Reducing C-Level Risk In Compliance Land

By David Riker

The CEOs, CFOs, COOs and Chief Compliance Officers we meet with are well aware of the FCPA and are working to put in place compliance programs to keep their companies on the right side of the law, but they are not terribly concerned about their own personal exposures. Their logic: If I’m not physically handing over a bag of money to a corrupt government official, I’m clean.

This, of course, is not true. According to this great analysis from Chadbourne & Parke (in pdf here), 53 of the 61 individuals charged with violating the FCPA over the past six years were senior corporate officers, not bag men. Moreover, 8 of these individuals were charged despite committing no direct action in the corrupt act.

Based on our own analysis of hundreds of FCPA cases, meetings with C-level managers and FCPA screening programs implemented around the world, we’ve come up with a five question reality check for senior execs who don’t think they need to worry about their personal exposure to the FCPA:

Is your company doing business in Mexico, Nigeria, Brazil, China or India?

Operations in countries with less mature corporate governance laws/regulations are more likely to create a compliance breach for a multinational firm. It is critical to segment vendors, suppliers and marketing partners on a continuum of high-to-low risk based on their country of origin. China, for example, has seen a 50% increase in vendor, supplier and procurement fraud between 2010 and 2011 according to our annual Global Fraud Report.

Are you in the energy, manufacturing, pharmaceutical, defense or telecom sectors?

Based on total fines and recent enforcement trends, these are the highest risk industries. Since the FCPA was passed in 1977, companies in the Energy sector have been fined $2 billion; Defense and Aerospace contractors have been fined $443 million; Manufacturing firms have been fined $225 million;and Telecom companies have been fined $218 million. The DOJ has also been vocal about its plans to target more Pharmaceutical companies, which currently account for $84 million in total fines.

Do I know what I need to know about who I know?

The nature of emerging market expansion is such that multinationals typically assemble networks of vendors and agents to rapidly put boots on the ground in these regions. Perhaps not surprisingly, subsidiaries, agents and vendors are often a corporation’s weakest link in foreign corruption cases. These corporate outsiders, most of whom were probably not screened or background-checked like full-time employees, need to be vetted.

How can I standardize the process of compliance-checking everyone everywhere all at once?

As every 21st century CEO knows, good systems make good managers. Unfortunately, the process of vetting compliance measures in fast-moving emerging markets has historically been done in an ad-hoc, incomplete fashion with some regions collecting some data on vendors and partners, others collecting altogether different information and others collecting none. To avoid data overload, it is critical to build a systemic approach to fraud risk analysis.

What do I do when I find a violation?

We see this most commonly in the mergers and acquisition process: due diligence will reveal a series of inappropriate payments or other questionable accounting that raises serious red flags.  What managers do with this information can be the difference between a reputation for courageous leadership and potential personal liability. History has proven again and again that companies who spot a problem early and self-report it are far less likely to find themselves tangled in a long, painful investigation and, if they do, they are much more likely to avoid major sanctions.

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David Riker is Managing Director, Third Party Screening at Kroll. He blogs about corporate compliance risk at www.fcpalert.com. He can be contacted here.

O’Shea Acquitted On All Counts

In another serious blow to the DOJ's FCPA unit, former ABB manager John O'Shea was acquitted yesterday of bribing officials at Mexico's state-owned electric utility and covering up the payments.

U.S. District Judge Lynn N. Hughes granted O'Shea's motion for acquittal on the substantive charges at the close of the prosecution’s case. He then dismissed the jury.

The judge said the government’s chief witness, Fernando Basurto Jr., couldn't tie O’Shea to the alleged bribery and cover up. Judge Hughes said O’Shea’s conduct was reasonably explained by lawful motives.

O'Shea was represented by Joel M. Androphy (pictured) and Sarah M. Frazier, partners of Berg & Androphy, and associate Ashley Gargour.

Androphy said, “Deflecting blame for bribery in corruption-ridden countries onto unknowing business executives is both Cervantian and unfair. My hope is that our victory for Mr. O’Shea will encourage others wrongfully accused under the FCPA to fight the charges against them.”

Judge Hughes also questioned the prosecution's granting of immunity to Fernando Basurto Sr. that allowed him to disclose selective information to prosecutors. He didn't testify at the trial.

The government had accused O’Shea of authorizing corrupt payments to officials of Mexico's Comisión Federal de Electricidad (CFE) through Basurto's company in exchange for an ABB contract to provide utility products and services.

O'Shea faced one count of conspiracy to violate the FCPA, twelve substantive FCPA counts, four counts of international money laundering, and one count of falsifying records in a federal investigation. If convicted on all counts, he could have been sentenced to more than twenty years in prison.

Chris Matthews of the Wall Street Journal said O’Shea still faces the money laundering counts and a charge of falsifying records, and could be retried for those offenses.

Fernando Basurto Jr., a Mexican citizen, admitted in a guitly plea in 2009 that he paid kickbacks to officials at CFE in exchange for contracts for ABB. He's waiting to be sentenced on one count of conspiracy to violate the FCPA, launder money, and falsify records.

In September 2010, ABB Ltd of Switzerland reached a $58 million settlement with the DOJ and SEC. Its U.S. unit that O'Shea worked for pleaded guilty to one count of violating the anti-bribery provisions of the FCPA and one count of conspiracy to violate the FCPA.

O'Shea's acquittal was the latest in a string of setbacks for the DOJ in its prosecution of individuals under the FCPA.

In December last year, a federal judge in Los Angeles dismissed indictments against three defendants because of misconduct by prosecutors. Keith Lindsey and Steve K. Lee, and their company Lindsey Manufacturing, were convicted by a jury of bribing Mexican officials, also at the electric utility CFE. But Judge Howard Matz threw out the convictions. He said prosecutors withheld evidence and violated court orders, among other things. The DOJ is appealing the dismissals.

Also in December, a federal judge in Washington, D.C. dismissed FCPA conspiracy charges against six Africa sting defendants. Five of the defendants face other charges and their trial is ongoing. But Judge Richard Leon's ruling resulted in the outright acquittal of Stephen G. Giordanella, who faced only one count of conspiracy to violate the FCPA. The judge said there was insufficient evidence to sustain a conspiracy conviction.

In July last year, the first Africa sting trial ended in a mistrial for four other defendants. Judge Leon declared the mistrial when the jury failed to reach a verdict after deliberating for five days. The government said it will retry the four defendants later this year.

O'Shea's lawyer Ashley Gargour said, “Justice was served with this acquittal of Mr. O’Shea. A married father of two daughters and a recent grandfather, John has had an exemplary career for more than 35 years as an engineer, manager, and businessman specializing in computer systems that run electricity grids and other sophisticated infrastructure.”

O'Shea was arrested in November 2009. His trial in Houston opened on January 11. Jason Varnado, Nicola Mrazek, Charles Duross, and Lisa Diemert appeared for the DOJ.

The case is U.S. v. John Joseph O’Shea, No. H:09-cr-629, in the U.S. District Court for the Southern District of Texas, Houston Division.

Final Countdown For O'Shea

Jury selection in John O'Shea's trial is scheduled to start on January 11.

The former ABB manager is being tried in federal court in Houston before Judge Lynn N. Hughes.

He's charged with one count of conspiracy to violate the FCPA, twelve substantive FCPA counts, four counts of international money laundering, and one count of falsifying records in a federal investigation. He also faces a forfeiture count.

The conspiracy and substantive FCPA counts each carry a penalty of up to five years in prison. The money laundering and falsification of records counts each carry a maximum penalty of twenty years in prison.

Last week, O'Shea lost his 'foreign official' challenge. He argued that alleged recipients of the bribes were employees of Comisión Federal de Electricidad (CFE), a Mexican state-owned enterprise. SOEs aren't government 'instrumentalities' under the FCPA, O'Shea said, so their employees aren't 'foreign officials.'

Judge Hughes didn't issue a written ruling. But he accepted as facts that under Mexican law electricity is a public service, CFE has a monopoly over it, a Mexican ministry sets requirements for CFE, the President of Mexico appoints the general director of CFE, and CFE's governing board includes ministry secretaries.

The judge in the Lindsey case also ruled that CFE was an 'instrumentality' under the FCPA and its people were 'foreign officials.'

After the ruling in O'Shea's case, prosecutors asked Judge Hughes for this jury instruction:

The term “foreign official” means any officer or employee of a foreign government or any department, agency, or instrumentality. An “instrumentality” of a foreign government includes state-owned or state-controlled companies.

Last year, O'Shea lost motions to dismiss based on the statute of limitations and on government misconduct for withholding evidence.

Fernando Basurto is expected to testify against O'Shea. He's a Mexican citizen O'Shea hired to act as ABB's sales agent. Basurto admitted in a guitly plea in 2009 that he paid kickbacks to officials at CFE in exchange for contracts for ABB.

In September 2010, ABB Ltd of Switzerland reached a $58 million settlement with the DOJ and SEC. Its U.S. unit that O'Shea worked for pleaded guilty to one count of violating the anti-bribery provisions of the FCPA and one count of conspiracy to violate the FCPA. Since then, ABB has been cooperating with prosecutors by handing over evidence developed during internal investigations.

DOJ Tosses Aguilar's Conviction, Pending Appeal

The government last week agreed to vacate Angela Aguilar's conviction pending its appeal of the judge's order to dismiss the indictments against her co-defendants.

Aguilar, 56, a Mexican citizen, was convicted in May with the Lindsey and Lee defendants. She was charged with conspiracy to launder money. After her conviction, she faced up to twenty years in prison.

Earlier this month, Judge Howard Matz dismissed the indictments against Lindsey Manufacturing, Keith Lindsey, and Steve K. Lee after they were convicted of conspiracy and substantive FCPA counts. The judge cited misconduct by the prosecution. The DOJ said last week it plans to appeal the dismissal.

Aguilar's indictment wasn't dismissed by the judge's ruling. Unlike the Lindsey and Lee defendants, she didn't fight her conviction. Instead she agreed in June to a sentencing deal with the feds that required her to forfeit $3 million in family assets but released her from federal detention and allowed her to return to Mexico.

But the DOJ last week voluntarily tossed her conviction based on the judge's decision about the Lindsey and Lee defendants.

'We are delighted that Angela Aguilar will be given the opportunity to have her conviction set aside, if the Lindsey dismissal is upheld,' said Jan Handzlik of Venable LLP, the lawyer for the Lindsey defendants. 'The government should be commended for agreeing to this.'

Aguilar's husband, Enrique Faustino Aguilar Noriega, 56, of Cuernavaca, Mexico, was also charged in the case. He faced a seven-count indictment for conspiracy to violate the Foreign Corrupt Practices Act, four substantive FCPA violations, money laundering conspiracy, and money laundering. He didn't appear at the trial and is a fugitive in Mexico.

The couple allegedly laundered money used to bribe an official of the Mexican state-owned electric utility, Comisión Federal de Electridad (CFE), on behalf of Lindsey Manufacturing. The indictment alleged that Noriega bought a yacht for $1.8 million and a Ferrari for $297,500 for a CFE official. He was also charged with paying more than $170,000 of American Express bills and sending about $600,000 to the CFE official's relatives.

Breaking: Lindsey and Lee Indictment Dismissed (Updated)

It was a long time coming, but justice has been done.

-- Jan Handzlik, attorney for the Lindsey defendants

Federal District Judge Howard Matz on Tuesday dismissed with prejudice the indictment against Lindsey Manufacturing, Keith Lindsey, and Steve K. Lee, ending the prosecution of one of the biggest FCPA cases ever.

The judge in Los Angeles said government misconduct 'included providing false information to obtain a search warrant, making unauthorized searches, and providing incorrect testimony to a grand jury,' according to Bloomberg's report.

The Lindsey defendants and Lee were each convicted by a federal jury in May of conspiracy to violate the Foreign Corrupt Practices Act and five substantive FCPA offenses.

The government said they paid millions in bribes to Nestor Moreno, an official at the Mexican state-owned electric utility Comisión Federal de Electridad, in exchange for contracts.

Following Tuesday’s hearing, Jan Handzlik told the FCPA Blog: “In the 38-page tentative order provided to the parties today, Judge Matz said the convictions should be thrown out and the indictment dismissed with prejudice. The judge told the parties he would make some revisions to the tentative order and enter the final order tomorrow.”

A dismissal of the indictment with prejudice means the defendants cannot be tried again for the same offenses. If the judge’s final order is consistent with the tentative order, the government’s only option will be to appeal the dismissal to the Ninth Circuit Court of Appeals.

Another defendant in the case, Angela Aguilar, a Mexican citizen, was convicted of conspiracy to launder money. Her husband, Enrique Faustino Aguilar Noriega, of Cuernavaca, Mexico, was charged in a seven-count indictment with conspiracy to violate the Foreign Corrupt Practices Act, four substantive FCPA violations, money laundering conspiracy, and money laundering. He's a fugitive in Mexico.

After her conviction, Aguilar accepted a sentencing deal with the DOJ. It called for time served (about nine months in custody without bail since her arrest in Houston), a probationary sentence, immediate release from prison and return to Mexico, and no fine, but she agreed not to contest the government's seizure of about $3 million in family assets.

The Lindsey and Lee defendants had argued that prosecutors 'engaged in a course of misconduct that was both flagrant and prejudicial.' 

In July, Lindsey defense counsel Handzlik told us: "Individually, several of these transgressions [by the prosecutors] would justify dismissal. Considered on a cumulative basis, however, the unfairly prejudicial impact of this conduct was extraordinarily damaging."

Judge A. Howard Matz presided over the case -- U.S. v. Noriega et al, U.S. District Court, Central District of California (Western Division - Los Angeles), Case #: 2:10-cr-01031-AHM-4.

Jan L. Handzlik of Venable defended Lindsey Manufacturing and Dr. Keith Lindsey. Steve K. Lee was represented by Janet Levine of Crowell & Moring.