The FCPA Blog

It's not hard to find reasons why the DOJ and SEC would rather prosecute corporations instead of individuals.

Here are a few:

Corporations can't defend themselves. They're strictly liable under respondeat superior for crimes committed by employees in the scope of their jobs. That's why no company has fought against FCPA charges in court for more than two decades. Individuals, on the hand, can and do fight in court and sometimes win. Recent examples of tough trials with mixed results include Frederick Bourke and William Jefferson. 

Corporations cooperate. No all companies self-disclose their FCPA offenses, but most do. They hire outsiders to conduct in-depth internal investigations and hand the results over to the government. That makes life easier for prosecutors and in theory benefits the company. Individuals can also plead guilty, of course, and many do. But they usually first try to defend themselves, which increases the government's burden.

Corporations can't run or hide. Domestic companies are all registered in their home states and can be brought to court there. Foreign corporations that are issuers under the FCPA have also submitted to the jurisdiction of U.S. courts. But individuals of any nationality can run. If they make it to another country, they have to be extradited back to the U.S. to face trial, a complicated process that can take years and may not be successful. Some examples include Viktor Kozeny and Jeffrey Tesler.

Corporate cases make headlines. For years, journalists have known that FCPA cases don't generate much buzz with the general public, and cases involving individuals hardly make a ripple (the Bourke and Jefferson cases were exceptions because of the defendants' fame). But giant penalties assessed against well-known global corporations are widely reported. Recent examples are Siemens, KBR, Daimler, and BAE. If the DOJ and SEC want to spread the word about the FCPA, chasing big companies is a good way to do it.

Corporate prosecutions are cost effective. They don't require long and expensive trials, so there's less drain on agency resources. And the payday for the U.S. government can be a quarter or even a half billion dollars per case, swamping the top fines for individuals.

How do any of the above influence prosecutorial decisions, if at all? The DOJ and SEC would say they don't. In other posts, we'll look at the recent enforcement track record, and we'll try to see things from the perspective of the prosecutors.

General Electric Company, whose compliance program is among the most respected and admired in the world, has settled civil violations of the Foreign Corrupt Practices Act with the Securities and Exchange Commission.

The company today agreed to pay $23.4 million to resolve claims that arose from a $3.6 million kickback scheme by four GE subsidiaries -- two of which were acquired after the offenses occurred. The kickbacks were paid under the United Nation's oil-for-food program. The GE subsidiaries were selling medical and water purification equipment to the Iraqi government.

The SEC charged GE and two subsidiaries -- Ionics Inc. and Amersham plc -- with civil violations of the books and records and internal controls provisions of the FCPA.

The kickbacks were paid from 2000 to 2003 and were not properly accounted for. They consisted of cash, computer equipment, medical supplies, and services to the Iraqi Health Ministry or the Oil Ministry. GE acquired two of the subsidiaries in 2004 and 2005 and became liable for their securities law violations, including FCPA offenses.

Cheryl J. Scarboro, the head of the SEC's FCPA unit, said: "GE failed to maintain adequate internal controls to detect and prevent these illicit payments by its two subsidiaries to win oil for food contracts, and it failed to properly record the true nature of the payments in its accounting records. Furthermore, corporate acquisitions do not provide GE immunity from FCPA enforcement of the other two subsidiaries involved."

In the SEC settlement, GE was ordered to disgorge $18,397,949 of profits and pay $4,080,665 in prejudgment interest and a penalty of $1 million. GE and subsidiaries Ionics Inc. and Amersham plc agreed not to violate Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934.

The SEC said it has taken 15 FCPA enforcement actions against companies involved in the now discredited U.N. oil for food program and has recovered more than $204 million. The program was intended to provide humanitarian relief for the Iraqi population, which faced hardship under international trade sanctions. It allowed the Iraqi government to purchase humanitarian goods through a U.N. escrow account. The Iraqi government instructed vendors to use middlemen and to inflate prices to fund the kickbacks.

In addition to GE, other companies charged under the oil-for-food program include Chevron, Total SA, AB Volvo, Innospec, Ingersoll-Rand, Akzo-Nobel, and Fiat.

The DOJ did not join the enforcement action against GE or the subsidiaries. It usually prosecutes criminal antibribery offenses under the FCPA, which require payments to foreign officials. In GE's case, the kickbacks apparently went directly to Iraqi ministries and not to government officials.

The SEC said that in settling the case, it "considered remedial acts promptly undertaken by GE and the cooperation the company afforded the Commission staff in its investigation."

View the SEC's July 27, 2010 press release here.

View the SEC's Litigation Release No. 21602 and Accounting and Auditing Enforcement Release No. 3159 (both dated July 27, 2010) in Securities and Exchange Commission v. General Electric Company; Ionics, Inc.; and Amersham plc, Civil Action No. 1:10-CV-01258 (D.D.C.)(RWR) here.

View the SEC civil complaint against GE, Ionics, and Amersham here.

The debate about medical ghosting has focused on the U.S. market. But could the DOJ and SEC now be looking at the practice overseas, where it might violate the FCPA?

Main Justice reported that in April, the DOJ and SEC sent letters to AstraZeneca PLC, Baxter International Inc., Eli Lilly & Co., and Bristol-Myers Squibb Co. The letters asked about business practices in Brazil, China, Germany, Greece, Italy, Poland, Russia, and Saudi Arabia.

Medical ghosting works like this. Drug companies hire outside firms to draft articles touting a drug, then retain a doctor or scientist to sign off as the author. The drug company then finds a publisher, who doesn't know the article was written by someone other than the person who signed it.

Doctors and scientists eagerly participate because publication credit increases their prestige and professional standing. And the drug-companies use the medical journal articles as "independent" proof that their drugs are safe and effective.

A Senate report released last month and quoted in the New York Times said: “Manipulation of medical literature could lead physicians to prescribe drugs that are more costly or may even harm patients."

The FCPA's antibribery provisions prohibit among other things (1) the giving of anything of value (2) to a foreign official (3) to obtain or retain business. See, e.g., 15 U.S.C. §78dd-1(a) [Section 30A of the Securities & Exchange Act of 1934].

Ghosting has those elements. Giving a doctor or scientist an unsigned manuscript for publication has real value. Doctors and scientists working in government-owned or managed hospitals overseas are "foreign officials" under the FCPA. And articles appearing to independently endorse a drug help its manufacturer obtain or retain business.

We don't know if medical ghosting will figure in any FCPA-related investigations of the drug companies. But it could.

Judge Denny ChinThe prosecution of James Giffen for violating the FCPA is a ghostlike case. As David Glovin of Bloomberg wrote earlier this month: "Oil consultant Jim Giffen was told by a U.S. judge six months after his 2003 arrest in an international bribery scheme that he would go on trial in the fall of 2004. He’s still waiting."

His trial may be on hold, but his case made legal history years ago. Professor Elizabeth Spahn, a friend of the FCPA Blog and an occasional contributor here, has published a great article on U.S. v. Giffen and the act of state doctrine -- the notion that sovereign nations engaged in domestic actions cannot be questioned in the courts of another nation.

She says:

The act of state doctrine is not typical fare for most prosecutors or judges in U.S. criminal proceedings. The first opinion addressing the act of state doctrine in a U.S. bribery case was issued in 2002 in the Giffen prosecution [when it was still before a grand jury] by Judge Denny Chin (more recently famous for sentencing white collar criminal, Ponzi scheme architect Bernie Madoff). The 2002 Chin opinion is a landmark case of first impression. It provides helpful precedent for future decisions on the most significant legal hurdle facing prosecutors developing a case—discovering the facts of complicated bribery schemes where the documents are ostensibly protected by foreign law. [footnotes omitted]

Prof Spahn describes the Giffen case as "a gripping story of alleged grand corruption bribery suitable for a Hollywood movie." What's remarkable, she says, is that despite the best efforts of powerful U.S. lobbyists and law firms in an FCPA case allegedly involving $105 million in bribes in Kazakhstan, during one of the darkest periods in the history of the U.S. Department of Justice, the case still "demonstrates the rule of law operating even handedly, even when major oil interests are at stake."

The article can be downloaded from SSRN here. The citation is Discovering Secrets: Act of State Defenses to Bribery Cases (2009), Hofstra Law Review, Vol. 38, p. 163, 2009.

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And more from Prof Spahn. We'd like to thank her for mentioning the FCPA Blog during her talk at the June 30 ABA ROLI Anti-Corruption Mini-Seminar. She referred to us as a clearinghouse serving the FCPA / compliance community. We'll do our best to live up to that role. During the last segment of her talk, Prof Spahn suggested topics for future compliance-related research. We often hear from students and others looking for ideas, so check out what she had to say here.

Photo courtesy of World Vision CanadaThe Justice Department has published its second FCPA Opinion Procedure Release of 2010.

The Requestor in Release 10-02 is a U.S. non-governmental organization and a “domestic concern” under the FCPA. It's a non-profit microfinance institution operating globally, providing loans and other basic financial services to the world’s lowest-income entrepreneurs. Funding comes from grants and donations by governments, NGOs, public and private organizations, and individuals.

The Requestor has a wholly-owned, self-sufficient subsidiary organized as a limited liability company in "a Eurasian country." The so-called Eurasian Subsidiary wanted to contribute $1.42 million to a local microfinance institution through a grant.

The Requestor has been converting all of its local operations, including the Eurasian Subsidiary, to commercial entities licensed as financial institutions. The conversion will help the local entities attract capital and offer new services such as savings accounts, microinsurance, and remittances. The Eurasian Subsidiary's $1.42 million grant to the local microfinance organization is required for the subsidiary's license conversion.

During due diligence, the Requestor discovered that one of the board members of the local microfinance institution and its parent "is a sitting government official in the Eurasian country and that other board members are former government officials."

Despite the presence of at least one foreign official on the target's board, the DOJ gave the Requestor a green light for its subsidiary's investment. The sitting foreign official has and will have no government role in the Requestor's activities. And, under the law of the Eurasian country, sitting government officials can't be paid for this type of board service.

Additional controls in the grant included staggered payments, ongoing monitoring and auditing, earmarking of funds to be spent, further prohibitions on compensating board members, and anti-corruption compliance provisions in the grant documents.

The Release said the purpose of the proposed grant is to obtain or retain business. The DOJ reasoned that the Eurasian Subsidiary's nonprofit business is to be followed by for-profit business activity in the Eurasian country, and the proposed grant would be made as a condition precedent to obtaining a license to operate as a profit-making financial institution.

So, the DOJ said, the issue is whether the proposed grant would amount to the corrupt giving of anything of value to any officials of the Eurasian country in return for obtaining or retaining business. "Based on the due diligence that has been done and with the benefit of the controls that will be put into place, it appears unlikely that the payment will result in the corrupt giving of anything of value to such officials."

Release 10-02 also includes a helpful discussion about charitable giving and the FCPA.

Download a copy of the DOJ's FCPA Opinion Procedure Release No. 10-02 dated July 16, 2010 here.

All DOJ Opinion Procedure Releases can be found here.