In a securities filing this month, Bank of New York Mellon Corp. said it received a subpoena from the SEC asking about job offers to government officials and internships awarded to their family members.
Entries in family relationships (10)
We at the FCPA Blog are long overdue in recognizing the new resource that is the Global Anticorruption Blog. With my colleague in the legal academy, Harvard Law professor Matthew Stephenson, at the helm, GAB analyzes corruption law issues with uncommon intellectual rigor. They break down issues as few can. In so doing, they add great value to the anti-corruption debates of our day.
A former co-owner and executive of California-based Pacific Consolidated Industries (PCI) pleaded guilty yesterday to violating the Foreign Corrupt Practices Act. Martin Eric Self, 51, of Orange, California pleaded guilty to a two-count information charging him with violating the FCPA by paying more than $70,000 in bribes to a U.K. Ministry of Defence official. The bribes were intended to secure equipment contracts with the U.K. Royal Air Force.
In October 1999, Self, a U.S. citizen, and Leo Winston Smith, then PCI’s executive vice president and director of sales and marketing, had PCI enter into a marketing agreement with a relative of a U.K. Ministry of Defence official. According to the DOJ, Self -- a signatory on PCI's marketing agreements and bank accounts -- admitted that he didn't know of any genuine services provided by the official’s relative. Instead, Self believed the payments probably were benefiting the official in exchange for obtaining and retaining the equipment-supply contracts.
Self is scheduled to be sentenced in federal court on September 29, 2008. Although he faces a maximum sentence of five years in prison per count, his plea agreement contemplates a prison term of eight months, subject to the court's final determination at sentencing.
For his role in the scheme, former marketing head Smith, a co-founder of PCI, was indicted in April 2007. The government says he conspired to bribe the U.K. Ministry of Defence official in order to obtain equipment contracts worth more than $11 million dollars. In addition to the FCPA violations, the indictment also charges Smith with money laundering and tax offenses. He's scheduled to stand trial in July 2008. Self, as part of his plea agreement, will presumably testify against his former colleague. Evidence against Smith is also likely to come from U.K. authorities. Their investigation of the U.K. Ministry of Defence official resulted in his guilty plea in the United Kingdom for accepting bribes from PCI. He was sentenced to two years in prison.
Privately-held PCI manufactures Air Separation Units (ASUs) and other equipment for the military, medical, and oil and gas markets. ASUs generate oxygen in remote, extreme and confined locations. The DOJ said that in late 2003, after the alleged illegal conduct occurred, PCI was acquired by a group of investors who referred the case to U.S. prosecutors and "fully cooperated in the government’s investigation."
Assistant Attorney General for the Criminal Division Alice S. Fisher, who departs from the DOJ later this month, said, “Individuals who resort to bribery and other fraudulent means to secure contracts with foreign governments not only corrupt legitimate bidding processes, but they also damage the integrity of the global marketplace. Furthermore, using an intermediary to make bribe payments will not insulate individuals from prosecution."
Referring to the collaboration by prosecutors in the U.S. and U.K., Ms. Fisher also said, "The coordinated international law enforcement efforts of this case exemplify the type of cooperation needed to fight crime in the 21st century, where physical borders are not boundaries for criminal activity. I would like to thank our colleagues in the United Kingdom for their efforts and assistance in prosecuting this case as well as the FBI and IRS for their investigatory assistance.”
View the DOJ's May 8, 2008 news release here.
In a post here we described our edits to Wikipedia's article on the Foreign Corrupt Practices Act (here). Wiki's old article said a bank owner (pictured far left) whose brother was the minister of finance (far right) would be a foreign official for the FCPA. That's wrong, we said, because although consanguinity might be important, it has never been a definitive test of foreign-officialdome under the FCPA.
One of our readers had this to say about our edits: The omission of prohibitions on payments to family members creates a significant loophole. Are there any cases where business dealings with family members have been examined? My reading of the SEC statement on Statoil is that the Iranian official may not have had the formal authority to guarantee the contract but that it was his family connections which were being purchased.
We replied this way: Good point. But as far as we know, neither the FCPA itself nor any Opinion Releases or cases say that commercial dealings with family members of government officials are per se violations of the FCPA. If a family member is being used to make an illegal payment "indirectly" to a foreign official, then a violation would probably result, in the same way that indirect payments through other agents are illegal. But the mere fact of the consanguinity is not determinative, and that was the problem with Wiki's original article. No question, however, that dealing with family members of foreign officials always raises compliance red flags. It should probably be avoided in most cases because of the risks. But under some circumstances commercial relationships with family members of foreign officials may be permissible under an effective compliance program.
Exhibit A for our answer is FCPA Review Procedure Release No. 82-04 (November 11, 1982) [mislabeled as 82-02 on the DOJ site]. It's available here. In it, the Department of Justice received a review request from Thompson & Green Machinery Company, Inc. ("T & G"). It hired a foreign businessman ("Mr. X") as its agent in connection with a generator sale in a foreign country. However, Mr. X's brother was an employee of the same foreign government to whom T & G was trying to sell its generator. The DOJ gave its blessing, however, after receiving assurances from T & G that (i) the written consultant agreement with Mr. X prohibited him from using any part of his commission to pay a finder’s fee to a third party, and also expressly referred to the FCPA; and (ii) both Mr. X and his brother signed separate affidavits in which they pledged to adhere to the FCPA’s antibribery provisions.
So it's not illegal per se under the FCPA to have commercial dealings with family members of foreign officials. No question, however, that doing so is full of risk. For example, Paradigm's hiring of the brother of an official from Pemex, from which Paradigm was then awarded a contract, was cited as an offense. See our post here. Family members were also involved in FCPA convictions or allegations in U.S. v. Kozeny (see our posts here), U.S. v. Sapsizian & Acosta [see also Alcatel] (S.D. Fla. 2006), SEC v. Bellsouth Corporation (N.D. Ga. 2002), U.S. v. Metcalf & Eddy (D. Ma. 1999), and others.
But the FCPA itself doesn't mention family members, and as of today, Exhibit A above -- FCPA Review Procedure Release No. 82-04 -- remains "good law," if we can refer to a DOJ opinion that way. It means the fact that someone is related by blood or marriage to a foreign official doesn't make the person a foreign official for the FCPA. It does, however, mean dealing with them is always a high-risk proposition. That's why lots of compliance-minded companies ban the practice entirely.
Many thanks to our reader who contributed the thoughtful comment about family relationships and the FCPA.
A reader pointed out that our assault last week on Wikipedia (here) was senseless. That's because if you don't like something on Wiki -- in our case its FCPA article -- just change it. The community site, after all, calls itself "the free encyclopedia that anyone can edit." We adopted our reader's advice. And today we can report that all is well. There's a newly revised FCPA page on the site (here).
In the old article there was a bank owner mistakenly designated as an FCPA foreign official because his brother was the minister of finance. Well, in the revised article he has a new incarnation. He's still a bank owner, but he's also the minister of finance. That's right -- we combined the brothers into a single person. It sounds awkward, but at least our new man's status as a foreign official is confirmed -- not by family relations, which he couldn't do anything about even if he wanted to, but by his choice to take on governmental duties in the unnamed country.
That scenario, by the way, has played out in Indonesia and other countries from time to time. It happens when local business people -- who might be agents or partners of U.S. companies -- are named to government posts, thereby becoming foreign officials for the FCPA. Whenever a sales agent or business partner suddenly becomes a foreign official, there's an urgent compliance need to review the commercial relationship -- and probably terminate it. That's because any business-related payments to the newly-minted foreign official might violate the FCPA. So the example of the bank owner cum-minister of finance works fine for Wiki.
Our few other alterations also found their way into the paragraph at issue. It now reads in relevant part like this:
The meaning of foreign official [under the FCPA] is broad. For example, an owner of a bank who is also the minister of finance would count as a foreign official according to the U.S. government. Doctors at government-owned or managed hospitals are also considered to be foreign officials under the FCPA, as is anyone working for a government-owned or managed institution or enterprise. Employees of international organizations such as the United Nations are also considered to be foreign officials under the FCPA. There is no materiality to this act, making it illegal to offer anything of value as a bribe, including cash or non-cash items. The government focuses on the intent of the bribery rather than on the amount.
It's not a perfect description of the FCPA's coverage, but it's improving. Go Wiki.
Wikipedia -- "the free encyclopedia that anyone can edit" -- has a page on the Foreign Corrupt Practices Act here. It defines the FCPA this way:
The Foreign Corrupt Practices Act of 1977 (15 U.S.C. §§ 78dd-1, et seq.) is a United States federal law known primarily for two of its main provisions, one that addresses accounting transparency requirements under the Securities Exchange Act of 1934 and another concerning bribery of foreign officials.
The article sets out the elements of an antibribery offense like this:
The antibribery provisions of the FCPA, prohibit: 1. Issuers, domestic concerns, and any person 2. From making use of interstate commerce 3. Corruptly 4. In furtherance of an offer or payment of anything of value 5. To a foreign official, foreign political party, or candidate for political office 6. For the purpose of influencing any act of that foreign official in violation of the duty of that official or to secure any improper advantage in order to obtain or retain business.
So far so good.
But be very careful with this article. For example, a paragraph about the application of the FCPA, which strangely appears under the heading "History," makes some good points. But an unqualified statement about "the brother of the minister of finance" misses the mark: The meaning of foreign official is broad. For example an owner of a bank who is also the brother of the minister of finance would count as a foreign official according to the U.S. government. Not really. Consanguinity might be important but it has never been a definitive test of foreign-officialdome under the FCPA.
Wikipedia's article -- one of 2,274,622 in English-- is not among the site's better entries. We're confident, though, that it'll improve with time.
On a higher note, in the article's "External Links" section is one of our all-time favorite FCPA-related pages. Trace International's BRIBEline here says everything you need to know about the universality of public bribery.
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.