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


AGA Medical Resolves China-Related FCPA Charges

Privately-held AGA Medical Corporation will pay a $2 million criminal penalty and enter into a deferred prosecution agreement with the Department of Justice to settle Foreign Corrupt Practices Act violations. It paid bribes in China of at least $460,000 to doctors in government-owned hospitals and patent-office officials. The Minnesota-based firm makes products used to treat congenital heart defects.

AGA was charged with two counts of violating and conspiring to violate the FCPA, 15 U.S.C. § 78dd-2(a)(1) and 18 U.S.C. § 371. Between 1997 and 2005, the company, one of its officers and other employees authorized corrupt payments to the doctors through AGA’s Chinese distributor. In exchange, the doctors directed their government-owned hospitals to purchase AGA’s products. Its sales in China for the period were about $13.5 million. Also, from 2000 through 2002, AGA applied for several Chinese patents. A high-ranking AGA officer agreed to pay bribes through the distributor to officials in the China State Intellectual Property Office to have the patents approved.

AGA's three-year deferred prosecution agreement requires appointment of a compliance monitor. Similar to the provisions seen recently with Willbros Group Inc., AGA will pick the monitor and the DOJ will approve or reject its choice: "AGA agrees to engage an independent corporate monitor ('the Monitor') within sixty (60) calendar days of signing this Agreement. Within thirty (30) calendar days after the signing of this Agreement, and after consultation with the Department, AGA will propose to the Department a candidate to serve as the Monitor. The Department retains the right, in its sole discretion, to accept or reject any Monitor proposed by AGA pursuant to the Agreement. In the event the Department rejects a proposed monitor, AGA shall propose another candidate within ten (10) calendar days after receiving notice of the rejection. This process shall continue until a Monitor acceptable to all parties is chosen."

The deferred prosecution agreement also contains a now-customary successor liability clause, whereby anyone who acquires AGA's business will also be bound by the compliance obligations in the agreement: "AGA agrees that in the event it sells, merges, or transfers all or substantially all of its business operations as they exist as of the date of this Agreement, whether such sale is structured as a stock or asset sale, merger or transfer, it shall include in any contract for sale, merger or transfer a provision binding the purchaser, or any successor in interest thereto, to the obligations described in this Agreement."

AGA self-disclosed the violations to the Department of Justice. Emails it provided between some of its U.S.-based officers and employees and the Chinese distributor left no doubt that illegal activity had occurred. Here are some excerpts from the distributor's messages:

This week I have maken [sic] an appointment with one key person in China knowledge and Patent Protection Bureau, Any action in China I must pay money to do.

I am still in agreement with our prior discussions and will cover her fee as long as we can get the [sic] patent issued in a timely manner.

Please inform [Officer A] don't give up the application for the first three patents in China. I will contact with the officials of China patent bureau again after Chinese new year. Maybe money will help us.

My company also need to provide 20% kickback for physicians and sometimes 10% discount to hospitals.

The physicians suggest the patient to use which device according [to] the patient's family economic ability and the kickback.

View the DOJ's June 3, 2008 news release here.

View the criminal complaint against AGA Medical Corporation here and the deferred prosecution agreement here (courtesy of the Corporate Crime Reporter).


Unintended Consequences

Crooked officials and those who bribe them cripple economies and ruin lives. So all sincere efforts to reduce public corruption and deliver clean government deserve praise. At the same time, not all anti-corruption initiatives are equal, and good intentions can sometimes produce bad results. With that in mind, we want to take a quick look at the programs run by the Council of Europe's "Group of States against Corruption," also known as GRECO.

It was founded in 1999 to monitor compliance with the Council of Europe's anti-corruption standards. GRECO does that by studying the members' existing laws and practices, publishing reports that evaluate their efforts, and recommending how they can improve their performance. Then it checks back to see how they're doing and, with the member's permission, publishes its findings for the public to read.

All that sounds good. Third-party reviews, peer pressure and plenty of accountability. But when you look at GRECO's country reports, there's something fishy.The same recommendations show up again and again. For example, GRECO tells both Azerbaijan (#150 on Transparency International's 2007 Corruption Perception Index) and Iceland (#6 on the CPI) to do more training of public officials in ethics and anti-corruption awareness. The language used for both countries is nearly identical. And the report on Moldova (#111 on the CPI) warns that public-sector transparency has to be increased. That's good too, but it loses its punch when you read that Switzerland (# 7 on the CPI) needs the same medicine. Albania (#105 on the CPI) should develop standards for public servants moving to the private sector, GRECO says. Good idea, except that the message is the same for squeeky-clean Denmark (#1 on the CPI).

Our concern, you might have guessed, is that GRECO appears to approach all of its 44 member States with the same checklist. The impression given is that fighting corruption is a matter of changing this law, adopting that code of conduct, or imposing this training module. True enough, those steps might help, but only in a country already committed to fighting public corruption. On the other hand, where leaders take a cynical view -- where they line their own pockets with kickbacks and bribes and let their subordinates do the same -- GRECO's approach provides cover for the bad guys to hide behind. Here's the problem: corrupt regimes can implement GRECO's technical recommendations and periodically announce great progress in the battle against public sleaze. Do this, check. Do that, check . . check, check, check. Meanwhile everyone can still be stealing the silverware.

With all institutions and organizations -- as with individuals -- the difference between compliance and lawlessness is a matter of intent. Any law, rule or regulation can be ignored, avoided, bent or broken to achieve a corrupt purpose. And no amount of legal reform, ethics training or transparency will make a dent if attitudes don't change. But when attitudes do change, when leaders decide to clean things up, they can do it practically overnight. Singapore (#4 on the CPI) has amazingly simple anti-corruption legislation. But its leaders are committed to cleanliness and the result is easy to see. Neighboring Indonesia (#143 on the CPI) has layers of laws, rules and regulations aimed at public corruption. None of it works because the attitude at the top is inconsistent, to put it kindly.

So it's fair to ask this question: Is GRECO spending its time and public funding wisely? Do Azerbaijan and Switzerland really need more rules regulating gifts to public servants? According to GRECO they do. But will a ban on fruit baskets ever turn Azerbaijan's culture around? At the same time, does the absence of gift-giving rules really threaten the integrity of Swiss bureaucrats? Perhaps, just maybe, GRECO would do better to ditch the checklist and, in countries where public corruption is really a problem, work on attitudes instead.

The people at GRECO would say they're already changing perceptions. They'd say their evaluation visits, recommendations and public reports focus local and international attention on the need for anti-corruption initiatives in all member countries. That to pick on just the Azerbaijans and not the Denmarks would create an atmosphere of bullying and intimidation, draining both GRECO and its parent, the Council of Europe, of their moral authority.

There's some truth to those arguments. But in Germany, Italy and France, for example, attitudes toward domestic and international public corruption changed over the past decade -- helped along by an uncompromising antibribery message from the OECD. Those countries reformed their tax codes, which helped, and started enforcing anti-corruption laws already on the books. Prosecutions, convictions and punishment deter crime more than anything else. Most importantly, however, the leaders of Germany, Italy and France showed the political will to find, catch and incarcerate wrongdoers. That's an ingredient that can never come from an outsider's checklist.

GRECO members -- 43 European countries and the United States -- are right to fight public corruption. It's a scourge that destroys hope and robs people of their futures. Its proper place is in the dustbin of history. But GRECO and its parent, the Council of Europe, might want to ask themselves whether their approach, though well-meaning in all respects, though thorough and even-handed, is really the right path to less corruption in some of its more troublesome member States.

Visit GRECO's website here.

View Transparency International's 2007 Corruption Perception Index here.


The Dog Ate Our Homework

We had a nice post ready for today. Really. Then we remembered the 11:59 p.m. deadline on May 31 for the 2008 TRACE International essay contest on fighting public bribery. There were only a few hours to go so in desperation we sent our post off as our entry. TRACE, by the way, is a non-profit group that conducts due diligence and compliance training for intermediaries -- agents, joint venture partners, distributors and the like. We wanted to be part of the essay contest, which drew 120 entries last year. So here we are with no post and a rather flimsy excuse on top of it.

It's embarrassing to have mailed away the blog's work product. If we hadn't done that, we'd be using this space right now to talk about our favorite subject: in-house compliance training. How much we always learn from the sessions. How we enjoy talking about the Foreign Corrupt Practices Act with company personnel from management, marketing, operations and more -- and how the training sessions go far beyond the mere words of the FCPA.

But we can't say too much. TRACE, we noticed, has rules intended to protect the integrity of its essay contest. Entries must be original and unpublished. So we're scrupulously avoiding any hint of self-plagiarizing. Imagine how bad it would look if the FCPA Blog triggered a scandal in an essay contest about fighting corruption through ethical practices? Oh boy. We'd need a new identity just to get dinner at home.

So until the post flew out of our hands, we intended to mention that FCPA training is required for an effective compliance program. Now, constrained by the rulebook, we can't even talk about that. We can only reproduce below part of the 2005 Federal Sentencing Guidelines, trusting that curious readers will ponder why:

The organization shall take reasonable steps to communicate periodically and in a practical manner its standards and procedures, and other aspects of the compliance and ethics program, to the individuals [responsible for compliance] by conducting effective training programs and otherwise disseminating information appropriate to such individuals’ respective roles and responsibilities.

And finally, to tie it all together, we would have tossed in some nice examples to show how training can prevent FCPA violations; or uncover them; or even reveal who in the company may be heading for a compliance meltdown.

Gosh, it really would have been a good post. Too bad all we've got to show for it is the fuzzy screen shot above. Here's our plan, though. If we win the essay contest, we'll seek permission to "reprint" our post right here, with full credit to TRACE for all the great compliance work they're doing. If we lose, which we concede to be the overwhelmingly probable outcome, we'll be free to use the post anyway.

The judges will decide by September, TRACE says. Meanwhile, we'll get back to work -- and hope this humbling editorial debacle will soon be forgotten.

Visit TRACE International here.

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



That's right. The title of today's post says in Japanese, Terminate With Extreme Prejudice. Why? Well, we were spending just a few minutes surfing the internet (only during our company-approved tea break, of course) and happened to see the following news item from Japan's Yomiuri Shimbun (here):


U.S. firm asks court to void contract with Yamada

LOS ANGELES--A U.S. aviation fuel-related equipment manufacturer has filed a lawsuit at a U.S. district court in Cleveland against defense equipment trader Yamada Corp. and its U.S. subsidiary, claiming Yamada's involvement in bribery cases violated their contract, which therefore should be terminated, The Yomiuri Shimbun has learned.

Cleveland-based Argo-Tech Corp. also demanded compensation from Yamada and its subsidiary.

In response, Yamada filed a countersuit against Argo-Tech at a U.S. district court in California, claiming the termination of their contract would be illegal.

According to the claims by the two sides, former Yamada President Masashi Yamada, 84, participated in a 150 million dollars capital boost for Argo-Tech around 1990, when the U.S. company faced financial difficulty.

Argo-Tech in return concluded a 50-year exclusive agency agreement with Yamada on the sales of Argo-Tech's fuel pumps for aircraft and other products in 1994.

In the documents submitted to the Ohio court, Argo-Tech claimed that incidents including former Yamada executive Motonobu Miyazaki's bribing of former Administrative Vice Defense Minister Takemasa Moriya and Miyazaki's provision of 100 million yen to Naoki Akiyama, former executive director of the Japan-U.S. Center for Peace and Cultural Exchange, in connection with the company's winning contracts for the disposal of chemical weapons found in Fukuoka Prefecture violated their contract, in which they agreed they would adhere to the U.S. Foreign Corrupt Practices Act.

For its part, Yamada claimed in its documents submitted to the California court that the incidents mentioned by Argo-Tech had no relation to the company, so they should not cause the termination of their contract.

(May 28, 2008)


Now we know nothing about the story except what's printed above. But assuming the Yomiuri Shimbun has its facts straight, we can say for sure that Cleveland-based Argo-Tech made a fundamental compliance error when it entered into the 50-year agency agreement with Yamada in 1994.

Long-suffering readers of this Honorable Blog will know that every agreement with an overseas partner or agent should give the principal the unfettered right to terminate if the agent breaches its obligations to comply strictly with the requirements of the Foreign Corrupt Practices Act. Otherwise, the principal might get caught between a 石 and a ハード面. That's exactly what the Department of Justice warned against in Opinion Procedure Release 2001-01 (May 24, 2001) (here).

In that case, a U.S. company (called the “Requestor”) proposed to enter into a joint venture with a French company. There were doubts about how the French company obtained some of its contracts. So the Requestor took various precautions to protect itself against an FCPA violation. Accordingly, if it learned its French partner had breached the compliance warranty, the Requestor could terminate the relationship if the breach had a “material adverse effect” upon the business.

Not good enough, said the DOJ:

Should the Requestor's inability to extricate itself result in the Requestor taking, in the future, acts in furtherance of original acts of bribery by the French company, the Requestor may face liability under the FCPA. Thus, the Department specifically declines to endorse the "materially adverse effect" standard.

The lesson from Release 2001-01 is this: Accept no limits or conditions on the right to terminate a joint venture or agency when there is evidence of an FCPA violation.

We don't know the terms of the agreement between them, but if Argo-Tech had to file a lawsuit in federal court to get away from a bribe-paying Yamada, then Argo-Tech surely didn't have an unfettered right to terminate because of the breach of FCPA compliance obligations. And that's a serious mistake to have made, even way back in 1994. On the other hand, if Argo-Tech neglected to include a proper termination clause, going to court now to end the agreement (and at the same time establish that it had nothing to do with Yamada's alleged bribery) is its best course of action -- even though the litigation will be expensive, time-consuming, and on public display.

So that's today's post, along with a confession -- well, two confessions. We were surfing before and after our tea break today. In fact, it was only during our tea break that we stopped surfing. And our Japanese fluency isn't what you might call . . . fluent. So there's a chance the post's title doesn't quite say Terminate With Extreme Prejudice. Another plausible translation may be Thank You For The Wonderful Visit, Beloved Mother-In-Law.

View DOJ Opinion Procedure Release 2001-01 (May 24, 2001) here.


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.


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.


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.


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.


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.


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.


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.


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.