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U.S. Steps Up Enforcement of Corruption Law Against International Companies, Executives; Whistleblower Bounties Expanded
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July 26, 2010
By Fiona A. Philip and Joseph Walker
In the last few weeks, with the extradition of foreign executives and the imposition of hundreds of millions of dollars in fines, the Department of Justice and Securities and Exchange Commission have sent a strong message that they will be undeterred by the nationality or location of alleged wrongdoers under the Foreign Corrupt Practices Act. And, in a move to beef up enforcement tools, Congress has enacted a cash reward program for whistleblowers of FCPA violations.
Extradition of Foreign Agents
Flavio Ricotti, an Italian citizen and former vice president and head of sales for Control Components, Inc., a California-based company, arrived in the United States on July 2, 2010, after being arrested in Frankfurt, Germany, in February. DOJ alleges that Ricotti was involved in making corrupt payments of more than $1 million to state-owned companies and private employees in the United Arab Emirates, Kazakhstan, India and Qatar. Ricotti was indicted in April 2009 for, among other things, conspiracy to violate the FCPA and violating the Travel Act. Trial is scheduled to begin on November 2, 2010. Five other former CCI executives also were indicted. 1/
Ousama M. Naaman pleaded guilty on June 25, 2010, to violating the FCPA, conspiracy to commit wire fraud and falsifying books and records. Naaman, a dual citizen of Canada and Lebanon, worked as an agent in Iraq for Innospec. He was indicted in August 2008, arrested in Germany in July 2009 and extradited to the United States. Naaman admitted to paying bribes to Iraqi officials in order to win contracts under the UN Oil for Food Program and to guarantee sales. In addition, Naaman falsified invoices that Innospec accepted and used in its recordkeeping. He faces up to 10 years in jail. 2/
Naaman and Ricotti are just two examples of foreign agents whom DOJ has tracked down overseas in recent years. It took nearly a year for the U.S. government to obtain custody of Ricotti and two years for Naaman.
While Germany appears to be a jurisdiction that will readily extradite, the Bahamas seems to be another story. For the last five years, DOJ has sought the extradition of Victor Kozeny. Kozeny is alleged to have created a scheme to bribe officials in Azerbaijan in connection with the privatization of that country’s State Oil Company. He was arrested in the Bahamas in 2005, but his extradition since has been blocked by courts there. 3/
In addition, DOJ currently is pressing for extradition of two British citizens, Jeffrey Tesler and Wojciech Chodan, whom the agency alleges were involved in Halliburton/KBR’s bribery of Nigerian officials.
The Ricotti and Naaman extradition experiences and the follow-on plea agreement by Naaman seem likely to strengthen DOJ’s resolve to go after other foreign agents.
Foreign Companies
DOJ also is keeping up pressure on foreign companies listed on U.S. exchanges. For example, Naaman’s employer, Innospec, agreed to pay a $14 million criminal fine, disgorge $11 million in profits and retain a compliance monitor. Innospec, headquartered in the United Kingdom, is listed on NASDAQ. 4/
On June 28 and July 7, 2010, respectively, Technip, the French engineering and construction services company, and Snamprogetti Netherlands B.V., the Dutch-registered petroleum and chemical EPC contractor, agreed to settle with the U.S. government regarding FCPA violations. Both settlements relate to the Bonny Island, Nigeria, joint venture formed among Technip, Snamprogetti and Halliburton/KBR.
Technip will pay a $240 million criminal fine in exchange for a two-year deferred prosecution agreement with DOJ and will disgorge $98 million in profits as part of a settlement with the SEC. 5/
Snamprogetti and its former parent company, ENI S.p.A. of Italy, will pay $240 million to settle the criminal FCPA charges, and Snamprogetti will disgorge $125 million in profits to the SEC under the terms of a consent order. 6/
The U.S. government alleged that Technip, Halliburton/KBR and Snamprogetti/ENI used the joint venture to win contracts to build liquefied natural gas facilities on Bonny Island, Nigeria. The joint venture allegedly employed Tesler and others as agents and paid more than $180 million to the agents, who in turn bribed Nigerian officials. 7/
Halliburton/KBR agreed in February 2009 to pay a $402 million criminal penalty and to disgorge $177 million in profits. The fines and penalties collected for the alleged Bonny Island scheme total $1.28 billion -- the largest combined settlement in FCPA history. 8/
It is clear from activity in the last month alone that both the SEC and DOJ will aggressively pursue FCPA violators regardless of citizenship or the location of the violator or company headquarters. Companies should choose their agents, consultants and in-county representatives carefully, conducting thorough due diligence and educating their employees about the perils of violating the FCPA. DOJ is unlikely to back down from using its long arm to bring FCPA violators into U.S. courts. And, as more countries become partners of the United States in fighting corruption, fewer safe havens will be available for alleged violators.
Rewards for FCPA Whistleblowers
Whistleblower provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R. 4173), signed into law on July 21, 2010, will increase the pressure to comply with FCPA by providing incentives to individuals to report violations of FCPA.
The new law allows whistleblowers to receive up to 30 percent of the fines collected in any settlement that exceeds $1 million, including penalties, disgorgement and interest. The act expands the whistleblower provisions of the Sarbanes-Oxley Act of 2002 (SOX) and creates whistleblower bounties and protections to encourage employees to “blow the whistle” on all fraudulent securities activity, including FCPA violations. See, §922 of the new act.
The opportunity for a reward arises when a whistleblower provides the SEC with “original information” that is independently known to the whistleblower and leads to a “successful enforcement” action. The amount of compensation is determined by the SEC based on the significance of the information provided, the level of cooperation provided by the whistleblower and the programmatic interest of the SEC in deterring the violation. The law seeks to encourage whistleblowing by holding out the chance for a huge windfall by the whistleblower. Awards will be funded by penalties from enforcement actions, and the information provided to the SEC can be shared with other government enforcement agencies. However, people convicted of crimes related to the action will not qualify for bounties.
DOJ reported that in 2008 and 2009, 51 prosecutions netted $932.9 million in penalties for FCPA violations. The SEC has said that it “would like an expanded whistleblower program that will encourage more people to come forward when they see serious misconduct…. But [its] ultimate goal is to affect behavior. Ideally, this new authority would cause companies to become increasingly concerned and improve their compliance programs to avoid violations in the first place.” 9/
Consistent with the staggering fines already collected and broadened whistleblower provisions in the new law, federal authorities have dedicated additional resources to investigating allegations of bribery of foreign officials to win business overseas.
With the new law, we expect increased information flow to the U.S. government from disgruntled employees and third parties (potentially including joint venture partners, competitors and/or consultants) that expect to profit from the bounty program.
The U.S. government’s heightened interest in global FCPA investigations and the new whistleblower program intensify the need for corporations, both domestic and foreign, to take proactive steps to ensure that they have a strong FCPA compliance program by reviewing their existing FCPA compliance programs and implementing and testing their own whistleblower programs and hotlines. It is clear that, both locally and globally, corporations must quickly evaluate, respond to and address any indications of violations of the FCPA or risk learning about the issue through the very expensive process of a DOJ or SEC investigation.
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ENDNOTES
| 1/ | Press Release, Department of Justice, Italian Executive Extradited from Germany to the United States to Face Foreign Bribery Charges, July 6, 2010, available at www.justice.gov/opa/pr/2010/July/10-crm-774.html
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| 2/ | Press Release, Department of Justice, Canadian National Charged with Foreign Bribery and Paying Kickbacks Under the Oil for Food Program, July 31, 2009, available at www.justice.gov/opa/pr/2009/July/09-crm-757.html
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| 3/ | Indictment in United States v. Kozeny, Case No. 1:05-cr-00518-SAS (S.D.N.Y. May 12, 2005).
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| 4/ | Plea Agreement in Case No. 1:10-cr-00061-ESH, filed March 18, 2010.
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| 5/ | Deferred Prosecution Agreement, Case No. 4:10-cr-00439, filed June 28, 2010.
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| 6/ | Press Release, Department of Justice, Snamprogetti Netherlands B.V. Resolves Foreign Corrupt Practices Act Investigation and Agrees to Pay $240 Million Criminal Penalty, July 7, 2010, available at www.justice.gov/opa/pr/2010/July/10-crm-780.html
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| 7/ | Indictment, United States v. Tesler, No. H-09-098 (S.D. Tex. Feb. 17, 2009). DOJ also has investigated the alleged involvement of JGC Corp. in the Bonny Island venture, and JGC has reported that it is in discussions with DOJ about these allegations. See, JGC Corporation Annual Report, May 14, 2010, available at www.jgc.co.jp/en/06ir/pdf/financial_statements-summary/FY09/fy09_yem.pdf
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| 8/ | Guilty Plea, United States v. Kellogg Brown & Root LLC, No. 4:09-cr-00071 (S.D.Tex. Feb. 12, 2009); Press Release, Department of Justice, KBR Pleads Guilty to Foreign Bribery Charges and Agrees to Pay $402 million Criminal Fine, Feb. 11, 2009, available at www.justice.gov/opa/pr/2009/February/09-crm-112.html
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| 9/ | See, Samuel Rubenfeld, Expanded Whistleblower Program Could Aid FCPA Enforcement, Dow Jones Newswires, April 12, 2010.
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