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“Corporate Bribery Is Not The Simple, Safe Issue It Seems At First Blush”

By on May 6, 2014 in Legislative History, Nigeria, Origins of FCPA Actions

I tend to read the news with Foreign Corrupt Practices Act goggles on.  It’s an occupational hazard that sometimes is annoying, but often rewarding.

Although the FCPA was not mentioned in a recent Wall Street Journal article “Can Moguls Untangle Nigeria’s Power Lines?,” the article is interesting from so many angles relevant to the issues discussed on this website and highlights that FCPA issues are multi-faceted legal and policy issues involving multiple actors and are often not as simple as some seem to suggest.

Indeed, the article reminded me of one of my favorite statements from the FCPA’s legislative history by Theodore Sorensen:

“Corporate bribery abroad is not the simple, safe issue it seems at first blush. […]  [T]here will be countless situations in which a fair-minded investigator or judge will be hard-put to determine whether a particular payment or practice is a legitimate and permissible business activity or a means of improper influence […]  Reasonable [persons] and even angels will differ on the answers to these and similar questions. At the very least such distinctions should make us less sweeping in our judgments and less confident of our solutions.”

(See here for the “Story of the Foreign Corrupt Practices Act”)

Prior to discussing the article, I want to make crystal clear that the recent Wall Street Journal article does not accuse any companies or individuals of any wrongdoing, nor am I. Rather, I am merely using the general issues discussed in the article to highlight various issues relevant to the FCPA and related issues.

The article highlights how Nigeria’s electrical system is dismal and in disrepair.  According to the article, “the result:  Nigeria produces less than half as much electricity as North Dakota for 249 times more people.  Blackouts strike 320 days a year.”  If the electrical system is modernized, the article notes, “airlines will be able to land after sunset” and “schoolchildren will do their homework after dark.”

Let’s assume for purpose of this post, that in connection with the modernization of Nigeria’s electrical system, Company A involved in the project (a company that is otherwise viewed as selling the best product for the best price) makes an improper payment to a Nigerian “foreign official” to motivate the “foreign official” to select the company’s product for the modernization. This conduct leads to an FCPA enforcement action against Company A and those who claim all FCPA enforcement actions must involve a “victim” will say that the Nigerian people have been victimized, their human rights violated, and some will even request that the FCPA settlement amount be diverted to the Nigerian “victims.”

Without in any way countenancing the above hypothetical payments, I struggle to find any “victims” from a modernized Nigerian electrical system.

Some will say, but wait, because of the improper payment, inferior product will be incorporated into Nigeria’s electrical system (the lines will crumble, electrical fires will ensure, people will be injured).  At least so goes the conventional rhetoric surrounding bribery issues.  Yet recall that Company A is otherwise viewed as selling the best product for the best price and its goods are used the world over because they are the best.

Some will still say, but wait, because of the improper payment, the Nigerian government ended up paying more for the electrical upgrade then it would have paid but for the hypothetical improper payment.  But what if the Nigerian government selected Company A’s product because it was actually cheaper because, by selecting Company A, the Nigerian government availed itself of low interest loans from the Export-Import Bank of the U.S. which titled the balance in favor of Company A?

Again, without in any way countenancing the above hypothetical payments, I struggle to find any “victims” when a foreign government pays a lower price for a better product and indeed is incentivized to choose the product by the U.S. government.

What about the role of the U.S. government?

Is the U.S. government not seeking to influence an act or decision of a foreign official to favor a U.S. company through low interest loans?  After all, the Export-Import Bank low interest loans in Nigeria are in furtherance of President Obama’s $7 billion “Power Africa” initiative.  (See here).

As noted in this prior post, the U.S. government bears some responsibility when it comes to certain circumstances that result in FCPA scrutiny.  Indeed, several FCPA enforcement actions (see here, here and here for instance) have involved conduct in connection with U.S. government financing programs.  There is an irony of course in the U.S. government encouraging companies to do business in certain countries because it serves U.S. interests.  Then when the company does business in that country and encounters business conditions that the U.S. government no doubt knew it was going to encounter, the company then becomes the subject of a U.S. law enforcement inquiry.

Reading the recent Wall Street Journal article about transforming Nigeria’s electrical system with FCPA goggles on was rewarding in that it reminded me of the multi-faceted legal and policy issues involving multiple actors that are often relevant to the issues discussed on this website.

As Theodore Sorensen said “corporate bribery abroad is not the simple, safe issue it seems at first blush.”

Friday Roundup

By on September 20, 2013 in Compliance Defense, Danone, Enforcement Agency Speeches, Gabriel Resources, Industry Sweeps, Novartis, Origins of FCPA Actions, Voluntary Disclosure

A roundup of comments made yesterday by Charles Duross (DOJ FCPA Unit Chief) and Kara Brockmeyer (SEC FCPA Unit Chief) at the ABA’s National Institute on the Foreign Corrupt Practices Act in Washington, D.C.

Resources

Duross stated that the DOJ has “20 full-time prosecutors” focused on the FCPA, an “embarrassment of riches” in terms of resources compared to the past he said.  He indicated that the DOJ’s FCPA unit also makes frequent use of Assistant U.S. Attorneys, particularly in litigated cases.  Duross countered the notion that his unit sits “back on our hands” waiting for the next case to come in.  He stated that DOJ FCPA attorneys are “actively encouraged to follow-up on leads” and cited the BizJet enforcement action as an example where the case involved a voluntary disclosure, individuals cooperating, and charging individuals under seal (see here for a prior post).

According to Brockmeyer, the SEC FCPA Unit “has about three dozen” staff dedicated full-time to the FCPA.  This number is in addition to other enforcement attorneys in SEC offices outside of DC who may also work on FCPA cases.  Her best guess is that approximately 75% of SEC FCPA cases are handled in Washington, D.C. with the rest of the cases handled by regional offices (such as Fort Worth, Salt Lake City, etc.) with coordination from D.C.

Law Enforcement Partners

According to Duross, domestic law enforcement partners include U.S. Attorneys Offices and the FBI.  He also mentioned the IRS as a partner in FCPA cases and indicated that the Haiti Teleco case was an “IRS case from start to finish” and thus it was not surprising that the prosecutions in that case included money laundering charges.

Challenges

Despite an “embarrassment of riches” in terms of resources compared to the past, Duross indicated that the FCPA Unit, like other DOJ offices, “could always use more resources.”  He cited the following challenges in bringing FCPA cases:  foreign evidence collection, foreign laws concerning data privacy, foreign blocking statutes, and multi-jurisdictional issues.  As to the later, Duross stated that with increasing frequency more than one sovereign is involved in bribery and corruption investigations and that this is a “fact of life.”  He indicated that the U.S. has encouraged foreign jurisdictions to increase their involvement in this area and that since “we invited them to the party” “we must now deal with it.”

Brockmeyer cited the same general challenges as Duross in terms of enforcing the FCPA.

Case Origins

Brockmeyer indicated that the SEC FCPA Unit tracks its inventory of cases and she shared the following.  30% – 40% of cases come from corporate voluntary disclosures.  According to Brockmeyer, the number of voluntary disclosures has been steady compared to prior years, but as a percentage of the overall enforcement pie it is shrinking because the overall enforcement pie is growing.   Other sources Brockmeyer identified included whistleblower tips (including more sophisticated and detailed tips), enforcement attorneys reading the news, that a “pretty significant number of investigations” began as “spin-offs” of other investigations, and that “increasing number of referrals” are from foreign law enforcement authorities.”

Duross said that the DOJ FCPA Unit does not formally track its inventory like the SEC but his “general sense” was that voluntary disclosures are less than 50% of the inventory of cases.  According to Duross, voluntary disclosure as a source of FCPA cases “is less than people tend to think it is.”  According to Duross, the number of voluntary disclosures has remained steady, but most “get declined and nobody ever hears about them.”

Duross said that over the past several years, FBI agents and DOJ prosecutors (outside of the FCPA unit) have become more sophisticated about the FCPA and that more cases are coming to the FCPA Unit’s attention from others in the field who may spot FCPA issues in their other cases.  Brockmeyer agreed with this comment and stated that SEC enforcement attorneys handling typical accounting fraud cases are also now looking for indicia of FCPA issues.

Related to the above issue, both Brockmeyer and Duross talked about so-called “industry sweeps” (see here for the prior post).

According to Brockmeyer, an industry sweep is not a situation where an existing case may suggest a wider problem in an industry and lead to investigations of others.  Nevertheless, she did indicate that “very occasionally” the SEC does engage in industry sweeps, but “not as often as people think,” where the SEC, in its role as a regulator, sends out “high-level requests for information” to certain industries in which the SEC thinks there are FCPA risk factors.  As to the predication leading to such an inquiry, Brockmeyer said that such a sweep can result even if there is no specific tip as to the industry.  Nevertheless she stated that the SEC is not going to send out information letters “willy-nilly” because the SEC does recognize that when it sends out letters there are costs to the company’s associated with the request.

Duross agreed that following the evidence in one particular case to perhaps another company is not an “industry sweep,” it is simply following the evidence.

Future

According to Duross, the future of the DOJ FCPA’s unit is “bright,” there is a “tremendous pipeline of cases,” and that his unit continues “to do proactive cases” using all of the resources in its toolkit (i.e. wiretaps, etc.).

According to Brockmeyer, the SEC has become more focused on how compliance programs and internal controls are “intertwined.”  She indicated that companies have generally become more sophisticated when it comes to compliance programs, but that much work still needs to be done in monitoring compliance programs and how compliance can impact a company’s overall internal financial controls.

Other Issues

As to the “where else” question (see here for the prior post), Duross suggested that often company lawyers are seeking to over do it through a global search of operations for FCPA issues.  He discussed a case in which a company and its professional advisors came to a meeting with a global search plan and he said “no, no, no, that is not what I want.”  He indicated that the lawyers and other professional advisors in the room “looked unhappy,” but that the general counsel of the company was happy.  (For more on this dynamic, see this prior post).

As to a compliance defense, as I highlight in my article “Revisiting an FCPA Compliance Defense,” the DOJ already recognizes in various ways a de facto compliance defense to the FCPA.  Further support for this proposition is found in the following comment from Duross.  He indicated that a large company (he did not provide the company’s name – other than it would be recognizable to the audience) was a “serial reporter” of FCPA issues to the DOJ’s FCPA Unit.  Duross said that this company has a “good compliance program and system” in place and does “robust” internal investigations when issues arise.  Duross said that he and his unit have a “relationship of trust” with this company and its counsel and that “frankly, most of the time” the issue is “not a particularly large issue.”  According to Duross this company remediates the issue and then it “goes on its way.”

As to the media, Duross indicated that media reports (domestic and foreign) have led the DOJ to open up FCPA investigations.  He stated “what happens in China, doesn’t stay in China.”  Duross stated that while the media can be critical of the DOJ’s FCPA unit and its efforts, that is not necessarily a “bad thing” because “criticism of us can be useful and cause us to look inward.”  Duross indicated that “we should be held accountable for what we do – good and bad.”  Duross shared that one of his biggest surprises upon becoming FCPA Unit chief is realizing how the unit “operates under a microscope” which highlights the need for his unit “to have its A game” at all times.  Duross stated that media reporting of bribery and corruption issues can also spread a message of general deterrence.

Scrutiny Alerts

A roundup of the latest scrutiny alerts.  As Christopher Matthews at the Wall Street Journal’s Risk & Compliance Journal stated “if you’re a corruption probe enthusiast, the hits just keep coming out of China these days.”

Danone

As noted in this article, Dumex Baby Food Co., a subsidiary of France’s Danone SA, is “launching a probe of its infant-formula marketing after China’s state broadcaster alleged the formula maker pays hospital staff to use its products and influence sales.”  Danone has ADRs that are traded in the U.S.

Novortis

Novortis, already on the scrutiny list see here, was the focus of recent media articles (see here) suggesting that “it would investigate allegations published in a Chinese newspaper that its eye care unit Alcon bribed doctors.”  Novortis has ADRs that are traded in the U.S.

Gabriel Resources

Gabriel Resources, a Canada based company with shares traded “over the counter” in the U.S., was the focus of this article concerning allegations of bribery in Romania in connection with a proposed gold mine.

*****

A good weekend to all.

At The 11th Hour

By on August 12, 2013 in 1989 – 1997 Enforcement Actions, Advertising Industry, Arnold Foote, Arthur Klein, DOJ Enforcement Action, Eric Abrahams, FCPA Jurisprudence, FCPA Related Charges, Foreign Official, Jamaica, Origins of FCPA Actions, Statute of Limitations, Steven McKenna, Third Parties, Thomas Spangenberg, Young & Rubicam

[This post is part of a periodic series regarding “old” Foreign Corrupt Practices Act enforcement actions]

The 1989 Foreign Corrupt Practices Act enforcement action against advertising agency Young & Rubicam, Inc. (“Y&R”) and its executives Arthur Klein, Thomas Spangenberg and others is one of the more interesting enforcement actions of all-time.

For starters, the enforcement action had an unusual origin.  According to media reports, in connection with an unrelated tax fraud case against Robin Moore (the author of the “French Connection” and “The Green Berets”), law enforcement officials confiscated his diaries.  Moore was a friend of Jamaican Prime Minister Edward Seaga and the diaries led to the investigation of Y&R and its executives.

The indictment alleges a conspiracy between Y&R, Klein, Spangenberg and others to induce Eric Abrahams and Arnold Foote “in their official capacities with respect to the selection and retention of an advertising agency for the Jamaica Tourist Board” and to induce Abrahams and Foote “to use their influence with the Jamaica Tourist Board to affect and influence the decisions of the Board with respect to the selection and retention of an advertising agency.”

Eric Abrahams is described in the indictment as the Minister of Tourism of the Government of Jamaica and Arnold Foote is described as “a prominent Jamaican citizen with close political ties to the Jamaican Labor Party and to the Administration of Prime Minister Edward Seaga”.  As to Foote, the indictment further alleges as follows.  “Foote served as executive chairman of Martin’s Travel, an instrumentality of the Government of Jamaica, and he also acted in an official capacity on behalf of the Minister of Tourism and the Jamaica Tourist Board as an advisor to the Government of Jamaica with respect to tourism, advertising and public relations matters, including the selection and retention of an advertising agency for the Jamaica Tourist Board.

According to the indictment, the defendants “would and did arrange for and pay kickbacks” to Foote and through Foote, to Abrahams.  The indictment alleges that the “kickbacks and the manner in which they were paid would and did cause the Jamaica Tourist Board to make unnecessary and excessive expenditures for advertising services and deprived the Board of economically material information in its business dealings” with Y&R.

According to the indictment, as part of the conspiracy Robin Moore (described as a well-known author residing in Connecticut who had longstanding ties to the Island of Jamaica and was a close friend of Foote and Jamaican Prime Minister Seaga) and Frederick Sturges (described as a resident of Connecticut and an associate of Moore and Foote) “would and did act as middlemen and ‘go betweens’ for the communication of information and monies between and among the conspirators, and that certain kickback payments would be and were funnelled through bank accounts established and controlled by them.”

According to the indictment, “in order to disguise and conceal their unlawful activities, the conspirators would and did cause Y&R to enter into a contract with Ad Ventures, Ltd. a Cayman Island corporation created for the purposes of funneling kickbacks to Foote and Abrahams and affording Y&R an ostensibly legitimate reason for making such payments.”  According to the indictment, various means and devices were used to conceal the unlawful activities including: false statements to government investigators; testifying falsely before the Grand Jury; making some kickback payments in cash and others to a Cayman Islands bank account so as to make the tracing of funds more difficult; and Y&R failed to reflect the kickback payments on reports it filed with the DOJ pursuant to the Foreign Agents Registration Act.

In addition to the conspiracy charge, Y&R, Klein, Spangenberg – along with the “foreign officials” Abrahams and Foote – were also charged with violating RICO.  The predicate offenses alleged were multiple violations of the Travel Act.

The indictment further alleged that the defendants sought to buy the silence of various individuals who had threatened to expose the unlawful conduct.

Y&R, Klein and Spangenberg all pleaded not guilty and the case resulted in extensive media coverage.  In a statement, Y&R said that the criminal charges were “based on speculation and innuendo and [were] without substance or merit.”  A Y&R attorney (Thomas Barr of Cravath, Swaine and Moore) stated at the courthouse as follows.  “This is a lawsuit that involves characterization.  If you pull the characterization out, you haven’t got anything.”  Referring to the labeling of Foote in the indictment as a foreign official, Barr is quoted as follows.  “The reality is this.  Y&R makes very simple, conventional business arrangements in Jamaica.  By calling an advertising man a foreign official the prosecution has converted these charges into one of the most bizarre criminal allegations.”

According to media reports, many were shocked that Klein and Spangenberg were criminally charged.  Quotes to the media included the following.

“[Klein] is the straightest guy in the world.  I was absolutely shocked at the charges.  Of all the people I know in advertising, I don’t know anyone I’d least expect this to happen to.”

“Of all the people I’ve worked with, I’d rank them in the upper 10 percent for their ethical conduct.”

Y&R and Klein moved to dismiss the RICO charge.  Among other things, the defendants argued that the FCPA “cannot serve as a basis for a Travel Act violation, nor in turn as a predicate for a RICO violation.”  The court denied the motion to dismiss the RICO charge.  (See here for the decision).

The defendants also moved to dismiss the conspiracy charge concerning payments to Abrahams on the ground that prosecution of that aspect was time-barred.  The defendants argued that “Abrahams ceased to be Jamaica’s Minister of Tourism more than five years prior to the return of the indictment.”  The court noted that a conspiracy charge is timely if it alleges the commission of at least one overt act in furtherance of the conspiracy within the applicable five-year statute of limitations and rejected the defendants’ arguments.  The court stated as follows.

“Whether Abrahams withdrew from the conspiracy is a question of fact for the jury.  Nor does Abrahams’ resignation as Minister of Tourism necessarily end the alleged conspiracy or his participation in it.  The indictment charges overt acts committed in furtherance of a single conspiracy from 1984 until 1989.  The allegation of overt acts committed within five years meets the requirements of the statute of limitations.”

The defendants also moved for a bill of particulars requesting specific information as to particular allegations including: the facts which supported the allegations that Mr. Foote was a foreign official within the meaning of the FCPA.  The court stated that “adequate notice of the manner in which Mr. Foote obtained his status as a foreign official” was provided in the indictment.  [See the above description of Foote’s status]. 

Of further interest from the pre-trial proceedings, the DOJ moved to make an opening statement at trial.  The opinion states as follows.

“The government claims that the complexity of this case, both factually and legally, as well as the nature of the evidence to be presented warrant the need for opening statements.  First, the government argues that the term ‘foreign official’ as defined in the FCPA has a meaning broader than the ordinary meaning of the phrase.  Without categorizing the evidence for the jury, the government claims that the jury might misinterpret the significance of the evidence.  This amounts to a request to make a legal argument during opening statement which is precisely what should be avoided in opening statements.  Second, the government contends that a substantial portion of its case depends on ‘a complex confluence of circumstantial evidence’ which a jury may not understand if it is not allowed to make an opening statement.  However, ‘a mere recitation’ of what evidence is going to be presented does not necessarily ‘help jurors better understand the evidence when it is introduced.’  To go beyond that would risk stepping into the realm of legal argument which is not allowed.”

Shortly before the trial was to begin in February 1990, Y&R pleaded guilty (see here for the plea agreement).  Pursuant to the plea agreement, Y&R agreed to pay a $500,000 criminal fine.  Although not apparent from the plea agreement, Y&R pleaded guilty to one count of conspiracy to violate the FCPA.

If your only source of FCPA information is the DOJ’s FCPA website, this is where the story stops.  But the story does indeed continue.

The company issued the following press release on February 9, 1990.

“Young &  Rubicam Inc., announced today that it had reached an agreement with  the U.S. Attorney for the District of Connecticut under which the  government agreed to drop all RICO charges against the agency that had been brought in indictments on Oct. 6, 1989.  The charges were  made in connection with the agency’s successful attempts to obtain the advertising account of the Jamaica Tourist Board in 1981.

Further, the government dropped all the indictments charging that the agency was guilty of bribery of Arnold Foote, a Jamaican advertising executive, for the purposes of his bribing the Minister of Tourism, Eric Anthony Abrahams.  In addition, all  charges against Arthur Klein, an executive vice president of Young & Rubicam, and Thomas  Spangenberg, a former senior vice president of the agency  were dismissed.

The company, in order to put the case entirely behind it, agreed to plead guilty to conspiring to violate a section of the Foreign Corrupt Practices Act (FCPA) and accepted a fine of  $500,000.  The section of the Act under which the plea is made has been a controversial part of the law because it requires organizations and people who are placed in positions where criminal  activities may be taking place in a “reason to know” relationship with those activities, whether or not they, in fact, did know or if the events did or didn’t occur.  This section of the Act is no longer in the statute, having been removed by Congress in 1988.  Y&R was charged with events that allegedly took place in 1981 when this portion of the statute was in effect.  Ironically, if the case were brought today there would have been no such charge.

A Young & Rubicam spokesperson said, ‘We are particularly  pleased that one of Y&R’s finest individuals, Arthur Klein, has been cleared completely of all charges made against him.  The failed indictments caused Klein and his family extraordinary grief, and to  us this was the worst part of this entire procedure.  His complete exoneration is a cause for major celebration around Y&R.

The government no longer claims that the agency won the competition for the account on anything but the merits of its  presentation, or that Arnold Foote was a public official, as had  been charged.  To the best of Y&R’s knowledge, there is no  evidence that any monies were given to Abrahams.

For  its part, Young & Rubicam did agree that beginning in late 1981, some of its employees did on occasions hear reports of alleged  bribery efforts.  These rumors alleged that Foote, who had been  retained by Y&R to represent the agency in Jamaica, was using  money paid to him by the agency to bribe Abrahams.  Young &  Rubicam itself is not charged with paying bribes.  In fact, an  investigation by the agency in 1986 could find no evidence to support those rumors, and the government has conducted a four-year  investigation, and it has never proved that such bribes occurred.  Both of the individuals deny that any bribes were paid.  There is now no charge that any Young & Rubicam employee, past or present, knew enough ‘individually’ about these rumors to cause a violation.  Thus the agency agreed that because of that knowledge by ‘some’ of its employees it can be construed that it ‘technically’ entered into a “conspiracy.”

The  spokesperson stated, ‘In hindsight, we agree that an early investigation should have been carried out sometime during 1982 when these rumors began surfacing.  We did complete an investigation in 1986 and discovered no evidence of bribery.  The government in its four-year investigation has also not made such a discovery.  So, in  fact, we would have looked and found nothing.  But looking back, we agree that we should have done it in 1982; hence our guilty plea to that violation. ‘In fact we have been pressing since early October for an early decision so that the agency can put the matter  behind us and get on with our business.  This certainly allows us to  do just that.'”

[For on the FCPA’ original knowledge standard applicable to third-party payments, see this prior post.]

As to the “reason to know” standard, media reports quote U.S. Attorney Stanley Twardy as follows.  “The ‘reason to know’ plea meant that while no individual within Y&R knew enough to understand that a law was being violated, the cumulative knowledge of the group working on the account, who should have been in touch with each other, would have given the agency the requisite information.”

According to media reports, the DOJ’s case “fell apart” on the eve of trial “when Y&R’s attorneys submitted to the [DOJ] a document that had been subpoenaed two years ago and that made clear, in the words of U.S. Attorney Twardy, “that Arthur Klein was not aware of what was going on.”  Twardy further stated that the document “suggested quite strongly that Spangenberg did not have criminal intent.”  Twardy further stated:  “We got a transcript of a tape of a phone conversation that made it obvious that the accusations against Mr. Klein were totally without merit.  Ironically, we’d been trying for two years to get a hold of that tape.”  Another media report quoted Twardy as follows.  “The transcript of the conversation was extremely exculpatory, meaning it gave evidence that Klein and in turn Spangenberg were not knowledgeable of the illegal aspects of the payments …”.

Friday Roundup

By on August 2, 2013 in AB InBev, Avon, Baxter International, ENI, FCPA Statistics, GlaxcoSmithKline, Internal Investigation Issues, Lingua Franca, Multimedia, Origins of FCPA Actions, Pharmaceutical Industry, Wal-Mart, Weatherford International, Year in Review 2013

Scrutiny alerts, misleading yet interesting, the flip side, and for the reading stack.  It’s all here in the Friday roundup.

Scrutiny Updates

Baxter International

The Wall Street Journal reports that Baxter International “investigated a joint venture in China and discovered expense violations there last year.”  According to the article, Baxter took action after employees of Guangzhou Baxter Qiaoguang Healthcare Co., reported problems internally in July 2012.  According to the article, similar allegations were made in July 2013 that “employees at Baxter’s joint venture paid travel agencies for arranging conferences between 2011 and 2012 for Chinese health officials.”  According to the article, “employees at several hotels identified as the conference sites in the documents said they had no records of the conferences.”

ENI

IntelliNews report here:  “ENI SpA  chief executive Paolo Scaroni will become a target of a major US Foreign Corruption Practices Act investigation by the US Department of Justice and the US Securities Exchange Commission in connection with an Algerian bribery scandal, [Italian] judicial sources said.” Among other things, the article states: “Judicial sources in Milan said they have compelling evidence Scaroni had personal knowledge of the bribe paid by SAIPEM and that SAIPEM is directly controlled by ENI and its management.”

As noted in this previous post, Eni has ADRs registered with the SEC.  In 2010, Eni resolved (see here) an SEC FCPA enforcement action concerning Bonny Island, Nigeria conduct.  In resolving the action, Eni consented to the entry of a court order permanently enjoining it from violating the FCPA’s books and record and internal controls provisions.

Weatherford

The company recently disclosed as follows concerning its long-lasting FCPA scrutiny.

“During the quarter ended June 30, 2013, negotiations related to the oil-for-food and FCPA matters progressed to a point where we recognized a liability for a  loss contingency that we believe is probable and for which a reasonable estimate  can be made.  Certain significant issues remain unresolved in the negotiations and, if these issues are not resolved to the Company’s satisfaction,  negotiations may be discontinued and such unresolved issues may ultimately  impact our ability to reach a negotiated resolution of the matters.  At this  time, the Company estimates that the most likely amount of this loss is $153 million.”

A $153 million settlement would be the eighth largest in FCPA history.

Avon

The company recently disclosed as follows concerning its long-lasting FCPA scrutiny.

“As previously reported in August 2012, we are in discussions with the SEC and the DOJ regarding resolving the government investigations. Our factual presentations as part of these discussions are substantially complete. In June 2013, we made an offer of settlement to the DOJ and the SEC that, among other terms, included payment of monetary penalties of approximately $12. The DOJ and the SEC have rejected the terms of our offer. Although we expect that the DOJ and the SEC will make a counterproposal to our offer, they have not yet done so. Our discussions with the DOJ and the SEC are ongoing.

There can be no assurance that a settlement with the SEC and the DOJ will be reached or, if a settlement is reached, the timing of any such settlement or the terms of any such settlement. We expect any such settlement will include civil and/or criminal fines and penalties, and may also include non-monetary remedies, such as oversight requirements and additional remediation and compliance requirements. We may be required to incur significant future costs to comply with the non-monetary terms of any settlement with the SEC and the DOJ. Under certain circumstances, we may also be required to advance significant professional fees and expenses to certain current and former Company employees in connection with these matters. Until any settlement or other resolution of these matters, we expect to continue to incur costs, primarily professional fees and expenses, which may be significant, in connection with the government investigations.
At this point we are unable to predict the developments in, outcome of, and economic and other consequences of the government investigations or their impact on our earnings, cash flows, liquidity, financial condition and ongoing business.  However, based on our most recent discussions with the DOJ and the SEC, the Company believes that it is probable that the Company will incur a loss upon settlement that is higher than the offer made by the Company of approximately $12, which was accrued by the Company as of June 30, 2013. We are unable to reasonably estimate the amount of any additional loss above the amount accrued to date; however it is reasonably possible that such additional loss will be material.”

Owens-Illinois

The beverage company recently disclosed as follows.

“The Company conducted an internal investigation into conduct in certain of its overseas operations that may have violated the anti-bribery provisions of the United States Foreign Corrupt Practices Act (the “FCPA”), the FCPA’s books and records and internal controls provisions, the Company’s own internal policies, and various local laws. In October 2012, the Company voluntarily disclosed these matters to the U.S. Department of Justice (the “DOJ”) and the Securities and Exchange Commission (the “SEC”). The Company intends to cooperate with any investigation by U.S. authorities. On July 18, 2013, the Company received a letter from the DOJ indicating that it presently did not intend to take any enforcement action and is closing its inquiry into the matter. The Company is presently unable to predict the duration, scope or result of any investigation by the SEC or whether the SEC will commence any legal action.”

AB InBev

The beverage company recently disclosed as follows.

“As previously disclosed, we have been informed by the SEC that it is conducting an investigation into our affiliates in India, including our non-consolidated Indian joint venture, InBev India Int’l Private Ltd, and whether certain relationships of agents and employees were compliant with the FCPA. We continue to cooperate in this investigation and have been informed by the Department of Justice (DOJ) that it is also conducting a similar investigation. Our investigation into the conduct in question is ongoing and we are cooperating with the SEC and the DOJ.”

Misleading Yet Interesting

Perhaps one reason for why there appears to much confusion about the FCPA and FCPA enforcement is due to the vast amount of misleading information in the public domain concerning the FCPA.

This recent article in the Economic Times of India concerning Wal-Mart is an instructive example.

Stating that the FCPA is a “law that prohibits American companies and their foreign subsidiaries from bribing officials” is not a completely accurate statement concerning the scope of the law.  Stating that “the anti-bribery provisions of the FCPA are enforced by the Department of Justice and the accounting provisions by the Securities and Exchange Commission” is not completely accurate either.  The SEC can also bring civil actions for FCPA anti-bribery violations and the DOJ can also bring criminal actions for wilful violations of the accounting provisions.

“In 2008, for example, Siemens paid a fine of $1.6 billion, the largest ever for an FCPA violation.”  This is a false statement.  While the Siemens enforcement action is indeed the largest in FCPA history in terms of fine and penalty amount, the amount was $800 million.”

Citing a source that says Wal-Mart’s FCPA scrutiny could result in an enforcement action “between $4.5 billion and $9 billion” is outrageous beyond belief.

Despite its deficiencies, the article highlights an interesting tension between conducting a thorough internal investigation and the treatment of employees.  The article states:

“The long shadow of Bentonville, channelled by the permanent gaze of investigators, is causing angst among the Indian staff of Walmart. A company official quoted earlier says the army of investigators, who enjoy sweeping powers to seize documents and equipment of the staff, are seen by many employees as intrusive and as an extra-judicial authority in the office. For example, the investigators scan even the couriers sent out by the staff. The official quoted above says the objective to ensure FCPA compliance is causing even minor situations to snowball.”

[…]

“In another case, Richard Leonard, a British citizen and general manager for asset protection in India, was on a store visit to Ludhiana, that too with Asia head Price, when he received a frantic call from a colleague that KPMG executives were trying to seize his desktop computer and break open his drawer. He immediately called other colleagues, asking them to stop the investigators from taking possession of his workstation. On his return to the office, Leonard dashed off e-mails to his bosses, including Walmart’s global head Mike Duke, on how employees like him have lost respect in the office and they are being portrayed as “criminals” by independent auditors.”

The article also states:

“Walmart is asking all India employees who have left or been suspended to sign a three-page ‘consultancy and cooperation agreement’, ostensibly with the FCPA fallout in mind. The agreement essentially requires them to make themselves available to provide any information or explanation of materials or documents requested by Walmart or any government authority. “The manner in which lawyers and audit team are going about doing their business, I have started believing that I have done something wrong,” says an employee.”

The Flip Side

This Forbes columnist asks – in the context of GlaxoSmithKline –  “is big pharma addicted to fraud?”

The question reminded me of the spot-on statement previously profiled here.  In a Law360 interview, Stephen Jonas (here), a partner in the Boston office of WilmerHale, was asked “what aspects of law in your practice are in need of reform, and why?”  He stated:

“One area greatly in need of reform, in my view, is the investigation of alleged health care fraud. This is an area in which the government regularly secures enormous settlements, starting in the tens of millions of dollars, and now exponentially expanding to the billions of dollars. Virtually every pharmaceutical company has now been subjected to one or more of these investigations and the results are predictable — enormous monetary contributions to the federal government. I find it hard to believe that wrongdoing is so rampant in this industry that every company has at least several hundred million dollars worth of it. The more likely answer is that these settlements often have far more to do with the leverage the government enjoys than the merits of what the company did or didn’t do. In order to stay in business, pharmaceutical and medical device companies must be able to sell products that can be paid for by Medicaid and Medicare. But a conviction for a health care offense would result in exclusion of the companies from federal health insurance and essentially a death sentence for their business. So they cannot afford to fight even the most debatable of charges. One of the results is that novel legal theories and sketchy evidence will never be tested in a court of law and negotiated settlements (under threat of exclusion) serve as “precedent” for the next case. That is a system badly in need of reform.”

Related to GSK, see here for my recent TV interview with LinkAsia.

Reading Stack

The always informative Miller & Chevalier FCPA Summer Review 2013.  As noted in the review “while investigation activity levels appear robust, the overall pace of  enforcement in 2013, in terms of resolved dispositions, remains at its lowest  level since 2006.”  This is correct, although difficult to square with a recent article from Compliance Week titled “FCPA Enforcement on the Rise Once Again.”  This is why an FCPA lingua franca is so important.  (See prior posts here and here).  Among other things, the Miller & Chevalier review contains useful charts including the nationality of companies under FCPA investigation and the countries implicated most frequently in FCPA enforcement actions.

Press coverage of BSG Resources and Beny Steinmetz (the wealthy Israeli for whom BSG Resources is named) regarding its business in Guinea continues.  (See this recent article from the U.K. Guardian).

An informative read from John Rupp (Covington) on how corporate interests and individual interests in a bribery investigation can collide and what corporate counsel can do to prevent this dynamic.

An interesting read from Trace Blog on how bribery schemes fall apart.  The post states:

“The reality is that many bribery schemes simply self-implode.  Think of it this way, once a bribe is paid, a corresponding debt is created to all who are involved in the scheme:  to the business partner who provides the funds; to the third party “consultant” who launders them through false pretense; to the accountant who cooks the books; to the bagman who delivers the payment; to each and every role player, big or small, who helps to bring about the bribe. At the time, loyalties may seem obvious: each co-conspirator will usually have a clear self-interest in keeping the bribery scheme hidden.  But as situations change, so too do incentives, and in business there are few guarantees as unsure as the honor among thieves.  […] Think of all the bribery stories that have come to light simply by their own accord.”

*****

A good weekend to all.

 

Deposition Prep That Lead To One Of The Most Notable FCPA Cases

By on February 19, 2013 in Origins of FCPA Actions, U.S. v. Kay

Foreign Corrupt Practices Act enforcement actions have had many origins.

As explored in this prior post, 2012 corporate enforcement actions originated from the following sources:  voluntary disclosures; disclosures following industry sweeps; and foreign law enforcement investigations.  Other origins of FCPA enforcement actions have been whistleblower or competitor complaints, media reporting – all of which may prompt enforcement agency inquiries –  and sting operations, as in the Africa Sting case (although, contrary to popular misperception this was not the first instance of a sting operation being used in an FCPA case – see here for the prior post).

FCPA enforcement actions can also originate in other interesting and unique ways.  The 2001-2002 enforcement action against David Kay and Douglas Murphy is an instructive example.

Kay was a Vice President of American Rice Inc., (“ARI”) and Murphy was the President and a Director of ARI.  The conduct at issue involved payments to Haitian officials in connection with the importation of rice and an effort to lower customs duties on the product.  The conduct lead to a DOJ enforcement action (see here) and an SEC component (see here) against the indivduals.  The DOJ enforcement action is well-known by FCPA followers given the litigation that ensued both at the trial court and appellate court levels.  (See here for previous posts concerning U.S. v. Kay).

Less well-known, but equally interesting, is the origins of the enforcement action.  As explained in the Fifth Circuit’s opinion (513 F.3d 432):

“In 1999 [American Rice, Inc. – Kay and Murphy’s employer] retained a prominent Houston law firm to represent it in a civil suit.  Preparing for this suit, the lawyers asked Kay for background information on ARI’s rice business in Haiti.  Kay volunteered that he had taken the actions [i.e., made or authorized payments to Haitian customs officials], explaining that doing so was part of doing business in Haiti.  Those lawyers informed ARI’s directors.  The directors self-reported these activities to government regulators.  The SEC launched an investigation into ARI, Murphy, and Kay.  Murphy and Kay were eventually indicted  …”

In short, one of the more notable FCPA cases originated from deposition preparation in a civil case.

The Kay and Murphy prosecution is also notable given that ARI, despite the positions of the Kay and Murphy, was never the subject of an FCPA enforcement action – DOJ or SEC.  The Kay and Murphy prosecutions occurred before non-prosecution and deferred prosecution agreements were introduced to the FCPA context in 2004 and if the Kay and Murphy prosecutions occurred today, ARI would almost certainly be part of the overall enforcement action.

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