The top five FCPA stories of 2012

1. Allegations against Wal-Mart -- Just when the debate about FCPA reform was heating up, the New York Times reported that Wal-Mart may have paid $24 million in bribes to Mexican officials to grow the business. The story showed why the FCPA is important. And it derailed the Chamber of Commerce's campaign to narrow the law and restrict the DOJ's enforcement of it.

Click to read more ...

Four charged in U.K. for Nigeria bribes

The U.K. Serious Fraud Office said Monday that three men and a woman were charged in Westminster Magistrates' Court with two counts of conspiracy to corrupt. 

Click to read more ...

For France, mixed grades in the battle against bribery

The Palais de Justice, located in the Ile de la Cite in central ParisThe OECD Working Group on Bribery has published its latest assessment on France's fight against overseas graft.

Click to read more ...

Strip Stamp 'Scandal in the Making' in the Philippines

In editorials directly addressing Bureau of Internal Revenue Commissioner Kim Henares, two Philippines-based journalists urged the government to exercise "extreme caution" before entertaining a contract bid from Chinese laser technology company Huagong Tech Company Ltd.

Click to read more ...

Noble Execs Charged By SEC

Three executives from oil services firm Noble Corporation were charged today by the Securities and Exchange Commission with bribing officials in Nigeria in exchange for illegal import permits for drilling rigs.

Click to read more ...

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.

Click to read more ...

Prison For Ex-Willbros Execs

FCPA violations: The Justice Department is targeting individuals who pay bribes to foreign officials. Photo by Ken MayerTwo former Willbros managers on Thursday were given jail time for conspiracy to violate the Foreign Corrupt Practices Act. They bribed foreign government officials and employees of state-owned firms to win pipeline work and gain other advantages.

Jim Bob Brown, 48, was sentenced in federal court in Houston to one year and one day in prison and fined $17,500; Jason Edward Steph, 40, was sentenced to 15 months and fined $2,000.

Steph, who once served as general manager of on-shore operations for Willbros International, pleaded guilty in November 2007. He said in his plea that in 2005 he, Brown, and others arranged to pay about $1.8 million in cash to Nigerian officials.

Brown pleaded guilty in September 2006 to conspiracy to violate the FCPA. He and Steph cooperated with the government’s investigation.

Brown said from 1996 to 2004, he and others plotted to negotiate lower Nigerian federal and state taxes in exchange for bribes to revenue officials. And he admitted conspiring to make corrupt payments to officials in the Nigerian court system in exchange for favorable treatment on pending cases. Brown also paid at least $300,000 in bribes to Ecuadorian government officials from PetroEcuador and PetroCommercial in exchange for contracts. The DOJ said all the payments violated the FCPA's antibribery provisions.

In May 2008, Willbros Group and its subsidiary Willbros International paid $22 million and entered into a deferred prosecution agreement with the DOJ to settle criminal FCPA charges in connection with corrupt payments to Nigerian and Ecuadorian officials. Willbros Group also paid $10.3 million (disgorgement of $8.9 million, plus prejudgment interest of $1.4 million) to resolve the SEC's civil enforcement action.

In December 2008, another former executive and an ex-consultant of Willbros International Inc. were charged in the case. Consultant Paul G. Novak, 43, pleaded guilty in November 2009 to conspiracy to violate the FCPA. He's scheduled to be sentenced on February 19. James K. Tillery, 49, a former Willbros International executive, was also charged but remains at large.

In May 2008, the Securities and Exchange Commission charged Steph and former employees Gerald Jansen, Lloyd Biggers, and Carlos Galvez with aiding and abetting Willbros Group's violation of the antibribery, books and records, and internal controls provisions of the FCPA, and knowingly circumventing the FCPA's internal controls and books and records provisions. All four consented to permanent injunctions, with Jansen and Galvez ordered to pay civil penalties of $30,000 and $35,000 respectively. Determination of Steph's civil penalty was deferred pending his sentencing in the criminal case.

*   *   *

Substantive FCPA violations and conspiracy to violate the FCPA both carry a maximum sentence of five years in prison. Here are some recent FCPA-related sentences:

• In November last year, Frederic Bourke, who was convicted at trial, was sentenced to a year and day in jail for conspiracy.

• David Kay and Douglas Murphy started serving their sentences last year for substantive FCPA violations. They were convicted at trial and sentenced to 37 months and 63 months respectively.

• In April 2009, Virginia-based physicist Shu Quan-Sheng was sentenced to 51 months in prison. He pleaded guilty in November 2008 to one count of violating the Foreign Corrupt Practices Act and two counts of violating the Arms Export Control Act.

• In September 2008, two former executives from telecoms company ITXC Corporation avoided prison. Roger Michael Young was sentenced to five years probation with three months home confinement after he pleaded guilty in July 2007 to violating the FCPA and the Travel Act. Steven J. Ott also pleaded guilty and was sentenced to five years probation with six months in a community confinement center and six months home confinement.

• Also in September 2008, Albert "Jack" Stanley, KBR's former CEO, pleaded guilty to a two-count criminal information charging him with conspiracy to violate the Foreign Corrupt Practices Act and conspiracy to commit mail and wire fraud. He agreed to a seven year jail term with a chance for reduction based on his cooperation. 

• In  April 2008, a former World Bank employee, Ramendra Basu, received 15 months in prison for conspiring to award World Bank contracts to consultants in exchange for kickbacks and for helping a contractor bribe a foreign official. He pleaded guilty to conspiring to commit wire fraud and to violating the FCPA.

A copy of the DOJ's January 28, 2010 release is here.

See our prior posts about Willbros and its personnel here.

Deducting Disgorgements

 A reader asked a question we hadn't seen before. Is an FCPA-related disgorgement tax deductible? We've talked about disgorgement (here) and taxes (here). But we've never put the two together in a post. So we began checking the cases but nothing came up. Then we dove into the Tax Code and the Treasury Regulations and landed on Subchapter A, Sec. 1.162-21. It deals with the deductibility of "fines and penalties." We're always expecting to find straight lines and right angles in tax land. But once again we were in a grey area.

The law says fines and penalties aren't deductible. But even the TaxAlmanac (here), with lots of examples of fines and penalties, didn't mention disgorgement. So we were left wondering.

That's when we punted the question to George Clarke, a tax lawyer in the District of Columbia. He said:

Whether a disgorgement payment made pursuant to a settlement with the SEC/DOJ is deductible turns on whether it is a "fine or similar penalty" under the internal revenue laws. Under those laws, a payment is a "fine or similar penalty" if the purpose of the payment is punitive. To determine the purpose of the payment, the taxpayer must look to the statute under which the SEC/DOJ brings its action as well as to the facts of the taxpayer's case, especially the specific language of the settlement agreement, the history of the enforcement action, and the context in which the payment was made. The taxpayer can to some extent influence deductibility by carefully considering these issues during settlement negotiations. 

As a very general matter, unless the language of the settlement agreement or the history and context of the settlement compels the conclusion that the disgorgement is intended to punish, a taxpayer should be able to effectively argue that the purpose of the payment was not to punish (i.e., that it was remedial, to encourage future compliance, or to compensate the government or other harmed parties). The IRS may try to analogize the disgorgement payment to a criminal forfeiture of assets (and the authorities thereunder) as a basis for an argument that such payments are non-deductible. But the purpose of criminal forfeiture is, in the main, different and more akin to a fine or similar penalty than is disgorgement worked by a settlement agreement in these situations.  

The lesson is that FCPA-related disgorgements -- which have reached hundreds of millions of dollars -- may be deductible. It depends chiefly on what the SEC intends and how the agreement describing the disgorgement is written to reflect that intent.

Readers Respond To Hired Guns

A comment last week from Huffington Post blogger Andrew Woods asked whether the reach of the Foreign Corrupt Practices Act should be extended to ban payments to local security forces. Our post about it is here. We've now heard from several readers, and nearly all were skeptical. The note below (which we've edited slightly for context) is from a lawyer in the D.C. area. It reflects the consensus:
_________

Dear FCPA Blog,

I don't know, it sounds like a stretch...

The author should propose the enactment of a new statute to address the human rights abuse issue.

The best argument I can come up with for using the FCPA for this purpose is as follows:

Even ignoring the human rights abuse issue, something like this should be incorporated into the FCPA if it involves payment to a government official (was an "official" actually paid in this case?) for services for which governments are not traditionally paid. If so, the firms are in effect "bribing" the government officials for services the government would not normally provide and for which it would not normally be compensated. Those payments, then, create an unfair advantage and are therefore banned by the FCPA. But if such payments are allowed under local law, then firms can still rely on that affirmative defense.

As for the "obtaining and retaining business" objective, the statute may have to be tweaked with regards to "proximity," if you will. The government could argue, however, that the military officials were compensated or "bribed" in order to obtain the security necessary to continue drilling to extract oil to sell. If oil companies cannot drill in Nigeria without the security forces, they therefore cannot sell oil. So ultimately their payments for security do help them obtain or retain business.

Here I would cite your October 7, 2008 post, Case Closed For Kay And Murphy. In the Kay case, you said,

the Fifth Circuit emphatically did not think enforcing the statute against Kay and Murphy would be unfair, even if the business nexus element is a bit ambiguous. 'A man of common intelligence,' it ruled, 'would have understood that . . . in bribing foreign officials, [Kay and Murphy were] treading close to a reasonably-defined line of illegality. . . . Defendants took this risk, and splitting hairs . . . does not allow them to argue successfully that the FCPA’s standards were vague....'

[In light of the court's opinion in Kay,] compliance programs need to be expansive as well, aimed not just at bribes intended to help land business directly from foreign governments but extending also to any overseas public bribery that might create a commercial advantage. That includes payments to reduce taxes or speed up refunds, jump customs queues, obtain favorable product inspections, manipulate business registrations, alter rates or delivery times of national carriers, reduce utility costs, and enhance property usage -- to name just a few.

________

We think the debate about how far to extend the FCPA is worthwhile, and we'll continue to post ideas from readers.

Our thanks to those who have already taken the time to voice their opinions on this provocative issue.
.

Outing Secret Account Holders

In July this year, we posted about the U.S. Senate's investigation into how Swiss bank UBS AG hid around $18 billion for 19,000 Americans that went unreported to the IRS. We mentioned that the Senate's 115-page report cited a memo from LGT Bank, run by the royal family of Liechtenstein, describing the use of secret offshore accounts for bribery in the U.S. and elsewhere.

The Senate report didn't specifically refer to potential Foreign Corrupt Practices Act violations, but we thought the Justice Department might turn some attention to foreign-bank clients who could be involved in the alleged bribery. To do that, though, the DOJ would first need to crack European bank secrecy laws that protect the identity of account holders.

Now comes a report that the DOJ may be succeeding. The Washington Post said this week that Swiss authorities have revealed the identities of "about 70 UBS clients for use by Justice Department investigators." The DOJ has also obtained names of an additional 30 or so American holders of undeclared UBS accounts from other parties, the Post said. And Reuters reported that 250 U.S. customers of UBS were given 30 days to appeal against Switzerland's plan to hand over their details to U.S. investigators.

Yesterday, however, Swiss authorities and UBS denied disclosing information about Americans suspected of tax evasion. The Swiss said cooperation between Washington and Bern was ongoing, without giving any details. UBS also said it had not given any information to U.S. authorities.

Assuming the Washington Post is right, the Swiss disclosures follow an earlier leak to the IRS of confidential information by a former employee at LGT Bank in Lichtenstein. The IRS used the information to begin enforcement proceedings earlier this year against about 100 U.S. taxpayers, some of whom were named in the Senate report. The U.S. government, the Post said, has been offering whistleblowers up to 30 percent of any money they help the IRS recover. IRS Commissioner Douglas Shulman said the strategy is working: "[W]e've got a lot of names that we're combing through and will be pursuing aggressively." He advised anyone using secret accounts to make voluntary disclosures to the IRS right away.

(Even President-Elect Obama has weighed in. He labeled UBS as one of the banks who helped "tax cheats," and he co-sponsored a Senate bill last year to crack down on offshore tax havens. The Stop Tax Haven Abuse Act listed 34 jurisdictions, including Switzerland, as potential tax-evasion countries.)

Foreign account holders should also be worried about a report that Liechtenstein and Washington have agreed to exchange confidential bank information in connection with tax-related investigations. Liechtenstein's bank secrecy laws had been seen as stronger than Switzerland's. But tax scandals during the past year traced back to clients at Lichtenstein banks have forced the country and its ruling family to start cooperating with tax fraud investigations.

None of this confirms that the DOJ is looking for FCPA violators among holders of undeclared foreign bank accounts, or that it will find any if it is looking for them. But as we said in June, the story is worth watching.

.