Middle East Rulers Wage War On Whistleblowers

The Arab Spring showed the power of social media and grass-roots transparency. Corrupt heads of state were swept out of office in Tunisia and Egypt. But some neighboring kleptocrats are fighting back.

The Independent reported that in September alone, the Iraqi government 'has forced the head of its anti-corruption watchdog to resign. And a prominent Iraqi journalist, who had been threatened for leading anti-government protests, was shot dead in his home in Baghdad.'

Jordan's lawmakers passed a bill last month imposing fines up to $85,000 on anyone who publicly accuses another person of corruption without proof. The next day, after a huge outcry and protests by journalist, opposition members, lawyers and others, the Jordanian senate delayed implementing the bill for at least a month.

Two weeks ago, two journalists in Oman were sentenced to five months in prison for reporting alleged government corruption.

In Iraq, the Independent said, Prime Minister Nouri al-Maliki and his government are trying to strip immunity from Sabah al-Saadi, a member of parliament and formerly head of the its committee on integrity, 'so that they can arrest him for making allegations against Mr Maliki.'

Ammonnews.net said several MPs in Jordan opposed to the anti-whistleblower bill 'blasted that the stipulation aims to 'fortress corruption and corrupt officials and contradicts the reform principles publicly propagated by the legislative and executive branches.'

Iraq ranks 175 on the Corruption Perception Index, ahead of only Afghanistan, Myanmar, and Somalia. Jordan ranks 50, and Oman 41.

On the Press Freedom Index, Iraq ranks 130 out of 178, Jordan is 120, and Oman 124.

Good Intentions, Bad Results

Does foreign aid cause corruption? Yes, mainly by helping corrupt regimes stay in power. And because corrupt regimes are the most unstable, aid also fuels civil unrest.

Here are the top ten U.S. foreign aid recipients as of a couple of years ago, followed by their rank now on the Corruption Perception Index:

1. Israel / 30
2. Egypt / 98
3. Pakistan / 143
4. Jordan / 50
5. Kenya / 154
6. South Africa / 54
7. Mexico / 98
8. Colombia / 78
9. Nigeria / 134
10. Sudan / 172

The top ten donor recipients have an average CPI ranking of about 100 out of 178 ranked countries. But the bottom five of those countries by CPI rank -- Egypt, Pakistan, Kenya, Nigeria, Sudan -- have an average CPI rank of 140. In other words, they're among the most corrupt countries on earth. Not coincidentially, they're also among the most unstable.

Four of those five countries are in Africa. Here's what Dambisa Moyo of the Wall Street Journal said in March 2009 about aid to countries there:

[E]vidence overwhelmingly demonstrates that aid to Africa has made the poor poorer, and the growth slower. The insidious aid culture has left African countries more debt-laden, more inflation-prone, more vulnerable to the vagaries of the currency markets and more unattractive to higher-quality investment. It's increased the risk of civil conflict and unrest (the fact that over 60% of sub-Saharan Africa's population is under the age of 24 with few economic prospects is a cause for worry). Aid is an unmitigated political, economic and humanitarian disaster.

And here's an excerpt (without footnotes) from a prescient U.S. Congressional report from 1999 that explored the link between aid, corruption, and instability:

Research relating to foreign aid shows that such aid is dispersed not on the basis of need, but on the basis of strategic and geo-political considerations. That is, aid tends to support existing recipients who generally are supportive of existing donors. Donors, after all, have incentives to provide aid to those forces, supporters, and organizations that will help them remain in power. In practice, these characteristics are more important to donors than forces of change. A World Bank survey of research on foreign aid, for example, indicates that "there is little relationship between changes in aid and policy reform."

Foreign aid, then, often has not worked to promote reform. Consequently, aid tends to subsidize -- and thereby strengthen -- existing government connections and structures since aid recipients also will distribute this aid so as to preserve their political positions. In short, political elites can benefit from aid. In practice, aid subsidizes and strengthens existing regimes so they become solidified and entrenched. When existing regimes are corrupt, such regimes can be strengthened by foreign aid. It has been shown, for example, that foreign aid seldom includes meaningful incentives to alter governmental behavior with regard to corruption. In sum, when existing regimes are corrupt, the result is that these corrupt political regimes can benefit from foreign aid and become more firmly entrenched.

No one wants to be stingy and hard-hearted toward people anywhere who need help finding food and water, shelter and medicine. But international aid, especially when used to help prop up friendly yet corrupt regimes, isn't part of the solution. It's part of the problem.

Blackwater And Bribery

Will the latest federal indictment involving private security firm Blackwater lead to Foreign Corrupt Practices Act charges? It's possible, based on allegations against the five defendants.

On Friday, a federal grand jury in North Carolina indicted Gary Jackson, Blackwater’s former president; William Matthews, the former executive vice president; Andrew Howell, the former general counsel; Ana Bundy, a former vice president; and Ronald Slezak, a former weapons manager.

They were charged with 15 counts of conspiracy to violate firearms laws, making false statements and representations on federally licensed firearms dealers' records, possession of machine guns, possession of other firearms (short-barrelled shotguns) not registered in the National Firearms and Registration and Transfer Record, and aiding and abetting.

They weren't charged with bribing foreign officials. But federal investigators have reportedly been looking into possible violations of the Foreign Corrupt Practices Act by Blackwater, now renamed Xe. And the indictment contained this allegation:

Another means [of circumventing the possession and disposition of arms] consisted of Blackwater/Xe's efforts to gain favor with the Government of the Kingdom of Jordan. When the King of Jordan came to examine Blackwater/Xe's training facility at Moyock, North Carolina, the defendants arranged to present the King and/or his entourage with several firearms as gifts. When the defendants subsequently realized they were unable to account for the disposition of the firearms, they falsified four separate Alcohol, Tobacco, and Firearms (ATF) Form 4473s for submission to federal authorities. The defendants falsely completed the forms to give the appearance that the weapons had been purchased by them as individuals.

Giving gifts to foreign officials to obtain or retain business can violate the FCPA. Members of royal families are foreign officials under the law.

In November last year, the New York Times reported that Blackwater executives authorized secret payments of about $1 million to Iraqi officials that might have violated the FCPA. The payments were "intended to silence [the officials'] criticism and buy their support after a September 2007 episode in which Blackwater security guards fatally shot 17 Iraqi civilians in Baghdad," the Times said.

Four former employees the Times interviewed for the November story claimed the payments were approved by the company's president and money was wired to Iraq from accounts in Jordan. The employees didn't know if the payments were actually made. The report said "Blackwater’s strategy of buying off the government officials, which would have been illegal under American law, created a deep rift inside the company, according to the former executives."

A report by the Times Friday said, "While the indictment is somewhat limited in scope, it could be the government’s opening salvo in a broader offensive to bring criminal charges against the company. They could include charges for bribery and export violations, according to officials familiar with the case, perhaps under a strategy of turning former and current executives of the company against one another."

Download a copy of the April 15, 2010 indictment in U.S. v. Gary Jackson et al here. 

Novo Nordisk Pays $18 Million In Penalties For Iraq Bribery

Denmark-based Novo Nordisk A/S will pay a $9 million criminal penalty and enter into a deferred prosecution agreement with the Justice Department for illegal kickbacks paid to the former Iraqi government under the U.N. oil-for-food program. It will also pay $3,025,066 in civil penalties and $6,005,079 in disgorgement of profits, including pre-judgment interest, to the Securities and Exchange Commission.

The DOJ charged Novo in U.S. District Court for the District of Columbia with one count of conspiracy to commit wire fraud and to violate the books and records provisions of the Foreign Corrupt Practices Act.

Novo manufactures insulin, medicines and other pharmaceutical supplies. Between 2001 and 2003, it paid about $1.4 million to the former Iraqi government by inflating the price of contracts by 10 percent before submitting them to the United Nations for approval. It then concealed from the U.N. the amount of the kickbacks included in its prices. Novo also admitted it inaccurately recorded the kickback payments as commissions in its books and records.

The deferred prosecution agreement has a term of three years. The DOJ didn't charge the company under the FCPA's anti-bribery provisions. It said Novo conducted a "thorough review of the illicit payments" and implemented "enhanced compliance policies and procedures. "

In the civil enforcement action, the SEC charged Novo with violating Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. §78m(b)(2)(A)] for failing to keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflected its transactions and dispositions of its assets. It also charged the company under Section13(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(2)(B)] for failing to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) payments were made in accordance with management's general or specific authorization; and (ii) payments were recorded as necessary to maintain accountability for its assets.

The SEC said Novo paid kickbacks in three ways:

Initially, Novo Nordisk wired the kickback to [its] Agent's account at the Arab Bank in Amman, Jordan as an advance on his commission. The Agent would then Wire the funds to an official Kimadia account at the Rafidain Bank in Amman, Jordan. [Kimadia is the Iraq State Company for the Importation and Distribution of Drugs and Medical Appliances.] After Kimadia received the kickback payment, the Iraqis authorized the opening of a letter of credit and then Novo Nordisk shipped the goods to Iraq.

Later, Novo Nordisk informed Kimadia that it could not pay the ten percent kickback before it received payment from the U.N. as it was not easy for [Novo's] Athens office to authorize large advance payments to the Agent.

Thereafter, Kimadia no longer required the kickback be made upfront, and instead insisted on a bank guarantee. [The Agent in Jordan] opened a bank guarantee from the Arab Bank payable to Kimadia's account at the Rafidain Bank in Jordan. Eventually, Kimadia informed Novo Nordisk that it would no longer accept bank guarantees paid to its account at the Rafidain Bank. Instead, Kimadia provided Novo Nordisk with an account number where the kickback was to be paid.

Novo Nordisk's ADRs trade on the New York Stock Exchange under the symbol NVO.

Download the DOJ's May 11, 2009 release here.

Download the May 11, 2009 criminal information against Novo Nordisk A/S here.

View the SEC's Litigation Release No. 21033 dated May 11, 2009 in Securities & Exchange Commission v. Novo Nordisk A/S, Civil Action No. 1:09-CV-00862 (D.D.C.) (EGS) here.

Download the SEC's civil complaint against Novo Nordisk here.

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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