2010 Mid-Year FCPA Update

July 8, 2010

On January 18, 2010, hundreds of law enforcement agents from the Federal Bureau of Investigation and City of London Police launched a coordinated, bi-continental strike, executing twenty-one search warrants and arresting twenty-two people in what Assistant Attorney General Lanny Breuer described as "the largest action ever undertaken by the Justice Department against individuals for FCPA violations."  Thus began the year in Foreign Corrupt Practices Act enforcement, a juggernaut that each annum surpasses the record heights set the year before. 

This client update provides an overview of the Foreign Corrupt Practices Act ("FCPA") and a survey of FCPA enforcement activities during the first half of 2010.  It also analyzes recent enforcement trends and offers practical guidance to help companies and their executives avoid or minimize liability under the FCPA.  A collection of Gibson Dunn’s publications regarding the FCPA, including prior enforcement updates and more in-depth discussions of the statute’s complicated framework, may be found on our FCPA Website. 

FCPA Overview

The FCPA’s anti-bribery provisions make it illegal to offer or provide money or anything of value to officials of foreign governments or foreign political parties with the intent to obtain or retain business.  These provisions apply to "issuers," "domestic concerns," and "agents" acting on behalf of issuers and domestic concerns, as well as to "any person" that violates the FCPA while in the territory of the United States.  The term "issuer" covers any business entity that is registered under 15 U.S.C. § 78l or that is required to file reports under 15 U.S.C. § 78o(d).  In this context, the approximately 1,500 foreign issuers whose American Depository Receipts ("ADRs") are traded on U.S. exchanges are "issuers" for purposes of the statute.  The term "domestic concern" is even broader and includes any U.S. citizen, national, or resident, as well as any business entity that is organized under the laws of a U.S. state or that has a principal place of business in the United States.

In addition to the anti-bribery provisions, the FCPA’s books-and-records provision requires that issuers make and keep accurate books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the issuer’s transactions and disposition of assets.  Finally, the FCPA’s internal controls provision requires that issuers devise and maintain reasonable internal accounting controls aimed at preventing and detecting FCPA violations.  Regulators frequently invoke these latter two sections — collectively known as the accounting provisions — when they cannot establish the elements for an anti-bribery prosecution or as a mechanism for compromise in settlement negotiations.  Because there is no requirement that a false record or deficient control be linked to an improper payment, even a payment that does not constitute a violation of the anti-bribery provisions can lead to prosecution under the accounting provisions if inaccurately recorded or attributable to an internal controls deficiency.

2010 Mid-Year Enforcement Statistics

The following table and graph track the number of FCPA enforcement actions brought by the Department of Justice ("DOJ") and Securities and Exchange Commission ("SEC") — the FCPA’s dual enforcers — during the past seven years.   

The raw numbers for the first half of 2010 are undeniably influenced by the massive, twenty-two defendant sting operation referenced above.  But one cannot overestimate what a seismic impact this shift in practice — whereby the government engages in proactive, undercover operations rather than long-term investigations, assessing whistleblowers and voluntary disclosures — will have on the future of FCPA enforcement. Furthermore, the sting case was far from the only development of the past six months, with DOJ and the SEC negotiating settlements with BAE Systems plc and Technip S.A. of $400 and $338 million, respectively — the third and fourth largest dispositions in the statute’s thirty-three-year history.  And, with at least ten companies close enough to FCPA resolutions that they have announced the settlement terms in public filings, Assistant Attorney General Breuer confirming 140 active FCPA investigations at DOJ, a squad of DOJ prosecutors refreshed with new resources and looking to continue the groundbreaking pace set by Mark F. Mendelsohn, DOJ’s former top FCPA enforcer who has left for private practice, and the dedication of a regional FCPA enforcement unit in the SEC’s San Francisco Office under the supervision of newly named FCPA Unit Chief Cheryl J. Scarboro, it is clear that 2010 will go down as yet another landmark year for FCPA enforcement. 

2010 Mid-Year Enforcement Docket

Veraz Networks, Inc.

On June 29, 2010, the SEC filed a settled civil action charging Veraz Networks, Inc., a California-based telecommunications firm, with violating the FCPA’s books-and-records and internal controls provisions in connection with sales in China and Vietnam.  In China, a third-party consultant of Veraz’s allegedly provided approximately $4,500 in gifts to officials of a state-controlled telecommunications company in what one Veraz employee purportedly referred to as a "gift scheme."  The consultant also offered to pay a $35,000 bribe to officials at this same state company in connection with a specific tender, but Veraz discovered the improper offer before the transaction was completed and cancelled the sale.  In Vietnam, a Veraz employee allegedly used a distributor to offer and make unspecified amounts of improper payments to the CEO of a government-controlled telecommunications firm.  It is also alleged that Veraz reimbursed its employees for "questionable expenses" relating to the Vietnamese state-controlled company, including gifts and entertainment for staff members and flowers for the CEO’s wife.  This settlement marks the twenty-eighth China-related FCPA enforcement action since 2002.    

Without admitting or denying the allegations, Veraz agreed to pay a $300,000 civil penalty and consent to an injunction from future violations of the FCPA’s accounting provisions.  There is no indication that there will be a corresponding criminal case brought by DOJ.    

Technip S.A.

Just one day earlier, on June 28, 2010, DOJ and the SEC announced another huge corporate settlement arising from the government’s long-running investigation of the four-party joint venture aligned to obtain contracts to build liquefied natural gas facilities on Bonny Island, Nigeria.  DOJ and the SEC alleged that Technip S.A., a French engineering and construction company, participated in a decade-long scheme to bribe Nigerian government officials, including high-level executive officials, through two third-party agents. All told, between 1995 and 2004, the joint venture allegedly paid nearly $182 million in consulting fees to the two agents with the expectation that some or all of the payments would be passed along to Nigerian officials. These unlawful payments allegedly led to the award of more than $6 billion in contracts to the joint venture, netting approximately $199 million in profits to Technip. 

Paris-based Technip subjected itself to FCPA jurisdiction in 2001, when the company listed its ADRs on a U.S. stock exchange.  According to the government, Technip was aware at that time of the FCPA’s prohibitions on improper payments to foreign government officials, but rather than implement adequate controls to ensure compliance with the statute, treated FCPA "due diligence [] as a ‘perfunctory exercise’ conducted so that [it] would have some documentation in its files." 

To settle criminal anti-bribery and conspiracy charges, Technip entered into a two-year deferred prosecution agreement with DOJ, paid a $240 million criminal fine, and agreed to retain an independent monitor, of French nationality, to review the design and implementation of the company’s compliance program.  Technip also settled civil charges brought by the SEC, consenting to the filing of a complaint alleging that it violated the anti-bribery, books-and-records, and internal controls provisions and agreeing to disgorge $98 million in ill-gotten gains. 

The $338 million settlement ranks Technip in the top five resolutions in FCPA history.  But it is not the largest of the year — that would be BAE — and it is not the largest for a foreign ADR-issuer, as Technip trails both Siemens (2008) and BAE (2010) in that category.  Indeed, Technip’s settlement is not even the largest of the Bonny Island joint venture participants — Halliburton/KBR paid $579 million in 2009 to resolve FCPA charges arising out of this investigation. 

The two other Bonny Island joint venture participants have been identified publicly as ENI S.p.A. of Italy and JGC Corp. of Japan.  ENI, an ADR issuer like Technip, has announced a €250 million reserve in connection with its discussions with DOJ and the SEC to resolve FCPA allegations arising from the company’s participation in the joint venture.  (UPDATE:  On July 7, 2010, DOJ and the SEC announced a $365 million joint settlement with ENI and its Dutch subsidiary, Snamprogetti Netherlands, BV.)  JGC, which is not an ADR issuer, has made no public statements concerning this matter.  Rounding out the charges brought in connection with the government’s investigation, former KBR CEO Albert Stanley has pleaded guilty to FCPA charges and is awaiting sentencing, while Jeffrey Tesler, one of the joint venture’s third-party agents, and Wojciech Chodan, a former salesperson and consultant for KBR, have been indicted and are undergoing extradition proceedings in the United Kingdom. 

Employees of Alliance One, Inc.

As part of its ongoing investigation of North Carolina-based tobacco company Alliance One International, Inc., on April 28, 2010, the SEC charged four former company employees — Bobby J. Elkin, Jr., Baxter J. Myers, Thomas G. Reynolds, and Tommy L. Williams — with violating the FCPA’s anti-bribery bribery provisions and aiding and abetting the company’s alleged violations of the statute’s accounting provisions. According to the complaint, between 1996 and 2004, Alliance One’s subsidiary in Kyrgyzstan paid more than $3 million in bribes to Kyrgyz government officials to facilitate the subsidiary’s production and export of Kyrgyz tobacco and more than $500,000 in cash and travel benefits to government officials in Thailand to influence their purchase of $9.4 million of Alliance One products.  Elkin, Alliance One’s Country Manager for Kyrgyzstan, allegedly authorized, directed, and paid the bribes in that country, while Myers, a Regional Financial Director, authorized the transfer of funds used to pay the bribes between company bank accounts, and Reynolds, a Corporate Controller, formalized the accounting methodology used to record the payments for internal reporting purposes.  Williams, a Senior Vice President of Sales, allegedly authorized the company’s agent in Thailand to make improper payments to officials of the government-owned Thailand Tobacco Monopoly. 

All four defendants consented to civil injunctions from future violations of the FCPA, and Myers and Reynolds additionally agreed to pay civil penalties of $40,000 each.  The differential treatment in the fines imposed is noteworthy, because the two defendants ordered to pay penalties (Myers and Reynolds) were charged only with accounting for the improper payments, whereas the two who were not ordered to pay fines (Elkin and Williams) were alleged to have directed and made the improper payments (including Elkin allegedly delivering bags filled with $100 bills to a high-ranking Kyrgyz official).  In announcing the settlement, the SEC noted Elkin’s cooperation, but made no such statement with respect to Williams or the other defendants. 

Daimler AG

On April 1, 2010, DOJ and the SEC announced a joint resolution with German automaker Daimler AG and three of its subsidiaries, resolving civil and criminal FCPA charges arising from the companies’ alleged payments to government officials in a number of different countries.  According to court documents, over a ten-year period, Daimler and its subsidiaries funneled the improper payments through internal "third-party accounts," which were on the companies’ books, but controlled by third parties, subsidiaries, and affiliates. These accounts were allegedly used for the payments because they were not subject to regular audits or the companies’ other standard financial controls. 

To resolve the charges, Daimler AG and its Chinese subsidiary, DaimlerChrysler China Ltd., entered into two-year deferred prosecution agreements charging each with one substantive and one conspiracy count of violating the FCPA’s books-and-records provision.  Two other Daimler subsidiaries, DaimlerChrysler Automotive Russia SAO of Russia and Export and Trade Finance GmbH of Germany, each pleaded guilty to criminal informations charging them with substantive and conspiracy counts of violating the FCPA’s anti-bribery provision.  Daimler and its subsidiaries agreed to pay a collective criminal fine of $93.6 million, in addition to Daimler’s agreement to disgorge $91.4 million in allegedly ill-gotten gains in connection with settling a related SEC complaint alleging violations of the anti-bribery, books-and-records, and internal controls provisions.  Daimler AG also agreed to retain former FBI Director Louis J. Freeh as its compliance monitor for a term of three years, though there is a provision permitting the early termination of this appointment if DOJ "finds, in its sole discretion, that there exists a change in circumstances sufficient to eliminate the need for the corporate compliance monitor." 

In structuring the settlement without an anti-bribery charge against the parent company, DOJ explicitly noted that it took into "consideration the risk of debarment and exclusion from government contracts and in particular . . . European Union Directive 2004/18/EC, which provides that companies convicted of corruption offenses shall be mandatorily excluded from government contracts in all EU countries." 

Innospec, Inc.

On March 18, 2010, in yet another FCPA enforcement action stemming from the United Nations Oil-for-Food Program ("OFFP"), Innospec, Inc., settled criminal and civil FCPA charges with DOJ and the SEC.  On that same day, as part of a global resolution, Innospec also settled a civil economic sanctions matter with the U.S. Treasury Department’s Office of Foreign Assets Control ("OFAC"), and its U.K. subsidiary, Innospec Ltd., pleaded guilty to criminal foreign bribery charges brought by the U.K. Serious Fraud Office ("SFO"). 

The charging documents filed by these four different agencies collectively allege that Innospec

• paid approximately $1.85 million, and agreed to pay nearly $2 million more, to the Iraqi government in connection with five contracts administered under the OFFP;
• paid $1.6 million, and agreed to pay an additional $884,000, for the personal benefit of certain Iraqi officials in connection with post-OFFP contracts;
• paid $2.88 million in bribes to officials of state-owned oil companies in Indonesia; and
• sold $19.9 million in products to state-owned companies in Cuba in violation of U.S. trade embargo regulations. 

With respect to the OFFP, Innospec is alleged to have inflated its contract submissions to the United Nations escrow account by 10% and passed the difference to the Iraqi government as "after sales service fee" payments.  Together with the Daimler AG settlement, which also included an OFFP component, DOJ and the SEC have now brought fifteen FCPA prosecutions arising from the United Nations Program.   

The post-OFFP payments were allegedly made to the Iraqi officials responsible for evaluating a product that competed against Innospec’s to ensure that this product would not receive approval from the Iraqi government.  Similarly, the Indonesian charges stem from allegations that Innospec paid bribes to government officials to influence them not to move forward with plans to switch to a competing product. The Cuban embargo charges consist of allegations that Innospec maintained a local office in Cuba, incurring general operating expenses and employing Cuban nationals, and entered into sales contracts with power companies owned and run by the Cuban government. 

To settle the criminal charges, Innospec, Inc., pleaded guilty in the United States to a twelve-count information charging it with violations of the FCPA’s anti-bribery and books-and-records provisions, in addition to wire fraud charges, and Innospec Ltd. pleaded guilty in the United Kingdom to violating the Prevention of Corruption Act in connection with the Indonesian transactions.  Innospec’s civil settlements encompass a complaint filed by the SEC charging violations of the FCPA’s anti-bribery, books-and-records, and internal controls provisions, as well as an economic sanctions settlement with OFAC. 

Despite facing a DOJ-calculated U.S. Sentencing Guidelines fine of between $100 and $200 million for the U.S. criminal charges alone, Innospec paid a cumulative monetary penalty of just $40.2 million to the four agencies to resolve all of its liabilities arising from the global settlement, broken down as follows:  $14.1 million as a criminal fine to DOJ; $12.7 million as a criminal fine to the SFO; $11.2 million in disgorgement to the SEC; and $2.2 million as a civil penalty to OFAC.  And in a creative structuring of the settlement, certain of the fines due to DOJ and the SFO are contingent upon future sales of Innospec’s products in one of the countries in which the corrupt payments allegedly took place, with each agency receiving a cut of every sale that Innospec makes in Iraq over the next several years.  The agencies’ willingness to forego substantial portions of the fines and flexibility in payment terms was predicated on Innospec’s financial inability to pay.  DOJ’s Sentencing Memorandum, for example, represents that "the continued viability of the company would [have] be[en] threatened" by imposition of a full Guidelines fine. 

After the herculean feat of coordinating a global resolution across four agencies on two continents, Innospec found that it had still two more obstacles in its path toward settlement. 

Although courts in the United States typically defer to negotiated dispositions in criminal cases, Judge Ellen Segal Huvelle of the U.S. District Court for the District of Columbia initially balked at DOJ’s proposal to appoint a then-unnamed independent compliance monitor for a three-year term.  After expressing concern about the Court’s ability to oversee the monitor’s activities, Judge Huvelle stated:  "It’s an outrage, that people get $50 million to be a monitor."  Apparently referring to a $52 million (non-FCPA) monitorship awarded by then-New Jersey U.S. Attorney Chris Christie to former Attorney General John Ashcroft, which was the subject of a recent investigation by the House Judiciary Committee, Judge Huvelle continued:  "It’s a boondoggle for some of these people.  If I was in private practice, I would love to be a monitor."  Judge Huvelle ultimately signed off on the plea agreement, but ordered the parties to keep her informed about who was appointed as the monitor and the monitor’s work plan. 

And Judge Huvelle was the comparatively easy judge before which Innospec found itself in connection with its plea hearings.  Lord Justice Thomas of the Crown Court at Southwark rebuked SFO prosecutors for overstepping the bounds of their constitutional powers and usurping the role of the judiciary in negotiating in advance the fines and allocation thereof to be imposed in connection with the global settlement.  Lord Justice Thomas wrote:  "Principles of transparent and open justice require a court sitting in public itself first to determine by a hearing in open court the extent of the criminal conduct on which the offender has entered the plea and then, on the basis of its determination as to the conduct, the appropriate sentence." And beyond the procedural deficiencies, the Crown Court described the $12.7 million fine allocated to the SFO’s investigation as "wholly inadequate . . . to reflect the criminality displayed by Innospec Ltd."  Although Lord Justice Thomas reluctantly approved the plea deal in light of the unique circumstances presented, he made very clear that in the future "this court must and will sentence in the way set out in the law," without respect to negotiated deals reached between defendants and the SFO.  These remarks from Britain’s second-most senior criminal judge raise significant doubts about the ability of prosecutors in the United States and the United Kingdom to coordinate negotiated dispositions in the future. 

BAE Systems plc

For years, British defense contractor BAE Systems plc has been plagued by controversy surrounding allegations of improper payments to foreign government officials.  On March 1, 2010, BAE took a significant step towards putting those issues behind it by pleading guilty to participating in a criminal conspiracy to impair and impede the lawful functions of the U.S. government by making false statements concerning its FCPA compliance program and payments to third-party consultants in connection with suspected bribes to government officials in the Czech Republic, Hungary, and Saudi Arabia. 

According to the charging documents, from the mid-1980s through 2002, BAE regularly retained "marketing advisors" to assist the company in securing sales to foreign governments.  BAE allegedly made substantial payments to these third parties with very little scrutiny as to their purpose and end use, while taking steps to conceal the payments by routing them "through various offshore shell entities beneficially owned by BAE[]."  With respect to certain of these payments, "there was a high probability that part . . . would be used in order to ensure that BAE[] was favored in the foreign government decisions regarding the sales of defense articles."  

But despite what appears to be the factual predicate of an FCPA violation, BAE did not actually plead guilty to FCPA charges.  Instead, the charges center on alleged false statements to the U.S. Departments of Defense and State.  Specifically, in November 2000, BAE’s CEO wrote a letter to the U.S. Secretary of Defense representing, allegedly falsely, that BAE was "strongly committed to operating in full compliance with the [FCPA]," would not knowingly offer or provide anything of value to officials of foreign governments with the intent to obtain or retain business, and would "develop an FCPA compliance program for its non-U.S. businesses to operate as if these businesses were, in fact, subject to the FCPA."  BAE then supplemented the 2000 letter with a second letter in 2002, falsely representing that BAE "had complied with the spirit and letter" of the 2000 letter, although it "had still not created and was not intending to create sufficient mechanisms for its non-U.S. businesses to ensure compliance with the FCPA."  Further, BAE allegedly made false statements in connection with export applications filed with the Department of State’s Directorate of Defense Trade Controls concerning commissions paid to third-party agents that were required to be disclosed, but were not. 

Despite technically avoiding FCPA charges, it is difficult to characterize BAE’s disposition as a lenient one. For its allegedly false statements, BAE agreed to plead guilty and pay a $400 million criminal fine.  At twice the alleged gain from the offense of $200 million, this fine represents the statutory maximum and the third-largest disposition in the history of FCPA enforcement.  BAE also was required to retain an independent compliance monitor, of U.K. citizenship, for a three-year term, although, in an interesting development, DOJ has rejected the first slate of three monitors proposed by BAE. 

BAE also agreed, in February, to pay a £30 million fine to resolve a related, long-running investigation by the SFO concerning BAE’s alleged failure to maintain adequate accounting records.  This settlement has been criticized because it only concerns allegedly improper payments to a consultant in Tanzania and does not address BAE’s suspected corrupt activity in several other countries.

SHOT Show Sting Operation

In what is indisputably the biggest development in 2010 FCPA enforcement to date, on January 18, agents of the Federal Bureau of Investigation ("FBI") arrested twenty-two people — twenty-one of them at a Las Vegas trade show — in connection with the first-ever FCPA sting operation.  According to the superseding indictment, Daniel Alvirez, Helmie Ashiblie, Andrew Bigelow, R. Patrick Caldwell, Yochanan R. Cohen, Haim Geri, Stephen G. Giordanella, John G. Godsey, Amaro Goncalves, Saul Mishkin, Mark F. Morales, Jeana Mushriqui, John M. Mushriqui, David Painter, Pankesh Patel, Ofer Paz, Michael Sacks, Jonathan M. Spiller, Lee A. Tolleson, Lee Wares, John B. Weir III, and Israel Weisler conspired to pay a total of $3 million in commissions — half of which were to be kicked back to government officials — in connection with a $15 million deal to supply defense-related articles to the government of an African country that has been identified in press accounts as Gabon.  But the allegedly corrupt deal was all a law enforcement ruse orchestrated by undercover FBI agents, including one posing as the Minister of Defense, and a cooperating defendant facing his own FCPA charges, Richard T. Bistrong. 

The story begins with Bistrong, the former Vice President of International Sales for a Florida-based security products company that has been publicly identified as Armor Holdings, Inc.  According to a criminal information filed against Bistrong, in 2001 and 2003, he and another Armor employee engaged a third-party agent to assist Armor in obtaining two contracts, collectively worth $6 million, to sell body armor to United Nations peacekeeping forces.  In connection with each contract, the agent allegedly instructed Bistrong to provide him with a signed, but otherwise blank, bid sheet for the competitive tender so that the agent could fill in the pricing information on behalf of Armor after the agent obtained the non-public bids of Armor’s competitors from a United Nations procurement official.  Bistrong arranged for Armor to pay $200,000 in commissions to the agent allegedly knowing that a portion of that money would be passed on to the official providing the non-public bid information.  (The FCPA encompasses officials of "public international organization[s]," including the United Nations, within the definition of "foreign officials" for purposes of the statute’s anti-bribery provisions.)  The criminal information further alleges that, from 2001 through 2006, Bistrong utilized third-party agents to pay and agree to pay government officials to influence competitive tenders to supply pepper spray to the National Police Services Agency of the Netherlands and fingerprint ink pads to the Independent National Election Commission of Nigeria.  Bistrong is charged with conspiracy to violate the FCPA’s anti-bribery and books-and-records provisions in connection with the corrupt payments, as well as to violate the International Emergency Economic Powers Act in connection with a separate scheme to ship export-controlled ballistic armor vests and helmets to Iraq without first obtaining the necessary licenses. 

Instead of — or perhaps more likely in addition to — providing DOJ with historical information on his alleged co-conspirators in an effort to reduce his sentence, Bistrong utilized his connections in the security products industry to set up the sting operation that would ultimately ensnare his twenty-two co-defendants.  Bistrong and undercover FBI agents, who posed as representatives of the Gabonese Ministry of Defense, met with each of these persons — under audio and video surveillance — and worked out a deal whereby the defendants allegedly agreed to pay an agent a 20% commission on sales to the Defense Ministry, knowing that half of that commission would be passed on to the Minster of Defense.  The purportedly corrupt deal was to be executed in two phases, with a first "test phase" consisting of a small sale to demonstrate that the payments would, in fact, be paid to the Minister of Defense, to be followed by a second, larger phase. Twenty-one of the twenty-two defendants were arrested at the annual "SHOT Show" trade convention in Las Vegas, while attending what they believed would be a meeting with the Gabonese Defense Minister to finalize the second phase of the deal.  As Assistant Attorney General Breuer wryly commented after the arrests, "This is one case where what happens in Vegas doesn’t stay in Vegas." 

The logistical challenges of trying a twenty-two defendant case are already showing.  Although DOJ initially filed sixteen separate indictments, grouping the defendants by the company with which they were associated, it then moved to combine the trials of all twenty-two defendants based on a theory that they engaged in a single conspiracy.  Although a federal grand jury sitting in the District of Columbia endorsed this approach by returning a consolidated conspiracy indictment, U.S. District Court Judge Richard Leon, who is presiding over the case(s), was skeptical:  "I have zero sense that there was an omnibus conspiracy."  In reaction to the judge’s comments, the government has proposed splitting the defendants into four groups for trial. 

Other key issues brewing in the case include potential entrapment defenses and discovery disputes over access to more than 615 audio and video recordings of more than 150 in-person meetings, more than 5,200 recorded phone calls, 3,000 pages of text messages between Bistrong and his FBI handlers, 242,000 pages of documents seized in connection with thirteen search warrants executed in the United States, and forty-four "items of computer material" and 122 "bags" of documents seized by London police in connection with the U.K. search warrants. 

The complexity of this case is certain to grow.  There are reports that some defendants are already negotiating plea deals with DOJ that include cooperation components that will expand the case beyond the sting allegations.  In the first example of this, defendant Daniel Alvirez has consented to the filing of a superseding information — usually an indication that a defendant is cooperating with prosecutors and expects to enter a guilty plea — adding allegations of corrupt arms sales to the Republic of Georgia in 2008, immediately prior to the Russian invasion of breakaway province South Ossetia. 

NATCO Group, Inc.

In the first FCPA case of 2010, on January 11, the SEC filed settled civil and administrative actions charging Texas-based oilfield equipment manufacturer NATCO Group, Inc., with violations of the books-and-records and internal controls provisions.  The SEC alleged that, in 2007, Kazahk immigration officials auditing a branch office of a NATCO subsidiary in Kazakhstan learned that expatriates working on a local oilfield had failed to obtain the necessary in-country work permits.  The immigration officials threatened to deport, imprison, and/or fine the workers if the company did not pay cash fines.  After checking with company officials in the United States, employees of the local branch office used personal funds to make two cash payments to the immigration officials, totaling $45,000, and then sought and received reimbursement from the company. The NATCO subsidiary described one of the reimbursement payments as a "payroll advance" and the other as "visa fines." 

Also in 2007, a consultant hired to assist the NATCO subsidiary’s employees with obtaining visas allegedly asked for cash "to help him obtain the visas."  Because Kazakh law requires supporting invoices before a company can withdraw cash from a commercial bank account, the NATCO subsidiary generated false invoices and ultimately reimbursed the consultant $80,000 against those invoices.  It is not known what the consultant did with the money. 

NATCO discovered its subsidiary’s inaccurate accounting entries later that same year as part of a "routine internal audit review."  The company responded swiftly with an internal investigation and then voluntarily disclosed the results to the SEC, in addition to undertaking numerous remedial measures.  NATCO even expanded its internal investigation to examine the relevant subsidiary’s operations in Angola, China, and Nigeria — according to the SEC filings, "geographic locations with historic FCPA concerns" — but uncovered no additional wrongdoing.  Still, the SEC initiated an enforcement action, and NATCO, without admitting or denying the allegations in the complaint and administrative proceeding, agreed to cease and desist from future violations of the FCPA’s accounting provisions and to pay a $65,000 civil penalty.  There is no indication that there will be a corresponding criminal case brought by DOJ.    

2010 Mid-Year Sentencing Docket

Longest Prison Sentence Ever in an FCPA Prosecution

As we have observed in prior updates, DOJ is becoming increasingly aggressive in pursuing substantial prison sentences for persons convicted of FCPA violations.  Continuing this trend, on April 19, 2010, Charles Paul Edward Jumet, a former executive of Ports Engineering Consultants Corporation, was sentenced to the longest term of incarceration ever imposed in an FCPA case — eighty-seven months.  In addition, Jumet was sentenced to three years of supervised release to follow his term of imprisonment and ordered to pay a $15,000 criminal fine.  Jumet pleaded guilty in 2009 to conspiring to violate the FCPA and to making a false statement to federal agents in connection with their investigation.  Jumet was alleged to have paid $212,400 to high-ranking Panamanian officials to obtain maritime contracts for his company — not an insubstantial amount by any measure, but also not itself record-setting.  In the press release announcing Jumet’s sentence, Assistant Attorney General Breuer warned that this case serves as a reminder that "foreign corruption carries with it very serious penalties, which can include substantial prison time for individuals who violate the law." 

Other Recent Sentences

On June 25, 2010, John W. Warwick, a co-defendant of Jumet’s in the Panamanian Port Authority case, received a thirty-seven month sentence and was ordered to forfeit $331,000 in criminal proceeds for his admitted role in providing more than $200,000 in bribes to government officials. 

Two former managers of Willbros International, Inc., Jason Edward Steph and Jim Bob Brown, were sentenced on January 28, 2010, after pleading guilty to FCPA charges in 2007 and 2006, respectively.  Steph was sentenced to fifteen months in prison and fined $2,000 in connection with his admitted role in paying approximately $1.8 million in cash to Nigerian officials.  Brown was sentenced to one year and one day in prison and fined $17,500 in connection with similar charges in both Ecuador and Nigeria.  Willbros settled its own FCPA charges in 2008. 

As noted in prior updates, DOJ has recently signaled that it will also pursue substantial prison sentences for the foreign official-recipients of improper payments.  Although such persons are not covered by the FCPA and therefore cannot be charged directly under the statute, DOJ has taken the position that they may be prosecuted for related offenses that often accompany foreign bribery, such as money laundering.  An example of this trend is the 2010 money laundering indictment of Juthamas Siriwan and Jittisopa Siriwan, respectively the former Governor of the Tourism Authority of Thailand and her daughter, who figured prominently as the foreign official-recipients of the bribes successfully prosecuted in the 2009 FCPA trial of husband and wife film producers, Gerald and Patricia Green.  DOJ has requested that Thailand extradite the Siriwans, but this effort may be complicated by a recent announcement by the Thai National Anti-Corruption Commission that it believes that it has gathered its own evidence against the Siriwans that is "even more convincing than that collected by the U.S. authorities." 

On June 1, 2010, Robert Antoine, the former Director of International Affairs for Haiti’s state-owned national telecommunications company, who was indicted in 2009 for FCPA-related money laundering offenses in connection with his alleged receipt of $800,000 in bribes, was sentenced to forty-eight months in prison and three years of supervised release, just a few months after he had pleaded guilty on March 12, 2010.  On February 19, 2010, Jean Fourcand, a third-party consultant involved in passing the money between U.S. companies and Antoine, also pleaded guilty to money laundering charges.  He was sentenced on May 3, 2010, to six months incarceration. 

FCPA Defendants Pending Sentencing

As significant as the recent FCPA-related sentences have been, perhaps as interesting are some of the ones that have not yet taken place.  The roll of FCPA defendants awaiting sentencing is steadily growing with many sentencing dates being postponed (in many cases, to allow the defendants time to cooperate with government authorities).  One defendant, Joshua C. Cantor, is still awaiting sentencing nearly nine years after entering a guilty plea, and another, Clayton Lewis, has seen his sentencing date continued a dozen times over the four-and-one-half years since his plea hearing.  The current list of FCPA defendants awaiting sentencing includes the following:

Ongoing Criminal Litigation

In 2009, we saw the first three FCPA trials since 2004.  Given the current docket of post-indictment cases pending trial across the country, it seems unlikely that we will have to wait another five years before a jury hears evidence in another FCPA case.  Indeed, we may see another (or two) before the end of 2010.  Cases poised for trial in the near term include the following: 

Executives of Control Components, Inc.

The case against four former executives of Control Components, Inc. ("CCI"), is moving steadily towards a November 2, 2010 trial date.  As described in our 2009 Year-End FCPA Update, Stuart Carson, Hong "Rose" Carson, Paul Cosgrove, and David Edmonds were indicted in 2009 on multiple charges relating to an alleged conspiracy to make corrupt payments to foreign government and private commercial purchasing officials for the purpose of influencing the recipients to award contracts to CCI or skew technical specifications of competitive tenders in CCI’s favor.  Gibson Dunn represents Mr. Carson in this case.  As described above, the company and two other former employees have pleaded guilty and agreed to cooperate with DOJ at trial.  Two other defendants — Flavio Ricotti and Han Yong Kim — have been charged, but had yet to make an appearance until Ricotti was successfully extradited from Germany, where he was arrested on February 14, 2010, arriving in the United States to face charges on July 2.  

One issue that arose late last year in this case was U.S. District Court Judge James Selna’s denial of defendants’ motion to obtain discovery from CCI relating to the results of the company’s extensive internal investigation and, in particular, the documents and information that it shared with DOJ.  The defendants petitioned the Ninth Circuit to review Judge Selna’s decision on a writ of mandamus, but, on March 18, 2010, the Ninth Circuit denied the petition, finding that defendants had "not demonstrated that this case warrants the intervention of this court by means of the extraordinary remedy of mandamus." 

Another issue that arose more recently is the scope of the alleged improper payments DOJ will seek to prove at trial, which will also impact the scope of discovery afforded the defendants.  Although DOJ’s superseding indictment broadly alleges that the co-conspirators made or authorized 236 improper payments, totaling approximately $6.85 million, in more than thirty countries, it specifically identifies and describes only a subset of those payments.  Judge Selna ruled at a May 24, 2010 status hearing that "[t]he government will be required to restrict the number of transactions it intends to offer at trial.  The question is how . . . we do that."  In response, DOJ filed a status report proposing two separate plans, pursuant to which it would seek to prove a number of the allegedly corrupt payments, but in each case would reserve the right to introduce evidence at trial relating to the balance of the 236 payments under the theory that "such payments are admissible in that they are intrinsic to the conspiracy charge and also are admissible to prove motive, opportunity, intent, preparation, plan, knowledge, identity, or absence of mistake or accident."  The defendants objected to DOJ’s proposals, and, on July 7, 2010, Judge Selna ruled provisionally that DOJ will be permitted to introduce evidence relating to only thirty transactions beyond those specifically set forth in the superseding indictment.  DOJ is to select those transactions and provide discovery accordingly.  The Court also converted the September 13, 2010 motions hearing to a status hearing, at which time the parties will discuss whether November 2 remains a viable trial date.

The Haiti Teleco Prosecution

Also as described in our 2009 Year-End FCPA Update, DOJ filed a number of cases in 2009 arising from its investigation of several Florida-based telecommunications companies and their allegedly corrupt arrangements with officials of Telecommunications D’Haiti ("Haiti Teleco"), Haiti’s state-owned telecommunications company and the sole provider of landline telephone services to and from the island nation.  In all, eight people have now been charged, including two Haiti Teleco officials (Robert Antoine and Jean Rene Duperval), three executives of the telecommunications companies (Joel Esquenazi, Antonio L. Perez, and Carlos Rodriguez), and three third-party consultants used as intermediaries to make the alleged payments (Juan Diaz, Jean Fourcand, and Marguerite Grandison). 

Antoine, Diaz, Fourcand, and Perez have all pleaded guilty:  Antoine and Fourcand to money laundering charges, Diaz to FCPA conspiracy and money laundering violations, and Perez to a single count of conspiring to violate the FCPA’s anti-bribery provision.  This leaves Duperval, Esquenazi, Rodriguez, and Grandison currently facing trial.  Esquenazi and Rodriguez have been charged with FCPA anti-bribery, money laundering, and wire fraud offenses for allegedly authorizing the payment of more than $800,000 in bribes to Antoine and Duperval.  Duperval has been charged with money laundering offenses for allegedly receiving some of those bribe payments.  And Grandison has been charged with FCPA anti-bribery, money laundering, and wire fraud offenses for allegedly acting as a go-between on some of the bribe payments.  

Esquenazi, Grandison, and Rodriguez have all moved to dismiss their indictment on statute-of-limitations grounds and unjustified pre-indictment delay.  The indictment, which was returned on December 4, 2009, alleges that the FCPA and money laundering conspiracies lasted until March 2005.  However, the moving defendants claim that the only act in furtherance of the conspiracy in 2005 was issuance of a check from a shell company beneficially owned by Duperval, who has not joined in this motion, to himself.  The last allegedly improper payment involving the moving defendants allegedly occurred sometime between April and September 2004, which would mean that the five-year statute of limitations had run no later than September 2009, several months before the December 2009 indictment.  DOJ asserts that the statute of limitations was tolled prior to the expiration of the limitations period pursuant to 18 U.S.C. § 3292, which permits DOJ to obtain court orders to toll a statute of limitations for up to three years while it pursues an official inter-governmental request to obtain evidence located in a foreign jurisdiction (in this case, Haiti).  Defendants have challenged the § 3292 tolling order. 

Esquenazi, Grandison, and Rodriguez have also moved to dismiss the indictment based on a second theory – that DOJ permitted the destruction of evidence within its control that was favorable to the defense.  Terra Communications, the company for which Esquenazi and Rodriguez worked during the relevant period, sought bankruptcy protection in 2005, after which the company’s records were turned over to counsel for the bankruptcy trustee.  Then, pursuant to a 2009 order from the U.S. Bankruptcy Court, the trustee’s counsel allegedly destroyed the relevant records, save only a small collection produced to DOJ as part of its investigation.  The moving defendants have argued that the bankruptcy trustee was cooperating with DOJ in its investigation, thus placing the documents in question within the control of the government. 

Trial in this case is currently scheduled to begin on July 19, 2010, but the defendants have sought a continuance.  The court will hear all pending motions at a status hearing now set for July 13. 

"Kazakhgate"

More than seven years after his arrest on a criminal complaint, DOJ’s case against James H. Giffen appears at long last to be showing signs of life.  Giffen, the former Chairman of Mercator Corporation, a small merchant bank, has been indicted on no fewer than sixty-five counts relating to his alleged payment of more than $78 million in bribes to two senior Kazakh officials in connection with six separate oil transactions, in which several major American oil companies acquired valuable rights to oil and natural gas fields in Kazakhstan.  Giffen is described in court documents as "counselor to the president," a reference to his close association to Kazakh President Nursultan Nazarbayev.  According to press accounts, President Nazarbayev is one of the unindicted co-conspirators referenced in the Giffen indictment. 

Much of the docket sheet is shrouded in references to classified filings, leading many to speculate about the political motivations driving (or not driving) the case that has become known as "Kazakhgate."  Adding fuel to this fire, Giffen has asserted a public authority defense, claiming that he was an operative for the Central Intelligence Agency, charged with ensuring that Kazakhstan’s rich reserves of oil and natural gas would be controlled by American and not Chinese or Russian oil companies.  The geopolitical intrigue has only grown of late, as President Nazarbayev met with U.S. President Barack Obama in April 2010 to discuss the "strategic relationship" between the two nations.  President Nazarbayev also enjoyed an audience with the former U.S. administration when he visited the Bush family compound in Kennebunkport, Maine, in 2006. 

A status hearing is scheduled for July 16, 2010. 

2010 DOJ FCPA Opinion Procedure Release

By statute, DOJ must provide a written opinion at the request of an "issuer" or "domestic concern" regarding whether DOJ would prosecute the requestor under the FCPA’s anti-bribery provisions for prospective conduct that the requestor is considering taking.  DOJ publishes these opinions on its FCPA website, but only a party who joins in the request may authoritatively rely on the opinion generated.  The SEC does not itself issue FCPA opinion procedure releases, but has opted as a matter of policy not to prosecute issuers that obtain clean opinions from DOJ.  Including the release discussed below, DOJ has now issued fifty-two FCPA opinion procedure releases.

FCPA Opinion Procedure Release 2010-01

On April 19, 2010, DOJ released its first, and thus far only, opinion of the year in response to an inquiry from a U.S. company (the "Requestor") that is a domestic concern under the FCPA and had entered into a contract with a U.S. government agency to perform services in a foreign country.  The United States and the foreign country had executed an agreement, pursuant to which the responsible U.S. government agency would provide assistance to the foreign country in designing and building a facility in the foreign country.  The U.S. government then contracted the design/build job to the Requestor.  As part of the contract, the Requestor hired, through a local subcontractor, individuals to work at the facility at the direction of the U.S. government agency.  One of those individuals, who is currently a government official in the foreign country, was selected by the foreign country’s government to serve as the Facility Director, with a one-year, $60,000 contract.  His role as Facility Director will be distinct from his role as a government official, and he will not in either role perform any services on behalf of, or make any decisions affecting, the Requestor. 

Based on these facts, DOJ stated that it does not intend to pursue an enforcement action against the Requestor with respect to the proposed hiring of the Facility Director.  In particular, DOJ noted that the Facility Director "will not be in a position to influence any act or decision affecting the Requestor" and that the foreign country, with no input from the Requestor, selected the employee based solely upon his qualifications. 

FCPA Legislative and Regulatory Developments

The first six months of 2010 have seen the introduction of several pieces of legislation that, if enacted, could significantly impact the world of FCPA enforcement.  Further, testimony taken before congressional committees suggests that even more legislative proposals may be on the horizon.  In addition, newly introduced amendments to the U.S. Sentencing Guidelines that govern sentencing calculations for organizational defendants counsel in favor of corporations reexamining how they structure and implement their anti-corruption compliance programs. 

SEC Whistleblower Bounty Program

One collateral consequence of the financial regulatory reform legislation introduced in response to the massive fraud perpetrated by Bernard Madoff may be the pace of FCPA enforcement reaching even greater heights.  At a February 2009 congressional hearing concerning the tools available to the SEC to root out securities fraud, Harry Markopolos, the securities law expert who first alerted the SEC to Madoff’s Ponzi scheme in 1999, suggested that the SEC’s little-used Whistleblower Bounty Program be extended to cover persons coming forward with evidence of all securities fraud violations.  (Currently, bounties are available only to those with information concerning illegal insider trading.)  Following the hearing, Representative Paul Kanjorski (D-PA) began pushing aggressively for the expansion of the program as part of the House’s financial regulatory reform bill, and, on December 2, 2009, Representative Barney Frank (D-MA) introduced the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173), which includes such a provision.

Although not specific to FCPA violations, the expanded Whistleblower Bounty Program would encompass the FCPA.  If enacted, persons coming forward to the SEC with original information that leads to an FCPA enforcement action resulting in the assessment of a civil penalty in excess of $1 million could be rewarded with as much as thirty percent of the penalty, depending upon the quality of the information provided.  The bill passed the House on December 11, 2009. 

In the Senate, on April 15, 2010, Senator Chris Dodd (D-CT) introduced the Restoring American Financial Stability Act of 2010 (S. 3217), which includes a very similar expansion of the SEC Whistleblower Bounty Program.  The most notable difference from the House version is that the Senate version provides for a minimum reward of ten percent of the total penalty assessed.  This bill passed the Upper House on May 20, 2010.  The House and Senate bills are currently in conference, and a final bill is expected to emerge in the coming weeks.

Should expansion of the SEC’s Whistleblower Bounty Program become law, one can expect an even greater uptick in FCPA enforcement activity at both DOJ and the SEC as, for the first time, persons who come across evidence of suspected corrupt behavior will have a substantial financial incentive to report it to government regulators.  Just as important, the increased whistleblower incentive will change the landscape of corporate internal investigations and voluntary disclosure decisions.  Employees who once approached company auditors and compliance personnel with their suspicions may decide instead to approach the SEC.  And when company management and counsel uncover evidence of potential improper payments, they will have to weigh the new incentives for employees when deciding how to conduct internal investigations and whether or not to disclose their findings. 

Mandatory Debarment for Anti-Bribery Violations

On May 20, 2010, Representative Peter Welch (D-VT) introduced the Overseas Contractor Reform Act (H.R. 5366), which would mandate debarment from federal government contracting for issuers and domestic concerns "found to be in violation" of the FCPA’s anti-bribery provisions.  The bill provides that those so "found" will be proposed for debarment within thirty days of final judgment (including appeals), although it does provide for an exemption if, within this time period, the "head of the agency concerned" delivers a waiver to Congress "along with an accompanying justification." 

The proposed bill does not define what constitutes a "finding" that an entity has violated the FCPA’s anti-bribery provisions.  Certainly this would include a criminal conviction, but whether this would extend to deferred and non-prosecution agreements with DOJ or neither-admit-nor-deny civil complaints and cease-and-desist orders filed by the SEC remains unclear.  Another interesting gap in the proposed bill is that it only applies to violations by issuers and domestic concerns, but not those based outside of the United States who use the U.S. wires, mails, or other instrumentalities of U.S. commerce to further their foreign bribery schemes.  If passed, this bill could therefore further exacerbate the perception of U.S. companies that FCPA enforcement creates an "unlevel playing field" vis-à-vis their foreign competitors, a sentiment that has been the subject of much debate since the FCPA took effect more than three decades ago. 

The bill has been referred to the House Committee on Oversight and Government Reform.

Congressional Testimony

Although no legislative proposals have yet emerged, we would be remiss if we did not mention the February 23, 2010 testimony of Nuhu Ribadu, the former Chief of Nigeria’s Economic and Financial Crimes Commission, before the Senate Foreign Relations Subcommittee on African Affairs.  Ribadu testified regarding the status of the United States-Nigeria relationship and recommended the expansion of the FCPA’s reach to foreign nationals "who accept bribes and use [U.S.] financial institutions to hide or launder these funds."  As discussed in our 2009 Mid-Year FCPA Update, Ribadu made a similar appeal before the House Financial Services Committee on May 19, 2009. 

Extending the FCPA’s reach to foreign government officials would certainly expand DOJ’s authority to combat foreign corrupt practices.  But even without such statutory authority, DOJ has already found other ways to prosecute the foreign official-recipients of bribes.  For example, DOJ has brought money laundering charges against Robert Antoine and Jean Rene Duperval, as well as Juthamas Siriwan and Jittisopa Siriwan, respectively the alleged recipients of bribes in the Haiti Teleco and Tourism Authority of Thailand FCPA investigations discussed above.

Pending Amendments to the U.S. Sentencing Guidelines

In a move that will undoubtedly affect the manner in which companies structure their compliance programs and respond to allegations of improper conduct, the U.S. Sentencing Commission voted unanimously on April 7, 2010, to amend the U.S. Sentencing Guidelines applicable to business organizations by modifying the conditions necessary to receive credit for having an "effective compliance and ethics program" ("ECEP"). On April 29, 2010, the Sentencing Commission submitted this proposed amendment to Congress as part of a package of amendments.  Unless Congress affirmatively passes legislation rejecting the amendments, an unlikely proposition, they will take effect on November 1, 2010.

The theory behind offering ECEP credit is that a company being held vicariously liable for the conduct of one or more of its employees should receive credit in its Guidelines calculation if the illicit conduct occurred despite of the existence of a vigorous compliance program, rather than because of a lack of internal controls.  In practice, however, ECEP credit has been the "white whale" of the Guidelines; few have ever seen it. 

Under the amended Guideline, there will no longer be a per se disqualification from ECEP credit solely because a member of "high-level personnel" within the company participated in, condoned, or was willfully ignorant of the offense.  To benefit from this change, however, the company must satisfy the following four conditions:

(1)   the person(s) with operational responsibility for the company’s compliance program must "have a direct reporting obligation" to the board of directors or an appropriate committee of the board;

(2)   the company’s compliance program must have "detected the offense before discovery outside the organization or before such discovery was reasonably likely";

(3)   the company must have "promptly reported the offense to the appropriate governmental authorities"; and

(4)   no person with operational responsibility for the company’s compliance program may have "participated in, condoned, or [have been] willfully ignorant of the offense."

The first of these four requirements provides strong encouragement for companies to examine the reporting lines of their chief compliance officers.  Commentary to the amended Guideline states that a compliance officer will be deemed to have a "direct reporting obligation" for purposes of this subsection "if the individual has express authority to communicate personally to the governing authority or appropriate subgroup thereof (A) promptly on any matter involving criminal conduct . . . and (B) no less than annually on the implementation and effectiveness of the compliance [program]."  Further, the third requirement above may shape how a company responds to potentially improper conduct by bringing additional pressure to the all-important voluntary disclosure decision. 

For more on the impact of this pending amendment, please see Gibson Dunn’s client alert, "U.S. Sentencing Commission Amends Requirements for an Effective Compliance and Ethics Program."

Ongoing FCPA-Related Civil Litigation

In recent years, companies facing government investigations into potential FCPA violations have often found themselves further targeted in private, civil lawsuits brought by shareholders, competitors, and foreign governments, among others.  Although the FCPA does not provide for a private right of action, plaintiffs’ attorneys constantly seek new ways to parlay violations of the statute into collateral claims.  For example, nearly every announcement of an FCPA investigation or settlement by an issuer of stock is now quickly followed by a press release from a plaintiffs’ law firm, announcing their own investigation and soliciting potential clients for a putative derivative suit.  This trend has shown no signs of abating in 2010, as the first half of the year saw the continuation of several high-stakes follow-on private suits, as well as the appearance of several noteworthy new actions. 

Securities Fraud Actions

• Nature’s Sunshine Products, Inc. — After settling civil FCPA charges with the SEC in 2009 for allegedly making corrupt payments in Brazil, Utah-based nutritional product manufacturer Nature’s Sunshine Products has now finally brought to a close a related Section 10(b) shareholder lawsuit filed in 2006.  On February 9, 2010, the U.S. District Court for the District of Utah approved a $6 million settlement and dismissed the case.    
• UTStarcom, Inc. — Similarly, California-based telecommunications company UTStarcom appears poised to resolve a long-running securities fraud lawsuit in 2010, after its 2009 settlement of criminal and civil FCPA charges with DOJ and the SEC arising from alleged bribe payments to government officials in China, India, and Mongolia.  A hearing on UTStarcom’s proposed $30 million settlement with the plaintiffs’ class is scheduled before the U.S. District Court for the Northern District of California on August 30, 2010.

Shareholder Derivative Suits

• Pride International, Inc. — On April 15, 2010, a group of shareholders filed a derivative action in state court in Harris County, Texas, against offshore oil rig operator Pride International and eight members of its board of directors.  The suit alleges breaches of fiduciary duty arising from Pride’s alleged payment of over $4 million in kickbacks to officials of foreign governments, from Angola to Venezuela.  Pride has publicly disclosed that it nearing a negotiated resolution of criminal and civil charges with DOJ and the SEC, accruing $56.2 million for these expected settlements.   

Lawsuits Brought by Foreign Sovereigns

• Alcatel-Lucent S.A. — Shortly after announcing a $137.4 million reserve for pending FCPA settlements with DOJ and the SEC related to alleged corrupt payments in Costa Rica, Kenya, and Taiwan, French telecommunications company Alcatel-Lucent found itself the defendant in a civil action brought by one of the victim countries.  On May 7, 2010, El Instituto Costarricense de Electricidad, Costa Rica’s government-owned telecommunications and electricity provider, filed suit in Miami-Dade County Circuit Court in Florida, seeking recovery of treble damages under Florida’s civil racketeering laws.
• Republic of Iraq Oil-for-Food RICO Suit — For several years now, we have been following the 2008 lawsuit filed by the Republic of Iraq against nearly one hundred companies and individuals who allegedly conspired with Saddam Hussein’s Regime to make corrupt payments in connection with the United Nations Oil-for-Food Program.  On January 15, 2010, the defendants filed a consolidated motion to dismiss, focusing primarily on arguments that the claims are time-barred under the relevant statutes of limitation and that Plaintiff Republic of Iraq is legally one-and-the-same as the government that demanded and benefited from the allegedly improper payments. Iraq has responded in opposition and, separately, moved to compel arbitration against certain of the defendants.  All motions are currently pending. 
• Alba Lawsuits — Typically, collateral civil litigation surrounding alleged FCPA violations follows the announcement of government investigations and/or resolutions.  But Aluminum Bahrain BSC ("Alba"), which is majority owned by a sovereign wealth fund of the Government of Bahrain, has taken the offensive in two separate lawsuits filed in U.S. courts against companies — Alcoa, Inc. and Sojitz Corporation — alleged to have bribed its own employees to obtain illegal discounts on aluminum.  The 2008 suit against Alcoa was immediately stayed by the court at the request of DOJ so that DOJ could investigate the company’s alleged corrupt activities.  Similarly, in May 2010, DOJ intervened in the Sojitz lawsuit, obtaining a judicial stay in those proceedings while the Department investigates the company. 

Lawsuits Brought by Business Partners or Competitors

• RSM Litigation — As we reported in our 2009 Year-End FCPA Update, RSM Production Corporation’s 2006 lawsuit against Gregory Bowen, the former Deputy Prime Minister responsible for energy issues in Grenada, for allegedly soliciting bribes from RSM and then awarding contracts to RSM’s competitors when it refused to pay them was dismissed on Foreign Sovereign Immunities Act grounds.  That case remains on appeal to the Second Circuit.  Not satisfied to await that outcome, however, on March 17, 2010, RSM filed suit against the U.K. Magic Circle law firm Freshfields Bruckhaus Deringer LLP, alleging that the firm’s representation of Grenada in an international arbitration against RSM was funded with the proceeds of bribe payments from one of RSM’s competitors. 

Employment Litigation

• Alcatel-Lucent S.A. — In January 2007, Fadi Kanafani, a former salesman for a Lucent subsidiary based in the United Arab Emirates, filed a retaliatory discharge suit under New Jersey’s Conscientious Employee Protection Act, alleging that he was terminated for reporting suspected FCPA violations to the company’s legal department.  In September 2009, Judge Jose Linares of the U.S. District Court for the District of New Jersey denied Alcatel-Lucent’s motion for summary judgment, finding that Kanafani had made out a prima facie case, thereby shifting the burden of proof under the state whistleblower law to Alcatel-Lucent.  The case was then referred to mediation and, on April 28, 2010, dismissed pursuant to a confidential settlement agreement between the parties. 

Spotlight on International Anti-Corruption Enforcement Efforts

The first half of 2010 continued the trend toward increased global enforcement of anti-bribery laws and closer cooperation between the anti-corruption enforcement authorities in different countries.  Indeed, the above-described resolution of the Innospec case is one prominent example of these trends, as the company simultaneously resolved charges brought by enforcement authorities in the United Kingdom and the United States.  These trends are also reflected in recent publications by TRACE International ("TRACE") and the Organisation for Eeconomic Cooperation and Development’s ("OECD") Working Group on Bribery, both of which are aimed at measuring the progress of worldwide anti-corruption enforcement efforts. 

On June 10, 2010, TRACE released its first annual Global Enforcement Report, which is intended "to identify and track international anti-bribery enforcement trends."  The initial report begins the process by summarizing all known enforcement actions since the passage of the FCPA in 1977.  TRACE’s broad conclusion is that, "[b]y any calculation, international anti-bribery enforcement is increasing worldwide." Among the key findings are the following:

• the United States has pursued three enforcement actions for every one initiated by another country over the past thirty-three years;
• although enforcement activity outside the United States increased between 2000 and 2009, the United States maintained its three-to-one enforcement ratio over that period; and
• the countries whose officials have been most often implicated as the recipients of foreign bribes are China, Iraq, and Nigeria. 

A few days after publication of TRACE’s Global Enforcement Report, the OECD Working Group on Bribery issued its annual report, along with data on the enforcement efforts of the countries party to the OECD’s Anti-Bribery Convention.  At the time of the report, thirty-seven of the thirty-eight parties to the Convention had provided enforcement information.  That data, which distinguishes foreign bribery offenses from related offenses, such as accounting misconduct, shows that, between the Convention’s entry into force in 1999 and the end of 2009, thirteen states sanctioned 148 individuals and seventy-seven entities for bribing foreign officials.  In addition, the data revealed that there are approximately 280 ongoing investigations in twenty-one countries.  Five states reported no ongoing investigations, and twelve did not provide data on investigations. 

Developments in China

Since 2002, DOJ and the SEC have brought twenty-eight anti-corruption enforcement actions relating to business activities in China.  Fifteen of those cases have been brought against corporations, and thirteen have been initiated against individual defendants.  These actions have targeted a broad swath of industries, from automotive to healthcare to telecommunications, and they illustrate certain unique risks faced by multi-national companies doing business in China.  First, the Chinese government remains an active participant in many aspects of what would otherwise be "private" industries.  In fact, the Chinese government is thought to own 70% of the country’s productive wealth and serve as the majority shareholder of 31% of publicly listed companies.  Further, state-owned and state-controlled enterprises account for approximately one half of all urban investment in fixed assets in China.  This pervasive role of government in the ownership and control of commercial enterprises qualifies many people who work in China as "foreign officials" under the FCPA, at least according to the U.S. regulators’ interpretation of the statute.  Second, Chinese business culture relies upon a deeply rooted tradition of gift giving and the provision of other business courtesies, such as meals and entertainment, to build relationships.  This cultural norm exposes corporations doing business in China to significant FCPA risks.

These risks and the resultant level of enforcement activity have caused a number of trends to emerge that should sound a warning note for companies doing business in China.  First, China-related enforcement actions often involve the provision of gifts or entertainment.  Second, these prosecutions have reaffirmed U.S. regulators’ broad interpretation of what constitutes a "foreign official" and a "thing of value."  Third, third-party intermediaries often are implicated in such actions. 

Provision of Leisure or Sightseeing Travel and Gifts

Many China-related FCPA prosecutions over recent years have involved the provision of leisure or sightseeing trips to Chinese government officials.  Perhaps the most well known of these enforcement actions is the 2007 prosecution of Lucent Technologies, Inc.  From 2000 to 2003, Lucent allegedly spent more than $10 million to pay for 315 trips to the United States for employees of Chinese state-owned and state-controlled telecommunications enterprises.  The employees were sent to Hawaii, Las Vegas, the Grand Canyon, Disneyland, Niagara Falls, Universal Studios, and other popular tourist destinations.  Similarly, Paradigm BV ran afoul of the FCPA by allegedly paying all expenses associated with sightseeing trips for officials of Chinese state oil and gas companies, and Siemens AG was alleged to have paid $9 million in travel costs for "study trips" to U.S. vacation spots for Chinese physicians employed by state-owned hospitals. Avery Dennison Corporation, Control Components, Inc., UTStarcom, Inc., and, most recently, Daimler AG also allegedly provided similar sightseeing trips to Chinese officials.

Because gift giving is an integral part of Chinese business culture, FCPA actions involving business in China often include allegations that improper gifts were given to Chinese officials.  Most recently, Veraz Networks, Inc., was alleged to have given $4,500 worth of gifts to officials of a state-owned telecommunications company in what one Veraz supervisor purportedly referred to as a "gift scheme."  Similarly, Daimler AG and its Chinese subsidiary were alleged to have given officials working for a state-owned oil company gifts worth €980 while those officials were on an all-expenses-paid trip to Germany.  In 2009, Control Components, Inc., was charged with giving "expensive gifts" to foreign officials, and Schnitzer Steel Industries, Inc., was prosecuted for similar conduct in 2006 — allegedly giving expensive gifts, including $10,000 gift certificates and a $2,400 watch, to various Chinese officials.

Broad Interpretation of "Foreign Official" and "Thing of Value"

Recent China-related FCPA enforcement actions also showcase the U.S. enforcement authorities’ broad interpretation of "foreign official" and "thing of value" under the FCPA.  DOJ and the SEC have asserted that partial government ownership of a commercial entity renders its employees "foreign officials" under the FCPA, even if the government is not a majority shareholder.  This presents a significant risk for companies doing business in China because of the pervasive presence of the Chinese government in "private" industry. The actions against Schnitzer Steel and Daimler illustrate this risk.  Schnitzer Steel and its Korean subsidiary were each prosecuted for allegedly making improper payments to employees of Chinese steel mills that were either wholly or partially owned by the Chinese government.  The related civil enforcement action against Si Chan Wooh, the former head of Schnitzer Steel’s Korean subsidiary, asserted that "[b]ecause the mills were at least partially government-owned, the managers were foreign officials within the meaning of the FCPA."  Relatedly, DOJ and the SEC have consistently asserted that partial government ownership of a publicly traded entity qualifies its employees as foreign officials under the FCPA.  Indeed, Daimler was recently charged with making improper payments to Sinopec, a publicly traded oil company that DOJ characterized as a "Chinese state-owned energy company" because the Chinese government owns a majority of its shares.

Along similar lines, recent China-related FCPA enforcement activity evidences the U.S. regulators’ broad interpretation of what constitutes a "thing of value" under the statute.  For example, Lucent Technologies allegedly paid or offered to pay certain educational expenses, including tuition and living expenses, for Chinese officials and their relatives.  Similarly, Control Components allegedly paid college tuition expenses for children of two foreign officials in violation of the FCPA.  Most recently, Daimler and its Chinese subsidiary were prosecuted for allegedly providing internships to a Chinese official’s son and his girlfriend, helping the official’s son and his girlfriend obtain student visas, and allowing them to use a Mercedes passenger car.

Third-Party Intermediaries

Although not unique to China, the use of third-party intermediaries to make improper payment is a feature in many FCPA enforcement actions relating to China.  For example, AGA Medical Corporation allegedly made improper payments to physicians at state-owned hospitals through its Chinese distributor.  Similarly, InVision Technologies, Inc.’s third-party distributors allegedly made payments to foreign officials to induce them to buy InVision’s baggage screening machines, and Paradigm BV’s Chinese subsidiary was alleged to have used an agent to make payments to a subsidiary of the Chinese National Offshore Oil Company.  Other companies that have been prosecuted recently for allegedly channeling bribes to Chinese officials through intermediaries include Control Components, Daimler, Faro Technologies, Inc., ITT Corporation, Siemens, and Veraz Networks.

For additional information on the corruption-related risks associated with doing business in China and recent FCPA enforcement activity related to China, please see Gibson Dunn’s recent article, "FCPA Compliance in China and the Gifts and Hospitality Challenge."

Developments in the United Kingdom

Over the past year, the United Kingdom has been a hotbed of anti-corruption activity, culminating with the enactment of the Bribery Act.  The Bribery Act, which cleared the final stages of the Parliamentary process on April 8, 2010 and is expected to come into force by this fall, will dramatically impact corporations that carry on any part of their business or maintain any presence in the United Kingdom.  In addition to passing the Bribery Act, the U.K. Government has issued new guidance regarding voluntary disclosure and the settlement of enforcement actions. 

Following the recent general election, the new coalition government has indicated its determination to put anti-corruption policy front and center with the appointment of Justice Secretary Kenneth Clarke as the U.K.’s new anti-bribery champion.  Mr. Clarke is tasked with ensuring the smooth implementation of the Bribery Act.  Given all of these developments, it is clear that the current heightened focus on anti-corruption enforcement in the United Kingdom will not subside in the near future. 

The Bribery Act

The Bribery Act creates four separate offenses:  (1) bribing; (2) being bribed; (3) bribing a foreign public official; and (4) failing to prevent bribery (applicable to corporate entities only).  Entities found guilty of any of these offenses will be subject to monetary penalties, which may be unlimited in cases of failure to prevent bribery.  Individuals convicted of these offenses may be fined or imprisoned. 

The offense of bribing a foreign public official is directly analogous to the FCPA’s anti-bribery provisions. Specifically, the Bribery Act provides that "[a] person (‘P’) who bribes a foreign public official (‘F’) is guilty of an offense if P’s intention is to influence F in his or her capacity as a foreign public official." Significantly, jurisdiction exists if the prohibited conduct takes place in the United Kingdom or if the defendant has a "close connection" with the United Kingdom.  Broadly, this means that the Bribery Act applies to U.K. companies, U.K. citizens, and U.K. residents, regardless of where the alleged bribery occurs.  Non-U.K. nationals and entities can be liable if any act or omission forming part of the offense takes place in the United Kingdom. 

The prohibition on bribing a foreign official set forth in the Bribery Act compares to the FCPA in a number of notable ways.  First, the definition of a "foreign public official" under the Bribery Act closely mirrors the FCPA’s definition of "foreign official" and includes, among others, government officials and those working for international organizations.  The prohibition does not, however, contain a provision comparable to the FCPA’s express requirement that the payor act "corruptly," although one hopes that the healthy exercise of prosecutorial discretion will result in few actions in which there is no clear evidence that the payor intended to induce the recipient to misuse his or her official position.  The Bribery Act’s requirement that the payor must "intend to obtain or retain business, or an advantage in the conduct of business" appears broader than the FCPA’s requirement that the bribe be paid to "obtain or retain business," although U.S. courts and enforcement authorities have interpreted the latter phrase expansively.  Finally, the Bribery Act prohibits improper payments made through a third party. 

Perhaps the most significant difference between the Bribery Act and the FCPA concerns exceptions and affirmative defenses.  The FCPA includes an exception for facilitation payments and affirmative defenses for both bona fide promotional expenses and payments that are lawful under the written laws of the recipient’s country.  The Bribery Act incorporates only one of these provisions, providing that no violation occurs if the written law governing the official’s conduct requires or permits him or her to be influenced by the offer, promise, or gift.  Although this provision could be used to defend certain facilitation payments and promotional expenditures, it likely applies to a much narrower range of conduct than that permitted under the FCPA.  For additional information on the thorny issue of the FCPA’s facilitating payments exception in today’s increasingly global business environment, please see Gibson Dunn’s article, "Narrow, Don’t Abolish, The FCPA Facilitating Payments Exception." 

For additional information on the sweeping impact of the Bribery Act, please see Gibson Dunn’s recent client alert, "UK Enacts New Bribery Act." 

Enforcement Practice Issues

In addition to passing the Bribery Act, the United Kingdom has recently devoted additional resources to anti-corruption enforcement and announced the creation of an enforcement super-agency that will consolidate the enforcement efforts of the SFO, the Financial Services Authority, and other enforcement agencies to streamline all white-collar crime enforcement efforts.  As anti-corruption activity has increased in the United Kingdom, topics such as voluntary disclosure and settlement practices have recently moved to the forefront. 

Similar to the approach of U.S. prosecutors, the SFO has begun encouraging corporations to identify, investigate, and voluntarily disclose improper payments made to foreign officials.  Indeed, guidance issued by the SFO in July 2009 states that voluntary disclosure of misconduct may result in "a civil rather than a criminal outcome as well as the opportunity to manage, with [the SFO], the issues and any publicity proactively."  Although preferring to settle voluntarily disclosed cases civilly "wherever possible," the SFO does not give an "unconditional guarantee that there will not be a prosecution of the corporate."  U.S. authorities similarly encourage companies to come forward with information concerning conduct that may violate the FCPA, but their promises of leniency have been more amorphous.  For example, there has been no announcement comparable to the SFO’s statement favoring civil resolutions of voluntarily disclosed cases.  It thus remains unclear what benefits companies considering disclosures to U.S. authorities can expect in exchange for their disclosure. 

In addition to the carrot of potential civil resolution for those that voluntarily disclose their conduct, the SFO has begun to wield a substantial stick by threatening to bring criminal enforcement actions against the directors of companies that do not report corruption.  The U.S. enforcement agencies are unable to exert such pressure because the FCPA’s criminal provisions do not apply to directors who are not directly involved in the underlying misconduct.  To date, only two SFO enforcement actions have resulted from voluntary disclosure, so it remains too early to assess whether the SFO’s encouragement will result in an increase in enforcement activity. 

A second issue that has received recent attention in the United Kingdom is the use of plea agreements, a common vehicle in the United States, to resolve U.K. anti-corruption enforcement actions.  Two recent developments have sharply restricted the ability of the SFO to resolve matters through plea agreements. First, as noted above, the judge who sentenced Innospec Ltd., while accepting the company’s plea agreement, challenged the SFO’s power to enter into these extra-judicial, negotiated dispositions:  "I have concluded that the director of the SFO had no power to enter into the arrangements made and no such arrangements should be made again."  A few months later, in May 2010, a judge rejected the cooperation agreement that the SFO forged with Robert John Dougall, a former vice president of Depuy International Ltd., and sentenced him to twelve months in prison for corruption-related offenses.  Although an appeals court reversed this sentence, in doing so, it nonetheless chastised the SFO:  "Responsibility for the sentencing decision in cases of fraud or corruption is vested exclusively in the sentencing court (or on appeal, from that court, to the Court of Appeal Criminal Division).  There are no circumstances in which it may be displaced."  These decisions will affect how companies facing corruption charges in the United Kingdom negotiate a resolution of those enforcement actions with U.K. authorities.

One final issue that has received substantial attention is the appointment of independent compliance monitors as a component of anti-corruption settlements.  Whereas DOJ has issued detailed guidelines regarding the selection of a monitor, the scope of a monitor’s responsibilities, and other issues, the SFO has yet to provide guidance in this area.  Instead, it has simply stated that it will apply "light touch monitoring" to help a convicted company implement remedial measures.  SFO Director Richard Alderman has stated that "[n]ot all cases will require a monitor," such as a "one off lapse in an ethical corporate with a very strong anti-corruption culture, particularly if the corporate has shown [the SFO] that this was picked up and remedied by its own processes."  In cases in which a monitor is justified, the SFO expects that the offending company will suggest an approach to the monitorship and that the SFO will be able to work with the company to define the scope of the monitorship.  DOJ has recently permitted self-monitoring in select cases, but the SFO has not mentioned this possibility. 

Risk-Mitigation Measures

Many multi-national companies likely now find themselves subject to both the FCPA and the Bribery Act.  To reduce the risk of running afoul of either law, companies should take certain precautions.  First, a company may seek an opinion from the SFO or DOJ regarding prospective conduct.  Although not as broad as DOJ’s opinion procedure release process, described above, the SFO has offered to opine on situations in which an acquiring company uncovers corruption issues during the course of due diligence on the target.  Under certain circumstances, the SFO may assure the acquiring entity that it will not take any enforcement action, provided that appropriate remedial actions are taken.  If, however, "the corruption is long lasting and systemic," the SFO may insist on pursuing a criminal investigation.  The SFO has not yet issued any opinions of this sort, nor has it released guidance detailing the process for requesting such an opinion.

Second, a company can adopt a compliance program to detect and prevent violations of the FCPA and the Bribery Act.  Implementation of such a program can help a company avoid prosecution in the first place — for example, if the program is deemed to satisfy the "adequate procedures" defense under the Bribery Act — or to argue for a reduced sentence, as in the above-described ECEP mitigation credit available under the U.S. Sentencing Guidelines.  Both U.K. and U.S. authorities have outlined recommended compliance policies and procedures.  The SFO’s suggested policies and procedures are tailored to deal solely with foreign corruption, whereas the U.S. Sentencing Guidelines provide more general guidance on implementation of an ECEP.  It is important that any entity subject to both the FCPA and the Bribery Act make sure that its compliance program is designed with both laws in mind.  For example, although the FCPA permits facilitation payments and certain business promotion expenditures, the Bribery Act is, on its face, more restrictive in this regard and those types of payments may need to be regulated more closely to ensure compliance with the latter law. 

Gibson Dunn’s Presence in London

Gibson Dunn has a team of lawyers based in London with extensive experience in anti-corruption enforcement and compliance issues.  Led by Lord Charles Falconer, the former Lord Chancellor and Secretary of State for Justice, this team regularly advises financial institutions and investment advisors in connection with securities litigation and investigations and represents a range of clients in connection with high-risk disputes and crisis management issues.  We are well positioned to assist companies in complying with the Bribery Act and to represent them and their executives in investigations of potential violations of the Act.  

Conclusion

It has become our semi-annual refrain that the heightened enforcement environment for prosecuting cross-border corruption of government officials — be it in the United States under the FCPA, or in any number of other countries now enforcing analogous laws on their books — is here to stay.  Certainly, nothing we have seen in the first half of 2010 has changed our minds.  Now, more than ever, companies and their executives doing business with governments around the world must take heed of these developments and take steps to address any potential corruption issues. 

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. We have more than 65 attorneys with FCPA experience, including a number of former federal prosecutors, spread throughout the firm’s domestic and international offices. Joe Warin, a former Assistant U.S. Attorney, currently serves as FCPA counsel for the first non-U.S. compliance monitor and recently completed his compliance consultancy for Statoil A.S.A. pursuant to its DOJ and SEC FCPA enforcement action. Please contact the Gibson Dunn attorney with whom you work, or any of the following:

Washington, D.C.
F. Joseph Warin (202-887-3609, [email protected])  
Daniel J. Plaine (202-955-8286, [email protected])
Judith A. Lee (202-887-3591, [email protected])
David P. Burns (202-887-3786, [email protected])  
Jim Slear (202-955-8578, [email protected])
Brian C. Baldrate (202-887-3717, [email protected])  
Michael S. Diamant (202-887-3604, [email protected])
John W.F. Chesley (202-887-3788, [email protected])
Patrick F. Speice, Jr. (202-887-3776, [email protected])

New York
Joel M. Cohen (212-351-2664, [email protected])
Lee G. Dunst (212-351-3824, [email protected])
Mark A. Kirsch (212-351-2662, [email protected])
Jim Walden (212-351-2300, [email protected])
Alexander H. Southwell (212-351-3981, [email protected])
Lawrence J. Zweifach (212-351-2625, [email protected])
Adam P. Wolf (212-351-3956, [email protected])

Dallas
Evan S. Tilton (214-698-3156, [email protected])

Denver
Robert C. Blume (303-298-5758, [email protected])
Jessica H. Sanderson (303-298-5928, [email protected])
Laura M. Sturges (303-298-5929, [email protected])

Orange County
Nicola T. Hanna (949-451-4270, [email protected])
J. Scot Kennedy (949-451-3805, [email protected])
Eric Raines (949-451-4050, [email protected])
Bryan E. Smith (949-451-4055, [email protected])

Los Angeles
Debra Wong Yang (213-229-7472, [email protected]),
the former United States Attorney for the Central District of California,
Michael M. Farhang (213-229-7005, [email protected])
Douglas M. Fuchs (213-229-7605, [email protected])
Marcellus A. McRae (213-229-7675, [email protected])
Melissa Epstein Mills (213-229-7314, [email protected])

Munich
Benno Schwarz (+49 89 189 33-110, [email protected])
Michael Walther (+49 89 189 33-180, [email protected])
Mark Zimmer (+49 89 189 33-130, [email protected])

London
Charlie Falconer (+44 (0)20 7071 4270, [email protected])
Barbara Davidson (+44 (0)20 7071 4216, [email protected])

 © 2010 Gibson, Dunn & Crutcher LLP