A Royal Mess, Pt. 1: Spanish Princess Charged with Corruption 1

Protesters in Madrid last month, protesting the Spanish monarchy.  [Courtesy of Flickr: https://www.flickr.com/photos/barcex/14338528062/in/photolist-nR3GR5-o17F9M-73NRnm-dWpT8Q-dWpT8E-8ph2vB-73Bgnb-677h19-6U9vhZ-6VhtVM-6UJ5m5-7bw8y3-nBCtaD-4jYTmW-4jYU2L-a3Bx9r/]

Protesters in Madrid last month, advocating an end to the Spanish monarchy. [Courtesy of Flickr]

If there are perks to being a member of the Spanish royal family (undoubtedly there are), immunity from corruption prosecutions is not one of them. Last month, on June 25th, Princess Cristina of Spain was charged with tax fraud and money laundering, casting a pall over the recent crowning of her brother, King Felipe VI, and testing his promise of a new, transparent government. The allegations provide a timely example of the corrupt behavior that has frustrated the Spanish public.  The royal family’s reaction will certainly also provide insight into the type of monarchist King Felipe VI is going to be.

Princess Cristina’s charges relate to a 3-year investigation of her husband, Duke Iñaki Urdangarin. Mr. Urdungarin, a former Olympic handball player and member of the Spanish Olympic Committee, married the Princess in 1997. Between 2004 and 2006, Mr. Urdungarin was president of the Instituto Nóos, a non-profit sports consultancy and event organization where Princess Cristina served on the board. Mr. Udrungarin and Princess Cristina also co-owned a real estate company called Aizoon.

Trouble started for the royal couple in 2011, when Mr. Urdungarin’s tenure at Instituto Nóos came under scrutiny. Instituto Nóos was accused of skimming money from government contracts, and Mr. Urdungarin was accused of profiting from funds that had been channeled through the non-profit and real-estate company co-owned with Princess Cristina. Mr. Urdungarin allegedly used his royal connections to win contracts that were either over-budgeted or never completed at all. After an investigation by the Spanish Anticorruption Bureau found that Mr. Urdungarin sent money from the contracts to accounts in Belize and the UK, the Royal Household banned Urdungarin from Royal Family activities, and in January 2013, removed him from their website.

For two years, Princess Cristina avoided implication in the corruption scandal, surely to the relief of the Royal Family, who has been trying to repair their damaged public image. But that changed in April 2013 when, despite efforts by her husband to protect her from the case, the Princess was named a suspect by the judge overseeing the investigation, prompting her to move to Switzerland with her children.

Initially the prosecutor appealed the decision, resulting in a revocation of the summons for lack of evidence; but in January 2014, the Princess was summoned again on charges of tax fraud and money laundering. In February, the Princess appeared in court for questioning, and formal charges of fraud were filed on Wednesday, June 25th, creating the unprecedented possibility that Princess Cristina could spend 11 years in jail. Currently those charges are under appeal. More…


Seal of the 11th Circuit Court of Appeals

Seal of the 11th Circuit Court of Appeals

Haiti in 2001 might have seemed like an entrepreneur’s playground — the kind of place where the stakes were high, the risks were big, and if you played your cards right, you might find fabulous riches. Sure, it was one of the poorest countries in the world, but after decades of political turmoil, democracy seemed finally possible. The country had committed itself to modernization and had begun privatizing state-owned entities. More importantly, America had backed the fledgling Haitian government in a huge way: with military intervention to support the democratically elected President Aristide, and billions of dollars in foreign aid.

Joel Esquenazi and Carlos Rodriguez, co-owners of the Florida-based company, Terra Telecommunications Corp. (“Terra”), seized the opportunity. They would buy phone time from the Haitian provider, Telecommunications D’Haiti, S.A.M. (“Teleco”), and re-sell those minutes to American customers. By October 2001, Terra was failing. It owed Teleco over $400,000. Esquenazi arranged a meeting between his company’s comptroller and a director at Teleco. Suddenly, Terra was presented a lifeline. If Terra made side-payments to the director—through various discreet channels that included a grocery store owner and the director’s sister—Terra would see its debts reduced. Esquenazi and Rodriguez were ecstatic. Who would care about bribes made to a phone company? Teleco was majority-owned by the Haitian government, but nowhere was it formally designated as a public entity. Besides, this is how business was done in Haiti.

On May 16, 2014, the United States Court of Appeals for the Eleventh Circuit handed down a landmark decision in United States v. Esquenazi, which held that state-owned enterprises qualify as “government instrumentalities” under the Foreign Corrupt Practices Act (“FCPA”). The court affirmed the convictions of Esquenazi and Rodriguez for bribery of foreign officials, resulting in 15-year prison sentences.

As the first appellate level decision on the issue, the Esquenazi court defines “government instrumentality” as “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.” Thus, two elements must be satisfied: both government control and a public functionCommentators have heralded the clarity the decision brings to an area of the FCPA otherwise shrouded in doubt. The emerging consensus seems to be that the Esquenazi test defines instrumentality broadly, in accordance with how the DOJ and SEC have previously brought FCPA charges.

In evaluating the two elements of government instrumentality, the court provides a “non-exhaustive” set of factors to consider. In looking at government control, courts should consider whether the government has a majority interest, the ability to hire and fire principals, and whether profits and losses are shared. Courts are to consider the entity’s function as public if the entity enjoys a monopoly, its services are subsidized by the government, the services are provided to the public at large, or if the public perceives the services to be a governmental function.

But key questions remain over just how broadly the definition sweeps. How much of each element must be present to satisfy the test? Would strong evidence of government control bolster weaker evidence of public function, or vice versa? Neither of these scenarios are purely hypothetical. For example, what if a country outsources its police functions, as some towns in California have already begun to do?  On the other hand, what if a company, like a sovereign wealth fund, is controlled by the government but does not perform any traditional governmental function?

Although the Eleventh Circuit’s decision may have broadened and helped clarify some aspects of the definition of the ‘government instrumentality’, it may not be the final word. Many suspect that the case will be appealed to the Supreme Court.  Either way, questions of how to apply the court’s multi-factor test are still likely to play out in the lower courts.

Biggest Compliance Stories for June, 2014 Reply

Below is our roundup for June 2014’s biggest compliance stories.  Vote for which one you think deserves the top spot!

Dodd-Frank Conflict Mineral Disclosure Deadline Reached - June 2, 2014 was the first filing deadline for SEC issuers to comply with the SEC’s conflict minerals rule under Dodd Frank.  Listed companies must report to the SEC under the statute as to what due diligence measures they undertook regarding any conflict minerals in their chain of custody.

China Continues Arrests of Top-Level Officials as Part of Official Anti-Graft Campaign - In recent weeks, Wan Qingliang party chief of Guangzhou, Xu Caihou, a former vice-chairman of the powerful Central Military Commission, and Su Rong, vice-chairman of China’s parliamentary advisory body have all been fired or are under investigation for corruption.  Thousands of Communist party officials have been investigated for corruption since President Xi Jinping took power two years ago.

SEC Brings First Anti-Retaliation Case Under Dodd-Frank Act Whistleblower Provisions – In an administrative proceeding against Paradigm Capital Management, an investment adviser to private funds, the SEC alleged that the company had demoted a head trader and removed him from his trading and supervisory responsibilities after he’d disclosed infractions by the company to the SEC.  The company was penalized $2.1 million and ordered to hire an independent compliance consultant. More…

TRACE Poll: May’s Biggest Compliance Story Reply

Vote below for what you think was this month’s biggest compliance story:

  1. Conflict Mineral Disclosure Deadline Approaches. The Appellate Court for the District of Columbia denied the National Association of Manufacturer’s emergency stay motion to block the SEC’s conflict minerals rule.  Meanwhile, lntel Corporation filed its conflict minerals report with the SEC in advance of the June 2 deadline, noting that some of their suppliers were in fact “DRC conflict undeterminable.”
  1. 11th Circuit Court Rules on Definition of “Instrumentality” under the FCPA In a landmark ruling affirming the sentences of Joel Esquenazi and Carlos Rodriguez, the court upheld a multi-factor test used to determine that Telecommunications D’Haiti, S.A.M. (Teleco) was an “instrumentality” of the government and its employees were therefore “foreign officials” as defined by the FCPA.
  1. PetroTiger CEO Indicted for FCPA Violations. Joseph Sigelman, chief executive officer of the oil and gas services company PetroTiger, Ltd., was indicted by Grand Jury in New Jersey on May 9, 2014. The indictment charges that Sigelman negotiated the terms of a kick-back scheme and paid $333,500 in bribes to obtain approval from Colombia’s national oil company, Ecopetrol S.A., for a $39.6 Million contract. The payments were masked as “consulting services” conducted by an official’s wife on behalf of PetroTiger.