In Depth On The Magyar Telekom and Deutsche Telekom Enforcement Action
This post analyzes the DOJ and SEC enforcement actions against Magyar Telekom, Deutsche Telekom and certain former executives of Magyar generally discussed in this previous post.
Total fines and penalties were approximately $95 million ($59.6 million against Magyar Telekom via a DOJ deferred prosecution agreement, $4.4 million against Deutsche Telekom via a DOJ non-prosecution agreement, and $31.2 million against Magyar Telekom via a settled SEC civil complaint). The SEC action against former Magyar executives remains active.
Because Magyar Telekom and Deutsche Telekom were “foreign issuers,” jurisdiction under the FCPA’s anti-bribery provisions require “use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance” of a bribery scheme. The sole jurisdictional allegations in the enforcement action (other than the companies made filings with the SEC) are two e-mails that passed through, were stored on, and transmitted to servers located in the U.S.
It is also noteworthy that the companies faced FCPA exposure based on the conduct of a few Magyar executives who concealed their conduct from others. Indeed, the DOJ alleged that the existence and true purpose of the sham contracts used in the bribery scheme “were unknown to anyone within Magyar Telekom and Deutsche Telekom other than [two executives]’ and a relatively small number of additional participants.” Furthermore, the DOJ alleges that the executives, assisted by Greek intermediaries, circumvented Magyar Telekom’s internal controls by, among other things, backdating contracts and creating other fabricated documents.
The DOJ’s NPA with Deutsche Telekom states that the DOJ “will not criminally prosecute Deutsche Telekom … for any crimes … related to the offering or making of improper payments by employees of Magyar Telekom to foreign officials, foreign political parties, and officials of foreign political parties in Macedonia and the accounting and record-keeping associated with these improper payments in violation” of the FCPA’s books and records provisions.” Yet one struggles to find any facts that would justify criminal charges against Deutsche Telekom. The DOJ has said in the past that it “does not prosecute corporations based on the acts of a single rogue employee.” Yet all one learns from reading the NPA is that a Deutsche Telekom executive was a board member of Magyar Telekom and one of its subsidiaries and that the executive had passive knowledge of the scheme and later learned of the Magyar Telekom executives circumvention of Magyar Telekom’s internal controls. In all other respects, Deutsche Telekom’s criminal and civil exposure appears to be based on a strict liability like theory in that Magyar Telekom’s financial results were incorporated into Deutsche Telekom’s for purposes of financial reporting.
DOJ
The DOJ enforcement action involved a criminal information (here) against Magyar Telekom resolved through a deferred prosecution agreement (here) as well as a non-prosecution agreement (here) with Deutsche Telekom.
Criminal Information
The information focuses on conduct in Macedonia and Montenegro.
Macedonia
As to Macedonia, the information alleges as follows. “During 2005 and 2006, certain executives then employed by Magyar engaged in a course of conduct with consultants, intermediaries and other third parties, including contracting through sham contracts to pay an aggregate amount of €4.875 million to
the Cypriot Shell Company [a shell company controlled by Greek Intermediary #1 (an individual who assisted Magyar Telekom in its dealings with Macedonian government officials), Greek Intermediary #2 (an individual who assisted Magyar Telekom in its dealings with Macedonian government officials), and Greek Intermediary #3 (an individual who assisted Magyar Telekom in its dealings with Macedonian government officials) that executed contracts with, submitted paperwork to, and received payments from, Magyar Telekom and its subsidiaries]
and one of its affiliates, under circumstances in which they knew, or were aware of a high probability that circumstances existed in which, all or a portion of the proceeds of such payments would be offered, given, promised or paid, directly or indirectly to
Macedonian Government Official #1 [a high-ranking government official with responsibility related to telecommunications laws and regulations and a leader of Macedonian Political Party A],
Macedonian Government Official #2 [a high-ranking government official with responsibility for telecommunications laws and regulations and a leader of Macedonian Political Party B],
Macedonian Political Party A, and/or Macedonian Political Party B [collectively political parties in the Macedonian governing coalition each representing a traditional ethnic group in Macedonia]
with the intention of obtaining business and advantages for Magyar Telekom. In addition, Macedonian Political Party B was offered the opportunity to designate the beneficiary of a business venture in exchange for the party’s support of Magyar Telekom’s desired benefits.”
According to the information, in early 2005, the Macedonian Parliament enacted a law designed to liberalize the telecommunications market in a manner that would have been unfavorable to Magyar Telekom. Specifically the law authorized the telecommunications regulatory bodies in Macedonia to hold a public tender for a license to operate a third mobile telephone business that would directly compete in Macedonia against Magyar Telekom’s Macedonian subsidiary, MakTel, and imposed increased frequency fees and other regulatory burdens. According to the information, certain Magyar Telekom executives and the Greek Intermediaries met with Macedonian Official #1 and others to “inform them that a third mobile license was not acceptable.”
According to the information, certain Magyar Telekom executives approved and executed two secret agreements with Macedonian Official #1 to delay or preclude the issuance of a third mobile telephone license and to mitigate the other adverse effects of the new law, including not requiring MakTel to pay the full amount of the increased frequency fee. The information alleges, among other things, that an e-mail was sent to a Macedonian government official “at his U.S. based e-mail address” that “was passed through, stored on, and transmitted from servers located in the United States” and that a MakTel executive received an e-mail discussing the secret agreements in his “Hotmail email account, which passed through, was stored on, and transmitted to servers located in the United States.”
The information alleges that between 2005 and 2006 Magyar Telekom received the benefits promised in the agreements and that Magyar Telekom executives authorized MakTel and other Magyar Telekom subsidiaries to enter into a series of sham contracts and to pay an aggregate amount of € 4.875 million under those contracts to the Cypriot Shell Company and one of its affiliates, under circumstances in which the Magyar Telekom Executives knew, or were aware of a high probability that circumstances existed in which, all or a portion of the proceeds of such payments would be offered, given, promised, or paid, directly or indirectly to Macedonian government officials.
The information alleges that following the sham contracts “the Macedonian government delayed the introduction of a third mobile telephone competitor until 2007 and reduced the frequency fee tariffs imposed on Magyar Telekom’s Macedonian subsidiary, MakTel.”
According to the information, “the existence and true purpose of the agreements were unknown to anyone within Magyar Telekom and Deutsche Telekom other than [the two executives] and a relatively small number of additional participants.” In fact, the information alleges that the two executives, assisted by Greek Intermediary #1, circumvented Magyar Telekom’s internal controls by, among other things, backdating contracts or creating other fabricated documents.
Nevertheless the information alleges as follows. “The payments made under these sham contracts were recorded on Magyar Telekom’s books and records in a manner that did not accurately reflect the true purposes of the contracts under which they were made, and the false books and records were consolidated into DT’s financial statements.”
Based on the above allegations as to Macedonia, the information charges FCPA anti-bribery violations and FCPA books and records violations.
Montenegro
The information states as follows. “In October 2004, the Government of Montenegro issued a tender to privatize its approximately 51% stake in the state-owned telecommunications company TCG [Telekom Crne Gore A.D.]. Magyar Telekom submitted a bid that sought to obtain a super-majority ownership stake, consisting of the government’s 51% share, plus enough additional minority shares from private investors to give Magyar Telekom ownership of at least two-thirds of TCG.” According to the information, in March 2005 Magyar Telekom succeeded in acquiring an approximately 73% stake in TCG, and after the Government of Montenegro facilitated Magyar Telekom’s acquisition of shares of TCG from minority shareholders, certain Magyar Telekom executives caused Magyar Telekom, TCG, and/or its affiliates to enter into four contracts that purported to relate to the TCG acquisition and/or Magyar Telekom’s operations in Montenegro, but under which no valuable performance was actually rendered. The information alleges that “payments under those contracts were not recorded accurately on Magyar Telekom’s or Magyar Telekom’s subsidiaries’ books and records.”
According to the information, “the payments under the four contracts … were recorded on Magyar Telekom’s books and records, or those of certain of Magyar Telekom’s subsidiaries, in a manner that did not accurately reflect the true purposes of the contracts under which they were made, and the false books and records were consolidated into Magyar Telekom’s and DT’s financial statements.”
Based on the above conduct as to Montenegro, the information charges FCPA books and records violations.
DPA
The DOJ’s charges against Magyar Telekom were resolved via a deferred prosecution agreement. Pursuant to the DPA, Magyar Telekom admitted, accepted and acknowledged “that it is responsible for the acts of its officers, employees, agents, and those of Magyar Telekom’s subsidiaries as charged in the Information.”
The term of the DPA is two years and it states that the DOJ entered into the agreement based on the following factors.
(a) following reports by the company’s auditors, Magyar Telekom made a timely and voluntary disclosure to the DOJ and SEC about potential misconduct;
(b) over the course of several years, Magyar Telekom’s audit committee led a thorough global internal investigation concerning bribery and related misconduct;
(c) Magyar Telekom’s audit committee reported its findings to the DOJ and SEC;
(d) the pervasiveness of the scheme, the involvement of a number of now-former senior managers at Magyar Telekom and certain of its subsidiaries , and conduct by some of those employees designed to obstruct the audit committee’s investigation;
(e) Magyar Telekom undertook remedial measures, including the implementation of an enhanced compliance program, and agreed to undertake further remedial measures; and
(f) Magyar Telekom agreed to continue to cooperate with the DOJ in any ongoing investigation of the conduct of Magyar Telekom’s current and former employees, agents, consultants, contractors, subcontractors, and subsidiaries relating to violations of the FCPA.
As detailed in the DPA, the advisory Sentencing Guidelines range for the charges at issue was $72.5 million – $145 million. Pursuant to the DPA, Magyar agreed to pay $59.6 million (18% below the minimum Guidelines range). According to the DPA, this amount was “appropriate given the nature and extent of Magyar Telekom’s cooperation in this matter and the remediation undertaken by Magyar Telekom.”
Pursuant to the DPA, Magyar Telekom represented that “it has implemented and will continue to implement a compliance and ethics program designed to prevent and detect violations of the FCPA” and related laws throughout its operations. The specific compliance provisions are set forth in an attachment to the DPA. In addition, Magyar Telekom agreed to “report to the DOJ annually during the term of the Agreement regarding remediation and implementation of the compliance measures” set forth in the attachment. As is common in FCPA DPA’s Magyar Telekom expressly agreed “that it shall not [directly or indirectly through others] make any public statement, in litigation or otherwise, contradicting the acceptance of responsibility by Magyar Telekom” of the above described facts.
The DOJ’s enforcement action also included a non-prosecution agreement against Deutsche Telekom. It states that the DOJ “will not criminally prosecute Deutsche Telekom … for any crimes … related to the offering or making of improper payments by employees of Magyar Telekom to foreign officials, foreign political parties, and officials of foreign political parties in Macedonia and the accounting and record-keeping associated with these improper payments in violation” of the FCPA’s books and records provisions.
The DOJ agreed to enter into the NPA based on the following factors: “(a) DT’s timely, voluntary, and complete disclosure of the facts [described below]; (b) DT’s thorough cooperation with the DOJ and SEC; and (c) DT’s remedial efforts already undertaken and to be undertaken, including enhancements to its compliance program …”.
The NPA relates only to conduct in Macedonia and the NPA contain similar facts as described above. The NPA also states that a DT Executive was a board member of Magyar Telekom and a MakTel mobile subsidiary. According to the NPA, the “DT Executive supported” Magyar Telekom entering into an agreement described above and the DT executive was aware an executed agreement “was not kept in Magyar Telekom’s books and records.” As to the sham contracts with Greek Intermediaries used to circumvent Magyar Telekom’s internal controls and to avoid detection, the NPA states that the DT Executive “later learned of these contracts and the circumstances in which they were executed.”
Under the section heading “Impact on DT’s Books and Records,” the NPA states as follows. “Magyar Telekom recorded the payments under [the sham contracts] on its books and records in a manner that did not accurately reflect the true purpose of the contracts. The false entries in Magyar Telekom’s books and records were consolidated into the books and records of DT, which reported the results of Magyar Telekom’s operations in its consolidated financial statements.”
The NPA has a term of two years and, as is standard, DT agreed not to make any public statements contradicting the described facts. Under the NPA, DT agreed to pay a monetary penalty of $4.36 million.
See here for the DOJ’s release.
SEC
The SEC enforcement action involved a settled complaint against Magyar Telekom and Deutsche Telekom as well as a separate complaint against former Magyar Telekom executives.
The SEC’s settled civil complaint (here) against the companies involves “multiple violations” of the FCPA by Magyar Telekom and “corresponding violations of the books and records and internal controls provisions of the FCPA by Magyar Telekom’s parent company Deutsche Telekom.” The complaint concerns the same Macedonia and Montenegro schemes identified in the DOJ enforcement action.
In summary fashion, the SEC complaint alleges as follows. “During the relevant time period, Magyar Telekom and Deutsche Telekom lacked sufficient internal accounting controls to prevent and detect violations of the FCPA. As a result, the contracts described above [used in furtherance of the schemes] were not subjected to meaningful review, and substantially all of the amounts were paid without question, prior to the initiation of an internal investigation at the direction of the Audit Committee of Magyar Telekom. Magyar Telekom recorded the payments to third-parties under these contracts on its books and records in a manner that did not accurately reflect the true purpose of the contracts. The false entries in Magyar Telekom’s books and records were consolidated into the books and records of Deutsche Telekom, which reports the results of Magyar Telekom’s operations in its consolidated financial statements.”
Based on the above allegations, the SEC complaint charges FCPA anti-bribery, books and records and internal controls violations as to both the Macedonia and Montenegro conduct. As stated in the SEC’s release (here), without admitting or denying the allegations in the SEC’s complaint, Magyar Telekom agreed to settle the SEC’s charges by paying approximately $31.2 million in disgorgement and pre-judgment interest; Deutsche Telekom settled the SEC’s charges, and as part of a non-prosecution agreement with the Department of Justice agreed to pay a penalty of $4.36 million.
The SEC’s complaint (here) against the former Magyar Telekom executives, Elek Straub (former Chairman and CEO of Magyar Telekom) and Andras Balogh and Tamas Morvai (two former senior executives in Magyar Telekom’s Strategy Department), is also based on the same Macedonia and Montenegro schemes. In both schemes, the SEC alleged that the individuals authorized or caused the payments at issue with “knowledge, the firm belief, or under circumstances that made it substantially certain” that all or a portion of the money would be forwarded to foreign officials. The complaint also alleges that the individuals caused the payments to be falsely recorded in Magyar Telekom’s books and records.
In addition, the complaint alleges that the individuals “made false or misleading statements or omissions to Magyar Telekom’s auditors in connection with the preparation of the company’s financial statements.” Specifically, the SEC alleged that the individuals signed management representation letters or management sub-representation letters that contained false or misleading information. The complaint states as follows. “Had Magyar Telekom’s auditors known [the various facts falsified or concealed] they would not have accepted the management representation letters and other representations provided by Straub. Nor would the auditors have provided an unqualified audit opinion to accompany Magyar Telekom’s annual report.”
The SEC’s complaint against Straub, Balogh, and Morvai alleges that they violated or aided and abetted violations of the anti-bribery, books and records, and internal controls provisions of the FCPA; knowingly circumvented internal controls and falsified books and records; and made false statements to the company’s auditor. The SEC seeks disgorgement and penalties and the imposition of permanent injunctions.
Magyar Telekom’s release (here) (which per the DPA needed to be cleared by the DOJ) states as follows. “As previously disclosed, the Audit Committee of Magyar Telekom conducted an internal investigation regarding certain contracts relating to the activities of the Company and/or its affiliates in Montenegro and Macedonia that totaled more than EUR 31 million. In particular, the internal investigation examined whether the Company and/or its Montenegrin and Macedonian affiliates had made payments prohibited by U.S. laws or regulations, including the FCPA. The Company’s Audit Committee informed the DOJ and the SEC of the internal investigation. The DOJ and the SEC commenced investigations into the activities that were the subject of the internal investigation. The Company has previously disclosed the results of the internal investigation. As also previously disclosed, the Company’s Board of Directors approved an agreement in principle with the staff of the SEC to resolve the SEC’s investigation through a settlement.” The release further states as follows. “The final settlements recognize the DOJ’s and the SEC’s consideration of the Company’s self-reporting, thorough internal investigation, remediation and cooperation with the DOJ’s and the SEC’s investigations. The Company has undertaken several remedial measures to address the issues identified during the course of these investigations. These measures include steps designed to revise and enhance the Company’s internal controls, as well as the establishment of the Corporate Compliance Program. The Corporate Compliance Program promotes awareness of the Company’s compliance policies and procedures through training, the operation of a whistleblower hotline, and monitoring of, and communications with, employees and subsidiaries of the Company. The Company remains fully committed to responsible corporate behavior.”
Peter Clark (Cadwalader, Wickersham & Taft – here – a former DOJ FCPA Unit chief) represented Magyar Telekom. Debevoise & Plimpton attorneys Mary Jo White (here – the former U.S. Attorney for the S.D. of N.Y.) and Jonathan Tuttle (here) represented Deutsche Telekom.
Magyar Telekom and Deutsche Telekom Resolve $95 Million FCPA Enforcement Action – SEC Also Charges Former Magyar Executives
Hold the phone on the 2011 FCPA enforcement statistics.
Once again, the end of the year sees a telecom company resolving an FCPA enforcement action. In 2007, it was Lucent Technologies (see here and here); in 2009 it was UTStarcom (see here for the prior post); in 2010 it was Alcatel-Lucent (see here for the prior post); and in 2011 it is Magyar Telekom and Deutsche Telekom.
Earlier today, the DOJ and SEC announced (see here and here) parallel FCPA enforcement actions against Magyar Telekom (a Hungarian telecommunications company) and Deutsche Telekom (a German telecommunications company that is the majority owner of Magyar). Fines and penalties in the DOJ and SEC enforcement actions is approximately $95 million.
DOJ
The DOJ release states that the companies agreed to pay a combined $63.9 million criminal penalty to resolve an FCPA investigation into activities by Magyar Telekom and its subsidiaries in Macedonia and Montenegro.
The DOJ filed a three-count information (see here) against Magyar Telekom charging it with one count of violating the FCPA’s anti-bribery provision and two counts of violating the FCPA’s books and records provisions. The DOJ release notes that at the time of the charged conduct, Magyar Telekom’s American Depository Receipts (ADRs) traded on the New York Stock Exchange.
The DOJ’s release states as follows. “Magyar Telekom’s scheme in Macedonia stemmed from potential legal changes being made to the telecommunications market in that country. In early 2005, the Macedonian government tried to liberalize the Macedonian telecommunications market in a way that Magyar Telekom deemed detrimental to its Macedonian subsidiary, Makedonski Telekommunikacii AD Skopje (MakTel). Throughout the late winter and spring of 2005, Magyar Telekom executives, with the help of Greek intermediaries, lobbied Macedonian government officials to prevent the implementation of the new telecommunications laws and regulations. Magyar Telekom eventually entered into an agreement with certain high-ranking Macedonian government officials to resolve its concerns about the legal changes. In the secret agreement, a so-called “protocol of cooperation,” Macedonian government officials agreed to delay the entrance of a third mobile license into the Macedonian telecommunications market, as well as other regulatory benefits. Magyar Telekom executives signed two copies of the protocol of cooperation, each with high-ranking officials of the different ruling parties of Macedonia. The Magyar Telekom executives then kept the only executed copies outside of Magyar Telekom’s company records. According to court documents, in order to secure the benefits in the protocol of cooperation, the Magyar Telekom executives engaged in a course of conduct with consultants, intermediaries and other third parties, including through sham consultancy contracts with entities owned and controlled by a Greek intermediary, to pay €4.875 (approximately $6 million) under circumstances in which they knew, or were aware of a high probability that circumstances existed in which, all or part of such payment would be passed on to Macedonian officials. The sham contracts were recorded as legitimate on MakTel’s books and records, which were consolidated into Magyar Telekom’s financials. Deustche Telekom, which owned approximately 60 percent of Magyar Telekom, reported the results of Magyar Telekom’s operations in its consolidated financial statements. Additionally, the criminal information charges Magyar Telekom with falsifying its books and records in regard to its activity in Montenegro. According to the court filing, Magyar Telekom made improper payments in connection with its acquisition of a state-owned telecommunications company in Montenegro. These payments were documented on Magyar Telekom’s books and records through the execution of four bogus contracts. For example, two of the contracts were backdated and concealed the true counterparties, and no legitimate services were provided under the contracts even though the contracts were for €4.47 million.”
The criminal charges against Magyar Telekom were resolved via a deferred prosecution agreement (see here). Pursuant to the DPA, Magyar Telekom agreed to pay a $59.6 million penalty for its illegal activity, implement an enhanced compliance program and submit annual reports regarding its efforts in implementing the enhanced compliance measures and remediating past problems.
The DOJ also entered into a two-year non-prosecution agreement (see here) with Deutsche Telekom for its failure to keep books and records that accurately detailed the activities of Magyar Telekom. At the time of the conduct at issue, Deutsche Telekom’s ADRs traded on the NYSE. The NPA requires Deutsche Telekom to pay a $4.36 million penalty and to enhance its compliance program.
The DOJ release states as follows. “Both agreements acknowledge Magyar Telekom and Deutsche Telekom’s voluntary disclosure of the FCPA violations to the department and the leadership of Magyar Telekom’s audit committee in pursuing a ‘thorough global internal investigation concerning bribery and related misconduct.’ In addition, the agreements highlight that the companies have already undertaken remedial measures and have committed to further remedial steps through the implementation of an enhanced compliance program.”
SEC
Based on the same core conduct, the SEC also charged (see here for the complaint) Magyar Telekom and Deutsche Telekom. Magyar Telekom is charged with FCPA anti-bribery violations as well as books and records and internal controls violations. Deutsche Telekom is charged with FCPA books and records and internal controls violations.
Without admitting or denying the SEC’s allegations, Magyar Telekom and Deutsche Telekom consented to the entry of final judgments. Magyar Telekom agreed to settle the SEC’s charges by paying $31.2 million in disgorgement and pre-judgment interest.
The SEC also alleged in a separate complaint (see here) that the three former top executives at Magyar Telekom “orchestrated, approved, and executed” the Macedonia and Montenegro bribery schemes. Charged in the complaint are: Elek Straub (former Chairman and CEO); Andras Balogh (former Director of Central Strategic Organization); and Tamas Morvai (former Director of Business Development and Acquisitions).
The complaint alleges that the individuals violated or aided and abetted violations of the FCPA’s anti-bribery, books and records, and internal controls provisions; knowingly circumvented internal controls and falsified books and records; and made false statements to the company’s auditor. Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated as follows. “Magyar Telekom’s senior executives used sham contracts to funnel millions of dollars in corrupt payments to foreign officials who could help them keep competitors out and win business. They purposely structured the sham contracts to circumvent internal review, and when questions were eventually raised about their use of ‘consulting’ contracts, they reconfigured them as ‘marketing’ contracts to avoid scrutiny and prolong their scheme.” The SEC seeks disgorgement and penalties and the imposition of permanent injunctions against the individuals.
Stay tuned for additional analysis of the enforcement actions.
ABM Industries Discloses Merger Related Issue
One FCPA reform proposal is to amend the law to provide a period of repose following an acquisition. Championed by George Terwilliger (here – an FCPA practitioner at White & Case and former Deputy Attorney General) the idea, as Terwilliger explains in this piece “is that US companies, with notice to US enforcement authorities, would have a defined period after an acquisition in which to perform a rigorous FCPA compliance review of the acquired entity. If FCPA compliance issues were uncovered, the acquiring company would remediate them, and disclose both the existence of the problem and its remediation to the government. The acquiring company would be immune from civil or criminal enforcement as to matters uncovered during the review period, which could be on the order of 90 to 120 days.”
I was reminded of Terwilliger’s reform proposal when reading ABM Industries Inc. recent disclosure. Before getting to the disclosure, a bit of background. In December 2010, ABM Industries Inc. (a leading provider of facility services) announced its acquisition of The Linc Group LLC (“TLG”). (See here). ABM President and CEO Henrik Slisager described the acquisition as a “game changer” in that the transaction, among other things, would bring ABM “into the $70 billion government marketplace, where TLG brings broad experience and deep client relationships.”
According to the ABM, substantially all of its operations are conducted in the United States, but it does do business internationally through joint ventures. In ABM’s annual report filed last week (see here) the company disclosed as follows. “During October 2011, the Company began an internal investigation into matters relating to compliance with the U.S. Foreign Corrupt Practices Act and the Company’s internal policies in connection with services provided by a foreign entity affiliated with a Linc joint venture partner. Such services commenced prior to the Company’s acquisition of Linc. As a result of the investigation, the Company has caused Linc to terminate its association with the arrangement. In December 2011, the Company contacted the U.S. Department of Justice and the Securities and Exchange Commission to voluntarily disclose the results of its internal investigation to date. The Company cannot reasonably estimate the potential liability, if any, related to these matters. However, based on the facts currently known, the Company does not believe that these matters will have a material adverse effect on its business, financial condition, results of operations or cash flows.”
DOJ Guidance – Better Late Than Never, But Will It Matter?
The FCPA’s 1988 amendments required that the Attorney General, “after consultation with the [the SEC], the Secretary of Commerce, the United States Trade Representative, the Secretary of State, and the Secretary of the Treasury, and after obtaining the views of all interested persons through public notice and comment procedures, shall determine to what extent compliance with [the anti-bribery provisions] would be enhanced and the business community would be assisted by further clarification” of its various provisions. Among other things, Congress requested that the Attorney General consider issuing guidelines as to “general precautionary procedures [companies] may use on a voluntary basis to conform their conduct to the Department of Justice’s present enforcement policy …”.
Following the 1988 Congressional mandate, the DOJ did issue a formal notice inviting all interested persons “to submit their views concerning the extent to which compliance with [the anti-bribery provisions] would be enhanced and the business community assisted by further clarification of the provisions of the anti-bribery provisions through the issuance of guidelines.” However, the DOJ stated that “only 5 responses were received, and 3 of the responses were to the effect that guidelines were unnecessary” and based on this information it declined to issue FCPA compliance guidelines envisioned by Congress. In July 1990, the DOJ stated as follows. “After consideration of the comments received, and after consultation with the appropriate agencies, the Attorney General has determined that no guidelines are necessary…. [C]ompliance with the [anti-bribery provisions] would not be enhanced nor would the business community be assisted by further clarification of these provisions through the issuance of guidelines.”
Mr. Alderman Goes to Washington
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Richard Alderman is the Director of United Kingdom Serious Fraud Office, an agency (here) similar to the U.S. Department of Justice and the primary U.K. enforcer of the Bribery Act (as well as the country’s prior bribery laws). Last week, Alderman gave three speeches in Washington and this post contains excerpts from those speeches. In his remarks Alderman touched upon the following topics: SFO resources, current workload and enforcement priorities; differences between how the UK and US investigate and prosecute bribery actions; WikiLeaks and the Arab Spring; the demand side of bribery; individual prosecutions under the Bribery Act; adequate procedures under the Bribery Act (“let me emphasize this is a complete defense, it is not a matter of mitigation”) and the SFO’s active engagement approach; and merger and acquisition issues (“society benefits if an ethical corporation takes over and sorts out a corporation that has corruption problems”).
Trace Forum 2011 (here)
“I shall talk a little later about the Bribery Act but let me tell you first a little more about what the SFO has been doing in order to justify the recognition of the UK as an active enforcer. We are a comparatively small office and we devote a considerable amount of that resource to dealing with anti-corruption. We have about 80 frontline staff dealing with anti-corruption with a resource for this of some $7.5 million. Our resource in the SFO is also a flexible one and we can move additional resource into anti-corruption from other areas depending upon workload. Currently, our anti-corruption workload is dominated by pre-Bribery Act cases. That is likely to remain for some time. We have about 50 corruption cases (whether involving the public sector or private sector) under formal investigation or prosecution and, of course, a number of additional ones that we are looking at to see whether we should open an investigation. Although these figures may look low in terms of the figures of some other authorities, it is important to understand quite what they mean. All of these cases are actually large complex anti-corruption investigations reaching across many countries and many individuals and companies. Under our system, we have to conduct every investigation to the standards required by our Criminal Justice System and with the possibility of a contested trial before Judge and Jury very much in mind. This means that each case is very resource intensive because we have to ensure that all evidence is obtained in the appropriate way and is admissible in court. The resource that goes into these cases is very great and is the source of great concern to me. “
*****
“Another feature of our cases that you do not have [in the U.S.] is the ability of those under investigation and indeed other parties such as non-governmental organisations to challenge anything that the SFO does. We saw that, for instance, in the BAE case where the decision to terminate the Saudi investigation was challenged by two non-governmental organisations. Any interested party (and that is construed very widely) can go to court and require the SFO to give an explanation to the satisfaction of the court about what we are doing. We need to show that our actions are lawful and proportionate. It is a very important discipline in my jurisdiction and we are at all times very conscious of this.”
*****
“There are some particularly important issues under [the Bribery Act] for an audience based in the US. Let me talk first about the extended reach of the Bribery Act to foreign corporations that carry on business in the UK. We have received lots of questions about this and about the meaning of those very simple words “carrying on business in the UK. I know that there is the potential for much litigation on this issue. Nevertheless, I tell corporations that it will be very unwise of them to try to rely upon a very technical interpretation of the Bribery Act in order to persuade themselves that it is safe to carry on using bribery. I have said that they might be in for a very unpleasant surprise in a number of years time when our Supreme Court gives its views on this test. I say to corporations that the only safe way of doing business is not to use bribery.”
*****
The Bribery Act has a new offence aimed at senior officers of corporations who consent to or connive in bribery. I know that there are many who are worried about this offence, particularly if they happen to be Directors or Non-Executive Directors based in the UK and where their companies are high risk. You may find, for example, that some London executive or non-executive directors may be worried about their exposure if US corporations are found to have been involved in corruption. We are actively looking for cases where we can apply this provision. Society expects senior members of a corporation to be responsible for ensuring that there is a true ethical culture. They have a key responsibility here. My view is that if they find that their efforts to do this meet with resistance or no success then they should consider resigning and telling us about their concerns. Expressing doubts about the company’s culture but remaining a highly paid officer would not be sensible because this would seem to be a model case of conniving in bribery for the purposes of the legislation.”
*****
“Some cases may involve corruption under the old law. You will not be surprised, for example, to hear that we looking through Wikileaks and the other information becoming available as a result of the Arab Spring in order to see what corporations have been doing over a period of years. We are going to be very interested in the sorts of deals that are going to come to light and I am sure that this will be a fruitful source of work for us. The message from me is that if corporations are worrying about this, then they ought to come and talk to us now rather than wait for the dawn raid.”
Anti-Corruption Summit 2011 (here)
“What we have been doing is to encourage corporations to work together and with us and other authorities in order to try to work on the underlying problem. I have been very impressed by what a number of corporations have been doing. They come to me to tell me what they are doing because they are slightly nervous that the SFO will pick this up and may even start making enquiries or investigate. This is not what we want to do. If there is a genuine attempt being made to solve the problem of corruption then I want to let the corporations get on with that so far as possible and indeed to provide any help that I can in the SFO. We have had a number of discussions of this nature. I do not underestimate the difficulties here and the constraints. It appears to me though to be absolutely the right thing to do. This is because in my view one of the likely issues in the coming years is not going to be what we do about the supply side of bribery, but what happens about the demand side of bribery. It is an issue that I am concerned about in the SFO and one where I want us to contribute.”
*****
“The Bribery Act creates a new offence at the corporate level of failing to prevent bribery. The defence to this is that there are adequate procedures to prevent that bribery. Let me emphasise that this is a complete defence. It is not a matter of mitigation. If an act of bribery occurs somewhere in your worldwide corporation and you had adequate procedures, then no criminal offence has been committed. This is something that has been reassuring to corporations. Of course what this means is that there has been great interest in the meaning of adequate procedures. The guidance from our Ministry of Justice sets out the UK Government’s approach to this in considerable and to my mind, helpful detail. Let me though give you a flavour of what you might expect if you came to us to talk about your adequate procedures. I should add here that many corporations do that. You may find this surprising but we do have a regular succession of corporations coming to the SFO to seek our views on their procedures and what they are doing. We stress that we can give no guarantee and certainly no certificate to the effect that their procedures are adequate but we are able to give them helpful advice. The feedback we get is that these are positive and pragmatic discussions. Some of the themes you will hear from us will be these. First, what is the approach of the most senior management in the corporation? They set the lead. Employees of corporations are very shrewd. They know what really matters to top management. They will know if something matters or does not matter. We will want to know therefore what top management is doing in order to ensure that the importance of good ethical business is known to every member of that company. We hear for example of contracts that corporations do not enter into because they could be secured only by corruption. This is a good practical example of the importance placed upon anti-corruption. There are others as well. We also want to know about risk assessment. This is something that corporations ought to be doing anyway but my own perception is that this has been intensified because of the Bribery Act. How do you assess the risks in your corporation? Is this simply a paper and routine exercise or is it genuine? It certainly ought to be genuine because this could bring down your corporation if you get it wrong and overlook some key risk. We will want therefore to talk through your risk assessment process. We shall of course be particularly interested if you find you have a considerable problem about something that was not flagged up in the risk assessment. This may or may not mean that the risk assessment process was flawed. We want to know what you are doing about this and indeed how you are developing the risk assessment process in future. We will offer any thoughts we have about any risks you should be thinking about but are not. What we will also want to be sure about is this. Please take it from me that simply handing us a large pile of documents with lots of boxes ticked on checklists will not be enough to satisfy us that you have adequate procedures. That is a paper exercise. It is part of what is needed but only part. We shall want to know what lies behind this and what the real issues are. Personally, I believe we are not alone in wanting to know this. When we are talking about corruption with all the reputational issues that are involved here, senior management should actually be asking exactly the same questions that the SFO will be asking in this respect. I have mentioned that corporations come and talk to us about all of these issues. Please feel free to contact us if you would find this helpful in order to talk through what you are doing. It is not a threatening process and please do not worry that if you came to us and expressed a few doubts about whether your procedures are adequate that you would find yourself on the wrong end of a prosecution before you left the SFO building. This simply does not happen. The object of these discussions is to be constructive and supportive. I hope you will find that if you approach us.”
*****
“I want finally in this overview of what is happening, to talk about mergers and acquisitions. I know how important this subject is. Some time ago we said publicly in the SFO that we were prepared to assist corporations that were in the process of carrying out a merger or acquisition and discovered problems during the course of due diligence. We made this willingness clear about two years ago although I have to say that there was little take up at that stage. That seems to be changing now. I have been struck in recent months by the fact that a number of corporations have been to see us about some sensitive potential acquisitions where they are identifying some real issues about corruption during the course of due diligence. Ultimately, the decision about an acquisition is a commercial one and will involve an analysis of risk and reputation as well as many other issues. The corporation and its advisors though want to try to manage the regulatory risk so far as possible by seeking views from the SFO. We have been ready to engage in this. What we do is to talk to the corporation and its advisors about what they are finding and what they propose to do about it if the acquisition takes place. It is quite clear to me as a result of the discussions that a negative response from the SFO is sufficiently important to put the acquisition in jeopardy. On the other hand, a positive view from us on the basis of what the corporation intends to do could enable the acquisition to go ahead. My view on this, simply stated, is that society benefits if an ethical corporation takes over and sorts out a corporation that has corruption problems. It is something I am keen for the SFO to promote, so far as we legitimately can.
Risk Advisory Dinner (here)
“What we are trying to do with private sector corporations is to work on some real initiatives in particular countries and even particular areas such as ports in order to try to find ways of curbing the demand for these payments. This is not just a question of simply saying “no”; it is also a question of seeing what is the underlying problem (for example, public officials are not paid by the state and so are forced to demand bribes) and what can be done about these underlying causes. It is also a question of how we deal with governments and other authorities about these issues.”
*****
“I have said publicly that a high priority for us will be to find a foreign corporation with a UK business presence that has got involved in corruption in another country and has undermined a good ethical UK corporation. Those corporations have been within the SFO’s reach since July 1st as a result of the new Bribery Act. An English jury will take the view that there is a very clear UK public interest in bringing such corporations to a criminal court. It is a high priority for us.”