Haiti Teleco Defendant Receives Record-Breaking Sentence for FCPA Violations

Posted by Daniel Matzkin on November 15, 2011

As detailed in a previous blog post, a federal jury convicted Joel Esquinazi and Carlos Rodriguez, two former executives of Terra Telecommunications Corp. ("Terra"), earlier this year on all counts for their roles in a scheme to pay bribes to Haitian government officials at the state-owned Telecommunications D’Haiti S.A.M (Haiti Teleco).

Federal District Judge Jose E. Martinez has passed sentence and, in the process, has set a new sentencing record for an FCPA-related offense; Defendant Esquinazi was sentenced to a record-shattering 15-year prison term, eclipsing the previous 7.25-year record set with the sentencing of Charles Jumet in April 2010. Co-defendant Rodriguez received a seven-year sentence. The defendants must also forfeit $3.09 million to the government.

Taken together with the previously-discussed failed foreign-official challenge in this case, the enormity of the sentences imposed, particularly Esquinazi's, will almost inevitably give rise to an appeal to the Eleventh Circuit in the coming months.

 

Two Senior Executives Convicted In Haiti Teleco Bribes Case

Posted by Gabriel Colwell on August 19, 2011

Following a two week trial, on August 4, 2011, a federal jury convicted Joel Esquenazi and Carlos Rodriguez, former executives of Terra Telecommunications Corp. (“Terra”), on all counts for their roles in a scheme to pay bribes to Haitian government officials at the state-owned Telecommunications D’Haiti S.A.M (Haiti Teleco).  The DOJ’s press release is here.

Conduct

  • Esquenazi was the president and Rodriguez the vice president of Miami-based Terra.  Both were convicted of one count of conspiracy to violate the Foreign Corrupt Practices Act (FCPA) and wire fraud, seven counts of FCPA violations, one count of money laundering conspiracy, and 12 counts of money laundering.
  • According to the DOJ, Esquenazi and Rodriguez “authorized more than $800,000 in illegal bribe payments to Haitian officials in exchange for business advantages” in violation of the FCPA."
  • Per DOJ, the purpose of these bribes “was to obtain various business advantages from the Haitian officials for Terra, including the issuance of preferred telecommunications rates, reductions in the number of minutes for which payment was owed, and the continuance of Terra’s telecommunications connection with Haiti.”
  • The DOJ also said they “used shell companies to pay $890,00 in bribes from 2001 through 2005 to "successive directors of international relations" at Haiti Telco, and “created false records claiming that the payments were for “consulting services,” which were never intended to be performed or actually performed.”

Penalties

  • The defendants face a maximum penalty of five years in prison and a fine of the greater of $250,000 or twice the value gained or lost on the FCPA conspiracy charge. Each of the seven FCPA counts carries a maximum penalty of five years in prison and a fine of the greater of $100,000 or twice the value gained or lost.
  • The money laundering conspiracy counts carry a maximum penalty of 20 years in prison and a fine of the greater of $500,000 or twice the value of the property involved in the transactions.
  • The government is seeking forfeiture against all defendants.

Notes

  • This is just the latest entry of the DOJ's extensive FCPA enforcement action regarding bribes allegedly paid to Haitian government officials at Haiti Teleco.  The jury verdicts rendered in this case were based upon indictments filed in December 2009.  Multiple individual defendants had already pled guilty to FCPA violations and related money laundering charges. 
  • Esquenazi and Rodriguez are unique in the Haiti Teleco prosecutions in that they contested the DOJ’s charges at trial and also challenged the DOJ’s definition of “foreign official” under the FCPA.  Esquenazi and Rodriguez almost certainly will appeal both the Court’s pre-trial ruling and their convictions. 
  • Additionally, whether the Court’s jury instruction on what constitutes an “instrumentality” of a foreign government under the FCPA survives appellate scrutiny is worth watching and should be instructive as to the limits of the FCPA’s jurisdictional reach.

 

Ex-CEO of Telecom Company Pleads Guilty In Honduras Bribe Case

Posted by Gabriel Colwell on May 26, 2011

Last week, Jorge Granados, former chief executive officer of Miami-based Latin Node, Inc. (Latinode) pleaded guilty to conspiring to pay bribes to government officials in Honduras.  The DOJ press release is here. This is the latest chapter in the on-going saga of Latinode and its former executives who allegedly violated the Foreign Corrupt Practices Act (FCPA) by paying bribes to officials of state owned Honduran telecommunications companies.

Conduct

  • Latinode provided telecommunications services to Honduras and Yemen. Granados admitted that he authorized bribe payments.  From March 2004 to June 2007, Latinode paid or caused to be paid US$2,249,543 directly or through third-parties, knowing that some or all of the funds would be passed on as bribes to “foreign officials” including officials of Honduran telecommunications companies, which qualified as state owned entities (SOE) under the FCPA. Latinode admitted that it made these payments in exchange for obtaining an agreement with the Honduran SOE and for reducing the rate charged under the agreements with the Honduran SOE. Each payment was made from Latinode’s Miami bank account and was approved by Latinode senior executives. Granados is the fourth former senior executive of Latinode to plead guilty in the case.

 Penalty

  • Granados faces up to five years in prison and a fine of $250,000 or more.

 Notes

  • In 2009, Latinode pleaded guilty to a one-count information charging the company with a criminal violation of the FCPA.  As part of the plea agreement, Latinode paid a $2 million fine. The DOJ represented that the investigation’s resolution reflected, “in large part,” the acts of eLandia International, Inc. (eLandia), Latinode’s corporate parent, in disclosing the potential violations to the DOJ after eLandia’s acquisition of Latinode. eLandia promptly voluntarily disclosed to the DOJ the conduct after discovering it, conducted an internal investigation, shared the internal investigation’s factual results with the DOJ, cooperated fully with the DOJ in its investigation and took remedial action including terminating senior Latinode management with involvement in or knowledge of the violations, which included Granados.

FCPA Inspired Bribery Act To Hit Oil & Gas Industry Hardest

Posted by Gabriel Colwell on May 11, 2011

The UK’s Bribery Act, scheduled to come into force on July 1, 2011, will have the most significant impact on the oil and gas industry, according to research by Ernst & Young.

Ernst & Young’s findings are based on an analysis of bribery prosecutions under the U.S. Foreign Corrupt Practices Act (FCPA) over the last 30 years.  Analysts from the firm reviewed 118 FCPA cases involving 242 companies and 167 prosecutions and ranked the most prosecuted industries.

Oil and gas companies came in first, accounting for 18 percent of all prosecutions.  Life sciences and consumer products were the second and third, accounting for 13 and 12 percent of prosecutions, respectively.  Criminal fines were the most common outcome of an FCPA investigation in all three sectors.

Ernst & Young elected to examine the historical data on FCPA prosecutions to forecast the impact of the UK Bribery Act because the Act’s provisions are similar to the FCPA and prohibit similar conduct.  The firms predictions may not be precisely on point, however, because the UK Bribery Act is actually more expansive than the FCPA.  Most notably, the UK Bribery Act prohibits the bribery of private individuals and companies as well as foreign officials, includes an offense of “corporate failure to prevent bribery” and specifically outlaws facilitation payments, which are permitted in some limited instances under the FCPA.  

The UK Bribery Act and guidance to comply with its provisions is explored in more detail here.

Ernst & Young made a point to note that it expects the oil and gas industry to see the harshest impact of the UK Bribery Act, not because the sector is somehow predisposed to greater corruption, but because the sector operates in different parts of the globe.  David Lister, a director at the firm’s Fraud Investigations and Dispute Services team, explained “There is no suggestion that individuals and companies within the oil and gas sector [or other sectors on the list] are intrinsically more corrupt than their counterparts in other sectors. Rather, it is the nature and locations of their businesses that exposes them to additional risk.”

Comverse Technologies Inc. and the DOJ and SEC Settle Up

Posted by Squire Sanders on April 13, 2011

Comverse Technologies Inc. (CTI), a New York based provider of software for communication and billing services, resolved Foreign Corrupt Practices Act (FCPA) enforcement actions brought by the DOJ and SEC arising out of the acts of an indirectly owned overseas subsidiary and the subsidiary’s third party agent.  CTI resolved the DOJ investigation via an NPA, and the SEC investigation by neither admitting nor denying the allegations contained in a civil complaint. 

Conduct

  • The DOJ and SEC alleged (and CTI admitted in the NPA) CTI violated the FCPA’s books and records and internal controls provisions.  CTI did so when it failed to prevent improper payments made by employees and a third party agent of an indirectly owned Israeli subsidiary, Comverse Limited, and recorded the bribes as legitimate commissions.  The payments were made to individuals affiliated with OTE, a partially state-owned telecommunications firm in Greece, to obtain purchase orders from OTE and its subsidiaries.  The books and records of Comverse Limited and its direct parent corporation, Comverse Inc., rolled up into CTI’s books and records.
  • To facilitate and conceal the payments, certain Comverse Limited employees instructed the third party agent to establish an offshore entity and bank account in Cyprus, which funneled the improper payments to individuals connected to OTE, including employees of OTE subsidiaries.  Comverse Limited employees made payments to the agent’s offshore entity.  At the direction of Comverse Limited employees, the agent took 15% off the top of these payments and paid the remaining 85% in cash, directly or indirectly, to individuals connected to OTE.  The agent’s Cyprus entity had no offices or employees and was described by the agent as “purely a money laundering operation.”
  • CTI did not have adequate internal controls to detect or prevent such payments.  For example, there was no third party agent due diligence process or independent review of the agent’s contract outside the sales departments. 

Penalties

  • The NPA has a two year term and requires CTI to realize certain compliance undertakings, such as enhancing existing internal controls, and pay a $1.2 million penalty. 
  • The settled civil complaint requires CTI to disgorge $1.6 million in profits and prejudgment interest. 

Notes

  • The compliance undertakings required by the NPA are similar to those found in other recent prosecutorial agreements and are far less onerous than those found in the J&J enforcement action (see our earlier post).
  • The CTI enforcement action represents yet another example of the ongoing FCPA investigations in the communications and software industries. 

Washington, London and Athens Come Calling for Johnson & Johnson

Posted by Squire Sanders on April 11, 2011

In a sign of things to come, Johnson & Johnson (J&J) and J&J wholly-owned subsidiaries Depuy, Inc. (DePuy) and DePuy International Limited (DePuy International) resolved corruption related investigations on both sides of the Atlantic on Friday, April 8.

Conduct 

  • J&J, a New Jersey based issuer, resolved FCPA enforcement actions brought by the DOJ and SEC for the misconduct of certain subsidiaries and agents concerning payments to government officials in Greece, Poland and Romania, and to the government of Iraq under the UN Oil for Food Program (OFFP).  To resolve the DOJ matter, J&J entered into a deferred prosecution agreement (DPA) that deferred the prosecution of DePuy, an Indiana based subsidiary.  To resolve the SEC enforcement action, J&J neither admitted nor denied the allegations contained in a civil complaint. 
  • The DPA and civil complaint concern similar behavior.  In the DPA, J&J accepts and admits to the conduct of its subsidiaries, employees and agents who made improper payments to public healthcare providers in Greece, Poland and Romania, and the government of Iraq to induce the purchase of products manufactured by J&J or its subsidiaries. 
  • For example, the deferred information filed against DePuy charges DePuy with one count of conspiracy to violate the FCPA and one count of violating and aiding and abetting a violation of the FCPA for conduct related to the bribing of Greek healthcare providers.  The DOJ alleged DePuy made or caused to be made, directly and indirectly through agents, payments totaling approximately $16.4 million from 1998 to 2006 knowing that some or all of the payments would paid to publicly-employed healthcare providers to influence the purchase of DePuy products.
  • In respect to Poland, the DPA indicates a Polish subsidiary and its employees authorized the improper payment, directly or indirectly, of approximately $775,000 in monetary compensation and travel to publicly-employed healthcare providers to induce the purchase of J&J products. 
  • From mid-2005 to mid-2008, a J&J Romanian subsidiary and its employees authorized the payment, directly or indirectly, of approximately $140,000 in cash, gifts (e.g., laptops and other electronics) and travel to publicly-employed healthcare providers to induce the purchase of pharmaceuticals manufactured by J&J subsidiaries and operating companies. 
  • From December 2000 to March 2003, wholly owned J&J subsidiaries based in Belgium and Switzerland secured 18 OFFP pharmaceutical sales contracts through the payment of kickbacks to the government of Iraq.  
  • The above described payments were euphemistically referred to as “cash incentives”, “sales promotional costs”, “local support payments”, “civil contracts” or “commissions” and were recorded as such in the corporate books and records of the J&J subsidiaries.  These inaccurate books and records were then incorporated into J&J’s books and records for the purposes of preparing financial statements filed with the SEC.  

Penalties

  • To resolve the enforcement actions, J&J agreed to pay $70 million in a criminal fine ($21.4 million), profit disgorgement and pre-judgment interest ($48.6 million). 
  • The DPA has a term of three years and contains numerous conditions common in recent DPAs in the FCPA context.  Notably, however, the DPA also contains several additional and onerous conditions not found in recent FCPA-related DPAs.  For example, the DPA requires J&J to implement a system of annual certifications by senior managers in each of the company’s corporate-level functions, divisions, and business units in each foreign country wherein they confirm their local standard operating procedures adequately implement the company’s anticorruption policies and procedures, including training requirements, and that they are not aware of any FCPA or other corruption issues that have not already been reported to corporate compliance.  This condition and several other onerous and expensive conditions have not appeared in recent prosecutorial agreements and may indicate the DOJ has raised the standard in FCPA compliance. 
  • To resolve the SEC enforcement action, in addition to the disgorgement mentioned above, J&J also agreed “to comply with certain undertakings regarding its compliance program.”  The SEC did not further delineate the nature of these “undertakings”.  However, given the coordinated nature of the DOJ and SEC’s investigations and resolutions, the unprecedented nature of the DOJ’s compliance requirements may encompass those envisioned by the SEC. 

Notes

  • The unprecedented nature of the DOJ’s FCPA compliance requirements sets an extremely high bar for FCPA compliance.  In the prosecutorial agreements that follow, it will be interesting to see if the requirements of the J&J DPA are unique to J&J or whether they represent a new, heightened standard the DOJ will demand of corporate defendants to defer prosecution of FCPA charges. 
  • On the same day the DOJ and SEC resolved their enforcement actions, the UK’s Serious Fraud Office (SFO) resolved its prosecution of DePuy International Limited, a UK-based subsidiary of J&J, which the DOJ had referred to the SFO.  The conduct of certain DePuy International personnel figured prominently in the U.S. enforcement actions.  To resolve the UK matter, the SFO sought and obtained a civil recovery order in the amount of £4.829 million, plus prosecution costs.  The SFO’s press release indicates principles of double jeopardy prevented a UK criminal prosecution and, consequently, the most appropriate resolution was a civil recovery order pursuant to the Proceeds of Crime Act 2002. 
  • In addition to the US and UK enforcement actions, Greek authorities have reportedly frozen at least €5.785 in assets belonging to a J&J subsidiary.

Has the DOJ's Ship Sailed from Bonny Island?

Posted by Squire Sanders on April 08, 2011

With the last member of the infamous TSKJ joint-venture resolving FCPA charges this week, has the DOJ finally closed the door on its very lucrative Bonny Island investigation?  JGC, a Japanese company headquartered in Yokohama, Japan, resolved an FCPA enforcement action brought by the DOJ concerning JGC’s participation in the Bonny Island, Nigeria, bribery scheme.  The DOJ charged JGC with conspiring to violate and aiding and abetting violations of the FCPA’s antibribery provisions.  To resolve the allegations, JGC and the DOJ entered into a deferred prosecution agreement (DPA) that requires JGC to realize certain compliance and cooperation measures, and pay a criminal penalty of $218.8 million.  This post describes the JGC Corporation resolution.

Conduct


  • JGC admitted TSKJ, a joint-venture comprised of Technip, S.A., M.W. Kellogg, Brown & Root Inc. (and then, Kellogg Brown & Root Inc., collectively, KBR), and Snamprogetti Netherlands B.V., engaged Jeffrey Tesler, a UK citizen, resident and licensed attorney who owned and controlled Tri-Star Investments Ltd. (Tri-Star), a Gibraltar corporation, to assist in securing four engineering, procurement, and construction (EPC) contracts to build liquefied natural gas (LNG) facilities on Bonny Island, Nigeria.
  • Between 1995 and 2004, Nigeria Liquefied Natural Gas Limited (NLNG) awarded TSKJ the four EPC contracts collectively valued at more than $6 billion.  The government-owned Nigerian National Petroleum Corporation (NNPC) was the largest shareholder of NLNG, owning 49 percent of the company.
  • According to court documents, pursuant to JGC’s authorization, TSKJ hired Tesler, Tri-Star, and a Japanese trading company, to bribe a range of Nigerian government officials, including top-level executive branch officials, to assist TSKJ in obtaining the EPC contracts.  At crucial junctures preceding the award of the EPC contracts, KBR’s former CEO, Albert "Jack" Stanley, and others, met with top-level Nigerian executive branch officials to confirm that TSKJ should use Tesler as its agent and to learn or confirm the identity of a representative with whom TSKJ and Tesler should negotiate bribes for the officials.  TSKJ paid approximately $132 million in “consulting fees” via correspondent accounts in New York City to Tesler and Tri-Star and more than $50 million to the Japanese trading company in furtherance of the bribery scheme.  According to court documents, these monies were intended to be used, in part, for bribes for the Nigerian officials.

Penalty

  • As mentioned above, JGC agreed to pay a criminal penalty of $218.8 million, and to realize certain compliance and cooperation undertakings during a two-year period.  Part of the compliance undertakings requires JGC to retain an independent compliance consultant for a period of two years. 

Notes

  • Earlier in 2011 Tesler, pleaded guilty to one count of conspiracy to violate the FCPA and one substantive violation of an FCPA antibribery provision.  In 2010 Wojceich Chodan, Technip and Snamprogetti each resolved enforcement actions arising out of their respective roles in the Bonny Island scheme.  In 2009, the Halliburton Company, Kellogg Brown and Root LLC, and KBR, all resolved FCPA enforcement actions arising out their roles in the Bonny Island conspiracy.  In 2008, Stanley, pleaded guilty to conspiring to violate the FCPA for his role in the Bonny Island scheme.  To date, the Bonny Island investigation has produced penalties, disgorgement, and forfeiture, in excess of $1.49 billion – the largest ever to arise out of one investigation. 
  • The Bonny Island prosecutions highlight the Government’s focus on industry-wide investigations and its thoroughness in such investigations.
  • The Bonny Island prosecutions also demonstrate the significant international cooperation that is now becoming commonplace in FCPA enforcement actions.  The DOJ specifically commended the assistance provided by authorities in the United Kingdom, France, Italy and Switzerland in the JGC enforcement action. 

This is a Collect Call from The Department of Justice

Posted by Squire Sanders on March 15, 2011

Not too long ago I was clicking through the greatly improved DOJ FCPA webpage when I stumbled onto an enforcement action that had flown under the anticorruption/compliance blogosphere's radar.  Yes, Manuel Salvoch had escaped the dreaded DOJ press release, but not the Fraud Section's posting of documents for the world to see.  It was only a matter of time before someone found them. 

Conduct

Salvoch pleaded guilty to one count of conspiracy to violate the FCPA for his role in a scheme to bribe officials at Honduras’ state-owned Empresa Hondureña de Telecomunicaciones (Hondutel).

From March 2005 to 2007 Salvoch served as the Chief Financial Officer of Latin Node, Inc. (Latinode).  Officially, Salvoch was responsible for, among other things, approving payments and wire transfers.

From April 2006 to October 2007, Salvoch, Jorge Granados, Latinode’s former CEO and Chairman of the Board, and Manuel Caceres, Juan Pablo Vasquez and an individual identified as "Co-Conspirator A", all former senior executives at Latinode, (collectively, the Co-Conspirators) participated in a scheme to bribe at least three Hondutel-affiliated officials to maintain an interchange agreement Latinode had with Hondutel and to obtain reductions from the rates contained in said agreement as well as other benefits. 

Salvoch’s principal role in the scheme was to facilitate payments to the three officials to secure rate reductions to the existing interchange agreement. 

From September 2006 through June 2007, the Co-Conspirators authorized and facilitated the payment of several hundred thousand dollars to the Hondutel officials.  

Penalties

At sentencing Salvoch faces five years in prison and a fine of $250,000 or twice the gain or loss realized from the criminal conduct. 

Notes

In commenting on the April 7, 2009 resolution to the Latinode enforcement action wherein Latinode pleaded guilty to one count of violating the FCPA’s antibribery provision and agreed to pay a $2 million fine, the DOJ represented the investigation’s resolution reflected, “in large part,” the acts of eLandia International, Inc. (eLandia), Latinode’s corporate parent, in disclosing the violations to the DOJ after eLandia’s acquisition of Latinode.  eLandia promptly voluntarily disclosed to the DOJ the conduct after discovering it, conducted an internal investigation, shared the internal investigation’s factual results with the DOJ, cooperated fully with the DOJ, and took remedial action, including terminating senior Latinode management with involvement in or knowledge of the violations. 

In December 2010, the DOJ charged Granados and Caceres in a 19 count indictment with FCPA and international money laundering violations.  The indictment also contained a notice of forfeiture. 

Bonny Island Keeps on Giving (to the US Treasury that is)

Posted by Squire Sanders on March 13, 2011

On Friday, March 11, Jeffrey Tesler, who had challenged extradition from the UK to the US, relented in his fight and pleaded guilty to one count of conspiracy to violate the FCPA and one substantive violation of an FCPA antibribery provision.  In 2009, the DOJ initially charged Tesler in an 11 count indictment consisting of a conspiracy charge and ten substantive FCPA charges. 

Conduct

A UK citizen, resident and licensed attorney, Tesler owned and controlled Tri-Star Investments Ltd. (Tri-Star), a Gibraltar corporation.  TSKJ, a joint-venture comprised of Technip, S.A., M.W. Kellogg, Brown & Root (and then Kellogg Brown & Root Inc., collectively, KBR), Snamprogetti Netherlands B.V., and an engineering and construction company headquartered in Yokohama, Japan (identified in press reports as JGC Corporation) engaged Tesler and Tri-Star to assist in securing four engineering, procurement, and construction (EPC) contracts to build liquefied natural gas (LNG) facilities on Bonny Island, Nigeria.

Between 1995 and 2004, Nigeria Liquefied Natural Gas Limited (NLNG) awarded TSKJ the four EPC contracts collectively valued at more than $6 billion.  The government-owned Nigerian National Petroleum Corporation (NNPC) was the largest shareholder of NLNG, owning 49 percent of the company.

According to court documents, TSKJ hired, Tesler, Tri-Star and a Japanese trading company, to bribe a range of Nigerian government officials, including top-level executive branch officials, to assist TSKJ in obtaining the EPC contracts.  At crucial junctures preceding the award of the EPC contracts, KBR’s former CEO, Albert "Jack" Stanley, and others, met with top-level Nigerian executive branch officials to confirm that TSKJ should use Tesler as its agent and to learn or confirm the identity of a representative with whom TSKJ and Tesler should negotiate bribes for the officials.  TSKJ paid approximately $132 million in “consulting fees” via correspondent accounts in New York City to Tesler and Tri-Star and more than $50 million to the Japanese trading company in furtherance of the bribery scheme.  According to court documents, these monies were intended to be used, in part, for bribes for the Nigerian officials.

Tesler served as an agent of TSKJ and of its members, including KBR, and reported to Stanley, among others.  As such, Tesler acted as an agent of a domestic concern. 

Penalties

The court scheduled Tesler’s sentencing for June 22, 2011.  At sentencing he faces five years in prison for each count.  Tesler also faces a fine of $250,000 or twice the gain or loss realized for each count.  Finally, as part of his plea agreement, Tesler agreed to forfeit nearly $149 million in proceeds traceable to the illegal conduct. 

Notes

In 2010 Wojceich Chodan, Technip and Snamprogetti each resolved enforcement actions arising out of their respective roles in the Bonny Island scheme.  In 2009, the Halliburton Company, Kellogg Brown and Root LLC, and KBR, all resolved FCPA enforcement actions arising out their roles in the Bonny Island conspiracy.  In 2008, Stanley, pleaded guilty to conspiring to violate the FCPA for his role in the Bonny Island scheme.  To date, the Bony Island investigation has produced penalties, disgorgement, and forfeiture, in excess of $1.42 billion – the largest ever to arise out of one investigation. 

Tesler’s prosecution, like those of Stanley, Chodan, KBR, Technip, Snamprogetti, and reportedly ongoing settlement discussions with JGC, highlights the Government’s focus on industry-wide investigations and its thoroughness in such investigations.

The Bonny Island prosecutions also demonstrate the significant international cooperation that is now becoming commonplace in FCPA enforcement actions.  The DOJ specifically commended the assistance provided by authorities in the United Kingdom, France, Italy and Switzerland in the Tesler enforcement action. 

The FCPA Green Room: Private Equity May Be Next

Posted by Yevgenya Muchnik on February 07, 2011

To date, the SEC has never charged a private equity firm for the inappropriate conduct of one of its portfolio companies (the DOJ has been involved in a few investigations: see Vetco International Ltd.; Omega Advisors; and, Leo Winston Smith). However, with recent news of both internal and external bribery-related investigations into Allianz Capital Partners (manroland AG), Bain Capital (Sensata Technologies Holding NV), Carlyle Group and Onex Corp. (Allison Transmission), private equity's protective bubble may soon be burst. At least, this appears to be the message being relayed by the DOJ and SEC, which have announced that they will target the conduct of specific industries to determine their compliance with the FCPA.

In an interview published in Wall Street Journal's Private Equity Beat Blog, Ken Springer, author of "Digging For Disclosure," states that while private equity firms may be ten years ahead of hedge funds as far as understanding the importance of vetting management teams in onsite due diligence, unlike hedge funds, they are not prepared to face the intense scrutiny dealt by the DOJ and SEC when it comes to anti-corruption compliance.

Despite a possible unpreparedness to dodge the firing squad of the DOJ and SEC, the results of Deloitte's 4th annual "Look Before You Leap" survey of corporate executives, investment bankers, private equity executives and hedge fund managers, found that 63 percent of respondents reported that the FCPA and anti-corruption issues caused their companies to renegotiate or pull out of planned business relationships, mergers or acquisitions over the last three years.

Additional key findings include:

  • A clear majority (60 percent) of respondents said that they have either pulled out of a transaction or adjusted deal pricing to reflect compliance and integrity-related issues.
  • China is highest on the list of countries or regions ranked according to concerns about the potential for compliance and integrity-related issues when doing business. More than 80% of respondents said they were significantly or somewhat concerned about China.
  • Entities from Mexico appear to be very finely attuned to compliance and integrity due diligence issues, and highly confident in their ability to meet the challenges.

Private equity firms may face liability under the FCPA even if a corrupt act occurred prior to the acquisition of a portfolio company. Not only may liability be inherited for a company's past actions through the concept of successor liability, but a firm may also be under fire for any ongoing consequences of corrupt acts, even if there is no direct evidence that the fund or its officers knew of the corrupt acts. Additionally, as with the pending investigation into Allianz SE, liability may arise for corrupt or irregular payments made by a portfolio company, which in Allianz's case arose as part of an internal audit investigation initiated by manroland AG and prudently self-reported to the authorities.

For a detailed account on recommendations for private equity companies in preparing themselves for increased anti-corruption regulation, please refer to Financier Worldwide's November 2010 "A brave (but scary) new world: why private equity is not exempt from US and UK anti-corruption laws" by Carol M. Welu and Yevgenya Muchnik.

What to Look for in 2011

Posted by Squire Sanders on January 27, 2011

Recently, we wrote about the 2010 enforcement environment.  Today’s post looks forward to 2011 and some things to keep an eye out for in the coming year.  Without further ado:

Prosecutions of Individuals. In 2010 we saw a significant number of individuals prosecuted for FCPA and related violations.  A number of defendants resolved their prosecutions criminally with the Department of Justice (DOJ) or civilly with the Securities and Exchange Commission (SEC).  In 2010 the DOJ also prosecuted multiple putative “foreign officials” (see here and here).  In 2011 the DOJ will continue to prosecute individuals.  As DOJ Criminal Division Assistant Attorney General Lanny Breuer recently stated, “Just as important as the collection of fines and penalties, we have aggressively pursued individual executives under the FCPA.”  And late last year, AAG Breuer opined the prosecution of individuals was a cornerstone of deterring further FCPA violations.  We have no reason to doubt AAG Breuer. 

Industry-wide Investigations.  In recent years industry-wide investigations have yielded considerable results for the DOJ and SEC.  Whether aerospace and defense, oil and gas, telecommunications, tobacco, or the defunct UN Oil for Food Program continue to make headlines remains to be seen.  Industry-wide investigations afford the regulators and their investigators considerable advantages.  For example, the government is able to become familiar with how a particular industry operates, even how a particular agent or foreign instrumentality operate, and how FCPA violations occur in such circumstances.  They yield, to modify an expression of the dismal science (economics), “prosecutions of scale."  

Cooperation.  We will keep an eye out for cooperation among regulators in the U.S. and their counterparts abroad.  Recently, the U.S., EU, and the individual member states entered into new extradition and mutual legal assistance treaties.  These formal arrangements, in addition to informal information exchange mechanisms, create a robust environment for international cooperation.  Last year we saw increased use of extradition as a weapon in the fight against corruption.  And just a few days ago we wrote about the pending extradition of a UK national, Jeffrey Tessler, from England to the U.S. in connection with the Bonny Island, Nigeria, scheme.  Expect increased cooperation to continue.

Dodd-Frank Act.  Dodd-Frank brought us the whistle blower bounty and extractive resource reporting provisions.  We will keep an eye out to see how these two provisions may be implemented.  The repercussions for companies already concerned about FCPA compliance may only heighten the compliance concerns of in-house legal and compliance/ethics officers. 

Civil Litigation.  In recent years an aggressive and burgeoning FCPA plaintiffs’ bar has emerged.  It seems soon after a company announces it is conducting an internal investigation, a plaintiffs’ firm announces it is pursuing a civil suit against the entity for the conduct that gave rise to the investigation.  Causes of action vary (for example, shareholder derivative, breach of contract or fiduciary duty, and securities fraud) and so do degrees of relative success.  These suits will likely continue in 2011. 

This is just a sampling of what to watch for in 2011.  In closing, we will leave you with one final quote from AAG Breuer:  "in the Criminal Division we have dramatically increased our enforcement of the Foreign Corrupt Practices Act in recent years.   That statute, which was once seen as slumbering, is now very much alive and well.   In fact, over the last two years, we have charged more than 50 individuals with FCPA-related offenses and collected nearly $2 billion in FCPA-related fines and penalties – by far the most people charged and penalties imposed in any similar period."    

Breaking News: Another Possible FCPA Extradition from the UK.

Posted by Squire Sanders on January 21, 2011

We had a different post planned for today (one on trends to look for in 2011, which include international cooperation), but the ruling of London appeals court takes priority.  According to Law360, a London appeals court decided Jeffrey Tesler, a UK lawyer charged by the DOJ with paying more than $132 million from a former Halliburton subsidiary to Nigerian government officials to secure $6 billion in natural gas contracts should be extradited to the U.S.  Information on the U.S. case against Tesler may be found on the DOJ’s Fraud Section FCPA website.  

Previously, a co-defendant, Wojciech J. Chodan, also a UK citizen and a former vice president and consultant to a UK subsidiary of Kellogg, Brown & Root Inc. (KBR Inc.) was extradited from the UK and pleaded guilty to conspiring to violate the FCPA.  According to the plea agreement, Chodan was intimately involved in a decade-long conspiracy to bribe Nigerian government officials in order to obtain and retain engineering, procurement and construction (EPC) contracts for Bonny Island, Nigeria, liquefied natural gas (LNG) projects. KBR Inc., Technip, Snamprogetti and an unnamed Japanese company formed a joint-venture that was awarded EPC contracts by Nigeria LNG Ltd. to build LNG facilities on Bonny Island. Chodan admitted he and his co-conspirators agreed to pay bribes to senior Nigerian government officials to obtain and retain the EPC contracts.

Chodan further admitted he recommended and agreed to the joint-venture’s hiring of two agents, Tesler and the Japanese company, to pay the bribes. Over the course of the scheme, approximately US$182 million in bribes were paid. At crucial junctures during the scheme, Chodan and others met with senior Nigerian government officials so the officials could designate individuals with whom the joint-venture should negotiate bribes.

At sentencing Chodan faces a maximum of five years in prison, a criminal fine of US$250,000 or twice the gain or loss realized from the illegal conduct, and three years of supervised release.  Chodan agreed, in his plea agreement, to forfeit US$726,885 from frozen Swiss accounts.

Stay tuned for developments on the Tesler extradition and prosecution. 

"We Are in a New Era of FCPA Enforcement"

Posted by Squire Sanders on January 19, 2011

U.S. Department of Justice (DOJ) Criminal Division Assistant Attorney General Lanny Breuer so stated at the American Conference Institute’s 24th National Conference on the Foreign Corrupt Practices Act (FCPA) late last year.  The recent actions of the DOJ and Securities and Exchange Commission (SEC), the FCPA’s dual enforcers, backed up AAG Breuer’s words.  The DOJ and SEC combined to resolve 75 FCPA enforcement actions in 2010.  These enforcement actions included unprecedented fines, disgorgement of ill gotten gains, prejudgment interest, and prison sentences.  Squire Sanders’ 2010 summaries summarize the underlying conduct leading to each enforcement action, the actions’ respective resolutions, and highlight noteworthy aspects of each prosecution. 

2010 saw the continuation of industry-wide investigations and a heightened focus on individual prosecutions.  Old FCPA standby industries, like oil and gas, continued to make headlines, while several industries, such as telecommunications and tobacco, drew considerable attention from the DOJ and SEC in 2010.  In 2010, the DOJ and SEC continued to prosecute individuals at a record pace.  Of particular note are the DOJ and SEC’s prosecutions of non-U.S. persons, including one putative “foreign official” for a money laundering conspiracy related to a series of FCPA telecommunication prosecutions. 

While little case law developed in 2010, other developments may guide companies on the current “best practices” to be considered when benchmarking compliance and ethics programs.  Recent deferred and non-prosecution agreements yield considerable insight into where the U.S. Government considers the “best practices” bar to be located.  In addition, new amendments to the U.S. Federal Sentencing Guidelines may assist in benchmarking compliance programs.  Squire Sanders’ 2010 enforcement actions’ summaries demonstrate that U.S. regulators will seek to severely punish corporations that fail to adopt and implement appropriate compliance programs while rewarding others who do. 

Looking forward to the New Year, industry wide investigations and prosecutions of individuals will likely continue.  Additional industries, including the financial services and medical device industries, may experience enforcement actions.  Individual prosecutions will also make headlines as pre-trial motions will continue in the massive SHOT Show trials and those of other defendants.  The DOJ may also prosecute yet another “foreign official” as charges have been filed against a Thai national.

In closing, we leave you with another quote from AAG Breuer:  “I want to tell you this afternoon that you are right to be more concerned…I continue to believe that prosecuting individuals – and levying substantial criminal fines against corporations – are the best ways to capture the attention of the business community.”

The Long Arm of the Law: Why non-US Companies Need to Comply with the Foreign Corrupt Practices Act

Posted by Squire Sanders on January 16, 2011

The Foreign Corrupt Practices Act (“FCPA”) has started garnering headlines around the world.  It's no wonder, considering the size of the fines and settlements extracted by the DOJ and SEC from non-U.S. companies in 2010 for violations of the FCPA.  As of the date of this writing, eight of the top 10 largest settlements and fines involved non-U.S. companies.  Since the “The Long Arm of the Law:  Why non-US companies Need to Comply with the Foreign Corrupt Practices Act” was drafted in mid-December 2010, Alcatel-Lucent and affiliated entities settled charges with the DOJ and or the SEC for a total of $137 million, giving the French company the #8 spot in the top 10 list and moving Panalpina and ABB Ltd. down to #9 and #10, respectively (and bumping Shell off the top 10 list).  This article was written to demonstrate to companies based in South America, and Argentina in particular, about the broad reach of the FCPA, but the guidance in the article is broad enough that its lessons should be heeded by all companies around the world, wherever they are based.

David Saltzman and Franco Rodriguez Vazquez are lawyers at Squire, Sanders & Dempsey (US) LLP and Estudio Bunge, respectively. 

The DOJ and SEC Close 2010 with an FCPA Bang!

Posted by Squire Sanders on January 09, 2011

The DOJ and SEC Close 2010 with an FCPA Bang!

The Department of Justice ("DOJ") and Securities and Exchange Commission ("SEC") closed another Foreign Corrupt Practices Act record setting year -- 75 FCPA enforcement actions resolved -- with a bang.  In late December, the U.S. enforcement agencies, Alcatel-Lucent S.A. and several of its subsidiaries resolved the agencies' investigations into conduct that occurred prior to Alcatel's 2006 merger with Lucent Technologies Inc.  This post summarizes the conduct underlying the enforcement actions, subsequent penalties, and provides noteworthy takeaways from the Alcatel-Lucent S.A. et al. enforcement actions. 

 

Conduct

  • Alcatel-Lucent S.A. (“Alcatel-Lucent”), and several subsidiaries, resolved DOJ and SEC investigations into the worldwide business practices of Alcatel S.A. (“Alcatel”) and its subsidiaries that occurred prior to Alcatel’s 2006 merger with Lucent Technologies Inc.  The DOJ filed a criminal information alleging Alcatel-Lucent violated the books and records and internal controls provisions of the FCPA.  The SEC’s complaint alleged Alcatel-Lucent violated the FCPA’s antibribery, books and records, and internal controls provision.  Both agencies’ enforcement actions related to the hiring and conduct of third party agents in several countries.  The DOJ also filed a one count criminal information charging Alcatel-Lucent France S.A., (f/k/a Alcatel CIT S.A.) (“Alcatel CIT”), Alcatel-Lucent Trade International, A.G. (f/k/a Alcatel Standard A.G.) (“Alcatel Standard”), and Alcatel Centroamerica (f/k/a Alcatel de Costa Rica S.A.) (“Alcatel Costa Rica”) with conspiring to violate the FCPA’s antibribery, books and records, and internal controls provisions.
  • Allegedly, the three subsidiaries paid millions of dollars in bribes to foreign officials in Costa Rica, Honduras, Malaysia, and Taiwan to obtain, retain, or secure improper advantages in violation of the FCPA.  Examples of the alleged conduct included:
    • Alcatel CIT wiring more than $18 million to two consultants in Costa Rica which had been retained by Alcatel Standard.  The consultants gave more than half of these monies to various Costa Rican officials for assisting Alcatel CIT and Alcatel Costa Rica with obtaining and retaining business.  Senior Alcatel executives approved the consultants’ retention and payments despite the obvious indications the consultants were performing little or no legitimate services. 
    • Alcatel Standard retaining a Honduran man who had no telecommunications industry experience.  The man was retained after being personally selected by the brother of a senior Honduran government official.  Alcatel CIT executives knew a significant portion of the money paid to this individual would be shared with the family of the senior Honduran government official to secure favorable treatment for Alcatel CIT. 
    • Alcatel Standard retaining two consultants with close ties to legislators in the Taiwanese government on behalf of Alcatel SEL A.G. (“Alcatel SEL”) (now known as Alcatel-Lucent Deutschland) to assist in re-drafting a public tender’s technical requirements to improve Alcatel SEL’s chances of winning and secure support for its bid.  The consultants were paid nearly $1 million despite neither having any industry experience.   
    • Alcatel Network Systems Malaysia Sdn. Bhd. (“Alcatel Malaysia”), making illegal payments to Malaysian government officials to secure non-public, confidential information relating to a public tender that Alcatel Malaysia ultimately won.
  • Alcatel failed to maintain accurate books and records when the payments (described above) were recorded in ways that obscured their purpose and ultimate recipients.  None of the payments were properly documented or recorded in the books and records of Alcatel’s subsidiaries, which rolled into Alcatel’s books and records.  For example:
    • Alcatel subsidiaries made payments pursuant to consulting agreements that inaccurately described the services provided.
    • Alcatel subsidiaries created false invoices to justify payments.
    • Alcatel distributed funds in cash without accurate documentation.
    • Alcatel recorded illegal payments as payments for legitimate services.
    • Alcatel subsidiaries entered into consulting agreements retroactively.
    • Alcatel established and used a system of intermediaries to obscure the source and destination of funds.
  • Alcatel knowingly failed to establish or maintain an adequate system of internal controls to prevent or detect such payments.  For example:
    • Alcatel failed to detect or investigate several red flags that suggested third parties, at the direction of certain Alcatel employees, were likely bribing foreign officials.  The heads of several Alcatel subsidiaries and geographical regions, some of which reported directly to Alcatel’s executive committee, authorized extremely high commission payments under circumstances in which they failed to determine whether such payments were, in part, to be funneled to foreign officials.  These Alcatel officials either knew or were extremely reckless in not knowing such conduct occurred. 
    • In many instances, personnel whose responsibility it was to review due diligence reports concerning prospective third parties did not have the skills necessary to do so (e.g., they could not read the language in which the reports were prepared). 
    • Alcatel employees also entered into agreements retroactively and obscured amounts paid to third parties by splitting the payments among separate agreements. 
    • Alcatel Standard’s due diligence on third parties was “inadequate” and Alcatel CIT often paid third parties without proof of services rendered. 
    • A former high-level employee and the president of Alcatel Standard trained country senior officials how to “paper” third party agreements so Alcatel-Standard would authorize them. 

Penalties

  • Alcatel-Lucent agreed to pay more than $137 million in penalties, fines, disgorged profits and prejudgment interest, and enter into enhanced compliance agreements with U.S. enforcement authorities to resolve their respective investigations.
  • To resolve the DOJ action, Alcatel-Lucent entered into a Deferred Prosecution Agreement ("DPA") with the DOJ while Alcatel-Lucent France, Alcatel-Lucent Trade, and Alcatel-Lucent Costa Rica agreed to plead guilty to the criminal information’s charge.  The corporate parent and three subsidiaries will pay a $92 million criminal penalty and implement rigorous compliance enhancements pursuant to their respective DPA and guilty pleas.  Pursuant to the DPA, the DOJ will dismiss the Alcatel-Lucent criminal information if it complies with the DPA.
  • To resolve the SEC action, Alcatel-Lucent agreed to disgorge more than $45 million in ill gotten gains and prejudgment interest.   
  • Alcatel-Lucent further agreed with the DOJ and SEC to retain an independent compliance monitor for three years to oversee the implementation and maintenance of an enhance FCPA compliance program and to submit yearly reports to the DOJ and SEC.
  • Previously, in January 2010, Alcatel agreed to pay a $10 million penalty to resolve an investigation by Costa Rican authorities into the Costa Rican bribery scheme. 

Notes

  • In March 2007, the DOJ charged Christian Sapsizian, a French citizen and former Alcatel CIT executive, and Edgar Valverde Acosta, a Costa Rican citizen and former president of Alcatel Costa Rica, with a litany of FCPA-related violations concerning the conduct described above.  Sapsizian pleaded guilty and was sentenced.  Valverde Acosta is considered fugitive and his whereabouts unknown. 
  • In public documents the DOJ noted after Alcatel and Lucent merged Alcatel-Lucent substantially improved its cooperation with the DOJ.  The DOJ commended Alcatel-Lucent with deciding “on its own initiative and at a substantial financial cost,” with “making an unprecedented pledge to stop using third party sales and marketing agents in its worldwide business.”  These significant changes to Alcatel-Lucent’s behavior and business practices may have contributed to the parent company being offered a DPA, notwithstanding the egregiousness of the pre-merger conduct.
  • The Alcatel-Lucent et al. enforcement actions demonstrate that failing to conduct adequate anticorruption due diligent pre-merger, may result in significant successor liability for the post-merger entity.  Public documents indicate Alcatel used Alcatel Standard to conduct “very limited due diligence on business consultants.”  Upon obtaining the necessary approvals, based on the “due diligence,” Alcatel Standard entered into an agreement with the third party usually requiring the third party to perform “vaguely-described marketing services.”
  • The Alcatel-Lucent et al. enforcement actions also demonstrates the need to conduct adequate due diligence prior to retaining third parties as their actions (and liabilities for their actions) may be imputed to the corporate entity that retained them.
  • Finally, the Alcatel-Lucent et al. enforcement actions demonstrate the U.S. enforcement authorities’ continued collaborative efforts.  Both the DOJ and SEC acknowledged the assistance provided by Costa Rican and France authorities, in addition to that of a variety of U.S. law enforcement agencies.  French authorities, reportedly, continue to investigate the matter.
  • The SEC's litigation release and complaint are available here and here, respectively.  While the DOJ has not posted on its FCPA website the public documents referenced in this post, links to the Alcatel-Lucent criminal information, DPA, and criminal information filed against the three subsidiaries are available here and here, courtesy of the FCPA Blog and FCPA Professor.