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“Offensive” Use Of The FCPA

Ordinarily, companies are in a defensive position when it comes to the Foreign Corrupt Practices Act.

However, in this new era, the FCPA is increasingly being used “offensively” to achieve a business objective or to further advance a litigating position.  Previous posts here, here, and here have explored various examples of this dynamic.

The latest example of “offensive” use of the FCPA, as highlighted here by the on-line news agency Main Justice, is in connection with the fight between Dish Network and Tokyo-based SoftBank for Sprint Nextel, the nation’s No. 3 wireless carrier.

As noted here, “in a letter submitted to the Federal Communications Commission, which is reviewing SoftBank’s $20 billion deal to acquire 70 percent of Sprint, Dish draws attention” to the 2009 FCPA enforcement action against UTStarcom.  (See here for the prior post).

As noted in the prior post, UTStarcom agreed to pay $3 million via a DOJ non-prosecution agreement and an SEC civil settlement “for the actions of UTS-China [its wholly-owned subsidiary) and its employees and agents, who arranged and paid for employees of Chinese state-owned telecommunications companies to travel to popular tourist destinations in the United States, including Hawaii, Las Vegas and New York City.”  According to the DOJ, it agreed to the non-prosecution agreement based on the company’s “voluntary disclosure, thorough self-investigation of the underlying facts, the cooperation provided by the company to the Department, and the remedial efforts undertaken by the company.”  The SEC’s complaint also included allegations that the company: (i) “provided other gifts and benefits to foreign government customers, including paying for them to attend executive training programs at U.S. universities,” (ii) provided “foreign government customers or their family members with work visas and purportedly hir[ing] them to work for [the company] in the U.S., when in reality they did no work for the company,” and (iii) made payments to purported consultants in China and Mongolia who provided no documented services, under circumstances that showed a high probability that the payments would be used to bribe foreign government officials.”

The asserted connection between the 2009 FCPA enforcement action and the battle for Sprint?

Why of course, Softbank’s founder Masayoshi Son was on the board of UTStarcom during certain time periods relevant to the conduct at issue in the FCPA enforcement action.

In this letter to the FCC, Dish asserted that the 2009 UTStarcom enforcement action “is relevant to the public interest analysis of the proposed transaction, and that it is incumbent upon … SoftBank to provide a full explanation of these matters.”

In this reply Softbank stated that the UTStarcom enforcement action is not relevant to the proposed transaction.  In pertinent part, the letter states as follows.

“Those settlements do not involve SoftBank or Mr. Masayoshi Son, Chairman and CEO of SoftBank. The settlement documents do not name, implicate, or otherwise relate to SoftBank or Mr. Son, and are legally and factually irrelevant to this proceeding.”

“DISH suggests that these settlements raise a potential issue in this proceeding because Mr. Son at one time served as the Chairman of the Board ofUTSI.  Neither the DoJ or SEC settlement documents, however, even mention SoftBank or Mr. Son. This is hardly surprising. Mr. Son was not an operating officer of UTSI at any time and the alleged violations came to light years after Mr. Son left the Board, which he did in 2004. The FCPA-related misconduct, according to the settlement documents, involved an executive of the company’s Chinese subsidiary, UTStarcom China Co., Ltd.”

In this reply DISH stated, in pertinent part, as follows.

“The ties between SoftBank, Mr. Son, and UTSI, which at minimum raise the question of whether Softbank was in control of UTSI during the relevant period, make SoftBank’s assertion that the non-prosecution agreement does “not relate to” either SoftBank or Mr. Son difficult to believe.”

“In light of the close involvement of SoftBank and Mr. Son with UTSI, SoftBank’s effort to discount the relevance of UTSI’s admitted misconduct appears misguided. SoftBank would better aid the Commission’s evaluation of its applications by providing additional information. For example, who were the employees of the government-controlled telecommunications companies who were the beneficiaries of the admitted misconduct? With what agencies or departments of the Chinese government were they affiliated? Were they involved in regulation of the telecommunications sector?”

The current era of FCPA enforcement has long tentacles. And with increasing frequency, the “offensive use” of the FCPA is one of them.

FCPA Goes Main Street

Growing up in a village of 1,054 in central Wisconsin, I was not exposed to oil and gas companies, defense contractors, or other companies that tend to have a high FCPA risk profile.

Yet one person I did have contact with on a near daily basis, because she lived around the corner, was the “Avon Lady.”

Thus, a bit of my youthful innocence was taken away upon learning last week that Avon Products Inc. (here) of all companies “suspended four executives amid an internal investigation into alleged bribery that began with the company’s China operation” and “now involves a dozen or more countries” according to the Wall Street Journal. According to the WSJ, the executives suspended include the president, chief financial officer and top government affairs executive of Avon’s China unit as well as a senior executive in New York who was Avon’s head of internal audit until the middle of last year.

According to the WSJ, Avon’s chief exectuive, Andrea Jung is a “corporate celebrity” in China and she has met frequently with “senior government officials.”

The conduct at issue involves alleged “purchase of trips to France, New York, Canada, and Hawaii for Chinese government officials with ties to Avon’s business.” However, according to the WSJ, “the scope of the investigation has since widened to regions including Latin America, where the company garners the bulk of its sales and profits.”

According to the WSJ, what sparked the investigation was “an employee who wrote a letter to Ms. Jung alleging improper spending related to travel with Chinese government officials.”

Here is what the company had to say in its 2009 Annual Report (filed in March 2010):

“As previously reported, we have engaged outside counsel to conduct an internal investigation and compliance reviews focused on compliance with the FCPA and related U.S. and foreign laws in China and additional countries. The internal investigation and compliance reviews, which are being conducted under the oversight of our Audit Committee, began in June 2008. We voluntarily contacted the United States Securities and Exchange Commission and the United States Department of Justice to advise both agencies of our internal investigation and compliance reviews and we are, as we have done from the beginning of the internal investigation, continuing to cooperate with both agencies and have signed tolling agreements with them.

The internal investigation and compliance reviews, which started in China, are focused on reviewing certain expenses and books and records processes, including, but not limited to, travel, entertainment, gifts, and payments to third-party agents and others, in connection with our business dealings, directly or indirectly,
with foreign governments and their employees. The internal investigation and compliance reviews of these matters are ongoing. At this point we are unable to predict the duration, scope or results of the internal investigation and compliance reviews.”

Based on information that is publicly available, this potential FCPA enforcement action fits the mold of Lucent Technologies and UTStarcom (here), in that it appears focused on excessive travel and entertainment benefits to Chinese “foreign officials.”

However, looking to the prior “on-point” Lucent and UTStarcom enforcement actions may not provide much useful guidance. But you probably already knew that, this is FCPA enforcement after all, where predictabilty and transparency are not distinguishing features.

If ever two FCPA enforcement actions were carbon-copies of each other, it would be the December 2007 enforcement action against Lucent and the December 2009 enforcement action against UTStarcom (“UTS”) Both enforcement actions involved telecommunications companies, both enforcement actions principally concerned business conduct in China, both enforcement actions involved payment of excessive travel and entertainment expenses, and both enforcement actions were resolved through a DOJ NPA and an SEC settled civil complaint and consent decree. Despite these similarities the end results were significantly different.

UTS settled its matter by agreeing to pay $3 million in total fines and penalties for FCPA antibribery, books and records and internal control violations. However, Lucent settled its matter by agreeing to pay $2.5 million in total fines and penalties for merely FCPA books and records and internal controls violations – in other words no antibribery violations. This despite the fact that, per the government’s statement of facts and allegations, Lucent sponsored more trips than UTS (315 compared to 225) and spent more money on the problematic trips than UTS ($10 million compared to $7 million) to influence more foreign officials in the hopes of winning billion dollar and multi-million contracts. Also relevant is that UTS was charged with antibribery violations and paid a higher combined fine/penalty amount compared to Lucent (based on less severe allegations) despite the fact that UTS, per the DOJ’s release, voluntarily disclosed the conduct at issue – a factor noticeably absent in the DOJ’s Lucent release.

A Double Standard? Part II

A government official has over $7,000 of expenses paid for by an organization hoping to establish a personal connection with the official and seeking access to the official to educate him on a multibillion dollar program favored by the organization.

The same organization spends over $20,000 for baggage-handling tips, alcohol, snacks, refreshments, and other “trip supplies” for another government official.

Sounds like the organization has some FCPA issues, right?



Because the government officials involved are not “foreign officials,” but rather U.S. government officials and the organization is the U.S. military. (See here for the recent story from the Wall Street Journal).

According to the article, members of Congress are not required to be disclose such expenses and the information is from military expense records obtained through a Freedom of Information Act request.

While not a perfect parallel to an FCPA enforcement action, the above, as well as “A Double Standard Part I” (see here) raise the question of whether there is a double standard.

Will a U.S. company’s interaction with a “foreign official” be subject to more scrutiny and different standards than its interaction with a U.S. official?

Do we reflexively label a “foreign official” who receives “things of value” from an organization with a business interest as corrupt, yet when a U.S. official similarly receives “things of value” from an organization with a business interest we merely say “well, no one said our system is perfect”?

Is there any difference between the bottles of wine given to the Thai “foreign officials” in the UTStarcom, Inc. matter (see here para. 23 of the complaint) and the bottles of wine and alcohol given to the U.S. officials by an organization with a business interest pending before the U.S. officials? Is there any difference between the sightseeing trips provided to the Chinese “foreign officials” in the UTStarcom matter and the corporate funded sightseeing trip by the U.S. official discussed in Part I?

One is a crime and the other is … well what is it, just the way things get done?

As always, your comments are welcome.

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