Notable RICO Decision And Development

Notable RICO Decision And Development

 This article was reprinted with permission from FCPA Professor

Several FCPA enforcement actions have been brought against foreign companies based on sparse U.S. jurisdiction allegations (a required legal element for an anti-bribery violation against a foreign company).

For instance, the recent Total enforcement action (the third largest in FCPA history in terms of fine and penalty amount) was based on a 1995 wire transfer of $500,000 (representing less than 1% of the alleged bribe payments at issue) from a New York based account.

The JGC Corp. enforcement action was based on the jurisdictional theory that certain alleged bribe payments flowed through U.S. bank accounts and that co-conspirators faxed or e-mailed information into the U.S. in furtherance of the bribery scheme.

The Magyar Telekom enforcement action was based on allegations that a company executive sent two e-mails to a foreign official from his U.S. based e-mail address that passed through, was stored on, and transmitted from servers located in the U.S. and that certain electronic communications made in furtherance of the alleged bribery scheme and the concealment of payments, including drafts of certain agreements and copies of certain contracts with intermediaries, were transmitted by company employees and others through U.S. interstate commerce or stored on computer servers located in the U.S.

The Bridgestone enforcement action was based on allegations that employees sent and received e-mail and fax communications to/from the U.S. in connection with the bribery scheme.

The Tenaris enforcement action was based on allegations that a payment to an agent in connection with the alleged bribery scheme was wired through an intermediary bank located in New York.

The above enforcement actions and the jurisdictional allegations they were based on makes the recent civil RICO decision in PEMEX v. SK Engineering & Construction & Siemens all the more interesting.  As set forth in Judge Louis Stanton’s (S.D.N.Y.) opinion, PEMEX alleged that the defendants violated RICO and common law fraud by bribing PEMEX officials to approve overrun and expenses payments to CONPROCA, a Mexican corporation completing an oil refinery rehabilitation project in Mexico.

According to the complaint, CONPROCA would receive payment from PEMEX’s Project Funding Master Trust (the “Master Trust”), organized under Delaware law, and managed by its then-trustee Bank of New York.  According to the complaint, The Master Trust paid each invoiced amount from its New York account to CONPROCA’s account at Citibank in New York.

The complaint further alleged that CONPROCA financed the project at issue ”through the issuance of bonds registered with the SEC, and through institutional credit, a substantial amount of which were issued by U.S. financial institutions and guaranteed by the Export Import Bank of the United States.”

The DOJ would surely take the position that the above U.S. jurisdictional allegations would be sufficient to bring a criminal FCPA enforcement action against a foreign company for bribing foreign officials.

Not so in a civil RICO action subjected to judicial scrutiny.

In ruling on the defendants’ motion to dismiss based on the argument that the RICO claims were extraterritorial, Judge Stanton first noted that because RICO is silent as to any extraterritorial application, the RICO statutes do not apply extraterritorially.  Judge Stanton then observed that “when foreign actors were the primary operators, victims, and structure of a RICO claim” courts have properly concluded that the claims were extraterritoritial.

Judge Stanton then held that PEMEX’S RICO claims were extraterritorial because “they allege a foreign conspiracy against a foreign victim conducted by foreign defendants participating in foreign enterprises.”

As to those U.S. jurisdictional allegations, Judge Stanton stated:

“They fail to shift the weight of the fraudulent scheme away from Mexico. Seen simply, as a result of the claimed conspiracy PEMEX, the Mexican Plaintiff for whom the work was done in Mexico, paid fraudulent overcharges to CONPROCA, the Mexican corporation which did the work.  PEMEX officials in Mexico granted the challenged approvals to pay CONPROCA. The American trustee merely transferred the payments through two banks in New York.  The defendants’ bribery of PEMEX officials, and CONPROCA’s underbidding and submitting false claims under Mexican public works contracts, all occurred in Mexico. Thus, ‘it is implausible to accept that the thrust of the pattern of racketeering activity was directed at’ the United States.  The RICO claims are accordingly dismissed.”

Judge Stanton’s “thrust” reference is similar to the “sufficient force” language in Justice Alito and Justice Thomas’s concurring opinion in the Kiobel case concerning the extraterritorial application of the Alien Tort Statute.  (See here for the prior post on Kiobel including additional information concerning FCPA jurisdictional issues as to foreign companies).

In addition to the above, another interesting RICO development concerns a lawsuit recently brought by Otto Reich (a former U.S. diplomat and Ambassador to Venezuela) against individuals he accuses of bribing senior Venezuelan officials in exchange for contracts worth hundreds of millions of dollars.”  According to the lawsuit, the individuals are U.S. residents and associated with U.S.-based companies Derwick Associates USA LLC and Derwick Associates Corporation.

In pertinent part, Reich alleges as follows.

“Derwick Associates’ ‘business model’ is simple. From the United States Defendants offer multi-million dollar kickbacks to public officials in Venezuela in exchange for the award of energy-sector construction contracts. Once the contracts are secured for Derwick Associates (and the money ultimately transferred into bank accounts in New York) Defendants skim millions off the top, which they deposit in U.S. banks. Defendants then subcontract out the actual work to be performed on site to other U.S.-based companies, including one based in Missouri. Defendants run their illegal scheme from their homes and offices in New York and through their U.S.-based companies. The scheme has been a huge financial boon to Defendants … all of whom enjoy lifestyles of extreme wealth in the United States.”

It is likely that this civil RICO suit, like others before it, will spawn a DOJ FCPA investigation …  if it hasn’t already.

Read more articles on the FCPA by Mike Koehler at FCPA Professor.

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