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Harry Cassin Publisher and Editor

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Julie DiMauro Contributing Editor

Thomas Fox Contributing Editor

Marc Alain Bohn Contributing Editor

Bill Waite Contributing Editor

Shruti J. Shah Contributing Editor

Russell A. Stamets Contributing Editor

Richard Bistrong Contributing Editor 

Eric Carlson Contributing Editor

Bill Steinman Contributing Editor

Aarti Maharaj Contributing Editor


FCPA Blog Daily News

Tuesday
Mar042008

California Here We Come

We've said before (here and here) that there's no private right of action under the FCPA. Which means offenses can be prosecuted only by the U.S. Department of Justice or the Securities and Exchange Commission. The DOJ's Lay Person's Guide to the FCPA notes, however, that "[c]onduct that violates the antibribery provisions of the FCPA may also give rise to a private cause of action for treble damages under the Racketeer Influenced and Corrupt Organizations Act (RICO), or to actions under other federal or state laws." State laws? Those two words can be easy to miss. But they might be important.

The UCL. California, for example, has an Unfair Competition Law. See Bus. & Prof. Code, § 17200 et seq. It prohibits unfair competition, including unlawful, unfair, and fraudulent business acts, and it protects both consumers and competitors. Relevant to this discussion, the UCL "borrows" violations from other laws by making them independently actionable as unfair competitive practices.

Enter the FCPA. California's UCL was the basis for the suit in Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134. The plaintiff, a Korean company acting as a sales agent of Loral Corporation, alleged that Lockheed Martin submitted competing bids to sell military equipment to the Republic of Korea that were tainted by bribery and sexual favors. So in its complaint, the plaintiff "borrowed" a cause of action from the Foreign Corrupt Practices Act. The FCPA prohibits, among other things, the bribing of a foreign government official for the purpose of influencing any act or decision in his official capacity and in violation of a lawful duty, or for the purpose of inducing him to use his official influence to obtain or retain business. See 15 U.S.C. 78dd-2(a)(1)(A), (B).

Lockheed Martin argued in defense that the FCPA "impliedly bars a private action for unfair competition predicated on its violation, because the federal statute does not expressly provide for private enforcement." But the California court said the "UCL may be predicated on a violation of a statute for which there is no private right of action, unless the predicate statute or the UCL expressly provides otherwise. . . . There is no language in the UCL barring 15 United States Code section 78dd-2 as a predicate for an unfair competition action." Therefore, the court concluded, a suit under the UCL for violations of the FCPA could proceed. If that reasoning works for California, it might work for other states as well.

Limited but useful remedies. California's UCL doesn't get much attention as an FCPA-related cause of action. That's probably because the remedies available under it exclude compensatory damages. As the court explained in Korea Supply Co. v. Lockheed Martin Corp., "Suits asserting statutory UCL claims are equitable actions. . . . For that reason, compensatory damages are not available in such suits. . . . Instead, successful private UCL plaintiffs are generally limited to injunctive relief and restitution." But the UCL can still be a potent weapon. Companies can enjoin competitors that obtain contracts or bid for new work using corrupt means.

More state laws? The DOJ's advice to check state laws for private causes of action for FCPA offenses is prudent after all. But there aren't many reported cases on this point. If our readers have had any relevant experiences under state laws, we'd like to hear your stories. You can leave anonymous comments by clicking here. Or you can email comments to us here.

Monday
Mar032008

Pride Discloses Global Corruption Probe

Pride International, Inc., a Houston-based drill-rig provider to the oil and gas industry, disclosed in its February 29, 2008 Form 10-K (annual report) an ongoing internal investigation into potential violations of the Foreign Corrupt Practices Act. The countries involved may include Venezuela and Mexico, India and Malaysia, Saudi Arabia, Kazakhstan, Brazil, Nigeria, Libya, Angola and the Republic of the Congo.

Wide scope of alleged practices . . . and Panalpina too. The company says it has already found evidence that from 2001 through 2005 payments were made directly or indirectly to government officials "in connection with clearing rigs or equipment through customs or resolving outstanding issues with customs, immigration, tax, licensing or merchant marine authorities." Pride says it is also responding to requests from the Department of Justice about its "relationships with a freight and customs agent and . . . importation of rigs into Nigeria." That inquiry apparently relates to the DOJ's wide-ranging investigation of global-logistics firm Panalpina and its oil and gas services customers in Nigeria and other countries.

Self-disclosure. Pride -- which has over 7,000 employees and offices in the United States, Africa, Asia, Europe and South America -- said it self-disclosed to the DOJ and the Securities and Exchange Commission the potential FCPA violations when the company's audit committee first heard about them. Since then it has been keeping U.S. authorities up to date on the progress and results of the investigation.

Remedial action has started. Pride said members of its senior operations management probably knew or should have known about the improper payments. It said its former chief operating officer retired from his post on May 31, 2006 and the audit committee will decide whether it has cause to terminate his employment and strip him of retirement benefits. Other employees, including officers, have already been fired, placed on leave or resigned, and more workplace discipline may be imposed, the company said.

Of special note. We've written and read a lot of FCPA disclosures. But Pride's -- which is reprinted below -- stands out. It's the most complete and clearest statement about an ongoing investigation and the company's response to it that we've seen. It conveys not only the required factual information, but through a dogged recitation of the facts in unusually direct language, it also imparts something more. There are, we think, hints of the company's shock on discovering an apparently corrupt culture; its disappointment with senior people and others who betrayed the trust of their positions; the professional and personal wreckage being left behind by the scandal; and the company's bracing for whatever institutional punishment U.S. prosecutors, foreign governments and customers will impose. The honest tone and plain words also convey that Pride's leaders are taking responsibility. That they're fixing what's been wrong at the company and preparing to move forward with a new culture of compliance. Presumably, we'll hear more about the next chapter from Pride and the U.S. authorities in the coming months.

Pride International, Inc. trades on the New York Stock Exchange under the symbol PDE.

View Pride's February 29, 2008 Form 10K (annual report) here and read from it the FCPA disclosure immediately below.

_______________________

Although we implement policies and procedures designed to promote compliance with the laws of the jurisdictions in which we operate, our employees, contractors and agents may take actions in violation of our policies and such laws. Any such violation, even if prohibited by our policies, could materially and adversely affect our business. We are conducting an investigation into allegations of improper payments to foreign government officials, as well as corresponding accounting entries and internal control issues. The outcome and impact of this investigation are unknown at this time.

During the course of an internal audit and investigation relating to certain of our Latin American operations, our management and internal audit department received allegations of improper payments to foreign government officials. In February 2006, the Audit Committee of our Board of Directors assumed direct responsibility over the investigation and retained independent outside counsel to investigate the allegations, as well as corresponding accounting entries and internal control issues, and to advise the Audit Committee.

The investigation, which is continuing, has found evidence suggesting that payments, which may violate the U.S. Foreign Corrupt Practices Act, were made to government officials in Venezuela and Mexico aggregating less than $1 million. The evidence to date regarding these payments suggests that payments were made beginning in early 2003 through 2005 (a) to vendors with the intent that they would be transferred to government officials for the purpose of extending drilling contracts for two jackup rigs and one semisubmersible rig operating offshore Venezuela; and (b) to one or more government officials, or to vendors with the intent that they would be transferred to government officials, for the purpose of collecting payment for work completed in connection with offshore drilling contracts in Venezuela. In addition, the evidence suggests that other payments were made beginning in 2002 through early 2006 (a) to one or more government officials in Mexico in connection with the clearing of a jackup rig and equipment through customs, the movement of personnel through immigration or the acceptance of a jackup rig under a drilling contract; and (b) with respect to the potentially improper entertainment of government officials in Mexico.

The Audit Committee, through independent outside counsel, has undertaken a review of our compliance with the FCPA in certain of our other international operations. In addition, the U.S. Department of Justice has asked us to provide information with respect to (a) our relationships with a freight and customs agent and (b) our importation of rigs into Nigeria. The Audit Committee is reviewing the issues raised by the request, and we are cooperating with the DOJ in connection with its request.

This review has found evidence suggesting that during the period from 2001 through 2005 payments were made directly or indirectly to government officials in Saudi Arabia, Kazakhstan, Brazil, Nigeria, Libya, Angola, and the Republic of the Congo in connection with clearing rigs or equipment through customs or resolving outstanding issues with customs, immigration, tax, licensing or merchant marine authorities in those countries. In addition, this review has found evidence suggesting that in 2003 payments were made to one or more third parties with the intent that they would be transferred to a government official in India for the purpose of resolving a customs dispute related to the importation of one of our jackup rigs. The evidence suggests that the aggregate amount of payments referred to in this paragraph is less than $2 million. We are also reviewing certain agent payments related to Malaysia.

The investigation of the matters described in the prior paragraph and the Audit Committee’s compliance review are ongoing. Accordingly, there can be no assurances that evidence of additional potential FCPA violations may not be uncovered in those or other countries.

Our management and the Audit Committee of our Board of Directors believe it likely that members of our senior operations management either were aware, or should have been aware, that improper payments to foreign government officials were made or proposed to be made. Our former Chief Operating Officer resigned as Chief Operating Officer effective on May 31, 2006 and has elected to retire from the company, although he will remain an employee, but not an officer, during the pendency of the investigation to assist us with the investigation and to be available for consultation and to answer questions relating to our business. His retirement benefits will be subject to the determination by our Audit Committee or our Board of Directors that it does not have cause (as defined in his retirement agreement with us) to terminate his employment. Other personnel, including officers, have been terminated or placed on administrative leave or have resigned in connection with the investigation. We have taken and will continue to take disciplinary actions where appropriate and various other corrective action to reinforce our commitment to conducting our business ethically and legally and to instill in our employees our expectation that they uphold the highest levels of honesty, integrity, ethical standards and compliance with the law.

We voluntarily disclosed information relating to the initial allegations and other information found in the investigation and compliance review to the DOJ and the Securities and Exchange Commission and are cooperating with these authorities as the investigation and compliance reviews continue and as they review the matter. If violations of the FCPA occurred, we could be subject to fines, civil and criminal penalties, equitable remedies, including profit disgorgement, and injunctive relief. Civil penalties under the antibribery provisions of the FCPA could range up to $10,000 per violation, with a criminal fine up to the greater of $2 million per violation or twice the gross pecuniary gain to us or twice the gross pecuniary loss to others, if larger. Civil penalties under the accounting provisions of the FCPA can range up to $500,000 and a company that knowingly commits a violation can be fined up to $25 million. In addition, both the SEC and the DOJ could assert that conduct extending over a period of time may constitute multiple violations for purposes of assessing the penalty amounts. Often, dispositions for these types of matters result in modifications to business practices and compliance programs and possibly a monitor being appointed to review future business and practices with the goal of ensuring compliance with the FCPA.

We could also face fines, sanctions and other penalties from authorities in the relevant foreign jurisdictions, including prohibition of our participating in or curtailment of business operations in those jurisdictions and the seizure of rigs or other assets. Our customers in those jurisdictions could seek to impose penalties or take other actions adverse to our interests. In addition, disclosure of the subject matter of the investigation could adversely affect our reputation and our ability to obtain new business or retain existing business from our current clients and potential clients, to attract and retain employees and to access the capital markets. No amounts have been accrued related to any potential fines, sanctions or other penalties, which could be material individually or in the aggregate.

We cannot currently predict what, if any, actions may be taken by the DOJ, the SEC, the applicable government or other authorities or our customers or the effect the actions may have on our results of operations, financial condition or cash flows, on our consolidated financial statements or on our business in the countries at issue and other jurisdictions. If we are unable to renew or obtain new and favorable contracts for rigs whose contracts are expiring or are terminated, our revenues and profitability could be materially reduced.

Sunday
Mar022008

The FCPA Is No Private Matter

Last week we heard (here) that Alba -- not the movie star Jessica but the smelter Aluminum Bahrain BSC -- had sued Alcoa for bribing Bahraini officials in exchange for supply contracts. The allegations sounded exactly like an offense under the Foreign Corrupt Practices Act. Alba's federal lawsuit, however, is based not on the FCPA but on common law fraud and RICO -- the Racketeer Influenced & Corrupt Organizations Act found at 18 U.S.C. §§1961-68. So what happened to the FCPA?

Private parties, as we've said before, have no right of action under the FCPA. Only the Department of Justice and the Securities and Exchange Commission can enforce this law. Yet private rights of action under federal statutes aren't that rare. They're found in RICO, as we've mentioned, and most famously in the SEC's Rule 10b-5, which outlaws fraud as part of the Securities Exchange Act of 1934. The False Claims Act brings into U.S. law qui tam suits, whereby private parties can act for the king -- or in this case, for Uncle Sam. The Clayton Act creates a private right of action for antitrust enforcement, the Jones Act for injured maritime employees, the Migrant and Seasonal Agricultural Worker Protection Act for farm workers, and our favorite, the Employee Polygraph Protection Act -- for everyone who wants to avoid submitting to needless lie detector tests at work. That certainly includes us and everyone we've ever known. And there are many more examples.

So what happened to the FCPA's private right of action? Well, it was never there to begin with. The leading case on the subject is Lamb v. Philip Morris, Inc. (6th Cir. 1990) 915 F.2d 1024, cert. den. (1991) 498 U.S. 1086. The plaintiffs were two tobacco growers named Billy Lamb and Carmon Willis. They sued Philip Morris and B.A.T. Industries, PLC under the FCPA and U.S. antitrust laws, alleging that PM and BAT contributed to charities in Venezuela, Argentina, Brazil, Costa Rica, Mexico, and Nicaragua for the corrupt purpose of locking in price controls, all in violation of the FCPA.

But the court couldn't find anything in the FCPA giving private parties the right to enforce the law. "The availability of a private right of action," the court said, "apparently was never resolved (or perhaps even raised) at the conference that ultimately produced the compromise bill passed by both houses and signed into law; neither the FCPA as enacted nor the conference report mentions such a cause of action. . . . Because the conference report accompanying the final legislative compromise makes no mention of a private right of action, we infer that Congress intended no such result. " (footnotes omitted)

Game over, at least for now. Which is why Alba the smelter -- and Alba the actress, for that matter -- cannot sue Alcoa under the Foreign Corrupt Practices Act. Instead, the Albas and all private litigants have to pin their hopes on RICO, or on common law fraud, or some other legal theory, even though Alcoa's alleged behavior might fit the description of an FCPA bribery offense exactly.

Our post here sets out Lamb v. Philip Morris in full.

Sunday
Mar022008

Lamb v. Philip Morris


Billy LAMB and Carmon Willis, Plaintiffs-Appellants,
v.
PHILIP MORRIS, INC. and B.A.T. Industries, PLC, Defendants-Appellees.

No. 89-5960.

United States Court of Appeals,
Sixth Circuit.

Argued Aug. 24, 1990.
Decided Sept. 28, 1990.

John F. Lackey (argued), and John F. Lackey, Lackey & Lackey, Richmond, Ky., for plaintiffs-appellants.

Robert M. Watt, III, Stoll, Keenon & Park, Lexington, Ky., Abe Krash, Robert N. Weiner (argued), Philip W. Horton, Arnold & Porter, Washington, D.C., for Philip Morris, Inc.

James Park, Jr. (argued), Brown, Todd & Heyburn, Lexington, Ky., for B.A.T. Industries, PLC.

Before KEITH and GUY, Circuit Judges, and BROWN, Senior Circuit Judge.

RALPH B. GUY, Jr., Circuit Judge.

In this antitrust action, plaintiffs Billy Lamb and Carmon Willis appeal from the dismissal of their claims against defendants Philip Morris, Inc. (Philip Morris), and B.A.T. Industries, PLC (B.A.T.). Because we find that the act of state doctrine presents no impediment to adjudication of the plaintiffs' antitrust claims, we reverse the district court's dismissal of those claims and remand them for further consideration. Since we find that no private right of action is available under the Foreign Corrupt Practices Act of 1977 (FCPA), 15 U.S.C. Secs. 78dd-1, 78dd-2, we affirm the dismissal of the plaintiffs' FCPA claim. I.

In accordance with Kerasotes Michigan Theatres, Inc. v. National Amusements, Inc., 854 F.2d 135 (6th Cir.1988), we must accept as true all factual allegations in the complaint when reviewing the granting of a Federal Rule of Civil Procedure 12(b)(6) motion to dismiss. Id. at 136. Moreover, dismissal under Rule 12(b)(6) is appropriate only "if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81 L.Ed.2d 59 (1984); accord Morgan v. Church's Fried Chicken, 829 F.2d 10, 12 (6th Cir.1987). Therefore, we shall set forth the facts as alleged in the plaintiffs' complaint.

Plaintiffs Lamb and Willis, along with various other Kentucky growers, 1 produce burley tobacco for use in cigarettes and other tobacco products. Defendants Philip Morris and B.A.T. routinely purchase such tobacco not only from Kentucky markets serviced by the plaintiffs, but also from producers in several foreign countries. Thus, tobacco grown in Kentucky competes directly with tobacco grown abroad, and any purchases from foreign suppliers necessarily reduce the defendants' purchase of domestic tobacco.

On May 14, 1982, a Philip Morris subsidiary known as C.A. Tabacalera National and a B.A.T. subsidiary known as C.A. Cigarrera Bigott, SUCS. entered into a contract with La Fundacion Del Nino (the Children's Foundation) of Caracas, Venezuela. The agreement was signed on behalf of the Children's Foundation by the organization's president, the wife of the then President of Venezuela. Under the terms of the agreement, the two subsidiaries were to make periodic donations to the Children's Foundation totalling approximately $12.5 million dollars. In exchange, the subsidiaries were to obtain price controls on Venezuelan tobacco, elimination of controls on retail cigarette prices in Venezuela, tax deductions for the donations, and assurances that existing tax rates applicable to tobacco companies would not be increased. According to the plaintiffs' complaint, the defendants have arranged similar contracts in Argentina, Brazil, Costa Rica, Mexico, and Nicaragua.

In the plaintiffs' view, the donations promised by the defendants' subsidiaries amount to unlawful inducements designed and intended to restrain trade. The plaintiffs assert that such arrangements result in artificial depression of tobacco prices to the detriment of domestic tobacco growers, while ensuring lucrative retail prices for tobacco products sold abroad. In this action, the plaintiffs seek redress in the forms of treble damages and injunctive relief principally for the former result--reduction in domestic tobacco prices.

The plaintiffs filed their complaint alleging violations of federal antitrust laws on August 21, 1985, in the United States District Court for the Eastern District of Kentucky. Both defendants promptly moved for dismissal on several grounds. The plaintiffs then sought leave to amend their complaint to add a claim under the FCPA. On June 28, 1989, the district court dismissed the plaintiffs' antitrust claims as barred by the act of state doctrine, and dismissed the FCPA claim as an impermissible private action. This appeal followed.

The plaintiffs contend that the district court erroneously abdicated its authority to consider the antitrust claims asserted in the complaint by invoking the act of state doctrine. The plaintiffs further assert that the district court erred in prohibiting them from pursuing a private cause of action under the FCPA. We shall address these two issues individually. Our review of the district court's ruling on the defendants' Rule 12(b)(6) motion is de novo. See, e.g., Peck v. General Motors Corp., 894 F.2d 844, 846 (6th Cir.1990).

II.

"The act of state doctrine in its traditional formulation precludes the courts of this country from inquiring into the validity of the public acts a recognized foreign sovereign power committed within its own territory." 2 Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 401, 84 S.Ct. 923, 926, 11 L.Ed.2d 804 (1964). As the Supreme Court explained Underhill v. Hernandez, 168 U.S. 250, 18 S.Ct. 83, 42 L.Ed. 456 (1897), this concept is based on the notion that "[e]very sovereign State is bound to respect the independence of every other sovereign State, and the courts of one country will not sit in judgment on the acts of the government of another done within its own territory." Id. at 252, 18 S.Ct. at 84; Oetjen v. Central Leather Co., 246 U.S. 297, 303, 38 S.Ct. 309, 311, 62 L.Ed. 726 (1918) (reaffirming Underhill ). The evolution of the act of state doctrine has revealed that it is not "compelled either by the inherent nature of sovereign authority ... or by some principle of international law." Sabbatino, 376 U.S. at 421, 84 S.Ct. at 936. Although the text of the Constitution similarly "does not require the act of state doctrine," id. at 423, 84 S.Ct. at 938, the doctrine has " 'constitutional' underpinnings ... aris[ing] out of the basic relationships between branches of government in a system of separation of powers" and based upon "the strong sense of the Judicial Branch that its engagement in the task of passing on the validity of foreign acts of state may hinder" the conduct of foreign affairs. Id.; see also W.S. Kirkpatrick & Co. v. Environmental Tectonics Corp., Int'l, --- U.S. ----, 110 S.Ct. 701, 704, 107 L.Ed.2d 816 (1990). In this respect, "[t]he act of state doctrine is not a jurisdictional limit on courts, but rather is 'a prudential doctrine designed to avoid judicial action in sensitive areas.' " 3 Liu v. Republic of China, 892 F.2d 1419, 1431 (9th Cir.1989); accord Riedel v. Bancam, S.A., 792 F.2d 587, 592 (6th Cir.1986).

Although the act of state doctrine typically involves an assessment of "the likely impact on international relations that would result from judicial consideration of the foreign sovereign's act," Allied Bank Int'l v. Banco Credito Agricola de Cartago, 757 F.2d 516, 520-21 (2d Cir.), cert. dismissed, 473 U.S. 934, 106 S.Ct. 30, 87 L.Ed.2d 706 (1985), we must initially determine whether the defendants in this case have established the factual predicate for application of the act of state doctrine. 4 While act of state analysis is not generally guided by "an inflexible and all-encompassing rule," see Sabbatino, 376 U.S. at 428, 84 S.Ct. at 940, the Supreme Court recently indicated that, as a threshold matter, "[a]ct of state issues only arise when a court must decide--that is, when the outcome of the case turns upon--the effect of official action by a foreign sovereign." Kirkpatrick, 110 S.Ct. at 705 (emphasis omitted). Here, the defendants have failed to make such a showing.

The defendants view Justice Holmes' discussion of the act of state doctrine American Banana Co. v. United Fruit Co., 213 U.S. 347, 357-58, 29 S.Ct. 511, 513, 53 L.Ed. 826 (1909), as supportive of their position that the doctrine may be applied if a legal claim impugns the motivations of a foreign state. Clayco Petroleum Corp. v. Occidental Petroleum Corp., 712 F.2d 404, 407-08 (9th Cir.1983), cert. denied, 464 U.S. 1040, 104 S.Ct. 703, 79 L.Ed.2d 168 (1984); Hunt v. Mobil Oil Corp., 550 F.2d 68, 77 (2d Cir.1977). However, the Supreme Court's recent decision in Kirkpatrick--a case involving civil RICO and Robinson-Patman Act claims relating to a New Jersey corporation's bribery of Nigerian officials--undercuts their contention by explicitly eschewing the logic of American Banana. 5 The Court explained in Kirkpatrick that the act of state doctrine in its present formulation "does not establish an exception for cases and controversies that may embarrass foreign governments, but merely requires that, in the process of deciding, the acts of foreign sovereigns taken within their own jurisdiction shall be deemed valid." 110 S.Ct. at 707. In reaching this conclusion and permitting the plaintiffs' claims to go forward, Justice Scalia's opinion for the unanimous Court held that the act of state doctrine does not "bar[ ] a court in the United States from entertaining a cause of action that ... require[s] imputing to foreign officials an unlawful motivation (the obtaining of bribes) in the performance of ... an official act." Id. at 702. Like the bribes underlying the civil RICO and Robinson-Patman Act claims in Kirkpatrick, the payments made by the defendants in this case to induce favorable action in Venezuela may support the plaintiffs' antitrust claims. 6 Because the antitrust claims at issue in this suit merely call into question the contracting parties' motivations and the resulting anticompetitive effects of their agreement, not the validity of any foreign sovereign act, the district court erred in applying the act of state doctrine to dismiss the plaintiffs' claims. Accordingly, the order of dismissal is REVERSED insofar as the antitrust claims are concerned; the claims shall be REMANDED for further consideration. 7

III.

Although the Foreign Corrupt Practices Act was enacted more than a decade ago, 8 the question of whether an implied private right of action exists under the FCPA apparently is one of first impression at the federal appellate level. 9 Thus, we must analyze the FCPA, which generally forbids issuers of registered securities and other "domestic concerns" (as well as their agents) to endeavor to influence foreign officials by offering, promising, or giving "anything of value," see 15 U.S.C. Secs. 78dd-1(a), 78dd-2(a), to ascertain whether the plaintiffs may assert a private cause of action. The Supreme Court recently explained that:

In determining whether to infer a private cause of action from a federal statute, our focal point is Congress' intent in enacting the statute. As guides for discerning that intent, we have relied on the four factors set out Cort v. Ash, 422 U.S. 66, 78, 95 S.Ct. 2080, 2087-88, 45 L.Ed.2d 26 (1975), along with other tools of statutory construction. Our focus on congressional intent does not mean that we require evidence that Members of Congress, in enacting the statute, actually had in mind the creation of a private cause of action.... The intent of Congress remains the ultimate issue, however, and "unless this congressional intent can be inferred from the language of the statute, the statutory structure, or some other source, the essential predicate for implication of a private remedy simply does not exist."

Thompson v. Thompson, 484 U.S. 174, 179, 108 S.Ct. 513, 516, 98 L.Ed.2d 512 (1988) (citations omitted). Thus, as Thompson makes clear, our central focus is on congressional intent, see also Karahalios v. National Fed'n of Fed. Employees, Local 1263, 489 U.S. 527, 109 S.Ct. 1282, 1286, 103 L.Ed.2d 539 (1989), "with an eye toward" the four Cort factors: (1) whether the plaintiffs are among "the class for whose especial benefit" the statute was enacted; (2) whether the legislative history suggests congressional intent to prescribe or proscribe a private cause of action; (3) whether "implying such a remedy for the plaintiff would be 'consistent with the underlying purposes of the legislative scheme' "; and (4) whether the cause of action is " 'one traditionally relegated to state law, in an area basically the concern of States, so that it would be inappropriate to infer a cause of action.' " See Chairez v. United States I.N.S., 790 F.2d 544, 546 (6th Cir.1986) (quoting Cort, 422 U.S. at 78).

A. "Especial Beneficiaries"

The defendants contend, and we agree, that the FCPA was designed with the assistance of the Securities and Exchange Commission (SEC) to aid federal law enforcement agencies in curbing bribes of foreign officials. According to the Senate report regarding the FCPA, the Senate Committee on Banking, Housing and Urban Affairs initially "ordered reported a bill, S. 3664, which incorporated the SEC's recommendations and a direct prohibition against the payment of overseas bribes by any U.S. business concern." 10 S.Rep. No. 114, 95th Cong., 1st Sess. 2, reprinted in 1977 U.S.Code Cong. & Admin.News 4098, 4099. As the Senate report indicates, the resulting enactment of the FCPA represents a legislative endeavor to promote confidence in international trading relationships and domestic markets; see id. at 3, 1977 U.S.Code Cong. & Admin.News at 4100-01; the authorization of stringent criminal penalties amplifies the foreign policy and law enforcement considerations underlying the FCPA. See, e.g., 15 U.S.C. Sec. 78dd-2(g). The House Conference report refers to the "jurisdictional, enforcement, and diplomatic difficulties" of broadening the FCPA's reach, see H.R.Conf.Rep. No. 831, 95th Cong., 1st Sess. 14, reprinted in 1977 U.S.Code Cong. & Admin.News 4121, 4126, thereby addressing concerns typically of special interest to law enforcement officials. In light of these comments and the general tenor of the FCPA itself, which requires the Attorney General to participate actively in encouraging and supervising compliance with the Act, 11 see, e.g., 15 U.S.C. Secs. 78dd-1(e), 78dd-2(f), we find that the FCPA was primarily designed to protect the integrity of American foreign policy and domestic markets, rather than to prevent the use of foreign resources to reduce production costs. The plaintiffs, as competitors of foreign tobacco growers and suppliers of the defendants, cannot claim the status of intended beneficiaries of the congressional enactment under scrutiny.

B. Congressional Intent Concerning Private Rights of Action

Despite the paucity of authority in the legislative history for their position, the plaintiffs assert that Congress fully intended to permit private rights of action under the FCPA. We disagree. The plaintiffs have identified only one reference in a House report to a private right of action: "The committee intends that courts shall recognize a private cause of action based on this legislation, as they have in cases involving other provisions of the Securities Exchange Act, on behalf of persons who suffer injury as a result of prohibited corporate bribery." H.R.Rep. No. 640, 95th Cong., 1st Sess. 10 (1977). Unlike the House, the Senate initially included a provision that expressly conferred a private right of action under the FCPA on competitors. See S. 3379, 94th Cong., 2d Sess. Sec. 10, 122 Cong.Rec. 12,605, 12,607 (1976). Significantly, the Senate committee deleted that provision. See S.Rep. No. 1031, 94th Cong., 2d Sess. 13 (1976). The availability of a private right of action apparently was never resolved (or perhaps even raised) at the conference that ultimately produced the compromise bill passed by both houses and signed into law; neither the FCPA as enacted nor the conference report mentions such a cause of action. See 15 U.S.C. Secs. 78dd-1, 78dd-2; H.R.Conf.Rep. No. 831, 95th Cong., 1st Sess., reprinted in 1977 U.S.Code Cong. & Admin.News 4121. Because the conference report accompanying the final legislative compromise makes no mention of a private right of action, we infer that Congress intended no such result. 12 Accordingly, we reject the plaintiffs' assertion that one isolated comment in an earlier House report mandates recognition of a private right of action. 13

C. Consistency with the Legislative Scheme

Recognition of the plaintiffs' proposed private right of action, in our view, would directly contravene the carefully tailored FCPA scheme presently in place. Congress recently expanded the Attorney General's responsibilities to include facilitating compliance with the FCPA. See 15 U.S.C. Secs. 78dd-1(e), 78dd-2(f). Specifically, the Attorney General must "establish a procedure to provide responses to specific inquiries" by issuers of securities and other domestic concerns regarding "conformance of their conduct with the Department of Justice's [FCPA] enforcement policy...." 15 U.S.C. Secs. 78dd-1(e)(1), 78dd-2(f)(1). Moreover, the Attorney General must furnish "timely guidance concerning the Department of Justice's [FCPA] enforcement policy ... to potential exporters and small businesses that are unable to obtain specialized counsel on issues pertaining to [FCPA] provisions." 15 U.S.C. Secs. 78dd-1(e)(4), 78dd-2(f)(4). Because this legislative action clearly evinces a preference for compliance in lieu of prosecution, the introduction of private plaintiffs interested solely in post-violation enforcement, rather than pre-violation compliance, most assuredly would hinder congressional efforts to protect companies and their employees concerned about FCPA liability.

D. Alternative Avenues of Redress

Regulation of bribery directed at foreign officials cannot be characterized as a matter traditionally relegated to state control. In this respect, implying a private right of action under the FCPA--a statutory scheme aimed at activities ordinarily undertaken abroad--would not intrude upon matters of state concern. Nevertheless, the international reach of federal antitrust laws dilutes the plaintiffs' assertion that a private cause of action under the FCPA constitutes the only viable mechanism for redressing anticompetitive behavior on a global scale. Continental Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 704, 82 S.Ct. 1404, 1413, 8 L.Ed.2d 777 (1962); Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 582 n. 6, 106 S.Ct. 1348, 1354 n. 6, 89 L.Ed.2d 538 (1986) ("The Sherman Act does reach conduct outside our borders, but only when the conduct has an effect on American commerce."). Because the potential for recovery under federal antitrust laws in this case belies the plaintiffs' contention that an implied private right of action under the FCPA is imperative, we attach no significance to the absence of state laws proscribing bribery of foreign officials. More importantly, since none of the Cort factors supports the plaintiffs' private right of action theory, we AFFIRM the district court's dismissal of the FCPA claim.

AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.

---------------

1 The plaintiffs' complaint requests certification under Federal Rule of Civil Procedure 23 of a class encompassing "all persons who sold burley tobacco grown within the counties of Scott, Madison, Jessamine, Bourbon, Fayette, Mercer, Clark, and Woodford in the State of Kentucky, who consummated such sales of burley tobacco within the past six (6) years." As the district court observed in dismissing the complaint, however, the plaintiffs never moved for class certification.

2 The Second Circuit has stated that "[s]uch an inquiry is foreclosed ... regardless of whether the foreign government is named as a party to the suit or whether the validity of its actions are directly challenged in the pleadings." O.N.E. Shipping Ltd. v. Flota Mercante Grancolombiana, S.A., 830 F.2d 449, 452 (2d Cir.1987), cert. denied, 488 U.S. 923, 109 S.Ct. 303, 102 L.Ed.2d 322 (1988).

3 Because the act of state doctrine imposes no limitations upon the jurisdiction of the federal courts, "[a] motion to dismiss based on the act of state doctrine raises ... a Rule 12(b)(6) objection, not a jurisdictional defect." Timberlane Lumber Co. v. Bank of America, N.T. & S.A., 549 F.2d 597, 602 (9th Cir.1976).

4 "The party moving for the [act of state] doctrine's application has the burden of proving that dismissal is an appropriate response to the circumstances presented in the case." Environmental Tectonics v. W.S. Kirkpatrick, Inc., 847 F.2d 1052, 1058 (3d Cir.1988), aff'd, --- U.S. ----, 110 S.Ct. 701, 107 L.Ed.2d 816 (1990).

5 In the Kirkpatrick Court's estimation, "American Banana was squarely decided on the ground (later substantially overruled) that the antitrust laws had no extraterritorial application," 110 S.Ct. at 705-06 (citation omitted), and any act of state discussion in American Banana was nothing more than dictum subsequently "overcome" by United States v. Sisal Sales Corp., 274 U.S. 268, 47 S.Ct. 592, 71 L.Ed. 1042 (1927). See Kirkpatrick, 110 S.Ct. at 706. The Kirkpatrick Court, in fact, cited Sisal for the proposition that, "American Banana notwithstanding, the defendant's actions in obtaining Mexico's enactment of 'discriminating legislation' could form part of the basis for suit under the United States antitrust laws." Id.

6 The defendants conceded at oral argument that Kirkpatrick undercut the rationale for the district court's decision with regard to the act of state doctrine.

7 In rejecting the district court's invocation of the act of state doctrine, we do not pass judgment on whether the plaintiffs have set forth viable antitrust claims. The defendants interposed several alternative justifications for dismissal that the district court has not yet addressed. The defendants are free to raise these arguments to support a subsequent motion for dismissal or summary judgment following remand.

8 The FCPA, initially enacted in 1977, see Pub.L. No. 95-213, Secs. 103(a), 104, 91 Stat. 1494, 1495-98 (1977), has since been reenacted and amended by the Omnibus Trade and Competitiveness Act of 1988, Pub.L. No. 100-418, Secs. 5003(a), 5003(c), 102 Stat. 1107, 1415-24 (1988) (codified at 15 U.S.C. Secs. 78dd-1, 78dd-2).

9 The Ninth Circuit has applied the act of state doctrine to bar a private plaintiff's claim under the FCPA. See Clayco, 712 F.2d at 408-09. Clayco, however, offers no guidance on the issue before us. Additionally, at least one district court has referred to the issue without resolving it. See, e.g., Instituto Nacional de Comercializacion Agricola (Indeca) v. Continental Illinois Nat'l Bank and Trust Co., 576 F.Supp. 985, 990 & n. 4 (N.D.Ill.1983).

10 S. 3664, which the committee did not order reported until the end of the 94th Congress in 1976, never became law. However, "[i]n the first session of the 95th Congress, ... Senator Proxmire introduced an exact replica of S. 3664 ... as S. 305 on January 18, 1977, and the bill was again referred to the Senate Banking Committee." Lewis v. Sporck, 612 F.Supp. 1316, 1329 (N.D.Cal.1985). "On May 2, 1977, the committee reported out S. 305, [which] passed the Senate on May 5, 1977." Id. at 1329-30 (citations omitted). Following a conference to resolve differences between S. 305 and a corresponding House bill, both the Senate and the House passed a compromise bill in December 1977 and the President signed the compromise bill into law soon thereafter. See id. at 1330.

11 The Ninth Circuit has noted that, in practice, "[t]he Justice Department and the SEC share enforcement responsibilities under the FCPA. They coordinate enforcement of the Act with the State Department, recognizing the potential foreign policy problems of these actions." Clayco, 712 F.2d at 409 (footnote omitted).

12 In this regard, we reject the suggestion Jacobs v. Pabst Brewing Co., 549 F.Supp. 1050, 1062 (D.Del.1982), that the comment in the House report suggesting the existence of a private right of action trumps contrary statements by two conferees, thereby giving rise to a private cause of action. This sort of reasoning illustrates the problematic nature of divining the true purpose of a conference committee by delving into reports on bills that were discussed at length and modified in conference.

13 Speaking only for myself, if writing on a clean slate, I would never infer a private right of action where the legislation itself is silent in that regard. If the courts stopped filling these legislative gaps, Congress would soon stop leaving this question unresolved.

Thursday
Feb282008

U.S. v. Green -- See You In September

Variety -- our favorite FCPA news source on leap day or any other day -- is reporting that the trial of Hollywood movie producers Gerald and Patricia Green has been postponed to September 2008. The husband and wife are accused of violating the Foreign Corrupt Practices Act by paying more than $1.7 million in bribes to a government official with the Tourism Authority of Thailand. Prosecutors say the purpose of the alleged payments was to obtain a no-bid contract to manage the prestigious Bangkok International Film Festival, for which the Greens' company received about $10 million. They've pleaded not guilty and are free on bail. Before being postponed, the trial was set to start this week.

Variety also reports that Thailand's Department of Special Investigations is expected to announce soon the results of its investigation into corruption allegations against the former head of the Bangkok International Film Festival, Juthamas Siriwan. The high-profile politician wasn't named in the FBI's affidavit about the Greens. But she was easy to identify from descriptions of her and her family members. Both the Greens and their prosecutors will be anxious to learn the results of the Thai government's investigation into Siriwan, who has "proclaimed her innocence and threatened to sue the FBI," according to Variety.

View prior posts about the Greens here.

View the FBI's Affidavit here.

View Variety's February 25, 2008 report here.

Thursday
Feb282008

Bahrain Accuses Alcoa Of Bribery

Today's Wall Street Journal reports that Aluminum Bahrain BSC ("Alba") has filed a lawsuit in federal court in Pittsburgh accusing Alcoa of a 15-year conspiracy linked to overcharging, fraud and bribery. The suit says more than $2 billion in Alba's payments under supply contracts passed from Bahrain to tiny companies in Singapore, Switzerland and the Isle of Guernsey, and that some of the money was then used to bribe Bahraini officials involved in granting the contracts.

Alcoa hasn't made any comment about the suit. With 116,000 employees in 44 countries, it's one of the world's largest producers and managers of primary aluminum, fabricated aluminum and alumina facilities.

Alcoa's agent. The WSJ quotes the suit as alleging that from 1990, Alcoa began assigning its supply contracts with Alba to a series of companies set up by Alcoa's agent, a Canadian businessman of Jordanian origin named Victor Dahdaleh. "...These assignments served no legitimate business purpose and were used as a means to secretly pay bribes and unlawful commissions as part of a scheme to defraud Alba."

FCPA violations? According to the report, the suit grew out of an investigation commissioned by Bahrain itself to uncover corruption in its state-owned enterprises. The story notes that "[i]t is highly unusual for a country to use U.S. courts to accuse an American company of bribery. The dispute is likely to put Alcoa under the microscope of the Justice Department, which has been cracking down on questionable dealings between U.S. companies and foreign officials."

The U.S. Foreign Corrupt Practices Act prohibits both direct and indirect corrupt payments to foreign officials for the purpose of obtaining or retaining business. Indirect payments typically pass through the hands of an overseas partner or agent and then end up with the foreign official for an unlawful purpose. Most FCPA violations happen that way.

But there is no private right of action under the FCPA. That means offenses can be prosecuted only by the U.S. Department of Justice or the Securities and Exchange Commission. The DOJ's Lay Person's Guide to the FCPA notes, however, that "[c]onduct that violates the antibribery provisions of the FCPA may also give rise to a private cause of action for treble damages under the Racketeer Influenced and Corrupt Organizations Act (RICO), or to actions under other federal or state laws." Fraud and misrepresentation would be among such private causes of action.

A rare lawsuit. Dan Newcomb -- author of the FCPA Digest -- says in the WSJ story, "The reason it's rare for governments to accuse U.S. companies of corruption in American courts is that once you raise a question of corruption, the sovereign runs the risk they will be embarrassed by the requests of discovery from the private party." In this case, he added,"They have to be prepared to withstand Alcoa coming back to them and saying, 'We want to look at every other corrupt transaction you have been involved in.' "

Alcoa Inc. trades on the NYSE under the symbol AA.

View the Wall Street Journal's February 28, 2008 report here.

Wednesday
Feb272008

U.S. v. Kay: Once More To The Courts

On January 10, 2008, the United States Court of Appeals for the Fifth Circuit denied a petition for rehearing en banc from David Kay and Douglas Murphy. Kay and Murphy, executives of American Rice, Inc., were indicted in 2002 for bribing Haitian officials in violation of the Foreign Corrupt Practices Act. The U.S. District Court in Houston dismissed the indictments, finding that the FCPA did not apply to their conduct -- i.e., paying bribes to reduce their company's taxes.

In 2004, the U.S. Court of Appeals held that the bribes alleged in the indictment could fall within the scope of the FCPA and remanded. At trial, Kay and Murphy were convicted of violating the FCPA. Kay was sentenced to 37 months in prison and Murphy to 63 months. They appealed, and in October 2007 the Fifth Circuit affirmed their convictions. They then filed a petition for rehearing en banc, which the Fifth Circuit denied. Their convictions now stand.

Kay and Murphy argued in their petition for rehearing that the trial court gave incorrect jury instructions. The question before the en banc panel (Higginbotham, Barksdale and Clement) was whether an FCPA conviction must be supported by evidence that the defendants knew about the existence and prohibitions of the FCPA, or whether they could be convicted on the basis of their general knowledge that their actions violated U.S. law?

The Fifth Circuit said no specific knowledge about the FCPA is needed to support a conviction under the statute. All that the government needs to prove to satisfy the "knowing" element of an FCPA offense is that the defendants understood that their actions were illegal. Thus a general jury instruction that does not require specific knowledge about the FCPA was adequate with respect to the "knowing" element of the FCPA charges. On that basis -- and after reviewing some of the arguments about the evidence adduced at the trial -- the appellate court denied Kay and Murphy's petition for a rehearing.

The Fifth Circuit said:

"The jury instructions on corrupt intent, looking to the instructions as a whole and the closing arguments of counsel, show that the jury did not believe that Defendants could be convicted if they did not know that they were doing something unlawful. The jury's question to the judge confirms this, indicating that the jury was unsure of whether Defendants knew that they were violating the FCPA specifically, not the law in general. The jury asked, 'Can lack of knowledge of the FCPA be considered an accident or mistake?'

"The defense understandably focuses on the differences underlying the gradations of intent and suggests that the opinion has offered the instruction here as satisfying both general intent and specific intent. To be clear, we return to first principles. That is, this case was tried on the basis that the Government had to prove that the Defendants knew that their actions violated the law, although they did not need to prove that they were aware of the specific provisions of the FCPA. Set in the context of trial, including the closing arguments of counsel, there was no uncertainty in the instructions regarding the Government's burden to prove that Defendants knew that their conduct was illegal. [Kay's lawyer] argued forcefully and eloquently that his client could never have known the detail of the FCPA. The Government, while responding that they need not prove the specifics of the FCPA, made clear that it had to prove that Defendants knew that their conduct was illegal."

View prior posts about David Kay and Douglas Murphy here.

View United States v. Kay, Nos. 05-20604 (5th. Cir., 2008) in the Public Library of Law (registration required) here.

Tuesday
Feb262008

A Little Help From Our Friends, Part II

In Singapore circa 1994, Jeffrey Garten, who was then the Undersecretary of Commerce for International Trade, hosted a "breakfast briefing." The event was sponsored by the American Chamber of Commerce, and the invitations said it would be a chance to discuss the challenges Americans face when they do business overseas.

The turnout was light -- maybe a dozen or so early risers. After scrambled eggs and a few pleasantries, the room turned a bit hostile toward Mr. Garten. Why? Americans trying to do business then in Southeast Asia were constantly upset by the Foreign Corrupt Practices Act. The law put them at a disadvantage, they said. There wasn't anything close to a level playing field with the Europeans, Japanese and Koreans. Americans were being sacrificed economically for the sake of Washington's idealistic moral crusade. And on and on it went.

After listening for about a half hour, Mr. Garten lifted a hand to call for quiet. His exact words have faded, but we remember that he compared the FCPA to mom and apple pie. He said it was the non-negotiable policy of the United States to oppose public bribery anywhere, and that the U.S. government was totally committed to leveling the playing field for U.S. companies by working with the OECD and its member countries. He finished by telling the assembled complainers to get used to the FCPA because it was here to stay.

In the years since Mr. Garten threw cold water on his breakfast companions in Singapore, the OECD -- under Washington's lash -- has in fact enacted a comprehensive antibribery convention. Prosecutions by other OECD members still lag, but most Americans who follow the FCPA see real progress in the international anti-corruption effort. At the same time, the U.S. government has focused plenty of FCPA-enforcement attention on foreign companies. That has raised compliance awareness globally and encouraged American business people to believe that Washington is serious about that long-promised level playing field.

On top of that, the Department of Commerce now lists foreign public bribery as a trade barrier -- similar to discriminatory tariffs, overly burdensome product testing guidelines, ridiculous labeling rules, and so on. Public corruption overseas remains a big issue. The U.S. government estimated that from May 2004 to April 2005, "competition for over 53 contracts valued at approximately $15 billion may have been affected by bribery involving foreign firms." In response, the Department of Commerce now has a "bribery hotline" accessible here. U.S. companies can use it to report bribes by their foreign competitors in international business transactions.

As the Commerce Department's Kathryn Nickerson has said, "We worked hard to negotiate the OECD and other international anticorruption conventions, and we'd like to know whether our trading partners are following through on enforcement. At a minimum," she continued, "we want to put countries on notice that we are watching and expect action. So if you think you are about to lose or have already lost business to a foreign competitor because of a bribe to a foreign public official, don't assume that your Government can't do anything about it. We firmly believe that informing other governments of bribery by persons falling within their jurisdiction is an effective way to ensure that cases will be brought against this pernicious practice that we have outlawed since 1977."

The U.S. government's strategies to level the playing field for American businesses overseas are working -- not all at once, but a step at a time. These days, we're fairly certain an Undersecretary of Commerce for International Trade could show up at a breakfast briefing in Southeast Asia and actually enjoy his or her eggs. Which makes us feel somewhat guilty about the treatment dished out to Mr. Garten back when he held the job. Fortunately, though, it appears he didn't lose his taste for the region. We noticed with some relief that in 2005 he joined the first Governing Board of The Lee Kuan Yew School of Public Policy at the National University of Singapore.

Monday
Feb252008

A Little Help From Our Friends

Our subject is always some aspect of the the Foreign Corrupt Practices Act. So around here the U.S. Department of Justice and the Securities and Exchange Commission get lots of attention. But another U.S. government agency has a role to play in the FCPA -- the Department of Commerce. Its mission is "to foster, promote, and develop the foreign and domestic commerce" of the United States. It does that by helping -- that's right, helping -- American companies do business overseas. And what interests us is how Commerce helps U.S. companies comply with the FCPA.

First, some background. The Department of Commerce concentrates most of its efforts on small and medium sized U.S. exporters. That makes sense. According to a 2004 USTR fact sheet, in the United States small and medium sized businesses make up almost 97% of all direct exporters, and approximately 65% of exporters are businesses with fewer than 20 employees. As our readers know, smaller companies with fewer resources struggle to comply with the FCPA. Big companies aren't excluded from Commerce's programs, but they usually know how to do buisness overseas and comply with the FCPA, and they have the resources to do so on their own. So it's the smaller companies that need the most help. With that in mind, let's see what Commerce has to offer.

Finding a partner. The Department of Commerce helps U.S. companies find business partners or agents overseas. Its Commercial Service -- a group of trade and business experts stationed in about 80 U.S. embassies around the globe -- runs the International Partner Search Program. It actually identifies suitable strategic partners for U.S. exporters. As Commerce says, "You provide your marketing materials and background on your company, and the [Commercial Service] will use its strong network of foreign contacts to interview potential partners and provide you with a list of up to five pre-qualified partners. This information is available in 30 days or less."

Vetting the candidate. Once a potential overseas partner or agent is found, either through Commerce or otherwise, it's time for some compliance-oriented due diligence. As we've said before, international joint venture partners and sales agents bring very high risks under the FCPA. Unreliable partners and agents -- those who might pay bribes to foreign officials to help the business -- need to be spotted early and either avoided or controlled. Doing that requires due diligence. And here again Commerce can help.

The Commercial Service's International Company Profile (ICP) Program provides background reports on foreign companies in about 80 countries. The price is reasonable -- around $500 per ICP, depending somewhat on local costs. Be warned, however, that the Commercial Service doesn’t offer ICPs in countries where Dun & Bradstreet or other private-sector vendors already provide a similar service. But where ICPs are available, the Commercial Service specialists deliver a product that helps satisfy at least the basic level of due diligence.

International Company Profiles are assembled by combing the local press, industry contacts and other sources. The result is a financial report on the prospective overseas partner or agent. Some ICPs are more detailed than others, depending on both the amount of information ultimately available and on the resourcefulness of the local Commerce specialist. Delivery time is advertised to be about 10 business days. The final report includes "a list of the company's key officers and senior management, banking relationships and other financial information about the company; and market information, including sales and profit figures, and potential liabilities."

Uncle Sam's opinion. Crucial to FCPA due diligence, the Commercial Service will also provide "an opinion as to the viability and reliability of the overseas company or individual you have selected as well as an opinion on the relative strength of that company's industry sector in your target market." It's not called an FCPA due diligence opinion, but that's practically what it amounts to. Sure, there are lots of scenarios by which a "reliable" overseas partner or agent might still cause FCPA problems. But the International Company Profile and the viability and reliability opinion are great evidence. They demonstrate how the U.S. company tried to pick a law-abiding foreign partner or agent. In most cases, evidence like that goes a long way to protecting U.S. companies and executives who find out later that an overseas intermediary may have caused an FCPA violation.

Our recommendation. We've dealt with people from the Commercial Service in a number of countries. Overall, the specialists are unabashed boosters of American business overseas. They have impressive, even astounding knowledge about local markets, and they're resourceful as well. We've met some with a great sense of humor, which is a welcome relief in countries in transition and under stress.

In fact, we can't think of any reason why straight-shooting smaller companies shouldn't check in with a Commercial Service specialist -- either in the U.S. or the country of destination. There are literally hundreds of Commercial Service offices -- across the U.S. from Akron to Ypsilanti, and around the world from Albania to Zimbabwe. The chats are free and may ultimately contribute richly to successful overseas business development and effective FCPA compliance.

__________________

A special acknowledgment to Kathryn Nickerson, Senior Counsel, Office of the Chief Counsel for International Commerce, U.S. Department of Commerce, for some of the information and ideas in this post. See her speech to the American Bar Association, National Institute of the Foreign Corrupt Practices Act, Special Focus: Issues Faced By Small and Medium Enterprises, Washington, D.C., October 17, 2006 here.

_________________

View the Department of Commerce's International Company Profile Program here.

Sunday
Feb242008

BAE And Prince Bandar Stay In The News

In mid-February the British High Court heard how Saudi Arabia threatened to end all anti-terrorism cooperation with the U.K. unless the Blair government quashed an investigation into alleged corruption. A social justice advocacy group called the Campaign Against Arms Trade and the Corner House has alleged that the government acted unlawfully in December 2006 when it told the Serious Fraud Office to stand down. After two days of hearings, the court is now considering whether to order the SFO to re-open its examination into BAE System's alleged illegal payments to Saudi Arabian officials in exchange for the sale of jet fighters.

The U.K. Guardian reported that the two-judge High Court panel "heard unchallenged allegations that it was Prince Bandar, the alleged beneficiary of £1bn in secret payments from the arms giant BAE, who threatened to cut off intelligence on terrorists if the investigation into him and his family was not stopped. Investigators said they were given to understand there would be 'another 7/7' and the loss of 'British lives on British streets' if they carried on delving into the payments. The government argued . . . that these threats were so 'grave' and put Britain's security in such 'imminent' threat that the head of the Serious Fraud Office had no option but to shut down his investigation immediately."

The U.K. government's decision to end the investigation drew criticism from the OECD and apparently spurred Swiss authorities to look into possible breaches of anti-money laundering laws and American prosecutors to examine whether there were violations of the Foreign Corrupt Practices Act. Both BAE and Prince Bandar have denied breaking any laws.

Meanwhile, the Associated Press reported on February 9 that a United States federal district court has temporarily blocked Prince Bandar -- the former Saudi ambassador to the United States and now head of Saudi Arabia's National Security Council -- from removing real estate sales proceeds from the U.S. pending resolution of a class-action lawsuit. "The suit filed last September by a tiny Michigan city retirement system accuses current and former directors of BAE Systems PLC, a giant British defense company, of breaches of fiduciary duties in connection with $2 billion or more in alleged illegal bribes paid to Bandar in connection with an $86 billion BAE arms sale to Saudi Arabia in 1985. Bandar also is named as a defendant in the suit, along with the former Riggs Bank of Washington and its successor, PNC Financial Group. BAE and Bandar have strongly denied that illegal payments were made to Bandar."

The AP story said U.S. District Judge Rosemary M. Collyer issued "a temporary restraining order, signed Feb. 5, that the suit by the City of Harper Woods Employees' Retirement System raises serious questions of law that warrant a temporary order keeping Bandar from taking the proceeds of real estate sales out of U.S.-based accounts. . . . The retirement system suit maintains that Bandar used funds illicitly obtained from BAE Systems to acquire U.S. real estate, including a Colorado ranch and mansion once placed on the market at $135 million and the former William Randolph Hearst mansion in California, offered for sale last summer at $165 million."

The same AP story reported developments in the U.K. this way: "In London, lawmakers disclosed last month that Britain's head of overseas intelligence had warned that Saudi Arabia probably would stop sharing vital information on terrorism if prosecutors pursued an investigation into alleged corruption in the arms deal. MI6, Britain's overseas intelligence service, believed Saudi Arabia would probably end information-sharing with Britain if investigators continued the inquiry, former Attorney General Peter Goldsmith told the committee. MI6 raised objections to the prosecution before Britain's Serious Fraud Office decided to end the case, he said."

View the February 16, 2008 report from the Guardian here.

View the February 9, 2008 report from the Associated Press here.

View prior posts about BAE Systems here.

Thursday
Feb212008

Flowserve Resolves Oil For Food Bribery Charges

French and Dutch Subsidiaries Paid Kickbacks and Caused FCPA Books and Records Violations

Texas-based Flowserve Corporation will pay about $10.5 million to resolve criminal and civil charges brought by the United States for illegal payments to Iraq under the U.N. Oil for Food Program. The Securities and Exchange Commission's final judgment requires Flowserve to disgorge $2,720,861, in profits, plus $853,364 in pre-judgment interest, and pay a civil penalty of $3,000,000. In a criminal action brought by the Department of Justice, the company will pay a $4,000,000 fine and enter into a three-year deferred prosecution agreement. In Holland, Flowserve's Dutch subsidiary will also pay a fine of an undisclosed amount to settle related criminal charges.

Flowserve -- which has more than 14,000 employees in 56 countries -- supplies pumps, valves and seals mainly to the power, oil and gas and chemical industries. The SEC said that during 2001 to 2003, Flowserve's French and Dutch subsidiaries entered into twenty sales contracts with Iraqi government entities through the U.N. Oil for Food Program. Under those contracts, $646,488 in kickbacks were paid and another $173,758 were authorized. Flowserve's subsidiaries funded the bribes by including in the contracts a bogus 10% after-sales service fee to a Jordanian agent. In reality, the agent provided no after-sales services but instead used the money to deposit cash into an Iraqi-controlled account at a Jordanian bank.

Flowserve's internal accounting records falsely reflected that its French and Dutch subsidiaries paid the after-sales service fee to the agent on each contract. The financial results of the subsidiaries were included in the consolidated financial statements that Flowserve filed with the SEC. As a result, the SEC charged that Flowserve "either knew or was reckless in not knowing that illicit payments were either offered or paid in connection with these transactions. . . . The company's books falsely characterized the [after-sales service fee] payments either as payments for services actually performed or as agent commissions."

The SEC said Flowserve violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 [15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)] by failing to keep accurate books and records and by failing to devise and maintain a system of internal accounting controls sufficient to detect and prevent the illicit payments. The DOJ charged Flowserve's French subsidiary with conspiracy to commit wire fraud and to violate the books and records provisions of the Foreign Corrupt Practices Act.

Flowserve accepted responsibility for the acts of its French and Dutch subsidiaries and agreed to cooperate with the DOJ's ongoing Oil for Food investigations. U.S. prosecutors acknowledged Flowserve’s "thorough review of the improper payments and the company’s implementation of enhanced compliance policies and procedures. . . ." On that basis, the DOJ said it agreed to defer prosecution of Flowserve's French subsidiary for three years. "If Flowserve and [its French subsidiary] abide by the terms of the agreement, the Department will dismiss the Criminal Information." The SEC also said it "considered remedial acts promptly undertaken by Flowserve and the cooperation the company afforded the Commission staff in its investigation."

Flowserve Corporation trades on the New York Stock Exchange under the symbol FLS.

View the Department of Justice's February 21, 2008 Release here.

Veiw the SEC's Litigation Release No. 20461 / February 21, 2008 here.

View the Complaint in Securities and Exchange Commission v. Flowserve Corporation, Civil Action No. 08 CV 00294 (D.D.C.) (EGS) here.

Wednesday
Feb202008

Disorder In The Court, Last Call

How prevalent is judicial corruption? Our primary source this week, Transparency International, took a close look. During 2006 it asked almost 60,000 people in 62 countries whether they or any member of their household had interacted with their country's judicial system in the past year and, if so, had they paid a bribe.

Here's what TI found: "Of the 8,263 people who had been in contact with the judicial system recently, 991, more than one in 10, had paid a bribe. In Africa and Latin America, about one in five of people who had interacted with the judicial system had paid a bribe. In Bolivia, Cameroon, Gabon, India, Mexico, Morocco, Pakistan and Paraguay the figure was more than one in three court users."

The numbers break down this way: In Africa and Latin America, 20% of the people had contact with the judicial system during the past year. Of those, 21% and 18% respectively paid a bribe. In newly independent states (Moldova, Russia and Ukraine), 8% of the people had recent contact with the courts, and 15% of that number paid bribes. In southeast Europe (Albania, Bulgaria, Croatia, Kosovo, Macedonia, Romania, Serbia and Turkey), 9% had contact with the courts and of those 9% paid bribes. In Asia Pacific, only 5% went to court, and of those 15% paid bribes. In the EU and North America, 19% and 23% respectively had contact with their judicial systems during the past year, and of those 1% and 2% respectively paid bribes.

Perceptions Matter. We've asked before if some companies approach certain places expecting to find a corrupt environment. And once there -- no matter what they find -- do they lower their compliance standards instead of raising them? We think the answer is yes. And that's why perceptions about public bribery can be as important as actual occurrences. TI's findings illustrate the point. It says the "public often views its judiciary as more corrupt than it actually is: more people around the world described their judiciary as ‘extremely corrupt’ than have personally been part of judi­cial corruption. . . . In 55 out of the 62 countries polled, a higher percentage of people perceived extreme judicial corruption than had paid a bribe. In 33 of the 62 countries polled, a majority of respondents described the judiciary/ legal system of their country as corrupt."

TI continues, "A majority of people in all but one African country polled (South Africa) and one Latin American country (Colombia) perceive the legal system/judiciary to be corrupt. Trailing the table are Bolivia, Cameroon, Mexico, Paraguay and Peru, where 80 per cent or more of respondents described the judicial system as corrupt. . . . The judiciaries of India and Pakistan fare badly, with 77 per cent and 55 per cent of respondents in the two countries, respectively, describing the judicial system as corrupt. . . . In all former communist countries, 45 per cent or more of the people polled described the legal-judicial system as corrupt."

What about U.S. Foreign Corrupt Practices Act compliance? Judicial corruption is a real problem. An effective compliance program will recognize it, discuss the compliance challenge openly, and draw clear lines to prohibit the practice anywhere. Compliance education and training should stress that even in the countries ranking worst for judicial bribery -- where nearly everyone thinks the courts are crooked -- only a minority of cases are actually influenced by corrupt practices. That means the people representing foreign firms should not mistakenly assume that bribery is the only way to deal with local litigation.

And beware of "legal" advice. We've heard too many lawyers from high-risk countries advise foreign business clients that bribes to local judges are expected and required. Why would they say that? Maybe to impress clients with their stroke in the local courts. And maybe to get their hands on some black-bag money for which they won't be accountable. In every case, however, advice to pay bribes is wrong and shouldn't deter compliance. As we've said before, all foreign judges, court clerks and others associated with a country's judicial system are "foreign officials" for the FCPA. Bribing them will probably violate U.S. law and will certainly violate the local law. And that, at the very least, will leave an effective compliance program in ruins.

View Transparency International's 2007 Global Judicial Corruption Report here.