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Entries in China (794)


A Gold Medal For Opinion Procedure Release 08-03

Foreign organizations in China have been vexed for years by the need to pay or reimburse Chinese journalists who attend local press events. The journalists can't afford to travel on their own and their employers don't reimburse them. But because most media outlets in the PRC are state-owned, the journalists are "foreign officials" under the Foreign Corrupt Practices Act. That means paying their expenses might violate the FCPA.

Facing this dilemma, foreign companies either don't pay the journalists anything and pass up domestic press coverage for their events in China, or they pay the local journalists (sometimes on the advice of counsel) and risk violating the FCPA.

Now, thanks to the efforts of Trace International, there's help. The DOJ has said the payments may fall within the FCPA's affirmative defense for so-called promotional expenses. That defense allows the payment or reimbursement of expenses of foreign officials that are directly related to “the promotion, demonstration, or explanation of products or services." 15 U.S.C. §§ 78dd-1(c)(2)(A) and 78dd-2(c)(2)(A).

In its opinion request, TRACE told the DOJ that for a press conference in Shanghai next week to announce the BRIBEline results for China, it will provide local and out-of-town journalists with the following benefits:

Local Journalists -- A cash stipend of RMB 200 (approximately $28) for each journalist based in Shanghai. The stipend is intended to cover lunch, local transportation costs, and incidental expenses. The cash stipends will be handed openly to each journalist upon signing in for the press conference.

Out-of-town Journalists -- A cash stipend of RMB 425 (approximately $62) for each journalist based somewhere other than Shanghai. The stipend is intended to cover lunch, local transportation costs, incidental expenses, and two additional meals. The cash stipends will be handed openly to each journalist upon signing in for the press conference. Reimbursement for economy-class inter-city domestic air, train, bus, and taxi travel upon submission of a receipt. One night's lodging for out-of-town journalists will be provided at the hotel where the press conference is being held. The lodging costs, not to exceed $229 per journalist, will be paid directly to the hotel by TRACE.

TRACE represented that:

  • Members of the state-owned PRC media are not typically reimbursed by their employers for work-related travel expenses or meals when covering an event such as the TRACE press conference.
  • TRACE will make the stipends and expense reimbursements equally available to all journalists who attend the press conference regardless of whether or not the journalists subsequently provide coverage of the press conference and regardless of the nature of such coverage.
  • The 200 RMB and 425 RMB stipends TRACE intends to pay to local and out-of-town journalists, respectively, are reasonable approximations of the costs likely to be incurred by such journalists in attending a press conference in Shanghai.
  • TRACE will send letters to the invited journalists' employers in advance of the press conference, advising that the stipend will be paid, its purpose, and TRACE's understanding that the payments are permitted under PRC laws and regulations. The letter will invite anyone with a different understanding of the applicable rules to so inform TRACE.
  • TRACE has no business pending with any PRC government agency.
  • TRACE has obtained written assurance from an established international law firm that TRACE's payment of the stipends is not contrary to PRC law.
  • TRACE will accurately record the payments in its own books and records.

The DOJ said it won't take enforcement action. "Based on TRACE's representations, the stipend and expenses TRACE intends to pay on behalf of foreign officials fall within the FCPA's promotional expenses affirmative defense in that the expenses are reasonable under the circumstances and directly relate to 'the promotion, demonstration, or explanation of [TRACE's] products or services.' 15 U.S.C. § 78dd-2(c)(2)(A)."

In an unusual reminder to other companies, the DOJ said that it "places no weight on the fact that it may be a common practice for companies in the PRC to provide such benefits to journalists attending a press conference."

Great work by TRACE -- and just in time to help the many sponsors and other foreign organizations coming to Beijing for the August 8th start of the 2008 Summer Olympics.

And kudos to the Justice Department for responding to TRACE's request in just four days.

View DOJ Opinion Procedure Release 08-03 (July 11, 2008) here.


Faro Pays $2.95 Million For FCPA Settlement

Faro Technologies Inc. confirmed that it has resolved Foreign Corrupt Practices Act offenses with the Department of Justice and the Securities and Exchange Commission. The DOJ settlement requires payment of a $1.1 million criminal penalty and entry into a two-year non-prosecution agreement with appointment of a compliance monitor. In settling with the SEC, Faro will pay about $1.85 million in disgorgement and prejudgment interest.

Florida-based Faro -- which designs, develops, and markets software and portable, computerized measurement devices -- self-disclosed potential FCPA violations in China to U.S. authorities in March 2006. It announced an anticipated settlement with prosecutors in its October 30, 2007 earnings release (see our post here).

Faro began selling its products directly to customers in China in 2003 through a Shanghai-based subsidiary, Faro China. In 2004 and 2005, a Faro employee authorized corrupt payments in the form of “referral fees” directly to employees of state-owned or controlled entities to secure business. It made illicit payments of $444,492 to obtain contracts worth about $4.9 million, and its net profit from the contracts was $1,411,306.

Faro employees routed the corrupt payments through a shell company to “avoid exposure,” according to internal e-mails. The employees also caused Faro China to enter into a bogus service contract with an intermediary, using it to pay the bribes. The intermediary aggregated the payments and invoiced Faro for reimbursement under the service contract. In its books and records, Faro falsely recorded the bribes as referral fees. The DOJ and SEC said the company failed to devise and maintain a system of internal controls for foreign sales sufficient to ensure compliance with the FCPA.

Faro's own documents, the DOJ said, revealed the extent of the bribery. "Profit lists" reflected the price of contracts and the costs of manufacture, along with line items for "referral fees" of 10%-15% of the contract price that were kickbacks to employees of state-owned customers. The DOJ gave the following examples:
A 2005 profit list for Purchase Order CH2005-VW34 for a purchase by Shanghai Turbine Generator Co., Ltd., a Chinese government entity, shows a contract value of $148,700 and an anticipated referral fee of $14,800, or approximately 10% of the contract value.

A 2005 profit list for Purchase Order Ch-2005-VW50(SW) for a purchase by Jiangxi Changhe Auto Co., Ltd. Hefel Plant, a Chinese government entity, shows a contract value of $53,086 and a referral fee of $8,000, or approximately 15% of the contract value.

Faro's non-prosecution agreement has a two-year term instead of the usual three years, presumably reflecting the company's prompt and detailed self-disclosure and effective corrective action. Faro said its estimated costs associated with the monitoring and stepped-up compliance obligations will be "in the range of $1 million to $2 million."

Neither Faro nor the DOJ explained why it took more than nine months to formally approve the previously announced settlement. We've speculated (here) that the Justice Department was delaying settlements involving compliance monitors, including Faro's, pending some accommodation with lawmakers on safeguards for the appointments. Controversy erupted last year after New Jersey U.S. Attorney Chris Christie appointed his former boss, ex-U.S. Attorney General John Ashcroft, as a monitor in a domestic bribery case for orthopedic device maker Zimmer Holdings Inc. The news that Mr. Ashcroft's firm could make as much as $52 million from the appointment sent shock waves around Capitol Hill and triggered Congressional hearings.

It appears from FCPA settlements announced in the past month involving Willbros, AGA Medical, and now Faro that monitor appointments are back on track. The solution appears to have been relatively simple. As with Willbros and AGA Medical, Faro will nominate its candidate to act as compliance monitor (after consulting with the DOJ), and the DOJ will have final approval over its choice. Provided the DOJ doesn't interfere directly and allows Faro and the other companies to pick their own qualified candidates, the selection is taken out of the hands of the DOJ. That should prevent the appearance of political abuse or cronyism in the appointments.

Faro Technologies, Inc. trades on NASDAQ under the symbol FARO.

View the DOJ's June 5, 2008 news release here.

View the SEC's Securities Exchange Act of 1934 Release No. 57933 / June 5, 2008, Accounting and Auditing Enforcement Release No. 2836 / June 5, 2008, and Administrative Proceeding File No. 3-13059 here.

View Faro's June 5, 2008 press release here.


AGA Medical Resolves China-Related FCPA Charges

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

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

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

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

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

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

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

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

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

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

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

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


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.


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.


Lucent Settles FCPA Violations For $2.5 Million

It Misused Affirmative Defense For Promotional Expenses

Lucent Technologies Inc. settled U.S. Foreign Corrupt Practices Act charges with the Department of Justice and the Securities and Exchange Commission for $2.5 million. The settlement includes a $1 million criminal fine and $1.5 million in civil penalties. Lucent's violations involved promotional expenses for Chinese government officials. The FCPA includes an affirmative defense that allows payment or reimbursement of expenses of foreign officials that are directly related to “the promotion, demonstration, or explanation of products or services." 15 U.S.C. §§ 78dd-1(c)(2)(A) and 78dd-2(c)(2)(A). Many of Lucent's payments, however, were not directly related to legitimate business purposes and were not recorded accurately in its books and records.

According to the DOJ, from at least 2000 to 2003, Lucent -- a global communications company that became part of Alcatel SA in November 2006, after the violations occurred -- spent millions of dollars on approximately 315 trips for Chinese government officials that included primarily sightseeing, entertainment and leisure. These trips were requested and approved with the consent and knowledge of the most senior Lucent Chinese officials and with the logistical and administrative assistance of Lucent employees in the United States, including at corporate headquarters in Murray Hill, N.J. Lucent improperly recorded expenses for these trips in its books and records and failed to provide adequate internal controls to monitor the provision of travel and other things of value to Chinese government officials.

Lucent provided Chinese government officials with pre-sale trips to the United States to attend seminars and visit Lucent facilities, as well as to engage in sightseeing, entertainment and leisure activities. In 2002 and 2003 alone, there were 24 Lucent-sponsored pre-sale trips for Chinese government customers. Of these, at least 12 trips were mostly for the purpose of sightseeing. Lucent spent over $1.3 million on at least 65 pre-sale visits between 2000 and 2003. The individuals participating in these trips were senior level government officials, including the heads of state-owned telecommunications companies in Beijing and the leaders of provincial telecommunications subsidiaries.

Between 2000 and 2003, Lucent also provided Chinese government officials with post-sale trips that were typically characterized as “factory inspections” or “training” in contracts with its Chinese government customers. By 2001, however, Lucent had outsourced most of its manufacturing and no longer had any Lucent factories for its customers to tour. Nevertheless, Lucent provided individuals with trips for “factory inspections” to the United States, Europe, Australia, Canada, Japan and other countries that involved little or no business content. These trips consisted primarily or entirely of sightseeing to locations such as Disneyland, Universal Studios, the Grand Canyon, and in cities such as Los Angeles, San Francisco, Las Vegas, Washington, D.C., and New York City, and typically lasted 14 days each and cost between $25,000 and $55,000 per trip.

The DOJ's non-prosecution agreement requires Lucent to adopt new or modify existing internal controls, policies and procedures. Those enhanced internal controls must ensure that Lucent makes and keeps fair and accurate books, records and accounts, as well as a rigorous anti-corruption compliance code, standards and procedures designed to detect and deter violations of the FCPA and other applicable anti-corruption laws. Lucent will not be prosecuted if it complies with all of the requirements contained in the agreement for two years.

View other posts about promotional expenses Here.

View the DOJ's December 21, 2007 release Here.


Faro Discloses Expected FCPA Resolution

Faro Technologies, Inc.'s third quarter disclosure describes a not-yet-effective deferred or non-prosecution agreement with the U.S. Department of Justice and the Securities and Exchange Commission.

In March 2006, Florida-based Faro -- which designs, develops, and markets software and portable, computerized measurement devices -- self-disclosed to prosecutors potential violations in China of the U.S. Foreign Corrupt Practices Act. On October 30, 2007, it said it expects to pay $2.65 million in estimated fines and penalties to resolve the case. It also said this:

"FCPA Update

"The Company anticipates that resolution of the FCPA matter will not result in formal criminal charges being filed against it by the DOJ. The Company expects, in addition to monetary sanctions, the final resolution of the FCPA matter with the SEC and the DOJ will include continuing obligations with the SEC and the DOJ with respect to monitoring, compliance with the FCPA and other laws, full cooperation with the government, and the adoption of a compliance code containing specific provisions intended to prevent violations of the FCPA.

"The Company expects that its monitoring obligations will continue for a period of two years starting with the final resolution of the FCPA matter with the SEC and the DOJ. The Company preliminarily estimates that the costs associated with the monitoring obligations to be in the range of $1 million to $2 million. However, because the scope of the monitoring obligation has not yet been determined and the outside monitoring firm has not yet been selected, the actual costs incurred may vary from the Company's preliminary estimate. The Company intends to provide updates with respect to the monitoring costs when additional information is available to the Company."

Faro Technologies, Inc. trades on NASDAQ under the symbol FARO.

View Faro's October 30, 2007 Press Release Here.


Red Tape Round-Up

With the 17th National Congress of the Chinese Communist Party in full swing in Beijing, we thought it would be a good time to see what leaders there are doing about corruption. Here's some of what we found.

Red tape is out. The CCP says that since 2002, 68 national government departments have rescinded or amended 1,806 of their 3,605 administrative approval items for new businesses. We're not always sure about China's statistics, but these sound positive. At the provincial level, too, times are changing. The Party says local governments have canceled more than half their regulations. It cites the Zhejiang government, which "slashed the number of required approvals for new businesses from 3,251 to 630 in five years, and Chongqing, which canceled 312 items last year alone."

One reformer from the Party said cleaning up the country's over-regulated administrative approval system -- making it simpler and more transparent for new businesses to get up and running -- is essential to cutting corruption. He cited the example of "a city government in Henan Province that established a 'steamed bread office,' which required the registration of every person in the city who wanted to make and sell steamed bread." He also reported the story of "a south China farmer who took two years to acquire the 270 official seals needed to establish a poultry farm, by which time he found the business was no longer viable."

Notwithstanding the steamed bread office in Henan Province, the World Bank says China is making steady progress. It reduced the time to register a new business from 48 days in 2005 to 35 days in 2006. And new online customs procedures reduced the time to import and export by two days.

That's good news, because red tape and corruption are always best friends. And China -- though trying to help its citizens and foreign investors -- still has a long way to go in both departments. For now, FCPA compliance there remains difficult, and the red tape means compliance red flags are always in sight.

View the "News of the Communist Party of China" Here.

View a Summary of the World Bank's Doing Business Report 2007 Here.


Termites In China

The happy people in the photo are Ma Wen (right), head of China's new National Bureau of Corruption Prevention, and her deputy, Qu Wanxiang. The occasion is the official unveiling of the anti-corruption bureau in Beijing on September 13, 2007.

But according to an October 11, 2007 story by Terry Atlas in U.S. News and World Report here, China's top corruption-busters have very little to smile about. The story, citing a report by Minxin Pei, a China expert at the Carnegie Endowment for International Peace in Washington, describes China's bribery problem as "termites chewing into the foundation of China's growth" and "one of the most serious threats to the nation's future economic and political stability." The story says the direct costs of China's corruption are as much as $86 billion a year. "It contributes to social unrest — sparking thousands of protests a year — and contributes to environmental and health problems. "

Though full of smiles, the pictured Ms. Ma and Mr. Qu could probably use some additional staff. The story says that in China "the odds of a corrupt official going to jail are less than 3 percent, making corruption a high-return, low-risk activity."

Everything may be relative, but FCPA enforcement isn't supposed to be. There are no breaks because one host county has more bribery than another. In a place like China, that means stepped up FCPA compliance is the only option.

View the Carnegie Report Here.


Greetings, Comrade

A friend of The FCPA Blog who bunked in Singapore awhile and has since returned to Washington, D.C. asks: In a communist country, is everyone a government official?

The question is important because the U.S. Foreign Corrupt Practices Act prohibits corrupt payments to "foreign officials" for the purpose of obtaining or retaining work or gaining any unfair advantage. If, as our questioner suspects, everyone in a communist country is a foreign official, then compliance risks multiply. In China, for example, there will be 1.3 billion chances to violate the FCPA every day.

Duly frightened, we believe the prudent approach in a communist state or any country where the government dominates the economy is to consider everyone a foreign official, until proven otherwise. There are no cases or FCPA Opinion Procedure Releases we know of that answer the question definitively. But foreign officials for the FCPA include officers, employees or representatives of any government, at any level. They also include officials of foreign political parties.

In the communist states we're familiar with, especially the really Big One, most people work for government-owned or controlled enterprises -- hospitals, shipyards, oil companies, airlines, banks, insurance companies, media firms, sports teams, real estate developers, investment funds, the 2008 Olympics Committee, you name it. Even when ultimate ownership is obscure, which can be the case with listed companies, control may still rest with the government or its alter ego, the Chinese Communist Party. The CCP appoints only its own members to be directors of state-owned enterprises. And any CCP member important enough to nab a directorship at a state-owned enterprise or international joint venture probably holds some kind of party title and should therefore be deemed an "official of a foreign political party" for the FCPA.

Some practitioners are also guided by local laws. Using again the example of China, the legal definition of a "public official" in a number of statutes and regulations is broad and apparently covers all Chinese Communist Party members. The U.S. Department of Justice has said in another context that it is not bound by local statutory definitions or legal opinions. But for this question, the DOJ is unlikely to interpret "public officials" much different than the host country does. Mark Mendelsohn, the Deputy Chief of the DOJ's Criminal Division, Fraud Section (the group that prosecutes FCPA cases), noted in 2006 that many companies now assume that everyone in China is a government official, because "Chinese regulators are involved in any business enterprise." He warned against an FCPA defense based on claims that "you thought you were paying a kickback to a private individual." (SEC Today, Volume 2006-57, Friday, March 24, 2006).

Anyone overcome by a desire to inspect this post's annotations -- now safely stored in a nearby cardboard box -- should contact us Here.


York International Pays $22 Million To Resolve Global Corruption Case

Internal Investigation into Oil-For-Food Abuses Uncovered Widespread Bribery

York International Corporation has reached a settlement with U.S. prosecutors of numerous violations of the U.S. Foreign Corrupt Practices Act -- relating to bribes paid under the United Nations oil-for-food program and kickbacks for other government contract work in Bahrain, Egypt, India, Turkey, the United Arab Emirates and China. York -- a subsidiary of Johnson Controls, Inc. since 2005 -- provides heating, ventilation, air conditioning, and refrigeration products and services worldwide.

Under York's three-year deferred prosecution agreement with the U.S. Department of Justice, it will pay a $10 million criminal penalty, cooperate with the DOJ’s related investigations and appoint an independent compliance monitor. York also consented to the Securities and Exchange Commission’s filing of a complaint for FCPA violations and agreed to disgorge about $10 million and pay $2 million in civil penalties.

From 2001 through 2006, York paid over $7.5 million in bribes through subsidiaries and agents to obtain work on commercial and government projects throughout the world. York referred to the payments internally as "consultancy payments" but no bona fide services were involved. It made 854 improper consultancy payments on more than 770 contracts -- 302 projects involved government end-users, such as government-owned companies, public hospitals, or schools.

The payments violated the anti-bribery provisions of the FCPA, and York failed to devise and maintain an effective system of internal controls to prevent or detect the bribes. It also failed to accurately record in its books and records the kickbacks to Iraq, bribes in the UAE, and the bogus consultancy payments made in various countries. York consented to the entry of a final judgment with the SEC permanently enjoining it from future violations of Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934. The DOJ’s three-count criminal Information charged York with conspiracy to commit wire fraud and to falsify books and records in violation of 15 U.S.C. §§ 78m(b)(2)(A), 78m(b)(5) and 78ff(a).

York self-reported the violations and worked with the DOJ and the SEC to investigate the illegal conduct. The criminal Information also mentions "Employee A" and “Employee B,” citizens of the United Kingdom and Syria respectively, who were involved in the bribery, as well as "Company X," a consulting company based in Jordan that acted as a sales agent for York in the Middle East. They have not yet been charged with FCPA violations.

Among the details mentioned by prosecutors, York’s Danish subsidiary, which sells refrigeration equipment to ship builders and ship yards owned by the Chinese government, made illegal payments from 2004 through 2006 to agents and to Chinese officials connected with the shipyards. “Hundreds of thousands of dollars for nebulous and undocumented services” were processed through York’s Danish subsidiary, which also provided Chinese ship yard employees with lap top computers and other electronics.

York's parent company, Johnson Controls, Inc. (NYSE: JCI) will not be prosecuted on the facts admitted by York.

View the DOJ’s October 1, 2007 News Release Here.

View the October 1, 2007 Deferred Prosecution Agreement and Criminal Information Here.

View the SEC’s Litigation Release No. 20319 / October 1, 2007 Here.

View the SEC’s Complaint Here.


Paradigm's Pre-IPO Due Diligence Reveals FCPA Violations

Paradigm B.V., a Houston-based oil and gas services provider, entered into a non-prosecution agreement with the U.S. Department of Justice to resolve payments that violated the Foreign Corrupt Practices Act. Paradigm made prohibited payments to foreign officials in China, Indonesia, Kazakhstan, Mexico and Nigeria. It will "pay a $1 million penalty, implement rigorous internal controls, retain outside compliance counsel, and cooperate fully with the Department of Justice," according to the DOJ's September 24, 2007 announcement.

Paradigm's parent company, Paradigm Ltd., which is controlled by private equity fund Fox Paine, discovered the corrupt payments during due diligence for its planned NASDAQ IPO and self-disclosed them to prosecutors. The conduct at issue did not involve current senior management, according to the company. The DOJ said, “Paradigm’s actions in this matter, including voluntary disclosure and remedial efforts, are consistent with our view of responsible corporate conduct when FCPA violations are uncovered. Accordingly, the Department has resolved this case to permit the company to move forward on sound footing, governed by ethical business practices.”

The corrupt payments involved $22,250 deposited into the Latvian bank account of a British West Indies company recommended as a consultant by an official of KazMunaiGas, Kazakhstan’s national oil company, to secure a tender for geological software. The DOJ said Paradigm performed no due diligence, did not enter into any written agreement and apparently received no services.

In China, Paradigm used an agent to make commission payments to representatives of a subsidiary of the China National Offshore Oil Company in connection with the sale of software to the CNOOC subsidiary. Paradigm also directly retained and paid employees of Chinese national oil companies or state-owned entities as "internal consultants" to evaluate Paradigm’s software and to influence their employers’ procurement divisions to purchase Paradigm’s products. Employees of CNOOC and other state-owned enterprises in China are "foreign officials" for purposes of the FCPA.

Paradigm said it also made corrupt payments in Mexico, Indonesia and Nigeria. In Nigeria, it used intermediaries to pay between $100,000 and $200,000 to politicians to obtain a contract to perform services and processing work for a subsidiary of the Nigerian National Petroleum Corporation. In Mexico, it hired the brother of a Pemex decision maker, and paid for the decision-maker's $12,000 trip to Napa Valley, California and $10,000 to entertain him. In Indonesia, its agent paid employees of Pertamina through a New York bank account.

In a sign that the DOJ is encouraging more voluntary disclosure and self-directed remedial action -- which means implementing an "effective compliance program" -- Paradigm's non-prosecution agreement expires after just 18 months instead of the usual three-year period, and requires appointment of outside compliance counsel instead of an independent monitor. In addition to Paradigm's self disclosure and remedial actions, another major influence on the DOJ's handling of the case must have been the fact that the company's current senior management was not involved in the unlawful conduct.

View the Department of Justice's News Release Here.

View Paradigm's Non-Prosecution Agreement Here.