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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

Monday
May192008

U.S. Prosecutors Detain And Search BAE Leaders

The Justice Department escalated its politically explosive investigation into BAE Systems' role in the $2 billion bribery scandal involving alleged illegal payments to former Saudi ambassador to the United States, Prince Bandar bin-Sultan, in return for the sale of jet fighters to the Saudi government.

BAE confirmed today that chief executive Mike Turner and director Nigel Rudd were detained by U.S. officials when they landed last week at Houston's George Bush International Airport. They were later released and allowed to leave the country. Reports say U.S. authorities confiscated and copied information on the executives' laptop computers, cell phones, and papers. The DOJ has also reportedly served additional subpoenas in the U.S. on employees of BAE Systems PLC and BAE Systems Inc. The DOJ's investigation centers on alleged violations of the Foreign Corrupt Practices Act and money laundering.

Britain's Serious Fraud Office dropped its investigation of BAE in 2006. The High Court last month ruled that the SFO acted illegally when it shut down the investigation, but allowed the SFO to appeal the decision to the House of Lords. That appeal is pending. Evidence in the High Court showed that Prince Bandar threatened to stop Saudi Arabia's cooperation with the U.K. on counter-terrorism unless the SFO ended its investigation. The High Court strongly criticized the government's capitulation. It said, "No one within this country or outside, is entitled to interfere with the course of our justice."

View prior posts about BAE here.

Sunday
May182008

The Victims Of Corruption

Today's Observer (the Sunday edition of the U.K.'s Guardian) carries an excellent commentary by Will Hutton here. It's about China's heartbreaking May 12, 2008 earthquake. The first paragraph says,

Earthquake's don't destroy strong, well-built buildings, they destroy weak ones. As China reels from its biggest earthquake in 30 years, public anger is mounting. A third of the 20,069 confirmed dead (the number is expected to rise to 50,000) were children trapped in the 6,900 classrooms that the government says were destroyed - weaker than other buildings in withstanding the shock. It has also said that as many as 390 dams could be at risk.

When reports first came from Szechuan about collapsed school buildings, our thoughts turned to a similar event in a different place many years ago. On October 12, 1992, an earthquake hit the city of Cairo, Egypt. We were in the Nile Hilton that day, resting before dinner. Our eighth-floor room vibrated at first, then began lurching up and down. We headed for an exit. The hallway was twisting and bending and terrified guests were crawling on their hands and knees, screaming for help. When we looked out from the hotel's back fire-escape, we saw a cloud of dust rising slowly from the ground across the entire city.

The Nile Hilton survived with little damage. Its flexible joints did their job. The hotel bent and twisted but remained structurally sound. But from around town, especially from the denser and less affluent neighborhoods, came stories about lots of collapsed buildings -- usually crowded ten- and twelve-floor apartment blocks. The government reported around 2,000 fatalities, but unofficial sources said right away that at least 10,000 were lost. The next day, amid nerve-jangling aftershocks, we saw some of the damage. At what had been apartment buildings there were now piles of debris. Not rubble, as you'd expect, but mounds of what looked like sand and small marbles. The buildings had simply disintegrated.

Before the earthquake, we'd heard how apartment buildings in Cairo sometimes collapsed under their own weight. An Egyptian friend had explained it to us this way: The government issues permits to build only four or six stories high. But developers pay bribes to add more floors using the same plans. Then they pay more bribes to leave the steel reinforcement out of the cement. So the buildings sometimes fall down.

By 1992, it had become too common for apartment blocks to simply crumble. When the earthquake hit, lots of people mistook the event. They thought it was only their building that was crumbling and didn't understand the earth was shaking. The most common injuries among quake survivors were broken legs, a result of people leaping from their apartment's windows and balconies. They'd learned to do that from those who had survived the collapse of other tenements. In the earthquake, not all the apartment buildings collapsed. Not even most. But people jumped from buildings all over the city. The lucky ones only broke a leg or maybe both legs. The unlucky ones broke their backs or necks. It was awful proof of the real-life impact of public corruption.

In China's case, the Observer's Will Hutton says,

The government has announced an investigation into why so many classrooms collapsed, but the answer is already known. People want the government to maintain the pace of development but increasingly do not accept that the price has to be corruption. The government agrees and launches unsuccessful anti-corruption drives. The problem is that local officials have unchecked, unaccountable power and have no compunction, given the loss of the belief that they are building a communist utopia, in helping themselves to cash on an ever grander scale. Professor Hu Angang, an economist at Tsinghua university, estimates that one yuan in six is, in effect, corrupt. Even army officers buy their rank.

The events in China this month and in Cairo in 1992 are reminders, if we still need any, that public corruption isn't a victimless crime. Not nearly. Its victims suffer not only when big events strike but also in their daily lives. It's wrong to think that crooked officials and those who bribe them are engaged in a quaint or harmless local practice, something the rest of us should get used to. The truth is that public corruption is a destructive force that ruins lives by the millions.

Wednesday
May142008

Willbros Resolves FCPA Offenses

Willbros Group Inc. has confirmed that it will pay $32.3 million and enter into a deferred prosecution agreement to settle civil and criminal Foreign Corrupt Practices Act charges with the Justice Department and the Securities and Exchange Commission.

As first detailed in Willbros third quarter 2007 earnings release reported on October 31, 2007 here, the FCPA violations involved former operations in Bolivia, Ecuador and Nigeria. The company will pay $22 million to settle the DOJ's criminal case and $10.3 million relating to the SEC's civil enforcement action. Its three-year deferred prosecution agreement with the DOJ requires appointment of a compliance monitor, the first announcement of such an appointment in an FCPA case in nearly three months. (The White Collar Crime Prof Blog has an interesting discussion here about the deferred prosecution agreement and selection of the monitor.)

The DOJ's twelve-count information included substantive violations of the FCPA's antibribery provisions and violations of the books and records provisions. All twelve counts relate to operations in Nigeria, Ecuador and Bolivia during the period from 1996 to 2005. The SEC's complaint alleged civil violations of the antifraud provisions of the Securities Exchange Act, the antibribery provisions, and the reporting, books and records and internal controls provisions.

Willbros is headquartered in Panama City, Panama and has its administrative offices in Houston, Texas. It provides construction and engineering services to industry and government entities worldwide, specializing in pipelines and associated facilities in onshore, coastal and offshore locations.

In November 2007, Willbros' former employee Jason Edward Steph, 37, entered into a plea agreement with the DOJ. He admitted violating the FCPA by conspiring to bribe officials of the government of Nigeria with more than $6 million. Steph is awaiting sentencing and faces five years in prison and a $250,000 fine. Steph said that in February and March 2005, he, former Willbros executive Jim Bob Brown, and others arranged for payment of approximately $1.8 million in cash to government officials in Nigeria. Brown pleaded guilty to a similar charge on Sept. 14, 2006 and is also awaiting sentencing. Both he and Steph have been cooperating with the government’s investigation.

Also named in the SEC's complaint were Gerald Jansen, a former administrative supervisor in Nigeria; Lloyd Biggers, a former employee in Nigeria; and Carlos Galvez, a former accounting employee in Bolivia. The allegations included a scheme to pay $300,000 to officials of an Ecuadorean state-owned oil and gas company and to avoid paying taxes in Bolivia.

The DOJ said, "In recognition of Willbros' [and its subsidiary's] thorough review of the improper payments, the companies’ exemplary cooperation, the companies’ implementation of enhanced compliance policies and procedures, and the companies’ engagement of an independent corporate monitor, the Department has agreed to defer prosecution of these companies for three years. If Willbros Group and Willbros International abide by the terms of the agreement, the Department will dismiss the criminal information when the term of the agreement ends."

Willbros Group, Inc. trades on the New York Stock Exchange under the symbol WG.

View prior posts about Willbros here.

View the DOJ's May 14, 2008 news release here.

View the SEC's Litigation Release No. 20571 / May 14, 2008 in Securities and Exchange Commission v. Willbros Group, Inc., et al., Civil Action No. 4:08-CV-01494 U.S.D.C./Southern District of Texas (Houston Division) here.

Tuesday
May132008

From The Mailbag

The question our readers most want answered -- after we tell them bloggers have no way to predict Powerball winners -- is, Who's covered by the Foreign Corrupt Practices Act? It's always the jurisdiction thing -- and for good reason. How, for gosh sakes, does the FCPA reach from Washington to the four corners of the earth and back again? It's unnatural -- until you know how it works. Then it's just plain terrifying.

So to keep the FCPA's jurisdiction straight, we take inspiration from the Justice Department. That means we think about it by categories. Here's how:

Category One: Issuers. An "issuer" is a corporation that has issued securities that have been registered in the United States or who is required to file periodic reports with the SEC. See 15 U.S.C. §§ 78c(a)(8), 78dd-1(a). All issuers are covered by the FCPA, wherever they are.

Category Two: Domestic concerns. A "domestic concern" is any individual who is a citizen, national, or resident of the United States, or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship which has its principal place of business in the United States, or which is organized under the laws of a State of the United States, or a territory, possession, or commonwealth of the United States. See § 78dd-2(h)(1). All domestic concerns are covered by the FCPA, wherever they are. Helpful hint: If your lawyer calls you a domestic concern, it's more likely to be a warning than an insult.

Category Three: Parent companies. U.S. parent corporations (issuers or domestic concerns) may be held liable for the acts of their foreign subsidiaries if they (the U.S. parent) authorized, directed, or controlled the activity in question, as can U.S. citizens or residents, themselves domestic concerns, who were employed by or acting on behalf of such foreign-incorporated subsidiaries.

Category Four: Foreign companies and individuals. A foreign company or person is subject to the FCPA if it, he or she takes any act in furtherance of a corrupt payment while within the territory of the United States. See § 78dd-3(a), (f)(1). When a foreign company or person acts on U.S. soil, the FCPA applies. Note, however, that the Justice Department interprets Category Four much more expansively. The government's position --untested in court -- is that there's FCPA jurisdiction whenever a foreign company or national (wherever they are) causes an act to be done within the territory of the United States by any person acting as that company's or national's agent.

Those are the categories. As we said, they're inspired by the Justice Department -- specifically the United States Attorneys' Manual, Title 9, Criminal Resource Manual §1018 “Prohibited Foreign Corrupt Practices” (November 2000).

And now, back to our Powerball picks.

View CRM §1018 here.

Monday
May122008

A Modality By Any Other Name

The language of corruption, as of most bad actions, is endlessly inventive. It could even be called picturesque if the subject wasn't the grubby crime of bribery. Like drug dealers who constantly rename their product to keep it attractive, those in the business of corruption do the same. Commission, success fee, performance incentive, gift, gesture, backhander, remembrance, honorarium, rebate, pork, quality claim, netback, freight savings, gratuity, congratulations money, perquisite, lagniappe, plugola, boodle, baksheesh -- pick your window dressing.

The evasion has even found its unedited way from the field to officialdom, with predictably turbulent results. It happened in a 1998 FCPA Opinion Procedure Request to the Department of Justice. The requestor reported that the Nigerian government was holding it liable for environmental contamination and had levied a $50,000 fine and a clean-up order. The requestor's idea was to solve the problem by "retaining a Nigerian contractor with experience in the removal of environmental contaminants." Unfortunately for the guileless requestor, the contractor was recommended by officials of the Nigerian Federal Environmental Protection Agency -- the folks who levied the fine in the place.

To make sure everything went well, the contractor insisted that (1) the $50,000 fine must be paid to the Nigerian government through the contractor itself, and (2) the balance of the contractor's proposed fee -- approximately $170,000 -- had to include some $30,000 in "community compensation and modalities for officials of the Nigerian FEPA and the Nigerian Ports Authority." Not a second too soon, the requestor's light bulb came on. "[U]nder these circumstances," the DOJ said, "the requestor has reasonably concluded that all or a portion of the 'fine' and the 'modalities' will be paid, in fact, to Nigerian Government officials."

The steady hands at the DOJ reacted about as you'd expect. They went ballistic. Based upon all the facts and circumstances disclosed to us by the requestor, the Department would -- if the requestor were to proceed with the requested payments to the contractor of the "fine" and the "modalities" -- commence an investigation to determine if a criminal prosecution would be merited.

When they'd regained their composure, the prosecutors helpfully suggested another way forward. The requestor, they said, could instead pay the fine directly to an official account of the appropriate Nigerian government agency, and reduce the contractor's fee by the amount included for modalities, and pay the contractor only after the government of Nigeria actually certified that the necessary environmental clean-up was completed. If all that happened, the DOJ said, it would "reconsider its present intention to take an enforcement action with respect to the proposed transaction." Nice response, but probably not the answer our requestor was hoping for.

All of which goes to show that in the wrong hands, even modalities -- whatever the heck those are -- can be dangerous and downright illegal. Who would've guessed?

View FCPA Opinion Procedure Release 98-01 (Feb. 23, 1998) here.

Monday
May122008

A Strange Season

The last time it happened, North America was still deep in winter. On February 22nd, Flowserve agreed to appoint a monitor under a deferred prosecution agreement with the Department of Justice. Since then, just one corporate FCPA case is known to have settled. AB Volvo's agreement with the DOJ was announced on March 22nd. But -- typical of oil-for-food cases -- it didn't call for appointment of a monitor. In April and so far in May, no corporate FCPA settlements have made the news, with or without monitors.

What's going on? Last year -- even with fewer FCPA cases pending -- the DOJ still settled an average of one corporate case a month. Why the slowdown in 2008? Well, as we've mentioned before, there's an undeclared moratorium at the DOJ on new appointments of monitors. And since most corporate FCPA settlements involve a monitor, that means settlements must wait.

The de facto moratorium started after ex-U.S. Attorney General John Ashcroft's controversial appointment by his former subordinate, U.S. Attorney Chris Christie. Ashcroft became a monitor for orthopedic device maker Zimmer Holdings Inc. as part of Zimmer's settlement of a domestic bribery case. The news that Ashcroft's firm could rake in as much as $52 million from the appointment triggered sticker shock on Capitol Hill. Democratic lawmakers (and plenty of Republicans) were very unhappy to learn that Bush-appointed prosecutors, acting alone, could tap Republican big shots and other friends for such lucrative (part-time) posts. So Congress launched investigations into all aspects of the monitors -- their appointment, pay, oversight and reporting responsibilities -- and even whether deferred prosecution agreements make sense in the first place. Until the political firestorm is doused, nobody wants new appointments to happen -- not Congress, the DOJ, companies in trouble, or potential monitors themselves.

It's up to Attorney General Michael Mukasey to make peace with Congress and end the stalemate. Can he do it? A better question may be, is he willing to do it? According to a story in the Washington Post from April 17th, the AG's approach with lawmakers hasn't been . . conciliatory. The story focused not on the monitorship mess but on other disagreements between the DOJ and Congress -- warrantless wiretapping operations, the media shield law, updating the state secrets law, the use of national security letters, and attorney-client privilege for military detainees. Based on comments from Republican Sen. Arlen Specter, the story said on these issues the new Attorney General has been overly obstinate and unwilling to compromise. Ouch. If that's the attitude, it could be blocking resolution of the monitorship logjam as well.

For some companies, the delay is bad news. Siemens has been saying publicly since Christmas that it wants a quick resolution with U.S. authorities -- so it can concentrate on repairing its scandal-damaged business. Panalpina's bottom line is also hurting, in part, it says, because of the DOJ's pending FCPA case. Other companies, though, are sure to be using the delay to their advantage -- by conducting deep internal investigations, firing or demoting people who caused the FCPA violations, and adopting best practices to create effective compliance programs. Those companies should be in a better position to deal with the DOJ when the time finally comes.

For now, though, the strange season continues.

Friday
May092008

FCPA Guilty Plea For Bribing UK Official

A former co-owner and executive of California-based Pacific Consolidated Industries (PCI) pleaded guilty yesterday to violating the Foreign Corrupt Practices Act. Martin Eric Self, 51, of Orange, California pleaded guilty to a two-count information charging him with violating the FCPA by paying more than $70,000 in bribes to a U.K. Ministry of Defence official. The bribes were intended to secure equipment contracts with the U.K. Royal Air Force.

In October 1999, Self, a U.S. citizen, and Leo Winston Smith, then PCI’s executive vice president and director of sales and marketing, had PCI enter into a marketing agreement with a relative of a U.K. Ministry of Defence official. According to the DOJ, Self -- a signatory on PCI's marketing agreements and bank accounts -- admitted that he didn't know of any genuine services provided by the official’s relative. Instead, Self believed the payments probably were benefiting the official in exchange for obtaining and retaining the equipment-supply contracts.

Self is scheduled to be sentenced in federal court on September 29, 2008. Although he faces a maximum sentence of five years in prison per count, his plea agreement contemplates a prison term of eight months, subject to the court's final determination at sentencing.

For his role in the scheme, former marketing head Smith, a co-founder of PCI, was indicted in April 2007. The government says he conspired to bribe the U.K. Ministry of Defence official in order to obtain equipment contracts worth more than $11 million dollars. In addition to the FCPA violations, the indictment also charges Smith with money laundering and tax offenses. He's scheduled to stand trial in July 2008. Self, as part of his plea agreement, will presumably testify against his former colleague. Evidence against Smith is also likely to come from U.K. authorities. Their investigation of the U.K. Ministry of Defence official resulted in his guilty plea in the United Kingdom for accepting bribes from PCI. He was sentenced to two years in prison.

Privately-held PCI manufactures Air Separation Units (ASUs) and other equipment for the military, medical, and oil and gas markets. ASUs generate oxygen in remote, extreme and confined locations. The DOJ said that in late 2003, after the alleged illegal conduct occurred, PCI was acquired by a group of investors who referred the case to U.S. prosecutors and "fully cooperated in the government’s investigation."

Assistant Attorney General for the Criminal Division Alice S. Fisher, who departs from the DOJ later this month, said, “Individuals who resort to bribery and other fraudulent means to secure contracts with foreign governments not only corrupt legitimate bidding processes, but they also damage the integrity of the global marketplace. Furthermore, using an intermediary to make bribe payments will not insulate individuals from prosecution."

Referring to the collaboration by prosecutors in the U.S. and U.K., Ms. Fisher also said, "The coordinated international law enforcement efforts of this case exemplify the type of cooperation needed to fight crime in the 21st century, where physical borders are not boundaries for criminal activity. I would like to thank our colleagues in the United Kingdom for their efforts and assistance in prosecuting this case as well as the FBI and IRS for their investigatory assistance.”

View the DOJ's May 8, 2008 news release here.

Wednesday
May072008

Former ITXC Execs Settle Civil FCPA Charges

The Securities and Exchange Commission said this week that on April 18, 2008 it settled civil proceedings under the Foreign Corrupt Practices Act against Steven J. Ott, Roger Michael Young, and Yaw Osei Amoako. The SEC charged the former executives of ITXC Corp. with violating the antibribery and books and records provisions of the FCPA by bribing senior officials of government-owned telephone companies in Nigeria, Rwanda and Senegal, and concealing and falsely reporting the illegal payments. ITXC was a publicly-held VOIP company based in Princeton, New Jersey. It was acquired by Teleglobe International Holdings Ltd. in May 2004.

In settling the SEC's civil enforcement action, Ott, Young and Amoako each consented to the entry of a final judgment that permanently enjoins them from violating Sections 30A and 13(b)(5) of the Securities Exchange Act of 1934, Rule 13b2-1 thereunder, and from aiding and abetting violations of Exchange Act Section 13(b)(2)(A) and, with respect to Ott and Young, violations of Exchange Act Section 13(b)(2)(B). Amoako also must pay $188,453 in disgorgement and prejudgment interest. He took kickbacks for some of the bribes he paid to the foreign officials.

The three defendants have also been charged by the Department of Justice for criminal violations of the FCPA. In the criminal action, Amoako, 55, of Hillsborough, N.J., was sentenced in December 2006 to 18 months in prison for conspiring to violate the antibribery provisions of the FCPA and to violate the Travel Act. Amoako pleaded guilty in September 2006 to paying about $266,000 in bribes disguised as “commissions” to employees of state-owned phones companies in Nigeria, Rwanda and Senegal. In addition to his prison sentence, he was also ordered to pay a $7,500 fine and serve two years of supervised release.

In July 2007, Ott and Young also pleaded guilty to separate one-count criminal informations charging them with conspiring to violate the FCPA and the Travel Act. They haven't been sentenced yet in the criminal proceedings and face up to five years in prison and a $250,000 fine.

Ott was ITXC's former vice president for global sales, Young was its former managing director for the Middle East and Africa, and Amoako was the regional director for sales in Africa. They negotiated and / or approved bribes to foreign officials in Nigeria, Rwanda and Senegal in order to obtain contracts for ITXC to transmit telephone calls to those countries. The three executives paid $267,468.95 in bribes between August 2001 and May 2004. ITXC made $11,509,733 in net profits from the contracts obtained through the bribery.

In its complaint against Amoako, the SEC gave this description of his bribery in Nigeria: The sole purpose of the payments was to influence the agent, a foreign official, to steer the carrier contract to ITXC and thereby enable it to obtain and retain business with Nitel. There was no legitimate purpose for the payments. In fact, as a result of the agreement with the Nitel Agent, ITXC earned profits of $1,136,618 from selling telephone service to customers calling Nigeria. ITXC could not have made such sales without having the carrier contract with Nitel that resulted from Amoako’s bribes to the agent. Amoako received a kickback of $50,000 from the Nitel Agent in mid- 2004. Amoako concealed the kickback from ITXC and his superiors by having the money deposited at financial institutions in Africa.

View the SEC's Litigation Release No. 20556 / May 6, 2008 here.

View the SEC's Complaint in Securities and Exchange Commission v. Steven J. Ott and Roger Michael Young, Civil Action No. 06-4195 (GEB) (D.N.J.) and Securities and Exchange Commission v. Yaw Osei Amoako Civil Action No. 05-4284 (GEB) (D.N.J.) here.

View the DOJ's July 27, 2007 news release about Ott and Young's guilty pleas here.

View the DOJ's Sept. 6, 2006 news release about Amoako's guilty plea here.

Tuesday
May062008

The Woolf Report Tells No Tales

The message in our inbox yesterday said: You may find this interesting if you haven't seen it already. It's the Woolf Committee Report on BAE -- released this morning. It's breathtaking in the extent to which they have focused stubbornly on the future and avoided a meaningful review of past conduct. I know that was the basis upon which the committee was formed, but it's difficult to imagine how future conduct can be determined without past wrongdoing explored.

Our correspondent is a fine compliance professional with one foot in Washington and the other in London, so we took the warning seriously. That is, we lowered our expectations. But even so, the report was disappointing. Not only does it avoid dealing with anything historical or factual, but it also never says that public corruption is wrong. That it's a crime that always cheats a national treasury somewhere, perverts the marketplace, and victimizes the citizens. There was none of that.

Instead, the report from the 75-year-old former lord chief justice, who was commissioned in June 2007 by BAE at a wage of £6,000 a day, says over-and-over that BAE's reputation is hurt when the company is caught doing bad things, and that damage to its reputation is in turn bad for its business. Beyond that, the report's action items could have been cut-and-pasted from compliance boilerplate -- creating an impression that the Woolf Committee (Lord Woolf, Philippa Foster Back, Sir David Walker, Dr Richard Jarvis and Douglas Daft) either didn't actually speak with anyone who works at BAE, or didn't find anything they said notable enough to be repeated.

The Guardian, meanwhile, posted a short list of provocative questions that remain unanswered:

· Did BAE set up a secret offshore subsidiary called Red Diamond to handle worldwide cash for arms deals?

· Did the company pay 31% "commission" into a Swiss account on a sale to the African state of Tanzania?

· Did BAE employ Count Alfons Mensdorff-Pouilly, previously caught up in a bribery scandal, as its undercover agent in central Europe?

· Did it provide exotic holidays and prostitutes to the entourage of the head of the Saudi air force?

· Did it pay £1bn to Saudi agents including Wafic Said, and another £1bn to Saudi Prince Bandar? To every question about what BAE may have actually done, Woolf's answer was the same: "We weren't given the job of looking at the past."

The Guardian also reminded readers that BAE "still faces criminal investigations in London, Washington, Dar es Salaam, Bucharest, Prague, Berne, Budapest and Johannesburg, over continuing multi-million pound arms contracts. Last month Woolf's former colleague, Lord Justice Moses, ruled that the abandonment of the Serious Fraud Office investigation into BAE had betrayed the rule of law. Moses said there had been an 'abject surrender' to threats when the SFO, under pressure from BAE, from the then prime minister Tony Blair, and from Prince Bandar, agreed to drop investigations into the Saudi payments."

(As an aside, we're not often on common editorial ground with the Guardian. But its enterprise and leadership on the BAE story show why the somewhat offbeat, trust-controlled newspaper has a reputation for courageous reporting. In the movie, "The Bourne Ultimatum," an investigative report in the Guardian that mentions Jason Bourne is important to the plot and ultimately leads to the assassination of the fictional reporter. )

The Corner House, one of the public-interest campaigners that won the BAE court case against the Serious Fraud Office, called the Woolf inquiry "an interesting academic exercise. . . BAE should have saved its £1.7m spent on the committee and adopted instead accepted best practice: namely, to employ a law firm as an independent investigator to go through all its internal emails and documents in order to make adequate disclosure to the law enforcement authorities. . . . If BAE is serious about breaking from the past, it needs to show that it is fully cooperating with all the current investigations by law enforcement officers in the UK, US and Switzerland."

As for our disappointment, we always try to be realistic about public corruption. We know bribery is the second oldest profession and won't disappear anytime soon. The temptation in business to take shortcuts via well-placed bribes to government officials is powerful. When people fall, as they sometimes will, they and their approving employers deserve punishment. Once punished, though, they also deserve another chance -- assuming there's at least some recognition of wrongdoing ("mistakes were made"). That, after all, is the path to rehabilitation and to a full restoration of corporate citizenship.

The Woolf Committee Report is available here.

Monday
May052008

We Ask, And Answer, A Question

Can an employee be charged with a criminal violation of the Foreign Corrupt Practices Act even if his or her company isn't convicted of an FCPA offense? Yes. An employee can be prosecuted under the FCPA even if the employer hasn't been convicted. But -- and this is why the question is still asked -- the answer hasn't always been yes. Here's the story.

When Congress first debated criminalizing overseas public bribery, there was concern, especially at the Securities and Exchange Commission, that employees would become scapegoats for bribe-paying corporations. Congressman Bob Eckhardt championed the issue, and in 1977 called for testimony from Harvey Pitt, who was then general counsel of the SEC. Pitt, using the term "agent" to mean "employee," explained the SEC's concern this way:

"Indeed, the corporation's interest might even be in conflict with that of the agent. The corporation might desire to have Joe Bloke found to have intentionally engaged in bribery and to have been the sole moving agent, that is, the company never agreed to it and the quicker they can convict Joe Bloke, the better off the company is. It is relieved of responsibility and it has a sacrificial lamb in Rome and everybody forgets about the activity."

Congressman Eckhardt responded by inserting into the FCPA language requiring the government to convict an issuer or domestic concern of violating the FCPA's antibribery provisions as a condition precedent for holding any employee responsible. When the FCPA became law, it included at Section 78ff(c)(3) the following italicized language (known as the Eckhardt Amendment): "Whenever an issuer is found to have violated section 78dd-1(a) of this title, any employee or agent of such issuer who is a United States citizen, national, or resident or is otherwise subject to the jurisdiction of the United States (other than an officer, director, or stockholder of such issuer), and who willfully carried out the act or practice constituting such violation shall, upon conviction, be fined not more than $10,000, or imprisoned not more than five years or both."

That solved the problem for the SEC. For the Department of Justice, however, the seemingly simple fix had disastrous consequences -- first seen publicly in a case called U.S. v. McLean, 738 F.2d 655 (5th Cir. 1984), cert. denied, 470 U.S. 1050 (1985). George McLean's employer, International Harvester Company, was the dominant worldwide supplier of turbine equipment for the oil and gas industry. After a U.S. grand jury's investigation into overseas bribery, McLean was charged in 1982 with conspiring to bribe officials at Mexico's state-owned Petroleos Mexicanos ("Pemex") and with 43 substantive FCPA counts of aiding and abetting the bribery. Also in 1982, Harvester entered into a plea agreement with the DOJ, admitting to one count of conspiracy to violate the FCPA. In the plea agreement, the government stipulated that Harvester wouldn't face further charges related to the sales to Pemex.

McLean, in his trial, then moved to dismiss all the charges against him. He said that under the Eckhardt Amendment, the government's failure to convict Harvester of any substantive FCPA violation barred his prosecution for any FCPA-related offenses. The federal district court agreed as to the 43 substantive counts against McLean, which were dismissed, but denied his motion to dismiss the conspiracy charge. Harvester, the trial court said, had pleaded guilty to conspiracy to violate the FCPA; therefore the government could prosecute McLean for conspiracy as well.

On appeal (in which McLean represented himself), the Fifth Circuit disagreed. It said the conspiracy count must also be dismissed. That ended the government's case against McLean. "[I]n order to convict an employee under the FCPA for acts committed for the benefit of his employer," the appellate court said, "the government must first convict the employer. Because the government failed to convict Harvester [of a substantive FCPA count] and under the plea agreement will be unable to indict Harvester and try it with McLean, the [FCPA] bars McLean's prosecution."

The DOJ faced an awful dilemma. It now had to obtain criminal convictions against companies for substantive FCPA offenses before it could bring FCPA charges against their employees. But even in the early 1980s, the DOJ recognized and feared the disproportionate damage corporate prosecutions could unleash -- best illustrated some 20 years later by Arthur Andersen's demise after a felony conviction (later overturned) and the loss of some 85,000 jobs. Clearly the Eckhardt Amendment -- intended to fix one problem for the SEC -- had caused an even worse problem for the DOJ. The fix needed to be fixed.

Relief came through the Trade and Competitiveness Act /Foreign Corrupt Practices Act Amendments of 1988. It repealed the Eckhardt Amendment language, and from then till now there's been no "condition precedent" to the government's prosecution of employees for FCPA offenses. What about the SEC's fear that employees would become sacrificial lambs for bribe-paying companies?

Some white collar criminal defendants will always feel sacrificed. That's unavoidable. But have corporations really slipped the noose for their FCPA violations by selling out their employees? Well, lots of companies have escaped criminal conviction through deferred prosecution agreements, and those agreements typically do require cooperation with the DOJ's efforts to prosecute employees. But are the companies getting off lightly? Not really.

Deferred prosecution agreements usually impose stringent compliance obligations, some of which -- like the appointment of monitors, waiver of attorney-client privilege, periodic reporting to the DOJ, and the like -- are financially burdensome and even punitive, as well as intrusive. They're also generally effective at preventing recidivism. At the same time, while individuals have been prosecuted for FCPA violations, there's been no flood of cases against employees in lieu of corporate enforcement actions.

The balance, then, seems healthy. Bribe-paying companies are being punished (if not convicted) for their criminal behavior, but they're also being allowed to survive. Meanwhile, employees who blatantly flout the FCPA are also held accountable for their crimes.

View the Foreign Corrupt Practices Act Amendments of 1988 here.

View U.S. v. McLean, 738 F.2d 655 (5th Cir. 1984), cert. denied, 470 U.S. 1050 (1985) in the Public Library of Law (by free registration) here.

Sunday
May042008

Great Words From The Hill, Circa 1977

Aside from the villa on Lake Como and the Aston Martin in the garage, the greatest perk that comes from tending this garden is hearing from so many talented experts in the field of the Foreign Corrupt Practices Act. Last week, for example, a generous reader shared with us a soon-to-be published paper about Facilitating Payments. Seeing our favorite FCPA topic treated with such thorough scholarship, and wrapped in a truly eloquent presentation, was genuinely exciting. It made our day.

We mention the incident, first, to express our gratitude to that particular reader and to all who contribute to the FCPA Blog in so many ways. We also mention it because the paper in question made copious use of the FCPA's rich legislative history -- stimulating us to revisit some of Washington's original debate about the law. Indeed, the Congressional record is still a deep well of meaning and inspiration for FCPA practitioners, judges and scholars.

Among the goodies in the legislative history are the reasons given in 1977 for why the country needed the FCPA. Thirty years on, we think those reasons still ring true.

Here's what the House Committee on Interstate and Foreign Commerce said:

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More than 400 corporations have admitted making questionable or illegal payments. The companies, most of them voluntarily, have reported paying out well in excess of $300 million in corporate funds to foreign government officials, politicians, and political parties. These corporations have included some of the largest and most widely held public companies in the United States; over 117 of them rank in the top Fortune 500 industries.

The abuses disclosed run the gamut from bribery of high foreign officials in order to secure some type of favorable action by a foreign government to so-called facilitating payments that allegedly were made to ensure that government functionaries discharge certain ministrial [sic] or clerical duties. Sectors of industry typically involved are: drugs and health care; oil and gas production and services; food products; aerospace, airlines and air services; and chemicals.

The payment of bribes to influence the acts or decisions of foreign officials, foreign political parties or candidates for foreign political office is unethical. It is counter to the moral expectations and values of the American public. But not only is it unethical, it is bad business as well. It erodes public confidence in the integrity of the free market system. It short-circuits the marketplace by directing business to those companies too inefficient to compete in terms of price, quality or service, or too lazy to engage in honest salesmanship, or too intent upon unloading marginal products. In short, it rewards corruption instead of efficiency and puts pressure on ethical enterprises to lower their standards or risk losing business.

Bribery of foreign officials by some American companies casts a shadow on all U.S. companies. The exposure of such activity can damage a company's image, lead to costly lawsuits, cause the cancellation of contracts, and result in the appropriation of valuable assets overseas.

Corporate bribery is also unnecessary. The Secretary of Treasury testified before the Subcommittee on Consumer Protection and Finance: Paying bribes. . . is simply not necessary to the successful conduct of business in the United States or overseas. My own experience as Chairman of the Bendix Corp. was that it was not necessary to pay bribes to have a successful export sales program.

Nor is Secretary Blumenthal's experience unique. Former SEC Chairman Hills testified: Indeed, we find in every industry where bribes have been revealed that companies of equal size are proclaiming that they see no need to engage in such practices.

Despite the fact that the payments which this bill would prohibit are made to foreign officials, in many cases the resulting adverse competitive affects are entirely domestic. Former Secretary of Commerce Richardson pointed out that in a number of instances, "payments have been made not to "outcompete" foreign competitors, but rather to gain an edge over other U.S. manufacturers."

Corporate bribery also creates severe foreign policy problems for the United States. The revelation of improper payments invariably tends to embarrass friendly governments, lower the esteem for the United States among the citizens of foreign nations, and lend credence to the suspicions sown by foreign opponents of the United States that American enterprises exert a corrupting influence on the political processes of their nations. For example, in 1976, the Lockheed scandal shook the Government of Japan to its political foundation and gave opponents of close ties between the United States and Japan an effective weapon with which to drive a wedge between the two nations. In another instance, Prince Bernhardt of the Netherlands was forced to resign from his official position as a result of an inquiry into allegations that he received $1 million in pay-offs from Lockheed. In Italy, alleged payments by Lockheed, Exxon, Mobil Oil, and other corporations to officials of the Italian Government eroded public support for that Government and jeopardized U.S. foreign policy, not only with respect to Italy and the Mediterranean area, but with respect to the entire NATO alliance as well.

Finally, a strong antibribery statute would actually help U.S. corporations resist corrupt demands. According to former Gulf Oil Co., Chairman Bob Dorsey: If we could cite our law which says we just may not do it, we would be in a better position to resist these pressures and refuse those requests.

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On the Senate side of the Hill in 1977, the problem of improper payments to foreign officials by American corporations was on the agenda of the Committee on Banking, Housing and Urban Affairs. Its final report contained a more concise although no less articulate (and even passionate) description of the need for the legislation. By the way, the working title of the bill, before it became the FCPA, was the "Unlawful Corporate Payments Act of 1977."

Here are the Senate's words:

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Recent investigations by the SEC have revealed corrupt foreign payments by over 300 U.S. companies involving hundreds of millions of dollars. These revelations have had severe adverse effects. Foreign governments friendly to the United States in Japan, Italy, and the Netherlands have come under intense pressure from their own people. The image of American democracy abroad has been tarnished. Confidence in the financial integrity of our corporations has been impaired. The efficient functioning of our capital markets has been hampered.

Corporate bribery is bad business. In our free market system it is basic that the sale of products should take place on the basis of price, quality, and service. Corporate bribery is fundamentally destructive of this basic tenet. Corporate bribery of foreign officials takes place primarily to assist corporations in gaining business. Thus foreign corporate bribery affects the very stability of overseas business. Foreign corporate bribes also affect our domestic competitive climate when domestic firms engage in such practices as a substitute for healthy competition for foreign business.

Managements which resort to corporate bribery and the falsification of records to enhance their business reveal a lack of confidence about themselves. Secretary of the Treasury Blumenthal, in appearing before the committee in support of the criminalization of foreign corporate bribery testified that: "Paying bribes - apart from being morally repugnant and illegal in most countries - is simply not necessary for the successful conduct of business here or overseas.''

The committee concurs in Secretary Blumenthal's judgment. Many U.S. firms have taken a strong stand against paying foreign bribes and are still able to compete in international trade. Unfortunately, the reputation and image of all U.S. businessmen has been tarnished by the activities of a sizable number, but by no means a majority of American firms. A strong antibribery law is urgently needed to bring these corrupt practices to a halt and to restore public confidence in the integrity of the American business system.

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View House Report No. 95-640 (September 28, 1977 - Ordered to be printed) here.

View Senate Report No. 95-114 (May 2 (legislative day, March 28), 1977 - Ordered to be printed) here.

Thursday
May012008

May It Please The Court

We enjoy a good argument just as much as the next lawyer. Stare decisis, analogy, plain meaning, ambiguity -- bring 'em on. Which is why it took us awhile -- the better part of two decades, but who's counting -- to firmly grasp this simple idea: When it comes to the Foreign Corrupt Practices Act, forget the fancy lawyer stuff.

If the few reported FCPA criminal trials have taught anything, it's that legalistic quibbling and the FCPA don't mix. David H. Mead learned that in 1998. Mead, it has to be said, had a great-looking defense. Evidence at trial showed he'd paid a bribe in Panama on the advice of counsel. His company's lawyer, whom he trusted, told him a payment via a Dutch subsidiary to a Panamanian official wouldn't violate the FCPA. So, he argued, if he was acting on the advice of trusted counsel, how could he have had any corrupt intent to violate the FCPA? It must have shocked Mead and his lawyers when the jury convicted him anyway.

David Kay and Douglas Murphy, in their 2002 criminal trial on FCPA charges, argued that bribes to reduce their company's taxes in Haiti couldn't violate the FCPA. Those bribes, they said, weren't about "obtaining or retaining business" and so aren't covered by the antibribery provisions. The trial court bought the argument and dismissed the case. But the appellate court shot them down, and hard. "A man of common intelligence," it ruled, "would have understood that . . . in bribing foreign officials, [Kay and Murphy were] treading close to a reasonably-defined line of illegality. . . . Defendants took this risk, and splitting hairs . . . does not allow them to argue successfully that the FCPA’s standards were vague."

It's not every day that a United States appellate court describes defendants as hairsplitters, an epithet which shouldn't encourage anyone to put the FCPA under a microscope and begin dissecting it with tiny scalpels. By doing just that, Kay and Murphy landed prison terms of 37 months and 63 months respectively. Meade, meanwhile, was sentenced to four months in federal prison for his counsel-induced FCPA violation.

Years before Meade, Kay and Murphy took their chances in court and lost, another defendant had come up short in an FCPA criminal case. Although a jury acquitted Richard H. Liebo on seventeen FCPA-related counts, it convicted him of one count of violating the antibribery provisions, 15 U.S.C. §§ 78dd-1(a)(1), (3); 78dd-2(a)(1), (3); 78dd-2(b)(1)(B) and 78ff(c)(2) (1988), and making a false statement to a government agency, 18 U.S.C. § 1001 (1988). U.S. v. Richard H. Liebo (Cr. No. 4-89-76) (D. Minn., Mar. 1989); 923 F.2d, 1308 (8th Cir. Minn., Jan. 15, 1991).

In 1985, Liebo bought airplane tickets (Niger - Paris - Stockholm - London - Niger; cost - $2,028) for a honeymooning government official from Niger. Liebo was then the vice-president in charge of the Aerospace division of NAPCO International, Inc., located in Hopkins, Minnesota. NAPCO's primary business consisted of selling military equipment and supplies. In Niger, it wanted to service two Lockheed C-130 cargo planes for the Ministry of Defense. The honeymooning Niger official receiving the air tickets was a cousin of another official who could (and did) influence the award of the contract to NAPCO.

Liebo appealed his conviction, arguing that his gift-giving couldn't support the jury's findings. Lawyers at the time thought Liebo's arguments were strong. True, the FCPA prohibits "gifts" that are given "corruptly" for the purpose of "obtaining or retaining business." But, Liebo argued, his gift was just . . . a gift. And the recipient himself said he understood the tickets were from Liebo personally and not from NAPCO. How then, Liebo argued, could the jury find that he acted "corruptly" within the meaning of the FCPA? Such a result would kill gift-giving practices in the commercial world forever, and that couldn't be what the FCPA intended.

The United States Court of Appeals for the Eighth Circuit not only rejected Liebo's arguments, it did so with a decisiveness and brevity that took the defense bar's breath away. With minimal discussion about the evidence itself, the court said, "There is sufficient evidence that the airplane tickets were given to obtain or retain business. . . .We are satisfied that sufficient evidence existed from which a reasonable jury could find that the airline tickets were given 'corruptly.'" That was that.

Liebo, however, did win a new trial on another issue. There was newly discovered evidence, he said -- a memo from his corporate superior showing that Liebo's payment for the honeymoon travel was approved by NAPCO. The appellate court ruled that the jury, with the benefit of that evidence, might have found that Liebo didn't act “corruptly” in giving the tickets, if he'd acted at his supervisor’s direction. That looked promising for Liebo, but it didn't change anything. He was sentenced to 18 months in prison, suspended with three years’ probation, with 60 days of home confinement and 600 hours of community service.

The lesson from all these cases? The elements of an antibribery offense may look to a 1L as though they're riddled with loopholes. And it's tempting to argue that "gift" and "corruptly" and "obtaining or retaining business" are ambiguous and vulnerable to legal attack. But while lawyers should always think like lawyers, they should also remember that most juries and appellate courts haven't been sympathetic. Jurors and judges, it appears, just don't like it when people pay bribes to foreign officials. That's why, in FCPA trials, lots of smart lawyers have been sent to the showers before anyone even worked up a good sweat.

U.S. v. Liebo, 923 F.2d, 1308 (8th Cir. Minn., Jan. 15, 1991), can be viewed at the Public Library of Law (by free registration) here.