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FCPA Blog Daily News


Kozeny's Co-Defendant Wins Appeal

Frederic Bourke won't face Foreign Corrupt Practices Act charges after all. He was indicted in May 2005 with Victor Kozeny and David Pinkerton over an alleged plan to bribe officials from Azerbaijan from 1997 to 1999 in connection with the privatization of the state oil company. But the U.S. Court of Appeals for the Second Circuit affirmed the June 2007 dismissal of FCPA charges against Bourke, saying the government failed to indict him within the FCPA's five-year statute of limitations.

Kozeny wasn't a party to the appeal because he's outside the United States and fighting extradition. In October 2007, the Bahamas Supreme Court refused to order his return to the U.S. to face trial. He's from the Czech Republic and reportedly has Irish citizenship, but he's been living in the Bahamas for more than a decade. The Bahamas court said the FCPA charges against Kozeny were not provable or prosecutable under local law, and there was an abuse of the court process. Apparently the U.S. government did not properly disclose the U.S. trial court's dismissal of the FCPA charges on statute of limitations grounds, a failing the Bahamas judge cited as a reason for the ruling.

Co-defendant Pinkerton was dropped from the case in July this year after the government withdrew all charges against him. See United States v. Kozeny, No. 1:05-cr-00518-SAS (S.D.N.Y. July 2, 2008) (order of nolle prosequi). The former head of AIG Global Investment Corp. invested about $15 million of AIG's money with Kozeny. After the government ended the case against Pinkerton, his lawyer said, "We have always known that David Pinkerton is completely innocent of any wrongdoing and we are thrilled by his vindication. Mr. Pinkerton is a self-made man who through his hard work, integrity and talent rose to the highest levels of his profession. Now that these charges have been entirely dismissed, Mr. Pinkerton looks forward to continuing his career."

Prosecutors obtained a related conviction in the case in February 2004. Clayton Lewis, a former employee of Omega Advisors, Inc., pleaded guilty to conspiring to violate the FCPA. Then in July 2007, Omega itself settled with the government, entering into a non-prosecution agreement with the DOJ and agreeing to a civil forfeiture of $500,000. Omega invested more than $100 million with Kozeny in 1998 for the Azeri privatization program. The program fizzled and Omega lost its entire investment, as did Bourke, AIG and others. Reports said Kozeny kept $182 million from the deal.

Bourke, 62 -- owner of the luxury handbag brand Dooney & Bourke -- said after his indictment in 2005 that he invested
$8 million with Kozeny only after lawyers had advised him the deal was legal. Soon after, he said, he suspected illegal behavior. His lawyers said he traveled to Azerbaijan to warn then President Heydar Aliyev about the scheme and he testified before a New York grand jury "as a victim of Kozeny's fraud."  

Last month, a Washington-based non-profit watchdog group that defends whistleblowers alleged that James Wolfensohn, the former head of the World Bank, helped Kozeny by quashing staff concerns and writing letters on Kozeny's behalf. Wolfensohn has said the report by the Government Accountability Project (GAP) is wrong.

On its website, GAP says,

The report shows that James Wolfensohn, then president of the World Bank, personally assisted a rogue financier in his efforts to gain control of the State Oil Company of the Republic of Azerbaijan (SOCAR). While these efforts were ultimately unsuccessful, documents show that Wolfensohn silenced Bank staff members who spoke out about corrupt government officials working with Viktor Kožený, a notorious financial operator who had allegedly defrauded investors in the Czech Republic of nearly $1 billion only three years earlier.
“Before the financial fiasco in Azerbaijan occurred, Bank staff tried to expose the risks inherent in dealing with Kožený and corrupt government officials poised to profit illicitly from Caspian oil,” said Bea Edwards, GAP International Program Director and author of the report. “They were silenced about the impending fraud, however, when Wolfensohn directly intervened on Kožený’s behalf.”

A Bloomberg story said Bourke's lawyers provided documents to GAP and that Bourke funded the Kozeny-World Bank report. GAP says Kozeny's scheme in Azerbaijan came to light "in 1999, when U.S. investor and whistleblower Frederic Bourke came forward and exposed the fact that at least one major investor had been defrauded . . . ." Kozeny has denied taking money illegally from investors and criticized GAP for its work on Bourke's behalf.




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.



Two Minute Warning

Boy, were we wrong. Syriana deserves our top rating of 5 Red Flags -- not as a movie, but as a compliance tool. A thoughtful reader set us straight. Our sincere thanks to Daniel, whose imaginative use of Syriana we heartily endorse.

Here's what he told us:

Dear FCPA Blog,


Very nice analysis of Syriana in response to the movie that at least this reader had called out, following your post entitled "Sleaze in the Cinema, Take One."  

In truth, the aspect of the movie I liked best is the original promotional trailer itself, of which I have shown a portion (after having received a license) at the start of anti-corruption compliance training to grab an audience's attention ("for three points, name the movie; for five points, name three actors you'll see; for fifteen points, recite the fifteen key words you'll hear in the voice over" and I then stop the trailer at the 1.25'' mark, after the oily Texas oilman's rich ["NOT"] assertion "... Corruption is why we win!").

I note that if Hollywood gave central casting to the FCPA in this 2005 movie, it surely is a sign of the importance of the issue. Of course, I make clear, as you have understood, that the movie is not reflective of the approach and experience today of most in the U.S. multinational business community - certainly, not of those in the company for which I work. Almost without fail, I am assured that the audience will then listen to the many legal and business imperatives for clear corporate policies and commitment to procedures on anti-corruption that follow.

Thus, while conceding that "five" may be too high a ranking given the film's dark and jaundiced take on corruption, I would award at least four red flags to a movie trailer that can accomplish this goal in less than 2 minutes. This is especially the case for an audience in the regulated pharmaceutical industry in which I practice, which today may suffer from "compliance fatigue" as a result of the virtually continuous training employees receive to address the many many different and evolving standards required to ensure that operations in a heavily regulated industry are conducted in a compliant manner.

The "enthusiastic support" you may have read into my singling out the movie was more for the educational values of both the trailer and your terrific blog - of which I am a devoted and appreciative reader, than for the underlying message of George Clooney's thriller.



Daniel Kessler




Swiss Police Raid Alstom

Swiss police last week arrested a former manager of French engineering giant Alstom and searched for evidence as part of a corruption and money-laundering investigation. Offices near Zurich and in Baden were raided, as were homes in several cantons.

Paris-based Alstom is a global leader in equipment and services for power generation and high-speed rail transport. It operates in more than 70 countries with about 76,000 employees. Revenues last year were €16.9 billion. It has an office in Windsor, Connecticut and its securities trade in the pink sheets (Other OTC: AOMFF.PK).

The raids and arrest last week are reported to be unrelated to another investigation involving suspected corrupt payments in Asia and South America between 1995 and 2003. Reports in May said that Swiss authorities found evidence Alstom paid around €20 million via shell companies to agents and others in Singapore, Indonesia, Venezuela and Brazil. Reports also mentioned payments of $6.8 million in connection with a $45 million contract for the Sao Paolo subway and a Brazilian energy plant.

In June this year, the press said French judges had charged a former Alstom consultant for his role in suspected overseas bribes. The company apparently appeared as a civil plaintiff in that case, claiming it may have been a victim of embezzlement.

Alstom said over the weekend that it's "cooperating fully with the judicial authorities in this [new] matter."

Forbes said "investors were cautious about painting [Alstom] with the same brush as Siemens, which has been embroiled in a slush fund scandal. Also, the previous investigation into Alstom was over infrastructure contracts in South America and Asia between 1995 and 2003, before the company's chief executive, Patrick Kron, took charge. If the previous investigation was over past contracts, chances are that this one is too, suggesting a limited impact on the company and its current management."

U.S. authorities haven't said whether they're investigating or planning to investigate Alstom for violations of the Foreign Corrupt Practices Act or other laws.

Thanks to CW for the heads up.



More Than Gold

Just a generation ago, the idea that China would host the greatest Olympics ever would have been outlandish. Black bicycles, gray Mao suits, grim faces -- it was a closed country, both fearful and feared. But for the past 16 days, the world has witnessed something awesome. A new and beautiful China -- smiling, proud, and graceful. Traditional but suddenly modern, and above all a nation now capable and effective.

Could anyone who knew the country back then have imagined it? That around the globe the Bird's Nest and Water Cube would become as familiar as the Great Wall and the Summer Palace. That scores of Chinese athletes would weep in victory. That thousands of exuberant local fans would pack the basketball venue, many wearing Kobe's jersey, whooping it up as their "Little Flying Warrior" brought his second-half brilliance to the Games' last event.

The magnificent sporting performances throughout the Games paid tribute to China's great staging, keeping the focus on the play and off the politics. The country is still a work in progress but it's rising fast, powered by pride and purpose, and lifting the rest of Asia with it. Korea's baseball team, Mongolia's boxers, Singapore's ping-pong paddlers -- they all reflect the new confidence of the Orient re-made.

The PRC has often appeared in these posts for the wrong reasons. But not today.

Congratulations, China.



That's Milton Friedman?

Syriana is the best Hollywood movie ever made about the Foreign Corrupt Practices Act. It's also the only Hollywood movie ever made about the FCPA. But despite enthusiastic support for the film by some of our readers, we can't give it top marks in our Sleaze in the Cinema category. Here's why.

While the movie takes on plenty of important themes -- the term Syriana is supposed to be Potomac shorthand for a political re-alignment of the Middle East -- it's unrelentingly cynical. Statecraft, spycraft, energy and military policy, the oil business -- all come off as dark and dirty to the core. There's no daylight anywhere, and that's the problem.

If you haven't seen the 2005 film, it's about lots of things. There's Bob Barnes (George Clooney), a CIA war horse thrown into a U.S. plot to remove a Middle East prince. The oil companies and U.S. government don't want the prince around because he's too independent. Bryan Woodman (Matt Damon) is an oil broker helping the prince consolidate power. Then there's the Justice Department, busy reviewing a merger of two U.S. oil companies -- which is where the FCPA comes in. So the film has plenty going on.

As for the FCPA, it's thoroughly trashed. In a scene featuring an oily Texas oilman called Danny Dalton (Tim Blake Nelson), he annihilates the rule of law:

. . . Corruption charges! Corruption? Corruption is government intrusion into market efficiencies in the form of regulations. That's Milton Friedman. He got a goddamn Nobel Prize. We have laws against it precisely so we can get away with it. Corruption is our protection. Corruption keeps us safe and warm. Corruption is why you and I are prancing around in here instead of fighting over scraps of meat out in the streets. Corruption is why we win.
Well . . . baloney. Instead of the greedy evasiveness of Syriana, we've found that most American business people genuinely want to do the right thing. Sure, in the early days of the FCPA nearly everyone involved with it was upset. The law seemed vague and threatening and somehow unfair. Why should American companies have to keep it clean overseas when others could do whatever the heck they wanted? But the years passed and the FCPA started to make sense. Today (and Syriana takes place today) most American business leaders and the rank-and-file understand why graft anywhere is bad for everyone. They even talk and act as though they're proud of our global leadership in fighting public corruption.

Syriana is clever, raw, and disturbing. It's slick and sophisticated. The dialogue is edgy and gives the impression that you're eavesdropping on insiders. But the film is just too mean for our taste, and it's inconsistent with our experience in the world.

Although we're fans of Clooney, Damon and the FCPA, in the category of Sleaze in the Cinema, we give Syriana . . . 3 (out of 5) Red Flags.



Why We Cheat

People who've violated the Foreign Corrupt Practices Act fall into two categories: those who had criminal intent from the start, and those who stumbled into the offense. It's the second group -- the regular folks who've done a bad thing -- who are so tragic. They're just like the rest of us -- except they've ruined their careers and professional reputations, and sometimes lost their freedom and more.

It's also the second group -- the "ordinary, well-meaning people" -- who are the focus of an article in this month's Stanford Business Magazine (available here). Author Margaret Steen looks at how easy it is for well-intentioned corporate employees to break the law. She also recommends ways to reduce corrupt behavior -- without crippling the organization with too much internal regulation. Promote a culture of compliance, encourage dissent, hire an ethics officer, rethink goals and rewards, and marginalize misconduct. Sound familiar? The article doesn't say so, but those recommendations echo elements of an "effective compliance program" described in the U.S. Federal Sentencing Guidelines.

So why do "normal" corporate employees break the law? Here are some excerpts from the article:

Group Power. If there’s a single, most primitive lever for behavior in our species, it’s the power of the crowd.

Organizational Structure. “My lifetime’s work in business ethics suggests that business corruption has everything to do with culture and with incentives,” says Kirk Hanson, MBA ’71, executive director of the Markkula Center for Applied Ethics at Santa Clara University and an emeritus GSB faculty member. For example, auditors want smooth working relationships with their clients, and they don’t want to be fired, so they have an incentive not to ask awkward questions.

Rationalization. The division of labor required for much corporate work, with many people contributing a small amount to a project, makes this easier. For example, an employee can tell himself, "I’m not the person who falsified the safety data for the product; I just reported the data that I had.”

Fear and Confusion. For most people fear is a more common cause of corrupt behavior than greed. People want to avoid conflict, and being a whistleblower can ruin a person’s career, even if the person is vindicated. So many people keep quiet.

The lesson? It's easy (and wrong) to think compliance programs should be aimed only at stopping hard-core criminal activity. The more subtle internal threat comes from regular employees -- those who wouldn't jaywalk outside the office but who fall into illegal behavior at work, one tiny step at a time.

The article is "How to Prevent Cheating" by Margaret Steen, from this month's Stanford Business Magazine.



Panalpina Quits Nigeria

Compliance concerns have forced Swiss logistics giant Panalpina to withdraw completely from the Nigerian domestic market. It said in its 2008 half-yearly report (available here) that it will sell its local operations to a Nigerian group and retain no ownership or operating interest.

The exit from Nigeria follows Panalpina's announcement in September 2007 that it would suspend domestic logistics and freight forwarding services there for all oil and gas-related customers. That earlier announcement was part of Panalpina's statement that it was cooperating with the U.S. Justice Department and the Securities and Exchange Commission in a Foreign Corrupt Practices Act investigation.

As a refresher, in February 2007, the DOJ noted in connection with the resolution of Vetco's FCPA case that bribes in Nigeria "were paid through a major international freight forwarding and customs clearance company to employees of the Nigerian Customs Service . . .” Since then about a dozen leading oil and gas-related companies received letters from the DOJ and SEC asking them to "detail their relationship with Panalpina . . . ." Shell, Schlumberger, Tidewater, Nabors Industries, Transocean, GlobalSantaFe Corp., Noble Corp., Pride International and Global Industries are among those involved.

As we've said, with crude prices above $100 and global supplies tight, the U.S. government wants to avoid impairing output anywhere. So to protect production in Nigeria but ensure FCPA compliance, the DOJ may have made special arrangements directly with the Nigerian government for customs clearance and permitting on behalf of U.S. producers and services companies.

Here's the full text of Panalpina's recent announcement:

Withdrawal from Nigeria and discontinuation of inland services

The Board of Directors and the Executive Board of Panalpina have decided to withdraw from the domestic business in Nigeria by the end of 2008. The company will continue to offer transportation services up to arrival port / airport Nigeria, including flight operations and coastal shipping services but will terminate all local and domestic services. In the meantime, Nigerian investors have shown interest in taking over Panalpina’s local service portfolio. They intend to acquire some of Panalpina’s assets and resources for their own company and they also plan to recruit employees from the current Panalpina Nigeria staff. This company will operate completely independently from Panalpina and the Panalpina Group will not have any equity stake in this new company.

[CEO] Monika Ribar explains, “In view of the Group’s future development, the withdrawal from Nigeria is in the company’s best interest”. She emphasizes that it has not been an easy decision to make. “Admittedly foreign companies operate in an ongoing uncertain and hard to assess legal environment in Nigeria. This makes it difficult for Panalpina to offer both a comprehensive service portfolio and at the same time meet the high ethical standards as outlined in Panalpina’s Code of Business Conduct”, she continues to explain. With the emerging solution customer demands can be fulfilled even after Panalpina’s withdrawal from the domestic and local business.
View our prior posts about Panalpina here.



Trouble For Siemens In South America

Scandal-plagued Siemens now faces possible charges of public corruption in Argentina. Police in Buenos Aires raided Siemens' office there in connection with a bribery investigation. The United States, Greece, Italy, China, Hungary, Indonesia and Norway are also investigating whether Siemens broke anti-corruption laws.

Here's a dispatch from the August 16, 2008 online edition of Deutsche Welle:

Argentine authorities on Friday searched the Buenos Aires offices of German technology giant Siemens, in an investigation of the payment of bribes during the 1989-99 government of former Argentine president Carlos Menem.

German media reported in recent days, based on court documents, that Menem allegedly received a direct payment from Siemens of $16 million (10.9 million euros). The firm reportedly expected to pay $100 million in bribes to Argentine officials including Menem and the then ministers of finance and interior.

Siemens' Argentine headquarters, located near the historic Plaza de Mayo in central Buenos Aires, were searched in an effort to secure evidence on an order from Judge Ariel Lijo.

Former Siemens officials claimed -- in the context of a broader investigation against the German multinational firm -- that the company paid bribes in Argentina. German courts forwarded the information to authorities in Buenos Aires.

Siemens in the 1990s was seeking a $1.26-billion contract to digitalize Argentine identity documents and other services, the daily Sueddeutsche Zeitung reported. The contract was signed under Menem in 1998 but cancelled in 2001 by his successor, President Fernando de la Rua.

Later, Siemens allegedly paid further bribes until 2004 -- under former Argentine president Nestor Kirchner, husband of current President Cristina Fernandez de Kirchner -- in an effort to have the contract restored.


Sleaze In The Cinema, Take One

Among the many great movies about public corruption, one of our favorites is "The Big Easy." Released in 1987, it's set in New Orleans -- the most unique (and least American) of all American cities. We were living in New Orleans when the movie came out, and our work involved compliance. So the film grabbed our interest as both entertainment and education.

"Half of Louisiana is under water and the other half is under indictment," former U.S. Representative from Louisiana, Billy Tauzin, once said. He's quoted in a recent Reuters story that also reports that since 2001, 213 officials and private individuals have been indicted in the state for corruption, and nearly all have been convicted. That's a big change from our time there. In the mid-1980s, we often talked with the FBI agent who'd been assigned to investigate political corruption in New Orleans and a couple of nearby parishes. The enormous amount of graft and the local tolerance of it made his task impossible. He looked exhausted and said the job had burned him out after a couple of completely unfruitful years.

Back in "The Big Easy," the characters are wonderfully realistic and offbeat. Dennis Quaid and Ellen Barkin are the heroes -- Barkin as a naive, hard-charging, self-righteous prosecutor from out of town, and Quaid as a local go-with-the-flow cop who becomes Barkin's reluctant helper. The large cast -- including Ned Beatty and John Goodman -- would be over the top if they weren't playing personalities from NOLA. Roger Ebert said in his August 1987 review, "All of these characters inhabit the most convincing portrait of New Orleans I've ever seen. The authentic local Cajun music on the soundtrack and the instinctive feel for the streets and alleys, the lives and the ways of doing business, the accents and the evasions, make the city itself a participant in what happens."

Our favorite character in the movie (and Ebert's too) is Lamar Parmentel, played by the late Charles Ludlam. He's a brilliant and bent defense lawyer with seersucker suits, wide-brim hats, a shrill voice and outrageous New Orleans elocution. Ebert called him "a cross between Truman Capote and F. Lee Bailey."

Great movies deal honestly with serious themes. "The Big Easy" shows lives ruined by public corruption and hints at other problems it causes -- poverty, high crime rates, a dysfunctional education system, sub-par health care, local courts that people don't trust, city services that don't serve, and a constant brain drain.

So in the category of Sleaze in the Cinema, we give "The Big Easy" our top rating -- 5 Red Flags.



A Question Of Knowledge

The mailbag this week brought the following question from KER:

The FCPA prohibits payments to a third party while "knowing" that all or a portion of the payment will go directly or indirectly to a foreign official. The FCPA defines "knowing" as "highly probably" when it it forms an element of the offense and only "substantially certain to occur" with respect to conduct, a circumstance, or a result.

Is it correct that the highly probable standard applies to the books and records provision (triggering criminal as opposed to civil sanctions) and that the "substantially certain to occur standard applies to third party payments"?

At the start, we need to know the statutory basis for criminal violations of the books and records provisions. Section 78m sets out the accounting standards and says in part:
(4) No criminal liability shall be imposed for failing to comply with the requirements of paragraph (2) of this subsection except as provided in paragraph (5) of this subsection.

(5) No person shall knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record, or account described in paragraph (2).

And § 78ff of the FCPA says:
(a) Willful violations; false and misleading statements

Any person . . . who willfully and knowingly makes, or causes to be made, any statement in any application, report, or document required to be filed under this chapter or any rule or regulation thereunder or any undertaking contained in a registration statement as provided in subsection (d) of section 78o of this title, or by any self-regulatory organization in connection with an application for membership or participation therein or to become associated with a member thereof, which statement was false or misleading with respect to any material fact, shall upon conviction be fined not more than $5,000,000, or imprisoned not more than 20 years, or both, except that when such person is a person other than a natural person, a fine not exceeding $25,000,000 may be imposed; but no person shall be subject to imprisonment under this section for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation.

The anti-bribery provisions contain the following definitions of "knowing" and "knowledge:"
(2) (A) A person’s state of mind is “knowing” with respect to conduct, a circumstance, or a result if--

(i) such person is aware that such person is engaging in such conduct, that such circumstance exists, or that such result is substantially certain to occur; or

(ii) such person has a firm belief that such circumstance exists or that such result is substantially certain to occur.

(B) When knowledge of the existence of a particular circumstance is required for an offense, such knowledge is established if a person is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist.

The problem, however, is that the above definitions of "knowing" and "knowledge" apply to the anti-bribery provisions but not to the accounting standards. And as we've discussed before, a criminal books and records offense can occur with or without an anti-bribery offense. Said another way, the FCPA's anti-bribery provisions and its accounting standards can work together or separately. So an intentional ("knowing") violation of the accounting standards can be a criminal offense “whether or not such falsification is related to a foreign corrupt practice proscribed by the FCPA.” See the United States Attorneys' Criminal Resource Manual (Title 9, Section 1017, FCPA Corporate Recordkeeping).

So the question, as KER makes clear, is what is "willful and knowing" under the accounting standards?

Because there is no definition of "knowing" in the accounting standards, we need to look to case law in the respective federal circuits (and up to the Supreme Court). We can also rely on criminal jury instructions, which are usually based on the relevant case law.

For example, the First Circuit's pattern (standard) criminal jury instructions explain "knowingly" this way:

The word “knowingly,” as that term has been used from time to time in these instructions, means that the act was done voluntarily and intentionally and not because of mistake or accident.
The First Circuit's comment to this instruction also explains how other circuits define "knowingly":
In United States v. Tracy, 36 F.3d 187, 194-95 (1st Cir. 1994), cert. denied, 115 S. Ct. 1717 (1995), the First Circuit acknowledged a split of authority over how to define the term “knowingly.” The Fifth and Eleventh circuits use the instruction stated above, emphasizing the voluntary and intentional nature of the act. Id. at 195. The Sixth, Seventh and Ninth circuits, on the other hand, embrace an instruction to the effect that “‘knowingly’ . . . means that the defendant realized what he was doing and was aware of the nature of his conduct, and did not act through ignorance, mistake or accident.” Id. (quoting Seventh Circuit Instruction 6.04); see also Model Penal Code § 2.02(2)(b)(i).

Although the First Circuit in Tracy approved of the trial court’s “voluntary and intentional” instruction under the circumstances of the case, it did not expressly adopt or reject either definition of “knowingly.” Id. There may be cases when, given the evidence, the alternative instruction will be more helpful to the jury. But the term “nature” in the alternative instruction might incorrectly suggest to the jury that the actor must realize that the act was wrongful.

The Seventh Circuit's equivalent pattern criminal jury instruction on "knowingly" says this:
When the word “knowingly” [the phrase “the defendant knew”] is used in these instructions, it means that the defendant realized what he was doing and was aware of the nature of his conduct, and did not act through ignorance, mistake or accident. [Knowledge may be proved by the defendant's conduct, and by all the facts and circumstances surrounding the case.]

[You may infer knowledge from a combination of suspicion and indifference to the truth. If you find that a person had a strong suspicion that things were not what they seemed or that someone had withheld some important facts, yet shut his eyes for fear of what he would learn, you may conclude that he acted knowingly, as I have used that word. {You may not conclude that the defendant had knowledge if he was merely negligent in not discovering the truth.}]The second paragraph quoted above describes a defendant's willful blindness.

The second paragraph above mentions the Seventh Circuit's view of "willful blindness," an important concept in FCPA enforcement.

The First Circuit also talks about "willful blindness" as a way of satisfying "knowingly" and recommends the following pattern jury instruction:

In deciding whether [defendant] acted knowingly, you may infer that [defendant] had knowledge of a fact if you find that he/she deliberately closed his/her eyes to a fact that otherwise would have been obvious to him/her. In order to infer knowledge, you must find that two things have been established.

First, that [defendant] was aware of a high probability of [the fact in question].

Second, that [defendant] consciously and deliberately avoided learning of that fact. That is to say, [defendant] willfully made himself/herself blind to that fact.

It is entirely up to you to determine whether he/she deliberately closed his/her eyes to the fact and, if so, what inference, if any, should be drawn. However, it is important to bear in mind that mere negligence or mistake in failing to learn the fact is not sufficient. There must be a deliberate effort to remain ignorant of the fact.

So KER is mostly correct -- but for reasons not cited in the original question. The "highly probable standard" comes from the courts' discussion of "willful blindness" and can apply to the books and records provisions (triggering criminal prosecution as opposed to civil sanctions). Similarly, the "substantially certain to occur standard" might also be used by courts to explain "willful blindness." The courts, however, would be relying not on the anti-bribery provisions of the FCPA but on case law and trial practice within their circuit.

Our thanks to KER for the excellent question. And if any readers can add their experience and insights about criminal enforcement of the accounting standards, please drop us a line.



Speaking Of International Cooperation . . .

We were moved -- very moved -- by the opening scenes from the Beijing Olympics. Part of the fun is seeing the fabulous changes in China since our first visit there 15 years ago. Has any country ever transformed itself so completely in such a short amount of time?

And watching the China - United States basketball game was a kick as well. The Chinese are b-ball fanatics, and it showed. They cheered every point scored by both teams, making the game a love fest in the stands and on the court. The lopsided result (101 - 70 in favor of the Redeem Team) didn't matter much. More important was all the goodwill in the bleachers and the fine sportsmanship on the floor. The Olympics are still something special.

Turning to business, Eurojustice is on the radar. Eurojustice? It's an initiative of top prosecutors from all the EU member countries. They're working together to exchange information about how crimes are investigated and prosecuted in their respective jurisdictions. More importantly, they're creating an infrastructure for sharing evidence of criminal behavior when it's spread across several countries.

Since the start of the initiative about five years ago, Eurojustice has consisted mainly of a series of annual conferences and the development of a neat public website. To help member countries understand each other better, they all answered 150 questions about how they investigate and prosecute crimes. The results are posted on the site. It's a great resource. And the transparency it represents is bound to encourage law enforcement agencies from member countries to work together.

In fact, in what may be Eurojustice's first publicly acknowledged cooperative effort, Greek, German and Swiss authorities are locking arms on the Siemens case. According to recent stories in the Greek press (here, for example), all three countries want to know "where the money from the German company’s slush fund went."

The Munich prosecutor's office, the stories say, invited Greek prosecutors to question former Siemens officials in Germany about allegations that the company paid bribes to politicians in Athens to secure contracts. Greek authorities are also saying they'll have access to Swiss records. They say they'll "be able to skirt the laborious procedures demanded (especially by the Swiss authorities) in order to get information regarding bank accounts."

“This is a very important and unprecedented instance in the annals of Greek justice,” a judicial source said.

Cheers from the bleachers for Eurojustice. It's showing why compliance by companies doing business in Europe is more important than ever.