FCPA Enforcement Related to UN Oil-for-Food Program Continues; Recent Fifth Circuit Decision Holds that FCPA Gives Fair Notice of Illegal Conduct

FCPA Enforcement Related to UN Oil-for-Food Program Continues; Recent Fifth Circuit Decision Holds that FCPA Gives Fair Notice of Illegal Conduct

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Continuing their enforcement activity against companies involved in the United Nations Oil-for-Food Program (OFFP), the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) recently brought enforcement actions against Chevron Corporation, Ingersoll-Rand Company Limited and Akzo Nobel N.V. The latest cases yet again confirm that the government recognizes that FCPA antibribery charges are not appropriate in the OFFP context because the OFFP cases involve alleged kickbacks made to the Iraqi government rather than to Iraqi government officials. The enforcement authorities nonetheless can bring charges using other provisions, such as FCPA books and records provisions or conspiracy to commit wire fraud.

Other recent FCPA developments include an SEC settlement with former Schnitzer Steel Industries Chairman and CEO Robert W. Philip, who paid more than $250,000 to settle charges of FCPA violations; an announcement by Willbros Group, Inc. of an agreement-in-principle with the DOJ and SEC settling FCPA violations; the arrest of a Los Angeles couple accused of making corrupt payments to a Thai government official in order to procure contracts to run an international film festival in Bangkok; a Fifth Circuit decision affirming FCPA convictions and holding that the FCPA provides fair notice of the conduct it prohibits; and a speech by Assistant Attorney General, Criminal Division, Alice Fisher, once again highlighting that FCPA enforcement remains a high priority for the Department of Justice.

Chevron Corporation

On November 14, 2007, Chevron agreed to pay combined civil and criminal penalties of $30 million for violations of the FCPA's books and records provisions related to alleged kickbacks to the former Iraqi government under the OFFP. The agreements were announced as a collaborative investigative effort between the DOJ and SEC, as well as the Federal Bureau of Investigation, the New York County District Attorney's Office and the Treasury Department's Office of Foreign Assets Control (OFAC). Notably, neither the DOJ nor the SEC alleged violations of the FCPA antibribery provisions--yet another affirmation that antibribery charges are inappropriate in the OFFP context because the payments are made directly to the government of Iraq itself and not to government officials. Read more.

Ingersoll-Rand Company Limited

On October 31, 2007, Ingersoll-Rand Company Ltd. (Ingersoll) settled an OFFP case with both the DOJ and SEC for violations committed by its European subsidiaries. This case is notable because Ingersoll was aware of its German subsidiary's attempt to make an illegal surcharge payment in 2000, yet failed to implement a vigorous compliance policy or conduct appropriate due diligence to prevent future illegal payments. Read more.

Akzo Nobel N.V.

On December 20, 2007, the DOJ and SEC announced agreements with Akzo Nobel N.V. (Akzo), a company headquartered in the Netherlands. According to the government papers, Akzo's wholly owned Dutch subsidiaries made $279,491 in kickback payments to the Iraqi government in connection with sales of humanitarian goods under the OFFP. The government asserted jurisdiction over Akzo based on the company's registration of American Depositary Receipts that were quoted on NASDAQ during the period when the alleged improper activity occurred. In 2007, the company terminated its registration with the SEC. Read more.

Schnitzer Steel

On December 13, 2007, the SEC announced a settlement agreement with Robert W. Philip (Philip), the former Chairman and CEO of Schnitzer Steel Industries (Schnitzer). Without admitting or denying the charges, Philip agreed to pay more than $250,000 to settle alleged violations of FCPA antibribery, recordkeeping and internal controls provisions. According to the Complaint, Philip approved more than $200,000 in cash payments and other gifts to officials at Chinese government-owned steel mills to induce them to purchase scrap metal. Philip also allegedly authorized more than $1.7 million in payments to managers of privately owned steel mills in China and South Korea.

Philip's charges come more than a year after the DOJ and SEC settled related charges against Schnitzer, a US issuer, and its wholly owned Korean subsidiary, SSI International Far East Ltd.[i]

[i] SeeWilmerHale November 2006 FCPA Briefing Series discussion of Schnitzer.

Willbros Group, Inc.

In its 10-Q filed on November 1, 2007, Willbros disclosed agreements-in-principle between the company and its subsidiary, Willbros International, to settle DOJ and SEC investigations regarding possible FCPA violations. Willbros is a publicly traded company that provides construction, engineering and other services in the oil and gas industries. Read more.

Los Angeles Film Executive and Wife Arrested on FCPA Charges

On December 18, 2007, Gerald and Patricia Green, owners of Film Festival Management, a Los Angeles-based business, were arrested on allegations of making corrupt payments to a Thai government official. According to the criminal complaint, the Greens conspired to make more than $1.7 million in payments to a government official with the Tourism Authority of Thailand in order to obtain a film festival contract worth more than $10 million. The complaint alleged that beginning in 2003 and continuing into 2007, the Greens conspired to bribe a senior Thai government official who, as a result of her position, was able to influence the awarding of film festival contracts. The complaint further alleged that the Greens attempted to conceal their bribery by creating various business entities with fictitious addresses and by making "commission" payments to the senior official through foreign bank accounts of intermediaries.

The Philip, Steph and Green cases demonstrate the continued interest of the DOJ and SEC in pursuing enforcement actions against individuals involved in corrupt activities.

Fifth Circuit Affirms FCPA Convictions

On October 24, 2007, the Fifth Circuit Court of Appeals affirmed FCPA and obstruction of justice convictions against David Kay and Douglas Murphy, two former executives at American Rice, Inc. (ARI). During the 1990s, ARI exported rice to Haiti through a Haitian subsidiary. According to the court papers, Kay and Murphy implemented various schemes to reduce the costs of Haitian duties and taxes on rice imports, including payments to government officials to accept the false reporting of imports, thereby reducing duties and taxes. In 2002, the district court dismissed the indictment against the defendants, finding that payments for the reduction of customs duties and taxes did not fall within the scope of the "obtaining or retaining business" prong of the FCPA.[i] The Court of Appeals for the Fifth Circuit reversed, holding that "bribes paid to foreign officials in consideration for unlawful evasion of customs duties and sales taxes could fall within the purview of the FCPA's proscription...but it still must be shown that the bribery was intended to produce an effect...that would 'assist in obtaining or retaining business.'"[ii] On remand, the district court denied a motion to dismiss for lack of fair warning and, following a trial and conviction, the defendants appealed. Kay and Murphy argued that the FCPA failed to give fair notice that their conduct was illegal, and that proceeding to trial with the late clarification from the Fifth Circuit Court of Appeals violated their due process rights. Read more.

[i] United States v. Kay, 200 F. Supp. 2d 681, 682 (S.D. Tex. 2002).

[ii] United States v. Kay, 359 F.3d 738, 756 (5th Cir. 2004) (emphasis in original). For a discussion of this case, seeWilmerHale Foreign Corrupt Practices Act Update, February 20, 2004.

Keynote Address of Alice S. Fisher, Assistant Attorney General, Criminal Division

On November 13, 2007, Alice Fisher, Assistant Attorney General, Criminal Division, presented the keynote address at the ACI Conference on the Foreign Corrupt Practices Act. It was the second time Fisher had publicly addressed the FCPA and the most recent of several instances in which high-level DOJ officials have discussed the significance of FCPA enforcement in public speeches.

Fisher emphasized the importance of anticorruption enforcement measures such as the FCPA, its role in rooting out global public corruption and the DOJ's mission to safeguard markets and ensure transparency for investors. Fisher warned that corruption destabilizes markets, undercuts democracy and the rule of law, and creates an uneven playing field for honest companies. Fisher also noted the increased efforts by the DOJ to engage its foreign counterparts in an effort to level the playing field for US companies that abide by antibribery laws.

Fisher also emphasized the benefits to corporations who self-report potential FCPA violations to the government, and the importance of due diligence in both the acquisition context and for the engagement of third-party consultants and business partners.

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Chevron Corporation

On November 14, 2007, Chevron agreed to pay combined civil and criminal penalties of $30 million for violations of the FCPA's books and records provisions related to alleged kickbacks to the former Iraqi government under the OFFP. The agreements were announced as a collaborative investigative effort between the DOJ and SEC, as well as the Federal Bureau of Investigation, the New York County District Attorney's Office and the Treasury Department's Office of Foreign Assets Control (OFAC). Notably, neither the DOJ nor the SEC alleged violations of the FCPA antibribery provisions--yet another affirmation that antibribery charges are inappropriate in the OFFP context because the payments are made directly to the government of Iraq itself and not to government officials.

According to the court papers, approximately $20 million in illegal surcharges were paid by third parties on 36 transactions involving Chevron's purchases of Iraqi oil under the OFFP. The DOJ and SEC alleged that Chevron knew or should have known that it was paying inflated premiums to third parties that included the costs of surcharge payments to Iraq. In January 2001, Chevron learned of Iraq's surcharge demands and subsequently implemented a company-wide policy prohibiting any payment of surcharges in connection with the purchase of Iraqi oil. The policy required oil traders to obtain prior written approval for all proposed Iraqi oil purchases and charged management with reviewing each proposed Iraqi oil deal to ensure that no surcharges had been or would be paid. Management was to consider, among other things, the identity, experience and reputation of a third-party seller. Chevron's management allegedly failed to take these factors into consideration when reviewing contracts, relying instead on its traders' representations. For example, the SEC papers highlight one instance in which the credit check of a proposed third-party seller revealed that it had no experience in the oil business, no legitimate business operations and no known assets, yet Chevron's management approved the contract.

The papers allege that Chevron also failed to have robust financial controls. According to the court papers, Chevron knew or should have known that it was paying inflated premiums to third parties because the payments increased after Iraq's surcharge demands began in August 2000. The SEC stated that these increases in premiums were significant and should have alerted Chevron's management to potential improprieties.

The DOJ took several factors into account when determining whether to allow Chevron to enter into a non-prosecution agreement. Those factors included: (1) cooperation with the various government investigations into the corruption of the OFFP; (2) commitment to continue to provide cooperation; (3) implementation of enhanced compliance procedures; (4) confirmation that culpable employees were no longer working for Chevron; (5) settlement of the SEC's civil enforcement action prior to entering the agreement with DOJ; and (6) agreement on the approximate amount of illegal surcharges paid to the former government of Iraq by third parties. The DOJ also noted its consideration of the significant consequences that a criminal indictment would have on Chevron's legitimate operations, innocent employees and shareholders.

Chevron provides several lessons regarding FCPA enforcement:

  • The DOJ and SEC offer leniency where there has been self-reporting and full cooperation, but, even so, the financial penalties can still be considerable.
  • It is not enough for companies to create FCPA policies; they must take active steps to vigorously implement and maintain those policies at all corporate levels.
  • Adequate due diligence and control of agents is crucial. The prior demands by the Iraqi government, as well as inflated premiums, were "red flags" that should have been fully investigated.

Ingersoll-Rand Company Limited

On October 31, 2007, Ingersoll-Rand Company Ltd. (Ingersoll) settled an OFFP case with both the DOJ and SEC for violations committed by its European subsidiaries. This case is notable because Ingersoll was aware of its German subsidiary's attempt to make an illegal surcharge payment in 2000, yet failed to implement a vigorous compliance policy or conduct appropriate due diligence to prevent future illegal payments.

The DOJ charges focused on conduct by Ingersoll-Rand Italiana SpA (IR Italiana), a wholly owned Italian subsidiary of Ingersoll, and Thermo King Ireland Limited (TKI), a wholly owned Irish subsidiary of Ingersoll. The Information against IR Italiana charged it with both conspiracy to commit wire fraud and conspiracy to violate the books and records provisions of the FCPA; the Information against TKI charged it with conspiracy to commit wire fraud. Ingersoll agreed to pay a $2.5 million criminal fine and entered into a three-year deferred prosecution agreement on behalf of itself and its subsidiaries, accepting responsibility for the acts of its officers, employees and subsidiaries. As in other OFFP cases, the government did not charge Ingersoll under the antibribery provisions, presumably because the payments were made directly to the Iraqi government rather than to Iraqi officials.

The charges against Ingersoll's Italian subsidiary focused in part on payments of approximately $20,282 in travel and entertainment expenses for eight Iraqi officials when they visited the company's manufacturing facility. According to the DOJ's Statement of Facts, only two of the eight officials were in Italy for business purposes, while the other six were "on holiday." IR Italiana concealed the kickbacks and payments to Iraqi officials on its books and records, thereby causing Ingersoll's books to be false as well. The court papers also described actions taken by TKI, which secured contracts with the government of Iraq through offers to pay kickbacks. In or around November 2000, TKI sent one of the OFFP contracts to the legal department of Ingersoll in order to obtain a license from OFAC that would allow the shipment from Ireland to Iraq of parts originating in the United States.

The SEC alleged that Ingersoll knew or was reckless in not knowing that illicit payments were either offered or paid in connection with the OFFP transactions, that it failed to maintain an adequate system of internal controls and that Ingersoll's subsidiaries failed to properly record the true nature of the company's payments. Notably, the SEC emphasized that senior officials at Ingersoll had been on notice that the Iraqi government was demanding cash kickbacks on OFFP contracts, yet chose to do nothing. According to the complaint, the office of Ingersoll's Chairman received an anonymous fax in November 2000, alerting the company to a kickback arrangement between its German subsidiary and the Mayoralty of Baghdad for road construction equipment. Upon receiving the fax, Ingersoll initiated an investigation and questioned the German subsidiary about the payment. The German sales manager admitted that the contract contained a 10 percent markup, which would be paid back to the Iraqi Ministry as "working capital." After seeking advice from outside counsel, the German subsidiary submitted the contracts to the UN with a statement disclosing that each contract "includes 10% working capital to be given as a rebate to [the] Baghdad Mayoralty." The UN advised that such payments were not permitted. The Baghdad Mayoralty refused to go forward without the 10% payment, and the contract was never concluded.

The SEC's complaint faults Ingersoll for not withdrawing from participation in the OFFP at this point as well as failing to conduct appropriate due diligence to prevent future kickback payments. Interestingly, the SEC nonetheless noted its consideration of Ingersoll's "prompt[] undertak[ing]" of remedial acts during the SEC's investigation.

The enforcement actions in Ingersoll provide several important lessons:

  • Companies must take steps to address red flags, take effective remedial measures and implement internal controls to prevent future violations.
  • A US parent company cannot ignore the conduct of its foreign affiliates and subsidiaries.
  • The DOJ continues to focus on travel and entertainment expenses that have no permissible business purpose.

Akzo Nobel N.V.

On December 20, 2007, the DOJ and SEC announced agreements with Akzo Nobel N.V. (Akzo), a Dutch company with its headquarters in the Netherlands. According to the government papers, Akzo's wholly owned Dutch subsidiaries made $279,491 in kickback payments to the Iraqi government in connection with sales of humanitarian goods under the OFFP. The government asserted jurisdiction over Akzo based on the company's registration of American Depositary Receipts that were quoted on NASDAQ during the period when the alleged improper activity occurred. In 2007, the company terminated its registration with the SEC.

The DOJ entered into a non-prosecution agreement with Akzo that recognized an anticipated resolution between the Dutch National Public Prosecutor's Office and one of Akzo's subsidiaries, N.V. Organon. According to the non-prosecution agreement, N.V. Organon will pay a criminal fine of approximately €381,000 to the Dutch Public Prosecutor's office within 180 days of the execution of the agreement. In the event N.V. Organon fails to pay the criminal fine to the Dutch authorities, Akzo will be required to pay $800,000 to the US Treasury.

Under the SEC's agreement, Akzo agreed to pay a civil penalty of $750,000 plus $2.2 million in disgorgement of profits, including pre-judgment interest. The complaint alleged that two Dutch-based subsidiaries used local agents and consultants in the Middle East to facilitate illegal payments to Iraqi ministries under the OFFP. One subsidiary, Intervet, initially refused to make any payments to the Iraqi ministry. However, at the contract signing, an Intervet employee who was aware of the initial kickback demand saw the agent deliver an envelope to one of the Iraqi representatives. Shortly thereafter, the agent sought and partially received reimbursement of the kickback made on the contract. The same agent that worked on the Intervet transaction was also involved in three contracts negotiated by the other Akzo subsidiary, N.V. Organon. According to the government papers, N.V. Organon either inflated the contract price by 10 percent to cover the illicit payment, or agreed with the Iraqi ministry on an initial contract price that was already inflated by 10 percent. An N.V. Organon employee created backdated price quotes that matched the pricing reflected in the contracts, and the agent's commission was increased by 10 percent to account for the kickback.

The SEC found that Akzo knew or was reckless in not knowing that improper payments were offered or paid in connection with the OFFP transactions, that Akzo failed to maintain a system of internal controls sufficient to prevent or detect FCPA violations and that the company's accounting for OFFP transactions failed to properly record the nature of the company's kickback payments.

The Akzo case is another recent example of the US government pursuing enforcement action against a company with no ties to the United States other than the fact that they issue securities in US markets.

Willbros Group, Inc.

In its 10-Q filed on November 1, 2007, Willbros disclosed agreements-in-principle between the company and its subsidiary, Willbros International, to settle DOJ and SEC investigations regarding possible FCPA violations. Willbros is a publicly traded company that provides construction, engineering and other services in the oil and gas industries.

If the agreements-in-principle are accepted by the DOJ and SEC and approved by the court, Willbros and Willbros International will pay an aggregate of $32.3 million in penalties and disgorgement plus interest payments of $7.725 million. According to the 10-Q filing, the investigations stem from the company's former operations in Bolivia, Ecuador and Nigeria from 1996 to 2005. Willbros and Willbros International will each be subject to a three-year deferred prosecution agreement, which includes 12 counts for substantive violations of the antibribery and books and records provisions of the FCPA. The agreements will require 1) full cooperation with the government; 2) compliance with all federal criminal laws, including but not limited to the FCPA; and 3) a three-year monitor for Willbros and its subsidiaries.

In a related development, a former Willbros International executive, Jason Edward Steph, pleaded guilty to conspiring to bribe Nigerian government officials in violation of the FCPA. According to the DOJ's press release and Steph's guilty plea, Steph served as general manager of Nigerian onshore operations from 1998 to 2005. As part of the guilty plea, Steph admitted that he, along with another senior executive, two consultants and employees of a German company based in Nigeria, agreed to make payments totaling over $6 million dollars. In order to secure a major gas pipeline construction contract, payments were offered and made to employees of the Nigerian state-owned oil company and a Nigerian political party, as well as a senior official in the executive branch of the Nigerian federal government. As part of the plea agreement, Steph agreed to fully cooperate with the government in its ongoing investigation. Sentencing is scheduled for January 2008, and Steph faces a maximum of five years' imprisonment and a fine of $250,000.

Fifth Circuit Affirms FCPA Convictions

On October 24, 2007, the Fifth Circuit Court of Appeals affirmed FCPA and obstruction of justice convictions against David Kay and Douglas Murphy, two former executives at American Rice, Inc. (ARI). During the 1990s, ARI exported rice to Haiti through a Haitian subsidiary. According to the court papers, Kay and Murphy implemented various schemes to reduce the costs of Haitian duties and taxes on rice imports, including payments to government officials to accept the false reporting of imports, thereby reducing duties and taxes. In 2002, the district court dismissed the indictment against the defendants, finding that payments for the reduction of customs duties and taxes did not fall within the scope of the "obtaining or retaining business" prong of the FCPA.[i] The Court of Appeals for the Fifth Circuit reversed, holding that "bribes paid to foreign officials in consideration for unlawful evasion of customs duties and sales taxes could fall within the purview of the FCPA's proscription...but it still must be shown that the bribery was intended to produce an effect...that would 'assist in obtaining or retaining business.'"[ii] On remand, the district court denied a motion to dismiss for lack of fair warning and, following a trial and conviction, the defendants appealed. Kay and Murphy argued that the FCPA failed to give fair notice that their conduct was illegal, and that proceeding to trial with the late clarification from the Fifth Circuit Court of Appeals violated their due process rights.

The Court of Appeals found that the FCPA provided fair notice. It concluded that although it previously held that the business nexus standard was ambiguous, the statutory language itself was not void for vagueness. The court also found that a person of "common intelligence" would have understood that bribing officials trod close to a "reasonably defined line of illegality."

The defendants also argued that the jury was erroneously charged on the meaning of "willfulness" because the instructions omitted the phrase "specific intent." The Court of Appeals held that the jury instructions were sufficient because 1) they indicated that there must be evidence amounting to "knowledge of the facts that constitute the offense" and 2) that the defendants acted knowingly with awareness of unlawful ends. In other words, it was sufficient to find that a defendant "knew that he was doing something generally 'unlawful' at the time of his action." Since the FCPA does not define willfulness, the court looked to the definitions under common law, which provide three levels of interpretation of criminal willfulness. The court found that the FCPA satisfied the first two levels of interpretation. Under the first and most basic interpretation, the defendant must have knowledge of the act. He does not need to know the specific terms of the statute or the existence of the statute; rather, simply knowing that he committed the act is sufficient. Under the second level of criminal willfulness, the defendant must know that his actions were somehow unlawful. The third level is the strictest interpretation, which requires that a defendant know the terms of the statute and that he was violating the statute. Following the logic of the Second Circuit Court of Appeals,[iii] the Fifth Circuit declined to apply the strictest level of interpretation to the FCPA, noting that it typically applied only to a narrow category of complex statutes.

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[i] United States v. Kay, 200 F. Supp. 2d 681, 682 (S.D. Tex. 2002).

[ii] United States v. Kay, 359 F.3d 738, 756 (5th Cir. 2004) (emphasis in original). For a discussion of this case, seeWilmerHale Foreign Corrupt Practices Act Update, February 20, 2004.

[iii] Stichting Ter Behartiging Van de Belangen Van Oudaandeelhouders In Het Kapitaal Van Saybolt Int'l B.V. v. Schreiber, 327 F.3d 173, 181 (2d Cir. 2003).

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