Category: Foreign Corrupt Practices Act

Data on Bribe Demands in China

An anonymous online survey by TRACE International found that, of those business people visiting China who were asked for more than one bribe, almost 20 percent reported that they had been solicited more than 100 times.

TRACE set up an online bribe-reporting system that allows people to file reports in different languages about bribe demands. The first report by its online system (called BRIBEline) covered data it collected in China from July 2007 to June 2008.

  • Eighty-five percent of the bribes were solicited by someone tied to the Chinese government. That includes
    • 11 percent requested by a Communist Party official
    • 11 percent by a police officer
    • 11 percent by someone in the court system and
    • 52 percent by officials from another government branch.
  • Seventy-three percent of people who reported being asked for a bribe in China said they were asked more than once.
  • The bribe requests ranged from less than $20 (3 percent) to more than $500,000 (6 percent), with 22 percent of them asking for more than $10,000. Some 12 percent asked for gifts, entertainment or hospitality, while 4 percent asked for more business, and 3 percent requested sex.
  • Fifty-four percent of the demands were to induce action to which the business was entitled, such as timely service or avoidance of some kind of trouble.

Right to Audit

From the KPMG 2008 Anti-Bribery and Anti-Corruption Survey:

While 63 percent of those respondents that require periodic compliance certifications said they incorporate a right-to-audit clause in their third-party contracts, a significant majority of these (68 percent) has never exercised the right (see Chart 4). A right-to-audit clause appears to be the kind of oversight expected by regulators and prosecutors, and has been included as an essential element of FCPA compliance in several recent deferred or nonprosecution agreements that companies have reached with the SEC and the DOJ. Recent agreements entered into in 2008 included, for example, stipulations that the parties agree to adopt new or to modify existing procedures to include “rights to conduct audits of the books and records of” agents or business partners “to ensure compliance” with anti-bribery laws and regulations.

KPMG 2008 Anti-Bribery and Anti-Corruption Survey

KPMG Forensic published its 2008 Anti-bribery and Anti-corruption Survey. KPMG surveyed 103 U.S. executives in the summer of 2008.

At a time when bribery and corruption prosecutions and enforcement actions are on the rise across the globe, the results of a new KPMG LLP survey suggest that multinational organizations based in the United States continue to be challenged by a number of key issues, which, if addressed, could lower the risk of violating the Foreign Corrupt Practices Act (FCPA) and other global anti-bribery and anti-corruption standards. The survey, conducted in summer 2008, found that although 85 percent of the respondents reported having an FCPA compliance program, many struggled with fundamental elements, including:

    • Performing effective due diligence on foreign agents/third parties (cited as challenging by 82 percent of respondents)
    • Auditing third parties for compliance (cited as challenging by 76 percent of respondents)
    • Performing due diligence during merger and acquisition (M&A) activities (cited as challenging by 73 percent of respondents).

Defining “Foreign Official” Under the Foreign Corrupt Practices Act

Jeffrey Clark of  Willkie Farr & Gallagher moderated a conference on Defining “Foreign Official” Under the Foreign Corrupt Practices Act. David Stewart, U.S. Department of State and Georgetown University Law Center and Kathleen Hamann, U.S. Department of Justice led the discussion.

They start with a quote: why is a raven like a writing desk? (From Alice in Wonderland) There is no answer. There are some obvious examples. The problem is the “instrumentality of a foreign government” part of the definition of foreign official. The statute offers no clarification. The DOJ releases provide some examples: 94-01 and 08-01. There are some settlements that provide some guidance.

The issues is also pertinent to the OECD, the UN convention against corruption and other international treaties.

One thing to look at is whether a public official can veto or control the operations of the enterprise. It is not necessarily majority ownership or majority voting rights.

You can also look to the sovereign immunity. Would that person be protected by the sovereign immunity laws? If so, then they are public officials.

They also point out that a corrupt act is a corrupt act. You could be violating other non-public corruption laws. You should focus on not committing the corrupt acts.

It was clear from the discussion that companies are having a hard time figuring out when an entity is public and when it is private. If you can’t figure that out then you cannot figure out the individuals.

Securities Litigation and the FCPA

last week the Ninth Circuit handed down a decision in a securities litigation case related to FCPA violations in Glazer Capital Management LP v. Magistri.

Glazer’s claims arose after InVision Technologies, Inc. (InVision) announced, in March 2004, that it had entered into a merger agreement with General Electric (GE). Several months later, in July 2004, InVision issued a press release, casting doubt on the merger because of the discovery of potential violations of the Foreign Corrupt Practices Act of 1997(FCPA), 15 U.S.C. § 17dd-1. Although the proposed merger ultimately was consummated, the July 2004 announcement resulted in an immediate drop in InVision’s share price. A class action complaint was filed by InVision shareholders and Glazer was appointed lead plaintiff.

The suit was largely based on three alleged misstatements in the merger agreement attached to the 10-K filed to announce the transaction. The merger agreement has representations that InVision was in compliance with all applicable law, in compliance with the books and record provisions of the FCPA and that the company had no knowledge of any FCPA violations. The merger agreement was signed by the President/CEO and the COO of the company.

One element of securities litigation is to show the element of scienter, that is the the required state of mind for the violation. In this case, that the defendant intended to commit the fraud. There is a concept of “collective scienter” where the intent of the company is imputed on the individual.  In this case, the court found that since the CEO and COO are the ones that signed the merger agreement the plaintiff needs to prove that one of those two new that the statements were not correct.

As Kevin M. LaCroix of the D & O Diary points out:

[I]n the InVision case, “the surreptitious nature of the transactions creates an equally strong inference that the payments would have deliberately kept secret – even within the company.” Obviously, payments of this kind invariably are of a surreptitious nature and of a kind that would be kept secret, even within the company. The implication is that in order for a securities claim alleging FCPA-related disclosures to survive the initial pleadings stage, the claimants may have to plead that the company officials who prepared the company’s public disclosures were aware of the improper activities.

Kozeny Decision Limits Defense to FCPA

Melissa Klein Aguilar wrote a peice on Compliance Week about the decision in U.S. v. Kozeny decision that limits the local law defense under the Foreign Corrupt Practices Act: FCPA Decision Narrows Local-Law Defense.

The Kozeny decision makes clear that if the payment itself is illegal, the local-law defense can’t be used even if the common practice in that country is to forgive the offense; the transaction must be permitted under local law.

In the facts of the Kozeny case were unusual. Local Azerbaijani law the voluntary declaration of having committed bribery absolves the bribe-giver and his accomplices from criminal responsibility. The Kozeny court did not seem to think this was the same as the bribe being legal.

The judge also finds that mere economic coercion is not a defense. The Kozeny judge equates true extortion with a “payment made to an official to keep an oil rig from being dynamited.”

The article also points us to two law firm legal alerts:

Bribery and Corruption Have Become Endemic in Russia

The Economist ran a special report on Russia. The article that caught my eye was Grease My Palm. In looking at the scope of the problem in Russia, the articel cites the corruption market being estimated at $300 billion, which is about 20% of Russia’s GDP. INDEM (a Russian NGO) says 80% of all Russian businesses pay bribes.

It makes you wonder how any U.S. business can being doing business in Russia without violating the FCPA.

Iraq Is Quietly Firing Fraud Monitors

From James Glanz and Riyadh Mohammed of the New York Times: Premier of Iraq Is Quietly Firing Fraud Monitors.

The dismissals, which were confirmed by senior Iraqi and American government officials on Sunday and Monday, have come as estimates of official Iraqi corruption have soared. One Iraqi former chief investigator recently testified before Congress that $13 billion in reconstruction funds from the United States had been lost to fraud, embezzlement, theft and waste by Iraqi government officials.

Iraq, in its earliest days of existence, looks like it headed toward being a kleptocracy and will be another example of the resource course.

Bribery’s Broken Windows

Alexandra Wrage of TRACE international wrote Bribery’s Broken Windows (.pdf) for the Q1 edition of Ethisphere. She tackles the credibility issue with allowing facilitating payments to low level officials, but saying “no” to senior ranking official. She advocates that the companies should prohibit payments at all levels.

She looks to the New York subway system’s Clean Car Program which is in turn based on the Broken Windows theory of James Wilson and George Kelling.

Once one window in a building is broken, the rest will be broken soon after. The broken  window, left unrepaired, is a sign to the world that no one cares. If no one cares, there is no risk in breaking the rest of the windows. People are better behaved and less prone to escalating criminal activity when they see that their petty acts are addressed promptly and decisively.

Doesn’t it seem likely that this would hold true of petty bribery, too? If officials face “zero tolerance” for the smallest inappropriate demands, if both companies and enforcement agencies declare even the five and ten dollar demands an intolerable abuse of official power, won’t it be more difficult for a culture of corruption to flourish? Otherwise, low-level govern-ment officials will look at the broken windows and assume that no one cares.

Larger Foreign Corrupt Practices Act Fines Ahead

Lynn Marek of the National Law Journal reports:

The U.S. Securities and Exchange Commission expects in the next two to six months to slap larger penalties than in the past on a number of companies that have allegedly violated the Foreign Corrupt Practices Act, reminding lawyers in the field that the regulator is taking a tougher stance today on international bribery.

Larger Foreign Corrupt Practices Act Fines Ahead

The largest FCPA penalty to date is $44.1 million paid by Baker Hughes last year. U.S. v. Baker Hughes Inc., No. 07-00130 (S.D. Texas). Siemens A.G., the German conglomerate has set aside $1.3 billion for settles bribery charges in the U.S. and Germany. [Siemens Reserves $1.3 Billion to Settle Corruption Charges]