Welcome to the May 2014 edition of Red Notice, a publication of Akin Gump Strauss Hauer & Feld LLP.
This month, on the anticorruption front, Avon Products, Inc. (“Avon”) agrees to pay USD $135 million to settle a Foreign Corrupt Practices Act (FCPA) investigation; a UK pharmaceutical giant faces multiple investigations around the globe; two New York broker-dealer execs are the fifth and sixth people to be charged in a banking bribery scheme; multiple multinational corporations face serious bi-continental probes into bribery violations stemming from business activities in China.
In export control and sanctions enforcement news, a Washington man is sentenced to 30 months in prison for conspiracy to export sophisticated computer equipment to Iran, and a travel services provider reaches a USD $2.8 million settlement with the U.S. government to resolve allegations that it violated the Cuban Assets Control Regulations (CACR).
In developments in export control and sanctions law, the Bureau of Industry and Security (BIS) adds nine persons to the BIS Entity List for their affiliation with a weapons proliferator and issues an interim final rule related to the export jurisdiction of certain spacecraft items, and the Office of Foreign Assets Control (OFAC) amends the Iran Transactions and Sanctions Regulations (ITSR), releases Ukraine-Related Sanctions Regulations, and adds South Sudan-connected individuals to its Specially Designated Nationals (SDN) List in response to a South Sudan-related executive order.
Thank you as always for reading Red Notice.
Avon Agrees to DPA, $135 Million Penalty and Compliance Monitor to Settle FCPA Probe
In May, door-to-door cosmetics giant Avon agreed to pay USD $135 million to settle FCPA-related claims — USD $68 million to settle the U.S. Department of Justice’s (DOJ) criminal investigation and USD $67 million to settle the U.S. Securities and Exchange Commission’s (SEC) civil investigation. The penalty, which includes fines, disgorgement and prejudgment interest, is slightly higher than the anticipated USD $132 million the company set aside for the settlement in its quarterly financial disclosures in February. Avon’s FCPA troubles began in June 2008 with an internal investigation into illicit payments in China. The six-year probe cost the company more than USD $340 million (as of February), not including the USD $135 million penalty. In addition to the USD $135 million, the company will enter into a three-year deferred prosecution agreement (DPA), and Avon’s Chinese unit will plead guilty to violating the FCPA’s books-and-records provision. Under the recently developed and increasingly utilized "hybrid monitorship" construct, the company is required to have a compliance monitor for the first 18 months of the agreement. However, with the DOJ’s permission, the company will be able to self-monitor for the remaining year and a half of the DPA. Read more at Business Week and Compliance Week.
GSK Former China Head Arrested, Company Facing Bribery Allegations in the United Kingdom, Poland, Iraq, Lebanon and Jordan
GlaxoSmithKine PLC (GSK) announced on Tuesday, May 27, that it is facing a formal investigation by the U.K.’s Serious Fraud Office (SFO). This disclosure marks the latest development in a series of investigations surrounding the U.K.-based pharmaceutical company. Earlier in May, the former head of GSK was accused by Chinese police of “authorizing corrupt practices” in China. The allegations stem from charges that GSK personnel bribed doctors in China and other foreign government officials. In July, the company was accused of paying Chinese doctors USD $483 million to promote GSK prescriptions.
The company is also being investigated in Poland by Poland’s Central Anti-Corruption Bureau (CBA) for allegedly bribing doctors to promote an asthma drug, Seretide. Between 2010 and 2012, GSK set up a diagnostic standard and medical training program run by doctors in Lodz, Poland. During that time, 11 doctors and one GSK regional manager were charged with alleged corruption. The company suggested that one rogue employee had been responsible for a scheme in which GSK paid doctors to provide “patient education” in return for those doctors writing a certain number of prescriptions for GSK drugs. According to the company, that employee was disciplined and is now cooperating with the ongoing investigation. GSK faces similar allegations of making improper payments to doctors to promote GSK prescriptions in Iraq, Jordan and Lebanon. The company said that the allegations relate to “a small number of individuals” in those countries.
In 2012, GSK pleaded guilty to “promoting two drugs for unapproved uses” in the largest health care fraud settlement in US history — USD $3 billion. Read additional coverage on the U.K. at Reuters, on China at the Times of India, on Poland at the Chicago Tribune, on Iraq at London South East and on Jordan / Lebanon at Reuters.
Defunct New York Broker-Dealer Execs Face Charges for $60 Million Bribery Scheme
Earlier this month, the former chief executive officer, Benito Chinea, and former managing director, Joseph DeMeneses, of Direct Access Partners (DAP) faced 16 counts of criminal charges for FCPA and Travel Act violations, including bribery, conspiracy, money-laundering and obstruction of justice. The charges stem from a scheme to bribe an official at a Venezuelan bank in order to secure more than USD $60 million in bond-trading business from the bank. The defendants allegedly made payments through a third party to Maria de los Angeles Gonzalez de Hernandez, a vice president of Banco de Desarollo Económico y Social de Venezuela (BANDES). In 2008, DAP established the Global Markets Group (GMG), and BANDES was a GMG client. According to the allegations, Chinea and DeMeneses worked with three other DAP employees based in Miami to execute a bribery scheme in which Ms. Gonzales directed trading business to GMG. Broker-dealers would execute fixed-income trades on behalf of BANDES, for which they could charge the bank a commission. From 2008-2012, the broker-dealers made more than USD $60 million in commissions using this scheme. The three Miami-based broker-dealers pleaded guilty for their roles in August 2013. The vice president pleaded guilty for her role in the scheme in November 2013 and is awaiting sentencing, which is scheduled for August. Read the DOJ press release and additional coverage at Reuters.
Problems in China Lead to DOJ and SEC Probes for Qualcomm, Delphi, and Johnson
In April, Qualcomm Inc. ("Qualcomm"), Delphi Automotive Plc ("Delphi") and Johnson Controls Inc. ("Johnson Controls") all announced that they had self-reported potential FCPA violations to the SEC and the DOJ related to business activities in China.
Qualcomm is cooperating with official DOJ and SEC investigations and revealed the company did offer gift benefits to individuals in China who were affiliated with state-owned companies and agencies, including preferential hiring and gifts. In total, the mobile-chip vendor estimates that these benefits amounted to less than USD $250,000.
Qualcomm learned of and disclosed the SEC investigation in 2012. Last year, Chinese regulators received a tip from industry groups complaining about Qualcomm’s alleged unfair practices to corner China’s smartphone market and raided Qualcomm’s offices twice. Qualcomm could face serious financial penalties in the United States, including disgorgement of profits, imposition of an independent monitor and civil monetary penalties as well as additional penalties in China, including confiscation of financial gains and a possible fine of up to ten percent of Qualcomm’s annual revenue for 2013. Read additional coverage at Yahoo News and here at PC World.
In late April, Delphi revealed in a 10-Q filing to the SEC that it had identified “certain potentially improper payments” by some employees in China that could violate the FCPA. The company disclosed this information to the DOJ and SEC and is cooperating fully with both agencies. Read more at Reuters.
In May, Johnson Controls also disclosed that it self-reported potential FCPA violations to both the SEC and the DOJ and opened its own internal investigation. The automotive-seating and car-interior electronics manufacturer disclosed in its 10-Q filing potential violations related to its building-efficiency marine business in China. The company said it is cooperating fully with ongoing DOJ and SEC investigations. Read additional coverage at Compliance Week.
EXPORT CONTROL AND SANCTIONS ENFORCEMENT
Washington Man Sentenced in Conspiracy to Export Sophisticated Computer Equipment to Iran
A Florida judge sentenced John Alexander Talley of Seattle, Washington, to 30 months in prison in late April 2014, in part, for conspiracy to violate the Iranian Transaction Regulations (now known ITSR). The judge also sentenced Talley’s company, Tallyho Peripherals, Inc. (“Tallyho”), to one-year probation on the same grounds. Court documents indicate that Talley and Tallyho took part in a conspiracy to export sophisticated computer equipment from the United States to Iran and to provide related IT support services. Conspirators transshipped the computer equipment through the United Arab Emirates (UAE), and payments to Talley for providing IT training and support similarly passed through the UAE. Read the BIS press release and coverage from the Tampa Bay Business Journal.
Decolar.com, Inc. Settles Potential Civil Liability for Apparent Violations of the Cuban Assets Controls Regulations
Decolar.com, Inc., a U.S. company with headquarters in Buenos Aires, Argentina, along with its subsidiaries and affiliates (collectively, “Decolar”), agreed to a settlement of USD $2.8 million with OFAC in early May 2014 regarding allegations that it violated the CACR by providing travel-related services involving Cuba. OFAC alleged that Decolar’s foreign subsidiaries assisted over 17,800 individuals with Cuba-related flight and hotel reservations over a span of three years. The large settlement amount apparently reflects OFAC’s consideration of the following factors: the company’s senior managers appeared to have known of the Cuba-related services; the alleged violations, representing a large volume of transactions over an extended period of time, appeared to have resulted from a pattern or practice of conduct; and, despite Decolar’s sophistication as a travel services provider, it did not have an OFAC risk-based compliance program in place during the period of the alleged violations. With a base penalty amount of USD $4,460,000, however, the settlement amount also reflects OFAC’s assessment that the apparent violations represented only a small portion of Decolar’s business and recognition of Decolar’s subsequent adoption of OFAC compliance policies and procedures. Read the OFAC enforcement action and Havana Times coverage.
EXPORT CONTROL AND SANCTIONS DEVELOPMENTS
U.S. Commerce Department Adds Nine Persons Associated with Missile Proliferator to Entity List
The BIS at the U.S. Department of Commerce in late April 2014 added one Chinese individual and eight Chinese companies to the BIS Entity List in connection with their affiliation with Chinese weapons proliferator Li Fangwei in efforts to supply Iran’s ballistic missile program. To designate persons for the Entity List, the U.S. government must determine that listed persons are acting against U.S. national security or foreign policy interests. In a related action, the U.S. Department of the Treasury (the “Treasury Department”) sanctioned the eight Chinese companies. Read the BIS press release and the Treasury Department press release for more details.
Amendments to Iranian Transactions and Sanctions Regulations
OFAC adopted a final rule in early April 2014 that amends the ITSR to expand the general license authorizing food exports/reexports to persons in Iran by including the more broadly defined category of agricultural commodities, with certain exclusions, and to clarify that eligible items are both items that are subject to the Export Administration Regulations (EAR) and classified as EAR99 and items that are not subject to the EAR but would be classified as EAR99 if subject. The amendment also creates a new general license for the export/reexport of designated replacement parts for certain medical devices. Read the Treasury Department’s announcement and the final rule and background information in the Federal Register.
Issuance of South Sudan-related Executive Order and Designation
President Barack Obama issued an Executive Order in early April 2014 permitting sanctions against individuals and entities responsible for the conflict in South Sudan and who threaten the peace, stability and security of South Sudan. OFAC responded in early May by adding certain South Sudan-connected individuals to its SDN List. Read the Executive Order, the OFAC designations and the Treasury Department coverage.
OFAC Releases Ukraine-Related Sanctions Regulations
On May 8, 2014, OFAC released regulations pursuant to President Obama’s March 2014 Ukraine-related Executive Orders. The new Ukraine-Related Sanctions Regulations include provisions detailing prohibited transactions, as well as provisions on licenses under the OFAC-administered sanctions regime. OFAC intends to further supplement the regulations to include “additional interpretative and definitional guidance and additional general license and statements of licensing policy.” Read the new regulations and Treasury Department coverage.
Interim Final Rule Transitions Certain Spacecraft Items to the Commerce Control List
BIS issued an interim final rule in mid-May 2014 relating to the export jurisdiction of certain spacecraft and related items. The rule, part of President Obama’s Export Control Reform Initiative, creates new Export Control Classification Numbers (ECCNs) on the Commerce Control List under the EAR, which, along with certain existing ECCNs, will control certain spacecraft and related items deemed to no longer warrant control under the U.S. Munitions List and the International Traffic in Arms Regulations. The Departments of State and Commerce have requested comments on the interim final rule, given the national and economic security implications of the rule. Read the interim final rule summary and comments.