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


Compliance Is The New Norm

Raymond Fisman, left, is a professor at the Columbia Business School. In a commentary last week in Forbes titled When Corruption Is The Norm, he had this to say about Morgan Stanley's compliance problems in China: "The . . . head office has taken the view that this was the rogue act of a rogue individual, and an internal investigation revealed that 'questionable activity was isolated to a discrete set of real estate transactions in China.' This is an unfortunate--yet all too common--reaction to revelations of corporate misdeeds."

Professor Fisman says the alleged bribery and corruption by Garth Peterson at Morgan Stanley wasn't deviant business conduct after all. Instead it was business as usual, not just at Morgan Stanley but at global companies everywhere. Siemens, he says, is another example of his thesis. His point is that our collective failure to see corruption as normal prevents us from dealing with it. "As long as the conversation focuses on catching deviants," he says, "we'll never have an open dialog on changing the norms that bear much of the responsibility."

But is he right? Are bribery and corruption everywhere, as Professor Fisman thinks, but kept hidden from view? Was Morgan Stanley's Peterson really a "typical banker put in a situation where bribe-paying was very literally the norm?"

Well, he's partly right. Anyone doing business globally will acknowledge that bribery and corruption are common in lots of countries. Nigeria, Kenya, China, Azerbaijan, Indonesia, Iraq, Kazakhstan, Pakistan, Bulgaria, Romania, Malaysia, Russia, Mexico -- they're well known as red-flag countries. But it doesn't follow that in all companies doing business in those countries, graft and sleaze are the norm. Yesterday over coffee, for example, a friend from the U.K. said, "As far as the FCPA is concerned, the battle for hearts and minds is over. Now everyone is concentrating on the tactics of compliance."

We agree. Most of the business people we know genuinely want to do the right thing. That wasn't always true. Not too long ago, executives and lawyers were still groaning about the uneven global playing field caused by the FCPA, and their view of compliance often ran from indifference to outright cynicism. But these days, company leaders and the rank-and-file usually want to comply. They get it -- graft anywhere is bad for everyone.

Beyond that, most people can see that flouting the FCPA is a fool's choice. Sarbanes Oxley raised the compliance bar. Today's public-company boards of directors have a zero-tolerance, no-excuses attitude toward illegal business tactics. Internal and external auditors are harder to fool -- really. And whistleblower hotlines are getting plenty of use, while FBI agents assigned to enforce the FCPA are always lurking. Even NGOs and the press are keeping a closer eye on overseas business practices.

Sure, enforcement around the world is uneven. Among the biggest economies, the U.K and Japan haven't distinguished themselves, although pressure is building as more OECD members enforce their overseas anti-corruption laws. And yes, graft will never be extinct; there's no shortage of corrupt officials, and some business people will take the crooked path no matter how much compliance training you give them. But companies tolerating bribery and corruption -- like the old Siemens -- can't keep it hidden anymore. And those individuals still passing bribes to foreign officials to land business are simply doomed. Just ask KBR's former star CEO, Jack Stanley.

Corruption may be the norm in plenty of countries. But the reaction we're seeing from companies these days to high levels of corruption isn't denial, as Professor Fisman suggests, but more and better compliance. And there's nothing wrong with that.


A Blight On Their Lives

Dan Bilefsky of the New York Times is a roving reporter with a knack for revealing the heart of things. He's done that now for the problem of petty corruption in Romania. His story is about the human consequences of the countless little bribes so often ignored and unreported, and categorized as those pesky and insignificant facilitating payments. Here's how he starts:

BUCHAREST, Romania — Alina Lungu, 30, said she did everything necessary to ensure a healthy pregnancy in Romania: she ate organic food, swam daily and bribed her gynecologist with an extra $255 in cash, paid in monthly installments handed over discreetly in white envelopes.

She paid a nurse about $32 extra to guarantee an epidural and even gave about $13 to the orderly to make sure he did not drop the stretcher.

But on the day of her delivery, she said, her gynecologist never arrived. Twelve hours into labor, she was left alone in her room for an hour. A doctor finally appeared and found that the umbilical cord was wrapped twice around her baby’s neck and had nearly suffocated him. He was born blind and deaf and is severely brain damaged.

Now, Alina and her husband, Ionut, despair that the bribes they paid were not enough to prevent the negligence that they say harmed their son, Sebastian. “Doctors are so used to getting bribes in Romania that you now have to pay more in order to even get their attention,” she said.

Romania, a poor Balkan country of 22 million that joined the European Union two years ago, is struggling to shed a culture of corruption that was honed during decades of Communism, when Romanians endured long lines just to get basics like eggs and milk and used bribes to acquire scarce products and services.

Alarm is growing in Brussels that Romania and other recent entrants to the European Union are undermining the bloc’s rule of law. The European Commission, the European Union’s executive body, published a damning report last month criticizing Romania for backtracking on judicial changes necessary to fight corruption. And Transparency International, the Berlin-based anticorruption watchdog, ranked Romania as the second most corrupt country in the 27-member European Union last year, behind neighboring Bulgaria.

Those who have faced corruption allegations in recent years have included a former prime minister, more than 1,100 doctors and teachers, 170 police officers and 3 generals, according to Romanian anticorruption investigators.

Romanians say it is the everyday graft and bribery that blights their lives, and nowhere are the abuses more glaring than in the socialized health care system.

Interviews with doctors, patients and ethicists suggest that the culture of bribery has infected every level of the system, sometimes leaving patients desperate.

One doctor said a patient recently offered him a free shopping trip to Dubai . . . .

Dan Bilefsky's article is well worth a trip to the New York Times here.

The EU's February 12, 2009, "Interim Report from the Commission to the European Parliament and the Council" on Romania's progress to remedy judicial shortcomings and fight against corruption can be downloaded here.


Kenya, Corruption And Global Security

A Reuters report said FBI Director Robert Mueller made a one-day visit to Kenya last week. After meeting with the prime minister, Mueller was quoted as saying, "We discussed what could be described as the unhealthy climate of impunity here in Kenya and steps that can be taken to investigate and to prosecute public corruption."

Perhaps looking for a reason for Mueller's visit, Reuters said Kenya is "sandwiched between the chaotic Horn of Africa and turbulent Great Lakes region [and] was the target of Al Qaeda-linked extremists who blew up the U.S. embassies in Kenya and in Tanzania in 1998."

What's the connection between the corruption Mueller was talking about and the security concerns mentioned by Reuters? We haven't seen hard studies linking the two. But our eyes tell us that corruption breeds weak institutions that aren't dependable when it comes to the fight against terrorism. So does that explain why the FBI director was in Kenya last week? Was he there to urge the government to clean itself up or risk becoming a haven for extremists? We don't know the answer. But knowing John Githongo's story, it's easy to see why Kenya's corruption might be a special concern to Mueller. Here's what happened.

In December 2002, Kenya's new president, Mwai Kibaki, said he'd end corruption. And when he needed someone to lead the fight, he picked John Githongo (pictured above). Named permanent secretary for ethics and governance in the office of the president, Githongo, then 37, was a perfect choice. He was a popular journalist, a passionate anti-corruption crusader, and founder and head of Transparency International's Kenya office since 1999. It all looked good. But then came the so-called Anglo Leasing Finance scandal -- or Kenya's Watergate, as many called it.

The government in 2002 had said it wanted to update the way it printed and tracked its passports. Everything would be new and high-tech. A French company was found for the job, at a price of €6 million. But the contract went instead to an unknown U.K. company called Anglo Leasing Finance, at a price of €30 million. There was no public tender and the story only leaked to the press because of a junior civil servant. Githongo grabbed the investigation. Two years later, he'd uncovered about twenty government contracts awarded to phantom overseas companies at inflated prices, signaling the presence of high-level corruption. And most of the tainted contracts related to Kenya's security apparatus -- passport controls, forensic labs, security vehicles and satellite services, among others.

He wrote a report and delivered it to the president in November 2005. (A copy, later leaked to the public, can be downloaded here.) Soon after, he left Kenya for England, fearing for his safety. From his exile in the U.K., Githongo publicly blew the whistle on Kenya's top politicians. President Kibaki was forced to fire three ministers -- though he reappointed two of them a year and half later.

As his friend and fellow journalist Michela Wrong put it in 2006:

Appointed within days of the opposition's election victory in the 2002 polls, Githongo spent two years as permanent secretary for ethics and governance. When he fled to London last year, it was clear he had stumbled on something toxic.

His 36-page dossier . . . reveals what that was. In compelling detail -- Githongo was always fastidious about keeping a diary -- he records what he alleges were his conversations with Kenya's vice-president and three ministers, who confess their roles in concealing a series of bogus contracts designed to leach hundreds of millions of dollars from the exchequer. . . .

In July 2007, Britain's Serious Fraud Office opened a criminal investigation. It was looking into contracts between the Kenyan government and "business entities collectively known as the Anglo Leasing matter." With help from the City of London Police, in May 2008 private and business addresses in the U.K. were searched. Documents seized in the raids led the SFO to ask for and receive evidence from Spain, France and Switzerland. But Kenya refused to cooperate, and without its help, the SFO said it couldn't make a case.

On February 4, 2009, the SFO ended its investigation into Anglo Leasing Finance. Its announcement is here. A month later, FBI director Mueller was in Nairobi, talking about Kenya's "unhealthy climate of impunity."

Was Mueller perhaps telling the country's leaders that the FBI will pick up the case where the Serious Fraud Office left off, just as it did with BAE Systems? Did the director tell the Kenyan prime minister that the FBI and Justice Department will use the Foreign Corrupt Practices Act to pursue the people behind Anglo Leasing Finance and phantom companies like it? Did he explain that when that happens, Kenya's crooked politicians will be named and shamed on the global stage?

And what about John Githongo? In 2006, the New York Times had said:

In tilting against graft, Mr. Githongo seems to be positioning himself across a far broader front, part of a generational shift among Africans burdened by what he calls the ancestral ties between urban homes and rural roots that bind and, in his view, stymie much of the continent. . . . That has to change, he says. "Africa has been left behind by Asia and the others. We need to get our act together."
Maybe Kenya's exiled anti-corruption czar is about to get some badly needed help. This time from the FBI and the Foreign Corrupt Practices Act.

Michela Wrong's book about John Githongo and the Anglo Leasing Finance scandal was published last month. It's Our Turn to Eat: The Story of a Kenyan Whistleblower is available from Amazon (UK) here.


KBR's U.K. Middlemen Indicted

Two U.K. citizens who allegedly helped Houston-based Kellogg Brown & Root (KBR) bribe Nigerian officials have been indicted for violating the Foreign Corrupt Practices Act. Jeffrey Tesler, 60, of London, England, and Wojciech Chodan, 71, of Maidenhead, England, were indicted on Feb. 17, 2009 by a federal grand jury sitting in Houston. The Justice Department didn't unseal the indictments until after yesterday's arrest of Tesler by British police, who acted at the request of U.S. authorities. Chodan hasn't been arrested but faces an outstanding U.S. warrant. The DOJ said it will try to extradite Tesler and Chodan from the U.K. to stand trial in the U.S.

Tesler, a lawyer in London, and Chodan, a former employee and consultant of KBR's U.K subsidiary, were charged with one count of conspiracy to violate and ten counts of violating the FCPA. They face up to 55 years in prison if convicted on all counts. The indictment also seeks forfeiture from them of more than $132 million.

The indictment says a joint venture that included KBR entered into consulting contracts with a Gibraltar corporation allegedly controlled by Tesler called Tri-Star Investments. The joint venture paid Tri-Star about $132 million to be used to bribe Nigerian government officials. The bribes were intended to secure contracts worth more than $6 billion to build liquefied natural gas facilities on Bonny Island, Nigeria. The joint venture, known as TSKJ, was equally owned by KBR, Technip, SA of France, Snamprogetti Netherlands B.V. (a subsidiary of Saipem SpA of Italy) and JGC of Japan. Chodan allegedly participated in meetings where the bribery was discussed and he wired $50 million from KBR-controlled accounts to a Japanese trading company to be used to bribe Nigerian officials.

Among the details in the indictment: In August 2002, a KBR representative, using money KBR provided to Tesler, "delivered a pilot's briefcase containing one million U.S. dollars in one-hundred dollar bills to the [Nigerian] Official at a hotel in Abuja, Nigeria, for the benefit of a political party in Nigeria." And in April 2003, a KBR representative "delivered a vehicle containing Nigerian currency valued at approximately $500,000 to the hotel of the [Nigerian] Official in Abuja, Nigeria, for the benefit of a political party in Nigeria, leaving the vehicle in the hotel parking lot until the . . . Official caused the money to be removed."

Last month, KBR pleaded guilty to violating the Foreign Corrupt Practices Act. It agreed with the DOJ to pay a $402 million fine. KBR and its former parent company, Halliburton Company, also agreed to pay $177 million in disgorgement to the Securities and Exchange Commission to settle the FCPA offenses. KBR's former CEO, Albert "Jack" Stanley, pleaded guilty in September 2008 to conspiring to violate the FCPA and to mail and wire fraud charges. He has been cooperating with prosecutors. His sentencing is now scheduled for Aug. 27, 2009.

The DOJ said it had help in the case from "authorities in France, Italy, Switzerland and the United Kingdom, including in particular the Serious Fraud Office’s Anti-Corruption Unit, the London Metropolitan Police and the City of London Police."

The indictment against Tesler and Chodan contains only FCPA charges. Usually the DOJ adds other criminal counts, such as money-laundering, mail and wire fraud. Relying strictly on alleged antibribery offenses will test the jurisdictional reach of the FCPA over foreign citizens who apparently were not in the U.S. at any times relevant to the charged conduct.

The FCPA asserts jurisdiction over foreign companies and nationals that take any act in furtherance of a corrupt payment while within the territory of the United States. See §78dd-3(a), (f)(1). This part of the FCPA is untested in court, but the DOJ interprets it expansively as conferring jurisdiction whenever a foreign company or national acting as an agent of an issuer or domestic concern causes an act to be done within the territory of the United States. (See the United States Attorneys' Manual, Title 9, Criminal Resource Manual §1018 “Prohibited Foreign Corrupt Practices” here.) The indictment says Tesler and Chodan were agents of KBR and sent some of the bribe money through U.S. bank accounts.

Another unusual aspect of the indictment is the use of the forfeiture remedy against Tesler and Chodan. (See 28 USC Section 2461, and Title 18 USC Section 981 (a)(l )(C), "all property, real and personal, which constitutes or is derived from proceeds traceable to the violations.") The U.S. government says it wants the entire $132 million that KBR transferred to Tesler's Gibraltar company or the property derived from it. The DOJ apparently isn't distinguishing the KBR money Tesler allegedly paid out in bribes from amounts he may have kept.

Jeffrey Tesler was identified in KBR's 2007 annual report. British and French authorities investigated him two years ago but didn't file any charges. In 2007, British authorities searched his London office at the request of U.S. officials. He is listed as a consultant to a small North London law firm called Kaye Tesler & Co. Among other things, the firm offers anti-money laundering training. 

As the Justice Department says: Criminal indictments are only charges and not evidence of guilt. A defendant is presumed to be innocent until and unless proven guilty.

The DOJ's March 5, 2009 release can be downloaded here.

The federal grand jury's February 17, 2009 indictment of Jeffrey Tesler and Wojciech Chodan can be downloaded here.


Sounding Off About Third Party Compliance

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

Dear FCPA Blog,

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

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


Pete from DC

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

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

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

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

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



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

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

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

There are no easy answers.

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

Yours truly,

Doug Cornelius / Compliance Building

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

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


Another Look At Argo-Tech v. Yamada

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

Argo-Tech alleges, among other things, that:

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

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

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

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


The SEC Takes It Back

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

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

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

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

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

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

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

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

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

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

It's available from SSRN here.


Opening Our Eyes To 'Associative Liability'

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

Dear FCPA Blog,

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

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

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

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

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

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

Best regards,

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

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


Pride's Disclosure Tells The Story

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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


Understanding the KBR, Halliburton Charges

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

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

Here's what he told us:

Dear FCPA Blog,

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

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

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

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

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

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

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


Following Kozeny's Money

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

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

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

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

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

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

* * *

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

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

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

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

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