Anti-Corruption Quarterly
4th Quarter 2012
In This Issue:
2012 YEAR IN REVIEW
Major Corporate
Enforcement Actions................1
Major Individual
Enforcement Actions................7
Trial Losses...................................10
Other Major Developments...11
Columns
IN THE INTERIM.................................2
COMPLIANCE CORNER: ...................5
2012 YEAR-IN-REVIEW
The past twelve months mark another year of robust FCPA enforcement activity by the government, albeit with mixed results. According to Lanny Breuer,
Assistant Attorney General for the Criminal Division, “FCPA enforcement is
stronger than it’s ever been—and getting stronger.” Nevertheless, the DOJ experienced a rocky start to 2012 as it continued a series of trial losses that began
in 2011. After touting the “Africa Sting” case, a two-and-a-half-year undercover
operation that resulted in twenty-two FCPA indictments, the DOJ was only
able to secure a single conviction, that of its cooperating witness. In addition, a
federal judge dismissed the DOJ’s FCPA charges against a former Swiss executive, finding the government’s case constituted little more than “gossip.”
This year also saw the government and companies releasing more details
regarding declination decisions in FCPA cases. In April, the DOJ announced the
most significant of these declinations: its decision not to pursue Morgan Stanley
for the FCPA violations of its employee, Garth Peterson. A number of other
companies also disclosed declination decisions in their SEC filings. In several of
these cases, the government highlighted the companies’ compliance programs
as important factors in the declination decisions.
Also of significance, in November the DOJ and SEC jointly released the longawaited Resource Guide to the U.S. Foreign Corrupt Practices Act, which advances
the government’s position on what constitutes an FCPA violation and what steps
regulators believe are appropriate for a company to take to avoid violations.
The Guide appears designed, at least in part, to give an imprimatur of authority to some questionable positions taken by the DOJ and SEC in FCPA cases.
However, it is worth emphasizing that the Guide is not meant to restrain the
government’s interpretation of the FCPA in future matters. By its own terms,
the Guide “does not in any way limit the enforcement intentions or litigating
positions” of the DOJ and SEC. It remains to be seen to what use companies and
practitioners and even the government will put the Guide going forward, but its
release is perhaps the biggest news this year, and indicative of the government’s
intention to continue vigorously pursuing FCPA enforcement actions in the
years to come.
These developments, along with the other major FCPA actions of 2012, are
summarized below.
Major Corporate Enforcement Actions
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Prior results described herein do not guarantee a similar outcome.
Wal-Mart
Throughout 2012, Wal-Mart has been the target of DOJ, SEC, and congressional
investigations and has received extensive media attention as a result of a New
York Times article alleging the company’s largest foreign subsidiary, Wal-Mart
de Mexico (“Walmex”), engaged in a widespread bribery scheme to expand the
retailer’s presence in Mexico. The April 21, 2012, article alleged that, in September 2005, a Wal-Mart attorney received a tip from a former executive at Walmex
claiming the Mexican subsidiary had made suspect payments totaling more
than $24 million, which they concealed from Wal-Mart. According to the former
Continued on Page 3
Anti-Corruption Quarterly
“IN THE INTERIM”
10/9/12: The Serious
Fraud Office (UK) released
new guidance stating that
facilitation payments can
be bribes. It also released
additional guidance
regarding bona fide business
expenditures.
about $447 million, when
combining the cash payment
and the long-term contract.
10/12/12: Herbert
Steffen, a former Siemens
executive, moved to dismiss
SEC charges that he violated
the FCPA, arguing the court
lacked personal jurisdiction
and that the SEC’s complaint
was barred by the fiveyear statute of limitations.
Steffen is one of several
former Siemens executives
embroiled in SEC and DOJ
enforcement actions. These
individual cases followed
Siemens’ record-setting $800
million FCPA settlement with
the DOJ and the SEC in 2008.
10/10/12: Alcoa agreed
to settle with Aluminum
Bahrain B.S.C. (“Alba”), a
state-owned company, for
$85 million. The lawsuit
alleged that Alcoa engaged
in overcharging, fraud, and
bribery in its dealings with
Alba. While Alba’s civil
suit alleged common law
fraud and RICO violations,
the DOJ is conducting
an investigation into the
possibility that these
allegations contain FCPA
violations. Separately,
Alcoa resumed a long-term
agreement to sell raw
materials to Alba, which
owns one of the largest
aluminum smelters in
the world. Alba claims
the settlement is worth
10/22/12: Another former
Siemens executive, Ariel
Sharef, decided not to
challenge the SEC and
reached an agreement
in principle to settle SEC
charges that he violated
the FCPA. The terms of
the settlement were not
announced.
FCPA-Related Cases*
10/29/12: Three former
Magyar Telekom executives,
Elek Straub, Andras
Balogh, and Tamás Morvai,
filed a motion to dismiss SEC
charges that they violated
the FCPA while working for
Magyar, which previously
settled its own FCPA actions.
The defendants argued that
the court lacked personal
jurisdiction, the statute
of limitations barred the
complaint, and the complaint
failed to allege sufficient facts
to support the allegations.
Their motion has not yet
been ruled on.
11/5/12: Total, the French
oil company, announced
in an SEC filing that it may
accept settlement proposals
by the SEC and DOJ that
would terminate agency
investigations regarding
potential FCPA violations
in Iran. The company
announced that it had set
aside $398 million to cover
the estimated costs of the
possible settlements. If
Corporate FCPA-Related Penalties*
103
(in U.S. millions)
1885.1
85
DOJ
SEC
49
803.0
28
16
8
19
26
22
20
14
579.0
25
502.7
398.0
15
11
9
13
260.3
155.1
87.2
2006
*
2007
2008
2009
2010
2011
2012
New criminal or civil cases (settled or contested)
instituted by year
** Based upon public disclosures of investigations
Pending
Investigations**
2006
*
2007
2008
2009
2010
2011
2012 YTD
Pending
Settlement**
Includes disgorgement; does not include non-U.S. fines
** Includes publicly disclosed reserves for future FCPA
settlements
that figure is accurate, it
would be the fourth largest
FCPA enforcement action in
history.
11/5/12: The DOJ provided
a novel type of reward in
the FCPA context by ending
Pride International’s
Deferred Prosecution
Agreement one year early
because of the oil services
company’s exemplary
compliance program. The
deferred prosecution
agreement stemmed from
allegations that Pride paid
bribes to government
officials in Venezuela, India,
and Mexico to gain business
advantages from oil rigs in
those countries.
11/9/12: Husband and wife,
Stuart and Hong “Rose”
Carson, were sentenced for
their FCPA violations. In
April, each pleaded guilty
to one count of violating
the FCPA related to Control
Components Inc.’s bribery
scheme in which the
manufacturer of valves for
energy industries sought
to secure contracts in over
thirty countries. Stuart,
CCI’s former CEO, was
sentenced to four months
in prison, eight months of
home detention and was
fined $20,000. Hong Rose,
CCI’s former sales director,
was sentenced to three
years probation with a
condition that she serve six
months’ home confinement,
fined $20,000, and ordered
to perform 200 hours of
community service.
Continued on Page 3
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Anti-Corruption Quarterly
2012 YEAR-IN-REVIEW
“IN THE INTERIM”
continued from page 2
Cont. FROM COVER PAGE
executive, Walmex made payments to local government officials across Mexico
to induce them to make the bureaucratic and legal accommodations necessary to
facilitate Wal-Mart’s aggressive expansion plan in Mexico.
The New York Times article further alleged that, although preliminary investigations confirmed the whistleblower’s tip, Wal-Mart executives declined to undertake a full-scale investigation of possible FCPA violations or disclose the situation
to government agencies. Instead, Wal-Mart executives directed Walmex’s general
counsel—who allegedly approved the bribes—to conduct the investigation. His
report, which a Wal-Mart executive called “truly lacking,” exonerated Walmex
and accused the whistleblower of fraud. According to the Times article, Wal-Mart
accepted the report and did not notify the DOJ until December 2011 when it
learned the newspaper was going to publish the article.
On December 17, the Times published a follow-up piece chronicling the results
of its continued investigation of Wal-Mart’s practices in Mexico. According to the
Times, Walmex did not merely respond to the demands of a corrupt bureaucratic
culture in Mexico but proactively offered and paid bribes in order to circumvent
permit requirements and build new stores. By way of example, the article
described in great detail how Walmex officials paid numerous bribes in order to
improperly obtain the building, traffic, environmental, and cultural permits necessary to build a supermarket in the historically significant city of Teotihuacán.
Wal-Mart filings with the SEC and various public statements have indicated that
the Arkansas-based retail giant notified the DOJ and SEC in November 2011 and
has undertaken extensive efforts to investigate FCPA violations in Mexico. WalMart has also indicated that it is cooperating with DOJ and SEC investigations.
As of a November 15, 2012, SEC filing, Wal-Mart has expanded its investigations
to Brazil, China, and India. According to a December 4 SEC filing, Wal-Mart spent
$99 million on FCPA investigations in the first three quarters of 2012. Additionally, Wal-Mart must contend with an unprecedented level of congressional
scrutiny into its possible FCPA violations in Mexico. See prior Sidley Article in
the 3rd Quarter 2012 Anti-Corruption Quarterly. All this is sets the stage for
what could be a record-breaking FCPA settlement.
11/14/12: The DOJ and SEC jointly
released their much-anticipated
FCPA guidance, which “addresses
a wide variety of topics, including
who and what is covered by the
FCPA’s anti-bribery and accounting
provisions; the definition of a
‘foreign official;’ what constitute
proper and improper gifts, travel
and entertainment expenses;
facilitating payments; how successor
liability applies in the mergers and
acquisitions context; the hallmarks
of an effective corporate compliance
program; and the different types
of civil and criminal resolutions
available in the FCPA context.”
12/17/12: Allianz SE, a German
insurance and asset management
company that issues stock on the
NYSE, paid more than $12.3 million
to settle SEC charges that it violated
the books-and-records and internal
controls provisions of the FCPA. The
SEC alleged that Allianz’s subsidiary
used a slush fund to make improper
payments of $650,626 to government
officials in Indonesia that secured
more than $5.3 million in profits over
the course of seven years. Allianz
neither admitted nor denied the
SEC’s findings.
On February 13, 2012, the DOJ began presenting evidence to a grand jury
against U.S. executives at Avon Products, Inc. Press reports suggested that the
grand jury proceeding was in response to potential FCPA violations involving
bribery by Chinese employees. In July 2012, federal prosecutors asked to speak
to Avon’s former CEO about the company’s FCPA issues in China. In August 2012,
the Wall Street Journal reported that Avon had spent approximately $280 million
on its internal investigation into the matter and was engaged in settlement talks
with the DOJ and SEC. Adding to Avon’s troubles, in March 2012, company
shareholders filed a derivative action in the United States District Court for the
Southern District of New York against the directors and officers of the company,
alleging that their failure to implement sufficient anti-corruption compliance
12/17/12: David Edmonds, a
former VP of Control Components
Inc., was sentenced to four months
imprisonment for violating the FCPA,
followed by four months of home
confinement. He was also ordered
to pay a $20,000 fine. Edmonds, 60,
pleaded guilty in June to one count
of making a corrupt payment to a
foreign official in Greece in 2003. He
was originally indicted on 16 FCPArelated counts. CCI plead guilty to
related charges in 2009.
Continued on Page 4
Continued on Page 4
Avon Products, Inc.
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Anti-Corruption Quarterly
2012 YEAR-IN-REVIEW
“IN THE INTERIM”
continued from page 3
Cont. FROM PAGE 3
controls enabled the corrupt conduct. The derivative suit also alleges that the
company provided a large severance to the former head of the company’s internal audit unit in 2006 to keep him from reporting the bribes in China.
BizJet International
On March 12, 2012, BizJet International Sales and Support Inc., agreed to pay
an $11.8 million criminal fine and enter into a three-year deferred prosecution
agreement with the DOJ to resolve FCPA offenses in Latin America. BizJet’s
German owner, Lufthansa, also entered into a three-year DPA. The complaint
alleged that BizJet had bribed government officials in Latin America to secure
contracts to perform aircraft maintenance, repair, and overhaul for government
agencies. The DOJ’s press release acknowledged that BizJet and Lufthansa
voluntarily disclosed the FCPA violations to the DOJ and were extraordinarily
cooperative—conducting an extensive internal investigation, engaging in extensive remediation, and enhancing due-diligence protocols for third-party agents
and consultants. Neither BizJet nor Lufthansa are issuers, so there was no SEC
enforcement action in this case.
Biomet, Inc.
12/20/12: Eli Lilly and Company
settled FCPA civil charges brought by
the SEC based on conduct in Russia,
Brazil, China, and Poland. Lilly
agreed to pay $29.4 million to the
SEC, which included disgorgement of
$13.9 million, prejudgment interest
of $6.7 million, and a penalty of $8.7
million.
12/20/12: Judge Leon (D.D.C.)
rejected a proposed 2011 settlement
between the SEC and IBM, saying
the company should be required to
report all accounting violations and
not just FCPA anti-bribery problems.
In 2011, IBM agreed to pay $10
million to resolve a civil complaint
filed by the SEC and to inform the
agency of certain compliance issues.
On March 26, 2012, Biomet Inc. agreed to pay a fine of $17.3 million to the DOJ
and $5.5 million in disgorgement and pre-judgment interest to the SEC to settle
allegations that it bribed doctors at government hospitals in Argentina, Brazil,
and China from 2000 to 2008. Biomet’s deferred prosecution agreement with
the DOJ also required the company to cooperate in the ongoing industry investigation and to retain a compliance monitor for 18 months. The enforcement
action against Biomet was a part of an industry-wide investigation into unlawful
payments by orthopedic device manufacturing companies to officials employed
by foreign state-owned hospitals. In commenting on the Biomet case, Kara
Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit said, “Biomet’s
misconduct came to light because of the government’s proactive investigation
of bribery within the medical device industry . . . A company’s compliance and
internal audit should be the first line of defense against corruption, not part of
the problem.” Medical device companies, like Biomet, are particularly susceptible to FCPA problems because many of the individuals to whom they market
their products are medical health professionals for state-run healthcare systems,
whom the government views as “foreign officials.”
FalconStor Software
On April 25, 2012, FalconStor Software agreed to pay federal authorities $5.8
million in penalties to settle criminal and civil charges relating to domestic,
private sector bribery. FalconStor entered into a deferred prosecution agreement with the DOJ, admitting that it conspired to pay more than $400,000 in
bribes—including gambling slush funds and stock options—to executives at a
U.S. investment bank in order to obtain over $12 million in electronic storage
licensing contracts. The bribes were falsely recorded in FalconStor’s books and
records as “compensation to an advisor” or as “employment bonuses.” In this
case, the recipients of the bribes were domestic, private sector bankers and not
Continued on Page 5
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Anti-Corruption Quarterly
2012 YEAR-IN-REVIEW
COMPLIANCE CORNER
Cont. FROM page 4
foreign officials, so the criminal charges were not FCPA violations. However,
the SEC did charge FalconStor under the FCPA’s books-and-records provisions
which broadly apply to, among other things, any attempts by issuers to conceal
bribery—illustrating the SEC and DOJ view, articulated in the Guide, that the
government can use the FCPA’s books-and-records provisions even in cases that
do not involve foreign government officials.
Data Systems & Solutions
On June 18, 2012, Data Systems & Solutions LLC, a power plant services
provider, agreed to pay an $8.82 million criminal penalty to settle a two-count
criminal information for conspiring to violate, and violating, the FCPA’s antibribery provisions. The DOJ alleged that Data Systems paid bribes to officials
employed by a state-owned nuclear power plant in Lithuania to secure service
contracts at the plant. Data Systems entered into a two-year deferred prosecution agreement, in which the DOJ acknowledged its extraordinary cooperation,
swift internal investigation, and extensive remediation, including terminating
the employees responsible for making the corrupt payments. Nevertheless,
while the DOJ continues to propound the idea that companies, like Data Systems, that engage in extensive cooperation, undertake wide-reaching internal
investigations, and implement broad remediation efforts, will receive substantial
leniency from the government, quantifying the government’s leniency is difficult,
making it impossible to know if the benefit of that leniency outweighs the costs
of those efforts.
Pfizer Inc
On August 7, 2012, Pfizer Inc and its subsidiaries, Pfizer H.C.P. Corp. and Wyeth
LLC, paid over $60 million to settle FCPA charges brought by the DOJ and SEC.
Pfizer H.C.P. entered into a deferred prosecution agreement with the DOJ and
paid a $15 million penalty to resolve charges alleging Pfizer H.C.P. bribed government officials in Bulgaria, Croatia, Kazakhstan, and Russia. Pfizer Inc agreed to
pay $26.3 million in disgorgement and prejudgment interest to settle the SEC’s
claim that Pfizer violated the books-and-records and internal-controls provisions as a result of Pfizer’s H.C.P. and other subsidiaries’ FCPA violations. In a
factually unrelated matter, Wyeth, which Pfizer acquired in 2009, agreed to pay
$18.9 million to settle the SEC’s claim that Wyeth violated the books-and-records
and internal-controls provisions from approximately 2005 through 2010 as a
result of bribes paid by Wyeth’s subsidiaries in China, Indonesia, Pakistan, and
Saudi Arabia. Much of the Wyeth conduct was pre-acquisition and was reviewed
by Pfizer post-acquisition pursuant to the procedures set forth in the DOJ’s
Halliburton opinion procedure release. As a result of Pfizer’s compliance efforts,
the DOJ reduced Pfizer H.C.P.’s criminal penalty, and the SEC did not charge
Pfizer or Wyeth with civil penalties. While these three actions illustrate the FCPA
risk a parent assumes as a result of its subsidiaries’ actions—including actions
taken by a subsidiary prior to its acquisition—they also highlight the importance
of instituting and implementing a strong FCPA compliance program that covers
subsidiaries, performing FCPA due diligence reviews of new subsidiaries, and
voluntarily disclosing uncovered violations in a timely manner.
Continued on Page 6
Tone at the Top:
More than Just Jargon
Setting the right “tone at the top” of
a company is key to the success of
any compliance program. Indeed,
the recently issued Resource Guide to
the U.S. Foreign Corrupt Practices Act
says as much, noting that “compliance with the FCPA and ethical rules
must start at the top.” But what is the
Board of Directors’ role in creating
the right tone, how can corporate
leadership communicate its message effectively, and what is the link
between setting the right tone and
enforcement?
What is the Board’s Role?
An important element to creating the
correct tone at the top is the support
of the Board of Directors. Corporate
leadership is best positioned to set
the proper tone for the rest of the
company when it has the support of
its Board of Directors. This allows
for a solid foundation from which
to broadcast the message of commitment to compliance throughout
the company. The Board should
not merely oversee the compliance
program, but should be actively
involved in ensuring that compliance
is a top corporate priority and that
the message of compliance is effectively communicated throughout the
company.
The Board can help ensure that
compliance is a top priority by
guaranteeing the company devotes
sufficient resources to implementing
an effective compliance program.
Additionally, the Board can create
a compliance structure in which a
Chief Compliance Officer (“CCO”),
or similar position, is responsible
for the day-to-day management
of the compliance program and is
Continued on Page 6
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Anti-Corruption Quarterly
2012 YEAR-IN-REVIEW
COMPLIANCE CORNER
Cont. FROM page 5
Oracle
On August 16, 2012, Oracle, a California-based computer company, agreed to
pay a $2 million civil penalty to settle SEC claims that Oracle violated the booksand-records and internal-controls provisions of the FCPA. According to the
Complaint, Oracle’s subsidiary, Oracle India Private Limited, made sales to the
Indian government through distributors at inflated prices, and the distributors
“parked” the excess margin in an unrecorded and illegitimate side fund. The SEC
alleged that these side funds were used as a means to keep the proceeds from the
sales off Oracle India’s corporate books, in violation of the FCPA’s requirement
that public companies keep accurate books and records. Interestingly, the SEC
did not allege that Oracle India paid any bribes with the funds; the Commission
instead said that the funds “created a risk that they potentially could be used
for illicit means, such as bribery or embezzlement.” Although Oracle India’s
employees concealed the side fund and Oracle did not know about it, Oracle
India’s incorrect accounting consolidated into Oracle’s books and records. This
case is an example of the government’s aggressive use of the books-and-records
provisions to punish an issuer for the foreign acts of a foreign subsidiary, and it
evidences the proactive use of the books-and-records provisions to address not
just bribes, but also situations in which bribes could have been paid. This expansive view is reflected in the Guide, which states that the accounting provisions of
the FCPA apply to more than just bribery-related violations.
Allianz SE
On December 17, Allianz SE paid almost $12.4 million to settle an SEC enforcement action alleging that the German insurance and asset management company
violated the books-and-records and internal controls provisions of the FCPA.
The SEC order imposing the settlement found that, between 2001 and 2008,
Allianz’s Indonesian majority-owned subsidiary, PT Asuransi Allianz Utama
(“Utama”), which provided financing and insurance for large government projects in Indonesia, used a “special purpose account” to make improper payments
of approximately $650,626 to agents and employees of state-owned entities in
order to secure 295 government insurance contracts, resulting in $5,315,649 in
profits. Without admitting or denying the SEC’s findings, Allianz agreed to cease
and desist from future violations and to pay disgorgement of $5,315,649, prejudgment interest of $1,765,125, and a $5,315,649 civil penalty.
Allianz’s settlement illustrates the importance of not only instituting a procedure
for internal whistleblower complaints, but also thoroughly investigating any
complaints that are made and adequately responding to possible violations. On
December 1, 2005, an internal complaint identified the special purpose account
as an accounting controls weakness, prompting Allianz to audit Utama. According to the SEC’s order, the audit failed to take steps to determine the illicit nature
of the account, and an Utama manager continued to use the account to make
illicit payments despite Allianz’s instruction to close it. In fact, the Utama manager began to employ additional methods to make and hide payments to foreign
officials over the next several years. Until Allianz received a second internal
whistleblower complaint in March 2009, the SEC’s order asserts that Allianz’s
Continued on Page 7
given direct access to the Board or
a committee of the Board. Indeed,
many recently-negotiated Corporate
Integrity Agreements (“CIAs”)
require this structure be part of the
company’s compliance program.
The Board should not allow other
departments or business managers
to overrun the CCO. Frequently,
middle managers are given ambitious and unequivocal financial
goals that may be difficult to meet
in light of the company’s ethical
standards. Set too high, or without
some flexibility given the realities on
the ground, these goals can give the
incorrect appearance that corporate
leadership wants business managers
to prioritize financial goals over ethical compliance. The Board can play
a role in preventing such mistaken
messages by reminding middle
managers of the overall importance
of compliance, and being clear that
the company’s ethical standards
should never be compromised to
meet financial or business goals.
Finally, Board members should
themselves be accountable. Adopting a Code of Ethics and articulating
the importance of compliance will
fail to create a strong culture of compliance if it is obvious, by conduct
or otherwise, that the Code’s provisions do not apply to the Board and
corporate leadership.
How Can Corporate
Leadership Communicate
Its Message Effectively?
Corporate leadership must find a
way to effectively communicate
that the company is committed to
the highest ethical standards in its
business.
First, the compliance message
should be conveyed often. The more
Continued on Page 7
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2012 YEAR-IN-REVIEW
COMPLIANCE CORNER
Cont. FROM PAGE 6
efforts to ensure that the account was closed or to otherwise monitor improper
payments were inadequate. Although the March 2009 complaint prompted
an internal investigation, Allianz did not report the findings to the SEC, which
learned of the FCPA violations independently when it received an anonymous
complaint in April 2012.
Eli Lilly and Company
On December 20, the Indianapolis-based pharmaceutical manufacturer Eli
Lilly and Company settled SEC charges that it violated the books-and-records,
internal controls, and anti-bribery provisions of the FCPA. Without admitting
or denying the SEC’s allegations, Lilly agreed to pay approximately $29.4 million
($13,955,196 in disgorgement, $6,743,538 in prejudgment interest, and an $8.7
million penalty) and agreed to the entry of a final judgment permanently enjoining the company from committing future FCPA violations.
Major Individual Enforcement Actions
Patrick Joseph
On February 8, 2012, Patrick Joseph, the former Director General of Haiti
Teleco, pleaded guilty to one count of conspiracy to commit money laundering.
Although the FCPA makes it a crime for companies and individuals to bribe foreign officials, the foreign officials who receive those bribes are not liable under
the FCPA. For this reason, the DOJ charged Joseph, who had previously been
classified by the DOJ as a foreign official by virtue of his position at Haiti Teleco,
with conspiracy to commit money laundering, a charge that carries a sentence
of up to twenty years in prison. Joseph received a significantly reduced sentence
in exchange for his cooperation in the multi-defendant Haiti Teleco case. On
July 6, Joseph was sentenced by Judge Jose E. Martinez to one year and one
day in prison and ordered to pay a $955,596 fine. In an unusual twist, Joseph’s
sentencing hearing was not listed in advance on the court’s docket because
officials at the DOJ feared for his safety. These fears stemmed from the fact that
Joseph’s father, who formerly served at high levels within the Haitian government, was murdered two days after his cooperation with DOJ was made public.
Press reports suggest that Joseph’s wide-ranging cooperation in exchange for
the relativity short sentence will likely implicate a broad range of individuals
and organizations down the road. In the Guide, the DOJ and SEC used this case
as a warning that the government is willing and able to use other laws, including
money laundering statutes, the Travel Act, the mail and wire fraud statutes, and
the tax laws, to charge bribery-related conduct. It is also a clear indication that,
when the opportunity presents itself, the government is willing to use a corrupt
foreign government official to build cases against companies and individuals that
violate the FCPA.
William Jefferson
On March 27, 2012, the United States Court of Appeals for the Fourth Circuit
affirmed former U.S. Representative William Jefferson’s convictions on FCPA
conspiracy and nine other corruption counts. In 2007, Jefferson became the
first member of the United States Congress to be charged with a violation of the
Continued on Page 8
pervasive the message, the more
effective it is likely to be. Corporate
leadership should speak frequently
about the company’s values. Integrating the message throughout the
business—in compliance, business
development, auditing, budgeting,
production, marketing, and every
other significant aspect of the
business—will increase the message’s efficacy. Moreover, the more
uniform the message, the more
likely it will be effective. Corporate
leadership should devote time to
ensuring that the messages about
compliance it sends are consistent.
This will involve examining both the
words and marketing of the compliance message to ensure it reaches all
levels of the company in a recurring
and consistent manner.
Second, effective tone at the top is
created through behavior. Behaviors
that convey the compliance message
include: (1) explicitly supporting and
praising individuals for adherence
to the company’s values and ethical
business practices; (2) starting an
open dialogue with middle management about the challenges they face
in trying to implement and live up to
the company’s ethical standards; (3)
making corporate leadership available to discuss with middle management appropriate resolutions to hard
ethical cases as the need arises; and
(4) making ethical competencies
part of performance evaluations and
compensation decisions.
Third, the optimal method of delivering the compliance message has
evolved. Conversations about ethics
and ethical behavior can no longer
be top-down only conversations;
instead, to be most effective, they
must also include two-way conversations. Corporate leaders must be
Continued on Page 8
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COMPLIANCE CORNER
Cont. FROM PAGE 7
FCPA. In 2009, Jefferson was acquitted by a jury on the one substantive FCPA
charge he faced; however, he was convicted on eleven other counts, including
a conspiracy to violate the FCPA. Jefferson was sentenced by Judge T.S. Ellis
to thirteen years in federal prison. Jefferson argued that his convictions were
impermissibly tainted by erroneous jury instructions. While the Fourth Circuit
threw out a single wire fraud conviction, Jefferson’s convictions on the other
10 counts were unanimously upheld. The Fourth Circuit also left Jefferson’s
sentence intact. On May 4, 2012, Jefferson reported to a federal prison in
Beaumont, Texas to begin serving his sentence. The Fourth Circuit’s decision
will likely stand as an endpoint in the long running effort to prosecute Jefferson
for his efforts to bribe a Nigerian official to steer contracts to companies that
Jefferson and his family had interests in.
Wojciech Chodan, Jeffrey Tesler, and Jack Stanley
A trio of former executives at Houston-based KBR (formerly known as Kellogg
Brown & Root) was sentenced by federal judges for their role in KBR’s unlawful
efforts to secure a contract in connection with the TSKJ joint venture in Bonny
Island, Nigeria. On February 22, 2012, Judge Keith B. Ellison of the United States
District Court for the Southern District of Texas sentenced Wojciech Chodan,
the former UK-based KBR manager, to one year of unsupervised probation and
a $20,000 fine. Chodan, who holds British and Polish citizenship, served as a
salesman for a KBR affiliate and had been fighting his extradition from the UK to
the United States. While the UK’s Serious Fraud Office (“SFO”) had considered
prosecuting Chodan, the SFO decided to step aside and allow the DOJ to handle
the prosecution. In 2010, Chodan pleaded guilty to one count of conspiracy to
violate the FCPA.
Judge Ellison also sentenced Jeffrey Tesler, a London lawyer who served as the
conduit for the more than $130 million in bribes to Nigerian officials. On February 23, 2012, Tesler was sentenced by a federal court in Houston to 21 months in
federal prison. Tesler was also ordered to forfeit $149 million held in a number
of offshore bank accounts over which he exercised control. Tesler admitted that
his role in the conspiracy was to act as a middleman between the KBR officials
and the Nigerian officials, shuttling unlawful payments between bank accounts
in Monaco and Switzerland. At his sentencing hearing, Tesler said: “I allowed
myself to accept standards of behavior in a business culture which can never be
justified.” Tesler, who is also facing charges related to KBR’s corruption in France,
had his trial there postponed until his release from federal prison in the United
States, which will occur in October of 2013.
The third executive, Jack Stanley, who formerly served as the Chairman and
CEO of KBR and has been described as the “mastermind” behind the scheme,
was the last to be sentenced by Judge Ellison. Following Tesler’s sentencing on
February 23, 2012, Stanley was sentenced to 30 months in federal prison and
three years of probation following his release. Stanley had pleaded guilty to a
two-count criminal information in 2008, which charged him with conspiracy
to violate the FCPA and to commit mail and wire fraud. Stanley’s preliminary
Continued on Page 9
encouraged to leave their secluded
offices and communicate personally
and transparently with employees.
Further, employees must be encouraged to put forward their own ideas
and concerns about compliance.
This allows employees to feel fully
engaged in the process; indeed,
employees who are committed to a
message make the best ambassadors
of that message.
How Does Setting the Right
Tone Affect Enforcement?
The Board can be encouraged to
“buy in” to a culture of compliance
by being educated about the consequences of failing to do so. There
are clear instances where serious
consequences have resulted from
failure to adhere to and enforce a
culture of compliance. In a recent
high-profile investigation, the
government stated that it decided
to significantly expand the scope
and depth of its investigation after
learning the company’s top officials
had failed to inform the Board of an
initial internal probe. Further, in
two large settlements, the government took aim at corporate leadership’s tolerance of bribery. In one
case, the government noted that
corporate culture had “long [been]
at odds with the FCPA” and bribery
“was tolerated and even rewarded
at the highest levels.”1 In the other
case, the government highlighted the
1 Litigation Release No. 20829, U.S. Securities and
Exchange Commission, SEC Files Settled Foreign
Corrupt Practices Act Charges Against Siemens AG
for Engaging in Worldwide Bribery With Total Disgorgement and Criminal Fines of Over $1.6 Billion,
http://www.sec.gov/litigation/litreleases/2008/
lr20829.htm (Dec. 15, 2008).
Continued on Page 9
8
Anti-Corruption Quarterly
2012 YEAR-IN-REVIEW
COMPLIANCE CORNER
Cont. FROM PAGE 8
prison sentence had been 84 months when he pleaded guilty in 2008; however, it
was shortened by Judge Ellison because of Stanley’s cooperation with the DOJ
and SEC.
This case illustrates that, in certain cases, the government will pursue even
lower-level employees for violations of the FCPA.
Garth Peterson
After Morgan Stanley voluntarily disclosed possible bribery in China, the DOJ
and SEC brought actions against its former employee, Garth Peterson, but
neither agency brought an action against Morgan Stanley. The criminal and civil
charges stemmed from corrupt payments made by Peterson while he was the
managing director for Morgan Stanley’s real estate practice in China. According to the charging documents, Peterson colluded with a Chinese government
official and a Canadian attorney to create an offshore shell company, which was
later used to defraud Morgan Stanley in a multi-million dollar real estate investment deal in Shanghai. On April 25, 2012, Peterson pleaded guilty to conspiring to circumvent the internal accounting controls that Morgan Stanley had
established to prevent violations of the FCPA. He was sentenced to nine months
in prison. To resolve the civil charges alleging that he violated the anti-bribery
provisions of the FCPA and internal controls and fraud provisions of the securities laws, he agreed to pay over $250,000 in disgorgement and to relinquish a
$3.4 million real estate interest.
Manuel Caceres, Juan Pablo Vasquez and Manuel Salvoch
Latin Node Inc., a privately held Florida corporation that was acquired by
eLandia International, Inc., pleaded guilty in 2009 to violating the FCPA in
connection with improper payments to third parties, knowing that some or all
of those funds would be passed on as bribes to foreign officials. In connection
with this scheme, the DOJ also prosecuted Latin Node executives, including:
(1) Manuel Caceres, the former Vice President for Business Development; (2)
Juan Pablo Vasquez, the former senior commercial executive and CEO; and (3)
Manuel Salvoch, the former Chief Financial Officer. According to the DOJ, the
executives allegedly conspired to pay more than $500,000 in bribes on behalf
of the company to employees of Hondutel, the Honduran state-owned telecommunications company, in exchange for preferred rates as well as to secure Latin
Node’s continued operation in Honduras. All three executives pleaded guilty.
On April 25, 2012, Vasquez was sentenced to three years’ probation and a $7,500
fine. Caceres was sentenced on April 19, 2012, to 23 months in prison followed
by one year of supervised release. On June 5, 2012, Salvoch was sentenced to 10
months in prison and three years of supervised release.
fact that “tolerance of the offense by
substantial authority personnel was
pervasive.”2
An ethical culture is often cited as the
single biggest factor in determining
the amount of misconduct that will
take place in a corporation. According to the recently released FCPA
guidance, one of the factors the DOJ
considers when deciding whether to
prosecute a corporation is “the pervasiveness of wrongdoing within the
corporation, including the complicity
in, or the condoning of, the wrongdoing by corporate management.”
This consideration is echoed in the
U.S. Sentencing Guidelines, which
provide that corporate leadership
“shall be knowledgeable about the
content and operation of the compliance and ethics program … and shall
promote an organizational culture
that encourages ethical conduct and
a commitment to compliance with
the law.”
Thus, setting the right tone at the top
has the potential to prevent ethical
violations, thereby eliminating the
need for enforcement actions, and
the potential to mitigate any enforcement actions should they occur.
Stuart and Hong Carson, Paul Cosgrove and David Edmonds
Control Components Inc. (“CCI”) pleaded guilty in July 2009 to conspiracy to
violate the FCPA and the Travel Act and to two substantive violations of the
FCPA. The company paid an $18.2 million criminal penalty and agreed to implement rigorous internal controls. Stuart Carson, the former CEO of CCI, and his
wife, Hong “Rose” Carson, former director of sales for China and Taiwan, were
Continued on Page 10
2 Litigation Release No. 20897A, U.S. Securities
and Exchange Commission, SEC Charges KBR,
Inc. with Foreign Bribery; Charges Halliburton Co.
and KBR, Inc. with Related Accounting Violations
— Companies to Pay Disgorgement of $177 Million; KBR Subsidiary to Pay Criminal Fines of $402
Million; Total Payments to be $579 Million, http://
www.sec.gov/litigation/litreleases/2009/lr20897a.
htm (Feb. 11, 2009).
9
Anti-Corruption Quarterly
2012 YEAR-IN-REVIEW
Cont. FROM PAGE 9
indicted for their involvement in the corruption scheme that
spanned more than 30 countries and allegedly resulted in
the payment of more than $6.8 million in bribes. On April
17, 2012, both pleaded guilty to one count of making a corrupt payment to a foreign government official. Mr. Carson
was sentenced to four months in prison and ordered to pay
a $20,000 fine. Mrs. Carson was sentenced to three years
probation with a condition that she serve six months’ home
confinement, fined $20,000, and ordered to perform 200
hours of community service. The DOJ seemed sympathetic
to Mrs. Carson, recommending she receive a light sentence
because she was born and grew up in China and “viewed
business [in China] through very different lenses based on
her upbringing, education, and professional experience.” On
May 29, 2012, Paul Cosgrove, CCI’s former head of worldwide sales, pleaded guilty to one count of making a corrupt
payment to a foreign government official in China in violation of the FCPA. After Cosgrove was criminally charged,
he needed to have quadruple bypass heart surgery and was
hospitalized several times with recurring heart issues. On
September 14, 2012, he was sentenced to 13 months’ home
confinement with three years of probation and 200 hours
of community service. On June 15, 2012, David Edmonds,
former Vice President of Worldwide Customer Service at
CCI, pleaded guilty to making a corrupt payment to a foreign
official in Greece. Mr. Edmonds is the seventh former CCI
executive to plead guilty to FCPA charges. On December 17,
2012, Edmonds was sentenced to four months imprisonment and a $20,000 fine.
Trial Losses
Shot-Show/Africa Sting Trials
This year marked the culmination of the DOJ’s string
of losses in its prosecution of the “Africa Sting” case, an
undercover operation in which executives from several
companies in the military and law enforcement products
industry allegedly bribed an undercover FBI agent posing as
a sales representative for the defense minister of Gabon in
order to secure a lucrative contract to supply that country’s
presidential guard. The DOJ had called the Africa Sting case
“the largest single investigation and prosecution against
individuals in the history of DOJ’s enforcement of the Foreign Corrupt Practices Act.” The DOJ indicted twenty-two
individuals and tried ten individuals in the two “shot-show”
trials in the U.S. District Court for the District of Columbia,
but the DOJ was only able to secure one conviction: that of
its cooperating witness.
The DOJ’s losses in the shot-show trials began in 2011. The
first trial ended in September with a mistrial as the jury
was unable to reach a verdict for the first four defendants
charged with FCPA violations, Pankesh Patel, Andrew Bigelow, John Benson Weir, and Lee Allen Tolleson. In December of 2011, following the close of the government’s case in
the second shot-show trial, Judge Richard J. Leon acquitted
Stephen G. Giordanella, who was charged with conspiracy
to violate the FCPA, finding there was insufficient evidence
to support a conviction for conspiracy against any of the
defendants. The five defendants who faced substantive FCPA
counts in the second trial remained, but not for long.
On January 30, 2012, the jury found R. Patrick Caldwell and
John Gregory Godsey not guilty. The following day, Judge
Leon declared a mistrial of the three remaining defendants,
John and Jeana Mushriqui and Marc Morales. Unable to
sustain the prosecution in light of the acquittals and mistrials, the DOJ moved to dismiss with prejudice the remaining
indictments on February 21, leaving only the three defendants who had previously pleaded guilty to conspiracy to
violate the FCPA, Jonathan M. Spiller, Haim Geri, and Daniel
Alvirez. But in light of Judge Leon’s prior ruling that there
was insufficient evidence to support the conspiracy charges,
the DOJ filed another motion to dismiss those three indictments on March 27. As a result, the court withdrew their
guilty pleas.
United States v. John O’Shea
On January 16, 2012, former ABB manager, John O’Shea,
was acquitted in a directed verdict by Judge Lynn Hughes
of corruption charges connected to the unlawful payment
of officials at Mexico’s state-owned electric utility, Comisión Federal de Electricidad (“CFE”). In 2009, O’Shea was
indicted by the government on twelve substantive FCPA
counts, one count of conspiracy to violate the FCPA, and
five other corruption-related offenses. ABB had previously
pleaded guilty to criminal FCPA charges, while O’Shea had
made the decision to go to trial on his individual criminal
charges.
After hearing the government’s evidence, Judge Hughes
decided that the prosecution’s main witness could not
sufficiently connect O’Shea to the illegal payments made
to officials at CFE for the purpose of securing the desired
contract. Judge Hughes, speaking from the bench, found
that the government’s case, as evidenced by their central
witness, consisted of not much more than “gossip” and that
Continued on Page 11
10
Anti-Corruption Quarterly
2012 YEAR-IN-REVIEW
Cont. FROM PAGE 10
the witness’s “answers were abstract and vague.” On February 9, 2012, the government moved to dismiss the remaining
conspiracy, money laundering and obstruction charges with
prejudice, effectively ending the government’s case against
O’Shea.
Other Major Developments
Int’l Fed’n of Pharm. Mfrs. and Ass’ns.
Expanded Code of Practice
In March 2012, the International Federation of Pharmaceutical Manufacturers and Associations expanded its code of
practice to cover all interactions with healthcare professionals, medical institutions and patient organizations, including
a ban on doctors receiving payments to attend conferences.
According to the Federation’s press release, “the Code now
also includes high-level guiding principles for practice, a
clear distinction between gifts, promotional aids and items
of medical utility, guidance for supporting continuing medical education, and a provision on disclosure of clinical trials
information.”
DOJ Declination Decisions
Although the DOJ secured a conviction against Garth
Peterson, a former managing director for Morgan Stanley’s
real estate business in China, it declined to pursue charges
against Morgan Stanley. As was discussed above, Peterson
pleaded guilty to charges that he conspired to evade internal
accounting controls that Morgan Stanley had established to
prevent violations of the FCPA. Even though it was Morgan
Stanley’s system that Peterson circumvented, the DOJ
praised the bank’s internal controls. A DOJ press release
indicated that it decided not to go after Morgan Stanley
because of its exemplary FCPA compliance program and
extensive employee training. Indeed, in its recently issued
guidance, the DOJ pointed to Morgan Stanley’s FCPA compliance program as a model for other companies to follow.
According to the DOJ’s Information against Peterson, he had
a close personal relationship with the Chinese official that
began before Peterson joined Morgan Stanley, he actively
concealed his actions from his employer, and he acted for
his own benefit and contrary to Morgan Stanley’s interests
– so much so that Judge Jack Weinstein said that “it is likely
that [Morgan Stanley] would be considered a victim” in this
case.
There is further evidence that a company’s compliance programs and cooperation motivate DOJ declination decisions
as the DOJ declined to bring FCPA charges against several
other companies that either disclosed or investigated FCPA
violations. On July 19, 2012, the DOJ ended its investigation of Academi, the private security contractor formerly
known as Blackwater, without bringing any FCPA charges.
The DOJ appeared content with the information provided
by Academi and the enhancements to its anti-corruption
compliance program. In an August 1 SEC filing, the chemical company Huntsman announced that the DOJ and SEC
would not bring FCPA charges, despite Huntsman’s prior
disclosure of payments made to government officials in
India. Also, an August 8 SEC disclosure filed by Hercules
Offshore, Inc. stated that the DOJ and SEC would not bring
FCPA charges. The enforcement agencies cited Hercules’
thorough investigation into possible violations and the
enhancements to its FCPA compliance program, among
other factors, as the reasons for the declination decision. In
late 2012, the DOJ declined to prosecute two pharmaceutical companies for possible FCPA violations they voluntarily
disclosed in connection with internal FCPA investigations.
After cooperating with the DOJ for several years, the DOJ
notified the companies that it was closing its inquiry without
taking any enforcement action based on a number of factors,
including the companies’ significant cooperation, remedial
efforts, existing procedures, and continuing improvements
to the companies’ compliance programs. (Sidley Austin
represented the companies before the DOJ.)
First SEC Whistleblower Award
On August 21, 2012, the SEC announced its first-ever award
under its new Whistleblower Program, part of the reforms
enacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). The whistleblower,
who helped the SEC stop a multi-million dollar fraud, will
receive nearly $50,000 or 30% of the amount collected in
the enforcement action—which represents the maximum
percentage of sharing available under the program. The
whistleblower remains anonymous, as the SEC cannot
disclose any information that could reasonably be expected
to reveal a whistleblower’s identify. Notably, the SEC did not
disclose substantive details about the underlying fraud, nor
did it disclose whether the whistleblower first reported the
conduct to the company at the center of the fraud charges.
According to the SEC press release, the whistleblower’s
assistance led to more than $1 million in court-ordered
sanctions. The court is considering whether to issue a final
judgment against other defendants in the matter, and the
SEC indicated in the press release that any increase in the
Continued on Page 12
11
Anti-Corruption Quarterly
2012 YEAR-IN-REVIEW
Cont. FROM PAGE 11
sanctions ordered and collected will increase the award to
the whistleblower. According to Robert Khuzami, Director
of the SEC’s Division of Enforcement, “[t]his whistleblower
provided the exact kind of information and cooperation
we were hoping the whistleblower program would attract.
Had this whistleblower not helped to uncover the full
dimensions of the scheme, it is very likely that many more
investors would have been victimized.” With this first
whistleblower award, the bounty program will almost certainly receive increased attention—especially from potential
whistleblowers, who now see the payout of a successful
tip. We anticipate that this award announcement will only
increase the volume of tips received by the SEC, creating
additional challenges for its already thinly-staffed office. See
prior Sidley Alerts on the SEC’s Whistleblower Rules and the
First Whistleblower Award Under Dodd-Frank.
FCPA Resource Guide Released
On November 14, 2012, the DOJ and SEC released the
much-anticipated Resource Guide to the U.S. Foreign Corrupt
Practices Act. Assistant Attorney General Lanny Breuer
of the DOJ Criminal Division described it as “perhaps
the boldest manifestation of our transparent approach to
enforcement,” because it offers unprecedented insight “to
understand why we prosecute FCPA cases as vigorously
as we do, and also how and why we make our charging
decisions.”
In many ways, the Guide is a useful compilation of positions
that the DOJ and SEC have taken in numerous settlement
agreements, opinion procedure releases, speeches, press
releases, and trial briefs. The Guide is also an invaluable
display of the government’s current thinking on what constitutes an FCPA violation and what steps regulators believe
are appropriate for a company to take to avoid such violations. But the Guide is also an advocacy piece advancing the
government’s current aggressive approach to FCPA enforcement. The Guide appears designed, at least in part, to invoke
an imprimatur of authority in support of some aggressive
and likely questionable positions taken by the DOJ and SEC
in FCPA cases.
Broadly speaking, the Guide rehashes many of the positions
long espoused by the government and avoids many strong
policy pronouncements. The Guide certainly will not satisfy
everyone. But certain sections of it, such as the discussion of
gifts, travel, and entertainment, the elements of an effective compliance program, the procedures for vetting third
parties, and the examples of how companies may avoid
prosecution, may prove useful to companies and practitioners—providing insight into the government’s theories of
liability and enforcement practices. See prior Sidley Alerts
on the Resource Guide to the U.S. Foreign Corrupt Practices
Act and The Top-Ten Take-Aways from the DOJ and SEC
Resource Guide.
12
Anti-Corruption Quarterly
The FCPA/Anti-Corruption Practice of Sidley Austin LLP
Our FCPA/Anti-Corruption practice, which involves over 90 of our lawyers, includes creating and implementing compliance
programs for clients, counseling clients on compliance issues that arise from international sales and marketing activities, conducting internal investigations in more than 90 countries and defending clients in the course of SEC and DOJ proceedings.
Our clients in this area include Fortune 100 and 500 companies in the pharmaceutical, healthcare, defense, aerospace, energy,
transportation, advertising, telecommunications, insurance, food products and manufacturing industries, leading investment
banks and other financial institutions.
For more information, please contact:
Washington, D.C.
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