Bribes Paid by Foreign Sales Representative Lead to FCPA Conviction
Antitrust, Competition and Distribution Update
Date: May 23, 2011
On May 10, 2011, a federal jury in Los Angeles convicted Lindsey Manufacturing Company (Lindsey), along with its president and chief financial officer, of violating the anti-bribery provisions of the Foreign Corrupt Practices Act (FCPA) (15 U.S.C. ?? 78dd-1 et seq.). According to Assistant Attorney General Lanny A. Breuer, Lindsey is the first company to be tried and convicted on FCPA violations.
Lindsey, a manufacturer of emergency restoration systems and other equipment used by electric utilities, was charged with participating in a scheme to bribe an employee of a state-owned utility in Mexico in return for the utility's purchase of Lindsey equipment. The bribes were paid by Lindsey's Mexican sales representative, and the conviction underscores the need for firms to exercise care in the appointment of foreign sales agents and distributors and diligence in monitoring their relationships with customers. It also underscores the breadth of the U.S. government's interpretation of the meaning of "foreign official" in the FCPA.
The FCPA prohibits a person, in order to obtain or retain business, from offering or paying any money or offering or giving anything of value to another person while knowing that all or a part of it will be offered, given or promised to a foreign official in order to influence official duties or acts. It applies, broadly speaking, to any company or firm (1) organized under the laws of a state, territory or possession of the United States or having a principal place of business in the United States or (2) whose securities are registered in the United States or which is required to file periodic reports with the Securities and Exchange Commission (SEC).
Facts of the Case
Lindsey, a privately held company based in Asuza, California, sells products to foreign state-owned utilities through a network of sales representatives that are paid commissions based on a percentage of Lindsey's revenues. From approximately February 2002 until March 2009, Enrique Aguilar, a director at Lindsey's sales representative, Grupo Internacional De Asesores S.A. (Grupo), was paying bribes to an official employed at the Comisi?n Federal de Electricidad (CFE), in exchange for CFE awarding purchase contracts to Lindsey. Prior to trial, the court ruled that the employee could be considered a foreign official for purposes of the FCPA prohibition against bribing foreign officials.
According to evidence at trial, Lindsey paid Grupo inflated commissions to reimburse Aguilar for the bribes and marked up the prices of goods and services sold to CFE to ensure that CFE, rather than Lindsey, absorbed the additional costs. In order to conceal the bribes, Grupo would, with the knowledge of Lindsey, submit fraudulent invoices to Lindsey. The evidence at trial also established that, prior to engaging Grupo, Lindsey knew that Aguilar had a corrupt relationship with a top CFE official and had even complained to CFE about Aguilar improperly influencing contract awards. Within months after engaging Grupo, Lindsey began receiving contracts from CFE, ultimately obtaining more than $19 million in business from it over the next seven years.
Lindsey's president and chief financial officer were convicted of one count of conspiracy to violate the FCPA and, along with Lindsey, five counts of FCPA violations. The FCPA conspiracy count carries a maximum penalty of five years in prison and a fine of the greater of $250,000 or twice the value gained by the defendant or lost by the victim. Each of the five FCPA counts carries a penalty of up to five years in prison and a fine of the greater of $100,000 or twice the value gained by the defendant or lost by the victim. According to the government's May 10 press release following the convictions, the Lindsey defendants are scheduled to be sentenced on September 16, 2011.
Liability for Conduct of Agents and Distributors
Firms face FCPA liability not just for conduct of their foreign subsidiaries and employees but also for conduct of third parties used in the sale of products, whether consultants, agents or distributors. The Lindsey conviction demonstrates this graphically, as does the SEC's May 17, 2011 announcement of a deferred prosecution agreement with Tenaris S.A., a global manufacturer of steel pipe products. According to the SEC press release, Tenaris had violated the FCPA as a result of bribes paid by its Uzbekistan sales agent to government officials to secure orders for steel pipe for oil and natural gas pipelines in the Caspian Sea region.1
The government's evidence in the Lindsey trial pointed to knowing participation by Lindsey management in the bribery scheme, and the Tenaris deferred prosecution agreement indicates that regional sales personnel of a Tenaris subsidiary paid commissions to the sales agent knowing that all or part of the payment would be used to bribe government officials. Liability does not depend, however, upon proof of this level of involvement. The Department of Justice takes the position that a firm can be deemed to have made a payment to a third party "knowing" that all or a portion of it will be paid to a foreign official if the evidence shows "conscious disregard" or "deliberate ignorance" on the part of the firm.2
The Need for Effective Compliance Measures
In order to minimize the risk of violation of the FCPA, firms should not only engage in thorough due diligence before appointing foreign agents and distributors, but they should also include explicit compliance representations and assurances in written agreements. In the Department of Justice's deferred prosecution agreement with AGA Medical Corporation, for example, the defendant, a manufacturer of medical devices sold in China through an independent distributor, agreed to implement compliance procedures that included use of the following standard provisions in contracts with agents and other third parties: "(A) anti-corruption representations and undertakings relating to compliance with the FCPA and other applicable anti-corruption laws; (B) rights to conduct audits of the books and records of the agent or business partner to ensure compliance with the foregoing; and (C) rights to terminate an agent or business partner as a result of any breach of anti-corruption laws, and regulations or representations and undertakings related to such matters."3
The importance of compliance provisions in contracts with agents and distributors was similarly highlighted in Daimler AG's $185 million settlement of FCPA charges in 2010. The government noted in its sentencing memorandum that, among other remediation efforts undertaken by Daimler, the "company now requires anti-bribery contract terms and audit rights for its intermediaries, including provisions that allow for unilateral termination by Daimler."4
FOR MORE INFORMATION
Our lawyers can provide additional information about the Lindsey case or implementation of effective compliance measures for agents and distributors.
1 SEC Release 2011-112, Tenaris to Pay $5.4 Million in SEC's First-Ever Deferred Prosecution Agreement (May 17, 2011), available at www.sec.gov/news/press/2011/2011-112.htm.
2 U.S. Dept. of Justice, A Resource Guide to the U.S. Foreign Corrupt Practices Act, available at www.justice.gov/criminal-fraud/fcpa-guidance.