Sam Eastwood and Adam Smith
Enforcement against companies and individuals
UK: Innospec executive pleads guilty to corruption charges
Dr Turner pleaded guilty to two counts of conspiracy to give corrupt payments to public officials and agents of the governments of Indonesia and Iraq between 2002 and 2008. The payments managed to induce assisting Innospec to secure government contracts with Innospec to provide products including Tetraethyl Lead, a petrol additive banned from many countries due to child health concerns. The 56-year-old Dr Turner also pleaded guilty to one count of conspiring to corrupt Iraqi public officials and agents between June 2006 and May 2007 to ensure that government tests on a competitor product manufactured by Ethyl Corporation produced unfavourable results. No date for sentencing was provided.
Dr Turner had already settled civil charges in the U.S. in 2010, when agreeing with the SEC to disgorge $40,000. Two other executives, Dennis Kerrison and Paul Jennings, also face criminal charges in the UK and will face hearings on April 4, 2012. Innospec’s Iraqi agent, Ousama Naaman, received a thirty month prison sentence in the U.S. on charges of violating the FCPA.
The prosecutions that have followed Innospec’s $40 million 2010 settlement with U.S. and UK authorities demonstrate the increasing focus on prosecutors on the individuals that were instrumental in directing corporate misconduct. With individuals facing tough sanctions that compromise their freedom, authorities are sending a clear message that corruption is regarded as a serious crime and corporate fines can no longer be regarded as the sole remedy for such conduct.
U.S: Deutsche Telekom and Magyar
Hungarian telecoms company Magyar Telekom, together with its German majority parent Deutsche Telekom, announced on December 29, 2011 that they had reached a $95 million settlement with U.S. authorities to resolve Foreign Corrupt Practices Act (FCPA) charges. Ranking as one of the ten largest in the history of the FCPA, the settlement relates to Magyar’s attempts to corruptly influence officials’ decisions in relation to market competition regulation and the proposed acquisition of a Serbian telecoms company.
Magyar’s two-year deferred prosecution agreement (DPA) with the U.S. Department of Justice (DoJ) resolves charges of bribing foreign public officials and violations of the FCPA’s books and records provisions. Magyar agreed to pay a $59.6 million criminal fine, in addition to $31.2 million in disgorgement of profits and interest to the SEC. Deutsche Telekom paid $4.36 million in fines in its own DPA for failing to accurately report Magyar’s activities in its accounts. The five year investigation by U.S. authorities was triggered after Deutsche Telekom reported its discovery of a number of suspicious consultancy contracts involving Magyar worth a combined 31 million euros.
According to the complaints, three former senior executives, including the former chairman and chief executive, executed a plan to bribe officials in Macedonia and Montenegro between 2005 and 2006. In Macedonia, payments worth $6.3 million were paid by a Greek middleman to delay or prevent the entry of a competitor into the country’s mobile phone market. In Montenegro, around $9.5 million was allegedly paid in sham contracts to bribe officials in order to facilitate the acquisition of Belgrade-based Telekom Crne Gore AD. Civil complaints have been brought by the SEC against the Magyar executives at the centre of the alleged scheme, alleging that they violated or aided and abetted violations of the FCPA. It is further alleged that they knowingly sidestepped internal controls and falsified books and records, as well as making false statements to the company’s auditor.
The telecoms industry has come under increased scrutiny in recent years. Many of the largest telecoms contracts involve the state or government-owned enterprises, making it a high risk industry for corruption. An ongoing FCPA investigation into Haitian telecoms contracts dating back as far as 2001 resulted in the longest prison sentence in the FCPA’s history after former telecoms executive Joel Esquenazi received a 15 year term on October 25, 2011 for his role in the alleged bribery. Meanwhile, a corruption case involving the sale of 2G contracts at a fraction of their true value is underway in India, heralded as the biggest corruption case in the country’s history.
UK: Mabey and Johnson — SFO targets shareholders
On January 13, 2012, the SFO successfully obtained a civil recovery order demanding that shareholders of Mabey Engineering (Holdings) Ltd repay £131,201 in dividends received from Mabey & Johnson (M&J), its wholly-owned subsidiary. The dividends resulted from profits made by modular bridge-building company M&J on Iraqi contracts that were obtained through bribery.
Under the Proceeds of Crime Act 2002 (PoCA), prosecutors can recover from companies and individuals property acquired through “unlawful conduct”. To make a civil recovery order under the Act, the courts need only satisfy themselves on a balance of probabilities that the alleged unlawful conduct occurred. In the case of M&J, who in 2009 pleaded guilty to charges of corruption and bribery, it was easy for prosecutors to prove such conduct had taken place.
The SFO’s move under PoCA marks the first time that the prosecutor has sought to claim dividends paid to shareholders. Richard Alderman, director of the SFO, said: “Shareholders and investors in companies are obliged to satisfy themselves with the business practices of the companies they invest in…It is particularly so for institutional investors who have the knowledge and expertise to do it. The SFO intends to use the civil recover process to pursue investors who have benefited from illegal activity. Where issues arise, we will be much less sympathetic to institutional investors whose due diligence has clearly been lax in this respect”. In February 2011, the SFO obtained a civil recovery order to claim £7 million earned by MW Kellogg as a result of corrupt conduct.
Under s.7 of the Bribery Act 2010, corporate bodies are liable for failing to prevent bribery. The SFO’s new approach may be seen to extend the accountability of corporate bodies to include their ownership. The move to force investors to consider the strength of companies’ anti-corruption compliance regimes should encourage companies to ensure they have effective policies and procedures in place in order to attract investment.
The scope of this incentive for shareholders remains a question for debate. Civil recovery proceedings seek to recoup property rather than establishing liability for the conduct that has taken place. In the case of Mabey and Johnson, the order was made with the consent of the shareholders and followed an admission of wrongdoing on the part of the subsidiary from where the dividends were provided. But a prior criminal conviction is not required under PoCA, meaning it could theoretically be used in the same way that the SEC regularly obtains disgorgement of profits from companies as part of wider FCPA settlements involving both civil and criminal violations of the law.
U.S: Marubeni settle FCPA charges over Nigerian LNG joint venture
It was announced on January 17, 2012 that Japanese trading company Marubeni Corporation had reached an agreement with U.S. authorities to settle charges that it violated the FCPA. The violations relate to the TSKJ joint venture on Bonny Island in the Niger Delta of Nigeria. Marubeni was contracted by the four-party TSKJ joint venture group to help it to secure and retain a number of contracts to build LNG facilities on Bonny Island.
Under the direction of TSKJ, Marubeni bribed a number of low-level Nigerian officials in order to obtain contracts, while Jeffrey Tesler, operating through a Gibraltar-based investment vehicle, paid off high level officials. TSKJ paid Marubeni $51 million and Tesler $132 million that U.S. authorities claim was intended, in part, to fund bribes to Nigerian officials. This resulted in the group winning four contracts between 1995 and 2004 worth around $6 billion.
Marubeni entered into a two-year DPA with the DoJ, agreeing to pay a $54.6 million criminal fine to resolve one count of conspiring to violate the FCPA and another of aiding and abetting FCPA violations. As part of the deal, Marubeni agreed to retain a consultant for two years to oversee the design and implementation of the company’s compliance program, and to assist with ongoing investigations.
Marubeni is the fifth company to settle with U.S. authorities, who have now recouped $1.7 billion in fines and profit disgorgements. In March 2011, Jeffrey Tesler pleaded guilty to FCPA charges and, as part of his plea, forfeited $149 million, the largest forfeiture by an individual under the anti-corruption law. The conviction of both Marubeni and Jeffrey Tesler demonstrates the appetite of U.S. authorities for claiming jurisdiction where possible over agents and holding them to account for any misconduct undertaken at the behest of principal organisations.
Governance and regulation
U.S: SEC alters its ‘neither accepts nor denies’
The SEC has changed its policy to prevent companies and individuals saying that they “neither admit nor deny” wrongdoing in civil cases where they have admitted guilt in parallel criminal proceedings. Prior to the policy change, the phrase was frequently used in settlements with parties that had already made admissions of guilt on similar charges when entering agreements with the DOJ.
The decision, announced on January 6, 2012 and taking effect immediately, follows the criticism of Judge Rakoff, who refused to approve an agreement between the SEC and Citigroup in part because the settlement included the phrase. It brings to an end the confusion surrounding companies admitting to criminal liability but not civil liability for the same offences. Rakoff claimed that the SEC’s policy of allowing defendants to neither admit nor deny charges made it difficult for judges to know whether the penalties paid in settlements are justified by the facts. Interestingly, the Citigroup case involved no criminal allegations.
The move has narrow scope, and only affects SEC cases in which companies and individuals have admitted guilt when resolving similar criminal controls with authorities such as the DoJ. Those who have not made such admissions will be free to use the phrase when entering into settlements with the securities regulator. The new policy will remove the ambiguity that surrounds settlements and avoid providing a loophole whereby companies can seek to minimise reputational damage by explaining in public releases that it does not admit the charges.
India: Lokpal stalls
Throughout 2011, Indian politicians and activists debated the proposed introduction of the Lokpal Bill, which would establish an independent anti-corruption ombudsman. Many questioned the potential effectiveness of the legislation in deterring corruption and providing a mechanism for citizens to report instances of corruption yet few could argue that the passing of such a law would mark a positive step for a nation that has historically been plagued by endemic corruption.
The activist Anna Hazare incited many communities to speak out against corruption and campaign for a stronger Lokpal Bill with fewer loopholes that would allow some positions of public office to enjoy immunity from prosecution, resulting in huge protests in India’s major cities during the summer. Likewise, groups such as Youth Against Corruption have found their voice and aired their frustration at the corruption that pervades through all levels of public office. With such campaigning leading to opposition parties asking for a record number of amendments to the Bill, in late December 2011 the government withdrew from a vote to confirm the Bill in the Rajva Sabha, India’s upper house of parliament. While publicly the government has reasserted its resolve to implement the Bill into law at the earliest opportunity, few others are as confident, questioning the government’s true commitment to eradicating corruption from public bodies.