The Department of Justice has strongly encouraged companies voluntarily to disclose potential violations of the Foreign Corrupt Practices Act (“FCPA”). Both the former Attorney General and the current Assistant Attorney General for the Criminal Division have stated that companies that self-report, conduct thorough internal investigations, implement corrective actions and cooperate fully with the Department, “will get a real, tangible benefit.”1
Three recent cases demonstrate how significant the benefits can be for a corporation as a result of uncovering unlawful conduct, conducting a thorough internal investigation and taking remedial action, making a prompt voluntary disclosure and cooperating with governmental authorities.
Paradigm’s Non Prosecution Agreement with the Department of Justice
On September 21, 2007, the Department of Justice entered into a Non-Prosecution Agreement with Paradigm, B.V., its subsidiaries and affiliates (“Paradigm”), which had voluntarily disclosed, thoroughly investigated and fully cooperated with the Department with respect to certain payments made by Paradigm to government officials in China, Kazakhstan, Mexico, Nigeria and Indonesia. In its press release announcing the Paradigm action, Assistant Attorney General for the Criminal Division Alice S. Fisher commented that it was a further example of a company receiving a significant benefit from its “responsible corporate conduct.”
Paradigm’s actions in this matter, including voluntary disclosure and remedial efforts, are consistent with our view of responsible corporate conduct when FCPA violations are uncovered. Accordingly, the Department has resolved this case to permit the company to move forward on sound footing, governed by ethical business practices.2
Paradigm agreed to terms typically found in deferred prosecution agreements, including specific requirements regarding the implementation of a rigorous compliance program, the conduct of effective due diligence on, and oversight of, agents and business partners, and the appointment of a Compliance Counsel. Following the example set in the February 2007 deferred prosecution agreement with Aibel Group Limited,3 the Department agreed to permit counsel for Paradigm to serve as Compliance Counsel. In addition, Paradigm agreed to pay a $1,000,000 fine.4
Paradigm is a provider of enterprise software solutions for the global oil and natural gas exploration and production industry, with substantial operations in the Asia Pacific region, Latin America and the Middle East. During the relevant time period, Paradigm was a privately-held company registered in The Netherlands, with its principal place of business in Herzliya, Israel. In 2005, it became a “domestic concern,” as defined in the FCPA, 15 U.S.C. § 78dd-2(h)(1)(B), when it relocated its principal operations to Houston, Texas.
According to the Statement of Facts, in early 2007, during due diligence for an upcoming Initial Public Offering (“IPO”), Paradigm uncovered several instances in which its employees and agents had made, or promised to make, payments to government officials in China, Kazakhstan, Mexico, Nigeria and Indonesia.
In August 2005, in response to a tender issued by KazMunaiGas, Kazakhstan’s national oil company, and on the recommendation of a KazMunaiGas official, Paradigm retained Frontera Holding S.A. (“Frontera”) as an agent, ostensibly to assist in preparing its tender documentation. Paradigm neither conducted due diligence on, nor entered into a written agreement with, Frontera to establish the scope of the services to be provided. After Paradigm was successful in obtaining a $249,290 contract from KazMunaiGas, it paid a $22,250 “commission” to Frontera, despite the fact that there was no evidence that Frontera had provided any services to Paradigm.
In July 2006, Paradigm’s representative office in China entered into an agreement with an agent in connection with a transaction involving a subsidiary of the China National Offshore Oil Company (“CNOOC”). The agreement contemplated commission payments to both the agent and representatives of CNOOC’s subsidiary. In addition, Paradigm retained as “internal consultants” various technical employees of Chinese government- owned oil companies to evaluate Paradigm’s software, and to “inspect” and “accept” the software once it was purchased and delivered. Paradigm agreed to make cash payments to these consultants and paid for the travel, accommodations, meals, entertainment, gifts and cash per diems during “training” trips for the consultants as well as for employees of the CNOOC subsidiary. According to the Statement of Facts, those payments were intended to influence the purchase of Paradigm products.
Paradigm’s Mexican subsidiary made a variety of payments to, or for the benefit of, a senior official of Pemex, the Mexican national oil company, in order to obtain and retain, among others, subcontracts with companies doing business with Pemex. Those payments included:
- A “relationship building” trip to Napa Valley, California, as well as other entertainment consisting of dinners, drinks and “other activities.”
- Commissions totaling $206, 698 to an agent, without having conducted due diligence or entering into a written agreement. Paradigm agreed to make these payments, at the direction of the agent, to five different entities without performing due diligence on them.
- Hiring as a driver the brother of the Pemex official with whom Paradigm was negotiating a subcontract.
- Leasing a house from the wife of an official of a Pemex affiliate with which Paradigm was negotiating a contract.
In 2003, Paradigm entered into discussions with Integrated Data Services Limited (“IDSL”), a subsidiary of the government-owned Nigerian National Petroleum Corporation. A year later, Paradigm submitted a bid to IDSL to form a joint venture to provide services and processing work to Nigerian oil companies. Paradigm retained an agent to assist its Nigerian operations and agreed to pay the agent a commission in the event Paradigm received the IDSL contract. According to the Statement of Facts, in May 2005, Paradigm representatives agreed to make “corrupt” payments of between $100,000 and $200,000, through the agent, to unidentified Nigerian politicians in order to secure the IDSL contract.
In April 2003, Paradigm’s Indonesian subsidiary made payments to employees of Indonesia’s national oil company for the purpose of obtaining and retaining business. The total amount of any “improper” payments could not be confirmed from readily available documentation, although Paradigm confirmed at least one such payment was made.
The Non-Prosecution Agreement6
Paradigm admitted the government’s factual statement, accepted full responsibility for the conduct, and “agreed not to make any public statement” to the contrary. It further agreed that, during the eighteen-month term of the Agreement, it would (1) cooperate fully with the Department and any other law enforcement agency designated by the Department in connection with any investigation related to the matters set out in the Agreement; (2) not commit any new crime; (3) report, and disclose any relevant information, to the Department regarding any conduct or investigation involving allegations of fraud by Paradigm.
Paradigm also agreed to adopt a set of internal controls, policies and procedures in order to ensure that Paradigm “maintains: (a) a system of internal accounting controls designed to ensure that Paradigm makes and keeps fair and accurate books, records and accounts; and (b) a rigorous anti-corruption compliance code, standards, and procedures designed to detect and deter violations of FCPA and other applicable anti-corruption laws.” As in the case of prior deferred prosecution agreements, the Agreement requires that the compliance code and controls include, at a minimum, the following:
- A “clearly articulated corporate policy against violations of the FCPA and other applicable anti-corruption laws;”
- A compliance code, standards and procedures applicable to all directors, officers, and employees of the company, and, where necessary and appropriate, “outside parties acting on behalf of Paradigm in a foreign jurisdiction including agents, consultants, representatives, distributors, teaming partners, joint venture partners;”
- Assignment of responsibility to “one or more senior corporate officials of Paradigm for the implementation of and oversight of compliance with policies, standards and procedures regarding the FCPA and other applicable anti-corruption laws,” including the “authority to report matters directly to Paradigm’s Audit Committee of the Board of Directors;”
- Effective communication to, and periodic training for, all directors, officers, employees and, where necessary and appropriate, agents and business partners with respect to Paradigm’s policies, standards and procedures regarding the FCPA;
- An “effective system of reporting suspected criminal conduct and/or violations of compliance policies, standards, and procedures,” and implementation of “appropriate disciplinary procedures” to address violations of the compliance code and applicable laws;
- “Appropriate due diligence requirements pertaining to the retention and oversight of agents and business partners;” and
- Inclusion of “standard provisions” in agreements with agents and business partners “designed to prevent violations of the FCPA and other applicable anti-corruption laws."
Finally, Paradigm agreed to retain an outside Compliance Counsel to (1) review the implementation and effectiveness of Paradigm’s compliance code, policies and procedures; (2) recommend, where necessary and appropriate, enhancements to Paradigm’s compliance code, policies and procedures; (3) review Paradigm’s compliance with the Agreement; (4) recommend and, if appropriate, direct that internal investigations be conducted and voluntary disclosures be made to the Department and other relevant regulatory agencies; and (5) report periodically, as directed by the Department, regarding the foregoing.
York International Corporation’s Deferred Prosecution Agreement
On October 1, 2007, York International Corporation, a global supplier of heating, ventilation, air-conditioning, and refrigeration equipment and services, and its subsidiaries and affiliates (“York”), entered into a Deferred Prosecution Agreement with the Department of Justice arising from kickbacks made by York employees and agents in Iraq in violation of the United Nations “Oil for Food” program (the “OFF Program”), and arising from other improper payments made by York employees and agents to government officials in Bahrain, Egypt, India, Turkey and the United Arab Emirates between 1999 and 2005.
The OFF Program was implemented pursuant to sanctions imposed by United Nations resolutions adopted in response to Iraq’s invasion of Kuwait in 1990. Those sanctions prohibited United Nations member states from trading in any Iraqi product or commodity. In 1995, the United Nations adopted a resolution that authorized the government of Iraq to sell oil on the condition that the proceeds be deposited with the United Nations and used only for the purchase of designated humanitarian goods for the benefit of the Iraqi people.
Beginning in 2000, the Government of Iraq began to subvert the OFF Program by demanding kickbacks from companies. These kickbacks were in the form of 10% “After-Sales Service Fees” (“ASSFs”) added to all bids, and required to be paid, as a condition of being awarded a contract for the sale of goods. Iraqi officials required payment of the ASSFs prior to the goods entering the country and held shipments at the border until proof of payment of ASSFs was provided.
The Department’s news release stated that it agreed to defer prosecution of the company “in recognition of York’s early discovery and reporting of the kickback payments, its thorough review of those payments, as well as its discovery and review of improper payments made in other countries, the company’s implementation of enhanced compliance policies and procedures, and the company’s willingness to have its compliance program and procedures reviewed by an independent monitor for three years.”7 York agreed, inter alia, to pay a $10 million criminal fine and to settle a related SEC civil matter by entering into a consent decree and paying $2 million in civil penalties and approximately $10 million in disgorgement of profits, including pre-judgment interest.8
At all relevant times, York was a Delaware corporation with its headquarters in York, Pennsylvania. York was an “issuer” under the FCPA whose shares were publicly traded on the New York Stock Exchange. York had operations in various countries, including Bahrain, Egypt, India, Turkey and the United Arab Emirates. On December 9, 2005, York was acquired by Johnson Controls, Inc.
Between November 2000 and March 2003, York subsidiaries entered into six sales contracts, administered through the OFF Program, with various Iraqi Ministries to supply air compressors, air-conditioners, air-cooled package units and spare parts. In order to secure these contracts, valued at approximately $7 million, York admitted it made $647,000 in illegal ASSF payments to the government of Iraq. York concealed these payments from the United Nations by inflating the contract prices by 10% and disguising them on its own books and records by mischaracterizing them as “commission” and “consultancy” payments.
In addition, from September 1999 through December 2005, York subsidiaries paid kickbacks and bribes to government officials and contractors in Bahrain, Egypt, Turkey and the United Arab Emirates to secure and retain contracts on government projects worth approximately $42 million. The payments were facilitated by means of false invoices for consulting services that had not been performed.
The Department filed a three-count criminal Information charging York with engaging in, and conspiring to engage in, wire fraud, and with falsifying its books and records in violation of the accounting provisions of the FCPA. The Department agreed to defer prosecution of these charges and to dismiss the charges at the end of three years “if York fully complies with all of its obligations under this Agreement.”
Significantly, the Department expressly stated that it entered into the Agreement based, inter alia, on the fact that York had:
- voluntary and timely disclosed to the government the improper conduct;
- conducted a thorough investigation of the initially uncovered payments and other possible misconduct;
- reported all findings of its investigation to the Department;
- cooperated with the Department’s investigation;
- identified and implemented remedial measures to ensure that the conduct does not recur and agreed to undertake further remedial measures;
- agreed to continue to cooperate with the Department in its ongoing investigation of the conduct of York employees; and
- undertook and agreed to “complete a thorough review by an outside forensic accounting firm . . . designed to detect and remediate any weaknesses in internal controls . . . that may have led to or could lead to additional conduct similar to that described in the Statement of Facts.”
York agreed to terms in the deferred prosecution agreement identical to those set out in the Paradigm Agreement. In addition, York agreed to engage an independent monitor, acceptable to the Department, to review and evaluate the effectiveness of York’s internal controls, record-keeping, and financial reporting policies and procedures as they relate to compliance with the anti-bribery provisions of the FCPA and other applicable anti-corruption laws.
Textron Inc.’s Non-Prosecution Agreement
On August 22, 2007, the Department entered into a Non-Prosecution Agreement with Textron Inc. (“Textron”), a global, multi-industry company, “in recognition of Textron’s early discovery” and reporting of improper payments and agreements to make payments by Textron employees and agents to the Iraqi government in connection with the United Nations OFF Program.10 Textron had also disclosed to the Department improper payments it had made in other countries, including India, Egypt and the United Arab Emirates, between 2000 and 2005. The Department further cited, as a basis for its decision, Textron’s implementation of enhanced compliance policies and procedures. Textron agreed, inter alia, to pay a $1,150,000 fine, and to settle a related SEC civil injunctive action in which it further agreed to pay $2,284,579 in disgorgement, $450,461.68 in pre-judgment interest and $800,000 in civil penalties.11
Textron, a publicly-traded Delaware corporation with headquarters in Providence, Rhode Island,12 operated in four separate business segments. In its Industrial Segment, Textron operated a Fluid and Power Business Unit through various subsidiaries, including several of its “David Brown” entities. Three David Brown subsidiaries in France that manufactured and sold industrial pumps, industrial gears, valves and mechanical transmissions for use in the oil, gas and petrochemical industries, sold goods to Iraq through the OFF Program.
According to the Statement of Facts, the David Brown subsidiaries entered into thirteen sales contracts with either Iraq’s Ministry of Oil or Ministry of Industry and Minerals and paid, or agreed to pay, $600,000 to the Iraqi government by means of ASSF payments equal to 10% of the contract price. These payments were made through consultants based in the Middle East, with whom there were no written agreements in violation of company policy. In addition, the ASSF payments were inaccurately recorded in Textron’s books and records.
In addition to the payments made in connection with the OFF Program, Textron disclosed 36 other “illicit” payments involving $114,995.20 made by the David Brown subsidiaries to officials in the United Arab Emirates, Bangladesh, Indonesia, Egypt and India. According to the Statement of Facts, as in the case of the payments to the Iraqi government, these other payments were made to secure contracts and mischaracterized on Textron’s books and records.
The Non Prosecution Agreement
The Non-Prosecution Agreement, which is for a three year period, is virtually identical to the Paradigm Agreement and prior deferred prosecution agreements, including with respect to the elements of the required anti-corruption compliance policy. Interestingly, however, Textron was not required to engage either a Monitor or a Compliance Counsel.