United States: Quarterly FCPA Report: Fourth Quarter 2012

By The Global Compliance And Disputes Practice Group

I. Introduction

The final quarter of 2012 was a relatively quiet one, with the U.S. Department of Justice ("DOJ") and U.S. Securities and Exchange Commission ("SEC") declining more corporate enforcement actions than they settled. In addition, for the first time, the DOJ ended a deferred prosecution agreement earlier than scheduled, giving Pride International Inc. a one-year break from its three year agreement.

The highlight of the quarter was the release of the highly anticipated Resource Guide to the U.S. Foreign Corrupt Practices Act (the "Guide"). While the Guide may not clarify many of the gray areas surrounding the FCPA, it does provide many useful real-life and hypothetical examples. Notably, the Guide does not signal any retreat from the government's assertive enforcement of the FCPA nor does it provide any additional defenses to an FCPA violation.

Several recent challenges to FCPA enforcement actions suggest that the era of nearly automatic cooperation from corporate and individual defendants may be nearing a turning point. After a decade of enforcement mostly against cooperative defendants, the SEC and DOJ are now facing challenges in three separate actions, suggesting that such challenges are becoming more common. In the first challenge, two former executives of Noble Corporation ("Noble") filed motions to dismiss the SEC's charges against them for failure to plead necessary facts, namely failure to name the foreign officials who allegedly received improper payments. A federal judge recently dismissed the SEC's monetary claims without prejudice (which would allow the SEC to file an amended complaint), but allowed the SEC's claims for injunctive relief to go forward. In the second and third cases, former Magyar Telecom executives and a former Siemens executive, respectively, filed motions to dismiss the cases against them for lack of personal jurisdiction. Whether these challenges are the beginning of a trend of significant pushback against FCPA enforcement actions remains to be seen.

II. Summary of Recent Corporate Enforcement Actions

A. W.W. Grainger, Inc. – Declination

In a November 1, 2012 SEC filing, industrial supply company W.W. Grainger, Inc. ("Grainger") stated that the DOJ closed its inquiry into possible FCPA violations. The DOJ inquiry stemmed from allegations that a subsidiary of the company, Grainger China LLC, may have falsified expense reimbursement documentation. Grainger launched an internal investigation in which it uncovered evidence that sales employees of the Chinese subsidiary may have given prepaid gift cards to certain customers in China. The company first disclosed its internal investigation to the DOJ and SEC in January 2012, and submitted the results to the government in July 2012. According to Grainger, its investigation "did not substantiate initial information suggesting significant use of gift cards for improper purposes." The DOJ closed its inquiry on August 14, 2012, although the SEC has not yet indicated whether it too will close its investigation.

B. Nabors Industries Ltd. – Declination

In its November 2, 2012 SEC filing, Nabors Industries Ltd. ("Nabors"), an oil services firm, stated that the SEC determined not to pursue an enforcement action against it in connection with the SEC's investigation of Panalpina. The DOJ initiated its inquiry of Panalpina in 2007, which provided Nabors with freight forwarding services. Panalpina previously admitted to making improper payments to assist its customers with customs clearance in Kazakhstan, Saudi Arabia, Algeria, and Nigeria.

According to its SEC filing, Nabors, with the assistance of outside counsel, launched an internal investigation into its transactions involving Panalpina. After Nabors provided the results of its investigation to both the SEC and DOJ, the SEC declined to bring an enforcement action. The DOJ has not yet indicated whether it too will decline to bring an action.C. Pride International Inc. – Termination of Deferred Prosecution Agreement

On November 5, 2012, the DOJ ended Pride International Inc.'s ("Pride") deferred prosecution agreement, one year earlier than scheduled. Pride and its French subsidiary, Pride Forasol, were originally charged with making improper payments to government officials in Venezuela, Mexico, and India through their vendor Panalpina. In November 2010, Pride entered into a three-year deferred prosecution agreement with the DOJ and paid $23.5 million in disgorgement and interest to the SEC, while its French subsidiary Pride Forasol paid $32.6 million in criminal penalties. Pride was subsequently acquired by Ensco Corp., which agreed to be bound by the deferred prosecution agreement.

In its decision to terminate the deferred prosecution agreement, the DOJ cited Pride's good corporate citizenship, including the quality of its compliance and ethics program, maintenance of internal controls, and reduced reliance on third party partners. This is the first time that the DOJ ended an FCPA-related deferred prosecution agreement earlier than initially agreed.

D. Grifols, SA – Declination

In a November 30, 2012 SEC filing, Spanish pharmaceutical firm Grifols, SA ("Grifols") stated that the DOJ determined not to pursue an enforcement action against it for potential FCPA violations by Grifols's subsidiary, Talecris, which occurred prior to Griffols's acquisition in 2011. The SEC filing indicated that Talecris's internal investigation examined its practices in Belarus, Russia, Iran, Brazil, Bulgaria, China, Georgia, Libya, Poland, Turkey, and Ukraine.

In the notice of declination, the DOJ cited Grifols's "exemplary level of cooperation" throughout the investigation as a factor in closing the probe. Grifols stated that the DOJ specifically mentioned the company's "immediate steps to secure valuable information and making responsible decisions that lead to the early disclosure of information to the DOJ."

E. Allianz SE – Settlement Agreement

On December 17, 2012, Allianz SE, ("Allianz") a German-based insurance and asset management company, entered into a settlement agreement with the SEC covering violations of the FCPA books and records and internal controls provisions. Allianz agreed to pay a penalty of $5.3 million, disgorge $5.3 million, and pay prejudgment interest of $1.8 million.According to the SEC, Allianz's subsidiary in Indonesia made improper payments to employees of state-owned entities for government projects from 2001 to 2008. The money came from "special purpose accounts," which were not properly accounted for. The SEC alleged that improper payments were implicated in 295 insurance contracts obtained by the company.

Allianz first became aware of the issue in 2005 as a result of a complaint, and a subsequent audit revealed the special purpose accounts. Allianz allegedly did not initiate an internal investigation until a second whistleblower complaint was received in March 2009.

F. Eli Lilly – Settlement Agreement

On December 20, 2012, Eli Lilly and Company ("Eli Lilly"), an Indianapolis-based pharmaceutical company, agreed to pay $29.4 million to the SEC. The settlement amount includes $13.9 million in disgorgement, $6.7 million in prejudgment interest, and an $8.7 million penalty.

According to the SEC, Eli Lilly made improper payments to governmental officials in Russia, China, Poland, and Brazil between 1994 and 2009. The investigation of Eli Lilly pre-dates the pharmaceutical industry-wide sweep that began in 2010.

The SEC alleged that Eli Lilly's subsidiary in Poland made eight improper payments to a charitable foundation administrated by the head of a government health authority in exchange for that official putting Eli Lilly products on the government reimbursement list. This is the same charitable foundation – the Chudow Castle Foundation – to which Schering-Plough allegedly made improper payments. Schering-Plough ultimately paid a $500,000 civil penalty to the SEC in 2008 in connection with those allegations.

In Russia, the SEC alleged that Eli Lilly used offshore "marketing agreements" to make payments to third parties chosen by government customers or distributors. The SEC alleged that the third parties did not actually provide services and were used in some instances to funnel money to government officials. The SEC particularly noted the lack of due diligence done by Eli Lilly on the third parties.

The SEC also alleged that one of Eli Lilly's distributors in Brazil made payments to government officials to obtain sales of an Eli Lilly product to government institutions. Finally, the SEC alleged that Eli Lilly's internal sales representatives and managers falsified expense reimbursement documentation in order to obtain money to buy gifts such as food, wine, cosmetics, jade bracelets, and visits to bath houses and karaoke bars for government officials in China.

The DOJ and the Federal Bureau of Investigation assisted the SEC's investigation of Eli Lilly, which started in 2003 and was one of the longest FCPA investigations to-date. One of the issues emphasized by the SEC's complaint was that Eli Lilly continued to make improper payments for years after it became aware of them, including after Eli Lilly was first advised of the government's investigation in 2003. The DOJ has not indicated whether it will pursue any additional actions of its own.

III. Summary of Recent Individual Enforcement Actions

A. Uriel Sharef – Settlement Announced

In documents filed with the U.S. District Court for the Southern District of New York on October 12, the SEC stated that it has reached a settlement agreement with Uriel Sharef. Mr. Sharef is a former member of Siemens AG's ("Siemens") managing board and is among the seven Siemens executives charged last year with violating the FCPA for agreeing to more than $100 million in improper payments in Argentina. The civil and criminal charges came more than three years after Siemens settled with the DOJ and SEC for $800 million regarding allegations encompassing several countries.

B. Herbert Steffen – Challenge to Jurisdiction

Also on October 12, in the same case in which Mr. Sharef was charged, Herbert Steffen, a German citizen and former Siemens executive who ran the company's subsidiary in Argentina, filed a motion to dismiss the charges against him, arguing that the SEC failed to plead facts sufficient to establish personal jurisdiction over him. Mr. Steffen argued that he lives in Germany, spent his entire career with Siemens in Germany, Brazil, and Argentina, was never employed in the United States, and never travelled to the United States on business for Siemens during the period at issue in the SEC's complaint. He stated that the only "contact" he is alleged to have had with the U.S. was a phone call. Mr. Steffen also argued that the SEC's action is barred by the FCPA's five-year statute of limitations.

C. Stuart and Rose Carson – Sentenced

Stuart Carson, former CEO of Control Components, Inc. ("CCI"), previously pleaded guilty to one count of violating the FCPA in April 2012. On November 8, 2012, he was sentenced to four months in prison, eight months of home detention, and payment of a $20,000 fine.

His wife and former sales director for CCI, Hong Rose Carson, also pleaded guilty to one count of violating the FCPA and was sentenced to six months home confinement, payment of a $20,000 fine, and 200 hours of community service. Prosecutors had recommended home confinement and no jail time for Ms. Carson because she "lacked the American education and early business training of her co-defendants."

In 2009, CCI pleaded guilty to violating the FCPA and Travel Act and admitted to making approximately $4.9 million in improper payments to foreign officials.

D. David Edmonds – Sentenced

David Edmonds, former vice-president of CCI, was sentenced on December 18, 2012 to four months in prison, followed by four months of home confinement, and payment of a $20,000 fine. Mr. Edmonds had previously pleaded guilty to one count of violating the FCPA in relation to improper payments to Greek government officials.

E. Mark A. Jackson and James J. Ruehlen – Motion to Dismiss Denied

Mark A. Jackson, former CEO of Noble Corporation, and James J. Ruehlen, former head of Noble's Nigerian subsidiary, previously filed a motion to dismiss the SEC's complaint against them for failure to plead the basic facts of an FCPA claim. Jackson and Ruehlen argued that the SEC failed to identify any specific Nigerian officials who had received improper payments, what those officials did in exchange for the payments, or how Noble benefited from the payments.

On December 11, District Judge Keith Ellison dismissed the SEC's monetary claims but left open the claims for injunctive relief. The monetary claims were dismissed without prejudice, leaving open the option for the SEC to file an amendment complaint. Judge Ellison also dismissed certain claims occurring outside the five year statute of limitations.

In reaching his conclusions, Judge Ellison stated that the FCPA does not require the SEC to name the foreign officials who allegedly received improper payments from the defendants. It is notable that Judge Lynn Hughes, also in the Southern District of Texas, ruled to the contrary on the same issue in the DOJ's unsuccessful prosecution of John O'Shea.

Judge Ellison also concluded that the SEC must bear the burden of proving that the facilitation payment exception does not apply. The Noble executives argued that because facilitation payments are an exception to the FCPA, rather than an affirmative defense, that it is not up to the defendants to raise the issue. Instead, the defendants have argued that the government must affirmatively plead and prove that payments were not facilitation payments as part of its case.

F. Elek Straub, András Balogh, and Tamás Movai – Challenge to Jurisdiction

On December 6, briefing was completed on motions to dismiss charges against Elek Straub, former Chairman and CEO of Magyar Telekom, and András Balogh and Tamás Morvai, both former senior executives in Magyar Telekom's Strategy Department. The lawsuit pertains to their alleged involvement with improper payments made to government officials in Macedonia and Montenegro. Last year, Magyar Telekom agreed to pay over $90 million to settle charges against it relating to alleged improper activities in Macedonia and Montenegro.

The defendants asserted in their various briefs on the motion to dismiss that the SEC failed to plead sufficient facts establishing personal jurisdiction over the defendants or to show that the SEC's claims were not time-barred by the statute of limitations. In its opposition brief, the SEC argued that jurisdiction exists, amongst other reasons, because the executives took actions in paying and concealing bribes that they knew rendered Magyar Telekom's financial statements and filings to the SEC false. The SEC argued that "where a defendant knowingly or foreseeably causes the falsification of an SEC filing, he will be subject to jurisdiction in the United States."

Oral argument for this case is currently scheduled for January 17, 2013.

IV. Summary of Recent Corporate Investigation Disclosures

A. Central European Distribution Corp. – Investigation Disclosed

On October 5, 2012, Central European Distribution Corp. ("CEDC") disclosed in an SEC filing that it has uncovered potential violations of the books and records provisions of the FCPA. CEDC, a Polish-based company, is one of the largest producers of vodka globally. According to its filing, CEDC did not maintain adequate records to track certain payments and gifts, or to ensure that they had a valid business purpose. CECD's SEC filing also stated that it has identified a "material weakness" in its internal controls. The company did not disclose the country or region of operation related to these potential violations.

B. Owens-Illinois Group, Inc. – Investigation Disclosed

On October 25, 2012, Owens-Illinois Group, Inc., ("Owens-Illinois") a manufacturer of glass used for bottling beer, wine, liquor, and other foods, disclosed in an SEC filing that it launched an internal investigation into potential FCPA violations. The company identified potential violations of the anti-bribery, books and records, and internal controls provisions of the FCPA, along with violations of its internal policies and local laws.

Prior to this announcement, the company disclosed its internal investigation to the SEC and DOJ, and stated that it intends to cooperate fully in any government investigation. Owens-Illinois did not identify the location or the amount of potential improper payments at issue.C. Barclays – Investigation Disclosed

Following an investigation launched by the Serious Fraud Office ("SFO") in August 2012, Barclays PLC announced on October 31, 2012 that the DOJ and SEC initiated investigations of the financial services provider. According to the company's October 31 disclosure with the London Stock Exchange, the DOJ and SEC investigations relate to Barclays's use of third parties. The company did not provide details about the location or nature of services provided by these third parties.

The investigation by the SFO relates to the relationship between Barclays and Qatar Holdings. Barclays first reported potential improper conduct to the U.K. Financial Services Authority in July 2012, and then to the SFO in August 2012.

D. Beam Inc. – Investigation Disclosed

On November 8, 2012, Beam Inc. ("Beam") disclosed in an SEC filing that it began investigating possible improper payments by its business unit in India. In its filing, Beam stated that it had voluntarily disclosed the existence of its investigation to the DOJ and SEC, and affirmed its intention to cooperate fully with any potential investigations launched by the government. The alleged improper activity relates to excise duties, invoicing, and distribution in India.

Beam is the fourth largest liquor producer in the world. The company became aware of the allegations from whistleblower complaints.

V. DOJ Opinion Procedure Release

The DOJ published its second Opinion Procedure Release of the year this quarter ("Release 12-02"), addressing the application of the bona fide promotional expenditures affirmative defense under the FCPA. The facts presented were as follows: 19 non-profit adoption agencies (the "Requestors") headquartered in the U.S. submitted a proposal to host 18 governmental officials from a foreign country during visits to the U.S. The officials include government ministers, legislators, a director, and a judge – all involved in the foreign country's adoption process or policies. The U.S. adoption agencies stated that the purpose of the trip is to allow the government officials to learn more about the adoption agencies' work, which includes processing adoptions in the foreign country. During each trip, which will last approximately two days, the government officials will interview the Requestors' staff members, inspect the Requestors' files, and meet with families who adopted children from the foreign country.

The anticipated expenses covered by the Requestors include: a mixture of business class and coach airfare, two to three nights stay at a business-class hotel, meals, transportation between agencies, and local transportation. All entertainment will be nominal and will involve families who have adopted children from the foreign country, and no side trips or leisure activities will be funded.

Based on the DOJ's review of the request, it concluded that the proposed funding of the trip may go forward without enforcement action. In reaching this conclusion, the DOJ found that the travel and related expenses fall within the FCPA's § 78dd-2(c)(2)(A) affirmative defense, which covers "reasonable and bona fide expenditure[s]...directly related to...the promotion, demonstration, or explanation of products or services." It is notable that Release 12-02 featured very similar facts as the ones presented in Release 11-01, issued on June 30, 2011, suggesting that companies may feel the need to be overly cautious when dealing with the FCPA.

VI. FCPA Guidance Released by the DOJ and SEC

On November 14, 2012, the DOJ and SEC released their long-awaited FCPA guidelines, entitled Resource Guide to the U.S. Foreign Corrupt Practices Act (the "Guide"). Although the Guide does not signal any sea changes to the way the FCPA will be enforced or add new defenses for corporations such as those found in the U.K. Bribery Act, as many U.S. businesses sought, the Guide does provide a summary of the current body of DOJ and SEC opinions, leading cases, and enforcement practices.

Most usefully, the Guide sets out hypothetical scenarios of prohibited conduct and includes multiple "real world" examples based on past investigations where the government declined prosecution. The Guide adds relatively little new information for large multinational companies and businesses in highly regulated industries that have grappled with the FCPA and its nuances for decades. On the other hand, the Guide provides helpful insights for small- and mid-sized companies that are beginning to develop anti-corruption compliance policies and programs.

On November 20, 2012, Paul Hastings published a comprehensive summary and analysis of the Guide entitled: Guidance on the U.S. Foreign Corrupt Practices Act from the Department of Justice and the Securities & Exchange Commission: The Key, as with the U.K. Bribery Act and the OECD Anti-Bribery Convention, Is a Robust Compliance Program.

VII. Conclusion

The fourth quarter was dominated by discussion of the newly released FCPA Guide, but potentially more significant in the long run is the emerging willingness of defendants to challenge the limitations of the FCPA's reach and power. The outcomes of the jurisdictional challenges to the FCPA by individual defendants connected to Magyar Telecom and CCI may have far-reaching consequences with regard to the FCPA's role as a global enforcement mechanism in years to come.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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Timothy L. Dickinson
 
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