The Securities and Exchange Commission fined a Virginia-based technology company $180,000 Monday for using severance agreements that impeded former employees from communicating information to the SEC.
Entries in Lockheed (12)
A few weeks ago, Transparency International UK’s (“TI-UK”) International Defence and Security Programme published the 2012 “Defence Companies Anti-Corruption Index.”
Doping in sport, like graft in business, skews the rules of the game.
There's a reason why you don't see many of the biggest U.S.-based government contractors on the FCPA top ten list (e.g., Lockheed, General Dynamics, Raytheon, Northrup, Boeing, etc.).
The leader of the Dutch government has refused to open a new investigation into the role played by Prince Bernhard in the Lockheed scandal that broke in 1976.
The first time we heard from Andy Spalding (left), a lawyer on a year-long Fulbright Research Grant in Mumbai, India, he floored us with the idea that the Foreign Corrupt Practices Act causes corruption and hurts poor people. We just heard from him again, this time about the way the Justice Department explains the purpose of the FCPA and approaches enforcement. We'll let Andy speak for himself (because he does it so well). Here's what he said:
Dear FCPA Blog,
I was recently reading the DOJ's "Lay-Person's Guide to the FCPA," available here, which provides a helpful overview of the FCPA, including a brief reference to its legislative history. I am generally grateful for any effort on Justice's part to make the statute transparent and user-friendly; the more that can be done in that area, the better. But I must take issue with Justice's brief but telling account of the statute's legislative history, particularly the political events of the 1970s that precipitated the bill's enactment. The guide is telling, not for what it says, but for what it does not say -- that is, for what the DOJ has seemingly forgotten. And as Edmund Burke famously warned, "those who don't know history are destined to repeat it."
The guide refers to the SEC report, well known to your readers, which disclosed that hundreds of companies had engaged in overseas bribery. The guide further implies that recognition of the need for anti-bribery legislation occurred mainly in response to this report. But the report was not released until mid-1976, and Congress had begun deliberating on the need for anti-bribery legislation as early as August of 1975. What, then, was Congress talking about in 1975, if not the SEC report?
Look to the transcripts of the earliest testimony. Congress was concerned with the conduct of one company in particular -- Lockheed -- which was publicly known at the time to have bribed officials from several overseas governments, particularly Japan, the Netherlands, and Italy. Scandals erupted in these countries, and public officials were shamed or forced to resign as a result. That much remains in our memory, but we forget the rest of the story. Particular attention was paid in congressional testimony to Italy, whose parliament at the time was divided roughly in half between the democrats and, yes, the communists.
Witnesses and congressmen alike, from both sides of the political aisle, expressed concern that revelations of bribery would confirm the stereotype of the corrupt capitalist that was widely promoted in communist propaganda. This, in turn, would weaken our political ties to unstable countries, and open the door to further influence from countries that we believed were hostile to the values of a liberal democratic society. The FCPA, then, was designed not only to promote business ethics, but to serve as an instrument of foreign policy. Ample support for this account in the legislative history may be found at your post here.
Although the Cold War is over, the FCPA nonetheless operates today in an international political context that is only slightly less delicate than in the 1970s. As Congressman Stephen Solarz (D-NY) stated in 1976, "it is important to examine the problem of overseas payments in broader terms than simply a matter of economics or even morality." I would ask, does the DOJ heed the congressman's warning today? Does it consider the impact of FCPA enforcement on delicate international political relationships? I see absolutely no evidence that it does. Indeed, I would politely throw down the gauntlet and challenge anyone to provide an account of Justice's foreign policy vision of FCPA enforcement that requires more than just a couple sentences to articulate.
When Suleiman A. Nassar was indicted in 1994 for violating the Foreign Corrupt Practices Act, he was a regional vice president of Lockheed International living near Geneva, Switzerland. His territory for Lockheed included Egypt, and in the late 1980s he landed a nice sale there -- three C-130 military cargo planes worth $79 million. But he won the business, the Justice Department said, by bribing a member of the Egyptian parliament with a million dollars. The DOJ indicted him, along with a co-worker and Lockheed itself.
Before issuing the indictment, the Justice Department spoke with Nassar, a Syrian-born, naturalized U.S. citizen. He assured prosecutors he would appear voluntarily in Atlanta, where the case would be filed. They in turn agreed not to have him arrested in Europe, which would have triggered a long extradition process. It was a gentlemanly arrangement but Nassar had other intentions. He never showed up in Atlanta and instead did his best to vanish.
He fled to his birthplace, Syria, a country with no extradition treaty or law-enforcement agreements with the U.S. Prosecutors said later they were "disappointed and frustrated" by Nassar's escape. But they didn't give up.
They tracked him to Damascus after Swiss police noticed that his wife was receiving mail from an address there. But how to get him back? As the prosecutors said, the relationship between America and Syria was, at best, "notoriously tenuous."
One thing the Justice Department could do was make his life difficult. When he sold two condos in Washington, D.C., prosecutors used the Federal Debt Collection Procedures Act ( 28 U.S.C. § 3001, et seq.) to block the international transfer of the sale proceeds. Then they used the ancient All Writs Act (28 U.S.C. § 1651)* to freeze Nassar’s worldwide assets -- including pension payments that eventually amounted to about $750,000. Prosecutors even threatened to freeze an inheritance his wife was about to receive, on the grounds that she might use the money to help her husband evade arrest.
The Syrians, meanwhile, did their part too. They arrested Nassar in late September 1994 under an Interpol warrant circulated by the U.S. They held him in jail until he made bail two months later. Once released, he stayed in Damascus -- the local police had impounded his passport -- and nothing further happened. The Americans couldn't extradite him, the Syrians wouldn't keep him locked up, and everyone assumed the case was stuck. But they were wrong.
In January 1995, Lockheed pleaded guilty to violating the Foreign Corrupt Practices Act. That generated global headlines, leading the Syrian government to take a new interest in their now-notorious FCPA fugitive. In March 1995, DOJ prosecutors were meeting with the Syrian justice minister. He chose that moment to deliver some dramatic news: Nassar had just been arrested "on charges of violating the Foreign Corrupt Practices Act, and that under the doctrine of extraterritoriality, the Syrian Government intended to try him in Damascus." As U.S. prosecutors said later, it wasn't exactly the trial they had in mind.
But by then Nassar was exhausted and scared. The global freeze on his family's assets, two arrests, a looming Syrian criminal trial, the prospect of years in a local prison -- he'd had enough. According to the DOJ's account, in July 1995 their man was "released from Adra Prison in Syria and escorted to the Damascus Airport where he boarded a plane for Frankfurt, Germany. There he was met by Special Agent Chris Amato of the Defense Criminal Investigation Service, taken to Atlanta, and placed under arrest."
Nassar agreed to plead guilty to violating the FCPA. By prior arrangement, he was sentenced to 18 months in prison and fined $125,000, to be paid from his frozen funds before they were released. His co-worker Allen Love pleaded guilty to lying to investigators and was fined $20,000. Lockheed's guilty plea to conspiracy to violate the FCPA's antibribery provisions resulted in penalties of $24.8 million.
A final note: Suleiman A. Nassar -- who almost became the first person to be tried outside the United States for violating the Foreign Corrupt Practices Act -- was the first person ever imprisoned in the U.S. for an FCPA offense.
* * *
This post is adapted in part from an article called "The International Fugitive," by Martin J. Weinstein and Daniel A. Caldwell of the U.S. Attorneys' Office for the Northern District of Georgia. The article appeared in the USA Bulletin for December 1996, Volume 44, Number 6, which can be downloaded here.
We're grateful to Cody Worthington, whose outstanding research was the basis for our series on FCPA fugitives.
*The All Writs Act (28 U.S.C. § 1651) provides: (a) The Supreme Court and all courts established by Act of Congress may issue all writs necessary or appropriate in aid of their respective jurisdictions and agreeable to the usages and principles of law. (b) An alternative writ or rule nisi may be issued by a justice or judge of a court which has jurisdiction.
In May, a month after it agreed to be acquired by Oracle for $7.4 billion, Sun Microsystems said it may have violated the Foreign Corrupt Practices Act and that the violations could have a material effect on its business. It launched an internal investigation and shared the results with the Justice Department and the Securities and Exchange Commission. See our post here.
Now it looks like it was all a false alarm. Sun's latest SEC filing, a Definitive Merger Proxy dated June 8, 2009 (Schedule 14A), says this:
Section 4.13. Compliance with Applicable Law.And a little later in the merger document, Sun represents to Oracle that without exception it has "complied with the U.S. Foreign Corrupt Practices Act of 1977 and other applicable anti-corruption laws." (see Section 4.24)
(a) The Company and each of its Subsidiaries is and, since June 30, 2006 has been, in compliance in all material respects with all Applicable Laws and Orders. Neither the Company nor any of its Subsidiaries has received any written notice since June 30, 2006 (i) of any administrative, civil or criminal investigation or audit by any Governmental Authority relating to the Company or any of its Subsidiaries or (ii) from any Governmental Authority alleging that the Company or any of its Subsidiaries are not in compliance with any Applicable Law or Order in any material respect.
So, no FCPA violations and no notice from the DOJ or SEC of any investigations. A clean slate.
Not many internal FCPA investigations end this way. More often -- usually, in fact -- they start because of apparently reliable signs of compliance trouble. Most investigations then end up confirming that yes, violations occurred -- usually beyond the scope of initial concerns. Sun's outcome, therefore, isn't typical.
What happened here? Sun isn't saying. But the timing may not have been accidental. Did anonymous whistleblowers opposed to Oracle's acquisition file false complaints? It's happened before. Did people upset about potential disturbances in Sun's pivotal and hallowed role in the open-source community try to torpedo the deal by tossing false allegations into the mix? Twisted, but possible.
Wherever the allegations came from, Sun made all the right moves. It responded fast with a proper internal investigation, self-reports to the feds, and full disclosure to the marketplace. After all that, it came up with nothing. Compliance program and corporate integrity intact. Great result. Time to move on.
Before we all scatter, though, one last question.
Could Sun's statements in its merger proxy be wrong? Just boilerplate reps saving the place in the text? Might Sun still have FCPA problems it isn't disclosing just yet? Not likely, considering the Lockheed Martin / Titan case.
Those companies planned to merge in 2003. During due diligence, Titan was found to have serious FCPA compliance issues. Before Lockheed Martin terminated the merger, Titan had already filed an 8-K disclosure document with the SEC that included a proxy form with the merger agreement attached to it. That merger agreement, like Sun's, contained an unqualified representation by Titan to Lockheed Martin affirming FCPA compliance. But the representation later proved to be untrue.
The SEC warned through a release that the 8-K was a "communication with shareholders" from Titan and that a reasonable investor could have relied on the untrue FCPA representation, resulting in liability for securities law violations. Presumably, that SEC release would have guided Sun's preparation and publication of its Definitive Merger Proxy, including the compliance reps quoted above.
See Securities Exchange Act of 1934 Release No. 51283 / March 1, 2005 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on potential Exchange Act Section 10(b) and Section 14(a) liability here.
Editor's Note: It's not all that clear whether Sun's reps are correct as written. Take a look at the AmLaw Daily's story suggesting Sun may have jumped the gun with its filing. We're waiting for clarification from Sun itself. And so, we imagine, are its shareholders.
Bob Beamon's long jump of 29 feet 2½ inches in Mexico City in the 1968 Olympics broke the world record by an astounding 21¾ inches. With that one jump Beamon became the first man to reach both 28 and 29 feet, and the word Beamonesque was born -- meaning a spectacular event. We'd describe Siemens' $800 million settlement on Monday of Foreign Corrupt Practices Act violations as Beamonesque, considering that it surpassed the existing FCPA settlement record by $755.9 million.
Before Siemens, Baker Hughes' April 2007 payment of $44.1 million (including penalties and disgorgement) was the biggest in an FCPA case. Baker Hughes, we think, won't be sorry to relinquish the top spot on the settlement list since being there gets you mentioned in the press about as often as Madonna.
Among other notable settlements, Willbros paid $32.3 million in May this year and Chevron's violations related to the U.N.'s oil for food program cost it $30 million last year. Titan Corporation held the record after it paid $28.5 million in 2005 for its FCPA settlement. Vetco's resolution cost it $26 million in 2007 and Lockheed paid $24.8 million in 1994, the biggest case of its time. York International spent $22 million last year to end its enforcement action. Statoil was close behind in 2006, paying $21 million. AB Volvo's 2008 case settled for $19.6 million, and ABB's violations cost it $16.4 million in 2004. Schnitzer Steel agreed to pay $15.2 million in 2006 and Flowserve $10.5 million this year.
Bob Beamon's great leap stood as a world record for 23 years and earned him a postage stamp in Burundi (pictured above). We're fairly sure Siemens won't be appearing soon on any postage stamps, but it could hold the FCPA settlement record for a very long time.
Our thanks to Joe Hixson for helping assemble the settlement data in this post. He's with the strategic communications firm The Abernathy MacGregor Group Inc., which has represented some very well-known companies in connection with FCPA enforcement actions. Despite Joe's help, any mistakes in what's written above are all ours.
Aside from the villa on Lake Como and the Aston Martin in the garage, the greatest perk that comes from tending this garden is hearing from so many talented experts in the field of the Foreign Corrupt Practices Act. Last week, for example, a generous reader shared with us a soon-to-be published paper about Facilitating Payments. Seeing our favorite FCPA topic treated with such thorough scholarship, and wrapped in a truly eloquent presentation, was genuinely exciting. It made our day.
We mention the incident, first, to express our gratitude to that particular reader and to all who contribute to the FCPA Blog in so many ways. We also mention it because the paper in question made copious use of the FCPA's rich legislative history -- stimulating us to revisit some of Washington's original debate about the law. Indeed, the Congressional record is still a deep well of meaning and inspiration for FCPA practitioners, judges and scholars.
Among the goodies in the legislative history are the reasons given in 1977 for why the country needed the FCPA. Thirty years on, we think those reasons still ring true.
Here's what the House Committee on Interstate and Foreign Commerce said:
More than 400 corporations have admitted making questionable or illegal payments. The companies, most of them voluntarily, have reported paying out well in excess of $300 million in corporate funds to foreign government officials, politicians, and political parties. These corporations have included some of the largest and most widely held public companies in the United States; over 117 of them rank in the top Fortune 500 industries.
The abuses disclosed run the gamut from bribery of high foreign officials in order to secure some type of favorable action by a foreign government to so-called facilitating payments that allegedly were made to ensure that government functionaries discharge certain ministrial [sic] or clerical duties. Sectors of industry typically involved are: drugs and health care; oil and gas production and services; food products; aerospace, airlines and air services; and chemicals.
The payment of bribes to influence the acts or decisions of foreign officials, foreign political parties or candidates for foreign political office is unethical. It is counter to the moral expectations and values of the American public. But not only is it unethical, it is bad business as well. It erodes public confidence in the integrity of the free market system. It short-circuits the marketplace by directing business to those companies too inefficient to compete in terms of price, quality or service, or too lazy to engage in honest salesmanship, or too intent upon unloading marginal products. In short, it rewards corruption instead of efficiency and puts pressure on ethical enterprises to lower their standards or risk losing business.
Bribery of foreign officials by some American companies casts a shadow on all U.S. companies. The exposure of such activity can damage a company's image, lead to costly lawsuits, cause the cancellation of contracts, and result in the appropriation of valuable assets overseas.
Corporate bribery is also unnecessary. The Secretary of Treasury testified before the Subcommittee on Consumer Protection and Finance: Paying bribes. . . is simply not necessary to the successful conduct of business in the United States or overseas. My own experience as Chairman of the Bendix Corp. was that it was not necessary to pay bribes to have a successful export sales program.
Nor is Secretary Blumenthal's experience unique. Former SEC Chairman Hills testified: Indeed, we find in every industry where bribes have been revealed that companies of equal size are proclaiming that they see no need to engage in such practices.
Despite the fact that the payments which this bill would prohibit are made to foreign officials, in many cases the resulting adverse competitive affects are entirely domestic. Former Secretary of Commerce Richardson pointed out that in a number of instances, "payments have been made not to "outcompete" foreign competitors, but rather to gain an edge over other U.S. manufacturers."
Corporate bribery also creates severe foreign policy problems for the United States. The revelation of improper payments invariably tends to embarrass friendly governments, lower the esteem for the United States among the citizens of foreign nations, and lend credence to the suspicions sown by foreign opponents of the United States that American enterprises exert a corrupting influence on the political processes of their nations. For example, in 1976, the Lockheed scandal shook the Government of Japan to its political foundation and gave opponents of close ties between the United States and Japan an effective weapon with which to drive a wedge between the two nations. In another instance, Prince Bernhardt of the Netherlands was forced to resign from his official position as a result of an inquiry into allegations that he received $1 million in pay-offs from Lockheed. In Italy, alleged payments by Lockheed, Exxon, Mobil Oil, and other corporations to officials of the Italian Government eroded public support for that Government and jeopardized U.S. foreign policy, not only with respect to Italy and the Mediterranean area, but with respect to the entire NATO alliance as well.
Finally, a strong antibribery statute would actually help U.S. corporations resist corrupt demands. According to former Gulf Oil Co., Chairman Bob Dorsey: If we could cite our law which says we just may not do it, we would be in a better position to resist these pressures and refuse those requests.
On the Senate side of the Hill in 1977, the problem of improper payments to foreign officials by American corporations was on the agenda of the Committee on Banking, Housing and Urban Affairs. Its final report contained a more concise although no less articulate (and even passionate) description of the need for the legislation. By the way, the working title of the bill, before it became the FCPA, was the "Unlawful Corporate Payments Act of 1977."
Here are the Senate's words:
Recent investigations by the SEC have revealed corrupt foreign payments by over 300 U.S. companies involving hundreds of millions of dollars. These revelations have had severe adverse effects. Foreign governments friendly to the United States in Japan, Italy, and the Netherlands have come under intense pressure from their own people. The image of American democracy abroad has been tarnished. Confidence in the financial integrity of our corporations has been impaired. The efficient functioning of our capital markets has been hampered.
Corporate bribery is bad business. In our free market system it is basic that the sale of products should take place on the basis of price, quality, and service. Corporate bribery is fundamentally destructive of this basic tenet. Corporate bribery of foreign officials takes place primarily to assist corporations in gaining business. Thus foreign corporate bribery affects the very stability of overseas business. Foreign corporate bribes also affect our domestic competitive climate when domestic firms engage in such practices as a substitute for healthy competition for foreign business.
Managements which resort to corporate bribery and the falsification of records to enhance their business reveal a lack of confidence about themselves. Secretary of the Treasury Blumenthal, in appearing before the committee in support of the criminalization of foreign corporate bribery testified that: "Paying bribes - apart from being morally repugnant and illegal in most countries - is simply not necessary for the successful conduct of business here or overseas.''
The committee concurs in Secretary Blumenthal's judgment. Many U.S. firms have taken a strong stand against paying foreign bribes and are still able to compete in international trade. Unfortunately, the reputation and image of all U.S. businessmen has been tarnished by the activities of a sizable number, but by no means a majority of American firms. A strong antibribery law is urgently needed to bring these corrupt practices to a halt and to restore public confidence in the integrity of the American business system.
View House Report No. 95-640 (September 28, 1977 - Ordered to be printed) here.
View Senate Report No. 95-114 (May 2 (legislative day, March 28), 1977 - Ordered to be printed) here.
When the Foreign Corrupt Practices Act became law in 1977, it ignited suspicions outside Washington that the government was planning a clever ambush, like a central-Florida speed trap, intended to catch unsuspecting business people and their lawyers in felonious conduct overseas.
In part to allay those fears, Congress created a procedure by which anyone subject to the FCPA could ask the Justice Department whether it would prosecute proposed conduct under the antibribery provisions, and receive an answer back in 30 days. The opinion shall state whether or not certain specified prospective conduct would, for purposes of the Department of Justice’s present enforcement policy, violate the preceding provisions of this section. (See 15 U.S.C. § 78dd-1(e) [Section 30A of the Securities & Exchange Act of 1934] and § 78dd-2(f); the FCPA can be viewed here.) A DOJ opinion, the law stipulates, creates "a rebuttable presumption" that the conduct in question complies with the FCPA and with the DOJ's current enforcement practices.
The FCPA Opinion Procedure Regulations appear in 28 CFR Part 80. They say, among other things, that a request must come from an issuer or domestic concern, must be in writing and must contain all details of the transaction. "The requesting issuer or domestic concern is under an affirmative obligation to make full and true disclosure with respect to the conduct for which an opinion is requested. . . The person signing the request must certify that it contains a true, correct and complete disclosure with respect to the proposed conduct and the circumstances of the conduct."
Responses from the DOJ are now known as Opinion Procedure Releases. Although not binding on anyone except the requesting parties, and not creating legal precedent in the strict sense for anyone else, Releases are very influential in the world of compliance. The FCPA is seldom litigated, so the Releases are a de facto substitute for judicial interpretation. They don't have the force of law behind them (except as to requestors), but Releases are cited by practitioners and compliance professionals as "official" guidance from the government. We're no exception; we rely on Releases all the time, as evidenced by our many posts citing one or more of them (here).
The first Release to be published, No. 80-01 from October 29, 1980, broke the ice with a touching story. An American law firm asked if it could provide about $10,000 in annual support to two adopted children of a government official in a country where the firm wanted to do business. The official -- whose duties were merely ceremonial -- was elderly and a semi-invalid. How could the DOJ say no? It couldn't, of course, and the two lucky kids presumably enjoyed their FCPA-compliant support in the years that followed.
The DOJ's next Release, No. 80-02, also dated October 29, 1980 (all four Releases from 1980 have the same date), involved a request from Castle & Cooke, Inc. (the folks who turned bananas and pineapples into one of the world's biggest real estate empires). An employee in a foreign country wanted to run for the local legislature. Could he become an elected official and retain his employment? Yes, said the DOJ. One condition being that the employee would "refrain from participation in any legislative matters or other governmental action which would directly affect the corporation, and his salary [would] be based on the amount of time he actually works for the corporation." Castle & Cook also had an opinion of local counsel saying the proposed conduct wouldn't violate local conflict of interest or other laws.
The DOJ's third Release, No. 80-03, limited the scope of all reviews that would follow. The requestor submitted to the Justice Department a proposed contract to retain an attorney in West Africa. The attorney represented that he was not a foreign official and, using language from the FCPA, agreed not to make prohibited payments to foreign officials. The requestor asked no specific questions -- it simply submitted the agreement to the DOJ and waited for a response. No good, said the Justice Department -- an answer that still stands today. "In the absence of any reasonable concern about the application of or possible violation of the [FCPA], review of a proposed contract is not an appropriate function of the Review Procedure. The Criminal Division therefore has declined to respond to this Review Request by stating whether or not it will take an enforcement action."
The DOJ's final Release of maiden year 1980 is No. 80-04. Under the old rules for requests, the names of parties were often revealed. This one talked about a proposed partnership between the Lockheed Corporation and the Olayan Group. Lockheed was well-known in 1980, of course, as an important military contractor but also as one of the companies whose notorious overseas bribery helped spur enactment of the FCPA in the first place. The other party named in the request, the Olayan Group, was then one of the most prominent and respected diversified businesses in Saudi Arabia. Its founder was Suliman S. Olayan (1918 - 2002) , who by 1980 was a legendary businessman in Arabia and the region.
The details of Release No. 80-04-- dealing with Mr. Olayan's representation of Lockheed, notwithstanding his directorship in state-owned airline Saudia -- were far less important than the headline-grabbing presence of Lockheed and Mr. Olayan themselves. Their public appearance helped put the commercial world's stamp of approval on the DOJ's FCPA review procedure, and brought a new level of awareness in 1980 to the importance of the still-new phenomenon of FCPA compliance.