SFO Targets F1 Supremo Ecclestone

The U.K. Serious Fraud Office may investigate bribery allegations against Formula One boss Bernie Ecclestone, left, according to reports from Reuters and others.

Ecclestone, 81, testified in a German court last week that he 'paid former BayernLB banker Gerhard Gribkowsky to stay quiet and keep tax authorities at bay while acquiring Formula One rights five years ago,' Reuters said.

F1 is the top class of single-seater car racing sanctioned by the Fédération Internationale de l'Automobile.

Gribkowsky is on trial in Germany for taking $44 million from Ecclestone. In return, prosecutors charge, the banker made sure BayernLB’s F1 stake went to Ecclsestone and his companies.

U.K. Attorney General Dominic Grieve has confirmed the SFO's involvement, according to the Financial Times.

'The SFO is aware of the allegations against Mr. Ecclestone and is liaising with the authorities in Germany to ascertain if there is a case to answer in the U.K.,' a Serious Fraud Office spokesman told the Financial Times.

The Telegraph reported today that Ecclestone, a U.K. citizen, told authorities the German banker extorted the payment.

Ecclestone and his family trust, Bambino Holdings, have admitted making the payments but claim they were blackmailed by Gribkowsky who threatened to go to HM Revenue & Customs with evidence that Ecclestone was more involved in the running of Bambino than he was allowed under the law. Neither Ecclestone nor Mullens, until recently a director of Bambino, have been charged with any crime.

Ecclestone testified in Gribkowsky's trial that a tax investigation into Formula One could have been 'a disaster' for him and his companies that could have cost him more than £2 billion pounds, Reuters said.

In 2010, F1 reported revenue of $1.6 billion, according to Autoweek.

The Law Ain't Broke

On Monday, Kyle Sheahen told us how useless the FCPA's two affirmative defenses are. He suggested that Congress fix the local-law and promotional-expenses defenses.

But at least two readers, one from the private sector and another from the DOJ (apparently), dissented. Both believe the defenses work, just not at trial. Here's what they had to say.

From Compliance Officer, August 16:

While the promotional expenses defense might not be useful at trial, it is the underpinning for a lot of companies' compliance programs around gifts. Companies must give gifts when operating internationally; it is simply too much a part of a lot of cultures to avoid. When operating in the public sector, however, these gifts present FCPA issues.

Companies use the promotional expenses defense to justify their permissive gift-giving policies.

From a compliance perspective, the problem with the defense isn't its utility---or lack thereof---at trial, but rather that it permits gifts during the course of the contracting process. When I'm analyzing a gift, I look at the potential for corrupt intent, and the affirmative defense. During the contracting process, you're more squarely under the defense, but to my mind, the optics are worse when looking at potentially corrupt intent. It looks like you're giving the gift to get the contract.

But if the gift is just to "maintain the relationship" (a phrase I hear quite often), you're less covered by the defense, but there's less chance that you're trying to get a quid pro quo.

And from Federal Prosecutor, August 17:

One cannot deduce from the lack of successful uses of statutory defenses at trial the conclusion that those defenses are meaningless.

In practice, trials take place in but a small subset of cases brought, cases brought are but a small subset of investigations, investigations look at but a small subset of real-life situations, and only a small subset of real-life situations are going to raise these particular factual issues in the first place. The ability of these statutory defenses to steer behavior within acceptable limits and to ward off prosecution cannot be judged by how many trial defendants get off on them. There is no need for a legislative fix just to even the odds for trial defendants.

That the law ain't broke is best exemplified by the author's dismissive discussion of OECD's suppression of affirmative defenses based on extortion. This is a considered policy choice to flush out corruption by giving no quarter to businessmen who wittingly profit from it. Permitting a defense based on extortion would simply take the heat off of businessmen to comply with the law, to report corrupt officials squeezing them, and to blow the whistle on their competitors who take the easy way. The end result of such a defense -- more corruption. Admittedly, though, there may be more exciting trials for law students to follow.

NATCO Settles "Extorted" Bribe Case

The Securities and Exchange Commission kicked off the FCPA-enforcement year this week with civil books and records and internal controls charges against Texas-based oil and gas services firm NATCO Group Inc. The company admitted that its wholly owned subsidiary, TEST Automation & Controls, Inc., "created and accepted false documents while paying extorted immigration fines and obtaining immigration visas in the Republic of Kazakhstan."

NATCO agreed to pay a $65,000 civil penalty. In settling with the SEC in federal court in Houston, NATCO admitted that its "system of internal accounting controls failed to ensure that TEST recorded the true purpose of the payments, and NATCO's consolidated books and records did not accurately reflect these payments." It also consented to an administrative cease and desist order against future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act.

The case confirms that civil FCPA charges can result from paying blackmail money to protect the welfare of employees overseas. Many companies are faced with extortionate demands from foreign police, bureaucrats and regulators, who threaten to hold, expel or even harm employees if ransoms aren't paid. There have always been questions whether those involuntary payments can violate the FCPA.

In criminal antibribery cases --  where intent is an element of the FCPA offense -- extortion is a defense. The issue came up in last year's criminal trial of Frederic Bourke for conspiracy to violate the FCPA. When he asked for a jury instruction on "true extortion," Judge Shira Scheindlin said evidence of extortion would go to the issue of whether Bourke possessed a corrupt intent in making alleged illegal payments. She explained that the government must prove beyond a reasonable doubt that a defendant had an improper motive or purpose for a payment intended to induce the recipient to misuse his official position in discharging an official act. On the other hand, she said, evidence of extortion can show the defendant acted without a corrupt intent. See our post here.

But unlike criminal cases, civil books and records and internal controls charges don't require mens rea or corrupt intent. So extortion isn't a defense. In NATCO's case, the SEC acknowledged the extortion. It said TEST's employees were threatened with fines, jail or deportation, and they believed the threats to be genuine. NATCO's violations, however, occurred not in paying the ransom but in mischaracterizing the payments to cover them up.

Here, from the SEC's complaint, is more of what happened:

In February and September 2007, Kazakh immigration prosecutors conducted audits and claimed that TEST expatriate workers lacked proper immigration documents. The prosecutors threatened to fine, jail or deport the workers if TEST did not pay cash fines. The TEST employees believed the prosecutor’s threats to be genuine. They sought guidance from TEST’s senior management in Harvey, Louisiana, who authorized the payments.

The TEST employees in Kazakhstan used personal funds to pay the prosecutors $25,000 in February and $20,000 in September, and then obtained reimbursement from TEST.

For the February 2007 payment, TEST made a $25,000 wire transfer to the affected employee. TEST inaccurately described it in an email as “an advance against his [the paying employee's] bonus payable in March.” As further camouflage, the email noted the bonus would be “substantial.” And in TEST’s letter to the bank providing wire instructions, the company inaccurately described the payment as a “Payroll Advance.” TEST then falsely recorded the payment in its books and records as a salary advance.

The SEC said TEST Kazakhstan used consultants to help obtain immigration documentation for its expatriate employees. It said,

One of these consultants did not have a license to perform visa services, but maintained close ties to an employee working at the Kazakh Ministry of Labor, the entity issuing the visas. On two instances, the consultant requested cash from TEST Kazakhstan to help him obtain the visas. . . . [T]he consultant provided TEST Kazakhstan bogus invoices for “cable” from third-party entities he controlled. TEST Kazakhstan knew these invoices were false, but nonetheless presented them to Kazakh banks to withdraw the requested cash. TEST Kazakhstan later submitted the false invoices – which totaled in excess of $80,000 – to TEST for reimbursement. TEST reimbursed these requests despite knowing the invoices mischaracterized the true purpose of the services rendered.

When the violations occurred, NATCO was an issuer. Its common stock was registered with the SEC under Section 12(b) of the Exchange Act and listed on the New York Stock Exchange. In November 2009, NATCO became a subsidiary of Cameron International Corporation, a publicly held reporting corporation listed on the NYSE, and the registration of NATCO’s common stock and its listing on the NYSE ended.

View the Securities and Exchange Commission's Litigation Release No. 21374 and Accounting and Auditing Enforcement Release No. 3102  (both dated January 11, 2010) in Securities and Exchange Commission v. NATCO Group Inc., Civil Action No. 4:10-CV-98 (S.D. Tex.) here.

Download the SEC's civil complaint here.

Download the federal court's final judgment here.

Download NATCO's consent to the final judgment here.

Download the order instituting cease-and-desist proceedings here.

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Special thanks to Marc Bohn in the District of Columbia for help with this post.

Paying The Pirates

This month's online edition of Foreign Policy magazine has an article (here) saying Somali pirates are handing over part of their proceeds to the regional Puntland government in exchange for being allowed to operate in areas it controls.

So what? Stay with us a minute.

The State of Puntland is a semi-autonomous region in northeastern Somalia that's been self-governing since 1998. With 2.4 million people, Puntland has a president and cabinet, a house of representatives and a court system. It has a website. It deals directly with other countries and with international institutions such as the World Bank. It levies taxes and spends money on public projects -- it's operating one airport, for example, and developing another. In other words, it's an actual government.

With the connection between the pirates and the Puntland government in mind, the author of the Foreign Policy article, J. Peter Pham, thinks there's an opportunity to choke off the supply of funds to the bad guys. His idea is to use various anti-terrorism and anti-corruption laws already in place to stop all ransom payments. A case to do that, he says, can be made under the Foreign Corrupt Practices Act.

Is that possible? Let's take a look.

First, not everyone has to obey the FCPA. Issuers and domestic concerns and those acting for them are subject to the law. That probably means some but not all of the shipping companies, insurers and security firms that are dealing with the pirates are covered. A fuller discussion about the reach of the law can be found in our post here.

Next, the FCPA outlaws corrupt payments directly or indirectly to a "foreign official." That's a human being, not a government entity. Payments to a government entity do not violate the FCPA. So even if the pirates are known to be paying the government of the State of Puntland for operating rights, that doesn't mean payments to the pirates violate the FCPA. As we've said before -- no foreign official, no FCPA offense. For more on this, see our post here.

But what if some of the ransom money is known to be going directly into the pockets of members of the Puntland government? They're foreign officials under the FCPA. So wouldn't there be a violation? The answer is still no.

Under American law, a payment that's extorted is not a bribe. Judge Shira Scheindlin, in a ruling in U.S. v. Kozeny last year, explained it this way: The legislative history makes clear that while the FCPA would apply to a situation in which a "payment [is] demanded on the part of a government official as a price for gaining entry into a market or to obtain a contract," it would not apply to one in which payment is made to an official "to keep an oil rig from being dynamited." Quoting from S.Rep. No. 95-114, at 10-11 (1977), reprinted in 1977 U.S.C.C.A.N. 4098, 4108.

Judge Scheindlin said the difference is that in the former situation, the bribe payer made the conscious decision to pay the bribe. So he cannot argue that he lacked the intent. "In other words," she said, "in the first example, the payer could have turned his back and walked away -- in the latter example, he could not." See generally United States v. Gonzalez, 407 F.3d 118, 122 (2nd Cir. 2005).

When pirates hold crews hostage and threaten to kill them and destroy their ships and cargo, it's extortion. Where there's duress, there cannot be a voluntary decision "to enter a market or obtain a contract." So the ransom payments -- no matter where they end up -- aren't illegal under the FCPA or any other United States criminal law.
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