Jury convicts first corporate Foreign Corrupt Practices Act defendant

Comment by Fulbright & Jaworski LLP

On May 10 2011 Lindsey Manufacturing Company, two of its executives and a Mexican intermediary were convicted by a federal jury on all counts for their alleged respective roles in a bribery scheme involving Mexican government officials. After a five-week trial, the jury took just one day to return the guilty verdicts. Executives Keith E Lindsey and Steve K Lee were each convicted of one count of conspiracy to violate the Foreign Corrupt Practices Act and five counts of Foreign Corrupt Practices Act violations. Angela Aguilar, the Mexican intermediary, was convicted of one count of money laundering conspiracy.

Facts

Lindsey Manufacturing hired Grupo Internacional de Asesores SA to act as its Mexican sales representative and to obtain contracts for Lindsey from Mexico's state-owned utility company, Comisión Federal de Electricidad (CFE). Grupo received a percentage of Lindsey Manufacturing's revenue from CFE contracts. Aguilar and her husband, Enrique Aguilar,(1) were directors of Grupo.

At trial, the Department of Justice presented evidence that from approximately February 2002 until March 2009, Lindsey Manufacturing and Lindsey, Lee and others orchestrated a bribery scheme whereby Mr Aguilar was paid a 30% commission on Lindsey Manufacturing's sales to CFE, a significantly higher commission than that given to previous Lindsey Manufacturing sales representatives. According to the department's evidence, Lindsey and Lee understood that all or part of this commission amount would be used to bribe CFE officials in exchange for contract awards. According to the evidence presented at trial, Lindsey Manufacturing then increased the price of the goods and services sold to CFE by 30% to ensure that CFE, rather than Lindsey Manufacturing, absorbed the cost of the bribes.

The Department of Justice also presented evidence that:

• Grupo submitted fraudulent invoices to Lindsey Manufacturing for the commission amount;
• Lindsey and Lee then wired the money requested into Grupo's account, knowing that the invoices were fraudulent and that at least some of the funds were being used as bribes;
• Lindsey and Lee learned that Mr Aguilar had a corrupt relationship with a top CFE official;
• Mrs Aguilar authorised money in the Grupo account to be used to buy a CFE official a $297,500 Ferrari Spyder and a $1.8 million yacht, in addition to paying more than $170,000 worth of the official's credit card bills; and
• Mrs Aguilar also authorised the transfer of $500,000 from Grupo's account to relatives of another CFE official.

Comment

The convicted defendants face a penalty of up to five years in prison and a fine of the greater of $250,000 or twice the value gained or lost on the Foreign Corrupt Practices Act conspiracy charge. Each of the five Foreign Corrupt Practices Act counts carries a penalty of up to five years in prison and a fine of the greater of $100,000 or twice the value gained or lost. The money laundering conspiracy count carries a penalty of up to 20 years in prison and a fine of the greater of $500,000 or twice the value of the property involved in the transaction. In addition, the government is seeking forfeiture against all of the defendants. Sentencing for Lindsey Manufacturing and Lindsey and Lee is scheduled for September 16 2011, while sentencing for Mrs Aguilar is scheduled for August 12 2011.

Before trial, the defendants challenged the Department of Justice's definition of 'foreign official' under the Foreign Corrupt Practices Act; however, the court upheld the department's definition, finding that CFE was an "instrumentality" of the Mexican government.(2) Therefore, the CFE officer who allegedly accepted the bribes was a "foreign official" for Foreign Corrupt Practices Act purposes.

In its press release regarding the convictions, the Department of Justice quoted Assistant Attorney General Lanny Breuer as saying:

"Lindsey Manufacturing is the first company to be tried and convicted on Foreign Corrupt Practices Act violations, but it will not be the last... As this prosecution shows, we are fiercely committed to bringing to justice all the players in these bribery schemes – the executives who conceive of the criminal plans, the people they use to pay the bribes, and the companies that knowingly allow these schemes to flourish."(3)

Several points from the verdicts are noteworthy:

• The Department of Justice will continue to pursue Foreign Corrupt Practices Act enforcement aggressively against companies and individuals – and currently plans to do so under a broad definition of 'foreign official'.(4)
• Coupled with the department's aggressive pursuit of Foreign Corrupt Practices Act enforcement, the speed with which the jury convicted the defendants is also noteworthy.
• Although historically there have been relatively few enforcement actions leading to trial, this case confirms that the department can prevail at trial against both companies and individuals.
• Multiple theories of potential liability will be pursued by the enforcement authorities in Foreign Corrupt Practices Act enforcement actions; here, violation of the Foreign Corrupt Practices Act, conspiracy to violate the Foreign Corrupt Practices Act and conspiracy to money launder were theories on which the government prevailed.
• The department acknowledged in its press release the assistance that it received from the Mexican authorities during the investigation, marking another continuing enforcement trend of increased international enforcement cooperation.

Given the continuing upswing in aggressive enforcement, companies subject to the Foreign Corrupt Practices Act must ensure that they and their employees, agents, consultants or other third-party representatives take steps to comply with the Foreign Corrupt Practices Act.(5) Those steps include:

• assessing the company's international business reach and environment and establishing a robust risk-based compliance programme;
• conducting due diligence on third parties and subsidiaries;
• training company personnel and third parties to understand anti-corruption obligations and identify red flags; and
• ensuring transparency and accuracy when recording financial transactions.

As US Attorney André Birotte remarked in connection with the convictions, the Department of Justice:

"remains committed to prosecuting violations of the Foreign Corrupt Practices Act to ensure that the payment of bribes can no longer be viewed simply as the cost of doing business in a foreign nation. Bribery, wherever it occurs, will carry the potential cost of criminal prosecution, hefty fines and prison terms."(6)

For further information on this topic please contact Marsha Z Gerber, Richard Craig Smith or Paul Simonat Fulbright & Jaworski LLP by telephone (+1 202 662 0200), fax (+1 202 662 4643) or email (mgerber@fulbright.com, rcsmith@fulbright.com or psimon@fulbright.com).

Endnotes

(1) Mr Aguilar has also been charged with conspiracy to violate the Foreign Corrupt Practices Act, violations of the Foreign Corrupt Practices Act and money laundering. Mr Aguilar remains a fugitive and is presumed innocent unless and until proven guilty.

(2) For an analysis of the court's ruling on the definition of 'foreign official' please see "California court retains government's broad interpretation of 'foreign official'".

(3) Department of Justice press release, May 10 2011, "California Company, Its Two Executives and Intermediary Convicted by Federal Jury in Los Angeles on All Counts for Their Involvement in Scheme to Bribe Officials at State-Owned Electrical Utility in Mexico," available atwww.justice.gov/opa/pr/2011/May/11-crm-596.html

(4) The definition of 'foreign official' under the Foreign Corrupt Practices Act has also been challenged in two other current cases – see US v O'Shea (No 4:09-cr-00629 (SD Tex)) and US v Carson (No 8:09-cr-00077 (CD Ca)). Those courts have yet to rule on the pending motions.

(5) Companies with operations providing a nexus to the United Kingdom must equally ensure compliance with the UK Bribery Act of 2010, which will come into force on July 1 2011.

(6) Supra note 3.

Pondering section 27 Integrity in Public Life Act 2000 (as amended) of Trinidad and Tobago

The Hon. Prime Minister, Kamla Persad Bissessar

From the first time I heard that the Hon. PM's "free lodging" at the Gopaul's was being interpreted as a "fee, gift or personal benefit" under section 27 (1) of the Integrity in Public Life Act 2000 as amended, I intuitively thought it an uncomfortable interpretation but I could not put my finger on exactly why it was so.  It was certainly a benefit received and so I understand the readiness to conclude that it must be covered under the section dealing with the prohibition and declaration of gifts by public officials. I held my tongue on the topic ( even though as most of you know I am most inclined to comment on topics of this sort) and pondered a little.  Why was I uncomfortable with this interpretation?  Why did it seem like forcing a square peg into a round hole to me?  

Let us look at section 27 closely :

"27. (1) A person to whom this Part applies shall not accept a fee, gift or personal benefit, except compensation authorized by law, that is connected directly or indirectly with the performance of the duties of his office.

         (2) Subsection (1) does not apply to a gift or personal benefit that is received as an incident of the protocol or social obligations that normally accompany the responsibilities of office.

          (3) Where a gift or personal benefit referred to in subsection (2) exceeds five thousand dollars in value or where the total value received directly or indirectly from one source in any twelve-month period exceeds five thousand dollars, a person in public life shall file with his declaration, a statement indicating the nature of the gift or benefit, its source and the circumstances under which it was given or accepted.

           (4) For the purposes of this section, the amount of a gift comprising property, other than money, shall be deemed to be an amount equal to the value of the property.”

If we were to look at 27 it would appear that there is not there created an absolute bar to the receipt of any gift whatsoever.  Further from a consideration of the section in its entirety it is clear that there are distinctions made between categories of gifts etc.  Let us break it down.  From my reading of it there are at least four potential categories of gifts :

Gift Category 1

Defined by section 27 (1) - those fees, gifts, personal benefits, not authorized by law, that are connected directly or indirectly with the performance of one's duties of office. -Prohibited

Gift Category 2

Defined by section 27 (2) - those gifts/benefits received as an incident of the protocol or social obligations that normally accompany the responsibilities of office (under the value of 5000TT) - Permitted

Gift Category 3

Defined by section 27 (3) - those gifts/benefits received as an incident of the protocol or social obligations that normally accompany the responsibilities of office (over the value of 5000TT) - To be declared

Gift Category 4

Not defined by the section but nonetheless must exist - those fees, gifts, personal benefits received by public officials which are NOT connected directly or indirectly with the performance of one' duties of office. - Not Covered by the Act

It is of course category 4 which causes the most concern but given the manner in which the section 27 is drafted - it must exist.  Section 27 (1) breaks down the elements which one must find in the type of fee, gift or benefit which is prohibited eg. 

1. Must be a Fee, gift or personal benefit

2. Must not be authorized by the law (wages, salaries, benefits or perks of office)

3. Must be connected directly or indirectly to the performance of one's duties of office. 

The Gift of Free Lodging 

In the instant situation relating to the benefit of "free lodging", whilst elements 1 and 2 are made out, it is questionable whether element 3 is made out. There are two sub elements to 3 which are (a) must be connected directly or indirectly and (b) to the performance of one's duties of office. 

Taking the latter sub element first, the reference in s.27(1) (as amended) to “the duties of office” would seem to be a reference to public duties, ie duties which are an incident of the holding of a public office. Section 23 provides that Part IV of the Act applies to “a person in public life and to all persons exercising public functions”. Such persons are defined in section 2 and include all persons holding office under the Public Service. “Public functions” is a term not defined in the Act but “persons exercising public functions” is defined in s.2 to include, inter alia, the Judicial, Police and Teaching services.  Sections 24 to 27 are concerned with the use and misuse of office. This must, ex hypothesi, mean ‘public’ office. Similarly, the reference in s.24(1) to the performance of functions must be a reference to ‘public’ functions.

S.24(1)(a) makes express reference to the exercise of “public duty”. The term is not defined. However, it must necessarily encompass duties which are an incident of the public office and, possibly, which are owed to the public. A public duty may, in principle, be distinct from a ‘private’ duty, which may, eg, include those duties arising by way of contract of employment.

Accordingly, holding a public office may, in principle, give rise to both public and private duties. So a teacher’s duties might include, eg, one to mark exam papers impartially which could properly be characterized as a public duty; and a duty to work the hours stipulated in her contract, which is perhaps more readily categorized as a private duty. 

If this public/private distinction is in principle valid, then one can interpret s.27(1) as being concerned with matters “connected directly or indirectly with the performance of the [public] duties of his office”.

Leaving aside, for one moment, the meaning of “connected directly or indirectly”, one can interpret s.27(1) as, therefore, being concerned with the relationship between the acceptance of a fee, gift or personal benefit and the performance of a public duty which is an incident of the holding of a public office.

Considering the first sub element (a) “Connected” is defined in Collins English Dictionary as meaning “joined or linked together”. Using this definition, the term is suggestive of there being a link or relationship between said acceptance and said performance. That is to say that the acceptance of the benefit (and presumably also its offering) is referable to the performance of the public duty, or is linked to the performance of the public duty. 

It can be seen that s.27 distinguishes between benefits connected directly or indirectly with the performance of the duties of office (s.27(1)) and benefits “received as an incident of the protocol or social obligations that normally accompany the responsibilities of office” (s.27(2)). As explained above, this is not an exhaustive characterization of all benefits that a holder of public office could receive. Thus, by way of example, a birthday present from a family member would not fall under either category of benefit identified in s.27(1) or (2). The gift does not fall within s.27(1) because it is not connected with the performance of the duties of office. It does not fall within s.27(2) because it was not received as an incident of the protocol or social obligations that normally accompany the responsibilities of office, and therefore would not fall within s.27(3) either, even if its value exceeded TT5,000. Let us refer to this type of gift/benefit as the Category 4 gift outlined above. 

Similarly, the gift of free lodging from a friend without any evidence of a "connection directly or indirectly" with the performance of a public duty (for example the public duty to award a contract fairly and impartially) would not therefore appear to infringe section 27 (1). It would also not infringe section 27 (2) as it is not a gift given as an incident of protocol or social obligation accompanying the office and neither is it declarable under section 27 (3). 

On the above interpretation of the Act, it follows that, the mere fact that a fee, gift or benefit may be convenient to the performance of a public duty does not by itself establish the connectivity required by section 27(1).  

A Note on the Integrity in Public Life Act

Ok so I understand the discomfort with this.. it may be readily accepted that the Act is not the best example of parliamentary draftsmanship. Party financiers who are friends can give gifts of value and once no evidence can be adduced showing a connection with the performance of a public duty there is no infringement.  I am uncertain whether this was the intention of the framers. Perhaps a simpler expression of the rules would be 

1. Create an absolute bar on all gifts received in connection with the performance of duties of office (as is done by section 27 (1) as amended). 

2. However, require full disclosure of ALL gifts received over the value of 5000TT so that in the event of an allegation being made there should be appropriate records to assist with the investigation.  Our section 27 (3) requires only the declaration of gifts over 5000TT which are received as an incident of protocol or social obligation relating to the public office, thereby creating a fairly large loophole relative to Category 4 gifts. 

A Note on the NP Procurement Process 

All of this to say, I am not defending the NP procurement process nor am I saying that the Hon. PM did or did not interfere and or influence the process.  All I am saying, is

(1) the mere fact of the acceptance of the gift/benefit of free lodging by the Hon. PM  does not of itself establish a breach of section 27 (1) and

(2) the award by an SOE of a contract to the donor of the said gift/benefit of free lodging,  is not, without more, sufficient to support an allegation of impropriety.  

This notwithstanding, there may be evidence which is adduced later on pointing to unfairness of procedure, breaches of duties to award the contract as tendered, to disqualify non compliant bids etc, and there may even be evidence elicited relating to political interference and influence over the award.   In such circumstances, it may be that the Hon.PM or other public officials may have a case to answer.  

New Anti-Corruption Compliance Checklist issued by TI Canada

Transparency International Canada (TI-Canada) today announced the launch of its Anti-Corruption Compliance Checklist (TI-Canada ACC).

In line with Canada’s Corruption of Foreign Public Officials Act (CFPOA), the TI-Canada ACC is a critical tool for those Canadian corporations seeking to significantly enhance their risk management processes.

Implementation of the TI-Canada ACC will enable a Canadian corporation of any size to conduct itself in international markets in compliance with ethical and legal obligations to avoid corruption and operate with transparency, accountability and integrity.

As the Canadian chapter of TI, the global coalition leading the fight against corruption, TI-Canada’s mandate is to promote methods to eradicate corruption in Canada, and via education to help Canadian companies address and avoid corruption in their international business activities.

The recent revelation from the RCMP Sensitive Investigations and International Anti-Corruption Unit that 23 CFPOA investigations are underway means that, “Canadian companies can no longer hide behind the world’s perception that business is done here in a completely ethical manner. Companies must learn to operate internationally without paying bribes,” according to James M. Klotz, Chair and President of TI-Canada. The TI-Canada ACC, available for free download from www.transparency.ca, is a solid tool for Canadian corporations faced with the challenges of operating ethically in today’s global environment.