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Richard L. Cassin Publisher and Editor

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Thomas Fox Contributing Editor

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Bill Waite Contributing Editor

Shruti J. Shah Contributing Editor

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Richard Bistrong Contributing Editor 

Eric Carlson Contributing Editor

Bill Steinman Contributing Editor

Aarti Maharaj Contributing Editor


FCPA Blog Daily News

Thursday
Sep202007

Best Intentions: The Problem of Promotional Expenses

The affirmative defense for promotional expenses has always been a riddle, which explains why it appears so often among the Justice Department's Opinion Procedure Releases, including both Releases so far this year. Congress added it to the U.S. Foreign Corrupt Practices Act in 1988, to allow businesses to pay travel expenses of foreign officials. The expenses, the law says, must be “reasonable and bona fide” and related directly to “the promotion, demonstration, or explanation of products or services." 15 U.S.C. §§ 78dd-1(c)(2)(A) and 78dd-2(c)(2)(A).

That sounds simple enough, but there's a problem. If an expenditure is reasonable and bona fide, it is not a corrupt payment. If it is not a corrupt payment, it is not prohibited by the FCPA. In that case, what's the purpose of the affirmative defense? Congress itself created this conundrum with its eyes wide open. The notes to the 1988 House and Senate Conference agreement say in relation to promotional expenses: “If a payment or gift is corruptly made, in return for an official act or omission, then it cannot be a bona fide, good-faith payment, and this defense would not be available.” In other words, if the payment violates the FCPA to begin with, this affirmative defense doesn’t work, period.

So when is it safe to pay for a foreign official’s trip? Only when there is no corrupt intent -- that is, no expectation that in return for the trip, the foreign official will misuse his or her authority to obtain or retain business or gain an unfair advantage for any party. To be practical, proving the absence of a corrupt intent in this scenario is difficult. Why invite foreign officials for a visit unless they have some connection with the company's business in the first place? But if they have the power to help the business, inviting them on the trip implies an expectation that they will use their power corruptly. That implication has to be refuted by the weight of the evidence.

That's why prudent companies and their lawyers produce long lists of facts showing the host's innocent state of mind concerning the visit. No role in selecting the guests. No company-related new matters in their ministry. No advance funds or reimbursements in cash. No expenses for spouses, family, or other guests. No funding or organizing of any entertainment or leisure activities. No side trips. No stipends or spending money. No souvenirs unless they carry the host’s name and/or logo and are of nominal value, e.g., shirts or tote bags. It all sounds less like hospitality and more like a stay in the hospital.

True, the affirmative defense for promotional expenses was never intended to be a blank check to buy influence from foreign officials. But at least it should give Americans a chance to invite guests home, show them some basic hospitality, and brag a bit about the goods and services on offer. That cannot happen, however, as long as the law is tied up in knots and American businesses are caught in the tangle. The question is whether Congress, the DOJ or the courts will ever come to the rescue?

View Other Posts Dealing With Promotional Expenses Here.

Thursday
Sep202007

Panalpina Suspends Services For Oil and Gas-Related Customers in Nigeria

Panalpina's cooperation with the U.S. Department of Justice appears to be in full swing. For starters, it is exiting the Nigeria logistics and freight forwarding market for all oil and gas services customers, at least a dozen of which have been contacted by the DOJ about Panalpina's customs clearance practices in Nigeria and other countries.

Panalpina confirmed that its U.S. subsidiary has been instructed to "produce documents and other information related to its business, its services to certain customers and its services in Nigeria, Kazakhstan and Saudi Arabia." It also said its internal investigation into corrupt payments in those countries is continuing. Presumably it is sharing the results with the DOJ on a real-time basis.

Apparently echoing the U.S. Government's position on Nigeria's persistent corruption problem, Panalpina blamed the suspension of services on the "unclear and uncertain regulatory framework," which means the corrupt practices embedded in the Nigerian bureaucracy.

This turns the heat up further on Nigeria. It is facing a choice to clean up public-sector corruption or do without the services of oil and gas-related companies and others subject to the jurisdiction of the Foreign Corrupt Practices Act. In August this year, Noble Corporation said it could not obtain or renew permits for five of its seven drilling rigs operating in Nigeria, presumably because it stopped authorizing potentially corrupt payments, and may need to exit the market entirely.

View Panalpina's Announcement Here.

View Other Posts About Panalpina Here.

Sunday
Sep162007

Schnitzer’s Victory

The case was full of bad facts. For nearly ten years until late 2004, some $1.8 million in bribes went to foreign officials and private parties in South Korea and China. Officers and employees of Schnitzer Steel Industries Inc. and its Korean subsidiary, SSI International Far East Ltd., approved the bribes, then used elaborate means to fund and conceal them.

Cash, gift certificates, a Cartier watch, pens, perfume, entertainment, a golf club membership, even a condo timeshare – all these changed hands. Off-the-books bank accounts in Korea held slush funds. The bribes were falsely accounted for as “refund to customer” or “rebate to customer,” or “quality claims,” “discounts,” “credits” or “freight savings.” They were disguised as “gratuities” or “congratulations money." Some bribes were even masked as “condolence money.” The corruption was so habitual that even after it was discovered and ordered stopped, an executive approved two more bribes.

There were still more bad facts. Schnitzer had no Foreign Corrupt Practices Act compliance program of any kind – no education for employees, no training, no due diligence, no audits. In ignorance of the FCPA, senior managers emailed each other about arranging “kickbacks” and protecting the crooked recipients from legal trouble in their home countries. Schnitzer, a public company and one of America's largest recyclers of scrap metal, lacked even the basic financial controls needed to prevent or detect secret bank accounts, corrupt payments and false accounting.

Did prosecutors, as expected, seek the corporate death penalty? Not at all. In the end, Schnitzer was never charged with a crime. Its subsidiary, SSI Korea, pleaded guilty in October 2006 to violating the FCPA's anti-bribery and books and records provisions, as well as conspiracy and wire fraud. It paid a $7.5 million criminal fine. Schnitzer itself, however, escaped with a $7.7 million civil penalty and a deferred prosecution agreement, whereby it promised to keep its nose clean and take remedial actions. Thereafter, Schnitzer survived and has since flourished in the robust global steel market.

What accounts for this surprising result? For a start, Schnitzer accepted all responsibility. On first learning about the corrupt payments, the board's audit committee commissioned an aggressive internal investigation. At each stage of the investigation, Schnitzer voluntarily disclosed what it was learning to the Department of Justice and the Securities and Exchange Commission. Then, looking forward, Schnitzer set out to transform its culture. To make sure everyone inside the company and outside got the point, it replaced the chairman of the board, hired a new CEO, and brought in a fresh team of senior management.

The Department of Justice was satisfied, even impressed. “When companies voluntarily disclose FCPA violations and cooperate with Justice Department investigations, they will get a real, tangible benefit. In fact," the DOJ said, "Schnitzer Steel’s cooperation in this case was excellent and . . . the disposition announced today reflects that fact.”

The outcome was never inevitable. Like other companies facing a corruption scandal, Schnitzer had a crucial choice -- to retreat behind the corporate parapet and wait for prosecutors and public opinion to storm the gates, or to cooperate up to a point but try to keep defense options open, or to surrender peacefully, make a full confession, show a repentant spirit and seek forgiveness. By choosing the last option, the company was able to enjoy a quick rehabilitation and full restoration to corporate citizenship. Schnitzer's victory was no accident, but a product of its own decisions.

View the DOJ’s Press Release Here.

Wednesday
Sep122007

An Expenses-Paid Training Program For Foreign Officials Is OK

In its second Opinion Procedure Release of 2007, the Department of Justice again looked at promotional expenses. An affirmative defense in the U.S. Foreign Corrupt Practices Act allows payment or reimbursement of expenses of foreign officials that are directly related to “the promotion, demonstration, or explanation of products or services." 15 U.S.C. §§ 78dd-1(c)(2)(A) and 78dd-2(c)(2)(A).

The DOJ said it would take no action against a requestor proposing to cover some U.S. domestic travel and accommodation expenses for six foreign officials. The officials, selected by the foreign government, are attending an annual six-week long internship program for foreign insurance regulators sponsored by the National Association of Insurance Commissioners ("NAIC"). After the NAIC program concludes, the requestor will host the foreign officials for a five-day educational program at the requestor's U.S. headquarters "to familiarize them with the operation of a United States insurance company."

The requestor will reimburse air fares (domestic economy class), domestic lodging, local transport, meals and incidental expenses (up to a modest set amount per day upon presentation of a receipt), and "a modest four-hour city sightseeing tour" for the six officials.

"Based on the Requestor's representations," the DOJ said, "consistent with the FCPA's promotional expenses affirmative defense, the expenses contemplated are reasonable under the circumstances and directly relate to 'the promotion, demonstration, or explanation of [the Requestor's] products or services.' 15 U.S.C. § 78dd-2(c)(2)(A)."

The requestor distanced itself from the foreign officials' influence, and made clear the strict limits of its largess. It represented, among other things, that:

-- It will not pay any expenses related to the foreign officials' travel to or from the United States, or their participation in the NAIC internship program.

-- It has no non-routine business under consideration by the relevant foreign government agency.

-- Its routine business before the relevant foreign government agency consists primarily of reporting of operational statistics, reviewing the qualifications of additional agents, and onsite inspections of operations. Such routine business is guided by administrative rules with identified standards.

-- Its only work with other entities within the foreign government consists of collaboration on insurance-related research, studies, and training.

-- It will not select the particular officials who will travel. That decision will be made solely by the foreign government.

-- It will host only the designated officials, and not their spouses or family members.

-- It intends to pay all costs directly to the providers; in the event that an expense requires reimbursement, the requestor will only do so, up to a modest daily minimum, upon presentation of a written receipt.

-- Any souvenirs that it gives the visiting officials would reflect its business and/or logo and would be of nominal value, e.g., shirts or tote bags.

-- Apart from the expenses identified above, it will not compensate the foreign government or the officials for their visit, nor will it fund, organize, or host any other entertainment, side trips, or leisure activities for the officials, or provide the officials with any stipend or spending money.

-- The training visit will be for a six-day period (five days of training plus travel time), and costs and expenses will be only those necessary and reasonable to educate the visiting officials about the operation of a U.S. company in the requestor's industry.

View DOJ Opinion Procedure Release No.: 07-02 (September 11, 2007) Here.

Tuesday
Sep112007

Another Look At Facilitating Payments

As the lone exception written into the U.S. Foreign Corrupt Practices Act, facilitating payments have a reputation for being safe and practical. In truth, grease payments are often dangerous and potentially damaging.

The facilitating payments exception allows bribes to be paid for “routine governmental action . . . which is ordinarily and commonly performed by a foreign official." See 15 U.S.C. §§78dd-1 (b) and (f) (3) [Section 30A of the Securities & Exchange Act of 1934]. But claiming that a bribe is really a facilitating payment risks intense scrutiny from the U.S. Department of Justice and, for issuers, the Securities and Exchange Commission. Prosecutors say that anyone relying on the exception should be prepared to defend it -- that is, the burden of proof is always on the one asserting the exception as a defense to an FCPA violation. They warn that dollar thresholds alone aren't reliable, which means bribes aren't facilitating payments just because they are small. And, they say, an issuer’s books and records must accurately reflect facilitating payments, so that the actual purpose for the bribes is clear to an outside observer. That amounts to a signed confession, creating a further risk of prosecution in foreign countries where there may be violations of local anti-corruption laws.

More often than not, bribes first identified as permitted grease payments do not fall within the exception after all. Sometimes it is the purpose of the payments that makes them unsuitable, or the recipient's identity or role, or even the timing or size of the payments. In other words, a lot can go wrong. And then there is the requirement for issuers to disclose grease payments through their SEC filings. Corrupt dealings overseas, no matter how petty, aren't something investors will cheer about.

The facilitating payments exception is a lot trickier than often assumed. No wonder, then, that so many companies are deciding to ban the use of facilitating payments entirely.

See, for example, SEC Today, Volume 2006-57, Friday, March 24, 2006 (“DC Bar Panelists Discuss Developments in Foreign Corrupt Practices Act Cases”), beginning at page 1.

Monday
Sep102007

Six Years On

Instead of our regular post today, these familiar and fitting words:

No man is an Island, entire of itself; every man is a piece of the Continent, a part of the main; if a clod be washed away by the sea, Europe is the less, as well as if a promontory were, as well as if a manor of thy friends or of thine own were; any man's death diminishes me, because I am involved in Mankind; And therefore never send to know for whom the bell tolls; It tolls for thee.

From Meditation XVII
John Donne, English clergyman and poet (1572 - 1631)

Friday
Sep072007

From Our Sponsor

The FCPA Blog is produced and edited by attorneys of Cassin Law LLC. The firm helps clients comply with United States laws, including the Foreign Corrupt Practices Act.

The information in The FCPA Blog is intended for public discussion and educational purposes only. It does not constitute legal advice and the use of this blog and any information contained in it does not create an attorney-client relationship.

Contact Cassin Law LLC Here.

 

Wednesday
Sep052007

The Requestor's French Dilemma

Facing a decision to either stay in a joint venture or leave, when staying means violating the Foreign Corrupt Practices Act and leaving means breaching contractual obligations, is a legal disaster. But it's an easy trap to fall into.

One U.S. company (called the “Requestor”) proposed to enter into a joint venture with a French company. There were doubts about how the French company obtained some of its contracts. So the Requestor took various precautions to protect itself against an FCPA violation. Accordingly, if it learned its French partner had breached the compliance warranty, the Requestor could terminate the relationship if the breach had a “material adverse effect” upon the business.

Not good enough, said the U.S. Department of Justice:

Should the Requestor's inability to extricate itself result in the Requestor taking, in the future, acts in furtherance of original acts of bribery by the French company, the Requestor may face liability under the FCPA. Thus, the Department specifically declines to endorse the "materially adverse effect" standard.

The Lesson: Accept no limits or conditions on the right to terminate a joint venture when there is evidence of an FCPA violation.

View DOJ Opinion Procedure Release 2001-01 (May 24, 2001) Here.

Monday
Sep032007

Siemens' Global Corruption Problems Will Worsen

Perhaps the biggest, although not yet the loudest, international corruption story involves Siemens AG, the German electronics and electrical engineering giant. Siemens says it has identified "a multitude of payments made in connection with [consulting agreements] for which we have not yet been able either to establish a valid business purpose or to clearly identify the recipient. These payments raise concerns in particular under the Foreign Corrupt Practices Act (FCPA) in the United States, anti-corruption legislation in Germany and similar legislation in other countries." Some reports put the level of potentially corrupt payments at a staggering half a billion dollars.

The press, led by the Wall Street Journal, is also reporting that Siemens' managers in many countries are stonewalling the internal investigation. That, in turn, may have pushed the U.S. Department of Justice and the Securities and Exchange Commission to begin working on a deal with German prosecutors to share information and possibly resources in their respective investigations.

With Siemens' own managers now going silent, the DOJ and SEC face tough challenges collecting evidence abroad and compelling non-residents to appear in American courts, either as witnesses or defendants. Meanwhile, the tension among Siemens' management-level employees must be enormous. If they voluntarily give evidence, they could end up being prosecuted. If they refuse to give evidence, they could end up being fired and still be prosecuted. And unless the internal investigation gets back on track, Siemens itself may lose the opportunity to work out a favorable disposition of the case with U.S. and other prosecutors.

Siemens AG's ADRs trade on the NYSE under the symbol SI.

View A Recent Press Report Here.

View Siemens' Recent SEC Disclosure Here.

Sunday
Sep022007

Enron's Culture Of Non-Compliance

One consistent measure of a compliance culture is executive responsibility. In the case of Enron's CEO, Jeffrey Skilling, there was little evidence of that. True, he was obligated to comply with the Foreign Corrupt Practices Act. But remarkably, his January 1, 1996 Employment Agreement might have allowed him to be convicted under the FCPA and still keep his job. How? By his own declaration that he had no personal knowledge of or involvement in the crime -- the same defense he later bet on and lost at his federal trial for conspiracy, securities fraud, wire fraud and insider trading.

Fellow executives Rebecca Mark, Kenneth Rice and Joseph Sutton lacked Mr. Skilling's sui generis right to declare themselves innocent. Upon an FCPA offense, however, their employment agreements, like his, allowed the board to decide that if they'd acted in good faith after all, they could remain employed by Enron (never mind the mens rea element of a federal criminal conviction under the FCPA).

Mr. Skilling's Employment Agreement said in part:

Employee shall at all times comply with United States laws applicable to Employee's actions on behalf of Employer, including specifically, without limitation, the United States Foreign Corrupt Practices Act, generally codified in 15 USC 78 (FCPA), as the FCPA may hereafter be amended, and/or its successor statutes. If Employee pleads guilty to or nolo contendere or admits civil or criminal liability under the FCPA, or if a court finds that Employee has personal civil or criminal liability under the FCPA, or if a court finds that Employee personally committed an action resulting in any Enron entity having civil or criminal liability or responsibility under the FCPA with knowledge of the activities giving rise to such liability or knowledge of facts from which Employee should have reasonably inferred the activities giving rise to liability had occurred or were likely to occur, such action or finding shall constitute "cause" for termination under this Agreement unless (i) such action or finding was based on the activities of others and Employee had no personal involvement or knowledge of such activities, or (ii) Employer's Board of Directors or Enron's management committee (or, if there is no Enron management committee, the highest applicable level of Enron management) determines that the actions found to be in violation of the FCPA were taken in good faith and in compliance with all applicable policies of Employer and Enron.
(emphasis added)

View Jeffrey Skilling's Employment Agreement Here.

Wednesday
Aug292007

Materiality, But Not By The Numbers

Strictly speaking, “materiality” should never be part of an FCPA discussion. A payment or promise to pay anything of value can violate the antibribery provisions, and the books and records provisions apply to any book, record or account. So size doesn’t matter after all.

Even so, materiality discussions sometimes happen. For example, what test applies to small cash gifts to foreign officials that are unrecorded but discovered during pre-acquisition due diligence of a non-U.S. target?

There is no purely quantitative test. Under U.S. accounting standards, small undisclosed amounts can be material, depending on all the circumstances. Some questions to ask are whether the payments are illegal under local law? If the payments stop, does the target risk losing a big amount of business? Do the payments mean the target's compliance in other areas is questionable? Do they violate loan covenants or other contractual requirements?

An omission or misstatement about small illegal payments can interact with important aspects of the business and thereby become material. So it is more than a matter of numbers.

View SEC Staff Accounting Bulletin: No. 99 – Materiality Here.

Tuesday
Aug282007

Dear Readers,

The FCPA Blog is grateful for your many expressions of support and encouragement. Your comments and suggestions are an important ingredient, so please let us hear from you, either in the comments section after a post or by email Here.

The aim is to respond to all ideas for discussions and to share contributions from readers, many of whom have a wealth of FCPA knowledge and experience.

Again, thank you for your support.

Sincerely,

The FCPA Blog