This article highlights the efforts of the Department of Justice and the Securities and Exchange Commission in enforcing the Foreign Corrupt Practices Act (“FCPA”) during the first half of 2008.
I. FRICA and SOUTH AMERICA
Ramendra Basu – Ethiopia and Kenya
On April 22, 2008, Ramendra Basu, a former World Bank Trust Funds manager, was sentenced to 15 months in prison for conspiring to steer certain World Bank contracts in exchange for kickbacks, and for assisting in the bribery of a Kenyan government official in violation of the FCPA. In late 2002, Basu, an Indian national and permanent legal resident of the United States, admitted that between 1997 and 2000 he accepted a total of $127,000 to assist Swedish companies secure World Bank contracts for projects in Ethiopia and Kenya, and arranged, on behalf of Swedish consultants, for a wire transfer of $50,000 to the Kenyan official. Basu later tried to withdraw his guilty plea but was denied. Basu’s co-conspirators had already been sanctioned: a former World Bank Task Manager, Gautam Sengupta, pleaded guilty to charges similar to Basu’s in February 2002 and was sentenced four years later, while the consultants were prosecuted and convicted by the Swedish government.
Willbros Group, Inc. – Nigeria and Ecuador
On May 14, 2008, the Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”) announced settlements with Willbros Group Inc. (“Willbros Group”) and its wholly owned subsidiary, Willbros International Inc., (“Willbros International”) under which the entities (collectively “Willbros”) agreed to pay more than $32 million to address charges by the DOJ and SEC that they violated the FCPA by offering bribes to government officials in Nigeria and Ecuador. Willbros Group operates in the oil and gas industry to provide construction, engineering and other services, and Willbros International is a wholly owned subsidiary through which Willbros conducts international operations. According to a Criminal Information filed by the DOJ, from late 2003 through March 2005, Willbros offered more than $6.3 million to a range of Nigerian officials and a Nigerian political party in exchange for assistance in obtaining a $387 million pipeline project. Willbros employees based in South America also allegedly agreed to pay bribes totaling $300,000 to Ecuadorian officials, in exchange for the award of a project to help restore a major gas pipeline in the country.
Willbros has agreed to pay a $22 million criminal penalty because of its FCPA violations. Furthermore, provided Willbros complies with the terms of the deferred prosecution agreement for three years, the DOJ will dismiss the Criminal Information in its entirety. In making this agreement, the DOJ noted Willbros’ “exemplary cooperation” with its investigation, including a review of the improper payments, implementation of compliance measures, and the engagement of an independent corporate monitor.
In a related development, the SEC charged Willbros Group with various violations of the Exchange Act and Securities Act in connection with the company’s alleged bribes to Nigerian officials, by agreeing to disgorge $10.3 million in profits and pre-judgment interest. The SEC also acknowledged Willbros Group’s cooperation with the investigation.
II . MIDDLE EAST
Flowserve Corporation - Iraq
On Feb. 21, 2008, the DOJ and SEC settled matters with Flowserve Corporation (“Flowserve”) stemming from Flowserve’s FCPA violations in connection with activities related to the United Nations Oil-for-Food Program. Based in Texas, Flowserve manufactures pumps, valves, seals, and other automation and service to the power, oil, gas, and chemical industries. Between July 2002 and February 2003, Flowserve Pompes SAS (“Flowserve Pompes”), a Flowserve subsidiary, is alleged to have paid kickbacks characterized as “after-sales services fees” (“ASSFs”), without the performance of any services to the Iraqi government totaling $604,651 according to the DOJ (or $646,488 according to the SEC), and authorized an additional $173,758 to the Iraqi government.
The DOJ filed an agreement with Flowserve as well as a Criminal Information against Flowserve Pompes in the U.S. District Court for the District of Columbia. The criminal information charges Flowserve Pompes with two violations of the FCPA: conspiracy to commit wire fraud and conspiracy to violate the books and records provisions. In its agreement with the DOJ, Flowserve took full responsibility for the actions of Flowserve Pompes and promised its full cooperation with the DOJ’s Oil-for-Food Program investigations. Additionally, Flowserve agreed to pay a $4 million penalty. In return, and in recognition of Flowserve’s willingness to conduct a thorough review of the improper payments and to implement enhanced FCPA compliance procedures, the DOJ agreed to defer prosecution of Flowserve for three years. Additionally, pending Flowserve and Flowserve Pompes’ full cooperation with the terms of the agreement, the DOJ promised to dismiss the Criminal Information.
The SEC filed a complaint against Flowserve in the U.S. District Court for the District of Columbia Feb. 21, 2008 also alleging violations of the FCPA’s books and records and internal controls provisions. The SEC also recognized the immediate remedial efforts made by Flowserve and the company’s cooperation with the SEC investigation. Flowserve consented to an entry of a final judgment in the case, without denying or admitting the allegations made by the SEC. As a result, Flowserve has been permanently enjoined from future violations of sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities and Exchange Act of 1934, and must disgorge $2,720,861 in profits, pay $853,364 in pre-judgment interest, and pay a $3 million civil penalty.
AB Volvo - Iraq
On March 20, 2008, the DOJ and SEC filed agreements with AB Volvo, a Swedish company that provides commercial transport solutions in the form of trucks, buses, and construction equipment. According to the allegations by the federal agencies, from approximately 1999 through 2003, employees and agents of Renault Trucks SAS (“Renault Trucks”), a subsidiary of AB Volvo, paid a total of approximately $5 million in kickbacks characterized as ASSFs to the Iraqi government under the Oil for Food Program. These kickbacks resulted in contracts with various Iraqi ministries worth approximately €61 million. From 1999-2000, another AB Volvo subsidiary, Volvo Construction Equipment International (“VCEI”), also paid kickbacks totaling more than $103,000 to the Iraqi government under the Oil for Food Program.
The DOJ filed an agreement with AB Volvo in addition to Criminal Informations against Renault Trucks and Volvo Construction Equipment AB (“VCE”), the successor of VCEI, in the U.S. District Court for the District of Columbia, alleging that Renault Trucks and VCE both engaged in conspiracies to violate the two provisions of the FCPA: books and records, and wire fraud. AB Volvo agreed to pay a $7 million penalty. The DOJ agreed to defer prosecution of Renault Trucks and VCE for three years; moreover, if both AB Volvo and its subsidiaries abide by the terms of the agreement, the DOJ will dismiss the Criminal Informations. In making this agreement, the DOJ recognized AB Volvo’s thorough review of the improper payments and the parent company’s willingness to enhance compliance policies and procedures.
The SEC filed a complaint against AB Volvo in the U.S. District Court for the District of Columbia March 20, 2008. Neither admitting nor denying the SEC’s allegations, AB Volvo consented to the entry of a final judgment permanently enjoining it from future violations of sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities and Exchange Act of 1934. Additionally, AB Volvo agreed to disgorge $7,299,208 in profits, $1,303,441 in pre-judgment interest, and to pay $4 million in a civil penalty. The SEC again recognized AB Volvo’s immediate remedial efforts and its cooperation with the SEC’s investigation.
III . ASIA
Westinghouse Air Brake Technologies Corporation – India
Westinghouse Air Brake Technologies Corporation (“Wabtec”), a Western Pennsylvania-based company that manufactures brake subsystems for locomotives, freight cars, and passenger vehicles, entered into agreements with the DOJ and the SEC to settle complaints regarding violations of the FCPA for improper payments to government officials. From at least 2001 through 2005, Pioneer Friction Limited (“Pioneer”), Wabtec’s Indian subsidiary, was accused of making improper payments to employees of the Indian government in order to obtain business from the Indian National Railway System. As a result of the award of certain contracts in 2005, Pioneer realized profits of $259,000.
On Feb. 14, 2008, Wabtec entered into an agreement with the DOJ that obligates Wabtec to pay a $300,000 penalty, adopt internal controls, and continue to cooperate with the DOJ. The DOJ recognized Wabtec’s initial efforts to thoroughly investigate the matter and to institute remedial measures. Consequently, as long as Wabtec satisfies its duties under the agreement for three years, the DOJ has agreed not to prosecute Wabtec or Pioneer.
On Feb. 14, 2008, the SEC (1) issued an administrative order finding that Wabtec violated the anti-bribery, books-and-records, and internal controls provisions of the FCPA, and (2) settled a civil action against Wabtec in the U.S. District Court for the Eastern District of Pennsylvania. In the administrative proceedings, Wabtec was ordered to cease and desist from its FCPA violations, to return the $259,000 of Pioneer’s realized profits and $29,351 in prejudgment interest, and to retain an independent consultant to monitor Wabtec’s compliance with the FCPA policies and procedures. In the federal action, Wabtec agreed to a final judgment in the amount of $87,000. Wabtec consented to the relief in both forums, without admitting or denying the SEC’s claims against it.
AGA Medical Corporation – China
On June 3, 2008, the Department of Justice announced that AGA Medical Corporation (“AGA”), a manufacturer of products used in the treatment of congenital heart defects, agreed, among other things, to pay $2 million to defer its prosecution on charges that it violated the FCPA by offering bribes to Chinese officials. According to a Criminal Information filed by the DOJ in the U.S. District Court for the District of Minnesota in conjunction with the deferred prosecution agreement, between 1997 and 2005, AGA officials offered payments through a local distributor to doctors employed by Chinese government-owned hospitals, in exchange for which those doctors directed their hospitals to purchase AGA’s products. The DOJ further alleged that in early 2000, AGA offered payments (also through its distributor) to employees of China’s State Intellectual Property Office, in order to obtain approval for patents on several of its products.
The DOJ favorably regarded AGA’s cooperation with the federal agency’s investigation, including voluntarily disclosing the details of its violations, thoroughly reviewing the improper payments, implementing enhanced compliance policies and procedures, and engaging an independent corporate monitor. Consequently, the DOJ agreed to defer prosecution for three years, at the end of which it would dismiss the criminal information, provided AGA had abided by the terms of the agreement.
Faro Technologies, Inc. – China
On June 5, 2008, the DOJ announced that Faro Technologies Inc. (“Faro”) agreed to pay a $1.1 million criminal penalty to address charges that Faro violated the FCPA by offering bribes to Chinese government officials. Faro is a company that manufactures computerized measurement devices and software for use in the manufacturing sector, including automotive, aerospace, and consumer goods industries. According to a statement of facts issued by the DOJ, in 2004 and 2005, Faro employees offered illicit payments dubbed “referral fees” to employees of Chinese state-owned or controlled entities in return for contracts worth nearly $5 million. In 2005, Faro’s Chinese subsidiary also established a shell company to further disguise its bribes.
Faro voluntarily disclosed its actions to the DOJ, and as part of its settlement with the DOJ, has agreed to undertake a number of measures to ensure its future compliance with FCPA requirements, in addition to paying the $1.1 million criminal penalty. Provided Faro abides by these conditions for two years, the DOJ has promised not to prosecute the company for its admitted conduct.
In a related development June 5, the SEC instituted a settled enforcement action against Faro, finding that Faro violated the anti-bribery, books and records, and internal controls provisions of the FCPA. The settlement requires the company to pay $1.85 million in disgorgement of profits and prejudgment interest gained through its unlawful activities in China. Additionally, the SEC requires that Faro retain an independent consultant for two years to monitor Faro’s FCPA compliance. The SEC considered Faro’s cooperation with the investigation and the prompt remedial actions that the company undertook.
Former Pacific Consolidated Industries LP Executive – United Kingdom
In an action before the U.S. District Court for the Central District of California, Martin Eric Self, a former Pacific Consolidated Industries LP (“PCI”) executive, pleaded guilty May 8, 2008 to violating the FCPA by paying more than $70,000 in bribes to an official of the U.K. Ministry of Defence (“UK MOD”) in order to obtain equipment contracts for PCI in late 1999. PCI, headquartered in Santa Ana, manufactured equipment, including Air Separation Units (“ASUs”), for defense departments around the world. Self was a partial owner and president of PCI, and was also the signatory on PCI bank accounts and marketing agreements. PCI’s successor, Pacific Consolidated Industries, LLC, referred the matter to the DOJ and offered its full cooperation in the DOJ’s investigation.
The other individuals involved in this bribery scheme have also been indicted: (1) Leo Winston Smith, PCI’s executive vice president and director of sales and marketing during the time in question, was indicted in April 2007 and is scheduled for trial in July 2008; and (2) the UK MOD official involved has pleaded guilty to accepting the bribes from PCI and was sentenced to two years in prison.
The FCPA developments of the first half of 2008 demonstrate the growing coordination between U.S. law enforcement agencies and their counterparts worldwide, as well as the ongoing emphasis on alleged violators’ self-disclosure and cooperation with federal investigations, and the importance of proactive FCPA planning when engaging in risky transactions.
In the DOJ’s press release regarding the settlement with Martin Eric Self, Alice C. Fisher, the Assistant Attorney General for the Criminal Division, emphasizes the need for global cooperation in the fight against international bribery, stating that “the coordinated international law enforcement efforts of this case exemplify the type of cooperation needed to fight crime in the 21st century.” While coordination was possible in this case between U.S. and U.K. officials, the potential for effective cooperation between U.S. officials and their counterparts overseas clearly will vary on a country-by-country basis.
As the enforcement actions discussed above reveal, the DOJ and SEC continue to reward companies for cooperating with the agencies’ investigations into potential FCPA transgressions, explicitly pointing out such cooperation as a factor in the determination of penalties. In the Deferred Prosecution Agreement with AGA, for example, the DOJ noted the following actions taken by AGA as contributing to the agreed settlement:
- Voluntarily and timely disclosing the misconduct
- Conducting a thorough internal investigation of the misconduct
- Reporting all findings to the DOJ
- Cooperating in the DOJ’s investigation
- Undertaking the remedial measures of the Deferred Prosecution Agreements
- Agreeing to future cooperation in the DOJ investigation of possible FCPA violations in connection with the actions of its directors, officers, employees, agents, consultants, contractors, and subcontractors
The Opinion Procedure Releases from this year also demonstrate the DOJ’s favorable treatment of extensive compliance planning when companies face transactions involving FCPA risk. In the mergers and acquisition context, extensive FCPA due diligence of a proposed transaction should be conducted (Opinion Procedure Release 08-01) or, where such due diligence is not possible prior to consummation, a thorough FCPA compliance-related investigation should be conducted post-transaction (Opinion Procedure Release 08-02). When planning promotional or business development events in environments with significant FCPA risk (such as China), integrating compliance measures into a company’s event planning from the beginning can ensure that such activities take place in conformance with the requirements of the FCPA.