Newsletter
Summer 2007
White Collar and
Government Investigations
Issue No. 1
The Potential Impact on White Collar
Sentences of the Supreme Court’s Decision
in Rita and its Upcoming Decision in Gall
By Alexandra A.E. Shapiro & Nathan H. Seltzer1
Inside This
Issue:
The Potential Impact on
White Collar Sentences
of the Supreme Court’s
Decision in Rita and its
Upcoming Decision in
Gall
1
Know Your Counterparty:
It’s not Just for Financial
Institutions
7
The Extraterritorial
Reach of the Foreign
Corrupt Practices Act:
Risks and Challenges
for Multinational
Companies
12
News From the Courts
18
The Federal Sentencing Guidelines were
enacted in 1987 primarily to reduce what
Congress perceived to be unwarranted
disparities in sentences for similarly
situated offenders across the US federal
court system. Congress also sought to
“inject transparency, consistency, and
fairness into the sentencing process.”2
Under the guidelines, district judges
were required to make complicated
factual findings, and, once those
findings were made, impose a sentence
within a specified range based upon a
combination of the current offense level
and criminal history. Judges were bound
to apply the guidelines range except
in rare situations. Strict application of
the guidelines, particularly in the postSarbanes-Oxley era (after the Sentencing
Commission amended the fraud
guidelines to lengthen imprisonment
terms), has led to extremely harsh
sentences for white-collar offenders,
including, for example, a 25 year
sentence for Bernie Ebbers.
The Sentencing Guidelines, however,
no longer bind judges, who have greater
sentencing discretion following a series
of recent Supreme Court culminating
in United States v. Booker,3 which
held that mandatory application of the
guidelines violates defendants’ Sixth
Amendment rights. The Court declared
the guidelines “effectively advisory,” and
directed district judges to “consider” the
guidelines, along with the other factors
set forth in 18 U.S.C. § 3553(a)—such
as “the nature and circumstances
of the offense and the history and
characteristics of the defendant” and
“the kinds of sentences available”—
when selecting an appropriate sentence.
The Court also held that appeals
courts are to review sentences for
“unreasonableness.”4
Booker held the promise of more
reasonable sentences for white collar
offenders. By declaring the guidelines
merely “advisory,” the Supreme Court
freed district courts to exercise greater
discretion and to impose sentences
more precisely tailored to the individual
offender and circumstances of the offense
beyond the amount of money involved
(or the amount selectively charged by the
prosecutor5). However, in the two years
following Booker, very little actually
changed—in large part because the
way appellate courts were reviewing
sentences signaled to district courts that
following the guidelines would lead to
affirmance, whereas sentencing below
the guidelines would likely lead to
reversal.
01
Alexandra A.E. Shapiro
The Potential Impact on White-Collar Sentences of the Supreme
Court’s Decision in Rita and its Upcoming Decision in Gall
Two Supreme Court cases elaborating on
the standard of appellate review of federal
sentences after Booker could change this
pattern. The Court’s recent decision in
Rita v. United States,6 and its forthcoming
decision in Gall v. United States, which is
to be argued this fall, may lead to greater
district court discretion to deviate from the
guidelines and impose lower sentences in
appropriate cases. In this article, we discuss
how Booker was applied over the last two
years and how the Court’s Rita opinion and
its decision in Gall may affect white collar
sentences in the future.
Applying Booker’s Holding
After Booker, it seemed that district courts
would have greater discretion in selecting
the appropriate sentence, and that this
would lead to more reasonable sentences for
white-collar offenders. In the two years since
Booker, however, lower courts struggled to
implement the decision and were unable to
reach consensus on the role the guidelines
should continue to play in sentencing. Seven
courts of appeal held that sentences within
a correctly calculated advisory-guidelines
range are presumptively reasonable—in
effect requiring defendants to prove that
the guidelines sentence is not appropriate.7
Five courts of appeal have not adopted this
explicit presumption but still give significant
deference to the guidelines.8 The practical
result was that courts continued to place
great weight on the guidelines, and many
judges effectively treated them as still
binding. In fact, the Sentencing Commission
reported that in the six months through
September 30, 2006, district courts imposed
non-guidelines sentences less frequently
than in the year following Booker.98
Nathan H. Seltzer
The results of a study of appellate
reasonableness review in practice, conducted
by Latham & Watkins LLP, assisted by
Cooley Godward Kronish LLP and Professor
Douglas Berman of Ohio State University
on behalf of the New York Council of
White Collar and Government Investigations
Defense Lawyers (NYCDL), confirmed that
district courts’ sentencing discretion has
been severely cabined by appellate courts
following Booker. The study was conducted
in conjunction with amicus briefs the NYCDL
filed in support of the petitioners in Rita (and
Claiborne v. United States, a companion case
subsequently dismissed as moot, as discussed
below). At Latham, we undertook the task
of compiling and analyzing all post-Booker
applications of reasonableness review10 in
order to assist the Court in understanding
how the courts of appeal were limiting the
discretion of district judges by reversing
below-guidelines sentences while affirming
within- and above-guidelines sentences.
The final study compiled 1,515 cases
showing that virtually all within- and aboveguidelines sentences were affirmed while
below-guidelines sentences appealed
by the government were being reversed.
Only seven of 154 appeals of aboveguidelines sentences resulted in a sentence
being reversed.11 On the other hand, the
government prevailed in 60 of 71 belowguidelines sentence appeals. Defendants
were unable to win a single one of 138
appeals of below-guidelines sentences.
The remaining 1,152 appeals involved
within-guidelines sentences appealed by
defendants, and only 16 were vacated
as unreasonable. Fifteen of the 16
were reversed not because they were
unreasonably short or long, but because the
district court did not adequately explain its
reasons for choosing the particular sentence.
Only one sentence out of the 1,152 was
reversed as substantively unreasonable (and,
on remand, the district court in that case
imposed the same sentence, which was later
affirmed by the Eighth Circuit12).
In the circuits with a presumption of
reasonableness, 88 out of 93 aboveguidelines sentences appealed by
defendants were affirmed and only five were
vacated as unreasonably high. On the other
01
The Potential Impact on White-Collar Sentences of the Supreme
Court’s Decision in Rita and its Upcoming Decision in Gall
hand, the government obtained reversals of
below-guidelines sentences in 47 out of 51
appeals. Of 693 within-guidelines sentences,
seven were vacated (six for an inadequate
explanation).13
In the non-presumption circuits, only two
out of 61 above guidelines sentences were
reversed. The government appealed 20
below-guidelines sentences, 13 of which
were reversed as unreasonably low. Nine
of the remaining 459 within-guidelines
sentences appealed by defendants were
vacated for procedural reasons.
The Supreme Court Weighs In Again
The Rita Decision
On June 21, 2007, the Supreme Court issued
its first decision on the sentencing guidelines
after Booker. The principal issue in Rita v.
United States was whether courts of appeal
reviewing sentences under Booker could
apply a presumption of reasonableness to
sentences within the applicable guidelines
range. The Court held that an appellate
presumption along these lines is permissible.
This holding represented a victory for the
government. However, the Court sent several
strong signals indicating that district judges
have considerable discretion to deviate from
the guidelines in appropriate cases:
First, the Court held only that appellate
courts “may” adopt a presumption that
guidelines sentences are reasonable—it did
not require them to do so.14
Second, the Court stressed that “the
presumption is not binding,” and went
to some lengths to explain why a mere
presumption would not violate the Sixth
Amendment (even though under Booker
mandatory guidelines would).15
Third, the Court expressly stated: “A
nonbinding appellate presumption that a
Guidelines sentence is reasonable does not
require the sentencing judge to impose that
sentence.”16 And, the Court made clear—
implicitly responding to arguments by Rita
White Collar and Government Investigations
and his amici (including NYCDL), pointing
out that the vast majority of below-guidelines
sentences have been reversed by appellate
courts—that appellate courts may not “adopt
a presumption of unreasonableness.”17 In
other words, even if guidelines sentences
are presumed to be reasonable and should
be affirmed on appeal, that in no way
suggests that sentences below (or above)
the guidelines are to be viewed particularly
skeptically on appeal—which, as NYCDL’s
study demonstrated, is precisely what was
happening before Rita.
Fourth, and perhaps most importantly, the
Court described the appellate standard of
review in deferential terms, highlighting
its “explanation in Booker that appellate
‘reasonableness’ review merely asks whether
the trial court abused its discretion.”18 The
Court also emphasized that the presumption
“is an appellate court presumption” and
that “the sentencing court does not enjoy
the benefit of a legal presumption that the
Guidelines sentence should apply.”19
Finally, the Court’s message that district
judges may exercise substantial discretion
in sentencing, including deviating from the
guidelines in appropriate cases, is clearly
expressed in the separate concurring
opinion by Justice Stevens, joined by Justice
Ginsburg. (These two Justices’ votes were
necessary to form a majority for the holding
permitting a presumption of reasonableness,
so the opinion has considerable force.20)
Justice Stevens opined that Booker adopted
“an abuse-of-discretion standard.”21 He
observed that in Koon v. United States, a
pre-Booker case, the Court applied this
deferential standard to departures from the
guidelines, holding that “a district court’s
decision to depart from the Guidelines ‘will
in most cases be due substantial deference,
for it embodies the traditional exercise of
discretion by a sentencing court.’”22 This
reasoning, according to Justice Stevens,
“applies with equal force to the sentencing
judge’s decision” on whether the sentence is
reasonable.23
01
The Potential Impact on White-Collar Sentences of the Supreme
Court’s Decision in Rita and its Upcoming Decision in Gall
Justice Stevens also pointed out that, after
Booker, appellate courts must “assess a
district court’s exercise of discretion ‘with
regard to § 3553(a),’” and that:
Guided by the[] § 3553(a) factors,
Booker’s abuse-of-discretion standard
directs appellate courts to evaluate
what motivated the District Judge’s
individualized sentencing decision.
While reviewing courts may presume
that a sentence within the advisory
Guidelines is reasonable, appellate
judges must still always defer to the
sentencing judge’s individualized
sentencing determination.24
Claiborne and Gall
On November 3, 2006, the day the Court
granted certiorari in Rita, it also accepted
a companion case raising important postBooker sentencing issues. The principal
question presented in that case, Claiborne
v. United States, was whether a substantial
variance from the guidelines must be
justified by extraordinary circumstances.
Although Claiborne was briefed and argued
in conjunction with Rita, the defendant
died before the Court’s decision was issued,
rendering the case moot.25 The Court later
granted certiorari in another case raising the
same issue, Gall v. United States, which will
be argued this fall. Gall will thus address
whether a form of proportionality review is
appropriate for non-guidelines sentences—
that is, whether, as a sentence varies further
from the recommended guidelines range,
the circumstances justifying such a variance
must be increasingly compelling.26
What Do Rita and Gall Mean for White
Collar Sentences?
The results in Rita and Gall could have a
significant impact on white-collar sentencing.
Many courts and commentators point out
that the advisory guidelines for white-collar
sentences are particularly excessive and
inconsistent with Section 3553(a)’s command
that sentences be “sufficient, but not
greater than necessary” to achieve statutory
sentencing goals (commonly referred to as
White Collar and Government Investigations
the “parsimony provision”). For example,
Judge Rakoff of the Southern District of
New York noted the “travesty of justice
that sometimes results from the guidelines’
fetish with abstract arithmetic, as well as
the harm that guidelines calculations can
visit on human beings if not cabined by
common sense.”27 Significant recent whitecollar sentences have included 15 years for
John Rigas and 20 years for Timothy Rigas,
30 years for Patrick Bennet, and 20 years
for Steven Hoffenberg.28 Some of these
lengthy sentences seem inconsistent with the
Sentencing Commission’s study of 15 years
of guidelines sentencing, which noted that
the white-collar guidelines were written, in
part, to “ensure a short but definite period
of confinement for a larger proportion of
these ‘white collar’ cases, both to ensure
proportionate punishment and to achieve
deterrence.”29 The excessive sentences
imposed on white-collar defendants seem
far greater than necessary to achieve the
purposes of sentencing—particularly with
respect to deterrence and protecting the
public from future crimes of the defendant.
Rita and Gall have the potential to impact
white-collar defendants, who would
emphasize mitigating factors such as
significant charitable activities and other
good deeds that might justify a lesser
sentence when the court considers “the
history and characteristics of the defendant”
under § 3553(a)(1). As Judge Rakoff
observed, “[t]his elementary principle, the
weighing the good with the bad, which
is basic to all the great religions, moral
philosophies, and systems of justice, was
plainly part of what Congress had in mind
when it directed courts to consider, as a
necessary sentencing factor, ‘the history
and characteristics of the defendant.’”30 Rita
clearly leaves ample room for district courts
to consider defendants as individuals, and
to sentence below the guidelines based on
the reasoned judgment of the district court,
which is closest to the facts.
If the decision in Gall builds further on those
aspects of Rita that allow for greater district
01
The Potential Impact on White-Collar Sentences of the Supreme
Court’s Decision in Rita and its Upcoming Decision in Gall
court discretion, courts will also have greater
leeway to consider the kinds of sentences
available and whether different types of
sentences would still meet the purposes of
sentencing.31 In addition, the weight given
to the parsimony provision’s directive that
sentences be no greater than necessary to
comply with the purposes of sentencing
could have a substantial impact on whitecollar sentences, due to evidence that even
relatively short terms of imprisonment “can
have a strong deterrent effect on prospective
‘white collar’ offenders.”32 Because the
current ranges for some cases of white-collar
crime appear to have “so run amok that
they are patently absurd on their face,” a
Supreme Court decision endorsing greater
discretion for district judges to impose
sentences sufficient, but not greater than
necessary, could benefit many white-collar
defendants.
Concluding Thoughts
The data we assembled on behalf of NYCDL
to assist the Supreme Court suggested that,
at least before the Court decided Rita, the
mandate of Section 3553(a) was not being
followed and raised serious questions about
whether the principles behind the Booker
constitutional majority opinion were being
effectively carried out. As a practical matter,
it appears, little changed from the pre-Booker
mandatory guidelines regime, and that is
not in the best interests of many white-collar
defendants.
With the draconian sentencing ranges that
the guidelines suggest for some whitecollar crimes, lower sentences will tend to
vary greatly from the advisory range. If the
Sentencing Commission does not rethink
these sentencing ranges, a decision in Gall
agreeing with the government could make
it much more difficult for district judges to
sentence well-below the guidelines range
and will likely make district judges far more
reluctant to be lenient. A pro-government
White Collar and Government Investigations
decision will also give prosecutors more
power in plea negotiations and defendants
facing significant sentences approximating
the guidelines recommendations will be
more inclined to accept a deal and forego the
risk of perhaps decades in prison.
On the other hand, if in Gall the Supreme
Court rejects the notion that deviation from
the guidelines must be assessed on a sliding
scale, with greater justification required for
greater variance from the guidelines, and
instead reaffirms the seemingly deferential
standard of review described in Rita, district
judges will have broader discretion to take
account of the mitigating factors that whitecollar defendants can emphasize. District
judges will also be more free to make the
individualized assessment of the nature and
circumstances of the offense and offender
that Booker seemed to contemplate. Whether
they will choose more often than not to
exercise their discretion, and tailor white
collar sentences more appropriately to the
offender’s particular circumstances, however,
remains to be seen.
Endnotes
Alexandra Shapiro is a partner in the New York office
of Latham & Watkins. Her practice focuses on securities,
corporate governance, federal regulatory and criminal
enforcement as well as appellate litigation. Ms. Shapiro
has conducted internal investigations on behalf of
firms and audit committees and represents institutional
and individual clients in connection with government
investigations, prosecutions and complex civil litigation.
Ms. Shapiro was an Assistant US Attorney in the
Southern District of New York, where she also served
as Deputy Chief Appellate Attorney. Nathan Seltzer is
an associate in Latham’s Washington, D.C. office. His
practice focuses on appellate, white collar and securities
matters. Mr. Seltzer has contributed to petitions for
certiorari and merits briefs in the Supreme Court.
1
US Sentencing Commission, Fifteen Years of Guidelines
Sentencing: An Assessment of How Well The Federal
Criminal Justice System Is Achieving The Goals Of
Sentencing Reform iv (2004) (“Fifteen Year Report”).
2
543 US 220 (2005).
3
Id. at 261, 264.
4
Stephanos Bibas, White-Collar Plea Bargaining and
Sentencing After Booker, 47 WM. & MARY L. REV. 721,
739-40 (2005) (noting flexibility prosecutors have to
manipulate loss amounts to effect sentencing).
5
01
The Potential Impact on White-Collar Sentences of the Supreme
Court’s Decision in Rita and its Upcoming Decision in Gall
551 US __, No. 06-5754 (2007).
22
The courts adopting the presumption are the Fourth,
Fifth, Sixth, Seventh, Eighth, Tenth, and D.C. Circuits.
See United States v. Green, 436 F.3d 449 (4th Cir. 2006);
United States v. Alonzo, 435 F.3d 551 (5th Cir. 2006);
United States v. Williams, 436 F.3d 706 (6th Cir. 2006);
United States v. Mykytiuk, 415 F.3d 606 (7th Cir. 2005);
United States v. Lincoln, 413 F.3d 716 (8th Cir. 2005);
United States v. Kristl, 437 F.3d 1050 (10th Cir. 2006);
United States v. Dorcely, 454 F.3d 366 (D.C. Cir. 2006).
23
6
7
See, e.g., United States v. Hunt, 459 F.3d 1180, 1184
(11th Cir. 2006); United States v. Jimenez-Beltre, 440
F.3d 514, 518 (1st Cir. 2006).
8
US Sentencing Commission, Preliminary Quarterly Data
Report, 4th Quarter Release, Preliminary Fiscal Year
2006 Data Through September 30, 2006, at p. 10, Figure
A.
9
The study compiled cases from January 1, 2006 through
November 16, 2006.
10
Many of the findings discussed are summarized at pages
1a-6a of NYCDL’s database, which, along with all of the
briefs and case materials, is available at http://www.
nycdl.org.
11
United States v. Goodwin, 486 F.3d 449 (8th Cir. 2007).
12
For a more detailed discussion of these findings, see
Alexandra A.E. Shapiro & Nathan H. Seltzer, Guidelines
or Higher: NYCDL’s Study of Reasonableness Review
Patterns Reveals the Courts of Appeals’ Aversion to
Parsimony, 19 FED. SENT’G REP. 177 (Feb. 2007).
13
No. 06-5754, slip. op. at 7 (“The first question is
whether a court of appeals may apply a presumption of
reasonableness to a district court sentence that reflects
a proper application of the Sentencing Guidelines.
We conclude that it can.”); id. at 14 (“Thus, our Sixth
Amendment cases do not forbid appellate court use of
the presumption.”).
14
Id. at 12-16.
15
Id. at 14 (emphasis in original).
16
Id. at 15.
17
Id. at 11 (emphasis added).
18
Id.
19
Justice Scalia, joined by Justice Thomas, filed
an opinion concurring in part and concurring in
the judgment, in which he took the position that
the presumption was inconsistent with the Sixth
Amendment holding in Booker and that Booker
reasonableness review should be limited to procedural
review. Justice Souter dissented.
20
Id. at 2 (Stevens, J., concurring).
21
White Collar and Government Investigations
Id. at 4 (Stevens, J., concurring).
Id.
Id. at 5 (quoting Booker, 543 US at 261).
24
551 US ___ (2007) (“The Court is advised that the
petitioner died in St. Louis, Missouri, on May 30, 2007.
The judgment of the United States Court of Appeals
for the Eighth Circuit is therefore vacated as moot. See
United States v. Munsingwear, Inc., 340 US 36 (1950). It
is so ordered.”).
25
Rita, slip. op. at 15-16 (“[A] number of circuits adhere
to the proposition that the strength of the justification
needed to sustain an outside-Guidelines sentence varies
in proportion to the degree of the variance. We will
consider that approach next Term in United States v.
Gall, No. 06-7949.”).
26
United States v. Adelson, 441 F. Supp. 2d 506, 512
(S.D.N.Y. 2006) (imposing 3 ½ year sentence despite
guidelines draconian suggestion of 85 years for what
the court described as: “[T]he evidence showed that
Adelson was sucked into the fraud not because he
sought to inflate the company’s earnings, but because,
as President of the company, he feared the effects
of exposing what he had belatedly learned was the
substantial fraud perpetrated by others”).
27
Id.
28
Fifteen Year Report, at 56.
29
Adelson, 441 F. Supp. 2d at 514.
30
The case of Kenneth K. Livesay, the former Assistant
Controller and Chief Information Officer of HealthSouth
Corporation, is an example of how the current proguidelines and pro-government trends limit the
discretion of district judges in white-collar cases.
The Eleventh Circuit has twice reversed a belowguidelines sentence imposed by the district judge based
on Livesay’s cooperation with the government, and
because Livesay “did substantially withdraw from the
conspiracy.” See United States v. Livesay, No. 06-11303,
— F.3d —, slip op. at 9 (11th Cir. Apr. 19, 2007) (quoting
sentencing transcript). The Eleventh Circuit found
the below-guidelines sentence unreasonable based
on the financial “enormity of the crimes and Livesay’s
significant role in the underlying criminal conspiracy,”
and concluded that the below-guidelines sentence did
not sufficiently promote respect for the law, provide just
punishment, or afford adequate deterrence. Id. at 21.
31
Id. (citing Richard Frase, Punishment Purposes, 58
STANFORD L. REV. 67, 80 (2005)) and Elizabeth
Szockyj, Imprisoning White Collar Criminals?, 23 S. ILL.
U. L.J. 485, 492 (1998)).
32
02 Know Your Counterparty:
It’s not Just for Financial Institutions
By Douglas Greenburg, Robert Sims and Asha Olivas1
Background
For most people, the terms “money
laundering” and “terrorist financing” invoke
images of secret Swiss bank accounts,
clandestine meetings and suitcases full of
cash. Many businesses believe these are the
kinds of crimes that no legitimate company
would commit and only banks and other
financial institutions need be concerned
about. In fact, the risks posed by money
laundering and terrorist financing crimes
should be of concern to a wide variety of
businesses inside and outside of the United
States, as organized criminals and terrorists
exploit weaknesses in the legitimate
financial system to launder criminal proceeds
and to support terrorist activities. As a
result, criminal proceeds such as the profits
of narcotics traffickers and assets looted
from state coffers by dishonest government
officials can corrupt and destabilize
companies, communities, markets and
national economies.
Douglas Greenburg
Robert Sims
While banks and a wide range of other
“financial institutions” in the United States
are specifically required by the Bank Secrecy
Act (BSA) and the US Patriot Act, among
other laws, to be vigilant against such
dangers, companies outside the financial
sector are also at risk of being complicit in
a money laundering or terrorist financing
scheme and should also take measures
to safeguard against such liability. Not
only do all companies face increasingly
aggressive enforcement activity in the US
and elsewhere, but they also risk serious
reputational harm and increased regulatory
and compliance costs.
Asha Olivas
Money laundering is a global epidemic.
Although the secretive nature of money
laundering makes coming up with an
accurate estimate of the size of the problem
virtually impossible, there is no doubt that
huge amounts of illicit funds regularly flow
White Collar and Government Investigations
through world economies.2 Whether they
know it or not, many businesses around the
world deal directly with, or feel the impact of,
illegal proceeds. The United States’ principal
anti-money laundering laws, 18 U.S.C.
§§1956 and 1957, and other financial crimes
statutes have broad application and can
potentially result in severe penalties against
companies and individuals who knowingly,
or with “willful blindness,” handle “dirty
money” generated by a wide variety of illicit
activity. US laws can reach companies that
engage directly in the criminal activity that
generates the illegal funds, companies that
use otherwise untainted funds for some illicit
purpose, and even companies unconnected
to the original crime that knowingly conduct
financial transactions involving tainted funds.
Even perfectly legitimate companies selling
completely legitimate products can face
money laundering exposure if they take
tainted money in receipt for their goods. For
example, US companies selling products into
Colombia have been subject to forfeiture
actions in which the US government seizes
the products and/or the money received
for them on the basis of evidence which,
according to the government, demonstrated
that the company was willfully blind to the
drug-related origins of their customers’
funds.3
An effective anti-money laundering program
can help minimize a company’s exposure to
transaction, compliance and reputation risks.
Such programs should borrow principles
from the “Know Your Customer” policies
many financial institutions have put in place
to comply with BSA requirements. It is also
important to have a mechanism to monitor
suspicious activity by your customers or other
counterparties. While identifying possible
terrorist financing will be more difficult, since
transactions may originate from legitimate
sources and often involve relatively small
amounts of money, companies should, at
02
Know Your Counterparty:
It’s not Just for Financial Institutions
an absolute minimum, ensure that they
are not, directly or indirectly, engaging in
transactions with persons that have been
officially designated as terrorists by the
US government, or unlawfully facilitating
transactions with these persons. Such groups
and individuals can be found on the List of
Specially Designated and Blocked Persons
maintained by the United States Department
of Treasury’s Office of Foreign Assets Control
(OFAC).4
The Legal Framework
Money laundering is traditionally understood
as the criminal practice of filtering ill-gotten
gains or “dirty” money through a series of
transactions so that the funds are “cleaned”
to look like proceeds from legal activities.
Successful money laundering transactions
conceal the true source, ownership, or use of
criminally-derived funds. Money laundering
generally involves three independent
steps that can occur simultaneously:
1) Placement—unlawful proceeds are placed,
through deposits or other means, into the
financial system; 2) Layering—proceeds of
criminal activity are separated from their
origin through the use of layers of complex
financial transactions; and 3) Integration—
additional transactions are used to create the
appearance of legality through the purchase
of assets.5
While US anti-money laundering laws target
this traditional form of money laundering,
it is important to note that they also cover a
broader range of illicit financial transactions.
For example, wiring otherwise untainted
funds outside the United States for the
purpose of committing certain offenses
overseas (e.g., bribing a foreign government
official or unlawfully purchasing goods from
a sanctioned country) could violate US antimoney laundering laws and other financial
crime statutes, including the Foreign Corrupt
Practices Act (FCPA).6 Similarly, these laws
can reach the proceeds of certain criminal
offenses committed outside of the US and
funds moving through the US financial
White Collar and Government Investigations
system for the purpose of committing certain
crimes in third countries.
Terrorist financing is sometimes described as
the inverse of traditional money laundering,
as it often involves using money with “clean”
origins for a “dirty” purpose. Terrorists
also fund themselves by illicit means, so in
some cases there is direct overlap between
traditional money laundering and terrorist
financing. In many ways, terrorist financing
is a “cousin” to traditional money laundering
and should be considered in implementing
a strategy for anti-money laundering
compliance. A number of US laws criminalize
terrorist financing. For example, 18 U.S.C. §
2339B makes it a serious felony to provide
“material support,” including money, to a
“Foreign Terrorist Organization” designated
by the US government, such as al Qaeda,
Hezbollah, Hamas or any of numerous other
groups.
Companies subject to US jurisdiction
must also avoid transactions with the
increasingly large numbers of individuals
and entities subject to US economic sanctions
administered by OFAC. Sanctioned parties
include citizens or nationals, business
entities, and political organizations in or from
designated “rogue” nations like Cuba, Iran
or Sudan, as well as other people and entities
listed on OFAC’s Specially Designated
Nationals (SDN) list. The SDN list includes
not only rogue government officials, terrorists
and their supporters, but also persons
designated by the US government as
narco-traffickers, money launderers, WMD
proliferators and other designated enemies of
the United States.7
Violations of the OFAC sanctions can result
in both criminal and civil liability. Recently,
for example, Chiquita Brands International
announced that it had agreed to plead guilty
to one count of Engaging in Transactions
with a Specially-Designated Global Terrorist
in violation of 50 U.S.C. § 1705(b) and 31
C.F.R. § 594.204. The company agreed to
pay a $25 million fine after admitting it paid
02
Know Your Counterparty:
It’s not Just for Financial Institutions
$1.7 million to a Colombian terrorist group
to protect its workforce in a volatile region.
The group, the United Self-Defense Forces
of Columbia, was designated a Foreign
Terrorist Organization and added to the
OFAC SDN list in September 2001. These
payments apparently continued after the
company was warned by outside counsel that
they might be illegal and after the company
voluntarily disclosed them to DOJ.8 Although
Chiquita paid a high price for its conduct,
it was spared potentially more serious
“material support” charges under 18 U.S.C.
§ 2339, which could have potentially been
asserted, given the payments to a designated
Foreign Terrorist Organization.
In this era of global business operations, it
is also important to keep in mind that the
US anti-money laundering and terrorist
financing laws have very broad extraterritorial application. Companies potentially
subject to US jurisdiction should ensure
compliance by their global operations, not
merely by their operations in the United
States. For example, the main US money
laundering laws generally allow prosecution
of a foreign national if a financial transaction
takes place “in whole or in part” in the US,
even if the person never sets foot in the US.
And US citizens can be prosecuted for money
laundering even if the transaction takes
place entirely outside of the US.
Operation White Dollar, a criminal
prosecution brought in the Southern District
of New York in 2004, provides a good
example of the extra-territorial reach of the
money laundering laws. This prosecution
attacked users of the “black market peso
exchange” in Colombia, a system through
which major proceeds from drug sales in
the US were laundered through Colombia.
Federal prosecutors in New York charged
a prominent Columbian industrialist with
making a peso exchange in Colombia using
dollars he knew or should have known
were drug dollars coming from the US.
Although his conduct took place exclusively
in Colombia, the government alleged that
White Collar and Government Investigations
he was essentially buying dollars generated
in the US from narcotics trafficking. The
defendant agreed to a deferred prosecution
agreement and a $20 million forfeiture.9
The terrorist financing laws extend even
further than their money laundering
counterparts. 18 U.S.C. § 2339B, for example,
has explicitly broad “extra-territorial” scope.
It applies not only to any US person, but also
to:
• Anyone outside the US, if the offense
occurs in whole or in part in the US;
• Anyone outside the US who aids and
abets or conspires with anyone subject to
US jurisdiction; and
• Anyone who commits a violation and then
comes into, or is brought into, the US.
Of course, though the full scope of these
statutes has not been tested in the courts,
this broad jurisdiction is subject to the US
Constitution, which at the very least will
require some nexus between the crime and
the United States.
Even US sanctions laws have been applied
to non-US companies outside the United
States. For example, the US has sanctioned
government-owned and private companies
in China and Russia for allegedly providing
support to nuclear programs in Iran and/or
North Korea. These companies have been
added to the OFAC SDN list, making it
unlawful for any US person to do business
with them. In some cases, US sanctions have
substantially disrupted the listed companies’
business.
How to Protect Your Company
In light of the risks, companies—even
those outside the financial sector—should
take steps to protect themselves. To do so
effectively, companies need to know with
whom they are transacting business. A Know
Your Customer (KYC) program, applied
broadly to any counterparty with whom a
company does business, is therefore critical
02
Know Your Counterparty:
It’s not Just for Financial Institutions
to minimizing exposure. Essentially, the
KYC program should be able to address the
following types of basic questions:
• Who is the counterparty and who stands
behind it? (If it is a corporation, who
controls it; if it is a partnership, who are
the partners, etc.)
• Is the counterparty a legitimate business
and how does it get its funds?
• Does the counterparty have sufficient
legitimate revenue to pay you?
• Is the counterparty known to be associated
with illicit activity?
• Is the counterparty, including its
principles, subject to OFAC sanctions?
In deciding how much due diligence to
conduct, it is appropriate to adopt a riskbased approach, considering the totality of
the circumstances. First, you need to consider
where you are doing business. Your overseas
transactions are likely more risky than your
sales to Omaha, Nebraska, for example.
You need to consider whether you are doing
business in a country or region:
• With an active black market for currency,
like Colombia;
• That is known for lawlessness or
corruption, e.g., the “tri-border region” in
Latin America, or Nigeria;
• That has been the subject of substantial
law enforcement activity or press reporting
about criminal activity that could affect
your industry; or
• That is a substantial money laundering
concern according to regular reports
by the US State Department, the US
Treasury Department, and international
organizations, such as the Financial Action
Task Force.
The size of the transaction, the industry
in which a company operates, the nature
of its counterparty, and a host of other
factors can influence the degree of due
10
White Collar and Government Investigations
diligence a company should perform
in reviewing counterparties. The key is
to evaluate the risks particular to each
company’s circumstances and each particular
transaction.
Know Your Red Flags and Don’t
Ignore Them
It is critical that companies tailor their
compliance programs to their particular
industries and businesses. Off the shelf
programs or programs that exist on paper
alone may not protect the company. An
effective part of every compliance program is
to make people understand “red flags” that
should put them on notice of potential issues
with a counterparty.
Red flags will vary from business to business,
but some common red flags that may raise
questions about illicit activity can include the
following:
• False information received from the
counterparty in response to KYC requests;
• Refusal by the counterparty to cooperate
with the KYC program, including
reluctance to disclose principals of an
entity;
• Inexplicable third-party payments;
• Requests for unusually complex deal
structures or structures with no apparent
business purpose;
• Attempts by the counterparty to pay in
cash, without good explanation;
• Requests by the counterparty that funds
be delivered to apparently unconnected
accounts;
• Payment of one invoice or group of
invoices with multiple instruments;
• News reports or rumors indicating that
the counterparty is engaged in criminal
or regulatory violations or is under
government investigation; and
02
Know Your Counterparty:
It’s not Just for Financial Institutions
• A desire by the counterparty to engage in
transactions that seem inappropriate given
its stated business.
An effective compliance program should
encourage employees to report suspected
wrongdoing and suspicions. Once red flags
appear or an employee raises an issue or
concern about a counterparty, it is important
to investigate thoroughly any suspected
wrongdoing. Ignoring red flags and refusing
to investigate can be worse than refusing
to adopt a compliance program in the first
place.
The bottom line is that companies should
make sure their employees understand
there is risk and that they should be on the
look out for transactions that are outside the
normal commercial mainstream. Of course,
there is one important caveat to this rule:
Companies need to be careful because in
certain areas or industries the mainstream
may be dirty water. So, if a company is
selling to a high risk jurisdiction, it cannot
accept that “everybody” takes third party
payments, or “everybody” gets paid by
couriers who bring cash in pillow cases, or
that “nobody” asks who stands behind a
partnership. Sales people may say that the
competitors are doing business that way—
but that, of course, does not mitigate the risk.
Endnotes
Douglas Greenburg is a partner in the Washington
D.C. office of Latham and Watkins LLP (L&W). He
served in 2003-04 on the professional staff of the 9/11
Commission, where he investigated the financing of
the 9/11 attacks and the al Qaeda organization, the
efforts of the US government to detect and disrupt the
financing of terrorist organizations, and the role of
financial institutions in terrorist financing. Robert Sims is
a partner in the Latham San Francisco office. From 1994
through 1997 he served in the Clinton administration
1
11
White Collar and Government Investigations
as the senior adviser for the US Department of State’s
Bureau of International Narcotics and Law Enforcement
Affairs in Washington, D.C. and served as a delegate
to the G-7 Senior Experts Group on Transnational
Organized Crime, the United Nations Crime
Commission and the Financial Action Task Force. Mr.
Sims also served as an Assistant United States Attorney
where he focused primarily on white collar, money
laundering and narcotics offenses. Asha Olivas is an
associate in the Latham Los Angeles office. Her practice
is primarily focused on securities litigation, professional
liability, white collar and government investigations.
As the Financial Action Task Force has noted:
By its very nature, money laundering is an illegal
activity carried out by criminals which occurs outside of
the normal range of economic and financial statistics….
[I]t must be said that overall it is absolutely impossible
to produce a reliable estimate of the amount of money
laundered and therefore the FATF does not publish any
figures in this regard.
FATF Money Laundering FAQ, available at http://
www.fatf-gafi.org/document/29/0,2340,en_32250379_
32235720_33659613_1_1_1_1,00.html.
2
See, e.g., O. Zill and L. Bergman, US Business and
Money Laundering, PBS Frontline, (available at http://
www.pbs.org/wgbh/pages/frontline/shows/drugs/
special/us.html).
3
www.ustreas.gov/offices/enforcement/ofac/sdn
4
Office of the Comptroller of the Currency, Washington,
DC, December 2002, “Money Laundering: A Banker’s
Guide to Avoiding Problems”.
5
A good example of this type of money laundering
charge occurred in December 2006, when the DOJ
announced the indictment of a former executive of
Alcatel CIT, a French telecommunications company,
on charges relating to corrupt payments to Costa Rican
officials made to obtain a mobile telephone contract
from the state-owned telecommunications authority.
In addition to violations of the FCPA, the indictment
charged one count of money laundering conspiracy,
alleging that the defendant conspired with a senior
officer to transfer money from the US to Costa Rica for
purposes of promoting illicit bribe payments.
6
www.ustreas.gov/offices/enforcement/ofac/sdn.
7
MSNBC.com, Associated Press, March 15, 2007,
“Chiquita admits to paying Colombia terrorists”.
8
US Drug Enforcement Administration, News Release,
May 4, 2004.; US Department of State, International
Narcotics Control Strategy Report: Law Enforcement
cases, released by the Bureau for International Narcotics
and Law Enforcement Affairs, March 2005.
9
03 The Extraterritorial Reach of the Foreign
Corrupt Practices Act: Risks and Challenges
for Multinational Companies
By Richard D. Owens, Annette Rosskopf and Melinda C. Franek1
The Foreign Corrupt Practices Act (FCPA)
is currently at the forefront of enforcement
efforts by the United States Department
of Justice (DOJ) and the Securities and
Exchange Commission (SEC), and it is
therefore now more critical than ever to
understand its extraterritorial reach. Both
agencies have broad authority to enforce the
FCPA and have shown a willingness to assert
jurisdiction against foreign companies.
Richard D. Owens
In October 2006, the DOJ for the first time
took criminal action against a foreign issuer,
Norwegian Statoil ASA. Assistant United
States Attorney General Alice S. Fisher
hailed this prosecution as a step which
“demonstrate[d] the Justice Department’s
commitment vigorously to enforce the
FCPA against all international business
whose conduct falls within its scope.”2
Shortly thereafter, in February 2007, the
Justice Department resolved criminal
FCPA charges against three subsidiaries of
Vetco International Ltd. Notably, the recent
criminal actions against Statoil and Vetco
have charged foreign entities for conduct
which took place largely or entirely outside
of the United States.3
Annette Rosskopf
The past decade has also witnessed a
significant increase in parallel anti-bribery
investigations undertaken simultaneously,
and with varying degrees of inter-agency
cooperation, by US and European authorities
into the same underlying conduct. The
ongoing investigations into allegations of
bribery at Siemens AG by German, Swiss
and Italian prosecutors, the SEC, and
the DOJ provide one of the most recent
examples of this trend.
Melinda C. Franek
Finally, the monetary and reputational
costs associated with FCPA violations have
been on the rise, and there is no evidence
to suggest these costs will level off anytime
12
White Collar and Government Investigations
soon. Statoil paid a total of $21 million in
fines, penalties and disgorgement, and
the Vetco subsidiaries were fined $26
million to settle allegations of a continuing
pattern of conduct that violated the FCPA.
Most recently, Baker Hughes Services
International, a wholly owned subsidiary
of Baker Hughes Inc., agreed to pay $44
million in fines, penalties and disgorgement
of profits, the largest monetary sanction
imposed in an FCPA case to-date. The
reputational costs, of course, cannot be
quantified.
In light of this aggressive enforcement
climate, many US companies are revisiting
and enhancing their FCPA compliance
programs. Multinational foreign companies
should consider taking similar steps. This
article sets forth a brief overview of the
FCPA’s extraterritorial reach and some
basic guidelines for effective compliance
programs.
US and International Efforts to
Combat Foreign Corruption
The FCPA was enacted in 1977 as an
amendment to the US securities laws
in response to findings that American
companies had engaged in systematic
bribery abroad. For more than 20 years, the
FCPA’s prohibition against foreign bribery
was uniquely American. Most nations
viewed the bribery of foreign officials
as extraterritorial and solely within the
jurisdiction of the country whose officials
were bribed. Given this dichotomy, US
companies complained that the FCPA put
American companies at a disadvantage
when competing for business with foreign
companies abroad.
In response to that complaint, in 1988,
Congress directed the President to seek
03
The Extraterritorial Reach of the Foreign Corrupt Practices Act:
Risks and Challenges for Multinational Companies
an international agreement to ban foreign
bribery. Almost a decade later, in 1997, the
Organization for Economic Cooperation
and Development (OECD) adopted the
Convention on Combating Bribery of Foreign
Public Officials in International Business
Transactions. The OECD-Convention, signed
by 36 nations,4 requires its members to
criminalize the bribery of foreign officials.
Because such bribes had historically been
tax deductible in many countries, the OECDConvention marked a dramatic shift in
policy.
The FCPA’s Provisions
The FCPA seeks to ban corruption abroad
through three basic means: a prohibition
against bribing foreign officials (the antibribery provisions), a requirement that
every issuer’s books and records disclose, in
reasonably accurate detail, the company’s
transactions and disposition of assets
(the books and records provision),5 and a
requirement that issuers have a system
of accounting and other internal controls
reasonably designed to ensure that bribery
and other control failures don’t occur (the
internal controls provisions).6 The books and
records and internal controls provisions are
often collectively called the “accounting
provisions.”
The Anti-Bribery Provisions
The FCPA prohibits making payments,
giving gifts, or offering payments or gifts, to
any official of a foreign government, foreign
political party or candidate for office in a
foreign country for the purpose of obtaining
or retaining business or otherwise securing
any “improper advantage.”7
Any person acting in an official capacity
may qualify as a foreign official. The
DOJ’s working definition is broad and
includes “any officer or employee of a
foreign government, a public international
organization, or any department or agency
thereof, or any person acting in an official
capacity.”8 This definition includes members
of a royal family and officials of a state13
White Collar and Government Investigations
owned enterprise, such as a public health
system. Some commentators have suggested
that the definition goes even further and
includes officials of a heavily state-subsidized
business.
It is also important to note that anything of
value can trigger liability—even if the value
is minimal or the payment is customary
in the country. For example, charitable
contributions, if clearly made to induce
action by an official, can trigger the FCPA.9
US prosecutors have also taken the position
that actual knowledge is not required,
conscious disregard or deliberate ignorance
will suffice.10
The Accounting Provisions
It is crucial to understand that although the
accounting provisions were first enacted
to prevent bribes disguised as “innocent”
transactions (e.g., bribes falsely recorded
and disguised as “consulting costs”), they
apply to all transactions that are part of
an issuer’s business operations, including
transactions that are “immaterial.” However,
as a general rule, penalties are not imposed
for insignificant, inadvertent or technical
violations of the accounting provisions.
Criminal liability under the accounting
provisions requires proof of a knowing
violation.11 For civil liability to attach,
however, knowledge is not required.
Moreover, there are few limitations on
who may be held liable for false entries in
an issuer’s books and records. Under SEC
Rule 13b2-1, nearly anyone who knowingly
causes a false entry to be made in books
and records can be held liable. CEOs,
CFOs, outside auditors, and even outside
vendors who knowingly signed false audit
confirmation letters have been the subject of
civil and criminal enforcement actions.
An issuer can also be civilly liable for a
majority-owned subsidiary’s accounting
violations even if the parent company does
not have any knowledge or suspicion of
the underlying conduct. In one of the first
enforcement actions based on that principle,
03
The Extraterritorial Reach of the Foreign Corrupt Practices Act:
Risks and Challenges for Multinational Companies
the SEC held IBM Corporation liable for its
failure to ensure that IBM’s wholly-owned
subsidiary in Argentina maintained books
and records in compliance with the FCPA.
Underlying this charge were allegations that
IBM-Argentina had paid bribes to officials at
a government-owned bank through a subcontractor and the Cease-and-Desist Order
that was entered as part of the settlement
explicitly noted that no IBM employee in the
US knew or approved of the transaction with
the sub-contractor.12
The FCPA’s Extraterritorial Reach
Extraterritorial Reach of the Anti-Bribery
Provisions
The extraterritorial reach of the anti-bribery
provisions is extremely broad, applying to
“issuers,” “domestic concerns,” and “any
person” acting while in the territory of the
United States. Those terms encompass
foreign entities and foreign persons and
extend to extraterritorial conduct in a
number of ways:
Issuers and Persons Acting on Behalf of
Issuers
First, the anti-bribery provisions expressly
apply to every foreign company with
securities registered in the US or trading on a
US exchange (foreign issuers). This includes
entities that merely list American Depository
Shares.
Second, the anti-bribery provisions apply
to any “officer, director, employee, or agent
… or any stockholder … acting on behalf
of” an issuer or foreign issuer, regardless of
nationality, as long as the conduct involves
a use of an instrumentality of interstate
commerce.13 The “use of the mails or any
means or instrumentality of interstate
commerce” requirement is easily satisfied. A
phone call or e-mail made, sent or received
on US soil can trigger jurisdiction.
Under this jurisdictional hook, a foreign
national who acts on behalf of a foreign
issuer can be liable for corrupt payments
to a foreign official anywhere in the world.
14
White Collar and Government Investigations
Non-US citizens acting as agents of foreign
issuers may even be held criminally liable so
long as there is a US nexus as minimal as a
phone call. In December 2006, for example,
a former French executive of a subsidiary
of Alcatel was indicted by a Grand Jury in
Miami for allegedly bribing government
officials in Costa Rica.14 In March 2007, a
superseding indictment was filed charging
an additional former Alcatel executive, a
Costa Rican citizen, for participating in the
same alleged corrupt conduct.15 Allegedly,
the corrupt payments were wired through
bank accounts in New York and Miami.
Foreign Subsidiaries
A foreign subsidiary of a US or foreign
issuer, acting on its own behalf (and not
as an agent of the parent issuer) is liable
under the anti-bribery provisions for conduct
that occurs on US territory. While a foreign
subsidiary controlled by an issuer is not itself
liable under the anti-bribery provisions of
the FCPA for conduct wholly outside US
territory, the DOJ has taken the position
that US parent issuers “may be held liable
for the acts of foreign subsidiaries where
they authorized, directed, or controlled the
activity in question . . .”16
Foreign Companies and Foreign Persons
The anti-bribery provisions also apply to
any foreign person or foreign company for
acts committed in furtherance of a foreign
bribe “while in the territory of the United
States.”17 This provision has been broadly
interpreted to apply to any act that extends
to US territory, including for example, an
email to the US or a wire transfer through a
US bank.18
Domestic Concerns
The term “domestic concern” encompasses
a large group of entities and persons and
may include foreigners or foreign entities,
US resident aliens, subsidiaries of foreign
companies organized under the laws of a
US State or having their principal place of
business in the US, and any employees,
officers and directors of any such entity,
regardless of their nationality.19
03
The Extraterritorial Reach of the Foreign Corrupt Practices Act:
Risks and Challenges for Multinational Companies
Alternative Nationality Jurisdiction
Under the alternative nationality jurisdiction
provisions, any US person is liable for
corrupt conduct anywhere in the world,
irrespective of the existence of a US nexus.20
In February 2007, for example, a US citizen
was sentenced to three years in prison for
attempting to bribe an Iraqi police official
in violation of the FCPA. The case marked
the first time that the DOJ invoked the
alternative nationality jurisdiction prong of
the FCPA to prosecute a US national based
upon wholly extraterritorial conduct.21
While not involving any foreigners, this
case underlines the recurring theme of an
increasingly expansive approach to the
enforcement of the FCPA.
Extraterritorial Reach of the Accounting
Provisions
The FCPA accounting provisions apply to
any company, whether foreign or domestic,
with a class of securities registered pursuant
to § 12 of the Securities Exchange Act of
1934 (the ’34 Act), or any company which
is required to file periodic reports with the
SEC pursuant to § 15(d) of the ’34 Act.
The accounting provisions also extend to
majority-owned subsidiaries of issuers,
including foreign subsidiaries of foreign
issuers. Issuers are also responsible for
the accuracy of the books and records of
domestic and foreign subsidiaries under their
control.
For example, in 2004, Swiss-based ABB, a
foreign issuer whose American Depository
Shares traded on the NYSE, settled a case
in which the SEC alleged that ABB lacked
the appropriate internal controls to prevent
or detect bribes paid by its US and UK
subsidiaries to officials in Nigeria, Angola
and Kazakhstan.22 The SEC further alleged
that ABB violated the accounting provisions
because the subsidiaries improperly recorded
the bribes as consulting fees.
If an issuer holds less than 50 percent of the
voting power of a subsidiary, it is not held to
as strict a standard. In that case, the statute
15
White Collar and Government Investigations
merely requires the issuer to “proceed in
good faith to use its influence, to the extent
reasonable under the issuer’s circumstances,
to cause such domestic or foreign firm to
devise and maintain a system of internal
accounting controls” consistent with the
FCPA.23 The relative degree of ownership
and the laws and practices governing the
business operations of the country where the
subsidiary is located are taken into account
to determine whether the issuer’s efforts
were reasonable under the circumstances.24
FCPA Enforcement
The DOJ is responsible for all criminal
enforcement and for the civil enforcement
against foreign companies, foreign
nationals, and non-issuers. The SEC has civil
enforcement authority against issuers, their
officers, agents, and shareholders.
The penalties for violating the FCPA are
severe. Under the anti-bribery provisions,
individuals may be fined up to $100,000
and imprisoned up to five years for a willful
violation. Companies may be fined up to $2
million per violation, or twice the gross gain
or loss from the unlawful activity, whichever
is greatest.25 Additional civil penalties of up
to $10,000 per violation and disgorgement of
profits may also apply.26
Violations of the FCPA’s accounting
provisions have the same enforcement
consequences as the violation of other
provisions of the ’34 Act. These include
SEC injunctive actions, as well as civil and
criminal penalties.27 For willful violations,
individuals can be fined up to $5 million,
imprisoned for 20 years, or both.28 A
company may be fined up to $25 million.
Compliance Programs and Internal
Controls
In light of current enforcement trends and
the broad extraterritorial reach of the FCPA,
it is critical that multinational companies
have effective FCPA compliance procedures
03
The Extraterritorial Reach of the Foreign Corrupt Practices Act:
Risks and Challenges for Multinational Companies
in place, as the strength of a company’s
compliance policies and procedures is an
important factor that both the DOJ and SEC
will consider in disposing of an FCPA case.29
As a basic matter, a structure must be set up
within the company both to oversee and to
implement compliance strategies. It is crucial
that in-house counsel is informed and aware
of transactions and projects that could pose
FCPA problems. Decisions about whether or
not specific payments are permissible should
be left to legal counsel and compliance
officers at the corporate headquarters,
and not to sales personnel in the field.
Compliance measures also must be tailored
to industry and country-specific risks.
At a minimum, a robust compliance program
should include: (1) the implementation
of an Audit Committee of the Board with
compliance oversight functions, and the
assignment of at least one senior official
who reports directly to that committee; (2)
a strong system of accounting controls;
(3) clearly articulated corporate standards
against bribery and written procedures
and policies; (4) measures for proactive risk
assessment regarding operations in foreign
countries; (5) periodic reviews and audits –
especially of operations in high-risk countries
and industries; (6) FCPA-training programs
for employees, officers, agents, and other
intermediaries involved in projects in foreign
countries, especially the sales force; (7)
strategies for merger & acquisition and thirdparty due diligence that take into account
potential FCPA liability for joint-venture
partners, acquired companies, and agents;
and (8) appropriate disciplinary measures to
address violations of the FCPA.30
Finally, most importantly, management
and employees involved in international
operations need to be sensitive to and aware
of common issues:
• Know the customer—sales personnel
should know who they are dealing with
and specifically whether the customer
may be deemed a government official by
16
White Collar and Government Investigations
reason of state ownership or control of that
customer’s business;
• Any person acting in an official capacity
on behalf of a foreign government is
considered a “foreign official;”
• In (former) communist countries, stateemployed personnel may occupy
positions that don’t appear “official.”
It does not matter whether the person
would not be deemed an official in the
US or the company’s home country.
Dangerous industries may include health
care, telecommunications, oil and gas,
transportation, banks and utilities;
• Know your agents—it does not matter
whether a corrupt payment is made by an
employee or by an intermediary;
• Avoid acquiring a problem—FCPA
problems at target companies can trigger
successor liability and M&A due diligence
therefore needs to address potential FCPA
issues;
• Charitable contributions may fall under
the FCPA if made to a specific charity
at the direction of, and for the indirect
benefit of, a government official;
• It is irrelevant that the payments are
customary in the country in question;
• Giving or promising “anything of value”
can trigger FCPA liability; and
• Enforcement activity is likely to increase
internationally, particularly in countries
that are signatories to the OECD
Convention.
Conclusion
Doing business in foreign countries
presents opportunities and challenges for
multinational companies. Rigorous FCPA
enforcement in the US is a serious risk
associated with expanding business abroad
and participation in the global economy.
Sanctions for violations of the FCPA can
have a devastating effect on a company’s
operations and reputation. Moreover, recent
03
The Extraterritorial Reach of the Foreign Corrupt Practices Act:
Risks and Challenges for Multinational Companies
trends show that when authorities in one
country begin anti-bribery investigations
into a company, authorities in other
countries where the company operates often
initiate their own parallel investigations.
Implementing an effective compliance
program is therefore crucial for international
companies with exposure to FCPA liability.
See, e.g., SEC v. Schering-Plough Corp., No. 04-CV-0945
(D.D.C. 2004).
9
Supra, note 8.
10
11
15 U.S.C. § 78m(b)(4) and (5).
12
In the Matter of International Business Machines Corp.,
Exchange Act Release No. 43,761, 2000 WL 1867969
(Dec. 21, 2000).
13
15 U.S.C. § 78dd-1(a).
14
Press Release, Department of Justice, Former Alcatel
CIT Executive Is Indicted for Alleged Bribes to Costa
Rican Officials to Obtain Mobile Telephone Contract
(Dec. 19, 2006). The executive subsequently pled guilty
to participating in the payment of more than $2.5 million
in bribes. Press Release, Department of Justice
(June 7, 2007).
15
Press Release, Department of Justice, Two Former
Alcatel Executives Indicted for Allegedly Bribing Costa
Rican Officials to Obtain a Telecommunications Contract
(Mar. 20, 2007).
16
Supra, note 8.
17
15 U.S.C. § 78dd-3.
18
See, e.g., United States v. SSI Int’l Far East, Ltd., No.
06-CR-398 (D. Or. 2006) (foreign subsidiary of an issuer
acted within the territorial jurisdiction of the United
States by transmitting requests to the US for approval
and wire transfer of funds).
Endnotes
Richard Owens is a partner in the New York office
of Latham & Watkins. His practice focuses primarily
on representing corporations and individuals in a
wide variety of criminal and regulatory investigations
and proceedings, as well as conducting internal
investigations and advising on compliance matters.
Prior to joining Latham, Mr. Owens served for over
twelve years as an Assistant United States Attorney in
the United States Attorney’s Office for the Southern
District of New York, and was widely recognized as
one of the most experienced white-collar prosecutors
and trial lawyers in the US Department of Justice. From
2002 through 2006, Mr. Owens served as Chief of the
Securities and Commodities Fraud Task Force. Annette
Rosskopf is an associate in the Latham New York office.
She is a German Rechtsanwalt with a broad experience
in advising European clients on US and cross-border
litigation matters. Her practice is primarily focused
on white collar and government investigations, and
securities litigation. Melinda Franek is an associate in
the Latham New York office.
1
15 U.S.C. § 78dd-1(g) and § 78dd-2(i).
20
US v. Faheem Mousa Salam, No. 06-MJ-00094-JMF-1
(D.D.C. 2006).
21
SEC Litigation Release No. 18775, SEC Sues ABB Ltd In
Foreign Bribery Case, 2004 WL 1514888 (July 6, 2004);
SEC v. ABB Ltd, No. 04-CV-1141-RWB (D.D.C. 2004).
Press Release, Department of Justice, US Resolves Probe
Against Oil Company That Bribed Iranian Official (Oct.
13, 2006).
22
See, e.g., In the Matter of Statoil, ASA, Exchange Act
Release No. 54,599, 2006 WL 2933839 (Oct. 13, 2006);
Press Release, Department of Justice, Three Vetco
International Ltd. Subsidiaries Plead Guilty to Foreign
Bribery and Agree to Pay $26 Million in Criminal Fines
(Feb. 6, 2007).
23
2
3
Argentina, Australia, Austria, Belgium, Brazil, Bulgaria,
Canada, Chile, Czech Republic, Denmark, Estonia,
Finland, France, Germany, Greece, Hungary, Iceland,
Ireland, Italy, Japan, Korea, Luxemburg, Mexico,
Netherlands, New Zealand, Norway, Poland, Portugal,
Slovak Republic, Slovenia, Spain, Sweden, Switzerland,
Turkey, United Kingdom and the United States.
4
15 U.S.C. § 78m(b)(2)(A).
5
15 U.S.C. § 78m(b)(2)(B).
6
15 U.S.C. §§ 78dd-1, 78dd-2, 78dd-3.
7
Foreign Corrupt Practices Act: Anti-Bribery Provisions,
DOJ Summary Memorandum (available at http://www.
usdoj.gov/criminal/fraud/fcpa/dojdocb.htm).
8
17
15 U.S.C. § 78dd-2(a) and (h)(1).
19
White Collar and Government Investigations
15 U.S.C. § 78m(b)(6).
Id.
24
15 U.S.C. §§ 78dd-2(g); 78dd-3(e); 18 U.S.C. § 3571.
25
A civil penalty of up to $10,000 per violation may be
imposed on both companies and individuals.
26
Criminal liability for violations of the accounting
provisions prerequisites “knowing” conduct, 15 U.S.C. §
78m(b)(4)-(5).
27
15 U.S.C. § 78ff.
28
Prepared remarks of Assistant Attorney General Alice
S. Fisher at the American Bar Association, National
Institute on the Foreign Corrupt Practices Act (Oct. 16,
2006).
29
For an example of a DOJ-endorsed compliance
program, see the DOJ Opinion Procedure Release 0402 relating to the acquisition of certain companies and
assets of ABB in 2004 (available at http://www.usdoj.
gov/criminal/fraud/fcpa/o0402.htm).
30
04 News From the Courts
S.D.N.Y. Guilty Plea Suggests
Further Expansion of Liability for
Obstruction of Justice
In another example of a what may become
a trend that has a significant impact on
internal investigations, the US District
Court for the Southern District of New York
recently accepted a guilty plea to a charge of
conspiracy to obstruct justice by a corporate
executive who made false statements to his
company’s outside counsel.
On March 23, 2007, the defendant in U.S. v.
Jones, No. 07-cr-227 (S.D.N.Y), pled guilty
to conspiring to obstruct an investigation by
his company’s audit committee. The audit
committee was investigating claims that
Collins & Aikman Corp. had inflated its
revenue by improperly recognizing certain
cost reductions and rebates. Jones admitted
that he made false statements to the law firm
that the audit committee had retained to
conduct the investigation and that he knew
his statements would be transmitted to the
SEC. He pled guilty to a charge of conspiracy
to violate 18 U.S.C. § 1505, which prohibits
the obstruction of proceedings before
government departments, agencies, and
committees.
Jones is similar to the April 24, 2006 guilty
plea of Sanjay Kumar, the former CEO of
Computer Associates Inc., in U.S. v. Kumar
et al., 04-cr-846 (E.D.N.Y.), to charges of
making false statements and obstructing
justice charges, also based on statements
made to an investigating law firm. Kumar
was sentenced to 12 years in prison and
made to pay restitution of $52 million.
The obstruction of justice and false statement
pleas in Jones and Kumar are interesting
in that traditionally such charges have
been limited to statements made directly to
government officials. However, these guilty
pleas demonstrate that—at least in the plea
context—the government will extend the
statutes to prohibit false statements made
18
White Collar and Government Investigations
to outside counsel when those statements
will be communicated to the government.
That, of course, raises the specter that
the government will eventually choose to
prosecute such charges in an adversarial
context.
While the threat of liability for false
statements made to independent
investigators might be seen as an additional
tool in the independent investigators’
arsenal, it could also have a chilling effect
on the willingness of employees to volunteer
information. Moreover, it increases the need
for individual employees to retain their own
counsel, as it will be more important than
ever that witnesses be well prepared for
interviews by independent investigators
so that they do not inadvertently create a
record that can be the basis of an obstruction
charge.
– Mohamed Rali Badissy
Eighth Circuit Rejects Request
For Specific Performance of Plea
Agreement
In United States v. Norris, 486 F.3d 1045
(8th Cir. Apr. 23, 2007), the Eighth Circuit
recently discussed the government’s right
to withdraw from a plea agreement before
its acceptance by the district court, holding
that a defendant has no right to specific
performance except under very limited
circumstances. Although the opinion arose
in the context of a narcotics prosecution, its
applicability is potentially far broader.
The defendant agreed to plead guilty to
two counts of a narcotics indictment in
return for the government’s promise not
to file additional charges arising out of the
same offenses or investigation. Prior to the
plea hearing, the government reviewed a
comprehensive overview of gang conduct
uncovered during its investigation and
realized that the defendant, Norris, was
involved in criminal activity prior to the
04
News From the Courts
conduct alleged in the indictment. The
parties signed the agreement on the morning
of the plea hearing, and Norris admitted
his guilt at the hearing. After the plea
colloquy, the government stated its position
that the plea agreement did not preclude
it from bringing additional charges based
on that prior conduct. Defendant’s counsel
disagreed, and the district court did not
accept the plea.
Norris was subsequently charged in a
superseding indictment with 20 counts of
narcotics-related offenses and moved to
compel specific performance of the plea
agreement. The district court granted the
motion and the government appealed to the
Eighth Circuit, which reversed the lower
court.
The Eight Circuit recognized that, because
courts have independent power to accept or
reject plea agreements, a plea agreement
is more than simply a contract between a
defendant and the government. It held that
neither party can justifiably contemplate
any benefit from the plea bargain unless
and until it is approved, and therefore
neither defendants nor the government
can use detrimental reliance as a basis for
requiring specific performance. The Court
acknowledged two limited exceptions:
the government may not withdraw from a
plea agreement i) if it has gained an unfair
advantage in future proceedings against
the defendant or ii) to the extent that the
plea agreement contemplates a defendant’s
performance prior to the court’s acceptance
of the plea.
In this case, Norris had no right to specific
performance of the plea agreement because
his plea had not been accepted by the district
court and neither of the two exceptions to the
general rule applied. The plea agreement
did not contemplate performance prior to the
plea hearing and the government averred
that it would not use Norris’ plea colloquy
19
White Collar and Government Investigations
statements against him. The Eighth Circuit
further held that that Norris should be
allowed in subsequent proceedings to seek
to exclude any evidence that represented
an attempt by the government to take unfair
advantage of the prior agreement, and
also to make unfair advantage arguments
on appeal should the government obtain a
conviction.
– Viravyne Chhim
Defendant’s Right to Appeal
Restitution Order Survives General
Waiver of Right to Appeal
The Tenth Circuit recently joined the Ninth
and Fourth Circuits in holding that a plea
agreement that waives a defendant’s right
to appeal a sentence within statutory limits
does not bar the defendant from appealing
the lawfulness of a restitution order. The
decision is important in light of a continuing
circuit split on the issue, with the Sixth
Circuit having held that restitution orders
cannot be appealed under a general waiver
since they are not governed by a statutory
maximum or guideline range.
United States v. Gordon, 480 F.3d 1205
(10th Cir. Mar. 28, 2007), considered a case
where a defendant pled guilty to one count
of credit card fraud but was subsequently
ordered to pay restitution for a total of seven
instances of fraud. Gordon entered into a
plea agreement that included a waiver of
her right to appeal any sentence within the
“statutory maximum” or the “guideline
range.” The plea agreement also provided
that “the court must order the payment of
restitution to the victim(s) of the offense.”
The loss associated with the one count to
which Gordon pled was $7,950.98. The trial
court, however, ordered restitution in the
amount of $68,698.52 after the Pre-Sentence
Report revealed that Gordon had actually
engaged in seven incidents of fraud.
04
News From the Courts
On appeal, Gordon argued that the
restitution exceeded the statutory maximum
under the Mandatory Victim Restitution
Act (MVRA), 18 U.S.C. § 3663A. The
Tenth Circuit had previously held that
the predecessor statute to the MVRA
limited restitution to that amount which “is
authorized only for losses causes by conduct
underlying the offense of conviction.” As
a threshold issue, the Tenth Circuit first
considered whether Gordon had waived her
right to appeal the restitution order.
The Tenth Circuit began by noting that while
“waivers of appellate rights are generally
enforceable” the scope of the waiver in
the plea agreement is still “governed by
contract principles.” Employing the doctrine
of contra proferentem, the court noted that
any ambiguities in the contract would be
construed against the Government. Since
the plea agreement waiver applied only to a
sentence within the “statutory maximum” or
the “guideline range,” the court found that
Gordon had not waived the right to appeal
an imprisonment sentence that was beyond
the lawful range or, by extension, the right to
appeal an “unlawful restitution order.”
The Court went on to question whether a
waiver of the right to appeal an unlawful
restitution order was even possible in light of
public policy considerations. Based on public
policy concerns, the court extended its prior
holding that a defendant cannot waive the
right to appeal an unlawful sentence to cover
unlawful restitution orders.
Having found that Gordon had not waived
her right to challenge the restitution order,
the court proceeded to the merits of her
claim. The court recognized that there were
only two exceptions to the general rule that
restitution under the MVRA must be limited
to the charged offence: 1) when a “scheme,
conspiracy, or pattern of criminal activity”
exists and 2) “if agreed to by the parties in
a plea agreement.” The court found that the
20
White Collar and Government Investigations
use of the singular word “offense” in the
plea agreement meant that Gordon had only
agreed to restitution for the single count of
fraud.
– Mohamed Rali Badissy
Tenth Circuit Overturns Conviction
of Executives Charged with
Misusing Company Assets
In a prosecution of two defendants for failure
to disclose personal use of company property,
the Tenth Circuit Court of Appeals took a
strict view of the SEC reporting requirements
and held that the failure to introduce
specific evidence on the incremental cost
to the company of that use and the district
court’s failure to instruct the jury about
SEC reporting requirements was reversible
error, even when the government had
demonstrated that the absolute value of the
use exceeded $1 million. United States v.
Lake, 472 F.3d 1247 (10th Cir., Jan.5, 2007).
The defendants, former investment bankers
and then-executives at Westar Energy, Inc.,
were indicted in December 2003 on charges
of wire fraud and circumvention of internal
financial controls, among other things.
The government charged the defendants
with wire fraud on the ground that the
company’s Annual Reports and Proxy
Statements were false or fraudulent because
they failed to disclose that the defendants
had each received a value of $1 million
for their personal use of corporate aircraft.
The Tenth Circuit reversed the defendants’
conviction, holding that the government
had produced no evidence that defendants
failed to comply with SEC filing regulations
regarding personal use of company property.
Since SEC regulations only require reporting
if the additional cost to the company for
such personal use exceeds $50,000 or 10
percent of the executives’ annual salary and
bonuses, and since the government offered
04
News From the Courts
no evidence of such additional cost, the
wire fraud convictions were reversed for
insufficient evidence that the SEC filings
were false or misleading. The court set a
high standard for future prosecutions, noting
that the incremental cost to the company
could be as little as the cost of fuel if the pilot
was on standby and not incurring overtime.
With respect to the circumvention of internal
controls charges, the Tenth Circuit found
that the district court’s failure to instruct the
jury about SEC reporting requirements was
reversible error because the defendants had
sought the instruction to bolster an argument
that they could only have wrongful intent
with respect to the D&O questionnaires
if they knew what the SEC required the
company to report. The court found that
“when a defendant’s defense is so dependent
on an understanding of the applicable law,
the court has a duty to instruct the jury on
that law, rather than requiring the jury to
decide whether to believe a witness on the
subject or one of the attorneys presenting
closing argument.”
– Viravyne Chhim
Ninth Circuit Rules on Standard
of Materiality in Prosecutions For
Securities Law Violations
In United States v. Berger, 473 F.3d 1080
(9th Cir. Jan. 18,2007), the Ninth Circuit
recently decided that the materiality of false
statements in a criminal prosecution must
be determined from the perspective of an
investor rather than that of the SEC.
The defendant, the president of Craig
Consumer Electronics, was convicted of,
among other things, making false statements
in SEC filings related to a revolving credit
agreement with a consortium of banks.
Three counts of the indictment specifically
required the jury to find that Berger had
21
White Collar and Government Investigations
“knowingly omitted material facts about
Craig Electronics” from SEC filings.
At trial, the government argued that the
materiality of Berger’s omissions should be
judged from the perspective of a reasonable
investor. To support its argument, the
government sought to introduce a “victim
investor” and an expert on the effect of the
statements on the investor. Berger objected
on the grounds that the materiality of his
statement should be determined from
the perspective of the SEC, to whom the
statements were made, and not that of an
investor. His argument rested upon the
Supreme Court decision in Kungys v. United
States 485 U.S. 759 (1988), where the Court
found that the materiality of false statements
to the Immigration and Naturalization
Service should be determined from the
perspective of the “decisionmaking body.”
The district court rejected Berger’s argument
but nevertheless found that the government’s
evidence was irrelevant.
On appeal, the Ninth Circuit upheld the
district court’s rejection of the Kungys
standard as applied to the SEC. The
court focused on the fact that the purpose
of the 1934 Act was “to benefit and
protect investors, with proper agency
decisionmaking as a secondary concern.”
The court explained that the appropriate
standard for omissions is that “[a]n omitted
fact is material if there is a substantial
likelihood that a reasonable shareholder
would consider it important in deciding
how to vote.” (citing TSC Industries, Inc.
v. Northway, Inc., 426 U.S. 438 (1976)).
The Ninth Circuit noted that applying the
“reasonable investor” is consistent with
the “goals of the SEC” since “in addition
to being a regulatory body, the SEC acts as
a repository of information intended to be
disseminated to and used by the public.”
– Mohamed Rali Badissy
www.lw.com
White Collar and Government Investigations is published by Latham & Watkins LLP
as a news reporting service to clients and other friends. The newsletter is edited by
William O. Reckler and Alexandra A.E. Shapiro in the New York Office. The information
contained in this publication should not be construed as legal advice. Should further
analysis or explanation of the subject matter be required, please contact the attorneys
listed here or the attorney whom you normally consult. For more information, visit our
Web site at www.lw.com.
If you wish to update your contact details or customize the information you receive from
Latham & Watkins, please visit www.lw.com/LathamMail.aspx to subscribe to our global
client mailings program.
Office locations:
Barcelona
Brussels
Chicago
Chicago
New York
Silicon Valley
312.876.7700
212.906.1200
650.328.4600
Sean Berkowitz
Zachary Fardon
David Brodsky
Noreen Kelly-Najah
Richard Owens
Alexandra Shapiro
Catherine Palmer
Frankfurt
Los Angeles
Hamburg
213.485.1234
Hong Kong
Manuel Abascal
David Schindler
London
Los Angeles
Madrid
Milan
Moscow
Munich
San Diego
619.236.1234
Katherine Lauer
Washington, D.C.
202.637.2200
Roger Goldman
Douglas Greenburg
William McGlone
Kathryn Ruemmler
San Francisco
415.391.0600
Steven Bauer
Robert Sims
New Jersey
New York
Northern Virginia
Orange County
Paris
San Diego
San Francisco
Shanghai
Silicon Valley
Singapore
Tokyo
Washington, D.C.
Latham & Watkins operates as a limited liability partnership worldwide with an affiliated limited
liability partnership conducting the practice in the United Kingdom and Italy. Under New York’s
Code of Professional Responsibility, portions of this communication contain attorney advertising.
Prior results do not guarantee a similar outcome. Results depend upon a variety of factors unique
to each representation. Please direct all inquiries regarding our conduct under New York’s
Disciplinary Rules to Latham & Watkins LLP, 885 Third Avenue, New York, NY 10022-4834,
Phone: +1.212.906.1200. © Copyright 2007 Latham & Watkins. All Rights Reserved.