In Carson Case, DOJ Agrees 'Foreign Official' Knowledge Is Required

Does a defendant need to know a bribe taker is a 'foreign official' to be guilty of an FCPA offense?

According to the DOJ, the answer is 'yes.'

The question came up this month in U.S. v. Carson et al.

Prosecutors and the defendants have been trying to work out jury instructions for the trial, set to start in June next year.

In May, the defendants lost a motion to dismiss the FCPA counts against them based on the definition of 'foreign official.' They claimed employees of state-owned enterprises aren't covered by the FCPA. The court disagreed.

But this month the arguments about 'foreign officials' resurfaced. This time in the discussion about jury instructions. Judge James V. Selna asked both parties to consider whether an element of an FCPA offense is a defendant's knowledge that the individual allegedly taking a bribe is a 'foreign official.'

The DOJ and the Carson defendants have both answered 'yes.'

They haven't agreed yet on the final language for the jury instructions.

The trial is set to begin on June 5, 2012. The defendants -- Stuart Carson, Hong Carson, Paul Cosgrove, David Edmonds, Flavio Ricotti, and Han Yong Kim -- are facing FCPA and Travel Act-related charges.

They're accused of bribing employees at state-owned companies in Korea, China, the UAE, and Malaysia.

The case is US v. Carson et al, U.S. District Court, Central District of California, Southern Division - Santa Ana, Case #: 8:09-cr-00077-JVS-1.

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Here's part of the government's latest brief, filed Monday:

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At the hearing on September 6, 2011, the government requested an opportunity to submit further briefing on the following hypothetical question posed by the Court:

THE COURT: I want to get the business, and I’m going to pay you $50,000. I want you to misuse your position. I may or may not know that you’re a government official. But assume the record establishes that the person is a foreign official and that the conduct solicited, whether he knows it or not, is misuse of an official position. He intended to make the bribe, and his conduct brought about misuse of an official position. Must he know that? Must he know that the individual is in fact a government official?

The Court subsequently ordered the government to submit its brief no later than September 20, 2011, with any defense response to be filed no later than October 4, 2011. On September 21, 2011, the parties filed a stipulation stating, in part, as follows:

Since the hearing, counsel for the government and counsel for the Defendants have discussed the issue raised by the Court. Those discussions have yielded what appears to be at least some consensus that the answer to the questions posed by the Court is “yes.” Accordingly, the parties have exchanged proposed jury instructions to reflect the resolution of this issue. The parties expect that their discussions will result in a joint proposed jury instruction on the elements of a substantive offense under the FCPA. If those discussions do not result in a joint proposed jury instruction, the parties expect that additional submissions will be limited to their respective proposed instructions, and any legal argument explaining how their respective instructions in fact differ.

On September 22, 2011, the Court issued an Order resetting the briefing schedule, with the government’s brief due on September 26, 2011, and the defendants’ brief due on October 10, 2011. The parties have continued to exchange proposed instructions over the course of the past week but have been unable to reach agreement on certain language in elements 4 and 5 of the instruction.

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Download the government's September 26, 2011 supplemental brief regarding jury instructions; memorandum of points and authorities here.

Diageo Pays $16.4 Million In SEC Settlement

London-based Diageo plc will pay the SEC more than $16 million to resolve FCPA offenses that stretched over six years and involved bribes to foreign officials in India, Thailand, and South Korea.

The maker of many top liquor brands -- including Johnnie Walker and Windsor Scotch whiskeys -- paid $2.7 million in bribes through subsidiaries for sales and tax benefits.

Diageo's civil penalty consists of $11,306,081 in disgorgement, prejudgment interest of $2,067,739, and a further penalty of $3 million.

The company apparently won't be prosecuted by the DOJ for the offenses.

Diageo paid $1.7 million in bribes to government officials in India from 2003 to mid-2009. "The officials were responsible for purchasing or authorizing the sale of its beverages in India," the SEC said, "and increased sales from these payments yielded more than $11 million in profit for the company."

In Thailand, Diageo paid $12,000 per month from 2004 to 2008– totaling nearly $600,000 – to a Thai government and political-party official for "consulting" services. He intervened on Diageo’s behalf in multi-million dollar tax and customs disputes, helping it win favorable decisions from the Thai government.

In South Korea, it paid $86,000 to a customs official "as a reward for his role in the government’s decision to grant Diageo significant tax rebates." Other payments went to customs officials for travel and entertainment expenses connected with the tax negotiations. Diageo also gave hundreds of cash payments as gifts to South Korean military officials to obtain and retain liquor business.

“For years, Diageo’s subsidiaries made hundreds of illicit payments to foreign government officials,” said Scott W. Friestad, Associate Director of the SEC’s Division of Enforcement. “As a result of Diageo’s lax oversight and deficient controls, the subsidiaries routinely used third parties, inflated invoices, and other deceptive devices to disguise the true nature of the payments.”

It's unusual for the SEC to resolve FCPA violations with administrative action only. Usually it files a civil enforcement suit in federal court. 

The SEC said Diageo cooperated with the investigation and took remedial measures, "including the termination of employees involved in the misconduct and significant enhancements to its FCPA compliance program."

Diageo plc trades on the NYSE under the symbol DEO.

View the SEC's July 27, 2011 news release here.

Download the SEC's Release No. 64978, Accounting and Auditing Enforcement Release No. 3307, and Administrative Proceeding File No. 3-14490 (all dated July 27, 2011) here.

Breakthrough Enforcement Action In Korea

The Incheon (Korea) district prosecutor’s office in May indicted two representatives from a Korean logistics company and a travel agency under the Korean anti-bribery statute.

They're accused of bribing the executive of a Chinese airline, considered a public official because the airline is owned by the Chinese government.

The enforcement action is the first one under OECD-member Korea's overseas anti-corruption law, called the Act on Combating Bribery of Foreign Public Officials in International Business Transactions (the Foreign Bribery Act). An official English translation is available from the Korea Legislation Research Institute (registration is required, there's no charge).

The researcher for this post, John Chung, confirmed that the case is a first one enforcing the Foreign Bribery Act involving a foreign public official in Korean jurisdiction, and the first time the Act's enforcement involved a Chinese official. "It seems that this recent case is different from previous ones," Chung said, "because the Chinese foreign public official was in Korean jurisdiction during the breach whereas previous cases all involved U.S. military personnel on U.S. military base."

The representative of the Korean logistics company allegedly bribed the Chinese airline official in order to lower the transport fare and increase the transport quantity. The logistics firm is alleged to have handled up to 80% of logistics to China from Korea as a result of the bribe. 

According to reports, the representative of the Korean travel agency allegedly obtained a monopoly right to sell China-bound airline tickets in Korea because of the corrupt payments.

The alleged bribe amounts were $5.3 million from the logistics company and $1.4 million from the travel agent.  

Korea is one of China's biggest trading partners, behind only the U.S., Japan, and Hong Kong.

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Our thanks to Chun Woong (John) Chung, a member of the Massachusetts bar and a global compliance & ethics officer for Diageo in Korea, and to Professor Elizabeth Spahn at New England Law | Boston, for the research and most of the writing for this post.

IBM Pays $10 Million In SEC Settlement

IBM today resolved civil charges brought by the SEC for violating the books and records and internal control provisions of the Foreign Corrupt Practices Act.

The company admitted making improper cash payments to government officials in South Korea and China, and giving gifts and paying travel and entertainment expenses that violated the FCPA.

IBM will disgorge $5.3 million and pay prejudgment interest of $2.7 million, and pay a $2 million civil penalty.

From 1998 to 2003, the SEC said, employees in Korea of a wholly-owned subsidiary, IBM Korea, Inc., and of a majority-owned joint venture called LG IBM PC Co., Ltd., "paid cash bribes and provided improper gifts and payments of travel and entertainment expenses to various government officials in South Korea in order to secure the sale of IBM products." The bribes, improper gifts, and payments totaled $207,000.

And from at least 2004 to early 2009, employees of IBM (China) Investment Company Limited and IBM Global Services (China) Co., Ltd., both wholly-owned subsidiaries, "engaged in a widespread practice of providing overseas trips, entertainment, and improper gifts to Chinese government officials." The gifts included cameras and computers.

The FCPA includes an affirmative defense that allows payment or reimbursement of expenses of foreign officials that are directly related to “the promotion, demonstration, or explanation of products or services." 15 U.S.C. §§ 78dd-1(c)(2)(A) and 78dd-2(c)(2)(A). Many of IBM's payments, however, were not directly related to legitimate business purposes and were not recorded accurately in its books and records.

The SEC's complaint describes bribes to government officials in Korea consisting of bags stuffed with up to $20,000 in cash, and of slush funds at travel agencies in China that IBM used to pay for unauthorized overseas trips by government officials.

The SEC's civil complaint charged IBM with violating the books and records and internal control provisions of the FCPA, Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934.

The company trades on the NYSE under the symbol IBM.

View the SEC's Litigation Release No. 21889 and Accounting and Auditing Enforcement Release No. 3254 (both dated March 18, 2011) in Securities and Exchange Commission v. International Business Machines Corporation, Civil Action No. 01:11-cv-00563 (RJL) (D.D.C.) here.

Download the SEC's March 18, 2011 civil complaint against IBM here.

You're Grounded

An Italian citizen extradited from Germany in July last year to face FCPA charges was released from jail two weeks after his arraignment in California. But he can't leave home.

Flavio Ricotti was granted pre-trial bail of $500,000 and placed under "home incarceration." He can only go out for medical treatment, religious services, and court appearances -- and only then with the fed's pre-approval.

Ricotti, 49, was indicted in April 2009 with five other former executives of California-based valve-maker Control Components Inc. (CCI). He was a fugitive until his arrest in Germany and extradition to the U.S. The federal court in California denied the government's request that he be jailed until his trial.

His home incarceration includes "active electronic monitoring," paid for by Ricotti himself.

Under "intensive pretrial supervision," the U.S. is holding his passport, his travel is restricted to central California, he's not allowed to go inside any airport, seaport, railroad, or bus terminal that allows travel outside the U.S., and his place of residence must be approved by the government and can't be changed without further approval.

Ricotti and his co-defendants are charged with one count of conspiracy to violate the FCPA and the Travel Act, one count of violating the FCPA, and three counts of violating the Travel Act. They face up to five years in prison for each count.

The others from CCI indicted with Ricotti are Stuart Carson, former chief executive officer; Hong (Rose) Carson, former director of sales for China and Taiwan; Paul Cosgrove, former director of worldwide sales; David Edmonds, former vice president of worldwide customer service; and Han Yong Kim, the former president of CCI’s Korean office. They and Ricotti are scheduled to go on trial on October 4 this year.

In July 2009, valve-maker CCI pleaded guilty to violating the anti-bribery provisions of the FCPA and the Travel Act. It admitted bribing foreign officials in a decade-long scheme to secure contracts in about 36 countries. CCI's three-year plea agreement imposed a criminal fine of $18.2 million.

The government alleges that Ricotti, who was CCI’s vice president and head of sales for Europe, Africa, and the Middle East from 2001 through 2007, arranged bribes of at least $750,000 to officers and employees of state-owned companies, and bribes of about $380,000 to officers and employees of private companies. The payments allegedly related to projects in the United Arab Emirates, Kazakhstan, India and Qatar.

In pre-trial motions, the defendants have challenged whether officers and employees of state-owned companies are "foreign officials" under the FCPA. A hearing on their motion to dismiss is set for May 9.

Two former CCI employees pleaded guilty last year to conspiring to bribe officers and employees of foreign state-owned companies on behalf of CCI. In January 2009, Mario Covino, the company's former director of worldwide factory sales, pleaded guilty to one count of conspiracy to violate the FCPA. He admitted arranging bribes of about $1 million.

In February last year, Richard Morlok, CCI’s former finance director, pleaded guilty to one count of conspiracy to violate the FCPA. He admitted arranging about $628,000 in bribes.

Covino and Morlok are cooperating with prosecutors and won't be sentenced until at least February 6, 2012.

Download the minutes of the July 16, 2010 detention hearing in U.S. v. Flavio Ricotti here.