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

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