Shifting The FCPA Reform Debate Into High Gear

By T. Markus Funk and M. Bridget Minder

Simmering throughout 2011, the robust FCPA reform debate can now be divided into a number of distinct drafting and public policy battle fields.

Our hope in writing a recent Bloomberg Law Report piece (available in pdf here) was to advance the dialogue. We examine (1) the core criminal law theory assumptions and (2) some of the public policy objectives driving the debate, including whether reforming the FCPA is advisable on public policy grounds, and the extent to which the position that foreign governments will view even modest FCPA reform as a signal to abandon wholesale their domestic anti-corruption efforts are justified.

(Having served two years in a post-conflict environment for USDOJ/State setting up domestic anti-corruption laws and enforcement mechanisms, the latter issue was of particular concern to one of the authors). 

In the article, we also make four suggestions for reforming the FCPA.

They are:

• Provide a sensible “adequate compliance procedures” defense

• Appropriately limit successor liability

• Establish a fitting scope of corporate liability for acts of a subsidiary

• Properly define “foreign official”

To round out the analysis, we take a closer look at the theoretical assumptions grounding recent critiques of the U.S. Chamber of Commerce's calls for reform.

In the end, all sides of the debate undeniably have a genuine, well-intentioned interest in balancing the noble pursuit of a corruption-free world against the values of fairness and transparency in our domestic laws and enforcement policies. 

We hope that 2012 will see us come closer to reaching consensus.

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T. Markus Funk, a former federal prosecutor who is now in private practice and is the Co-Chair of the ABA's Global Anti-Corruption Task Force, and his Perkins Coie colleague M. Bridget Minder just authored "Bribery of Foreign Officials: The FCPA in 2011 and Beyond: Is Targeted FCPA Reform Really the “Wrong Thing at the Wrong Time”? in the Bloomberg Law Reports. It is available in pdf here.

Happy New Year

We wish all our readers, contributors, and sponsors a Happy New Year.

This blog was launched in 2007 with a short post about an enforcement action against Textron. That company's compliance problems, we noted, were caused by fifth-tier French subsidiaries.

Nearly a thousand posts later, that first one is still a favorite of ours. Although brief, it broke the ice -- and reminded our few initial readers about the dangers that lurk in overseas operations.

We wanted to start posting about the FCPA years earlier but had to wait a while. Blogging from a big law firm about white-collar crime is nearly impossible. It's tough to say anything authentic with hundreds of lawyers in the mix, and thousands of clients with their own interests. But by 2007, the time was right.

The idea behind the blog was simple enough -- put information about the statute and its enforcement into circulation in an informal setting and see where the conversation goes from there.

The experiment worked. Early readers sent questions and ideas for posts, along with constructive criticism. It all helped.

Even so, about three months into the enterprise, we thought maybe we'd said everything that needed saying about the FCPA, and we considered a graceful exit. Then some news came our way from the DOJ, and more ideas from readers, and things began to flow. It's been that way ever since.

In truth, we've never been alone here. So many great posts are courtesy of bylined contributors. Those generous souls come from all parts of the compliance community -- practicing lawyers, academicians, NGO leaders, auditors, journalists, students, and others. Other contributors want to remain anonymous.

And for sure, we wouldn't be here without the generous support of the sponsors, whose cheerful banners appear on every page. Please visit them to show your appreciation.

Thanks for being part of the FCPA Blog.

And remember to keep a close eye on those fifth-tier French subsidiaries.

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.

AGCO Resolves Iraq Bribe Charges

Agricultural equipment-maker AGCO Corporation will pay nearly $20 million in criminal and civil penalties to resolve charges related to kickbacks it paid under the U.N. oil for food program. Under its plea deal with the Justice Department, the Duluth, Ga.-based firm will pay a criminal penalty of $1.6 million and enter into a three-year deferred prosecution agreement. The DOJ charged its U.K. subsidiary, AGCO Limited, in a one- count criminal information with conspiracy (18 U.S.C. § 371) to commit wire fraud (18 U.S.C. § 1343) and to violate the books and records provisions of the Foreign Corrupt Practices Act by falsifying accounts of parent AGCO Corporation, an issuer ( 15 U.S.C. §§ 78m(b)(2)(A), 78m(b)(5), and 78ff(a)).

In settling civil charges brought by the Securities and Exchange Commission, AGCO Corporation will disgorge $13,907,393 in profits and $2 million in pre-judgment interest. It will also pay a civil penalty of $2.4 million. The SEC charged the company with failing to maintain an adequate system of internal controls to detect and prevent the corrupt payments and failing to properly record the payments (Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934).

AGCO is also paying a fine of $630,000 to the Danish State Prosecutor for Serious Economic Crimes to resolve criminal charges against its Danish subsidiary.

From 2000 through 2003, wholly-owned subsidiaries in Denmark, the U.K. and France paid about $5.9 million in kickbacks to the Iraqi regime and officials there in connection with sales of equipment under the oil for food program. The illegal payments were made through an agent and falsely recorded as “after sales service fees.” The U.K. subsidiary maintained and used a second set of accounts to track the payments. The SEC said,

The [second] accrual account was created by AGCO Ltd.’s marketing staff with virtually no oversight from AGCO Ltd.’s finance department. No one questioned the existence of the dual accounts. No one questioned why the Ministry Accrual account contained approximately ten percent of the contract value despite the fact that there was no contract in place requiring that such ten percent be paid to the ministry or anyone else. Unlike other payments to the agent, the Ministry Accrual payments were made by bank guarantee and in French francs or Euros instead of U.S. dollars. Marketing and finance employees in the U.K., Denmark, and France were all instrumental in the scheme. . . .

AGCO's cooperation with U.S. authorities was evident. Among other things, in its deferred prosecution agreement it undertook to give the DOJ and other agencies all information it has about the illegal conduct and individuals involved, including the material from its internal investigations. The company didn't reserve the right to assert any claims of attorney-client or work-product privilege. In return, the DOJ didn't charge the U.S. parent company but only its U.K. subsidiary, and didn't bring substantive criminal FCPA or wire fraud charges, but instead used only the federal conspiracy statute. That should preserve AGCO Corporation's eligibility to do business with the U.S. government and bid for World Bank and IMF-funded projects.

AGCO operates worldwide and has annual revenues of about $8 billion. It manufacturers and sells tractors, combines, hay tools, sprayers, and forage and tillage equipment through its Challenger, Fendt, Massey Ferguson and Valtra brands.

AGCO Corporation trades on the New York Stock Exchange under the symbol AGCO.

Download the DOJ's September 30, 2009 release here.

Download the criminal information in U.S. v. AGCO Limited here.

Download AGCO Corporation's September 29, 2009 plea agreement with the Justice Department here.

View the SEC's Litigation Release No. 21229 dated September 30, 2009 in Securities & Exchange Commission v. AGCO Corporation, Civil Action No. 1:09-CV-01865 (D.D.C.)(RMU) here.

Download the SEC's civil complaint against AGCO Corporation here.
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Con-way Settles FCPA Enforcement Action

Internal controls and books and records violations; impermissible "facilitating payments" to customs officials and bribes to airline employees

California-based Con-way, Inc., a global freight forwarder, has paid a $300,000 penalty and accepted a cease and desist order to settle a Foreign Corrupt Practices Act enforcement action with the Securities and Exchange Commission. Con-way's FCPA violations were caused by a Philippines-based subsidiary, Emery Transnational. It made about $244,000 in improper payments between 2000 and 2003 to officials at the Philippines Bureau of Customs and the Philippine Economic Zone Area, and $173,000 in improper payments to officials at fourteen state-owned airlines.

The bribes to customs officials consisted of hundreds of small payments. They were intended to induce the officials to violate customs regulations, settle customs disputes, and reduce or not enforce otherwise legitimate fines for administrative violations. To fund the payments, Emery's employees obtained cash advances to complete customs processing. The SEC said that "unlike legitimate customs payments, the payments at issue were not supported by receipts from the Philippines Bureau of Customs and the Philippine Economic Zone Area. Emery Transnational did not identify the true nature of these payments in its books and records."

Emery's employees also made corrupt payments between 2000 and 2003 to employees at fourteen state-owned airlines that did business in the Philippines. According to the SEC, the "payments were made with the intent of improperly influencing the acts and decisions of these foreign officials and to secure a business advantage or economic benefit." There were “weight shipped” payments intended to induce airline officials to improperly reserve space for Emery on the airplanes, and “gain shares” payments to induce airline officials to falsely under-weigh shipments and to consolidate multiple shipments into a single shipment, resulting in lower shipping charges. Emery paid the airline employees 90% of the reduced shipping costs.

Government-owned or controlled airlines receiving payments were Air France, Alitalia (Italy), China Airlines, EgyptAir, Emirates (Dubai), Gulf Air (Bahrain, Abu Dhabi, Oman), Kuwait Airways, Malaysian Airlines, Pakistan International Airlines, Royal Brunei Airlines, Saudi Arabian Airlines, SilkAir (Singapore), Singapore Airlines, and Thai Airways International.

According to the SEC's complaint, none of Emery's improper payments were accurately reflected in Con-way’s books and records. Also, Con-way knowingly failed to implement a system of internal accounting controls concerning Emery that would both ensure that Emery complied with the FCPA and require that the payments it made to foreign officials were accurately reflected on its books and records. As a result, Con-way violated Sections 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Securities Exchange Act of 1934 (15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)).

Con-way discovered the illegal conduct at Emery in early 2003. After a preliminary internal investigation, Con-way self-disclosed the potential FCPA violations to the SEC. Following a more thorough internal investigation, Con-way imposed strict financial reporting and compliance requirements on Emery, fired a number of Emery employees involved in the misconduct, provided FCPA training and education to Con-way's own employees and strengthened its compliance program. In December 2004, Con-way sold Emery to UPS.

In the Philippines, payments to customs officials by local employees are a common compliance problem. Such payments are locally referred to as "facilitating payments" but shouldn't be confused with payments of the same name that are permitted under the FCPA. There's an exception in the FCPA for facilitating payments -- but only as defined by the FCPA itself. Among other things, the payments must be for “routine governmental action . . . which is ordinarily and commonly performed by a foreign official." See 15 U.S.C. §§78dd-1 (b) and (f) (3) [Section 30A of the Securities Exchange Act of 1934].

The exception will not apply, however, if there was no legitimate routine governmental action pending and for which the payment was made. A governmental action obtained or sought to be obtained by subornation of the official’s duty is not an action “ordinarily and commonly performed by a foreign official” and therefore is outside the scope of the exception. For example, paying a customs clerk to schedule an inspection of goods already in the customs queue may be permissible. But paying a customs clerk to jump the queue, or paying for positive inspection results, may be outside the exception.

Emery's payments to customs officials were intended to induce them to (i) violate customs regulations by allowing Emery to store shipments longer than otherwise permitted, thus saving the company transportation costs related to its inbound shipments; and (ii) improperly settle Emery's disputes with the Philippines Bureau of Customs, or to reduce or not enforce otherwise legitimate fines for administrative violations. Those clearly weren't actions “ordinarily and commonly performed by a foreign official.” That's why the payments fell outside the scope of the FCPA's facilitating payments exception. And whether or not the payments were permissible, Con-way was required to accurately account for them in its books and records, which it didn't do.

The case is also a reminder that employees of government- owned or controlled airlines are "foreign officials" for purposes of the FCPA. Contact with them, either directly or through travel agents or others, should be covered by compliance programs.

Con-way Inc. trades on the NYSE under the symbol CNW.

View SEC Litigation Release No. 20690 and Accounting and Auditing Enforcement Release No. 2866 (August 27, 2008) here.

View the Complaint in Securities and Exchange Commission v. Con-way Inc., Civil Action No. 1:08-CV-01478 (D.D.C.) (EGS) here.

View the SEC's Administrative Enforcement Action / Cease and Desist Order here.

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