Richard L. Cassin Publisher and Editor

Andy Spalding Senior Editor

Jessica Tillipman Senior Editor

Harry Cassin Managing Editor

Elizabeth K. Spahn Editor Emeritus

Cody Worthington Contributing Editor

Julie DiMauro Contributing Editor

Thomas Fox Contributing Editor

Marc Alain Bohn Contributing Editor

Bill Waite Contributing Editor

Shruti J. Shah Contributing Editor

Russell A. Stamets Contributing Editor

Richard Bistrong Contributing Editor 

Eric Carlson Contributing Editor

Bill Steinman Contributing Editor

Aarti Maharaj Contributing Editor

FCPA Blog Daily News


The Great Temptation

Some of the most charming and charismatic people in this world are agents – the middlemen who help foreign companies navigate local waters in return for a slice of revenues, typically around 5%. That may sound like small money, but 5% of $100 million – a little deal for telecommunications, military hardware or energy projects, for example – is $5 million. These days, in lots of industries, $1 billion deals aren't uncommon, and a 5% slice of that pie is a tidy $50 million. Paychecks that size attract very talented people.

The best agents are gifted with the tools of their trade -- old-world manners, great annecdotes (in which they usually cast themselves as heroes), reassuring confidence and up-to-the-minute market intelligence. They salt their conversation with the names of world leaders they golf with, and cabinet members, judges, atheletes and Hollywood stars they host on their boats or in their ski lodges.

But despite their savvy, or because of it, agents are the cause of most FCPA problems. All too often they allocate some of their fees to bribe potential public customers, with their principals either not knowing or not caring about the illegal conduct. In the most confusing and opaque economies, agents bring the most value -- and the greatest FCPA compliance risks. Countries that come to mind include the newly independent states, as well as Mexico, India, Egypt, Burma, Indonesia and others.

Despite their potential for mischief, the FCPA never declares agents off limits per se. Anyone can retain an agent whenever they want to – at their own risk. The Justice Department warns about the use of agents and dishes out practical advice how to recognize the compliance dangers. For example, in the Lay Person's Guide to FCPA, the DOJ says this:

“The FCPA prohibits corrupt payments through intermediaries. It is unlawful to make a payment to a third party, while knowing that all or a portion of the payment will go directly or indirectly to a foreign official. The term 'knowing' includes conscious disregard and deliberate ignorance. The elements of an offense are essentially the same . . ., except that in this case the 'recipient' is the intermediary who is making the payment to the requisite 'foreign official.'

“Intermediaries may include joint venture partners or agents. To avoid being held liable for corrupt third party payments, U.S. companies are encouraged to exercise due diligence and to take all necessary precautions to ensure that they have formed a business relationship with reputable and qualified partners and representatives. . . .In addition, in negotiating a business relationship, the U.S. firm should be aware of so-called 'red flags,' i.e., unusual payment patterns or financial arrangements, a history of corruption in the country, a refusal by the foreign joint venture partner or representative to provide a certification that it will not take any action in furtherance of an unlawful offer, promise, or payment to a foreign public official and not take any act that would cause the U.S. firm to be in violation of the FCPA, unusually high commissions, lack of transparency in expenses and accounting records, apparent lack of qualifications or resources on the part of the joint venture partner or representative to perform the services offered, and whether the joint venture partner or representative has been recommended by an official of the potential governmental customer.” (emphasis in original)

In new or hard-to-reach markets, agents can be an important and even essential ingredient for commercial success. They can help identify real opportunities, keep foreign companies clear of local political quicksand, and teach important lessons about the home town culture. But when agents guarantee successful results, open doors in high places a little too easily, and wink when asked about their business methods – then they're too good to be true. Those agents might make great dinner companions, but they shouldn't make it past an effective compliance program.


Ten Fast Facts About The FCPA

It's easy enough to scoff at the slogans, proverbs and aphorisms that line the halls of the great corporations. Who hasn't emerged from a conference-room donnybrook wondering who the Teamwork posters are supposed to be talking about? And yet, THINK helped create an industry and a company to lead it, and Safety First really can save lives.

How about compliance? Can we ever be reminded too many times to play by the rules, obey the law, keep our noses clean? Just as the best safety programs prevent accidents before they happen, so the best compliance programs should likewise head off illegal schemes before they hatch. So, could it be that the best -- which means the most memorable -- lessons about the FCPA might just be the shortest?

With that in mind, here are ten fast facts about the FCPA. Some aren't all that "fast" and none will fit on a bumper sticker. But we'll keep trying -- and we'll welcome your help.

1. Companies and individuals subject to the FCPA's antibribery provisions cannot give or promise to give anything of value to foreign officials directly or indirectly in order to obtain or retain business.

2.Those subject to the FCPA's accounting standards must make and keep books and records that accurately and fairly reflect the transactions and dispositions of the assets of the corporation, and have internal accounting controls adequate to provide reasonable assurance of the integrity of the company's financial systems and its disclosures.

3. An FCPA antibribery offense is punishable by up to five years in jail; intentionally violating the accounting standards can result in 20 years in prison.

4. The antibribery provisions generally apply to all organizations based or operating in the United States, and the accounting standards apply to companies with securities trading on a U.S. exchange and filing periodic reports with the SEC. Directors, officers, employees and agents of the foregoing are covered by the FCPA, as is anyone who does anything to cause an FCPA offense while they're on U.S soil.

5. Even if a foreign subsidiary isn't covered by the FCPA, its acts might cause its U.S. parent to be in violation.

6. Indirect payments or promises to pay foreign officials through partners, agents or other intermediaries can violate the law.

7. Corrupt payments to a foreign political party, party official or candidate for foreign political office intended to obtain or retain business are prohibited.

8. Anyone acting on behalf of a "public international organization" such as the International Olympic Committee, the United Nations, the World Bank and the International Red Cross is a “foreign official” for the FCPA.

9. Members of a royal family are “foreign officials” for the FCPA.

10. The best protection against an FCPA violation is an "effective compliance program." It can result in penalty reductions for companies by up to 95%, according to the U.S. Federal Sentencing Guidelines.

10-A. The board of directors is always responsible for the oversight and management of the company’s FCPA compliance program.


Why Do We Need (Or Want) The FCPA?

In these pixels, we're fond of quoting A. A. Sommer, Jr. (1924-2002). During his years of public service, his perspective on the markets and their regulation was always influential, and is still worth studying. He was a commissioner of the Securities and Exchange Commission from 1973 to 1976 -- during the lead up to enactment of the Foreign Corrupt Practices Act. Although he was a lawyer and not a CPA, he also served in the 1980s and 1990s as chairman of the Public Oversight Board and as a board member of the Financial Accounting Standards Advisory Council.

Here, from a speech he delivered on April 2, 1976 called “Business Ethics and the Free Enterprise System ,” are some of his thoughts about public corruption and its impact on global markets and ordinary citizens:

"[E]ven apart from the scandalous cases that have caught the headlines, there is something deeply troubling to me when business is done in the manner in which it is apparently done in some countries.

“All of us have been schooled in the notion that competition in price and quality among sellers is the surest road to the most efficient use of resources and maximum benefit to consumers. When business is bought by payments to gain official favor, this desirable competitive process is, somewhere in the world, subverted.

“And while we in this nation may not be the direct victims of this, nonetheless, such activity runs contrary to our heritage, our ideologies, our modes of thinking, and we therefore feel constrained to condemn it wherever it occurs and no matter what justification may be asserted.

"I think all of us would much prefer if all business, not just that done by American companies, were done in accordance with high ethics and strict adherence to the law. Regrettably, in some countries, apparently, the abortion of the competitive process is not seen as the evil that it is in this country and practices, repugnant to us, but which are ancient in origin and woven into the very structure of society, are accepted ways of doing business. This cultural clash, this conflict of ideologies, is a part of a total reality we cannot ignore and it is one that I would suggest we have not yet begun to understand fully or deal with effectively."

He concluded by urging his listeners to ponder the harm to a country and its citizens when payments land in the pockets of corrupt officials instead of the national treasury: "This is surely a dimension that most people have not consid­ered, and yet, I think is a most important one for it may well involve an ethical consideration that is perhaps more meaningful and more important than the legal problems associated with the bribe itself."

As we've said before, Commissioner Sommer's words always remind us why the FCPA matters.


Roll Call

It was just two weeks ago that we were waxing about the quiet times for FCPA watchers, due to the temporary bottleneck in the appointment of corporate monitors. But come to think of it, the Justice Department's Fraud Section, the group in charge of FCPA enforcement, has a lot on its mind right now.

In addition to the monitor controversy, there are sensitive investigations of BAE and Saudi Prince Bandar, along with Siemens, Panalpina and most of the oil and gas services industry. Giant insurance brokerage Aon announced an FCPA investigation. Medtronic is under the microscope with the rest of the leading orthopedic device makers (whose deferred prosecution agreements in their domestic bribery cases helped ignite the aforementioned controversy about corporate monitors).

Last week, even stolid Alcoa joined the FCPA line up, courtesy of an inexplicable federal civil suit filed against it by Bahrain's Alba (in Pittsburgh, of all places) -- which the DOJ promptly stayed while it plays investigative catch-up. And let's not forget that at least three dozen other companies have disclosed yet-unresolved FCPA investigations over the past few years -- Shell recently became one of them (see also Panalpina, above); Halliburton and DaimlerChrysler are two others. And there's Total, ABB, Bristol Myers Squibb, Tyco and . . . . well, it's a long list.

So it's not a quiet time over at the DOJ after all. That means the hardworking people there can be forgiven for little things, like gremlins making mischief on their FCPA Opinion Procedure Release website. Sometimes Releases disappear. This time, it's Release 08-01. When it was published earlier this year, we posted about it here, and it should be accessible as a pdf file here. As a reminder, Release 08-01 is the wordiest on record. It's about a proposed investment in an overseas privatization, and describes in detail the due diligence for the deal, protracted negotiations over the parties' compliance rights and obligations, and some final, remedial due diligence. In other words, it's packed with issues, action and guidance -- so it might come in handy.

Quiet times for the FCPA? Not nearly. In fact, when the dam breaks for the appointment of new corporate monitors, which should be any day now, we're expecting the busiest FCPA enforcement season ever.


At Alcoa, Who Knew What?

If, as Alba alleges, Alcoa overcharged it for supply contracts by $2 billion, and some or all of the money went into offshore accounts controlled by Alcoa's agent and was used to bribe Alba's personnel and other Bahraini government officials, then the focus of the U.S. government's criminal investigation will be on whether anyone from Alcoa knew what was happening, or if the agent acted alone and without Alcoa's knowledge.

The Justice Department last week intervened in Alba's federal civil suit against Alcoa, asking the court to stay the case while the government investigates possible criminal violations of the Foreign Corrupt Practices Act and other laws by Alcoa and its executives and agent. Alcoa has said it's innocent. "We will cooperate fully with the DOJ and believe this will help bring this matter to a speedy conclusion," Alcoa communications director Kevin Lowery said.

For U.S. prosecutors to obtain a criminal conviction of an individual under the FCPA, they must prove, among other things, that the defendant acted with "knowledge." The most recent discussion of the knowledge element in an FCPA prosecution is U.S. v. Kay (No. 05-20604, 5th. Cir., 2008). In that case, the United States Court of Appeals for the Fifth Circuit said the government didn't need to prove the defendants had specific knowledge about the FCPA. Instead, the court said, the government could satisfy the knowledge element by proving merely that the defendants understood that their actions were illegal.

Sitting en banc, the U.S. v. Kay appellate court -- which was reviewing the trial court's jury instructions on "knowledge" -- said: To be clear, we return to first principles. That is, this case was tried on the basis that the Government had to prove that the Defendants knew that their actions violated the law, although they did not need to prove that they were aware of the specific provisions of the FCPA. . . . The Government, while responding that they need not prove the specifics of the FCPA, made clear that it had to prove that Defendants knew that their conduct was illegal."

U.S. v. Kay involved bribery offenses under the FCPA, which carry a potential prison term of five years. What about criminal violations of the accounting standards, for which individuals can face up to 20 years? Those prosecutions must include proof that the accused acted willfully. The FCPA says a willful violation is the intentional circumvention of or failure to implement a system of internal accounting controls, or willful falsification of an issuer's books, records, or accounts.

What about Alcoa's corporate exposure for criminal charges? If any employee was involved with the agent and knowingly participated in bribing foreign officials in Bahrain, or intentionally cooked Alcoa's books with respect to the overcharges and bribery, then Alcoa itself might be held criminally responsible under the doctrine of respondeat superior. That could happen even if Alcoa's employees acted secretly, completely outside their authority, and against Alcoa's policies.

“An Overview of the Organizational Guidelines” from the United States Sentencing Commission's May 2004 release says this:

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.

The statement reflects the majority view of the federal appellate courts that have considered whether corporations are criminally liable for the crimes employees commit while acting within the scope of their employment. Courts have said it may be irrelevant that the employee is not a high managerial official, that the corporation may have specifically instructed the employee not to engage in the proscribed conduct, or that the statute is one that requires willful or knowing violations, rather than one that imposes strict liability.

The rationale for applying respondeat superior to corporations is that criminal statutes such as the FCPA impose a duty upon the corporation to prevent its employees from committing the statutory violations. If it fails in its duty to prevent the criminal behavior, then the corporation itself should be made to answer for the same criminal acts.

Despite the doctrine of respondeat superior, the DOJ is now understandably reluctant to charge corporations with criminal offenses. The Arthur Andersen prosecution demonstrated the catastrophic consequences that can result from a corporate felony charge, which for Andersen was a death sentence, even though the firm was later exonerated. The DOJ has since adopted the practice for FCPA and other white collar offenses of offering companies deferred prosecution agreements as an alternative to criminal prosecutions.

In cases involving the FCPA, corporations have additional (albeit largely theoretical) protection from the harshness of the respondeat superior doctrine. The "Overview of the Organizational Guidelines" says this:

The [federal sentencing guidelines mitigate] the potential fine range - in some cases up to 95 percent - if an organization can demonstrate that it had put in place an effective compliance program. This mitigating credit under the guidelines is contingent upon prompt reporting to the authorities and the non-involvement of high level personnel in the actual offense conduct.

If, as Alba alleges, people from Alcoa were involved in activity that may violate the FCPA, then the company's task, among others, will be to show that it has an effective compliance program, that top executives were unaware of any illegal conduct, and that it never concealed the conduct from the DOJ or SEC. If Alcoa can demonstrate these things, it will be eligible for mitigation of the potential criminal penalties. It is certainly true, however, that mitigation is less relevant when deferred prosecution agreements are offered. But the arguments for mitigation should still influence the DOJ's determination of the terms of any eventual deferred prosecution agreement.

Would the presence of actual FCPA violations ruin Alcoa's ability to establish that it has an effective compliance program? No. The Sentencing Guidelines stipulate that the failure to prevent or detect an FCPA offense "does not necessarily mean that the program is not generally effective in preventing and detecting criminal conduct."

* * *

Alba's allegations raise a multitude of FCPA issues for Alcoa, its employees and agent. We've mentioned just a few here, and we'll come back to the case from time to time. As one pundit said to us, this will be a zoo.

Please click on the labels below for prior posts on the topics discussed above and for access to the sources and authorities referred to in the post. You can also contact us for the annotations.


A Matter Of Money

At the White Collar Crime Prof Blog, Ellen Podgor -- who's now the solo blog editor since Peter Henning placed himself on well-deserved blog editor emeritus status -- discusses some of the obligations imposed by the Department of Justice on AB Volvo and its two subsidiaries in their deferred prosecution agreement here. Those companies recently resolved Foreign Corrupt Practices Act violations that arose under the U.N. Oil for Food Program. (See our post here.)

She mentions a few aspects among many in AB Volvo's deferred prosecution agreement -- the requirement for the DOJ's pre-approval of any statements to the media by the companies about their agreement, and the right of the DOJ to take into account refusals by the companies to waive attorney-client privilege in determining their level of cooperation. And, she says, the DOJ alone has the right to decide if the agreement has been breached, generally without regard to the companies' statute of limitation rights. Prof Podgor posts the AB Volvo deferred prosecution agreement here.

We're fascinated, as usual, by the successor liability provision in the agreement. This feature has been common for a while -- it appeared in ABB's agreement with the DOJ, for example -- but we're still trying to work out the implications. The substance of it is that in any agreement by the companies to sell, merge or transfer all or substantially all of their business operations, whether structured as a stock or asset sale, merger or other transfer, the operative document must include provisions "binding the purchaser or any successor in interest thereto to the obligations described" in the deferred prosecution agreement.

The provision is intended, among other things, to prevent the companies from slipping out of their deferred prosecution agreements through a corporate transaction or restructuring of some kind. That makes good sense. And to be effective, the provision really does need to reach not only immediate but also subsequent buyers -- who could actually be the companies themselves or related entities.

The interesting part, however, is when bona fide third-party buyers show up. That has happened with other businesses subject to successor liability provisions. It doesn't matter, for example, if the buyer is non-American and not otherwise subject to the jurisdiction of the FCPA. The compliance obligations still travel with the business being sold, no matter where it comes to rest.

That helps level the playing field for American companies. Non-U.S. companies can't exploit businesses that may be distressed because of FCPA problems. They can't buy the assets, domicile them offshore, and free them from their compliance obligations. It protects American businesses from unfair competition. Also, successor liability provisions help disseminate and promote best practices around the globe by tying compliance obligations to the business assets, wherever they end up, and not to the original corporate entities that are parties to the deferred prosecution agreements. The process has already spread compliance best practices to European and other companies that have purchased businesses subject to the successor liability requirements.

But there's a price attached to successor liability provisions -- an unidentified penalty of sorts. Business assets subject to FCPA compliance obligations, including waivers of rights to media access, for example, and attorney-client privilege and statute of limitations, are likely to have a different valuation than similar, unencumbered assets.

How much impact successor liability provisions have on a business' valuation is anyone's guess. But the direct cost of compliance would be an element. Another aspect could be a diminution in the business' value because of the threat of further sanctions by the DOJ without the benefit of any judicial review or protections offered by attorney-client privilege and statute of limitations. These must have a price tag -- whatever it may be.


Questions And More Questions About Alba v. Alcoa

What's the story behind this case? To be honest, we've got lots of questions and so few answers.

This we know: Aluminum Bahrain BSC ("Alba") sued Alcoa Inc., its long-time raw materials supplier, for corruption and fraud in a Pittsburgh federal court. Alba -- majority owned by the government of Bahrain -- alleged that it paid $2 billion in overcharges over a 15-year period. The money went to overseas accounts controlled by Alcoa's agent. Some of the money was then used to bribe Alba's executives in return for more supply contracts. Among the Bahraini officials alleged to be involved is Alba's former chairman, who also served as the country's powerful minister of petroleum.

Before filing the suit, Alba confronted Alcoa. It demanded a payment of $1 billion within two weeks. A spokesman for Alcoa reported later, “We said we’d be happy to do a more extensive investigation with them - they said ‘we’ll see you in court.’”

Alba launched its lawsuit in late February 2008. As if on cue, the U.S. government appeared in the same federal court in Pittsburgh three weeks later. The government asked the court to stay Alba's civil suit pending a criminal investigation into whether Alcoa and its executives and agents violated the Foreign Corrupt Practices Act and mail and wire fraud statutes. Alcoa said it's innocent and will cooperate with the feds.

So what's going on here?

First off, we're having trouble understanding why Alba sued Alcoa in a U.S. court. Foreign governments and their companies work extra hard to avoid being dragged into civil litigation in the United States. Despite arguments about confidentiality, privilege and sovereign immunity, civil lawsuits expose foreign parties to U.S.-style discovery, and that's bad news. They can be compelled to turn over any documents or other information that might lead to the other side's discovery of relevant evidence. That's a broad category. Their representatives can be deposed and their facilities inspected. In other words, in civil litigation there's no place to hide.

Dan Newcomb -- author of the annual FCPA Digest -- said this in a Wall Street Journal story about the case: "The reason it's rare for governments to accuse U.S. companies of corruption in American courts is that once you raise a question of corruption, the sovereign runs the risk they will be embarrassed by the requests of discovery from the private party." In this case, he added,"They have to be prepared to withstand Alcoa coming back to them and saying, 'We want to look at every other corrupt transaction you have been involved in.' "

Alcoa's version of recent events is important. It said Alba gave it just two weeks to pay $1 billion or face a lawsuit. Two weeks? That's a meaningless deadline. As Alba and its lawyers would know, corporate giants cannot possibly decide to settle huge claims involving potentially felonious allegations in two weeks. More like a year or maybe two. Which is probably less time than a complicated and well-defended civil suit would require.

Alba's allegations are filled with dynamite. Alcoa's reaction to them was what we'd expect. It wanted to investigate the facts and, we imagine, start the process of reconciliation with its huge, long-time customer. That's a normal commercial response, and it makes sense. What doesn't make sense is why Alba refused -- why it rushed into a public lawsuit in U.S. federal court without first giving private negotiations with Alcoa a chance to work.

Did Alba file the lawsuit because it wanted the U.S. government to investigate Alcoa? Probably not. The civil suit, after all, was the long way around to the Justice Department. Alba could have taken its allegations and evidence directly to the DOJ from the start. The prosecutors would have been compelled to call on Alcoa right away. So again, what was the point of the civil suit? We're not sure. The suit, by the way, now looks like a distraction for everyone, as demonstrated by the DOJ's move last week to stay the proceedings -- which even Alba didn't oppose.

If Alba didn't expect to be paid the $1 billion in two weeks -- if instead it wanted all along to file its lawsuit and make a big splash in the U.S. press -- the question is why? Why file the civil suit when it could have dealt with Alcoa in a safer and less public way? So our real question is whether Alcoa is the target of Alba's U.S. lawsuit? Or is the target something or someone else? Is Alcoa collateral damage? We're not conspiracy theorists -- the simple explanation is usually right -- and we have no idea what's happening inside Bahrain's leadership. But we're having trouble seeing the big picture here.

Finally, what if Alcoa's account of Alba's two-week payment demand isn't accurate? In that case, Alcoa has some tough questions to answer. When did it learn about the fraud and bribery allegations? What investigation did it do? Who within Alcoa might have been involved? Did it self-report the allegations and its internal reactions to them to the SEC and the DOJ? If not, why not? And when was it planning to disclose all this to shareholders?

Stay tuned.

View prior posts about Alba and Alcoa here.


Feds Investigating Alcoa For FCPA Violations

The U.S. Justice Department has opened a criminal investigation into allegations that Alcoa Inc. violated the Foreign Corrupt Practices Act and other laws by bribing officials in Bahrain.

The federal investigation was triggered when Aluminum Bahrain BSC ("Alba") filed a civil lawsuit three weeks ago in federal court in Pittsburgh accusing Alcoa of a 15-year conspiracy linked to overcharging, fraud and bribery. The suit alleges that more than $2 billion in Alba's payments under supply contracts passed from Bahrain to tiny companies in Singapore, Switzerland and the Isle of Guernsey, and that some of the money was then used to bribe Bahraini officials involved in granting the contracts. See our prior posts here.

Federal prosecutors this week asked the U.S. District Court to stay Alba's federal civil lawsuit because the U.S. has a "direct and substantial interest" in Alba's allegations. A Wall Street Journal report (here) says the U.S. government's court filing is a possible prelude to the empanelment of a federal grand jury, although for the moment prosecutors are working directly with Alcoa. "We will cooperate fully with the DOJ and believe this will help bring this matter to a speedy conclusion," Alcoa communications director Kevin Lowery said.

The government's filing says the Justice Department's fraud section is looking into whether Alcoa, its executives and its agents "have engaged in conduct with respect to their commercial relationship with Alba in alleged violation of various criminal laws, including the FCPA, and the mail and wire fraud statutes. . . . The Alba complaint alleges numerous facts which, if true, could be relevant to the government's criminal investigation and a potential criminal trial."

Bahrain's own investigation centers on Sheikh Isa bin Ali al-Khalifa, the country's former minister of petroleum and chairman of Alba, and on Jordan-born Canadian businessman Victor Dahdaleh, who acted as Alcoa's agent in Bahrain.

A report in Resource Investor (here) said the Justice Department approached Alcoa earlier this week with plans to stay the litigation with Alba in order to conduct its own investigation. Alcoa's Kevin Lowery said the civil suit arose after Alba confronted Alcoa with a series of allegations and demanded compensation of $1 billion in two weeks time. Alcoa investigated the claims, he said, and found “no evidence of any wrongdoing.”

“We said we’d be happy to do a more extensive investigation with them - they said ‘we’ll see you in court,’” Lowery told Resource Investor.

The WSJ reported that Alba's lawyer, Mark MacDougall of Akin Gump Straus Hauer & Feld LLP, won't oppose the stay in the civil case. "Our clients certainly respect the important role that the Department of Justice may play in this case," he said.


AB Volvo Settles FCPA Charges For $19.6 Million

AB Volvo today entered into a consent agreement with the U.S. Securities and Exchange Commission and a deferred prosecution agreement with the Department of Justice to resolve Foreign Corrupt Practices Act violations in Iraq caused by two subsidiaries under the U.N. Oil for Food Program. The settlements include financial penalties, disgorgement and interest of about $19.6 million.

AB Volvo was charged with violating the FCPA's books and records and internal controls provisions. Two of its subsidiaries, Renault Trucks SAS and Volvo Construction Equipment AB, were also charged with engaging in separate conspiracies to commit wire fraud and to violate the books and records provisions of the FCPA. AB Volvo's settlement with the SEC includes an agreement permanently enjoining it from future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, ordering it to disgorge $7,299,208 in profits plus $1,303,441 in pre-judgment interest, and to pay a civil penalty of $4,000,000.

The Swedish truck and equipment maker will also pay a $7,000,000 penalty pursuant to a deferred prosecution agreement with the DOJ. The agreements with the DOJ and SEC also provide for improved internal compliance programs at AB Volvo and its subsidiaries. If the two subsidiaries abide by the terms of the deferred prosecution agreement for three years, the DOJ will dismiss the criminal charges against them.

Between November 2000 and July 2001, AB Volvo's subsidiary, Renault Trucks SAS, entered into at least 18 contracts under the Oil for Food Program to supply trucks to the Iraqi government. Renault Trucks then subcontracted with truck bodybuilders to tailor the trucks to the Iraqi ministries' specifications. In order to mask its bribe payments, Renault Trucks devised a scheme in which the bodybuilders added the cost of so-called after-sales service fees into their bodybuilding costs and submitted the total cost to Renault Trucks for payment. In reality, no bona fide after-sales services were provided. The bodybuilders then passed the payments to Iraq. According to the SEC, AB Volvo's internal documents discuss the fact that had Renault Trucks made the payments in its own name, "we would have been caught red-handed." Illegal payments of $5,103,941 were made and another $1,255,922 was authorized but not paid.

From October 1999 to July 2000, another subsidiary, Volvo Construction Equipment International ("VCEI"), entered into four contracts under the Oil for Food Program in which more than $103,000 in kickbacks were paid to Iraqi ministries. On two contracts, illegal payments between 5% and 11.27% of the contract value were paid. An internal VCEI document discussed the extra trips VCEI staff had to make to Iraq in order to make the payments, and the possibility of having to give more payments. On one contract, VCEI's internal documents indicate that it gave its Jordanian agent a total of $15,950 as "the commitment to the third party whom support us and VOLVO to gain orders in the said ministry." In addition, VCEI's internal documents show that $19,000 was given to the Jordanian agent to purchase a car for the Ministry of Interior. VCEI did not disclose the payments or the car to the U.N.

According to a U.N. report of an interview of the Jordanian agent, he admitted that he personally paid kickbacks on behalf of VCEI. That company also used a Tunisian distributor to facilitate additional sales of its products to Iraq, and reduced its prices to enable the distributor to make the illegal payments based on bogus after-sales service fees. In total, VCEI or its distributors authorized more than $2.2 million in illegal payments.

The Oil for Food Program was intended to provide humanitarian relief for the Iraqi population, which faced hardship under international trade sanctions. The Program allowed the Iraqi government to purchase humanitarian goods through a U.N. escrow account. There were numerous abuses. Including AB Volvo's $7 million criminal penalty, the DOJ has now collected more than $24 million in penalties in cases involving suppliers of humanitarian goods under the Oil for Food Program.

The SEC said AB Volvo either knew or was reckless in not knowing that illicit payments were either offered or paid in connection with these transactions. "The company failed to maintain an adequate system of internal controls to detect and prevent the payments and its accounting for these transactions failed properly to record the nature of the payments," the SEC said. AB Volvo has already taken remedial acts and it cooperated with the SEC, DOJ and other authorities. “The incident is, of course, regrettable, but we do note with some satisfaction that the authorities spoke favorably of the cooperation by Volvo as well as Volvo’s own investigation and measures”, said AB Volvo CEO Leif Johansson. “It is important that we all now learn from what occurred,” he said in a company press release.

The DOJ explained its jurisdiction in the case this way: VCEI was a wholly-owned subsidiary of Aktiebolaget Volvo ("AB Volvo"), a company that had American Depositary Receipts ("ADRs") publicly traded on the National Association of Securities Dealers Automated Quotations ("NASDAQ"). AB Volvo issued and maintained a class of publicly-traded securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934 (15 U.S.C. § 781), and was required to file periodic reports with the United States Securities and Exchange Commission under Section 13 of the Securities Exchange Act (15 u.s.c. § 78m). Accordingly, AB Volvo was an "issuer" within the meaning of the FCPA, 15 u.s.c. § 78dd-1(a). By virtue of its status as an issuer within the meaning of the FCPA, AB Volvo was required to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflected the transactions and disposition of assets of AB Volvo and its subsidiaries, including those of VCEI which were incorporated into the books of AB Volvo.

View SEC Litigation Release No. 20504 / March 20, 2008 here.

View the SEC's Complaint in Securities & Exchange Commission v. AB Volvo, Civil Action No. 08 CV 00473 (D.D.C.) (JB) Here.

View the DOJ's March 20, 2008 News Release Here.

View the DOJ's Crininal Informations Against AB Volvo's Subsidiaries Here and Here.

View AB Volvo's News Release Here.


All In The Family

In a post here we described our edits to Wikipedia's article on the Foreign Corrupt Practices Act (here). Wiki's old article said a bank owner (pictured far left) whose brother was the minister of finance (far right) would be a foreign official for the FCPA. That's wrong, we said, because although consanguinity might be important, it has never been a definitive test of foreign-officialdome under the FCPA.

One of our readers had this to say about our edits: The omission of prohibitions on payments to family members creates a significant loophole. Are there any cases where business dealings with family members have been examined? My reading of the SEC statement on Statoil is that the Iranian official may not have had the formal authority to guarantee the contract but that it was his family connections which were being purchased.

We replied this way: Good point. But as far as we know, neither the FCPA itself nor any Opinion Releases or cases say that commercial dealings with family members of government officials are per se violations of the FCPA. If a family member is being used to make an illegal payment "indirectly" to a foreign official, then a violation would probably result, in the same way that indirect payments through other agents are illegal. But the mere fact of the consanguinity is not determinative, and that was the problem with Wiki's original article. No question, however, that dealing with family members of foreign officials always raises compliance red flags. It should probably be avoided in most cases because of the risks. But under some circumstances commercial relationships with family members of foreign officials may be permissible under an effective compliance program.

Exhibit A for our answer is FCPA Review Procedure Release No. 82-04 (November 11, 1982) [mislabeled as 82-02 on the DOJ site]. It's available here. In it, the Department of Justice received a review request from Thompson & Green Machinery Company, Inc. ("T & G"). It hired a foreign businessman ("Mr. X") as its agent in connection with a generator sale in a foreign country. However, Mr. X's brother was an employee of the same foreign government to whom T & G was trying to sell its generator. The DOJ gave its blessing, however, after receiving assurances from T & G that (i) the written consultant agreement with Mr. X prohibited him from using any part of his commission to pay a finder’s fee to a third party, and also expressly referred to the FCPA; and (ii) both Mr. X and his brother signed separate affidavits in which they pledged to adhere to the FCPA’s antibribery provisions.

So it's not illegal per se under the FCPA to have commercial dealings with family members of foreign officials. No question, however, that doing so is full of risk. For example, Paradigm's hiring of the brother of an official from Pemex, from which Paradigm was then awarded a contract, was cited as an offense. See our post here. Family members were also involved in FCPA convictions or allegations in U.S. v. Kozeny (see our posts here), U.S. v. Sapsizian & Acosta [see also Alcatel] (S.D. Fla. 2006), SEC v. Bellsouth Corporation (N.D. Ga. 2002), U.S. v. Metcalf & Eddy (D. Ma. 1999), and others.

But the FCPA itself doesn't mention family members, and as of today, Exhibit A above -- FCPA Review Procedure Release No. 82-04 -- remains "good law," if we can refer to a DOJ opinion that way. It means the fact that someone is related by blood or marriage to a foreign official doesn't make the person a foreign official for the FCPA. It does, however, mean dealing with them is always a high-risk proposition. That's why lots of compliance-minded companies ban the practice entirely.

Many thanks to our reader who contributed the thoughtful comment about family relationships and the FCPA.


More Weight On The Greens

Thailand's investigation of the alleged bribery case involving Hollywood movie producers Gerald and Patricia Green is moving ahead. The Thai press reported last week (here, among other places) that the Department of Special Investigation has found enough evidence of alleged bribery to refer the matter to the National Counter Corruption Commission (NCCC), which handles prosecutions involving high-level public corruption. "The case will be transferred to NCCC before the end of this month," DSI spokesman Colonel Piyawat Kingket said.

The Greens were arrested in December 2007 and charged in federal court in Los Angeles with violating the Foreign Corrupt Practices Act. The complaint alleges that the husband and wife paid $1.7 million in bribes to the head of the Tourism Authority of Thailand. Their purpose, according to U.S. prosecutors, was to obtain a no-bid contract to manage the prestigious Bangkok International Film Festival. The FBI said the Greens' company received $10 million under the contract. The Greens, now out on bail, pleaded not guilty and had their trial postponed from February until September 2008.

The FBI didn't name the Thai official. But Juthamas Siriwan headed the Tourism Authority of Thailand from 2001 to 2006 and was in charge of the film festival. She has denied any wrongdoing and threatened to sue anyone implicating her in the case. Soon after news of the Greens' arrest in the U.S. broke last year, she resigned from her post as deputy chair of Thailand's Puea Pandin (People's Power) Party.

During its investigation, the FBI apparently sent agents to Bangkok, where they observed and may have listened to meetings between the Greens and Ms. Siriwan. Some of the evidence cited by the Thai Department of Special Investigation might have come from the FBI. If the DSI has collected more evidence on its own and is sharing it with U.S. authorities, the Greens could be in for a rough ride.

View prior posts about the Greens here.

View the FBI's Affidavit here.


Shell Discloses FCPA Investigation Related To Panalpina

In its Annual Report and Form 20-F for the year ended December 31, 2007, Royal Dutch Shell plc includes a Foreign Corrupt Practices Act disclosure. It relates to the Department of Justice's ongoing investigation of Panalpina. Shell says,

"In July 2007, Shell’s US subsidiary, Shell Oil, was contacted by the US Department of Justice regarding Shell’s use of the freight forwarding firm Panalpina, Inc and potential violations of the US Foreign Corrupt Practices Act (FCPA) as a result of such use. Shell has started an internal investigation and is cooperating with the US Department of Justice and the United States Securities and Exchange Commission investigations. While these investigations are ongoing, Shell may face fines and additional costs."

Shell's Annual Report can be downloaded here. Warning -- it's a 224 page pdf file.

Shell is the first major oil and gas producer we know of to be named in the Panalpina investigation. Before this, oil and gas services firms were disclosed as targets, but not producers. For those unfamiliar with the Panalpina investigation, here's some background:

In February 2007, the DOJ said in connection with the Vetco case that bribes in Nigeria "were paid through a major international freight forwarding and customs clearance company to employees of the Nigerian Customs Service . . .” Since then, about a dozen leading oil and gas services companies have announced FCPA investigations resulting from their relationship with logistics leader Panalpina.

By mid 2007, the DOJ and SEC had extended the investigation into Panalpina's activities in Nigeria, Kazakhstan and Saudi Arabia, and had sent letters to its customers, “asking them to detail their relationship with Panalpina . . . ." Schlumberger, Tidewater, Nabors Industries, Transocean, GlobalSantaFe Corp., Noble Corp. and Global Industries are among those involved. In September 2007, Panalpina said it is cooperating with U.S. prosecutors and exiting the Nigeria logistics and freight forwarding market for all oil and gas services customers.

We commented earlier that with crude prices at triple digits, can the U.S. government afford to cripple output anywhere in the name of FCPA enforcement? Probably not. But in addition to encouraging Panalpina to stop doing business in Nigeria for oil and gas services firms, the DOJ may have made special arrangements directly with the Nigerian government for customs clearance and permitting on behalf of Panalpina's former customers. That will allow them to keep working in Nigeria but still comply with the FCPA.

View prior posts about Panalpina here.