Search

Editors

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

Tuesday
May272008

Bribe Takers Get A Pass Under The FCPA

With $4-a-gallon gas, disappearing honey bees and a world-wide hops shortage, there's hardly time to worry about anything else. Like why bribe-taking foreign officials are never prosecuted under the Foreign Corrupt Practices Act. Fortunately, a reader with time to ponder such things asked us that question after we reported last month (here) the FCPA-related sentencing of former World Bank employee, Ramendra Basu.

Basu and his co-conspirator, Gautam Sengupta, another World Bank employee, pleaded guilty to helping a Swedish consultant make corrupt payments to government officials in Ethiopia and Kenya. At the time of their offense, Basu and Sengupta were working in the World Bank's headquarters in the District of Columbia, and both were U.S. permanent residents. Our reader wanted to know if Basu and Sengupta, who also took money from the Swedish consultants, could have been prosecuted not only as "domestic concerns" but also based on their status as employees of the World Bank, because "the Bank is a public international organization and its employees are therefore foreign officials under the FCPA." See 15 U.S.C. § 78dd-1(a)(f)(1) et seq.

Thanks to a definitive case from 1991, the answer is clear. Only bribe-payers can be prosecuted under the FCPA or under the general conspiracy statute of the United States. Bribe-takers are excluded. References in the FCPA to "foreign officials" are always talking about those who accept bribes, not those who pay them. That means foreign officials aren't targeted for prosecution.

The case that settled the issue is U.S. v. Castle, 925 F.2d 831 (5th Cir. 1991) (per curiam). In it, the Fifth Circuit adopted the Memorandum Opinion and Order from the trial court written by Judge Barefoot Sanders. The four original defendants in the case were charged in a one-count indictment with conspiring to violate the Foreign Corrupt Practices Act, 15 U.S.C. §§ 78dd-1, 78dd-2. Two defendants, Donald Castle and Darrell W.T. Lowry, moved to dismiss the indictment against them on the grounds that as Canadian government officials, they couldn't be convicted of accepting a $50,000 bribe to steer award of a bus-service contract by the Saskatchewan provincial government.

The two other defendants who paid the bribe didn't dispute that they could be prosecuted for conspiring to violate the FCPA. Nor was there any dispute that defendants Castle and Lowry, as Canadian government officials, could not be charged with a substantive violation of the FCPA, since the statute doesn't criminalize the receipt of a bribe by a foreign official. The issue, then, was whether the U.S. could prosecute Castle and Lowry under the general conspiracy statute, 18 U.S.C. § 371, for conspiring to violate the FCPA. "Put more simply," the district court said, "the question is whether foreign officials, whom the Government concedes it cannot prosecute under the FCPA itself, may be prosecuted under the general conspiracy statute for conspiring to violate the Act."

The trial court's memorandum opinion of June 4, 1990 was adopted by the appellate court. It traces the FCPA's legislative history relevant to whether foreign officials who take bribes can be prosecuted under the FCPA or the general conspiracy statute or both, and it sets out a comprehensive policy analysis behind Congress' intent to exclude foreign officials from prosecution. As far as we know, the 1991 case persuaded the Justice Department to end all further attempts to make conspiracy to violate the FCPA a chargeable offense against bribe-taking foreign officials.

Happily, Judge Barefoot Sanders' opinion lives up to its author's great moniker. It's a terrific read for FCPA lawyers, policy wonks, and policy-wonking lawyers. Here are just a few paragraphs from the 2,500-word decision:

"Yet the very individuals whose participation was required in every case--the foreign officials accepting the bribe--were excluded from prosecution for the substantive offense. Given that Congress included virtually every possible person connected to the payments except foreign officials, it is only logical to conclude that Congress affirmatively chose to exempt this small class of persons from prosecution.

"Most likely Congress made this choice because U.S. businesses were perceived to be the aggressors, and the efforts expended in resolving the diplomatic, jurisdictional, and enforcement difficulties that would arise upon the prosecution of foreign officials was not worth the minimal deterrent value of such prosecutions. Further minimizing the deterrent value of a U.S. prosecution was the fact that many foreign nations already prohibited the receipt of a bribe by an official. See S.Rep. No. 114 at 4, 1977 U.S.Code Cong. & Admin.News at 4101 (testimony of Treasury Secretary Blumenthal that in many nations such payments are illegal). In fact, whenever a nation permitted such payments, Congress allowed them as well. See 15 U.S.C. Sec. 78dd-2(c)(1).

"Based upon the language of the statute and the legislative history, this Court finds in the FCPA what the Supreme Court in [Gebardi v. United States, 287 U.S. 112, 53 S.Ct. 35, 77 L.Ed. 206 (1932)] found in the Mann Act: an affirmative legislative policy to leave unpunished a well-defined group of persons who were necessary parties to the acts constituting a violation of the substantive law. The Government has presented no reason why the prosecution of Defendants Castle and Lowry should go forward in the face of the congressional intent not to prosecute foreign officials. If anything, the facts of this case support Congress' decision to forego such prosecutions since foreign nations could and should prosecute their own officials for accepting bribes. Under the revised statutes of Canada the receipt of bribes by officials is a crime, with a prison term not to exceed five years, see Criminal Code, R.S.C. c. C-46, s.121 (pp. 81-84) (1985), and the Royal Canadian Mounted Police have been actively investigating the case, apparently even before any arrests by U.S. officials. Defendant Castle's and Lowry's Supplemental Memorandum In Support of Motion to Dismiss, filed May 14, 1990, at 10. In fact, the Canadian police have informed Defendant Castle's counsel that charges will likely be brought against Defendants Castle and Lowry in Canada. Id. at 10 & nn. 3-4. Thus, prosecution and punishment will be accomplished by the government which most directly suffered the abuses allegedly perpetrated by its own officials, and there is no need to contravene Congress' desire to avoid such prosecutions by the United States."

Download U.S. v. Castle, 925 F.2d 831 (5th Cir. 1991) (per curiam) here.
.

Thursday
May222008

The Highest Roller In Town

Does it ever pay to stonewall the Department of Justice in an FCPA investigation? We're asking because of an item that ran in the May 21st edition of the U.K. Times Online (available here). It described the DOJ's detention of BAE's ceo and a director as they travelled separately through the Houston and Newark airports last week. The DOJ, investigating alleged corrupt payments to Saudi officials, reportedly searched and copied information from their laptops, phones and briefcases, then let the men continue traveling. In the Times piece, Joshua Hochberg, the former head of the DOJ's group responsible for Foreign Corrupt Practices Act prosecutions, explained "that the recent heavy-handed behaviour of investigators indicated 'a severe lack of cooperation by BAE'."

Is a "severe lack of cooperation" a viable legal strategy -- for BAE and its personnel, or for any company facing an FCPA investigation? Does being non-cooperative and recalcitrant ever serve the best interests of a corporation? When dealing with the FCPA, does ordering company employees and agents to keep quiet and stay away from the DOJ ever enhance a company's defensive position?

The questions aren't merely academic. In most criminal investigations, corporate targets have some options to consider. They can decide to force the government to do the hard work of uncovering evidence. That's their right. Defendant's don't have to testify against themselves, and the government's burden to prove guilt beyond a reasonable doubt is a safeguard for corporations too. At its criminal trial, an accused company can sit mute and force the government to make its case.

But the FCPA doesn't work like a typical criminal statute. Companies facing FCPA charges don't go to trial. They can't withstand the withering publicity -- the front page stories around the world of their alleged international public bribery. They usually can't risk being banned from U.S. government contracts, or losing their export licenses -- which can happen based on mere allegations of FCPA offenses. And anyway, their chances at trial are exremely bleak. With the application of respondeat superior, once a company employee admits to violating the FCPA, the company is guilty as a matter of law. That's the rule in most U.S. circuits that have considered the question. It doesn't matter if the guilty employee held a low rank or was violating company policy. The employee's guilt is still imputed to the company. So one bad apple really does spoil the barrel.

Companies are sitting ducks in FCPA cases, and their people are vulnerable too. Let's face it, what director, officer or executive responsible for compliance wants to risk his or her hide because an assistant sales manager in Mongolia decided sui generis to grease some government palms? In other words, it's all downside risk to fight the DOJ in an FCPA case. So instead, companies cooperate, knowing a "good" outcome -- usually involving a deferred prosecution agreement -- is only possible when the DOJ is on their side.

If fighting isn't an option, if cooperating is the only way to salvation, then the DOJ ends up holding all the cards. Its decision to investigate and charge a corporation becomes paramount. There won't be a trial where lawyers can argue, raise defenses, challenge the witnesses' credibility, and implore the jury to dish out justice. Instead the process will start and end with the DOJ itself. Yes, there are grounds to criticize the prosecutors' omnipotence in FCPA cases. But for now that omnipotence is a fact of life that has to be faced. Why, then, would a corporation under investigation for alleged FCPA offenses thumb its nose at the prosecutors? What's to be gained?

Instead of fighting, the path forward has been for accused companies to work with the DOJ, to investigate the facts cooperatively, to self-disclose the results, to take remedial action, and to hope the DOJ will be willing to defer the prosecution if the company keeps its nose clean. But that's not what BAE is doing. Why not?

Well, in the U.K., BAE has been protected. The Serious Fraud Office -- responsible for investigating and prosecuting high-level overseas public corruption -- opened a file on the company but closed it in 2006 under irresistible pressure from the Blair government. The High Court in March this year ruled that the SRO couldn't legally drop the investigation, but the government is now appealing that decision to the House of Lords. In the U.K., BAE may yet keep its secrets. So is the company also betting that its U.K. protectors will prevail against U.S. prosecutors as well? That the Western Alliance will be unwilling to press the case and embarrass Saudi Arabia -- a key security ally and OPEC's largest exporter?

We don't know what's going on inside BAE. It has denied doing anything illegal. So all we really know is that the company isn't playing by the usual rules. Instead of making peace with the DOJ, it's flipping the feds an awfully rude gesture. Does that mean BAE has a legal strategy that relies on an ultimate savior, such as the man in the White House? If that's true, what happens if the strategy doesn't work? What happens if BAE ends up in the hands of the Department of Justice like every other company facing FCPA allegations? In that case, BAE and its leaders will have lost an enormous bet, and life will never be the same.

View prior posts about BAE here.

Tuesday
May202008

More Than Normally Careful

Due diligence is a common subject, so it's natural to think of it as an easy subject as well. But it's not. There's no black-letter law anywhere describing due diligence, or what type is needed for an effective compliance program under the Foreign Corrupt Practices Act, or how much should be done. Surprisingly, the FCPA itself never mentions it. The statute describes what behavior constitutes an offense, and lists a few things that don't -- facilitating payments, promotional expenses and payments allowed under the written laws of the host country. But it doesn't mention due diligence.

Where, then, does due diligence come from? As with so many aspects of compliance, the Federal Sentencing Guidelines are the fountainhead. They leave no doubt that due diligence is an essential ingredient of compliance. But even the Guidelines don't give examples, checklists, or timetables. They leave the "details" to those who know the organization best -- its directors, officers and executives. Instead of being a compliance how-to, the Guidelines describe the hallmarks of an organization whose intention is to comply. One hallmark -- you guessed it -- is due diligence. There's even some case law on the topic that's helpful.

In re Holland Furnace Company et al., 341 F.2d 548 (7th Cir., 1965) is a leading decision. Paraphrasing its holding and applying it to FCPA due diligence, the case says an organization must be able to demonstrate, on the basis of the entire record, and through the acts of certain of its officers, agents, representatives and employees, that it didn't knowingly, willfully or intentionally violate any prohibitions found in the law. And doing all that is the job of the due diligence.

Another leading case on the evidence of an organization's intention to comply is U.S. v. Greyhound Corporation. There, the Seventh Circuit was referring to compliance with a court order. But it could have been talking about a company's legal duty to comply with the FCPA (or any other criminal statute). In distinguishing between genuine and bogus compliance, the court said:

"Similarly, while actions showing a good faith effort to comply with the order will tend to negate willfulness, . . . delaying tactics, indifference to the order, or mere 'paper compliance' will support a finding of willfulness. In re Holland Furnace Co., 341 F.2d 548, 551 (7th Cir. 1965), cert. denied, 381 U.S. 924, 85 S.Ct. 1559, 14 L.Ed.2d 683. The very issuance of the order puts the party on notice that his past acts have been wrongful. 'No concept of basic fairness is violated by requiring a person in this position to be more than normally careful in his future conduct.' United States v. Custer Channel Wing Corp.,247 F.Supp. 481, 496 (D.Md.1965), aff'd, 376 F.2d 675 (4th Cir. 1967), cert. denied, 389 U.S. 850, 88 S.Ct. 38, 19 L.Ed.2d 119."

U.S. v. Greyhound Corporation, 508 F.2d 529 (7th Cir., 1974).

So an organization accused of criminal conduct can show that it intended to comply with the law by being "more than normally careful." For the FCPA, that means there has to be due diligence that's appropriate to the circumstances. If the host country is known to tolerate public corruption, for example, then being "more than normally careful" will involve more due diligence. Again, the more risk of an FCPA offense, the more effort is needed to keep the offense from happening.

Finally, then, the record of the company's due diligence (of its being "more than normally careful") becomes the evidence that the company didn't knowingly, willfully or intentionally violate the law. An FCPA offense requires willful and knowing conduct, so a record of due diligence demonstrating a lack of willfulness and knowledge might be the organization's best and only defense. That's why due diligence has to be at the center of any effective compliance program. It's the proof that the company intended to comply all along.

____________________

There's no doubt that due diligence is woven into the fabric of any true compliance culture. For readers wanting to know a bit more, we set out below the references to due diligence in the Federal Sentencing Guidelines under "Effective Compliance and Ethics Program." Here's what the Guidelines say:

-- To have an effective compliance and ethics program, for purposes of subsection (f) of §8C2.5 (Culpability Score) and subsection (c)(1) of §8D1.4 (Recommended Conditions of Probation - Organizations), an organization shall—

(1) exercise due diligence to prevent and detect criminal conduct . . . .

* * *

-- Due diligence and the promotion of an organizational culture that encourages ethical conduct and a commitment to compliance with the law within the meaning of subsection (a) minimally require the following:

(1) The organization shall establish standards and procedures to prevent and detect criminal conduct.

(2) (A) The organization’s governing authority shall be knowledgeable about the content and operation of the compliance and ethics program and shall exercise reasonable oversight with respect to the implementation and effectiveness of the compliance and ethics program.

(B) High-level personnel of the organization shall ensure that the organization has an effective compliance and ethics program, as described in this guideline. Specific individual(s) within high-level personnel shall be assigned overall responsibility for the compliance and ethics program.

(C) Specific individual(s) within the organization shall be delegated day-to-day operational responsibility for the compliance and ethics program. Individual(s) with operational responsibility shall report periodically to high-level personnel and, as appropriate, to the governing authority, or an appropriate subgroup of the governing authority, on the effectiveness of the compliance and ethics program. To carry out such operational responsibility, such individual(s) shall be given adequate resources, appropriate authority, and direct access to the governing authority or an appropriate subgroup of the governing authority. . . .

* * *

-- The organization shall use reasonable efforts not to include within the substantial authority personnel of the organization any individual whom the organization knew, or should have known through the exercise of due diligence, has engaged in illegal activities or other conduct inconsistent with an effective compliance and ethics program.

* * *

-- High-level personnel and substantial authority personnel of the organization shall be knowledgeable about the content and operation of the compliance and ethics program, shall perform their assigned duties consistent with the exercise of due diligence, and shall promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.

* * *

-- [T]he organization shall hire and promote individuals so as to ensure that all individuals within the high-level personnel and substantial authority personnel of the organization will perform their assigned duties in a manner consistent with the exercise of due diligence and the promotion of an organizational culture that encourages ethical conduct and a commitment to compliance with the law . . .

___________________

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

Monday
May192008

U.S. Prosecutors Detain And Search BAE Leaders

The Justice Department escalated its politically explosive investigation into BAE Systems' role in the $2 billion bribery scandal involving alleged illegal payments to former Saudi ambassador to the United States, Prince Bandar bin-Sultan, in return for the sale of jet fighters to the Saudi government.

BAE confirmed today that chief executive Mike Turner and director Nigel Rudd were detained by U.S. officials when they landed last week at Houston's George Bush International Airport. They were later released and allowed to leave the country. Reports say U.S. authorities confiscated and copied information on the executives' laptop computers, cell phones, and papers. The DOJ has also reportedly served additional subpoenas in the U.S. on employees of BAE Systems PLC and BAE Systems Inc. The DOJ's investigation centers on alleged violations of the Foreign Corrupt Practices Act and money laundering.

Britain's Serious Fraud Office dropped its investigation of BAE in 2006. The High Court last month ruled that the SFO acted illegally when it shut down the investigation, but allowed the SFO to appeal the decision to the House of Lords. That appeal is pending. Evidence in the High Court showed that Prince Bandar threatened to stop Saudi Arabia's cooperation with the U.K. on counter-terrorism unless the SFO ended its investigation. The High Court strongly criticized the government's capitulation. It said, "No one within this country or outside, is entitled to interfere with the course of our justice."

View prior posts about BAE here.

Sunday
May182008

The Victims Of Corruption

Today's Observer (the Sunday edition of the U.K.'s Guardian) carries an excellent commentary by Will Hutton here. It's about China's heartbreaking May 12, 2008 earthquake. The first paragraph says,

Earthquake's don't destroy strong, well-built buildings, they destroy weak ones. As China reels from its biggest earthquake in 30 years, public anger is mounting. A third of the 20,069 confirmed dead (the number is expected to rise to 50,000) were children trapped in the 6,900 classrooms that the government says were destroyed - weaker than other buildings in withstanding the shock. It has also said that as many as 390 dams could be at risk.

When reports first came from Szechuan about collapsed school buildings, our thoughts turned to a similar event in a different place many years ago. On October 12, 1992, an earthquake hit the city of Cairo, Egypt. We were in the Nile Hilton that day, resting before dinner. Our eighth-floor room vibrated at first, then began lurching up and down. We headed for an exit. The hallway was twisting and bending and terrified guests were crawling on their hands and knees, screaming for help. When we looked out from the hotel's back fire-escape, we saw a cloud of dust rising slowly from the ground across the entire city.

The Nile Hilton survived with little damage. Its flexible joints did their job. The hotel bent and twisted but remained structurally sound. But from around town, especially from the denser and less affluent neighborhoods, came stories about lots of collapsed buildings -- usually crowded ten- and twelve-floor apartment blocks. The government reported around 2,000 fatalities, but unofficial sources said right away that at least 10,000 were lost. The next day, amid nerve-jangling aftershocks, we saw some of the damage. At what had been apartment buildings there were now piles of debris. Not rubble, as you'd expect, but mounds of what looked like sand and small marbles. The buildings had simply disintegrated.

Before the earthquake, we'd heard how apartment buildings in Cairo sometimes collapsed under their own weight. An Egyptian friend had explained it to us this way: The government issues permits to build only four or six stories high. But developers pay bribes to add more floors using the same plans. Then they pay more bribes to leave the steel reinforcement out of the cement. So the buildings sometimes fall down.

By 1992, it had become too common for apartment blocks to simply crumble. When the earthquake hit, lots of people mistook the event. They thought it was only their building that was crumbling and didn't understand the earth was shaking. The most common injuries among quake survivors were broken legs, a result of people leaping from their apartment's windows and balconies. They'd learned to do that from those who had survived the collapse of other tenements. In the earthquake, not all the apartment buildings collapsed. Not even most. But people jumped from buildings all over the city. The lucky ones only broke a leg or maybe both legs. The unlucky ones broke their backs or necks. It was awful proof of the real-life impact of public corruption.

In China's case, the Observer's Will Hutton says,

The government has announced an investigation into why so many classrooms collapsed, but the answer is already known. People want the government to maintain the pace of development but increasingly do not accept that the price has to be corruption. The government agrees and launches unsuccessful anti-corruption drives. The problem is that local officials have unchecked, unaccountable power and have no compunction, given the loss of the belief that they are building a communist utopia, in helping themselves to cash on an ever grander scale. Professor Hu Angang, an economist at Tsinghua university, estimates that one yuan in six is, in effect, corrupt. Even army officers buy their rank.

The events in China this month and in Cairo in 1992 are reminders, if we still need any, that public corruption isn't a victimless crime. Not nearly. Its victims suffer not only when big events strike but also in their daily lives. It's wrong to think that crooked officials and those who bribe them are engaged in a quaint or harmless local practice, something the rest of us should get used to. The truth is that public corruption is a destructive force that ruins lives by the millions.

Wednesday
May142008

Willbros Resolves FCPA Offenses

Willbros Group Inc. has confirmed that it will pay $32.3 million and enter into a deferred prosecution agreement to settle civil and criminal Foreign Corrupt Practices Act charges with the Justice Department and the Securities and Exchange Commission.

As first detailed in Willbros third quarter 2007 earnings release reported on October 31, 2007 here, the FCPA violations involved former operations in Bolivia, Ecuador and Nigeria. The company will pay $22 million to settle the DOJ's criminal case and $10.3 million relating to the SEC's civil enforcement action. Its three-year deferred prosecution agreement with the DOJ requires appointment of a compliance monitor, the first announcement of such an appointment in an FCPA case in nearly three months. (The White Collar Crime Prof Blog has an interesting discussion here about the deferred prosecution agreement and selection of the monitor.)

The DOJ's twelve-count information included substantive violations of the FCPA's antibribery provisions and violations of the books and records provisions. All twelve counts relate to operations in Nigeria, Ecuador and Bolivia during the period from 1996 to 2005. The SEC's complaint alleged civil violations of the antifraud provisions of the Securities Exchange Act, the antibribery provisions, and the reporting, books and records and internal controls provisions.

Willbros is headquartered in Panama City, Panama and has its administrative offices in Houston, Texas. It provides construction and engineering services to industry and government entities worldwide, specializing in pipelines and associated facilities in onshore, coastal and offshore locations.

In November 2007, Willbros' former employee Jason Edward Steph, 37, entered into a plea agreement with the DOJ. He admitted violating the FCPA by conspiring to bribe officials of the government of Nigeria with more than $6 million. Steph is awaiting sentencing and faces five years in prison and a $250,000 fine. Steph said that in February and March 2005, he, former Willbros executive Jim Bob Brown, and others arranged for payment of approximately $1.8 million in cash to government officials in Nigeria. Brown pleaded guilty to a similar charge on Sept. 14, 2006 and is also awaiting sentencing. Both he and Steph have been cooperating with the government’s investigation.

Also named in the SEC's complaint were Gerald Jansen, a former administrative supervisor in Nigeria; Lloyd Biggers, a former employee in Nigeria; and Carlos Galvez, a former accounting employee in Bolivia. The allegations included a scheme to pay $300,000 to officials of an Ecuadorean state-owned oil and gas company and to avoid paying taxes in Bolivia.

The DOJ said, "In recognition of Willbros' [and its subsidiary's] thorough review of the improper payments, the companies’ exemplary cooperation, the companies’ implementation of enhanced compliance policies and procedures, and the companies’ engagement of an independent corporate monitor, the Department has agreed to defer prosecution of these companies for three years. If Willbros Group and Willbros International abide by the terms of the agreement, the Department will dismiss the criminal information when the term of the agreement ends."

Willbros Group, Inc. trades on the New York Stock Exchange under the symbol WG.

View prior posts about Willbros here.

View the DOJ's May 14, 2008 news release here.

View the SEC's Litigation Release No. 20571 / May 14, 2008 in Securities and Exchange Commission v. Willbros Group, Inc., et al., Civil Action No. 4:08-CV-01494 U.S.D.C./Southern District of Texas (Houston Division) here.

Tuesday
May132008

From The Mailbag

The question our readers most want answered -- after we tell them bloggers have no way to predict Powerball winners -- is, Who's covered by the Foreign Corrupt Practices Act? It's always the jurisdiction thing -- and for good reason. How, for gosh sakes, does the FCPA reach from Washington to the four corners of the earth and back again? It's unnatural -- until you know how it works. Then it's just plain terrifying.

So to keep the FCPA's jurisdiction straight, we take inspiration from the Justice Department. That means we think about it by categories. Here's how:

Category One: Issuers. An "issuer" is a corporation that has issued securities that have been registered in the United States or who is required to file periodic reports with the SEC. See 15 U.S.C. §§ 78c(a)(8), 78dd-1(a). All issuers are covered by the FCPA, wherever they are.

Category Two: Domestic concerns. A "domestic concern" is any individual who is a citizen, national, or resident of the United States, or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship which has its principal place of business in the United States, or which is organized under the laws of a State of the United States, or a territory, possession, or commonwealth of the United States. See § 78dd-2(h)(1). All domestic concerns are covered by the FCPA, wherever they are. Helpful hint: If your lawyer calls you a domestic concern, it's more likely to be a warning than an insult.

Category Three: Parent companies. U.S. parent corporations (issuers or domestic concerns) may be held liable for the acts of their foreign subsidiaries if they (the U.S. parent) authorized, directed, or controlled the activity in question, as can U.S. citizens or residents, themselves domestic concerns, who were employed by or acting on behalf of such foreign-incorporated subsidiaries.

Category Four: Foreign companies and individuals. A foreign company or person is subject to the FCPA if it, he or she takes any act in furtherance of a corrupt payment while within the territory of the United States. See § 78dd-3(a), (f)(1). When a foreign company or person acts on U.S. soil, the FCPA applies. Note, however, that the Justice Department interprets Category Four much more expansively. The government's position --untested in court -- is that there's FCPA jurisdiction whenever a foreign company or national (wherever they are) causes an act to be done within the territory of the United States by any person acting as that company's or national's agent.

Those are the categories. As we said, they're inspired by the Justice Department -- specifically the United States Attorneys' Manual, Title 9, Criminal Resource Manual §1018 “Prohibited Foreign Corrupt Practices” (November 2000).

And now, back to our Powerball picks.

View CRM §1018 here.

Monday
May122008

A Modality By Any Other Name

The language of corruption, as of most bad actions, is endlessly inventive. It could even be called picturesque if the subject wasn't the grubby crime of bribery. Like drug dealers who constantly rename their product to keep it attractive, those in the business of corruption do the same. Commission, success fee, performance incentive, gift, gesture, backhander, remembrance, honorarium, rebate, pork, quality claim, netback, freight savings, gratuity, congratulations money, perquisite, lagniappe, plugola, boodle, baksheesh -- pick your window dressing.

The evasion has even found its unedited way from the field to officialdom, with predictably turbulent results. It happened in a 1998 FCPA Opinion Procedure Request to the Department of Justice. The requestor reported that the Nigerian government was holding it liable for environmental contamination and had levied a $50,000 fine and a clean-up order. The requestor's idea was to solve the problem by "retaining a Nigerian contractor with experience in the removal of environmental contaminants." Unfortunately for the guileless requestor, the contractor was recommended by officials of the Nigerian Federal Environmental Protection Agency -- the folks who levied the fine in the place.

To make sure everything went well, the contractor insisted that (1) the $50,000 fine must be paid to the Nigerian government through the contractor itself, and (2) the balance of the contractor's proposed fee -- approximately $170,000 -- had to include some $30,000 in "community compensation and modalities for officials of the Nigerian FEPA and the Nigerian Ports Authority." Not a second too soon, the requestor's light bulb came on. "[U]nder these circumstances," the DOJ said, "the requestor has reasonably concluded that all or a portion of the 'fine' and the 'modalities' will be paid, in fact, to Nigerian Government officials."

The steady hands at the DOJ reacted about as you'd expect. They went ballistic. Based upon all the facts and circumstances disclosed to us by the requestor, the Department would -- if the requestor were to proceed with the requested payments to the contractor of the "fine" and the "modalities" -- commence an investigation to determine if a criminal prosecution would be merited.

When they'd regained their composure, the prosecutors helpfully suggested another way forward. The requestor, they said, could instead pay the fine directly to an official account of the appropriate Nigerian government agency, and reduce the contractor's fee by the amount included for modalities, and pay the contractor only after the government of Nigeria actually certified that the necessary environmental clean-up was completed. If all that happened, the DOJ said, it would "reconsider its present intention to take an enforcement action with respect to the proposed transaction." Nice response, but probably not the answer our requestor was hoping for.

All of which goes to show that in the wrong hands, even modalities -- whatever the heck those are -- can be dangerous and downright illegal. Who would've guessed?

View FCPA Opinion Procedure Release 98-01 (Feb. 23, 1998) here.

Monday
May122008

A Strange Season

The last time it happened, North America was still deep in winter. On February 22nd, Flowserve agreed to appoint a monitor under a deferred prosecution agreement with the Department of Justice. Since then, just one corporate FCPA case is known to have settled. AB Volvo's agreement with the DOJ was announced on March 22nd. But -- typical of oil-for-food cases -- it didn't call for appointment of a monitor. In April and so far in May, no corporate FCPA settlements have made the news, with or without monitors.

What's going on? Last year -- even with fewer FCPA cases pending -- the DOJ still settled an average of one corporate case a month. Why the slowdown in 2008? Well, as we've mentioned before, there's an undeclared moratorium at the DOJ on new appointments of monitors. And since most corporate FCPA settlements involve a monitor, that means settlements must wait.

The de facto moratorium started after ex-U.S. Attorney General John Ashcroft's controversial appointment by his former subordinate, U.S. Attorney Chris Christie. Ashcroft became a monitor for orthopedic device maker Zimmer Holdings Inc. as part of Zimmer's settlement of a domestic bribery case. The news that Ashcroft's firm could rake in as much as $52 million from the appointment triggered sticker shock on Capitol Hill. Democratic lawmakers (and plenty of Republicans) were very unhappy to learn that Bush-appointed prosecutors, acting alone, could tap Republican big shots and other friends for such lucrative (part-time) posts. So Congress launched investigations into all aspects of the monitors -- their appointment, pay, oversight and reporting responsibilities -- and even whether deferred prosecution agreements make sense in the first place. Until the political firestorm is doused, nobody wants new appointments to happen -- not Congress, the DOJ, companies in trouble, or potential monitors themselves.

It's up to Attorney General Michael Mukasey to make peace with Congress and end the stalemate. Can he do it? A better question may be, is he willing to do it? According to a story in the Washington Post from April 17th, the AG's approach with lawmakers hasn't been . . conciliatory. The story focused not on the monitorship mess but on other disagreements between the DOJ and Congress -- warrantless wiretapping operations, the media shield law, updating the state secrets law, the use of national security letters, and attorney-client privilege for military detainees. Based on comments from Republican Sen. Arlen Specter, the story said on these issues the new Attorney General has been overly obstinate and unwilling to compromise. Ouch. If that's the attitude, it could be blocking resolution of the monitorship logjam as well.

For some companies, the delay is bad news. Siemens has been saying publicly since Christmas that it wants a quick resolution with U.S. authorities -- so it can concentrate on repairing its scandal-damaged business. Panalpina's bottom line is also hurting, in part, it says, because of the DOJ's pending FCPA case. Other companies, though, are sure to be using the delay to their advantage -- by conducting deep internal investigations, firing or demoting people who caused the FCPA violations, and adopting best practices to create effective compliance programs. Those companies should be in a better position to deal with the DOJ when the time finally comes.

For now, though, the strange season continues.

Friday
May092008

FCPA Guilty Plea For Bribing UK Official

A former co-owner and executive of California-based Pacific Consolidated Industries (PCI) pleaded guilty yesterday to violating the Foreign Corrupt Practices Act. Martin Eric Self, 51, of Orange, California pleaded guilty to a two-count information charging him with violating the FCPA by paying more than $70,000 in bribes to a U.K. Ministry of Defence official. The bribes were intended to secure equipment contracts with the U.K. Royal Air Force.

In October 1999, Self, a U.S. citizen, and Leo Winston Smith, then PCI’s executive vice president and director of sales and marketing, had PCI enter into a marketing agreement with a relative of a U.K. Ministry of Defence official. According to the DOJ, Self -- a signatory on PCI's marketing agreements and bank accounts -- admitted that he didn't know of any genuine services provided by the official’s relative. Instead, Self believed the payments probably were benefiting the official in exchange for obtaining and retaining the equipment-supply contracts.

Self is scheduled to be sentenced in federal court on September 29, 2008. Although he faces a maximum sentence of five years in prison per count, his plea agreement contemplates a prison term of eight months, subject to the court's final determination at sentencing.

For his role in the scheme, former marketing head Smith, a co-founder of PCI, was indicted in April 2007. The government says he conspired to bribe the U.K. Ministry of Defence official in order to obtain equipment contracts worth more than $11 million dollars. In addition to the FCPA violations, the indictment also charges Smith with money laundering and tax offenses. He's scheduled to stand trial in July 2008. Self, as part of his plea agreement, will presumably testify against his former colleague. Evidence against Smith is also likely to come from U.K. authorities. Their investigation of the U.K. Ministry of Defence official resulted in his guilty plea in the United Kingdom for accepting bribes from PCI. He was sentenced to two years in prison.

Privately-held PCI manufactures Air Separation Units (ASUs) and other equipment for the military, medical, and oil and gas markets. ASUs generate oxygen in remote, extreme and confined locations. The DOJ said that in late 2003, after the alleged illegal conduct occurred, PCI was acquired by a group of investors who referred the case to U.S. prosecutors and "fully cooperated in the government’s investigation."

Assistant Attorney General for the Criminal Division Alice S. Fisher, who departs from the DOJ later this month, said, “Individuals who resort to bribery and other fraudulent means to secure contracts with foreign governments not only corrupt legitimate bidding processes, but they also damage the integrity of the global marketplace. Furthermore, using an intermediary to make bribe payments will not insulate individuals from prosecution."

Referring to the collaboration by prosecutors in the U.S. and U.K., Ms. Fisher also said, "The coordinated international law enforcement efforts of this case exemplify the type of cooperation needed to fight crime in the 21st century, where physical borders are not boundaries for criminal activity. I would like to thank our colleagues in the United Kingdom for their efforts and assistance in prosecuting this case as well as the FBI and IRS for their investigatory assistance.”

View the DOJ's May 8, 2008 news release here.

Wednesday
May072008

Former ITXC Execs Settle Civil FCPA Charges

The Securities and Exchange Commission said this week that on April 18, 2008 it settled civil proceedings under the Foreign Corrupt Practices Act against Steven J. Ott, Roger Michael Young, and Yaw Osei Amoako. The SEC charged the former executives of ITXC Corp. with violating the antibribery and books and records provisions of the FCPA by bribing senior officials of government-owned telephone companies in Nigeria, Rwanda and Senegal, and concealing and falsely reporting the illegal payments. ITXC was a publicly-held VOIP company based in Princeton, New Jersey. It was acquired by Teleglobe International Holdings Ltd. in May 2004.

In settling the SEC's civil enforcement action, Ott, Young and Amoako each consented to the entry of a final judgment that permanently enjoins them from violating Sections 30A and 13(b)(5) of the Securities Exchange Act of 1934, Rule 13b2-1 thereunder, and from aiding and abetting violations of Exchange Act Section 13(b)(2)(A) and, with respect to Ott and Young, violations of Exchange Act Section 13(b)(2)(B). Amoako also must pay $188,453 in disgorgement and prejudgment interest. He took kickbacks for some of the bribes he paid to the foreign officials.

The three defendants have also been charged by the Department of Justice for criminal violations of the FCPA. In the criminal action, Amoako, 55, of Hillsborough, N.J., was sentenced in December 2006 to 18 months in prison for conspiring to violate the antibribery provisions of the FCPA and to violate the Travel Act. Amoako pleaded guilty in September 2006 to paying about $266,000 in bribes disguised as “commissions” to employees of state-owned phones companies in Nigeria, Rwanda and Senegal. In addition to his prison sentence, he was also ordered to pay a $7,500 fine and serve two years of supervised release.

In July 2007, Ott and Young also pleaded guilty to separate one-count criminal informations charging them with conspiring to violate the FCPA and the Travel Act. They haven't been sentenced yet in the criminal proceedings and face up to five years in prison and a $250,000 fine.

Ott was ITXC's former vice president for global sales, Young was its former managing director for the Middle East and Africa, and Amoako was the regional director for sales in Africa. They negotiated and / or approved bribes to foreign officials in Nigeria, Rwanda and Senegal in order to obtain contracts for ITXC to transmit telephone calls to those countries. The three executives paid $267,468.95 in bribes between August 2001 and May 2004. ITXC made $11,509,733 in net profits from the contracts obtained through the bribery.

In its complaint against Amoako, the SEC gave this description of his bribery in Nigeria: The sole purpose of the payments was to influence the agent, a foreign official, to steer the carrier contract to ITXC and thereby enable it to obtain and retain business with Nitel. There was no legitimate purpose for the payments. In fact, as a result of the agreement with the Nitel Agent, ITXC earned profits of $1,136,618 from selling telephone service to customers calling Nigeria. ITXC could not have made such sales without having the carrier contract with Nitel that resulted from Amoako’s bribes to the agent. Amoako received a kickback of $50,000 from the Nitel Agent in mid- 2004. Amoako concealed the kickback from ITXC and his superiors by having the money deposited at financial institutions in Africa.

View the SEC's Litigation Release No. 20556 / May 6, 2008 here.

View the SEC's Complaint in Securities and Exchange Commission v. Steven J. Ott and Roger Michael Young, Civil Action No. 06-4195 (GEB) (D.N.J.) and Securities and Exchange Commission v. Yaw Osei Amoako Civil Action No. 05-4284 (GEB) (D.N.J.) here.

View the DOJ's July 27, 2007 news release about Ott and Young's guilty pleas here.

View the DOJ's Sept. 6, 2006 news release about Amoako's guilty plea here.

Tuesday
May062008

The Woolf Report Tells No Tales

The message in our inbox yesterday said: You may find this interesting if you haven't seen it already. It's the Woolf Committee Report on BAE -- released this morning. It's breathtaking in the extent to which they have focused stubbornly on the future and avoided a meaningful review of past conduct. I know that was the basis upon which the committee was formed, but it's difficult to imagine how future conduct can be determined without past wrongdoing explored.

Our correspondent is a fine compliance professional with one foot in Washington and the other in London, so we took the warning seriously. That is, we lowered our expectations. But even so, the report was disappointing. Not only does it avoid dealing with anything historical or factual, but it also never says that public corruption is wrong. That it's a crime that always cheats a national treasury somewhere, perverts the marketplace, and victimizes the citizens. There was none of that.

Instead, the report from the 75-year-old former lord chief justice, who was commissioned in June 2007 by BAE at a wage of £6,000 a day, says over-and-over that BAE's reputation is hurt when the company is caught doing bad things, and that damage to its reputation is in turn bad for its business. Beyond that, the report's action items could have been cut-and-pasted from compliance boilerplate -- creating an impression that the Woolf Committee (Lord Woolf, Philippa Foster Back, Sir David Walker, Dr Richard Jarvis and Douglas Daft) either didn't actually speak with anyone who works at BAE, or didn't find anything they said notable enough to be repeated.

The Guardian, meanwhile, posted a short list of provocative questions that remain unanswered:

· Did BAE set up a secret offshore subsidiary called Red Diamond to handle worldwide cash for arms deals?

· Did the company pay 31% "commission" into a Swiss account on a sale to the African state of Tanzania?

· Did BAE employ Count Alfons Mensdorff-Pouilly, previously caught up in a bribery scandal, as its undercover agent in central Europe?

· Did it provide exotic holidays and prostitutes to the entourage of the head of the Saudi air force?

· Did it pay £1bn to Saudi agents including Wafic Said, and another £1bn to Saudi Prince Bandar? To every question about what BAE may have actually done, Woolf's answer was the same: "We weren't given the job of looking at the past."

The Guardian also reminded readers that BAE "still faces criminal investigations in London, Washington, Dar es Salaam, Bucharest, Prague, Berne, Budapest and Johannesburg, over continuing multi-million pound arms contracts. Last month Woolf's former colleague, Lord Justice Moses, ruled that the abandonment of the Serious Fraud Office investigation into BAE had betrayed the rule of law. Moses said there had been an 'abject surrender' to threats when the SFO, under pressure from BAE, from the then prime minister Tony Blair, and from Prince Bandar, agreed to drop investigations into the Saudi payments."

(As an aside, we're not often on common editorial ground with the Guardian. But its enterprise and leadership on the BAE story show why the somewhat offbeat, trust-controlled newspaper has a reputation for courageous reporting. In the movie, "The Bourne Ultimatum," an investigative report in the Guardian that mentions Jason Bourne is important to the plot and ultimately leads to the assassination of the fictional reporter. )

The Corner House, one of the public-interest campaigners that won the BAE court case against the Serious Fraud Office, called the Woolf inquiry "an interesting academic exercise. . . BAE should have saved its £1.7m spent on the committee and adopted instead accepted best practice: namely, to employ a law firm as an independent investigator to go through all its internal emails and documents in order to make adequate disclosure to the law enforcement authorities. . . . If BAE is serious about breaking from the past, it needs to show that it is fully cooperating with all the current investigations by law enforcement officers in the UK, US and Switzerland."

As for our disappointment, we always try to be realistic about public corruption. We know bribery is the second oldest profession and won't disappear anytime soon. The temptation in business to take shortcuts via well-placed bribes to government officials is powerful. When people fall, as they sometimes will, they and their approving employers deserve punishment. Once punished, though, they also deserve another chance -- assuming there's at least some recognition of wrongdoing ("mistakes were made"). That, after all, is the path to rehabilitation and to a full restoration of corporate citizenship.

The Woolf Committee Report is available here.