More Math For The General Counsel

Bruce Hinchey's post No Good Deed Goes Unpunished kicked up some dust around here. His effort to make sense of FCPA settlement numbers produced some exciting scholarship, which doesn't often happen.

We had meandered down that path a couple of years ago in our post Handicapping The FCPA, which looked at the amount of bribes paid compared to fines levied. That's one way to see things. But the settlements can also be viewed differently. Here's why.

The federal sentencing guidelines (chapter 8, part c) set out how fines should be calculated for organizations. There's a lot to consider. Like the size of the company, the number of employees, involvement of high-level management, prior history, whether there was voluntary disclosure, cooperation, and acceptance of responsibility, and finally the amount of gain or profit produced by the bribes (minus the amount paid through disgorgement).

Technically, then, disgorgement paid to the SEC is not part of the fine calculation under the sentencing guidelines. And removing disgorgement changes some of the ratios Bruce talked about.

In Baker Hughes' case, for example, the penalties without disgorgement were $21 million instead of $44 million. Baker's DPA at paragraph 24 of the statement of facts says: "Net revenues realized by Baker Hughes on the Karachaganak project were $189.2 million. After offsetting net revenues by the company's expenses, Baker Hughes recognized a profit of approximately $19.9 million."

The sentencing guidelines, then, would use the $19.9 million profit and not the amount of the bribes, which was $4.1 million. So the ratio for the penalty would be 1.05 -- not 10.73, as when looking just at the bribe paid. So is Baker Hughes an outlier and a harsh result as Bruce says? We're not too sure.

Schnitzer Steel is sometimes mentioned as an example of a self-reporting company not receiving any benefits. That appears to be true because it paid only $204,537 in bribes and $15.2 million in penalties. But $7.7 million was disgorgement. And, as the DOJ said in its June 2007 press release, the net profit to Schnitzer's subsidiary was $6.3 million, which would be a basis of the penalty calculation under the guidelines. (There was also a lot of management-level involvement in the bribery by Schnitzer's home-office people; as we said in an earlier post, the company "replaced the chairman of the board, hired a new CEO, and brought in a fresh team of senior management" as part of its corrective actions.)

One more thing to keep in mind. No study can account for cases where the DOJ doesn't charge a company that has voluntarily disclosed potential FCPA offenses. Those decisions aren't public but companies occasionally mention it themselves, Digi International being the latest. The ratios for them would be zero.

To be fair, Bruce didn't have the space in his post to get into a lot of detail. In his full paper, however, he talked about the sentencing guidelines and some of the issues we've mentioned above. And he'll have a chance to respond to this post soon, which we look forward to.

No Good Deed Goes Unpunished

While looking at FCPA enforcement data, Bruce Hinchey, left, made a startling and disturbing discovery about the consequences of self reporting.

Here's his story:

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Dear FCPA Blog,

Many question the Department of Justice’s claim that there are tangible benefits to voluntary disclosure of a FCPA violation.

As a part of a yet unpublished paper, I consider the data from 40 FCPA cases from 2002 through 2009 and the differences between bribes paid and penalties levied against companies that do and do not self-disclose.

In the paper, linear regression analysis of the cases reveals a sound statistical relationship between the amounts a company bribes and the corresponding fine it receives. For now, I will focus on the fine-to-bribe ratio companies face for FCPA violations. The fine-to-bribe ratio is calculated by simply dividing the total penalty a company received by the amount it bribed.

Voluntary Disclosures

Within the voluntary disclosure group the fine-to-bribe ratios ranged from encouragingly low (Bristow Group Inc. and Latinode Inc. stand out with a fine-to-bribe ratio of 0 and .89, respectively) to strikingly high (Baker Hughes Inc. and Schnitzer Steel Industries Inc. had fine-to-bribe ratios of 10.73 and 8.46, respectively). On average, this group faced a 4.53 fine-to-bribe ratio. Thus, it appears as though a voluntarily disclosing company might expect a fine of $4.53 for every dollar given as a bribe.

Involuntary Disclosures

The involuntary disclosure group also had surprisingly high ratios (Flowserve Corp. and Akzo-Nobel NV had fine-to-bribe ratios of 17.37 and 13.42, respectively) and low ratios (the Chevron Corp. and El Paso Corp.’s fine-to-bribe ratios were 1.5 and 1.41, respectively). This group, however, faced an average fine-to-bribe ratio of 3.22, suggesting a non-voluntarily disclosing company might expect a fine of only $3.22 per dollar bribed, compared to the voluntary disclosure group’s 4.53. This ratio would be even lower had it included the disproportionately low fine-to-bribe ratios levied in the cases against Siemens AG and KBR, which I dismissed as outliers.

Remaining Questions

Given the bribe-to-fine ratios in the published cases in recent years, the Justice Department appears not to be following up with its promised benefits. The seemingly disproportionate bribe-to-fine ratios outlined above raise questions about whether current FCPA enforcement is fundamentally fair.

Many thanks,

Bruce Hinchey

______________________

Bruce is a lawyer completing an LLM in government procurement law at the George Washington University Law School. His paper, "Punishing the Penitent: Disproportionate Fines in Recent FCPA Enforcements and Suggested Improvements," can be downloaded at SSRN here.

It was generous of Bruce to share his work with us and our readers. Thank you, Bruce, for blowing our mind.

He's currently looking for a position in an FCPA defense and government contracts practice and can be reached at bhinchey@law.gwu.edu

Asian Values, FCPA Risks

By Michael S. Diamant

Few FCPA compliance challenges are as vexing as the provision of everyday business courtesies, like gifts, meals, drinks, travel, and entertainment. Because the FCPA has no de minimis threshold, even minor expenditures could implicate the statute’s anti-bribery and accounting provisions. Although they are a necessary and common facet of international business, such benefits have led to enforcement actions against companies like Lucent Technologies, Avery Dennison, and UTStarcom.

Multinational companies that do business in China confront this challenge daily. The Chinese business environment particularly amplifies this risk for two reasons. First, the Chinese government owns a huge percentage of its domestic economy.  It is thought to own more than 70% of the country’s productive wealth, and it is the majority shareholder of 31% of publicly listed Chinese companies.

This has profound implications for FCPA compliance due to how the law is currently enforced: In their prosecution of companies like Schnitzer Steel, the U.S. regulators have taken an expansive view of the meaning of “foreign official.” The statute defines “foreign official” as an “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.” According to the U.S. authorities, this includes for-profit businesses, like steel mills, that are only partially owned or controlled by a foreign government.

Therefore, China’s broad ownership of its publicly listed companies qualifies a huge percent of Chinese businesspeople as “foreign officials” according to U.S. regulators.  When you discuss a prospective deal over dinner or a drink with a Chinese business executive, you might be giving a thing of value to a foreign official!

Second, Chinese business culture typically values the provision of things of value to build relationships. This development of business connections, termed guanxi, is especially important for multinational companies trying to develop business in China and make inroads into that country’s booming economy. Further, the failure to reciprocate courtesies that have been provided by your business counterparties in the past may be seen as rude and could hamper business. The risk of offending on one hand may be balanced against the risk of violating the FCPA on the other.

Over the years, we have advised numerous multinational companies on how to handle this conundrum.  This month we published an article in the Virginia Law & Business Review that gathers some of our accumulated wisdom on the issue, both by performing a legal analysis of the FCPA’s anti-bribery provisions to determine why certain business courtesies are permissible while others are not and by providing some internal compliance suggestions to manage this risk with regard to a company’s Chinese operations. We hope readers of the FCPA Blog find it helpful. It can be downloaded here.

Michael Diamant is a member of the white collar defense and investigations practice group in the Washington, D.C. office of Gibson, Dunn & Crutcher. His practice focuses on white collar criminal defense, internal investigations, and corporate compliance. He has conducted internal investigations in eleven countries on four continents regarding possible FCPA violations and assisted clients in complying with government subpoenas and negotiating settlements with enforcement agencies.

Prosecuting Private Overseas Corruption

Hold on. When did the United States criminalize commercial overseas bribery? We're not talking about bribes to foreign officials under the Foreign Corrupt Practices Act.* But bribes overseas to private parties. When did that become a federal offense? Well, it happened this year when the Justice Department indicted California valve-maker Control Components Inc. (CCI) and six of its former employees. Here's how.

They were all charged under both the FCPA and the Travel Act (18 U.S. C. §1952). The latter prohibits traveling between states or countries or using an interstate facility in aid of any crime, and carries a 5-year jail sentence for most offenses. Here's the thing. The underlying crime doesn't have to be a federal offense. Traveling around or using the mails to violate a state law can also trigger a Travel Act violation.

In the cases of CCI and the six ex-employees, the federal government alleged they violated or conspired to violate California's anti-bribery law (California Penal Code section 641.3). It bans corrupt payments anywhere of more than $1,000 between any two persons, including private commercial parties. In the federal indictments, the Travel Act charges relied on alleged violations of California's anti-corruption law. CCI pleaded guilty to its three-count indictment; the six ex-employees have pleaded not guilty and are presumed innocent unless convicted at trial.

When it announced CCI's guilty plea, the DOJ talked about the company's private overseas bribery. It said:

According to the information and plea agreement, from 1998 through 2007, CCI violated the FCPA and the Travel Act by making corrupt payments to numerous officers and employees of state-owned and privately-owned customers around the world, including in China, Korea, Malaysia and the United Arab Emirates, for the purpose of obtaining or retaining business for CCI. Specifically, from 2003 through 2007, CCI paid approximately $4.9 million in bribes, in violation of the FCPA, to officials of various foreign state-owned companies and approximately $1.95 million in bribes, in violation of the Travel Act, to officers and employees of foreign and domestic privately-owned companies.

We've seen references to private bribery in other FCPA enforcement actions. Schnitzer Steel is one example. The DOJ said its employees had bribed people not only at government-owned enterprises but also at private companies abroad. But Schnitzer was charged only under the books and records and internal controls provisions of the FCPA and not the Travel Act, so specific allegations about private bribery weren't part of the actual charges.

In CCI's case, however, its private overseas bribery violated California law. That's what formed the basis of the Travel Act charge in the indictment. And in its plea agreement, one of CCI's undertakings was directed specifically at private bribery that fell outside the scope of the FCPA. The plea agreement said:

CCI shall truthfully disclose . . . all matters relating to corrupt payments to foreign public officials or to employees of private customers . . . about which CCI has any knowledge . . . .

What does it all mean? That the DOJ is now prosecuting (and monitoring) not just bribes to foreign officials that violate the Foreign Corrupt Practices Act but also corrupt payments to private overseas parties that violate state law. Is this a massive expansion of the DOJ's battle against foreign corruption by U.S. companies and their employees? Oh yes.

What's next? All of a sudden, it seems like a very good time to re-evaluate compliance programs -- and make sure they cover both public and private overseas bribery.

We're grateful to an extremely astute reader in Asia for helping us understand the importance of the Travel Act charges in the CCI-related indictments.

* Foreign official is defined in the FCPA at 15 U.S.C. §78dd-1(f)(1)(A), §78dd-2(h)(2)(A) and §78dd-3(f)(2)(A). "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."

Download the DOJ's July 31, 2009 release about CCI's guilty plea here.

Download a copy of CCI's July 22, 2009 plea agreement here.

Download the July 22, 2009 criminal information against CCI here.

Download the indictment of the six former executives of CCI here.
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The SEC Takes It Back

Disgorging profits is a common and prominent feature these days in Foreign Corrupt Practices Act settlements with the Securities and Exchange Commission. Last year Siemens disgorged $350 million and this year KBR paid $177 million. Maybe because disgorgements now happen so often, or because the payments have become so enormous, we automatically accept them as a suitable remedy. We don't question why the SEC uses disgorgement, where the remedy came from, or where it's going.

But at least one person has asked those questions. He's David C. Weiss (Dartmouth College, Michigan Law School), student-author of an extended note in the January 17, 2009 edition of the Michigan Journal of International Law.

According to Weiss, disgorgement never appeared in an FCPA enforcement action until just five years ago. That's right -- 27 years passed without a single FCPA-related disgorgement order. Then, in 2004, ABB Vetco Gray, Inc. paid $16.4 million in disgorgement and prejudgment interest. Next came Titan Corp. in 2005, paying $15.5 million. That same year, Diagnostics Products Corp. disgorged $2.8 million and DPC (Tianjin) Co. Ltd. $2.8 million. In 2006, Schnitzer Steel Industries, Inc. disgorged $7.7 million and Statoil $10.5 million. In 2007, Baker Hughes Inc. disgorged $23 million, El Paso Corp. $5.5 million, and York International $10 million.

Want to hear the rest? In 2008, Fiat disgorged $7.2 million, Siemens $350 million, Faro Technologies $1.8 million, Willbros $10.3 million, AB Volvo $19.6 million, Flowserve $3.2 million, and Westinghouse Air Brake Technologies Corp. $289,000. And so far this year, ITT Corporation has disgorged $1.4 million, and KBR $177 million.

Disgorgement, then, has a short but intense history in FCPA enforcement actions, and it seems to have appeared out of the blue. As Weiss puts it, "The SEC has developed the 'law' of disgorgement with neither the input, contemplation, nor blessing of Congress, and it is for this reason that one should ask normative questions about the role of disgorgement in the future enforcement of the prohibition on foreign bribery."

He points out that the SEC began requiring disgorgement just when other countries (with U.S. encouragement) started enacting their own extra-territorial anti-corruption laws. So here's the question: When more than one country enforces antibribery laws against a single company, which jurisdictions, if any, should use disgorgement as a remedy? Who decides, for example, if Siemens should forfeit ill-gotten gains to the United States Treasury or the German Chancellery? How about Italy or Norway, Greece or Argentina?

Weiss looks at laws around the world aimed at punishing foreign public bribery, and particularly those with disgorgement-like remedies. "The penal codes of at least twenty-one countries," he says, "include provisions for 'forfeiture' or 'confiscation' of the proceeds of a crime, or they base the amount of a fine on such proceeds." His survey shows just how new most of the laws are -- the majority coming into force either following enactment of the OECD anti-corruption convention in 1998 or after the events of 9/11 in 2001.

There's no evidence, Weiss says, that "Congress intended that the SEC pursue disgorgement as it has done since 2004. This fact alone should at least make one question the normative function of disgorgement." Disgorgement, he says, wasn't mentioned when the FCPA was first debated and adopted in 1977, nor when Congress amended the law in 1988 or 1998. Weiss himself doesn't say the SEC lacks the legal mandate to pursue disgorgement or that the remedy is somehow improper. But he does point out that the "lack of any statement that disgorgement should be part of the SEC’s enforcement arsenal, and the rarity of the remedy at the time that Congress passed the FCPA and its amendments, are reasons that some commentators have used to question the impropriety of the remedy."

It's great to see the Foreign Corrupt Practices Act as the object of some fresh research and scholarship. And at 47 pages and 238 footnotes (a couple of which mention the FCPA Blog), Weiss' work is thorough and thoughtful.

The cite for the note is: Weiss, David C.,The Foreign Corrupt Practices Act, SEC Disgorgement of Profits, and the Evolving International Bribery Regime: Weighing Proportionality, Retribution, and Deterrence, Michigan Journal of International Law, Vol. 30, No. 2 (January 17, 2009).

It's available from SSRN here.
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