In two recent public appearances, Department of Justice (DOJ) representatives spoke to issues of concern to every compliance practitioner regarding one role of the DOJ going forward and how that role will continue to feed the need for robust compliance programs going forward. The first remarks were by Acting Assistant Attorney General Kenneth A. Blanco at the Atlantic Council Inter-American Dialogue Event on Lessons From Brazil: Crisis, Corruption and Global Cooperation (Blanco speech) and the second remarks were by Sandra Moser, Acting Chief, U.S. Department of Justice, Criminal Division, Fraud Section, at the Anti-Corruption Compliance in High-Risk Markets conference (Moser remarks).

Blanco highlighted the close cooperation between the US and Brazil in anti-corruption investigations and enforcements. The last 12 months has been a signature year for such corruption, with “the Criminal Division’s Fraud Section and the Brazilian Lava Jato task force have cooperated and coordinated resolutions in four FCPA cases: Embraer, Rolls Royce, Braskem, and Odebrecht.” The investigative cooperation is based upon a “strong relationship built on trust” between the prosecutors of the two counties. Blanco noted, “This trust allows prosecutors and agents to have direct communications regarding evidence. Given the close relationship between the Department and the Brazilian prosecutors, we don’t need to rely solely on formal processes such as mutual legal assistance treaties, which often take significant time and resources to draft, translate, formally transmit, and respond to.”

Blanco went on to detail some of the specific aspects of this cooperation. He said, “At the beginning of an investigation, a prosecutor or agent from a country’s financial intelligence unit can call his or her foreign counterpart and ask for financial information that, for example, may identify bank accounts. Once the investigation has progressed to the point where prosecutors are ready to proceed to trial, the evidence may be requested through the mutual legal assistance channel so that it can be admissible at trial. This prosecutor-to-prosecutor or law-enforcement-to-law-enforcement cooperation has allowed both countries to more effectively pursue their cases.”

Beyond simply the trust and cooperation is the coordination of penalties. He stated, “It is important to mention how the penalties were levied in these coordinated resolutions. By working together, Brazil and the Department not only assisted one another in gathering evidence and building the case, but made sure to credit the fines and penalties paid to each country, rather than imposing duplicative fines and penalties. This ensures fairness to the companies, and provides the right incentives for companies to cooperate fully with the relevant jurisdictions implicated in the case.”

As reported by Jimmy Hoover in an article in Law360 (sub req’d) entitled, “DOJ To Increase International Coordination In FCPA Fines” , Moser went further regarding the penalty aspects in international enforcement efforts.  She said, “the DOJ would work with its counterparts abroad to avoid “piling on” additional penalties for companies in Foreign Corrupt Practices Act cases, borrowing a phrase that Attorney General Jeff Sessions has used in the regulatory context to signal enforcement relief to corporations. Moser noted cases like the massive corruption investigation into Odebrecht SA and Braskem SA, where the department credited criminal penalties that the Brazilian conglomerates paid to Switzerland and Brazil authorities in calculating how much they owed the U.S.”

Moser emphasized “These cases are not an aberration.” She also noted, “the increased international coordination in assessing FCPA fines stems from the realization that the money for paying back multiple governments for corrupt practices comes from the same corporate accounts.” Even with the ongoing cooperation she added ““We are trying to do better,” Moser regarding about such coordination.”

Moser’s remarks followed on those from Daniel Kahn, Chief, FCPA Unit, Fraud Section, Criminal Division at the DOJ and Kara Brockmeyer, the former Chief, FCPA Unit, Division of Enforcement at the Securities and Exchange Commission (SEC) made at ACI’s 33rd International Conference on the Foreign Corrupt Practices Act in November 2016 (2016 ACI-FCPA Conference). At the 2016 ACI-FCPA Conference, they discussed the “one pie” concept. They explained that increasingly, enforcement authorities were moving towards one total cost to anti-corruption violators which would be equitably split up by authorities where the corruption occurred or by the countries which had jurisdiction. Kahn said that companies who self-disclosed to multiple regulators and extensively remediated, along the lines laid out in the FCPA Pilot Program, were more likely to garner credit with US regulators for fines paid to overseas authorities. A contra example was Alstom, which tried to settle piecemeal with a variety of countries and entities such as the World Bank. Under this approach, Alstom did not received credit from US authorities for any of their other payments.

The role of the DOJ and SEC in this one pie concept is critical. For it is only the US which has the track record in anti-corruption enforcement and cache to lead this international fight, most particularly in the enforcement phase. In the financial penalty phase the lion’s share of fines in the Rolls-Royce case went to the UK government and in the Odebrecht case to Brazil. It is critical interest to US companies that there be certainty in resolutions and the US government can help lead this initiative. Yet US companies will need to understand the requirements as set out by Brockmeyer last fall, which coincide with the requirements of the Pilot Program for self-disclosure, cooperation and remediation. Any US company doing business outside the US must have a compliance program to prevent, detect and remedy any corruption issues. Furthermore, if they want to receive the maximum credit from multiple regulatory bodies they will need such a best practices compliance program.

Blanco ended his speech with words which inspire every compliance professional and clearly speak to the current DOJ’s approach to anti-corruption enforcement. He stated, “People are demanding action, they are no longer silent. We at the Department of Justice will continue, like we have for years, pushing forward hard against corruption, wherever it is, and we welcome our fellow counterparts around the world who are fighting this important fight against corruption.  We are committed to working with our partners like Brazil – shoulder to shoulder – steadfast come what might. Together we will ensure that there is no place for corrupt individuals to hide, and no place for them to hide their money, assets or any kind of wealth. No refuge or rest for the wicked. That is the plan, this is our strategy, this is our goal. I hope you will all join us in this important and noble endeavor.”

I plan to continue with this endeavor and I hope you will join me.

 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2017

This week, Jay and I return for a wide-ranging discussion on some of the week’s top compliance related stories, including:

  1. U.S. charges top Colombia anti-graft prosecutor with money laundering. See article by Dick Cassin the FCPA Blog.
  2. US Supreme Court may finally settle one of the fiercest debates arising from the Dodd-Frank Act: What is a whistleblower and when are they protected against corporate retaliation? See Joe Mont’s article in Compliance Week.
  3. Alstom obtains ISO 37001 certification but does it mean anything?
  4. Benefits of FCPA Pilot Program becoming clear after two 2017 declinations. See article by Jaclyn Jaeger in Compliance Week.
  5. Head of federal government ethics office to step down. See article in The Hill.
  6. At nearly the half-way mark, the Astros lead the majors with the best record. See Tom’s article on how and why in the FCPA Compliance Report.
  7. New eBook on Trump and Compliance: the First 100 Days is out. It collects the musings from the four amigos on the Everything Compliance podcast (+1). You can download your copy by clicking here.

Last week the Department of Justice (DOJ) issued its second Declination under the Sessions regime. Short with brevity, the matter nonetheless has some significant points for the compliance practitioner to help move their corporate compliance program forward. The matter involved CDM Smith Inc. (CDM) a privately held engineering and construction concern, headquartered in Massachusetts. As with Linde Gas, CDM obtained a superior result for obtaining a declination in the face of unrefuted violations of the Foreign Corrupt Practices Act (FCPA).

From 2011 until 2015, CDM’s India operations acted corruptly in paying bribes to employees at the National Highways Authority of India (NHAI), the country’s state-owned highway management agency. The bribe payments were reported to be “2-4% of the contract price and paid through fraudulent subcontractors, who provided no actual services and understood that payments were meant to solely benefit the officials.” In addition to these ongoing payments, the company’s division responsible for India and the Indian subsidiary “paid $25,000 to local officials in the Indian state of Goa in relation to a water project contract.”

This was not a situation of the non-existence ‘rogue employees’ but there was substantive involvement at the management level. The declination stated, “All senior management at CDM India (who also acted as employees and agents of CDM Smith and signed contracts on behalf of CDM Smith, including CDM India’s country manager) were aware of the bribes for CDM Smith and CDM India contracts, and approved or participated in the misconduct.”

As a part of the declination, CDM agreed to disgorge $4,037,138, which represented the “profit to CDM Smith from the illegally obtain contracts in India.” The payment was spread out over several months with $1,037,318 due within 10 days of the date of the declination and the remaining $3MM due in $1mm installments on August 1, September 1 and October 1. As with all DOJ declinations granted with disgorgement, CDM agreed that it would not seek any tax deduction with “any part of its payment or the Disgorgement Amount.”

The declination related that the DOJ made its decision to grant the close the investigation based upon six factors.

  1. CDM timely and voluntarily self-disclosed the matter;
  2. CEM engaged in a “thorough and comprehensive investigation”;
  3. CDM cooperated fully with the DOJ in the investigation of this matter;
  4. CDM agreed to disgorge all profits it made from its illegal conduct;
  5. The remediation engaged in by CDM, including enhancements to its compliance program and internal controls regime; and
  6. CDM’s termination of the executives and employees who were involved in or directed the illegal conduct.

In addition to agreeing to not seek favorable tax treatment for its disgorgement, CDM also agreed it “will not seek or accept directly or indirectly reimbursement or indemnification from any source with regard to the Disgorgement Amount.” As with the Linde Gas declination the company ceded its right to seek clawbacks from culpable senior executives or others who might have benefited financially from the illegal conduct. Also, the company appears to have given up the right to seek any type of insurance reimbursement for FCPA violations, if it had any such insurance which might cover the Disgorgement Amount.

While the conduct at CDM did not reach the invidious level as was demonstrated at Linde Gas, it was clear a large swath of company employees were aware or engaged in illegal conduct. It was not limited to the Indian subsidiary alone as both employees and agents of the CDM signed the contracts which were obtained through bribery and corruption. Also, the conduct occurred over a five-year period which certainly raises questions about oversight by the US parent. There was no information presented about when or how the illegal conduct came to the US parent’s attention, only that the company did timely disclose this matter in a voluntary manner.

For the compliance practitioner, the CDM case once again drives home and re-emphasizes the lessons to be drawn from the Linde Gas declination. The DOJ has now, for a second time, sent a clear message that it will reward companies which meet the four pillars under the FCPA Pilot Program through (a) self-disclosure, (b) extraordinary cooperation, (3) full remediation, and (d) profit disgorgement. Interestingly, the profit disgorgement in this case would appear to have been beyond the five year of limitations for profit disgorgement under the recent Supreme Court decision in Kokesh.

The CDM declination also reiterates what Jim McGrath used to say, a serious case requires a seriously good lawyer. Linde Gas had as its lead counsel, a lawyer who Howard Sklar characterized as “one of the Deans of the FCPA bar”, Lucinda Low from Steptoe & Johnson LLP, which led it to obtain a declination from the DOJ. CDM had Nat Edmonds currently the Chair of the Litigation Section at Paul Hastings LLP and formerly the head of the FCPA Unit at the Fraud Section of the DOJ, as its counsel and FCPA investigation counsel which led it to obtain a declination from the DOJ. These are both superior FCPA counsel who know what they are talking about when it comes to FCPA investigations, decisions to self-disclose and following the prescripts of the FCPA Pilot Program.

Yet the in-house compliance practitioner also has a role in obtaining such a superior result. As Hui Chen noted in her interview with Matt Kelly on the Radical Compliance podcast, it is more than simply having a paper compliance program in place. When she was Compliance Counsel for the DOJ, Chen was much more interested in how a compliance program was used in “actual operations” of the company. In other words, as made clear in the DOJ’s Evaluation of Corporate Compliance Programs, how is your compliance program operationalized in your company? This is something which a Chief Compliance Officer (CCO) can work to achieve so that if there is a FCPA violation, as occurred in Linde Gas and CDM, then your company has a fair chance of receiving such a superior result.

As we now have two FCPA matters resolved under the Trump Administration and Sessions’ DOJ, compliance practitioners and the compliance profession can only applaud the results. The DOJ has given clear incentives for companies to meet the four prongs of the FCPA Pilot Program. Companies now have a clear road map to resolve substantive FCPA violations with no criminal penalty.

 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2017

In this episode, Matt Kelly and I take a deep dive into the first Declination issued by the DOJ in the era of the Trump Administration, which was issued by the DOJ on June 16, 2017, when it issued a Declination to Linde North American Inc. and Linde Gas North America LLC (collectively “Linde”). The case presented several interesting factors which merit consideration so we are presenting lessons to be learned for the Chief Compliance Officer (CCO) or compliance practitioner.

The Bribery Scheme

Linde acquired Spectra Gases, Inc. (Spectra Gases) in October 2006. In November 2006, it purchased certain assets from the National High Technology Center (NHTC) of the Republic of Georgia. One of the keys to this purchase was a piece of equipment called the ““boron column,” which were used to produce boron gas.” Sales of boron gas after the acquisition helped fund the purchase price and payout to Spectra executives who stayed on after Linde purchased Spectra Gases.

Unfortunately, the three Spectra executives who stayed on were in cahoots with corrupt offices from the NHTC who made the sales agreement with Linde. Part of the Earn-Out by the former Spectra (now Linde) officials was paid to these corrupt government officials, both directly and through certain third parties. But the funding scheme to pay the bribes was quite creative and demonstrates once again to the compliance practitioner the myriad ways in which funds can be generated to pay bribes.

For reasons not made clear, Linde did not purchase the boron column outright but allowed the former Spectra executives and the corrupt NHTC officials to form two new entities to own and operate the boron column, Spectra Investors LLC (Spectra Investors) and Spectra Gases Georgia, which was wholly owned by Spectra Investors. Spectra Investors was owned 51% by the corrupt NHT officials and 49% by the Spectra Gases executives who now worked for Linde. Spectra Gases Georgia was formed as a separate management company, by the NHTC officials, which was claimed to provide services to Spectra Investors for which it would receive recompense. Of course, there was no evidence of services being delivered under this arrangement as it was simply a mechanism to funnel monies to the corrupt officials.

As a result of the ownership structure of Spectra Investors, with 51% being owned by corrupt NHTC officials and the management services contract, the corrupt NHTC officials received “approximately 75% of the profits generated by the boron column” while Spectra Gases received 25% of the profits. Clearly even with bribery and corruption, it was a bad business deal. In January 2010, Linde dissolved Spectra Gases and became its successor-in-interest and at some point later discovered the illegal conduct. Prior to the time of the dissolution, Spectra Gases had “received approximately $6,390,000”. After Linde became the direct owner, it “received approximately $1,430,000 as a result of the corrupt” actions.

The Declination

While there is a dearth of fact about how the matter came to the attention of Linde and when it disclosed the matter to the DOJ, the decision to decline to prosecute was based on the following factors: (1) Linde’s timely self-disclosure; (2) a “thorough, comprehensive and proactive investigation” [emphasis supplied]; (3) Linde’s full cooperation and meeting the Yates Memo requirement for disclosing all known relevant facts about the “individuals involved in or responsible for the misconduct”; (4) full profit disgorgement; (5) Linde’s enhancement of its compliance program and internal controls; and (6) Linde’s full remediation, including termination or discipline of the three Spectra executives and lower-level employees involved in the misconduct; termination of the fraudulent management contract between the corrupt NHTC officials and Spectra Investors and termination of the Earn-Out payment due to the former Spectra executives who became Linde employees.

Lessons Learned

This was yet another Foreign Corrupt Practices Act (FCPA) action where a company performed insufficient due diligence in the acquisition phase. The timing of the Linde purchase of Spectra Gases and Spectra Gases’ purchase of the income producing assets is too close in time to be a coincidence. It would certainly appear that Linde purchased Spectra Gases to facilitate its acquisition of the boron column and other assets. If your company is going to make such a multi-step acquisition, you must perform due diligence on all the actors and the assets involved.

The Byzantine corporate structure created for the ownership of the boron column, its operation and management contract are clear red flags that any CCO should sniff out immediately. While I am sure the internal corporate excuse for this clear ruse was the ubiquitous ‘tax considerations’; every such transaction should be reviewed by compliance as well. Anytime there is more than one entity to accomplish one task, there is the possibility of fraud present. Further, it is not clear how Linde could not have been aware of the ownership interests of a company which it ultimately controlled. It would seem that the company did not even make any inquiry.

Even in 2006, the Republic of Georgia’s reputation for bribery and corruption was quite high. The 2006 Transparency International-Corrupt Perceptions Index (TI-CPI) listed Georgia at 99 out of 176 countries listed so that alone warranted red flag scrutiny. If you are purchasing an entity in a country with such well known affinity for corruption, extra care is warranted. Perhaps back in 2006, Linde did not view the FCPA as something which it would deal with in such a situation.

Yet even with all the apparent miss-steps and non-steps of compliance, the company was able to secure a declination from the DOJ. While there may be some additional penalties or sanctions by the Securities and Exchange Commission (SEC) for the failures of internal controls, the result obtained by Linde was certainly a superior result. The company would seem to have met the four pillars under the FCPA Pilot Program through (a) self-disclosure, (b) extraordinary cooperation, (3) full remediation, and (d) profit disgorgement. Interestingly, the profit disgorgement in this case would appear to have been beyond the five year of limitations for profit disgorgement under the recent Supreme Court decision in Kokesh. If there is a FCPA enforcement action brought by the SEC perhaps additional facts will be recited in any resolution documents.

Nevertheless, kudos are due to Linde and its counsel for obtaining this declination. Every CCO should study it for both the superior result received and underlying facts to see if you face anything similar in the Republic of Georgia or elsewhere.

There are multiple ways to deal with an issue which can provide known and unforeseen benefits. Today we celebrate one of those as it was on this day in 1944, that President Franklin Roosevelt signed the GI Bill into existence. The primary purpose of the GI Bill was to avoid a relapse into the Great Depression after the war ended, provide GIs with a smoother economic transition back into US society and, most particularly, to prevent a repeat of the Bonus March of 1932, when 20,000 unemployed veterans and their families flocked in protest to Washington. The destruction of their makeshift camp and dispersal of the Bonus Marches was a black eye on the Hoover administration and contributed to his defeat in 1932.

However, the GI Bill ended up achieving much more than even these laudable goals. An entire generation of returning GIs (including my father) went to college on the GI Bill. Before the war, only 10-15% of US males went to college but the GI Bill opened this educational opportunity up with interest loans, business loans and unemployment compensation. In many ways the American economic miracle of the last half of the 20th century was fueled by this signature government effort.

I thought about the numerous effects of the GI Bill in the context of the fight against bribery and corruption. The Foreign Corrupt Practices Act (FCPA) is well known as a supply side law focusing on the bribe payor’s conduct. It criminalizes the offer to or bribe of a foreign government official or employee of a state-owned enterprise. Yet for every bribe paid there are multiple parties involved and multiple illegal acts engaged in by a number of these parties. Put simply, the money must go somewhere. While it is possible to hide millions of dollars in illegal bribe payments between your mattresses or in false wall of your home as recently occurred in Nigeria where CNN reported, “The Nigerian anti-corruption unit discovered more than $43 million in US dollars at an upscale apartment in Lagos”, where the money was ““neatly arranged” inside cabinets hidden behind wooden panels of a bedroom wardrobe.” Of course, there were reports earlier this year of the discovery of $9.7MM, in fireproof safe in a house owned by Dr. Andrew Yakubu who was the former Group Managing Director of the Nigeria National Petroleum Corporation (NNPC).

More typically money is laundered the more traditional way, through a bank. Rebecca R. Ruiz, reporting in a New York Times (NYT) article, entitled “Banker Admits to Money Laundering in FIFA Case”, discussed former Swiss banker, Jorge Luis Arzuaga, a former managing director at the Swiss bank Julius Baer, who pled guilty last week to money laundering conspiracy in conjunction with the ongoing FIFA corruption scandal. Arzuaga admitted to arranging the transfers of more than $25 million in bribes and other corrupt payments from 2010 to 2015 for corrupt FIFA officials. This is the first guilty plea in the plethora of service providers who facilitated the massive corruption scandal engaged in by FIFA officials. His former employer, the bank Julius Baer, which is under an unrelated Deferred Prosecution Agreement (DPA) for helping wealthy Americans evade taxes, is also under investigation for its role in helping corrupt FIFA officials to launder money obtained through illegal bribery and corruption.

Arzuaga’s money laundering was for one of the defendants who has pled guilty, the Argentinian sports marketing firm Torneos y Competencias and Julio Grondona, a longtime FIFA and Argentine soccer association official who died in 2014. Being a professional Swiss banker, Arzuaga was quite diligent in the services he provided. Ruiz noted, “The indictment said Mr. Arzuaga also arranged for money in accounts held by Mr. Grondona to be distributed to his heirs after his death.”

In a statement, Richard Weber, chief of the Internal Revenue Service (IRS) criminal investigation division said “We are pursuing the bad actors — including soccer officials, sports marketing companies, financial institutions and their bankers — who have intentionally and criminally violated the law by laundering illegal proceeds. Prospective private bankers and relationship managers should take note of Mr. Arzuaga’s conviction and think twice about the consequences of conspiring to launder money.”

Azuaga’s guilty plea not only opens a new front in the FIFA corruption scandal but also shines a light on services providers who help illegal actors. If bankers can be prosecuted, what about others who might facilitate such conduct? This expansion of the FIFA corruption scandal may portend a new and most welcome chapter in anti-corruption enforcement.

Combatting corruption with other tools, the Wall Street Journal (WSJ) reported last week, in an article entitled “U.S. Lawsuit Links $2.2 Billion Deal to Malaysian 1MDB Scandal”, the Department of Justice (DOJ) filed suit involving a $2.2 billion purchase of a US energy company, Coastal Energy by the Abu Dhabi sovereign wealth fund. The allegation is that $50 million of the purchase price was provided by Jho Low, who is alleged to have been involved in the looting of the 1MDB fund. Reports indicate that for his $50 million contribution to the purchase price, a shell company controlled by Low received recompense in the amount of $350 million one week later. In a lawsuit, seeking forfeiture of the proceeds of the sale, the DOJ dryly noted, “The commercial basis for this nearly immediate 600% return on investment is not immediately apparent.”

The WSJ article went on to note, the lawsuit “provided detailed allegations that in 2013 and 2014 funds allegedly stolen from 1MDB were funneled via a series of bank accounts and shell companies to partly finance the purchase of Coastal Energy, a Houston firm controlled at the time by legendary Texas oilman Oscar Wyatt Jr. The lawsuit seeks to seize proceeds from the Coastal deal, but not Coastal assets.” Additionally, “The Justice Department is interested in the Coastal deal because it says the $50 million Mr. Low invested originally came from 1MDB. The Justice Department on Tuesday moved to seize London property that it says was bought with some of the $350 million proceeds of the Coastal deal. The Justice Department has questioned people involved in the deal in recent months, according to people familiar with the investigation.”

The asset forfeiture lawsuit is also interesting as it shows that companies must now not only know with whom they are doing business but the source of money which forms the basis of a transaction. This had been a well-known requirement in banking around KnowYourCustomer (KYC) and investigations of business partners and sales agents. However, this new approach for acquisitions of organizations should put all compliance professionals and business advisors on notice as to the provenance of the funds involved and the ownership structure of purchasers.

 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2017