Welcome to the June 2014 edition of Red Notice, a publication of Akin Gump Strauss Hauer & Feld LLP.
This month, on the anticorruption front, the U.S. Court of Appeals for the 11th Circuit defines key Foreign Corrupt Practices Act (FCPA) terminology, a former oil executive charged with FCPA violations goes to trial, the U.S. Securities and Exchange Commission (SEC) continues to investigate China business payments, a multinational development bank levies historically large penalties for a bribery scheme and a global shipping company discloses alleged FCPA violations in Kenya.
In export control and sanctions enforcement news, a Dutch aerospace company reaches a $21 million global settlement with the U.S. government to resolve allegations that it violated Iranian Transactions and Sanctions Regulations (ITSR) and Sudanese Sanctions Regulations, a U.S. circuit maker reaches a $10 million settlement with the U.S. Department of State for alleged International Traffic in Arms Regulations (ITAR) violations, a foreign freight forwarder reaches a $125,000 settlement with the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) for alleged Export Administration Regulations (EAR) violations and the State Department administratively debars a Spanish individual and his affiliated companies.
In developments in export control and sanctions law, the State Department and BIS issue interim final rules related to the export jurisdiction of certain satellites, the Office of Foreign Assets Control (OFAC) designates Russian individuals under the Sergei Magnitsky Rule of Law Accountability Act and Central African Republic (CAR)-connected individuals pursuant to a CAR-related executive order.
Thank you as always for reading Red Notice.
11th Circuit Defines “Instrumentality”
Earlier this month, the 11th Circuit handed down a landmark decision defining the term “instrumentality” under the FCPA. Two former executives of Terra Telecommunications Corporation challenged the government’s interpretation of the term in United States v. Esquenazi. Joel Esquenazi and Carlos Rodriguez, who were found guilty for their roles in bribing officials at Haiti’s state-owned telecom company, Haiti Teleco (“Teleco”), sought to limit “instrumentality” to mean “entities that perform traditional, core government functions.” The court rejected this argument and adopted a two-part test defining an “instrumentality” as any entity that (1) is “controlled by the government of a foreign country” and (2) “performs a function the controlling government treats as its own.” The court noted that whether an entity is controlled by, or performs, a function that the government treats as its own is a factual question. The court enumerated a non-exhaustive list of factors, which includes official designation as a government entity, the extent of the government’s interest in the company and the government’s control over hiring and firing company executives and managing profits and losses.
In Esquenazi, the appellate court affirmed the trial court’s decision that Teleco was an “instrumentality” controlled by the Haitian government. At the trial level, the court instructed the jury to consider a number of factors to determine whether Teleco was an instrumentality of Haiti. Based on the non-exhaustive list of enumerated factors, the appellate court found that the jury had sufficient evidence to find that Teleco was an instrumentality of Haiti given that: (1) Haiti granted Teleco a monopoly and offered lucrative tax advantages; (2) Haiti’s national bank owns 97 percent of Teleco; (3) the President of Haiti hired Teleco’s top executives and appointed all of Teleco’s board members; and (4) experts testified that “Teleco was considered . . . a public entity” and that “government officials, everyone consider[ed] Teleco as a public administration.”
While the Esquenazi decision provides much-anticipated guidance on the definition of “instrumentality” under the FCPA, the court left open potential challenges to FCPA cases in the future under the ambiguous second prong, “performing a government function.”
For additional coverage see insidecounsel.com and Compliance Week.
Former PetroTiger Executive Fights FCPA Charges at Trial
On Friday, May 9, former PetroTiger Ltd. CEO Joseph Sigelman was indicted in New Jersey federal court for FCPA violations and money laundering. According to the indictment, Mr. Sigelman allegedly bribed a Colombian official at Ecopetrol SA, Colombia’s national gas company, in order to obtain a $39 million oil contract. He also allegedly participated in a separate kickback scheme in connection with an acquisition PetroTiger was hoping to secure. Initially, Mr. Sigelman and his alleged co-conspirators used the Ecopetrol foreign official’s wife as a conduit for the bribes, compensating her for “consulting services” that were never performed for the company. PetroTiger’s former general counsel Gregory Weisman pled guilty in November 2013 to conspiracy to violate the FCPA and to commit wire fraud, and former co-CEO Knut Hammarskjold pled guilty to the same charges in February 2014.
Mr. Sigelman pled not guilty in federal court in Camden, New Jersey on May 14. A trial date is set for July 28.
For more information, read the U.S. Department of Justice (DOJ) press release and additional coverage at Business Week.
Manufacturing Company Subpoenaed in China Probe
In May, industrial manufacturer PTC Inc. (formerly Parametric Technology Corporation) received an SEC subpoena regarding questionable “payments and expenses” that raised FCPA concerns. In February, PTC disclosed that the SEC was seeking additional information from the company regarding questionable “payments and expenses” made by PTC’s China subsidiary business partners. According to the company’s 10-Q, PTC “terminated certain employees and business partners in China in connection with this matter.” The filing stated that the company was cooperating with the DOJ and SEC’s requests for information, but did not mention any current settlement discussions.
Read more at the Wall Street Journal and the FCPA Blog.
Engineering Services Provider to Pay AfDB $5.7 Million to Settle Bribery Case
Engineering services provider, Snamprogetti Netherlands BV (Snamprogetti), received a $5.7 million financial penalty from the Integrity and Anti-Corruption Department (IACD) of the African Development Bank (AfDB). This sanction is part of a concluded negotiated resolution agreement that followed the company’s acceptance of the charge of corrupt practices. Snamprogetti and three other companies paid $180 million over nine years to government officials in Nigeria to secure a joint venture project to develop a liquefied natural gas plant in the country. The IACD levied a total of $22.7 million in penalties related to the joint venture, the highest penalty amount imposed by a multinational development bank. All four companies reached settlements with the DOJ and SEC on FCPA charges related to the joint venture. Snamprogetti and Technip SA also entered into deferred prosecution agreements (DPAs) with the DOJ. In June 2010, Technip agreed to pay $240 million in criminal penalties to the DOJ and $98 million in civil penalties to the SEC. In July 2010, Snamprogetti entered a DPA, paying $240 million in criminal penalties to the DOJ and $125 million in civil penalties to the SEC.
Read AfDB’s press release and additional coverage at Compliance Week.
Shipping Giant Discloses Possible FCPA Violations in Kenya
In mid-June, FedEx Corporation confirmed that it has notified the DOJ and SEC of allegations that its Kenya business has paid bribes to government officials. The claims of this potential FCPA infringement revolve around potential payments made between 2010 and 2013 to customs officials in Kenya in exchange for clearing shipments without inspection as well as to government vehicle inspectors. FedEx operates in Kenya via a “nominated Service Contractor” called Pan Africa Express, according to the company’s website.
“Shortly after” becoming aware of these allegations in an anonymous December 2013 email, the shipping company says it informed authorities and has continued to cooperate with both agencies since initiating an investigation into the matter in 2013.
According to a FedEx spokesperson, the investigation is ongoing but the company has been unable to substantiate the reported claims thus far. Outside representation in East Africa has also been retained as part of the ongoing investigation.
Read additional coverage at International Business Times and Compliance Week.
EXPORT CONTROL AND SANCTIONS ENFORCEMENT
Fokker Services B.V. Agrees to $21 Million Settlement for Alleged Violations of the ITSR and Sudanese Sanctions Regulations
Fokker Services B.V. (FSBV), a Netherlands-based aerospace company, reached a global settlement of $21 million with OFAC, BIS and the U.S. Attorney’s Office (USAO) for the District of Columbia in early June 2014 regarding allegations of 1,112 violations of the ITSR and of 41 violations of the Sudanese Sanctions Regulations. Specifically, the U.S. government alleged that, over a period of five years, FSBV indirectly exported or reexported aircraft spare parts to Iranian and Sudanese customers that were either procured or repaired in the United States to fill those customers’ orders, or that were U.S.-origin items subject to export licensing requirements. The OFAC base penalty alone carried potential civil liability of greater than $145 million, as OFAC deemed the alleged violations to be egregious even though FSBV had filed a voluntary self-disclosure. The $21 million settlement represents the value of FSBV’s alleged Iran and Sudan transactions and consists of a $10.5 million civil penalty to OFAC and BIS and a $10.5 million forfeiture pursuant to the deferred prosecution agreement with USAO.
Read OFAC’s summary, press releases from the DOJ and BIS, and Washington Post coverage.
Intersil Corporation Reaches $10 Million Settlement with the State Department on U.S. Export Control Allegations
Intersil Corporation, a California-based circuit maker, entered into a consent agreement with the State Department in mid-June 2014, under which it agreed to pay a $10 million civil penalty in settlement of 339 alleged violations of the Arms Export Control Act (AECA) and the ITAR. Specifically, the State Department alleged that Intersil improperly classified U.S. Munitions List (USML) circuit components as subject to the Commerce Department's Commerce Control List (CCL) and thereby exported them without ITAR licenses to customers in various destinations, which were then re-exported without proper authorization. The alleged violations included export to China, which is subject to a U.S. arm’s embargo, and to entities on the State Department’s watch list, which are typically denied permission to receive ITAR items. The State Department will suspend a $4 million portion of the penalty if Intersil agrees to spend that amount on compliance enhancements. In that regard, Intersil agreed to set up a special internal compliance position to oversee the consent agreement, conduct two audits and provide additional training for employees. The State Department decided not to administratively debar Intersil based on the company’s voluntary disclosure, cooperation with the State Department’s investigation and implementation of extensive remedial measures. Read the State Department press release and Reuters coverage.
UAE Freight Forwarder Agrees to Pay $125,000 Penalty in Connection with Export and Reexport of Web Monitoring Devices to Syria
Aramex Emirates, LLC (Aramex), a freight forwarding company headquartered in Dubai, United Arab Emirates (UAE), agreed to a settlement of $125,000 with BIS in late May 2014 regarding allegations that it violated the EAR by shipping Internet traffic control and monitoring equipment to Syria without BIS authorization on two occasions. BIS alleged that Aramex agreed to receive shipments of network devices and software from another UAE freight forwarder and then forward them to Syria, knowing that the freight was of U.S. origin. According to BIS, the settlement amount, one half of the maximum possible civil penalty, reflects Aramex’s full cooperation with the BIS investigation. Under the settlement terms, Aramex is barred from publicly denying the BIS allegations, and BIS can issue a one-year revocation of the company’s export privileges if Aramex fails to pay the penalty on time. Read the BIS press release for more information.
State Department Administratively Debars Spanish National and Associated Entities for Violations of the AECA and ITAR
Pursuant to the default order and recommendation of an Administrative Law Judge (ALJ), in early June 2014, the Bureau of Political-Military Affairs at the State Department imposed on Spaniard Carlos Dominguez and three of his Madrid-based companies an administrative debarment from all activity subject to the ITAR. The default order resulted from the State Department’s referral to the ALJ of its charging letter after the subject parties failed to respond to formal charges within the allotted timeframe. The State Department had charged that Mr. Dominguez and his companies violated the AECA and the ITAR on 366 occasions by reexporting and retransferring U.S.-origin defense articles (in this case, night vision devices) without authorization and engaging in practices to evade detection (for example, by changing company names and utilizing third-party purchasers upon State Department notification of ineligibility to participate in defense trade). The debarment marks the first time the State Department initiated an administrative proceeding against foreign persons by referral of a charging letter to an ALJ and underscores the range of penalties at the State Department’s disposal for ITAR violations against foreign entities, even where, as stated by the State Department, the alleged violations did not result in direct harm to U.S. national security or foreign policy interests. Read the State Department summary, the Charging Letter, and the Administrative Debarment Order.
EXPORT CONTROL AND SANCTIONS DEVELOPMENTS
Interim Final Rule Transitions Certain Satellites from the U.S. Munitions List to the Commerce Control List
Companion interim final rules issued by the departments of State and Commerce in mid-May 2014, pursuant to President Barack Obama’s Export Control Reform initiative, will move most commercial, scientific and civil satellites and related parts and components from Category XV of the USML to the CCL. The items moving to BIS’ jurisdiction include commercial satellites that do not contain classified parts, certain remote sensing satellites, various spacecraft parts, components and equipment and most radiation-hardened microelectric microcircuits. The updated regulations also allow, in some cases, the transferred satellites to incorporate USML parts and components while remaining under BIS licensing authority. The State Department has requested public comment on its proposed ITAR amendments reflecting this transition.
Read press releases from the State Department and BIS, and see the Federal Register Notice for additional information.
Magnitsky Sanctions Designations
In late May 2014, OFAC, in concert with the State Department, imposed sanctions on 12 Russian individuals under the Sergei Magnitsky Rule of Law Accountability Act of 2012 (the “Act”). The Act targets for sanctions: (1) individuals involved in the detention, abuse, and/or death of Russian auditor Sergei Magnitsky; (2) participants in the criminal conspiracy Magnitsky uncovered; and (3) those who perpetrate gross human rights violations against persons seeking to expose illegal activity by the Russian government or seeking to promote, exercise or obtain human rights. Ten of the 12 sanctioned targets were involved in the detention, abuse or death of Magnitsky or in the criminal conspiracy he uncovered, while the remaining two were designated for gross human rights violations. Persons on this list are ineligible to receive visas or to be admitted into the United States. Their property and interests in property subject to U.S. jurisdiction are blocked and U.S. persons may not engage in transactions involving such blocked property or property interests. Read the Treasury Department press release, the SDN designations and the State Department press release.
Issuance of Central African Republic-Related Executive Order and Designation
President Obama issued an Executive Order in mid-May 2014 blocking the property and interests in property of five individuals with ties to the Central African Republic (CAR) and permitting sanctions against additional individuals and entities who threaten CAR’s peace, stability and security or who target civilians through acts of violence. OFAC responded by adding the five CAR-connected individuals to its Specially Designated Nationals (SDN) List. Read OFAC’s coverage and the Executive Order.