Recent Developments in Global Antibribery Enforcement

Recent Developments in Global Antibribery Enforcement

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In the last few months there have been several notable developments in FCPA antibribery enforcement. Nexus Technologies Inc. and four of its employees were charged in an alleged bribery scheme involving Vietnamese government officials. A former Kellogg, Brown & Root CEO pleaded guilty to participation in a Nigerian bribery scheme and to kickback charges. Two former ITXC employees were sentenced for making corrupt payments to officials in various African countries. In a case related to an alleged scheme to bribe senior government officials in Azerbaijan, the prosecutions against David B. Pinkerton and Frederic Bourke were dismissed. And Con-way Inc. settled charges brought by the SEC under the FCPA's accounting provisions in connection with payments made to customs officials.

In addition, the Department of Justice (DOJ) published two important documents. First, an opinion release provided further guidance on the issue of appropriate promotional expenses. Second, Deputy Attorney General Mark R. Filip announced the Department's revisions to the Principles of Federal Prosecution of Business Organizations. The revised guidelines provide more protection for the attorney-client and work product privileges. Referring to the principle of presumption of innocence, the Deputy Attorney General also highlighted that refusal by a corporation to cooperate, like refusal by an individual to cooperate, would not be considered evidence of guilt. The Filip Memo notes, however, that lack of cooperation could still entirely offset other considerations that might mitigate the exercise of prosecutorial discretion.

It is of considerable interest that the supervisory board of Siemens AG has asserted damages claims against former members of its management board and supervisory board. The claims are based on alleged breaches of their organizational and supervisory duties to implement and monitor effective antibribery compliance controls across the company's operations, and the financial burdens resulting from these failures.

Finally, the UK Serious Fraud Office recently reached a settlement with Balfour Beatty plc for the failure of a subsidiary to keep accurate accounting records relating to payments made in the context of a construction project in Egypt. This was the first settlement of its kind in the United Kingdom.

DOJ Charges Nexus Technologies Inc. and Four Individuals in Vietnamese Bribery Case

Four US citizens were arrested on charges that they and their company, Nexus Technologies Inc., took part in a conspiracy to pay bribes to various Vietnamese government officials. Payments were allegedly made to the officials to win contracts to supply equipment and technology to Vietnamese government agencies. Nexus Technologies is a US domestic concern with offices in the US and Vietnam. It purchases equipment and technology to be used for underwater mapping and bomb containment, as well as helicopter parts, chemical detectors, satellite communication parts and air tracking systems from vendors in the United States to be sold to agencies of the Vietnamese government.

According to the indictment, all four defendants established relationships with Vietnamese officials who assisted Nexus Technologies in obtaining business by providing confidential information, rigging bids, and through other means, in exchange for bribes. The first defendant, Mr. Nam Nguyen, agreed on the amount of the payments--typically described in Nexus Technologies' books as "commissions"--with the officials. The other three defendants allegedly arranged for payments to the officials as directed by Mr. Nguyen. Allegedly, all defendants deliberately mischaracterized and concealed the bribes in the books and records of the company to prevent detection. The indictment alleges that the defendants paid at least $150,000 in bribes.

Former Kellogg, Brown & Root CEO Pleads Guilty to Participating in Nigerian Bribery and Kickback Scheme

Albert "Jack" Stanley, the former CEO of Kellogg, Brown & Root, Inc. (KBR), a subsidiary of Halliburton Company, pleaded guilty to conspiring to violate the FCPA by participating in a scheme to bribe Nigerian government officials. The scheme, which, according to the plea papers, involved a Gibraltar shell company controlled by a UK-based solicitor and a Japanese company as agent, had been set up to obtain engineering, procurement and construction contracts to build liquefied natural gas facilities in Nigeria between 1995 and 2004, at a value of more than $6 billion. Mr. Stanley had represented KBR on the steering committee of a four-company joint venture that had been awarded those contracts. The steering committee had been responsible for hiring agents to assist the joint venture in obtaining business. Two of those agents were hired with Mr. Stanley's authorization to pay bribes to obtain contracts.

Mr. Stanley acknowledged that he intended at least part of the agents' overall fees of approximately $182 million to be used for bribes. He also admitted that he met with top-level Nigerian government officials to designate a person with whom the joint venture should negotiate bribes.

Mr. Stanley also pleaded guilty to a conspiracy count stemming from a mail and wire fraud scheme designed to defraud his former employer and others. He received approximately $10.8 million in kickbacks from a consultant whom he had caused his employer to hire.

Mr. Stanley faces a penalty of up to seven to 10 years in prison, a $500,000 fine and an order to pay $10.8 million in restitution. He was separately charged by the Securities and Exchange Commission with violating the antibribery provisions of the FCPA and other provisions of the federal securities laws.

This case is another stark example of liability for bribes paid through third parties. Under the FCPA, a person or company may be held liable for bribes paid by third-party intermediaries, provided that the person or company "knows" that all or part of the money provided to the intermediary will be used to bribe foreign officials.1 Third-party intermediaries typically include foreign agents, representatives, consultants and, at times, distributors and joint venture partners. The statutory definition of "knowledge" is very broad. It covers more than actual knowledge, reaching situations in which a person is "substantially certain" that the third party will make improper payments or where there is a "high probability" of a violation. Consequently, any person or company subject to the FCPA should complete a thorough due diligence review before using a third party to interface with foreign government authorities, paying particular attention to obvious warning signs (red flags), and should secure appropriate contractual protections to reduce the likelihood that the third party will make improper payments.

This case also demonstrates the increasing effectiveness of international judicial assistance among prosecutors. According to the government's press release, authorities in France, Italy, Switzerland and the United Kingdom provided considerable support in gathering evidence outside of the United States in preparation for the charges against Mr. Stanley.

Finally, this case evidences the Justice Department's continued, indeed heightened, focus on prosecutions of individuals for FCPA violations. The DOJ believes that the prospect of individual criminal liability will have a broad and useful deterrent effect. For companies, this means that the resolution of an investigation does not necessarily put the entire case behind the company–the company will need to cooperate with the DOJ/SEC's ongoing investigation into individuals, and proceedings related to individuals may generate unwelcome publicity and attention.

1See, e.g., 15 U.S.C. § 78dd-2(h)(3).

Former ITXC Corporation Executives Sentenced for Roles in Foreign Bribery Scheme

Richard Michael Young and Steven J. Ott, two former senior executives of ITXC Corporation (ITXC), a provider of internet telecommunication services, were each sentenced to five years probation, including up to six months of home confinement and six months in a community confinement center, for their involvement in a foreign bribery scheme regarding telecommunications contracts in various African countries. In addition, they were ordered to pay fines of $7,000 and $10,000, respectively.

Both had pleaded guilty to conspiring with each other and with other ITXC employees to make corrupt payments to employees of foreign state-owned telecommunication carriers. The payments were made to influence decision-makers at the African carriers to assist ITXC in obtaining and retaining contracts. The defendants were granted reduced sentences based on their cooperation with the investigation. These prosecutions are further evidence of the Justice Department's emphasis on prosecuting individuals.

Prosecution Against Pinkerton, Bourke for Alleged Bribery of Azeri Government Officials Dismissed

In a case related to an alleged scheme to bribe senior government officials in Azerbaijan, the prosecutions against David B. Pinkerton and Frederic Bourke were dismissed, each for a different reason. Victor Kozeny, the third defendant in the bribery scheme, currently resides in the Bahamas pending requests for extradition to the United States. The government's case against him continues.

In July 2008, the federal district court in Manhattan dismissed charges against Mr. Pinkerton, a former executive at AIG Global Investment who had been indicted along with Mr. Bourke and Mr. Kozeny after the US government concluded that further prosecution of Mr. Pinkerton would not be in the interests of justice.

On August 29, 2008, the US Court of Appeals for the Second Circuit affirmed a lower court ruling that certain charges against Mr. Bourke were outside the statute of limitations and could not be prosecuted. According to the indictment, Mr. Bourke was a principal shareholder in a company that allegedly had invested in another company that was part of a bribery scheme in Azerbaijan. In June 2007, the district court judge determined that most of the conduct subject to the indictment occurred before the end of July 1998 and that therefore that date triggered the start of the five-year statute of limitations. The government appealed the judgment, arguing that it had moved to suspend the statute of limitations in order to seek evidence from a foreign jurisdiction. The Court of Appeals, however, agreed with the district court that the suspension had not become effective because the motion had been brought after the limitations period had already expired.

The decisions in the case against Mr. Bourke are particularly noteworthy in that there is now a circuit split on the question of when a statute of limitations is considered tolled under a law that allows the tolling of a statute of limitations when a party seeks foreign assistance in acquiring evidence abroad. The Ninth Circuit has held that the government did not have to apply for a suspension order within the original five-year limitations period where a parallel request for foreign evidence had been made before the statute of limitations expired. The District Court for the District of Columbia has reached the same conclusion. The District Court for the Southern District of New York, and now the Court of Appeals for the Second Circuit, explicitly rejected this approach.

Con-way Inc. Settles Enforcement Action with SEC

Con-way Inc., an international freight forwarder from California, settled with the Securities and Exchange Commission for alleged FCPA books and records and internal controls violations and paid $300,000 in fines. The violations related to payments made by Philippines-based freight shipping firm Emery Transnational to Philippine customs officials totaling not less than $417,000. Con-way controlled 55 percent of Emery through a wholly-owned subsidiary. Apparently because Emery itself was not a US entity and had not acted in US territory, there was no jurisdiction to bring charges under the FCPA's antibribery provisions. However, Con-way was charged under the FCPA's accounting provisions for failure to record these payments accurately in the company's books and records, and its failure to implement or maintain a system of effective internal accounting controls.

This case demonstrates the importance of exercising control over foreign subsidiaries and the adverse consequences if a US parent company does not review or follow-up on the activities of its foreign subsidiary. The FCPA's accounting provisions require companies with securities listed in the United States to keep books, records and accounts that accurately and fairly reflect transactions in reasonable detail, and to maintain adequate internal accounting controls.1 A covered company is responsible for ensuring that its controlled subsidiaries, including foreign subsidiaries, comply with the FCPA accounting provisions.

The settlement also illustrates customs-related corruption risks that are widespread in many countries. Global companies must often rely on freight forwarders, customs brokers and similar agents to move goods through customs. The US government is separately investigating several other companies for similar activities conducted through Panalpina, another freight forwarder. While customs activities might be viewed as falling outside the FCPA's "obtaining or retaining business" provision, many such cases, as well as cases involving issues such as taxes and patents, have been prosecuted, presumably in reliance on the Fifth Circuit's 2004 decision in United States v. Kay.2 The Kay decision held that improper payments relating to such activities could be charged under the antibribery provisions if they were tied to the company's efforts to obtain or retain business. While Kay provides the government with wide latitude, the government can also avoid the issue entirely, as it did in Con-way, by proceeding entirely under the accounting provisions.

1 15 U.S.C. § 78m(b).

2United States v. Kay, 359 F.3d 738 (5th Cir. 2004).

DOJ Releases Opinion on Proposal to Pay Expenses of Chinese Journalists

In July 2008, the Department of Justice released its third opinion for the year. While the first two opinions relate to M&A issues, the July 2008 opinion provides guidance regarding the FCPA's promotional expenses affirmative defense.1

The requestor was TRACE International (TRACE), a US domestic concern and membership organization specializing in anti-bribery initiatives. TRACE had scheduled a press conference in Shanghai on the occasion of an international anti-corruption conference to present results obtained by TRACE relating to a TRACE web-based tool that provides a mechanism for anonymously communicating bribery demands by government officials. Among other things, TRACE intended that the press conference would increase its membership, enhance its reputation, and promote its initiatives.

TRACE proposed to provide local Shanghai-based and out-of-town journalists certain benefits and to pay their expenses to enable them to attend the press conference. Because the journalists were mostly employed by media outlets wholly-owned by the Chinese government, the recipients were assumed to be foreign government officials. In its release, the DOJ confirmed that the various benefits proposed by TRACE would fall within the FCPA's promotional expenses affirmative defense in that they were reasonable under the circumstances and directly related to "the promotion, demonstration, or explanation of [TRACE's] products or services."

Notably, TRACE's proposal drew a distinction between benefits provided to local journalists and those traveling to Shanghai from out-of-town. For local journalists, the benefits included cash stipends that would cover local transportation costs, one meal, and incidental expenses in an amount of RMB 200 (approximately $28). For out-of-town journalists, the cash stipend would amount to RMB 425 (approximately $62) to cover two additional meals. Moreover, journalists traveling from out of town would be reimbursed for domestic economy-class travel expenses upon submission of receipts and lodging for one night at the hotel hosting the press conference, at a cost of approximately $229 per night. TRACE represented that it intended to pay the hotel costs directly to the hotel.

In its request, TRACE made a number of additional representations. First, it stated that journalists employed by Chinese state-owned media outlets typically were not reimbursed by their employers for work-related travel expenses or meals. Second, TRACE would grant the proposed benefits to all journalists attending the conference, regardless of whether a journalist would later report on the press conference and regardless of whether any such coverage was positive or negative. Third, TRACE announced that it would advise each invited journalist's employer in advance that a stipend would be paid, and invited the employer to inform TRACE if it did not agree with the assumption that the payments were permitted under Chinese law. Moreover, TRACE represented that it had no pending business with any Chinese government agency and that it had obtained written assurance from an established international law firm that the stipends were not contrary to Chinese law. Finally, TRACE promised to record the payments accurately in its own books and records.

The opinion release sheds further light on some recurring issues arising under the FCPA. First, it illustrates that the term "government official" must be construed broadly, taking account of the local situation. While journalists typically are not employed as government officials in many countries, there are countries, including China, where media outlets are owned by government agencies and viewed as being tasked with performing official actions. FCPA-covered companies need to be aware of similar situations in other industries and countries. Second, the opinion release demonstrates that the affirmative defense regarding payments related to the promotion, demonstration, or explanation of a company's goods and services is alive and well, so long as the expenses are reasonable and appropriate and not corrupt. It bears emphasis, however, that the DOJ explicitly refused to place any weight on the fact that it may be a common practice for companies in China to provide such benefits to journalists. Moreover, it should be noted that any such expenses must be accurately recorded in the company's books and records even if they fall within the promotional expenses affirmative defense.

1See, e.g., U.S.C. § 78dd-2(c)(2)(A).

DOJ Publishes Revised Principles of Federal Prosecution of Business Organizations

On August 28, 2008, Deputy Attorney General Mark R. Filip announced revisions to the Department of Justice's Principles of Federal Prosecution of Business Organizations (the Principles). The Principles, which are binding on all federal prosecutors, govern how prosecutors investigate and charge corporate crimes, and therefore are of great significance to companies addressing the ways in which they prevent criminal conduct and respond when such conduct occurs. For the first time, the revised Principles were incorporated into the United States Attorneys' Manual, which DOJ said demonstrated their importance.

Prior versions of the Principles have been subject to substantial criticism in recent years. Critics argued in particular that the Principles allowed prosecutors essentially to force companies to waive attorney-client privilege and/or work product protections in order to receive credit for cooperation, and that the Principles punished companies that chose to advance or reimburse employees' attorneys' fees or that enter into joint defense agreements.

Considering the role of corporations as important allies in its investigations of corporate wrongdoing, the DOJ entered into discussions with various stakeholders, including members of Congress and the business community, to review the Principles. As Deputy Attorney General Filip explained, the review was made in recognition of the critical importance of the attorney-client privilege and work product protection in the US legal system. Referring to the principle of presumption of innocence, he also highlighted that refusal by a corporation to cooperate, just like refusal by an individual to cooperate, is not evidence of guilt. While there is no duty upon corporations to cooperate or to seek cooperation credit by disclosing information to prosecutors, lack of cooperation could offset other mitigating factors.

The following revisions to the Principles merit particular emphasis:

  • First, credit for cooperation will depend on the disclosure of facts generally. It will not depend on whether or not the corporation waives attorney-client privilege or work product protection in the process, or produces material prepared under those protections.
  • Second, prosecutors will be allowed to request disclosure of non-factual related attorney-client privileged communications and work product, including legal advice, only in situations where the company is asserting an advice-of-counsel defense or the material is subject to the crime-fraud exception. Under the prior policy, this core privileged information (referred to under the prior policy as "Category II" information) could be requested by prosecutors much more easily. DOJ's revision takes account of the fact that such legal communications are often necessary to help a corporation comply with the law. Subjecting those communications to disclosure risked the result that corporations and their employees would hesitate to seek legal advice, which would be counterproductive to efforts to improve compliance.
  • Third, the government no longer may take into account that a corporation advanced or reimbursed attorneys' fees to its employees, officers, or directors, to the extent such payments are permitted by its bylaws and the law of its state of incorporation. The revised Principles note, however, that the DOJ can still consider such payments as a negative factor if the company in some way uses the payments to obstruct justice.
  • Fourth, a corporation may now enter into joint defense agreements where appropriate without fear of losing cooperation credit. As Deputy Attorney General Filip emphasized, the new policy recognizes that a corporation may have legitimate reasons to enter, or not to enter, into that kind of agreement. Therefore, federal prosecutors are now instructed to no longer consider a corporation's participation when evaluating its other cooperation efforts. The policy still allows the government to request that a corporation not disclose to third parties information provided to the corporation by the government. The policy also notes that restrictions on disclosure that are often contained in joint defense agreements may prevent a company from providing information to the government that might be relevant to the company's ability to seek cooperation credit. Thus, corporations should take care in deciding whether to enter into such agreements, and, if they do, take care in drafting them with flexibility where appropriate.
  • Finally, Deputy Attorney General Filip stated that DOJ's prior guidance that prosecutors could account for employee discipline in evaluating cooperation has been revised. Under the revised Principles, prosecutors may consider disciplinary measures, but only where the company has found the relevant employees culpable, and only in the context of evaluating the company's remedial measures or compliance program.

Amendment to FCPA Proposed to Congress

A proposed amendment to the FCPA has been submitted to the House of Representatives Committee on Energy and Commerce, and to the Committee on the Judiciary. The bill proposes the authorization of certain rights of private action under the FCPA for violations by foreign concerns that damage US businesses.

The draft defines a foreign concern as any person other than an issuer, domestic concern, or other US person already covered by the FCPA. It provides that a foreign concern that violates the antibribery provisions of the FCPA while in the territory of the United States, and that makes use of the mails or any means or instrumentality of interstate commerce, may be liable for an amount up to three times the damages caused to issuers, domestic concerns, or other persons.

The bill is awaiting consideration by Congress. If passed, the risk of financially burdensome lawsuits before US courts will be an added potential consequence for non-US companies that fail to comply with the FCPA.

Siemens Supervisory Board Asserts Damages Claims Against Former Managing Directors and Supervisory Board Members

The supervisory board of Siemens AG, a German multinational company with annual revenue of more than $100 billion, has asserted damages claims against former members of its management board and supervisory board. The claims are based on alleged breaches of their organizational and supervisory duties to implement and monitor effective antibribery compliance controls across the company's operations and the resulting financial burdens. Potential defendants include former CEOs Heinrich von Pierer and Klaus Kleinfeld. To date, as a consequence of bribery allegations, Siemens has paid a substantial fine of EUR 200 million (approximately $278 million) in Germany; incurs quarterly expenses of more than $100 million for outside advisors engaged in connection with investigations as well as remediation efforts; and expects more fines to be levied by other authorities, including the SEC and DOJ. Siemens estimates the total consequential damages in terms of fines, back taxes, and costs for advisors at EUR 1.9 billion.

The damages claims rest on the principle that each individual management board member must ensure that the company and its employees operate in compliance with German and foreign law (to the extent it applies to the company's operations), and that failure to do so may cause harm to the company. Compensation for damages may include all direct and indirect disadvantages caused by the breach of duty. Hypothetical and future developments, including loss of profit, can be taken into account.

German law obligates a supervisory board to initiate civil proceedings against a former manager for damages caused to the company during his or her term if the supervisory board is convinced that the company would prevail in such proceedings. It is still relatively rare that a supervisory board of a German company would consider taking such drastic measures against former senior managers. The announcement follows the opening of a formal investigation by the Munich prosecutor against former members of the Siemens supervisory board and management board based on alleged violations of their duty to take appropriate supervisory measures required to prevent breaches of criminal and administrative law.

German criminal law penalizes bribery of foreign government officials in line with the OECD Convention Against Bribery of Public Officials. It is in some ways stricter than the FCPA. For example, German law does not explicitly exclude prosecution for facilitation payments. In addition to prohibiting bribery of foreign government officials, German law also clearly prohibits payments made with the intent to corrupt an employee of a commercial enterprise in or outside of Germany.

However, there have been very few, if any, German convictions of individuals for acts of foreign bribery in the last decade. Instead, there have been prosecutions and convictions for criminal breach of fiduciary duties based on the theory that the employees who used their employer's money to set up slush funds in secret bank accounts to be used for bribes had transferred those assets out of the company's reach. A recent judgment of the German Federal Supreme Court involving former Siemens employees proceeded under that theory. There, the employees had used secret funds to bribe employees of the Italian utility company ENEL to win a tender for Siemens. The court held this was a punishable act regardless of whether the company later gained a commercial advantage from the use of slush funds for bribes.

UK Serious Fraud Office Reaches First-Ever Settlement with Target of Foreign Corruption Inquiry

The Serious Fraud Office (SFO), the UK government entity tasked with investigating and prosecuting serious or complex fraud, announced that it has reached a settlement with Balfour Beatty plc for the failure of its subsidiary to keep accurate accounting records relating to certain payments made during the construction of The Bibliotheca Project in Alexandrina, Egypt. Once Balfour Beatty learned of the payment irregularities, it notified the SFO, which conducted a detailed investigation. The company agreed to pay £2.25 million, together with a contribution towards the costs of the Civil Recovery Order proceedings. Additionally, it has agreed to introduce certain compliance systems and to submit the systems to a form of external monitoring for an agreed period. The SFO concluded that the prosecution of any individual or corporate entity is not merited.

This is the first settlement of its kind reached by the SFO since the power to reach such agreements was made available in April 2008. Specifically, the SFO may recover property obtained by unlawful conduct, and, notably, it is not required to establish a specific offense against any particular company or individual. Rather, the SFO must merely demonstrate that the property sought includes the proceeds of unlawful conduct.

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