by Bruce Carton
Summer temperatures are just starting to arrive, but anti-corruption fervor is already sizzling. Headlined by a wave of extraordinary and even historic developments in enforcement of the Foreign Corrupt Practices Act, the month of May was a blistering lead-in to this summer. And turning up the heat even more, Britain’s long-awaited Bribery Act finally goes into effect in July.
First, the historic. On May 10, a jury convicted Lindsey Manufacturing; its CEO, Keith Lindsey; and its CFO, Steve K. Lee, on one count of conspiracy to violate the FCPA and five counts of violating the FCPA itself. With the verdict, Lindsey Manufacturing became the first company to ever be convicted of FCPA violations. As Assistant Attorney General Lanny Breuer stated, however, “It will not be the last.” He noted that the Justice Department was “fiercely committed to bringing to justice all the players in these bribery schemes—the executives who conceive of the criminal plans, the people they use to pay the bribes, and the companies that knowingly allow these schemes to flourish.”
In more than 30 years of FCPA enforcement, only one other corporate defendant—Harris Corp. more than two decades ago—had ever gone all the way to trial; it was acquitted in 1991. At the time, the acquittal was described as a “stunning defeat for the Justice Department.” The Lindsey case, then, breaks new ground in the consequences for companies, as the Justice Department now will seek forfeiture of corporate assets following a conviction. Sentencing in the case is scheduled for Sept. 16, and attorneys and other compliance professionals will be watching closely to see how much the sentence exceeds what Lindsey likely would have received if it had simply pleaded guilty or otherwise settled the case.
Another historic event in FCPA enforcement occurred on May 17, when the Securities and Exchange Commission entered into its first-ever deferred prosecution agreement with Luxembourg-based Tenaris S.A. The SEC alleged that Tenaris, a manufacturer of steel pipe products, violated the FCPA by bribing Uzbekistan government officials to obtain several contracts with the Uzbekistan government. Rather than follow its typical practice of bringing a civil enforcement action against Tenaris, however, the SEC and Tenaris agreed to a DPA under which Tenaris will pay $5.4 million in disgorgement and prejudgment interest, conduct a review of its controls and compliance measures, and significantly enhance its anti-corruption policies and practices. If Tenaris complies with the undertakings set forth in the DPA, it will completely avoid an SEC enforcement action.
The SEC has described the use of DPAs and similar tools to bring cooperation as a “game-changer,” and FCPA experts agree—but for different reasons. Richard Cassin, who writes the FCPA Blog, says that the SEC’s use of DPAs shows that “instead of being a somewhat passive or reactive regulator, the [SEC] now wants companies to come in as soon as they learn about securities law violations, including FCPA problems.” On the other hand, Mike Koehler, author of the FCPA Professor blog, observed that the Tenaris DPA was troubling because the “SEC’s enforcement of the FCPA will now be even further removed from judicial scrutiny and resolutions will now more frequently be negotiated over private conference room tables.”
Several other key anti-corruption events occurred in the past month or so, including an attempt to narrow the law by questioning the language of the Act. The FCPA prohibits the payment of bribes to “foreign officials” for the purpose of obtaining or retaining business. It further defines a “foreign official” as:
Any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization.
Since the law became effective in 1977, however, no case had ever addressed one of its most critical questions: Under what circumstances can a state-owned enterprise be considered an “instrumentality” of a foreign government for purposes of the FCPA? In late April and May, two cases addressed this issue in response to defendants’ arguments that the state-owned corporations that employed the people receiving bribes were not “instrumentalities” of a foreign government. As such, they argued, the recipients were not foreign officials and the FCPA was not violated.
Both courts that ruled on this issue rejected the defendants’ arguments. One of these cases was the Lindsey Manufacturing case discussed above. In Lindsey, Judge Howard Matz rejected defendants’ pre-trial argument that a state-owned entity cannot be an instrumentality under the FCPA, and therefore employees of a state-owned entity cannot be foreign officials. In a ruling issued on April 20, the court laid out five non-exclusive factors to help determine if an entity is an “instrumentality” under the FCPA:
- The entity provides a service to the citizens–indeed, in many cases to all the inhabitants–of the jurisdiction.
- The key officers and directors of the entity are, or are appointed by, government officials.
- The entity is financed, at least in large measure, through governmental appropriations or through revenues obtained as a result of government-mandated taxes, licenses, fees, or royalties, such as entrance fees to a national park.
- The entity is vested with and exercises exclusive or controlling power to administer its designated functions.
- The entity is widely perceived and understood to be performing official (i.e., governmental) functions.
Similarly, in U.S. v. Carson, four former executives of Control Components Inc. sought the dismissal of FCPA charges against them on the grounds that employees of certain foreign state-owned companies were not “foreign officials.” On May 18, U.S. Judge James Selna of the Central District of California denied the motion, setting forth his own six-factor test to determine if an entity is an “instrumentality” under the FCPA. Judge Selna introduced new factors to consider, such as the foreign state’s characterization of the entity and its employees. The decisions in the Lindsey and Carson cases show that going forward, companies should assume that the specific facts surrounding a state-owned entity will determine whether it is an “instrumentality” of a foreign government under the FCPA.
May 18 was a busy day for FCPA-related events. Also on that day, the first wave of trials in perhaps the most high-profile FCPA prosecution ever got underway. Remember that FCPA sting operation the Justice Department conducted back in December 2009, when federal agents arrested more than 20 people at a gun show in Las Vegas? Well, the defendants have been divided into four groups for trial, and the first of these trials has now begun in a packed Washington, D.C. courtroom.
In addition, Paul Pelletier and Cheryl Scarboro—two of the most senior government enforcers of the FCPA—both announced their departures from the government to private law practice after 25 and 19 years of service, respectively. Pelletier, former principal deputy chief for litigation for the Justice Department Criminal Division’s Fraud Section, had supervised the Justice Department’s FCPA unit at the national level. Scarboro was chief of the SEC Enforcement Division’s FCPA unit.
The barrage of anti-corruption developments does not appear to be slowing down, either. In response to loud rumblings from the business community, the U.S. House Judiciary Committee has indicated that it plans an oversight hearing on the Justice Department’s surge in FCPA enforcement. And on July 1, the strict U.K. Bribery Act will finally go into effect, adding one more layer of complexity to corporate compliance in the field of anti-corruption.
In short, it looks like this unseasonably hot spring for anti-corruption will not be cooling down as we head into summer.
Originally published in Compliance Week. Reprinted with permission.
© 2011 Haymarket Media, Inc. All Rights Reserved. Compliance Week can be found at http://www.complianceweek.com. Call (888) 519-9200 for more information.