A newly published legal alert sent to us from our partner firm Baker & McKenzie in Moscow explores recent amendments to Russia’s anti-corruption law – Federal Law No. 273 “On Combating Corruption.” Article 13.3 of the law, which went into effect on January 1, 2013, imposes an affirmative duty on companies to develop compliance programs aimed at curbing corruption. More…
Guest blogger Severin Wirz, an attorney specializing in compliance with the Foreign Corrupt Practices Act, reflects back on the most noteworthy anti-bribery developments of 2012.
By Severin Wirz
With 2012 behind us, it seems a perfect opportunity to pause and reflect back on the anti-bribery developments of the last twelve months. So here are TRACE’s “Top 12 of 2012” – all the biggest trends, breakthroughs and scandals of 2012, composed neatly in list form:
12. Whistleblowers favored – The US government showed just how serious it is about encouraging whistleblowing when the IRS agreed to pay jailed banker Bradley Birkenfeld $104 million in September for information he provided against his former employer UBS. The payout followed on the heels of the DOJ’s announcement in early August of the creation of an Office of Inspector General Whistleblower Ombudsperson and the SEC’s first whistleblower payout later that month.
11. Barclays’ woes worsen – It’s been a difficult year for international banking giant Barclays plc. Four months after settling a $160 million fine over interest rate manipulation, Barclays announced that it was also being investigated by both British and US authorities for potential acts of bribery in Qatar.
10. UK adopts deferred prosecution agreements - In October, Britain’s Ministry of Justice declared that it would begin using deferred prosecution agreements (DPAs). Widely used in the United States, DPAs are expected to encourage more self-reporting and greater certainty for corporations in negotiating settlements with the UK Serious Fraud Office.
9. Ongoing FCPA sweep of the medical industry – The SEC and DOJ brought no less than 10 separate FCPA-related actions in 2012 against companies in the healthcare sector, including suits against Pfizer, Wyeth, Biomet, Smith & Nephew and Orthofix. Read more about these cases in the TRACE Compendium.
8. Twilight of the facilitation payment exception – Only 6 OECD countries continue to uphold the facilitation payments exception. Among those is Australia, which this year proposed getting rid of the defense altogether. TRACE’s 2012 Anti-Bribery Benchmarking Survey indicates that even when legal, companies are increasingly choosing to prohibit employees from making so-called “grease” payments abroad.
7. Wal-Mart bribery scandal in Mexico – Reminding us of the power of journalism as an anti-corruption tool, the New York Times published a investigative exposé in April revealing that Wal-Mart sought to cover-up millions of dollars in bribes to agents and government officials in Mexico. The article has since led to a growing probe of Wal-Mart’s activities in other countries as well as a formal investigation by Congress.
6. DOJ’s FCPA unit suffers trial losses– Prosecutors at the DOJ suffered several surprising FCPA losses this year, including defendant John O’Shea’s acquittal in January, the dismissal of all charges against the African sting defendants in March and the end of the DOJ’s appeal in the Lindsay Manufacturing case in May. And while the stinging setbacks won’t stop future FCPA prosecutions, it may well embolden more pushback from defense lawyers who now perceive cracks in the DOJ’s enforcement facade.
5. SEC implements widening net of Dodd-Frank rules – The SEC issued several new rules this past year mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, including disclosure requirements concerning the use of conflict minerals as well as payments made in the extractives industry to foreign governments. Along with new federal regulations against human trafficking, companies are becoming ever more vigilant against compliance problems that may arise during the course of overseas dealings.
4. New collective action tools alleviate costs of anti-bribery compliance –Speaking of compliance, for many the two biggest buzzwords of 2012 were “collective action.” Online platforms such as TRACE’s TRAC tool now allow companies to conduct broader baseline due diligence at a lower cost. It should come as little surprise, then, that the Basel Institute on Governance launched the International Center for Collective Action (ICCA) in October to serve as a resource hub for companies looking to improve their anti-corruption programs.
3. Anti-Corruption efforts rev-up in “BRIC” countries – There’s been an undeniable increase in the attention paid to anti-bribery concerns within BRIC countries (Brazil, Russia, India and China) recently. Over the past year, Brazil’s former presidential chief-of-staff was sentenced to over 10 years in prison in a vote-buying scandal there, Russia entered into the OECD anti-bribery convention, the grassroots anti-bribery movement in India continued to pick up steam, and China’s new leader Xi Jinping voiced renewed resolve to launch an offensive against corruption in his country as well.
2. Morgan Stanley’s Declination– The DOJ and SEC declined to initiate an enforcement action against Morgan Stanley for violations committed by a “rogue employee.” Not only is the value of a robust compliance program and frequent training confirmed, a true breakthrough in the history of the FCPA, the seldom accepted “rogue employee” defense prevails.
1. DOJ and SEC publish long-awaited FCPA Guidelines – The hype surrounding the much-anticipated FCPA Guidelines finally proved real when, in mid-November, the DOJ and SEC released their 120-page compilation of information about the FCPA. And while the Guidelines are by no means game-changing, they have been roundly applauded for providing needed insight into such lingering questions as the definition of a foreign official, what makes for a good compliance program, and what constitutes a facilitation payment.
In October 2007, Boris Berezovsky served Russian business tycoon and owner of the Chelsea Football Club Roman Abramovich with a writ claiming USD 5.6 billion in damages. At a trial that began four years later in October 2011, Berezovsky asserted that Abramovich blackmailed him into selling off his interest in Sibneft, one of Russia’s largest oil companies, and in the aluminium company RusAl, for an aritifically low sum of USD 1.3 billion. Abramovich contended that Berezovsky never owned shares in Sibneft, but was paid large sums of money by Abramovich to exercise his political influence, or крыша (krysha) to obtain advantages for Abramovich’s business interests, including Sibneft.
In London’s High Court this morning, the case was concluded after the judge decided in favor of Abramovich, refusing to award damages to Berezovsky and calling him “an inherently unreliable witness” who views “truth as a transitory, flexible concept.” A summary of the Court’s judgment, in which the judge rejected every claim advanced by Berezovsky, is available here.
The case is certainly of interest to the anti-corruption professional. It raises the question, to what extent does the krysha for which Abramovich so liberally paid constitute “legitimate” lobbying, and to what extent does it constitute improper payments, possibly to be used for the purpose of bribing Russian officials? It raises the question, but unfortunately does not answer it.
Another item of interest is the money laundering scheme discussed in the judge’s summary. Berezovsky claimed that he sold his interest in Sibneft to Devonia Investments Limited in June 2001 to Abramovich, a Georgian business associate named Patarkatsishvili, and Sheikh Sultan bin Khalifa al Nahyan, a crown prince of Abu Dhabi. The judge, who in any event had already declared insufficient Berezovsky’s proferred evidence of ownership of an interest in Sibneft, made a point of labeling the Devonia agreement as a sham “entered into for the purposes of generating documentation that would give a false impression that a genuine commercial transaction had been entered into, so as to satisfy the money-laundering requirements” of the UK bank into which the USD 1.3 billion purportedly to be paid by Berezovsky was to be deposited. The judge made two points regarding this sham agreement: first, that Abramovich was not a party to the agreement, and second, that because it was a sham transaction, the Devonia Agreement did not support the allegations put forward by Berezovsky, and “the fact that Mr. Berezovsky chose to assert that the Devonia Agreement was a genuine agreement, did not reflect well on Mr. Berezovsky’s credibility.”
So much for using one’s evasion of money laundering laws to support a claim based on an oral contract for the lucrative exploitation of one’s political connections.
It remains to be noted that, although in this case Mr. Abramovich’s defense prevailed, an unpleasant incident in August 2011 demonstrates that, even for a multibillionaire, krysha doesn’t always work. When Abramovich pulled his 557 ft. yacht, the largest in the world, into port at Antibes on the French Riviera, his parking spot had already been taken (by a yacht belonging to Saudi Prince Al-Waleed bin Talal Alsaud). Unable to persuade the harbor authorities to allow him to moor, Abramovich’s boat, Eclipse, had to anchor at sea.
Guest blogger Marcus Cohen chronicles a business partnership gone sour, and follows the far-reaching and rather surprising consequences which international corruption can cause.
Squeezed out of a lucrative Russian gas deal, Zenon and Oleg turned on each other. With the High Court in Jerusalem as the ultimate arbiter, there is more at stake than a multimillion dollar bribe slush fund – the rule of law hangs in the balance. Will Soviet-style cash-and-carry justice prevail?
More than just the tag line for a straight-to-DVD melodrama, the disastrous dealings between Zenon Kluger, Oleg Izikowitz, and Russia’s energy giant Gazprom triggered a wave of litigation, arbitration, and cross complaints in the courts of Helsinki, London, Moscow, and Tel Aviv.
Following the Soviet collapse, Russia was the place to make a fortune. But there were known dangers. Russia consistently ranks near the bottom of Transparency International’s Corruption Perceptions Index, with a score on par with Nigeria and Tajikistan.
In the late 90’s, Kluger, an Israeli businessman and former banker, managed to receive a license from Gazprom to export natural-gas from Russia to Finland. Kluger partnered with Izikowitz, a Russian intermediary who brokered the deal for railroad cars to ship the natural-gas condensate, and formed the chemical trading company, Double K Oil Products Ltd. Four years later, Double K entered into a multi-year contract with Gazprom valued at approximately $350M to supply the natural-gas condensate to the Finnish national gas company, called Neste Oil Oyj. Double K was poised to make a sizable profit of $100M. But within 3 years, Gazprom and Neste squeezed the middleman out of the deal – or so Double K’s allegations went.
Litigation ensued. First, Double K turned to the courts in Finland. Then the company sought arbitration in London – a courtroom spectacular, complete with charges of forged documents and double-dealing. Next, Double K appealed to the High Court in Britain, but to no avail.
Meanwhile Gazprom filed a complaint with the Russian Court of Claims in Moscow, seeking €5M for gas purchases from Double K before that company had its export license revoked. Unsurprisingly, the Russian court sided with Gazprom, Vladimir Putin’s personal monopoly. But Double K refused to pay up. Undeterred, Gazprom filed suit in Israel. And this is where things get interesting…
Suing for Bribes
In 2010, with its business in ruin, Double K’s owners turned on each other. Specifically, Kluger sued Izikowitz for his share of a fund that was created by skimming profits from each shipment of gas and depositing the money in a subsidiary’s account in the Virgin Islands. Kluger claimed that the account contained funds for the express purpose of “giving special incentives to the persons at Gazprom in order to move the deal forward.”
You mean bribe money… right? In response to this question from the court, Kluger responded, “you could call it bribery, or you could call it incentives.” Ok, let’s call it bribe money. In any event, Kluger alleged that the money was intended for Gazprom officials, but was withdrawn by Izikowitz for his own personal business deals. Kluger wanted his money back and he went to court to get his share of the bribe slush fund back. Now that’s chutzpah!
Izikowitz denied these allegations and countered that the funds were used to cover office expenses in Moscow as well as “commission” payments. The Jerusalem District Court agreed, primarily because this was how the account was described in the financial records that Kluger signed – financial records that were likely doctored to conceal the intended nature of the funds. Touché Izikowitz.
Justice for Sale
Last year Gazprom sued Kluger in an Israeli court, seeking to enforce the prior Russian judgment against Double K. In response, Kluger claimed that the decision of the Russian court was the result of fraud and, further, that the entire Russian court system is corrupt. In his testimony, Kluger declared that because Gazprom is controlled by Putin and his cronies, no judge will rule against Gazprom. He testified that “[t]here is no court in Moscow that will rule against Gazprom, there is no such judge. All of the judges are afraid, and no judge will rule against Gazprom, and all of the Russians who are here in this room today know that.”
Kluger averred that the fungiblilty of Russian judicial decrees was common knowledge, but last month the Tel Aviv District Court Judge disagreed. The precedent-setting decision, that the Russian judgment was enforceable in Israel, sent shockwaves throughout the Israeli business community.
Kluger is appealing the ruling to Israel’s Supreme Court. But in the interim, it appears that a decision which may have been obtained through dishonest means in Moscow can be enforced in Jerusalem. Corruption, it seems, is no bar to reciprocity.