Fox's Favorites For 2010

Attorney Thomas Fox looks back on 2010's most memorable enforcement actionsBy Thomas Fox

As December is a time for reflection on the past twelve months, I have been considering the FCPA year. I submit for your consideration my Top 10 Favorite FCPA Enforcement Actions for 2010. Happy Holidays to all!

1. Alliance One/Universal Corp.-the DPAs list the specific steps that a company can take during the pendency of a FCPA investigation to reduce the overall fines and penalties.

2. Daimler-a company can receive credit for self-disclosure under the sentencing guidelines even if it does not self report a possible FCPA violation. The DOJ investigation was started by a whistleblower report to the DOJ but Daimler nevertheless received a two-point reduction in its culpability. 

3. NATCO-if a company pays money that is an extortion payment, it must accurately report such payments on its books and records. Otherwise such payments violate the books and records component of the FCPA. 

4. Nexus Technologies, Inc.-demonstrates the differences viewed by the courts and DOJ regarding sentencing of FPCA defendants. The sentencing recommendations by DOJ and sentences passed down by court were as follows:

•  Nam Nguyen-DOJ recommended-14 to 17 years. Sentenced-16 months.
•  An Nguyen-DOJ recommended-7 to 9 years. Sentenced-9 months.
•  Kim Nguyen-DOJ recommended-6 to 7 years. Sentenced-Probation.
•  Joseph Lukas-DOJ recommended 3 to 4 years. Sentenced-Probation

5. Nigerian Bribery Case-the conclusion of enforcement actions against Technip ($338 million) and Snamprogetti and ENI ($365 million) bring the total fines and penalties paid by companies involved in this matter approximately $1.28 billion to-date. Additionally, this month, one UK citizen, Wojciech Chodan was extradited from the UK, brought to the US and has now pled guilty to violation of the FCPA. Another UK citizen, Jeffery Tesler, has appealed his UK extradition order. In an interesting development, the country of Nigeria charged former Halliburton CEO Dick Chaney regarding the bribery payments and such charges were dropped for payment of a (reported) $250 million fine. 

6. Panalpina Settlements-the largest one-day settlement of FCPA enforcement actions, which included Panalpina, Shell, Transocean, Pride, GlobalSantaFe [now owned by Transocean], Tidewater and Noble who received a NPA. In Appendix C to each DPA, (Appendix B to Noble's NPA) is the DOJ’s most current views on the minimum best practices of a FCPA compliance program.

7. RAE Systems, Inc.-companies are fully liable for their joint ventures actions and that even with actual knowledge of FCPA violations, conduct during the DOJ investigation can result in a Non-Prosecution Agreement. Appendix B of the DPA provides additional guidance on due diligence to be performed on JVs prior to purchase of any ownership interest. 

8. Gerald and Patricia Green-two individuals convicted of FCPA violations at trial in July, 2009. The DOJ had originally sought a sentence of 25 years for Gerald Green (later reduced to requesting 10 years) and a ten year sentence for Patricia Green. U.S. District Judge George Wu sentenced the couple to six months each. While this sentence reduction may result in more personal freedom, the DOJ has obtained such complete forfeiture of the couples’ assets such that they have filed in forma pauperis appeals. 

9. Haitian Telecom-foreign governmental official who was the recipient of an bribe (which is not illegal under the FCPA) was sentenced to four years in prison under U.S. Anti-Money Laundering laws. 

10. Innospec-the company had its agreed to fines and penalties of $60 million for its FCPA violations reduced to approximately $11.2 million based upon the company’s inability to pay. 

Thomas Fox is an attorney in Houston, Texas, specializing in FCPA compliance, risk management and international transactions. His blog can be found here and he can be reached at tfox@tfoxlaw.com.

NATCO Settles "Extorted" Bribe Case

The Securities and Exchange Commission kicked off the FCPA-enforcement year this week with civil books and records and internal controls charges against Texas-based oil and gas services firm NATCO Group Inc. The company admitted that its wholly owned subsidiary, TEST Automation & Controls, Inc., "created and accepted false documents while paying extorted immigration fines and obtaining immigration visas in the Republic of Kazakhstan."

NATCO agreed to pay a $65,000 civil penalty. In settling with the SEC in federal court in Houston, NATCO admitted that its "system of internal accounting controls failed to ensure that TEST recorded the true purpose of the payments, and NATCO's consolidated books and records did not accurately reflect these payments." It also consented to an administrative cease and desist order against future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act.

The case confirms that civil FCPA charges can result from paying blackmail money to protect the welfare of employees overseas. Many companies are faced with extortionate demands from foreign police, bureaucrats and regulators, who threaten to hold, expel or even harm employees if ransoms aren't paid. There have always been questions whether those involuntary payments can violate the FCPA.

In criminal antibribery cases --  where intent is an element of the FCPA offense -- extortion is a defense. The issue came up in last year's criminal trial of Frederic Bourke for conspiracy to violate the FCPA. When he asked for a jury instruction on "true extortion," Judge Shira Scheindlin said evidence of extortion would go to the issue of whether Bourke possessed a corrupt intent in making alleged illegal payments. She explained that the government must prove beyond a reasonable doubt that a defendant had an improper motive or purpose for a payment intended to induce the recipient to misuse his official position in discharging an official act. On the other hand, she said, evidence of extortion can show the defendant acted without a corrupt intent. See our post here.

But unlike criminal cases, civil books and records and internal controls charges don't require mens rea or corrupt intent. So extortion isn't a defense. In NATCO's case, the SEC acknowledged the extortion. It said TEST's employees were threatened with fines, jail or deportation, and they believed the threats to be genuine. NATCO's violations, however, occurred not in paying the ransom but in mischaracterizing the payments to cover them up.

Here, from the SEC's complaint, is more of what happened:

In February and September 2007, Kazakh immigration prosecutors conducted audits and claimed that TEST expatriate workers lacked proper immigration documents. The prosecutors threatened to fine, jail or deport the workers if TEST did not pay cash fines. The TEST employees believed the prosecutor’s threats to be genuine. They sought guidance from TEST’s senior management in Harvey, Louisiana, who authorized the payments.

The TEST employees in Kazakhstan used personal funds to pay the prosecutors $25,000 in February and $20,000 in September, and then obtained reimbursement from TEST.

For the February 2007 payment, TEST made a $25,000 wire transfer to the affected employee. TEST inaccurately described it in an email as “an advance against his [the paying employee's] bonus payable in March.” As further camouflage, the email noted the bonus would be “substantial.” And in TEST’s letter to the bank providing wire instructions, the company inaccurately described the payment as a “Payroll Advance.” TEST then falsely recorded the payment in its books and records as a salary advance.

The SEC said TEST Kazakhstan used consultants to help obtain immigration documentation for its expatriate employees. It said,

One of these consultants did not have a license to perform visa services, but maintained close ties to an employee working at the Kazakh Ministry of Labor, the entity issuing the visas. On two instances, the consultant requested cash from TEST Kazakhstan to help him obtain the visas. . . . [T]he consultant provided TEST Kazakhstan bogus invoices for “cable” from third-party entities he controlled. TEST Kazakhstan knew these invoices were false, but nonetheless presented them to Kazakh banks to withdraw the requested cash. TEST Kazakhstan later submitted the false invoices – which totaled in excess of $80,000 – to TEST for reimbursement. TEST reimbursed these requests despite knowing the invoices mischaracterized the true purpose of the services rendered.

When the violations occurred, NATCO was an issuer. Its common stock was registered with the SEC under Section 12(b) of the Exchange Act and listed on the New York Stock Exchange. In November 2009, NATCO became a subsidiary of Cameron International Corporation, a publicly held reporting corporation listed on the NYSE, and the registration of NATCO’s common stock and its listing on the NYSE ended.

View the Securities and Exchange Commission's Litigation Release No. 21374 and Accounting and Auditing Enforcement Release No. 3102  (both dated January 11, 2010) in Securities and Exchange Commission v. NATCO Group Inc., Civil Action No. 4:10-CV-98 (S.D. Tex.) here.

Download the SEC's civil complaint here.

Download the federal court's final judgment here.

Download NATCO's consent to the final judgment here.

Download the order instituting cease-and-desist proceedings here.

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Special thanks to Marc Bohn in the District of Columbia for help with this post.