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Harry Cassin Publisher and Editor

Andy Spalding Senior Editor

Jessica Tillipman Senior Editor

Richard L. Cassin Editor at Large

Elizabeth K. Spahn Editor Emeritus 

Cody Worthington Contributing Editor

Julie DiMauro Contributing Editor

Thomas Fox Contributing Editor

Marc Alain Bohn Contributing Editor

Bill Waite Contributing Editor

Shruti J. Shah Contributing Editor

Russell A. Stamets Contributing Editor

Richard Bistrong Contributing Editor 

Eric Carlson Contributing Editor

Bill Steinman Contributing Editor

Aarti Maharaj Contributing Editor


FCPA Blog Daily News

Thursday
Jan242008

Handicapping The FCPA

We heard a few days ago (here) that some Siemens insiders are trying to calculate the company's potential financial penalties for alleged Foreign Corrupt Practices Act offenses. Apparently the insiders think that past FCPA settlements reveal a correlation between the amount of bribes paid and the financial penalties imposed on the organizations. We don't think the correlation exists, but we're never going to be mistaken for mathematicians. So we're providing the raw data below in case any real mathematicians are paying attention.

Who knows? Maybe there is a pattern after all. Even so, we don't advise anyone to decide about FCPA compliance after a cost - benefit analysis. For individuals, there is a 100% chance that an FCPA offense can result in five years behind bars. No matter how you figured it beforehand, ending up in prison will always turn out to be an enormous tragedy. And no, we're not suggesting that organizations should compute their odds. The only bet that makes any sense is to comply.

So for purely academic purposes, here are the numbers. They're for FCPA matters that companies resolved with the SEC, DOJ or both during 2007. As a caveat, most of the companies also agreed to appoint monitors or compliance consultants. The cost of doing that is not included in the amounts shown. As we've learned from John Ashcroft's recent appointment by Zimmer Holdings in a domestic bribery case, monitors can cost millions or even tens of millions of dollars a year. Nor do the numbers reveal the damage done to the fabric of organizations by FCPA problems, and the ruined lives of men and women who lost their jobs and perhaps a lot more because of non-compliance.

El Paso Corp.
, Feb. 7, 2007 Amount of alleged bribes: approximately $5.5 million. Financial penalties: $7.65 million ($5.4 million in disgorgement and a $2.25 million civil penalty).

The Dow Chemical Co., Feb. 13, 2007 Amount of alleged bribes: about $200,000. Financial penalties: $325,000 civil penalty.

Baker Hughes Inc., Apr. 26, 2007 Amount of alleged bribes: $15.4 million. Financial penalties: $44 million (about $22 million in disgorgement and pre-judgment interest, a $10 million civil penalty for violating a prior cease-and-desist order, and an $11 million criminal fine).

Delta & Pine Land Co., July 26, 2007 Amount of alleged bribes: $43,000. Financial penalties: $300,000 civil penalty.

Textron Inc., Aug. 23, 2007 Amount of alleged bribes: about $650,000. Financial penalties: about $4.5 million (over $3 million in disgorgement and pre-judgment interest, an $800,000 civil penalty, and a $1.15 million fine).

Bristow Group, Inc., Sept. 26, 2007 Amount of alleged bribes: over $423,000. Financial penalties: Nil.

York International Corp., Oct. 1, 2007 Amount of alleged bribes: about $7.5 million. Financial penalties: $22 million (over $10 million in disgorgement and pre-judgment interest, a civil penalty of $2 million, and a $10 million fine).

Ingersoll-Rand Co. Ltd., Oct. 31, 2007 Amount of alleged bribes: over $1.5 million. Financial penalties: $6.7 million (over $2.2 million in disgorgement and pre-judgment interest, a $1.95 million civil penalty, and a $2.5 million fine).

Chevron Corp., Nov. 14, 2007 Amount of alleged bribes: over $20 million. Financial penalties: $30 million ($25 million in disgorgement, a $3 million civil penalty and a $2 million penalty to the Office of Foreign Asset Controls of the U.S. Department of the Treasury).

Akzo Nobel NV, Dec. 20, 2007 Amount of alleged bribes: $280,000. Financial penalties: $2.9 million (over $2.2 million in disgorgement and a $750,000 civil penalty).

Lucent Technologies, Inc., Dec. 21, 2007 Amount of alleged bribes: at least $1.3 million. Financial penalties: $2.5 million ($1.5 million civil penalty and a $1 million fine).

________

View more information by clicking on the subject headings to the right.

Wednesday
Jan232008

Heading For Trial In Tinseltown

Our favorite news source here at the FCPA Blog -- Variety -- reports that the Hollywood film producers arrested for violating the Foreign Corrupt Practices Act have pleaded not guilty and will go to trial on February 26, 2008. Gerald Green, 75, and his wife Patricia Green, 52, both of Los Angeles, were arrested on a criminal complaint filed in December 2007 in federal court in Los Angeles. The complaint alleges that the Greens conspired to pay more than $1.7 million in bribes to a government official with the Tourism Authority of Thailand in order to obtain a film festival contract worth more than $10 million. The Greens are out on $500,000 bail.

The trial could be a major embarrassment for at least one Thai government official. The FBI affidavit doesn't name names. But the Feds describe then-governor of the Tourism Authority of Thailand and president of the Bangkok International Film Festival, Juthamas Siriwan. Variety says, "Siriwan, who has neither been charged in the U.S. nor in Thailand, has denied any suggestion of corruption. But the day after the charges against the Greens were made public, her political career took a dive and she resigned from the deputy chairmanship of the People's Power Party."

The Greens owned and operated Film Festival Management, a Los Angeles-based business formed in 2003 specifically to bid for the management contract for the Bangkok film festival. They also produced the movie "Rescue Dawn" last year. The bio-pic stars Christian Bale as a U.S. air force pilot shot down and captured by the Viet Cong in 1966. Bale's a terrific actor so we flipped to the movie on a recent transpacific flight. It looked good -- but too intense to watch at 40,000 feet. So we switched to an episode of "House," followed by the "Office," and then another confusing golf lesson.

FCPA-related trials are rare events -- only individuals, not corporations, take their chances in court. So we'll keep an eye on what happens with the Greens.

View Variety's January 23, 2008 report Here.

View our prior post about the Greens Here.

Monday
Jan212008

How Much Will Siemens Pay?

A January 19, 2008 report in the German business magazine WirtschaftsWoche (here) says unnamed members of Siemens' supervisory board (equivalent to U.S. directors) think the company may be fined as much as €4 billion by United States regulators for alleged violations of the Foreign Corrupt Practices Act. The magazine reports that the supervisors are basing the figure on three times the €1.3 billion in illegal payments identified by the company. The article says Siemens insiders had hoped the U.S. Justice Department and Securities and Exchange Commission would be satisfied with penalties of not more than €1 billion. But their new worst-case scenario reflects FCPA-related penalties imposed on Titan Corporation in 2005 and ABB Ltd. in 2004. The article says the Siemens insiders have calculated that Titan's penalties amounted to almost ten times the bribes it paid, and ABB's penalties were about eight times the amount of the bribes in question. The unattributed story doesn't carry any comments or reaction from official sources in Siemens or from U.S. authorities.

In fact, the Titan and ABB cases, among others, demonstrate that there's no simple or consistent formula for determining financial penalties in FCPA matters. In March 2005, Titan paid $28.5 million -- at the time the largest FCPA penalty ever imposed. For bribes of $3.5 million, it paid a criminal fine of $13 million and a civil penalty and disgorgement of $15.5 million. ABB resolved an FCPA matter in July 2004. For questionable payments of around $1 million to secure a $180 million contract, it agreed to pay a $10.5 million penalty and $5.9 million in disgorgement. Baker Hughes currently holds the record for penalties paid in an FCPA case -- $44 million. The company's illegal payments amounted to about $5.2 million. To settle the case in April 2007, it disgorged about $20 million, paid prejudgment interest of $3.1 million, a civil penalty of $10 million for violating a prior SEC cease-and-desist order, and a criminal fine of $11 million.

Some factors the SEC and DOJ have considered when assessing FCPA-related penalties in negotiated settlements are these:

-- the presence or absence of an effective compliance program;

-- the role played by the company itself in discovering and investigating potential violations, whether and when it self-reported to U.S. authorities, and the corrective action already taken to prevent future violations;

-- the company's history of prior violations;

-- the role and culpability of current members of senior management and directors in the alleged violations; and

-- the duration and extent of the alleged illegal behavior.

Under the statute itself, criminal penalties for organizations can include a fine of up to $2 million. But under the Alternative Fines Act, the actual criminal fine may be up to twice the benefit that the defendant sought to obtain by making the corrupt payment. Civil fines for an organization can be the greater of (i) the gross amount of the pecuniary gain to the defendant as a result of the violation or (ii) $50,000 to $500,000. When negotiating the financial aspects of FCPA settlements, however, the DOJ and SEC are not limited by the types or amounts of penalties specified in the statutes.

View Prior Posts About Siemens Here.

Saturday
Jan192008

Scandal Hits The Compliance Monitors

The problems started for the Justice Department's corporate monitoring program late last year. Five leading orthopedic device makers had been charged with bribing doctors in the U.S. to get their business. (Now they're being investigated for bribing doctors overseas in violation of the Foreign Corrupt Practices Act.) In September, New Jersey's U.S. Attorney Chris Christie used deferred prosecution agreements to settle the domestic cases. The terms required the appointment of compliance monitors -- private parties who police the corporations from the inside, report directly to the DOJ, and send their bills for doing so to the companies themselves.

For the orthopedic device makers, Mr. Christie's corporate monitors were ex-U.S. Attorney General John Ashcroft (his former boss), former U.S. Attorney for the Central District of California Debra Yang, former New Jersey Attorney General David Samson, former U.S. Attorney for the Southern District of New York in Manhattan David N. Kelly, and former counsel to the Federal Trade Commission during the Reagan Administration John Carley. In other words, the monitors were people close to Mr. Christie.

No matter how you spin it -- and Messrs. Christie and Ashcroft have been doing plenty of that -- the appointments have the appearance of impropriety. Peel away the PR and the best you can say is that there was some obvious cronyism going on. The worst you can say is that the DOJ created a scheme by which U.S. Attorneys can extract millions of dollars from wrongdoers and funnel the money to former bosses, friends and political allies. We don't buy the sinister version for a second, but lots of people will take it as gospel.

At this point, we might ask whether we need corporate monitors at all? Was there something terribly wrong with the old fashioned approach? Our experience with companies involved in the FCPA forerunner cases -- companies that were required to operate under pre-FCPA consent decrees with the DOJ and SEC because of bribe-paying overseas -- taught that the threat of expedited enforcement and enhanced penalties really worked. With the stakes always high -- including potential jail time for executives -- the companies changed their culture. Compliance became real, not cynical, and recidivism wasn't an issue. Many of those monitorless companies are today's model citizens of FCPA compliance.

Wherever the debate about corporate monitors ends up, the reality is that the program is badly wounded. And the people responsible for the bloodletting -- with Messrs. Christie and Ashcroft at the top of the list -- should have known better. This scandal is just beginning, but here's a sample of what some others are already saying about it. By the sound of things, this is another problem for the Justice Department that isn't going away any time soon.

  • Federal prosecutors are steering no-bid contracts to former government officials who earn millions of dollars by monitoring companies accused of cheating investors and other schemes. . . . In the past few years, U.S. attorneys in Alabama, New York and Virginia have turned to corporate monitors to keep companies clean, hiring various former prosecutors and SEC officials with ties to President Bush, his father and other Republican luminaries. Some prosecutors hammer out with companies a short list of candidates from which to choose, while others have retained veto power over a business's choice. A smaller group has given corporate executives little input on the selection.-- The Washington Post
  • In a letter to the Government Accountability Office, Sen. Patrick Leahy (D-Vt.) and U.S. Rep. John Conyers (D-Mich.) asked for that office to investigate "if political or personal favoritism played a role" in the appointment of dozens of monitors to potentially lucrative but secretive contracts. -- The (New Jersey) Star Ledger
  • When the top federal prosecutor in New Jersey needed to find an outside lawyer to monitor a large corporation willing to settle criminal charges out of court last fall, he turned to former Attorney General John Ashcroft, his onetime boss. With no public notice and no bidding, the company awarded Mr. Ashcroft an 18-month contract worth $28 million to $52 million. -- The New York Times
  • . . . much has been made of the estimated cost of former Attorney General John Ashcroft's monitorship for Zimmer Holdings that will cost the company between $28 million and $52 million. That case is fairly straightforward, involving illicit payments to doctors to use the company's devices in replacement surgeries. Indeed, it's not clear how Ashcroft can charge that much for a fairly simple monitorship . . . . -- The White Collar Crime Prof Blog
  • In November the Law Blog took interest in an eye-poppingly lucrative contract that the U.S. Attorney in New Jersey awarded to John Ashcroft, the former attorney general-turned-confidential strategic consultant. Now it seems that Ashcroft’s former employer — i.e., the Justice Department — has taken an interest too . . . Now, the DOJ has begun an internal inquiry into its procedures for selecting outside monitors to police settlements with large companies. Apparently, aides to [U.S. Attorney General] Mukasey were concerned about the appearance of favoritism. -- The Wall Street Journal's Law Blog

Thursday
Jan172008

Siemens' Investigation Steams Ahead

Siemens AG -- the German industrial giant enmeshed in a global corruption scandal -- said this week that for fiscal 2007 it will delay ratifying acts of individuals who have served on its managing board at any time since 1999. President and CEO Peter Löscher, who joined Siemens after the events under investigation occurred, and who's leading the effort to clean up the company, is exempt from the ratification's postponement.

The move may preserve Siemens' ability to act against managers who knowingly participated in the fraud, which allegedly involves illegal payments amounting 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. Before settling any eventual charges against Siemens, U.S. prosecutors will want assurances that the company has taken proportionate corrective action, including identifying those responsible for the illegal payments and imposing on them some level of work-place discipline.

In September 2007, there were reports that Siemens' internal investigation was stalling, hampered by the stonewalling of its managers in various countries. A dead-end internal investigation would have jeopardized Siemens' ability to work out a deal with U.S. prosecutors. The company then announced an internal amnesty for most employees. Last month, President and CEO Löscher said: "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."

It appears the amnesty has worked as intended. Siemens' counsel, Debevoise & Plimpton, says the investigation is on track. In a January 16, 2008 letter to the chairman of Siemens' supervisory board's compliance committee, Debevoise said this:

"Since November 28, 2007, we have obtained significant new information and developed very substantial leads from participants in Siemens' amnesty program, as well as other sources, regarding topics relevant to our investigation. In particular, certain of this new information pertains to the conduct and knowledge of a number of individuals who have served on the Managing Board during the past several years. We do not consider it necessary or appropriate to identify these individuals at this time for several reasons. First, significant new information continues to be developed on virtually a daily basis and disclosure could impede the flow of information to us. Second, the investigation is ongoing and we are following up on the new information recently received. Third, in order to protect the reputations of individuals (and not to expose Siemens to any claims from such individuals), we do not believe it appropriate to identify anyone prior to conclusions being reached by us and the Compliance Committee. And fourth, information developed in the investigation may be relevant for governmental or judicial proceedings relating to these or other individuals or to Siemens, and for this reason, consistent with Siemens' commitment to cooperate with public officials, should not be made public at this time."

These latest revelations raise expectations that Siemens' internal report -- when it's finally produced -- will be comprehensive enough to help the company clean up its internal mess and reach a final resolution with prosecutors in the U.S. and elsewhere.

View Siemens' January 16, 2008 News Release Here.

View Debevoise & Plimpton's January 16, 2008 Letter Here.

View Prior Posts About Siemens Here.

Thursday
Jan172008

FCPA Release 08-01 Goes The Distance

The first Foreign Corrupt Practices Act Opinion Procedure Release of 2008 is out. It's the longest Release we know of -- just over twelve pages, and packed with details. It tells of a proposed investment in an overseas privatization, a raft of due diligence, tough and prolonged negotiations, yet more due diligence, and a final victory for compliance. The Release shows by its length, dense content and quick turnaround by the Department of Justice -- 13 days from Request to Release -- the new levels of awareness and effort that characterize modern FCPA compliance. Here's the short version:

The Players and the Proposed Transaction. The Requestor is a U.S. Fortune 500 company. It sought approval from the DOJ for a majority investment in the Target -- a foreign company that manages public services for a major foreign municipality. Compliance complications arose because a private citizen of the host country (the "Foreign Owner") was the ultimate controlling shareholder of the Target, which he jointly owned with the foreign government. After the Requestor's investment, the Foreign Owner would eventually buy out the government's interests. He would also remain a minority owner and enter into a joint venture with the Requestor. Due to his various roles and relationships with the foreign government, the Requestor deemed him to be a "foreign official" for purposes of the FCPA, 15 U.S.C. § 78dd-1(f)(1)(A) -- at least until he acquired all of the government's interests. The foreign government and the Foreign Owner himself disputed his status as a "foreign official," but the DOJ evidently agreed with the Requestor.

The Problem and the Solution.
When the bids for the privatization were in, the Requestor's bid valued the potential controlling interest in the Target at a significant premium. Although there was ample commercial support for the valuation, the Requestor became concerned that its payments to the Foreign Owner (as a "foreign official") could violate the FCPA. Working under tight deadlines imposed by the privatization rules, the Requestor decided to seek an Opinion from the DOJ on an expedited basis. In under two weeks, the DOJ considered the Request and determined that the payments would not violate the FCPA. It based its Opinion on the Requestor's extensive due diligence, the transparency of the transaction, the commercial valuation of the bid, the undertakings by both the Requestor and the Foreign Owner, and the terms and conditions of the joint venture between them.

The Due Diligence. The Requestor's due diligence was the most comprehensive yet described in a Release -- and we commend it as a useful guide. Here's the list:

-- The Requestor commissioned a report on the Foreign Owner by a reputable international investigative firm.

-- The Requestor retained a business consultant in the foreign municipality who provided advice on possible due diligence procedures in the foreign country.

-- The Requestor commissioned International Company Profiles on the Target and related entities from the U.S. Commercial Service of the Commerce Department.

-- The Requestor searched the names of all relevant persons and entities involved with the transaction from the Target's side, through the various services and databases accessible to the Requestor's International Trade Department -- including a private due diligence service -- to determine that no relevant parties were included on lists of designated or denied persons, terrorist watches, or similar designations.

-- The Requestor met with representatives of the U.S. Embassy in the foreign municipality and learned that there were no negative records at the Embassy regarding any party to the proposed transaction.

-- Outside counsel conducted due diligence and issued a preliminary report, to be followed by a final report before the closing.

-- An outside forensic accounting firm prepared a preliminary due diligence report with a final report to be completed before the closing.

-- A second law firm reviewed all of the due diligence.

Transparency. A lack of transparency in the sale of public assets to private parties is a compliance red flag. The Requestor worked hard to satisfy itself that the proposed transaction was known to the relevant authorities and entirely legal under the host country's laws. Although the Foreign Owner initially objected to any disclosure about his role, the Requestor eventually overcame his objections. Then the Requestor met with numerous officials and lawyers of the foreign government. It received assurances from multiple sources that the proposed transaction -- and specifically the Foreign Owner's role in it -- were adequately disclosed and compliant with local law. Only then did the Requestor resume negotiations with the Foreign Owner and perform additional due diligence.

Lessons Learned. A couple of notable features emerge. First, as the full text of the Release makes clear, the Requestor was unrelenting in its due diligence. It ran into obstacles and resistance but worked through them -- probably at the risk of offending the Foreign Owner and spoiling the deal. That business risk is present in most proposed overseas joint ventures. There is, unfortunately, something at least mildly insulting about the aggressive due diligence needed under an effective compliance program. Typically, when potential foreign partners perceive an insult and complain, the response is to throttle back the due diligence. Here, though, the Requestor pressed forward with its compliance duties.

Second, the final form of the transaction embodied all the right compliance features. The Foreign Owner represented and warranted that there had been no past violations of antibribery laws, including the FCPA, and that there would be none in the future. He said there were no other foreign officials involved. And crucially, he agreed to include in the joint venture documents potent remedies in case of breach -- including termination of the relationship, dissolution of the joint venture company, and a buy-out of the other party's interests. That's the unfettered remedial action needed to ensure FCPA compliance in a joint venture. By contrast, an earlier post called The Requestor's French Dilemma told how the DOJ refused to endorse a proposed overseas joint venture. The problem was that the Requestor could exit only if a compliance breach rose to a "materially adverse" level. The DOJ said,

"Should the Requestor's inability to extricate itself [from the joint venture] 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."

Kudos in this case to the Requestor -- for its determination to do a complicated and important foreign transaction and yet comply in all ways with the FCPA. And to the DOJ -- for its extraordinary responsiveness in a fast-moving deal. It ran the mile in record time.

View Opinion Procedure Release No. 08-01 (January 15, 2008) Here.

View Prior Posts About Overseas Joint Ventures Here.

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.