The Gun Sting Case Defeats and What it means For FCPA Enforcement? Absolutely Nothing!

In a stunning rebuke of the Department of Justice’s (DOJ) trial strategy, all defendants in the second group of Gun Sting defendants walked out of the federal courthouse, still free. Two defendants were acquitted and the remaining three defendants were granted a mistrial. One defendant was dismissed at the close of the prosecution’s case in December as was the DOJ’s Foreign Corrupt Practices Act (FCPA) conspiracy count against all defendants. So, as the FCPA Professor noted, the DOJ is 0-10 in trial prosecutions in its Gun Sting case. However, that stark number does not tell the full picture of what is going on in enforcement of the FCPA.

First and foremost, not all of the Gun Sting defendants have been acquitted or even been granted mistrials, three defendants, Haim Geri, Daniel Alvarez and Jonathan Spiller all pled guilty. A fourth defendant, Richard Bistrong, reported by the FCPA Blog to be “the key intermediary between the FBI and the shot-show defendants”, pled guilty to one count of conspiracy to violate the FCPA and other statutes in 2010. So to imply the DOJ is zero in obtaining guilty verdicts and pleas for all defendants in its Gun Sting case is not precisely correct.

The defeats in the Gun Sting trials, coupled with the overturning of the guilty verdict in the Lindsey Manufacturing case and the O’Shea acquittal, have lead many commentators to make one of two arguments: (1) the DOJ is getting is comeuppance for ‘aggressive’ prosecution of the FCPA; and (2) coupled with the claim that the FCPA hurts US competitiveness overseas, it is the end of FCPA enforcement as we know it. Both positions are far wide of the mark. So what does the DOJ record for the two Gun Sting trials mean for FCPA enforcement? Absolutely nothing! As reported by the FCPA Blog, in 2011 15 companies settled FCPA enforcement actions by paying a total of $508.6 million in fines and penalties. Although this is a drop from both the number of companies which resolved FCPA enforcement actions and aggregate amount of fines and penalties paid over the previous year, this number is still significant. One need only take a look at the reported ongoing FCPA investigations to see that there is still significant enforcement occurring. As to the ‘aggressive’ DOJ enforcement, remember these enforcement actions against companies are made largely through self-disclosure. If the DOJ does not believe that there is a sufficient basis to bring an enforcement action, it will decline to prosecute the company.

What can be portended by the defeats at trial? First the whole notion that the Lindsey Manufacturing company defendants were somehow acquitted or over-zealously prosecuted is just plain wrong. They were found guilty and this guilty verdict was thrown out due to prosecutorial misconduct. As to O’Shea, it appears that the trial judge concluded that the government simply did not have enough evidence to get it to a jury. While it appears that the O’Shea case should not have gone to trial, the government at least put enough evidence forward to get to trial.

Such was not the case in the Gun Sting trials, where it appears the jury both (a) did not think the defendants were guilty, or (b) leaned so heavily towards acquittal that no unanimous decision could be made. It is still not clear why the government failed so miserably with the juries in the Gun Sting trials. It may be that people do not understand why the government would set up an apparently legitimate business transaction and then overlay a corruption case on it. After all, everyone understands that any business dealing involving illegal narcotics is illegal from the get-go. It does not matter if bribery and corruption are involved, the entire transaction is illegal. It may be the jurors did not feel the same about an underlying transaction which was clearly legal; here the sale of armaments to a foreign government, something the US government does on a routine basis.

It may also be the jury simply did not believe or even like the government’s star co-operating witness, Richard Bistrong. As reported by the FCPA Professor, Bistrong pled guilty long before any of the 2010 arrests in the Gun Sting case. He pled guilty back in 2009 which means that at least some of the time he was working undercover for the government, he had already pled guilty. This fact may have persuaded the jury in the Gun Sting trials that his testimony did not support the illegal conduct that the government claimed it supported. Or as asked by the FCPA Professor, in a post entitled “Will Bistrong’s Plea Impact The Africa Sting Cases?”, “What impact will Bistrong’s plea have in the Africa [Gun] Sting case – particularly the defendants’ expected entrapment defense?” It may have been quite a bit.

As your company’s compliance officer, what should you make of all this? My take is that you had better double down on your compliance program because I believe that the DOJ will refocus its efforts where it will have the most success, with enforcement actions against corporations. Why do I say this? First of all, there is the self-disclosure issue noted above which is now compounded by the Dodd-Frank Whistleblower provision. Second is the new norm of industry sweeps, and remember these started long before Johnson & Johnson who agreed, as part of its DPA, to turn in its competitors for alleged FCPA violations. Also name one company which will go to trial? The answer is easy because it’s none, nada, zilch and zero. After Arthur Anderson, no public US Company will go to trial in a FCPA case and risk a guilty verdict. Lindsey Manufacturing and the individual defendants went to trial because they were the company and the company was them.

So what is my take on the effect on ongoing FCPA enforcement of the failure of the DOJ to convict any of the Gun Sting defendants at trial? Once again, Absolutely nothing!

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2012

Ten Compliance Issues from 2011

I have seen several lists of the Top Foreign Corrupt Practices Act (FCPA) issues of 2011. Sam Rubenfeld and Chris Matthews at the Wall Street Journal’s Corruption Currents have been interviewing several of the top legal practitioners on their thoughts. The ever-present Mike Volkov has weighed in with his list and his “Person of the Year”, the Chief Compliance Officer. Howard Sklar and I even got into the video act by discussing our most significant issues in “This Week in FCPA”. So as part of the compliance commentariati, I submit, for your consideration, my Top Ten anti-corruption and anti-bribery issues over the past 12 months.

1.         Amendments to the FCPA? The Senate ended 2010 with hearings focusing on why there were not more individual prosecutions under the FCPA. In June, the House Judiciary Committee focused on ways to ease up on or gut the anti-corruption provisions of the FCPA in the name of US “competitiveness” overseas. Then in a stunning turnaround, the House Judiciary Chair asked the Department of Justice (DOJ) representative if the DOJ would support a ban on all commercial bribery, not just a ban on bribing foreign governmental officials. Then again he did say was drafting amendments to the FCPA which we haven’t heard about since the great theater in June.

2.         UK Bribery Act goes live. For many in the anglophile world, the event of the year was the marriage of Prince William to Kate Middleton. However, for us in the anti-corruption and anti-bribery world, it was effective date of the UK Bribery Act, July 1. While some had opined that the Bribery Act was “the FCPA on steroids” the initial prosecution under the Bribery Act was for a £500 bribe paid to a UK court clerk. Perhaps it just takes awhile for UK steroids to kick in.

 3.         Crystal Ball Reading. One does not have to read a crystal ball or tea leaves to know what should constitute a best practices compliance program. The DOJ continues to respond to calls for information by practitioners and the commentarati by providing solid information through which you can implement or enhance your compliance program. In addition to continuing to list the 12 points in a minimum best practices compliance program in each Deferred Prosecution Agreement (DPA)/Non-Prosecution Agreement (NPA) released; the DOJ has provided ‘enhanced compliance obligations’ in DPAs which provide information on evolving standards. Back in January, the DOJ provided information on areas of risk which should be assessed to inform your compliance program.

4.         Chief Compliance Officer Upgrade. With the effective changes in the federal sentencing guidelines from November, 2010 and the DOJ comments this year, it has become clear that companies must give a more prominent role to the Chief Compliance Officer and separate that function from that of the General Counsel.

5.         Investigating Private Equity. Both the DOJ and Serious Fraud Office (SFO) announced that they would be looking at private equity, in conjunction with anti-bribery and anti-corruption. Well known for cost reductions through cutting corporate budgets, they may become a prime and profitable set of targets for enforcement agencies.  Additionally, their unique structure of separately operating portfolio companies may greatly increase ownerships control and person risks. If you are in private equity and are reading this and have no clue what I am talking about, get on the phone to one of Howard Sklar’s recommended FCPA counsel ASAP.

6.         It Just Can’t Get any Weirder. Just when you think you have seen it all in the FCPA world, News Corp., is accused of bribing Scotland Yard to further its newspaper business and it is also alleged that a lawyer representing a US company in Mexican litigation attempts to bribe a court official to obtain a favorable ruling. Then, of course there is Olympus, which not only fires its whistle-blowing Chief Executive Officer (CEO) for questioning Red Flag payments to agents, which reveals that it has been engaged in a decade long corporate fraud. But here’s the topper in my book, someone posted a comment to my blog post about Tyson’s Foods paying bribes to the wives of Mexican food inspectors to obtain ‘favorable treatment’. She said the following “The meat being TIF-certified for export was not meat distributed to U.S. The meat was being exported to countries such as Japan and other Asian destinations.” I am sure that is of great comfort to the folks in “Japan and other Asian destinations”. Memo to Tyson: Call Gini Dietrich at Spin Sucks for some serious PR help.

7.         Plaintiff’s Bar gets that old time (FCPA) religion. The FCPA was used, in a somewhat novel manner, in three civil actions which may portend an entire new wave of private and civil FCPA litigations. In SciClone a shareholder derivative action was filed after the announcement of a FCPA investigation. During the pendency of a FCPA investigation, this civil action was settled with the company agreeing to implement a best practices compliance program. In Alba v. Alcoa a company whose employees were allegedly paid bribes (Alba) sued the alleged bribe-payor (Alcoa) for damages in driving up the costs for products sold because of the corrupt acts of Alcoa. In ICE, the Costa Rican telecom company sought to use the victim restitution component to allow it to participate in the DOJ’s FCPA settlement with Alcatel-Lucent.

8.         Rule of Law. Several DOJ prosecutions of individuals under the FCPA have brought a plethora of legal rulings to flesh out legal standards under the FCPA. In the spring, there were district court rulings on whether a state owned enterprise is covered by the FCPA and an analysis of what constitutes a state owned enterprise. These cases will probably be appealed so we may have the first US court of appeals’ interpretation of the FCPA in quite some time.

9.         Wide World of Enforcement. More countries are implementing new anti-corruption laws and more resources are being dedicated to enforcement. The US has had significant cooperation with the UK SFO and Financial Services Association (FSA) and this will increase with the go live date of the Bribery Act. However, the BRIC countries have passed, or are considering, significant anti-corruption laws. The US is starting to coordinate and share more information with these countries — China being the most significant.  For global companies, this increase will portend greater numbers of fines and penalties and will complicate international settlement efforts.

10.       Year of the FCPA Trial. This was the year that the DOJ brought out the big trial guns for three very high profile FCPA trials: the Gun Sting cases; Lindsey Manufacturing; and Haitian Telecom. The resolution results have been mixed, with convictions in Lindsey and Haitian Telecom; mistrial in the first of four Gun Sting trials and some dismissals in the second Gun Sting trial. However, the government has taken a black eye for some procedural missteps, particularly the judge throwing out the entire guilty verdict for prosecutorial misconduct in the Lindsey Mfg. case.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2012

Top Ten 2011 Enforcement Actions-Corporate Division

As December is a time for reflection on the past twelve months, I have been considering the FCPA Enforcement Action year. I submit for your consideration my Top 10 FCPA Enforcement Actions for 2011 in the Corporate Division. Happy and Safe New Year to all and we will see you next week in 2012 with our list of Top FCPA issues from 2011.

1.         Alcatel-Lucent ($137MM) or non-cooperation will cost you.-the company lost between $10MM to $20MM in penalty reduction because its initial investigative counsel did not fully cooperate with the DOJ after self-disclosure.

2.         AON-($16.2MM)(NPA) or it’s still not a good thing to send that foreign official to Disneyland-the world wide insurer Aon was issued an NPA for setting up a “educational fund” which paid for travel and entertainment of Nicaraguan insurance officials and then not recording it properly.

 

3.         Armor Holdings ($10.29MM)(NPA) or you can step back from the abyss-the company which had 92 separate instances of disguising bribes yet was able to obtain a NPA, through self-disclose, cleaning house, remediation and implementing a best practices compliance program.

4.         Bridgestone ($28MM)-don’t double down a FCPA violation by adding Anti-Trust violations–the company was found to have engaged in both bribery of foreign officials by using such corrupt acts in furtherance of bid-rigging.

5.         JGC ($218.8MM)-and then there were none–the final corporate conclusion of the infamous Bonney Island, Nigeria Bribery Scandal. Joining with previously settled defendants, Halliburton, Technip and Snamprogetti/ENI to bring a total settlement amount of over $1.5 billion. Four of the top 6 FCPA settlements of all-time came out of this enforcement action and that does not even count the $147MM in disgorgement agreed to by Jeffery Tessler.

6.         Johnson and Johnson ($77MM)-enhanced compliance obligations, the new normal?-not only did J&J agree to implement a minimum best practices compliance program, it also agreed to “enhanced compliance obligations”.

7.         Maxwell Technologies ($14.3 MM) –start you day with a risk assessment–one of several cases where the DOJ specified some of the parameters of the risks you should assess to inform your compliance program. Further the implementation or enhancement of any anti-corruption compliance program should occur after and not before you complete your risk assessment. (Same holds true for the UK Bribery Act)

8.         SciClone ($2.5MM to date) or the plaintiff’s bar finds compliance–not an enforcement action but the settlement of a shareholder derivative action during the pendency of a FCPA investigation, where the company agreed to implement a best practices compliance program. Settlement of the enforcement action is yet to come.

9.         Tenaris ($8.9MM) or the SEC joins the DPA party-the first instance of the SEC entering into a Deferred Prosecution Agreement for the settlement of civil FCPA violations.

10.       Watts Water ($3.7MM) or it is a good thing to keep up with the news-the company’s General Counsel read about an enforcement action involving a non-related company in a different industry but with the same sales model as his company and wondered if it the same sales model might be a FCPA problem for his company. It was.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2011

Checklist for Defending FCPA Cases

Most readers of this blog will be familiar with the Lindsey Manufacturing and Esquenazi Rodriguez prosecutions earlier this year. Both sets of individual defendants in these cases were convicted of violating the Foreign Corrupt Practices Act (FCPA). These convictions were what the FCPA Blog called, “quick verdicts”. There was also the first of four groups of defendants tried in the Gun Sting case. In this case the jury deliberated for five days before the judge declared a mistrial. The second group of defendants is currently in trial.

While the Lindsey Manufacturing defendants have yet to be sentenced, Joel Esquenazi was sentenced to 15 years in prison and Carlos Rodriguez received a sentence of seven years. The John O’Shea case, which was set to go to trial this week here in Houston has been delayed until January, 2012 and the individual defendants in the Control Components case, US v. Carson, are scheduled to go to trial next spring. So there is an increase in the number of individuals going to trial and the length of their sentences, with apparently more to come.

An article in the September issue of The Champion, the monthly magazine of National Association of Criminal Defense Lawyers, entitled “You Mean You’re Really Going to Try an FCPA Case?” authors Timothy O’Toole and Andrew Wise provide “a checklist of defenses that should be explored” if an individual finds himself in such a prosecution. They list some of the defenses that might be raised.

The Foreign Official Defense

While the trial judge in the Carson case made a ruling on the defense claim of who might be a foreign official under the FCPA, the authors believe that the factor listed requires a “complicated analysis and are difficult to apply.” Therefore, with “the absence of any appellate precedent, it remains to be seen whether this fact-based analysis will prevail or whether courts will ultimately accept the Carson defendants’ argument that employees of a state-owned business enterprise are not, as a matter of law, ’foreign officials’ under the FCPA.” This would allow such a defense to at least be explored.

Facilitation Payments

This defense might be available where the amount of the alleged bribe made is small and is made to obtain a “routine, ministerial act…” However, the authors note that the line between a bribe and a facilitation payment is a “blurry one” and the Department of Justice (DOJ) considers this exception to “quite narrow.” I would also add that any payment where the facilitation defense is claimed should not be recurring.

Promotional Expenses

This defense might arise where the defendant is alleged to “have paid for travel as well as room and board for foreign governmental officials coming to the United States.” However, the FCPA specifically requires that such payments under the exception to the FCPA might be “reasonable and bona fide”. The authors note that if you took foreign government officials to Disneyland and your employer is not the Walt Disney Corporation that this defense is not available to you by stating, “The more the trip looks like a routine business trip, and the more that the company itself pays for meal and lodging expenses directly, the more viable the defense becomes.” If you have taken the foreign officials to your plant for a visit, have paid for coach travel and have not paid for wives or other family members, this defense might be available. The overall key is reasonableness.

Local Law

The authors note that “The FCPA also contains an affirmative defense for payments to foreign officials that are ’lawful under the written laws and regulations’ of the foreign country.” However, there is no country in the world which allows the bribery of its governmental officials so there has never been a successful invocation of this defense.

Jurisdictional Defenses

The jurisdiction of the FCPA is quite broad reaching any US company, US citizen, anywhere in the world, and any employee of any US company; all for “acts that take place entirely outside of the United States.” The authors note that even with this very wide application, the DOJ interprets this jurisdictional base quite broadly so that “enforcement authorities have based jurisdictional claims entirely on foreign wire transfers denominated in U.S. dollars, under the theory that such transfers proceed through a correspondent bank account in New York.” This may be quite a difficult defense to raise.

Business Nexus Requirement

The authors cite the statute for the basis of criminalization of a payment to a foreign governmental official

(i)                 influencing any act or decision of such foreign official in his official capacity, (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage … in order to assist [the company making the payment] in obtaining or retaining business for or with, or directing business to, any person.

Recognizing that the first two elements are more or less straightforward, the authors argue that the third element is “more difficult to apply both because it often involves administrative action similar to the circumstances in which facilitating payments can be made, and because there is confusion about the meaning of the ’obtaining or retaining business’ requirement.” This is the “business nexus requirement.” The authors believe that the case which has the most thorough discussion of the business nexus requirement, the Kay case, “provides little clarity about the scope of the FCPA’s reach other than to suggest that the government must prove a ‘business nexus’ beyond a reasonable doubt.” Due to this lack of “clarity” the authors posit that the business nexus requirement is one that defendants “should pursue both through pretrial motions and potentially as a fact-based defense before the jury.”

Mens Rea

This requires that any payment made to a foreign governmental official is made knowing “that all or part of the money would be used to bribe” such foreign official. As the FCPA is a criminal statute, the government “must prove beyond a reasonable doubt that the required mental state coexisted with the proscribed act, i.e., that the defendant acted with the requisite ‘corrupt intent’ when the alleged misconduct occurred.” However, the government also can invoke the “willful blindness” doctrine which the authors define as a doctrine that “merely allows a finding of ’knowledge’ and ’willfulness’ in a situation where the evidence shows the defendant ’actually knew but he refrained from obtaining final confirmation’”. The authors argue that the mens rea defense is important in defending high level company officials when bribes were paid by a lower level employee or an agent.

Entrapment

This is reserved for cases which might be similar to the Gun Sting case in which the government engages in an undercover sting to obtain indictments for violation of the FCPA. Recognizing that this defense will never be an “easy one” it may be “an easier one to pursue in white collar cases than blue collar cases due to the potential differences with regard to predisposition evidence.” Also, as was found after the mistrial in the first Gun Sting trial, juries may be sympathetic to situations where the government creates an entire scenario which the defendant may have believed such conduct was not illegal. Contrast this with the recent conviction of Raj Rajaratnam where the case involved wiretaps but was not an undercover sting operation with an entire business opportunity created by the government.

I found this article though provoking and quite interesting that it should be in the monthly magazine of the National Association of Criminal Defense Lawyers. I do believe that there will be an increase in the prosecution of individuals under the FCPA as there is an outcry for such prosecutions even from Congress.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2011

Reading a Crystal Ball? Guidance on Instrumentality under the FCPA-Part II

In Part I of Reading a Crystal Ball? Guidance on Instrumentality under the FCPA, we listed the factors which the three federal district courts have set forth for the determination of whether an entity is an instrumentality under the Foreign Corrupt Practices Act (FCPA). In Part II, we will review these factors to see if there is any pattern which we can suggest to the compliance practitioner or indeed the US Chamber of Commerce, which desires to bring some ‘clarity’ to this question, all of which might help an understanding of when the FCPA applies to a transaction or business partner. The chart below consolidates the factors raised by the courts and are set out for reference:

Factor	Lindsey	Carson	Esquenazi
1	Entity provides services to citizens, in many cases all in country	Foreign states characterization of the entity and its employees	Does the entity provides services to citizens and inhabitants of country
2	Are key officers/directors government employees or appointed by government employees	Foreign State’s control over the entity	Are key officers/directors government employees or appointed by government  employees
3	Is entity financed by or in large measure by government appropriations or through government mandates	Purpose of the entity’s activities	Extent of government ownership or does government provide financial support
4	Is entity vested with or does it exercise exclusive/controlling power to administer its designated functions	The Entity’s obligations and privileges under country’s laws, including whether it exercises exclusive/controlling power to administer its designated functions	Extent of obligations and privileges under its country’s laws, including whether it exercises exclusive/controlling power to administer its designated functions
5	Is entity widely perceived and understood to be providing official functions	Circumstances around the entities creation	Is entity widely perceived and understood to be providing official functions
6		The foreign state’s extent of ownership of the entity, including the level offinancial support by the state

I.                   Overlap?

There is clear overlap in the Lindsey and Esquenazi factors.

Identical – does the government appoint the officers/directors and is the entity understood to be owned by or an agency of the government in the home country? In Lindsey and Esquenazi, the courts agree on factors (2) Are key officers/directors government employees or appointed by government employees; and (5) Is the entity widely perceived and understood to be providing official functions?

Similar – are the services provided by the entity available to all citizens of the home country? In Lindsey and Esquenazi, the similar factors are (1) Does the entity provide services to the inhabitants of the country?

Related – does the government finance the entity in question and does it own the entity? Does it exercise exclusive/controlling power to administer its designated functions and the extent of obligations and privileges under its country’s laws? In Lindsey and Esquenazi, two courts had nearly similar factors, but the Esquenazi court added an additional component. In factor (3) The Lindsey court inquired ‘is the entity financed by or in large measure by government appropriations or through government mandates’ and the Esquenazi court added to this inquiry ‘the extent of government ownership.’ In factor (4) the Lindsey court inquired, ‘Is entity vested with or does it exercise exclusive/controlling power to administer its designated functions’ and the Esquenazi court added the factor of ‘Extent of obligations and privileges under its country’s laws’.

II.      Compare and Contrast

At first blush it may appear that the Carson court takes a slightly different approach. If one examines the Carson factors in detail they are not significantly different from Lindsey and Esquenazi. One clear factor that Carson has in common with Lindsey and Esquenazi is the factor of the entity’s obligations and privileges under its country’s laws, including whether it exercises exclusive/controlling power to administer its designated functions. Carson combines two of the Esquenazi factor of the extent of government ownership and financial support by said government. While Lindsey does not speak to financial ownership it does have the factor of government financing and government appointment of officers and directors. Carson speaks to the entity’s purpose while Lindsey and Esquenazi list the factor of providing services to the country’s citizens. Indeed the only factor included in Carson and not found in Lindsey and Esquenazi is the following: the circumstances around the entity’s creation. It is incumbent to note that both the Lindsey and Carson court opinions and the Esquenazi jury instructions all have language that indicates these factors are not exclusive, and no single factor will determine whether an entity is an instrumentality of a foreign government.

III.             Reading the Crystal Ball

With all this information in mind what inferences can be drawn by a compliance officer, or indeed the US Chamber of Commerce, for guidance on whether a business is an instrumentality under the FCPA? Reviewing the foregoing, the factors can be distilled down to a manageable list, which I believe is as follows:

1. Ownership/Financial Control – There is no percentage amount listed but the inclusion of financial control would clearly indicate that anything over 50% would be a significant factor.
2. Actual control is key in all three court decisions. In Lindsey and Esquenazi, it is characterized as the government’s right to appoint key officers and directors. In Carson, it is called government control. But this means that if actual control is exercised by the government in question, it may trump the 50% guidance stated above.
3. Privileges and Obligations are also mentioned in all three. Does the entity have the right to control its own functions?
4. Financing – Is the entity a for-profit entity, financed through its own revenues or does it depend on financing by its government?
5. Perception is Reality – André Agassi’s immortal words appear again. If it is widely perceived to be providing an official function, then it is an instrumentality under the FCPA.

That leaves Carson factor 5, the circumstances around the entity’s creation. While I believe this could well be the last factor in your analysis, it can be one which is ascertained. Most government entities will disclose how they were formed; this information can be found on their website or within their company history. If you cannot determine how a business was formed perhaps you need to think hard about doing business with them.

So that is my reading of the Crystal Ball. You may have a different reading but for my money the information is out there to be read and indeed it may not be all that difficult.

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This Week in FCPA is back. Howard Sklar and I continue our conversation on all things FCPA and global anti-corruption. The audio is up. Click here.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2011

Reading a Crystal Ball? Guidance on Instrumentality under the FCPA-Part I

One the criticisms of the Foreign Corrupt Practices Act (FCPA) is that it provides little guidance as to what constitutes an instrumentality under the Act and attendant question of who is a foreign governmental official. One of the five points raised by the US Chamber of Commerce in its lobbying efforts to amend the FCPA is on this issue. In the Chamber’s White Paper, authored by Andrew Wiessmann and Alixandra Smith, entitled “Restoring Balance-Proposed Amendments to the Foreign Corrupt Practices Act”, they wrote that this lack of statutory guidance has led US companies to have “no way of knowing whether the FCPA applies” to a transaction because there is allegedly no way to know if a foreign governmental official is involved.

The authors suggest that the definition of an instrumentality and foreign governmental official be more clearly defined to include such information as (1) “the percentage ownership by a foreign government that will qualify a corporation as an “instrumentality”; (2) whether ownership by a foreign official necessarily qualifies a company as an instrumentality and, if so, (3) whether the foreign official must be of a particular rank or the ownership must reach a certain percentage threshold; and (4) to what extent “control” by a foreign government or official will qualify a company as an “instrumentality.” At the House Judiciary Committee hearing in June, former Attorney General and current Debevoise & Plimpton partner Michael Mukasey followed this article up by urging a clarification of the definition of instrumentality.

As reported by the FCPA Professor, in a post entitled “House Hearing-Overview and Observations”, Mukasey stated that the federal district court rulings in the Lindsey Manufacturing and Carson cases did very little to clarify the limits of the “foreign official” issue other than to say that whether an employee of an alleged state-owned or state-controlled enterprise could constitute a “foreign official” varied depending on the circumstances. Mukasey stated that leaving this issue in the hands of a jury in a criminal trial makes it “impossible” for companies to determine in advance who is a “foreign official” thereby increasing uncertainty and barriers to US business. According to Mukasey, “majority ownership is the most plausible threshold” for whether a state-owned or state-controlled enterprise constitutes a foreign government “instrumentality.”

In addition to the definitions found in the Lindsey Manufacturing and Carson cases, there has been the district court’s jury instruction in the recent trial of Joel Esquenazi and Carlos Rodriguez. This case involved the lengthy saga of the Haitian Telecom matter. In July, both men were found guilty by a Miami jury. In this post we will set out factors the courts have set out to define an instrumentality under the FCPA in these three cases. In our next post we analyze these factors to see what they have in common and what guidance, if any, that they may provide.

a.      Lindsey Manufacturing

The court in Lindsey Manufacturing pointed to various characteristics of foreign government ‘instrumentalities’ that would provide coverage under the FCPA. The court listed five non-exclusive factors:

•           The entity provides a service to its citizens, in many cases to all the inhabitants of the country.

•           The key officers and directors of the entity are government officials or are appointed by government officials.

•           The entity is financed, at least in large measure, through governmental appropriations or through revenues obtained as a result of government-mandated taxes, licenses, fees or royalties, such as entrance fees to a national park.

•           The entity is vested with and exercises exclusive or controlling power to administer its designated functions.

•           The entity is widely perceived and understood to be performing official functions.

In Lindsey Manufacturing the foreign governmental entity at issue was the Mexican national electric company CFE. The trial court found that the entity had all of the characteristics listed in the five non-exclusive factors. It was created as a public entity; its governing Board consisted of high ranking government officials; CFE described itself as a government agency and it performed a function that the Mexican government itself said was a government function, the delivery of electricity.

b.      Carson

 In the Carson case, the court denied the “foreign official” challenge ruling that “the question of whether state-owned companies qualify as instrumentalities under the FCPA is a question of fact.” The court cited the following factual inquiries to determine whether a business entity constitutes a “government instrumentality” including:

(1)   The foreign state’s characterization of the entity and its employees;

(2)   The foreign state’s degree of control over the entity;

(3)   The purpose of the entity’s activities;

(4)   The entity’s obligations and privileges under the foreign state’s law, including whether the entity exercises exclusive or controlling power to administer its designated functions;

(5)   The circumstances surrounding the entity’s creation; and

(6)   The foreign state’s extent of ownership of the entity, including the level of financial support by the state (e.g., subsidies, special tax treatment, and loans).

The Court specifically noted that the factors were non-exclusive and no single factor is dispositive. Later, in its opinion, the court added additional guidance with the following, “Admittedly, a mere monetary investment in a business by the government may not be sufficient to transform the entity into a government instrumentality. But when a monetary investment is combined with additional factors that objectively indicate that the entity is being used as an instrumentality to carry out governmental objectives that business entity would qualify as a governmental instrumentality.” Lastly, as it is a factual inquiry, the question will go to the jury.

c.       Esquenazi and Rodriguez

In the Esquenazi and Rodriguez case, the defendants challenged the Department of Justice’s (DOJ) foreign official interpretation and the DOJ. However, the district court denied the Motion to Dismiss with a short order which did not set out any factors for analysis. Nevertheless, the court did provide contested jury instructions on the definition. As reported by the FCPA Professor, the jury instructions were as follows.

“An ‘instrumentality’ of a foreign government is a means or agency through which a function of the foreign government is accomplished. State-owned or state-controlled companies that provide services to the public may meet this definition. To decide whether [Haiti Telecom] is an instrumentality of the government of Haiti, you may consider factors including but not limited to:

(1) whether it provides services to the citizens and inhabitants of Haiti;

(2) whether its key officers and directors are government officials or are appointed by government officials;

(3) the extent of Haiti’s ownership of Teleco, including whether the Haitian government owns a majority of Teleco’s shares or provides financial support such as subsidies, special tax treatment, loans or revenue from government-mandated fees;

(4) Teleco’s obligations and privileges under Haitian law, including whether Teleco exercises exclusive or controlling power to administer its designated functions; and

(5) whether Teleco is widely perceived and understood to be performing official or government functions. These factors are not exclusive, and no single factor will determine whether [Teleco] is an instrumentality of a foreign government. In addition, you do not need to find that all the factors listed above weigh in favor of Teleco being an instrumentality in order to find that Teleco is an instrumentality.”

Tomorrow we will compare these factors and attempt to distill a formula which can bring the clarity that the Chamber of Commerce so desires.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2011

Recent DPAs Provide Guidance on FCPA Compliance Best Practices

The House Judiciary Committee will hold hearings Tuesday on the Foreign Corrupt Practices Act. At this point the Witness List as set forth on the Committee’s website is as follows:

Hon. Michael Mukasey Former Attorney General Partner Debevoise & Plimpton LLP Mr. Greg Andres Deputy Assistant Attorney General Criminal Division U.S. Department of Justice Mr. George Terwilliger Partner White & Case LLP Ms. Shana-Tara Regon Director White Collar Crime Policy National Association of Criminal Defense Lawyers

At this point no preview of the witnesses’ testimony has been released. However, other than Greg Andres, the testimony will probably not be a defense of the FCPA or even the need to expand it to meet the anti-bribery and anti-corruption enhancements found in the UK Bribery Act. Indeed it reads like a list of representatives from the US Chamber of Commerce, which has been engaged in a campaign to amend the FCPA.

However in the past 12 months or so many of the complaints which have practitioners have made regarding the FCPA have been addressed by the Department of Justice (DOJ) or by recent court rulings. In a blog entitled, “House Judiciary FCPA Hearing: An Opportunity for Greater Information” I have reviewed the federal district court rulings in the CCI and Lindsey Manufacturing cases, which both discussed the factors which should go into an analysis of what is a foreign governmental instrumentality under the FCPA. So at this point, I thought it might be propitious to review some of the information which has come out from the DOJ on what it considers the current best practices for a FCPA compliance program.

Alliance One/Universal Corp.-actions during the pendency of an investigation

Last July, the DOJ released joint Deferred Prosecution Agreement (DPAs) for two companies in the tobacco industry: Alliance One and Universal Corp. These DPAs started a year-long process by which the DOJ has informed the compliance community about specific steps companies can take to enhance their FCPA compliance program or benchmark their current compliance programs against DOJ suggested best practices. These two DPAs in question provided to companies in the midst of FCPA enforcement actions specific steps that should be implemented during the pendency of an investigation to present to the DOJ, which could reduce the overall penalties at the end of the day. Initially it should be noted that full cooperation with the DOJ at all times during the investigation is absolutely mandatory. Thereafter from the Alliance One matter, the focus was on accounting procedures and control of cash payments. From the Universal case, a key driver appears to be the due diligence on each pending international transaction, and subsequent full due diligence on each international business partner. Next is the management of any international business partner after due diligence is completed and a contract executed. Lastly is the focus on the Chief Compliance Officer position, emphasizing this new position throughout the organization and training, training and more training on FCPA compliance.

Panalpina Settlements-Best Practices

In the DOJ settlement with the freight forwarder Panalpina and all related settlements announced on the same day last November, the DOJ attached as Attachment C (Attachment B to the Noble Non-Prosecution) a list of 13 best practices which included the collective Corporate Compliance Programs provided the FCPA compliance practitioner with the most current components that the Department of Justice believes should be included in a FCPA compliance program. Hence, this information is a valuable tool by which companies can assess if they need to adopt new or to modify existing their internal controls, policies, and procedures in order to ensure that it maintains: (a) a system of internal accounting controls designed to ensure that a Company makes and keeps fair and accurate books, records, and accounts; and (b) a rigorous anti-corruption compliance code, standards, and procedures designed to detect and deter violations of the FCP A and other applicable anti-corruption laws. The Preamble notes that these suggestions are the “minimum” which should be a part of a Company’s existing internal controls, policies, and procedures:

1. Code of Conduct.

2. Tone at the Top.

3. Anti-Corruption Policies and Procedures.

4. Use of Risk Assessment.

5. Annual Review.

6. Sr. Management Oversight and Reporting.

7. Internal Controls.

8. Training.

9. Ongoing Advice and Guidance.

10.  Discipline.

11. Use of Agents and Other Business Partners.

12. Contractual Compliance Terms and Conditions.

13. Ongoing Assessment.

The DOJ goes on to fill in each of these categories so that it a valuable list to create, enhance or benchmark your FCPA compliance program.

Alcatel-Lucent, Maxwell Technologies and Tyson Foods-Risk Assessments

The three enforcement actions, all announced in early 2011, involving the companies Alcatel-Lucent, Maxwell Technologies and Tyson Foods, had common areas that the DOJ indicated were FCPA compliance risk areas which should be evaluated for a minimum best practices FCPA compliance program. In both Alcatel-Lucent and Maxwell Technologies, the Deferred Prosecution Agreements (DPAs) listed the seven following areas of risk to be assessed.

1.         Geography-where does your Company do business.

2.         Interaction with types and levels of Governments.

3.         Industrial Sector of Operations.

4.         Involvement with Joint Ventures.

5.         Licenses and Permits in Operations.

6.         Degree of Government Oversight.

7.         Volume and Importance of Goods and Personnel Going Through Customs and Immigration.

In the Tyson Foods DPA, this list was reduced to the following (1) Geography, (2) Interaction with Governments, and (3) Industrial Sector of Operations. As with all DPAs released since the Panalpina settlements, each DPA has included an Attachment C, compliance program best practices. However these three DPAs give the compliance practitioner the guidance that the DOJ considers a risk assessment to be the starting pointing for any compliance program. In addition to this information on the starting point, there are specific risks which should be assessed listed by the DOJ. 

Johnson and Johnson-self disclosure and enhanced compliance obligations

1. Self-Disclosure

FCPA practitioners have repeatedly asked the DOJ for specific guidance as to what will be the tangible results of self-disclosure. In the Johnson & Johnson DPA this question is clearly answered. Listed under the section “Relevant Considerations” one of the reasons the DOJ entered into the DPA is the following:

a.         J&J voluntarily and timely disclosed the majority of the misconduct described in the [Criminal] Information and Statement of Facts;

So the self-disclosure was one of the reasons that the DOJ entered into the DPA, however, and perhaps more importantly, the self-disclosure brought to Johnson & Johnson a monetary benefit with a tangible reduction in its overall fine and penalty. The DPA reported a reduction by 5 points of the company’s overall Culpability Score with the following:

(g)(1) The organization, prior to an imminent threat of disclosure or government investigation, within a reasonably prompt time after becoming aware of the offense, reported the offense, fully cooperated, and clearly demonstrated recognition and affirmative acceptance of responsibility for its criminal conduct;  -5

It is not possible to determine from the DPA how much of the reduction was attributable to the self-disclosure and how much was attributed to the conduct thereafter. However, this precise language makes clear that the DOJ places a real value on such self-disclosures and companies should take this as a clear sign that, at the end of the day, it will be better for them to self-disclose.

1. Attachment D-Enhanced Compliance Obligations

The following nine points will not be unfamiliar to the FCPA compliance practitioner. These points are recognized to be in most ‘good to best’ compliance programs. However, the Johnson & Johnson DPA goes much further by adding an Attachment D, entitled “Enhanced Compliance Obligations” which is designed to be in addition to, and to build upon, the commitments made by Johnson & Johnson in Attachment C. These enhanced obligations include the following:

A.        Compliance Department

B.        Gifts, Hospitality and Travel

C.        Complaints and Reports

D.        Risk Assessments and

E.         Acquisitions

F.         Relationships with Third Parties

G.        Training

H.        Annual Certifications

This Attachment D “Enhanced Compliance Obligations” is an excellent road map for the FCPA practitioner in which to establish, enhance, or simply review a company’s FCPA compliance program. As with the Attachment C, the DOJ expands upon each of these categories. The Johnson & Johnson DPA demonstrates that a company’s commitment to ongoing FCPA remediation and program enhancement will help it reduce its overall FCPA liability in a case with facts as bad as those presented in this matter.

These DPAs demonstrate that the DOJ is committed to releasing information on what it believes will constitute a best practices compliance program. It will be interesting to see if any of the witnesses before the House Judiciary Committee will acknowledge the DOJ’s efforts in this area or the recent federal court rulings on what may constitute an foreign governmental instrumentality under the FCPA in their testimony.

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Join Me for Following Upcoming Webinars

Tuesday, June 21 at 1 EDT, I am co-presenting on a webinar with Mary Shaddock Jones, former Assistant General Counsel and Director of Compliance at Global Industries, Ltd., on “Supply Chain Relationship Management Under the FCPA and Bribery Act”. The event is co-hosted by Ethisphere and World Check. For information and registration details click here.

Wednesday, June 22 at 1 PM EDT, I am a co-panelist with Henry Mixon, Managing Director of Mixon Consulting, in a webinar hosted by Corporate Compliance Insights, entitled, “Internal Controls Under the FCPA & UK Bribery Act”. For information and registration details click here.

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This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2011

Factors to Use in a Foreign Government Instrumentality Analysis under the FCPA

In a guest post on this Blogsite yesterday, my colleague Michael Volkov, criticized the two district courts which have passed on the question of whether a state owned enterprise (SOE) can be an “instrumentality thereof” under the Foreign Corrupt Practices Act (FCPA). The two cases were the Lindsey Manufacturing case and the Carson case. Volkov stated, “By deciding these cases using fact specific standards, the courts have failed to clarify this issue by adopting a more focused and simple inquiry.  Unfortunately, the courts have now obscured even more the application of the FCPA.” No doubt inspired by my “This Week in the FCPA” partner, Howard Sklar, I will take a contrarian view from Mike.

I.                The Defendants’ Claims

The issue was presented as starkly as possible to both courts. The defendants in both cases argued that employees of state-owned enterprises could never be ‘foreign officials’ under the FCPA. The defendants made five general arguments, which were

First, in the absence of an express definition, the Court must give the term its ordinary meaning as used in the statute. As used in the FCPA, the term “instrumentality” refers to a governmental unit or subdivision that is akin to a “department” or an “agency,” the two terms that precede it in the statute.

Second, the Government’s proposed interpretation would lead to absurd results. Among other things, if it were adopted, the Government’s definition would transform persons no one would consider to be foreign government employees – specifically citing the example of employees of the US company CITGO, because it is owned by the Venezuelan national oil company PDVSA.

Third, the extensive legislative history of the FCPA makes clear that Congress did not intend the statute to cover payments made to employees of state-owned business enterprises. Rather, the FCPA was aimed at preventing the special harm posed by the bribery of foreign government officials.

Fourth, as other statutes and proposed legislation make clear, Congress knows how to define the term “instrumentality” in terms of government ownership of a commercial enterprise where it desires to do so. But it did not do so in the FCPA.

Fifth, in construing statutes, courts should avoid interpretations resulting in unconstitutional vagueness. Adopting the Government’s amorphous and expansive interpretation of “instrumentality” here would result in exactly the type of unconstitutional vagueness that must be avoided.

But courts made quick and direct refutations of the defendants’ points 2-5. The major guidance provided by courts was in creating an inquiry to define the term instrumentality in response to defendants’ Point 1. We therefore turn to the respective courts holdings on what factors should go into an analysis to determine if a state-owned enterprise is a foreign government instrumentality under the FCPA.

II.             Court Ruling in Lindsey Manufacturing

The court in Lindsey Manufacturing responded to the defendants’ claims by pointing to various characteristics of foreign government ‘instrumentalities’ that would provide coverage under the FCPA. The court listed five non-exclusive factors:

• The entity provides a service to its citizens, in many cases to all the inhabitants of the country.
• The key officers and directors of the entity are government officials or are appointed by government officials.
• The entity is financed, at least in large measure, through governmental appropriations or through revenues obtained as a result of government-mandated taxes, licenses, fees or royalties, such as entrance fees to a national park.
• The entity is vested with and exercises exclusive or controlling power to administer its designated functions.
• The entity is widely perceived and understood to be performing official functions.

In Lindsey Manufacturing the foreign governmental entity at issue was the Mexican national electric company CFE. The trial court found that the entity had all of the characteristics listed in the five non-exclusive factors. It was created as a public entity; its governing Board consisted of high ranking government officials; CFE described itself as a government agency and it performed a function that the Mexican government itself said was a government function, the delivery of electricity. (I would also note that the US entity CITGO does not meet this test, so much for the absurd result prong.)

III.           The Carson Case

In the Carson case, the court denied the “foreign official” challenge ruling that “the question of whether state-owned companies qualify as instrumentalities under the FCPA is a question of fact.”  The court cited the following factual inquiries to determine whether a business entity constitutes a government instrumentality” including (1) The foreign state’s characterization of the entity and its employees; (2) The foreign state’s degree of control over the entity; (3) The purpose of the entity’s activities; (4) The entity’s obligations and privileges under the foreign state’s law, including whether the entity exercises exclusive or controlling power to administer its designated functions; (5) The circumstances surrounding the entity’s creation; and (6) The foreign state’s extent of ownership of the entity, including the level of financial support by the state (e.g., subsidies, special tax treatment, and loans). The Court specifically noted that the factors were non-exclusive and no single factor is dispositive. Later in its opinion the court added additional guidance with the following, “Admittedly, a mere monetary investment in a business by the government may not be sufficient to transform the entity into a government instrumentality. But when a monetary investment is combined with additional factors that objectively indicate that the entity is being used as an instrumentality to carry out governmental objectives, that business entity would qualify as a governmental instrumentality.” Lastly, as it is a factual inquiry, the question will go to the jury.

IV.            Conclusion

I do not find these factors set out by either court obscure or vague. I believe that both courts provided guidance to the compliance practitioner in the form of a guideline or checklist that can be used to determine if a counter-party has these characteristics of a foreign government instrumentality. In fact, these are factors (or ones similar as they are non-exclusive) that a compliance officer should have been using to make a determination of a counter-party’s status even before these cases came down the pike. With CFE, the decision seems very straight forward. In the Carson case, there were several entities which had employees to which bribes were paid. These entities included CNOOC, PetroChina, China Petroleum Material and Equipment Corp., National Petroleum Construction Corp., Dongfang Electric Corp., Gouohua Electric Power and Petronas. Some of these companies clearly meet the Carson test, some may take additional research. The moniker “Know Your Customer (KYC)” is one that is well known in marketing circles and should becoming equally as well known in the compliance arena.

Mike and I hope to post several point-counter-point blogs over the next couple of weeks setting out our respective positions on other issues. I hope that you will find them both enjoyable and informative.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2011

Failing to Clarify: The Courts Try to Define “Foreign Official” in FCPA Cases

Ed. Note-today we have a guest post by our colleague Michael Volkov, noted FCPA specialist and partner in the firm of Mayer Brown LLP

The role of our courts is to define and uphold our laws.  Our Nation’s history is filled with important court decisions which have demonstrated the critical role that our Judicial Branch can play in American history – whether it was Marbury v. Madison, or Brown v. Board of Education, the courts are well equipped to be the “final arbiter of the law.”

Unfortunately, this summer we are watching as our courts are failing to step up and resolve an important controversy surrounding the scope of the FCPA.  At the heart of this controversy is the scope of the FCPA and how it applies, if at all, to state-owned or state-controlled private enterprises.

The FCPA defines the term as “any officer or employee of a foreign government or any department, agency or instrumentality thereof . . . or any person acting in an official capacity for or on behalf of any such government or department, agency or instrumentality.  Relying on this definition, the Justice Department  treats employees of state-owned or state-controlled entities as “foreign officials,” focusing on whether the entity is controlled by a foreign government.

In three separate cases, Lindsey Manufacturing, O’Shea and Carson, defendants filed motions to dismiss challenging the DOJ’s interpretation of “foreign official” under the FCPA.  Two of these cases have now been resolved and the Justice Department’s position has been upheld.  While doing so, the courts have launched separate fact-specific tests to “guide” actors in resolving how the law applies to state-owned enterprises.

In rejecting the defendant’s motion to dismiss in Lindsey Manufacturing, the court  found that CFE (the Mexican electric company) had “various characteristics of government agencies and departments,” such as: (1) it exclusively provides a service, the supply of energy, which the Mexican government recognized as an exclusive government function; (2) the key officers and directors are or are appointed by government officials; (3) it is financed largely through governmental appropriations; and (4) it was created by statute as a “decentralized public entity.”

In Carson, the court denied the “foreign official” challenge ruling that “the question of whether state-owned companies qualify as instrumentalities under the FCPA is a question of fact.”  The court cited the following factual inquiries to determine whether a business entity constitutes a government instrumentality” including (1) The foreign state’s characterization of the entity and its employees; (2) The foreign state’s degree of control over the entity; (3) The purpose of the entity’s activities; (4) The entity’s obligations and privileges under the foreign state’s law, including whether the entity exercises exclusive or controlling power to administer its designated functions; (5) The circumstances surrounding the entity’s creation; and (6) The foreign state’s extent of ownership of the entity, including the level of financial support by the state (e.g., subsidies, special tax treatment, and loans).

By deciding these cases using fact specific standards, the courts have failed to clarify this issue by adopting a more focused and simple inquiry.  Unfortunately, the courts have now obscured even more the application of the FCPA.

Aside from the defendants who lost their motions, the big losers are now compliance professionals who have to interpret and apply the law to their companies.  Out of an abundance of caution, companies will be forced to treat more and more entities as state-owned enterprises and their employees as “foreign officials” for purposes of the FCPA.  The result – higher compliance costs.

The courts have now given businesses even more ammunition to support lobbying efforts to amend the law and clarify the definition of “foreign official.”   Congress will listen; whether it will act remains to be seen.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The editor can be reached at tfox@tfoxlaw.com.

Lindsey Convictions, Stevens Acquittal: Implications for the FCPA Compliance Officer

It has been quite a week in the white collar criminal defense world. It began with the convictions, on all counts, of all defendants in the Lindsey Manufacturing case involving the Foreign Corrupt Practices Act (FCPA) and yesterday with the conviction of Raj Rajaratnam on all counts in his insider-trading trial. Sandwiched in between these two huge victories for the Department of Justice was the acquittal of former GlaxoSmithKline in-house attorney Lauren Stevens by the presiding Federal District Judge. As reported by the FCPA Blog, Judge Roger Titus granted an acquittal during a hearing and said,

“I conclude on the basis of the record before me,” Judge Titus said, “that only with a jaundiced eye and with an inference of guilt that’s inconsistent with the presumption of innocence could a reasonable jury ever convict this defendant.”

This post will focus on the Stevens case and its implications for the compliance officer. One of the concerns I frequently hear expressed by compliance officers is their risk of personal criminal liability, particularly if they work at a company where a Deferred Prosecution Agreement is in place. I believe that the Stevens case, contrasted with the Lindsey Manufacturing case, demonstrates the parameters of the type of conduct which will result in a criminal sanctions.

Stevens had been indicted on four counts of making false statements, one count of obstruction of justice, and one count of falsifying and concealing documents related to the company’s promotion of the anti-depressant drug for weight loss, which hadn’t been approved by the Food and Drug Administration. The Lindsey defendants were charged with conspiracy to violate the FCPA and individual counts for violating the FCPA as well. One defendant was charged with a count of violation of money laundering laws.

However in the Stevens case, she was providing legal advice to her company and then was dealing with US government regulators in an ongoing investigation. It is this prong which concerns compliance officers. As noted in yesterday’s Wall Street Journal, “The government’s defeat points to the difficulty of prosecuting individuals over alleged wrongdoing at large corporations, where teams of people may be involved in a matter and it is hard to show that executives intended to break the law.” In the Lindsey Manufacturing case, it certainly appears that the government was able to demonstrate to the jury that the Lindsey Manufacturing defendants intended to violate the FCPA by the payment of bribes.

There is another obvious difference between the Lindsey Manufacturing defendants and Stevens. It is that she was an in-house lawyer (she left the company earlier this year) and the Lindsey Manufacturing defendants were from the business side of the company. Indeed as reported in the FCPA Blog, the trial judge said that the time of acquittal, “There is an enormous potential for abuse in allowing prosecution of an attorney for the giving of legal advice. I conclude that the defendant in this case should never have been prosecuted and she should be permitted to resume her career.”

So what does all of this mean for the compliance officer? I have heard my colleague; attorney Mike Volkov say that no one is prosecuted for engaging is something less that best practices, they are prosecuted for engaging in no practices in the compliance arena. In Lindsey, it seems clear that the company had no compliance program to fall back on as some type of defense that the defendants had not engaged in bribery or did not have the intent to engage in bribery. In the Stevens case, she was able to demonstrate that she had relied on the advice of outside counsel in her legal work and she was not a rogue agent going off the reservation. So if your company has a compliance program, you should follow it. While as the compliance officer, you may well have to make some close or difficult calls, do not do so in a vacuum, obtain some legal advice or other assistance. One mechanism I have advocated is a Compliance Oversight Committee, which can review compliance decision from the engagement and management of foreign business partners to all facets of a company’s compliance efforts. This puts more resources in the hands of the compliance officer.

The differences and messages from the outcomes of Lindsey Manufacturing and the Stevens case seem clear. Do not engage in intentional conduct which violates the FCPA.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2011