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Richard L. Cassin Publisher and Editor

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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


FCPA Blog Daily News

Monday
Jan052009

Dealing With Danger

Compliance-savvy executives worry about the risks that come from third parties -- overseas acquisition targets, joint venture partners, distributors and agents. About three quarters of the bosses, according to KPMG's 2008 Anti-Bribery and Anti-Corruption Survey, think their company's handling of intermediaries isn't working. They cite difficulties performing effective due diligence and their inability to adequately audit third parties for compliance.

The executives are right to be concerned. The Foreign Corrupt Practices Act says you can't hire an agent to pay bribes for you. You can't use joint venture partners for the dirty work either. You can't use a brother-in-law or charitable foundation or any other circuitous route. Bribes to foreign officials that originate from your hand are your responsibility, no matter how indirectly you try to pass them on. So when American companies go abroad, it's up to them to make sure all their business partners -- suppliers, subcontractors, professional advisors, agents and joint venture partners -- keep the business clean. Companies that don't try to stop intermediaries from paying bribes have no real defense under the FCPA when problems happen.

But how far must companies go to prevent their middlemen from paying bribes? That's always the question on everyone's mind. There's no bright line here, no blueprint from the DOJ or SEC, no safe harbor. And that's what worries the executives. They have to do business with and through intermediaries, but they also have to comply with the Foreign Corrupt Practices Act. Doing both sometimes seems impossible.

Take, for example, our reader who sent the comments below. He's a top compliance professional but he doesn't have all the answers and neither do we. But we appreciate his honesty and willingness to share his concerns and thoughts. He's fairly typical, we think, of those who want to comply with the FCPA but aren't always sure how to do that -- a group most of us are in most of the time.

Here's what he says:
__________

During the ACI FCPA conference held in Washington in November, the topic of documentation of agents came up. This is a familiar topic to anyone who has experience with the FCPA.

One of the points was that companies get hammered because they do a poor job of documenting or having the agent document their activities. I thought to myself "what would the agent document?" If they are out trying to drum up business what is it that they need to report? Do they report the golf trip with potential customers? Do they document the dinner they had or the train ride they took where they discovered a potentially new client and discussed opportunities?

This led me to ask what do business development people document for their activities? Surely they must provide something to justify their salaries. Shouldn't an agent's documentation be just as thorough? But then again, because a business development person is on salary and everyone knows they're sort of doing something, maybe they don't have to document very well. If they get results, some companies may ask "Does it matter?" If the documentation is poor or nonexistent, and all the focus (risk) is on agents, why wouldn't a company consider bringing agents in as business development employees? They could structure the compensation (salary and/or bonus) to be identical to what the agent already received. This would have the effect of moving the expense to payroll from agent commission or something similar.

Speaking from experience in conducting FCPA investigations, the scrutiny of payroll expense is night and day different from the scrutiny of commission or agent expense. Furthermore, perceived FCPA due diligence requirements are not the equal for employees as agents. What about the recording of a bonus as payroll expense when all or a portion is used to pay a bribe to a government official? The question then would be what is documented as the purpose of the bonus and did the company know about where the money would ultimately go?

We all know about the high level Jack Stanley-like business development people, but what about the local agents with cousins in the Ministry or uncles in Parliament. These are the guys that bring relationships to the table who might be hired as "employees" and be buried in payroll but continue on agents as if nothing really changed. . . .
_____________

Other readers with good or bad experiences dealing with intermediaries are invited to share their thoughts, anecdotes and advice about this difficult topic.
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Sunday
Jan042009

No Quick Fix

The consequences of a Foreign Corrupt Practices Act compliance problem can reverberate inside a company long after it reaches a settlement with the Justice Department. An illustration of that comes from AGA Medical. In early June last year, we reported that the privately-held maker of heart-related products resolved FCPA violations with the DOJ. The company's self-disclosure to prosecutors included emails to and from a Chinese distributor that left no doubt illegal activity had occurred, such as bribes in China of at least $460,000 to doctors at government-owned hospitals and to patent-office officials.

Just weeks after the settlement, AGA filed a registration statement with the Securities and Exchange Commission for an initial public offering, which is still pending. That document (we're quoting below from Amendment No. 4 to the S-1) talks about the settlement's actual and potential impact on the company, including its need for a new sales model overseas.

Here's what it says:
____________

The terms and effects of our Deferred Prosecution Agreement with the U.S. Department of Justice relating to potential violations of the U.S. Foreign Corrupt Practices Act may negatively affect our business, financial condition and results of operations.

On June 2, 2008, we entered into a Deferred Prosecution Agreement, or the DPA, with the Department of Justice concerning alleged improper payments that were made by our former independent distributor in China to (1) physicians in Chinese public hospitals in connection with the sale of our products and (2) an official in the Chinese patent office in connection with the approval of our patent applications, in each case, in potential violation of the Foreign Corrupt Practices Act, or the FCPA. The FCPA makes it unlawful for, among other persons, a U.S. company, acting directly or through an agent, to offer or to make improper payments to any "foreign official" in order to obtain or retain business or to induce such "foreign official" to use his or her influence with a foreign government or instrumentality thereof for such purpose.

As part of the DPA, we consented to the Department of Justice filing a two-count criminal statement of information against us in the U.S. District Court, District of Minnesota, which was filed on June 3, 2008. The two counts include a conspiracy to violate the FCPA and a substantive violation of the anti-bribery provisions of the FCPA related to the above-described activities in China. Although we did not plead guilty to that information, we accepted responsibility for the acts of our employees and agents as set forth in the DPA, and we face prosecution under that information, and possibly other charges as well, if we fail to comply with the terms of the DPA. Those terms require us to, for approximately three years, (1) continue to cooperate fully with the Department of Justice on any investigation relating to violations of the FCPA and any and all other matters relating to improper payments, (2) continue to implement a compliance and ethics program designed to detect and prevent violations of the FCPA and other applicable anti-corruption laws, (3) review existing, and if necessary, adopt new controls, policies and procedures designed to ensure that we make and keep fair and accurate books, records and accounts and maintain a rigorous anti-corruption compliance code designed to detect and deter violations of the FCPA and other applicable anti-corruption laws, and (4) retain and pay for an independent monitor to assess and oversee our compliance and ethics program with respect to the FCPA and other applicable anti-corruption laws. The DPA also required us to pay a monetary penalty of $2.0 million. In the fourth quarter of 2007, we had recorded a financial charge of $2.0 million for the potential settlement. The terms of the DPA will remain binding on any successor or merger partner as long as the agreement is in effect.

The effects that compliance with any of the terms of the DPA will have on us are unknown and they may have a material impact on our business, financial condition and results of operations. The activities of the government-approved independent monitor, as well as the continued implementation of a compliance and ethics program and the adoption of internal controls, policies and procedures to detect and prevent future violations of the FCPA and other applicable anti-corruption laws, may result in increased costs to us and change the way in which we operate, the outcome of which we are unable to predict. For example, implementing and monitoring such compliance procedures in the large number of foreign jurisdictions where we operate can be expensive and time-consuming. As a result of our remediation measures, we may also encounter difficulties conducting business in certain foreign countries and retaining and attracting additional business with certain customers, and we cannot predict the extent of these difficulties.

In addition, entering into the DPA in the United States may adversely affect our operations or result in legal claims against us, which may include claims of special, indirect, derivative or consequential damages.

Our failure to comply with the terms of the deferred prosecution agreement with the Department of Justice would have a negative impact on our ongoing operations.

As described above, we are subject to a three-year DPA with the Department of Justice. If we comply with the DPA, the Department of Justice has agreed not to prosecute us with respect to the above-described activities in China and, following the term of the DPA, to permanently dismiss the criminal statement of information that is currently pending against us. Accordingly, the DPA could be substantially nullified, and we could be subject to severe sanctions and resumed civil and criminal prosecution, as well as severe fines, penalties and other regulatory sanctions, in the event of any additional violation of the FCPA or any other applicable anti-corruption laws by us or any of our officers, other employees or agents in any jurisdiction or of our failure to otherwise meet any of the terms of the DPA as determined by the Department of Justice in its sole discretion. The claims alleged in the DPA with the Department of Justice only relate to our actions in China as outlined above, and do not relate to any future violations or the discovery of past violations not expressly covered by the DPA. Any breach of the terms of the DPA would also cause damage to our business and reputation, as well as impair investor confidence in our company and result in adverse consequences on our ability to obtain or continue financing for current or future projects.

In addition, although we are not currently restricted by the U.S. Department of Health and Human Services, Office of the Inspector General, from participating in federal healthcare programs, any criminal conviction of our company under the FCPA in the future would result in our mandatory exclusion from such programs, and it may lead to debarment from U.S. and foreign government contracts. Any such exclusion or debarment would have a material adverse effect on our business, financial condition and results of operations.

Our ability to comply with the terms of the DPA is dependent, among other things, on the success of our ongoing compliance and ethics program, including our ability to continue to manage our distributors and agents and supervise, train and retain competent employees, as well as the efforts of our employees to adhere to our compliance and ethics program and the FCPA and other applicable anti-corruption laws. It is possible that, despite our best efforts, additional FCPA issues, or issues under anti-corruption laws of other jurisdictions, could arise in the future. Any failure by us to adopt appropriate compliance and ethics procedures, to ensure that our officers, other employees and agents comply with the FCPA and other applicable anti-corruption laws and regulations in all jurisdictions in which we operate or to otherwise comply with any term of the DPA would have a material adverse effect on our business, financial condition and results of operations.

In certain international markets, we have converted, or are in the process of converting, to a direct sales force model from a distributor-based sales model. Our business, financial condition and operating results may be adversely affected by the transition to a new sales model.

In August 2006, we negotiated an early termination with one of our international distributors, and we have since then undertaken to distribute our products in such distributor's country through our direct sales force. We also gave notice of termination to a second distributor and began operations in April 2008 through our direct sales force in such distributor's country. We gave notice of termination to a third distributor and began operations in July 2008 through our direct sales force in such distributor's country. In addition, we gave notice of termination to five other distributors and expect to begin operations in January 2009 through our direct sales force in these distributors' countries. We are also currently assessing the viability of distributing our products directly in other international markets. We have limited experience with direct sales of our products in international markets and, therefore, may not obtain the financial benefits that we expect. In addition, we may experience delays in implementing our direct sales force model due to the difficulty of hiring a sales force, establishing relationships with physicians, complying with local regulatory requirements, and other factors, which could have an adverse effect on our business, financial condition and results of operations.

_______________

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Monday
Dec292008

2008 FCPA Enforcement Index

Eleven organizations were named in Foreign Corrupt Practices Act enforcement actions during 2008 by the Justice Department, the Securities and Exchange Commission, or both. All of the companies on our list resolved their enforcement actions, except privately-held Nexus Technologies Inc.

The twenty-six individuals we've listed were charged with new FCPA offenses this year, or they settled enforcement actions or had charges amended, reinstated or affirmed in rehearings or on appeal. In the case of David Kay and Douglas Murphy, the U.S. Supreme Court refused to review their FCPA convictions. In U.S. v. Kozeny the prosecution against Frederic Bourke is going ahead, while his co-defendant Victor Kozeny has stayed in the Bahamas fighting extradition to the United States and another co-defendant, David Pinkerton, was dismissed from the case.

During the year, parties acting as private litigants filed five suits in U.S. federal court alleging behavior by defendants that, if true, would likely violate the FCPA. Our list of private litigation doesn't include the FCPA-related class action lawsuits that Kevin LaCroix has written about at the D&O Diary (here).

The pace of FCPA enforcement during 2008 was uneven. There were no enforcement actions against individuals until April. And during the first four months of the year -- while Congress investigated how corporate compliance monitors are appointed and paid -- just a couple of actions against organizations were announced.

There are now around 50 pending FCPA investigations at the DOJ and SEC, according to most estimates, with some investigations involving up to a dozen companies from single-industry segments, such as oil and gas services and orthopedic device makers.

_________

Organizations (countries involved) / U.S. enforcement agencies / financial penalties including fines, disgorgement and interest:


  • Fiat (Iraq, U.N. oil for food program) / DOJ, SEC / $17.7 million
  • Siemens (Iraq, U.N. oil for food program) (Other violations related to Argentina, Bangladesh, Venezuela, Iraq, Israel, Nigeria, Vietnam, China, Russia, Mexico) / DOJ, SEC / $800 million
  • Aibel (Nigeria) / DOJ / $4.2 million
  • AB Volvo (Iraq, U.N. oil for food program) / DOJ, SEC / $19.6 million
  • Flowserve Corp. (Iraq, U.N. oil for food program) / DOJ, SEC / $10.5 million

Individuals:

  • Misao Hioki (Bridgestone) Two years in prison, $80,000 fine
  • Shu Quan-Sheng (rocket scientist / AMAC International Inc) Guilty plea, sentencing pending
  • Richard John Novak (diploma mill syndicate) Three-years probation, three hundred hours of community service
  • Christian Sapsizian (Alcatel) Thirty months in prison, three-years supervised release, forteiture of $261,500
  • David Kay (American Rice) Thirty-seven months in prison
  • Nam Nguyen (Nexus Technologies Inc) Trial pending
  • Kim Nguyen (Nexus Technologies Inc) Trial pending
  • An Nguyen (Nexus Technologies Inc) Trial pending
  • Roger Michael Young (ITXC Corporation) Five-years probation, three-months home confinement, three months in a community confinement center, $7,000 fine
  • Yaw Osei Amoako (ITXC Corporation) Eighteen months in prison, two-years of supervised release, $7,500 fine
  • Steven J. Ott (ITXC Corporation) Five-years probation, six months home confinement, six months in a community confinement center, $10,000 fine
  • Ramendra Basu (The World Bank) Fifteen months in prison, two-years supervised released, fifty hours of community service

Private litigants:
_________

If we've missed any names that should be included in the 2008 index, please let us know.
.

Sunday
Dec282008

Cartels And Compliance

A post earlier this month reported the sentencing of former Bridgestone manager Misao Hioki to two years in jail and an $80,000 fine for violating the Foreign Corrupt Practices Act and conspiring to rig bids. Hioki, a Japanese citizen, became the ninth person from the so-called marine hose cartel to plead guilty to bid-rigging and the first to plead to an FCPA charge.

We've said before that cartel behavior often involves corrupt payments. That point was well made by Gary Spratling when he was Deputy Assistant Attorney General of the Antitrust Division at the Justice Department. In a 1999 speech to the American Conference Institute's National Conference on the FCPA, Spratling (who's now a partner in the San Francisco office of Gibson, Dunn & Crutcher), said this:

The fact is that in today's global economy there is a recurring intersection of conduct that violates both the Sherman Antitrust Act and the Foreign Corrupt Practices Act. A payment to a foreign official in violation of the FCPA may also be an act by an international bid-rigging, price-fixing, or market-allocation cartel in furtherance of its scheme injuring American businesses and consumers in violation of the Sherman Act. . . . Thus, a compliance audit by a multinational firm that detects a payment potentially in violation of the FCPA may actually have detected much more: international cartel activity with additional -- indeed, likely far greater -- exposure for the firm and its executives.
When the Antitrust Division discovers evidence of illegal payments during international cartel investigations, he said, it may refer the facts to the Fraud Section of the DOJ's Criminal Division for follow-up. We think that's probably what happened to Bridgestone's Misao Hioki.

And on compliance programs to fight both antitrust and FCPA violations, Spratling said: "Here the important point is that a compliance audit that detects a payment potentially in violation of the FCPA may simultaneously have detected a payment (as part of a bid-rigging or project-allocation scheme) potentially in violation of the Sherman Act, and vice versa."

We would add that a lax approach to compliance in one area often leads to problems in other areas. Siemens, for example, which just resolved FCPA violations with U.S. authorities, heard earlier this month from European Union antitrust regulators that it was being charged with forming a price-fixing cartel among makers of power transformers. And the overseas sales practices of leading orthopedic device makers, who settled domestic bribery charges last year, are also under investigation by the DOJ and SEC.

Fair competition, cash management, tax reporting, workplace health and safety, proper disclosure, export controls, hiring, employment and environmental practices -- all compliance is driven by the attitudes of an organization's leaders.
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Thursday
Dec252008

Help Wanted For Siemens Report

One of ProPublica's outstanding investigative reporters, T. Christian Miller, wrote the story below (which ProPublica co-published with MSN Money). We reprint it under ProPublica's generous license ("You can republish our articles for free, if you credit us, link to us, and don't edit our material or sell it separately.")

If you have trouble accessing the DOJ and SEC charging documents linked in the story (we did), you can also find them at the bottom of our earlier post here.

_________

Help Us Name Names in Siemens Corruption Scandal

by T. Christian Miller, ProPublica - December 22, 2008 1:05 pm EST

Get ready for the Siemens World Corruption Tour, 2001-2008. Siemens pleaded guilty last week to corruption across the globe, receiving a record-setting fine -- $1.6 billion (which sounds like a lot, but really, it's just 0.3 percent of their revenue during those years.)

In announcing the fine, the Justice Department and the Securities and Exchange Commission released formal complaints detailing how Siemens bribed government officials all around the world. (We published a story in Sunday's New York Times profiling the Siemens accountant at the center of the scandal.)

However -- and this is a big "however" if you're into accountability -- they released none of the names of the corrupt bureaucrats that took the cash or the Siemens officials who paid it.

This was done, Justice folks said, to protect the integrity of ongoing investigations and to comply with privacy laws in various countries.

At the hearing prosecutors seemed a bit wistful that they couldn't reveal the names, which were provided to Judge Richard Leon in a sealed file. Lori Weinstein, the dogged prosecutor who pursued the case, said the department could not provide exact names. But, she said, the documents were sprinkled with clues to provide "sufficient clarity" for the court to figure out who was who.

Some identifications are vague -- there are plenty of "government officials." But others are more specific. (Hello, "Wife of the former Nigerian Vice President, a dual U.S.-Nigerian citizen.") ProPublica figures that with the help of readers, we might be able to ID at least some of these folks. Below, you'll find descriptions of the bribees. Send us a name and a link sourcing the information.

To get things started, take the case of the Argentine identity card contract. The SEC's complaint said that Siemens paid bribes to a certain "president of Argentina" who left office in 1999. Not too hard to figure out that one -- Carlos Menem ran the country from 1989 to 1999. Looks like the buck really did stop there.

This is by no means an exhaustive list. As of last count, 16 countries had investigations ongoing into Siemens. Our list below includes only those bribery schemes detailed in the formal complaints by the Justice Department and the Securities and Exchange Commission.

E-mail us if you find clues to figure out the other grafters.

Argentina
Source: SEC Complaint, p. 21
National Identity Card contract (1998-2004)
Contract Amount: $1 billion
Bribe Amount: $40 million
Recipients:

  • President of Argentina until 1999 (Carlos Menem)
  • Minister of the Interior
  • Head of Immigration Control
  • Cabinet ministers

Bangladesh
Source: SEC Complaint, p. 19
Mobile Phone contract (2004-2006)
Contract Amount: $40.9 million
Bribe Amount: $5.3 million
Recipients:

  • Son of then-Prime Minister
  • Minister of Posts & Telecommunications
  • Director of Procurement for the Bangladesh Telegraph & Telephone Board
  • In addition, Siemens Ltd. Bangladesh hired relatives of two BTTB and Ministry of Posts and Telecom officials.

Venezuela
Source: SEC Complaint, p. 14
Metro contracts (2001-2007)
Valencia and Maracaibo metro systems
Contract Amounts: $642 million
Bribe Amount: $16.7 million
Recipients:

  • A high-ranking member of the central Venezuela government
  • Two prominent Venezuelan attorneys acting on behalf of government officials
  • A former Venezuelan defense minister and diplomat

Israel
Source: SEC Complaint, p. 17
Power plants (2002-2005)
Contract Amount: $786 million
Bribe Amount: $20 million
Recipients:

  • Former director of the Israel Electric Company
  • Payments routed through brother-in-law of former CEO of Siemens Israel Ltd.

Nigeria
Source: SEC Complaint, p. 20
Telecommunications projects (2000-2001)
Contract Amount: $130 million
Bribe Amount: At least $4.5 million
Recipients:

  • Wife of the former Nigerian Vice President, a dual U.S.-Nigerian citizen who lived in the U.S.
  • "likely" the former President of Nigeria
  • "likely" the former Vice President of Nigeria

Vietnam
Source: SEC Complaint, p. 22
Hospital equipment sales (2005-2006)
Contract Amount: $6 million
Bribe Amount: $383,000
Recipients:

  • Government officials

Source: SEC Complaint, p. 27
Mobile network (2002)
Contract Amount: $35 million
Bribe Amount: $140,000
Note: Siemens did not win the project but agreed to pay 8 percent to 14 percent of project value to Vietnamese government officials
Recipients:

  • "likely" Vietnamese Ministry of Defense officials
  • Vietel, state-owned mobile phone network

China
Source: SEC Complaint, p.16
Metro trains and signaling devices contracts (2002-2007)
Contract Amount: $1 billion
Bribe Amount: $22 million
Recipients:

  • Government officials

Source: SEC Complaint, p. 18
High voltage lines (2002-2003)
Contract Amount: $838 million
Bribe Amount: $25 million
Recipients:

  • Government officials

Source: SEC Complaint, p. 23
Medical equipment sales (2003-2007)
Contract Amount: $295 million
Bribe Amount: $14.4 million
Recipients:

  • Deputy Director, Songyuan City Central Hospital, convicted in China and sentenced to 14 years in prison

Source: SEC Complaint, p.24
Hospital equipment sales (1998-2004)
Contract Amount: Unknown
Bribe Amount: $650,000
Recipients:

  • Chinese hospital officials

Russia
Source: SEC Complaint, p. 25
Traffic control system (2004-2006)
Contract Amount: $27 million
Bribe Amount: $741,419
Recipients:

  • Government officials

Source: SEC Complaint, p. 27
Hospital equipment (2000-2007)
Contract Amount: Unknown
Bribe Amount: $55 million
Recipients:

  • Russian state-owned hospital officials

Mexico
Source: SEC Complaint, p. 26
Refinery modernization (2004)
Contract Amount: Unknown
Bribe Amount: $2.6 million
Recipients:

  • Senior official of Pemex, state-owned oil company

Iraq
Source: SEC Complaint, p. 28
Oil for Food program (2000-2003)
Contract Amount: $124 million
Bribe Amount: $1.7 million
Recipients:

  • Iraqi Ministry of Electricity officials
  • Iraqi Ministry of Oil official
So who are these folks? Send us a name and a link sourcing the information.
_________

Will readers of the FCPA Blog contribute to this story? Let's see.

* * *
A Siemens / Jefferson Link? Meanwhile, a story in the Dec. 24 edition of Harper's Magazine by Ken Silverstein refers to the earlier joint ProPublica/New York Times story about Siemens, and then says: "Now ProPublica has asked for help identifying some of the alleged recipients of the bribes who are described but not named in the SEC complaint. One of those people appears to be Jennifer Atiku-Abubakar, who is tied to the scandal involving the former Louisiana congressman William Jefferson and is also a donor to the Republican Party. But I want to emphasize that I have no way of knowing whether the charges made in the complaint about her are accurate. . . . According to this Washington Post story, she is the wife of Atiku Abubakar, the very controversial former vice president of Nigeria from 1999 to 2007."
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Wednesday
Dec242008

Who Fills Your Cup?

It really boils down to this: that all life is interrelated. We are all caught in an inescapable network of mutuality, tied into a single garment of destiny. Whatever affects one directly, affects all indirectly. We are made to live together because of the interrelated structure of reality. Did you ever stop to think that you can't leave for your job in the morning without being dependent upon most of the world? You get up in the morning and go to the bathroom and reach over for the sponge, and that's handed you by a Pacific Islander. You reach for a bar of soap, and that's given to you at the hands of a Frenchman. And then you go into the kitchen to drink your coffee for the morning and that is poured into your cup by a South American. And maybe you want tea: that's poured into your cup by a Chinese. Or maybe you desire to have cocoa for breakfast, and that's poured into your cup by a West African. And then you reach over for your toast, and that's given you at the hands of an English-speaking farmer, not to mention the baker. And before you finish your breakfast in the morning, you've depended on more than half the world. This is the way our universe is structured, that is its interrelated quality. We aren't going to have peace on earth until we recognize this basic fact of the interrelated structure of all reality. ~ Martin Luther King, Jr., "Conscience for Change," 1967 Massey Lecture
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Tuesday
Dec232008

Fiat Pays $17.8 Million For FCPA Violations

Italian vehicle- and equipment-maker Fiat S.p.A. has resolved Foreign Corrupt Practices Act violations arising out of the U.N. oil for food program. It agreed with the Justice Department to pay a $7 million penalty for illegal kickbacks to officials of the former Iraqi government by three of its subsidiaries. Fiat also reached a settlement with the Securities and Exchange Commission for which it will pay $3.6 million in civil penalties and $7.2 million in disgorgement and interest.

The DOJ filed criminal informations against three Fiat subsidiaries in U.S. District Court for the District of Columbia. Iveco S.p.A. and CNH Italia S.p.A. were each charged with one count of conspiracy to commit wire fraud and violate the books and records provisions of the Foreign Corrupt Practices Act. 15 U.S.C. §§ 78m(b)(2)(A), 78m(b)(5) and 78ff(a). CNH France S.A. was charged with conspiracy to commit wire fraud.

While Fiat itself wasn't charged by the DOJ, the Turin-based company and its three subsidiaries were given a three-year deferred-prosecution agreement. In addition to paying the $7 million penalty under the deferred-prosecution agreement, Fiat acknowledged responsibility for its subsidiaries' violations, agreed to cooperate with U.S. and foreign investigations, and undertook to implement a compliance and ethics program. The DOJ, however, didn't require Fiat's appointment of a compliance monitor.

Both the DOJ and SEC recognized Fiat's remedial acts. The DOJ said,

In recognition of Fiat’s thorough review of the illicit payments and its implementation of enhanced compliance policies and procedures, the Department has agreed to defer prosecution of criminal charges against Fiat and its three subsidiaries for a period of three years. If Fiat abides by the terms of the agreement, at the end of the three-year period the Department will dismiss the criminal informations against the subsidiaries.
The SEC said,
The Commission considered remedial acts promptly undertaken by Fiat and CNH Global and the cooperation the companies afforded the Commission staff in its investigation. (emphasis added)
The SEC's civil complaint charged Fiat and CNH Global (a majority-owned subsidiary headquartered in Amsterdam) with failing to maintain adequate systems of internal controls to detect and prevent the corrupt payments and failing to properly record them. Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 [15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)]. In addition to the civil penalty of $3,600,000 under the SEC settlement and disgorgement of $5,309,632 in profits and $1,899,510 in pre-judgment interest, the companies were permanently enjoined from future violations of the internal controls and books and records provisions.

Between 2000 and 2002, Iveco, CNH Italia and CNH France paid a total of about $4.4 million to the Iraqi government in order to obtain contracts to provide industrial pumps, gears, heavy vehicles and other equipment. The companies inflated the price of contracts by 10 percent before submitting them to the United Nations for approval, and concealed that the price contained a kickback. Iveco and CNH Italia also inaccurately recorded the kickback payments as “commissions” and “service fees” for its agents in its books and records.

The DOJ said that during the time in question and until August 23, 2007, Fiat had American Depositary Receipts publicly traded on the New York Stock Exchange. It was therefore an "issuer" within the meaning of the Foreign Corrupt Practices Act, 15 U.S.C. § 78dd-1(a), and required to keep books, records, and accounts that, in reasonable detail, accurately and fairly reflected the transactions and disposition of its own assets and those of its subsidiaries that were incorporated into its books. The SEC's civil complaint said about jurisdiction that "Fiat and CNH Global, directly or indirectly, made use of the means or instrumentalities of interstate commerce, of the mails, or of the facilities of a national securities exchange in connection with the transactions, acts, practices, and courses of business alleged in this Complaint."
_______

Download the DOJ's Dec. 22, 2008 release here.

Download the Fiat deferred prosecution agreement here.

Download the Iveco criminal information here.

Download the CNH France criminal information here.

Download the CNH Italia criminal information here.

View the SEC's Litigation Release No. 20835 (December 22, 2008) in Securities and Exchange Commission v. Fiat S.p.A. and CNH Global N.V., Civil Action No. 08 CV 0221 (D.D.C.) (CKK) here.

Download the SEC's civil complaint against Fiat and CNH Global here.
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Monday
Dec222008

First-Time Criminal Internal Controls Charges

In an earlier post here we said: "The Siemens Information included the first ever criminal internal controls charge brought by the Justice Department. Although the SEC routinely includes internal controls charges in its civil resolutions, the DOJ has never done so."

An astute reader responded: "I assume you say that because 15 U.S.C. Section 78m(b)(5) was listed in the charging documents? Have not other DOJ FCPA enforcement actions (i.e. Flowserve, AB Volvo etc.) included 78m(b)(5) charges as well?"

Here's the answer: The FCPA’s books and records provisions are found in 15 U.S.C. Section 78m(b)(2)(A), and are separate and distinct from the FCPA’s internal controls provisions, which are found in 15 U.S.C. Section 78m(b)(2)(B). The confusion is that the “knowing” failures to violate both those provisions fall within the same statutory provisions – 15 U.S.C. Section 78m(b)(5) and 78ff(a). However, the DOJ has never charged 78m(b)(5) and 78ff(a) as part of an internal controls violation – only as a books and records violation. Count 1 of the Siemens AG information charges violations of 78m(b)(2)(B), which has never been done, as well as 78m(b)(5) and 78ff(a). Count 2 charges violations of 78m(b)(2)(A), 78m(b)(5), and 78ff(a), which the DOJ has done many times before. The two counts have two statutory provisions in common – the difference is 78m(b)(2)(A) v. 78m(b)(2)(B).

The text of the Foreign Corrupt Practices Act can be found here.
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Sunday
Dec212008

Two More Ex-Willbros Workers Charged

The Justice Department's aggressive enforcement of the Foreign Corrupt Practices Act against individuals continues. On Friday, a former executive and an ex-consultant of Willbros International Inc., a subsidiary of Houston-based Willbros Group Inc., were charged in connection with a conspiracy to bribe government officials in Nigeria and Ecuador. Former consultant Paul G. Novak, 41, was arrested on arrival at George Bush Intercontinental Airport in Houston. He was returned to the United States from Constantia, South Africa after his U.S. passport was revoked. James K. Tillery, 49, the former Willbros International executive, remains at large.

An indictment unsealed Friday in U.S. District Court in Houston charges Novak and Tillery with conspiring to bribe Nigerian and Ecuadorian government officials to obtain and retain gas pipeline construction and rehabilitation business from state-owned oil companies in those countries. Tillery and Novak face one count of conspiracy to violate the FCPA, two counts of violating the FCPA in connection with the authorization of specific corrupt payments to officials in Nigeria and Ecuador, and one count of conspiring to launder the bribe payments through purported consulting companies controlled by Novak.

If convicted of all charges, they each face up to 35 years in prison and fines of the greater of $250,000 or twice the pecuniary gain or loss from the FCPA offenses and, for the money laundering conspiracy, $500,000 or twice the value of the funds involved in the transfer.

The indictment says Tillery was a Willbros International employee and executive from the 1980s through January 2005. From 2002 until January 2005, he served as executive vice president and later as president of the company. Novak was an employee in the mid-1990s and later worked as an oil and gas consultant in Nigeria, purporting to provide consulting services to companies in that field.

Tillery and Novak, along with a Nigerian working as a consultant and employees of a German engineering firm Willbros had partnered with, conspired to pay more than $6 million in return for a $387 million contract to construct Nigeria's Eastern Gas Gathering System, according to the indictment. From late 2003 to 2005, payments were made and others promised to Nigerian officials. The indictment also alleges that Tillery, Novak and other Willbros employees based in South America paid $300,000 to officials at the state-owned oil company in Ecuador, PetroEcuador, and its subsidiary PetroComercial, in exchange for a $3 million contract to refurbish a 16-mile gas pipeline between Santo Domingo and El Beaterio.

In May this year, Willbros Group and Willbros International paid $22 million and entered into a deferred prosecution agreement with the DOJ to settle criminal FCPA charges in connection with corrupt payments to Nigerian and Ecuadorian officials. Willbros Group also paid $10.3 million (disgorgement of $8.9 million, plus prejudgment interest of $1.4 million) to resolve the SEC's civil enforcement action. As part of the settlement, the Willbros companies have been cooperating with the DOJ's ongoing investigation.

In November 2007, Jason Edward Steph, 37, who once served as general manager of on-shore operations for Willbros International, pleaded guilty to conspiring to violate the FCPA by bribing Nigerian officials. Steph said that in February and March of 2005 he, former Willbros executive Jim Bob Brown, and others arranged to pay about $1.8 million in cash to the officials. Brown also pleaded guilty to a similar charge in September 2006. He and Steph are cooperating with the government’s investigation and are waiting to be sentenced.

In the May 2008 SEC complaint against Willbros Group, Steph and former employees Gerald Jansen, Lloyd Biggers, and Carlos Galvez were named for aiding and abetting Willbros Group's violation of the antibribery, books and records, and internal controls provisions of the FCPA, and knowingly circumventing the FCPA's internal controls and books and records provisions. All four consented to permanent injunctions, with Jansen and Galvez ordered to pay civil penalties of $30,000 and $35,000 respectively. Determination of Steph's civil penalty was deferred pending his sentencing in the criminal case.

Willbros Group, Inc. trades on the New York Stock Exchange under the symbol WG. It provides construction, engineering and other services to the oil and gas industry.
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Download the DOJ's Dec. 19, 2008 release regarding Paul G. Novak and James K. Tillery here.

Download the DOJ's indictment of Novak and Tillery here.

Download the DOJ's May 14, 2008 release regarding Willbros Group Inc. here.

View the SEC's Litigation Release No. 20571 (May 14, 2008) in Securities and Exchange Commission v. Willbros Group, Inc., et al., Civil Action No. 4:08-CV-01494 U.S.D.C., Southern District of Texas (Houston Division) here.

Download the SEC's May 14, 2008 civil complaint against Willbros Group Inc., Jason Steph, Gerald Jansen, Lloyd Biggers and Carlos Galvez here.

Download the DOJ's November 5, 2007 release regarding Jason Edward Steph's guilty plea here.

Download Steph's November 5, 2007 Plea Agreement with the DOJ here.
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Friday
Dec192008

Siemens: The Clean-up Crew

Here are some important corrections and clarifications to earlier posts about Siemens:

1. Wednesday’s post indicates that Schnitzer Steel pleaded guilty to books and records and internal controls violations. In fact, it was Schnitzer’s subsidiary that pleaded guilty, and those charges included antibribery and books and records charges, but not internal controls charges. The Siemens Information included the first ever criminal internal controls charge brought by the Justice Department. Although the SEC routinely includes internal controls charges in its civil resolutions, the DOJ has never done so.

2. The same post implies that Bristow Group Inc. settled an FCPA case with DOJ. That never happened. Bristow settled only with the SEC.

3. Friday's post mentions the 1998 amendments and implies that only after that did the FCPA apply to foreign companies, but the FCPA has applied to foreign issuers (like Siemens and some of the other companies mentioned in the post) since its enactment in 1977. The amendments only broadened the scope to include foreign individuals and foreign companies that were not issuers when they act unlawfully while within the territory of the U.S. The list of companies includes both issuers and non-issuers, but the post makes it seem as though none of them could have been prosecuted under the FCPA before 1998, which is not true.
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Our thanks to those who provided their help in setting the record straight.

The relevant posts have also been corrected to prevent the spread of errors.

Enjoy the weekend.
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Thursday
Dec182008

Foreign Affairs

Our singular focus over the past week moved our spouse to ask whether we also plan to redo the walls in Siemens Blue. We're considering it. But what really comes to mind after the biggest FCPA enforcement action in history is that it involves not a U.S. company -- not a Boeing or an Exxon or a GE -- but "a corporation organized under the laws of Germany with its principal offices in Berlin and Munich." It was snared by the FCPA because, as the Justice Department's Information put it: "As of March 12, 2001, Siemens was listed on the New York Stock Exchange and was an 'issuer' as that term is used in the FCPA. 15 U.S.C. § 78dd-1(a). By virtue of its status as an issuer, Siemens was required to comply with the provisions of the FCPA."

We shouldn't be too surprised that the big hammer fell on a foreign company. Since 1998, the pace of investigations and enforcement actions involving foreign companies has accelerated. In addition to Siemens, overseas names in the FCPA news include ABB Ltd (Switzerland), Vetco Gray UK Ltd, Akzo Nobel, NV (the Netherlands), Statoil ASA (Norway), AstraZeneca (UK-Sweden), BAE Systems (UK), DaimlerChrysler (Germany), Innospec (UK), Magyar Telekom (Hungary), Norsk Hydro (Norway), Novo Nordisk (Denmark), Panalpina (Switzerland), Smith & Nephew (UK) and Total (France), among others.

Outside America's borders, its globo-cop role may not sit well with everyone (it makes a lot of Americans uneasy, too). But the FCPA's long reach and sharp teeth are changing global business practices. Our favorite pundit said it was probably the threat of criminal prosecution under the FCPA that finally scared Siemens enough to come clean. That's what Congress had in mind in 1998 when it expanded the FCPA to cover foreign companies that weren't issuers when they act unlawfully while within the territory of the U.S. ; American businesses needed a more level playing field.

But fighting public graft is also the right thing to do. A. A. Sommer, Jr., a commissioner of the SEC, said in 1976, a year before enactment of the FCPA, that "there are moral problems as well as legal problems that go far beyond simply the question of illegal payoffs to foreign officials. There are questions concerning the role of multi­national corporations, the extent to which they have obligations to the countries in which they conduct their business, the extent to which they should seek to raise the standards of conduct there, the respect which they should show the laws of other countries." Thirty-two years later the Wall Street Journal could say that the quixotic Foreign Corrupt Practices Act had turned into one of Congress's finer moments.

The DOJ's Matthew Friedrich summed up the case this week with these words:

For let there be no doubt that corruption is not a victimless offense. Corruption is not a gentlemen's agreement where no one gets hurt. People do get hurt. And the people who are hurt the worst are often residents of the poorest countries on the face of the earth, especially where it occurs in the context of government infrastructure projects, contracts in which crucial development decisions are made, in which a country will live by those decisions for good or for bad for years down the road, and where those decisions are made using precious and scarce national resources.
That's why the fight against international public corruption is worthwhile, and why the FCPA makes sense.
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Wednesday
Dec172008

A Spectacular Leap

Bob Beamon's long jump of 29 feet 2½ inches in Mexico City in the 1968 Olympics broke the world record by an astounding 21¾ inches. With that one jump Beamon became the first man to reach both 28 and 29 feet, and the word Beamonesque was born -- meaning a spectacular event. We'd describe Siemens' $800 million settlement on Monday of Foreign Corrupt Practices Act violations as Beamonesque, considering that it surpassed the existing FCPA settlement record by $755.9 million.

Before Siemens, Baker Hughes' April 2007 payment of $44.1 million (including penalties and disgorgement) was the biggest in an FCPA case. Baker Hughes, we think, won't be sorry to relinquish the top spot on the settlement list since being there gets you mentioned in the press about as often as Madonna.

Among other notable settlements, Willbros paid $32.3 million in May this year and Chevron's violations related to the U.N.'s oil for food program cost it $30 million last year. Titan Corporation held the record after it paid $28.5 million in 2005 for its FCPA settlement. Vetco's resolution cost it $26 million in 2007 and Lockheed paid $24.8 million in 1994, the biggest case of its time. York International spent $22 million last year to end its enforcement action. Statoil was close behind in 2006, paying $21 million. AB Volvo's 2008 case settled for $19.6 million, and ABB's violations cost it $16.4 million in 2004. Schnitzer Steel agreed to pay $15.2 million in 2006 and Flowserve $10.5 million this year.

Bob Beamon's great leap stood as a world record for 23 years and earned him a postage stamp in Burundi (pictured above). We're fairly sure Siemens won't be appearing soon on any postage stamps, but it could hold the FCPA settlement record for a very long time.
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Our thanks to Joe Hixson for helping assemble the settlement data in this post. He's with the strategic communications firm The Abernathy MacGregor Group Inc., which has represented some very well-known companies in connection with FCPA enforcement actions. Despite Joe's help, any mistakes in what's written above are all ours.
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