Richard L. Cassin Publisher and Editor

Julie DiMauro Executive Editor

Andy Spalding Senior Editor

Jessica Tillipman Senior Editor

Michael Scher
Senior Editor

Elizabeth K. Spahn Contributing Editor

Eric Carlson Contributing Editor

Michael Kuria Contributing Editor

Thomas Fox Contributing Editor

Philip Fitzgerald Contributing Editor

Marc Alain Bohn Contributing Editor

Bill Waite Contributing Editor

Shruti J. Shah Contributing Editor

Russell A. Stamets Contributing Editor


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BAE: Bribery, Bombs And Black Knights

Photo by Annie MoleIs there a place where anti-corruption policy stops and international politics begins? Andy Spalding -- a lawyer and Fulbright scholar who's a familiar face around here -- thinks so. He sent this dispatch from Mumbai, India:

Dear FCPA Blog,

The BAE matter leaves many of us bewildered, struggling to grasp its greater significance. While several FCPA commentators have deemed 2009 "The Year of the Individual," I wonder if BAE points to another trend that is emerging. . . or rather, re-emerging.  Consider:

1. BAE, Saudi Arabia, and Terrorism. The UK's anti-bribery enforcement was severely obstructed by seemingly unrelated foreign policy objectives.  Since when, we may ask, did foreign policy impact FCPA enforcement? 

2. Iran and Nuclear Proliferation. Mike Jacobson of the Washington Institute recently suggested that the FCPA might be enforced selectively against companies doing business in Iran, as a form of economic sanctions. I understand that at least some FCPA insiders found Mike's core idea -- selective enforcement of the FCPA to advance foreign policy objectives -- not inconceivable.

3. China, Russia, and Political Alliances in the Developing World. Another piece ran earlier this year which demonstrated that as companies subject to the FCPA do less business in heavily bribery-prone countries, the resulting void of foreign capital will be filled by companies from countries that are not enforcing, or have not adopted, anti-bribery laws -- so-called "black knights." Economists predicted that the FCPA specifically would produce this effect, and we are indeed observing it today as China and Russia invest aggressively in Africa, Latin America, Central Asia, and the Middle East without fear of a bribery penalty. This dynamic is likely to significantly alter international politics for many years to come, though the FCPA community seems loathe to admit it.

4. History is Circular: the Forgotten Cold War Origins of the FCPA. Though we generally think of the FCPA as the product of Watergate, legislative history makes all too clear that the FCPA was also conceived, for better or for worse, as a tool of the Cold War -- punishing bribery was deemed essential to maintaining capitalism's credibility and ultimately spreading liberal democracy to politically unstable countries. This was not a partisan idea, advocated by a mere handful of arch-conservatives; to the contrary, both sides of the aisle readily endorsed it, including vociferous, high-profile critics of the Vietnam War such as George Ball. 

With the end of the Cold War, we largely stopped thinking about the FCPA's foreign policy implications, and were probably happy to do so. But alas, realpolitik has reared its ugly head once again, unlikely to return whence it came. So we're right back where we started, wrestling with the awkward convergence of anti-bribery laws and international politics. It may not be pleasant, but we should probably get used to it. 

With thanks,
Andy Spalding

 As always, other views are welcome.


Was Daimler's Deal Twice Delayed?

Friday we posted Bloomberg's report that German company Daimler AG (manufacturer of Mercedes-Benz cars and trucks) will pay about $200 million to resolve a Foreign Corrupt Practices Act investigation that began in 2004.

Why did the settlement take so long?

We've heard this explanation, which hasn't been confirmed by the company or the Justice Department:

Daimler first reached agreement with the government at end of the Bush administration. Counsel advised Daimler to wait until the Obama administration came in, in order to get a better deal. Daimler waited but wasn't able to improve on the terms and may have ended up with a harsher settlement.

The deal was originally brought to Judge Richard Leon at the federal district court in Washington, D.C. in August 2009. He took his time reviewing the terms (to Daimler's disappointment) and ultimately wouldn't give approval because it was not severe enough on the company. The government and Daimler revised the terms to meet Judge Leon's concerns.

The deal calls for the appointment of a compliance monitor for three years. Former FBI director Louis Freeh's name has been mentioned.

As we said, no one from the government or Daimler has confirmed this information.


Daimler Settlement Reported

A Bloomberg story today in Business Week here says Daimler AG will pay "about $200 million and two subsidiaries will plead guilty to resolve a U.S. investigation into whether it paid bribes to secure business overseas, according to people familiar with the accord."

Bloomberg said the deal still needs approval by federal district court judge Richard Leon in Washington, D.C.

The story quoted a Daimler spokesperson as saying: “We are in discussions with the DOJ and the SEC regarding consensually resolving the agencies’ investigations.” The spokesperson was identified as Ute Wuest von Vellberg, from Stuttgart, Germany. “There can be no assurance about whether and when settlement with the DOJ and the SEC will become final and effective," he said in an interview.

The FCPA investigation into Daimler began in 2004, triggered by the firing of an alleged whistleblower from the audit group at DaimlerChrysler Corp., Daimler's former affiliate.

We'll update this story as it develops.

Special thanks to Marc Bohn for his help with this post.


Technip's €245 Million FCPA Charge 

French company Technip said on Friday in its fourth quarter earnings release that it has reserved €245 million for an exceptional charge related to a potential settlement of Foreign Corrupt Practices Act offenses with the Justice Department and Securities and Exchange Commission for its role in the TSKJ Nigeria joint venture.

The company said:

As previously disclosed in its public filings, Technip has been cooperating with the United States Securities and Exchange Commission ("SEC") and the United States Department of Justice ("DOJ") in the ongoing investigations involving the joint venture company TSKJ, of which Technip has a 25% share, in relation to events which occurred between 1994 and 2004. Technip and the SEC and DOJ have discussed a resolution of all potential claims against the company arising from the investigation. While these discussions have not concluded, Technip will record an exceptional charge of €245 million in the fourth quarter 2009 reflecting the estimated costs of resolution based on the current status of the ongoing discussions.

Technip's chairman and CEO Thierry Pilenko said discussions with the SEC and DOJ "have intensified over the last weeks. There is now a roadmap to a satisfactory global resolution of all potential claims in the U.S. arising from the investigation. This is why we are now able to estimate the monetary cost of a resolution in our fourth quarter 2009 accounts."

A year ago, Houston-based global engineering firm Kellogg Brown & Root LLC (KBR) pleaded guilty to a five-count criminal information, with one conspiracy count and four substantive counts of violating the Foreign Corrupt Practices Act, for its role in the TSKJ joint venture. And with its former parent, Halliburton, it settled civil charges with the SEC. KBR's criminal fine was $402 million and with Halliburton it agreed to pay the SEC $177 million in disgorgement.

KBR admitted paying Nigerian officials at least $182 million in bribes for engineering, procurement and construction contracts awarded between 1995 and 2004 to build liquefied natural gas facilities on Bonny Island, Nigeria. The contracts to TSKJ were worth more than $6 billion. KBR's former CEO, Albert "Jack" Stanley, pleaded guilty in September 2008 to conspiring to violate the FCPA. He was sentenced to seven years in prison, subject to court review based on his cooperation.

The TSKJ joint venture was equally owned by KBR, Technip, Snamprogetti Netherlands B.V., a subsidiary of Saipem SpA of Italy, and JGC of Japan. It operated through three Portuguese special purpose corporations based in Madeira, Portugal. See our prior posts about KBR and TSKJ here.

In its release today, Technip said it doesn't expect " a criminal conviction for Technip’s role in the TSKJ joint venture." It said the fine will be "substantial" but won't impede the company from continuing its global business "in a normal manner."

The company added that the deal with the DOJ and SEC isn't completed.

Technip is a market leader in oil, gas, and petrochemical engineering, construction and services. It is headquartered in Paris and has about 23,000 employees. In 2009, revenue was €6.4 billion and operating income was €677 million.

Technip S.A.'s ADRs trade on the over-the-counter market under the symbol TKPPY.

View a copy of the company's February 12, 2010 release here.

Special thanks to Cody Worthington for his help with this post.


Mega-Bust Is Only The Beginning

The shot-show arrests (see our posts here) have raised lots of questions about FCPA enforcement and prosecution. In a post here, for example, we wondered if the government's argument that the 22 defendants were part of a single conspiracy might open the door for the entrapment defense, particularly because some defense counsel in the case have said their clients didn't know each other.

Law professor Dru StevensonIn response, Dru Stevenson, a professor at the South Texas College of Law, said it wasn't entrapment but maybe an "overdone" conspiracy charge. He wrote:

" . . . The federal courts use the 'subjective' rule for entrapment, which focuses on the defendant's predisposition and not on the government's conduct. It does not matter if the 'conspiracy' itself was really a huge sting operation -- each conspirator can still be guilty of conspiring with the government agent(s). Entrapment always has a sting operation as its origin, but most sting operations -- even grandiose ones -- do not run afoul of the rules for entrapment or provide the basis for the defense. . . .

"Regarding conspiracies, courts have upheld them where the members of the conspiracy did not know how big the conspiracy was or who all the other members were (in fact, most criminal conspiracies keep all the members on a 'need to know' basis so they can't rat out all the others if they bail out on the plot). On the other hand, courts have refused to entertain conspiracy charges where there was really one criminal making dirty deals with lots of criminal clients. Each person might be guilty of a conspiracy regarding the single transaction in which they participated, but not the transactions of others, unless it was reasonably apparent that their transaction was merely part of a larger scheme."

His full comment is here.

Michael Volkov, a former federal prosecutor and now a white-collar criminal defense lawyer at Dickinson Wright's Washington, D.C. office, thinks the entrapment defense might appear. He also talked about the government's FCPA investigation techniques and trial tactics.

He said:Michael Volkov: Former Assistant U.S Attorney and current white-collar criminal defense lawyer

"You mentioned in one entry the fact that the FBI undercover posed as a foreign official and was not an actual foreign official. While there is no caselaw directly on point, one thing is clear -- undercover agents can pose as persons for purposes of a violation -- e.g. an FBI agent acting as a minor, under 14 on the internet, for purposes of criminal solicitation etc. I suspect that principle will carry the day.

"I am much more interested, as a defense counsel, in the decision to prosecute the cases in D.C., where entrapment defenses normally get more traction. On the other hand, given the nature of the defendants and their origin, D.C. juries are less sympathetic. But my understanding of D.C. juries (based on 17 years as AUSA) is that they have difficulty understanding the instruction, thinking it means only 'trapped' as opposed to the legal definition of 'entrapped.'

"Finally, the most important aspect of this case is that DOJ and the FBI have now decided to use traditional law enforcement techniques typically reserved for drug traffickers, gang members and terrorists. Under these circumstances, I would expect the government to use a wiretap, undercover officers, etc, as they try to bring in more and more defendants. This is just the beginning and compliance will be incredibly important for corporate defendants -- big and small."


Second Guilty Plea For Panama Bribes

DOJ Release February 10, 2010 -- A Virginia resident pleaded guilty today in connection with his role in a conspiracy to pay bribes to former Panamanian government officials.

John W. Warwick, 64, of Virginia Beach, Va., pleaded guilty before U.S. District Court Judge Henry E. Hudson in Richmond, Va., to a one-count indictment charging him with conspiring to make corrupt payments to foreign government officials for the purpose of securing business for Ports Engineering Consultants Corporation (PECC) in violation of the Foreign Corrupt Practices Act (FCPA).

Warwick was indicted on Dec. 15, 2009. PECC, a company incorporated under the laws of Panama, was affiliated with an engineering firm based in Virginia Beach. According to the indictment, PECC was created so that Warwick, co-conspirator Charles Jumet, the engineering firm and others could corruptly obtain certain maritime contracts from the Panamanian government.

According to court documents, Warwick and Jumet participated in a conspiracy to pay money secretly to Panamanian government officials for awarding contracts to PECC to maintain lighthouses and buoys along Panama’s waterway. In December 1997, the Panamanian government awarded PECC a no-bid 20-year concession to perform these duties. Upon receipt of the concession, Warwick, Jumet and others authorized corrupt payments to be made to the Panamanian government officials.

In connection with his guilty plea, Warwick admitted that at least from 1997 through approximately July 2003, he, Jumet and others conspired to make corrupt payments totaling more than $200,000 to the former administrator and deputy administrator of the Panama Maritime Authority and to a former, high-ranking elected executive official of the Republic of Panama.

As part of his plea agreement, Warwick has agreed to forfeit $331,000, which represents the proceeds of this crime. At sentencing, scheduled for May 14, 2010, at 10:30 a.m. before Judge Hudson, Warwick faces a maximum of five years in prison and a fine of the greater of $250,000 or twice the gain or loss.

Jumet pleaded guilty on Nov. 13, 2009, to a two-count criminal information charging him with conspiring to make corrupt payments to foreign government officials for the purpose of securing business for PECC, in violation of the FCPA, and making a false statement. Jumet is scheduled to be sentenced on March 26, 2010.

A copy of the plea agreement in U.S. v. Warwick can be downloaded here.


A Gesture Of Justice

Judge William K. Sessions III, chief judge for the federal district of Vermont since July 2002. He chairs the six-member United States Sentencing Commission. Under proposed amendments to the federal sentencing guidelines, corporations could get a break on fines and other penalties for white collar crimes committed by top executives. To benefit, the companies would have to show that their compliance officer had direct access to the board of directors, their compliance program detected the criminal activity, and the company quickly self-disclosed it to the feds.

Will fine-tuning the sentencing guidelines help companies? Not likely. Writing in the Wall Street Journal's law blog, Amir Efrati said: "Given that judges don’t often oversee prosecutions of major companies, we’re not exactly sure how many big cases the change would effect in the future. Still, many smaller companies face prosecution all the time." (Not a single corporate defendant, big or small, has fought Foreign Corrupt Practices Act charges in court for the past two decades.)

The problem isn't the sentence a company might receive. It's the conviction itself -- best illustrated by Arthur Andersen's demise after a 2002 conviction (later overturned) and the loss of 85,000 jobs. Not only are the consequences disastrous, the risk of conviction at trial is nearly one hundred percent. The legal doctrine of respondeat superior makes corporations vicariously liable for crimes committed by employees at any level acting within the scope of their employment, even for actions in direct violation of company policy. With respondeat superior as a legal weapon, prosecutors can't lose. 

The U.S. Sentencing Commission itself said so in its May 2004 release:

Criminal liability can attach to an organization whenever an employee of the organization commits an act within the apparent scope of his or her employment, even if the employee acted directly contrary to company policy and instructions. An entire organization, despite its best efforts to prevent wrongdoing in its ranks, can still be held criminally liable for any of its employees’ illegal actions.

Because respondeat superior leaves companies defenseless, their only choice when threatened with prosecution is to cop a plea. That gives the DOJ and other enforcement agencies enormous power to force settlements on their corporate targets.

Using the sentencing guidelines to encourage corporate compliance is important. But it doesn't help targeted companies that are forced to choose between settlement and death. What's the fix? As many have suggested, instead of imposing strict liability, let companies at (or before) trial show they tried to prevent the criminal activity. If they can prove they had an effective compliance program, drop the prosecution and chase culpable employees instead.

The U.S. Sentencing Commission will hold a public hearing on March 18 and will vote on the proposed amendments in April.

Download a copy of the 76-page Proposed Amendments to the Sentencing Guidelines (January 21, 2010) here.


The SFO: Faux Enforcement Or First Real Step?

Like many people, we're tempted to bash the Serious Fraud Office. Its reluctance to pursue BAE -- despite the company's outrageous selling practices and offensive attitude -- generated strong emotions over the years. Andrew Feinstein, a former African National Congress MP who helped South Africa's parliament investigate BAE, told the Financial Times the SFO's settlement was a "travesty of justice."

The end wasn't pretty. The SFO -- which should have taken the lead -- barely laid a glove on BAE. It let the company plead guilty to an accounting lapse for payments to a former agent in small-market Tanzania. No other countries were mentioned. And it fined BAE £30 million (with some portion going to charity) -- a mere gesture considering the company's £18.5 billion in revenue last year.

Let's ask then: Why the tiny slap from the SFO? Why not something a lot more  . . . proportionate? The Justice Department, for example, followed a familiar script. In settling allegations that BAE paid and concealed bribes to government officials from Saudi Arabia, the Czech Republic, and Hungary, the DOJ hit the company with a small criminal charge -- one count of conspiracy to make false statements  -- and a huge financial penalty of $400 million. That's similar to the Siemens settlement in December 2008.

The SFO's main goal, it appeared, was to put the case behind it. On Friday it said "no further prosecutions will be brought against BAE Systems in relation to the matters that have been under investigation by the SFO." To prove the point, it dropped the prosecution of BAE's agent, Alfons Mensdorff-Pouilly. Just days earlier, he'd been charged with bribing government officials in the Czech Republic, Hungary, and Austria to sell jets for BAE. The end of his case probably sealed his lips -- and any evidence he might have offered -- forever.

We're not apologizing for the SFO. But could the BAE case have been too much enforcement too soon? The American Justice Department, after all, had 30 years to cut its teeth on FCPA prosecutions. When the big cases came along -- Siemens, KBR, then BAE -- the feds knew the drill. They had created politician-friendly templates that look like real punishment but let the corporate body survive unharmed and maybe even a lot wiser.

When the SFO launched its investigation into BAE six years ago, no British agency had prosecuted a case of overseas bribery. There wasn't any U.K. precedent to ensure punishment that wouldn't kill the company, à la Arthur Andersen. Beyond the mechanics, there was a cultural barrier. The British idea that laws broken overseas are no concern back home was around for a long time (see our post here). That idea didn't disappear on the day ten years ago when the U.K. signed the OECD's anti-corruption convention. Attitudes can change, as they did in the U.S., but that takes time.

Politics, too, may have helped overwhelm the case. The hawks who wanted BAE prosecuted were mainly from the press, NGOs, the judicial system, and the public. But the doves -- Britain's elected officials -- held the real power and they opposed putting BAE on trial. That's probably why the company's top brass never acted as though the SFO posed a serious threat.

There were also hints of something more cynical at work. As the Financial Times reported: "Norman Lamb, MP of the Liberal Democrats -- the only one of the three main parties not implicated in BAE's Saudi dealings of more than £40 billion over two decades -- said he was 'deeply concerned' that the settlement failed to deal with the company's suspected conduct in full." (Our italics.)

Going forward, the optimistic version is that the BAE case will help change British attitudes. And that the SFO, soon to be armed with a tough new antibribery law, will use the lessons learned to become a global leader in the fight against international public corruption.


BAE's "Black Money"

John Weston: BAE's former chief executive lied to the U.S. government about the company's compliance with the FCPA.At the heart of the DOJ's one-count criminal information that BAE pleaded guilty to on Friday is the al-Yamamah contract -- an $80 billion deal signed in the mid-1980s for the sale of jet fighters to Saudi Arabia. BAE won the contract by agreeing to pay bribes and kickbacks.

The DOJ said:

BAE agreed to transfer sums totalling more than £10 million and more than $9 million to a bank account in Switzerland controlled by an intermediary. BAE was aware that there was a high probability that the intermediary would transfer part of these payments to the [Saudi] official.

And this:

BAE took steps to conceal its relationships with . . . advisers and its undisclosed payments to them. For example, BAE contracted with and paid certain of its advisers through various offshore shell entities beneficially owned by BAE. BAE also encouraged certain of its advisers to establish their own offshore shell entities to receive payments while disguising the origins and recipients of such payments.

Despite the bribes and the elaborate money-laundering operation to conceal them, John Weston, BAE's chief executive, wrote a letter on November 16, 2000 to William Cohen, the U.S. Secretary of Defense. Weston promised that BAE was not knowingly violating the  Foreign Corrupt Practices Act and other antibribery laws. The letter is Exhibit A to the DOJ's criminal information.

*   *   *
If you haven't seen "Black Money," the PBS Frontline show examining al-Yamamah and the wider BAE scandal through the eyes and words of some of those involved, here it is. We think it's the best documentary about international corruption ever produced. There are great appearances by many, including David Leigh of the Guardian, who with colleague Rob Evans first reported the BAE scandal in 2003. Without their dogged work the story of BAE's corrupt practices may never have been told.



BAE Settles Bribery Case

British arms-maker BAE Systems plc reached a simultaneous settlement today of bribery allegations with the U.K.'s Serious Fraud Office and the U.S. Justice Department. In its release, the company said:

Under the agreement with the Department of Justice, which requires court approval, the Company will plead guilty to one charge of conspiring to make false statements to the U.S. Government in connection with certain regulatory filings and undertakings. The Company will pay a fine of $400 million and make additional commitments concerning its ongoing compliance.

Under the agreement with the Serious Fraud Office, the Company will plead guilty to one charge of breach of duty to keep accounting records in relation to payments made to a former marketing adviser in Tanzania. The Company will pay an agreed penalty of £30 million comprising a fine to be determined by the Court with the balance paid as a charitable payment for the benefit of Tanzania.

The SFO's announcement is here and a copy of the U.S. criminal information can be downloaded here.

The case began six years ago with allegations that BAE secretly paid $2 billion to Prince Bandar bin Sultan -- Saudi Arabia's former ambassador to Washington -- in return for inside help selling Typhoon jet fighters to the Saudi government. The SFO opened an investigation but was forced to drop it in December 2006 -- just as investigators were closing in on evidence about money transfers through Switzerland. The SFO later said Saudi Arabia had threatened to end all anti-terrorism cooperation with the U.K. unless the Blair government pulled the plug on the investigation.

In an apparent response to the SFO's decision, the DOJ opened an investigation in 2007. When BAE stonewalled, the U.S. turned up the heat. In May 2008, federal agents detained and searched BAE's CEO and a director as they travelled separately through the Houston and Newark airports.

BAE -- Europe's largest defense contractor and the fourth biggest military supplier to the American government -- has 32,000 employees in the U.K. and about 105,000 worldwide. It's a lead contractor for the Eurofighter and other big arms projects.

In October 2009, the SFO announced it would seek approval from the U.K. attorney general to prosecute BAE for overseas corruption in Africa and Eastern Europe. The press reported the prosecution would involve sales of aircraft in South Africa and the Czech Republic, purchases of two frigates in Romania, and radar equipment for air traffic control in Tanzania. BAE's talks with the SFO to resolve those charges reportedly broke down when BAE refused to plead guilty to offenses that could disqualify it from government business in other countries.

Then last week, the SFO charged one of BAE's former middlemen, Count Alfons Mensdorff-Pouilly, with bribery in connection with arms sales to the Czech Republic, Hungary, and Austria of SAAB / Gripen fighter jets marketed by BAE. But on Friday the SFO said it would drop all charges against Mensdorff-Pouilly, an Austrian citizen, because of BAE's settlement.

Dowload a copy of the government's sentencing memorandum in U.S. v. BAE Systems plc here.