Wal-Mart’s FCPA Scrutiny Grows
In December 2011, Wal-Mart made the following generic disclosure in a 10-K filing.
“During fiscal 2012, the Company began conducting a voluntary internal review of its policies, procedures and internal controls pertaining to its global anti-corruption compliance program. As a result of information obtained during that review and from other sources, the Company has begun an internal investigation into whether certain matters, including permitting, licensing and inspections, were in compliance with the U.S. Foreign Corrupt Practices Act. The Company has engaged outside counsel and other advisors to assist in the review of these matters and has implemented, and is continuing to implement, appropriate remedial measures. The Company has voluntarily disclosed its internal investigation to the U.S. Department of Justice and the Securities and Exchange Commission. We cannot reasonably estimate the potential liability, if any, related to these matters. However, based on the facts currently known, we do not believe that these matters will have a material adverse effect on our business, financial condition, results of operations or cash flows.”
Today, the New York Times ran a major story (here) titled “Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle” that relates to Wal-Mart’s prior disclosure. Was Wal-Mart’s disclosure to the DOJ, as stated in its December 10-K filing “voluntary”? According to the Times article, “in December, after learning of The Times’s reporting in Mexico, Wal-Mart informed the Justice Department that it had begun an internal investigation into possible violations of the Foreign Corrupt Practices Act.” (emphasis added).
The conduct at issue in the Times article relates to Wal-Mart’s largest foreign subsidiary, Wal-Mart de Mexico (“Wal-Mart Mexico), and suggests that Wal-Mart Mexico “orchestrated a campaign of bribery to win market dominance” and that the entity “paid bribes to obtain permits in virtually every corner” of Mexico.
According to the article, in 2005, “Wal-Mart dispatched investigators to Mexico City, and within days they unearthed evidence of widespread bribery. They found a paper trail of hundreds of suspect payments totaling more than $24 million. They also found documents showing that Wal-Mart de Mexico’s top executives not only knew about the payments, but had taken steps to conceal them from Wal-Mart’s headquarters in Bentonville, Ark.” According to the Times, Wal-Mart’s lead investigator, a former FBI agent, “recommended that Wal-Mart expand the investigation” but its own examination found that “Wal-Mart’s leaders shut it down.” The article states that “in one meeting where the bribery case was discussed, H. Lee Scott Jr., then Wal-Mart’s chief executive, rebuked internal investigators for being overly aggressive.”
The Times examination included more than 15 hours of interviews with Sergio Cicero Zapata a former executive who resigned from Wal-Mart Mexico in 2004 after nearly a decade in the company’s real estate department. The article states as follows. “In the interviews, Mr. Cicero recounted how he had helped organize years of payoffs. He described personally dispatching two trusted outside lawyers to deliver envelopes of cash to government officials. They targeted mayors and city council members, obscure urban planners, low-level bureaucrats who issued permits — anyone with the power to thwart Wal-Mart’s growth. The bribes, he said, bought zoning approvals, reductions in environmental impact fees and the allegiance of neighborhood leaders.”
Elsewhere, the Times article states as follows. “The idea, [Cicero] said, was to build hundreds of new stores so fast that competitors would not have time to react. Bribes, he explained, accelerated growth. They got zoning maps changed. They made environmental objections vanish. Permits that typically took months to process magically materialized in days. ‘What we were buying was time,’ he said. ” The article states that Cicero’s “allegations were all the more startling because he implicated himself” and “helped funnel bribes through trusted fixers, known as ‘gestores.'”
The times article contains several internal documents including Willkie Farr & Gallagher’s 2005 “investigative work plan” that called for tracing all payments to anyone who helped Wal-Mart Mexico obtain permits for the previous five years. The Times article states as follows. “In short, Willkie Farr recommended the kind of independent, spare-no-expense investigation major corporations routinely undertake when confronted with allegations of serious wrongdoing by top executives. Wal-Mart’s leaders rejected this approach. Instead, records show, they decided Wal-Mart’s lawyers would supervise a far more limited ‘preliminary inquiry’ by in-house investigators.”
According to the Times article, in 2006, Wal-Mart again considered a full investigation of the conduct in Mexico, but that in the end, the company largely delegated responsibility for the investigation to Wal-Mart Mexico. The Times article quotes a person with knowledge of the thinking of Wal-Mart executives as follows. “It’s a Mexican issue; it’s better to let it be a Mexican response.”
The Times article contains a detailed statement by Wal-Mart. Among other things, the Wal-Mart statement notes that “many of the alleged activities in the New York Times article are more than six years old” and that “in a large global enterprise such as Walmart, sometimes issues arise despite our best efforts and intentions.” The statement continues as follows. “When they do, we take them seriously and act quickly to understand what happened. We take action and work to implement changes so the issue doesn’t happen again. That’s what we’re doing today.”
See here for Wal-Mart’s video response to the New York Times article.
*****
The New York Times article paints a troubling picture for Wal-Mart that will likely occupy the company for years to come. In addition to the Mexico conduct, the DOJ and SEC will surely be interested in the response (or lack thereof) by company executives in Arkansas as well as the results of Wal-Mart’s worldwide review of its operations.
The DOJ and SEC frequently bring FCPA enforcement actions premised on payments to obtain foreign licenses, permits and the like. For instance see here (and embedded posts therein) for the numerous Panalpina related enforcement actions in 2010. See here at pages 972-975 for a listing of such cases 2007-2009.
This despite the following relevant history.
The FCPA’s original definition of “foreign official” was as follows. “… any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or any person acting in an official capacity for or on behalf of such government or department, agency or instrumentality. Such terms do not include any employee of a foreign government or any department, agency, or instrumentality thereof whose duties are essentially ministerial or clerical.”
This last sentence was the FCPA’s original (albeit indirect) facilitating payment or grease exception. The relevant House Report states in pertinent part as follows: “… a gratuity paid to a customs official to speed the processing of a customs document would not be reached by this bill. Nor would it reach payments made to secure permits, licenses, or the expeditious performance of similar duties of an essentially ministerial or clerical nature which must be performed in any event.”
When Congress amended the FCPA in 1988 it, among other things, amended the definition of foreign official by removing this indirect facilitating payment exception from the “foreign official” definition by creating a stand-alone facilitating payment exception currently found in the statute.
The relevant House Report indicates that Congress did not seek to disturb Congress’s original intent. “The policy adopted by Congress in 1977 remains valid, in terms of both U.S. law enforcement and foreign relations considerations. Any prohibition under U.S. law against this type of petty corruption would be exceedingly difficult to enforce, not only by U.S. prosecutors but by company officials themselves. Thus while such payments should not be condoned, they may appropriately be excluded from the reach of the FCPA. U.S. enforcement resources should be devoted to activities have much greater impact on foreign policy.”
Also relevant is the holding of U.S. v. Kay, the only appellate court decision to directly address payments outside the context of directly securing a foreign government contract. In Kay, the 5th Circuit said that such payments “could” violate the FCPA, but that “there are bound to be circumstances” in which such payments merely increase the profitability of an existing profitable company and thus, presumably does not assist the payer in obtaining or retaining business. The court specifically stated as follows. “If the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”
BizJet FCPA Enforcement Action Involves Executive Conduct
Yesterday the DOJ announced (see here) that BizJet International Sales and Support Inc. (see here – a Tulsa, OK based provider of aircraft maintenance, repair and overhaul services (MRO)) agreed to pay an $11.8 million criminal penalty “for bribing government officials in Latin America to secure contracts to perform aircraft MRO services for government agencies.”
The enforcement action involved a criminal information (here) against BizJet resolved through a deferred prosecution agreement (here). The DOJ release states that BizJet’s “indirect parent company, Lufthansa Technik AG” (see here – a German provider of aircraft-related services) also “entered into an agreement with the DOJ in connection with the unlawful payments by BizJet and its directors, officers, employees and agents.” The release states as follows. “The DOJ has agreed not to prosecute Lufthansa Technik provides that Lufthansa Technik satisfies its obligations under the agreement for a period of three years. Those obligations include ongoing cooperation and the continued implementation of rigorous internal controls.” There is no mention of Lufthansa Technik in the below described BizJet information.
Criminal Information
The information alleges that between 2004 – 2010 BizJet and others conspired “to obtain and retain MRO service contracts and other business for BizJet from foreign government customers, including the Mexican Federal Police, the Mexican President’s Fleet [the air fleet for the President of Mexico], Sinaola [the air fleet for the Governor of the Mexican State of Sinaloa], the Panama Aviation Authority, and other customers, by paying bribes to foreign officials employed by such customers.
The foreign officials included: Official 1 – “a Captain in the Mexican Federal Police,” Official 2 – “a Colonel in the Mexican President’s Fleet,” Official 3 – “a Captain in the Mexican President’s Fleet,” Official 4 – “employed by the Mexican President’s Fleet,” Official 5 – “a Director of Air Services at Sinaloa,” and Official 6 – “a chief mechanic at the Panama Aviation Authority.” According to the information, all of the above officials “had broad decision-making authority and influence over the award of contracts to MRO service providers.”
The information alleges conduct by several executives including: Executive A (a senior executive at BizJet from 2004 to 2010 who “was responsible for the operations and finances of BizJet”); Executive B (a senior executive at BizJet from 2005 to 2010 whose duties included “oversight of BizJet’s efforts to obtain business from new customers and to maintain and increase business with existing customers”); Executive C (a senior finance executive at BizJet from 2004 to 2010 who “was responsible for overseeing BizJet’s accounts and finances and the approval of payment of invoices and of wire and check requests”); and Sales Manager A (a regional sales manager at BizJet from 2004 to 2010 who “interacted with potential and existing customers and was responsible for obtaining business from new customers and maintaining and increasing business with existing customers”).
The information alleges that the purpose of the conspiracy – which BizJet accomplished through its employees including Executive A, Executive B, Executive C, and Sales Manager A – was to make bribe payments “which they called ‘commissions,’ ‘incentives’ or ‘referral fees’ to employees of customers, including foreign government customers, in order to obtain and retain for BizJet contracts to perform MRO services.” The information further alleges that these individuals attempted to conceal the payments to foreign officials by using Shell Company A (owned by Sales Manager A and run out of this personal residence) to funnel the payments from BizJet to the foreign officials and by making payments in cash delivered by hand to the foreign officials.
The overt acts section of the information begins as follows. In November 2005, “at a Board of Directors meeting of the BizJet Board, Executive A and Executive B discussed with the Board that the decision of where an aircraft is sent for maintenance work is generally made by the potential customer’s director of maintenance or chief pilot, that these individuals are demanding $30,000 to $40,000 in commissions, and that BizJet would pay referral fees in order to gain market share.”
The information then alleges various payments made to the above officials in return for the official’s help in securing contracts.
Based on the above conduct, the information charges one count of conspiracy to violate the FCPA.
DPA
The DOJ’s charges against BizJet were resolved via a deferred prosecution agreement. Pursuant to the DPA, BizJet admitted, accepted, and acknowledged that it was responsible for the acts of its officers, directors, employees and agents as charged in the Information.
The term of the DPA is three years and its states that the DOJ entered into the agreement based on the following facts: “(a) following discovery of the FCPA violations during the course of an internal audit of the implementation of enhanced compliance related to third-party consultants, BizJet initiated an internal investigation and voluntarily disclosed to the DOJ the misconduct …; (b) BizJet’s cooperation has been extraordinary, including conducting an extensive internal investigation, voluntarily making U.S. and foreign employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the DOJ; (c) BizJet has engaged in extensive remediation, including terminating the officers and employees responsible for the corrupt payments, enhancing its due diligence protocol for third-party agents and consultants, and instituting heightened review of proposals and other transactional documents for all BizJet contracts; (d) BizJet has committed to continue to enhance its compliance program and internal controls, including ensuring that its compliance program satisfies the minimum elements set forth in the” corporate compliance program set forth in an attachment to the DPA; and (e) “BizJet has agreed to continue to cooperate with the DOJ in any ongoing investigation of the conduct of BizJet and its officers, directors, employees, agents, and consultants relating to violations of the FCPA.” With so many executives generically identified in the information as being involved in the improper conduct, it will be interesting to see whether individual FCPA prosecutions are forthcoming.
As detailed in the DPA, the advisory Sentencing Guidelines range for the criminal charge was $17.1 million – $34.2 million. Pursuant to the DPA, BizJet agreed to pay $11.8 million (30% below the minimum amount suggested by the Guidelines). The DPA states as follows. “BizJet and the DOJ agree that this fine is appropriate given the facts and circumstances of this case, including the nature and extent of BizJet’s voluntary disclosure, extraordinary cooperation, and extensive remediation in this matter.”
Interestingly, the DPA was signed by the DOJ, BizJet and BizJet’s counsel – Jay Holtmeier (here – Wilmer Cutler Pickering Hale and Dorr) in late December 2011, but only made public yesterday.
The First Enforcement Action To Involve CFE
[This post is part of a periodic series regarding “old” FCPA enforcement actions]
There have been several repeat offenders in the FCPA’s history (see here for a prior post involving a few examples). What about repeat bribe recipients (at least at the entity level)? The entities at issue in the Bonny Island Bribery cases (see here) come to mind, but those separate enforcement actions were all based on the same core set of conduct.
This post discusses the first time, but not last, the Mexican entity Comision Federal de Electricidad (“CFE”) was at the center of an FCPA enforcement action.
In 1985, Silicon Contractors, Inc. (a Texas company engaged in the manufacture, sale and installation of radiation and fire-stop penetration seals for use in nuclear power plants) was charged in a criminal information with FCPA anti-bribery violations. According to the two-paragraph information, in June 1980 an officer of Silicon made a $132,000 payment to a person “knowing or having reason to know that said money would be offered, given or promised, directly or indirectly, to one of more officials of [CFE] to induce said officials to use their influence to affect an act of CFE, to wit, the awarding of a certain contract to manufacture and install radiation and fire-stop prevention seals for a nuclear power plant in Laguna Verde, Mexico.” The information alleged that CFE “was an instrumentality of a foreign government, to wit, an agency of the Republic of Mexico.” Silicon Contractors agreed to plead guilty and was ordered to pay a $150,000 criminal fine.
CFE – the entity at the center of the Silicon Contractors enforcement actions – is the same entity that was at issue in the Lindsey Manufacturing enforcement action and is at issue in the ongoing John Joseph O’Shea FCPA enforcement actions.
In addition to the criminal information, the DOJ also filed a civil injunction against Silicon, Diversified Group Inc. (a company that acquired the stock ownership of Silicon Contractors after the conduct at issue), Herbert Hughes (Chairman and President of Diversified Group), Ronald Richardson (Executive Vice President of Diversified Group), Richard Noble (former President of Silicon), and John Sherman. Silicon, Diversified, and the named individuals consented to an injunction permanently enjoining future FCPA violations.
See here for original source documents of the Silicon Contractors enforcement actions.
Bridgestone Corporation Resolves FCPA (and Antitrust) Enforcement Action
The DOJ announced yesterday (here) that “Bridgestone Corporation [a Japanese company that is the world’s largest manufacturer of tires and rubber products] has agreed to plead guilty and to pay a $28 million criminal fine for its role in conspiracies to rig bids and to make corrupt payments to foreign government officials in Latin America related to the sale of marine hose and other industrial products manufactured by the company.”
Part conspiracy to violate the Sherman Act and part conspiracy to violate the FCPA, the FCPA portion of the criminal information (see here) alleges that Bridgestone conspired with others to “obtain and retain for Bridgestone’s IEPD [International Engineered Products Department] business million of dollars of sales of marine hose and other industrial products by making corrupt payments to foreign government officials in Latin America and elsewhere.” Among other things, the DOJ alleged that Bridgestone: (i) “contracted with local sales agents in many of the Latin American countries where Bridgestone sought IEPD sales;” (ii) developed relationships with employees of the state-owned entities [PEMEX in Mexico is specifically mentioned] with which Bridgestone sought to do business;” (iii) “negotiated with employees of state-owned entities who were ‘foreign officials’ under the FCPA, in Mexico and other Lartin American countries, to make corrupt payments to those foreign officials to secure business for Bridgestone and BIPA [Bridgestone Industrial Products of America Inc. – Bridgestone’s U.S. subsidiary];” (iv) “approved the making of corrupt payments to the foreign officials through the local sales agents to secure business for Bridgestone and BIPA;” (v) paid local sales agents commissions within which BIPA included corrupt payments to be paid to the foreign officials; (vi) “coordinated these corrupt payments in Latin America through Bridgestone’s agents in the United States located in BIPA’s offices, including in Houston, Texas; and (vii) “took steps to conceal these payments, including, in some instances writing ‘Read and Destroy’ on facsimiles that contained information related to the corrupt payments and, in other instances using verbal communication rather than written communication to avoid creating written record.”
As to jurisdiction against Bridgestone, the DOJ asserts 78dd-3 and merely alleges that e-mails or faxes were sent to or from Japan to the U.S. in connection with bribery scheme. Interestingly, in the Africa Sting case, Judge Leon – in the first judicial test of 78dd-3 jurisdiction – seemed to reject the notion that such conduct, in and of itself, satisfied 78dd-3’s “while in the territory of the U.S.” requirement. See here for the prior post.
According to this filing, it would appear that approximately 80% of the $28 million fine is for the FCPA conduct. The guidelines range for the antitrust conduct was $6.7 million – $13.4 million. The guidelines range for the FCPA conduct was $40 million – $80 million.
In other respects, the DOJ release states as follows. “Under the plea agreement, the department recognized Bridgestone’s cooperation with the investigations, including conducting a worldwide internal investigation, voluntarily making employees available for interviews, and collecting, analyzing and providing to the department voluminous evidence and information. In addition, the plea agreement acknowledges Bridgestone’s extensive remediation, including restructuring the relevant part of its business, terminating many of its third-party agents and taking remedial actions with respect to employees responsible for many of the corrupt payments. Under the terms of the plea agreement, Bridgestone has committed to continuing to enhance its compliance program and internal controls. As a result of these mitigating factors, the department agreed to recommend a substantially reduced fine.”
In a press release (here), Bridgestone [BSJ] noted as follows. “Since May 2007, the DOJ has been investigating BSJ’s involvement in international cartel activities relating to the sale of marine hose. The DOJ has also investigated improper payments to government officials through local sales agents focusing primarily on Latin America in connection with certain industrial products. BSJ has cooperated fully in this matter. The DOJ has agreed that BSJ’s cooperation has been ‘extraordinary’. The DOJ has also acknowledged that BSJ has engaged in extensive remediation including dismantling the International Engineered Products Department, closing its Houston office of Bridgestone Industrial Products of America, Inc., terminating many of its third party agents, and taking remedial actions with respect to its employees. BSJ has also decided to withdraw from the marine hose business.” The release further notes that the $28 million fine is a “significant reduction from the applicable sentencing guidelines due to BSJ’s cooperation and remediation efforts.”
Ordinarily, extraordinary cooperation, remediation, etc. allow a company to settle an FCPA enforcement action via a non-prosecution or deferred prosecution agreement. Yet, the two-crime nature of the Bridgestone enforcement action may have prompted the DOJ to insist on a plea agreement to actual criminal charges.
As noted in the DOJ release, in 2008 Misao Hioki, the former general manager of Bridgestone’s international engineered products department, pleaded guilty to antitrust and FCPA conspiracy charges. See here for that prior enforcement action.
Since April, Japanese companies have contributed approximately $248 million to the U.S. Treasury for violating the FCPA (recognizing that the Bridgestone action also contains an antitrust component). See here for the prior JGC Corporation enforcement action. Another Japanese company, Sojitz Corporation, is also reportedly the subject of an FCPA investigation in relation to conduct in Bahrain. See here for the prior post.
You ask, doesn’t Japan have its own “FCPA-like” law? Yes, it does; however there is no criminal liability for corporations under the law. To learn more see here.
Finally, the FCPA Blog reports (here) that Bridgestone has ADRs traded in the U.S. over the counter in the pink sheets. In the past, the SEC has asserted FCPA books and records and internal controls jurisdiction over a company based on such a listing. Given that DOJ and SEC enforcement actions are typically announced on the same day, and given nothing was announced yesterday by the SEC, it is further interesting that the SEC has apparently chosen to sit out the Bridgestone matter.
Guilty Verdicts in Lindsey Case
This past October, I asked (here) what will happen to Lindsey Manufacturing Company?
The company (a privately held manufacturer of electrical transmission towers and related products that employs approximately 100 individuals) was indicted along with its President, Keith Lindsey, and its Chief Financial Officer, Steven Lee. [Others outside the company were charged as well in connection with the case].
The case represented a rare instance of a criminal indictment of a company in the FCPA context.
Yesterday, after a five week trial in federal court in the C.D. of California, a jury returned guilty verdicts.
As noted in this DOJ release, Lindsey Manufacturing, Lindsey and Lee were convicted of one count of conspiracy to violate the FCPA and five counts of FCPA violations. The conduct at issue focused on commission payments made by Lindsey Manufacturing to Enrique and Angela Aguilar (directors of Grupo Internacional de Asesores S.A.) that “would be used to pay bribes to Mexican officials in exchange for [Comisión Federal de Electricidad (CFE), a state-owned utility company] awarding contracts to Lindsey Manufacturing.” As noted in the DOJ release, Angela Aguilar was convicted of one count of money laundering conspiracy and the court entered a judgment of acquittal prior to the jury’s verdict on one substantive count of money laundering against her. Enrique Aguilar is currently a fugitive.
Sentencing for Lindsey Manufacturing, Lindsey and Lee is scheduled for Sept. 16, 2011. Angela Aguilar’s sentencing is scheduled for Aug. 12, 2011.
Reacting to the guilty verdicts, Assistant Attorney General Lanny Breuer stated as follows. ““Today’s guilty verdicts are an important milestone in our Foreign Corrupt Practices Act (FCPA) enforcement efforts. Lindsey Manufacturing is the first company to be tried and convicted on FCPA violations, but it will not be the last. Foreign corruption undermines the rule of law, stifling competition and the health of international markets and American businesses. As this prosecution shows, we are fiercely committed to bringing to justice all the players in these bribery schemes – the executives who conceive of the criminal plans, the people they use to pay the bribes, and the companies that knowingly allow these schemes to flourish. Bribery has real consequences.”
The Lindsey case attracted much interest as it was one of the “foreign official” challenges. See here for the full briefing and here for the written decision.
Prior to the jury verdicts, on Monday, Jan Handzlik (here – attorney for defendants Lindsey Manufacturing and Keith Lindsey) and Janet Levin (here – attorney for defendant Steve Lee) filed a motion to “Dismiss the Indictment with Prejudice due to Repeated and Intentional Government Misconduct.” Handzlik is quoted in this story by Samuel Rubenfeld at the Wall Street Journal as saying “we continue to believe in our clients’ innocence and will pursue our motion to dismiss the indictment on grounds of prosecutorial misconduct.” A hearing on that motion is set for June 6. Aguilar’s attorney, Stephen Larson (here) reportedly intends to seek a motion of acquittal as to the one charge his client was found guilty of.
Another case concerning alleged payments to CFE is pending in the Southern District of Texas against John Joseph O’Shea. See here for more.
So the question remains – what will happen to Lindsey Manufacturing?
As a small privately held company, Lindsey Manufacturing was able to aggressively mount a legal defense that publicly traded companies are unwilling, or some would say are logistically unable, to mount. Whether one agrees with certain of the judge’s pre-trial rulings or not, or whether one finds arguments about prosecutorial misconduct persuasive or not, the fact is, the Lindsey case, unlike the majority of FCPA enforcement actions, was subject to an adversary proceeding in which someone other than the enforcement agencies weighed in on the issues – and that is a good thing!