United States: Red Notice Newsletter - October 2018

ANTICORRUPTION DEVELOPMENTS

DOJ Files Superseding Indictment in Haitian Port Corruption Plot

On October 30, 2018, the U.S. Department of Justice (DOJ) filed a superseding indictment in the District of Massachusetts against Roger Boncy charging him with one count of conspiracy to violate the U.S. Foreign Corrupt Practices Act (FCPA), along with one count of violating the Travel Act, and one count of conspiracy to commit money laundering. Boncy is a dual citizen of Haiti and the U.S., who resides in Madrid, Spain. The DOJ alleges that Boncy participated in a scheme to make corrupt payments to government officials of the Republic of Haiti related to a $84 million port development project. Boncy's alleged co­ conspirator, Joseph Baptiste, a Haitian­born, retired U.S. Army colonel, was charged in the initial indictment in October 2017, which was previously covered by the Red Notice here. Baptiste is scheduled to go to trial on December 3, 2018.

The superseding indictment alleges that the co­conspirators solicited improper payments from undercover agents who were posing as potential investors for the port development project. The agents recorded a meeting in Boston where Boncy and Baptiste told agents that they would launder money to Haitian government officials through a Maryland­based non­profit entity controlled by Baptiste. Additionally, the superseding indictment details intercepted telephone calls where Baptiste and Boncy discussed making additional improper payments to a government official's aide in order to obtain authorization for the project.

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Former Adidas Executive Convicted in College Basketball Corruption Probe

On October 24, 2018, in the Southern District of New York (SDNY), after a three­week trial and over two days of jury deliberations, three individuals were convicted in the government's ongoing investigation into corruption surrounding the National Collegiate Athletic Association (NCAA). James Gatto a former Director of Global Basketball Sports Marketing for Adidas was found guilty of three counts of wire fraud, along with Merl Code, a former Adidas consultant, and Christian Dawkins, an aspiring NBA agent, who were each convicted of two counts of wire fraud. The government argued at trial that the defendants paid top college basketball recruits, in violation of the NCAA's rules, thereby defrauding other universities who awarded scholarships to the recruits. In a statement, deputy U.S. Attorney Robert S. Khuzami praised Wednesday's verdict: "The defendants not only deceived universities into issuing scholarships under false pretenses," Khuzami said, "they deprived the universities of their economic rights and tarnished an ideal which makes college sports a beloved tradition by so many fans all over the world."

Multiple universities have also been ensnared in this investigation, with the University of Maryland specifically receiving a subpoena for all communications with Christian Dawkins, as previously covered in the Red Notice. Although this is the first trial arising from the government's investigation into the NCAA, there are two more trials stemming from the same investigation scheduled for 2019. The sentencing for all three defendants is set for March 5, 2019.

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SEC Investigative Report Encourages Companies to Address Cyber Fraud with Internal Accounting Controls

On October 16, 2018, the Securities and Exchange Commission (SEC) issued a Report of Investigation reminding public companies of the importance of considering cyber threats when creating internal accounting controls. The report detailed an SEC investigation into the internal accounting controls of nine companies that were victims of "business email compromises"—a form of cyber fraud in which an attacker convinces an employee to send money to the perpetrator's account by posing as a company executive or vendor. According to the FBI, cyber fraud involving this type of scheme has led to over $5 billion in damages since 2013.

In many of the cases, employees failed to follow or did not fully understand their company's internal accounting controls—such as dual­authorization requirements and senior­level payment authorization requirements—which could have prevented the payments from being made. Although the SEC did not charge the nine companies, citing the books and records provision of the FCPA, it stressed the duty that all public companies have to update internal accounting controls and urged companies to put in place controls "sufficient to provide reasonable assurances" that investor's assets will be protected from new risks arising from cyber fraud.

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Department of Justice Announces New Guidance Regarding Corporate Monitors

On October 11, 2018, the U.S. Department of Justice (DOJ) released new guidance on the use of corporate monitors in a memorandum by Assistant Attorney General Brian Benczkowski. The guidance follows a broader pledge by Deputy Attorney General Rod Rosenstein to reevaluate numerous corporate compliance policies. Benczkowski detailed his memorandum in an address the following day to the NYU Program on Corporate Compliance and Enforcement.

Benczkowski's memo and speech shed light on the factors to be considered before imposing a monitor and how monitors are selected. The factors to be considered in determining whether a monitor should be imposed include: (1) the nature of the underlying conduct; (2) the pervasiveness of the wrongdoing; (3) the projected financial costs and the potential burden on business operations; (4) any remedial measures taken by the company; and (5) whether a new compliance program would be successful. In terms of process, the memorandum introduces certain required terms for inclusion in monitorship agreements and establishes a new three­member standing committee on the selection of monitors.

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U.K. Charges Third Employee in Seismology Corruption Case

On September 28, 2018, the U.K. Serious Fraud Office (SFO) charged a third employee of Güralp Systems Ltd., a U.K.based seismology engineering firm, as part of an ongoing probe into the company's involvement in a corrupt payment scheme. Heather Pearce, the former sales director, was charged with conspiracy to bribe a foreign official. As previously covered by Red Notice, SFO charged Güralp Systems' founder and former managing director in August 2018 for allegedly making improper payments to Heon­Cheol Chi, a South Korean government official who served as the former director of the South Korean Institute of Geoscience and Mineral Resources (KIGAM). On July 18, 2017, Chi was convicted for laundering bribes paid to him through U.S. banks.

As explained by Red Notice at the time, the U.S. Department of Justice (DOJ) issued Güralp Systems a declination notice in August 2018 in light of the parallel SFO investigation; Güralp Systems' voluntarily disclosure of the misconduct; its cooperation with DOJ's investigation, including in the prosecution of Chi; and the company's significant remedial efforts.

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Two Former Oil Executives Sentenced for FCPA Violations

On September 28, 2018, two former executives of Dutch oil services firm SBM Offshore, N.V. (SBM) received prison sentences for making corrupt payments to foreign officials in three different countries, in violation of the Foreign Corrupt Practices Act (FCPA). Former SBM CEO Anthony Mace was ordered to pay a fine totaling $150,000 and received a 36­ month sentence. Robert Zubiate, a marketing and sales executive previously at SBM Offshore USA (SBM USA), received a sentence of 30 months and was ordered to pay

$50,000.

Both sentences follow guilty pleas made by the executives in November 2017, as previously covered by Red Notice. Each pleaded guilty to one count of conspiracy to violate the FCPA due to their involvement in a scheme to funnel improper payments to officials at Petroleo Brasiliero S.A. using a third party in order to obtain contracts for SBM. The pair also admitted to making improper payments to officials in Angola and Equatorial Guinea. SBM and SBM USA previously resolved U.S., Brazilian, and Dutch investigations this misconduct, paying a total of $582 million in financial penalties to various government authorities.

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SEC Charges Medical Device Company with Violation of FCPA

On September 28, 2018, the SEC charged Stryker Corp. ("Stryker"), the Michigan based medical device company, with violating the FCPA's books, records and internal accounting controls provisions. On the same day, it was announced that Stryker had settled the charges by paying a $7.8 million penalty. Stryker is also required to retain an independent compliance consultant. The settlement arises from the failure of Stryker's subsidiaries in India, China and Kuwait to comply with written accounting controls and anti­corruption policies and procedures intended to prevent improper payments.

Previously, in October 2013, Stryker paid a $3.5 million penalty, $7.5 million in disgorgement, and more than $2.2 million in interest for other violations of the books, records and internal accounting controls provisions of the FCPA.

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Anticorruption Spotlight: World Bank Releases Annual Report on Global Sanctions

On October 3, 2018, the World Bank issued its first joint sanctions report, covering enforcements and investigations by the Integrity Vice Presidency (INT), the Office of Suspension and Debarment (OSD) and the Sanctions Board during FY18. During this period, the INT received more than 1,400 complaints resulting in the opening of 68 new investigations. The World Bank debarred a total of 78 individuals and corporate entities, 27 of which involved corrupt practices. Also, five additional corporate entities were subjected to conditional non­debarment.

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Anticorruption Spotlight: SEC Issues Whistleblower Determinations

On October 30, 2018, the Securities and Exchange Commission (SEC) announced that it would deny claims for whistleblower awards in two separate enforcement actions. In both cases, the SEC determined that the whistleblowers submitted information that was not used by the SEC in connection with the successful enforcement of the cases. The whistleblowers submitted information after the SEC had already initiated investigations into the relevant underlying conduct—in one case, as much as one year after the SEC had reached an agreement in principle on the terms of a proposed settlement with the subject company—and the submitted information did not present the SEC with new information of potential misconduct.

The SEC has made a total of 59 whistleblower awards since it first began the practice in 2012. Awards totaling more than $326 million have been paid for whistleblower information.

Whistleblower awards—provided for under the Dodd­Frank Act—can range from 10 percent to 30 percent of the money collected when monetary sanctions from a successful enforcement exceed $1 million. Notices of Covered Actions—enforcement actions with sanctions greater than $1 million—are posted on the SEC's website, and claims must be submitted within 90 days of such posting.

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Red Notice Newsletter – October 2018 (Chinese)

Red Notice Newsletter – October 2018 (Russian)

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