FCPA Compliance and Ethics Blog

February 2, 2010

SO YOU WANT TO BUY A BUSINESS: THE ROLE OF THE FCPA IN INTERNATIONAL ACQUISITIONS

The recession has lessened and all that cash your Company has been hoarding for the rainy days of the Obama years is burning a whole in your CEO’s pocket. He has his powder dry and is ready to make a big bang by going on a buying spree, targeting overseas entities, to beat the competition in coming out of your industry’s downturn. The Legal Department is told to put together an acquisition squad and to be ready to go at a moment’s notice. The job assigned to you is to make sure that your acquisition does not run afoul of the Foreign Corrupt Practices Act (FCPA) and to prepare a list of FCPA based due diligence that the Law Department should focus on to perform on the Target Company. What should be on your list? In the recent article, “FCPA Due Diligence in Acquisitions,” Securities and Commodities Regulation, Vol. 43, No. 2, January 20, 2010, lawyers from Squire Sanders, thoroughly explored this topic, through a hypothetical case it was based upon a “real life scenario”. Some of their suggestions included the following suggestions.

I. Who is the Owner of the Target Company?

An initial inquiry should be made into the ownership structure of the target company. If any portion of the entity is owned or held by a government or governmental entity then such an entity is covered under the FCPA as a “foreign governmental instrumentality”. There are several factors to consider in making such a determination. Some of these factors include: percentage ownership of the target company; control exercised over the target company; and how are the employees of the target company described by their country’s government.

II. Are Agents involved in the Transaction?

Many times a “consultant” will be used in facilitating the purchase of a target company in a country outside the United States. If there is a clear and articulated business case for the Agent to be involved in the transaction, there should be due diligence on the Agent. It should include some a review of the Agent’s credentials, ownership structure and financial records going back 3 to 5 years. Lastly, it is also critical to know the reputation of the Agent in the country’s business community. If the Agent passes all these reviews, you establish a business relationship with a strong written contract.

III. Does the Target Company want you to pay for Travel?

What if the Target Company desires your business to pay for a representative to come to the US to visit your facilities? Such a trip falls under the FCPA and its proscription of “offering or promising anything of value”. However, if there are legitimate business expenses which can be paid by the US purchasing company under the FCPA. The key is to evaluate each travel and entertainment request. Generally, coach class travel and hotel expenses such as room charges, business center and telephone charges related to business can be reimbursed. Personal room expenses such as minibar, Pay-for-Movies and spa fees at the hotel should not be reimbursed. Receipts should be provided for any charges and if possible, the third party service provider should be paid directly rather than reimbursement of the Target Company’s representative. Entertainment and business dinners can be reimbursed if there is a legitimate business purpose but personal, including the family expenses of the Target Company’s Representative, cannot be reimbursed under the FCPA. Lastly, do not give a “per-diem” in cash.

IV. Did the Target Company make any “Red Flag” Payments?

In your company’s financial due diligence of the Target Company, did any evidence of “Red Flag” payments turn up which warrant further investigation? If such “Red Flags” arise, the US purchasing company must not turn a blind eye. If there is reason to believe that payments of the Target Company may violation the FCPA, further investigation is mandated. The recent conviction of Frederick Bourke for engaging in “conscious indifference” in that he knew, or should have known, that bribery and corruption was involved in the proposed acquisition, demonstrates the power of the FCPA in the acquisition arena. Red Flag areas would include the discovery of payments for gifts, entertainment, use of agents, facilitation payments or other payments which could not be adequately accounted for are discovered.

V. Are the Books and Records Reasonable?

In addition to its anti-bribery provisions, the FCPA also requires that a company keep such books and records which reasonably reflect the transactions of the entity and that there are proper internal controls. A key in this area is if the Target Company has any payments which are labeled as “miscellaneous” or there are payments which cannot be reasonably described. Gifts, entertainment and business expenses need to be recorded and documented. Internal controls are required to show that the Target Company has its statements in accordance with some form of accepted accounting principles.

VI. What Happens Afterwards?

Your Company has completed all the above steps but your due diligence has turned up items which cannot be resolved before your Company’s President wants to fire that dry powder. What can you do? In Opinion Procedure Release 08-02, the Department of Justice gave its opinion on the steps required by a US company contemplating a such a transaction. This opinion held that if Halliburton, in purchasing a Target Company, satisfactorily completed a rigorous, DOJ-mandated 180-day FCPA and anticorruption due diligence work plan after the closing, then the DOJ did not “presently intend” to take enforcement action against Halliburton for any disclosed unlawful pre-acquisition conduct by the Target Company within 180 days of the closing. Halliburton was not the successful bidder for the Target Company but the DOJ’s flexibility and Halliburton’s open dialogue with the DOJ indicates there will be increased involvement between companies and regulators during FCPA acquisition due diligence.

VII. The End or Is it?

The potential liabilities for failing to engage in pre-acquisition FCPA due diligence can be severe. Just how severe can be demonstrated by the eLandia acquisition of Latin Node. The FCPABlog reported that “eLandia also disclosed that its purchase price for Latin Node “was approximately $20.6 million”. After the acquisition, eLandia discovered that Latin Node had engaged in bribery and corruption. eLandia investigated, albeit after the purchase, and self-reported the violations to the DOJ. eLandia was assessed a $2 million fine, shut down Latin Node as an operating business and wrote off the entire purchase. For those of you keeping score at home, that is several years of pre-acquisition due diligence, plus legal fees for the FCPA investigation added to the fine, purchase price, business shut down and full financial write-off.

So what’s the moral of this story? You can keep your powder dry but you must engage in full FCPA due diligence in any overseas transaction before moving forward.

—————————

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.

© Thomas R. Fox, 2010

January 28, 2010

FCPA Sentencing Box Score

Tfoxlaw is an avid baseball fan. As a child, he was taught how to keep score at professional baseball games by his Grandfather. This had two effects. The first was immediate; it kept him quiet at ballgames. The second is more long term; he continues to keep score at baseball games up to the present. So he appreciates it when he reads (or hears) the words, “For those of you scoring at home” as was stated by the FCPA Professor in his December 31, 2009 posting on the UTStarcom matter. Judging from his posts, it appears the FCPA Professor is also a baseball fan.

In his post of January 18, entitled, “Four Awaiting Sentencing”; the FCPABlog discussed four persons, currently scheduled to be sentenced in January for pleas or convictions of FCPA violations. Two of the individuals are former Willbros employees who have pled guilty and are awaiting sentencing, Jim Bob Brown and Jason Edward Steph. The remaining two are the husband and wife team of Gerald and Patricia Green, who were convicted in a jury trial of FCPA violations related to their attempts to acquire lucrative film festival contracts in Thailand. The Greens were the third of three high profile FCPA trials which were concluded in 2009. See my prior post, “2009-Year of the Trial” at https://tfoxlaw.wordpress.com/2009/12/31/2009-the-year-of-the-trial/.

The convicted defendants from the first two trials, Frederick Bourke and William Jefferson have been sentenced and are out on bail during their respective appeals. As mentioned in its “Four Awaiting Sentencing”, the FCPA Blog stated that “Under the federal guidelines, Gerald Green, 77, is facing between 20 and 25 years in prison; the government wants him sentenced to life in prison.” While a 25 year sentence for a 77 year old man is tantamount to a life sentence, it is not clear how much weight the trial judge would give to the Prosecution’s proposed life sentence.

As pitchers and catchers are scheduled to report to Spring Training in only 30 days, the FCPABlog article and the FCPA Professor’s comment got Tfoxlaw’s baseball mind thinking about the FCPA sentencing boxscore for the two defendants in the other 2009 FCPA trials and how that might related to those upcoming in 2010.

FCPA SENTENCING BOXSCORE

Defendant Sentencing Guidelines Prosecution Recommended Sentence Defense Recommended Sentence Judge’s Sentence
William

Jefferson

324 to 405 mos.

=27 to 33 yrs.

27 to 33 years “less than 10 years” 13 years
Frederick Bourke 57 to 71 mos.

=4.75 to 6 yrs.

10 years Probation A year and a day
Gerald Green 235 to 293 mos.

=20 to 24.4 yrs.

Life in Prison Green does not pose risk to society Sentencing now set for March 11

 In both the Bourke and Jefferson cases, the trial judge gave jail time considerably less than that suggested by the Sentencing Guidelines and that sought by the Prosecutors; albeit with longer sentences than requested by the defendant’s attorneys. So what does all this mean? Tfoxlaw comes from a civil law background so has no experience as a prosecutors. Perhaps a blogger with the prosecutorial background can help to explain these (apparently) wide discrepancies and what that might mean for Gerald Green.

January 11, 2010

Robert Kennedy, the Travel Act and the FCPA

Robert Kennedy, the Travel Act and the FCPA

What does Robert Kennedy have to do with the Foreign Corrupt Practices and how has a nearly 50 year old statute aimed at US based organized crime now impacted the FCPA? It turns out quite a bit and perhaps it will be quite a bit more in significantly widening the scope of the FCPA.

Robert Kennedy’s contribution is that while Attorney General, he urged Congress to enact the Travel Act in 1961 which was passed as part of the same series of bills as the Wire Act and was a part of his program to combat organized crime and racketeering. The Travel Act is aimed at prohibiting interstate travel or use of an interstate facility in aid of a racketeering or an unlawful business enterprise. It prohibits the use of communications and travel facilities to commit state or federal crimes, but until now was mostly known for its use in prosecutions for domestic crimes. Its impact to the FCPA is that the Travel Act applies to foreign as well as interstate commerce; it can be also used to prosecute those US companies and individuals which engage in bribery and corruption of foreign officials AND commercial bribery and corruption of private foreign citizens.

The Travel Act elements are: (1) use of a facility of foreign or interstate commerce (such as email, telephone, courier, personal travel); (2) with intent to promote, manage, establish, carry on, or distribute the proceeds of: (3) an activity that is a violation of state or federal bribery, extortion or arson laws, or a violation of the federal gambling, narcotics, money-laundering or RICO statutes. This means that, if in promoting or negotiating a private business deal in a foreign country, a sales agent in the United States or abroad offers and pays some substantial amount to his private foreign counterpart to influence his acceptance of the transaction, and such activity may a violation of the state law where the agent is doing business, the Justice Department may conclude that a violation of the Travel Act has occurred. For instance, in the state of Texas there is no minimum limit under its Commercial Bribery statute (Section 32.43, TX. Penal Code), which bans simply the agreement to confer a benefit which would influence the conduct of the individual in question to make a decision in favor of the party conferring the benefit. As noted below, the state of California bans payment of more than $1,000 between private parties for the purposes of influencing a business decision.

The Travel Act was most recently used when four executives of Control Components, Inc. (“CCI”) were indicted on April 8, 2009 for alleged violations of the FCPA’s anti-bribery provision and the Travel Act. According to the indictment, the defendants conspired to make hundreds of corrupt payments with the purpose of influencing the recipients to award contracts to CCI or skew technical specifications of competitive tenders in CCI’s favor. The Travel Act came into play as the DOJ alleged the CCI employees violated or conspired to violate California’s anti-bribery law (California Penal Code section 641.3), which bans corrupt payments anywhere of more than $1,000 between any two persons, including private commercial parties. In the indictments, the Travel Act charges relied on alleged violations of California’s anti-corruption law.

On July 31, 2009, CCI itself pleaded guilty to substantive FCPA anti-bribery charges and to conspiring to violate both the FCPA and the Travel Act. CCI admitted that, between 2003 and 2007, its employees made more than 150 corrupt payments, totaling approximately $4.9 million, to officials of state-owned enterprises in China, Korea, Malaysia, and the United Arab Emirates, and paid $1.95 million in bribes to officers and employees of foreign and domestic private companies in violation of the Travel Act. CCI agreed to pay a criminal fine of $18.2 million and to retain an independent compliance monitor for three years.

In July 31, 2009 Press Release announcing CCI’s guilty plea, the DOJ referenced the Company’s private overseas bribery. It said:

According to the information and plea agreement, from 1998 through 2007, CCI violated the FCPA and the Travel Act by making corrupt payments to numerous officers and employees of state-owned and privately-owned customers around the world, including in China, Korea, Malaysia and the United Arab Emirates, for the purpose of obtaining or retaining business for CCI. Specifically, from 2003 through 2007, CCI paid approximately $4.9 million in bribes, in violation of the FCPA, to officials of various foreign state-owned companies and approximately $1.95 million in bribes, in violation of the Travel Act, to officers and employees of foreign and domestic privately-owned companies. [DOJ Press Release: http://www.justice.gov/criminal/pr/press_releases/2009/07/07-31-09control-guilty.pdf

The CCI matter was not the first case to use the Travel Act in conjunction with the FCPA. As reported in the FCPABlog, is the mater of U.S. v. David H. Mead and Frerik Pluimers, (Cr. 98-240-01) D.N.J., Trenton Div. 1998. In this case defendant Mead was convicted following a jury trial of conspiracy to violate the FCPA and the Travel Act (incorporating New Jersey’s commercial bribery statute) and two counts each of substantive violations of the FCPA and the Travel Act. In its 2008 article entitled, “The Foreign Corrupt Practices Act: Walking the Fine Line of Compliance in China” the law firm of Jones, Day reported the case of United States v. Young & Rubicam, Inc., 741 F.Supp. 334 (D.Conn. 1990), where a Company and individual defendants pled guilty to FCPA and Travel Act violations and paid a $500,000 fine. In addition to the Mead and Young and Rubicam cases, the DOJ’s website on “A Lay Person’s Guide to the FCPA, specifically states that “other statutes such as the mail and wire fraud statutes, 18 U.S.C. § 1341, 1343, and the Travel Act, 18 U.S.C. § 1952, which provides for federal prosecution of violations of state commercial bribery statutes, may also apply…” to US companies doing business overseas. See: http://www.justice.gov/criminal/fraud/docs/dojdocb.html

What does this mean for US companies doing business overseas? The FCPA Professor and others have written extensively on the broadening of the definitions of who is a ‘foreign official’ and what is a ‘state owned entity’ under the FCPA. However with the incorporation of the Travel Act into FCPA prosecutions, these broad definitions may be completely blurred away if all foreign private citizens can be brought in under the FCPA by application of the Travel Act. US companies doing business overseas, which have a distinction in their FCPA compliance policies between gifts for and travel and entertainment of employees of private companies, and employees of state owned entities or foreign officials should immediately rethink this distinction in approach. The new decade is upon us the Kennedy-era statute of the Travel Act may become as relevant in overseas law enforcement in the 20-teens as it was in the domestic arena for the past 50 years.

——————–
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.

© Thomas R. Fox, 2010

December 31, 2009

2009-The Year of the Trial

2009 FCPA-The Year of the Trial

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

A. Frederick Bourke

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

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

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

B. William Jefferson

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

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

C. Gerald and Patricia Green

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

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

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

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

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

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

December 21, 2009

DOJ Goes for KO with Gerald Green Sentencing

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

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

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

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

« Previous Page

Blog at WordPress.com.