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


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.


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.


Disorder In The Court, Part II

We noted yesterday some of the causes of judicial corruption -- underpaid and overworked judges, complex and slow court procedures, and anti-corruption enforcement monopolized by a single agency. Unfortunately, all those symptoms show up in Azerbaijan's judicial system.

A Living Wage? Judges' salaries are low even after a big recent pay raise. According to Transparency International's 2007 country report, local judges make the annual equivalent of $11,635 -- compared to $23,800 in Estonia. As for their workload, there are only about 4 judges per 100,000 people. That's the lowest number in the region. Germany, by the way, has more than five times as many judges per capita.

No Show, No Problem. Predictably, court litigation is extremely time-consuming. "This is especially ruinous for private companies," TI said, "which usually prefer to drop a case or 'negotiate' with the judge. Parties in litigation have many opportunities to drag out a case because the legis­lation prevents a court from proceeding to a deci­sion if the other party does not appear in court. There is no punishment for the defaulting party. On average about 5 per cent of businesses use courts in Azerbaijan, compared with 30 per cent in Europe and Central Asia."

Going Once, Going Twice . . . Judges -- who owe their positions to the executive branch, as does the general prosecutor -- can decide whether or not to hear a case without giving any explan­ation. And in rendering judgments, they aren't bound by precedent or statutory law. Fuad Mustafayev, deputy chairman of the opposition Popular Front Party, told TI that judges in Azerbaijan decide cases in two ways: for political reasons or, in a judi­cial equivalent to the construction "tender," they rule in favor of the highest bidder. Lawyers complain that they've been turned into "brokers" rather than legal advocates. The Ministry of Justice evaluates judges’ performances annually. "None has been fired for corrupt practices, however, though such cases are numerous . . . ," TI said.

Enforce This. Bailiffs aren't part of the judicial system, but fall under the executive branch. TI said they "lack the power, skills, resources and initiative to enforce decisions. . . . Failure to enforce court decisions further undermines trust in the justice system."

Recognizing Risk. Since its independence from the Soviet Union in 1991, oil-rich Azerbaijan has been popular with foreign investors. They've committed some $60 billion to long-term oilfield development there. But the country of eight million demonstrates again that where the rule of law is under attack, corruption flourishes. That's why companies trying to maintain an effective FCPA compliance program will want to mark Azerbaijan -- and other countries showing the same symptoms -- with a big red flag.

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


Disorder In The Court

It probably makes no sense to ask which form of public corruption is the worst, since they all destroy the fabric of society. But as lawyers, we think judicial corruption should be singled out. Honest judges, after all, restrain corruption, while crooked judges unleash it on entire countries. When courts are for sale, those with money and power ravage the rights of those whose pockets are empty. Without honest and independent judiciaries, ordinary citizens lose the certainty of their legal, political and economic freedoms.

Judges are likely to be corrupt in countries where per capita income is low and economies are closed. Beyond those environmental causes, judicial corruption rises when judges are underpaid and overworked, when court procedures are complex and slow, and when anti-corruption enforcement is monopolized by a single enforcement agency. Those are the findings of one Stefan Voigt from the Department of Economics and Management at Philipps University in Marburg, Germany, as published by Transparency International.

India, according to TI's 2007 global report on judicial corruption, is one of the countries that illustrates some of Prof Voigt's hypotheses. In India, "[t]he estimated amount paid in bribes [for judicial corruption] in a 12-month period is around R2,630 crores (around US $580 million). . . . The primary causes of corruption are delays in the disposal of cases, shortage of judges and complex procedures, all of which are exacerbated by a preponderance of new laws. As of February 2006, 33,635 cases were pending in the Supreme Court with 26 judges; 3,341,040 cases in the high courts with 670 judges; and 25,306,458 cases in the 13,204 subordinate courts. This vast backlog leads to long adjournments and prompts people to pay to speed up the process. In 1999, it was estimated: ‘At the current rate of disposal it would take another 350 years for dis­posal of the pending cases even if no other cases were added.’ The ratio of judges is abysmally low at 12–13 per one million persons, compared to 107 in the United States, 75 in Canada and 51 in the United Kingdom. . . . This prompts people to pay ‘speed money’. . . . People seek shortcuts through bribery, favours, hospi­tality or gifts, leading to further unlawful behav­iour."

In any country, most citizens are powerless in the face of judicial corruption. Foreign investors, too, may feel threatened and victimized, and tempted to join the corrupt practices. But judges, court clerks and others in the judicial system are "foreign officials" under the U.S. Foreign Corrupt Practices Act. Bribing them can violate U.S. law and certainly violates local law. That means there are plenty of reasons to raise compliance standards in places where judicial corruption is prevalent.

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


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.


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.


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.


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.


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 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 article here.


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.


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.


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:


(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.