Friday Roundup
Chevron and others get the front-page treatment, the Aguilar prosecution is officially over as well, some additional FCPA compliance survey data, Wal-Mart civil suits continue to pile up, and Chinese state-owned enterprises continue their global M&A push, it’s all here in the Friday roundup.
Kazakhstan Customs Inquiry
In yesterday’s Wall Street Journal, Christopher Matthews and Joe Palazzolo broke a story (“Oil Giants Launch Bribe Probes”) about an apparent investigation regarding Kazakh customs issues involving members of Karachaganka Petroleum Operating BV (“KPO”) including Chevron Corp. and Eni SpA, as well as a logistics arm of Deutsche Post AG, DHL, which handles freight shipments for the group. (For more on KPO see here). According to tips discussed in the WSJ article, the “KPO joint venture authorized DHL to bribe Kazakh customs officials to ignore paperwork irregularities that could have delayed shipments.” The WSJ article discusses “the difficult choices companies face operating in developing countries” and notes that, according to a knowledgeable source, when KPO logistics officials ordered DHL representatives to “stop payments to customs officials” in March 2011 the “customs inspectors found problems with virtually very KPO shipment” and “nothing was cleared to pass” until DHL resumed the payments.
Payments in connection with foreign customs, licenses, permits and the like have been fertile ground for FCPA enforcement activity, although as noted in this recent post in connection with Wal-Mart’s potential FCPA exposure, it is an open question in many cases whether the conduct at issue is the type of conduct Congress sought to capture in passing the FCPA.
In 2007, Chevron resolved an enforcement action (here) involving Iraqi Oil for Food conduct and in 2010 Eni (and related entities) resolved an enforcement action (see here for the prior post) involving Bonny Island, Nigeria conduct. In addition, as highlighted in this recent post, Eni is also reportedly under investigation concerning its conduct in Libya.
Aguilar Conviction Vacated
This recent post highlighted the official end to the Lindsey Manufacturing prosecution. The prosecution of Angela Maria Gomez Aguilar, who was tried along with the Lindsey defendants, is officially over as well. As noted in this previous post, Aguilar (a purported agent of Lindsey Manufacturing) was granted a judgment of acquittal after the DOJ’s case as to one substantive count of money laundering, but the jury convicted her of one count of money laundering conspiracy. After the conviction, Aguilar negotiated an agreement with the DOJ for a time-served sentence and immediate release from custody. Following Judge Matz’s dismissal of the indictment last December based on numerous instances of prosecutorial misconduct (see here for the prior post), Aguilar obtained an agreement from the DOJ to stipulate to a motion vacating the one count of conviction, an agreement which took effect upon the DOJ’s recent decision not to further pursue its appeal.
As noted in this recent release, Judge Matz this week signed an order vacating Aguilar’s conviction. In the release, Aguilar’s counsel, Stephen Larson (Arent Fox – here) stated as follows. “The government overreached in its efforts to press this case. It is bittersweet whenever a prosecution is terminated for misconduct. Although Ms. Aguilar is greatly relieved by Judge Matz’s decision to end this ordeal, it is tragic that it was permitted to go this far. I am pleased that the Department of Justice has recognized as much by opting not to pursue its appeal in this case.”
Kroll’s 2012 FCPA Benchmarking Report
This post discussed recent FCPA survey data. Add Kroll’s recent FCPA Benchmarking Report (here) to the list.
As noted in the Report, the study was “designed to take the pulse of corporate compliance officers at U.S. based multinationals and to provide benchmarks for the current state of anti-bribery preparedness.”
Survey results that caught my eye include the following.
“Sixty-nine percent of all respondents said their companies were either moderately or highly exposed to bribery risk; this number jumps to 100 percent in the pharmaceutical industry and drops to 46 percent in the financial services industry. […] 85 percent believe [such risk] will increase or stay the same in the future.”
“Fifty-three percent of respondents said their compliance departments have increased their budgets in the last year; 49 percent said they have increased hiring; and 22 percent said they have experienced a centralization of compliance decision-making.”
“The most frequently cited challenges to anti-bribery compliance include the inability to anticipate regulators’ next moves (21 percent) and ensuring that employee training is taken seriously and is used when a risky situation presents itself (20 percent).”
“Seventy-nine percent of respondents characterized their compliance efforts as a strategic advantage in addition to being a strong defensive tactic.”
“[T]he weakest link among survey respondents was how they handled third party relationships. While 99 percent of respondents said they had anti-bribery provisions for employees in their companies’ codes of conduct, that number fell to 73 percent when compliance officers were asked about anti-bribery provisions for third parties. […] The scope of [FCPA risk by using third parties] is exacerbated by the fact that approximately three in four U.S. companies (77 percent) report that they partner with foreign companies to do business abroad. Thirty-seven percent of respondents said they do business with between 100 and 1,000 third parties; 27 percent said they work with between 1,000 and 10,000 third parties; and 17 percent said they work with between 10,000 and 100,000 different third parties. A small number said they worked with more than 100,000 different third parties.”
It’s a third-party world.
The Report was based on responses from “139 senior corporate compliance executives from companies ranging in size from $100 million to over $10 billion in revenues per year” who were interviewed by phone from July 2011 to February 2012. Survey respondents were drawn mainly from four industries: financial services, IT/telecommunications, energy, and pharmaceuticals.
The report was published by Kroll Advisory Solutions (here), a company that assists clients mitigate and respond to risks, including FCPA issues.
Wal-Mart Civil Suits
One of my earliest Wal-Mart posts (here) noted that not only will the DOJ and SEC likely be examining the conduct of Wal-Mart executives, but so too will plaintiff law firms representing shareholders who will likely scour Wal-Mart’s SEC filings and other statements to the market in bringing derivative claims alleging breach of fiduciary duty and potential Section 10(b) claims based on material omissions concerning Wal-Mart Mexico.
Sure enough.
Wal-Mart’s recent quarterly SEC filing stated as follows.
“The Company is a defendant in several recently-filed lawsuits in which the complaints closely track the allegations set forth in a news story that appeared in the New York Times on April 21, 2012. One of these is a securities lawsuit that was filed on May 7, 2012 in the United States District Court for the Middle District of Tennessee, in which the plaintiff alleges various violations of the U.S. Foreign Corrupt Practices Act (the “FCPA”) beginning in 2005, and asserts violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, relating to certain prior disclosures of the Company. The plaintiff seeks to represent a class of shareholders who purchased or acquired stock of the Company between December 8, 2011, and April 20, 2012, and seeks damages and other relief based on allegations that the defendants’ conduct affected the value of such stock. In addition, eleven derivative complaints were filed in April and May 2012, in Delaware and Arkansas, also tracking the allegations of the Times story, and naming various current and former officers and directors as additional defendants. The plaintiffs in the derivative suits (in which the Company is a nominal defendant) allege, among other things, that the defendants who are or were directors or officers of the Company breached their fiduciary duties in connection with oversight of FCPA compliance. While management cannot predict the outcome of these matters, management does not believe the outcome will have a material effect on the Company’s financial condition or results of operations.”
Chinese SOEs
This recent post focused on China SOEs and provided links to data and analysis concerning the ever increasing global push of Chinese SOEs. Yesterday, the Wall Street Journal ran an article titled “China Buys Overseas Assets” that discusses a recent report from A Capital, a private equity firm based in China and Paris (see here for A Capital’s report). As indicated in the article, “China’s overseas investment surged in the first quarter [of 2012] to $21.4 billion as state-owned companies snapped up resource-related assets around the globe.” According to the report, state-owned companies accounted for 98% of all deal value in the first quarter, a new high.
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A good weekend to all.
Friday Roundup
This week’s disclosure, Jefferson’s non-FCPA appeal, statistics of note, and an update on Brazil’s “FCPA”. It’s all here in the Friday roundup.
MTS Systems Corp. Disclosure
Minnesota-based MTS Systems Corp. (here), a global supplier of test systems and industrial position sensors, disclosed earlier this week (here) as follows.
“MTS Systems Corporation (the “Company”) is investigating certain gift, travel, entertainment and other expenses that may have been improperly incurred in connection with some of the Company’s operations in the Asia Pacific region. The investigation has focused on possible violations of Company policy, corresponding internal control issues and any possible violations of applicable law, including the Foreign Corrupt Practices Act. Though the investigation is not complete, the Company has taken remedial actions, including changes to internal control procedures and removing certain persons formerly employed in its Korea office. The Company believes, however, that the amount of the expenses in question is not material to its reported consolidated financial statements. The Company has voluntarily disclosed this matter to the U.S. Department of Justice and the U.S. Securities and Exchange Commission. Additionally, the Company has disclosed this matter to the U.S. Air Force pursuant to its Administrative Agreement. The Company cannot predict the outcome of this matter at this time or whether it will have a materially adverse impact on its business prospects, financial condition, operating results or cash flows.”
MTS’s FCPA disclosure marks the fourth time in the last five weeks that a company has newly disclosed FCPA scrutiny. See here for the prior post “The Sun Rose, a Dog Barked, and a Company Disclosed FCPA Scrutiny.”
Jefferson’s Non-FCPA Appeal
I respectfully disagree with others who have recently stated that the 4th Circuit upheld former Congressman William Jefferson’s FCPA conspiracy conviction. Yes, the 4th Circuit did affirm Jefferson’s conviction of Count 1, as well as other charges. Count 1 was a conspiracy charge to solicit bribes, commit honest services wire fraud, and violate the FCPA in violation of 18 USC 371; however, as even the 4th Circuit noted in its opinion – here, this count charged a conspiracy with multiple objects and the jury was instructed that it only had to find that Jefferson conspired to commit one of the substantive offenses identified. In announcing the jury verdict the court did not specify which object of the conspiracy the jury agreed on and in fact the jury found Jefferson not guilty of a substantive FCPA charge, a charge principally based on allegations that Jefferson attempted to bribe Nigerian officials (including the former Nigerian Vice President) to assist himself and others obtain or retain business for a Nigerian telecommunications joint venture.
As stated in the 4th Circuit’s opinion, Jefferson appealed his convictions on the following grounds: “(1) that an erroneous instruction was given to the jury with respect to the bribery statute’s definition of an ‘official act’; (2) that another erroneous instruction was given with respect to the ‘quid pro quo’ element of the bribery-related offenses; (3) that Jefferson’s schemes to deprive citizens of honest services do not constitute federal crimes; and (4) that venue was improper on one of his wire fraud offenses.” [Reference to the “bribery statute” is to 18 USC 201 – the domestic bribery statute, not the FCPA]. In short, Jefferson’s 4th Circuit appeal had nothing to do with the FCPA.
Statistics of Note
In “Revisiting a Foreign Corrupt Practices Act Compliance Defense” (see here), I argue that a compliance defense will better incentivize corporate compliance, reduce improper conduct, and thereby advance the FCPA’s objective of preventing bribery of foreign officials. Sure, business organizations at present have at least two incentives (the DOJ’s Principles of Prosecution of Business Organizations and the U.S. Sentencing Guidelines) to implement FCPA compliance policies and procedures. I argue that these incentives are not well known by a meaningful segment of the business community and, even if they were, despite these incentives (incentives which merely lessen the impact of legal exposure vs. reduce legal exposure), few business organizations operating in a world of finite resources are sufficiently implementing comprehensive FCPA policies and procedures. Various survey data is cited in support.
Add Deloitte’s recent third-party business relationships poll (see here) to the list. Despite the fact that a significant majority of corporate FCPA enforcement actions are based on the conduct of foreign third parties (such as agents, representatives, distributors, joint venture partners) the poll found the following.
On what percentage of your organization’s third-party business partners do you estimate it performs due diligence and risk assessments?
Votes Received: 1,339
| None | 5% |
| Up to 25% | 23.4% |
| 26–50% | 14.5% |
| 51–75% | 12.4% |
| 76-100% | 13.4% |
| NA/Don’t know | 31.3% |
An FCPA compliance defense surely will not cause 100% of business organizations to perform due diligence and risk assessment of all foreign third parties, but it is reasonable to conclude that an FCPA compliance defense will better incentivize more robust FCPA compliance policies and procedures, including as to third-parties.
Another statistic of note. A recent Global Anti-Corruption Survey by AlixPartners found that 95% of survey participants believe their industry is exposed to business practices that may constitute corruption. Southeast Asia and Africa presented the most significant risk according to survey participants. Survey participants were in-house legal counsel or compliance officers at North American multinational companies with annual revenues of $250 million or greater (with 90% of respondents working for companies with annual revenues exceeding $1 billion).
Brazil Update
In this prior post, Matteson Ellis (founder and Principal of Matteson Ellis Law, PLLC, who also writes the FCPAmericas Blog), provided an overview of a draft bill making its way through the Brazilian Congress that would strengthen its “FCPA-like” law. In this recent post on his FCPAmericas Blog, Ellis provides an update on the draft bill. Ellis reports as follows. “A Special Committee created by the Brazilian Congress to analyze [the draft bill] has recently presented a revised draft that bolsters certain key provisions and keeps other significant ones the same. The House aims to vote on the legislation before July 2012.” In his post, Ellis provides various highlights of the revised draft bill as to corporate liability, sanctions, voluntary disclosure, and compliance programs.
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A good weekend to all.
Off-Target
As detailed in this prior post, in September the Open Society Foundation released “Busting Bribery: Sustaining the Global Momentum of the Foreign Corrupt Practices Act” (here). The white paper was in response to the October 2010 white paper “Restoring Balance: Proposed Amendments to the Foreign Corrupt Practices Act” (here) released by the Institute for Legal Reform, an affiliate of the U.S. Chamber of Commerce. Authored by David Kennedy (Professor of Law, Harvard Law School) and Dan Danielsen (Professor of Law, Northeastern University School of Law), Busting Bribery stated that “the Chamber proposes to change the [FCPA] in ways that would substantially undermine the possibility for successful enforcement of America’s anti-bribery commitments” and that the “Chamber’s proposed amendments would also set back decades of progress in the global struggle against corruption.”
As to a potential FCPA compliance defense, a defense that not only the Chamber supports, Kennedy and Danielsen (the “Authors”) stated as follows in the Executive Summary. “Often seen as the least concerning of the Chamber’s proposals, the creation of an affirmative defense of ‘compliance’ to FCPA corporate criminal liability is actually potentially very dangerous. Compliance is already taken into account at every stage in the investigation and resolution of FCPA violations. In 1988, Congress amended the FCPA to eliminate liability based on a company’s failure to eliminate bribery which it had ‘reason to know’ was taking place. A defense of ‘adequate’ or ‘good faith’ compliance makes no sense when, as under the current FCPA, corporate criminal liability requires proof beyond a reasonable doubt that the company acted with actual knowledge and corrupt intent to influence a foreign government to gain an improper business advantage. Creating a compliance defense to knowing and intentional violations of the FCPA would amount to eliminating criminal liability under the Act all together by permitting a ‘fig leaf’ compliance program to insulate companies from their knowing and intentional wrongdoing.” (emphasis in original).
In the substantive section of report, the Authors stated, among other things, as follows. “… [A]n affirmative defense of ‘adequate’ or ‘good faith’ compliance is fundamentally inconsistent with the FCPA’s very high standards for corporate criminal liability which require prosecutors to prove that a company’s prohibited acts be both ‘knowing’ and ‘corruptly’ undertaken with intent.” The Authors then state that “these standards of liability were summarized in the Congressional Report on the 1988 amendments to the Act” and quote a portion of the Congressional Conference Report on the 1988 amendments as follows. “Thus, the ‘knowing’ standard adopted covers both prohibited actions that taken with ‘actual knowledge‘ of intended results as well as other actions that, while failing short of what the law terms ‘positive knowledge,’ nevertheless evidence a conscious disregard or deliberate ignorance of known circumstances that should reasonably alert one to the high probability of violations of the Act.” (emphasis in original).
The Authors then continue as follows. “From these articulated and clearly-defined standards of corporate culpability under the FCPA, it becomes immediately apparent that an affirmative defense of ‘good faith’ or ‘adequate’ compliance is simply inappropriate. On the one hand, effective, ‘good faith’ compliance is logically incompatible with the requirement under the Act that violations be undertaken with ‘actual knowledge’ or a ‘conscious disregard or deliberate ignorance of known circumstances’ and the requisite ‘corrupt’ intent to induce a foreign official to misuse his official position to wrongfully obtain business or direct business to another. Any compliance program that knowingly permitted, facilitated, or consciously or deliberately turned a blind eye to corrupt, intentional violations of the FCPA must be either per se inadequate or not undertaken in good faith. On the other hand, the existence of a merely formal compliance program is irrelevant to the question of whether knowing, intentional and corrupt behavior took place. Creating a ‘compliance defense’ to knowing and intentional violations of the Act would amount to eliminating criminal liability under the Act all together by permitting a ‘fig leaf’ compliance program to insulate companies from having knowing and intentional wrong-doing.”
To use the Authors phrase of “immediately apparent,” what is immediately apparent upon reading Busting Bribery is how the Authors are off-target when it comes to the FCPA’s 1988 amendments as well as respondeat superior principles of corporate criminal liability.
In asserting that “Congress amended the FCPA to eliminate liability based on a company’s failure to eliminate bribery which it had ‘reason to know’ was taking place,” the Authors appear to assume that such was the general standard for corporate criminal liability prior to the 1988 amendments. It wasn’t.
The FCPA, as originally enacted, prohibited those subject to the law from, among other things, providing things of value to “any person, while knowing or having reason to know that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official.” (emphasis added). The FCPA, as originally enacted, thus contained a third-party payment prohibition triggered by a broad “while knowing or having to reason to know” standard.
This standard was very quickly criticized by many because companies were “unsure about the degree of their responsibility for questionable payments made by their foreign agents in cases when the companies believe they have instituted reasonable safeguards.” (See GAO Report, “Impact of Foreign Corrupt Practices Act on U.S. Business” at pg. iv). U.S. Trade Representative William Brock candidly stated during a 1981 Senate FCPA hearing that “frankly, nobody knows what it means.” (See “Business Accounting and Foreign Trade Simplification Act,” Joint Hearings Before the Subcommittee on Securities and the Subcommittee on International Finance and Monetary Policy of the Committee on Banking, Housing, and Urban Affairs, United States Senate, 97th Congress, First Session at pg. 63).
The FCPA reform efforts that began in 1980 and culminated in FCPA amendments in 1988 had, as a core reform proposal, revising the “reason to know” standard relevant to third-party payments. Jonathan Rose (Assistant Attorney General) stated, in connection with a 1983 House FCPA hearing, that the FCPA’s then standard of liability for third-party payments was akin to a “simple negligence standard” and “is plainly inappropriate and inconsistent with the general approach of modern criminal law to state-of-mind requirements.” (See “The Foreign Trade Practices Act,” Hearings Before the Subcommittee on International Economic Policy and Trade of the Committee on Foreign Affairs, House of Representatives, 98th Congress, First Session at pg. 118).
In 1987, the House Committee on Energy and Commerce stated, in reporting out an FCPA reform bill revising the third-party knowledge standards that the “reason to know standard under current law has been criticized as unclear” and that “some businesses interpret the standard as tantamount to “reason to suspect that an agent will pass on a bribe, or a negligence standard …”. (See Trade and International Economic Policy Reform Act of 1987, House Report 100-49 (April 6, 1987) at pg. 75). The House Report stated that “clearly such an interpretation was not intended by Congress …” and when the FCPA was ultimately amended in 1988, the relevant Conference Report, under the heading “Standard of Liability for Acts of Third Parties (Agents)” stated that the conferees intended to retain the “knowing” requirement for payments to third-parties, to delete the House bill’s reference to “reckless disregard” and to include concepts of “conscious disregard” or “willful blindness.” (See House Report No. 100-576 at 920 (1988) at pg. 919).
The third-party payment provisions were amended in 1988 (and remain the same today) to prohibit those subject to the law from providing things of value to “any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official.” Knowledge was defined in the 1988 amendments, and still is today, as follows. “(A) A person’s state of mind is ‘knowing’ with respect to conduct, a circumstance, or a result if – (i) such person is aware that such person is engaging in such conduct, that such circumstance exists, or that such result is substantially certain to occur; or (ii) such person has a firm belief that such circumstance exists or that such result is substantially certain to occur. (B) When knowledge of the existence of a particular circumstance is required for an offense, such knowledge is established if a person is aware of a high probability of the existence of such circumstance, unless the person actually believes that such a circumstance does not exist.”
In other words, Busting Bribery constructs, as the primary foundation for opposing an FCPA compliance defense, a knowledge standard that was relevant only, and continues to be relevant only, to the FCPA’s third-party payment provisions. The FCPA, when enacted, and to this day, allows corporate criminal liability under respondeat superior principles when an employee acts within the scope of his or her duties intending to benefit, at least in part, the organization. Knowledge (however defined) of the employee’s conduct by the board, executive officers, or other high-ranking executives is not required and, at present, the organization’s pre-existing compliance policies and procedures are not relevant as a matter of law to the organization’s criminal liability.
For instance, the only time in the FCPA’s history that a corporate FCPA charge was presented to a jury was in the Lindsey Manufacturing case early this year. The relevant jury instruction (instruction 16 – entity responsibility – entity defendant – agency) stated as follows.
“To sustain the charge of conspiracy to violate the Foreign Corrupt Practices Act (“FCPA”) or violation of the FCPA against Lindsey Manufacturing Company, the government must prove the following propositions:
First, the offense charged was committed by one or more agents or employees of Lindsey Manufacturing Company; Second, in committing the offense, the agent or employee intended, at least in part, to benefit Lindsey Manufacturing Company; and Third, the acts by the agent or employee were committed within the authority or scope of his employment.
For an act to be within the authority of an agent or the scope of the employment of an employee, it must deal with a matter whose performance is generally entrusted to the agent or employee by Lindsey Manufacturing Company. It is not necessary that the particular act was itself authorized or directed by Lindsey Manufacturing Company. If an agent or an employee was acting within the authority or scope of his employment, Lindsey Manufacturing Company is not relieved of its responsibility because the act was illegal.” (emphasis added).”
So yes, while it is true that the corrupt intent element must be met in order to convict a company of an FCPA offense, that corrupt intent element can be satisfied by singular and isolated acts of any employee, even if their conduct is in violation of pre-existing company policies and procedures. However, you would not glean this significant point from Busting Bribery because the term respondeat superior (or general concept) does not even appear in the lengthy white paper.
An FCPA compliance defense would not, as the Authors suggest, create a wholesale corporate defense to “knowing and intentional violations of the FCPA.” If the board, executives, or other senior personnel were involved in the knowing and intentional conduct at issue, a company could not rely on the compliance defense. If an employee, at any level, engaged in knowing and intentional conduct in violating of the FCPA, a company could not rely on the compliance defense unless it had in place pre-existing compliance policies and procedures reasonably designed and implemented to prevent and detect, insofar as practicable, the conduct at issue.
The notion that creating a potential compliance defense “would amount to eliminating [corporate] criminal liability under the Act all together” is simply false and off-target, as is Busting Bribery’s misleading reference to the FCPA’s 1988 third party payment revisions to support its position.
Despite its obvious shortcomings, others are championing Busting Bribery’s compliance defense rebuttal. For instance, last week Citizens for Responsibility and Ethics in Washington (CREW) issued a release (here) touting the Authors’ work and praising Busting Bribery for “thoroughly debunk[ing] the Chamber’s arguments for amending the FCPA, finding them based on ‘myth.'” See CREW’s letters to both the House (here) and Senate (here).
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How did Aaron Murphy (Latham & Watkins), an FCPA practitioner and author of “Foreign Corrupt Practices Act: A Practical Resource for Managers and Executives” react to Busting Bribery? In this twitter feed he asked – “why are professors with no apparent experience actually investigating corruption used as experts?”
The 80’s Began With A Focus On “Finders”
[This post is part of a periodic series regarding “old” FCPA enforcement actions]
Having left the 1970’s, lets start a new decade, the 1980’s. The FCPA began to mature and enforcement, while still measured, began to increase. The 1980’s witnessed nine “core” FCPA enforcement actions (including one involving several distinct companies) and this post starts off the decade by highlighting the SEC’s enforcement action against Tesoro Petroleum Corporation.
In 1980, the SEC filed a civil injunctive action against Tesoro Petroleum Corporation. In pertinent part, the SEC complaint alleged (as to conduct that occurred prior to 1977 – the year the FCPA was enacted) as follows. “Since at least the time Tesoro became a public company, Tesoro and others have engaged in a course of business in connection with acquiring material foreign assets, attempting to acquire material foreign assets, or conducting foreign business whereby they made or caused to be made substantial payments to ‘finders’ and ‘consultants’ where such payments, with respect to multi-million dollar contracts, were disproportionate to the business obtained or the services rendered, were not usual or customary and were made under circumstances such that Tesoro was and continues to be unable to account for or satisfy itself as to the final disposition of such corporate funds. In certain instances involving payments made in connection with foreign business activities, the circumstances of the payments indicate that the funds, in whole or in part, may have been directly or indirectly transferred to foreign government officials or political leaders.”
The SEC alleged that Tesoro: “(1) made and kept books, records and accounts which failed in reasonable detail to accurately and fairly reflect the transactions and dispositions of Tesoro’s assets; and (2) made transfers and disbursements without adequate records and controls sufficient to ensure that such transfers and disbursements were actually made for the purposes indicated and without adequate records and controls to document whether the services provided therefore, if any, were commensurate with the amounts paid.”
Specifically, the SEC alleged that Tesoro, through the participation of the Chairman of its Board, Robert West, caused approximately $450,000 in payments to be made to James Morgan, a “finder/consultant who assisted Tesoro in obtaining certain foreign oil and gas concessions from a foreign government.” According to the SEC, “these payments were disproportionate to the business obtained or the services rendered, were not usual or customary, and were made under circumstances indicating that the funds, in whole or in part, may have been transferred directly or indirectly to foreign government officials.” In one instance, the SEC alleged that Tesoro made a payment to Morgan’s home “where an official of the national oil company of the country involved was waiting.”
In another instance, the SEC alleged that Tesoro paid $120,000 to another consultant “in connection with an application to do business in another foreign country, and in connection with subsequent applications by Tesoro to do business in that country and a refinery joint venture.” According to the SEC, the payments ($10,000 monthly for a year) “were disproportionate to the business obtained or the services rendered, were not usual or customary, and were made under circumstances indicating that the funds, in whole or in part, may have been passed on to government officials. The SEC alleged that “during the period when Tesoro’s application to do business was pending” the company transferred money to the consultant’s bank account and that the consultant paid, at various times, a director of the national oil company. According to the SEC, Tesoro’s application to purchase oil was denied by the national oil company.
Based on the above conduct, the SEC charged Tesoro with filing materially false and misleading reports with the SEC. Without admitting or denying the SEC’s allegations, Tesoro consented to entry of a final judgment requiring, among other things, Tesoro: (i) to make and keep books, records, and accounts, which in reasonable detail, accurately and fairly reflect the transactions and dispositions of Tesoro’s assets; and (ii) to disclose in an SEC filing the amount and circumstances of all material “finders,” “consultants” or other fees similar to those described above, paid in the future in connection with the acquisition or disposition of foreign assets or the conduct of foreign business.
Original source documents from the Tesoro enforcement action can be found here.
Will There Be Any Daimler-Related Prosecutions?
Bribery schemes are often facilitated, aided and abetted, and enabled by third parties and with increasing frequency the DOJ targets such enablers. In November 2009, Assistant Attorney General Lanny Breuer stated as follows. “The use of intermediaries to pay bribes will not escape prosecution under the FCPA. The Department will continue to hold accountable all the players in an FCPA scheme – from the companies and their executives who hatch the scheme, to the consultant they retain to carry it out.“ Recent FCPA enforcement actions that have targeted such enablers include: Jeffrey Tesler and Wojciech Chodan (in connection with the Bonny Island, Nigeria cases); the Aquilars (in connection with the Lindsey Manufacturing enforcement action); Ousama Naaman (in connection with the Innospec enforcement action); and Paul Novak (in connection with the Willsbro enforcement action).
The March 2010 FCPA enforcement action against Daimler and its related entities (see here for the prior post) contained unusually detailed allegations concerning the conduct of various enablers in Daimler’s bribery scheme. Thus, back in March 2010, I observed as follows. “The alleged improper payments involved dozens and dozens of third parties, including several located in the U.S., which were allegedly utilized by Daimler and its affiliates to bribe foreign officials. Given Daimler’s use of numerous U.S. based entities, it will be interesting to see if any of these U.S. entities and/or entity employees will be prosecuted for their role in the respective bribery schemes.”
A year and a half has passed, there have been no related prosecutions, and it is appropriate to again ask the question – will any U.S. enablers of Daimler’s bribery scheme be held accountable?
Based on the DOJ’s allegations in the Daimler enforcement action, the following entities would seem to be the most logical candidates.
M.F. Mechanical & Electrical, Inc. (Daimler payment to the entity for the benefit of Chinese “foreign officials” – para 50 of Daimler AG information);
Shores International, a Texas corporation (Daimler payment to the entity for the benefit of the wife of a Chinese government official – para 51 of Daimler AG information);
Lily Energy Services, Inc., a Texas corporation (Daimler payment to the entity for the benefit of Chinese “foreign officials” – para 52 of Daimler AG information);
King Jack Inc., a California corporation (Daimler payment to the entity for the benefit of Chinese “foreign officials” – para 53 of Daimler AG information);
Oldenburgh Financial Corporation, incorporated in Delaware, and United Petrol Group LLP, incorporated in Oregon (Daimler payments to the entities for the benefit of Latvian government officials – para 106 of Daimler AG information);
Biotop Group, Inc., a Delaware corporation, and Marketing Research and Consultants LLC, a Wyoming corporation (Daimler payments to the entities for the benefit of Croatian government officials – para 123-128 of Daimler AG information)