Search

Editors

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


Connect
FCPA Blog Daily News

Wednesday
Oct172007

One Law,Two Parts

The question comes from Pune, India: Can a payment that is not a bribe – such as a facilitating payment – be the basis for a criminal violation of the U.S. Foreign Corrupt Practices Act if the accounting for the payment is intentionally misleading?

The answer is yes, and here's how. The FCPA has two parts – the anti-bribery provisions and the accounting standards. They're supposed to work together and often do, but they can also work separately. The anti-bribery provisions are a stand-alone federal criminal statute enforced by the Department of Justice. They reach all U.S. companies and their personnel. In contrast, the accounting standards do not stand alone. They're part of the Securities Exchange Act of 1934. The accounting standards do not apply to everyone, just SEC-reporting companies, called "issuers," and their employees.

While the anti-bribery provisions are a pure criminal statute, the accounting standards – as part of the SEC’s regulatory scheme for public companies – are both administrative rules and a criminal statute. As administrative rules, the accounting standards can be violated by accident. When a “technical violation” happens, the SEC can sanction the violator, but only with civil or administrative penalties and not with criminal fines or jail time. The accounting standards become a criminal matter, however, when a violation happens “knowingly.” In that case, the offense is punishable by up to 20 years in prison and fines. By the way, the possible jail time for violating the anti-bribery provisions is "only" five years, not 20, and proving an accounting offense is simpler than an anti-bribery charge. That's why the Department of Justice favors FCPA accounting prosecutions when there's a choice.

But we're getting ahead of ourselves. Because the anti-bribery provisions and the accounting standards can work separately, an intentional violation of the accounting standards can be a criminal offense “whether or not such falsification is related to a foreign corrupt practice proscribed by the FCPA.” See the United States Attorneys' Criminal Resource Manual (Title 9, Section 1017, FCPA Corporate Recordkeeping). To paraphrase Uncle Sam, then, you can take the fcp out of the FCPA and still commit a criminal offense under the accounting standards. All that's required is for an issuer to cook the books. Therefore, a lawful facilitating payment that is knowingly accounted for in a misleading way can be the basis for a criminal violation of the FCPA.

View the United States Attorneys' Criminal Resource Manual, Title 9, Section 1017 Here.

Tuesday
Oct162007

Red Tape Round-Up

With the 17th National Congress of the Chinese Communist Party in full swing in Beijing, we thought it would be a good time to see what leaders there are doing about corruption. Here's some of what we found.

Red tape is out. The CCP says that since 2002, 68 national government departments have rescinded or amended 1,806 of their 3,605 administrative approval items for new businesses. We're not always sure about China's statistics, but these sound positive. At the provincial level, too, times are changing. The Party says local governments have canceled more than half their regulations. It cites the Zhejiang government, which "slashed the number of required approvals for new businesses from 3,251 to 630 in five years, and Chongqing, which canceled 312 items last year alone."

One reformer from the Party said cleaning up the country's over-regulated administrative approval system -- making it simpler and more transparent for new businesses to get up and running -- is essential to cutting corruption. He cited the example of "a city government in Henan Province that established a 'steamed bread office,' which required the registration of every person in the city who wanted to make and sell steamed bread." He also reported the story of "a south China farmer who took two years to acquire the 270 official seals needed to establish a poultry farm, by which time he found the business was no longer viable."

Notwithstanding the steamed bread office in Henan Province, the World Bank says China is making steady progress. It reduced the time to register a new business from 48 days in 2005 to 35 days in 2006. And new online customs procedures reduced the time to import and export by two days.

That's good news, because red tape and corruption are always best friends. And China -- though trying to help its citizens and foreign investors -- still has a long way to go in both departments. For now, FCPA compliance there remains difficult, and the red tape means compliance red flags are always in sight.

View the "News of the Communist Party of China" Here.

View a Summary of the World Bank's Doing Business Report 2007 Here.

Monday
Oct152007

Looking Back At Johnson & Johnson's FCPA Disclosure

The SEC's just-announced investigation of several orthopedic device makers for possible violations of the U.S. Foreign Corrupt Practices Act (reported here) probably originated in February 2007. That's when Johnson & Johnson said it had "voluntarily disclosed to the U.S. Department of Justice and the U.S. Securities and Exchange Commission that subsidiaries outside the United States are believed to have made improper payments in connection with the sale of medical devices in two small-market countries. "

At the same time, Johnson & Johnson said Michael J. Dormer, Worldwide Chairman of its Medical Devices & Diagnostics group, had retired. The company said, "In a letter to Johnson & Johnson, Mr. Dormer cited the internal review of these matters and noted he had 'ultimate responsibility by virtue of my position' for those subsidiaries that were the subject of the disclosure." Dormer started his career with Johnson & Johnson in the 1970s. He later worked for device-maker Depuy Orthopedics for six years until Johnson & Johnson acquired it in 1998.

Johnson & Johnson's self-disclosure about potential FCPA violations would have given the SEC and DOJ a quick start in examining the overseas practices of orthopedic device makers. But before prosecutors turned their attention to the FCPA, they apparently wanted to first resolve the domestic bribery cases against Depuy and its peers -- Biomet, Zimmer, Smith & Nephew and Stryker. The DOJ announced a settlement of the domestic bribery cases on September 27, 2007, and the SEC's investigative letters about potential FCPA violations went out to the companies just two weeks later.

View Johnson & Johnson's February 12, 2007 Press Release Here.

Friday
Oct122007

Medical Device Makers Face FCPA Investigation

The Securities and Exchange Commission is investigating possible violations of the U.S. Foreign Corrupt Practices Act by Biomet Inc., Stryker Corp., Zimmer Holdings Inc., Smith & Nephew plc and Medtronic Inc. They've all made announcements about the SEC's action and deny any violations. The companies make replacement implants for knees, hips and the spine and control most of the U.S. market.

Last month, four of them settled charges that they paid kickbacks to induce U.S. doctors to buy their products. Medtronic wasn't part of that case, but Depuy Orthopedics (part of Johnson & Johnson) also joined the settlement. Together, Biomet, Zimmer, Smith & Nephew and Depuy paid penalties of $310 million. Stryker was part of the settlement but wasn't required to pay anything.

Since resolving the domestic kickback charges, the companies have been under the surveillance of plenty of high-profile legal talent. Their deferred prosecution agreements with the Department of Justice required appointing compliance monitors, and here's the impressive line up: former U.S. Attorney General John Ashcroft for Zimmer (which paid $169.5 million for the settlement), former U.S. Attorney for the Central District of California Debra Yang for Depuy (which is not named yet in the SEC's FCPA investigation), former New Jersey Attorney General David Samson for Smith & Nephew, former U.S. Attorney for the Southern District of New York in Manhattan David N. Kelly for Biomet, and former counsel to the Federal Trade Commission during the Reagan Administration John Carley for Stryker.

Curiously, the companies' deferred prosecution agreements -- although packed with legal details -- focus entirely on their future behavior in the U.S. domestic market. There's no mention of overseas bribery or the Foreign Corrupt Practices Act. That big gap, we think, is likely to close soon. Which may result in the A-Team monitors expanding their roles to include audits of the companies' compliance with the anti-bribery and books-and-records provisions of the FCPA.

Zimmer, Stryker, Medtronic and Smith & Nephew are public companies. Biomet was bought last month by Blackstone Group, Goldman Sachs Capital Partners, KKR and TPG Capital.

View all of the DOJ's September 27, 2007 Deferred Prosecution Agreements and Related Documents Here.

Thursday
Oct112007

Termites In China

The happy people in the photo are Ma Wen (right), head of China's new National Bureau of Corruption Prevention, and her deputy, Qu Wanxiang. The occasion is the official unveiling of the anti-corruption bureau in Beijing on September 13, 2007.

But according to an October 11, 2007 story by Terry Atlas in U.S. News and World Report here, China's top corruption-busters have very little to smile about. The story, citing a report by Minxin Pei, a China expert at the Carnegie Endowment for International Peace in Washington, describes China's bribery problem as "termites chewing into the foundation of China's growth" and "one of the most serious threats to the nation's future economic and political stability." The story says the direct costs of China's corruption are as much as $86 billion a year. "It contributes to social unrest — sparking thousands of protests a year — and contributes to environmental and health problems. "

Though full of smiles, the pictured Ms. Ma and Mr. Qu could probably use some additional staff. The story says that in China "the odds of a corrupt official going to jail are less than 3 percent, making corruption a high-return, low-risk activity."

Everything may be relative, but FCPA enforcement isn't supposed to be. There are no breaks because one host county has more bribery than another. In a place like China, that means stepped up FCPA compliance is the only option.

View the Carnegie Report Here.

Wednesday
Oct102007

Greetings, Comrade

A friend of The FCPA Blog who bunked in Singapore awhile and has since returned to Washington, D.C. asks: In a communist country, is everyone a government official?

The question is important because the U.S. Foreign Corrupt Practices Act prohibits corrupt payments to "foreign officials" for the purpose of obtaining or retaining work or gaining any unfair advantage. If, as our questioner suspects, everyone in a communist country is a foreign official, then compliance risks multiply. In China, for example, there will be 1.3 billion chances to violate the FCPA every day.

Duly frightened, we believe the prudent approach in a communist state or any country where the government dominates the economy is to consider everyone a foreign official, until proven otherwise. There are no cases or FCPA Opinion Procedure Releases we know of that answer the question definitively. But foreign officials for the FCPA include officers, employees or representatives of any government, at any level. They also include officials of foreign political parties.

In the communist states we're familiar with, especially the really Big One, most people work for government-owned or controlled enterprises -- hospitals, shipyards, oil companies, airlines, banks, insurance companies, media firms, sports teams, real estate developers, investment funds, the 2008 Olympics Committee, you name it. Even when ultimate ownership is obscure, which can be the case with listed companies, control may still rest with the government or its alter ego, the Chinese Communist Party. The CCP appoints only its own members to be directors of state-owned enterprises. And any CCP member important enough to nab a directorship at a state-owned enterprise or international joint venture probably holds some kind of party title and should therefore be deemed an "official of a foreign political party" for the FCPA.

Some practitioners are also guided by local laws. Using again the example of China, the legal definition of a "public official" in a number of statutes and regulations is broad and apparently covers all Chinese Communist Party members. The U.S. Department of Justice has said in another context that it is not bound by local statutory definitions or legal opinions. But for this question, the DOJ is unlikely to interpret "public officials" much different than the host country does. Mark Mendelsohn, the Deputy Chief of the DOJ's Criminal Division, Fraud Section (the group that prosecutes FCPA cases), noted in 2006 that many companies now assume that everyone in China is a government official, because "Chinese regulators are involved in any business enterprise." He warned against an FCPA defense based on claims that "you thought you were paying a kickback to a private individual." (SEC Today, Volume 2006-57, Friday, March 24, 2006).

Anyone overcome by a desire to inspect this post's annotations -- now safely stored in a nearby cardboard box -- should contact us Here.

Tuesday
Oct092007

With Friends Like These . . . .

The U.S. Foreign Corrupt Practices Act prohibits both direct and indirect corrupt payments to foreign officials. Indirect payments typically pass through the hands of an overseas partner or agent, then end up with the foreign official for an unlawful purpose. Most violations happen that way.

A plain-English explanation of the anti-bribery provisions written by the Department of Justice warns U.S. firms about their choice of overseas partners and agents. A bad choice is someone who is likely to make corrupt payments. That likelihood, the DOJ says, is usually indicated by warning signs called "red flags." If there are red flags to start with and if the intermediary does bribe a foreign official to help the business, the U.S. company will have trouble arguing it shouldn't be responsible for an FCPA violation based on an indirect corrupt payment.

Red flags, as the name suggests, are easy to spot. Unusual payment patterns or financial arrangements. A history of corruption in the country. A refusal by the foreign joint venture partner or representative to certify that it will not take any action that would cause the U.S. firm to be in violation of the FCPA. Unusually high commissions. Lack of transparency in expenses and accounting records. An apparent lack of qualifications or resources on the part of the joint venture partner or representative to perform the services offered. A recommendation from the local government of the intermediary. All these, the DOJ says, should set off compliance alarm bells.

When red flags appear, the burden of compliance increases. More red flags mean more caution is required. It's a mistake to interpret red flags merely as a sign of the local culture, a helpful clue about how business is really done there, and something you just have to live with. Seeing red flags and lowering compliance standards, when the right response is to raise them, often leads to an FCPA disaster.

View the DOJ's "Lay Person's Guide to FCPA" Here.

Monday
Oct082007

Compliance Guidelines

Many come to The FCPA Blog seeking compliance guidelines. That's good, because our aim is to help people comply with the U.S. Foreign Corrupt Practices Act. Some seekers, however, have noticed that our posts and resources don't include any out-of-the-box compliance programs, at least not yet. A number of specimens are available on the Internet, of course, and a Google search will turn up at least a half dozen programs already used by well-known companies.

But The FCPA Blog doesn't want to mislead anyone into thinking that a model program always equals model compliance. It doesn't. Compliance is a matter of substance, not form, and springs from management's commitment to obey the law. A compliance culture protects against FCPA disasters; model programs adopted for their good looks do not. Camouflaging a cultural bald spot with a compliance toupee broadcasts that the effort is a cover-up and a sham. It can do more harm than good. But we digress.

We meant to say that those seeking compliance guidelines often arrive here from small private companies, doing business internationally for the first time. Where should they start? A good place is the "Lay Person's Guide to FCPA." It's a plain-English explanation of the FCPA's anti-bribery provisions from the U.S. Department of Justice. And it's written especially for "potential exporters and small businesses that are unable to obtain specialized counsel on issues related to the FCPA." Another good resource -- although a bit more technical -- is Chapter 8, Part B of the U.S. Federal Sentencing Guidelines. It describes what it takes to have an effective compliance and ethics program, and how small companies can leverage the tools on hand to meet the requirements. Finally, visitors are always welcome to contact The FCPA Blog and our sponsor for more help.

View the "Lay Person's Guide to FCPA" Here.

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

View the Post "FCPA Compliance For Small Companies" Here.

Saturday
Oct062007

Saved By The Bell In Germany?

Siemens' blitzkrieg settlement of corruption charges with German prosecutors happened without public proceedings and, so far, with very little disclosure. Apart from Siemens' statement that its tax adjustment involved "questionable payments of approximately €420 million," not much is known about the settlement and what it covers. Now, with German enforcement actions against Siemens apparently closed, some may view the moves by the Munich Office of Public Prosecution as opaque and premature.

The U.S. Department of Justice and the Securities and Exchange Commission are unlikely to consider settling Foreign Corrupt Practices Act allegations until they know the full scope of Siemens' potentially illegal conduct. The next challenge for Siemens, then, will be to convince U.S. prosecutors that the company's internal investigation, when it is finished, is accurate and complete. That might be difficult. An earlier report by the Wall Street Journal said some Siemens' managers are not cooperating with the internal investigation, and a second Journal report said Siemens' American law firm thinks the questionable payments might amount to €1.6 billion instead of the €420 million cited in the German settlement.

While U.S. prosecutors ponder their next steps, the abrupt end of the German prosecutions may cause other governments in Europe and elsewhere to wonder if they should demand full public disclosure of Siemens' questionable conduct and perhaps impose sanctions of their own.

Friday
Oct052007

Siemens Settles Corruption And Tax Cases With German Prosecutors

Siemens AG said it will pay a €201 million fine in connection with global corruption allegations that will end the investigation by the Munich Office of Public Prosecution. In an October 4, 2007 press release, Siemens said it will also take a charge for taxes of €179 million for questionable payments of approximately €420 million that were improperly deducted.

The engineering and electronics giant based in Germany said its internal investigation into global corrupt practices is ongoing. It said it has already taken remedial measures to avoid sensitive payments and strengthen internal controls. On October 1, 2007, it announced the reorganization of corporate-wide legal and compliance responsibilities.

Siemens can now concentrate on reaching a resolution with U.S. prosecutors of potential U.S. Foreign Corrupt Practices Act violations.

Siemens AG's ADRs trade on the New York Stock Exchange under the symbol SI.

View Siemens' October 4, 2007 Press Release Here and its October 1, 2007 Press Release Here.

Thursday
Oct042007

Tidewater's Compliance Review Goes Global

The Importance of Being Cooperative; Are Facilitating Payments Causing More Problems?

Tidewater Inc. is now investigating its compliance with the U.S. Foreign Corrupt Practices Act worldwide, the company said in an October 4, 2007 press release. In April this year, Tidewater announced an internal investigation of practices in Nigeria. The Nigeria investigation -- which grew out of the Department of Justice's review of Panalpina's operations there -- uncovered potential compliance problems in several countries.

Tidewater's 454-vessel fleet is the largest in the offshore energy industry. It says it is looking at immigration and customs practices, and its use of agents for obtaining business. It doesn't mention which other countries are involved, but Panalpina -- a global logistics and freight forwarding firm -- has said the DOJ asked for information about customs clearance, among other things, in Saudi Arabia and Kazakhstan as well as Nigeria.

The dozen or so oil and gas-related companies implicated so far in the investigation of Panalpina may be working to keep their internal investigations a step or two ahead of the Department of Justice and the Securities and Exchange Commission. They will want to be viewed by the DOJ and SEC as cooperative when it comes time to resolve any FCPA problems that are found.

The current crop of oil and gas-related investigations into customs clearance and immigration practices should eventually help clarify the permitted uses of facilitating payments, a favorite topic of The FCPA Blog.

Tidewater Inc. trades on the New York Stock Exchange under the symbol TDW.

View Tidewater's Press Release Here.

Wednesday
Oct032007

The "I Didn't Know" Defense

As defenses against the U.S. Foreign Corrupt Practices Act go, "I didn't know" is among the most popular. I didn't know it was against the law. I didn't know our agent would give money to foreign officials. I didn't know our partner's brother-in-law works for the prime minister. Often the defense has no visible means of support and is only a handy excuse. Other times, though, the defense is sincere and looks strong. But even then it probably won't work, as David H. Mead discovered the hard way back in 1998.

Mead, the former president of Saybolt Inc., was charged with violating and conspiring to violate the FCPA's anti-bribery provisions by making a $50,000 corrupt payment to government officials in Panama. Mead pleaded not guilty and went to trial. His defense rested in part on evidence that Saybolt's former outside counsel had advised that the $50,000 payment might not violate the FCPA if it came from Saybolt's Dutch affiliate. That advice was wrong, and Saybolt and Mead were indicted. Saybolt -- which later sued its former lawyer for legal malpractice -- pleaded guilty and paid a $1.5 million fine.

At Mead's trial, prosecutors had the burden of proving Mead acted with "knowledge" that the $50,000 payment was illegal under U.S. law. In his instructions to the jury, the judge explained the concept of legal "knowledge" and how the jury could determine what Mead knew:
_____________

Ladies and Gentlemen of the Jury:

The element of knowledge may be satisfied by inferences you may draw if you find that the defendant deliberately closed his eyes to what otherwise would have been obvious to him. When knowledge of the existence of a particular fact is an element of the offense, such knowledge may be established if a person is aware of a high probability of its existence and then fails to take action to determine whether it is true or not.

If the evidence shows you that the defendant actually believed that the transaction was legal, he cannot be convicted. Nor can he be convicted for being stupid or negligent or mistaken; more is required than that. But a defendant’s knowledge of a fact may be inferred from willful blindness to the knowledge or information indicating that there was a high probability that there was something forbidden or illegal about the contemplated transaction and payment. It is the jury’s function to determine whether or not the defendant deliberately closed his eyes to the inferences and the conclusions to be drawn from the evidence here.
_____________

The jury, for some reason, didn't believe that Mead believed the payment was legal. Nor did the jury believe he had been stupid or negligent or mistaken. Had he been willfully blind? That would mean he knew more than Saybolt's own lawyer. Unfortunately for Mead, in the face of the evidence the jury somehow found that he had "knowledge" the payment would violate the law. He was convicted and sentenced to four months in prison, home detention and probation, and a $20,000 fine. The best explanation is that the New Jersey jury simply didn't want a $50,000 bribe to a government official in Panama to go unpunished.

If the "I didn't know" defense didn't work back then for David H. Mead -- who violated the FCPA on the advice of counsel -- then it's unlikely to work now in most other cases.

See U.S. v. David H. Mead and Frerik Pluimers (Cr. No. 98-240-01), D.N.J., 1998. See also Stichting Ter Behartiging Van De Belangen Van Oudaandeelhouders In Het Kapitaal Van Saybolt International B.V. (Foundation of the Former Shareholders of Saybolt International B.V.) v. Philippe S.E. Schreiber and Walter, Conston, Alexander & Green P.C. (S.D.N.Y.) (99 Civ. 114411, Memorandum Order, Filed June 13, 2001) and U.S. v. Saybolt North America Inc. (Cr. No. 98CR10266WGY), D. Mass., Aug. 18, 1998.