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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
Feb142008

Wabtec Resolves FCPA Violations Related To India

Westinghouse Air Brake Technologies Corporation ("Wabtec") will pay about $675,000 and enter into a deferred prosecution agreement to resolve Foreign Corrupt Practices Act offenses caused by its Indian subsidiary, Pioneer Friction Limited. In the Securities and Exchange Commission's administrative proceeding, Wabtec will disgorge $259,000 and prejudgment interest of $29,351. It will also retain an independent consultant to review and make recommendations concerning its FCPA compliance. The SEC's federal civil action further requires Wabtec to pay a civil penalty of $87,000. Separately, the company will pay a fine of $300,000 to the Department of Justice and enter into a non-prosecution agreement imposing a strict compliance program and further cooperation with the DOJ.

In 2006, Pennsylvania-based Wabtec -- which has about 5,000 employees worldwide and manufactures brakes and related products for train locomotives and cars, among other things -- discovered that over the prior five years, Pioneer had paid more than $137,400 in cash to various officials from an agency in India’s Ministry of Railroads. According to the DOJ, "The payments were made in order to: assist Pioneer in obtaining and retaining business with the [Indian Railway Board]; schedule pre-shipping product inspections; obtain issuance of product delivery certificates; and curb what Pioneer considered to be excessive tax audits." Wabtec investigated the payments and voluntarily disclosed its findings to U.S. authorities. It also took remedial compliance measures.

Wabtec's consolidated financial statements include Pioneer's results. So in addition to causing Wabtec to violate the FCPA's antibribery provisions, Pioneer's financial improprieties triggered Wabtec's violation of the books-and-records and internal controls provisions of the FCPA. According to the SEC's complaint, Pioneer's agents "submitted invoices for materials that Pioneer did not receive in whole or in part. Pioneer issued checks to the marketing agent for the amount of the invoice and the marketing agent returned cash (less the service fee and any amount owed for any material actually received) to Pioneer. Pioneer maintained the cash generated through the use of marketing agents in a locked metal box, and documented each unlawful payment on a voucher that was maintained with the cash. Pioneer also kept track of the unlawful payments on a spreadsheet. The vouchers and the spreadsheet were maintained separately from Pioneer's other books and records and were not subject to review during annual audits."

As a result, Wabtec violated Sections 13(b)(2)(A), 13(b)(2)(B) and 30A of the Securities Exchange Act of 1934 [15 U.S.C. §§ 78m(b)(2)(A), 78m(b)(2)(B) and 78dd-1].

The SEC's complaint noted that although Wabtec's Code of Conduct in effect from 2001 to 2006 prohibited giving anything of value to improperly influence any person in a business relationship with Wabtec, the company had no FCPA policy and did not provide training or education to any of its employees, agents, or subsidiaries regarding the requirements of the FCPA. Wabtec also failed to establish a program to monitor its employees, agents, and subsidiaries for compliance with the FCPA.

Wabtec trades on the New York Stock Exchange under the symbol WAB.

View the SEC's Litigation Release No. 20457 (February 14, 2008) here.

View the SEC's Complaint in SEC v. Westinghouse Air Brake Technologies Corporation, Civil Action No. 08-CV-706 (E.D.Pa.) here.

View the DOJ's February 14, 2008 Release here.

Wednesday
Feb132008

U.S. v. Green, Take One

Two weeks from now, in a Los Angeles federal district court, the husband-and-wife Hollywood movie producers charged with violating the U.S. Foreign Corrupt Practices Act will go on trial. Gerald and Patricia Green were arrested last December and are out on bail. They're accused of bribing a Thai government official with kickbacks of more than $1.7 million in exchange for a film festival contract worth $10 million.

We're not privy to the Greens' defense, of course, but they appear to have a tough legal battle ahead of them. Here are some reasons why:

-- CW-1 and CW-2. According to the FBI's 28-page affidavit, at least two former insiders identified as Confidential Witnesses One and Two are giving evidence against the Greens, and it's juicy. The FBI says the CWs prepared the budgets, arranged the meetings, wrote the checks and ran the bank accounts that are now at the center of the case. The government says it has physical evidence too. When the police raided the Greens' office, among the goods seized was a spreadsheet showing the details of each kickback. And earlier in the investigation, FBI agents even jetted to Thailand to watch (and perhaps listen?) as Mr. Green met with the Thai government official to seal their allegedly corrupt deal. The Greens' defense lawyers, it appears, will have an armory full of smoking guns to deal with at the trial.

-- War on multiple fronts. In addition to the FCPA charges, the government might raise allegations of fraud and obstruction. That's important because the elements of an FCPA offense can be complicated to prove. When prosecutors think they can obtain a conviction based on other charges, as they did in Oscar Wyatt's trial, they'll usually try to do that. Paragraph 12 of the FBI's affidavit is a potential blueprint. It says, "The defendants attempted to conceal their bribery of the Thai official in a variety of ways, among other things, by: (a) employing different business entities, some with dummy business addresses and telephone numbers, in their dealings with the [Tourism Authority of Thailand] in order to hide the large amount of money they were being paid under the contracts; (b) making 'commission' payments to the Thai official through the foreign bank accounts of intermediaries; and (c) once the government's investigation became known to the defendants, attempting to manufacture evidence in support of false, exculpatory explanations for the corrupt payments."

-- There's something rotten in Denmark. The Greens' story as the government is telling it sounds like an Elmore Leonard movie script. Here's the pitch: A high-powered Hollywood couple befriend a Thai government official who controls a prestigious film festival in exotic Bangkok. She's crooked, so she and the Greens hatch a plan. She'll give them the exclusive no-bid right to promote the festival, and they'll kick back a part of every dollar they make. Together the plotters create shell companies and phony invoices. They use borrowed bank accounts, and so much more. The plan works perfectly. But one day someone close to the Greens betrays them and calls the feds. It's a great story, and that's probably bad news for the Greens. Even if the government's evidence isn't rock solid on all the elements of an FCPA offense, the jury will still get the picture that people stepped over the line of acceptable business behavior. To understand the significance, consider what happened to poor David H. Mead, the former president of Saybolt Inc. In 1998, a jury in New Jersey convicted him of paying a $50,000 bribe to government officials in Panama in violation of the FCPA. Mead had admitted making the payment but pleaded not guilty. He only paid the bribe, he said, because the company's outside lawyer assured him it could be done legally from Saybolt's Dutch affiliate. So his defense was that he didn't act "knowingly" to violate the FCPA, which the statute requires. His defense looked great on paper but the jury convicted him anyway. Why? Probably because they just didn't want a $50,000 bribe to a corrupt government official in Panama to go unpunished. Will the government's version of a similarly sordid tale in U.S. v. Green have the same effect on the jury?

-- For better or for worse. Any time family members appear as co-defendants in a criminal case, the defense has a problem. The FBI affidavit separates Mrs. Green's role from her husband's somewhat by indicating that she was part of the conspiracy but less involved in the substantive FCPA violation. But just by bringing her into the case, the government is putting enormous pressure on Mr. Green. He'll want to spare her a trial and possible jail time. And presumably Mrs. Green, who's in her early 50s, will be desperately trying to keep her 75-year-old husband out of jail. Will these terrible worries convince the Greens either to cop a plea before trial or to shape their defense to save one of them from prison?

-- Looking at the numbers. Perry Mason's lucky clients were assured of a successful outcome in their criminal trials. But real-life FCPA defendants have fared much worse. Most accused individuals have plea bargained to avoid jail time -- FCPA convictions carry a prison term of up to five years. Of the few people who've gone to trial since 1991, none have been acquitted. Dan Newcomb, in his invaluable 2007 FCPA Digest, sorts the numbers out this way: "Since, 1990, DOJ prosecutions under the FCPA against seventy-one individual defendants and corporations have been resolved. Of those seventy-one, forty-three were resolved through plea agreements. In only four of those cases was there a conviction after trial. In the cases where a plea was taken or a defendant was convicted, defendants were sentenced to a term in prison, fined, or both. Sentences have been imposed in 26 of those cases, and sentencing has been deferred in two others. Recently, the defendants in U.S. v. David Kay and Douglas Murphy received terms of 37 months and 63 months, respectively. In 1990, seven prosecutions ended in a dismissal of the charges. Since then, only one case (in 2004) has been dismissed. Also, during the years 1990 and 1991 there were five acquittals after trial. There have not been any since. In addition, at least four individuals have failed to appear in court to answer the charges against them." There's not much there to cheer the Greens as their trial date approaches.

View the FBI's Affidavit here.

View the 2007 FCPA Digest here.

View prior posts about the Greens here.

Monday
Feb112008

A Straight Shot At FCPA Compliance

Question: What essential aspect of FCPA compliance is also the toughest for organizations to come by? Here's a hint. It's what made the man on the left, Ben Hogan, the greatest golfer of his day.

Answer: Consistency.

It may as well be a physical law -- like the law of gravity or one of the laws of thermodynamics. Whatever you call it, there's always a strong and almost irresistible tendency by organizations to make downward adjustments in their FCPA compliance efforts. A sort of relativism seeps in at every seam, corner and crack. For example, pressure grows to dilute typical compliance-related reps and warranties in joint venture or agency agreements -- especially when an attractive foreign principal threatens to walk away. Many sophisticated overseas parties have learned by now to argue that typical FCPA compliance language is "insulting and demeaning." When the complaints work, the agreements are softened, and compliance obligations become weaker by a little or a lot.

In a similar way, compliance is sometimes compromised in staunchly nationalistic countries, such as China or Russia. "Referring to U.S. law and the FCPA insults our sovereignty and our domestic legal system," the foreign parties say. That old argument still works sometimes, resulting in FCPA compliance language that's sharp and clear being replaced with fuzzy and less offensive references to "applicable law."

At other times, a strong-willed executive from within the organization itself -- perhaps someone with a sales or business development function -- might work to water down FCPA compliance. A seasoned veteran or cocky newcomer might stay away from compliance-related training and administrative duties. Predictably, their next step is to ignore, block or hinder compliance efforts directed toward a potential overseas partner they've been courting for a while.

Being consistent in compliance sounds hard and it is, so the next question is whether every company really needs to be a Ben Hogan? The answer is yes -- with an exclamation point! Consistency is a specific requirement of an "effective compliance program." The 2005 U.S. Federal Sentencing Guidelines say, "The organization’s compliance and ethics program shall be promoted and enforced consistently throughout the organization . . . ." (See Chapter 8 - PART B - §8B2.1. Effective Compliance and Ethics Program, Subsection (b) (6)) Without a consistent effort, then, an organization might lose the chance to mitigate its potential criminal penalties for an FCPA offense. The Sentencing Guidelines allow for mitigation of up to a life-saving 95% of the recommended penalties -- but only if the organization can demonstrate that it has an effective compliance program. It won't be able to do that if it comes up short on consistency.

What's the best way to maintain a consistent approach to FCPA compliance? As dog owners and parents of young children know, you reward compliance and punish non-compliance. That's not just common sense; it's also advice straight from the Sentencing Guidelines themselves. Subsection (b) (6) cited above says in full: "The organization’s compliance and ethics program shall be promoted and enforced consistently throughout the organization through (A) appropriate incentives to perform in accordance with the compliance and ethics program; and (B) appropriate disciplinary measures for engaging in criminal conduct and for failing to take reasonable steps to prevent or detect criminal conduct." The Guidelines allow an organization to be creative when it comes to punishing an errant employee. As the commentary to Subsection (b)(6) says, "Adequate discipline of individuals responsible for an offense is a necessary component of enforcement; however, the form of discipline that will be appropriate will be case specific." Similar creativity is permitted in dishing out rewards for exemplary performance.

Like in a good golf swing, consistency in FCPA compliance is essential -- and so hard to achieve. But consistency truly is an aspect of compliance where each individual in an organization can make the difference between a slice, a hook or a beauty down the middle.

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

Friday
Feb082008

The Accounting Standards Make The Shortlist

The FCPA's anti-bribery provisions attract lots more attention than its accounting standards -- and there's no mystery why. Public corruption is fascinating, while public accounting is . . . well, less fascinating. But although it might be tempting to ignore the accounting standards, doing that is never smart. Violations can be easier to prove than anti-bribery offenses and even more devastating, with potential jail terms and fines many times greater than under the anti-bribery provisions.

Without question, then, anyone dealing with compliance needs to be completely fluent in the accounting standards. With that in mind -- and to suit our short attention span for anything "accounting" -- we've come up with these ten steps to enlightenment. Our little list gives us a place to start, which helps. But to be honest, our public-company auditing friends can teach us volumes about the accounting standards. So we're never shy to ask for their help.

1. Who's Covered? The Foreign Corrupt Practices Act's accounting standards -- which are sometimes called the "books and records provisions" -- apply only to domestic and foreign companies whose securities (any class of equity or debt) are listed in the United States. See 15 U.S.C. § 78m(b)(2). In FCPA-speak, those companies are called "issuers."

2. Subsidiaries and Affiliates. In addition to being responsible for its own books and records, each issuer is also responsible under the FCPA for the books and records of subsidiaries and affiliates over which it exercises control. But an issuer that holds 50% or less of the voting power of a domestic or foreign subsidiary or affiliate is only required to attempt in good faith to use its influence to cause the subsidiary or affiliate's compliance with the FCPA's books and records provisions. See § 78m(b)(6).

3. Books and Records. What exactly do the accounting standards require? First, issuers must make and keep books and records that accurately and fairly reflect the transactions and dispositions of the assets of the corporation.

4. Internal Controls. Second, issuers must devise and maintain a system of internal accounting controls adequate to provide reasonable assurances that: (i) transactions are executed in accordance with management's authorization; (ii) transactions are recorded as necessary to enable preparation of financial statements in accordance with GAAP and to maintain accountability of assets; (iii) access to assets is permitted only in accordance with management's authorization; and (iv) the recorded accountability for assets is periodically compared with the existing assets and any differences are addressed.

5. SEC Enforcement. The accounting standards can be enforced through civil and administrative actions brought by the Securities and Exchange Commission. The SEC can seek disgorgement or civil monetary penalties ranging from $50,000 to $500,000 per violation for business entities (or more if the “gross pecuniary gain” to the accused exceeds $500,000). The SEC also has the power to bar individuals from serving as officers or directors of public companies.

6. DOJ Prosecution. Criminal prosecutions under the accounting standards -- which must involve willful violations -- are brought by the Department of Justice.

7. The Criminal Standard. A willful violation is the intentional circumvention of or failure to implement a system of internal accounting controls, or willful falsification of an issuer's books, records, or accounts in violation of § 78m.

8. Corporate Felons. Willful violations of the accounting standards are a felony under § 32(d) of the Exchange Act of 1934 and punishable by a fine of up to $25 million against entities.

9. Personal Crimes. Against individuals, criminal convictions for willful violations can result in a maximum fine of $5 million, and up to 20 years’ imprisonment if the individual knew he or she was breaking the law. [The maximum prison sentence for an anti-bribery violation is five years.]

10. No Bribery Needed. Offenses under the accounting standards can be enforced or prosecuted whether or not there has been any violation of the FCPA's anti-bribery provisions. See § 78m(b)(5). So there is no requirement that any bribery to a foreign official be alleged or proven in an enforcement action or prosecution under the accounting standards.

View prior posts about accounting here.

Tuesday
Feb052008

FCPA To The World: I Want You

In its early days, the Foreign Corrupt Practices Act of 1977 stirred up a lot of angry talk from Americans because of its extra-territorial reach. Some legal scholars even questioned the constitutionality of a statute that clung to the citizens wherever they went. These days -- in a strange twist -- most of the angry talk about the FCPA is coming not from inside America but from outside.

Putting foreign companies in the cross hairs is bound to cause resentment. The FCPA, after all, is blowing away traditional concepts of borders and sovereignty. Here's a U.S. law, some would say, that's regulating what non-U.S. parties do with other non-U.S. parties when both are outside the United States. That's a tough sell, even in the age of global corporate scandals.

The change started after 1998, the year the FCPA -- in the words of the U.S. attorneys' manual -- was "expanded . . . to assert territorial jurisdiction over foreign companies and nationals." Non-U.S. companies like ABB Ltd, Vetco Gray UK Ltd, Akzo Nobel, NV and Statoil ASA started making the news with their FCPA problems. Today the foreign targets of FCPA investigations include Siemens AG, BAE Systems, Panalpina, Magyar Telekom, AstraZeneca PLC, Smartmatic Corp, Total SA, Norsk Hydro ASA, Novo Nordisk A/S, Schlumberger N.V., Alcatel SA and Petro-Canada -- and the list keeps growing.

The upset the FCPA is causing across the pond is evident in a January story by Michelle Madsen in legalweek.com. She discusses a survey of U.K. general counsels. About a third of them are in denial about the reach of the FCPA, and two thirds just wish it would go away. Here are some excerpts from her story. We should point out that the article itself tries to be a lot more balanced than our selections would suggest. In any case, we think the story is a preview of a coming flood of debate about the application of the FCPA to non-U.S. companies.

-- Peter Kennerley, general counsel at FTSE 100 brewing group Scottish & Newcastle, dismissed the idea that laws such as the FCPA would change the way UK companies operated. "We have a small export business to the US but these acts have not really been brought to our attention," he said. "If you attempted to second-guess every law that the US Government tried to impose on extraterritorial jurisdictions you would never get anything done."

-- O2 general counsel Justine Campbell agreed and said that far-reaching US laws can prove a real obstacle to business. "Laws like this impose a layer of bureaucracy to the process of business,' said Campbell. The laws, which are rigid, prescriptive and often frustrating, are not always relevant."

-- Such trends often spark resentment. One responding corporate counsel said that it was not the US’s place to dictate anti-corruption laws to companies operating out of other jurisdictions and that cross-border anti-corruption legislation should work both ways. "The asymmetry in the US-UK extradition act should be fixed and reciprocity should be the principle in areas like this. We are now seeing these laws being enforced extraterritorially by political and commercial pressure from the US."


View the January 10, 2008 legalweek.com article here.

Monday
Feb042008

Jurisdiction Untangled

So much of the buzz about the Foreign Corrupt Practices Act right now concerns investigations of name-brand foreign companies -- Siemens, BAE and Panalpina among them. Which makes it natural to ask, how do foreign companies come under the jurisdiction of the FCPA? The best explanation, we still think, comes from the United States Attorneys' Manual. We've posted the following language before, but it's worth repeating. The lesson here is that the jurisdictional trip wires are everywhere, and foreign companies with global businesses are likely to have a tough time slipping the grip of the FCPA. Here's how the Department of Justice instructs its prosecutors to look at it:

Under the FCPA, U.S. jurisdiction over corrupt payments to foreign officials depends upon whether the violator is an "issuer," a "domestic concern," or a foreign national or business. An "issuer" is a corporation that has issued securities that have been registered in the United States or who is required to file periodic reports with the SEC. See 15 U.S.C. §§ 78c(a)(8), 78dd-1(a). A "domestic concern" is any individual who is a citizen, national, or resident of the United States, or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship which has its principal place of business in the United States, or which is organized under the laws of a State of the United States, or a territory, possession, or commonwealth of the United States. See § 78dd-2(h)(1).

Issuers and domestic concerns may be held liable under the FCPA under either territorial or nationality jurisdiction principles. For acts taken within the territory of the United States, issuers and domestic concerns are liable if they take an act in furtherance of a corrupt payment to a foreign official using the U.S. mails or other means or instrumentalities of interstate commerce. See §§ 78dd-1(a), 78dd-2(a). For acts taken outside the United States, U.S. issuers and domestic concerns are liable if they take any act in furtherance of a corrupt payment, even if the offer, promise, or payment is accomplished without any conduct within U.S. territory. See §§ 78dd-1(g), 78dd-2(i). In addition, U.S. parent corporations may be held liable for the acts of their 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.

Prior to 1998, foreign companies, with the exception of those who qualified as "issuers," and most foreign nationals were not covered by the FCPA. The 1998 amendments expanded the FCPA to assert territorial jurisdiction over foreign companies and nationals. A foreign company or person is now subject to the FCPA if it takes any act in furtherance of the corrupt payment while within the territory of the United States. There is, however, no requirement that such act make use of the U.S. mails or other means or instrumentalities of interstate commerce. See § 78dd-3(a), (f)(1). Although this section has not yet been interpreted by any court, the Department interprets it as conferring jurisdiction whenever a foreign company or national causes an act to be done within the territory of the United States by any person acting as that company's or national's agent.

(emphasis in original)


From the United States Attorneys' Manual, Title 9, Criminal Resource Manual §1018 “Prohibited Foreign Corrupt Practices” (November 2000).

View CRM §1018 Here.

Friday
Feb012008

Siemens' Employees Come In From The Cold

German engineering giant Siemens AG said yesterday that it will extend its employee-amnesty program for another month until the end of February. The extension is no surprise. In mid-January this year, Siemens' counsel, Debevoise & Plimpton, said that "[s]ince 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." The company's latest announcement said it is still pursuing the new leads.

Siemens' official statement provided these further details: "To date, 66 employees have come forward in connection with the amnesty program. In addition, a large number of employees are currently receiving information about the program. 54 cases are now under review. So far, 2 applications for amnesty have been rejected and 10 granted. 'The amnesty program has been very successful. We’re pleased that so many employees have made use of the program and are thereby expediting clarification,' said Peter Y. Solmssen, member of the Managing Board and General Counsel of Siemens AG."

In October 2007, Siemens settled global corruption charges with Munich prosecutors for €201 million. The settlement was based on questionable payments of €420 million. But since then the company has identified €1.3 billion in potentially illegal payments to public officials around the world. 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, Greece and Norway.

Before the amnesty was announced in November 2007, Siemens' internal investigation reportedly had stalled because of stonewalling by managers in various countries. The amnesty -- which covers information about Siemens' involvement in public corruption -- protects employees against claims for damages or unilateral termination of their employment. But Siemens reserves the right to impose lesser workplace discipline. The company has not said why it rejected some applications for amnesty or how it intends to deal with employees whose applications are rejected.

View Siemens' January 31, 2008 News Release Here.

Thursday
Jan312008

Who's Monitoring The Monitors?

Ellen Podgor at the indispensable White Collar Crime Prof Blog has a post about the federal compliance monitors program here. It links to an article in the Washington Post here, and sets out the text of proposed federal legislation to regulate the monitors and their appointments. (Our earlier posts on the subject are here.)

In the Washington Post article -- which deals mainly with how U.S. Attorney General Michael Mukasey almost became a monitor before his appointment as AG -- reporter Carrie Johnson nicely summarizes the monitor-program controversy this way:

"Scrutiny of the monitor arrangements and complaints about their secrecy have mounted in recent weeks after a deal worth as much as $52 million was awarded to a consulting firm led by former attorney general John D. Ashcroft. The Justice Department launched a policy review last year to determine whether national standards should be imposed to avoid the appearance of impropriety. Lawmakers and legal experts have sounded alarms about possible political patronage, raising questions about whether prosecutors have steered the sole-source contracts to people with ties to the Bush administration, the Justice Department and the Securities and Exchange Commission. In the vast majority of cases, monitors operate without a judge's oversight of their work and their bills. The agreements have risen more than sevenfold in recent years as prosecutors have settled corporate fraud cases rather than bringing them to trial, which might destroy the business and cost employees their jobs. "

The bill proposed by Rep. Frank Pallone (D-NJ) would remove most of the discretion for the appointment of monitors from the hands of individual U.S. attorneys. It would also create a mechanism to set their pay and hold them accountable for reporting back to the Justice Department and the federal courts. Part of the bill reads:

SEC. 3. FEDERAL MONITORS.

(a) In General- A Federal monitor shall oversee a deferred prosecution agreement.

(b) Appointment of Federal Monitors- A Federal monitor shall be appointed by an independent third party (a United States district court judge or a United States magistrate judge) from a pool of pre-qualified firms or individuals (or both).

(c) Qualifications of Federal Monitors- A Federal monitor shall have experience in criminal and civil litigation.

(d) Payment of Federal Monitors- A Federal monitor shall be paid according to a pre-determined fee schedule set by the United States district court.

(e) Report Requirement in Deferred Prosecution Agreement-

(1) A deferred prosecution agreement shall include a requirement that a Federal monitor submit reports to the United States attorney and to the United States district court.

(2) A deferred prosecution agreement shall include the number and frequency of reports required by a Federal monitor.

Wednesday
Jan302008

Another Look At China

Yesterday we talked about a recent story in the Chinese press blaming foreign companies for more than half of the PRC's corruption, and singling out U.S. companies that violated the Foreign Corrupt Practices Act in China. On reflection, we may have been unduly skeptical about China's motives for publishing the story. So today we want to set the record straight.

To be clear, the PRC's economic policies and the results they've produced are phenomenal. Last year the country attracted nearly $75 billion in foreign direct investment. Total FDI has topped $700 billion. There are now some 120,000 foreign-invested enterprises in the PRC, double the number from just 2002. The economy is still growing at over 11% a year, and in a country of more than 1.3 billion people, per capita income has reached around $5,500. Foreign businesses in China are getting bigger. McDonald's this week said it plans to open 125 more outlets there in 2008, and Dunkin' Donuts wants 100 new locations in Shanghai alone over the next 10 years. What's the growth look like at street level? Our first visit to China was in 1993. Crossing main roads in Beijing was nearly impossible because of the streaming bicycles pedaled by factory workers wearing black Mao suits. The same blocks now make up some of the world's fanciest neighborhoods -- upscale condos and cafes filled with world-class fashionistas, and streets flowing with BMWs and Audis, Lamborghinis and more.

With such a staggering level of foreign activity in the economy, it's logical that a lot of the corruption over the past ten years can be traced to foreign companies. We thought 64% -- the amount noted in the aforementioned story -- sounded too high. But it could be close to the mark after all. For sure, the number of Foreign Corrupt Practices Act enforcement actions and investigations related to China has ballooned over the past few years. Among the companies involved are Lucent Technologies Inc., Faro Technologies, Inc., York International Corporation, Paradigm B.V., Schnitzer Steel Industries Inc., InVision Technologies, Inc., Diagnostics Products Corporation, Alltel Corporation, BearingPoint Inc. and UTStarcom Inc. Siemens may have FCPA issues in China, and there could be others. That's a long list in the rather limited FCPA universe. So what gives?

We've wondered before if some companies go into certain countries -- China, Nigeria and Indonesia come to mind -- expecting to find a corrupt environment. And once there -- no matter what they find -- they lower their compliance standards instead of raising them. Some pundits in Nigeria have talked about this syndrome and how it victimizes the local economy and the people in it. Perhaps the Chinese press is now sensitive to the same thing.

So in the spirit of the approaching Lunar New Year -- the beautiful character above means "rat," the sign next up on the Chinese calendar -- we acknowledge that ten years ago China put out the welcome mat to the world's entrepreneurs on a scale never seen before. Since then people by the billions have enjoyed the fruits, both in China and around the globe. At the same time, the Chinese government has struggled with public corruption -- as most developing economies do. It has fought against it using all available weapons. [Sometimes we cringe to read about executions for bribe-taking there.] Now China is telling the international community that a big part of its corruption problem is imported from overseas -- even from the United States. It's a good reminder to foreign companies -- especially those required to comply with the FCPA -- that instead of being part of the problem they should be part of the solution.

Tuesday
Jan292008

Most Corruption Comes From Abroad, Says China

A Special Warning For U.S. Companies

As China battles indigenous corruption, it's also spotlighting foreign and especially U.S. companies that are importing illegal practices into the PRC. A story in the Chinese press in December 2007 said, "According to a report by local consulting company Anbound, of the 500,000 bribery cases investigated in China over the last 10 years, 64 percent involved foreign companies." It mentioned allegations involving Lucent Technologies Inc., IBM, Cisco and NCR. Four of Lucent's employees in China, the story reported, were apparently fired in 2004 for violating the Foreign Corrupt Practices Act. The story quotes a Beijinger as saying: "I cannot understand after many foreign companies complain about corruption and bribery in China, then why are they doing similar things?"

Official statistics about corruption from the PRC can be dodgy. But any discussion about foreign companies involved or suspected of being involved in corrupt payments, and the naming of some U.S.-based headliners, may mark an important new strategy. Presumably, China will use the foreign companies' names to defend itself against charges from the U.S. and OECD that its anti-corruption enforcement is lax. Most of our corruption, China will argue, actually came from you first. We're the victim here.

One result is that foreign companies -- particularly those subject to the FCPA -- will be very attractive targets during the PRC's Olympic-year anti-corruption campaign. That means it's a good time to put China-related compliance programs on high alert.

Meanwhile, Chinese President Hu Jintao told leaders of the Communist Party that the country's anti-corruption drive remains a top priority. President Hu -- who also serves as general secretary of the Communist Party of China Central Committee -- spoke at the organization's important three-day plenary session in mid-January. "Anti-corruption measures and the upholding of integrity should run thoroughly through the nation's economic, political and cultural makeup and the Party's ideological, organizational, work style and institutional building," he said. In typical PRC practice, President Hu's speech became a "guideline document to enhance the work of anti-corruption and upholding of integrity," the communique said.

By June 2007, some 24,879 cases of official corruption had been investigated in the PRC, the communique said. The cases involved bribes totaling more than 6.156 billion yuan (US$860 million). Government employees were involved in 5,523 bribery cases, accounting for 22.2 percent of those caught, the communique said. For example, He Minxu, former vice-governor of eastern Anhui Province, was sentenced to death with a two-year reprieve for taking bribes of 8.41 million yuan (US$1.12 million) from 27 organizations and individuals, the latest senior official to be brought down in a corruption scandal. Another case cited was that of Zheng Xiaoyu, former director of China's State Food and Drug Administration. He was executed in July 2007 and was the fourth senior official to be sentenced to death since 2000. Zheng was found guilty of taking 6.49 million yuan (US$910,000) in bribes. When he was sentenced, the Supreme People's Court said his dereliction of duty undermined China's drug monitoring and supervision, endangered public life and health and had a very negative social impact. Speculation in China and elsewhere is that some of the bribes Zheng took came from foreign companies.

View articles from the December 12, 2007 edition of China Daily Here and January 17, 2008 edition Here.

Monday
Jan282008

Politics Is Still A Risky Business

A note to our readers: Former Indonesian President Suharto, 86, died on Sunday, January 27, 2008. He led Indonesia from 1965 until 1998, when he was driven from office after months of street protests. During his one-man rule, Indonesia had an average annual growth rate of 6.5%, helping to raise millions of its citizens from poverty to the middle class. But the Suharto regime also made Indonesia one of the world's most challenging countries for Foreign Corrupt Practices Act compliance. The following article -- which appeared under our byline in a slightly different form in the Wall Street Journal Asia in June 1998 -- discusses corruption in Suharto's Indonesia and the frequent links among entrenched regimes, corruption and political risk. -- The Editors

As the recent troubles in Indonesia, not to mention South Asia, the Balkans and much of Africa, keep showing, the world is still a very dangerous place. Anyone involved in decisions to deploy capital or people overseas should have some idea of the risks involved, if only to appreciate the need for a good exit strategy. So why has the field of political-risk analysis become almost extinct? To answer that question one must delve a little into the early days of the discipline and its past mistakes. Then it becomes apparent that there’s no reason why it shouldn’t re-emerge, albeit in a more user-friendly form.

This field of study had its heyday back in the early 1980s, when academicians began publishing serious works about political-risk analysis, which became known as PRA. These weighty tomes often bore pretentious titles like "Introduction to Political Risk Analysis" and "A Survey of the Quantitative Approaches to Country Risk Analysis." A lot of us back then thought PRA was hot and here to stay.

The best time for PRA practitioners was probably marked by the publication of Don DeLillo’s quirky book, "The Names," in 1983. The narrator-hero was an American expatriate political-risk analyst working in and around the Middle East. I was then a young lawyer at the Arabian American Oil Company in Dhahran, Saudi Arabia, and the copy I snuck in was passed from hand to hand. Typically, around the same time, a few PRA practitioners even started a professional group known, I think, as the American Association of Political Risk Analysts. I joined and heard nothing for almost a year. Then a photocopied half-page notice came in the mail, explaining that the group had dissolved because there didn’t seem to be much demand for the association after all.

In truth, Political-Risk Analysis never really got off the ground. The discipline had problems from the start because it pretended to be quantitative but never really was. In the number-crunching 1980s, that was an unforgivable sin. On top of that, the serious PRA practitioners -- mainly ex-university professors from the broad and vague field of political science -- blended in with corporate MBA types about as well as Indonesian businessmen with Arkansas politicians.

Today the field is nearly extinct. A few stalwarts hang on like the middle-aged guys who recreate American Civil War battles. But for the most part, to quote from a lonely but comprehensive PRA web site, (www.grai.com), “in the 1980s various MNCs disbanded their political risk functions or incorporated these functions into other staff activities.” Why did the field of Political-Risk Analysis go the way of the buggy whip and Nehru jacket? A book review on the above-named web site laments “three fairly familiar reasons”: (1) failure of companies to formally integrate PRA into corporate decision making, (2) the desensitizing of business people to political risk by its very prevalence, and (3) corporate downsizing of staff groups that would never be profit centers.

But all this is not to say the rest of us should forget about PRA. To be useful, political-risk analysis needs to be simple, that’s all. So I've created the “Three Strikes, You’re Out” test of political risk. If a country has all three Strikes, it's already a political-risk basket case, beyond help or hope. A country with one or two Strikes is sick but ambulatory, and should be treated for business purposes like a fragile aunt. Here are the Strikes. By the way, I strongly recommend against exploring the 3S Test in a dissertation or through other less lethal means.

Strike One: Excessive Love for the Long-Time Leader. It's a sure sign of coming disaster when the citizenry dearly love their despot. It means he's been on the throne too long and gone from strong father to cranky granddad. I was in Jakarta last year the day then-President Suharto, or Pak Harto, as he was lovingly called, flew off to Germany for a mysterious medical check up. Everyone was depressed. A man at the airport who wheeled my luggage cart from the curb to the counter was near tears, barely able to shuffle his feet. I thought I saw him on the TV news last month throwing rocks through windows in downtown Jakarta. A leader is over ripe when his country is referred to as his possession. I'm thinking how many times during the past couple of years I read or heard of “Mr. Suharto’s Indonesia.” “Tito’s Yugoslavia,” incidentally, is still falling apart. “Marcos’s Philippines,” like the “Medici’s Florence,” also did not end well. Even “Daley’s Chicago” looked pretty sick in 1968.

Strike Two: The Same Faces in Every Deal. As soon as Mr. Suharto abdicated, the students aptly coined the phrase “nepotism, collusion and corruption” to mean all the evils of his 32-year rule. An American executive working in Jakarta complained to me in 1992 that every time he tried to do anything, one of Mr. Suharto’s kids or cronies would show up and demand a piece of the action. He said it happened on everything, from a $100 million project to routine purchase orders. It was easy to do business in the Philippines during Marcos’s time, likewise in Iran during the Shah’s or Nicaragua during Somoza’s. Foreign investors cut through the red tape by working with one of the few wired local partners. Well-greased insider deals always look good at the time, but are usually too good to be true.

Strike Three: Abnormal Banker Behavior. When expatriate bankers (especially Americans, Germans and Japanese) start acting less like morticians and looking more like game-show hosts, head for cover. My experiences in Indonesia again come to mind. I watched foreign bankers in Jakarta transmogrify from the men-or-women in gray flannel suits to batik-shirted glad handers. I should also have sensed real danger when male bankers showed up at meetings to woo potential borrowers and brought along very attractive young ladies in flowery outfits.

So there is the 3S Test if you want to pursue "PRA," which, as I said, still has a role to play. There's also a final warning: You may hear each of the Strikes used separately or in combination to compliment a country's business climate. Here’s an overheard hotel-lobby remark, and it includes everything you need to know: “Jakarta's a great place to do business. The people love Suharto. I always see my old friends here. And the foreign bankers are so much fun.”

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).

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