Under the U.S. Supreme Court: Murdoch scandal's shadow reaching the United States?

By MICHAEL KIRKLAND  |  July 24, 2011 at 3:30 AM
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WASHINGTON, July 24 (UPI) -- Eyes are riveted on Britain where Rupert Murdoch is up to his neck in the phone-hacking and police bribery scandal, but on this side of the Atlantic the question is whether the media mogul or any of his crew violated U.S. law.

The law getting the most attention is the Foreign Corrupt Practices Act, with its broad scope and ferocious penalties that can reach all the way into the most sacred of corporate inner sanctums.

Even if the alleged telephone hacking and bribery by newspaper employees didn't take place in the United States -- officials are still looking at that -- the act would still apply. The U.S. law covers any employee of U.S. corporations who may have gotten caught up in the British scandal, even covering executives in this country managing employees who may be based overseas.

Murdoch, an Australian native, is a naturalized U.S. citizen. News International Ltd. is his British publishing company, but his News Corp. is a U.S. company, as is his Fox Broadcasting Co.

U.S. Attorney General Eric Holder says he's put the FBI on the case -- though his main thrust may be to discover whether anyone hacked into the e-mails of Sept. 11 terror victims and families.

Congress passed the Foreign Corrupt Practices Act in 1977, and President Jimmy Carter signed it. The U.S. Justice Department says in its official description of the law that the anti-bribery provisions "prohibit the willful use of the mails or any means of instrumentality of interstate commerce corruptly" in offering payment or anything of value while knowing that the exchange is to "influence [a] foreign official in his or her official capacity, induce the foreign official to do or omit to do an act in violation of his or her lawful duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business to, any person."

In other words, coming up with money or anything else for a government official -- like a police officer -- quid pro quo.

The act had teeth, but Congress sharpened those teeth in 1998 when it joined the United States to 33 other countries, including Britain, in amendments to the law to combat bribery of foreign officials and money laundering through the global financial system.

The U.S. Securities and Exchange Commission enforces those elements of the act involving record keeping -- corporate executives are made extraordinarily responsible for the actions of their subordinates -- but the Justice Department enforces most of its criminal provisions.

The international law firm, Foley & Lardner LLP, headquartered in Milwaukee, alerted its clients to the "myths" clinging to the modern version of the FCPA.

The firm said one of the myths is that the "FCPA doesn't apply to conduct that takes place entirely outside of the United States without U.S. parent company involvement. False. The harsh reality is that turning a 'blind eye' to business operations in the far corners of the globe is a sure-fire way to invite FCPA non-compliance and regulatory scrutiny."

In other words, Murdoch executives in the United States might be held accountable if underlings in Britain do awful things.

The 1998 amendments expanded the reach of the act, the firm said, "to include an alternative nationality test. Whereas, prior to the amendments, 'use of the mails or any means of instrumentality of interstate commerce in furtherance of' an improper payment was needed for the FCPA to apply, under the alternative nationality test, the FCPA applies to improper payments made by U.S. companies and citizens that take place wholly outside of the United States without regard to whether 'the mails or any of other means of instrumentality of interstate commerce' were used in furtherance of the improper payment."

The firm warns business leaders "must be knowledgeable about all business activity, including activity that takes place thousands of miles away from U.S. corporate headquarters."

Other myths: The act applies only to public companies, not private companies; the act applies only to business with foreign government customers; the act applies only to interaction with foreign government officials; and the act doesn't apply when the company does business in a foreign country indirectly through agents, representatives and distributors. All those assumptions, among others, are false.

How harsh are the penalties?

Harsh enough to make executives of Murdoch's News Corp. nervous, given the breadth of the law and the responsibilities it lays on company leaders for the actions of subordinates.

A company can be criminally fined as much as $2 million per violation of the anti-bribery provisions; an individual can be fined as much as $250,000 per violation and be sentenced to as long as five years in prison on each count.

Knowing violations of the act's Books and Records and Internal Control provisions -- the SEC arena -- can subject a company to a criminal fine of as much as $25 million and an individual to $5 million and 20 years in prison.

Besides the termination of government licenses and the loss of government contracts, a guilty firm might be required to pay back the profits from contracts gained through improper payments. The Justice Department or the SEC also can ask for a court to appoint an FCPA compliance monitor for a number of years.

For its part, the U.S. Supreme Court passed up the chance a few years ago to narrow the scope of the law.

In October 2008, the international law firm Chadbourne & Parke LLC issued a "client alert" to warn of new legal perils in the act. That month, the high court refused to review decisions by the 5th U.S. Circuit Court of Appeals, headquartered in New Orleans, that the firm said "greatly expanded the scope of liability under the Foreign Corrupt Practices Act."

"In light of the Kay (5th Circuit) opinions and the (Supreme) Court's decision not to review them," the alert said, "the Justice Department and SEC should be expected to continue taking broad views on the types of conduct that are prohibited by the FCPA -- meaning that companies, in their training and compliance programs, would be well advised to do the same."

In the case, David Kay and Douglas Murphy were executives at exporter American Rice Inc. The company, through a foreign subsidiary, exported rice to Haiti, which imposed high duties and taxes on rice imports. The two executives, saying they were acting to reduce the taxes, made payments to Haitian officials. The two men were eventually indicted on more than a dozen counts, including violations of the FCPA.

Chadbourne & Clark said Kay was sentenced to 37 months in prison and two years supervised release, Murphy to 63 months and three years supervision.

The lower courts rejected the executives' argument that the bribes were made to reduce tax, not to gain business -- and as such was not specifically a violation of the FCPA. They also argued they didn't "willfully" violate the act.

The 5th Circuit said, among other things, the arguments violated common sense, and the law didn't require a knowledge of the FCPA and a specific knowledge of a violation.

"For companies that fall within the broad jurisdictional scope of the FCPA, the denial of (review by the Supreme Court) in U.S. vs. Kay means that government's trend of expansive enforcement is likely to continue," C & P said. "Specifically, companies and their employees must be aware that the government may take the position that any payment made to a foreign official to secure a business advantage of any sort assists in 'obtaining or retaining business' in violation of the FCPA. Moreover, companies and their employees must be cognizant that courts may follow the Kay decisions and be wholly unsympathetic to technical arguments that payments to foreign officials fall within a 'gray zone' of FCPA liability."

Vedder Price PC, a large law firm based in Chicago, told clients earlier this year: "The emerging era of FCPA enforcement activity is characterized by escalating numbers of enforcement actions, bolstered by industrywide investigations with a focus on prosecuting individuals, and heightened levels of international anti-corruption cooperation and enforcement."

There was "an unprecedented number of FCPA enforcement actions brought by the SEC and the DOJ -- 26 and 48, respectively" in 2010, the firm said. "In comparison, the SEC brought a total of 14 and 13 enforcement actions in 2009 and 2008, while the DOJ brought 26 and 20 such actions, respectively, in those years. ... Eight of the top 10 monetary settlements in FCPA history were reached in 2010."

So how would Murdoch and his employees run afoul of the U.S. law?

Think Progress, a blog for the left-leaning Center for American Progress think tank, said the aggressive expansion of Foreign Corrupt Practices Act enforcement "could spell trouble for Rupert Murdoch.

"Among other corrupt practices, The News of The World, a subsidiary of Murdoch's U.S.-based News Corp, is accused of bribing U.K. police officers for information on former Prime Minister Gordon Brown. ...

"The U.K. Daily Telegraph reports that News Corp. would have to foot the bill for any investigation, even if (it is) never prosecuted," the blog said, "which could cost more than $100 million. A global investigation into Avon Products, started in 2008 and still ongoing, has so far cost the cosmetics giant $154 million."

Meanwhile, the pot is boiling in Britain.

Murdoch, 80, appeared before a parliamentary committee last Tuesday to answer questions about the scandal, and was subjected to a protester who rushed the dais and threw what appeared to be shaving cream in his face before being wrestled away by security.

Murdoch, his son James at his side, later continued to testify in his shirt sleeves.

The hearing was broadcast on U.S. news shows. Though he told the committee he was "appalled and ashamed" at the scandal, he denied responsibility for it. He said people "let me down ... and it's for them to pay" while he himself will not resign.

"The once great media mogul paused, halted and blinked his way through the persistent, calm and courteous questioning .... [H]e said little but revealed a huge amount. He was, apparently, ignorant of almost everything that had happened in his company," a BBC reporter said in characterizing the testimony.

The Conservative government has been busy trying to explain why British Prime Minister David Cameron hired Murdoch veteran Andy Coulson as press secretary. Coulson resigned and was arrested earlier this month in the scandal.

Scotland Yard officials were forced to resign for allegedly failing to follow through on the phone hacking investigation several years ago. Another police official heading the hacking investigation stepped down and has become a columnist for one of Murdoch's newspapers, The New York Times reports.

A number of Murdoch journalists are ensnared in the scandal, chief among them Rebekah Brooks, former chief executive of Murdoch's News International and former editor of his now-defunct newspaper, The News of the World. She stepped down earlier this month, was arrested last week and ended up testifying before the parliamentary committee, also insisting she didn't know what was going on.

Though he has not been charged, after years of being courted by prime ministers, Rupert Murdoch has seen his power and his influence melt away with each new revelation, like snow in the sunshine.

Journalists have had an ancient tradition of doing whatever it takes to get the story, even if it means cutting corners, long before reporter Anne Royall sat on John Quincy Adams' clothes while he skinny dipped in the Potomac River, forcing the president to grant her an interview.

But Murdoch's employees were obviously pushing the envelope. It will be up to Scotland Yard and the FBI to determine if they broke the law, and who if anyone told them to do it.

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