Category: Foreign Corrupt Practices Act

FCPA Opinion Procedure Release 09-01

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The Department of Justice released its latest Opinion Procedure Release under the FCPA: 09-01

The Requestor designs and manufactures a specific type of medical device. The Requestor’s competitors already operate and sell their products to the government of a certain foreign country and the Requestor wants to enter that market.

A senior government official laid out the foreign government’s plan to provide a specific type of medical device for patients in need in the country. The government intends to purchase the medical devices, and then subsidize the cost of such devices when it resells them to patients. The Requestor and its competitors would be allowed to participate in the program.

To get the foreign medical centers familiar with their product, the government official suggested free samples for evaluation. The Requestor must have been nervous given that a sample size of 100 units was needed for evaluation. Since each cost $19,000, that was a $1.9 million payment involving a foreign official.

Ten different medical centers will each get ten medical devices. The Requestor will select the centers that will participate in order to ensure that the participating centers have the requisite expertise, resources, and experience to successfully participate in the evaluation.

The obvious comparison is to the Iowa Beef Packers request to send free samples addressed in FCPA Review Procedure Release 81-02. But that only involved 700 pounds of beef, with an estimated total value of less than $2,000.

The key element in the DOJ’s decision in this latest release is that the devices are being provided to the foreign government, not to individual government officials. Close family members of the Government Agency’s officers or employees, working group members, or employees of the health centers are ineligible to receive a sample device except in certain, specific circumstances. Also, the names of the recipients will be published on the Government Agency’s web site for two weeks following the selection.

There is nothing inherently wrong with giving stuff to a foreign government. You just have to make sure it does not personally benefit a government official.

The DOJ does not presently intend to take any enforcement action with respect to the proposal described Opinion Procedure Release 09-01.

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Jefferson Case Will be Remembered for Cash in the Freezer

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Former Congressman William Jefferson’s corruption trial will always be remembered as the one about the guy with the cash in his freezer. But Jefferson was acquitted of Count 11, violation of the Foreign Corrupt Practices Act. This was the primary crime related to the stash of $100 bills the FBI found between boxes of Boca burgers and Pillsbury pie crust in Jefferson’s Washington townhouse.

U.S. Attorney Dana Boente said at a news conference after the verdict was announced: “$90,000 in a freezer is not a gray area. It is a violation and today a jury of the congressman’s peers held him guilty. . . .We always thought that a powerful piece of evidence was $90,000 in the freezer.”

Jefferson was the first public official charged under the Foreign Corrupt Practices Act.

Jefferson Convicted of Corruption Charges

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William Jefferson, the former nine-term congressman from Louisiana, was found guilty of 11 of 16 corruption charges on Wednesday by a federal jury.

The Jefferson case was most famous for the discovery of $90,000 of cash stuffed in his freezer. Prosecutors said Jefferson planned to use the cash for a bribe. Jefferson’s lawyers said the cash in the freezer proved the ex-lawmaker didn’t use the money as a bribe.

There was also a constitutional battle over the FBI’s raid of his Jefferson’s Congressional office. Ultimately, some of the information seized by the FBI was returned and not used as evidence.

During the six-week trial, prosecutors said that from 2000 to 2005, Mr. Jefferson sought hundreds of thousands of dollars in bribes from a dozen companies involved in oil, communications, sugar and other businesses, often for projects in Africa. Mr. Jefferson used his position as a member of the House Ways and Means trade subcommittee to promote the companies’ ventures without disclosing his own financial stakes in the deals.

The jury deliberated five days before reaching its decision.

Guilty

  • Count 1 18 USC §371. Conspiracy to solicit bribes by a public official and deprive citizens of honest services by wire fraud and violate the Foreign Corrupt Practices Act to advance a telecommunications project sponsored by iGate Inc. of Louisville, Ky.
  • Count 2 18 USC §371. Conspiracy to solicit bribes by a public official and deprive citizens of honest services by wire fraud related to his efforts on behalf of Arkel Sugar, LETH Energy, TDC Overseas, Procura Financial Interests of South Africa and WorldSpace for projects that included a sugar refinery and fertilizer plant in Nigeria, development of marginal oil fields in Nigeria, the sale of garbage-to-energy incinerators in West African nations; the development of satellite educational programming in several West African nations; and a settlement of a dispute regarding oil development rights off the coast of Sao Tome & Principe in West Africa.
  • Count 3 18 USC §201(b)(2)(A). Solicitation of bribes by a public official related to allegations that Jefferson sought payments from iGate Inc. to a firm controlled by his wife, Andrea, in return for his help securing telecommunications projects in Nigeria and Ghana.
  • Count 4 18 USC §201(b)(2)(A). Solicitation of a bribe by a public official related to what the government contends was Jefferson demanding, seeking, receiving, accepting and agreeing to receive things of value from Lori Mody, the Virginia investor who wore a wire to record conversations with the then-congressman.
  • Count 6 18 U.S.C. §1343 and §1346. Deprive citizens of honest services by wire fraud related to a fax from Jefferson to Lori Mody establishing the percentages of ownership in Mody’s company to be given to Mody, Brett Pfeffer, iGate and a company controlled by the Jefferson family.
  • Count 7 18 U.S.C. §1343 and §1346. Deprive citizens of honest services by wire fraud related to a wire transfer of $59,300 fromMody’s bank account to an account held by the ANJ Group, headed by Jefferson’s wife, Andrea.
  • Count 10 18 U.S.C. §1343 and §1346. Deprive citizens of honest services by wire fraud related to a telephone call from Jefferson in Ghana to Vernon Jackson in Louisville, Ky., discussing the progress of meetings with Ghanaian officials.
  • Count 12 18 U.S.C. §1957. Money laundering related to the transfer of a check for $25,015 written from ANJ payable to the Jefferson Committee.
  • Count 13 18 U.S.C. §1957.Money laundering related to the wire transfer of $25,000 from ANJ to iGate.
  • Count 14 18 U.S.C. §1957.Money laundering related to the transfer of a check for $25,000 from an ANJ account made payable to Andrea Jefferson and deposited to an account held by both Andrea and William Jefferson.
  • Count 16 18 U.S.C. §1962(c). Racketeer Influenced Corrupt Organization, pattern of racketeering activity, related to what the government says was Jefferson’s use of his congressional office for illegal activities.

Not Guilty

  • Count 5 18 U.S.C. §1343 and §1346. Deprive citizens of honest services by wire fraud related to credit card charges by Jefferson from his congressional office totaling $14,885.95 for travel from Washington to Lagos, Nigeria, with the “understanding” iGate would reimburse that charge.
  • Count 8 18 U.S.C. §1343 and §1346. Deprive citizens of honest services by wire fraud related to a fax from Jefferson to Mody attaching various documents, including a letter to then-Nigerian Vice President Atiku Abubakar promoting a telecommunications project.
  • Count 9 18 U.S.C. §1343 and §1346. Deprive citizens of honest services by wire fraud related to a fax from Jefferson to Mody with a copy of a letter from Jefferson to a high-ranking Ghanaian government official seeking a meeting.
  • Count 11 15 U.S.C. §78dd-2(a). Violation of the Foreign Corrupt Practices Act related to Jefferson’s discussion with Mody about possibly bribing Nigerian Vice President Abubakar and other Nigerian officials. Charge includes transfer from Mody of $100,000 (in FBI money) that Jefferson said was intended as a bribe to Nigerian Vice President Abubakar. All but $10,000 was later found in Jefferson’s freezer.
  • Count 15 18 U.S.C. § 15112(c)(1). Obstruction of justice related to Jefferson putting two iGate Inc. faxes into a briefcase while the FBI was searching his house on Aug. 3, 2005.

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Hollywood and the FCPA

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With the guilty verdict in the case of handbag magnate Frederic Bourke and while waiting for the verdict in the Jefferson corruption case, we can turn to Hollywood for the next FCPA trial. The U.S. Attorney’s office charged a Hollywood producer with paying bribes to a foreign official.

Gerald and Patricia Green are accused of paying a Thai official $1.8 million between 2002 and 2006 in order to obtain $14 million worth of contracts. Prosecutors claim the couple paid off Juthamas Siriwan, the former governor of the Tourism Authority of Thailand, which puts on Bangkok’s international film festival. Gerald Green was the producer of Werner Herzog’s Resuce Dawn along with a dozen other movies.

Richard Cassin of the FCPA Blog is providing coverage, including an insight to trial strategy:

Prosecutors plan to introduce into evidence a Thai anti-bribery statute that applies to public officials (here). That law — even if it’s rarely enforced — probably blocks the Greens from raising the local-law affirmative defense. The FCPA allows otherwise prohibited payments if the “payment, gift, offer, or promise of anything of value that was made, was lawful under the written laws and regulations of the foreign official’s” country. 15 U.S.C. §§ 78dd-1(c)(1), 78dd-2(c)(1) and 78dd-3(c)(1). The defense is rarely available because most countries, like Thailand, have anti-corruption laws.

The trial starts today in California. Patricia Green is represented by Marilyn Bednarski of Pasadena’s Kaye, McLane & Bednarski. Gerald Green is represented by Jerome Mooney of L.A.’s Weston, Garrou, Walters & Mooney.

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Avery Dennison Settles SEC Case for China FCPA Violation

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Avery Dennison has settled two related Securities and Exchange Commission cases over alleged Foreign Corrupt Practices Act violations. In an administrative action, the SEC imposed a cease-and-desist order against the consumer product company and ordered it to pay $318,470 in disgorgement and interest. In a civil case, Avery agreed to pay a $200,000 penalty. Avery settled both proceedings without admitting or denying the claims.

The SEC had charged that the Reflectives Division of Avery (China) Co. Ltd. paid kickbacks, sightseeing trips, and gifts to Chinese government officials.

  • In January 2004, an Avery China sales manager went to a meeting with government officials and bought each a pair of shoes with a combined value of $500.
  • In May 2004, the subsidiary hired a former government official as a sales manager because his wife was still employed at the government institute and was in charge of two projects the company wanted to pursue.
  • In August 2004, Avery China obtained two contracts to install new graphics on police cars through the Institute. The sales manager agreed that the total sales price of the contracts would be inflated so the additional charges could be paid back to the Institute as a “consulting fee.” Total sales under these contracts were about $677,000, with profits of about $363,000. The kickback payments, which would have been about $41,000, were discovered by another division and halted prior to payment.
  • In December 2002, an Avery salesman hosted a sightseeing trip for five government officials. Two reimbursement requests were used to conceal the expenses for the trip.
  • In August 2004, Avery China paid a kickback to another government owned enterprise to secure a sales contract. Total sales under the contract were about $106,000, with profits of about $61,000. The $2,415 kickback was not paid after it was discovered by company officials.
  • In 2005, Avery China secured a sale to a state-owned end user by agreeing to pay a Chinese official a kickback of nearly $25,000 through a distributor. Avery China realized $273,213 in profit from this transaction, which it inaccurately booked as a sale to the distributor rather than to the end user.
  • In late 2005, during a sales conference hosted by Avery China at a famous tourist destination, a sales manager paid for sightseeing trips for at least four government officials at a cost of $15,000
  • After Avery acquired a company, employees of the acquired company continued their pre-acquisition practice of making illegal petty cash payments to customs or other officials in several foreign countries. Those in illegal payments were approximately $51,000.

A spokesperson for Avery told the FCPA Blog, “What’s important to us is the fact, noted in the SEC’s administrative order, that we discovered the questionable actions. We investigated them and took disciplinary action, and reported them to the Securities Exchange Commission and Department of Justice (DOJ). As the SEC’s administrative order notes, in some cases we prevented them. We believe ethical conduct is critical to our reputation and our success, and we back that up with a rigorous training and reporting process to help employees make the right decisions. Our training includes training on the FCPA.”

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Sticking Your Head in the Sand and the FCPA

dooney and Bourke

Prosecutors told the jury during Frederic Bourke’s trial that instead of doing adequate due diligence for his investment, he’d “stuck his head in the sand.” A jury convicted him conspiring to violate the Foreign Corrupt Practices Act and making false statements to federal investigators.

How did the head of a prominent handbag company end up in this position? What did Bourke do?

He invested in a deal in a country where he knew or should have known that bribes would be paid. He didn’t pay any bribes himself. He didn’t benefit from the bribes. He lost his money in the investment.

Bourke invested in Czech-born Viktor Kozeny’s unsuccessful attempt in 1998 to gain control of Azerbaijan’s state oil company.  Kozeny himself had a shady background and was known as the Prague Pirate. Kozeny’s plan was to bribe senior government officials in Azerbaijan with several hundred million dollars in shares of stock, cash, and other gifts to ensure that those officials would privatize the State Oil Company of the Azerbaijan Republic (SOCAR) in a rigged auction that their investment consortium could win. Prosecutors offered evidence that Bourke “consciously avoided” learning about the bribes by not asking questions about them. Jurors were allowed to convict if they found Bourke knew or took steps to avoid learning of the payments.

The jury looked at the shady deal, the shady partner and in a shady country and must have thought that bribery was obvious. Bourke just chose to ignore the warning signs.

The sentence for Bourke is up to five years in prison for the FCPA violation, and another five for lying to the FBI.

References:

FCPA Visualization

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The number of Foreign Corrupt Practices Act charges and the size of the penalties have surged recently. The James Mintz Group pinpointed the location of every bribe that has led to an FCPA case in the last 10 years and illustrated them graphically.

The countries that have generated the most FCPA cases in the last decade are:

  • Nigeria with 11 cases
  • China with 10 cases
  • Iraq with 10 cases

You can see the full-sized map and more details in the June issue of Global Fact Gathering from the James Mintz Group.

Vetting Business Partners

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My notes, live, from Vetting Business Partners, with Alexandra Wrage of Trace International to talk about how leading companies have approached this challenge in a global company.

Due diligence on business partners is one of the most important things a company can do, but also one of the least interesting things. She points out that the FCPA has a “should have known” standard. So ignorance is not a defense.

Sales consultants are some of the higher risk because they are usually paid on a commission basis. Consultants, paid by the hour, are a lesser risk merely because of the different compensation model. Distributors and resellers can be a risk. Merely having a third party in between your company and the corrupt official is still bad and is not a defense to charges.

Resellers are a new problem. The take title to your product and are your customer. But if there is evidence that the resellers are paying bribes to their customers, your company can be potentially be pulled in.

She turned to focus on some problem areas in due diligence when working with third parties.

Ownership – This is the most important and should be a deal-breaker if true beneficial ownership is not disclosed. (You can also work in the negative- not a government official or blocker person. This is not a good practice. The hidden identity should be a red flag. It would certainly be a red flag in a government investigation.)

Government relations. You need to find out if a clse relative is in the government. It is not a deal-breaker, but you need to be aware of the relationship.

Expertise. What is this person being paid to do if they do not have any particular expertise.

Financial stability. If they are acting as your agent, their financial failing will rub off on you.

Media searches. You need to know if your business partner is in the headlines.

Training. You need to letting them know what they need to do.

Periodic review and certifications. You want to make sure that you update things when the contract is renewed. You also want to check periodically to make sure there has not been a big change in the business partner. Certifications can be included on each invoice so they certify each time they paid that they have not bribed a foreign official.

It is important to keep red flags in mind, but you should standardize your contracts and review and not target specific areas. Many of the biggest FCPA cases have come from individuals acting in countries that are not known for being corrupt.

You can have a tiered due diligence program, depending on the nature of the relationship, the basis of compensation,and  the reputation of the company. The most common is three tiers: not risky, standard, and more risky. That allows you to target your resources.

She sees the divide in the DOJ cases where companies are either do due diligence or not doing any diligence. Not doing diligence almost moves you into a strict liability position. You have no defense.

There has been a surge in FCPA cases over the last few years. Most involved problems with intermediaries.

She points out that corruption due diligence is a two-way street. Increasingly, foreign companies are conducting due diligence on American companies.

She also takes a controversial position that you may be better off not having audit rights if you do not intend to actually do audits. She advocates triggered audit rights instead of a matter of course if you are not going audit on a regular basis. You want to have a meaningful conversation with your intermediary that these audit rights are real.

There is an increasing turf battle on international enforcement. The SFO (Britain’s version of the DOJ) has stated that reporting to the DOJ first is not a voluntary disclosure for their purposes and reserve the right to still enforce.

(These notes are taken live, so I apologize if I left out anything or misquoted someone. Please forgive any typos or grammatical errors.)

FCPA and the Wall Street Journal

Not since the Siemens FCPA case have I seen the Foreign Corrupt Practices Act show up on the front page of the Wall Street Journal.  That case was highlighted because of billion dollar fine.

The big part of today’s story was the number of active FCPA cases. According to the story there are at least 120 active cases: U.S. Cracks Down on Corporate Bribes. There are two big names on the list of companies currently under Justice Department review: Sun Microsystems Inc. and Royal Dutch Shell PLC. the Sun disclosure probably came from the diligence in connection with its acquisition by Oracle.

Dionne Searcy, author of the article, believes the renewed emphasis on enforcing the FCPA “began in the wake of a series of business scandals earlier this decade, including the collapse of Enron, that stirred up a new corporate-reform movement.”

When the FCPA was first passed there was concern that it would limit the competitive of the United States. If Non-U.S. companies were paying bribes to win contracts, then U.S. firms would lose the business unless they broke the law. The online comments to the article bring up those same thoughts.

References:

Proclamation 7750, Diplomatic Immunity and Corruption

The Foreign Corrupt Practices Act only applies to those making bribes. It does not apply to the recipients of bribes. Since the recipient must be a “foreign official” you run into the issue of “diplomatic immunity.”

The concept is that officials should only be held accountable to the laws in their home state. We would not want our officials being courted off to a foreign country for prosecution. Other countries should not expect their officials to be courted off to the U.S. for prosecution. I am sure you have seen an episode of Law & Order or Lethal Weapon2 where a criminal runs free under diplomatic immunity.

It should not surprise you that there is a correlation between parking violations scofflaws under diplomatic immunity and the corruption in their home country.  Ray Fishman and Edward Miguel published a paper researching parking violations and diplomatic immunity in New York City. (The Clinton-Schumer Amendment, which gave the New York City permission to tow diplomatic vehicles, revoke their official parking permits, and have 110 percent of the total amount due paid from U.S. government aid to the offending diplomats’ countries of origin, resulted in a substanital decrease in diplomatic parking scofflaws. )

Congress wrote the FCPA that way because it believed “the efforts expended in resolving the diplomatic, jurisdictional, and enforcement difficulties that would arise upon the prosecution of foreign officials was not worth the minimal deterrent value of such prosecutions.” U.S. v. Castle, 925 F.2d 831 (5th Cir. 1991) (per curiam).

I [George W. Bush] have determined that it is in the interests of the United States to take action to restrict the international travel and to suspend the entry into the United States, as immigrants or nonimmigrants, of certain persons who have committed, participated in, or are beneficiaries of corruption in the performance of public functions where that corruption has serious adverse effects on international activity of U.S. businesses, U.S. foreign assistance goals, the security of the United States against transnational crime and terrorism, or the stability of democratic institutions and nations.

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