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BAE – The Non-Bribery Bribery Allegations

Back in law school, a professor was fond of the phrase ““if it walks like a duck, quacks like a duck, looks like a duck, it must be a duck.”

Among other allegations, DOJ’s criminal information (here) against BAE alleges that BAE served as the “prime contractor to the U.K. government following the conclusion of a Formal Understanding between the U.K. and the Kingdom of Saudi Arabia (“KSA”)” in which BAE sold to the U.K. government, which then in turn sold to the Saudi government several Tornado and Hawk aircraft, “along with other military hardware, training and services.” The information refers to these frequent arrangements as the “KSA Fighter Deals.”

In connection these deals, the information alleges that “BAE provided substantial benefits to one KSA public official, who was in a position of influence regarding the KSA Fighter Deals (the “KSA Official”), and to the KSA Official’s associates.” The indictment alleges that BAE “provided these benefits through various payment mechanisms both in the territorial jurisdiction of the U.S. and elsewhere.”

WALKS LIKE A DUCK!

This allegation is important from an FCPA perspective because the FCPA only applies to a company like BAE (a foreign company with no shares listed on a U.S. exchange) if conduct in furtherance of a bribery scheme has a U.S. nexus. See 78dd-3. [BAE does have a wholly-owned U.S. subsidiary – a “domestic concern” under the FCPA – but the information states that this entity was not involved in the conduct alleged in the information].

In addition, the information contains additional allegations which clearly demonstrate that BAE’s bribery scheme had a U.S. nexus. For instance, the information alleges that BAE “provided support services to [the] KSA Official while in the territory of the U.S.” and that these benefits “included the purchase of travel and accommodations, security services, real estate, automobiles and personal items.” The information alleges that over $5 million in invoices for benefits provided to the KSA Official were submitted by just one BAE employee during a one year period.

QUACKS LIKE A DUCK!

The information also alleges that BAE “used intermediaries and shell entities to conceal payments to certain advisers who were assisting in the solicitation, promotion and otherwise endeavoring to secure the conclusion or maintenance of the KSA Fighter Deals.”

Specifically, the information alleges that “in connection with the KSA Fighter Deals, BAE agreed to transfer sums totaling more than £10,000,00 and more than $9,000,000 to a bank account in Switzerland controlled by an intermediary. BAE was aware that there was a high probability that the intermediary would transfer part of these payments to the KSA Official.”

Such “high probability” language is a direct quote from the FCPA’s so-called third party payment provisions which prohibit making improper payments to any person “while knowing that all or a portion” of the money will be given to a foreign official in order to obtain or retain business. The FCPA specifically provides that “[w]hen knowledge of the existence of a particular circumstance is required for an offense, such knowledge is established if a person is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist.”

In order words, the “high probability” language used in the BAE criminal information is no mere coincidence. In fact, that language (i.e. a company was aware that there was a high probability that the intermediary would transfer part of its payments to a foreign official) is frequently used by the DOJ in resolving FCPA antibribery actions.

For instance, in the InVision FCPA enforcement action, the “investigations by the DOJ and SEC revealed that InVision, through the conduct of certain employees, was aware of a high probability that its agents or distributors” in Thailand, China and the Philippines “had paid or offered to pay money to foreign officials or political parties in connection with transactions or proposed transactions for the sale by InVision of its airport security screening machines.” (See here). Specifically, the non-prosecution agreement (here) notes that: (i) InVision “was aware of a high probability that part of the source of funds” to an agent was to be used by the agent “to fund an offer to promise to make payments” to Thai officials; (ii) InVision authorized a payment to an agent “with awareness of a high probability” that the agent “intended to use part of that payment to influence” Chinese officials; and (iii) InVision sought authorization for a payment to an agent “with awareness of a high probability that” the agent “intended to use part of that payment to influence officials of the government of the Philippines” – all in an effort to obtain or retain business for InVision.

LOOKS LIKE A DUCK!

Yet, the DOJ’s criminal information merely charges one count of conspiracy and it lacks any FCPA antibribery charges. Moreover, the conspiracy charge relates only to “making certain false, inaccurate and incomplete statements to the U.S. government and failing to honor certain undertakings given to the U.S. government, thereby defrauding the United States” and “caus[ing] to be filed export license applications with [various U.S. government entities] that omitted a material fact” concerning fee and commission payments.” Among the false statements BAE is alleged to have made to the U.S. government is its commitment to not knowingly violate the FCPA.

This is the only mention of the FCPA in the information despite the above allegations concerning the KSA Fighter Deals – facts which clearly implicate the FCPA’s antibribery provisions.

In other words, NO DUCK!

For a prior post on BAE (see here).

The FCPA As A Foreign Policy Stick

Michael Jacobson’s piece (see here) about using the FCPA as perhaps a way to increase pressure on Iran has been discussed elsewhere (see here).

Below are some additional issues to consider.

The suggestion that the FCPA “gives the government extraterritorial reach over non-U.S. companies” and that “any foreign company listed on the U.S. stock exchange falls under FCPA jurisdiction” is not entirely accurate.

True, the FCPA’s books and records and internal control provisions apply to non-U.S. companies which issue stock on a U.S. exchange, and true the books and records and internal control provisions contain no specific jurisdictional requirement. If a company is an issuer (including a foreign issuer) it must comply with the books and records and internal control provisions.

However, the jurisdictional reach of the anti-bribery provisions as to foreign companies is a different story.

The anti-bribery provisions were amended in 1998 to include an alternative “nationality” jurisdictional test for U.S. issuers and domestic concerns (see 78dd-1(g) and 78dd-2(i)).

As a result of these amendments, the original “use of the mails or any means or instrumentality of interstate commerce” nexus is no longer required and the reach of the anti-bribery provisions as to U.S. companies and U.S. citizens is indeed extraterritorial.

However, for a foreign issuer, the old “use of the mails or any means or instrumentality of interstate commerce” jurisdictional nexus is still applicable because the alternative jurisdictional test in 78dd-1(g) only applies to an “issuer organized under the laws of the U.S.”

The other way in which a foreign company (other than an issuer) or foreign national can become subject to the FCPA anti-bribery provisions is through application of 78dd-3 (also added by the 1998 amendments). However, 78dd-3 has a “while in the territory of the U.S. […] make use of the mails or any means or instrumentality of interstate commerce” jurisdictional requirement as well.

Big picture, for foreign companies (whether issuers or not) there is a U.S. jurisdictional requirement for the anti-bribery provisions to apply.

One sees this when looking at the Statoil enforcement action, which as Jacobson points out, is indeed the first time the U.S. held a foreign company accountable under the FCPA’s criminal anti-bribery provisions – in the Statoil case for improper payments to Iranian officials to secure oil and gas rights in Iran.

However, the U.S. did not assert anti-bribery jurisdiction over Statoil merely on the basis of “its listing on the U.S. stock exchange.”

Rather, Statoil was subject to the anti-bribery provisions because the improper payments were routed through a U.S. bank in New York, thus providing the U.S. the nexus needed to hold a foreign company accountable (see here for the criminal information describing the payments through the U.S. bank account and invoking the “means and instrumentality of interstate commerce” jurisdictional clause and here for the SEC cease and desist order finding violations of the anti-bribery provisions and finding that the improper payments were routed through a U.S. bank account in New York).

The point is, because of the U.S. nexus jurisdictional requirement of the anti-bribery provisions as to foreign companies, using the FCPA to hold foreign companies accountable in Iran is not as simple as Jacobson makes it seem.

Two “bigger picture” points as well.

First, I remain skeptical as to the suggestion that increased FCPA focus by U.S. enforcement authorities as to conduct in a particular country “could sufficiently deter many companies from doing business” in that particular country.

Those that adhere to this theory have, for instance, a “China issue” to address (i.e. it is common knowledge that U.S. enforcement authorities have announced several FCPA enforcement actions relating to conduct in China, yet such increased focus by the U.S. as to China business conduct has done little to deter companies from doing business in China).

Second, and more relevant to Jacobson’s assertion that “even the suggestion of increased focus by the United States […] could sufficiently deter many companies from doing business with Iran,” is the following fact regarding Statoil in Iran.

In 2006 (as discussed above) Statoil paid $21 million in combined DOJ and SEC fines and penalties for improper payments that assisted the company in securing contracts for the South Pars field in Iran.

To my knowledge, the Statoil enforcement action is the only FCPA enforcement action concerning business conduct in Iran.

The Statoil case is thus the only “test case.”

And it is a unique test case at that because both the DOJ and SEC material specifically refer to the South Pars field (often times DOJ/SEC material is silent as to specific projects), as does the company’s annual reports filed with the SEC.

No doubt Jacobson is right when he says that the 2006 FCPA enforcement action had a “major impact” on Statoil. As Jacobson points out, “[s]ince then, Statoil has spent millions of dollars in building a more robust internal anti corruption compliance system and putting good governance procedures into place.”

You know what else Statoil has done since the 2006 enforcement action?

It has continued to do business in Iran, including in the same South Pars fields that were the subject of the 2006 FCPA enforcement action.

Here is what the company’s website says about its activity in Iran (see here).

“StatoilHydro is offshore development operator for phases 6, 7 & 8 of the South Pars gas and condensate field in the Iranian sector of the Persian Gulf. We have also engaged in onshore exploration and drilling activities.”

More specifically, here is what Statoil’s website says about South Pars (see here).

“Phases 6, 7 & 8 of South Pars – the world’s largest gas field – are being developed by StatoilHydro as operator under an agreement signed with its local partner Petropars and the National Iranian Oil Company (NIOC) in October 2002.”

For those who enjoy reading SEC’s filings, Statoil’s Annual Report on Form 20-F (2008) (see here) indicates the company has invested $225 million in developing South Pars.

So, what does the only Iran “test case” show?

At least from public documents, it appears to show that enforcing the FCPA against a foreign company doing business in Iran does not even deter the subject of the enforcement action from continuing to do business in Iran.

The FCPA … It’s Not Just For Americans

In 1998, the FCPA’s antibribery provisions were amended to, among other things, broaden the jurisdictional reach of the statute to prohibit “any person” “while in the territory of the U.S.” from making improper payments through “use of the mails or any means or instrumentality of interstate commerce” or from doing “any other act in furtherance” of an improper payment. (see 15 USC 78dd-3(a)). “Any person” is generally defined to include any person other than a U.S. national or any business organization organized under the laws of a foreign nation. (see 15 USC 78dd-3(f)).

Thus, since 1998, and contrary to a still widely-held misperception, foreign nationals can be subject to the FCPA.

Ousama Naaman apparently did not get the memo as the DOJ recently unsealed a criminal indictment charging him with violating the FCPA and conspiracy to violate the FCPA and commit wire fraud. According to a DOJ release (see here) Naaman (a Canadian citizen), acting on behalf of a U.S. public chemical company and its subsidiary, allegedly offered and paid kickbacks to the Iraqi government on five contracts under the United Nations Oil for Food Program. In addition, the indictment alleges that Naaman paid $150,000 on behalf of a U.S. company to Iraqi Ministry of Oil officials to keep a competing product out of the Iraqi market.

This is certainly not the first time a foreign national has been subject to an FCPA enforcement action. Other recent examples include Jeffrey Tesler and Wojciech Chodan (both U.K. citizens criminally indicted for their roles in the KBR / Halliburton bribery scheme)(see here) and Chrisitan Sapsizian (a French citizen who pleaded guilty to violating the FCPA for his role in a scheme to bribe Costa Rican foreign officials) (see here).

The Bourke Jury Instructions

As those who follow the FCPA are already aware, Frederic Bourke, Jr. was recently found guilty by a federal jury of (among other charges) conspiracy to violate the FCPA for his role in a scheme to bribe “foreign officials” in Azerbaijan in connection with the privatization of the State Oil Company of Azerbaijan. See here for the DOJ News Release.

Contrary to numerous media reports, Bourke was not on trial for “violating the FCPA” (the original indictment against Bourke contained substantive FCPA charges, however the superseding indictment removed the substantive FCPA charges in favor of conspiracy charges).

Regardless, the Bourke trial was closely followed by the FCPA bar as FCPA trials are very rare. Because FCPA trials are rare, so too are FCPA jury instructions. The Bourke jury instructions (see here) provide for an interesting, albeit frustrating, read. In instructing the jury on the conspiracy counts, the jury was instructed on the seven elements of an FCPA violation.

“Big picture” these FCPA instructions (which begin on Pg. 23 and which the jury was duty-bound to accept) are a mess.

The problem starts with the second element “interstate commerce” and contains a fundamental misstatement of the law. The instructions say (on pg. 24) that a “domestic concern” (as Bourke is under FCPA-speak) “must have intended to make use of the mails or a means or instrumentality of interstate commerce” in order to violate the FCPA. This is the so-called “territorial” jurisdictional provision found at 78dd-2. However, the 1998 amendments to the FCPA expanded the jurisdictional reach of the FCPA, as applied to “domestic concerns,” by adding an alternative “nationality” jurisdictional provision found at 78dd-2(i) which removes the interstate commerce / U.S. territorial nexus requirements. Thus, a “domestic concern” can be charged and found liable for a substantive FCPA violation even if the prohibited activity took place entirely outside of the U.S. The jury instruction that the “domestic concern” “must have intended to make use of the mails or a means or instrumentality of interstate commerce” is thus just plain wrong.

The second problem is found in what the instructions say is the fifth element of a substantive FCPA violation – the knowledge of payment to a foreign official. The instructions say (on pg. 26-27) that a “foreign official” is: (1) an officer or employee of a foreign government; (2) any department, agency, or instrumentality of such foreign government, or (3) any person acting in an official capacity for or on behalf of such government or department, agency, or instrumentality. So far so good as the instruction merely tracks the language of 78dd-2(h)(2). The problem is the next sentence of the instruction – “[a]n ‘instrumentality’ of a foreign government includes government-owned or government-controlled companies” (see pg. 27).

Where did that come from? Certainly not the text of the FCPA, as the statute does not define the term “instrumentality.” While it is true the the Department of Justice and the Securities and Exchange Commission take the position that government-owned or government-controlled companies are “instrumentalities” of a foreign government and that all employees of such companies (regardless of rank or title) are thus “foreign officials” under the FCPA, this is an unchallenged and untested legal theory.

As I am exploring in a current work-in-progress, DOJ/SEC’s aggressive interpretation of the “foreign official” element – to include employees of government-owned or government-controlled companies – is ripe for challenge in that it is, among other things, not supported by the FCPA’s extensive legislative history and is undermined by reference to other U.S. statutes which cover foreign or domestic government instrumentalities. Another way to look at it is this way – if the DOJ/SEC’s interpretation were to be applied in an intellectually honest fashion, would not all GM or AIG employees be considered U.S. “foreign officials” because the U.S. government owns or controls those companies?

A further problem with the instructions, is that even accepting the broadness by which the instructions define “foreign official” that term is not used consistently throughout the instructions. For instance, in discussing the sixth element of an FCPA violation – purpose of payment, the instructions interchangeably use the terms “foreign official” and “foreign public official.” (see Pg. 28). Even more confusing is that the instructions, when discussing that solicitation of a bribe is not a defense, (see Pg. 29) say that “[i]t is not a defense that the payment was demanded by a government official as a price for gaining entry into a market or to obtain a contract or other beneift.” Thus, literally in the span of three pages, the instructions refer to the key “foreign official” element of an FCPA violation three different ways – “foreign official,” “foreign public official,” and “government official” even though the later two terms appear nowhere in the statute.

What a mess!

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