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Dissecting Daimler

April Fool’s Day is a day traditionally full of practical jokes and pranks.

Thus, it is only fitting that on April 1st U.S. District Court Richard Leon will hold a hearing on the Daimler FCPA enforcement action during which he is expected to approve a DOJ – Daimler brokered deferred prosecution agreement and other various aspects of the settlement discussed below.

If so, one pillar which contributes to the “facade of FCPA enforcement” (more on that in a future post) – bribery, yet no bribery – will have a new poster-child in addition to the Siemens and BAE bribery, yet no bribery FCPA enforcement actions (see here for prior Siemens posts and here for prior BAE posts).

At least, Siemens and BAE pleaded guilty to something – even if that something was not an FCPA antibribery charge.

The Daimler enforcement action appears to take the “facade” one step further in that Daimler will not have to plead guilty to anything … zero … zilch.

Rather, Daimler will agree to a deferred prosecution agreement despite clear evidence (per the DOJ’s own allegations as set forth below) of FCPA antibribery violations.

One can legitimately ask, what did Innospec Inc. and Control Components, Inc. (two companies that recently pleaded guilty to FCPA antibribery violations) do that Daimler also didn’t do?

Sure, two insignificant entities in Daimler’s massive corporate hierarchy, Daimler Export and Trade Finance GmbH (“ETF”) and DaimlerChrysler Automotive Russia SAO (“DCAR”), are expected to plead guilty to FCPA antibribery charges. EFT is a finance arm far down on Daimler’s corporate hierarchy and DCAR sells spare parts for Daimler in Russia.

In other words, it sure looks and feels like two junior, indirect subsidiaries are being offered up as “sacrificial corporate lambs” to take the fall for the more significant, powerful parent.

The end result is that the DOJ can boast it secured two FCPA antibribery pleas while allowing Daimler to say that it never violated the FCPA’s antibribery provisions, thus allowing Daimler to escape debarment in Europe – a factor clearly at issue in this enforcement action as highlighted below.

Yet another instance of bribery, yet no bribery is not the only reason why the Daimler enforcement action contributes to the facade of FCPA enforcement.

In addition, wrapped into allegations which clearly establish all the elements of an FCPA antibribery violation, are numerous dubious and untested theories of FCPA liability.

Most notably, the entire criminal information against DaimlerChrysler China Ltd. (“DCCL”) is premised, as so many recent FCPA enforcement actions are, on employees of alleged Chinese state-owned entities (companies doing business all over the world and companies with publicly traded stock) being “foreign officials” under the FCPA. As in other FCPA enforcement actions, the allegations as to these entities are bare-bones, uninformative, and replete with legal conclusions as to why these entities are “instrumentalities” of a foreign government.

Because these dubious and untested theories of FCPA liability are embedded into the much larger bribery, yet no bribery charges against Daimler which are being resolved through a deferred prosecution agreement, these dubious and untested theories will once again escape judicial scrutiny.

Because of the general lack of substantive FCPA case law, the entire Daimler enforcement action (including theories of liability premised on the dubious and untested legal theories) will once again be viewed as de facto FCPA case law.

The Daimler bribery, yet no bribery enforcement action is wide in scope and allegations of improper conduct go all the way up to senior levels of the company. The “things of value” are numerous, the “foreign officials” include bona fide government officials (as well as the dubious “foreign officials” referenced above) and the amount of business allegedly obtained or retained through bribery and corruption is in the hundreds of millions.

The countries in which the payments were allegedly made are numerous (in fact, the label function at the bottom of this post only allows so many characters and I was unable to separately label each country in which the alleged improper payments occurred).

The alleged improper payments involved dozens and dozens of third parties, including several located in the U.S., which were allegedly utilized by Daimler and its affiliates to bribe foreign officials. Given Daimler’s use of numerous U.S. based entities, it will be interesting to see if any of these U.S. entities and/or entity employees will be prosecuted for their role in the respective bribery schemes.

The Daimler bribery, yet no bribery case involves involves ineffective internal controls, lack of effective third-party due diligence, and intentional misrecording of bribe payments on Daimler’s books and records (and those of its affiliates).

Yet in another interesting twist, Daimler also escapes criminal charges for knowingly failing to implement effective internal controls, even though the DOJ’s own allegations would seem to support such a charge. (Even Siemens plead guilty to both criminal books and records and internal controls charges).

This a long post.

However, the more that is known about the Daimler FCPA enforcement action and the more that is understood about the facade of FCPA enforcement, the greater the chance the facade of FCPA enforcement will be exposed and addressed.

It all starts with the person standing between the DOJ and Daimler and that is Judge Richard Leon and he would be doing a great public service by rejecting the proposed settlement and injecting the “rule of law” into the current facade of FCPA enforcement.

This post details the Daimler criminal information, the Daimler deferred prosecution agreement, the three separate criminal informations against Daimler subsidiaries, and the DOJ omnibus sentencing memorandum.

The Daimler AG Bribery, Yet No Bribery Allegations

According to the criminal information (see here) filed against Daimler AG (and the Statement of Facts in the below described deferred prosecution agreement), the company “engaged in a long-standing practice of paying bribes to ‘foreign officials’ as that term is defined in the FCPA … through a variety of mechanisms, including the use of corporate accounts [such as cash desks], offshore bank accounts, deceptive pricing arrangements, and third-party intermediaries.”

In summary fashion, the information charges that “between 1998 and January 2008, Daimler made hundreds of improper payments worth tens of millions of dollars to foreign officials in at least 22 countries – including China, Croatia, Egypt, Greece, Hungary, Indonesia, Iraq, Ivory Coast, Latvia, Nigeria, Russia, Serbia and Montenegro, Thailand, Turkey, Turkmenistan, Uzbekistan, Vietnam, and others – to assist in securing contracts with government customers for the purchase of Daimler vehicles valued at hundreds of millions of dollars.”

According to the information, “in some cases, Daimler wired these improper payments to U.S. bank accounts or to the foreign bank accounts of U.S. shell companies in order to transmit the bribe.” The information alleges that “in at least one instance, a U.S. shell company was incorporated for the specific purpose of entering into a sham consulting agreement with Daimler in order to conceal improper payments routed through the shell company to foreign government officials.” According to the information “certain improper payments even continued as late as January 2008.” The information charges that “in all cases, Daimler improperly recorded these payments in its corporate books and records.”

Despite being a German company, the information charges that “as a result of Daimler’s filing of periodic reports with the SEC, and Daimler’s use of U.S. bank accounts and U.S. companies in transacting certain business with foreign governments and officials, the company is subject to the FCPA.”

According to the information, “Daimler’s longstanding violations of the FCPA resulted from a variety of factors, including: (1) an inadequate compliance structure; (2) a highly decentralized system of selling vehicles through a myriad of foreign sales forces, subsidiaries, and affiliates, with no central oversight; (3) a corporate culture that tolerated and/or encouraged bribery; and (4) the involvement of certain key executives, such as the then head of its overseas sales division (“DCOS”), the then head of internal audit, and the then CEO’s of several subsidiaries and affiliates.”

According to the information, “in total, the corrupt transactions with a territorial connection to the United States resulted in over $50,000,000 in pre-tax profits for Daimler.”

The information alleges improper conduct at the highest levels of the country. For instance, in 1999 during a Daimler “Board of Management meeting, Daimler’s then head of internal audit proposed that the company adopt an integrity code that included anti-bribery provisions …” However, the information charges that “participants in the meeting discussed that adopting such policies (and stopping the practice of making ‘useful payments’) would result in Daimler losing business in certain countries.” Even though the company did adopt “an integrity code with anti-bribery provisions” at the meeting, the information charges that Daimler, among other things, “failed to make sufficient efforts to enforce the code, train employees on compliance with the FCPA or other applicable anti-bribery statutes” or “otherwise attempt to ensure that the company was not continuing to make improper payments in order to obtain or retain government business overseas.”

Elsewhere, the information charges that “in or about 2000 or 2001” “Daimler’s internal audit department was aware that Daimler employees had made and could make bribe payments” and that the department drafted a document identifying 14 separate improper payment mechanisms. According to the information, the same document noted that “payment of ‘useful expenditures’ through these methods was subject to criminal prosecution in countries such as the United States.” However, the document also noted the “level of difficulty” law enforcement authories would have in “proving corruption carried out through the various methods.”

The Daimler information, as to conduct in Russia, China, and Croatia, contains the same substantive allegations as set forth in the separate criminal informations against DCAR, ETF, and DCCL (described more fully below).


As to Vietnam, the information charges that “Daimler employees working at Mercedes Benz Vietnam (“MBV”) made improper payments and provided gifts and other things of value to Vietnamese government officials in exchange for business from Vietnamese government owned and controlled customers.” According to the information, “these improper payments were routinely paid to government officials through broker commissions” and the payments were “improperly categorized as broker commissions, cost of goods sold, and/or gifts” in MBV’s books and records.

The information states that between “2000 and 2005, MBV was majority owned (70%) and controlled by Daimler through its subsidiary Daimler Benz Vietnam Investments Singapore Pte. Ltd., which Daimler wholly owned from June 30, 2003 through 2006.” The information further states that “although a Vietnamese government entity, Saigon Auto Corp., was a minority owner (30%) of MBV” and that “MBV was managed primarily by German Daimler employees.”

According to the information, the “foreign official” recipients of the improper payments included employees of Saigon Passenger Transport Company (“Saigon Bus”) (see here), an alleged “instrumentality” of the Vietnamese government and “Vietnamese government officials in the Ministry of Public Security.”

The information alleges that “MBV agreed to make the improper payments to the Saigon Bus official through” an account of Trading & Investment Houston, a U.S. based entity. The information also alleges that during negotiations of the Saigon Bus deal, “a Vietnamese government official with the government-owned Saigon High Tech Park suggested that MBV make a contribution [approximately $22 million over a five yeard period] to the high tech park as a condition of Daimler and MBV winning the business contract.”

The information also alleges that in connection with the 2004 Asia Europe Meeting (“ASEM 5”), “Vietnamese government officials sought to obtain 78 Mercedes Benz passenger cars in order to transport officials attending the conference.” According to the information, MBV “agreed to lend the vehicles to the Vietnamese government free of charge” and that in exchange “the Vietnamese government allowed MBV to import these 78 completely assembled passenger cars into Vietnam at a tariff rate of only 25%, when the standard tariff rate for completely assembled vehicles was 100%.” According to the information, following the conference, when MBV sold the vehicles, it was thus able to make a “much higher profit, approximately €1.65 million, because of the lower tariff costs.”

According to the information, “the making of [these] improper payments was known about and encouraged at the highest levels of the former MBV management.”


As to Turkmenistan, the information alleges that Daimler, and its Vienna based distributor (IPC) delivered to high-level Turkmen government officials various gifts, including “an armored Mercedes Benz S-class passenger car, valued at more than €300,000 for his birthday.” According to the information, “neither the Turkmen Government Official nor the Turkmen government paid for the vehicle” but that Daimler affiliate employees “agreed to provide this birthday gift to the Turkmen Government Official with the expectation that [Daimler] would receive large contracts for the purchase of vehicles by the Turkmenistan government in the coming year.”


As to Nigeria, the information focuses on the conduct of Anambra Motor Manufacturing Company (“Anammco”), “a joint venture between Daimler and the Nigerian government” that Daimler utilized to sell vehicles into Nigeria. According to the information, “Daimler owned 40% of Anammco and controlled Anammco, inter alia, through Anammco’s then managing director, who was a German expatriate and dual employee of both Daimler and Anammco.”

According to the information, “Daimler entered into a contract to sell vehicles to the Nigerian State House, which was also known as the Nigerian Presidential Complex, and was the office and residence of the Nigerian President (the ‘State House Contract’) and that pursuant to this contract, Daimler charged “the State House approximately 21% over the wholesale price for the vehicles, parts, and services.” According to the information, “in connection with these sales to the State House, Daimler made €1,427,242 in improper commission payments … with the understanding that these funds would be passed on, in whole or in part, to Nigerian officials to secure the State House Contract.”

The information also charges that Daimler made improper payments to high-level executive branch officials in Nigeria in connection with the State House Contract; that Anammco entered into contracts worth $4.6 million with Savannah Sugar Company Ltd. (an alleged instrumentality of the Nigerian government) to supply Daimler vehicles, spare parts, and tools on which approximately €554,396 in “consultant” payments were made; and that “Daimler entered into a contract with the Nigerian Police Force” in which Anammco requested that Daimler make payment to a member of the Nigerian Police Force in his German bank account.

The information also alleges that Daimler made various payments to Nigerian government officials in connection with selling “54 buses to the Nigerian Ministry of Industry” to provide transport for the World Youth Championship games held in Nigeria. The informatin further alleges that Anammco agreed to provide $500,000 in support of the “All-Africa Games” and that Anammco supplied numerous vehicles for the games, but that the Nigeria organizing committee for the games did not pay for the vehicles.

Finally, the information charges that Daimler’s wholly-owned subsidiary in Brazil utilized the services of an entity owned by a senior Nigerian diplomat in Brazil and his wife to help facilitate the sale of buses to a Nigerian state and that approximately $60,000 in commission payments were paid to the Nigerian diplomat.

Ivory Coast / West Africa

As to the Ivory Coast and West Africa, the information states that “from at least 1992 to 2007, Daimler sold passenger cars in the Ivory Coast and other West African countries through its majority owned (89%) and controlled subsidiary, Star Auto S.A. (“Star Auto”)” and that Star Auto made direct sales of Daimler passenger cars to various government customers in West Africa, including government ministries, the military, and government agencies, including for use by diplomats and heads of state.” In connection with these sales, Daimler employees “authorized and made improper payments to government officials at its customers in the Ivory Coast and elsewhere in West Afria…”

Among other conduct, the information alleges that commission payments were made to an entity that would pass on, in whole or in part, the payments to Ghanaian Army officials in connection with a contract to sell trucks to the Army of Ghana, and that Daimler, to assist in securing a contract to provide trucks to an Indonesian firm operating a logging project in Liberia, “gave a then senior executive branch official of Liberia a gift of an armored Mercedes passenger car worth approximately €267,000.”


As to Latvia, the information charges that EvoBus GmbH (“EvoBus”), a wholly-owned subsidiary of Daimler and part of a Daimler business unit called Daimler Buses, paid approximately €1,800,000 in ‘commision’ payments to third parties with the understanding that such improper payments would be passed on, in whole or in part, to Latvian government officials to influnce the award of contracts to EvoBus.” According to the information, the contracts were awarded by the Riga City Council Traffic Department and EvoBus paid bribes to members of the Riga City Council. To make these “commission payments and to disguise their true nature and purpose” the information charges that “EvoBus entered into sham consulting contracts with, among others, two U.S. based entities: Oldenburgh Financial Corporation, incorporated in Delaware, and United Petrol Group LLP, incorporated in Oregon.”

Austria / Hungary

As to Austria and Hungary, the information charges that, to help facilitate the sale of 32 used buses to a state-owned regional public transport company in Hungary, EvoBus Austria GmbH agreed to pay a “commission of €333,370 to a U.S. based corporation called USCON Ltd. with the understanding that the payment would be passed on, in whole or in part, to Hungarian government officials.”


As to Turkey, the information charges that Daimler’s Corporate Audit Department “discovered three binders located in a safe at MB Turk’s [a Daimler subsidiary in Turkey] offices in Istabul” that, along with other evidence, demonstrated that “MB Turk made approximately €6.05 million in payments to third parties in connection with vehicle export transactions that involved the sale of vehicles to non-Turkish government customers in North Korea, Latvia, Bulgaria, Libya, Romania, Russia, Saudi Arabia, Yemen, and other countries in deals with revenues of approximately €95 million.” According to the information, at least €3.88 million of the €6.05 million comprised of “improper payments and gifts […] paid to foreign government officials or to third parties with the understanding that the payments and gifts would be passed on, in whole or in part, to foreign government officials to assist in securing the sale of Daimler vehicles to government customers.”


As to Indonesia, the information charges that “Daimler’s local affiliates provides gifts, travel and entertainment to government officials associated with Perum Damri in order to secure business.” According to the information, Perum Damri (see here) is a “state-owned bus company” and an “instrumenality of the Indonesian government” thus making its employees “foreign officials” under the FCPA. The information alleges that between 1998 and 2005, “Daimler’s local affiliates spent approximately $41,000 on such gifts, including golf clubs, wedding gifts for the children of a senior offical at Perum Damri, golf outings for Perum Damri officials, and gifts that were raffled off to low-level employees on the occasion of Perum Damri’s anniversary. According to the information, Perum Damri purchased approximately $8.36 million worth of buses from Daimler’s Indonesian affiliates. The information also alleges that “Daimler’s local affiliates also made several large cash payments to tax officials in Indonesia for the purpose of reducing their tax obligations.”


As to Iraq, the information charges, what has become, standard Iraqi Oil for Food Program allegations in that Daimler “agreed to pay a 10% commission to the government of Iraq in connection with sales of its vehicles under the [Oil for Food Program].” Yet in a twist, the information states certain sales between “Daimler and the Iraqi government were prepared, negotiated and finalized by employees at Daimler’s headquarters in Germany” and that “Daimler negotiated its [Oil for Food Contracts] directly with the government of Iraq.” (In many of the prior Oil for Food cases, the Iraqi government contracts were prepared, negotiated, and finalized primarily by third-party agents retained by the offending company). When third party agents were used by Daimler to make sales to the Iraqi government, the information charges that Daimler executives “understood that Daimler’s contract partners would pay illegal kickbacks to Iraqi ministries.”

After this laundry list of bribes in several differnt countries, the information then alleges that “prior to 2005, Daimler’s anti-bribery compliance program was inadequate.” Among other things, the information alleges that Daimler had “inadequate guidelines and controls concerning the disbursement of cash from cash desks;” inadequate controls over other corporate accounts; “inadequate controls over the opening and maintaining of bank accounts;” “inadequate controls over the selection, use, and making of payments to agents and intermediaries;” and “inadequate training of Daimler employees on FCPA or other anti-bribery compliance.”

Against this backdrop, one might assume that Daimler was charged with FCPA antibribery violations – which generally prohibit the payment of money or anything of value, to a foreign official, in order to obtain or retain business.

However, in this current facade era of FCPA enforcement, nothing can be taken for granted and the Daimler enforcement action is yet another instance of bribery, yet no bribery, as Daimler was merely charged with two counts: (i) conspiracy to violate the FCPA’s books and records provisions; and (ii) knowingly falsifying books, records, and accounts – a criminal charge under 78m(b)(5).

Even more troubling, Daimler will not even by pleading guilty to these charges, because the charges are being resolved through a deferred prosecution agreement (“DPA”).

Daimler AG’s Deferred Prosecution Agreement

The DPA (see here) is a fairly standard FCPA DPA in that in return for the DOJ deferring prosecution of the criminal charges against Daimler, Daimler “admits, accepts, and acknowledges that is is responsible for the acts of its employees, subsidiaries, and agents” as set forth above. As is common, Daimler also agrees to a host of compliance undertakings, including hiring an independent monitor for a three year period (an issue discussed in this prior post).

The term of the DPA is an unusual two years and seven months after the guilty pleas of ETF and DCAR (most FCPA NPAs or DPAs are for whole year terms). Also unusual is that the DPA states that if the DOJ finds “in its sole discretion, that there exists a change in circustances sufficient to eliminate the need for the corporate compliance monitor … and that other provisions of [the DPA] have been satisfied, the Term of the Agreement may be terminated early.”

Like other NPAs and DPAs, the Daimler DPA essentially muzzles Daimler, its directors, its employees, and agents, from making “any public statement … contradicting the acceptance of responsibility by Daimler” for the facts set forth in the charging documents. In this way, DOJ is able to insulate itself from criticism from the only other party besides DOJ (i.e. Daimler) that actually knows the precise facts and issues relevant to the charged conduct. Specifically, if Daimler wants to issue a press release relevant to this case, it must first get DOJ’s approval.

The DPA also states: “with respect to Daimler’s present reliability and responsibility as a government contractor, the Department agrees to cooperate with Daimler, in a form and manner to be agreed, in bringing facts relating to the nature of the conduct underlying this Agreement and to Daimler’s cooperation and remediation to the attention of governmental and other debarment authorities, including Multinational Development Banks, as requested.”

Thus, as in the BAE and Siemens bribery, yet no bribery enforcement actions, debarment seems to have been a key factor in selecting the actual charges against Daimler – a fact confirmed by the DOJ’s sentencing memorandum described below.

Daimler Export and Trade Finance GmbH and the Croatian Firetrucks

DOJ also filed a two count criminal information against Daimler Export and Trade Finance GmbH (“ETF”) which is described as wholly-owned subsidiary of Daimler Financial Services AG (“DFS”), which in turn is described as a wholly-owned subsidiary of Daimler AG. According to the information, “ETF specialized in the structuring and arranging of customized financing solutions for exports by Daimler and external customers to countries without a local DFS company.” “In addition,” the information charges that “ETF participated in business ventures outside of Daimler’s core businesses of the manufacture and sale of passenger cars and vehicles.”

The charged conduct involves selling fire trucks to the Croatian Ministry of the Interior (“MOI”) as well as the conduct of IM Metal (“IMM”) an alleged “Croatian government controlled and partially owned former weapons manufacturer.” The information charges that “IMM was an ‘instrumentality’ of the Croatian government, and executives employed by IMM, or their designess were ‘foreign officials’ as those terms are used in the FCPA …” The charged conduct also involves Biotop Group, Inc. (“Biotop”), a Delaware corporation and Marketing Research and Consultants LLC (“MRC”), a Wyoming corporation.

Count one of the information charges conspiracy and alleges that “from in or about 2002, through in or about January 2008” ETF, and others were engaged in a conspiracy to “make improper payments to Croatian government officials to induce them to cause the Croatian government agencies and instrumentalities to purchase Daimler vehicles.”

Among other things, the information charges that:

prior to be awarded a €85 million fire truck contract, “ETF understood that improper payments to Croatian government officials would be required in order to secure the Fire Truck Contract from the Croatian MOI;”

“ETF made improper payments directly to Croatian government officials and to third parties with the understanding that the payments would be passed on, in whole or in part, to Croatian government officials to assist in the Fire Truck Contract;”

“between 2002 and January 2008, ETF made approximately €3.02 million in payments to IMM and/or its principles in connection with the contract to sell fire trucks to the Croatian MOI with the understanding that all or a portion of the funds were paid to IMM’s employees, themselves foreign government officials, and that another portion of the funds were paid to Croatian government officials outside IMM in exchange for assistance in securing for the ETF-led consortium the Fire Truck Contract;” and

“in total, between 2002 and January 2008, ETF made approximately €1,673,349 in improper payments to Biotop and MRC in connection with the Fire Truck Contract with the understanding that those payments would be passed on, in whole or in part, to Croatian government officials” and that “neither Biotop nor MRC performed legitimate services for ETF sufficient to warrant payments in those amounts.”

The information alleges that “ETF entered into a sham consulting contract with Biotop in order to conceal the nature of improper payments ETF made to Biotop, and with the understanding that these funds would be passed on, in whole or in part, to Croatian government officials to assist in securing the Fire Trucks Contract with the Croatian MOI.” As to MRC, the information alleges that “six days after MRC’s incorporation, ETF executed a written consulting contract with MRC in order to conceal the nature of improper payments being made to MRC, with the understanding that the payments to MRC would be passed on, in whole or in part, to Croatian government officials.”

Count two of the information charges an FCPA antibribery violation. Because ETF is a foreign entity, the applicable section of the statute is 78dd-3 which requries a U.S. nexus. The information charges “ETF entered into sham consulting contracts with shell companies incorporated in Delaware and Wyoming for the purpose of making improper payments to Croatian government officials, and made payments to those companies’ accounts outside the United States with the understanding that such payments would be passed on, in whole or in part, to Croatian government officials.”

Because the information charges that ETF’s payments to Biotop and MRC were to the companies’ accounts “outside the United States” it appears that the sole U.S. nexus DOJ is using to charge ETF with an FCPA antibribery is the act of entering into a contract with a U.S. company.

DaimlerChrysler China Ltd. and the Chinese “Foreign Officials”

DOJ also filed a two count criminal information against DaimlerChrysler China Ltd. (“DCCL”), a “Beijing-based, wholly-owned Daimler subsidiary and cost center that managed Daimler’s business relationships in [China], assisted Daimler in selecting and managing joint ventures in China, and helped manage Daimler’s expatriate employees in China.” According to the information, “although DCCL did not itself sell any vehicles directly into China, certain DCCL employees assisted with the sale of vehicles by various Daimler divisions in Germany to government customers in China.”

The charged conduct focuses solely on three Chinese state-owned entities the DOJ alleges are “instrumentalities” of the Chinese government.

First, the DOJ alleges that “The Bureau of Geophysical Prospecting (“BGP”) was a division of the China National Petroleum Corporation (“CNPC”), a Chinese state-owned oil company” and that “among other things, BGP was involved in searching for oil in various regions of China” and that “BGP was an ‘instrumentality’ of the Chinese government, and individuals employed by BGP were ‘foreign officials'” under the FCPA. According to its website (see here), BGP is a limited liability company and it has “forty overseas branches and offices have been established in Asia, America, Africa and the Middle East” (see here). According to its website (here), CNPC ” is China’s largest oil and gas producer and supplier, as well as one of the world’s major oilfield service providers and a globally reputed contractor in engineering construction” and it has “a presence in almost 70 countries.” CNPC’s corporate hierachy (here) looks similar to other commercial enterprises and one of CNPC’s largest holdings is PetroChina, an entity with shares traded on the New York Stock Exchange as well as other exchanges (see here).

Second, the DOJ alleges that “Sinopec Corp. (“Sinopec”) was a Chinese state-owned energy company involved in, among other things, exploration and production of petroleum and natural gas, as well as the refining and sale of petroleum products” and that “Sinopec was an ‘instrumenality’ of the Chinese government, and individuals employed by Sinopec were ‘foreign officials'” under the FCPA. According to its website (here) Sinopec is “a listed company on domestic and international stock exchanges” and it has shares traded in Shanghai, Hong Kong, New York and London.

Third, the DOJ alleges that “Changqing Petroleum Exploration Bureau (“Changqing”) was a Chinese state-owned oil and natural gas extracting company” and that “Changqing was an ‘instrumentality’ of the Chinese government and individuals employed by Changqing were ‘foreign official'” under the FCPA. Changqing is an entity within CNPC’s extensive organization.

According to the information, “between 2000 and 2005, DCCL employees and/or Daimler employees through DCCL made at least €4,173,944 in improper payments in the form of ‘commissions,’ delegation travel, and gifts for the benefit of Chinese government officials and their designees, in connection with over €112,357,719 in sales” of vehicles to Chinese government customers. The information alleges that “these sales to Chinese government customers were made directly from Daimler’s [divisions] in Germany through various intermediaries with the assistance of DCCL employees in the commercial vehicles division.”

According to the information, “to make improper payments to Chinese government officials, Daimler and DCCL typically inflated the sales price of vehicles sold to Chinese government customers and then maintained the overpayments in debtor accounts on Daimler’s books and records, including one debtor account called the ‘special commissions’ account.” The information alleges that “DCCL employees, including its then head of sales and marketing disbursed payments” from the account and “at the time, no checks or policies were in place to ensure the legitimacy or appropriateness of such payments.”

According to the information, “DCCL and Daimler also employed agents to assist in securing” vehicles from Chinese government customers, but that “neither DCCL nor Daimler performed due diligence on these agents, and there were inadequate controls in place to ensure that payments made to these agents were not passed on to Chinese government officials and their designees.” The information states that “the agency agreements were often not in writing” and that “DCCL and Daimler lacked adequate oversight into the appropriateness or purpose of payments from debtor accounts that ultimately went to government officials in China and their designees.” The information charges that “finance and controls oversight was so lacking with respect to Daimler’s sale of commercial vehicles in China that DCCL’s Sales and Marketing Head was able to remove at least approximately €230,000 from a company debtor account without detection, and then direct those funds to the offshore bank account of his wife.”

Count one of the information charges conspiracy and alleges that DCCL, and others, were engaged in a conspiracy to “make improper payments to Chinese government officials to induce them to cause Chinese government agencies and instrumenalties to purchase Daimler vehicles.”

Among other things, the information charges that:

“in total, Daimler and DCCL made approximately €2,599,694 in improper payments to Chinese government officials associated with these entities to assist in obtaining sales worth approximately €71,562,882;”

“between 2001 and 2004, DCCL and Daimler at the direction of Chinese government officials made improper payments totaling at least €188,840 into U.S. bank accounts belonging to third parties to obtain contracts valued at €5,533,381 for the sale of vehicles to Chinese government customers “even though no part of the transaction involved the U.S., nor were the entities that nominally controlled the bank accounts parties to any of these transactions;” that “DCCL and Daimler did not perform any due diligence to discern who the recipients were” and the “corporate entities that received the payments from Daimler for the benefit of the Chinese government officials performed no legitimate services for DCCL or Daimler and did nothing to earn those payments;”

“between 1998 and 2005, DCCL and Daimler also provided at least €268,568 worth of delegation trips to employees of its government customers in China for the purpose of assisting in securing business from those customers;” according to the information “agents working as intermediaries between DCCL and Daimler, on the one hand, and its Chinese government customers, on the other hand, typically requested the delegation trips up front during the contract negotiation process on behalf of the customer involved” that “DCCL and Daimler then estimated the cost of the trip and increased the purchase price of vehicles accordingly” and that “some contracts characterized these trips as ‘factory inspection trips’ even though the trips were primarily visits to tourist locations.”

In furtherance of this conspiracy, the information identifies several agents used to make the improper payments including: M.F. Mechanical & Electrical; Shores International (a Texas corporation); Lily Energy Services, Inc. (a Texas corporation); King Jack, Inc. (a California corporation); and Chinese Agent A.

Additional payments charged in the information include: “€155,905 for the purpose of entertaining executives at” BGP and Sinopec; “payments totaling approximately €56,400 into accounts at multiple banks to an individual associated with an official at BGP in charge of operations in another country;” “a payment of approximately €14,800 to a relative of a Chinese government official associated with BGP in connection with the sale of commercial vehicles to BGP; “payments totaling approximately €30,000 in commissions for ‘market research’ to the Stuttgart bank account of the son of an official of BGP;” and “a payment of approximately €57,000 to the wife of a Chinese government official employed at Sinopec” disguised as a payment pursuant to a “phony consulting agreement with the wife of the Chinese government official.”

The information further charges a laundry list of “things of value” provided “to the son of a Chinese government official who made purchasing decisions for BGP in order to assist in securing business from BGP” including: interships at Daimler for his girlfriend; “letters from a former Daimler employee to German immigration officials to assist him and his girlfriend with their efforts to obtain student visas;” “€2,224 in expenses to attend a truck race;” “use of a Mercedes passenger car for a period of time;” and “employment at Daimler” for a five month period “with a monthly salary of €600.”

Count two of the information charges an FCPA antibribery violation. Because DCCL is a foreign entity, the applicable section of the statute is 78dd-3 which requires a U.S. nexus. As relevant to this issue, the information charges that “DCCL caused wire transfers to be sent from Daimler accounts in Germany to financial institutions in the United States.”

DaimlerChrysler Automotive Russia SAO and Russian Sales

DOJ also filed a two count criminal information against DaimlerChrysler Automotive Russia SAO (“DCAR”), a “Moscow-based, wholly-owned subsidiary of Daimler” that “sold Daimler spare parts, assisted with the sale of vehicles from various Daimler divisions in Germany, including in particular its overseas sales division (“DCOS”), to government customers in [Russia], and also imported Daimler passenger and commercial vehicles into Russia for sale to customers and distributors.”

The charged conduct focuses on Daimler’s, DCAR’s and DCOS’s relationships with: “the Russian Ministry of Internal Affairs (“MVD”) a department and agency of the Russian government principally responsible for police, militia, immigration and other functions” including supervising the “Russian traffic police; “the Special Purpose Garage (“SPG”) an ‘instrumenality’ of the Russian government” whose employees were “foreign officials” under the FCPA; “Machinoimport a Russian government-owned and controlled purchasing agent for the City of Moscow,” an “instrumentality of the Russian government” whose employees were “foreign officials” under the FCPA; and “Dorinvest a Russian government-owned and controlled purchasing agent for the City of Moscow,” an “instrumentality of the Russian government” whose employees were “foreign officials” under the FCPA.

According to the information, “Daimler’s business in Russia was substantial.” The information states that “Daimler sold passenger cars and commercial vehicles directly from its headquarters in Stuttgart, Germany, to its Russian government clients with the assistance of DCAR and Daimler’s representative office in Moscow” and that “Daimler carried out such sales from DCOS and DCAR acting as an agent to assist with such direct sales.”

The information charges that “Daimler, through DCAR, made improper payments at the request of Russian government officials or their designess in order to secure business from Russian government customers.” According to the information, payments were “made with the knowledge and involvement of the former senior management of DCAR and DCOS.”

The information states that “DCAR and Daimler sometimes made improper payments to government officials in Russia to secure business by over-invoicing the customer and paying the excess amount back to the government officials, or to other designated third parties that provided no legitimate services to Daimler or DCAR, with the understanding that such payments would be passed on, in whole or in part, to Russian government officials.” The information further states that “when requested, Daimler employees wired and authorized the wiring of payments from Daimler’s bank accounts in Germany to, among other destinations, U.S. and Latvian bank accounts beneficially owned by shell companies with the understanding that the money, in whole or in part, was for the benefit of Russian government officials.”

Count one of the information charges conspiracy and that DCAR, and others, were engaged in a conspiracy to “make improper payments to Russian government officials to induce them to cause Russian government agencies and instrumentalties to purchase Daimler vehicles.”

Among other things, the information charges that:

“between 2000 and 2005” Daimler’s sale of vehicles to Russian government customers was approximately “€64,660,000” and that “in connection with these vehicle sales, DCAR and Daimler made over €3 million in improper payments to Russian government officials employed at their Russian governmental customers, their designess, or to third-party shell companies that provided no legitimate services to Daimler or DCAR with the understanding that the funds would be passed on, in whole or in part, to Russian government officials.”

According to the information, the payments were routed all over the world including: “to the Deutsche Bank acount in Stuttgart, Germany, of a Russian government official at the SPG;” to “Berwick Commercial LLC, a corporation registered in Delaware, with the understanding that the payment would be passed on, in whole or in part, to the SPG official;” “to Kongress Food Ltd., a corporation with an address in Dublin, Ireland, with the understanding that the payments would be passed on, in whole or in part, to the SPG official;” “to Delight Commercial Ltd., a corporation with an address in the Seychelles, with the understanding that the payments would be passed on, in whole or in part, to the SPG official;” “to Pyrmont Alliance Corp., a corporation with an address in the Bahamas, with the understanding that the payments would be passed on, in whole or in part, to the SPG official;” “to Loretti LLP, a corporation with an address in the United Kingdom, with the understanding that the payment would be passed on, in whole or in part, to the SPG official;” “to a Bank of America account in San Diego, California, for Sittard Investments, a California corporation, to secure passenger car sales to the Moscow tarffic police;” “to a bank account in Latvia for Novitta Ltd., a Delaware corporation, in connection with passenger car sales to the MVD;” “to a bank account in Latvia for Tower Block Ventures, a U.K. corporation, for the benefit of a consultant to the MVD in connection with passenger car sales to the MVD;” “to a bank account in Latvia for Silvarado Ltd., a corporation that provided no legitimate services for Daimler or DCAR, in connection with passenger car sales to the MVD;” “to a bank account in Latvia for Capital Alliance Corp., a Florida corporation, in connection with passenger car sales to the MVD and to the Russian military;” “to Technoforex, a Delaware corporation, to secure the sale of one commercial vehicle to the SPG;” “to Contrex, a Cyprus corporation established for the benefit of the wife” of an official;” “to the Latvian bank account of Fidelity Finance Corporation, a Delaware corporation, in connection with the sale [of vehicles] to Gormost, a department within the city of Moscow responsible for bridges and tunnels, with the understanding that such payments would be passed on, in whole or in part, to Russian government officials in order to secure this sale;” “to Fidelity Finance Corporation’s Latvian bank account with the understanding that such payment would be passed on, in whole or in part, to Russian government officials;” “to the Latvian bank account of Forfun Co., a Delaware corporation, in connection with the sale [of vehicles] with the understanding that such payment would be passed on, in whole or in part, to Russian military officials;” “to the Swiss bank account of Northcote Holdings, a Costa Rican corporation, with the understanding that such payment would be passed on, in whole or in part, to Russian military officials;” and “to the bank account of Crofton Allianz, a Delaware corporation” “with the understanding that such payment would be passed on, in whole or in part, to a Russian government official.”

Count two of the information charges an FCPA antibribery violation. Because DCAR is a foreign entity, the applicable section of the statute is 78dd-3 which requires a U.S. nexus. As relevant to this issue, the information charges that “DCAR caused wire transfers to be sent from Daimler accounts in Germany to financial institutions in the United States and elsewhere, via international and interstate wires, in furtherance of corrupt payments to Russian government officials” and that “DCAR made payments to third party agents, including shell companies established in the United States, knowing that such payments would be passed on, in whole or in part, to Russian government officials on behalf of DCAR and Daimler.”

DOJ’s Sentencing Memorandum

In the sentencing memo (here) DOJ “respectfully requests that the Court” approve the disposition of the matter against Daimler and all of the above referenced entities and “accept the guilty pleas of DaimlerChrysler Automotive Russia SAO and Daimler Export and Trade Finance GmbH.” The memo notes, in a footnote, that “the court will not actually be sentencing Daimler AG and DaimlerChrysler China Ltd., as those entities have entered into deferred prosecution agreements.”

The DOJ provides this summary of the overall disposition of the matter:

“The Department and Daimler agree that the appropriate resolution of this matter consists of (1) a DPA with Daimler AG, the parent company; (2) a DPA with DCCL, the Chinese subsidiary; (3) guilty pleas pursuant to plea agreements with DCAR, the Russian subsidiary, and ETF, the Daimler Finance subsidiary; (4) overall payment of a $93.6 million criminal penalty, which is apportioned, based on a Guidelines analysis, among the subsidiaries and the parent company; (5) continued obligations to provide full, complete, and truthful cooperation to the Department and any other law enforcement agency, domestic or foreign; (6) implementation of rigorous compliance enhancements, including periodic testing of same, with a recognition that the Company has already implemented substantial changes due to the investigation; and (7) the imposition of a corporate compliance monitor who will, over a three-year term, conduct a review of the compliance code, the Company’s internal controls and related issues, and will prepare periodic reports on his reviews.”

DOJ specifically notes that its “analysis of collateral consequences included the consideration of the risk of debarment and exclusion from government contracts, and in particular European Union Directive 2004/18/EC, which provides that companies convicted of corruption offenses shall be mandatorily excluded from government contracts in all EU countries.”

As the Daimler, the BAE and Siemens enforcement actions all make clear, the simple way to avoid application of the European Union Directive is not to charge the company with a corruption offense, notwithstanding the existence of facts to support such a conviction.

This “let’s not call a spade a spade” silliness occurs notwithstanding the fact that the U.S. is a member of the OECD. As relevant, OECD guidance specifically states that “Member countries should be vigilant in ensuring that investigations and prosecutions of the bribery of foreign public officials in international business transactions are not influenced by considerations of national economic interest, the potential effect upon relations with another State or the identity of the natural or legal persons involved, in compliance with Article 5 of the OECD Anti Bribery Convention.”

The DOJ’s sentencing guidelines calculations contains a bit of irony in that Daimler received a sentencing credit (a credit which reduces the overall fine amount) because the “organization fully cooperated in the investigation and clearly demonstated recognition and affirmative acceptance of responsiblity for its criminal conduct” despite the fact that elsewhere in the sentencing memo the DOJ notes that the entire investigation started in March 2004 when a “former Daimler employee filed a whistleblower complaint with the U.S. Department of Labor Occupational Safety & Health Administration … allege[ing] that he was terminated for voicing concerns about Daimler’s practice of maintaining secret accounts, including accounts in its own books and records, for the purpose of bribing foreign government officials.”

In other words, even if an investigation is hatched by an internal whistleblower, a company may still be able to receive a sentencing credit for cooperating in the eventual investigation.

The sentencing range set forth in the DOJ memo is $116 – $232 million. Thus, the $93.6 million penalty is 20% below the bottom fine range of $116 million.

DOJ seeks to justify this reduction by stating that such a “reduction is appropriate given the nature and extent of Daimler’s cooperation in this matter, including sharing information with the Department regarding evidence obtained as a result of Daimler’s extensive investigation of corrupt payments around the world.”

The DOJ further states, “indeed, because Daimler did not voluntarily disclose its conduct prior to the filing of the whistleblower lawsuit, it only receives a two-point reduction in its culpability.” However, in a rather odd statement, DOJ then said that it “respectfully submits that such reduction is incongruent with the level of cooperation and assistance provided by the company in the Department’s investigation.” In other words, the DOJ seems to be saying something like “who cares what the guidelines say, we will do what we feel like.”

In conclusion, the DOJ notes that the disposition “promotes respect for the law, provides just punishment, and affords adequate deterrence to criminal conduct for Daimler and the marketplace generally.”

This would seem to be the biggest April Fools joke of all. How does another bribery, yet no bribery enforcement action “promote respect for the law?”

Finally, the DOJ states that Daimler’s cooperation in the investigation has been “excellent.” The DOJ notes that Daimler “conducted a worldwide internal investigation;” “regularly presented it findings” to the DOJ; “made certain witnesses available to the Department;” “voluntarily complied with requests for the production of documents from overseas;” and took disciplinary actions against over “60 company employees, with approximately 45 employees being terminated or separated under termination agreements.” “Finally, and perhaps most significantly,” in the words of the DOJ, “Daimler began to reform its anti-bribery compliance program while the investigation was still ongoing, without waiting until the finalization of a disposition with the Department.” The sentencing memo then sets forth a list of changes Daimler made to its compliance program. Such measures, no doubt, will now come to be viewed as “best practices.”

Innospec Gets Hit on Both Sides of the Atlantic

Last month (see here) Innospec, Inc. disclosed that it accured $40.2 million for potential settlement of corruption investigations on both sides of the Atlantic. Yesterday, on both sides of the Atlantic, it was announced that Innospec agreed to resolve these enforcement actions by, among other things, paying $40.2 million in combined fines and penalties. How’s that for an accurate corporate disclosure!

See here for the DOJ release and criminal information, here for the SEC release and complaint, and here for the SFO release and supporting documents.

If you are looking for additional evidence / validation that the DOJ and SFO cooperate in enforcement actions, this would be it!

As explained more fully below, the Innospec enforcement action is part Iraqi Oil for Food, part payment of excessive travel and entertainmet expenses, part Cuba, part Indonesia and it involves U.S. companies, U.K. entities, Swiss entities, U.S. citizens, British citizens, German citizens, South African citizens, and Iraqi citizens.

Innospec manufacturers and sells speciality chemicals and is apparently the “world’s only manufacturer of the anti-knock compound tetraethyl lead, used in leaded gasoline.”


According to the DOJ criminal information (here), Innospec, Innospec Limited (a wholly-owned U.K. subsidiary), Alcor Chemie Vertriebs GmbH (a wholly-owned Swiss subsidiary), Ousama Naaman (an agent for Innospec and Alcor in Iraq and elsewhere), and others, knowingly conspired: (i) to defraud the U.N. Oil for Food Program; (ii) to violate the FCPA’s antibribery provisions; and (iii) to violate the FCPA’s books and records provisions.

According to the information, the primary purpose of the conspiracy was to “obtain and retain lucrative business with the government of Iraq through payment and promise of payment of kickbacks and bribes to the Iraqi government and its officials.

In addition to the “standard” Oil for Food allegations found in previous enforcement actions (i.e. inflated commission payments to an agent which were then used to pay kickbacks to the government of Iraq), the information further alleges that “Naaman, on behalf of Innospec, paid approximately $150,000 in bribes to officials of the [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]…”

In addition, the information alleges that “Innospec and Naaman agreed to pay and promise to pay bribes, including but not limited to money, travel, gifts, and entertainment, to officials of the MoO to obtain and retain contracts.”

Among other overt acts, the information details an e-mail Naaman sent to, among others, Executive B (a U.S. citizen and former senior Innospec executive) that indicates “with [Director’s (a U.K. citizen and former Innospec Division Managing Director)] instructions, we proceeded, as we don’t want to discuss this issue in writing any further because it is so delicate, and as per [Director’s] instructions that we don’t elaborate in writing, for which I agree.”

According to the information, Innospec paid Naaman over $700,000 to reimburse him for payments to Iraqi officials.

The information also contains “travel” allegations including: that Innospec paid approximately $35,000 for eight Iraqi officials to travel to Switzerland for a morning meeting and “four days of sightseeing” complete with “9,000 in pocket money” for the officials;” that Naaman arranged for cash filled envelopes to be given to Iraqi officials visiting the U.K.; that Innospec paid for an Iraqi official’s “vacation with his wife in Thailand” a trip with cost approximately $13,000 including “pocket money” for the official; and that Alcor reimbursed Naaman $35,000 “to cover the cost of the travel of the three Iraqi MoO officials to Lebanon for the half-day meeting to finalize the 2008 Long Term Purchase Agreement, including hotel accomodations for six days, $1,800 for ‘entertainment, lunches, & dinners in Lebanon,’ $1,650 for ‘mobile phone cards for international calling + 3 cameras’ and $15,000 in ‘pocket money.'”

According to the information, all of these payments were improperly recorded on Alcor’s books and records (which were consolidatd with Innospec’s for purposes of financial reporting) as “commissions” or “sales promotion expenditures.”

In addition to the above described conspiracy charge, the information also charges five counts of wire fraud, five counts of FCPA antibribery violations and an FCPA books and records violation.

The DOJ release notes that, pursuant to a yet to be released plea agreement, “Innospec also admitted to selling chemicals to Cuban power plants in violation of the U.S. embargo against Cuba.” The DOJ release further notes that Innospec acknowledged paying “approximately $2.9 million in bribes to officials of the Indonesian government to secure sales.”

According to the DOJ release, as part of the plea agreement, “Innospec agreed to pay a $14.1 million criminal fine and to retain an independent compliance monitor for a minimum of three years to oversee the implementation of a robust anti-corruption and export control compliance program and report periodically to the DOJ.” According to the release, “Innospec also agreed to fully cooperate with the DOJ and other U.S. and foreign authorities in ongoing investigations of corrupt payments by Innospec employees and agents.”

In other words, stayed tuned for more. Previously, Naaman (the agent) was indicted (see here).

In annoucing the charges, Assistant Attorney General Lanny Breuer noted that “[t]oday’s case is a win for law-abiding companies trying to compete fairly in the marketplace” and that “fraud and corruption cannot be viewed simply as a cost of doing business.”

For more on the Innospec plea hearing, including Judge Ellen Segal Huvelle’s concern about the compliance monitor, see here for Christopher Matthew’s piece from Main Justice. For more on compliance monitors, and the controversy often associated with them, see here.


In its complaint (here), the SEC alleges that “[f]rom 2000 to 2007, Innospec violated the anti-bribery, books and records and internal control provisions of the FCPA when it routinely paid bribes in order to sell Tetra Ethyl Lead (“TEL”) … to government owned refineries and oil companies in Iraq and Indonesia.”

According to the SEC, “Innospec’s former management did nothing to stop the bribery activity, and in fact authorized and encouraged it.” The SEC alleges that “Innospec’s internal controls failed to detect the illicit conduct, which continued for nearly a decade.”

According to the SEC, “[i]n all, Innospec made illicit payments of approximately $6,347,588 and promised an additional $2,870,377 in illicit payments to Iraqi ministries, Iraqi government officials, and Indonesian government officials in exchange for contracts worth $176,717,341 in revenues and profits of $60,071,613.”

The SEC’s charges relating to Iraqi are substantively similar to the DOJ’s allegations in the criminal information and include both Iraqi Oil for Food conduct as well as additional improper conduct after the Oil for Food Program was terminated in late 2003.

The SEC’s complaint has more detail than the DOJ’s criminal information concerning Indonesia and alleges: (i) that “[f]rom 2000 until approximately 2005, Innospec used [a] Indonesian Agent [an Indonesian citizen] and his company to pay bribes of approximately $1,323,507 to Official X [a senior official at BP Migas, an Indonesian state owned oil and gas company … who previously was a senior official at the Ministry of Energy and Mineral Resources]”; (ii) that “in 2000 and 2001, Innospec also made payments [totaling $700,000] to government officials at Pertamina, another state owned oil compay related to BP Migas” through a “privately owned bank in Geneva, Switzerland;” and (iii) that Innospec “also bribed other officials at Pertamina in order to influence their decisions regarding TEL purchases.”

The SEC charged that “at least one U.S. person and officer was complicit in the scheme” and that “[m]any of the bribes were mischaracterized as legitimate commissions, travel and legal fees in Innospec’s books and records.”

According to the SEC, “as evidenced by the extent and duration of the improper payments to foreign officials made by Innospec, the improper recording of these payments in Innospec’s books and records, and the significant involvement of certain members of management at the highest levels of the company, Innospec failed to devise and maintain an effective system of internal controls to prevent or detect these anti-bribery and books and records violations.

The SEC release (here) notes that Innospec, without admitting or denying the SEC’s allegations, was ordered to pay $60,071,613 in disgorgement, but because of Innospec’s “sworn Statement of Financial Condition” all but $11,200,000 of that disgorgement will be waived. The release states that “[b]ased on its financial condition, Innospec offered to pay a reduced criminal fine of $14.1 million to the DOJ and a criminal fine of $12.7 million to the SFO. Innospec will pay $2.2 million to OFAC for unrelated conduct concerning allegations of violations of the Cuban Assets Control Regulations.


Stay tuned for additional analysis of the SFO – U.K. prong of this enforcement action.

Blackwater In Hot Water

The New York Times (here) reports that the DOJ “is investigating whether officials of Blackwater Worldwide tried to bribe Iraqi government officials in hopes of retaining the firm’s security work in Iraq.”

According to the Times, the DOJ’s fraud section open an investigation “late last year” to determine whether Blackwater employees violated the FCPA. The investigation follows a November 2009 times article (here) which first raised questions about Blackwater’s (now known as Xe Services) conduct in Iraq. That article suggested that the alleged payments at issue were made to Iraqi “foreign officials” to help secure an operating license the company needed to continue doing business in Iraq.

As noted in a prior post (here), this case is interesting on several levels.

First, the case (from an FCPA antibribery perspective) would seem to hinge on the FCPA’s “obtain or retain” business element, and is another example of the post-Kay explosion in enforcement actions in which alleged improper payments were made to help secure foreign government licenses, permits, etc. An interesting wrinkle to this analysis is that the Iraqi license was apparently needed so that Blackwater could retain its contract with the U.S. State Department – not with a foreign entity as is usually the case.

Second, rarely if perhaps ever, has an FCPA inquiry focused on the conduct of a company so intertwined with U.S. government agencies (State Department and CIA) operating in a war zone.

In the News

Some interesting news articles to pass along.

The first piece is from today’s New York Times and is titled “Blackwater Said to Pursue Bribes to Iraq After 17 Died” (see here).

The article suggests, based on former company sources, that Blackwater (and its executives) could … well … be in some murky FCPA water in connection with alleged secret payments to Iraqi officials.

According to former company officials, the payments were intended to silence the officials’ “criticism and buy their support after a September 2007 episode in which Blackwater security guards fatally shot 17 Iraqi civilians” an event which generated much media coverage and congressional interest (see here among other sources).

The specific recipients of the payments? According to sources, officials in the Iraqi Interior Ministry who demanded that Blackwater secure an operating license after the September 2007 incident in order to continue doing business in the country.

The FCPA anti-bribery provisions contain an obtain or retain business element.

You ask, does making payments to foreign officials to secure a license satisfy that important element?

This general issue was addressed by the Fifth Circuit in U.S. v. Kay, 359 F.3d 738 (5th Cir. 2004) (one of the few instances in which a court has rendered a substantive FCPA decision).

The issue in Kay was whether payments to Haitian officials for the purpose of avoiding custom duties and sales taxes in Haiti could satisfy the FCPA’s obtain or retain business element.

Concluding that the obtain or retain business element was vague, the court analyzed the FCPA’s legislative history and concluded that such payments (even though they do not lead to specific government contracts) could nevertheless provide an unfair advantage to the payor over competitors and thereby assist the payor in obtaining and retaining business.

The court did not hold that ALL such payments could satisfy the FCPA’s obtain or retain business element, only that such payments COULD satisfy this key element if, for instance (as in the Kay case), the payments were intended to lower the company’s cost of doing business in the foreign country.

Post-Kay there has been an explosion in FCPA enforcement actions involving payments made to secure foreign government licenses, permits, and certifications or otherwise involving custom duties and the like. Because these enforcement actions have not been contested, it remains an open question as to whether all such payments can indeed satisfy the FCPA’s obtain or retain business element and under what circumstances.

Blackwater (now called Xe Services), through a spokeswomen, dismissed the allegations as baseless.

Nevertheless, some juicy stuff here – the U.S. military’s then prime security contractor in Iraq (and a company which did classified work for the CIA) making bribe payments in a war zone.

One wonders who knew what within official Washington.

Will this alleged conduct be pursued by the DOJ or put on the backshelf due to national security / foreign policy issues?

To my knowledge, this angle of Blackwater’s activities in Iraq has never been disclosed and, if so, the piece would seem to represent a dandy piece of investigative journalism.

The second article, titled “A Morgan Stanley Star Falls In China,” is from Reuters (see here).

The piece examines the rise and fall of Garth Peterson, a U.S. citizen, who joined Morgan Stanley’s Hong Kong office earlier this decade and quickly rose through the ranks of V.P., executive director, and ultimately managing director of Morgan Stanley’s real estate investment operation in China.

Peterson was fired by Morgan Stanley last December over concerns that he may have violated the FCPA.

Morgan Stanley disclosed the results of its internal investigation into Peterson’s conduct to both the DOJ and the SEC. Here is the company’s February 2009 8-K filing.

What did Peterson do that may have violated the FCPA?

The article suggests that Peterson’s relationship with Shanghai Yongye Group (a real estate developer) and its former Chairman, Wu Yonghua, and his daughter, Linda Wu, are at issue. Also relevant, it appears, is Shanghai Dragon Investment Co.

I hate to be the one always bringing up this issue, but if employees of Shanghai Yongye Group and Shanghai Dragon Investment Co., are somehow being considered “foreign officials” under the FCPA, I would sure love to see that legal analysis.

Anyway, back to the story.

The article is an interesting read on a number of fronts and provides an insight into one company’s handling of an FCPA issue.

First, the article notes that Morgan Stanley sent Peterson to an FCPA workshop. Given that this occured in 2008, it is debatable whether this was “too little too late.”

Second, comes an internal review, which from the article, appears to have been done in the ordinary course of business. The ordinary internal review uncovers some extraordinary issues.

Next, the company initiates an internal investigation to look into the suspicious issues. And what an internal investigation it was. According to the article, more than 7.4 million pages of e-mails were reviewed. According to the article, the investigation “found that in a discrete number of instances, investment assets were used for improper purposes not authorized by senior management” an occurrence which would seem to violate, at the very least, the FCPA’s internal control provisions which require, among other things, that an issuer like Morgan Stanley devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management’s general or specific authorization; and (ii) access to assets is permitted only in accordance with management’s general or specific authorization.

Next, comes the corrective measures, in this case, Peterson was fired.

Next, comes the disclosure (see above).

The article closes by saying that even if found guilty Peterson is “unlikely to be jailed as he and the firm are expected to pay damages and fees, possibly through a deferred prosecution agreement.”

Spot-on with the company likely entering into a deferred prosecution agreement.

However, the authors (and their sources) apparently have never heard the names of Frederic Bourke, Albert Jack Stanley, Steven Ott, Roger Michael Young (and many others) who are currently living in a federal prison (or waiting to check in) for violating or conspiring to violate the FCPA.

According to article, Peterson currently lives in Singapore.

Iraq … And What Constitutes An FCPA Violation?

A couple of Iraq articles of interest to pass along.

As noted (here), yesterday in Washington D.C. the “Iraqi government, backed by the Obama administration, kick[ed] off its biggest post-Saddam investment roadshow […] to convince American businesses to join the country’s reconstruction efforts.”

According to the article, “[d]ozens of Iraqi government officials, provincial governors, state investment commission authorities and others will give presentations” and “present overviews of sectors such as oil, agriculture and construction” and “investment opportunities in about 750 projects.”

Bringing the topic home, there are lots of Iraqi “foreign officials” in Washington this week.

The article points out the obvious security and legal risks awaiting U.S. investors and businesses seeking to do business in Iraq.

The articles also concludes by saying that “[t]he biggest potential roadblock for most U.S. companies in Iraq is corruption” and that “American companies are generally under much closer scrutiny by U.S. regulators when it comes to overseas operations.”

Although the article does not mention the FCPA specifically, readers of this blog obviously know that the comment invokes and relates to the FCPA.

So here is the question.

Corruption is high in Iraq. But what constitutes “corruption” or more to the point, what constitutes an FCPA violation when doing business or seeking business in Iraq?

Last month, when commenting on the Green’s FCPA trial verdict, our friends over at the FCPA Blog (see here) said that the trial judge’s jury instructions “show just how simple the FCPA’s antibribery provisions really are” and noted that the only ones who seem to think that the FCPA is “complicated, technically challenging and obscure, poorly drafted and badly organized” are the lawyers who are trained to “quibble.”

I agree (and to use my favorite cliche) when offering a suitcase full of cash to a government official to secure a government contract, the FCPA is straightforward and provides little room for lawyers to “quibble.”

However, most FCPA issues are not as straightforward.

Given a number of reasons (the general lack of substantive FCPA case law, untested and unchallenged legal theories, etc.), there remains much about the FCPA that justifiably causes lawyers to … well … quibble.

So here is an exam question.

Let’s say you are interested in doing business in Iraq – specifically its oil and gas sector. You learn that, per the applicable production sharing agreement or joint venture agreement being proposed, x% of employees will need to be Iraqi. Problem is, these prospective employees are not technically competent to perform the job. You are then told that it will be up to you to establish special colleges to train them.

Scratching your head?

Well, this is no academic hypothetical, this is very real world.

Iraqi’s oil minister was recently quoted as saying (see here) that “Iraqis would have to make up 85 percent of the work force for the international oil companies doing business here.” The minister acknowledged the fact that Iraq currently lacked the “hundreds of thousands of Iraqi engineers and technicians” needed and that “it would be up to the foreign oil companies to establish special colleges to train them.”

So let’s run this fact pattern through the FCPA elements assuming that the foreign oil company is an issuer or domestic concern under the FCPA.

“foreign officials” check – at least under the DOJ/SEC’s untested and unchallenged assertion that employees of state-owned companies (regardless of title or rank) are foreign officials.

“thing of value” check – surely an education and obtaining technical skills is valuable.

“to obtain or retain business” check – it is a contractual term which you must agree to in order to get the business.

Sure the FCPA does have a “corrupt intent” element, but that element is often read out of the statute. For instance, many enforcement action merely set forth in conclusory fashion the corrupt intent element without providing any factual support.

The above Iraq example is not unique as most production sharing agreements or joint venture agreements in the foreign extraction industry contain similar terms or conditions requiring the U.S. company to buy “local content,” fund certain community causes, and the like.

What’s there to quibble about in such crystal clear examples as these?


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