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FCPA Blog Daily News

Tuesday
Sep092008

Intent On Complying

The shocking news last week about Jack Stanley's guilty plea teaches again that not all FCPA violations can be prevented. No compliance program or compliance training would have kept Mr. Stanley on the right side of the law. Leaders with bad intentions -- with criminal intent -- can always find a way to cheat, and putting a compliance program in their path won't help.

But Jack Stanley isn't a typical company leader. Unlike him, most want to comply with the FCPA. They want to stay in their jobs and out of jail. They want to protect their companies and the people in them. They want to be proud of the way they do business. For the overwhelming majority of executives, compliance is the goal and compliance training is the tool -- because it works.

That's why regular, repeated training is required for an effective compliance program. The 2005 Federal Sentencing Guidelines say:

The organization shall take reasonable steps to communicate periodically and in a practical manner its standards and procedures, and other aspects of the compliance and ethics program, to the individuals [responsible for compliance] by conducting effective training programs and otherwise disseminating information appropriate to such individuals’ respective roles and responsibilities.
The Sentencing Guidelines don't dictate content or format. That's up to each organization. But the objective is clear: make sure everyone knows what the Foreign Corrupt Practices Act says, requires and prohibits, and do that through training.

Aside from filling heads with knowledge, training sessions sometimes start a dialogue with weird surprises. Schnitzer Steel Industries Inc., the story goes, learned about its public bribery problem after an employee came back from a company-sponsored FCPA training course. He told his supervisors that he and his co-workers were doing all the things the trainers just said were illegal. That triggered Schnitzer's internal investigation, which led finally to a company clean-up and a favorable settlement with the government.

During training sessions, it's best if senior executives are part of the program. They can tell everyone face-to-face that the company really and truly expects 100% compliance. No kidding. And if someone decides on their own not to follow company policy but instead to do something illegal, then they'll likely end up unemployed and facing the full wrath of the law.

Employees working outside the U.S. are especially susceptible to the notion that more sales are always the goal. They need to hear that the first priority is compliance -- and that sales landed illegally aren't wanted. A general counsel told us last month that her CEO often says he isn't interested in being in a market where the company can't operate legally. The CEO has stayed out of at least one rich but dicey African country, sending his compliance message to everyone, loud and clear.

One more thing. FCPA training doesn't need to be elaborate to be effective. In fact, sometimes less formal settings produce the best results. Even the Federal Sentencing Guidelines say organizations, especially smaller ones, can train employees "through informal staff meetings, and monitoring through regular 'walk-arounds' or continuous observation while managing the organization." In other words, effective FCPA training can be woven into the fabric of the organization. That, after all, is the hallmark of a real compliance culture.

We hear from managers, sales people, engineers and others about the daily pressure in the marketplace to win. The temptation to take shortcuts is always huge. Jack Stanley couldn't resist. But most people want to stay straight. They want to avoid hurting themselves, their families, colleagues and companies. Compliance training helps them do that.

View Chapter 8 - PART B - §8B2.1. ("Effective Compliance and Ethics Program") of the 2005 U.S. Federal Sentencing Guidelines here.

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Monday
Sep082008

A Hair Trigger For Corporate Liability

All the briefs in United States v. Ionia Management, S.A. are now available on the White Collar Crime Prof Blog. The Second Circuit case challenges respondeat superior -- the legal doctrine by which companies are vicariously liable for crimes committed by employees acting within the scope of their employment.

How important is respondeat superior to the Foreign Corrupt Practices Act? Well, think of it as the government's Magic Bullet. With respondeat superior, prosecutors can't lose. But don't take our word for it. Here's what the United States Sentencing Commission said about respondeat superior in its May 2004 release:

Criminal liability can attach to an organization whenever an employee of the organization commits an act within the apparent scope of his or her employment, even if the employee acted directly contrary to company policy and instructions. An entire organization, despite its best efforts to prevent wrongdoing in its ranks, can still be held criminally liable for any of its employees’ illegal actions.
No wonder corporations settle FCPA enforcement actions instead of fighting them in court. But does the law make sense? Should corporations at least be able to present evidence of their compliance efforts in their own defense? Under current law, that evidence may be entirely irrelevant. That's why Ionia -- which is about a ship that released pollutants -- is so important to the FCPA.

We've already posted some excerpts from the excellent amicus brief in support of the defendant-appellant in Ionia. Here's one worth repeating:

A criminal indictment can be a life-or-death matter for a company. Yet, the vast sweep of the district court’s standard for the imposition of vicarious criminal liability makes corporations accountable for almost all criminal acts of any low level employees—even those acting against explicit instructions and in the face of the most robust corporate compliance program. This has caused a tremendous imbalance between the power of a prosecutor and a corporate defendant. Given the hair-trigger for corporate liability even for the most responsible corporate citizen, many corporations forego any defenses in order to resolve threatened prosecution.
And one more:
The potential for inappropriate prosecutorial pressure is particularly heightened in the area of corporate criminal investigations that end in Draconian non-prosecution and deferred prosecution agreements, where no court has oversight authority. There, the prosecutor effectively serves as both judge and jury. Because of the disastrous consequences of a corporate indictment and the ease with which corporations may be liable under the doctrine of respondeat superior, corporations are under immense pressure to agree to almost any terms. The vast majority of these negotiations go on behind closed doors, with little public scrutiny and no judicial review.
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Sunday
Sep072008

More Individuals Indicted For FCPA Violations

The Justice Department said it arrested four people last week on charges that they and their company bribed Vietnamese officials in exchange for contracts to supply equipment and technology to government agencies in Vietnam.

The DOJ said U.S. citizens Nam Nguyen, 52, of Houston; Joseph Lukas, 59, of Smithville, N.J.; Kim Nguyen, 39, of Philadelphia; and An Nguyen, 32, of Philadelphia were arrested after they, along with Nexus Technologies Inc., were indicted on Sept. 4, 2008, by a federal grand jury in Philadelphia on one count of conspiracy to violate the Foreign Corrupt Practices Act and four substantive counts of violating the FCPA.

The arrests are more evidence of the government's stepped-up enforcement of the FCPA and its apparent strategy to target individuals.

In April 2008, Washington Post business columnist Steven Pearlstein said the DOJ used to have the equivalent of two people assigned to FCPA cases but "now has as many as 12 prosecutors, assisted by a new team of FBI agents dedicated to these cases." And ProPublica's story about Jack Stanley's guilty plea said, "The active involvement of the FBI is particularly worrisome to [people who violate the FCPA]. In contrast to white-collar investigations handled by the Justice Department and the Securities and Exchange Commission, the FBI is believed to be prepared to use techniques more familiar to investigations of organized crime, including wiretapping and undercover agents."

According to the indictment, Nexus Technologies Inc., a privately-held Delaware company with offices in Philadelphia, New Jersey and Vietnam, sold third-party underwater mapping and bomb containment equipment, helicopter parts, chemical detectors, satellite communication parts and air tracking systems to the government of Vietnam. The indictment alleges that from about 1999 through 2008, the defendants paid at least $150,000 to officials at Vietnam’s Ministries of Transport, Industry and Public Safety to secure supply contracts. The indictment says Nam Nguyen negotiated contracts and bribes with Vietnamese government officials while Lukas negotiated with vendors in the United States. Kim and An Nguyen allegedly arranged for the transfer of funds at Nam Nguyen’s direction.

The conspiracy count carries a maximum penalty of five years in prison, a fine of the greater of $250,000 or twice the gain; and a three year term of supervised release. The FCPA counts each carry a maximum penalty of five years in prison, a fine of the greater of $100,000 or twice the gain; and a three year term of supervised release. Nexus Technologies Inc., faces a maximum $2 million fine per count, if convicted.

The DOJ's announcement said the case was investigated by the FBI and the U.S. Department of Commerce, Office of Export Enforcement. The government hasn't said whether the four individuals or their company may have violated U.S. export rules.

As the Justice Department says, an indictment is merely an accusation and the defendant is presumed innocent until and unless proven guilty at trial beyond a reasonable doubt.

View the DOJ's Sept. 5, 2008 release here.

View a copy of the indictment here.

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Saturday
Sep062008

Jack Stanley's Guilty Plea, Up Close

ProPublica is a privately-funded, non-profit, independent newsroom located in Manhattan. It's led by Paul Steiger, the former managing editor of The Wall Street Journal, and its staff includes some of the best editors and reporters in the business. Its mission is to save investigative journalism, which is going the way of the dodo in commercial newrooms across America.

One story ProPublica is now chasing is the guilty plea a few days ago by Albert "Jack" Stanley, the former chairman and CEO of KBR. He admitted violating the Foreign Corrupt Practices Act by helping arrange and hide more than $182 million in illegal payments to Nigerian government officials. When news about the plea broke, we knew right away the story would be too big for blogs or even most traditional news organizations. The scale of the bribery is enormous, the companies involved are powerhouses, and the cast of characters is daunting. But it's the most important FCPA story around, and maybe the most important one ever. So it needs some special handling.

Enter ProPublica. Its first look at the Stanley plea appeared yesterday, in an article written by T. Christian Miller. He and four others reported the story, including the legendary Lowell Bergman, who's no stranger to the FCPA. This story appeared first in MSN Money, and then on ProPublica's site under what's called a Creative Commons Attribution- Noncommercial- No Derivative Works 3.0 United States License. That means we can republish it with attribution to ProPublica and without any changes.

While this post exceeds our typical word count, we doubt any readers will object.

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Bribery scandal rocks Big Oil

A former Halliburton exec has pleaded guilty to being in cahoots with crooked foreign officials. He's now helping US investigators, and a much wider crackdown is expected to unfold.

By ProPublica and PBS' "Frontline"

In the world of Big Oil, Albert "Jack" Stanley was legendary for winning billion-dollar contracts in Third World countries as the Halliburton executive who knew all the secrets of deals in places like Malaysia, Egypt and Yemen.

In the wake of his admission in a guilty plea last week that he had resorted to bribes, kickbacks and high-level corruption to secure deals in Nigeria, however, Stanley now lies at the center of a widening scandal in the oil industry that has implications for corporations and governments across the globe.

Stanley's case is the first in what federal officials believe will be a string of indictments in coming months against U.S. corporate executives who have participated in bribing foreign officials in recent years.

By agreeing to cooperate with prosecutors, Stanley, who ran KBR when it was a subsidiary to Halliburton, promises to become a hammer for federal investigators seeking to crack open additional cases under a 30-year-old statute designed to halt overseas corporate corruption. About 80 cases involving major corporations accused of overseas bribery were under investigation as of last year, a high-level Justice Department official said.

In addition, Stanley's cooperation may provide a new tool for encouraging industrial countries in Europe and Asia to get more serious about enforcing anti-bribery laws against corporations based there. The $182 million in bribes were allegedly paid not just by Halliburton but by its partners, an international consortium of engineering companies from France, Italy and Japan. The United Kingdom has jurisdiction, too, because much of the bribery scheme was, according to court documents, hatched in London, where Stanley maintained a sumptuous home.

"We are very pleased to see that there has been an uptick in enforcement not only in the U.S. but in other countries as well,'' said Patrick McCormick, a spokesman for Transparency International-USA, an anti-corruption group funded by donations from government development agencies and private businesses and foundations. "We are hoping that (this case) is a sign of things to come."

A nightmare unfolding

The intensifying level of this government effort, pushed by a Republican administration normally friendly to business, cuts two ways for American business executives.

For those who may have been involved in bribery to secure construction contracts or equipment sales in developing countries around the world, it represents a nightmare.

The active involvement of the FBI is particularly worrisome to such people. In contrast to white-collar investigations handled by the Justice Department and the Securities and Exchange Commission, the FBI is believed to be prepared to use techniques more familiar to investigations of organized crime, including wiretapping and undercover agents.

Stanley's high profile and punishment -- he faces a potential seven-year sentence, the longest in the history of the federal statute outlawing the bribing of foreign officials -- also signal the federal government's willingness to seek long prison terms rather than fines and court injunctions.

For those who fret that they have been losing out to foreign competitors in jurisdictions less likely to prosecute bribery, it offers hope that the playing field will soon be leveled.

Stanley has already acknowledged paying bribes to unnamed senior Nigerian officials, although reports have identified the primary recipient as Nigeria’s late president, Sani Abacha. Stanley also has admitted receiving kickbacks of $10.8 million from contracts that Halliburton and predecessor companies signed with governments in Nigeria, Malaysia, Egypt and Yemen. Government officials in those countries, with the exception of Abacha, have not yet been implicated, according to a person familiar with the investigation.

Stanley's testimony may also pose concerns for Vice President Dick Cheney, who ran Halliburton between 1995 and 2000, when Stanley was appointed as KBR's chief executive officer. Cheney has consistently denied wrongdoing.

Law enforcement officials familiar with the investigation said that in previous interviews, Stanley repeatedly said that then-CEO Cheney had no knowledge of the bribes. At the time, however, Stanley was not a cooperating witness, a stance that changed in June when he was confronted with evidence of his involvement in the bribery scheme.

The vice president's office declined to comment, citing the continuing litigation.

Larry Veselka, Stanley's lawyer, said his client will cooperate fully in any investigation. A judge will determine Stanley's final sentence depending on his compliance with the plea agreement.

"He's going to cooperate with wherever they want to go and whatever they want him to do,'' Veselka said Thursday.

When oil mixes with greed

Stanley's rise and fall, detailed in U.S. and leaked French court documents, show what can happen when corporate greed mixes with the autocratic governments that control valuable natural resources such as oil and copper in lawless corners of the globe.

Now 65, Stanley spent nearly his entire career in the oil business, a globe-trotting high-level roustabout who made a specialty of dealing with governments in resource-rich, accountability-poor countries. He owned a million-dollar home in Texas and a residence in one of London's swankest neighborhoods -- a property that he will now have to sell under his plea agreement.

A fearsome competitor, Stanley had a reputation as a hard drinker. At his hearing in Texas, Stanley held himself up by gripping the podium, and he looked frail. He appeared to wince at references to alcoholism as a mitigating factor for his actions and to statements by the government prosecutor William Stuckwisch, who characterized Stanley's behavior as "egregious."

"Jack was . . . extremely capable, smart and totally dedicated to the company,'' said one former colleague, who did not want to be identified because of the continuing investigation. "I was shocked like everyone else when we heard about the bribes."

Others expressed less surprise that Halliburton was involved. Walter Carrington was the U.S. ambassador to Nigeria in 1994, when Stanley acknowledged making the first bribe payments to the Nigerian government.

"I used to brag that because of our Foreign Corrupt Practices Act, Americans weren't involved as other countries were. American businessmen would complain that it wasn't fair -- (that) other countries really ought to be doing more to keep people from doing this. It was a competitive disadvantage,'' said Carrington, who did not recall meeting Stanley. "Halliburton was a different kettle of fish. There were always stories going on about the way in which their people operated."

Stanley began his rise up the corporate ladder with M.W. Kellogg, an oil infrastructure company then owned by Dresser Industries. Dresser would later merge with Halliburton, and Kellogg would become KBR.

Stanley was working as a senior executive at Kellogg in the 1990s when the company formed a joint venture called TSKJ to pursue contracts to construct a liquefied-natural-gas plant on Bonny Island off Nigeria's oil-rich coast. Besides Kellogg, the TSKJ companies were France's Technip; Snamprogetti Netherlands, an affiliate of Italy's Eni.

As Nigerian officials weighed the consortium's bid against a competing group led by San Francisco-based Bechtel Engineering, Stanley decided to improve the chances of winning by offering bribes, according to court documents filed by the Justice Department and the SEC.

He hatched a plan to hire consultants who could direct the money to Nigerian officials, the court documents said. A consultant from the United Kingdom would pay off higher-level Nigerian officials, while a second, from Japan, would be responsible for bribing lower-ranking officials. In November 1994, the U.K. consultant, who was not identified, allegedly told an associate that it would take $60 million to secure the contract, the court documents said. Of that money, $40 million to $45 million would go to the "first top-level executive branch" of Nigerian officials, while an additional $15 million to $20 million would go to other Nigerian officials.

Later that month, Stanley traveled to the Nigerian capital to meet with senior officials and confirm that the U.K. consultant would serve as a go-between, according to court documents and officials familiar with the investigation.

Over the next year, TSKJ, operating through subsidiary companies in Madeira, Portugal, in the Portuguese offshore tax haven of Madeira Island, signed agreements to transfer millions of dollars to the U.K. consultant, according to court documents and people familiar with the investigation.

In December 1995, the Nigerian government awarded the first of the gas plant contracts to TSKJ. Over the next decade, the government awarded TSKJ four contracts worth a total of $6 billion to build and expand the plant.

Throughout that time, Stanley continued traveling to Nigeria to meet with senior officials and continued arranging payments through the U.K. and Japanese consultant firms, according to the court documents.

Abacha died suddenly in 1998. According to Nigerian press accounts, his death was either the result of a marathon Viagra-fueled orgy with four prostitutes or a conspiracy among his closest confidantes to poison him. No autopsy was ever performed. In the decade since Abacha's death, Switzerland alone has returned at least $500 million in his bank accounts to the government of Nigeria.

All told, Stanley traveled to Nigeria to meet with top officials on four occasions between 1994 and 2001 as part of the bribery scheme. TSKJ paid out $130 million in bribes through the U.K. consultant and $50 million through the Japanese firm, according to the court documents.

French and Nigerian investigators have identified the primary consultant to the consortium as Jeffrey Tesler, a London attorney who worked with Nigerian immigrants, according a transcript of testimony from the French case.

Tesler was not identified in U.S. court documents. He has been investigated by British and French authorities but has never been charged with wrongdoing. Last year, British authorities conducted a search of his London office at the urging of U.S. officials. A woman who answered the phone at Tesler's law office Thursday said the attorney could not be reached and would have no comment.

The Cheney connection

In the middle of the bribery and plant construction, Kellogg changed hands. In 1998, Kellogg's parent company, Dresser Industries, merged with Halliburton.

Cheney, then CEO of Halliburton, arranged the merger during a quail-hunting trip. Afterward, Cheney appointed Stanley to head KBR, a newly formed construction and logistics subsidiary that grew out of the merger.

In a 1999 article in Middle East Economic Digest, Cheney praised Stanley: "We took Jack Stanley (and a colleague) . . . to head up the organization, and that has helped tremendously."

As allegations of corruption mounted, however, Halliburton conducted an internal investigation into the charges. In June 2004, the oil services company publicly fired Stanley, who was working as a consultant, for improper personal enrichment. The company also severed all relations with Tesler's firm, Tri-Star Investments.

The bribery scandal is one of many involving Halliburton's KBR subsidiary in the past several years. KBR has repeatedly been criticized for overbilling the U.S. government for providing food, fuel and other services to U.S. soldiers in Iraq. Last year, Halliburton spun off KBR into a separate corporation. KBR spokeswoman Heather Browne said the company has not yet reviewed the plea agreement. "KBR does not in any way condone or tolerate illegal or unethical behavior. The company stands firm in its unwavering commitment to conduct business with the utmost integrity,'' Browne said in a prepared statement.

Halliburton spokeswoman Cathy Mann declined to comment, saying the company had not yet reviewed the plea agreement. Earlier this year, Halliburton reported that the SEC was dramatically widening the scope of the investigation to cover projects built during the past 20 years in multiple countries.

Those investigations may focus on Stanley's activities in other countries. Court documents show that Stanley worked with another consultant, identified as a dual-national Lebanese and American citizen, in an elaborate kickback scheme.

Under the scheme, Stanley hired the consultant to help Halliburton and its predecessor firms arrange deals to build liquefied-natural-gas projects not only in Nigeria but also in Egypt, Yemen and Malaysia. From 1991 to 2004, the consultant directed $10.8 million of the proceeds back to Stanley through a Swiss bank account. These deals involved Stanley's original employer, M.W. Kellogg, as well as KBR.

This story is part of a joint reporting project by PBS's Frontline and ProPublica on international bribery, the subject of an upcoming documentary. Marlena Telvick and Oriana Zill de Granados reported from Houston. Additional reporting was contributed by Lowell Bergman, Jake Bernstein and T. Christian Miller. The story was written by Miller.

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Thursday
Sep042008

Why Comply?

The potential consequences of a Foreign Corrupt Practices Act violation for an individual are easy to explain and understand. Personal tragedies result from the losses of freedom, jobs and reputations, and there's often financial ruin and damage to families. But the possible consequences to a corporation -- and indirectly to its employees, shareholders, creditors, customers, suppliers and other stakeholders -- are more complex. A good explanation, however, comes from KBR in its 2007 annual report. The disclosure is comprehensive and clear, and downright spooky.

As discussed in our prior post, KBR's former chairman and CEO, Jack Stanley, just pleaded guilty to violating the FCPA. He helped arrange (and conceal) at least $182 million in illegal payments to Nigerian government officials. The continuing investigation by U.S. authorities is the focus of KBR's FCPA disclosure. Although the scale of the potential violations behind the disclosure is unusual, most of the possible consequences that KBR describes could apply to most public companies with FCPA concerns.

We've deleted a few KBR-specific references and broken the disclosure into smaller chunks for readability. Otherwise, it's straight from the annual report.

Here it is:

A person or entity found in violation of the FCPA could be subject to fines, civil penalties of up to $500,000 per violation, equitable remedies, including disgorgement (if applicable) generally of profits, including prejudgment interest on such profits, causally connected to the violation, and injunctive relief. Criminal penalties could range up to the greater of $2 million per violation or twice the gross pecuniary gain or loss from the violation, which could be substantially greater than $2 million per violation.

It is possible that both the SEC and the DOJ could assert that there have been multiple violations, which could lead to multiple fines. The amount of any fines or monetary penalties which could be assessed would depend on, among other factors, the findings regarding the amount, timing, nature and scope of any improper payments, whether any such payments were authorized by or made with knowledge of us or our affiliates, the amount of gross pecuniary gain or loss involved, and the level of cooperation provided the government authorities during the investigations.

Agreed dispositions of these types of violations also frequently result in an acknowledgement of wrongdoing by the entity and the appointment of a monitor on terms negotiated with the SEC and the DOJ to review and monitor current and future business practices, including the retention of agents, with the goal of assuring compliance with the FCPA.

Other potential consequences could be significant and include suspension or debarment of our ability to contract with governmental agencies of the United States and of foreign countries. . . . Suspension or debarment from the government contracts business would have a material adverse effect on our business, results of operations, and cash flow.

These investigations could also result in (1) third-party claims against us, which may include claims for special, indirect, derivative or consequential damages, (2) damage to our business or reputation, (3) loss of, or adverse effect on, cash flow, assets, goodwill, results of operations, business, prospects, profits or business value, (4) adverse consequences on our ability to obtain or continue financing for current or future projects and / or (5) claims by directors, officers, employees, affiliates, advisors, attorneys, agents, debt holders or other interest holders or constituents of us or our subsidiaries. . . .

In addition, our compliance procedures or having a monitor required or agreed to be appointed at our cost as part of the disposition of the investigation have resulted in a more limited use of agents on large-scale international projects than in the past and put us at a competitive disadvantage in pursuing such projects.

Continuing negative publicity arising out of these investigations could also result in our inability to bid successfully for governmental contracts and adversely affect our prospects in the commercial marketplace. In addition, we could incur costs and expenses for any monitor required by or agreed to with a governmental authority to review our continued compliance with FCPA law.

The investigations by the SEC and DOJ and foreign governmental authorities are continuing. We do not expect these investigations to be concluded in the immediate future. The various governmental authorities could conclude that violations of the FCPA or applicable analogous foreign laws have occurred . . . In such circumstances, the resolution or disposition of these matters . . . could have a material adverse effect on our business, prospects, results or operations, financial condition and cash flow.

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Wednesday
Sep032008

Ex-KBR Boss Pleads Guilty

The Justice Department said today that Albert “Jack” Stanley, 65, a former chairman and CEO of KBR, the global engineering and construction firm based in Houston, pleaded guilty to a two-count criminal information charging him with conspiracy to violate the Foreign Corrupt Practices Act and conspiracy to commit mail and wire fraud. He appeared in U.S. District Court in his hometown of Houston before U.S. District Judge Keith P. Ellison.

From 1995 to 2004, Stanley helped a joint venture that included KBR and its predecessors funnel $182 million in bribes to government officials in Nigeria. The bribes were paid in exchange for contracts worth $6 billion to build liquefied natural gas facilities there. Stanley and others met with high-ranking Nigerian government officials and their representatives at least four times to arrange the bribe payments. He also received $10.8 million in kickbacks from a consultant hired in connection with LNG projects around the world.

Under the plea deal accepted by the court, Stanley faces seven years in prison and a restitution payment of $10.8 million. A sentencing date hasn't been set. Criminal violations of the FCPA's anti-bribery provisions are punishable by five years in prison, and criminal violations of the accounting provisions by 20 years in jail. As part of his plea agreement, Stanley agreed to cooperate with law enforcement authorities in the ongoing investigations. The DOJ said it gathered evidence abroad and was helped by authorities in France, Italy, Switzerland and the United Kingdom.

In a related civil enforcement proceeding, the Securities and Exchange Commission said Stanley has consented to a final judgment permanently enjoining him from violating the anti-bribery, record-keeping and internal control provisions of Securities Exchange Act of 1934 (Sections 30A and 13(b)(5) and Rule 13b2-1).

Stanley was a senior vice president of Dresser Industries, Inc. when it merged into Halliburton in September 1998. Dresser's wholly-owned construction subsidiary, Kellogg, was combined with Halliburton's construction subsidiary, Brown & Root, Inc., to form KBR. Stanley became CEO of KBR and was named chairman in 2001. He was fired in June 2004. In November 2006, Halliburton spun KBR off and it became a separate publicly-traded company. Vice President Dick Cheney was Halliburton's chief executive from 1995 to 2000.

KBR's 2007 annual report describes a joint venture called TSKJ "formed to design and construct large-scale projects in Nigeria. TSKJ's members are Technip, SA of France, Snamprogetti Netherlands B.V., which is a subsidiary of Saipem SpA of Italy, JGC [of Japan] and us, each of which has a 25% interest. TSKJ has completed five LNG production facilities on Bonny Island, Nigeria and is nearing completion on a sixth such facility."

As KBR's senior representative in TSKJ, Stanley authorized the hiring of an agent in the U.K. and another in Japan to pay bribes to various Nigerian government officials, and concealed the payments. The SEC's complaint said,

In numerous Dresser, Halliburton and KBR company records, Stanley and others falsely characterized the payments to the UK Agent and the Japanese Agent as legitimate “consulting” or “services” fees when, in fact, Stanley knew they were bribes. For example, Stanley authorized entering into contracts with the UK Agent and the Japanese Agent that he knew falsely described the purpose of the contracts in order to make it appear that the agents would perform legitimate services. Stanley and others also prepared for approval internal company bid documents for the LNG Trains that mischaracterized the bribe payments as legitimate expenses. In addition, certain records falsified by Stanley were used in the companies’ due diligence process for approving use of the UK Agent.
KBR's 2007 annual report added these details:
In connection with the Bonny Island project, TSKJ entered into a series of agency agreements, including with Tri-Star Investments, of which Jeffrey Tesler is a principal, commencing in 1995 and a series of subcontracts with a Japanese trading company commencing in 1996. We understand that a French magistrate has officially placed Mr. Tesler under investigation for corruption of a foreign public official. . . .

Our representatives have met with the French magistrate and Nigerian officials. In October 2004, representatives of TSKJ voluntarily testified before the Nigerian legislative committee. Halliburton notified the other owners of TSKJ of information provided by the investigations and asked each of them to conduct their own investigation. . . .

In June 2004, all relationships with Mr. Stanley and another consultant and former employee of M.W. Kellogg Limited were terminated. The terminations occurred because of violations of Halliburton's Code of Business Conduct that allegedly involved the receipt of improper personal benefits from Mr. Tesler in connection with TSKJ's construction of the Bonny Island project.

Jeffrey Tesler, the Tri-Star Investments principal referred to in the annual report (called "the UK Agent" by the SEC), is a 60-year old lawyer in a small North London law firm called Kaye Tesler & Co.

KBR employs 52,000 people worldwide. Revenue last year was about $8.7 billion. According to its website, "not only is KBR the largest contractor for the United States Army and a top-ten contractor for the U.S. Department of Defense, it is currently the world’s largest defense services provider. "

KBR, Inc. trades on the NYSE under the symbol KBR.

Halliburton Company trades on the NYSE under the symbol HAL.

View the plea agreement here.

View the DOJ's Sept. 3, 3008 release here.

View SEC Litigation Release No. 20700 and Accounting and Auditing Enforcement Release No. 2871 (Sept. 3, 2008) here.

View the SEC's Civil Complaint Securities and Exchange Commission v. Albert Jackson Stanley, 08-CV-02680, S.D. Tex. (Houston) here.

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Tuesday
Sep022008

Former Execs Avoid Hard Time

Two former telecommunications executives who admitted bribing employees of state-owned companies in Africa and concealing the payments have avoided prison in exchange for their cooperation in an ongoing FBI investigation.

The Justice Department said yesterday that Roger Michael Young, 48, of Washington, D.C., a former managing director of ITXC Corporation, has been sentenced to five years probation, including three months home confinement, three months in a community confinement center, and a $7,000 fine. He pleaded guilty in July 2007 to violating the Foreign Corrupt Practices Act and the Travel Act.

Former ITXC Vice President Steven J. Ott, 49, of Princeton, N.J., who also pleaded guilty, was sentenced in July this year to five years probation, including six months in a community confinement center and six months home confinement. He was fined $10,000.

Young and Ott faced up to five years in prison and fines of $250,000. The DOJ said both were granted a reduced sentence based on their cooperation with an investigation the FBI is conducting into the foreign bribery scheme. They were sentenced by U.S. District Court Judge Garrett E. Brown of New Jersey.

A third defendant in the case, Yaw Osei Amoako, 55, of Hillsborough, N.J., pleaded guilty in September 2006. He was sentenced in August 2007 to 18 months in prison followed by two years of supervised release, and a $7,500 fine.

ITXC was a publicly-held VOIP company based in Princeton, N.J. It was acquired by Canada's Teleglobe International Holdings Ltd. in May 2004 (Teleglobe was itself acquired by Tata's VSNL in July 2005). Between August 2001 and May 2004, the three executives paid $267,468.95 in bribes to foreign officials in Nigeria, Rwanda and Senegal in order to obtain contracts for ITXC to transmit telephone calls to those countries. ITXC made $11,509,733 in net profits from contracts obtained through the bribery. Ott was ITXC's vice president for global sales, Young was its managing director for the Middle East and Africa, and Amoako was the regional director for sales in Africa.

In April 2008, the Securities and Exchange Commission settled a civil enforcement action against all three. It charged them with violating the antibribery provisions of the FCPA and concealing and falsely reporting the illegal payments. In the settlement, they each consented to the entry of a final judgment permanently enjoining them from violating and aiding and abetting violations of the FCPA. Amoako also agreed to pay $188,453 in disgorgement and prejudgment interest because he took kickbacks for some of the bribes he paid to the foreign officials.

View the DOJ's Sept. 2, 2008 release here.

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Sunday
Aug312008

Kozeny's Co-Defendant Wins Appeal

Frederic Bourke won't face Foreign Corrupt Practices Act charges after all. He was indicted in May 2005 with Victor Kozeny and David Pinkerton over an alleged plan to bribe officials from Azerbaijan from 1997 to 1999 in connection with the privatization of the state oil company. But the U.S. Court of Appeals for the Second Circuit affirmed the June 2007 dismissal of FCPA charges against Bourke, saying the government failed to indict him within the FCPA's five-year statute of limitations.

Kozeny wasn't a party to the appeal because he's outside the United States and fighting extradition. In October 2007, the Bahamas Supreme Court refused to order his return to the U.S. to face trial. He's from the Czech Republic and reportedly has Irish citizenship, but he's been living in the Bahamas for more than a decade. The Bahamas court said the FCPA charges against Kozeny were not provable or prosecutable under local law, and there was an abuse of the court process. Apparently the U.S. government did not properly disclose the U.S. trial court's dismissal of the FCPA charges on statute of limitations grounds, a failing the Bahamas judge cited as a reason for the ruling.

Co-defendant Pinkerton was dropped from the case in July this year after the government withdrew all charges against him. See United States v. Kozeny, No. 1:05-cr-00518-SAS (S.D.N.Y. July 2, 2008) (order of nolle prosequi). The former head of AIG Global Investment Corp. invested about $15 million of AIG's money with Kozeny. After the government ended the case against Pinkerton, his lawyer said, "We have always known that David Pinkerton is completely innocent of any wrongdoing and we are thrilled by his vindication. Mr. Pinkerton is a self-made man who through his hard work, integrity and talent rose to the highest levels of his profession. Now that these charges have been entirely dismissed, Mr. Pinkerton looks forward to continuing his career."

Prosecutors obtained a related conviction in the case in February 2004. Clayton Lewis, a former employee of Omega Advisors, Inc., pleaded guilty to conspiring to violate the FCPA. Then in July 2007, Omega itself settled with the government, entering into a non-prosecution agreement with the DOJ and agreeing to a civil forfeiture of $500,000. Omega invested more than $100 million with Kozeny in 1998 for the Azeri privatization program. The program fizzled and Omega lost its entire investment, as did Bourke, AIG and others. Reports said Kozeny kept $182 million from the deal.

Bourke, 62 -- owner of the luxury handbag brand Dooney & Bourke -- said after his indictment in 2005 that he invested
$8 million with Kozeny only after lawyers had advised him the deal was legal. Soon after, he said, he suspected illegal behavior. His lawyers said he traveled to Azerbaijan to warn then President Heydar Aliyev about the scheme and he testified before a New York grand jury "as a victim of Kozeny's fraud."  

Last month, a Washington-based non-profit watchdog group that defends whistleblowers alleged that James Wolfensohn, the former head of the World Bank, helped Kozeny by quashing staff concerns and writing letters on Kozeny's behalf. Wolfensohn has said the report by the Government Accountability Project (GAP) is wrong.

On its website, GAP says,

The report shows that James Wolfensohn, then president of the World Bank, personally assisted a rogue financier in his efforts to gain control of the State Oil Company of the Republic of Azerbaijan (SOCAR). While these efforts were ultimately unsuccessful, documents show that Wolfensohn silenced Bank staff members who spoke out about corrupt government officials working with Viktor Kožený, a notorious financial operator who had allegedly defrauded investors in the Czech Republic of nearly $1 billion only three years earlier.
“Before the financial fiasco in Azerbaijan occurred, Bank staff tried to expose the risks inherent in dealing with Kožený and corrupt government officials poised to profit illicitly from Caspian oil,” said Bea Edwards, GAP International Program Director and author of the report. “They were silenced about the impending fraud, however, when Wolfensohn directly intervened on Kožený’s behalf.”

A Bloomberg story said Bourke's lawyers provided documents to GAP and that Bourke funded the Kozeny-World Bank report. GAP says Kozeny's scheme in Azerbaijan came to light "in 1999, when U.S. investor and whistleblower Frederic Bourke came forward and exposed the fact that at least one major investor had been defrauded . . . ." Kozeny has denied taking money illegally from investors and criticized GAP for its work on Bourke's behalf.

 

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Thursday
Aug282008

Con-way Settles FCPA Enforcement Action

Internal controls and books and records violations; impermissible "facilitating payments" to customs officials and bribes to airline employees

California-based Con-way, Inc., a global freight forwarder, has paid a $300,000 penalty and accepted a cease and desist order to settle a Foreign Corrupt Practices Act enforcement action with the Securities and Exchange Commission. Con-way's FCPA violations were caused by a Philippines-based subsidiary, Emery Transnational. It made about $244,000 in improper payments between 2000 and 2003 to officials at the Philippines Bureau of Customs and the Philippine Economic Zone Area, and $173,000 in improper payments to officials at fourteen state-owned airlines.

The bribes to customs officials consisted of hundreds of small payments. They were intended to induce the officials to violate customs regulations, settle customs disputes, and reduce or not enforce otherwise legitimate fines for administrative violations. To fund the payments, Emery's employees obtained cash advances to complete customs processing. The SEC said that "unlike legitimate customs payments, the payments at issue were not supported by receipts from the Philippines Bureau of Customs and the Philippine Economic Zone Area. Emery Transnational did not identify the true nature of these payments in its books and records."

Emery's employees also made corrupt payments between 2000 and 2003 to employees at fourteen state-owned airlines that did business in the Philippines. According to the SEC, the "payments were made with the intent of improperly influencing the acts and decisions of these foreign officials and to secure a business advantage or economic benefit." There were “weight shipped” payments intended to induce airline officials to improperly reserve space for Emery on the airplanes, and “gain shares” payments to induce airline officials to falsely under-weigh shipments and to consolidate multiple shipments into a single shipment, resulting in lower shipping charges. Emery paid the airline employees 90% of the reduced shipping costs.

Government-owned or controlled airlines receiving payments were Air France, Alitalia (Italy), China Airlines, EgyptAir, Emirates (Dubai), Gulf Air (Bahrain, Abu Dhabi, Oman), Kuwait Airways, Malaysian Airlines, Pakistan International Airlines, Royal Brunei Airlines, Saudi Arabian Airlines, SilkAir (Singapore), Singapore Airlines, and Thai Airways International.

According to the SEC's complaint, none of Emery's improper payments were accurately reflected in Con-way’s books and records. Also, Con-way knowingly failed to implement a system of internal accounting controls concerning Emery that would both ensure that Emery complied with the FCPA and require that the payments it made to foreign officials were accurately reflected on its books and records. As a result, Con-way violated Sections 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Securities Exchange Act of 1934 (15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)).

Con-way discovered the illegal conduct at Emery in early 2003. After a preliminary internal investigation, Con-way self-disclosed the potential FCPA violations to the SEC. Following a more thorough internal investigation, Con-way imposed strict financial reporting and compliance requirements on Emery, fired a number of Emery employees involved in the misconduct, provided FCPA training and education to Con-way's own employees and strengthened its compliance program. In December 2004, Con-way sold Emery to UPS.

In the Philippines, payments to customs officials by local employees are a common compliance problem. Such payments are locally referred to as "facilitating payments" but shouldn't be confused with payments of the same name that are permitted under the FCPA. There's an exception in the FCPA for facilitating payments -- but only as defined by the FCPA itself. Among other things, the payments must be 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].

The exception will not apply, however, if there was no legitimate routine governmental action pending and for which the payment was made. A governmental action obtained or sought to be obtained by subornation of the official’s duty is not an action “ordinarily and commonly performed by a foreign official” and therefore is outside the scope of the exception. For example, paying a customs clerk to schedule an inspection of goods already in the customs queue may be permissible. But paying a customs clerk to jump the queue, or paying for positive inspection results, may be outside the exception.

Emery's payments to customs officials were intended to induce them to (i) violate customs regulations by allowing Emery to store shipments longer than otherwise permitted, thus saving the company transportation costs related to its inbound shipments; and (ii) improperly settle Emery's disputes with the Philippines Bureau of Customs, or to reduce or not enforce otherwise legitimate fines for administrative violations. Those clearly weren't actions “ordinarily and commonly performed by a foreign official.” That's why the payments fell outside the scope of the FCPA's facilitating payments exception. And whether or not the payments were permissible, Con-way was required to accurately account for them in its books and records, which it didn't do.

The case is also a reminder that employees of government- owned or controlled airlines are "foreign officials" for purposes of the FCPA. Contact with them, either directly or through travel agents or others, should be covered by compliance programs.

Con-way Inc. trades on the NYSE under the symbol CNW.

View SEC Litigation Release No. 20690 and Accounting and Auditing Enforcement Release No. 2866 (August 27, 2008) here.

View the Complaint in Securities and Exchange Commission v. Con-way Inc., Civil Action No. 1:08-CV-01478 (D.D.C.) (EGS) here.

View the SEC's Administrative Enforcement Action / Cease and Desist Order here.

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Tuesday
Aug262008

Two Minute Warning

Boy, were we wrong. Syriana deserves our top rating of 5 Red Flags -- not as a movie, but as a compliance tool. A thoughtful reader set us straight. Our sincere thanks to Daniel, whose imaginative use of Syriana we heartily endorse.

Here's what he told us:

Dear FCPA Blog,

 

Very nice analysis of Syriana in response to the movie that at least this reader had called out, following your post entitled "Sleaze in the Cinema, Take One."  

In truth, the aspect of the movie I liked best is the original promotional trailer itself, of which I have shown a portion (after having received a license) at the start of anti-corruption compliance training to grab an audience's attention ("for three points, name the movie; for five points, name three actors you'll see; for fifteen points, recite the fifteen key words you'll hear in the voice over" and I then stop the trailer at the 1.25'' mark, after the oily Texas oilman's rich ["NOT"] assertion "... Corruption is why we win!").

I note that if Hollywood gave central casting to the FCPA in this 2005 movie, it surely is a sign of the importance of the issue. Of course, I make clear, as you have understood, that the movie is not reflective of the approach and experience today of most in the U.S. multinational business community - certainly, not of those in the company for which I work. Almost without fail, I am assured that the audience will then listen to the many legal and business imperatives for clear corporate policies and commitment to procedures on anti-corruption that follow.


Thus, while conceding that "five" may be too high a ranking given the film's dark and jaundiced take on corruption, I would award at least four red flags to a movie trailer that can accomplish this goal in less than 2 minutes. This is especially the case for an audience in the regulated pharmaceutical industry in which I practice, which today may suffer from "compliance fatigue" as a result of the virtually continuous training employees receive to address the many many different and evolving standards required to ensure that operations in a heavily regulated industry are conducted in a compliant manner.

The "enthusiastic support" you may have read into my singling out the movie was more for the educational values of both the trailer and your terrific blog - of which I am a devoted and appreciative reader, than for the underlying message of George Clooney's thriller.

 

Sincerely,

Daniel Kessler

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Monday
Aug252008

Swiss Police Raid Alstom

Swiss police last week arrested a former manager of French engineering giant Alstom and searched for evidence as part of a corruption and money-laundering investigation. Offices near Zurich and in Baden were raided, as were homes in several cantons.

Paris-based Alstom is a global leader in equipment and services for power generation and high-speed rail transport. It operates in more than 70 countries with about 76,000 employees. Revenues last year were €16.9 billion. It has an office in Windsor, Connecticut and its securities trade in the pink sheets (Other OTC: AOMFF.PK).

The raids and arrest last week are reported to be unrelated to another investigation involving suspected corrupt payments in Asia and South America between 1995 and 2003. Reports in May said that Swiss authorities found evidence Alstom paid around €20 million via shell companies to agents and others in Singapore, Indonesia, Venezuela and Brazil. Reports also mentioned payments of $6.8 million in connection with a $45 million contract for the Sao Paolo subway and a Brazilian energy plant.

In June this year, the press said French judges had charged a former Alstom consultant for his role in suspected overseas bribes. The company apparently appeared as a civil plaintiff in that case, claiming it may have been a victim of embezzlement.

Alstom said over the weekend that it's "cooperating fully with the judicial authorities in this [new] matter."

Forbes said "investors were cautious about painting [Alstom] with the same brush as Siemens, which has been embroiled in a slush fund scandal. Also, the previous investigation into Alstom was over infrastructure contracts in South America and Asia between 1995 and 2003, before the company's chief executive, Patrick Kron, took charge. If the previous investigation was over past contracts, chances are that this one is too, suggesting a limited impact on the company and its current management."

U.S. authorities haven't said whether they're investigating or planning to investigate Alstom for violations of the Foreign Corrupt Practices Act or other laws.

Thanks to CW for the heads up.

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Sunday
Aug242008

More Than Gold

Just a generation ago, the idea that China would host the greatest Olympics ever would have been outlandish. Black bicycles, gray Mao suits, grim faces -- it was a closed country, both fearful and feared. But for the past 16 days, the world has witnessed something awesome. A new and beautiful China -- smiling, proud, and graceful. Traditional but suddenly modern, and above all a nation now capable and effective.

Could anyone who knew the country back then have imagined it? That around the globe the Bird's Nest and Water Cube would become as familiar as the Great Wall and the Summer Palace. That scores of Chinese athletes would weep in victory. That thousands of exuberant local fans would pack the basketball venue, many wearing Kobe's jersey, whooping it up as their "Little Flying Warrior" brought his second-half brilliance to the Games' last event.

The magnificent sporting performances throughout the Games paid tribute to China's great staging, keeping the focus on the play and off the politics. The country is still a work in progress but it's rising fast, powered by pride and purpose, and lifting the rest of Asia with it. Korea's baseball team, Mongolia's boxers, Singapore's ping-pong paddlers -- they all reflect the new confidence of the Orient re-made.

The PRC has often appeared in these posts for the wrong reasons. But not today.

Congratulations, China.

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