By Paul Hastings LLP | December 7th, 2015

By Thomas P. O’BrienDaniel Prince & Brian S. Kaewert

Recent guidance by the United States Department of Justice (“DOJ”) reveals that the government may leverage “cooperation credit” under the “Principles of Federal Prosecution of Business Organizations” (authored by former Deputy Attorney General Mark Filip, i.e., the “Filip Memorandum”) to obtain foreign-based information that is outside the scope of a federal grand jury subpoena. And, while this issue was recently previewed in the anti-corruption and anti-bribery context, there is no reason to believe that it may be so limited going forward.

In September, the DOJ released new policy guidance regarding its intent to incentivize changes in corporate culture by investigating and/or prosecuting culpable individuals. The linchpin of that guidance, announced by Deputy Attorney General Sally Q. Yates in a memorandum entitled “Individual Accountability for Corporate Wrongdoing” (the “Yates Memorandum”), is the DOJ’s express linkage of any “cooperation credit” for an organizational defendant to the disclosure—by the company to the government—of “all relevant facts about individual misconduct” and “all individuals involved in or responsible for the misconduct at issue” (emphasis added).

The Yates Memorandum amended the Filip Memorandum with respect to cooperation credits. That is, to emphasize the significance of holding individual wrongdoers accountable for corporate misconduct, prosecutors may not consider a reduction or elimination of penalties for cooperating organizational defendants unless the company conducts a thorough investigation into the scope of the wrongdoing, identifies potentially culpable wrongdoers (including executives), and timely provides the DOJ with all relevant facts concerning the same.

Prosecutors, corporate business and legal professionals, and members of the defense bar continue to consider the import of the Yates Memorandum, both as a general matter and, according to recent public statements, in connection with the production of foreign-based documents and information that might be outside the scope of a federal grand jury subpoena. Put another way, because a federal grand jury subpoena may only be served in the United States (or on a United States national or resident in a foreign country), there is a question regarding whether the government may obtain overseas evidence that it otherwise may not be able to access as a feature of a company’s cooperation under the Yates Memorandum.

The risk is unique given the inherent tension between the government’s recent demand for all information and facts related to wrongdoing and a corporation’s eligibility for cooperation credit, particularly where critical emails or documents may be located in foreign jurisdictions that are outside the scope of compulsory process. The DOJ acknowledged this issue on November 17, 2015, when Assistant Attorney General Leslie R. Caldwell delivered remarks during the American Conference Institute’s 32nd Annual International Conference on the Foreign Corrupt Practices Act. In addressing the Yates Memorandum, Assistant Attorney General Caldwell explained that “[i]n addition to identifying the individuals involved, full cooperation includes providing timely updates on the status of the internal investigation, making officers and employees available for interviews—to the extent this is within the company’s control—and proactive document production, especially for evidence located in foreign countries” (emphasis added).

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By Paul Hastings LLP | November 3rd, 2015

By William Sullivan, John Durant and Jenifer Doan

On September 9, 2015, the Department of Justice (“DOJ”) issued new policies in the form of “six specific steps” intended to strengthen the DOJ’s efforts in holding individual corporate wrongdoers accountable (the “Yates Memorandum”). Though most of the announced policies in the Yates Memorandum are not entirely new, many represent institutional policy shifts that change the way the DOJ will investigate, develop, charge, and resolve cases, according to Deputy Attorney Sally Yates. These policies may have wide-reaching implications for companies and corporate executives dealing with parallel proceedings, as outlined below. The following overview focuses on the potential impact to civil litigation rather than criminal issues.

Overview of the Yates Memorandum

Briefly, the six guidelines are as follows:

  1. Cooperation credit only available if companies provide “all relevant facts.” To be eligible for any cooperation credit, corporations must provide to the DOJ all relevant facts about the individuals involved in corporate misconduct. Specifically, if known, the company must identify all individuals involved in or responsible for the misconduct at issue, regardless of their position, status, or seniority, and provide to the Department all facts relating to that misconduct.
  2. Criminal and civil corporate investigations should focus on individuals from inception.Criminal and civil corporate investigations should focus on individuals from inception.
  3. Criminal and civil DOJ attorneys should communicate and refer. Criminal and civil attorneys handling corporate investigations should be in routine communication with one another. As early as permissible, the DOJ’s criminal and civil attorneys should notify each other of conduct that might give rise to potential liability under each department’s purview.
  4. No more protection for individuals from criminal and civil liability. Because of the importance of holding responsible individuals to account, absent extraordinary circumstances or a contrary approved departmental policy, DOJ lawyers should not agree to a corporate resolution that includes an agreement to dismiss charges against, or provide immunity for, individual officers or employees.
  5. Individual cases must be efficiently prosecuted. Corporate cases should not be resolved without a clear plan to resolve related individual cases before the statute of limitations expires, and declinations as to individuals in such cases must be memorialized. Delays in the corporate investigation should not affect the Department’s ability to pursue potentially culpable individuals and tolling agreements should be the rare exception.
  6. Reduce focus on an individual’s ability to pay. Civil attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond that individual’s ability to pay. Rather, in deciding whether to file a civil action against an individual, Department attorneys should consider factors such as whether the person’s misconduct was serious, whether it is actionable, whether the admissible evidence will probably be sufficient to obtain and sustain a judgment, and whether pursuing the action reflects an important federal interest.

The Potential Impact on Parallel Proceedings

As an initial matter, the Yates Memorandum leaves many questions unanswered regarding what exactly the DOJ will require in order to receive “cooperation credit.” Will it be that corporations must “point the finger” at some individual in order to receive cooperation credit, even if their thorough investigation demonstrates that there is no culpable individual? What about individuals—will those who cooperate and identify others culpable be entitled to any similar cooperation credit? These questions, among others, are likely to remain unanswered until we see how the guidance in the Yates Memorandum is applied in future criminal and civil cases.

Importantly, the Yates Memorandum expressly recognizes and reaffirms the “importance of parallel development of civil and criminal proceedings,” citing to Chapter 1-12.000 of the U.S. Attorneys’ Manual titled “Coordination of Parallel Criminal, Civil, Regulatory and Administrative Proceedings.” While the DOJ has had a longstanding policy that DOJ prosecutors and civil attorneys handling white-collar matters “should timely communicate, coordinate, and cooperate with one another and with agency attorneys to the fullest extent appropriate to the case and permissible by law,” the Yates Memorandum not only reinforces this policy but broadens it, advising that criminal attorneys should notify civil attorneys “as early as permissible” of potential individual civil liability, and vice versa. Further, the Yates Memorandum notes that “if there is a decision not to pursue a criminal action against an individual—due to questions of intent or burden of proof, for example—criminal attorneys should confer with their civil counterparts so that they may make an assessment under applicable civil statutes and consistent with this guidance.” Considering that the burden of proof is generally easier to meet in civil cases, this guidance is likely to result in more civil cases being filed as a result of referrals from DOJ attorneys handling ongoing criminal actions.

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By Paul Hastings LLP | August 4th, 2015

By Nathaniel Edmonds and Corinne Lammers

On July 30, 2015, the Chief of the Fraud Section of the U.S. Department of Justice (“DOJ”) confirmed that DOJ is hiring an attorney to serve as a Foreign Corrupt Practices Act (“FCPA”) compliance expert. DOJ has long emphasized the importance of compliance and remediation, and with this new position, it is putting its money where its mouth is. There has never been a more explicit signal by DOJ that companies need to enhance their anti-corruption compliance programs. DOJ has made clear that it will reward companies that go beyond mere paper programs and instead design anti-corruption compliance programs that efficiently prevent misconduct and quickly detect improper payments when employees evade a company’s strong financial controls.

DOJ’s new compliance counsel—who has been selected and currently is undergoing vetting—will help DOJ determine whether to prosecute a company for FCPA violations. This new compliance counsel position constitutes a significant change for DOJ, which in the past has relied on its cadre of white collar criminal prosecutors to evaluate compliance programs. The compliance counsel will help DOJ answer the recurring issue of whether an FCPA violation occurred because the company lacked an effective anti-corruption compliance program or because a rogue employee circumvented an otherwise strong program. Should DOJ decide to prosecute the company, the compliance counsel’s evaluation of the company’s compliance program will inform the final resolution with the company, including whether the company will be required to retain an independent compliance monitor.

In several FCPA resolutions with companies, public speeches by DOJ staff, official guidance provided in the FCPA Resource Guide, and the U.S. Sentencing Guidelines, DOJ has repeatedly emphasized that compliance must be a priority for companies facing anti-corruption challenges and that companies who have invested in effective compliance programs to prevent and detect potential FCPA violations will receive significant consideration and meaningful benefits from DOJ. Cases providing vivid examples of this point include:

  • Morgan Stanley: DOJ declined to prosecute Morgan Stanley for FCPA violations based on its strong compliance program, expressly observing that “Morgan Stanley maintained a system of internal controls meant to ensure accountability for its assets and to prevent employees from offering, promising or paying anything of value to foreign government officials.” In their press release, DOJ also cited to the significant training that Morgan Stanley provided to its employees, the rigorous monitoring and testing protocols, and third party controls.
  • Ralph Lauren: Ralph Lauren secured a Non-Prosecution Agreement with DOJ and the U.S. Securities and Exchange Commission (“SEC”) for its FCPA violations because of that company’s “early and extensive remediation, including conducting extensive FCPA training for employees worldwide, enhancing the company’s existing FCPA policy, implementing an enhanced gift policy and other enhanced compliance, control, and anti-corruption policies and procedures, enhancing its due diligence protocol for third-party agents, terminating culpable employees and a third-party agent, instituting a whistleblower hotline, and hiring a designated corporate compliance attorney.”

In these and other cases, DOJ repeatedly has emphasized the importance of a strong compliance program and attempted to demonstrate publicly how an effective compliance program can either help a company avoid prosecution altogether or at least mitigate the associated penalties. In contrast, DOJ makes clear that when a company knowingly and willfully fails to invest in anti-corruption compliance programs, that company should pay a significant penalty. In the press release announcing the guilty plea of BAE Systems plc and the corresponding $400 million penalty, DOJ highlighted the fact that the company had “knowingly and willfully failed to create sufficient compliance mechanisms to prevent and detect violations of the anti-bribery provisions of the FCPA.”

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By Paul Hastings LLP | May 7th, 2015

By Gary F. GiampetruzziS. Joy Dowdle and Lucy B. Jennings

In a potentially alarming trend for companies, the Securities and Exchange Commission (the “SEC”) recently announced the award of more than one million dollars to a compliance officer who utilized the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Whistleblower Program (the “Dodd-Frank Whistleblower Program” or the “Program”) to voluntarily provide information to assist the SEC in an enforcement action against the whistleblower’s own company. According to Andrew Ceresney, Director of the SEC’s Division of Enforcement, the compliance officer reported misconduct through the Program “after responsible management at the entity became aware of potentially impending harm to investors and failed to take steps to prevent it.” This whistleblower is the 16th to receive an award under the Program since its inception in 2011, and the second in 2015. The SEC’s full April 22, 2022 press release (the “Release”) and award order can be found here. This represents the second time a compliance professional has received an award under the Program, with the first having come just this past August.

The SEC awarded the compliance professional turned whistleblower between $1.4 million and $1.6 million, which represents between 10 and 30 percent of the amount collected in actions, as required under Dodd-Frank Whistleblower Program. To qualify for an award, an eligible whistleblower must voluntarily provide original information about a possible violation of the federal securities laws that results in a recovery by the SEC of $1 million or more.  As with prior awards under the Program, and keeping with the strong and stated goal of the SEC to maintain the confidentiality of whistleblowers, the award order is redacted and provides little detail about the underlying matter or the compliance professional who triggered it.

The Program generally provides that employees whose principal duties involve compliance or internal audit responsibilities are ineligible to receive awards, but there are several exceptions, including instances where the whistleblower has a reasonable basis for believing that the disclosure to the SEC is necessary to prevent the company from engaging in conduct that was likely to cause substantial financial harm to the company or investors. These exceptions were the subject of much debate during the rule-making period as companies, trade associations, and others expressed concern that permitting gatekeepers to participate in the Program would inappropriately incentivize internal audit and compliance professionals to report matters rather than address them through the internal functions they are responsible for executing. Despite these concerns and the initial uncertainty surrounding the breadth of these exemptions, two of the 16 awards provided under the Program have now gone to such whistleblowers, making clear that the SEC is ready, willing, and able to reward compliance and internal audit employees turned whistleblowers.

As detailed in the 2014 Annual Report of the Dodd-Frank Whistleblower Program, the number of whistleblower tips received through the program has increased steadily each year, with 3,620 tips received during the Program’s FY2014—up from 3,238 in FY2013, and 3,001 in FY2012. For FY2014, the most common complaint categories reported by whistleblowers included Corporate Disclosures and Financials (16.9%), Offering Fraud (16%), and Manipulation (15.5%). The specific category covering FCPA-related submissions, which has increased each year, rose in FY2014 to 159 tips. Similarly, the “Other” category, which is generally understood to include some FCPA-related tips, also again rose in FY2014, with 911 reported tips. In FY2014, tips were received from all fifty states, the District of Columbia, and Puerto Rico. Since the Program’s creation, the SEC has received tips from individuals in 83 countries outside of United States and in FY2014, submissions were sent by individuals in 60 foreign countries. In FY2014, the highest number of foreign tips came from whistleblowers in the United Kingdom (70 tips), India (69 tips), Canada (58 tips), the People’s Republic of China (32 tips), and Australia (29 tips). The continued rise in the number of tips received, in addition to the expanding origin of such submissions, makes clear the Dodd-Frank Whistleblower Program is quickly becoming a core mechanism for whistleblowers across the globe to raise concerns. This most recent award further complicates the landscape for corporations considering this trend, underscoring that—in addition to increased reporting from around the globe—a company may well find its issues reported by the very internal personnel entrusted to detect, analyze, and remediate these concerns.

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By Paul Hastings LLP | March 27th, 2015

By Gary F. GiampetruzziS. Joy DowdleJennifer A. Ebling

In an 8-K issued last week, Biomet, Inc., (“Biomet” or the “Company”) an Indiana-based medical device company, announced that the Department of Justice (“DOJ”) had extended the Company’s Deferred Prosecution Agreement (“DPA”) and monitorship relating to violations of the Foreign Corrupt Practices Act (“FCPA”). While few details have been disclosed relating to this historic extension, its warning is clear—where prosecutors question a company’s candor, cooperation, or remediation of issues, the grip of formal oversight will not be easily released.

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By Paul Hastings LLP | September 2nd, 2014

By Gary Giampetruzzi, Ananda Martin, Haiyan Tang and Baker Chen

In recent years, eliminating corruption in the healthcare industry has been a major focus of U.S. regulators.  Since 2003, the U.S. Securities and Exchange Commission (“SEC”) and Department of Justice (“DOJ”) have brought over 30 enforcement actions against medical device and pharmaceutical companies under the U.S. Foreign Corrupt Practices Act (“FCPA”). China, which has figured in roughly a quarter of these cases, has responded in kind, revamping its own anti-bribery laws and initiating numerous investigations into the activities of domestic and international healthcare companies operating within its territory.  Until recently, multinational healthcare companies operating in this challenging but growing market could afford to concentrate their compliance efforts on U.S., and, since the entry into force of the U.K. Bribery act in 2010, U.K. regulatory risks.  Chinese regulators’ proactive stance, as reflected by the announcement of their own industry sweeps of the pharmaceutical and medical device industries and the seemingly endless succession of enforcement headlines that has followed, means that multinationals must now also focus on compliance with domestic law.  This heightened focus on combatting corruption in the healthcare industry is clearly reflected in the recent adoption of several anti-bribery measures: Circulars 50, 163 and 49.

I. CIRCULARS 50 AND 163: A BIGGER, BADDER BLACKLIST

Effective March 1, 2014, Circular 50 updates existing rules for blacklisting healthcare companies engaged in bribery of state healthcare institutions and medical personnel, which had been in effect since January 2007, and expands the scope of activity subject to sanctions.  Under the previous rules, healthcare companies and individual service providers who were convicted of commercial bribery by a Chinese court, investigated and sanctioned by Communist Party disciplinary authorities or subject to administrative penalties such as those issued by China’s State Food and Drug Administration were subject to blacklisting. Provincial medical institutions were prohibited from purchasing pharmaceuticals, medical equipment and disposable medical products from such “blacklisted” companies for two years.  Circular 50 extends blacklisting to situations in which (i) the defendant in a bribery prosecution is exonerated in court and (ii) the alleged crime is “minor” and the regulatory authority declines to pursue criminal charges.

In short, Circular 50 now raises the possibility that companies and their employees will be blacklisted simply because they become the target of a bribery investigation, even in cases where they are found not guilty in court or a prosecutor fails to press charges.
Circular 50 also provides the following enhancements to existing blacklisting regulations:

  • New pre-blacklisting administrative procedures to contest regulatory decisions;
  • Additional requirements for purchase and distribution agreements between hospitals and healthcare companies, including disclosure of the identity of the relevant sales representative and inclusion of anti-commercial bribery provisions;
  • Clarifications regarding the geographic scope and duration of sanctions.  For public hospitals and other state-funded medical institutions, in addition to the existing prohibition against purchasing goods from blacklisted companies for two years in the province where the bribery occurred, the new regulations impose a penalty in the form of a deduction of points when competing for government contracts in other provinces.  If a company is blacklisted two or more times within a five-year period, the violator will be prohibited from selling its products to any public or publicly-funded medical institution nationwide; and
  • Obligations for healthcare institutions and lower-level healthcare authorities to report improper payments.

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By Paul Hastings LLP | April 22nd, 2014

By Jeremy Evans and Andreas Stargard

The long-arm of the U.S. government and its increasing willingness to pursue foreign nationals for alleged violations of U.S. law was further in evidence last Friday when the Antitrust Division of the U.S. Justice Department announced that it had extradited Romano Pisciotti, an Italian national, from Germany to the U.S. on a charge filed more than 31⁄2 years ago that he participated in a price-fixing cartel involving the sale of marine hose.

Pisciotti is the first foreign national to be extradited to the U.S. purely for an antitrust charge, although he joins a large number of foreign nationals in recent years to have been charged criminally by the Division in cartel cases, many of whom have agreed to plea deals requiring them to serve time in U.S. prisons. The Antitrust Division is not alone in its pursuit of foreign nationals; the Fraud Division of the Justice Department has also pursued extraditions of foreign nationals for violations of the Foreign Corrupt Practices Act (“FCPA”) in recent years. Indeed, Pisciotti follows his countryman Flavio Ricotti, who, in 2010, also was arrested in Germany and extradited to the U.S. following his indictment on an FCPA charge. It is clear that in both antitrust cartel and FCPA investigations, the U.S. government is growing ever-confident in its power and ability to bring uncooperative foreign executives to the U.S. to face criminal charges in the U.S., even for conduct that occurred outside the U.S.

The Marine Hose Investigation

Pisciotti’s extradition is the latest chapter in the long-running marine hose cartel investigation. In May 2007, the Antitrust Division arrested eight foreign nationals traveling on business in the U.S. and charged them for their roles in an antitrust conspiracy involving the sale of marine hose used to transport oil. The Division’s investigation was part of a multi-national law enforcement effort that included the European Commission and the U.K.’s Office of Fair Trading and much of the conduct at issue was alleged to have happened overseas. In the years that followed, the Antitrust Division secured over $54 million in fines from five companies, and nine individuals served jail time arising from their alleged involvement in the cartel. Two of these dispositions are worth particular note. The first involved the separate plea agreements by Bridgestone Corporation and Misao Hioki, a Japanese executive, each of which agreed to plead guilty to both an antitrust charge for involvement in the alleged conspiracy, as well as an FCPA charge relating to corrupt payments to government officials in various Latin American countries. These appear to be the only instances in which either a company or an executive has pled to both antitrust and FCPA charges arising from the same investigation. The second involved three British executives arrested in the U.S. at the onset of the investigation. Under a unique arrangement, the three were charged and sentenced by authorities in both the U.S. and the U.K., but the U.S. plea deals permitted them to return to the U.K. where they served their prison sentences concurrently.

Prior to Pisciotti’s extradition, the last criminal disposition involving an executive in the marine hose investigation occurred in 2009. But, what was not publicly known until recently is that the Antitrust Division had secured a sealed indictment of Pisciotti in August 2010 alleging that he rigged bids, fixed prices, and allocated markets in the sale of marine hose. It was this indictment that led to Pisciotti’s arrest in Germany last June and the subsequent extradition proceedings. The Division likely followed the same procedure that it did with Ricotti in the earlier FCPA case, using Pisciotti’s sealed indictment to obtain an Interpol red notice, effectively an international arrest warrant. Under the principle of reciprocal or dual criminality, countries often will only extradite individuals to the U.S. if an extradition treaty exists between the two countries that requires a person’s conduct to be a crime in both countries. Bid rigging is a criminal offense in Germany, thus ensnaring Pisciotti transiting through Germany on business travel and leading to his arrest in a country prepared to extradite him. Pisciotti was flown to Miami on Thursday and arraigned in federal court the following day. He now faces charges that could result in a maximum of 10 years in prison and $1 million in criminal fines.

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By Paul Hastings LLP | January 24th, 2014

By Stephen B. Kinnaird, Charles A. Patrizia, Igor V. Timofeyev, Sean D, Unger and Ian A. Herbert

Extending its 2011 decision narrowing the application of general jurisdiction over foreign corporations, the Supreme Court significantly limited the forums in which a foreign (or out-of-state) corporation may be sued for foreign conduct. In Daimler AG v. Bauman, No. 11-965 (January 14, 2022), the Supreme Court held that “all-purpose” or “general” personal jurisdiction — the ability to hear claims unrelated to the forum state — is only proper where the corporation is “at home.”

The Court explained that a corporation is not “at home” everywhere it does substantial business, effectively abrogating many state statutes that authorize exercise of personal jurisdiction against any out-of-state company found to be “doing business” in the state. Instead, the Court has now largely constrained the exercise of general personal jurisdiction over a corporation to forums in the state where it is incorporated or has its principal place of business.1 In addition, the Court severely curtailed plaintiffs’ ability to use a subsidiary’s presence in the forum state to claim jurisdiction over a foreign or out-of-state parent corporation. Because Daimler strengthens the ability of foreign and out-of-state corporations to avoid court proceedings in inhospitable forums, it has substantial strategic implications for defendants and plaintiffs alike.

Background

Daimler AG is a German company that manufactures Mercedes Benz vehicles in Germany and markets them worldwide through subsidiaries. In 2004, twenty-two Argentinian plaintiffs brought suit against Daimler in the Northern District of California. Asserting violations of the Alien Tort Statute and the Torture Victim Protection Act, as well as claims for wrongful death and intentional infliction of emotional distress, the plaintiffs alleged that, between 1976 and 1983, Daimler’s subsidiary, Mercedes-Benz Argentina, collaborated with Argentinian forces to harm plaintiffs and their relatives.

The plaintiffs asserted that, although they were foreigners and the events at issue all occurred outside California, the California district court nonetheless had jurisdiction over Daimler based on Daimler’s own limited presence in California and on the presence of Daimler’s indirect subsidiary, Mercedes-Benz USA (MBUSA) — Daimler’s exclusive importer and distributor in the United States. With respect to Daimler, the plaintiffs alleged that the company was listed on the Pacific Stock Exchange in California and engaged in litigation and other activities in California. With respect to MBUSA, the plaintiffs argued that it should be treated as Daimler’s agent for jurisdictional purposes. MBUSA is a Delaware corporation with its principal place of business in New Jersey, but it has multiple facilities in California and is the largest supplier of luxury vehicles to the California market.

The district court granted Daimler’s motion to dismiss, concluding that Daimler’s own contacts with California were insufficient to support general jurisdiction and that MBUSA’s presence in California was irrelevant because it was not Daimler’s agent. After initially affirming the district court, the Ninth Circuit then granted rehearing and reversed. The court of appeals concluded that MBUSA acted as Daimler’s agent, and therefore MBUSA’s contacts with California could be imputed to Daimler. In reaching this conclusion, the Ninth Circuit considered whether the subsidiary “performs services that are sufficiently important to the foreign corporation” so that, in the subsidiary’s absence, “the corporation’s own officials would undertake to perform substantially similar services.”

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ANALYSIS: U.S. Department of Justice May Leverage "Cooperation Credit" to Obtain Foreign-Based Evidence