Enforcement action dispositions under the Foreign Corrupt Practices Act (“FCPA”) dropped slightly in 2008, falling from their record high of thirty-eight in 2007 to thirty-four. Despite this small drop, 2008 saw the Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”) hand down the largest FCPA penalty ever imposed against a company, a stunning $800 million in fines, disgorgement, and pre-judgment interest assessed against Siemens, nearly twenty times higher than the largest settlement to date. 2009 is expected to be another active year on the enforcement front, with seven enforcement actions already resolved, including the recent dispositions against the Halliburton Co., Kellogg, Brown & Root LLC, and KBR, Inc., which involved the largest FCPA penalty to date against a U.S.-based company. Mark Mendelsohn, Deputy Chief of the DOJ’s Fraud Section (Criminal Division), recently warned that the public statistics on DOJ prosecutions do not accurately reflect how busy the DOJ has been. He noted that the DOJ has upwards of 100 open matters currently under investigation, along with increased resources that have been allocated to FCPA enforcement. The high level of activity is not likely to be affected by the DOJ’s new leadership under Attorney General Eric Holder and Assistant Attorney General-designate (Criminal Division) Lanny Breuer, or the SEC’s new leadership under the yet-to-be-named successor to SEC Division of Enforcement Director Linda Chatman Thomsen, who resigned on February 9, 2009.
Enforcement in 2008 was marked by a number of developments and trends that offer a glimpse of what corporations and individuals should expect on the enforcement front in 2009:
- Industry-Wide Investigations: In recent years, U.S. enforcement authorities have undertaken several industry-wide investigations that will likely be the subject of numerous enforcement actions in 2009. Scores of companies currently remain under investigation for alleged corruption relating to the U.N. Oil for Food Program, the use of global freight forwarder Panalpina, and the sale of medical devices to hospitals and healthcare professionals abroad. In addition to these existing industry-wide investigations, Mr. Mendelsohn indicated at a conference in November 2008, that the financial sector may become the subject of increased DOJ attention in the future.
- Substantial Fines: This fall, Scott Friestad, a Deputy Director with the SEC’s Division of Enforcement, revealed that the SEC was preparing to bring several “very, very large” FCPA cases that would “dwarf ” those previously filed, noting that this was “an ongoing trend.” Joan McKown, Chief Counsel with the SEC’s Division of Enforcement, also recently promised that the penalties associated with some of the enforcement actions we will see this coming year would “take your breath away.” These comments likely refer, in part, to the $800 million combined penalty handed down in the Siemens settlement in December. But it is already apparent that Siemens is just the first of a number of extraordinarily large enforcement actions that are likely to be resolved in 2009. As noted earlier, Halliburton, Kellogg, Brown & Root LLC, and KBR, Inc., entered into a large settlement with the SEC and DOJ on February 11, 2009, that will impose a combined $579 million penalty against the companies. And the Swiss engineering firm ABB revealed in December that it was setting aside $850 million to cover the potential costs of enforcement actions in the United States for alleged bribery and the European Union for alleged anticompetitive practices.
- Increased Enforcement Against Individuals: While the prosecution of corporations by U.S. enforcement authorities dropped in 2008, the prosecution of individuals increased. The DOJ and SEC resolved twelve actions against individuals in 2008, while bringing as-yet-unresolved charges against nine others, a marked increase over the thirteen individuals who were prosecuted or charged in 2007. We expect to see a continued emphasis on the prosecution of individuals in 2009, with charges likely to be brought against a number of high-profile executives, including, according to press accounts, former members of Siemens’s governing board.
- Decrease in Non-Prosecution Agreements: The number of corporate non-prosecution agreements resolving FCPA violations decreased from a high of seven in 2007, to two in 2008, while the number of deferred prosecution agreements increased slightly from four to five over the same time period. In context, the number of corporations pleading guilty to FCPA violations increased from two in 2007, to seven in 2008. Along with the increase in individual enforcement, this suggests that the DOJ may be increasingly less willing to settle for non-prosecution agreements, instead preferring to focus on the prosecution (deferred or otherwise) of both corporations and individuals.
- FCPA Cases Brought To Trial: The criminal prosecution of several individuals who appear to be ready to fight FCPA allegations in court proceeded in 2008. Charges under the FCPA are not frequently brought to trial, but several cases, including Frederic Bourke, Jr. (indicted in 2005), William Jefferson (indicted in 2007), Leo Winston Smith (indicted in 2007), and Gerald and Patricia Green (indicted in 2008) are scheduled for trial in 2009. These cases, if they proceed to trial, could ultimately help to test the contours of the FCPA and provide case law precedents for those charged with FCPA violations in the future.
- Increased International Enforcement: There appeared to be a significant rise in international enforcement in 2008. Although heavily criticized this past year for what many consider to be its historically weak anticorruption efforts, the United Kingdom notably prosecuted its first case involving foreign bribery in August 2008, and followed up on this landmark enforcement action by prosecuting several more cases through the end of the year. As part of this effort, the United Kingdom instituted a U.S.-style plea bargaining system for corporations, and imposed a £5.25 million fine on the insurance company Aon, marking the country’s largest penalty to date. Simultaneous with U.S. authorities, Germany imposed another record fine on Siemens, and, despite its settlements with U.S. and German authorities, Siemens remains under investigation in a number of other countries. Switzerland, France and Brazil all continue their probes into the engineering giant Alstrom. The World Bank blacklisted a number of prominent IT firms in India on the basis of alleged corruption, sparking several high-profile investigations. And Bangladesh, China, Finland, India, Israel, Japan, Mexico, Nigeria, Norway, and Taiwan, among others, all pursued noteworthy enforcement actions against foreign bribery this past year. Given the emphasis that has been placed on anticorruption by the United States, the OECD, and others, it is likely that this surge in enforcement will continue. This progress notwithstanding, Transparency International’s Bribe Payers Index still found “supply-side” corruption to be rampant, particularly among companies in emerging powers such as China, India and Russia, which are perceived to “routinely engage in bribery when doing business abroad.”
- International Cooperation: In his remarks at the annual ACI Conference in November 2008, Mr. Mendelsohn called 2008 “the year of international coordination in enforcement,” noting that there were twenty three multi-jurisdictional cases in which the DOJ coordinated with foreign regulators. Most notably, U.S. authorities, on the basis of the mutual legal assistance provisions of the OECD antibribery convention, collaborated extensively with German authorities in prosecuting Siemens, including sharing information and evidence. Siemens’s DOJ sentencing memorandum states that the case “set a standard going forward for the type of multinational cooperation that can greatly enhance worldwide law enforcement efforts involving corruption of foreign officials.” Several countries, including Nigeria, Bangladesh, and India, specifically requested assistance from U.S. enforcement authorities in 2008, as part of their respective efforts to prosecute allegations of foreign bribery in their own countries. Press accounts have detailed additional reports of international cooperation among numerous countries on the Alstrom, Siemens, and BAE investigations. This sort of cooperation may advance discussion of and agreements as to which jurisdiction may appropriately prosecute the parties involved, although current information suggests that companies in 2009 will continue to face prosecutions in multiple jurisdictions for alleged acts of foreign bribery.
- The New Charging Guidelines: It still is not completely clear how the revised corporate charging guidelines for federal prosecutors introduced in August 2008, will work in practice since only three corporations (along with several subsidiaries) have resolved enforcement actions since their introduction, and each of these actions was at the tail end of the settlement process. 2009 should provide a better sense of how the revised guidance will affect corporations, attorney-client privilege and work product protection during the investigative process. In 2008, there was only one FCPA enforcement action, Willbros, in which the DOJ explicitly sought a privilege waiver; this represents a significant decline from previous years. Notably, newly confirmed Attorney General Eric Holder, who authored the original guidance on indicting corporations in 1999, will be in charge of the DOJ as it seeks to implement this revised guidance.
- Private Collateral Litigation: In 2008, there was a dramatic spike in civil litigation that implicated the FCPA. Although historically rare, a number of civil suits alleging foreign corruption were brought in 2008, most alleging FCPA violations as part of a larger RICO claim. Nearly all of these cases, which include Grynberg v. BP, Alba v. Alcoa, Argo v. Yamada, Iraq v. Oil for Food, and Supreme Fuels Trading FZE v. Henry Sargeant III, are ongoing and will proceed in 2009. Given the significant rise in FCPA prosecutions over the past several years and the high stakes for the companies and shareholders affected, it is likely that collateral civil litigation involving the FCPA will only continue to become more commonplace.
Actions Against Corporations
A. Halliburton and KBR
On February 11, 2009, KBR, Inc., its subsidiary Kellogg, Brown & Root, LLC (unless otherwise noted, all KBR, Inc.’s predecessors and subsidiaries are referred to as “KBR”), and KBR’s former parent Halliburton Co. (“Halliburton”), settled charges of FCPA violations with the DOJ and SEC. The charges stem from alleged payments KBR’s predecessor company made between 1994 and 2004 in connection with contracts to build and expand a natural gas liquefaction plant on Bonny Island, Nigeria.
According to the U.S. Government documents, in 1991, KBR’s predecessor, Dresser Industries, became a part of a four-company consortium, TSKJ. Dresser, as well as a Japanese company, a French company and a Dutch company, each owned a 25% share of TSKJ. TSKJ, which was registered in Madeira, Portugal, was formed to participate in bidding on the Bonny Island project contracts with Nigeria LNG Ltd. (NLNG), a company controlled and partially owned by the Nigerian Government. Halliburton purchased Dresser in 1998, and merged Dresser’s construction subsidiary, Kellogg, with its own construction subsidiary, Brown and Root. The resulting entity, KBR, became the successor in interest to Dresser’s share in TSKJ.
The SEC alleged that from its inception, TSKJ considered bribes to be a strategic method of winning the Bonny Island project contracts. According to U.S. Government filings, TSKJ employees formed a “cultural committee” to discuss and implement the clandestine bribery scheme. TSKJ eventually set up three shell companies, also based in Madeira, Portugal, and used them to funnel payments to Nigerian officials through two agents, with whom TSKJ entered into sham “consulting” and “services” agreements. One of these intermediaries, to which the SEC refers as “U.K. Agent,” a Gibraltar corporation controlled by a U.K. citizen, transmitted money to high-ranking Nigerian officials. The other intermediary, a global Japanese trading company, referred to by the SEC as a “Japanese Agent,” passed on payments to lower-level Nigerian officials. Eventually, according to the U.S. Government filings, over $130 million was paid to the U.K. Agent, and over $50 million was paid to the Japanese Agent. The agencies allege that most of these funds were passed on to Nigerian government officials, in U.S. Dollar- and Nigerian Naira-denominated payments. The DOJ describes various mechanisms used to deliver the money, from wire transfers to suitcases full of $100 bills and cars filled with Nigerian currency. In exchange for the payments, TSKJ allegedly received contracts worth over $6 billion for construction and expansion of the Bonny Island project.
According to the SEC, Halliburton did not effectively apply its system of internal controls to KBR’s conduct. Since the companies’ merger in 1998, Halliburton controlled and supervised KBR, specifically by placing its senior officials on KBR’s board of directors and managing key aspects of KBR’s performance. The SEC documents state that Halliburton was allegedly aware of TSKJ’s use of the U.K. Agent. Halliburton’s attorneys conducted due diligence on the U.K. Agent, but the SEC stated that the investigation was not sufficient. Halliburton did not conduct any due diligence review of the Japanese Agent. Halliburton reported KBR’s profits as its own to its investors, and recorded alleged bribes on its books as “consulting” or “services” fees.
On February 6, 2009, the DOJ filed a criminal information charging KBR with one count of conspiracy to violate anti-bribery provisions of the FCPA, and with four counts of substantive FCPA anti-bribery violations. The DOJ did not file a formal criminal charge against Halliburton but entered into a Non-Prosecution Agreement (“NPA”) with Halliburton. On the civil enforcement side, the SEC alleged that KBR violated the anti-bribery, record-keeping, and internal controls provisions of the FCPA, and aided and abetted Halliburton to violate the record-keeping and internal controls provisions of the statute. The SEC’s allegations against Halliburton included record-keeping and internal controls violations.
KBR pleaded guilty to DOJ’s charges; both KBR and Halliburton consented to entry of the final order with the SEC without admitting or denying the allegations. KBR agreed to pay a criminal fine of $402 million to the DOJ and to disgorge $177 million in tainted gains to the SEC, for a total of $579 million in monetary penalties.
In 2007, Halliburton spun off KBR into an independent company. According to Halliburton’s press release, in order to make the separation financially viable, Halliburton agreed to indemnify KBR from monetary penalties imposed by the United States and some foreign governments for violations of the FCPA and similar foreign statutes in connection with pending investigations. Halliburton announced that pursuant to this indemnity agreement, it will pay $382 million of KBR’s fine to the DOJ and will pay the full $177 million disgorgement to the SEC. In return, KBR will release Halliburton from further indemnity obligations. KBR will be responsible for the remaining $20 million in criminal fines. Both companies announced in their press releases that they will make the respective portions of the criminal fine to the DOJ in eight quarterly installments over the next two years.
Pursuant to the terms of the SEC final order and the plea agreement, KBR will appoint an independent monitor for three years. The SEC final order also requires that Halliburton appoint an independent consultant. The SEC final order also enjoins Halliburton and KBR from committing future FCPA violations.
Noteworthy Aspects of Halliburton and KBR Settlements:
- Record Fine: The combined monetary penalty of $579 million assessed against KBR and Halliburton is a record FCPA fine against a U.S. company. Of all FCPA enforcement actions to date, the KBR penalty is second only to the recent $800 million penalty against Siemens AG, a German conglomerate, and its subsidiaries. Although FCPA penalties have been increasing over the past several years, the levels of the KBR/Halliburton and Siemens fines likely reflect the systematic nature of alleged violations in both cases rather than new benchmark levels for FCPA fines.
- Independent Monitor and Independent Consultant: Halliburton’s NPA does not require Halliburton to retain a monitor. Per terms of the settlement with the SEC, Halliburton is required to engage an independent consultant to perform an assessment of the company’s internal controls and record-keeping policies. The initial 60-day assessment will be followed up by another 30-day review approximately a year later. On the other hand, both the DOJ and SEC require KBR to retain an independent monitor for a term of three years. Court documents do not cite explicit reasons for the different monitoring sanctions.
- KBR’s Alleged Attempted to Avoid FCPA Applicability: The DOJ faulted KBR for efforts to avoid FCPA liability. In particular, the DOJ noted that KBR intentionally “avoided placing U.S. citizens on the board of managers” of a shell company in Portugal as a part of its “intentional effort to insulate itself from FCPA liability.”
- International Enforcement and Cooperation: As another example of growing international anti-bribery enforcement, the Bonny Island project payments are being investigated in a number of countries, including France, Nigeria, Switzerland, and the United Kingdom. According to Halliburton’s second quarter 2008 10-Q SEC filing, the company’s representatives had met with French and Nigerian investigating officials, presumably for cooperation in the investigations in those countries. Commenting on the resolution of the cases on February 11, U.S. enforcement officials referred to cooperation not only among U.S. enforcement agencies, but also with authorities across borders.
- Stanley’s Guilty Plea: The investigation of Halliburton and KBR was linked to the September 2008 guilty plea by former KBR CEO Jack “Albert” Stanley. As described in our Autumn 2008 FCPA Review, Mr. Stanley was fired from KBR in June 2004 for Code of Business Conduct violations and receiving kickbacks from the agents. In his plea agreement, Mr. Stanley agreed to cooperate with the government’s on-going investigations. Mr. Stanley’s name prominently features in the description of TSKJ’s bribery scheme in both SEC and DOJ’s cases against Halliburton and KBR. Mr. Stanley’s sentencing is scheduled for May 6, 2009.
On February 11, 2009, ITT Corp. (“ITT”), a U.S. engineering and manufacturing company with global operations, settled charges with the SEC relating to alleged violations of books and records and internal controls provisions of the FCPA in China from 2001 through 2005. Without admitting or denying the charges, ITT consented to the entry of a final judgment permanently enjoining it from future FCPA violations and agreed to pay a $1.55 million penalty, which included a $250,000 civil fine along with over $1.4 million in disgorgement and prejudgment interest.
The SEC complaint alleges that Nanjing Goulds Pumps Ltd. (“NGP”), a wholly owned subsidiary of ITT, made illicit payments of approximately $200,000 to the employees of numerous Chinese state-owned entities to influence the entities to purchase NGP water pumps for use in power plants and large construction and infrastructure projects. As a result of these illicit payments, the SEC claims NGP sold more the $4 million worth of industrial water pumps and realized a profit of more than $1 million from these sales.
According to the SEC complaint, NGP made both direct and indirect payments to these foreign officials, channeling some of the bribes through third-party agents via inflated commissions and disguising direct payments by employees as increased commissions on its books and records, which were subsequently incorporated into the financial statements ITT filed with the SEC over the relevant period.
On the basis of these payments and erroneous filings, the SEC claimed that ITT had failed to accurately maintain its books and records and devise an adequate system of internal controls, alleging that the company failed to provide reasonable assurances that its transactions were authorized by management, properly recorded, and only those with authorization had access to company assets. The SEC noted that its settlement reflected ITT’s voluntary self-disclosure, its cooperation with the SEC throughout the investigation, and its subsequent remedial measures. ITT also disclosed these issues to the DOJ, but it is unclear whether enforcement authorities at the agency intend to take action on this matter.
As reported in our December 2008 FCPA Alert, the German engineering firm Siemens Aktiengesellschaft (“Siemens”) settled a landmark FCPA matter on December 15, 2008, resolving numerous FCPA violations with the DOJ and SEC for a record $800 million in combined penalties. Siemens pleaded guilty to violating the FCPA’s internal controls and books and records provisions through a pervasive pattern of widespread bribery that totaled nearly $1.4 billion in illicit payments, while three of its subsidiaries pleaded guilty to conspiring to violate the FCPA as part of this pattern. Including those imposed by German authorities, Siemens has now incurred over $1.6 billion in total penalties.
Since the settlement, a German newspaper reported that company officials are optimistic that Siemens would receive an insurance payout of over $330 million from an insurance consortium led by Allianz SE for damages caused by senior company officials. Siemens reportedly took the policy out years ago to cover actions committed by top executives and supervisory board members and is seeking to use it to cover some of the billions of dollars in costs it incurred as a result of the recent bribery scandal.
According to press accounts, U.S. and German authorities are continuing to investigate individuals in connection with the Siemens case. To date, several former Siemens employees have been prosecuted for their involvement in the scandal, including a former Siemens management board member, Johannes Feldmayer, who in November 2008 was given a two-year suspended sentence and a $37,000 fine by German authorities for bribing the former head of a German trade union between 2001 and 2006. This sentencing closely followed that of two other former Siemens executives, who were found guilty in German courts of being accessories to misappropriation and corruption in various countries. In addition to U.S. and German enforcement efforts, Siemens continues to face charges and investigations stemming from the bribery scandal in a number of other countries.
On December 22, 2008, Fiat S.p.A. (“Fiat”), an automotive-focused industrial group incorporated in Italy, settled charges with the DOJ and SEC relating to violations of FCPA accounting and internal controls provisions committed by Fiat subsidiaries during their participation in the U.N. Oil for Food Program. Fiat settled the charges by agreeing to pay a $7 million fine as part of a DPA with the DOJ and, to settle a complaint filed by the SEC, consenting to the entry of a final judgment by the SEC permanently enjoining Fiat from future FCPA violations and ordering Fiat to pay over $10 million in disgorgement, pre-judgment interest, and a civil fine. At the time the questionable payments were made, Fiat had ADRs publicly traded on the New York Stock Exchange, thus qualifying Fiat as an “issuer’ for purposes of the FCPA. In August 2007, Fiat delisted its shares and applied to terminate its registration with the SEC.
Fiat is the latest company to be prosecuted by the DOJ and SEC in their ongoing investigation into the U.N. Oil for Food Program (please refer to our Autumn 2007 FCPA Review, Winter 2008 FCPA Review, and Spring 2008 FCPA Review for more information on past Oil for Food prosecutions). The U.N. established the Oil for Food Program to enable Iraq to sell a certain amount of oil for humanitarian purposes to alleviate the effects of international trade sanctions. To ensure that the money went towards intended purposes, the oil proceeds were deposited in a U.N. escrow account, from which the funds could only be withdrawn for contracts approved by the U.N. The Iraqi government devised a scheme to appropriate a portion of these funds. Under the scheme, in order to obtain a contract for the sale of humanitarian goods, the companies were typically required to pay the government 10% of the proposed contract. According to complaints in past investigations, the companies that were subject to prosecution disguised these kickbacks in the documents submitted to the U.N. for approval and on their books and records. In all, over $1 billion designated for humanitarian purchases was diverted to the Iraqi government. In addition to causing the direct diversion of funds from the program, the corruption is also estimated to have deprived the Iraqi people of nearly $9 billion in humanitarian goods. The scheme was uncovered following discovery of some key documents during the U.S. invasion of Iraq, and has since been described as the largest financial fraud in human history.
The DOJ filed criminal against three Fiat subsidiaries, Iveco S.p.A. (“Iveco”), CNH Italia S.p.A. (“CNH Italia”), and CNH France S.A. (“CNH France”). The DOJ charged Iveco and CNH Italia with conspiring to commit wire fraud and to violate the books and records provisions of the FCPA. CNH France was charged with conspiracy to commit wire fraud. According to the DPA and criminal informations, between 2000 and 2002, the subsidiaries paid a total of approximately $4.4 million to the Iraqi government in order to obtain contracts to provide trucks, tractors, and other equipment. The subsidiaries allegedly made the improper payments to the Iraqi government by inflating the price of contracts by 10 percent before submitting the contracts to the U.N. for approval, concealing the kickbacks from the U.N., and inaccurately recording the payments as “commissions” and “service fees” for agents in the subsidiaries’ books and records. Under the DPA, Fiat accepted responsibility for the acts of its subsidiaries and agreed to pay a $7 million fine. Fiat and its subsidiaries also agreed to cooperate in future investigations regarding corrupt payments, false books and records, and inadequate internal controls, and to maintain compliance and ethics programs designed to detect and prevent FCPA violations. If Fiat and its subsidiaries adhere to the terms of the DPA for three years, the DOJ will dismiss the informations. The DOJ, in agreeing to defer its prosecution, recognized Fiat’s internal investigation that was conducted by outside legal counsel, and the cooperation of Fiat and its subsidiaries with the DOJ’s investigation.
In the SEC’s related action, the SEC filed FCPA books and records and internal controls charges against Fiat and another of its subsidiaries, CNH Global N.V. (“CNH Global”). According to the SEC complaint, Fiat’s subsidiary Iveco allegedly paid kickbacks to the Iraqi government on sales of commercial vehicles and parts. Initially, Iveco allegedly used an agent in making over $1.8 million in kickback payments, and falsely recorded the payments as legitimate commissions. Later, Iveco allegedly converted the agent to a distributor, which purchased goods from Iveco, sold the goods to the government of Iraq, submitted inflated contracts to the U.N., and made over $1.3 million in kickback payments to the government of Iraq. The SEC complaint also alleged that a CNH Global subsidiary, Case France, made over $187,000 in kickback payments on the sale of construction equipment, and another CNH Global subsidiary, New Holland, paid over $447,000 in kickbacks on the sale of tractors. Similar to Iveco’s alleged practices, New Holland allegedly used a distributor to distance itself from the kickback payments. Based on the actions of their subsidiaries, the SEC charged Fiat and CNH Global with failing to maintain adequate systems of internal controls and failing properly to record the nature of the kickback payments. Without admitting or denying the allegations, Fiat and CNH Global consented to the entry of a final judgment permanently enjoining them from future FCPA violations and ordering Fiat to pay over $7 million in disgorgement and pre-judgment interest, and a civil penalty of $3.6 million. In reaching this settlement agreement, the SEC considered the remedial acts promptly undertaken by Fiat and CNH Global and the cooperation they afforded the SEC in its investigation.
E. Aibel Group
On November 21, 2008, Aibel Group Ltd. (“Aibel”), a U.K. corporation, pleaded guilty to a two-count superseding information charging a conspiracy to violate the FCPA’s anti-bribery provisions and a violation of the FCPA’s anti-bribery provisions, and admitted that it had breached a DPA it had entered into with the DOJ in 2007 regarding the same underlying conduct. The DPA required Aibel to establish a Compliance Committee, engage outside compliance counsel, and establish and effectively implement an FCPA compliance program. Although the plea agreement recognizes Aibel’s commitment of substantial time, personnel, and resources to compliance, it nevertheless concludes that Aibel failed to meet its obligations under the DPA. The plea agreement does not give any details regarding Aibel’s breach of the DPA.
The facts underlying this enforcement action are the same as those set forth in the original DPA. According to that document, in 2001, Aibel began providing engineering and procurement services, as well as subsea construction equipment, to Nigeria’s first deepwater oil drilling operation, known as the Bonga Project. Between 2002 and 2005, Aibel participated in a scheme to make at least 387 corrupt payments totaling approximately $2.1 million to Nigerian customs service officials in exchange for preferential treatment during the customs process. Aibel coordinated these payments through an affiliated company’s U.S. offices, and the payments were paid through an international freight forwarding and customs clearance company. Specifically, the freight forwarding and customs clearance company provided services such as an express air courier service, “interventions” and “evacuations” to get Aibel’s goods through customs when (1) goods and equipment were improperly or illegally imported into Nigeria, (2) documentation for imported goods were not in order, (3) there were delays in clearing goods and equipment through the lawful customs process due to the failure to post bonds with sufficient funds to cover duties and tariffs, or (4) infractions of Nigerian customs laws were committed by, or on behalf of, Aibel. The total estimated value of the benefit received by Aibel and its co-conspirators was $10,500,000.
Under the plea agreement, Aibel must pay a $4.2 million criminal fine and serve a two year term of organizational probation that requires, among other things, that Aibel submit periodic reports regarding its progress in implementing anti-bribery compliance measures.
Entities affiliated with Aibel have similarly pleaded guilty to violating the FCPA. Vetco Gray Controls Inc., Vetco Gray Controls Ltd., Vetco Gray UK Ltd., and Aibel were all wholly owned subsidiaries of Vetco International Ltd., a U.K. corporation. Vetco Gray Controls Inc. and Vetco Gray UK Ltd. pleaded guilty to violating the FCPA in 2004. In 2007, Vetco Gray Controls Inc., Vetco Gray Controls Ltd., and Vetco Gray UK Ltd. pleaded guilty to violations of the anti-bribery provisions of the FCPA, agreeing to a collective fine of $26 million. At that time, Aibel avoided a fine and entered into the DPA that it now admits breaching.
Actions Against Individuals
A. Frederic Bourke Jr. and Viktor Kozeny Litigation Developments
1. Ruling in Bourke Hearing Narrows Local Law Defense Under the FCPA
On October 21, 2008, the United States District Court for the Southern District of New York issued a decision in the matter of U.S. v. Kozeny, et. al. As reported in our Autumn 2008 FCPA Review, the matter related to a privatization scheme for the state oil company of Azerbaijan, SOCAR. The program gave the Azeri President, Heydar Aliyev, sole authority over whether and when to privatize SOCAR. According to the U.S. Government, Bourke, Viktor Kozeny and certain others made payments to Azeri officials in order to promote the privatization and gain access to the program. In his defense, Bourke asserted that the payments in question were permissible under the FCPA’s local law defense because they were the product of extortion, which relieved him of criminal liability in Azerbaijan.
To address Bourke’s argument, the court held a hearing as to the legality of such payments under the Azeri legal system. The court relied on the Government expert’s translation of Articles 170 and 171 of the Azerbaijan Criminal Code; Article 170 prohibited the payment of a bribe “in any form whatsoever,” while Article 171 stated that “a person who has given a bribe shall be relieved from criminal responsibility if extortion of the bribe occurred with respect to him or if this person after giving the bribe voluntarily stated what happened.” Bourke alleged that his actions were “lawful,” and that he therefore could avail himself of the FCPA’s affirmative defense, because he was “relieved” of responsibility after reporting the payments to the President of Azerbaijan.
In response to Bourke’s claims, the court noted that the initial payment of the bribe was “certainly not lawful” under local Azeri law. The court then held that the FCPA’s affirmative defense is not available to persons who “could not have been prosecuted in a foreign country due to a technicality . . . or because a provision in the foreign law ‘relieves’ a person of criminal responsibility.” The court then independently determined that Bourke could raise a separate extortion defense at trial. The court noted that the “extortion” defense was identified in the legislative history of the FCPA, but that it was only available in cases of “true extortion,” such as where a “payment is made to an official to keep an oil rig from being dynamited.” The court noted that in cases of “true extortion,” the payor would lack the corrupt intent to give a bribe.
The decision in this matter narrowly limits the FCPA’s local law defense to situations in which a bribe payment itself is legally permissible under the applicable written laws, regardless of whether the bribe-giver may avoid criminal prosecution for making the payment.
2. Former U.S. Officials Agree to Testify Against Bourke and Kozeny
On November 24, 2008, the court made public certain affidavits in the case against Bourke and Kozeny, which revealed that two former U.S. officials have agreed to testify in exchange for U.S. authorities’ agreement not to prosecute them. Christine Rastas, a former Defense Department intelligence analyst who later worked in various capacities for Kozeny, and John Pulley, a former agent of the Drug Enforcement Administration who later worked as Kozeny’s personal assistant and head of security, alleged that Kozeny paid bribes to Azeri officials with the objective of gaining an interest in SOCAR. Among Rastas’s allegations, she said that Kozeny told an Egyptian businessman during a dinner meeting in Moscow that “the Azeri government would do what Kozeny wanted because he was paying the President of Azerbaijan.” Rastas further alleged that Kozeny used a system of family trusts to conceal the distribution of money to Azeri officials. Additionally, Kozeny allegedly paid for lavish expenses incurred by an Azeri official while in the United States for medical treatment in 1998. Specifically, Kozeny allegedly paid for Barat Nuriyev, the Deputy Chairman of the Azeri agency responsible for the privatization of SOCAR, to fly to New York page 12 and see a physician. Kozeny also allegedly paid for Nuriyev’s hotel accommodations, limousine transportation, clothing purchases, and meals.
Pulley alleged that Kozeny purchased SOCAR privatization vouchers in cash through various intermediaries, and purchased blocks of vouchers from a relative of Nuriyev. To compensate Azeri officials for helping him secure an interest in SOCAR, Kozeny allegedly set up Swiss bank accounts for Nuriyev, members of Nuriyev’s family, and another Azeri official, Nadir Nasibov. Similar to the expenses Kozeny covered for Nuriyev, Kozeny paid for Nasibov to fly to New York and to receive medical services, and to travel onward to London on the Concorde.
In exchange for the promise of the U.S. Attorney’s Office not to prosecute them, Rastas and Pulley have agreed to cooperate fully with the U.S. Attorney’s Office and the Federal Bureau of Investigation in their investigation into this matter, and to testify truthfully at trial.
B. William Jefferson Loses Appeal
On November 12, 2008, the U.S. Court of Appeals for the Fourth Circuit denied Congressman William Jefferson’s motion to dismiss most counts of a pending indictment in which he had been charged with an FCPA anti-bribery violation, racketeering, soliciting bribes and money-laundering in a long-running investigation into business deals he attempted to broker in Nigeria and elsewhere in Africa. As reported in our Autumn 2007 FCPA Review, Jefferson, a former member of the U.S. House of Representatives representing Louisiana, allegedly solicited and received bribes from various persons and business entities. In exchange, he promoted their products and services to government officials in Africa, and allegedly participated in the bribery of a Nigerian government official. In this appeal, Jefferson argued that the grand jury based its decision to indict him on improper evidence of his legislative acts, which are privileged under the U.S. Constitution. In particular, Jefferson was concerned that the grand jury had considered evidence from Brett Pfeffer, a former Jefferson staffer who had pleaded guilty to related charges and was cooperating with the prosecution. The court, however, rejected Jefferson’s arguments and refused to dismiss the indictment, noting that federal courts have consistently accorded a grand jury “wide latitude” to inquire into violations of criminal law. On December 7, 2008, Jefferson lost his bid for re-election. Currently, Jefferson is awaiting a Supreme Court ruling on his plea to dismiss most counts of the indictment. Jefferson is also currently attempting to secure the depositions of three Nigerian witnesses. While the trial court refused to authorize the deposition of the witnesses at this time, it has offered to provide Jefferson with judicial assistance in determining whether the witnesses will provide material testimony if deposed. Additionally, in recent months, media sources have uncovered a link between the Jefferson case and the Siemens bribery scandal. Specifically, Jennifer Abubakar, the wife of former Nigerian Vice President Atiku Abubakar, was named as an unindicted co-conspirator in the Jefferson case and also matches the description of an unnamed co-conspirator in the SEC complaint against Siemens. Siemens also had a three-year contract with a Kentucky company that paid bribes in exchange for Jefferson’s services. Jefferson’s trial is scheduled to take place on May 26, 2009
C. Mario Covino and Richard Morlok Plead Guilty
On January 8, 2009, Mario Covino, a former executive of Control Components Inc. (“CCI”), an Orange County, California-based company that designs and manufactures service control valves for power generation, entered into an agreement with the DOJ and pleaded guilty to conspiring to violate the FCPA, as part of an effort to obtain and retain contracts for the valve company from state-owned companies in countries including Brazil, China, India, Korea, Malaysia, and the United Arab Emirates.
On February 3, 2009, the DOJ revealed that Richard Morlok, a former executive of the same Orange County valve company, had pleaded guilty to conspiring to violate the FCPA, as part of an effort to obtain and retain contracts for the valve company from state-owned companies in countries including China, Korea, Romania, and Saudi Arabia. A sentencing date of July 20, 2009, has been set for both defendants. Covino and Morlok each face a maximum of five years imprisonment and may be required to pay restitution to the victims of the offense.
As part of the pleas, both defendants are enjoined from committing any crime and agree to cooperate with the DOJ’s ongoing investigation.
Covino had been the Director of Worldwide Factory Sales for CCI from about March 2003 to about 2007, where he was responsible for oversight of new construction projects and replacement of existing valves at customers’ power plants in more than thirty countries. Morlok had been the Finance Director from approximately 2002 to 2007, where he oversaw the Finance Department and was responsible for approving commission payments and signing off on wire transfers.
According to the plea agreements, the illicit payments occurred from approximately 2003 to 2007. During that time, Covino directed employees and agents of CCI to make an estimated $1 million in illicit payments to foreign officials employed at state-owned companies in order to secure or retain contracts, and Morlok directed employees and agents of CCI to make an estimated $628,000 in illicit payments for the same purpose. The illicit payments were disguised as commissions to employees of state-owned companies, individuals with the power to award contracts or influence the technical specifications of an order in a manner that would favor CCI. The plea agreements note that as a result of contracts obtained thorough the illicit payments, CCI earned substantial profits: approximately $5 million through Covino’s involvement and approximately $3.5 million through Morlok’s involvement. Both Covino and Morlok admitted to providing false and misleading responses during a 2004 internal audit of CCI’s commission payments conducted by CCI’s parent company, IMI plc. Covino also admitted to deleting emails that referred to illicit payments and instructing others to do the same, for the purpose of obstructing the internal audit. In addition, Morlok admitted to providing false and misleading responses during a 2004 external audit of CCI’s commission payments. The misleading statements that Covino and Morlok made during the internal audit and that Morlok also made during the external audit were listed in the charging documents as overt acts in furtherance of the conspiracy to violate the FCPA. Thus, FCPA liability attached to Covino and Morlok’s actions even in an internal investigation setting.
According to a recent news report, South Korea’s state-owned nuclear power company, Korea Hydro & Nuclear Power Co. (KHNR) started an internal investigation after Morlok’s plea became public. KHNR reportedly plans to ask the public prosecutor’s office to open an investigation into whether any of KHNR’s employees accepted illicit payments from CCI. Morlok’s plea included responsibility for illicit payments made to KHNR.
D. Virginia Physicist Pleads Guilty
On November 17, 2008, the DOJ announced the guilty plea of Shu Quan-Sheng, a physicist from Newport News, Virginia, to charges of offering bribes to Chinese officials in violation of the FCPA. Shu also pleaded guilty to export controls violations for illegally exporting space launch technical data and defense services to China. Shu is a naturalized U.S. citizen and serves as President, Secretary, and Treasurer of AMAC International Inc., (“AMAC”), a high-tech company based in Newport News with offices in Beijing. As such, Shu was considered to be a “domestic concern,” and an officer of a “domestic concern,” as those terms are defined in the FCPA. According to the plea agreement, Shu was also considered to be an agent of an “issuer,” as that term is defined in the FCPA, because at the time of the illicit payments he represented an unnamed French company that qualified as an “issuer.” As reported in our 2008 Autumn Review, Shu was arrested on September 24, 2008, on related charges.
Shu pleaded guilty to a three-count criminal information, charging him with one count of violating the anti-bribery provisions of the FCPA, and two counts of violating the Arms Export Control Act. According to the FCPA charge, Shu, on behalf of himself, AMAC, and the unnamed French company, paid bribes to Chinese government officials in the 101st Institute, a state-owned research institution, to secure a $4 million contract for the development of a liquid hydrogen tank system. Specifically, between February and May 2006, Shu secured the contract for the French company he represented by giving over $189,000 worth of “Percentage Points” to three 101st Institute officials. Both Shu and AMAC received commissions after the 101st Institute awarded the contract to the French company.
According to the Arms Export Control Act charges, between 2003 and 2007, Shu furnished assistance in the design and development of a cryogenic fueling system for space launch vehicles to be used at a launch facility in the southern island province of Hainan, China, without the required export license. In 2003, Shu allegedly exported to China controlled military technical data contained in a document regarding a liquid hydrogen tank and other equipment, without the required export license.
Shu’s sentencing is scheduled for April 6, 2009, and he faces possible penalties of up to ten years of imprisonment and $2 million in fines for the export controls violations. For the FCPA violations, Shu faces up to five years imprisonment and a fine of $250,000 or twice the amount of the gains from the offence. The criminal information also requires the forfeiture of various personal assets belonging to Shu.
E. James K. Tillery and Paul G. Novak Charged in Willbros Bribery Conspiracy
On December 19, 2008, the DOJ announced that James K. Tillery, a former executive of Willbros International Inc. (“WII”), and Paul G. Novak, a former consultant to WII, had been indicted in connection with a conspiracy to make more than $6 million in corrupt payments to Nigerian and Ecuadorian government officials in connection with oil and gas pipeline construction projects. Specifically, Tillery and Novak were charged with one count of conspiring to violate FCPA anti-bribery provisions, two counts of violating FCPA anti-bribery provisions, and one count of conspiring to commit money laundering.
This is the fifth FCPA enforcement action in connection with the activities of WII and its parent company, Willbros Group, Inc. (“Willbros”). Willbros and WII are Panamanian energy services providers headquartered in Texas. As reported in our Autumn 2007 Review, Winter 2008 FCPA Review, and Spring 2008 FCPA Review, WII, Willbros and several WII executives have been the subject of ongoing investigations and FCPA enforcement actions. In 2005, Willbros conducted an internal investigation into possible FCPA violations by Tillery and disclosed its findings to the DOJ and SEC. In 2006 and 2007, WII executives Jim Bob Brown and Jason Edward Steph pleaded guilty to bribing Nigerian Government officials. On May 15, 2008, Willbros and WII settled FCPA charges with the DOJ and SEC, agreeing to pay a $22 million criminal penalty in connection with corrupt payments to Nigerian and Ecuadorian government officials for construction projects. As part of the agreements, Willbros and WII agreed to cooperate with the DOJ in its ongoing investigation.
According to the indictment, from 2003 to 2005, Tillery, Novak, and others (including WII employees, a Nigerian “consultant” to Willbros, and employees of a major German company) conspired to pay millions of dollars in bribes to Nigerian officials in order to obtain a major gas pipeline engineering, procurement, and construction project. The bribes were allegedly paid via consultancy agreements, and laundered through Novak and the Nigerian “consultant.” The indictment specifically cites Jason Edward Steph and Jim Bob Brown as WII employees involved in the Nigerian bribery. Indeed, according to the indictment, Steph and Brown continued to pay bribes promised by Tillery and Novak to Nigerian officials after the 2005 internal investigation forced Tillery to resign. In Ecuador, the indictment alleges that Tillery, Novak and other WII employees agreed to pay approximately $300,000 in bribes to officials of state-owned oil and gas companies in order to obtain a $3 million gas pipeline rehabilitation project.
Tillery and Novak -- if convicted -- each face penalties of up to thirty-five years imprisonment, and fines of $250,000 or twice the gain or loss from the offence for conspiring to violate the FCPA and for each FCPA violation. Additionally, for the money laundering charge, they could be fined $500,000 or twice the value of the funds involved in the applicable transfers.
The indictment against Tillery and Novak was filed on January 17, 2008, but was unsealed on December 19, 2008 after authorities arrested Novak when he returned to the United States from South Africa, after his U.S. passport was revoked. Tillery remains at large.
F. Misao Hioki Pleads Guilty
On December 10, 2008, Misao Hioki, a former executive of a Japanese rubber products manufacturing company, (“Company X”), entered into an agreement with the DOJ and pleaded guilty to conspiracies to violate the Sherman Antitrust Act (“Sherman Act”) and the FCPA between approximately January 2004 and May 2007. Hioki’s violation of the Sherman Act involved conspiring with executives of marine hose manufacturers and vendors to rig bids, fix prices and allocate market shares for sales of marine hose in the United States and overseas. As part of the conspiracy to violate the FCPA, Hioki and Company X employees and agents allegedly made corrupt payments to foreign government officials in an effort to secure contracts from state-owned companies in Latin America. Both conspiracies were ongoing when Hioki became involved in approximately January 2004. Eight other individuals have pleaded guilty to violations of the Sherman Act in connection with these schemes. Hioki is the first individual to plead guilty to the FCPA conspiracy. Hioki was sentenced to two years imprisonment at a minimum-security prison and ordered to pay a fine of $80,000. As part of the plea, Hioki agreed to cooperate with the DOJ’s ongoing investigation.
Hioki had been the General Manager of Company X’s International Engineered Products Department (“IEP”) in Tokyo, Japan from approximately January 2004 through May 2007. Hioki was responsible for overseeing Company X’s international sales of marine hose (a rubber hose used to transfer oil between tankers and storage facilities) and other products, supervising sales employees in Japan and elsewhere, and approving Company X’s pricing decisions in concert with his Company X colleagues. According to the plea agreement, between January 2004 and the end of May 2007, Hioki caused employees and agents of Company X to make over $1 million in illicit payments to foreign officials employed at state-owned companies in order to secure contracts in Latin America, particularly in Mexico. Company X’s local sales agents paid a commission for each sale of IEP products to foreign officials employed by state-owned companies. Hioki and his co-conspirators at Company X discussed the illicit payments over the telephone or via facsimiles marked for destruction after reading to avoid the creation of a written or email record and conceal the illicit payments. Hioki admitted to authorizing and discussing illicit payments.
At the time of his arrest in May 2007, Hioki was an executive at Bridgestone Corporation in Japan. The conspiracy to violate the Sherman Act included executives from Dunlop Oil & Marine Ltd. and PW Consulting (Oil & Marine) Ltd. in the United Kingdom; Trelleborg Industrie S.A., a French subsidiary of the Swedish corporation Trelleborg AB); and Manuli Rubber Industries SpA and Parker ITR slr (a subsidiary of Parker Hannifin Corporation of Ohio) in Italy.
A. InVision, Inc. Shareholders Claim
On November 26, 2008, the United States Court of Appeals for the Ninth Circuit concluded that alleged misstatements in FCPA representations and warranties made in a merger agreement by InVision, Inc. (“InVision”) could support a securities fraud claim brought by shareholders (see Glazer Capital Mgmt.,LP v. Magistri, No. 06-16899 (9th Cir. 2008)). Specifically, the court decided that such alleged misstatements could support a shareholder claim where a company has publicly disclosed FCPA representations and warranties by attaching them to its Form 10-K filing.
According to the court’s opinion, this case arose out of a merger between InVision and General Electric (“GE”), which was nearly derailed by the discovery of FCPA violations committed by InVision. InVision, a manufacturer of devices that detect explosives, entered into discussions regarding a possible merger with GE in 2003. In March 2004, InVision announced in a press release that it would be acquired by GE. On the same day, InVision filed a Form 10-K and attached a copy of its merger agreement, which contained representations and warranties with regard to FCPA compliance. Several months later, however, in July 2004, InVision announced that an internal investigation revealed possible FCPA violations, and that InVision had voluntarily reported the issues to the SEC and DOJ.
According to the disposition agreements, InVision’s internal investigation had uncovered questionable payments made by InVision to local agents or distributors in China, the Philippines, and Thailand. In each country, InVision made payments to a local agent or distributor despite, according to the disposition documents, being aware of the high probability that the payments would be passed on to employees of state-owned customers of InVision. Ultimately, InVision, GE, and the post-merger company, GE-InVision, entered into agreements with the DOJ and SEC to settle charges of violating the anti-bribery, recordkeeping, and internal controls provisions of the FCPA, in which the companies agreed to pay over $1.9 million in penalties, disgorgement, and prejudgment interest.
Following the July 2004 announcement of these possible FCPA violations, the price of InVision stock sharply dropped and this shareholders’ suit ensued. A class of shareholders who purchased InVision stock between the announcement of the merger and the announcement of the potential FCPA violations claimed that InVision, and specifically its CEO and CFO, misled investors by misstating InVision’s compliance with the FCPA in the representations and warranties contained in the merger agreement that InVision attached to its publicly-filed Form 10-K. The United States District Court for the Northern District of California dismissed the shareholders claim and the shareholders appealed to the Ninth Circuit.
The Ninth Circuit ruled in favor of InVision and affirmed the lower court’s dismissal of the shareholders’ claim. Specifically, the court held that the shareholders had not adequately pleaded facts to support their securities fraud claim. In doing so, however, the court considered and rejected InVision’s argument that the alleged misstatements in the publicly disclosed FCPA representations and warranties could not support a shareholders’ claim.
InVision argued that the context of the alleged misstatements rendered them legally incapable of supporting a securities fraud claim. In particular, InVision contended that because the statements appeared in a private merger agreement directed solely to GE, they should not be interpreted as communications to investors. InVision pointed out that a provision of the merger agreement stated that the agreement was not intended to confer any rights or remedies on any person other than InVision and GE. InVision also contended that no reasonable investor would have relied on the representations and warranties because a separate section of the agreement rendered the entire agreement subject to a disclosure schedule that was never released to the public. The court rejected both of these arguments, noting that the proposed merger agreement with GE was a very significant event for InVision and its shareholders, and that InVision could have therefore expected intense investor interest in the details of the merger. Thus, InVision’s public disclosure of the merger agreement, combined with the likelihood of intense investor interest in the deal, made the representations and warranties an actionable communication to investors.
This decision represents the first time a court has adopted the position held by the SEC in its March 1, 2005 Section 21(a) Report regarding Titan Corp. (“Titan”). In this Report, Titan was faulted for not having updated the representations in its publicly disclosed merger agreement with Lockheed Martin Corporation after Titan discovered potential FCPA violations. Overall, the Report highlighted issuers’ responsibility to ensure that disclosures regarding material contractual provisions such as FCPA representations are not misleading. The Report stated that an issuer cannot avoid this obligation simply because the publicly disclosed information was contained in an agreement not prepared as a disclosure document. Similar to the InVision decision, the SEC Report asserted that the FCPA representation in Titan’s merger agreement that was filed with the SEC as an attachment to a proxy statement could create liability to the company’s shareholders, even though the shareholders were not the beneficiaries of the FCPA representation as it appeared in the merger agreement.
B. Other Examples of FCPA Issues Arising in Civil Litigation
1. Harry Sargeant III and International Oil Trading Company
On October 21, 2008, Supreme Fuels Trading FZE (“Supreme”), a United Arab Emirates-based support service provider, filed a complaint in a Florida federal court alleging racketeering and antitrust violations against Harry Sargeant III, the Finance Chairman of the Republican Party of Florida and prominent fundraiser for Senator John McCain’s presidential campaign, and his company, International Oil Trading Company (“IOTC”), among others. The complaint alleges that the defendants participated in a conspiracy to bribe Jordanian government officials to secure over one billion dollars worth of U.S. government contracts for the supply of bulk fuels to the U.S. military in Iraq. Specifically, the complaint alleges that the U.S. government only accepted bids from companies that were authorized by the Jordanian government to transport fuels across Jordan into Iraq, and that the bribery scheme ensured that IOTC was the only bidder to obtain such authorization, allowing them to win every bid since 2004. Supreme alleges that this scheme violated the Racketeer Influenced and Corrupt Organizations (“RICO”) Act, the Sherman Act, and Florida law, and is claiming tens of millions of dollars in lost profits.
2. Oil for Food Suit
On October 20, 2008, the Republic of Iraq was granted an extension in its civil claim against companies and individuals that were allegedly involved in the Oil for Food bribery scandal. (Please see Fiat, above, for a description of the Oil for Food Program.) As reported in our past four Reviews, U.S. authorities have brought enforcement actions against companies allegedly involved this scheme and have imposed large fines on companies that have benefited from the corruption. In June 2008, the Republic of Iraq filed its own suit in the U.S. District Court for the Southern District of New York against ninety-one companies and two individuals implicated in the scheme, and is seeking over $10.4 billion. In the October ruling, the court granted the Republic of Iraq an extension of time within which the defendants must be served with the summons and complaint. In general, if a defendant is not served within 120 days after the complaint is filed, the court must dismiss the complaint against that defendant. With this extension, however, the Republic of Iraq has until February 22, 2009 to serve any remaining defendants.
New Revelations on U.S. Enforcement Investigations
As noted in the Introduction, Mark Mendelsohn of the DOJ recently stated that there are approximately 100 companies currently subject to open DOJ investigations. According to recent press accounts, the following companies have recently reported possible FCPA violations to the DOJ and/or SEC:
- Avery Dennison: After Avery Dennison, a producer of labels and self-adhesive products, voluntarily disclosed to the DOJ potential FCPA violations by its employees in China, the DOJ launched an investigation of the company. The potential violations disclosed by Avery Dennison stem from a contract with a company owned and operated by China’s Public Security Ministry. Avery Dennison reportedly made “commission” payments to the company that ended up in the hands of government officials.
- Avon Products, Inc.: Avon Products, Inc., a leading global cosmetics company, recently announced that it is conducting an internal investigation of its China operations to probe possible FCPA violations. The potential violations involve the payment of travel and entertainment expenses of government officials in China. Avon has informed both the DOJ and SEC that an investigation is underway.
- Morgan Stanley: On February 11, 2008, Morgan Stanley announced that it had terminated a China-based employee who engaged in actions that may have violated the FCPA. The actions apparently related to a real estate subsidiary. Morgan Stanley reported the dismissal, and identity of the employee, to the SEC.
- RAE Systems: In 2008, the internal audit committee of RAE Systems, a maker of chemical and radiation detection monitors, discovered a number of payments by company personnel in China that may have violated the FCPA. The company has since initiated an internal investigation and has made a voluntary disclosure to the DOJ.
The Swiss Government has continued investigations into the suspected bribery scheme involving Alstrom SA, the power and rail transport company. In November 2008, a Swiss criminal court determined that a large portion of approximately $400 million may have been used in a company bribery scheme to obtain business through cash payments. The Swiss Government’s investigation was initially focused on the period between 1995 and 2003. Recently, however, the Government has expanded the investigation into payments made as late as 2008. A former Alstrom executive, Bruno Kälin, is already in custody in connection with this matter. For more information on the Alstrom issues, see our Autumn 2008 FCPA Review and Spring 2008 FCPA Review.
1. Increased Anti-Corruption Efforts Promised
In 2009, the Government of China pledged to intensify investigations into corruption involving government officials. During a plenary session of the Government’s Central Commission for Discipline Inspection (CCDI), President Hu Jin Tao outlined his anti-corruption plan for 2009 and asked all Communist Party members to focus on implementing the plan. According to the Xin Hua News Agency, the anti-corruption effort in 2009 will focus on a wide range of areas, including food and safety, land use, oil prices, and the use of government funds. President Hu also asked all government officials to deepen the level of anti-corruption reform in key industrial sectors.
2. Direct Marketing Investigations
The Chinese Government is currently investigating the involvement of two U.S. law firms in a corruption scandal which has already resulted in the detention of certain Chinese Government officials. Although the two firms remain unnamed, press accounts indicate that the investigations relate to the licensing of foreign direct marketing companies that operate in China. Also involved in the scandal are two other China-based lawyers, who were detained in connection with the probe. The most senior governmental official detained thus far appears to be Guojing Yi, of China’s page 20 Ministry of Commerce. Mr. Guo was previously responsible for determining which foreign operations could obtain licenses to operate in China.
C. United Kingdom
On October 16, 2008, The Organization for Economic Co-Operation and Development (“OECD”) Working Group on Bribery in International Business Transactions issued a report which harshly criticized the United Kingdom for its failure to observe its obligations under the OECD Anti-Bribery Convention. The working group issued a statement indicating that it was “disappointed and seriously concerned” at the United Kingdom’s continued failure to amend its anti-bribery laws to meet its international obligations. The working group also stated that British laws are currently unable to reach corporate bribery overseas, and fall short of international standards.
These new criticisms were levied only months after the OECD issued a letter directly to the British government attacking its failures in the anti-corruption enforcement arena. The letter, which was signed by all members of the OECD except Britain, was issued shortly after the House of Lords ruled that the SFO lawfully terminated its inquiry into dealings between Saudi Arabia and BAE Systems. For more information the OECD letter and the BAE matter, see the BAE section, below.
While the OECD working group has no power to impose sanctions, or any other form of punishment, for these stated failures, the working group’s negative conclusions have received significant press attention both inside the United Kingdom and elsewhere.
2. AON Ltd.
In January 2009, the Financial Services Authority of the United Kingdom (“FSA”) issued a Formal Notice to AON Limited (AON), in which it levied a fine of £5.25 million (approximately $8 million). AON is a U.K. subsidiary of the U.S.-based insurance group, AON Corporation, This penalty represents the first and only time the FSA has moved to enforce its antibribery regulations. The FSA criticized AON for failing to “establish and maintain effective systems and controls for countering the risks of bribery and corruption associated with making payments to non FSA-authorised overseas third parties.” This FSA concluded that this failure caused AON to make “suspicious” payments to a number of foreign third parties between 2005 and 2007.
According to press accounts, in December 2008, the U.K.’s Serious Fraud Office (“SFO”) won access to Swiss bank records in its continuing investigation into BAE Systems PLC (“BAE”), a British aerospace and defense company. As reported in our 2008 Autumn Review, the SFO had been investigating allegations that BAE paid nearly $4 billion to members of the Saudi royal family in exchange for its help in securing a contract for the sale of jet fighters to the Saudi government. However, in December 2006, then Prime Minister Tony Blair reportedly directed the SFO to halt the inquiry, citing potential harm to U.K.-Saudi diplomatic relations and national security issues, and incurring harsh criticism from the OECD (see OECD section, above). Despite the termination of the Saudi investigation, the SFO nevertheless continued to investigate BAE in connection with the alleged bribery of officials in Austria and the Czech Republic to secure contracts for the sale of military aircraft. In 2007, Austrian police raided several locations in connection with this investigation, including the home of an Austrian Count. In this most recent development, a Swiss court reportedly held that Swiss authorities could supply the SFO with confidential financial records related to the alleged bribery of Czech politicians.
4. Anti-bribery Law Reform
In November 2008, the Law Commission, a U.K. body tasked with reviewing the country’s laws, recommended an overhaul of U.K. anti-bribery legislation. Whereas U.K. anti-bribery laws are currently composed of several imperfectly overlapping offenses, involving both statutory and common law, the Law Commission recommended the creation of a single set of laws that would encompass public and private bribery, as well as the bribery of foreign officials. Additionally, the set of laws would include an offense that would punish companies for negligently allowing employees or agents to pay bribes.
According to press accounts, the Oslo based crime unit, Okokrim, arrested and charged twelve Norwegian military officers with accepting bribes in the form of gifts, entertainment and golfing trips from Siemens AG. The December 2008 arrests involve a 2004 golf trip for the military offices to Alicante, Spain, for which the Siemens group paid an estimated 17,400 Norwegian Crowns (approximately $3,220). In an official statement, Okokrim indicated that it could not “rule out further charges” as the investigation progressed.
Press stories stated that Finnish police questioned an unnamed executive and a former CEO, Jorma Wiitakorpi, of the Finnish arms group Patria concerning alleged bribe payments to a Slovenian governmental authority for the sale of Patria vehicles. The payments were allegedly made through a Helsinki based company. Finland’s National Bureau of Investigation stated that both men are suspected of “industrial espionage, aggravated bribery and bribery in business operations.”
According to press accounts, in early 2009, the Nigerian House of Representatives formally requested assistance from the DOJ in identifying those Nigerian Customs officials who were implicated in the Vetco Gray FCPA violations. The House sent a letter to the DOJ acknowledging that Vetco Gray employees made approximately $2.1 million in payments to Nigerian Customs officials from 2002 to 2005, for the purpose of obtaining preferential treatment during the customs process.
Press accounts also noted that on September 11, 2008, the House instructed the Committee on Customs and Excise to conduct a public hearing on the functioning of the Nigerian Customs Service and its continued involvement in such payment schemes.
According to press stories, the former Taiwanese President, Chen Shui Bian, was arrested in November 2008, over charges of money-laundering, corruption, forgery and illegal possession of state assets. The Taiwanese District Court issued a statement indicated that the alleged crimes were “severe.” Mr. Chen’s former aides, and certain members of his family are also under investigation. It is alleged that Mr. Chen’s family may have sent at least $30 million to various countries around the world. Prosecutors are investigating whether the money was from political donations or was the result of bribe payments. For more information on former President Chen’s bribery scandal, please see our Autumn 2008 FCPA Review.
More recently, according to press accounts, Chen’s wife, Wu Shu-Chen, pleaded guilty to charges of money-laundering and forgery. Wu denied involvement in the alleged bribery and embezzlement schemes discussed above. Wu’s court appearance in February of this year marks the first time she has attended court proceedings in two years. Since 2006, Wu has refused to acknowledge 17 court summons allegedly due to her ill health.
News accounts have stated that in January 2009, Mikio Kunisawa, the former president of Nishimatsu Construction Company, was arrested over allegations that he ran a ¥70 million slush fund in Tokyo. Also arrested were the former Nishimatsu Vice President, the former deputy head of Nishimatsu’s overseas business department, the deputy head of Nishimatsu’s overseas operations and a former president of a Nishimatsu subsidiary. According to news stories, prosecutors allege that Kunisawa instructed the men to bring in a total of ¥100 million from Hong Kong and other foreign locations without reporting the imports to the Japanese Customs Service. Prosecutors have only levied charges against ¥70 million of the imports because the relevant statute of limitations has expired as to some of the monetary imports.
1. Israel Signs OECD Convention
In December 2008, Israel signed the OECD Anti-Bribery Convention. Israel is the first Middle-Eastern country to sign the Convention.
2. Morris Talansky/Ehud Olmert
Although the relevant U.S. Attorney’s office has declined to give an official statement, certain media outlets have reported that the FBI is actively investigating Morris Talansky for his involvement in the bribery scandal surrounding Israeli Prime Minister Ehud Olmert. Talansky has admitted to giving Olmert contributions, sometimes in the form of cash. In 2008, Talansky traveled to Israel to testify as to his involvement in the scandal. The U.S. Government is reportedly using that testimony as the basis of its investigation.
J. India/World Bank
On January 10, 2009, the World Bank announced that it will begin publishing the names of all companies that have been blacklisted or debarred from participating in its corporate procurement programs. Until the announcement, the Bank has only published the names of companies which had been banned from involvement in Bank-financed projects. The Bank indicated that the decision to publish blacklisted companies was made “in the interest of fairness and transparency.”
Immediately after the announcement, the Bank published the names of three Indian companies which had been debarred in the last two years; Satyam Computer Services, India’s fourth-largest software company, which was debarred for eight years, and Wipro Technologies, India’s No. 3 software company, which was debarred for four years. Both were debarred for allowing “improper benefits to bank staff.” The bank also debarred India’s Megasoft Consultants for four years for “participating in a joint venture with Bank staff while conducting business with the Bank.”
K. United Nations
1. U.N. Procurement Task Force
In November 2008, the U.N. Procurement Task Force announced that it had uncovered five cases of corruption which involved an estimated $20 million. The task force announced that the cases involved a broad spectrum of industries and countries, stemming from the Congo to Greece. These five cases are the latest to surface during the thee-year investigation into corrupt practices in the U.N. purchasing programs.
According to press accounts, in December 2008, Russia attempted to block certain staff from being hired or transferred into the U.N. Procurement Task Force. The move came after it became clear that certain Task Force investigations might implicate Russian citizens and corporations. Russia has claimed that certain Task Force investigations have denied its citizens adequate due process of the law.
2. Oil for Food
A top U.N. tribunal has ruled that the organization must pay at least a portion of the legal fees incurred by former Oil for Food program Executive Director Benon Sevan after allegations surfaced in 2005 that Sevan had been paid to influence the awarding of lucrative Iraqi oil contracts under the program. Sevan’s alleged involvement in the scandal was brought to light by the investigation conducted by the Independent Inquiry Committee into the United Nations Oil-for-Food Programme (“ICC”) led by Paul Volker. After being promised that the U.N. would help defray some of the costs of his defense, Sevan contested a decision to rescind that promise on the grounds that reimbursement was subject to a presumption of no wrongdoing. In 2007, Sevan was indicted on bribery-related charges by U.S. enforcement authorities, but has, until now, avoided extradition in his home-country of Cyprus.
Publications, Speaking Engagements, Recognition, and Awards
James G. Tillen and J. Matteson Ellis published articles in World Trade Magazine (February 2009), Latin American Law & Business Report (January 2009), and RGE Monitor (December 2008) discussing the results of Miller & Chevalier’s Latin American Corruption Survey. The survey, conducted together with six Latin American law firms, measured the current perspectives of leading corporate executives regarding corruption in the region.
Homer E. Moyer Jr., James G. Tillen, and Marc Alain Bohn published an article on “FCPA Liability for the Acts of Third Parties” in the November issue of Risk Advisory News, and the December edition of Corporate Secretary. The article suggests several measures companies can take to reduce the risk of improper conduct by third parties for which the company could be found liable.
George M. Clarke III published an article in The International Lawyer entitled “More Sticky Strands in the FCPA Web: Tax Rules and Financial Reporting May Drive Disclosure.” The article concerns the interrelationship between the FCPA, U.S. tax laws, and recent U.S. financial reporting rules and how companies should take each into account when deciding whether to voluntarily disclose FCPA violations.
Kathryn Cameron Atkinson will serve as co-chair and speaker at the Institute for International and Comparative Law and Center for American and International Law 4th Annual Program on International Corporate Compliance. The conference takes place February 26-27, 2009, in Washington, DC.
Homer E. Moyer Jr. will serve as the conference Chair for ACI’s 21st National FCPA Conference on March 23-26, 2009, in New York City. He will also moderate the panel “Internal Investigations: What Is a Reasonable, Yet Responsible, Way to Investigate Suspected and Alleged Violations.” John E. Davis is will speak on the topic “Conducting Effective FCPA Compliance Assessments.”
James G. Tillen will co-conduct a pre-conference workshop at the Second Canadian Forum on Bribery and Foreign Corruption on April 27, 2009, in Toronto. The workshop will address the topic “Conducting an Effective FCPA Compliance Assessment.”
Homer E. Moyer Jr. will chair the International Bar Association’s 7th Annual Anti-Corruption Conference: “The Awakening Giant of Anti-Corruption Enforcement.” The conference will take place April 29- May 1, 2009, in Prague, Czech Republic.
Matthew Reinhard will speak on the FCPA at a pre-conference workshop to the Dubai Summit on Anti-Corruption Enforcement and Compliance, presented by ACI and the C5 Group. The conference occurs on May 12-13, 2009, with pre-conference workshops on May 11.
In the News
Miller & Chevalier’s Latin American Corruption Survey received significant press attention, with articles appearing in Financial Week, Washington Business Journal (as well as the Atlanta Business Chronicle, South Florida Business Journal, Triangle Business Journal, Charlotte Business Journal, and Bizjournals), Inside U.S. Trade, Latin Lawyer, Latin America Advisor, Latin Business Chronicle, World News, Petroleum World, Securities Docket, Multinational Corporations, Directorship, Infobae, Diario Gestión, Marcasur, and La Estrella.
The October 24, 2008 edition of Inside U.S. Trade extensively quotes Homer E. Moyer Jr. in the article “NFTC Criticizes Broadening FCPA Enforcement, Lawyers Disagree” regarding the increase in FCPA enforcement actions.
For further information, please contact any of the following lawyers:
Homer Moyer, email@example.com, 202-626-6020
John Davis, firstname.lastname@example.org, 202-626-5913
Kathryn Cameron Atkinson, email@example.com, 202-626-5957
James Tillen, firstname.lastname@example.org, 202-626-6068