Mooncakes May Mean Jail Time in Hong Kong Reply

We have written before about these troublesome cookies, which aren’t always quite as benign as they seem. A longstanding tradition around the Autumn Festival, we have found them priced in the hundreds of dollars with exotic fillings and, in one case, offered in elaborate packaging with engraved bars of gold on either side. Now, it seems, the Hong Kong authorities have mooncakes on their radar. Yuet Ming Tham, in DLA Piper’s Asia Regulatory & Litigation practice group in Hong Kong provides this update.

“In Hong Kong, a March court case caused sleepless nights for many a compliance officer in the territory, when Hong Kong’s powerful anti-graft agency, the Independent Commission Against Corruption, charged a construction company director for giving mooncakes to a police-station.

Every September and October, the Mid-Autumn Festival is celebrated by millions of Chinese people across Asia and in the weeks leading up to the Festival, thousands upon thousands of mooncakes, a pastry synonymous with the festival, are presented as customary gifts to business associates. In this case, the company director was sentenced to two months’ imprisonment for bribery, after he pleaded guilty to presenting 15 boxes of mooncakes to officers of a traffic-police team. It made no difference that the police officers promptly returned the 15 boxes uneatened the next day.

In Hong Kong, it is an offence to offer any benefit to an employee of the government or a public body where there are “dealings of any kind”, even if the dealings are not ongoing, but only anticipated. In this case, the moon cakes were presented eleven days before the Mid-Autumn Festival to the traffic team from which the company director had obtained a series of roadwork approvals. The Hong Kong court rejected the defendant’s plea that he had not realised it was an offence and that what he did was part of Chinese custom.

The anti-bribery provision in question is a draconian one. Unlike the FCPA, there is no need for the prosecution to show any corrupt intent on the part of the defendant. This provision presumes corrupt intent if: (a) there are dealings and (b) a benefit or gift is presented. The only way to escape conviction is for the defendant to show that there was lawful authority or a reasonable excuse, (for example, if the government employee happened to be the defendant’s good friend of many years preceding any “dealings”, mooncakes have always been exchanged and a reasonable number of moon cakes was given). This provision applies where a benefit and gift is offered not just to a government employee, but also to any employee of a public body such as Ocean Park, a famous local tourist attraction, or the Hong Kong Tourism Board. Finally, there is no minimum value involved, so that offering a piece of mooncake would have been as much an offence as 100 boxes of mooncakes. Harsh as it sounds, similar statutory presumptions can be found in the anti-bribery statutes of Singapore and Malaysia.

The irony of the case is that lunches, dinners and drinks (and entertainment provided during these meals) are exempt from the Hong Kong anti-bribery provisions. So, technically, if our hapless company director had instead of presenting the mooncakes as gifts, taken public servants out to a fabulous meal where they could have eaten all the mooncakes they desired in one sitting, this may have been alright.

This case is a good example of how corporations need to be aware of not just the FCPA, but also the pitfalls that come with not paying enough attention to local laws. Of course, an argument can be made that Hong Kong does not recognise the concept of corporate liability, unlike the FCPA. However, it would be a brave compliance or legal officer who would be willing to allow employees to violate such a law in Hong Kong, and not worry that there may be FCPA implications somehow for the company, whether under the FCPA’s antibribery provisions or the accounting provisions.”

TRACE Benchmarking Survey: Facilitation Payments Reply

In the recent TRACE benchmarking survey on facilitating payments, more than 45 percent of respondents said that if such payments were prohibited everywhere, their jobs would be easier, and another 48 percent said such a prohibition would not affect their jobs at all. Fewer than 7 percent of those responding said their jobs would be more difficult if facilitation payments were banned. Our finding that 93 percent of respondents’ jobs would be easier or unaffected if facilitation payments were banned confirms the growing recognition worldwide that what grease payments tend to facilitate is more demands and, in many cases, they make doing business even more difficult.

Seventy-six percent of respondents stated that they believe it is possible to do business successfully without making facilitation payments if there is sufficient management support and careful planning.  Buttressing this, 71% believe the employees of their company either never, or only rarely, make facilitation payments, regardless of whether facilitation payments are permitted under their corporate policies.  When respondents were asked to gauge the level of risk facilitation payments pose to a company with respect to books and records violations or violations of other internal accounting controls, 58% assess such risk level as medium to high.   Asked to assess how likely their company is to face a governmental investigation or prosecution related to facilitation payments, just over half believe they are moderately or highly likely to face such an investigation in the country where they are headquartered, and 40% believe they are likely to be investigated or prosecuted in the country where the payment is made. 

To see the full report, please visit the TRACE website.

The Water In Which We All Swim Reply

As a follow-on to our September 17, 2009 post – The Latest FCPA Forecast From U.S. Regulators – Anne Richardson of TRACE shares some of the comments of Edward Cooper, the Program Manager for the International Corruption Unit at the FBI and a retired Special Agent. Mr. Cooper appeared on a government enforcement panel with Mark Mendelsohn of the DOJ and Cheryl Scarboro of the SEC at a conference in Washington last month.

“Mr. Cooper began his comments with an allusion to the 1974 film “Chinatown,” citing the conversation between Noah Cross (played by John Huston) and J.J. “Jake” Gittes (played by Jack Nicholson) over a breakfast of broiled fish at the Albacore Club. Trying to size up the police officer investigating the murder of his daughter’s husband, Cross asks Gittes whether the officer is a capable man, to which Gittes responds: “Very.” Cross then asks if the officer is honest, to which Gittes replies: “Far as it goes – of course he has to swim in the same water we all do.

While we can debate whether or not Jake Gittes is cinema’s greatest postmodern hero, Mr. Cooper’s allusion in an FCPA conference is apt. What is not open to debate is the fact that today bribery is high on the agendas of governments, financial institutions and companies around the world. U.S. and international enforcement of foreign bribery laws is on the rise, as is the focus on corruption as the pivotal obstacle to economic development and political stabilization across the globe, from Afghanistan to Zimbabwe. While we may all swim in the same water, that water is shifting.

Public corruption in general is the highest priority of the Criminal Investigative Division at the FBI, according to Mr. Cooper. He described public corruption cases as the most sensitive, the most political, the longest running, and the hardest to provide. One must, after all, start by proving whether a crime was even committed. These difficulties are only amplified when the conduct occurs abroad.

Unlike most FBI criminal investigations, which are coordinated at the field office level, all FCPA investigations are initiated in Washington, DC and FBI investigators work closely with DOJ prosecutors throughout an investigation. Mr. Cooper recalled that his special agent training in 1980 included not a single reference to the FCPA. The water is different today. Last year, the FBI established a dedicated team of special agents in its Washington Field Office to work exclusively on FCPA cases and these agents undergo a specialized FCPA training course. The FBI has also created an International Contract Corruption Task Force, based in Washington, to focus on contract corruption and procurement fraud (particularly in Iraq, Kuwait, and Afghanistan).

So will this dedication of FBI resources mean that more FCPA violations will come to light through the use of sophisticated FBI investigative techniques, rather than through voluntary disclosures? Not yet, it appears, though we may be moving in that direction. Mr. Cooper estimated that about one-third of open FCPA cases were the result of companies’ self-reporting. The remaining two-thirds come from a variety of sources, including (i) informants; (ii) whistleblowers; (iii) disgruntled former employees; (iv) competitors; (v) other investigations; (vi) news media; and (vii) referrals from other U.S. and international agencies. He emphasized that cooperators in existing investigations are a very important source of information, as they are usually extremely motivated.

With newly committed resources and an energized FBI, there is little doubt about which direction FCPA enforcement is heading. The water in which we all swim is becoming less hospitable to the bribe-payers.”

Role of Federal Sentencing Guidelines in FCPA Cases Reply

Given the tremendous fines imposed upon Siemens AG and Kellogg Brown & Root LLC (“KBR”) in the past 10 months, many have asked how the DOJ calculates criminal fines in FCPA cases and how statutory penalties and the United States Sentencing Guidelines (“U.S.S.G.”) interact in that calculation. We turned to Billy Jacobson, formerly at Justice and now Chief Compliance Officer at Weatherford, for an explanation:

“Despite two separate statutory schemes and the Sentencing Guidelines (all explained below), it is important to realize that the DOJ has tremendous discretion in this area and its decisions will, almost always, boil down to three relatively simple criteria, the first objective and the latter two subjective and dependant on the DOJ’s discretion and judgment: (1) how much the company profited from its corruption; (2) the extent of the company’s cooperation with the government’s investigation; and (3) the quality of the company’s remediation efforts.

The FCPA itself contains penalty provisions: violations of the anti-bribery provisions carry penalties of up to $2 million per violation and accounting provision violations carry fines of up to $25 million. Another statute, however, provides that the fines can be even higher. The Alternative Fines Act—as its name suggests—provides an alternative to most criminal fine thresholds and means that companies may be fined “the greater of twice the gross gain or twice the gross loss [to a person other than the company].” 18 U.S.C § 3571(d); see 18 U.S.C. § 3571(c)(2).

Despite these statutory limits, the Sentencing Guidelines and DOJ’s decision about how those guidelines should be applied usually dictate the fine a company will pay. This is true in cases of a corporate conviction (which usually occur in the context of a plea agreement) and also in cases of deferred prosecution agreements. Both the KBR and Siemens plea agreements provide helpful illustrations of how this works.

In KBR’s plea agreement, the DOJ and the company explained the Sentencing Guideline calculation to which they agreed. First, the parties agreed that “the value of the benefit KBR received in return for the unlawful payments” was $235 million. This amount was used as the “Base Fine.” In most FCPA cases, the Base Fine will be the profit earned as a result of the corrupt conduct. Next, under the theory that to be truly penalized a company must be forced to pay more than simply the amount if profited from the illicit conduct, a “culpability score” must be determined. That score leads to a multiplier that will be applied to the base fine to arrive at a final fine range. Several factors go into determining the culpability score, including the size of the company, whether high-level officials of the company were involved in the conduct and the extent of cooperation by the company. The KBR culpability score resulted in a multiplier range of 1.6 to 3.2. By doing math simple enough even for lawyers, the parties arrived at a fine range between $376.8 and $753.6 million. The final, agreed-upon criminal fine of $402 million fell squarely within this range. (KBR plea agreement)

In the Siemens case, however, DOJ agreed to a fine amount well below the Guidelines range which would have been between $1.35 and $2.7 billion. (The DOJ’s Sentencing Memorandum explains in detail how the parties arrived at the figure, in part, by walking step-by-step through the Sentencing Guidelines). Instead, the DOJ agreed to a $450 million fine. It’s hard to think of a $450 million fine as getting off lightly, but that is at least arguably what happened in this case. In its Sentencing Memorandum, the DOJ explained that it was agreeing to such a large departure from the sentencing range in recognition of several factors, including: Siemens’ assistance in investigations of itself, individuals and other organizations; its payments of penalties in other proceedings; its compliance and remediation efforts; and its “extraordinary rehabilitation.” The DOJ further explained that a downward departure from the Sentencing Guidelines range was warranted, under 18 U.S.C. § 3553(b)(1), because the “mitigating circumstances [were] ‘of a kind, or to a degree, not adequately taken into consideration by the United States Sentencing Commission.’” (Siemens’ sentencing memo)

The discussion above makes obvious that companies will be treated very differently by DOJ depending on their level of cooperation and remediation. While the DOJ has not to my knowledge specifically said this, it can be inferred that prosecutors felt Siemens’ cooperation and remediation was superior to that of KBR. Hence, Siemens was allowed to pay a fine well below the Guidelines range while KBR was not. As explained above, other factors were also at play, but they all lead to the inescapable conclusion that despite two clear statutory schemes and the very detailed Sentencing Guidelines, much in this area depends on the DOJ’s discretion and judgment.”