FCPA Risks and the Middle East

The dangers of corruption extend into countries in the Middle East. Everyone likes to talk about Brazil, Russia, India and China, but the Middle east raises real corruption risks, and that risk is growing every day. Everyone likes to think that the events of the Spring with increased desires for democracy would reduce the risk of corruption but there is no evidence that has occurred.

The Middle East is particularly corrupt, even as some countries work to combat graft. In particular, Algeria, Egypt, Lebanon, Libya, Yemen, Iran, Syria and Iraq fall within the bottom half of all countries scored by Transparency International. Countries higher up the scale don’t fare much better: Turkey is seen as being as corrupt as Cuba, Kuwait is seen as corrupt as Georgia, and Saudi Arabia and Italy are seen as comparable. In fact, the only Middle Eastern countries in the top quarter of countries surveyed were Qatar, the United Arab Emirates and Oman.

Other characteristics of Middle Eastern countries create an increased risk of corruption, including: authoritarian regimes, monarchies and state-owned or controlled entities. The authoritarian rule often found in these countries means there is a lack of transparency Several FCPA enforcement actions have involved activities in the Middle East, including the United Nations Iraq Oil-for-Fodd-Scandal; Control Components; and

The numerous enforcement actions related to the UN Iraq Oil for Food program reflect the dangers of third party agents and consultants and so-called “after-sales service fees.” The Oil for Food program was set up to provide humanitarian relief to Iraqis while their country was under international trade sanctions. Its terms required payments for Iraqi crude oil be made to a U.N. escrow account created to allow the Iraqi government to purchase humanitarian goods. Beginning in 2000, the Iraqi government began to subvert the program, demanding kickbacks from both companies purchasing oil and those providing humanitarian relief. The payments took many forms, with companies making the bribes into Iraqi-controlled accounts in Jordan and Lebanon.

The Oil for Food scandal also highlights two other common corruption patterns—using consultants to pay bribes and the use of false invoices or fictitious “service fees” to hide improper payments to government officials. In cases, such as AB Volvo, companies use third party agents or intermediaries to make payments to government officials, which are then reimbursed or otherwise paid by the company through “consulting fees” for nonexistent services or through fictional invoices for goods and services that do not exist.

The pharmaceutical industry, in which DOJ has recently indicated a particular interest, was also caught up in the Iraq scandal, with Akzo Nobel and Novo Nordisk both paying millions to settle charges regarding illegal payments through third-party agents and consultants, including “after-sales service fees.”

The action against York International Corp. further illustrates the inherent risks inherent in using agents. In York, the company paid $22 million to settle charges that it paid approximately $522,500 to an intermediary knowing that most of the money was intended to bribe UAE officials to secure contracts. Similarly, going back to the Siemens case, Siemens allegedly paid nearly $20 million in bribes to a former director of the state-owned Israel Electric Company, which were routed through a consultant ostensibly engaged to “identify and define sales opportunities” and otherwise support contract negotiations. In reality, the business consultant was a Hong Kong-based clothing company with no expertise in the power generation industry.

The Textron matter is also relevant because it made many payments through Lebanese and Jordanian consulting firms and was ultimately charged for the manner in which it recorded the payments (a common hook used by government regulators to get companies to admit to FCPA violations). The company recorded the bribes paid through the agent as “commissions”, evidencing its awareness of the illicit nature of the “after-sales service fees”. Textron was also charged for illicit payments made through its Egyptian agent, where the kickbacks were again disguised as commissions

Adding to the complexity of operating in the Middle East is the broad definition of “government official” under the FCPA. Under the government’s interpretation of the FCPA, employees of the state-owned Abu Dhabi National Oil Company in the Textron case were “foreign officials” for purposes of the FCPA. This same view was also applied to quasi-governmental entities, as in HealthSouth, where the company was charged with making illicit payments to the director of a foundation in connection with efforts to secure a staffing and management agreement with a Saudi Arabian hospital.

Other routine interactions with government officials also present FCPA risks. Industries subject to government licensing controls are at risk, as with Latin Node, a Florida-based telecommunications company, that pleaded guilty to violating the FCPA’s antibribery provisions in connection with payments of more than $1 million to government officials in Yemen in order to receive and maintain favorable interconnection rates. The payments were made through a local partner, who received certain profits that Latin Node understood would be paid to government officials.

Interactions with routine government functions also present risks. In the Turk Deltapine case, involving Delta & Pine’s Turkish subsidiary, the company allegedly made payments to government inspectors who issued certifications regarding the fields where the company’s crops were grown. Rather than actually conducting necessary inspections, Turk Deltapine paid off government inspectors, who in turn failed to inspect the fields as they were required to do.

In the case of Control Components executives, both pled guilty to making corrupt payments to officials at various state-owned enterprises, including the Dolphin Energy company in the United Arab Emirates and Safco in Saudi Arabia. As with other cases, the executives made payments to government officials, disguised as “commissions.” The payments were primarily made to individuals at the state-owned companies who had the power to direct business.