Category: Bribery and Corruption

Bribes are Like a Box of Chocolates

The Securities and Exchange Commission charged medical device company Orthofix International N.V. with violating the Foreign Corrupt Practices Act. A subsidiary paid bribes, referred to as “chocolates”, to Mexican officials in order to obtain lucrative sales contracts with government hospitals. (I assume every commentator on this story will reference Forrest Gump, including me.)

The “chocolates” came in the form of cash, laptop computers, televisions, and appliances that were provided directly to Mexican government officials or indirectly through companies owned by the officials.

“Once bribery has been likened to a box of chocolates, you know a corruptive culture has permeated your business,” said Kara Novaco Brockmeyer, Chief of the SEC Enforcement Division’s Foreign Corrupt Practices Act Unit.

Orthofix consented to a final judgment ordering it to pay $4,983,644 in disgorgement and more than $242,000 in prejudgment interest. Orthofix also disclosed in an 8-K filing that it has reached an agreement with the U.S. Department of Justice to pay a $2.22 million penalty in a related action.

I found it interesting that Orthofix had a chance to discover the bribes, but missed it. The Orthofix subsidiary involved in the bribery, Promeca, hid the bribes in the promotional and training expenses budget item. That line item went over budget, leading to an inquiry from the parent company. Orthofix failed to find the true problem or put a control in place to control the budget line item.

It should come as no surprise that compliance program failed.

20. Although Orthofix disseminated some code of ethics and anti-bribery training to Promeca, the materials were only in English, and it was unlikely that Promeca employees understood them as most Promeca employees spoke minimal English.

Clearly, you need a translation of your code of ethics into other languages if you are operating abroad.

Sources:

Real Estate Executive Guilty of FCPA Violations

Back in February, 2009, Morgan Stanley self-reported FCPA violations in the firm’s China real estate investment operations. Garth Peterson, the ex-Morgan Stanley Real Estate Investing managing director has pleaded guilty for his role in evading he firm’s internal controls for the purposes of personal gain.

Peterson agreed to a settlement of the SEC’s charges in which he will be permanently barred from the securities industry, pay more than $250,000 in disgorgement, and relinquish his ill-gotten real estate (currently valued at approximately $3.4 million). The U.S. Department of Justice has filed a related criminal case against Peterson.

“Peterson crossed the line not once, but twice. He secretly bribed a government official to illegally win business for his employer and enriched himself in violation of his fiduciary duty to Morgan Stanley’s clients.”
– Robert Khuzami, Director of the SEC’s Division of Enforcement

Both the DOJ and the SEC acknowledged Morgan Stanley’s internal controls and compliance procedures. Morgan Stanley regularly updated the policies to reflect regulatory developments and specific risks to the firm. Mr. Peterson received FCPA training seven times and was reminded to comply on 35 occasions. In one instance the firm specifically told him that certain employees of  China-based counterparty, Yongye, were government officials for FCPA purposes. Periodically Morgan Stanley required Mr. Peterson to certify compliance.

What saved Morgan Stanley from prosecution? The DOJ  concluded that Morgan Stanley’s internal policies and procedures “provided reasonable assurances that its employees were not bribing government officials.” Once the firm discovered the problem, it took decisive action, shutting down the office and disciplining Mr. Peterson. The firm self-reported and  cooperated with the government investigation.

Peterson worked for Morgan Stanley in Hong Kong and Shanghai from mid-2002 to December 2008. The firm fired him when they found out he conspired to dodge Morgan Stanley’s controls  to transfer an interest in a property interest from the firm to himself and a Chinese official.

His scam was to sell the property interest to Shanghai Yongye Enterprise Group, a China state-controlled company, at a discount. However, Peterson intervened and the interest was sold to a shell company controlled by Peterson, the Chinese official and a Canadian lawyer. During their ownership, they accepted distributions from the asset and realized appreciated.

According to allegations from the SEC, Peterson also arranged to pay himself and the official at least $1.8 million in finders fees which they represented to Morgan Stanley as fees required to be paid to third parties. In exchange for offers and payments from Peterson, the official is alleged to have helped Peterson and Morgan Stanley obtain business from which they personally benefited.

The DOJ’s assistant attorney General Breuern said in its statement: “Mr. Peterson admitted today that he actively sought to evade Morgan Stanley’s internal controls in an effort to enrich himself and a Chinese government official. As a managing director for Morgan Stanley, he had an obligation to adhere to the company’s internal controls; instead, he lied and cheated his way to personal profit. Because of his corrupt conduct, he now faces the prospect of prison time.” Following his sentencing, scheduled on July 17, Peterson could be imprisoned for a maximum of five years in prison and a maximum fine of $250,000 or twice his gross gain from the offense.

Morgan Stanley itself condemned Peterson’s actions as an “intentional circumvention” of its controls and a “deliberate and egregious violation of our values and policies.” The bank said: “Morgan Stanley is pleased that this matter is resolved. We cooperated fully with the government and we are very satisfied with this outcome.”

Sources:

Handy Decision Trees to Help with your Bribes

Thinking about making a payment or giving “anything of value” as part of a business meeting and wondering if you could be prosecuted for it under the Foreign Corrupt Practices Act or the Travel Act? Just reach into your briefcase and pull out a handy-dandy decision tree to help you through this difficult process.

T. Markus Funk put together a decision tree to help walk you through the FCPA and Travel Act’s Anti-bribery provisions (.pdf).

FCPA Conviction Upheld

There are few court cases involving the Foreign Corrupt Practices Act. Most of those accused quickly settle and move on. With few court cases that means the appellate decisions helping to interpret the FCPA are rare. Yesterday we had one of those rare sightings.

Frederic Bourke was convicted of FCPA violations in 2009. Bourke co-founded the fashion accessory company Dooney & Bourke, but considers himself an inventor, investor and philanthropist. Unfortunately he fell into business with Viktor Kozeny, the Pirate of Prague. The government charged Kozeny and Bourke with conspiring in a scheme to illegally purchase the state-owned oil company of Azerbaijan, SOCAR, by bribing the Azerbaijani president and other government officials.

Bourke’s main defense to the charges was that he did not have explicit knowledge of the bribery.  The government took the position that Bourke had “conscious avoidance”.

Under those circumstances, a jury might conclude that no actual knowledge existed but might nonetheless convict, if it believed that the defendant had not tried hard enough to learn the truth.

However, the government had some statements from Bourke stepping around the bribery issue. Unfortunately, Bourke also got some advice from his attorney “that if Bourke thought there might be bribes paid, Bourke could not just look the other way.” That was in 1999 and before the current era of FCPA enforcement. I think you would be hard-pressed to find an attorney who make that statement today. The Sergeant Schultz defense does not work any more when it comes to bribery.

Sources:

FCPA as a Strike Breaker

united steel workers logo

The United Steelworkers sent a request to investigate to the U.S. Justice Department. The union believes Freeport-McMoRan has violated the Foreign Corrupt Practices Act by engaging the bribery of security forces in Indonesia.  The Jakarta Post said national police chief Gen. Timur Pradopo admitted his personnel had received ‘meal money’ to guard the company’s gold and copper mine in Grasberg, West Papua. The union is arguing that those payments to police from Freeport-McMoRan’s local subsidiary constitute bribes. Production at the mine has been crippled and infrastructure sabotaged by protesters. Seven people have been killed in clashes between workers and police and mysterious hit and run attacks.

According to the Jakarta Post a diplomatic cable leaked by Wikileaks also revealed that Freeport paid the Indonesian Military (TNI) and the Police to secure mining activities in the restive province.

A spokeperson for PT Freeport Indonesia said funds given to security personnel guarding project sites in Papua are allowed under the Voluntary Principles on Security and Human Rights, a set of guidelines created by the United States and Britain in 2000 for the extractive industry dealing with security issues. “The support for the government-provided security includes in-kind assistance and monetary allowances to mitigate living costs and the hardship elements of a remote posting assignment to our mining area in Papua,” the statement said.

A member of the Indonesian Forum for the Voluntary Principles for Security and Human Rights, Agus Widjojo, said that security officers should not directly receive “meal money” without reporting it to the Finance Ministry. “It may be true that police officers face particularly tough situations in Papua. But it does not mean they can receive the money directly from Freeport without reporting it to the state’s finance agency,” he said.

Back in 2006, the New York City Comptroller asked the SEC to look into Freeport-McMoRan for knowingly made “false or misleading” statements about payments to the Indonesian military. In a letters to the agency, the comptroller, William Thompson Jr. said he believed the company might have violated the Foreign Corrupt Practices Act.

Could it be a bribe to pay the police to do their job? The United Steelworkers take the position that Indonesian security personnel are being paid to act in the defense of the interests of Freeport-McMoRan in
conflict with their duty to protect Indonesian people.

At the very least, it’s an interesting strategy by the union to help workers in another country.

Sources:

Another FCPA Opinion Procedure Release on Corporate Hospitality

The Department of Justice released the latest Opinion Procedure Release on the Foreign Corrupt Practices Act. The releases are great tool to help you figure out if a proposed corporate action could lead to an enforcement action. Anyone with an interest in the FCPA looks to the existing body of opinion releases as a way to help understand the DOJ’s interpretation of the law and what corporate actions are acceptable, which are risky and which are forbidden.

This opinion request came from an adoption agency. So maybe there is an interesting twist to their corporate behavior that could offer an interesting new perspective on the FCPA.

Unfortunately FCPA Opinion Procedure Release 11-01 (.pdf) covers no new ground. In fact the fact pattern is nearly identical to those presented in the FCPA Opinion Procedure Release 2007-01 and 2007-02.

At best the release once again lays out best practices for corporate hospitality:

  • Let the government agency pick who will come.
  • No spouses or family members on the trip
  • Pay costs directly to providers
  • No cash to the government officials
  • Souvenirs should be of nominal value and/or have the corporate logo
  • Don’t fund side trips or leisure activities
  • Focus the function on educating the visiting officials about the operations and services of your company

These best practices were in the old opinion releases. Howard Sklar scratched his head over why the requestor went through the trouble and expense of getting this opinion release.  I share the same thoughts. The fact pattern was not a close call. Anyone who could spell FCPA should have been able to find the releases. The DOJ has all of the FCPA Opinion Procedure Releases published on their FCPA website.

Maybe it was the nature of the requestor: and international adoption agency. I would guess that the government officials are from either Russia or China, two countries with an international reputation for bribery and corruption.

From what I’ve heard from some friends, there are often numerous shakedowns and cash requests made on the adoptive parents during the international adoption process.  Obviously, the parents are in an emotionally fragile state when heading overseas to adopt. They are likely in a country that is unfamiliar to them, lost in a fog of foreign languages. Could some of those “gifts” be bribes and could some of the recipients be foreign officials? Sure.

There have been big headlines about FCPA enforcement actions in the US and the coming rise of enforcement under the UK Bribery Act. The adoption agency should be concerned that its activities could be in violation of these laws.

International adoption agencies also have a larger moral question to consider. To the extent they are making payment or encouraging the adoptive parents to make payments, their activities start to look more like baby buying. If the activity is more wholesale, you end up looking like a baby farmer. I think more people are concerned with that moral question, than the legal question of bribery.

Sources:

The First Days of the UK Bribery Act

It’s a been a few days since the UK’s Bribery Act became effective, making some questionable corporate behavior become clearly illegal. There have been thousands of news stories, legal alerts, and dire warnings about the line in the sand drawn on its date of effectiveness, July 1.

Now, there is a bit a waiting, a calm before the storm, until we hear the first government action. Companies with a UK presence have most likely taken a look at their operations and implemented the changes needed to comply with the new law. (Perhaps that is optimistic.) The SFO now has a loaded gun and is likely on the hunt for behavior that violates the new law.

It took decades before the FCPA became actively enforced. I don’t expect it will take as long to see the first action under the Bribery Act. The SFO has already seen how effective FCPA has been in the United States. (If you consider “effective” to be good headlines and relatively easy wins.)

When will the first action happen? Will it be a government investigation or self-reporting? What industry will be first?

Sources:

Corruption and Twitter

“If someone is being hit for a bribe, isn’t the easiest thing just to put it on Twitter? It goes round the world in next to no time.”

Richard Alderman, head of the U.K.’s Serious Fraud Office, is apparently serious about Twitter. After self-congratulating themselves for organizing the government overthrows in North Africa and the Middle East, social media sites are apparently ready to stop global corruption.

So I decided to search through Twitter to see what it had to say about bribery. I started with what I thought would be the most obvious using #bribe. The most common messages using that hashtag looked something like this example:

Had to resort to the best method of all just to get my niece to come to Target with me #bribe #sparklynailpolish

Not exactly focusing on the world’s problems.

But I did notice a message from @IPaidABribe, connected to the IPaidaBribe.com the Indian website mentioned in the Financial Times article. That led to this message:

I suppose that is closer to what Mr. Alderman was talking about.

On the other hand Mr. Alderman is in charge of enforcing the UK Bribery Act which makes it a crime to pay a bribe. So if you do report a bribe on Twitter, Mr. Alderman would be responsible for bringing charges against you. The SFO has said they would use prosecutorial discretion when bringing charges, so from a practical matter it would seem unlikely that you would end up with charges against you. But still, would you publicly announce that you just broke the law?

A few days ago, I heard about the Bribespot app for your smartphone that allows you to report bribery and see where it happening using the mapping tool. That would hide your identity when making your bribery report.

Sources

Paying a Bribe? There’s an App for that

Can you crowdsource the fight against corruption? An international team coming from Estonia, Lithuania, Finland and Iran thinks you might. They created a smartphone app that allows people to anonymously report incidences of bribery and later see the data visualized on an interactive map.

Bribespot is an app that allows you to see how much corruption is going on around. Using your smartphone (or a website) you can report locations where bribes are requested/paid, indicate the size of a bribe and area of government affected by it.

At the moment you can use Bribespot on Android, but they have not finished the iPhone app. There is no mention of a blackberry app.

In poking around the data, I found three reports in the United States.

  • Made to pay $100 (~75 euro) to get a fake ID back from a bouncer at Fat Tuesday
  • 35 EUR To cut the line at Pianos
  • 70 EUR for 3 guys to cut the line at Southside

Those are not exactly riveting incidents.

On the other hand, there are many reports coming in from Lithuania and Romania in Bribespot’s Check-in Stream.

Sources:

Guidance Under the UK Bribery Act

We have been waiting for some guidance from the United Kingdom about their new Bribery Act since it received Royal Assent last April. The delay on the guidance has delayed the implementation of the Bribery Act itself. Now the guidance is out.

The Bribery Act 2010 creates a new offence under section 7 which can be committed by commercial organisations which fail to prevent persons associated with them from bribing another person on their behalf.

An organisation that can prove it has adequate procedures in place to prevent persons associated with it from bribing will have a defence to the section 7 offence.

The guidance, published here under section 9 of the Act, will help commercial organisations of all sizes and sectors understand what sorts of procedures they can put in place to prevent bribery, as mentioned in section 7.

With the release of the guidance, Kenneth Clarke, Lord Chancellor and Secretary of State for Justice, announced that the Bribery Act will go into force on July 1.

Bribery and Corruption are bad and we want to have systems in place to prevent them and to detect them if they happen. Tucked into Section 9 of the Bribery Act was requirement that the Secretary of State publish guidance about procedures which commercial organizations can put in place to prevent persons associated with them from bribing. Under section 9 of the Bribery Act, the only defense against criminal liability for a commercial organization which has “failed to prevent bribery” is that the organization had adequate procedures” to prevent bribery.

In what appears to be a very user-friendly approach the Ministry of Just has published a Quick start guide (PDF 0.27mb 9 pages) to get you up to speed on the Bribery Act.

Commercial Organization

Of course there is some question about the applicability and enforcement beyond the borders of the United Kingdom. Clearly, if you have operations in the UK and those employees are paying bribes for business to be sent to those operations then it falls under.

If you have an office in London, are all of your operations worldwide subject to the Act? I’m sure we will find out, eventually.

It will be up to the court to decide whether or not any individual organisation can be said to be ‘carrying on a business’ in the UK. They obviously take a range of factors into account – mere listing on the London Stock Exchange or just the fact of having a UK incorporated subsidiary would not necessarily mean the Act applies. To be clear: this is not a ‘carve-out. Under the terms of the Act, it has always been a decision for the courts. – Kenneth Clarke, Lord Chancellor and Secretary of State for Justice

If you have a London office (or operations somewhere in the United Kingdom), or other “demonstrable business presence in the United Kingdom” you should pay attention to the Act. However, merely being listed on the London Exchange alone would not be enough. (See paragraph 36 in the guidance.)

Hospitality

According to Quick Start Guide:

The government does not intend that genuine hospitality or similar business expenditure that is reasonable and proportionate be caught by the Act.

In any case where it was thought the hospitality was really a cover for bribing someone, the authorities would look at such things as the level of hospitality offered, the way in which it was provided and the level of influence the person receiving it had on the business decision in question. But, as a general proposition, hospitality or promotional expenditure which is proportionate and reasonable given the sort of business you do is very unlikely to engage the Act. So you can continue to provide tickets to sporting events, take clients to dinner, offer gifts to clients as a reflection of your good relations, or pay for reasonable travel expenses in order to demonstrate your goods or services to clients if that is reasonable and proportionate for your business.

That may actually be a broader ability to deal with government officials than under the FCPA.

Facilitation Payments

Facilitation payments, which are payments to induce officials to perform routine functions they are otherwise obligated to perform, are bribes. There was no exemption for such payments under the previous law nor is there under the Bribery Act.

That is more strict than the FCPA. They do leave it open to prosecutorial discretion, that based on the facts and circumstances they can decide whether prosecution is in the public interest.

Foreign Public Official

Over here in the US it looks like there some be some court decisions coming down that will add clarity to the definition of a foreign official under the US FCPA. Here is the guidance under the Bribery Act as to who is a foreign public official:

A ‘foreign public official’ includes officials, whether elected or appointed, who hold a legislative, administrative or judicial position of any kind of a country or territory outside the UK. It also includes any person who performs public functions in any branch of the national, local or municipal government of such a country or territory or who exercises a public function for any public agency or public enterprise of such a country or territory, such as professionals working for public health agencies and officers exercising public functions in state-owned enterprises. Foreign public officials can also be an official or agent of a public international organisation, such as the UN or the World Bank.

There is lots to digest in the guidance. Ultimately, other than the removal of facilitation payments I does not seem that compliance with the UK law would be any different than compliance under the FCPA.

Sources: