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FCPA Blog Daily News

Monday
May122008

A Strange Season

The last time it happened, North America was still deep in winter. On February 22nd, Flowserve agreed to appoint a monitor under a deferred prosecution agreement with the Department of Justice. Since then, just one corporate FCPA case is known to have settled. AB Volvo's agreement with the DOJ was announced on March 22nd. But -- typical of oil-for-food cases -- it didn't call for appointment of a monitor. In April and so far in May, no corporate FCPA settlements have made the news, with or without monitors.

What's going on? Last year -- even with fewer FCPA cases pending -- the DOJ still settled an average of one corporate case a month. Why the slowdown in 2008? Well, as we've mentioned before, there's an undeclared moratorium at the DOJ on new appointments of monitors. And since most corporate FCPA settlements involve a monitor, that means settlements must wait.

The de facto moratorium started after ex-U.S. Attorney General John Ashcroft's controversial appointment by his former subordinate, U.S. Attorney Chris Christie. Ashcroft became a monitor for orthopedic device maker Zimmer Holdings Inc. as part of Zimmer's settlement of a domestic bribery case. The news that Ashcroft's firm could rake in as much as $52 million from the appointment triggered sticker shock on Capitol Hill. Democratic lawmakers (and plenty of Republicans) were very unhappy to learn that Bush-appointed prosecutors, acting alone, could tap Republican big shots and other friends for such lucrative (part-time) posts. So Congress launched investigations into all aspects of the monitors -- their appointment, pay, oversight and reporting responsibilities -- and even whether deferred prosecution agreements make sense in the first place. Until the political firestorm is doused, nobody wants new appointments to happen -- not Congress, the DOJ, companies in trouble, or potential monitors themselves.

It's up to Attorney General Michael Mukasey to make peace with Congress and end the stalemate. Can he do it? A better question may be, is he willing to do it? According to a story in the Washington Post from April 17th, the AG's approach with lawmakers hasn't been . . conciliatory. The story focused not on the monitorship mess but on other disagreements between the DOJ and Congress -- warrantless wiretapping operations, the media shield law, updating the state secrets law, the use of national security letters, and attorney-client privilege for military detainees. Based on comments from Republican Sen. Arlen Specter, the story said on these issues the new Attorney General has been overly obstinate and unwilling to compromise. Ouch. If that's the attitude, it could be blocking resolution of the monitorship logjam as well.

For some companies, the delay is bad news. Siemens has been saying publicly since Christmas that it wants a quick resolution with U.S. authorities -- so it can concentrate on repairing its scandal-damaged business. Panalpina's bottom line is also hurting, in part, it says, because of the DOJ's pending FCPA case. Other companies, though, are sure to be using the delay to their advantage -- by conducting deep internal investigations, firing or demoting people who caused the FCPA violations, and adopting best practices to create effective compliance programs. Those companies should be in a better position to deal with the DOJ when the time finally comes.

For now, though, the strange season continues.

Friday
May092008

FCPA Guilty Plea For Bribing UK Official

A former co-owner and executive of California-based Pacific Consolidated Industries (PCI) pleaded guilty yesterday to violating the Foreign Corrupt Practices Act. Martin Eric Self, 51, of Orange, California pleaded guilty to a two-count information charging him with violating the FCPA by paying more than $70,000 in bribes to a U.K. Ministry of Defence official. The bribes were intended to secure equipment contracts with the U.K. Royal Air Force.

In October 1999, Self, a U.S. citizen, and Leo Winston Smith, then PCI’s executive vice president and director of sales and marketing, had PCI enter into a marketing agreement with a relative of a U.K. Ministry of Defence official. According to the DOJ, Self -- a signatory on PCI's marketing agreements and bank accounts -- admitted that he didn't know of any genuine services provided by the official’s relative. Instead, Self believed the payments probably were benefiting the official in exchange for obtaining and retaining the equipment-supply contracts.

Self is scheduled to be sentenced in federal court on September 29, 2008. Although he faces a maximum sentence of five years in prison per count, his plea agreement contemplates a prison term of eight months, subject to the court's final determination at sentencing.

For his role in the scheme, former marketing head Smith, a co-founder of PCI, was indicted in April 2007. The government says he conspired to bribe the U.K. Ministry of Defence official in order to obtain equipment contracts worth more than $11 million dollars. In addition to the FCPA violations, the indictment also charges Smith with money laundering and tax offenses. He's scheduled to stand trial in July 2008. Self, as part of his plea agreement, will presumably testify against his former colleague. Evidence against Smith is also likely to come from U.K. authorities. Their investigation of the U.K. Ministry of Defence official resulted in his guilty plea in the United Kingdom for accepting bribes from PCI. He was sentenced to two years in prison.

Privately-held PCI manufactures Air Separation Units (ASUs) and other equipment for the military, medical, and oil and gas markets. ASUs generate oxygen in remote, extreme and confined locations. The DOJ said that in late 2003, after the alleged illegal conduct occurred, PCI was acquired by a group of investors who referred the case to U.S. prosecutors and "fully cooperated in the government’s investigation."

Assistant Attorney General for the Criminal Division Alice S. Fisher, who departs from the DOJ later this month, said, “Individuals who resort to bribery and other fraudulent means to secure contracts with foreign governments not only corrupt legitimate bidding processes, but they also damage the integrity of the global marketplace. Furthermore, using an intermediary to make bribe payments will not insulate individuals from prosecution."

Referring to the collaboration by prosecutors in the U.S. and U.K., Ms. Fisher also said, "The coordinated international law enforcement efforts of this case exemplify the type of cooperation needed to fight crime in the 21st century, where physical borders are not boundaries for criminal activity. I would like to thank our colleagues in the United Kingdom for their efforts and assistance in prosecuting this case as well as the FBI and IRS for their investigatory assistance.”

View the DOJ's May 8, 2008 news release here.

Wednesday
May072008

Former ITXC Execs Settle Civil FCPA Charges

The Securities and Exchange Commission said this week that on April 18, 2008 it settled civil proceedings under the Foreign Corrupt Practices Act against Steven J. Ott, Roger Michael Young, and Yaw Osei Amoako. The SEC charged the former executives of ITXC Corp. with violating the antibribery and books and records provisions of the FCPA by bribing senior officials of government-owned telephone companies in Nigeria, Rwanda and Senegal, and concealing and falsely reporting the illegal payments. ITXC was a publicly-held VOIP company based in Princeton, New Jersey. It was acquired by Teleglobe International Holdings Ltd. in May 2004.

In settling the SEC's civil enforcement action, Ott, Young and Amoako each consented to the entry of a final judgment that permanently enjoins them from violating Sections 30A and 13(b)(5) of the Securities Exchange Act of 1934, Rule 13b2-1 thereunder, and from aiding and abetting violations of Exchange Act Section 13(b)(2)(A) and, with respect to Ott and Young, violations of Exchange Act Section 13(b)(2)(B). Amoako also must pay $188,453 in disgorgement and prejudgment interest. He took kickbacks for some of the bribes he paid to the foreign officials.

The three defendants have also been charged by the Department of Justice for criminal violations of the FCPA. In the criminal action, Amoako, 55, of Hillsborough, N.J., was sentenced in December 2006 to 18 months in prison for conspiring to violate the antibribery provisions of the FCPA and to violate the Travel Act. Amoako pleaded guilty in September 2006 to paying about $266,000 in bribes disguised as “commissions” to employees of state-owned phones companies in Nigeria, Rwanda and Senegal. In addition to his prison sentence, he was also ordered to pay a $7,500 fine and serve two years of supervised release.

In July 2007, Ott and Young also pleaded guilty to separate one-count criminal informations charging them with conspiring to violate the FCPA and the Travel Act. They haven't been sentenced yet in the criminal proceedings and face up to five years in prison and a $250,000 fine.

Ott was ITXC's former vice president for global sales, Young was its former managing director for the Middle East and Africa, and Amoako was the regional director for sales in Africa. They negotiated and / or approved bribes to foreign officials in Nigeria, Rwanda and Senegal in order to obtain contracts for ITXC to transmit telephone calls to those countries. The three executives paid $267,468.95 in bribes between August 2001 and May 2004. ITXC made $11,509,733 in net profits from the contracts obtained through the bribery.

In its complaint against Amoako, the SEC gave this description of his bribery in Nigeria: The sole purpose of the payments was to influence the agent, a foreign official, to steer the carrier contract to ITXC and thereby enable it to obtain and retain business with Nitel. There was no legitimate purpose for the payments. In fact, as a result of the agreement with the Nitel Agent, ITXC earned profits of $1,136,618 from selling telephone service to customers calling Nigeria. ITXC could not have made such sales without having the carrier contract with Nitel that resulted from Amoako’s bribes to the agent. Amoako received a kickback of $50,000 from the Nitel Agent in mid- 2004. Amoako concealed the kickback from ITXC and his superiors by having the money deposited at financial institutions in Africa.

View the SEC's Litigation Release No. 20556 / May 6, 2008 here.

View the SEC's Complaint in Securities and Exchange Commission v. Steven J. Ott and Roger Michael Young, Civil Action No. 06-4195 (GEB) (D.N.J.) and Securities and Exchange Commission v. Yaw Osei Amoako Civil Action No. 05-4284 (GEB) (D.N.J.) here.

View the DOJ's July 27, 2007 news release about Ott and Young's guilty pleas here.

View the DOJ's Sept. 6, 2006 news release about Amoako's guilty plea here.

Tuesday
May062008

The Woolf Report Tells No Tales

The message in our inbox yesterday said: You may find this interesting if you haven't seen it already. It's the Woolf Committee Report on BAE -- released this morning. It's breathtaking in the extent to which they have focused stubbornly on the future and avoided a meaningful review of past conduct. I know that was the basis upon which the committee was formed, but it's difficult to imagine how future conduct can be determined without past wrongdoing explored.

Our correspondent is a fine compliance professional with one foot in Washington and the other in London, so we took the warning seriously. That is, we lowered our expectations. But even so, the report was disappointing. Not only does it avoid dealing with anything historical or factual, but it also never says that public corruption is wrong. That it's a crime that always cheats a national treasury somewhere, perverts the marketplace, and victimizes the citizens. There was none of that.

Instead, the report from the 75-year-old former lord chief justice, who was commissioned in June 2007 by BAE at a wage of £6,000 a day, says over-and-over that BAE's reputation is hurt when the company is caught doing bad things, and that damage to its reputation is in turn bad for its business. Beyond that, the report's action items could have been cut-and-pasted from compliance boilerplate -- creating an impression that the Woolf Committee (Lord Woolf, Philippa Foster Back, Sir David Walker, Dr Richard Jarvis and Douglas Daft) either didn't actually speak with anyone who works at BAE, or didn't find anything they said notable enough to be repeated.

The Guardian, meanwhile, posted a short list of provocative questions that remain unanswered:

· Did BAE set up a secret offshore subsidiary called Red Diamond to handle worldwide cash for arms deals?

· Did the company pay 31% "commission" into a Swiss account on a sale to the African state of Tanzania?

· Did BAE employ Count Alfons Mensdorff-Pouilly, previously caught up in a bribery scandal, as its undercover agent in central Europe?

· Did it provide exotic holidays and prostitutes to the entourage of the head of the Saudi air force?

· Did it pay £1bn to Saudi agents including Wafic Said, and another £1bn to Saudi Prince Bandar? To every question about what BAE may have actually done, Woolf's answer was the same: "We weren't given the job of looking at the past."

The Guardian also reminded readers that BAE "still faces criminal investigations in London, Washington, Dar es Salaam, Bucharest, Prague, Berne, Budapest and Johannesburg, over continuing multi-million pound arms contracts. Last month Woolf's former colleague, Lord Justice Moses, ruled that the abandonment of the Serious Fraud Office investigation into BAE had betrayed the rule of law. Moses said there had been an 'abject surrender' to threats when the SFO, under pressure from BAE, from the then prime minister Tony Blair, and from Prince Bandar, agreed to drop investigations into the Saudi payments."

(As an aside, we're not often on common editorial ground with the Guardian. But its enterprise and leadership on the BAE story show why the somewhat offbeat, trust-controlled newspaper has a reputation for courageous reporting. In the movie, "The Bourne Ultimatum," an investigative report in the Guardian that mentions Jason Bourne is important to the plot and ultimately leads to the assassination of the fictional reporter. )

The Corner House, one of the public-interest campaigners that won the BAE court case against the Serious Fraud Office, called the Woolf inquiry "an interesting academic exercise. . . BAE should have saved its £1.7m spent on the committee and adopted instead accepted best practice: namely, to employ a law firm as an independent investigator to go through all its internal emails and documents in order to make adequate disclosure to the law enforcement authorities. . . . If BAE is serious about breaking from the past, it needs to show that it is fully cooperating with all the current investigations by law enforcement officers in the UK, US and Switzerland."

As for our disappointment, we always try to be realistic about public corruption. We know bribery is the second oldest profession and won't disappear anytime soon. The temptation in business to take shortcuts via well-placed bribes to government officials is powerful. When people fall, as they sometimes will, they and their approving employers deserve punishment. Once punished, though, they also deserve another chance -- assuming there's at least some recognition of wrongdoing ("mistakes were made"). That, after all, is the path to rehabilitation and to a full restoration of corporate citizenship.

The Woolf Committee Report is available here.

Monday
May052008

We Ask, And Answer, A Question

Can an employee be charged with a criminal violation of the Foreign Corrupt Practices Act even if his or her company isn't convicted of an FCPA offense? Yes. An employee can be prosecuted under the FCPA even if the employer hasn't been convicted. But -- and this is why the question is still asked -- the answer hasn't always been yes. Here's the story.

When Congress first debated criminalizing overseas public bribery, there was concern, especially at the Securities and Exchange Commission, that employees would become scapegoats for bribe-paying corporations. Congressman Bob Eckhardt championed the issue, and in 1977 called for testimony from Harvey Pitt, who was then general counsel of the SEC. Pitt, using the term "agent" to mean "employee," explained the SEC's concern this way:

"Indeed, the corporation's interest might even be in conflict with that of the agent. The corporation might desire to have Joe Bloke found to have intentionally engaged in bribery and to have been the sole moving agent, that is, the company never agreed to it and the quicker they can convict Joe Bloke, the better off the company is. It is relieved of responsibility and it has a sacrificial lamb in Rome and everybody forgets about the activity."

Congressman Eckhardt responded by inserting into the FCPA language requiring the government to convict an issuer or domestic concern of violating the FCPA's antibribery provisions as a condition precedent for holding any employee responsible. When the FCPA became law, it included at Section 78ff(c)(3) the following italicized language (known as the Eckhardt Amendment): "Whenever an issuer is found to have violated section 78dd-1(a) of this title, any employee or agent of such issuer who is a United States citizen, national, or resident or is otherwise subject to the jurisdiction of the United States (other than an officer, director, or stockholder of such issuer), and who willfully carried out the act or practice constituting such violation shall, upon conviction, be fined not more than $10,000, or imprisoned not more than five years or both."

That solved the problem for the SEC. For the Department of Justice, however, the seemingly simple fix had disastrous consequences -- first seen publicly in a case called U.S. v. McLean, 738 F.2d 655 (5th Cir. 1984), cert. denied, 470 U.S. 1050 (1985). George McLean's employer, International Harvester Company, was the dominant worldwide supplier of turbine equipment for the oil and gas industry. After a U.S. grand jury's investigation into overseas bribery, McLean was charged in 1982 with conspiring to bribe officials at Mexico's state-owned Petroleos Mexicanos ("Pemex") and with 43 substantive FCPA counts of aiding and abetting the bribery. Also in 1982, Harvester entered into a plea agreement with the DOJ, admitting to one count of conspiracy to violate the FCPA. In the plea agreement, the government stipulated that Harvester wouldn't face further charges related to the sales to Pemex.

McLean, in his trial, then moved to dismiss all the charges against him. He said that under the Eckhardt Amendment, the government's failure to convict Harvester of any substantive FCPA violation barred his prosecution for any FCPA-related offenses. The federal district court agreed as to the 43 substantive counts against McLean, which were dismissed, but denied his motion to dismiss the conspiracy charge. Harvester, the trial court said, had pleaded guilty to conspiracy to violate the FCPA; therefore the government could prosecute McLean for conspiracy as well.

On appeal (in which McLean represented himself), the Fifth Circuit disagreed. It said the conspiracy count must also be dismissed. That ended the government's case against McLean. "[I]n order to convict an employee under the FCPA for acts committed for the benefit of his employer," the appellate court said, "the government must first convict the employer. Because the government failed to convict Harvester [of a substantive FCPA count] and under the plea agreement will be unable to indict Harvester and try it with McLean, the [FCPA] bars McLean's prosecution."

The DOJ faced an awful dilemma. It now had to obtain criminal convictions against companies for substantive FCPA offenses before it could bring FCPA charges against their employees. But even in the early 1980s, the DOJ recognized and feared the disproportionate damage corporate prosecutions could unleash -- best illustrated some 20 years later by Arthur Andersen's demise after a felony conviction (later overturned) and the loss of some 85,000 jobs. Clearly the Eckhardt Amendment -- intended to fix one problem for the SEC -- had caused an even worse problem for the DOJ. The fix needed to be fixed.

Relief came through the Trade and Competitiveness Act /Foreign Corrupt Practices Act Amendments of 1988. It repealed the Eckhardt Amendment language, and from then till now there's been no "condition precedent" to the government's prosecution of employees for FCPA offenses. What about the SEC's fear that employees would become sacrificial lambs for bribe-paying companies?

Some white collar criminal defendants will always feel sacrificed. That's unavoidable. But have corporations really slipped the noose for their FCPA violations by selling out their employees? Well, lots of companies have escaped criminal conviction through deferred prosecution agreements, and those agreements typically do require cooperation with the DOJ's efforts to prosecute employees. But are the companies getting off lightly? Not really.

Deferred prosecution agreements usually impose stringent compliance obligations, some of which -- like the appointment of monitors, waiver of attorney-client privilege, periodic reporting to the DOJ, and the like -- are financially burdensome and even punitive, as well as intrusive. They're also generally effective at preventing recidivism. At the same time, while individuals have been prosecuted for FCPA violations, there's been no flood of cases against employees in lieu of corporate enforcement actions.

The balance, then, seems healthy. Bribe-paying companies are being punished (if not convicted) for their criminal behavior, but they're also being allowed to survive. Meanwhile, employees who blatantly flout the FCPA are also held accountable for their crimes.

View the Foreign Corrupt Practices Act Amendments of 1988 here.

View U.S. v. McLean, 738 F.2d 655 (5th Cir. 1984), cert. denied, 470 U.S. 1050 (1985) in the Public Library of Law (by free registration) here.

Sunday
May042008

Great Words From The Hill, Circa 1977

Aside from the villa on Lake Como and the Aston Martin in the garage, the greatest perk that comes from tending this garden is hearing from so many talented experts in the field of the Foreign Corrupt Practices Act. Last week, for example, a generous reader shared with us a soon-to-be published paper about Facilitating Payments. Seeing our favorite FCPA topic treated with such thorough scholarship, and wrapped in a truly eloquent presentation, was genuinely exciting. It made our day.

We mention the incident, first, to express our gratitude to that particular reader and to all who contribute to the FCPA Blog in so many ways. We also mention it because the paper in question made copious use of the FCPA's rich legislative history -- stimulating us to revisit some of Washington's original debate about the law. Indeed, the Congressional record is still a deep well of meaning and inspiration for FCPA practitioners, judges and scholars.

Among the goodies in the legislative history are the reasons given in 1977 for why the country needed the FCPA. Thirty years on, we think those reasons still ring true.

Here's what the House Committee on Interstate and Foreign Commerce said:

_____________

More than 400 corporations have admitted making questionable or illegal payments. The companies, most of them voluntarily, have reported paying out well in excess of $300 million in corporate funds to foreign government officials, politicians, and political parties. These corporations have included some of the largest and most widely held public companies in the United States; over 117 of them rank in the top Fortune 500 industries.

The abuses disclosed run the gamut from bribery of high foreign officials in order to secure some type of favorable action by a foreign government to so-called facilitating payments that allegedly were made to ensure that government functionaries discharge certain ministrial [sic] or clerical duties. Sectors of industry typically involved are: drugs and health care; oil and gas production and services; food products; aerospace, airlines and air services; and chemicals.

The payment of bribes to influence the acts or decisions of foreign officials, foreign political parties or candidates for foreign political office is unethical. It is counter to the moral expectations and values of the American public. But not only is it unethical, it is bad business as well. It erodes public confidence in the integrity of the free market system. It short-circuits the marketplace by directing business to those companies too inefficient to compete in terms of price, quality or service, or too lazy to engage in honest salesmanship, or too intent upon unloading marginal products. In short, it rewards corruption instead of efficiency and puts pressure on ethical enterprises to lower their standards or risk losing business.

Bribery of foreign officials by some American companies casts a shadow on all U.S. companies. The exposure of such activity can damage a company's image, lead to costly lawsuits, cause the cancellation of contracts, and result in the appropriation of valuable assets overseas.

Corporate bribery is also unnecessary. The Secretary of Treasury testified before the Subcommittee on Consumer Protection and Finance: Paying bribes. . . is simply not necessary to the successful conduct of business in the United States or overseas. My own experience as Chairman of the Bendix Corp. was that it was not necessary to pay bribes to have a successful export sales program.

Nor is Secretary Blumenthal's experience unique. Former SEC Chairman Hills testified: Indeed, we find in every industry where bribes have been revealed that companies of equal size are proclaiming that they see no need to engage in such practices.

Despite the fact that the payments which this bill would prohibit are made to foreign officials, in many cases the resulting adverse competitive affects are entirely domestic. Former Secretary of Commerce Richardson pointed out that in a number of instances, "payments have been made not to "outcompete" foreign competitors, but rather to gain an edge over other U.S. manufacturers."

Corporate bribery also creates severe foreign policy problems for the United States. The revelation of improper payments invariably tends to embarrass friendly governments, lower the esteem for the United States among the citizens of foreign nations, and lend credence to the suspicions sown by foreign opponents of the United States that American enterprises exert a corrupting influence on the political processes of their nations. For example, in 1976, the Lockheed scandal shook the Government of Japan to its political foundation and gave opponents of close ties between the United States and Japan an effective weapon with which to drive a wedge between the two nations. In another instance, Prince Bernhardt of the Netherlands was forced to resign from his official position as a result of an inquiry into allegations that he received $1 million in pay-offs from Lockheed. In Italy, alleged payments by Lockheed, Exxon, Mobil Oil, and other corporations to officials of the Italian Government eroded public support for that Government and jeopardized U.S. foreign policy, not only with respect to Italy and the Mediterranean area, but with respect to the entire NATO alliance as well.

Finally, a strong antibribery statute would actually help U.S. corporations resist corrupt demands. According to former Gulf Oil Co., Chairman Bob Dorsey: If we could cite our law which says we just may not do it, we would be in a better position to resist these pressures and refuse those requests.

_____________

On the Senate side of the Hill in 1977, the problem of improper payments to foreign officials by American corporations was on the agenda of the Committee on Banking, Housing and Urban Affairs. Its final report contained a more concise although no less articulate (and even passionate) description of the need for the legislation. By the way, the working title of the bill, before it became the FCPA, was the "Unlawful Corporate Payments Act of 1977."

Here are the Senate's words:

____________

Recent investigations by the SEC have revealed corrupt foreign payments by over 300 U.S. companies involving hundreds of millions of dollars. These revelations have had severe adverse effects. Foreign governments friendly to the United States in Japan, Italy, and the Netherlands have come under intense pressure from their own people. The image of American democracy abroad has been tarnished. Confidence in the financial integrity of our corporations has been impaired. The efficient functioning of our capital markets has been hampered.

Corporate bribery is bad business. In our free market system it is basic that the sale of products should take place on the basis of price, quality, and service. Corporate bribery is fundamentally destructive of this basic tenet. Corporate bribery of foreign officials takes place primarily to assist corporations in gaining business. Thus foreign corporate bribery affects the very stability of overseas business. Foreign corporate bribes also affect our domestic competitive climate when domestic firms engage in such practices as a substitute for healthy competition for foreign business.

Managements which resort to corporate bribery and the falsification of records to enhance their business reveal a lack of confidence about themselves. Secretary of the Treasury Blumenthal, in appearing before the committee in support of the criminalization of foreign corporate bribery testified that: "Paying bribes - apart from being morally repugnant and illegal in most countries - is simply not necessary for the successful conduct of business here or overseas.''

The committee concurs in Secretary Blumenthal's judgment. Many U.S. firms have taken a strong stand against paying foreign bribes and are still able to compete in international trade. Unfortunately, the reputation and image of all U.S. businessmen has been tarnished by the activities of a sizable number, but by no means a majority of American firms. A strong antibribery law is urgently needed to bring these corrupt practices to a halt and to restore public confidence in the integrity of the American business system.

______________

View House Report No. 95-640 (September 28, 1977 - Ordered to be printed) here.

View Senate Report No. 95-114 (May 2 (legislative day, March 28), 1977 - Ordered to be printed) here.

Thursday
May012008

May It Please The Court

We enjoy a good argument just as much as the next lawyer. Stare decisis, analogy, plain meaning, ambiguity -- bring 'em on. Which is why it took us awhile -- the better part of two decades, but who's counting -- to firmly grasp this simple idea: When it comes to the Foreign Corrupt Practices Act, forget the fancy lawyer stuff.

If the few reported FCPA criminal trials have taught anything, it's that legalistic quibbling and the FCPA don't mix. David H. Mead learned that in 1998. Mead, it has to be said, had a great-looking defense. Evidence at trial showed he'd paid a bribe in Panama on the advice of counsel. His company's lawyer, whom he trusted, told him a payment via a Dutch subsidiary to a Panamanian official wouldn't violate the FCPA. So, he argued, if he was acting on the advice of trusted counsel, how could he have had any corrupt intent to violate the FCPA? It must have shocked Mead and his lawyers when the jury convicted him anyway.

David Kay and Douglas Murphy, in their 2002 criminal trial on FCPA charges, argued that bribes to reduce their company's taxes in Haiti couldn't violate the FCPA. Those bribes, they said, weren't about "obtaining or retaining business" and so aren't covered by the antibribery provisions. The trial court bought the argument and dismissed the case. But the appellate court shot them down, and hard. "A man of common intelligence," it ruled, "would have understood that . . . in bribing foreign officials, [Kay and Murphy were] treading close to a reasonably-defined line of illegality. . . . Defendants took this risk, and splitting hairs . . . does not allow them to argue successfully that the FCPA’s standards were vague."

It's not every day that a United States appellate court describes defendants as hairsplitters, an epithet which shouldn't encourage anyone to put the FCPA under a microscope and begin dissecting it with tiny scalpels. By doing just that, Kay and Murphy landed prison terms of 37 months and 63 months respectively. Meade, meanwhile, was sentenced to four months in federal prison for his counsel-induced FCPA violation.

Years before Meade, Kay and Murphy took their chances in court and lost, another defendant had come up short in an FCPA criminal case. Although a jury acquitted Richard H. Liebo on seventeen FCPA-related counts, it convicted him of one count of violating the antibribery provisions, 15 U.S.C. §§ 78dd-1(a)(1), (3); 78dd-2(a)(1), (3); 78dd-2(b)(1)(B) and 78ff(c)(2) (1988), and making a false statement to a government agency, 18 U.S.C. § 1001 (1988). U.S. v. Richard H. Liebo (Cr. No. 4-89-76) (D. Minn., Mar. 1989); 923 F.2d, 1308 (8th Cir. Minn., Jan. 15, 1991).

In 1985, Liebo bought airplane tickets (Niger - Paris - Stockholm - London - Niger; cost - $2,028) for a honeymooning government official from Niger. Liebo was then the vice-president in charge of the Aerospace division of NAPCO International, Inc., located in Hopkins, Minnesota. NAPCO's primary business consisted of selling military equipment and supplies. In Niger, it wanted to service two Lockheed C-130 cargo planes for the Ministry of Defense. The honeymooning Niger official receiving the air tickets was a cousin of another official who could (and did) influence the award of the contract to NAPCO.

Liebo appealed his conviction, arguing that his gift-giving couldn't support the jury's findings. Lawyers at the time thought Liebo's arguments were strong. True, the FCPA prohibits "gifts" that are given "corruptly" for the purpose of "obtaining or retaining business." But, Liebo argued, his gift was just . . . a gift. And the recipient himself said he understood the tickets were from Liebo personally and not from NAPCO. How then, Liebo argued, could the jury find that he acted "corruptly" within the meaning of the FCPA? Such a result would kill gift-giving practices in the commercial world forever, and that couldn't be what the FCPA intended.

The United States Court of Appeals for the Eighth Circuit not only rejected Liebo's arguments, it did so with a decisiveness and brevity that took the defense bar's breath away. With minimal discussion about the evidence itself, the court said, "There is sufficient evidence that the airplane tickets were given to obtain or retain business. . . .We are satisfied that sufficient evidence existed from which a reasonable jury could find that the airline tickets were given 'corruptly.'" That was that.

Liebo, however, did win a new trial on another issue. There was newly discovered evidence, he said -- a memo from his corporate superior showing that Liebo's payment for the honeymoon travel was approved by NAPCO. The appellate court ruled that the jury, with the benefit of that evidence, might have found that Liebo didn't act “corruptly” in giving the tickets, if he'd acted at his supervisor’s direction. That looked promising for Liebo, but it didn't change anything. He was sentenced to 18 months in prison, suspended with three years’ probation, with 60 days of home confinement and 600 hours of community service.

The lesson from all these cases? The elements of an antibribery offense may look to a 1L as though they're riddled with loopholes. And it's tempting to argue that "gift" and "corruptly" and "obtaining or retaining business" are ambiguous and vulnerable to legal attack. But while lawyers should always think like lawyers, they should also remember that most juries and appellate courts haven't been sympathetic. Jurors and judges, it appears, just don't like it when people pay bribes to foreign officials. That's why, in FCPA trials, lots of smart lawyers have been sent to the showers before anyone even worked up a good sweat.

U.S. v. Liebo, 923 F.2d, 1308 (8th Cir. Minn., Jan. 15, 1991), can be viewed at the Public Library of Law (by free registration) here.

Tuesday
Apr292008

Workers Of The World, Comply

Tomorrow is May 1st -- also known as May Day or International Workers' Day -- a public holiday in much of the world, including our present location. It's a day to honor workers and their achievements, and to give people a well-timed spring holiday.

We're totally in favor of honoring workers and taking a day off. Who isn't? But our enthusiasm for the international labor movement is, shall we say, somewhat cautious. It's been that way since our first visit to the Soviet Union in the early 1970s. From that and many subsequent stays in the Workers' Paradise, we learned to tell the difference between "capitalism" and the other competing "isms." The relative advantages of the former are very clear in our mind.

But getting back to the business of the Foreign Corrupt Practices Act, we're convinced that one of the best things a company can do for its employees is to have an effective compliance program. When the rules against bribing foreign officials on company time are clear, life is simpler and a lot safer. Employees we talk to sometimes assume a compliance program is just another way to punish hapless workers. Not true, we tell them. A compliance program is for everyone's protection. Be grateful your company cares about staying on the right side of the law.

Companies that ignore compliance or settle for slipshod programs are putting themselves and their employees at great risk. Without clear lines, workers naturally become confused. They might think a well-placed bribe to help the company will enhance their careers. Imagine their surprise and horror when the company fires them, as it must, and helps the Justice Department prosecute them for a crime that carries a possible five-year prison term.

Companies that respect their employees will give them a safe workplace by having an effective FCPA compliance program. What's that? The elements are described in the United States Federal Sentencing Guidelines. Features include a written program, high-level oversight, personal responsibility, adequate authority and resources, communication and training, anonymous reporting, consistent enforcement, and constant self-evaluation and correction. And it doesn't have to be complicated or expensive. In other words, it's within easy reach of any organization that wants to comply.

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

Monday
Apr282008

Fear And Greed And The FCPA

We've noticed that when prices for energy and other commodities climb, there's more public corruption. Spiking prices, after all, mean fatter margins for producers and proportionately more insecurity for consumers. Meanwhile, middlemen see nothing but opportunities. All these inject an extra dose of fear and greed into the markets -- the perfect fertilizer for public bribery. For us, that means times of economic dislocation are also times of high-alert for Foreign Corrupt Practices Act compliance.

We were reminded of all this yesterday when we read the following news report:

"Speaking in Detroit at the ninth World Energy Conference, the [U.S.] president said that in the face of clear danger, he was optimistic that oil-producing and consuming nations would cooperate to find a solution, and the United States would reach its goal of energy independence.

"In a gloomy speech to the United Nations General Assembly, meanwhile, the secretary [of state] said the 'early warning signs of a major economic crisis are evident.

"'Rates of inflation unprecedented in the past quarter century are sweeping developing and developed nations . . . . The world's financial institutions are staggering under the most massive movements of reserves in history. And profound questions have arisen about meeting man's fundamental needs for energy and food.'"

That report, you might have guessed, isn't recent. It appears on page 1085 of the 20th Century Day by Day, and it's dated September 23, 1974. The president in question was Gerald Ford, and his secretary of state was Henry Kissinger.

When they issued their warnings in 1974, there was no FCPA. Just two years later, however, in a post-Watergate investigation, the Securities and Exchange Commission found that "over 400 U.S. companies admitted making questionable or illegal payments in excess of $300 million [$2.5 billion in today's dollars] to foreign government officials, politicians, and political parties. The abuses ran the gamut from bribery of high foreign officials to secure some type of favorable action by a foreign government to so-called facilitating payments . . . . Congress enacted the FCPA [in 1977] to bring a halt to the bribery of foreign officials and to restore public confidence in the integrity of the American business system." See the Department of Justice's "Lay Person's Guide to FCPA" here.

Did rocketing energy and food prices in the mid-1970s contribute to enactment of the FCPA? Indirectly, yes. Rising prices then, as now, injected more fear and greed into the world markets. That's what President Ford and Secretary Kissinger were talking about. And an astounding number of U.S. companies responded with illegal conduct overseas. The Foreign Corrupt Practices Act is intended to prevent history from repeating itself.

Sunday
Apr272008

Ex-World Bank Manager Sentenced For FCPA Offense

The Justice Department has announced the April 22, 2008 sentencing of former World Bank employee, Ramendra Basu. The Indian national and U.S. permanent resident received 15 months in prison for conspiring to award World Bank contracts to consultants in exchange for kickbacks and for helping a contractor bribe a foreign official in violation of the Foreign Corrupt Practices Act. In addition to the 15- month prison term, Basu was sentenced to two years supervised release and 50 hours of community service. U.S. v. Basu, (Cr. No. 02-475) D.D.C., November 2002.

Basu pleaded guilty on Dec. 17, 2002 to conspiring to commit wire fraud in violation of 18 U.S.C. §371 and to violating the Foreign Corrupt Practices Act, 15 U.S.C. §78dd-3. Under his 2002 plea agreement he cooperated with U.S. authorities. In 2006, however, he moved unsuccessfully to withdraw his guilty plea. During his cooperation, he admitted that between 1997 and 2000, as a World Bank Trust Funds Manager, he conspired with a Swedish consultant and others to steer World Bank contracts in Ethiopia and Kenya to certain Swedish companies in exchange for kickbacks amounting to $127,000. He also helped the Swedish consultants bribe a Kenyan government official by, among other things, arranging for $50,000 to be wire transferred to an account outside the United States for the benefit of the Kenyan official.

In September 1997, Basu left his job at the World Bank and joined the Swedish consulting firm. He also arranged jobs there for his father, brother-in-law, and a close friend. He took a commission of ten percent of the value of all contracts he worked on for the Swedish consultant. In December 1997, Basu returned to the World Bank but continued to receive commissions from the Swedish consultant. By January 1998, the consultant had been awarded three contracts by Basu's co-conspirator, Gautam Sengupta, a World Bank Task Manager.

Sengupta, also an Indian national and U.S. permanent resident, pleaded guilty in February 2002 to the same charges as Basu. He was sentenced in February 2006 to two months in prison and fined $6,000. U.S. v. Sengupta, (Cr. No. 02-40) D.D.C., January 2002. Separately, the Swedish consultants were prosecuted and convicted of bribery by a court in Sweden. In February 2004, they were sentenced to 18 months and 12 months in prison respectively .

The Sengupta and Basu cases were the first criminal referrals to national prosecutors from the World Bank (or apparently from any international financial institution). The plea agreements with the DOJ required the defendants to cooperate with the World Bank's investigation and with Swedish and Kenyan authorities, as well as the DOJ. The plea agreements said: The defendant agrees to disclose completely and truthfully all information regarding his activities and those of others in all matters about which he has knowledge or hereafter acquires knowledge concerning any matter about which the United States, The World Bank, or the Government[s] of Sweden [or Kenya] may inquire. Defendant agrees to accompany agents of the United States, The World Bank, or the Government[s] of Sweden [or Kenya] to any location in order to accomplish that purpose ... Defendant agrees to answer all questions completely and truthfully and must not withhold any information.

Despite his initial cooperation with prosecutors, Basu tried four years later in 2006 to withdraw his guilty plea. The court wouldn't allow it. We don't know why he wanted to withdraw his plea -- after he had already provided evidence about the corruption -- or if his change of heart influenced the court's decision in his sentencing.

View the DOJ's April 25, 2008 news release here.

Friday
Apr252008

Boom Times For The FCPA Business

Washington Post business columnist Steven Pearlstein writes in today's paper here about the boom for law firms, accountants, investigators, computer forensics specialists, compliance consultants, conference organizers, "risk mitigators" and others triggered by the recent increase in enforcement activity, internal investigations and self-reporting under the Foreign Corrupt Practices Act.

For most of the past 30 years, the FCPA was a legal backwater, he correctly reports. That's now changed.

"[T]hese days," he says, "FCPA business is booming, a welcome growth area for Washington law offices just as work on mergers and securities offerings has begun to wane. You can't go into a business class lounge at the international terminals at Dulles Airport without running into at least one lawyer headed to Europe or Asia to conduct an internal investigation of a possible bribe or kickback for a corporate audit committee. And law firm Web sites now boast entire practice areas devoted to advising multinational companies on how to design and implement compliance systems meant to deter and ferret out corrupt practices."

Pearlstein says the Justice Department and the Securities and Exchange Commission think there are as many as 70 investigations ongoing -- not including "dozens of internal company probes that haven't been reported to the government, and may never be." [A story in the April 22, 2008 issue of Compliance Week by Melissa Klein Aguilar reports that Gibson Dunn & Crutcher identified about 100 companies at the start of the year that are the subject of open FCPA investigations. We're quoted in the article as well. It's available by subscription here.] Each FCPA case, Pearlstein says, typically costs the company involved between $1 million and $20 million.

The DOJ used to have the equivalent of two people assigned to FCPA cases, according to Pearlstein, but "now has as many as 12 prosecutors, assisted by a new team of FBI agents dedicated to these cases." He says the DOJ and SEC are also being helped by foreign governments who are members of the OECD antibribery convention. That, he says, has given U.S. investigators access to secret bank accounts and foreign tax records.

Pearlstein concludes by saying FCPA-related work, along with the coming flood of subprime mortgage litigation, "should be enough to keep Washington's legal industry humming, even as the rest of the economy slips slowly into recession." All of which proves again that preventing FCPA problems through an effective compliance program is a lot cheaper than dealing with violations after they occur.

Thursday
Apr242008

U.K. Government Appeals BAE Decision

The U.K. government is appealing the High Court's ruling that the Serious Fraud Office broke the law in shutting down an investigation into BAE's sale of jet fighters to Saudi Arabia. Pending the appeal to the House of Lords, the SFO will not reopen the investigation. The High Court panel of Lord Justice Moses and Mr. Justice Sullivan gave the government permission to challenge their judgment because the case raises crucial issues. As reported by the Guardian (here), Lord Justice Moses said: "This is a paradigm case that goes to the way this country is governed and to its constitutional principles."

View prior posts about BAE and the SFO here.