Discussing some of the most important civil and criminal Foreign Corrupt Practices Act (FCPA)1 prosecutions of 2007, this update offers a review of the trends set by the settled cases and decision law of last year. The trends discussed in this analysis are:
- Increased efforts in targeting entire industries
- An expansive review of what is considered “obtaining and retaining business”
- Substantial penalties imposed on recidivists
- Increased prosecutions by foreign enforcement authorities
- Scrutiny of travel and training expenses provided to employees of foreign governments
- Continued focus on “problem” countries such as Nigeria, China, India, and the former Soviet Republics
An understanding of these trends and their implications on American businesses with foreign operations is becoming more important as the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) have ramped up their investigations. In 2003, the DOJ and SEC combined initiated only two FCPA cases. In 2007, however, the two agencies combined initiated more than 35 civil and/or criminal cases.
The increase in scrutiny of U.S. businesses and a greater willingness of U.S. authorities to target companies and individuals alike, combined with an upswing in global enforcement of anti-corruption measures, suggests that companies doing business outside the United States can expect to be faced with rigorous enforcement in the year ahead.
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Targeted Industry: The Iraqi Oil for Food Program Investigation
The United Nations Independent Inquiry Committee report on the corruption in the humanitarian oil for food program run by the U.N. that allowed oil sales from Iraq evolved into a major investigation involving Congress, multiple U.S. agencies, and many foreign governments. Lead by Paul Volker the commission reported that thousands of companies worldwide had paid almost $2 billion in kickbacks to the Iraqi government. The results of this investigation included DOJ or SEC enforcement actions against participants in the program. Six such enforcement actions are discussed below.
El Paso Corp. announced on February 7, 2007 that it had reached a settlement with the SEC and a non-prosecution agreement with the U.S. Attorney’s Office for the Southern District of New York.2 According to the SEC, El Paso paid inflated prices for oil purchased from intermediaries in order to reimburse those parties for illegal kickbacks they paid to the Iraqi Government. The kickback payments were reimbursed as increased commissions that were recorded as cost of goods sold. The company was required to pay a civil penalty of $2,250,000 and agreed to disgorge $5,480,000 in profits.
In August of 2007, Textron, Inc. entered into a settlement with the SEC and a non-prosecution agreement with the DOJ that called for the payment of an $800,000 civil penalty, a fine of $1,150,000, disgorgement of $2,284,579 in profits, and pre-judgment interest of $450,462.3 The complaint alleged that Textron’s subsidiaries entered into contracts with the Iraqi government to supply industrial equipment and as part of the contract, the Textron subsidiaries agreed to pay after-sales service fees of 10 percent to the Iraqi government. These “fees” were paid through a Lebanese consultant who was reimbursed by the payment of additional “commissions.” The claim for goods sold, including money for the fees, was then presented to the U.N. escrow account that held oil sale proceeds. Although the oil for food program was the impetus for this investigation, the company also acknowledged making similar payments in other countries, including the United Arab Emirates, Bangladesh, and Egypt. The additional issues appear to have been discovered during the company’s internal investigation of the alleged Iraqi kickbacks.
On October 1, 2007, the SEC announced a settlement with York International, Inc. on books and records and internal control charges4 after the company was found to have recorded fictitious aftersales service fees on its books. The company also entered into a deferred prosecution agreement with the DOJ after the company self-reported findings that it had paid approximately $650,000 in kickbacks to overseas bank accounts controlled by the Iraqi government in connection with the sale of “humanitarian” goods through the use of a third-party intermediary. The settlement also covered payments totaling $550,000 made through an intermediary to a government official in the United Arab Emirates in order to secure a construction contract on a hotel. Left uncharged, were incidents disclosed by the company involving an additional $8,000,000 in payments in various other countries. York also paid a civil penalty of $2,000,000, a $10,000,000 fine in connection with the deferred prosecution, and disgorged approximately $10,000,000 in profits and interest thereon. The company was also ordered to retain an independent compliance monitor.
Ingersol-Rand Co. Ltd. settled books and records charges with the SEC and entered into a deferred prosecution as to a wire fraud allegation with the DOJ on October 31, 2007.5 The Government alleged that the company and its subsidiaries paid $1,500,000 in kickbacks to the Iraqi government, which were charged to the U.N. escrow accounts. The company paid a $1,950,000 civil penalty, a $2,500,000 criminal fine, and disgorged approximately $2,300,000 in profits and interest. Interestingly, both Ingersol-Rand and York were required to enter into deferred prosecution agreements which carry a higher risk of future penalty than the non-prosecution agreements entered into by other companies charged under the Iraqi program investigation. It is unclear how this distinction was drawn.
Chevron Corp. also settled far reaching charges stemming from its Iraqi purchases. On November 15, 2007, the company entered into a settlement of books and records and internal control charges with the SEC by agreeing to pay a $3,000,000 penalty. A $20,000,000 disgorgement obligation was deemed satisfied by payments made to the Southern District of New York on related non-FCPA charges and a total of $7,000,000 in additional penalties were paid to other agencies.
Finally, the SEC announced a settlement with Akzo Nobel N.V. in December of 2007.6 The company also signed a deferred prosecution agreement with the DOJ. The Dutch pharmaceutical company was accused of paying over $275,000 in kickbacks to Iraqi government accounts through third-party agents and overseas bank accounts controlled by the Iraqi government. Akzo paid a $750,000 civil penalty and disgorged $2,220,000 in profits and interest. The DOJ did not impose a fine, citing payments already made to Dutch authorities.
In this same vein, the medical device industry was hit with a wave of subpoenas requesting data on their foreign sales practices. The Government appears to be interested in whether payments were made to physicians employed by foreign state-owned hospitals in an attempt to influence their purchasing decisions.
It is likely that the Government will continue down this path by selecting industries it believes are subject to FCPA problems and serving major players in the industry with broad subpoenas requiring intensive internal investigation and potential disclosure.
Expanding the scope of the FCPA: Vetco International and United States v. Kay In February of 2007, three subsidiaries of Vetco International, Inc. entered into a settlement agreement with the SEC and a fourth entered into a deferred prosecution agreement with the DOJ that called for a criminal fine of $26,000,0007 (the cause of this fine will be addressed in the next section). The DOJ stated that, “from at least September 2002 to at least April 2005, . . . the defendants engaged the services of a major international freight forwarding and customs clearing company and, collectively, authorized that agent to make at least 378 corrupt payments totaling approximately $2.1 million to Nigerian Customs Service officials to induce those officials to provide the defendants with preferential treatment during the customs process.” The agent charged these payments as “courier services,” “interventions,” and “evacuations.” DOJ Deputy Attorney General Paul McNulty said at the time, “this case represents the largest criminal penalty the Department of Justice has ever sought in a Foreign Corrupt Practices case and confirms our commitment to root out corruption . . . the Department of Justice will continue its efforts to assure a level playing field for businesses operating abroad.”
Vetco was important because the DOJ and SEC used an expansive view of the FCPA requirement of “obtaining and retaining business” in bringing this case. Even though bribes were not paid to secure or keep a contract, the agencies believed that there was a sufficient connection between the payments to customs officials and the retention of business.
This view was recently endorsed by the Fifth Circuit in United States v. Kay, --- F.3d ---, 2007 WL 3088140 (5th Cir. October 24, 2007). In 2004, the court had reversed the district court’s dismissal of an indictment and held that payment of bribes to Haitian officials for the purpose of avoiding paying customs duties and taxes could fall within the scope of the FCPA as assisting in the obtaining or in the retention of business. After trial and conviction, the Court rejected Kay’s claim that he had not been given fair warning of the illegality of the conduct and upheld the conviction on the theory used in Vetco.
Two Strikes You’re Out: Baker Hughes Inc. and Vetco International
In April of 2007, Baker Hughes Incorporated agreed to pay a total of $44,000,000 to settle FCPA charges stemming from alleged payments of $15,000,000 to the state-owned oil company of Kazakhstan designed to win a contract for oil field development and operation.8 The settlement included a $11,000,000 criminal fine, $23,000,000 in disgorgement, and a $10,000,000 civil penalty imposed as a result of the violation of a prior cease and desist order entered into by the company in 2001. A Baker Hughes subsidiary was required to plead guilty to criminal charges of violating the anti-bribery provisions of the FCPA and the company itself entered into a deferred prosecution agreement and was required to retain an independent monitor for three years.
Vetco was also involved in a repeat violation of the FCPA. The company had previously pled guilty to FCPA violations in 2004 involving illicit payments to Nigerian officials. The relevant businesses were subsequently sold to a private equity firm. As part of the acquisition, the acquirers agreed to institute various compliance measures to prevent a reoccurrence of the FCPA violations. Despite this due diligence and remediation, the parent company was apparently unaware of the depth of the problem until the latest round of allegations surfaced, forcing it into a deferred prosecution agreement with the DOJ that called for a criminal fine of $26,000,000.
The level of fines and penalties imposed in these cases make it clear that the DOJ and SEC will be focused on assuring that companies adhere to deferred prosecution agreements and compliance and monitoring agreements.
The Globalization of Anti-Corruption Efforts
Corruption is not just a local issue anymore. Regulators and prosecutors in other countries have stepped up their enforcement efforts and there has been an increase in cross-border investigations and coordination between various agencies. For example, as disclosed in Siemens AG’s Form 6-K filing, public prosecutors and other government authorities in jurisdictions around the world “are conducting investigations of Siemens AG and its consolidated subsidiaries and certain of its current and former employees regarding allegations of public corruption, including criminal breaches of fiduciary duty including embezzlement as well as bribery, money laundering, tax evasion, among others. These investigations involve allegations of corruption at a number of Siemens’ business Groups.”
On October 4, 2007, the company disclosed that the Munich district court imposed a fine of €201 million on Siemens. According to the court’s decision, “a former manager of the former Com Group committed bribery of foreign public officials in Russia, Nigeria, and Libya in 77 cases during the period from 2001 to 2004 for the purpose of obtaining contracts on behalf of the Company.” The company also reported ongoing investigations in Greece, Italy, and Switzerland. Many of the bribery allegations focus on European contracts as opposed to those in lesser developed nations.
Similarly, BAE Systems has been reported to be the target of major probes in the United Kingdom and the United States after reports that BAE may have paid billions of dollars to members of the Saudi royal family over the past 20 years in an effort to obtain over $80 billion in business.9 In that same article, Assistant Attorney General Alice Fisher, head of the DOJ’s criminal division, made it clear that the Department would continue its focus on FCPA cases and that the Government took a broad view of who was subject to the law. “Corruption undercuts democracy, stifles economic growth and creates an uneven playing filed for U.S. companies overseas,” Ms. Fisher says. “We are facing transnational crime all over the place.” The Times points out that only minimal contact with the U.S. can be sufficient to invite a DOJ or SEC investigation.
In sum, companies can expect increased scrutiny by regulators in countries outside the United States and a greater willingness of U.S. authorities to target companies based abroad.
Hospitality and Travel: Lucent Technologies, Inc.
On December 21, 2007, Lucent announced that it had entered into an agreement with the DOJ to avoid criminal charges under the FCPA in exchange for a civil penalty of $1,000,000.10 Lucent also announced a settlement with the SEC which had alleged violations of the FCPA’s books and records and internal control provisions. The Government claimed that between 2000 and 2003, Lucent paid over $10,000,000 for visits to the U.S. by more than 1,000 employees of China’s stateowned telecom entities. The visits, which Lucent originally claimed were for factory inspections and training purposes, were alleged to have been little more than junkets to popular tourists sites such as Las Vegas and Disney World. Officials received significant per diem payments over and above the all-expense paid trips. Lucent supposedly booked more than 160 trips to an account for factory inspections, even though, according to the Government, none of the officials ever visited the factories.
The Lucent case highlights a key area of FCPA enforcement – business travel and hospitality. Although the FCPA permits payments for valid business travel, such as training and inspection tours, companies often fly outside the boundaries of permissible spending in an effort to obtain foreign business. Two of the three opinions issued by the DOJ in its Opinion Procedures dealt with the limits of travel and hospitality.11 Some of the key aspects the agency relied on to determine permissible travel costs include:
- The foreign government selected the visitors, not the requestor;
- In one case, the visiting officials were not authorized to make purchasing decisions;
- Air transport was economy only;
- Leisure activities were not provided for or were limited to modest receptions or city bus tours;
- Souvenirs provided were promotional in nature and had the requestors logo or name (i.e., ball caps or tote bags);
- No expenses were paid for spouses, family or guests;
- Expenses were paid directly to service providers or receipts were required for reimbursement of incidental expenses; and
- No laws of the foreign country involved were violated.
Companies should consider these key aspects as guidelines in all situations where travel or hospitality are to be provided.
High Risk Countries: Individuals Face Aggressive Investigation
As described below, a series of cases against individuals highlight both the willingness of the SEC and DOJ to target individuals suspected of involvement in FCPA violations and the agencies’ specific focus on “high risk” countries, such as Nigeria and China.
William Jefferson. On June 4, 2007, Congressman William Jefferson was indicted on a variety of charges including FCPA anti-bribery violations.12 The indictment alleges that Jefferson agreed to use his influence on behalf of a Kentucky corporation in exchange for a share of the profits from the venture. Jefferson was allegedly responsible for negotiating, offering, and delivering payments of bribes to the official identified in the indictment as “Nigerian Official A,” and believed to be a former Nigerian vice-president. According to the indictment, on or about July 18, 2005, Jefferson met with the Nigerian official at the official’s residence in Potomac, Md., and offered him a bribe to induce him to use his position to assist the Kentucky corporation in obtaining commitments from NITEL, the government-controlled main telecommunications service provider in Nigeria. Jefferson agreed to provide a front-end payment of $500,000 and to deliver 5 percent of the profits from the venture. On or about August 3, 2005, Jefferson allegedly secreted in his freezer at his Washington D.C. home, $90,000 of the $100,000 in cash provided to him by a cooperating witness as part of the front-end bribe payment to the Nigerian official. Although, the case is unique in involving a sitting Congressman, it does highlight the Government’s willingness to take affirmative steps to uncover and prosecute FCPA violations.
Schnitzer Steel. Robert Phillip and Si Chan Wooh, formerly CEO and Executive Vice President, respectively, of Schnitzer Steel Industries, Inc. settled FCPA charges with the SEC and in Wooh’s case with the DOJ in June of 2007.13 Wooh pled guilty to charges of violating the anti-bribery provisions of the FCPA and agreed to cooperate with the Government’s ongoing investigation. The facts show Wooh coordinated kickbacks to nearly every Schnitzer Steel Chinese governmentowned customer. This case highlights the perils of doing business in China or other countries where illicit payments are virtually required as a cost of doing business.
Monty Fu. In 2002, the SEC settled an FCPA case with medical device manufacturer Syncor International Corp. Nearly five years later, the SEC announced a settlement with Monty Fu, the founding Chairman of Syncor. The SEC alleged that Fu had failed to implement a system of internal controls at a time when he knew or should have known that Syncor was making illegal payments to foreign physicians in state-owned hospitals, including in Taiwan, to influence their purchasing decisions. Here, even absent a direct connection to the payments at issue, the SEC aggressively pursued an individual corporate officer for failure to exercise supervisory responsibilities.
Jason Steph. Prosecutors continued their focus on companies doing business in Nigeria with the indictment of Jason Steph, a former executive of Houston based Willbros Corp., on charges of violating the FCPA through the payment of bribes to Nigerian officials in exchange for obtaining a $387 million pipeline construction project.14 Willbros paid its consultants a 3 percent fee which was transferred into a foreign bank account and then funneled to Nigerian officials and a political party. The Government also charged Steph with money laundering, citing his use of intermediary accounts to transfer the funds.