2009 was one of continued heightened FCPA enforcement activity. It is a year that will be remembered for more records and “firsts”: a year that started with imposition of the second-highest FCPA-related penalty (US$579 million) in the KBR/Halliburton case and the highest penalty to date for a US company; a year when new prosecutorial tools were unleashed in FCPA cases, such as control person liability; a year when foreign officials became targets for prosecution; a year when a focus on individual prosecutions clearly emerged; and a year that ended with a flurry of activity, which has continued into 2010.
Indeed, the final tally for the year showed the number of individual prosecutions outpacing the number of corporate prosecutions (28 and 18 respectively). By comparison, in 2008, there were nine individual prosecutions and 14 corporate prosecutions. Moreover, unlike in prior years, none of the DoJ or SEC prosecutions in 2009 were of the same individual, making the numbers even more significant.i The chart here shows the growth in individual prosecutions over the last five years.
The precise number of ongoing investigations is unknown, but reportedly includes at least 140 DoJ investigations,ii including more than a dozen investigations spawned by the 2007 Vetco Gray settlement involving a well-known freight forwarder whose resolution is reported to have begun in 2010.iii This marks a dramatic increase in the level of FCPA investigative activity. In its proposed budget for the fiscal year 2009, the Criminal Division included the statistics citing the increase in the number of ongoing DoJ FCPA investigations since 2007iv:
The 2009 FCPA cases and initial results from early 2010 reflect several developments and trends: (1) use of new investigative techniques to generate new cases and build evidence for existing ones, focusing on senior corporate officials; (2) continued imposition of jail terms for individuals found guilty of criminal FCPA violations, coupled with DoJ efforts to seek substantial jail terms in pending cases; (3) demand-side prosecutions of foreign officials; and (4) continued use of a broad range of federal criminal statutes beyond the FCPA in international anti-corruption enforcement actions.
1. Enforcement authorities’ use of new techniques to generate new leads and evidence to build cases. The substantial increases in enforcement and investigative activity in 2009 are due only in part to an increase in voluntary disclosures by corporations; increasingly, prosecutions come from other sources.
- The Sting. In January 2010, the DoJ filed criminal charges against the largest number of individuals prosecuted in a single case as part of an undercover sting operation.v In remarks on February 25, US Assistant Attorney General Lanny Breuer observed, “[o]ut are the days of resting easy in the belief that only self-reporting or tipsters will bring criminality to light. In are the days of proactive and innovative white collar enforcement.”vi
- Motivating Individual Cooperation—New SEC Policy. The SEC also is expanding its efforts to secure tips and detailed evidence from individuals. In a newly-announced policy,vii the SEC stated that it will evaluate “[w]hether the investigation was initiated based on information or other cooperation provided by the individual” in determining the level of credit to grant the individual for cooperation. In several recent appearances, the Deputy Director of the Division of Enforcement at the SEC has clarified how the SEC intends to use a new tool – so-called “cooperation agreements” with individuals who are in a position to provide substantial assistance to SEC investigations and were not themselves involved in egregious conduct. These agreements would obligate the SEC staff to recommend credit for the fully cooperative witness, and would be used principally to motivate lower-level personnel or personnel with lower degrees of culpability to provide evidence that the SEC could use against higher level company personnel or those with higher degrees of culpability.viii To further motivate individuals to cooperate, the SEC announced a streamlined process for seeking DoJ grants of immunity from criminal prosecution, as well as a policy of allowing deferred prosecution and nonprosecution agreements (a method of resolving cases previously utilized only by the DoJ).
2. Courts continue to impose jail terms for individuals, while DoJ seeks terms of substantial periods in other cases.
- The Greens. DoJ is aggressively pursuing extended sentences in the case of convicted filmmakers Gerald and Patricia Green. The DoJ announced in December that it is seeking a sentence of more than 30 years imprisonment for Mr. Green and a sentence of 19 to 24 years for Ms. Green. These would be by far the longest criminal sentences ever imposed on an individual in an FCPA case. Some have described the sentence sought against Mr. Green, who reportedly is in his 70s and in ailing health, as an effective “life sentence”. In fact, in an earlier filing in the sentencing phase, the DoJ commented that a life sentence may be appropriate. The sentencing for the Greens is scheduled for March 2010.
- Willbros Executives. In late January and early February 2010, the US District Court for the Southern District of Texas sentenced two former executives of Willbros International Inc. (“WII”), a subsidiary of Houston-based oil services company Willbros Group, Inc., who had pleaded guilty to conspiracy charges in a long-running FCPA case relating to $6 million in improper payments to foreign officials in Nigeria and other countries. The Court sentenced Jason Edward Steph to 15 months in prison, followed by two years of supervised release, and a $2,000 fine. The court sentenced Jim Bob Brown to 12 months and one day in prison, followed by a similar supervised release term of two years, and a fine of $17,500. The SEC actions against both have been stayed pending resolution of these criminal cases.
- More to Come. Sentencings in several other recent cases also are scheduled for the next few months.ix
3. Demand-side prosecutions. As part of its increased emphasis on prosecuting individuals in transnational corruption cases, the DoJ has been using the Money Laundering Control Act (“MLCA”) to prosecute the demand (official) side of corruption and bribery as well as the "supply" side.
- Haiti Telecom Officials Prosecuted for Conspiracy. In December 2009, the DoJ brought prosecutions of five more individuals in connection with a bribery scheme involving Telecommunications D’Haiti (“TDH”). Two of the accused, Messrs. Antoine and Duperval, were TDH officials. Both were charged with one count of conspiracy to violate the MLCA; Mr. Duperval was also charged with twelve counts of violating the MLCA. See United States v. Esquenazi, Rodriguez, Antoine, Duperval, and Grandison, Case No. 09-cr-21010 (S.D. Fla.), Indictment Filed Dec. 8, 2009.x Mr. Antoine pleaded guilty to one count of conspiracy to commit money laundering on March 12, 2010. His sentencing is scheduled for May 27, 2010.
- Thai Officials Charged in Green Case. In January of this year, the DoJ announced the prosecution of two additional foreign officials under a provision added to the MLCA in 2001 by the PATRIOT Act making foreign bribery a predicate offense to money laundering. The Thai officials were indicted on one count of conspiracy to violate the MLCA and seven substantive MLCA counts. See United States v. Siriwan and Siriwan, Case No. 09-cr-81 (C.D. Ca. 2010). The DoJ cited this prosecution in support of its request for long imprisonment terms for the Greens.
4. Continued use of broad federal authorities, including predicating major anti-corruption enforcement actions on ancillary statutes, and continued imposition of significant penalties.
- BAE Systems plc Fined $400 Million by US for False Statements Conspiracy. On March 1, 2010, BAE Systems plc (“BAE”), a UK-based defense contractor, settled criminal charges in the United States as part of a concurrent settlement with UK authorities.xi In its settlement with DoJ, BAE pleaded guilty to one count of criminal conspiracy to make false statements and to engage in related export control violations (for a more in-depth discussion of the export controls-related aspects of this settlement, please see our March alert at http://www.steptoe.com/publications-6692.html). The DoJ alleged that BAE falsely represented to US authorities that it would adopt anti-bribery compliance mechanisms, and later that it had done so, when in fact it had not subjected certain questionable or improper foreign payments to adequate compliance scrutiny.xii For a case that did not involve substantive violations of the FCPA, the magnitude of the penalty – $400 million (the third-highest in any FCPA-related case) – is particularly significant.
- The DoJ also charged Charles Jumet, a former executive of a US engineering firm (see the PECC case discussed below), with false statements in connection with the criminal FCPA enforcement action against him. The false statements charge against Mr. Jumet is notable in several respects. First, this charge is increasingly used against individuals charged with FCPA violations who denied the allegations when speaking to investigating authorities. In this case, the charge stems from Jumet’s claim, made to US Immigration and Customs Enforcement (“ICE”) authorities in January 2005, that an $18,000 “dividend” payment was for an elected official’s re-election campaign. The DoJ alleged the statement was false because the official was not seeking re-election, and that the payment was a bribe and not a campaign contribution. Second, the statement was not made to the FBI, which normally investigates FCPA violations, but instead to ICE, which reportedly began investigating the case in 2004, around the time that ICE formed a Foreign Political Corruption Task Force targeting corruption in Latin America.
Review of Enforcement Activity in Late 2009
The significant number of FCPA enforcement actions brought in late 2009 also illustrates hot topics in anti-corruption enforcement, both with respect to the types of payments under scrutiny and the geographical regions involved.
Continued Emphasis on Sponsorships and Immigration
Lucent Redux – UTStarcom Settles DoJ and SEC Allegations of Improper Sponsorship of Chinese Officials
On December 31, 2009, UTStarcom Inc. (“UTSI”) entered into agreements with the DoJ and SEC to settle allegations that it had bribed Chinese government employees to promote its business in the country. UTSI, incorporated in Delaware and based in Alameda, California, is a global telecommunications company that designs, manufactures and sells networking equipment and handsets. Its operations are centered in China, where it does business primarily through a wholly-owned subsidiary, UTStarcom China Co. Ltd. (“UTS-China”). UTSI is registered on the NASDAQ securities exchange, bringing it under the SEC’s jurisdiction.
The SEC charged UTSI with violating the anti-bribery, books and records and internal controls provisions of the FCPA. The SEC alleged that UTSI sponsored sightseeing tours to popular US destinations under the guise of “training trips” for employees of Chinese government customers. These trips were included as part of telecommunications system contracts that UTS-China completed in major Chinese municipalities. As UTS-China’s financial results comprised part of UTSI’s consolidated financial statements, the SEC charged that between 2002 and 2007, UTSI spent approximately $7 million on some 225 trips for customer employees pursuant to such false contractual “training” provisions.
According to the SEC’s complaint, UTSI also paid for executive training programs on at least seven occasions at US universities for managers and other employees of its Chinese customers. The training sessions pertained to general business topics, and were not specifically related to UTSI’s business. UTSI paid for all expenses associated with the programs, including cash allowances ranging from $800 to $3,000 per person. UTSI accounted for these programs as marketing expenses, which totaled some $4 million from 2002 to 2004.
In addition, UTSI was charged with hiring at least ten employees of its customers in China and Thailand or their family members as UTSI personnel, completing evaluations and providing them with salaries and benefits when they did no actual work. UTSI accounted for these payments as employee compensation. The SEC also accused UTSI’s Executive Vice President and CEO of UTS-China of approving some $23,000 for wine and entertainment expenses for agents of a government customer in Thailand and authorizing a $1.5 million payment to a Mongolian company for a license fee that actually cost only $50,000 while knowing that some of the additional funds would go to a Mongolian government official. The same UTSI employee also authorized a $200,000 payment to a Chinese company for a sham consulting contract in an effort to obtain business. The responsible employee ceased employment with UTSI in 2007.
To settle the allegations with the SEC, UTSI paid a $1.5 million penalty and agreed to the entry of a permanent injunction against further FCPA violations, as well as to submit annual reports on its FCPA compliance. UTSI also entered into a non-prosecution agreement with the DoJ to settle allegations related to the false “training” trips described above. Under the agreement, UTSI agreed to pay an additional $1.5 million penalty, enhance its compliance, bookkeeping and internal controls and provide periodic reports. In settling the matter, the DoJ noted UTSI’s voluntary disclosure, thorough cooperation and remedial efforts.
The UTSI settlement comes two years after a settlement by Lucent Technologies, Inc. (“Lucent”) over a very similar wide-ranging pattern of providing sponsorships, travel and entertainment to Chinese officials, and illustrates the continued risks associated with sponsorship of travel, gifts, and entertainment. The charging documents indicate that US authorities are applying particular scrutiny to such arrangements with Chinese state enterprises, including arrangements set forth in customer contracts. Thus the inclusion of a contractual requirement to sponsor travel is not an ironclad guarantee of a defense against enforcement action. This enforcement focus confirms the need for companies subject to the FCPA to adopt policies and procedures for compliance in this area.
NATCO Group Settles SEC Action over Alleged Immigration Payments in Kazakhstan
On January 11, 2010, the SEC announced a settlement with NATCO Group, Inc., a global oilfield services provider (“NATCO”), related to an investigation into certain immigration practices in Kazakhstan. Under the terms of the agreement, TEST Automation & Controls, Inc. (“TEST”), a wholly-owned subsidiary of NATCO, neither admitted nor denied the charges that it created and accepted false documents while paying extorted immigration fines and obtaining immigration visas in the Republic of Kazakhstan,xiii and agreed to pay a $67,000 civil penalty. In a related administrative proceeding, the SEC issued a cease-and-desist order against NATCO, finding that the company violated the books and records and internal controls provisions of the FCPA in connection with the improper payments to TEST.
TEST’s operations in Kazakhstan required the company to hire a combined local and expatriate workforce. During two periodic audits of the immigration papers of TEST expatriates in February and September 2007, Kazakh officials claimed the expatriates were working without proper papers, and threatened to fine, jail, and/or deport those workers unless the company paid cash fines. Believing these threats to be genuine, TEST personnel in the United States authorized TEST Kazakhstan to use personal funds to pay the officials a total of $45,000, which was later reimbursed by the company. The first reimbursement, made by wire transfer, was recorded as a salary advance on the company’s books; the second reimbursement was recorded as “visa fines”. In addition, the company used the services of an immigration consultant who, on two occasions, requested and received large cash payments from TEST. In making these payments, TEST knowingly accepted and paid false invoices from/to the consultant. It is not known what the consultant did with the funds.
This settlement is noteworthy due to the immigration focus of the claim as well as the extortion component. It is the first instance of an FCPA prosecution based exclusively upon payments in the immigration context. The use of agents and other third parties, such as expediting services, in this area is common. Notably, this enforcement action does not appear to involve a parallel criminal prosecution by the Department of Justice, perhaps due to the extortion element.
Enforcement Relating to Business Activity in Latin America and the Caribbean
In addition to the Haitian telecommnications-related prosecution (see United States v. Esquenazi et al., summarized above), US authorities brought several FCPA actions relating to business dealings in Latin America and the Caribbean in 2009.
Second Former Executive of ABB Unit Sugar Land is Criminally Charged
On November 23, 2009, the DoJ announced that John Joseph O’Shea, the former general manager of an ABB subsidiary, was arrested for his alleged role in a conspiracy to bribe Mexican government officials.xiv The bribes were allegedly made to secure contracts for the ABB subsidiary, Sugar Land, with the Comisión Federal de Electridad (CFE), a Mexican state-owned utility company.xv According to the indictment, O’Shea managed the Texas business unit of Sugar Land, whose primary business was to provide products and services to electrical utilities, many of which were foreign state-owned enterprises, for network management in power generation, transmission and distribution.xvi
The indictment alleges O’Shea contracted with an unnamed Mexican company to serve as Sugar Land’s sales representative in Mexico. Fernando Maya Basurto was a principal of this Mexican company, performing work for O’Shea’s unit on its contracts with CFE. While using the Mexican company as its sales representative, O’Shea’s unit received multiple contracts with CFE for goods and services, and the Mexican company received a percentage of the revenue generated from business with Mexican government utilities.
According to the indictment, in approximately October 2003, CFE awarded O’Shea’s unit a contract for maintenance and upgrades of a contract awarded in 1997, known as the SITRACEN contract. The 2003 contract was referred to as the Evergreen contract. The indictment alleges that O’Shea, Basurto, officials at CFE and others agreed that approximately 10 percent of the $37 million revenue received from the Evergreen contract would be returned to CFE officials as corrupt payments, and that O’Shea would receive approximately one percent of the contract revenue in kickbacks. O’Shea, Basurto and others allegedly also made additional “commission” payments to Basurto and his family that were further transferred to CFE officials. According to the indictment, O’Shea authorized more than $900,000 in corrupt payments to CFE officials in connection with the Evergreen contract before an internal investigation by ABB stopped the transfers. The indictment also alleges that O’Shea, Basurto and others engaged in a cover up after O’Shea was terminated.
O’Shea is charged with conspiracy, violations of the FCPA, money laundering and falsification-of-records in a federal investigation. The conspiracy and falsification of records counts each carry a maximum penalty of five years in prison and a fine of the greater of $250,000 or twice the value gained or lost from the alleged conduct. Each of the 12 substantive FCPA counts carry a maximum penalty of five years in prison and a fine of the greater of $250,000 or twice the value gained as a result of the bribes. The four money laundering counts each carry a maximum penalty of 20 years in prison and a fine of the greater of $500,000 or twice the value of the property involved in the money laundering transaction. The indictment also gives notice of criminal forfeiture.
Basurto (a Mexican national and resident charged as an “agent of a domestic concern”) was arrested in Dallas on April 25, 2009 on a criminal complaint charging him with conspiracy to structure transactions and structuring transactions to evade currency reporting requirements and subsequently detained. Basurto pleaded guilty on Nov. 16, 2009, before US District Judge Lynn N. Hughes in Houston to a one-count information charging him for his role in the conspiracy. His sentencing is scheduled for May 2010.
In its press release announcing the indictment, the DoJ noted that ABB had voluntarily disclosed the payments to the DoJ and SEC and was fully cooperating with the agencies’ investigations.xvii The DoJ also acknowledged the assistance of the Federal Republic of Germany for supplying evidence in connection with its investigation.xviii
Ports Engineering and Consultants Corporation (“PECC”) Executives Charged Over Dealings in Panama
Panama’s National Ports Authority, known in the 1990s as Autoridad Portuaria Nacional (“APN”), is the Panamanian government entity responsible for operating and maintaining the lighthouses and buoys in the waterways near the Panama Canal. During the administration of President Ernesto Pérez Belladares in the late 1990s, APN awarded certain sole-source, no-bid contracts to PECC, a private corporate entity organized in Panama in 1996. In or around 1997, PECC received a provisional contract, and later a 20-year contract, to maintain those lighthouses and buoys, collect tariffs levied for their upkeep, and provide engineering and consulting services. Under the contracts, which effectively privatized the state function of collecting the tariffs in question and other APN engineering functions, PECC allegedly was allowed to keep 90% of the tariff collections, with the remaining 10% paid to APN. PECC allegedly received approximately US$18 million in revenue under the contracts from 1997 to 2000.
John Warwick was the President of PECC, as well as of Overman Associates, a Virginia-based engineering firm that held an ownership interest in PECC and controlled a Panamanian affiliate, Overman de Panama. Charles Jumet was a PECC Vice President, and later became its President; he also served as the Vice President of Overman Associates and Overman de Panama. Both Warwick and Jumet are US citizens. According to DoJ, the person who served in 1996 and 1997 as APN Administrator allegedly controlled a Panamanian shell company, Soderville Corporation (“Soderville”), which allegedly received 30% of PECC’s shares in a transaction in which PECC allegedly first issued those shares to a British Virgin Islands company whose corporate officers allegedly were relatives of another individual who served as APN Deputy Administrator in 1996 and 1997 and as Administrator in 1998 and 1999. In addition, PECC allegedly issued “bearer” shares, including shares that were delivered to a high-ranking government official,xix and in December 1997, allegedly paid its shareholders US$300,000 as “dividends”, including US$18,000 in bearer instruments that were deposited into an account of the high-ranking official, US$81,000 to the British Virgin Islands company (which also later received a similar payment in 2003), US$81,000 to Soderville, and unspecified payments to Warwick, Jumet, and two other holders of bearer shares.xx
In 1999, the new administration in Panama that succeeded Belladares began investigating the PECC contract. The Comptroller General suspended payments to PECC. The new administration also reportedly arranged for tariff receipts to be deposited into an APN account rather than a PECC account, and sought to nullify the PECC contract. Around the same time, in 2000, Overman Associates sued PECC in a US court in 2000 for payment for engineering services. In connection with that suit, Overman Associates received alleged overpayments of US$100,000, much of which then was directed as “dividends” from Overman Associates to a personal account used by Warwick in the United States.xxi A Panamanian lawyer also allegedly wired US$50,000 to Jumet in the United States in 2004, after meeting with Jumet and the high-level former government official in Miami in 2003.xxii
The DoJ criminally charged Warwick and Jumet. On November 13, 2009, Mr. Jumet pleaded guilty to conspiracy and to a charge of making a false statement to US authorities. Under the conspiracy charge, Jumet faces a maximum penalty of five years in prison and a fine of the greater of US$250,000 or twice the gross gain or loss from the scheme. Under the false statement charge, Jumet faces a maximum penalty of five years in prison and a fine of US$250,000. Jumet is scheduled for sentencing in March 2010. On December 15, 2009, the DoJ indicted Mr. Warwick on a single charge of conspiracy to violate the anti-bribery provisions of the FCPA. Warwick pleaded guilty and is scheduled to be sentenced in May of this year.
In addition to the overall complexity of the allegations, these prosecutions have some particularly notable aspects:
- The DoJ identified Messrs. Warwick and Jumet as “domestic concerns” under the FCPA, both as US citizens and as officers and employees of the US-based firm Overman Associates. Based upon their US citizenship, they also were charged under the alternative nationality provision of the FCPA, id. § 78dd-2(i). This provision, which renders the anti-bribery prohibition applicable to the worldwide conduct of US nationals, gives US authorities broad power to prosecute US citizens for conduct that occurs exclusively overseas.
- In an unusual move for an FCPA case, the DoJ also sought and obtained a restraining order prohibiting Mr. Warwick from alienating funds, real property and corporate ownership interests. The restraining order includes a freeze on his bank accounts, and was issued in support of the DoJ’s motion to cause Warwick and Overman Associates to forfeit funds they received under the PECC contracts. Warwick consented to forfeiture of $331,000 in February 2010.
- Efforts to prosecute the officials involved in Panama have not succeeded, notwithstanding the significant amount of evidence collected against them, due to 2005 ruling by the Supreme Court in Panama that the Panamanian government’s investigation of them was unconstitutional.
The PECC case also highlights the FCPA risks to companies and executives making payments to firms with non-transparent shareholdings. According to DoJ’s allegations, PECC ownership interests were deliberately issued to companies in Panama and the British Virgin Islands, and in bearer form, to enable PECC to disguise corrupt payments in the form of “dividends”, notwithstanding the fact that the true identities of the recipients were known to the persons charged.xxiii As the practice of structuring of business entities with nominee shareholders and using bearer shares can be FCPA red flags, this case highlights the importance of conducting thorough due diligence on companies with offshore vehicles or bearer instruments in the ownership chain, to ensure that government officials are not receiving improper benefits as unknown beneficial owners.
SEC Files Civil Charges Against Former Pride International Executive Relating to Business in Mexico and Venezuela
On December 11, 2009, the SEC filed a complaint in federal court against Bobby Benton, the former Vice President of Western Hemisphere Operations for Pride International, Inc. (“Pride”), alleging violations of the FCPA and related aiding and abetting violations. The factual allegations against Benton relate to five general areas of conduct: first, that Benton authorized a $10,000 payment to a Mexican customs official; second, that he learned of a second payment to a Mexican customs official; third, that Benton learned of certain additional payments made by a Pride subsidiary in Venezuela for the benefit of a Venezuelan official; fourth, that he redacted references to the payments in an action plan responding to an internal audit report; and fifth, that he signed two false certifications denying any knowledge of bribery in connection with audits and reviews of Pride’s financial statements. The SEC is seeking a permanent injunction, a civil penalty, disgorgement and prejudgment interest in its guilt. Mr. Benton has filed an answer in the case, which remains pending.
Pride previously conducted an internal investigation relating to the payments, and has been cooperating with US authorities. Last month Pride disclosed that it had accrued a US$56.2 million charge relating to the pending resolution of its FCPA matters in Latin America with the US authorities.
US Agencies Plan to Further Increase FCPA Enforcement in 2010 and Beyond
The trend toward record FCPA enforcement levels that has continued for the past several years seems unlikely to abate in 2010. Several larger settlements appear to be imminent: on February 12, the French company Technip announced it had accrued €245 million (approximately US$330 million) in connection with a pending resolution of investigations relating to its participation in the TSKJ consortium in Nigeria, which led to the KBR/Halliburton settlements. On March 15, 2010 Italian energy producer ENI announced it had accrued €250 million in connection with its expected settlement in the same matter. It also has been reported that Daimler AG is close to an agreement with US authorities to resolve its longstanding FCPA investigation, which repeatedly would involve the payment of approximately $200 million in fines and penalties.xviii When and if these investigations will be settled is not clear.
Both the DoJ and SEC have requested budget increases for the upcoming fiscal year that would give them additional resources to substantially increase their FCPA enforcement activity.xix At the same time, as part of the restructuring of its Enforcement Division, the SEC is increasing its focus on FCPA enforcement, and in January appointed Cheryl Scarboro, a former Division of Enforcement Associate Director, to lead the newly-formed FCPA Unit in the Division of Enforcement. The FCPA Unit is expected to develop industry-wide investigations and regional expertise. Both the increased specialization in the FCPA Unit, and the new practices to entice individuals to provide evidence while minimizing any concerns over criminal prosecution, may generate significant increases in SEC FCPA enforcement activity going forward.