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Richard L. Cassin Publisher and Editor

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Jessica Tillipman Senior Editor

Elizabeth K. Spahn Editor Emeritus

Cody Worthington Contributing Editor

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Thomas Fox Contributing Editor

Marc Alain Bohn Contributing Editor

Bill Waite Contributing Editor

Shruti J. Shah Contributing Editor

Russell A. Stamets Contributing Editor

Richard Bistrong Contributing Editor 

Eric Carlson Contributing Editor

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FCPA Blog Daily News

Sunday
Oct192008

Amid OECD Criticism, A Breakthrough In Britain

The U.K.'s failure to prosecute its multinationals for overseas bribery, while other European countries and the U.S. are stepping up enforcement, threatens the integrity of the international anti-bribery effort. That's what a fed-up OECD Working Group on Bribery says in its just-released report.

The 37-member OECD anti-bribery group launched an investigation into Britain's enforcement practices after the U.K.'s Serious Fraud Office quashed a corruption investigation into BAE Systems in December 2006. The military equipment supplier had been accused of funneling £1 billion in secret payments to the former Saudi ambassador to the United States, Prince Bandar bin-Sultan, in exchange for help selling jet fighters to the Saudi government. Both BAE and the Prince have denied breaking any laws.

The OECD was blunt. It said in its report:

The Working Group is disappointed and seriously concerned with the unsatisfactory implementation of the [OECD Anti-bribery] Convention by the UK. The continued failure of the UK to address deficiencies in its laws on bribery of foreign public officials and on corporate liability for foreign bribery has hindered investigations. . . . The Working Group also strongly regrets the uncertainty about the UK's commitment to establish an effective corporate liability regime in accordance with the Convention, as recommended in 2005, and urges the UK to adopt appropriate legislation as a matter of high priority.
Meanwhile, the U.K. government is celebrating two well-timed maiden anti-corruption victories. The breakthrough prosecutions are reported in a briefing from a Fulbright & Jaworski team led by Washington partner William B. Jacobson. Billy -- who joined Fulbright last month after serving with distinction as the Assistant Chief for FCPA Enforcement at the Justice Department's Fraud Section, Criminal Division -- graciously consented to our liberal use of the material. We're happy about that. For the past few days we haven't had a spare minute due to the ALCS -- i.e., planning to watch the games, watching the games, then talking about what happened in the games.

Here, then, is an abridged version of Fulbright's report:

In the course of just a few weeks, the UK has brought two separate foreign bribery cases to conclusion - the first such cases brought by UK authorities.

First, in late September, the Overseas Anti-Corruption Unit ("OACU") of the City of London Police announced that both an employee of CBRN Team Ltd ("CBRN"), a UK security consulting firm, and an official of Uganda pled guilty to bribery charges stemming from a scheme in which CBRN paid the Ugandan official in order to receive a contract to advise the Ugandan Presidential Guard. While the CBRN employee received a suspended sentence, the Ugandan official was sentenced to twelve months' incarceration.

Second, on October 6, 2008, the UK's Serious Fraud Office ("SFO"), in a case the SFO was investigating for evidence of foreign bribery, announced that it had reached a £2.25m (US$3.9m) settlement with major construction firm Balfour Beatty plc for alleged unlawful accounting in connection with certain 'payment irregularities' which it self-reported. While the SFO acknowledged that there were no grounds for criminal prosecution of either the company or any individual, this marks the first time a company has reached this type of civil settlement as part of a foreign bribery investigation. This is a significant event in the UK's enforcement of anti-corruption laws and comes only 6 months after the SFO was given the powers to make a civil recovery of the proceeds of crime.

The SFO's Powers

The SFO is a UK investigation and enforcement authority established to deal with serious financial crime and has the power to investigate any suspected offence appearing on reasonable grounds to involve serious or complex fraud. In the course of an investigation, the SFO may give notice to the subjects of the investigation, or to anyone else that the SFO thinks may have relevant information, to answer questions or to provide information or specified documentation, and in appropriate circumstances may issue warrants to compel production. The SFO may also commence and conduct criminal proceedings relating to that fraud. The SFO's powers to obtain civil recoveries in relation to the proceeds of crime are relatively new. In April 2008, the Serious Crime Act 2007 transferred the civil recovery powers formerly vested in the Assets Recovery Agency to a number of agencies including the SFO.

The CBRN Team Case

The prosecution of the managing director of CBRN and the Ugandan official who received the bribe is noteworthy in many respects. First and foremost, it represents the first convictions for foreign bribery in UK history. Second, having been investigated by the City of London Police's OACU, it also marks the first successful foreign bribery investigation by that recently-formed unit. Third, the prosecution was handled by the Crown Prosecution Service and not the SFO, which usually investigates foreign bribery with the OACU.

Additionally, the UK's ability to prosecute the foreign official who took the bribe sets the UK's legislation apart from the United States' foreign bribery law, the Foreign Corrupt Practice Act ("FCPA"). Under the FCPA, only the giver of a bribe, and not the foreign official who received the bribe' may be prosecuted. For all the criticism that the UK's foreign bribery legislation has received in recent years, those laws are, in this respect, stronger than the FCPA.

View Fulbright's full briefing on the cases here.

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Thursday
Oct162008

Looking Through The FCPA

Legal loopholes, the conventional wisdom goes, expand over time, until there's more hole than donut. But is that true of the Foreign Corrupt Practices Act? Have its three Congressionally created loopholes -- two affirmative defenses and one exception -- gotten bigger over time?

The answer is no. In fact, there's never been much wiggle room in the FCPA, and what's there hasn't grown (it might have shrunk a bit, though). Here's why.

The facilitating payments exception sounds more important than it is. Yes, it allows bribes-- grease payments -- for “routine governmental action . . . which is ordinarily and commonly performed by a foreign official." 15 U.S.C. §§78dd-1 (b) and (f) (3). The examples in the law include obtaining permits and licenses, processing visas, getting police protection, mail and phone service, scheduling inspections, connecting power and water, loading and unloading cargo, and protecting perishable goods. There's even a catch-all for "actions of a similar nature."

But here's the problem. Most so-called grease payments don't fall within the exception after all. The only protected payments are those intended to facilitate legitimate routine governmental action. So bribing an official to do anything outside his or her assigned duties isn't legal. For example, paying a customs clerk to schedule an inspection of goods already in the customs queue is OK, but paying to leapfrog the queue or pass an inspection isn't. Grease payments only work when you pay for something you're already entitled to, and that's not a common need.

The government has always taken a narrow view of facilitating payments, so there's no reason for optimism when approaching the subject. But still, the idea persists that this exception is broader than it really is. Our guess is that at least a third of all internal investigations today are triggered when companies discover illegal bribes that someone first mischaracterized as facilitating payments. No wonder 80% of U.S. companies now ban grease payments entirely.

How about payments related to product promotions? Has this loophole grown over the years? Do companies use it to pass buckets of money to foreign officials? Not a chance.

The FCPA says payments to foreign officials are permitted for expenses related directly to “the promotion, demonstration, or explanation of products or services" that are "reasonable and bona fide.” 15 U.S.C. §§ 78dd-1(c)(2)(A) and 78dd-2(c)(2)(A). If a payment to a foreign official is reasonable and bona fide, however, it can't be corrupt. And if it's not corrupt, it's not prohibited by the FCPA. If it's not prohibited by the FCPA, what's the point of the affirmative defense? Well, no one knows.

Congress created loads of uncertainty about this exception through its inartful language (thanks, William Safire). So compliance-minded companies have to approach it with extreme caution. They adopt elaborate guidelines to prove their payments are reasonable and bona fide. No new business can be brought before the officials being comped. No advance funds or reimbursements in cash. No expenses for spouses, family, or other guests. No entertainment or leisure activities. No side trips. No golf (yikes!). No walking-around money. No give-away hats or tee shirts that don't sport the host’s name or logo. Everything has to be reasonable and bona fide. Which means this exception isn't threatening the structural integrity of the FCPA. But it is making U.S. companies look cheap, stingy and inhospitable.

Finally, there's the local law defense. The FCPA allows otherwise prohibited payments that are "lawful under the written laws and regulations of the foreign official’s" country. 15 U.S.C. §§ 78dd-1(c)(1), 78dd-2(c)(1) and 78dd-3(c)(1). This affirmative defense was added to the FCPA in 1988. It sounded promising then because most people misunderstood what Congress intended. They thought that if a payment wasn't criminalized by local law, it was permitted under the FCPA. But that idea was seriously wrong.

Unlike its snafu with promotional payments, Congress was clear on this. It said that only payments permitted by the written laws of the official's country are immunized under the FCPA. Which means the defense only works if the local law says the payment is permitted. But do governments enact laws to declare things legal? No, they enact laws to declare things illegal. Laws usually tell people what they can't do, not what they can do. With very few countries rushing to pass laws that permit their officials to accept bribes, it's safe to say this exception won't be expanding much any time soon.

So there they are -- the FCPA's three little loopholes. They really are tiny. Nothing Joe the Plumber could drive his truck through, that's for sure.

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Tuesday
Oct142008

Surveying FCPA Compliance

Eighty percent of U.S. companies have now banned facilitating payments entirely, and nearly four in ten small U.S. companies have walked away from business in countries where the perceived risk of non-compliance was too high.

Those are among the findings of Fulbright & Jaworski's 2008 Litigation Trends Survey. The fifth annual report is based on input from 358 U.S. and U.K. in-house counsel, including 251 U.S. respondents.

Here are some facts from the "Bribery and Foreign Corruption" section of the survey, which is available here:

  • Twenty percent of companies with $1 billion or more in revenues undertook a bribery or corruption investigation during the survey period. For companies with less than $1 billion in revenues, the number was 2%, and for companies under $100 million, it was just 1%.
  • Manufacturers led all other industry segments in corruption investigations at 14%, followed by energy firms at 12%.
  • Seven percent of U.S. companies engaged outside counsel because of possible corruption or bribery charges, including violations of the Foreign Corrupt Practices Act.
  • Eleven percent of the responding companies with international operations hired outside counsel during the survey year to investigate bribery claims, and 20% dealt with potential bribery concerns as part of due diligence in a corporate acquisition.
  • Only 20% of U.S. companies still allow facilitating payments in some countries as a means of expediting business and government functions.
  • In the U.K, 39% of companies still permit facilitating payments.
  • Thirteen percent of the responding companies admit they still allow small direct payments to foreign governments in certain specific situations.
  • One-quarter of energy companies and one-fifth of financial services firms admitted making direct payments to foreign hosts in some cases.
  • Twenty three percent of all U.S. companies said they have made the decision to walk away from doing business in a country based on the perceived degree of local corruption. For companies with under $100 million in revenues, the walk-away rate was 39%, and for billion-dollar companies it was 31%.
A release says the survey was conducted earlier this year (and in the prior four years) by Greenwood Associates, a Houston-based research firm. It canvassed 358 in-house counsel in the U.S. and U.K., more than two-thirds of whom identified themselves as either general counsel or deputy general counsel, with 7% holding the title of senior counsel, 10% associate general counsel, and 15% staff counsel.

The industry groups covered by the survey included financial services, energy, manufacturing, health care, retail, real estate, insurance, education, and technology and telecommunications. By size, 22% of the responding companies report revenues under $100 million, 39% report revenues between $100 million and $999 million, and 39% at $1 billion and above. Just under half the companies are publicly held (a quarter are listed on the NYSE) and 57% maintain at least one foreign office, with 19% having locations in more than 20 countries.

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Monday
Oct132008

Comments To What's The Count

Nine out of 10 visitors to this blog (according to feedburner.com) view our posts through a reader such as Google Feedfetcher or an aggregator. That means most visitors normally don't see comments (or the buttons and other information to the right).

In response to our prior post about how the DOJ and SEC count their FCPA actions, we've received some helpful comments that we want to share with everyone. Here's what we've heard so far:

Anonymous said...

Still doesn't really answer varying scenarios:

(1) If the DOJ indicts someone who six months later enters a plea agreement, is that two enforcement actions?

(2) What if the DOJ indicts someone one year and that person enters a plea agreement a year later? Does that count as an enforcement action each year?

(3) What if the DOJ charges a subsidiary and enters a DPA or NPA with the parent (ala Baker Hughes last year), does that count as two enforcement actions?

October 13, 2008 10:01 PM

The FCPA Blog said...
Yup, there are some unanswered questions. We'll post any further responses to clear up the mysteries.
October 13, 2008 2:15 AM
bc said...
The SEC counts enforcement actions on a fiscal year ending Sept. 30.

http://www.complianceweek.com/blog/carton/2008/10/03/like-clockwork-the-secs-september-surge-returns-again/

October 13, 2008 8:17 AM

Miguel V said...
Not sure how they count it internally, but thus far I've got about 6 different incidents from Jan 1, 2008 from the SEC's lit releases. This is not counting the IXTC case that wrapped up this year after it had dragged on seemingly forever.

October 14, 2008 3:38 PM

Miguel V said...
Should also add I'm counting 4-5 for the DOJ since Jan 1 depending how you want to count it.

October 14, 2008 4:15 PM

Marc said...
Not sure how you figure Miguel. If you include settlements, pleas and unresolved indictments, on the DOJ side you appear to have 15 enforcement actions so far this year. If you don't include indictments, you have 8.

6 Corporate Settlements
• Willbros Group (May)
• AGA Medical Corp.(May)
• AB Volvo (Mar.)
• Flowserve Corp. (Feb.)
• Faro Technologies (Jun.)
• WABTEC (Feb.)

2 Individual Pleas
• Jack Stanley (Sep.)
• Martin Self (May

7 Indictments
• Gerald Green (Superceding) (Oct.); (Initial) (Jan.)
• Patricia Green (Superceding) (Oct.); (Initial) (Jan.)
• Shu Quan Sheng (Physicist) (Sep.)
• Nam Nguyen (Nexus Tech) (Sep.)
• Kim Nguyen (Nexus Tech) (Sep.)
• An Nguyen (Nexus Tech) (Sep.)
• Joseph Lukas (Nexus Tech) (Sep.)

On the SEC side, you appear to have 13 enforcement actions.

6 Corporate Settlements/Orders
• Con-Way Inc.(August)
• Faro Technologies (Jun.)
• Willbros Group (May)
• AB Volvo (Mar.)
• Flowserve Corp. (Feb.)
• WABTEC (Feb.)

7 Individual Settlements/Orders
• Jack Stanley (Sep.)
• Jason Steph (May)
• Gerald Jansen (May)
• Lloyd Biggers (May)
• Steven J. Ott (April)
• Roger M. Young (April)
• Yaw Osei Amoako (April)

October 14, 2008 7:12 PM

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Sunday
Oct122008

What's The Count?

Some weekend. We should've expected it since the calendar says mid-October. That always means one thing, or maybe two. The sky is falling on Wall Street . . . and the American League Championship Series is in full swing, literally. In Game 2, seven home runs in five innings. Five hours and 27 minutes of pure tension. Great baseball, even if outside the park the Anglo-American capitalist model was taking strike three (at least according to some voices from the Eurozone).

But coming back to our subject of the Foreign Corrupt Practices Act, a reader last week with an eye for detail asked the following:

I have a question about how DOJ and SEC provide numbers of prosecutions /enforcement actions for a particular year. First, when they say 2008, is it fiscal year (e.g., Oct. 2007-Oct. 2008) or calendar year? Second, do you know what they count as an action? I assume it is any indictment, plea agreement, DPA/NPA/or (in the case of the SEC) settlement or enforcement action filed, but not sentencing?

We can't answer for the SEC, but the Justice Department counts actions on a calendar-year basis. The description in the question of what's included is correct. Any indictment, plea agreement, deferred prosecution agreement or non-prosecution agreement gets a number. To avoid double counting, sentencings do not get numbers because the actions are included from the time of charging or entry of the guilty plea.

If anyone would like to add more to this answer or speak for the SEC, please drop us a line.

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Thursday
Oct092008

After Kay, Another Warning About Grease Payments

Responding to our post, Case Closed For Kay And Murphy, reader Jon May has asked a great question: Isn't there a danger that the grease exception will lull businesses into the very conduct that is proscribed by Kay?

Yes, there's a danger of that happening, but it's not new.

Before Kay, the DOJ already had an expansive view of FCPA enforcement. Prosecutors were looking beyond bribes intended to help land business directly from overseas government customers. Enforcement scrutiny extended to any overseas public bribery that might create a commercial advantage, and Kay didn't change that.

So what bribes have been fair game for prosecution? The list in our prior post about Kay mentioned payments to reduce taxes or speed up tax refunds, jump customs queues, obtain favorable product inspections, manipulate business registrations, alter rates or delivery times of national carriers, reduce utility costs, and enhance property usage, among others.

And here's Jon's point: Those examples sound a lot like facilitating payments. And doesn't the FCPA allow facilitating payments? Then what's going on?

The facilitating payments exception permits bribes for “routine governmental action . . . which is ordinarily and commonly performed by a foreign official." See 15 U.S.C. §§78dd-1 (b) and (f) (3) [Section 30A of the Securities & Exchange Act of 1934]. That seems clear enough. But according to the statute, facilitating payments can relate only to an action which is ordinarily and commonly performed by a foreign official.

The clear implication of the language -- and the view adopted by the Justice Department years ago -- is that the exception will not apply if there was no legitimate routine governmental action pending and for which the payment was made. Anything obtained or sought to be obtained by subornation of the official’s duty is not an action “ordinarily and commonly performed by a foreign official.” So it's outside the scope of the exception.

For example, paying a customs clerk to inspect goods already in the customs queue and awaiting inspection may be permissible. But paying a customs clerk to jump the queue, or paying for positive inspection results, may be outside the exception. Think of it this way: Any time an official is asked to do something more -- something beyond the scope of his or her normal duty, the facilitating payments exception is unlikely to apply.

The FCPA itself lists these examples of facilitating payments: (i) obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country; (ii) processing governmental papers, such as visas and work orders; (iii) providing police protection, mail pick-up and delivery, or scheduling inspections associated with contract performance or inspections related to transit of goods across country; (iv) providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products or commodities from deterioration; or (v) actions of a similar nature.

But here's the catch. No matter how hard you try to make a bribe fit into one of those examples, the facilitating payments exception won't apply if there was no legitimate routine governmental action pending and for which the bribe was paid. Again, action obtained or sought to be obtained by subornation of the official’s duty is not an action ordinarily and commonly performed by a foreign official. Therefore, it's outside the scope of the exception.

If this sounds like a difference without a distinction, like another piece of linguistic linguine -- well, that's right. It's confusing. Which is why the facilitating payments exception, to use Jon's word, is filled with danger.

As he says, companies can be lulled by the exception into illegal behavior. More often than not, bribes first identified as permitted grease payments do not fall within the exception after all. Sometimes it's the purpose of the payments that makes them unsuitable -- there's no underlying legitimate routine governmental action. Sometimes the recipient's identity or role spoils the exception. The so-called clerk who's collecting the bribe turns out to be a real decision maker. And sometimes the timing or size of a payment isn't consistent with a payment for mere routine governmental action. Why pay big money for something you're already entitled to receive?

Prosecutors say that anyone relying on the exception should be prepared to defend it. They warn that dollar thresholds alone aren't reliable, which means bribes aren't facilitating payments just because they're small. And, say the feds, an issuer’s books and records must accurately reflect facilitating payments, making clear to an outside observer the actual purpose for the bribe. That sort of disclosure -- which amounts to a signed confession in the public domain -- is terrible publicity. It also creates a further risk of prosecution in host countries where the grease payments were made.

In other words, a lot can go wrong with facilitating payments, and when it does the downside can be . . . a long way down.

That's why plenty of compliance-minded companies now ban all bribes. Grease payments, companies have decided, are just too hard to control and account for. They might have to be publicly disclosed, they might violate local laws, and they might promote a culture of corruption that will spoil the company's effective compliance program. And what about the ethics and morality of grease payments? After all, they harm local economies and honest citizens and perpetuate corrupt regimes. Should any corporate citizen promote that outcome? So even though the FCPA permits them, grease payments are getting a well-deserved boot.

Thanks, Jon, for the great question. And for giving us another chance to sound the alarm about facilitating payments.

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Tuesday
Oct072008

Charting The FCPA

"Cash crunch could result in more corruption cases," says a headline in the current Financial Week (available here.) In the article, Steven Tyrrell, the head of the Justice Department's fraud section, says the credit crisis may produce a crop of additional Foreign Corrupt Practices Act cases. The targets this time would be banks and others that went looking for cash from sovereign wealth funds in exchange for favors rendered to the host-country's rulers.

"Mr. Tyrrell," the article says, "noted the recent boom of sovereign wealth funds is an area at the top of the Justice Department’s hit list, though it has not yet garnered any definitive cases."

We've never seen empirical studies on the subject, but we've noticed that FCPA cases generally spring from industries that deal in scarce commodities -- whatever those happen to be at any moment in history. It could be energy, telecommunications licenses, access to hospital patients, metals, food, cash and so on.

Wherever buyers are scrambling for supply, sellers have opportunities to squeeze them. Rising energy prices over the past decade, for example, increased the leverage corrupt oil-producing countries could exert over foreign buyers. In her excellent book, Bribery and Extortion, Alexandra Wrage talks about corruption in Nigeria's ruling family during the energy and metals boom. The story is grotesque, and the scenario was repeated in resource-rich, governance-poor countries around the globe. The pressures in energy-related markets eventually resulted in many FCPA enforcement actions, culminating in Jack Stanley's shocking guilty plea last month.

These days, a commodity in short supply is cash. Sovereign wealth funds have it and banks need it. Will the financial institutions succumb to market pressures? Will they abandon FCPA compliance to save their balance sheets? Some might, as the DOJ's Steven Tyrrell predicts. And if that happens, pin-striped tragedies are sure to follow.

We don't have empirical evidence for this one either. But we're fairly certain that anyone who has ever occupied a jail cell because of an FCPA offense wishes they'd complied instead.

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Monday
Oct062008

Case Closed For Kay And Murphy

The U.S. Supreme Court will not review the Fifth Circuit's decisions in U.S. v. Kay, the Justices said yesterday. The Foreign Corrupt Practices Act convictions of David Kay and Douglas Murphy cannot be further appealed and the two must now serve their prison sentences -- 37 months for Kay and 63 months for Murphy.

The former executives of American Rice, Inc. were found guilty in 2005 of bribing Haitian officials in order to reduce their company's taxes. They argued all along that the FCPA didn't apply to bribes to reduce taxes, or that if it applied, the "obtaining or retaining" language in the law (the business nexus element) is so ambiguous that enforcement in their case would be unfair. The Justice's denied the petition for certiorari after a review at their Sept. 29, 2008 docket conference.

The lower court's view of the FCPA, left undisturbed by the Supreme Court, is important for at least a few reasons:

First, the Fifth Circuit said any payments to foreign officials that might assist in obtaining or retaining business by lowering the costs of operations can fall within the FCPA.

Second, the Fifth Circuit emphatically did not think enforcing the statute against Kay and Murphy would be unfair, even if the business nexus element is a bit ambiguous. "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."

And third, the court said the government can satisfy the "knowing" element of an FCPA offense by showing merely that the defendants understood that their actions were illegal. No specific knowledge about the FCPA and its prohibitions is required.

Denial of cert is terrible news for Kay and Murphy and a personal tragedy for them. For the rest of us, it means the Justice Department's so-called "expansive enforcement" of the FCPA will continue. Compliance programs need to be expansive as well, aimed not just at bribes intended to help land business directly from foreign governments but extending also to any overseas public bribery that might create a commercial advantage. That includes payments to reduce taxes or speed up refunds, jump customs queues, obtain favorable product inspections, manipulate business registrations, alter rates or delivery times of national carriers, reduce utility costs, and enhance property usage -- to name just a few.

View the U.S. Supreme Court's Oct. 6, 2008 Orders List here.

View our prior posts about U.S. v. Kay here.

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Sunday
Oct052008

Tax Charges Added In Hollywood FCPA Case

Last week's superseding indictment of movie producers Gerald and Patricia Green includes new allegations that Mrs. Green filed two false tax returns. The government says she signed returns in 2005 and 2006 that included deductions for "commissions" which she knew were "bribes to a foreign official for obtaining and retaining business."

FCPA trouble can lead to tax problems, says Selva Ozelli, a New York City lawyer and CPA. In an earlier post (The FCPA Can Be A Very Taxing Matter), we talked about her excellent article, "Is This Bribe Deductible? Tax Implications Of the U.S. Foreign Corrupt Practices Act." It appears in Tax Notes International (December 17, 2007, p. 1171).

She says that knowingly filing tax returns that characterize illegal payments abroad as deductible expenses can lead to criminal charges for fraud. The IRS has the burden of proving fraud -- that is, that the filer knew its return was false and intended to evade paying taxes by making a false return. But, she says, the standard of proof is not "beyond a reasonable doubt" but by "clear and convincing evidence," a lower burden for the government. She also says a taxpayer can be acquitted in a criminal bribery case and still lose a fraudulent-filing case.

The U.S. government is alleging that Patricia Green filed two tax returns she knew were false. Paragraph 29 of the superseding indictment contains one of the tax-related charges. It says:

On or about June 15, 2005, in Los Angeles County, within the Central District of California, and elsewhere, defendant PATRICIA GREEN did willfully make and subscribe a U.S. Income Tax Return, Form 1120, for SASO Entertainment ("SASO"), for the tax year 2004, which was verified by a written declaration that it was made under the penalties of perjury and that was filed with the Internal Revenue Service on or about June 20, 2005, which return defendant PATRICIA GREEN did not believe to be true and correct as to every material matter, in that said return claimed SASO paid $303,074 in "commissions" deductible from SASO's gross income as costs of goods sold, whereas, as defendant PATRICIA GREEN then well knew, that figure was a false and overstated amount including bribes to a foreign official for obtaining and retaining business with SASO that were not commissions or costs of goods sold.
Each tax charge is punishable by up to 10 years in prison. The new indictment also contains one count of conspiracy to violate the FCPA and engage in money laundering, 10 counts of violating the FCPA, seven counts of transportation promotion money laundering, one count of a transaction in criminally derived property, and one count of forfeiture. The conspiracy and FCPA charges each carry a maximum penalty of five years in prison and each money laundering count carries a maximum penalty of up to 20 years in prison.

The Greens pleaded not guilty to the original charges. They're scheduled to be arraigned on the superseding indictment on October 14.

As the DOJ says, an indictment is merely an accusation and a defendant is presumed innocent until proven guilty beyond a reasonable doubt.

Ms. Ozelli's article is available exclusively from Tax Notes International (which is by subscription only) here.

View our prior posts about the Greens here.

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Friday
Oct032008

News On The Greens

A reader just sent along the following release from the DOJ:

__________

Issued on Friday, October 3 at 11:05 a.m. PDT

FILM EXECUTIVE AND SPOUSE INDICTED FOR PAYING BRIBES

TO A THAI TOURISM OFFICIAL TO OBTAIN LUCRATIVE CONTRACTS

Acting Assistant Attorney General Matt Friedrich of the Criminal Division and United States Attorney Thomas P. O’Brien announced today that a Los Angeles-area film executive and his spouse who were previously charged with bribing a Thai government official have been charged in a superseding indictment that adds allegations of bribery in relation to a series of contracts that brought the couple at least $14 million in revenue.

Gerald Green, 75, and Patricia Green, 52, both of West Hollywood, were named in a new indictment returned Wednesday afternoon that accuses them of paying kickbacks to a former governor of the Tourism Authority of Thailand (TAT) in exchange for receiving contracts for an “elite privilege card” marketed to wealthy foreigners, calendars, a book, a website, a video featuring Thailand, and a TAT logo. These contracts allegedly resulted in more than $14 million in revenue to businesses owned by the Greens and approximately $1.8 million in bribe payments for the governor.

The Greens were originally indicted in January 2008 on charges of paying bribes to the former governor of the Tourism Authority of Thailand (TAT) in connection with securing contracts to operate and manage the annual Bangkok International Film Festival (BKKIFF) from 2002-2007.

According to the superseding indictment, the Greens formed Film Festival Management, Inc. (FFM), a Los Angeles-based film company, in 2002 to obtain the BKKIFF contract. As charged, from 2002 and continuing into 2007, the Greens conspired with others to bribe a senior Thai government official who was, at the time, the president of the BKKIFF and the governor of the TAT. As a result of her position at the TAT, the governor was able to influence the awarding of the BKKIFF contracts and other TAT-related contracts. The superseding indictment charges that the Greens used different business entities, some with dummy business addresses and telephone numbers, in their dealings with the TAT in order to hide the large amount of money the Greens were being paid under the contracts. The superseding indictment further charges that the Greens disguised the bribes as “sales commission” payments and made the payments for the benefit of the governor through the foreign bank accounts of intermediaries, including bank accounts in the name of the governor’s daughter.

The indictment specifically charges the Greens with one count of conspiracy to commit an offense against the United States by paying bribes to a foreign public official in violation of the Foreign Corrupt Practices Act (FCPA) and by engaging in money laundering, 10 counts of violating the FCPA, seven counts of transportation promotion money laundering, one count of a transaction in criminally derived property, two counts of false subscription of tax returns, and one count of forfeiture.

The conspiracy and FCPA charges each carry a maximum penalty of five years in prison, each of the false subscription charges carries a 10-year maximum sentence, and each of the money laundering counts carries a maximum penalty of up to 20 years in prison.

An indictment is merely an accusation and a defendant is presumed innocent until proven guilty beyond a reasonable doubt.

This case is being prosecuted by DOJ Trial Attorney Jonathan E. Lopez and DOJ Contract Attorney Allan J. Medina of the Fraud Section and Assistant U.S. Attorney Bruce Searby of the Central District of California. The case was investigated by the Federal Bureau of Investigation and IRS-Criminal Investigation.

USAO Release No. 08-134

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View prior posts about the Greens here.

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Thursday
Oct022008

Probation For FCPA Offenses In Fake Degree Case

A member of a Spokane, Washington–based diploma mill syndicate who bribed foreign officials to obtain accreditation of phony schools escaped prison in return for his cooperation with prosecutors.

According to reports, Richard John Novak, 58, who pleaded guilty in 2006 to one count of violating the Foreign Corrupt Practices Act and another count of conspiring to violate the FCPA and commit wire and mail fraud, was placed on three years probation and ordered to perform 300 hours of community service. He had faced up to ten years in prison. Two other members of the syndicate were sentenced with Novak to probation for conspiracy to commit wire and mail fraud.

Other gang members had already been jailed on non-FCPA charges. Steven Karl Randock, Sr., 69, and his wife, Dixie Ellen Randock, were each sentenced to 36 months in prison followed by 3 years of court supervision; Dixie Randock's daughter, Heidi Kae Lorhan, was sentenced to 12 months and one day in prison followed by 2 years of court supervision; and Roberta Markishtum was sentenced to 4 months in prison followed by 1 year of court supervision. They had pleaded guilty to charges of conspiracy to commit wire and mail fraud and money laundering.

From 1999 to 2005, the group collected as much as $8 million selling fraudulent academic credentials to over nine thousand individuals located in the United States and elsewhere, the Justice Department said. According to earlier reports, at least 135 U.S. federal employees -- including a White House staff member and National Security Agency employees -- bought bogus college degrees through the gang. The government refused to publicly name any federal employees holding phony degrees.

In his plea agreement, Novak admitted paying more than $43,000 to several Liberian government officials to obtain accreditation from Liberia for Saint Regis University, Robertstown University, and James Monroe University. The bribes were also meant to induce Liberian officials to issue letters and other documents to third parties falsely representing that Saint Regis University was properly accredited by Liberia. According to his plea agreement, between October 2002 and September 2004, more than $19,000 was wired from an account in the State of Washington controlled by Dixie and Steven Randock to a bank account in Maryland in the name of the Liberian Consul. Novak was paid $60,000 for helping the Randocks deal with the foreign government officials.

The Secret Service filmed a Liberian diplomat taking a bribe from Novak in a hotel room in Washington, D.C. Novak also made cash payments to diplomats in Liberia and Ghana. Of the 6,000 phony college degrees sold by the gang from schools accredited by Liberia, about 40 percent were bought by foreign residents seeking entry into the United States, the government said.

The Seattle Times reported in 2006 that Novak attended Spokane Community College for one year. He left without a degree and then worked as a car salesman. But after joining the Randocks' operation in 2002, he was shown on the Saint Regis University web site as holding doctorates in international business, educational administration and psychology.

The gang created more than 100 phony schools such as: Saint Regis University; James Monroe University; Robertstown University; Holy Acclaim University; Ameritech University; Fort Young University; Pan America University; All Saints American University; American Capital University; Blackstone University; Capital America University; Hampton Bay University; Hartland University; Intech University; Nation State University; New Manhattan University and Graduate Institute; North United University; Port Rhode University; St. Lourdes University; Saint Renoir University; Stanley State Graduate University; Van Ives University; West American University; International MBA Institute; Apollo Certification Institute; James Monroe High School; Liberty Academy Preparatory High School; Trinity Christian High School; Mission College Preparatory High School; and Bradford Academy College Preparatory High School.

The syndicate also sold counterfeit diplomas and academic products purporting to be from legitimate academic institutions, such as the University of Maryland, George Washington University, Missouri University, and Texas A&M University.

View the DOJ's August 05, 2008 release here.

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Wednesday
Oct012008

In Search Of The Level Playing Field

The Foreign Corrupt Practices Act was last amended ten years ago. The "International Anti-Bribery and Fair Competition Act of 1998" was intended to make the FCPA consistent with the OECD Convention -- formally titled the Organization for Economic Cooperation and Development Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

The OECD Convention itself resulted from a 10-year initiative by the United States. In 1988, Congress told the White House to help U.S. companies compete by encouraging trading partners to pass laws similar to the FCPA. The OECD members -- consisting then of 33 countries with the most significant economies -- signed the Convention in Paris in December 1997. It went to the U.S. Senate six months later.

The 1998 Amendments implemented the OECD Convention and made five conforming changes to the FCPA:

First, payments made to secure "any improper advantage" -- language used in the OECD Convention -- were added to the FCPA's prohibitions.

Second, the FCPA's coverage was extended to include all foreign persons who commit an act in furtherance of a foreign bribe while in the United States.

Third, the FCPA's definition of foreign officials was expanded to include employees and representatives of public international organizations.

Fourth, jurisdiction was extended over the acts of U.S. businesses and nationals involved in illegal payments that take place wholly outside the United States.

And fifth, the distinction was eliminated between U.S. nationals and non-U.S. nationals, making all employees or agents of U.S. businesses subject to both civil and criminal penalties under the FCPA.

When President Clinton signed the 1998 Amendments (S. 2375) into law, his message about the search for the elusive level playing field was clear:
. . . Since the enactment in 1977 of the Foreign Corrupt Practices Act, U.S. businesses have faced criminal penalties if they engaged in business-related bribery of foreign public officials. Foreign competitors, however, did not have similar restrictions and could engage in this corrupt activity without fear of penalty. . . . As a result, U.S. companies have had to compete on an uneven playing field, resulting in losses of international contracts estimated at $30 billion per year.

The OECD Convention - - which represents the culmination of many years of sustained diplomatic effort - - is designed to change all that. Under the Convention, our major competitors will be obligated to criminalize the bribery of foreign public officials in international business transactions. . . . The United States intends to work diligently, through the monitoring-process to be established under the OECD, to ensure that the Convention is widely ratified and fully implemented. We will continue our leadership in the international fight against corruption. . . .

Ten years later, how well are the 1998 Amendments working? Non-U.S. companies and individuals are being prosecuted under the FCPA. And despite some disappointments, there are encouraging signs from Europe and Asia, where countries are prosecuting their companies and citizens for overseas public bribery. The level playing field is still a work in progress, but at least there's progress to measure.

View the DOJ's 1998 Amendments site here.

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