FCPA Compliance and Ethics Blog

December 31, 2009

2009-The Year of the Trial

2009 FCPA-The Year of the Trial

At the end of this year, many commentators have weighed in on the changes in enforcement under the Foreign Corrupt Practices Act (FCPA) over the past decade or the catastrophic increase in fines and disgorgement of profits over the past year. I believe that in the FCPA world 2009 will be remembered as the Year of the Trial. Here is a summary of the three FCPA enforcement actions which went to a full jury verdict this year and their outcomes.

A. Frederick Bourke

The first of the convictions was delivered on July 10, 2009, when Frederic Bourke was convicted of conspiring to violate the Foreign Corrupt Practices Act; the Travel Act and lying to FBI agents. The jury found that he invested in Czech-born promoter Viktor Kozeny’s unsuccessful attempt in 1998 to gain control of Azerbaijan’s state oil company, State Oil Company of the Azerbaijan Republic (SOCAR), despite knowing Kozeny planned to bribe Azeri leaders.

In its Press Release, the Department of Justice (DOJ) stated that evidence was presented at trial established that Bourke was a knowing participant in a scheme to bribe senior government officials in Azerbaijan with several hundred million dollars in shares of stock, cash, and other gifts. These bribes were meant to ensure that those officials would privatize SOCAR in a rigged auction that only Bourke, fugitive Czech investor Viktor Kozeny and members of their investment consortium could win, to their massive profit. [DOJ Press Release can be found at http://www.justice.gov/opa/pr/2009/July/09-crm-677.html%5D

On November 12, Bourke was sentenced by the trial judge, Shira Scheindin to a sentence of ‘a year and a day’, followed by three years of probation and a $1,000,000 fine. The government had sought a sentence of 10 years as” a deterrence to others”. At the Sentencing Hearing Judge Scheindin is reported to have said: “After years of supervising this case, it’s still not entirely clear to me whether Mr. Bourke is a victim or a crook or a little bit of both.”

B. William Jefferson

On August 5, former nine-term congressman William Jefferson was convicted on 11 of 16 corruption charges. As reported in the FCPABlog, Jefferson was acquitted on Count 11 of the indictment — the only substantive FCPA charge he faced. But the jury convicted him on Count 1; which alleged three separate illegal conspiracies — to solicit bribes, deprive citizens of honest services and violate the FCPA. The jury’s verdict form did not require it to specify which of the three illegal conspiracies the panel believed he engaged in so Jefferson’s conviction on Count 1 may or may not have included a finding that he conspired to violate the FCPA. [DOJ Press release can be found at http://washingtondc.fbi.gov/dojpressrel/pressrel09/wfo111309b.htm ]

Jefferson was sentenced on November 14 to 13 years in prison by Judge T.S. Ellis. It is not clear if Judge Ellis used the FCPA-related conspiracy element to calculate Jefferson’s sentence as the jury acquitted Jefferson on the substantive FCPA charge but was convicted then on conspiracy to violate the FCPA. It may never be known. Jefferson is currently on bail pending his appeal. The DOJ had asked the trial judge for a sentence ranging from 27 to 33 years in prison.

C. Gerald and Patricia Green

The third FCPA related verdict was handed down on September 14, when Gerald Green and his wife Patricia were convicted of FCPA violations. According to the DOJ Press Release, during the period from 2002 through 2007, the Greens conspired with others to bribe the former governor of the Tourism Authority of Thailand (to the tune of $1.8MM) in order to acquire lucrative film festival contracts as well as other deals for the development of a Thai Privilege Card, a website, book, video, calendars and public relations services.

As reported in the FCPABlog on December 18, 2009, the Greens used different business entities, some with dummy addresses and telephone numbers, to hide how much they were receiving under the contracts. The jury found that Greens disguised the bribes as “sales commissions” and made the payments through foreign bank accounts of intermediaries in Singapore, the United Kingdom and Jersey, some in the name of the former governor’s daughter and a friend. [DOJ Press Release can be found at http://www.usdoj.gov/opa/pr/2009/September/09-crm-952.html.%5D

Sentencing was originally scheduled for December 17; however it has been rescheduled to January 21, 2010. The Pre-Sentencing Report was filed on December 14, 2009 and now the Justice Department now wants Gerald Green, aged 76, sentenced to life in prison. In a December 14 court filing, prosecutors said although the Pre-Sentence Report recommended a downward departure under the federal sentencing guidelines and a sentence of about 20 to 25 years, Green’s sentence should instead be enhanced. The DOJ alleged that Green was “the ring leader of the bribery plot” and said he “repeatedly and blatantly perjured himself” at his trial.

FCPA cases rarely go to trial. And even when they do, such trials rarely result in acquittals. There has not been an outright acquittal in an FCPA case since 1991. After this year, it may be that no individuals are willing to take their chances by putting their fate in front of a judge or jury for an FCPA charge. Why is it so difficult to win an FCPA case for an individual? I believe it comes down to two reasons.

The first reason relates to judges and the law. Trial judges and Courts of Appeal have not been friendly to technical legal arguments over the language of the FCPA. “What is a business nexus”; “who is a foreign official”; “what is obtaining or retaining business”, or the invocation of a “local law defense” have not received favorable rulings from courts. The second reason relates to juries and the facts. Juries do not take well to the payment of bribes. No matter how these payments are described, such as payments of over $1 million to intermediaries by the Greens, $90,000 in cash stuffed in a freezer in the Jefferson case, or, as in the Bourke case as related by the Jury Foreman, “we thought he knew” that bribery and corruption were involved in the business deal in which he was a participant, to the tune of an $8 million investment, but equally importantly “he definitely should have known”.

One of the first things one learns in law school is that “if the facts are against you argue the law” and “if the law is against you argue the facts”. However, in FCPA cases, it appears that individual defendants cannot seem to argue either way as there has been no favorable law (legal) ruling which may form the basis of legal defenses AND all FCPA cases involve large amounts of cash or money, so that the facts always look bad. So the lesson from 2009 is that a defendant should be very careful in weighing the benefits vs. the risk of an FCPA criminal trial.

December 23, 2009

Elements Of An Effective Compliance Program

Elements Of An Effective Compliance Program

In his excellent FCPA Blog, Richard Cassin has written about an effective compliance program. He notes that the purpose of an “effective compliance program” is to prevent and detect criminal conduct. In his listing his suggestions for what constitutes an “effective compliance program” Mr. Cassin based his guidance on the United States Federal Sentencing Guidelines. He suggested the following:

1. A Written Program. A company must have standards and procedures in place to prevent and detect criminal conduct.
2. Board Oversight. A public company’s Board of Directors must be knowledgeable about the content and operation of the compliance program and must exercise reasonable oversight of its implementation and effectiveness.
3. Responsible Persons. One or more individuals among a company’s high-level personnel must be assigned overall responsibility for the compliance program.
4. Operating and Reporting. One or more individuals must be delegated day-to-day operational responsibility for the compliance program. They must report periodically to high-level personnel on the effectiveness of the compliance program. The individuals must have adequate resources, appropriate authority, and direct access to the Board or Audit Committee.
5. Management’s Record of Compliance. A company must use reasonable efforts not to hire or retain personnel who have substantial authority and whom a company knows or should know through the exercise of due diligence have engaged in illegal activities or other conduct inconsistent with an effective compliance program.
6. Communicating and Training. A company must take reasonable steps to communicate periodically and in a practical manner its standards and procedures, and other aspects of the compliance program, to directors, officers, executives, managers, employees and agents — by conducting effective training programs and otherwise disseminating information appropriate to the individuals’ respective roles and responsibilities.
7. Monitoring and Evaluating; Anonymous Reporting. A company must take reasonable steps (a) to ensure that its compliance program is followed, including monitoring and auditing to detect criminal conduct, (b) to evaluate periodically the effectiveness of the compliance program and (c) to have and publicize a system, which may include mechanisms that allow for anonymity or confidentiality, whereby a company’s employees and agents may report or seek guidance regarding potential or actual criminal conduct without fear of retaliation.
8. Consistent Enforcement — Incentives and Discipline. A company’s compliance program must be promoted and enforced consistently throughout a company through appropriate (a) incentives to perform in accordance with the compliance program and (b) disciplinary measures for engaging in criminal conduct and for failing to take reasonable steps to prevent or detect criminal conduct.
9. The Right Response. After criminal conduct has been detected, a company must take reasonable steps to respond appropriately and to prevent further similar criminal conduct, including making any necessary modifications to a company’s compliance program.
10. Assessing the Risk. A company must periodically assess the risk of criminal conduct and take appropriate steps to design, implement, or modify its compliance program to reduce the risk of criminal conduct identified through this process.

In the coming weeks, we will review each of these suggested guidelines and provide nuts and bolts recommendations for you to use in crafting your own effective compliance program.

December 21, 2009

DOJ Goes for KO with Gerald Green Sentencing

In September, 2009 Gerald Green and his wife Patricia were convicted of Foreign Corrupt Practices Act (FCPA) violations. According to the DOJ Press Release, from 2002 through 2007, the Greens conspired with others to bribe the former governor of the Tourism Authority of Thailand (to the tune of $1.8MM) in order to land lucrative film festival contracts as well as other deals for the development of a Thai Privilege Card, and for a website, book, video, calendars, and public relations services. As reported in the FCPABlog on December 18, 2009, the Greens used different business entities, some with dummy addresses and telephone numbers, to hide how much they were receiving under the contracts. The jury found that Greens disguised the bribes as “sales commissions” and made the payments through foreign bank accounts of intermediaries in Singapore, the United Kingdom and Jersey, some in the name of the former governor’s daughter and a friend.

The Pre-Sentencing Report was filed on December 14, 2009 and now the Justice Department now wants Gerald Green, aged 76, sentenced to life in prison. In a December 14 court filing, prosecutors said although the pre-sentence report recommends a downward departure under the federal sentencing guidelines and a sentence of about 20 to 25 years, Green’s sentence should instead be enhanced. The DOJ alleged that Green was the ring leader of the bribery plot, the DOJ said, and he “repeatedly and blatantly perjured himself” at his trial.

Both the convictions of Gerald Green and his wife Patricia, coupled with the Government’s aggressive stance in sentencing make clear that ‘business as usual’ in overseas film work will no longer be tolerated. It should be noted that both convictions were not for “conscious avoidance” as with Frederick Bourke or conspiracy with no underlying action as with William Jefferson. The evidence in the Greens case was actual, old fashioned bribery.

The entertainment industry needs to understand that it can longer use agents/intermediaries to procure business. Further, formerly typical excessive gifts or lavish entertainment cannot be used to procure business. As many films are financed through overseas corporations for tax purposes, the potential of FCPA violations are substantially increased. In addition to the anti-bribery component of the FCPA, the Act also includes a books and records provision which requires that all payments must be properly accounted for and correctly classified. It can only be hoped that the entertainment industry sits up and takes notice that times indeed must change.

December 18, 2009

END OF GREASE PAYMENTS COMING

As recently reported in WragBlog, the OECD announced a new recommendation at the OECD’s celebration of “International Anti-Corruption Day” and the Tenth Anniversary of the “Entry into Force of the OECD Anti-Bribery Convention”. This change relates to facilitation payments (aka “grease payments”) which are legal under the Foreign Corrupt Practices Act (FCPA).

OECD Secretary-General Angel Gurría described these low-level payments, designed to expedite performance of a “routine government action” such as obtaining mail delivery, phone or power service, as “corrosive . . . particularly on sustainable economic development and the rule of law”.

Facilitation payments, also known as “expediting payments” or “grease payments,” are bribes paid to induce foreign officials to perform routine functions they are otherwise obligated to perform. Examples of such routine functions include issuing licenses or permits and installing telephone lines and other basic services. The only countries that permit facilitation payments are the United States, Canada, Australia, New Zealand and South Korea. Facilitation payments, however, are illegal in every country in which they are paid. They have come under increasing fire under the FCPA as inconsistent with the totality of US policy on anticorruption.

This change by the OECD brings the considerable problems associated with facilitation in the international business arena into keener focus. Just like large commercial bribes, grease payments abuse the public trust and corrode corporate governance. Treating them as anything other than outright bribery muddies the compliance waters and adds confusion where there should be clarity. This new stance by the OECD, coupled with the increased enforcement under the FCPA, may well bode the end of facilitation payments.

I. TRACE Facilitation Payments Benchmark Survey

In October, 2009, TRACE International published the results of its “Facilitation Payments Benchmark Survey”. TRACE conducted a global survey with the following objectives: (1) to understand how facilitation payments are perceived in the international business community, including the level of risk they are deemed to pose and the compliance challenges they present; and (2) to map corporate policies on facilitation payments, including whether they are permitted and, if so, the types of safeguards corporations impose on their payment.

The results of the TRACE survey reveal a definitive move by corporations to ban facilitation payments, coupled with an awareness of the added risk and complexity presented by facilitation payments:

• 76% of survey respondents believe it is possible to do business successfully without making facilitation payments given sufficient management support and careful planning.
• Over 70% believe that employees of their company either never, or only rarely, make facilitation payments, even if their corporate policy permits facilitation payments.
• Over 93% revealed that their job would be easier, or at least no different, if facilitation payments were prohibited in every country.
• Nearly 44% reported that their corporations prohibit facilitation payments or simply do not address them because facilitation payments are prohibited together with other forms of bribery.
• Almost 60% of respondents reported that facilitation payments pose a medium to high risk of books and records violations or violations of other internal controls.
• Over 50% believe a company is moderately to highly likely to face a government investigation or prosecution related to facilitation payments in the country in which the company is headquartered.

II. Facilitation Payments under the FCPA

The original version of the FCPA, enacted in 1977, contained an exception for payments made to non-US officials who performed duties that were “essentially ministerial or clerical”. In 1988 Congress responded by amending the FCPA under the Omnibus Trade and Competitiveness Act to clarify the scope of the FCPA’s prohibitions on bribery, including the scope of permitted facilitation payments. An expanded definition of “routine governmental action” was included in the final version of the bill, reflecting the intent of Congress that the exceptions apply only to the performance of duties listed in the subcategories of the statute and actions of a similar nature. Congress also meant to make clear that “ordinarily and commonly performed actions”, with respect to permits or licenses, would not include those governmental approvals involving an exercise of discretion by a government official where the actions are the functional equivalent of “obtaining or retaining business for, or with, or directing business to, any person”.

The FCPA now contains an explicit exception to the bribery prohibition for any “facilitation or expediting payment to a foreign official, political party, or party official for the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official, political party, or party official”. “Routine government action” does not include any decision by a public official to award new business or continue existing business with a particular party. The statute lists examples of what is considered a “routine governmental action” including:
• obtaining permits, licenses, or other official documents to qualify a person to do business in a country;
• processing government papers, such as visas or work orders;
• providing police protection, mail pick-up and delivery, or scheduling inspections associated with contract performance or transit of goods across country;
• providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products from deterioration; and
• actions of a similar nature.

There is no monetary threshold for determining when a payment crosses the line between a facilitation payment and a bribe. The accounting provisions of the FCPA require that facilitation payments must be accurately reflected in an issuer’s books and records, even if the payment itself is permissible under the anti-bribery provisions of the law

III. Risks associated with relying on the “facilitation payments” exception

Facilitation payments carry legal risks even if they are permitted under the anti-bribery laws of a particular country. In the US enforcement agencies have taken a narrow view of the exception and have successfully prosecuted FCPA violations stemming from payments that could arguably be considered permissible facilitation payments. Violations of the accounting and recordkeeping provisions of the FCPA are also more likely when a company makes facilitation payments. Abroad, countries are increasingly enforcing domestic bribery laws that prohibit such payments. Companies that allow facilitation payments face a slippery slope to educate their employees on the nuances of permissible payments in order to avoid prosecution for prohibited bribes.

A. US enforcement authorities construe the exception narrowly

Other than as discussed above, there is no definitive guidance on circumstances in which the facilitation payments exception applies. There may be less risk of enforcement by US authorities in cases involving bona fide facilitation payments that are made specifically for one of the purposes enumerated in the FCPA. However, companies still face the risk of at least facing a governmental inquiry to explain the circumstances surrounding the payments, possibly resulting in penalties based on an unanticipated restrictive interpretation of the exception.

B. Potential non-compliance with the FCPA’s accounting and recordkeeping provisions

While the anti-bribery provisions of the FCPA permit facilitation payments, the accounting and recordkeeping provisions of the law nevertheless require companies making such payments to accurately record them in their books and records. Companies or individuals may be reluctant to properly record such payments, as it shows some semblance of impropriety and effectively creates a permanent record of a violation of local law. However, failure to properly record such expenditures may result in prosecution by the Securities and Exchange Commission (SEC) even if the underlying payments themselves are permissible. One example of prosecution resulting from the misreporting of seemingly permissible facilitation payments involves Triton Energy Corporation, which settled an investigation by the SEC involving multiple alleged FCPA violations, including the miss-recording of facilitation payments. An Indonesian subsidiary of the company had been making monthly payments, of approximately $1,000, to low-level employees of a state-owned oil company in order to assure the timely processing of monthly crude oil revenues. The SEC did not charge that these payments violated the anti-bribery provisions of the FCPA; however, these payments were miss-recorded in corporate books and therefore violated the FCPA’s accounting and recordkeeping provisions. Triton Energy consented to an injunction against future violations of the FCPA and was fined $300,000.

C. Increased enforcement of non-US laws that do not recognize an exception for facilitation payments

While the FCPA and certain other national anti-bribery laws contain exceptions for facilitation payments, such payments typically are considered illegal in the country in which they are made; there is not any country in which facilitation payments to public officials of that country are permitted under the written law of the recipient’s country. Accordingly, even if a particular facilitation payment qualifies for an exception of the FCPA, it, nevertheless, is likely to constitute a violation of local law – as well as under anti-bribery laws of other countries that also might apply simultaneously – and thus exposes the payer, his employer and/or related parties to prosecution in one or more jurisdictions. While enforcement to date in this area has been limited increased global attention to corruption makes future action more likely. Countries that are eager to be seen as combating corruption are prosecuting the payment of small bribes with greater frequency.

D. Corporate approaches to facilitation payments may exceed the legitimate scope and applicability of the exception

As demonstrated in the TRACE Benchmark Survey, businesses struggle with how to address the “facilitation payments” exception in their compliance policy and procedures, if the subject is covered at all. Businesses should be wary of allowing employees to decide on their own whether a particular payment is permissible. Unless such payments are barred completely or each payment is subject to pre-approval (which in many cases would be unrealistic (e.g., passport control)), there is always the risk that an employee, agent or other person whose actions may be attributed to the company will make a payment in reliance on the exception when in fact the exception does not apply. In addition, the temptation to improperly record otherwise permissible facilitation payments has been discussed above.

IV. End of facilitation payments?

The global business environment has changed even as the FCPA has remained static. In the absence of any legislative action to roll back the facilitation payment exception, the Department of Justice (DOJ) and the SEC plainly have set out to repeal it on a case-by-case basis. US companies should recognize the weakening of the argument supporting a facilitation payment exception and should develop compliance policies that do not permit any kind of grease payments. A policy that prohibits all payments (unless there is high level of legal and compliance approval) will relieve businesses of the compliance burden of differentiating between lawful and unlawful payments. From the point of view of the modern global corporation, a compliance regime that attempts to differentiate between “good” corrupt payments and “bad” corrupt payments will do more harm than good.

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