FCPA Compliance and Ethics Blog

June 7, 2015

Why Should Americans Care About the FIFA Indictments? Part I – Only the US Government Could Do It

DOJA colleague recently posed that question to me. I thought it was an interesting one and although at first blush the response to me might appear self-evident, the fact that it was posed means that my view may not be universal. The more I thought about how to respond to my friend’s query, the longer my response became. So today, I begin a three-part series on why Americans should care about the Department of Justice (DOJ) bringing their indictments against the 14 named defendants who were all associated with the governing body of international soccer, the Fédération Internationale de Football Association (FIFA).

Over the weekend, I went to England to attend the wedding of my sister-in-law. My wife has numerous aunts, uncles, nieces, nephews and cousins and they all attend such family events. One of the more interesting comments I heard was from one of my wife’s cousins who said, “only America was big enough to take on FIFA” and that “you can say what you want about Americans but they get things done.” I realize the sample size may have been small to fully validate these perceptions but consider the headline from the lead editorial in the Sunday Times today which read “JUSTICE 1, FIFA O” where the Times discussed the revelations that Sepp Blatter himself is now under investigation by the US DOJ for direct involvement of the $10MM bribe paid to Jack Warner to swing his vote to award South Africa the 2010 World Cup.

The statement by my cousin-in-law presages something that is not discussed consistently about prosecutions under the Foreign Corrupt Practices Act (FCPA); that is the US government is the undisputed worldwide leader in the global fight against corruption and bribery. For all the discussion about whether it is fair or right to prosecute companies with headquarters outside the US for FCPA violations, the bottom line is if the US government did not engage in such prosecutions, no one else would do so. But these are not companies that lie outside the jurisdiction limit of US justice; these are companies that have voluntarily subjected themselves to US jurisdiction. Remember TOTAL, who howled about how unfair it was that the US government was prosecuting them? It turned out that they wired part of their bribes through the US banking system. Alstom was another company that fought the DOJ over jurisdiction. Yet it has listed securities on certain US exchanges which invoked FCPA jurisdiction, engaged in illegal conduct in the US and involved US citizens in the bribery and corruption allegations against it.

This fact of US leadership in the global fight against corruption and bribery was driven home even more so with the FIFA indictments. The Sunday Times had been investigating FIFA through investigative journalism for years. As far back as 2010, the Sunday Times published evidence that votes of FIFA executives could be purchased for votes to secure World Cup tournaments. The Sunday Times handed over wire tapes, videotapes and transcripts confirming these allegations to FIFA officials. FIFA’s response was to discipline those who had talked with reporters from the Sunday Times. Most amazingly, in May 2011 the Sunday Times provided this evidence to a British Parliamentary commission.

Did anything come about from this evidence being handed over to the UK government? A generous response might be not that we know of, as yet. This is in the face that the UK has arguably the strongest anti-corruption law on the books, the UK Bribery Act, which makes illegal the paying and receiving of bribes in both the public and private sector. So the laws are in the books in the UK, if the UK government wanted to enforce them.

The DOJ has made clear they will use all tools available to them in the fight against international corruption and bribery. For US companies or others subject to the FCPA, that means using a supply-side law, which criminalizes the conduct of the bribe payor. But there are numerous other laws that criminalize the conduct of the bribe receiver. We saw a couple of those at play with the FIFA indictments. These include money laundering and tax evasion, with tax evasion first. Ever since the conviction of Al Capone, the government has made use of laws against evading taxes on monies you are paid for criminal activity. Under FCPA cases, the companies seem to report the income from their ill-gotten gain accurately so we have not seen that tool used in FCPA prosecutions. However individuals who receive bribe payments generally do not report the income because they cannot account for receiving it for any honest or legal services. Since they do not report it, they do not pay taxes on it.

Anti-money laundering (AML) laws are an important tool in the fight against international bribery and corruption. My colleague Mike Brown, no doubt channeling his inner Woodward and Bernstein, often says that when it comes to bribery and corruption, you should “follow the money”. This is the basic truth about money laundering and why it is such an important tool in the fight against corruption. We have seen it used occasionally as an adjunct to FCPA prosecutions. Most recently was the money laundering charge against María de los Ángeles González de Hernandez, the official at a state-owned Venezuelan bank, Banco de Desarrollo Económico y Social de Venezuela (BANDES) who was paid upward of $5MM in bribes to win bond trading work. She was extradited to the US and pled guilty.

The bottom line is that only the US government has the wherewithal to engage in such a worldwide investigation and coordinate the actions of numerous of countries in providing assistance. Do you think the Swiss police would have been so involved if it was not for the US government lead in this investigation? From President Obama on down, the US government has made clear that it will lead the international fight against bribery and corruption. The FIFA indictments are yet one more indication that they will continue to do so.

But the US is no longer alone in this fight. Witness the large numbers of countries that have passed domestically and internationally focused laws against bribery and corruption. Whatever the motives behind the Chinese government prosecution of GlaxoSmithKline PLC (GSK) in China, the fact of the prosecution sent shock waves through western companies doing business in China that the old ways of bribing officials was no longer acceptable. The effect was that western companies doing business in China beefed up their compliance function and oversight of compliance. The same has been true from the burgeoning Petrobras corruption scandal in Brazil. Brazil itself has only recently enacted domestic anti-corruption legislation and it may have been the political fallout from the Petrobras corruption scandal that finally led the President of the country to accede to having the law made effective.

FIFA is the biggest sports empire in the world. The National Football League (NFL) is downright paltry when it comes to the monies, numbers and passions around international soccer. However the US government became aware of the inherent corruption at FIFA; whether through the investigative work of The Sunday Times, a whistleblower, an unrelated investigation into other criminal activities or some other means, Americans should care about the FIFA indictments because it shows the US government continues to lead the world’s fight against bribery and corruption.

Why should Americans care about the FIFA indictments? First as a measure of national pride, we have a Justice Department that has the wherewithal to take on the world’s largest sports organization, particularly one which thought itself above the law. While the US certainly did not bring the indictments against FIFA alone, it clearly was the leader in this effort to continue the fight against global corruption and bribery. For if America does not lead, others will not follow in this fight so Americans should care greatly that the DOJ is continuing to lead this fight with the laws available to it.

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, 2015

June 5, 2014

Citibank: Multiple Failure of Compliance as the Hammer Drops

FailureWhat is the cost of the failure to perform appropriate due diligence on a regular basis? What red flags should you look for when considering doing business with a customer, party in the sales channel or entity in the supply chain? All of these questions and more continue to swirl around Citigroup and its Mexican subsidiary Banamex over the ongoing investigation into allegations of fraud at Citi’s Mexico bank unit.

Citi had come to grief when there was a reported $400MM loss in Banamex involving the Mexican marine energy services company Oceanografía SA de CV. The problems arose after Banamex had extended $585MM in short-term credit to a company that Citi itself had warned its own bond investors was “from time to time subject to various accusations, including accusations of corrupt practices.” Oceanografía provided construction, maintenance and vessel-chartering services to the Mexican national energy company, Pemex’s exploration and production subsidiary. But Oceanografía’s fortunes, changed sharply in February of this year after it became the subject of a new government review that resulted in a suspension of Pemex contracts to Oceanografía for the next 20 months. Banamex had previously advanced as much $585 million to Oceanografía through an accounts receivable program, which would advance money to Oceanografía to provide services to Pemex. Pemex would then pay back Banamex, verifying invoices provided by Oceanografía to confirm that the work had been completed. In other words, Banamex was relying on Pemex’s ability to pay back the bank. But all of this ended when Pemex suspended its contracts with Oceanografía.

In a Wall Street Journal (WSJ) article, entitled “Citi Says Signs of Mexico Fraud Weren’t Escalated”, Christina Rexrode reported that Citi Chief Executive Officer (CEO) Michael Corbat told investors that employees “missed signs of trouble they should have recognized and elevated to superiors.” In a talk to investors Corbat was quoted as saying “There were telltales along the way” and he promised that “the bank would work on motivating and encouraging employees to raise their concerns when they notice potential problems.” But the problems ran deeper and were perhaps more systemic than simply the failure to escalate. Rexrode reported “People inside the bank have said the unit was allowed to operate as its own fiefdom, with New York employees struggling to get information about how the unit operated.” However, “A Citigroup spokesman said in a statement that “Banamex is absolutely subject to the same risk, control, anti-money-laundering and technology standards and oversight which are required throughout the company.””

These statements come on the heels of the dramatic firing of 11 Banamex employees just two weeks earlier. After meeting with the Citi Board of Directors, Corbat flew to Mexico City and terminated 11 employees. In an article in the New York Times (NYT), entitled “Citi Fires 11 More in Mexico Over Fraud”, Michael Corkery and Elisabeth Malkin reported that “Among those fired were four of the bank’s top executives in Mexico: its head of corporate banking, head institutional risk officer, head of trade finance and head of trade and treasury solutions. Some of the employees had worked at Banamex for as long as two decades and were not involved in the fraud directly. The bank fired many because they had not taken steps to detect the fraud or had ignored warning signs about the client.”

But apparently Citi expects there to be more disciplinary actions stemming form the matter. In an article in the Financial Times (FT), entitled “Citi fires 11 staff in Mexico unit”, Jude Webber, Camilla Hall and Kara Scannell reported that Corbat said in a memo to staff “Before our investigation concludes, we expect that several other employees, both inside and outside of Mexico, may receive forms of disciplinary action as well.” Two persons who may yet face such disciplinary action are “Manuel Medina-Mora, a Citi executive who oversees the Mexican operations and had his pay docked by $1.1m in March, or Javier Arrigunaga, Banamex chief executive.” Additionally, and perhaps more ominously for Citi, both the F.B.I. and prosecutors from the United States attorney’s office in Manhattan are investigating “Whether Citigroup willfully ignored possible warning signs”.

What red flags did Citi miss and for how long? One clue was reported in the NYT article, which noted that Oceanografía “is known among Mexican investors as politically connected but financially troubled. Credit rating firms in the United States, corporate bond investors and Mexican lawmakers have raised concerns about Oceanografía. In 2009, United States ratings firm Fitch warned about Oceanografía’s high leverage and poor cash flow generation. Fitch eventually withdrew its ratings because the company was not supplying enough information. In 2008, Standard & Poor’s noted that Mexico’s congress had investigated accusations of improper deals between Oceanografía and Pemex, though no wrongdoing was proved. Still, Oceanografía grew to become one of Banamex’s 10 largest corporate clients. The fraud erased 19 percent of the unit’s banking profits last year.”

These troubles were seemingly magnified in Mexico when the CEO of Oceanografía, Amado Yáñez Osuna, was arrested and charged with violating Mexican banking laws. In a WSJ article, entitled “Oil-Tinged Graft Scandal Roils Mexico, Laurence Iliff and Amy Gutherie reported “The arrest deepens a scandal that has sent shock waves across Mexico’s political landscape. That put a spotlight on long-simmering allegations that the country’s former ruling National Action Party, known as PAN, used Pemex to favor Oceanografía and other contractors during the party’s 12 years in power, which ended with the 2012 election of President Enrique Peña Nieto of the Institutional Revolutionary Party (PRI).” Further, during those “12 years, Oceanografía’s contracts with the oil monopoly swelled from a few million dollars a year to hundreds of millions of dollars, according to a review of the contracts by The Wall Street Journal. Most of the contracts were obtained in public bids, although some were assigned directly without bids, including one contract for about $65 million in the final months of the Calderón administration.”

The case took a far more ominous turn when authorities when Mexican authorities announced last week that they had issued arrest warrants for multiple Banamex executives. In an article in the FT entitled, “Mexico issues fresh set of Banamex arrest warrants” Jude Webber reported that “Mexico has issues more arrest warrants – including an unspecified number for staff at Citigroup’s Banamex unit – a day after detaining the owner of the oil services company at the centre of a $400m alleged fraud scandal that has rocked the bank since its disclosure there months ago.” In an article in the NYT entitled, “Mexico Authorizes Arrests In Fraud at Citigroup Unit” Elisabeth Malkin and Michael Corkery reported, “Attorney General Jesús Murillo Karam of Mexico confirmed on Friday that the authorities were seeking the former executives. He declined to say how many were involved.” Yes, there are warrants, but I won’t say who,” Mr. Murillo Karam told reporters.” Apparently not even Citigroup knows whose arrests may be imminent.

What are the lessons for the compliance practitioner? Three keys points are controls, escalation and oversight. What type of internal controls, or lack thereof, allowed one company to obtain such credit on what were basically receivables financing? What about allowing the Banamex unit to basically run its own show with little to no oversight from the corporate headquarters? Corkery and Malkin reported, “Citigroup is keen to demonstrate to regulators and investigators in the United States and in Mexico that it is cracking down on its employees for not catching the fraud. But the breadth of the punishment could also suggest that the bank, despite assurances that the fraud is confined this case, has had widespread problems with controls and oversight across its Mexican unit.” Moreover, in his memo to staff, Corbat said, ““we are reviewing our controls and processes in Mexico and strengthening any area we think falls short of our global standards or best practices.”” Corbat also noted Citi was looking at ways to encourage employees to increase escalation of issues earlier.

Moreover with these now imminent arrests of Banamex executives, Citi may be facing more serious charges in the US. Leaving aside the inane argument of a ‘rogue business unit’ it may be that the US parent choose not to look too closely at its high-flying and very profitable Mexican subsidiary. If, as it seems from the newspaper accounts, that Oceanografía was well known for the business tactic of under-bidding for contract and then making up the differences in cost overruns, this may not bode well for the Banamex executives or Citigroup. Likewise if there was one company that Banamex did business with, which engaged in such behavior, there may other similarly situated companies once a detailed investigation of the Citigroup unit is concluded.

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, 2014


June 4, 2014

Whither FIFA?

Filed under: FIFA — tfoxlaw @ 12:01 am
Tags: ,

World Cup TrophyOn this day in 1942, the Battle of Midway, one of the most decisive US victories against Japan during World War II, began. During the four-day sea-and-air battle, the outnumbered US Pacific Fleet succeeded in destroying four Japanese aircraft carriers while losing only one of its own, the Yorktown, to the previously invincible Japanese navy. It truly was one of the turning points of the war because the destruction of the Japanese carriers prevented Japan from taking the offense again in the Pacific.

One may have seen such a turning point over the weekend with Fédération Internationale de Football Association (FIFA) and allegations of corruption throughout it in several areas. This was when The Sunday Times rocked the sporting world with its article “Plot to Buy the World Cup” by Jonathan Calvert and Heidi Blake. It the article, they reported that a number of football officials took £3m in return for support of the Qatari bid. The BBC, in an article entitled “Qatar World Cup 2022: Investigator nears probe conclusion”, said that “The Sunday Times claims to have obtained secret documents that implicate the former AFC president in corrupting members of football’s governing body to win the right to stage the 2022 World Cup. The newspaper alleges the documents, seen by BBC sports editor David Bond, show that Qatari Bin Hammam, 65, was lobbying on his country’s behalf at least a year before the decision to award the country hosting rights. They also allegedly show he had made payments into accounts controlled by the presidents of 30 African football associations and accounts controlled by Trinidadian Jack Warner, a former vice-president of Fifa.”

While these allegations are certainly sensational, they are not the first time that questions have been raised as to whether improper payments were made to influence the vote awarding the 2022 World Cup Championship to Qatar. Back in 2010, the New York Times (NYT), in an article entitled “FIFA Suspends Officials in Vote-Selling Scandal”, reported that Reynald Temarii, the Tahitian President of FIFA’s Oceanic regional confederation, reportedly said that he wanted “about $2.3 million to finance a sports academy” in New Zealand. Amos Adamu, the Nigerian representative, was alleged to have requested approximately $790,000 to fund the construction of soccer fields in Nigeria. Mr. Adamu reportedly asked for “cash to be paid into his personal account”. FIFA President Sepp Blatter was quoted as saying that the two men’s actions had “created a very negative impact on FIFA and on the bidding process”. On November 17, 2010, the FIFA Executive Committee did take action as both men were suspended by FIFA for their actions; subsequently both men have recently had the appeals of their suspensions denied by the FIFA appeal committee.

The Wall Street Journal (WSJ) separately raised questions about Qatar spending in a 2011 article, entitled “Qatar’s World Cup Spending Spree”, where reporter Matthew Futterman detailed the “spending spree” of a reported one year amount of $43.3 million by Qatar, which led to its winning World Cup bid. Futterman’s article focused on information derived from the internal documents of Qatar’s bidding committee. Futterman reported that there was no evidence that Qatar violated the rules and regulations of FIFA to secure its winning bid. Rather he reported on how Qatar “worked within FIFA’s broad guidelines” to secure its winning bid.

From the internal bid documents, obtained by the WSJ, Futterman reported that some of the tactics used by Qatar included:

1. Charitable Donations. Commitments were made to establish, build or continue to fund soccer academies, in the home countries in which FIFA executives who would vote on the 2022 site selection, through a Qatar football training academy, Aspire Academy for Sports Excellence, controlled by the Qatar Royal Family. The WSJ article cited examples in Thailand and Nigeria. In Thailand, Futterman reported that Aspire would “build a football academy” and in Nigeria, it would “expand grass-roots training”. These internal documents also revealed that the Aspire Academy also continued to work with three African countries which were home to FIFA executive committee members, who all had a vote on the 2022 site selection.

2. Use of Marketing Agents. The Qatar bid included the hiring of certain well-known celebrities to assist in the effort. In order to “talk up” the Qatar bid to host the 2022 World Cup, the WSJ reported that it hired several international personalities as “Bid Ambassadors” to endorse the Qatar bid. These endorsements were important because they assisted Qatar to “establish its legitimacy within FIFA and connections to executive committee members.” The only Bid Ambassador named in the WSJ article was the former French star Zinedine Zidane. It was reported that Zidane received $3 million for his endorsements of the Qatar bid.

There have been other issues raised regarding Qatar’s bid to host the World Cup. One is its treatment of the workers who are building the stadiums for the event. In an article in the online magazine Slate, entitled “The Qatar World Cup Is a Human Rights Catastrophe. It’s Time to Do Something About It.” Jeremy Stahl reported that the Nepali embassy has said 400 citizens of its country had died during construction in Qatar and India has reported that 500 of its citizens have died. The article quoted Sharan Burrow, the general secretary of the International Trade Union Confederation (ITUC), who said in an ESPN documentary “that at current rates, 4,000 people will die to make the 2022 World Cup a reality.” The ITUC itself had reported in March that there had been 1200 deaths in the construction of the facilities for the World Cup. And what about the heat in Qatar, which can easily reach 45 Celsius in the summer? Even if the stadiums are air conditioned, how are you going to walk to them in that heat?

But the Qatar winning bid is not the only thing that FIFA has to worry about these days. In a stunning two-part series in the NYT over the weekend, entitled “Fixed Soccer Matches Cast Shadow Over World Cup”, reporters Declan Hill and Jeré Longman detailed an extensive corruption scheme where referees were bribed to influence the outcome of certain pre-2010 World Cup ‘Friendly’ or exhibition matches in South Africa. It is the role of the host country to designate referees for such friendlies and apparently through corruption a betting syndicate took over this role. The reporters had reviewed an internal FIFA report that found “It provides extensive details of the clever and brazen ways that fixers apparently manipulated “at least five matches and possibly more” in South Africa ahead of the last World Cup. As many as 15 matches were targets, including a game between the United States and Australia, according to interviews and emails printed in the FIFA report.”

All of these allegations make clear the need for vigilance in all levels of international sporting groups. While these allegations remain unsubstantiated at this point, if they are proven true FIFA may truly be at the same turning point about corruption as the American navy was with its fight against the Japanese navy after the Battle of Midway.

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, 2014

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