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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


FCPA Blog Daily News

Thursday
Feb282008

Bahrain Accuses Alcoa Of Bribery

Today's Wall Street Journal reports that Aluminum Bahrain BSC ("Alba") has filed a lawsuit in federal court in Pittsburgh accusing Alcoa of a 15-year conspiracy linked to overcharging, fraud and bribery. The suit says more than $2 billion in Alba's payments under supply contracts passed from Bahrain to tiny companies in Singapore, Switzerland and the Isle of Guernsey, and that some of the money was then used to bribe Bahraini officials involved in granting the contracts.

Alcoa hasn't made any comment about the suit. With 116,000 employees in 44 countries, it's one of the world's largest producers and managers of primary aluminum, fabricated aluminum and alumina facilities.

Alcoa's agent. The WSJ quotes the suit as alleging that from 1990, Alcoa began assigning its supply contracts with Alba to a series of companies set up by Alcoa's agent, a Canadian businessman of Jordanian origin named Victor Dahdaleh. "...These assignments served no legitimate business purpose and were used as a means to secretly pay bribes and unlawful commissions as part of a scheme to defraud Alba."

FCPA violations? According to the report, the suit grew out of an investigation commissioned by Bahrain itself to uncover corruption in its state-owned enterprises. The story notes that "[i]t is highly unusual for a country to use U.S. courts to accuse an American company of bribery. The dispute is likely to put Alcoa under the microscope of the Justice Department, which has been cracking down on questionable dealings between U.S. companies and foreign officials."

The U.S. Foreign Corrupt Practices Act prohibits both direct and indirect corrupt payments to foreign officials for the purpose of obtaining or retaining business. Indirect payments typically pass through the hands of an overseas partner or agent and then end up with the foreign official for an unlawful purpose. Most FCPA violations happen that way.

But there is no private right of action under the FCPA. That means offenses can be prosecuted only by the U.S. Department of Justice or the Securities and Exchange Commission. The DOJ's Lay Person's Guide to the FCPA notes, however, that "[c]onduct that violates the antibribery provisions of the FCPA may also give rise to a private cause of action for treble damages under the Racketeer Influenced and Corrupt Organizations Act (RICO), or to actions under other federal or state laws." Fraud and misrepresentation would be among such private causes of action.

A rare lawsuit. Dan Newcomb -- author of the FCPA Digest -- says in the WSJ story, "The reason it's rare for governments to accuse U.S. companies of corruption in American courts is that once you raise a question of corruption, the sovereign runs the risk they will be embarrassed by the requests of discovery from the private party." In this case, he added,"They have to be prepared to withstand Alcoa coming back to them and saying, 'We want to look at every other corrupt transaction you have been involved in.' "

Alcoa Inc. trades on the NYSE under the symbol AA.

View the Wall Street Journal's February 28, 2008 report here.

Wednesday
Feb272008

U.S. v. Kay: Once More To The Courts

On January 10, 2008, the United States Court of Appeals for the Fifth Circuit denied a petition for rehearing en banc from David Kay and Douglas Murphy. Kay and Murphy, executives of American Rice, Inc., were indicted in 2002 for bribing Haitian officials in violation of the Foreign Corrupt Practices Act. The U.S. District Court in Houston dismissed the indictments, finding that the FCPA did not apply to their conduct -- i.e., paying bribes to reduce their company's taxes.

In 2004, the U.S. Court of Appeals held that the bribes alleged in the indictment could fall within the scope of the FCPA and remanded. At trial, Kay and Murphy were convicted of violating the FCPA. Kay was sentenced to 37 months in prison and Murphy to 63 months. They appealed, and in October 2007 the Fifth Circuit affirmed their convictions. They then filed a petition for rehearing en banc, which the Fifth Circuit denied. Their convictions now stand.

Kay and Murphy argued in their petition for rehearing that the trial court gave incorrect jury instructions. The question before the en banc panel (Higginbotham, Barksdale and Clement) was whether an FCPA conviction must be supported by evidence that the defendants knew about the existence and prohibitions of the FCPA, or whether they could be convicted on the basis of their general knowledge that their actions violated U.S. law?

The Fifth Circuit said no specific knowledge about the FCPA is needed to support a conviction under the statute. All that the government needs to prove to satisfy the "knowing" element of an FCPA offense is that the defendants understood that their actions were illegal. Thus a general jury instruction that does not require specific knowledge about the FCPA was adequate with respect to the "knowing" element of the FCPA charges. On that basis -- and after reviewing some of the arguments about the evidence adduced at the trial -- the appellate court denied Kay and Murphy's petition for a rehearing.

The Fifth Circuit said:

"The jury instructions on corrupt intent, looking to the instructions as a whole and the closing arguments of counsel, show that the jury did not believe that Defendants could be convicted if they did not know that they were doing something unlawful. The jury's question to the judge confirms this, indicating that the jury was unsure of whether Defendants knew that they were violating the FCPA specifically, not the law in general. The jury asked, 'Can lack of knowledge of the FCPA be considered an accident or mistake?'

"The defense understandably focuses on the differences underlying the gradations of intent and suggests that the opinion has offered the instruction here as satisfying both general intent and specific intent. To be clear, we return to first principles. That is, this case was tried on the basis that the Government had to prove that the Defendants knew that their actions violated the law, although they did not need to prove that they were aware of the specific provisions of the FCPA. Set in the context of trial, including the closing arguments of counsel, there was no uncertainty in the instructions regarding the Government's burden to prove that Defendants knew that their conduct was illegal. [Kay's lawyer] argued forcefully and eloquently that his client could never have known the detail of the FCPA. The Government, while responding that they need not prove the specifics of the FCPA, made clear that it had to prove that Defendants knew that their conduct was illegal."

View prior posts about David Kay and Douglas Murphy here.

View United States v. Kay, Nos. 05-20604 (5th. Cir., 2008) in the Public Library of Law (registration required) here.

Tuesday
Feb262008

A Little Help From Our Friends, Part II

In Singapore circa 1994, Jeffrey Garten, who was then the Undersecretary of Commerce for International Trade, hosted a "breakfast briefing." The event was sponsored by the American Chamber of Commerce, and the invitations said it would be a chance to discuss the challenges Americans face when they do business overseas.

The turnout was light -- maybe a dozen or so early risers. After scrambled eggs and a few pleasantries, the room turned a bit hostile toward Mr. Garten. Why? Americans trying to do business then in Southeast Asia were constantly upset by the Foreign Corrupt Practices Act. The law put them at a disadvantage, they said. There wasn't anything close to a level playing field with the Europeans, Japanese and Koreans. Americans were being sacrificed economically for the sake of Washington's idealistic moral crusade. And on and on it went.

After listening for about a half hour, Mr. Garten lifted a hand to call for quiet. His exact words have faded, but we remember that he compared the FCPA to mom and apple pie. He said it was the non-negotiable policy of the United States to oppose public bribery anywhere, and that the U.S. government was totally committed to leveling the playing field for U.S. companies by working with the OECD and its member countries. He finished by telling the assembled complainers to get used to the FCPA because it was here to stay.

In the years since Mr. Garten threw cold water on his breakfast companions in Singapore, the OECD -- under Washington's lash -- has in fact enacted a comprehensive antibribery convention. Prosecutions by other OECD members still lag, but most Americans who follow the FCPA see real progress in the international anti-corruption effort. At the same time, the U.S. government has focused plenty of FCPA-enforcement attention on foreign companies. That has raised compliance awareness globally and encouraged American business people to believe that Washington is serious about that long-promised level playing field.

On top of that, the Department of Commerce now lists foreign public bribery as a trade barrier -- similar to discriminatory tariffs, overly burdensome product testing guidelines, ridiculous labeling rules, and so on. Public corruption overseas remains a big issue. The U.S. government estimated that from May 2004 to April 2005, "competition for over 53 contracts valued at approximately $15 billion may have been affected by bribery involving foreign firms." In response, the Department of Commerce now has a "bribery hotline" accessible here. U.S. companies can use it to report bribes by their foreign competitors in international business transactions.

As the Commerce Department's Kathryn Nickerson has said, "We worked hard to negotiate the OECD and other international anticorruption conventions, and we'd like to know whether our trading partners are following through on enforcement. At a minimum," she continued, "we want to put countries on notice that we are watching and expect action. So if you think you are about to lose or have already lost business to a foreign competitor because of a bribe to a foreign public official, don't assume that your Government can't do anything about it. We firmly believe that informing other governments of bribery by persons falling within their jurisdiction is an effective way to ensure that cases will be brought against this pernicious practice that we have outlawed since 1977."

The U.S. government's strategies to level the playing field for American businesses overseas are working -- not all at once, but a step at a time. These days, we're fairly certain an Undersecretary of Commerce for International Trade could show up at a breakfast briefing in Southeast Asia and actually enjoy his or her eggs. Which makes us feel somewhat guilty about the treatment dished out to Mr. Garten back when he held the job. Fortunately, though, it appears he didn't lose his taste for the region. We noticed with some relief that in 2005 he joined the first Governing Board of The Lee Kuan Yew School of Public Policy at the National University of Singapore.

Monday
Feb252008

A Little Help From Our Friends

Our subject is always some aspect of the the Foreign Corrupt Practices Act. So around here the U.S. Department of Justice and the Securities and Exchange Commission get lots of attention. But another U.S. government agency has a role to play in the FCPA -- the Department of Commerce. Its mission is "to foster, promote, and develop the foreign and domestic commerce" of the United States. It does that by helping -- that's right, helping -- American companies do business overseas. And what interests us is how Commerce helps U.S. companies comply with the FCPA.

First, some background. The Department of Commerce concentrates most of its efforts on small and medium sized U.S. exporters. That makes sense. According to a 2004 USTR fact sheet, in the United States small and medium sized businesses make up almost 97% of all direct exporters, and approximately 65% of exporters are businesses with fewer than 20 employees. As our readers know, smaller companies with fewer resources struggle to comply with the FCPA. Big companies aren't excluded from Commerce's programs, but they usually know how to do buisness overseas and comply with the FCPA, and they have the resources to do so on their own. So it's the smaller companies that need the most help. With that in mind, let's see what Commerce has to offer.

Finding a partner. The Department of Commerce helps U.S. companies find business partners or agents overseas. Its Commercial Service -- a group of trade and business experts stationed in about 80 U.S. embassies around the globe -- runs the International Partner Search Program. It actually identifies suitable strategic partners for U.S. exporters. As Commerce says, "You provide your marketing materials and background on your company, and the [Commercial Service] will use its strong network of foreign contacts to interview potential partners and provide you with a list of up to five pre-qualified partners. This information is available in 30 days or less."

Vetting the candidate. Once a potential overseas partner or agent is found, either through Commerce or otherwise, it's time for some compliance-oriented due diligence. As we've said before, international joint venture partners and sales agents bring very high risks under the FCPA. Unreliable partners and agents -- those who might pay bribes to foreign officials to help the business -- need to be spotted early and either avoided or controlled. Doing that requires due diligence. And here again Commerce can help.

The Commercial Service's International Company Profile (ICP) Program provides background reports on foreign companies in about 80 countries. The price is reasonable -- around $500 per ICP, depending somewhat on local costs. Be warned, however, that the Commercial Service doesn’t offer ICPs in countries where Dun & Bradstreet or other private-sector vendors already provide a similar service. But where ICPs are available, the Commercial Service specialists deliver a product that helps satisfy at least the basic level of due diligence.

International Company Profiles are assembled by combing the local press, industry contacts and other sources. The result is a financial report on the prospective overseas partner or agent. Some ICPs are more detailed than others, depending on both the amount of information ultimately available and on the resourcefulness of the local Commerce specialist. Delivery time is advertised to be about 10 business days. The final report includes "a list of the company's key officers and senior management, banking relationships and other financial information about the company; and market information, including sales and profit figures, and potential liabilities."

Uncle Sam's opinion. Crucial to FCPA due diligence, the Commercial Service will also provide "an opinion as to the viability and reliability of the overseas company or individual you have selected as well as an opinion on the relative strength of that company's industry sector in your target market." It's not called an FCPA due diligence opinion, but that's practically what it amounts to. Sure, there are lots of scenarios by which a "reliable" overseas partner or agent might still cause FCPA problems. But the International Company Profile and the viability and reliability opinion are great evidence. They demonstrate how the U.S. company tried to pick a law-abiding foreign partner or agent. In most cases, evidence like that goes a long way to protecting U.S. companies and executives who find out later that an overseas intermediary may have caused an FCPA violation.

Our recommendation. We've dealt with people from the Commercial Service in a number of countries. Overall, the specialists are unabashed boosters of American business overseas. They have impressive, even astounding knowledge about local markets, and they're resourceful as well. We've met some with a great sense of humor, which is a welcome relief in countries in transition and under stress.

In fact, we can't think of any reason why straight-shooting smaller companies shouldn't check in with a Commercial Service specialist -- either in the U.S. or the country of destination. There are literally hundreds of Commercial Service offices -- across the U.S. from Akron to Ypsilanti, and around the world from Albania to Zimbabwe. The chats are free and may ultimately contribute richly to successful overseas business development and effective FCPA compliance.

__________________

A special acknowledgment to Kathryn Nickerson, Senior Counsel, Office of the Chief Counsel for International Commerce, U.S. Department of Commerce, for some of the information and ideas in this post. See her speech to the American Bar Association, National Institute of the Foreign Corrupt Practices Act, Special Focus: Issues Faced By Small and Medium Enterprises, Washington, D.C., October 17, 2006 here.

_________________

View the Department of Commerce's International Company Profile Program here.

Sunday
Feb242008

BAE And Prince Bandar Stay In The News

In mid-February the British High Court heard how Saudi Arabia threatened to end all anti-terrorism cooperation with the U.K. unless the Blair government quashed an investigation into alleged corruption. A social justice advocacy group called the Campaign Against Arms Trade and the Corner House has alleged that the government acted unlawfully in December 2006 when it told the Serious Fraud Office to stand down. After two days of hearings, the court is now considering whether to order the SFO to re-open its examination into BAE System's alleged illegal payments to Saudi Arabian officials in exchange for the sale of jet fighters.

The U.K. Guardian reported that the two-judge High Court panel "heard unchallenged allegations that it was Prince Bandar, the alleged beneficiary of £1bn in secret payments from the arms giant BAE, who threatened to cut off intelligence on terrorists if the investigation into him and his family was not stopped. Investigators said they were given to understand there would be 'another 7/7' and the loss of 'British lives on British streets' if they carried on delving into the payments. The government argued . . . that these threats were so 'grave' and put Britain's security in such 'imminent' threat that the head of the Serious Fraud Office had no option but to shut down his investigation immediately."

The U.K. government's decision to end the investigation drew criticism from the OECD and apparently spurred Swiss authorities to look into possible breaches of anti-money laundering laws and American prosecutors to examine whether there were violations of the Foreign Corrupt Practices Act. Both BAE and Prince Bandar have denied breaking any laws.

Meanwhile, the Associated Press reported on February 9 that a United States federal district court has temporarily blocked Prince Bandar -- the former Saudi ambassador to the United States and now head of Saudi Arabia's National Security Council -- from removing real estate sales proceeds from the U.S. pending resolution of a class-action lawsuit. "The suit filed last September by a tiny Michigan city retirement system accuses current and former directors of BAE Systems PLC, a giant British defense company, of breaches of fiduciary duties in connection with $2 billion or more in alleged illegal bribes paid to Bandar in connection with an $86 billion BAE arms sale to Saudi Arabia in 1985. Bandar also is named as a defendant in the suit, along with the former Riggs Bank of Washington and its successor, PNC Financial Group. BAE and Bandar have strongly denied that illegal payments were made to Bandar."

The AP story said U.S. District Judge Rosemary M. Collyer issued "a temporary restraining order, signed Feb. 5, that the suit by the City of Harper Woods Employees' Retirement System raises serious questions of law that warrant a temporary order keeping Bandar from taking the proceeds of real estate sales out of U.S.-based accounts. . . . The retirement system suit maintains that Bandar used funds illicitly obtained from BAE Systems to acquire U.S. real estate, including a Colorado ranch and mansion once placed on the market at $135 million and the former William Randolph Hearst mansion in California, offered for sale last summer at $165 million."

The same AP story reported developments in the U.K. this way: "In London, lawmakers disclosed last month that Britain's head of overseas intelligence had warned that Saudi Arabia probably would stop sharing vital information on terrorism if prosecutors pursued an investigation into alleged corruption in the arms deal. MI6, Britain's overseas intelligence service, believed Saudi Arabia would probably end information-sharing with Britain if investigators continued the inquiry, former Attorney General Peter Goldsmith told the committee. MI6 raised objections to the prosecution before Britain's Serious Fraud Office decided to end the case, he said."

View the February 16, 2008 report from the Guardian here.

View the February 9, 2008 report from the Associated Press here.

View prior posts about BAE Systems here.

Thursday
Feb212008

Flowserve Resolves Oil For Food Bribery Charges

French and Dutch Subsidiaries Paid Kickbacks and Caused FCPA Books and Records Violations

Texas-based Flowserve Corporation will pay about $10.5 million to resolve criminal and civil charges brought by the United States for illegal payments to Iraq under the U.N. Oil for Food Program. The Securities and Exchange Commission's final judgment requires Flowserve to disgorge $2,720,861, in profits, plus $853,364 in pre-judgment interest, and pay a civil penalty of $3,000,000. In a criminal action brought by the Department of Justice, the company will pay a $4,000,000 fine and enter into a three-year deferred prosecution agreement. In Holland, Flowserve's Dutch subsidiary will also pay a fine of an undisclosed amount to settle related criminal charges.

Flowserve -- which has more than 14,000 employees in 56 countries -- supplies pumps, valves and seals mainly to the power, oil and gas and chemical industries. The SEC said that during 2001 to 2003, Flowserve's French and Dutch subsidiaries entered into twenty sales contracts with Iraqi government entities through the U.N. Oil for Food Program. Under those contracts, $646,488 in kickbacks were paid and another $173,758 were authorized. Flowserve's subsidiaries funded the bribes by including in the contracts a bogus 10% after-sales service fee to a Jordanian agent. In reality, the agent provided no after-sales services but instead used the money to deposit cash into an Iraqi-controlled account at a Jordanian bank.

Flowserve's internal accounting records falsely reflected that its French and Dutch subsidiaries paid the after-sales service fee to the agent on each contract. The financial results of the subsidiaries were included in the consolidated financial statements that Flowserve filed with the SEC. As a result, the SEC charged that Flowserve "either knew or was reckless in not knowing that illicit payments were either offered or paid in connection with these transactions. . . . The company's books falsely characterized the [after-sales service fee] payments either as payments for services actually performed or as agent commissions."

The SEC said Flowserve violated 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)] by failing to keep accurate books and records and by failing to devise and maintain a system of internal accounting controls sufficient to detect and prevent the illicit payments. The DOJ charged Flowserve's French subsidiary with conspiracy to commit wire fraud and to violate the books and records provisions of the Foreign Corrupt Practices Act.

Flowserve accepted responsibility for the acts of its French and Dutch subsidiaries and agreed to cooperate with the DOJ's ongoing Oil for Food investigations. U.S. prosecutors acknowledged Flowserve’s "thorough review of the improper payments and the company’s implementation of enhanced compliance policies and procedures. . . ." On that basis, the DOJ said it agreed to defer prosecution of Flowserve's French subsidiary for three years. "If Flowserve and [its French subsidiary] abide by the terms of the agreement, the Department will dismiss the Criminal Information." The SEC also said it "considered remedial acts promptly undertaken by Flowserve and the cooperation the company afforded the Commission staff in its investigation."

Flowserve Corporation trades on the New York Stock Exchange under the symbol FLS.

View the Department of Justice's February 21, 2008 Release here.

Veiw the SEC's Litigation Release No. 20461 / February 21, 2008 here.

View the Complaint in Securities and Exchange Commission v. Flowserve Corporation, Civil Action No. 08 CV 00294 (D.D.C.) (EGS) here.

Wednesday
Feb202008

Disorder In The Court, Last Call

How prevalent is judicial corruption? Our primary source this week, Transparency International, took a close look. During 2006 it asked almost 60,000 people in 62 countries whether they or any member of their household had interacted with their country's judicial system in the past year and, if so, had they paid a bribe.

Here's what TI found: "Of the 8,263 people who had been in contact with the judicial system recently, 991, more than one in 10, had paid a bribe. In Africa and Latin America, about one in five of people who had interacted with the judicial system had paid a bribe. In Bolivia, Cameroon, Gabon, India, Mexico, Morocco, Pakistan and Paraguay the figure was more than one in three court users."

The numbers break down this way: In Africa and Latin America, 20% of the people had contact with the judicial system during the past year. Of those, 21% and 18% respectively paid a bribe. In newly independent states (Moldova, Russia and Ukraine), 8% of the people had recent contact with the courts, and 15% of that number paid bribes. In southeast Europe (Albania, Bulgaria, Croatia, Kosovo, Macedonia, Romania, Serbia and Turkey), 9% had contact with the courts and of those 9% paid bribes. In Asia Pacific, only 5% went to court, and of those 15% paid bribes. In the EU and North America, 19% and 23% respectively had contact with their judicial systems during the past year, and of those 1% and 2% respectively paid bribes.

Perceptions Matter. We've asked before if some companies approach certain places expecting to find a corrupt environment. And once there -- no matter what they find -- do they lower their compliance standards instead of raising them? We think the answer is yes. And that's why perceptions about public bribery can be as important as actual occurrences. TI's findings illustrate the point. It says the "public often views its judiciary as more corrupt than it actually is: more people around the world described their judiciary as ‘extremely corrupt’ than have personally been part of judi­cial corruption. . . . In 55 out of the 62 countries polled, a higher percentage of people perceived extreme judicial corruption than had paid a bribe. In 33 of the 62 countries polled, a majority of respondents described the judiciary/ legal system of their country as corrupt."

TI continues, "A majority of people in all but one African country polled (South Africa) and one Latin American country (Colombia) perceive the legal system/judiciary to be corrupt. Trailing the table are Bolivia, Cameroon, Mexico, Paraguay and Peru, where 80 per cent or more of respondents described the judicial system as corrupt. . . . The judiciaries of India and Pakistan fare badly, with 77 per cent and 55 per cent of respondents in the two countries, respectively, describing the judicial system as corrupt. . . . In all former communist countries, 45 per cent or more of the people polled described the legal-judicial system as corrupt."

What about U.S. Foreign Corrupt Practices Act compliance? Judicial corruption is a real problem. An effective compliance program will recognize it, discuss the compliance challenge openly, and draw clear lines to prohibit the practice anywhere. Compliance education and training should stress that even in the countries ranking worst for judicial bribery -- where nearly everyone thinks the courts are crooked -- only a minority of cases are actually influenced by corrupt practices. That means the people representing foreign firms should not mistakenly assume that bribery is the only way to deal with local litigation.

And beware of "legal" advice. We've heard too many lawyers from high-risk countries advise foreign business clients that bribes to local judges are expected and required. Why would they say that? Maybe to impress clients with their stroke in the local courts. And maybe to get their hands on some black-bag money for which they won't be accountable. In every case, however, advice to pay bribes is wrong and shouldn't deter compliance. As we've said before, all foreign judges, court clerks and others associated with a country's judicial system are "foreign officials" for the FCPA. Bribing them will probably violate U.S. law and will certainly violate the local law. And that, at the very least, will leave an effective compliance program in ruins.

View Transparency International's 2007 Global Judicial Corruption Report here.

Tuesday
Feb192008

Disorder In The Court, Part II

We noted yesterday some of the causes of judicial corruption -- underpaid and overworked judges, complex and slow court procedures, and anti-corruption enforcement monopolized by a single agency. Unfortunately, all those symptoms show up in Azerbaijan's judicial system.

A Living Wage? Judges' salaries are low even after a big recent pay raise. According to Transparency International's 2007 country report, local judges make the annual equivalent of $11,635 -- compared to $23,800 in Estonia. As for their workload, there are only about 4 judges per 100,000 people. That's the lowest number in the region. Germany, by the way, has more than five times as many judges per capita.

No Show, No Problem. Predictably, court litigation is extremely time-consuming. "This is especially ruinous for private companies," TI said, "which usually prefer to drop a case or 'negotiate' with the judge. Parties in litigation have many opportunities to drag out a case because the legis­lation prevents a court from proceeding to a deci­sion if the other party does not appear in court. There is no punishment for the defaulting party. On average about 5 per cent of businesses use courts in Azerbaijan, compared with 30 per cent in Europe and Central Asia."

Going Once, Going Twice . . . Judges -- who owe their positions to the executive branch, as does the general prosecutor -- can decide whether or not to hear a case without giving any explan­ation. And in rendering judgments, they aren't bound by precedent or statutory law. Fuad Mustafayev, deputy chairman of the opposition Popular Front Party, told TI that judges in Azerbaijan decide cases in two ways: for political reasons or, in a judi­cial equivalent to the construction "tender," they rule in favor of the highest bidder. Lawyers complain that they've been turned into "brokers" rather than legal advocates. The Ministry of Justice evaluates judges’ performances annually. "None has been fired for corrupt practices, however, though such cases are numerous . . . ," TI said.

Enforce This. Bailiffs aren't part of the judicial system, but fall under the executive branch. TI said they "lack the power, skills, resources and initiative to enforce decisions. . . . Failure to enforce court decisions further undermines trust in the justice system."

Recognizing Risk. Since its independence from the Soviet Union in 1991, oil-rich Azerbaijan has been popular with foreign investors. They've committed some $60 billion to long-term oilfield development there. But the country of eight million demonstrates again that where the rule of law is under attack, corruption flourishes. That's why companies trying to maintain an effective FCPA compliance program will want to mark Azerbaijan -- and other countries showing the same symptoms -- with a big red flag.

View Transparency International's 2007 Global Judicial Corruption Report here.

Tuesday
Feb192008

Disorder In The Court

It probably makes no sense to ask which form of public corruption is the worst, since they all destroy the fabric of society. But as lawyers, we think judicial corruption should be singled out. Honest judges, after all, restrain corruption, while crooked judges unleash it on entire countries. When courts are for sale, those with money and power ravage the rights of those whose pockets are empty. Without honest and independent judiciaries, ordinary citizens lose the certainty of their legal, political and economic freedoms.

Judges are likely to be corrupt in countries where per capita income is low and economies are closed. Beyond those environmental causes, judicial corruption rises when judges are underpaid and overworked, when court procedures are complex and slow, and when anti-corruption enforcement is monopolized by a single enforcement agency. Those are the findings of one Stefan Voigt from the Department of Economics and Management at Philipps University in Marburg, Germany, as published by Transparency International.

India, according to TI's 2007 global report on judicial corruption, is one of the countries that illustrates some of Prof Voigt's hypotheses. In India, "[t]he estimated amount paid in bribes [for judicial corruption] in a 12-month period is around R2,630 crores (around US $580 million). . . . The primary causes of corruption are delays in the disposal of cases, shortage of judges and complex procedures, all of which are exacerbated by a preponderance of new laws. As of February 2006, 33,635 cases were pending in the Supreme Court with 26 judges; 3,341,040 cases in the high courts with 670 judges; and 25,306,458 cases in the 13,204 subordinate courts. This vast backlog leads to long adjournments and prompts people to pay to speed up the process. In 1999, it was estimated: ‘At the current rate of disposal it would take another 350 years for dis­posal of the pending cases even if no other cases were added.’ The ratio of judges is abysmally low at 12–13 per one million persons, compared to 107 in the United States, 75 in Canada and 51 in the United Kingdom. . . . This prompts people to pay ‘speed money’. . . . People seek shortcuts through bribery, favours, hospi­tality or gifts, leading to further unlawful behav­iour."

In any country, most citizens are powerless in the face of judicial corruption. Foreign investors, too, may feel threatened and victimized, and tempted to join the corrupt practices. But judges, court clerks and others in the judicial system are "foreign officials" under the U.S. Foreign Corrupt Practices Act. Bribing them can violate U.S. law and certainly violates local law. That means there are plenty of reasons to raise compliance standards in places where judicial corruption is prevalent.

View Transparency International's 2007 Global Judicial Corruption Report here.

Thursday
Feb142008

Wabtec Resolves FCPA Violations Related To India

Westinghouse Air Brake Technologies Corporation ("Wabtec") will pay about $675,000 and enter into a deferred prosecution agreement to resolve Foreign Corrupt Practices Act offenses caused by its Indian subsidiary, Pioneer Friction Limited. In the Securities and Exchange Commission's administrative proceeding, Wabtec will disgorge $259,000 and prejudgment interest of $29,351. It will also retain an independent consultant to review and make recommendations concerning its FCPA compliance. The SEC's federal civil action further requires Wabtec to pay a civil penalty of $87,000. Separately, the company will pay a fine of $300,000 to the Department of Justice and enter into a non-prosecution agreement imposing a strict compliance program and further cooperation with the DOJ.

In 2006, Pennsylvania-based Wabtec -- which has about 5,000 employees worldwide and manufactures brakes and related products for train locomotives and cars, among other things -- discovered that over the prior five years, Pioneer had paid more than $137,400 in cash to various officials from an agency in India’s Ministry of Railroads. According to the DOJ, "The payments were made in order to: assist Pioneer in obtaining and retaining business with the [Indian Railway Board]; schedule pre-shipping product inspections; obtain issuance of product delivery certificates; and curb what Pioneer considered to be excessive tax audits." Wabtec investigated the payments and voluntarily disclosed its findings to U.S. authorities. It also took remedial compliance measures.

Wabtec's consolidated financial statements include Pioneer's results. So in addition to causing Wabtec to violate the FCPA's antibribery provisions, Pioneer's financial improprieties triggered Wabtec's violation of the books-and-records and internal controls provisions of the FCPA. According to the SEC's complaint, Pioneer's agents "submitted invoices for materials that Pioneer did not receive in whole or in part. Pioneer issued checks to the marketing agent for the amount of the invoice and the marketing agent returned cash (less the service fee and any amount owed for any material actually received) to Pioneer. Pioneer maintained the cash generated through the use of marketing agents in a locked metal box, and documented each unlawful payment on a voucher that was maintained with the cash. Pioneer also kept track of the unlawful payments on a spreadsheet. The vouchers and the spreadsheet were maintained separately from Pioneer's other books and records and were not subject to review during annual audits."

As a result, Wabtec violated Sections 13(b)(2)(A), 13(b)(2)(B) and 30A of the Securities Exchange Act of 1934 [15 U.S.C. §§ 78m(b)(2)(A), 78m(b)(2)(B) and 78dd-1].

The SEC's complaint noted that although Wabtec's Code of Conduct in effect from 2001 to 2006 prohibited giving anything of value to improperly influence any person in a business relationship with Wabtec, the company had no FCPA policy and did not provide training or education to any of its employees, agents, or subsidiaries regarding the requirements of the FCPA. Wabtec also failed to establish a program to monitor its employees, agents, and subsidiaries for compliance with the FCPA.

Wabtec trades on the New York Stock Exchange under the symbol WAB.

View the SEC's Litigation Release No. 20457 (February 14, 2008) here.

View the SEC's Complaint in SEC v. Westinghouse Air Brake Technologies Corporation, Civil Action No. 08-CV-706 (E.D.Pa.) here.

View the DOJ's February 14, 2008 Release here.

Wednesday
Feb132008

U.S. v. Green, Take One

Two weeks from now, in a Los Angeles federal district court, the husband-and-wife Hollywood movie producers charged with violating the U.S. Foreign Corrupt Practices Act will go on trial. Gerald and Patricia Green were arrested last December and are out on bail. They're accused of bribing a Thai government official with kickbacks of more than $1.7 million in exchange for a film festival contract worth $10 million.

We're not privy to the Greens' defense, of course, but they appear to have a tough legal battle ahead of them. Here are some reasons why:

-- CW-1 and CW-2. According to the FBI's 28-page affidavit, at least two former insiders identified as Confidential Witnesses One and Two are giving evidence against the Greens, and it's juicy. The FBI says the CWs prepared the budgets, arranged the meetings, wrote the checks and ran the bank accounts that are now at the center of the case. The government says it has physical evidence too. When the police raided the Greens' office, among the goods seized was a spreadsheet showing the details of each kickback. And earlier in the investigation, FBI agents even jetted to Thailand to watch (and perhaps listen?) as Mr. Green met with the Thai government official to seal their allegedly corrupt deal. The Greens' defense lawyers, it appears, will have an armory full of smoking guns to deal with at the trial.

-- War on multiple fronts. In addition to the FCPA charges, the government might raise allegations of fraud and obstruction. That's important because the elements of an FCPA offense can be complicated to prove. When prosecutors think they can obtain a conviction based on other charges, as they did in Oscar Wyatt's trial, they'll usually try to do that. Paragraph 12 of the FBI's affidavit is a potential blueprint. It says, "The defendants attempted to conceal their bribery of the Thai official in a variety of ways, among other things, by: (a) employing different business entities, some with dummy business addresses and telephone numbers, in their dealings with the [Tourism Authority of Thailand] in order to hide the large amount of money they were being paid under the contracts; (b) making 'commission' payments to the Thai official through the foreign bank accounts of intermediaries; and (c) once the government's investigation became known to the defendants, attempting to manufacture evidence in support of false, exculpatory explanations for the corrupt payments."

-- There's something rotten in Denmark. The Greens' story as the government is telling it sounds like an Elmore Leonard movie script. Here's the pitch: A high-powered Hollywood couple befriend a Thai government official who controls a prestigious film festival in exotic Bangkok. She's crooked, so she and the Greens hatch a plan. She'll give them the exclusive no-bid right to promote the festival, and they'll kick back a part of every dollar they make. Together the plotters create shell companies and phony invoices. They use borrowed bank accounts, and so much more. The plan works perfectly. But one day someone close to the Greens betrays them and calls the feds. It's a great story, and that's probably bad news for the Greens. Even if the government's evidence isn't rock solid on all the elements of an FCPA offense, the jury will still get the picture that people stepped over the line of acceptable business behavior. To understand the significance, consider what happened to poor David H. Mead, the former president of Saybolt Inc. In 1998, a jury in New Jersey convicted him of paying a $50,000 bribe to government officials in Panama in violation of the FCPA. Mead had admitted making the payment but pleaded not guilty. He only paid the bribe, he said, because the company's outside lawyer assured him it could be done legally from Saybolt's Dutch affiliate. So his defense was that he didn't act "knowingly" to violate the FCPA, which the statute requires. His defense looked great on paper but the jury convicted him anyway. Why? Probably because they just didn't want a $50,000 bribe to a corrupt government official in Panama to go unpunished. Will the government's version of a similarly sordid tale in U.S. v. Green have the same effect on the jury?

-- For better or for worse. Any time family members appear as co-defendants in a criminal case, the defense has a problem. The FBI affidavit separates Mrs. Green's role from her husband's somewhat by indicating that she was part of the conspiracy but less involved in the substantive FCPA violation. But just by bringing her into the case, the government is putting enormous pressure on Mr. Green. He'll want to spare her a trial and possible jail time. And presumably Mrs. Green, who's in her early 50s, will be desperately trying to keep her 75-year-old husband out of jail. Will these terrible worries convince the Greens either to cop a plea before trial or to shape their defense to save one of them from prison?

-- Looking at the numbers. Perry Mason's lucky clients were assured of a successful outcome in their criminal trials. But real-life FCPA defendants have fared much worse. Most accused individuals have plea bargained to avoid jail time -- FCPA convictions carry a prison term of up to five years. Of the few people who've gone to trial since 1991, none have been acquitted. Dan Newcomb, in his invaluable 2007 FCPA Digest, sorts the numbers out this way: "Since, 1990, DOJ prosecutions under the FCPA against seventy-one individual defendants and corporations have been resolved. Of those seventy-one, forty-three were resolved through plea agreements. In only four of those cases was there a conviction after trial. In the cases where a plea was taken or a defendant was convicted, defendants were sentenced to a term in prison, fined, or both. Sentences have been imposed in 26 of those cases, and sentencing has been deferred in two others. Recently, the defendants in U.S. v. David Kay and Douglas Murphy received terms of 37 months and 63 months, respectively. In 1990, seven prosecutions ended in a dismissal of the charges. Since then, only one case (in 2004) has been dismissed. Also, during the years 1990 and 1991 there were five acquittals after trial. There have not been any since. In addition, at least four individuals have failed to appear in court to answer the charges against them." There's not much there to cheer the Greens as their trial date approaches.

View the FBI's Affidavit here.

View the 2007 FCPA Digest here.

View prior posts about the Greens here.

Monday
Feb112008

A Straight Shot At FCPA Compliance

Question: What essential aspect of FCPA compliance is also the toughest for organizations to come by? Here's a hint. It's what made the man on the left, Ben Hogan, the greatest golfer of his day.

Answer: Consistency.

It may as well be a physical law -- like the law of gravity or one of the laws of thermodynamics. Whatever you call it, there's always a strong and almost irresistible tendency by organizations to make downward adjustments in their FCPA compliance efforts. A sort of relativism seeps in at every seam, corner and crack. For example, pressure grows to dilute typical compliance-related reps and warranties in joint venture or agency agreements -- especially when an attractive foreign principal threatens to walk away. Many sophisticated overseas parties have learned by now to argue that typical FCPA compliance language is "insulting and demeaning." When the complaints work, the agreements are softened, and compliance obligations become weaker by a little or a lot.

In a similar way, compliance is sometimes compromised in staunchly nationalistic countries, such as China or Russia. "Referring to U.S. law and the FCPA insults our sovereignty and our domestic legal system," the foreign parties say. That old argument still works sometimes, resulting in FCPA compliance language that's sharp and clear being replaced with fuzzy and less offensive references to "applicable law."

At other times, a strong-willed executive from within the organization itself -- perhaps someone with a sales or business development function -- might work to water down FCPA compliance. A seasoned veteran or cocky newcomer might stay away from compliance-related training and administrative duties. Predictably, their next step is to ignore, block or hinder compliance efforts directed toward a potential overseas partner they've been courting for a while.

Being consistent in compliance sounds hard and it is, so the next question is whether every company really needs to be a Ben Hogan? The answer is yes -- with an exclamation point! Consistency is a specific requirement of an "effective compliance program." The 2005 U.S. Federal Sentencing Guidelines say, "The organization’s compliance and ethics program shall be promoted and enforced consistently throughout the organization . . . ." (See Chapter 8 - PART B - §8B2.1. Effective Compliance and Ethics Program, Subsection (b) (6)) Without a consistent effort, then, an organization might lose the chance to mitigate its potential criminal penalties for an FCPA offense. The Sentencing Guidelines allow for mitigation of up to a life-saving 95% of the recommended penalties -- but only if the organization can demonstrate that it has an effective compliance program. It won't be able to do that if it comes up short on consistency.

What's the best way to maintain a consistent approach to FCPA compliance? As dog owners and parents of young children know, you reward compliance and punish non-compliance. That's not just common sense; it's also advice straight from the Sentencing Guidelines themselves. Subsection (b) (6) cited above says in full: "The organization’s compliance and ethics program shall be promoted and enforced consistently throughout the organization through (A) appropriate incentives to perform in accordance with the compliance and ethics program; and (B) appropriate disciplinary measures for engaging in criminal conduct and for failing to take reasonable steps to prevent or detect criminal conduct." The Guidelines allow an organization to be creative when it comes to punishing an errant employee. As the commentary to Subsection (b)(6) says, "Adequate discipline of individuals responsible for an offense is a necessary component of enforcement; however, the form of discipline that will be appropriate will be case specific." Similar creativity is permitted in dishing out rewards for exemplary performance.

Like in a good golf swing, consistency in FCPA compliance is essential -- and so hard to achieve. But consistency truly is an aspect of compliance where each individual in an organization can make the difference between a slice, a hook or a beauty down the middle.

View Chapter 8 - PART B - §8B2.1. ("Effective Compliance and Ethics Program") of the 2005 U.S. Federal Sentencing Guidelines here.