TRACE Compendium Update: Another Major Gifts & Hospitality Case Reply

In what resembles a sequel to the oft-quoted Lucent FCPA enforcement matter of 2007, on December 31, 2009 the DOJ and SEC announced settlements with UTStarcom, Inc., another U.S. telecommunications company, for violating the FCPA in connection with improper travel provided to employees of Chinese government-controlled telecommunications companies (as well as other improper gifts and benefits provided to Chinese, Thai and Mongolian telecommunications officials). Through its Chinese subsidiary, UTStarcom spent nearly $7 million on approximately 225 overseas leisure trips for Chinese officials between 2002 and 2007 in order to obtain and retain municipal and provincial telecommunications contracts, with China constituting the company’s largest sales market during the period. While purportedly for customer “training,” the trips – to such tourist destinations as Hawaii, Las Vegas and New York City – were primarily or exclusively for leisure and sightseeing purposes.

UTStarcom was also alleged to have (i) improperly paid for over $4 million in expenses for Chinese officials to attend executive training programs at U.S. universities between 2002 and 2004; (ii) provided fictitious U.S. employment salaries, benefits and permanent U.S. residency sponsorships to at least three Chinese and Thai officials between 2001 and 2005; (iii) paid over $23,000 in improper gifts and entertainment expenses for a government customer in Thailand in 2004; (iv) made $1.5 million in questionable payments to a consultant in Mongolia in 2005; and (v) made $200,000 in questionable payments to a consultant in China in 2007.

UTStarcom voluntarily disclosed the conduct to the U.S. authorities. In settling the matter, UTStarcom entered into a non-prosecution agreement with the DOJ and agreed to pay a $1.5 million fine. In the related SEC action, the company agreed, without admitting or denying the allegations, to the entry of a permanent injunction and a $1.5 million civil penalty. Notably, the SEC settlement also obligates UTStarcom to submit annual FCPA compliance reports and certifications for a four year period.

For more information on this and other international anti-bribery enforcement actions – in the gifts and hospitality genre and beyond – please visit the TRACE Compendium.

The Anti-Bribery World in 2009 Reply

Billy Jacobson, VP, Co-General Counsel and Chief Compliance Officer at Weatherford International, contributed this year-in-review piece highlighting the five most significant developments in the anti-bribery world this year. We thank Billy and wish everyone a happy, peaceful and rewarding 2010.

No. 1: Individual Prosecutions

By a considerable margin, the top anti-corruption story of 2009 is the U.S. DOJ’s focus on individual prosecutions. I’ve been calling 2009, in the parlance of the United Nations, the “Year of the Individual.” The first FCPA trials since 2004 highlighted this trend with all three trials this year resulting in convictions on FCPA charges for the four indictees: William Jefferson, Frederic Bourke and Gerald and Patricia Green. And, 4 others were convicted of FCPA charges this year via plea agreement. In addition, by my count (with the help of the TRACE Compendium), an astounding 20 individuals were indicted in 2009.

Corporate compliance officers know that nothing gets their business-unit colleagues’ attention quicker than the sight of executives behind bars. The DOJ and the FBI know this as well and have provided compliance professionals with plenty of cautionary tales this year.

No. 2: The UK Wakes Up

Beginning in the Fall of 2008, the UK began to awaken from its anti-corruption slumber by bringing cases against Balfour Beatty and employees of CBRN. In 2009, the positive trend continued with cases brought against Aon and Johnson & Mabey by the UK Financial Services Agency and the Serious Fraud Office, respectively.

More important than any one case, however, is the anti-bribery bill introduced to Parliament in early-2009. This legislation aims to consolidate and strengthen the UK’s current and oft-criticized panoply of anti-bribery laws. One of the more interesting features of the bill pending before Parliament is the imposition of corporate criminal liability only in the face of negligence by a corporation. Should this bill pass into law, UK companies would be daft (as they say) to fail to implement best-in-class compliance programs as such programs could well get the corporates (as they also say) a free pass from criminal liability.

In light of such progress, it is almost unfair to mention the lack of a resolution to the BAE case on either side of the Atlantic. Therefore, I won’t mention it. Not a word.

No. 3: Control Person Liability

With its case against officers of Nature’s Sunshine Products, Inc. (NSP), the SEC broke a bit of new ground by charging “control person” liability for books and records and internal controls violations. Section 20(a) of the Securities Exchange Act of 1934 essentially provides that any person who controls another that violates the act may be jointly and severally liable along with the violator. The SEC alleged that two NSP officers had the responsibility to oversee the conduct at issue, including the books and records and internal controls of the business and so held the officers liable under Section 20(a) without alleging that the officers themselves had personal knowledge of the FCPA violations.

It remains to be seen whether the SEC will use this theory in future cases and if so, how often, but the potential reach of 20(a) liability quite significant and is yet another wake-up call to any companies that have not yet instituted robust internal controls. Additionally, anytime one of the enforcement agencies gets at all creative in imposing liability upon corporate officers it is worth noting.

No. 4: The Munich Prosecutors’ Christmas Special

In December 2008, the Munich Public Prosecutors Office and the DOJ brought us the landmark Siemens prosecution. Any thoughts that the good folks in Munich would rest on their laurels were dispelled just a few weeks ago with their prosecution of the MAN Group for corrupt activities involving more than €50M in suspicious payments in several countries. The MAN Group was fined more than €150M and paid an additional €20M to settle unpaid taxes.

The Germans — or at least those in Munich – have now made it clear that they are taking their corporate corruption laws seriously. And so, the pendulum continues to swing in the right direction with countries other than the U.S. continuing to crack down on foreign bribery. It will likely be some time before any country can match the record of the U.S. in this area, but there is more reason than ever to believe that the mythical “level playing field” for U.S businesses will one day be a reality.

No. 5: The OECD’s Statement on Facilitating Payments

In 2009, the OECD’s Working Group on Bribery considered amending the OECD’s anti-corruption convention to eliminate the allowance of facilitating payments. The odds were against the working group recommending that the convention be altered to prohibit such payments, but the fact that the group was giving the issue consideration and providing a forum for such discussion was, in and of itself, progress. In the end, the OECD recognized the “corrosive effect of small facilitation payments” while recommending that member countries “encourage companies to prohibit or discourage” their use.

Many companies have begun to ban facilitating payments within their own organizations and are, somewhat paradoxically, ahead of the U.S. government and the OECD on this issue. While the OECD working group did not correct this situation, it did make an important statement about the corrosive effects of such payments. The working group’s recommendation makes my list of Top 5 for 2009 not so much for the impact it had this year, but because of the effect I think it will have in years to come as the movement to ban facilitating payments grows stronger.

Good Cop / Bad Cop Reply

If you’re traveling in Chile and encounter a police officer don’t try to bribe him to get out of a ticket. Unlike much of the rest of the world, Chile reportedly has a squeaky clean police force that will arrest those who offer to “tip” or “thank” them in exchange for favorable treatment. This warning was given to Carolyn Lindsey of TRACE by almost everyone she encountered there last week, and was even mentioned in the Frommer’s guide book, which says “never, ever, think about bribing a police officer – you’ll be taken straight to the comisaria (police station).”

Why is this noteworthy? Shouldn’t the citizens of every country expect that their police force doesn’t accept bribes or extort victims? Unfortunately, at least some of the police in most countries look for opportunities to line their own pockets. The results of BRIBEline, TRACE’s anonymous online reporting mechanism for bribe demands, back this up. In a number of countries, most of the reports to BRIBEline implicate the police force. Our reports on Russia and India revealed that over 30 percent of bribe demands reported were demanded by police officers. The numbers for China and Ukraine show that 11 percent and 18 percent of bribe demands, respectively, are made by the police. In Mexico, a staggering 46 percent of the BRIBEline reports involve police officers. TRACE has received reports on police in the United States asking for bribes, too, but has not received a single report on the police in Chile.

A strong, honest police force helps maintain the rule of law and ensures the safety, security and confidence of all citizens. Too often it’s the police in an area that people fear most and we hear a lot of stories about the “customary” response to a traffic stop or other encounter with a police officer. In one such story in Indonesia, the businessman in question decided not to pay the bribe demanded by the officer, which resulted in the individual being escorted to the police station and ultimately appearing before a judge. At each step in the process, the officers and officials he encountered were incredulous that he wouldn’t simply pay the officer to take care of the ticket – that was the accepted and expected practice.

By all accounts, the police in Chile are different. According to the Chileans we talked with, the police take pride in their office and are offended at the thought that they could be “bought off”. For this, the Chilean police force should be commended. Officials who do their duty without abusing their position do not receive enough praise and attention in a world that focuses on those who view a government position as an easy way to cash in on the power entrusted to them.

An FCPA Pūpū Platter 1

As an active year in FCPA enforcement comes to a close and Anne Richardson of TRACE prepares to head to her hometown in Hawaii for the holidays, she thought it would be worthwhile to present a sampling– a pūpū platter, if you will – of interesting and peculiar cases in the evolution of the FCPA. More information on these and other international anti-bribery enforcement actions can be found on the TRACE Compendium.

As a related matter, please note that we have “counted” (and will regularly update on the Compendium) the number of FCPA enforcement actions brought by the DOJ and SEC since 1977. As of today, the DOJ has brought 71 enforcement actions against corporate entities and 104 actions against individuals. The SEC has brought 57 enforcement actions against corporate entities and 46 actions against individuals. Calculating the number of FCPA actions is not exactly straightforward and requires a defined methodology – we explain ours on the Compendium FAQs page.

Now, for the pūpū platter:

• In the “Page Airways” case from the late 1970s, the SEC filed a civil injunctive action against Page Airways, Inc. – Grumman Corporation’s worldwide sales distributor for twin-jet Gulfstream II corporate aircraft – and six officers and directors for violating the antifraud, proxy and FCPA recordkeeping provisions in connection with over $2.5 million in alleged bribes paid to foreign officials in a variety of countries, including $200,000 to the late President of Gabon, Albert Bongo. In the end, the SEC succeeded on the reporting (Section 13(a)) and proxy (Section 14(a)) charges. Interestingly, the SEC News Digest announcing the settlement stated: “In reaching this settlement, the Commission and Page considered concerns raised by another agency of the United States Government regarding matters of national interest.” To our knowledge, this is the only FCPA enforcement action where it was publicly disclosed that “matters of national interest” (national security or foreign policy, perhaps) were a predominant factor.

• In the “Crawford Enterprises” case from the early 1980s, which concerned an extensive bribery scheme involving multiple corporate entities, individuals and officials at Mexico’s state-owned oil company, Petroleos Mexicanos, two individuals successfully based their defenses on the now-deceased “Eckhardt Amendment.” The Eckhardt Amendment, which was removed from the FCPA in 1988, had provided that an employee could not be convicted of a criminal FCPA offense unless the employer had also been convicted of a substantive FCPA provision. The removal of this amendment opened the door to prosecuting individual employees separately from, or in lieu of, a corporate criminal prosecution.

• In the “Eagle Bus Manufacturing” case from the late 1980s, the DOJ charged a Greyhound subsidiary and several individuals with conspiracy to violate the FCPA in connection with a kickback scheme involving the president and vice president of a bus company owned by the Saskatchewan provincial government in Canada. The two Canadian officials at the Saskatchewan bus company were initially indicted for conspiracy to violate the FCPA. The officials challenged the indictment, arguing that foreign official recipients of bribe payments cannot be charged with conspiracy to violate the FCPA. The court agreed, finding that foreign official bribe-takers cannot be charged under the general conspiracy statute (18 U.S.C. 371) as their conduct was not substantively criminalized in the FCPA statute itself. To find otherwise, the court said, would be inconsistent with Congress’s intent not to punish foreign officials for their participation in the prohibited bribery schemes.

• In the “Tannenbaum” case in the late 1990s, the president of a garbage incinerator company was charged with conspiring to violate the FCPA in connection with scheme to bribe a supposed Argentine official to secure sales of garbage incinerators to the Government of Argentina. Tannenbaum offered a bribe to an undercover FBI agent posing as an Argentine procurement officer. Tannenbaum’s subjective belief that the intended recipient of a bribe was a foreign official – even if the recipient was not, in fact, a foreign official – was sufficient for the conspiracy charge.

The year 2009 saw three well-publicized FCPA trials – Bourke, Green and Jefferson. As more FCPA actions to go trial, we hope to see a body of FCPA case law develop. That’s good news for companies and individuals craving more guidance and clarification in the interpretation of the FCPA.