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FCPA Blog Daily News


Sounding Off About Third Party Compliance

Our posts about extending codes of conduct to third parties (here and here) attracted some thoughtful comments from readers. We first heard from Pete from DC, an old friend of the FCPA Blog. He helps out whenever he senses we're in over our head. This time he wisely tied the issue of third-party compliance to audit rights. Here's what he said:

Dear FCPA Blog,

I recall the post you did earlier (here) about audit rights - it's bad to have them and not use them if something pops up. In regard to imposing compliance requirements, it occurs to me that you have the same issue. The DOJ said in FCPA Opinion Procedure Release 04-02 that part of their expectation is "Independent audits by outside counsel and auditors, at no longer that three-year intervals, to ensure that the Compliance Code, including its anti-corruption provisions, are implemented in an effective manner."

If you extend your compliance program to third parties, you need to have audit rights and the guts to use them. Furthermore, the audit rights can't be limited to financial data relating to the third party's business - it has to be completely "open kimono," with access to the business partner's own compliance policies, contracts, etc. That's a tough sell, but if it's a high-risk country / industry / entity, it may be the only way to truly mitigate FCPA risk.


Pete from DC

Another reader took a darker view -- that is, using third-party compliance to "paper over" red flags that come up with intermediaries. We wouldn't recommend that medicine to anyone, but here's what our reader said about it:
Dear FCPA Blog,

Your post doesn't address one of the main reasons why ethical standards and law compliance provisions are extended to third parties in the first place.

Many times these extensions are made for commercial reasons in the contracts with the third parties. One of the key risk considerations with contracts involves avoiding competing commercial obligations that conflict with a compliance or ethical requirement for the company. For example, this dilemma could arise if there is a red flag that a contractor may be passing on a payment to a foreign official, but there is also a competing contractual obligation to make that payment.

A well drafted contract will provide the company with an "out" if it is concerned that one of its contractors may violate the FCPA or other law even if those laws are not actually applicable to the contractor. Therefore, contracts typically incorporate by reference those requirements where third party contractors can create liability for the company. Besides the FCPA, these can include references to other U.S. laws such as export controls, sanctions and anti-boycott as well as the company's own policies.

It's important to know the commercial as well as the compliance rationale behind the so-called extension. Including these provisions in contracts is a good and increasingly common commercial practice that helps to achieve the long term aims of anti-corruption and other legislation through commercial influence. If the inclusion of these standards results in a greater exposure to the companies who include them, that's definitely a "con" and surely an unintended consequence.



We also heard from Doug Cornelius at the Compliance Building blog. Doug's posts about compliance and business ethics are part of our daily diet. His comment raised a neat point about the dangers of inconsistent standards. He said:
Dear FCPA Blog -

Dealing with key third party vendors is a difficult area. As Rebecca Walker points out (here), there is potential liability of you do it wrong.

I have found the situation where vendors are a bit behind you in their focus on compliance or ahead of you. But since every company has different needs for compliance, you end up with different policies. As a result, you have a battle of policy forms.

There are no easy answers.

I find the first step to be letting your key vendor know that you care about these issues.

Yours truly,

Doug Cornelius / Compliance Building

That's some of what we've heard (the printable parts, anyway) on the subject of third-party compliance. The topic stirs plenty of interest, warnings and fear. That makes sense. Most Foreign Corrupt Practices Act offenses involve intermediaries, and yet most executives don't think their companies are dealing successfully with third-party risks. That was the conclusion from KPMG's 2008 Anti-Bribery and Anti-Corruption Survey that we talked about here, and the recent survey by the Society of Corporate Compliance & Ethics. That one found that most companies don't disseminate their internal codes of conduct to third parties or require third parties to certify to their own codes.

So the problem of third party compliance is still looking for a solution.


Another Look At Argo-Tech v. Yamada

Included in our 2008 FCPA Enforcement Index among FCPA-related private litigation was a suit called Argo-Tech Corp v. Yamada Corp. We first mentioned it in May 2008 (here). Argo-Tech is a Cleveland, Ohio-based aviation fuel-related equipment manufacturer. It filed suit in the U.S. federal district court in Cleveland against Japan-based defense equipment trader Yamada Corp. and its U.S. subsidiary, claiming Yamada's involvement in a bribery case violated their contract, which therefore should be terminated. At the time of our first post about the case, we didn't have access to the pleadings. We've now seen the suit, and here are some details:

Argo-Tech alleges, among other things, that:

  • The distributorship agreement requires Yamada to “ensure that its personnel fully understand the United States Foreign Corrupt Practices Act and any similar local laws as well as Argo-Tech’s policy against giving bribes, kickbacks or any benefits to customer personnel or anyone else (other than normal wages paid full-time sales employees), with respect to business with customers. [Yamada] agrees to obey the letter and spirit of such laws and policies and to provide regular acknowledgements of such compliance as requested. It will also take all steps necessary to ensure compliance by its owners, managers, employees, agents and affiliates and will cooperate fully in any investigation audit of such compliance conducted by or at the request of Argo-Tech. . . .”
  • Yamada paid about $900,000 to the Japan - U.S. Center for Peace and Cultural Exchange in an attempt to have Yamada serve as a subcontractor in a project to remove poison gas shells left in Fukuoka Prefecture by the former Japanese military.
  • The money came from a slush fund held in a number of bank accounts managed by Yamada’s U.S. subsidiary, Yamada International Corp.
  • $400,000 of that money ended up in a bank account of Motonoba Miyazaki, a Yamada executive who has been arrested on suspicion of embezzlement and bribery.
  • Japanese prosecutors are looking into the payment as part of their expanding investigation into Miyazaki and former Vice Defense Minister Takemasa Moriya, who has been arrested on suspicion of receiving bribes.
  • In December 2007, General Electric suspended its agreements with Yamada as the representative for the sale of the C-X engine -- the next-generation cargo transport aircraft.
In reply, Yamada denied most of the allegations. It says in 1990 it helped Argo-Tech raise $150 million in financing and invested tens of millions of dollars in the company. In return, it says, it was given a 50-year contract to distribute Argo-Tech's products. The agreement doesn't expire until 2044. But, it says, in 2007 Eaton Corporation bought Argo-Tech and set out to consolidate distribution rights of Argo-Tech's products. When a former employee of Yamada was named in a bribery story, it says, "Eaton seized upon the allegations in an attempt to terminate the agreement . . . ."

Private parties such as Argo-Tech have no right of action under the Foreign Corrupt Practices Act (see our post here). Only the Justice Department and the Securities and Exchange Commission can enforce the FCPA. Private claims asserting facts that, if true, would violate the antibribery provisions are usually based on the Racketeer Influenced and Corrupt Organizations Act (RICO), common-law fraud, breach of fiduciary duty or, as in this case, breach of contract.

According to the docket, the case is still in discovery and the parties have not had settlement talks.

Download the complaint in Argo-Tech Corp v. Yamada Corp. here and Yamada's counter claim here.


The SEC Takes It Back

Disgorging profits is a common and prominent feature these days in Foreign Corrupt Practices Act settlements with the Securities and Exchange Commission. Last year Siemens disgorged $350 million and this year KBR paid $177 million. Maybe because disgorgements now happen so often, or because the payments have become so enormous, we automatically accept them as a suitable remedy. We don't question why the SEC uses disgorgement, where the remedy came from, or where it's going.

But at least one person has asked those questions. He's David C. Weiss (Dartmouth College, Michigan Law School), student-author of an extended note in the January 17, 2009 edition of the Michigan Journal of International Law.

According to Weiss, disgorgement never appeared in an FCPA enforcement action until just five years ago. That's right -- 27 years passed without a single FCPA-related disgorgement order. Then, in 2004, ABB Vetco Gray, Inc. paid $16.4 million in disgorgement and prejudgment interest. Next came Titan Corp. in 2005, paying $15.5 million. That same year, Diagnostics Products Corp. disgorged $2.8 million and DPC (Tianjin) Co. Ltd. $2.8 million. In 2006, Schnitzer Steel Industries, Inc. disgorged $7.7 million and Statoil $10.5 million. In 2007, Baker Hughes Inc. disgorged $23 million, El Paso Corp. $5.5 million, and York International $10 million.

Want to hear the rest? In 2008, Fiat disgorged $7.2 million, Siemens $350 million, Faro Technologies $1.8 million, Willbros $10.3 million, AB Volvo $19.6 million, Flowserve $3.2 million, and Westinghouse Air Brake Technologies Corp. $289,000. And so far this year, ITT Corporation has disgorged $1.4 million, and KBR $177 million.

Disgorgement, then, has a short but intense history in FCPA enforcement actions, and it seems to have appeared out of the blue. As Weiss puts it, "The SEC has developed the 'law' of disgorgement with neither the input, contemplation, nor blessing of Congress, and it is for this reason that one should ask normative questions about the role of disgorgement in the future enforcement of the prohibition on foreign bribery."

He points out that the SEC began requiring disgorgement just when other countries (with U.S. encouragement) started enacting their own extra-territorial anti-corruption laws. So here's the question: When more than one country enforces antibribery laws against a single company, which jurisdictions, if any, should use disgorgement as a remedy? Who decides, for example, if Siemens should forfeit ill-gotten gains to the United States Treasury or the German Chancellery? How about Italy or Norway, Greece or Argentina?

Weiss looks at laws around the world aimed at punishing foreign public bribery, and particularly those with disgorgement-like remedies. "The penal codes of at least twenty-one countries," he says, "include provisions for 'forfeiture' or 'confiscation' of the proceeds of a crime, or they base the amount of a fine on such proceeds." His survey shows just how new most of the laws are -- the majority coming into force either following enactment of the OECD anti-corruption convention in 1998 or after the events of 9/11 in 2001.

There's no evidence, Weiss says, that "Congress intended that the SEC pursue disgorgement as it has done since 2004. This fact alone should at least make one question the normative function of disgorgement." Disgorgement, he says, wasn't mentioned when the FCPA was first debated and adopted in 1977, nor when Congress amended the law in 1988 or 1998. Weiss himself doesn't say the SEC lacks the legal mandate to pursue disgorgement or that the remedy is somehow improper. But he does point out that the "lack of any statement that disgorgement should be part of the SEC’s enforcement arsenal, and the rarity of the remedy at the time that Congress passed the FCPA and its amendments, are reasons that some commentators have used to question the impropriety of the remedy."

It's great to see the Foreign Corrupt Practices Act as the object of some fresh research and scholarship. And at 47 pages and 238 footnotes (a couple of which mention the FCPA Blog), Weiss' work is thorough and thoughtful.

The cite for the note is: Weiss, David C.,The Foreign Corrupt Practices Act, SEC Disgorgement of Profits, and the Evolving International Bribery Regime: Weighing Proportionality, Retribution, and Deterrence, Michigan Journal of International Law, Vol. 30, No. 2 (January 17, 2009).

It's available from SSRN here.


Opening Our Eyes To 'Associative Liability'

When the student is ready, the proverb says, the teacher will appear. We must have been ready last week because two great teachers appeared. First, David P. Burns, who helped us understand the charging decisions in the Halliburton / KBR enforcement actions. Then came Rebecca Walker, left. We mentioned her concept of “associative liability” in a discussion about extending codes of conduct to third parties. She noticed that our perspective was limited to the Foreign Corrupt Practices Act (guilty as charged). And she generously helped by sending the primer (below) on the broader application of her ideas. We've read it a half dozen times and it keeps getting better. Here's what she said:

Dear FCPA Blog,

I took a look at the discussion in your post Extending Compliance To Third Parties, and I would like to point out that the survey and my article were not actually limited to the FCPA context. Indeed, in the FCPA context, when companies are often dealing with agents for whom liability for misconduct is pretty much a given, I would encourage organizations to implement appropriate compliance program controls, including pre-relationship due diligence, contractual requirements, written policies, auditing, monitoring, and all those tools that you are undoubtedly very familiar with (even including, in some instances, special approaches to training and encouraging reports of violations directed to relevant third parties.)

But, as mentioned, the survey was a general survey, asking organizations in a wide variety of industries about third party codes. In that, more general, context, I do think that it is important that organizations exercise caution when extending compliance requirements to third parties. Part of my concern flows from the fairly well-accepted theory in the compliance world that standards that are neither monitored nor enforced can be detrimental to a compliance program. They can corrode employees’ and other stakeholders’ belief in the program and cause a general loss of program credibility. So to the extent that an organization promulgates a code but doesn’t take any steps to implement or monitor compliance with the code, it can actually be detrimental to the organization’s compliance program and the culture of compliance and ethics more generally.

In addition, and to get to the question you posed, there is the “associative liability” risk that I mention in the article – an important consideration in some settings (although, I should stress again, it is not really relevant to FCPA compliance). That is a term that I like to think I coined, but I Googled it, and I found a couple of references to it before I first used the term a few years ago.

The manner in which this risk most often arises for organizations is in the context of third parties who are temporary employees or employees of a contractor or subcontractor of the organization. These employees may claim an employment relationship based in part on compliance program elements (typically policies, codes and/or training) that the organization sought to apply to them, and bring a claim based in part on that alleged relationship. In the supplier context, there have been a few suits claiming that supplier codes have created liability for the misconduct of the suppliers, but they have been largely unsuccessful. For example, there was a fairly famous case against Wal-Mart a few years ago (Doe v. Wal-Mart, Cal. Sup. Ct. Los Angeles (Sep. 13, 2005)), in which the International Labor Rights Fund brought suit against Wal-Mart on behalf of a purported class of Bangladeshi, Chinese, Indonesian, Nicaraguan, Swazilander and U.S. workers for alleged violations of Wal-Mart’s code of conduct for suppliers. The allegation was basically that Wal-Mart assumed a duty (in contract) to the employees of the suppliers when it promulgated the code and made it a part of the supplier contracts, and that it breached its contractual duty (claiming that the employees are third-party beneficiaries). However, in Chen v. Street Beat Sportswear, Inc., 226 F.Supp.2d 355 (E.D.N.Y. 2002), the court did find liability, although the facts of that case are fairly unique.

There is also the risk that I mention in the article of reputational harm. There are examples of organizations receiving bad press for promulgating standards for third parties that they fail to monitor or enforce, including, e.g., Levi-Strauss and Starbucks.

As you indicate in your blog post, I in no way seek to discourage organizations from extending any compliance standards to third parties. In my view, third-party compliance standards can be extremely helpful in decreasing the risk of third-party misconduct, which can harm an organization as much as the misconduct of its own employees. I simply suggest that they do so carefully, in light of the particular risks caused by the particular category of third party, the practicalities of whether it is possible to monitor or enforce the standards they seek to apply, and the potential associative liability risks

Best regards,

Rebecca Walker
Kaplan & Walker LLP
740 20th Street
Santa Monica, CA 90402

A note to our readers: Rebecca's book, Conflicts of Interest in Business and the Professions: Law and Compliance, is available here. The publisher's description says, "This treatise covers how to identify, detect, manage and resolve conflicts of interest. It details the knowledge gap about conflicts of interest by discussing various situations and analyzing compliance steps to cope with conflicts. The goal is to help those who deal with conflicts of interest in the business and professional worlds do so more effectively. Discussion includes conflicts of interest within organizations including corporations, employer/employee relationships, shareholders, partnerships, associations and government, as well as professional conflicts including lawyers, investment advisors, retail brokerage, auditors, lobbyists, journalists, research analysts and trustees."


Pride's Disclosure Tells The Story

We admire Pride International, Inc.'s approach to its Foreign Corrupt Practices Act disclosures. The company talks about the serious problems it had for years with sensitive payments, and how it's been dealing with them. The countries involved included Venezuela and Mexico, India and Malaysia, Saudi Arabia, Kazakhstan, Brazil, Nigeria, Libya, Angola and the Republic of the Congo, among others. Bribes apparently were paid directly or by intermediaries to clear rigs and equipment through customs, and to help solve problems with immigration, tax, and licensing authorities. Some of the payments in question involved global logistics firm Panalpina and other third parties.

Sadly, people near the top of the company probably knew what was going on. The ex-chief operating officer resigned his position in mid-2006 but has stayed as an employee during the FCPA investigation. If the audit committee or the board of directors think there's "cause" under his employment agreement to terminate his services, he could lose retirement benefits and maybe a lot more. Other senior people have already been fired or placed on administrative leave, and some resigned because of the FCPA investigation. The company says it has "taken and will continue to take disciplinary actions where appropriate and various other corrective action to reinforce our commitment to conducting our business ethically and legally and to instill in our employees our expectation that they uphold the highest levels of honesty, integrity, ethical standards and compliance with the law."

Who is Pride? It's a can-do Houston-based drilling contractor for the oil and gas industry. It has over 7,000 employees working around the world. "We have positioned our fleet," its website says, "in some of the world's largest and most active exploration and production areas, with a market presence in West Africa (Angola), Latin America (Brazil), the Gulf of Mexico, the Mediterranean and Middle East. Today, we operate a total of 45 rigs."

As we did a year ago here, we're reprinting below Pride International's FCPA disclosure from its annual report (Form 10-K), this one for the period ending December 31, 2008. Pride filed it with the Securities and Exchange Commission this week. It's a long read (for a blog post, anyway). But it's filled with details and admissions not usually found in similar disclosures. We think it also gives fair warning to shareholders and other stakeholders that an eventual resolution with the Justice Department and SEC could be expensive and disruptive.

Pride International, Inc. trades on the New York Stock Exchange under the symbol PDE.

Download Pride's February 25, 2009 Form 10K (annual report) here.

During the course of an internal audit and investigation relating to certain of our Latin American operations, our management and internal audit department received allegations of improper payments to foreign government officials. In February 2006, the Audit Committee of our Board of Directors assumed direct responsibility over the investigation and retained independent outside counsel to investigate the allegations, as well as corresponding accounting entries and internal control issues, and to advise the Audit Committee.

The investigation, which is continuing, has found evidence suggesting that payments, which may violate the U.S. Foreign Corrupt Practices Act, were made to government officials in Venezuela and Mexico aggregating less than $1 million. The evidence to date regarding these payments suggests that payments were made beginning in early 2003 through 2005 (a) to vendors with the intent that they would be transferred to government officials for the purpose of extending drilling contracts for two jackup rigs and one semisubmersible rig operating offshore Venezuela; and (b) to one or more government officials, or to vendors with the intent that they would be transferred to government officials, for the purpose of collecting payment for work completed in connection with offshore drilling contracts in Venezuela. In addition, the evidence suggests that other payments were made beginning in 2002 through early 2006 (a) to one or more government officials in Mexico in connection with the clearing of a jackup rig and equipment through customs, the movement of personnel through immigration or the acceptance of a jackup rig under a drilling contract; and (b) with respect to the potentially improper entertainment of government officials in Mexico.

The Audit Committee, through independent outside counsel, has undertaken a review of our compliance with the FCPA in certain of our other international operations. In addition, the U.S. Department of Justice has asked us to provide information with respect to (a) our relationships with a freight and customs agent and (b) our importation of rigs into Nigeria. The Audit Committee is reviewing the issues raised by the request, and we are cooperating with the DOJ in connection with its request.

This review has found evidence suggesting that during the period from 2001 through 2006 payments were made directly or indirectly to government officials in Saudi Arabia, Kazakhstan, Brazil, Nigeria, Libya, Angola, and the Republic of the Congo in connection with clearing rigs or equipment through customs or resolving outstanding issues with customs, immigration, tax, licensing or merchant marine authorities in those countries. In addition, this review has found evidence suggesting that in 2003 payments were made to one or more third parties with the intent that they would be transferred to a government official in India for the purpose of resolving a customs dispute related to the importation of one of our jackup rigs. The evidence suggests that the aggregate amount of payments referred to in this paragraph is less than $2.5 million. We are also reviewing certain agent payments related to Malaysia.

The investigation of the matters described in the prior paragraph and the Audit Committee’s compliance review are ongoing. Accordingly, there can be no assurances that evidence of additional potential FCPA violations may not be uncovered in those or other countries.

Our management and the Audit Committee of our Board of Directors believe it likely that then members of our senior operations management either were aware, or should have been aware, that improper payments to foreign government officials were made or proposed to be made. Our former Chief Operating Officer resigned as Chief Operating Officer effective on May 31, 2006 and has elected to retire from the company, although he will remain an employee, but not an officer, during the pendency of the investigation to assist us with the investigation and to be available for consultation and to answer questions relating to our business. His retirement benefits will be subject to the determination by our Audit Committee or our Board of Directors that it does not have cause (as defined in his retirement agreement with us) to terminate his employment. Other personnel, including officers, have been terminated or placed on administrative leave or have resigned in connection with the investigation. We have taken and will continue to take disciplinary actions where appropriate and various other corrective action to reinforce our commitment to conducting our business ethically and legally and to instill in our employees our expectation that they uphold the highest levels of honesty, integrity, ethical standards and compliance with the law.

We voluntarily disclosed information relating to the initial allegations and other information found in the investigation and compliance review to the DOJ and the Securities and Exchange Commission and are cooperating with these authorities as the investigation and compliance reviews continue and as they review the matter. If violations of the FCPA occurred, we could be subject to fines, civil and criminal penalties, equitable remedies, including profit disgorgement, and injunctive relief. Civil penalties under the antibribery provisions of the FCPA could range up to $10,000 per violation, with a criminal fine up to the greater of $2 million per violation or twice the gross pecuniary gain to us or twice the gross pecuniary loss to others, if larger. Civil penalties under the accounting provisions of the FCPA can range up to $500,000 and a company that knowingly commits a violation can be fined up to $25 million. In addition, both the SEC and the DOJ could assert that conduct extending over a period of time may constitute multiple violations for purposes of assessing the penalty amounts. Often, dispositions for these types of matters result in modifications to business practices and compliance programs and possibly a monitor being appointed to review future business and practices with the goal of ensuring compliance with the FCPA.

We could also face fines, sanctions and other penalties from authorities in the relevant foreign jurisdictions, including prohibition of our participating in or curtailment of business operations in those jurisdictions and the seizure of rigs or other assets. Our customers in those jurisdictions could seek to impose penalties or take other actions adverse to our interests. We could also face other third-party claims by directors, officers, employees, affiliates, advisors, attorneys, agents, stockholders, debt holders, or other interest holders or constituents of our company. In addition, disclosure of the subject matter of the investigation could adversely affect our reputation and our ability to obtain new business or retain existing business from our current clients and potential clients, to attract and retain employees and to access the capital markets. No amounts have been accrued related to any potential fines, sanctions, claims or other penalties, which could be material individually or in the aggregate.

We cannot currently predict what, if any, actions may be taken by the DOJ, the SEC, any other applicable government or other authorities or our customers or other third parties or the effect the actions may have on our results of operations, financial condition or cash flows, on our consolidated financial statements or on our business in the countries at issue and other jurisdictions.


Extending Compliance To Third Parties reported this week the results of a survey conducted by the Society of Corporate Compliance & Ethics (SCCE). The group asked a random sample of compliance professionals about their use of codes of conduct with third parties, such as suppliers, and received back 400 responses.

The findings: Fifty-three percent of companies don't disseminate their internal codes of conduct to third parties; only 26% require third parties to certify to their own codes; and just 17% of the respondents have any third-party codes of conduct to begin with.

Those results are consistent with KPMG's 2008 Anti-Bribery and Anti-Corruption Survey that we talked about here. It revealed that around three quarters of the bosses surveyed think their companies aren't able to handle the compliance risks that come from third parties -- including overseas acquisition targets, joint venture partners, distributors and agents. The execs responding to KPMG's survey complained about difficulties doing effective due diligence and auditing third parties for compliance.

This is serious. Third parties, after all, cause most Foreign Corrupt Practices Act offenses. They deserve lots of compliance attention but aren't getting it. Why not?

Most foreign third parties push back hard against compliance pressures from outside. A lot of them don't want to risk being in breach of contract if they don't comply. They view U.S.-style compliance regimes as highly technical, which only increases their contract risks. Some overseas suppliers have an irrational fear of being dragged into the jurisdiction of the Justice Department if they agree to FCPA compliance language. Others resist on the reasonable grounds that they don't understand exactly what's intended by the compliance language -- and no one from the other side can give them a clear explanation.

The survey results published by the above-mentioned Society of Corporate Compliance & Ethics are part of an article written by attorney Rebecca Walker of Kaplan & Walker LLP. She's smart -- Georgetown undergrad, Harvard Law School, author of the book Conflicts of Interest in Business and the Professions: Law and Compliance.

We haven't read her book or other articles yet. But a couple of her comments in this article got our attention. She said organizations should be "cautious" about extending codes of conduct to third parties. "Companies," she said, "should be careful not to create compliance and ethics standards that are difficult to monitor or enforce and that could potentially create their own risks of 'associative liability.' Extending compliance and ethics obligations to third parties could lead to reputational harm when a company holds itself out as requiring others’ compliance, when in fact the company’s ability to ensure compliance by third parties may be limited, a problem which could be compounded if the third-party compliance requirements more closely link the company to the third party in the minds of the public (and press). There is also a risk that unsatisfied standards could be used against a company in the context of litigation or a government investigation."

Her words remind us of executives and even some company lawyers who used to talk that way about their own FCPA compliance. They reasoned that if they adopted a program but something went wrong, they might be held accountable against whatever measuring stick they'd created. So it was better, they thought, not to have any program at all.

That argument, of course, was wrong. The Federal Sentencing Guidelines make it clear that an effective compliance program -- with written guidelines -- is always to everyone's advantage. The only time that's not true, we suppose, is when an organization intentionally adopts a program as pure window dressing, knowing from the outset it won't comply. But anyone in that category is already well down the road to disaster.

Ms. Walker isn't suggesting that companies shouldn't have compliance programs. She's just cautioning against possibly futile attempts to extend codes of conduct beyond an organization's actual range of influence. Her advice sounds practical, but it's a controversial idea. We'd like to hear from others on this question, pro and con. Should companies even try to impose codes of conduct on suppliers and other third parties? Are there risks that outweigh the rewards? Let us know what you think.

The SCCE's survey is available for download by registration here.


Understanding the KBR, Halliburton Charges

With the Halliburton / KBR settlement in mind, we asked readers last week (here) to help us understand how decisions are made to charge companies or individuals under the Foreign Corrupt Practices Act with violations of the antibribery provisions -- criminally or civilly. The best responses, we said, would earn both our gratitude and a copy of Bribery Abroad. We're sending a copy today to David P. Burns (left). His comments are below, and they're great.

Burns (Boston College '91, Columbia Law '95) is a partner in the D.C. office of Gibson, Dunn & Crutcher, where he has a white-collar criminal defense practice. From 2000 to 2005, he was an Assistant United States Attorney in the Southern District of New York, earning in 2004 the DOJ's Director's Award for superior performance. He works with the FCPA -- helping clients handle internal and government investigations, dealing with the DOJ and SEC, developing and running compliance programs -- and on securities and accounting fraud, criminal antitrust violations, government procurement fraud and public corruption investigations. His full bio is here.

Here's what he told us:

Dear FCPA Blog,

In your Waters So Deep post, you raised two separate questions regarding the distinction between civil and criminal charges under the FCPA's anti-bribery provisions: (1) Is there any difference in the elements required for a civil versus a criminal violation of the anti-bribery provisions; and (2) In the KBR / Halliburton case, why did the SEC charge Halliburton and KBR Inc. with civil anti-bribery violations, while the DOJ charged only Kellogg Brown and Root LLC?

1. Civil versus Criminal Anti-bribery Violation
According to the statute, the elements necessary for a criminal violation of the anti-bribery provisions are identical to those required for a civil violation, except where the defendant is a natural person. Where the defendant is a natural person, in order for criminal liability to attach, the government must additionally prove that the defendant acted "willfully." See 15 U.S.C. § 78ff(c); 15 U.S.C. § 78dd-2(g). Of course, the level of proof required to establish a criminal violation (beyond a reasonable doubt) versus a civil violation (by a preponderance of the evidence) also is different.

2. Why DOJ Charged Kellogg Brown & Root but not Halliburton
The SEC did not charge Halliburton with civil anti-bribery violations. Rather, the SEC charged only KBR Inc. with anti-bribery violations; it charged Halliburton solely with books-and-records and internal controls violations. The DOJ charged Kellogg Brown & Root LLC with anti-bribery violations and made no books-and-records or internal controls charges.

Why did neither the SEC nor the DOJ charge Halliburton with anti-bribery violations? There are at least two possible answers. First, the charges likely were the result of intense negotiations between the companies and the SEC and DOJ, and the result may have been something that all parties agreed to live with. The DOJ, for example, frequently exercises its prosecutorial discretion to charge only those entities most directly responsible for the FCPA violation at issue. See, for example, Schnitzer Steel (SSI Korea charged), Flowserve Corporation (Flowserve Pompes charged), and Fiat S.p.A. (Iveco, CNH Italia, and CNH France charged).

Second, it is possible that the SEC and DOJ did not believe they had evidence that Halliburton acted "corruptly," an element required for both civil and criminal applications of the anti-bribery provisions. (Note that "corruptly" is a separate element from "willfully" which, as described above, applies only to criminal violations of the anti-bribery provisions by natural persons.) The SEC's complaint states that although Halliburton was aware of KBR's use of United Kingdom and Japanese "agents" in relation to the Nigerian joint venture, KBR officials "did not tell the Halliburton officials that the UK Agent would use the money to pay bribes" (SEC Complaint at 10). With regard to the Japanese agent, the SEC alleged that "senior KBR officials…effectively hid the true nature of the relationship" (SEC Complaint at 11).

FCPA legislative history and courts have defined "corruptly" to mean acting with an evil purpose and with an intent to influence a foreign official to misuse his official position. See, e.g., Stichting v. Schreiber, 327 F.3d 173 (2d Cir. 2003); United States v. Kay, 513 F.3d 432 (5th Cir. 2007). Without knowledge that bribes were being paid by its subsidiary, Halliburton could not have "corruptly" authorized the payments.

David P. Burns
Gibson, Dunn & Crutcher LLP (Washington, D.C)


Following Kozeny's Money

The Justice Department obtained a federal court order ten days ago against Viktor Kozeny, barring him from touching any of the proceeds from the 2001 sale of his Aspen, Colorado residence (left), amounting now to about $23 million. The government said the funds came from the money laundering offenses alleged in U.S. v. Kozeny, a federal criminal prosecution in New York that includes Foreign Corrupt Practices Act charges. A copy of the restraining order can be downloaded here.

The DOJ sought the order after Kozeny settled a nine-year-old London High Court case last month. Bloomberg has the story here. During the London suit, court orders obtained by the plaintiff, Omega Advisors, Inc., froze $177 million of Kozeny's assets, including the Aspen house. Last month's settlement resulted in the freeze orders being discharged. Omega had sued Kozeny for more than $100 million in damages -- the amount Omega invested in Kozeny's 1998 failed attempt to take over the Azerbaijan state oil company, Socar. Omega lost its investment and, in 2007, paid a civil penalty of $500,000 in an FCPA enforcement action brought because of bribery allegations in the Socar deal.

Czech-born Kozeny has been a fugitive for about a decade. From the Bahamas, he's been fighting extradition to the United States and the Czech Republic. He was indicted in 2003 in a New York state criminal case for stealing $182 million from investors, including Omega and AIG. And in 2005, he and co-defendant Frederic Bourke were charged under the Foreign Corrupt Practices Act for bribing Azerbaijan officials in the Socar privatization. Kozeny hasn't appeared in the case, which is scheduled for trial in June this year.

After Kozeny fled the jurisdiction of the United States, his house in Aspen sat empty. In 2001, a federal judge in Denver allowed the house to be sold, with the proceeds to remain frozen. The buyer, boss Richard Braddock, paid $22 million -- a Colorado record at the time. The money went into an escrow at Wells Fargo for Kozeny's creditors, where it still sits today.

Kozeny bought the "Peak House," as it's known, in 1997 for $19.7 million. It has 24,000-square-feet, five bedrooms and nine bathrooms and sits on Red Mountain, overlooking Aspen. Kozeny threw fancy parties there and hosted investment seminars for his wealthy neighbors. Frederic Bourke, Kozeny's eventual co-defendant in the FCPA case, was a part-time resident of Aspen when Kozeny was there.

The Justice Department's restraining order freezing the "Peak House" proceeds is bad news for Kozeny. Although he's entering his second decade of exile in the Bahamas, it looks like the Justice Department isn't likely to forget about him (or his money) any time soon.

* * *

Bloomberg's David Glovin visited Viktor Kozeny last year in the Bahamas. Glovin's account of their meeting (here) is a great piece of reporting and writing. Here's an excerpt:

. . . The life of a fugitive is tough, Kozeny says during three days of interviews at his $29 million estate in July. "I feel a little like Napoleon sent to St. Helena,'' the 45-year-old Czech native says of his life in the Bahamas, which he hasn't left since 1999.

"Havel was jailed,'' he says of the former Czech president. "People would have laughed if they saw him as a president.'' He rattles off the names of other famous figures who've been imprisoned: "Nelson Mandela. Alexander Solzhenitsyn.'' Kozeny says he plans to clear his own name and run for the European Parliament by 2014.

Prosecutors would like to thwart Kozeny's political ambitions and send him to jail. New York District Attorney Robert Morgenthau says Kozeny stole $182 million from Americans who invested in his 1998 bid to win control of an oil company in the former Soviet republic of Azerbaijan.

U.S. Attorney Michael Garcia in New York says Kozeny offered millions of dollars in bribes to Azeri leaders to cement the acquisition. Czech prosecutors, meanwhile, are presenting evidence to a court that is trying Kozeny in absentia on charges of embezzling $1.1 billion from mutual funds he established in the early 1990s. . . .


Sir Allen And The FCPA

Since hearing about Allen Stanford's cozy relationships with certain Caribbean leaders, we've wondered if he'll eventually face criminal charges under the Foreign Corrupt Practices Act. Neither bribery nor the FCPA have been mentioned yet in connection with Stanford. But here's what's been reported, so far, in the New York Times and elsewhere.

Because of the SEC's suspicions, the FBI helped gather evidence about Stanford's business practices. The investigation led to the SEC's February 16 civil complaint. It alleged that Stanford's representations about his bank's certificates of deposit were false and misleading. It wasn't true, the SEC charged, that the funds were managed by at least 20 professionals and invested in safe, liquid assets. The truth, instead, was that the money went wherever Stanford himself and a couple of close associates directed, including into risky real estate and private equity deals. And at least $8 billion can't be accounted for.

Stanford, 58, is a U.S. citizen (from Texas) and therefore an FCPA "domestic concern." He has to comply with the antibribery provisions. (Before the recent headlines, we always thought he was British or maybe South African; he calls himself "Sir Allen," sports a small mustache, wears crested blazers, and is crazy about international cricket.)

About Stanford's cozy relationships with foreign leaders -- the tightest, it appears, was with the rulers of Antigua, population 85,000. He resettled his offshore bank there after it was booted off neighboring Montserrat in 1996 for unspecified reasons. His closeness to Antigua's former prime minister, Lester Bird, led to him being "knighted" by the tiny country's government a few years ago. On the Stanford website, he signs the chairman's letter as "Sir Allen Stanford." A note on the homepage says, "Stanford Financial Group and other Stanford entities are currently controlled and managed by a receiver."

In the late 1990s, the New York Times said, Prime Minister Bird appointed Stanford to Antigua's banking advisory board. The appointment created a blatant conflict of interest. The advisory board regulated the banks on Antigua, including those owned by Stanford. What's more, the Times said, "The [advisory board] project was paid for by the Antiguan government by money either lent or granted by Mr. Stanford."

Could those loans or grants have violated the FCPA? Not likely. A payment to a foreign government -- even a payment intended to influence decisions in favor of the donor -- cannot violate the FCPA. An FCPA antibribery offense requires a corrupt payment to a foreign official -- that is, to a human being. See §§ 78dd-1(a), 78dd-2(a). See also the DOJ's FCPA Opinion Procedure Release No. 97-02 (November 5, 1997) discussed in our post here. The DOJ said, because the "requestor's donation would go directly to a government entity -- and not to any foreign government official -- the provisions of the FCPA do not appear to apply to this prospective transaction."

In its civil complaint, the SEC alleged no facts about overseas corruption; the complaint focused on misrepresentations related to the certificates of deposit and unregistered investment-adviser activity by Stanford's companies. And we've seen no reports of credible evidence about illegal payments to foreign officials by Stanford or on his behalf. That doesn't mean evidence won't surface, however. In a couple of other recent cases, when the FBI was called in to investigate foreign business practices unrelated to FCPA concerns, it also discovered evidence of antibribery violations.

That's apparently what happened, for example, to Shu Quan-Sheng, the Virginia-based rocket scientist. The naturalized U.S. citizen sold defense-related goods and services to China without first obtaining U.S. export licenses or State Department approvals. During its export-related investigation, the FBI learned Shu was bribing Chinese government officials to buy his products. Shu pleaded guilty in November 2008 to violating the Arms Export Control Act and the FCPA. And in September last year, four U.S. citizens and their Philadelphia-based company, Nexus Technologies, were charged under the Foreign Corrupt Practices Act with bribing government officials in Vietnam. The FBI may have been investigating the defendants' alleged sales of sensitive equipment to Vietnamese government agencies when it discovered the potential FCPA offenses.

Stanford hasn't been charged by U.S. authorities with any criminal acts. The SEC's complaint is a civil enforcement action and, as mentioned, is limited to securities law issues. The New York Times pointed out, though, that he and his organization were big donors to U.S. politicians and courted them with favors and perks. "Mr. Stanford," the Times said, "also wooed lawmakers and their staff with plane rides and 'fact-finding' trips to vacation destinations. Many were paid for by the Inter-American Economic Council, a nonprofit organization that he supported."

Similar donations, gifts and favors to foreign officials might violate the Foreign Corrupt Practices Act. The law prohibits giving or promising to give, directly or indirectly, anything of value -- including cash, gifts and perks -- to a foreign official for the purpose of obtaining or retaining business. There are three narrow exceptions in the FCPA -- for facilitating payments, promotional expenses, and payments legal under the written laws of the host country. The Justice Department and the courts, however, view the FCPA's "obtaining or retaining business" prohibitions expansively, and take a narrow view of the limited exceptions.

So is this an FCPA story? Not yet. But it's one to watch.

The SEC's Feb. 17, 2009 press release is here. With the press release are links to the SEC's Litigation Release No. 20901 (February 17, 2009) in Securities and Exchange Commission v. Stanford International Bank, et al., Case No. 3-09CV0298-L (N.D.TX.) (here), the SEC's civil complaint (here), the SEC's memorandum of law (here), and information for Stanford customers concerning the federal court's order freezing assets and appointing a receiver over property of Stanford and his companies (here).


The Friday Report

Former Congressman William J. Jefferson says the cash found in his freezer four years ago proves he didn't violate the Foreign Corrupt Practices Act. Yesterday Jefferson filed a petition for certiorari to the Supreme Court, asking for review of the Fourth Circuit's refusal to dismiss most of the corruption-related charges against him. But he's not asking for dismissal of the two Foreign Corrupt Practices Act counts.

Jefferson's case is best known for allegations that in August 2005, he hid $90,000 in the freezer at his Washington home. The New Orleans Times-Picayune reports here that Jefferson's lawyers say the cash in the freezer is not alleged to be a bribe to Jefferson, but rather evidence of a violation of the Foreign Corrupt Practices Act. In an apparent preview of his FCPA defense, his lawyers said the money "was transmitted to Mr. Jefferson by the government's cooperating witness during the course of the FBI's sting operation so that he would pass it to a foreign government official," the then vice president of Nigeria. "But Mr. Jefferson did not do that. Instead, the marked funds were recovered in his home."

Jefferson says that except for the two FCPA charges, the grand jury's 16-count indictment depended on materials protected by the absolute privilege in the Constitution’s Speech or Debate Clause (Article I, Section 6, Clause 1). The evidence concerning the cash in the freezer, he acknowledges, wasn't protected by the privilege. A federal grand jury indicted him in June 2007 for violating the antibribery provisions of the Foreign Corrupt Practices Act, and also for soliciting and accepting bribes, wire fraud, money laundering and obstruction of justice. He faces a maximum of 235 years in prison if convicted on all counts. His trial is scheduled to start on May 26. Last year he lost an election for a 10th term in Congress from Louisiana.

The always-excellent scotusblog has a full report. It also has links to the Supreme Court petition in Jefferson v. U.S. here and the Fourth Circuit Court's decision from November 2008 rejecting Jefferson’s motion to dismiss here.

* * *

The murder of Russian journalist Anna Politkovskaya in 2006 that we talked about earlier this week (here) remains officially unsolved. Yesterday a jury in Moscow acquitted three men charged in her shooting. The LA Times has the story here. On trial were two Chechen brothers and a former Russian police officer. Another man accused in the murder and being tried separately was also released. He's a member of Russia's FSB, the domestic successor of the KBG.

The LA Times said of the verdict, "Critics say it was no accident that the search for the killers was ultimately fruitless. Even Moskalenko, the lawyer representing the Politkovskaya family, stopped just short of urging jurors to acquit the suspects, throwing blame instead on corrupt authorities."

Another journalist from Politkovskaya's paper, the Novaya Gazeta, was shot and killed in Moscow last month. The Washington Times says four journalists from Novaya Gazeta have been killed in the past eight years. "Since 2000," it says, "16 journalists have died in Russia under suspicious circumstances -- and scores of others have been threatened, intimidated and assaulted."

* * *

Russia dropped to 147th on the 2008 Corruption Perception Index, tied with Bangladesh, Kenya and Syria. On the 2009 Index of Economic Freedom, it ranks 146th. "Corruption remains all-encompassing," according to the Heritage Foundation report, "both in the number of instances and in the size of bribes sought. Manifestations include misuse of budgetary resources, theft of government property, kickbacks in the procurement process, extortion, and official collusion in criminal acts. Customs officials are extremely inconsistent in their application of the law."

In the World Bank's 2009 Doing Business project, Russia ranks near the bottom -- 120th, down eight places from last year. The amount of red tape choking the system is astounding. Building a warehouse in Russia requires 54 procedures and takes an average of 704 days. The OECD-wide averages, by comparison, are about 15 procedures and 161 days.


Waters So Deep

There are things we know we don't know, said the former boss at the Pentagon. But then again, he added, there are things we don't know we don't know. That distinction came to mind as we read the latest email from a correspondent who always holds us to a high standard. He said this:

"I, and other readers of the blog, could benefit from a discussion of what distinguishes a criminal violation of the FCPA's antibribery provisions brought by the DOJ from a civil violation of the antibribery provisions brought by the SEC. Of course, prosecutorial discretion is relevant, but I do not see in the statute any distinction between the two (i.e. no additional elements necessary for a criminal charge vs. a civil charge). Compare this to the books and records and internal control provisions which state at 15 USC 78m(b)(4) that 'no criminal liability shall be imposed' for violation of the books and records and internal control provisions except for 'knowing circumvention' or 'knowingly failing' to implement a system of internal controls or 'knowing falsification' of books and records."

Our correspondent said he'd been thinking about this since the SEC charged Halliburton Company and KBR Inc. with civil antibribery violations, while the DOJ charged only Kellogg Brown and Root LLC with criminal violations, even though the SEC's complaint sets forth all the "criminal" elements of an antibribery violation.

So what's the story?

Well, we're stumped. As we told our correspondent, we've read the U.S. Attorney’s Manual 9-28.000 / Principles of Federal Prosecution of Business Organizations (here). But we still don't know how decisions get made by the folks at the DOJ and SEC about who to charge with criminal or civil antibribery offenses. To which our correspondent replied, "From a policy standpoint, you hate to think that whether behavior x is charged civilly or criminally depends on the whim of a prosecutor and not proving additional elements needed to charge a crime."

So here's an invitation to all readers. Tell us, if you know, how decisions are made to charge companies or individuals under the Foreign Corrupt Practices Act with violations of the antibribery provisions either criminally or civilly. Is everything left to prosecutorial discretion? Are there published guidelines? How about unpublished guidelines? Secret handshakes?

To promote this discussion, we've adopted our own Stimulus Plan. The best response -- make that the best several responses -- will earn a copy of Bribery Abroad.

Download the DOJ's criminal information against Kellogg Brown and Root LLC here.

Download the SEC's February 11, 2009 civil complaint against KBR Inc. and Halliburton Company here.


This Talk Is Not Cheap

Public corruption doesn't happen in public. It needs dark places to flourish. That's why the press can play a decisive role in fighting sleaze--just by shining light on it. So the announcement this week by the Chicago Tribune that it's going all out to fight graft is welcome news. After all, one former Illinois governor, George Ryan, is doing time for corruption and another former governor, the freshly impeached Rod Blagojevich, faces a trial for trying to sell a U.S Senate seat.

In some countries, journalists on the corruption beat are putting their lives on the line. On Monday, a Chinese blogger who writes about corruption was stabbed in the stomach at a Beijing book store after giving a reading there. Xu Lai, who blogs under the pseudonym Qian Liexian, was apparently dragged into the store's bathroom by two men who stabbed him and fled. Xu Lai should recover from his injuries; whether he'll go on writing about corruption in China isn't known. Even if he does, however, other bloggers and journalists there are likely to think twice before they post stories about crooked government officials.

Corruption in Russia is a deadly topic for journalists. Investigative reporter Anna Politkovskaya was shot in a lift in her apartment building two years ago. She'd been threatened many times about her coverage of Chechnya and public corruption throughout the Russian government. Her murder, still unsolved, appeared to be a contract killing. She was 48 and a mother of two and often spoke of the risks of her job. In 2004, the editor of Forbes' Russian edition, Paul Klebnikov, was shot and killed in Moscow. And in 1995, a leading Russian journalist, Vladislav Listyev, was also shot dead in Moscow.

Kenya had a high-profile murder in January. Francis Nyaruri, who wrote about police corruption under the name of Mong'are Mokua, was beheaded and dumped in a forest. He was the second journalist killed in Kenya in the past year and had been threatened just before his disappearance.

It would be hard to find a country that's been more dangerous for journalists than the Philippines. In 2007, five were murdered and two others wounded. A radio host / reporter from Davao City, Ferdinand Lintuan, was killed on Christmas Eve 2007 after hosting his local radio show. He was shot by two men riding a motorcycle. Lintuan often accused local politicians of corrupt dealings, particularly involving the military.

So the Chicago Tribune's "campaign against the Illinois culture of political sleaze" is good news. Not only because it'll shine some light on the dark places where corruption grows. But also because it's a reminder of our free press in America that, at least for now, can still raise its voice without fear of violence.

Links to stories about Illinois are here, China here, Kenya here, Russia here, and the Philippines here.