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FCPA Violations Can Occur Even in Low-Risk Countries

By on September 4, 2009 in DOJ Enforcement Action, Individual Enforcement Action, Leo Winston Smith, Manufacturing Industry, Martin Eric Self, Pacific Consolidated Industries, United Kingdom

The Department of Justice announced today (see here) that Leo Winston Smith pleaded guilty to conspiracy to violate the FCPA. According to the plea agreement, Smith (the former Director of Sales and Marketing for Pacific Consolidated Industries), along with Martin Eric self (a partial owner and former president of the company), created a sham marketing agreement with a relative of a United Kingdom Ministry of Defense official to facilitate the payment of approximately $70,000 to the official in exchange for Pacific Consolidated receiving contracts.

In May 2008, Self pleaded guilty to violating the FCPA for his role in the scheme and he is currently serving a probation sentence (see here). The DOJ release notes that the U.K. official pleaded guilty in the U.K. to receiving the bribes and he was sentenced to two years in prison.

FCPA violations in the U.K. – such things only happen in places like China and Nigeria right?

Wrong.

Companies need to be diligent about FCPA compliance no matter where they do business, not just traditional FCPA high-risk countries.

In announcing the plea, Assistant Attorney General Lanny Breuer warned, “[b]ribery cannot be viewed as standard operating procedure when representatives from U.S. companies seek contracts abroad,” and a FBI official warned “[t]he FBI, with its partners, will continue to actively search for – and counter – these corrupting influences.”

Smith is to be sentenced this December.

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).

Avery Dennison Settles FCPA Matter – Is There a Strict Liability Standard for FCPA Books and Records and Internal Controls Violations?

By on July 29, 2009 in Avery Dennison, China, Indonesia, Manufacturing Industry, Pakistan, SEC Enforcement Action

The FCPA’s books and records and internal control provisions, as written, generally state where an issuer “holds 50 per[cent] or less of the voting power with respect to a domestic or foreign firm” the books and records and internal control provisions “require only that the issuer proceed in good faith to use its influence, to the extent reasonable under the issuer’s circumstances, to cause such domestic or foreign firm to devise and maintain a system of internal accounting controls…” See 15 USC 78m(b)(6). The section further notes that “[s]uch circumstances include the relative degree of the issuer’s ownership of the domestic or foreign firm and the laws and practices governing the business operations of the country in which such firm is located. An issuer which demonstrates good faith efforts to use such influence shall be conclusively presumed to have complied with the requirements of [the books and records and internal control provisions].” Id.


As readers of this blog are perhaps keenly aware – the FCPA, as written, and the FCPA, as enforced, are sometimes two different things.

Such is the case with the SEC’s apparent position that issuers are liable (in a way that closely resembles strict liability) for any record keeping or internal control deficiency of any entity (no matter how remotely related to the issuer) in its corporate hierarchy. Although it is sometimes difficult to draw conclusions from negotiated settlement documents, the recent FCPA enforcement action against Avery Dennison Corporation would seem on-point. (See here for the SEC Cease- and-Desist Order, here for the SEC Litigation Release).

“Big picture,” and as noted in the Litigation Release, the SEC filed a settled civil complaint against Avery Dennison (a California-based manufacturer of self-adhesive materials, offices products, labels, and graphics imaging media) (“Avery”), charging Avery with violations of the FCPA’s books and records and internal control provisions. The SEC also issued an administrative cease-and-desist order (“Order”) finding that Avery violated these same provisions.

The alleged violations principally involve Avery (China) Co. Ltd. (“Avery China”), an “indirect subsidiary” of Avery. I wish I knew how to post a flow-chart in this forum, because to connect Avery to Avery China, a flow-chart would indeed be useful. In any event, here is the narrative version as found in para 6 of the Order:

“Avery China is a wholly-owned subsidiary of Avery headquartered in Shanghai, China. It is incorporated under the laws of China and wholly-owned by Avery Dennison Hong Kong BV, which is in turn wholly owned by Avery Dennison Group Danmark ApS, which is in turn wholly owned by Avery Dennison Corporation. The Reflective Division is part of Avery China and is currently part of Avery’s Graphics Division. Avery China is overseen by Avery’s Asia Pacific Group, an unincorporated group based in Hong Kong within the Avery Dennison Hong Kong BV entity.”

As set forth in the Order, the SEC found that: “Avery China’s Reflective Division paid or authorized the payments of several kickbacks, sightseeing trips, and gifts to Chinese government officials” with “the purpose and effect of improperly influencing decisions by foreign officials to assist Avery China to obtain or retain business.” (See para. 2).

The SEC also found that “after Avery acquired a company in June 2007, employees of the acquired company continued their pre-acquisition practice of making illegal petty cash payments to customs or other officials in several foreign countries.” (See para. 3). These findings, which relate to payments to customs officials in Indonesia and Pakistan, and China, are interesting as well from the standpoint that the Order, at various times, refers to these payments as “certain potential [FCPA] violations” (para. 1), “illegal” (para. 3, 16 and 17), “possible improper payments” (para. 15), and “illicit” (para. 17).

The Order is silent as to Avery’s participation in, or knowledge of, any of this conduct.

Yet the SEC found that “Avery failed to accurately record these payments and gifts in the company’s books and records, and failed to implement or maintain a system of internal accounting controls sufficient to detect and prevent such illegal payments or promises of illegal payments.” (See para. 4).

More specifically, the SEC found that:

“Avery’s books, records, and accounts did not properly reflect the illicit payments, sightseeing trips and gifts that Avery China made or provided to government officials, and the illicit payments to customs officials in several countries by employees of the acquired subsidiaries. As a result, Avery violated the [the books and records provisions]” (para. 19).

“Avery also failed to devise or maintain sufficient internal controls to provide reasonable assurance that Avery China and the acquired subsidiaries complied with the FCPA and that payments, gifts or sightseeing expenses they provided to foreign officials were accurately reflected on its books and records. As a result Avery violated [the internal control provisions]” (para 20).

Avery agreed to settle the matter by paying approximately $520,000 (disgorgement, prejudgment interest, and a civil penalty) and agreeing to cease and desist from future violations of the FCPA’s books and records and internal control provisions.

Notwithstanding 15 USC 78m(b)(6), this sure seems like a strict liability standard for multinational issuers. So long as this is the SEC’s position, the FCPA compliance message is clear – multinational issuers will be held responsible for the conduct of all entities within its corporate hierarchy (no matter how remote or indirect) which could potentially implicate the FCPA. For this reason, corporate leaders are wise to fully implement FCPA compliance policies and procedures and audit protocols throughout the entire corporate hierarchy.

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