Charles E. Duross and James M. Koukios
FCPA + Global Anti-Corruption, Government Contracts + Public Procurement, Public Companies Counseling + Compliance, Securities Enforcement, Securities Litigation, and Investigations + White Collar Defense
In order to provide an overview for busy in-house counsel and compliance professionals, we summarize below some of the most important international anti-corruption developments from the past month, with links to primary resources. This month we ask: What is a Department of Justice (DOJ) “declination with disgorgement”? How many FCPA resolutions was the Securities and Exchange Commission (SEC) able to bring in the last month of its fiscal year? How does one avoid running afoul of South Korea’s new anti-corruption laws? The answers to these questions and more are here in our September 2016 Top Ten list:
1. DOJ Debuts “Declinations with Disgorgement.”
On September 29, 2016, DOJ released two “letter agreements” in which DOJ informed non-public companies that the agency had closed its investigations into the companies and the companies agreed to disgorge profits allegedly derived from violations of 15 U.S.C. §§ 78dd-2 and 78dd-3. According to its letter to Texas-based industrial supply and maintenance company NCH Corporation, DOJ found that, from February 2011 to mid-2013, the company’s Chinese subsidiary provided gifts, meals, and entertainment to employees of Chinese state-owned and state-controlled companies to influence purchasing decisions. The company agreed to disgorge $335,342 in profit from the allegedly resulting sales. According to its letter to Texas-based aboveground liquid storage tank provider HMT LLC, DOJ found that the company’s employees and agents bribed Venezuelan and Chinese officials, through third-party sales agents or distributors, to influence their purchasing decisions. The company agreed to disgorge $2,719,412 in profit from the allegedly resulting sales. Both letters were posted on the DOJ FCPA Unit website under “FCPA Pilot Program Declinations,” but, because the companies were publicly named and agreed to disgorge substantial sums, they do not feel like “declinations.” Rather, these “letter agreements” (a term used in both letters), appear to be examples of a new, fourth type of resolution (in addition to guilty pleas, DPAs, and NPAs) that is essentially an NPA without undertakings or admissions and with disgorgement taking the place of a Guidelines penalty. In many ways, these “declinations” are the domestic concern equivalent of an SEC cease-and-desist order in which only disgorgement is required. It will be interesting to gauge the reaction of the business community to this new type of resolution: a resolution without undertakings or admissions is more company‑friendly than a standard NPA, but the reputational and disgorgement costs could discourage non-public companies from self-disclosing potential misconduct, which was one of the stated purposes of the FCPA Pilot Program.
DOJ also posted three additional declination letters in which it informed issuers Akamai Technologies, Inc., Nortek, Inc., and Johnson Controls, Inc. that it had closed its investigations, “despite” concluding that bribery had occurred, based in part on their agreement to disgorge allegedly illegal proceeds to SEC. DOJ did not post (or has yet to post) similar letters for four of the SEC-only cases discussed below (NuSkin, AB InBev, GSK, and Harris Corporation), raising interesting questions as to whether DOJ felt it could not bring a case against those companies (e.g., for jurisdictional reasons), whether DOJ requires a company’s consent to post a declination when not seeking disgorgement itself, or whether there is simply a lag in posting to DOJ’s website.
2. New York-Based Hedge Fund Resolves Africa FCPA Allegations.
On September 29, 2016, DOJ and SEC announced that they had resolved allegations that Och-Ziff Capital Management Group LLC (“Och-Ziff”) and its subsidiary OZ Management LP (“the subsidiary”) paid bribes to officials in several African countries. The combined monetary penalty of $412 million makes this resolution the fourth largest FCPA resolution of all time, behind only the Siemens, Alstom, and KBR/Halliburton resolutions. Och-Ziff entered into a three-year Deferred Prosecution Agreement (“DPA”) with DOJ, agreeing to pay a criminal penalty of $213,055,689 in connection with two counts of conspiracy to violate the anti‑bribery provisions of the FCPA, one count of falsifying books and records, and one count of failing to implement adequate internal accounting controls. The subsidiary pleaded guilty to a conspiracy to violate the anti-bribery provisions of the FCPA. According to the DOJ press release, sentencing for the subsidiary has been set for March 29, 2017. Och-Ziff agreed to pay approximately $199 million in disgorgement and prejudgment interest to resolve SEC’s charges that it violated the FCPA’s anti-bribery and accounting provisions and that its subsidiary violated the anti-fraud provisions of the Investment Advisers Act of 1940. Och‑Ziff also agreed to a three-year monitorship. DOJ’s charging documents focus on alleged bribery schemes in the Democratic Republic of Congo (DRC) and Libya, while the SEC order also covers alleged misconduct in Chad, Niger, and Guinea, among other countries. SEC announced in its press release that Och-Ziff CEO Daniel Och and CFO Joel Frank had also resolved allegations that they caused certain of the violations. Och agreed to pay nearly $2.2 million to settle the allegations, while Frank’s penalty will be assessed at a later date; both consented to the order without admitting or denying the findings. Highlighting the ever-increasing international cooperation in foreign corruption investigations, DOJ’s and SEC’s press releases announced eight different countries had cooperated with the investigation: British Virgin Islands, Cyprus, Gibraltar, Guernsey, Jersey, Malta, Switzerland, and the UK.
3. Utah-Based Cosmetics and Nutritional Product Company Resolves China FCPA Allegations.
On September 20, 2016, SEC announced that it had resolved allegations that Nu Skin Enterprises, Inc. violated the FCPA’s accounting provisions when its Chinese subsidiary made a $150,000 donation to a charity to obtain the influence of a high‑ranking Chinese Communist Party official to impact an on-going provincial agency investigation. According to the SEC order, a provincial Administration of Industry and Commerce backed off of its stated intention to charge and fine the subsidiary for violations of the Direct Selling Laws shortly after a public ceremony announcing the donation. SEC also alleged that the subsidiary encouraged the parent issuer to convince an influential U.S. person to write college recommendation letters for the party official’s child. Without admitting or denying the charges, the company agreed to pay a total penalty of approximately $766,000 to resolve the charges. This resolution marks only the second time that an FCPA resolution has related solely to charitable giving. In 2004, pharmaceutical company Schering-Plough resolved allegations that its Polish subsidiary had made a $76,000 donation to a castle restoration foundation whose director was a public health official who could influence governmental pharmaceutical purchases.
4. Belgium-Based Brewing Company Resolves India FCPA Allegations.
On September 28, 2016, SEC announced that it had resolved allegations that, from 2009 to 2012, Anheuser-Busch InBev’s joint venture in India paid bribes, through third-party promoters, to officials in two Indian states to increase beer sales and that the principal of one of the third‑party promoters used his local connections to secure extra brewing hours after one of the states limited production to 8 hours per day. According to the SEC order, AB InBev’s wholly owned subsidiary in India held a 49% stake in the JV (an Indian company held the remaining 51%) and appointed its own CFO and in-house legal counsel to the same positions in the JV (the Indian company appointed the CEO and other members of the management team). The order is not entirely clear as to the basis for the parent’s liability—was it because the subsidiary reimbursed the JV for some of the payments to the third-party promoters and those reimbursements rolled up into the parent’s books; was it because the subsidiary was “on notice” about some of the issues with one of the third-party promoters and did not take action; was it because SEC believed that the subsidiary exercised enough control over the JV to be held responsible for its actions; or was it because SEC has extended its “strict liability” view of foreign subsidiaries to the minority JV context as well? SEC further alleged that a former employee of AB InBev’s wholly owned Indian subsidiary stopped communicating with SEC after signing a separation agreement with the company that he believed precluded his cooperation with the agency. Thus, unlike in its other recent “pretaliation” resolutions (see our April 2015 and August 2016 Top Tens), SEC alleged that the severance clause here actually chilled a whistleblower’s cooperation. Without admitting or denying the conduct, the company agreed to pay a total penalty of approximately $6 million to resolve the FCPA accounting provision and whistleblower charges, to report to SEC on its remedial efforts for two years, and to make reasonable efforts to notify certain employees that the company does not prohibit employees from contacting SEC about possible violations of the law. The company also amended its standard separation agreement to clarify that separated employees may report possible violations of law to a governmental agency or entity without informing the company. Given SEC’s focus on this issue, companies would be wise to review their standard HR policies to ensure that they do not inadvertently run afoul of Rule 21F-17(a), which provides that, “No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.” In August 2016, the company disclosed in a securities filing that DOJ had declined to prosecute.
5. UK-Based Pharmaceutical Company Resolves China FCPA Allegations.
On September 30, 2016, SEC announced that it had resolved allegations that, between 2010 and June 2013, GlaxoSmithKline plc violated the FCPA’s accounting provisions when its Chinese subsidiary and its 55%-owned Chinese joint venture provided gifts, travel, and entertainment to Chinese public officials, including healthcare professionals (HCPs), to increase sales of the company’s products in China. According to the SEC order, employees of the subsidiary and joint venture used speaker fees, a marketing program, and third-party travel agents and event planners to transfer things of value to the HCPs. Without admitting or denying the allegations, the company agreed to pay a $20 million civil penalty and to report to SEC on its remedial efforts for two years. GSK is the fifth pharmaceutical company to settle China-related FCPA allegations with SEC in less than a year (see our October 2015, February 2016, March 2016, and August 2016 Top Tens for the other four). Although SEC’s enforcement action is quiet on the subject, GSK likely received credit against any disgorgement in the United States as a result of the $489 million penalty levied on the company following a one-day, closed-door trial in China in September 2014, which was the largest-ever corporate fine in China, according to the official Chinese news agency Xinhua.
6. Executive of Florida-Based Information Technology Company Resolves China FCPA Allegation, While Company Secures SEC Declination.
On September 12, 2016, SEC announced that it had resolved allegations that, from April 2011 to April 2012, Jun Ping Zhang, the former Vice President of Technology of Harris Corporation and the former Chairman and CEO of Harris’s Chinese subsidiary, had used bogus expense receipts to generate cash to purchase “between $200,000 and $1 million in improper gifts” for officials at state-owned hospitals in China to influence their purchasing decisions. Without admitting or denying the allegations, Ping agreed to pay a $46,000 civil penalty to resolve the FCPA anti-bribery and accounting charges. According to the SEC order, Harris acquired the subsidiary in April 2011 and, with it, Ping. The agency stated in its press release that it “determined not to bring charges against Harris, taking into consideration the company’s efforts at self-policing that led to the discovery of Ping’s misconduct shortly after [the company acquired the Chinese subsidiary], prompt self-reporting, thorough remediation, and exemplary cooperation[.]” The order further states that the company terminated Ping in July 2012 and ceased operations in China in June 2015. In light of the declination, the Ping resolution is a potentially significant precedent on how companies engaged in M&A transactions can avoid FCPA liability.
7. California-Based Technology Company Discloses Declination of Russia, CIS FCPA Allegations.
On September 8, 2016, Cisco Systems, Inc. disclosed in a securities filing that DOJ and SEC had informed the company that they have decided not to bring enforcement actions in connection with possible violations of the FCPA in Russia and certain of the Commonwealth of Independent States (CIS). Cisco first disclosed the government investigation in a 2014 securities filing, stating that DOJ and SEC had requested that the company look into its activities and the activities of certain of its resellers in those countries, which collectively comprised less than two percent of the company’s revenues.
8. SEC Wins Summary Judgment on FCPA Jurisdictional Question.
On September 30, 2016, Southern District of New York Judge Richard J. Sullivan ruled that a foreign issuer’s EDGAR filings could form the basis for establishing FCPA jurisdiction. In December 2011, SEC brought civil FCPA charges against three former executives of Magyar Telekom, Plc., Elek Straub, Tamas Morvai, and Andras Balogh, for allegedly participating in a scheme to offer or pay bribes to Macedonian officials in exchange for favorable treatment for the Hungarian telecom’s Macedonian subsidiary. In October 2015, the parties filed cross‑motions for summary judgment on several issues, including whether SEC could establish that the defendants used an “instrumentality of interstate commerce” in connection with the alleged bribery scheme. In 2013, Judge Sullivan held that SEC had satisfied its burden by pleading that defendant Balogh had sent or received emails from locations outside the United States that were routed through or stored on servers inside the United States in connection with the alleged bribery scheme. Discovery revealed, however, that defendants Straub and Morvai did not send or receive any such emails. On summary judgment, SEC raised an alternative theory: that all three defendants used an instrumentality of interstate commerce “by participating in the preparation of falsified SEC filings that were posted to and accessible from the SEC’s EDGAR internet web site.” Judge Sullivan concluded that, “based on the undisputed evidence, there can be no doubt that [the company] itself clearly used an instrumentality of interstate commerce (the Internet) when it made filings through EDGAR.” In ruling on a matter of first impression, Judge Sullivan then held that an individual makes use of an instrumentality of interstate commerce for purposes of the FCPA “if he acts with knowledge that [such use] will follow in the ordinary course of business, or where such use can reasonably be foreseen, even though not actually intended.” Under the circumstances here, Judge Sullivan determined that “there can be no genuine dispute that Magyar’s filings with the SEC were a foreseeable consequence of Defendants’ actions” because all three made representations regarding their lack of awareness of illegal conduct to Magyar’s auditors in connection with various EDGAR filings. Accordingly, Judge Sullivan granted summary judgment in SEC’s favor on the issue of whether the defendants used an instrumentality of interstate commerce. Judge Sullivan’s decision is an important addition to the relatively sparse body of FCPA case law and helps clarify when a foreign issuer and its employees can fall within the jurisdiction of the FCPA. The decision should not, however, be interpreted to mean that FCPA jurisdiction is created whenever a company or individual outside the United States accesses an internet site in the United States—the use of the internet here satisfied the specific interstate nexus requirement of the FCPA anti-bribery provision that applies to issuers (15 U.S.C. § 78dd-1). Accessing a website in the United States from outside the United States would likely not constitute the “use of . . . [an] instrumentality of interstate commerce . . . while in the territory of the United States” for purposes of the FCPA’s territorial jurisdiction provision (15 U.S.C. § 78dd-3).
9. Developments in Brazil.
“Operation Car Wash,” the sweeping investigation into alleged corruption involving Petrobras, Brazil’s state-owned oil company, continued its forward momentum in September.
10. South Korea Anti-corruption Law Comes into Force.
On September 28, 2016, a tough new anti-corruption law came into force in South Korea. The Kim Young-ran law, named after the former Supreme Court judge who drafted it, applies to over four million public servants who are now prohibited from accepting over 30,000 won (around $25) for meals or 50,000 won (around $45) in gifts and entertainment. Those in breach of the new law face stiff fines or imprisonment. The South Korean restaurant scene has reacted quickly, with many restaurants now reportedly offering law-abiding citizens an "anti-corruption menu" priced at 29,900 won or less.
 The latter position would be somewhat inconsistent with prior SEC statements. In A Resource Guide to the US Foreign Corrupt Practices Act, at page 43 (footnotes omitted), the enforcement agencies stated: “Companies may not be able to exercise the same level of control over a minority-owned subsidiary or affiliate as they do over a majority or wholly owned entity. Therefore, if a parent company owns 50% or less of a subsidiary or affiliate, the parent is only required to use good faith efforts to cause the minority-owned subsidiary or affiliate to devise and maintain a system of internal accounting controls consistent with the issuer’s own obligations under the FCPA. In evaluating an issuer’s good faith efforts, all the circumstances—including ‘the relative degree of the issuer’s ownership of the domestic or foreign firm and the laws and practices governing the business operations of the country in which such firm is located’—are taken into account.”
 SEC v. Straub, et al., No. 11-cv-09645, ECF No. 261 (Sept. 30, 2016).
 SEC v. Straub, 921 F. Supp. 2d 244 (S.D.N.Y. 2013).
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