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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

Tuesday
Jun172008

Moscow Debates Reforms, Sort Of

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

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

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

Bill Floated to Ban Gifts to Bureaucrats as Bribes.

17 June 2008By Francesca Mereu / Staff Writer

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

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

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

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

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

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

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

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

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

Calls to the Investigative Committee went unanswered Monday.

A final note. Our correspondent wondered how the "legal contradiction" noted in the article between the Russian civil code and criminal law would fit into the Foreign Corrupt Practices Act's affirmative defense that allows payments (or gifts) to foreign officials, if permitted under the written laws of the host country. Good question. For now, though, as Winston Churchill said about Russia itself, the answer remains a riddle, wrapped in a mystery, inside an enigma. Which means in Russian, don't bet the lunch money on the defense just yet.
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Monday
Jun162008

Tackling Corruption, Transforming Lives, Part II

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

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

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

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

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

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

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

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

_______________

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

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

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

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

View Seoul's OPEN system here.
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Sunday
Jun152008

Sweating The Small  Stuff

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

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

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

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

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

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

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

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

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

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

That question goes beyond legal compliance. It's part of the "soft" subject of ethics, which is never easy to talk about in the business world. Ethics can't be measured, and measuring things -- costs, profits, losses -- is what business is mostly about. That's why it's important sometimes to hear what those outside the business world are saying. The U.N.'s Asia Pacific Human Development Report is full of those voices, and they're worth listening to.
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Friday
Jun132008

Industry-Wide Investigation Snares Wright Medical

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

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

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

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

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

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

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

View prior posts about medical device makers here.

Wednesday
Jun112008

It's A Wonderful Life, Really

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


Dear Sir -

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

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

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

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

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

Regards,

Sally Anderson
Houston
Worldwide Oilfield Services Co.


And our reply . . . .

Dear Sally,

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

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

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

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

Thanks again.

All the best,

The FCPA Blog

Tuesday
Jun102008

A Hundred Tiny Bribes

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

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

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

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

View prior posts about facilitating payments here.

Tuesday
Jun102008

Justice For Corporate Defendants?

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

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

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

Criminal liability can attach to an organization whenever an employee of the organization commits an act within the apparent scope of his or her employment, even if the employee acted directly contrary to company policy and instructions. An entire organization, despite its best efforts to prevent wrongdoing in its ranks, can still be held criminally liable for any of its employees’ illegal actions.
As long as respondeat superior is the law of the land, corporations won't be mounting any defense to potential criminal charges under the FCPA. They can't win in court so of course they don't go to court. Naturally enough, that puts the prosecutors in full control. They know an FCPA criminal indictment waved in front of a defenseless corporation inevitably leads to a plea deal -- usually a deferred or non-prosecution agreement with terms dictated by the DOJ.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Monday
Jun092008

Feeling The Heat Overseas

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

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

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

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

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

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

Thursday
Jun052008

Faro Pays $2.95 Million For FCPA Settlement

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

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

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

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

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

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

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

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

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

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

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

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

View Faro's June 5, 2008 press release here.
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Tuesday
Jun032008

AGA Medical Resolves China-Related FCPA Charges

Privately-held AGA Medical Corporation will pay a $2 million criminal penalty and enter into a deferred prosecution agreement with the Department of Justice to settle Foreign Corrupt Practices Act violations. It paid bribes in China of at least $460,000 to doctors in government-owned hospitals and patent-office officials. The Minnesota-based firm makes products used to treat congenital heart defects.

AGA was charged with two counts of violating and conspiring to violate the FCPA, 15 U.S.C. § 78dd-2(a)(1) and 18 U.S.C. § 371. Between 1997 and 2005, the company, one of its officers and other employees authorized corrupt payments to the doctors through AGA’s Chinese distributor. In exchange, the doctors directed their government-owned hospitals to purchase AGA’s products. Its sales in China for the period were about $13.5 million. Also, from 2000 through 2002, AGA applied for several Chinese patents. A high-ranking AGA officer agreed to pay bribes through the distributor to officials in the China State Intellectual Property Office to have the patents approved.

AGA's three-year deferred prosecution agreement requires appointment of a compliance monitor. Similar to the provisions seen recently with Willbros Group Inc., AGA will pick the monitor and the DOJ will approve or reject its choice: "AGA agrees to engage an independent corporate monitor ('the Monitor') within sixty (60) calendar days of signing this Agreement. Within thirty (30) calendar days after the signing of this Agreement, and after consultation with the Department, AGA will propose to the Department a candidate to serve as the Monitor. The Department retains the right, in its sole discretion, to accept or reject any Monitor proposed by AGA pursuant to the Agreement. In the event the Department rejects a proposed monitor, AGA shall propose another candidate within ten (10) calendar days after receiving notice of the rejection. This process shall continue until a Monitor acceptable to all parties is chosen."

The deferred prosecution agreement also contains a now-customary successor liability clause, whereby anyone who acquires AGA's business will also be bound by the compliance obligations in the agreement: "AGA agrees that in the event it sells, merges, or transfers all or substantially all of its business operations as they exist as of the date of this Agreement, whether such sale is structured as a stock or asset sale, merger or transfer, it shall include in any contract for sale, merger or transfer a provision binding the purchaser, or any successor in interest thereto, to the obligations described in this Agreement."

AGA self-disclosed the violations to the Department of Justice. Emails it provided between some of its U.S.-based officers and employees and the Chinese distributor left no doubt that illegal activity had occurred. Here are some excerpts from the distributor's messages:

This week I have maken [sic] an appointment with one key person in China knowledge and Patent Protection Bureau, Any action in China I must pay money to do.

I am still in agreement with our prior discussions and will cover her fee as long as we can get the [sic] patent issued in a timely manner.

Please inform [Officer A] don't give up the application for the first three patents in China. I will contact with the officials of China patent bureau again after Chinese new year. Maybe money will help us.

My company also need to provide 20% kickback for physicians and sometimes 10% discount to hospitals.

The physicians suggest the patient to use which device according [to] the patient's family economic ability and the kickback.

View the DOJ's June 3, 2008 news release here.

View the criminal complaint against AGA Medical Corporation here and the deferred prosecution agreement here (courtesy of the Corporate Crime Reporter).

Tuesday
Jun032008

Unintended Consequences

Crooked officials and those who bribe them cripple economies and ruin lives. So all sincere efforts to reduce public corruption and deliver clean government deserve praise. At the same time, not all anti-corruption initiatives are equal, and good intentions can sometimes produce bad results. With that in mind, we want to take a quick look at the programs run by the Council of Europe's "Group of States against Corruption," also known as GRECO.

It was founded in 1999 to monitor compliance with the Council of Europe's anti-corruption standards. GRECO does that by studying the members' existing laws and practices, publishing reports that evaluate their efforts, and recommending how they can improve their performance. Then it checks back to see how they're doing and, with the member's permission, publishes its findings for the public to read.

All that sounds good. Third-party reviews, peer pressure and plenty of accountability. But when you look at GRECO's country reports, there's something fishy.The same recommendations show up again and again. For example, GRECO tells both Azerbaijan (#150 on Transparency International's 2007 Corruption Perception Index) and Iceland (#6 on the CPI) to do more training of public officials in ethics and anti-corruption awareness. The language used for both countries is nearly identical. And the report on Moldova (#111 on the CPI) warns that public-sector transparency has to be increased. That's good too, but it loses its punch when you read that Switzerland (# 7 on the CPI) needs the same medicine. Albania (#105 on the CPI) should develop standards for public servants moving to the private sector, GRECO says. Good idea, except that the message is the same for squeeky-clean Denmark (#1 on the CPI).

Our concern, you might have guessed, is that GRECO appears to approach all of its 44 member States with the same checklist. The impression given is that fighting corruption is a matter of changing this law, adopting that code of conduct, or imposing this training module. True enough, those steps might help, but only in a country already committed to fighting public corruption. On the other hand, where leaders take a cynical view -- where they line their own pockets with kickbacks and bribes and let their subordinates do the same -- GRECO's approach provides cover for the bad guys to hide behind. Here's the problem: corrupt regimes can implement GRECO's technical recommendations and periodically announce great progress in the battle against public sleaze. Do this, check. Do that, check . . check, check, check. Meanwhile everyone can still be stealing the silverware.

With all institutions and organizations -- as with individuals -- the difference between compliance and lawlessness is a matter of intent. Any law, rule or regulation can be ignored, avoided, bent or broken to achieve a corrupt purpose. And no amount of legal reform, ethics training or transparency will make a dent if attitudes don't change. But when attitudes do change, when leaders decide to clean things up, they can do it practically overnight. Singapore (#4 on the CPI) has amazingly simple anti-corruption legislation. But its leaders are committed to cleanliness and the result is easy to see. Neighboring Indonesia (#143 on the CPI) has layers of laws, rules and regulations aimed at public corruption. None of it works because the attitude at the top is inconsistent, to put it kindly.

So it's fair to ask this question: Is GRECO spending its time and public funding wisely? Do Azerbaijan and Switzerland really need more rules regulating gifts to public servants? According to GRECO they do. But will a ban on fruit baskets ever turn Azerbaijan's culture around? At the same time, does the absence of gift-giving rules really threaten the integrity of Swiss bureaucrats? Perhaps, just maybe, GRECO would do better to ditch the checklist and, in countries where public corruption is really a problem, work on attitudes instead.

The people at GRECO would say they're already changing perceptions. They'd say their evaluation visits, recommendations and public reports focus local and international attention on the need for anti-corruption initiatives in all member countries. That to pick on just the Azerbaijans and not the Denmarks would create an atmosphere of bullying and intimidation, draining both GRECO and its parent, the Council of Europe, of their moral authority.

There's some truth to those arguments. But in Germany, Italy and France, for example, attitudes toward domestic and international public corruption changed over the past decade -- helped along by an uncompromising antibribery message from the OECD. Those countries reformed their tax codes, which helped, and started enforcing anti-corruption laws already on the books. Prosecutions, convictions and punishment deter crime more than anything else. Most importantly, however, the leaders of Germany, Italy and France showed the political will to find, catch and incarcerate wrongdoers. That's an ingredient that can never come from an outsider's checklist.

GRECO members -- 43 European countries and the United States -- are right to fight public corruption. It's a scourge that destroys hope and robs people of their futures. Its proper place is in the dustbin of history. But GRECO and its parent, the Council of Europe, might want to ask themselves whether their approach, though well-meaning in all respects, though thorough and even-handed, is really the right path to less corruption in some of its more troublesome member States.

Visit GRECO's website here.

View Transparency International's 2007 Corruption Perception Index here.

Sunday
Jun012008

The Dog Ate Our Homework

We had a nice post ready for today. Really. Then we remembered the 11:59 p.m. deadline on May 31 for the 2008 TRACE International essay contest on fighting public bribery. There were only a few hours to go so in desperation we sent our post off as our entry. TRACE, by the way, is a non-profit group that conducts due diligence and compliance training for intermediaries -- agents, joint venture partners, distributors and the like. We wanted to be part of the essay contest, which drew 120 entries last year. So here we are with no post and a rather flimsy excuse on top of it.

It's embarrassing to have mailed away the blog's work product. If we hadn't done that, we'd be using this space right now to talk about our favorite subject: in-house compliance training. How much we always learn from the sessions. How we enjoy talking about the Foreign Corrupt Practices Act with company personnel from management, marketing, operations and more -- and how the training sessions go far beyond the mere words of the FCPA.

But we can't say too much. TRACE, we noticed, has rules intended to protect the integrity of its essay contest. Entries must be original and unpublished. So we're scrupulously avoiding any hint of self-plagiarizing. Imagine how bad it would look if the FCPA Blog triggered a scandal in an essay contest about fighting corruption through ethical practices? Oh boy. We'd need a new identity just to get dinner at home.

So until the post flew out of our hands, we intended to mention that FCPA training is required for an effective compliance program. Now, constrained by the rulebook, we can't even talk about that. We can only reproduce below part of the 2005 Federal Sentencing Guidelines, trusting that curious readers will ponder why:

The organization shall take reasonable steps to communicate periodically and in a practical manner its standards and procedures, and other aspects of the compliance and ethics program, to the individuals [responsible for compliance] by conducting effective training programs and otherwise disseminating information appropriate to such individuals’ respective roles and responsibilities.

And finally, to tie it all together, we would have tossed in some nice examples to show how training can prevent FCPA violations; or uncover them; or even reveal who in the company may be heading for a compliance meltdown.

Gosh, it really would have been a good post. Too bad all we've got to show for it is the fuzzy screen shot above. Here's our plan, though. If we win the essay contest, we'll seek permission to "reprint" our post right here, with full credit to TRACE for all the great compliance work they're doing. If we lose, which we concede to be the overwhelmingly probable outcome, we'll be free to use the post anyway.

The judges will decide by September, TRACE says. Meanwhile, we'll get back to work -- and hope this humbling editorial debacle will soon be forgotten.

Visit TRACE International here.

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