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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
Feb122009

China Deals Trigger Investigation

In an SEC filing this week, Morgan Stanley disclosed (here) that it's investigating possible Foreign Corrupt Practices Act violations in China. The bank said in a short statement that "it has recently uncovered actions initiated by an employee based in China in an overseas real estate subsidiary that appear to have violated the Foreign Corrupt Practices Act. Morgan Stanley terminated the employee, reported the activity to appropriate authorities and is continuing to investigate the matter."

There are several reports (here, here and here) that in December, the China-based managing director of Morgan Stanley Real Estate in Shanghai, Garth Peterson, left the bank. And Morgan Stanley's global head of property investing, Sonny Kalsi, has also been placed on administrative leave. Some of Morgan Stanley's property projects involved investments with government-linked Chinese enterprises. Several high-ranking Chinese officials from Shanghai have been arrested in recent years for corruption in connection with deals in the property market.

On Wednesday, Morgan Stanley's chief executive John Mack and seven other bank CEOs took thier lumps from the House Financial Services Committee over the financial crisis. During his testimony, Mack said, "We are sorry for it. I am especially sorry for what's happened to shareholders and to all Americans. Clearly, as an industry, we have accountability and we're taking responsibility. I'll take responsibility for my firm."

Morgan Stanley trades on the New York Stock Exchange under the symbol MS.

Listen to the podcast here.
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Wednesday
Feb112009

KBR and Halliburton Resolve Charges

Houston-based global engineering firm Kellogg Brown & Root LLC (KBR) pleaded guilty on Wednesday to a five-count criminal information, with one conspiracy count and four substantive counts of violating the Foreign Corrupt Practices Act. KBR agreed to pay a $402 million fine, the second largest criminal fine for an FCPA violation, following Siemens' $450 million penalty in December 2008.

KBR admitted paying Nigerian officials at least $182 million in bribes for engineering, procurement and construction contracts awarded between 1995 and 2004 to build liquefied natural gas facilities on Bonny Island, Nigeria. The contracts to an international joint venture led by KBR were worth more than $6 billion. KBR's former CEO, Albert "Jack" Stanley, pleaded guilty in September 2008 to conspiring to violate the FCPA. His sentencing is scheduled for May 6th.

Also on Wednesday, KBR’s parent company, KBR Inc., and its former parent company, Halliburton Company, settled civil FCPA charges with the Securities and Exchange Commission, agreeing to be jointly liable to pay $177 million in disgorgement. The SEC's complaint alleges that Halliburton's internal controls failed to detect or prevent the bribery, and that its records were falsified to cover up the illegal payments.

The SEC's final order (i) permanently enjoins KBR from violating the anti-bribery and records falsification provisions in Sections 30A, 13(b)(5) and Rule 13b2-1 of the Securities Exchange Act of 1934, and from aiding and abetting violations of the record-keeping and internal control provisions in Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act; (ii) permanently enjoins Halliburton from violating the record-keeping and internal control provisions of the Exchange Act; (iii) orders the companies to disgorge $177 million in profits derived from their FCPA violations; (iv) imposes an independent monitor for KBR for three years to review its FCPA compliance program, and (v) imposes an independent consultant to review Halliburton's FCPA-related policies and procedures.

The DOJ said it had help in its investigations from authorities in France, Italy, Switzerland and the United Kingdom.

Jack Stanley was a senior vice president of Dresser Industries, Inc. when it merged into Halliburton in September 1998. Dresser's wholly-owned construction subsidiary, Kellogg, was combined with Halliburton's construction subsidiary, Brown & Root, Inc., to form KBR. In November 2006, Halliburton spun KBR off and it became a separate publicly-traded company. Under their agreement for KBR's spin off, Halliburton is obligated to pay most of KBR's fines and other penalties for the FCPA violations.

The SEC's complaint alleges that after the Dresser acquisition, Halliburton's due diligence didn't detect any bribe payments and failed "to devise and maintain adequate internal controls to govern the use of foreign sales agents and failed to maintain and enforce the internal controls it had." Former Vice President Dick Cheney was Halliburton's chief executive from 1995 to 2000. He has denied any wrongdoing.

Download the DOJ's February 11, 2009 release here.

Download KBR's February 11, 2009 criminal plea agreement with the DOJ here.

View the SEC's Litigation Release No. 20897 (February 11, 2009) and Accounting and Auditing Enforcement Release No. 2935 (February 11, 2009) in Securities and Exchange Commission v. Halliburton Company, 4:09-CV-399, S.D. Tex. (Houston) here.

Download the SEC's February 11, 2009 civil complaint against KBR and Halliburton here.

View prior posts about Halliburton, KBR and Jack Stanley here.

Listen to the podcast here.
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Tuesday
Feb102009

I'd Want My Conscience

It may seem to Liberians as though everyone in their civil service is corrupt, but it's not true. There's at least one honest man. He's Richard Karyea, a former customs officer at the Roberts International Airport. Two years ago he refused a bribe from a drug smuggler worth more than 1,300 times his $15 monthly salary.

He was offered a $20,000 bribe by the owner of a DVD after finding cocaine hidden inside. Instead of looking the other way, he turned the man over to the police. For his trouble, Karyea was fired by the customs department; the drug smuggler was allowed to board another plane that day for Nigeria.

But there's a happy ending. In January, Liberia's president, Ellen Johnson Sirleaf, who has vowed to fight public corruption, pinned a medal on Karyea. At a ceremony in Monrovia (pictured above), she named him the Civil Servant of the Year. He won a $1,000 cash award and landed a new job -- Deputy Chief Examiner at the Ministry of Finance. And he's become a national hero. Comments to the Liberia Post said some people might consider him stupid for turning down the huge bribe, but he actually deserves to be a minister in the government. "You are a mentor for all [civil servants] to learn from. Bravo."

Liberians needed some good news. Last year, their country ranked 138th on Transparency International's Corruption Perception Index, tied with Paraguay and Tonga. That sounds awful, but its better than 2007, when the country ranked 150th on the CPI, tied with Azerbaijan, Belarus, the Congo, Cote d'Ivoire, Kazakhstan, Kenya, Kyrgyzstan, Sierra Leone, Tajikistan and Zimbabwe. That's a tough neighborhood no one would be sorry to leave behind.

At Karyea's award ceremony, President Sirleaf said he demonstrated "honesty and integrity in support of the Government’s determination to fight corruption in all sectors." For his part, the new hero told the BBC, "It wasn't difficult to turn down the money. If it took me 50 years to earn that money, I'd want my conscience. I will always want my conscience."

Listen to the podcast here.
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Monday
Feb092009

KBR's Twisted Web

We've been looking over the criminal information charging Kellogg, Brown & Root LLC with violating the Foreign Corrupt Practices Act. There's one conspiracy and four substantive counts. There's also a related document called the Joint Motion to Waive Presentence Investigation. That's where the Justice Department talks about the potential criminal fine range and agrees with KBR on a final penalty (subject to court approval) of $402 million.

(Halliburton, KBR's former parent, said two weeks ago that the Securities and Exchange Commission has also agreed, contingent on the DOJ's settlement, to a separate disgorgement payment to the SEC of $177 million.)

The criminal information describes KBR's attempts to shield from the FCPA its corrupt payments to Nigerian officials. Its TSKJ joint venture, equally owned with Technip, SA of France, Snamprogetti Netherlands B.V., a subsidiary of Saipem SpA of Italy, and JGC of Japan, "operated through three Portuguese special purpose corporations based in Madeira, Portugal." Madeira Company 3, as the information calls it, was used to enter into so-called consulting agreements with agents, who in turn passed bribes to Nigerian officials.

KBR and its top brass tried to hide behind Madeira Company 3. Ownership was held indirectly through M.W. Kellogg Ltd., a U.K. company. The criminal information says the ownership structure was "part of KBR's intentional efforts to insulate itself from FCPA liability for bribery of Nigerian government officials through the Joint Venture's agents." And the information continues:

The boards of managers of Madeira Company 1 and Madeira Company 2 included U.S. citizens . . . but KBR avoided placing U.S. citizens on the board of managers of Madeira Company 3 as a further part of KBR's intentional effort to insulate itself from FCPA liability.
The Foreign Corrupt Practices Act prohibits both direct and indirect corrupt payments to foreign officials. Indirect payments typically pass through the hands of an overseas partner or agent, then end up with the foreign official for an unlawful purpose. That's how most violations happen. And yet, executives keep trying to outsmart the FCPA. They create convoluted ownership structures and payment patterns that they think will somehow insulate them and their company from FCPA liability. The results, as the KBR case shows, are usually disastrous.

The FCPA is smart. It looks not at how payments to foreign officials are made, but why. It looks, in other words, at the intent. If a payment was meant to corruptly obtain and retain business, then the payment violates the FCPA, no matter how many Madeira-like companies it passed through, and no matter how many agents or other middlemen were involved.

The DOJ's plain-English explanation of the FCPA's anti-bribery provisions talks about warning signs, called "red flags." They should tip off anyone about impending compliance dangers. Red flags include unusual payment patterns or other strange arrangements, and a lack of transparency. Red flags would include all of the devices KBR employed. So the lesson? Whenever company structures, payment arrangements, and management compositions have no obvious operational or economic justification, there must be something wrong. That's when everyone involved should be asking hard questions, such as whether the real intent is to do legitimate business or to violate the FCPA and other laws.

Download a copy of KBR's criminal information here.

Download a copy of the DOJ / KBR Joint Motion to Waive Presentence Investigation here.

Listen to the podcast here.
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Friday
Feb062009

KBR Nears Final Plea Deal

A criminal information filed in federal court in Houston on Friday shows that Kellogg, Brown & Root LLC, the Houston-based global engineering and construction firm that was once part of Halliburton, will plead guilty to violating the Foreign Corrupt Practices Act. KBR may appear in court next week. The information refers to a plea agreement that has not yet been released by the Justice Department. The Houston Chronicle and the AP have reports.

The criminal information, according to the reports, indicates that the government has agreed to a $402 million fine, payable in installments, beginning with a $52 million payment five days after sentencing, and seven $50 million installments, each due on the first day of each quarter beginning April 1. Under federal sentencing guidelines, the fine range was between $376.8 million and $753.6 million.

Two weeks ago, KBR's former parent, Halliburton, said a settlement of Foreign Corrupt Practices Act enforcement actions with the Justice Department and the Securities and Exchange Commission was waiting for the DOJ's final approval. It said it had reserved $559 million for the proposed settlements. Halliburton is obligated under indemnity agreements to pay fines and penalties on behalf of KBR. It said in the release that it would "pay $382 million [to the DOJ] on behalf of KBR in eight installments over the next two years. Pursuant to the terms of the prospective settlement with the SEC, Halliburton would agree to be jointly and severally liable with KBR for and, as a result of the indemnity, to pay to the SEC $177 million in disgorgement."

In September 2008, Albert “Jack” Stanley, 65, a former chairman and CEO of KBR, pleaded guilty to a two-count criminal information charging him with conspiracy to violate the Foreign Corrupt Practices Act and conspiracy to commit mail and wire fraud. His final sentencing is set for May this year. Under his plea agreement, he faces up to seven years in prison and a restitution payment of $10.8 million.

From 1995 to 2004, Stanley helped a joint venture that included KBR and its predecessors funnel $182 million in bribes to government officials in Nigeria. The bribes were paid in exchange for contracts worth $6 billion to build liquefied natural gas facilities there. KBR's 2007 Annual Report (its most recent) described a joint venture called TSKJ "formed to design and construct large-scale projects in Nigeria. TSKJ's members are Technip, SA of France, Snamprogetti Netherlands B.V., which is a subsidiary of Saipem SpA of Italy, JGC [of Japan] and us, each of which has a 25% interest. TSKJ has completed five LNG production facilities on Bonny Island, Nigeria . . . ."

Jack Stanley was a senior vice president of Dresser Industries, Inc. when it merged into Halliburton in September 1998. Dresser's wholly-owned construction subsidiary, Kellogg, was combined with Halliburton's construction subsidiary, Brown & Root, Inc., to form KBR. In November 2006, Halliburton spun KBR off and it became a separate publicly-traded company. Former Vice President Dick Cheney was Halliburton's chief executive from 1995 to 2000.

Why did Halliburton, and not KBR, first announce the proposed settlements with the DOJ and SEC two weeks ago? Under the indemnity in their agreement for KBR's spin off, known as the master separation agreement, Halliburton calls the shots on most FCPA-related matters. Here's what KBR said about that in the 2007 Annual Report:

As part of the master separation agreement, Halliburton has agreed to indemnify us for certain FCPA Matters, but we had to agree that Halliburton will, in its sole discretion, have and maintain control over the investigation, defense and / or settlement of FCPA Matters until such time, if any, that we exercise our right to assume control of the investigation, defense and /or settlement of FCPA Matters. We have also agreed, at Halliburton’s expense, to assist with Halliburton’s full cooperation with any governmental authority in Halliburton’s investigation of FCPA Matters and its investigation, defense and/or settlement of any claim made by a governmental authority or court relating to FCPA Matters, in each case even if we assume control of FCPA Matters.
Halliburton said in its release two weeks ago that it gave KBR the indemnity "[t]o enhance KBR's financial stability and solvency, making possible the separation of KBR . . . ."

KBR, Inc. trades on the NYSE under the symbol KBR.

Halliburton Company trades on the NYSE under the symbol HAL.

Listen to the podcast here.
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Thursday
Feb052009

The DOJ Contra Mundum

Six months ago, without fanfare, the Justice Department scrapped the McNulty Memo. It was replaced by new guidance for federal prosecutors about charging corporate organizations with crimes, including violations of the Foreign Corrupt Practices Act. The new guidance appears in the U.S. Attorney’s Manual (USAM) at chapter 9-28.000. Among its most striking features is new language about the attorney-client and attorney work-product privileges.

Under the 2006 McNulty Memo, and the Thompson Memo before it -- both named for former Deputy Attorney Generals who signed them -- the DOJ gave itself the green light to determine cooperation based in part on a company's willingness to waive the privileges. Refusing to waive could result in a criminal indictment or stepped up charges. Agreeing to waive, however, obligated the company to disclose to prosecutors conversations and documents exchanged between the company's employees and its lawyers, even if the employees thought those communications were confidential and protected from disclosure. At least that's how everyone outside the Justice Department thought it worked.

But the new U.S. Attorney’s Manual says everyone was wrong. It says the DOJ never required corporations to give up their rights. It argues, with a straight face, that since the privilege belongs to the company, only the company can choose to give it up. So every waiver is therefore voluntary. Getting back to business, the DOJ pays tribute to the privileges, saying they're old and sacrosanct; they serve the public interests by allowing full and frank discussions between attorneys and clients; and they're essential in today's world of complex rules and regulations imposed by governments at all levels. "For these reasons," the DOJ concludes, "waiving the attorney-client and work product protections has never been a prerequisite under the Department's prosecution guidelines for a corporation to be viewed as cooperative."

Never a prerequisite? That's not what 33 former U.S. Attorneys think. They sent a letter last June to Senator Patrick Leahy (D.,VT), chair of the Judiciary Committee. In the letter, they asked him to support a proposed bill intended to stop the Justice Department's practice of pressuring companies to waive the attorney-client privilege. The bill hasn't gone anywhere but the message from the 33 ex-federal prosecutors was loud and clear.

Under the McNulty Memo, they said, prosecutors could "demand that a business waive the privilege with regard to a host of communications with its counsel in exchange for more lenient treatment. . . . The widespread practice of requiring waiver has led to the erosion not only of the privilege itself, but also of the constitutional rights of the employees who are caught up, often tangentially, in business investigations."

The former prosecutors told Senator Leahy that federal legislation is the only way to fix things. The McNulty Memo, they wrote, supposedly set up a review process whenever waivers were sought, but the oversight didn't work. They cited a report by E. Norman Veasey, the former Chief Justice of Delaware. He found that prosecutors in the field still requested or demanded privilege waivers without the supervision required by the McNulty Memo. And, the ex-prosecutors warned, the McNulty Memo never covered other federal agencies, including the SEC, HUD, the FCC, and the EPA, among others, "all of which have issued copy-cat policies requiring waiver in exchange for cooperation."

USAM 9-28.000 didn't really change anything. It's the latest version of the DOJ's internal guidance, and that's all. It clarifies that what the government really needs from companies is not a waiver of the privileges but disclosure of relevant facts about their misconduct. But will U.S. Attorneys in the field follow the new guidance? Who can say? The track record under the McNulty Memo isn't encouraging. And the new guidance doesn't apply to other federal agencies. No matter what the DOJ does or doesn't do, other parts of the federal government can go on demanding waivers in exchange for cooperation. It's up to them.

View the U.S. Attorney’s Manual 9-28.000 / Principles of Federal Prosecution of Business Organizations here and USAM 9-28.710 on attorney-client and work-product protections here.

Download the June 20, 2008 letter to Senator Leahy regarding the Attorney Client Privilege Protection Act here.

Download the McNulty Memo here (large pdf file) and the Thompson Memo here.

Listen to the podcast here.
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Tuesday
Feb032009

Another Guilty Plea In Valve-Maker Case

A second executive of a California-based firm has pleaded guilty to a Foreign Corrupt Practices Act violation. Richard Morlok, 55, the former finance director of Control Components Inc., admitted that from 2003 through 2006, he arranged corrupt payments to foreign officials of about $628,000. The payments, usually made through agents, went to employees at state-owned enterprises in order to assist in obtaining and retaining business for his company. He was charged in a one-count information with conspiring to violate the FCPA.

Morlok said in his plea agreement that Control Components, which designs and makes valves for the oil, gas, nuclear, coal and power plant industries, earned about $3.5 million in profits from contracts obtained through the bribes. Illegal payments, he said, went to employees at China National Offshore Oil Company, PetroChina, Jiangsu Nuclear Power Corporation (China), KHNP (Korea), Rovinari Power (Romania) and Safco (Saudi Arabia), among others.

Morlok said during a 2004 audit he provided false and misleading information about Control Component's commission payments to agents. The company is owned by British-based IMI plc, which trades on the London Stock Exchange under the symbol IMI.L.

Last month, the former worldwide sales director of Control Components, Mario Covino, also pleaded guilty in federal court to a single count of conspiring to violate the Foreign Corrupt Practices Act. Both Morlok and Covino are cooperating in an ongoing federal investigation and waiting to be sentenced. Covino, 44, is an Italian citizen living in Irvine, California. He was released on bail of $100,000 after surrendering his passport. Morlok, 55, lives in Rancho Santa Margarita. He was released on $20,000 bail. Morlok is scheduled to be sentenced on July 10, 2009, and Covino's sentencing is set for July 20, 2009. Both face up to five years in prison.

Download Richard Morlok's plea agreement here.

Download Mario Covino's plea agreement here.

Download the Justice Department's February 3, 2009 release here.

Listen to the podcast here.
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Monday
Feb022009

A Bit Of An Old Boy's Club

The U.K.'s Serious Fraud Office was created in 1988 with the mission to investigate and prosecute big-time fraud and corruption -- the misdeeds, as Teddy Roosevelt would have said, of the wealthy criminal class. But things at the SFO haven't gone well, and Britain's Sunday Times is reporting that dozens of lawyers, accountants and investigators are being offered up to three times their annual salaries to leave their jobs.

The SFO has often been in hot water because of blown prosecutions. But the worst trouble came after its 2006 decision to stop investigating BAE Systems for bribery. It said it had to drop the case because Saudi Arabia threatened not to buy Typhoon aircraft or continue sharing anti-terrorism intelligence. The High Court called the episode an outrage, an abject surrender to threats, and a capitulation.

After the BAE debacle, the U.K.'s then-attorney general, Lord Goldsmith, hired a former New York City prosecutor to find out why the SFO couldn't get it right. Jessica de Grazia had been an assistant district attorney in Manhattan for 13 years before she took the job. As the Times said, her arrival at the SFO sparked panic.

What de Grazia found, among other things, was that in 2007, the Serious Fraud Office had about three times more lawyers than the Frauds Bureau at the Manhattan District Attorneys Office. The New York DA's 19 lawyers, with virtually no outside help, managed to conclude the prosecution of 124 white collar defendants from 2003 to 2007. During the same period, however, the SFO's 56 staff lawyers concluded 166 prosecutions, even though the SFO spent more than £4 million on external counsel, ranging from newly qualified barristers to Queen’s Counsel. In other words, the per-lawyer prosecution rate in the New York DA's office was at least double and maybe triple that of the SFO.

De Grazia also found huge discrepancies in conviction rates. During the 2003-2007 period, the SFO’s average conviction rate for serious and complex white collar crimes was just 61%; the Frauds Bureau in New York had a 92% conviction rate for the same type of offenses. And at the federal prosecutor's office in New York City, the conviction rate was a nearly perfect 97%.

What's the problem in the SFO? De Grazia cited "a commingling of external and internal factors." External factors, she said, were the laws, government policy, and legal professional rules and practices. The big problem within the SFO's control, she said, was "insufficient innovation." The Times newspaper wasn't so polite. Cronyism and incompetence, it said, and “a bit of an old boy’s club.”

Former SFO director Robert Wardle left his post in April 2008, two months before de Grazia released her report. “She caused chaos,” one of her eventual victims recalled last week. The Times report said, “She called meetings of case controllers and asked them to identify the crap assistant directors. Then she went to the investigators and asked them who was a crap case controller.”

More changes at the SFO are probably ahead. The Times says de Grazia has just delivered another report -- this one highly confidential -- to Britain's new attorney general, Baroness Scotland. The new report, the Times says, is far more blunt than the June '08 version released to the public. It calls the SFO “a demoralised and underperforming agency” where the work of many dedicated and competent employees was “ blocked by inadequate management and leadership.”

Our thanks to a friend, now in Paris, for sending us the Times stories this weekend.

Download a copy of Jessica de Grazia's June 2008 report here.

Listen to this podcast here.
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Sunday
Feb012009

It's A Start

We've never come across any good news to report about Japan's overseas anticorruption enforcement. Until now, that is. Last Thursday, according to an AFP report, a court in Tokyo convicted three former executives and their consulting company for bribery in Vietnam.

The three men -- Haruo Sakashita, 62, Kunio Takasu, 66, and Tsuneo Sakano, 59, all former executives of Tokyo-based Pacific Consultants International, or PCI -- admitted bribing a senior Vietnamese government official to secure contracts for road projects backed by Japanese aid money. The Japanese press said the former PCI executives admitted paying $820,000 in bribes to Huynh Ngoc Sy, who was then the Ho Chi Minh City senior transport official named in the Tokyo trial. Prosecutors said PCI had promised Sy a total of $2.6 million for awarding consulting contracts to the firm in connection with road projects in Vietnam financed by Japan's Official Development Assistance program. The scandal caused by the case resulted in Japan's suspending all aid loans to Vietnam.

"The crime was devious, organized and calculated. PCI systematically supplied cash to foreign government employees with the agreement of the top cadre," said the Tokyo District Court judge. "This has inevitably led to a loss of confidence in our country's Official Development Assistance activities, and the result is serious," he said.

Despite his tough talk, the judge suspended the ¥70 million ($780,000) fine he imposed on the defendants and didn't sentence the men to any prison time. AFP said in its report, "Japanese courts often spare prison time, particularly for white-collar crime, if the accused admit the allegations."

Japan is among the 37 countries that have joined the OECD Convention on Combating the Bribery of Foreign Public Officials in International Business Transactions. But along with the United Kingdom, Japan comes in for regular criticism from the OECD for failing to prosecute overseas bribery. In this case, we suspect the Japanese government was forced to act because tax-payer funded foreign aid was involved.
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Thursday
Jan292009

Off Topic And On

Our colleague, Paul Oki, sent this note from Nigeria a few days ago: Would it surprise you if I told you that even now it's not unusual to find cars with Obama campaign stickers plying our roads? Or that there were billboards in prominent places with "Obama for President" in some of our major cities? Or that on inauguration day several companies took out full page, color adverts in our national newspapers congratulating the American people? We all feel like proud Americans at this point in history -- I can't express it any better. He also sent the photo, above, showing the back of a passing car in Lagos.

* * *
Does slapping a huge "crime tax" on public companies make sense? First Siemens for $800 million; now Halliburton, apparently, for almost $600 million. We're always in favor of more enforcement and less bribery. But corporations, as we've said, can't defend themselves against FCPA charges. And it's the powerless shareholders who ultimately pay. Imposing stiff compliance obligations on offending firms is a good idea. Prosecuting culpable executives is even better. But these mega-settlements -- is anyone else uncomfortable?

* * *
The Wall Street Journal nailed it. "World Bank Omerta" is how it headlined the bank's indefensible practice of keeping quiet about suppliers guilty of corruption. A Journal editorial this week said, "[W]e are left to wonder whether the fraud at Satyam might have been discovered earlier if the World Bank had been more forthcoming about what it already knew to be a corruption-prone enterprise." We wonder -- will anyone try to sue the bank for breaching its duty to the public?

* * *
There's precedent for ex-Gov. Blagojevich's bizarre road show earlier this week to New York City. Earl Long (Huey's younger brother) made a couple of similar trips when he was governor of Louisiana and under a few clouds of his own. In 1959, A. J. Liebling spent time with him and wrote about it in The Earl of Louisiana. The book opens with these wonderful words: "Southern political personalities, like sweet corn, travel badly. They lose flavor with every hundred yards away from the patch. By the time they reach New York, they are like Golden Bantam that has been trucked up from Texas -- stale and unprofitable. The consumer forgets that the corn tastes different where it grows."
_____

The Steelers by 7?

Enjoy the weekend.
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Wednesday
Jan282009

The Hunt For Overseas Evidence

No corporations and just a few individuals have fought Foreign Corrupt Practices Act charges in court, so only a handful of people have ever seen an FCPA defense up close. But for the first time, we have a chance to follow not one but three pending prosecutions -- in U.S.v. Kozeny (defendant Frederic Bourke, Jr., owner of the luxury handbag brand Dooney & Bourke), U.S. v. Green (husband-and-wife movie producers Gerald and Patricia), and U.S. v. Jefferson (former Rep. William J. Jefferson).

Because alleged FCPA violations usually involve some overseas behavior, prosecution and defense evidence has to be retrieved from beyond U.S. borders. There's no way to compel production from a foreign entity or individual outside the United States. So prosecutors usually work directly with foreign law enforcement agencies to exchange information on a voluntary basis; defendants don't have that option. Their route to foreign evidence is through letters rogatory. In United States usage, according to 22 CFR 92.54, "letters rogatory have been commonly utilized only for the purpose of obtaining [overseas] evidence. Requests rest entirely upon the comity of courts toward each other, and customarily embody a promise of reciprocity."

Mr. Bourke says for his defense he needs stock ownership and transfer records about a Liechtenstein corporation. In his case docket, item 135 is an order directing issuance of a letter rogatory. Attached to the order is the letter rogatory itself, formally called a "Request for International Judicial Assistance (Letter Rogatory) to the appropriate judicial authority of the Principality of Liechtenstein."

Again, a letter rogatory can't compel a foreign individual or entity outside the U.S. to produce evidence; it's only a polite request to a foreign court on behalf of one of the parties, in this case Mr. Bourke. We imagine the normally secretive authorities in Liechtenstein won't be anxious to release corporate ownership information. What happens if Mr. Bourke never sees the company records he's after? Can he describe the "missing" evidence to the jury? Can he argue that his right to a fair trial is somehow violated? We'll keep watching.

For practical advice about how to prepare, obtain and use letters rogatory, the State Department runs an excellent resource site here.

Download the trial court's docket (as reported by Pacer) in U.S. v. Kozeny et al here.

Download the Order Directing Issuance of Letter Rogatory on behalf of Frederic Bourke, Jr., with a copy of the letter rogatory attached (entered October 17, 2008) here.
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Tuesday
Jan272009

Dealing With The DOJ

The Justice Department resolves corporate FCPA enforcement actions these days by using deferred and non-prosecution agreements. And the go-to guys for information about them are Ryan McConnell, an Assistant United States Attorney in Houston, and Larry Finder, a partner in Houston with Haynes and Boone. They've identified, cataloged, analyzed and published findings about every "corporate pre-trial agreement" (their term) used from 1993 to 2008 -- all 112 of them.

They were joined for their latest study by Scott Mitchell, the head of the high-profile Open Compliance & Ethics Group, a nonprofit organization that helps member companies improve their culture by "integrating governance, risk management, and compliance processes."

In 2008, the authors say, there were just 16 deferred and non-prosecution agreements, down 60% from the record-setting 40 agreements in 2007. (From 2003-2006, there were 47 agreements; before 2003, there were just 9.) Seven of the 16 agreements last year related to Foreign Corrupt Practices Act settlements, compared with about a third in 2007. Last year's pre-trial agreements involved Sigue Corp., Jackson Country Club, WABTEC, Flowserve, AB Volvo, Willbros Group, AGA Medical, Faro Technologies, ESI, Milberg Weiss, Lawson Products, Republic Services, American Italian Pasta Co, Penn Traffic, IFCO and Fiat.

We asked Larry Finder a couple of questions about the 2008 study. Here's what he had to say:

The FCPA Blog: Why were the DPA / NPA numbers down so much last year?

Lary Finder: Your guess is as good as mine. It's possible that the DOJ was distracted with Congressional hearings and the possibility of federal legislation on the monitor issue, but I truly can't divine the reasons. It is equally as possible that in the post-9/11 environment, more investigatory resources, e.g., FBI and U.S. Attorney, have been concentrated on terrorism-related matters rather than fraud cases. I just don't know.

The FCPA Blog: Your 2008 study talks about the Justice Department's recent clarification [at United States Attorneys Manual 9-28.710] that it won't require waivers of attorney-client or attorney work-product privileges when determining corporate "cooperation." You also talk about the DOJ's new internal rules on the appointment of monitors and the ban on "extraordinary restitution" payments by corporate targets. Do the DOJ's internal rules have the force of law?

LF: As I recall, the DOJ often states (in its published monographs, for example) that its policies are generally not enforceable against the government. The federal case the Department often cites as authority for that proposition is United States v. Caceres, a Supreme Court case from the late 1970s. That being said, our analysis suggests that the Department has been abiding by its own waiver policy. We saw that the privilege waiver language in DPAs was the exception (statistics from 2007 showed only 3 waivers, while in 2008 we found but two) . Further, the Department has every incentive to avoid the perception of violating its own policies on privilege and monitors, lest the organized white collar bar again lobby for curative federal legislation. We'll have to wait and see.

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Ellen Podgor at the White Collar Crime Prof Blog has already said, "This piece should be a must-read for in-house counsel and all attorneys working with companies on compliance programs." She's right. We don't know of any other way to get a clearer picture of what's going on with the DOJ's compliance agreements. This is practical information and a welcome bit of accountability.

The article can be downloaded now from SSRN here. It will appear in the May 2009 Corp. Counsel Rev. - Published by S. Tex. College Of Law, Volume XXVIII, No. 1.
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