Recent guilty plea in US demonstrates ongoing commitment to corruption prosecutions

On May 19 2011 the US Department of Justice (DOJ) announced that Jorge Granados, former chief executive officer (CEO) of Miami-based telecommunications company Latin Node Inc (LatiNode), pleaded guilty to one count of conspiracy to violate the Foreign Corrupt Practices Act. On December 21 2010 the DOJ obtained a 19-count indictment against Granados and other LatiNode senior executives for their roles in a conspiracy to pay over $500,000 in bribes to Honduran government officials to retain a lucrative telecommunications contract. Granados's plea represents the latest example of the US government's ongoing and aggressive commitment to prosecute high-level business executives for Foreign Corrupt Practices Act violations.

Background

In December 2005 LatiNode was awarded a contract with Empresa Hondurena de Telecomunicaciones (Hondutel), the wholly state-owned telecommunications authority in Honduras. Almost immediately after winning the contract, LatiNode executives learned that LatiNode would need to bribe Hondutel employees in order to keep them from rescinding the contract. The indictment alleged that Granados and other LatiNode executives agreed to a secret deal to pay bribes to Hondutel officials, including the general manager, a Hondutel senior attorney and a minister of the Honduran government who became a representative on the Hondutel board of directors(1). The indictment also alleged that Granados actively participated in making concealed payments by laundering money through LatiNode subsidiaries in Guatemala and to accounts in Honduras controlled by government officials(2). On April 7 2009 LatiNode pleaded guilty to a one-count criminal violation of the Foreign Corrupt Practices Act (3). As part of the plea agreement, LatiNode agreed to pay a $2 million fine and cooperate with any further investigations by law enforcement agencies(4).

Three other former LatiNode senior executives – Manuel Salvoch, chief financial officer (CFO), Juan Pablo Vasquez, chief commercial officer, and Manuel Caceres, vice president for business development – have already pleaded guilty to the Foreign Corrupt Practices Act violations this year for their involvement in the Hondutel bribery scheme. Granados is scheduled for sentencing on August 22 2011 and faces up to five years in prison and a fine of $250,000 or more(5).

Comment

Granados's plea agreement reflects the DOJ's aggressive stance on holding high-level business executives accountable for the Foreign Corrupt Practices Act violations. During a Senate committee hearing last November, Senator Arlen Specter had expressed concern regarding the lack of significant prosecutions of individuals who are responsible for the Foreign Corrupt Practices Act violations, notwithstanding the penalties against companies and shareholders for such violations(6).

Recent cases suggest that, in fact, high-level business executives are being held accountable for Foreign Corrupt Practices Act violations. For example, on January 24 2011 the former CEO and CFO of Innospec Inc, Paul W Jennings, agreed to settle the Foreign Corrupt Practices Act charges with the Securities and Exchange Commission for approving improper payments to Iraqi and Indonesian government officials(7). On May 10 2011 a federal jury in California found Lindsey Manufacturing Co president, Keith Lindsey, its CFO, Steve Lee, and an intermediary guilty on all counts in a criminal prosecution for the Foreign Corrupt Practices Act violations(8). As Assistant Attorney General Lanny A Breuer of the Criminal Division of the DOJ remarked about the Granados case: "[f]oreign bribery undermines competition in the marketplace, and weakens democratic institutions. CEOs and other corporate executives should know that now, more than ever, violating the Foreign Corrupt Practices Act will lead to criminal prosecution"(9).

For further information on this topic please contact Richard Craig Smith, John Kelly, Fatema Merchant orRabeha Kamaluddin at Fulbright & Jaworski LLP by telephone (+1 202 662 0200), fax (+1 202 662 4643) or email (rcsmith@fulbright.com, jkelly@fulbright.com, fmerchant@fulbright.com,rkamaluddin@fulbright.com)

Endnotes

(1) Criminal Indictment, United States v Latin Node Inc, Case 10-20881, available athttp://www.justice.gov/criminal/fraud/fcpa/cases/granados-jorge/12-21-10granados-indict.pdf

(2) Id at 22-23

(3) In early 2007, Florida-based eLandia International Inc (eLandia) acquired LatiNode. Following the acquisition, eLandia discovered the bribes and self-disclosed the violations to the DOJ and Securities and Exchange Commission.

(4) Criminal Plea Agreement, United States v Latin Node Inc, Case 09-20239, available athttp://www.justice.gov/criminal/fraud/fcpa/cases/litton-applied/04-03-09latinnode-plea-agree.pdf

(5) Specifically, Granados faces a fine of the greater of $250,000, or twice the gross amount of any pecuniary gain or loss that any person derived or sustained from the offence. See Criminal Plea Agreement, 10-CR-20881 (SD Fla May 19 2011)

(6) See "Granados and Caceres Indictments Latest in FCPA Individual Prosecutions," Fulbright & Jaworski LLP Briefing, December 22 2010

(7) See Securities and Exchange Commission Press Release, "SEC Charges Former CEO of Innospec for Role in Bribery Scheme", available at http://www.sec.gov/news/press/2011/2011-21.htm

(8) United States v Noriega et al, 2:10-CR-01031 (CD Cal May 10 2011)

(9) DOJ Press Release, "Former CEO of US Telecommunications Company Pleads Guilty to Foreign Bribery Conspiracy" (May 19 2011), available at http://www.justice.gov/opa/pr/2011/May/11-crm-644.html

Contributed by Fulbright & Jaworski LLP

New Anti-Corruption Laws passed in Mexico - Spotlight on Contractors and Concession Holders

Introduction

The Senate has passed the Federal Anti-corruption Law regarding Government Contracts. It is expected to be passed by the lower house in the course of 2011, probably before the end of the congressional term.

Mexico is a member state of the United Nations Convention against Corruption, the Inter-American Convention against Corruption and the Organisation for Economic Cooperation and Development (OECD) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. When the law comes into force, it will fill one of the main legislative gaps in the government's fight against corruption, which focuses specifically on private contractors that do business with the government. This anti-corruption drive will also affect business undertaken with state institutions (eg, Pemex and the Comisión Federal de Electricidad (CFE), the government-owned oil and power companies), and with the agencies in charge of awarding and handling infrastructure concessions (eg, the Ministry of Communications). The purpose of the law is to penalise individuals and companies, from Mexico or abroad, that engage in unethical behaviour in the context of government contracting in Mexico - the law refers to such actions as 'irregular activities'. Public servants are already subject to the Federal Law on the Administrative Responsibilities of Public Servants, but this statute is enforceable only in respect of wrongdoing on the government side, whereas OECD studies and international practice show that corrupt practices are more likely to originate with a contractor or concession holder. In seeking to be more active in regulating and overseeing contractors, Mexico is following an international trend.

Key features

The Anti-corruption Law applies only at federal level, but at which nearly 70% of the federal budget is spent through contracts and concessions. It covers all forms of contract, agreement and concession; it even extends to the granting of permits, from the design, bid preparation, tendering and award stages to their execution and completion. It explicitly applies to Pemex and CFE contracts, and to infrastructure projects. Like most foreign legislation implemented by OECD countries, and following a trend that was started by the US Foreign Corrupt Practices Act, the law also applies to acts beyond the Mexican territory, covering irregular activities by national companies or individuals in international commercial transactions where a foreign official is involved.

The federal agency in charge of enforcing the law is the Bureau of the Federal Comptroller, along with its internal comptroller departments which are integrated into most government agencies and public entities. The bureau is also in charge of enforcing the Law on the Administrative Responsibilities of Public Servants and supervising budget spending at federal level.

The Anti-corruption Law empowers the bureau to punish persons and companies involved in irregular activity. This includes intermediaries, agents and consultants, but also extends to the beneficiaries of irregular activities - which will typically be Mexican-domiciled companies and their shareholders, parents and affiliates, whether foreign or Mexican.

The law identifies eight forms of irregular activity. As well as bribery and peddling influence, these include a catch-all provision that penalises any action that involves obtaining - or has the purpose or effect of obtaining - an undue benefit or advantage in a government contract. 'Bribery' is broadly defined to include promises, undue influence or the giving of money or anything of value to a private contractor that is involved in the design, preparation or execution of a bid or public contract. Unlike anti-bribery laws in some other jurisdictions, the law makes no exception for facilitation or similar payments made to accelerate the receipt of a service or contract that would have been rightfully assigned or granted in any case.

The law provides for large fines, which may be increased in proportion to the benefit gained. It also allows the authorities to blacklist individuals and companies, debarring them from participation in federal government contracts or concessions for up to 10 years. Fines imposed by the bureau will be treated as tax credits and may be collected pursuant to tax laws and regulations. The bureau's penalties are independent and additional to any criminal penalties which may be imposed following prosecution by the Attorney General's Office. The law provides for a 10-year statute of limitations.

The law includes a leniency programme whereby individuals and companies involved in irregular activity may plead guilty to involvement and assist the bureau in conducting its investigation, thereby qualifying for a 50% to 70% reduction in fines.

Anyone has standing to file a claim under the law. In practice, many claims are likely to be filed by the agency or public entity in charge of the government contract or concession in question. However, the law allows claims to be filed online, anonymously, or through the filing of a claim submitted under oath with respect to knowledge of the facts, the indication of evidence and information about the responsible parties - such a claim can be brought only by a private contractor, not by the government. The bureau is mandated to maintain claimant confidentiality. This factor is expected to encourage competitors to file corruption claims if there is reason to believe that a case for corruption may exist, although concerns remain about the submission of false information.

A public servant must make known a fact or activity that violates the law; otherwise, he or she is subject to penalties under the Federal Law on the Administrative Responsibilities of Public Servants and is liable under the Federal Criminal Code.

The bureau may start an investigation on its own initiative or on the basis of information provided in a claim. The law confers broad powers to request production of documents and information not only from government agencies or state entities, but also from third parties. For the purposes of its investigation, the bureau may access information that is classified or reserved under the Freedom of Public Information Laws and Regulations.

If, on the basis of an investigation, the bureau can show probable cause of a violation, it must begin administrative penalty proceedings. Once notified, the defendants have 15 business days to file a plea in response. Thereafter, the bureau must allow the production and admission of evidence by the defendants under the terms of the Federal Rules of Civil Procedure. Thereafter, the defendants have five business days to submit closing arguments. The bureau will then have 10 business days to issue its resolution.

Comment

In future, the law is expected to open up a broad area of practice in respect of claims and investigations. The coming months and years are likely to see the development of significant precedents and further legislation.

Contributed by López Velarde, Heftye y Soria