July 11, 2011
For years now, we have been documenting the unprecedented surge of anti-corruption enforcement activity by the two regulators charged with enforcing the Foreign Corrupt Practices Act ("FCPA")–the U.S. Department of Justice ("DOJ") and Securities and Exchange Commission ("SEC"). As the wave crested, these FCPA enforcers became increasingly aggressive in both their investigative tactics and their expansive interpretations of the statute’s text and jurisdictional reach. Yet even in the face of this onslaught, the trend had been for nearly all defendants to settle these enforcement actions short of litigation, leaving the DOJ and SEC positions largely untested. This year, that is changing.
2011 is poised to yield a record number of trials (and certainly defendants) to challenge FCPA charges. Even Corporate America is playing its part, with the first ever FCPA trial of a company. And outside the courtroom, a well-financed lobbying effort is engaging legislators in an effort to bring clarifying and limiting amendments to the statute. Although the success of these efforts has, to date, been mixed, it is clear that the DOJ and SEC enforcement positions will continue to be scrutinized in the coming months, potentially resulting in judicial decisions and/or legislative actions that could substantially alter the FCPA enforcement landscape.
This client update provides an overview of the FCPA and a survey of FCPA enforcement activity during the first six months of 2011. It also analyzes recent enforcement trends and offers practical guidance to help companies and their executives avoid or minimize liability under the FCPA. A collection of Gibson Dunn’s publications on the FCPA, including prior enforcement updates and more in-depth discussions of the statute’s complicated framework, may be found on our FCPA Website.
The FCPA’s anti-bribery provisions make it illegal to offer or provide money or anything of value to officials of foreign governments or foreign political parties with the intent to obtain or retain business. The anti-bribery provisions apply to "issuers," "domestic concerns," and "agents" acting on behalf of issuers and domestic concerns, as well as "any person" that violates the FCPA while in the territory of the United States. The term "issuer" covers any business entity that is registered under 15 U.S.C. § 78l or that is required to file reports under 15 U.S.C. § 78o(d). In this context, the approximately 1,500 foreign issuers whose American Depository Receipts ("ADRs") are listed on U.S. exchanges are "issuers" for purposes of this statute. The term "domestic concern" is even broader and includes any U.S. citizen, national, or resident, as well as any business entity that is organized under the laws of a U.S. state or that has a principal place of business in the United States.
In addition to the anti-bribery provisions, the FCPA’s books-and-records provision requires issuers to make and keep accurate books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the issuer’s transactions and disposition of assets. Finally, the FCPA’s internal controls provision requires that issuers devise and maintain reasonable internal accounting controls aimed at preventing and detecting FCPA violations. Regulators have frequently invoked these latter two sections–collectively known as the accounting provisions–in recent years when they cannot establish the elements for an anti-bribery prosecution or as a mechanism for compromise in settlement negotiations. Because there is no requirement that a false record or deficient control be linked to an improper payment, even a payment that does not constitute a violation of the anti-bribery provisions can lead to prosecution under the accounting provisions if inaccurately recorded or attributable to an internal controls deficiency.
The following table and graph track the number of FCPA enforcement actions initiated by DOJ and the SEC during the past eight years.
With teams of DOJ prosecutors tied up for more than 50 courtroom days in the bi-coastal FCPA trials of eight defendants during the first half of 2011, it is little wonder that enforcement actions have been initiated during the past six months at a slower pace than the regulators had set in recent years. Few predict, however, that the surge of FCPA enforcement activity is now subsiding, and we are not among them. Indeed, Assistant Attorney General Lanny Breuer recently confirmed in a speech before corporate counsel that DOJ intends to accelerate its FCPA enforcement activity and has devoted additional resources to that end:
[I]n the Criminal Division, we have dramatically increased our enforcement of the Foreign Corrupt Practices Act in recent years. That statute, which was once seen as slumbering, is now very much alive and well. . . . We recently promoted a new head of the Section’s FCPA Unit and two assistant chiefs, and we have also increased the number of line prosecutors in the Unit, attracting high caliber attorneys with extensive experience–including Assistant U.S. Attorneys with significant trial and prosecutorial experience and attorneys from private practice with defense-side knowledge and experience. These changes have significantly increased our FCPA enforcement capabilities.
With more than 150 open FCPA investigations and a growing platoon of experienced prosecutors to pursue offenders, DOJ’s efforts to enforce the statute are unlikely to be scaled back in the near future. The SEC, similarly, appears poised to continue aggressively pursuing suspected FCPA violations. Even with the announcement that its top enforcement magnate, FCPA Unit Chief Cheryl Scarboro, would be departing for private practice, SEC Director of Enforcement Robert Khuzami recently confirmed the SEC’s long-term commitment to enforcing the statute: "Word is getting out that bribery is bad business, and we will continue to work closely with the business community and our colleagues in law enforcement in the fight against global corruption."
On January 31, 2011, San Diego-based Maxwell Technologies, Inc., a developer and manufacturer of energy storage and delivery products, resolved criminal and civil FCPA charges. The charging documents collectively allege that, from 2002 through May 2009, Maxwell’s wholly owned Swiss subsidiary paid kickbacks amounting to more than $2.5 million to officials at Chinese state-owned electric utility infrastructure manufacturers in order to secure contracts worth over $15.4 million and earn profits exceeding $5.6 million. Maxwell allegedly funded the kickbacks by inflating its prices for high-voltage capacitors sold to the state-owned customers by 20%. It then transferred the excess money to officials who worked for those customers through its Chinese agent, who invoiced the Maxwell subsidiary for "extra amount" or "special arrangement" fees in the exact sum of the 20% mark-up.
This scheme was first detected and reported internally in 2002, when a Maxwell officer based in Europe flagged the issue for several of his U.S.-based colleagues. Maxwell’s then-chief operating officer reported that the issue was well known and said that he would send an employee familiar with the issue to assist the Europe-based officer, while at the same time requesting that there be "[n]o more emails" about the issue. Nonetheless, the kickbacks continued until 2009, when Maxwell’s incoming CEO learned about the payments and caused the company to undertake an internal investigation and make a voluntary disclosure to U.S. regulators.
The SEC’s civil complaint reads as a cautionary tale for issuers that have implemented less-than-robust anti-corruption compliance programs. Describing Maxwell’s internal controls as "wholly inadequate," the SEC alleged that the company’s Code of Conduct contained only a "brief section on FCPA issues" and criticized Maxwell for failing to maintain adequate controls over payments to the agent, conduct due diligence regarding the agent, and provide anti-corruption training to all relevant employees.
To settle the civil action alleging violations of the FCPA’s anti-bribery and accounting provisions, Maxwell agreed to disgorge to the SEC $5,654,576 in profits, plus $696,314 in prejudgment interest. The company resolved its criminal charges through a three-year deferred prosecution agreement, pursuant to which Maxwell agreed to pay a criminal fine of $8 million, conduct a review of its internal controls, and provide annual reports to DOJ regarding its compliance program. The deferred prosecution agreement notes that the criminal fine assessed was 25% below the range prescribed by the U.S. Sentencing Guidelines, due to Maxwell’s voluntary disclosure and cooperation.
On February 10, 2011, Tyson Foods, Inc., the world’s largest beef, pork, and chicken processor, resolved criminal and civil FCPA charges stemming from the alleged bribery of Mexican government veterinarians by Tyson’s wholly-owned Mexican subsidiary. From 2004 to 2006, Tyson de Mexico allegedly made $90,000 in illicit payments to two Mexican state-employed veterinarians who certified Tyson de Mexico’s products for export. Initially, the payments were made by placing the veterinarians’ wives, who performed no work for Tyson de Mexico, on the company’s payroll and paying invoices submitted by one of the veterinarians. After this scheme was discovered by a Tyson accountant, the veterinarians’ wives were taken off of Tyson de Mexico’s payroll, but the amounts that they had been receiving were simply added to the amount that one of the veterinarians was charging Tyson de Mexico. This alleged misconduct continued until 2006, when a company attorney ordered that the payments be halted.
To resolve the civil charges, Tyson agreed to disgorge to the SEC $1.2 million in ill-gotten profits and prejudgment interest. The company resolved its criminal charges through a two-year deferred prosecution agreement, pursuant to which Tyson agreed to pay a $4 million criminal fine (20% below the minimum fine prescribed by the U.S. Sentencing Guidelines). Tyson also agreed to report to DOJ concerning its compliance program on a semi-annual basis. When announcing the settlement, Assistant Attorney General Breuer noted Tyson’s voluntary disclosure of the misconduct, cooperation with regulators, and remedial measures.
On March 18, 2011, International Business Machines Corp. ("IBM") settled a civil action filed by the SEC alleging violations of the FCPA’s books-and-records and internal controls provisions. According to the complaint, from 1998 to 2003, IBM’s Korean subsidiary and its majority-owned joint venture provided cash, entertainment, and gratis computer equipment to officials of 16 different South Korean government entities in order to obtain contracts to provide computer equipment to the officials’ employers. In addition, the SEC alleged that, from 2004 to 2009, employees of two wholly owned subsidiaries in China utilized fake purchase orders and invoices to create slush funds at travel agencies. These employees then used the purported slush funds to finance sightseeing trips, per diems, and gifts for Chinese government officials. To resolve this matter, IBM consented to the entry of a final judgment requiring it to pay $5.3 million in disgorgement, $2.7 million in prejudgment interest, and a $2 million civil penalty.
On March 24, 2011, Ball Corporation, which manufactures metal packaging for food, beverage, and household products, settled FCPA administrative charges with the SEC by agreeing to pay a $300,000 monetary penalty and agreeing to the entry of a cease-and-desist order. According to the SEC, Ball Corporation employees discovered that the company’s Argentine subsidiary, Formametal S.A., had made improper payments prior to being acquired by Ball Corporation in March 2006. Nevertheless, Ball Corporation allegedly failed to implement internal controls to prevent further improper payments, enabling Formametal to continue to pay more than $100,000 to Argentine customs officials between July 2006 and October 2007. Senior Formametal managers, including its president, allegedly knew about the payments, which were disguised in the company’s books and records as legitimate customs fees and business expenses. Although the SEC noted that Ball Corporation did not promptly terminate the responsible employees when company accountants learned about the improper payments in February 2007, it assessed only a $300,000 fine because of the company’s other remedial efforts, voluntary disclosure of the misconduct, and cooperation in connection with a related investigation.
On April 6, 2011, the long-running investigation into the alleged bribery of senior members of Nigeria’s Executive Branch to win engineering, procurement, and construction contracts on Bonny Island, Nigeria, ensnared the fourth and final corporate partner of the TSKJ joint venture. Japanese engineering and construction company JGC Corporation entered into a deferred prosecution agreement with DOJ, agreeing to pay a $218.8 million criminal fine to resolve charges stemming from its participation in the bribery scheme. As discussed in both our 2010 Mid-Year FCPA Update and 2010 Year-End FCPA Update, the four members of the TSKJ joint venture allegedly paid nearly $200 million to third parties between 1995 and 2004, with knowledge that some of the money would be used to bribe senior Nigerian officials in order to win four contracts, cumulatively worth $6 billion, to build liquefied natural gas facilities in connection with the Bonny Island Project. In addition to the substantial fine, JGC agreed to retain an independent compliance consultant for a two-year term.
In a press release announcing DOJ’s settlement with JGC, DOJ Principal Deputy Assistant Attorney General Mythili Raman trumpeted, "The approximately $1.5 billion in criminal and civil penalties that have been imposed on the [four] members of the joint venture thus far exceed their profits from the scheme. Foreign bribery is a serious crime, and as this case makes clear, we are investigating and prosecuting it vigorously."
On April 7, 2011, just one day after the JGC settlement was announced, New York-based software provider Comverse Technology, Inc., agreed to pay a combined monetary penalty in excess of $2.8 million to settle criminal and civil allegations that it violated the FCPA’s accounting provisions due to improper payments made by its wholly owned Israeli subsidiary, Comverse Limited. According to the charging documents, between 2003 and 2006, Comverse Limited used an Israeli agent to transfer approximately $536,000 to individuals connected to Hellenic Telecommunications Organisation S.A. ("OTE"), a partially state-owned Greek telecommunications provider, in order to obtain business from OTE. The agent opened a bank account and incorporated a shell company in Cyprus to funnel the payments, which were represented on Comverse Limited’s books as legitimate agency fees. In its complaint, the SEC alleged that Comverse did not provide anti-corruption training to its employees, conduct due diligence on its sales agents, or maintain adequate controls over payments to agents. To resolve the civil charges, Comverse consented to the entry of a judgment and agreed to pay more than $1.6 million in disgorgement and prejudgment interest. Based on Comverse’s voluntary disclosure, full cooperation with DOJ, and remedial efforts already undertaken and to be undertaken by Comverse, DOJ agreed to resolve the matter through a non-prosecution agreement that required the company to pay a $1.2 million fine.
In the third corporate FCPA settlement in as many days, on April 8, 2011, healthcare product manufacturer Johnson & Johnson resolved a six-year-long investigation into alleged violations of the FCPA. The Government contended that, between 1998 and 2008, Johnson & Johnson entities in Greece, Poland, and Romania provided millions of dollars in bribes and improper travel and entertainment benefits to employees of government-owned hospitals in those countries (with the vast majority occurring in Greece) in order to induce purchases of Johnson & Johnson products. Further, the charging documents allege that, between 2000 and 2003, Johnson & Johnson’s Belgian and Swiss subsidiaries utilized a Lebanese agent to funnel more than $800,000 in kickback payments to the Iraqi government in connection with the United Nations Oil-for-Food Program. (This makes Johnson & Johnson the 17th corporate settlement arising from the DOJ and SEC’s long-running Oil-for-Food Program investigation.)
To resolve these allegations, Johnson & Johnson entered into a deferred prosecution agreement with DOJ and consented to entry of a final judgment resolving the SEC’s civil charges. Johnson & Johnson paid a $21.4 million criminal fine, which reflected a 25% discount from the minimum sentence prescribed by the U.S. Sentencing Guidelines due to the "important role [it played] in identifying improper practices [including by other companies] in the life sciences industry." In connection with its civil settlement, Johnson & Johnson paid approximately $48.7 million in disgorgement plus prejudgment interest.
In addition to the U.S. settlements, Johnson & Johnson subsidiary DePuy International Ltd. settled charges arising from the Greek bribery scheme with the United Kingdom’s Serious Fraud Office ("SFO"). Pursuant to a civil recovery order, DePuy forfeited £4.829 million, plus prosecution costs. Greek authorities also froze €5.785 million in assets held by DePuy’s Greek affiliate in connection with the scheme.
On May 3, 2011, the SEC filed an administrative action alleging that Rockwell Automation, Inc., violated the FCPA’s accounting provisions. According to the SEC, from 2003 to 2006, a former Rockwell subsidiary in Shanghai, China, that produced power transmission products and industrial motors and drives paid $615,000 to Chinese design institutes, which the SEC described as "state-owned enterprises that provided design engineering and technical integration services that can influence contract awards by end-user state-owned customers." The SEC noted that the design institutes provided legitimate services in return for the payments, but alleged that Rockwell also intended for the payments, which were recorded as "cost of sales," to influence the awarding of contracts by state-owned end users over which the design institutes held sway. The SEC also alleged that the Chinese subsidiary spent $450,000 on improper travel for design institute employees and officials of state-owned customers, none of which was "directly related to business purposes." These expenditures were recorded on Rockwell Automation’s books as business expenditures. To resolve this matter, Rockwell consented to the entry of a cease-and-desist order, agreeing to disgorge a total of $2,361,091 in illicit gains, plus prejudgment interest, and to pay a $400,000 civil penalty. According to Rockwell’s public filings, DOJ notified the company in 2010 that it would not be bringing a criminal enforcement action.
The final FCPA enforcement action of the first half of 2011 was also perhaps one of the most significant. For the first time since the launch of the SEC’s Cooperation Initiative in 2010, the SEC agreed to resolve an enforcement action with a deferred prosecution agreement. On May 17, 2011, the SEC announced a deferred prosecution agreement with Luxembourg-based pipe manufacturer Tenaris S.A., whose ADRs are listed on the New York Stock Exchange. According to the SEC, in 2006 and 2007, Tenaris employees made improper payments to officials of a subsidiary of Uzbekistan’s state-owned oil and gas company to obtain confidential information regarding bids submitted by Tenaris’s competitors. Tenaris allegedly used that information to resubmit its bids and undercut its competitors. The payments amounted to between 3% and 3.5% of the awarded contracts and allegedly resulted in Tenaris winning four contracts worth nearly $20 million.
In announcing the settlement, Mr. Khuzami stated that Tenaris’s "immediate self-reporting, thorough internal investigation, full cooperation with SEC staff, enhanced anti-corruption procedures, and enhanced training made it an appropriate candidate for the Enforcement Division’s first Deferred Prosecution Agreement." The two-year agreement obliges Tenaris to augment its compliance program and disgorge $5,428,338 of ill-gotten profits and prejudgment interest. On the same day that the SEC announced its deferred prosecution agreement with Tenaris, the company announced its settlement of related criminal FCPA charges through a two-year non-prosecution agreement requiring it to pay a $3.5 million criminal penalty.
Corporations were not the only ones to find themselves on the right (or wrong) side of the "v" in 2011 FCPA enforcement actions. Three individual defendants settled new FCPA charges during the past six months, with the interesting tie between the three being that each of their former employers had previously settled its own FCPA charges in prior years.
On January 12, 2011, Manuel Salvoch, the former CFO of Miami-based telecommunications company Latin Node, Inc., pleaded guilty to one count of conspiracy to violate the FCPA. Nine days later, on January 21, 2011, Juan Vasquez, Latin Node’s former Chief Commercial Officer joined Salvoch in pleading guilty to FCPA conspiracy charges. Both Salvoch and Vasquez admitted to playing a role in a scheme to bribe officials at Honduras’ state-owned telecommunications provider that, as discussed in our 2009 Mid-Year FCPA Update, led to Latin Node pleading guilty and paying a $2 million criminal fine in 2009. Both Salvoch and Vasquez face a statutory maximum five-year prison sentence at their sentencings in August 2011. As discussed below, two other former Latin Node employees, Jorge Granados and Manuel Caceres, who were indicted in December 2010 on FCPA and money laundering charges, pleaded guilty in May 2011.
Finally, in the first FCPA enforcement action filed in 2011, the former CEO and CFO of chemical manufacturer Innospec, Inc., Paul W. Jennings, agreed to pay a $100,000 civil penalty and to disgorge nearly $130,000 in improper bonuses plus prejudgment interest to resolve his alleged violations of the FCPA’s anti-bribery and accounting provisions. According to the SEC, Jennings was an active participant in Innospec’s bribery of Indonesian and Iraqi officials in connection with fuel additive sales, which was described in our 2010 Mid-Year FCPA Update and 2010 Year-End FCPA Update. In addition to openly discussing bribery in e-mail communications, acknowledging, among other things, that Innospec was "sharing most of [its] profits with Iraqi officials," Jennings allegedly signed annual certifications falsely stating that he had complied with Innospec’s Code of Ethics and FCPA compliance policy.
Following the conclusion of a five-week trial, on May 10, 2011, a jury returned guilty verdicts as to Lindsey Manufacturing Company, two of its top executives, CEO Keith Lindsey and CFO Steve Lee, and one of the company’s third-party intermediaries, Angela Aguilar. Lindsey Manufacturing is a small, privately held corporation based in California that manufactures and sells electricity transmission systems to electric utility companies. As described in our 2010 Year-End FCPA Update, the Government alleged that Lindsey Manufacturing’s sales representative in Mexico, Enrique Aguilar (husband of defendant Angela Aguilar and an indicted fugitive), secured business contracts for the company by passing a portion of his 30% commission to officials of Comisión Federal de Electricidad ("CFE"), Mexico’s state-owned electric utility, in exchange for the officials steering contracts to Lindsey Manufacturing. Despite the length of the proceedings, the jury took little more than one day to convict Lindsey Manufacturing and its two executives of all six FCPA counts in the indictment and Angela Aguilar of conspiracy to commit money laundering.
Sentencing for the Lindsey Manufacturing defendants is currently set for September 16, 2011 (Aguilar was sentenced to time served shortly after her conviction), but, ill content to await their fate, they have filed a motion to dismiss predicated on prosecutorial misconduct. The motion alleges that prosecutors violated the defendants’ Due Process and Brady rights by concealing and failing to correct inconsistent statements made by key witnesses and by failing to turn over exculpatory evidence to the defense in a timely fashion. The most important pieces of disputed evidence are transcripts from an FBI agent’s testimony before the Grand Jury, which the Government produced to the defendants on June 27, 2011, a month after the jury returned its guilty verdicts. Although the prosecution claims that this omission from its prior productions was an inadvertent mistake, Judge A. Howard Matz expressed his concern regarding this development during a recent hearing and ordered the parties to provide additional briefing on the motion to dismiss in advance of a September 8, 2011 hearing.
In addition to being the first corporate trial (and trial conviction) in FCPA history, this case provides at least two critical lessons for companies and corporate executives subject to the FCPA. First, as highlighted in our spotlight section below, Judge Matz issued a significant ruling on the scope of the term "foreign official," finding that employees of state-owned entities may qualify as "foreign officials" for purposes of the FCPA. Second, this case demonstrates that juries are quite willing to convict corporate executives on FCPA charges, even when the only evidence against them is circumstantial and indirect. Indeed, the Government did not present any "smoking gun" evidence to show that Lindsey or Lee knew of the Aguilars’ bribes. Instead, the prosecutors focused on circumstantial evidence, such as the fact that the commission that Lindsey Manufacturing paid the Aguilars was much higher than the one that it paid to its prior sales agent and e-mails that Lee received discussing Enrique Aguilar’s alleged reputation for corruption. Summarizing the Government’s contention, formidable prosecutor Jeffrey A. Goldberg asked again and again how Lindsey and Lee could not have known about the bribes.
No sooner than the ink was dry on the verdict forms from the Lindsey Manufacturing trial in California, a federal district court across the country was preparing to empanel a jury in the year’s second FCPA trial–the first group of defendants to be tried as part of the massive 22-defendant SHOT Show prosecution. As described in our 2010 Mid-Year FCPA Update, FBI agents arrested all 22 SHOT Show defendants on January 18, 2010, following a massive, multi-year sting operation. Prosecutors allege that the defendants participated in a corrupt (but entirely fictitious) deal to pay nearly $1.5 million to the Gabonese Minister of Defense to secure a $15 million defense equipment contract.
Three of the 22 SHOT Show defendants (Jonathan Spiller, Daniel Alvirez, and Haim Geri) pleaded guilty in 2011, joining the Government’s key cooperating witness, Richard Bistrong, who pleaded guilty in 2010. The remaining 19 defendants face trial on a 44-count superseding indictment in 4 trial groupings, the first of which (consisting of Andrew Bigelow, Pankesh Patel, Lee Tolleson, and John Wier III) went before a jury in May and June 2011.
After three weeks of testimony, including that of FBI agents and cooperating defendant Jonathan Spiller, the Government rested its case. Spiller, who pleaded guilty just months before trial, testified that it was clear to him that the deal involved an illegal payment. Interestingly, however, prosecutors did not offer the testimony of Bistrong, the cooperating witness who went undercover for the Government and used his defense industry connections to help the FBI ensnare the 22 SHOT Show defendants. The prosecution’s reasoning for this move became more and more apparent as the pretrial filings, and then the trial, progressed. In (unsuccessful) entrapment motions filed before trial, the defendants alleged that Bistrong, at the direction of his FBI handlers, lied to the sting targets and told them that the proposed deal with the Gabonese military was lawful. During one such conversation, defendant Saul Mishkin read Bistrong an e-mail from his lawyer warning that the proposed transaction could violate the FCPA, to which Bistrong responded by attempting to reassure Mishkin that the deal had been vetted by the U.S. Department of State. At trial, Bistrong’s FBI handler recounted Bistrong’s prior habits of frequenting prostitutes and using cocaine, as well as his history of cheating on drug tests and padding expense reports.
DOJ’s closing arguments, perhaps unsurprisingly, deemphasized the importance of Bistrong’s credibility in light of the extensive audio and video recordings that the prosecutors claimed presented, in the aggregate, "devastating evidence" that each defendant agreed to pay $1.5 million to a person who they believed was the Gabonese Minister of Defense. Defense attorneys, for their part, did more than just attack Bistrong. They directly took on the Government’s allegation that anyone with "common sense" would know that the commission payments were improper, arguing that the Government deliberately "obfuscated" the nature of the commissions and "went out of [its] way in this case to hide the illegality of the transaction from the participants." Emphasizing that commissions are perfectly proper in the industry, that the defendants were not sophisticated enough to understand the illegality of the transaction, and that the Government studiously avoided the use of words like "bribe" and "kickback," defense counsel argued that the defendants did not willfully violate the FCPA.
At least for the moment, defense counsel seem to have gotten the better of the argument. On July 7, 2011, Judge Richard J. Leon declared a mistrial, finding that the jury, which had deliberated without verdict for six days, was hopelessly deadlocked. DOJ prosecutor Joseph Lipton informed the Court that the Government intends to retry the case before a new jury. What this will mean for the second grouping of SHOT Show defendants is, at this time, unclear. At the time of this Update, no information regarding the jury’s concerns or discussions has been disclosed.
Before this case was turned over to the jury, Judge Leon provided critical guidance for interpreting the FCPA’s jurisdictional provisions. After the Government rested, Patel moved for a Rule 29 judgment of acquittal for one of several FCPA counts he was facing. Because Patel is a U.K. citizen and managing director of a non-issuer company located in the United Kingdom, he was charged under 15 U.S.C. § 78dd-3, the FCPA anti-bribery provision that applies to "persons other than issuers or domestic concerns." This section of the statute prohibits corrupt payments made by non-issuers/domestic concerns only to the extent that the person makes use of the mails or any means or instrumentalities of interstate commerce, or otherwise acts in furtherance of the improper payment, "while in the territory of the United States." The Government’s evidence as to this count against Patel was that he mailed a package containing an allegedly corrupt purchase agreement from the United Kingdom to the United States. In granting the motion for judgment of acquittal, Judge Leon reasoned that the single act in question–mailing a package–did not take place in the United States and that, under 15 U.S.C. § 78dd-3, the corrupt act must be taken while in the territory of the United States.
As noted in our 2010 Year-End FCPA Update, 2011 began with five former executives of Control Components, Inc. ("CCI"), expecting to proceed to trial in October 2011. (The allegations underlying this case are described in detail in our 2009 Mid-Year FCPA Update.) During the first half of 2011, however, ongoing discovery disputes and other pretrial litigation (most prominently the "foreign official" challenge described below) led Judge James V. Selna of the U.S. District Court for the Central District of California to push back the trial date to June 5, 2012. Consistent with Assistant Attorney General Breuer’s comments regarding experienced prosecutors joining DOJ’s FCPA enforcement efforts, Charles G. La Bella, a seasoned former federal prosecutor and defense counsel who re-joined DOJ as Deputy Chief of the Fraud Section in November 2010, has entered an appearance in the case as a prosecutor.
Meanwhile, defendant Flavio Ricotti, an Italian citizen who served as CCI’s Vice President of Sales and was extradited from Germany to the United States during the summer of 2010, pleaded guilty on April 28, 2011, to one count of conspiring to violate the FCPA and the Travel Act for his role in the allegedly unlawful bribery scheme. As part of his plea agreement, Ricotti, who faces up to five years in prison, has agreed to cooperate with DOJ’s ongoing prosecution of his co-defendants.
Four defendants continue to await trial before Judge Jose Martinez in the U.S. District Court for the Southern District of Florida on charges related to an alleged scheme to bribe officials of Haitian state-owned telecommunications provider, Telecommunications D’Haiti ("Haiti Teleco") (described in our 2009 Year-End FCPA Update and 2010 Mid-Year FCPA Update). These defendants include Joel Esquenazi and Carlos Rodriguez, executives of a telecommunications company alleged to have made corrupt payments to Haiti Teleco officials; Marguerite Grandison, a third-party consultant who allegedly funneled improper payments to the officials; and Jean Rene Duperval, one of the officials who allegedly accepted bribes. (Duperval is charged with money laundering associated with the alleged corrupt payments, rather than FCPA violations, because the FCPA does not criminalize the receipt of bribes by foreign government officials.)
This case entered 2011 with a February 28 trial date. But scheduling complications arising from defendant Esquenazi’s motion to sever his trial from that of Duperval (due to inculpatory statements made by Duperval that also implicate Esquenazi and which are admissible against the former, but not the latter) have pushed the start date for the trial of Esquenazi and Rodriguez back to July 18. Duperval and Grandison are then scheduled to go to trial shortly thereafter.
A fifth Haiti Teleco defendant, former telecommunications company executive Antonio L. Perez, was sentenced to serve 24 months in prison and ordered to forfeit $36,375 on January 21, 2011. Perez pleaded guilty in 2009 to FCPA conspiracy charges arising from his involvement in the allegedly corrupt payments to Haiti Teleco officials.
As discussed in our 2010 Year End Update, last September, ABB Ltd. settled a criminal FCPA enforcement action stemming from bribes allegedly paid by employees of its Texas subsidiary to CFE officials. A trial date now looms for the former general manager of the implicated ABB subsidiary, John Joseph O’Shea. O’Shea’s trial is currently set to begin in the U.S. District Court for the Southern District of Texas on October 25, 2011. In the meantime, Judge Lynn N. Hughes is considering O’Shea’s motion to dismiss the FCPA-related charges on the ground that CFE employees are not "foreign officials" under the FCPA (discussed below). O’Shea has also waged a pitched battle in recent months for the disclosure of purportedly exculpatory evidence gathered by DOJ in its preparation of the Lindsey Manufacturing prosecution, which also involved alleged corruption at CFE.
In addition to Salvoch and Vasquez, the former Latin Node executives whose guilty pleas are discussed above, two former executives of the company who were indicted in 2010 decided to plead guilty before trial in 2011. On May 18 and 19, respectively, former Latin Node Vice President for Business Development Manuel Caceres and former CEO Jorge Granados pleaded guilty to FCPA conspiracy charges arising from their alleged involvement in the scheme to make corrupt payments to officials of Honduras’s state-owned telecommunications provider. These guilty pleas may been motivated, at least in part, by incriminating evidence provided by Salvoch. The same day that Granados pleaded guilty, DOJ filed a 5K1.1 motion requesting that Judge Paul C. Huck depart downward by 40% from the sentence prescribed by the U.S. Sentencing Guidelines because of Salvoch’s cooperation with the Government in building a case against Granados and Caceres.
And on March 11, 2011, more than two years after he was indicted for his alleged role as a third-party intermediary who funneled corrupt payments from the TSKJ joint venture participants to senior members of Nigeria’s Executive Branch in the Bonny Island bribery scheme, Jeffrey Tesler pleaded guilty to one count of violating the FCPA and one count of conspiring to violate the statute. Tesler, a U.K. citizen, had spent the better part of the last two years fighting extradition from the United Kingdom to the United States by arguing that the conduct at issue was not sufficiently connected to the United States to justify his extradition and that he would be unable to obtain a fair trial in the United States. After these arguments proved unsuccessful in the U.K. courts, up to and including the U.K. High Court, Tesler was extradited to the United States on March 10, 2011. One day later, Tesler pleaded guilty, agreeing to forfeit nearly $149 million to the United States, the largest FCPA-related forfeiture levied against an individual to date. Tesler is currently scheduled to be sentenced on September 8, 2011, the day after his co-defendant, Wojciech Chodan, is sentenced. Chodan, a former sales executive and then consultant of one of the TSKJ joint venture partners, pleaded guilty in December 2010 to one count of conspiracy to violate the FCPA for his role in the scheme.
The prominent FCPA prosecution of Frederic Bourke, which we covered closely throughout a five-week trial in June 2009 (see our 2009 Mid-Year FCPA Update), reemerged into the FCPA spotlight during the first half of 2011. Two years ago, Bourke was convicted of conspiring to violate the FCPA and making false statements to a U.S. government official arising from his role in an alleged scheme to corruptly secure an interest in the Azeri state-owned oil company. One month after Judge Shira Scheindlin of the U.S. District Court for the Southern District of New York denied his motion for a judgment of acquittal or a new trial in October 2009, Bourke was sentenced to one year and one day in prison.
On March 9, 2011, Bourke again moved for a new trial, arguing that the Government knowingly introduced false evidence against him at trial. Bourke contended that statements made by a prosecutor during oral argument before the Second Circuit Court of Appeals demonstrate that DOJ knew that Hans Bodmer, Bourke’s co-defendant and a key prosecution witness against Bourke, would give false testimony at trial. Specifically, Bodmer testified at trial that he spoke with Bourke about corrupt payments at a meeting that took place on February 6, 1998, even though flight records belied Bodmer’s attendance at this meeting. Judge Scheindlin noted this evidentiary "discrepancy" when denying Bourke’s initial motion for a judgment of acquittal, but held that, even if Bodmer perjured himself, there was no reason to direct a verdict in Bourke’s favor or retry the case. DOJ also disputes that the "hypothetical" statements of its counsel at oral argument before the Second Circuit establish that the Government knew that Bodmer would perjure himself. Given this record, Bourke may face an uphill battle in his efforts to secure a new trial.
Even as the resurfacing of the Bourke case was unexpected, the prize for resurrected FCPA case of 2011 (thus far) goes to Si Chan Wooh, a former Executive Vice President of Schnitzer Steel Industries, Inc., who pleaded guilty to FCPA conspiracy charges in 2007. Despite having entered a guilty plea nearly four years ago, Wooh has yet to be sentenced. (His sentencing hearing has been postponed more than 10 times.) Wooh’s plea agreement provides that DOJ will recommend that Wooh serve a probationary, non-jail sentence due to his reporting of the bribes in question to both the company and the Government. But recently filed court documents suggest that there has been internal disagreement within DOJ and the FBI as to whether Wooh should have ever been charged. According to Wooh, an FBI agent who investigated the case expressed concerns in a May 2010 letter to DOJ Fraud Section Chief Dennis McInerney about the Government’s prosecution of him in light of his "whistleblower" posture in the case, his potential lack of knowledge that the payments in question violated the FCPA, and DOJ’s failure to bring charges against more senior Schnitzer Steel officers who allegedly approved the payments. Wooh is reportedly seeking to vacate his guilty plea.
The FCPA does not provide for a private right of action. But one would never know that from the steady stream of shareholder-, competitor-, employee-, and even foreign government-initiated lawsuits filed in federal and state courts across the country seeking to capitalize on allegations of FCPA misconduct. In recent years, enterprising plaintiffs have circumvented the FCPA’s lack of a private right of action by filing derivative lawsuits, securities fraud actions, tort and contract law claims, employment lawsuits, and private actions under the Racketeer Influenced and Corrupt Organizations Act ("RICO").
Mandatory Victim’s Restitution Act
Both Alcatel-Lucent and DOJ filed briefs in opposition to ICE’s petition, arguing that it was inappropriate to consider ICE a "victim" of Alcatel-Lucent’s illegal activity, in part because corruption at ICE ran to the highest levels. In a hearing on June 1, 2011, Judge Marcia Cooke agreed, finding that ICE could not be considered a victim of Alcatel-Lucent’s bribery because corruption was rampant at ICE and that ICE was therefore not entitled to restitution. ICE appealed Judge Cooke’s ruling to the Eleventh Circuit Court of Appeals, but the Eleventh Circuit denied the appeal on June 17, 2011.
By statute, DOJ must provide a written opinion at the request of an "issuer" or "domestic concern" regarding whether DOJ would prosecute the requestor under the FCPA’s anti-bribery provisions for prospective (not hypothetical) conduct that the requestor is considering taking. DOJ publishes these opinions on its FCPA website, but only a party who joins in the request may authoritatively rely on it. The SEC does not itself issue FCPA opinion procedure releases, but has opted as a matter of policy not to prosecute issuers that obtain clean opinions from DOJ. On June 30, 2011, DOJ issued its only opinion of the first half of 2011 (the 56th such release in the FCPA’s 34-year history).
On June 30, 2011, DOJ issued an opinion to a U.S. adoption services provider that qualifies as a "domestic concern." The adoption services provider reportedly intends to pay for two foreign government officials to travel to the United States for two days to learn about the provider’s business. In particular, the requester plans to pay travel vendors directly (rather than providing money to the foreign officials as reimbursement) for only those expenses that are "necessary and reasonable" to achieve the requester’s goal of educating the officials, including economy-class airfare, lodging, local transportation, and meals. The adoption services provider specifically stated that it would not provide any cash to the officials or provide any other benefits in connection with the trip, such as by covering expenses for the officials’ spouses to travel with them or organizing any entertainment or leisure activities during the trip. Any souvenirs provided to the officials would be of nominal value and reflect the provider’s business or logo. Other relevant facts that DOJ apparently considered in rendering its opinion are that (1) the adoption services provider had no non-routine business pending before the two agencies that employed the two officials who would participate; (2) the provider’s routine business before the agencies was regulated; and (3) the particular officials who would participate in the program would be selected by their employers without any input from the provider.
Given these facts, DOJ concluded that it would not initiate an enforcement action for this conduct because the provider’s intended course of action was reasonable and permissible under the FCPA’s affirmative defense for legitimate business promotional expenditures. As noted in the opinion, DOJ’s decision in this matter is consistent with prior opinions that have permitted requestors to pay for certain travel expenses of foreign officials under similar circumstances.
Given the surge of FCPA enforcement and resultant publicity during the past few years, it is no surprise that the FCPA is now garnering renewed interest on Capitol Hill.
The U.S. Chamber of Commerce has recently ramped up its lobbying efforts, first reported in our 2010 Year-End FCPA Update, aimed at enacting pro-business amendments to the FCPA. These increased efforts include the much-publicized retention of former U.S. Attorney General Michael Mukasey as a lobbyist in favor of statutory reforms espoused in an October 2010 report commissioned by the U.S. Chamber Institute for Legal Reform ("ILR"), including
1. adding an affirmative defense for companies with robust compliance programs;
2. adding a "willfulness" element for the imposition of corporate criminal liability;
3. clarifying the definition of "foreign official;"
4. limiting a company’s liability for acts of its foreign subsidiaries; and
5. limiting a company’s successor liability for prior acts of an acquired company.
On June 14, 2011, the House Judiciary Subcommittee on Crime, Terrorism and Homeland Security held a hearing to examine the ILR’s proposals. The Subcommittee heard testimony from four witnesses, including Mukasey and Acting Assistant Attorney General Greg Andres. Although the hearing addressed a wide variety of issues, two topics received particular focus–the proposed corporate compliance defense and the FCPA’s definition of a "foreign official." With the exception of Mr. Andres, the witnesses supported the adoption of a compliance defense like that proposed by the ILR. These witnesses argued that the lack of a compliance defense results in corporate FCPA exposure for the misconduct of individual employees committed in circumvention of robust compliance measures and that prosecutors currently have unlimited discretion to determine how much weight to give a company’s compliance program when deciding how to resolve an enforcement action. Adding a compliance defense, they argued, would incentivize companies to implement more robust ethics and compliance programs. Speaking on behalf of DOJ, Mr. Andres opposed the explicit inclusion of a corporate compliance defense in the FCPA, asserting that doing so would create a loophole under which some forms of bribery would become acceptable.
The other primary focus of the hearing was the uncertainty surrounding the FCPA’s definition of "foreign official." Mr. Andres argued that legislative clarification was unnecessary because adequate guidance already exists, including that available through DOJ’s above-described FCPA opinion procedure. The other witnesses disagreed and suggested that many companies have forgone legitimate business opportunities because they are unable to determine the precise scope of the statute’s reach. They also emphasized the importance of fairness in FCPA enforcement and argued that clarifying the law will help companies ensure compliance in connection with future transactions.
At the close of the hearing, Chairman F. James Sensenbrenner (R-WI) declared that there is no question that the FCPA needs revision, particularly in light of changes in the global economy that have occurred in the 34 years since the statute was enacted. In particular, Chairman Sensenbrenner emphasized his belief that the FCPA’s lack of clarity forces U.S. companies to exercise undue caution, undermining legitimate business activity and U.S. competiveness. As a result, he promised that the Subcommittee would draft a bill to amend the FCPA. Although it is unclear to what extent such a bill would incorporate the ILR’s proposals, there is no doubt that those proposals–and the Chamber’s aggressive lobbying efforts–have set the stage for an important and much-needed debate regarding FCPA reform.
On May 25, 2011, the SEC approved rules implementing the whistleblower award program established by the Dodd-Frank Act. The impact of the rules, which establish the SEC’s procedures for administering the program and clarify the anti-retaliation provisions, on FCPA compliance and enforcement practices is explored in greater detail in our 2010 Year-End FCPA Update. For a full analysis of the new rules, please view a recording of our webcast held on June 8, 2011, or see our Client Alert published on May 31, 2011, "U.S. SEC Adopts Final Rules Implementing Whistleblower Provisions of Dodd-Frank."
Trailing from afar the surge of anti-corruption enforcement activity in the United States, but nonetheless picking up steam, numerous foreign nations continued to ramp up their own anti-corruption enforcement programs in 2011. Although not all front-line reports are positive–indeed, several sobering reports detail just how few countries are rigorously enforcing their laws against foreign bribery–the first half of the year did see several foreign nations introduce new or supplement existing anti-corruption legislation, at least suggesting that enforcement activity in this sphere may someday (even soon) become more than a U.S.-centric novelty.
On May 4, 2011, Global Integrity, an independent non-profit organization, released its annual report tracking global governance and corruption trends across 36 countries. The report was particularly critical of nations in the Middle East and North Africa, where anti-corruption efforts continue to lag behind the rest of the world. Specifically, the report concluded that Egypt has experienced a steady deterioration in this area since 2006, possibly exacerbating some of the issues underlying the January 2011 revolution. The results were similarly bleak for other countries in the region, including Morocco and Yemen. Since 2006, only two countries in the region, Israel and the United Arab Emirates ("UAE"), have obtained a score higher than "Very Weak" on Global Integrity’s annual country assessment. During this period, the average score for countries in the Middle East and North Africa was 51 out of 100, as compared to a global average of 66.
On April 20, 2011, the Organisation for Economic Co-operation and Development ("OECD") Working Group on Bribery released its 2010 Annual Report detailing enforcement of and commitment to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions ("Convention") by its 38 signatory countries. The report’s sobering conclusion is that international anti-corruption enforcement efforts were stagnant in 2010. According to the Working Group, from the Convention’s entry into force in 1999 through 2010, 13 signatories sanctioned 199 individuals and 91 entities for foreign bribery, while the other 25 signatories have yet to impose any sanctions for foreign bribery offenses. In 2010, only five of the signatory nations–France, Germany, Switzerland, the United Kingdom, and the United States–sanctioned individuals or entities for engaging in foreign bribery. Despite these paltry figures, 15 of the signatories reported that there are a total of approximately 260 ongoing foreign bribery investigations in their countries, and only four signatories reported no such investigations in their countries. The 19 remaining signatories did not provide any information regarding ongoing corruption-related investigations.
Approximately one month after the release of the OECD’s 2010 Annual Report, on May 24, 2011, Transparency International ("TI") released its seventh annual progress report detailing the efforts of OECD member states to adhere to the Convention. Like the OECD’s Working Group on Bribery, TI concluded that, although there has been steady progress in the decade since the Convention came into force, there was very little progress in the anti-corruption enforcement arena in 2010. This lack of progress, according to TI, raises concern about whether the Convention is losing its "forward momentum." TI categorized the surveyed countries into three groups, depending on their level of anti-corruption enforcement activity: (1) "Active Enforcement" (Denmark, Germany, Italy, Norway, Switzerland, the United Kingdom, and the United States); (2) "Moderate Enforcement" (Argentina, Belgium, Finland, France, Japan, Netherlands, Spain, South Korea, and Sweden); and (3) "Little or No Enforcement" (Australia, Austria, Brazil, Bulgaria, Canada, Chile, Czech Republic, Estonia, Greece, Hungary, Ireland, Israel, Luxembourg, Mexico, New Zealand, Poland, Portugal, Slovak Republic, Slovenia, South Africa, and Turkey). This was the same breakdown set forth in TI’s last progress report. According to TI, the continued lack of enforcement activity in 21 countries a decade after the Convention entered into force indicates a lack of commitment by those countries’ governments to fight corruption.
In May 2011, prosecutors in Munich, Germany, resolved corruption charges against Thomas Ganswindt, the former member of Siemens AG’s managing board who oversaw the company’s telecommunications business. Ganswindt was charged with three counts of (i) aiding and abetting corruption by way of omission, (ii) tax evasion, and (iii) willful violation of supervisory duties in connection with more than $20 million in bribes allegedly paid by Siemens employees in Argentina between 2000 and 2007. The aiding and abetting and tax evasion charges were resolved on May 19, 2011, when the Munich District Court ordered Ganswindt to pay a fine of €175,000. The supervisory duty charges, which relate to Ganswindt’s alleged failure to heed suggestions from his subordinates about bribes being paid to Argentinian officials, are still pending.
Also in May 2011, Korean anti-corruption prosecutors indicted two representatives from a Korean logistics company and a travel agency for violating Korea’s foreign anti-bribery law by bribing officials of a Chinese government-owned airline. The improper payments, which totaled nearly $7 million, allegedly resulted in the logistics company handling up to 80% of logistics from Korea to China and the travel agency obtaining exclusive rights to sell China-bound airline tickets in Korea. This is the first enforcement action under Korea’s foreign anti-bribery law.
On June 24, 2011, Niko Resources Ltd. pleaded guilty under Canada’s foreign anti-bribery law, the Corruption of Foreign Public Officials Act ("CFPOA"), for allegedly bribing a Bangladeshi minister. The bribes allegedly included provision of a luxury sport utility vehicle and trips to Calgary and New York in 2005. The company was fined C$9.5 million and put on probation for three years. The probation terms are extensive and include obligations to self-report any potential criminal conduct, produce documents to the Canadian authorities, adopt detailed compliance, record-keeping, and monitoring standards, and retain an independent auditor. With the prosecution of Niko Resources, the Canadian authorities may be signaling an increased commitment to enforce CFPOA and a willingness to severely punish those who violate the law. (The only prior conviction under CFPOA resulted in a C$25,000 fine imposed on Hydro Kleen Systems Inc. in 2005.) Coincidentally, the Niko Resources plea agreement was announced approximately one month after the issuance of TI’s 2011 Annual Progress Report, which ranked Canada as the only G7 country engaged in "little or no enforcement" of the OECD Convention.
The United Nations’ Convention against Corruption ("U.N. Convention") obliges its members to enact and enforce strong anti-corruption laws, enhance transparency in government, and cooperate in international law enforcement and crime prevention efforts. During the past six months, Iceland, India, Nepal, and Thailand have ratified the U.N. Convention, and numerous other parties to the U.N. Convention have taken steps to implement new anti-corruption legislation or strengthen existing statutes.
On February 25, 2011, the Chinese National People’s Congress approved an amendment to the country’s criminal laws that criminalized foreign bribery for the first time. The amendment, which went into effect on May 1, 2011, prohibits all citizens of the People’s Republic of China ("PRC"), all natural persons physically located in the PRC, and all companies, enterprises and institutions organized under PRC law, including joint ventures, wholly foreign-owned enterprises and representative offices, from giving any "property to any foreign public official or official of an international public organization" to obtain any "illegitimate commercial benefit." The terms "illegitimate commercial benefit," "property," "foreign public official," and "official of an international public organization" are undefined in the statute, and it remains to be seen how they will be interpreted. There are no exceptions, exemptions, or affirmative defenses set forth in the new law, and violators are subject to both fines and imprisonment for up to 10 years. Previously, China’s bribery laws prohibited commercial bribery and official bribery of PRC government officials, but not bribery of foreign public officials.
On May 4, 2011, President Dmitry Medvedev of Russia signed landmark legislation that punishes those involved in foreign bribery schemes, including corporate entities, any intermediaries involved in the bribery, and the foreign official recipients of improper payments. The law provides for both imprisonment and fines of up to 100 times the amount of the bribe, with a maximum fine of 500 million rubles (approximately $18 million). The law provides immunity from liability for any bribe payers or intermediaries that voluntarily report their violations and/or assist with the investigation. Just three weeks after the law’s passage, on May 25, 2011, the OECD formally invited Russia to join its Working Group on Bribery.
Although there remains skepticism about the seriousness of the country’s efforts to fight corruption, the Russian constitutional court, in a highly publicized decision issued on June 30, 2011, backed the constitutional free speech rights of government officials who become whistleblowers. The court clarified that government officials are not absolutely prohibited from disclosing information learned during their terms of service, meaning that public statements by government officials that violate their confidentiality obligations will need to be judged in light of the content of the statements, the likely public interest in the statements, and a balancing of the likely damage to the state by disclosing the information against the constitutional free speech rights of the officials.
In March 2011, the government of India circulated a draft anti-corruption bill that would prohibit bribery of foreign public officials and officials of public international organizations. Under the bill, any person holding a legislative, executive, administrative, or judicial office of a foreign country qualifies as a "foreign public official," and "official of a public international organization" encompasses any international civil servant and any person authorized to act on behalf of such an organization. In addition, India has been debating another bill that would create an independent anti-corruption body, the Lokpal, which would consist of one chairperson and two members and would possess the authority to (1) initiate prosecutions against public servants and private entities; (2) modify or cancel licenses, leases, permissions, and contracts; (3) blacklist entities accused of corruption; (4) protect whistleblowers; and (5) summon and enforce attendance of witnesses, receive evidence, and commission witnesses or documents. The "Lokpal Bill" would also target those who aid and abet such offenses, and violators would face up to seven years in prison and monetary penalties. Although the proposal of anti-corruption legislation represents a step forward in the battle against corruption in India, the legislature has failed to enact similar bills numerous times in the past.
Other countries that have proposed or adopted anti-corruption legislation during the past six months include Indonesia, Jordan, Morocco, Taiwan, and Ukraine. The legislation proposed in Indonesia, which ratified the U.N. Convention in 2006, would replace Indonesia’s existing anti-graft legislation and would address foreign public bribery, commercial bribery, and match-fixing in sporting events. In Jordan, King Abdullah II authorized the country’s Anti-Corruption Commission to bring corrupt officials to justice, declaring that combating corruption is now a top priority for the country. All of Jordan’s governmental institutions, including the royal court, are now subject to scrutiny by the Commission. In Morocco, King Mohammed VI adopted a draft anti-corruption law that aims to protect witnesses and whistleblowers, in the hope of reducing the fear of reporting corruption. Recently enacted Taiwanese legislation established a new anti-corruption agency that will be responsible for formulating, coordinating, and promoting Taiwan’s anti-corruption policies and regulations, including by conducting investigations and supervising the ethics divisions of other governmental agencies. Finally, the Ukrainian Parliament recently enacted legislation targeting corruption within its own ranks. The bill, which went into effect on July 1, 2011, obliges elected officials to disclose their income and expenditures publicly.
In April 2010, the United Kingdom enacted the Bribery Act and immediately moved to the forefront of the global fight against bribery and corruption. The Bribery Act, in large part, creates four separate bribery offenses that address both public and private sector bribery, including two prohibiting bribery and receipt of a bribe, the discrete offense of bribing a foreign public official, and a corporate offense of failing to prevent bribery. It also establishes personal criminal liability for senior officers of a company that commits a bribery offense with the consent or connivance of the officer. The Bribery Act does not contain an exception for facilitation payments like the FCPA, and it applies extraterritorially, reaching any individual "closely connected" with the United Kingdom and, with respect to the corporate offense of failing to prevent bribery, any commercial organization that carries on a business or part of a business in the United Kingdom. Penalties for violations of the Bribery Act include unlimited fines for companies and individuals and a term of imprisonment of up to 10 years for individual defendants.
Gibson Dunn has published numerous analyses of the Act’s key provisions, including the corporate offense of failing to prevent bribery, and met with SFO Director Richard Alderman and other senior officials at the SFO to discuss their views on application and enforcement of the Act. For additional analysis and summaries of these discussions, please see our comprehensive academic study of the Bribery Act entitled "The British Are Coming!: Britain Changes Its Law on Foreign Bribery and Joins the International Fight Against Corruption," as well as our recent Client Alerts "UK Enacts New Bribery Act," "UK Government and Serious Fraud Office Publish Guidance on the Bribery Act," "UK Serious Fraud Office Discusses Details of UK Bribery Act with Gibson Dunn," and "UK Serious Fraud Office Director Alderman Visits Again with Gibson Dunn, Discusses Bribery Act Enforcement and Lays Out Engagement Strategy."
In preparation for the Bribery Act’s entry into force on July 1, 2011, the U.K. Ministry of Justice and the SFO, which is charged with enforcing the Act, recently issued guidance for both companies and prosecutors regarding enforcement of the Act.
Significantly, the Bribery Act contains no exception for "facilitating payments," unlike the FCPA, meaning that compliance with the FCPA in this regard does not necessarily ensure compliance with the Act. With respect to the SFO’s position on such payments, Director Alderman has stated that he does "not expect facilitation payments to end the moment the Bribery Act comes into force." And the SFO has provided guidance indicating that it will look to the following six factors when considering how to treat companies who continue to permit facilitating payments in limited instances:
Although many multinational companies may elect to prohibit facilitating payments in order to ensure compliance with the Bribery Act, those that continue to permit facilitating payments will need to be mindful of these factors when revising and updating their compliance programs in light of the Bribery Act.
On March 30, 2011, the U.K. Ministry of Justice released its long-awaited guidance intended to assist organizations in developing anti-bribery compliance programs sufficient to avoid liability for the offense of failing to prevent bribery. The only affirmative defense to a charge of failing to prevent bribery is proof that the organization had an adequate compliance program in place to prevent such misconduct. The guidance issued by the Ministry of Justice sets forth the following six principles to guide commercial organizations in developing an adequate anti-bribery compliance program:
The U.K. Secretary of State for Justice has stated that the Bribery Act will be implemented in a workable way, particularly for small firms with limited resources. Accordingly, even with these six guiding principles in place, determinations regarding whether an organization has adequate procedures in place to prevent bribery will be made on a case-by-case basis, taking into account the particular facts and circumstances of each case.
On March 30, 2011, the Director of Public Prosecutions and Director Alderman jointly issued guidance for prosecutors regarding the Bribery Act. To prosecute an alleged act of bribery, one of the two directors’ consent is required. When considering whether to grant their consent to prosecute, the directors’ decisions will be influenced by the particular facts and circumstances of each individual case, including (1) whether there is sufficient evidence to provide a realistic prospect of conviction and, if so, (2) whether a prosecution is in the public interest. For the offenses of bribery, accepting a bribe, and failure to prevent bribery, the factors that will inform the public interest determination include the following:
Factors Tending To Favor Prosecution
Factors Tending Against Prosecution
For the offense of bribing foreign public officials, the public interest factors are as follows:
Factors Tending To Favor Prosecution
Factors Tending Against Prosecution
The Bribery Act took effect on July 1, 2011. It was originally due to be implemented in April 2011, but this date was delayed after a torrent of complaints from the worldwide business community about various provisions in the Act. All signs suggest that the SFO is poised to use the Bribery Act to vigorously pursue violators, although the SFO has lost some key resources over the past six months. Robert Amaee, the former Head of the Anti-Corruption and Proceeds of Crime Unit, Charlie Monteith, the former Head of Assurance, and Vivian Robinson QC, the very talented former General Counsel, have all announced that they will be leaving the SFO to enter private practice. Although these departures will certainly impact the SFO’s ability to bring cases in the short term, most expect a vigorous enforcement regime moving forward.
That is the question on every FCPA practitioner’s lips these days. During the first six months of 2011, defendants under indictment for FCPA offenses in three separate cases filed motions to dismiss predicated on the Government’s expansive view of who qualifies as a "foreign official," particularly as that term has been applied to encompass employees of foreign state-owned enterprises ("SOEs").
The FCPA prohibits, inter alia, corrupt payments to "any foreign official," which is defined in the statute to include "any officer or employee of a foreign government or any department, agency, or instrumentality thereof." The critical question, therefore, is whether an SOE qualifies as an "instrumentality" of a foreign government, a term that is left undefined in the FCPA.
In two separate FCPA enforcement actions being prosecuted in the Central District of California–the Lindsey Manufacturing case and the CCI case–the defendants moved to dismiss the FCPA counts against them on the basis that employees of SOEs could not, as a matter of law, be considered "foreign officials" within the meaning of the FCPA. Gibson Dunn filed the seminal, comprehensive brief supporting the motion to dismiss on behalf of one of the CCI defendants, and that brief has been used by the others in supporting their own motions.
Although the SOEs identified in both cases were quite different–the CCI case concerns commercial energy companies allegedly owned in whole or in part by foreign governments, and the Lindsey Manufacturing case involves a Mexican state-owned electric utility that outwardly advertises itself as a government "agency"–the defendants in both cases advanced similar arguments:
1. The plain meaning of the word "instrumentality" as used in the FCPA does not encompass SOEs and must be construed in relation to the terms "department" and "agency," which precede it in the statute and refer to traditional governmental units or subdivisions;
2. "Instrumentalities" of a foreign government should include government branches, administrations, and commissions, all of which either set forth and administer public policy or exercise political authority;
3. DOJ’s interpretation of the statute would lead to absurd results, such as transforming U.S. citizens who work for American companies with some component of foreign government ownership (e.g., General Motors) into "foreign officials"; and
4. DOJ’s position is not supported by the FCPA’s extensive legislative history, which evidences a congressional intent to criminalize corrupt payments made to persons more traditionally associated with foreign government entities (e.g., "Presidents, Prime Ministers, and Princes").
Finally, defendants argued that, unless DOJ could show that its interpretation was unambiguously correct, defendants’ interpretation should be adopted under the rule of lenity and, alternatively, that the statute was unconstitutional and void for vagueness as applied to them because it failed to provide adequate notice that employees of SOEs could be considered "foreign officials."
In both cases, the respective judges denied defendants’ motions, holding that employees of SOEs could qualify as "foreign officials" in appropriate circumstances and enumerating a number of non-exclusive factors that may be considered in determining whether a particular SOE is an "instrumentality" of a foreign government, thereby rendering its employees "foreign officials" under the FCPA.
On April 20, 2011, Judge Matz held in the Lindsey Manufacturing case that "because a state-owned corporation having the attributes of CFE may be an ‘instrumentality’ of a foreign government within the meaning of the FCPA . . . officers of such a state-owned corporation . . . may therefore be ‘foreign officials’ within the meaning of the FCPA." In reaching this conclusion, Judge Matz held that CFE could qualify as a government "instrumentality" even under the definition of the word proposed by defendants, which encompassed government "commissions." Although it did not affect the court’s ultimate holding, the court did find that the legislative history of the FCPA was "inconclusive." Importantly, the court set forth a "non-exclusive list" of factors to be considered when determining whether a particular SOE could be considered an "instrumentality" of a foreign government:
Holding that "CFE has all these characteristics," Judge Matz denied the Lindsey Manufacturing defendants’ motion to dismiss, and, as noted previously, they were subsequently convicted of all charges against them.
Less than one month later, on May 18, 2011, Judge Selna ruled on the motion filed by Gibson Dunn in the CCI case that "the question of whether state-owned companies qualify as instrumentalities under the FCPA is a question of fact." Acknowledging that "a mere monetary investment in a business entity by the government may not be sufficient to transform that entity into a governmental instrumentality," the court nonetheless held that "when a monetary investment is combined with additional factors that objectively indicate the entity is being used as an instrument to carry out governmental objectives, that business entity would qualify as a governmental instrumentality." The factors that Judge Selna stated "bear on the question of whether a business entity constitutes a government instrumentality" are the following:
The court further stated that "[s]uch factors are not exclusive, and no single factor is dispositive," explaining that the "chief utility" of the factors "is simply to point out that several types of evidence are relevant when determining whether a state-owned company constitutes an ‘instrumentality’ under the FCPA–with state ownership being only one of several considerations." Judge Selna did not consider the legislative history of the FCPA, noting that such an analysis is unnecessary because "the statutory language of the FCPA is clear."
Given Judge Selna’s ruling that the question of whether an SOE employee is one of fact for the jury, the battle lines have now shifted to jury instructions. On June 30, 2011, each side filed its proposed jury instructions, which Judge Selna has agreed to rule on at a pretrial hearing scheduled for August 12, 2011.
As noted above, a third challenge to the DOJ’s interpretation of "foreign official" has been filed by John Joseph O’Shea and fully briefed in the U.S. District Court for the Southern District of Texas. That case, like the Lindsey Manufacturing case, concerns alleged bribes paid to employees of the CFE, and it remains to be seen whether Judge Hughes will agree with his counterparts in California and deny O’Shea’s motion to dismiss.
Although FCPA enforcement "stats" are certainly down in the first half of 2011, there was no shortage of significant anti-corruption developments during that time, and few will credibly suggest that FCPA enforcement is a phenomenon in decline. From the Lindsey Manufacturing and SHOT Show trials to the U.S. Chamber of Commerce’s efforts to lobby for revision of the statute to the enactment of new anti-corruption legislation around the world, it is clear that the worldwide focus on combating graft will remain strong for the foreseeable future.
Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these issues. We have more than 65 attorneys with FCPA experience, including a number of former federal prosecutors, spread throughout the firm’s domestic and international offices. Joe Warin, a former Assistant U.S. Attorney, currently serves as FCPA counsel to the first non-U.S. compliance monitor and as compliance monitor for another company that settled FCPA charges during 2010. In 2009, he completed his compliance consultancy for Statoil A.S.A. pursuant to its DOJ and SEC FCPA settlements. Please contact the Gibson Dunn attorney with whom you work, or any of the following:
F. Joseph Warin (202-887-3609, [email protected])
Daniel J. Plaine (202-955-8286, [email protected])
Judith A. Lee (202-887-3591, [email protected])
David P. Burns (202-887-3786, [email protected])
David Debold (202-955-8551, [email protected])
Brian C. Baldrate (202-887-3717, [email protected])
Michael S. Diamant (202-887-3604, [email protected])
John W.F. Chesley (202-887-3788, [email protected])
Patrick F. Speice, Jr. (202-887-3776, [email protected])
Oleh Vretsona (202-887-3779, [email protected])
Elizabeth H. Goergen (202-887-3623, [email protected])
Joel M. Cohen (212-351-2664, [email protected])
Lee G. Dunst (212-351-3824, [email protected])
Mark A. Kirsch (212-351-2662, [email protected])
Jim Walden (212-351-2300, [email protected])
Alexander H. Southwell (212-351-3981, [email protected])
Lawrence J. Zweifach (212-351-2625, [email protected])
Adam P. Wolf (212-351-3956, [email protected])
Debra Wong Yang (213-229-7472, [email protected]),
the former United States Attorney for the Central District of California,
Michael M. Farhang (213-229-7005, [email protected])
Douglas M. Fuchs (213-229-7605, [email protected])
Marcellus A. McRae (213-229-7675, [email protected])
Patrick Doris (+44 20 7071 4276, [email protected])
Charlie Falconer (+44 20 7071 4270, [email protected])
Philip Rocher (+44 20 7071 4202, [email protected])
Barbara Davidson (+44 20 7071 4216, [email protected])
Tim Vogel (+44 20 7071 4271, [email protected])
© 2011 Gibson, Dunn & Crutcher LLP
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