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Entries in China (807)


California Exec Pleads Guilty

The Justice Department has announced its first Foreign Corrupt Practices Act enforcement action of 2009. Mario Covino, 44, an Italian citizen living in Irvine, California, pleaded guilty in federal court in Santa Ana to a single count of conspiring to violate the FCPA by paying at least $1 million in bribes to foreign officials in several countries. He's cooperating in an ongoing federal investigation and waiting to be sentenced in July. He faces up to five years in prison.

The DOJ said Covino was formerly the worldwide sales director for an unidentified Rancho Santa Margarita-based company that designs and makes valves used in the oil, gas, nuclear, coal and power plant industries. The plea agreement refers to the company as an "unnamed co-conspirator." A report from the Associated Press said online business directories list Covino as having worked for Control Components Inc. The company, also known as CCI, hasn't commented. It is owned by British-based IMI plc, which trades on the London Stock Exchange under the symbol IMI.L.

Covino acknowledged that he arranged for company employees and agents to pay about $1 million to employees at state-owned foreign enterprises from March 2003 through August 2007. He said his company made about $5 million in profits from the business obtained through the bribes. According to the plea agreement, some of the corrupt payments went to officials at Petrobras (Brazil), Dingzhou Power (China), Datang Power (China), China Petroleum, China Resources Power, China National Offshore Oil Company, PetroChina, Maharashtra State Electricity Board (India), KHNP (Korea), Petronas (Malaysia), Dolphin Energy (UAE) and Abu Dhabi Company for Oil Operations (UAE).

Covino also said he provided false and misleading responses during a 2004 internal audit of the company’s commission payments. And to obstruct the audit, he deleted and told others to delete emails that referred to corrupt payments.

Download the DOJ's January 8, 2009 release here.

Download Covino's plea agreement here.


No Quick Fix

The consequences of a Foreign Corrupt Practices Act compliance problem can reverberate inside a company long after it reaches a settlement with the Justice Department. An illustration of that comes from AGA Medical. In early June last year, we reported that the privately-held maker of heart-related products resolved FCPA violations with the DOJ. The company's self-disclosure to prosecutors included emails to and from a Chinese distributor that left no doubt illegal activity had occurred, such as bribes in China of at least $460,000 to doctors at government-owned hospitals and to patent-office officials.

Just weeks after the settlement, AGA filed a registration statement with the Securities and Exchange Commission for an initial public offering, which is still pending. That document (we're quoting below from Amendment No. 4 to the S-1) talks about the settlement's actual and potential impact on the company, including its need for a new sales model overseas.

Here's what it says:

The terms and effects of our Deferred Prosecution Agreement with the U.S. Department of Justice relating to potential violations of the U.S. Foreign Corrupt Practices Act may negatively affect our business, financial condition and results of operations.

On June 2, 2008, we entered into a Deferred Prosecution Agreement, or the DPA, with the Department of Justice concerning alleged improper payments that were made by our former independent distributor in China to (1) physicians in Chinese public hospitals in connection with the sale of our products and (2) an official in the Chinese patent office in connection with the approval of our patent applications, in each case, in potential violation of the Foreign Corrupt Practices Act, or the FCPA. The FCPA makes it unlawful for, among other persons, a U.S. company, acting directly or through an agent, to offer or to make improper payments to any "foreign official" in order to obtain or retain business or to induce such "foreign official" to use his or her influence with a foreign government or instrumentality thereof for such purpose.

As part of the DPA, we consented to the Department of Justice filing a two-count criminal statement of information against us in the U.S. District Court, District of Minnesota, which was filed on June 3, 2008. The two counts include a conspiracy to violate the FCPA and a substantive violation of the anti-bribery provisions of the FCPA related to the above-described activities in China. Although we did not plead guilty to that information, we accepted responsibility for the acts of our employees and agents as set forth in the DPA, and we face prosecution under that information, and possibly other charges as well, if we fail to comply with the terms of the DPA. Those terms require us to, for approximately three years, (1) continue to cooperate fully with the Department of Justice on any investigation relating to violations of the FCPA and any and all other matters relating to improper payments, (2) continue to implement a compliance and ethics program designed to detect and prevent violations of the FCPA and other applicable anti-corruption laws, (3) review existing, and if necessary, adopt new controls, policies and procedures designed to ensure that we make and keep fair and accurate books, records and accounts and maintain a rigorous anti-corruption compliance code designed to detect and deter violations of the FCPA and other applicable anti-corruption laws, and (4) retain and pay for an independent monitor to assess and oversee our compliance and ethics program with respect to the FCPA and other applicable anti-corruption laws. The DPA also required us to pay a monetary penalty of $2.0 million. In the fourth quarter of 2007, we had recorded a financial charge of $2.0 million for the potential settlement. The terms of the DPA will remain binding on any successor or merger partner as long as the agreement is in effect.

The effects that compliance with any of the terms of the DPA will have on us are unknown and they may have a material impact on our business, financial condition and results of operations. The activities of the government-approved independent monitor, as well as the continued implementation of a compliance and ethics program and the adoption of internal controls, policies and procedures to detect and prevent future violations of the FCPA and other applicable anti-corruption laws, may result in increased costs to us and change the way in which we operate, the outcome of which we are unable to predict. For example, implementing and monitoring such compliance procedures in the large number of foreign jurisdictions where we operate can be expensive and time-consuming. As a result of our remediation measures, we may also encounter difficulties conducting business in certain foreign countries and retaining and attracting additional business with certain customers, and we cannot predict the extent of these difficulties.

In addition, entering into the DPA in the United States may adversely affect our operations or result in legal claims against us, which may include claims of special, indirect, derivative or consequential damages.

Our failure to comply with the terms of the deferred prosecution agreement with the Department of Justice would have a negative impact on our ongoing operations.

As described above, we are subject to a three-year DPA with the Department of Justice. If we comply with the DPA, the Department of Justice has agreed not to prosecute us with respect to the above-described activities in China and, following the term of the DPA, to permanently dismiss the criminal statement of information that is currently pending against us. Accordingly, the DPA could be substantially nullified, and we could be subject to severe sanctions and resumed civil and criminal prosecution, as well as severe fines, penalties and other regulatory sanctions, in the event of any additional violation of the FCPA or any other applicable anti-corruption laws by us or any of our officers, other employees or agents in any jurisdiction or of our failure to otherwise meet any of the terms of the DPA as determined by the Department of Justice in its sole discretion. The claims alleged in the DPA with the Department of Justice only relate to our actions in China as outlined above, and do not relate to any future violations or the discovery of past violations not expressly covered by the DPA. Any breach of the terms of the DPA would also cause damage to our business and reputation, as well as impair investor confidence in our company and result in adverse consequences on our ability to obtain or continue financing for current or future projects.

In addition, although we are not currently restricted by the U.S. Department of Health and Human Services, Office of the Inspector General, from participating in federal healthcare programs, any criminal conviction of our company under the FCPA in the future would result in our mandatory exclusion from such programs, and it may lead to debarment from U.S. and foreign government contracts. Any such exclusion or debarment would have a material adverse effect on our business, financial condition and results of operations.

Our ability to comply with the terms of the DPA is dependent, among other things, on the success of our ongoing compliance and ethics program, including our ability to continue to manage our distributors and agents and supervise, train and retain competent employees, as well as the efforts of our employees to adhere to our compliance and ethics program and the FCPA and other applicable anti-corruption laws. It is possible that, despite our best efforts, additional FCPA issues, or issues under anti-corruption laws of other jurisdictions, could arise in the future. Any failure by us to adopt appropriate compliance and ethics procedures, to ensure that our officers, other employees and agents comply with the FCPA and other applicable anti-corruption laws and regulations in all jurisdictions in which we operate or to otherwise comply with any term of the DPA would have a material adverse effect on our business, financial condition and results of operations.

In certain international markets, we have converted, or are in the process of converting, to a direct sales force model from a distributor-based sales model. Our business, financial condition and operating results may be adversely affected by the transition to a new sales model.

In August 2006, we negotiated an early termination with one of our international distributors, and we have since then undertaken to distribute our products in such distributor's country through our direct sales force. We also gave notice of termination to a second distributor and began operations in April 2008 through our direct sales force in such distributor's country. We gave notice of termination to a third distributor and began operations in July 2008 through our direct sales force in such distributor's country. In addition, we gave notice of termination to five other distributors and expect to begin operations in January 2009 through our direct sales force in these distributors' countries. We are also currently assessing the viability of distributing our products directly in other international markets. We have limited experience with direct sales of our products in international markets and, therefore, may not obtain the financial benefits that we expect. In addition, we may experience delays in implementing our direct sales force model due to the difficulty of hiring a sales force, establishing relationships with physicians, complying with local regulatory requirements, and other factors, which could have an adverse effect on our business, financial condition and results of operations.




Help Wanted For Siemens Report

One of ProPublica's outstanding investigative reporters, T. Christian Miller, wrote the story below (which ProPublica co-published with MSN Money). We reprint it under ProPublica's generous license ("You can republish our articles for free, if you credit us, link to us, and don't edit our material or sell it separately.")

If you have trouble accessing the DOJ and SEC charging documents linked in the story (we did), you can also find them at the bottom of our earlier post here.


Help Us Name Names in Siemens Corruption Scandal

by T. Christian Miller, ProPublica - December 22, 2008 1:05 pm EST

Get ready for the Siemens World Corruption Tour, 2001-2008. Siemens pleaded guilty last week to corruption across the globe, receiving a record-setting fine -- $1.6 billion (which sounds like a lot, but really, it's just 0.3 percent of their revenue during those years.)

In announcing the fine, the Justice Department and the Securities and Exchange Commission released formal complaints detailing how Siemens bribed government officials all around the world. (We published a story in Sunday's New York Times profiling the Siemens accountant at the center of the scandal.)

However -- and this is a big "however" if you're into accountability -- they released none of the names of the corrupt bureaucrats that took the cash or the Siemens officials who paid it.

This was done, Justice folks said, to protect the integrity of ongoing investigations and to comply with privacy laws in various countries.

At the hearing prosecutors seemed a bit wistful that they couldn't reveal the names, which were provided to Judge Richard Leon in a sealed file. Lori Weinstein, the dogged prosecutor who pursued the case, said the department could not provide exact names. But, she said, the documents were sprinkled with clues to provide "sufficient clarity" for the court to figure out who was who.

Some identifications are vague -- there are plenty of "government officials." But others are more specific. (Hello, "Wife of the former Nigerian Vice President, a dual U.S.-Nigerian citizen.") ProPublica figures that with the help of readers, we might be able to ID at least some of these folks. Below, you'll find descriptions of the bribees. Send us a name and a link sourcing the information.

To get things started, take the case of the Argentine identity card contract. The SEC's complaint said that Siemens paid bribes to a certain "president of Argentina" who left office in 1999. Not too hard to figure out that one -- Carlos Menem ran the country from 1989 to 1999. Looks like the buck really did stop there.

This is by no means an exhaustive list. As of last count, 16 countries had investigations ongoing into Siemens. Our list below includes only those bribery schemes detailed in the formal complaints by the Justice Department and the Securities and Exchange Commission.

E-mail us if you find clues to figure out the other grafters.

Source: SEC Complaint, p. 21
National Identity Card contract (1998-2004)
Contract Amount: $1 billion
Bribe Amount: $40 million

  • President of Argentina until 1999 (Carlos Menem)
  • Minister of the Interior
  • Head of Immigration Control
  • Cabinet ministers

Source: SEC Complaint, p. 19
Mobile Phone contract (2004-2006)
Contract Amount: $40.9 million
Bribe Amount: $5.3 million

  • Son of then-Prime Minister
  • Minister of Posts & Telecommunications
  • Director of Procurement for the Bangladesh Telegraph & Telephone Board
  • In addition, Siemens Ltd. Bangladesh hired relatives of two BTTB and Ministry of Posts and Telecom officials.

Source: SEC Complaint, p. 14
Metro contracts (2001-2007)
Valencia and Maracaibo metro systems
Contract Amounts: $642 million
Bribe Amount: $16.7 million

  • A high-ranking member of the central Venezuela government
  • Two prominent Venezuelan attorneys acting on behalf of government officials
  • A former Venezuelan defense minister and diplomat

Source: SEC Complaint, p. 17
Power plants (2002-2005)
Contract Amount: $786 million
Bribe Amount: $20 million

  • Former director of the Israel Electric Company
  • Payments routed through brother-in-law of former CEO of Siemens Israel Ltd.

Source: SEC Complaint, p. 20
Telecommunications projects (2000-2001)
Contract Amount: $130 million
Bribe Amount: At least $4.5 million

  • Wife of the former Nigerian Vice President, a dual U.S.-Nigerian citizen who lived in the U.S.
  • "likely" the former President of Nigeria
  • "likely" the former Vice President of Nigeria

Source: SEC Complaint, p. 22
Hospital equipment sales (2005-2006)
Contract Amount: $6 million
Bribe Amount: $383,000

  • Government officials

Source: SEC Complaint, p. 27
Mobile network (2002)
Contract Amount: $35 million
Bribe Amount: $140,000
Note: Siemens did not win the project but agreed to pay 8 percent to 14 percent of project value to Vietnamese government officials

  • "likely" Vietnamese Ministry of Defense officials
  • Vietel, state-owned mobile phone network

Source: SEC Complaint, p.16
Metro trains and signaling devices contracts (2002-2007)
Contract Amount: $1 billion
Bribe Amount: $22 million

  • Government officials

Source: SEC Complaint, p. 18
High voltage lines (2002-2003)
Contract Amount: $838 million
Bribe Amount: $25 million

  • Government officials

Source: SEC Complaint, p. 23
Medical equipment sales (2003-2007)
Contract Amount: $295 million
Bribe Amount: $14.4 million

  • Deputy Director, Songyuan City Central Hospital, convicted in China and sentenced to 14 years in prison

Source: SEC Complaint, p.24
Hospital equipment sales (1998-2004)
Contract Amount: Unknown
Bribe Amount: $650,000

  • Chinese hospital officials

Source: SEC Complaint, p. 25
Traffic control system (2004-2006)
Contract Amount: $27 million
Bribe Amount: $741,419

  • Government officials

Source: SEC Complaint, p. 27
Hospital equipment (2000-2007)
Contract Amount: Unknown
Bribe Amount: $55 million

  • Russian state-owned hospital officials

Source: SEC Complaint, p. 26
Refinery modernization (2004)
Contract Amount: Unknown
Bribe Amount: $2.6 million

  • Senior official of Pemex, state-owned oil company

Source: SEC Complaint, p. 28
Oil for Food program (2000-2003)
Contract Amount: $124 million
Bribe Amount: $1.7 million

  • Iraqi Ministry of Electricity officials
  • Iraqi Ministry of Oil official
So who are these folks? Send us a name and a link sourcing the information.

Will readers of the FCPA Blog contribute to this story? Let's see.

* * *
A Siemens / Jefferson Link? Meanwhile, a story in the Dec. 24 edition of Harper's Magazine by Ken Silverstein refers to the earlier joint ProPublica/New York Times story about Siemens, and then says: "Now ProPublica has asked for help identifying some of the alleged recipients of the bribes who are described but not named in the SEC complaint. One of those people appears to be Jennifer Atiku-Abubakar, who is tied to the scandal involving the former Louisiana congressman William Jefferson and is also a donor to the Republican Party. But I want to emphasize that I have no way of knowing whether the charges made in the complaint about her are accurate. . . . According to this Washington Post story, she is the wife of Atiku Abubakar, the very controversial former vice president of Nigeria from 1999 to 2007."


Siemens: Systematic Global Corruption

[Updated and Corrected] It was a corporation that tolerated fraud, deceit and concealment. There were slush funds used to bribe public officials. There were phony contracts and fake invoices to cover up the corruption, and there was a boardroom that knew for years what was happening but feigned ignorance. And yet it was one of the world's most important companies, a global powerhouse in electronics and electrical engineering, with nearly 400,000 employees and yearly revenues above $100 billion.

As reported Friday, Siemens AG will plead guilty as early as Dec. 15th to Justice Department charges of violating the Foreign Corrupt Practices Act, likely resulting in fines of $450 million. And once an expected agreement with the Securities and Exchange Commission is signed, the company will also be required to disgorge at least $350 million of its tainted profits.

The Justice Department's Information charging Siemens in the biggest FCPA enforcement action ever tells of more than 4,000 payments worth at least $1.4 billion to foreign officials to obtain or retain business -- and systematic and intentional violations of the internal controls and books and records provisions that might have prevented or detected the payments (15 U.S.C. §§ : 78m(b)(2), 78(b)(5) and 78ff(a)).

How could it have happened? Because of the corporate structure Siemens created and the culture it nourished. Where operating groups and foreign subsidiaries were accountable for their bottom line but little else. Where ethics training didn't happen. Where compliance personnel and inside auditors were choked off from resources and hobbled by internal restrictions and a confused mission. Where reliable reports to headquarters of large-scale corruption weren't investigated. Where senior employees known to have paid bribes and cooked the books were never disciplined -- but instead were allowed to retire with benefits, bonuses and severance packages.

And then there's the story in the Sentencing Memorandum of Siemens' eventual road to redemption. Because of the scope of its bribery, the company faced fines under the Federal Sentencing Guidelines of up to $2.7 billion. But the DOJ's prosecutors are asking for a penalty reduced to $450 million. And they haven't charged Siemens under the FCPA's antibribery provisions, so it probably won't be barred from U.S. government contracts. Why? The Justice Department said it views as exceptional Siemens’ wide-ranging cooperation efforts throughout this investigation, which included a sweeping internal investigation, the creation of innovative and effective amnesty and leniency programs, and exemplary efforts with respect to preservation, collection, testing, and analysis of evidence. ... More on that in later posts.

For today, here are some key allegations from the 36-page Information:

  • In April 2006, in response to a special audit request by the board of directors, Siemens’ outside auditors reported at least 250 suspicious payments made through the parent to companies in foreign jurisdictions. The audit report was provided to the board of directors, members of management and the Corporate Compliance Office. But no one made any attempt to investigate these facts, or explore whether they were related to other similar instances of wrongdoing.
  • From 2004 to 2006, in addition to learning of corruption issues involving Siemens in Nigeria, Italy, Greece, Liechtenstein, and elsewhere, the company's senior management learned of government investigations into corruption by Siemens in Israel, Hungary, Azerbaijan, Taiwan, and China. Nevertheless, executives and senior management failed to adequately investigate or follow up on any of these issues.
  • Siemens also failed to take effective disciplinary measures with respect to any of the employees implicated in the various investigations. For example, the three managers implicated in the Italian cases each received a severance package standard for early retirees, despite the fact that certain Siemens board members knew that at least two of the managers had already admitted to paying bribes at the time of their retirement.
  • From 2004 to 2006, the Corporate Compliance Office continued to lack resources, and there was an inherent conflict in its mandate, which included both defending the company against prosecutorial investigations and preventing and punishing compliance breaches. In addition, there were extremely limited internal audit resources to support compliance efforts. All of these factors undermined the improved policies because violations were difficult to detect and remedy, and resources were insufficient to train business people in anti-corruption compliance.
  • There was a consistent failure on the part of certain members of management to alert the Audit Committee to the significance of the compliance failures discovered within Siemens. Reports to the Audit Committee by the Chief Compliance Officer were principally status reports on prosecutorial investigations and often conveyed incomplete information. In some instances, management provided inaccurate information in response to Audit Committee inquiries. At no time did management convey to the Audit Committee a sense of alarm or growing crisis.
And here, from the final paragraph of the Information, are the DOJ's books-and-records charges against the company:

From at least March 2001 to November 2006, Siemens knowingly falsified and caused to be falsified books, records, and accounts required to, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the company. In doing so, Siemens:

(a) used off-books accounts as a way to conceal corrupt payments;

(b) entered into purported business consulting agreements with no basis, sometimes after Siemens had won the relevant project;

(c) justified payments to purported business consultants based on false invoices;

(d) mischaracterized bribes in the corporate books and records as consulting fees and other seemingly legitimate expenses;

(e) accumulated profit reserves as liabilities in internal balance sheet accounts and then used them to make corrupt payments through business consultants as needed;

(f) used removable Post-It notes to affix signatures to approval forms authorizing payments to conceal the identity of the signors and obscure the audit trail; and

(g) drafted and backdated sham business consulting agreements to justify third party payments; and

(h) falsely described kickbacks paid to the Iraqi government in connection with the Oil for Food Program in its corporate books and records as commission payments to agents when Siemens and Siemens France, Siemens Turkey and others were aware that a substantial portion of these payments was being passed on to the Iraqi government in exchange for being awarded contracts with the Iraqi government.

Download a copy of the DOJ's Information charging Siemens AG here.

Download the DOJ's Sentencing Memorandum here.

Download here the charges related to Argentina, Bangladesh and Venezuela.

Download the Joint Statement here.

* * *
Our special thanks to readers who assisted in compiling the documents filed by the DOJ in U.S. District Court in Washington, D.C. Friday. Those linked above are at the heart of this extraordinary FCPA enforcement action.



Mandarins Gone Wild

Las Vegas is Everyman's cut-rate Babylon. Not far away there is, or was, a roadside lunch counter and over it a sign proclaiming in three words that a Roman emperor's orgy is now a democratic institution. "Topless Pizza Lunch." ~Alistair Cooke

According to the Associated Press (which based its reporting on stories in the state-run Xinhua News Agency), 23 officials from the eastern Chinese city of Wenzhou took a three-week trip to the U.S. The jaunt cost taxpayers $94,000, which the Communist Party has now ordered the officials to pay back.

The party animals (党动物) visited nearly a dozen American cities over three weeks but spent just five days on official business. They hit the beaches in Hawaii, caught a sex show in San Francisco, and spent two nights in $700 suites at the Sahara Hotel & Casino in Las Vegas. They said the purpose of their trip was to gain "An Overview of American History" and to study "Honest and Clean Government Management." And if one of them hadn't lost a bag on the Shanghai subway that contained dozens of receipts with lurid hand-annotated comments, their cover story would have worked. But whoever found the bag posted its contents on the Internet, and details of the escapade then spread "like wildfire across Chinese cyberspace over the past week."

Although the trip in question was on the public tab and doesn't involve the Foreign Corrupt Practices Act, it does show what regulators from China expect to see and do when they travel to the U.S. And those expectations can cause serious problems for American companies sponsoring the visits. Here's how.

The FCPA allows payments to foreign officials for expenses related directly to “the promotion, demonstration, or explanation of products or services" that are "reasonable and bona fide.” 15 U.S.C. §§ 78dd-1(c)(2)(A) and 78dd-2(c)(2)(A). The affirmative defense, however, is notoriously risky, mainly because no one is quite sure what reasonable and bona fide really means. So compliance-minded companies play it safe by adopting elaborate restrictions on what they'll pay for and what they won't. The result is that anything resembling entertainment usually gets the chop. Fun is out, work is in. Think of it as the no-monkey-business rule.

But as the saga of the 23 travelers shows, regulators from emerging economies often expect fun, fun and more fun when they land on foreign shores. What they call a business trip, we'd call spring break. So a point to remember is this: The expectations of the travelers don't change the host's compliance responsibilities. A compliant company can pay or reimburse only those expenses that are reasonable and bona fide and related directly to the promotion or demonstration of a product or services. We're not really sure what all that means. Except that it probably doesn't include tuition for a surfing school on Oahu. Too bad.



Rocket Scientist Pleads Guilty

A Virginia-based scientist who sold controlled space-launch technology to China by bribing government officials there has pleaded guilty to violating the Foreign Corrupt Practices Act. Shu Quan-Sheng (left), 68, a native of China, naturalized U.S. citizen and PhD physicist, also pleaded guilty to two counts of violating the Arms Export Control Act by delivering defense articles and services to the PRC without first obtaining the required export license or written approval from the State Department.

In 2006, Shu offered "percentage points" worth a total of $189,300 to officials at a research institute affiliated with the China Academy of Launch Vehicle Technology. He was trying to land a contract to develop a liquid hydrogen tank system for a heavy payload launch facility located on Hainan Island in the PRC. In January 2007, the $4 million hydrogen liquefier project was awarded to a French company that Shu represented.

For violating the Foreign Corrupt Practices Act, Shu faces up to five years in prison and a fine of $250,000 or twice the gross gain resulting from the FCPA offense. He also faces up to 10 years in prison and a $1,000,000 fine for each of the two violations of the Arms Export Control Act. His sentencing is scheduled for April 6, 2009.

Shu's company, AMAC International Inc., is based in Newport News, Virginia and also has an office in Beijing. According to its website, AMAC is "a high tech company operating at the cutting edge of technology." The site says because of its accomplishments "in Research & Development of Superconducting RF Power Technologies, Magnetic Levitation and Cryogenics in space, AMAC has been awarded more than $2,000,000 of innovative research grants from the US Department of Energy (DOE) and National Aeronautics & Space Administration (NASA)."

We noted in a prior post that Shu's arrest in September was similar to arrests earlier that month of U.S. citizens Nam Nguyen, Joseph Lukas, Kim Nguyen, and An Nguyen, along with their Philadelphia-based company, Nexus Technologies (see our post here). They were charged with one count of conspiracy to violate the Foreign Corrupt Practices Act and four substantive counts of violating the FCPA. They're accused of bribing government officials in Vietnam to secure contracts to supply high-tech items -- including third-party underwater mapping and bomb containment equipment, helicopter parts, chemical detectors, satellite communication parts and air tracking systems. That case doesn't yet involve charges under U.S. export laws.

View the Justice Department's November 17, 2008 release here.



Siemens Announces €1 Billion Reserve

Siemens AG said yesterday that it has reserved €1 billion in fiscal 2008 "in connection with the settlement being sought by the company and with authorities in Germany and the United States." The short statement also said, "This current estimate is based on the status of ongoing discussions being held between the company and authorities in Germany and the U.S. The company will make no further comments on the ongoing proceedings."

The statement is available here.

The amount of the reserve for a possible settlement with U.S. authorities is lower than expected.

Siemens has admitted that its questionable payments around the globe amounted to at least €1.3 billion. In addition to Germany and the U.S., the company faces corruption investigations in Switzerland, Italy, Greece, China, Hungary, Russia, Norway, and Indonesia.

Earlier this year, Siemens said it plans to sue nearly a dozen former executives, including two former chief executives, for failing to prevent the company's corrupt practices. It also agreed last year to pay a fine in German proceedings of €201 million.

Siemens had hoped to settle the U.S. proceedings by late 2007. Its talks then with U.S. authorities were apparently derailed when the company found that the scope of its global corruption was more extensive than originally disclosed.

View our prior posts about Siemens here.



U.S. Law Firms Face China Bribery Probe

At least two unidentified American law firms with offices in Beijing and Hong Kong have been mentioned in connection with an anti--corruption sweep in China. The current investigation is apparently linked to Avon Product's Foreign Corrupt Practices Act disclosure two weeks ago. The direct seller of beauty products reported it had launched an internal review into possible violations of the FCPA that involve "travel, entertainment and other expenses" paid to Chinese officials.

The Wall Street Journal and Reuters are now reporting the detention of at least two senior officials from China's Ministry of Commerce who oversaw the licensing of foreign companies. Guo Jingyi and Deng Zhan were picked up recently, along with one or two lawyers from Seafront, a Chinese law firm said to have close ties to Ministry of Commerce officials. One of the detained lawyers is Seafront's Zhang Yudong, a prominent Beijing-based attorney who helps foreign companies obtain business and investment licenses in China.

Reuters also says Chinese investigators are "reviewing foreign investment cases involving at least two U.S. law firms with offices in Hong Kong and Beijing, part of a growing corruption probe, the sources said, declining to name the firms."

This is the first time we've heard of Chinese anti-corruption investigators looking closely at local and foreign lawyers. Any American law firms named by Chinese law enforcement agencies may risk criminal prosecution at home under the Foreign Corrupt Practices Act. The law bans corrupt payments directly or indirectly to foreign officials to obtain or retain business, including payments to secure business and investment licenses. No major American law firms have been named in FCPA enforcement actions or publicly disclosed investigations since the law came into effect in 1977.

Although every U.S. law firm is required to comply with the Foreign Corrupt Practices Act, not all firms have been diligent about their own compliance efforts, and that puts them at risk. In FCPA training sessions we've conducted for U.S. law firms, we've noticed that most American lawyers working overseas are familiar with the FCPA and can usually spot potential problems. In contrast, foreign lawyers practicing with American firms in non-U.S. offices sometimes know little or nothing about the FCPA (and may be reluctant to ask for help in understanding it). Yet those same lawyers are frequently called upon to help clients secure business and investment licenses in high-risk countries such as China. The work requires daily contacts with regulators, either directly or through intermediaries, and many of the regulators openly expect illegal gifts and payments.

American law firms helping clients overseas -- either from offices in foreign countries or in the United States -- should have FCPA compliance programs in place. The programs need to include large doses of regular FCPA education and training for all lawyers, and for staff in sensitive positions.


This weekend, with Tuesday in mind, we watched the 1933 film, Gabriel Over the White House. The film's concrete predictions about the uses and abuses of executive power make it one of the most interesting American political movies ever made. After 75 years, it's still amazingly relevant. This clip with Gene Healy from the Cato Institute talking about Gabriel will give you the idea:

Good luck to everyone hoping to cast a ballot on Tuesday.

We'll be back on the other side of the election.



Ding Dong, FCPA Investigation Calling

Beauty-products giant Avon said Monday it has launched an internal investigation into possible Foreign Corrupt Practices Act violations in China. The investigation may be linked to the payment of improper promotional expenses. Avon -- with five and a half million independent sales representatives in more than 100 countries -- is the world's largest direct seller. The company's FY2007 revenues were $9.9 billion.

China imposed restrictions on direct selling in the late 1990s that forced Avon to market its products through shops and boutiques. Two years ago, the company convinced China's regulators to allow its traditional door-to-door sales model. Avon's FCPA disclosure refers to "certain travel, entertainment and other expenses" but doesn't say if the investigation involves promotional expenses for Chinese regulators involved in that decision.

Foreign companies often feel pressure to sponsor trips by Chinese regulators, who aren't shy to ask for such perquisites. Last week we discussed the FCPA's affirmative defense for payments to officials related directly to “the promotion, demonstration, or explanation of products or services" that are "reasonable and bona fide.” 15 U.S.C. §§ 78dd-1(c)(2)(A) and 78dd-2(c)(2)(A). That defense, as we said, is loaded with uncertainty and very difficult for companies to safely use.

Here's the portion of the company's release that deals with the FCPA investigation:

Avon Products, Inc. (NYSE: AVP) announced today, October 20, 2008, that it is voluntarily conducting an internal investigation of its China operations, focusing on compliance with the Foreign Corrupt Practices Act ("FCPA"). The Company, under the oversight of the Audit Committee, commenced in June 2008 an internal investigation after it received an allegation that certain travel, entertainment and other expenses may have been improperly incurred in connection with the Company's China operations. The company has voluntarily contacted the Securities and Exchange Commission and the United States Department of Justice to advise both agencies that an internal investigation is underway. The internal investigation is in its early stage and no conclusion can be drawn at this time as to its outcome.
View Avon's full "Statement on Voluntary Disclosure" (October 20, 2008) here.



Rocket Scientist Arrested Under FCPA

The U.S. Department of Justice reported the arrest in Virginia on Wednesday of a physicist accused of bribing Chinese government officials in exchange for contracts to supply space-launch technology that he illegally exported to China.

The DOJ said Shu Quan-Sheng, 68, a native of China, naturalized U.S. citizen, and PhD physicist, was arrested in Newport News by FBI agents. Shu controls AMAC International, a high-tech company based in Newport News with an office in Beijing. He appeared in U.S. District Court for the Eastern District of Virginia, Norfolk Division.

Shu has been charged with bribing and attempting to bribe a foreign government official in violation of the Foreign Corrupt Practices Act. He's also charged with violating the Arms Export Control Act by unlawfully exporting a defense service and a defense article to foreign persons without prior approval. He faces up to 10 years in prison for each violation of the Arms Export Control Act, and five years in prison for violating the FCPA.

The complaint alleges that Shu offered bribes to government officials in the PRC’s 101st Research Institute to induce the award of a $4 million contract for a hydrogen liquefier to a French company that Shu and AMAC represented. The 101 Institute, as it's known, is part of the China Academy of Launch Vehicle Technology. The French company received the contract in January 2007 and was obligated to pay Shu a success fee of ten to fifteen percent.

According to the complaint, beginning around January 2003, Shu worked with several PRC government entities involved in the development of a space launch facility on China's Hainan Island. The facility is designed to house liquid-propelled heavy payload launch vehicles to send space stations and satellites into orbit, as well as provide support for manned space flight and future lunar missions.

The DOJ says the liquefier contract was the first of perhaps five projects by AMAC and the French company related to ground-based support for launch vehicles at the new Hainan Island facility. According to the DOJ, Shu provided technical expertise and purchasing assistance for components critical to the use of liquefied hydrogen -- including cryogenic pumps, valves, transfer lines and refrigeration equipment. He was also instrumental in arranging for PRC officials to visit various European space launch facilities and hydrogen production / storage facilities.

The DOJ says Shu lacked "the required licenses or written approvals with respect to brokering, export of defense articles, or proposals to provide defense services to the PRC."

Shu was investigated by the FBI, with assistance from U.S. Immigration and Customs Enforcement, and the U.S. Department of Commerce, Office of Export Enforcement. The Counterespionage Section of the Justice Department’s National Security Division also assisted.

Shu's arrest is similar in many ways to arrests earlier this month of U.S. citizens Nam Nguyen, Joseph Lukas, Kim Nguyen, and An Nguyen, along with their Philadelphia-based company, Nexus Technologies (see our post here). They were charged with one count of conspiracy to violate the Foreign Corrupt Practices Act and four substantive counts of violating the FCPA. They're accused of paying bribes to officials at Vietnam’s Ministries of Transport, Industry and Public Safety to secure contracts to supply high-tech items -- including third-party underwater mapping and bomb containment equipment, helicopter parts, chemical detectors, satellite communication parts and air tracking systems. That case, which doesn't yet involve charges under U.S. export laws, was also investigated by both the FBI and the U.S. Department of Commerce, Office of Export Enforcement.

Shu's company, AMAC, describes itself on its website as "a high tech company operating at the cutting edge of technology." The site says because of its accomplishments "in Research & Development of Superconducting RF Power Technologies, Magnetic Levitation and Cryogenics in space, AMAC has been awarded more than $2,000,000 of innovative research grants from the US Department of Energy (DOE) and National Aeronautics & Space Administration (NASA)."

In September 2002, according to its website, AMAC, in cooperation with the Virginia Economic Development Partnership, the U.S. Department of Commerce, and the Small Business Development Center of Hampton Roads, hosted a workshop "for Virginia's business owners interested in exporting to China."

Charges in a criminal complaint, as the DOJ says, are mere allegations and defendants are presumed innocent unless and until proven guilty in a court of law.

View the DOJ's Sept. 24, 2008 release here.



More Than Gold

Just a generation ago, the idea that China would host the greatest Olympics ever would have been outlandish. Black bicycles, gray Mao suits, grim faces -- it was a closed country, both fearful and feared. But for the past 16 days, the world has witnessed something awesome. A new and beautiful China -- smiling, proud, and graceful. Traditional but suddenly modern, and above all a nation now capable and effective.

Could anyone who knew the country back then have imagined it? That around the globe the Bird's Nest and Water Cube would become as familiar as the Great Wall and the Summer Palace. That scores of Chinese athletes would weep in victory. That thousands of exuberant local fans would pack the basketball venue, many wearing Kobe's jersey, whooping it up as their "Little Flying Warrior" brought his second-half brilliance to the Games' last event.

The magnificent sporting performances throughout the Games paid tribute to China's great staging, keeping the focus on the play and off the politics. The country is still a work in progress but it's rising fast, powered by pride and purpose, and lifting the rest of Asia with it. Korea's baseball team, Mongolia's boxers, Singapore's ping-pong paddlers -- they all reflect the new confidence of the Orient re-made.

The PRC has often appeared in these posts for the wrong reasons. But not today.

Congratulations, China.



Trouble For Siemens In South America

Scandal-plagued Siemens now faces possible charges of public corruption in Argentina. Police in Buenos Aires raided Siemens' office there in connection with a bribery investigation. The United States, Greece, Italy, China, Hungary, Indonesia and Norway are also investigating whether Siemens broke anti-corruption laws.

Here's a dispatch from the August 16, 2008 online edition of Deutsche Welle:

Argentine authorities on Friday searched the Buenos Aires offices of German technology giant Siemens, in an investigation of the payment of bribes during the 1989-99 government of former Argentine president Carlos Menem.

German media reported in recent days, based on court documents, that Menem allegedly received a direct payment from Siemens of $16 million (10.9 million euros). The firm reportedly expected to pay $100 million in bribes to Argentine officials including Menem and the then ministers of finance and interior.

Siemens' Argentine headquarters, located near the historic Plaza de Mayo in central Buenos Aires, were searched in an effort to secure evidence on an order from Judge Ariel Lijo.

Former Siemens officials claimed -- in the context of a broader investigation against the German multinational firm -- that the company paid bribes in Argentina. German courts forwarded the information to authorities in Buenos Aires.

Siemens in the 1990s was seeking a $1.26-billion contract to digitalize Argentine identity documents and other services, the daily Sueddeutsche Zeitung reported. The contract was signed under Menem in 1998 but cancelled in 2001 by his successor, President Fernando de la Rua.

Later, Siemens allegedly paid further bribes until 2004 -- under former Argentine president Nestor Kirchner, husband of current President Cristina Fernandez de Kirchner -- in an effort to have the contract restored.