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First Case Under Korea’s Version Of The FCPA Tests The Limits Of Defining “Foreign Official”

By on September 5, 2013 in Foreign Official, Guest Posts, Korea, South Korea

This previous guest post discussed “Korea’s FCPA” and a recent case in which a trial court held that the prosecution failed to meet its burden of proof that China Eastern Airlines was a state owned enterprise, and, therefore, that the president of China Eastern’s Korean subsidiary was a foreign public official sufficient to state a claim under the law.

The prosecution appealed the ruling and in this guest post Alston & Bird attorneys Edward Kang and Christopher Lucas discuss the appellate court ruling.

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An appeals court in Korea affirmed a lower court decision to reject a prosecution’s theory of what it means to be a “foreign official” under Korea’s version of the Foreign Corrupt Practices Act, called the Act on Preventing Bribery of Foreign Public Officials (“FBPA”). This was the first case brought by prosecutors under the FBPA with allegations that an executive of a state-controlled company was a “foreign official.” Prosecutors have appealed to the Korean Supreme Court, and the high court’s decision could be an important signal as to how aggressively prosecutors can pursue future cases under the FBPA.

In 2011, Korean prosecutors brought FBPA charges against two individuals – executives at a shipping company and a travel agency – for allegedly bribing the president of the Korean subsidiary of China Eastern Airlines to secure improper business advantages. Prosecutors argued that the Korean president of China Eastern Airlines was a “foreign official” and pointed to documents that allegedly linked the company to the Chinese government.

The lower court acknowledged the evidence suggesting a connection with the Chinese government, but found that prosecutors had not met their burden in proving that the China Eastern executive was a “foreign official” under the FBPA. The Korean prosecutors appealed and directed the appellate court to additional pieces of evidence to support its theory, including the facts that the Chinese government: (1) through a wholly-owned subsidiary, owned more than 50% of China Eastern’s capital; (2) had appointment and dismissal power over China Eastern’s CEO; (3) was in charge of certain business decisions of China Eastern, including mergers and spin-off decisions; and (4) provides China Eastern with large amounts of government subsidies.

Despite that evidence, the appellate court affirmed the lower court’s decision without further elaboration. The case has been appealed to the Korean Supreme Court. We will continue to monitor developments and provide an update once this decision has been announced.

The Korean FBPA defines “foreign official” to include employees of certain state-owned or state-controlled companies. Under Article 2(2)(c) of the FBPA, the term “foreign official” includes:

“[A]n executive or employee of a company in which a foreign government contributed more than 50% of the paid-in-capital or with respect to which a foreign government exercises de facto control over its overall management including major business decisions and the appointment or dismissal of its executives.”

Interestingly, at the same time the Korean Supreme Court wrestles with the limits of defining “foreign official” when it comes to state-owned or controlled companies, the U.S. Court of Appeals for the Eleventh Circuit is currently considering a similar issue in U.S. v. Esquenazi, a case that is slated for oral arguments in October.

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Similar to the issue raised in this recent post concerning Canada’s FCPA-like law, Korea’s FBPA defines the targeted recipient category to include state-owned enterprise (“SOE”) definitions and concepts.  As noted in my “foreign official” declaration (which has been cited by the defense in the pending 11th Circuit “foreign official” appeal), despite being aware of state-owned enterprises (SOEs) during the FCPA’s legislative process, despite exhibiting a capability for drafting a foreign official definition that expressly included SOEs in other bills, and despite being provided a more precise way to describe SOEs during the legislative process, Congress chose not to include such definitions or concepts in FCPA.

As noted in this prior post regarding the DOJ’s response brief in the 11th Circuit challenge, among other arguments the DOJ is making is the alarmist argument that “Defendants’ construction of the statute to exclude employees of SOEs … means that the United States is out of compliance with its treaty obligations under the [OECD] Convention.”

Like the U.S., Korea is also a member of the OECD Convention.

[Disclosure – I am providing pro bono expert services to defendants’ counsel relevant to the “foreign official” issue].

The Compliance Defense Around The World

By on June 28, 2011 in Australia, Chile, Compliance Defense, FCPA Reform, Germany, Hungary, Italy, Japan, Korea, OECD, Poland, Portugal, Sweden, Switzerland, U.K. Bribery Act

As highlighted in this prior post, numerous FCPA reform bills in the 1980’s included a specific defense which stated a company would not be held vicariously liable for a violation of the FCPA’s anti-bribery provisions by its employees or agents, who were not an officer or director, if the company established procedures reasonably designed to prevent and detect FCPA violations by employees and agents. An FCPA reform bill containing such a provision did pass the U.S. House, but was not enacted into law.

Amending the FCPA to include a compliance defense is one of the U.S. Chamber’s FCPA reform proposals (see here). In November 2010, Andrew Weissman, on behalf of the Chamber, testified in favor of a compliance defense (and other reform proposals) during the Senate’s FCPA hearing (see here for the prior post) and during the House hearing earlier this month (see here for the prior post), former Attorney General Michael Mukasey, on behalf of the Chamber, also testified in favor of a compliance defense (and other reform proposals).

During the House hearing, there appeared to be bi-partisan support for consideration of an FCPA compliance defense.

Even so, Greg Andres, testifying on behalf of the DOJ, stated that a potential FCPA compliance defense was “novel and risky” and that the “time is not right to consider it.”

Public debate on a potential compliance defense has thus far focused, from a comparative standpoint, on the United Kingdom and Italy.

The purpose of this post is to further inform the public debate on a potential compliance defense by highlighting various compliance-like defenses around the world in other countries that are signatories (like the U.S.) to the OECD Anti-Bribery Convention.

This post is further to my work in progress – Revisiting an FCPA Compliance Defense – and represents hours of research analyzing 38 OECD Country Reports.

The post provides an overview of compliance-like defenses in the following OECD Convention signatory countries: Australia, Chile, Germany, Hungary, Italy, Japan, Korea, Poland, Portugal, Sweden, and Switzerland. [The U.K. Bribery Act, set to go live on July 1st, also contains a compliance-like defense in Section 7].

A first reaction might be – only 12 of the 38 OECD member countries have a compliance-like defense.

However, this number must be viewed against the backdrop of the following dynamics: (i) in many OECD Convention signatory countries, the concept of legal person criminal liability (as opposed to natural person criminal liability) is non-existent; and (ii) in many OECD Convention signatory countries that do have legal person criminal liability, such legal person liability can only result from the actions of high-level executive personnel or other so-called “controlling minds” of the legal person.

Obviously if a foreign country does not provide for legal person liability, there is no need for a compliance defense, and the rationale for a compliance defense is less compelling if legal exposure can result only from the conduct of high-level executive personnel or other “controlling minds.”

When properly viewed against these dynamics, a compliance-like defense (whether specifically part of a foreign country’s “FCPA-like” law or otherwise generally part of a foreign country’s legal principles) is far from a “novel” idea, but rather common among OECD Anti-Bribery Convention signatory countries that – like the U.S. – have legal person criminal liability that can attach based on the conduct of non-executive officers or other “controlling minds.”

[The below information is based strictly on OECD country reports and is subject to the qualification that in many instances the most recent information concerning a particular country may be several years old. If anyone has more recent information concerning any particular country, how the compliance defense in a particular country has worked in practice, or any other relevant information, please leave a comment on this site or contact me at mjkoehle@butler.edu]

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Australia

Australian law implementing the OECD Convention entered into force on December 18, 1999.

Thereafter, a section of the Criminal Code on corporate criminal liability came into full force establishing an organizational model for the liability of legal persons. “Bodies corporate” are liable for offences committed by “an employee, agent or officer of a body corporate acting within the actual or apparent scope of his or her employment, or within his or her actual or apparent authority” where the body corporate “expressly, tacitly, or impliedly authorised or permitted the commission of the offence”.

Pursuant to the Criminal Code, authorisation or permission by the body corporate may be established in the following ways: (1) the board of directors intentionally, knowingly or recklessly carried out the conduct, or expressly, tacitly or impliedly authorised or permitted it to occur; (2) a high managerial agent intentionally, knowingly or recklessly carried out the conduct, or expressly, tacitly or impliedly authorised or permitted it to occur; (3) a corporate culture existed that directed, encouraged, tolerated or led to the offence; or (4) the body corporate failed to create and maintain a corporate culture that required compliance with the relevant provision.

However, under the Criminal Code, “if a high managerial agent is directly or indirectly involved in the conduct, no offence is committed where the body corporate proves that it “exercised due diligence to prevent the conduct, or the authorisation or permission.”

Chile

Chilean law implementing the OECD Convention entered into force on October 8, 2002.

In December 2009, a separate Chilean law entered into force establishing criminal responsibility of legal persons for a limited list of offences including bribery of foreign public officials.

In order for a legal person to be held responsible for a foreign bribery offence, the following “three cumulative requirements” must be satisfied: (1) the offence must be committed by a person acting as a representative, director or manager, a person exercising powers of administration or supervision, or a person under the “direction or supervision” of one of the aforementioned persons; (2) the offence must be committed for the direct and immediate benefit or interest of the legal entity. No offence is committed where the natural person commits the offence exclusively in his/her own interest or in the interest of a third party; and (3) the offence must have been made possible as a consequence of a failure of the legal entity to comply with its duties of management and supervision. An entity will have failed to comply with its duties if it violates the obligation to implement a model for the prevention of offences, or when having implemented the model, it was insufficient.”

As to the final element, the OECD report states as follows. “The final cumulative requirement for responsibility stresses that the offence must have been made possible as a consequence of the failure of the legal person to comply with its duties of administration and supervision. The entity will have failed to comply with its duties if it violated the obligation to implement a model for the prevention of offences, or when having implemented the model, the latter was insufficient. It shall be considered that the functions of direction and supervision have been met if, before the commission of the offense, the legal person had adopted and implemented organization, administration and supervision models, pursuant to the following article, to prevent such offenses as the one committed.”

The minimum features of a prevention system under the law are as follows: identify the different activities or processes of the entity, whether habitual or sporadic, in whose context the risk of commission of the offences emerges or increases; establish protocols, rules and procedures that permit persons involved in above-mentioned activities or processes to program and implement their tasks or functions in a manner that prevents the commission of the indicated offences; identify procedures for the administration and auditing that allow the entity to impede their use in the listed offences; establish internal administrative sanctions, as well as procedures for reporting or pursuing pecuniary responsibility against persons who violate the prevention system; introduce the above-mentioned duties, prohibitions and sanctions into the internal regulations of the legal person, and ensure that they are known by all persons bound to apply it (workers, employees, and service providers).

The OECD report states – as to the minimum requirements as follows. “It also aims to introduce a system of self-regulation by companies. Having a code of conduct on paper will not be sufficient to avoid responsibility. If prosecutors can prove that the code does not meet the minimum requirements of or that it is not implemented, the company can be responsible for the offence.”

Under Chilean law, “the failure to comply with duties of management and supervision is an element of the offence rather than a defence. Therefore the burden of proof lies on prosecutors, i.e. it will be up to prosecutors to prove that the entity failed to comply with its duties of management and supervision.”

The OECD report notes as follows. “This will require prosecutors to prove that the company failed in the design and/or implementation of the offense prevention model including why, in the circumstances, the prevention model was insufficient. This would appear to also require the prosecutor to establish that this failure made perpetration of the offence possible.”

As noted in the OECD report, the Chilean “standard of liability is inspired from the Italian system of liability of legal persons” (discussed below).

Germany

German law implementing the OECD Convention entered into force on February 15, 1999.

German law establishes the liability of legal persons, including liability for the foreign bribery offence, under an administrative (i.e. non-criminal form) act.

Pursuant to the administrative act, “the liability of legal persons is triggered where any “responsible person” (which includes a broad range of senior managerial stakeholders and not only an authorised representative or manager), acting for the management of the entity commits i) a criminal offence including bribery; or ii) an administrative offence including a violation of supervisory duties which either violates duties of the legal entity, or by which the legal entity gained or was supposed to gain a “profit”.”

As noted in the OECD report, “in other words, Germany enables corporations to be imputed with offences i) by senior managers, and, somewhat indirectly, ii) with offences by lower level personnel which result from a failure by a senior corporate figure to faithfully discharge his/her duties of supervision.”

The OECD report states that the “standards for a violation of supervisory duties include consideration of factors such as whether the company has in place a monitoring system or in-house regulations for employees.”

Hungary

Hungarian law implementing the OECD Convention entered into force on March 1, 1999.

In 2004, a separate law was enacted specifying the individuals whose actions can trigger the liability of the legal person.

The OECD report states as follows. “The specific persons and additional conditions for liability are defined as follows: (i) the bribery is committed by one of the members or officers [of the legal entity] entitled to manage or represent it, or a supervisory board member and/or their representatives acting within the legal scope of activity of the legal person ; (ii) the bribery is committed by one of the members of the legal entity or an employee acting within the legal scope of activity of the legal person provided the bribery could have been prevented by the chief executive fulfilling his supervisory or control obligations; and (iii) the bribery is committed by a third party individual, provided that the legal entity’s member or officer entitled to manage or represent the it had knowledge of the facts.”

According to the OECD report, the relevant law does not provide any guidance as to the necessary degree of supervision to avoid liability for bribery.

Italy

Italian law implementing the OECD Convention entered into force on October 26, 2000.

Under Italian law, “criminal liability cannot be attributed to legal persons” however, “administrative liability may be attributed to legal persons for certain criminal offences (including foreign bribery) committed by a natural person.

The relevant administrative decree provides a “defence of organisational models” to a body which makes reasonable efforts to prevent the commission of an offence.

The OECD report states as follows. “… [A] body is not liable for offences committed by persons in senior positions if it proves the following. First, before the offence was committed, the body’s management had adopted and effectively implemented an appropriate organisational and management model to prevent offences of the kind that has occurred. Second, the body had set up an autonomous organ to supervise, enforce and update the model. Third, this autonomous organ had sufficiently supervised the operation of the model. Fourth, the perpetrator committed the offence by fraudulently evading the operation of the model.” The defence of organisation models operates as a full defence which completely exculpates a legal person.

The relevant administrative decree stipulates the essential elements of an acceptable organisational model described in the OECD report as follows. “First, the model must identify activities which may give rise to offences. Second, the model must define procedures through which the body makes and implements decisions relating to the offences to be prevented. It must also prescribe procedures for managing financial resources to prevent offences from being committed. Third, the model must oblige the internal organ responsible for supervision and enforcement to provide information to the body. Finally, the model must include a disciplinary system for non-compliance.”

Japan

Japanese law implementing the OECD Convention entered into force on February 15, 1999 .

“Under Japanese law, criminal responsibility of a legal person is based on the principle that the company did not exercise due care in the supervision, selection, etc. of an officer or employee to prevent the culpable act.

The burden rests on the legal person to prove that due care was exercised. Where a legal person raises the defence, a person must be identified as having exercised due care, etc., and the court must determine whether it was exercised properly having regard to the nature of the legal person and the circumstances of the case.”

Korea

Korean law implementing the OECD Convention entered into force on February 15, 1999.

Korean law establishes the criminal responsibility of legal persons for the bribery of a foreign public official, however, a legal person is exempt from liability where it has paid “due attention” or exercised “proper supervision” to prevent the offence.

The statute itself does not provide information about what constitutes “due attention” or “proper supervision.” A representative of the Supreme Public Prosecutor’s Office informed the OECD that “the exemption is triggered when a director or ‘superior person’ exercises due attention.” The Explanatory Manual published by the Ministry of Justice states that “it is difficult to standardize the extent of attention or supervision in deciding whether a legal person can be exempted from criminal punishment.” The Explanatory Manual further states that whether the exemption applies depends upon “general circumstances such as the motive and background that led to the bribery, intervention of exclusive members of the legal person, whether it was informed earlier, and how much effort was usually made by the corporation to prevent bribery, etc.” and that companies involved in international business must prevent violations of the law by all employees and executives of the company “through sufficient necessary management”.

Poland

Polish law implementing the OECD Convention entered into force on February 4, 2001.

Polish law provides “a noncriminal form of responsibility for collective entities.” Among the requirements for liability is the offence was committed “in the effect of at least absence of due diligence in electing the natural person [committing the act] or of at least the absence of due supervision over this person by an authority or a representative of the collective entity.”

According to the relevant Polish legislative history, “the perpetration of a prohibited act by a natural person will trigger liability of the
collective entity where the act occurred as a result of negligence on the part of the authority or representative of the collective entity.”

Portugal

Portuguese law implementing the OECD Convention entered into force on June 9, 2001.

Under Portuguese law relevant to corruption in international business transactions, legal persons can be liable for conduct committed “on their behalf and in the collective interest by natural persons occupying a leadership position within the legal person structure” or by “whoever acts under the authority” of such natural persons.

However, “[t]he liability of legal persons and equivalent entities is excluded when the actor has acted against the orders or express instructions of the person responsible.”

Sweden

Swedish law implementing the OECD Convention entered into force on July 1, 1999.

Under Swedish Law, only natural persons can commit crimes. However, pursuant to the Swedish Penal Code, a “kind of quasi-criminal liability is applied to an ‘entrepreneur’ (a general term meaning “any natural or legal person that professionally runs a business of an economic nature) for a ‘crime committed in the exercise of business activities.’”

However, one requirement under the Penal Code is that “the entrepreneur has not done what could reasonable be required of him for prevention of the crime.”

Switzerland

Swiss law implementing the OECD Convention entered into force on May 1, 2000.

Article 100quater of the Swiss Criminal Code requires “defective organisation as a condition for corporate criminal liability.”

In order to incur criminal liability, “the enterprise must not have taken all reasonable and necessary organisational measures to prevent the individual from committing the offence.”

Under Swiss law, the burden is on the prosecutor to furnish proof of defective organization and according to Swiss authorities contacted by the OECD “steps should be taken to assess whether employees have been sufficiently informed, supervised and controlled” and “the fact that an enterprise is organised in compliance with international management standards will not be sufficient to rule out all liability on its part; it will be one element to take into consideration among others …”. In the view of Swiss authorities, “ shifting the burden of proof in criminal cases would contravene Article 6 of the European Convention on Human Rights.”

Friday Roundup

By on September 3, 2010 in Anadarko Petroleum Corp, Declination Decisions, Diageo, Ghana, Korea, Mexico, Orthofix International

The DOJ appears not interested in Anadarko’s allegations and more disclosure news … its all here in the Friday roundup.

DOJ Appears Not Interested in Anadarko’s Allegations

The Jubilee field is located off the coast of Ghana.

Participants in the West Cape Three Points Block include: Kosmos Energy LLC; Anadarko Petroleum Corporation; Tullow Oil PLC; Ghana National Petroleum Corporation; E.O. Group Ltd.; and Sabre Oil and Gas Limited.

Anadarko (here) apparently reported Kosmos (here) to U.S. authorities for possible violations of the FCPA “in connection with securing licensing and exploration and production agreements.”

Anadarko apparently made similar allegations against EO Group.

Apparently, the DOJ is not interested – according to this Bloomberg article by David Wethe and and Jason McClure.

The article, which cites to a May 12 letter from the DOJ to Kosmos and June 2 letter from the DOJ to EO Group, states that the DOJ does not intend to “take any enforcement action” or pursue charges against either company and that the DOJ closed its inquiry into the matter.

According to the article, “Ghana is pressing ahead with its own criminal inquiry into alleged corruption in the development of the field.”

Disclosure News

From Orthofix International N.V.’s Form 8-K filed August 31 (see here):

“During a recent internal management review of Promeca S.A. DE C.V. (“Promeca”), one of its Mexican subsidiaries, the Company received allegations of improper payments, allegedly made by certain of Promeca’s local employees in Mexico, to employees of a Mexican governmental health care entity. The Company has engaged Hogan Lovells US LLP and Deloitte Financial Advisory Services LLP to conduct an internal investigation focusing on compliance with the Foreign Corrupt Practices Act (“FCPA”) and voluntarily contacted the U.S. Securities and Exchange Commission and the United States Department of Justice to advise both agencies that an internal investigation is underway. During 2009, Promeca accounted for approximately one percent of the Company’s consolidated net sales and consolidated total assets. The internal investigation is in its early stages and no conclusions can be drawn at this time as to its outcome; however, the FCPA and related statutes and regulations provide for potential criminal and civil sanctions in connection with FCPA violations, including criminal fines, civil penalties, and disgorgement of past profits.”

From Diageo PLC’s 2010 Preliminary Results Release, dated August 26th (see here)

“SEC investigation: As previously reported, Diageo Korea and several of its current and former employees have been subject to investigations by Korean authorities regarding various regulatory and control matters. Convictions for improper payments to a Korean customs official have been handed down against two former Diageo Korea employees, and a former and two current Diageo Korea employees have been convicted on various counts of tax evasion. Diageo had previously voluntarily reported the allegations relating to the convictions for improper payments to the US Department of Justice and the US Securities and Exchange Commission (SEC). The SEC has commenced an investigation into these and other matters, and Diageo is in the process of responding to the regulators‟ enquiries regarding activities in Korea, Thailand, India and elsewhere. Diageo‟s own internal investigation in Korea, Thailand, India and elsewhere remains ongoing. The US Foreign Corrupt Practices Act (FCPA) and related statutes and regulations provide for potential monetary penalties, criminal sanctions and may result in some cases in debarment from doing business with governmental entities in connection with FCPA violations. Diageo is unable to quantify meaningfully the possible loss or range of loss to which these matters may give rise.”

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A good Labor Day weekend to all.

Friday Roundup

By on September 3, 2010 in Diageo, Ghana, Korea, Mexico, Orthofix International

The DOJ appears not interested in Anadarko’s allegations and more disclosure news … its all here in the Friday roundup.

DOJ Appears Not Interested in Anadarko’s Allegations

The Jubilee field is located off the coast of Ghana.

Participants in the West Cape Three Points Block include: Kosmos Energy LLC; Anadarko Petroleum Corporation; Tullow Oil PLC; Ghana National Petroleum Corporation; E.O. Group Ltd.; and Sabre Oil and Gas Limited.

Anadarko (here) apparently reported Kosmos (here) to U.S. authorities for possible violations of the FCPA “in connection with securing licensing and exploration and production agreements.”

Anadarko apparently made similar allegations against EO Group.

Apparently, the DOJ is not interested – according to this Bloomberg article by David Wethe and and Jason McClure.

The article, which cites to a May 12 letter from the DOJ to Kosmos and June 2 letter from the DOJ to EO Group, states that the DOJ does not intend to “take any enforcement action” or pursue charges against either company and that the DOJ closed its inquiry into the matter.

According to the article, “Ghana is pressing ahead with its own criminal inquiry into alleged corruption in the development of the field.”

Disclosure News

From Orthofix International N.V.’s Form 8-K filed August 31 (see here):

“During a recent internal management review of Promeca S.A. DE C.V. (“Promeca”), one of its Mexican subsidiaries, the Company received allegations of improper payments, allegedly made by certain of Promeca’s local employees in Mexico, to employees of a Mexican governmental health care entity. The Company has engaged Hogan Lovells US LLP and Deloitte Financial Advisory Services LLP to conduct an internal investigation focusing on compliance with the Foreign Corrupt Practices Act (“FCPA”) and voluntarily contacted the U.S. Securities and Exchange Commission and the United States Department of Justice to advise both agencies that an internal investigation is underway. During 2009, Promeca accounted for approximately one percent of the Company’s consolidated net sales and consolidated total assets. The internal investigation is in its early stages and no conclusions can be drawn at this time as to its outcome; however, the FCPA and related statutes and regulations provide for potential criminal and civil sanctions in connection with FCPA violations, including criminal fines, civil penalties, and disgorgement of past profits.”

From Diageo PLC’s 2010 Preliminary Results Release, dated August 26th (see here)

“SEC investigation: As previously reported, Diageo Korea and several of its current and former employees have been subject to investigations by Korean authorities regarding various regulatory and control matters. Convictions for improper payments to a Korean customs official have been handed down against two former Diageo Korea employees, and a former and two current Diageo Korea employees have been convicted on various counts of tax evasion. Diageo had previously voluntarily reported the allegations relating to the convictions for improper payments to the US Department of Justice and the US Securities and Exchange Commission (SEC). The SEC has commenced an investigation into these and other matters, and Diageo is in the process of responding to the regulators‟ enquiries regarding activities in Korea, Thailand, India and elsewhere. Diageo‟s own internal investigation in Korea, Thailand, India and elsewhere remains ongoing. The US Foreign Corrupt Practices Act (FCPA) and related statutes and regulations provide for potential monetary penalties, criminal sanctions and may result in some cases in debarment from doing business with governmental entities in connection with FCPA violations. Diageo is unable to quantify meaningfully the possible loss or range of loss to which these matters may give rise.”

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A good Labor Day weekend to all.

FCPA Enforcement … It’s More Than Just Suitcases Full of Cash to Government Officials

By on August 9, 2009 in Anything of Value, Carson, China, Control Components Inc., David Edmonds, DOJ Enforcement Action, Foreign Official, Han Yong Kim, Individual Enforcement Action, Korea, Malaysia, Manufacturing Industry, Mario Covino, Paul Cosgrove, Richard Morlock, Travel Act, United Arab Emirates

When conducting FCPA training, one of the first things I like to do is immediately dispel the notion that the FCPA only applies to suitcase full of cash to a government official types of situations. While the FCPA does indeed apply to such egregious situations, the FCPA (and certainly DOJ/SEC’s interpretation of the statute) applies to a wide range of other – seemingly less culpable – conduct as well.

My future FCPA training slides will certainly include the recent Control Components Inc. (“CCI”) FCPA enforcement action as it clearly demonstrates the broadness of FCPA enforcement.

First, the big picture.

As described in a recent DOJ release (see here), CCI pleaded guilty to a three-count criminal information charging two counts of violating the FCPA and one count of violating the Travel Act in connection with a “decade-long scheme to secure contracts in approximately 36 countries by paying bribes to officials and employees of various foreign state-owned companies as well as foreign and domestic private companies.”

Pursuant to the plea agreement, CCI agreed to pay a criminal fine of $18.2 million, serve a three-year term of organizational probation and adopt a host of other measures common in FCPA settlements such as create, implement and maintain an anti-bribery compliance program and retain an independent compliance monitor.

The CCI enforcement action demonstrates the broadness of FCPA enforcement in at least two respects: (i) the “foreign official” element; and (ii) the “anything of value” element.

“Foreign Official”

As to the “foreign official” element, para 5 of the Indictment is the key paragraph. It states as follows:

“Defendant CCI’s state-owned customers included, but were not limited to, Jiangsu Nuclear Power Corporation (China), Guohua Electric Power (China), China Petroleum Materials and Equipment Corporation, PetroChina, Dongfang Electric Corporation (China), China National Offshore Oil Company, Korea Hydro and Nuclear Power, Petronas (Malaysia), and National Petroleum Construction Company (United Arab Emirates). Each of these state-owned entities was a department, agency, or instrumentality of a foreign government, within the meaning of the FCPA, Title 15, United States Code, Section 78dd-2(h)(2)(A). The officers and employees of these entities, including but not limited to the Vice-Presidents, Engineering Managers, General Managers, Procurement Managers, and Purchasing Officers, were “foreign officials” within the meaning of the FCPA, Title 15, United States Code, Section 78dd-2(h)(2)(A).

As I’ve stated before in this forum (see here) and likely will in the future until this legal issue is decided by a court, DOJ’s position that employees of state-owned companies, regardless of position, are “foreign officials” under the FCPA is an unchallenged and untested legal theory – and one I believe is ripe for challenge.

Even if DOJ’s position were to be upheld by a court, those subject to the FCPA could certainly benefit from some clarity as to what DOJ considers to be a state-owned entity. Instead, in the CCI Information (and countless others) all that is there is a mere conclusory statement that each of the relevant companies are “state-owned entities” (see para 5).

What attributes of, for instance, Guohua Electric Power, make it a state-owned entity? I’ve long been curious as to what extent of investigation or discovery DOJ undertakes before it concludes that a company is a state-owned entity? If anyone has insight into this issue, please do share.

Also interesting to note is that even though para 6 of the Information states that CCI, through its former officers and employees, made corrupt payments to officers and employees of “numerous state-owned” customers around the world for the purpose of assisting in obtaining or retaining business for CCI, the Information charges only two FCPA violations.

Count two concerns payments to secure a contract with China National Offshore Oil Company and Count three concerns payments to secure a contract with Korean Hydro and Nuclear Power.

Presumably DOJ did not have sufficient evidence to support other FCPA counts as to CCI’s alleged payments to the other “numerous state-owned” customers, including the others specifically listed in para. 5 of the Information.

So why would a company such as CCI plead guilty to violating the FCPA when the “foreign officials” it allegedly bribed are “foreign officials” only under DOJ’s untested and unchallenged legal theory?

That is a good question, but I suspect it has to do with the fact that companies are in the business of making money and not in the business of setting legal precedent. With a settlement comes certainty, whereas with litigation comes uncertainty.

“Anything of Value”

As to the “anything of value” element, the Information lists the following “things of value” given by CCI, directly or indirectly to “foreign officials” – “overseas holidays to places such as Disneyland and Las Vegas” (para 19); “extravagant vacations” with the following expenses “first-class airfare to destinations such as Hawaii, five-star hotel accommodations, charter boat trips, and similar luxuries” (para 20); “college tuition” [for] the children of at least two executives” at CCI’s state-owned customers (para 20); “lavish sales events” including CCI payment of “hotel costs, meals, green fees for golf, and travel expenses” (para 21); and “expensive gifts” (para 21).

What do all these things have in common? They are not “suitcases full of cash” yet still “things of value” under the FCPA.

This is not the first time FCPA followers have heard of CCI and it is likely not the last time either. As described in the DOJ release, two former CCI executives (Mario Covino and Richard Morlok) have already pleaded guilty to conspiracy to violate the FCPA (see here and here). In addition, six former CCI executives (Stuart Carson, Hong (Rose) Carson, Paul Cosgrove, David Edmonds, Flavio Ricotti, and Han Yong Kim) were criminally indicted in April 2009 on charges of, among other things, violating the FCPA (see here).

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