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Harry Cassin Publisher and Editor

Andy Spalding Senior Editor

Jessica Tillipman Senior Editor

Richard L. Cassin Editor at Large

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

Wednesday
Jan142009

Our Hollywood Minute

Let's not forget the Greens. They're the husband-and-wife movie producers arrested in December 2007 for violating the Foreign Corrupt Practices Act. Prosecutors allege they paid more than $1.8 million in bribes to a former governor of the Tourism Authority of Thailand in return for $14 million in contracts to stage the Bangkok Film Festival.

According to the docket at the Los Angeles federal criminal court, their trial is now set to start on April 21st. Gerald Green, 76, and his wife Patricia, 53 -- whose screen credits as producers include Rescue Dawn -- pleaded not guilty in October last year to all 21 counts of a superseding indictment. In addition to the FCPA charges, they face counts for money laundering, illegally transporting money-laundering proceeds, and filing false tax returns. The government has also filed a forfeiture action against some of their property, and the court has issued a restraining order that prevents them from disposing of those assets at least until the trial's outcome.

The Greens face up to five years in prison for each FCPA charge, up to 10-years for each tax count, and up to 20 years for the money-laundering charges.

And in yet anther sign of growing cross-border cooperation in the fight against public corruption, the Thai Department of Special Investigation has apparently been sharing potential evidence it collected with U.S. authorities. Pretrial maneuverings show that the Greens have tangled with prosecutors over "hundreds of documents written in the Thai language, which the plaintiff, United States of America, apparently received from the Kingdom of Thailand." The U.S. hasn't said yet which of those documents it intends to use at trial.

The Thai official at the center of the case against the Greens is reported to be Juthamas Siriwan, who headed the Tourism Authority of Thailand from 2001 to 2006 and was in charge of the film festival the Greens produced. She denies doing anything wrong and has threatened to sue anyone implicating her in the case. She resigned as deputy chair of Thailand's Puea Pandin (People's Power) Party soon after the Greens' arrest in December 2007.

Download the government's first superseding indictment here.

Download the parties' December 15, 2008 joint status memo here.
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Tuesday
Jan132009

It's Another World At That Bank

Like everyone else, we're stunned by the news coming from the World Bank these days. First Satyam, then Wipro, and now Megasoft Consultants Ltd. All three Indian outsourcing companies have been banned from doing business with the Bank because they violated the fraud and corruption provisions of its procurement guidelines. Satyam's ban is eight years; Wipro's and Megasoft's are four years.

The three companies are obligated to comply with the Foreign Corrupt Practices Act. Satyam and Wipro are "issuers" and subject to the antibribery and accounting provisions; Megasoft Consultants is a "domestic concern" and subject to the antibribery provisions. Staffers at the World Bank are "foreign officials" under the FCPA, so giving or promising to give them anything of value to obtain or retain business with the Bank might be prohibited. All that is quite clear.

What's not clear at all is why the World Bank, an international public organization that advertises its global leadership in fighting corruption, didn't until now publish the names of companies and individuals that it has banned as suppliers. Despite the public's interest, the Bank only revealed the names on Sunday, after news groups and others protested the lack of transparency.

For its part, the Bank said its policy of keeping the bans secret "let it move more quickly," according to the Wall Street Journal. Now, though, it's listing 111 companies and individuals that it has banned, with some bans dating back to 1999. (Satyam and Wipro were banned in June 2007, and Megasoft in December 2007.) Most of the 111 bans are permanent, while others have a duration of up to 15 years.

So, will U.S. authorities investigate Satyam, Wipro, and Megasoft Consultants for violating the Foreign Corrupt Practices Act? What about the rest of the 111 companies and individuals named by the World Bank? And will staffers at the Bank itself ever be investigated by an outside agency for corruption as well?

How important is all this? Here's what the Bank has said about other people's corruption:

It undermines development by distorting the rule of law and weakening the institutional foundation on which economic growth depends.The harmful effects of corruption are especially severe on the poor, who are hardest hit by economic decline, are most reliant on the provision of public services, and are least capable of paying the extra costs associated with bribery, fraud, and the misappropriation of economic privileges. Corruption sabotages policies and programs that aim to reduce poverty, so attacking corruption is critical to the achievement of the Bank's overarching mission of poverty reduction.
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Our colleague, Russ Stamets, is working through these cases from an Indian perspective and contributed to this post. (Russ holds a Master of Business Laws from the National Law School of India in Bangalore, making him one of the few Western lawyers with an advanced Indian law degree.) We'll be hearing more from him in the days to come.
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Monday
Jan122009

Aon's New Path

A couple of months ago, guest-blogger Scott Moritz talked about risk-based compliance. His post, we now see, was prophetic. Why? Because just last week, when Aon settled an enforcement action with the U.K.'s Financial Services Authority, the real star of the show was . . . risk-based compliance.

The FSA's Final Notice described how both U.K.-based Aon Ltd and its U.S. parent, Aon Corporation, have improved the way they'll deal with intermediaries -- the group apparently responsible for Aon's problems in a number of countries. The Aon companies, the Final Notice said, have "designed and implemented a new global anti-corruption programme that includes a policy limiting the use of third parties. Aon Ltd has also implemented robust risk-based procedures that control and restrict the circumstances in which staff may make payments to Overseas Third Parties, particularly in high risk jurisdictions."

Aon's new compliance policy, according to the Final Notice, generally . . .

. . . prohibits the use of third parties whose only service to Aon is to assist in the obtaining and retaining of business solely through client introductions in countries where the risk of corrupt practices is anything other than low. These jurisdictions are defined by reference to an internationally accepted corruption perceptions index. Any use of third parties not prohibited by the policy must be reviewed and approved in accordance with global anti-corruption protocols. . . . In addition, Aon Ltd has implemented an enhanced comprehensive risk-based training regime for its staff.
How does risk-based compliance work? Guest-blogger Moritz said the concept is simple: certain customers, vendors, and intermediaries represent a higher compliance risk than others. Geography, nexus to government officials, business type, method of payment, dollar volume -- all are risk indicators. And he said the key to any risk-based approach is the strategic use of information technology -- tracking and sorting the critical elements, including risk-ranking, as well as enhanced due diligence and ongoing monitoring of high-risk parties proportionate to their risk profiles.

The benefits of risk-based compliance are clear. In places where risks are very low, compliance burdens can be reduced. Where risks are anything but low, compliance is stepped up one or more notches, to make sure nothing slips through. As we've often said, when there are more red flags around, the proper response is more compliance, not less. And that's what risk-based compliance is all about.
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And one more thing . . .

Take a look at Don Lee's amazing story from the January 12th edition of the LA Times about Avery Dennison's FCPA compliance problems in China. Shanghai bureau chief Lee seems to have gotten everyone to talk on the record. This is one of the best articles we've read in the mainstream press or anywhere else about the Foreign Corrupt Practices Act at ground level.
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Sunday
Jan112009

Chasing Dirty Money

The Foreign Corrupt Practices Act may frighten business people everywhere, but it has never been a big concern for crooked overseas officials. That's because they can't be prosecuted under the FCPA, which is aimed exclusively at punishing those who pay them bribes. But the Justice Department may have found one way to help plug that gap.

Last week it filed a forfeiture action against bank accounts in Singapore held by Arafat "Koko" Rahman (pictured above), the son of Bangladesh's former prime minister, Khaleda Zia. The accounts allegedly hold nearly $3 million in bribe money that Siemens AG and China Harbor Engineering Company paid to Rahman and other Bangladeshi officials.

Siemens and three of its subsidiaries were penalized $800 million after pleading guilty last month to violating the Foreign Corrupt Practices Act. One of the subsidiaries, Siemens Bangladesh, admitted that from 2001 to 2006, it paid $5.3 million in bribes through purported business consultants to Rahman and other local officials in order to win a mobile telephone project.

The Justice Department says it has forfeiture jurisdiction over the money because the proceeds of foreign offenses such as bribery and extortion that flow through the United States are covered by U.S. money laundering laws. Some of the money that ended up with Rahman came from a U.S. bank account, according to the DOJ, and the bribes paid in U.S. dollars were sent through the U.S. financial system before landing in the Singapore accounts.

The Singapore government, meanwhile, has reportedly received an official U.S. request for the funds. And last month, the head of Bangladesh's Anti-Corruption Commission said Singapore authorities had already frozen $1.6 million belonging to Rahman.

Acting Assistant Attorney General Matthew Friedrich said the Justice Department will not only "prosecute companies and executives who violate the Foreign Corrupt Practices Act, we will also use our forfeiture laws to recapture the illicit facilitating payments often used in such schemes."

View the DOJ's January 9, 2009 release here.

For a discussion about why foreign officials who take bribes cannot be prosecuted under the FCPA, see our earlier post here.
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Friday
Jan092009

Aon Pays £5.25 Million Corruption Fine

The U.K.'s Financial Services Authority said yesterday that it has fined Aon Ltd £5.25 million ($8.05 million) for failing to recognize and control the risks of overseas payments being used as bribes. The fine is the largest the FSA has levied for financial crimes. Aon Ltd is the principal U.K. subsidiary of Chicago-based Aon Corporation, the world's biggest insurance broker.

Aon Corporation disclosed in November 2007 an internal investigation into possible violations of the Foreign Corrupt Practices Act and non-U.S. anti-corruption laws. Aon said then in its Form 10-Q that it had self-reported the investigation to the Department of Justice, the Securities and Exchange Commission and others, and that it had already agreed with U.S. prosecutors to toll any applicable statute of limitations. The U.S. investigations are still pending.

This is now the third case brought by U.K. authorities involving overseas bribery by U.K. companies. In September 2008, the Overseas Anti-Corruption Unit of the City of London Police said an employee of CBRN Team Ltd, a U.K. security consulting firm, and an official of Uganda, had pleaded guilty to bribery charges. The CBRN employee received a suspended sentence and the Ugandan official was sentenced to twelve months in jail. And in October last year, the U.K.'s Serious Fraud Office reached a £2.25 million civil settlement with construction firm Balfour Beatty plc for alleged unlawful accounting in connection with overseas "payment irregularities" which it self-reported.

Apparently to emphasize the new willingness of her agency and other U.K. authorities to prosecute overseas bribery, Margaret Cole, the FSA's director of enforcement, said:

The involvement of UK financial institutions in corrupt or potentially corrupt practices overseas undermines the integrity of the UK financial services sector. The FSA has an important role to play in the steps being taken by the UK to combat overseas bribery and corruption. We have worked closely with other law enforcement agencies in this case and will continue to take robust action focused on firms’ systems and controls in this area.
According to its website, the Financial Services Authority is an independent non-governmental body with statutory powers under the Financial Services and Markets Act 2000. It has a range of rule-making, investigatory and enforcement powers intended to "promote efficient, orderly and fair financial markets and help retail financial service consumers get a fair deal." The Treasury appoints its 12-member board.

Between January 2005 and September 2007, according to the FSA, Aon Ltd didn't properly assess or control the risks involved in its dealings with overseas firms and individuals who helped it win business. "As a result of Aon Ltd’s weak control environment, the firm made various suspicious payments, amounting to approximately US$7 million, to a number of overseas firms and individuals." The payments were made in Bahrain, Bangladesh, Bulgaria, Burma, Indonesia and Vietnam.

The FSA said Aon cooperated fully and agreed to settle early in the investigation, qualifying for a 30% discount under the FSA’s settlement discount scheme. Without the discount the fine would have been £7.5 million.

View the FSA's January 8, 2009 release here.

Download the FSA's Final Notice (January 6, 2009) here.

View Aon's January 8, 2009 statement here.
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Thursday
Jan082009

California Exec Pleads Guilty

The Justice Department has announced its first Foreign Corrupt Practices Act enforcement action of 2009. Mario Covino, 44, an Italian citizen living in Irvine, California, pleaded guilty in federal court in Santa Ana to a single count of conspiring to violate the FCPA by paying at least $1 million in bribes to foreign officials in several countries. He's cooperating in an ongoing federal investigation and waiting to be sentenced in July. He faces up to five years in prison.

The DOJ said Covino was formerly the worldwide sales director for an unidentified Rancho Santa Margarita-based company that designs and makes valves used in the oil, gas, nuclear, coal and power plant industries. The plea agreement refers to the company as an "unnamed co-conspirator." A report from the Associated Press said online business directories list Covino as having worked for Control Components Inc. The company, also known as CCI, hasn't commented. It is owned by British-based IMI plc, which trades on the London Stock Exchange under the symbol IMI.L.

Covino acknowledged that he arranged for company employees and agents to pay about $1 million to employees at state-owned foreign enterprises from March 2003 through August 2007. He said his company made about $5 million in profits from the business obtained through the bribes. According to the plea agreement, some of the corrupt payments went to officials at Petrobras (Brazil), Dingzhou Power (China), Datang Power (China), China Petroleum, China Resources Power, China National Offshore Oil Company, PetroChina, Maharashtra State Electricity Board (India), KHNP (Korea), Petronas (Malaysia), Dolphin Energy (UAE) and Abu Dhabi Company for Oil Operations (UAE).

Covino also said he provided false and misleading responses during a 2004 internal audit of the company’s commission payments. And to obstruct the audit, he deleted and told others to delete emails that referred to corrupt payments.

Download the DOJ's January 8, 2009 release here.

Download Covino's plea agreement here.
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Wednesday
Jan072009

What's Wrong With Corporate Criminal Liability?

Fiat's recent Foreign Corrupt Practices Act settlement brought this strong comment from Ellen Podgor at the White Collar Crime Prof Blog:

The deferred prosecution agreement is yet another instance of the company selling out individuals within the company. Now clearly if these individuals are going against company policy, and acting illegally - it is deserved. But having the larger entity being able to negotiate these agreements while individuals take the fall, raises issues as to whether power is being used against the less powerful.
Prof Podgor is among those who have argued for a good-faith defense for corporations. Instead of imposing on them what now amounts to strict liability for their employees' criminal acts, let companies show evidence that they tried to prevent the criminal activity. That way, organizations threatened with criminal prosecution might feel less compelled to rush into settlements with the DOJ that "sell out individuals within the company."

That's one way to redress the current imbalance of power between the government and corporate employees. But does it go far enough? How about ending the application of criminal laws against corporations entirely?

John Hasnas, an associate professor of business at the McDonough School of Business at Georgetown University, argues that it's unjust to punish companies for their employees' criminal misconduct. Corporations, he says, cannot be put in prison, so they're punished only with fines that are ultimately paid by the shareholders. That, he believes, makes no sense.

The defining characteristic of the modern publicly traded corporation, however, is the separation of ownership and control. In the publicly traded corporations that are often the targets of federal prosecutors, the shareholders who are the owners of the corporation do not control the actions of corporate employees. Thus, imposing criminal punishment on a corporation for the actions of its employees, rather than exclusively on the employees themselves, is actually punishing shareholders who are innocent of wrongdoing.
And beyond Prof Hasnas' concern about misplaced financial punishment, does corporate criminal liability actually shield some individuals from accountability? Do powerful people within corporations try to buy peace with prosecutors by having the company pay large fines and, worse still, deliver the scalps of their subordinates?

A good-faith defense, or even the end of corporate criminal liability, wouldn't prevent or impede the prosecution of white-collar criminals. The government would still have ample weapons to bring the crooks to justice. It just wouldn't have the overwhelming advantage handed to it when corporations sell out their employees.

It's not about giving anyone a free pass. It's about protecting the fragile rights of individuals against the massive combined firepower of corporations and the government. That means stopping companies from waiving the attorney–client privilege, handing over other people's private documents and data, cutting off support to employees for their legal defense, and firing those who don't cooperate with government investigations.
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Tuesday
Jan062009

Above The Morals Of The Marketplace

Griffin Bell, who was serving as attorney general when the Foreign Corrupt Practices Act became law, died Monday at age 90. He was appointed by Jimmy Carter in January 1977 and stayed until August 1979. As the first attorney general after the Nixon and Ford years, he came to a Justice Department that was damaged and diminished. But Judge Bell was the right man for the job. His integrity -- wrapped in beautiful southern manners and simple eloquence -- earned respect from both sides of the aisle and throughout the country, and he brought the shine back to the DOJ.

Dan Slater's post in the Wall Street Journal's law blog about Griffin Bell's passing included this wonderful anecdote:
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In 2002, Bell gave this commencement speech at his alma mater, Mercer University’s law school. He said:

In 1835, a young Frenchman by the name of Alexis de Tocqueville came to this country to study our prison system. He stayed for two years and ended up writing Democracy in America, an epic study of our democratic system. He reached many conclusions, and two apply to you.

First, he said that almost every problem that arises in a democracy will eventually be resolved in the court system. This was true then and it is true now.

Second, he said that there was no aristocracy in America, but that the nearest approach to aristocracy was in the lawyer class. His thought was that lawyers occupy an unusual and favored position in our system.

So now that you are about to become aristocrats, I want to give you a short lecture on behavior. We have an ample supply of lawyers in our country, and some of the lawyers overlook the obligation to serve others. They also distort the privilege of practicing law by converting it into a mere occupation. I was taught in law school that a lawyer had ethical obligations well above the morals of the marketplace.
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Monday
Jan052009

Dealing With Danger

Compliance-savvy executives worry about the risks that come from third parties -- overseas acquisition targets, joint venture partners, distributors and agents. About three quarters of the bosses, according to KPMG's 2008 Anti-Bribery and Anti-Corruption Survey, think their company's handling of intermediaries isn't working. They cite difficulties performing effective due diligence and their inability to adequately audit third parties for compliance.

The executives are right to be concerned. The Foreign Corrupt Practices Act says you can't hire an agent to pay bribes for you. You can't use joint venture partners for the dirty work either. You can't use a brother-in-law or charitable foundation or any other circuitous route. Bribes to foreign officials that originate from your hand are your responsibility, no matter how indirectly you try to pass them on. So when American companies go abroad, it's up to them to make sure all their business partners -- suppliers, subcontractors, professional advisors, agents and joint venture partners -- keep the business clean. Companies that don't try to stop intermediaries from paying bribes have no real defense under the FCPA when problems happen.

But how far must companies go to prevent their middlemen from paying bribes? That's always the question on everyone's mind. There's no bright line here, no blueprint from the DOJ or SEC, no safe harbor. And that's what worries the executives. They have to do business with and through intermediaries, but they also have to comply with the Foreign Corrupt Practices Act. Doing both sometimes seems impossible.

Take, for example, our reader who sent the comments below. He's a top compliance professional but he doesn't have all the answers and neither do we. But we appreciate his honesty and willingness to share his concerns and thoughts. He's fairly typical, we think, of those who want to comply with the FCPA but aren't always sure how to do that -- a group most of us are in most of the time.

Here's what he says:
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During the ACI FCPA conference held in Washington in November, the topic of documentation of agents came up. This is a familiar topic to anyone who has experience with the FCPA.

One of the points was that companies get hammered because they do a poor job of documenting or having the agent document their activities. I thought to myself "what would the agent document?" If they are out trying to drum up business what is it that they need to report? Do they report the golf trip with potential customers? Do they document the dinner they had or the train ride they took where they discovered a potentially new client and discussed opportunities?

This led me to ask what do business development people document for their activities? Surely they must provide something to justify their salaries. Shouldn't an agent's documentation be just as thorough? But then again, because a business development person is on salary and everyone knows they're sort of doing something, maybe they don't have to document very well. If they get results, some companies may ask "Does it matter?" If the documentation is poor or nonexistent, and all the focus (risk) is on agents, why wouldn't a company consider bringing agents in as business development employees? They could structure the compensation (salary and/or bonus) to be identical to what the agent already received. This would have the effect of moving the expense to payroll from agent commission or something similar.

Speaking from experience in conducting FCPA investigations, the scrutiny of payroll expense is night and day different from the scrutiny of commission or agent expense. Furthermore, perceived FCPA due diligence requirements are not the equal for employees as agents. What about the recording of a bonus as payroll expense when all or a portion is used to pay a bribe to a government official? The question then would be what is documented as the purpose of the bonus and did the company know about where the money would ultimately go?

We all know about the high level Jack Stanley-like business development people, but what about the local agents with cousins in the Ministry or uncles in Parliament. These are the guys that bring relationships to the table who might be hired as "employees" and be buried in payroll but continue on agents as if nothing really changed. . . .
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Other readers with good or bad experiences dealing with intermediaries are invited to share their thoughts, anecdotes and advice about this difficult topic.
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Sunday
Jan042009

No Quick Fix

The consequences of a Foreign Corrupt Practices Act compliance problem can reverberate inside a company long after it reaches a settlement with the Justice Department. An illustration of that comes from AGA Medical. In early June last year, we reported that the privately-held maker of heart-related products resolved FCPA violations with the DOJ. The company's self-disclosure to prosecutors included emails to and from a Chinese distributor that left no doubt illegal activity had occurred, such as bribes in China of at least $460,000 to doctors at government-owned hospitals and to patent-office officials.

Just weeks after the settlement, AGA filed a registration statement with the Securities and Exchange Commission for an initial public offering, which is still pending. That document (we're quoting below from Amendment No. 4 to the S-1) talks about the settlement's actual and potential impact on the company, including its need for a new sales model overseas.

Here's what it says:
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The terms and effects of our Deferred Prosecution Agreement with the U.S. Department of Justice relating to potential violations of the U.S. Foreign Corrupt Practices Act may negatively affect our business, financial condition and results of operations.

On June 2, 2008, we entered into a Deferred Prosecution Agreement, or the DPA, with the Department of Justice concerning alleged improper payments that were made by our former independent distributor in China to (1) physicians in Chinese public hospitals in connection with the sale of our products and (2) an official in the Chinese patent office in connection with the approval of our patent applications, in each case, in potential violation of the Foreign Corrupt Practices Act, or the FCPA. The FCPA makes it unlawful for, among other persons, a U.S. company, acting directly or through an agent, to offer or to make improper payments to any "foreign official" in order to obtain or retain business or to induce such "foreign official" to use his or her influence with a foreign government or instrumentality thereof for such purpose.

As part of the DPA, we consented to the Department of Justice filing a two-count criminal statement of information against us in the U.S. District Court, District of Minnesota, which was filed on June 3, 2008. The two counts include a conspiracy to violate the FCPA and a substantive violation of the anti-bribery provisions of the FCPA related to the above-described activities in China. Although we did not plead guilty to that information, we accepted responsibility for the acts of our employees and agents as set forth in the DPA, and we face prosecution under that information, and possibly other charges as well, if we fail to comply with the terms of the DPA. Those terms require us to, for approximately three years, (1) continue to cooperate fully with the Department of Justice on any investigation relating to violations of the FCPA and any and all other matters relating to improper payments, (2) continue to implement a compliance and ethics program designed to detect and prevent violations of the FCPA and other applicable anti-corruption laws, (3) review existing, and if necessary, adopt new controls, policies and procedures designed to ensure that we make and keep fair and accurate books, records and accounts and maintain a rigorous anti-corruption compliance code designed to detect and deter violations of the FCPA and other applicable anti-corruption laws, and (4) retain and pay for an independent monitor to assess and oversee our compliance and ethics program with respect to the FCPA and other applicable anti-corruption laws. The DPA also required us to pay a monetary penalty of $2.0 million. In the fourth quarter of 2007, we had recorded a financial charge of $2.0 million for the potential settlement. The terms of the DPA will remain binding on any successor or merger partner as long as the agreement is in effect.

The effects that compliance with any of the terms of the DPA will have on us are unknown and they may have a material impact on our business, financial condition and results of operations. The activities of the government-approved independent monitor, as well as the continued implementation of a compliance and ethics program and the adoption of internal controls, policies and procedures to detect and prevent future violations of the FCPA and other applicable anti-corruption laws, may result in increased costs to us and change the way in which we operate, the outcome of which we are unable to predict. For example, implementing and monitoring such compliance procedures in the large number of foreign jurisdictions where we operate can be expensive and time-consuming. As a result of our remediation measures, we may also encounter difficulties conducting business in certain foreign countries and retaining and attracting additional business with certain customers, and we cannot predict the extent of these difficulties.

In addition, entering into the DPA in the United States may adversely affect our operations or result in legal claims against us, which may include claims of special, indirect, derivative or consequential damages.

Our failure to comply with the terms of the deferred prosecution agreement with the Department of Justice would have a negative impact on our ongoing operations.

As described above, we are subject to a three-year DPA with the Department of Justice. If we comply with the DPA, the Department of Justice has agreed not to prosecute us with respect to the above-described activities in China and, following the term of the DPA, to permanently dismiss the criminal statement of information that is currently pending against us. Accordingly, the DPA could be substantially nullified, and we could be subject to severe sanctions and resumed civil and criminal prosecution, as well as severe fines, penalties and other regulatory sanctions, in the event of any additional violation of the FCPA or any other applicable anti-corruption laws by us or any of our officers, other employees or agents in any jurisdiction or of our failure to otherwise meet any of the terms of the DPA as determined by the Department of Justice in its sole discretion. The claims alleged in the DPA with the Department of Justice only relate to our actions in China as outlined above, and do not relate to any future violations or the discovery of past violations not expressly covered by the DPA. Any breach of the terms of the DPA would also cause damage to our business and reputation, as well as impair investor confidence in our company and result in adverse consequences on our ability to obtain or continue financing for current or future projects.

In addition, although we are not currently restricted by the U.S. Department of Health and Human Services, Office of the Inspector General, from participating in federal healthcare programs, any criminal conviction of our company under the FCPA in the future would result in our mandatory exclusion from such programs, and it may lead to debarment from U.S. and foreign government contracts. Any such exclusion or debarment would have a material adverse effect on our business, financial condition and results of operations.

Our ability to comply with the terms of the DPA is dependent, among other things, on the success of our ongoing compliance and ethics program, including our ability to continue to manage our distributors and agents and supervise, train and retain competent employees, as well as the efforts of our employees to adhere to our compliance and ethics program and the FCPA and other applicable anti-corruption laws. It is possible that, despite our best efforts, additional FCPA issues, or issues under anti-corruption laws of other jurisdictions, could arise in the future. Any failure by us to adopt appropriate compliance and ethics procedures, to ensure that our officers, other employees and agents comply with the FCPA and other applicable anti-corruption laws and regulations in all jurisdictions in which we operate or to otherwise comply with any term of the DPA would have a material adverse effect on our business, financial condition and results of operations.

In certain international markets, we have converted, or are in the process of converting, to a direct sales force model from a distributor-based sales model. Our business, financial condition and operating results may be adversely affected by the transition to a new sales model.

In August 2006, we negotiated an early termination with one of our international distributors, and we have since then undertaken to distribute our products in such distributor's country through our direct sales force. We also gave notice of termination to a second distributor and began operations in April 2008 through our direct sales force in such distributor's country. We gave notice of termination to a third distributor and began operations in July 2008 through our direct sales force in such distributor's country. In addition, we gave notice of termination to five other distributors and expect to begin operations in January 2009 through our direct sales force in these distributors' countries. We are also currently assessing the viability of distributing our products directly in other international markets. We have limited experience with direct sales of our products in international markets and, therefore, may not obtain the financial benefits that we expect. In addition, we may experience delays in implementing our direct sales force model due to the difficulty of hiring a sales force, establishing relationships with physicians, complying with local regulatory requirements, and other factors, which could have an adverse effect on our business, financial condition and results of operations.

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Monday
Dec292008

2008 FCPA Enforcement Index

Eleven organizations were named in Foreign Corrupt Practices Act enforcement actions during 2008 by the Justice Department, the Securities and Exchange Commission, or both. All of the companies on our list resolved their enforcement actions, except privately-held Nexus Technologies Inc.

The twenty-six individuals we've listed were charged with new FCPA offenses this year, or they settled enforcement actions or had charges amended, reinstated or affirmed in rehearings or on appeal. In the case of David Kay and Douglas Murphy, the U.S. Supreme Court refused to review their FCPA convictions. In U.S. v. Kozeny the prosecution against Frederic Bourke is going ahead, while his co-defendant Victor Kozeny has stayed in the Bahamas fighting extradition to the United States and another co-defendant, David Pinkerton, was dismissed from the case.

During the year, parties acting as private litigants filed five suits in U.S. federal court alleging behavior by defendants that, if true, would likely violate the FCPA. Our list of private litigation doesn't include the FCPA-related class action lawsuits that Kevin LaCroix has written about at the D&O Diary (here).

The pace of FCPA enforcement during 2008 was uneven. There were no enforcement actions against individuals until April. And during the first four months of the year -- while Congress investigated how corporate compliance monitors are appointed and paid -- just a couple of actions against organizations were announced.

There are now around 50 pending FCPA investigations at the DOJ and SEC, according to most estimates, with some investigations involving up to a dozen companies from single-industry segments, such as oil and gas services and orthopedic device makers.

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Organizations (countries involved) / U.S. enforcement agencies / financial penalties including fines, disgorgement and interest:


  • Fiat (Iraq, U.N. oil for food program) / DOJ, SEC / $17.7 million
  • Siemens (Iraq, U.N. oil for food program) (Other violations related to Argentina, Bangladesh, Venezuela, Iraq, Israel, Nigeria, Vietnam, China, Russia, Mexico) / DOJ, SEC / $800 million
  • Aibel (Nigeria) / DOJ / $4.2 million
  • AB Volvo (Iraq, U.N. oil for food program) / DOJ, SEC / $19.6 million
  • Flowserve Corp. (Iraq, U.N. oil for food program) / DOJ, SEC / $10.5 million

Individuals:

  • Misao Hioki (Bridgestone) Two years in prison, $80,000 fine
  • Shu Quan-Sheng (rocket scientist / AMAC International Inc) Guilty plea, sentencing pending
  • Richard John Novak (diploma mill syndicate) Three-years probation, three hundred hours of community service
  • Christian Sapsizian (Alcatel) Thirty months in prison, three-years supervised release, forteiture of $261,500
  • David Kay (American Rice) Thirty-seven months in prison
  • Nam Nguyen (Nexus Technologies Inc) Trial pending
  • Kim Nguyen (Nexus Technologies Inc) Trial pending
  • An Nguyen (Nexus Technologies Inc) Trial pending
  • Roger Michael Young (ITXC Corporation) Five-years probation, three-months home confinement, three months in a community confinement center, $7,000 fine
  • Yaw Osei Amoako (ITXC Corporation) Eighteen months in prison, two-years of supervised release, $7,500 fine
  • Steven J. Ott (ITXC Corporation) Five-years probation, six months home confinement, six months in a community confinement center, $10,000 fine
  • Ramendra Basu (The World Bank) Fifteen months in prison, two-years supervised released, fifty hours of community service

Private litigants:
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If we've missed any names that should be included in the 2008 index, please let us know.
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Sunday
Dec282008

Cartels And Compliance

A post earlier this month reported the sentencing of former Bridgestone manager Misao Hioki to two years in jail and an $80,000 fine for violating the Foreign Corrupt Practices Act and conspiring to rig bids. Hioki, a Japanese citizen, became the ninth person from the so-called marine hose cartel to plead guilty to bid-rigging and the first to plead to an FCPA charge.

We've said before that cartel behavior often involves corrupt payments. That point was well made by Gary Spratling when he was Deputy Assistant Attorney General of the Antitrust Division at the Justice Department. In a 1999 speech to the American Conference Institute's National Conference on the FCPA, Spratling (who's now a partner in the San Francisco office of Gibson, Dunn & Crutcher), said this:

The fact is that in today's global economy there is a recurring intersection of conduct that violates both the Sherman Antitrust Act and the Foreign Corrupt Practices Act. A payment to a foreign official in violation of the FCPA may also be an act by an international bid-rigging, price-fixing, or market-allocation cartel in furtherance of its scheme injuring American businesses and consumers in violation of the Sherman Act. . . . Thus, a compliance audit by a multinational firm that detects a payment potentially in violation of the FCPA may actually have detected much more: international cartel activity with additional -- indeed, likely far greater -- exposure for the firm and its executives.
When the Antitrust Division discovers evidence of illegal payments during international cartel investigations, he said, it may refer the facts to the Fraud Section of the DOJ's Criminal Division for follow-up. We think that's probably what happened to Bridgestone's Misao Hioki.

And on compliance programs to fight both antitrust and FCPA violations, Spratling said: "Here the important point is that a compliance audit that detects a payment potentially in violation of the FCPA may simultaneously have detected a payment (as part of a bid-rigging or project-allocation scheme) potentially in violation of the Sherman Act, and vice versa."

We would add that a lax approach to compliance in one area often leads to problems in other areas. Siemens, for example, which just resolved FCPA violations with U.S. authorities, heard earlier this month from European Union antitrust regulators that it was being charged with forming a price-fixing cartel among makers of power transformers. And the overseas sales practices of leading orthopedic device makers, who settled domestic bribery charges last year, are also under investigation by the DOJ and SEC.

Fair competition, cash management, tax reporting, workplace health and safety, proper disclosure, export controls, hiring, employment and environmental practices -- all compliance is driven by the attitudes of an organization's leaders.
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