The Road To Corruption

By Richard E. Messick

A new World Bank study on corruption in the roads sector shows the challenges contractors and engineering firms working in developing countries face when trying to avoid being drawn into schemes that violate the Foreign Corruption Practices Act or the anti-corruption laws of other nations or both.

The study cites cases where government official have made participation in a bid rigging scheme the price of doing business in their country and other instances where consulting engineers refusing to go along with fraudulent schemes are blackballed.

Among the findings:

• World Bank investigators were told that foreign firms wanting to bid on roads contracts in Bangladesh were warned by a road agency official that they would be disqualified if they undercut the price local firms had agreed on.

• In India, a senior official reported that “road mafias” of contractors, engineers, the local police, civil servants, “and last but not least local politicians” all conspire to keep prices on road contracts above market rates; and in explaining roads sector corruption in the state of Jharkhand, a civil society activist told the New York Times that “the nexus of politicians, contractors and bureaucrats is very strong.”

• In Uganda, researchers found that “the tendering process has been turned into a business by politicians at the district to settle their economic problems. . . . [They] pressure evaluation teams” to select certain contractors.”

• In Indonesia, engineers admitted to investigators from the Bank’s Integrity Vice Presidency that they were bribed to ignore fraud, explaining that if they did not go along, local officials “in on” the fraud would refuse to hire them on future government projects.

• In a project in Africa, Bank staff received information that in return for approving inflated invoices the engineer received 15 percent of the amount overbilled. The practice is apparently widespread in that country; during the investigation Bank investigators learned that the builder had instructed its local affiliate to “develop partnerships with local consultants,” so that if they were appointed engineers on future projects, they would be sure to cooperate with similar schemes.

Titled "Curbing Fraud, Corruption, and Collusion in the Roads Sector," the study recommends a number of steps developing countries and the World Bank can take to reduce collusion in the tendering for road construction contracts and fraud and corruption in contract execution. It is available here.

Richard E. Messick, the study’s author, is a Senior Operations Specialist in the World Bank’s Integrity Vice Presidency where he advises Bank staff and policymakers in developing countries on anticorruption policies. He can contacted here.

Alcatel-Lucent Settles Bribery Case

In one of the biggest Foreign Corrupt Practices Act settlements of all time, Paris-based Alcatel-Lucent S.A. will pay $137 million for bribing officials in Costa Rica, Honduras, Malaysia, and Taiwan.

The company and three subsidiaries will pay $92 million to resolve criminal charges with the DOJ and $45 million in disgorgement to the SEC.

The settlement places Alcatel-Lucent seventh on the top-ten FCPA list. 

By agreeing to plead guilty, Alcatel-Lucent escaped substantive bribery charges. In a two-count criminal information, the DOJ charged the company with violating the internal controls and books and records provisions of the FCPA.

The DOJ and the company entered into a three-year deferred prosecution agreement. Among other things, Alcatel-Lucent pledged to stop using third-party sales and marketing agents in conducting its worldwide business. The DOJ said the unprecedented pledge was made on the company's "own initiative and at a substantial financial cost."

Three subsidiaries were also charged and each agreed to plead guilty to conspiring to violate the antibribery, books and records, and internal controls provisions of the FCPA.

Alcatel-Lucent -- which provides telecommunications equipment and services -- was formed in 2006 after U.S.-based Lucent Technologies merged with Alcatel, a French company. The new company is headquartered in Paris, France.

The illegal conduct started in the late 1990s and continued through 2006.

Prosecutors said Alcatel-Lucent’s three subsidiaries bribed foreign officials to win business in Costa Rica, Honduras, Malaysia, and Taiwan. The company also hired agents without proper controls in Kenya, Nigeria, Bangladesh, Ecuador, Nicaragua, Angola, Ivory Coast, Uganda, and Mali. Overall, Alcatel-Lucent admitted making $48.1 million in profits as a result of its bribery.

In Costa Rica, a subsidiary wired about $18 million to two consultants. More than half of the money, the DOJ said, was then passed to Costa Rican government officials. The bribes produced contracts worth more than $300 million for Alcatel-Lucent and a profit of more than $23 million.

In Honduras, a company subsidiary hired a "consultant" who was a perfume distributor with no experience in telecommunications. He was personally selected by "the brother of a senior Honduran government official," the DOJ said. Alcatel-Lucent won contracts in Honduras worth $47 million, with profit of $870,000.

In Taiwan, the company and its joint venture there hired two consultants with no telecommunications experience. They passed some of their $950,000 payments to Taiwanese legislators. Alcatel-Lucent received a contract worth $19.2 million and earned $4.3 million.

In September 2008, former Alcatel executive Christian Sapsizian, 62, was sentenced to 30 months in prison, three years of supervised release, and forfeiture of $261,500 for bribing employees of the state-owned telecommunications authority in Costa Rica. He had pleaded guilty in June 2007 to two counts of violating the Foreign Corrupt Practices Act.

Sapsizian, a French citizen, was a 20-year Alcatel employee and served as the company's deputy vice president for Latin America. Before being fired in 2004, he caused Alcatel to wire $14 million in “commission” payments to a consultant, who then transferred $2.5 million to a government official in Costa Rica.

Sapsizian admitted to conspiring with Edgar Valverde Acosta, a citizen of Costa Rica who was Alcatel’s senior country officer there, to arrange the bribes. Acosta was indicted with Sapsizian on June 14, 2007. He's an FCPA fugitive, last known address: Costa Rica.

The U.S. indictments of Sapsizian and Acosta resulted from bribery investigations by Costa Rican authorities. In October 2004, Alcatel learned of the investigations. It fired Sapsizian and Acosta and disclosed to U.S. authorities that it had uncovered payments from employees and consultants to government officials and political parties.

Lucent, meanwhile, settled Foreign Corrupt Practices Act charges of its own in December 2007 with the DOJ and SEC. Its violations occurred before the merger with Alcatel. The settlement included a $1 million criminal fine and $1.5 million in civil penalties. Lucent's offenses involved payment of travel expenses for Chinese government officials from 2000 to 2003.

In April 2009, Alcatel-Lucent signed agreements in Washington, D.C. worth $1.7 billion with China Mobile and China Telecom to help the Chinese companies roll out 3G technology.

In February this year, Alcatel-Lucent said in its consolidated financial statements that it had reached agreement in principle with the Justice Department and the Securities and Exchange Commission to settle Foreign Corrupt Practices Act offenses. 

Alcatel-Lucent also paid $10 million in January to settle corruption charges brought by the government of Costa Rica.

The SEC's civil complaint said all of Alcatel-Lucent's bribes were "undocumented or improperly recorded as consulting fees in the books of Alcatel’s subsidiaries and then consolidated into Alcatel’s financial statements. The leaders of several Alcatel subsidiaries and geographical regions, including some who reported directly to Alcatel’s executive committee, either knew or were severely reckless in not knowing about the misconduct."

Alcatel-Lucent's common stock trades on the NYSE under the symbol ALU.

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View the DOJ's December 27, 2010 release here.

Download the criminal information in US v. Alcatel-Lucent, S.A. here.

Download the deferred prosecution agreement in US v. Alcatel-Lucent, S.A. here.

Download the criminal information in US v. Alcatel-Lucent France, S.A. et al here.

Download the plea agreement in US v. Alcatel Centroamerica, S.A. (Costa Rica) here.

View the SEC's Litigation Release No. 21795 (dated December 27, 2010) in SEC v. Alcatel-Lucent, S.A., Civil Action No. 1:10-CV-24620-GRAHAM (S.D. FL.) here.

Download the SEC's civil complaint here.

Amid OECD Criticism, A Breakthrough In Britain

The U.K.'s failure to prosecute its multinationals for overseas bribery, while other European countries and the U.S. are stepping up enforcement, threatens the integrity of the international anti-bribery effort. That's what a fed-up OECD Working Group on Bribery says in its just-released report.

The 37-member OECD anti-bribery group launched an investigation into Britain's enforcement practices after the U.K.'s Serious Fraud Office quashed a corruption investigation into BAE Systems in December 2006. The military equipment supplier had been accused of funneling £1 billion in secret payments to the former Saudi ambassador to the United States, Prince Bandar bin-Sultan, in exchange for help selling jet fighters to the Saudi government. Both BAE and the Prince have denied breaking any laws.

The OECD was blunt. It said in its report:

The Working Group is disappointed and seriously concerned with the unsatisfactory implementation of the [OECD Anti-bribery] Convention by the UK. The continued failure of the UK to address deficiencies in its laws on bribery of foreign public officials and on corporate liability for foreign bribery has hindered investigations. . . . The Working Group also strongly regrets the uncertainty about the UK's commitment to establish an effective corporate liability regime in accordance with the Convention, as recommended in 2005, and urges the UK to adopt appropriate legislation as a matter of high priority.

Meanwhile, the U.K. government is celebrating two well-timed maiden anti-corruption victories. The breakthrough prosecutions are reported in a briefing from a Fulbright & Jaworski team led by Washington partner William B. Jacobson. Billy -- who joined Fulbright last month after serving with distinction as the Assistant Chief for FCPA Enforcement at the Justice Department's Fraud Section, Criminal Division -- graciously consented to our liberal use of the material. We're happy about that. For the past few days we haven't had a spare minute due to the ALCS -- i.e., planning to watch the games, watching the games, then talking about what happened in the games.

Here, then, is an abridged version of Fulbright's report:

In the course of just a few weeks, the UK has brought two separate foreign bribery cases to conclusion - the first such cases brought by UK authorities.

First, in late September, the Overseas Anti-Corruption Unit ("OACU") of the City of London Police announced that both an employee of CBRN Team Ltd ("CBRN"), a UK security consulting firm, and an official of Uganda pled guilty to bribery charges stemming from a scheme in which CBRN paid the Ugandan official in order to receive a contract to advise the Ugandan Presidential Guard. While the CBRN employee received a suspended sentence, the Ugandan official was sentenced to twelve months' incarceration.

Second, on October 6, 2008, the UK's Serious Fraud Office ("SFO"), in a case the SFO was investigating for evidence of foreign bribery, announced that it had reached a £2.25m (US$3.9m) settlement with major construction firm Balfour Beatty plc for alleged unlawful accounting in connection with certain 'payment irregularities' which it self-reported. While the SFO acknowledged that there were no grounds for criminal prosecution of either the company or any individual, this marks the first time a company has reached this type of civil settlement as part of a foreign bribery investigation. This is a significant event in the UK's enforcement of anti-corruption laws and comes only 6 months after the SFO was given the powers to make a civil recovery of the proceeds of crime.

The SFO's Powers

The SFO is a UK investigation and enforcement authority established to deal with serious financial crime and has the power to investigate any suspected offence appearing on reasonable grounds to involve serious or complex fraud. In the course of an investigation, the SFO may give notice to the subjects of the investigation, or to anyone else that the SFO thinks may have relevant information, to answer questions or to provide information or specified documentation, and in appropriate circumstances may issue warrants to compel production. The SFO may also commence and conduct criminal proceedings relating to that fraud. The SFO's powers to obtain civil recoveries in relation to the proceeds of crime are relatively new. In April 2008, the Serious Crime Act 2007 transferred the civil recovery powers formerly vested in the Assets Recovery Agency to a number of agencies including the SFO.

The CBRN Team Case

The prosecution of the managing director of CBRN and the Ugandan official who received the bribe is noteworthy in many respects. First and foremost, it represents the first convictions for foreign bribery in UK history. Second, having been investigated by the City of London Police's OACU, it also marks the first successful foreign bribery investigation by that recently-formed unit. Third, the prosecution was handled by the Crown Prosecution Service and not the SFO, which usually investigates foreign bribery with the OACU.

Additionally, the UK's ability to prosecute the foreign official who took the bribe sets the UK's legislation apart from the United States' foreign bribery law, the Foreign Corrupt Practice Act ("FCPA"). Under the FCPA, only the giver of a bribe, and not the foreign official who received the bribe' may be prosecuted. For all the criticism that the UK's foreign bribery legislation has received in recent years, those laws are, in this respect, stronger than the FCPA.

View Fulbright's full briefing on the cases here.

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