INTRODUCTION

The U.S. Department of Justice ("DOJ") and U.S. Securities and Exchange Commission ("SEC") continue to reevaluate and adapt their approach to FCPA enforcement. Specifically, recent months have provided insight to the DOJ and SEC's expanded approach to enforcement, including the exploration of new techniques and utilization of resources aimed at gathering a broad spectrum of information.

The DOJ and SEC appear to be directing increased attention to the demand side of improper payments. As part of this focus, the DOJ continues to pursue the extradition of Juthamas Siriwan, the former governor of the Thailand Tourism Authority, and her daughter in connection with allegedly accepting improper payments. Information disclosed this quarter also shows that U.S. authorities are committed to seizing any assets of foreign officials that are the proceeds of corruption through the DOJ's Kleptocracy Asset Recovery Initiative. In July, U.S. District Court Judge Lamberth of the District of Columbia unsealed a restraining order issued to protect U.S.-based assets of a former Nigerian official. The order prohibits the former Nigerian governor, James Onanefe Ibori, and his solicitor, Bhadresh Gohil, from disposing of or using any property or funds located in the United States until related criminal proceedings in the United Kingdom are concluded.

FCPA-related activity this quarter also reflects that authorities are using a number of new investigatory techniques. In August, the SEC voted in favor of requiring American oil and mining companies to disclose taxes and other fees paid to foreign governments. At this early stage, it is hard to predict how onerous the measure will be or how the SEC will design specific provisions to address FCPA-related concerns, if it chooses to do so.

Additionally, the SEC is seeking to obtain company audit papers from accounting firms. The Chinese branches of the Big Four accounting firms (Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers) continue to confront the SEC's attempts to access audit documents prepared for Chinese companies listed on American stock exchanges. From a FCPA perspective, this ongoing dispute may create another resource that U.S. authorities can use to obtain evidence related to possible improper payments abroad.

I. Summary of Recent Corporate Enforcement Actions

Orthofix International – Deferred Prosecution Agreement

On July 10, 2012, Orthofix International, a U.S.-based medical device company, reached an agreement with the DOJ and SEC to settle charges related to alleged improper payments made in Mexico. Orthofix agreed to pay a $2.22 million penalty and entered into a three-year deferred prosecution agreement ("DPA") to settle charges with the DOJ. Additionally, the company will pay $5.2 million to the SEC in disgorgement and pre-judgment interest to resolve related charges. The allegations stem from activities by Orthofix's Mexican subsidiary, Promeca S.A. de C.V. ("Promeca"). According to the SEC's civil complaint, Promeca made improper payments, internally referred to as "chocolates," to officials of the Mexican government-owned healthcare provider, Instituto Mexicano del Seguro Social ("IMSS"). The subsidiary also allegedly provided gifts, such as laptops, televisions, and vacation packages, in exchange for sales contracts at IMSS hospitals.

In June 2010, Orthofix voluntarily reported these issues to the DOJ and SEC after their discovery during a management review. In the DPA, the government noted the company's self-reporting and remedial measures, including the termination of the executives involved in the alleged activities, and the implementation of an enhanced compliance program. Likely as a result of these remedial efforts, neither the SEC nor DOJ required the appointment of an independent compliance monitor.

NORDAM Group Inc. – Non-Prosecution Agreement

On July 17, 2012, NORDAM Group Inc. ("NORDAM"), an aircraft maintenance, repair, and overhaul service provider based in Tulsa, Oklahoma, entered into a three-year, non-prosecution agreement ("NPA") with the DOJ and agreed to pay a $2 million penalty to resolve violations of the FCPA. NORDAM also agreed to cooperate with the DOJ to report periodically regarding its compliance efforts, and to continue to implement and enhance its compliance program.

According to the NPA, NORDAM, its subsidiaries, and its affiliates made improper payments to employees at Chinese state-owned airlines in order to secure contracts. To disguise the payments, employees of NORDAM's affiliates allegedly entered into sales representation agreements with fictitious entities, and then used the money from these fake agreements to make payments to the airline employees.

According to the DOJ, it entered into an NPA as a result of NORDAM's timely, voluntary, and complete disclosure of its conduct, its cooperation with the DOJ, and its remedial efforts. The DOJ noted that the fine was below the standard U.S. Sentencing Guideline range, as "a fine exceeding $2 million would substantially jeopardize the company's continued viability."

Pfizer/Wyeth –Deferred Prosecution Agreement

On August 7, 2012, the DOJ announced that it had reached a two-year deferred prosecution agreement with Pfizer HCP, a subsidiary of Pfizer Inc., to settle charges related to alleged violations of the FCPA in Bulgaria, Russia, Croatia, and Kazakhstan. Pfizer Inc. and Wyeth also reached a settlement with the SEC for alleged violations of the FCPA in Saudi Arabia, Bulgaria, Russia, Kazakhstan, Croatia, China, Czech Republic, Italy, Serbia, Indonesia, and Pakistan. The government alleged that the parties, either directly or through their agents, made improper payments or provided benefits (including cash payments, gifts, entertainment, and support for domestic and international travel) to physicians, pharmacologists, and other individuals, who were employed by foreign governments or instrumentalities of foreign governments. The improper payments were allegedly made to gain regulatory approvals, stimulate sales, and boost prescriptions of Pfizer products. The SEC also alleged that Pfizer employees inaccurately recorded these transactions as travel, entertainment, clinical trials, and advertising.

Under the DOJ settlement, Pfizer will pay a $15 million penalty. According to the DOJ, the penalty reflects a reduction based on Pfizer's timely voluntary disclosure, thorough internal investigation, cooperation with the government, and implementation of early and extensive remedial measures. Under the SEC settlement, Pfizer agreed to pay $26.3 million in disgorgement, including pre-judgment interest. Likewise, Wyeth will pay $18.8 million in disgorgement, including pre-judgment interest.

Oracle Corporation – Settlement

On August 16, 2012, Oracle Corporation ("Oracle"), a California-based enterprise systems company, reached a settlement with the SEC related to alleged violations of the books and records provisions of the FCPA and agreed to pay a $2 million civil penalty. The DOJ did not bring any charges against Oracle.

According to the SEC complaint, between 2005 and 2007, Oracle's Indian subsidiary, Oracle India Private Limited, allegedly structured transactions with distributors in a way that caused $2.2 million in sales proceeds to be maintained in side funds. The company allegedly did not accurately record the funds in its books and records. No evidence of bribery existed, and the SEC did not allege that any bribes or kickbacks were paid.

The SEC stated that the settlement takes into account Oracle's voluntary disclosure of the conduct, exhaustive investigation, cooperation with the government, and extensive remedial measures, including terminating employees involved in the conduct and enhancing the company's anti-corruption compliance program.

Tyco International Ltd. – Non-Prosecution Agreement

On September 24, 2012, Tyco International Ltd. ("Tyco") entered into an NPA with the DOJ, and its subsidiary, Tyco Valves & Controls Middle East Inc. ("TVC ME"), pleaded guilty to charges of conspiring to violate the FCPA. Tyco also settled with the SEC, and together the companies agreed to pay more than $26 million to U.S. enforcement agencies.

Tyco is a Swiss company that manufactures and sells security, fire protection, and energy products. The company agreed to pay $13.68 million for allegedly falsifying books and records in connection with payments by subsidiaries to government officials in various countries in order to obtain and retain business. According to the NPA, a number of Tyco subsidiaries allegedly made payments to government officials and falsely described these payments in Tyco's books and records. The NPA also states that Tyco knowingly conspired to falsify its records in connection with these payments. Tyco's subsidiary, TVC ME, was charged with conspiracy to violate the FCPA in connection with payments made to employees of Saudi Aramco, the Saudi Arabian-owned oil and gas company. As part of the $13.68 million penalty, TVC ME agreed to pay a $2.1 million fine.

In addition to the $13.68 million penalty, Tyco agreed to cooperate with the DOJ, to report periodically regarding its compliance efforts, and to continue to implement a compliance program. The agreement acknowledges the company's timely, voluntary, and complete disclosure, cooperation, global internal investigation, and extensive remediation, such as implementation of an enhanced compliance program, termination of employees, severing of related contracts, and closing certain subsidiaries.

Tyco also settled with the SEC and agreed to pay over $10.5 million in disgorgement and $2.5 million in pre-judgment interest related to violations of the books and records, internal controls, and anti-bribery provisions of the FCPA. This settlement related to alleged illicit payment schemes from 2006 to 2009 operated by Tyco subsidiaries in China, India, Thailand, Croatia, Serbia, Saudi Arabia, Libya, Syria, the United Arab Emirates, Mauritania, the Congo, Niger, Madagascar, Turkey, Poland, Malaysia, and Egypt.

II. Summary of Recent Individual Enforcement Actions

Patrick Joseph – Sentenced

On July 6, 2012, Patrick Joseph, former Director General at Haiti Teleco, was sentenced to one year and one day in prison and ordered to forfeit $956,000. He previously pleaded guilty to one count of conspiracy to commit money laundering for his role in accepting alleged improper payments from Cinergy Telecommunications and Uniplex Telecommunications in exchange for preferential telecommunications rates and credits towards accounts. Joseph faced up to 20-years in prison, but the DOJ recommended a reduction in his sentence due to his acceptance of responsibility for the misconduct.

Richard Bistrong – Sentenced

On July 31, 2012, Judge Richard Leon sentenced Richard Bistrong, the main cooperating witness in the government's Shot Show Prosecution (Africa Sting Prosecution), to 18-months in federal prison followed by 36-months of probation. Bistrong previously pleaded guilty to one count of conspiracy to violate the FCPA. The DOJ had requested that Bistrong avoid prison time as a result of his "extraordinary" cooperation with the government's investigation; however, Judge Leon ignored the DOJ's request, stating that "[w]e certainly don't want the moral of the story to be: Steal big. Violate the law big. Cooperate big. Probation."

Garth Peterson – Sentenced

On August 16, 2012, Garth Peterson, a former managing director in Morgan Stanley's real estate investment and advisory business in China, was sentenced to nine-months in prison for one count of conspiracy to violate the books and records provisions of the FCPA. Peterson pleaded guilty to the charge in April, and the DOJ recommended that he receive a minimum of 51-months in prison due to the "gravity of his fraud." Peterson previously settled with the SEC, agreeing to a permanent ban from the securities industry, payment of $250,000 in disgorgement of profits, and relinquishment of real estate in Shanghai valued at $3.4 million.

Paul Cosgrove – Sentenced

On September 13, 2012, Paul Cosgrove, former director of worldwide sales for Control Components Inc. ("CCI"), was sentenced to 13-months of home confinement and fined $20,000. Cosgrove pleaded guilty in May to one count of violating the FCPA, after admitting to authorizing alleged improper payments to employees of a Chinese state-owned company to gain business for CCI. He was one of seven former CCI executives to plead guilty to FCPA charges. After entering his plea, the DOJ stated in a filing that due to Cosgrove's health concerns it would be satisfied with home confinement, despite initially recommending a 15-month sentence.

Subramanian Krishnan – Charged

On September 28, 2012, the SEC filed a complaint against Subramanian Krishnan, former Chief Financial Officer of Digi International, Inc., alleging his conduct led to Digi's filing of inaccurate reports and certifications with the SEC from 2005 to 2010. Krishnan consented to a final judgment permanently enjoining him from future violations and to a prohibition on serving as an officer or director of any issuer. The SEC will stipulate to the length of the prohibition and the amount of any disgorgement, prejudgment interest, and civil penalty at a later date.

III. DOJ Opinion Procedure Release

On September 18, 2012, the DOJ published an Opinion Procedure Release addressing the following set of facts: a U.S. lobbying firm seeks to represent the embassy of a foreign country and, in order to facilitate that representation, the requestor wants to contract with a third party consulting company. One of the partners in the consulting company is a member of the Royal Family of the foreign country, although he holds no position in the government. Before entering into the relationship, the requestor sought the DOJ's opinion regarding (1) whether the Royal Family member is a "foreign official" under the FCPA; and, if so, (2) whether the requestor's proposed engagement with the consulting company would result in any enforcement action by the DOJ.

In response, the DOJ held that the Royal Family member does not qualify as a foreign official, so long as the individual does not represent that he is acting on behalf of the Royal Family or in his capacity as a member of the Royal Family. The opinion notes that a person's mere membership in the Royal Family of the foreign country does not automatically qualify that person as a "foreign official." As a result, the proposed consulting company would be permitted to assist the requestor in its representation of the foreign embassy.

In making this determination, the DOJ considered a number of factors, including, among other things, the Royal Family's current and historical legal status and powers; the individual's position within the Royal Family; the individual's past and present positions within the government; the mechanism by which the individual could come to hold a position with governmental authority or responsibilities; the likelihood that the individual would come to hold such a position; and the individual's ability to affect governmental decision-making.

IV. Other

ICE Appeal

On August 3, 2012, the U.S. Court of Appeals for the Eleventh Circuit held that it lacked jurisdiction to hear a case brought by Instituto Costarricense de Electridad ("ICE"), the wholly state-owned Costa Rican telecommunications company, against Alcatel-Lucent under the Crime Victims' Rights Act. In 2010, Alcatel-Lucent and three of its subsidiaries agreed to pay more than $137 million to settle an FCPA investigation involving alleged improper payments in Costa Rica, Honduras, Malaysia, and Taiwan. ICE argued that it should be declared a "victim" of Alcatel-Lucent based on admissions contained in Alcatel-Lucent's DPA. In particular, ICE referenced statements that Alcatel-Lucent allegedly hired and paid unusually large fees to consultants, who in turn curried favor with high-ranking ICE officials and board members to secure contracts by offering direct kickbacks from any contract awarded by ICE to Alcatel-Lucent or its subsidiaries.

The Court held that it lacked jurisdiction to hear ICE's case because Alcatel-Lucent agreed to a DPA, meaning that neither a conviction nor sentencing had occurred. Additionally, the Court denied jurisdiction over the case brought against Alcatel-Lucent's subsidiaries based on the grounds that crime victims have no standing to appeal a defendant's sentence in a criminal hearing.

SEC Whistleblower Bounty Program

On August 21, 2012, the SEC announced that it had issued its first award under the Dodd-Frank Act's whistleblower bounty program. Although the tip did not relate to the FCPA, this development demonstrates the SEC's commitment to its newly established whistleblower program. Under the 2010 Dodd-Frank Act, a person who provides information that leads to an SEC enforcement resulting in more than $1 million in sanctions can receive between 10 and 30 percent of the money collected.

According to Sean McKessy, Chief of the SEC's Whistleblower Office, the SEC has received approximately eight tips per day since the program was established in August 2011.

According to the SEC announcement, the whistleblower received $50,000 for helping the SEC stop an ongoing multi-million dollar fraud. This award represented 30 percent of the amount collected, the maximum amount allowed under the law. The whistleblower could receive more money if additional sanctions are ordered and collected. An award for a second whistleblower in this matter was denied because the information "did not lead to or significantly contribute to the SEC's enforcement action, as required for an award."

DOJ Defends Interpretation of "Instrumentality" in 11th Circuit Appeal Brief

In August, the DOJ filed an appellate brief arguing for its expansive interpretation of "foreign official" under the FCPA. The FCPA defines "foreign official" as an officer or employee of a foreign government or any "department, agency, or instrumentality thereof." On this point, U.S. authorities take a broad view of this definition and consider employees of state-owned entities to be covered.

The brief was filed in opposition to appeals brought by Joel Esquenazi and Carlos Rodriguez, the former President and Vice President of Terra Telecommunications Corporation. In 2011, Esquenazi and Rodriguez were convicted of seven counts of violating the FCPA along with other related offenses. The charges stemmed from their involvement in an alleged scheme to provide improper payments to officials at Haiti's state-owned telecommunications company, Telecommunications D'Haiti ("Haiti Teleco"). On appeal, the defendants challenged the DOJ's assertion that Haiti Teleco should be considered a government instrumentality, arguing instead that the state-owned enterprise does not perform a government function similar to those performed by a government agency. Additionally, the appellants argue that the phrase "instrumentality" in the FCPA is unconstitutionally vague.

The appeal has forced the DOJ to articulate specific methods through which it evaluates whether an entity should be considered an instrumentality of a foreign government. In its brief, the DOJ argued that the District Court's jury instructions on the definition of instrumentality were correct and agreed with a case-by-case analysis for evaluating state-owned entities rather than requiring bright-line rules. Specifically, the DOJ endorsed the following factors referenced by the Court as considerations for determining whether Haiti Teleco was an instrumentality of the Haitian Government:

  • Whether the entity provides services to the citizens and inhabitants of Haiti;
  • Whether its key officers and directors are government officials or are appointed by government officials;
  • The extent of Haiti's ownership of Teleco, including whether the Haitian Government owns a majority of Teleco's shares or provides financial support such as subsidies, special tax treatment, loans, or revenue from government-mandated fees;
  • Teleco's obligations and privileges under Haitian law, including whether Teleco exercises exclusive or controlling power to administer its designated function; and
  • Whether Teleco is widely perceived and understood to be performing official or governmental functions.

In support of the proposition that Haiti Teleco is an instrumentality of the Haitian Government, the DOJ cited to the following facts: (1) the Haitian government, through its National Bank, owned 97% of Teleco's shares, and if Teleco had been profitable, those profits would have been distributed to the treasury and its National Bank; (2) Teleco was managed and controlled by government appointed employees; and (3) Haiti's public bribery laws applied to officials at Teleco. The Eleventh Circuit has not ruled on the appeal; however, its decision is highly anticipated, as this case marks the first time that the meaning of government official under the FCPA has been challenged on appeal.

V. Conclusion

The DOJ's and SEC's activities in the third quarter signal that the enforcement authorities require continued diligence from U.S. companies to ensure their monitoring programs are sufficient to identify and correct potentially improper actions. In the fourth quarter, the DOJ finally released its long-awaited guidance on several contested provisions of the FCPA. A summary of the guidance, prepared by Paul Hastings, can be found here.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.