Corruption Digest April 2011

1 of 6

Welcome to Dorsey & Whitney’s monthly corruption digest. Anti-corruption enforcement crosses boundaries like no other, so keeping up to date is more important than ever. In this digest, we draw together news of enforcement activity throughout the world and aim to reduce your information overload. Our London, New York and Washington DC offices edit the digest and select the most important material so that you can use this digest as a single source of information.

Dorsey & Whitney also offers a US/UK corruption workshop featuring experts from both countries that can be tailored to individual organisations. If you have any questions or want to learn about the corruption workshops, feel free to call either Nicholas Burkill in London, Nick Akerman in New York or Tom Gorman in Washington DC. Their contact information appears at the end of this digest.

Corruption issues are also addressed in the Anti-Fraud Network’s newsletters: see http://www.antifraudnetwork.com for current and archived material; see also the Computer Fraud website at http://computerfraud.us and www.secactions.com.

Nicholas Burkill and Tom Gorman will be among several Dorsey panelists taking part in the Dorsey & Whitney Symposium for Corporate Leaders in New York City on 3 May 2011.

THE USA

Investigations

Hercules Offshore, Inc.

Hercules Offshore Inc. reported recently that it had received notifications from the U.S. Department of Justice (“DOJ”) and the U.S. Securities and Exchange Commission (“SEC”) related to an investigation of the company’s foreign activities. Hercules also received a subpoena requesting the production of documents as part of an investigation into possible violations of the Foreign Corrupt Practices Act (“FCPA”).

The company stated that it intends to cooperate fully with the investigations, while noting that it is not possible to predict the outcome of the investigations, the expenses that will be incurred, or the impact the investigations will have on the company’s stock price.

Settlements

Johnson & Johnson

Johnson & Johnson recently announced that it will pay over $90 million in fines, disgorgement and

interest to settle FCPA investigations by the DOJ and the SEC. The investigations began in 2007 when Johnson & Johnson voluntarily disclosed that it believed non-U.S. subsidiaries had made improper payments in connection with the sale of medical devices. In addition, the settlement resolved an investigation of certain Johnson & Johnson subsidiaries in connection with the United Nations Oil for Food Program in Iraq.

As a formal matter, the settlement includes a Deferred Prosecution Agreement with the DOJ and a Consent to Final Judgment with the SEC. Johnson & Johnson’s voluntary disclosures, subsequent cooperation, and recent compliance efforts are recognized in the agreements. Pursuant to the Deferred Prosecution Agreement, the charges filed by the DOJ against a Johnson & Johnson subsidiary will be dismissed if Johnson & Johnson completes three years of enhanced FCPA compliance undertakings and reporting.

IBM

In the culmination of a lengthy investigation, IBM settled SEC charges made pursuant to the FCPA. As part of the settlement, IBM agreed to disgorge $5.3 million and to pay a $2 million penalty and $2.7 million in prejudgment interest.

The investigation had concerned payments made by IBM's Chinese subsidiaries to cover travel expenses of Chinese government officials. The SEC claimed that IBM had failed to detect at least 114 instances of this misconduct. The SEC also alleged that employees of an IBM subsidiary in Korea paid more than $200,000 in bribes to governmental officials to secure $54 million in procurement contracts.

Comverse Technology Inc.

Comverse, a Manhattan software company, has agreed to pay a total of $2.8 million to the DOJ and the SEC to avoid prosecution in an FCPA case. The government had alleged that Comverse made $536,000 in payments to officials from OTE, a Greek telecom company, from 2003 to 2006. OTE agreed to purchase Comverse’s services in exchange for this payment. In addition to paying penalties, Comverse accepted responsibility for the fact that the illegal payments had been recorded falsely as legitimate in a subsidiary’s books.

The DOJ noted that "[t]he agreement recognises the company’s thorough self-investigation and the results of its investigation, voluntary disclosure of the underlying conduct, and full cooperation with the department.” DOJ also stated that Comverse has “undertaken extensive remedial efforts and overhauled its overall compliance culture ... "

Last month, Comverse fired its chief executive who reportedly fled to Namibia in the hope of avoiding federal charges.

Ball Corporation

It was recently reported that Ball Corporation, a public company whose businesses include aerospace and technologies segments, resolved an SEC enforcement action concerning FCPA violations. Ball agreed to a cease and desist order prohibiting future FCPA violations, and agreed to pay a $300,000 civil penalty.

The action had centered on the SEC’s allegations that Ball, through an Argentine subsidiary, paid bribes totaling at least $106,749 to employees of the Argentine government. The purpose of the bribes was to secure the importation of prohibited

machinery and reduced tariffs on the exportation of raw materials.

The payments were fraudulently characterized on the company’s books. The SEC claimed that when Ball accounting personnel had learned of the improper payments, the company did not take sufficient action to ensure that such activities did not recur.

The settlement of the SEC action was predicated on Ball’s remedial action, voluntary disclosure of these matters, and cooperation with the SEC.

Pleas

KBR Attorney

Jeffrey Tesler, a British lawyer accused of helping the former Halliburton subsidiary Kellogg, Brown & Root (KBR) bribe Nigerian officials to win more than $6 billion in contracts, pleaded guilty recently to federal charges. The bribery was alleged to have occurred for about 10 years, through 2004, and involved at least four construction contracts.

Tesler was ordered to forfeit nearly $150 million and will be sentenced on June 22. He had been extradited from Britain earlier this year to face the charges.

In February 2009, KBR pleaded guilty in an FCPA case to paying bribes for the Nigerian construction contracts. The company agreed to pay more than $400 million in fines. KBR's former chief executive, Albert J. Stanley, pleaded guilty in September 2008 for his role in the bribery scheme.

Trends

Given the prevalence of FCPA investigations and prosecutions, it is perhaps not surprising that an insurance company is now offering FCPA insurance. Chartis recently announced the introduction of "Investigation Edge,” a product to cover costs “arising from SEC investigations, including those related to internal investigations." This coverage, according to Chartis, will pay for legal expenses, discovery costs and insurable settlements resulting from investigations by enforcement authorities.

2 of 6

THE UNITED KINGDOM

The Bribery Act

The UK government has released guidance in preparation for the Bribery Act (the “Act”) coming into force on 1 July 2011. The guidance makes it clear that companies should adopt a risk-based and proportionate approach and address the concerns of the business community. Kenneth Clarke, the Lord Chancellor and Secretary of State for Justice, described the Act as “an important piece of legislation which seeks to tackle the scourge of bribery in international commerce.”

The guidance sets out six principles that all companies should use as a framework in order to ensure that “adequate procedures” have been taken: proportionate procedure, top level commitment, risk assessment, due diligence, communication (including training) and monitoring and review.

The guidance confirms that adequate bribery prevention procedures ought to be proportionate to the bribery risks faced, and that reasonable and proportionate corporate hospitality is not prohibited.

The guidance also provides clearer meaning to the definition of "associated person". Although the definition is deliberately broad, it will apply to supply chains, subsidiaries and joint ventures but within specific parameters. The exact scope of who is an “associated person” will still need to be decided by the courts, so some uncertainty remains.

The guidance also suggests that it is unlikely that a company that has no other connection with the UK other than being listed on the London Stock Exchange will be caught by the Act. The guidance contains a series of case studies designed to show appropriate responses. These include facilitation payment and corporate hospitality issues.

The Serious Fraud Office has also published its guidelines on the exercise of its prosecutorial discretion.

Medical goods to Iraq supplier jailed for paying kick-backs

Mark Rodney Jessop sold medical goods to Iraq, initially as an employee of a British surgical instruments company and then subsequently through his own companies. He established JJ Bureau Ltd and Opthalmedex Ltd in 1987. The majority of his business dealings were through these companies although he also acted as an agent for other suppliers.

Contracts for medical goods were awarded by the Iraqi government (in this case the State Company for Marketing Drugs and Medical Appliances, known as Kimadia). Between 1996 and 2003 Mr Jessop entered into 54 contracts, which made him the most active supplier of medical goods in terms of numbers of contracts. The value of these contracts totalled $12.3 million.

The Oil For Food Programme was designed to alleviate the effect economic sanctions were having on the people of Iraq, the UN Security Council allowed Iraq to export its oil in order to pay for the importation of humanitarian goods. Kimadia negotiated with suppliers and awarded contracts. Suppliers in the UK would need approval from the British Government and an export licence before they could contend for contracts. Funds would be held in UN escrow accounts.

In August 2000, the Iraqi government imposed a policy that contract prices be uplifted to allow for a 10% bribe to the regime. Pro-forma invoices were submitted by suppliers that did not reveal the uplift, describing it as "after sales service fees". The supplier was required to pay the kickback into accounts held by the Iraqi government before the goods were shipped to Iraq.

Mr Jessop accepted contracts on this basis. He admits that nearly €104,649 was illegally transferred, with a further € 235,237 outstanding, unpaid because of military intervention in March 2003.

Mr Jessop also had contract dealings with Kimadia through a local agent Dr Ishan Ibrahim. Mr Jessop paid commission to Mr Ibrahim for his services totalling £40,000, in the form of cash during his visits to Iraq. Such payments were outside the scope of the contracts and, like the 10% contract value payments into a Kimadia

3 of 6

account, were made without approval from HM Treasury, therefore in breach of UN sanctions that prohibited payments to Iraq or persons in Iraq without (in the UK) a Treasury licence.

In January 2001 Mr Jessop contacted the Foreign & Commonwealth Office for advice on the 10% "after sales service fees". He was advised that he should not proceed with contracts that would put him in breach of UN sanctions. Despite this, later that month Mr Jessop applied for a licence to supply goods to Iraq in a contract with the provision of the bribe.

Mr Jessop was charged in November 2009, and at his trial in April 2011, he pleaded guilty to ten counts of engaging in activities to make funds available to the Iraqi Government in contravention of the Iraq (United Nations Sanctions) Order 2000 (Statutory Instrument 3241) which made it a criminal offence to make funds available to the Iraqi government without a licence.

In addition to the custodial sentence of 24 weeks, Mr Jessop was ordered to pay £150,000 to the Development Fund for Iraq and pay costs of £25,000.

Nigerian Former State Governor Extradited to UK on Corruption Charges

James Onanefe Ibori, one of Nigeria's wealthiest politicians, has been charged in London with 25 offences relating to money laundering and fraud.

Mr Obori was governor of oil-rich Delta state between 1999 and 2007 and has been under investigation in the UK for some years, for allegedly stealing $290 million in state assets and depositing them in UK bank accounts.

State governors, and especially those in oil-rich regions, enjoy extensive powers. While in office Mr Obori had immunity from prosecution He was arrested in Dubai in May 2010 and then extradited to the UK to face the charges.

The UK authorities are reported to have frozen in excess of $100 million in assets that are associated with him.

Mr Obori denies allegations of corruption, stating that “there is no truth to the allegation”.

The SFO successfully pursue DePuy International Limited in joint operation

The SFO has obtained a Civil Recovery Order against DePuy International Limited. The company will pay £4.83 million, plus costs, in recognition of unlawful conduct relating to the sale of orthopaedic products in Greece between 1998 and 2006. This was part of a deal involving the US DOJ: see the US section of this Digest.

The Director of the SFO, Richard Alderman, stated: “When Johnson & Johnson reported the DePuy corruption, the DOJ informed the SFO of issues within our jurisdiction. We worked with the DOJ to find a solution that served both the interests of justice and the company's desire to put illegal activity behind it and move on. I believe the order approved in the High Court...will illustrate to other companies how the SFO works closely with organisations across the world in enforcing the highest ethical standards, but is willing to engage and listen to companies that come to us with problems and help them find solutions”.

An employee of DePuy International Limited received a suspended prison sentence in 2010 for his role.

THE REST OF THE WORLD

France

The former head of L’Oréal, Lindsay Owen-Jones, is facing claims of corruption and money laundering in a scandal that dates back to the 1990s. In papers that were filed with the public prosecutor in Paris, Mr Owen-Jones, is accused of misusing company assets and of involvement in an “abuse of trust”.

L’Oréal have dismissed the charges as being “unfounded” and maintain that they relate to an extinct case that was dismissed from the French courts in 2003. Counsel for Janez Mercun, who has issued the proceedings on behalf of his company Temtrade, say that L’Oréal refer to criminal proceedings that do not relate to the civil proceedings that they have issued.

The claim is in relation to the breach of an exclusivity agreement that Mr Mercun, a Slovenian businessman, had with L’Oréal to

4 of 6

distribute its cosmetic brands such as Lancome in Russia, Belarus and Ukraine in the 1990s. L’Oréal are accused of creating a “grey market” through a company in Dubai that allowed them to avoid paying substantial French taxes as well as personally benefiting Mr Owen-Jones financially. Goods were allegedly being imported into Moscow through this parallel distribution network and being sold 40 percent cheaper. As a result, Mr Mercun is claiming €34 million in damages.

Germany

An extensive bribery scandal at Siemens AG that has shocked corporate Germany over the last four years has finally come to trial. Although Thomas Ganswindt is not the first manager to face charges in relation to this matter, he is the most senior yet.

Mr Ganswindt, who is a former member of the executive board, and who was on track to become chief executive, stands accused of tax evasion and neglecting his supervisory duty. Mr Ganswindt denies any wrongdoing, stating that he trusted the team that he led, and that “[t]here have always been suspicions, but during my time at Siemens, I didn’t learn about one real and concrete case of bribery.” His team is at the centre of the scandal that concerned the payment of bribes to secure contracts on a global scale.

Mr Ganswindt also stands accused of tax evasion, as the bribes were accounted for as consultancy costs, which were subsequently tax-deductible. The maximum possible custodial sentence for tax evasion is five years. Siemens are also claiming damages of €5 million against Mr Ganswindt for failing to prevent corruption from taking place.

The prosecutors are reported as saying that they believe that they have uncovered funds that have been used to pay in the region of €1.3 billion of bribes in recent years. This has led to the departure of an entire senior management team and a cost to Siemens of €2 billion in fines and advisory fees.

Siemens have taken action against other members of the executive board. Last year Heinrich von Pierer, former chief executive and chairman, settled out of court for €5 million.

India

Andimuthu Raja, the former telecommunications minister, and senior industry executives are reportedly facing numerous charges including: forgery of documents, conspiracy, abuse of official position and fraud in relation to a multi-million dollar corruption scandal.

The allegations relate to the awarding of various valuable second generation (“2G”) mobile phone licences. Mr Raja is accused of favouring certain companies whilst awarding the 2G telecoms contracts on a “first come, first served” basis instead of auctioning them off. It is estimated that the loss to the country is $39 billion in lost revenues.

Senior Executives who also face charges in connection with the contracts include those from Etisalat, Reliance ADAG and Reliance. They all deny the charges.

Ireland

A billionaire businessman is said to have paid bribes to a former Irish government minister allowing him to win a highly lucrative mobile-phone licence, according to the report of a corruption tribunal in Dublin, which was 14 years in the making, and was estimated to cost £217 million.

The tribunal, which was headed by Mr Justice Moriarty, concluded that the former minister for communications, Michael Lowry, had "irregular interactions" before the government licence was awarded. The report stated that it was beyond doubt that while the licence was under confidential consideration by civil servants, the minister gave the businessman "substantive information of significant value and assistance to him in securing the licence".

Denis O’Brien, a businessman with a global communications network, is listed as the 254th wealthiest person in the world. In connection to the contracts that he won, he apparently made payments to Mr Lowry totaling £900,000. Mr O’Brien, vehemently denied the charges against him; he accused the Judge of making fundamental errors and said that he himself should be investigated.

5 of 6

The judge described Mr Lowry’s behaviour as “profoundly corrupt to a degree that was nothing short of breathtaking”.

6 of 6

CONTACTS

LONDON

Nicholas Burkill Partner+44 (0)20 7826 4583 burkill.nick@dorsey.com

Alexander Steyne Trainee Solicitor +44 (0)20 7826 4580 mailto:steyne.alexander@dorsey.com

NEW YORK

Nick Akerman Partner+1 (212) 415-9217 akerman.nick@dorsey.com

Joshua Colangelo-Bryan Senior Attorney +1 (212) 415-9234 colangelo.bryan.josh@dorsey.com

WASHINGTON DC

Thomas Gorman Partner+1 (202) 442-3507 gorman.tom@dorsey.com

This update is provided for general informational purposes and is not intended to constitute advice. If you require advice on any of the matters raised in this update, please let us know and we will be delighted to assist.