Top Ten International Anti-Corruption Developments for August 2016

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: Which companies resolved FCPA cases in August?  What is the latest in the ongoing saga of a Ukrainian billionaire that the United States is seeking to extradite from Austria for FCPA violations?  How does one avoid upsetting the Securities and Exchange Commission (SEC) about whistleblower restrictions in severance agreements?  The answers to these questions and more are here in our August 2016 Top Ten list:

1.  Texas-Based Well Servicing Company Resolves Mexico FCPA Accounting Allegations.

On August 11, 2016, SEC announced it had resolved allegations that Houston-based Key Energy Services, Inc. improperly recorded as legitimate consulting expenses payments made to a contract employee at the Mexican state-owned oil company, Petróleos Mexicanos (Pemex), in exchange for inside information used to negotiate contracts with Pemex.  According to the SEC Order, the company did not perform due diligence on the consulting firm that received the payments and did not enter into a written agreement or contract with the firm for several years.  The country manager who arranged and approved the hiring of the consulting firm “knew that the Consulting Firm had ties to the Pemex employee and that payments to the Consulting Firm were used to funnel Key Mexico funds to the Pemex employee in exchange for his assistance with obtaining Pemex business, [but] . . . never disclosed the nature of this relationship to Key Energy.”  The Order further alleges that there was no evidence that the consulting firm performed any legitimate services for the company.  In explaining its decision to seek $5 million in disgorgement and to forego a civil penalty, SEC cited the company’s “current financial condition and its ability to maintain necessary cash reserves to fund its operations and meet its liabilities,” as well as its cooperation with the investigation and its remedial actions.  In April 2016, the company disclosed in a securities filing that DOJ had declined to prosecute the company.

2.  British Pharmaceutical Company Resolves China, Russia FCPA Accounting Allegations.

On August 30, 2016, SEC announced that it had resolved allegations that U.K.-based pharmaceutical company AstraZeneca PLC (AZN) had violated the FCPA’s books and records and internal controls provisions when its wholly owned subsidiaries gave gifts, cash, and other items to health care providers (HCPs) at state-owned and -controlled entities in China and Russia.  According to the SEC Order, AZ China employees used various means to generate cash for the improper payments, including submitting fake fapiao (tax receipts), hiring a “collusive travel vendor” to submit fake or inflated invoices, and paying speakers fees for fabricated events.  SEC alleged that AZ Russia employees provided “improper incentives” to government-employed HCPs in Russia, but the Order does not describe the means by which the incentives were provided.  SEC also alleged that AZ China employees made cash payments to local Chinese government officials in 2008 in exchange for “reductions or dismissals of proposed financial sanctions against the subsidiary.”  The company agreed to pay more than $5 million--consisting of $4.325 million in disgorgement, $822,000 in prejudgment interest, and a $375,000 civil penalty--without admitting or denying the SEC’s findings.  According to SEC, the company did not self-report the FCPA violations but did provide significant cooperation and take remedial measures.  DOJ appears to have declined to prosecute the company.  AZN is the ninth company to resolve China-related FCPA allegations with SEC during this calendar year and the fourth pharmaceutical company to settle China-related FCPA allegations with SEC in less than a year (see our October 2015, February 2016, and March 2016 Top Tens for the others).

3.  Belgian Brewing Company Discloses DOJ Declination of India Allegations.

In 2013, Belgium-based Anheuser-Busch InBev SA/NV disclosed in its securities filings that SEC and DOJ were investigating potential FCPA violations involving the company’s Indian operations. In an August 29, 2016 securities filing, the company disclosed that it had been notified in June 2016 that DOJ had closed its investigation into the matter.  The company also noted that it is continuing to cooperate with the ongoing SEC investigation and “is in discussions with the SEC to resolve this matter.”

4.  Former Head of Non-Profit Sentenced to Twenty Months’ Imprisonment for Bribing U.N. Official.

On August 4, 2016, the U.S. Attorney’s Office (USAO) for the Southern District of New York announced that U.S. District Judge Vernon S. Broderick had sentenced Shiwei (“Sheri”) Yan to 20 months’ imprisonment for paying more than $800,000 in bribes to John Ashe, the former President of the United Nations General Assembly and former Permanent Representative of Antigua and Barbuda to the U.N.  Judge Broderick also ordered Yan to forfeit $300,000.  Yan, a naturalized U.S. citizen and the former CEO of the Global Sustainability Foundation, pleaded guilty in January 2016 to one count of bribing an official of an organization receiving federal funds (rather than to violating the FCPA, even though Ashe was a “foreign official”).  According to the USAO, the bribes began in 2012 and were intended to further the interests of certain Chinese business people in Antigua.  Ashe was also charged with bribery-related offenses in October 2015, but the charges were dismissed after he died in June 2016.

5.  Austrian Court Refuses to Hear Challenge to U.S.-Austria Extradition Agreement in FCPA Case.

In April 2015, an Austrian court denied a request to extradite Ukrainian billionaire Dmitri Firtash to the United States to face accusations that he conspired to pay at least $18.5 million in bribes to government officials in India to allow the mining of titanium minerals, in violation of the FCPA and other statutes.  The Austrian prosecutor’s office handling the U.S. extradition request appealed the denial, but the appeal was delayed when Firtash asked Austria’s Constitutional Court to rule that the U.S.-Austria extradition agreement was unconstitutional.  On August 19, 2016, the Constitutional Court reportedly confirmed to a German media outlet that it had refused Firtash’s request, opening the way for the prosecution’s appeal.  This is an important case to watch, as the ability to extradite foreign residents is a critical component of DOJ’s efforts to prosecute individuals for FCPA violations.

6.  Consultant to Company Tied to U.S. Hedge Fund Charged with Alleged African FCPA Conspiracy.

On August 16, 2016, Samuel Mebiame, a Gabon national, was arrested and charged in the Eastern District of New York with conspiracy to violate the FCPA by bribing officials in three African nations in order to obtain mining rights for a joint venture, which included an anonymized U.S. hedge fund, and one of its portfolio companies.[1]  According to the complaint, Mebiame “worked as a ‘fixer’ to obtain rights to mineral concessions in Africa by routinely paying bribes to foreign government officials.” The bribes allegedly included money, cars, travel, and shopping trips, among other things.  Mebiame was charged with conspiring to violate the FCPA’s territorial jurisdiction provision (15 U.S.C. § 78dd-3) and allegedly “took numerous steps while in the United States in furtherance of the [bribery] scheme.”

7.  SEC Fines Two Companies for Severance Agreements Restricting Whistleblowing.

As noted in its 2015 Annual Report (which was released in November 2015) and reflected in the April 2015 resolution with KBR, SEC’s Office of the Whistleblower is focused on preventing companies from using confidentiality, severance, and other kinds of agreements to restrict an individual’s ability to report potential wrongdoing to the agency.  In August 2016, SEC issued two additional orders that reflect that this remains a focus for the agency.  On August 10, 2016, SEC announced that it had resolved allegations that Atlanta-based building products distributor BlueLinx Holdings Inc. had violated federal securities laws by using severance agreements that required outgoing employees to waive their rights to monetary recovery should they file a charge or complaint with the SEC or another federal agency or else risk losing their severance payments and other post-employment benefits.  On August 16, 2016, SEC announced that it had resolved allegations that California-based health insurance provider Health Net, Inc. had violated federal securities laws for including similar language in its severance agreements.  The companies agreed to pay penalties of $265,000 and $340,000, respectively, and to provide former employees who signed such agreements with the SEC’s order and a statement that the company does not prohibit former employees from seeking or accepting whistleblower awards and, in the case of BlueLinx, from communicating with SEC.

8.  Important Developments in SEC Practice.

As reflected in several previous Top Tens, we have been closely following the cases challenging SEC’s abilities to obtain disgorgement and to institute administrative enforcement actions because of their potential impact on how SEC brings and resolves FCPA cases. In August 2016, there were significant developments on both fronts.

• Appellate Court Upholds Appointment of SEC Administrative Law Judges.
  
  On August 9, 2016, the D.C. Circuit upheld the constitutionality of SEC’s use of its own Administrative Law Judges (ALJs).  The central issue in Lucia v. SEC was whether SEC ALJs are “inferior officers” covered by the Constitution’s Appointments Clause (Art. II, § 2, cl. 2) or “employees” that are not.  Because the SEC ALJ was undisputedly not appointed as the Clause requires, the defendants argued that the administrative proceeding was an unconstitutional procedure.  In an earlier challenge, the D.C. Circuit had held that defendants in SEC administrative proceedings cannot go directly to federal district court to challenge the constitutionally of such proceedings.  (See our June 2016 Top Ten for a discussion of this and similar decisions.)  In Lucia, the constitutional challenge was ripe for review because the defendants went through the SEC administrative process before petitioning the D.C. Circuit for review:  they were found liable by the ALJ of one count of violating the Investment Advisors Act of 1940 in connection with their “Buckets of Money” investment strategy, and that decision was affirmed on appeal by the Commission, which considered and rejected the constitutional challenge.  The D.C. Circuit held that SEC ALJs have not been delegated the authority to “issue final decisions of the Commission” because their initial orders become final only when the Commission issues a “finality order,” thereby ensuring that “politically accountable Commissioners” affirmatively determine that an ALJ’s decision is “to be the final action of the Commission.”  Accordingly, the court held, the ALJs were employees who did not have to be appointed in conformance with the Appointments Clause.  The court then affirmed the Commission’s decision of liability on the merits.  As the first appellate decision addressing this issue, Lucia may have an important impact on similar upcoming cases in other circuits, for example in Bandimere v. SEC, No. 15-9586 (10th Cir. filed Dec. 22, 2015).
• Circuit Split on Limitations Period for SEC Disgorgement.
  
  In May 2016, in SEC v. Graham, the Eleventh Circuit held that SEC claims for disgorgement are governed by the five-year statute of limitations period set out in 28 U.S.C. § 2462 for suits brought by the government to enforce “any civil fine, penalty, or forfeiture.”  On August 23, 2016, the Tenth Circuit reached a contrary result, agreeing with SEC that disgorgement is an equitable remedy not subject to § 2462’s five-year limitations period.  In SEC v. Kokesh, SEC brought an enforcement action against Charles Kokesh more than five years after he allegedly misappropriated funds from four SEC-registered business development companies.  After a New Mexico jury returned a verdict in favor of SEC, the district court entered a final judgment ordering Kokesh to, among other things, disgorge $34.9 million.  Kokesh appealed, arguing that the disgorgement order was precluded by § 2462’s five-year limitations period.  In rejecting Kokesh’s position, the Tenth Circuit expressly disagreed with the holding in Graham that disgorgement is a “forfeiture” under § 2462.  In so holding, the Tenth Circuit joined the First, Ninth, and D.C. Circuits, further deepening a circuit split with potential ramifications for SEC FCPA enforcement actions, which typically contain a disgorgement component.

9.  Petrobras Class Action Stayed in U.S. While Political Turmoil Continues in Brazil.

In February 2016, Southern District of New York Judge Jed Rakoff certified two classes of plaintiffs alleging that Petroleo Brasileiro S.A. (Petrobras), the Brazilian state-owned oil company and a U.S. issuer, violated federal securities laws by making false and misleading statements regarding a multi-year, multi-billion dollar bribery and kickback scheme.  Petrobras appealed the ruling and moved for a stay of the underlying litigation.  On August 2, 2016, the Second Circuit granted the motion to stay.[2]  Meanwhile, the tumultuous political situation in Brazil continued.  On August 31, 2016, Brazil’s Senate voted 61 to 20 to remove President Dilma Rousseff from office for allegedly manipulating the budget to obscure the country’s ballooning deficit.  Former Vice-President Michael Temer, who was made interim President upon Rousseff’s suspension in May 2016, was sworn in as President later that day and will serve the remainder of Rousseff’s term through 2018.  Temer, however, may face legal troubles of his own, as construction magnate Marcelo Odebrecht, who was convicted in connection with the Petrobras corruption investigation in Brazil (known as Operation Car Wash), reportedly told Brazilian prosecutors that he contributed illegal funds to Temer’s 2014 re-election campaign.  Brazilian federal investigators also reportedly announced on August 26, 2016, that they will seek corruption charges against Rouseff’s predecessor, Luiz Inacio Lula da Silva (Lula).  The charges relate to allegations that a construction and engineering firm paid for improvements on a beachfront property owned by Lula.

10.  Chief Commissioner of the Malaysian Anti-Corruption Commission Resigns.

On August 1, 2016, Abu Kassim Mohamed, who led the Malaysian Anti-Corruption Commission (MACC) for six years, resigned, along with deputy commissioner for operations, Mohd Shukri Abdull, and deputy commissioner for prevention, Mustafar Ali.  Abu Kassim had led an investigation of state investment fund 1Malaysia Development Berhad (1MDB), which (as discussed in our July 2016 Top Ten) is the target of a U.S. civil forfeiture complaint seeking forfeiture of more than $1 billion in assets allegedly connected with corruption and an international money laundering scheme.  In a press conference announcing the forfeiture action, the chief of the FBI’s International Corruption Unit praised the MACC for its involvement in the investigation of 1MBD, saying the MACC showed “tremendous courage.”  Abu Kassim also headed the investigation of a $647 million transfer to the bank account of Malaysian Prime Minister Najib Razak.  Najib was cleared of any criminal offences by Malaysia’s Attorney General earlier this year.  While local media has reported that Najib pressured Abu Kassim to step down, Abu Kassim denied such reports, saying he requested to end his contract early.  He will continue to serve as an anticorruption officer until his mandatory retirement in 2020.

[1] United States v. Mebiame, No. 16-mj-752, Compl. (E.D.N.Y. Aug. 12, 2016).

[2] Universities Superannuation Scheme Limited, et al., v. Petroleo Brasileiro S.A. Petrobras, et al., No. 14-cv-9662, ECF 761 (S.D.N.Y. Aug. 2, 2016).