Investigating And Prosecuting Fraud & Corruption In The International Business Environment - Part 2

Article by Monty Raphael, Joint Head of the

Fraud and Regulatory Department.

6. CORRUPTION IN AN INTERNATIONAL BUSINESS COMMUNITY

US Developments

Foreign Corrupt Practices Act 1977, (amended in 1998 by

the International Anti-Bribery Act of

1998)

In 1977, the United States Congress passed The Foreign Corrupt

Practices Act. The FCPA was introduced as an attempt to ensure

commercial fair dealing, government integrity and accountability,

and the efficient and equitable distribution of limited economic

resources. In order to do this, the FCPA established both civil and

criminal penalties for payments made to foreign officials by US

corporations or US nationals abroad.

The US has a particularly aggressive attitude towards seeking

out and prosecuting corruption, the deterrent effects of which are

obvious. If up to 5 years imprisonment or £100,000 fine for

individuals were not sufficient to dissuade delinquency then fines

of $2million or twice the gain for firms is certainly enough for

companies to take a tough line on corruption21.

The FCPA has led to numerous successful prosecutions for

bribery, since 2005 there have been more than 68 new

investigations, 10 prosecutions against individuals last year and

24 new proceedings against corporations. According to Transparency

International USA, the number of prosecutions in the US has

dramatically increased in the last few years22. At the

end of last year, the U.S. federal government investigated 84

companies, up from three in 2002, according to Shearman &

Sterling LLP, a law firm based in New York that tracks

anticorruption cases23.

In particular, there have been two recent high profile

convictions, former Halliburton Co. executive Albert J.

"Jack" Stanley and Baker Hughes Inc. Jack Stanley led a

scheme to bribe Nigerian government officials to secure natural-gas

contracts, he was sentenced to seven years imprisonment, the

longest term ever given in the 30-year history of the Foreign

Corrupt Practices Act.

In April 2007, Baker Hughes Inc. pleaded guilty to bribing

foreign officials to win oil-related work. The company agreed to

pay $44 million in fines combining a criminal fine of $11million

and a civil fine of £33million in connection with Baker

Hughes's improper business practices in a number of

countries24. It was the largest financial penalty ever

given under the FCPA.

Mark F. Mendelsohn, deputy chief of the U.S. Justice

Department's fraud section, said that pursuing anticorruption

cases has become "a significant priority in recent

years." The Justice Department is assigning more lawyers

to corruption cases and, last year, the Federal Bureau of

Investigation created a team to work on foreign bribery and

antitrust cases.25

UBS: Swiss Banking Secrecy

Last month, UBS reached a $780million settlement with the US DOJ

over the allegations that UBS bankers in Geneva, Zurich and Lugano

helped American clients evade tax in a number of ways including

creating complex shell companies to hide their identities. More

interestingly, the bank, on instructions from the Swiss bank

regulator, passed on names of up to 300 US clients who allegedly

used sham companies to evade tax. The Inland Revenue Service has

also announced that it will pursue a separate civil action

demanding the bank divulge thee names of US holders of up to 52,000

accounts with about $14.8billion in assets

A few weeks ago, the Chairman of UBS, Peter Kurer, stepped down

saying that he would not seek re-election. Although not directly

linked to the DOJ settlement, his standing was hurt by intensifying

US regulatory pressure over the allegations that UBS helped US

clients evade tax. In 2006, Mr Kurer received a letter from a

whistleblower, his handling of which has since been deemed

inadequate by the US DOJ.

In November 2008, Mr Weil, the head of private banking for the

world's biggest wealth manager at UBS and its predecessor, was indicted by a US

Federal Grand Jury on the charge of conspiracy.

The American authorities had gathered vast amounts of evidence

which was revealed in the recently released 11-page indictment as

well as in an earlier 110-page report by a special Senate

investigating committee.

The indictment refers to unspecified other

"co-conspirators, suggesting that the US authorities are

poised to make further arrests.

There is speculation that such mounting US pressure on UBS is

part of a wider campaign aimed at Switzerland itself. Carl Levin,

the US senator whose permanent sub-committee on investigations has

been prominent in US attempts to crack down on tax havens, made

that clear in remarks after Mr Weil's indictment as

follows:

Today's indictment . . . sends an overdue message

that the United States will no longer tolerate tax haven banks

helping US clients hide money from the IRS,

The US authorities want Switzerland to co-operate under the

judicial assistance provisions of the double taxation treaties

between the two countries and provide client names. Progress has,

however, been slower than the US would have liked. For the Swiss,

no client names can be provided unless the US authorities can prove

such customers committed tax fraud – a crime which in

Switzerland justifies the lifting of bank secrecy. Tax evasion, on

the other hand, is only a civil offence in Switzerland, and does

not qualify for the same treatment. Whatever the reason, the US

authorities appear to have become increasingly frustrated that no

names have been supplied, amid suggestions of Swiss

stonewalling.

On 4th March, UBS announced that it would not divulge

any further names to the US, Mark Branson, finance chief of

UBS's wealth management division, said Swiss law prevented UBS

from handing over the identities of its customers. Mr Branson

stated:

"We believe that UBS has now complied with the summons

to the fullest extent possible without subjecting its employees to

criminal prosecution in Switzerland."

Mr Branson added that the IRS's decision to file a lawsuit

to try to extract the names was "neither productive nor

proper", furthermore, it was the opinion of UBS that the

issue should be resolved through diplomatic discussions between the

US and Switzerland.

Carl Levin, chairman of the Senate permanent subcommittee on

investigations and a long-standing opponent of tax havens, railed

against the Swiss government and accused them of "trying

to thwart" the US's efforts. Mr Levin stated

that:"the Swiss hold bank secrecy as a national value, the

way Americans prize freedom and democracy, They make a living off

secrecy; bank secrecy is a cash cow in Switzerland."

Haliburton

In January 2009 Halliburton, a US energy services group, agreed

to pay a record $559 million (£394 million) to settle charges

that a former subsidiary of the compnay bribed Nigerian officials

during a gas deal. The settlement will be split, with $382 million

(£269 million) paid to the DoJ and $177 million (£125

million) paid to the Securities and Exchange Commission (SEC).

The biggest payment before the Halliburton settlement was $44

million (£31 million) by another US oil services group, Baker

Hughes, in 2007 over improper payments in Kazakhstan.

Such penalties for bribery and corruption offences appear to

have been increasing worldwide with German company Siemens agreeing

to pay $800 million (£564 million) in a settlement with the

US over allegations regarding payments to government officials in

several countries to win infrastructure contracts.

Halliburton released a statement which did not specifically say

whether it would admit or deny the accusations as part of the final

settlement.

UK Developments :

Serious Fraud Office

The UK Government has confirmed that the Serious Fraud Office

has the lead role in handling foreign bribery allegations and the

...