High-Level Executives Targeted for FCPA Enforcement; Continued Scrutiny of Foreign Subsidiary Operations

October 8, 2008

The past two months have seen a continued high level of Foreign Corrupt Practices Act (“FCPA”) enforcement activity by both the DoJ and the SEC. The following reviews two of the more significant recent enforcement actions, involving (1) Jack Stanley, a former executive of Kellogg, Brown & Root, and (2) a settlement with Con-Way regarding improper payments made by a subsidiary, and highlights several other enforcement actions in this period.

1. Jack Stanley

The Stanley case,¹ announced on September 3, 2008, involved Jack Stanley ("Stanley"), a former high-ranking executive at Kellogg, Brown & Root (“KBR”), a global engineering and construction company, and former wholly-owned subsidiary of Halliburton. This case is noteworthy for several reasons: the continued targeting of individuals for prosecution; the sheer scope of the alleged improper payments, amounting to over US $180 million; the lengthy sentence agreed to by the defendant; and the amount of disgorgement.

Stanley plead guilty to conspiring to violate the FCPA, and to conspiracy to commit mail and wire fraud. Between 1995 and 2004, Stanley devised and implemented a scheme to bribe Nigerian government officials to assist in obtaining six contracts on behalf of a four-company joint venture (“TSKJ”) worth over $6 billion to build liquefied natural gas (“LNG”) production facilities at Bonny Island, Nigeria.

In early 1994, KBR formed a joint venture with three other multi-national companies for the purpose of pursuing LNG projects in Nigeria. According to the plea documents, Stanley and other unidentified members of the joint venture concluded that it would be necessary to make payments to Nigerian government officials in order to obtain the LNG contracts. They decided to make these payments through both a UK and a Japanese agent under the guise of consulting agreements.

The joint venture paid the UK agent (identified in press reports as Jeffrey Tessler) approximately $132 million between 1995 and 2004, in exchange for “vaguely described marketing and advisory services,” when the primary purpose of the payments was to facilitate payment of bribes to Nigerian government officials. This money was then systematically passed by the agent to accounts controlled by one or more unidentified high-ranking Nigerian government officials for the purpose of obtaining LNG contracts.

The joint venture paid the Japanese agent more than $50 million between 1996 and 2004, also purportedly in exchange for marketing and advisory services. However, in reality, the money was passed by the agent to lower-level Nigerian officials (also unidentified) for the improper purpose of assisting in obtaining LNG contracts.

Further, Stanley engaged in a scheme to defraud his employer. He partnered with a former KBR salesperson (“LNG Consultant”) to convince KBR to enter into consulting agreements with LNG Consultant. These consulting agreements generally provided for the payment of a fixed $10 million success fee if KBR was awarded an LNG project covered by the agreement. However, unknown to KBR, LNG Consultant paid Stanley kickbacks for his role in helping LNG Consultant win the lucrative consulting contracts.

Under his plea agreement, Stanley faces a sentence of seven years in prison and the payment of $10.8 million in restitution (the amount of the kickbacks) to his former employer. A sentencing date has not yet been set.²

In a related civil action, the SEC has charged Stanley with violating the anti-bribery provisions of the FCPA. In addition to the acts described above, the SEC charged Stanley with falsely characterizing the payments to the UK and Japanese agents as legitimate “consulting” or “services” fees when, in fact, Stanley knew they were bribes with no legitimate business purpose.³

In addition to the investigations by the SEC and DoJ, Halliburton has been conducting its own internal investigation in this matter, as well as others related to the Bonny Island Project. Halliburton has reported that it, along with KBR, are complying with subpoenas from both the DoJ and the SEC in relation to current and prior projects over the past 20 years, both inside and outside of Nigeria, in which Halliburton, KBR, or their affiliates or subsidiaries were participants. Further, French, Swiss and Nigerian authorities are also looking into allegations of improper payments made in relation to the Bonny Island Project.⁴ It is not yet known what other prosecutions of entities or individuals by the US or other authorities may result. The DoJ press release on the Stanley plea highlighted the cooperation it received from foreign authorities, including Nigeria’s Economic and Financial Crimes Commission (EFCC).

This case, along with its harsh penalties, demonstrates the recent focus of the DoJ and the SEC on individuals, especially corporate executives, involved in FCPA-related misconduct. How the enforcement agencies will allocate responsibility between corporate entities and individuals is a key issue in any FCPA case that arises today. Intervening corporate acquisitions and dispositions can also, obviously, have an impact.

2. Con-Way

Not all recent prosecutions have focused on individuals, however. The SEC continues to hold parent issuers responsible for the activities of the foreign subsidiaries, including small but recurring operating payments deemed improper. The Con-Way case, announced in late August 2008,⁵ involved allegations that a former majority-owned subsidiary of Con-Way in the Philippines, Emery International, a company engaged in the freight forwarding business, made a large number of small payments to Philippine customs officials and to officials of state-owned airlines in connection with freight forwarding and customs brokerage activities in that country. The payments totaled $417,000. Con-Way was prosecuted by the SEC for violations of the FCPA’s books and records and internal control provisions. It agreed to pay a civil penalty of $300,000 to settle the allegations. The payments were made not to expedite the shipment of cargo, but to induce actions that would lower shipping costs or cause the officials to overlook violations of law or regulations, or to resolve disputes.⁶

The settlement documents made no mention of Con-Way’s customers. It is not known at this writing whether or not the SEC or other authorities plan on targeting those customers, or even whether they have jurisdiction to do so. In light of other pending cases involving customs issues and customs brokers, this case is of particular interest.

3. Other Recent Actions

The DoJ has also recently announced several additional indictments and sentences of individuals and entities for FCPA-related violations. On September 4, 2008, four employees of Nexus Technologies Inc. (“Nexus”), and Nexus itself, were indicted on charges of both conspiring to bribe Vietnamese public officials in violation of the FCPA and of violating the FCPA itself.⁷ The indictment alleges that between 1999 and 2008, the defendants conspired to, and did, bribe Vietnamese government officials to secure contracts for Nexus. They are alleged to have paid at least $150,000 in bribes to Vietnamese officials.

Further, on September 24, 2008, in a case that pairs export violations with FCPA issues, Shu Quan-Sheng (“Shu”), the President, Secretary and Treasurer of AMAC International, a high-tech company located in Newport News, Virginia, was arrested and charged with illegally exporting space launch technical data and offering bribes to Chinese government officials.⁸

Also, on September 24, 2008, Christian Sapsizian, a former Alcatel executive and non-US national, was sentenced to 2.5 years in prison and the forfeiture of $261,500 for his participation in the payment of $2.5 million in bribes to Costa Rican government officials in order to obtain a mobile telephone contract from Costa Rica’s state-owned telecommunications authority.⁹ This is one of the largest penalties assessed against a foreign national under the FCPA to date.

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; Erik Kitchen at 202.429.8132; Pat Norton at 202.429.8034; Jonathan Drimmer at 202.429.6477; Matt Herrington at 202.429.8164; Andrew Irwin at 202.429.8177; Julia Court Ryan at 202.429.6418; David Lorello at 44(0)20.7367.8007; Alexandra Baj at 202.429.6478; Tom Best at 202.429.8079; Owen Bonheimer at 202.429.6266; Michael Pass at 202.429.8101; Brittany Prelogar at 202.429.5518; Sarah Lamoree at 202.429.6488; Michael Lieberman at 202.429.8064; or William Gordon at 202.429.8013.

The FCPA in China
Pat Norton discussed corruption risk in China during a roundtable on Doing Business in China hosted by the Deloitte Forensic Center.

^{1. US v. Stanley, Case No. 4:08-cr-00597 (S.D. Tex. 2008) (information).

2. US v. Stanley, Case No. 4:08-cr-00597 (S.D. Tex. 2008) (plea agreement).

3. SEC v. Stanley, Case No. 4:08-cv-02680 (S.D. Tex. 2008) (complaint).

4. The Halliburton Board of Directors has appointed a committee of independent directors to oversee and direct the FCPA investigations. Halliburton 10-Q (July 25, 2008); Halliburton spun KBR off in 2007; KBR is also under investigation for its alleged involvement with TSKJ in using Tri-Star investments as an agent and a Japanese trading company as a subcontractor to make improper payments to Nigerian government officials in connection with the Bonny Island project.

5. SEC v. CON-WAY Inc., Case No. 1:08-cv-01478-EGS (D.D.C. complaint filed Aug. 2008).

6. Interestingly, Con-Way’s subsidiary was alleged to have made payments to secure special treatment from an airline. It may not be too far-reaching to think that if someone were to pay a flight attendant on a state-owned airline a few dollars for an upgrade, it could be considered to be an FCPA violation. And if not properly recorded on the books and records, it could be considered an accounting violation as well. This is a small point, but it shows that one can get caught up in bribery and accounting violations for things many people might not usually think of as bribes.

7. US v. Nam Nguyen, Lukas, Kim Nguyen, An Quoc Nguyen, and Nexus Technologies, Inc., Case No. 2:08-cr-00522-AB (E.D. Pa. 2008) (indictment).

8. US v. Shu Quan-Sheng, Case No. 2:08-mj-440 (E.D. Va. 2008) (complaint).

9. US v. Sapsizian, Case No. 06-20797-CR-SEITZ/001 (S.D. Fla. 2008) (judgment).}