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Anti-Corruption | Q1 2018 • 1

Anti-CorruptionQUARTERLY

Q1 2018

NEWS

English High Court Opinion Provides Guidance, But Not Complete Clarity, on UK Legal Privilege Law Protection of Internal Investigation Materials ......................... 1

IN THE INTERIM ................................................. 3

NEWS

English High Court Opinion Provides Guidance, But Not Complete Clarity, on UK Legal Privilege Law Protection of Internal Investigation Materials

The recent UK High Court decision in Bilta v. RBS addressed the scope of litigation privilege protection over internal investigation materials, a particularly important topic to companies and their legal counsel since a High Court opinion last year appeared to significantly narrow such protection. The court in Bilta held that the privilege applies to documents created as part of an internal investigation, as long as the documents were created for the dominant purpose of conducting litigation. Though the reasoning in Bilta is very fact-specific, and thus does not offer complete clarity on the issue, it does offer some guidance on protecting the legal privilege for companies under investigation by foreign regulators. Critically, though, Bilta also serves as another important reminder that the legal privilege in various jurisdictions has its limitations.

The legal privilege dispute in Bilta arose in connection with a tax fraud investigation by the UK government involving the failure of Bilta (UK Ltd) and other companies (collectively Bilta) to pay value added tax to Her Majesty’s Revenue and Customs (HMRC) in connection with executing certain financial transactions. In early February 2010, HMRC informed the Royal Bank of Scotland (RBS) of its interest in investigating some transactions in 2009 for possible fraudulent activity. On March 29, 2012, HMRC wrote a letter to RBS informing RBS that HMRC had sufficient grounds to deny RBS’s request for 90 million pounds of input tax from HMRC “on the basis that [RBS] knew or should have known that their transactions were connected to fraud.” Shortly after receiving HMRC’s letter, RBS hired external lawyers to conduct an internal investigation into the 2009 transactions. The investigation concluded with RBS’s production of a report to HMRC.

After learning of a significant potential tax liability owed to HMRC, Bilta sought internal investigation documents from RBS, including witness interview transcripts, created during the RBS investigation. RBS argued that those documents were protected by the litigation privilege, which applies under UK law if three requirements are satisfied: (a) litigation must be in progress or in contemplation, (b) the applicable document(s) must have been created for the sole or dominant purpose of conducting that litigation and (c) the litigation must be adversarial, not investigative or inquisitorial.

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Bilta conceded that the documents were created in contemplation of litigation and that such litigation was adversarial, leaving the sole issue in dispute of whether the documents were created for the sole or dominant purpose of conducting litigation.

The English High Court accepted RBS’s argument that the documents created as part of its internal investigation were created for the dominant purpose of conducting litigation, and, thus, the documents were covered by the litigation privilege. In determining the dominant purpose of the documents, the court stated that it must take a “realistic, indeed commercial, view of the facts.” In particular, the court said that RBS’s receipt of HMRC’s March 2012 letter was a “watershed moment” that was “similar in nature…to a letter before claim” in an ordinary commercial litigation and that RBS’s report provided to HMRC was similar to a response to a claim letter in ordinary litigation. The court further found that HMRC’s letter served as an indication that it was highly likely that HMRC would issue an adverse assessment against RBS, which could only be contested by litigation, and that RBS’s report was “just part of the continuum that formed the road to the litigation.”

The Bilta decision is important in light of the UK High Court 2017 decision in SFO v. ENRC, which limited a company’s ability to assert privilege under UK law in the context of a criminal investigation, but not a criminal prosecution. (That case was analyzed in our 2017 Q2 Anti-Corruption Quarterly newsletter). The court’s reasoning in SFO v. ENRC centered on the fact that adversarial litigation was not reasonably contemplated because a criminal investigation by the UK Serious Fraud Office (SFO) (as opposed to a criminal prosecution) was not adversarial litigation. The court also reasoned that even if adversarial litigation had been reasonably contemplated, the documents at issue in SFO v. ENRC were not created for the dominant purpose of being used in such litigation. While the Bilta court reached a different conclusion than the court in SFO v. ENRC, Bilta is unlikely to be the last word on the scope of legal privilege under UK law, as the UK Court of Appeal is due to hear an appeal in SFO v. ENRC later this year.

In the meantime, and despite the court’s fact-specific reasoning, Bilta offers some guidance for companies regarding whether internal investigation materials will be protected by the privilege. In particular, before creating documents as part of an investigation, companies and their legal counsel should specifically analyze whether the documents would be for the dominant purpose of litigation. In considering this question, the specific facts of the investigation will be crucial. If a company concludes that a document may not be considered privileged at a later time, the company and its legal counsel should consider, on balance, if it is worth preparing a potentially discoverable document. Bilta is also another important reminder that companies under investigation by foreign regulators must keep in mind that the legal privilege in various jurisdictions has limitations. Accordingly, it is important for companies to work with their lawyers from the onset of any investigation to fully understand the types of documents and information that may not be protected by the privilege and to develop strong arguments for establishing privilege over otherwise appropriate materials.

…before creating documents as part of an

investigation, companies and their legal counsel

should specifically analyze whether the

documents would be for the dominant purpose of litigation. In considering this question, the specific facts of the investigation

will be crucial.

Bilta is also another important reminder

that companies under investigation by foreign

regulators must keep in mind that the legal

privilege in various jurisdictions has

limitations.

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IN THE INTERIM

January 1, 2018: Petrobras, Brazil’s state-controlled energy company, agreed to pay $2.95 billion to settle a class action lawsuit brought by Petrobras shareholders. The lawsuit alleged that contractors overcharged Petrobras and then gave kickbacks to Petrobras employees and politicians. Petrobras says it is a victim of the scheme and previously notified the SEC that it had written off $2.5 billion worth of overpayments. In a statement, the company denied liability but said the settlement will eliminate the risk of an adverse judgment that could have a material adverse effect on the company and its financial situation. Petrobras has so far recovered approximately $453 million in restitution in connection with the matter from former executives and suppliers. The settlement is subject to approval by the court.

January 5, 2018: Dennis Bahn, a New Jersey-based real estate broker and nephew of former United Nations Secretary-General Ban Ki-moon, pleaded guilty to one count of violating the Foreign Corrupt Practices Act (FCPA) and one count of conspiracy to violate the FCPA. Bahn was charged in December 2016 in connection with a scheme to bribe a Qatari official to help secure the $800 million sale of an office building complex to Qatar’s sovereign wealth fund. Bahn gave $500,000 to Malcolm Harris, who claimed to be an agent of the Qatari official, but Harris stole the money and never passed it along to the official. Harris was also charged in connection with the plot and has already been sentenced to 42 months in prison. In a press release, the DOJ said that the fact that Bahn’s scheme was thwarted by Harris did not change the fact that Bahn attempted to make a corrupt payment. Bahn’s sentencing is scheduled for June 29, 2018, and he faces up to five years in prison on each count.

January 9, 2018: Patrick Ho, the former Hong Kong Secretary for Home Affairs, pleaded not guilty to one count of violating the FCPA, one count of conspiracy to violate the FCPA, one count of committing international money laundering and one count of conspiracy to commit international money laundering. According to the complaint, Ho and a co-defendant paid a $500,000 bribe to a Ugandan government official and offered a $2 million bribe to the President of Chad. In his communications, Ho referred to the $500,000 payment as a donation to the reelection campaign of the President of Uganda and the $2 million payment as a donation or gift for charitable causes. Ho was allegedly acting on behalf of a Chinese energy company. Currently in custody, he faces up to five years in prison for each of the FCPA counts and up to 20 years in prison for each of the money laundering counts.

January 12, 2018: Mark Lambert, the former co-president of Maryland-based Transport Logistics International (TLI), was charged in an 11-count indictment with a scheme to pay $2 million in bribes to Vadim Mikerin, a Russian official. Mikerin worked at a subsidiary of Russia’s State Atomic Energy Corporation, and the bribes were intended to facilitate the award of uranium transportation contracts to Lambert’s company. The bribes were allegedly disguised through the use of code words like “lucky figures,” “LF” and “cake” and by using fake invoices. Mikrim and TLI co-president Daren Condrey have already pleaded guilty in connection with the scheme.

January 18, 2018: The UK SFO has opened an investigation into UK-based defense technology firm Chemring Group PLC and its subsidiary, Chemring Technology Solutions Limited (CTSL). According to a news release, the investigation is a result of a self-report made by CTSL.

January 31, 2018: Cobalt International Energy, Inc. stated in a securities filing that the SEC has concluded its second FCPA investigation relating to the company’s operations in Angola and does not intend to recommend any SEC enforcement action against the company. The investigation concerned Cobalt’s funding of a research and technology center under an agreement with Angola’s state-owned oil and gas company. This investigation follows an earlier FCPA investigation by the DOJ and the SEC relating to Cobalt’s Angola operations, which also ended with declinations. Cobalt filed for Chapter 11 bankruptcy in December 2017.

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February 2, 2018: The World Bank announced the debarment of three Argentina-based construction companies—Gavinor, S.R.L., J.C. Segura Construcciones S.A., and a joint-venture between the companies—for knowingly misrepresenting work progress in connection with a World Bank-funded project in Argentina. The debarments will last for 18 months during which the companies are ineligible to participate in World Bank-funded projects. The debarments qualify for cross-debarment by the Asian Development Bank, the European Bank for Reconstruction and Development, the Inter-American Development Bank and the African Development Bank, pursuant to the Agreement for Mutual Enforcement of Debarment Decisions.

February 12, 2018: Juniper Networks, Inc. stated in a filing that it received a declination letter from the DOJ, closing its investigation into possible FCPA violations by the company. The company first disclosed the investigation in 2013 but never publicly disclosed details regarding the potential violations. The filing states that the SEC is also conducting an FCPA investigation that has not yet been resolved.

February 12, 2018: Netherlands-based Core Laboratories N.V. stated in a securities filing that the DOJ and the SEC have closed FCPA investigations into the company’s dealings with Monaco-based Unaoil and will not bring enforcement actions. The investigations stemmed from a March 2016 report by the Huffington Post and Fairfax Media that alleged Unaoil paid bribes on behalf of a number of companies, including Core Laboratories.

February 13, 2018: The DOJ charged five former employees of Venezuela’s state energy company (PDVSA) with money laundering in connection with allegedly accepting at least $27 million in bribes. Two of the employees were also charged with conspiring to violate the FCPA. The government wrote in a press release that the five defendants were known as the “management team” and wielded significant influence within PDVSA and that the group solicited bribes and kickbacks from U.S.-based vendors in exchange for providing assistance to those vendors in connection with their PDVSA business.

February 22, 2018: The World Bank Group debarred Pak Elektron Limited and two affiliated companies for 33 months for colluding on bids for a project in Pakistan. A former executive, Abdul Waheed Butt, was also debarred. According to a press release, Butt chaired a trade group that colluded so that each of the five group members would receive a pre-determined share of five World Bank-financed contracts. The debarment makes the companies ineligible to participate in World Bank-financed projects and qualify for cross-debarment by the Asian Development Bank, the European Bank for Reconstruction and Development, the Inter-American Development Bank and the African Development Bank, pursuant to the Agreement for Mutual Enforcement of Debarment Decisions.

February 23, 2018: The World Bank debarred two related healthcare companies for 18 months in connection with fraudulent practices under two health projects in Bangladesh. A press release states that one company misrepresented the commission amounts it had agreed to pay to its local agent in relation to two bids for contracts it received under two World Bank-funded programs. The debarments make the companies ineligible to participate in World Bank-financed projects and qualify for cross-debarment by the Asian Development Bank, the European Bank for Reconstruction and Development, the Inter-American Development Bank and the African Development Bank, pursuant to the Agreement for Mutual Enforcement of Debarment Decisions.

February 26, 2018: Ohio-based Teradata Corporation announced in a securities filing that it was informed by the DOJ and the SEC that no enforcement action would be taken against the company in connection with investigations into certain expenditures made by a Teradata subsidiary in Turkey. Teradata first disclosed the investigation in the second quarter of 2017. The filing states that Teradata promptly initiated an internal investigation after discovering the questionable expenditures, and engaged outside counsel and forensic accountants for assistance. The company self-disclosed the relevant events to authorities in February 2017.

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February 27, 2018: Homburg, Germany-based Fresenius Medical Care AG, the world’s largest provider of dialysis products and services, disclosed in a securities filing that it had set aside €200 million (appx. $245 million) with respect to its ongoing settlement negotiations with the DOJ and the SEC regarding conduct that may have violated provisions of the FCPA. According to its disclosure, the €200 million reservation “encompasses government agencies’ claims for profit disgorgement, as well as accruals for fines and/or penalties, certain legal and other consultancy expenses and other related costs or asset impairments.” The company has not released any details about the possible FCPA violations but announced that “settlement negotiations are continuing and have not yet achieved an agreement-in-principle; failure to reach agreement remains possible.”

February 28, 2018: Houston-based oil and gas services firm, Exterran Corporation, disclosed in a securities filing that the DOJ and the SEC have declined to bring enforcement actions following a two-year investigation that focused on equipment contracts for desalination plants in the Middle East. Exterran first disclosed the potential FCPA violations to the SEC in April 2016.

March 9, 2018: Israel-based Elbit Imaging LTD agreed to pay $500,000 to settle with the SEC violations of the FCPA’s books and records and internal controls provisions through an internal administrative cease and desist order without admitting or denying the findings. According to the SEC’s order, Elbit and its subsidiary, Plaza Centers NV, paid millions of dollars to third-party offshore consultants and a sales agent purportedly for their services related to a real estate development project in Romania and the sale of a large portfolio of real estate assets in the United States. Elbit and Plaza made these payments even though they lacked evidence that the consultants and the sales agent had actually provided the contracted for services. The SEC said that, in determining to accept the offer, it “considered Elbit’s self-reporting, cooperation, remedial acts, and that it is in the process of winding down operations by selling its principal assets.”

March 13, 2018: Transport Logistics International Inc. (TLI), a Maryland-based company that provides services for the transportation of nuclear materials, agreed to enter into a three-year deferred prosecution agreement (DPA) with the DOJ and pay a $2 million criminal fine to resolve charges of conspiracy to violate the FCPA’s anti-bribery provisions in connection with bribes paid to an official at a subsidiary of Russia’s State Atomic Energy Corporation in order to influence the award of uranium transportation contracts to TLI. In the DPA, the DOJ agreed that, because of the company’s financial inability to pay the penalty calculated under the U.S. sentencing guidelines, the appropriate criminal penalty is $2 million. TLI received “full credit for its substantial cooperation,” including firing all employees engaged in the misconduct. Under the terms of the DPA, TLI was not required to appoint a monitor. But, as part of its settlement, TLI agreed to adopt a compliance program, report periodically to the DOJ and cooperate fully with the DOJ’s ongoing investigation.

March 15, 2018: Former Siemens AG executive and German citizen, Eberhard Reichert, pleaded guilty to conspiracy to violate the FCPA’s anti-bribery, internal controls and books and records provisions, and to commit wire fraud. Reichert was one of eight people charged in 2011 with FCPA offenses related to a bribery scheme in Argentina. He was arrested last year in Croatia and agreed to be extradited to the United States. When he appeared in federal court in Manhattan in December, Reichert pleaded not guilty and was released on bond of $500,000. His trial was set to begin in July this year. In his plea, Reichert admitted to a “decade-long scheme to pay tens of millions of dollars in bribes” in exchange for a $1 billion contract to create national identity cards and using shell companies controlled by intermediaries “to disguise and launder the funds” for the Argentina bribes.

March 19, 2018: The World Bank announced the five-and-a-half-year debarment of Manila-based consulting company Innogy Solutions Inc. and its president, Lloly Yana de Jesus, for “collusive and fraudulent practices” in connection with a World Bank funded project in the

Anti-Corruption | Q1 2018 • 6

Anti-Corruption QUARTERLY

Philippines. The Integrated Persistent Organic Pollutants Management Project was designed to help the Philippines government reduce the risk of human and environmental exposure to persistent organic pollutants—a class of pollutants that includes certain pesticides and industrial chemicals and their byproducts. According to the World Bank, Innogy and de Jesus used confidential information to win the contract and concealed information about a conflict of interest during another contract selection process. But the settlement agreement provides for a reduced period of debarment in light of de Jesus’ and the company’s cooperation and voluntary remedial actions, and agreement to commit to developing a compliance program consistent with the principles set out in the World Bank Group Integrity Compliance Guidelines.

March 26, 2018: Toronto-based Kinross Gold Corporation agreed to pay $950,000 to settle with the SEC violations of the FCPA’s books-and-records and internal controls provisions through an internal administrative cease and desist order without admitting or denying the findings. According to the SEC’s order, Kinross acquired two African mining companies in 2010, one operating in Mauritania and the other in Ghana, and the acquired companies “lacked anti-corruption compliance programs and internal accounting controls.” Nevertheless, according to the SEC, it “took Kinross Gold almost three years to implement adequate controls, despite multiple internal audits flagging widespread deficiencies.”

March 28, 2018: The World Bank announced the two-year debarment of Belgium-based medical device manufacturer Eckert & Ziegler BEBIG s.a. for engaging “in fraudulent practices by misrepresenting the commission amounts it had agreed to pay to its local agent in relation to bids for two contracts” in connection with the Health Sector Development Program in Bangladesh. According to the World Bank, the company also engaged in collusive practices by arranging “with procurement officials to artificially inflate the prices of the company’s bids” for the Bangladesh contracts.

Anti-Corruption | Q1 2018 • 7

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FCPA GOVERNMENT INVESTIGATIONS AND CORPORATE SETTLEMENTS

DOJ SEC

FCPA-Related Cases*

* New criminal or civil cases (settled or contested) instituted by year

** Based upon public disclosures of investigations

Corporate FCPA-Related Penalties*

(in U.S. millions)

* Includes disgorgement; does not include non-U.S. fines

** Includes publicly disclosed reserves for future FCPA settlements

1619

8 9

2014

28

15

49

2623 25

11 12

21 20 19

11

95

28

1411 13

118

1510

2 2

20072006 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 PendingInvestigations**

155.187.2

803

644.6

1885.1

502.7

260.3

731.1

1569.7

143.2

1452.5

2436.7

3.45

495

2015 2016 2017 2018 PendingSettlement**

20072006 2008 2009 2010 2011 2012 2013 2014

Anti-Corruption | Q1 2018 • 8

THE FCPA/ANTI-CORRUPTION PRACTICE OF SIDLEY AUSTIN LLP

Our FCPA/Anti-Corruption practice, which involves over 90 of our lawyers, includes creating and implementing compliance programs for clients, counseling clients on compliance issues that arise from international sales and marketing activities, conducting internal investigations in more than 90 countries and defending clients in the course of SEC and DOJ proceedings. Our clients in this area include Fortune 100 and 500 companies in the pharmaceutical, healthcare, defense, aerospace, energy, transportation, advertising, telecommunications, insurance, food products and manufacturing industries, leading investment banks and other financial institutions.

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