BAE
In a joint enforcement action that is sure to generate much discussion and controversy, the U.K. Serious Fraud Office (SFO) and the U.S. DOJ announced today resolution of an enforcement action against BAE Systems.
The SFO announced (here) that it has “reached an agreement with BAE systems that the company will plead guilty” to the offense of “failing to keep reasonably accurate accounting records in relation to its activities in Tanzania.”
BAE’s press release (here) notes that “[i]n connection with the sale of a radar system by the Company to Tanzania in 1999, the Company made commission payments to a marketing adviser and failed to accurately record such payments in its accounting records. The Company failed to scrutinise these records adequately to ensure that they were reasonably accurate and permitted them to remain uncorrected. The Company very much regrets and accepts full responsibility for these past shortcomings.”
The SFO and company release note that BAE will pay a £30 million penalty “comprising a fine to be determined by the Court with the balance paid as a charitable payment for the benefit of Tanzania.”
In a strange turn of events, the SFO also announced (here) that it has withdrawn charges filed last week (see here) against a former agent charged with “conspiracy to corrupt” and for “conspiring with others to give or agree to give corrupt payments […] to unknown officials and other agents of certain Eastern and Central European governments, including the Czech Republic, Hungary and Austria as inducements to secure, or as rewards for having secured, contracts from those governments for the supply of goods to them, namely SAAB/Gripen fighter jets, by BAE Systems Plc.”
The SFO release notes that “[t]his decision brings to an end the SFO’s investigations into BAE’s defence contracts.”
So what happened to the charges and allegations involving certain Eastern and Central European governments, including the Czech Republic, Hungary, and Austria?
Good question.
Much like the wave of magician’s wand, they have simply disappeared.
Closer to home, the DOJ announced that it:
“filed a criminal charge (here) in the U.S. District Court for the District of Columbia against BAE Systems plc charging that the multinational defense contractor conspired to impede the lawful functions of the Departments of Defense and State, made false statements to the Departments of Defense and Justice about establishing an effective anti-corruption compliance program to ensure conformance with the Foreign Corrupt Practices Act and paid hundreds of millions of dollars in undisclosed commission payments in violation of U.S. export control laws.”
The DOJ and BAE release note that the company “will pay a fine of $400 million and make additional commitments concerning its ongoing compliance.”
According to the DOJ release (which is available through the DOJ Office of Public Affairs, but not yet publicly posted on DOJ’s website) “BAE Systems is charged with intentionally failing to put appropriate, anti-bribery preventative measures in place, contrary to the representations it made to the United States government, and then making hundreds of millions of dollars in payments to third parties, while knowing of a high probability that money would be passed on to foreign government decision makers to favor BAE in the award of defense contracts. BAE Systems allegedly failed to disclose these payments to the State Department, as it was required to do so under U.S. laws and regulations in order to get necessary export licenses.”
The bold language above would expose most companies to an FCPA enforcement action, but BAE is no ordinary company. It is a major defense contractor on both sides of the Atlantic (as noted in the criminal information “in 2008, BAE was the largest defense contractor in Europe and the fifth largest in the U.S. as measured by sales”).
You can bet that these charges were the subject of much negotiation so as to not upset current or future government contracts as well as foreign policy issues and concerns.
The BAE charges and thus similar to those against Siemens in December 2008. In that case, despite the company engaging in bribery “unprecedented in scale and geographic scope” and despite the company being one in which “bribery was nothing less than standard operating procedure” (both direct DOJ quotes), the company avoided FCPA antibribery charges. (See here for prior posts about Siemens).
These two cases seriously raise the issue of whether certain companies in certain industries are simply “above” the FCPA.
Can the enforcement agencies on both sides of the Atlantic say with a straight face that this case was merely about improper record keeping, making false statements to the government, and export licenses?
Transparency, corporate accountability, and indeed a criminal justice system all suffered setbacks today.
The FCPA suffered a black-eye as well and one would be right to ask, “what the heck is going on here!”
Africa Sting – The Big Question
There is a big question raised by the Africa Sting indictments.
As explained in the indictments, one FBI special agent posed “as a representative of the Minister of Defense of a country in Africa (Country A)” and another FBI special agent posed “as a procurement officer for Country A’s Ministry of Defense who purportedly reported directly to the Minister of Defense.”
The DOJ release (here) notes that there was “no actual involvement from any minister of defense.”
According to an individual who attended the DOJ press conference announcing the charges, DOJ officials: did not identify the African country; did say (as indicated in the release) that the African country was not involved in the investigation; but would not say whether the African country had knowledge or was aware of the investigation.
Given the above, two scenarios seem possible.
The first is that the Minister of Defense was purely fictitious (for instance John Doe, the Minister of Defense of Uganda, when in reality there is no John Doe Minister of Defense of Uganda). This would seem unlikely as the indicted individuals could have easily figured out that John Doe was not the Minister of Defense of Uganda – thereby compromising the entire sting operation.
The second, and more plausible scenario, is that John Doe was indeed the Minister of Defense of Uganda, but (as noted in the DOJ release) he was not involved, did not participate, and was not actually seeking bribe payments. It would seem though that to avoid compromising the entire sting operation, John Doe may have known that his name was being used.
Why is this a big question?
Because a key element of an FCPA violation is the existence of a “foreign official.”
Whether a fictitious “foreign official” (the first scenario) or a real, but non-participating “foreign official” (the second scenario) the big question is: can offering to bribe or paying a bribe to such a “foreign official” constitute a substantive FCPA violation?
One can only assume that DOJ thought through this obvious legal issue before seeking the indictments and that it presumably concluded that the answer is yes.
But is that the right answer? What does the FCPA actually say?
The key statutory language is the FCPA’s so-called “third-party payment provisions” because, as alleged in the indictments, the bribe payments were paid not directly to the “foreign official,” but rather to the FBI agent the defendants believed to be the sales agent representative of the “foreign official.”
In pertinent part, these provisions prohibit the payment, offer of payment, etc.
to “any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official […] for purposes of —
(A) (i) influencing any act or decision of such foreign official in his official capacity, (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such foreign official, or (iii) securing any improper advantage; or
(B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality.” (emphasis added).
On this issue, the U.S. Attorneys Manual (here) says:
“The payment must be intended to induce the recipient to misuse his official position to direct business wrongfully to the payer or to any other person. The FCPA prohibits any corrupt payment intended to influence any act or decision of a foreign official in his or her official capacity, to induce the official to do or omit to do any act in violation of his or her lawful duty, to obtain any improper advantage, or to induce a foreign official improperly to use his or her influence with other government officials or agencies to affect or influence any act or decision.” (emphasis added).
Thus, the key statutory language (as indicated in the US Attorneys Manual) requires that the payment or offer of payment influence or induce the “foreign official” to do something.
It’s an open question whether one can or seek to influence or induce a fictitious “foreign official” or a real, but non-participating “foreign official.”
Could the “securing any improper advantage” be the hook the DOJ is “hanging its hat on?”
That clause was added to the FCPA in 1998. The legislative history of the 1998 amendments (see here) is not illuminating as to what precisely that clause means. It is clear though that this clause was added to the FCPA to conform the statute to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, specifically Art. 1, para. 1.
Art. 1, Par. 1 of the OECD Convention(see here) would seem to hinge on a foreign official “acting or refraining from acting in relation to the performance of official duties, in order to obtain or retain business or other improper advantage in the conduct of international business.”
Thus, it would still seem to be an open question whether a fictitious “foreign official” or a real, but non-participating “foreign official” can act or refrain from acting in relation to the performance of official duties in order to obtain or retain business or other improper advantage.
Of course this big question is only relevant to the FCPA charges in the indictment and of course the indictments contain non-FCPA charges as well.
The FCPA’s Murky “Knowledge” Element
Knowledge is one of the more difficult concepts to distill in criminal law.
The FCPA is no exception, particularly when it comes to the FCPA’s “while knowing” standard set forth in the FCPA’s third party payment provisions which generally prohibit otherwise improper payments to “any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly” to a foreign official. (see 78dd-1(a)(3)).
The third party payment provisions have not always included this “while knowing” standard. When first enacted in 1977 and up until 1988 (when the FCPA was amended), the third party payment provisions had a broader standard and applied if a defendant engaged in the prohibited conduct “while knowing or having reason to know” that all or a portion of such money or thing of value would be offered, given, or promised, directly or indirectly to a foreign official.
In a superb new piece titled, “The ‘Knowledge’ Requirement of the FCPA Anti-Bribery Provisions: Effectuating Or Frustrating Congressional Intent?,” – Kenneth Winer and Gregory Husisian of Foley & Lardner (the “Authors”) conclude that “[t]he DOJ and SEC … now interpret the knowledge requirement so broadly that they have effectively eviscerated the 1988 statutory changes thereby raising an important question: Are the DOJ and SEC frustrating the intent of Congress by ignoring the reason that Congress amended the FCPA?” (see here).
These are the type of questions we like to posed here at the FCPA Professor blog and, for the record, I am glad to see that I am not alone in questioning whether certain aspects of current FCPA enforcement frustrate or contradict Congressional intent in enacting or amending the FCPA.
The authors do a fine job of walking the reader through a concise overview of the “knowledge” element’s legislative history, particularly the 1988 House and Senate bills which sought to amend the “knowledge” element. Reviewing case law cited in the compromise conference report, the Authors conclude that the “intent of the 1988 amendments” was to “address concerns that FCPA intermediary violations could be found where there was no actual knowledge” and that even though “Congress adopted language to cover situations beyond actual knowledge, it did so in a very circumscribed fashion.”
That fashion, according to the Authors, – “[o]nly in the limited circumstances where the party had something very close to actual knowledge – that is, both awareness of a ‘high probability’ that a corrupt payment would be made and a ‘deliberate’ decision to avoid gaining information in a conscious effort to avoid learning the truth – is the knowledge requirement satisfied.”
According to the Authors, the DOJ and SEC, and most FCPA commentators, talk about “willful blindness” or “head in the sand” language, provide a list of red flags, and then state that “failure to follow up on red flags will be treated as knowledge, regardless of the reason why the person did not inquire.”
Suppose a company is aware of a “high probability” that a corrupt payment is being made on its behalf, but that the company, perhaps because of “cost, delay, disruption or likely futility involved” in attempting to conduct an investigation, does not further. Under the “common view,” such a failure to investigate is a form of culpable knowledge.
Nonsense says Winer and Husisian. They note that “[o]f course, failing to conduct sufficient due diligence or ignoring red flags can, in many circumstances, be foolish in the extreme,” but that, as noted in the FCPA’s legislative history and cases cited therein, such “foolishness, in and of itself, cannot constitute a finding that knowledge is present.”
According to the Authors, the “net effect of this attitude is to bring the FCPA back to its original ‘reason to know’ standard” and the current enforcement approach utilizing this standard is nothing more than “implementing an approach that Congress specifically rejected.”
Winer and Husisian close by saying:
“The SEC, DOJ, and many commentators might think it would be best if the knowledge requirement was satisfied by failure to conduct adequate due diligence or the failure to follow up on red flags (even if the defendant was not motivated by a purpose of avoiding knowledge of the corrupt payment). But that is not the policy balance that Congress struck in the 1988 amendments. The agencies should rethink their interpretation of the FCPA and enforce the knowledge requirement as Congress intended.”
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Curious as to the Author’s take on the knowledge jury instructions from the Bourke and Green trials this summer? The Bourke jury instructions – thumbs up; the Green jury instructions – thumbs down.