Tag: FCPA

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.

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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.

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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.

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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.

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 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/

FCPA Release 10-03: Foreign Agents as Foreign Officials

The Department of Justice released its latest FCPA Opinion Release. The requesting company for this opinion release is stepping into a situation full of FCPA red flags. In the end, the DOJ opined that it would not bring an enforcement action based on the safeguards put in place by the company.

The company is involved in “natural resource infrastructure development” and trying to get a government contract. They want to hire a consultant who has previously and currently holds contracts to represent the foreign government
and act on its behalf and a registered agent of a foreign government pursuant to the Foreign Agents Registration Act, 22 U.S.C. § 611 et seq. Of course, the consultant is being paid on a contingency basis.

The DOJ points out that the FCPA does not “per se prohibit business relationships with, or payments to, foreign officials.” They look for these factors in the business relationship:

  • indicia of corrupt intent
  • transparency to the foreign government and the general public
  • whether the arrangement is in conformity with local law
  • whether there are safeguards to prevent the foreign official from improperly using his or her position

In this case, the company is putting extensive safeguards in place. The DOJ found the safeguards were good enough.

The consultant is an agent of the foreign government and there are situations in which the consultant will act on behalf of the foreign government, so the company should treat the consultant and its employees “foreign officials” for purposes of the FCPA.

The company is walling off the employees working on the various representations from each other and is disclosing  the relationships to the relevant parties. The business relationships are permitted under local law. The obligations limit representation of the foreign government by the consultant are sufficient to ensure that the consultant will not be acting on behalf of the foreign government in acting for the company.

The walling off and limitations are actually enough to pull the consultant out from under the label of being a “foreign official.”

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FCPA Opinion Procedure Release 10-02

A continuing quirk of the Foreign Corrupt Practices Act is the ability to ask the Department of Justice whether a particular set of facts would be a violation of the Act. Given all of the recent FCPA activity I expected there to be an uptick in Opinion Procedure Releases under the FCPA. So far that does not seem to be the case. There was one release in 2009 and only the second for 2010 has recently been issued.

Maybe the bribery situations being faced by corporate America are straightforward and don’t need interpretation (or unwanted attention) from the Department of Justice.

The Opinion Requestor runs a micro-finance operation in a country in Eurasia. (I’m not sure why they used this identification.) They are trying to convert from a non-profit model to a commercial operation. The government of the unnamed Eurasian country is insisting that the requestor make a significant grant to local micro-finance institution. The regulating agency has provided a short list of six local MFIs in the Eurasian country. Either cough of the cash to get it localized or it can’t get its operating permits.

Of the six local micro-finance institutions, they found three “as generally unqualified to receive the grant funds and put them to effective use.” They then conducted further diligence on the remaining three and ruled out two more: one for conflict of interest concerns, the other after the discovery of a previously undisclosed ownership change in the entity.

That left them with one choice, so they dove deeper in their diligence. They discovered that one of the board members of the local micro-finance institution was also a government official.

The requestor laid out a series of controls is would put in place to protect the investment in the local micro-finance institution from corrupt influence and prevent money from flowing to board members.

There is some interesting discussion about what charitable institutions need to look at and controls needed to avoid FCPA violations. The DOJ also refers to three prior releases that have dealt with charitable-type grants or donations:

  1. FCPA Opinion Release 95-01 (Jan. 11, 1995)
  2. FCPA Opinion Release 97-02 (Nov. 5, 1997)
  3. FCPA Opinion Release 06-01 (Oct. 16, 2006)

The situation in the release is unique but you can use the controls and discussion in the release to help with your own FCPA compliance program.

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