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Entries in Agents (71)


Pride's Disclosure Tells The Story

We admire Pride International, Inc.'s approach to its Foreign Corrupt Practices Act disclosures. The company talks about the serious problems it had for years with sensitive payments, and how it's been dealing with them. The countries involved included Venezuela and Mexico, India and Malaysia, Saudi Arabia, Kazakhstan, Brazil, Nigeria, Libya, Angola and the Republic of the Congo, among others. Bribes apparently were paid directly or by intermediaries to clear rigs and equipment through customs, and to help solve problems with immigration, tax, and licensing authorities. Some of the payments in question involved global logistics firm Panalpina and other third parties.

Sadly, people near the top of the company probably knew what was going on. The ex-chief operating officer resigned his position in mid-2006 but has stayed as an employee during the FCPA investigation. If the audit committee or the board of directors think there's "cause" under his employment agreement to terminate his services, he could lose retirement benefits and maybe a lot more. Other senior people have already been fired or placed on administrative leave, and some resigned because of the FCPA investigation. The company says it has "taken and will continue to take disciplinary actions where appropriate and various other corrective action to reinforce our commitment to conducting our business ethically and legally and to instill in our employees our expectation that they uphold the highest levels of honesty, integrity, ethical standards and compliance with the law."

Who is Pride? It's a can-do Houston-based drilling contractor for the oil and gas industry. It has over 7,000 employees working around the world. "We have positioned our fleet," its website says, "in some of the world's largest and most active exploration and production areas, with a market presence in West Africa (Angola), Latin America (Brazil), the Gulf of Mexico, the Mediterranean and Middle East. Today, we operate a total of 45 rigs."

As we did a year ago here, we're reprinting below Pride International's FCPA disclosure from its annual report (Form 10-K), this one for the period ending December 31, 2008. Pride filed it with the Securities and Exchange Commission this week. It's a long read (for a blog post, anyway). But it's filled with details and admissions not usually found in similar disclosures. We think it also gives fair warning to shareholders and other stakeholders that an eventual resolution with the Justice Department and SEC could be expensive and disruptive.

Pride International, Inc. trades on the New York Stock Exchange under the symbol PDE.

Download Pride's February 25, 2009 Form 10K (annual report) here.

During the course of an internal audit and investigation relating to certain of our Latin American operations, our management and internal audit department received allegations of improper payments to foreign government officials. In February 2006, the Audit Committee of our Board of Directors assumed direct responsibility over the investigation and retained independent outside counsel to investigate the allegations, as well as corresponding accounting entries and internal control issues, and to advise the Audit Committee.

The investigation, which is continuing, has found evidence suggesting that payments, which may violate the U.S. Foreign Corrupt Practices Act, were made to government officials in Venezuela and Mexico aggregating less than $1 million. The evidence to date regarding these payments suggests that payments were made beginning in early 2003 through 2005 (a) to vendors with the intent that they would be transferred to government officials for the purpose of extending drilling contracts for two jackup rigs and one semisubmersible rig operating offshore Venezuela; and (b) to one or more government officials, or to vendors with the intent that they would be transferred to government officials, for the purpose of collecting payment for work completed in connection with offshore drilling contracts in Venezuela. In addition, the evidence suggests that other payments were made beginning in 2002 through early 2006 (a) to one or more government officials in Mexico in connection with the clearing of a jackup rig and equipment through customs, the movement of personnel through immigration or the acceptance of a jackup rig under a drilling contract; and (b) with respect to the potentially improper entertainment of government officials in Mexico.

The Audit Committee, through independent outside counsel, has undertaken a review of our compliance with the FCPA in certain of our other international operations. In addition, the U.S. Department of Justice has asked us to provide information with respect to (a) our relationships with a freight and customs agent and (b) our importation of rigs into Nigeria. The Audit Committee is reviewing the issues raised by the request, and we are cooperating with the DOJ in connection with its request.

This review has found evidence suggesting that during the period from 2001 through 2006 payments were made directly or indirectly to government officials in Saudi Arabia, Kazakhstan, Brazil, Nigeria, Libya, Angola, and the Republic of the Congo in connection with clearing rigs or equipment through customs or resolving outstanding issues with customs, immigration, tax, licensing or merchant marine authorities in those countries. In addition, this review has found evidence suggesting that in 2003 payments were made to one or more third parties with the intent that they would be transferred to a government official in India for the purpose of resolving a customs dispute related to the importation of one of our jackup rigs. The evidence suggests that the aggregate amount of payments referred to in this paragraph is less than $2.5 million. We are also reviewing certain agent payments related to Malaysia.

The investigation of the matters described in the prior paragraph and the Audit Committee’s compliance review are ongoing. Accordingly, there can be no assurances that evidence of additional potential FCPA violations may not be uncovered in those or other countries.

Our management and the Audit Committee of our Board of Directors believe it likely that then members of our senior operations management either were aware, or should have been aware, that improper payments to foreign government officials were made or proposed to be made. Our former Chief Operating Officer resigned as Chief Operating Officer effective on May 31, 2006 and has elected to retire from the company, although he will remain an employee, but not an officer, during the pendency of the investigation to assist us with the investigation and to be available for consultation and to answer questions relating to our business. His retirement benefits will be subject to the determination by our Audit Committee or our Board of Directors that it does not have cause (as defined in his retirement agreement with us) to terminate his employment. Other personnel, including officers, have been terminated or placed on administrative leave or have resigned in connection with the investigation. We have taken and will continue to take disciplinary actions where appropriate and various other corrective action to reinforce our commitment to conducting our business ethically and legally and to instill in our employees our expectation that they uphold the highest levels of honesty, integrity, ethical standards and compliance with the law.

We voluntarily disclosed information relating to the initial allegations and other information found in the investigation and compliance review to the DOJ and the Securities and Exchange Commission and are cooperating with these authorities as the investigation and compliance reviews continue and as they review the matter. If violations of the FCPA occurred, we could be subject to fines, civil and criminal penalties, equitable remedies, including profit disgorgement, and injunctive relief. Civil penalties under the antibribery provisions of the FCPA could range up to $10,000 per violation, with a criminal fine up to the greater of $2 million per violation or twice the gross pecuniary gain to us or twice the gross pecuniary loss to others, if larger. Civil penalties under the accounting provisions of the FCPA can range up to $500,000 and a company that knowingly commits a violation can be fined up to $25 million. In addition, both the SEC and the DOJ could assert that conduct extending over a period of time may constitute multiple violations for purposes of assessing the penalty amounts. Often, dispositions for these types of matters result in modifications to business practices and compliance programs and possibly a monitor being appointed to review future business and practices with the goal of ensuring compliance with the FCPA.

We could also face fines, sanctions and other penalties from authorities in the relevant foreign jurisdictions, including prohibition of our participating in or curtailment of business operations in those jurisdictions and the seizure of rigs or other assets. Our customers in those jurisdictions could seek to impose penalties or take other actions adverse to our interests. We could also face other third-party claims by directors, officers, employees, affiliates, advisors, attorneys, agents, stockholders, debt holders, or other interest holders or constituents of our company. In addition, disclosure of the subject matter of the investigation could adversely affect our reputation and our ability to obtain new business or retain existing business from our current clients and potential clients, to attract and retain employees and to access the capital markets. No amounts have been accrued related to any potential fines, sanctions, claims or other penalties, which could be material individually or in the aggregate.

We cannot currently predict what, if any, actions may be taken by the DOJ, the SEC, any other applicable government or other authorities or our customers or other third parties or the effect the actions may have on our results of operations, financial condition or cash flows, on our consolidated financial statements or on our business in the countries at issue and other jurisdictions.


Extending Compliance To Third Parties reported this week the results of a survey conducted by the Society of Corporate Compliance & Ethics (SCCE). The group asked a random sample of compliance professionals about their use of codes of conduct with third parties, such as suppliers, and received back 400 responses.

The findings: Fifty-three percent of companies don't disseminate their internal codes of conduct to third parties; only 26% require third parties to certify to their own codes; and just 17% of the respondents have any third-party codes of conduct to begin with.

Those results are consistent with KPMG's 2008 Anti-Bribery and Anti-Corruption Survey that we talked about here. It revealed that around three quarters of the bosses surveyed think their companies aren't able to handle the compliance risks that come from third parties -- including overseas acquisition targets, joint venture partners, distributors and agents. The execs responding to KPMG's survey complained about difficulties doing effective due diligence and auditing third parties for compliance.

This is serious. Third parties, after all, cause most Foreign Corrupt Practices Act offenses. They deserve lots of compliance attention but aren't getting it. Why not?

Most foreign third parties push back hard against compliance pressures from outside. A lot of them don't want to risk being in breach of contract if they don't comply. They view U.S.-style compliance regimes as highly technical, which only increases their contract risks. Some overseas suppliers have an irrational fear of being dragged into the jurisdiction of the Justice Department if they agree to FCPA compliance language. Others resist on the reasonable grounds that they don't understand exactly what's intended by the compliance language -- and no one from the other side can give them a clear explanation.

The survey results published by the above-mentioned Society of Corporate Compliance & Ethics are part of an article written by attorney Rebecca Walker of Kaplan & Walker LLP. She's smart -- Georgetown undergrad, Harvard Law School, author of the book Conflicts of Interest in Business and the Professions: Law and Compliance.

We haven't read her book or other articles yet. But a couple of her comments in this article got our attention. She said organizations should be "cautious" about extending codes of conduct to third parties. "Companies," she said, "should be careful not to create compliance and ethics standards that are difficult to monitor or enforce and that could potentially create their own risks of 'associative liability.' Extending compliance and ethics obligations to third parties could lead to reputational harm when a company holds itself out as requiring others’ compliance, when in fact the company’s ability to ensure compliance by third parties may be limited, a problem which could be compounded if the third-party compliance requirements more closely link the company to the third party in the minds of the public (and press). There is also a risk that unsatisfied standards could be used against a company in the context of litigation or a government investigation."

Her words remind us of executives and even some company lawyers who used to talk that way about their own FCPA compliance. They reasoned that if they adopted a program but something went wrong, they might be held accountable against whatever measuring stick they'd created. So it was better, they thought, not to have any program at all.

That argument, of course, was wrong. The Federal Sentencing Guidelines make it clear that an effective compliance program -- with written guidelines -- is always to everyone's advantage. The only time that's not true, we suppose, is when an organization intentionally adopts a program as pure window dressing, knowing from the outset it won't comply. But anyone in that category is already well down the road to disaster.

Ms. Walker isn't suggesting that companies shouldn't have compliance programs. She's just cautioning against possibly futile attempts to extend codes of conduct beyond an organization's actual range of influence. Her advice sounds practical, but it's a controversial idea. We'd like to hear from others on this question, pro and con. Should companies even try to impose codes of conduct on suppliers and other third parties? Are there risks that outweigh the rewards? Let us know what you think.

The SCCE's survey is available for download by registration here.


Settlement In ITT China Payments Case

Global conglomerate ITT Corporation settled civil Foreign Corrupt Practices Act charges with the Securities and Exchange Commission on Wednesday. The SEC filed a settled civil injunctive action in the U.S. District Court for the District of Columbia against New York-based ITT. The complaint alleged violations of the FCPA's books and records and internal controls provisions, Section 13(b)(2)(A) and (B) of the Securities Exchange Act of 1934.

ITT agreed to disgorge $1,041,112, together with prejudgment interest of $387,538.11, and pay a $250,000 civil penalty. The SEC said ITT self-reported the violations, cooperated with the SEC's investigation, and instituted remedial measures.

The violations resulted from payments to Chinese government officials by ITT's wholly-owned Chinese subsidiary, Nanjing Goulds Pumps Ltd. (NGP). From 2001 through 2005, NGP paid about $200,000 in bribes to employees of Chinese state-owned enterprises. ITT generated over $4 million in sales through the bribes and made profits of more than $1 million.

NGP, part of ITT's Fluid Technology division, bribed employees of Chinese state-owned enterprises to sell water pumps for large infrastructure projects. The payments were disguised as increased commissions in NGP's books and records. The improper NGP entries were consolidated and included in ITT's financial statements contained in its filings with the SEC for the company's fiscal years 2001 through 2005.

The SEC's complaint said ITT did not make or keep books, records, and accounts which, in reasonable detail, accurately and fairly reflected the illicit payments by NGP employees and the related disposition of its assets. ITT also failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions were executed in accordance with management's general or specific authorization; (ii) transactions were recorded as necessary to maintain accountability for its assets; and (iii) access to its assets was permitted only in accordance with management's general or specific authorization.

ITT discovered the illegal payments in December 2005. The company had a corporate compliance ombudsman program in place designed to receive and respond to anonymous complaints of alleged wrongdoing throughout the company. The ombudsman received an anonymous complaint from NGP employees alleging illegal payments to Chinese government officials by NGP employees.

ITT is one of America's most famous conglomerates. From 1960 to 1977, under boss Harold Geneen, it acquired more than 350 companies, at times owning such brands as Sheraton hotels, Avis Rent-a-Car, Hartford Insurance and Continental Baking, the maker of Wonder Bread. Rand Araskog was CEO from 1979 to 1995. He restructured the company into just a few business segments. Today it concentrates on water and fluids management, global defense and security, and motion and flow control. It has about 40,000 employees in 55 countries and generates nearly $12 billion in annual revenue.

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

View the SEC's Litigation Release No. 20896 (February 11, 2009) and Accounting and Auditing Enforcement Release No. 2934 (February 11, 2009) in Securities and Exchange Commission v. ITT Corporation, Civil Action No. 1:09-cv-00272 (RJL) (D.D.C. filed Feb. 11, 2009) here.

Download the SEC's February 11, 2009 civil complaint against ITT Corporation here.

Listen to the podcast here.


KBR's Twisted Web

We've been looking over the criminal information charging Kellogg, Brown & Root LLC with violating the Foreign Corrupt Practices Act. There's one conspiracy and four substantive counts. There's also a related document called the Joint Motion to Waive Presentence Investigation. That's where the Justice Department talks about the potential criminal fine range and agrees with KBR on a final penalty (subject to court approval) of $402 million.

(Halliburton, KBR's former parent, said two weeks ago that the Securities and Exchange Commission has also agreed, contingent on the DOJ's settlement, to a separate disgorgement payment to the SEC of $177 million.)

The criminal information describes KBR's attempts to shield from the FCPA its corrupt payments to Nigerian officials. Its TSKJ joint venture, equally owned with Technip, SA of France, Snamprogetti Netherlands B.V., a subsidiary of Saipem SpA of Italy, and JGC of Japan, "operated through three Portuguese special purpose corporations based in Madeira, Portugal." Madeira Company 3, as the information calls it, was used to enter into so-called consulting agreements with agents, who in turn passed bribes to Nigerian officials.

KBR and its top brass tried to hide behind Madeira Company 3. Ownership was held indirectly through M.W. Kellogg Ltd., a U.K. company. The criminal information says the ownership structure was "part of KBR's intentional efforts to insulate itself from FCPA liability for bribery of Nigerian government officials through the Joint Venture's agents." And the information continues:

The boards of managers of Madeira Company 1 and Madeira Company 2 included U.S. citizens . . . but KBR avoided placing U.S. citizens on the board of managers of Madeira Company 3 as a further part of KBR's intentional effort to insulate itself from FCPA liability.
The Foreign Corrupt Practices Act prohibits both direct and indirect corrupt payments to foreign officials. Indirect payments typically pass through the hands of an overseas partner or agent, then end up with the foreign official for an unlawful purpose. That's how most violations happen. And yet, executives keep trying to outsmart the FCPA. They create convoluted ownership structures and payment patterns that they think will somehow insulate them and their company from FCPA liability. The results, as the KBR case shows, are usually disastrous.

The FCPA is smart. It looks not at how payments to foreign officials are made, but why. It looks, in other words, at the intent. If a payment was meant to corruptly obtain and retain business, then the payment violates the FCPA, no matter how many Madeira-like companies it passed through, and no matter how many agents or other middlemen were involved.

The DOJ's plain-English explanation of the FCPA's anti-bribery provisions talks about warning signs, called "red flags." They should tip off anyone about impending compliance dangers. Red flags include unusual payment patterns or other strange arrangements, and a lack of transparency. Red flags would include all of the devices KBR employed. So the lesson? Whenever company structures, payment arrangements, and management compositions have no obvious operational or economic justification, there must be something wrong. That's when everyone involved should be asking hard questions, such as whether the real intent is to do legitimate business or to violate the FCPA and other laws.

Download a copy of KBR's criminal information here.

Download a copy of the DOJ / KBR Joint Motion to Waive Presentence Investigation here.

Listen to the podcast here.


Aon Pays £5.25 Million Corruption Fine

The U.K.'s Financial Services Authority said yesterday that it has fined Aon Ltd £5.25 million ($8.05 million) for failing to recognize and control the risks of overseas payments being used as bribes. The fine is the largest the FSA has levied for financial crimes. Aon Ltd is the principal U.K. subsidiary of Chicago-based Aon Corporation, the world's biggest insurance broker.

Aon Corporation disclosed in November 2007 an internal investigation into possible violations of the Foreign Corrupt Practices Act and non-U.S. anti-corruption laws. Aon said then in its Form 10-Q that it had self-reported the investigation to the Department of Justice, the Securities and Exchange Commission and others, and that it had already agreed with U.S. prosecutors to toll any applicable statute of limitations. The U.S. investigations are still pending.

This is now the third case brought by U.K. authorities involving overseas bribery by U.K. companies. In September 2008, the Overseas Anti-Corruption Unit of the City of London Police said an employee of CBRN Team Ltd, a U.K. security consulting firm, and an official of Uganda, had pleaded guilty to bribery charges. The CBRN employee received a suspended sentence and the Ugandan official was sentenced to twelve months in jail. And in October last year, the U.K.'s Serious Fraud Office reached a £2.25 million civil settlement with construction firm Balfour Beatty plc for alleged unlawful accounting in connection with overseas "payment irregularities" which it self-reported.

Apparently to emphasize the new willingness of her agency and other U.K. authorities to prosecute overseas bribery, Margaret Cole, the FSA's director of enforcement, said:

The involvement of UK financial institutions in corrupt or potentially corrupt practices overseas undermines the integrity of the UK financial services sector. The FSA has an important role to play in the steps being taken by the UK to combat overseas bribery and corruption. We have worked closely with other law enforcement agencies in this case and will continue to take robust action focused on firms’ systems and controls in this area.
According to its website, the Financial Services Authority is an independent non-governmental body with statutory powers under the Financial Services and Markets Act 2000. It has a range of rule-making, investigatory and enforcement powers intended to "promote efficient, orderly and fair financial markets and help retail financial service consumers get a fair deal." The Treasury appoints its 12-member board.

Between January 2005 and September 2007, according to the FSA, Aon Ltd didn't properly assess or control the risks involved in its dealings with overseas firms and individuals who helped it win business. "As a result of Aon Ltd’s weak control environment, the firm made various suspicious payments, amounting to approximately US$7 million, to a number of overseas firms and individuals." The payments were made in Bahrain, Bangladesh, Bulgaria, Burma, Indonesia and Vietnam.

The FSA said Aon cooperated fully and agreed to settle early in the investigation, qualifying for a 30% discount under the FSA’s settlement discount scheme. Without the discount the fine would have been £7.5 million.

View the FSA's January 8, 2009 release here.

Download the FSA's Final Notice (January 6, 2009) here.

View Aon's January 8, 2009 statement here.


Dealing With Danger

Compliance-savvy executives worry about the risks that come from third parties -- overseas acquisition targets, joint venture partners, distributors and agents. About three quarters of the bosses, according to KPMG's 2008 Anti-Bribery and Anti-Corruption Survey, think their company's handling of intermediaries isn't working. They cite difficulties performing effective due diligence and their inability to adequately audit third parties for compliance.

The executives are right to be concerned. The Foreign Corrupt Practices Act says you can't hire an agent to pay bribes for you. You can't use joint venture partners for the dirty work either. You can't use a brother-in-law or charitable foundation or any other circuitous route. Bribes to foreign officials that originate from your hand are your responsibility, no matter how indirectly you try to pass them on. So when American companies go abroad, it's up to them to make sure all their business partners -- suppliers, subcontractors, professional advisors, agents and joint venture partners -- keep the business clean. Companies that don't try to stop intermediaries from paying bribes have no real defense under the FCPA when problems happen.

But how far must companies go to prevent their middlemen from paying bribes? That's always the question on everyone's mind. There's no bright line here, no blueprint from the DOJ or SEC, no safe harbor. And that's what worries the executives. They have to do business with and through intermediaries, but they also have to comply with the Foreign Corrupt Practices Act. Doing both sometimes seems impossible.

Take, for example, our reader who sent the comments below. He's a top compliance professional but he doesn't have all the answers and neither do we. But we appreciate his honesty and willingness to share his concerns and thoughts. He's fairly typical, we think, of those who want to comply with the FCPA but aren't always sure how to do that -- a group most of us are in most of the time.

Here's what he says:

During the ACI FCPA conference held in Washington in November, the topic of documentation of agents came up. This is a familiar topic to anyone who has experience with the FCPA.

One of the points was that companies get hammered because they do a poor job of documenting or having the agent document their activities. I thought to myself "what would the agent document?" If they are out trying to drum up business what is it that they need to report? Do they report the golf trip with potential customers? Do they document the dinner they had or the train ride they took where they discovered a potentially new client and discussed opportunities?

This led me to ask what do business development people document for their activities? Surely they must provide something to justify their salaries. Shouldn't an agent's documentation be just as thorough? But then again, because a business development person is on salary and everyone knows they're sort of doing something, maybe they don't have to document very well. If they get results, some companies may ask "Does it matter?" If the documentation is poor or nonexistent, and all the focus (risk) is on agents, why wouldn't a company consider bringing agents in as business development employees? They could structure the compensation (salary and/or bonus) to be identical to what the agent already received. This would have the effect of moving the expense to payroll from agent commission or something similar.

Speaking from experience in conducting FCPA investigations, the scrutiny of payroll expense is night and day different from the scrutiny of commission or agent expense. Furthermore, perceived FCPA due diligence requirements are not the equal for employees as agents. What about the recording of a bonus as payroll expense when all or a portion is used to pay a bribe to a government official? The question then would be what is documented as the purpose of the bonus and did the company know about where the money would ultimately go?

We all know about the high level Jack Stanley-like business development people, but what about the local agents with cousins in the Ministry or uncles in Parliament. These are the guys that bring relationships to the table who might be hired as "employees" and be buried in payroll but continue on agents as if nothing really changed. . . .

Other readers with good or bad experiences dealing with intermediaries are invited to share their thoughts, anecdotes and advice about this difficult topic.


No Quick Fix

The consequences of a Foreign Corrupt Practices Act compliance problem can reverberate inside a company long after it reaches a settlement with the Justice Department. An illustration of that comes from AGA Medical. In early June last year, we reported that the privately-held maker of heart-related products resolved FCPA violations with the DOJ. The company's self-disclosure to prosecutors included emails to and from a Chinese distributor that left no doubt illegal activity had occurred, such as bribes in China of at least $460,000 to doctors at government-owned hospitals and to patent-office officials.

Just weeks after the settlement, AGA filed a registration statement with the Securities and Exchange Commission for an initial public offering, which is still pending. That document (we're quoting below from Amendment No. 4 to the S-1) talks about the settlement's actual and potential impact on the company, including its need for a new sales model overseas.

Here's what it says:

The terms and effects of our Deferred Prosecution Agreement with the U.S. Department of Justice relating to potential violations of the U.S. Foreign Corrupt Practices Act may negatively affect our business, financial condition and results of operations.

On June 2, 2008, we entered into a Deferred Prosecution Agreement, or the DPA, with the Department of Justice concerning alleged improper payments that were made by our former independent distributor in China to (1) physicians in Chinese public hospitals in connection with the sale of our products and (2) an official in the Chinese patent office in connection with the approval of our patent applications, in each case, in potential violation of the Foreign Corrupt Practices Act, or the FCPA. The FCPA makes it unlawful for, among other persons, a U.S. company, acting directly or through an agent, to offer or to make improper payments to any "foreign official" in order to obtain or retain business or to induce such "foreign official" to use his or her influence with a foreign government or instrumentality thereof for such purpose.

As part of the DPA, we consented to the Department of Justice filing a two-count criminal statement of information against us in the U.S. District Court, District of Minnesota, which was filed on June 3, 2008. The two counts include a conspiracy to violate the FCPA and a substantive violation of the anti-bribery provisions of the FCPA related to the above-described activities in China. Although we did not plead guilty to that information, we accepted responsibility for the acts of our employees and agents as set forth in the DPA, and we face prosecution under that information, and possibly other charges as well, if we fail to comply with the terms of the DPA. Those terms require us to, for approximately three years, (1) continue to cooperate fully with the Department of Justice on any investigation relating to violations of the FCPA and any and all other matters relating to improper payments, (2) continue to implement a compliance and ethics program designed to detect and prevent violations of the FCPA and other applicable anti-corruption laws, (3) review existing, and if necessary, adopt new controls, policies and procedures designed to ensure that we make and keep fair and accurate books, records and accounts and maintain a rigorous anti-corruption compliance code designed to detect and deter violations of the FCPA and other applicable anti-corruption laws, and (4) retain and pay for an independent monitor to assess and oversee our compliance and ethics program with respect to the FCPA and other applicable anti-corruption laws. The DPA also required us to pay a monetary penalty of $2.0 million. In the fourth quarter of 2007, we had recorded a financial charge of $2.0 million for the potential settlement. The terms of the DPA will remain binding on any successor or merger partner as long as the agreement is in effect.

The effects that compliance with any of the terms of the DPA will have on us are unknown and they may have a material impact on our business, financial condition and results of operations. The activities of the government-approved independent monitor, as well as the continued implementation of a compliance and ethics program and the adoption of internal controls, policies and procedures to detect and prevent future violations of the FCPA and other applicable anti-corruption laws, may result in increased costs to us and change the way in which we operate, the outcome of which we are unable to predict. For example, implementing and monitoring such compliance procedures in the large number of foreign jurisdictions where we operate can be expensive and time-consuming. As a result of our remediation measures, we may also encounter difficulties conducting business in certain foreign countries and retaining and attracting additional business with certain customers, and we cannot predict the extent of these difficulties.

In addition, entering into the DPA in the United States may adversely affect our operations or result in legal claims against us, which may include claims of special, indirect, derivative or consequential damages.

Our failure to comply with the terms of the deferred prosecution agreement with the Department of Justice would have a negative impact on our ongoing operations.

As described above, we are subject to a three-year DPA with the Department of Justice. If we comply with the DPA, the Department of Justice has agreed not to prosecute us with respect to the above-described activities in China and, following the term of the DPA, to permanently dismiss the criminal statement of information that is currently pending against us. Accordingly, the DPA could be substantially nullified, and we could be subject to severe sanctions and resumed civil and criminal prosecution, as well as severe fines, penalties and other regulatory sanctions, in the event of any additional violation of the FCPA or any other applicable anti-corruption laws by us or any of our officers, other employees or agents in any jurisdiction or of our failure to otherwise meet any of the terms of the DPA as determined by the Department of Justice in its sole discretion. The claims alleged in the DPA with the Department of Justice only relate to our actions in China as outlined above, and do not relate to any future violations or the discovery of past violations not expressly covered by the DPA. Any breach of the terms of the DPA would also cause damage to our business and reputation, as well as impair investor confidence in our company and result in adverse consequences on our ability to obtain or continue financing for current or future projects.

In addition, although we are not currently restricted by the U.S. Department of Health and Human Services, Office of the Inspector General, from participating in federal healthcare programs, any criminal conviction of our company under the FCPA in the future would result in our mandatory exclusion from such programs, and it may lead to debarment from U.S. and foreign government contracts. Any such exclusion or debarment would have a material adverse effect on our business, financial condition and results of operations.

Our ability to comply with the terms of the DPA is dependent, among other things, on the success of our ongoing compliance and ethics program, including our ability to continue to manage our distributors and agents and supervise, train and retain competent employees, as well as the efforts of our employees to adhere to our compliance and ethics program and the FCPA and other applicable anti-corruption laws. It is possible that, despite our best efforts, additional FCPA issues, or issues under anti-corruption laws of other jurisdictions, could arise in the future. Any failure by us to adopt appropriate compliance and ethics procedures, to ensure that our officers, other employees and agents comply with the FCPA and other applicable anti-corruption laws and regulations in all jurisdictions in which we operate or to otherwise comply with any term of the DPA would have a material adverse effect on our business, financial condition and results of operations.

In certain international markets, we have converted, or are in the process of converting, to a direct sales force model from a distributor-based sales model. Our business, financial condition and operating results may be adversely affected by the transition to a new sales model.

In August 2006, we negotiated an early termination with one of our international distributors, and we have since then undertaken to distribute our products in such distributor's country through our direct sales force. We also gave notice of termination to a second distributor and began operations in April 2008 through our direct sales force in such distributor's country. We gave notice of termination to a third distributor and began operations in July 2008 through our direct sales force in such distributor's country. In addition, we gave notice of termination to five other distributors and expect to begin operations in January 2009 through our direct sales force in these distributors' countries. We are also currently assessing the viability of distributing our products directly in other international markets. We have limited experience with direct sales of our products in international markets and, therefore, may not obtain the financial benefits that we expect. In addition, we may experience delays in implementing our direct sales force model due to the difficulty of hiring a sales force, establishing relationships with physicians, complying with local regulatory requirements, and other factors, which could have an adverse effect on our business, financial condition and results of operations.




Japanese Executive Jailed

A Tokyo executive was sentenced to two years in jail and fined $80,000 for violating the Foreign Corrupt Practices Act and conspiring to rig bids for the sale of marine hose and other industrial rubber products.

Former Bridgestone manager Misao Hioki pleaded guilty to two felony counts filed on Dec. 8, 2008 in U.S. District Court in Houston. He was charged for his role in a conspiracy to violate the FCPA by making corrupt payments to government officials in Latin America and elsewhere. He was also charged with conspiring to rig bids, fix prices and allocate market shares of marine hose in the United States and other countries.

Marine hose is used to transfer oil between tankers and storage facilities. The marine-hose cartel fixed prices worldwide from 2004 to 2007 for products worth hundreds of millions of dollars.

Hioki was one of eight foreign executives arrested in May 2007 following their participation in a cartel meeting in Houston. The Justice Department said he's the ninth individual to plead guilty in the bid-rigging investigation but is the first person in the cartel to plead guilty to an FCPA charge.

The DOJ said Hioki and his co-conspirators:

* Negotiated with employees of government-owned businesses, who are foreign officials under the Foreign Corrupt Practices Act, in at least the following Latin American countries Argentina, Brazil, Ecuador, Mexico and Venezuela to make corrupt payments to those foreign officials to secure business for his company and its U.S. subsidiary;

* Approved the making of corrupt payments to the foreign government officials through the local sales agents, to secure business for his company and its U.S. subsidiary;

* Paid the local sales agents a commission for each sale and, if a corrupt payment to the customer through the local sales agent was involved with the sale, concealed that payment within the commission payment made to the local sales agent; and

* Coordinated these corrupt payments in Latin America through the U.S. subsidiary’s offices in the United States including its Houston office.

It's becoming more common to see FCPA charges in cases investigated primarily for other offenses. Last month, for example, Shu Quan-Sheng, a naturalized U.S. citizen who sold controlled space-launch technology to China, pleaded guilty to violating the Foreign Corrupt Practices Act and to two counts of violating the Arms Export Control Act.

And in September, U.S. citizens Nam Nguyen, Joseph Lukas, Kim Nguyen, and An Nguyen, along with their Philadelphia-based company, Nexus Technologies (see our post here) were charged with one count of conspiracy to violate the Foreign Corrupt Practices Act and four substantive counts of violating the FCPA. They're accused of bribing government officials in Vietnam to secure contracts to supply high-tech items -- including third-party underwater mapping and bomb containment equipment, helicopter parts, chemical detectors, satellite communication parts and air tracking systems. That case doesn't yet involve charges under U.S. export laws.

View the DOJ's Dec. 10, 2008 release here.



Family, Food, Football . . . And FCPA

Our post yesterday referred to the long-pending Foreign Corrupt Practices Act investigations at Halliburton and DaimlerChrysler (now Daimler AG). For readers wanting to know what the two companies are now saying about their FCPA issues, we've rounded up their latest disclosures. Daimler's is extracted from its Annual Report for December 31, 2007 (here), and Halliburton's is from its Quarterly Report for September 30, 2008 (here).

Daimler's disclosure is brief. It says the DOJ and SEC are investigating possible violations of the Foreign Corrupt Practices Act, and that the company has already determined through its own investigation that it made improper payments in Africa, Asia and Eastern Europe. The internal investigation detected tax liabilities resulting from "misclassifications of, or the failure to record, commissions and other payments and expenses," which have been self-reported to authorities in several jurisdictions. Daimler says it has also taken other corrective action and is working to complete the internal investigation.

(In August 2007, Daimler sold 80.1 percent of Chrysler to private-equity firm Cerberus Capital Management LP and retained the remaining 19.9 percent. Cerberus is now accusing Daimler of "intentionally and materially" misleading it in connection with the sale. FCPA issues have not been mentioned publicly. An AP report about the dispute features our favorite legal pundit, Professor Peter Henning.)

At around 2,500 words, Halliburton's most recent FCPA disclosure is one of the longest on record. It describes two decades of potential compliance problems related to the giant Bonny Island Project and others in Nigeria. The SEC, it says, has subpoenaed information about "current and former agents used in connection with multiple projects, including current and prior projects, over the past 20 years located both in and outside of Nigeria" involving Halliburton's energy services business and its former affiliate KBR. Halliburton says it has agreed with the DOJ and SEC to toll the statute of limitations.

Albert "Jack" Stanely, a past chairman and CEO of KBR, features in the disclosure. He pleaded guilty in September to helping funnel $182 million in bribes to government officials in Nigeria. He was sentenced to a maximum of 84 months in prison (subject to a reduction for future cooperation) and ordered to make restitution of about $11 million.

Research for this post was provided courtesy of Securities Mosaic.



Fearing Third Parties

U.S. executives know that most Foreign Corrupt Practices Act compliance risks come from third parties -- overseas acquisition targets, joint venture partners, agents and others. Despite that knowledge, about three quarters of them think their company's due diligence of intermediaries isn't working. That's according to KPMG's 2008 Anti-Bribery and Anti-Corruption Survey.

Here are some findings from the survey based on responses from 103 executives at U.S. multinational companies:

  • 82 percent of the respondents said they face difficulties performing effective due diligence on foreign agents and other third parties.
  • 76 percent said they cannot adequately audit third parties for compliance.
  • 73 percent said their mergers and acquisition due diligence is sub par.
  • 27 percent said their level of M&A due diligence is minimal.
Eighty-five percent of the respondents said their company has a formal FCPA or anti-corruption compliance program. That's good. What's not good is that the programs aren't dealing effectively with the greatest compliance risk of all -- third parties. No wonder Justice Department and SEC enforcement actions under the FCPA are still rising -- they more than doubled last year -- and why most U.S. company executives are still worried about violating the FCPA.

Recent cases involving individuals illustrate how FCPA offenses can harm anyone caught in the mess. That's why, even in tough times, U.S. executives should demand the protection of an effective compliance program. They shouldn't accept compliance risks from third parties that can damage or destroy their companies, their careers, and their families.

View the 2008 KPMG Anti-Bribery and Anti-Corruption Survey here (courtesy of the White Collar Crime Prof Blog).



Why We Keep Plugging

It's a familiar and unwelcome moment. Those on the other side of the table spot the FCPA compliance language for the first time:

The joint venture and all its personnel shall comply in all respects with the requirements of the United States Foreign Corrupt Practices Act.
Faces darken. The mood in the room goes sour.

"What's this?" they ask. "U.S. law doesn't have anything to do with our joint venture."

You start explaining: "The FCPA outlaws public bribery by Americans outside the United States. American companies are obligated to comply wherever they do business. Part of that is making sure their overseas partners don't pay bribes . . . "

"Excuse us," they say. "Our new joint venture isn't an American company and we're not Americans. Forget it. Anyway," they add, "our country has its own anti-corruption laws. And we always obey THEM."

It's going to be a long day. Lots of long days.


Reactions overseas to the FCPA range from mild irritation to vein-popping outrage. It's understandable. The law is sometimes seen as another example of America's arrogance and overreaching, a violation of sovereignty -- legal imperialism at its worst, and high-handed global moralizing. But that's a bum rap. Really.

The FCPA's aim isn't to change the world. It's to stop U.S. companies and their people from bribing foreign officials to obtain or retain business. That's clear from the early debates. Congress didn't want Americans bribing foreign government officials. Doing that, lawmakers and regulators said, distorts competition, ruins reputations, harms local populations and interferes with the foreign policy of the U.S. government.

But people always look for loopholes and shortcuts, so the FCPA takes that into account. It outlaws bribes to foreign officials that are paid directly or indirectly. And it's the indirectly part that causes so much upset overseas.

The FCPA says you can't hire an agent to pay bribes for you. You can't use joint venture partners for the dirty work either. You can't use a brother-in-law or charitable foundation or any other circuitous route. Bribes to foreign officials that originate from your hand are always your responsibility, no matter how indirectly you try to pass them on.

So when American companies go abroad, they have to make sure their business partners -- suppliers, subcontractors, professional advisors, agents and, of course, joint venture partners -- don't pay bribes to foreign officials to help the business. Taking steps to prevent that is required by an effective compliance program. Companies that don't try to stop intermediaries from paying bribes have no real defense under the FCPA when problems happen.

Does explaining all this (and a lot more) to overseas business partners help? Does it soothe their bruised pride and wounded nationalism? Yes, it usually helps, but the process isn't easy. Let's face it -- the FCPA makes people mad. Take due diligence: What contacts have you had for the past five years with any government or government-controlled entity? Are you now paying or have you ever paid bribes to anyone in any government? Can we ask your lawyer, banker, accountant and business associates if you're trustworthy? Those sorts of questions never sound friendly.

To get deals done overseas, though, it's necessary to explain what the FCPA is, what it's meant to accomplish, and how it works. That's good compliance and good business -- and worth fighting for.

So what's better? Spending a few extra hours or days at the negotiating table to do the right thing at the start, or spending years or even a lifetime trying to repair the terrible damage that an FCPA offense can cause?




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.