Questions Abound In IBM Enforcement Action
Last week, the SEC announced (here) a settled FCPA enforcement action against International Business Machines Corporation (“IBM”).
This post summarizes the enforcement action and then addresses the many questions raised by the enforcement action.
Summary of Enforcement Action
According to the SEC complaint (here): “During the period from 1998 through 2009, in violation of the Foreign Corrupt Practices Act of 1977, employees of certain of [IBM’s] subsidiaries and a majority-owned joint venture provided cash payments, improper gifts, as well as improper travel and entertainment to government officials in South Korea and China.”
The conduct at issue focused on:
IBM-Korea, Inc. (“IBM-Korea”), a South Korean corporation “wholly-owned indirectly by IBM International Group B.V, which, in turn is wholly-owned by IBM;”
LG IBM PC Co. Ltd. (“LG-IBM”), a South Korean joint venture formed in 1996 by IBM-Korea (51% owner of the JV) and LG Electronics (“LG”) (49% owners of the JV); and
IBM (China) Investment Company Limited and IBM Global Services (China) Co. Ltd. (collectively “IBM-China”) – entities “owned by IBM China/Hong Kong Limited, a Hong Kong company that is ultimately owned by IBM.”
In summary fashion, the SEC alleged as follows.
“From 1998 to 2003, employees of [IBM-Korea] and [LG-IBM] made payments to various government officials in South Korea. The purpose of these payments was to secure the sale of IBM products through IBM-Korea and LG-IBM’s business partners. During the relevant period, these managers paid approximately KRW 216,832,500 (South Korean Won), or $207,000, in cash bribes to South Korean government officials, including providing improper·gifts and payments of travel and entertainment expenses.”
“From at least 2004 to early 2009, employees of [IBM-China] engaged in a widespread practice of providing overseas trips, entertainment, and improper gifts to Chinese government officials. The misconduct in China involved several key IBM-China employees and more than 100 IBM China employees overall.”
As to IBM, the parent-company issuer, the SEC alleged as follows.
“Despite its extensive international operations, IBM lacked sufficient internal
controls designed to prevent or detect these violations of the FCPA. During the period 1998 to 2009, IBM had corporate policies prohibiting bribery and procedures relating to compliance with the FCPA; however, deficient internal controls allowed employees of IBM’s subsidiaries and joint venture to use local business partners and travel agencies as conduits for bribes or other improper payments to South Korean and Chinese government officials over long periods of time.”
“During the period 1998 to 2009, IBM failed to make and keep books and records that accurately reflected the improper payments made in South Korea and China. Instead, these payments were recorded as legitimate business expenses.”
The body of the SEC’s complaint alleges various “things of value” provided to alleged South Korean “foreign officials” including shopping bags filled with thousands of dollars, cash-filled envelopes exchanged in parking lots and free personal computers, and travel and entertainment expenses.
According to the SEC, such “things of value” were: “in exchange for designating IBM-Korea a preferred supplier of mainframe computers to [an alleged government entity] and for placing orders with IBM-Korea at higher prices;” “in exchange for (1) maintaining IBM-Korea as the supplier of mainframe computers to [an alleged government entity]; and (2) for helping an IBM-Korea business partner win bids to supply mainframe computers and storage equipment to [an alleged government entity] worth more than [$21 million]; “in exchange for [an alleged “foreign official’s] assistance to IBM-Korea in obtaining a contract with [an alleged government entity] worth approximately [$13 million] for the installation of a mainframe computer in 2002;” “to entice [foreign official’s] to purchase IBM products:” “to win a contract to supply 657 (later increased to 825) personal computers valued at [approximately $1.4 million]; “in exchange for providing LG-IBM with certain confidential information regarding the product specifications on [an alleged government entity’s] request for procurement;” “to persuade employees of [an alleged government entity] to purchase IBM products;” and to entice alleged foreign officials “to purchase IBM products or to provide information to assist LG-IBM in the bidding process.”
The body of the SEC’s complaint as to China conduct alleges as follows.
“From at least 2004 to early 2009, IBM-China employees created slush funds at local travel agencies in China that were then used to pay for overseas and other travel expenses incurred by Chinese government officials. In addition, IBM-China employees created slush funds at its business partners to provide a cash payment and improper gifts, such as cameras and laptop computers, to Chinese government officials. IBM failed to record accurately these payments in its books and records.”
Specifically, the SEC alleged as follows:
“Between 2004 and 2009, IBM’s internal controls failed to detect at least 114
instances in which (1) IBM-China employees and its local travel agency worked together to create fake invoices to match approved [Delegation Trip Requests] DTRs; (2) trips were not connected to any DTRs; (3) trips involved unapproved sightseeing itineraries for Chinese government employees; (4) trips had little or no business content; (5) trips involved one or more deviations from the approved DTR; and (6) trips where per diem payments and gifts were provided to Chinese government officials.”
Based on the above allegations, the SEC charged IBM with violating the FCPA’s books and records and internal control provisions. As noted in the SEC release, IBM, without admitting or denying the SEC’s allegations, consented to the entry of a final judgment permanently enjoining the company from future FCPA violations. IBM agreed to pay $10 million (disgorgement of $5.3 million, $2.7 million in prejudgment interest, and a $2 million civil penalty).
Peter Barbur and Evan Chessler (Cravath, Swaine & Moore – here and here) represented IBM.
Questions Abound
For starters, this is not the first time IBM has been the focus of an FCPA enforcement action.
In December 2000 (see here), the SEC found, in a cease and desist proceeding, that IBM violated the FCPA books and records provisions in connection with a $250 million contract to integrate and modernize computer systems in Argentina. As part of the settlement, “IBM consented to the entry of an Order that requires IBM to cease and desist from committing or causing any future violation of [the FCPA’s books and records provisions].
Given that IBM was charged last week with FCPA books and records violations, IBM has clearly violated this 2000 court order.
In my recent “Facade of FCPA Enforcement” article (here), I highlight various pillars that contribute to the facade of FCPA enforcement.
Pillars include, unsupported legal conclusions serving as the foundation for an enforcement action, including as to “foreign official” and disgorgement issues; the tendency of factually similar cases being resolved materially different ways; and bribery, yet no bribery.
These pillars are present in the IBM enforcement action.
For starters, who were the “government officials in South Korea and China.” Were they traditional bona-fide government officials or employees of alleged state-owned or state-controlled enterprises and thus “foreign officials” under the enforcement agencies’ interpretation – an interpretation currently the subject of judicial challenges?
As to the South Korean officials, the complaint merely alleges that the “foreign government officials involved worked for sixteen South Korean government entities.” These officials included the “Chief of Operations for the Electronic Operations Division” of an entity; an employee of the same entity; a “manager of the government-controlled entity”; the “Director of Planning” of another entity; employees of an entity; an employee of a “state-owned agency of the South Korean government;” a “Director of Information Technology” at another entity; employees of another entity; and “key decision makers at ten other” entities.
As to the Chinese officials, the complaint merely alleges that the individuals were associated with “government-owned or controlled customers in China for hardware, software, and other services.”
Based on the descriptions in the complaint, it seems as if the “foreign officials” were all employees of SOE entities. If so, two out of three corporate FCPA enforcement actions in 2011 (IBM and Maxwell Technologies – see here) involve SOE employees.
Why no FCPA anti-bribery charges against IBM or the relevant subsidiaries (accepting of course the SEC’s “foreign official” interpretation)?
According to the SEC, the conduct at issue took place between 1998 and 2009. Further, according to the SEC, “in connection with the conduct described herein, IBM, directly or indirectly, made use of the mails or the means or instrumentalities of interstate commerce in connection with the acts, transactions, practices and courses of business alleged in this Complaint.”
Why no DOJ involvement?
It is very common for the DOJ and SEC to announce FCPA enforcement actions on the same day. Thus, one can assume (perhaps future events will prove otherwise) that the DOJ elected to sit this one out.
Why?
The SEC’s complaint alleges vivid instances of bribery (not always seen in FCPA enforcement actions) in connection with multi-million dollar contracts.
Yet, no bribery – not even civil FCPA anti-bribery charges.
Is this another instance where the U.S. enforcement agencies look first at the corporate offender, its customers, and its products, and then craft a resolution that will hurt the least?
After all, one of IBM’s largest customer segments is the government (federal, state, etc.) see here.
Did this play any role in how the enforcement action was resolved?
The SEC charged IBM only with FCPA books and records and internal controls violations. Yet, as in several other cases, the SEC pursued a disgorgement remedy. As noted in my Facade article (pages 981-984) non-FCPA disgorgement case law clearly holds that disgorgement may not be used punitively. It is difficult to see how mis-recording of a payment (a payment the SEC does not allege violated the FCPA’s anti-bribery provisions) can properly give rise to a disgorgement remedy. See also here from Philip Urofsky and Danforth Newcomb on this issue.
In a transparent legal system, similar facts are supposed to be resolved with similar charges. However, it is questionable whether this fundamental principle (one that inspires trust and confidence in a legal system) is followed in many FCPA enforcement actions.
The China-related charges against IBM regarding excessive travel and entertainment expenses are nearly identical to two previous FCPA enforcement actions – the December 2007 enforcement action against Lucent Technologies and the December 2009 enforcement action against UTStarcom, Inc.
Lucent was resolved via a DOJ non-prosecution agreement (here) and an SEC enforcement action charging only FCPA books and records violations (here).
UTStarcom was resolved via a DOJ non-prosecution agreement (here) and an SEC enforcement action charging FCPA anti-bribery as well as books and records and internal controls violations (here).
IBM, as detailed above, is presumably being resolved without any DOJ involvement and an SEC enforcement action charging only FCPA books and records violations.
Three cases – all involving in whole or in part allegations of providing excessive travel and entertainment expenses to Chinese “foreign officials” – resolved in three different ways.
*****
And now, as one reader put it, the question all FCPA Professor blog readers (at least this particular reader) are dying to know.
Butler or Wisconsin?
I am a born and raised cheesehead and graduate of the University of Wisconsin Law School.
However, my allegiance is to my employer – Butler University. Let’s face it, Butler is an awesome, feel-good story. Student-athletes in every sense of the word, home games at historic Hinkle Fieldhouse, a coach who, a few years ago, left his job selling pharmaceuticals to become a volunteer coach (since promoted), and a small, cozy campus to top it off.
BU-TLE- R U a Bulldog – hell ya!
The Shrinking U.K. Bribery Act
Recent developments reported by the U.K. Telegraph suggest that when Bribery Act guidance is finalized and released, the Bribery Act will look very much like the FCPA. In fact, because of the Bribery Act’s adequate procedures defense and other hinted at limitations, the Bribery Act may turn out to be more lenient than the FCPA.
The Telegraph reported (here) that eventual guidance to be released by the U.K. government “will make allowances for the use of so-called ‘facilitating payments'” and that the guidance “will clarify how the law will view corporate hospitality and will give companies some protection against illegal acts committed by joint venture partners.”
According to the Telegraph, “the new guidance will acknowledge [facilitating payments] payments are a global problem that cannot be eradicated overnight.” According to the Telegraph, the eventual guidance “will say that while facilitating payments remain illegal, payments not considered ‘serious’ may not attract prosecution.”
This eventual guidance seems to be similar to the conclusion Congress arrived at in 1977 when enacting the FCPA. For instance, House Report No. 95-640 (September 28, 1977) states as follows:
“The language of the bill is deliberately cast in terms which differentiate between [corrupt payments] and facilitating payments, sometimes called ‘grease payments.’ […] For example, a gratuity paid to a customs official to speed the processing of a customs document would not be reached by this bill. Nor would it reach payments made to secure permits, licenses, or the expeditious performance of similar duties of an essentially ministerial or clerical nature which must of necessity be performed in any event. While payments made to assure or to speed the proper performance of a foreign official’s duties may be reprehensible in the United States, the committee recognizes that they are not necessarily so viewed elsewhere in the world and that it is not feasible for the United States to attempt unilaterally to eradicate all such payments. As a result, the committee has not attempted to reach such payments.”
Even though the Bribery Act will still apparently prohibit facilitating payments – in contrast to the FCPA’s express facilitating payment exception – numerous prior posts (see here, here and here for example as well as all the CustomsGate enforcement actions) raise the issue of whether the enforcement agencies recognize such an exception and whether the FCPA’s facilitating payment exception has any real meaning.
The expected U.K. guidance on corporate hospitality would seem to be akin to the FCPA’s current affirmative defense for “reasonable and bona fide expenditures, such as travel and lodging expenses, incurred by or on behalf of a foreign official” ” directly related to (A) the promotion, demonstration, or explanation of products or services; or (B) the execution or performance of a contract with a foreign government or agency theorof.”
Without the benefit of an actual analysis of the expected guidance on joint ventures, it is a bit difficult to draw conclusions from the Telegraph article. But if, as reported, the eventual guidance “will give companies some protection against illegal acts committed by joint venture partners” this protection will make the Bribery Act even more lenient than the FCPA (or at least FCPA enforcement theories).
Several FCPA enforcement actions in recent years, including some of the most high profile (see e.g., Bonny Island, Nigeria enforcement actions), have been based on conduct of joint venture partners.
Of note, the reported U.K. guidance regarding joint ventures would seem to conflict with the justification underlining the recent SFO charges against MK Kellog Ltd. under the Proceeds of Crime Act. (See here).
The oft-cited statement that the Bribery Act is the “FCPA on steroids” was curious to begin with; the statement now appears to be completely off-base given expected guidance on the Bribery Act.
Bonny Island Bribery Developments
As reported elsewhere earlier this week (see here among other places), JGC Corporation of Japan (here) is close to resolving an FCPA enforcement action. JGC is the fourth joint venture partner along with KBR, Technip and Snamprogetti in the TSKJ consortium (a consortium originally formed by M.W. Kellogg) involved in the Bonny Island, Nigeria project.
In a disclosure earlier this week (here) the company stated:
“JGC and DOJ have been engaged in discussions about a potential resolution of the investigation relating to JGC. It was confirmed at the meeting of JGC’s board of directors held on January 31, 2011 that the Board has approved a potential resolution of the investigation. Based on this approval, JGC recognized a provision for the cost estimated for such a resolution, which will be appropriated as a financial loss in the 3rd Quarter Financial Result. The amount of such loss is 17.8 billion Japanese yen [approximately $218 million]”.
The expected JGC settlement would thus fall in the Top Ten FCPA enforcement actions of all time (see here for the FCPA Blog’s current list) and would bump the total amount of corporate fines and penalties U.S. authorities have collected in Bonny Island bribery cases to approximately $1.52 billion.
See here for my current Bonny Island bribery statistics.
How will JGC’s expected settlement affect KBR (a company, along with its current or former affiliated entities, that has already paid $579 million in U.S. fines and penalties in connection with Bonny Island)?
In early January, KBR announced (here) that it “completed the acquisition of the 44.94 percent share interest in M.W. Kellogg Limited (MWKL) previously held by JGC Corporation. With the completion of the transaction, MWKL, which was previously an affiliate of both companies since 1992, is again a wholly-owned KBR subsidiary.”
During a January 13th earnings call, Sue Carter (KBR – Senior VP and CFO) stated as follows:
“Also in regards to MWKL, included in the transaction is an estimate of JGC’s share of the ongoing [Serious Fraud Office] investigation. Any potential liabilities at this point are only estimated. Therefore any financial impact pending an actual outcome in the investigation will be trued up positive or negative.”
During the Q&A, William Utt (KBR – Chairman, President and CEO) was asked “can you tell us what kind of risks are structured in the MWKL deal? I mean, you have indemnification clauses for FCPA from Halliburton on your original stake. Do you have a similar clause with JGC?” He responded as follows: “Well I think the indemnification from Halliburton goes towards any financial penalties associated with the SFO investigation and as Sue commented, we’ve already factored that into the purchase price with JGC subject to a true-up.”
As Halliburton disclosed in its Oct. 22, 2010 10-Q filing, its indemnification obligations to KBR in connection with the SFO investigation “is limited to 55% of such penalties, which is KBR’s beneficial ownership interest in MWKL.”
RAE Systems Held Liable For The Acts Of Its Subsidiaries’ Joint Venture Partners
If every company voluntarily disclosed that its distant subsidiaries and/or its distant subsidiaries’ joint venture partners provided minor things of value (such as a notebook computer, kitchen appliances, and business suits) to someone deemed a “foreign official” by the enforcement agencies, then instead of 15 to 20 core FCPA enforcement actions per year, there would probably be something like 150 to 200 FCPA enforcement actions per year.
If every issuer voluntarily disclosed that its internal controls were imperfect as to distant subsidiaries or its distant subsidiaries’ joint venture partners, and that such distant entities failed to follow issuer instructions or issuer provided training and guidance, then instead of 15 to 20 core FCPA enforcement actions per year, there would probably be something like 1,500 to 2,000 FCPA enforcement actions per year (recognizing that the FCPA’s books and records and internal control provisions equally apply to domestic operations).
So why did RAE Systems voluntarily disclose such conduct to the DOJ and the SEC? Would it not have been more efficient and cost-effective for the company to effectively remedy these issues internally?
Do the high professional expenses connected with voluntary disclosures (compared to effectively remedying issues internally) have anything to do with the increase in voluntary disclosures? (See here for a prior post on the issue). In RAE Systems annual report for the year ended December 31, 2009 (see here), filed in March 2010, the company disclosed that it had (at that point) incurred $4 million in professional fees in connection with the FCPA investigation.
From an enforcement standpoint, is the Foreign Corrupt Practices Act becoming an all-purpose corporate governance instrument? Should it?
These are some of the questions raised by the odd RAE Systems enforcement action.
Last Friday, the DOJ and SEC announced (see here and here) a joint enforcement against RAE System (a San-Jose, California based company with shares on the New York Stock Exchange) “a leading global provider of rapidly deployable connected, intelligent gas detection systems that enable real-time safety and security threat detection.” (See here for the company website). In September, RAE Systems signed a definitive agreement to be acquired by Battery Ventures. The transaction is expected to close by the end of the first quarter of 2011.
This post summarizes the DOJ and SEC enforcement actions in which RAE Systems agreed to pay approximately $2.95 million in fines and disgorgement.
DOJ
Pursuant to a three-year non-prosecution agreement, RAE Systems acknowledged its “knowing violations of the internal controls and books and records provisions” of the FCPA “arising from and related to improper benefits corruptly paid by employees of two joint ventures majority owned and controlled by RAE Systems to foreign officials of departments, agencies, and instrumentalities” of the Chinese government.” Pursuant to the NPA, RAE Systems agreed to pay a $1.7 million penalty.
According to the NPA, RAE Systems “had significant operations” in China organized “under a holding company called RAE Asia, headquartered in Hong Kong.” RAE Systems “sold products and services in mainland [China] primarily through second-tier subsidiaries organized as joint ventures with local Chinese entities.
One of the joint ventures is RAE-KLH (Beijing) Co., Limited (“RAE-KLH”). RAE Systems acquired a 64% stake in RAE-KLH in 2004 and upped the stake to approximately 96% in 2006. The other joint venture is RAE Coal Mine Safety Instruments (Fushun) Co., Ltd. (“RAE-Fushun”). In 2006, RAE Systems acquired a 70% interest in RAE Fushan.
Both RAE-KLH’s and RAE Fushun’s financial results were included in the consolidated financial statements that RAE Systems filed with the SEC.
According to the NPA, “a significant number of RAE-KLH’s and RAE Fushun’s customers” in China were “government departments and bureaus and large state-owned agencies and instrumentalties.” The NPA states as follows. “The Lanzhous City Honggu Mining Safety Bureau, for example, was a government customer. Other government clients included regional fire departments, emergency response departments, and entities under the supervision of the provincial environmental agency, among others. Accordingly, officers and employees of a significant number of RAE-KLH’s and RAE Fushun’s customers were ‘foreign officials’ within the meaning of the FCPA …”.
The NPA then contains a heading that states, “RAE System’s Knowing Failure to Implement Systems of Effective Internal Controls at RAE-KLH and RAE Fushun Post Closing.”
The NPA then cites various company documents that suggest RAE was aware that KLH sales personnel were making kickbacks or otherwise engaging in questionable sales tactics with its customers. The NPA cites a document from a RAE Systems employee from the United States who met with KLH personnel that stated “we knew this risk all along and have accepted it upon entering the JV deal.”
Following the acquisition, the NPA states that “RAE Systems did provide some FCPA training to RAE-KLH personnel and did tell RAE-KLH personnel to stop paying bribes and providing other improper benefits, but such steps were half-measures.” The NPA states that “RAE Systems did not impose sufficient internal controls or make sufficient changes to high-risk practices.”
As to RAE-Fushun, the NPA states that “RAE Systems did not conduct pre-acquisition corruption due diligence of RAE Fushun” but that “given RAE’s System’s experience with KLH described above, the high-risk nature of the location, and the existence of numerous government customers, pre-acquisition corruption-focused due diligence was merited. The NPA further states “as was later confirmed, improper business practices had occurred at RAE Fushun before the acquisition and continued post-acquisition, as RAE Systems failed to implement an effective system of internal controls at RAE Fushun.”
Based on the above facts, the NPA states that “RAE Systems knowingly failed to implement a system of effective internal accounting controls at RAE-KLH and RAE Fushun…”.
According to the NPA, the “lack of effective internal accounting controls permitted improper payments to continue at RAE-KLH and RAE-Fushun after acquisition.”
As to RAE-KLH, the NPA states that certain sales representatives at RAE-KLH “used cash advances and reimbursements for improper purposes, including the corrupt giving of gifts and paying for entertainment, as well as direct or indirect payments to customers.” According to the NPA, “the gifts included, among other things, a notebook computer for the son of the deputy director of a state-owned chemical plant as part of efforts to obtain business from that entity.” The NPA also states that RAE-KLH made payments under contracts with a purported consultant and that some or all of the payments were funneled to officials of a state-owned enterprise and government departments.
As to RAE Fushun, the NPA likewise statements that certain sales representatives at RAE Fushun “used cash advances and reimbursements for improper purposes including the corrupt giving of gifts and paying for entertainment, as well as making direct or indirect payments, to officers and employees of customers.” According to the NPA, “these gifts to certain officials of state-owned enterprises and government departments included, among other things, a variety of luxury items, such as jade, fur coats, kitchen appliances, business suits, and high-priced liquor.”
The NPA then states that the “lack of effective internal controls and continued improper payments led to inaccurate books and records.”
During the three-year term of the NPA, RAE Systems agreed to undertake a host of compliance reforms and to report to the DOJ on an annual basis.
The DOJ agreed to enter into the NPA “based in part, on the following factors: (a) RAE System’s timely, voluntary, and complete disclosure …; (b) RAE System’s thorough, real-time cooperation with the DOJ and SEC; (c) the extensive remedial efforts already undertaken and to be undertaken by RAE Systems; and (d) RAE System’s commitment to submit periodic monitoring reports to the DOJ.”
SEC
The SEC’s complaint (here) is based on the same core set of facts described above. It charges RAE Systems, not only with FCPA books and records and internal control violations, but anti-bribery violations as well.
The complaint begins by alleging that “from 2004 through 2008” RAE Systems violated the FCPA “by paying, through two of its joint venture entities in China, approximately $400,000 to third party agents and government officials in China to influence acts or decisions by foreign officials to obtain or retain business for RAE Systems.” According to the complaint, the payments “were made primarily by the direct sales force utilized by RAE Systems” at its two Chinese joint-venture entities: RAE-KLH and RAE-Fushun.
According to the SEC, RAE System’s “illicit payments to government officials and third-party agents generated revenues worth over $3 million and gross margin of $1,147,800.”
The complaint states: “While the payments were made exclusively in China and were conducted by Chinese employees of RAE-KLH and RAE-Fushun, RAE Systems was aware of significant indications of ongoing bribery at RAE-KLH. At the time, RAE Systems failed to effectively investigate these indications, or red flags, and to stop the bribery from continuing. RAE System’s failure to act on these significant red flags allowed, at least in part, bribery to continue at RAE-KLH.”
RAE Systems was held liable for RAE-KLH’s improper payments even though the SEC complaint states that “RAE Systems Instruct[ed] KLH Personnel to Stop Bribery Practices.” According to the SEC, “while RAE Systems communicated these instructions to RAE-KLH personnel, RAE Systems did not impose sufficient internal controls or make any changes to the practice of sales personnel obtaining cash advances.” According to the SEC, RAE System’s CFO visited RAE-KLH’s Chinese facilities and observed that certain cash advances may be used for “grease payments, to supplement sales employees’ incomes and as bribes.” In response, RAE Systems, “implemented FCPA compliance training and required each RAE-KLH employee to certify that he or she did not engage in bribery practices.” However, the SEC alleged “again, however, [RAE Systems] did not impose sufficient internal controls or make changes to the practice of sales personnel obtaining cash advances.”
Without admitting or denying the SEC’s allegations, RAE Systems agreed to pay $1,147,800 in disgorgement (plus $109,212 in prejudgment interest) and to undertake a host of FCPA compliance measures.
Cheryl Scarboro (Chief of the SEC’s FCPA Unit) stated as follows. “RAE Systems develops products to detect harmful emissions, yet it did not have adequate measures in place to detect and root out internal wrongdoing. Companies that fail to respond to red flags can be held liable for the acts of their joint venture partners.”
Carlos Ortiz (a former DOJ attorney now at LeClair Ryan – here) and Roy McDonald (DLA Piper – here) represented RAE Systems.
World Bribery & Corruption Compliance Forum – Comments By U.K. Officials
Day one of the World Bribery & Corruption Compliance Forum in London featured addresses by Dominic Grieve (the U.K. Attorney General) and Robert Amaee (Head of Anti-Corruption U.K. Serious Fraud Office). This post provides a summary overview of their comments.
Tomorrow’s post will provide a summary overview of comments made by Charles Duross (Deputy Chief – Fraud Section, DOJ) and Thierry Olivier Desmet (Assistant Regional Director, FCPA Unit, SEC).
Before turning to Grieve and Amaee’s remarks, the U.K. Ministry of Justice yesterday (see here) officially launched the consultation process to “gather the views of interested parties” on the Bribery Act that “will help shape guidance about procedures which commercial organisations can put in place to prevent bribery.” In connection with the launch, the Ministry of Justice released this 35 page document which contains statements of various officials, draft guidance, and draft illustrative scenarios. Interested persons are encouraged to make their views known (see here).
Remarks of Attorney General Grieve
Attorney Grieve began by noting the “pernicious” effects of bribery and that tackling bribery requires an effective law – something he firmly believes the U.K. Bribery Act (with implementation slated for April 2011- see here for a prior post) will do. Attorney Grieve noted that the Bribery Act takes the U.K.’s antiquated bribery laws and modernizes these laws into a modern statute.
However, Attorney Grieve noted that one would be wrong to assume that the U.K. was ignoring bribery issues prior to passage of the Bribery Act. Indeed, he stated that even under the U.K.’s existing law strong enforcement has taken place and that it was “pleasing” that the U.K.’s recent enforcement actions were recognized in Transparency International’s recent report (see here for a prior post on the subject).
Attorney Grieve provided a brief overview of the Bribery Act’s offenses (see here for the Act itself), including, most notably the Section 7 offense for “failure to prevent bribery.”
Attorney Grieve noted that while “it has been suggested that Section 7 creates a strict liability offense” he emphatically stated that “it does not.” He drew upon his prior experience as a health and safety prosecutor and stated that the practice of having an occurrence of an event “and then reversing the burden of proof” is a “perfectly acceptable tool within [the U.K.] legal system.” Regarding adequate procedures which indeed are a defense under Section 7, Attorney Grieve noted that “any company small or large” that puts into place a system of adequate procedures “has nothing to fear” when an employee or agent “goes off the rails” and makes a bribe payment.
Speaking of the Bribery Act more generally, Attorney Grieves said that “it is not a bad thing” that the Bribery Act views bribery broadly because in practice bribery can “take many forms” and the Bribery Act “needs to take account of that.”
Attorney Grieve spent a few minutes talking about corporate hospitality. He said that the starting point is that corporate hospitality is “not illegal” and that the Bribery Act is “not intended to clamp down” on acceptable corporate hospitality. He did caution however that lavish hospitality “can be used as a bribe” and that the Bribery Act “must be capable of penalizing such conduct.”
Attorney Grieve referenced a recent article in the Financial Times “Mining and Oil Groups Dig In For Bribery Act.” The article notes concern by the mining industry over an example of a company arranging to fly a local Chilean mayor to a remote region of the country to view the company’s production facilities and that during the trip, food and lodging would also be provided by the company. Attorney Grieve said he “found it difficult” how any “sensible person” could think that this was bribery. He contrasted this example with a company paying for a foreign public official to stay at the Ritz in Paris with “go-go girls” also provided.
In concluding his remarks on this issue, Attorney Grieve said that “common sense” needs to be taken into account when providing corporate hospitality.
Returning to the issue of adequate procedures, Attorney Grieve said that a company should have nothing to fear if it is “walking the walk, and talking the talk” when a rogue employee makes an improper payment. On the other hand, Attorney Grieve stated that that “those who don’t heed the warnings and don’t take the necessary steps have something to fear.”
Remarks of Robert Amaee
Amaee began by stating that the SFO “welcomes the opportunity [delay of the Bribery Act] provides for business to digest and implement remedial actions” to put them in compliance with the new Bribery Act.
Amaee spoke of the “main problem” confronting SFO prosecutors under existing U.K. law and that is the “concept of a controlling mind” – in other words, to indict a case today, the SFO needs to show that “at least one controlling mind (a person at the board level or close to such a position) knew of and participated in the conduct at issue. Given the nature of the modern multinational corporation – where decision making is often made on a regional basis, Amaee said that this standard is difficult to meet.
Amaee noted that “Section 7 sweeps away that whole requirement” and establishes the new corporate offense of failing to prevent bribery. Under Section 7, Amaee explained that a corporate can be criminally liable if its employees or agents made improper payments – something he described as a shift in U.K. law and a new and “novel offense for U.K. law.”
Amaee also commented how the Bribery Act will “significantly extend” the SFO’s jurisdictional reach in prosecuting bribery offenses. He noted that if a company is registered anywhere in the world, but conducts some business in the U.K., that company can be prosecuted for failing to prevent bribery wherever in the world that bribe was paid.
Even with the new offense, Amaee stressed that the Bribery Act does provide some “comfort in the form of a defense” and that is the defense of adequate procedures.
Amaee also touched upon certain risk areas that he is often asked about.
The first is intermediaries. He noted that the SFO clearly recognizes that intermediaries serve a useful purpose by opening up doors in foreign markets, but that “in the past, some companies have chosen not to ask too many questions” of the intermediary or that companies have in the past “ignored clear warning signs” as to the intermediary. He noted that under the Bribery Act – neither of these past practices “will do” and that corporates should think about re-vetting their entire intermediary base. Amaee stated – “a board should always ask – where are we doing business and how, and that if the board doesn’t like the answers it receives, it should be prepared to take the business elsewhere.”
The second area of risk is joint venture. Amaee acknowledged that in certain sectors joint ventures are routine. However, he cautioned that companies should be mindful of not partnering up with a company that is not “willing to be open and transparent or not willing to demonstrate that its code of conduct does not match your own.”
Like Attorney Grieve, Amaee also spoke of corporate hospitality. He noted that during passage of the Bribery Act, assurance was provided that the U.K. government will not seek to penalize legitimate corporate hospitality. He stated however that “lavish corporate hospitality can be used to secure an advantage and that the Bribery Act must be wide enough to cover it.”
Amaee next spoke of the SFO’s approach to combating bribery. He spoke of two strands – active engagement to assist companies improve its corporate culture and to maintain high standards and vigorous enforcement when dealing with corporates who believe in using corruption and thus put others at a disadvantage.
Amaee stated that the “criminal courts are the right place for the right defendants,” but he also noted that criminal prosecution is not the “only means of effective enforcement.”
He stated that the SFO has discretion to consider non-criminal resolutions such as civil sanctions and listed the following factors as relevant to the issue of resolution: sufficiency of the evidence, public interest considerations, concurrent jurisdiction issues, and potential debarement issues.
Amaee also spent a few minutes talking about the SFO’s approach to individuals and he noted that the Bribery Act contains several sections under which individuals may be prosecuted – both rogue employees who bypass a company’s adequate procedures and high-ranking corporate executives who consent or condone the improper conduct. Amaee stated that with the Bribery Act, the “stakes are higher than ever before for senior officers within a company” and that under the Bribery Act “it is no longer possible” for senior executives “to bury their head in the sand and look the other way.”
During a panel discussion about self disclosure, Amaee was asked when a corporate should consider making the voluntary disclosure decision. In summary fashion, he said that the SFO’s preference is “as soon as possible” because this allows the SFO a much better chance for it to tell the company what the SFO is thinking and that if the company self-reports early in the investigative process the company can actually end up saving money because the SFO may suggest a more limited scope of investigation than the company perhaps was considering.