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Cash In The Freezer

The strange case of the Honorable William J. Jefferson, Member of the United States House of Representatives, keeps getting stranger.

Rep. Jefferson (D-La.) -- a Congressman since 1991 from a district that includes New Orleans -- was indicted in June last year by a federal grand jury for violating the anti-bribery provisions of the Foreign Corrupt Practices Act. He was also charged with soliciting and accepting bribes, wire fraud, money laundering and obstruction of justice. He faces a maximum of 235 years in prison if convicted on all 16 counts.

Now he says that in spite of the indictment, he's running for re-election. "The fact that I am the target of an overly zealous prosecution has not prevented my delivering for our district and our state," he said last month. Jefferson, 61, becomes not only the first elected federal official to be indicted under the FCPA, but also the first person to run for Congress while facing criminal FCPA charges.

Prosecutors allege that in August 2005, Jefferson hid $90,000 in the freezer at his Washington home. It was part of $100,000 provided by the government's cooperating witness and intended to be used to bribe a Nigerian official. "The cash was separated into $10,000 increments, wrapped in aluminum foil, and concealed inside various frozen food containers," according to prosecutors. The purpose of the alleged bribe was to induce the Nigerian official to steer business from Nigeria's dominant government-controlled telecommunications company to firms in which Rep. Jefferson's family members had interests.

“The schemes charged are complex," the Department of Justice said in its news release, "but the essence of this case is simple: Mr. Jefferson corruptly traded on his good office, and on the Congress where he served as a Member of the United States House of Representatives, to enrich himself and his family through a pervasive pattern of fraud, bribery and corruption that spanned many years and two continents.”

Rep. Jefferson's alleged co-conspirators were Vernon L. Jackson, a Louisville, Ky., businessman, and Brett M. Pfeffer, a former Jefferson congressional staff member. Jackson was sentenced to 87 months in prison after pleading guilty to conspiracy to commit bribery and paying bribes to a public official. Pfeffer was sentenced to 96 months in prison after pleading guilty to conspiracy to commit bribery and aiding and abetting the solicitation of bribes by a member of Congress.

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

A conviction would bring a tragic end to Rep. Jefferson's amazing career. His official bio says he's the first African-American elected to Congress from his native Louisiana since Reconstruction. He graduated from Southern University A&M College and Harvard Law School, and in February of 1996 he received his Master of Laws in Taxation from Georgetown University, "making him only the second Member of Congress to do so while serving in the U.S. House of Representatives." As a State Senator, his bio says, he was "twice named 'Legislator of the Year' by the prestigious Alliance for Good Government."

View the DOJ's June 4, 2007 news release here.



Lights Out On Another Week

Fridays are a mellow and reflective time here at the FCPA Blog. Feet on the desk, head tilted back, wondering what we'll eat over the weekend since the spouse took eggs benedict off our menu.

So we were thinking -- were we too hard on the Justice Department this week? The DOJ appeared in a couple of posts that were a bit off topic, prompting a friend to ask, "Does the FCPA Blog have an opinion about everything or is it just a busy body?" For the record, we admire and respect most of what happens at the DOJ. We appreciate the public service its people perform and our hats are off to them. But they're at the center of all FCPA criminal enforcement and, don't forget, we're all lawyers around here. So we're bound to shower them with attention -- if not always affection.

* * *

A few days ago the folks at the Economist Intelligence Unit, whose logo we're exploiting today, asked us to speak at their September '08 FCPA Conference in New York City. The St. Regis Hotel is a great venue and two of the speakers among many are Mark Mershon, the assistant DIC of the FBI's New York regional office, and Katheryn Nickerson, a senior lawyer at the Commerce Department, whom we've quoted here. They'll have perspectives on the FCPA that'll be different and worth hearing. Our other job, though, means we don't always have tight control over our schedule -- meaning we don't really know where we'll be tomorrow -- so we haven't committed yet to being in New York in September (our favorite month in the city). But we're working on it.

* * *

On Wednesday this week we talked about Halliburton, Expro and Umbrellastream (makes you think of Mary Poppins, doesn't it?). If you haven't read about the DOJ's FCPA Opinion Procedure Release 08-02, try to make some time for it. It's a genuine piece of FCPA history -- the first time on record that an attempted hostile takeover has intersected with the FCPA's compliance requirements. The Release shows some of the enormous influence the FCPA is having on American business, and on companies abroad. It also shows how much involvement our friends at the DOJ can have in an organization's life on questions of compliance. Lawyers, investment bankers, pundits, professors and various experts are going to be talking about this Release (and trying to live with it) for decades.

Well, it'll soon be time to turn the lights off around here. Another week gone by. We don't suppose there's a low-fat, cholesterol-free, no-sodium, high-fiber, nutrient-dense version of eggs benedict on the market yet? Probably not.



The DOJ's Slaughter Of Hope

The Justice Department broke civil service laws and the country's heart by "deselecting" qualified young applicants linked to Democrats and liberal groups ("weed out the wackos and wack jobs"). It's the saddest news we've heard from the District in a long time -- maybe since the plumbers taped the door locks at the Watergate Complex.

No civic betrayals cut deeper than those by men and women sworn to protect us, but who instead abuse their power in order to mow down political opponents. Our real enemies, they forget, are those who confuse the loyal opposition with enemies of the State.

The temptations of power should never be underestimated. We can all fall from grace at any time -- but for grace itself. Still, some news weighs on the spirit. As Ellen Podgor wrote in her blog, "It is pretty frightening to think that the department that will monitor elections has been compromised and continues to be compromised by political hiring practices."

She's right. Who's guarding our liberties?


Fortunately the news from Washington can't keep the sun from rising. This morning the sky was beautiful and our breakfast fruit hit the spot. Then it was time for some chores so we turned to the screen. First stop -- the latest FCPA enforcement news from the DOJ's criminal division.

But the usual businesslike homepage was missing --replaced by a cheerful greeting and more:

Thank you for visiting the U.S. Department of Justice!

You have been randomly selected to take part in a survey, presented by Foresee Results, to let us know what we are doing well and where we need to do better.

The coincidence was jolting. The DOJ wanted our opinion about its performance. We couldn't wait.
Once you leave this site, the survey will appear in this window. In the meantime, please ignore this window and continue browsing our site in the other window.
Maybe there were too many windows. Maybe we closed something we shouldn't have. Anyway, the survey never appeared and we lost our chance.

There was, however, one small dialogue box still open:

ForeSee may disclose personal information in response to a judicial or other government subpoena, warrant or order.
Which reminded us again: Who is guarding our liberties?



Halliburton, Expro and Umbrellastream Star In Opinion Procedure Release 08-02

Halliburton's messy battle to acquire British firm Expro via a hostile takeover has been big news in the global business press, with Halliburton up one day and down the next, but fighting on and on. Now, though, the story isn't just big news in the business press. It's big news too in the FCPA press (whatever that is). So what's going on?

Halliburton is the Requestor in the Justice Department's latest Foreign Corrupt Practices Act Opinion Procedure Release No.: 08-02 (June 13, 2008). It's trying to acquire all the shares of the Target, which isn't identified in the Release but is Expro International Group PLC, a U.K.-based company traded on the London Stock Exchange. Expro -- with about 4,000 employees throughout the world -- provides well-flow management for the oil and gas industry.

Competition for Expro comes from a group of foreign investors. In the Release they're called the Competitor but in real life they're known more picturesquely as Umbrellastream.

Halliburton's problem is that it can't do much due diligence because of "U.K. legal restrictions inherent in the bidding process for a public U.K. company." So for FCPA compliance, it's buying a black box. And that's why it's asking the DOJ what will happen if Expro has been paying bribes to foreign officials to obtain business.

Will Halliburton be held responsible for Expro's past FCPA offenses, if there are any, or for violations after the acquisition but before Halliburton has a chance to clean up any compliance problems? Halliburton is worried -- as it should be.

Like most oil and gas services firms, Expro operates in high-risk countries and deals directly with government-owned customers. Halliburton may already have seen evidence of non-compliance but can't say anything now because it signed a non-disclosure agreement with Expro. (In a footnote, the DOJ warns would-be requestors not to limit their ability to put all the facts in an Opinion Request by signing non-disclosure agreements. But it lets Halliburton get away with it this time.)

While Halliburton would like to condition its bid on successful FCPA and anti-corruption due diligence and pre-closing remediation, it can't do that. Umbrellastream's bid is unconditional and unless Halliburton's is the same, it will automatically lose.

The DOJ says it's OK to proceed. But to get the green light, Halliburton has promised to pay a very high price. And that "price" is what makes Release 08-02 unique among all Releases.

If Halliburton wins Expro, it must meet with the DOJ right away and disclose information it has that "suggests that any FCPA, corruption, or related internal controls or accounting issues exist or existed at the Target." That's the kick-off.

Ten days later it will give the DOJ . . .

. . . a comprehensive, risk-based FCPA and anti-corruption due diligence work plan which will address, among other things, the use of agents and other third parties; commercial dealings with state-owned customers; any joint venture, teaming or consortium arrangements; customs and immigration matters; tax matters; and any government licenses and permits. Such work plan will organize the due diligence effort into high risk, medium risk, and lowest risk elements.
Then there are milestones at 90, 120 and 180 days, by when Halliburton must have finished the three "risk" phases of due diligence, all the while providing periodic reports to the DOJ.

Meanwhile Halliburton will impose on Expro its Code of Business Conduct and specific FCPA and anti-corruption policies and procedures; it will give all employees compliance training; fire agents and suppliers who aren't being retained; and require agents and others being retained to sign new contracts that include FCPA and anti-corruption representations and warranties.

In another feature new to Opinion Procedure Releases, Halliburton represents that after the closing it won't divest any of Expro if the DOJ is investigating Expro or "any of its officers, directors, employees, agents, subsidiaries, and affiliates." And no matter what, Expro and all its subsidiaries and affiliates will "retain their liability for past and future violations of the FCPA, if any."

That's not an express waiver of any and all available defenses, but it's close. And anyway, Halliburton will already have given the DOJ all the evidence of Expro's FCPA violations, which the DOJ would then be able to use to charge Expro, along with its aforesaid "officers, directors, employees, agents, subsidiaries, and affiliates."

No wonder the DOJ says that giving Halliburton the go-ahead to buy Expro (and expose everyone there to criminal enforcement action after the closing) "advances the interests of the Department in enforcing the FCPA . . . ."

People from Expro reading Release 08-02 must be seriously cheesed off. Is Halliburton promising to deliver their heads to the DOJ on a platter if they've ever done anything that would or could violate the FCPA? Well . . . . So will it surprise anyone if Expro's leaders aren't overjoyed by Halliburton's bid?

View DOJ Opinion Procedure Release 08-02 here.


As a postscript, here are excerpts from one of many current press reports about Halliburton's tortuous efforts to snare Expro. This is from the Financial Times :

UK court delays Expro sale to Umbrellastream

By Michael Kavanagh and Megan Murphy in London

Published: June 23 2008 20:32 | Last updated: June 23 2008 22:41

Halliburton locked horns with the Takeover Panel on Monday over its failed attempt to kick-start an auction for Expro International, as the High Court postponed its approval of the sale of the British oil services company to a rival bidder.

During a dramatic hearing in London, Halliburton and Mason Capital, a US hedge fund that holds a 7.1 per cent stake in Expro, won a two-day delay on efforts to gain a court sanction on the sale of the UK company to the Candover-led consortium Umbrellastream for £1.8bn. . . .

The High Court’s decision to postpone the hearing is the latest twist in a fiercely contested takeover battle. . . .

Expro says that Halliburton’s bid, while 10p higher, was inadequate given the delays and risks associated with that deal. . . .


Coercive, Abusive and Unconstitutional --- For Starters

The rule of law in the United States got some badly needed help last week from an unlikely source -- 33 former United States Attorneys. A letter they sent to Senator Patrick Leahy (D.,VT), chair of the Judiciary Committee, asked him to support the proposed Attorney-Client Privilege Protection Act known as S. 186. The bill's purpose is to stop the Justice Department's practice of pressuring companies to waive the attorney-client privilege.

Forcibly stripping legal entities of constitutional rights by threatening indictment or harsher punishment is a brutal practice. But it's the companies' flesh-and-blood employees who suffer most. Once an organization on its way to a plea deal or deferred-prosecution agreement waives the privilege, statements taken by the company's counsel during the internal investigation are handed over to prosecutors. That's done without the employees' consent, yet they face criminal prosecution and potential jail time for what they've said.

When they gave their statements, the employees didn't know all the relevant facts, couldn't possibly understand the implications of their words, had no idea the interviews would ever end up outside the company, never had help from lawyers and never even suspected they might need their own counsel. But according to the former USAs, several recent cases show that the employees "can be prosecuted for making false statements to the government, even though the statements were made only to company counsel."

A lesser but still important consequence of the DOJ's tactics is the undermining of compliance, the ex-prosecutors say. Employees who learn not to trust the attorney-client privilege will say less to company lawyers. Without a steady internal flow of honest and open dialogue, how can companies ever develop an effective compliance program? And when companies operate under deferred-prosecution agreements, the privilege is gone for two or three years. During that time everything said to in-house lawyers is open to the DOJ or SEC. So of course the lawyers aren't useful to employees as a compliance resource.

The New York Times reported that before the former U.S. Attorneys took up the cause, the DOJ's pressure tactics had come under "withering attack from lawyers, senior former Justice Department officials and federal judges, who criticized them as coercive, abusive and unconstitutional." There's more alarm today as the DOJ's modus operandi is adopted by more of the federal government -- now including the SEC, the Federal Communications Commission, and the Department of Housing and Urban Development, among others.

We close with thanks to the 33 former U.S. Attorneys. They must know better than most how the DOJ's current tactics are harming our companies, our citizens and our ideals. S. 186 would put a stop to it throughout the government. Let's hope Senator Leahy and his colleagues are listening.

The June 20, 2008 letter from the 33 former United States Attorneys to Senator Leahy can be found here courtesy of the Blog of the Legal Times.



Cases We'll Never Report

Not all Foreign Corrupt Practices Act violations make the news. Here are three reasons why:

Reason #1. Ignorance. Some companies don't discover their own FCPA problems. It sounds improbable, but it happens. The usual scenario is this: One or more employees in a foreign outpost draw cash by manipulating the company's accounts-payable or expense-reporting system. They use the money to bribe government officials to obtain business for the company. Sometimes it's one employee in a sales job or government-relations role, or a small group whose pay and bonuses depend on the office's performance. The expatriate supervisor, if there is one, is crooked or clueless, so the phony accounting and illegal payments remain a local secret.

Reason #2. Silence. When organizations learn of their own FCPA problems, they have a choice -- to self-disclose or keep quiet. Public companies ought to be disclosing just about everything these days. Sarbanes Oxley targets illegal conduct anywhere, including overseas bribery. So the number of issuers choosing not to report potential FCPA offenses -- both antibribery and books and records violations -- should be small. Privately-held companies, however, are more likely to stay silent. That's most common, we suspect, where founding-family members are still in charge. Sadly for them, someone in the conspiracy of silence usually plays ball with the DOJ to save their own skin. The former insiders -- now known as Co-operating Witnesses -- can drive a stake through the heart of the organization.

Reason #3. Compliance. How many potential FCPA violations are discovered, self-disclosed to the DOJ or SEC, but never publicized or prosecuted? Nobody on the outside knows the numbers. But here's what can happen. A compliance-minded organization reports its own potential violation to the feds. At the same time, it submits evidence demonstrating that:

(1) It had an effective compliance program before the problem occurred;

(2) There are no prior offenses;

(3) Although the compliance program didn't prevent the conduct this time, it detected it quickly;

(4) This was an isolated event -- a rogue employee broke the rules for personal gain and not for the company's sake;

(5) The culprit has already been fired and the company is suing for restitution of misused corporate funds;

(6) Supervision over the problem office has been reorganized and managers replaced;

(7) The company's compliance program has been reviewed and tweaked to prevent similar incidents from happening;

(8) The company reported the problem to authorities in the U.S. and the host country right away, and is eager to help them with their own investigations; and

(9) Management's commitment to compliance has never been stronger.

A year goes by, maybe more. One day the company's lawyers receive a call from the DOJ. It's off the record. "We're satisfied justice has been served," the caller says. "Case closed."



Putting Compliance Programs To The Test

How do you know if your company has an effective compliance program? The answer is crucial. If rogue employees violate the Foreign Corrupt Practices Act, having an effective compliance program becomes a factor in whether the company will face a criminal enforcement action and, if it does, whether it will be rewarded with reduced penalties. So what does an effective compliance program look like?

The FCPA doesn't answer the question, and the Federal Sentencing Guidelines are short on details. That's because all organizations have a different structure and no two operate the same way. So each one needs its own tailor-made program. The Federal Sentencing Guidelines describe hallmarks of an effective compliance program and what it should accomplish. And some features show up in FCPA Opinion Procedure Releases and deferred prosecution agreements. But the burden is always on each organization to figure out for itself how best to prevent, detect and respond to FCPA offenses.

So who finally decides what an effective compliance program looks like? Well, for better or worse, that's left to the people at the Justice Department. They decide which organizations will face FCPA criminal enforcement actions, and part of their decision should involve evaluating whether the company has an effective compliance program. And how do prosecutors do that? They look to the U.S. Attorneys' Criminal Resource Manual.

Relevant sections from the CRM appear between the lines below, with footnotes omitted and a couple of new paragraph breaks inserted, but otherwise unchanged. The provocative narrative is best read without our editorial filter -- at least for anyone curious to know how their own compliance program might someday be judged.

The DOJ's test of effectiveness, by the way, is consistent with the you'll-know-it-when-you-see-it-approach in the Federal Sentencing Guidelines. And it comes with an even clearer message of encouragement and warning: honest compliance, even if it doesn't prevent every FCPA violation, will be rewarded, while phony gestures will only multiply everyone's troubles.

Here's what the DOJ has to say to its U.S. Attorneys:


While the Department [of Justice] recognizes that no compliance program can ever prevent all criminal activity by a corporation's employees, the critical factors in evaluating any program are whether the program is adequately designed for maximum effectiveness in preventing and detecting wrongdoing by employees and whether corporate management is enforcing the program or is tacitly encouraging or pressuring employees to engage in misconduct to achieve business objectives.

The Department has no formal guidelines for corporate compliance programs. The fundamental questions any prosecutor should ask are: "Is the corporation's compliance program well designed?" and "Does the corporation's compliance program work?" In answering these questions, the prosecutor should consider the comprehensiveness of the compliance program; the extent and pervasiveness of the criminal conduct; the number and level of the corporate employees involved; the seriousness, duration, and frequency of the misconduct; and any remedial actions taken by the corporation, including restitution, disciplinary action, and revisions to corporate compliance programs. Prosecutors should also consider the promptness of any disclosure of wrongdoing to the government and the corporation's cooperation in the government's investigation.

In evaluating compliance programs, prosecutors may consider whether the corporation has established corporate governance mechanisms that can effectively detect and prevent misconduct. For example, do the corporation's directors exercise independent review over proposed corporate actions rather than unquestioningly ratifying officers' recommendations; are the directors provided with information sufficient to enable the exercise of independent judgment, are internal audit functions conducted at a level sufficient to ensure their independence and accuracy and have the directors established an information and reporting system in the organization reasonably designed to provide management and the board of directors with timely and accurate information sufficient to allow them to reach an informed decision regarding the organization's compliance with the law. In re: Caremark, 698 A.2d 959 (Del. Ct. Chan. 1996).

Prosecutors should therefore attempt to determine whether a corporation's compliance program is merely a "paper program" or whether it was designed and implemented in an effective manner. In addition, prosecutors should determine whether the corporation has provided for a staff sufficient to audit, document, analyze, and utilize the results of the corporation's compliance efforts. In addition, prosecutors should determine whether the corporation's employees are adequately informed about the compliance program and are convinced of the corporation's commitment to it. This will enable the prosecutor to make an informed decision as to whether the corporation has adopted and implemented a truly effective compliance program that, when consistent with other federal law enforcement policies, may result in a decision to charge only the corporation's employees and agents.

Compliance programs should be designed to detect the particular types of misconduct most likely to occur in a particular corporation's line of business. Many corporations operate in complex regulatory environments outside the normal experience of criminal prosecutors. Accordingly, prosecutors should consult with relevant federal and state agencies with the expertise to evaluate the adequacy of a program's design and implementation. . . .


View the United States Attorneys' Criminal Resource Manual, Title 9, Section 162 (Federal Prosecution of Business Organizations) here.


Moscow Debates Reforms, Sort Of

The biggest public corruption story on the planet may be Russia -- the entire country, where red tape and bribery are scaring away foreign investors and wearing down ordinary citizens. Reform can't come soon enough, so we're glad that President Dmitry Medvedev is at least talking about the problem.

The numbers tell the story. Russia's 2006 rank on Transparency International's Corruption Perception Index was a lowly 121st -- tied with Benin, Gambia, Guyana, Honduras, Nepal, the Philippines, Rwanda and Swaziland. Then things got even worse. In 2007, Russia fell to 143rd on the CPI -- tied with Gambia (again), Indonesia and Togo.

A thoughtful correspondent in Russia sent us the following story from the Moscow Times (here). The article signals that public corruption is finally on the Kremlin's agenda, which is good, but also that real reform may be a long way off. That may account for the gallows humor in the story -- a great Russian trait. (A government translator in Moscow once told us that the saying, "The spirit is willing but the flesh is weak" means in Russian, "We have plenty of vodka but we're out of potatoes.") Here's the article:

Bill Floated to Ban Gifts to Bureaucrats as Bribes.

17 June 2008By Francesca Mereu / Staff Writer

Bureaucrats face a ban on accepting small gifts under a bill being floated by law enforcement officials.

President Dmitry Medvedev has said the fight against corruption is a priority, and the government is under pressure to find ways to root it out.

Under the Criminal Code, any money or gift given to a bureaucrat in the performance of his or her duties constitutes a bribe, but Article 575 of the Civil Code allows for the acceptance of gifts worth up to 11,500 rubles ($485).

An Investigative Committee official said Sunday that the "legal contradiction" created by the articles hindered investigators in their attempts to fight corruption, Interfax reported. The Investigative Committee is under the Prosecutor General's Office.

"In legal practice, and in particular when you investigate a crime linked to corruption, you often run into problems linked to the interpretation of these," the unidentified official said.

The lack of a clear legal definition of what constitutes corruption poses one of the most difficult obstacles when trying to battle the problem.

The initiative by the Investigative Committee, which is the main body responsible for battling corruption, is an attempt to downplay the magnitude of the problem, said Kirill Kabanov, director of the National Anti-Corruption Committee, an advocacy group.

"It seems that the $300 billion market for corruption in our country consists of gifts," Kabanov said, sarcastically.

"This is to soften the problem in the eyes of the population," he said. "It is like treating a very ill patient with iodine."

Calls to the Investigative Committee went unanswered Monday.

A final note. Our correspondent wondered how the "legal contradiction" noted in the article between the Russian civil code and criminal law would fit into the Foreign Corrupt Practices Act's affirmative defense that allows payments (or gifts) to foreign officials, if permitted under the written laws of the host country. Good question. For now, though, as Winston Churchill said about Russia itself, the answer remains a riddle, wrapped in a mystery, inside an enigma. Which means in Russian, don't bet the lunch money on the defense just yet.


Tackling Corruption, Transforming Lives, Part II

The report published by the United Nations Development Program about public bribery in Asia that we talked about yesterday, Tackling Corruption, Transforming Lives, examines corruption in utilities, the courts, police departments, land offices and hospitals, among others. The impact of graft on the development and delivery of water supplies, for example, is astounding. The U.N. believes that eliminating corruption would help conserve as much as 70% of the world's water resources. The World Bank says that globally up to 40% of water-sector finances are lost through "leakage" -- by dishonest and corrupt practices.

The U.N.'s research into water supplies revealed the following areas of risk and damage:

Inefficiency. Corruption seriously undermines the performance and effectiveness of both public and private sectors, discouraging the investment urgently needed to improve supplies. In one major city in Asia the public utility allegedly held back on improving water supplies in the areas supplied through kiosks or hydrants, for fear of losing the side payments that the hydrant operators paid to utility officials. The operators of water tankers are often controlled by powerful mafias that capitalize on inept water distribution systems and have effectively privatized the supply: after paying corrupt officials to turn a blind eye, they sell the water to hotels and other businesses.

Warped distribution. Corruption skews decisions on who is likely to get services. Residential suburbs, for example, can be left without water because the supply has been siphoned off to service the farm of a prominent politician.

Capital-intensive investment. Corruption also biases investment towards large new infrastructure projects and away from smaller scale but less lucrative investment in the rehabilitation of systems or in improving operation and maintenance.

Weak finances. Corruption undermines the long-term financial stability of utilities and thus their ability to offer reliable services to a wider population, while also diverting government revenues that could be used to improve water supply and other services.

Environmental damage. Corruption constrains overall water-resource management by encouraging inefficient use of freshwater or over-extraction of ground and surface water.

Public health. Reducing supplies of drinking water directly undermines public health, and more so for the poor. Corruption in utility services can also undermine standards of health. In the Republic of Korea, for example, in order to avoid paying the costs of reconstruction of underground water sites, water quality testers were bribed to provide fake test results. Subsequently 1,753 water sites were found to have contaminated water, with high levels of nitrates, which can cause a condition known as methemoglobinemia or ‘blue baby’ disease.


It's not all doom and gloom though. The U.N. report notes that the antidote to a lot of public corruption, petty and grand, is simple: cut the red tape and increase transparency.

That's what the Hyderabad Metropolitan Water Supply and Sewerage Board did in the 1990s. It consolidated applications for new connections – previously a major source of corruption. Rather than filing an application in their local district office, the report says, customers now go to the Board’s headquarters to a "Single Window Cell" which manages all the related activities, such as obtaining a road-cutting permit or land surveying. The Board publishes the fee schedule for various plot and connection sizes in its office and in the press, thus reducing the opportunities for staff to levy excess charges. The process, the report says, has been designed as a one-visit operation so the customer rarely leaves without an "application token number," the equivalent of a receipt for acceptance of the application.

In Korea, too, the Seoul Metropolitan Government is using transparency to fight corruption. A public, online application system for licenses and other permits was launched in 1999. Called OPEN -- the Online Procedure Enhancement for Civil Applications -- the system covers 54 common procedures. By March 2001, about 1.5 million people had visited the website and there had been 39,000 civil applications. The site now attracts some 2,500 visitors a day. The U.N. report says the OPEN system has made the administra­tion more transparent because officials responsible for corruption-prone areas, such as permit or approval procedures, now have to upload reports and documents to enable citizens to monitor the progress of their applications.

Support for similar programs around the world would be a nice adjunct to corporate compliance programs among the companies that set the standards for global best practices.

View Seoul's OPEN system here.


Sweating The Small  Stuff

Public corruption isn't a victimless crime, and whatever helps dispel the false notion that it is, is welcome in this space. Which brings us to . . . the United Nations. We haven't spent much time praising that institution. In fact, we've never done it. But here goes.

The U.N.'s just-published Asia Pacific Human Development Report, Tackling Corruption, Transforming Lives, tells the story of public corruption in Asia. So what's new? This time the story is told not from the perspective of bribe payers or bribe takers, but from the victims themselves. The report isn't easy to read, not because of dry "technical" language or fuzzy jargon. There's none of that. In fact, the language is surprisingly simple. No, it's hard to read because the truth about public corruption isn't fun to look at.

For example, the 248-page report describes a survey from Bangladesh, India, Nepal, Pakistan and Sri Lanka. It found that health workers often demanded bribes for admission to the hospital, to provide a bed, or to give subsidized medications. According to the report,

Among people using hospitals in small cities the proportion paying bribes rose to almost 90 per cent. In maternity hospitals mothers even had to bribe the nurses in order to see their babies.
"Invisible taxes" are everywhere in the poorest countries. In Bangladesh, a study of 3,000 households showed that 97% that bought land had to pay bribes for registration, 88% of the households who changed their land ownership within the family had to pay bribes, and 83% of landowning households had to pay bribes for land surveys.

The most common victims? Poor people. Police corruption, for example, hits those on the bottom rung hardest because they lack the influence needed to defend themselves. Amounts extorted by police can be relatively small but may be a big part of the victims' income. Police sometimes harass whole neighborhoods, the report says, creating "an atmosphere of fear and apprehension." In a riverside slum settlement in Northern India poor families described how police were fleecing them:

They have made our lives miserable. We do not know when we will be thrown out of our homes. They land up any time and demand money. They threaten us that if we do not pay, they would throw us out of our homes. . . . Last week my clothes were torn apart after my husband could not pay the money demanded. We were allowed to go free only after we sold our rickshaw and paid the money.
The U.N. reporters note that most studies about petty corruption don't include any analysis of the impact on ordinary citizens. Why not? Probably because the amounts involved are relatively small, it's hard to measure what's happening, and also because the victims have little chance to complain. But the U.N., to its credit, went out and found people willing to talk.

In Indonesia, for example, one study involved ride-alongs with truckers on long-distance journeys that passed through some of the country's infamous police "checkpoints." Bribe expenses at the checkpoints constituted around 13% of the transportation cost which, though less than the fuel cost, amounted to more than wages. A report from Bangladesh found that a cattle trader had to pay extortion money at eight different places along the way to the market, both to the police and organized criminals - which added as much as 20% to the selling price.

Who would knowingly support that sort of exploitation? It's unthinkable, of course. But here's the problem. When well-known and respected multinational companies come to town and start greasing the palms of the local cops, health workers, land office-officials and postal workers, what's the message? That the rich and powerful think petty bribery is OK? That it's some kind of global best practice? And if brand-name companies are willing to make the small payments, how can local citizens, especially the poor and powerless, ever hope to change things?

Fortunately, a lot of compliance-minded companies now ban all bribes, including facilitating payments. That's great news. They've decided that facilitating payments are too hard to control and account for; that the payments might violate local laws and have to be publicly disclosed back home; and that small bribes overseas might promote a culture of corruption and spoil the company's effective compliance program. So there's too much risk with facilitating payments, even if the Foreign Corrupt Practices Act allows them.

Other companies, though, are sticking with the dangerous idea that small-time bribery is just "cultural," that it's business-as-usual in various countries and doesn't do any real harm. That sort of talk comes from business people and professionals who wouldn't dream of breaking a law back home. But on the road they turn into serial bribers -- under the banner of facilitating payments. It's true, after all, that the Foreign Corrupt Practices Act allows bribes for routine governmental action -- permits and licenses, visas and work orders, police protection, mail pick-up and inspections, phone service, power and water supply, cargo loading and unloading, protecting goods from spoilage, or any "actions of a similar nature." Bribes for those purposes, the FCPA says, are OK. But should any corporate citizen endorse bribery anywhere, whether or not the FCPA allows it?

That question goes beyond legal compliance. It's part of the "soft" subject of ethics, which is never easy to talk about in the business world. Ethics can't be measured, and measuring things -- costs, profits, losses -- is what business is mostly about. That's why it's important sometimes to hear what those outside the business world are saying. The U.N.'s Asia Pacific Human Development Report is full of those voices, and they're worth listening to.


Industry-Wide Investigation Snares Wright Medical

This week, Wright Medical Group became the latest orthopedic device maker to disclose a government investigation into its overseas sales practices. The company's Form 8-K said its principal operating subsidiary, Wright Medical Technology, Inc., received notice from the Securities and Exchange Commission of an informal investigation regarding potential violations of the Foreign Corrupt Practices Act. Wright said, "We understand that several other medical device companies have received similar letters. We intend to fully cooperate with this informal investigation."

Tennessee-based Wright designs, manufactures and distributes orthopaedic implants and instrumentation worldwide. Its products include large joint implants for the hip and knee; extremity implants for the shoulder, elbow, hand, wrist and foot; and biologic products, including bone graft substitutes.

In their investigation of the orthopedic implant industry, the SEC and Justice Department want to know whether the companies bribed doctors employed by government-owned hospitals overseas to use their products. Biomet Inc., Stryker Corp., Zimmer Holdings Inc., Smith & Nephew plc and Medtronic Inc. disclosed similar FCPA investigations during 2007, after they settled U.S. domestic bribery cases. They've denied violating any foreign laws.

We've wondered if one or more of the device makers may be providing industry-wide information to the authorities. In its disclosure last October, Medtronic said its letter from the SEC about the investigation "notes that the Company is a significant participant in the medical device industry, and seeks any information concerning certain types of payments made directly or indirectly to government-employed doctors."

Industry-wide investigations are a new development for the FCPA. There hadn't been any until 2007, when it emerged that the DOJ and SEC were examining customs clearance and permitting practices across the oil and gas services sector, and the overseas sales practices of the leading orthopedic device makers. Simultaneous investigations create their own dynamics, and we've asked before whether companies that become potential targets might bargain for leniency by implicating their peers. We don't know if that's happened yet. But there are well-known rewards for companies that are the first to talk about their co-conspirators in price-fixing cases, for example, so it's certainly possible that we'll see similar behavior in FCPA investigations.

Wright Medical Group, Inc. trades on NASDAQ under the symbol WMGI.

View Wright's June 10, 2008 Form 8-K here.

View prior posts about medical device makers here.


It's A Wonderful Life, Really

What's a typical workday at the FCPA Blog look like? You know the routine. Up by noon, pop over to the neighborhood brasserie for a crème bouffée or two (pictured left), then feed the pigeons and goldfish. After a nap we're ready to check the mail. . . . . OK, that's not quite our typical day. But it's true that the mailbag is always a highlight. Here, for example, is a verbatim exchange from yesterday. It reveals, we think, some familiar hallmarks of the decent but over-worked compliance community (which is why we've changed the names):

Dear Sir -

Thank you so much for your FCPA Blog - it is absolutely the best. I am a lawyer for an oilfield services company.

Now my confession - Your "Bribery Abroad" book is fantastic because it is easy to read and very interesting - not the usual dry, academic writing. Unfortunately for me, I discovered your book the day before a training session to be conducted by my group in the UK, and I made 100 copies of it. I apologize, but I felt it was an extremely important tool for the training.

May I please pay you the 12.95 for each of the 100 books I printed and have a license to cover those copies?

In addition, I need to order quite a few more.

Thanks again for your extremely valuable service in this very difficult area. I look forward to hearing from you soon.


Sally Anderson
Worldwide Oilfield Services Co.

And our reply . . . .

Dear Sally,

Thanks for your kind note and your confession, both of which are good news.

Since the blog and the book are intended to help people comply with the FCPA, and that was your purpose too, how about this as a solution.

I grant you a license for the 100 copies already made; in return, you simply agree to place traditional orders for enough printed books to meet your future needs (and perhaps to keep a few extra copies on hand just in case).

If that works for you, it will also work for me.

Thanks again.

All the best,

The FCPA Blog