Background

Alice Fisher, Assistant Attorney General and head of the US Department of Justice’s (DOJ) Criminal Division, stated that “Prosecuting corruption of all kinds [including the Foreign Corrupt Practices Act (FCPA)] is a high priority for the Justice Department and for me as head of the Criminal Division.” She explained that the DOJ is “enforcing the FCPA to root out global corruption and preserve the integrity of the world’s markets.”

The DOJ is not alone. On September 30, 2006 the US Senate approved the United Nations Convention Against Corruption. This convention was signed by 140 countries and has been ratified by 91. Parties to the Convention are required to criminalize bribery of domestic and foreign public officials. Also, the Organization for Economic Co-operation and Development (OECD) Working Group on Bribery regularly monitors its signatory countries’ progress in complying with the OECD Antibribery Convention’s mandate to enact and enforce effective laws prohibiting bribery of foreign public officials in international business transactions.

In addition, South Korea, Switzerland, France and Norway have begun actively prosecuting their own corruption, with numerous investigations under way in cooperation with the DOJ. Fines Are Often Off the Charts

In February 2007, three Vetco oil company subsidiaries pleaded guilty and a fourth entered into a deferred prosecution agreement with the US government for authorizing an international freight forwarding and customs clearing firm to pay Nigerian customs officials a total of US$2.1 million on their behalf over a three-year period ending in April 2005. The bribes were for obtaining preferential treatment in the customs clearance of supplies and equipment the companies imported for their work on the Bonga offshore oil exploration project.

The bribes were coordinated through the Houston office of Vetco. Each of the three subsidiaries paid multimillion dollar penalties, totaling US$26 million – the largest fine ever collected by the DOJ in an FCPA prosecution.

The DOJ imposed this record fine in part because the subsidiaries failed to follow through on compliance representations made by an investment group two years before, when the group obtained a DOJ undertaking, that it would not proceed against the group for violations committed by the subsidiaries concerned prior to the proposed acquisition.

The plea agreement requires them to (1) hire an independent monitor; (2) complete an investigation of the subsidiaries’ conduct in other countries (see DOJ Opinion Release No. 04-02); and (3) ensure that future purchasers of Vetco subsidiaries would agree to comply with the plea agreement.

The DOJ’s Voracious Appetite for FCPA Violators

Also in February, energy company El Paso Corp. agreed in a civil action brought against it by the Securities and Exchange Commission (SEC) in the Southern District of New York (SEC v. El Paso Corp., S.D.N.Y., No. 07 CV 00899) to pay US$7 million to settle charges it indirectly paid almost US$5.5 million in illegal surcharges in order to purchase oil from Iraq under the UN’s Oil for Food program. El Paso forfeited US$5.48 million in restitution in a nonprosecution agreement and paid US$2.25 million in a civil fine.

The SEC alleged El Paso knew, or was reckless in not knowing, that Iraqi officials were demanding illegal kickbacks in the form of surcharges on barrels of oil. It had recorded telephone calls to show El Paso’s knowledge of the scheme. The SEC also charged El Paso with violations of the FCPA’s accounting provisions, asserting that it failed to maintain an adequate system of internal controls to detect the improper payments and also failed to record the nature of the company’s payments properly. On October 13, 2006 the DOJ announced that Statoil, a Norwegian international oil company listed on the NYSE, had admitted FCPA violations, agreed to pay the DOJ a US$10.5 million fine and entered into a three-year deferred prosecution agreement in which it agreed to hire an FCPA compliance consultant. This was the first time the DOJ took a criminal enforcement action against a foreign-based company for violating the FCPA. The action emphasized Assistant Attorney General Alice Fisher’s statement at the ABA’s National Institute on the FCPA, held in Washington DC two weeks later: “I want to send a clear message today that if a foreign company trades on US exchanges and benefits from US capital markets, it is subject to our laws. The department will not hesitate to enforce the FCPA against foreign-owned companies just as it does against American companies.”

This case was resolved by a deferred prosecution agreement in part because the Norwegian authorities had investigated Statoil and levied a US$3 million penalty against Statoil for the same conduct. The facts of the case displayed many of the “red lights” that should have alerted an FCPA-subject company that it was entering dangerous waters.

Statoil executives met with an Iranian official who represented he had influence with the Iranian Oil Ministry, which is responsible for awarding oil and gas rights. The company entered into a “consulting contract” with an offshore intermediary company for vaguely defined services, which called for payment of US$15.2 million over 11 years. The purpose of the “consulting contract” was to induce the official to help Statoil secure a contract to develop part of the South Pars Field and additional oil and gas project contracts in future years. The contract required the payment of a “success fee” when Statoil was awarded a contract and payments to “charities” of the Iranian official’s choice.

Before this arrangement was exposed in the Norwegian press, the official received US$5.2 million by wire transfer through a New York bank account. Statoil failed to properly account for these payments in its books and records and Statoil senior management circumvented the company’s internal controls to pay the bribes.

Other FCPA actions announced late in 2006 included settlements among the DOJ, the SEC and Schnitzer Steel. The settlements dealt with illegal payments made by two subsidiaries of Schnitzer – one of them located in South Korea – to managers of government-owned and private customers in South Korea and China to induce them to buy scrap metal from Schnitzer and Japanese firms for which it was brokering the scrap.

Schnitzer had paid US$1.8 million in bribes over five years, which helped it make millions of dollars in commissions and profits. The bribes and kickbacks were made in a variety of ways: as “commissions” or “refunds” paid to the managers of Schnitzer’s customers; as cash payments through secret off-book bank accounts in South Korea; as gifts, e.g., jewelry, perfume and a US$2,400 Cartier watch; as golf club memberships; and in the use of company-owned five-star condominiums. The payments to the managers of Chinese government-owned steel companies violated the foreign payments provisions of the FCPA, and all the payments were held by the SEC to have been improperly recorded on the subsidiaries’ books and demonstrated a failure by Schnitzer to devise and maintain an effective system of internal controls to prevent and detect violations of the FCPA.

Schnitzer’s Korean subsidiary agreed to plead guilty to violations of the antibribery provisions of the FCPA and its books and records provisions, conspiracy and wire fraud. It paid a US$7.5 million criminal fine. The US parent company agreed to enter into a deferred prosecution agreement with the DOJ and a settlement agreement with the SEC, both of which contained a compliance consultant requirement.

The DOJ emphasized in its announcement of the case that Schnitzer was an excellent example of “how voluntary disclosure followed by extraordinary cooperation results in a real tangible benefit to the company. For example, Schnitzer and its audit committee:

  • voluntarily disclosed the matter to the Department;
  • conducted a searching and extensive internal investigation;
  • shared the results of that investigation in a prompt fashion;
  • cooperated extensively with the Department in its ongoing investigation;
  • took appropriate disciplinary action against wrongdoers, irrespective of rank;
  • replaced senior management; and
  • took significant remedial steps, including the implementation of a robust compliance program.”1

The Chemical Industry Is Not Immune

On February 13, 2007 the SEC settled a proceeding against Dow Chemical Company for violations of the FCPA’s books and records and internal controls provisions relating to alleged improper payments (US$200,000) and gifts to Indian state and federal officials. The payments were not accurately reflected in Dow’s books and records of the Dow foreign subsidiary that provided the payments and gifts. Dow paid a civil penalty of US$325,000 and settled the case without admitting or denying the allegations in the complaint.

Dow’s subsidiary was DE-Nocil Crop Protection Ltd., a fifth-tier Dow subsidiary doing business in India required to obtain government registration for its products at both state and federal levels prior to marketing them in India. The SEC alleged that between 1996 and 2001, DE-Nocil made illegal payments through consultants and unrelated companies to government officials in order to register several of its products scheduled for marketing in time for India’s growing season.

Dow conducted an internal investigation and voluntarily disclosed its findings to the SEC. It also took extensive remedial steps. The company:

  • instituted employee disciplinary actions;
  • retained an independent auditor to conduct a forensic audit of the subsidiary’s books and records and internal controls;
  • reported its findings to the board and audit committee;
  • provided FCPA compliance training to employees at DE-Nocil and its immediate parent;
  • restructured its global compliance program;
  • expanded FCPA compliance training worldwide;
  • trained auditors to recognize FCPA issues;
  • joined a nonprofit association specializing in antibribery due diligence that, among other things, screens potential partners and other third parties that work for multinational corporations; and
  • hired an independent consultant to review and assess the FCPA compliance program.

It is interesting to note that all of the conduct alleged by the SEC in its complaint occurred on or before 2001, which takes it outside the five-year statute of limitations for the FCPA. It may be that Dow entered into a tolling agreement with the SEC, or the SEC may have viewed the violations as ongoing.

Individuals Are Not Immune From Criminal Prosecution

Charles Martin, Monsanto’s former government affairs director for Asia, agreed to pay a US$30,000 civil fine to settle SEC charges that he authorized the payment of a bribe to an Indonesian official and concealed the payment in a bogus invoice from the company’s consultant in Indonesia. According to the SEC, Mr. Martin, who was based in Washington DC, had approved a US$50,000 bribe of a senior official in the Indonesian Ministry of Environment. He was unsuccessful in his effort to get the ministry to reverse a decree that required additional testing of genetically modified organisms (GMOs) that Monsanto wanted to market in Indonesia.

In reaching the settlement with the SEC, Mr. Martin, who left Monsanto in 2002, neither admitted nor denied the charges. Monsanto reached a separate settlement with the SEC and the DOJ for its role in the bribe in January 2005. The company agreed to pay a US$1 million civil penalty in its deal with the DOJ and a US$500,000 penalty in its agreement with the SEC. The government claimed that Monsanto, from 1997 to 2002, had actually been involved in the payment of about US$700,000 in bribes to 140 Indonesian officials.

Similarly, on December 19, 2006, Christian Sapsizian, a former deputy vice president of a Paris-based subsidiary of French telecommunication equipment service and provider Alcatel, was indicted by a federal grand jury in Miami on 10 counts of violations of the antibribery provisions of the FCPA, money laundering and conspiracy. Mr. Sapsizian, who oversaw Alcatel’s Latin American operations for the subsidiary, is alleged to have approved and implemented a scheme to funnel illegal payments to an unnamed senior official of Costa Rica’s state-owned telecommunications authority and other senior Costa Rican officials to secure support for Alcatel’s bid to run lucrative telecommunications contracts.

Mr. Sapsizian was arrested in Miami on a complaint. The jurisdictional nexus cited in the indictment includes wire transfers to and from the United States. What is notable about this case is the DOJ’s willingness to prosecute a foreign citizen, employed by a foreign company, and residing and having his office outside the United States, for allegedly corrupt payments to a foreign official.

This case was investigated by law enforcement in Costa Rica, whose official was allegedly bribed; in the United States, whose banks were allegedly used to transmit the payments; and in France, where Alcatel is located. France is the only country that did not initiate an enforcement proceeding.

Transparency International’s Corruption Indices in Various Business Sectors

Transparency International, the leading global nongovernmental and not-for-profit organization devoted to combating corruption, has compiled “corruption indices” for various business sectors based on surveys of how likely is it that senior public officials in a particular country would demand or accept bribes in areas such as public tenders, regulations or licensing. The scores are the mean of all responses on a 0 to 10 basis, where 0 represents very high perceived levels of corruption and 10 represents extremely low perceived levels of corruption.*