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Richard L. Cassin Publisher and Editor

Andy Spalding Senior Editor

Jessica Tillipman Senior Editor

Elizabeth K. Spahn Editor Emeritus

Cody Worthington Contributing Editor

Julie DiMauro Contributing Editor

Thomas Fox Contributing Editor

Marc Alain Bohn Contributing Editor

Bill Waite Contributing Editor

Shruti J. Shah Contributing Editor

Russell A. Stamets Contributing Editor

Richard Bistrong Contributing Editor 

Eric Carlson Contributing Editor

Bill Steinman Contributing Editor

Aarti Maharaj Contributing Editor


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FCPA Blog Daily News

Wednesday
Sep052007

The Requestor's French Dilemma

Facing a decision to either stay in a joint venture or leave, when staying means violating the Foreign Corrupt Practices Act and leaving means breaching contractual obligations, is a legal disaster. But it's an easy trap to fall into.

One U.S. company (called the “Requestor”) proposed to enter into a joint venture with a French company. There were doubts about how the French company obtained some of its contracts. So the Requestor took various precautions to protect itself against an FCPA violation. Accordingly, if it learned its French partner had breached the compliance warranty, the Requestor could terminate the relationship if the breach had a “material adverse effect” upon the business.

Not good enough, said the U.S. Department of Justice:

Should the Requestor's inability to extricate itself result in the Requestor taking, in the future, acts in furtherance of original acts of bribery by the French company, the Requestor may face liability under the FCPA. Thus, the Department specifically declines to endorse the "materially adverse effect" standard.

The Lesson: Accept no limits or conditions on the right to terminate a joint venture when there is evidence of an FCPA violation.

View DOJ Opinion Procedure Release 2001-01 (May 24, 2001) Here.

Monday
Sep032007

Siemens' Global Corruption Problems Will Worsen

Perhaps the biggest, although not yet the loudest, international corruption story involves Siemens AG, the German electronics and electrical engineering giant. Siemens says it has identified "a multitude of payments made in connection with [consulting agreements] for which we have not yet been able either to establish a valid business purpose or to clearly identify the recipient. These payments raise concerns in particular under the Foreign Corrupt Practices Act (FCPA) in the United States, anti-corruption legislation in Germany and similar legislation in other countries." Some reports put the level of potentially corrupt payments at a staggering half a billion dollars.

The press, led by the Wall Street Journal, is also reporting that Siemens' managers in many countries are stonewalling the internal investigation. That, in turn, may have pushed the U.S. Department of Justice and the Securities and Exchange Commission to begin working on a deal with German prosecutors to share information and possibly resources in their respective investigations.

With Siemens' own managers now going silent, the DOJ and SEC face tough challenges collecting evidence abroad and compelling non-residents to appear in American courts, either as witnesses or defendants. Meanwhile, the tension among Siemens' management-level employees must be enormous. If they voluntarily give evidence, they could end up being prosecuted. If they refuse to give evidence, they could end up being fired and still be prosecuted. And unless the internal investigation gets back on track, Siemens itself may lose the opportunity to work out a favorable disposition of the case with U.S. and other prosecutors.

Siemens AG's ADRs trade on the NYSE under the symbol SI.

View A Recent Press Report Here.

View Siemens' Recent SEC Disclosure Here.

Sunday
Sep022007

Enron's Culture Of Non-Compliance

One consistent measure of a compliance culture is executive responsibility. In the case of Enron's CEO, Jeffrey Skilling, there was little evidence of that. True, he was obligated to comply with the Foreign Corrupt Practices Act. But remarkably, his January 1, 1996 Employment Agreement might have allowed him to be convicted under the FCPA and still keep his job. How? By his own declaration that he had no personal knowledge of or involvement in the crime -- the same defense he later bet on and lost at his federal trial for conspiracy, securities fraud, wire fraud and insider trading.

Fellow executives Rebecca Mark, Kenneth Rice and Joseph Sutton lacked Mr. Skilling's sui generis right to declare themselves innocent. Upon an FCPA offense, however, their employment agreements, like his, allowed the board to decide that if they'd acted in good faith after all, they could remain employed by Enron (never mind the mens rea element of a federal criminal conviction under the FCPA).

Mr. Skilling's Employment Agreement said in part:

Employee shall at all times comply with United States laws applicable to Employee's actions on behalf of Employer, including specifically, without limitation, the United States Foreign Corrupt Practices Act, generally codified in 15 USC 78 (FCPA), as the FCPA may hereafter be amended, and/or its successor statutes. If Employee pleads guilty to or nolo contendere or admits civil or criminal liability under the FCPA, or if a court finds that Employee has personal civil or criminal liability under the FCPA, or if a court finds that Employee personally committed an action resulting in any Enron entity having civil or criminal liability or responsibility under the FCPA with knowledge of the activities giving rise to such liability or knowledge of facts from which Employee should have reasonably inferred the activities giving rise to liability had occurred or were likely to occur, such action or finding shall constitute "cause" for termination under this Agreement unless (i) such action or finding was based on the activities of others and Employee had no personal involvement or knowledge of such activities, or (ii) Employer's Board of Directors or Enron's management committee (or, if there is no Enron management committee, the highest applicable level of Enron management) determines that the actions found to be in violation of the FCPA were taken in good faith and in compliance with all applicable policies of Employer and Enron.
(emphasis added)

View Jeffrey Skilling's Employment Agreement Here.

Wednesday
Aug292007

Materiality, But Not By The Numbers

Strictly speaking, “materiality” should never be part of an FCPA discussion. A payment or promise to pay anything of value can violate the antibribery provisions, and the books and records provisions apply to any book, record or account. So size doesn’t matter after all.

Even so, materiality discussions sometimes happen. For example, what test applies to small cash gifts to foreign officials that are unrecorded but discovered during pre-acquisition due diligence of a non-U.S. target?

There is no purely quantitative test. Under U.S. accounting standards, small undisclosed amounts can be material, depending on all the circumstances. Some questions to ask are whether the payments are illegal under local law? If the payments stop, does the target risk losing a big amount of business? Do the payments mean the target's compliance in other areas is questionable? Do they violate loan covenants or other contractual requirements?

An omission or misstatement about small illegal payments can interact with important aspects of the business and thereby become material. So it is more than a matter of numbers.

View SEC Staff Accounting Bulletin: No. 99 – Materiality Here.

Tuesday
Aug282007

Dear Readers,

The FCPA Blog is grateful for your many expressions of support and encouragement. Your comments and suggestions are an important ingredient, so please let us hear from you, either in the comments section after a post or by email Here.

The aim is to respond to all ideas for discussions and to share contributions from readers, many of whom have a wealth of FCPA knowledge and experience.

Again, thank you for your support.

Sincerely,

The FCPA Blog

Monday
Aug272007

An Exodus From Nigeria?

A Reuters report from August 26, 2007 quotes Noble Corporation as saying it has been unable to obtain or renew permits for five of its seven drilling rigs operating in Nigeria due to the FCPA investigation of operations there. If those permits cannot be obtained, "we may need to terminate the drilling contract," Noble reportedly said. Presumably, the permits cannot be obtained because Noble will not authorize potentially corrupt payments to Nigerian government officials.

If true, the U.S. Department of Justice apparently has told Noble and at least ten more oil and gas service companies to pull out of Nigeria instead of risking future FCPA violations. That could put serious pressure on Nigeria's oil industry. The country finally will be forced either to renounce corrupt practices in the oil patch, or try to find new service providers who have the needed technology and are beyond the reach of the FCPA. Are there any?

View the Reuters' Report Here.

View Earlier Posts About Nigeria Here and Here.

Monday
Aug272007

The Long, Strong Arm of the FCPA

Its jurisdictional reach is legendary, but understanding exactly why the FCPA's coverage stretches so far and wide is not always easy. One explanation comes from the United States Attorneys' Manual, in this clear and sometimes ominous exposition:

Under the FCPA, U.S. jurisdiction over corrupt payments to foreign officials depends upon whether the violator is an "issuer," a "domestic concern," or a foreign national or business. An "issuer" is a corporation that has issued securities that have been registered in the United States or who is required to file periodic reports with the SEC. See 15 U.S.C. §§ 78c(a)(8), 78dd-1(a). A "domestic concern" is any individual who is a citizen, national, or resident of the United States, or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship which has its principal place of business in the United States, or which is organized under the laws of a State of the United States, or a territory, possession, or commonwealth of the United States. See § 78dd-2(h)(1).

Issuers and domestic concerns may be held liable under the FCPA under either territorial or nationality jurisdiction principles. For acts taken within the territory of the United States, issuers and domestic concerns are liable if they take an act in furtherance of a corrupt payment to a foreign official using the U.S. mails or other means or instrumentalities of interstate commerce. See §§ 78dd-1(a), 78dd-2(a). For acts taken outside the United States, U.S. issuers and domestic concerns are liable if they take any act in furtherance of a corrupt payment, even if the offer, promise, or payment is accomplished without any conduct within U.S. territory. See §§ 78dd-1(g), 78dd-2(i). In addition, U.S. parent corporations may be held liable for the acts of their foreign subsidiaries where they authorized, directed, or controlled the activity in question, as can U.S. citizens or residents, themselves "domestic concerns," who were employed by or acting on behalf of such foreign-incorporated subsidiaries.

Prior to 1998, foreign companies, with the exception of those who qualified as "issuers," and most foreign nationals were not covered by the FCPA. The 1998 amendments expanded the FCPA to assert territorial jurisdiction over foreign companies and nationals. A foreign company or person is now subject to the FCPA if it takes any act in furtherance of the corrupt payment while within the territory of the United States. There is, however, no requirement that such act make use of the U.S. mails or other means or instrumentalities of interstate commerce. See § 78dd-3(a), (f)(1). Although this section has not yet been interpreted by any court, the Department interprets it as conferring jurisdiction whenever a foreign company or national causes an act to be done within the territory of the United States by any person acting as that company's or national's agent.

(emphasis in original)

From the United States Attorneys' Manual, Title 9, Criminal Resource Manual §1018 “Prohibited Foreign Corrupt Practices” (November 2000).

View CRM §1018 Here.

Friday
Aug242007

Textron's FCPA Violations Caused by Fifth Tier French Subsidiaries

Textron Inc., without admitting or denying books and records and internal controls allegations, consented to the entry of a final judgment with the SEC permanently enjoining it from future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, ordering it to disgorge $2,284,579 in profits, plus $450,461.68 in pre-judgment interest, and to pay a civil penalty of $800,000. Textron will also pay a $1,150,000 fine pursuant to a non-prosecution agreement with the DOJ.

The SEC complaint alleges that from approximately 2001 through 2003, two of Textron's fifth tier French subsidiaries that it acquired in 1998 and 1999 authorized and made approximately $650,539 in kickback payments in connection with its sale of humanitarian goods to Iraq under the U.N. Oil for Food Program. The complaint also alleges that Textron's subsidiaries made illicit payments of $114,995 to obtain thirty-six contracts in the United Arab Emirates, Bangladesh, Indonesia, Egypt, and India from 2001 to 2005.

View the SEC’s Litigation Release Here.

View the SEC’s Complaint Here.

View the DOJ's Press Release Here.

Thursday
Aug232007

There Are Moral Problems . . .

"There are moral problems as well as legal problems that go far beyond simply the question of illegal payoffs to foreign officials.

"There are questions concerning the role of multi­national corporations, the extent to which they have obligations to the countries in which they conduct their business, the extent to which they should seek to raise the standards of conduct there, the respect which they should show the laws of other countries.

"Indicative of the complexity of this problem was the suggestion by one clergyman stated in a New York Times article -- that perhaps the gravest sin of a company, which had been exposed as making a multimillion dollar payment to the head of a Central American country to secure a reduction in tax level, was the harm inflicted upon the people of that country by channeling money into the hands of the ruler at the expense of tax revenues which would hopefully have been expended to alleviate the terrible poverty in that country.

"This is surely a dimension that most people have not consid­ered, and yet, I think is a most important one for it may well involve an ethical consideration that is perhaps more meaningful and more important than the legal problems associated with the bribe itself."

From a speech by A. A. Sommer, Jr., Commissioner, Securities and Exchange Commission, “Business Ethics and the Free Enterprise System ,” April 2, 1976.

Wednesday
Aug222007

Prosecutors Appeal Dismissal of FCPA Charges Related to Azerbaijan

The press is reporting that the Department of Justice on August 21, 2007 appealed the dismissal of FCPA charges against three men in connection with a bribery scheme in Azerbaijan.

On June 21, 2007, the U.S. District Court for the Southern District of New York dismissed all FCPA and related counts of an indictment against Viktor Kozeny, Frederic Bourke, Jr. and David Pinkerton. The District Court said the statute of limitations had run. The Justice Department argued that the five-year limitations period should be tolled based on the government's official requests for foreign evidence from the Netherlands and Switzerland.

The October 2005 indictment accused the three in a scheme to bribe senior government officials in Azerbaijan in order to ensure the privatization of the State Oil Company of the Republic of Azerbaijan ("SOCAR").

On July 6, 2007, hedge fund Omega Advisors, Inc. acknowledged that Clayton Lewis, one of its former employees, had learned, prior to Omega’s investment in the privatization of SOCAR, that Kozeny had entered into arrangements with some officials of the government of Azerbaijan that gave those officials a financial interest in the privatization. Lewis pleaded guilty on February 10, 2004 to conspiracy to violate the FCPA .

Omega entered into a settlement agreement with the DOJ and will not be prosecuted for any crimes related to its participation. Omega civilly forfeited $500,000 and agreed to continue to cooperate with the Government in connection with its investigation and prosecution of the case.

As a postscript, the DOJ noted that Omega invested more than $100 million in the Azeri privatization program in the spring and summer of 1998 and lost all of its investment, and to date privatization has not occurred.

View A Press Report of the Government's Appeal Here.

View the DOJ's Announcement of the Omega Settlement Here.

View the DOJ's Announcement of the Indictment Against Kozeny et al Here.

Sunday
Aug192007

FCPA Compliance For Small Companies

"Small Organizations.—In meeting the requirements [for an effective compliance program under the U.S. Sentencing Guidelines], small organizations shall demonstrate the same degree of commitment to ethical conduct and compliance with the law as large organizations. However, a small organization may meet the requirements . . . with less formality and fewer resources than would be expected of large organizations. In appropriate circumstances, reliance on existing resources and simple systems can demonstrate a degree of commitment that, for a large organization, would only be demonstrated through more formally planned and implemented systems.

"Examples of the informality and use of fewer resources with which a small organization may meet the requirements . . . include the following: (I) the governing authority’s discharge of its responsibility for oversight of the compliance and ethics program by directly managing the organization’s compliance and ethics efforts; (II) training employees through informal staff meetings, and monitoring through regular 'walk-arounds' or continuous observation while managing the organization; (III) using available personnel, rather than employing separate staff, to carry out the compliance and ethics program; and (IV) modeling its own compliance and ethics program on existing, well-regarded compliance and ethics programs and best practices of other similar organizations."

(emphasis added)

Quoted from the 2005 U.S. Federal Sentencing Guidelines, Chapter 8, Part B, §8B2.1., Effective Compliance and Ethics Program, Commentary Application Note 2 (c) (iii).


View Chapter 8, Part B of the U.S. Federal Sentencing Guidelines Here.

Sunday
Aug192007

An Effective FCPA Compliance Program Might Save the Company (A Great Defense Team Might Not)

“An Overview of the Organizational Guidelines” from the United States Sentencing Commission's May 2004 release includes the following jaw-dropping statement:

Criminal liability can attach to an organization whenever an employee of the organization commits an act within the apparent scope of his or her employment, even if the employee acted directly contrary to company policy and instructions. An entire organization, despite its best efforts to prevent wrongdoing in its ranks, can still be held criminally liable for any of its employees’ illegal actions.

(emphasis added)

This is meant to encourage adoption of effective compliance programs in order “to alleviate the harshest aspects of this institutional vulnerability . . . .”

It is also fair warning.

The majority view of the federal courts of appeals which have considered the question have held that a corporation is vicariously criminally liable for the crimes employees commit while acting within the scope of their employment--that is, within their actual or apparent authority and on behalf of the corporation. See Standard Oil Co. v. United States, 307 F.2d 120 (5th Cir. 1962); Developments in the Law--Corporate Crime: Regulating Corporate Behavior Through Criminal Sanctions, 92 Harv.L.Rev. 1227, 1247-5 1 (1979).

Under this view, which constitutes an application of respondeat superior principles to criminal statutes, it may be irrelevant that the employee is not a high managerial official, that the corporation may have specifically instructed the employee not to engage in the proscribed conduct, or that the statute is one that requires willful or knowing violations, rather than one that imposes strict liability. See, e. g., United States v. Hilton Hotels Corp., 467 F.2d 1000 (9th Cir. 1972), cert. denied, 409 U.S. 1125 (1973); Continental Baking Co. v. United States, 281 F.2d 137 (6th Cir. 1960); United States v. Armour & Co., 168 F.2d 342 (3d Cir. 1948); but see Holland Furnace Co. v. United States, 158 F.2d 2 (6th Cir. 1946). The stated rationale is that the criminal statutes impose a duty upon the corporation to prevent its employees from committing the statutory violations.

See Committee Comment to Instruction 5.3, Pattern Criminal Federal Jury Instructions (7th Cir. 1998).

What, then, should corporations do? The "Overview of the Organizational Guidelines" says this:

The [federal sentencing guidelines mitigate] the potential fine range - in some cases up to 95 percent - if an organization can demonstrate that it had put in place an effective compliance program. This mitigating credit under the guidelines is contingent upon prompt reporting to the authorities and the non-involvement of high level personnel in the actual offense conduct.

(emphasis added)

View "An Overview of the Organizational Guidelines" Here.

View the Seventh Circuit’s Pattern Criminal Federal Jury Instructions Here.