The Nobel Prize For Graft

By Andy Spalding

Today the imprisoned Chinese dissident Lu Xiaobo will receive, in absentia, the Nobel Peace Prize. Predictably, China is boycotting.

Less predictably, and more noteworthy, is this: of the 65 countries invited to the ceremony (all countries with embassies in Norway), an astonishing 18 will side with China.  

What do these countries have in common? Many things, but one stands out: the list of boycotting countries is a veritable corruption hit parade.

With CPI rankings in parentheses, the list includes: Saudi Arabia (50), Tunisia (59), Cuba (69), China (78), Colombia (78), Serbia (78), Morocco (85), Egypt (98), Kazakhstan (105), Vietnam (116), the Philippines (134), Ukraine (134), Pakistan(143), Iran (146), Russia (154), Venezuela (164), Sudan (172), Iraq (175), Afghanistan (176).

Are we seeing a new fault line in geopolitics? Half the BRICs are on this list. Could the world be drifting into two blocs, one in which corruption is tolerated and one in which it is not? We shouldn't be reductionistic, but the thought should give us pause.

As I said in this space recently, studies confirm that the present FCPA enforcement regime leads to a decrease in foreign direct investment in developing countries, including many on the list of Nobel-boycotting nations. Multiple reports from the U.S. Department of Commerce and academic economists confirm what's happening.

The FDI void is then filled by companies from countries that are not subject to anti-corruption measures. These "black knights" move in and do business in precisely the ways the FCPA seeks to prevent, thus perpetuating the culture and practices of corruption.

We took our first big step to fight international graft in 1977 with enactment of the Foreign Corrupt Practices Act. Here's hoping the time has finally come for our policy-makers and the Congress to see the real impact of FCPA enforcement on some of the poorest people on the planet, and conceive of a prize-worthy remedy.

Andrew Brady Spalding is a member of the faculty at Chicago-Kent College of Law. As a Fulbright Scholar based in India, he conducted research on the impact of FCPA enforcement. His work has been featured in the Wall Street Journal, Forbes, and various international publications. 

Doing Better For The World

Professor Andrew Brady Spalding of the Chicago-Kent College of LawBy Andy Spalding

The absurd conclusion to the Giffen prosecution illustrates, as effectively as any case could, the foreign policy debacle that is FCPA enforcement.  

As I have previously written on the FCPA Blog, U.S. industry lost much of its influence in Kazakhstan following Giffen's arrest. The void was filled by Chinese companies who, most assuredly, did not bribe less.  Now, with the judge in Giffen's trial essentially suggesting that the DOJ was wrong to go after him, there are no winners at all in this seven-year saga. The DOJ didn't get its man. U.S. influence in a crucial region diminished. And the Kazakhstani people were left vulnerable to a business presence that they largely resent but feel powerless to resist. Everybody loses.

The U.S. Chamber Institute for Legal Reform has issued a credible set of proposed amendments. We must remember, however, that the impact of FCPA enforcement is felt not just by the U.S. business community; it is also felt by the citizens of the countries where enforcement actions take place, and these are usually developing countries. With their interests in mind, I would like to suggest five reasons to amend the FCPA:

1.  Studies confirm that the present FCPA enforcement regime leads to a decrease in foreign direct investment in developing countries. Kazakhstan is but a single example; we have multiple reports from the U.S. Department of Commerce and academic economists confirming this predictable and intuitive effect. Indeed, one former high-ranking DOJ attorney personally told me that she considered this a good thing --
that withdrawing our FDI from corruption-prone countries will aid in the fight against global corruption. I submit that it will not, for the reasons below.

2.  We influence developing countries through our presence, not our absence. Such was the original vision of the FCPA, as the legislative history reflects -- we would set a good example in developing countries by operating there without participating in corruption. Indeed, the president of one of the biggest conglomerates in Asia told me that the prospect of curbing corruption in his country lies not in any effort that his government might initiate, but in increased interaction with companies that are subject to the FCPA.

3.  Curtailing our FDI has exactly the opposite effect.  The FDI void is filled by companies from countries that are not subject to anti-corruption measures. These "black knights" move in and do business in precisely the ways the FCPA seeks to prevent, thus perpetuating the culture and practices of corruption. This is currently occurring throughout the developing world.

4.  FDI is the best remaining tool for promoting good governance in developing countries. Economic sanctions haven't worked. Government aid hasn't worked. And military occupation is most certainly not working. Indeed, each has tended to increase, not decrease, corruption. So what is left?  FDI is the best tool we've got.

5.  We increasingly believe that a corrupt-free government is a human right. The Obama Administration has made this very claim. While the DOJ has historically focused on the perpetrators of corruption, we
should start thinking of the victims: the citizens of developing countries. I propose that we not leave them to be ravaged by companies that bribe recklessly.

We can do better -- for ourselves and for the world.

Andrew Brady Spalding is a member of the faculty at Chicago-Kent College of Law. He conducted research in Kazakhstan as a Fulbright Scholar on the impact of FCPA enforcement. Professor Spalding's research has been featured in the Wall Street Journal, Forbes, and various international publications. He has lectured to law schools, business schools, and political science departments throughout the United States and the world, including India, Turkey, Thailand, Bangladesh, Kazakhstan, the United Arab Emirates, and South Africa. 

No Punishment For 'Hero' Giffen

Kazakhstani President Nursultan Nazarbayev with then U.S. President George W. Bush, 2006. Photo credt to WikipediaOil consultant James H. Giffen, once accused of paying $84 million in bribes to the president of Kazakhstan and other foreign officials, wasn't punished for a misdemeanor tax charge he pleaded guilty to in August to end his case.

Giffen, 69, escaped jail time, criminal fines, and probation when he appeared Friday before U.S. District Judge William H. Pauley in New York.

His prosecution started more than seven years ago when he was charged with conspiracy, violating the Foreign Corrupt Practices Act, wire and mail fraud, money laundering, and filing false tax returns.

In the highest-profile FCPA prosecution up to then, the DOJ alleged he made illegal payments while serving as a middleman for several Western oil companies.

The case came to a sputtering end this year when prosecutors allowed Giffen to plead guilty to failing to report a foreign bank account in a 1996 tax return. His now-dormant firm, Mercator Corporation, pleaded guilty to one count of violating the Foreign Corrupt Practices Act by giving two snowmobiles to officials in Kazakhstan in 1999.

“This ordeal must come to an end,” Judge Pauley said Friday. “Mr. Giffen was a significant source of information for the U.S. government and a conduit for secret communications to the Soviet Union and its leadership during the Cold War,” the judge said.

Giffen faced up to a year in prison on the misdemeanor tax charge but the government didn't ask for jail time.

Judge Pauley fined Mercator $32,00. He said the company had incurred $10 million in expenses and lost profits of at least $30 million while fighting the criminal case.

Giffen himself was prevented from traveling during the prosecution and had to post bail of $10 million until his guilty plea in August.

The judge said classified documents showed that Giffen had "advanced the strategic interests of the United States and American businesses in Central Asia. Throughout this time," the judge said, Giffen "continued to act as a conduit for communications on issues vital to America’s national interest in the region.”

When Giffen was arrested before boarding a flight to Paris at New York's Kennedy Airport in March 2003, the American citizen was carrying a diplomatic passport issued by Kazakhstan. His lawyers later argued that whatever he did there had the full approval of the U.S. government. To prove his innocence, Giffen requested production of classified documents from the CIA and other U.S. government sources.

Judge Pauley said, "How does Mr. Giffen reclaim his reputation? This court begins by acknowledging his service."

Giffen's friend, J. Bryan Williams, a former executive at Mobil Oil, pleaded guilty in September 2003 to tax charges and was sentenced to 46 months in prison. Prosecutors said the Virginia lawyer took a $2 million kickback from Giffen for helping negotiate a deal involving Kazakhstan's Tengiz oil field. Williams was released from prison in 2006.

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Download the August 4, 2004 second superseding indictment in U.S. v. Giffen, et al. (S.D.N.Y., Docket No: 03-CR-404-WHP) here.

Download Giffen's August 6, 2010 plea agreement here.

Panalpina, Shell Near FCPA Settlements, Paper Says

The Wall Street Journal is reporting that Swiss logistics giant Panalpina and its customer Shell are close to settlement of FCPA charges with the DOJ and SEC. The paper said Panalpina may pay about $85 million in penalties and Shell about $30 million.

In April this year, Panalpina said had reserved an amount now equivalent to about $130 million for an expected FCPA settlement with the DOJ and SEC, and for a separate antitrust resolution. It said then the settlements should happen "in the near future."

Two weeks ago, Panalpina announced the settlement with the DOJ of violations of the antitrust laws. The company pleaded guilty to three counts of conspiring to violate the Sherman Act, and paid a fine of about $12 million. 

The corruption investigation of Panaplina dates back to at least February 2007. The DOJ noted then in connection with Vetco's FCPA settlement that bribes in Nigeria "were paid through a major international freight forwarding and customs clearance company to employees of the Nigerian Customs Service . . .”

In the following months, about a dozen leading oil and gas-related companies received letters from the DOJ and SEC asking them to "detail their relationship with Panalpina . . . ." Shell, Schlumberger, Tidewater, Nabors Industries, Transocean, GlobalSantaFe Corp., Noble Corp. and Pride International were among those involved.

In July 2007, Panalpina disclosed that some customers of its U.S. subsidiary had “been requested by U.S. authorities to produce documents related to the provision of its services to Nigeria . . . ." It said the federal investigation also related to Kazakhstan and Saudi Arabia for some customers.

In its Annual Report for the year ended December 31, 2007, Royal Dutch Shell plc included an FCPA disclosure related to Panalpina. Shell said,

In July 2007, Shell’s U.S. subsidiary, Shell Oil, was contacted by the U.S. Department of Justice regarding Shell’s use of the freight forwarding firm Panalpina, Inc and potential violations of the U.S. Foreign Corrupt Practices Act (FCPA) as a result of such use. Shell has started an internal investigation and is cooperating with the U.S. Department of Justice and the United States Securities and Exchange Commission investigations. While these investigations are ongoing, Shell may face fines and additional costs.

In October 2007, Schlumberger said it was under investigation because of Panalpina's freight-forwarding and customs clearance practices. Last week, the Wall Street Journal reported that the DOJ is investigating potential bribery in Yemen by Schlumberger Ltd. The story didn't say whether the Yemen investigation was connected with Schlumberger's earlier disclosure about Panalpina.

In July this year, Tidewater Inc. said in its annual report that it expected a settlement soon with the SEC and possibly the DOJ. It said its SEC settlement would require a total payment of about $11.4 million, consisting of $8.4 million in disgorgement and prejudgment interest, and a contingent civil penalty of $3 million. The disgorgement would be payable right away, while the contingent civil penalty would be due within 18 months, but only to the extent Tidewater has not paid a penalty to the DOJ for the same FCPA offenses.

Compliance concerns forced Panalpina in August 2008 to withdraw completely from the Nigerian domestic market. It had suspended local logistics and freight forwarding services there in September 2007 for all oil and gas-related customers. It said in 2008 it was cooperating with the DOJ and SEC in an FCPA investigation.

In July 2009, an investment fund that owns about 5% of Panalpina World Transport (Holding) Ltd. filed a federal civil suit in Texas against the company, some current and former officers and directors, and its owner before its 2005 IPO in Switzerland.

The fund sued to recover damages caused by Panalpina's withdrawal from Nigeria. There's no private right of action under the FCPA. Private litigants have to resort to other claims. In its case against Panalpina, the investment fund alleged violations of Sections 10(b) and 20 of the Securities Act, common law fraud, aiding and abetting common law fraud, and negligent misrepresentation.

The company operates through 500 branches in 80 countries with about 14,000 employees worldwide. It serves the rest of the world through local partners.

Panalpina Welttransport (Holding) AG (also known as Panalpina World Transport Holding Ltd.) trades on various European exchanges, and in the U.S. OTC pink sheets under the symbol PLWTF.PK.

Is The Giffen Case America's BAE?

We're always happy to hear from lawyer Andy Spalding, left. He recently returned from a year-long Fulbright Research Grant in Mumbai, India, and is now on the faculty at the Chicago-Kent College of Law.

He's been thinking about the extraordinary case of James Giffen, the former middleman to U.S. oil companies doing business in Kazakhstan. He writes:

Dear FCPA Blog,

With James Giffen's plea on Friday to a mere misdemeanor, the case is drawing to an anti-climatic and curious close. In an era of ever-increasing fines and penalties for FCPA violations, Giffen's modest settlement seems an aberration; even more peculiar, some have commented on how the otherwise highly-capable Southern District prosecutors fumbled through this case with atypical awkwardness.  

All of this gives rise to speculation that the case was subject to political pressures -- namely, that either the agencies that were asked to produce documents and stonewalled, or outside agencies that may have bore down on the Southern District, determined that the foreign policy implications of this case, involving delicate relations with resource-rich Kazakhstan, were so sensitive as to outweigh any public interest in Giffen's fulsome prosecution.

If political forces did indeed compromise the prosecution (and few of us can know for sure), does this scenario seem familiar to anyone?

Let's recall the similarly strange prosecution of BAE, the British defense contractor who allegedly paid more than $2 billion in bribes and kickbacks to a Saudi Arabian prince. The U.K.'s Serious Fraud Office opened an investigation, which it suddenly closed.  We would learn that pressure to terminate the investigation came from outside (or perhaps, above) the SFO: the Blair government apparently insisted on the file's closure in response to Saudi threats to cease cooperation with the UK's anti-terrorism efforts.  

The High Court in London berated the SFO for capitulating, and on appeal the House of Lords declared SFO's handling of the matter "extremely distasteful"; the SFO director resigned shortly thereafter. In apparent protest of the the SFO's decision, our DOJ opened its own investigation, and the SFO eventually reopened its file. The result? BAE settled with the DOJ for $400 million, the third-highest amount in FCPA history. But the SFO fined BAE a relative pittance -- £30 million. The parallel is unmistakable, and striking: in a case with heightened foreign policy sensitivities, allegations that seem to otherwise warrant a substantial settlement resulted in something far less.

In fairness to the DOJ, this may not be their fault: whether due to an uncooperative client, or irresistible political pressure, they may have wanted to push further but were hamstrung. Still, it raises a compelling question: Is the Giffen case America's BAE?

Thanks,
Andy Spalding