Category: Bribery and Corruption

The One with the Coffee Cup Full of Cash

Last week, the sentence of Michael Jarigese was upheld by an appellate court. Mr. Jarigese had been sentenced to 41 months of imprisonment and three years of supervised release in connection with a bribery case. 

Mr. Jarigese was the vice president of Castle Construction Corporation, and the president of its successor company, Tower Contracting LLC, when he signed three contracts with the City of Markham for public construction projects. 

Before awarding the third contract to Castle, Markham’s Mayor Webb asked Mr. Jarigese to hire his KAT Remodeling company as a subcontractor. The subcontract was to remove and haul construction debris and to level the ground at the third project. KAT Remodeling and Mayor Webb has no construction background and the invoices were bogus. 

Mr. Jarigese paid for the bogus contract with a $75,000 check.  The remaining $25,000 was paid by stopping by the Mayor’s office with some coffee cups. But instead of coffee, the cup was full of $2500 in cash.  

The jury only took two hours before convicting Mr. Jarigese and his construction company for honest services wire fraud and federal bribery. 

What was unusual about this case was that Mayor Webb was the cooperating witness for the prosecution. He had identified those contractors who had paid him bribes. He was working with prosecutors to help reduce the sentence for his conviction of wire fraud and tax fraud. Typically, it’s the contractors and other bribe payers who cooperate with the government and testify against the politicians who took the money. 

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Buy Assets From a Foreign Bank Without Violating the FCPA

A quirky feature of the Foreign Corrupt Practices Act is that you can ask the Department of Justice to opine on whether your proposed action would violate the FCPA. Generally, one or two of these FCPA opinions pop up each year. It’s been a six-year drought since the last one.

Some of the FCPA opinions have provided great insight into how the DOJ thinks about FCPA compliance. This latest is not one of those. I scratch my head wondering why the Requestor even bothered.

The Requestor planned to buy some assets from a state-owned foreign bank. Another subsidiary of that state-owned foreign bank helped with the transaction and wanted to get paid a fee. The opinion was on whether it was okay to pay that fee.

Sure, the parties are state-owned and the people working at them should be treated as government officials under the FCPA for compliance purposes. The FCPA doesn’t prevent US firms from entering into transactions with foreign companies, even if the company is state-owned. You just can’t pay a bribe to the people involved.

There is nothing in the facts that says any individual is getting paid a fee. The money is all going to a company. The opinion includes a statement that the Requestor has no belief that any of the money will be diverted to an individual.

The Requestor received legitimate services from the company, the payment is commensurate with the services and there is no indicia of corrupt offers.

The latest release notes that three prior releases all addressed this topic: 09-01, 97-02, and 87-01. They each had a declination when the payment was going to the government entity and not to an individual.

The fee to be paid was only $237,500. I would guess that the Requestor paid almost as much in legal fees to get the FCPA opinion.

Whatever uncertainty the Requestor had in making the payment I guess has been erased. We can pile this fact pattern into the stack of things that are okay to do.

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The New Anticorruption Requirements of the New NAFTA.

>The Trump Administration took great pride in tearing up the North American Free Trade Agreement and imposing a new framework for trade between the United States, Mexico, and Canada. Of course it had to be re-branded, with “America First”, as the US-Mexico-Canada Agreement. This refreshed version of NAFTA includes some increased labor protections for workers, increased standards for duty-free auto shipments, increased access to the Canadian dairy market for US farmers, and a slight tweak to the deal’s dispute-resolution system. I’m sure industry will adjust to the small changes while keeping the important cross-border commerce and manufacturing running smoothly.

One big change is Chapter 27 which adds a new tri-nation framework for anticorruption.

Some highlights of the USMCA’s anticorruption chapter:

  • Each country has to adopt or maintain legislative and other measures as may be necessary to establish public corruption as criminal offenses under its law, in matters that affect international trade or investment, the embezzlement.
  • Each country has to impose internal auditing controls and accounting standards to prohibit the off-the-books spending.
  • Facilitation payments are discouraged, but not prohibited.
  • Bribes can’t be tax deductible
  • Each country has to adopt or maintain appropriate measures to protect whistleblowers on public corruption from unjustified treatment.

This all sounds like most of what is already in place in the US and is exporting those requirements to Canada and Mexico.

Interesting that it take the step further to prohibit private corruption and bribery that was tackled under the UK Bribery Act.

In a concession to the FCPA, facilitation payments (however you want to define them) are not prohibited. Each country at least has to recognize that they have “harmful effects.”

If you expect there to be changes in the United States, you clearly have not been paying attention to the dysfunction in Congress. Assuming the House reverts back to Democratic control, I expect two years of investigation into President Trump and his administration with little else happening.

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Real Estate Broker Guilty of FCPA Violations

I’m not sure how I missed the sad tale of Joohyun Bahn before now. He agreed to an SEC order last week for FCPA violations. This was in connection with his criminal sentencing that also happened last week, after first being arrested in January 2017.

It’s uncommon for real estate to insect with the FCPA, but this tale involved a building in Vietnam and the potential acquisition by a Middle East sovereign wealth fund. The tale also ends up ending the political career of Ban Ki Moon, the former U.N. Secretary General who was expected to run for president of South Korea.

Mr. Bahn moved around in various real estate jobs around New York before landing a nice job at a real estate firm. Shortly after joining the firm, his father offered him an opportunity. His father was involved with company that built a trophy building in Vietnam known as Landmark 72. This would be Mr. Bahn’s first international deal, the opportunity to earn a big commission, help his father, and help a big company.

Mr. Bahn was clearly in over his head.

He fell in the treacherous circle of Malcolm Harris who claimed he could help with the Landmark 72 deal for a cut of the commission. He told Bahn to focus on Middle East sovereign wealth funds. He claimed to have a contact at the Qatar Investment Authority who was interested.

Then Harris made his play and told Bahn that his contact at the QIA required a bribe to facilitate the purchase. Bahn brought this news to his father and the company apparently agreed to make the $500,000 up front payment. Harris pocketed the money. Harris continued to play Bahn along while spending the bribe.

As part of his sentencing, Bahn said that he knew the bribe was wrong. He didn’t realize it was an FCPA violation. He signed an anti-bribery policy at the real estate firm. He just thought bribery was a necessary part of international business, a business he had little exposure to.

While Bahn was getting strung along by Harris, he in turn was stringing along the building owner. Harris gave Bahn a forged letter of intent from QIA. Bahn gave the building owner a letter he had forged from a UK bank showing that the QIA had put funds into an escrow account as a deposit.

It seems that QIA had some interest in the Landmark 72. But that all fell apart when the building owner came under scrutiny for corruption. The chairman committed suicide and detailed bribes he had paid in his suicide note. The $500,000 bribe by Bahn was revealed in the underlying investigation.

The timing of Mr. Bahn’s arrest coincided with the conclusion of Mr. Bahn’s uncle’s term as U.N. Secretary-General and reports that Ban Ki Moon intended to run for the presidency of South
Korea. Mr. Bahn was arrested the day before Ki Moon was scheduled to fly from New York back home to South Korea. Because of the timing, instead of focusing on his run, Ki Moon was forced to respond to the indictment against his brother and nephew instead of his candidacy. A month later, he withdrew from the race.

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Hiring Relatives Government Officials Can Be an Illegal Bribe

Back in 2015, the Securities and Exchange Commission made it clear that providing jobs to family members of foreign government officials could be a violation of the Foreign Corrupt Practices Act. That SEC investigation found that BNY Mellon did not evaluate or hire the family members in accordance with its hiring standards and require a minimum grade point average and multiple interviews. The family members did not meet the criteria yet were hired with the knowledge and approval of senior BNY Mellon employees in order to corruptly influence foreign officials and win or retain contracts to manage and service the assets of the sovereign wealth fund.

It turns out that BNY Mellon was not the only one doing that. The SEC and DOJ brought charges against Credit Suisse for doing the same thing.

From 2007 to 2013, Credit Suisse provided valuable employment to the relatives and friends of certain foreign government officials in the “Asia-Pacific region” as a personal benefit to the requesting officials in order to obtain or retain investment banking business or other benefits for Credit Suisse. According to the SEC Order, this was a violation of the bank’s policy. The Order describes three separate instances when Credit Suisse did not hire a relative of a government official because of the FCPA risk.

But there were instances where managers wetn around the process and sneaked those relatives into the hiring process. The SEC found plenty of “smoking gun” emails and documents.

Credit Suisse maintained spreadsheets that listed “referral hires” or “relationship hires.” These spreadsheets included information identifying the referring client or relationship when the relationship was with a government regulator. Some of these spreadsheets identified the “[c]ontribution” of the referral hire, including in at least three instances, deals specifically attributable to the relevant relationship. In an email to colleagues, a Credit Suisse employee explained: “Relationship hires have to translate to $” or “the relationship is worthless to our organization.” This email was forwarded to a senior Credit Suisse banking official in the U.S. In a different email, a senior Credit Suisse banker stated that a referral hire “will get us a US$1bn bond deal. . . . His family requested to change his status to permanent with CS. Given [] the level of importance of this deal, we will decide to renew his contract for another 24 months instead of permanent.”

Some of these relatives may have been well- qualified (or at least marginally qualified) for the positions. But some were clearly not qualified and should have been fired for their behavior during the onboarding. During her probationary period one such relative referred to “Referral Hire A”, she exhibited unprofessional behavior.

  • She failed to attend a mandatory boot camp.
  • Brought her mother to training events, and left early.
  • She received the worst grade in the class on an assessment, commenting that “from the looks of her assessment she didn’t even try (she filled in a pattern of 5As in a row, 5 Bs in a row, etc. on the answer key).”
  • Referral Hire A “has been leaving at 4 pm right after every lecture every day this week while the rest of the class is working until at least 9pm, 10 pm.”

Not only was Referral Hire A approved as a employee after her probationary period, she was promoted a year later.

She was clearly unqualified to be a junior investment banker.

But as Matt Levine points out in his newsletter, she is qualified to be a senior investment banker.

When banks hire senior bankers from their competitors, they don’t quiz them on Excel shortcuts; they hire them for their Rolodexes, their books of business, their reputation and relationships with clients.

She did make the deal possible for Credit Suisse. One transaction with her relatives state-owned enterpise generated approximately $2,680,733 in revenue for Credit Suisse. That is what a senior investment banker does.

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The Most Massachusetts Bribe

One thing that is clear about bribery and corruption is that the payments are not always envelopes full of cash. The FCPA opinions have long pointed out that directing charitable donations to the decision-makers “pet” charity could be a bribe. As former Director of the the Division of Enforcement at the SEC, Andrew Ceresney pointed out, “bribes come in many shapes and sizes.”

That shape could include coffee. It was not just a cup of coffee, but hundreds of pounds of coffee that lead to this story.

Former Massachusetts state senator Brian A. Joyce is facing a series of charges for racketeering, mail fraud, wire fraud, honest services fraud and extortion.

Among the most Massachusetts of charges is the allegation that Joyce took official action, or pressured others to take official action, on behalf of a coffee-business franchise owner in exchange for hundreds of pounds of free coffee. The indictment and press release don’t say which “coffee and pastry fast-food business” franchise was involved, but there is only one in Massachusetts with that many locations in New England: Dunkin’ Donuts.

The indictment alleges that the franchise owner gave Joyce 504 pounds of coffee at Joyce’s request in exchange for moving favorable legislation through the Massachusetts legislature.

Not to paint Joyce as a completely bad guy, the indictment points out that Joyce allegedly gave a pound of coffee to each state senator. Unfortunately, that generosity caught the attention of an intrepid reporter which lead to a news story and an ethics investigation. Allegedly, Joyce conspired with the franchise owner to falsify invoices for legal services and state that the coffee for given in barter.

The story is reminder that bribery comes in many shapes and sizes, including small, medium and large, with cream and sugar.

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Revised FCPA Corporate Enforcement Policy

The case for self-reporting failures has always been a nebulous promise from the government that the enforcement will be more lenient than if not self-reported. There has been limited proof that this has been true. That may be largely because we don’t hear about the self-reported problems because there is little to no government action in those instances.

The Department of Justice is stepping up its treatment of self-reporting bribery violations under the Foreign Corrupt Practices Act. In April, the DOJ had started a new program that it would provide a 50% discount on fines under the FCPA along with generally more leaner prosecution settlement terms.

On Wednesday, the DOJ that it was going further with the program.

Deputy Attorney General Rod J. Rosenstein said in a speech Wednesday that the DOJ is changing the policy again to increase the number of companies voluntarily disclosing their bribery misconduct. That would allow the DOJ to allocate resources to pursue the individuals responsible for the bribery.

First, the updated FCPA Corporate Enforcement Policy states that when a company satisfies the standards of voluntary self-disclosure, including full cooperation and appropriate remediation, there will be a presumption that the DOJ will resolve the corporate case through a declination. Of course, that presumption is swiped away if there are aggravating circumstances related to the nature and seriousness of the offense, or if this is not the offender’s first time.

Second, if a company voluntarily discloses wrongdoing and satisfies all other requirements, but aggravating circumstances compel an enforcement action, the Department will recommend a 50% reduction off the low end of the Sentencing Guidelines fine range. Once again, recidivists may not be eligible. (The DOJ does not like repeat business.)

Third, the updated FCPA Corporate Enforcement provides details about how the Department evaluates an appropriate compliance program, which will vary depending on the size and resources of a business.

That third point will likely set some new standards in the compliance community in defining a good compliance program.

“Implementation of an effective compliance and ethics program, the criteria for which will be periodically updated and which may vary based on the size and resources of the organization, but may include:

  • The company’s culture of compliance, including awareness among employees that any criminal conduct, including the conduct underlying the investigation, will not be tolerated;
  • The resources the company has dedicated to compliance;
  • The quality and experience of the personnel involved in compliance, such that they can understand and identify the transactions and activities that pose a potential risk;
  • The authority and independence of the compliance function and the availability of compliance expertise to the board;
  • The effectiveness of the company’s risk assessment and the manner in which the company’s compliance program has been tailored based on that risk assessment;
  • The compensation and promotion of the personnel involved in compliance, in view of their role, responsibilities, performance, and other appropriate factors;
  • The auditing of the compliance program to assure its effectiveness; and
  • The reporting structure of any compliance personnel employed or contracted by the company. “

This new policy now moves the promises of leniency to something much more tangible. I expect it will also be more effective at causing companies to shake the skeletons out of their closets and disclose FCPA violations.

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Political Party Contributions and the SEC’s Pay-to-Play Rule

I was looking through an issue under Rule 206(4)-5. The Securities and Exchange Commission limits the ability of investment advisers and fund managers to contribute to certain politicians that can influence investment decisions for state pension funds. Under Rule 206(4)-5, you can contribute up to $150 to any candidate or up to $350 if you can vote for the candidate. I was looking at how that rule applies to political parties.

Section (a)(2) makes it unlawful for an investment adviser or any of its covered associates

(ii) To coordinate, or to solicit any person or political action committee to make, any:
…

(B) Payment to a political party of a state or locality where the investment
adviser is providing or seeking to provide investment advisory services to a government
entity.

So it’s not unlawful to make a contribution to the party, but it’s unlawful to solicit others to make a contribution to the party.

Just to confirm the SEC responses seems to agree with this reading of the rule.

Question V.3. Contributions to Others.

Q: If an adviser subject to the pay to play rule, or one of the adviser’s covered associates, makes a contribution to a political party, PAC or other committee or organization, but not to an official, could the adviser still be subject to a two-year time out under rule 206(4)-5(a)(1)?

A: A contribution to a political party, PAC or other committee or organization would not trigger a two-year time out under rule 206(4)-5(a)(1), unless it is a means to do indirectly what the rule prohibits if done directly (for example, the contribution is earmarked or known to be provided for the benefit of a particular political official) (see footnote 154 of the Adopting Release).

We note, however, that the pay to play rule prohibits advisers and their covered associates from coordinating or soliciting any person (including a non-natural person) or PAC to make any payment to a political party of a state or locality where the investment adviser is providing or seeking to provide investment advisory services to a government entity (see rule 206(4)-5(a)(2)(ii)). (Posted March 22, 2011).

A covered associate at an investment adviser could attend a state political party fundraiser, but not host one.

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Excessive Travel as a Bribe Under the FCPA

The recent PTC Case caught my attention for a few reasons. First, the company is based near my house and I biked past it’s headquarters this past weekend. Second, the actions stated in the headline were not good, but seemed to be at the extreme of what I thought would be considered bribery.

ptc

According to the SEC’s press release, an SEC investigation found that two Chinese subsidiaries of PTC Inc. provided non-business related travel and other improper payments to various Chinese government officials in an effort to win business. From 2006 to 2011, two PTC China-based subsidiaries provided improper travel, gifts, and entertainment totaling nearly $1.5 million to Chinese government officials who were employed by state-owned entities that were PTC customers.

The travel was sightseeing trip in the US in connection with visiting the corporate headquarters in Massachusetts.

That does not sound so bad. Not great. But not a $28 million fine bad.

There is obviously the red flag of PTC selling to a China-based company. Most would start with the assumption that the company is state owned and therefore the employees could be considered government officials. If they are government officials you have to be worried about the FCPA.

The SEC order states that the employees are government officials and does not spend any time addressing this.

Were the trips meant to generate business for PTC? The SEC order only mentions a small connection, stating that the officials who went on the trips were “often” signatories on the purchase agreements.

It’s a settlement order and not a pleading, so we have to just agree that the individuals were government officials and that the things given to them were meant to influence their purchasing decision.

I’ve said it before and I stand behind the statement:

“If your are trying to figure out whether a company is a private company or an “instrumentality” of a foreign government under the Foreign Corrupt Practices Act you are already in trouble.”

At first blush this PTC case caused me to question the statement.

Combining business activities with some pleasure activities is a common practice. The presence of government officials should not change this practice. The concern is whether the pleasure activities are excessive compared to the business activities.

The SEC and the DOJ have made it clear that bribery is not limited to cash in an envelope. Excessive gifts and travel can be considered an illicit bribe.

That was the case here.

The officials would visit the PTC office in Massachusetts for one day and then spend ten days touring the sights of New York City, Los Angeles, the Grand Canyon and Honolulu. That’s a ten to one ratio of business to pleasure.

That does sound excessive.

It sounded excessive to PTC who had a policy prohibiting excessive gifts and entertainment. PTC’s policy required pre-clearance for expenses over $500 with documentation of the business purpose.

The costs of the overseas travel were hidden in the contracts. The funds budgeted for the overseas travel were disguised as expenses related to success fees or subcontracting payments for business partners. The cover-up made the trips more illicit. If the employees involved thought the trips were legitimate there would have been no reason to hide them.

I do have a problem with the SEC order including “tours of MIT, Harvard, and Faneuil Hall” in the list of what the SEC considers excessive leisure activities. Showing prospective business partners the area, amenities and source of corporate talent should be a legitimate leisure activity connected with the business. PTC is headquartered in a suburban office park. The Charles River is lovely in that area, but it’s legitimate to show the Greater Boston.

The rest of the activities sound excessive to me. Excessive enough, that I would not expect to pay those expenses for a business partner, whether it was a private individual or a government official.

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Hiring Relatives Could Be An Illegal Bribe

In the case of BNY Mellon, it was an illegal bribe in violation of the Foreign Corrupt Practices Act. The Securities and Exchange Commission charged BNY Mellon that it violated the Foreign Corrupt Practices Act by providing internships to family members of foreign government officials affiliated with a Middle Eastern sovereign wealth fund.

compliance and bribery

The unnamed Middle Eastern sovereign wealth fund was a client of BNY Mellon for custody and asset management. Unnamed officials at the sovereign wealth fund asked BNY Mellon to provide their family members with internships. One of those officials was a “key decision maker” who could award more business to BNY Mellon.

The SEC investigation found that BNY Mellon did not evaluate or hire the family members in accordance with its hiring standards and require a minimum grade point average and multiple interviews. The family members did not meet the criteria yet were hired with the knowledge and approval of senior BNY Mellon employees in order to corruptly influence foreign officials and win or retain contracts to manage and service the assets of the sovereign wealth fund.

The SEC found smoking gun emails that it made it clear that the internships were made to influence the government official.

A Boutique account manager wrote in a February 2010 e-mail concerning the internship request for Interns A and B that BNY Mellon was “not in a position to reject the request from a commercial point of view” even though it was a “personal request” from Official X. The employee stated: “by not allowing the internships to take place, we potentially jeopardize our mandate with [the Middle Eastern Sovereign
Wealth Fund].”

In June 2010, an employee of BNY Mellon with primary responsibility for the Asset Management relationship with the Middle Eastern Sovereign Wealth Fund wrote of the internships for Interns A and B: “I want more money for this. I expect more for this. . . . We’re doing [Official X] a favor.”

In a separate e-mail to a different BNY Mellon colleague, the same employee stated “I am working on an expensive ‘favor’ for [Official X] – an internship for his son and cousin (don’t mention to him as this is not official).”

The same employee advised a colleague in human resources: “[W]e have to be careful about this. This is more of a personal request . . . [Official X] doesn’t want [the Middle Eastern Sovereign Wealth Fund] to know about it.” The same employee later directed his administrative assistant to refrain from sending e-mail correspondence concerning Official X’s internship request “because it was a personal favor.”

Hiring practices have been an area more subtle bribery. More typically we’ve seen this with government contracting where the government official will award the contract then go to work for the company.

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