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Consultant Pleads Guilty to FCPA Charges Before Trial
On April 20, the DOJ announced that Dmitrij Harder, the former owner and president of two Pennsylvania consulting companies pleaded guilty to violations of the FCPA. Mr. Harder pleaded guilty to two counts of violating the FCPA by bribing an official at the European Bank for Reconstruction and Development (EBRD) before U.S. District Judge Paul S. Diamond of the Eastern District of Pennsylvania. The EBRD was a development bank based in London that was owned by approximately 65 sovereign nations and provided financing for development projects in Eastern Europe. On March 2, Judge Diamond ruled that the FCPA covered EBRD as a public international organization, rejecting one of Harder’s key defenses at his upcoming trial.
Between 2007 and 2009, Mr. Harder was alleged to have paid approximately $3.5 million in bribes to an EBRD official in exchange for the EBRD’s approval of applications for financing from two of the Pennsylvania consulting companies’ corporate clients. The Pennsylvania consulting companies earned approximately $8 million in “success fees” as a result of the two deals, which provided the clients with nearly $300 million in investments and loans.
Mr. Harder’s sentencing is scheduled for July 21, 2016. He faces up to 10 years in prison. In a related action, the EBRD official, Andrey Ryjenko, and his sister, Tatjana Sanderson, were charged by the United Kingdom’s Crown Prosecution Service and are pending trial.
DOJ Announces New Pilot Program to Encourage FCPA Cooperation and Self-Reporting
On April 5, the DOJ announced a one-year pilot program designed to encourage corporations to voluntarily self-report FCPA-related misconduct and cooperate with the DOJ. The program emerges from the DOJ’s heightened focus on individual accountability as highlighted in the Yates Memo. For corporations that (i) voluntarily disclose the misconduct and all relevant facts related to the misconduct “within a reasonably prompt time after becoming aware of the offense”; (ii) fully cooperate with the DOJ investigation; and (iii) take appropriate actions towards remediation, the DOJ may offer up to a 50% fine reduction from the bottom of the applicable Sentencing Guidelines fine range calculation, and will generally not require the appointment of a monitor if the corporation has already implemented an effective compliance plan. Furthermore, the DOJ notes that in certain circumstances, it will consider declining prosecution altogether.
While the pilot program ends in one year, any corporation that voluntarily self-reports or cooperates in FCPA matters during the pilot period will be eligible for the benefits, even if the pilot period expires during the investigation. More details and specific requirements can be found in the DOJ’s Foreign Corrupt Practices Act Enforcement Plan and Guidance.
Nevada Casino Operator Settles FCPA Allegations with SEC
On April 7, the SEC settled FCPA allegations with a Nevada-based operator of numerous hotel, resort, and casino properties in the United States and Asia. In a cease and desist order, the SEC found that the operating company violated the FCPA’s internal controls and books and records provisions related to activities in China and Macau. The SEC order alleged that the operating company made more than $62 million in payments to a consultant in Asia, without supporting documentation or appropriate authorizations, and at times continued to make payments to the consultant without being able to account for prior transfers.
The operating company consented to the SEC’s order without admitting or denying the charges and agreed to pay a $9 million dollar penalty. In addition to the penalty, the operating company agreed to obtain an independent monitor for two years to “review its FCPA-related internal controls, recordkeeping, and financial reporting policies and procedures and its ethics and compliance functions.”
Indiana Medical Device Manufacturer's Deferred Prosecution Agreement with DOJ Extended for a Second Time
On March 25, an Indiana-based medical device manufacturer announced that the deferred prosecution agreement it entered into with the DOJ to settle FCPA charges in 2012 would be extended a second time. The company reported that the DOJ and SEC’s investigation into alleged misconduct in Brazil and Mexico, and into the company’s compliance program, was still ongoing.
The company settled FCPA charges with the DOJ and SEC in 2012 related to its conduct in Argentina, Brazil and China. As previously reported, the company disclosed in March 2015 that the deferred prosecution agreement it had agreed to as part of the settlement would be extended for one year because the company had discovered additional potential FCPA violations in Brazil and Mexico.
Pharmaceutical Company Settles with SEC Regarding FCPA Offenses in China
On March 23, the SEC announced that it settled FCPA allegations with a Switzerland-based pharmaceutical company, via a cease and desist order finding that the company violated the FCPA’s book and records and internal controls provisions related to activities in China. The SEC found that employees of two of the company’s Chinese subsidiaries gave money and gifts to Chinese health care providers at state-owned hospitals in order to boost sales. In some cases, the order found, the company’s employees created spreadsheets that linked payments to individual Chinese health care providers to increased sales of certain drugs and created a ranking system for the health care providers.
The SEC’s order found that the company recorded the payments as lecture fees, conferences, seminars, medical studies, and travel and entertainment. The SEC further found that the company failed to devise and implement a sufficient system of internal accounting controls to detect the improper payments, and lacked an effective anti-corruption compliance program. The order did not say whether the company self-disclosed the involved conduct, but the order notes the company’s cooperation and states that the company began an internal investigation after news reports surfaced that a competitor was investigating similar FCPA concerns in its Chinese subsidiaries.
The company consented to the SEC’s order without admitting or denying the charges and agreed to pay $25 million to resolve the case, including a $2 million penalty, disgorgement of $21.5 million in profits, and $1.5 million in prejudgment interest. The company will also provide status reports to the SEC for the next two years regarding remediation efforts and new anti-corruption compliance measures.
Oil and Gas Company Discloses SEC Investigation into Potential FCPA Violations
On March 15, an Ohio-based provider of sand products used in the oil and gas industry disclosed that in December 2015, the SEC notified it of an investigation of potential violations of the FCPA and other securities laws related to its international operations. The company had previously retained outside counsel to conduct an investigation and determined that no further action was necessary. The company did not estimate the potential costs of the SEC investigation or any potential penalties or fines that could result.
Pennsylvania District Court Addresses "Public International Organization" Aspect of FCPA
The relatively sparse judicial caselaw on the FCPA expanded last week with a new opinion interpreting the “public international organization” language in the statute. In an opinion denying the defense’s Motion to Dismiss an indictment originally brought in 2015, Judge Paul Diamond of the United States District Court for the Eastern District of Pennsylvania found that the FCPA “plainly” applies to public international organizations. United States v. Dmitrij Harder, No. 2:15-cr-00001 (E.D. Pa. Mar. 2, 2016). Combined with the Eleventh Circuit’s 2014 opinion in Esquenazi, the contours of the types of foreign government entities subjecting defendants to FCPA sanctions are beginning to be fleshed out. (Previous coverage of the Esquenazi case can be found here.)
Dmitrij Harder – a Russian national, German citizen, and U.S. permanent resident – owned and operated two consulting companies that, in 2007 and 2009, assisted two different independent energy companies in obtaining financing from the European Bank for Regional Development (the “EBRD”). The EBRD is a multilateral development bank founded in 1991 to foster the growth of businesses operating in the former Soviet Union. Today it invests throughout Europe and is jointly owned by sixty-four countries.
The DOJ charged Harder in 2015 with 14 counts of violating the FCPA, the Travel Act, and money laundering. The government alleged that the energy companies entered into agreements with Harder whereby they agreed to pay him success fees upon receiving financing from the EBRD. After both companies obtained sizable investments from the EBRD – one company received an $85 million investment; the other a $40 million investment and $60 million loan – they allegedly paid Harder success fees totaling almost $8 million. Shortly after the success fees were paid, Harder allegedly wired payments totaling almost $3.5 million to the sister of an EBRD official. The government alleged that the sister of the EBRD official entered into sham consulting agreements with Harder’s companies, making it appear that the payments were made for services rendered under the agreements, but no such services were actually performed.
In arguing for dismissal of the FCPA counts of the indictment, Harder challenged the sufficiency of the Indictment on several bases, including a failure to plead the involvement of a “foreign official,” and that the Indictment impermissibly substituted the phrase “foreign government or instrumentality thereof” with “public international organization” in reciting the fourth of the FCPA’s proscribed corrupt purposes: “inducing such foreign official []to use his []influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality.” 15 USC 78dd-2(a)(3)(B).
On the first challenge, Judge Diamond rejected the idea that officials of EBRD could not qualify as “foreign official[s]” within the FCPA’s prohibitions. Op. at 6; see also Op. at 8 (noting that “whether EBRD falls within the FCPA’s ambit is necessarily a ‘fact-bound question[]’ properly decided by a jury”). On the second challenged, Harder had maintained that permitting the government to substitute “public international organization” into the statute would create an entirely new offense with no basis in the statute. Rejecting this argument, Judge Diamond pointed out that public international organizations are themselves “an association of foreign governments.” Op. at 7. He reasoned that refusing to allow this substitution in the language of indictments where a public international organization, rather than a foreign government, is involved would “make it impossible to prosecute any public international organization employee who unlawfully used his position,” calling this “an absurd result” in light of Congress’ decision to include public international organizations within the scope of the FCPA. Op. at 7.
Harder also raised two challenges to the constitutionality of the FCPA’s inclusion of the EBRD. In 1998, the FCPA was amended to include employees of public international organizations within the scope of the Act’s prohibition on certain corrupt payments. The 1998 amendments brought employees of two groups of public international organizations within the scope of the FCPA; (1) those organizations that the President declares by Executive order are covered by the FCPA, and (2) those organizations identified pursuant to the International Organization Immunities Act (“the IOIA”), 22 USC 288. The IOIA allows the President, acting by executive order, to provide public international organizations in which the US participates with legal capacity, certain immunities, and privileges under US law. In 1991, the EBRD was designated a public international organization under the IOIA, and so it became subject to the FCPA after the 1998 amendments.
First, Harder argued that the FCPA’s inclusion of the EBRD and other public international organizations violates the non-delegation doctrine, which provides that where Congress delegates legislative authority it must do so with “an intelligible principle” to guide the exercise of the delegated authority. United States v. Cooper, 750 F.3d 263, 270 (3d Cir. 2014). Harder argued that Congress, by allowing the President to expand the list of public international organizations covered by the FCPA by executive order, impermissibly delegated its legislative function to the executive branch. Judge Diamond rejected this argument, finding that the legislative scheme enacted by Congress constrains the President’s ability to add public international organizations to the scope of the FCPA, and that the clearly stated purposes of the FCPA provide sufficient guidance. Op. at 9-11.
Second, Harder argued that the FCPA’s inclusion of the EBRD violates the void-for-vagueness doctrine, which provides that a criminal law is void if it fails to define the offense in a way that “ordinary people can understand what conduct is prohibited” and in a way that does not encourage “arbitrary and discriminatory enforcement.” Skilling v. United States, 561 U.S. 358, 402-403 (2010). Harder argued that the somewhat circuitous route by which the EBRD was made subject to the FCPA renders the law unconstitutionally vague because it would require individuals to monitor whether a particular public international organization has been the subject of an executive order that subjects it to the FCPA. Judge Diamond rejected this argument also, finding that an ordinary person could research the status of a public international organization. Judge Diamond also pointed out that there is a publicly available list of all public international organizations subject to the FCPA, and that the FCPA’s knowledge requirement alleviated any concern that a defendant might unwittingly violate the FCPA. Op. at 13.
Large International Bank Discloses SEC and DOJ Investigations Into its Hiring Practices in Asia
On March 1, a large international bank based in the U.K. disclosed in its annual report that it is being investigated in connection with its hiring practices in Asia. In disclosing both DOJ and SEC investigations, the bank noted that it is cooperating with the investigations and “keeping certain regulators in other jurisdictions informed.” While not explicitly linking the hiring probe to the FCPA, the acknowledgement appears to be the latest by an international financial institution concerning U.S. investigations into FCPA implications of its hiring practices in Asia and continues the long-running “Sons and Daughters” investigations by the SEC. Prior coverage of other aspects of the “Sons and Daughters” investigation around the world is available here.
Separately in its annual report, the U.K.-based financial institution also stated that the “DOJ and SEC are undertaking an investigation into whether the [bank’s] relationships with third parties who assist [the bank] to win or retain business are compliant with the” FCPA. The bank disclosed that it has briefed regulators in other jurisdictions about these investigations.
SEC Settles with Health Science Company and Former Employee Over Bribes to Russian Government Officials
On March 3, the SEC announced it settled FCPA charges with a health science company and a former engineer, Mikhail Gourevitch, for their role in bribing Russian government officials to obtain approvals for a liver cancer drug. The company and Gourevitch settled their respective cases with the SEC via separate Administrative Orders Instituting Cease-and-Desist Proceedings. Both the company (now a privately held company, but which was publicly-traded on the NYSE during the 2004-2011 time period at issue) and Gourevitch consented to the SEC orders without admitting or denying the FCPA findings.
In the order settling the charges against the company, the SEC found that it violated the FCPA’s books and records and internal accounting controls provisions in connection with payments made to a Russian third-party agent. According to the SEC, portions of the payments to the agent were used to bribe government officials in Russia to obtain government approval to license, register, and distribute TheraSphere, a liver cancer therapy drug. The company never ultimately won approval to distribute TheraSphere and did not earn any profits as a result from the improper payments.
The order found that the company mischaracterized the agent fees as legitimate business expenses and that it (i) did not have adequate policies and procedures in places to detect corruption risks; and (ii) provided little, if any, training regarding how to conduct business in high-risk jurisdictions. The company, which is a leading provider of medical isotopes, targeted therapies, and sterilization technologies, agreed to pay a $375,000 penalty to settle the charges. The SEC noted the company’s cooperation, self-reporting, and remedial acts in assessing the penalty.
Gourevitch, a dual Canadian and Israeli citizen, agreed to pay $100,000 in disgorgement, $12,950 in prejudgment interest, and a $66,000 penalty to settle the charges that he violated the anti-bribery, books-and-records, and false records provisions of the FCPA. The SEC found that Gourevitch facilitated and monitored the consulting contracts between the company and the Russian third-party agent, who was Gourevitch’s childhood friend.
Telecommunications Company Settles FCPA Charges With SEC in Apparent "Sons and Daughters" Case
The SEC announced on March 1 that it settled FCPA charges with a San Diego-based mobile chip maker. The company agreed to pay a $7.5 million civil penalty to resolve charges that it violated the FCPA by hiring relatives of Chinese government officials and providing things of value to foreign officials and their family members, in an attempt to influence these officials to take actions that would assist the company in obtaining or retaining business in China.
The company and the SEC settled the case via an Administrative Order Instituting Cease-and-Desist Proceedings, in which the company did not admit or deny the findings set forth in the order. The order found that the company had violated the anti-bribery, internal controls, and books-and-records provisions of the FCPA. In addition to the $7.5 million civil penalty, the company agreed to provide the SEC with self-reports and certifications concerning its FCPA compliance during a two-year period.
According to the order, the company both offered and provided employment and paid internships to family members of Chinese foreign officials in order to try to obtain business. Many of these hires were referred to internally at the company as “must place” or “special” hires and did not satisfy the company’s internal hiring standards. The order also details the company’s provision of meals, gifts, travel, and entertainment to both foreign officials and relatives of foreign officials in an effort to influence these officials to use the company’s technology.
The settlement appears to be an extension of the SEC’s “Sons and Daughters” investigations which, up until now, have been focused on the hiring practices of financial institutions in the Asia Pacific. Prior coverage of other aspects of the “Sons and Daughters” investigations around the world is available here.