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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
Jan152008

The FCPA Can Be A Very Taxing Matter

If you love studying the U.S. corporate and personal tax ramifications of the Foreign Corrupt Practices Act -- and who doesn't? -- here's news about something special. It's an article called "Is This Bribe Deductible? Tax Implications of the U.S. Foreign Corrupt Practices Act." The twenty-page piece appears in Tax Notes International (December 17, 2007, p. 1171). Its author is New York City lawyer and CPA Selva Ozelli of RIA - Thomson, the well known publisher of tax and accounting materials.

Ms. Ozelli says a comprehensive study of the FCPA's U.S. tax implications was needed. She cites the surge in prosecutions -- 400 percent since 2000, with more than fifty additional investigations under way in 2006. The article covers in detail the ways American companies and their foreign subsidiaries can lose deductibility of payments that violate the FCPA. She also explains the more alarming risk of potential criminal consequences -- including RICO charges -- based on tax evasion:

"The increased global anticorruption scrutiny is subjecting multinational companies to a blizzard of simultaneous or sequential multijurisdictional FCPA investigations that are more aggressive than at any other time since the statute’s enactment, resulting in larger fines. These investigations may also shed light on a U.S. multinational company’s tax evasion if the income that is financing improper payments is excluded from a company’s taxable income, or on the mischaracterized improper pay­ments that can run into the hundreds of millions of dollars are deducted legally for tax purposes under the OECD convention but illegally under U.S. tax laws. Such findings may potentially subject a com­pany to civil or criminal penalties under U.S. and foreign tax laws, penalties under the Racketeer Influenced and Corrupt Organizations Act (RICO) that now applies to a taxpayer that has deprived a foreign government of tax revenue, and potential private FCPA civil claims made under the civil provisions of RICO."

In language that echoes back to the tactics used to put Al Capone out of business, Ms. Ozelli navigates the important distinctions among the burdens of proof in three settings -- an IRS challenge of deductibility, an allegation of fraud leading to tax evasion, and a criminal FCPA prosecution. She says:

"For the disallowance of a deduction . . . no conviction under the FCPA is necessary — the relevant criteria is whether the improper payment violates the FCPA. The IRS, however, has the burden of proving fraud . . . by showing that the company knew its return was false when it made it and intended to evade paying the proper tax by making a false return. The fraud, whether as to deficiencies or for additions to tax (that is, fraud penalties), must be proven by clear and convincing evidence. A mere preponderance of the evidence will not suffice. Because this is a lesser burden than proving guilt beyond a reasonable doubt, which must be established in a criminal case, a company may be found not guilty in a criminal bribery case and still lose the deduction if the IRS is able to meet the lesser burden in the tax case."

In other words, once a company lands in FCPA trouble, its problems may multiply. Knowingly filing tax returns that mischaracterized illegal payments abroad as deductible expenses can lead to criminal charges. In a footnote -- one of 117 that gird the text -- Ms. Ozelli makes a passing reference to the current investigations involving the dozen oil and gas service companies implicated in the Vetco / Panalpina affair. Those companies allegedly reimbursed Panalpina for customs clearance and permitting expenses that have now come under FCPA scrutiny. An addendum to the article lists all the currently-known FCPA investigations, the countries involved, and potential multi-jurisdictional enforcement aspects.

Recounting the scandals involving Enron, Tyco, Global Crossing, Refco, and Hollinger, Ms. Ozelli warns of the personal tax implications inherent in the misuse of company funds. She says that "while scrutinizing corporate records for FCPA violations, special attention should be placed on transactions that divert corporate funds that excessively benefit the executive since it might re­sult in charges of both corporate and personal tax evasion." It's not a stretch to imagine an executive reaping a compensation windfall by pumping up corporate earnings via bribes to foreign officials.

There's lots more meat in this article -- which manages to combine fine scholarship with practical advice. Those counseling corporations and executives on the importance of FCPA compliance -- and the implications of potential non-compliance -- will be happy to have Ms. Ozelli's work product. As of today, the article is available exclusively from Tax Notes International (which is by subscription only here). We're hoping it will soon see wider (and free) circulation. It's a bona fide contribution to an aspect of the FCPA that deserves more attention.

Monday
Jan142008

In Case You Missed It . . .

The White Collar Crime Prof Blog published its 2007 White Collar Crime Awards in December. It's an entertaining list that makes some serious points as well. A few of the Collars, as the awards are called, are of particular interest to us. Here's one that went to our favorite subject, the Foreign Corrupt Practices Act:

The Collar for Hottest 30-Year Old . . . Statute -- To the Foreign Corrupt Practices Act, which has come into its own as a "mature" criminal statute, even being noticed by the New York Times. And get your minds out of the gutter, this is a family-friendly blog!

Two Collars dealt with the appointment of monitors under deferred prosecution agreements. The cases involve domestic bribery by the leading orthopedic device makers. We've written about them here because they're being investigated for possible FCPA violations based on their overseas practices. The two Collars say this:

The Collar for Nice Work If You Can Get It -- to former AG John Ashcroft, appointed by a former subordinate as a monitor under a deferred prosecution agreement that will require the monitored company to pay him between $29,000,000 and $52,000,000.

The Collar for Biggest Bang From a Deferred Prosecution Agreement-- to U.S. Attorney Christopher Christie (the subordinate mentioned in the preceding Collar) for also getting three former colleagues appointed as monitors in the same case, and this comes after his law school alma mater happened to receive a chaired professorship in 2005 pursuant to a deferred prosecution agreement (surprise!!). Three guesses who may run for Governor of New Jersey in 2009?

The final Collar on the 2007 list mentions us. We have enormous respect for The White Collar Crime Prof Blog. Its authors -- Peter J. Henning of Wayne State University Law School and Ellen S. Podgor of Stetson University College of Law -- are the top white collar crime pundits around. So this recognition is a real honor. Congratulations also to our co-mentionee, Kevin LaCroix, whose blog, The D & O Diary, is an unequaled resource for news and commentary about directors and officers liability and related securities class action litigation. Here's the item:

The Collar for Blogs That Should Be Nominated for Some Award -- To The D & O Diary (written by Kevin LaCroix) and The FCPA Blog (written by Dick Cassin), both outstanding for their thorough, balanced posts that are uniformly informative -- they deserve recognition for the service they provide to readers but probably won't win various popularity contests.

Saturday
Jan122008

The Best FCPA Resources Money Can't Buy

Where do we go when we need help with the Foreign Corrupt Practices Act? Our top choices are likely to include one or more of the following:

1. FCPA Digest of Cases and Review Releases Relating to Bribes to Foreign Officials under the Foreign Corrupt Practices Act of 1977 (the "FCPA Digest").

Written by Danforth Newcomb, a partner in Shearman & Sterling's New York office, this annual publication is the definitive catalog of FCPA prosecutions, enforcement actions and investigations. The writing is meticulous and every case is presented in a consistent at-a-glance format. No wonder the U.S. government appends it to official submissions to the OECD and others.

The front section surveys current developments and trends. It's an amazing compilation of tables, charts, lists and narrative. Here's a sample from the 2007 edition:

Among recent FCPA investigations by the United States government, parallel investigations in the following foreign jurisdictions have been reported: Brazil (Gtech); Costa Rica (Alcatel Lucent); France (Halliburton, Total SA); Germany (Bristol Meyers, DaimlerChrysler, Siemens); Greece (Siemens); Hungary (Siemens); India (Xerox); Indonesia (Freeport, Monsanto); Italy (Immucor, UDI, Siemens); Korea (IBM); Liechtenstein (Siemens); Nigeria (Halliburton); Norway (Siemens); and Switzerland (Siemens). In addition, investigations into the defunct U.N. Iraq oil-for-food program by the governments of Australia, France, Denmark, India, South Africa and Sweden have also been reported. While the level of coordination between various governments and agencies currently conducting investigations is not fully apparent, the investigative and prosecutorial demands presented by these alleged violations are significant opportunities for the creation of an international standard of business propriety, casting aside any doubts about the strength of the international anti-corruption effort.

That's pure gold from Mr. Newcomb -- whose FCPA practice began before the FCPA itself. As his firm bio notes, "His experience with the Foreign Corrupt Practices Act began in 1976 with an SEC mandated investigation of Lockheed Aircraft Corporation’s foreign marketing practice, which was a precursor for the FCPA."

We're grateful to Mr. Newcomb and thankful to have the FCPA Digest.

2. Chapter 8, Part B of the U.S. Federal Sentencing Guidelines (2005).

This little document is the force that shapes every corporate compliance program. Search the pages of any handbook or how-to about the FCPA and you'll end up back here -- whether you realize it or not. Section 8B2.1 is called "Effective Compliance and Ethics Program" and it's a gem of brevity and clarity. "To have an effective compliance and ethics program . . . an organization shall (1) exercise due diligence to prevent and detect criminal conduct; and (2) otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law." It continues, "Such compliance and ethics program shall be reasonably designed, implemented, and enforced so that the program is generally effective in preventing and detecting criminal conduct."

As we've said before, no organization will ever eliminate the possibility of FCPA violations. But any organization can prepare itself for the consequences -- by having an effective compliance program. The inspiration for how to do that can be found in Chapter 8, Part B of the U.S. Federal Sentencing Guidelines (2005).

3. Lay Person's Guide to the FCPA.

It's a plain-English explanation of the FCPA's anti-bribery provisions. The U.S. Department of Justice wrote it to help those "unable to obtain specialized counsel on issues related to the FCPA." Among other things, Uncle Sam's missive famously lists the compliance red flags of overseas business development. And its concise statement on vicarious liability has opened countless eyes to the enormous risks created by the FCPA. It says, "U.S. parent corporations may be held liable for the acts of foreign subsidiaries where they 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."

The Lay Person's Guide to the FCPA works especially well as a handout to first-timers. Although it's written in non-technical language, it carries the authority of the U.S. government. That's a great combination.

View the documents mentioned above by clicking on the titles.


Wednesday
Jan092008

The Curious Case Of The Cautious Requestor

A typical reader of this blog will tell you that he or she is reasonably prudent when it comes to complying with the Foreign Corrupt Practices Act. But we're all downright reckless compared with the sweet lady who stars in the most recent FCPA Opinion Procedure Release. She needed to pay $9,000 to a foreign court as advance fees for the administration of an overseas estate. Although there's never been an FCPA enforcement action based on such a payment (and never will be), our Requestor somehow got spooked by the law. So before paying a dime to the foreign court, she insisted on a green light from none other than the United States Department of Justice.

Opinion Procedure Release No.: 07-03 of December 21, 2007 is truly unique, so we'll let it speak for itself. We'll only point out that it combines features never seen together in another FCPA Release. First -- and we couldn't make this up -- there is no payment to a foreign official. Second, there is no intent to obtain or retain business. In fact, the DOJ is forced to imagine some mens rea just to move things along. Third, the payment to the foreign court was entirely legal under the written laws of the subject country, and apparently a routine requirement. In short, we wonder how the Requestor thought to knock on the DOJ's door at all -- unless she has a young relative in law school someplace.

We're just guessing, but perhaps our Requestor was scared straight by her somewhat incomplete knowledge about the FCPA. That's understandable -- lots of us have been there before. And maybe she was addled because, as a U.S. permanent resident from Asia, she feared the foreign payment might spoil her one chance to someday gain American citizenship, a goal we unreservedly applaud. Whatever the cause, the DOJ didn't want to disappoint this lovely woman. So look closely below and you'll see evidence that the Department of Justice must have had an emotional moment.

We're babbling a bit, but read on and you'll know why. This Release is a charitable (we almost said "heartwarming") act by the DOJ. We've read it a dozen times already, and it always brings a smile.

* * *
No.: 07-03


Date: December 21, 2007

Foreign Corrupt Practices Act Review

Opinion Procedure Release

The Department has reviewed the FCPA Opinion Request (the "Request") of a lawful permanent resident of the United States (the "Requestor"). The person is a "domestic concern"within meaning of the FCPA. The Requestor proposes to make a payment required by a family court judge in an Asian country to cover certain litigation-related costs.

The Requestor is a party to disputed judicial proceedings in the Asian country relating to the disposition of real and personal property in a deceased relative's estate. One of the Requestor's family members has defacto control over the assets of the estate, a portion of which the Requestor believes she legally owns. The estimated value of the estate is equivalent to roughly $600,000, consisting of approximately 30.4% in foreign securities, 40.6% in bank and postal accounts, and 29.0% in real estate. In connection with the judicial proceedings, the Requestor submitted an application for the court to appoint an estate administrator pending the court"s decision on the disposition of the estate assets. The court then requested an advance payment equivalent to approximately $9,000 to cover expenses related to the court-appointed administrator and other miscellaneous court costs. Due to misgivings about the legality of such a payment under the FCPA, the Requestor withdrew the application for appointment of an administrator. In the coming months, if this Opinion Request results in a favorable response, the Requestor plans to renew such application and comply with the court's payment requirement. The Requestor has asked for a determination of the Department's present enforcement intention under the FCPA.

The Requestor has represented, among other things, that:

* the Requestor has not yet made the advance payment ordered by the foreign judge because she has withdrawn her request for the appointment of an estate administrator(1);

* nothing in the Requestor's communications with the foreign court indicated that the requested payment was sought for the purpose of influencing the court, misusing the judge's official position, or inducing the judge or the estate administrator to do anything improper;

* the Requestor has obtained written assurance, a copy of which has been provided to the Department of Justice, from a lawyer who received law degrees in both the U.S. and the foreign country, and who is a member of an established law firm, that the Requestor's proposed payment described in the request is not contrary to, and is in fact explicitly lawful under, the written law of the foreign country (the "legal opinion");

* the proposed payment would be made to the clerk's office of the family court, not to the individual judge presiding over the dispute;

* the Requestor would request an official receipt and an accounting of how the funds are spent, both of which, according to the legal opinion, are discretionary, but often granted upon request; and

* the Requestor would request that the court refund her any remaining amount of the payment not spent in the proceedings, as the legal opinion states is required under foreign law.

In addition, the Requestor has provided copies (and translations) of the relevant provisions of written foreign law and regulation that: (a) authorize a court, in connection with the administration of an estate, to "take necessary measures to preserve the estate;" and (b) govern family law proceedings and grant courts the authority to require parties to make advance payments to cover necessary expenses.

The FCPA Opinion procedure enables a domestic concern "to obtain an opinion of the Attorney General as to whether certain specified, prospective - not hypothetical - conduct conforms with the Department's present enforcement policy regarding the antibribery provisions of the Foreign Corrupt Practice Act."28 C.F.R. § 80.1.

The FCPA's antibribery provisions are implicated when a payment is made in order to obtain or retain business for or with, or to direct business to, any person. See 15 U.S.C. § 78dd-2(a). In this instance, in order to provide the Requestor with the guidance she seeks, the Department will assume that the proposed payment could be reasonably understood to relate to the Requestor's efforts "in obtaining or retaining business for or with, or directing business to, any person." Id. Thus, based on this assumption, the transaction sufficiently implicates the FCPA's antibribery provisions and is appropriately the subject of an FCPA Opinion.

Based upon all of the facts and circumstances, as represented by the Requestor, the Department does not presently intend to take any enforcement action with respect to the proposal described in this Request for two reasons. First, based on the Requestor's representations and consistent with the FCPA, the payment will be made to a government entity, the court clerk's office, rather than a foreign official. Cf. 15 U.S.C. § 78dd-2(a)(1) (emphasis added) ("It shall be unlawful to make use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of any offer, payment, promise to pay, or authorization of the payment...to any foreign official..."); 15 U.S.C. § 78dd-2(h)(2)(A) ("The term 'foreign official' means any officer or employee or a foreign government..."). Moreover, there is nothing to suggest that the presiding judge or the estate administrator will personally benefit from the funds after they are paid into the government account belonging to the court clerk's office. Second, consistent with the FCPA's law affirmative defense, the contemplated payment is "lawful under the written laws and regulations" of the foreign country according to an experienced attorney retained by the Requestor in the Asian country. 15 U.S.C. § 78dd-2(c)(1).

The FCPA Opinion Letter referred to herein, and this release, have no binding application to any party which did not join in the Request, and can be relied upon by the Requestor only to the extent that the disclosure of facts and circumstances in the Request is accurate and complete and continues to accurately and completely reflect such facts and circumstances.

(1) If this Opinion Request results in a favorable response, the Requestor intends to reapply for the appointment of an estate administrator and comply with the court's request for the advance payment.


* * *

View Opinion Procedure Release No.: 07-03 (December 21, 2007) Here.

Monday
Jan072008

When Is Charity A Bribe?

No good deed goes unpunished, or so the saying goes. That sure came true for Schering-Plough a few years ago. From February 1999 to March 2002, the New Jersey-based maker of Afrin, Claritin, Coricidin and Cipro, among other leading drugs, violated the Foreign Corrupt Practices Act through overseas charitable giving.

According to the Securities and Exchange Commission's June 2004 complaint, the company's subsidiary in Poland made improper payments to a charitable organization called the Chudow Castle Foundation. The Foundation was headed by an individual who was the director of the Silesian Health Fund during the relevant time. The health fund was a Polish governmental body that, among other things, provided money for the purchase of pharmaceutical products and influenced the purchase of those products by other entities, such as hospitals, through the allocation of health fund resources.

The SEC said Schering-Plough Poland paid 315,800 zlotys (approximately $76,000 at the time of the payments) to the Chudow Castle Foundation to induce its director to influence the health fund's purchase of Schering-Plough's pharmaceutical products. The SEC also said that none of the payments to the Foundation were accurately reflected on the subsidiary's books and records and that Schering-Plough's system of internal accounting controls was inadequate to prevent or detect the improper payments.

As a result, Schering-Plough paid a $500,000 civil penalty and consented to an SEC order requiring it to avoid violating Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934. It also had to retain an independent consultant to review its policies and procedures regarding compliance with the Foreign Corrupt Practices Act and implement any changes recommended by the consultant.

Schering-Plough's case, as far as we know, remains the only FCPA prosecution based entirely on charitable giving. We're talking about it now because it raised important compliance concerns that still linger. For example, how much due diligence is expected of companies with respect to their overseas charitable donations? At an FCPA conference last year, an audience member popped that question to Mark Mendelsohn, the head of the Department of Justice's group that prosecutes FCPA cases. He said each donation has to be considered on its merits, but there are always common-sense guidelines that help determine if donations could violate the FCPA. Is there a nexus between the charity and any government entity from which the company is seeking a decision? If the governmental decision-maker holds a position at the charity, that's a red flag. Is the donation consistent with the company's overall pattern of charitable contributions? For Schering-Plough, the SEC said that "[d]uring 2000 and 2001, the payments constituted approximately 40% and 20%, respectively, of S-P Poland's total promotional donations budget. Moreover, the Foundation was the only recipient of such donations that received multiple payments, making the four payments in 2000 and seven payments in 2001 highly unusual." If one donation or a series of them is more than the company has made to any other charity in the past five years, that's a red flag too.

Beyond the points made by Mr. Mendelsohn, there are other smell tests for charitable donations. Who initiated the request for payment to the charity? The key to most bribery charges appears to be the personal benefit to the government official, or the quid pro quo expected of him or her. If a government official hinted at or begged for a payment to the charity, that's another red flag. Will there be a tax deduction for the donation? In most countries, one important result of any gift to charity is tax relief. Therefore, not seeking the tax benefit can become yet another red flag.

And one final point. All due diligence concerning charitable payments -- the asking and answering of the questions posed above -- should be well documented. Nothing will aid in defending against a potential FCPA charge more than a stack of contemporaneously-generated papers backing the story that the payment really was meant to be a charitable contribution and not a bribe. Don't be shy about it. Create real-time documents that demonstrate awareness of potential FCPA issues and measures taken to manage and mitigate the risk. That, after all, is what compliance is really about.

Schering-Plough Corporation trades on the New York Stock Exchange under the symbol SGP.

View the SEC's Litigation Release No. 18740 / June 9, 2004 Here.

View the SEC's June 9, 2004 complaint against Schering-Plough Here.

As a postscript, we need to say how much we like what's written above. That sounds like outrageous braggadocio, but it's not. Our friend, Pete from D.C., is the inspiration and chief draftsman of this post. Despite his encyclopedic knowledge of the FCPA and vast experience in its application, he chooses to remain an anonymous contributor to these pages. We can only thank him yet again for his interest and great help in our work here -- and encourage him once more to reveal to the world his almost handsome face.

Tuesday
Jan012008

Joint Venture Compliance

International joint ventures bring very high risks under the U.S. Foreign Corrupt Practices Act. Unreliable partners -- those who might pay bribes to foreign officials to help the business -- need to be spotted early and either avoided or controlled. Like any courtship and marriage, the process of finding and keeping a suitable joint venture partner involves lots of work (and a dash of luck). The work part should be reflected through an effective compliance program aimed at managing the risks. Here, for example, are five (of many) joint venture-directed compliance elements:

1. Due Diligence. Take all necessary and prudent precautions through well-documented due diligence to ensure that business relationships are formed only with reputable and qualified joint venture partners.

2. Board or Management Reviews. Examine the suitability of all prospective joint venture partners for purposes of compliance with the Foreign Corrupt Practices Act. Review the adequacy of due diligence performed in connection with the selection of overseas partners, as well as the joint venture's selection of agents, subcontractors and consultants for business development outside the United States. Reviewers should not be subordinate to the most senior officer of the Company's department or unit responsible for the relevant transaction.

3. Compliance Obligations in the Joint Venture Documents. Include in all joint venture agreements representations and undertakings by the joint venture partners, with periodic re-certifications, that no payments of money or anything of value have been or will be offered, promised or paid, directly or indirectly, to any foreign officials, political parties, party officials, or candidates for public or political party office, to influence the acts of such officials, political parties, party officials, or candidates in their official capacity, to induce them to use their influence with a government or an instrumentality thereof to obtain or retain business or gain an improper advantage in connection with any business venture or contract in which the Company is a participant

4. Audits and Approvals. Retain audit rights over the joint venture. Agree with all partners that the joint venture will not hire an ­agent, subcontractor or consultant without the Company's prior written consent (to be based on adequate due diligence).

5. Right to Terminate. Make sure all joint venture documents allow for immediate and unfettered termination for any breach of compliance-related obligations.

This list is not exhaustive.

See, for example, U.S. v. Monsanto Company, Deferred Prosecution Agreement, Appendix B, Remedial Compliance Program (January 6, 2005).

View the Monsanto Deferred Prosecution Agreement Here.

Friday
Dec212007

Akzo Nobel Pays $2.9 Million For FCPA Violations Under the U.N. Oil for Food Program

Akzo Nobel N.V., a Netherlands-based pharmaceutical company, settled U.S. Foreign Corrupt Practices Act books and records charges with the U.S. Department of Justice and the Securities and Exchange Commission. With the SEC, Akzo Nobel consented to the entry of a final judgment permanently enjoining it from future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, ordering it to disgorge $1,647,363 in profits, plus $584,150 in pre-judgment interest, and to pay a civil penalty of $750,000. Akzo Nobel will also enter into a non-prosecution agreement with the DOJ.

The SEC's complaint alleges that from 2000 to 2003, two of Akzo Nobel's subsidiaries authorized and made $279,491 in kickback payments in connection with their sales of humanitarian goods to Iraq under the U.N. Oil for Food Program. The kickbacks were characterized as "after-sales service fees," but no bona fide services were performed. The kickbacks were paid by third parties to Iraqi-controlled accounts in Lebanon and Jordan.

The SEC said it considered remedial acts promptly undertaken by Akzo Nobel, which self-reported the violations and cooperated with the U.S. government's investigation.

Akzo Nobel NV's ADRs trade in the Pink Sheets (Other OTC) under the symbol AKZOY.PK.

View other posts about the Oil For Food Program Here.

View the SEC's Litigation Release No. 20410 / December 20, 2007 Here.

View the SEC's Complaint in Securities and Exchange Commission v. Akzo Nobel, N.V., Civil Action No. 07-CV-02293 (D.D.C.) (HHK) Here.

Friday
Dec212007

Lucent Settles FCPA Violations For $2.5 Million

It Misused Affirmative Defense For Promotional Expenses

Lucent Technologies Inc. settled U.S. Foreign Corrupt Practices Act charges with the Department of Justice and the Securities and Exchange Commission for $2.5 million. The settlement includes a $1 million criminal fine and $1.5 million in civil penalties. Lucent's violations involved promotional expenses for Chinese government officials. The FCPA includes an affirmative defense that allows payment or reimbursement of expenses of foreign officials that are directly related to “the promotion, demonstration, or explanation of products or services." 15 U.S.C. §§ 78dd-1(c)(2)(A) and 78dd-2(c)(2)(A). Many of Lucent's payments, however, were not directly related to legitimate business purposes and were not recorded accurately in its books and records.

According to the DOJ, from at least 2000 to 2003, Lucent -- a global communications company that became part of Alcatel SA in November 2006, after the violations occurred -- spent millions of dollars on approximately 315 trips for Chinese government officials that included primarily sightseeing, entertainment and leisure. These trips were requested and approved with the consent and knowledge of the most senior Lucent Chinese officials and with the logistical and administrative assistance of Lucent employees in the United States, including at corporate headquarters in Murray Hill, N.J. Lucent improperly recorded expenses for these trips in its books and records and failed to provide adequate internal controls to monitor the provision of travel and other things of value to Chinese government officials.

Lucent provided Chinese government officials with pre-sale trips to the United States to attend seminars and visit Lucent facilities, as well as to engage in sightseeing, entertainment and leisure activities. In 2002 and 2003 alone, there were 24 Lucent-sponsored pre-sale trips for Chinese government customers. Of these, at least 12 trips were mostly for the purpose of sightseeing. Lucent spent over $1.3 million on at least 65 pre-sale visits between 2000 and 2003. The individuals participating in these trips were senior level government officials, including the heads of state-owned telecommunications companies in Beijing and the leaders of provincial telecommunications subsidiaries.

Between 2000 and 2003, Lucent also provided Chinese government officials with post-sale trips that were typically characterized as “factory inspections” or “training” in contracts with its Chinese government customers. By 2001, however, Lucent had outsourced most of its manufacturing and no longer had any Lucent factories for its customers to tour. Nevertheless, Lucent provided individuals with trips for “factory inspections” to the United States, Europe, Australia, Canada, Japan and other countries that involved little or no business content. These trips consisted primarily or entirely of sightseeing to locations such as Disneyland, Universal Studios, the Grand Canyon, and in cities such as Los Angeles, San Francisco, Las Vegas, Washington, D.C., and New York City, and typically lasted 14 days each and cost between $25,000 and $55,000 per trip.

The DOJ's non-prosecution agreement requires Lucent to adopt new or modify existing internal controls, policies and procedures. Those enhanced internal controls must ensure that Lucent makes and keeps fair and accurate books, records and accounts, as well as a rigorous anti-corruption compliance code, standards and procedures designed to detect and deter violations of the FCPA and other applicable anti-corruption laws. Lucent will not be prosecuted if it complies with all of the requirements contained in the agreement for two years.

View other posts about promotional expenses Here.

View the DOJ's December 21, 2007 release Here.

Tuesday
Dec182007

That's Entertainment?

Wow! It's not often -- never, in fact -- that we can talk about the LA movie scene and tap Variety as one of our sources. But here it is. The Department of Justice just announced that a Los Angeles film executive and his wife were arrested on allegations of making corrupt payments to a Thai government official in order to obtain lucrative contracts to run an international film festival in Bangkok, in violation of the Foreign Corrupt Practices Act.

Gerald Green, 75, and his wife Patricia Green, 52, both of Los Angeles, were arrested on a criminal complaint filed on Dec. 7, 2007, in federal court in Los Angeles and unsealed today. The complaint alleges that the Greens conspired to pay more than $1.7 million in bribes for the benefit of a government official with the Tourism Authority of Thailand (TAT) in order to obtain the film festival contract and other contracts with the TAT worth more than $10 million.

The Greens owned and operated Film Festival Management, a Los Angeles-based business that was formed in 2003 specifically to bid for the management contract for the annual Bangkok International Film Festival (BIFF). The complaint alleges that from 2003 and continuing into 2007, the Greens conspired with others to bribe a senior Thai government official who was, at the time, the President of the BIFF and the Governor of the TAT. More than $1.7 million in payments were allegedly made for the benefit of the Governor.

The complaint also alleges that the Greens attempted to conceal their bribery. The government says they used different business entities -- some with dummy business addresses and telephone numbers -- to hide the large amounts they were being paid under the contracts with the TAT. The complaint also alleges that they paid “commissions” to the Governor through the foreign bank accounts of intermediaries. The conspiracy and FCPA allegations each carry a maximum of five years in prison. The government relied on at least two cooperating witnesses from within the Greens' organization, obtained detailed bank records and raided their offices to gather evidence.

What about Variety? Well, it nearly scooped the DOJ by a year. Last December, it reported here that the Tourism Authority of Thailand had canceled the Greens' contract to run the Bangkok International Film Festival and had decided to postpone the event for at least six months. Variety reported lots of wrangling among the parties about money but nothing specific about alleged corruption. While Variety didn't quite get the story, at least we got to mention Variety -- and quite shamelessly feature its logo on our post. What a day.

View the Department of Justice's release Here.

View the FBI's affidavit Here.

Tuesday
Dec182007

Making History In Pune

Pune, India was the site of a groundbreaking conference on December 16, 2007 about the U.S. Foreign Corrupt Practices Act. The first-ever FCPA compliance event to be staged in India was organized by Indiaforensic, a non-profit group for anti-fraud professionals. Presenters included Anil Roy, partner and head of Grant Thornton India, Sidarth Khasu, manager, E & Y, India, Jagdeep Singh, associate director, KPMG, Dr Vishnu Kanhere, director of KCPL and Vidya Rajarao, Associate Director of PWC India. Host Indiaforensic was founded in 2003 by Chartered Accountant Mayur Joshi (pictured above), who serves as the group's chairman.

Congratulations to Indiaforensic for this unique event. And our thanks to Pradeep Akunoor for the heads up.

Friday
Dec142007

Coming Clean At Siemens

Spiegel's December 12, 2007 online edition has a fascinating interview with Peter Löscher (left), who became ceo of Siemens AG in July 2007. There's lots for him to talk about. In October 2007, the German engineering and industrial giant settled global corruption charges with Munich prosecutors for €201 million, based on questionable payments of €420 million -- an amount the company later revised upward to €1.3 billion. In the United States, the Securities and Exchange Commission and the Department of Justice are investigating whether Siemens violated the Foreign Corrupt Practices Act. The company is also facing possible charges of public corruption in Italy, China, Hungary, Indonesia and Norway.

In the interview, Mr. Löscher slams Siemens' former culture. He also provides a neat preview of arguments the company will marshal in talks with U.S. prosecutors early next year. It's always a good idea when facing FCPA charges to stress corrective measures already taken -- such as aggressive house cleaning among management and real efforts to create a new culture of compliance. Mr. Löscher apparently will be doing just that.

Here are excerpts from the interview:

SPIEGEL: Siemens has been shaken by what has probably been the biggest corruption scandal ever made public. Were you truly aware of what you were getting yourself into?

Löscher: To be honest, I underestimated the scope of the problem. The sum of questionable payments has now increased to €1.3 billion ($1.9 billion). In the summer, the charges centered on the Com division, that is, the communications business. But it's now clear that other parts of the company were clearly infected, as well.

SPIEGEL: The company has already incurred costs of €1.5 billion in penalties, back taxes and legal and consultants' fees.

Löscher: And the investigation is still underway.

* * *

SPIEGEL: So it was a system based on a shadow economy. How could something like this have developed in the first place?

Löscher: It's completely clear that the management culture failed. Managers broke the law. But this has nothing to do with a lack of rules. Siemens had and still has an outstanding set of rules. The only problem is that they were apparently being violated on an ongoing basis. The management culture was simply not practiced consistently and uniformly. This is why my job now is to install a new culture. And I can guarantee you that senior management will practice what it preaches -- to a T.

* * *

SPIEGEL: Why did corruption at Siemens continue for so many years, even after the laws had been toughened in Germany, and after Siemens had been listed on US stock exchange, thereby subjecting itself to tighter American controls?

Löscher: Once again, our management culture failed. And that's something we will address -- all of it. Four-hundred-seventy executives have already been sanctioned, and we have parted ways with 130. It is important that every Siemens employee knows that rules and laws must be observed. Anyone who fails to comply can expect the most serious of consequences.

SPIEGEL: What if someone confesses to old sins and asks for a second chance?

Löscher: We have implemented an internal amnesty program that runs until the end of January. In addition, any employee can anonymously report confidential information. This could raise new suspicions that haven't even been part of the discussion until now. I want a comprehensive inquiry and the complete truth.

* * *

SPIEGEL: Siemens is a company with global operations. What will you do in the future in regions or in situations where landing a contract may depend on paying bribes?

Löscher: Siemens endorses clean business. Period. I am not interested in deals that can only be had through corruption. This doesn't necessarily mean that we have to stop doing business in an entire country, but perhaps it does mean turning down specific projects or customers.

SPIEGEL: You would turn down the prospect of sales voluntarily?

Löscher: Do I even have to? Our orders were up by 19 percent last quarter. Infrastructure projects worth €500 billion will be awarded in the coming years in India alone. Business is booming. Our worldwide opportunities are promising and by no means exhausted.

SPIEGEL: The Nigerian government has imposed a moratorium on doing business with Siemens. Do you expect other countries to follow its lead?

Löscher: I would rather not speculate about that.

* * *

View prior posts about Siemens Here.

View Spiegel's Interview with Siemens' CEO Peter Löscher Here.

Thursday
Dec132007

Schnitzer's Former Boss Settles FCPA Charges

The former chairman and ceo of Schnitzer Steel Industries, Inc. resolved charges on December 13, 2007 brought by the Securities and Exchange Commission under the U.S. Foreign Corrupt Practices Act. Robert W. Philip, 60, of Portland, Oregon, will pay about $250,000 to settle charges that he violated the antibribery, books and records and internal controls provisions of the FCPA (Section 30A of the Securities Exchange Act of 1934 [15 U.S.C. § 78dd-1], Section13(b)(2)(A) [15 U.S.C. § 78m(b)(2)(A)], and Section 13(b)(2)(B) [15 U.S.C. § 78m(b)(2)(B)]). He served as Schnitzer's president beginning in 1991, as its chief executive officer from 2002, and as chairman from 2004. He left the company in May 2005.

In October 2006 -- after an internal investigation and self-disclosure to authorities -- Schnitzer paid more than $15 million to resolve FCPA violations with the SEC and the Department of Justice. In June 2007, Si Chan Wooh, Schnitzer's former executive vice president and head of a foreign subsidiary, agreed with the SEC to pay about $40,000 in disgorgement, interest and penalties for FCPA violations.

The SEC's complaint against Mr. Philip said that from at least 1999 through 2004, Schnitzer paid more than $1.9 million in bribes to managers of steel mills in China and South Korea to induce them to purchase scrap metal from Schnitzer, generating over $500 million in gross revenue for the company. He authorized the payment of the bribes, aided and abetted Schnitzer's failure to make and keep accurate books and records, and failed to implement internal controls reasonably designed to detect and prevent Schnitzer's FCPA violations. The SEC's complaint alleged that after approving the improper payments, he instructed that they be falsely recorded in Schnitzer's books as "sales commissions," "commission to the customer," "refunds," or "rebates."

Schnitzer Steel Industries Inc. trades on NASDAQ under the symbol SCHN.

View prior posts about Schnitzer Here.

View the SEC's Litigation Release No. 20397 (December 13, 2007) Here.

View the SEC's complaint in Securities and Exchange Commission v. Robert W. Philip, Case No. CV 07-1836 (MO) (D. Or. filed December 13, 2007) Here.