By McGuireWoods LLP | September 4th, 2015

By Alex Brackett, Charlie Menges and J. Patrick Rowan

More than ever before, financial institutions are concerned about exposure to government enforcement actions, particularly in connection with trade sanctions regulations.  These concerns have led to increasingly robust compliance language in credit agreements with their corporate borrowers.  This article describes some of the enforcement trends that are combining to raise the threat-level for banks and identifies some of the concerns of borrowers regarding the cascading effects on the standard language of contracts governing access to corporate credit.

Representations and warranties, and covenants concerning general compliance with laws have long been a staple of credit agreements between corporate borrowers and financial institutions. More and more, these general provisions are followed by specific and detailed provisions addressing compliance with U.S. and non-U.S. laws and regulations governing sanctions and other trade restrictions, anti-terrorism, anti-bribery and anti-money laundering (AML). The addition of specific reference to some or all of these laws and regulations, combined with the absence of much wiggle room for compliance, stems from several developments that have raised the risks to financial institutions and incentivized them to shift some of that risk to their borrowers.  In turn, borrowers have become increasingly concerned about their ability to assume such risk.

The most important driver for financial institutions is likely the significant number of high-dollar sanctions-related enforcement actions directed at banks by the U.S. Department of Justice (“DOJ”) in recent years.  Most of the matters involve violations of regulations, promulgated and administered by Treasury’s Office of Foreign Assets Control (“OFAC”), that prohibit transactions between the U.S. financial system and Iran.  Eight of the world’s largest banks have acknowledged violating these regulations (or similar regulations involving countries such as Cuba and Sudan) and paid fines ranging from $33 million to $8.9 billion since 2009.  Some of these settlements involved parallel enforcement actions by the New York State Department of Financial Services, which along with counterparts such as the California Department of Business Oversight have become sanctions and AML enforcers to reckon with.

Although most of the enforcement activity has focused on foreign financial institutions, these cases have focused domestic lenders’ attention on compliance with OFAC regulations. At the same time, for several reasons, those regulations are growing increasingly complex.

Unpacking the OFAC Dynamic

First and foremost, the perceived success of international sanctions in forcing Iran to the negotiating table has demonstrated the utility of sanctions to policy makers.  As a result, sanctions are a more popular foreign policy tool.  Sanctions have been a key part of the West’s response to Russia’s activities in Ukraine.  In particular, the sanctions imposed by the U.S. against Russian individuals and businesses have implicated several Russian energy companies and financial institutions that did significant international business, increasing the likelihood that an international transaction could run afoul of OFAC’s regulations.

While U.S. sanctions against Russia have been growing tighter, there are several sets of sanctions that appear to be going in the opposite direction.  Pursuant to the P5+1 Joint Plan of Action with Iran (“JPA”) announced in November 2013, the U.S. temporarily suspended its Iran sanctions in a very limited number of areas. These temporary suspensions are focused almost exclusively on secondary sanctions targeting the conduct of non-U.S. persons and entities, leaving the sanctions essentially unaltered with respect to U.S. persons and entities owned or controlled by U.S. persons. Moreover, the suspension of sanctions will not be extended if the parties are unable to reach agreement on Iran’s nuclear program. Some sanctions imposed by the EU and other members of the international community have also been suspended.

If the agreement reached with Iran over its nuclear program in July 2015 is adopted by the Congress (as now appears likely), it will result in significant changes to U.S. sanctions. However, the U.S. has expressed that its concerns with Iran’s support of terrorism justify continued imposition of a significant sanctions program against Iran, indicating that at least some U.S. sanctions against Iran will remain in place.

On another front, in December 2014, President Obama announced that the U.S. would begin normalizing diplomatic relations with Cuba and called for a lifting of the comprehensive sanctions targeting Cuba. Since then, his administration has announced new measures permitting additional travel, trade and financial transactions with Cuba. However, the changes so far are modest, as the lifting of the embargo will require congressional approval.

The sanctions relating to Iran and Cuba are similar in that, with respect to each, there appears to be substantial easing on the horizon, but we are not there yet.  Because these countries have been closed to U.S. business for some time, there are likely U.S. businesses that are poised to jump in as soon as changes come.  And that raises the possibility that some might jump the gun, violating sanctions in the course of their attempts to lay the groundwork for a post-sanctions era.

In the past, for most companies the breadth of sanctions against these two countries translated to a single, straightforward principle: absolute prohibition.  Now if the red light turns to yellow, opportunities for sanctions violations may increase.

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By McGuireWoods LLP | March 25th, 2015

China’s recently announced plan to restructure and consolidate its state-owned enterprises (SOEs) focuses on bolstering the private sector of its economy and creating economies of scale to allow Chinese companies to better compete internationally. It also may implicate companies’ efforts to comply with the U.S. Foreign Corrupt Practices Act (FCPA), in positive and negative ways. Although the details of the restructuring plan are still unknown, the prospect of any change to China’s vast SOE network raises potentially significant considerations for legal and compliance officials dealing with the definition of “foreign official” under the FCPA. Companies operating in China need to watch this space, as significant changes to the SOE landscape could impact anti-bribery and anti-corruption policies and procedures related to business in China.

On March 5, 2015, at the opening of China’s annual parliamentary meeting, Premier Li Keqiang announced plans to move forward with a “Made in China 2025” strategy to merge and reorganize SOEs in many key industries. Railways, nuclear power plants, auto and aircraft manufacturing, and shipbuilding are likely initial targets for consolidation. Rumors also are swirling about mergers of conglomerates in the oil and telecommunications industries. The restructuring plan, which is expected to be released by the end of the month and will be implemented by the Small Leading Group for State-Owned Enterprise Reform, is expected to create asset-holding companies (perhaps like Temasek in Singapore) to oversee China’s shareholdings in the newly reorganized and consolidated companies and to ensure more economically competitive operations. China is also likely to open its doors to foreign investment as part of the plan, in industries in which foreign investors were never before allowed to participate.

Made in China 2025 was preceded by a pilot program last year, in which six large SOEs were tapped for reforms focusing on “mixed ownership” (i.e., partial privatization), transfers of management control away from political and policy-driven oversight and toward a capital management model focused purely on maximizing shareholder value, and board-centric (rather than centrally planned) appointment of senior management. This pilot program and the reforms announced this month are being viewed as a significant effort by China to make SOEs in key industries look more like − and be more internationally competitive with − Western multinationals through improved governance and increased efficiency.

The question this raises for companies seeking to ensure compliance with the FCPA and similar anti-corruption laws by their operations in China is whether consolidation of the 112 SOE portfolio currently managed by the Chinese government into 50 or fewer SOEs (as some believe is the goal) will improve transparency of government ownership or exacerbate current challenges in understanding just what businesses are owned or controlled, in whole or in part, by the government. Consolidation may bring comfort to compliance-responsible personnel, insofar as there will be fewer SOEs to track and a more recognizable management model with increased visibility into newly consolidated enterprises’ ownership and level of government control. Such information could make due diligence efforts easier and more effective.

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By McGuireWoods LLP | January 9th, 2015

Och-Ziff Capital Management (Och-Ziff), a publicly traded hedge fund, has disclosed that it is the subject of an ongoing investigation by the U.S. Department of Justice (DOJ) and Securities and Exchange Commission (SEC). The inquiry focuses on a “placement fee” Och-Ziff paid in 2007 to a London middleman − Lebanese businessman Mohamad Ali Ajami − to aid Och-Ziff in landing a deal to manage money for the Libyan Investment Authority, Libya’s sovereign-wealth fund. In addition to Och-Ziff, U.S. authorities are investigating Micheal L. Cohen, Och-Ziff’s former head of European investing, who oversaw investments in Libya and other countries in Africa.

Mr. Ajami, it is alleged, gave some of the placement fee he received from Och-Ziff to another intermediary, a Tunisian with ties both to former Libyan dictator Col. Moammar Gadhafi’s son, the now-imprisoned Saif al-Islam, and then-deputy chief of the Libyan Investment Authority, Mustafa Zarti. The U.S. government is investigating whether any portion of this placement fee violated the Foreign Corrupt Practices Act (FCPA), which prohibits, among other activities, providing anything of value to a foreign official to assist in obtaining or retaining business. For its part, Och-Ziff acknowledges the payment to Mr. Ajami. However, Och-Ziff claims it was unaware that the payment went beyond Mr. Ajamai and that Mr. Ajami assured Och-Ziff that he had complied with all laws.

Around the time of the payment of the placement fee, Och-Ziff loaned $40 million to the Magna Group, a company co-founded by Mr. Ajami, for the purpose of developing commercial real estate on the Tripoli, Libya, waterfront. Mr. Ajami’s nephew, who worked on the developments, was found guilty of corruption and sentenced to prison for conspiring with his uncle to pay bribes and forge documents.

This investigation should remind all businesses subject to the FCPA of the risks of using intermediaries when engaging in activity with the potential for contact with foreign officials. As the Organization for Economic Cooperation and Development (OECD) described in its recent analysis of the extent of foreign bribery, some three-quarters of the 427 cases of bribery analyzed involved payments through intermediaries. These intermediaries included, among others, local sales and marketing agents, distributors and local “consulting” firms.

While it may be the case that intermediaries make payments to foreign officials without the principal’s knowledge, a lack of awareness will not insulate such principals from investigation or scrutiny. Given the severe sanctions that may result from a finding of foreign bribery − including civil or criminal penalties, the implementation of a stringent compliance program and imprisonment of individuals − it is critical that entities subject to the FCPA appreciate their responsibilities when entering into arrangements with intermediaries − a primary vehicle for delivering illicit bribes, as described in detail by DOJ and SEC throughout their joint Resource Guide to the FCPA, numerous enforcement actions and other sources of guidance.

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By McGuireWoods LLP | November 13th, 2014

By Ryan E. Bonistalli

Imagine you are a compliance officer for a multinational company with securities listed on a U.S. stock market. The Foreign Corrupt Practices Act (FCPA) falls squarely within your purview, but other anti-corruption regimes seem less relevant because of a lack of enforcement (with the exception, perhaps, of the UK Bribery Act). Until recently, Brazil may have fallen into the category of countries about which you had lesser concerns in terms of vigorous anti-corruption enforcement. However, new enforcement efforts may be tilting the scale. Just ask Embraer SA, which finds itself dealing with criminal prosecutions of employees in Brazil, while facing parallel bribery-related investigations of the company in the United States and Brazil.

On September 23, 2014, The Wall Street Journal reported that Brazilian authorities had filed a criminal complaint alleging that eight Embraer employees bribed government officials in the Dominican Republic to secure a $92 million military procurement contract. According to the report, the U.S. Department of Justice and Securities and Exchange Commission provided evidence to the Brazilian authorities and are assisting in the investigation. The complaint alleges that Embraer vice presidents, regional directors and sales managers agreed to pay $3.5 million to a retired Dominican Air Force colonel who was serving as the director of special projects for the Dominican military, in exchange for his influence over the legislature to approve the contract with Embraer. The money was paid through three shell companies owned by the colonel and allegedly was intended for a Dominican senator. After Embraer’s compliance department prevented the employees from completing the transactions, the employees allegedly concealed the remaining payments as consulting fees in connection with a deal to sell aircraft to the Kingdom of Jordan. The employees are charged with corruption in international transactions and money laundering, and each faces eight years in prison if convicted.

It initially was reported in November 2013 that U.S. and Brazilian authorities were investigating whether Embraer had bribed a government official in the Dominican Republic in exchange for a contract to provide military aircraft. At the time, it was one of the first known investigations by Brazilian authorities into a Brazilian company for bribing government officials outside Brazil, and an indicator that the then-recently passed Brazil Clean Companies Act was in action. It is unknown whether the Brazilian investigation has ended with the criminal indictments. There are no indications that U.S. authorities have ended their investigations into Embraer or that Brazilian authorities have chosen not to pursue the company under the Clean Companies Act. Accordingly, more trouble may still be coming Embraer’s way.

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By McGuireWoods LLP | August 26th, 2014

By Adam Greaves

Bruce Hall, the former Chief Executive Office of Aluminium Bahrain Bsc (“ABLA”) was sentenced on 22 July 2022 to 16 months in prison for conspiracy to corrupt in relation to contracts for the supply of goods and services to ALBA during the period September 2001 to June 2005.  The Serious Fraud Office (“SFO”) press release is here.

Followers of this blog will remember that the SFO also prosecuted Victor Dahdaleh, a British/Canadian billionaire, whose trial collapsed at the end of 2013.

Bruce Hall decided in 2012 to plead guilty to the charges laid by the SFO in 2012.  He accepted that he had received £2.9 million in corrupt payments between 2002 and 2005 including 10,000 Bahraini Dinars in cash from Sheikh Isa Bin Ali Al Khalifa, a member of the Bahraini Royal Family and, at the time, Bahrain’s Minister of Finance and ALBA’s Chairman.  The payments were made in exchange for Mr Hall agreeing to and allowing corrupt payments that Sheikh Isa had been involved in before Mr Hall’s appointment as CEO to continue as a result of the corrupt payments received.  Mr Hall was ordered to pay:

  • £3,070,106.03 within seven days, or face serving an additional term of imprisonment of 10 years;
  • compensation to ALBA in the amount of £500,010;
  • £100,000 as a contribution to the prosecution costs.

The Judge presiding over the hearing, Judge Loraine-Smith said:

“In any view, this was an extremely serious use of corruption…you breached the trust that was placed in you as the CEO of ALBA…corruption has been described as an insidious plague that has corrosive effects across communities…there was a reluctance by you to accept that what was done by you was as corrupt as it so obviously was…”

Judge Loraine-Smith also noted that Mr Hall had cooperated with numerous authorities throughout the investigation.  The Judge held that if he had not been so cooperative, he could have faced around six years in prison, close to the maximum sentence for conspiracy to corrupt (under the old, pre-Bribery Act 2010 laws).  As a result of his cooperation Mr Hall was entitled to a 66% reduction in his sentence and a further one third reduction due to entering a guilty plea.  In addition to which, the 119 days that Mr Hall spent in prison in Australia awaiting extradition to the United Kingdom would be taken off his sentence.

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By McGuireWoods LLP | June 9th, 2014

On May 16, 2014, the U.S. Court of Appeals for the 11th Circuit ruled in U.S. v. Esquenazi that the Foreign Corrupt Practices Act’s (FCPA’s) “instrumentality” provision could include state-owned businesses.

Joel Esquernazi and Carlos Rodriquez co-owned Terra Communications (Terra). In 2011, a jury convicted Esquernazi and Rodriquez on 21 counts related to their business dealings with Telecommunications D’Haiti, S.A.M. (Teleco). Esquernazi and Rodriquez were sentenced to prison terms of 15 and 7 years, respectively.

Esquernazi and Rodriquez challenged their convictions on the ground that the district court’s FCPA jury instructions were erroneous. The jury was instructed that an “instrumentality of a foreign government is a means or agency through which a function of the foreign government is accomplished. State-owned or state-controlled companies that provide services to the public may meet this definition.”

The central question before the court was the meaning of “instrumentality” under the FCPA. The court provided the following list of factors to determine if an entity is an instrument of a foreign government.

• Does the government control the entity? Consider:

  • the nature of the foreign government’s formal designation of the entity;
  • whether the government has a majority interest in the entity;
  • the government’s ability to hire and fire entity principals;
  • the extent to which the entity’s profits, if any, go directly to the government;
  • the extent to which the government funds the entity if it fails to break even; and
  • the length of time these indicia have existed.

• Is the entity an instrumentality of a foreign government? Consider:

  • whether the entity has a monopoly over the function it exists to carry out;
  • whether the government subsidizes the costs associated with the entity providing services;
  • whether the entity provides services to the public at large; and
  • whether the public and the government of the foreign country generally perceive the entity to be performing a governmental function.

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By McGuireWoods LLP | May 23rd, 2014

On those rare occasions in which a U.S. business is confronted with the possibility of making a payment to a foreign official that is unrelated to the official’s government service, there is an understandable temptation to reject the payment and run in the opposite direction. In some cases, however, that is a very unattractive option. For example, if the foreign official is owed some amount as a result of his prior interest in the foreign subsidiary of the U.S. business and he is assuming a minister-level position in another country’s central monetary and banking agency, the U.S. business will be motivated to make the payment while navigating the FCPA-related obstacles associated with the situation. The Department of Justice’s first FCPA Advisory Opinion of 2014, Opinion No. 14-01 (Opinion), demonstrates that such a payment is permissible and will not prompt an enforcement action as long as the arrangement is transparent and steps are taken to undercut any suggestion of corrupt intent. The recently released Opinion emphasizes that the determination of whether a commercial transaction with a foreign official implicates the FCPA is fact intensive and offers beneficial guidance on DOJ’s FCPA enforcement analysis.

The facts giving rise to the Opinion are as follows. In March 2007, a U.S. company, through a wholly owned subsidiary, purchased a majority interest in a foreign financial services firm (foreign company) founded and managed by a foreign businessman (foreign shareholder). The 2007 purchase agreement prohibited the foreign shareholder from selling his minority interest in the foreign company for five years, unless the foreign shareholder was appointed to a “minister-level position or higher” in the foreign country’s government. The purchase agreement also provided the subsidiary with a buyout option, including a formula to value the minority shares.

In December 2011, as anticipated by the purchase agreement, the foreign shareholder was appointed to serve as an official in the foreign country’s central monetary and banking agency (foreign agency). There is no dispute that the foreign shareholder, by virtue of his appointment, became a “foreign official,” as that term is defined by the FCPA. Shortly after the appointment, the subsidiary foreign company entered into negotiations to purchase the foreign shareholder’s minority shares. Of note, both parties agreed that the buyout formula contained in the 2007 purchase agreement undervalued the foreign shareholder’s shares. Therefore, the parties engaged an independent accounting firm to provide a binding valuation of the purchased shares. Likewise, the parties carefully disclosed the relationship and potential sale to relevant authorities in the U.S. and in the foreign country. The matter was complicated by the fact that the foreign agency was a long-time client of the U.S. company, which provides asset management and investment banking services to the foreign agency. In line with DOJ’s prior guidance on this issue, see FCPA Opinion Procedure Release 2000-01 (Mar. 29, 2000), the U.S. company and the foreign company subsidiary represented that they would take appropriate steps to screen employees from the foreign shareholder and the foreign shareholder agreed to recuse himself from any decisions concerning awards of business to the U.S. company or the foreign company. The U.S. company sought guidance from DOJ on the FCPA implications of the proposed buyout.

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By McGuireWoods LLP | February 10th, 2014

Ryan E. Bonistalli

By Ryan E. Bonistalli

On Jan. 29, 2014, Brazil’s new Clean Companies Act came into effect, bringing with it a new wave of anti-corruption implications for companies operating in one of the largest economies in the world. Although the law shares many features with the U.S. Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act (UKBA), it once again brings to light the necessity for multinational companies to keep up with the changes in the anti-corruption world.

Brazil’s new law imposes civil and administrative liability on companies for wide-ranging corrupt activities, including bribery of Brazilian or foreign public officials. Fines can range up to 20 percent of a company’s gross revenue for the fiscal year ending prior to the initiation of the investigation. If, for whatever reason, a fine cannot be calculated based on revenue, a company may face a fine up to BRL 60 million (or approximately $25 million). Other administrative penalties may include forcing a company to relinquish any benefits received from the illegal conduct, limiting a company from participating in public bidding processes or even forcing dissolution.

Like the FCPA and UKBA, the Clean Companies Act has an international impact, allowing Brazilian enforcement agencies to enforce the law against acts occurring inside and outside Brazil, and against Brazilian companies and foreign companies with a registered office, affiliate or branch in Brazil. Although the Clean Companies Act brings strict liability and does not provide for an UKBA-style “adequate procedures” defense that could eliminate fines altogether, companies are able to mitigate potential fines based on cooperation and the existence of an effective compliance program. Unlike the FCPA and UKBA, the new law does not impose criminal liability on companies — but its civil and administrative penalties are potentially severe enough to result in similar effects. Also, it does not provide for a facilitating payments exception, such as the one found under the FCPA.

Even with a comprehensive compliance program and well-trained employees, companies falling under the Clean Companies Act’s jurisdiction face potentially challenging situations based on two key aspects of the law. First, the Clean Companies Act is enforced by multiple levels of government in Brazil, which raises the question of whether such multilevel enforcement will actually create more possibilities for illegal conduct in light of competing enforcement interests and Brazil’s culture. In fact, one European company has publicly commented about its concerns that some Brazilian government bodies may extort money or other things of value in exchange for looking the other way when it comes time to apply the law. Practically speaking, multiple enforcement fronts may also impose significant investigative costs on companies.

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