Following a few relatively quiet months, there has recently been a flurry of important FCPA and international anti-corruption enforcement activity. Most significant for companies registered on U.S. exchanges, Securities and Exchange Commission (SEC) Director of Enforcement Robert Khuzami recently gave a speech to the New York City Bar Association outlining the SEC's intention to create a "specialized" FCPA enforcement unit.
Notably, the number of individual prosecutions and trials continues to grow. Two individual defendants, Frederic Bourke, Jr. and former U.S. Congressman William J. Jefferson (D-LA), were recently tried and convicted of crimes arising from violations of, or conspiracy to violate, the antibribery provisions of the FCPA. In addition to these prosecutions, the trial of movie producers Gerald and Patricia Green has begun in Los Angeles, California. There also have been interesting discovery developments in the long-delayed trial of James Giffen, who was originally charged with violations of the antibribery provisions of the FCPA in April 2003.
A number of U.S. companies, including Avery Dennison, Nature's Sunshine, and Helmerich & Payne, have reached settlements with the SEC over allegations involving violations of the accounting provisions of the FCPA. Helmerich & Payne also entered into a non-prosecution agreement with the Department of Justice (DOJ) for related antibribery violations, and Control Components Inc. (CCI) pleaded guilty to violations of the FCPA and the Travel Act. Eight former CCI executives already have been charged with related offenses and two have pleaded guilty.
In international anti-corruption news, the U.K.'s Serious Fraud Office (SFO) recently announced its first prosecution of a U.K. company for overseas corruption, charging Mabey & Johnson Ltd. with engaging in corruption and breaching United Nations sanctions. In connection with this announcement, the SFO also released an operational note that provides a helpful blueprint for how the SFO intends to enforce current and proposed laws regarding overseas corruption, focusing in particular on the issue of voluntary disclosure, which has been a controversial topic in the United States for some time. Additionally, Siemens AG agreed to a comprehensive settlement with the World Bank Group stemming from misconduct in its global business, which included evidence of corruption by a Siemens subsidiary doing business with the World Bank in Russia.
Finally, the DOJ published its first Advisory Opinion of 2009 in response to a request by a U.S. company seeking to participate in a foreign government program to provide medical devices to individuals in need in that country.
SEC to Create New FCPA Specialized Enforcement Unit
On August 5, 2009, SEC Enforcement Director Robert Khuzami announced a number of new initiatives, including the creation of a specialized unit to enforce the FCPA. According to Khuzami, "more needs to be done" with respect to FCPA enforcement, and this unit "will focus on new and proactive approaches to identifying violations of the [FCPA]... including being more proactive in investigations, working more closely with our foreign counterparts, and taking a more global approach to these violations."1 The FCPA specialized unit will be headed by a Unit Chief, and will be staffed across the country by members of the SEC staff who already have expertise in the FCPA, as well as new hires with practical expertise from private industry, other SEC divisions and elsewhere. This particularized approach to FCPA enforcement is consistent with the DOJ's increased FCPA resources and its public statements that the level of FCPA enforcement activity will remain high in the new administration.
Frederic Bourke, Jr. and Former Congressman William Jefferson (D-LA) Convicted in Rare FCPA Trials; Green Trial Begins; Giffen Trial Tentatively Moves Forward
On July 10, 2009, accessories mogul Frederic Bourke, Jr. was found guilty of conspiracy to violate the antibribery provisions of the FCPA and the Travel Act after a five-week trial in the Southern District of New York. Bourke also was convicted of lying to federal agents but was acquitted on a single count of money-laundering conspiracy.
Bourke was a member of an investment consortium, headed by Viktor Kozeny, that the government alleged bribed Azeri officials to assist in its efforts to acquire a controlling interest in SOCAR, the state oil company of Azerbaijan. These systematic bribes came in the form of cash, issuance of shares of stock in one of the consortium's investing companies, promises of future profits obtained from the SOCAR investment, medical expenses, hotels, jewelry, and clothing. The government alleged that Bourke was expressly informed that the consortium intended to issue 300 million additional shares of its investors' stock, which would be transferred to one or more of the Azeri officials participating in the scheme. Moreover, Bourke was also alleged to have personally arranged for payments for medical care, travel, and lodging for two Azeri officials during visits to New York.
A key piece of evidence at trial was a tape-recorded conversation between Bourke and his attorney, in which Bourke asked the attorney what he should do if he learned that Kozeny was bribing government officials in Azerbaijan. This tape was admitted at trial on the theory that Bourke had waived his attorney-client privilege during a proffer session with the U.S. Attorney's office. Additionally, Bourke's two co-conspirators, Hans Bodmer and Thomas Farrell, testified against him. Bourke attempted to counter the recording and his co-conspirators' testimony by asserting that, although he knew that the investment plan involved Azeri officials, he understood that the officials had paid for their portion of shares and that the arrangement had been approved by the consortium's lawyers. This defense was undercut when Farrell testified on direct examination that he interacted with many of the investors, but that he only discussed the bribery scheme with Bourke.
In addition to pursuing a theory that Bourke knew about the bribes, the government put on evidence to support a theory that Bourke "consciously avoided" learning about the bribes by "sticking his head in the sand" so that he might later deny the scheme.2 In support of the conscious avoidance theory, the government was able to introduce, over defense objection, background evidence of corruption in Azerbaijan to show that Bourke was aware of a high probability that Azeri officials were being bribed. The court allowed this general corruption evidence, and, at the conclusion of trial, instructed the jury that "...knowledge may be established if a person is aware of a high probability of its existence and consciously and intentionally avoided confirming that fact."3 The prosecution's reliance on this sort of evidence, and the court's willingness to instruct the jury accordingly, reinforces the government long-standing position that the inherent corruption level in certain countries can itself be a presumptive red flag for companies doing business internationally.
Bourke remains the only individual participant convicted at trial for his role in the consortium's activities. The government has actively pursued extradition of Kozeny, who has, thus far, successfully defended against efforts to extradite him from the Bahamas. Several other investing participants, including hedge fund Omega Advisors, Inc., have settled with the government, either by guilty plea, or, in the case of Omega, by non-prosecution agreement.
On August 5, 2009, after the completion of a six-week trial in the Eastern District of Virginia, a jury convicted former U.S. Rep. William J. Jefferson (D-LA) of participating in a conspiracy, one of the objects of which was violating the antibribery provisions of the FCPA. The jury acquitted Jefferson of the substantive FCPA charge. Jefferson also was found guilty of various counts of domestic bribery, racketeering and money laundering.
The FCPA charges included in the sixteen count indictment against Jefferson arose from alleged attempts by Jefferson to bribe Atiku Abubakar, then the Vice President of Nigeria, on behalf of iGate, Inc., a U.S. technology company seeking to establish a telecommunications business in Nigeria. In exchange for Jefferson's efforts, Vernon Jackson, the President and CEO of iGate, was making regular payments to an entity created and controlled by Jefferson's family. As part of the scheme, Jefferson allegedly planned to travel to Nigeria and personally deliver $100,000 in cash to Abubakar. The FBI recovered $90,000 in cash from Jefferson's freezer.
Although the majority of the prosecution's case at trial focused on the domestic bribery and related charges, the government did put in some evidence to support its allegation that Jefferson had conspired to violate, and did violate, the FCPA. This evidence reportedly included taped conversations in which Jefferson told Lori Mody, the government's confidential witness, that Vice President Atiku Abubakar of Nigeria had agreed to "grease the skids" for a telecommunications venture the congressman was promoting in Nigeria in exchange for "a piece of the action." The lack of live testimony by Mody at trial, and the fact that $90,000 of the alleged bribe was recovered from Jefferson's house (and thus never delivered to Abubakar), could explain why the jury found insufficient evidence of a substantive FCPA violation.
These recent convictions bear on several trends in the prosecution of FCPA cases. First, this spate of activity indicates an exponential growth in the number of FCPA criminal cases that are actually going to trial. Prior to 2009, the most recent FCPA trial, that of Douglas Murphy and David Kay, occurred almost five years ago. In contrast, there are at least seven FCPA matters set for trial in 2009-2010. Second, to the extent that defendants do proceed through motions and trials in these cases, we can expect to see more judicial decisions relating to the FCPA–something that has been quite rare in the more than 30 years since the statute was enacted. Judicial decisions could put to the test many of the theories the government has espoused in settlement documents over the years. The Kay and Murphy case, as well as the Kozeny case, already have generated a number of court opinions.
The third FCPA trial of 2009 has begun in Los Angeles, with husband and wife producing team Gerald and Patricia Green defending against charges that they paid more than $1.8 million in bribes to a former governor of the Tourism Authority of Thailand in return for $14 million in contracts to stage the Bangkok Film Festival. Prosecutors plan to introduce into evidence a Thai antibribery statute that applies to public officials. That law, even if rarely enforced, probably blocks the Greens from raising the FCPA's local-law affirmative defense, which allows otherwise prohibited payments if the "payment, gift, offer, or promise of anything of value that was made, was lawful under the written laws and regulations of the foreign official's" country.
One of the cases tentatively set for trial in 2010 is that of James Giffen, who was charged in 2003 with FCPA violations arising from allegations that he funneled $80 million in payments from American oil companies to several high ranking Kazakh government officials in exchange for lucrative oil contracts. Recent developments in the Giffen case highlight another trend also exemplified by the Jefferson trial: discovery obstacles endemic to FCPA cases where the key documentary and witness evidence resides in a variety of international fora.
In the Giffen case, discovery battles over relevant documents have delayed the trial for over four years. One of Giffen's key defenses is his claim that the entire time he was working as a middleman for Kazakh officials, he was briefing the Central Intelligence Agency (CIA) about his activities and that, as a result, his actions were effectively sanctioned by the U.S. government. In order to prove this defense, Giffen has argued that he needs access to classified documents in the possession of the CIA. However, on June 5, 2009, Judge Pauley of the Southern District of New York issued an order precluding the defendant from viewing a set of classified documents produced to his attorneys. Judge Pauley ruled that, absent a showing of need for the defendant to review the documents, his attorneys may not allow him to do so.
A second discovery obstacle FCPA defendants can face, markedly present in the Jefferson case, is the challenge of extracting documents and testimony from unwilling witnesses overseas. Prior to trial, Jefferson sought a court order requiring the U.S. government to invoke its mutual assistance treaty with Nigeria in order to secure a deposition of Abubakar and another alleged co-conspirator in Nigeria. Jefferson's request was denied when Judge Elliot held that private parties may not force the government to invoke the treaty. Alternatively, Jefferson sought to obtain the deposition testimony by moving the court to issue letters rogatory, but once again, Jefferson was unsuccessful as he failed to meet the high burden accompanying such a request, namely, proof of "exceptional circumstances."
Avery Dennison Settles SEC Foreign Corruption Charges Alleging Kickback Scheme with Chinese Officials
On July 28, 2009, the SEC settled with Avery Dennison Corp. (Avery) for alleged violations of the FCPA's books and records and internal controls provisions. Under the terms of the settlement, Avery is required to disgorge $273,213 in illicit gains along with $45,257 in prejudgment interest, cease and desist from further FCPA violations, and pay a civil penalty of $200,000. No independent corporate monitor was imposed under the settlement agreement.
The SEC's complaint alleged that Avery's Chinese division (Avery China) paid or authorized the payment of kickbacks, travel excursions, and gifts to Chinese government officials or employees of state-owned facilities in exchange for contracts from 2002 to 2005. In connection with certain of these contracts, Avery China's sales manager agreed to pay a "commission" to a project manager in order to secure the sale. To conceal the payment, the manager paid the purported commission out of what ordinarily would have been the distributor's profit and booked the payment as a sale to the distributor, rather than to the end-user.
In addition to Avery China's alleged acts of bribery, Avery discovered through an internal investigation that employees of entities that it had acquired after the initial self-disclosure to the SEC routinely issued illegal petty cash payments to government officials. For example, Avery learned that two of its acquisition targets had paid a series of bribes to Indonesian customs and tax officials to obtain licenses and avoid regulatory violations. Other entities acquired by Avery were found to have made illegal payments to customs officials in Pakistan and China.
While the Avery settlement reflects the now common enforcement themes of liability for the acts of third-party agents and acquisition targets, the case is notable for the inclusion of post-disclosure violations in the settlement agreement. For liability purposes, the SEC did not appear to distinguish between corrupt payments made by entities Avery had acquired after its initial disclosure to the SEC from the corrupt payments undertaken by an Avery subsidiary that prompted the disclosure in the first place. The SEC emphasized that in some cases, FCPA violations continued in various acquisition targets up to three years after Avery's initial disclosure to the Staff. The settlement drives home the importance of moving as swiftly as possible to integrate the parent company's internal controls into acquired entities, particularly where the books and records of the target are consolidated with the parent company's.
Nature's Sunshine, Two Former Officers Settle with SEC
On July 31, 2009, Nature's Sunshine Products Inc. (NSP), a manufacturer of nutritional and personal care items, reached a settlement with the SEC in connection with charges involving alleged cash payments made by NSP's Brazilian subsidiary to Brazilian customs officials in 2000 and 2001. The settlement requires NSP to pay a civil penalty of $600,000 and enjoins the company from future FCPA and securities violations. No independent corporate monitor was imposed under the settlement agreement. Former CEO Douglas Faggioli and former CFO Craig D. Huff also were also individually charged by the SEC in their capacity as "Control Persons" and reached settlement agreements obligating them each to pay $25,000.
According to the SEC's press release, changes in Brazil's regulatory scheme resulted in the classification of numerous NSP products as medicines, requiring the registration of those products prior to importation into Brazil. This regulatory change allegedly caused NSP's Brazilian subsidiary to attempt to circumvent Brazilian customs controls by making a series of cash payments through customs brokers to customs officials for assisting in the importation of NSP's products. The subsidiary then allegedly purchased false documentation to conceal the nature of the payments to the customs officials. The SEC alleged that this conduct violated the FCPA's books and records and internal controls provisions.4
Interestingly, although NSP disclosed the conduct to both the SEC and DOJ after an internal investigation, the company said in a statement after the SEC settlement release that it anticipated "no action by the Department of Justice...in a previously disclosed investigation relating to these events."5 The DOJ's decision not prosecute the company notwithstanding the SEC complaint's imputation of knowledge on the part of the U.S. issuing entity is notable, and raises the possibility that although there was evidence of knowledge sufficient to meet the accounting provisions' civil standard, there was not sufficient evidence of knowledge to meet the higher criminal burden for an accounting violation found in §78M(B)(4)-(5).
Helmerich & Payne Settles with SEC and DOJ
On July 29, 2009, Helmerich & Payne, Inc. (H&P) entered into a non-prosecution agreement with the DOJ for alleged violations of the FCPA's antibribery and books and records provisions, involving attempts by H&P's employees and agents to pay Argentine and Venezuelan customs officials to aid in the importation and exportation of goods and equipment in those countries from November 2003 to July 2008. Under the agreement, H&P agreed to pay a monetary penalty of $1 million, adopt adequate internal controls, policies, and procedures, and report to the DOJ on the status of those efforts every six months for two years. Notably absent from the settlement is the now common requirement that H&P employ a government-appointed monitor; indeed, the DOJ showed flexibility in allowing instead for a self-reporting mechanism under the agreement.
Importantly, the DOJ identified several factors it considered when determining whether to allow H&P to enter into a non-prosecution agreement. Those factors included: (a) H&P's discovery of the violations through its own internal controls processes; (b) H&P's timely, voluntary, and complete disclosure of the facts; (c) H&P's thorough, real-time cooperation; and (d) the extensive remedial efforts H&P has already undertaken.
In addition to the non-prosecution agreement with DOJ, H&P reached a settlement with the SEC over related violations of the FCPA's books and records and internal controls provisions. The terms of the settlement require H&P to disgorge $320,604 in profits.
WilmerHale represented H&P in its investigation and settlement with the DOJ and SEC.
Control Components Inc. Pleads Guilty to FCPA and Travel Act Violations
Central Components Inc. (CCI), a California-based valve company, pleaded guilty on July 31, 2009 to violations of the FCPA and the Travel Act. CCI admitted to paying bribes to officials and employees of various foreign state-owned companies, as well as foreign and domestic private companies, in over 30 countries. Eight former CCI executives had already been charged with related offenses, and two have pleaded guilty. As part of the plea agreement, CCI will pay a criminal fine of $18.2 million. In addition, the company must create and implement an antibribery compliance program and retain an independent compliance monitor for three years. CCI also will be placed on organizational probation for a period of three years.
According to the information and plea agreement, CCI violated the antibribery provisions of the FCPA and the Travel Act from 1998 through 2007 by making corrupt payments to employees of state- and privately-owned customers in more than 30 countries, including China, Korea, Malaysia, and the United Arab Emirates. These payments, which totaled approximately $6.8 million from 2003 through 2007, were made for the purpose of obtaining or retaining business for CCI. The company admitted to having made over 230 payments from 2003 to 2007, generating approximately $46.5 million in sales for the company.
Like the prior charges against individual CCI defendants, the DOJ again used the Travel Act to capture bribery where no government officials were involved. As we discussed in our May 2009 FCPA Briefing Series, the Travel Act can serve as a statutory substitute to reach foreign and domestic commercial bribery that could not be charged under the FCPA's antibribery provisions due to the absence of a government official. Such conduct has typically been charged in prior cases involving issuers under the FCPA's books and records provisions. CCI, however, is not an issuer, and therefore the DOJ relied on the Travel Act to reach bribery conduct that it otherwise could not under the FCPA.
The CCI case is a powerful statement by the DOJ that government-related bribery is not the only corruption risk area, and companies need to be aware of commercial bribery risks both internationally and domestically. Indeed, in the CCI case, DOJ used the Travel Act to charge the company in connection with conduct that violated the California state commercial bribery statute where that conduct involved the US mails or other facilities of interstate or foreign commerce.6
U.K. Serious Fraud Office Undertakes First-Ever Prosecution of a U.K. Company for Foreign Bribery Activity and Provides Anticorruption Enforcement Guidance
On July 10, 2009, the U.K.'s SFO undertook its first prosecution of a U.K. company for overseas corruption, charging Mabey & Johnson Ltd. (M&J) with engaging in corruption and breaching United Nations sanctions. The alleged offenses involved the payment of $200,000 in bribes to the Iraqi government in connection with the United Nations Oil-for Food Program, as well as the payment of bribes to induce public officials in Ghana and Jamaica into awarding public contracts to M&J. The company reached a plea agreement with the U.K. government subjecting it to substantial fines, restitution payments, and the appointment of an SFO-approved independent monitor to review the company's internal compliance program. The prosecution may represent a turning point in what some have seen as the SFO's history of lackluster efforts in prosecuting overseas corruption. We are aware of other such investigations underway within the SFO.
On the heels of the M&J announcement, the SFO released its first ever set of guidelines on how it intends to prosecute overseas corruption cases under current and pending U.K. law.7 Among other things, these guidelines lay out instructions for voluntary disclosures and raise the possibility that self-reporting can lead to reduced civil, as opposed to criminal, charges. Like the U.S. Sentencing Guidelines, the SFO guidelines also list several mitigating factors that will be considered by the SFO in deciding whether to civilly or criminally charge a company, including, among other things, whether the company has: "a clear statement of an anti-corruption culture"; a code of ethics; policies on gifts, hospitality, and facilitation payments; policies on third-party business partners; policies on political contributions and lobbying; adequate training; and appropriate detection and remediation procedures. Finally, the guidelines detail what obligations companies can expect from non-prosecution settlements, including monetary restitution, establishment of an independent "monitor", a program of "cultural change and training" agreed with the SFO, and, to the extent it is relevant or necessary, a discussion of remediation with respect to certain individuals.
Siemens AG Enters into Global Settlement with the World Bank Group
On July 2, 2009, Siemens AG agreed to a comprehensive settlement with the World Bank Group stemming from past misconduct in its global business, which included evidence of corruption allegedly perpetrated by a Siemens subsidiary doing business with the World Bank in Russia. The alleged misconduct in Russia was uncovered by an investigation by the World Bank's Institutional Integrity Vice Presidency, which investigates fraud and corruption in Bank Group-financed activity.8 Under the terms of the settlement, Siemens agreed to pay $100 million over the next 15 years to support anti-corruption work, and consented to a four-year debarment for its Russian subsidiary. Moreover, the company and all of its consolidated subsidiaries and affiliates agreed to voluntarily refrain from bidding on World Bank Group-financed business for a period of two years and to withdraw any bids not accepted as of January 2009.
The latest settlement follows a series of resolutions reached with U.S. and German regulators. Investigations relating to Siemens are ongoing, however. For example, in June 2009, German prosecutors charged both Michael Kutschenreuter, the former head of finance for Seimens' communications branch, and Michael Christoforakos, the former head of Siemens' operations in Greece, for their alleged roles in facilitating Siemens' global acts of corruption. The Siemens World Bank settlement demonstrates the critical collateral damage that corrupt conduct can have on a company's business outside the scope of pure governmental enforcement actions. In the United States, an FCPA conviction can result in debarment from government contracting, which may be far more financially damaging than the criminal and civil fines and the costs of investigation.
DOJ Issues First Advisory Opinion of 2009
The DOJ recently responded to a request from a U.S. company seeking to provide medical device samples to a foreign government in connection with qualifying for a government program in that country to provide such devices to people in need. In its first FCPA Opinion Release of 2009, the DOJ explained that it does not presently intend to take enforcement action against the company because the complimentary provision of medical device samples to a foreign government, as opposed to individual government officials, falls outside the scope of the FCPA.9 The DOJ also noted that the ultimate beneficiaries of the free samples would be patients selected by the foreign government working with the company pursuant to strict selection guidelines. In connection with this opinion, the requesting company represented to the DOJ that it had no reason to believe that the government official coordinating the medical device program would personally benefit from the donation of the devices and related items and services. The opinion is a good example of how companies that have regular business interactions with foreign governments can do so successfully with careful planning and monitoring of the relationship.
2 David Glovin, Bourke "Stuck Head in Sand" on Azeri Oil Bribes, U.S. Says, Bloomberg. Com (July 7, 2009), available here.
3U.S. v. Bourke, S2 05-Cr-518, Jury Charge, p. 27-28 (SDNY, 2009).
4See SEC v. Nature's Sunshine Products, et al., Litigation Release No. 21162 (July 31, 2009).
6U.S. v. Control Components, Inc., Criminal Information, 8:09-cr-00162-JVS (C.D.Cal., July 22, 2009).
8See World Bank Group Press Release No. 2009/001/EXT, July 2, 2009.
9 DOJ FCPA Opinion Release 09-01 (August 3, 2009).