Category: Bribery and Corruption

Sovereign Wealth Funds, Bribery, Corruption, Hospitality and the FCPA

The FCPA seems to be most closely associated with shady oil operations, mining, defense contractors and infrastructure transactions.  The image is a big company coming in and bribing an official for access to the country’s resources.

The other side to that investment is that the countries build up big supplies of capital. Many deploy some of that capital into funds for investing using sovereign wealth funds. During the credit crisis of 2008, some of the big Wall Street firms got injections of capital from sovereign wealth funds.

This is the flip side of the FCPA. Instead of a US company trying to get the rights to invest in the foreign country, it’s getting the foreign country to invest in the US company. And cash payments to foreign officials are still going to be considered bribes in violation of the FCPA, regardless of which direction the capital flows.

The problem is that the people running the sovereign wealth funds are going to be considered “foreign officials” under the Foreign Corrupt Practices Act. That should not come as surprise. In 2008 the Department of Justice said it was taking a look at “passive and active investments by U.S. securities firms into sovereign funds, and vice versa.” They clearly stated that a sovereign wealth fund is a “State-Owned Enterprise” and that securities firms should treat employees of sovereign wealth funds as government officials for purposes of the FCPA.

Dionne Searcey and Randall Smith published a big headline in the Wall Street Journal about the launch of a new investigation by the Securities and Exchange Commission into whether US banks and private equity firms violated the FCPA in their dealings with sovereign wealth funds.

Clearly, under-the-table payments in exchange for the investment are going to be trouble. But even typical hospitality shown to investors will be under tighter scrutiny. If it’s too lavish, it could be considered a bribe.

There is an affirmative defense under the FCPA if

the payment, gift, offer, or promise of anything of value that was made, was a reasonable and bona fide expenditure, such as travel and lodging expenses, incurred by or on behalf of a foreign official, party, party official, or candidate and was directly related to the promotion, demonstration, or explanation of products or services [§ 78dd-1 (c)(A) and § 78dd-2 (c)(A)]

The investment officer for the SWF comes to your office, you put him (or her) up at a nearby hotel, shown him around the office to meet management, discuss investment strategies and take him out to dinner after a full day of diligence. The question will be whether the lodging expenses and dinner expenses were “reasonable” and “bona fide.”

I doubt that the DOJ and SEC would consider the cost of putting up the official at a Holiday Inn and dinner at Denny’s to be so excessive as to not be “reasonable” and “bona fide.” Then start increasing the quality of those offerings. Instead of the Holiday Inn, it’s the Ritz-Carlton, or the 1,900 s.f  Central Park Suite at the Ritz Carlton. Instead of Denny’s, it’s dinner at Le Bernadin, with a $500 bottle of wine. Now you you need to be concerned that the dinner and lodging are not “reasonable” and “bona fide.” Throw in a few party favors just to give your compliance officers ulcers and sleepless nights.

Wall Street is still an easy target. The excesses of Wall Street make great headlines. If there really is some wrongdoing it will be an interesting story.

However, some of those investments helped save those Wall Street firms from collapse. We would be much worse off today if Citibank or Morgan Stanley followed Lehman into bankruptcy. I’m not saying that corruption would be warranted in this situation. But we also need to be careful not to spook away foreign investors with a witch hunt. Otherwise, they may not be there for a legitimate investment when we need them.

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Image of Wall Street is used under a creative commons license.

The Impact of the UK Bribery Act on U.S. Companies

Securities Docket put on another fantastic webcast on topics relevant to compliance professionals. Today’s focused on the upcoming Bribery Act in the United Kingdom. If your company has operations in the United Kingdom, you need to pay attention to this law.

The upcoming law applies to individuals and companies and outlaws bribes to public officials and private individuals. That makes it broader than the US FCPA. There is also a new corporate offense for failure to prevent bribery. Conviction can have jail sentences up to 10 years and provides for unlimited fines.

Webcast Presenters:

  • Vivian Robinson QC, general counsel to the UK’s Serious Fraud Office
  • Barry Vitou, partner in Winston & Strawn’s London office
  • Richard Kovalevsky QC, 2 Bedford Row
  • David Childers, CEO of EthicsPoint

For compliance professionals, the key will be putting “adequate procedures” in place inside the business to prevent bribery. We are still waiting for the UK government to publish guidance on that standard.  One recommendation from the panel was to look at Transparency International’s Adequate Procedures – Guidance to the UK Bribery Act 2010.

It’s not an offense if you lack “adequate procedures.” It is merely a defense to the charge against the company for violation of the Bribery Act.

You can watch a rebroadcast of the webcast and download the materials

Private Equity Portfolio Companies and Bribery Charges

The U.S. is investigating Allianz SE, for possible bribery by a German printing press company in which it holds a majority stake according to a story by Joe Palazzolo in WSJ.com’s Corruption Currents.

The Foreign Corrupt Practices Act bars US companies from paying bribes to foreign officials to keep or obtain business. The SEC claims jurisdiction over Allianz under the FCPA because it was listed on the New York Stock Exchange until October 2009.

FCPA investigations are a dime a dozen, so I didn’t pay much attention to this one a first. But then I noticed something different about this one. The company accused of bribery is Manroland AG a private equity portfolio company of Allianz.

This raises the specter that federal regulators are looking at the private equity industry as the next area for increased enforcement under the FCPA. At least, Tom Fox raises that possibility.

The additional FCPA challenge in the private equity industry is what level of control and ownership will be required to pass the liability up to the parent. Past actions have shown that when you purchase a company, you purchase the FCPA liabilities. Will other forms of acquisitions continue FCPA liability and pass it up the ownership chain? What if a transaction is structured as a purchase of a company’s assets instead of the ownership of the company? That traditionally severs most liabilities. What if ownership is just a minority interest? How much of a say over management will trigger FCPA liability being passed to a minority owner? One board seat? A majority of board seats?

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The London Olympics and the Bribery Act

The London Olympics in 2012 will be a test of strength, agility and endurance. That’s just be for the corporate sponsors trying to comply with the UK’s Bribery Act.

Unlike the US Foreign Corrupt Practices Act, the UK’s Bribery Act applies equally to payments made to foreign government officials as it does to payment made to domestic companies. Should a potential bribery case arise under the Bribery Act, the only defense of the organization is to show that it had “adequate procedures” in place to stop bribery. Guidance on what are “adequate procedures” will not be promulgated until at least early 2011.

It is estimated that £100m will be spent on hospitality during 2012 London Olympic games. It will be a compliance headache for companies with hospitality tents, events and other rewards for customers.

Here in Massachusetts, you can’t offer a public official tickets to a playoff game or World Series game. That’s true even if the official pays for the ticket. It’s considered special access and you are getting a benefit of access that is not available to the general public.

If you take that same position, maybe corporate sponsors should only be handing out tickets to Olympic events that are not sold-out. That sounds silly. But it may be one of the challenges faced with corporate sponsors at the London Olympics in 2012.

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Lawyers and Corruption Laws

In April 2010, the International Bar Association, the Organisation for Economic Co-operation and Development and the United Nations Office on Drugs and Crime, launched the Anti-Corruption Strategy for the Legal Profession. The project is focusing on the role lawyers play in fighting corruption in international business transactions.

Nearly half of all respondents recognized corruption to be an issue affecting the legal profession in their own jurisdiction. However, responses varied significantly from region to region. It ranged from only 16 per cent of respondents from Australasia saw corruption as an issue to nearly 90 percent of respondents from the CIS (Commonwealth of Independent States) region, which includes Ukraine, Azerbaijan, Kyrgyz Republic, Moldova, and Russia.

The bad news:

  • Nearly 40 per cent of respondents had never heard of the major international instruments that make up the international anticorruption regulatory framework, such as the OECD Anti-Bribery Convention and the UN Convention against Corruption.
  • More than one in five said they have or may have been approached to act as an agent or middleman in a transaction that could reasonably be suspected to involve international corruption.
  • Nearly a third of respondents said a legal professional they know has been involved in international corruption offences.

The good news:

  • 42 per cent of respondents agreed that national anti-corruption laws and regulations were effective in preventing
    both inbound and outbound international corruption compared to five years ago
  • 60 per cent of survey respondents were aware of the FCPA and its scope, while 30 per cent were aware of the UK
    Bribery Act and its scope. (Of course you could look at the other side as bad news.)

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The International View on US Anti-Bribery Efforts

The Organization for Economic Cooperation and Development’s report on U.S. anti-bribery efforts released their Phase 3 Report on the United States.

In its report, the Working Group commended the United States for its engagement with the private sector, substantial enforcement, and commitment from the highest levels of the U.S. Government. In addition to the recommendation on facilitation payments, it also made recommendations that include the following on ways to improve U.S. enforcement:

  • Consolidating publicly available information on the application of the FCPA, including the affirmative defence for reasonable and bona fide expenses;
  • To increase transparency, making public, where appropriate, more information on the use of Non-Prosecution Agreements (NPAs) and Deferred Prosecution Agreements (DPAs) in specific cases; and
  • Ensure that the overall limitation period applicable to the foreign bribery offence is sufficient to allow adequate investigation and prosecution

The phase 2 evaluation happened in 2002. The report notes that since 2002, the US has prosecuted 71 individuals and 88 enterprises, criminally and civilly, for transnational bribery. They also achieved record penalties for FCPA violations and note the $800 million penalty against Siemens.

They also note more than 150 criminal and 80 civil ongoing FCPA investigations. There may be some double counting since some involve parallel civil and criminal cases.

One focus of the report was the facilitation payment exception under the FCPA. The private sector representatives that spoke to the OECD complained that the scope of the exception was unclear. The DOJ countered that there is sufficient guidance and had never received a request for an Opinion Procedure Release on this issue. In the end the OECD noted that the US position to allow facilitation payments is counter to the OECD position.

One theme that pops out from the report is the the United States may no longer be the leading the charge on international corruption. In several ways, the FCPA does not meet the higher standard the OECD’s Recommendation of the Council for Further Combating Bribery of Foreign Public Officials in International Business Transactions. The UK Bribery Act is likely to take the top spot once the government starts enforcement.

The OECD certainly encouraged the expansion the FCPA.

They don’t like the facilitation payment exception. The DOJ confirmed that facilitation payments may be tax deductible in the United States where they are properly classified as ordinary and necessary expenses, because they are not illegal under the FCPA. Of course, for an expense to be deductible, it must be an ‘ordinary and necessary expense.’

They also don’t like that non-issuers are not subject to the FCPA’s books and records provisions. They think it should be expanded to cover companies based on their level of foreign business.

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Real Estate, China and the FCPA

China is hotbed for violations of the Foreign Corrupt Practices Act. The real estate industry is not immune from the dangers. In February of 2009 Morgan Stanley’s real estate group reported an employee based in China in an overseas real estate subsidiary that appeared to have violated the Foreign Corrupt Practices Act.

My company has significant business relationships with CB Richard Ellis so it saddens me that they are the latest to report a problem under the FCPA.

As a result of an internal investigation that began in the first quarter of 2010, the Company determined that some of its employees in certain of its offices in China made payments in violation of Company policy to local governmental officials, including payments for non-business entertainment and in the form of gifts. The payments the Company discovered are minor in amount and the Company believes relate to only a few discrete transactions involving immaterial revenues. Nonetheless, the Company believes that the payments may have been in violation of the U.S. Foreign Corrupt Practices Act or other applicable laws. Consequently, the Company voluntarily disclosed these events to the U.S. Department of Justice (the “DOJ”) and the Securities and Exchange Commission (the “SEC”) on February 27, 2010 and has continued to cooperate with both the DOJ and the SEC in connection with this investigation. The Company engaged outside counsel to investigate these events and has implemented thorough remedial measures.

In addition, in the third quarter of 2010, the Company began another internal investigation, with the assistance of outside counsel, involving the use of a third party agent in connection with a purchase in 2008 of an investment property in China for one of the funds the Company manages through its Global Investment Management business. This investigation is ongoing and at this point the Company is unable to predict the duration, scope or results thereof. In light of the Company’s cooperation with the DOJ and the SEC as described above, the Company voluntarily notified both agencies of this separate internal investigation and will report back to them when the Company has more information.

The real estate industry should be just as concerned about bribery of foreign officials as any other industry. Perhaps even more so. Real estate is inherently local and you undoubtedly need to deal with government officials to get building permits, occupancy permits, zoning approvals and a myriad of other interactions.

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Corruption Currents: The Wall Street Journal’s New Corruption Blog

“Corruption Currents, the Wall Street Journal’s corruption blog, will dig into the ever-present and ever-changing world of corporate corruption. It will be a source of news, analysis and commentary for those who earn a living by finding corruption or by avoiding it.”

Apparently corruption has become such a big topic that the Wall Street Journal has launched a new blog focused on the topic. It went live on September 20, but has a dozen plus stories dating back to last week.

The blog is staffed by two reporters from Dow-Jones. Joseph Palazzolo, formerly from Main Justice and Samuel Rubenfeld, who has been reporting for Dow Jones for about a year.

Corruption Currents will focus primarily on bribery, money laundering, sanctions, and terrorism finance.

They are already producing some good stories and aggregating other stories into their “High Tide” feature. You can find it at http://blogs.wsj.com/corruption-currents/