Sunday, November 14, 2010

Foreign corrupt practices? It's negotiable.

At one time long ago, there was an advertisement, for a cigarette as Guambat vaguely recalls, whose theme was "I'd rather fight than switch".

The theme of this post is that, when it comes to foreign corrupt practices, big corporations would rather not fight, but don't really want to switch too much, either.

It pisses them off to get caught in the "no-fly" zones of the foreign corrupt practices law (FCPA), so they are arguing the law should be renegotiated so it won't catch so many of them with hands near, if not exactly, maybe, in the cookie jar.

It's the thin end of the wedge of a plan to gut the law. The better option is to test it.

Swiss Shipper Finds Resistance Futile in U.S. Bribery Probe
The U.S. and 37 other countries are fighting transnational bribery through the Paris-based Organization for Economic Cooperation and Development.

FCPA enforcement is a rising priority at the Justice Department, where about 30 to 40 lawyers might work at any time on FCPA cases, including 15 who are full-time. The SEC has assigned more than 30 lawyers to FCPA cases, and the Federal Bureau of Investigation has an entire squad of agents on foreign anti-bribery cases.

The Sarbanes-Oxley Act, passed in 2002, added to the burden with tougher standards for internal controls. Companies also faced more exposure to FCPA charges as businesses expanded internationally.

More than 50 people were charged with FCPA-related crimes in the past two years. A married couple who worked as Hollywood film executives were convicted at trial last year of violating the FCPA, and another man was convicted in a separate case of conspiring to violate the anti-bribery law.

Former U.S. Congressman William Jefferson was convicted of soliciting bribes, racketeering and conspiring to violate the FCPA. In January, the U.S. charged 22 people after an FBI undercover operation that focused on the military and law- enforcement products industry.

Panalpina World Transport Holding Ltd., like Siemens AG and others before it, faced potentially crippling penalties when U.S. prosecutors began investigating the bribes it paid to government officials around the world.

In December 2008, Siemens, Europe’s largest engineering company, agreed to pay $800 million to the U.S. and $814 million to German authorities. The company said it spent another $1 billion on lawyers and accountants and on strengthening internal controls.

In three other settlements, joint venture partners who built liquefied natural gas facilities in Nigeria admitted using agents to funnel $182 million in bribes to government officials for $6 billion in contracts. The partners agreed to pay a total of $1.28 billion, with Houston-based Kellogg Brown & Root LLC settling last year, and Paris-based Technip SA and Amsterdam- based Snamprogetti Netherlands BV reaching accords this year.

In the Panalpina case, the company admitted bribing government officials in Angola, Azerbaijan, Brazil, Kazakhstan, Nigeria, Russia and Turkmenistan. The bribes from 2002 to 2007 let its clients, most in the oil and oil-services business, avoid the customs process, pass off phony documents or smuggle contraband including medicines and explosives, Panalpina said in a statement of facts.

Settlements this year involved BAE Systems Plc, Europe’s largest defense company, which agreed to pay $400 million; Daimler AG, maker of Mercedes-Benz cars, which will pay $185 million; and Royal Dutch Shell Plc, Europe’s largest oil company, which agreed Nov. 4 to pay $48.1 million.

The U.S. Chamber of Commerce’s Institute for Legal Reform said the Justice Department and the U.S. Securities and Exchange Commission, which has civil authority in FCPA cases, “almost exclusively” define gray areas of the law without judicial oversight.

Congress should clarify ambiguities in the law that “have had a chilling effect” on U.S. businesses, some of which have “ceased foreign operations rather than face the uncertainties of FCPA enforcement,” the institute said in a paper last month.

Michael Koehler, an assistant professor of business law at Butler University in Indiana, assails settlements reached without judges having input on questions such as whether employees of state-owned companies are foreign officials. Many instances of “clear-cut bribery,” as in Siemens, are resolved through lesser books-and-records or internal controls charges, he said.

“The most egregious cases are not being resolved under the FCPA’s anti-bribery provisions,” said Koehler, who writes the FCPA Professor blog. “These untested and dubious legal theories have increased the compliance burden on companies.”

“Prosecutors know from the outset that they hold the upper hand because companies have to find terms to which they can agree,” said George Terwilliger III, a lawyer at White & Case LLP.

Surrender by companies such as Panalpina and Siemens is now the norm under the 33-year-old Foreign Corrupt Practices Act.

No company has risked an FCPA court fight in two decades out of fear that a conviction could lead to a loss of public contracts and higher penalties, lawyers said.

“Publicly traded companies cooperate in FCPA matters because they can’t afford the potential consequences of fighting with the government,” said Kirk Ogrosky, a partner at Arnold & Porter LLP who supervised Justice Department fraud cases.

Denis McInerney, chief of the US DOJ’s fraud section,said any company is free to defend itself in court.

“The courts are available to companies if they dispute the department’s interpretation of the law,” McInerney said.

Professor Mike Koehler, in his FCPA Professor blawg, puts the FCPA actions under his legal microscope and sees scope for misuse of the FCPA enforcement powers, accusing the government of asserting uncontested but contestable areas of law, particularly the nuanced or border-line factual issues that are critical to some of the definitions that make a "foreign corrupt practice". That is what was meant by the "no-fly" characterization above.

In a November 5 post, he described the latest round of enforcement actions.

Major Shipment - Customs Cases Bring In $236.5 Million
The pipeline that contains pending FCPA enforcement actions burst yesterday as the DOJ and SEC announced enforcement actions against 13 separate entities.

In enforcement actions that have long been anticipated, Panalpina entities, as well as several others, settled DOJ and SEC enforcement actions principally focused on customs and related payments in Nigeria, but also including alleged improper conduct in Angola, Brazil, Russia, Kazakhstan, Venezuela, India, Mexico, Saudi Arabia, the Republic of Congo, Libya, Azerbaijan, Turkmenistan, Gabon and Equatorial Guinea.

The combined DOJ/SEC settlement amounts total $236.5 million.

Your FCPA scorecard thus shows that since June 28th, the U.S. government has brought FCPA enforcement actions totaling approximately $1.1 billion. With numbers like these, aggressive FCPA enforcement based on, often times, dubious legal theories (more on that later) seems like the most profitable government program ever conceived.
That post, and the many other posts in the Professor's blawg, provide the kind of detail that put real flesh to the bones of MSM reports.

The Professor may be on to something with his observation/characterization that enforcement is "based on, often times, dubious legal theories", but his blawg also clearly reveals that, often times, actions taken upon which enforcement is undertaken, sail pretty close to the wind, and for the most part seems to be a pretty clear business calculation as to the cost of the action taken compared to the expected benefits.

For instance, he spends several posts explaining the various actions taken against companies who provide rigs for oil services, in actions he terms "CustomsGate". The circumstances are that some countries charge a tax for importing these rigs, which is not assessed if they are only imported temporarily. To make it temporary, the imported rig must be exported within a certain amount of time, then it is free to come back in, again, temporarily.

The companies, evidently, pay a local customs agent to fill out some paper work that suggests the rig is temporarily exported, which it isn't, and to file the paper, along with some other script, with the right persons or bodies who give their stamp of approval.

In the legal language used to describe this transaction:
According to the Statement of Facts, "whenever a TIP (and related TIP extensions) expired for a rig in Nigeria, the Nigerian Customs Agent, with the knowledge of Noble Nigeria, engaged in a process of submitting false paperwork on Noble Nigeria's behalf to avoid the time, cost, and risk associated with exporting the rig and reimporting it into Nigerian waters" - the so called "paper process" or a "paper move."

The Statement of Facts further assert that the "Nigeria Customs Agent, with the knowledge of Noble Nigeria, created and caused to be presented to the [Nigeria Customs Service] NCS documents that reflected that the rig had been physically exported and reimported, when, in fact, the rig had remained in Nigeria."

According to the Statement of Facts, the Nigeria Customs Agent included a line item in its invoices for "special handling charges" and "Noble Nigeria personnel were informed by the Nigerian Customs Agent that all or part of the 'special handling charges' would be paid by the Nigeria Customs Agents to NCS officials."

Further, the Statement of Facts assert that "Noble Nigeria personnel approved the payments to the Nigerian Customs Agent with the knowledge that some or all of the payments would be paid to NCS officials."

"Manager A" (a U.S. citizen and a former manager in Noble's Internal Audit Department) "interviewed several Noble-Nigeria employees who explained that false paperwork had been created and submitted to NCS officials through the Nigeria Customs Agent in connection with the process of securing TIPs" and that Manager A "also learned that the Nigeria Customs Agent in the past had charged a fee of approximately $75,000 per TIP to secure the TIPS."

Manager A provided a written summary to Executive A (a U.S. citizen, an officer of Noble, and Head of Internal Audit).

Executive A discussed Manager A's findings with Executive B (a U.S. citizen, an officer of Noble, and the Vice President-Eastern Hemisphere with management responsibility for Nigerian operations). Executive A then informed the Senior Executive (a U.S. citizen, an officer of Noble, and the former Chief Financial Officer).

Corrective action was contemplated, such as permanently importing rigs or moving them to a free trade zone, but Manager A and Executive B "decided that due to the time, cost, and risk of permanently importing or moving the rigs, the paper process would be used for three rigs for which TIPs had expired."
There's much more, but you get the idea, and if not or remain curious, please spend some time in the Professor's excellent blawg.

Professor Koehler has written an article recently, abstracted in his blawg, which claims FCPA enforcement action is a facade:
Against the backdrop of aggressive enforcement and the resulting multi-million dollar fines and penalties is the undeniable fact that, in most instances, there is no judicial scrutiny of the FCPA enforcement theories.

FCPA defendants are nudged to accept resolution vehicles notwithstanding the enforcement agencies’ untested and dubious enforcement theories or the existence of valid and legitimate defenses.

The end result is often the facade of FCPA enforcement.

in the absence of substantive FCPA case law, these privately negotiated resolution vehicles have come to represent de facto FCPA case law. The facade of FCPA enforcement also breeds inefficient overcompliance by risk averse business actors fearful of enterprise–threatening liability because of the enforcement agencies’ untested and dubious theories.

This article does not argue, or even suggest, that every FCPA enforcement action is unwarranted or that no company or individual has ever violated the FCPA.

Rather, this article demonstrates that a significant majority of recent FCPA enforcement actions are a facade—including those that allege clear instances of corporate bribery—yet are resolved without FCPA anti-bribery charges.

This article exposes the facade of FCPA enforcement, argues that addressing the facade and subjecting FCPA enforcement actions to greater judicial scrutiny is in the public interest, and encourages more FCPA defendants to challenge the enforcement agencies and further expose the facade of FCPA enforcement.

Guambat wholeheartedly agrees.

Much better a proper open legal forum than sending the American Chamber of Commerce off to the halls of Congress to do some deal and pull some string behind some locked door, which, Guambat must reckon, does not run foul of FCPA.

Cases, such as the CustomsGate cases, ought to be "vigorously contested". These are actions that cry out for judicial inquiry, both as to the facts and the law. Those companies should stop rolling over. Stop the shake-downs. Stand up and defend those actions!

Like that one hero the Professor mentions in this post, a US citizen representing a US corporation in Haiti (actually, it involved quite a few US individuals and corporations): Esquenazi Challenges DOJ's "Foreign Official" Interpretation.

The charges in the case include purposefully concealed payments of bribes of several hundred thousand dollars and other things, such as a Rolex watch, in return for lowered telephone rates, in breach of the FCPA.

Well, gosh darn it, however corrupt that may be, the FCPA charges are baseless if the Professor knows his peas, in this case, is a state-owned corporation employee a "foreign government official". As he put it,
Joel Esquenazi allegedly violated the FCPA's anti-bribery provisions by providing something of value, not to a foreign government official, but to an employee of an alleged state-owned or state-controlled enteprise ("SOE").
He also noted,
an interesting twist is that Haiti Teleco is currently 60% owned by Viettel, a telecommunications company run by Vietnam's military

Yes, yes, but all that aside, assuming the allegations to be true, is that a violation of the FCPA? Or does the DOJ have some luft in its sails.

Maybe that's why there are additional charges in the complaint for money laundering and conspiracy as well. There is usually some other basis on which to indict, and the argument is not whether the girl is pregnant, but how pregnant?

And maybe that is one reason why, when the DOJ holds up its mighty finger and says J'accuse!, companies would rather switch than fight.

Where there's (cigarette) smoke, there's usually fire.

The long arm of the law of procurement fraud

Detecting a climate of procurement fraud

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