Richard L. Cassin Publisher and Editor

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Elizabeth K. Spahn Editor Emeritus

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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

FCPA Blog Daily News


Coercive, Abusive and Unconstitutional --- For Starters

The rule of law in the United States got some badly needed help last week from an unlikely source -- 33 former United States Attorneys. A letter they sent to Senator Patrick Leahy (D.,VT), chair of the Judiciary Committee, asked him to support the proposed Attorney-Client Privilege Protection Act known as S. 186. The bill's purpose is to stop the Justice Department's practice of pressuring companies to waive the attorney-client privilege.

Forcibly stripping legal entities of constitutional rights by threatening indictment or harsher punishment is a brutal practice. But it's the companies' flesh-and-blood employees who suffer most. Once an organization on its way to a plea deal or deferred-prosecution agreement waives the privilege, statements taken by the company's counsel during the internal investigation are handed over to prosecutors. That's done without the employees' consent, yet they face criminal prosecution and potential jail time for what they've said.

When they gave their statements, the employees didn't know all the relevant facts, couldn't possibly understand the implications of their words, had no idea the interviews would ever end up outside the company, never had help from lawyers and never even suspected they might need their own counsel. But according to the former USAs, several recent cases show that the employees "can be prosecuted for making false statements to the government, even though the statements were made only to company counsel."

A lesser but still important consequence of the DOJ's tactics is the undermining of compliance, the ex-prosecutors say. Employees who learn not to trust the attorney-client privilege will say less to company lawyers. Without a steady internal flow of honest and open dialogue, how can companies ever develop an effective compliance program? And when companies operate under deferred-prosecution agreements, the privilege is gone for two or three years. During that time everything said to in-house lawyers is open to the DOJ or SEC. So of course the lawyers aren't useful to employees as a compliance resource.

The New York Times reported that before the former U.S. Attorneys took up the cause, the DOJ's pressure tactics had come under "withering attack from lawyers, senior former Justice Department officials and federal judges, who criticized them as coercive, abusive and unconstitutional." There's more alarm today as the DOJ's modus operandi is adopted by more of the federal government -- now including the SEC, the Federal Communications Commission, and the Department of Housing and Urban Development, among others.

We close with thanks to the 33 former U.S. Attorneys. They must know better than most how the DOJ's current tactics are harming our companies, our citizens and our ideals. S. 186 would put a stop to it throughout the government. Let's hope Senator Leahy and his colleagues are listening.

The June 20, 2008 letter from the 33 former United States Attorneys to Senator Leahy can be found here courtesy of the Blog of the Legal Times.



Cases We'll Never Report

Not all Foreign Corrupt Practices Act violations make the news. Here are three reasons why:

Reason #1. Ignorance. Some companies don't discover their own FCPA problems. It sounds improbable, but it happens. The usual scenario is this: One or more employees in a foreign outpost draw cash by manipulating the company's accounts-payable or expense-reporting system. They use the money to bribe government officials to obtain business for the company. Sometimes it's one employee in a sales job or government-relations role, or a small group whose pay and bonuses depend on the office's performance. The expatriate supervisor, if there is one, is crooked or clueless, so the phony accounting and illegal payments remain a local secret.

Reason #2. Silence. When organizations learn of their own FCPA problems, they have a choice -- to self-disclose or keep quiet. Public companies ought to be disclosing just about everything these days. Sarbanes Oxley targets illegal conduct anywhere, including overseas bribery. So the number of issuers choosing not to report potential FCPA offenses -- both antibribery and books and records violations -- should be small. Privately-held companies, however, are more likely to stay silent. That's most common, we suspect, where founding-family members are still in charge. Sadly for them, someone in the conspiracy of silence usually plays ball with the DOJ to save their own skin. The former insiders -- now known as Co-operating Witnesses -- can drive a stake through the heart of the organization.

Reason #3. Compliance. How many potential FCPA violations are discovered, self-disclosed to the DOJ or SEC, but never publicized or prosecuted? Nobody on the outside knows the numbers. But here's what can happen. A compliance-minded organization reports its own potential violation to the feds. At the same time, it submits evidence demonstrating that:

(1) It had an effective compliance program before the problem occurred;

(2) There are no prior offenses;

(3) Although the compliance program didn't prevent the conduct this time, it detected it quickly;

(4) This was an isolated event -- a rogue employee broke the rules for personal gain and not for the company's sake;

(5) The culprit has already been fired and the company is suing for restitution of misused corporate funds;

(6) Supervision over the problem office has been reorganized and managers replaced;

(7) The company's compliance program has been reviewed and tweaked to prevent similar incidents from happening;

(8) The company reported the problem to authorities in the U.S. and the host country right away, and is eager to help them with their own investigations; and

(9) Management's commitment to compliance has never been stronger.

A year goes by, maybe more. One day the company's lawyers receive a call from the DOJ. It's off the record. "We're satisfied justice has been served," the caller says. "Case closed."



Putting Compliance Programs To The Test

How do you know if your company has an effective compliance program? The answer is crucial. If rogue employees violate the Foreign Corrupt Practices Act, having an effective compliance program becomes a factor in whether the company will face a criminal enforcement action and, if it does, whether it will be rewarded with reduced penalties. So what does an effective compliance program look like?

The FCPA doesn't answer the question, and the Federal Sentencing Guidelines are short on details. That's because all organizations have a different structure and no two operate the same way. So each one needs its own tailor-made program. The Federal Sentencing Guidelines describe hallmarks of an effective compliance program and what it should accomplish. And some features show up in FCPA Opinion Procedure Releases and deferred prosecution agreements. But the burden is always on each organization to figure out for itself how best to prevent, detect and respond to FCPA offenses.

So who finally decides what an effective compliance program looks like? Well, for better or worse, that's left to the people at the Justice Department. They decide which organizations will face FCPA criminal enforcement actions, and part of their decision should involve evaluating whether the company has an effective compliance program. And how do prosecutors do that? They look to the U.S. Attorneys' Criminal Resource Manual.

Relevant sections from the CRM appear between the lines below, with footnotes omitted and a couple of new paragraph breaks inserted, but otherwise unchanged. The provocative narrative is best read without our editorial filter -- at least for anyone curious to know how their own compliance program might someday be judged.

The DOJ's test of effectiveness, by the way, is consistent with the you'll-know-it-when-you-see-it-approach in the Federal Sentencing Guidelines. And it comes with an even clearer message of encouragement and warning: honest compliance, even if it doesn't prevent every FCPA violation, will be rewarded, while phony gestures will only multiply everyone's troubles.

Here's what the DOJ has to say to its U.S. Attorneys:


While the Department [of Justice] recognizes that no compliance program can ever prevent all criminal activity by a corporation's employees, the critical factors in evaluating any program are whether the program is adequately designed for maximum effectiveness in preventing and detecting wrongdoing by employees and whether corporate management is enforcing the program or is tacitly encouraging or pressuring employees to engage in misconduct to achieve business objectives.

The Department has no formal guidelines for corporate compliance programs. The fundamental questions any prosecutor should ask are: "Is the corporation's compliance program well designed?" and "Does the corporation's compliance program work?" In answering these questions, the prosecutor should consider the comprehensiveness of the compliance program; the extent and pervasiveness of the criminal conduct; the number and level of the corporate employees involved; the seriousness, duration, and frequency of the misconduct; and any remedial actions taken by the corporation, including restitution, disciplinary action, and revisions to corporate compliance programs. Prosecutors should also consider the promptness of any disclosure of wrongdoing to the government and the corporation's cooperation in the government's investigation.

In evaluating compliance programs, prosecutors may consider whether the corporation has established corporate governance mechanisms that can effectively detect and prevent misconduct. For example, do the corporation's directors exercise independent review over proposed corporate actions rather than unquestioningly ratifying officers' recommendations; are the directors provided with information sufficient to enable the exercise of independent judgment, are internal audit functions conducted at a level sufficient to ensure their independence and accuracy and have the directors established an information and reporting system in the organization reasonably designed to provide management and the board of directors with timely and accurate information sufficient to allow them to reach an informed decision regarding the organization's compliance with the law. In re: Caremark, 698 A.2d 959 (Del. Ct. Chan. 1996).

Prosecutors should therefore attempt to determine whether a corporation's compliance program is merely a "paper program" or whether it was designed and implemented in an effective manner. In addition, prosecutors should determine whether the corporation has provided for a staff sufficient to audit, document, analyze, and utilize the results of the corporation's compliance efforts. In addition, prosecutors should determine whether the corporation's employees are adequately informed about the compliance program and are convinced of the corporation's commitment to it. This will enable the prosecutor to make an informed decision as to whether the corporation has adopted and implemented a truly effective compliance program that, when consistent with other federal law enforcement policies, may result in a decision to charge only the corporation's employees and agents.

Compliance programs should be designed to detect the particular types of misconduct most likely to occur in a particular corporation's line of business. Many corporations operate in complex regulatory environments outside the normal experience of criminal prosecutors. Accordingly, prosecutors should consult with relevant federal and state agencies with the expertise to evaluate the adequacy of a program's design and implementation. . . .


View the United States Attorneys' Criminal Resource Manual, Title 9, Section 162 (Federal Prosecution of Business Organizations) here.


Moscow Debates Reforms, Sort Of

The biggest public corruption story on the planet may be Russia -- the entire country, where red tape and bribery are scaring away foreign investors and wearing down ordinary citizens. Reform can't come soon enough, so we're glad that President Dmitry Medvedev is at least talking about the problem.

The numbers tell the story. Russia's 2006 rank on Transparency International's Corruption Perception Index was a lowly 121st -- tied with Benin, Gambia, Guyana, Honduras, Nepal, the Philippines, Rwanda and Swaziland. Then things got even worse. In 2007, Russia fell to 143rd on the CPI -- tied with Gambia (again), Indonesia and Togo.

A thoughtful correspondent in Russia sent us the following story from the Moscow Times (here). The article signals that public corruption is finally on the Kremlin's agenda, which is good, but also that real reform may be a long way off. That may account for the gallows humor in the story -- a great Russian trait. (A government translator in Moscow once told us that the saying, "The spirit is willing but the flesh is weak" means in Russian, "We have plenty of vodka but we're out of potatoes.") Here's the article:

Bill Floated to Ban Gifts to Bureaucrats as Bribes.

17 June 2008By Francesca Mereu / Staff Writer

Bureaucrats face a ban on accepting small gifts under a bill being floated by law enforcement officials.

President Dmitry Medvedev has said the fight against corruption is a priority, and the government is under pressure to find ways to root it out.

Under the Criminal Code, any money or gift given to a bureaucrat in the performance of his or her duties constitutes a bribe, but Article 575 of the Civil Code allows for the acceptance of gifts worth up to 11,500 rubles ($485).

An Investigative Committee official said Sunday that the "legal contradiction" created by the articles hindered investigators in their attempts to fight corruption, Interfax reported. The Investigative Committee is under the Prosecutor General's Office.

"In legal practice, and in particular when you investigate a crime linked to corruption, you often run into problems linked to the interpretation of these," the unidentified official said.

The lack of a clear legal definition of what constitutes corruption poses one of the most difficult obstacles when trying to battle the problem.

The initiative by the Investigative Committee, which is the main body responsible for battling corruption, is an attempt to downplay the magnitude of the problem, said Kirill Kabanov, director of the National Anti-Corruption Committee, an advocacy group.

"It seems that the $300 billion market for corruption in our country consists of gifts," Kabanov said, sarcastically.

"This is to soften the problem in the eyes of the population," he said. "It is like treating a very ill patient with iodine."

Calls to the Investigative Committee went unanswered Monday.

A final note. Our correspondent wondered how the "legal contradiction" noted in the article between the Russian civil code and criminal law would fit into the Foreign Corrupt Practices Act's affirmative defense that allows payments (or gifts) to foreign officials, if permitted under the written laws of the host country. Good question. For now, though, as Winston Churchill said about Russia itself, the answer remains a riddle, wrapped in a mystery, inside an enigma. Which means in Russian, don't bet the lunch money on the defense just yet.


Tackling Corruption, Transforming Lives, Part II

The report published by the United Nations Development Program about public bribery in Asia that we talked about yesterday, Tackling Corruption, Transforming Lives, examines corruption in utilities, the courts, police departments, land offices and hospitals, among others. The impact of graft on the development and delivery of water supplies, for example, is astounding. The U.N. believes that eliminating corruption would help conserve as much as 70% of the world's water resources. The World Bank says that globally up to 40% of water-sector finances are lost through "leakage" -- by dishonest and corrupt practices.

The U.N.'s research into water supplies revealed the following areas of risk and damage:

Inefficiency. Corruption seriously undermines the performance and effectiveness of both public and private sectors, discouraging the investment urgently needed to improve supplies. In one major city in Asia the public utility allegedly held back on improving water supplies in the areas supplied through kiosks or hydrants, for fear of losing the side payments that the hydrant operators paid to utility officials. The operators of water tankers are often controlled by powerful mafias that capitalize on inept water distribution systems and have effectively privatized the supply: after paying corrupt officials to turn a blind eye, they sell the water to hotels and other businesses.

Warped distribution. Corruption skews decisions on who is likely to get services. Residential suburbs, for example, can be left without water because the supply has been siphoned off to service the farm of a prominent politician.

Capital-intensive investment. Corruption also biases investment towards large new infrastructure projects and away from smaller scale but less lucrative investment in the rehabilitation of systems or in improving operation and maintenance.

Weak finances. Corruption undermines the long-term financial stability of utilities and thus their ability to offer reliable services to a wider population, while also diverting government revenues that could be used to improve water supply and other services.

Environmental damage. Corruption constrains overall water-resource management by encouraging inefficient use of freshwater or over-extraction of ground and surface water.

Public health. Reducing supplies of drinking water directly undermines public health, and more so for the poor. Corruption in utility services can also undermine standards of health. In the Republic of Korea, for example, in order to avoid paying the costs of reconstruction of underground water sites, water quality testers were bribed to provide fake test results. Subsequently 1,753 water sites were found to have contaminated water, with high levels of nitrates, which can cause a condition known as methemoglobinemia or ‘blue baby’ disease.


It's not all doom and gloom though. The U.N. report notes that the antidote to a lot of public corruption, petty and grand, is simple: cut the red tape and increase transparency.

That's what the Hyderabad Metropolitan Water Supply and Sewerage Board did in the 1990s. It consolidated applications for new connections – previously a major source of corruption. Rather than filing an application in their local district office, the report says, customers now go to the Board’s headquarters to a "Single Window Cell" which manages all the related activities, such as obtaining a road-cutting permit or land surveying. The Board publishes the fee schedule for various plot and connection sizes in its office and in the press, thus reducing the opportunities for staff to levy excess charges. The process, the report says, has been designed as a one-visit operation so the customer rarely leaves without an "application token number," the equivalent of a receipt for acceptance of the application.

In Korea, too, the Seoul Metropolitan Government is using transparency to fight corruption. A public, online application system for licenses and other permits was launched in 1999. Called OPEN -- the Online Procedure Enhancement for Civil Applications -- the system covers 54 common procedures. By March 2001, about 1.5 million people had visited the website and there had been 39,000 civil applications. The site now attracts some 2,500 visitors a day. The U.N. report says the OPEN system has made the administra­tion more transparent because officials responsible for corruption-prone areas, such as permit or approval procedures, now have to upload reports and documents to enable citizens to monitor the progress of their applications.

Support for similar programs around the world would be a nice adjunct to corporate compliance programs among the companies that set the standards for global best practices.

View Seoul's OPEN system here.


Sweating The Small  Stuff

Public corruption isn't a victimless crime, and whatever helps dispel the false notion that it is, is welcome in this space. Which brings us to . . . the United Nations. We haven't spent much time praising that institution. In fact, we've never done it. But here goes.

The U.N.'s just-published Asia Pacific Human Development Report, Tackling Corruption, Transforming Lives, tells the story of public corruption in Asia. So what's new? This time the story is told not from the perspective of bribe payers or bribe takers, but from the victims themselves. The report isn't easy to read, not because of dry "technical" language or fuzzy jargon. There's none of that. In fact, the language is surprisingly simple. No, it's hard to read because the truth about public corruption isn't fun to look at.

For example, the 248-page report describes a survey from Bangladesh, India, Nepal, Pakistan and Sri Lanka. It found that health workers often demanded bribes for admission to the hospital, to provide a bed, or to give subsidized medications. According to the report,

Among people using hospitals in small cities the proportion paying bribes rose to almost 90 per cent. In maternity hospitals mothers even had to bribe the nurses in order to see their babies.
"Invisible taxes" are everywhere in the poorest countries. In Bangladesh, a study of 3,000 households showed that 97% that bought land had to pay bribes for registration, 88% of the households who changed their land ownership within the family had to pay bribes, and 83% of landowning households had to pay bribes for land surveys.

The most common victims? Poor people. Police corruption, for example, hits those on the bottom rung hardest because they lack the influence needed to defend themselves. Amounts extorted by police can be relatively small but may be a big part of the victims' income. Police sometimes harass whole neighborhoods, the report says, creating "an atmosphere of fear and apprehension." In a riverside slum settlement in Northern India poor families described how police were fleecing them:

They have made our lives miserable. We do not know when we will be thrown out of our homes. They land up any time and demand money. They threaten us that if we do not pay, they would throw us out of our homes. . . . Last week my clothes were torn apart after my husband could not pay the money demanded. We were allowed to go free only after we sold our rickshaw and paid the money.
The U.N. reporters note that most studies about petty corruption don't include any analysis of the impact on ordinary citizens. Why not? Probably because the amounts involved are relatively small, it's hard to measure what's happening, and also because the victims have little chance to complain. But the U.N., to its credit, went out and found people willing to talk.

In Indonesia, for example, one study involved ride-alongs with truckers on long-distance journeys that passed through some of the country's infamous police "checkpoints." Bribe expenses at the checkpoints constituted around 13% of the transportation cost which, though less than the fuel cost, amounted to more than wages. A report from Bangladesh found that a cattle trader had to pay extortion money at eight different places along the way to the market, both to the police and organized criminals - which added as much as 20% to the selling price.

Who would knowingly support that sort of exploitation? It's unthinkable, of course. But here's the problem. When well-known and respected multinational companies come to town and start greasing the palms of the local cops, health workers, land office-officials and postal workers, what's the message? That the rich and powerful think petty bribery is OK? That it's some kind of global best practice? And if brand-name companies are willing to make the small payments, how can local citizens, especially the poor and powerless, ever hope to change things?

Fortunately, a lot of compliance-minded companies now ban all bribes, including facilitating payments. That's great news. They've decided that facilitating payments are too hard to control and account for; that the payments might violate local laws and have to be publicly disclosed back home; and that small bribes overseas might promote a culture of corruption and spoil the company's effective compliance program. So there's too much risk with facilitating payments, even if the Foreign Corrupt Practices Act allows them.

Other companies, though, are sticking with the dangerous idea that small-time bribery is just "cultural," that it's business-as-usual in various countries and doesn't do any real harm. That sort of talk comes from business people and professionals who wouldn't dream of breaking a law back home. But on the road they turn into serial bribers -- under the banner of facilitating payments. It's true, after all, that the Foreign Corrupt Practices Act allows bribes for routine governmental action -- permits and licenses, visas and work orders, police protection, mail pick-up and inspections, phone service, power and water supply, cargo loading and unloading, protecting goods from spoilage, or any "actions of a similar nature." Bribes for those purposes, the FCPA says, are OK. But should any corporate citizen endorse bribery anywhere, whether or not the FCPA allows it?

That question goes beyond legal compliance. It's part of the "soft" subject of ethics, which is never easy to talk about in the business world. Ethics can't be measured, and measuring things -- costs, profits, losses -- is what business is mostly about. That's why it's important sometimes to hear what those outside the business world are saying. The U.N.'s Asia Pacific Human Development Report is full of those voices, and they're worth listening to.


Industry-Wide Investigation Snares Wright Medical

This week, Wright Medical Group became the latest orthopedic device maker to disclose a government investigation into its overseas sales practices. The company's Form 8-K said its principal operating subsidiary, Wright Medical Technology, Inc., received notice from the Securities and Exchange Commission of an informal investigation regarding potential violations of the Foreign Corrupt Practices Act. Wright said, "We understand that several other medical device companies have received similar letters. We intend to fully cooperate with this informal investigation."

Tennessee-based Wright designs, manufactures and distributes orthopaedic implants and instrumentation worldwide. Its products include large joint implants for the hip and knee; extremity implants for the shoulder, elbow, hand, wrist and foot; and biologic products, including bone graft substitutes.

In their investigation of the orthopedic implant industry, the SEC and Justice Department want to know whether the companies bribed doctors employed by government-owned hospitals overseas to use their products. Biomet Inc., Stryker Corp., Zimmer Holdings Inc., Smith & Nephew plc and Medtronic Inc. disclosed similar FCPA investigations during 2007, after they settled U.S. domestic bribery cases. They've denied violating any foreign laws.

We've wondered if one or more of the device makers may be providing industry-wide information to the authorities. In its disclosure last October, Medtronic said its letter from the SEC about the investigation "notes that the Company is a significant participant in the medical device industry, and seeks any information concerning certain types of payments made directly or indirectly to government-employed doctors."

Industry-wide investigations are a new development for the FCPA. There hadn't been any until 2007, when it emerged that the DOJ and SEC were examining customs clearance and permitting practices across the oil and gas services sector, and the overseas sales practices of the leading orthopedic device makers. Simultaneous investigations create their own dynamics, and we've asked before whether companies that become potential targets might bargain for leniency by implicating their peers. We don't know if that's happened yet. But there are well-known rewards for companies that are the first to talk about their co-conspirators in price-fixing cases, for example, so it's certainly possible that we'll see similar behavior in FCPA investigations.

Wright Medical Group, Inc. trades on NASDAQ under the symbol WMGI.

View Wright's June 10, 2008 Form 8-K here.

View prior posts about medical device makers here.


It's A Wonderful Life, Really

What's a typical workday at the FCPA Blog look like? You know the routine. Up by noon, pop over to the neighborhood brasserie for a crème bouffée or two (pictured left), then feed the pigeons and goldfish. After a nap we're ready to check the mail. . . . . OK, that's not quite our typical day. But it's true that the mailbag is always a highlight. Here, for example, is a verbatim exchange from yesterday. It reveals, we think, some familiar hallmarks of the decent but over-worked compliance community (which is why we've changed the names):

Dear Sir -

Thank you so much for your FCPA Blog - it is absolutely the best. I am a lawyer for an oilfield services company.

Now my confession - Your "Bribery Abroad" book is fantastic because it is easy to read and very interesting - not the usual dry, academic writing. Unfortunately for me, I discovered your book the day before a training session to be conducted by my group in the UK, and I made 100 copies of it. I apologize, but I felt it was an extremely important tool for the training.

May I please pay you the 12.95 for each of the 100 books I printed and have a license to cover those copies?

In addition, I need to order quite a few more.

Thanks again for your extremely valuable service in this very difficult area. I look forward to hearing from you soon.


Sally Anderson
Worldwide Oilfield Services Co.

And our reply . . . .

Dear Sally,

Thanks for your kind note and your confession, both of which are good news.

Since the blog and the book are intended to help people comply with the FCPA, and that was your purpose too, how about this as a solution.

I grant you a license for the 100 copies already made; in return, you simply agree to place traditional orders for enough printed books to meet your future needs (and perhaps to keep a few extra copies on hand just in case).

If that works for you, it will also work for me.

Thanks again.

All the best,

The FCPA Blog


A Hundred Tiny Bribes

More than a month ago -- practically forever in the time-warped blogosphere -- we mentioned that a reader had shared with us a soon-to-be published paper about facilitating payments. Well, the paper is now available.

It's written by Hogan & Hartson partner T. Clark Weymouth and associate Jeremy B. Zucker. The link is here. They prepared it for pro bono client Global Financial Integrity, a non-profit organization that targets the illegal cross-border flow of funds around the world by working with governments, think tanks and NGOs.

In the paper, Messrs. Weymouth and Zucker trace the history, use and abuse of facilitating payments under the Foreign Corrupt Practices Act. They compare how facilitating payments are treated under the FCPA, the OECD Anti-Bribery Convention, the U.N. Convention Against Corruption and the Inter-American Convention Against Corruption. And they analyze compliance risks associated with grease payments -- with enough examples to cool anyone's ardor for this lone exception written into the FCPA.

As we mentioned back in May, seeing our favorite FCPA topic treated with such thorough scholarship and wrapped in a great presentation is genuinely exciting. We don't want to spoil the fun, though, so we'll stop here -- after we acknowledge the generosity and public spirit of the authors, their law firm and its pro bono client.

View prior posts about facilitating payments here.


Justice For Corporate Defendants?

Nothing has increased the impact of the Foreign Corrupt Practices Act on corporations more than respondeat superior. That's the legal doctrine by which companies are vicariously liable for crimes committed by employees acting within the scope of their employment--that is, within their actual or apparent authority and on behalf of the corporation. It has left companies completely defenseless in the face of criminal charges under the FCPA. Once an employee admits to an FCPA violation or is found guilty, the company is automatically guilty too. Case closed.

If respondeat superior sounds oppressive and unbalanced, that's because it is. It becomes irrelevant to a corporation's defense that the wrongdoer isn't a high managerial official, that the corporation specifically instructed the employee not to engage in the proscribed conduct, or that the statute in question (such as the FCPA) requires willful or knowing violations. The idea, the courts say, is that criminal statutes impose a duty upon the corporation to prevent its employees from committing the statutory violations. So forget intent, mens rea, good faith and so on; think instead of strict liability for the employee's criminal conduct.

Are we exaggerating? Not at all. Here's how the United States Sentencing Commission's May 2004 release describes respondeat superior as applied by the courts:

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.
As long as respondeat superior is the law of the land, corporations won't be mounting any defense to potential criminal charges under the FCPA. They can't win in court so of course they don't go to court. Naturally enough, that puts the prosecutors in full control. They know an FCPA criminal indictment waved in front of a defenseless corporation inevitably leads to a plea deal -- usually a deferred or non-prosecution agreement with terms dictated by the DOJ.

Now, though, there's a serious challenge to respondeat superior in a Second Circuit case called United States v. Ionia Management, S.A. It's the topic of a post on the White Collar Crime Prof Blog here. As Prof Podgor says, "This case forcefully takes on corporate criminal liability both from a policy perspective and in its application. This is clearly a case that needs to be watched."

The facts are these: A ship management company headquartered in Piraeus, Greece was convicted in a criminal jury trial under the Act to Prevent Pollution from Ships and obstruction of justice. It was fined $4.9 million and sentenced to probation and other assessments on the basis of the application of respondeat superior, which the defendant now challenges.

The amicus brief in support of the defendant / appellant is particularly powerful. The brief calls on the court to "adopt a standard for vicarious corporate criminal liability . . . that limits the application of respondeat superior." At the bottom of this post we've included a sample of the arguments.

Bloodless corporations are usually cast in the role of villain and seldom garner much sympathy. But we're in full agreement with the amicus brief and Prof Podgor, who says the doctrine of respondeat superior "needs to be examined in the real world of today, a world with international dimensions resulting from corporations that have employees on more than one continent, where statutes omit mens rea terms, and where the trial penalties can destroy a company."

What's the fix? Prof Podgor thinks the best option is a "good faith defense" for corporations charged for acts of rogue employees. That, she says, would be similar to the application of the analogous civil-law defense. It makes sense. Let corporations defend themselves based on their own good-faith compliance efforts. That would allow them a measure of justice and give them the strongest possible incentive to maintain an effective compliance program. Wouldn't everyone win?


Here are excerpts from the amicus brief in support of the defendant / appellant in United States v. Ionia Management, S.A. The brief comes from the Association of Corporate Counsel, the Chamber of Commerce, the National Association of Criminal Defense Lawyers, the National Association of Manufacturers, the New York Association of Criminal Defense Lawyers, and the Washington Legal Foundation. We've left in some of the citations but omitted the mountainous footnotes.

[T]he district court’s view of vicarious liability in the criminal context is inconsistent with the criminal law’s goals of deterrence and punishment. In cases where corporations have done everything reasonable to prevent criminal conduct on the part of their employees, the corporation itself is not morally culpable yet is disincentivized from taking steps to expose the wrongdoing because of the risk that expansive respondeat superior principles will lead to its own criminal liability. These are exactly the incentives that led the Supreme Court to adopt a more limited approach to vicarious liability in Faragher, Ellerth, and Kolstad. An alternative approach to corporate criminal liability is called for not only by Faragher, Ellerth, and Kolstad, but by numerous commentators who have criticized the respondeat superior approach.

The criticism of the prevailing scope of corporate vicarious criminal liability is widespread and growing, particularly given the rise of corporate investigations and prosecutions by the federal and state governments. While the availability of corporate criminal liability is congressionally mandated, the means by which such liability is established are critical.

A criminal indictment can be a life-or-death matter for a company. Yet, the vast sweep of the district court’s standard for the imposition of vicarious criminal liability makes corporations accountable for almost all criminal acts of any low level employees—even those acting against explicit instructions and in the face of the most robust corporate compliance program. This has caused a tremendous imbalance between the power of a prosecutor and a corporate defendant. Given the hair-trigger for corporate liability even for the most responsible corporate citizen, many corporations forego any defenses in order to resolve threatened prosecution. District Judge Gerald E. Lynch phrased the problem with precision:

If a corporation is criminally liable for the unauthorized acts of mid-level managers, the corporation will often not have a viable defense, despite legitimate questions about the justice of punishing it. . . . Such defendants are increasingly relegated to making their most significant moral and factual arguments to prosecutors, as a matter of “policy” or “prosecutorial discretion,” rather than making them to judges, as a matter of law, or to juries, as a matter of factual guilt or innocence.

Gerald E. Lynch, The Role of Criminal Law in Policing Corporate Misconduct, 60 Law & Contemp. Probs. 23, 59 (1997).

This imbalance and the problems it engenders are not theoretical. For example, one judge found that prosecutors violated the Constitution by causing KPMG to cut off attorneys’ fees to employees in the hope of obtaining a deferred prosecution agreement. United States v. Stein, 435 F. Supp. 2d 330 (S.D.N.Y. 2006), appeal docketed, No. 07-3042-cr (2d Cir. 2007). In another instance, as part of a deferred prosecution agreement, Bristol-Myers Squibb agreed to endow a professorship at Seton Hall University, the prosecutor’s alma mater. Interview of Mary Jo White, Corp. Crime Rep., Dec. 12, 2005, at 14-15; see also Andrew Weissmann with David Newman, Rethinking Criminal Corporate Liability, 82 Ind. L.J. 411, 415 n.5 (2007. The potential for abuse is manifested as well in the then‑common requirement that corporations agree to broad waivers of attorney-client privilege as a factor to be considered for a deferred prosecution agreement.

The potential for inappropriate prosecutorial pressure is particularly heightened in the area of corporate criminal investigations that end in Draconian non-prosecution and deferred prosecution agreements, where no court has oversight authority. There, the prosecutor effectively serves as both judge and jury. Because of the disastrous consequences of a corporate indictment and the ease with which corporations may be liable under the doctrine of respondeat superior, corporations are under immense pressure to agree to almost any terms. The vast majority of these negotiations go on behind closed doors, with little public scrutiny and no judicial review.

Special thanks to Luke McLoughlin at Jenner & Block's New York office for providing the link to the final version of the brief. The firm acted as counsel for the amici curiae.


Feeling The Heat Overseas

Foreign companies can't be blamed for wondering if they're being singled out under the Foreign Corrupt Practices Act. The names in the FCPA-related headlines alone are enough to cause high anxiety. ABB, Siemens, BAE, DaimlerChrysler, AstraZeneca and many more. But are U.S. prosecutors really focusing too much attention on U.K., European and other foreign companies instead of American firms? Probably not, at least according to the numbers. Here's the situation.

Foreign companies weren't subject to the FCPA at all until 1998, when the law was amended and, in the words of the U.S. attorneys' manual, "expanded . . . to assert territorial jurisdiction over foreign companies and nationals." For the next five years under the FCPA, the Justice Department hardly gave foreigners a second look. That began to change in 2004, when the number of all FCPA investigations started rising, and the number of purely foreign companies (not foreign subsidiaries of U.S. parents) being investigated rose along with the tide. Of the 20 investigations launched in 2004, says Dan Newcomb in Recent Trends and Patterns in FCPA Enforcement, four concerned purely foreign corporations. The numbers, he says, increased from 2005 to 2007, with about 13 investigations involving purely foreign companies, out of around 50 ongoing FCPA investigations in all. So while the actual number of foreign companies involved in FCPA problems has increased, the percentage of foreign firms under investigation has decreased during the past four years.

So why does it seem like the DOJ is picking on foreign companies? Partly because their headline-making names are so familiar. ABB Ltd (Switzerland) Vetco Gray UK Ltd, Akzo Nobel, NV (the Netherlands) and Statoil ASA (Norway) were all subject to still-fresh DOJ enforcement actions. And foreign companies under ongoing FCPA investigations include similarly big names: AstraZeneca (UK-Sweden, pharmaceuticals), BAE Systems (UK, defence) DaimlerChrysler (Germany, automotive), Innospec (UK, chemicals), Magyar Telekom (Hungary, telecoms), Norsk Hydro (Norway, energy), Novo Nordisk (Denmark, health, pharmaceuticals) Panalpina (Switzerland, transport), Siemens (Germany, engineering, electronics), Smith & Nephew (UK, medical devices) and Total (France, energy). All of them are well-known at home and most are famous around the globe.

Foreign attention has also been drawn to the FCPA by the so-called parallel investigations, where the DOJ and an anti-corruption agency from another country work together. Again, Dan Newcomb provides the details:

Among recent FCPA investigations by the United States government, parallel investigations in the following foreign jurisdictions were reported: Brazil (Gtech); China (Siemens); Costa Rica (Alcatel Lucent); France (Halliburton, Total SA); Germany (Bristol Meyers, DaimlerChrysler, Siemens); Greece (Siemens); Hungary (Siemens); India (Xerox); Indonesia (Freeport, Monsanto, Siemens); Israel (Siemens); Italy (Immucor, UDI, Siemens); Korea (IBM); Liechtenstein (Siemens); Nigeria (Halliburton, Siemens); Norway (Siemens); Russia (Siemens); and Switzerland (Siemens).
There's no way to know what percentage of FCPA violations are actually caused by foreign companies. So there's no way to know if foreign companies are getting more or less FCPA attention than they deserve. But in some cases, the DOJ doesn't have a choice. For example, it had to launch investigations when Siemens and BAE made headlines around the world for alleged corrupt practices on U.S. soil, and when evidence emerged that Panalpina's Houston office may have led an entire industry into an FCPA quagmire with its customs clearance and permitting practices for the oil and gas services segment.

But whether foreign companies receive exactly the "right" amount of FCPA attention from the DOJ isn't so important. What's important now is that when foreign companies are subject to the FCPA's compliance requirements because of where and how they do business, they should do everything reasonably necessary to comply with the law. They should have an effective compliance program. That should be true not only for the FCPA, by the way, but for the laws of all the countries they're subject to. The only other option is to watch for their names in the headlines.


Faro Pays $2.95 Million For FCPA Settlement

Faro Technologies Inc. confirmed that it has resolved Foreign Corrupt Practices Act offenses with the Department of Justice and the Securities and Exchange Commission. The DOJ settlement requires payment of a $1.1 million criminal penalty and entry into a two-year non-prosecution agreement with appointment of a compliance monitor. In settling with the SEC, Faro will pay about $1.85 million in disgorgement and prejudgment interest.

Florida-based Faro -- which designs, develops, and markets software and portable, computerized measurement devices -- self-disclosed potential FCPA violations in China to U.S. authorities in March 2006. It announced an anticipated settlement with prosecutors in its October 30, 2007 earnings release (see our post here).

Faro began selling its products directly to customers in China in 2003 through a Shanghai-based subsidiary, Faro China. In 2004 and 2005, a Faro employee authorized corrupt payments in the form of “referral fees” directly to employees of state-owned or controlled entities to secure business. It made illicit payments of $444,492 to obtain contracts worth about $4.9 million, and its net profit from the contracts was $1,411,306.

Faro employees routed the corrupt payments through a shell company to “avoid exposure,” according to internal e-mails. The employees also caused Faro China to enter into a bogus service contract with an intermediary, using it to pay the bribes. The intermediary aggregated the payments and invoiced Faro for reimbursement under the service contract. In its books and records, Faro falsely recorded the bribes as referral fees. The DOJ and SEC said the company failed to devise and maintain a system of internal controls for foreign sales sufficient to ensure compliance with the FCPA.

Faro's own documents, the DOJ said, revealed the extent of the bribery. "Profit lists" reflected the price of contracts and the costs of manufacture, along with line items for "referral fees" of 10%-15% of the contract price that were kickbacks to employees of state-owned customers. The DOJ gave the following examples:
A 2005 profit list for Purchase Order CH2005-VW34 for a purchase by Shanghai Turbine Generator Co., Ltd., a Chinese government entity, shows a contract value of $148,700 and an anticipated referral fee of $14,800, or approximately 10% of the contract value.

A 2005 profit list for Purchase Order Ch-2005-VW50(SW) for a purchase by Jiangxi Changhe Auto Co., Ltd. Hefel Plant, a Chinese government entity, shows a contract value of $53,086 and a referral fee of $8,000, or approximately 15% of the contract value.

Faro's non-prosecution agreement has a two-year term instead of the usual three years, presumably reflecting the company's prompt and detailed self-disclosure and effective corrective action. Faro said its estimated costs associated with the monitoring and stepped-up compliance obligations will be "in the range of $1 million to $2 million."

Neither Faro nor the DOJ explained why it took more than nine months to formally approve the previously announced settlement. We've speculated (here) that the Justice Department was delaying settlements involving compliance monitors, including Faro's, pending some accommodation with lawmakers on safeguards for the appointments. Controversy erupted last year after New Jersey U.S. Attorney Chris Christie appointed his former boss, ex-U.S. Attorney General John Ashcroft, as a monitor in a domestic bribery case for orthopedic device maker Zimmer Holdings Inc. The news that Mr. Ashcroft's firm could make as much as $52 million from the appointment sent shock waves around Capitol Hill and triggered Congressional hearings.

It appears from FCPA settlements announced in the past month involving Willbros, AGA Medical, and now Faro that monitor appointments are back on track. The solution appears to have been relatively simple. As with Willbros and AGA Medical, Faro will nominate its candidate to act as compliance monitor (after consulting with the DOJ), and the DOJ will have final approval over its choice. Provided the DOJ doesn't interfere directly and allows Faro and the other companies to pick their own qualified candidates, the selection is taken out of the hands of the DOJ. That should prevent the appearance of political abuse or cronyism in the appointments.

Faro Technologies, Inc. trades on NASDAQ under the symbol FARO.

View the DOJ's June 5, 2008 news release here.

View the SEC's Securities Exchange Act of 1934 Release No. 57933 / June 5, 2008, Accounting and Auditing Enforcement Release No. 2836 / June 5, 2008, and Administrative Proceeding File No. 3-13059 here.

View Faro's June 5, 2008 press release here.