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.
Innospec Settles (but only just) in the UK and the US: the SFO’s prosecution strategy is severely dented
Innospec is a specialty chemical maker listed in the US, and with a significant operation – Innospec Ltd – based in Ellesmere Port in the UK.
Executives were charged with conspiring to give corrupt payments to executives of Pertamina, an Indonesian state owned refinery in return for contracts to supply its old-technology anti-knock fuel additive Tetra-ethyl Lead between 2002 and 2006. Prosecutors also investigated making payments to Iraqi officials under the Oil for Food program, and in the US, selling some $20m of chemicals to Cuba without a license from the Treasury Department’s Office of Foreign Assets Control (OFAC), which is a still a violation of the Trading With the Enemy Act.
The US authorities began to investigate Innospec in 2005, and the SFO began to take a serious interest in 2007. The directors decided to admit wrongdoing in late 2008, and following the usual protracted negotiations as to the amount of the fine, with involvement by the SFO, DOJ, SEC, and OFAC, a deal was eventually struck. It was heralded as the first formal joint SFO/DOJ settlement, with a agreed fine being divied-up between UK and US regulators, and the appointment of a joint UK/US compliance monitor.
Innospec’s ability to pay was a key factor in the relatively small amount of the penalty – which had been agreed at $25.8m (payable in stages up to 2013) plus a further $14.4m which was contingent and performance-related (making a total of $40.2m). Profits resulting from the transgressions were likely to have been in the hundreds of millions of dollars, and following current US sentencing formulae the penalties could easily have been in the $500m ballpark. The total penalty here is a comparative drop in the ocean, and a great result for Innospec.
The SFO thought that they should take 50% of the agreed penalty, on the basis that the criminality was largely orchestrated and controlled from the UK (perfectly reasonable you might think). The US authorities on the other hand thought that they should have the majority of the fine, because, they had done some of the work, there were more of them, and er…. they could. So after some behind the scenes machinations, the UK’s share of the penalty was eventually agreed at 31% ($12.7m). Of this, $6.7m was planned to be allocated to a criminal fine or confiscation to be imposed in the Crown Court (in respect of Indonesia transgressions) with the balance being the subject of a civil settlement (in respect of Iraq OFF transgressions). Meanwhile, in the US, the penalty had been negotiated at $27.5m, comprising a fine of $14.1m to the DOJ, disgorgement of $11.2m to the SEC and $2.2m to OFAC. As part of both plea agreements, Innospec agreed to enter into a compliance monitoring agreement and it was proposed that a joint US and UK monitor be appointed. The press releases and 10-K announcements were duly drafted.
Such FCPA settlements have been routine in the US over the past few years. All that was required was the respective UK and US courts to rubber stamp the deal. But this is when the real problems started…..
The SFO initially put the agreed Innospec settlement in front of Southwark Crown Court for the deal to be approved. However, the Court was not impressed. His Honour Geoffrey Rivlin QC, the Senior Resident Judge recused himself from the hearing, describing the plea bargaining proposals as:
He instructed the parties to return properly represented at a later date to present the case to a more senior Court of Appeal Judge. Accordingly, the matter came again before Southwark Crown Court on 18 March 2010 when the company formally pleaded guilty. Lord Justice Thomas (Britain’s second most senior criminal judge) also declined to endorse the deal. So concerned was he that he deferred sentencing to 26 March and provided a detailed sentencing memorandum (which can be found here). Although he does not overturn the plea bargain, he concluded that the SFO does not have power to enter into plea arrangements such as this and unequivocally stated that:
We have set out the Court’s objections below, but in fact there was little about the deal that the Thomas really did like.
The level of the penalty
He made it clear that he considered the fine much too low, in part because the profits made in the UK by Innospec Ltd alone may have been as high as $160m, all of which could (should?) have been subject to disgorgement. If it had been up to him to decide, the fine would have been in the tens of millions.
He commented that:
The Judge was seemingly also unhappy with the agreed split, thinking that there was scant rationale for deviating from an equal split between the penalty to be paid in the UK and the US.
Ultimately though, Thomas LJ upheld the agreed $12.7m fine, however he did so because he viewed that it would be unjust and unfair to impose a penalty greater than the amount agreed over a period of extensive negotiations between the SFO, the US authorities and the company’s advisors.
Prosecutors agreeing the level of a fine with the defendant
Although counsel for the SFO pointed out that the penalties agreed were merely suggestions, they were clearly more than this. This does not bode well for the SFO’s pipeline of prosecutions.
Compliance monitors
The Judge also had a major problem with the appointment of the compliance monitor. Such appointments have been commonplace in DOJ settlements, although their scope and cost has been reined in since the early “$50m…boonbongles” (per District Judge Ellen Segal Huvelle – more here).
The Judge considered that imposing a compliance monitor on a company with new management team in place is an expensive form of checking, some of which can be done by its auditors. The huge cost of an Innospec compliance monitor would be far better used for fines, confiscation or compensation.
The use of civil recovery orders
The SFO see CROs as one of their key weapons in their bribery prosecution strategy, hoping that corporates will be encouraged to self-report and accept a negotiated civil penalty for the less serious crimes. Such civil penalties would not amount to a criminal conviction, which of course leads to automatic mandatory debarment from government contracts under the EU procurement directives.
As part of a CRO, part of the proceeds goes to the people or country which suffered. In this case however, it would have been unfair for Indonesia (the behavior in respect of which was dealt with by a fine) and Iraq (the behavior which was deal with by a CRO, and who would therefore have received some degree of reparations) to be treated differently.
The SFO allocating an agreed penalty between a fine and a confiscation
Under protocols agreed with the Home Office, the prosecuting authority and the investigating authority both keep 18.75% of the fine. So when the SFO act in both roles, they are entitled to 37.5% of any confiscation. There is a potential conflict therefore in the SFO’s role, if it is recommending to Courts (or going even stronger than this and all but agreeing the amounts with the corporate) how a settlement should be split between fines and confiscations.
Press releases agreed between the company and the SFO
Enough said.
The sentencing remarks can be found here.
To summarise therefore, again per Thomas LJ, the SFO “had no power to enter into the arrangements made” to settle the matter and “no such arrangements should be made again.” So its now going to be a busy time for Alderman to talk to the senior judiciary to plan how future plea negotiations are going to look.