. There can be no assurance that a settlement will be reached or, if a settlement is reached, the timing of any such settlement or that the terms of any such settlement would not have a material adverse effect on us.”  During the Q2 earnings call, company CEO Sheri McCoy stated as follows.   “We are in discussion with the SEC and DOJ regarding mutually resolving the government investigations.”

On Thursday, the Wall Street Journal reported (here) that McCoy “frustrated with the pace of Avon’s internal probe, has pushed to bring in a second law firm for advice on the progress of the investigation.   The company has held discussions with law firm Allen & Overy LLP for that role.”  Arnold & Porter has been leading Avon’s investigation.  According to the article, Avon’s “probe has turned up millions of dollars of payments in Brazil and France made to consultants hired to assist with Avon’s tax bills in those countries.”

What to make of the above information?

It is unusual for the enforcement agencies to want to speak to a former CEO and current chairman in connection with an FCPA inquiry.  But then again, prosecutors have reportedly spoken to several other Avon executives in connection with the probe.  Given Avon’s disclosure that it has begun settlement discussions, this would suggest that the factual portion of the enforcement agencies investigation is over.

Avon’s FCPA scrutiny has perhaps been most notable for the amount of pre-enforcement action professional fees and expenses – approximately $280 million.  Thus, yesterday’s report that the company is considering bringing in a second law firm nearly four years into the investigation is interesting and unusual.

Even though Avon has disclosed it is in settlement talks, an enforcement action in 2012 is not certain.  In many cases, companies have disclosed the existence of FCPA settlement discussions, but the actual enforcement action did not happen for 6-12 months (or longer).

Whenever the enforcement action occurs, and whatever the ultimate fine and penalty is, Avon’s greatest financial hit  has likely already occured – its pre-enforcement action professional fees and expenses.  For instance, assuming a settlement amount would match the $280 million, this would be the sixth largest FCPA settlement of all time, and none of the enforcement actions in the top 5 were outside the context of foreign “government” procurement.

Total Settlement Near?

For some time, there has been speculation that Total S.A. (you better sit down for this) would actually mount a defense and put the DOJ and SEC to its burden of proof in an enforcement action.  Information in a recent company press release suggests that this is unlikely to occur.  In this recent release, Total stated as follows.  “Total has been cooperating with the … SEC and DOJ in connection with an investigation concerning gas contracts awarded in Iran in the 1990’s.  Total, the SEC, and the DOJ have conducted discussions to resolve issues arising from the investigation.  In light of recent progess in these discussions, Total has provisioned 316 million euros [$389 million]  in its accounts in the second quarter of 2012.”

A $389 million settlement would be a top five FCPA settlement in terms of fine and penalty amounts.  For additional coverage, see here from Reuters.

Empty Olympic Seats

A reason, perhaps, for those empty Olympic seats?  According to a recent study (see here) by the Society for Corporate Compliance and Ethics  “tighter than anticipated corporate entertainment and gift policies.”

Smith & Wesson Derivative Action Dismissed

Even against the backdrop of generally frivolous plaintiff derivative claims in the FCPA context, the action against Smith & Wesson (“S&W”) stood out.  After S&W employee Amaro Goncalves was criminally indicted in the manufactured Africa Sting case, certain investors filed a derivative claim in U.S. District Court in Massachusetts suing members of the board of S&W and company officers derivatively on behalf of the corporation for failing to have effective FCPA controls and oversight, thereby breaching their duty of care.

In dismissing the complaint (see here for the decision) Judge Michael Ponsor characterized the complaint as follows. “[I]n essence, that the company enjoyed an increase in international sales and then had an employee indicted for FCPA violations. This indictment, later dropped, supposedly evidenced a failure to implement proper controls.”

For another recent dismissal of an FCPA inspired derivative claim against Tidewater, see this prior post.  See also this recent post from Kevin LaCroix at The D&O Diary blog.

Sensata Technologies

In October 2010, Sensata Technologies disclosed in a quarterly report (here) as follows.

“An internal investigation has been conducted under the direction of the Audit Committee of the Company’s Board of Directors to determine whether any laws, including the Foreign Corrupt Practices Act (“FCPA”), may have been violated in connection with a certain business relationship entered into by one of the Company’s operating subsidiaries involving business in China. The Company believes the amount of payments and the business involved was immaterial. The Company discontinued the specific business relationship and its investigation has not identified any other suspect transactions. The Company has contacted the United States Department of Justice and the Securities and Exchange Commission to begin the process of making a voluntary disclosure of the possible violations, the investigation, and the initial findings. The Company will cooperate fully with their review.”

In its most recent quarterly report (here), the company disclosed as follows.

“During 2012, the DOJ informed us that it has closed its inquiry into the matter but indicated that it could reopen its inquiry in the future in the event it were to receive additional information or evidence. We have not received an update from the SEC concerning the status of its inquiry.”

Did Sensata “win a declination” as the FCPA Blog suggested here?

Since August 2010 (see here for the prior post) I have proposed that when a company voluntarily discloses an FCPA internal investigation to the DOJ and the SEC, and when the DOJ and/or SEC decline enforcement, the DOJ and/or the SEC should publicly state, in a thorough and transparent manner, the facts the company disclosed to the agencies and why the agencies declined enforcement on those facts.

Perhaps then we would know if the DOJ concluded it could prove beyond a reasonable doubt all the necessary elements of an FCPA charge, yet decided not to pursue Sensata – which is my definition of declination as noted in this prior post.  Anything else, is what the law commands, not a declination.

Favorite Read

One of my favorite reads is always Shearman & Sterling’s “Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act.”  See here for the most recent edition.

As to “foreign official,” the report states as follows. “[T]he government does not appear to have been deterred by the [foreign official] debate. In most of the cases brought in 2012, the relevant government officials were employed by “instrumentalities” such as state health insurance plans (Orthofix), a state-owned nuclear plant (Data Systems & Solutions), government hospitals (Biomet and Smith & Nephew), a state-owned real estate development company (Peterson) a state-owned oil company (Marubeni), and state-owned airlines (NORDAM).”

As to FCPA guidance, the report states as follows. “We understand that this guidance will be issued before October, when the US is scheduled to issue a written progress report on its implementation of the OECD Working Group on Bribery’s recommendations.”

A final kudos – Shearman & Sterling keeps its FCPA enforcement statistics the best way.  As it explains – “we count all actions against a corporate “family” as one action. Thus, if the DOJ charges a subsidiary and the SEC charges a parent issuer, that counts as one action.”  This is consistent with my “core” approach (see here), but unlike many others in the industry.

Weekend Reading Stack

An interesting and informative article (here) in Fortune about the Alba-Alcoa tussle and the role of Victor Dahdaleh.  For more on the underlying civil suit between Alba and Alcoa see this recent Wall Street Journal Corruption Currents post.

SOX’s executive certification requirements were supposed to be a panacea for corporate fraud.  It has not happened.  See here from Alison Frankel (Reuters) and here from Michael Rapoport (Wall Street Journal).  As noted in this prior post concerning the Paul Jennings (former CFO and CEO of Innospec) enforcement action, SOX certification charges were among the charges the SEC filed against Jennings.  Then SEC FCPA Unit Chief Cheryl Scarboro stated, “we will vigorously hold accountable those who approve such bribery and who sign false SOX certifications and other documents to cover up the wrongdoing.”  Speaking of Jennings, as noted in this recent U.K. Serious Fraud Office, Jennings recently pleaded guilty to one charge of conspiracy to corrupt Iraqi public officials and other agents of the Government of Iraq.

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A good weekend to all.

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