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


Combating Caribbean Corruption

The U.K. government is in the process of assuming direct rule over its Caribbean dependency, the Turks and Caicos Islands. A U.K. Commission of Inquiry found "clear signs of political amorality and immaturity" in the government there. The BBC said chief minister Michael Misick is alleged to have "built up a multi-million dollar fortune since coming to power in 2003." He denies misusing public funds.

Turks and Caicos, a British Overseas Territory whose citizens have U.K. passports, consists of about 40 islands, eight of which are inhabited by a total population of around 30,000. The U.K.'s preliminary report said there was "information in abundance pointing to a high probability of systematic corruption or serious dishonesty" throughout the government. The CIA World Factbook says T&C is a transshipment point for South American narcotics destined for the U.S. and Europe.

The head of the U.K.'s Commission of Inquiry, Sir Robin Auld, hasn't said whether he'll recommend criminal investigations. His final report is due in April.

Reuters said today, "The U.K. will proceed with the seizure of power when a final report is published next month . . . . The decision is the latest effort by [British Prime Minister Gordon Brown], U.S. President Barack Obama and leaders in Germany and France to crack down on offshore financial centers. Turks & Caicos Premier Michael Misick called on the United Nations to intervene on the country’s behalf."

Antigua, another tiny Caribbean destination, was in the news last month. Texan Allen Stanford, accused by the Securities and Exchange Commission of an $8 billion investment fraud, headquartered his offshore bank there since 1996. As in Antigua, offshore financial services are an important part of the Turks and Caicos economy. That raises the same possibility of corrupt relationships between officials there and offshore operators. Whether past violations of the Foreign Corrupt Practices Act and other anti-corruption laws might be found by investigators after the British take direct control of the government is an open question.

Stay tuned.


Paris Pulls The Plug On Enforcement

We're trying to stay calm today but it's not easy. We just learned why France -- the largest country by area in the European Union and second largest by population, possessor of the world's fifth biggest economy, a founding member of the European Union and the United Nations, a permanent member of the Security Council and member of the G8, NATO, and the Latin Union (whatever that is) -- why that France, isn't prosecuting any foreign public bribery. Here's the story. But be warned, it isn't pretty:

GRECO -- the Council of Europe's Group of States against Corruption -- was founded ten years ago to monitor compliance with the Council's anti-corruption standards. It does that by studying the members' existing laws and practices, publishing reports that evaluate their efforts, and recommending how they can improve their performance. We talked about it in a post in June 2008 (here).

We hadn't thought much about GRECO since then, until this email showed up over the weekend: Dear FCPA Blog -- My father just forwarded me an article in which I thought you might have an interest. It relates to recent French legislation limiting prosecutorial authority over French companies' acts of bribery overseas. Regards -- Pete from DC.

Regular readers will know that when Pete from DC speaks, we listen. And sure enough, Pete (and his dad) were right. The article they sent said GRECO has just issued a report critical of French anti-corruption laws. And the GRECO report itself says, "France has severely restricted its jurisdiction and its ability to prosecute cases with an international dimension, which, given the country's importance in the international economy and the scale of many of its companies, is very regrettable."

The problem, according to GRECO, is that anti-corruption offenses committed abroad can only be investigated by French authorities at the request of the foreign prosecutors and following a complaint from the victim or his or her beneficiaries, or an official report by the authorities of the country where the offense was committed. And for good measure, French law also prohibits the prosecution of French companies for bribing French officials overseas. Taken together, GRECO says, the laws amount to "exceptional guarantees" to French companies that they won't be prosecuted for bribery abroad. As we said, it isn't pretty.

Even the normally placid GRECO is slapping its forehead over this one. It said France's legal system is fairly effective in combating corruption, but it wondered "why, despite the economic weight of France and its close historical links with certain regions of the world considered to be rife with corruption [the former French colonies in Africa], it has not yet imposed any penalties for bribing foreign public officials."

This story first appeared in the EUobserver on March 13, 2009 here. Our thanks to Pete from DC (and his father) for sending it to us.

A copy of the Third Evaluation Round / Report on France, Adopted by GRECO at its 41st Plenary Meeting (Strasbourg, 16-19 February 2009) can be downloaded here.

A key part of GRECO's report, Paragraph 90, says this:

It appears to the [GRECO Evaluation Team] that . . . France applies other limits to the application of the principle of jurisdiction based on nationality. [O]ffences committed abroad can only be prosecuted at the request of the state prosecution service and must be preceded by a complaint from the victim or his or her beneficiaries, or an official report by the authorities of the country where the offence was committed. In the absence of such a complaint or report, the French authorities are unable to prosecute the offence, and this was confirmed by the persons the team met and the legal theory supplied. The victim's complaint is unimportant in practice because according to legal theory in French law it is usually the foreign state that is concerned. An official report is therefore a precondition of criminal proceedings. The report must be issued by the foreign government, its prosecution service or an investigating judge. The police authorities have no competence in this matter. . . .

Certain persons confirmed that it is difficult to apply these provisions on jurisdiction, particularly when the perpetrator is a legal person. As indicated earlier (see paragraph 76), there have been no convictions so far for bribing foreign public officials, despite the fact that France is a major commercial and industrial power, which raises questions as to whether the obstacles in the way of recognising jurisdiction could possibly dissuade prosecutions. Legal theory has occasionally stressed that acts of corruption committed by French persons abroad cannot be prosecuted, thus offering French companies "exceptional guarantees". . .



The Case For More Compliance

The pressure these days to comply with the Foreign Corrupt Practices Act and other anti-corruption laws is coming from several directions at once. Last week we mentioned whistleblower hotlines as one example. But there are other reasons why it's harder than ever for companies to cheat and for bride-taking officials to hide their crimes. Here's a quick look at some of what's happening:

The internet. Hundreds of millions of people now have access to uncensored news, chat boards, social sites, blogs, email and short messaging, podcasts and the like. While plenty of the internet's so-called news is gossip, rumor and opinion, there are also some real scoops. Last year in China, for example, someone found a bag on the subway in Shanghai. In it were expense reports from a trip by 23 local officials who'd spent $94,000 of taxpayer money on a three-week USA "study tour. " The receipts showed that the real itinerary included Hawaiian beaches, a sex show in San Francisco, and casinos in Vegas. The finder published them anonymously, a few at a time, on the internet. As reported (here), the details spread "like wildfire across Chinese cyberspace."

The net isn't just for amateur sleuths. Powerful non-traditional news outlets have appeared online, backed by serious money and seasoned professionals. ProPublica is one of them. It's a privately funded, non-profit, independent newsroom led by Paul Steiger, the former managing editor of The Wall Street Journal. Its staff includes some of the best editors and investigative reporters in America. We've featured their work in posts about KBR's Jack Stanley (here) and Siemens (here).

A new virtual newsroom is called The Business of Bribes. It's a ten-week online project from Lowell Bergman and the Investigative Reporting Program at the UC Berkeley Graduate School of Journalism, along with PBS' Frontline. We mentioned Lowell Bergman in a 2007 post (here). He's a Pulitzer Prize-winning former producer of CBS' 60 Minutes. His new online project aims to go deeper into the investigation of international bribery -- how corrupt payments are hidden from sight, how public graft helps destabilize the developing world, and what the U.S. and other countries are doing to combat global corruption.

NGOs and public interest groups. They're able to exert enormous pressure on corporations and governments to be more accountable. Transparency International created the annual Corruption Perception Index, a handy measure of how well countries are doing in the fight against sleaze. You see the CPI everywhere now, and TI's message about it is always clear. Here, for example, is what TI said about crooked courts:

It is difficult to overstate the negative impact of a corrupt judiciary: it erodes the ability of the international community to tackle transnational crime and terrorism; it diminishes trade, economic growth and human development; and most importantly, it denies citizens impartial settlement of disputes with neighbors or the authorities. When the latter occurs, corrupt judiciaries fracture and divide communities by keeping alive the sense of injury created by unjust treatment and mediation.
Another NGO working to shine the light on corruption is Global Witness. It concentrates on graft linked to the exploitation of natural resources. In 2003, it was co-nominated for the Nobel Peace Prize for its work on conflict diamonds. Its latest report, Undue Diligence, names some major banks that it says have been complicit with corrupt regimes (Citigroup, Barclays, HSBC, Deutsche Bank). This is from the introduction of the 116-page report:
Now we are going to go on a journey, to the oil-producing countries of the Gulf of Guinea as well as to Central Asia, to witness the corrosive and devastating effects of banks being willing to do business with corrupt regimes. With each story, the effectiveness of the bank’s ethical standards, compliance with due diligence requirements, and regulatory action will be examined, as far as the available evidence permits. Many of the examples in this report raise serious questions about how well a bank really knew its customer, even if it had been able to tick the regulatory box to say it had done its due diligence; and about whether compliance with the letter of regulations that require identification of the customer is sufficient to prevent banks doing business that contributes to corruption.
Brave Officials. Perhaps inspired in part by the openness of the internet and the advocacy of the watchdog groups, younger people in developing countries are rejecting the old ways of bribery of corruption. In Nigeria, for example, Nuhu Ribadu, 49, was exposing government graft until he lost his job last year as head of the country's Economic and Financial Crimes Commission. In Kenya, John Githongo, 43, was permanent secretary for ethics and governance in the office of the president until one of his investigations took him too close to the president and his cronies. Githongo combines several modern anti-corruption roles -- journalist, founder and former head of Transparency International's Kenya office, and next-generation government official. We talked about him here. He and Ribadu are both in the U.K. now for their own safety. But it's a sure bet Africa and the world will be hearing more from them.

Add to the above the zeal of the United States, the OECD and others to enforce the anti-corruption laws, and you have a powerful case why companies everywhere should be improving their compliance efforts. Anyone who hasn't yet made it a priority to obey the letter and the spirit of anti-corruption legislation could well end up in tomorrow's spotlight -- for all the wrong reasons.


Wondering About Whistleblowers

Earlier this week, we mentioned the importance of whistleblower hotlines (here). How much are they used for bribery and corruption complaints? We haven't found any recent statistics. But we think the numbers must be significant (judging by the number of open investigations everywhere). Does that mean that while hotlines are operating, companies can't scale down compliance efforts, even during the financial crisis? After all, the complaints will keep coming and will still need to be handled, in good times and bad.

* * *
Stats about whistleblower complaints probably wouldn't reveal how the hotlines have changed company cultures. We think the biggest shift could be for overseas employees. In lots of countries outside North America and Western Europe, local employees of foreign-based multinationals have traditionally felt powerless and voiceless within their wider organizations, and they've often been treated that way too. But the hotlines have changed that. Local employees can now make themselves heard. And they have good reasons to speak out when their foreign employers pay bribes to local officials -- including national pride and protecting themselves from being implicated.

* * *
Off our topic, an excellent book is Angler: The Cheney Vice Presidency, by Barton Gellman. It's about the former veep's zen-like mastery of the Washington political process. Gellman reports for the Washington Post, which ran excerpts of the 2008 book in a series of articles here. The inside details are rich and a bit spooky. Like this:

Stealth is among Cheney's most effective tools. Man-size Mosler safes, used elsewhere in government for classified secrets, store the workaday business of the office of the vice president. Even talking points for reporters are sometimes stamped "Treated As: Top Secret/SCI." Experts in and out of government said Cheney's office appears to have invented that designation, which alludes to "sensitive compartmented information," the most closely guarded category of government secrets. By adding the words "treated as," they said, Cheney seeks to protect unclassified work as though its disclosure would cause "exceptionally grave damage to national security."


On The Subject Of Resources

We've mentioned before Dan Newcomb's FCPA Digest, calling it the most definitive publicly-available catalog of FCPA prosecutions, enforcement actions and disclosed investigations. So it's great to see the release of the March 2009 version, available here.

This year, Philip Urofsky becomes editor-in-chief. He told us last week, "In this Digest, we entirely scrapped the previous Trends & Patterns, which had largely become a statistical update, and replaced it with a more analytical piece." The T&P section has always been a favorite of ours, and this year's new-and-improved version (available here) didn't disappoint.

About the prosecution of individuals, for example, it said:

More recently, there is a strong trend of actions against individuals being brought separately or even in advance of charges against their employers and then, in all likelihood, following classic prosecutorial strategy of working up the chain of command, using the individuals to build the government’s case against their superiors and eventually the company. In Willbros, the DOJ charged four employees over a two-year period, with two pleading in previous years (Steph and Brown) and an indictment being returned against two others (Tillery and Novak) in February 2008. Finally, in May 2008, Willbros Group and Willbros International agreed to a deferred prosecution agreement. Similarly, the DOJ entered into a plea agreement with the former CEO of KBR, Stanley, in 2008, well in advance of settling the matter with Halliburton/KBR in early 2009.
And concerning disgorgement, a topic we recently talked about here, it said:
A final trend and pattern worth noting is the SEC’s continued demand for disgorgement of ill-gotten profits in cases in which only books & records violations are charged, such as in the [oil for food] cases. Whether or not a false entry in a company’s books and records (or a failure to implement adequate internal controls) truly results in increased profits is open to question. To date, however, no FCPA defendant has publicly challenged the SEC on whether disgorgement is appropriate when the sole charge is false books and records. Prior to the ABB case in 2004, the SEC had never collected disgorgement in FCPA cases; since then it has sought it in virtually every case with only a few exceptions, such as Dow Chemical, Delta & Pine Land, Lucent, and Conway. In Tyco, the SEC collected $1 in ill-gotten gains (along with $50 million in penalties related to other violations). While this is an isolated example of the SEC seeking such nominal disgorgement, the case does underscore the overall policy of levying disgorgement sanctions in nearly all cases against issuers.
We spend a lot of time in the FCPA Digest. And whenever we turn to it, we're grateful for the hard work and generosity of founding-editor Dan Newcomb, Philip Urofsky and their entire team.


Compliance Is The New Norm

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

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

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

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

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

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

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

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


A Blight On Their Lives

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

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

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

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

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

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

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

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

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

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

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

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

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


Kenya, Corruption And Global Security

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


KBR's U.K. Middlemen Indicted

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

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

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

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

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

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

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

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

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

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

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

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

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


Sounding Off About Third Party Compliance

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

Dear FCPA Blog,

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

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


Pete from DC

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

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

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

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

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



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

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

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

There are no easy answers.

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

Yours truly,

Doug Cornelius / Compliance Building

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

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


Another Look At Argo-Tech v. Yamada

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

Argo-Tech alleges, among other things, that:

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

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

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

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


The SEC Takes It Back

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

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

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

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

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

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

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

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

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

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

It's available from SSRN here.