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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

FCPA Blog Daily News

Entries in Agents (71)

Friday
May092008

FCPA Guilty Plea For Bribing UK Official

A former co-owner and executive of California-based Pacific Consolidated Industries (PCI) pleaded guilty yesterday to violating the Foreign Corrupt Practices Act. Martin Eric Self, 51, of Orange, California pleaded guilty to a two-count information charging him with violating the FCPA by paying more than $70,000 in bribes to a U.K. Ministry of Defence official. The bribes were intended to secure equipment contracts with the U.K. Royal Air Force.

In October 1999, Self, a U.S. citizen, and Leo Winston Smith, then PCI’s executive vice president and director of sales and marketing, had PCI enter into a marketing agreement with a relative of a U.K. Ministry of Defence official. According to the DOJ, Self -- a signatory on PCI's marketing agreements and bank accounts -- admitted that he didn't know of any genuine services provided by the official’s relative. Instead, Self believed the payments probably were benefiting the official in exchange for obtaining and retaining the equipment-supply contracts.

Self is scheduled to be sentenced in federal court on September 29, 2008. Although he faces a maximum sentence of five years in prison per count, his plea agreement contemplates a prison term of eight months, subject to the court's final determination at sentencing.

For his role in the scheme, former marketing head Smith, a co-founder of PCI, was indicted in April 2007. The government says he conspired to bribe the U.K. Ministry of Defence official in order to obtain equipment contracts worth more than $11 million dollars. In addition to the FCPA violations, the indictment also charges Smith with money laundering and tax offenses. He's scheduled to stand trial in July 2008. Self, as part of his plea agreement, will presumably testify against his former colleague. Evidence against Smith is also likely to come from U.K. authorities. Their investigation of the U.K. Ministry of Defence official resulted in his guilty plea in the United Kingdom for accepting bribes from PCI. He was sentenced to two years in prison.

Privately-held PCI manufactures Air Separation Units (ASUs) and other equipment for the military, medical, and oil and gas markets. ASUs generate oxygen in remote, extreme and confined locations. The DOJ said that in late 2003, after the alleged illegal conduct occurred, PCI was acquired by a group of investors who referred the case to U.S. prosecutors and "fully cooperated in the government’s investigation."

Assistant Attorney General for the Criminal Division Alice S. Fisher, who departs from the DOJ later this month, said, “Individuals who resort to bribery and other fraudulent means to secure contracts with foreign governments not only corrupt legitimate bidding processes, but they also damage the integrity of the global marketplace. Furthermore, using an intermediary to make bribe payments will not insulate individuals from prosecution."

Referring to the collaboration by prosecutors in the U.S. and U.K., Ms. Fisher also said, "The coordinated international law enforcement efforts of this case exemplify the type of cooperation needed to fight crime in the 21st century, where physical borders are not boundaries for criminal activity. I would like to thank our colleagues in the United Kingdom for their efforts and assistance in prosecuting this case as well as the FBI and IRS for their investigatory assistance.”

View the DOJ's May 8, 2008 news release here.

Monday
Apr072008

The Great Temptation

Some of the most charming and charismatic people in this world are agents – the middlemen who help foreign companies navigate local waters in return for a slice of revenues, typically around 5%. That may sound like small money, but 5% of $100 million – a little deal for telecommunications, military hardware or energy projects, for example – is $5 million. These days, in lots of industries, $1 billion deals aren't uncommon, and a 5% slice of that pie is a tidy $50 million. Paychecks that size attract very talented people.

The best agents are gifted with the tools of their trade -- old-world manners, great annecdotes (in which they usually cast themselves as heroes), reassuring confidence and up-to-the-minute market intelligence. They salt their conversation with the names of world leaders they golf with, and cabinet members, judges, atheletes and Hollywood stars they host on their boats or in their ski lodges.

But despite their savvy, or because of it, agents are the cause of most FCPA problems. All too often they allocate some of their fees to bribe potential public customers, with their principals either not knowing or not caring about the illegal conduct. In the most confusing and opaque economies, agents bring the most value -- and the greatest FCPA compliance risks. Countries that come to mind include the newly independent states, as well as Mexico, India, Egypt, Burma, Indonesia and others.

Despite their potential for mischief, the FCPA never declares agents off limits per se. Anyone can retain an agent whenever they want to – at their own risk. The Justice Department warns about the use of agents and dishes out practical advice how to recognize the compliance dangers. For example, in the Lay Person's Guide to FCPA, the DOJ says this:

“The FCPA prohibits corrupt payments through intermediaries. It is unlawful to make a payment to a third party, while knowing that all or a portion of the payment will go directly or indirectly to a foreign official. The term 'knowing' includes conscious disregard and deliberate ignorance. The elements of an offense are essentially the same . . ., except that in this case the 'recipient' is the intermediary who is making the payment to the requisite 'foreign official.'

“Intermediaries may include joint venture partners or agents. To avoid being held liable for corrupt third party payments, U.S. companies are encouraged to exercise due diligence and to take all necessary precautions to ensure that they have formed a business relationship with reputable and qualified partners and representatives. . . .In addition, in negotiating a business relationship, the U.S. firm should be aware of so-called 'red flags,' i.e., unusual payment patterns or financial arrangements, a history of corruption in the country, a refusal by the foreign joint venture partner or representative to provide a certification that it will not take any action in furtherance of an unlawful offer, promise, or payment to a foreign public official and not take any act that would cause the U.S. firm to be in violation of the FCPA, unusually high commissions, lack of transparency in expenses and accounting records, apparent lack of qualifications or resources on the part of the joint venture partner or representative to perform the services offered, and whether the joint venture partner or representative has been recommended by an official of the potential governmental customer.” (emphasis in original)

In new or hard-to-reach markets, agents can be an important and even essential ingredient for commercial success. They can help identify real opportunities, keep foreign companies clear of local political quicksand, and teach important lessons about the home town culture. But when agents guarantee successful results, open doors in high places a little too easily, and wink when asked about their business methods – then they're too good to be true. Those agents might make great dinner companions, but they shouldn't make it past an effective compliance program.

Wednesday
Mar262008

At Alcoa, Who Knew What?

If, as Alba alleges, Alcoa overcharged it for supply contracts by $2 billion, and some or all of the money went into offshore accounts controlled by Alcoa's agent and was used to bribe Alba's personnel and other Bahraini government officials, then the focus of the U.S. government's criminal investigation will be on whether anyone from Alcoa knew what was happening, or if the agent acted alone and without Alcoa's knowledge.

The Justice Department last week intervened in Alba's federal civil suit against Alcoa, asking the court to stay the case while the government investigates possible criminal violations of the Foreign Corrupt Practices Act and other laws by Alcoa and its executives and agent. Alcoa has said it's innocent. "We will cooperate fully with the DOJ and believe this will help bring this matter to a speedy conclusion," Alcoa communications director Kevin Lowery said.

For U.S. prosecutors to obtain a criminal conviction of an individual under the FCPA, they must prove, among other things, that the defendant acted with "knowledge." The most recent discussion of the knowledge element in an FCPA prosecution is U.S. v. Kay (No. 05-20604, 5th. Cir., 2008). In that case, the United States Court of Appeals for the Fifth Circuit said the government didn't need to prove the defendants had specific knowledge about the FCPA. Instead, the court said, the government could satisfy the knowledge element by proving merely that the defendants understood that their actions were illegal.

Sitting en banc, the U.S. v. Kay appellate court -- which was reviewing the trial court's jury instructions on "knowledge" -- said: To be clear, we return to first principles. That is, this case was tried on the basis that the Government had to prove that the Defendants knew that their actions violated the law, although they did not need to prove that they were aware of the specific provisions of the FCPA. . . . The Government, while responding that they need not prove the specifics of the FCPA, made clear that it had to prove that Defendants knew that their conduct was illegal."

U.S. v. Kay involved bribery offenses under the FCPA, which carry a potential prison term of five years. What about criminal violations of the accounting standards, for which individuals can face up to 20 years? Those prosecutions must include proof that the accused acted willfully. The FCPA says a willful violation is the intentional circumvention of or failure to implement a system of internal accounting controls, or willful falsification of an issuer's books, records, or accounts.

What about Alcoa's corporate exposure for criminal charges? If any employee was involved with the agent and knowingly participated in bribing foreign officials in Bahrain, or intentionally cooked Alcoa's books with respect to the overcharges and bribery, then Alcoa itself might be held criminally responsible under the doctrine of respondeat superior. That could happen even if Alcoa's employees acted secretly, completely outside their authority, and against Alcoa's policies.

“An Overview of the Organizational Guidelines” from the United States Sentencing Commission's May 2004 release says this:

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.

The statement reflects the majority view of the federal appellate courts that have considered whether corporations are criminally liable for the crimes employees commit while acting within the scope of their employment. Courts have said it may be irrelevant that the employee is not a high managerial official, that the corporation may have specifically instructed the employee not to engage in the proscribed conduct, or that the statute is one that requires willful or knowing violations, rather than one that imposes strict liability.

The rationale for applying respondeat superior to corporations is that criminal statutes such as the FCPA impose a duty upon the corporation to prevent its employees from committing the statutory violations. If it fails in its duty to prevent the criminal behavior, then the corporation itself should be made to answer for the same criminal acts.

Despite the doctrine of respondeat superior, the DOJ is now understandably reluctant to charge corporations with criminal offenses. The Arthur Andersen prosecution demonstrated the catastrophic consequences that can result from a corporate felony charge, which for Andersen was a death sentence, even though the firm was later exonerated. The DOJ has since adopted the practice for FCPA and other white collar offenses of offering companies deferred prosecution agreements as an alternative to criminal prosecutions.

In cases involving the FCPA, corporations have additional (albeit largely theoretical) protection from the harshness of the respondeat superior doctrine. The "Overview of the Organizational Guidelines" says this:

The [federal sentencing guidelines mitigate] the potential fine range - in some cases up to 95 percent - if an organization can demonstrate that it had put in place an effective compliance program. This mitigating credit under the guidelines is contingent upon prompt reporting to the authorities and the non-involvement of high level personnel in the actual offense conduct.

If, as Alba alleges, people from Alcoa were involved in activity that may violate the FCPA, then the company's task, among others, will be to show that it has an effective compliance program, that top executives were unaware of any illegal conduct, and that it never concealed the conduct from the DOJ or SEC. If Alcoa can demonstrate these things, it will be eligible for mitigation of the potential criminal penalties. It is certainly true, however, that mitigation is less relevant when deferred prosecution agreements are offered. But the arguments for mitigation should still influence the DOJ's determination of the terms of any eventual deferred prosecution agreement.

Would the presence of actual FCPA violations ruin Alcoa's ability to establish that it has an effective compliance program? No. The Sentencing Guidelines stipulate that the failure to prevent or detect an FCPA offense "does not necessarily mean that the program is not generally effective in preventing and detecting criminal conduct."

* * *

Alba's allegations raise a multitude of FCPA issues for Alcoa, its employees and agent. We've mentioned just a few here, and we'll come back to the case from time to time. As one pundit said to us, this will be a zoo.

Please click on the labels below for prior posts on the topics discussed above and for access to the sources and authorities referred to in the post. You can also contact us for the annotations.

Wednesday
Mar192008

All In The Family

In a post here we described our edits to Wikipedia's article on the Foreign Corrupt Practices Act (here). Wiki's old article said a bank owner (pictured far left) whose brother was the minister of finance (far right) would be a foreign official for the FCPA. That's wrong, we said, because although consanguinity might be important, it has never been a definitive test of foreign-officialdome under the FCPA.

One of our readers had this to say about our edits: The omission of prohibitions on payments to family members creates a significant loophole. Are there any cases where business dealings with family members have been examined? My reading of the SEC statement on Statoil is that the Iranian official may not have had the formal authority to guarantee the contract but that it was his family connections which were being purchased.

We replied this way: Good point. But as far as we know, neither the FCPA itself nor any Opinion Releases or cases say that commercial dealings with family members of government officials are per se violations of the FCPA. If a family member is being used to make an illegal payment "indirectly" to a foreign official, then a violation would probably result, in the same way that indirect payments through other agents are illegal. But the mere fact of the consanguinity is not determinative, and that was the problem with Wiki's original article. No question, however, that dealing with family members of foreign officials always raises compliance red flags. It should probably be avoided in most cases because of the risks. But under some circumstances commercial relationships with family members of foreign officials may be permissible under an effective compliance program.

Exhibit A for our answer is FCPA Review Procedure Release No. 82-04 (November 11, 1982) [mislabeled as 82-02 on the DOJ site]. It's available here. In it, the Department of Justice received a review request from Thompson & Green Machinery Company, Inc. ("T & G"). It hired a foreign businessman ("Mr. X") as its agent in connection with a generator sale in a foreign country. However, Mr. X's brother was an employee of the same foreign government to whom T & G was trying to sell its generator. The DOJ gave its blessing, however, after receiving assurances from T & G that (i) the written consultant agreement with Mr. X prohibited him from using any part of his commission to pay a finder’s fee to a third party, and also expressly referred to the FCPA; and (ii) both Mr. X and his brother signed separate affidavits in which they pledged to adhere to the FCPA’s antibribery provisions.

So it's not illegal per se under the FCPA to have commercial dealings with family members of foreign officials. No question, however, that doing so is full of risk. For example, Paradigm's hiring of the brother of an official from Pemex, from which Paradigm was then awarded a contract, was cited as an offense. See our post here. Family members were also involved in FCPA convictions or allegations in U.S. v. Kozeny (see our posts here), U.S. v. Sapsizian & Acosta [see also Alcatel] (S.D. Fla. 2006), SEC v. Bellsouth Corporation (N.D. Ga. 2002), U.S. v. Metcalf & Eddy (D. Ma. 1999), and others.

But the FCPA itself doesn't mention family members, and as of today, Exhibit A above -- FCPA Review Procedure Release No. 82-04 -- remains "good law," if we can refer to a DOJ opinion that way. It means the fact that someone is related by blood or marriage to a foreign official doesn't make the person a foreign official for the FCPA. It does, however, mean dealing with them is always a high-risk proposition. That's why lots of compliance-minded companies ban the practice entirely.

Many thanks to our reader who contributed the thoughtful comment about family relationships and the FCPA.

Sunday
Mar162008

Back On Track

A reader pointed out that our assault last week on Wikipedia (here) was senseless. That's because if you don't like something on Wiki -- in our case its FCPA article -- just change it. The community site, after all, calls itself "the free encyclopedia that anyone can edit." We adopted our reader's advice. And today we can report that all is well. There's a newly revised FCPA page on the site (here).

In the old article there was a bank owner mistakenly designated as an FCPA foreign official because his brother was the minister of finance. Well, in the revised article he has a new incarnation. He's still a bank owner, but he's also the minister of finance. That's right -- we combined the brothers into a single person. It sounds awkward, but at least our new man's status as a foreign official is confirmed -- not by family relations, which he couldn't do anything about even if he wanted to, but by his choice to take on governmental duties in the unnamed country.

That scenario, by the way, has played out in Indonesia and other countries from time to time. It happens when local business people -- who might be agents or partners of U.S. companies -- are named to government posts, thereby becoming foreign officials for the FCPA. Whenever a sales agent or business partner suddenly becomes a foreign official, there's an urgent compliance need to review the commercial relationship -- and probably terminate it. That's because any business-related payments to the newly-minted foreign official might violate the FCPA. So the example of the bank owner cum-minister of finance works fine for Wiki.

Our few other alterations also found their way into the paragraph at issue. It now reads in relevant part like this:

The meaning of foreign official [under the FCPA] is broad. For example, an owner of a bank who is also the minister of finance would count as a foreign official according to the U.S. government. Doctors at government-owned or managed hospitals are also considered to be foreign officials under the FCPA, as is anyone working for a government-owned or managed institution or enterprise. Employees of international organizations such as the United Nations are also considered to be foreign officials under the FCPA. There is no materiality to this act, making it illegal to offer anything of value as a bribe, including cash or non-cash items. The government focuses on the intent of the bribery rather than on the amount.

It's not a perfect description of the FCPA's coverage, but it's improving. Go Wiki.

Thursday
Feb282008

Bahrain Accuses Alcoa Of Bribery

Today's Wall Street Journal reports that Aluminum Bahrain BSC ("Alba") has filed a lawsuit in federal court in Pittsburgh accusing Alcoa of a 15-year conspiracy linked to overcharging, fraud and bribery. The suit says more than $2 billion in Alba's payments under supply contracts passed from Bahrain to tiny companies in Singapore, Switzerland and the Isle of Guernsey, and that some of the money was then used to bribe Bahraini officials involved in granting the contracts.

Alcoa hasn't made any comment about the suit. With 116,000 employees in 44 countries, it's one of the world's largest producers and managers of primary aluminum, fabricated aluminum and alumina facilities.

Alcoa's agent. The WSJ quotes the suit as alleging that from 1990, Alcoa began assigning its supply contracts with Alba to a series of companies set up by Alcoa's agent, a Canadian businessman of Jordanian origin named Victor Dahdaleh. "...These assignments served no legitimate business purpose and were used as a means to secretly pay bribes and unlawful commissions as part of a scheme to defraud Alba."

FCPA violations? According to the report, the suit grew out of an investigation commissioned by Bahrain itself to uncover corruption in its state-owned enterprises. The story notes that "[i]t is highly unusual for a country to use U.S. courts to accuse an American company of bribery. The dispute is likely to put Alcoa under the microscope of the Justice Department, which has been cracking down on questionable dealings between U.S. companies and foreign officials."

The U.S. Foreign Corrupt Practices Act prohibits both direct and indirect corrupt payments to foreign officials for the purpose of obtaining or retaining business. Indirect payments typically pass through the hands of an overseas partner or agent and then end up with the foreign official for an unlawful purpose. Most FCPA violations happen that way.

But there is no private right of action under the FCPA. That means offenses can be prosecuted only by the U.S. Department of Justice or the Securities and Exchange Commission. The DOJ's Lay Person's Guide to the FCPA notes, however, that "[c]onduct that violates the antibribery provisions of the FCPA may also give rise to a private cause of action for treble damages under the Racketeer Influenced and Corrupt Organizations Act (RICO), or to actions under other federal or state laws." Fraud and misrepresentation would be among such private causes of action.

A rare lawsuit. Dan Newcomb -- author of the FCPA Digest -- says in the WSJ story, "The reason it's rare for governments to accuse U.S. companies of corruption in American courts is that once you raise a question of corruption, the sovereign runs the risk they will be embarrassed by the requests of discovery from the private party." In this case, he added,"They have to be prepared to withstand Alcoa coming back to them and saying, 'We want to look at every other corrupt transaction you have been involved in.' "

Alcoa Inc. trades on the NYSE under the symbol AA.

View the Wall Street Journal's February 28, 2008 report here.

Monday
Feb252008

A Little Help From Our Friends

Our subject is always some aspect of the the Foreign Corrupt Practices Act. So around here the U.S. Department of Justice and the Securities and Exchange Commission get lots of attention. But another U.S. government agency has a role to play in the FCPA -- the Department of Commerce. Its mission is "to foster, promote, and develop the foreign and domestic commerce" of the United States. It does that by helping -- that's right, helping -- American companies do business overseas. And what interests us is how Commerce helps U.S. companies comply with the FCPA.

First, some background. The Department of Commerce concentrates most of its efforts on small and medium sized U.S. exporters. That makes sense. According to a 2004 USTR fact sheet, in the United States small and medium sized businesses make up almost 97% of all direct exporters, and approximately 65% of exporters are businesses with fewer than 20 employees. As our readers know, smaller companies with fewer resources struggle to comply with the FCPA. Big companies aren't excluded from Commerce's programs, but they usually know how to do buisness overseas and comply with the FCPA, and they have the resources to do so on their own. So it's the smaller companies that need the most help. With that in mind, let's see what Commerce has to offer.

Finding a partner. The Department of Commerce helps U.S. companies find business partners or agents overseas. Its Commercial Service -- a group of trade and business experts stationed in about 80 U.S. embassies around the globe -- runs the International Partner Search Program. It actually identifies suitable strategic partners for U.S. exporters. As Commerce says, "You provide your marketing materials and background on your company, and the [Commercial Service] will use its strong network of foreign contacts to interview potential partners and provide you with a list of up to five pre-qualified partners. This information is available in 30 days or less."

Vetting the candidate. Once a potential overseas partner or agent is found, either through Commerce or otherwise, it's time for some compliance-oriented due diligence. As we've said before, international joint venture partners and sales agents bring very high risks under the FCPA. Unreliable partners and agents -- those who might pay bribes to foreign officials to help the business -- need to be spotted early and either avoided or controlled. Doing that requires due diligence. And here again Commerce can help.

The Commercial Service's International Company Profile (ICP) Program provides background reports on foreign companies in about 80 countries. The price is reasonable -- around $500 per ICP, depending somewhat on local costs. Be warned, however, that the Commercial Service doesn’t offer ICPs in countries where Dun & Bradstreet or other private-sector vendors already provide a similar service. But where ICPs are available, the Commercial Service specialists deliver a product that helps satisfy at least the basic level of due diligence.

International Company Profiles are assembled by combing the local press, industry contacts and other sources. The result is a financial report on the prospective overseas partner or agent. Some ICPs are more detailed than others, depending on both the amount of information ultimately available and on the resourcefulness of the local Commerce specialist. Delivery time is advertised to be about 10 business days. The final report includes "a list of the company's key officers and senior management, banking relationships and other financial information about the company; and market information, including sales and profit figures, and potential liabilities."

Uncle Sam's opinion. Crucial to FCPA due diligence, the Commercial Service will also provide "an opinion as to the viability and reliability of the overseas company or individual you have selected as well as an opinion on the relative strength of that company's industry sector in your target market." It's not called an FCPA due diligence opinion, but that's practically what it amounts to. Sure, there are lots of scenarios by which a "reliable" overseas partner or agent might still cause FCPA problems. But the International Company Profile and the viability and reliability opinion are great evidence. They demonstrate how the U.S. company tried to pick a law-abiding foreign partner or agent. In most cases, evidence like that goes a long way to protecting U.S. companies and executives who find out later that an overseas intermediary may have caused an FCPA violation.

Our recommendation. We've dealt with people from the Commercial Service in a number of countries. Overall, the specialists are unabashed boosters of American business overseas. They have impressive, even astounding knowledge about local markets, and they're resourceful as well. We've met some with a great sense of humor, which is a welcome relief in countries in transition and under stress.

In fact, we can't think of any reason why straight-shooting smaller companies shouldn't check in with a Commercial Service specialist -- either in the U.S. or the country of destination. There are literally hundreds of Commercial Service offices -- across the U.S. from Akron to Ypsilanti, and around the world from Albania to Zimbabwe. The chats are free and may ultimately contribute richly to successful overseas business development and effective FCPA compliance.

__________________

A special acknowledgment to Kathryn Nickerson, Senior Counsel, Office of the Chief Counsel for International Commerce, U.S. Department of Commerce, for some of the information and ideas in this post. See her speech to the American Bar Association, National Institute of the Foreign Corrupt Practices Act, Special Focus: Issues Faced By Small and Medium Enterprises, Washington, D.C., October 17, 2006 here.

_________________

View the Department of Commerce's International Company Profile Program here.

Monday
Feb112008

A Straight Shot At FCPA Compliance

Question: What essential aspect of FCPA compliance is also the toughest for organizations to come by? Here's a hint. It's what made the man on the left, Ben Hogan, the greatest golfer of his day.

Answer: Consistency.

It may as well be a physical law -- like the law of gravity or one of the laws of thermodynamics. Whatever you call it, there's always a strong and almost irresistible tendency by organizations to make downward adjustments in their FCPA compliance efforts. A sort of relativism seeps in at every seam, corner and crack. For example, pressure grows to dilute typical compliance-related reps and warranties in joint venture or agency agreements -- especially when an attractive foreign principal threatens to walk away. Many sophisticated overseas parties have learned by now to argue that typical FCPA compliance language is "insulting and demeaning." When the complaints work, the agreements are softened, and compliance obligations become weaker by a little or a lot.

In a similar way, compliance is sometimes compromised in staunchly nationalistic countries, such as China or Russia. "Referring to U.S. law and the FCPA insults our sovereignty and our domestic legal system," the foreign parties say. That old argument still works sometimes, resulting in FCPA compliance language that's sharp and clear being replaced with fuzzy and less offensive references to "applicable law."

At other times, a strong-willed executive from within the organization itself -- perhaps someone with a sales or business development function -- might work to water down FCPA compliance. A seasoned veteran or cocky newcomer might stay away from compliance-related training and administrative duties. Predictably, their next step is to ignore, block or hinder compliance efforts directed toward a potential overseas partner they've been courting for a while.

Being consistent in compliance sounds hard and it is, so the next question is whether every company really needs to be a Ben Hogan? The answer is yes -- with an exclamation point! Consistency is a specific requirement of an "effective compliance program." The 2005 U.S. Federal Sentencing Guidelines say, "The organization’s compliance and ethics program shall be promoted and enforced consistently throughout the organization . . . ." (See Chapter 8 - PART B - §8B2.1. Effective Compliance and Ethics Program, Subsection (b) (6)) Without a consistent effort, then, an organization might lose the chance to mitigate its potential criminal penalties for an FCPA offense. The Sentencing Guidelines allow for mitigation of up to a life-saving 95% of the recommended penalties -- but only if the organization can demonstrate that it has an effective compliance program. It won't be able to do that if it comes up short on consistency.

What's the best way to maintain a consistent approach to FCPA compliance? As dog owners and parents of young children know, you reward compliance and punish non-compliance. That's not just common sense; it's also advice straight from the Sentencing Guidelines themselves. Subsection (b) (6) cited above says in full: "The organization’s compliance and ethics program shall be promoted and enforced consistently throughout the organization through (A) appropriate incentives to perform in accordance with the compliance and ethics program; and (B) appropriate disciplinary measures for engaging in criminal conduct and for failing to take reasonable steps to prevent or detect criminal conduct." The Guidelines allow an organization to be creative when it comes to punishing an errant employee. As the commentary to Subsection (b)(6) says, "Adequate discipline of individuals responsible for an offense is a necessary component of enforcement; however, the form of discipline that will be appropriate will be case specific." Similar creativity is permitted in dishing out rewards for exemplary performance.

Like in a good golf swing, consistency in FCPA compliance is essential -- and so hard to achieve. But consistency truly is an aspect of compliance where each individual in an organization can make the difference between a slice, a hook or a beauty down the middle.

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

Tuesday
Oct092007

With Friends Like These . . . .

The U.S. 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. Most violations happen that way.

A plain-English explanation of the anti-bribery provisions written by the Department of Justice warns U.S. firms about their choice of overseas partners and agents. A bad choice is someone who is likely to make corrupt payments. That likelihood, the DOJ says, is usually indicated by warning signs called "red flags." If there are red flags to start with and if the intermediary does bribe a foreign official to help the business, the U.S. company will have trouble arguing it shouldn't be responsible for an FCPA violation based on an indirect corrupt payment.

Red flags, as the name suggests, are easy to spot. Unusual payment patterns or financial arrangements. A history of corruption in the country. A refusal by the foreign joint venture partner or representative to certify that it will not take any action that would cause the U.S. firm to be in violation of the FCPA. Unusually high commissions. Lack of transparency in expenses and accounting records. An apparent lack of qualifications or resources on the part of the joint venture partner or representative to perform the services offered. A recommendation from the local government of the intermediary. All these, the DOJ says, should set off compliance alarm bells.

When red flags appear, the burden of compliance increases. More red flags mean more caution is required. It's a mistake to interpret red flags merely as a sign of the local culture, a helpful clue about how business is really done there, and something you just have to live with. Seeing red flags and lowering compliance standards, when the right response is to raise them, often leads to an FCPA disaster.

View the DOJ's "Lay Person's Guide to FCPA" Here.

Monday
Sep242007

Paradigm's Pre-IPO Due Diligence Reveals FCPA Violations

Paradigm B.V., a Houston-based oil and gas services provider, entered into a non-prosecution agreement with the U.S. Department of Justice to resolve payments that violated the Foreign Corrupt Practices Act. Paradigm made prohibited payments to foreign officials in China, Indonesia, Kazakhstan, Mexico and Nigeria. It will "pay a $1 million penalty, implement rigorous internal controls, retain outside compliance counsel, and cooperate fully with the Department of Justice," according to the DOJ's September 24, 2007 announcement.

Paradigm's parent company, Paradigm Ltd., which is controlled by private equity fund Fox Paine, discovered the corrupt payments during due diligence for its planned NASDAQ IPO and self-disclosed them to prosecutors. The conduct at issue did not involve current senior management, according to the company. The DOJ said, “Paradigm’s actions in this matter, including voluntary disclosure and remedial efforts, are consistent with our view of responsible corporate conduct when FCPA violations are uncovered. Accordingly, the Department has resolved this case to permit the company to move forward on sound footing, governed by ethical business practices.”

The corrupt payments involved $22,250 deposited into the Latvian bank account of a British West Indies company recommended as a consultant by an official of KazMunaiGas, Kazakhstan’s national oil company, to secure a tender for geological software. The DOJ said Paradigm performed no due diligence, did not enter into any written agreement and apparently received no services.

In China, Paradigm used an agent to make commission payments to representatives of a subsidiary of the China National Offshore Oil Company in connection with the sale of software to the CNOOC subsidiary. Paradigm also directly retained and paid employees of Chinese national oil companies or state-owned entities as "internal consultants" to evaluate Paradigm’s software and to influence their employers’ procurement divisions to purchase Paradigm’s products. Employees of CNOOC and other state-owned enterprises in China are "foreign officials" for purposes of the FCPA.

Paradigm said it also made corrupt payments in Mexico, Indonesia and Nigeria. In Nigeria, it used intermediaries to pay between $100,000 and $200,000 to politicians to obtain a contract to perform services and processing work for a subsidiary of the Nigerian National Petroleum Corporation. In Mexico, it hired the brother of a Pemex decision maker, and paid for the decision-maker's $12,000 trip to Napa Valley, California and $10,000 to entertain him. In Indonesia, its agent paid employees of Pertamina through a New York bank account.

In a sign that the DOJ is encouraging more voluntary disclosure and self-directed remedial action -- which means implementing an "effective compliance program" -- Paradigm's non-prosecution agreement expires after just 18 months instead of the usual three-year period, and requires appointment of outside compliance counsel instead of an independent monitor. In addition to Paradigm's self disclosure and remedial actions, another major influence on the DOJ's handling of the case must have been the fact that the company's current senior management was not involved in the unlawful conduct.

View the Department of Justice's News Release Here.

View Paradigm's Non-Prosecution Agreement Here.

Sunday
Sep232007

FCPA Defenses That Don't Work

The text of the Foreign Corrupt Practices Act sets out three types of payments to foreign officials that are lawful -- facilitating payments, promotional expenses and payments permitted under the written laws of the host country. In addition to these three defenses, there are others that are repeated often -- but are bogus. They originate not from judges or jurisprudence but from the wishful thinking of companies and people in need of a defense, and fast. Knowing which defenses are real and which are counterfeit is crucial, however, and learning the differences too late can have dire consequences.

Here, then, are some of the most popular FCPA defenses that do not work:

Everyone pays bribes in this country.

Don't look at me. The / joint venture partner / agent / foreign subsidiary / did it.

Only big companies get into FCPA trouble. No one cares about a little fish like us.

My supervisor approved it.

We had no choice -- either pay up or lose the deal. That's extortion, not bribery.

We can't control what our agent does on his own time with his own money.

A hundred tiny bribes do not add up to one big bribe.

We have to pay bribes to do business here. The U.S. Government doesn't really expect us to leave, does it?

I was outside the U.S. and only used foreign bank accounts.

It's not fair. . . . .

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More information is available from Cassin Law LLC.

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