Cracking Open The FCPA's Secrets

Law firm Hughes Hubbard & Reed, a sponsor of the FCPA Blog, has released its FCPA/Anti-Bribery Mid-Year Alert 2010.

The authors say it's both a quick desk reference and -- at 241 pages -- an authoritative collection of FCPA resources. They're right.

There's exhaustive enforcement-related information -- DOJ and SEC actions, DOJ opinion procedure releases, civil suits and related litigation, and domestic and foreign investigations. There's also plenty of high-level analysis of what's going on with enforcement and compliance. (The "Lessons Learned" section is particularly strong.)

Kevin Abikoff, one of the partners responsible for the Alert, said: "We developed it originally as a comprehensive internal resource for our lawyers and clients. On reflection, we decided to open-source it to the compliance community and beyond. We hope people will find it useful. And we're happy to be able to make a contribution."

Here, for example, is what it says about a subject we've never covered -- management changes:

In certain circumstances, regulators may use enforcement actions as a tool to force a change in management where the regulators believe management is insufficiently attuned to FCPA concerns. Regulators may also reward companies that change management in response to findings of misconduct or seek lesser penalties where management changed before the misconduct came to light. For example, the DOJ praised Siemens for its remedial efforts, including that it “replaced nearly all of its top leadership.” Similarly, in the case of Bristow, the misconduct was discovered by the company’s newly-appointed CEO, and the SEC imposed no monetary penalty on the company. (See, e.g., Technip, Siemens, Schnitzer, Bristow)

On the puzzle of FCPA jurisdiction, it says:

As the Siemens settlement (among others) confirms, U.S. regulators continue to take an expansive jurisdictional view as to the applicability of the FCPA. The charging documents applicable to Siemens Venezuela, Siemens Bangladesh, and Siemens Argentina detail connections, but not particularly close or ongoing connections, between the alleged improper conduct and the United States. Similarly, the United States government has continued to seek the extradition of Jeffrey Tesler and Wojciech Chodan, both United Kingdom citizens who were indicted for their involvement in the Bonny Island, Nigeria bribery scheme and who are described in the charging documents as “agents” of a domestic concern. Clearly, regulators in what they deem to be appropriate circumstances, will look carefully for hooks to establish U.S. jurisdiction over perceived violations of anti-corruption legislation.

And on parent-company liability for foreign subsidiaries, it says:

The U.S. Government will prosecute parent companies based on the conduct of even far-removed foreign subsidiaries and even in the absence of alleged knowledge or direct participation of the parent company in the improper conduct. As a result, as the Willbros Group and several Oil-for-Food settlements make clear, companies must ensure that their anti-corruption compliance policies and procedures are implemented throughout the corporate structure and are extended quickly to newly acquired subsidiaries. (See, e.g., Fiat, Faro, Willbros Group, AB Volvo, Flowserve, Westinghouse, Akzo Nobel, Ingersoll-Rand, York, Bristow, Paradigm, Textron, Delta & Pine, Dow).

The FCPA/Anti-Bribery Mid-Year Alert 2010 was written by Hughes Hubbard & Reed partners Kevin T. Abikoff, John F. Wood, and Gregory M. Williams.

No Good Deed Goes Unpunished

While looking at FCPA enforcement data, Bruce Hinchey, left, made a startling and disturbing discovery about the consequences of self reporting.

Here's his story:

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Dear FCPA Blog,

Many question the Department of Justice’s claim that there are tangible benefits to voluntary disclosure of a FCPA violation.

As a part of a yet unpublished paper, I consider the data from 40 FCPA cases from 2002 through 2009 and the differences between bribes paid and penalties levied against companies that do and do not self-disclose.

In the paper, linear regression analysis of the cases reveals a sound statistical relationship between the amounts a company bribes and the corresponding fine it receives. For now, I will focus on the fine-to-bribe ratio companies face for FCPA violations. The fine-to-bribe ratio is calculated by simply dividing the total penalty a company received by the amount it bribed.

Voluntary Disclosures

Within the voluntary disclosure group the fine-to-bribe ratios ranged from encouragingly low (Bristow Group Inc. and Latinode Inc. stand out with a fine-to-bribe ratio of 0 and .89, respectively) to strikingly high (Baker Hughes Inc. and Schnitzer Steel Industries Inc. had fine-to-bribe ratios of 10.73 and 8.46, respectively). On average, this group faced a 4.53 fine-to-bribe ratio. Thus, it appears as though a voluntarily disclosing company might expect a fine of $4.53 for every dollar given as a bribe.

Involuntary Disclosures

The involuntary disclosure group also had surprisingly high ratios (Flowserve Corp. and Akzo-Nobel NV had fine-to-bribe ratios of 17.37 and 13.42, respectively) and low ratios (the Chevron Corp. and El Paso Corp.’s fine-to-bribe ratios were 1.5 and 1.41, respectively). This group, however, faced an average fine-to-bribe ratio of 3.22, suggesting a non-voluntarily disclosing company might expect a fine of only $3.22 per dollar bribed, compared to the voluntary disclosure group’s 4.53. This ratio would be even lower had it included the disproportionately low fine-to-bribe ratios levied in the cases against Siemens AG and KBR, which I dismissed as outliers.

Remaining Questions

Given the bribe-to-fine ratios in the published cases in recent years, the Justice Department appears not to be following up with its promised benefits. The seemingly disproportionate bribe-to-fine ratios outlined above raise questions about whether current FCPA enforcement is fundamentally fair.

Many thanks,

Bruce Hinchey

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Bruce is a lawyer completing an LLM in government procurement law at the George Washington University Law School. His paper, "Punishing the Penitent: Disproportionate Fines in Recent FCPA Enforcements and Suggested Improvements," can be downloaded at SSRN here.

It was generous of Bruce to share his work with us and our readers. Thank you, Bruce, for blowing our mind.

He's currently looking for a position in an FCPA defense and government contracts practice and can be reached at bhinchey@law.gwu.edu

GE In $23 Million SEC Settlement

General Electric Company, whose compliance program is among the most respected and admired in the world, has settled civil violations of the Foreign Corrupt Practices Act with the Securities and Exchange Commission.

The company today agreed to pay $23.4 million to resolve claims that arose from a $3.6 million kickback scheme by four GE subsidiaries -- two of which were acquired after the offenses occurred. The kickbacks were paid under the United Nation's oil-for-food program. The GE subsidiaries were selling medical and water purification equipment to the Iraqi government.

The SEC charged GE and two subsidiaries -- Ionics Inc. and Amersham plc -- with civil violations of the books and records and internal controls provisions of the FCPA.

The kickbacks were paid from 2000 to 2003 and were not properly accounted for. They consisted of cash, computer equipment, medical supplies, and services to the Iraqi Health Ministry or the Oil Ministry. GE acquired two of the subsidiaries in 2004 and 2005 and became liable for their securities law violations, including FCPA offenses.

Cheryl J. Scarboro, the head of the SEC's FCPA unit, said: "GE failed to maintain adequate internal controls to detect and prevent these illicit payments by its two subsidiaries to win oil for food contracts, and it failed to properly record the true nature of the payments in its accounting records. Furthermore, corporate acquisitions do not provide GE immunity from FCPA enforcement of the other two subsidiaries involved."

In the SEC settlement, GE was ordered to disgorge $18,397,949 of profits and pay $4,080,665 in prejudgment interest and a penalty of $1 million. GE and subsidiaries Ionics Inc. and Amersham plc agreed not to violate Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934.

The SEC said it has taken 15 FCPA enforcement actions against companies involved in the now discredited U.N. oil for food program and has recovered more than $204 million. The program was intended to provide humanitarian relief for the Iraqi population, which faced hardship under international trade sanctions. It allowed the Iraqi government to purchase humanitarian goods through a U.N. escrow account. The Iraqi government instructed vendors to use middlemen and to inflate prices to fund the kickbacks.

In addition to GE, other companies charged under the oil-for-food program include Chevron, Total SA, AB Volvo, Innospec, Ingersoll-Rand, Akzo-Nobel, and Fiat.

The DOJ did not join the enforcement action against GE or the subsidiaries. It usually prosecutes criminal antibribery offenses under the FCPA, which require payments to foreign officials. In GE's case, the kickbacks apparently went directly to Iraqi ministries and not to government officials.

The SEC said that in settling the case, it "considered remedial acts promptly undertaken by GE and the cooperation the company afforded the Commission staff in its investigation."

View the SEC's July 27, 2010 press release here.

View the SEC's Litigation Release No. 21602 and Accounting and Auditing Enforcement Release No. 3159 (both dated July 27, 2010) in Securities and Exchange Commission v. General Electric Company; Ionics, Inc.; and Amersham plc, Civil Action No. 1:10-CV-01258 (D.D.C.)(RWR) here.

View the SEC civil complaint against GE, Ionics, and Amersham here.

Grease For Oil

Larry Buterman (left) from Chadbourne & Parke's New York office sent us an article he published in the Bloomberg Law Reports. It explains why the Justice Department's enforcement actions in the U.N. oil for food cases don't allege antibribery offenses under the Foreign Corrupt Practices Act. The reason: the kickbacks typically went directly to the Iraqi government and not to foreign officials. "[B]y their express terms," he says, "the FCPA's antibribery provisions apply only to payments made to those connected to the government. Payments to a government itself, in contrast, are not covered by the FCPA." (Also see our post here.)

The oil for food program probably helped a lot of average Iraqis. But it also funded the pre-war regime in a systematic, unaccountable and illegal way. Buterman says, "According to a United Nations' Independent Inquiry Committee, between 1999 and 2003, over 2,200 separate companies abused the [program] by making improper payments, totaling over $1.5 billion, to the Iraqi government in order to obtain goods contracts." The entities charged with violations have settled, taken deferred prosecution agreements, and paid about $170 million in fines, penalties and disgorgements. "And," he says, "given the DOJ's July 31, 2009 announcement that it plans to seek extradition of Ousama Naaman—a Canadian national charged with violating the FCPA in connection with the OFFP—it appears the government's vigorous enforcement efforts in the area are continuing."

We turned to footnote 3 in the article for the following list of OFFP-related enforcement actions by the DOJ and SEC (we've added last week's case involving AGCO Corporation). The Netherlands, Denmark, and the U.K have also punished companies for violating the U.N. Iraqi sanctions.

Here's the DOJ / SEC list (with related cases grouped together and linked to our original posts):

U.S. v. AGCO Limited, No. 09-cr-00249 (D.D.C. 2009); U.S. Sec. & Exch. Comm'n v. AGCO Corporation, No. 09-cv-01865 (D.D.C. 2009) (here)

U.S. v. Novo Nordisk A/S, No. 09-cr-00126 (D.D.C. 2009); U.S. Sec. & Exch. Comm'n v. Novo Nordisk A/S, No. 09-cv-00862 (D.D.C. 2009) (here)

U.S. v. Naaman, No. 08-cr-00246 (D.D.C. 2008); U.S. v. CNH Frances S.A., No. 08-cr-00379 (D.D.C. 2008) (here)

U.S. v. CNH Italia S.p.A., No. 08-cr-00378 (D.D.C. 2008); U.S. v. Iveco S.p.A., No. 08-cr-00377 (D.D.C. 2008); U.S. Sec. & Exch. Comm'n v. Fiat S.p.A., No. 08-cv-02211 (D.D.C. 2008) (here)

U.S. v. Volvo Constr. Equip., AB, No. 08-cr-00069 (D.D.C. 2008); U.S. v. Renault Trucks SAS, No. 08-cr-00068 (D.D.C. 2008); U.S. Sec. & Exch. Comm'n v. AB Volvo, No. 08-cv-00473 (D.D.C. 2008) (here)

U.S. Sec. & Exch. Comm'n v. Flowserve Corp., No. 08-cv-00294 (D.D.C. 2008) (here)

U.S. Sec. & Exch. Comm'n v. Akzo Nobel, N.V., No. 07-cv-02293 (D.D.C. 2007) (here)

U.S. Sec. & Exch. Comm'n v. Chevron Corp., No. 07-cv-10299 (S.D.N.Y 2007) (here)

U.S. v. Ingersoll-Rand Italiana S.p.A., No. 07-cr-00294 (D.D.C. 2007); U.S. Sec. & Exch. Comm'n v. Ingersoll-Rand Co. Ltd., No. 07-cv-01955 (D.D.C. 2007) (here)

U.S. v. York Int'l Corp., No. 07-cr-00253 (D.D.C. 2007); U.S. Sec. & Exch. Comm'n v. York Int'l Corp., No. 07-cv-01750 (D.D.C. 2007) (here)

U.S. Sec. & Exch. Comm'n v. El Paso Corp., 07-cv-00899 (S.D.N.Y. 2007) (here)

U.S. Sec. & Exch. Comm'n v. Textron Inc., No. 07-cv-01505 (D.D.C. 2007) (here)

A copy of "Enforcement Without a Violation: FCPA Lessons From the Government's Investigation Into the Oil for Food Program," by Lawrence E. Buterman, originally published in the Vol. 1, No. 3 edition of the Bloomberg Law Reports—White Collar Crime, can be downloaded here.
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RIP Craig Johnson. A founder of both Venture Law Group and, more recently, Virtual Law Partners, Craig was an inspirational figure in Silicon Valley and far beyond. He was many things -- great lawyer, venture capitalist and entrepreneur. With Guy Kawasaki and Rich Karlgaard he co-founded the influential Garage Technology Ventures. We knew him as a warm and engaging colleague, a man with the courage to think for himself; to many others he was a generous, good-humored mentor, unstinting with his encouragement. Our sympathies to his wife, RoseAnn Rotandaro, and his entire family.
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Iraq's Lawsuit Legacy

In July 2008, the government of Iraq launched a massive FCPA-related federal lawsuit in New York City. We first talked about it here. The complaint named 93 defendants in claims alleging bribery and fraud under the now-defunct United Nations oil-for-food program. Iraq sought more than $10 billion in damages, describing the U.N. program as "the largest financial fraud in human history." (Bernie Madoff hadn't yet reset the scale for measuring financial frauds.)

What's happening in the case today? After nearly a year, Iraq is still trying to serve some of the defendants. A claimant usually has 90 days to effect service of process; in this case, the court's been lenient by granting several extensions. Overseas service can be complicated. So Iraq asked the court to help by issuing letters rogatory (requests for assistance addressed to foreign courts). The non-binding letters are directed at courts in Austria, Jordan, Malaysia, South Africa, and the United Arab Emirates.

According to the federal court's most recent order, anyone not served by July 24, 2009 will be dropped from the suit. Until the deadline passes, none of the defendants have to file answers or raise their defenses.

The post-war Iraqi government alleged that kickbacks were paid to representatives of Saddam Hussein through illegal and undisclosed transportation and port fees, bogus after-sales service fees and overpricing of goods and services. Some of those named have already faced enforcement actions for violating the U.N. regulations or U.S. law, including the Foreign Corrupt Practices Act. Among them are ABB, AB Volvo, Flowserve, Akzo Nobel, Chevron, Siemens, Ingersoll-Rand, York International, Oscar Wyatt, El Paso and Textron.

There's no private right of action under the Foreign Corrupt Practices Act. So Iraq's claims are based on the Racketeer Influenced and Corrupt Organizations Act (RICO), common-law fraud, breach of fiduciary duty and illegal price discrimination.

Here's the full list (which may change after July 24) of everyone named as a defendant in the complaint:

AGCO Denmark A/S, AGCO S.A., Valtra do Brazil, Air Liquide Engineering, Akzo Nobel N.V., N.V. Organon ("Organon"), Intervet International B.V. (Intervet"), Mais Co. for Medical Products, Atlas Copsco CMT, AWB Ltd., B. Braun Medical France, B. Braun Melsungen A.G., B. Braun Medical Industries SDN BHD (Malaysia), Aesculap AG and KG, Aesculap Motric S.A., Aesculap Sugical Instruments SDN, Boston Scientific S.A., BNP Paribas USA, BNP Paribas (Suisse) SA, BNP Paribas Hong Kong, BNP Paribas Paris, BNP Paribas UK Holdings Limited, BNP Paribus London Branch, Buhler Ltd., David B. Chalmers, Jr, Chevron Corp., Daewoo International Corp., Daimler Chrysler AG, Dow Agrosciences, ABB AG, Eastman Kodak S.A., El Paso Corp. (successor to Coastal Corp.), Evapco (Austria), Evapco Europe S.R.L., Avio Flowserve Corp., Flowserve Corp., Flowserve Pompes (Formely Ingersoll-Dresser Pompes), Flowserve B.V.

And some more:

GlaxoSmithKline Walls House, Glaxo Smithkline Egypt SAE, ABB Automation, Glaxo Wellcome SA (South Africa) (PRY) Ltd., SmithKline Beecham International, ABG Allgemeine Baumaschinen-GesellschaftmbH, Dresser international, Ingersoll-Rand Italiana SPA, Thermo King Ireland Limited, Ingersoll-Rand Benelux N.V., Ingersoll-Rand World Trade Ltd., Cilag AG International, Janssen Pharmaceutical, ABB Elektric Sanayi AS, Kia Motors, Liebherr Export AG, Liebher France SA, Seono Pharma International, Merial, Novo Nordisk, Pauwels, Railtech International, ABB Industrie AC Machines, F. Hoffman La Roche, Roche Diagnostics GMBH, Rohm and Haas France S.A., Secalt S.A., Siemens S.A.A. of France, Siemens Sanayi ve Ticaret A.S. of Turkey, Osram Middle East FZE, Solar Turbines Europe,

And the final batch:

St. Jude Medical Export GMBH, ABB Industrie Champagne, Sulzer Buckhardt Engineering Works Ltd., Sulzer Pumpen Deutschland GMBH, Sulzer turbo Ltd., Textron Inc., David Brown Guinard Pumps S.A.S., David Brown Transmissions France S.A., Renault Trucks SAS, ABB Near East Trading Ltd., Renault Agriculture & Sonalika International, Renault V.I, Volvo Construction Equiptment AB, The Weir Group, Oscar S. Wyatt, Jr, Vitol S.A., Woodhouse International, York Air Conditioning and Refrigeration FZE, and ABB Solyvent-Ventec.

Download Iraq's June 27, 2008 complaint here.
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