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Richard L. Cassin Publisher and Editor

Andy Spalding Senior Editor

Jessica Tillipman Senior Editor

Harry Cassin Managing 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

Wednesday
Oct212009

How BAE Got Caught

Investigative reporters may be disappearing from newsrooms everywhere, but they still have an important role to play in holding institutions and people accountable for overseas bribery. Rob Evans of the U.K. Guardian contributed an essay to TI's Global Corruption Report 2009 here. It's about how he and David Leigh broke the BAE story. Their investigation wasn't quick or easy, and not many news organizations these days would have let the story play out the way the Guardian did. But the paper supported its reporters and with time and luck (which came in the form of a couple of well-placed whistleblowers) one of Britain's biggest commercial scandals made it into public view.

Here's part of what Rob Evans had to say:

. . . My experience of working with David Leigh on the Guardian investigation that led to the exposure of the BAE Systems scandal in the United Kingdom is illustrative of the challenges that journalists face in investigating corruption. The articles we wrote prompted the Serious Fraud Office (SFO) to launch an investigation into allegations that BAE Systems, the United Kingdom's biggest arms company, had paid bribes to win contracts from Saudi Arabia and other governments. Tony Blair's government eventually stepped in and stopped the SFO from completing its investigation into the allegations in December 2006. . . .

The investigation into BAE System's payments began in late 2002. Over three days in June 2003 the Guardian published articles into alleged bribery in the Czech Republic, India, Qatar and South Africa. A few weeks later whistleblower Edward Cunningham contacted the Guardian with new allegations of a slush fund that BAE Systems was using to bribe and "sweeten" Saudi officials connected to a huge arms contract. Cunningham spoke out because he was appalled by what he had seen. Those articles in September 2003 reported that BAE Systems was allegedly providing prostitutes, sports, cars, yachts, first-class plane tickets and other inducements. . .

During our investigation we faced a number of challenges. One of the most acute was the difficulty in penetrating the banking system to find out how BAE Systems had made its allegedly corrupt payments. The money flowed from the United Kingdom to the tax haven of the British Virgin Islands to Switzerland and onwards - to the Czech Republic, Romania, Qatar, Tanzania, South Africa and Chile. . . . As the number of investigations expanded around the world, so did the leaks, and slowly a picture of the payments began to emerge. We were working with reporters in other counties who were better placed to find out what was going on in the investigations in their countries and share information with us.

. . . Journalists aiming to expose corruption also need to be persistent. They need time to dig around -- to go and see people who may have information, to look through archives, read long reports to retrieve vital pieces of information buried deep within them, and so forth. Often reporters are prevented from doing this, however, as the media owners are far more interested in celebrity stories, or their next set of profits. For many editors, exposing the dry details of how improper payments have been laundered through bank accounts is, quite simply, less exciting than Britney Spears' latest antics. Many people believe that reporters are now being given less time to investigate stories over an extended period. This is a problem that afflicts reporters in developed countries, and it is even more so for journalists in developing countries. . . .

Read all our posts about BAE here.
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Tuesday
Oct202009

Mandarin Monkey Business

In Dongguan, a Chinese city on the Pearl River Delta, graft busters are using a powerful weapon against corrupt public officials: their mistresses. During a recent period, 32 out of 38 corruption cases handled by the city's prosecutors were based on complaints or confessions from girlfriends of married office-holders. "At least 80 percent of corrupt officials exposed in Dongguan had mistresses who gave us important information that we did not possess," said Zhou Yuefeng, deputy director of the Dongguan anti-graft bureau.

"We welcome tip-offs and we will protect and reward informers," Zhou said.

According to a local press report, the Chinese public-servants regulation that went into effect in 2007 "stipulates that any official must be dismissed if found to have a mistress." But the law hasn't deterred the amorous bureaucrats.

"Ninety-five percent of the corrupt officials have a mistress or more," said Wang Zhang, head of the discipline commission of Zhengzhou, Henan Province. After analyzing more than 50 cases, he put the women "into seven categories based on what they wanted from the officials -- love, power or money." His investigators are now using the categories to tailor interrogation techniques.

Wang clarified that mistresses don't cause corruption but are a symptom of the abuse of public office. He advised all officials "to stay home with their families, reading books and working on their computers. Of course, a harmonious family can help men stay away from other women," he said.

Apparently the practice has even spread to tax collectors and overworked doctors. Back in Dongguan, a spokesperson for the prosecutor's office said, "Our focus this year will be on the taxation and medical departments. However, that doesn't mean we won't be looking at corruption in other areas."
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Monday
Oct192009

Goodbye To Waivers? Not So Fast . . .

Companies facing criminal indictment for violating the Foreign Corrupt Practices Act and other federal laws have a sure-fire way to help themselves. They can cooperate. Those found to have “fully cooperated” under the Federal Sentencing Guidelines are entitled to reduced penalties; most of them escape with a deferred or non-prosecution agreement. How does the government measure cooperation? One way has been to look at whether the target agreed to spill the beans on employees by waiving the attorney-client privilege.

The Justice Department claims it has never forcibly stripped an organization of the privilege. That's technically true. As a matter of law only the holder of the privilege can give it up. But it's also true that organizations have routinely waived the privilege because of various inducements. Translation: the DOJ made them offers they couldn't refuse.

Cindy A. Schipani, above, a professor from the University of Michigan's business school (B.A. Michigan State, J.D. University of Chicago) has written an excellent paper (scholarly but readable) on the topic. It's called "The Future of the Attorney-Client Privilege in Corporate Criminal Investigations" (available from SSRN here). Ellen Podgor cited it on the White Collar Crime Prof Blog here.

Prof Schipani traces the history of the waiver as a measure of organizational cooperation. She starts from the Holder Memorandum in 1999 by then-Deputy Attorney General (now AG) Eric Holder, followed by the Thompson Memorandum (2003), the McCallum Memorandum (2005) and the McNulty Memorandum (2006). Each encouraged waiver of the privilege by linking it to some extent to reduced penalties and deferred or non-prosecution agreements. And under the various DOJ guidelines, refusing to waive the privilege became implicitly linked with the threat of indictment, maximum penalties, and corporate ruin.

How serious that threat was became clear, Prof Schipani says, in May 2002. Arthur Andersen LLP was charged with obstruction of justice for shredding documents related to its audit of Enron. The jury convicted Andersen and the Fifth Circuit affirmed. Prof Schipani says,

The indictment and subsequent conviction . . . devastated the firm’s reputation. Moreover, because the SEC does not allow convicted felons to audit public companies, the firm agreed to surrender its Certified Public Accounting licenses and its right to practice before the SEC, which effectively put what was once a “big five” accounting firm out of the business. Numerous Andersen clients deserted the firm, as did many partners and personnel, and Andersen was obliged to sell off profitable components of its business. In the aftermath, nearly 28,000 U.S. Andersen employees lost their jobs.
Although the Supreme Court reversed Andersen’s conviction in 2005 -- holding that the trial court’s jury instruction was faulty -- the firm was already gone.

By 2006, Prof Schipani says, most in-house and outside counsel were convinced that a "culture of waiver" permeated the DOJ and SEC. And they were right. "Nearly 80% of the [deferred or non-prosecution agreements] entered into before June, 2006 reportedly include waiver of privilege," she says. "One would imagine the percentage to be significantly lower if corporations believed waiver to be optional and inconsequential."

In August 2008, under heavy flak, the DOJ issued the so-called 2008 Guidelines. They purported to restore the privilege by removing consideration of a waiver from the evaluation of an organization's cooperation. Did anything change?

Prof Schipani says it's still too early to tell. But, she warns,

The 2008 Guidelines remain ambiguous regarding whether disclosure of internal investigation reports or interview memoranda prepared by attorneys may be required in order for a firm to receive credit for cooperation. If a corporation is deemed to have failed to timely disclose the relevant facts “for whatever reasons,” the guidelines instruct prosecutors not to give cooperation credit.
Her conclusion: Even if the DOJ does not make official demands for waivers, "corporations under governmental investigations may still feel pressure to voluntarily waive the privilege, particularly relating to factual work product."

View the "2008 Guidelines" in the U.S. Attorney’s Manual 9-28.000 / Principles of Federal Prosecution of Business Organizations here and USAM 9-28.710 on attorney-client and work-product protections here.

Download the McNulty Memo here and the Thompson Memo here.

Read prior posts about the attorney-client privilege here.
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Sunday
Oct182009

The Story Of Graft

Transparency International's Global Corruption Report 2009 is here. At 462 pages, it may be the most complete account of global corruption and anti-bribery efforts ever assembled. Reference books like this are both important and fun; you don't need to read from front to back, first page to last. Dive in anywhere -- at the country reports, narrative chapters, footnotes, tables, sidebars, illustrations or research, even the index. It's all worthwhile. Here, from a couple of random dives, is what we mean:

  • The Foreign Corrupt Practices Act "established the first comprehensive prohibition by any country against bribing foreign government officials for business purposes. The FCPA bans the use of bribery to obtain or retain business or to secure any other undue business advantage, and imposes strict record-keeping requirements for public companies. While enforcement in the early years was limited, it has increased markedly since the United States ratified the OECD Convention in 1998. From 2003 to 2007 the average number of new FCPA enforcement actions nearly tripled compared to the preceding five-year period."
  • "In France, Germany, the United Kingdom and the United States, all major foreign investors and exporters and more than 80 per cent of surveyed executives admitted to ‘not being familiar at all’ with one of the most important legal frameworks in global business, the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Only a third or so of companies surveyed by other polls in the construction and power sector -- industries with high corruption risks -- had training programs for executives on how to avoid corruption."
  • "Almost 90 per cent of the top 200 businesses worldwide have adopted business codes, but fewer than half report that they monitor compliance. Although more than 3,000 companies have published CSR [corporate social responsibility] reports in 2007, fewer than a third were verified through independent assurance."
  • Enforcement of foreign bribery cases has increased in France, Germany and the United States. "[T]here is still little or no enforcement in . . . Canada, Japan and the United Kingdom." In 2008, France brought 19 enforcement actions and had 16 ongoing investigations; Japan brought one case and had an unknown number of ongoing investigations.
  • Globally, nearly forty percent of polled business executives have been asked to pay a bribe when dealing with public institutions. Half estimated that corruption raised project costs by at least 10 percent. Twenty percent claimed to have lost business because of bribes by a competitor. More than a third felt that corruption is getting worse.
  • "In developing and transition countries alone, corrupt politicians and government officials receive bribes believed to total between US$20 and 40 billion annually – the equivalent of some 20 to 40 per cent of official development assistance."
  • "When corruption allows reckless companies to disregard the law, the consequences range from water shortages in Spain, exploitative work conditions in China or illegal logging in Indonesia to unsafe medicines in Nigeria and poorly constructed buildings in Turkey that collapse with deadly consequences. Even facilitation payments -- the many, often small payments made by companies to ‘get things done’ -- are found to be harmful, as they are funneled up through the system and help nurture and sustain corrupt bureaucracies, political parties and governments."
Transparency International's Global Corruption Report 2009: Corruption and the Private Sector can be downloaded here.

Disclosure: We acted as a peer reviewer for this publication.
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Thursday
Oct152009

Who Owns The War?

We've talked before about corruption in Afghanistan. In debating what to do there, some argue that Iraq was just as corrupt, yet the surge still worked. Was Iraq just as corrupt? It looks like it. Both countries are ranked near the bottom of the Corruption Perception Index: Iraq at 178 and Afghanistan at 176. With the inexact art of calibrating corruption, that's a dead heat. But for American policy makers, there's a world of difference between the two countries.

Iraq always had local leaders who were incorruptible. They were fighting for their tribes -- historically stable and cohesive groups -- and were unwavering. Their objective was to protect their tribal land and people from the insurgents, and they were willing to do whatever it took. They led the awakening movements, first in Anbar Province, then across the country. Official history says the awakening started around 2005; ask soldiers who were there, however, and they'll tell you it started earlier. It just took time before U.S. commanders and politicians gave the tribal leaders any credit.

But in Afghanistan, soldiers say, there's nobody equivalent to the Iraqi sheiks. Strong local leaders with a stake in peace don't exist. So America's choice of partners comes down to the politicians, military and police, and most aren't reliable from one day to the next.

* * *
Based on what Thomas Friedman had to say this week about the way the sleaze works, it's hard to see how a hearts-and-minds campaign can be successful:

Talking to Afghanistan experts in Kabul, Washington and Berlin, a picture is emerging: The Karzai government has a lot in common with a Mafia family. Where a “normal” government raises revenues from the people — in the form of taxes — and then disperses them to its local and regional institutions in the form of budgetary allocations or patronage, this Afghan government operates in the reverse. The money flows upward from the countryside in the form of payments for offices purchased or “gifts” from cronies.
What flows from Kabul, the experts say, is permission for unfettered extraction, protection in case of prosecution and punishment in case the official opposes the system or gets out of line. In “Karzai World,” it appears, slots are either sold (to people who buy them in order to make a profit) or granted to cronies, or are given away to buy off rivals. . . .
. . . Gen. Stanley McChrystal, our top commander there who is asking for thousands more troops, is not wrong when he says a lot of bad things would flow from losing Afghanistan to the Taliban. But I keep asking myself: How do we succeed with such a tainted government as our partner?

* * *
In a preview of the October 18, 2009 New York Times Magazine, Dexter Filkins reports from the battlefield (here). The article brings to mind David Halberstam's spot-on accounts from Vietnam in the 1960s. Filkins' focus is Gen. McChrystal and the soldiers on the ground. But he explores the whole idea of waging a counter-insurgency in a place where we don't have local partners.

Success takes time, but how much time does Stanley McChrystal have? The war in Afghanistan is now in its ninth year. The Taliban, measured by the number of their attacks, are stronger than at any time since the Americans toppled their government at the end of 2001. American soldiers and Marines are dying at a faster rate than ever before. Polls in the United States show that opposition to the war is growing steadily.
Worse yet, for all of America’s time in Afghanistan — for all the money and all the blood — the lack of accomplishment is manifest wherever you go. In Garmsir, there is nothing remotely resembling a modern state that could take over if America and its NATO allies left. Tour the country with a general, and you will see very quickly how vast and forbidding this country is and how paltry the effort has been.

And finally, there is the government in Kabul. President Hamid Karzai, once the darling of the West, rose to the top of nationwide elections in August on what appears to be a tide of fraud. The Americans and their NATO allies are confronting the possibility that the government they are supporting, building and defending is a rotten shell. . . .

Wednesday
Oct142009

Clueless In Quito

Our assigned subject is bribery abroad. So naturally some have wondered why we haven't talked about Chevron's legal tangle in Ecuador and accusations it might have violated the Foreign Corrupt Practices Act there. A couple of readers -- apparently from Ecuador -- even sent us what they said was evidence against the American oil company. It wasn't. We only found news stories from local papers and a copy of our own post about Chevron's $30 million oil-for-food settlement (here).

The reason we haven't talked about the Ecuador case is because we have no idea what it's really about. Like a gargantuan version of Jon & Kate, the back-and-forth charges have left us completely confused -- too addled to have an opinion.

As for facts, here's what we know, or what we think we know:

The case started 16 years ago. A group of Amazon residents alleged that Texaco, which Chevron acquired in 2001, contaminated large areas of rain forest before ending its operations and leaving the country. In a civil suit in the local courts, Chevron is facing damages that could reach $27 billion. The FCPA allegations (coming from sources in Ecuador, including the attorney general) involve an alleged plot by the oil company to bribe the country's leaders and a judge hearing the case.

Chevron says it's the Ecuador government and courts that haven't been honest. As evidence, it released tapes in August that appeared to implicate politicians and the judge in a plot to take $3 million in kickbacks from clean-up contractors if Chevron is found liable. Just how and why the tapes were made and given to Chevron is a mystery. The New York Times quoted Steven Donziger, a lawyer representing the Ecuadorans suing Chevron, as saying: “I suspect this is a Chevron sting operation; there needs to be an investigation into Chevron’s role in this as much as the judge’s. I find it awfully odd that these individuals would secretly film meetings using James Bond devices like a spy watch and a spy pen."

One of the men who made the tapes -- yes, using "watches and pens implanted with bugging devices" -- Diego Borja, was a Chevron contractor providing logistics services. The company said it didn't pay him for the tapes but gave him money to leave Ecuador with his family because of safety concerns. “Chevron had no involvement in the videotaping,” Kent Robertson, a company spokesman, told the New York Times. “Chevron referred this matter to the U.S. Department of Justice and Ecuador’s prosecutor general after making every reasonable effort to verify the evidence that was presented.”

Professor Ralph Steinhardt at George Washington University Law School -- a heavyweight expert in international civil litigation -- told the Times: “For someone who is trying to figure out what you can learn from this, it’s not as though it yields a rational narrative. In trying to appreciate the complexities of this case, you need to have the skills of a poker player rather than the skills of a lawyer.”

OK then. We've often displayed to ourself and others a lack of poker-playing skills. So for now at least, we fold.
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Tuesday
Oct132009

Bourke Denied New Trial

Frederic Bourke's attempt to overturn his conviction and obtain a new trial has failed. He was found guilty in July of conspiring to violate the Foreign Corrupt Practices Act under 18 U.S.C. § 371 and making false statements in violation of 18 U.S.C. § 1001. He faces up to five years in prison for each count. Sentencing is now scheduled for November 10 (see our post here).

In his motion for acquittal or a new trial, Bourke argued, among other things, that the jury instructions were wrong in a number of ways, including the mens rea element, the local law defense, a good-faith defense, and his possible conviction based on negligent acts.

During his trial, prosecutors said Bourke had "stuck his head in the sand." The jury thought so too. As the foreman said after the verdict: "It was Kozeny, it was Azerbaijan, it was a foreign country. We thought [Bourke] knew [about the bribery] and definitely could have known. He’s an investor. It’s his job to know.”

In his post-trial motion, Bourke argued that Judge Shira Scheindlin made a mistake by allowing the jury to convict him of conspiracy if all he did was stick his head in the sand. She issued an instruction on the theory of conscious avoidance even though the government's evidence of his actual knowledge was thin, Bourke said. That created a strong possibility the jury was mislead into believing it could convict him simply because he had "not tried hard enough to learn the truth."

But Judge Scheindlin said her instruction was correct. In fact the jury could convict him if he stuck his head in the sand to avoid knowing facts he should have known. The test was not Bourke's actual knowledge of Kozeny's bribes, but his efforts to avoid acquiring that actual knowledge. "The conscious avoidance doctrine provides that a defendant's knowledge of a fact required to prove the defendant's guilt may be found when the jury is persuaded that the defendant consciously avoided learning that fact while aware of high probability of its existence," she said, quoting United States v. Svoboda, 347 F.3d 471, 477 (2d Cir. 2003).

She explained further why there's no head-in-the-sand defense under the FCPA's antibribery provisions, or a conspiracy charge based on that part of the FCPA:

"In addition, the FCPA explicitly permits a finding of knowledge on a conscious avoidance theory. It provides that '[w]hen knowledge of the existence of a particular circumstance is required for an offense, such knowledge is established if a person is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist.' 15 U.S.C. § 78dd-2(h)(3)(B). Because the defendant must be found to possess the same intent as that required for the substantive offense, the conscious avoidance instruction was particularly appropriate in this case."

Bourke's lawyers plan to appeal his conviction.

Download a copy of Judge Shira A. Scheindlin's October 13, 2009 opinion and order in U.S. v. Victor Kozeny and Frederic Bourke, Jr. (United States District Court for the Southern District of New York, Case No.: 05-Cr 518) here.

Download the complete jury charge in U.S. v. Victor Kozeny and Frederic Bourke, Jr. here.

Read all our posts about the prosecution of Frederic Bourke here.
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Tuesday
Oct132009

Bourke Injured, Sentencing Delayed

Frederic Bourke's sentencing has been rescheduled to November 10, 2009 at 2:30 pm. Judge Shira Scheindlin in the federal district court in Manhattan ordered the four week delay last week. Bourke underwent surgery almost two weeks ago to repair a "ruptured distal biceps tendon in his left arm." The cause of the injury, which happened on September 22, isn't specified in the court record.

Bourke, 63, was convicted in July of conspiring to violate the Foreign Corrupt Practices Act and the Travel Act, and lying to FBI agents. The jury said he invested in Viktor Kozeny's 1998 scheme to take over Azerbaijan's state oil company despite knowing Kozeny planned to bribe Azeri leaders. Then he lied to federal agents during their investigation. Bourke faces up to ten years in prison. Kozeny, meanwhile, is a fugitive living in the Bahamas.

Without the surgery, according to his doctor, Bourke, who's left-handed, risked permanent loss of mobility in his left arm, including turning a doorknob or looking at his wristwatch. After the surgery, his arm will be in a splint for six weeks at a ninety degree angle. He'll then need physical therapy twice a week for about three months. His doctor is David S. Ruch, MD, a professor at Duke University and director of its hand, upper extremity and microvascular surgery fellowship program.

According to shoulderdoc.co.uk, "The people most likely to get a biceps tendon rupture are strength athletes, bodybuilders and heavy manual workers. Generally, males over the age of 35 years. . . . After the injury there is usually localized pain at the front of the elbow, with bruising and swelling. The biceps muscle may retract up the upper arm crating a prominent bump, known as the 'Popeye' sign. This is often visibly different to the other biceps when contracting the muscle."

The government agreed to postpone Bourke's sentencing until his splint is removed. Judge Scheindlin signed the rescheduling order last Wednesday, two days after receiving a request from Bourke's lead trial lawyer, Harold Haddon, accompanied by a letter to the judge from Bourke's doctor.

Bourke's attorneys have asked for a new trial and are also appealing his conviction. He's now free on bail.

Download a copy of Judge Scheindlin's handwritten order here.
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Monday
Oct122009

A Record Of Reform

In September 1977, the U.S. House of Representatives finished debating a bill designated as H.R. 3815. Its working title was the Unlawful Corporate Payments Act of 1977, or UCPA. The bill was a response to a huge scandal. As the record of the House debate explained:

"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."

But did the scandal really matter? Should Americans have cared about bribery abroad? The House of Representatives thought so. It listed about a dozen reasons in this little statement of purpose that's also part of the legislative record:

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.
After 32 years, there's nothing there that's out of date. Bribery is still -- and always has been -- the wrong way around. It spreads weakness everywhere. Like cheating in sports, it produces no winners and lots of losers -- the players involved, their teams, the team owners, the league, the sponsors and fans. It's all bad. That's why the bill to enact the UCPA was important in September 1977. And why the law it became -- the Foreign Corrupt Practices Act -- is important today.

Download a copy of House Report No. 95-640 (September 28, 1977) here.
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Sunday
Oct112009

Charity Without Fear

The question most asked by our readers during the past year was this: What does the Foreign Corrupt Practices Act say about charitable contributions? It comes up so often because all American and U.S. public companies are subject to the FCPA's antibribery provisions, and most have citizenship programs overseas that involve supporting public and private charitable causes. So they need to be sure their donations are FCPA compliant. That's not always easy to figure out. The FCPA itself doesn't mention charitable giving, and the DOJ and SEC have never issued any formal guidelines about it.

When the question first came up around here, we turned to Pete from D.C. (above), a compliance professional who's logged a lot of miles. He helped us with a post that first appeared nearly two years ago. With a few updates we've included, here's what it said:
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No good deed goes unpunished, or so the saying goes. That sure came true for Schering-Plough. From February 1999 to March 2002, the New Jersey-based maker of Afrin, Claritin, Coricidin and Cipro, among other leading drugs, violated the Foreign Corrupt Practices Act through overseas charitable giving.

According to the Securities and Exchange Commission's June 2004 complaint, the company's subsidiary in Poland made improper payments to a charitable organization called the Chudow Castle Foundation. The Foundation was headed by an individual who was the director of the Silesian Health Fund during the relevant time. The health fund was a Polish governmental body that, among other things, provided money for the purchase of pharmaceutical products and influenced the purchase of those products by other entities, such as hospitals, through the allocation of health fund resources.

The SEC said Schering-Plough Poland paid 315,800 zlotys (approximately $76,000 at the time of the payments) to the Chudow Castle Foundation to induce its director to influence the health fund's purchase of Schering-Plough's pharmaceutical products. The SEC also said that none of the payments to the Foundation were accurately reflected on the subsidiary's books and records and that Schering-Plough's system of internal accounting controls was inadequate to prevent or detect the improper payments.

As a result, Schering-Plough paid a $500,000 civil penalty and consented to an SEC order requiring it to avoid violating Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934. It also had to retain an independent consultant to review its policies and procedures regarding compliance with the Foreign Corrupt Practices Act and implement any changes recommended by the consultant.

Schering-Plough's case, as far as we know, remains the only FCPA enforcement action based entirely on charitable giving. We're talking about it now because it raised important compliance concerns that still linger. For example, how much due diligence is expected of companies with respect to their overseas charitable donations?

At an FCPA conference a couple of years ago, an audience member posed that question to Mark Mendelsohn, the head of the Department of Justice's group that prosecutes FCPA cases. He said each donation has to be considered on its merits, but there are always common-sense guidelines that help determine if donations could violate the FCPA. Is there a nexus between the charity and any government entity from which the company is seeking a decision? If the governmental decision-maker holds a position at the charity, that's a red flag. Is the donation consistent with the company's overall pattern of charitable contributions? For Schering-Plough, the SEC said that "[d]uring 2000 and 2001, the payments constituted approximately 40% and 20%, respectively, of S-P Poland's total promotional donations budget. Moreover, the Foundation was the only recipient of such donations that received multiple payments, making the four payments in 2000 and seven payments in 2001 highly unusual." If one donation or a series of them is more than the company has made to any other charity in the past five years, that's a red flag too.

Beyond the points made by Mark Mendelsohn, there are other smell tests for charitable donations. Who initiated the request for payment to the charity? The key to most bribery charges appears to be the personal benefit to the government official, or the quid pro quo expected of him or her. If a government official hinted at or begged for a payment to the charity, that's another red flag. Will there be a tax deduction for the donation? In most countries, one important result of any gift to charity is tax relief. Therefore, not seeking the tax benefit can become yet another red flag.

And one final point. All due diligence concerning charitable payments -- the asking and answering of the questions posed above -- should be well documented. Nothing will aid in defending against a potential FCPA charge more than a stack of contemporaneously-generated papers backing the story that the payment really was meant to be a charitable contribution and not a bribe. Don't be shy about it. Create real-time documents that demonstrate awareness of potential FCPA issues and measures taken to manage and mitigate the risk. That, after all, is what compliance is really about.
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Schering-Plough Corporation trades on the New York Stock Exchange under the symbol SGP.

View the SEC's Litigation Release No. 18740 (June 9, 2004) here.

Download the SEC's civil complaint in Securities and Exchange Commission v. Schering-Plough Corporation (D.D.C. 2004) here.
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Thursday
Oct082009

Bourke's Big Day

Frederic Bourke, the wealthy entrepreneur convicted in July of conspiring to violate the Foreign Corrupt Practices Act and the Travel Act, and lying to FBI agents, is scheduled to be sentenced on Tuesday, October 13. At his trial, a federal jury in Manhattan found that he invested in Czech-born promoter Viktor Kozeny's unsuccessful attempt in 1998 to gain control of Azerbaijan's state oil company, Socar, despite knowing Kozeny planned to bribe Azeri leaders.

Bourke, 63, the co-founder of handbag-maker Dooney & Bourke, faces up to five years in prison on each count. The judge has already said she'll impose less than the 10-year sentence prosecutors have asked for. Even so, any jail time will complete Bourke's fall from his "charmed life," as the American Lawyer's Andrew Longstreth calls it, to convicted felon.

In an October 9 feature in the American Lawyer (available at law.com here), Longstreth dives deep into the lives of Kozeny and Bourke and their run-in with the FCPA.

Here's an excerpt:

It's strange that Kozeny―the alleged mastermind behind the bribery scheme―is living in the Bahamas, while Bourke, an investor who merely knew of the bribes is preparing for a possible prison term. But what makes this story even stranger is that the government's FCPA investigation can be traced back to a civil suit filed by American investors against Kozeny in which Bourke was a witness for the plaintiffs. Kozeny's lawyers raised the bribes as a defense, and then alerted federal prosecutors about the bribes in the belief that Kozeny would not be charged with FCPA crimes. They were wrong. And Bourke is paying for it.

Before his disastrous investment with Kozeny, Ricky Bourke lived a charmed life. He grew up in the suburbs of Detroit, attended the University of Michigan, and married Eleanor Clay Ford, whose mother was Henry Ford's only granddaughter. Although Bourke married into money, he has made plenty on his own. In the seventies he teamed up with Peter Dooney, a talented designer at Coach, Inc., to start a leather goods manufacturing company called Dooney & Bourke, which originally sold belts and suspenders, but later became best known for its stylish handbags. (In 1996 Liz Claiborne, Inc., bought the company for an undisclosed amount.) In the nineties, Bourke became one of the first major investors in genome science.

By the time he reached his fifties, Bourke had collected all the material trophies of success: multiple homes, a private plane, and a yacht. But according to the prosecution's theory at his trial, Bourke wasn't satisfied. He wanted to be a billionaire. . . .

Read all our posts about U.S. v. Kozeny and the prosecution of Frederic Bourke here.

Wednesday
Oct072009

Keeping Courts Clean

Compliance programs don't always (or even usually) cover how overseas counsel are hired, supervised and paid. But they should. A year ago, the Supreme Court denied cert in U.S. v. Kay, leaving in place the Justice Department's expansive view of the FCPA's business nexus element (the meaning of "assist in obtaining or retaining business"). That cleared the way for prosecutors to target bribes to foreign judges and court workers in all kinds of foreign cases.

We liked what Larry Buterman had to say earlier this week about FCPA enforcement actions in the U.N. oil for food cases (here). And we noticed he co-wrote an article in September about overseas judicial corruption. So we asked his advice. Here -- in his own words -- is what he told us:
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As American and other companies subject to the FCPA expand into foreign markets, they become increasingly susceptible to the risk of foreign litigation. The reality is that in many countries, payments to judges and judicial officials are standard litigation practices. Organizations must recognize that foreign judges and judicial officials are "foreign officials" for purposes of the FCPA -- especially given the broad interpretation the U.S. government has adopted for that term.

Thus, organizations must be vigilant to ensure that all those who litigate on their behalves in foreign countries do not make any payments to judges and judicial officials.

The U.S. government has already shown its willingness to expand the reach of the FCPA in order to root out all types of foreign corruption. The FCPA appears to be the most promising legal tool at its disposal to combat bribery in foreign courts. Given the prevalence of judicial corruption overseas, it may only be a matter of time before the DOJ's prosecutors turn their attention to the problem.

Common sense dictates that foreign local counsel be treated by companies the same way they treat any suppliers, agents or distributors with respect to the FCPA.
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A copy of "Foreign Judicial Corruption and Liability for Local Counsel," co-authored by Howard B. Epstein and Lawrence E. Buterman and originally published in the New York Law Journal (September 9, 2009) can be downloaded here.

View our series about judicial corruption here.
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