Richard L. Cassin Publisher and Editor

Andy Spalding Senior Editor

Jessica Tillipman Senior Editor

Elizabeth K. Spahn Editor Emeritus

Cody Worthington Contributing Editor

Julie DiMauro Contributing Editor

Thomas Fox Contributing Editor

Marc Alain Bohn Contributing Editor

Bill Waite Contributing Editor

Shruti J. Shah Contributing Editor

Russell A. Stamets Contributing Editor

Richard Bistrong Contributing Editor 

Eric Carlson Contributing Editor

Bill Steinman Contributing Editor

Aarti Maharaj Contributing Editor

FCPA Blog Daily News


Enough Said


Malang, East Java Runs Amok

In a tie with Gambia, Togo and Russia, Indonesia ranks 143rd out of 179 on Transparency International's Corruption Perception Index. That lowly score warns us to expect some world-class silliness when it comes to red tape, which always walks hand-in-hand with corruption. Still, we thought a report on a website called Indonesia Matters was either a joke or an exaggeration. It described the requirements for obtaining permission to employ women workers at night in Malang, East Java -- a city of about 800,000 people. Curious, we looked up the regulations and found they actually exist. We reproduce them below in eye-watering completeness. Be warned, however, that to stay on the right side of this local law, the administrative hurdles need to be jumped not once but every year.


1.Administrative Qualification

* Request Letter of Service of Woman Night Time Working Permit;
* Copy of Resident Identity Card and NPWP of the owner/the director/the commissariat of the legal based company (double pages);
* Copy of Company Building Certificate of the legal based company;
* Copy of the Evidence Letter of Business Location Owning, land Certificate, Rent Contract legalized by Village Chief (2 pages);
* List of names of the Woman Night Time Working;
* Copy of infrastructure lists;
* Colored Photograph size 4 X 6 (2 pages).

2.Finishing Time, Used Period and Retribution Cost

* Finishing time is 22 days
* Used period is a year then renewed
* Retribution cost is based on Local Policy Number 16 Year 2002 about Business and Retribution Cost in the employment field.

3.Service Process Mechanism

1. The applicant comes to the Employment Department and brings the bundle of complete qualifications then fill the request form;
2. The locket staff will accept and check the bundle of administrative qualifications of Woman Night Time Working Permit from the applicant;
3. Incomplete bundle will be returned to the applicant for being completed;
4. Bundle that fulfilling the administrative qualifications will be made a receipt;
5. Bundle that fulfilling the administrative qualifications will be given a registration number and will be noted on Proposal Book of Woman Night Time Working Permit;
6. The staff gives the complete bundle to the processing staff for being reviewed;
7. The processing staff will research and analyze the proper of Woman Night Time Working Permit. After fulfilling the technical qualifications, the staff will make a recommendation and agreement proposal to The Mayor signed by the Head of Employment Department;
8. Based on the recommendation from the Employment Department, the Mayor will sign the legalizing/refusing of the Woman Night Time Working Permit Proposal;
9. After the permit has been legalized and agreed by the mayor, the bundle of agreement will be returned to the Employment Department;
10. The staff makes accounting and fixing of permit retribution cost;
11. The staff gives Paying Instruction Letter of Legalizing Woman Night Time Working Permit for paying retribution cost to the Helper of Cash Holder then to the Employment Department;
12. After paying the retribution, the cash holder helper will make a receipt of the Woman Night Time Working Permit to the applicant;
13. The applicant gives the receipt of the Woman Night Time Working Permit;
14. The service locket staff gives the legalizing of Woman Night Time Working Permit to the applicant;
15. Retribution Deposit Mechanism is based on the Mayor’s decision of Malang City Number 55 Year 2003 about the acceptance and payment of Local Income in the scope of City Government of Malang City.

View the above regulations on the Malang, East Java site Here.


Victor Kozeny’s Extradition From the Bahamas Is Denied

The Bahamas News Online Edition (The Bahama Journal) reports today that the Supreme Court there has ruled against the extradition of Victor Kozeny (left). The ruling means Kozeny is no longer under arrest in the Bahamas, which had detained him at the request of the U.S. government. He was indicted in the United States in October 2005 for violating and conspiring to violate the U.S. Foreign Corrupt Practices Act in connection with a scheme to bribe senior government officials in Azerbaijan.

On June 21, 2007, the U.S. District Court for the Southern District of New York dismissed all FCPA and related counts against Kozeny and his co-defendants, Frederic Bourke, Jr. and David Pinkerton, based on the running of the five-year statute of limitations. The Justice Department's appeal against the dismissal is still pending. If the charges are reinstated, only Bourke and Pinkerton will now go to trial.

According to the report, the Bahamas court said the FCPA charges against Kozeny were not provable or prosecutable under local law, and there was an abuse of the court process. Apparently the U.S. government did not properly disclose the U.S. trial court's dismissal of the FCPA charges on statute of limitations grounds, a failing the Bahamas judge cited as a reason for the ruling.

Victor Kozeny is from the Czech Republic. He reportedly has Irish citizenship and has lived in the Bahamas for more than a decade. American prosecutors had sought evidence against him and his co-defendants from the Netherlands and Switzerland. Delays in obtaining the evidence led to the running of the statute of limitations in the U.S. prosecution.

View the report from the Bahamas News Online Edition Here.

View a prior post about Victor Kozeny Here.


Panalpina's Problems Keep Spreading

Schlumberger N.V., the world's biggest oil and gas services company, is among the dozen or more firms in that industry being investigated in connection with Panalpina's freight-forwarding and customs clearance practices. Schlumberger made the disclosure in its October 24, 2007 quarterly filing with the U.S. Securities and Exchange Commission. It said in full:

"In July 2007, Schlumberger received an inquiry from the United States Department of Justice ('DOJ') related to the DOJ’s investigation of whether certain freight forwarding and customs clearance services of Panalpina, Inc., and other companies provided to oil and oilfield service companies, including Schlumberger, violated the Foreign Corrupt Practices Act. Schlumberger is cooperating with the DOJ and is conducting its own investigation with respect to these services."

Schlumberger trades on the New York Stock Exchange under the symbol SLB.

View Schlumberger's Form 10-Q for the period ending September 30, 2007 Here.

View other posts about the Panalpina-related investigations Here.


An Effective Compliance Program, For Pete's Sake

A sharp-eyed reader of our post Ten Elements Of An Effective Compliance Program suggested in a comment that it "may also be wise to take a peek at DOJ Opinion Release 04-02, which has a bit more FCPA-specific guidance. For example, it goes into a bit more detail about due diligence with regard to business partners." So we did just as Pete from DC instructed and found that he's more than a bit right. Opinion Procedure Release No .: 04-02 (July 12, 2004) is the mother lode -- an encompassing FCPA-specific description of the elements of an "effective compliance program." We're therefore setting out the operative language verbatim, capital letters and all.

As background, Opinion Procedure Release 04-02 responds to a request from a JP Morgan-led group and their investment vehicles ("Newcos") that were acquiring companies and assets from ABB Ltd. ABB had already settled FCPA charges with the U.S. Securities and Exchange Commission relating to the target businesses. So the "effective compliance program" was to be imposed on the ABB businesses after their acquisition by the Newcos. The circumstances explain the extra compliance features, including periodic independent audits by outside counsel and auditors (a good idea for any company, by the way).

The Newcos' "effective compliance program" looks like this:

(A) A clearly articulated corporate policy against violations of the FCPA and foreign anti-bribery laws and the establishment of compliance standards and procedures to be followed by all directors, officers, employees, and all business partners, including, but not limited to, agents, consultants, representatives, and joint venture partners and teaming partners, involved in business transactions, representation, or business development or retention in a foreign jurisdiction (respectively, "Agents"; and "Business Partners") that are reasonably capable of reducing the prospect that the FCPA or any applicable foreign anti-corruption law of Newco's Compliance Code will be violated;

(B) The assignment to one or more independent senior Newco corporate officials, who shall report directly to the Compliance Committee of the Audit Committee of the Board of Directors, of responsibility for the implementation and oversight of compliance with policies, standards, and procedures established in accordance with Newco’s Compliance Code;

(C) The effective communication to all shareholders' representatives directly involved in the oversight of Newco ("Shareholders") and to all directors, officers, employees, Agents, and Business Partners of corporate and compliance policies, standards, and procedures regarding the FCPA and applicable foreign anti-corruption laws, by requiring (i) regular training concerning the requirements of the FCPA and applicable foreign anti-corruption laws on a periodic basis to all Shareholders, directors, officers, employees, Agents, and Business Partners and (ii) annual certifications by all Shareholders, directors, officers, employees, including the head of each Newco business or division, Agents, and Business Partners certifying compliance therewith;

(D) A reporting system, including a "Helpline"; for directors, officers, employees, Agents, and Business Partners to report suspected violations of the Compliance Code or suspected criminal conduct;

(E) Appropriate disciplinary procedure to address matters involving violations or suspected violations of the FCPA, foreign anti-corruption laws, or the Compliance Code;

(F) Clearly articulated corporate procedures designed to assure that all necessary and prudent precautions are taken to cause Newco to form business relationships with reputable and qualified Business Partners;

(G) Extensive pre-retention due diligence requirements pertaining to, as well as post-retention oversight of, all Agents and Business Partners, including the maintenance of complete due diligence records at Newco;

(H) Clearly articulated corporate procedures designed to ensure that Newco exercises due care to assure that substantial discretionary authority is not delegated to individuals whom Newco knows, or should know through the exercise of due diligence, have a propensity to engage in illegal or improper activities;

(I) A committee consisting of senior Newco corporate officials to review and to record, in writing, actions relating to (i) the retention of any Agent or subagents thereof, and (ii) all contracts and payments related thereto;

(J) The inclusion in all agreements, contracts, and renewals thereof with all Agents and Business Partners of provisions: (i) setting forth anti-corruption representations and undertakings; (ii) relating to compliance with foreign anti-corruption laws and other relevant laws; (iii) allowing for internal and independent audits of the books and records of the Agent or Business Partner to ensure compliance with the foregoing; and (iv) providing for termination of the Agent or Business Partner as a result of any breach of applicable anti-corruption laws and regulations or representations and undertakings related thereto;

(K) Financial and accounting procedures designed to ensure that Newco maintains a system of internal accounting controls and makes and keeps accurate books, records, and accounts, and;

(L) Independent audits by outside counsel and auditors, at no longer that three-year intervals, to ensure that the Compliance Code, including its anti-corruption provisions, are implemented in an effective manner.

View Department of Justice Opinion Procedure Release No .: 04-02 (July 12, 2004) Here.


Compliance Resources -- India and Nigeria

Signs that the influence of the U.S. Foreign Corrupt Practices Act is felt around the world come today from India and Nigeria.

Pradeep Akkunoor lets us know about a December 16, 2007 FCPA Conference sponsored by Indiaforensic. It's a non-profit group founded in 2003 by Chartered Accountant Mayur Joshi to raise compliance awareness and bring together the anti-fraud professionals in India. "We call it India's first organized effort to combat white-collared crime," says Mr. Akkunoor. "What began as a one-man effort is today a network of over 600 professionals from across India. Indiaforensic conducts research, informs and supports those engaged in fighting fraud around the country." Messrs. Akkunoor and Joshi also run Indiaforensic Consultancy Services, which specializes in fraud examinations and forensic accounting in India, as well as training and education in bank forensic accounting, anti-money laundering and corporate forensic accounting.

From Nigeria, we hear from It does one thing: due diligence checks on Nigerian companies. Run by a group of FCPA-savvy lawyers accredited by the Nigerian Corporate Affairs Commission to conduct public-records searches, it has an interesting approach. No up-front fees, and if the company being searched doesn't exist, there's no charge at all. The people at acknowledge that "Nigerians are frequently considered 'high risk' business partners . . . . Until now, international businesses have found it very difficult to obtain urgent and reliable background or due diligence information about Nigerian companies. We solve this problem for you by obtaining all the important information you want from the Nigerian Corporate Affairs Commission and other official sources. We save you significant time, effort and money so that you can easily verify information about Nigerian companies quickly, conveniently and confidentially." Finally, if the target or its principals don't look legitimate, will help their client file reports with appropriate anti-corruption agencies.


Ten Elements Of An Effective Compliance Program

The purpose of an “effective compliance program” is to prevent and detect criminal conduct. Why is this important? Because an organization that violates the U.S. Foreign Corrupt Practices Act but has an “effective compliance program” is eligible for a reduced sentence -- by up to 95% of the statutory penalties. FCPA violations can happen no matter how much effort is made to prevent them -- and the consequences of a violation can be catastrophic -- so an “effective compliance program” might be an organization's last and best defense.

The requirements for an "effective compliance program" are described in the United States Federal Sentencing Guidelines and summarized as follows:

1. A Written Program. The organization must have standards and procedures to prevent and detect criminal conduct.

2. Board Oversight. The organization’s board of directors or equivalent must be knowledgeable about the content and operation of the compliance and ethics program and must exercise reasonable oversight of its implementation and effectiveness.

3. Responsible Persons. One or more individuals among the organization's high-level personnel must be assigned overall responsibility for the compliance and ethics program.

4. Operating and Reporting. One or more individuals must be delegated day-to-day operational responsibility for the compliance and ethics program. They must report periodically to high-level personnel and, as appropriate, to the board of directors or its audit committee or equivalent on the effectiveness of the program. The individuals must have adequate resources, appropriate authority, and direct access to the board or audit committee.

5. Management's Record of Compliance. The organization must use reasonable efforts not to hire or retain personnel who have substantial authority and whom the organization knows or should know through the exercise of due diligence have engaged in illegal activities or other conduct inconsistent with an effective compliance and ethics program.

6. Communicating and Training. The organization must take reasonable steps to communicate periodically and in a practical manner its standards and procedures, and other aspects of the compliance and ethics program, to directors, officers, executives, managers, employees and agents -- by conducting effective training programs and otherwise disseminating information appropriate to the individuals’ respective roles and responsibilities.

7. Monitoring and Evaluating; Anonymous Reporting. The organization must take reasonable steps (a) to ensure that its compliance and ethics program is followed, including monitoring and auditing to detect criminal conduct, (b) to evaluate periodically the effectiveness of the compliance and ethics program and (c) to have and publicize a system, which may include mechanisms that allow for anonymity or confidentiality, whereby the organization’s employees and agents may report or seek guidance regarding potential or actual criminal conduct without fear of retaliation.

8. Consistent Enforcement -- Incentives and Discipline. The organization’s compliance and ethics program must be promoted and enforced consistently throughout the organization through appropriate (a) incentives to perform in accordance with the compliance and ethics program and (b) disciplinary measures for engaging in criminal conduct and for failing to take reasonable steps to prevent or detect criminal conduct.

9. The Right Response. After criminal conduct has been detected, the organization must take reasonable steps to respond appropriately and to prevent further similar criminal conduct, including making any necessary modifications to the organization’s compliance and ethics program.

10. Assessing the Risk. The organization must periodically assess the risk of criminal conduct and take appropriate steps to design, implement, or modify its compliance program to reduce the risk of criminal conduct identified through this process.

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." That means the potential benefits of an "effective compliance program" (mitigation of penalties by up to 95%) will be available when needed most -- after a violation happens.

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


Counting Corruption

A friend from Nigeria, which appears on these pages for the wrong reasons all too often, visited us this week. He gives a face and a voice to the human cost of his country's terrible twins, red tape and corruption.

The statistics are bleak. An entrepreneur starting a new warehouse business in Nigeria will spend at least 350 days obtaining necessary licenses and permits, completing required notifications and inspections, and securing utility connections. If the business gets off the ground, the entrepreneur will need to make at least 35 separate tax payments every year, and spend a staggering 1,120 hours preparing, filing, and paying his or her annual taxes, compared to 183 hours on average in the OECD (roughly speaking, the world's 30 most developed economies). Imports for the entrepreneur's business will require 46 days, compared to 10.4 in the OECD. Exporting a product will take 26 days, almost three times longer than the OECD average. It's no wonder Nigeria ranks 147th out of 179 countries on Transparency International's Corruption Perception Index.

The economy can't move forward, and real people like our friend and his young family are victimized. Schools deteriorate, electricity is an occasional luxury, roads are ruled by bandits. Far worse, new generations of Nigerians -- a country of more than 140 million people -- come to believe their condition is unchangeable. They gradually see themselves the same way many foreign business people do -- the ones who show up with a business plan based on nothing more than greasing the system at every opportunity. An irony, our friend says, is that he gets things done simply by making sure the paperwork is in order and treating regulators and bureaucrats with a normal measure of respect. It takes patience, he says, but the strategy has never failed in nearly ten years of professional life.

In 1976, a year before the U.S. Foreign Corrupt Practices Act became law, A. A. Sommer, Jr., a Commissioner of the Securities and Exchange Commission, said we should 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 listen to our friend talk about the damage corruption inflicts on ordinary people in Nigeria, Commissioner Sommer's words come to mind, and we're reminded again why the FCPA matters.

View the World Bank's "Doing Business Project" Here.


One Law,Two Parts

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

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

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

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

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


Red Tape Round-Up

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

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

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

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

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

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

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


Looking Back At Johnson & Johnson's FCPA Disclosure

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

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

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

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


Medical Device Makers Face FCPA Investigation

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

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

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

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

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

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