International Law Advisory - Late 2006 FCPA Enforcement Explosion Reaches Across Industries and Around the Globe, Focusing on Countries in Lower Ranks in the Transparency International 2006 Corruption Perceptions Index

November 6, 2006

Since June 2006, the U.S. Department of Justice (“DoJ”) and the U.S. Securities Exchange Commission (“SEC”) have brought or settled numerous FCPA enforcement actions relating to a broad range of industries and regions around the globe.  During this four-month period, the government initiated and/or resolved FCPA cases relating to the U.S.-based Schnitzer Steel Industries, Inc. (“Schnitzer Steel”) and its Korean subsidiary; the Norwegian oil concern Statoil, ASA (“Statoil”) (whose securities trade in the United States); four former employees of subsidiaries of ABB Ltd.; a former employee of a subsidiary of Willbros Group, Inc.; and three former employees of ITXC Corp.  These cases relate to dealings in countries in Africa, Latin America, Asia, and the Middle East that are perceived as facing significant corruption problems according to the Transparency International 2006 Corruption Perceptions Index released today.1. In addition, the DoJ has issued its first FCPA Opinion Release since 2004, on a proposed government support project in an African country.  The cases end a period of enforcement actions solely against individuals, and demonstrate the continued upward trend in FCPA penalties.

Schnitzer Steel and Korean Subsidiary Agree to Pay $15.2 Million and Subsidiary Enters a Criminal Plea to Settle Allegations of Payments in China and South Korea

Last month, the DoJ announced a deferred prosecution agreement with Schnitzer Steel and a plea agreement with its Korean subsidiary, SSI International Far East Ltd. (“SSI-Korea”). 2 From 1999 through 2004, using off-the-books bank accounts in South Korea, Schnitzer Steel had paid approximately $205,000 to managers of wholly- or partly-government-owned customers in China in order to induce purchases of scrap steel.  These payments allegedly related to 30 transactions on which Schnitzer Steel earned more than $6.25 million in profit.  The company also allegedly made payments to managers of government customers on behalf of a Japanese supplier, resulting in approximately $20,000 in profits.  In addition, Schnitzer Steel paid approximately $1.68 million to managers of private customers in China and South Korea.  The company allegedly falsely described these payments in its books and records using more than a dozen different descriptions.  Schnitzer Steel further stipulated that the company had spent approximately $138,000 on gifts and entertainment for managers of customers over the five-year time period.  The agreement noted that pens, perfume, and jewelry were provided as adornments to some of the payments to managers, adding that “[t]he value of those gifts was generally less than $350. However, more substantial gifts, ranging in value from $400 to $8,000, were also given.”3 For example, the company allegedly gave officials access to SSI-Korea’s golf club and corporate condominium, $10,000 in gift certificates and a $2,400 luxury watch.4

The DoJ agreed to defer prosecution of Schnitzer Steel for three years pending annual reviews by a compliance consultant of its anti-corruption compliance program encompassing not only the FCPA, but also U.S. commercial bribery laws and foreign anti-bribery laws.  Schnitzer Steel agreed to adopt the recommendations in the consultant’s reports, which must be disclosed to the DoJ and to the SEC.  At the same time, SSI-Korea pleaded guilty to violations of the FCPA anti-bribery provisions and the federal wire fraud statute, conspiracy to violate these laws and to aiding and abetting violations of the FCPA books and records requirements, agreeing to pay a $7.5 million non-tax-deductible criminal penalty.5 

Schnitzer Steel consented to an SEC cease-and-desist order, agreeing to disgorge $6.27 million in profits on the sales to government-owned customers and to pay $1.45 million in prejudgment interest.  The total settlement amount to be paid by Schnitzer Steel and SSI-Korea thus reached $15.2 million.

There are several notable aspects of the Schnitzer Steel case:

Increasing effort to use the FCPA to deter payments to officials of state-owned enterprises in China.  U.S. enforcement authorities are placing increased scrutiny upon business dealings in China, whose economy is permeated with enterprises that are wholly or partly state-owned.6  The $6.28 million civil disgorgement and interest in this case is the largest such assessment in a case involving China.7 

Uncertainty of benefits from voluntary disclosure.  After discovering the payments in 2004, Schnitzer Steel made a voluntary disclosure to the DoJ and SEC.  While DoJ and SEC officials asserted that they took Schnitzer Steel’s voluntary disclosure into consideration in this case, the settlements nonetheless featured significant payment undertakings.

Mandated use of compliance consultants.  Many recent FCPA settlements have required the settling company to retain compliance consultants. DoJ states that it decides whether to seek such monitors by considering whether the company's existing compliance program is thorough, targeted and effective. Notably, the Schnitzer Steel compliance consultant will review compliance with foreign and commercial bribery laws as well as the FCPA.

Statoil Agrees to Toughest Settlement Yet in an FCPA Case Involving a Foreign Issuer

Also in October 2006, the DoJ and SEC announced FCPA enforcement settlements with Statoil.  According to stipulated facts, Statoil made two payments in 2002 and 2003 totaling $5.2 million to an offshore intermediary company with ties to an Iranian official who was the head of the Iranian Fuel Consumption Optimizing Organization (“IFCOO”) and known by Statoil to be an advisor to the Minister of Oil.  Statoil sought to induce the official to help Statoil obtain participation interests in the South Pars oil and natural gas field – one of the largest such fields in the world – and to gain an improper advantage vis-à-vis other projects in Iran.  Statoil allegedly knew of corruption allegations against the family of the official, but did not perform due diligence on the official.  After Statoil paid $200,000 in June 2002, the official allegedly provided Statoil with nonpublic information on oil and gas projects in Iran and disclosed copies of competitor bid documents, and Statoil obtained a participation interest in the South Pars field in October 2002.  Statoil then made a $5 million payment in January 2003.  Statoil made both payments through a New York bank account to an account in Switzerland in the name of a third party company.  On its books, Statoil characterized both payments as relating to consulting services under a contract with another offshore company.  Statoil terminated its contract, which called for ten additional $1 million payments, after its September 2003 disclosure in the press.

The DoJ charged Statoil with criminal violations of the anti-bribery and books and records provisions of the FCPA.  The SEC alleged that Statoil had violated the anti-bribery provisions and the accounting (books and records and internal controls) provisions.  Statoil entered into a deferred prosecution agreement with the DoJ and consented to an SEC administrative cease-and-desist order.  Statoil agreed to pay $21 million to resolve these actions, half as a fine payable to the DoJ and half as disgorgement and prejudgment interest to the SEC.  The DoJ agreed to treat a $3 million fine that Statoil had paid to the Norwegian authorities in 2004 relating to the same payments as an offset.  Statoil also agreed to retain a compliance consultant for three years to review its FCPA compliance program and prepare three reports with binding recommendations to be disclosed to the SEC and the DoJ.

There are several notable aspects of the Statoil case:

Most stringent penalties ever imposed in an FCPA case against a foreign issuer.  The $21 million settlement amount (even after the $3 million offset) is the second-largest amount ever paid to resolve an FCPA issue, and the largest ever in an FCPA case involving a foreign issuer.8   The Statoil case also represents the first time U.S. authorities have instituted a criminal proceeding under the FCPA against a foreign issuer and the second time a foreign issuer has consented to the use of a compliance monitor in an FCPA proceeding. 9  A top DoJ official recently emphasized the significance of U.S. jurisdiction over foreign issuers under the FCPA, declaring that “[t]he Department will not hesitate to enforce the FCPA against foreign-owned companies, just as it does against American companies.”10

“Red flags” in dealings with third parties give rise to heightened need for due diligence.  The Statoil case involved a relationship with third parties associated with public allegations of corruption, use of an offshore shell company as a contracting entity, and use of third party foreign bank accounts.  All of these features constitute FCPA “red flags” that trigger a need for heightened due diligence.

Role of foreign anti-corruption laws.  The $3 million penalty assessed by Norwegian authorities in 2004 was based upon allegations of violation of a trading-in-influence law enacted in Norway in 2003.  The U.N. Convention against Corruption (which now has 70 parties) and other regional treaties encourage the enactment of such laws around the world.

SEC Brings Civil FCPA Actions Against Former Employees of Willbros and ABB Focusing on Business in Nigeria

In September 2006, the SEC brought a settled civil action against Jim Bob Brown, a former employee of a subsidiary of Willbros Group, Inc., relating to alleged bribery schemes in Nigeria and Ecuador.11  Brown allegedly helped deliver $1.5 million in cash in 2005 for officials to help the company obtain projects in Nigeria.  He also allegedly assisted in a scheme to use fake invoices to obtain $7 million in petty cash from the U.S. headquarters of the company from the early 1990s through 2005, and to use at least $300,000 of those funds to bribe Nigerian tax and court officials.  In addition, he allegedly assisted a scheme in 2004 to pay $300,000 to officials of a state-owned Ecuadorian oil company in connection with a company contract there.  Mr. Brown consented to entry of an interlocutory civil judgment for violation of the FCPA’s anti-bribery and accounting provisions, among other violations.  The judgment is interlocutory because it provides that the court may assess a civil penalty at a later date.

The Brown case follows on the heels of another case relating to oil concessions in Nigeria.  In July 2006, the SEC brought settled civil actions against four former employees of subsidiaries of ABB Ltd., which had reached a corporate settlement in 2004.  The SEC action cites the alleged roles each of the four played between 1999 and 2001 in a scheme to pay bribes to Nigerian officials in furtherance of ABB’s bid to obtain a contract to provide equipment for Nigeria’s offshore Bonga Oil Field.  The SEC alleged that each of the four violated the FCPA anti-bribery and accounting provisions, among other violations.  All four agreed to be permanently enjoined from such conduct.  Messrs. Munro, Campbell, and Whelan each agreed to pay a $40,000 civil penalty.  Mr. Samson agreed to a $50,000 penalty and to pay $64,675 in disgorgement and prejudgment interest.  All but Mr. Whelan are U.K. nationals residing outside the United States, reflecting the increasing vigor with which enforcement officials are pursuing foreign nationals in FCPA cases.

FCPA Enforcement Actions Relating to Three Former ITXC Corp. Employees

In September 2006, enforcement authorities also concluded a plea agreement with Yaw Osei Amoako, a former employee of ITXC Corp. (“ITXC”), and brought civil actions against Steven Ott and R. Michael Young, two other former ITXC employees.12  Mr. Amoako admitted to a role in a conspiracy allegedly involving $270,000 in payments between 2001 and 2004 to employees of wholly- or partly-state-owned telecommunications enterprises in Nigeria, Rwanda, and Senegal.  Messrs. Ott and Young allegedly approved the payments to the employees, whom ITXC allegedly had engaged as its agents.  ITXC had sought and obtained business from these telecommunications enterprises before ITXC was acquired in 2004 by Teleglobe International Holdings, Ltd.13

Mr. Amoako pleaded guilty to one count of conspiracy to violate both the anti-bribery provisions of the FCPA and the Travel Act (based upon alleged violation of the New Jersey statute against commercial bribery); his sentencing is pending.14  The SEC has alleged that Messrs. Ott and Young violated the FCPA anti-bribery and accounting provisions (books and records and internal controls) and aided and abetted ITXC’s violation of those provisions.15  In a separate case previously filed, the SEC also alleged that Mr. Amoako violated the anti-bribery provisions of the FCPA.  As to all three former ITXC employees, the SEC is seeking an injunction against FCPA violations, unspecified civil penalties, and disgorgement of profits obtained from the scheme.

FCPA Opinion Release on Proposed Government Support Arrangement in Africa

In October 2006, the DoJ also issued an Opinion Release in response to a request from an unnamed Swiss-based corporation declining to take enforcement action if the corporation proceeded with a proposed contribution to the government of an unspecified African country.16  The company proposed to contribute $25,000 to the African country’s regional Customs department and/or Ministry of Finance as part of a pilot project to improve local enforcement of anticounterfeiting laws.  The company represented that it would execute a formal memorandum of understanding with the country, and would establish several procedural safeguards to ensure that the funds would be used as intended.  The Opinion Release, which is the first since 2004, reflects how multinational companies operating in developing nations are addressing FCPA compliance issues related to support provided to host governments.

We will continue to keep you apprised of developments related to anti-corruption 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, Tom Best at 202.429.8079, or Negar Katirai at 202.429.8028. 

Read more about our FCPA/Anti-Corruption Practice.

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1. The 2006 Transparency International Corruption Perceptions Index ("CPI") is available here.  The CPI is commonly used as an indicator of country corruption risk.  Lower rankings indicate a greater perception of corruption.  On a scale from 1 to 10, all scored lower than 5, indicating serious levels of perceived corruption.  The CPI accompanying materials did not list the countries involved in these cases as experiencing a significant change in perceived corruption.  China is ranked 70 out of 163 (compared to 78 out of 158 in 2005); Ecuador is ranked 138 out of 163 (compared to 117 out of 158 in 2005); Iran is ranked 105 out of 163 (compared to 88 out of 158 in 2005); Nigeria is ranked 142 out of 163 (compared to 152 out of 158 in 2005); Rwanda is ranked 121 out of 163 (compared to 83 out of 158 in 2005); and Senegal is ranked 70 out of 163 (compared to 78 out of 158 in 2005).
2. Deferred Prosecution Agreement ("DPA") with Schnitzer Steel (Oct. 16, 2006); United States v. SSI-Korea (D. Or. 2006) (Information and Plea Agreement).
3. See DPA at ¶¶ 27-30.
4. Luxury gifts also are a focus of the pending criminal FCPA prosecution against U.S. merchant banker James Giffen related to his dealings in the oil industry in Kazakhstan. United States v. Giffen, Case No. 1:03-cr-00404-WHP-1 (S.D.N.Y.) (filed 2003); see also Ron Stodghill, "Oil, Cash and Corruption; How Influence Flowed through Political Pipelines," N.Y. Times, at BU 2, 8-9 (Nov. 5, 2006) (citing allegations of gifts such as expensive jewelry, speedboats, snowmobiles and fur coats).
5. The concern of U.S. enforcement officials over the tax deductibility of certain penalty payments can be seen as part of a broader concern over the relationship between taxation issues and bribery, as seen in the recent FCPA enforcement actions involving tax assessments levied upon Monsanto Company and Baker Hughes.  A related concern also is reflected in the efforts of the Organisation for Cooperation and Economic Development (“OECD”) to train tax auditors to detect and report evidence of bribery identified in the context of tax audits.  See, e.g., OECD Bribery Awareness Handbook for Tax Examiners, available here (re-released in 2006).
6. The Chinese government also continues to focus on corruption issues in China.  According to recent reports, in the previous year the party discipline committee in China investigated 147,000 corruption cases; in addition, 20 officials at the ministry level have been arrested since 2002.  Jim Yardley, “The Chinese Go After Corruption Corruptly,” N.Y. Times (Oct. 22, 2006).
7. The previous high disgorgement and interest assessment for a FCPA case relating to China was $2.8 million against Diagnostic Products Corporation in 2005.
8. Not all recent cases have resulted in such large payment undertakings.  For example, the SEC’s 2006 action against Oil States International, Inc., led only to an administrative cease-and-desist order.  In the Matter of Oil States International, Inc., SEC Admin. Proc. 3-12280 (Apr. 27, 2006) (Cease-and-Desist Order).  While no payment undertaking was required to settle that case with the SEC, it should be noted that the SEC alleged FCPA accounting violations, but did not allege anti-bribery violations.
9. The first time a compliance monitor was required as a condition of settlement with a foreign issuer was the settlement ABB Ltd. reached with the SEC in late 2004.  See SEC v. ABB Ltd., Case No. 1:04-cv-01141-RBW (D.D.C. 2004) (Judgment of Nov. 30, 2004)
10. Prepared Remarks of U.S. Asst. Att'y Gen. Alice S. Fisher at ABA Nat'l Institute on the FCPA (Oct. 16, 2006) at p.4.
11. SEC v. Jim Bob Brown, Case No. 06-2919 (S.D. Tx. 2006) (Complaint).
12. In recent months, the DoJ also concluded a plea agreement with another U.S. citizen involving overseas conduct in an FCPA case.  See Plea Agreement in United States v. Salam, Case No. CR-06-157 (D.D.C. 2006) (filed Aug. 4, 2006) (plea to anti-bribery violation related to activity in Iraq).
13.Teleglobe later was acquired by Videsh Sanchar Nigam Limited (“VSNL”).
14. United States v. Amoako, Case No. 3:06-cr-00702-GEB (D.N.J. 2005) (Information and Plea Agreement).
15. SEC v. Ott and Young, Case No. 3:06-cv-04195-GEB-TJB (D.N.J. 2006) (Complaint).
16. DoJ FCPA Op. Rel. No. 06-01 (Oct. 16, 2006).