International Law Advisory - Enforcement Agencies Invoke the FCPA in Iraq and a Major Securities Fraud Settlement in the Tyco Case; Voluntary Disclosures Continue

Since the start of 2006, U.S. enforcement officials have brought three enforcement actions that include FCPA charges.  These cases include a significant prosecution by the U.S. Department of Justice ("DoJ") of a U.S. national for conduct occurring entirely abroad (in Iraq), and a settlement by the Securities and Exchange Commission ("SEC") of allegations of bribery in the operations of companies acquired by Tyco International Ltd.[1]  These cases demonstrate the continued vigor of FCPA enforcement activity and serve as a cautionary note to establish effective compliance programs capable of both preventing improper payments from occurring and detecting such payments.

• Department of Justice invokes the "alternative nationality jurisdiction" prong of the FCPA for the first time to bring an FCPA prosecution against a U.S. national based upon wholly extraterritorial conduct.

In March, the United States filed charges against Faheem Mousa Salam, a U.S. citizen, for his role in an alleged bribery scheme in Iraq.  See United States v. Salam , Criminal Docket No. 1:06-mj-00094-JMF-1 (D.D.C. 2006).  The Government alleges that, in December 2005, Mr. Salam, a naturalized U.S. citizen working as a translator for a U.S. contractor in Iraq, was introduced to a senior official of the Iraqi Police Force ("IPF") by a high-ranking official of the Iraqi Ministry of Interior, who allegedly recommended that the police do business with Mr. Salam.  Mr. Salam is alleged to have made several offers to give tens of thousands of dollars in cash to the senior IPF official to arrange for the Civilian Police Assistance Training Team ("CPATT"), an organization responsible for procuring goods for the IPF using funds received from the U.S.-supported Iraq Relief and Reconstruction Fund, to purchase a map printer and armored vests from Mr. Salam valued at approximately $1 million.  Mr. Salam also allegedly offered an undercover U.S. law enforcement official posing as a CPATT procurement officer between $28,000 and $35,000 to process the transaction.  Shortly thereafter, Mr. Salam allegedly cancelled the transaction.  The Special Inspector General for Iraq Reconstruction ("SIGR"), with whom the undercover officer worked, referred the case for prosecution in the United States.  Government authorities arrested Mr. Salam at Dulles Airport upon his return to the United States in March 2006.  The SIGR has indicated that more arrests are expected in this case.[2]

This case highlights two significant developments:

• Use of Alternative Nationality Jurisdictional Grounds Under the FCPA. This case is the second FCPA prosecution in less than a year in which the United States has prosecuted a U.S. national for conduct occurring wholly abroad, and is the first time the Government has invoked the alternative nationality provision of the FCPA relating to domestic concerns.  Under the alternative nationality jurisdiction provision, a U.S. national can be prosecuted for bribery under the FCPA based upon their nationality alone, even though conduct may occur wholly abroad with no alleged nexus to U.S. commerce.[3]  Even though the alleged bribe offers related to the use of funds donated by the United States, no use of inter-state U.S. commerce or nexus to the United States is expressly alleged in the complaint.
• Aggressive U.S. Prosecution of Foreign Bribery; Tip of the Iceberg in Iraq? This case also shows the aggressiveness with which the United States is investigating and prosecuting foreign bribery.  Investigators gathered evidence through telephone monitoring abroad and an undercover sting operation.  The prosecution was brought within weeks of communication of the alleged bribe offer.  There are indications that further prosecutions relating to Iraq will be brought.[4]  According to the SIGR, its ongoing investigative docket includes 15 cases involving bribery, kickbacks, and gratuities that have been opened or converted since January 2006.[5]

SEC settlement of Tyco case includes resolution of allegations of foreign bribery by subsidiaries acquired by Tyco in Brazil and South Korea.
In April, the SEC announced a wide-ranging settlement of its long-time investigation of Tyco International Ltd. ("Tyco"), imposing a $50 million civil penalty for a range of securities law violations including violations of the FCPA in Tyco's acquired operations in Brazil and South Korea.  Securities and Exchg. Com'n v. Tyco Int'l Ltd., Case No. 06-CV-2942 (S.D.N.Y. 2006).[6]

Earth Tech Brasil Ltda. ("Earth Tech Brasil") is a subsidiary Tyco acquired in 1998 engaged in constructing water, sewage, and irrigation systems for the government entities in Brazil.  The SEC alleges that from 1999 to 2002, Earth Tech Brasil made improper payments to government officials in Brazil in connection with at least 60 percent of Earth Tech Brasil's contracts, and that such payments were specifically mentioned in communications with executives at Earth Tech corporate offices in California.  These payments allegedly were accomplished through a scheme of false or inflated invoicing by companies controlled by Earth Tech Brasil employees and by lobbyists.  In addition, on at least one occasion, company books allegedly were falsified to conceal illicit payments and entertainment.  False invoices from companies owned by Earth Tech Brazil employees allegedly were used to generate the funds for the illicit payments and to conceal the payments on Earth Tech Brazil's books and records.

The SEC further alleged that between 1999 and 2002, Dong Bang Industrial Co. Ltd. ("Dong Bang"), a South Korean entity engaged in fire protection services acquired by Tyco in 1999, made cash payments and provided entertainment to South Korean officials to assist Dong Bang in obtaining contract work from the government.  These alleged bribes included $32,000 on entertainment expenses and $7,500 paid to a nuclear power plant official to obtain contract work.  Dong Bang allegedly established fictitious employees on its books to finance some of the improper cash payments and entertainment that it provided to South Korean officials.

Based upon these alleged facts, the SEC alleged that Tyco violated the anti-bribery and books-and-records provisions of the FCPA.  In addition, the SEC complaint also cites Tyco for its failure to have a uniform, company-wide FCPA compliance program in place, to have a system of internal controls sufficient to detect these violations, and to adequately train employees despite the corruption problems in these countries.  The SEC indirectly suggests that Tyco's due diligence at the time of the acquisition of both companies was inadequate because it was generally known that illicit payments to government officials were common in both countries and, in the case of Earth Tech Brazil, because such payments generally were understood as as necessary to do business in the industry.

Tyco's settlement with the SEC addressed a broad range of alleged securities law violations.  Without admitting or denying the allegations, Tyco consented to a permanent injunction, $50 million in civil penalties, and $1 in disgorgement, a penalty the SEC describes as consistent with its January 2006 statement on penalties.  The judgment does not elaborate on what portion of these monetary penalties are attributable to the alleged FCPA violations.

The FCPA-related allegations, charges, and penalties in this case also reflect two other important trends in FCPA enforcement:

• Continued Enforcement Emphasis on Due Diligence in Mergers and Acquisition Transactions. Although the alleged payments by the two subsidiaries appear to have been made at times when they were owned by Tyco, the SEC made a point of highlighting what it viewed as inadequate due diligence by Tyco in the acquisition of the Brazilian entity in 1998.  This statement makes clear the continued emphasis of U.S. enforcement officials upon addressing FCPA issues in corporate merger and acquisition transactions.[7]
• Use of the Equitable Disgorgement Remedy. The token $1 disgorgement penalty may reflect the view of the SEC that Tyco shareholders already experienced significant losses as a result of the fraud,[8] and thus a significant disgorgement penalty in this case (along this lines seen in other recent cases [9]) would be unfair to shareholders.  At the same time, the symbolic imposition of the $1 disgorgement remedy does signal a desire by the SEC to preserve its right to seek equitable disgorgement of profits obtained or losses avoided as a result of violation of securities laws including the FCPA.

Companies continue to make voluntary disclosures of foreign bribery issues.
The Tyco case also highlights another trend -- an increase in voluntary disclosures by companies to government enforcement officials.[10]  According to the recent Annual Report filed by Tyco, it reported the investigative steps and remedial measures it had taken in response to the allegation of improper payments that had been brought to its attention.[11]  Tyco is one of eight companies, including Nature's Sunshine, UPS, Outback Steakhouse, United Industrial Corp., Apex Silver Mines, Faro Technologies, and Alcatel Telecom, known to have either disclosed to the SEC or made public statements regarding their own internal investigations into possible FCPA violations in 2006 alone.

While the publicly-available information relating to such disclosures is limited, a significant number of the cases disclosed involve business activities in East Asia.  The People's Republic of China ("PRC"), for example, continues to be a country of focus for enforcement officials.  DoJ officials have publicly noted a number of investigations relating to business in the PRC and cautioned that because PRC regulators may be involved in almost any business enterprise in that country, companies should be especially vigilant when engaging in business there.

We will continue to keep you apprised of developments related to FCPA enforcement. If you have any questions or for further information, please feel free to contact Lucinda Low at 202.429.8051, Ed Krauland at 202.429.8083, Erik Kitchen at 202.429.8132, Andrew Irwin at 202.429.8177, Owen Bonheimer at 202.429.6266, or Negar Katirai at 202.429.8028.

1. The Government also recently reached a plea agreement with Richard Novak, a U.S. citizen, based upon his role in a scheme to pay more than $43,000 to three Liberian officials in exchange for accreditations of St. Regis University for use in the sale of diplomas.  See United States v. Richard John Novak  (E.D. Wash. 2006).
2. See James Glanz, The Struggle for Iraq:  Corruption; Iraqi Translator is Accused of Bribery in Kickback Case, N.Y. Times (Mar. 25, 2006), at A6.
3. See 15 U.S.C. 78-dd-2(i)(2); see also United States v. Amoako, Criminal Docket No. 3:05-mj-01122-JJH (D.N.J. 2005) (invoking alternative jurisdiction provisions relating to issuers and their employees at 15 U.S.C. 78-dd-1(g)). 
4. Transparency International recently cited Iraq as a country with one of the most serious corruption problems in the world, ranking it 137th in its 2005 Annual Corruption Perceptions Index.
5. Click here.
6. See SEC Announcement; Claudia H. Deutsch, Tyco Will Pay $50 Million to Settle Case with SEC, N.Y. Times (Apr. 18, 2006), at C3.
7. In just the last two years, the DoJ and the SEC have taken enforcement action relating to FCPA issues in the acquisitions of Titan Corporation, a business unit of ABB Ltd., and InVision Technologies, Inc.
8. See Statement of the SEC Concerning Financial Penalties (Jan. 6, 2006) (elaborating SEC view that its calculus of appropriate remedies will be based in significant part upon harm or benefit to shareholders from the improper conduct at issue).
9. See SEC v. ABB Ltd. (D.D.C. 2004) (judgment requiring disgorgement of $5.9 million including prejudgment interest; SEC v. Titan Corp. (D.D.C. 2005) (judgment requiring disgorgement of $15.5 million including prejudgment interest); SEC v. GE InVision, Inc. fka InVision Technologies (N.D. Ca. 2005) (judgment requiring disgorgement $0.6 million including prejudgment interest); In the Matter of Diagnostic Products Corporation (SEC 2005) (administrative cease-and-desist order requiring disgorgement of $2.8 million including prejudgment interest).
10. In its January 2003 publication entitled the Principles of Federal Prosecution of Business Organizations, also known as the "Thompson Memorandum," the DoJ indicated that voluntary disclosure may be a factor in the decision of whether to prosecute and what penalties to impose.  In addition, in a recent panel discussion on the FCPA before the District of Columbia Bar Association in March of 2006, Mark Mendelsohn, Deputy Chief of the Fraud Section of the DOJ's Criminal Division, advised companies that learned of potential FCPA violations through internal investigations to report such violations to the government immediately instead of awaiting the conclusion of the internal investigation.
11. Tyco 10-K (2005).