The Coming Chaos In Global Enforcement

Anti-corruption laws are breaking out all over.

In a few days, the U.K. Bribery Act will be a reality. Other countries, prodded by the OECD and U.S., are criminalizing overseas public bribery. Spain, the Netherlands, and the Czech Republic are among them. Russia has a new law, so do India and China. Indonesia wants one. In South America, Brazil joins the club, and others are talking about it.

It's good news.

But what happens to a company and its executives if they're prosecuted in three, four, or five jurisdictions for the same bribes? Will the companies pay multiple fines? Will individuals be handed off from one prison to the next?

No one knows how it will work. There's no international superstructure in place to sort it out. And with big money up for grabs, there's sure to be enforcement competition.

Earlier this year, we asked Richard Alderman, head of the U.K.'s Serious Fraud Office, about it. Here's the exchange:

FCPA Blog: When the Bribery Act becomes effective, should global companies fear the prospect of duplicate enforcement actions in both the U.S. and U.K.?

Richard Alderman: The SFO works closely with the DOJ and the SEC. We shall discuss how best to proceed. I do not want to see duplicate actions in each jurisdiction. I want the SFO to be able to agree with our U.S. counterparts on a resolution that we can pursue jointly with the corporate.

FCPA Blog: Isn't the prospect of multiple prosecutions even more disturbing if other countries join the U.S. and U.K. in aggressively pursuing global corruption? Do we need some kind of supra-national enforcement body?

Richard Alderman: It is important that the enforcement authorities liaise closely together so that there can be an overall resolution subject to the decisions of the courts in each jurisdiction. These issues are best left to the authorities in each jurisdiction and the courts.

Good intentions. But as more overseas antibribery laws come on line, will enforcement agencies always cooperate? Or will they sometimes compete?

For starters, the coming uncertainty will make self reporting less attractive. After a voluntary disclosure in Washington, what will happen when prosecutors get a whiff of it in London, Madrid, Prague, Moscow, Beijing, and ten other places?

Yet, with SOX obligations and the new SEC whistleblower rules, can any issuer really make a case against self reporting, even for one-off compliance problems? There are no easy answers.

So, let the chaos begin.

Private Fund Fights Czech Corruption

Financier Karel Janecek: He started the whistleblower fund to reward 'brave people' who stand up against corruption.The FCPA and most laws like it only target bribe payers and not bribe takers. Crooked public officials slip through the net and keep pressuring  foreign investors to pay up.

So prosecuting bribe-taking public officials removes demand and helps companies stay straight. That's why we like what's happening in the Czech Republic.

As reported last month in the Prague Daily Monitor, some prominent private citizens there created a fund that rewards whistleblowers who report suspected corruption in the federal government.

The first two cash awards went to Libor Michalek, former head of the State Environmental Fund, who exposed alleged corruption at the Environment Ministry, and Ondrej Zavodsky, at the Interior Ministry. They received about $30,000 and $15,000 respectively.

The private fund, according to the Daily Monitor, was set up in November by Karel Janecek, a venture capitalist in life sciences. He's since been joined by brewery owner Stanislav Bernard, actor Jan Kraus, economist Tomas Sedlacek, and former intelligence service chief Karel Randak.

The new fund is also seeking changes to Czech law that would "build ethical values in a democratic society," according to its press release.

Former BAE Agent Charged For Bribes

Austrian national Alfons Mensdorff-Pouilly: BAE's agent has been charged in Britain with corruption but his prosecution still needs approval from the U.K.'s attorney general.The U.K.'s Serious Fraud Office on Friday charged one of BAE's former middlemen, Count Alfons Mensdorff-Pouilly, with bribery in connection with arms sales to countries in Eastern and Central Europe. He was formally accused of "conspiracy to corrupt, contrary to section 1 of the Criminal Law Act 1977."

The SFO alleged that Mensdorff-Pouilly, 56, conspired with others from 2002 though 2008 to bribe government officials and representatives from the Czech Republic, Hungary, and Austria. The bribes were intended to secure contracts from those governments for the sale of SAAB/Gripen fighter jets marketed by BAe Systems plc.

David Leigh and Rob Evans, the investigative journalists from the Guardian who first reported BAE's alleged corrupt selling practices nearly five years ago, said Friday that Mensdorff-Pouilly's prosecution still needs approval from Britain's attorney general, Lady Scotland. Mensdorff-Pouilly lives in Luising, Austria and is an Austrian citizen. The attorney general hasn't yet agreed to let the case proceed, the SFO's lawyers said, and they asked the court for a month-long adjournment while she decides. 

These are the first criminal charges arising from the investigation of BAE's practices.

The SFO dropped an investigation in December 2006 into allegations the company bribed members of the Saudi Arabian government in exchange for the sale of Typhoon jet fighters. The SFO said it had to abandon the case after Saudi Arabia threatened to end anti-terrorism cooperation with the British government.

The U.S. Justice Department is reportedly still investigating BAE's payments of about $2 billion to Saudi Prince Bandar bin Sultan. He was formerly ambassador to the United States and some of the payments allegedly passed through U.S. bank accounts he controlled.

The SFO on Friday said its current investigation of BAE has involved collaboration with the Vienna (Austria) Prosecution Office (Staatsanwaltschaft Wien) and police (Bundeskriminalamt) and was coordinated with help from Eurojust. The SFO said it also had help from Czech, Hungarian and Swiss authorities.

View a copy of the Serious Fraud Office's January 29, 2010 release here.

Did EU Rules Ruin BAE's Settlement?

The British press in September reported (here) that BAE Systems -- the U.K.'s biggest defense contractor -- had been given until the end of the month by the Serious Fraud Office to settle bribery charges related to sales in Africa and Eastern Europe or face prosecution. When the deadline passed with no settlement, the BBC reported the two sides couldn't agree, among other things, "on what BAE would admit." We may now know why they couldn't agree.

The Times said Friday BAE's admissions could lead to an EU ban:

Insiders told the Times that one of the major obstacles to a settlement is a European Union law on bribery that states that European governments must not give work to companies found guilty of corruption. The EU directive means that a criminal conviction could ruin BAE, which employs more than 100,000 people and is the biggest supplier to the British Armed Forces. Most experts believe that a financial settlement will be reached that will mean BAE admitting lesser charges not covered by the EU rules.

When BAE's settlement talks broke down in September and the SFO announced it would seek prosecution, British MP Sir Menzies Campbell hinted at the problem with the EU. He told Sky News: "The company is the principal contractor in the programs for the Eurofighter, the aircraft carriers and Joint Strike Fighter, and many other significant procurement projects. These developments have a considerable impact on all of these projects."

The Times and others say BAE may yet settle with the SFO. Both sides want to reach a compromise that may include a large fine but avoid criminal prosecution, saving BAE's business in Europe and elsewhere. 

A resolution like that would resemble settlements the U.S. Justice Department routinely reaches in Foreign Corrupt Practices Act enforcement actions. It uses plea arrangements and pre-trial agreements to avoid prosecuting corporations for antibribery offenses. That in turn allows them to continue doing business with the U.S. government and others.

Some commentators are critical of the American approach. But we've defended the practice:

[T]he DOJ is understandably reluctant to hit corporations head on. The Arthur Andersen prosecution in the aftermath of the Enron scandal demonstrated the catastrophic consequences that can result from a corporate felony charge. For Andersen it was an instant death sentence, even though the firm was later exonerated. That's why the DOJ has since adopted a softer approach to FCPA and other white collar offenses. It offers companies that want to cooperate alternatives in the form of negotiated settlements.

The Justice Deparatment, meanwhile, is reportedly still investigating BAE's payments of about $2 billion to Saudi Prince Bandar bin Sultan. The SFO dropped that investigation in 2006. But is the DOJ moving slowly because of the EU rules? Is there concern a typical Justice Department settlement might also lead to an EU ban on BAE? Is the DOJ having trouble harmonizing its practices with the SFO and the EU?

Lots more will be said and written about this in the coming weeks and months. Stay tuned.

How BAE Got Caught

Investigative reporters may be disappearing from newsrooms everywhere, but they still have an important role to play in holding institutions and people accountable for overseas bribery. Rob Evans of the U.K. Guardian contributed an essay to TI's Global Corruption Report 2009 here. It's about how he and David Leigh broke the BAE story. Their investigation wasn't quick or easy, and not many news organizations these days would have let the story play out the way the Guardian did. But the paper supported its reporters and with time and luck (which came in the form of a couple of well-placed whistleblowers) one of Britain's biggest commercial scandals made it into public view.

Here's part of what Rob Evans had to say:

. . . My experience of working with David Leigh on the Guardian investigation that led to the exposure of the BAE Systems scandal in the United Kingdom is illustrative of the challenges that journalists face in investigating corruption. The articles we wrote prompted the Serious Fraud Office (SFO) to launch an investigation into allegations that BAE Systems, the United Kingdom's biggest arms company, had paid bribes to win contracts from Saudi Arabia and other governments. Tony Blair's government eventually stepped in and stopped the SFO from completing its investigation into the allegations in December 2006. . . .

The investigation into BAE System's payments began in late 2002. Over three days in June 2003 the Guardian published articles into alleged bribery in the Czech Republic, India, Qatar and South Africa. A few weeks later whistleblower Edward Cunningham contacted the Guardian with new allegations of a slush fund that BAE Systems was using to bribe and "sweeten" Saudi officials connected to a huge arms contract. Cunningham spoke out because he was appalled by what he had seen. Those articles in September 2003 reported that BAE Systems was allegedly providing prostitutes, sports, cars, yachts, first-class plane tickets and other inducements. . .

During our investigation we faced a number of challenges. One of the most acute was the difficulty in penetrating the banking system to find out how BAE Systems had made its allegedly corrupt payments. The money flowed from the United Kingdom to the tax haven of the British Virgin Islands to Switzerland and onwards - to the Czech Republic, Romania, Qatar, Tanzania, South Africa and Chile. . . . As the number of investigations expanded around the world, so did the leaks, and slowly a picture of the payments began to emerge. We were working with reporters in other counties who were better placed to find out what was going on in the investigations in their countries and share information with us.

. . . Journalists aiming to expose corruption also need to be persistent. They need time to dig around -- to go and see people who may have information, to look through archives, read long reports to retrieve vital pieces of information buried deep within them, and so forth. Often reporters are prevented from doing this, however, as the media owners are far more interested in celebrity stories, or their next set of profits. For many editors, exposing the dry details of how improper payments have been laundered through bank accounts is, quite simply, less exciting than Britney Spears' latest antics. Many people believe that reporters are now being given less time to investigate stories over an extended period. This is a problem that afflicts reporters in developed countries, and it is even more so for journalists in developing countries. . . .

Read all our posts about BAE here.
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