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Richard L. Cassin Publisher and Editor

Andy Spalding Senior Editor

Jessica Tillipman Senior Editor

Elizabeth K. Spahn Editor Emeritus

Cody Worthington Contributing Editor

Julie DiMauro Contributing Editor

Thomas Fox Contributing Editor

Marc Alain Bohn Contributing Editor

Bill Waite Contributing Editor

Shruti J. Shah Contributing Editor

Russell A. Stamets Contributing Editor

Richard Bistrong Contributing Editor 

Eric Carlson Contributing Editor

Bill Steinman Contributing Editor

Aarti Maharaj Contributing Editor


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FCPA Blog Daily News

Thursday
Jan312008

Who's Monitoring The Monitors?

Ellen Podgor at the indispensable White Collar Crime Prof Blog has a post about the federal compliance monitors program here. It links to an article in the Washington Post here, and sets out the text of proposed federal legislation to regulate the monitors and their appointments. (Our earlier posts on the subject are here.)

In the Washington Post article -- which deals mainly with how U.S. Attorney General Michael Mukasey almost became a monitor before his appointment as AG -- reporter Carrie Johnson nicely summarizes the monitor-program controversy this way:

"Scrutiny of the monitor arrangements and complaints about their secrecy have mounted in recent weeks after a deal worth as much as $52 million was awarded to a consulting firm led by former attorney general John D. Ashcroft. The Justice Department launched a policy review last year to determine whether national standards should be imposed to avoid the appearance of impropriety. Lawmakers and legal experts have sounded alarms about possible political patronage, raising questions about whether prosecutors have steered the sole-source contracts to people with ties to the Bush administration, the Justice Department and the Securities and Exchange Commission. In the vast majority of cases, monitors operate without a judge's oversight of their work and their bills. The agreements have risen more than sevenfold in recent years as prosecutors have settled corporate fraud cases rather than bringing them to trial, which might destroy the business and cost employees their jobs. "

The bill proposed by Rep. Frank Pallone (D-NJ) would remove most of the discretion for the appointment of monitors from the hands of individual U.S. attorneys. It would also create a mechanism to set their pay and hold them accountable for reporting back to the Justice Department and the federal courts. Part of the bill reads:

SEC. 3. FEDERAL MONITORS.

(a) In General- A Federal monitor shall oversee a deferred prosecution agreement.

(b) Appointment of Federal Monitors- A Federal monitor shall be appointed by an independent third party (a United States district court judge or a United States magistrate judge) from a pool of pre-qualified firms or individuals (or both).

(c) Qualifications of Federal Monitors- A Federal monitor shall have experience in criminal and civil litigation.

(d) Payment of Federal Monitors- A Federal monitor shall be paid according to a pre-determined fee schedule set by the United States district court.

(e) Report Requirement in Deferred Prosecution Agreement-

(1) A deferred prosecution agreement shall include a requirement that a Federal monitor submit reports to the United States attorney and to the United States district court.

(2) A deferred prosecution agreement shall include the number and frequency of reports required by a Federal monitor.

Wednesday
Jan302008

Another Look At China

Yesterday we talked about a recent story in the Chinese press blaming foreign companies for more than half of the PRC's corruption, and singling out U.S. companies that violated the Foreign Corrupt Practices Act in China. On reflection, we may have been unduly skeptical about China's motives for publishing the story. So today we want to set the record straight.

To be clear, the PRC's economic policies and the results they've produced are phenomenal. Last year the country attracted nearly $75 billion in foreign direct investment. Total FDI has topped $700 billion. There are now some 120,000 foreign-invested enterprises in the PRC, double the number from just 2002. The economy is still growing at over 11% a year, and in a country of more than 1.3 billion people, per capita income has reached around $5,500. Foreign businesses in China are getting bigger. McDonald's this week said it plans to open 125 more outlets there in 2008, and Dunkin' Donuts wants 100 new locations in Shanghai alone over the next 10 years. What's the growth look like at street level? Our first visit to China was in 1993. Crossing main roads in Beijing was nearly impossible because of the streaming bicycles pedaled by factory workers wearing black Mao suits. The same blocks now make up some of the world's fanciest neighborhoods -- upscale condos and cafes filled with world-class fashionistas, and streets flowing with BMWs and Audis, Lamborghinis and more.

With such a staggering level of foreign activity in the economy, it's logical that a lot of the corruption over the past ten years can be traced to foreign companies. We thought 64% -- the amount noted in the aforementioned story -- sounded too high. But it could be close to the mark after all. For sure, the number of Foreign Corrupt Practices Act enforcement actions and investigations related to China has ballooned over the past few years. Among the companies involved are Lucent Technologies Inc., Faro Technologies, Inc., York International Corporation, Paradigm B.V., Schnitzer Steel Industries Inc., InVision Technologies, Inc., Diagnostics Products Corporation, Alltel Corporation, BearingPoint Inc. and UTStarcom Inc. Siemens may have FCPA issues in China, and there could be others. That's a long list in the rather limited FCPA universe. So what gives?

We've wondered before if some companies go into certain countries -- China, Nigeria and Indonesia come to mind -- expecting to find a corrupt environment. And once there -- no matter what they find -- they lower their compliance standards instead of raising them. Some pundits in Nigeria have talked about this syndrome and how it victimizes the local economy and the people in it. Perhaps the Chinese press is now sensitive to the same thing.

So in the spirit of the approaching Lunar New Year -- the beautiful character above means "rat," the sign next up on the Chinese calendar -- we acknowledge that ten years ago China put out the welcome mat to the world's entrepreneurs on a scale never seen before. Since then people by the billions have enjoyed the fruits, both in China and around the globe. At the same time, the Chinese government has struggled with public corruption -- as most developing economies do. It has fought against it using all available weapons. [Sometimes we cringe to read about executions for bribe-taking there.] Now China is telling the international community that a big part of its corruption problem is imported from overseas -- even from the United States. It's a good reminder to foreign companies -- especially those required to comply with the FCPA -- that instead of being part of the problem they should be part of the solution.

Tuesday
Jan292008

Most Corruption Comes From Abroad, Says China

A Special Warning For U.S. Companies

As China battles indigenous corruption, it's also spotlighting foreign and especially U.S. companies that are importing illegal practices into the PRC. A story in the Chinese press in December 2007 said, "According to a report by local consulting company Anbound, of the 500,000 bribery cases investigated in China over the last 10 years, 64 percent involved foreign companies." It mentioned allegations involving Lucent Technologies Inc., IBM, Cisco and NCR. Four of Lucent's employees in China, the story reported, were apparently fired in 2004 for violating the Foreign Corrupt Practices Act. The story quotes a Beijinger as saying: "I cannot understand after many foreign companies complain about corruption and bribery in China, then why are they doing similar things?"

Official statistics about corruption from the PRC can be dodgy. But any discussion about foreign companies involved or suspected of being involved in corrupt payments, and the naming of some U.S.-based headliners, may mark an important new strategy. Presumably, China will use the foreign companies' names to defend itself against charges from the U.S. and OECD that its anti-corruption enforcement is lax. Most of our corruption, China will argue, actually came from you first. We're the victim here.

One result is that foreign companies -- particularly those subject to the FCPA -- will be very attractive targets during the PRC's Olympic-year anti-corruption campaign. That means it's a good time to put China-related compliance programs on high alert.

Meanwhile, Chinese President Hu Jintao told leaders of the Communist Party that the country's anti-corruption drive remains a top priority. President Hu -- who also serves as general secretary of the Communist Party of China Central Committee -- spoke at the organization's important three-day plenary session in mid-January. "Anti-corruption measures and the upholding of integrity should run thoroughly through the nation's economic, political and cultural makeup and the Party's ideological, organizational, work style and institutional building," he said. In typical PRC practice, President Hu's speech became a "guideline document to enhance the work of anti-corruption and upholding of integrity," the communique said.

By June 2007, some 24,879 cases of official corruption had been investigated in the PRC, the communique said. The cases involved bribes totaling more than 6.156 billion yuan (US$860 million). Government employees were involved in 5,523 bribery cases, accounting for 22.2 percent of those caught, the communique said. For example, He Minxu, former vice-governor of eastern Anhui Province, was sentenced to death with a two-year reprieve for taking bribes of 8.41 million yuan (US$1.12 million) from 27 organizations and individuals, the latest senior official to be brought down in a corruption scandal. Another case cited was that of Zheng Xiaoyu, former director of China's State Food and Drug Administration. He was executed in July 2007 and was the fourth senior official to be sentenced to death since 2000. Zheng was found guilty of taking 6.49 million yuan (US$910,000) in bribes. When he was sentenced, the Supreme People's Court said his dereliction of duty undermined China's drug monitoring and supervision, endangered public life and health and had a very negative social impact. Speculation in China and elsewhere is that some of the bribes Zheng took came from foreign companies.

View articles from the December 12, 2007 edition of China Daily Here and January 17, 2008 edition Here.

Monday
Jan282008

Politics Is Still A Risky Business

A note to our readers: Former Indonesian President Suharto, 86, died on Sunday, January 27, 2008. He led Indonesia from 1965 until 1998, when he was driven from office after months of street protests. During his one-man rule, Indonesia had an average annual growth rate of 6.5%, helping to raise millions of its citizens from poverty to the middle class. But the Suharto regime also made Indonesia one of the world's most challenging countries for Foreign Corrupt Practices Act compliance. The following article -- which appeared under our byline in a slightly different form in the Wall Street Journal Asia in June 1998 -- discusses corruption in Suharto's Indonesia and the frequent links among entrenched regimes, corruption and political risk. -- The Editors

As the recent troubles in Indonesia, not to mention South Asia, the Balkans and much of Africa, keep showing, the world is still a very dangerous place. Anyone involved in decisions to deploy capital or people overseas should have some idea of the risks involved, if only to appreciate the need for a good exit strategy. So why has the field of political-risk analysis become almost extinct? To answer that question one must delve a little into the early days of the discipline and its past mistakes. Then it becomes apparent that there’s no reason why it shouldn’t re-emerge, albeit in a more user-friendly form.

This field of study had its heyday back in the early 1980s, when academicians began publishing serious works about political-risk analysis, which became known as PRA. These weighty tomes often bore pretentious titles like "Introduction to Political Risk Analysis" and "A Survey of the Quantitative Approaches to Country Risk Analysis." A lot of us back then thought PRA was hot and here to stay.

The best time for PRA practitioners was probably marked by the publication of Don DeLillo’s quirky book, "The Names," in 1983. The narrator-hero was an American expatriate political-risk analyst working in and around the Middle East. I was then a young lawyer at the Arabian American Oil Company in Dhahran, Saudi Arabia, and the copy I snuck in was passed from hand to hand. Typically, around the same time, a few PRA practitioners even started a professional group known, I think, as the American Association of Political Risk Analysts. I joined and heard nothing for almost a year. Then a photocopied half-page notice came in the mail, explaining that the group had dissolved because there didn’t seem to be much demand for the association after all.

In truth, Political-Risk Analysis never really got off the ground. The discipline had problems from the start because it pretended to be quantitative but never really was. In the number-crunching 1980s, that was an unforgivable sin. On top of that, the serious PRA practitioners -- mainly ex-university professors from the broad and vague field of political science -- blended in with corporate MBA types about as well as Indonesian businessmen with Arkansas politicians.

Today the field is nearly extinct. A few stalwarts hang on like the middle-aged guys who recreate American Civil War battles. But for the most part, to quote from a lonely but comprehensive PRA web site, (www.grai.com), “in the 1980s various MNCs disbanded their political risk functions or incorporated these functions into other staff activities.” Why did the field of Political-Risk Analysis go the way of the buggy whip and Nehru jacket? A book review on the above-named web site laments “three fairly familiar reasons”: (1) failure of companies to formally integrate PRA into corporate decision making, (2) the desensitizing of business people to political risk by its very prevalence, and (3) corporate downsizing of staff groups that would never be profit centers.

But all this is not to say the rest of us should forget about PRA. To be useful, political-risk analysis needs to be simple, that’s all. So I've created the “Three Strikes, You’re Out” test of political risk. If a country has all three Strikes, it's already a political-risk basket case, beyond help or hope. A country with one or two Strikes is sick but ambulatory, and should be treated for business purposes like a fragile aunt. Here are the Strikes. By the way, I strongly recommend against exploring the 3S Test in a dissertation or through other less lethal means.

Strike One: Excessive Love for the Long-Time Leader. It's a sure sign of coming disaster when the citizenry dearly love their despot. It means he's been on the throne too long and gone from strong father to cranky granddad. I was in Jakarta last year the day then-President Suharto, or Pak Harto, as he was lovingly called, flew off to Germany for a mysterious medical check up. Everyone was depressed. A man at the airport who wheeled my luggage cart from the curb to the counter was near tears, barely able to shuffle his feet. I thought I saw him on the TV news last month throwing rocks through windows in downtown Jakarta. A leader is over ripe when his country is referred to as his possession. I'm thinking how many times during the past couple of years I read or heard of “Mr. Suharto’s Indonesia.” “Tito’s Yugoslavia,” incidentally, is still falling apart. “Marcos’s Philippines,” like the “Medici’s Florence,” also did not end well. Even “Daley’s Chicago” looked pretty sick in 1968.

Strike Two: The Same Faces in Every Deal. As soon as Mr. Suharto abdicated, the students aptly coined the phrase “nepotism, collusion and corruption” to mean all the evils of his 32-year rule. An American executive working in Jakarta complained to me in 1992 that every time he tried to do anything, one of Mr. Suharto’s kids or cronies would show up and demand a piece of the action. He said it happened on everything, from a $100 million project to routine purchase orders. It was easy to do business in the Philippines during Marcos’s time, likewise in Iran during the Shah’s or Nicaragua during Somoza’s. Foreign investors cut through the red tape by working with one of the few wired local partners. Well-greased insider deals always look good at the time, but are usually too good to be true.

Strike Three: Abnormal Banker Behavior. When expatriate bankers (especially Americans, Germans and Japanese) start acting less like morticians and looking more like game-show hosts, head for cover. My experiences in Indonesia again come to mind. I watched foreign bankers in Jakarta transmogrify from the men-or-women in gray flannel suits to batik-shirted glad handers. I should also have sensed real danger when male bankers showed up at meetings to woo potential borrowers and brought along very attractive young ladies in flowery outfits.

So there is the 3S Test if you want to pursue "PRA," which, as I said, still has a role to play. There's also a final warning: You may hear each of the Strikes used separately or in combination to compliment a country's business climate. Here’s an overheard hotel-lobby remark, and it includes everything you need to know: “Jakarta's a great place to do business. The people love Suharto. I always see my old friends here. And the foreign bankers are so much fun.”

Thursday
Jan242008

Handicapping The FCPA

We heard a few days ago (here) that some Siemens insiders are trying to calculate the company's potential financial penalties for alleged Foreign Corrupt Practices Act offenses. Apparently the insiders think that past FCPA settlements reveal a correlation between the amount of bribes paid and the financial penalties imposed on the organizations. We don't think the correlation exists, but we're never going to be mistaken for mathematicians. So we're providing the raw data below in case any real mathematicians are paying attention.

Who knows? Maybe there is a pattern after all. Even so, we don't advise anyone to decide about FCPA compliance after a cost - benefit analysis. For individuals, there is a 100% chance that an FCPA offense can result in five years behind bars. No matter how you figured it beforehand, ending up in prison will always turn out to be an enormous tragedy. And no, we're not suggesting that organizations should compute their odds. The only bet that makes any sense is to comply.

So for purely academic purposes, here are the numbers. They're for FCPA matters that companies resolved with the SEC, DOJ or both during 2007. As a caveat, most of the companies also agreed to appoint monitors or compliance consultants. The cost of doing that is not included in the amounts shown. As we've learned from John Ashcroft's recent appointment by Zimmer Holdings in a domestic bribery case, monitors can cost millions or even tens of millions of dollars a year. Nor do the numbers reveal the damage done to the fabric of organizations by FCPA problems, and the ruined lives of men and women who lost their jobs and perhaps a lot more because of non-compliance.

El Paso Corp.
, Feb. 7, 2007 Amount of alleged bribes: approximately $5.5 million. Financial penalties: $7.65 million ($5.4 million in disgorgement and a $2.25 million civil penalty).

The Dow Chemical Co., Feb. 13, 2007 Amount of alleged bribes: about $200,000. Financial penalties: $325,000 civil penalty.

Baker Hughes Inc., Apr. 26, 2007 Amount of alleged bribes: $15.4 million. Financial penalties: $44 million (about $22 million in disgorgement and pre-judgment interest, a $10 million civil penalty for violating a prior cease-and-desist order, and an $11 million criminal fine).

Delta & Pine Land Co., July 26, 2007 Amount of alleged bribes: $43,000. Financial penalties: $300,000 civil penalty.

Textron Inc., Aug. 23, 2007 Amount of alleged bribes: about $650,000. Financial penalties: about $4.5 million (over $3 million in disgorgement and pre-judgment interest, an $800,000 civil penalty, and a $1.15 million fine).

Bristow Group, Inc., Sept. 26, 2007 Amount of alleged bribes: over $423,000. Financial penalties: Nil.

York International Corp., Oct. 1, 2007 Amount of alleged bribes: about $7.5 million. Financial penalties: $22 million (over $10 million in disgorgement and pre-judgment interest, a civil penalty of $2 million, and a $10 million fine).

Ingersoll-Rand Co. Ltd., Oct. 31, 2007 Amount of alleged bribes: over $1.5 million. Financial penalties: $6.7 million (over $2.2 million in disgorgement and pre-judgment interest, a $1.95 million civil penalty, and a $2.5 million fine).

Chevron Corp., Nov. 14, 2007 Amount of alleged bribes: over $20 million. Financial penalties: $30 million ($25 million in disgorgement, a $3 million civil penalty and a $2 million penalty to the Office of Foreign Asset Controls of the U.S. Department of the Treasury).

Akzo Nobel NV, Dec. 20, 2007 Amount of alleged bribes: $280,000. Financial penalties: $2.9 million (over $2.2 million in disgorgement and a $750,000 civil penalty).

Lucent Technologies, Inc., Dec. 21, 2007 Amount of alleged bribes: at least $1.3 million. Financial penalties: $2.5 million ($1.5 million civil penalty and a $1 million fine).

________

View more information by clicking on the subject headings to the right.

Wednesday
Jan232008

Heading For Trial In Tinseltown

Our favorite news source here at the FCPA Blog -- Variety -- reports that the Hollywood film producers arrested for violating the Foreign Corrupt Practices Act have pleaded not guilty and will go to trial on February 26, 2008. Gerald Green, 75, and his wife Patricia Green, 52, both of Los Angeles, were arrested on a criminal complaint filed in December 2007 in federal court in Los Angeles. The complaint alleges that the Greens conspired to pay more than $1.7 million in bribes to a government official with the Tourism Authority of Thailand in order to obtain a film festival contract worth more than $10 million. The Greens are out on $500,000 bail.

The trial could be a major embarrassment for at least one Thai government official. The FBI affidavit doesn't name names. But the Feds describe then-governor of the Tourism Authority of Thailand and president of the Bangkok International Film Festival, Juthamas Siriwan. Variety says, "Siriwan, who has neither been charged in the U.S. nor in Thailand, has denied any suggestion of corruption. But the day after the charges against the Greens were made public, her political career took a dive and she resigned from the deputy chairmanship of the People's Power Party."

The Greens owned and operated Film Festival Management, a Los Angeles-based business formed in 2003 specifically to bid for the management contract for the Bangkok film festival. They also produced the movie "Rescue Dawn" last year. The bio-pic stars Christian Bale as a U.S. air force pilot shot down and captured by the Viet Cong in 1966. Bale's a terrific actor so we flipped to the movie on a recent transpacific flight. It looked good -- but too intense to watch at 40,000 feet. So we switched to an episode of "House," followed by the "Office," and then another confusing golf lesson.

FCPA-related trials are rare events -- only individuals, not corporations, take their chances in court. So we'll keep an eye on what happens with the Greens.

View Variety's January 23, 2008 report Here.

View our prior post about the Greens Here.

Monday
Jan212008

How Much Will Siemens Pay?

A January 19, 2008 report in the German business magazine WirtschaftsWoche (here) says unnamed members of Siemens' supervisory board (equivalent to U.S. directors) think the company may be fined as much as €4 billion by United States regulators for alleged violations of the Foreign Corrupt Practices Act. The magazine reports that the supervisors are basing the figure on three times the €1.3 billion in illegal payments identified by the company. The article says Siemens insiders had hoped the U.S. Justice Department and Securities and Exchange Commission would be satisfied with penalties of not more than €1 billion. But their new worst-case scenario reflects FCPA-related penalties imposed on Titan Corporation in 2005 and ABB Ltd. in 2004. The article says the Siemens insiders have calculated that Titan's penalties amounted to almost ten times the bribes it paid, and ABB's penalties were about eight times the amount of the bribes in question. The unattributed story doesn't carry any comments or reaction from official sources in Siemens or from U.S. authorities.

In fact, the Titan and ABB cases, among others, demonstrate that there's no simple or consistent formula for determining financial penalties in FCPA matters. In March 2005, Titan paid $28.5 million -- at the time the largest FCPA penalty ever imposed. For bribes of $3.5 million, it paid a criminal fine of $13 million and a civil penalty and disgorgement of $15.5 million. ABB resolved an FCPA matter in July 2004. For questionable payments of around $1 million to secure a $180 million contract, it agreed to pay a $10.5 million penalty and $5.9 million in disgorgement. Baker Hughes currently holds the record for penalties paid in an FCPA case -- $44 million. The company's illegal payments amounted to about $5.2 million. To settle the case in April 2007, it disgorged about $20 million, paid prejudgment interest of $3.1 million, a civil penalty of $10 million for violating a prior SEC cease-and-desist order, and a criminal fine of $11 million.

Some factors the SEC and DOJ have considered when assessing FCPA-related penalties in negotiated settlements are these:

-- the presence or absence of an effective compliance program;

-- the role played by the company itself in discovering and investigating potential violations, whether and when it self-reported to U.S. authorities, and the corrective action already taken to prevent future violations;

-- the company's history of prior violations;

-- the role and culpability of current members of senior management and directors in the alleged violations; and

-- the duration and extent of the alleged illegal behavior.

Under the statute itself, criminal penalties for organizations can include a fine of up to $2 million. But under the Alternative Fines Act, the actual criminal fine may be up to twice the benefit that the defendant sought to obtain by making the corrupt payment. Civil fines for an organization can be the greater of (i) the gross amount of the pecuniary gain to the defendant as a result of the violation or (ii) $50,000 to $500,000. When negotiating the financial aspects of FCPA settlements, however, the DOJ and SEC are not limited by the types or amounts of penalties specified in the statutes.

View Prior Posts About Siemens Here.

Saturday
Jan192008

Scandal Hits The Compliance Monitors

The problems started for the Justice Department's corporate monitoring program late last year. Five leading orthopedic device makers had been charged with bribing doctors in the U.S. to get their business. (Now they're being investigated for bribing doctors overseas in violation of the Foreign Corrupt Practices Act.) In September, New Jersey's U.S. Attorney Chris Christie used deferred prosecution agreements to settle the domestic cases. The terms required the appointment of compliance monitors -- private parties who police the corporations from the inside, report directly to the DOJ, and send their bills for doing so to the companies themselves.

For the orthopedic device makers, Mr. Christie's corporate monitors were ex-U.S. Attorney General John Ashcroft (his former boss), former U.S. Attorney for the Central District of California Debra Yang, former New Jersey Attorney General David Samson, former U.S. Attorney for the Southern District of New York in Manhattan David N. Kelly, and former counsel to the Federal Trade Commission during the Reagan Administration John Carley. In other words, the monitors were people close to Mr. Christie.

No matter how you spin it -- and Messrs. Christie and Ashcroft have been doing plenty of that -- the appointments have the appearance of impropriety. Peel away the PR and the best you can say is that there was some obvious cronyism going on. The worst you can say is that the DOJ created a scheme by which U.S. Attorneys can extract millions of dollars from wrongdoers and funnel the money to former bosses, friends and political allies. We don't buy the sinister version for a second, but lots of people will take it as gospel.

At this point, we might ask whether we need corporate monitors at all? Was there something terribly wrong with the old fashioned approach? Our experience with companies involved in the FCPA forerunner cases -- companies that were required to operate under pre-FCPA consent decrees with the DOJ and SEC because of bribe-paying overseas -- taught that the threat of expedited enforcement and enhanced penalties really worked. With the stakes always high -- including potential jail time for executives -- the companies changed their culture. Compliance became real, not cynical, and recidivism wasn't an issue. Many of those monitorless companies are today's model citizens of FCPA compliance.

Wherever the debate about corporate monitors ends up, the reality is that the program is badly wounded. And the people responsible for the bloodletting -- with Messrs. Christie and Ashcroft at the top of the list -- should have known better. This scandal is just beginning, but here's a sample of what some others are already saying about it. By the sound of things, this is another problem for the Justice Department that isn't going away any time soon.

  • Federal prosecutors are steering no-bid contracts to former government officials who earn millions of dollars by monitoring companies accused of cheating investors and other schemes. . . . In the past few years, U.S. attorneys in Alabama, New York and Virginia have turned to corporate monitors to keep companies clean, hiring various former prosecutors and SEC officials with ties to President Bush, his father and other Republican luminaries. Some prosecutors hammer out with companies a short list of candidates from which to choose, while others have retained veto power over a business's choice. A smaller group has given corporate executives little input on the selection.-- The Washington Post
  • In a letter to the Government Accountability Office, Sen. Patrick Leahy (D-Vt.) and U.S. Rep. John Conyers (D-Mich.) asked for that office to investigate "if political or personal favoritism played a role" in the appointment of dozens of monitors to potentially lucrative but secretive contracts. -- The (New Jersey) Star Ledger
  • When the top federal prosecutor in New Jersey needed to find an outside lawyer to monitor a large corporation willing to settle criminal charges out of court last fall, he turned to former Attorney General John Ashcroft, his onetime boss. With no public notice and no bidding, the company awarded Mr. Ashcroft an 18-month contract worth $28 million to $52 million. -- The New York Times
  • . . . much has been made of the estimated cost of former Attorney General John Ashcroft's monitorship for Zimmer Holdings that will cost the company between $28 million and $52 million. That case is fairly straightforward, involving illicit payments to doctors to use the company's devices in replacement surgeries. Indeed, it's not clear how Ashcroft can charge that much for a fairly simple monitorship . . . . -- The White Collar Crime Prof Blog
  • In November the Law Blog took interest in an eye-poppingly lucrative contract that the U.S. Attorney in New Jersey awarded to John Ashcroft, the former attorney general-turned-confidential strategic consultant. Now it seems that Ashcroft’s former employer — i.e., the Justice Department — has taken an interest too . . . Now, the DOJ has begun an internal inquiry into its procedures for selecting outside monitors to police settlements with large companies. Apparently, aides to [U.S. Attorney General] Mukasey were concerned about the appearance of favoritism. -- The Wall Street Journal's Law Blog

Thursday
Jan172008

Siemens' Investigation Steams Ahead

Siemens AG -- the German industrial giant enmeshed in a global corruption scandal -- said this week that for fiscal 2007 it will delay ratifying acts of individuals who have served on its managing board at any time since 1999. President and CEO Peter Löscher, who joined Siemens after the events under investigation occurred, and who's leading the effort to clean up the company, is exempt from the ratification's postponement.

The move may preserve Siemens' ability to act against managers who knowingly participated in the fraud, which allegedly involves illegal payments amounting to €1.3 billion. In the United States, the Securities and Exchange Commission and the Department of Justice are investigating whether Siemens violated the Foreign Corrupt Practices Act. The company is also facing possible charges of public corruption in Italy, China, Hungary, Indonesia and Norway. Before settling any eventual charges against Siemens, U.S. prosecutors will want assurances that the company has taken proportionate corrective action, including identifying those responsible for the illegal payments and imposing on them some level of work-place discipline.

In September 2007, there were reports that Siemens' internal investigation was stalling, hampered by the stonewalling of its managers in various countries. A dead-end internal investigation would have jeopardized Siemens' ability to work out a deal with U.S. prosecutors. The company then announced an internal amnesty for most employees. Last month, President and CEO Löscher said: "We have implemented an internal amnesty program that runs until the end of January. In addition, any employee can anonymously report confidential information. This could raise new suspicions that haven't even been part of the discussion until now. I want a comprehensive inquiry and the complete truth."

It appears the amnesty has worked as intended. Siemens' counsel, Debevoise & Plimpton, says the investigation is on track. In a January 16, 2008 letter to the chairman of Siemens' supervisory board's compliance committee, Debevoise said this:

"Since November 28, 2007, we have obtained significant new information and developed very substantial leads from participants in Siemens' amnesty program, as well as other sources, regarding topics relevant to our investigation. In particular, certain of this new information pertains to the conduct and knowledge of a number of individuals who have served on the Managing Board during the past several years. We do not consider it necessary or appropriate to identify these individuals at this time for several reasons. First, significant new information continues to be developed on virtually a daily basis and disclosure could impede the flow of information to us. Second, the investigation is ongoing and we are following up on the new information recently received. Third, in order to protect the reputations of individuals (and not to expose Siemens to any claims from such individuals), we do not believe it appropriate to identify anyone prior to conclusions being reached by us and the Compliance Committee. And fourth, information developed in the investigation may be relevant for governmental or judicial proceedings relating to these or other individuals or to Siemens, and for this reason, consistent with Siemens' commitment to cooperate with public officials, should not be made public at this time."

These latest revelations raise expectations that Siemens' internal report -- when it's finally produced -- will be comprehensive enough to help the company clean up its internal mess and reach a final resolution with prosecutors in the U.S. and elsewhere.

View Siemens' January 16, 2008 News Release Here.

View Debevoise & Plimpton's January 16, 2008 Letter Here.

View Prior Posts About Siemens Here.

Thursday
Jan172008

FCPA Release 08-01 Goes The Distance

The first Foreign Corrupt Practices Act Opinion Procedure Release of 2008 is out. It's the longest Release we know of -- just over twelve pages, and packed with details. It tells of a proposed investment in an overseas privatization, a raft of due diligence, tough and prolonged negotiations, yet more due diligence, and a final victory for compliance. The Release shows by its length, dense content and quick turnaround by the Department of Justice -- 13 days from Request to Release -- the new levels of awareness and effort that characterize modern FCPA compliance. Here's the short version:

The Players and the Proposed Transaction. The Requestor is a U.S. Fortune 500 company. It sought approval from the DOJ for a majority investment in the Target -- a foreign company that manages public services for a major foreign municipality. Compliance complications arose because a private citizen of the host country (the "Foreign Owner") was the ultimate controlling shareholder of the Target, which he jointly owned with the foreign government. After the Requestor's investment, the Foreign Owner would eventually buy out the government's interests. He would also remain a minority owner and enter into a joint venture with the Requestor. Due to his various roles and relationships with the foreign government, the Requestor deemed him to be a "foreign official" for purposes of the FCPA, 15 U.S.C. § 78dd-1(f)(1)(A) -- at least until he acquired all of the government's interests. The foreign government and the Foreign Owner himself disputed his status as a "foreign official," but the DOJ evidently agreed with the Requestor.

The Problem and the Solution.
When the bids for the privatization were in, the Requestor's bid valued the potential controlling interest in the Target at a significant premium. Although there was ample commercial support for the valuation, the Requestor became concerned that its payments to the Foreign Owner (as a "foreign official") could violate the FCPA. Working under tight deadlines imposed by the privatization rules, the Requestor decided to seek an Opinion from the DOJ on an expedited basis. In under two weeks, the DOJ considered the Request and determined that the payments would not violate the FCPA. It based its Opinion on the Requestor's extensive due diligence, the transparency of the transaction, the commercial valuation of the bid, the undertakings by both the Requestor and the Foreign Owner, and the terms and conditions of the joint venture between them.

The Due Diligence. The Requestor's due diligence was the most comprehensive yet described in a Release -- and we commend it as a useful guide. Here's the list:

-- The Requestor commissioned a report on the Foreign Owner by a reputable international investigative firm.

-- The Requestor retained a business consultant in the foreign municipality who provided advice on possible due diligence procedures in the foreign country.

-- The Requestor commissioned International Company Profiles on the Target and related entities from the U.S. Commercial Service of the Commerce Department.

-- The Requestor searched the names of all relevant persons and entities involved with the transaction from the Target's side, through the various services and databases accessible to the Requestor's International Trade Department -- including a private due diligence service -- to determine that no relevant parties were included on lists of designated or denied persons, terrorist watches, or similar designations.

-- The Requestor met with representatives of the U.S. Embassy in the foreign municipality and learned that there were no negative records at the Embassy regarding any party to the proposed transaction.

-- Outside counsel conducted due diligence and issued a preliminary report, to be followed by a final report before the closing.

-- An outside forensic accounting firm prepared a preliminary due diligence report with a final report to be completed before the closing.

-- A second law firm reviewed all of the due diligence.

Transparency. A lack of transparency in the sale of public assets to private parties is a compliance red flag. The Requestor worked hard to satisfy itself that the proposed transaction was known to the relevant authorities and entirely legal under the host country's laws. Although the Foreign Owner initially objected to any disclosure about his role, the Requestor eventually overcame his objections. Then the Requestor met with numerous officials and lawyers of the foreign government. It received assurances from multiple sources that the proposed transaction -- and specifically the Foreign Owner's role in it -- were adequately disclosed and compliant with local law. Only then did the Requestor resume negotiations with the Foreign Owner and perform additional due diligence.

Lessons Learned. A couple of notable features emerge. First, as the full text of the Release makes clear, the Requestor was unrelenting in its due diligence. It ran into obstacles and resistance but worked through them -- probably at the risk of offending the Foreign Owner and spoiling the deal. That business risk is present in most proposed overseas joint ventures. There is, unfortunately, something at least mildly insulting about the aggressive due diligence needed under an effective compliance program. Typically, when potential foreign partners perceive an insult and complain, the response is to throttle back the due diligence. Here, though, the Requestor pressed forward with its compliance duties.

Second, the final form of the transaction embodied all the right compliance features. The Foreign Owner represented and warranted that there had been no past violations of antibribery laws, including the FCPA, and that there would be none in the future. He said there were no other foreign officials involved. And crucially, he agreed to include in the joint venture documents potent remedies in case of breach -- including termination of the relationship, dissolution of the joint venture company, and a buy-out of the other party's interests. That's the unfettered remedial action needed to ensure FCPA compliance in a joint venture. By contrast, an earlier post called The Requestor's French Dilemma told how the DOJ refused to endorse a proposed overseas joint venture. The problem was that the Requestor could exit only if a compliance breach rose to a "materially adverse" level. The DOJ said,

"Should the Requestor's inability to extricate itself [from the joint venture] result in the Requestor taking, in the future, acts in furtherance of original acts of bribery by the French company, the Requestor may face liability under the FCPA. Thus, the Department specifically declines to endorse the 'materially adverse effect' standard."

Kudos in this case to the Requestor -- for its determination to do a complicated and important foreign transaction and yet comply in all ways with the FCPA. And to the DOJ -- for its extraordinary responsiveness in a fast-moving deal. It ran the mile in record time.

View Opinion Procedure Release No. 08-01 (January 15, 2008) Here.

View Prior Posts About Overseas Joint Ventures Here.

Tuesday
Jan152008

The FCPA Can Be A Very Taxing Matter

If you love studying the U.S. corporate and personal tax ramifications of the Foreign Corrupt Practices Act -- and who doesn't? -- here's news about something special. It's an article called "Is This Bribe Deductible? Tax Implications of the U.S. Foreign Corrupt Practices Act." The twenty-page piece appears in Tax Notes International (December 17, 2007, p. 1171). Its author is New York City lawyer and CPA Selva Ozelli of RIA - Thomson, the well known publisher of tax and accounting materials.

Ms. Ozelli says a comprehensive study of the FCPA's U.S. tax implications was needed. She cites the surge in prosecutions -- 400 percent since 2000, with more than fifty additional investigations under way in 2006. The article covers in detail the ways American companies and their foreign subsidiaries can lose deductibility of payments that violate the FCPA. She also explains the more alarming risk of potential criminal consequences -- including RICO charges -- based on tax evasion:

"The increased global anticorruption scrutiny is subjecting multinational companies to a blizzard of simultaneous or sequential multijurisdictional FCPA investigations that are more aggressive than at any other time since the statute’s enactment, resulting in larger fines. These investigations may also shed light on a U.S. multinational company’s tax evasion if the income that is financing improper payments is excluded from a company’s taxable income, or on the mischaracterized improper pay­ments that can run into the hundreds of millions of dollars are deducted legally for tax purposes under the OECD convention but illegally under U.S. tax laws. Such findings may potentially subject a com­pany to civil or criminal penalties under U.S. and foreign tax laws, penalties under the Racketeer Influenced and Corrupt Organizations Act (RICO) that now applies to a taxpayer that has deprived a foreign government of tax revenue, and potential private FCPA civil claims made under the civil provisions of RICO."

In language that echoes back to the tactics used to put Al Capone out of business, Ms. Ozelli navigates the important distinctions among the burdens of proof in three settings -- an IRS challenge of deductibility, an allegation of fraud leading to tax evasion, and a criminal FCPA prosecution. She says:

"For the disallowance of a deduction . . . no conviction under the FCPA is necessary — the relevant criteria is whether the improper payment violates the FCPA. The IRS, however, has the burden of proving fraud . . . by showing that the company knew its return was false when it made it and intended to evade paying the proper tax by making a false return. The fraud, whether as to deficiencies or for additions to tax (that is, fraud penalties), must be proven by clear and convincing evidence. A mere preponderance of the evidence will not suffice. Because this is a lesser burden than proving guilt beyond a reasonable doubt, which must be established in a criminal case, a company may be found not guilty in a criminal bribery case and still lose the deduction if the IRS is able to meet the lesser burden in the tax case."

In other words, once a company lands in FCPA trouble, its problems may multiply. Knowingly filing tax returns that mischaracterized illegal payments abroad as deductible expenses can lead to criminal charges. In a footnote -- one of 117 that gird the text -- Ms. Ozelli makes a passing reference to the current investigations involving the dozen oil and gas service companies implicated in the Vetco / Panalpina affair. Those companies allegedly reimbursed Panalpina for customs clearance and permitting expenses that have now come under FCPA scrutiny. An addendum to the article lists all the currently-known FCPA investigations, the countries involved, and potential multi-jurisdictional enforcement aspects.

Recounting the scandals involving Enron, Tyco, Global Crossing, Refco, and Hollinger, Ms. Ozelli warns of the personal tax implications inherent in the misuse of company funds. She says that "while scrutinizing corporate records for FCPA violations, special attention should be placed on transactions that divert corporate funds that excessively benefit the executive since it might re­sult in charges of both corporate and personal tax evasion." It's not a stretch to imagine an executive reaping a compensation windfall by pumping up corporate earnings via bribes to foreign officials.

There's lots more meat in this article -- which manages to combine fine scholarship with practical advice. Those counseling corporations and executives on the importance of FCPA compliance -- and the implications of potential non-compliance -- will be happy to have Ms. Ozelli's work product. As of today, the article is available exclusively from Tax Notes International (which is by subscription only here). We're hoping it will soon see wider (and free) circulation. It's a bona fide contribution to an aspect of the FCPA that deserves more attention.

Monday
Jan142008

In Case You Missed It . . .

The White Collar Crime Prof Blog published its 2007 White Collar Crime Awards in December. It's an entertaining list that makes some serious points as well. A few of the Collars, as the awards are called, are of particular interest to us. Here's one that went to our favorite subject, the Foreign Corrupt Practices Act:

The Collar for Hottest 30-Year Old . . . Statute -- To the Foreign Corrupt Practices Act, which has come into its own as a "mature" criminal statute, even being noticed by the New York Times. And get your minds out of the gutter, this is a family-friendly blog!

Two Collars dealt with the appointment of monitors under deferred prosecution agreements. The cases involve domestic bribery by the leading orthopedic device makers. We've written about them here because they're being investigated for possible FCPA violations based on their overseas practices. The two Collars say this:

The Collar for Nice Work If You Can Get It -- to former AG John Ashcroft, appointed by a former subordinate as a monitor under a deferred prosecution agreement that will require the monitored company to pay him between $29,000,000 and $52,000,000.

The Collar for Biggest Bang From a Deferred Prosecution Agreement-- to U.S. Attorney Christopher Christie (the subordinate mentioned in the preceding Collar) for also getting three former colleagues appointed as monitors in the same case, and this comes after his law school alma mater happened to receive a chaired professorship in 2005 pursuant to a deferred prosecution agreement (surprise!!). Three guesses who may run for Governor of New Jersey in 2009?

The final Collar on the 2007 list mentions us. We have enormous respect for The White Collar Crime Prof Blog. Its authors -- Peter J. Henning of Wayne State University Law School and Ellen S. Podgor of Stetson University College of Law -- are the top white collar crime pundits around. So this recognition is a real honor. Congratulations also to our co-mentionee, Kevin LaCroix, whose blog, The D & O Diary, is an unequaled resource for news and commentary about directors and officers liability and related securities class action litigation. Here's the item:

The Collar for Blogs That Should Be Nominated for Some Award -- To The D & O Diary (written by Kevin LaCroix) and The FCPA Blog (written by Dick Cassin), both outstanding for their thorough, balanced posts that are uniformly informative -- they deserve recognition for the service they provide to readers but probably won't win various popularity contests.