On March 5-6, 2009, at the American Bar Association’s 23rd Annual National Institute on White Collar Crime, Mark Mendelsohn, Deputy Chief of the Fraud Section of the Criminal Division of the U.S. Department of Justice (“Department”), reported on what is increasingly evident from a review of recent enforcement activity, namely, that the pace of efforts to combat overseas bribery, both within “the U.S and outside the U.S. in the past couple of years, and the past year in particular, has dramatically quickened.” The Department’s enforcement efforts are at an all-time high. There were 16 prosecutions brought in 2007, and another 16 cases in 2008, some of which resulted in record-setting fines and penalties. According to Mendelsohn, both the Department and the Securities and Exchange Commission (“SEC”) are dedicating significant resources to the enforcement of the Foreign Corrupt Practices Act (“FCPA”), and, as a result, in the coming year, additional FCPA-related activity can be expected.
In connection with this uptick in activity, Mendelsohn identified several trends emerging from 2008 that he predicted would continue into 2009. Many of these trends are reflected in recent additional enforcement activity.
Increased Prosecution of Individuals
As noted by Mendelsohn, the Department’s increased enforcement activity is not limited to the conduct of corporations. The Department has publicly stated that it is focusing on prosecution of individuals, where appropriate. Since January 2009, there have been several indictments of individuals and, according to Mendelsohn, more can be expected. In addition, the sentences imposed for violations of the FCPA continue to be significant.
Charges Related to the Halliburton/KBR Investigation
As reported in the November 2008 FCPA Advisor, the first criminal charges filed against an individual in connection with the payment of more than $180 million in bribes to senior Nigerian government officials in order to secure contracts related to designing and building liquefied natural gas (“LNG”) facilities on Bonny Island Nigeria (the “Bonny Island Project”) were brought against Albert “Jack” Stanley, the former Chairman of KBR Inc.1 On September 3, 2008, Stanley pleaded guilty to conspiring to violate the FCPA by orchestrating bribe payments to Nigerian officials to ensure the contracts were awarded to a KBR joint venture with three other multinational engineering and construction companies (the “Joint Venture”).2 Stanley acknowledged that, beginning in 2004, he and others at the Joint Venture 3 conducted “cultural meetings” to discuss the use of agents to bribe Nigerian government officials to provide support for the Joint Venture to win contracts related to the Bonny Island Project. Stanley admitted that he and others caused the Joint Venture to execute sham consulting agreements with companies in Japan and Gibraltar as a way of funneling money to officials in Nigeria. Stanley further admitted that, as part of the scheme, he and others at the Joint Venture met with high-ranking Nigerian government officials and their representatives to negotiate the amount of the bribe payments required to secure the LNG projects. According to Stanley, following such meetings, sham consultancy agreements were executed and funds were wired to the agents to facilitate the bribe payments.4
On March 5, 2009, the Department announced the unsealing of an indictment of two United Kingdom (“UK”) citizens, Jeffrey Tesler and Wojciech Chodan, who participated in the above scheme.5 Tesler and Chodan are each charged with one count of conspiracy to violate the FCPA and ten counts of violating the FCPA. According to the Indictment, Chodan, a former KBR salesman and consultant, discussed with Stanley and another coconspirators the use of Tesler and other agents to pay bribes to Nigerian government officials during “cultural meetings.”6 The Indictment further alleges that Tesler was retained by the Joint Venture as an agent to bribe high-level Nigerian government officials, including top-level executive branch officials. According to the Indictment, the Joint Venture paid, pursuant to a series of consulting contracts, approximately $132 million to a Gibraltar corporation allegedly controlled by Tesler, to use for bribe payments. Tesler allegedly transferred these funds by wire, on behalf of the Joint Venture, to or for the benefit of numerous Nigerian government officials, including officials of Nigerian National Petroleum Corporation, Nigeria LNG Limited, and Nigeria’s executive branch, and also, payments for the benefit of a Nigerian political party.
The Indictment seeks forfeiture of approximately $132 million from the two defendants. At the request of the U.S. government, Tesler was arrested on March 5, 2009, in London.7 The Department is seeking the extradition of both defendants from the UK to stand trial. According to British press reports, Tesler is currently opposing his extradition, claiming that the payments he received from the Joint Venture were fees for his services.8 If convicted on all charges, Chodan and Tesler each face up to 55 years in prison.
Additional Charges Against Former Executives of CCI
As reported in the February 2009 FCPA Advisor, in the first months of 2009, two former executives of control-valve manufacturer, Control Components, Inc. (“CCI”),9 Mario Covino and Richard Morlok, pleaded guilty to conspiring to pay at least $1 million in bribes to employees of foreign state-owned customers in exchange for lucrative contracts.10
On April 8, 2009, the Department announced the indictment of six other former CCI executives in relation to the scheme.11 Of the six former executives charged, four are California residents: Stuart Carson, the former Chief Executive Officer, his wife, Hong (Rose) Carson, the former Director of Sales for China and Taiwan, Paul Cosgrove, the former Director of Worldwide Sales, and David Edmonds, the former Vice President of Worldwide Customer Service. The other two executives charged are Flavio Ricotti, of Italy, the former Vice-President and Head of Sales for Europe, Africa and the Middle East, and Han Yong Kim, of Korea, the former President of CCI’s Korean office. Each of the defendants is charged with one count of conspiracy to violate the FCPA and the Travel Act12 in connection with their alleged orchestration of bribe payments to officials of foreign state-owned companies, as well as officers and employees of foreign and domestic private companies, in order to secure contracts allegedly worth approximately $46.5 million in net profits.13 In addition, all six individuals are charged with substantive violations of the FCPA, and Cosgrove, Edmonds and Ricotti were also charged with a substantive violation of the Travel Act. Rose Carson is also charged with one count of destruction of records for allegedly tearing up documents and flushing them down a toilet during a 2007 internal investigation.
According to the Indictment, the defendants engaged in the bribery conspiracy from approximately 1998 through 2007. Between 2003 and 2007, the defendants allegedly caused CCI to make 236 corrupt payments in over 30 countries totaling $6.85 million, of which approximately $4.9 million was used to pay bribes to officials of foreign state-owned companies, and approximately $1.95 million was used to pay bribes to officers and employees of foreign and domestic private companies. With respect to payments allegedly made to foreign officials at stateowned entities, such entities included Jiangsu Nuclear Power Corporation (China), Guohua Electric Power (China), China Petroleum Materials and Equipment Corporation, PetroChina, Dongfang Electric Corporation (China), China National Offshore Oil Corporation, Korea Hydro and Nuclear Power, Petronas (Malaysia), and National Petroleum Construction Company (United Arab Emirates).
On April 7, 2009, Shu Quan–Sheng (“Shu”), a native of China and a naturalized U.S. citizen, was sentenced to 51 months in prison,14 after pleading guilty on November 17, 2008, to one count of violating the FCPA and two counts of violating the Arms Export Control Act,15 in connection with his illegal export of space launch technical data and defense services to the People’s Republic of China (“PRC”) and offer of bribes to Chinese government officials.16 From January 2003 through October 2007, Shu violated the Arms Export Control Act by “willfully exporting a defense service from the United States to the PRC without first obtaining the required export license or written approval from the State Department.”17 The service involved the provision of assistance to the PRC in the design and development of a cryogenic fueling system for launch vehicles to be used at a launch facility in Hainan, PRC. The Information also charged a second violation of the Arms Export Control Act on December 20, 2003, as a result of Shu’s illegal export to the PRC of controlled military technical data. A third count of the Information involved violations of the FCPA. According to the Information, Shu, acting on behalf of his company, AMAC International Inc., a high-tech company based in Newport News, Virginia, with offices in Beijing, and a French company that he represented, offered to pay over $189,000 to foreign officials of the PRC to obtain a $4 million contract for the development of a liquid hydrogen tank system. 18 Three separate offers to pay money, in the form of “percentage points,” were allegedly made by Shu during telephone calls between Virginia and China between February and May 2006. According to the Information, in January 2007, the contract was awarded to the French company.
Increased International Cooperation and Enforcement Activity Abroad
In addition to an increase in prosecution of individuals, the Department’s Mark Mendelsohn reported a trend of improving international cooperation in multijurisdictional cases. According to Mendelsohn, it has become much easier for the Department to receive assistance from overseas law enforcement partners, as evidenced by the recent Siemens prosecution.19 Moreover, in general, the Department has not met resistance in its efforts to utilize the full jurisdictional reach of the FCPA. Some of the reasons Mendelsohn attributed to the improved coordinated international enforcement efforts are that the Department has been making an attempt to work with foreign prosecutors, and to respect any limitations they may face under the laws of their countries. For example, some countries have double jeopardy requirements prohibiting the prosecution of a person charged or convicted in another jurisdiction. While the United States does not have a similar prohibition, the Department may accommodate their foreign counterparts by, for example, waiting until a foreign conviction has been obtained before U.S. charges are brought. Mendelsohn further explained that greater enforcement of anti-bribery cases by foreign governments is starting to occur, such as the recent cases brought by the UK discussed further below.20 Interestingly, more recently, there has also been activity abroad in response to investigations and prosecutions initiated from other jurisdictions, including the United States, focused on prosecuting officials who allegedly received bribe payments.
As noted above, in early 2009, two former executives of CCI, Covino and Morlok, pleaded guilty to conspiring to pay at least $1 million in bribes to employees of foreign state-owned customers in exchange for lucrative contracts. Both Covino and Morlok admitted that they had caused employees and agents of CCI to make corrupt payments, disguised as “commissions,” to numerous employees of foreign state-owned customers in order to win business, including to officials of Korea Hydro and Nuclear Power Co. (“KHNP”).21 Morlok acknowledged that he caused a “commission,” in the amount of $57,658, to be paid from a CCI bank account in California to an account in Korea for the purpose of making a corrupt payment to a KHNP official. On February 18, 2009, the Seoul Central District Prosecutor’s Office arrested a financial official at KHNP, identified only by the surname Heo (“Heo”), in connection with criminal charges for accepting bribes.22 Heo, described as the head of the utility’s materials purchasing department, allegedly accepted a cash bribe of 55 million South Korean won from an employee of the Korean branch of CCI.
In February 2009, Huynh Ngoc Sy, a senior transport official (“Huynh”), was detained by Vietnamese police in Ho Chi Minh City on suspicion of receiving bribes from Pacific Consultants International (“PCI”) in relation to various infrastructure projects.23 According to a government web site, both Huynh, who had been suspended late last year, and his deputy have been transported to Hanoi where they will be charged with abuse of power. As reported in the January 2009 FCPA Advisor, on November 12, 2008, PCI and four of its former senior executives pleaded guilty to paying bribes to a Vietnamese government official to secure lucrative road construction projects in Vietnam, in violation of Japan’s Unfair Competition Prevention Law.24
According to press reports, following the announcement of the indictment of Tesler and Chodan in the United States, the Federal Government of Nigeria is planning to initiate criminal proceedings against these individuals at the International Criminal Court.25 In addition, the Federal Government has indicated that they will pursue separate prosecutions of the Nigerian government officials who allegedly received bribes. In that regard, the Federal Government of Nigeria announced it had sent a Mutual Legal Assistance Treaty request to the United States asking for the release of the names of the persons, including government officials, involved in the Halliburton/KBR case.26
Continued Increase in Voluntary Disclosures and Self- Reporting/Remediation Efforts
According to Mendelsohn, voluntary disclosures and self-reporting/remediation efforts by companies are on the rise. The Department reportedly has 110 matters under investigation, of which approximately 25% are the result of voluntary disclosures. Mendelsohn predicted that the combination of increased selfreporting and initiation by the Department of industry- wide enforcement actions will likely result in more competitors coming forward. He also stressed the benefits of voluntary disclosure to a company, which range from reduced criminal or civil charges, less impact on corporate family members (i.e., how many and which entities are charged),27 to the ultimate amount of any fine. In addition, self-remediation alone does not ensure a company will receive full cooperation credit. Considering the breadth of tools utilized by the Department in investigating potential violations of the FCPA, including search warrants, conservative monitoring and wiretaps, as well as increasing whistleblower activity, companies looking to maximize cooperation credit may fare better with a voluntary disclosure.
The benefits of voluntary disclosure continue to be evident from recent cases. On April 7, 2009, Latin Node Inc., a privately held Florida telecommunications services corporation (“LatinNode”), pleaded guilty to a one-count Information charging a criminal violation of the FCPA’s anti-bribery provisions in connection with illicit payments in both Honduras and Yemen.28 As part of this settlement, LatinNode agreed to pay a $2 million fine over a three-year period. The payments were disclosed to the Department by LatinNode’s parent, eLandia International Inc., a Delaware corporation (“eLandia”), after eLandia’s acquisition of LatinNode and post-closing discovery of the improper payments. In announcing the settlement, the Department commended eLandia’s prompt voluntary disclosure to the Department, as well as the fact that eLandia’s counsel conducted an internal FCPA investigation, shared the factual results of that investigation with the Department, cooperated fully with the Department in its ongoing investigation, and took appropriate remedial action, including terminating senior LatinNode management with involvement in or knowledge of the violations.29
According to the Information,30 from in or about March 2004 through in or about June 2007, LatinNode paid or caused to be paid approximately $1,099,889 in payments to third parties, with the knowledge that some or all of those funds would be ultimately used as bribes to officials of Hondutel, the Honduran state-owned telecommunications company. The Information further charged that these payments were made in order to obtain an interconnection agreement with Hondutel, as well as for reducing the rate per minute under the interconnection agreement.
In addition to the above payments, the Information charged that, between July 2005 and April 2006, LatinNode made 17 payments totaling approximately $1,150,654, either directly to Yemeni officials, or to a third-party consultant, with the knowledge that some or all of the money would be paid to Yemeni government officials in exchange for favorable interconnection rates in Yemen. According to the Information, company e-mails indicate that the intended payment recipients included, among others, the son of the Yemeni president, the vice president of operations at TeleYemen, the Yemeni government-owned telecommunications company, other officials of TeleYemen, and officials from the Yemeni Ministry of Telecommunications.
All of LatinNode’s payments to third parties or individuals in Honduras and Yemen were allegedly made from LatinNode’s bank account in Miami.