Crack Down on Corporate Bribery: Fix the Foreign Corrupt Practices Act

The Foreign Corrupt Practices Act (15 U.S.C.S. §§ 78dd-1, 78dd-2, and 78dd-3) prohibits payments to foreign officials to "obtain or retain business."

Overseas bribery by U.S. multinationals is assumed to have been drastically reduced after the FCPA in 1976, but recent evidence indicates it could be much more than a ripple in the ongoing corporate crime wave.

Transparency International, which publishes an annual report on global corruption estimated in 2004 that the amount lost due to bribery in government procurement is at least US$ 400 billion per year worldwide.

A number of major overseas bribery cases involving U.S. companies have been reported in recent years. Companies that reportedly have been involved in overseas corruption cases include Dow Chemical and Xerox (India), Tyco (Venezuela), Accenture (Middle East), IBM (South Korea), Monsanto, Titan and Enron (where allegations extend around the world, including the UK, India, Ghana, Colombia, Bolivia, Panama, Nigeria and the Dominican Republic).

The problem is by no means limited to the U.S. For example, the U.S. Department of Commerce reported that between May 1, 2003 and April 30, 2004 the global competition for contracts worth up to $18 billion "may have been affected by bribery by foreign firms of foreign officials," and a 2003 global survey by PriceWaterhouseCoopers found that 49 percent of companies surveyed were required to offer or pay a bribe at least four times.

Foreign governments followed the U.S. government's early lead in cracking down on bribery in 1998, when the OECD Convention on Combating Bribery of Foreign Public Officials (loosely modeled on the FCPA) was signed. The treaty obligates 35 wealthy countries to pass anti-bribery laws In addition, the U.N. convention Against Corruption, expected to come into force in 2005 -- will extend to the rest of the world the obligation to pass anti-bribery laws. Yet some observers say it will be difficult to enforce.

In order to align the FCPA with the OECD convention, Congress amended the FCPA in 1998. Under the amended act, the FCPA applies to any company (including foreign companies) listed by U.S. exchanges. (See ABB case, below). This provision allows U.S. prosecutors to, in essence, prosecute multinationals who might otherwise use their corporate structure to evade the law.

Responsibility for enforcement of the FCPA is divided between the Fraud Section of the Department of Justice's Criminal Division (which deals with criminal enforcement of the FCPA) and the SEC's Division of Enforcement (which deals with civil enforcement, particularly with the record-keeping and accounting provisions of the FCPA). This split in enforcement responsibility can result in bureaucratic rivalry, poor information-sharing and little objective monitoring of enforcement.

Evidence of weak enforcement of the FCPA by the SEC and Department of Justice includes a March 2003, the Senate Finance Committee report which reveals the two agencies "failed to act" on "serious allegations" of bribery associated with an Enron power project in Guatemala raised by an IRS audit team.

There are significant obstacles to successfully prosecuting corporate crimes when they occur overseas. Witnesses are difficult to procure and bribery cases often involve a complicated layering of offshore subsidiaries and secret bank accounts. The agencies are given few incentives to pursue such cases because the government generally sees its role as aiding U.S. business, not tarnishing its image abroad. An SEC that's notoriously overworked and under-resourced isn't likely to prioritize such cases, especially when the docket is full of accounting fraud and other kinds of high-profile cases.

Loopholes in the law

Ambiguities in the law have allowed defendants to claim there is no prohibition on bribes intended to reduce customs duties or tax obligations.

In a case involving officials from American Rice, Inc., U.S. vs. David Kay and Douglas Murphy, 200 F. Supp. 2d 681 (S.D. Tex. 2002), the court ruled that the plain language of the statute did not cover improper payments to reduce customs duties and sales taxes, and that the legislative history of the Act evidenced no clear Congressional intent to prohibit such practices.

Recent disclosures of bribery by U.S. corporations suggest some intent to use this decision to argue for a loophole in the law. Halliburton, for example reported in May that "one of our foreign subsidiaries operating in Nigeria made improper payments of approximately $2.4 million to an entity owned by a Nigerian national who held himself out as a tax consultant when in fact he was an employee of a local tax authority. The payments were made to obtain favorable tax treatment ..."

Fortunately, this gaping loophole in the FCPA can be easily fixed.

Recent FCPA Cases:

(For a useful summary, see Gibson, Dunn's 2006 Year-End Update, and Danforth Newcomb's Digest of Cases and Review Releases (11/06)).

ABB:

In July 2004, subsidiaries of ABB Ltd. (a Swiss company) settled charges by the SEC and Department of Justice for payments associated with the company's business in Nigeria. ABB Ltd. was subject to the FCPA’s books and records provisions as a company listed on U.S. exchanges. Its subsidiaries were charged with bribery, and ABB itself was charged with failing to maintain adequate internal controls. The company paid a $5.9 million civil penalty. Two subsidiaries paid a total $10.5 million criminal penalty.

American Rice
final judgement (Lawrence Theriot).
Mokhiber/Weissman on American Rice case

Baker Hughes SEC Order (9/12/01) and release. Also see the Fried Frank alert re: Baker Hughes case(9/01)

Bristol-Myers
The company reported the following in its 11/09/04 quarterly report: "On October 25, 2004, the SEC notified the Company that it is conducting an informal inquiry into the activities of certain of the Company’s German pharmaceutical subsidiaries and its employees and/or agents. The Company believes the SEC’s informal inquiry may encompass matters currently under investigation by the Staatsanwaltin prosecutor in Munich, German. Although, uncertain at this time, the Company believes the inquiry and investigation may concern potential violations of the Foreign Corrupt Practices Act and/or German law. The Company is cooperating with both the SEC and the German authorities. It is not possible at this time reasonably to assess the final outcome of these matters or to reasonably estimate the possible loss or range of loss." See this AP report too.

DaimlerChrysler:
The Detroit Free Press reported (10/29/04) that the SEC is investigating allegations made by a company whistleblower that DaimlerChrysler "maintained at least 40 secret bank accounts to bribe foreign government officials."

ExxonMobil/ChevronTexaco:

In September 2003, Chevron Texaco was subpoenaed by the Department of Justice as part of an ongoing investigation into alleged bribery in Kazakhstan’s oil industry. Former Mobil executive J. Bryan Williams was sentenced to three years and ten months in prison for tax evasion charges associated with a $2 million kickback he received in connection with Mobil's oil business in Kazakhstan. In addition, an American intermediary, James Giffen, was indicted in 2003 for violating the FCPA by allegedly paying $78 million to top political officials in Kazakhstan on behalf of Mobil.

Halliburton
Timeline of Halliburton Nigeria bribery probe.
Baker Botts attorney hired to do investigation Corporate Crime Reporter, 1/16/04
On February 4, 2004 Newsweek reported that the Justice Department is looking into a the case that reportedly occurred while Dick Cheney was CEO.
The Dallas Morning News first reported there were two cases on January 9.
"French Judge Probes Unit of Halliburton" (Washington Post, 1/21/04)
"Will the French Indict Dick Cheney" by Doug Ireland, The Nation, 12/29/03.
Le Figaro story (12/20/03)
Halliburton SEC Filings Page.
For updates see Halliburton Watch

IBM

Computer Weekly reported (1/5/04) that IBM dismissed three employees in Korea in association with attempts to use bribery to secure government contracts. One, the head of the company's operations in Korea, was sentenced to 18 months in jail. "Prosecutors alleged that the company created a slush fund from which to pay officials in order to receive contracts from government agencies. The size of the slush fund was $2.5m and the total value of contracts received was $55m."

Lucent disclosed (in its 12/04 10-K) that it was informed by the SEC and Department of Justice that they had each "commenced an investigation into possible violations of the Foreign Corrupt Practices Act. These investigations follow allegations made by National Group for Communications and Computers Ltd. in an action filed against us on August 8, 2003." In April 2004, the company reported to the DOJ and the SEC that an internal compliance audit and an outside counsel investigation "found incidents and internal control deficiencies in our operations in China that potentially involve FCPA violations. We are cooperating with both agencies." The company also disclosed that "our former Chairman and Chief Executive Officer, Richard McGinn, the former head of our Saudi Arabia operations, John Heindel, and a third former employee received “Wells” notices from the staff of the SEC. These Wells notices state that the staff of the SEC is considering recommending that civil actions be taken against these three former employees for violations of the Foreign Corrupt Practices Act (“FCPA”). The allegations against these individuals include violations of the anti-bribery provisions of the FCPA and aiding and abetting the Company’s alleged violations of requirements under the FCPA to keep accurate books and records and to maintain a proper system of internal accounting controls." The company itself has not received a Wells notice at this time, but the investigation is continuing.

Marathon Oil (10-Q report to investors, June, 2004)

Monsanto

Reported by Dow Jones on March 22, 2004, the Monsanto case involved an attempt by company operatives in Indonesia to give $50,000 to an Indonesian bureaucrat in exchange for blocking a law related to the company's plan to market GM cotton. According to the Corporate Crime Reporter, Monsanto has received a Deferred Prosecution Agreement, under which it agreed to pay $1.5 million and promised to abide by certain measures over a 3 year probationary period, in exchange for a promise to not prosecute the company. See SEC's settlement

Schering-Plough:

Schering-Plough agreed to pay a $500,000 civil penalty in 2004 for violating the FCPA’s bookkeeping and records provisions. The fine related to payments made by a Polish subsidiary to a charitable foundation headed by a Polish government official. Schering-Plough U.S. had no knowledge of the payments, but was charged with failing to implement internal controls adequate to prevent or detect the improper payments.

Syncor:

In December, 2002, the SEC announced a $500,000 civil penalty against Syncor International Corp., for bribes paid by a Taiwanese subsidiary, allegedly with the knowledge of the company's chairman. The company also failed to ensure that its non-U.S. subsidiaries implemented the FCPA’s accounting requirements (making it easier to hide the illegal bribes on the company's books). In addition, the company's Taiwanese subsidiary was pled guilty and was fined $2 million for violating the FCPA. The case against the Taiwanese subsidiary was the first in which Justice used its authority to prosecute non-U.S. persons for actions taken in furtherance of a foreign bribe.

Titan:

On 1/20/05, the Wall Street Journal reported (Jonathan Karp and Andy Pasztor, "Titan to Pay Fine and Plead Guilty in Bribery Probe") that defense contractor Titan Corp. would plead guilty and pay as much as $30 million to resolve a year-long overseas bribery investigation and avoid suspension/debarment from any new contracts.

U.S. Links:
Department of Justice FCPA Page
DoJ FCPA Opinion Page
Senate Finance Committee Report on Investigation of Enron Guatemala Case
"Addressing the Challenges of International Bribery and Fair Trade" U.S. Department of Commerce, July 2003
"Enron's Pawns" (report by SEEN)
"Corporate Bribery on the Rise" by Anthony Stoddard
Corporate Crime Reporter
"Payload: Taking Aim at Corporate Bribery" by Nelson Schwartz and Lowell Bergman (NYTimes, 11/25/2007)
"U.S. Targets Bribery Overseas" by Carrie Johnson (Washington Post, 12/5/2007)

Industry and Defense Attorney Links:
World Economic Forum Partnering Against Corruption Initiative
Paper by Jay G. Martin
Hughes Hubbard FCPA Advisory (1/05)
TRACE International, Inc.
Powell Goldstein (Washington, DC)
Shearman & Sterling Summary of Recent FCPA Trends and Patterns (10/05).
Shearman & Sterling also publishes a Digest of FCPA Cases (updated 2/06).
Foley & Lardner's FCPA page

International links:
OECD Convention Against Corruption
The World Bank suspended Acres International in July 2004 after the Canadian engineering firm was convicted of bribery in association with a Lesotho dam project.


Transparency International reports on global corruption. See the 2002 Bribe Payers Index
and Chapter 4 - "Corporate Money" of TI's 2004 corruption report.

"Enforcing the law on overseas corruption offences" discussion paper by Dr. Susan Hawley for The Corner House (UK), who also wrote "Export Credit Agencies and Corruption." For related radio report see this BBC report from November 2004.
Public Services International Research Unit
Oil firms secretly finance crooked regimes The Guardian, 3/24/04
Time for Transparency report by Global Witness on oil industry and corrupt governments that take "secret signature bonuses from western oil companies" if it adheres to conditions laid down in the agreement.
Publish What You Pay is a campaign that aims to help citizens of resource-rich developing countries hold their governments accountable for the management of revenues from the oil, gas and mining industries.

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