It has been widely reported that Paris-based Alcatel-Lucent SA has settled US charges for bribing officials in Costa Rica, Honduras, Malaysia, and Taiwan.
The French telecoms giant was formed in 2006 after US-based Lucent Technologies merged with French-based Alcatel. It works for companies and governments around the world, proving solutions for voice, data, and video, including through its Bell Labs subsidiary. It has operations in more than 130 countries, revenue of €15.2bn (2009) and employs over 77,000 people. Its corporate website is here.
It was announced on 28 December 2010 that the company and three subsidiaries will pay $137m in total comprising $92m to resolve criminal charges with the DOJ and $45m in disgorgement to the SEC. It had already paid $10m in January to settle corruption charges brought by the government of Costa Rica.
The DOJ and the parent company entered into a three-year deferred prosecution agreement (‘DPA’) for violating the accounting (internal controls and books and records) provisions of the FCPA. There were no charges brought under the anti-bribery provisions against the top company. Three subsidiaries (Alcatel-Lucent France S.A., formerly known as Alcatel CIT S.A.; Alcatel-Lucent Trade International A.G., formerly known as Alcatel Standard A.G.; and Alcatel Centroamerica S.A., formerly known as Alcatel de Costa Rica S.A.) were also charged and each agreed to plead guilty to conspiring to violate the antibribery, as well as the accounting provisions of the FCPA. A compliance monitor was imposed for a 3 year period.
The charges relate to behavior in Alcatel between 1999 and 2006. DOJ prosecutors said Alcatel-Lucent’s three subsidiaries bribed foreign officials to win business in Costa Rica, Honduras, Malaysia, and Taiwan. The company also hired agents without proper controls in Kenya, Nigeria, Bangladesh, Ecuador, Nicaragua, Angola, Ivory Coast, Uganda, and Mali. Overall, Alcatel-Lucent admitted making $48.1 million in profits as a result of its bribery.
The SEC’s civil complaint said all of Alcatel-Lucent’s bribes were “undocumented or improperly recorded as consulting fees in the books of Alcatel’s subsidiaries and then consolidated into Alcatel’s financial statements. The leaders of several Alcatel subsidiaries and geographical regions, including some who reported directly to Alcatel’s executive committee, either knew or were severely reckless in not knowing about the misconduct.”
Interestingly, one of the terms of the DPA was that Alcatel-Lucent agreed to stop using third-party sales and marketing agents in conducting its worldwide business. The DOJ said the unprecedented pledge was made on the company’s “own initiative and at a substantial financial cost.”
The other side of the merged company, Lucent, FCPA charges of its own in December 2007 with the DOJ and SEC. The settlement included a $1m criminal fine with the DOJ and $1.5m in civil penalties with the SEC. Lucent’s offenses involved payment of travel expenses for Chinese government officials from 2000 to 2003.
The case appears to stem from investigations by Costa Rican authorities, which Alcatel learned of in 2004. the investigations. It fired Christian Sapsizian, a French citizen and the company’s deputy vice president for Latin America and disclosed to the DOJ authorities that it had uncovered payments from employees and consultants to government officials and political parties. In September 2008, Sapsizian was sentenced to 30 months in prison for breaching the FCPA by bribing employees of the state-owned telecoms company in Costa Rica.
The FCPA Blog has further information, including the original DOJ and SEC charges, here.
The Line is Drawn Under the BAE Bribery Allegations
After a couple of long-awaited, and fairly frantic days in the UK courts, BAE Systems Plc’s settlement with the SFO was finally consummated on 21 December. The case continues though to demonstrate the procedural and legal difficulties still faced by the SFO in bringing corporate corruption cases to trial, and as one of the most significant UK-based corruption cases to see its way through the courts, we present here our thoughts on it.
The conclusion to this case, which involved allegations of bribery in several countries, had been a long time coming. Plea agreements with both the DOJ and the SFO had been announced in February, over 8 months previously. The SFO settlement – described by the Judge as “loosely and perhaps hastily drafted” – stated that BAE would “pay £30m comprising a financial order to be determined by a Crown Court judge with the balance paid as an ex gratia payment for the benefit of the people of Tanzania”. All that was needed was the settlement to be approved by the Court.
The BAE investigation
The December sentencing hearing should have been the conclusion to six years of investigation by the SFO. The case involved allegations of bribery and corruption in a number of deals that BAE had concluded in Chile, the Czech Republic, Hungary and Austria, Qatar, Romania, Saudi Arabia, South Africa and Tanzania. More here.
Indeed, the Saudi Al-Yamamah contract between BAE and the Saudi Arabian government had the UK government intimately involved throughout. It has been described as ‘the biggest [U.K.] sale ever of anything to anyone’ and even has its own Wikipedia page, here. The BBC reports (here) that “The UK’s biggest arms dealer, BAE Systems, paid hundreds of millions of pounds to the ex-Saudi ambassador to the US, Prince Bandar bin Sultan…. with the full knowledge of the Ministry of Defence.” The SFO inquiry into the Al Yamamah deal was stopped in December 2006. The decision – although taken by the SFO – appears to have been taken in the context of briefings from Attorney General Lord Goldsmith on the national interest. Tony Blair has said that if the SFO investigation into BAE had not been dropped, it would have led to “the complete wreckage of a vital strategic relationship and the loss of thousands of British jobs”.
Back in February, after what Private Eye described as a deal that the SFO ‘scrambled to cobble together’ BAE agreed to pay a settlement/fine of $450 million. As is now common, the settlement appears to be an overall amount, which was then reverse engineered into component parts. The DOJ took Saudi Arabia, the Czech Republic, and Romania and $400m, whilst the SFO took Tanzania and £30m.
The US end of the BAE settlement is described well by our friends at the FCPA Blog here, or the FCPA Professor here.
BAE’s UK settlement
In 2001, the Tanzanian government paid £28m to BAE for a military air defence radar system. Having no air force and a GDP per head of just £465, most observers now agree it did not really need and could ill afford it. To secure the contract, ‘commissions’ were paid by BAE to a marketing agent Shailesh Vithlani, the company’s former marketing adviser in Tanzania. Between January 2000 and December 2005 around $12.4 million was paid to Vithlani’s two companies . The payments to were recorded in the accounting records of the relevant BAE entities as payments for the “provision of technical services”.
Following investigations, BAE agreed in February 2010 to plead guilty in the UK to one charge of breach of duty to keeping accounting records in relation to payments to Vithlani, and to pay £30m which would be used to settle a UK fine against BAE Systems Plc, with the balance of the £30 million to be allocated to charitable payments “for the benefit of Tanzania.” In the plea agreement there was no allegation by the SFO that BAE had paid bribes, and there was no admission of this on the part of BAE.
The delay between February and December has not really been explained, but must in part have been due firstly to the legal challenge to the settlement mounted by two anti-corruption NGOs Campaign Against Arms Trade (CAAT) and The Corner House (ultimately unsuccessful). BAE then had to deal with the clear hostility of the judiciary to comparatively lenient plea agreements, and ensure that all the information and evidence was before the Court to allow the SFO to justify the deal. UK judges had previously passed on a clear message to Richard Alderman that international bribery was too serious to be dealt with by deals which did not mention at all the word ‘bribery’. They set out their opposition in both the Innospec settlement hearing (£8m agreed fine “wholly inadequate” – for previous posts see here) and then the Dougall/De Puy settlement hearing (for previous posts see here) to extra-judicial settlements which have been the norm in the US for years and what the SFO chief would like to see over here.
The judge on the BAE case was Mr Justice David Bean, a judge who is known to be critical of plea agreements like this – he was the judge who heard the plea agreement with Robert Dougall of Du Puy, and refused to rubber stamp it, sending it to the court of appeal. This case showed no thawing in the tension between the SFO and the Courts in relation to settlements concerning corrupt conduct, and the judge made critical comments about the settlement agreement and of the SFO’s handling of the case generally.
The Hearing – Day 1
In what BAE might once have hoped was going to be a short procedural hearing at Southwark Crown Court on a snowy 20 December, the judge, Mr Justice Bean, started to question barristers for both BAE and the SFO, making clear that he thought the terms of the agreement did not make sense. Outside the Court, supporters of the Campaign Against Arms Trade (CAAT) and The Corner House held a colourful protest in the freezing weather singing “We won’t go until there’s justice” to the tune of ‘We Wish You a Merry Christmas’.
Under the terms of the proposed February settlement , BAE agreed to plead guilty to one charge of accounting irregularities in a deal with Tanzania, expecting a fine, possibly of around £2 million. In return, the SFO would drop all corruption investigations into BAE, including those involving deals with South Africa, Romania and the Czech Republic as well as Tanzania. The details of the allegations and the payments are set out in the Judge’s sentencing remarks, which can be found here.
The SFO might have been concerned that it did not have sufficient evidence to secure a conviction on an explicit bribery offence, but the Judge made it clear that he would be happy to see BAE tried before a jury. So it was clear that this was not going to be a rubber stamping exercise. He instructed the parties to return the next day, with further information about the precise nature of the payments made to or via Vithlani.
The Hearing – Day 2
Bean J held reluctantly that he had no power to vary or to set aside the settlement agreement. He also could not “sentence for an offence which the prosecution has chosen not to charge” (e.g. conspiracy to corrupt), or decide who should be prosecuted. There was considerable incentive for the fine to be kept as low as possible so that the majority of the cash would end up with the people in Tanzania. Eventually therefore BAE was fined £500,000 (plus £225,000 in costs) for aiding, abetting, counselling or procuring an offence under Section 221(5) of the Companies Act 1985, by the officers of its subsidiary, British Aerospace Defence Systems Ltd, (“BAEDS”) “to keep accounting records which were insufficient to show and explain payments” made pursuant to contracts with certain companies owned by a Tanzanian agent, Mr Vithlani.
The offence under s221, with some minor variations, is now at s387 of the Companies Act 2006, and as the s221 offence can only be committed by directors or officers of the company, BAE could only be prosecuted for aiding and abetting the offence.)
No Admission of Bribery
The SFO made no allegations against BAE or its officers of involvement in any corruption offences. No officer of BAEDS or BAE has been or now can be prosecuted for the main offence, although the SFO has an avenue to bring personal charges relating to Czech Republic or Hungary (see below). Watch this space??
The Focus on Accounting Offences
Companies are finding that a plea of failing to keep proper books and records under s221 of the Companies Act 1985 is a convenient way of settling bribery offences. It avoids a plea to a crime, which can have all sorts of nasty knock on effects, such as debarment under EU Procurement Directives (more here). From a company’s perspective, it makes sense to admit the least they can get away with.
But Bean J was clearly unhappy about allowing BAE with getting away with a plea that excluded a bribery offence. He went into detail about the admission of incorrect accounting, asking why it was such a big deal unless corruption were involved. He wanted to know the exact nature of payments made through offshore companies to Vithlani. He was sceptical about the nature of the services offered by Vithlani and the $12 million paid to him. That the commission amounted to over 30% of the cost of the contract (when a normal agent’s commission was said to be nearer to 3%) led the judge to suppose that payments of such size were not spent on legitimate lobbying and marketing, but instead given to allow the agent to make bribes.
The Judge’s problem though was that those allegations had not been made by the SFO, and he wanted to know why. Commenting on the payments, Bean J asked,
Crucially, Bean J also asked how the payments to Vithlani’s companies should have appeared in BAE’s accounts instead of “technical services”. The SFO’s barrister said that they should have been recorded instead as “public relations and marketing services”. It was that simple offence which ostensibly made up the entirety of the case.
The Judge noted that there were no sentencing guidelines for the Companies Act accounting offences, and he questioned why the case had been brought at all if the payments had truly been for PR and marketing services and it was a simple mis-description in a set of accounts on which the case hung.
The fact that a far larger penalty had been agreed led him to suspect that bribery was the elephant in the room. In the event, Bean J said he would not sentence on the basis of an accounting mis-description, but instead on the basis that BAE had been
Further Non-prosecution
As part of the settlement, BAE also agreed to pay up to £30 million (less any fine imposed by the Court for the offence) as an ex gratia payment to compensate Tanzania, in return for the SFO:
The settlement was neither limited in time nor by reference to the events that the SFO had previously been investigating , and it appears to suggest that the SFO will never prosecute BAE for corruption, anywhere, ever. The unusually wide scope of what was described by the Judge as a “blanket indemnity” also received criticism, but the Judge also had no power to vary or set aside the settlement agreement.
Monitor
It will be recalled that David Gold was appointed as compliance monitor back in September. We reported on this here.
Reparations in Tazmania
A side effect of BAE agreeing a single figure of £30m to include a fine and reparations is that it pushes a moral burden onto the Judge to keep the headline fine low so as to maximise reparations in the affected country, and means BAE can walk away with a headline criminal fine much lower than it might otherwise have been. This approach is not without difficulties though to the SFO and judiciary in the UK, which continues to see headline fines far lower than those imposed in the US for seemingly comparable offences.
And although admirable in theory, making reparatory payments to countries where bribery or related offences has occurred is not without difficulties also. Mainly the issue being who actually gets the money? Simply put – if a country is corrupt enough to be involved in the first place, what guarantees are there that the reparations won’t also simply be pocketed by the same, or a new lot of corrupt officials?
The judge made no comment as to how the £29.5m should be paid and to whom, presumably leaving this for BAE to address. The Government of Tanzania has already pressed through an official delegation that the money came from the Government of Tanzania and that is where it should return, not to a Tanzanian charity. But all is not well in Tanzania. The Guardian’s investigation of the recent Wikileak-ed US diplomatic messages suggest the head of Tanzania’s anti-corruption bureau, Edward Hoseah, feared for his life and pressured to drop his investigations into the deal. More here and here. It is understood that the SFO handed the Tanzanian anti-bribery organisation – the Prevention and Combating of Corruption Bureau (PCCB) – a full case file on the transaction with evidence of corruption against prominent individuals, but many suspect that the PCCB will base a decision on this resolution and the fact that reparations will be paid to Tanzania to shut down its corruption investigation.
This is not the first time that a payment has been made to an affected country – it was seen recently in the settlement with Messent (more here). NGOs such as the World Bank have initiatives – the World Bank’s Stolen Assets Recovery Initiative is run in conjunction with the UN Office on Drugs and Crime. It repatriates misappropriated assets. However, this operates through requests by governments for assistance. Further thought at an international level is likely to be needed as to how best to achieve this.
Conclusion
The BAE settlement was concluded prior to the Court’s decision in Innospec and De Puy. If the plea agreement in the BAE case had been entered into after these cases, it is likely that the Court may have felt so constrained. Notably, the judge refused to accept the agreed facts in the settlement agreement where he felt they were “an artificial basis” for sentencing.
But the SFO still retains the discretion on what offences to charge. Also, the use of an agreed figure to be split between a fine and reparation at the judge’s discretion also worked in this case.
Had it taken place under the Bribery Act 2010, a conviction would have looked more likely on the strict liability corporate offence under section 7. BAE might have satisfied the Court that it had adequate procedures in place designed to prevent corruption. If however the SFO persuaded the Court that BAE had deliberately set up a structure involving a secret offshore corporate known only to the most senior executives in the company, in order to pay large commissions to intermediaries to assist them to win business, without wishing to know how they did it, then my money would not be on the defence succeeding.
A bribery conviction though would have been a disaster for BAE in that it would have then faced the prospect of debarment from tendering for EU public contracts.
Taking Bean J’s comments into account, we expect UK settlements based on accounting irregularities to become rarer. With the Bribery Act properly in force in spring, the majority of future actions will be brought under the new Act wherever possible, where a real bribery conviction and higher fine will be easier to secure.