Members of the Squire Sanders China team have written the China chapter to the fifth edition of Getting the Deal Through – Anti-Corruption Regulation 2011, which provides international analysis in key areas of law and policy for corporate counsel, cross-border legal practitioners and business people. Following the format adopted throughout the series, our China team has provided responses to certain key questions posed by the publishers to leading practitioners in each of the 51 jurisdictions featured, providing a helpful overview of anti-bribery developments in one of the hottest regions of the world today. Download of the contents of the entire book is possible on www.GettingtheDealThrough.com.
Ex-CEO of Telecom Company Pleads Guilty In Honduras Bribe Case
Last week, Jorge Granados, former chief executive officer of Miami-based Latin Node, Inc. (Latinode) pleaded guilty to conspiring to pay bribes to government officials in Honduras. This is the latest chapter in the on-going saga of Latinode and its former executives who allegedly violated the Foreign Corrupt Practices Act (FCPA) by paying bribes to officials of state owned Honduran telecommunications companies.
Conduct
- Latinode provided telecommunications services to Honduras and Yemen. Granados admitted that he authorized bribe payments. From March 2004 to June 2007, Latinode paid or caused to be paid US$2,249,543 directly or through third-parties, knowing that some or all of the funds would be passed on as bribes to “foreign officials” including officials of Honduran telecommunications companies, which qualified as state owned entities (SOE) under the FCPA. Latinode admitted that it made these payments in exchange for obtaining an agreement with the Honduran SOE and for reducing the rate charged under the agreements with the Honduran SOE. Each payment was made from Latinode’s Miami bank account and was approved by Latinode senior executives. Granados is the fourth former senior executive of Latinode to plead guilty in the case.
Penalty
- Granados faces up to five years in prison and a fine of $250,000 or more.
Notes
- In 2009, Latinode pleaded guilty to a one-count information charging the company with a criminal violation of the FCPA. As part of the plea agreement, Latinode paid a $2 million fine. The DOJ represented that the investigation’s resolution reflected, “in large part,” the acts of eLandia International, Inc. (eLandia), Latinode’s corporate parent, in disclosing the potential violations to the DOJ after eLandia’s acquisition of Latinode. eLandia promptly voluntarily disclosed to the DOJ the conduct after discovering it, conducted an internal investigation, shared the internal investigation’s factual results with the DOJ, cooperated fully with the DOJ in its investigation and took remedial action including terminating senior Latinode management with involvement in or knowledge of the violations, which included Granados.
SEC Enters Into First FCPA-Related Deferred Prosecution Agreement
For the first time in its history of bringing FCPA enforcement actions, the SEC has entered into a deferred-prosecution agreement with a corporate defendant, potentially signaling the start of a trend of tougher SEC action against alleged violators of the FCPA.
Conduct
- Tenaris, a Luxembourg-based global steel pipe supplier and manufacturer, entered into a two-year deferred prosecution agreement with the SEC and non-prosecution agreement with the DOJ, agreeing to pay fines to the SEC and DOJ in connection with its alleged violations of the FCPA.
- In 2006 and 2007, Tenaris bid on and ultimately won several contracts to supply pipelines for transporting oil and natural gas for OJSC O’ztashqineftgaz (OAO), an Uzbekistan state-controlled oil and gas production company.
- Tenaris allegedly retained an agent who, in exchange for 3.5% of the value of four contracts, bribed OAO officials to gain access to competitors’ confidential bids. The company used the confidential information to revise its own bids and, as a result, was ultimately awarded the contracts.
- Tenaris allegedly made approximately $5 million in profits from the contracts it obtained through this alleged bribery scheme. Tenaris also failed to accurately record the payments made to the agent and OAO officials in its books and records.
Penalty
- Pursuant to the two-year deferred prosecution agreement into which it entered with the SEC, Tenaris must disgorge approximately $5.4 million to the SEC and enhance its policies and procedures relating to the FCPA; the company must implement a detailed FCPA training program, review and update its code of conduct, require certifications of compliance with its anticorruption policies, and notify the SEC of future complaints, charges, or convictions of the antibribery or securities laws.
- Under its non-prosecution agreement with the DOJ, Tenaris also agreed to pay a $3.5 million criminal penalty to settle pending FCPA charges with the DOJ.
Notes
- This case marks the first time the SEC has entered into a deferred-prosecution agreement in an FCPA case, signaling what could represent the start of a more gloves-off approach to FCPA prosecutions reminiscent of the DOJ’s current aggressive approach to such cases.
- Press releases from the SEC and DOJ emphasize that Tenaris’s timely and substantial cooperation with and voluntary disclosures to the government resulted in reduced financial penalties.
First Jury Verdict Rendered Against FCPA Corporate Defendant
Last week, corporate defendant Lindsey Manufacturing, Inc. (“Lindsey Manufacturing”) was convicted of violating the Foreign Corrupt Practices Act (FCPA) for allegedly bribing and conspiring to bribe representatives of a state-owned Mexican utility through a third party intermediary.
The Department of Justice’s press release on the case can be found here.
Conduct
- The Department of Justice (DOJ) alleged that Lindsey Manufacturing, an electric utility equipment manufacturer, headquartered in Azusa, California, and two of its executives conspired to pay bribes to Mexican government officials at the Comisión Federal de Electricidad (CFE), a state-owned utility company.
- According to the DOJ, CFE is responsible for supplying electricity in Mexico, and contracts with Mexican and foreign companies for goods and services to help supply electricity services to its customers. Lindsey Manufacturing, allegedly, hired Grupo Internacional de Asesores S.A. (Grupo) to serve as its sales agent in Mexico and to obtain contracts from CFE, in exchange for a percentage of the revenue Lindsey Manufacturing realized from its contracts with CFE.
- According to the DOJ, from approximately February 2002 until March 2009, Lindsey Manufacturing, its CEO, Dr. Keith Lindsey, its CFO, Steve K. Lee, and Grupo directors Enrique Aguilar and Angela Aguilar allegedly orchestrated a scheme to obtain contracts from CFE by channeling improper payments to CFE officials through Grupo. According to the DOJ, “Lindsey Manufacturing directed that a 30 percent commission on all the goods and services it sold to CFE be paid to Enrique Aguilar, even though this was a significantly higher commission than previous sales representatives for the company had received.” Lindsey Manufacturing allegedly directed these 30 percent commission payments to Enrique Aguilar for the purpose of using the money to pay bribes to Mexican officials in exchange for CFE awarding contracts to Lindsey.
- Enrique and Angela Aguilar allegedly laundered 30 percent commission payments in the Grupo brokerage account to make concealed payments for the benefit of CFE officials.
- According to the DOJ, “within months of hiring Enrique Aguilar, Lindsey Manufacturing began receiving contracts from CFE and over the course of the next seven years received more than $19 million in CFE business.” Enrique and Angela Aguilar allegedly purchased a yacht for approximately $1.8 million named the Dream Seeker and a Ferrari for $297,500 for a CFE official. Enrique and Angela Aguilar also allegedly paid more than $170,000 worth of American Express bills for a CFE official and sent approximately $600,000 to relatives of a CFE official.
Trial
- Lindsey Manufacturing, Keith Lindsey, Lee and Angela Aguilar elected to hold the DOJ to its burden of proof and take their chances at trial. Enrique Aguilar did not participate in the trial and remains a fugitive.
- On May 10, 2011, following a five-week trial and after less than 24 hours of deliberations, the jury returned guilty verdicts on all counts against the defendants on trial in the case. Angela Aguilar was convicted of one count of conspiracy to commit money laundering. Lindsey Manufacturing, Keith Lindsey, and Steve Lee were each convicted of one count of conspiracy to violate the FCPA and five counts of violating the FCPA.
- Angela Aguilar’s sentencing is set for August 12, 2011, while the other three defendants are scheduled to be sentenced on September 16, 2011.
Penalty
- The defendants face a maximum penalty of five years in prison and a fine of the greater of $250,000 or twice the value gained or lost on the FCPA conspiracy charge. Each of the five FCPA counts carries a maximum penalty of five years in prison and a fine of the greater of $100,000 or twice the value gained or lost. The money laundering conspiracy count carries a maximum penalty of 20 years in prison and a fine of the greater of $500,000 or twice the value of the property involved in the transaction. The government is seeking forfeiture against all defendants.
Notes
- Since the inception of the FCPA in 1977, only one other corporate defendant had elected to defend an alleged FCPA violation at trial. In 1990-1991, Harris Corporation (and certain of its executives) were acquitted of alleged FCPA violations at trial. Obviously, Lindsey and its executives did not fair as well. The Lindsey Manufacturing verdict, therefore, represents the first case where a corporate defendant was convicted of FCPA violations after fully litigating the matter through trial.
- Because Lindsey Manufacturing was itself convicted of FCPA violations, the DOJ will seek to forfeit its corporate assets in subsequent proceedings. This undoubtedly will have a deleterious effect on Lindsey Manufacturing’s viability as a business concern and the jobs of its employees because once convicted, related forfeiture actions are almost invariably successful.
- The Lindsey Manufacturing case is also noteworthy because the defendants had challenged the FCPA counts in the indictment based upon the argument that the definition of “foreign official” under the FCPA does not include employees of foreign state owned corporations. The Court rejected defendants’ arguments and sided with the DOJ, ruling that CFE was an “instrumentality” of the Mexican government, and, therefore, the CFE representative who purportedly accepted bribes qualified as a “foreign official” under the FCPA.
Reference: DOJ Press Release No. 11-596, (dated May 10, 2011); U.S. v. Noriega et al, U.S. District Court, Central District of California (Western Division – Los Angeles), Case #: 2:10-cr-01031-AHM-4.
FCPA Inspired Bribery Act To Hit Oil & Gas Industry Hardest
The UK’s Bribery Act, scheduled to come into force on July 1, 2011, will have the most significant impact on the oil and gas industry, according to research by Ernst & Young.
Ernst & Young’s findings are based on an analysis of bribery prosecutions under the U.S. Foreign Corrupt Practices Act (FCPA) over the last 30 years. Analysts from the firm reviewed 118 FCPA cases involving 242 companies and 167 prosecutions and ranked the most prosecuted industries.
Oil and gas companies came in first, accounting for 18 percent of all prosecutions. Life sciences and consumer products were the second and third, accounting for 13 and 12 percent of prosecutions, respectively. Criminal fines were the most common outcome of an FCPA investigation in all three sectors.
Ernst & Young elected to examine the historical data on FCPA prosecutions to forecast the impact of the UK Bribery Act because the Act’s provisions are similar to the FCPA and prohibit similar conduct. The firms predictions may not be precisely on point, however, because the UK Bribery Act is actually more expansive than the FCPA. Most notably, the UK Bribery Act prohibits the bribery of private individuals and companies as well as foreign officials, includes an offense of “corporate failure to prevent bribery” and specifically outlaws facilitation payments, which are permitted in some limited instances under the FCPA.
The UK Bribery Act and guidance to comply with its provisions is explored in more detail here.
Ernst & Young made a point to note that it expects the oil and gas industry to see the harshest impact of the UK Bribery Act, not because the sector is somehow predisposed to greater corruption, but because the sector operates in different parts of the globe. David Lister, a director at the firm’s Fraud Investigations and Dispute Services team, explained “There is no suggestion that individuals and companies within the oil and gas sector [or other sectors on the list] are intrinsically more corrupt than their counterparts in other sectors. Rather, it is the nature and locations of their businesses that exposes them to additional risk.”
China’s Amendment to the Criminal Law to Outlaw Bribery of Foreign Officials Becomes Effective
An amendment of the PRC Criminal Law which criminalizes bribery of foreign government officials and “international public organizations” to secure illegitimate business benefits went into effect on May 1, 2011.
The PRC did not have any law addressing cross-border bribery before and this law will be the first law to condemn bribery of foreign officials. This amendment is the PRC’s effort to comply with the United Nations Convention Against Corruption to which the PRC is a signatory.
The amendment was made to Article 164 of the PRC Criminal Law prohibiting entities or individuals from offering bribes to employees of companies and enterprises who are not government officials. With the amendment, it is a criminal act to bribe foreign government officials or international public organizations.
According to this Article 164, if the payor is an individual, depending on the value of the bribes, he or she is subject to imprisonment up to 10 years; if the payor is an entity, criminal penalties will be imposed against the violating entity and the supervisor chiefly responsible and other directly responsible personnel may also face imprisonment of up to 10 years. Penalties may be reduced or waived if the violating individual or entity discloses the crime before being charged.
According to the PRC Supreme Procuratorate issued in 2001, individuals offering bribes of more than RMB10,000 and entities offering bribes of more than RMB 200,000 may be prosecuted under Article 164.
Unlike other bribery-related crimes in the PRC, which focus on the receipt by the briber of “illegitimate benefits,” bribery of foreign officials or international organizations prohibits securing illegitimate business benefits. In advance of the release of judicial interpretation of what may be “illegitimate business benefits,” the current legal understanding of what is “to secure illegitimate benefits” means in other briberyrelated crimes may provide a reasonable basis for understanding this amendment.
The law refers to “officials of foreign countries and international public organizations,” but does not define these terms. For example, it is not clear whether international public organization includes foreign nongovernmental organizations.
As of this post, no judicial interpretation or administrative regulations regarding the implementation of this provision has been promulgated. It is not clear whether foreign companies may also be subject to jurisdiction under the PRC Criminal Law with respect to this new amendment. We will continue to closely monitor future development related to this amendment.
Anti-Corruption measures in Decree Initiative for Federal Law of Administrative Accountability of Public Officials
As part of the strategy to put an end to corruption in Mexico, and within the scope of the 2007-2012 National Development Plan to strengthen security and the rule of law, President Felipe Calderon sent on March 2, 2011 the decree initiative amending and expanding various provisions of the Federal Law of Administrative Accountability of Public Officials. The following may be highlighted from it:
- It establishes the protection measures for those who denounce and provide information about any breach of duties by government officials, and the government officials’ obligation to refrain from inhibiting possible claimants.
- It contemplates the filing of anonymous reports.
- It confers greater discovery means to the federal government controllers, and to the heads of the auditing and the complaints and responsibilities areas.
- It increases the sanctions applicable to administrative offences, including the suspension from service of the public officer involved in incidents, which could be a suspension for up to 20 years and the removal of the official from his position in the case of serious offences.
- It establishes that the official’s position and its collaboration in the identification of the facts or accreditation of responsibility of other officials will be taken into account to set the administrative sanctions.
- It establishes means to encourage officials to provide information that may contribute to fight corruption, including a substantial reduction of the administrative sanctions for their collaboration.
- It improves the supervision of government officials’ wealth and provides the means for the State to sanction any violations and to compensate the citizens that denounce acts of corruption, in an attempt to make citizen claims a true tool to fight corruption.
Mexican Senate Approves Anti-Corruption Law
Last Thursday, May 5, 2011, the Mexican Senate approved President Felipe Calderon’s Federal Anti-Corruption in Government Contracting initiative.
Our colleagues at Sánchez DeVanny Eseverri, S.C. (“Sánchez DeVanny”), Mexico have analyzed the new legislation and provide its highlights below:
- It establishes the responsibility and sanctions applicable to individuals and legal entities, whether national or foreign, acting under any capacity (either as shareholders, partners, legal representatives, clients or agents, advisors, subcontractors, employees, or others) for irregular conducts in which they may incur during their direct or indirect participation in federal government contracting (including preliminary acts, bidding processes, and any other act or proceeding derived from such), or in international commercial transactions.
- The following are among the irregular conducts subject to sanctions: offering or paying money to a government officer in order for him to carry out or omit an act related with his functions, carry out acts to obtain an improper benefit or advantage in federal government contracting processes, or participate in public bids despite being prevented to do so by law or by an administrative resolution, or in any other way evade the rules or requirements of the federal government contracting.
- For individuals, the sanctions basically consist in fines that range from a thousand to fifty thousand times the general minimum wage in effect in Mexico City (this is, between US$5,000 and US$250,000 approximately) or 30% to 35% of the amount of the government contract and, for legal entities, in fines that range from ten thousand to two million times the general minimum wage in effect in Mexico City (this is, between US$50,000 and US$10,000,000) or 30% to 35% of the amount of the government contract. Additionally, both individuals and legal entities may be sanctioned with disqualification to participate in federal government contracting processes for a period from 3 months to 5 years.
- The competent authority to apply, develop and interpret this law and its provisions, and to apply sanctions, will be the Mexican Ministry of Public Administration.
The foregoing analysis of the Federal Anti-Corruption in Government Contracting initiative was provided by attorneys Humberto Morales-Barrón and Daniel Maldonado Alcántara of Sánchez DeVanny, Mexico.
Former CCI Executive Settles with DOJ
Flavio Ricotti, a former executive with Control Components, Inc. (“CCI”), has reached a settlement with the DOJ over charges for conspiring to violate the FCPA and the Travel Act.
Conduct
- In 2009, CCI, a California-based valve company, pled guilty to a three-count criminal information that charged two counts of violating the antibribery provisions of the FCPA and one count of conspiracy to violate the FCPA and Travel Act.
- CCI violated the FCPA by making corrupt payments totaling approximately US$4.9 million to officers and employees of state-owned enterprises (SOEs) – “foreign officials” under the FCPA – for the purpose of obtaining or retaining business. CCI generated approximately US$31.7 million in net profits as a result of these corrupt payments.
- In connection with the 2009 proceeding, Ricotti has pled guilty to one count of conspiring to violate the FCPA and the Travel Act.
- From 2001 to 2007, Ricotti served as CCI’s Director and then Vice President of Sales for Europe, Africa, and the Middle East. Ricotti admitted that, in 2002, he authorized a decision to offer a 1.2% commission to an employee of a private Qatari company on whose contract CCI was bidding, in exchange for the employee’s agreement to share confidential information on CCI’s competitors and exercise influence in CCI’s favor. In 2003, Ricotti conspired with another CCI employee to bribe an official of Saudi Aramco, a Saudi oil company, in the amount of approximately $43,000 to secure a valve contract for CCI.
Penalties
- Ricotti faces a maximum five-year prison sentence, $250,000 fine,and three years of supervised release.
Notes
- Payments were made to foreign officials in several countries, including Qatar and Saudi Arabia.
- Some payments were made to individuals who had the power to award contracts or influence projects’ technical specifications so as to favor CCI.
- In addition to violating the the FCPA, Ricotti admitted that his conduct violated the Travel Act, 18 USC 1952. The Travel Act makes it unlawful to travel in interstate or foreign commerce, or use any facility of interstate or foreign commerce, with the intent to promote, manage, establish, carry on, or facilitate the promotion, management, establishment or carrying-on of any unlawful activity.
Rockwell Settles With SEC Over Former Subsidiary’s Role In China Bribe Case
Rockwell Automation, Inc. (“Rockwell”), an industrial automation products and services provider, headquartered in Milwaukee, Wisconsin, resolved an enforcement action in which the SEC alleged it violated the FCPA’s books and records and internal controls provisions through the actions of its former China based subsidiary, Rockwell Automation Power Systems (Shanghai) Ltd. (“RAPS-China”), which was divested by Rockwell in 2007.
Conduct
- The SEC alleged that from 2003 to 2006, RAPS-China employees paid approximately $615,000 to Design Institutes which were typically state owned enterprises for design engineering and technical integrations services that can influence contract awards by end user state owned customers. The payments were made through third party intermediaries at the request of Design Institute employees and at the direction of RAPS-China’s Marketing and Sales Director with the expectation of influencing the state owned companies to purchase RAPS products. RAPS-China recorded these payments as “cost of sales.” These inaccurate books and records were then incorporated into Rockwell’s books and records for the purposes of preparing financial statements filed with the SEC.
- During this same period, the SEC alleged that RAPS-China also paid about $450,000 for sightseeing and leisure travel for employees of Design Institutes to destinations including New York City, Washington D.C., and Hawaii. According to the SEC, “some trips appeared to have no direct business component, other than the development of customer good will.” For example, the SEC stated, “RAPS-China arranged for so-called design meetings in New York City despite the lack of any Rockwell facility there because ‘everyone likes New York.’“
- In connection with the aforementioned payments by RAPS-China to Design Institutes, the SEC alleged that Rockwell “failed to make and keep accurate books, records and accounts as required by Section 13(b)(2)(A) of the Exchange Act” and “failed to devise or maintain sufficient internal controls as required by Section 13(b)(2)(B) of the Exchange Act.”
- Rockwell discovered the violations as part of its normal financial review process and global corporate compliance and internal controls program. Rockwell, thereafter, investigated the payments and self-reported.
Penalty
- Without admitting or denying the SEC’s allegations, Rockwell consented to the entry of a cease-and-desist order prohibiting Rockwell from further violations of the FCPA’s books and records and internal controls provisions, and agreed to pay disgorgement of $1,771,000, prejudgment interest of $590,091 and a civil penalty of $400,000.
Notes
- The cease-and-desist order specifically stated the SEC would not impose a civil penalty in excess of the $400,000 – a relatively modest penalty in today’s FCPA enforcement environment – based on Rockwell’s cooperation with the SEC in its investigation and enforcement action.
- The Rockwell enforcement action once again demonstrates the need for US companies with wholly-owned foreign subsidiaries to maintain a robust global compliance program that accurately and transparently documents the services being provided and monies being paid in the books and records, or face the prospect of discovering years later a “poison pill” in the subsidiary’s records resulting in SEC enforcement and significant liability.
Reference: SEC Administrative Release No. 64380, Accounting and Auditing Enforcement Release No. 3274, and Administrative Proceeding File No. 3-14364 in In Re Rockwell Automation Inc. (all dated May 3, 2011)
