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FCPA Blog Daily News


Grynberg v. BP et al

Last week we reported here about the civil suit filed in the U.S. District Court in D.C. by Colorado-based oilman Jack Grynberg, 76, against BP, Statoil and British Gas, along with some of their current or former top executives. The core allegation is that the defendants, without Grynberg's knowledge and using some of his money, bribed officials in Kazakhstan in order to win oil rights for joint ventures in which Grynberg had an interest.

A friend sent us a copy of Grynberg's complaint. It alleges facts which, if true, would violate the Foreign Corrupt Practices Act. Because there is no private right of action under the FCPA, we asked in our prior post whether the Department of Justice would investigate Grynberg's allegations. After reading his complaint, the answer must be yes.

What follow are excerpts from Grynberg's pleading. We've omitted the paragraph numbers that appear in the original document and we've split up some longer sections for the sake of readability. But all of the language between our lines is taken directly from the complaint.

This is a lot more text than we usually post at one go. But it's fascinating material and extremely unusual. Normally, allegations about international public corruption and violations of the FCPA come only from the Department of Justice and the Securities and Exchange Commission. This story, however, is told by an industry insider who's also an alleged victim.


COME NOW the Plaintiffs, Jack J. Grynberg (“Grynberg”), Grynberg Production Corporation, a Texas corporation (“GPC Texas”), Grynberg Production Corporation, a Colorado corporation (“GPC Colorado”) and Pricaspian Development Corporation, a Texas corporation (“PDC”), collectively, the “Grynberg Plaintiffs,” through their undersigned counsel and for their Complaint against Defendants B.P. P.L.C. (“BP”), BP Corp North America Inc., StatoilHydro ASA (“StatoilHydro”), John Browne (“Browne”), Anthony Hayward (“Hayward”), Peter Sutherland (“Sutherland”), Helge Lund (“Lund”), British Gas (“BG”) and Eivind Reiten (“Reiten”), respectfully allege as follows:

This is a case about Statoil’s, BP’s and BG’s role -- and the role of its executive leadership – in a massive scheme involving illegal bribes paid to various top officials of the Government of Kazakhstan by several oil companies, and the scheme to cover up those bribes from public disclosure through a series of misrepresentations. There have been many victims of these bribes and their cover up – beginning with the People of Kazakhstan who have been denied their right to the benefits of the resources extracted from their land and the right to the honest services of their governmental officials of the bribes and the cover-up. The Grynberg Plaintiffs are another group of victims.

The Grynberg Plaintiffs comprise a small petroleum exploration, development and production consortium, who have engaged in honest and fully transparent business dealings in Kazakhstan and elsewhere since the late 1980’s. Plaintiffs contracted with larger oil companies to help them explore and develop Kazakhstan’s vast oil and natural gas potential. But some of the larger oil companies cut their own deal with the Kazakhstan Government to squeeze the Grynberg Plaintiffs out of Kazakhstan, using the Grynberg Plaintiffs’ confidential, proprietary, and extremely valuable, geological and geophysical information.

Settlement agreements were ultimately reached between Plaintiffs and the larger companies, whereby the larger companies bore express duties to account for net profits in the Pricaspian Sedimentary Basin of offshore and onshore northwestern Kazakhstan, also known as the Area of Mutual Interest (“AMI”), and pay Plaintiffs a portion of those net profits, and implied duties to engage honest business practices including transparent accounting and refraining from foreign corrupt practices.

This lawsuit arises from the Grynberg Plaintiffs’ discovery that Defendants have engaged in criminal bribery schemes, and in attempting to cover up those bribes, have lied to the Plaintiffs, withheld evidence, with trickery have attempted to force Plaintiffs, without their knowledge, consent or approval, to pay a portion of those illegal bribes out of the profits that the corporate Plaintiffs should have shared in, thereby harming Plaintiffs’ hard-earned and well-justified reputation as a crusader against bribery and other corruption within the petroleum industry.

Grynberg has a long history of resisting and exposing the corruption in the petroleum industry. In April of 1995, Grynberg filed a series of False Claims Act qui tam lawsuits in his capacity as a Realtor for the United States and Native Americans, including Civ. No. 95-725 (TFH), District Court, District of Columbia, U.S. ex rel. Jack J. Grynberg v. Alaska Pipeline Co. et al., and Case No. 1999MDL1293, U.S. District Court, Casper, Wyoming, Natural Gas Royalties Qui Tam Litigation. Both were filed in accordance with the False Claims Act, 18 U.S.C. § 3729 et seq. In all, Grynberg has expended in excess of twenty million dollars ($20,000,000.00) on attorney’s fees, court costs and expenses.

The above mentioned qui tam lawsuits, against 66 and subsequently enlarged to 305 corporate Defendants in the natural gas industry, challenged the mismeasurement of the volume and wrongful analysis of the heating content of natural gas causing substantial underpayments of royalties to the United States and Native Americans. Grynberg’s lawsuits allege that those Defendants are responsible for under-measuring the volume and wrongly analyzing the heating content of natural gas produced from mineral property interests owned by the United States and Native Americans, and artificially inflating net-back charges using improper valuation and transactions with non-arm’s length affiliates, to reduce royalties owed to the United States and to Native Americans.

The consolidated qui tam actions are currently before the U.S. Tenth Circuit Court of Appeals. Several “copy-cat” qui tam actions against the oil and natural gas industry have been filed by other whistleblowers and are progressing through the courts as well. . . .

Mr. Grynberg speaks, reads and writes fluent Russian, and was a scientific analyst in the United States Army Research and Development Command working on Soviet radioactive warfare in 1956-57. . . .

Plaintiffs Grynberg [and his companies] have engaged in the international petroleum exploration, development and production for over forty (40) years.

In the late-1980’s Grynberg, using his knowledge of Russian, personally began establishing relationships with key individuals and decision makers in the oil, natural gas and mineral exploration and production industries in the former Soviet Union, including the satellite states of Eastern Europe, and the future Caspian Sea republics, including and especially Kazakhstan. . . .

James H. Giffen (“Giffen”) was the principal and CEO of Mercator Corporation (“Mercator”), a New York corporation owned by Mr. Giffen, who had been advising the Republic of Kazakhstan throughout the 1990’s and early 2000’s in connection with various transactions related to the sale by Kazakhstan of portions of its oil and natural gas wealth.

On March 30, 2003, Giffen was arrested at Newark Airport attempting to flee the United States, served with a criminal grand jury indictment, and is now awaiting trial after posting $10,000,000.00 bail, in U.S. v. Giffen, 03-MJ-663, S.D.N.Y. (March 2003). . . . Giffen was notorious for his part of a scheme to pay off high Kazakh government officials to smooth the way for the original KCS Concession Agreement and subsequent Kazakh Government approval for the BPX/Statoil assignment of its interests to other OKIOC Concessionaires. No payment to Giffen, by any person engaged in GKOF activities, could have been for other than criminally-tainted purposes.

The Defendants BP/Statoil and BG paid their share, amounting to at least 1/7th of $84 million or $12 million of the illicit bribes attributed to Giffen’ s activities with respect to GKOF.

One prominent American oil company, Chevron, which did not participate in OKIOC consortium appears to be the exception that proves the rule. Chevron did not pay the $40 million “entrance fee,” as it has been confided by a confidential source to Plaintiff Grynberg, precisely because it was seen as an illegal bribery. Plaintiff Grynberg has signed a verification of this Complaint to confirm this information.

The Foreign Corrupt Practices Act, 15 U.S.C. §§ 78a, 78dd-1 to 78dd-3, 78ff, the Interstate and Foreign Travel to Aid Racketeering, 18 U.S.C. § 1952, and Engaging in Monetary Transactions in Proceeds from Specified Unlawful Activities, 18 U.S.C. § 1957, not only bar this type of conduct directly but at the same time compel both the corporate Plaintiffs and Jack J. Grynberg to take independent action to disassociate themselves, in their contractual capacity, from these illegal acts by the BPX/Statoil, BG, and the individual defendants.

As a forced and innocent victim in the payment of approximately $40,500,000.00 of illegal payments to foreign government officials (a percentage of which was charged to Plaintiffs), failure to take the necessary steps to seek immediate return of these funds and disavowal in such practices might potentially expose Plaintiffs to risk and costs associated with the ongoing DOJ criminal investigations against each of the oil and gas company Defendants.

Following Giffen’s criminal indictment, Grynberg sought to obtain information concerning the details of Giffen’s arrangements with various oil companies within Kazakhstan, including BP, Statoil, BG, ENI and Chevron, both informally and in the context of settlement negotiations. Defendants have asserted attorney-client privileged information, trade secrets, contractual obligations or proprietary information for BP/Statoil and BG or other consortium members and ultimately demanding the return of documents, which, more likely than not, establish unlawful, potentially criminal conduct. Defendants will also seek to use the confidentiality agreement from the Arbitration to shield information and documents relating to their activity.

Plaintiffs have nevertheless uncovered documentary evidence that at least $500,000 has been paid by BP to Giffen for so-called “expenses” believed to constitute illegal bribe payments.

Defendants BP/Statoil, moreover, have classified approximately $40 million in unspecified expenses as “production sharing fees,” while BG has denied Plaintiffs access to audit its books where similar hidden, so-called “production sharing fees” are to be found. Standard international production sharing contracts pay production sharing fees only from actual petroleum production and not before any oil and natural gas production begins. The so-called “production sharing fees” of approximately $40 million are, more likely than not, illegal bribe payments.

Given Defendants’ intransigence and misuse of confidentiality provisions, the corporate Plaintiffs and Jack J. Grynberg are compelled to take independent action, through this Complaint and to the extent confidential as detailed in the Affidavit of Jack J. Grynberg (filed under seal).



At Siemens, Who Knew What?

German news magazine Spiegel posted a story online on April 12, 2008 (here) alleging that Siemens' former chairman Heinrich von Pierer and its executive board members may have been aware of "systematic corruption at the German multinational firm as far back as 2004."

Spiegel describes previously unreleased internal memos written by Siemens' former head of compliance, Albrecht Schäfer. The memos, Spiegel says, "could become a smoking gun in the case." The story claims that as recently as last year, Siemens' internal investigators showed no interest in the potentially important evidence. If true, the revelations could cast doubts on the integrity of the company's efforts to uncover and self disclose to U.S. authorities the full extent of its past corrupt practices and management's knowledge about them.

Compliance chief Schäfer apparently wrote the memos in 2004. His purpose was to inform Mr. Pierer and other members of Siemens's executive board about a prosecution in Milan. That case has involved allegations that Siemens paid bribes to sell turbines to the energy utility company Enel. In an April 29, 2004 memo, Mr. Schäfer even warned about the danger that U.S authorities might become involved as a result of the Enel case. Both the U.S. Department of Justice and the Securities Exchange Commission are today investigating Siemens for possible violations of the Foreign Corrupt Practices Act.

Spiegel says the "new memos first emerged at Siemens in recent days. According to the former compliance chief's attorney, her client already offered to share what he knew with internal Siemens investigators at the start of 2007. However, she claims the company had 'no interest in his testimony' during the first half of the year. She says they 'either weren't taken seriously or people just didn't want to hear' what he had to say. She claims a Siemens attorney rebuffed his effort to provide information." Siemens itself has not commented on Spiegel's story.

In October 2007, Siemens settled global corruption charges with Munich prosecutors for €201 million. The settlement was based on questionable payments of €420 million. But since then the company has identified €1.3 billion in potentially illegal payments to public officials around the world. The company is also facing possible charges of public corruption in Italy, China, Hungary, Indonesia, Greece and Norway. The scandal forced the resignations of Siemens' ceo Klaus Kleinfeld and chairman Pierer, among other executives and managers.

Assuming Spiegel's story is accurate, it may create fresh obstacles for Siemens. The company has said it's anxious to reach a deal with the DOJ and SEC, and its internal investigation is intended to support that effort. But four-year-old memos from compliance chief Schäfer to the company's former chairman and members of the executive committee about corruption allegations -- and charges that as recently as last year Siemens' internal investigators weren't interested in the memos -- won't help Siemens' convince anyone that it's finally coming clean.

View prior posts about Siemens here.


British High Court Slams Decision To Drop BAE Investigation

The U.K. Guardian reports today (here) that the British High Court has ruled in scathing language that the decision by the Serious Fraud Office to drop an investigation into bribery allegations involving BAE Systems and Saudi Prince Bandar was improper. The court said it will issue orders for further action later.

For anyone new to this story, British defense contractor BAE Systems is accused of paying £1 billion to the former Saudi ambassador to the United States, Prince Bandar (who allegedly passed money to other officials), in return for help selling Typhoon jet fighters to the Saudi government. The Serious Fraud Office started an investigation but Prime Minister Tony Blair shut it down last year, citing national security. Meanwhile, the U.S. Department of Justice picked up the investigation and started gathering evidence about possible Foreign Corrupt Practices Act violations directly from British witnesses. Both BAE and Prince Bandar have denied violating any laws.

The SFO's decision to drop its investigation was challenged earlier this year in court by public interest groups. The High Court in London heard in mid February "unchallenged allegations that it was Prince Bandar, the alleged beneficiary of £1bn in secret payments from the arms giant BAE, who threatened to cut off intelligence on terrorists if the investigation into him and his family was not stopped. Investigators said they were given to understand there would be 'another 7/7' and the loss of 'British lives on British streets' if they carried on delving into the payments. The government argued . . . that these threats were so 'grave' and put Britain's security in such 'imminent' threat that the head of the Serious Fraud Office had no option but to shut down his investigation immediately."

In the lead up to February's High Court hearings, the Guardian almost single-handedly kept the story alive. Here are excerpts from today's report:


In a stunning victory for the activist groups that launched the legal challenge, the two judges said Tony Blair's government and the SFO caved in too readily to threats by Saudi Arabia over intelligence sharing and trade.

In an often scathing judgement, Lord Justice Moses and Justice Sullivan rejected the SFO's argument that it was powerless to resist the Saudi threats.

"So bleak a picture of the impotence of the law invites at least dismay, if not outrage," they said.

"Had such a threat been made by one who was subject to the criminal law of this country, he would risk being charged with an attempt to pervert the course of justice."

To give in so easily, the judges said, "merely encourages those with power, in a position of strategic and political importance, to repeat such threats, in the knowledge that the courts will not interfere with the decision of a prosecutor to surrender".

Campaign Against Arms Trade (CAAT) and Corner House Research had sought a review of the decision by the SFO director, Robert Wardle, in December 2006 to drop the investigation into allegations of bribery and corruption over the £43bn Al-Yamamah arms deal, signed in 1985.

"No one, whether in this country or outside, is entitled to interfere with the course of our justice," Moses and Sullivan ruled. . . .

The judges ruled that the SFO decision was unlawful but made no formal orders for further action - something they will consider at a further hearing. It is believed the most likely course will be that the SFO will have to reconsider its decision.

They had harsh words for the attitude of the SFO and the Blair government in never even considering the option of telling the Saudis their threats would be ignored.

"No-one suggested to those uttering the threat that it was futile, that the United Kingdom's system of democracy forbad pressure being exerted on an independent prosecutor whether by the domestic executive or by anyone else; no-one even hinted that the courts would strive to protect the rule of law and protect the independence of the prosecutor by striking down any decision he might be tempted to make in submission to the threat."

At a two-day hearing in February, lawyers for CAAT and Corner House argued that the SFO dropped its investigation due to Saudi Arabian pressure that amounted to diplomatic blackmail.

Blair, the then prime minister, said the Saudis had privately threatened to cut intelligence cooperation over terrorism unless the inquiry was stopped.

The government did not dispute this version of events, the judges noted in their ruling.

They decided that Wardle "was required to satisfy the court that all that could reasonably be done had been done to resist the threat", and said: "He has failed to do so." . . .

David Leigh, the Guardian's investigations editor, said: "The Guardian unearthed and published the facts about BAE's dealings with Saudi Arabia as long ago as 2004. We passed our evidence to the SFO, who embarked on a long inquiry.

"Recently we also decided to name Prince Bandar as the recipient of £1bn from BAE. We are very pleased that today's high court judgment vindicates all the work the Guardian has done in the public interest to expose this scandal."

The judges were told Prince Bandar, a Saudi national security adviser allegedly involved in the bribery, was behind threats to hold back information about potential suicide bombers and terrorists. . . .


View prior posts about BAE and Prince Bandar here.


Bribery Allegations Are Aimed At BP

The British press is reporting (here and here) that oil giant BP and its current and former CEOs, Tony Hayward and Lord Browne, as well as Norway's Statoil and its CEO, are among the defendants named in a civil lawsuit involving allegations of bribery of government officials in Kazakhstan.

The suit was filed in the U.S. District Court for the District of Columbia by Grynberg Production Corporation, a Denver-based oil company owned and run by chairman Jack Grynberg. According to one report, "The 27-page lawsuit, a copy of which has been seen by The Daily Telegraph, accuses the defendants of violating the United States' Racketeer Influenced and Corrupt Organisations (RICO) Act, of conspiring to break the RICO Act, of common law fraud, of theft, and breaching constructive trust. . . . . The core allegation is that the defendants, without Grynberg's knowledge, bribed officials in Kazakhstan to win oil rights from joint ventures in which Grynberg had an interest."

Private parties, as we have said, have no right of action under the Foreign Corrupt Practices Act. Only the Department of Justice and the Securities and Exchange Commission can enforce it. But this is the second civil suit filed in U.S. federal district court recently that involves allegations of behavior that, if true, would constitute violations of the FCPA. Last month, Bahrain-owned Alba filed a civil suit against Alcoa and its agent alleging bribery of Bahraini officials. That suit also included causes of action based on RICO and common-law fraud. The suit was stayed after just three weeks at the request of the Department of Justice, while it conducts its own investigation whether the FCPA and other criminal laws were violated. The DOJ has not indicated whether it will also launch a criminal investigation into Mr. Grynberg's allegations against BP, Statoil and their leaders.

According to one British press report, "Mr. Grynberg began working in the Kazakh region in November 1990, signing partnership agreements with the defendants in a bid to take advantage of the untapped resources onshore and offshore in the north-west of the former Soviet state. However, Mr Grynberg claims that he did not know that the defendants were involved in allegedly channelling some of his money from the various joint ventures to bribe Kazakh officials in order to win specific licences."

The case is related to the smoldering controversy involving American businessman James Giffen. He was arrested in New York in 2003 for allegedly paying or offering $78 million in bribes to an advisor of Kazakhstan's president and its former oil and gas minister. Giffen was charged with violating the FCPA but has not been brought to trial. When arrested he was carrying a Kazakhstani diplomatic passport. His lawyers say he was acting in Kazahkstan with the full knowledge and approval of the U.S. government.

Mr. Grynberg alleges in his civil suit that BP, Statoil and the other defendants paid about $12 million among them of the alleged bribes in Kazakhstan that the U.S. government says are attributed to Mr Giffen. Mr Grynberg apparently told The Daily Telegraph he was bringing the civil suit to protect himself against FCPA charges. "Unless I assert that I was an unwilling participant in this, my neck could be on the line. I'm too old to go to prison," said 76-year-old Mr Grynberg. He has also recently sued BP and its former CEO Lord Browne based on bribery allegations involving government officials in Grenada.

The British press reports say BP declined to comment on the case and that a spokesman for Statoil said the suit was completely unfounded.


The Great Temptation

Some of the most charming and charismatic people in this world are agents – the middlemen who help foreign companies navigate local waters in return for a slice of revenues, typically around 5%. That may sound like small money, but 5% of $100 million – a little deal for telecommunications, military hardware or energy projects, for example – is $5 million. These days, in lots of industries, $1 billion deals aren't uncommon, and a 5% slice of that pie is a tidy $50 million. Paychecks that size attract very talented people.

The best agents are gifted with the tools of their trade -- old-world manners, great annecdotes (in which they usually cast themselves as heroes), reassuring confidence and up-to-the-minute market intelligence. They salt their conversation with the names of world leaders they golf with, and cabinet members, judges, atheletes and Hollywood stars they host on their boats or in their ski lodges.

But despite their savvy, or because of it, agents are the cause of most FCPA problems. All too often they allocate some of their fees to bribe potential public customers, with their principals either not knowing or not caring about the illegal conduct. In the most confusing and opaque economies, agents bring the most value -- and the greatest FCPA compliance risks. Countries that come to mind include the newly independent states, as well as Mexico, India, Egypt, Burma, Indonesia and others.

Despite their potential for mischief, the FCPA never declares agents off limits per se. Anyone can retain an agent whenever they want to – at their own risk. The Justice Department warns about the use of agents and dishes out practical advice how to recognize the compliance dangers. For example, in the Lay Person's Guide to FCPA, the DOJ says this:

“The FCPA prohibits corrupt payments through intermediaries. It is unlawful to make a payment to a third party, while knowing that all or a portion of the payment will go directly or indirectly to a foreign official. The term 'knowing' includes conscious disregard and deliberate ignorance. The elements of an offense are essentially the same . . ., except that in this case the 'recipient' is the intermediary who is making the payment to the requisite 'foreign official.'

“Intermediaries may include joint venture partners or agents. To avoid being held liable for corrupt third party payments, U.S. companies are encouraged to exercise due diligence and to take all necessary precautions to ensure that they have formed a business relationship with reputable and qualified partners and representatives. . . .In addition, in negotiating a business relationship, the U.S. firm should be aware of so-called 'red flags,' i.e., unusual payment patterns or financial arrangements, a history of corruption in the country, a refusal by the foreign joint venture partner or representative to provide a certification that it will not take any action in furtherance of an unlawful offer, promise, or payment to a foreign public official and not take any act that would cause the U.S. firm to be in violation of the FCPA, unusually high commissions, lack of transparency in expenses and accounting records, apparent lack of qualifications or resources on the part of the joint venture partner or representative to perform the services offered, and whether the joint venture partner or representative has been recommended by an official of the potential governmental customer.” (emphasis in original)

In new or hard-to-reach markets, agents can be an important and even essential ingredient for commercial success. They can help identify real opportunities, keep foreign companies clear of local political quicksand, and teach important lessons about the home town culture. But when agents guarantee successful results, open doors in high places a little too easily, and wink when asked about their business methods – then they're too good to be true. Those agents might make great dinner companions, but they shouldn't make it past an effective compliance program.


Ten Fast Facts About The FCPA

It's easy enough to scoff at the slogans, proverbs and aphorisms that line the halls of the great corporations. Who hasn't emerged from a conference-room donnybrook wondering who the Teamwork posters are supposed to be talking about? And yet, THINK helped create an industry and a company to lead it, and Safety First really can save lives.

How about compliance? Can we ever be reminded too many times to play by the rules, obey the law, keep our noses clean? Just as the best safety programs prevent accidents before they happen, so the best compliance programs should likewise head off illegal schemes before they hatch. So, could it be that the best -- which means the most memorable -- lessons about the FCPA might just be the shortest?

With that in mind, here are ten fast facts about the FCPA. Some aren't all that "fast" and none will fit on a bumper sticker. But we'll keep trying -- and we'll welcome your help.

1. Companies and individuals subject to the FCPA's antibribery provisions cannot give or promise to give anything of value to foreign officials directly or indirectly in order to obtain or retain business.

2.Those subject to the FCPA's accounting standards must make and keep books and records that accurately and fairly reflect the transactions and dispositions of the assets of the corporation, and have internal accounting controls adequate to provide reasonable assurance of the integrity of the company's financial systems and its disclosures.

3. An FCPA antibribery offense is punishable by up to five years in jail; intentionally violating the accounting standards can result in 20 years in prison.

4. The antibribery provisions generally apply to all organizations based or operating in the United States, and the accounting standards apply to companies with securities trading on a U.S. exchange and filing periodic reports with the SEC. Directors, officers, employees and agents of the foregoing are covered by the FCPA, as is anyone who does anything to cause an FCPA offense while they're on U.S soil.

5. Even if a foreign subsidiary isn't covered by the FCPA, its acts might cause its U.S. parent to be in violation.

6. Indirect payments or promises to pay foreign officials through partners, agents or other intermediaries can violate the law.

7. Corrupt payments to a foreign political party, party official or candidate for foreign political office intended to obtain or retain business are prohibited.

8. Anyone acting on behalf of a "public international organization" such as the International Olympic Committee, the United Nations, the World Bank and the International Red Cross is a “foreign official” for the FCPA.

9. Members of a royal family are “foreign officials” for the FCPA.

10. The best protection against an FCPA violation is an "effective compliance program." It can result in penalty reductions for companies by up to 95%, according to the U.S. Federal Sentencing Guidelines.

10-A. The board of directors is always responsible for the oversight and management of the company’s FCPA compliance program.


Why Do We Need (Or Want) The FCPA?

In these pixels, we're fond of quoting A. A. Sommer, Jr. (1924-2002). During his years of public service, his perspective on the markets and their regulation was always influential, and is still worth studying. He was a commissioner of the Securities and Exchange Commission from 1973 to 1976 -- during the lead up to enactment of the Foreign Corrupt Practices Act. Although he was a lawyer and not a CPA, he also served in the 1980s and 1990s as chairman of the Public Oversight Board and as a board member of the Financial Accounting Standards Advisory Council.

Here, from a speech he delivered on April 2, 1976 called “Business Ethics and the Free Enterprise System ,” are some of his thoughts about public corruption and its impact on global markets and ordinary citizens:

"[E]ven apart from the scandalous cases that have caught the headlines, there is something deeply troubling to me when business is done in the manner in which it is apparently done in some countries.

“All of us have been schooled in the notion that competition in price and quality among sellers is the surest road to the most efficient use of resources and maximum benefit to consumers. When business is bought by payments to gain official favor, this desirable competitive process is, somewhere in the world, subverted.

“And while we in this nation may not be the direct victims of this, nonetheless, such activity runs contrary to our heritage, our ideologies, our modes of thinking, and we therefore feel constrained to condemn it wherever it occurs and no matter what justification may be asserted.

"I think all of us would much prefer if all business, not just that done by American companies, were done in accordance with high ethics and strict adherence to the law. Regrettably, in some countries, apparently, the abortion of the competitive process is not seen as the evil that it is in this country and practices, repugnant to us, but which are ancient in origin and woven into the very structure of society, are accepted ways of doing business. This cultural clash, this conflict of ideologies, is a part of a total reality we cannot ignore and it is one that I would suggest we have not yet begun to understand fully or deal with effectively."

He concluded by urging his listeners to ponder the harm to a country and its citizens when payments land in the pockets of corrupt officials instead of the national treasury: "This is surely a dimension that most people have not consid­ered, and yet, I think is a most important one for it may well involve an ethical consideration that is perhaps more meaningful and more important than the legal problems associated with the bribe itself."

As we've said before, Commissioner Sommer's words always remind us why the FCPA matters.


Roll Call

It was just two weeks ago that we were waxing about the quiet times for FCPA watchers, due to the temporary bottleneck in the appointment of corporate monitors. But come to think of it, the Justice Department's Fraud Section, the group in charge of FCPA enforcement, has a lot on its mind right now.

In addition to the monitor controversy, there are sensitive investigations of BAE and Saudi Prince Bandar, along with Siemens, Panalpina and most of the oil and gas services industry. Giant insurance brokerage Aon announced an FCPA investigation. Medtronic is under the microscope with the rest of the leading orthopedic device makers (whose deferred prosecution agreements in their domestic bribery cases helped ignite the aforementioned controversy about corporate monitors).

Last week, even stolid Alcoa joined the FCPA line up, courtesy of an inexplicable federal civil suit filed against it by Bahrain's Alba (in Pittsburgh, of all places) -- which the DOJ promptly stayed while it plays investigative catch-up. And let's not forget that at least three dozen other companies have disclosed yet-unresolved FCPA investigations over the past few years -- Shell recently became one of them (see also Panalpina, above); Halliburton and DaimlerChrysler are two others. And there's Total, ABB, Bristol Myers Squibb, Tyco and . . . . well, it's a long list.

So it's not a quiet time over at the DOJ after all. That means the hardworking people there can be forgiven for little things, like gremlins making mischief on their FCPA Opinion Procedure Release website. Sometimes Releases disappear. This time, it's Release 08-01. When it was published earlier this year, we posted about it here, and it should be accessible as a pdf file here. As a reminder, Release 08-01 is the wordiest on record. It's about a proposed investment in an overseas privatization, and describes in detail the due diligence for the deal, protracted negotiations over the parties' compliance rights and obligations, and some final, remedial due diligence. In other words, it's packed with issues, action and guidance -- so it might come in handy.

Quiet times for the FCPA? Not nearly. In fact, when the dam breaks for the appointment of new corporate monitors, which should be any day now, we're expecting the busiest FCPA enforcement season ever.


At Alcoa, Who Knew What?

If, as Alba alleges, Alcoa overcharged it for supply contracts by $2 billion, and some or all of the money went into offshore accounts controlled by Alcoa's agent and was used to bribe Alba's personnel and other Bahraini government officials, then the focus of the U.S. government's criminal investigation will be on whether anyone from Alcoa knew what was happening, or if the agent acted alone and without Alcoa's knowledge.

The Justice Department last week intervened in Alba's federal civil suit against Alcoa, asking the court to stay the case while the government investigates possible criminal violations of the Foreign Corrupt Practices Act and other laws by Alcoa and its executives and agent. Alcoa has said it's innocent. "We will cooperate fully with the DOJ and believe this will help bring this matter to a speedy conclusion," Alcoa communications director Kevin Lowery said.

For U.S. prosecutors to obtain a criminal conviction of an individual under the FCPA, they must prove, among other things, that the defendant acted with "knowledge." The most recent discussion of the knowledge element in an FCPA prosecution is U.S. v. Kay (No. 05-20604, 5th. Cir., 2008). In that case, the United States Court of Appeals for the Fifth Circuit said the government didn't need to prove the defendants had specific knowledge about the FCPA. Instead, the court said, the government could satisfy the knowledge element by proving merely that the defendants understood that their actions were illegal.

Sitting en banc, the U.S. v. Kay appellate court -- which was reviewing the trial court's jury instructions on "knowledge" -- said: To be clear, we return to first principles. That is, this case was tried on the basis that the Government had to prove that the Defendants knew that their actions violated the law, although they did not need to prove that they were aware of the specific provisions of the FCPA. . . . The Government, while responding that they need not prove the specifics of the FCPA, made clear that it had to prove that Defendants knew that their conduct was illegal."

U.S. v. Kay involved bribery offenses under the FCPA, which carry a potential prison term of five years. What about criminal violations of the accounting standards, for which individuals can face up to 20 years? Those prosecutions must include proof that the accused acted willfully. The FCPA says a willful violation is the intentional circumvention of or failure to implement a system of internal accounting controls, or willful falsification of an issuer's books, records, or accounts.

What about Alcoa's corporate exposure for criminal charges? If any employee was involved with the agent and knowingly participated in bribing foreign officials in Bahrain, or intentionally cooked Alcoa's books with respect to the overcharges and bribery, then Alcoa itself might be held criminally responsible under the doctrine of respondeat superior. That could happen even if Alcoa's employees acted secretly, completely outside their authority, and against Alcoa's policies.

“An Overview of the Organizational Guidelines” from the United States Sentencing Commission's May 2004 release says this:

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

The statement reflects the majority view of the federal appellate courts that have considered whether corporations are criminally liable for the crimes employees commit while acting within the scope of their employment. Courts have said it may be irrelevant that the employee is not a high managerial official, that the corporation may have specifically instructed the employee not to engage in the proscribed conduct, or that the statute is one that requires willful or knowing violations, rather than one that imposes strict liability.

The rationale for applying respondeat superior to corporations is that criminal statutes such as the FCPA impose a duty upon the corporation to prevent its employees from committing the statutory violations. If it fails in its duty to prevent the criminal behavior, then the corporation itself should be made to answer for the same criminal acts.

Despite the doctrine of respondeat superior, the DOJ is now understandably reluctant to charge corporations with criminal offenses. The Arthur Andersen prosecution demonstrated the catastrophic consequences that can result from a corporate felony charge, which for Andersen was a death sentence, even though the firm was later exonerated. The DOJ has since adopted the practice for FCPA and other white collar offenses of offering companies deferred prosecution agreements as an alternative to criminal prosecutions.

In cases involving the FCPA, corporations have additional (albeit largely theoretical) protection from the harshness of the respondeat superior doctrine. The "Overview of the Organizational Guidelines" says this:

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

If, as Alba alleges, people from Alcoa were involved in activity that may violate the FCPA, then the company's task, among others, will be to show that it has an effective compliance program, that top executives were unaware of any illegal conduct, and that it never concealed the conduct from the DOJ or SEC. If Alcoa can demonstrate these things, it will be eligible for mitigation of the potential criminal penalties. It is certainly true, however, that mitigation is less relevant when deferred prosecution agreements are offered. But the arguments for mitigation should still influence the DOJ's determination of the terms of any eventual deferred prosecution agreement.

Would the presence of actual FCPA violations ruin Alcoa's ability to establish that it has an effective compliance program? No. The Sentencing Guidelines stipulate that the failure to prevent or detect an FCPA offense "does not necessarily mean that the program is not generally effective in preventing and detecting criminal conduct."

* * *

Alba's allegations raise a multitude of FCPA issues for Alcoa, its employees and agent. We've mentioned just a few here, and we'll come back to the case from time to time. As one pundit said to us, this will be a zoo.

Please click on the labels below for prior posts on the topics discussed above and for access to the sources and authorities referred to in the post. You can also contact us for the annotations.


A Matter Of Money

At the White Collar Crime Prof Blog, Ellen Podgor -- who's now the solo blog editor since Peter Henning placed himself on well-deserved blog editor emeritus status -- discusses some of the obligations imposed by the Department of Justice on AB Volvo and its two subsidiaries in their deferred prosecution agreement here. Those companies recently resolved Foreign Corrupt Practices Act violations that arose under the U.N. Oil for Food Program. (See our post here.)

She mentions a few aspects among many in AB Volvo's deferred prosecution agreement -- the requirement for the DOJ's pre-approval of any statements to the media by the companies about their agreement, and the right of the DOJ to take into account refusals by the companies to waive attorney-client privilege in determining their level of cooperation. And, she says, the DOJ alone has the right to decide if the agreement has been breached, generally without regard to the companies' statute of limitation rights. Prof Podgor posts the AB Volvo deferred prosecution agreement here.

We're fascinated, as usual, by the successor liability provision in the agreement. This feature has been common for a while -- it appeared in ABB's agreement with the DOJ, for example -- but we're still trying to work out the implications. The substance of it is that in any agreement by the companies to sell, merge or transfer all or substantially all of their business operations, whether structured as a stock or asset sale, merger or other transfer, the operative document must include provisions "binding the purchaser or any successor in interest thereto to the obligations described" in the deferred prosecution agreement.

The provision is intended, among other things, to prevent the companies from slipping out of their deferred prosecution agreements through a corporate transaction or restructuring of some kind. That makes good sense. And to be effective, the provision really does need to reach not only immediate but also subsequent buyers -- who could actually be the companies themselves or related entities.

The interesting part, however, is when bona fide third-party buyers show up. That has happened with other businesses subject to successor liability provisions. It doesn't matter, for example, if the buyer is non-American and not otherwise subject to the jurisdiction of the FCPA. The compliance obligations still travel with the business being sold, no matter where it comes to rest.

That helps level the playing field for American companies. Non-U.S. companies can't exploit businesses that may be distressed because of FCPA problems. They can't buy the assets, domicile them offshore, and free them from their compliance obligations. It protects American businesses from unfair competition. Also, successor liability provisions help disseminate and promote best practices around the globe by tying compliance obligations to the business assets, wherever they end up, and not to the original corporate entities that are parties to the deferred prosecution agreements. The process has already spread compliance best practices to European and other companies that have purchased businesses subject to the successor liability requirements.

But there's a price attached to successor liability provisions -- an unidentified penalty of sorts. Business assets subject to FCPA compliance obligations, including waivers of rights to media access, for example, and attorney-client privilege and statute of limitations, are likely to have a different valuation than similar, unencumbered assets.

How much impact successor liability provisions have on a business' valuation is anyone's guess. But the direct cost of compliance would be an element. Another aspect could be a diminution in the business' value because of the threat of further sanctions by the DOJ without the benefit of any judicial review or protections offered by attorney-client privilege and statute of limitations. These must have a price tag -- whatever it may be.


Questions And More Questions About Alba v. Alcoa

What's the story behind this case? To be honest, we've got lots of questions and so few answers.

This we know: Aluminum Bahrain BSC ("Alba") sued Alcoa Inc., its long-time raw materials supplier, for corruption and fraud in a Pittsburgh federal court. Alba -- majority owned by the government of Bahrain -- alleged that it paid $2 billion in overcharges over a 15-year period. The money went to overseas accounts controlled by Alcoa's agent. Some of the money was then used to bribe Alba's executives in return for more supply contracts. Among the Bahraini officials alleged to be involved is Alba's former chairman, who also served as the country's powerful minister of petroleum.

Before filing the suit, Alba confronted Alcoa. It demanded a payment of $1 billion within two weeks. A spokesman for Alcoa reported later, “We said we’d be happy to do a more extensive investigation with them - they said ‘we’ll see you in court.’”

Alba launched its lawsuit in late February 2008. As if on cue, the U.S. government appeared in the same federal court in Pittsburgh three weeks later. The government asked the court to stay Alba's civil suit pending a criminal investigation into whether Alcoa and its executives and agents violated the Foreign Corrupt Practices Act and mail and wire fraud statutes. Alcoa said it's innocent and will cooperate with the feds.

So what's going on here?

First off, we're having trouble understanding why Alba sued Alcoa in a U.S. court. Foreign governments and their companies work extra hard to avoid being dragged into civil litigation in the United States. Despite arguments about confidentiality, privilege and sovereign immunity, civil lawsuits expose foreign parties to U.S.-style discovery, and that's bad news. They can be compelled to turn over any documents or other information that might lead to the other side's discovery of relevant evidence. That's a broad category. Their representatives can be deposed and their facilities inspected. In other words, in civil litigation there's no place to hide.

Dan Newcomb -- author of the annual FCPA Digest -- said this in a Wall Street Journal story about the case: "The reason it's rare for governments to accuse U.S. companies of corruption in American courts is that once you raise a question of corruption, the sovereign runs the risk they will be embarrassed by the requests of discovery from the private party." In this case, he added,"They have to be prepared to withstand Alcoa coming back to them and saying, 'We want to look at every other corrupt transaction you have been involved in.' "

Alcoa's version of recent events is important. It said Alba gave it just two weeks to pay $1 billion or face a lawsuit. Two weeks? That's a meaningless deadline. As Alba and its lawyers would know, corporate giants cannot possibly decide to settle huge claims involving potentially felonious allegations in two weeks. More like a year or maybe two. Which is probably less time than a complicated and well-defended civil suit would require.

Alba's allegations are filled with dynamite. Alcoa's reaction to them was what we'd expect. It wanted to investigate the facts and, we imagine, start the process of reconciliation with its huge, long-time customer. That's a normal commercial response, and it makes sense. What doesn't make sense is why Alba refused -- why it rushed into a public lawsuit in U.S. federal court without first giving private negotiations with Alcoa a chance to work.

Did Alba file the lawsuit because it wanted the U.S. government to investigate Alcoa? Probably not. The civil suit, after all, was the long way around to the Justice Department. Alba could have taken its allegations and evidence directly to the DOJ from the start. The prosecutors would have been compelled to call on Alcoa right away. So again, what was the point of the civil suit? We're not sure. The suit, by the way, now looks like a distraction for everyone, as demonstrated by the DOJ's move last week to stay the proceedings -- which even Alba didn't oppose.

If Alba didn't expect to be paid the $1 billion in two weeks -- if instead it wanted all along to file its lawsuit and make a big splash in the U.S. press -- the question is why? Why file the civil suit when it could have dealt with Alcoa in a safer and less public way? So our real question is whether Alcoa is the target of Alba's U.S. lawsuit? Or is the target something or someone else? Is Alcoa collateral damage? We're not conspiracy theorists -- the simple explanation is usually right -- and we have no idea what's happening inside Bahrain's leadership. But we're having trouble seeing the big picture here.

Finally, what if Alcoa's account of Alba's two-week payment demand isn't accurate? In that case, Alcoa has some tough questions to answer. When did it learn about the fraud and bribery allegations? What investigation did it do? Who within Alcoa might have been involved? Did it self-report the allegations and its internal reactions to them to the SEC and the DOJ? If not, why not? And when was it planning to disclose all this to shareholders?

Stay tuned.

View prior posts about Alba and Alcoa here.


Feds Investigating Alcoa For FCPA Violations

The U.S. Justice Department has opened a criminal investigation into allegations that Alcoa Inc. violated the Foreign Corrupt Practices Act and other laws by bribing officials in Bahrain.

The federal investigation was triggered when Aluminum Bahrain BSC ("Alba") filed a civil lawsuit three weeks ago in federal court in Pittsburgh accusing Alcoa of a 15-year conspiracy linked to overcharging, fraud and bribery. The suit alleges that more than $2 billion in Alba's payments under supply contracts passed from Bahrain to tiny companies in Singapore, Switzerland and the Isle of Guernsey, and that some of the money was then used to bribe Bahraini officials involved in granting the contracts. See our prior posts here.

Federal prosecutors this week asked the U.S. District Court to stay Alba's federal civil lawsuit because the U.S. has a "direct and substantial interest" in Alba's allegations. A Wall Street Journal report (here) says the U.S. government's court filing is a possible prelude to the empanelment of a federal grand jury, although for the moment prosecutors are working directly with Alcoa. "We will cooperate fully with the DOJ and believe this will help bring this matter to a speedy conclusion," Alcoa communications director Kevin Lowery said.

The government's filing says the Justice Department's fraud section is looking into whether Alcoa, its executives and its agents "have engaged in conduct with respect to their commercial relationship with Alba in alleged violation of various criminal laws, including the FCPA, and the mail and wire fraud statutes. . . . The Alba complaint alleges numerous facts which, if true, could be relevant to the government's criminal investigation and a potential criminal trial."

Bahrain's own investigation centers on Sheikh Isa bin Ali al-Khalifa, the country's former minister of petroleum and chairman of Alba, and on Jordan-born Canadian businessman Victor Dahdaleh, who acted as Alcoa's agent in Bahrain.

A report in Resource Investor (here) said the Justice Department approached Alcoa earlier this week with plans to stay the litigation with Alba in order to conduct its own investigation. Alcoa's Kevin Lowery said the civil suit arose after Alba confronted Alcoa with a series of allegations and demanded compensation of $1 billion in two weeks time. Alcoa investigated the claims, he said, and found “no evidence of any wrongdoing.”

“We said we’d be happy to do a more extensive investigation with them - they said ‘we’ll see you in court,’” Lowery told Resource Investor.

The WSJ reported that Alba's lawyer, Mark MacDougall of Akin Gump Straus Hauer & Feld LLP, won't oppose the stay in the civil case. "Our clients certainly respect the important role that the Department of Justice may play in this case," he said.