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05 May 2015
Corporate cooperation and compliance efforts
SEC increasingly reliant on administrative proceedings
Executives continue to be targeted
What's to come?
Top 10 Foreign Corruption Practices Act penalties 2008-2014
Although the government has added new players to its line-up, the game seems to be the same in the world of Foreign Corruption Practices Act enforcement, as the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) continued to push for strong enforcement in 2014.
Last year brought personnel changes to the DOJ, with Leslie R Caldwell being confirmed as the new assistant attorney general for the Criminal Division on May 15 2014. Caldwell's public remarks underscore her commitment to Foreign Corruption Practices Act enforcement. On October 23 2014 she explained that fighting foreign corruption not only protects the ability of US companies to compete fairly, but also protects national security. International corruption creates "unstable countries… [that] become the breeding grounds and safe havens for terrorist groups and other criminals who threaten the security of the United States".(1)
Caldwell is not the only new player in the Foreign Corruption Practices Act game. In September 2014 Caldwell announced the appointment of Sung-Hee Suh as deputy assistant attorney general. Suh, like Caldwell, is a former assistant US attorney for the Eastern District of New York and will oversee the Appellate, Capital Case and Fraud Sections of the Criminal Division. The Foreign Corruption Practices Act Unit is part of the Fraud Section.
These leadership changes did not seem to affect Foreign Corruption Practices Act enforcement. In 2014 the DOJ initiated 24 prosecutions and the SEC opened eight enforcement actions; these were roughly comparable to 2013 numbers. Among the new cases in 2014, the prosecution of Alcoa World Alumina LLC netted a settlement of $384 million, the fifth-largest Foreign Corruption Practices Act settlement in history. Also prominently in the news was the prosecution of Marubeni Corporation, which resulted in criminal penalties of $88 million; and the global joint enforcement action against Hewlett-Packard and three of its foreign subsidiaries, which produced a total settlement of $74.2 million.
As in 2013, the DOJ continued to emphasise the importance of corporate compliance and cooperation with Foreign Corruption Practices Act investigators. Caldwell has signalled that corporate cooperation should include identification of culpable individuals. She explained that "for a company to receive full cooperation credit, it must uncover misconduct, identify the responsible individuals, and fully disclose the facts to the department".(2) In a similar vein, Principal Deputy Assistant Attorney General for the Criminal Division Marshall L Miller drew a contrast between the prosecution of Marubeni, which declined to cooperate with the DOJ's Foreign Corruption Practices Act investigation and ultimately paid $88 million in fines, and PetroTiger ltd, whose cooperation helped the DOJ to secure guilty pleas from a former co-chief executive officer and general counsel. Noting that, as a result of PetroTiger's cooperation, no charges were brought against PetroTiger and no non-prosecution agreement was entered, he said:
"This is all to say: we would like corporations to cooperate. We will ensure that there are appropriate incentives for corporations to do so. But if there is no cooperation, we will continue to investigate and prosecute the old-fashioned way. And companies will face the consequences."(3)
Public filings continue to suggest that the DOJ and the SEC are, in fact, giving credit to corporations that voluntarily disclose possible Foreign Corruption Practices Act violations. Although public reporting of declinations is not necessarily comprehensive, it appears that in 2014 at least two corporations that self-disclosed Foreign Corruption Practices Act compliance concerns were notified that the DOJ would not pursue criminal charges.
Government enforcement efforts also received a boost from the courts. The Eleventh US Circuit Court of Appeals gave its stamp of approval to the DOJ's broad interpretation of 'foreign official' in the act. In Esquenazi v United States(4) Joel Esquenazi and Carlos Rodriguez appealed their convictions relating to their efforts to bribe officials at Telecommunications D'Haiti. They argued that the Haitian telecommunications company was not an 'instrumentality' under the Foreign Corruption Practices Act, and therefore its directors, officers and employees were not 'foreign officials'. The Eleventh Circuit held that an 'instrumentality' is any "entity controlled by the government of a foreign country that performs a function the controlling government treats as its own".(5) The court concluded that an employee of the partially state-owned telecommunications company was a 'foreign official' for Foreign Corruption Practices Act purposes and laid out a non-exhaustive list of factors to consider in making this fact-specific determination. This decision bolsters the aggressive position the enforcement agencies have pressed for years in relation to bribes paid to officials of state-owned enterprises. Indeed, many of the actions initiated and disclosed in 2014 involved officials of state-owned enterprises.
Examining the cases brought in 2014, there are four major themes:
According to Caldwell's public remarks made on October 7 2014, Alcoa World Alumina LLC, which settled Foreign Corruption Practices Act allegations for $384 million in January 2014, could have faced a fine of more than $1 billion had it not cooperated by "conducting an extensive internal investigation[,] making proffers to the government, voluntarily making current and former employees available for interviews, and providing relevant documents".(6) In contrast, the DOJ's plea agreement with Marubeni indicates that the $88 million fine was in part due to the fact that Marubeni did not voluntarily disclose the violation or fully cooperate with the DOJ investigation. These contrasts highlight the continuing pressure from the DOJ and the SEC for companies to cooperate in a manner that the government deems sufficient.
Alcoa World Alumina LLC (January 9 2014)
Alcoa World Alumina LLC pleaded guilty to one count of violating the anti-bribery provisions of the Foreign Corruption Practices Act to resolve allegations that its subsidiary, Alcoa of Australia, paid millions of dollars in bribes to officials of the kingdom of Bahrain. According to the facts alleged in the criminal information, the violations occurred in 1989, when a Bahraini official requested that Alcoa use a London-based middleman to facilitate sales of alumina to Aluminium Bahrain BSC (Alba), a state-owned aluminium smelter. Alcoa allegedly paid sham commissions to several shell companies controlled by the middleman (collectively referred to as 'Alumet') in order to become and remain the preferred provider for Alba. In turn, those commissions were used to pay bribes to Bahraini officials. Over time, Alumet and Alcoa arranged a sham 'distribution' scheme through which Alcoa would 'sell' alumina to Alumet at a discount. Alumet would then 'sell' the alumina to Alba at a premium, despite the fact that Alcoa shipped the alumina directly to Alba. These premiums funded additional bribes to Bahraini officials.
Alcoa's in-house counsel repeatedly raised Foreign Corruption Practices Act and other concerns about the distribution contracts, but they were dismissed by the Alcoa executive responsible for the Alba relationship. To settle the DOJ's charges, Alcoa agreed to pay a $209 million criminal fine and $14 million in administrative forfeiture. In addition, Alcoa agreed to settle a parallel action undertaken by the SEC by disgorging an additional $161 million in ill-gotten gains. Alcoa also agreed to cooperate with further investigations and to continue implementing and maintaining a set of anti-bribery practices and procedures that reflect a "high-level commitment" to complying with the Foreign Corruption Practices Act and other applicable anti-corruption laws. As noted previously, the DOJ has publicly indicated that without Alcoa's cooperation with the investigation, it would have faced a much stiffer penalty.
Marubeni Corporation (March 19 2014)
Japanese trading company Marubeni pleaded guilty to one charge of conspiracy to violate the Foreign Corruption Practices Act and seven substantive Foreign Corruption Practices Act charges related to its efforts to secure a contract to manage a power supply development project (Tarahan Project) in Indonesia. Marubeni's agreement to pay a criminal fine of $88 million and implement a detailed Foreign Corruption Practices Act compliance programme resolved allegations that Marubeni executives and Connecticut-based executives of its French partner hired two consultants to bribe Indonesian officials, including officials at state-owned electricity company Perusahaan Listrik Negara.(7) The consultants worked under a contract that promised them a commission based on the value of the Tarahan Project contract awarded to Marubeni and its partners. In turn, the consultants agreed to use a portion of their commission payments to reward Indonesian officials for supporting Marubeni's bid.
The plea agreement indicates that the magnitude of the $88 million fine reflected:
"(1) the nature and seriousness of the offense; (2) [Marubeni's] failure to voluntarily disclose the conduct; (3) [Marubeni's] refusal to cooperate with the Department's investigation when given the opportunity to do so; (4) the lack of an effective compliance and ethics program at the time of the offense; (5) [Marubeni's] failure to properly remediate; and (6) [Marubeni's] history of prior criminal misconduct."
The prior criminal conduct referred to in the plea agreement likely related to allegations that Marubeni had previously bribed Nigerian officials. Marubeni was released from a two-year deferred prosecution agreement related to those allegations on February 26 2014, less than one month before Marubeni pleaded guilty to bribing Indonesian officials. In the Nigerian matter, Marubeni paid a criminal fine of $54.6 million and admitted to acting as an agent to bribe Nigerian officials on behalf of a consortium of engineering firms developing a liquefied natural gas facility on Bonny Island. The DOJ did not state whether Marubeni's actions surrounding the Tarahan Project violated the 2012 deferred prosecution agreement. However, it appears that the bribes paid to win the Tarahan Project that ended in 2009 pre-dated the deferred prosecution agreement executed on 14 January 2012.
Hewlett-Packard Company (April 9 2014)
Hewlett-Packard (HP) and its subsidiaries in Mexico, Poland and Russia agreed to pay $74.2 million to settle criminal Foreign Corruption Practices Act allegations. The Russian subsidiary, ZAO Hewlett-Packard AO (HP Russia), pleaded guilty to Foreign Corruption Practices Act bribery, books and records, and internal controls charges.
The Polish subsidiary, Hewlett-Packard Polska SP ZOO (HP Poland), entered a deferred prosecution agreement on Foreign Corruption Practices Act books and records and internal control charges. Finally, the Mexican subsidiary, Hewlett-Packard Mexico S de RL de CV (HP Mexico), entered a non-prosecution agreement to avoid potential Foreign Corruption Practices Act books and records and internal controls charges. HP also settled an SEC administrative proceeding alleging Foreign Corruption Practices Act books and records and internal controls violations, agreeing to pay $29 million in disgorgement and $5 million in pre-judgment interest to the SEC and the Internal Revenue Service. In sum, HP paid more than $108 million in criminal fines, disgorgement and interest.
Although HP agreed to one of the largest Foreign Corruption Practices Act settlements in total dollar terms, the criminal fines were actually lower than the sentencing guidelines suggested. For example, given HP Russia's acknowledged culpability, its calculated fine range per the US Federal Sentencing Guidelines was between $87 million and $174 million. Nevertheless, the parties agreed that a fine of approximately $57.8 million was appropriate given, among other things, HP's "extraordinary" cooperation and remediation.(8) This cooperation also resulted in no charges being brought against HP's US parent corporation and in an non-prosecution agreement for its Mexican subsidiary.
HP Russia pleaded guilty to conspiracy and substantive violations of the anti-bribery and accounting provisions of the Foreign Corruption Practices Act. The violations relate to HP Russia's effort to win a €35 million contract to upgrade the telecommunications infrastructure of the Office of the Prosecutor General of Russia (GPO). In order to secure the contract, executives at HP Russia conspired with co-conspirators and intermediaries to create a 'slush fund', which was used to bribe Russian officials responsible for overseeing the GPO project. Payments to Russian officials were routed through a web of shell companies and bank accounts and HP Russia executives kept two sets of books: a 'sanitised' version for dissemination to HP officers uninvolved in the scheme, and an encrypted spreadsheet detailing the bribe payments. HP Russia agreed to a criminal fine of more than $58 million and committed to cooperate with further investigations and implement a corporate compliance programme.
HP Poland reached a deferred prosecution agreement with the DOJ relating to violations of the Foreign Corruption Practices Act accounting provisions. The charges stemmed from payments made to the director of information and communications technology for Polish National Policy (KGP), who was responsible for overseeing KGP's technology contracts. Executives at HP Poland allegedly:
During the same time period, HP was awarded approximately $60 million in contracts with KGP. At least two of the contracts were 'single source' contracts that were not competitively bid. Under the terms of the deferred prosecution agreement, HP Poland acknowledged its culpability and agreed to cooperate with further investigations, implement a corporate compliance programme and pay a criminal fine of approximately $15.5 million.
HP and HP Mexico reached an non-prosecution agreement with the DOJ in which HP Mexico admitted to circumventing HP's internal controls to facilitate the bribery of officials at Petroleos Mexicanos (Pemex), Mexico's state-owned oil company. HP Mexico officials used an intermediary that was an approved HP channel partner to route 'influencer fee' payments to a consultant. The consultant in turn paid a Pemex official in an effort to win HP a contract to sell software to Pemex. As a part of the non-prosecution agreement, HP Mexico agreed to forfeit more than $2.5 million, the total net benefit that HP Mexico earned from the software contract.
Bio-Rad Laboratories Inc (November 3 2014)
Life sciences company Bio-Rad Laboratories Inc agreed to pay a total of $55 million to resolve DOJ and SEC investigations relating to payments made by its subsidiaries, through third parties, to foreign officials in Russia, Vietnam and Thailand. Bio-Rad entered into an non-prosecution agreement with the DOJ and agreed to pay a $14.4 million penalty to resolve allegations that it had falsified books and records and failed to implement adequate internal accounting controls. A parallel SEC administrative action was resolved and required Bio-Rad to pay $40.7 million in disgorgement and pre-judgment interest.
According to the facts admitted in the non-prosecution agreement, Bio-Rad's French subsidiary paid sham commissions to a sales agent in Russia, which purported to provide distribution services in connection with certain sales to the Russian government. These sham commission payments were recorded in the subsidiary's books and consolidated in the parent company's books. Thus, managers of the US parent company knowingly caused Bio-Rad to falsify its books and records. These US-based managers also failed to implement adequate controls that would have prevented the payment of above-market commissions for little or no service. The SEC's cease and desist order further indicates that Bio-Rad employees used intermediaries to funnel unlawful payments to Vietnamese and Thai government officials. In addition, Bio-Rad failed to uncover an existing bribery scheme in Thailand when it purchased a Thai company.
In addition to paying penalty, disgorgement and interest, Bio-Rad agreed to adopt compliance reforms and report to the DOJ about those reforms for two years. The DOJ's press release indicates that it entered into the non-prosecution agreement in large part because Bio-Rad self-disclosed the misconduct and fully cooperated with the DOJ investigation by making US and foreign employees available for interviews, voluntarily producing overseas documents and summarising the findings of its internal investigation.
Dallas Airmotive Inc (December 10 2014)
Dallas Airmotive Inc, a Texas-based provider of aircraft engine maintenance, entered into a deferred prosecution agreement with the DOJ and agreed to pay $14 million in criminal fines to resolve allegations that it bribed officials in Brazil, Peru and Argentina between 2008 and 2012. According to the information filed with the deferred prosecution agreement, bribes were conveyed through front companies affiliated with government officials, through third-party representatives and, in some cases, directly through gifts of paid vacations and other things of value. The information, which charged Dallas Airmotive with one count of conspiring to violate the Foreign Corruption Practices Act and one count of violating the Foreign Corruption Practices Act's anti-bribery provisions, relied heavily on email traffic between Airmotive sales representatives and government officials that discussed consulting arrangements and payments to third parties.
Avon Products Inc (December 17 2014)
Avon Products Inc and its China subsidiary (Avon China) resolved Foreign Corruption Practices Act allegations related to its efforts to secure a direct selling licence in China. According to the criminal information, between 2004 and 2008 China paid $8 million to Chinese officials in cash, gifts, travel, and entertainment. Avon allegedly was informed of the possible Foreign Corruption Practices Act violations by its internal audit group in 2005. However, it did not immediately take action to put an end to such payments. Instead, executives insisted that the audit reports be sanitised to remove discussion of the payments to China officials. Avon China pleaded guilty to Foreign Corruption Practices Act violations and Avon entered an 18-month deferred prosecution agreement. Avon China agreed to pay a criminal fine of $67.6 million.
The Avon deferred prosecution agreement noted that since its internal investigation began in 2008, the companies' efforts to enhance compliance have been extensive. The deferred prosecution agreement set forth a criminal fine of $67.6 million, but deducted the fine in the same amount paid by Avon China. The deferred prosecution agreement also required Avon to retain an independent compliance monitor and make periodic reports to the DOJ.
Avon also settled a parallel SEC investigation alleging violations of the Foreign Corruption Practices Act internal controls and books and records provisions. Avon agreed to disgorge approximately $67.36 million in profits and interest. Avon was also required to retain an independent compliance monitor for 18 months, followed by another 18-month period of self-reporting on compliance matters.
Alstom (December 22 2014)
Alstom, a Paris-based energy and transportation leader, and one of its subsidiaries pleaded guilty to charges relating to the bribery of officials in Indonesia, Saudi Arabia, Egypt and the Bahamas to win power contracts. The DOJ alleged that Alstom paid more than $75 million to secure $4 billion in projects around the world, with a profit to the company of approximately $300 million. The company will pay $772 million – the biggest criminal fine ever levied for Foreign Corruption Practices Act offences and the second biggest Foreign Corruption Practices Act enforcement action overall – to settle the charges.
The DOJ charged the company with violating the Foreign Corruption Practices Act by falsifying its books and records and failing to implement adequate internal controls. Alstom admitted its criminal conduct in two-count criminal information in federal court in Connecticut. The final sentencing hearing is scheduled for June 2015.
In addition, Alstom Network Schweiz AG, a Swiss subsidiary, pleaded guilty to a criminal information charging it with conspiracy to violate the anti-bribery provisions of the Foreign Corruption Practices Act. Two US subsidiaries – Alstom Power Inc and Alstom Grid Inc – entered into deferred prosecution agreements with the DOJ, admitting that they conspired to violate the anti-bribery provisions of the Foreign Corruption Practices Act.
Forgoing the courts, the SEC increasingly relied on administrative proceedings in 2014 to enforce the Foreign Corruption Practices Act. This shift in strategy tracks an overall expanded reliance on administrative proceedings at the SEC as a result of increased authority under the 2010 Dodd-Frank amendment to the Securities and Exchange Act of 1934. That amendment enables the SEC to collect civil penalties through administrative proceedings. In 2014 all eight SEC corporate enforcement actions (the five summarised in this section, along with the SEC proceedings that paralleled the DOJ investigations of Alcoa, HP and Bio-Rad discussed above) were resolved using the SEC's administrative process rather than a civil complaint. This trend is noteworthy because resolution of an administrative proceeding does not require judicial approval, an area that has caused the SEC some grief in the past.
Smith & Wesson (July 28 2014)
The SEC settled allegations that Smith & Wesson had violated the anti-bribery, books and records, and internal controls provisions of the Foreign Corruption Practices Act. The SEC's cease and desist order, issued pursuant to the settlement, found that between 2007 and 2010, Smith & Wesson had authorised its agents to provide gift guns and cash payments to officials in Pakistan, Indonesia, Turkey and Nepal to induce officials in those countries to award sales contracts to the company. The SEC noted that Smith & Wesson took prompt action to remediate its Foreign Corruption Practices Act issues, including conducting internal investigations, terminating its entire international sales staff and terminating pending international sales. Smith & Wesson agreed to pay over $2 million in civil penalties, disgorgement and pre-judgment interest.
Layne Christensen Company (October 27 2014)
The SEC settled allegations that subsidiaries of Layne Christensen, a global water management, construction and drilling company, had violated the anti-bribery, record-keeping and internal controls provisions of the Foreign Corruption Practices Act by making more than $1 million in payments to officials in Mali, Guinea, Burkina Faso, Tanzania and the Democratic Republic of Congo in order to receive favourable tax treatment, customs clearance for drilling equipment, work permits and relief from penalties for delinquent tax payments, customs duties and failure to register immigrant workers. Layne Christensen agreed to pay disgorgement of $3.9 million and $858,720 in pre-judgment interest. The settlement required a penalty payment of only $375,000, reflecting Layne's self-reporting, remediation and significant cooperation with the SEC's investigation.
Employees of FLIR Systems Inc (November 17 2014)
Two former employees, Stephen Timms and Yasser Ramahi, in the Dubai office of US-based defence contractor FLIR Systems Inc were penalised for allegedly violating the anti-bribery and record-keeping provisions of the Foreign Corruption Practices Act. The allegations centred on their efforts to sell $28 million worth of thermal binoculars and security cameras to the Saudi government in 2008. The two, who were the primary sales employees responsible for the Saudi contract, allegedly provided five Saudi officials with luxury watches worth more than $7,000 in total. They also arranged for two officials to embark on a 'world tour' with stops in Casablanca, Paris, Dubai, Beirut and New York City en route to a visit to FLIR's Boston facilities. FLIR paid for 20 nights of accommodation, despite the fact that there was no business purpose for any of the stops before the Boston visit. When these expenses were questioned by FLIR, Timms and Ramahi claimed the expenses were mistakenly charged to FLIR and allegedly directed a third party to provide false information supporting their assertion. Timms and Ramahi settled administrative proceedings with the SEC and agreed to pay $50,000 and $20,000 in civil penalties, respectively.
Bruker Corp (December 15 2014)
Bruker Corporation, a Massachusetts-based maker of scientific instruments, agreed to pay approximately $2.4 million to settle an SEC administrative procedure alleging that the company violated the internal controls and books and records provisions of the Foreign Corruption Practices Act. The SEC alleged that Bruker's lax internal controls allowed employees in its China office to enter into sham 'collaboration agreements' with Chinese government officials. These agreements made payments to Chinese government officials contingent on state-owned entities providing research on Bruker products or using Bruker products in demonstration laboratories. In addition, Bruker allegedly reimbursed Chinese officials for European and US shopping trips that had no business purpose. The SEC noted that Bruker's self-reporting and cooperation affected the settlement, which consisted of more than $2 million in disgorgement and interest and a $375,000 penalty.
As in 2013, the DOJ continues to charge individuals – US and foreign residents alike – aggressively with Foreign Corruption Practices Act violations. Moreover, despite the setbacks in the Gunshow cases of a couple years ago, the DOJ continues to rely on some old-school law enforcement techniques in pursuing individuals. In September Principal Deputy Assistant Attorney General for the Criminal Division Miller publicly disclosed that the 2013 case against BizJet executives relied in part on the cooperation of a BizJet employee who wore a body wire and recorded others scheming to bribe Mexican and Panamanian officials. Miller said: "Such proactive investigative tools — previously used primarily in organized crime and drug cases — have become a staple in our white collar investigations. I can promise you we will continue to use them."(9) This aggressive pursuit of culpable individuals resulted in the following 2014 actions.
Indian titanium mining bribery and racketeering scheme (2013 indictment unsealed April 2 2014)
In April 2014 the DOJ unsealed an indictment of five foreign defendants charged with conspiracy to violate the Foreign Corruption Practices Act in relation to a scheme to bribe Indian state and central government officials. All of the defendants are foreign nationals and face one count each of racketeering conspiracy and money-laundering conspiracy, two counts of interstate travel in aid of racketeering and one count of conspiracy to violate the Foreign Corruption Practices Act. The DOJ based its Foreign Corruption Practices Act charges on allegations that the conspirators "utiliz[ed] United States financial institutions to engage in the international transmission of millions of dollars for the purpose of bribing Indian public officials" and "us[ed] the facilities of interstate and foreign commerce to coordinate, plan, facilitate, and promote the bribery of Indian public officials". The defendants allegedly conspired to bribe Indian officials in order to secure a licence to mine ilmenite, which can be processed into titanium, in the eastern coastal Indian state of Andhra Pradesh. This mining was expected to generate more than $500 million in titanium sales annually, including sales to an unnamed US-based corporation (reported to be Boeing Co).(10)
The indictment accuses Dmitri Firtash, a prominent Ukrainian businessman with ties to the Russian natural gas industry, of orchestrating the complex bribery scheme. Firtash, along with others, allegedly arranged bribery payments to Indian officials totalling more than $18.5 million.(11) The indictment seeks to compel the defendants to jointly and severally forfeit approximately $10.6 million and also seeks to compel Firtash to forfeit his holdings in Group DF, a European energy and commodities conglomerate, and related entities. Firtash was arrested in March 2014 in Vienna, Austria and posted €125 million bail in order to gain his release. The remaining defendants remain at large.
Additional employees of Direct Access Partners indicted in bond trading kickback scheme (April 10 2014)
The DOJ filed charges against a number of employees of Direct Access Partners LLC in 2013. Two additional employees of the same broker-dealer were indicted in April and pleaded guilty in December. Benito Chinea, chief executive, and Joseph DeMeneses, managing partner, were indicted on 15 counts of conspiracy and substantive violations of the Foreign Corruption Practices Act, the Travel Act and the federal money-laundering statute. They were also charged with conspiring to obstruct justice for allegedly deleting emails relating to the scheme. The pair pleaded guilty to conspiracy to violate the Foreign Corruption Practices Act and to violate the Travel Act and are set to be sentenced in March 2015.
The alleged scheme involved paying kickbacks to Maria De Los Angeles Gonzalez De Hernandez,(12) a senior official in Venezuela's state economic bank, Banco de Desarrollo Económico y Social de Venezuela (BANDES). Gonzalez directed BANDES's bond buying and selling business to Direct Access's global markets group, generating more than $60 million of trading commissions for Direct Access and the defendants. The defendants and their co-conspirators used a portion of these commissions to fund kickbacks to Gonzalez.
Chinea and DeMeneses were added as defendants to the SEC's non-Foreign Corruption Practices Act fraud claim, which was presumably filed as such in 2013 because the SEC has Foreign Corruption Practices Act jurisdiction over issuers, but not broker-dealers. The SEC action seeks disgorgement of ill-gotten gains plus interest. The amended SEC complaint also contains new allegations of a kickback scheme allegedly used to bribe an official at a separate Venezuelan state-owned bank, Banfoandes Banco Universal CA.
PetroTiger executives (criminal charges filed November 8 2013 and unsealed January 6 2014)
The DOJ brought charges of conspiracy and substantive Foreign Corruption Practices Act anti-bribery violations against three executives of PetroTiger. Former co-chief executive officers Joseph Sigelman and Knut Hammarskjold and former general counsel Gregory Weisman allegedly conspired to pay bribes to a Colombian official in exchange for assistance in securing an oil services contract worth approximately $39 million. The three are also alleged to have attempted to arrange a kickback from officials at a company that PetroTiger purchased after Sigelman and Hammarskjold arranged for the board of directors to overpay for the purchase.
Hammarskjold and Weisman pleaded guilty to conspiring to violate both the Foreign Corruption Practices Act and the federal wire fraud statute. Sigelman did not enter a plea and was indicted in May 2014. Sigelman was charged with:
The DOJ is seeking to compel Seligman to forfeit proceeds and property related to the offences. Sigelman's trial commenced in January 2015 in the US District Court for the District of New Jersey.
Power generation company executive indicted (February 10 2014)
The DOJ has also started to show an interest in commercial bribery, even without the involvement of foreign officials. The DOJ indicted Asem Elgawhary, former executive of Bechtel Corporation and general manager of Power Generation Engineering and Services Company (PGESCo), a joint venture between Bechtel Corporation and the state-owned Egyptian Electricity Holding Company (EEHC), on charges of mail and wire fraud as well as money-laundering and tax violations.
The indictment alleges that Elgawhary solicited and received more than $5 million in kickbacks from three power companies while serving as general manager of PGESCo, which manages the bidding process for EEHC. In exchange, Elgawhary allegedly helped the companies to secure more than $2 billion in contracts with EEHC. The indictment does not allege that any other officials were involved in the scheme and does not assert any violations of the Foreign Corruption Practices Act because Elgawhary was not a government official. Elgawhary pleaded guilty to a single count of mail fraud, conspiracy to commit money laundering, and obstruction and interference with the administration of tax laws on December 5 2014.
This year will likely see heightened scrutiny of hiring practices by the big banks. The SEC is reportedly investigating the hiring practices of JPMorgan Chase & Co, Goldman Sachs, Citigroup, Credit Suisse and UBS AG to determine whether they have violated the Foreign Corruption Practices Act by hiring relatives of government officials.(13) In 2013, the SEC reportedly began inquiring whether JPMorgan hired children of Chinese officials to bolster its Chinese business.(14)
This is not the first time that Foreign Corruption Practices Act enforcers have asserted that jobs may be a 'thing of value' under the anti-bribery provision of the Foreign Corruption Practices Act. In 2011 Tyson Foods settled Foreign Corruption Practices Act allegations that it put wives of Mexican veterinarians responsible for certifying Tyson products for export on the corporate payroll with corrupt intent. In that case, the wives were alleged not to have performed any services for Tyson.(15) The broad investigation of banks' hiring activities could have far-reaching implications for the hiring practices of multinational corporations. While that investigation unfolds, companies should assure that any relative of a foreign official who is hired:
As noted above, the trial of former PetroTiger co-chief executive officer Sigelman commenced in January 2015 in the federal court. This is one of the first individual Foreign Corruption Practices Act trials since the DOJ abandoned its cases against numerous 'Africa Sting' defendants in 2012. The government's Africa Sting cases suffered from heavy reliance on an informant whom the jury found not to be credible. The government's ability to build a case against Sigelman without running into similar problems will be closely watched. In addition, the charges against Sigelman are premised on a broad interpretation of 'foreign official' that includes officials of state-owned or state-controlled entities. Specifically, the Sigelman action alleges that Ecopetrol is "the state-owned and state-controlled petroleum company in Colombia". The outcome of these charges may, along with the Esquenazi case discussed above, shape the parameters of Foreign Corruption Practices Act culpability for the future.
In her October 2014 speech at Duke University School of Law, Caldwell offered a vigorous defence of the Foreign Corruption Practices Act, suggesting that the DOJ's enforcement of the statute has not remotely reached its peak.
Caldwell characterised the DOJ's enforcement of the Foreign Corruption Practices Act as a broader foreign policy tool, rather than merely a device meant to punish and deter corporations that engage in anti-competitive overseas conduct. However, this foreign policy rationale for Foreign Corruption Practices Act enforcement is not necessarily new – it is one about which the DOJ rarely speaks publicly and thus has been deemed by one Foreign Corruption Practices Act commentator as the 'Caldwell doctrine'.
If the DOJ prioritises the United States' broader foreign policy goals in deciding how the agency will spend its Foreign Corruption Practices Act resources and prosecute violations, it could mean:
Caldwell's recent remarks can be used not only to predict the coming trends of Foreign Corruption Practices Act enforcement, but also to deduce ways in which corporations can stay ahead of the Foreign Corruption Practices Act enforcement curve. The only certainty is that there seem to be no foreseeable limits to how broadly US authorities will interpret their enforcement power – whether in their role as corporate regulators, protectors of foreign policy or stewards of a fair and competitive global marketplace.
For further information on this topic please contact Stuart Altman or Natalie Sinicrope at Hogan Lovells US LLP by telephone (+1 202 637 5600) or email (email@example.com or firstname.lastname@example.org).The Hogan Lovells US LLP website can be accessed at www.hoganlovells.com.
(1) Remarks at Duke University School of Law (October 23 2014), available at www.justice.gov/opa/speech/assistant-attorney-general-leslie-r-caldwell-speaks-duke-university-school-law.
(2) Remarks at 22nd Annual Ethics and Compliance Conference (October 1 2014), available at www.justice.gov/opa/speech/remarks-assistant-attorney-general-criminal-division-leslie-r-caldwell-22nd-annual-ethics.
(3) Remarks at Global Investigation Review Programme (September 17 2014), available at www.justice.gov/criminal/pr/speeches/2014/crm-speech-1409171.html.
(6) Remarks at 22nd Annual Ethics and Compliance Conference (October 1 2014), www.justice.gov/opa/speech/remarks-assistant-attorney-general-criminal-division-leslie-r-caldwell-22nd-annual-ethics.
(7) In 2013 four US citizens employed by one of Marubeni's partners, a US subsidiary of French power company Alstom SA, were indicted on similar charges. Two of the defendants, Frederic Pierucci and David Rothschild, pleaded guilty to the charges; another two defendants, William Pompon and Lawrence Hoskins, have not entered pleas.
(9) Remarks at the Global Investigation Review Programme (September 17 2014), www.justice.gov/criminal/pr/speeches/2014/crm-speech-1409171.html.
(10) Firtash Indictment, ¶ 1-e; Irina Reznik and Henry Meyer, "Billionaire Sought by U.S. Holds Key to Putin Gas, Bloomberg" (March 24 2014), available at www.bloomberg.com/news/2014-03-23/billionaire-sought-by-u-s-holds-key-to-putin-gas-cash.html.
(12) Gonzalez as well as Direct Access employees Ernesto Lujan, Jose Alejandro Hurtado and Tomas Alberto Clarke Bethancourt pleaded guilty in 2013 to conspiracy and substantive charges relating to their roles in the kickback scheme described above.
(13) Edna Curran and Jean Eaglesham, "Regulators Step Up Probe Into Bank Hiring Overseas", Wall Street Journal (May 6 2014), http://online.wsj.com/articles/SB10001424052702303417104579546190553220338#printMode.
(14) Joe Palazzolo, Christopher M Matthews and Serena NG, "Nepotism: Is It a Crime?", Wall Street Journal (August 19 2013), http://online.wsj.com/articles/SB10001424127887323423804579023273864417160.
(15) Press release, US Department of Justice, "Tyson Foods Inc. Agrees to Pay US$4 Million Criminal Penalty to Resolve Foreign Bribery Allegations" (February 10 2011), available at www.justice.gov/opa/pr/tyson-foods-inc-agrees-pay-4-million-criminal-penalty-resolve-foreign-bribery-allegations.
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Stuart M Altman