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Is This An FCPA Success Or Failure?

successfailure

In a recent investor conference call, Darren Jamison (President, CEO & Director of California-based Capstone Turbine Corporation) was asked about the status of an Ecuador deal – described as a “large megawatt opportunity” for the company.

Jamison stated:

“That deal has been put on hold for now. There’s another wave of corruption that unfortunately hit the Ecuadorian government. We’re hopeful that once things settle down, new folks will be put in place that, that opportunity will come back. But right now, I’d say that, that opportunity is on hold. And I will say that Capstone takes Foreign Corrupt Practices Act, or FCPA, very seriously. And we do have a zero-tolerance policy. So we do get into areas where there is potential corruption or graft, we have to separate ourselves from those opportunities.”

The question is posed: does this represent an FCPA success or failure? Who wins from Capstone Turbine’s decision? Who loses?

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Issues To Consider From The Key Energy Enforcement Action

Issues

This prior post summarized the recent Foreign Corrupt Practices Act enforcement action against Key Energy Services. This post continues the analysis by highlighting additional issues to consider.

Pre-Enforcement Action Professional Fees and Expenses

As highlighted in “FCPA Ripples,” settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from FCPA scrutiny or enforcement in this new era.

According to Key Energy’s 10-K filed in February 2015, the company had “legal expenses related to the FCPA investigation of $41.1 million.” Key Energy’s 10-K filed in February 2016 did not mention a specific figure, but merely stated that there “lower expenses related to our FCPA investigations compared to the prior year.”

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When A Company Pleads Guilty, But Individual Criminal Charges Fail

opposites

Occasionally, a post gets stuck in the pipeline, passed over by current events.

This is one such post, yet the substantive issues remains relevant.

This February 2016 Wall Street Journal article stated – regarding the government’s effort to find individuals criminally responsible for BP’s 2010 oil spill and how individuals criminally charged were found not guilty:

“the outcome of individual cases means BP is in the odd position of having pleaded guilty to crimes tied to charges against its employees that were dismissed by courts.”

As highlighted in this post, this is not exactly an odd position. Indeed, it occurs with some frequency in the Foreign Corrupt Practices Act context.

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Merely A Coincidence Or FCPA-Related?

Coincidence

Like many other laws, the Foreign Corrupt Practices Act has always had more of a “soft” enforcement impact than a “hard” enforcement impact. In other words, the FCPA will impact business operations (“soft” enforcement) even if the company is not the subject of an FCPA enforcement action or inquiry (“hard” enforcement).

It is often sound public policy for a company subject to the FCPA to make business decisions because of the threat of “hard” enforcement. Yet public policy issues arise when that business decision is the result of the threat of “hard” enforcement based on aggressive enforcement theories not subjected to any meaningful judicial scrutiny.

The risk/reward calculus of corporate leaders is a business judgment issue that the law clearly allows business leaders to make.

This prior post explored excessive risk aversion when Hercules Offshore abandoned a $92 million contract in Angola and posed the question of who really benefits from excessive FCPA risk aversion? A company’s shareholders certainly do not benefit.  The foreign country (including its government and citizens) would seemingly not benefit when an otherwise ethically sound company subject to the FCPA retreats from a foreign country.

Yet a troubling aspect of the current FCPA enforcement climate is that the enforcement agencies seem to view retreat from a foreign country that presents FCPA risk as a good thing – perhaps even a “remedial measure.”

For instance, in the Ralph Lauren FCPA enforcement action based on alleged conduct in Argentina (see here for the prior post), under the heading “remedial measures” the DOJ noted that the company “ceased retail operations in Argentina and is in the process of formally winding down all operations there.”

Likewise, in the Bio-Rad FCPA enforcement action based in part on alleged conduct in Vietnam (see here for the prior post) one factor the DOJ articulated as a basis for the NPA was the company “clos[ed] its Vietnam office after learning of improper payments by its Vietnam subsidiary.”

Notwithstanding the DOJ applauding the above examples, the fight against bribery and corruption is not advanced when ethically sound companies that are generally viewed as selling the best products and services retreat from foreign markets.

Yet, the remainder of this post highlights recent examples of retreat from foreign markets by companies that were recently under FCPA scrutiny or that remain under FCPA scrutiny.

Whether such retreats are merely a coincidence or FCPA-related is an open question.  However, if the latter, the below retreats are a significant public policy issue in this new era of FCPA enforcement.

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Cobalt International

For approximately four years Cobalt International Energy was under FCPA scrutiny concerning its business in Angola, specifically Blocks 9 and 21 of an oil and gas project offshore Angola.  As highlighted here, in January 2015 the company disclosed that it prevailed over the SEC and there would not be an FCPA enforcement action.

Nevertheless, Cobalt recently disclosed:

“The Angolan National Concessionaire Sociedade Nacional de Combustíveis de Angola – Empresa Pública (“Sonangol”) and Cobalt International Energy, Inc. … announced the signing of a Sale and Purchase Agreement for Sonangol to acquire all of Cobalt’s 40% participating interest in Blocks 21/09 and 20/11 offshore Angola (the “Blocks”) for $1.75 billion with an effective date of January 1, 2015. This transaction is subject to customary Angolan government approvals which are expected prior to the end of the year. The Sale and Purchase Agreement provides for a smooth transition to a new operator and underscores the parties’ commitment to attain the final investment decision for the Cameia development in Block 21/09 by year end 2015 …”.

In other words, Cobalt pulled out of the project that was the focus of its FCPA scrutiny.

Layne Christensen

As highlighted here, in October 2014, Layne Christensen resolved an FCPA enforcement action concerning alleged business practices in a variety of African countries. The alleged conduct involved the company’s minerals division.

Recently the company disclosed that its Minerals Services division plans to exist its Africa business.

General Cable

General Cable is currently under FCPA scrutiny for its alleged business practices in a number of countries including Thailand.

Recently the company disclosed that “it has completed the sale of its Thailand operations to MM Logistics Co. Ltd. for cash consideration of approximately $88 million.”

JPMorgan

Although not exactly “recent,” another example of risk aversion highlighted in “Foreign Corrupt Practices Act Ripples” relates to JP Morgan. In August 2013, the New York Times highlighted the company’s FCPA scrutiny based on alleged hiring practices in China.

As a result of JPMorgan’s FCPA scrutiny, the company withdrew from several lucrative financial deals. For instance, it was reported by the Wall Street Journal that JPMorgan “has withdrawn from underwriting midtier lender China Everbright Bank Co.’s $2 billion initial public offering in Hong Kong.” The reason given was that since its FCPA scrutiny surfaced, “deals have faced intense scrutiny from the U.S. bank’s compliance division.” Similarly, it was soon thereafter reported that JPMorgan “has pulled out of a $1 billion initial public offering of a Chinese chemical company and won’t seek a role in the IPO of a Chinese stateowned train maker, as the bank walks away from deals that could come under scrutiny from U.S. investigators probing its hiring practices in China.”

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