Harry Cassin Publisher and Editor

Andy Spalding Senior Editor

Jessica Tillipman Senior Editor

Richard L. Cassin Editor at Large

Elizabeth K. Spahn Editor Emeritus 

Cody Worthington Contributing Editor

Julie DiMauro Contributing Editor

Thomas Fox Contributing Editor

Marc Alain Bohn Contributing Editor

Bill Waite Contributing Editor

Shruti J. Shah Contributing Editor

Russell A. Stamets Contributing Editor

Richard Bistrong Contributing Editor 

Eric Carlson Contributing Editor

Bill Steinman Contributing Editor

Aarti Maharaj Contributing Editor

FCPA Blog Daily News


It's A Wonderful Life, Really

What's a typical workday at the FCPA Blog look like? You know the routine. Up by noon, pop over to the neighborhood brasserie for a crème bouffée or two (pictured left), then feed the pigeons and goldfish. After a nap we're ready to check the mail. . . . . OK, that's not quite our typical day. But it's true that the mailbag is always a highlight. Here, for example, is a verbatim exchange from yesterday. It reveals, we think, some familiar hallmarks of the decent but over-worked compliance community (which is why we've changed the names):

Dear Sir -

Thank you so much for your FCPA Blog - it is absolutely the best. I am a lawyer for an oilfield services company.

Now my confession - Your "Bribery Abroad" book is fantastic because it is easy to read and very interesting - not the usual dry, academic writing. Unfortunately for me, I discovered your book the day before a training session to be conducted by my group in the UK, and I made 100 copies of it. I apologize, but I felt it was an extremely important tool for the training.

May I please pay you the 12.95 for each of the 100 books I printed and have a license to cover those copies?

In addition, I need to order quite a few more.

Thanks again for your extremely valuable service in this very difficult area. I look forward to hearing from you soon.


Sally Anderson
Worldwide Oilfield Services Co.

And our reply . . . .

Dear Sally,

Thanks for your kind note and your confession, both of which are good news.

Since the blog and the book are intended to help people comply with the FCPA, and that was your purpose too, how about this as a solution.

I grant you a license for the 100 copies already made; in return, you simply agree to place traditional orders for enough printed books to meet your future needs (and perhaps to keep a few extra copies on hand just in case).

If that works for you, it will also work for me.

Thanks again.

All the best,

The FCPA Blog


A Hundred Tiny Bribes

More than a month ago -- practically forever in the time-warped blogosphere -- we mentioned that a reader had shared with us a soon-to-be published paper about facilitating payments. Well, the paper is now available.

It's written by Hogan & Hartson partner T. Clark Weymouth and associate Jeremy B. Zucker. The link is here. They prepared it for pro bono client Global Financial Integrity, a non-profit organization that targets the illegal cross-border flow of funds around the world by working with governments, think tanks and NGOs.

In the paper, Messrs. Weymouth and Zucker trace the history, use and abuse of facilitating payments under the Foreign Corrupt Practices Act. They compare how facilitating payments are treated under the FCPA, the OECD Anti-Bribery Convention, the U.N. Convention Against Corruption and the Inter-American Convention Against Corruption. And they analyze compliance risks associated with grease payments -- with enough examples to cool anyone's ardor for this lone exception written into the FCPA.

As we mentioned back in May, seeing our favorite FCPA topic treated with such thorough scholarship and wrapped in a great presentation is genuinely exciting. We don't want to spoil the fun, though, so we'll stop here -- after we acknowledge the generosity and public spirit of the authors, their law firm and its pro bono client.

View prior posts about facilitating payments here.


Justice For Corporate Defendants?

Nothing has increased the impact of the Foreign Corrupt Practices Act on corporations more than respondeat superior. That's the legal doctrine by which companies are vicariously liable for crimes committed by employees acting within the scope of their employment--that is, within their actual or apparent authority and on behalf of the corporation. It has left companies completely defenseless in the face of criminal charges under the FCPA. Once an employee admits to an FCPA violation or is found guilty, the company is automatically guilty too. Case closed.

If respondeat superior sounds oppressive and unbalanced, that's because it is. It becomes irrelevant to a corporation's defense that the wrongdoer isn't a high managerial official, that the corporation specifically instructed the employee not to engage in the proscribed conduct, or that the statute in question (such as the FCPA) requires willful or knowing violations. The idea, the courts say, is that criminal statutes impose a duty upon the corporation to prevent its employees from committing the statutory violations. So forget intent, mens rea, good faith and so on; think instead of strict liability for the employee's criminal conduct.

Are we exaggerating? Not at all. Here's how the United States Sentencing Commission's May 2004 release describes respondeat superior as applied by the courts:

Criminal liability can attach to an organization whenever an employee of the organization commits an act within the apparent scope of his or her employment, even if the employee acted directly contrary to company policy and instructions. An entire organization, despite its best efforts to prevent wrongdoing in its ranks, can still be held criminally liable for any of its employees’ illegal actions.
As long as respondeat superior is the law of the land, corporations won't be mounting any defense to potential criminal charges under the FCPA. They can't win in court so of course they don't go to court. Naturally enough, that puts the prosecutors in full control. They know an FCPA criminal indictment waved in front of a defenseless corporation inevitably leads to a plea deal -- usually a deferred or non-prosecution agreement with terms dictated by the DOJ.

Now, though, there's a serious challenge to respondeat superior in a Second Circuit case called United States v. Ionia Management, S.A. It's the topic of a post on the White Collar Crime Prof Blog here. As Prof Podgor says, "This case forcefully takes on corporate criminal liability both from a policy perspective and in its application. This is clearly a case that needs to be watched."

The facts are these: A ship management company headquartered in Piraeus, Greece was convicted in a criminal jury trial under the Act to Prevent Pollution from Ships and obstruction of justice. It was fined $4.9 million and sentenced to probation and other assessments on the basis of the application of respondeat superior, which the defendant now challenges.

The amicus brief in support of the defendant / appellant is particularly powerful. The brief calls on the court to "adopt a standard for vicarious corporate criminal liability . . . that limits the application of respondeat superior." At the bottom of this post we've included a sample of the arguments.

Bloodless corporations are usually cast in the role of villain and seldom garner much sympathy. But we're in full agreement with the amicus brief and Prof Podgor, who says the doctrine of respondeat superior "needs to be examined in the real world of today, a world with international dimensions resulting from corporations that have employees on more than one continent, where statutes omit mens rea terms, and where the trial penalties can destroy a company."

What's the fix? Prof Podgor thinks the best option is a "good faith defense" for corporations charged for acts of rogue employees. That, she says, would be similar to the application of the analogous civil-law defense. It makes sense. Let corporations defend themselves based on their own good-faith compliance efforts. That would allow them a measure of justice and give them the strongest possible incentive to maintain an effective compliance program. Wouldn't everyone win?


Here are excerpts from the amicus brief in support of the defendant / appellant in United States v. Ionia Management, S.A. The brief comes from the Association of Corporate Counsel, the Chamber of Commerce, the National Association of Criminal Defense Lawyers, the National Association of Manufacturers, the New York Association of Criminal Defense Lawyers, and the Washington Legal Foundation. We've left in some of the citations but omitted the mountainous footnotes.

[T]he district court’s view of vicarious liability in the criminal context is inconsistent with the criminal law’s goals of deterrence and punishment. In cases where corporations have done everything reasonable to prevent criminal conduct on the part of their employees, the corporation itself is not morally culpable yet is disincentivized from taking steps to expose the wrongdoing because of the risk that expansive respondeat superior principles will lead to its own criminal liability. These are exactly the incentives that led the Supreme Court to adopt a more limited approach to vicarious liability in Faragher, Ellerth, and Kolstad. An alternative approach to corporate criminal liability is called for not only by Faragher, Ellerth, and Kolstad, but by numerous commentators who have criticized the respondeat superior approach.

The criticism of the prevailing scope of corporate vicarious criminal liability is widespread and growing, particularly given the rise of corporate investigations and prosecutions by the federal and state governments. While the availability of corporate criminal liability is congressionally mandated, the means by which such liability is established are critical.

A criminal indictment can be a life-or-death matter for a company. Yet, the vast sweep of the district court’s standard for the imposition of vicarious criminal liability makes corporations accountable for almost all criminal acts of any low level employees—even those acting against explicit instructions and in the face of the most robust corporate compliance program. This has caused a tremendous imbalance between the power of a prosecutor and a corporate defendant. Given the hair-trigger for corporate liability even for the most responsible corporate citizen, many corporations forego any defenses in order to resolve threatened prosecution. District Judge Gerald E. Lynch phrased the problem with precision:

If a corporation is criminally liable for the unauthorized acts of mid-level managers, the corporation will often not have a viable defense, despite legitimate questions about the justice of punishing it. . . . Such defendants are increasingly relegated to making their most significant moral and factual arguments to prosecutors, as a matter of “policy” or “prosecutorial discretion,” rather than making them to judges, as a matter of law, or to juries, as a matter of factual guilt or innocence.

Gerald E. Lynch, The Role of Criminal Law in Policing Corporate Misconduct, 60 Law & Contemp. Probs. 23, 59 (1997).

This imbalance and the problems it engenders are not theoretical. For example, one judge found that prosecutors violated the Constitution by causing KPMG to cut off attorneys’ fees to employees in the hope of obtaining a deferred prosecution agreement. United States v. Stein, 435 F. Supp. 2d 330 (S.D.N.Y. 2006), appeal docketed, No. 07-3042-cr (2d Cir. 2007). In another instance, as part of a deferred prosecution agreement, Bristol-Myers Squibb agreed to endow a professorship at Seton Hall University, the prosecutor’s alma mater. Interview of Mary Jo White, Corp. Crime Rep., Dec. 12, 2005, at 14-15; see also Andrew Weissmann with David Newman, Rethinking Criminal Corporate Liability, 82 Ind. L.J. 411, 415 n.5 (2007. The potential for abuse is manifested as well in the then‑common requirement that corporations agree to broad waivers of attorney-client privilege as a factor to be considered for a deferred prosecution agreement.

The potential for inappropriate prosecutorial pressure is particularly heightened in the area of corporate criminal investigations that end in Draconian non-prosecution and deferred prosecution agreements, where no court has oversight authority. There, the prosecutor effectively serves as both judge and jury. Because of the disastrous consequences of a corporate indictment and the ease with which corporations may be liable under the doctrine of respondeat superior, corporations are under immense pressure to agree to almost any terms. The vast majority of these negotiations go on behind closed doors, with little public scrutiny and no judicial review.

Special thanks to Luke McLoughlin at Jenner & Block's New York office for providing the link to the final version of the brief. The firm acted as counsel for the amici curiae.


Feeling The Heat Overseas

Foreign companies can't be blamed for wondering if they're being singled out under the Foreign Corrupt Practices Act. The names in the FCPA-related headlines alone are enough to cause high anxiety. ABB, Siemens, BAE, DaimlerChrysler, AstraZeneca and many more. But are U.S. prosecutors really focusing too much attention on U.K., European and other foreign companies instead of American firms? Probably not, at least according to the numbers. Here's the situation.

Foreign companies weren't subject to the FCPA at all until 1998, when the law was amended and, in the words of the U.S. attorneys' manual, "expanded . . . to assert territorial jurisdiction over foreign companies and nationals." For the next five years under the FCPA, the Justice Department hardly gave foreigners a second look. That began to change in 2004, when the number of all FCPA investigations started rising, and the number of purely foreign companies (not foreign subsidiaries of U.S. parents) being investigated rose along with the tide. Of the 20 investigations launched in 2004, says Dan Newcomb in Recent Trends and Patterns in FCPA Enforcement, four concerned purely foreign corporations. The numbers, he says, increased from 2005 to 2007, with about 13 investigations involving purely foreign companies, out of around 50 ongoing FCPA investigations in all. So while the actual number of foreign companies involved in FCPA problems has increased, the percentage of foreign firms under investigation has decreased during the past four years.

So why does it seem like the DOJ is picking on foreign companies? Partly because their headline-making names are so familiar. ABB Ltd (Switzerland) Vetco Gray UK Ltd, Akzo Nobel, NV (the Netherlands) and Statoil ASA (Norway) were all subject to still-fresh DOJ enforcement actions. And foreign companies under ongoing FCPA investigations include similarly big names: AstraZeneca (UK-Sweden, pharmaceuticals), BAE Systems (UK, defence) DaimlerChrysler (Germany, automotive), Innospec (UK, chemicals), Magyar Telekom (Hungary, telecoms), Norsk Hydro (Norway, energy), Novo Nordisk (Denmark, health, pharmaceuticals) Panalpina (Switzerland, transport), Siemens (Germany, engineering, electronics), Smith & Nephew (UK, medical devices) and Total (France, energy). All of them are well-known at home and most are famous around the globe.

Foreign attention has also been drawn to the FCPA by the so-called parallel investigations, where the DOJ and an anti-corruption agency from another country work together. Again, Dan Newcomb provides the details:

Among recent FCPA investigations by the United States government, parallel investigations in the following foreign jurisdictions were reported: Brazil (Gtech); China (Siemens); Costa Rica (Alcatel Lucent); France (Halliburton, Total SA); Germany (Bristol Meyers, DaimlerChrysler, Siemens); Greece (Siemens); Hungary (Siemens); India (Xerox); Indonesia (Freeport, Monsanto, Siemens); Israel (Siemens); Italy (Immucor, UDI, Siemens); Korea (IBM); Liechtenstein (Siemens); Nigeria (Halliburton, Siemens); Norway (Siemens); Russia (Siemens); and Switzerland (Siemens).
There's no way to know what percentage of FCPA violations are actually caused by foreign companies. So there's no way to know if foreign companies are getting more or less FCPA attention than they deserve. But in some cases, the DOJ doesn't have a choice. For example, it had to launch investigations when Siemens and BAE made headlines around the world for alleged corrupt practices on U.S. soil, and when evidence emerged that Panalpina's Houston office may have led an entire industry into an FCPA quagmire with its customs clearance and permitting practices for the oil and gas services segment.

But whether foreign companies receive exactly the "right" amount of FCPA attention from the DOJ isn't so important. What's important now is that when foreign companies are subject to the FCPA's compliance requirements because of where and how they do business, they should do everything reasonably necessary to comply with the law. They should have an effective compliance program. That should be true not only for the FCPA, by the way, but for the laws of all the countries they're subject to. The only other option is to watch for their names in the headlines.


Faro Pays $2.95 Million For FCPA Settlement

Faro Technologies Inc. confirmed that it has resolved Foreign Corrupt Practices Act offenses with the Department of Justice and the Securities and Exchange Commission. The DOJ settlement requires payment of a $1.1 million criminal penalty and entry into a two-year non-prosecution agreement with appointment of a compliance monitor. In settling with the SEC, Faro will pay about $1.85 million in disgorgement and prejudgment interest.

Florida-based Faro -- which designs, develops, and markets software and portable, computerized measurement devices -- self-disclosed potential FCPA violations in China to U.S. authorities in March 2006. It announced an anticipated settlement with prosecutors in its October 30, 2007 earnings release (see our post here).

Faro began selling its products directly to customers in China in 2003 through a Shanghai-based subsidiary, Faro China. In 2004 and 2005, a Faro employee authorized corrupt payments in the form of “referral fees” directly to employees of state-owned or controlled entities to secure business. It made illicit payments of $444,492 to obtain contracts worth about $4.9 million, and its net profit from the contracts was $1,411,306.

Faro employees routed the corrupt payments through a shell company to “avoid exposure,” according to internal e-mails. The employees also caused Faro China to enter into a bogus service contract with an intermediary, using it to pay the bribes. The intermediary aggregated the payments and invoiced Faro for reimbursement under the service contract. In its books and records, Faro falsely recorded the bribes as referral fees. The DOJ and SEC said the company failed to devise and maintain a system of internal controls for foreign sales sufficient to ensure compliance with the FCPA.

Faro's own documents, the DOJ said, revealed the extent of the bribery. "Profit lists" reflected the price of contracts and the costs of manufacture, along with line items for "referral fees" of 10%-15% of the contract price that were kickbacks to employees of state-owned customers. The DOJ gave the following examples:
A 2005 profit list for Purchase Order CH2005-VW34 for a purchase by Shanghai Turbine Generator Co., Ltd., a Chinese government entity, shows a contract value of $148,700 and an anticipated referral fee of $14,800, or approximately 10% of the contract value.

A 2005 profit list for Purchase Order Ch-2005-VW50(SW) for a purchase by Jiangxi Changhe Auto Co., Ltd. Hefel Plant, a Chinese government entity, shows a contract value of $53,086 and a referral fee of $8,000, or approximately 15% of the contract value.

Faro's non-prosecution agreement has a two-year term instead of the usual three years, presumably reflecting the company's prompt and detailed self-disclosure and effective corrective action. Faro said its estimated costs associated with the monitoring and stepped-up compliance obligations will be "in the range of $1 million to $2 million."

Neither Faro nor the DOJ explained why it took more than nine months to formally approve the previously announced settlement. We've speculated (here) that the Justice Department was delaying settlements involving compliance monitors, including Faro's, pending some accommodation with lawmakers on safeguards for the appointments. Controversy erupted last year after New Jersey U.S. Attorney Chris Christie appointed his former boss, ex-U.S. Attorney General John Ashcroft, as a monitor in a domestic bribery case for orthopedic device maker Zimmer Holdings Inc. The news that Mr. Ashcroft's firm could make as much as $52 million from the appointment sent shock waves around Capitol Hill and triggered Congressional hearings.

It appears from FCPA settlements announced in the past month involving Willbros, AGA Medical, and now Faro that monitor appointments are back on track. The solution appears to have been relatively simple. As with Willbros and AGA Medical, Faro will nominate its candidate to act as compliance monitor (after consulting with the DOJ), and the DOJ will have final approval over its choice. Provided the DOJ doesn't interfere directly and allows Faro and the other companies to pick their own qualified candidates, the selection is taken out of the hands of the DOJ. That should prevent the appearance of political abuse or cronyism in the appointments.

Faro Technologies, Inc. trades on NASDAQ under the symbol FARO.

View the DOJ's June 5, 2008 news release here.

View the SEC's Securities Exchange Act of 1934 Release No. 57933 / June 5, 2008, Accounting and Auditing Enforcement Release No. 2836 / June 5, 2008, and Administrative Proceeding File No. 3-13059 here.

View Faro's June 5, 2008 press release here.


AGA Medical Resolves China-Related FCPA Charges

Privately-held AGA Medical Corporation will pay a $2 million criminal penalty and enter into a deferred prosecution agreement with the Department of Justice to settle Foreign Corrupt Practices Act violations. It paid bribes in China of at least $460,000 to doctors in government-owned hospitals and patent-office officials. The Minnesota-based firm makes products used to treat congenital heart defects.

AGA was charged with two counts of violating and conspiring to violate the FCPA, 15 U.S.C. § 78dd-2(a)(1) and 18 U.S.C. § 371. Between 1997 and 2005, the company, one of its officers and other employees authorized corrupt payments to the doctors through AGA’s Chinese distributor. In exchange, the doctors directed their government-owned hospitals to purchase AGA’s products. Its sales in China for the period were about $13.5 million. Also, from 2000 through 2002, AGA applied for several Chinese patents. A high-ranking AGA officer agreed to pay bribes through the distributor to officials in the China State Intellectual Property Office to have the patents approved.

AGA's three-year deferred prosecution agreement requires appointment of a compliance monitor. Similar to the provisions seen recently with Willbros Group Inc., AGA will pick the monitor and the DOJ will approve or reject its choice: "AGA agrees to engage an independent corporate monitor ('the Monitor') within sixty (60) calendar days of signing this Agreement. Within thirty (30) calendar days after the signing of this Agreement, and after consultation with the Department, AGA will propose to the Department a candidate to serve as the Monitor. The Department retains the right, in its sole discretion, to accept or reject any Monitor proposed by AGA pursuant to the Agreement. In the event the Department rejects a proposed monitor, AGA shall propose another candidate within ten (10) calendar days after receiving notice of the rejection. This process shall continue until a Monitor acceptable to all parties is chosen."

The deferred prosecution agreement also contains a now-customary successor liability clause, whereby anyone who acquires AGA's business will also be bound by the compliance obligations in the agreement: "AGA agrees that in the event it sells, merges, or transfers all or substantially all of its business operations as they exist as of the date of this Agreement, whether such sale is structured as a stock or asset sale, merger or transfer, it shall include in any contract for sale, merger or transfer a provision binding the purchaser, or any successor in interest thereto, to the obligations described in this Agreement."

AGA self-disclosed the violations to the Department of Justice. Emails it provided between some of its U.S.-based officers and employees and the Chinese distributor left no doubt that illegal activity had occurred. Here are some excerpts from the distributor's messages:

This week I have maken [sic] an appointment with one key person in China knowledge and Patent Protection Bureau, Any action in China I must pay money to do.

I am still in agreement with our prior discussions and will cover her fee as long as we can get the [sic] patent issued in a timely manner.

Please inform [Officer A] don't give up the application for the first three patents in China. I will contact with the officials of China patent bureau again after Chinese new year. Maybe money will help us.

My company also need to provide 20% kickback for physicians and sometimes 10% discount to hospitals.

The physicians suggest the patient to use which device according [to] the patient's family economic ability and the kickback.

View the DOJ's June 3, 2008 news release here.

View the criminal complaint against AGA Medical Corporation here and the deferred prosecution agreement here (courtesy of the Corporate Crime Reporter).


Unintended Consequences

Crooked officials and those who bribe them cripple economies and ruin lives. So all sincere efforts to reduce public corruption and deliver clean government deserve praise. At the same time, not all anti-corruption initiatives are equal, and good intentions can sometimes produce bad results. With that in mind, we want to take a quick look at the programs run by the Council of Europe's "Group of States against Corruption," also known as GRECO.

It was founded in 1999 to monitor compliance with the Council of Europe's anti-corruption standards. GRECO does that by studying the members' existing laws and practices, publishing reports that evaluate their efforts, and recommending how they can improve their performance. Then it checks back to see how they're doing and, with the member's permission, publishes its findings for the public to read.

All that sounds good. Third-party reviews, peer pressure and plenty of accountability. But when you look at GRECO's country reports, there's something fishy.The same recommendations show up again and again. For example, GRECO tells both Azerbaijan (#150 on Transparency International's 2007 Corruption Perception Index) and Iceland (#6 on the CPI) to do more training of public officials in ethics and anti-corruption awareness. The language used for both countries is nearly identical. And the report on Moldova (#111 on the CPI) warns that public-sector transparency has to be increased. That's good too, but it loses its punch when you read that Switzerland (# 7 on the CPI) needs the same medicine. Albania (#105 on the CPI) should develop standards for public servants moving to the private sector, GRECO says. Good idea, except that the message is the same for squeeky-clean Denmark (#1 on the CPI).

Our concern, you might have guessed, is that GRECO appears to approach all of its 44 member States with the same checklist. The impression given is that fighting corruption is a matter of changing this law, adopting that code of conduct, or imposing this training module. True enough, those steps might help, but only in a country already committed to fighting public corruption. On the other hand, where leaders take a cynical view -- where they line their own pockets with kickbacks and bribes and let their subordinates do the same -- GRECO's approach provides cover for the bad guys to hide behind. Here's the problem: corrupt regimes can implement GRECO's technical recommendations and periodically announce great progress in the battle against public sleaze. Do this, check. Do that, check . . check, check, check. Meanwhile everyone can still be stealing the silverware.

With all institutions and organizations -- as with individuals -- the difference between compliance and lawlessness is a matter of intent. Any law, rule or regulation can be ignored, avoided, bent or broken to achieve a corrupt purpose. And no amount of legal reform, ethics training or transparency will make a dent if attitudes don't change. But when attitudes do change, when leaders decide to clean things up, they can do it practically overnight. Singapore (#4 on the CPI) has amazingly simple anti-corruption legislation. But its leaders are committed to cleanliness and the result is easy to see. Neighboring Indonesia (#143 on the CPI) has layers of laws, rules and regulations aimed at public corruption. None of it works because the attitude at the top is inconsistent, to put it kindly.

So it's fair to ask this question: Is GRECO spending its time and public funding wisely? Do Azerbaijan and Switzerland really need more rules regulating gifts to public servants? According to GRECO they do. But will a ban on fruit baskets ever turn Azerbaijan's culture around? At the same time, does the absence of gift-giving rules really threaten the integrity of Swiss bureaucrats? Perhaps, just maybe, GRECO would do better to ditch the checklist and, in countries where public corruption is really a problem, work on attitudes instead.

The people at GRECO would say they're already changing perceptions. They'd say their evaluation visits, recommendations and public reports focus local and international attention on the need for anti-corruption initiatives in all member countries. That to pick on just the Azerbaijans and not the Denmarks would create an atmosphere of bullying and intimidation, draining both GRECO and its parent, the Council of Europe, of their moral authority.

There's some truth to those arguments. But in Germany, Italy and France, for example, attitudes toward domestic and international public corruption changed over the past decade -- helped along by an uncompromising antibribery message from the OECD. Those countries reformed their tax codes, which helped, and started enforcing anti-corruption laws already on the books. Prosecutions, convictions and punishment deter crime more than anything else. Most importantly, however, the leaders of Germany, Italy and France showed the political will to find, catch and incarcerate wrongdoers. That's an ingredient that can never come from an outsider's checklist.

GRECO members -- 43 European countries and the United States -- are right to fight public corruption. It's a scourge that destroys hope and robs people of their futures. Its proper place is in the dustbin of history. But GRECO and its parent, the Council of Europe, might want to ask themselves whether their approach, though well-meaning in all respects, though thorough and even-handed, is really the right path to less corruption in some of its more troublesome member States.

Visit GRECO's website here.

View Transparency International's 2007 Corruption Perception Index here.


The Dog Ate Our Homework

We had a nice post ready for today. Really. Then we remembered the 11:59 p.m. deadline on May 31 for the 2008 TRACE International essay contest on fighting public bribery. There were only a few hours to go so in desperation we sent our post off as our entry. TRACE, by the way, is a non-profit group that conducts due diligence and compliance training for intermediaries -- agents, joint venture partners, distributors and the like. We wanted to be part of the essay contest, which drew 120 entries last year. So here we are with no post and a rather flimsy excuse on top of it.

It's embarrassing to have mailed away the blog's work product. If we hadn't done that, we'd be using this space right now to talk about our favorite subject: in-house compliance training. How much we always learn from the sessions. How we enjoy talking about the Foreign Corrupt Practices Act with company personnel from management, marketing, operations and more -- and how the training sessions go far beyond the mere words of the FCPA.

But we can't say too much. TRACE, we noticed, has rules intended to protect the integrity of its essay contest. Entries must be original and unpublished. So we're scrupulously avoiding any hint of self-plagiarizing. Imagine how bad it would look if the FCPA Blog triggered a scandal in an essay contest about fighting corruption through ethical practices? Oh boy. We'd need a new identity just to get dinner at home.

So until the post flew out of our hands, we intended to mention that FCPA training is required for an effective compliance program. Now, constrained by the rulebook, we can't even talk about that. We can only reproduce below part of the 2005 Federal Sentencing Guidelines, trusting that curious readers will ponder why:

The organization shall take reasonable steps to communicate periodically and in a practical manner its standards and procedures, and other aspects of the compliance and ethics program, to the individuals [responsible for compliance] by conducting effective training programs and otherwise disseminating information appropriate to such individuals’ respective roles and responsibilities.

And finally, to tie it all together, we would have tossed in some nice examples to show how training can prevent FCPA violations; or uncover them; or even reveal who in the company may be heading for a compliance meltdown.

Gosh, it really would have been a good post. Too bad all we've got to show for it is the fuzzy screen shot above. Here's our plan, though. If we win the essay contest, we'll seek permission to "reprint" our post right here, with full credit to TRACE for all the great compliance work they're doing. If we lose, which we concede to be the overwhelmingly probable outcome, we'll be free to use the post anyway.

The judges will decide by September, TRACE says. Meanwhile, we'll get back to work -- and hope this humbling editorial debacle will soon be forgotten.

Visit TRACE International here.

View Chapter 8 - PART B - §8B2.1. ("Effective Compliance and Ethics Program") of the 2005 U.S. Federal Sentencing Guidelines here.



That's right. The title of today's post says in Japanese, Terminate With Extreme Prejudice. Why? Well, we were spending just a few minutes surfing the internet (only during our company-approved tea break, of course) and happened to see the following news item from Japan's Yomiuri Shimbun (here):


U.S. firm asks court to void contract with Yamada

LOS ANGELES--A U.S. aviation fuel-related equipment manufacturer has filed a lawsuit at a U.S. district court in Cleveland against defense equipment trader Yamada Corp. and its U.S. subsidiary, claiming Yamada's involvement in bribery cases violated their contract, which therefore should be terminated, The Yomiuri Shimbun has learned.

Cleveland-based Argo-Tech Corp. also demanded compensation from Yamada and its subsidiary.

In response, Yamada filed a countersuit against Argo-Tech at a U.S. district court in California, claiming the termination of their contract would be illegal.

According to the claims by the two sides, former Yamada President Masashi Yamada, 84, participated in a 150 million dollars capital boost for Argo-Tech around 1990, when the U.S. company faced financial difficulty.

Argo-Tech in return concluded a 50-year exclusive agency agreement with Yamada on the sales of Argo-Tech's fuel pumps for aircraft and other products in 1994.

In the documents submitted to the Ohio court, Argo-Tech claimed that incidents including former Yamada executive Motonobu Miyazaki's bribing of former Administrative Vice Defense Minister Takemasa Moriya and Miyazaki's provision of 100 million yen to Naoki Akiyama, former executive director of the Japan-U.S. Center for Peace and Cultural Exchange, in connection with the company's winning contracts for the disposal of chemical weapons found in Fukuoka Prefecture violated their contract, in which they agreed they would adhere to the U.S. Foreign Corrupt Practices Act.

For its part, Yamada claimed in its documents submitted to the California court that the incidents mentioned by Argo-Tech had no relation to the company, so they should not cause the termination of their contract.

(May 28, 2008)


Now we know nothing about the story except what's printed above. But assuming the Yomiuri Shimbun has its facts straight, we can say for sure that Cleveland-based Argo-Tech made a fundamental compliance error when it entered into the 50-year agency agreement with Yamada in 1994.

Long-suffering readers of this Honorable Blog will know that every agreement with an overseas partner or agent should give the principal the unfettered right to terminate if the agent breaches its obligations to comply strictly with the requirements of the Foreign Corrupt Practices Act. Otherwise, the principal might get caught between a 石 and a ハード面. That's exactly what the Department of Justice warned against in Opinion Procedure Release 2001-01 (May 24, 2001) (here).

In that case, a U.S. company (called the “Requestor”) proposed to enter into a joint venture with a French company. There were doubts about how the French company obtained some of its contracts. So the Requestor took various precautions to protect itself against an FCPA violation. Accordingly, if it learned its French partner had breached the compliance warranty, the Requestor could terminate the relationship if the breach had a “material adverse effect” upon the business.

Not good enough, said the DOJ:

Should the Requestor's inability to extricate itself result in the Requestor taking, in the future, acts in furtherance of original acts of bribery by the French company, the Requestor may face liability under the FCPA. Thus, the Department specifically declines to endorse the "materially adverse effect" standard.

The lesson from Release 2001-01 is this: Accept no limits or conditions on the right to terminate a joint venture or agency when there is evidence of an FCPA violation.

We don't know the terms of the agreement between them, but if Argo-Tech had to file a lawsuit in federal court to get away from a bribe-paying Yamada, then Argo-Tech surely didn't have an unfettered right to terminate because of the breach of FCPA compliance obligations. And that's a serious mistake to have made, even way back in 1994. On the other hand, if Argo-Tech neglected to include a proper termination clause, going to court now to end the agreement (and at the same time establish that it had nothing to do with Yamada's alleged bribery) is its best course of action -- even though the litigation will be expensive, time-consuming, and on public display.

So that's today's post, along with a confession -- well, two confessions. We were surfing before and after our tea break today. In fact, it was only during our tea break that we stopped surfing. And our Japanese fluency isn't what you might call . . . fluent. So there's a chance the post's title doesn't quite say Terminate With Extreme Prejudice. Another plausible translation may be Thank You For The Wonderful Visit, Beloved Mother-In-Law.

View DOJ Opinion Procedure Release 2001-01 (May 24, 2001) here.


Bribe Takers Get A Pass Under The FCPA

With $4-a-gallon gas, disappearing honey bees and a world-wide hops shortage, there's hardly time to worry about anything else. Like why bribe-taking foreign officials are never prosecuted under the Foreign Corrupt Practices Act. Fortunately, a reader with time to ponder such things asked us that question after we reported last month (here) the FCPA-related sentencing of former World Bank employee, Ramendra Basu.

Basu and his co-conspirator, Gautam Sengupta, another World Bank employee, pleaded guilty to helping a Swedish consultant make corrupt payments to government officials in Ethiopia and Kenya. At the time of their offense, Basu and Sengupta were working in the World Bank's headquarters in the District of Columbia, and both were U.S. permanent residents. Our reader wanted to know if Basu and Sengupta, who also took money from the Swedish consultants, could have been prosecuted not only as "domestic concerns" but also based on their status as employees of the World Bank, because "the Bank is a public international organization and its employees are therefore foreign officials under the FCPA." See 15 U.S.C. § 78dd-1(a)(f)(1) et seq.

Thanks to a definitive case from 1991, the answer is clear. Only bribe-payers can be prosecuted under the FCPA or under the general conspiracy statute of the United States. Bribe-takers are excluded. References in the FCPA to "foreign officials" are always talking about those who accept bribes, not those who pay them. That means foreign officials aren't targeted for prosecution.

The case that settled the issue is U.S. v. Castle, 925 F.2d 831 (5th Cir. 1991) (per curiam). In it, the Fifth Circuit adopted the Memorandum Opinion and Order from the trial court written by Judge Barefoot Sanders. The four original defendants in the case were charged in a one-count indictment with conspiring to violate the Foreign Corrupt Practices Act, 15 U.S.C. §§ 78dd-1, 78dd-2. Two defendants, Donald Castle and Darrell W.T. Lowry, moved to dismiss the indictment against them on the grounds that as Canadian government officials, they couldn't be convicted of accepting a $50,000 bribe to steer award of a bus-service contract by the Saskatchewan provincial government.

The two other defendants who paid the bribe didn't dispute that they could be prosecuted for conspiring to violate the FCPA. Nor was there any dispute that defendants Castle and Lowry, as Canadian government officials, could not be charged with a substantive violation of the FCPA, since the statute doesn't criminalize the receipt of a bribe by a foreign official. The issue, then, was whether the U.S. could prosecute Castle and Lowry under the general conspiracy statute, 18 U.S.C. § 371, for conspiring to violate the FCPA. "Put more simply," the district court said, "the question is whether foreign officials, whom the Government concedes it cannot prosecute under the FCPA itself, may be prosecuted under the general conspiracy statute for conspiring to violate the Act."

The trial court's memorandum opinion of June 4, 1990 was adopted by the appellate court. It traces the FCPA's legislative history relevant to whether foreign officials who take bribes can be prosecuted under the FCPA or the general conspiracy statute or both, and it sets out a comprehensive policy analysis behind Congress' intent to exclude foreign officials from prosecution. As far as we know, the 1991 case persuaded the Justice Department to end all further attempts to make conspiracy to violate the FCPA a chargeable offense against bribe-taking foreign officials.

Happily, Judge Barefoot Sanders' opinion lives up to its author's great moniker. It's a terrific read for FCPA lawyers, policy wonks, and policy-wonking lawyers. Here are just a few paragraphs from the 2,500-word decision:

"Yet the very individuals whose participation was required in every case--the foreign officials accepting the bribe--were excluded from prosecution for the substantive offense. Given that Congress included virtually every possible person connected to the payments except foreign officials, it is only logical to conclude that Congress affirmatively chose to exempt this small class of persons from prosecution.

"Most likely Congress made this choice because U.S. businesses were perceived to be the aggressors, and the efforts expended in resolving the diplomatic, jurisdictional, and enforcement difficulties that would arise upon the prosecution of foreign officials was not worth the minimal deterrent value of such prosecutions. Further minimizing the deterrent value of a U.S. prosecution was the fact that many foreign nations already prohibited the receipt of a bribe by an official. See S.Rep. No. 114 at 4, 1977 U.S.Code Cong. & Admin.News at 4101 (testimony of Treasury Secretary Blumenthal that in many nations such payments are illegal). In fact, whenever a nation permitted such payments, Congress allowed them as well. See 15 U.S.C. Sec. 78dd-2(c)(1).

"Based upon the language of the statute and the legislative history, this Court finds in the FCPA what the Supreme Court in [Gebardi v. United States, 287 U.S. 112, 53 S.Ct. 35, 77 L.Ed. 206 (1932)] found in the Mann Act: an affirmative legislative policy to leave unpunished a well-defined group of persons who were necessary parties to the acts constituting a violation of the substantive law. The Government has presented no reason why the prosecution of Defendants Castle and Lowry should go forward in the face of the congressional intent not to prosecute foreign officials. If anything, the facts of this case support Congress' decision to forego such prosecutions since foreign nations could and should prosecute their own officials for accepting bribes. Under the revised statutes of Canada the receipt of bribes by officials is a crime, with a prison term not to exceed five years, see Criminal Code, R.S.C. c. C-46, s.121 (pp. 81-84) (1985), and the Royal Canadian Mounted Police have been actively investigating the case, apparently even before any arrests by U.S. officials. Defendant Castle's and Lowry's Supplemental Memorandum In Support of Motion to Dismiss, filed May 14, 1990, at 10. In fact, the Canadian police have informed Defendant Castle's counsel that charges will likely be brought against Defendants Castle and Lowry in Canada. Id. at 10 & nn. 3-4. Thus, prosecution and punishment will be accomplished by the government which most directly suffered the abuses allegedly perpetrated by its own officials, and there is no need to contravene Congress' desire to avoid such prosecutions by the United States."

Download U.S. v. Castle, 925 F.2d 831 (5th Cir. 1991) (per curiam) here.


The Highest Roller In Town

Does it ever pay to stonewall the Department of Justice in an FCPA investigation? We're asking because of an item that ran in the May 21st edition of the U.K. Times Online (available here). It described the DOJ's detention of BAE's ceo and a director as they travelled separately through the Houston and Newark airports last week. The DOJ, investigating alleged corrupt payments to Saudi officials, reportedly searched and copied information from their laptops, phones and briefcases, then let the men continue traveling. In the Times piece, Joshua Hochberg, the former head of the DOJ's group responsible for Foreign Corrupt Practices Act prosecutions, explained "that the recent heavy-handed behaviour of investigators indicated 'a severe lack of cooperation by BAE'."

Is a "severe lack of cooperation" a viable legal strategy -- for BAE and its personnel, or for any company facing an FCPA investigation? Does being non-cooperative and recalcitrant ever serve the best interests of a corporation? When dealing with the FCPA, does ordering company employees and agents to keep quiet and stay away from the DOJ ever enhance a company's defensive position?

The questions aren't merely academic. In most criminal investigations, corporate targets have some options to consider. They can decide to force the government to do the hard work of uncovering evidence. That's their right. Defendant's don't have to testify against themselves, and the government's burden to prove guilt beyond a reasonable doubt is a safeguard for corporations too. At its criminal trial, an accused company can sit mute and force the government to make its case.

But the FCPA doesn't work like a typical criminal statute. Companies facing FCPA charges don't go to trial. They can't withstand the withering publicity -- the front page stories around the world of their alleged international public bribery. They usually can't risk being banned from U.S. government contracts, or losing their export licenses -- which can happen based on mere allegations of FCPA offenses. And anyway, their chances at trial are exremely bleak. With the application of respondeat superior, once a company employee admits to violating the FCPA, the company is guilty as a matter of law. That's the rule in most U.S. circuits that have considered the question. It doesn't matter if the guilty employee held a low rank or was violating company policy. The employee's guilt is still imputed to the company. So one bad apple really does spoil the barrel.

Companies are sitting ducks in FCPA cases, and their people are vulnerable too. Let's face it, what director, officer or executive responsible for compliance wants to risk his or her hide because an assistant sales manager in Mongolia decided sui generis to grease some government palms? In other words, it's all downside risk to fight the DOJ in an FCPA case. So instead, companies cooperate, knowing a "good" outcome -- usually involving a deferred prosecution agreement -- is only possible when the DOJ is on their side.

If fighting isn't an option, if cooperating is the only way to salvation, then the DOJ ends up holding all the cards. Its decision to investigate and charge a corporation becomes paramount. There won't be a trial where lawyers can argue, raise defenses, challenge the witnesses' credibility, and implore the jury to dish out justice. Instead the process will start and end with the DOJ itself. Yes, there are grounds to criticize the prosecutors' omnipotence in FCPA cases. But for now that omnipotence is a fact of life that has to be faced. Why, then, would a corporation under investigation for alleged FCPA offenses thumb its nose at the prosecutors? What's to be gained?

Instead of fighting, the path forward has been for accused companies to work with the DOJ, to investigate the facts cooperatively, to self-disclose the results, to take remedial action, and to hope the DOJ will be willing to defer the prosecution if the company keeps its nose clean. But that's not what BAE is doing. Why not?

Well, in the U.K., BAE has been protected. The Serious Fraud Office -- responsible for investigating and prosecuting high-level overseas public corruption -- opened a file on the company but closed it in 2006 under irresistible pressure from the Blair government. The High Court in March this year ruled that the SRO couldn't legally drop the investigation, but the government is now appealing that decision to the House of Lords. In the U.K., BAE may yet keep its secrets. So is the company also betting that its U.K. protectors will prevail against U.S. prosecutors as well? That the Western Alliance will be unwilling to press the case and embarrass Saudi Arabia -- a key security ally and OPEC's largest exporter?

We don't know what's going on inside BAE. It has denied doing anything illegal. So all we really know is that the company isn't playing by the usual rules. Instead of making peace with the DOJ, it's flipping the feds an awfully rude gesture. Does that mean BAE has a legal strategy that relies on an ultimate savior, such as the man in the White House? If that's true, what happens if the strategy doesn't work? What happens if BAE ends up in the hands of the Department of Justice like every other company facing FCPA allegations? In that case, BAE and its leaders will have lost an enormous bet, and life will never be the same.

View prior posts about BAE here.


More Than Normally Careful

Due diligence is a common subject, so it's natural to think of it as an easy subject as well. But it's not. There's no black-letter law anywhere describing due diligence, or what type is needed for an effective compliance program under the Foreign Corrupt Practices Act, or how much should be done. Surprisingly, the FCPA itself never mentions it. The statute describes what behavior constitutes an offense, and lists a few things that don't -- facilitating payments, promotional expenses and payments allowed under the written laws of the host country. But it doesn't mention due diligence.

Where, then, does due diligence come from? As with so many aspects of compliance, the Federal Sentencing Guidelines are the fountainhead. They leave no doubt that due diligence is an essential ingredient of compliance. But even the Guidelines don't give examples, checklists, or timetables. They leave the "details" to those who know the organization best -- its directors, officers and executives. Instead of being a compliance how-to, the Guidelines describe the hallmarks of an organization whose intention is to comply. One hallmark -- you guessed it -- is due diligence. There's even some case law on the topic that's helpful.

In re Holland Furnace Company et al., 341 F.2d 548 (7th Cir., 1965) is a leading decision. Paraphrasing its holding and applying it to FCPA due diligence, the case says an organization must be able to demonstrate, on the basis of the entire record, and through the acts of certain of its officers, agents, representatives and employees, that it didn't knowingly, willfully or intentionally violate any prohibitions found in the law. And doing all that is the job of the due diligence.

Another leading case on the evidence of an organization's intention to comply is U.S. v. Greyhound Corporation. There, the Seventh Circuit was referring to compliance with a court order. But it could have been talking about a company's legal duty to comply with the FCPA (or any other criminal statute). In distinguishing between genuine and bogus compliance, the court said:

"Similarly, while actions showing a good faith effort to comply with the order will tend to negate willfulness, . . . delaying tactics, indifference to the order, or mere 'paper compliance' will support a finding of willfulness. In re Holland Furnace Co., 341 F.2d 548, 551 (7th Cir. 1965), cert. denied, 381 U.S. 924, 85 S.Ct. 1559, 14 L.Ed.2d 683. The very issuance of the order puts the party on notice that his past acts have been wrongful. 'No concept of basic fairness is violated by requiring a person in this position to be more than normally careful in his future conduct.' United States v. Custer Channel Wing Corp.,247 F.Supp. 481, 496 (D.Md.1965), aff'd, 376 F.2d 675 (4th Cir. 1967), cert. denied, 389 U.S. 850, 88 S.Ct. 38, 19 L.Ed.2d 119."

U.S. v. Greyhound Corporation, 508 F.2d 529 (7th Cir., 1974).

So an organization accused of criminal conduct can show that it intended to comply with the law by being "more than normally careful." For the FCPA, that means there has to be due diligence that's appropriate to the circumstances. If the host country is known to tolerate public corruption, for example, then being "more than normally careful" will involve more due diligence. Again, the more risk of an FCPA offense, the more effort is needed to keep the offense from happening.

Finally, then, the record of the company's due diligence (of its being "more than normally careful") becomes the evidence that the company didn't knowingly, willfully or intentionally violate the law. An FCPA offense requires willful and knowing conduct, so a record of due diligence demonstrating a lack of willfulness and knowledge might be the organization's best and only defense. That's why due diligence has to be at the center of any effective compliance program. It's the proof that the company intended to comply all along.


There's no doubt that due diligence is woven into the fabric of any true compliance culture. For readers wanting to know a bit more, we set out below the references to due diligence in the Federal Sentencing Guidelines under "Effective Compliance and Ethics Program." Here's what the Guidelines say:

-- To have an effective compliance and ethics program, for purposes of subsection (f) of §8C2.5 (Culpability Score) and subsection (c)(1) of §8D1.4 (Recommended Conditions of Probation - Organizations), an organization shall—

(1) exercise due diligence to prevent and detect criminal conduct . . . .

* * *

-- Due diligence and the promotion of an organizational culture that encourages ethical conduct and a commitment to compliance with the law within the meaning of subsection (a) minimally require the following:

(1) The organization shall establish standards and procedures to prevent and detect criminal conduct.

(2) (A) The organization’s governing authority shall be knowledgeable about the content and operation of the compliance and ethics program and shall exercise reasonable oversight with respect to the implementation and effectiveness of the compliance and ethics program.

(B) High-level personnel of the organization shall ensure that the organization has an effective compliance and ethics program, as described in this guideline. Specific individual(s) within high-level personnel shall be assigned overall responsibility for the compliance and ethics program.

(C) Specific individual(s) within the organization shall be delegated day-to-day operational responsibility for the compliance and ethics program. Individual(s) with operational responsibility shall report periodically to high-level personnel and, as appropriate, to the governing authority, or an appropriate subgroup of the governing authority, on the effectiveness of the compliance and ethics program. To carry out such operational responsibility, such individual(s) shall be given adequate resources, appropriate authority, and direct access to the governing authority or an appropriate subgroup of the governing authority. . . .

* * *

-- The organization shall use reasonable efforts not to include within the substantial authority personnel of the organization any individual whom the organization knew, or should have known through the exercise of due diligence, has engaged in illegal activities or other conduct inconsistent with an effective compliance and ethics program.

* * *

-- High-level personnel and substantial authority personnel of the organization shall be knowledgeable about the content and operation of the compliance and ethics program, shall perform their assigned duties consistent with the exercise of due diligence, and shall promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.

* * *

-- [T]he organization shall hire and promote individuals so as to ensure that all individuals within the high-level personnel and substantial authority personnel of the organization will perform their assigned duties in a manner consistent with the exercise of due diligence and the promotion of an organizational culture that encourages ethical conduct and a commitment to compliance with the law . . .


View Chapter 8 - PART B - §8B2.1. ("Effective Compliance and Ethics Program") of the 2005 U.S. Federal Sentencing Guidelines here.