Bribery Abroad, Second Edition Preview (with Cover) by Faraz Ahmed

Bribery Abroad Lessons from the Foreign Corrupt Practices Act Richard L. Cassin

Second Edition

Bribery Abroad Second Edition Copyright ÂŠ 2011 by Richard L. Cassin All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means without written permission of the author.

ISBN 978-981-08-8750-6

Information in this book is intended for public discussion and educational purposes only. It does not constitute legal advice and its use does not create an attorney-client relationship.

In memory of Don Mulvihill

An extraordinary FCPA lawyer, patient teacher and loyal friend

Author’s Preface to Second Edition

FCPA Blog, an online publication that reports news about the U.S. Foreign Corrupt Practices Act (FCPA), and also talks more widely about bribery and corruption wherever it appears. The FCPA Blog was launched in 2007 with a short post about a U.S. enforcement action against Textron. That company’s compliance prob-

mine. Although brief, it broke the ice -- and reminded the blog’s few early readers about the dangers that lurk in overseas operations. I wanted to start posting about the FCPA years earlier but had to nearly impossible. It’s tough to say anything authentic with hundreds of lawyers in the mix, and thousands of clients with their own interests. But by 2007, the time was right. The idea behind the blog was simple enough—put information about the statute and its enforcement into circulation in an informal setting and see where the conversation goes from there. The experiment worked. Early readers sent questions and ideas for posts, along with constructive criticism. It all helped. Even so, about three months into the enterprise, I thought maybe I’d said everything that needed saying about the FCPA, and I considered a graceful exit. Then some news came my way from the DOJ, and more since. In truth, I’ve never been alone at the FCPA Blog. So many great posts are courtesy of bylined contributors. Those generous souls come from all parts of the compliance community—practicing lawyers, acav

demicians, NGO leaders, auditors, journalists, students, and others. Other contributors want to remain anonymous Although this slim volume is already a few years old, most of chapters continue to be relevant to current FCPA compliance. Best practices donâ&#x20AC;&#x2122;t go out of style. But a few of the chapters have been updated to include case results, for example, or new developments since the words were written. Thanks for picking up this book and by reading it, being part of the FCPA Blog. sidiaries. Charlottesville, Virginia April 2011

Author’s Foreword

ost of the chapters that follow started out as posts on the FCPA Blog, an online site that reports news and views about the Foreign Corrupt Practices Act.1 That means this is not a textbook or a law book in the traditional sense. Far from it. As a lawyer involved with the FCPA for more than 25 years, I’ve always looked for an informal source of relevant and easy-to-digest information. To be sure, there are lots of excellent legal guides, handbooks and loose-leaf services that cover the FCPA. But most are scholarly works—very useful for lawyers making formal legal arguments. I wanted something less formal—a grab bag of hints, tips and the inside scoop about the FCPA. The FCPA Blog niche. It’s not scholarly but practical, not formal but conversational—a place where people interested in the FCPA can meet and talk. A great surprise has been the FCPA Blog’s popularity. Regular read, government institutions, investment banks, courts, NGOs, news organizations and universities. The blog is fun to write, and a bonus is the steady stream of encouragement and ideas that come from supportive readers. This book is inspired by the FCPA Blog. That accounts for the informal style and the use of the “royal we”—a blogging convention of mysterious origin—and the somewhat scattergun approach to the subject. But it’s the informality of the FCPA Blog that readers seem to

http://fcpablog.com. vii

enjoy, along with, as one reader put it, the randomness of the daily topics. The informality of the FCPA Blog is preserved in these pages, along with some of the randomness—which only goes so far before it becomes chaos. So there is some structure to the way the chapters are practical issues—how to comply with the law, exceptions and defenses, and recent cases that have something special to teach. The book closes with some discussion about the bigger topics: ethics, red tape and corruption, the international battle to clean up the public sector, and where FCPA enforcement is headed. Who should read this book? The FCPA Blog’s readers include anyone interested in the Foreign Corrupt Practices Act. Attorneys, bankers, auditors, compliance professionals, executives, sales and marketing personnel, entrepreneurs, journalists, law students, professors—you name it. Most of the blog’s readers come from the United States, but interest in the FCPA is widespread, so visitors show up regularly from England, India, Russia, Japan, Nigeria, China, Brazil and so on—some 120 countries at last count. Although the discussion in the FCPA Blog and in this book occasionally swerves into law-talk, the presentation is mostly non-technical and accessible to everyone. In my law practice, I encounter real people dealing with the FCPA in the real world. It’s not easy for them. That has shaped my view of the Foreign Corrupt Practices Act, and that’s what this book is about. Singapore April 2008

viii

Table of Contents Author’s Preface to Second Edition ..............................................v Author’s Foreword ...........................................................................vii From New York to China ...............................................................13 Schnitzer’s Victory ...........................................................................17 Willful Blindness ..............................................................17 A New Beginning .............................................................18 Wise Choices.....................................................................18 Compliance Guidelines ...................................................................21 The Best Defense .............................................................................23 Respondeat Superior........................................................23 Compliance Works ...........................................................24 Ten Elements of an Effective Compliance Program .................27 One Law, Two Parts.........................................................................31 It’s Criminal .......................................................................31 Defenses That Don’t Work ............................................................33 The I-Didn’t-Know Defense..........................................................35 Bribery and Taxes.............................................................................37 U.S. v Kay ..........................................................................................41 Clear Warning?..................................................................41 The Law Speaks................................................................42 U.S. v Kay, Back to Court ...............................................................45 What Did They Know? ...................................................45 Greetings, Comrade .........................................................................47 Materiality, But Not By The Numbers .........................................49 Let’s Be Reasonable .........................................................................51 The Accounting Standards Make the Shortlist ............................53

The Narrow Gate.............................................................................57 Another Look at Facilitating Payments ........................................59 ...............................................................61 The Problem of Promotional Expenses ......................................65 Legislative History............................................................65 Good Intentions ...............................................................66 No Home Cooking ..........................................................66 When is Charity a Bribe?.................................................................67 The Man in the Castle .....................................................67 What’s My Bribe? .............................................................68 With Friends Like These .................................................................71 Joint Venture Compliance...............................................................73 The Requestor’s French Dilemma .................................................75 Paradigm’s Due Diligence ...............................................................77 Global Corruption ...........................................................77 Favorable Terms ...............................................................78 That’s Entertainment? .....................................................................79 Trouble in Tinseltown .....................................................................81 CW-1 and CW-2................................................................81 War on Multiple Fronts ...................................................81 Something’s Rotten in Denmark....................................82 For Better and for Worse ................................................83 Looking at the Numbers .................................................83 Cardinal Health and Successor Liability .......................................85 A Doctor in the House ...................................................................89 Watch That Inkblot..........................................................................91 A Straight Shot at FCPA Compliance ...........................................93

The FCPA is no Private Matter......................................................97 Disorder in the Court ......................................................................99 Imported Corruption ......................................................................101 In the Crosshairs ..............................................................101 A National Priority...........................................................102 China’s Progress ...............................................................................105 A Country of Change .....................................................105 Here Comes Trouble .......................................................106 Expecting the Worst ........................................................106 Red Tape Round-Up ........................................................................109 Self Examination .............................................................109 High Marks .......................................................................110 The Russia (Ware) House................................................................111 Counting Corruption.......................................................................113 Will Nigeria Boil Over? ...................................................................115 The Empty Chair .............................................................................117 A House Divided .............................................................118 Here to Stay.......................................................................................121 Appendix I ........................................................................................125 The Foreign Corrupt Practices Act of 1977.........125 Appendix II .......................................................................................153 Lay Person’s Guide to FCPA .................................153 Appendix III .....................................................................................165 Federal Sentencing Guidelines—Chapter 8, Part B ......165

Index 175

From New York to China

or most of its 30-year history, the Foreign Corrupt Practices Act1 was a legal backwater. Enforcement actions were rare and not many lawyers, auditors or business people paid much attention to it. Then came the Sarbanes-Oxley Act of 2002. With zero tolerance, it started holding public companies accountable for illegal conduct anywhere, including bribery abroad. Around the same time that Sarbanes-Oxley became law, federal prosecutors decided to make FCPA enforcement a high priority. The result has been a surge in FCPA-related prosecutions—a 400 tions under way since 2006. The FCPA is in the spotlight and has become one of the best known and most feared white collar criminal laws in the world. Corporations and their personnel—from directors in New York to factory managers in China—now live and work by codes of conduct shaped by the FCPA. Current or recent investigations and prosecutions involve some of America’s best-known companies—A.T. Kearney, Alcoa, Aon, Baker Hughes, Schlumberger, Biomet, Cardinal Health, Chevron, EDS, Ingersoll Rand, Johnson and Johnson, Monsanto, Pride International, Schering-Plough, Textron, Tidewater Inc., Westinghouse, Willbros and others. And among the companies from outside the United States involved in FCPA investigations or prosecutions are ABB, AB Volvo, Alcatel Lucent, AstraZeneca, BAE Systems, Daimler, Innospec, Magyar

15 U.S.C. §§ 78dd-1, et seq. See Appendix I. 13

Birbery Abroad

Telekom, Norsk Hydro, Novo Nordisk, Panalpina, Siemens, Smith & Nephew and Total. When violations occur, more than 30 years of experience with the FCPA have taught that few defenses are within reach. Companies accused of violating the FCPA invariably cop a plea, hoping to end the matter as quickly and as quietly as possible. Individuals facing FCPA allegations have the awful choice of admitting the offense and accepting their punishment, or going to trial to prove their innocence—where To be clear, it’s the policy of the U.S. government for everyone to comply with the FCPA. The government’s interest is not in prosecution, but in compliance. It provides fair warning about the dangers created by the FCPA that await the unwary. And it punishes those who don’t take the warnings seriously. *

Why do we have the Foreign Corrupt Practices Act? In the mid1970s, the remnants of the Watergate scandal led government investigators in Washington, D.C. to uncover a massive pattern of corrupt , Boeing and Lockheed—eventually admitted to paying more than $2 billion in today’s terms to secure overseas contracts or other advantages. The magnitude of the corruption was shocking. By the end of the investigation in 1976, Congress had to act fast, and it did. After a year of debate, battle and compromise, it sent the White House a bill intended to clean up the mess. On Dec. 20, 1977, President Jimmy Carter signed into law the Foreign Corrupt Practices Act. The FCPA has two parts: the antibribery provisions and the accounting standards. The antibribery provisions outlaw corrupt payments for or with, or directing business to, any person. All companies and partnerships organized under U.S. law or based in the U.S. are covered.

From New York to China

Foreign companies are also covered if they do business in the U.S., or have securities registered on a U.S. stock exchange, or if they commit any illegal acts related to an FCPA violation while in the United States. All U.S. citizens and permanent residents are also covered, along with non-U.S. persons temporarily within the United States. The FCPA’s accounting provisions apply to any company with seand Exchange Commission. The accounting provisions require corporations to make and keep books and records that accurately and fairly and maintain an adequate system of internal accounting controls. Generally, the U.S. Securities and Exchange Commission enforces the accounting provisions, while the Department of Justice prosecutes antibribery offences. Violations of the accounting standards can land a person in jail for 20 years, and antibribery offenses carry a penalty of up and other non-monetary penalties—such as loss of export privileges and being barred from U.S. government contracts. Worse still can be the reputational damage at home and abroad that FCPA problems can cause. *

People sometimes think they can outsmart the FCPA, a pride that has caused most of the problems and prosecutions over the last 30 years. But the FCPA is smart, if a law can be described in those terms. It anticipates human weakness. For example, it outlaws bribes to forcreative cash management and paying bribes through family members, friends and agents— the typical middlemen who live in the shadows and promise to help Americans do business in exotic, inscrutable and sometimes chaotic countries. Many executives have simply tried to keep themselves ignorant about public corruption in other countries. But the FCPA equates “willful blindness” with intentional misconduct, so the

Birbery Abroad

head-in-the-sand approach won’t work either. *

Can international public bribery ever be stopped? As long as people look for shortcuts, that’s impossible. But with the FCPA dangling over corporate necks, it’s clear that companies, board members, execuan effective compliance program. What’s that? A set of institutionalized procedures that teach company personnel their responsibilities under the FCPA and hold them personally responsible for the company’s compliance with the law. _____________ Next up is the story of a lucky company. It did business internationally without an effective compliance program or any FCPA compliance program at all—and lived to tell about it.

Schnitzer’s Victory

he case was full of bad facts. For nearly ten years until late 2004, and private parties in South Korea and China of Oregon-based Schnitzer Steel Industries Inc. and its Korean subsidiary, SSI International Far East Ltd., approved the bribes, then used elaborate means to fund and conceal them. Cash, gift ment, a golf club membership, even a condo timeshare—all these changed hands. Off-the-books bank accounts in Korea held slush funds. The bribes were falsely accounted for as refund to customer or rebate to customer, or quality claims, discounts, credits or freight savings. They were disguised as gratuities or congratulations money. Some bribes were even masked as condolence money. The corruption was so habitual that even after it was discovered and ordered stopped, an executive approved two more bribes.

Willful Blindness There were still more bad facts. Schnitzer had no program to comply with the Foreign Corrupt Practices Act—the law that prohibits American companies and their personnel from bribing foreign ofto obtain work. The company didn’t educate employees about the FCPA, or provide compliance training, due diligence or audits. In ignorance of their obligations under the FCPA, senior managers in the U.S. emailed each other about arranging overseas “kickbacks” and protecting the crooked recipients from legal trouble in their home countries. Schnitzer, a public company and one of America’s largest recyclers of

Birbery Abroad

or detect secret bank accounts, corrupt payments and false accounting.

A New Beginning Did prosecutors, as expected, seek the corporate death penalty? Not at all. In the end, Schnitzer was never charged with a crime. Its subsidiary, SSI Korea, pleaded guilty in October 2006 to violating the FCPA’s antibribery and books and records provisions, as well as conspirhowever, escaped with a $7.7 million civil penalty and a deferred prosecution agreement, whereby it promised to keep its nose clean and take in the robust global steel market. What accounts for this surprising result? For a start, Schnitzer acthe board’s audit committee commissioned an aggressive internal investigation. At each stage of the investigation, Schnitzer voluntarily disclosed what it was learning to the Department of Justice and the Securities and Exchange Commission. Then, looking forward, Schnitzer set out to transform its culture. To make sure everyone inside the company and outside got the point, it replaced the chairman of the board, hired a new CEO, and brought in a fresh team of senior management. The Department of Justice companies voluntarily disclose FCPA violations and cooperate with In fact,” the DOJ said, “Schnitzer Steel’s cooperation in this case was

Wise Choices The outcome was never inevitable. Like other companies facing a corruption scandal, Schnitzer had a crucial choice—to retreat behind the corporate parapet and wait for prosecutors and the public to storm the gates, or to cooperate up to a point but try to keep defense options open, or to surrender peacefully, make a full confession and seek for18

Schnitzerâ&#x20AC;&#x2122;s Victory

giveness. By choosing the last option, the company was able to enjoy a quick rehabilitation and full restoration to corporate citizenship. Schnitzerâ&#x20AC;&#x2122;s victory was no accident, but a product of its own decisions.

Compliance Guidelines

any come to the FCPA Blog seeking compliance guidelines. That’s good, because our aim is to help people comply with the Foreign Corrupt Practices Act. Some seekers, however, have noticed that our posts and resources don’t include any out-of-thebox compliance programs, at least not yet. A number of specimens are available on the Internet, of course, and a Google search will turn up at least a half dozen programs already used by well-known companies. But the FCPA Blog doesn’t want to mislead anyone into thinking that a model program always equals model compliance. It doesn’t. Compliance is a matter of substance, not form, and springs from management’s commitment to obey the law. A compliance culture protects against FCPA disasters; model programs adopted for their good looks broadcasts that the effort is a cover-up and a sham. It can do more harm than good. But we digress. We meant to say that those seeking compliance guidelines often arrive at the FCPA Blog from small private companies, doing business learn about the Foreign Corrupt Practices Act? A good place is the “Lay Person’s Guide to FCPA”2 It’s a plainEnglish explanation of the FCPA’s antibribery provisions from the U.S. Department of Justice. And it’s written especially for “potential exporters and small businesses that are unable to obtain specialized counsel on

See Appendix II. 21

Birbery Abroad

issues related to the FCPA.” Another good resource—although a bit more technical—is Chapter 8, Part B of the U.S. Federal Sentencing Guidelines.3 It describes what it takes to have an effective compliance and ethics program, and how small companies can leverage the tools on hand to meet the requirements.

See Appendix III. 22

The Best Defense

here are times—and this is one of them—when the law produces a harsh result. Listen to this: An entire organization, despite its best efforts to prevent wrongdoing in its ranks, can still be held criminally liable for any of its employees’ illegal actions. The words come from the United States Sentencing Commission. It also says, Criminal liability can attach to an organization whenever an employee of the organization commits an act within the apparent scope of his or her employment, even if the employee acted directly contrary to company policy and instructions.4 What, then, is a corporation to do? No matter how hard it tries to comply with the law, in our case with the Foreign Corrupt Practices Act, it might still be held criminally liable for the acts of a rebellious, renegade employee. So why try to be a good corporate citizen at all? Fortunately, the U.S. Sentencing Commission has one more piece of advice, and it’s important. Companies, it says, should adopt effective compliance programs in order “to alleviate the harshest aspects of this institutional vulnerability . . . .” That sounds promising and we’ll come back to the effective compliance program later. . This explanation is a bit technical. It’s worth reading, though, for an understanding of why the FCPA’s bite is as bad as its bark.

Respondeat Superior The majority view of the U.S. federal courts of appeals that have considered the question is that a corporation has vicarious criminal li-

“An Overview of the Organizational Guidelines” from the United States

Sentencing Commission’s May 2004 release. 23

Birbery Abroad

ability for the illegal acts its employees commit while acting within the scope of their employment—that is, within their actual or apparent authority and on behalf of the corporation.5 Under this view, which constitutes an application of respondeat superior6 principles to criminal statutes, it may be irrelevant that the employee cally instructed the employee not to engage in the proscribed conduct, or that the statute is one that requires willful or knowing violations, rather than one that imposes strict liability.7 The stated rationale is that the criminal statutes impose a duty upon the corporation to prevent its employees from committing the statutory violations.8

Compliance Works What, then, should corporations do? The “Overview of the Organizational Guidelines” says this: The [federal sentencing guidelines miti-

See Standard Oil Co. v. United States, 307 F.2d 120 (5th Cir. 1962); Developments

in the Law - Corporate Crime: Regulating Corporate Behavior Through Criminal Sanctions, 92 Harv.L.Rev. 1227, 1247-5 1 (1979). 6

The Latin translation of respondeat superior is “let the superior make answer.” It

is also called the master-servant rule. An easy way to think of it is, “look to the man higher up,” according to Prosser and Keeton on the Law of Torts, § 69, at 500 (5th ed. 1984). 7

See, e. g., United States v. Hilton Hotels Corp., 467 F.2d 1000 (9th Cir. 1972), cert.

denied, 409 U.S. 1125 (1973); Continental Baking Co. v. United States, 281 F.2d 137 (6th Cir. 1960); United States v. Armour & Co., 168 F.2d 342 (3d Cir. 1948); but see Holland Furnace Co. v. United States, 158 F.2d 2 (6th Cir. 1946). 8

See Committee Comment to Instruction 5.3, Pattern Criminal Federal Jury Instructions

(7th Cir. 1998). 24

The Best Defense

demonstrate that it had put in place an effective compliance program. This mitigating credit under the guidelines is contingent upon prompt reporting to the authorities and the non-involvement of high level personnel in the actual offense conduct. (emphasis added) The lesson is this: Companies should do their best to comply with the Foreign Corrupt Practices Act. If their efforts produce an effective compliance program, then even if lower level employees still cause FCPA violations to happen the companies will be protected. An effective compliance program, according to the Sentencing Guidelines, can result in mitigation up to 95% of the normal penalties. dollars. That kind of protection can save a corporationâ&#x20AC;&#x2122;s life.