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Entries in Foreign Official (157)


Proclamation 7750 Unwrapped

Last week, while we were looking into ways the U.S. fights foreign kleptocrats, we heard about Presidential Proclamation 7750. It was issued in 2004 and, by 2006, a high State Department official was calling it a "key tool" in America's anti-corruption arsenal. Yet except for a couple of mentions we found in the African press, Proclamation 7750 was -- and is -- practically invisible.

To find out why, and to learn more about how this anti-corruption tool works, we spoke this week with a couple of U.S. State Department officials. They can't be identified and wouldn't go on the record. But here's the background they provided.

The Foreign Corrupt Practices Act doesn't reach the kleptocrats -- it applies only to bribe-payers and not bribe-takers. And the truth, as the kleptocrats know, is that they're beyond the reach of practically all the laws of other countries. There just aren't that many big sticks to use against corrupt foreign officials.

That's why Presidential Proclamation 7750 is so important. It was issued a year after the G-8's 2003 commitment to deny safe havens to kleptocrats. It helped do that by suspending entry into the United States of past and present corrupt foreign officials and those who bribe them. It also barred their spouses, children, and dependents who benefited from the corruption.

The State Department can't publicly release the names of those denied entry under Proclamation 7750 -- U.S. law generally prohibits disclosure of visa-related information. And while the deterrent effect can't be measured, the idea is that whatever makes life more difficult or expensive for kleptocrats is a good thing. The Kenyan reformer John Githongo, for example, has advised the U.S. that denying the children of corrupt African leaders access to U.S. and U.K. universities is a big deal. The State Department says it welcomes that kind of input, and that's why Proclamation 7750 is only used against children who are college age and above.

The American press hasn't talked about Proclamation 7750, and that's too bad. It's probably because the names of the banned kleptocrats have to be kept secret, draining the entertainment value and pizzazz out of the story. But because quite a few corrupt foreign leaders believe they've been banned from the United States because of Proclamation 7750, and have complained back home about their treatment at the hands of U.S. authorities, the law is better known in developing countries, especially among those who might be targeted.

State Department officials regularly meet with anti-corruption NGOs. Any allegations leveled by NGOs are carefully evaluated along with other available evidence to determine that the individuals fall within the categories defined in the Proclamation. A decision to designate is vetted by several bureaus at the State Department and is approved by a high-level Department official. And despite the public's lack of awareness, the government thinks the program is working well. As when an NGO reported that corrupt officials in a developing country were engaged in systematic and illegal asset stripping of the country's natural resources. A State Department official said the NGO report led to further U.S. investigations and ultimately to some visa determinations under Proclamation 7750.

Sometimes leads come to the State Department from whistleblowers. They're typically anti-corruption investigators or officials in developing countries who've been effective in their roles -- and are therefore fired from their jobs, threatened, or blocked by corrupt judges or opponents. They might show up at a U.S. embassy, ready to talk. The information they bring is checked -- sources are vetted for reliability and evidence is weighed for credibility. Other sources are sought. "We don't want the United States to be used as a tool by political factions in other countries," an official said. "So we're very tough when we look at the evidence. Otherwise the program will lose credibility." For example, corroboration sometimes comes from bank documents showing secret transfers of illicit cash.

The visa bans are essentially lifetime actions, so the stakes are high. The program has plenty of support within the government -- in recent appropriations bills, for example, Congress directed the State Department to use Proclamation 7750 to ban from the U.S. foreign officials "involved in corruption relating to the extraction of natural resources in their countries." The State Department can even use Proclamation 7750 to ban foreign leaders who travel on diplomatic passports, except in limited cases where the U.S. is bound by treaty-based obligations.

This post is Part II of our series, Cornering The Kleptocrats. In Part III, we'll talk about a proposed way to pursue, prosecute and punish corrupt public officials.


Cornering The Kleptocrats, Part I

Only bribe-payers can be prosecuted under the Foreign Corrupt Practices Act; bribe-takers are excluded. Congress wrote the FCPA that way because it believed "the efforts expended in resolving the diplomatic, jurisdictional, and enforcement difficulties that would arise upon the prosecution of foreign officials was not worth the minimal deterrent value of such prosecutions." U.S. v. Castle, 925 F.2d 831 (5th Cir. 1991) (per curiam).

That inability to pursue, prosecute and punish corrupt foreign officials under the FCPA became a focus of the prior administration. In January 2004, President Bush took action by signing an extraordinary measure called Proclamation 7750. It suspended entry into the United States of past and present foreign officials whose corrupt practices have had "serious adverse effects on the international economic activity of U.S. businesses, U.S. foreign assistance goals, the security of the United States against transnational crime and terrorism, or the stability of democratic institutions and nations." Also barred from entry are the foreign officials' spouses, children, and dependents who benefited from the corruption.

It's left to the Secretary of State alone to implement and administer Proclamation 7750. The State Department hasn't revealed how it compiles the list of banned kleptocrats and family members or who's on it. Nor has anyone said how long the bans last, whether there's any kind of hearing or chance to present evidence, or how someone on the list might have their name removed.

All that secrecy has caused some discomfort and frustration, even among reformers outside the U.S. As one Kenyan commentary this week said,

We wish it were clear, however, just what the U.S. has done and why. Proclamation 7750 (better known as the Kleptocracy Initiative travel ban), issued by George W Bush in January 2004, has been used to prohibit corrupt officials from entering the U.S. At least 13 Kenyan public officials and their families are believed to have had travel restrictions placed on them under this directive. However, who they are and what they did remains a matter of conjecture. . . [W]hat use are anonymous corruption bans apart from exerting private pressure?
That's a good question. And we have questions of our own. Is Proclamation 7750 the right remedy against corrupt foreign officials? Are secret, extra-judicial actions by the State Department legitimate and useful weapons in the battle against international public corruption? Are there other and better ways to pursue, prosecute and punish kleptocrats?

Let's continue this discussion in Part II.


Chasing Dirty Money

The Foreign Corrupt Practices Act may frighten business people everywhere, but it has never been a big concern for crooked overseas officials. That's because they can't be prosecuted under the FCPA, which is aimed exclusively at punishing those who pay them bribes. But the Justice Department may have found one way to help plug that gap.

Last week it filed a forfeiture action against bank accounts in Singapore held by Arafat "Koko" Rahman (pictured above), the son of Bangladesh's former prime minister, Khaleda Zia. The accounts allegedly hold nearly $3 million in bribe money that Siemens AG and China Harbor Engineering Company paid to Rahman and other Bangladeshi officials.

Siemens and three of its subsidiaries were penalized $800 million after pleading guilty last month to violating the Foreign Corrupt Practices Act. One of the subsidiaries, Siemens Bangladesh, admitted that from 2001 to 2006, it paid $5.3 million in bribes through purported business consultants to Rahman and other local officials in order to win a mobile telephone project.

The Justice Department says it has forfeiture jurisdiction over the money because the proceeds of foreign offenses such as bribery and extortion that flow through the United States are covered by U.S. money laundering laws. Some of the money that ended up with Rahman came from a U.S. bank account, according to the DOJ, and the bribes paid in U.S. dollars were sent through the U.S. financial system before landing in the Singapore accounts.

The Singapore government, meanwhile, has reportedly received an official U.S. request for the funds. And last month, the head of Bangladesh's Anti-Corruption Commission said Singapore authorities had already frozen $1.6 million belonging to Rahman.

Acting Assistant Attorney General Matthew Friedrich said the Justice Department will not only "prosecute companies and executives who violate the Foreign Corrupt Practices Act, we will also use our forfeiture laws to recapture the illicit facilitating payments often used in such schemes."

View the DOJ's January 9, 2009 release here.

For a discussion about why foreign officials who take bribes cannot be prosecuted under the FCPA, see our earlier post here.


No Foreign Official, No FCPA Offense

CW (who knows a lot about the Foreign Corrupt Practices Act) asked a great question. Can a payment directly to a foreign government intended to influence decisions in favor of the donor violate the FCPA? Surprisingly, the answer is no.

An FCPA offense requires a corrupt payment to a "foreign official." The law defines "foreign official" as a human being but not a government entity.

The term “foreign official” means any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization.
CW's question came up in FCPA Opinion Procedure Release No. 97-02 (November 5, 1997). The requestor was a U.S.-based utility developing a plant in an Asian country. There was no primary school in the plant's vicinity and the requestor planned to donate $100,000 to help build one. The donation would go directly to the government entity responsible for constructing the school.

Before releasing any money, the U.S. utility required written assurance from the foreign government that the funds would be used solely to build the school. The government also guaranteed that land for the school would be available, along with other funding needed to build and operate it.

According to the Department of Justice, because the "requestor's donation would go directly to a government entity -- and not to any foreign government official -- the provisions of the FCPA do not appear to apply to this prospective transaction."

Then there's DOJ Opinion Procedure Release No. 06-01 (October 16, 2006). A Delaware corporation headquartered in Switzerland wanted to contribute $25,000 to an African country's regional customs department or ministry of finance. The money would fund incentive awards to local customs officials. The program was intended to improve enforcement relating to seizures of counterfeit products bearing the trademarks of the requestor and its competitors.

Among other controls, the customs department or central government would pay the incentive awards directly to local customs officials and the requestor would have no say in identifying recipients. On that basis, the DOJ said it wouldn't take enforcement action against the requestor for the $25,000 donation.

In both cases, however, it was up to the requestor to make sure the donations were consistent with local law. Payments to foreign governments that aren't FCPA offenses (because no "foreign official" is involved) may still violate local anti-bribery laws.



Con-way Settles FCPA Enforcement Action

Internal controls and books and records violations; impermissible "facilitating payments" to customs officials and bribes to airline employees

California-based Con-way, Inc., a global freight forwarder, has paid a $300,000 penalty and accepted a cease and desist order to settle a Foreign Corrupt Practices Act enforcement action with the Securities and Exchange Commission. Con-way's FCPA violations were caused by a Philippines-based subsidiary, Emery Transnational. It made about $244,000 in improper payments between 2000 and 2003 to officials at the Philippines Bureau of Customs and the Philippine Economic Zone Area, and $173,000 in improper payments to officials at fourteen state-owned airlines.

The bribes to customs officials consisted of hundreds of small payments. They were intended to induce the officials to violate customs regulations, settle customs disputes, and reduce or not enforce otherwise legitimate fines for administrative violations. To fund the payments, Emery's employees obtained cash advances to complete customs processing. The SEC said that "unlike legitimate customs payments, the payments at issue were not supported by receipts from the Philippines Bureau of Customs and the Philippine Economic Zone Area. Emery Transnational did not identify the true nature of these payments in its books and records."

Emery's employees also made corrupt payments between 2000 and 2003 to employees at fourteen state-owned airlines that did business in the Philippines. According to the SEC, the "payments were made with the intent of improperly influencing the acts and decisions of these foreign officials and to secure a business advantage or economic benefit." There were “weight shipped” payments intended to induce airline officials to improperly reserve space for Emery on the airplanes, and “gain shares” payments to induce airline officials to falsely under-weigh shipments and to consolidate multiple shipments into a single shipment, resulting in lower shipping charges. Emery paid the airline employees 90% of the reduced shipping costs.

Government-owned or controlled airlines receiving payments were Air France, Alitalia (Italy), China Airlines, EgyptAir, Emirates (Dubai), Gulf Air (Bahrain, Abu Dhabi, Oman), Kuwait Airways, Malaysian Airlines, Pakistan International Airlines, Royal Brunei Airlines, Saudi Arabian Airlines, SilkAir (Singapore), Singapore Airlines, and Thai Airways International.

According to the SEC's complaint, none of Emery's improper payments were accurately reflected in Con-way’s books and records. Also, Con-way knowingly failed to implement a system of internal accounting controls concerning Emery that would both ensure that Emery complied with the FCPA and require that the payments it made to foreign officials were accurately reflected on its books and records. As a result, Con-way violated Sections 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Securities Exchange Act of 1934 (15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)).

Con-way discovered the illegal conduct at Emery in early 2003. After a preliminary internal investigation, Con-way self-disclosed the potential FCPA violations to the SEC. Following a more thorough internal investigation, Con-way imposed strict financial reporting and compliance requirements on Emery, fired a number of Emery employees involved in the misconduct, provided FCPA training and education to Con-way's own employees and strengthened its compliance program. In December 2004, Con-way sold Emery to UPS.

In the Philippines, payments to customs officials by local employees are a common compliance problem. Such payments are locally referred to as "facilitating payments" but shouldn't be confused with payments of the same name that are permitted under the FCPA. There's an exception in the FCPA for facilitating payments -- but only as defined by the FCPA itself. Among other things, the payments must be for “routine governmental action . . . which is ordinarily and commonly performed by a foreign official." See 15 U.S.C. §§78dd-1 (b) and (f) (3) [Section 30A of the Securities Exchange Act of 1934].

The exception will not apply, however, if there was no legitimate routine governmental action pending and for which the payment was made. A governmental action obtained or sought to be obtained by subornation of the official’s duty is not an action “ordinarily and commonly performed by a foreign official” and therefore is outside the scope of the exception. For example, paying a customs clerk to schedule an inspection of goods already in the customs queue may be permissible. But paying a customs clerk to jump the queue, or paying for positive inspection results, may be outside the exception.

Emery's payments to customs officials were intended to induce them to (i) violate customs regulations by allowing Emery to store shipments longer than otherwise permitted, thus saving the company transportation costs related to its inbound shipments; and (ii) improperly settle Emery's disputes with the Philippines Bureau of Customs, or to reduce or not enforce otherwise legitimate fines for administrative violations. Those clearly weren't actions “ordinarily and commonly performed by a foreign official.” That's why the payments fell outside the scope of the FCPA's facilitating payments exception. And whether or not the payments were permissible, Con-way was required to accurately account for them in its books and records, which it didn't do.

The case is also a reminder that employees of government- owned or controlled airlines are "foreign officials" for purposes of the FCPA. Contact with them, either directly or through travel agents or others, should be covered by compliance programs.

Con-way Inc. trades on the NYSE under the symbol CNW.

View SEC Litigation Release No. 20690 and Accounting and Auditing Enforcement Release No. 2866 (August 27, 2008) here.

View the Complaint in Securities and Exchange Commission v. Con-way Inc., Civil Action No. 1:08-CV-01478 (D.D.C.) (EGS) here.

View the SEC's Administrative Enforcement Action / Cease and Desist Order here.



Bribe Takers Get A Pass Under The FCPA

With $4-a-gallon gas, disappearing honey bees and a world-wide hops shortage, there's hardly time to worry about anything else. Like why bribe-taking foreign officials are never prosecuted under the Foreign Corrupt Practices Act. Fortunately, a reader with time to ponder such things asked us that question after we reported last month (here) the FCPA-related sentencing of former World Bank employee, Ramendra Basu.

Basu and his co-conspirator, Gautam Sengupta, another World Bank employee, pleaded guilty to helping a Swedish consultant make corrupt payments to government officials in Ethiopia and Kenya. At the time of their offense, Basu and Sengupta were working in the World Bank's headquarters in the District of Columbia, and both were U.S. permanent residents. Our reader wanted to know if Basu and Sengupta, who also took money from the Swedish consultants, could have been prosecuted not only as "domestic concerns" but also based on their status as employees of the World Bank, because "the Bank is a public international organization and its employees are therefore foreign officials under the FCPA." See 15 U.S.C. § 78dd-1(a)(f)(1) et seq.

Thanks to a definitive case from 1991, the answer is clear. Only bribe-payers can be prosecuted under the FCPA or under the general conspiracy statute of the United States. Bribe-takers are excluded. References in the FCPA to "foreign officials" are always talking about those who accept bribes, not those who pay them. That means foreign officials aren't targeted for prosecution.

The case that settled the issue is U.S. v. Castle, 925 F.2d 831 (5th Cir. 1991) (per curiam). In it, the Fifth Circuit adopted the Memorandum Opinion and Order from the trial court written by Judge Barefoot Sanders. The four original defendants in the case were charged in a one-count indictment with conspiring to violate the Foreign Corrupt Practices Act, 15 U.S.C. §§ 78dd-1, 78dd-2. Two defendants, Donald Castle and Darrell W.T. Lowry, moved to dismiss the indictment against them on the grounds that as Canadian government officials, they couldn't be convicted of accepting a $50,000 bribe to steer award of a bus-service contract by the Saskatchewan provincial government.

The two other defendants who paid the bribe didn't dispute that they could be prosecuted for conspiring to violate the FCPA. Nor was there any dispute that defendants Castle and Lowry, as Canadian government officials, could not be charged with a substantive violation of the FCPA, since the statute doesn't criminalize the receipt of a bribe by a foreign official. The issue, then, was whether the U.S. could prosecute Castle and Lowry under the general conspiracy statute, 18 U.S.C. § 371, for conspiring to violate the FCPA. "Put more simply," the district court said, "the question is whether foreign officials, whom the Government concedes it cannot prosecute under the FCPA itself, may be prosecuted under the general conspiracy statute for conspiring to violate the Act."

The trial court's memorandum opinion of June 4, 1990 was adopted by the appellate court. It traces the FCPA's legislative history relevant to whether foreign officials who take bribes can be prosecuted under the FCPA or the general conspiracy statute or both, and it sets out a comprehensive policy analysis behind Congress' intent to exclude foreign officials from prosecution. As far as we know, the 1991 case persuaded the Justice Department to end all further attempts to make conspiracy to violate the FCPA a chargeable offense against bribe-taking foreign officials.

Happily, Judge Barefoot Sanders' opinion lives up to its author's great moniker. It's a terrific read for FCPA lawyers, policy wonks, and policy-wonking lawyers. Here are just a few paragraphs from the 2,500-word decision:

"Yet the very individuals whose participation was required in every case--the foreign officials accepting the bribe--were excluded from prosecution for the substantive offense. Given that Congress included virtually every possible person connected to the payments except foreign officials, it is only logical to conclude that Congress affirmatively chose to exempt this small class of persons from prosecution.

"Most likely Congress made this choice because U.S. businesses were perceived to be the aggressors, and the efforts expended in resolving the diplomatic, jurisdictional, and enforcement difficulties that would arise upon the prosecution of foreign officials was not worth the minimal deterrent value of such prosecutions. Further minimizing the deterrent value of a U.S. prosecution was the fact that many foreign nations already prohibited the receipt of a bribe by an official. See S.Rep. No. 114 at 4, 1977 U.S.Code Cong. & Admin.News at 4101 (testimony of Treasury Secretary Blumenthal that in many nations such payments are illegal). In fact, whenever a nation permitted such payments, Congress allowed them as well. See 15 U.S.C. Sec. 78dd-2(c)(1).

"Based upon the language of the statute and the legislative history, this Court finds in the FCPA what the Supreme Court in [Gebardi v. United States, 287 U.S. 112, 53 S.Ct. 35, 77 L.Ed. 206 (1932)] found in the Mann Act: an affirmative legislative policy to leave unpunished a well-defined group of persons who were necessary parties to the acts constituting a violation of the substantive law. The Government has presented no reason why the prosecution of Defendants Castle and Lowry should go forward in the face of the congressional intent not to prosecute foreign officials. If anything, the facts of this case support Congress' decision to forego such prosecutions since foreign nations could and should prosecute their own officials for accepting bribes. Under the revised statutes of Canada the receipt of bribes by officials is a crime, with a prison term not to exceed five years, see Criminal Code, R.S.C. c. C-46, s.121 (pp. 81-84) (1985), and the Royal Canadian Mounted Police have been actively investigating the case, apparently even before any arrests by U.S. officials. Defendant Castle's and Lowry's Supplemental Memorandum In Support of Motion to Dismiss, filed May 14, 1990, at 10. In fact, the Canadian police have informed Defendant Castle's counsel that charges will likely be brought against Defendants Castle and Lowry in Canada. Id. at 10 & nn. 3-4. Thus, prosecution and punishment will be accomplished by the government which most directly suffered the abuses allegedly perpetrated by its own officials, and there is no need to contravene Congress' desire to avoid such prosecutions by the United States."

Download U.S. v. Castle, 925 F.2d 831 (5th Cir. 1991) (per curiam) here.


Ten Fast Facts About The FCPA

It's easy enough to scoff at the slogans, proverbs and aphorisms that line the halls of the great corporations. Who hasn't emerged from a conference-room donnybrook wondering who the Teamwork posters are supposed to be talking about? And yet, THINK helped create an industry and a company to lead it, and Safety First really can save lives.

How about compliance? Can we ever be reminded too many times to play by the rules, obey the law, keep our noses clean? Just as the best safety programs prevent accidents before they happen, so the best compliance programs should likewise head off illegal schemes before they hatch. So, could it be that the best -- which means the most memorable -- lessons about the FCPA might just be the shortest?

With that in mind, here are ten fast facts about the FCPA. Some aren't all that "fast" and none will fit on a bumper sticker. But we'll keep trying -- and we'll welcome your help.

1. Companies and individuals subject to the FCPA's antibribery provisions cannot give or promise to give anything of value to foreign officials directly or indirectly in order to obtain or retain business.

2.Those subject to the FCPA's accounting standards must make and keep books and records that accurately and fairly reflect the transactions and dispositions of the assets of the corporation, and have internal accounting controls adequate to provide reasonable assurance of the integrity of the company's financial systems and its disclosures.

3. An FCPA antibribery offense is punishable by up to five years in jail; intentionally violating the accounting standards can result in 20 years in prison.

4. The antibribery provisions generally apply to all organizations based or operating in the United States, and the accounting standards apply to companies with securities trading on a U.S. exchange and filing periodic reports with the SEC. Directors, officers, employees and agents of the foregoing are covered by the FCPA, as is anyone who does anything to cause an FCPA offense while they're on U.S soil.

5. Even if a foreign subsidiary isn't covered by the FCPA, its acts might cause its U.S. parent to be in violation.

6. Indirect payments or promises to pay foreign officials through partners, agents or other intermediaries can violate the law.

7. Corrupt payments to a foreign political party, party official or candidate for foreign political office intended to obtain or retain business are prohibited.

8. Anyone acting on behalf of a "public international organization" such as the International Olympic Committee, the United Nations, the World Bank and the International Red Cross is a “foreign official” for the FCPA.

9. Members of a royal family are “foreign officials” for the FCPA.

10. The best protection against an FCPA violation is an "effective compliance program." It can result in penalty reductions for companies by up to 95%, according to the U.S. Federal Sentencing Guidelines.

10-A. The board of directors is always responsible for the oversight and management of the company’s FCPA compliance program.


Back On Track

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.


Disorder In The Court

It probably makes no sense to ask which form of public corruption is the worst, since they all destroy the fabric of society. But as lawyers, we think judicial corruption should be singled out. Honest judges, after all, restrain corruption, while crooked judges unleash it on entire countries. When courts are for sale, those with money and power ravage the rights of those whose pockets are empty. Without honest and independent judiciaries, ordinary citizens lose the certainty of their legal, political and economic freedoms.

Judges are likely to be corrupt in countries where per capita income is low and economies are closed. Beyond those environmental causes, judicial corruption rises when judges are underpaid and overworked, when court procedures are complex and slow, and when anti-corruption enforcement is monopolized by a single enforcement agency. Those are the findings of one Stefan Voigt from the Department of Economics and Management at Philipps University in Marburg, Germany, as published by Transparency International.

India, according to TI's 2007 global report on judicial corruption, is one of the countries that illustrates some of Prof Voigt's hypotheses. In India, "[t]he estimated amount paid in bribes [for judicial corruption] in a 12-month period is around R2,630 crores (around US $580 million). . . . The primary causes of corruption are delays in the disposal of cases, shortage of judges and complex procedures, all of which are exacerbated by a preponderance of new laws. As of February 2006, 33,635 cases were pending in the Supreme Court with 26 judges; 3,341,040 cases in the high courts with 670 judges; and 25,306,458 cases in the 13,204 subordinate courts. This vast backlog leads to long adjournments and prompts people to pay to speed up the process. In 1999, it was estimated: ‘At the current rate of disposal it would take another 350 years for dis­posal of the pending cases even if no other cases were added.’ The ratio of judges is abysmally low at 12–13 per one million persons, compared to 107 in the United States, 75 in Canada and 51 in the United Kingdom. . . . This prompts people to pay ‘speed money’. . . . People seek shortcuts through bribery, favours, hospi­tality or gifts, leading to further unlawful behav­iour."

In any country, most citizens are powerless in the face of judicial corruption. Foreign investors, too, may feel threatened and victimized, and tempted to join the corrupt practices. But judges, court clerks and others in the judicial system are "foreign officials" under the U.S. Foreign Corrupt Practices Act. Bribing them can violate U.S. law and certainly violates local law. That means there are plenty of reasons to raise compliance standards in places where judicial corruption is prevalent.

View Transparency International's 2007 Global Judicial Corruption Report here.


The Curious Case Of The Cautious Requestor

A typical reader of this blog will tell you that he or she is reasonably prudent when it comes to complying with the Foreign Corrupt Practices Act. But we're all downright reckless compared with the sweet lady who stars in the most recent FCPA Opinion Procedure Release. She needed to pay $9,000 to a foreign court as advance fees for the administration of an overseas estate. Although there's never been an FCPA enforcement action based on such a payment (and never will be), our Requestor somehow got spooked by the law. So before paying a dime to the foreign court, she insisted on a green light from none other than the United States Department of Justice.

Opinion Procedure Release No.: 07-03 of December 21, 2007 is truly unique, so we'll let it speak for itself. We'll only point out that it combines features never seen together in another FCPA Release. First -- and we couldn't make this up -- there is no payment to a foreign official. Second, there is no intent to obtain or retain business. In fact, the DOJ is forced to imagine some mens rea just to move things along. Third, the payment to the foreign court was entirely legal under the written laws of the subject country, and apparently a routine requirement. In short, we wonder how the Requestor thought to knock on the DOJ's door at all -- unless she has a young relative in law school someplace.

We're just guessing, but perhaps our Requestor was scared straight by her somewhat incomplete knowledge about the FCPA. That's understandable -- lots of us have been there before. And maybe she was addled because, as a U.S. permanent resident from Asia, she feared the foreign payment might spoil her one chance to someday gain American citizenship, a goal we unreservedly applaud. Whatever the cause, the DOJ didn't want to disappoint this lovely woman. So look closely below and you'll see evidence that the Department of Justice must have had an emotional moment.

We're babbling a bit, but read on and you'll know why. This Release is a charitable (we almost said "heartwarming") act by the DOJ. We've read it a dozen times already, and it always brings a smile.

* * *
No.: 07-03

Date: December 21, 2007

Foreign Corrupt Practices Act Review

Opinion Procedure Release

The Department has reviewed the FCPA Opinion Request (the "Request") of a lawful permanent resident of the United States (the "Requestor"). The person is a "domestic concern"within meaning of the FCPA. The Requestor proposes to make a payment required by a family court judge in an Asian country to cover certain litigation-related costs.

The Requestor is a party to disputed judicial proceedings in the Asian country relating to the disposition of real and personal property in a deceased relative's estate. One of the Requestor's family members has defacto control over the assets of the estate, a portion of which the Requestor believes she legally owns. The estimated value of the estate is equivalent to roughly $600,000, consisting of approximately 30.4% in foreign securities, 40.6% in bank and postal accounts, and 29.0% in real estate. In connection with the judicial proceedings, the Requestor submitted an application for the court to appoint an estate administrator pending the court"s decision on the disposition of the estate assets. The court then requested an advance payment equivalent to approximately $9,000 to cover expenses related to the court-appointed administrator and other miscellaneous court costs. Due to misgivings about the legality of such a payment under the FCPA, the Requestor withdrew the application for appointment of an administrator. In the coming months, if this Opinion Request results in a favorable response, the Requestor plans to renew such application and comply with the court's payment requirement. The Requestor has asked for a determination of the Department's present enforcement intention under the FCPA.

The Requestor has represented, among other things, that:

* the Requestor has not yet made the advance payment ordered by the foreign judge because she has withdrawn her request for the appointment of an estate administrator(1);

* nothing in the Requestor's communications with the foreign court indicated that the requested payment was sought for the purpose of influencing the court, misusing the judge's official position, or inducing the judge or the estate administrator to do anything improper;

* the Requestor has obtained written assurance, a copy of which has been provided to the Department of Justice, from a lawyer who received law degrees in both the U.S. and the foreign country, and who is a member of an established law firm, that the Requestor's proposed payment described in the request is not contrary to, and is in fact explicitly lawful under, the written law of the foreign country (the "legal opinion");

* the proposed payment would be made to the clerk's office of the family court, not to the individual judge presiding over the dispute;

* the Requestor would request an official receipt and an accounting of how the funds are spent, both of which, according to the legal opinion, are discretionary, but often granted upon request; and

* the Requestor would request that the court refund her any remaining amount of the payment not spent in the proceedings, as the legal opinion states is required under foreign law.

In addition, the Requestor has provided copies (and translations) of the relevant provisions of written foreign law and regulation that: (a) authorize a court, in connection with the administration of an estate, to "take necessary measures to preserve the estate;" and (b) govern family law proceedings and grant courts the authority to require parties to make advance payments to cover necessary expenses.

The FCPA Opinion procedure enables a domestic concern "to obtain an opinion of the Attorney General as to whether certain specified, prospective - not hypothetical - conduct conforms with the Department's present enforcement policy regarding the antibribery provisions of the Foreign Corrupt Practice Act."28 C.F.R. § 80.1.

The FCPA's antibribery provisions are implicated when a payment is made in order to obtain or retain business for or with, or to direct business to, any person. See 15 U.S.C. § 78dd-2(a). In this instance, in order to provide the Requestor with the guidance she seeks, the Department will assume that the proposed payment could be reasonably understood to relate to the Requestor's efforts "in obtaining or retaining business for or with, or directing business to, any person." Id. Thus, based on this assumption, the transaction sufficiently implicates the FCPA's antibribery provisions and is appropriately the subject of an FCPA Opinion.

Based upon all of the facts and circumstances, as represented by the Requestor, the Department does not presently intend to take any enforcement action with respect to the proposal described in this Request for two reasons. First, based on the Requestor's representations and consistent with the FCPA, the payment will be made to a government entity, the court clerk's office, rather than a foreign official. Cf. 15 U.S.C. § 78dd-2(a)(1) (emphasis added) ("It shall be unlawful to make use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of any offer, payment, promise to pay, or authorization of the any foreign official..."); 15 U.S.C. § 78dd-2(h)(2)(A) ("The term 'foreign official' means any officer or employee or a foreign government..."). Moreover, there is nothing to suggest that the presiding judge or the estate administrator will personally benefit from the funds after they are paid into the government account belonging to the court clerk's office. Second, consistent with the FCPA's law affirmative defense, the contemplated payment is "lawful under the written laws and regulations" of the foreign country according to an experienced attorney retained by the Requestor in the Asian country. 15 U.S.C. § 78dd-2(c)(1).

The FCPA Opinion Letter referred to herein, and this release, have no binding application to any party which did not join in the Request, and can be relied upon by the Requestor only to the extent that the disclosure of facts and circumstances in the Request is accurate and complete and continues to accurately and completely reflect such facts and circumstances.

(1) If this Opinion Request results in a favorable response, the Requestor intends to reapply for the appointment of an estate administrator and comply with the court's request for the advance payment.

* * *

View Opinion Procedure Release No.: 07-03 (December 21, 2007) Here.


Tough Medicine For Medical Device Makers

The Securities and Exchange Commission said in October this year it is investigating possible violations of the U.S. Foreign Corrupt Practices Act by the leading manufacturers of orthopedic implants. Biomet Inc., Stryker Corp., Zimmer Holdings Inc., Smith & Nephew plc and Medtronic Inc. all made announcements about the SEC's investigation and denied violating any laws. In September this year, four of them plus Depuy Orthopedics (part of Johnson & Johnson) paid $310 million to settle charges they paid kickbacks to induce U.S. doctors to buy their products.

Medtronic wasn't part of the domestic case. But it now confirms that the SEC and the Department of Justice are asking for information about payment practices abroad that might violate the FCPA. Medtronic -- based in Minneapolis -- does business in some 120 countries and employs more than 37,000 people worldwide. The company's latest Form 10-Q disclosed these details about the FCPA investigation:

"On September 25, 2007, the Company received a letter from the SEC requesting information relating to any potential violations of the U.S. Foreign Corrupt Practices Act in connection with the sale of medical devices in an unspecified number of foreign countries, including Greece, Poland and Germany. The letter notes that the Company is a significant participant in the medical device industry, and seeks any information concerning certain types of payments made directly or indirectly to government-employed doctors. A number of competitors have publicly disclosed receiving similar letters. On November 16, 2007, the Company received a letter from the Department of Justice requesting any information provided to the SEC. The Company intends to cooperate with both requests."

Doctors at government-owned or managed hospitals overseas are "foreign officials" for purposes of the FCPA. That means payments to them intended to obtain or retain business might violate the antibribery provisions. Application of the FCPA to overseas doctors made the headlines in 2002, when the SEC settled civil and administrative proceedings against Syncor International Corp. and the DOJ settled criminal FCPA charges against Syncor's Taiwan subsidiary. Payments to doctors have since resulted in FCPA enforcement actions against DPC (Tianjin) Co. Ltd. -- the Chinese subsidiary of Los Angeles-based Diagnostic Products Corporation -- and Micrus Corporation.

Those cases -- and the current investigation of Medtronic and its peers -- demonstrate the compliance risks involved when doing business with foreign hospitals that are owned or controlled by government authorities. The companies face a dilemma. Often the only way to promote their products is through direct contact with local physicians. Much of that contact is educational and might include, for example, sponsoring the doctors' evaluations of the companies' products and subsidizing the presentation of papers at medical seminars. The payments, however -- unless expressly permitted by the written laws or regulations of the host country -- can violate the FCPA.

The investigations of Medtronic and its peers will lead to better compliance practices by companies dealing with government-linked hospitals overseas. Another result, we suspect, will be that more countries -- with the backing of the global medical industry -- will pass laws and regulations to allow some level of financial support from foreign companies to local doctors for product evaluations and related programs.

Medtronic Inc. trades on the New York Stock Exchange under the symbol MDT.

View Medtronic's Form 10-Q (December 4, 2007) Here.


Will The Local Law Defense Help BAE?

BAE Systems is being investigated by the U.S. Department of Justice for possible violations of the Foreign Corrupt Practices Act. It allegedly paid £1 billion to Saudi Prince Bandar in return for his helping BAE sell 72 Typhoon jet fighters to Saudi Arabia. Prince Bandar may have moved a lot of the money through U.S. bank accounts and -- with BAE's knowledge -- to other members of the Saudi royal family. Those relatives -- along with the prince himself -- presumably are "foreign officials" for purposes of the FCPA. That could make the payments illegal. So if BAE is prosecuted, what defenses can it raise?

One might be the rarely-spotted local law defense. The FCPA allows otherwise prohibited payments if the "payment, gift, offer, or promise of anything of value that was made, was lawful under the written laws and regulations of the foreign official’s" country. 15 U.S.C. §§ 78dd-1(c)(1), 78dd-2(c)(1) and 78dd-3(c)(1). This affirmative defense -- one of only two -- was added to the FCPA in 1988. But it only works if the payment is legal under the written laws of the country in question -- a hurdle that has rendered the defense practically useless except in industry-specific scenarios, such as drug trials paid for by foreign pharmaceuticals but managed by government-employed doctors.

The Notes to the 1988 House and Senate Conference Agreement say in relation to the local law defense: "The House receded to the Senate, with an amendment to make it an affirmative defense that a payment to a foreign official is 'lawful under the written laws and regulations of the foreign official's country.' [emphasis in original] The Conferees wish to make clear that the absence of written laws in a foreign official's country would not by itself be sufficient to satisfy this defense. In interpreting what is 'lawful under the written laws and regulations,' the Conferees intend that the normal rules of legal construction would apply."

We doubt there are any laws or regulations now on the books in Saudi Arabia that would expressly permit members of the royal family to earn a commission on arms sales to the government. But would the King issue a decree -- the country is a true monarchy, after all -- that retroactively authorizes and approves the BAE payments? We don't know the answer. But the question is sure to raise issues for Saudi Arabia and its royal family that are well above our pay grade. Meanwhile, we imagine BAE is giving this some serious attention as it plots its potential defense strategy.

View the Notes to the 1988 House and Senate Conference Agreement Here.