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Richard L. Cassin Publisher and Editor

Andy Spalding Senior Editor

Jessica Tillipman Senior Editor

Elizabeth K. Spahn Editor Emeritus

Cody Worthington Contributing Editor

Julie DiMauro Contributing Editor

Thomas Fox Contributing Editor

Marc Alain Bohn Contributing Editor

Bill Waite Contributing Editor

Shruti J. Shah Contributing Editor

Russell A. Stamets Contributing Editor

Richard Bistrong Contributing Editor 

Eric Carlson Contributing Editor

Bill Steinman Contributing Editor

Aarti Maharaj Contributing Editor


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FCPA Blog Daily News

Monday
Oct012007

York International Pays $22 Million To Resolve Global Corruption Case

Internal Investigation into Oil-For-Food Abuses Uncovered Widespread Bribery

York International Corporation has reached a settlement with U.S. prosecutors of numerous violations of the U.S. Foreign Corrupt Practices Act -- relating to bribes paid under the United Nations oil-for-food program and kickbacks for other government contract work in Bahrain, Egypt, India, Turkey, the United Arab Emirates and China. York -- a subsidiary of Johnson Controls, Inc. since 2005 -- provides heating, ventilation, air conditioning, and refrigeration products and services worldwide.

Under York's three-year deferred prosecution agreement with the U.S. Department of Justice, it will pay a $10 million criminal penalty, cooperate with the DOJ’s related investigations and appoint an independent compliance monitor. York also consented to the Securities and Exchange Commission’s filing of a complaint for FCPA violations and agreed to disgorge about $10 million and pay $2 million in civil penalties.

From 2001 through 2006, York paid over $7.5 million in bribes through subsidiaries and agents to obtain work on commercial and government projects throughout the world. York referred to the payments internally as "consultancy payments" but no bona fide services were involved. It made 854 improper consultancy payments on more than 770 contracts -- 302 projects involved government end-users, such as government-owned companies, public hospitals, or schools.

The payments violated the anti-bribery provisions of the FCPA, and York failed to devise and maintain an effective system of internal controls to prevent or detect the bribes. It also failed to accurately record in its books and records the kickbacks to Iraq, bribes in the UAE, and the bogus consultancy payments made in various countries. York consented to the entry of a final judgment with the SEC permanently enjoining it from future violations of Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934. The DOJ’s three-count criminal Information charged York with conspiracy to commit wire fraud and to falsify books and records in violation of 15 U.S.C. §§ 78m(b)(2)(A), 78m(b)(5) and 78ff(a).

York self-reported the violations and worked with the DOJ and the SEC to investigate the illegal conduct. The criminal Information also mentions "Employee A" and “Employee B,” citizens of the United Kingdom and Syria respectively, who were involved in the bribery, as well as "Company X," a consulting company based in Jordan that acted as a sales agent for York in the Middle East. They have not yet been charged with FCPA violations.

Among the details mentioned by prosecutors, York’s Danish subsidiary, which sells refrigeration equipment to ship builders and ship yards owned by the Chinese government, made illegal payments from 2004 through 2006 to agents and to Chinese officials connected with the shipyards. “Hundreds of thousands of dollars for nebulous and undocumented services” were processed through York’s Danish subsidiary, which also provided Chinese ship yard employees with lap top computers and other electronics.

York's parent company, Johnson Controls, Inc. (NYSE: JCI) will not be prosecuted on the facts admitted by York.

View the DOJ’s October 1, 2007 News Release Here.

View the October 1, 2007 Deferred Prosecution Agreement and Criminal Information Here.

View the SEC’s Litigation Release No. 20319 / October 1, 2007 Here.

View the SEC’s Complaint Here.

Monday
Oct012007

Oscar Wyatt, Founder Of Coastal Corporation, Pleads Guilty To Iraq Bribes

Guilty Plea Follows El Paso's Settlement of FCPA Violations Earlier This Year

Oscar Wyatt Jr., 83, pleaded guilty on October 1, 2007 to one count of conspiracy to commit wire fraud in connection with the U.N. oil-for-food program. The U.S. Government accused him of paying millions in illegal surcharges directly to Iraqi officials in return for oil allocations from 2000 to 2002. He faces 18 to 24 months in prison under a plea agreement and will forfeit $11 million. He founded and ran Coastal Corporation, which he sold to El Paso Corporation in 2001.

In February this year, El Paso settled violations of the U.S. Foreign Corrupt Practices Act related to illegal surcharges it paid to Iraqi officials under the oil-for-food program. It disgorged $5,482,363 in profits and paid a civil penalty of $2,250,000. It also entered into a non-prosecution agreement with the U.S. Attorney’s Office for the Southern District of New York and cooperated in providing evidence relating to Wyatt's role. Violations under the anti-bribery provisions of the FCPA carry potential prison sentences of 5 years, while under the oil-for-food program, which ran from 1996 to 2003, Wyatt could have faced 20 years for his role.

The Securities and Exchange Commission's February 7, 2007 litigation release said, “El Paso failed to maintain an adequate system of internal controls to detect and prevent the illegal payments. Although El Paso inserted a provision in some contracts requiring the third party to represent that it had not paid surcharges, El Paso failed to conduct due diligence to ensure that surcharges were not paid. Recorded conversations reveal El Paso’s knowledge that the provision was entirely ineffective. In one conversation, a third party that indicated he was willing to pay illegal surcharges to Iraq indicated that he would be equally willing to sign a false certification denying the payment. El Paso’s accounting for its Oil for Food transactions failed properly to record the nature of the company’s payments. In at least fifteen transactions, a portion of the company’s price for oil constituted kickbacks to Iraq. The company failed to so designate those payments, characterizing them instead simply as part of the cost of goods sold.”

During Wyatt's trial, which ended mid-way with his guilty plea, prosecutors played tapes for the jury of conversations between him and Saddam Hussein.

El Paso Corporation trades on the New York Stock Exchange under the symbol EP.

View the SEC's Litigation Release No. 19991 / February 7, 2007 Here.

View the SEC's Complaint Against El Paso Corporation Here.

View the DOJ's 2005 Press Release About Wyatt's Indictment Here.

Monday
Oct012007

Syncor's Founder Settles FCPA Charges With The SEC

Cardinal Health's 2003 Acquisition of Syncor Established Important FCPA Precedents Concerning Pre-Merger Due Diligence and Successor Liability

Monty Fu, the founder of Syncor International Corp., agreed with the Securities and Exchange Commission on September 27, 2007 to resolve U.S. Foreign Corrupt Practices Act charges by consenting to a permanent injunction against FCPA books-and-records violations and agreeing to pay a $75,000 civil penalty. Fu was Syncor's CEO from 1985 to 1989 and board chairman from 1985 to November 6, 2002, when he went on paid leave until he resigned in December 2002.

Over a 17-year period ending in 2002, Syncor's Taiwan subsidiary made corrupt payments to doctors at government-owned and managed hospitals. In January 2003, Cardinal Health Inc. acquired Syncor, whose common stock before the acquisition had been registered with the SEC and listed on NASDAQ's National Market.

In December 2002, the SEC settled civil and administrative proceedings against Syncor, which paid a $500,000 civil penalty and agreed to a cease-and-desist order. See SEC v. Syncor International Corp., C.A. No. 1:02CV02421 (EGS) (D.D.C.) (filed Dec. 10, 2002), Litigation Release No. 17887 (Dec. 10, 2002). The DOJ at the same time settled criminal FCPA charges against Syncor Taiwan, which paid a $2 million fine. See U.S. v. Syncor Taiwan, Inc., No. 02-CR-1244-ALL (C.D. Cal.) (filed Dec. 4, 2002). The SEC did not explain why Fu's case took so long to resolve.

The 2002 cases and the circumstances of Cardinal Health's subsequent acquisition of Syncor were legally significant. They established or helped clarify the application of successor liability for FCPA violations and an acquirers' duty to discover, disclose and remedy potential FCPA violations of its target.

Cardinal Health (NYSE: CAH) is commonly believed to be the "Requestor" in DOJ Opinion Procedure Release 2003-01 (January 15, 2003) . The Release noted that:

"The Requestor is a U.S. issuer. Requestor intends to purchase the stock of Company A, another U.S. company which has both U.S. and foreign subsidiaries, and thereafter operate it as a subsidiary. During its due diligence efforts, Requestor learned that officers of a foreign subsidiary, including officers located within the United States, authorized and made payments to individuals employed by foreign state-owned entities to obtain or retain business. Requestor notified Company A of its findings, and both companies commenced parallel investigations of Company A's operations throughout the world. The companies then disclosed the results of their investigations to the Department of Justice and the staff of the U.S. Securities and Exchange Commission (the "SEC")."

The Release then said that "[w]ith Requestor's encouragement and approval, Company A [Syncor] has taken certain remedial actions, including making appropriate disclosures to the investing public, issuing instructions to each of its foreign subsidiaries to cease all payments to foreign officials, and suspending the most senior officers and employees implicated in the payments pending the conclusion of its investigation."

"Both Requestor and Company A wish to proceed with the acquisition," the Release continued. "Requestor, however, is concerned that by acquiring Company A it is also acquiring potential criminal and civil liability under the FCPA for the past acts of Company A's employees." In light of the Requestor's concerns, it "undertakes to do the following once the transaction closes and it becomes the owner of Company A:

1. Requestor will continue to cooperate with the Department and the SEC in their respective investigations of the past payments and will similarly cooperate with foreign law enforcement authorities;

2. Requestor will ensure that any employees or officers of Company A found to have made or authorized unlawful payments to foreign officials are appropriately disciplined;

3. Requestor will disclose to the Department any additional pre-acquisition payments to foreign officials made by Company A or its subsidiaries that it discovers after the acquisition;

4. Requestor will extend to Company A its existing compliance program. Such compliance program will, if necessary, be modified to insure that it is reasonably designed to detect and deter, through training and reporting, violations of the FCPA and foreign bribery laws; and

5. Requestor will ensure that Company A implements a system of internal controls and makes and keeps accurate books and records."

The DOJ concluded by saying it would not hold the Requestor responsible for the pre-acquisition conduct "of companies that will be wholly-owned subsidiaries following the acquisition. This statement of intent does not, of course, apply to any payments made after the date of acquisition, nor does it apply to individuals involved in making or authorizing the payments." The Release was understood to mean that acquirers who do less than the Requestor / Cardinal Health did or promised to do may face successor civil and criminal liability for FCPA violations committed by target companies before the acquisition.

The principles established and discussed in the Cardinal Health - Syncor Release were echoed in Opinion Procedure Release 04-02 (July 12, 2004), requested by JPMorgan Partners Global Fund and others trying to acquire upstream oil, gas and petrochemical businesses from ABB Ltd.

View the SEC's September 28, 2007 Litigation Release No. 20310 Here.

View the SEC's Complaint Against Monty Fu Here.

View Opinion Procedure Release 2003-01 Here.

View Opinion Procedure Release 2004-02 Here.

Friday
Sep282007

Did Siemens Pay More Than $2 Billion In Bribes?

The Wall Street Journal reports on September 27, 2007 that Siemens' bribery problem may involve corrupt payments of about €1.6 billion ($2.3 billion). That's four times the amount Siemens last disclosed, and its internal investigation is not yet complete. As mentioned in an earlier post Here, this will be the biggest international corruption story around when it comes to the surface. That may happen soon. The U.S. Department of Justice and the Securities and Exchange Commission are actively pursuing the case, perhaps in a cooperative effort with German prosecutors and others.

View the Wall Street Journal's Report Here.

Wednesday
Sep262007

Bristow Resolves Corrupt Nigeria Tax Payments

Houston-based Bristow Group Inc. (formerly Offshore Logistics Inc.) settled U.S. Foreign Corrupt Practices Act charges related to improper payments in Nigeria in 2002 and 2003 to lower expatriate employment taxes there. The payments to Nigerian state government officials violated the anti-bribery provisions of the FCPA and Bristow's under-reporting of its tax liabilities violated the books and records provisions. It consented to a September 26, 2007 administrative cease-and-desist order from the Securities and Exchange Commission. Bristow, which provides helicopter services worldwide to the offshore oil and gas industry, did not pay any financial penalties.

Bristow's internal investigation started in late 2004 when its newly-appointed CEO heard remarks suggesting that an affiliate, Pan African Airlines Nigeria Ltd., had engaged in bribery to reduce certain tax assessments. He reported it immediately to the audit committee and contacted outside counsel. The subsequent internal investigation showed corrupt payments totaling $443,300 and resulting tax savings of $873,940. Bristow self-reported the results to the SEC, which also found that the company had mischaracterized the payments in its books and records as legitimate payroll expenses and lacked sufficient internal controls. Bristow cooperated with the SEC and has taken remedial steps. The SEC's decision not to impose any financial penalties is an endorsement of Bristow's handling of the matter.

Bristow first reported the bribery problems in its 2005 annual report. The SEC's order requires it to cease and desist from violating Sections 30A, 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities and Exchange Act of 1934 and Rules 12b-20, 13a-1 and 13a-13.

Bribes to reduce taxes were the basis of the FCPA charges upheld in U.S. v. David Kay and Douglas Murphy (February 4, 2004), discussed in another post Here.

Bristow Group Inc. trades on the New York Stock Exchange under the symbol BRS.

View the SEC's Press Release Here.

View the SEC's September 26, 2007 Administrative Proceeding No. 34-56533 (Accounting and Auditing Enforcement Release No. 2727 and Administrative Proceeding File No. 3-12833) Here.

Wednesday
Sep262007

A.T. Kearney's Former India President Violated The FCPA

The U.S. Securities and Exchange Commission announced on September 25, 2007 two settled enforcement actions based on violations of the books and records provisions of the Foreign Corrupt Practices Act. The actions involved the founder and former president of A.T. Kearney Ltd's India business, Chandramowli Srinivasan, and Kearney's former parent company, Electronic Data Systems Corp.

Between 2001 and 2003, Srinivasan made corrupt payments of over $720,000 in the form of cash transfers, gifts and services to employees of two private energy companies partly owned by the Indian government in order to retain their buisness. To fund the bribes, Srinivasan and a Kearney-India contract accountant fabricated invoices that Srinivasan subsequently signed to authorize payment. This caused EDS to record the payments incorrectly in its accounting books and records. EDS recognized over $7.5 million in revenues from the Indian companies' contracts after Kearney-India began paying the bribes.

For violating Sections 13(b)(5) and 30A of the Securities Exchange Act of 1934, Srinivasan paid a civil penalty of $70,000. EDS paid $358,800 in disgorgement and $132,102 in prejudgment interest for violating Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 12b-20 and 13a-13, and Regulation FD in connection with a separate offense.

Kearney, which EDS owned from 1995 to 2006, is now "an independent, privately owned management consultancy, with 100 percent of the equity owned by officers in the firm." Srinivasan, whom EDS terminated in 2004, resides in Delhi, India. Kearney's change in ownership, Srinivasan's departure from Kearney / EDS and his foreign residency are all reasons why the Department of Justice may decide not to bring criminal prosecutions for the FCPA violations.

Electronic Data Systems Corp. trades on the New York Stock Exchange under the symbol EDS.

View the SEC's September 25, 2007 Litigation Release No. 20296 and Accounting and Auditing Enforcement Release No. 2726 Here.

View the SEC's Complaint Against Srinivasan Here.

View the SEC's Administrative Proceeding Order Against EDS Here.

Monday
Sep242007

Paradigm's Pre-IPO Due Diligence Reveals FCPA Violations

Paradigm B.V., a Houston-based oil and gas services provider, entered into a non-prosecution agreement with the U.S. Department of Justice to resolve payments that violated the Foreign Corrupt Practices Act. Paradigm made prohibited payments to foreign officials in China, Indonesia, Kazakhstan, Mexico and Nigeria. It will "pay a $1 million penalty, implement rigorous internal controls, retain outside compliance counsel, and cooperate fully with the Department of Justice," according to the DOJ's September 24, 2007 announcement.

Paradigm's parent company, Paradigm Ltd., which is controlled by private equity fund Fox Paine, discovered the corrupt payments during due diligence for its planned NASDAQ IPO and self-disclosed them to prosecutors. The conduct at issue did not involve current senior management, according to the company. The DOJ said, “Paradigm’s actions in this matter, including voluntary disclosure and remedial efforts, are consistent with our view of responsible corporate conduct when FCPA violations are uncovered. Accordingly, the Department has resolved this case to permit the company to move forward on sound footing, governed by ethical business practices.”

The corrupt payments involved $22,250 deposited into the Latvian bank account of a British West Indies company recommended as a consultant by an official of KazMunaiGas, Kazakhstan’s national oil company, to secure a tender for geological software. The DOJ said Paradigm performed no due diligence, did not enter into any written agreement and apparently received no services.

In China, Paradigm used an agent to make commission payments to representatives of a subsidiary of the China National Offshore Oil Company in connection with the sale of software to the CNOOC subsidiary. Paradigm also directly retained and paid employees of Chinese national oil companies or state-owned entities as "internal consultants" to evaluate Paradigm’s software and to influence their employers’ procurement divisions to purchase Paradigm’s products. Employees of CNOOC and other state-owned enterprises in China are "foreign officials" for purposes of the FCPA.

Paradigm said it also made corrupt payments in Mexico, Indonesia and Nigeria. In Nigeria, it used intermediaries to pay between $100,000 and $200,000 to politicians to obtain a contract to perform services and processing work for a subsidiary of the Nigerian National Petroleum Corporation. In Mexico, it hired the brother of a Pemex decision maker, and paid for the decision-maker's $12,000 trip to Napa Valley, California and $10,000 to entertain him. In Indonesia, its agent paid employees of Pertamina through a New York bank account.

In a sign that the DOJ is encouraging more voluntary disclosure and self-directed remedial action -- which means implementing an "effective compliance program" -- Paradigm's non-prosecution agreement expires after just 18 months instead of the usual three-year period, and requires appointment of outside compliance counsel instead of an independent monitor. In addition to Paradigm's self disclosure and remedial actions, another major influence on the DOJ's handling of the case must have been the fact that the company's current senior management was not involved in the unlawful conduct.

View the Department of Justice's News Release Here.

View Paradigm's Non-Prosecution Agreement Here.

Sunday
Sep232007

FCPA Defenses That Don't Work

The text of the Foreign Corrupt Practices Act sets out three types of payments to foreign officials that are lawful -- facilitating payments, promotional expenses and payments permitted under the written laws of the host country. In addition to these three defenses, there are others that are repeated often -- but are bogus. They originate not from judges or jurisprudence but from the wishful thinking of companies and people in need of a defense, and fast. Knowing which defenses are real and which are counterfeit is crucial, however, and learning the differences too late can have dire consequences.

Here, then, are some of the most popular FCPA defenses that do not work:

Everyone pays bribes in this country.

Don't look at me. The / joint venture partner / agent / foreign subsidiary / did it.

Only big companies get into FCPA trouble. No one cares about a little fish like us.

My supervisor approved it.

We had no choice -- either pay up or lose the deal. That's extortion, not bribery.

We can't control what our agent does on his own time with his own money.

A hundred tiny bribes do not add up to one big bribe.

We have to pay bribes to do business here. The U.S. Government doesn't really expect us to leave, does it?

I was outside the U.S. and only used foreign bank accounts.

It's not fair. . . . .

________________________

More information is available from Cassin Law LLC.

Thursday
Sep202007

Best Intentions: The Problem of Promotional Expenses

The affirmative defense for promotional expenses has always been a riddle, which explains why it appears so often among the Justice Department's Opinion Procedure Releases, including both Releases so far this year. Congress added it to the U.S. Foreign Corrupt Practices Act in 1988, to allow businesses to pay travel expenses of foreign officials. The expenses, the law says, must be “reasonable and bona fide” and related directly to “the promotion, demonstration, or explanation of products or services." 15 U.S.C. §§ 78dd-1(c)(2)(A) and 78dd-2(c)(2)(A).

That sounds simple enough, but there's a problem. If an expenditure is reasonable and bona fide, it is not a corrupt payment. If it is not a corrupt payment, it is not prohibited by the FCPA. In that case, what's the purpose of the affirmative defense? Congress itself created this conundrum with its eyes wide open. The notes to the 1988 House and Senate Conference agreement say in relation to promotional expenses: “If a payment or gift is corruptly made, in return for an official act or omission, then it cannot be a bona fide, good-faith payment, and this defense would not be available.” In other words, if the payment violates the FCPA to begin with, this affirmative defense doesn’t work, period.

So when is it safe to pay for a foreign official’s trip? Only when there is no corrupt intent -- that is, no expectation that in return for the trip, the foreign official will misuse his or her authority to obtain or retain business or gain an unfair advantage for any party. To be practical, proving the absence of a corrupt intent in this scenario is difficult. Why invite foreign officials for a visit unless they have some connection with the company's business in the first place? But if they have the power to help the business, inviting them on the trip implies an expectation that they will use their power corruptly. That implication has to be refuted by the weight of the evidence.

That's why prudent companies and their lawyers produce long lists of facts showing the host's innocent state of mind concerning the visit. No role in selecting the guests. No company-related new matters in their ministry. No advance funds or reimbursements in cash. No expenses for spouses, family, or other guests. No funding or organizing of any entertainment or leisure activities. No side trips. No stipends or spending money. No souvenirs unless they carry the host’s name and/or logo and are of nominal value, e.g., shirts or tote bags. It all sounds less like hospitality and more like a stay in the hospital.

True, the affirmative defense for promotional expenses was never intended to be a blank check to buy influence from foreign officials. But at least it should give Americans a chance to invite guests home, show them some basic hospitality, and brag a bit about the goods and services on offer. That cannot happen, however, as long as the law is tied up in knots and American businesses are caught in the tangle. The question is whether Congress, the DOJ or the courts will ever come to the rescue?

View Other Posts Dealing With Promotional Expenses Here.

Thursday
Sep202007

Panalpina Suspends Services For Oil and Gas-Related Customers in Nigeria

Panalpina's cooperation with the U.S. Department of Justice appears to be in full swing. For starters, it is exiting the Nigeria logistics and freight forwarding market for all oil and gas services customers, at least a dozen of which have been contacted by the DOJ about Panalpina's customs clearance practices in Nigeria and other countries.

Panalpina confirmed that its U.S. subsidiary has been instructed to "produce documents and other information related to its business, its services to certain customers and its services in Nigeria, Kazakhstan and Saudi Arabia." It also said its internal investigation into corrupt payments in those countries is continuing. Presumably it is sharing the results with the DOJ on a real-time basis.

Apparently echoing the U.S. Government's position on Nigeria's persistent corruption problem, Panalpina blamed the suspension of services on the "unclear and uncertain regulatory framework," which means the corrupt practices embedded in the Nigerian bureaucracy.

This turns the heat up further on Nigeria. It is facing a choice to clean up public-sector corruption or do without the services of oil and gas-related companies and others subject to the jurisdiction of the Foreign Corrupt Practices Act. In August this year, Noble Corporation said it could not obtain or renew permits for five of its seven drilling rigs operating in Nigeria, presumably because it stopped authorizing potentially corrupt payments, and may need to exit the market entirely.

View Panalpina's Announcement Here.

View Other Posts About Panalpina Here.

Sunday
Sep162007

Schnitzer’s Victory

The case was full of bad facts. For nearly ten years until late 2004, some $1.8 million in bribes went to foreign officials and private parties in South Korea and China. Officers and employees of Schnitzer Steel Industries Inc. and its Korean subsidiary, SSI International Far East Ltd., approved the bribes, then used elaborate means to fund and conceal them.

Cash, gift certificates, a Cartier watch, pens, perfume, entertainment, a golf club membership, even a condo timeshare – all these changed hands. Off-the-books bank accounts in Korea held slush funds. The bribes were falsely accounted for as “refund to customer” or “rebate to customer,” or “quality claims,” “discounts,” “credits” or “freight savings.” They were disguised as “gratuities” or “congratulations money." Some bribes were even masked as “condolence money.” The corruption was so habitual that even after it was discovered and ordered stopped, an executive approved two more bribes.

There were still more bad facts. Schnitzer had no Foreign Corrupt Practices Act compliance program of any kind – no education for employees, no training, no due diligence, no audits. In ignorance of the FCPA, senior managers emailed each other about arranging “kickbacks” and protecting the crooked recipients from legal trouble in their home countries. Schnitzer, a public company and one of America's largest recyclers of scrap metal, lacked even the basic financial controls needed to prevent or detect secret bank accounts, corrupt payments and false accounting.

Did prosecutors, as expected, seek the corporate death penalty? Not at all. In the end, Schnitzer was never charged with a crime. Its subsidiary, SSI Korea, pleaded guilty in October 2006 to violating the FCPA's anti-bribery and books and records provisions, as well as conspiracy and wire fraud. It paid a $7.5 million criminal fine. Schnitzer itself, however, escaped with a $7.7 million civil penalty and a deferred prosecution agreement, whereby it promised to keep its nose clean and take remedial actions. Thereafter, Schnitzer survived and has since flourished in the robust global steel market.

What accounts for this surprising result? For a start, Schnitzer accepted all responsibility. On first learning about the corrupt payments, the board's audit committee commissioned an aggressive internal investigation. At each stage of the investigation, Schnitzer voluntarily disclosed what it was learning to the Department of Justice and the Securities and Exchange Commission. Then, looking forward, Schnitzer set out to transform its culture. To make sure everyone inside the company and outside got the point, it replaced the chairman of the board, hired a new CEO, and brought in a fresh team of senior management.

The Department of Justice was satisfied, even impressed. “When companies voluntarily disclose FCPA violations and cooperate with Justice Department investigations, they will get a real, tangible benefit. In fact," the DOJ said, "Schnitzer Steel’s cooperation in this case was excellent and . . . the disposition announced today reflects that fact.”

The outcome was never inevitable. Like other companies facing a corruption scandal, Schnitzer had a crucial choice -- to retreat behind the corporate parapet and wait for prosecutors and public opinion to storm the gates, or to cooperate up to a point but try to keep defense options open, or to surrender peacefully, make a full confession, show a repentant spirit and seek forgiveness. By choosing the last option, the company was able to enjoy a quick rehabilitation and full restoration to corporate citizenship. Schnitzer's victory was no accident, but a product of its own decisions.

View the DOJ’s Press Release Here.

Wednesday
Sep122007

An Expenses-Paid Training Program For Foreign Officials Is OK

In its second Opinion Procedure Release of 2007, the Department of Justice again looked at promotional expenses. An affirmative defense in the U.S. Foreign Corrupt Practices Act allows payment or reimbursement of expenses of foreign officials that are directly related to “the promotion, demonstration, or explanation of products or services." 15 U.S.C. §§ 78dd-1(c)(2)(A) and 78dd-2(c)(2)(A).

The DOJ said it would take no action against a requestor proposing to cover some U.S. domestic travel and accommodation expenses for six foreign officials. The officials, selected by the foreign government, are attending an annual six-week long internship program for foreign insurance regulators sponsored by the National Association of Insurance Commissioners ("NAIC"). After the NAIC program concludes, the requestor will host the foreign officials for a five-day educational program at the requestor's U.S. headquarters "to familiarize them with the operation of a United States insurance company."

The requestor will reimburse air fares (domestic economy class), domestic lodging, local transport, meals and incidental expenses (up to a modest set amount per day upon presentation of a receipt), and "a modest four-hour city sightseeing tour" for the six officials.

"Based on the Requestor's representations," the DOJ said, "consistent with the FCPA's promotional expenses affirmative defense, the expenses contemplated are reasonable under the circumstances and directly relate to 'the promotion, demonstration, or explanation of [the Requestor's] products or services.' 15 U.S.C. § 78dd-2(c)(2)(A)."

The requestor distanced itself from the foreign officials' influence, and made clear the strict limits of its largess. It represented, among other things, that:

-- It will not pay any expenses related to the foreign officials' travel to or from the United States, or their participation in the NAIC internship program.

-- It has no non-routine business under consideration by the relevant foreign government agency.

-- Its routine business before the relevant foreign government agency consists primarily of reporting of operational statistics, reviewing the qualifications of additional agents, and onsite inspections of operations. Such routine business is guided by administrative rules with identified standards.

-- Its only work with other entities within the foreign government consists of collaboration on insurance-related research, studies, and training.

-- It will not select the particular officials who will travel. That decision will be made solely by the foreign government.

-- It will host only the designated officials, and not their spouses or family members.

-- It intends to pay all costs directly to the providers; in the event that an expense requires reimbursement, the requestor will only do so, up to a modest daily minimum, upon presentation of a written receipt.

-- Any souvenirs that it gives the visiting officials would reflect its business and/or logo and would be of nominal value, e.g., shirts or tote bags.

-- Apart from the expenses identified above, it will not compensate the foreign government or the officials for their visit, nor will it fund, organize, or host any other entertainment, side trips, or leisure activities for the officials, or provide the officials with any stipend or spending money.

-- The training visit will be for a six-day period (five days of training plus travel time), and costs and expenses will be only those necessary and reasonable to educate the visiting officials about the operation of a U.S. company in the requestor's industry.

View DOJ Opinion Procedure Release No.: 07-02 (September 11, 2007) Here.