Tuesday, July 29, 2014

SEC Fines US Gunmaker For Bribing Pakistani Officials

US gun manufacturer Smith and Wessen has agreed to pay the U.S. government $2 million fine for bribing officials in Pakistan, Indonesia and other countries as it tried to sell firearms to military and law enforcement agencies, according to US media reports.

The company has also implemented new procedures for its overseas business practices. It will report back to the US SEC (Securities Exchange Commission) on its FCPA (Foreign Corrupt Practices Act) compliance efforts for the next two years.

Here are some excerpts from SEC's press release on this settlement:

According to the SEC’s order instituting a settled administrative proceeding, the Springfield, Mass.-based firearms manufacturer sought to break into new markets overseas starting in 2007 and continuing into early 2010. During that period, Smith & Wesson’s international sales staff engaged in a pervasive effort to attract new business by offering, authorizing, or making illegal payments or providing gifts meant for government officials in Pakistan, Indonesia, and other foreign countries. 

 “This is a wake-up call for small and medium-size businesses that want to enter into high-risk markets and expand their international sales,” said Kara Brockmeyer, chief of the SEC Enforcement Division’s FCPA Unit. “When a company makes the strategic decision to sell its products overseas, it must ensure that the right internal controls are in place and operating.” 

 According to the SEC’s order, Smith & Wesson retained a third-party agent in Pakistan in 2008 to help the company obtain a deal to sell firearms to a Pakistani police department. Smith & Wesson officials authorized the agent to provide more than $11,000 worth of guns to Pakistani police officials as gifts, and then make additional cash payments. Smith & Wesson ultimately won a contract to sell 548 pistols to the Pakistani police for a profit of $107,852. The SEC’s order finds that Smith & Wesson employees made or authorized improper payments related to multiple other pending or contemplated international sales contracts.
The SEC’s order finds that Smith & Wesson also authorized improper payments to third-party agents who indicated that portions would be provided to foreign officials in Turkey, Nepal, and Bangladesh. The attempts to secure sales contracts in those countries were ultimately unsuccessful. 

The SEC’s order finds that Smith & Wesson violated the anti-bribery, internal controls and books and records provisions of the Securities Exchange Act of 1934. The company agreed to pay $107,852 in disgorgement, $21,040 in prejudgment interest, and a $1.906 million penalty. Smith & Wesson consented to the order without admitting or denying the findings. The SEC considered Smith & Wesson’s cooperation with the investigation as well as the remedial acts taken after the conduct came to light. Smith & Wesson halted the impending international sales transactions before they went through, and implemented a series of significant measures to improve its internal controls and compliance process. The company also terminated its entire international sales staff.

Similar allegations have in the past surfaced in FCPA cases relating to MicrosoftSiemensPaxar and other foreign entities in Pakistan. Last year, US media reported that an unnamed provincial minister in Punjab government and his wife traveled to the United States in December 2009 to close a $9 million deal for Microsoft Office software. The trip was booked by a travel agent working for Microsoft. Microsoft paid the costs of business class fare and stay at a luxury hotel in the United States, according to the Wall Street Journal.  In another case, Paxar Corporation, a New York listed company acquired  by Avery, acknowledged paying $30,000 to bribe Pakistani customs officials in 2008 through its local customs broker. Avery, a California-based company, manufactures and markets various office products in several dozen countries around the world.

Raymond Baker, author of "Capitalism's Achilles Heel", has detailed billions of dollars worth of bribes received by government leaders in several developing countries including Pakistan.  Here's a brief except from Baker's book on Sharif family:

"At least $160 million pocketed from a contract to build a highway from Lahore, his home town, to Islamabad, the nation’s capital. At least $140 million in unsecured loans from Pakistan’s state banks. More than $60 million generated from government rebates on sugar exported by mills controlled by Mr. Sharif and his business associates. At least $58 million skimmed from inflated prices paid for imported wheat from the United States and Canada. In the wheat deal, Mr. Sharif ’s government paid prices far above market value to a private company owned by a close associate of his in Washington, the records show. Falsely inflated invoices for the wheat generated tens of millions of dollars in cash."

Baker mentions the use of several offshore entities in British Virgin Islands and Channel Islands controlled by the family of Prime Minister Nawaz Sharif to launder billions of dollars received in bribes.

Similar details are offered in the book that explain how Bhutto-Zardari family have siphoned off money from deals made by Pakistan government. Here's a more extensive excerpt from Baker's book:

Upon taking office in 1988, Bhutto reportedly appointed 26,000 party hacks to state jobs, including positions in state-owned banks. An orgy of lending without proper collateral followed. Allegedly, Bhutto and Zardari “gave instructions for billions of rupees of unsecured government loans to be given to 50 large projects. The loans were sanctioned in the names of ‘front men’ but went to the ‘Bhutto-Zardari combine.’ ” Zardari suggested that such loans are “normal in the Third World to encourage industrialisation.” He used 421 million rupees (about £10 million) to acquire a major interest in three new sugar mills, all done through nominees acting on his behalf. In another deal he allegedly received a 40 million rupee kickback on a contract involving the Pakistan Steel Mill, handled by two of his cronies. Along the way Zardari acquired a succession of nicknames: Mr. 5 Percent, Mr. 10 Percent, Mr. 20 Percent, Mr. 30 Percent, and finally, in Bhutto’s second term when he was appointed “minister of investments,” Mr. 100 Percent. The Pakistan government’s largest source of revenues is customs duties, and therefore evasion of duties is a national pastime. Isn’t there some way to tap into this major income stream, pretending to fight customs corruption and getting rich at the same time? Of course; we can hire a reputable (or disreputable, as the case may be) inspection company, have the government pay the company about a one percent fee to do price checking on imports, and get multimillion-dollar bribes paid to us upon award of the contracts. Société Générale de Surveillance (SGS), headquartered in Switzerland, and its then subsidiary Cotecna, the biggest group in the inspection business, readily agreed to this subterfuge. Letters in 1994 promised “consultancy fees,” meaning kickbacks, of 6 percent and 3 percent to two British Virgin Island (BVI) companies, Bomer Finances Inc. and Nassam Overseas Inc., controlled by Bhutto and Zardari. Payments of $12 million were made to Swiss bank accountsof the BVI companies. SGS allegedly has paid kickbacks on other inspection contracts around the world. Upon being accused in the inspection kickback scheme, Bhutto sniffed, “I ran the government to the best of my honest ability. And I did it for nothing but acknowledgment and love.” Then there was the 1994 deal to import $83 million worth of tractors from Poland. Ursus Tractors allegedly paid a 7 percent commission to another of Zardari’s Caribbean companies, Dargal Associated. Bhutto waived import duties on the tractors, costing the Pakistani government some 1.7 billion rupees in lost revenues. Upon discovery of this scheme the Poles hastened to turn over 500 pages of documentation confirming the kickback. The Polish tractor deal was just a warm-up for the French fighter jet deal. After the U.S. government cancelled a sale of two squadrons of F-16s, Bhutto dangled a $4 billion contract for Mirages in front of the French—Dassault Aviation; Snecma, the engine manufacturer; and Thomson-CSF, producer of aviation electronics. Without missing a beat they allegedly agreed to pay a “remuneration” of 5 percent to Marleton Business S.A., yet another of Zardari’s British Virgin Island companies. This would have generated a tidy $200 million for the Bhutto-Zardari couple, but unfortunately for them she was driven from office before they could collect. Ah, but the gold deal gave some comfort to these aspiring kleptocrats. Gold is culturally important in the Asian subcontinent, in particular as a way for women to accumulate wealth. Upwards of $100 billion is invested in this unproductive asset in Pakistan, India, and surrounding countries. Smuggling is big business. Ostensibly to regulate the trade, a Pakistani bullion dealer in Dubai, Abdul Razzak Yaqub, asked Bhutto for an exclusive import license. In 1994, yet another Zardari offshore company, M.S. Capricorn Trading, was created in the British Virgin Islands. Later in the year, Jens Schlegelmilch, “a Swiss lawyer who was the Bhutto family’s attorney in Europe and close personal friend for more than 20 years,” opened an account for Capricorn Trading at the Dubai branch of Citibank. According to a 1999 U.S. Senate report: “Mr. Schlegelmilch did not reveal to the Dubai banker that Mr. Zardari was the beneficial owner of the PIC [private investment company], and the account manager never asked him the identity of the beneficial owner of the account. . . . Shortly after opening the account in Dubai, Mr. Schlegelmilch signed a standard referral agreement with Citibank Switzerland private bank guaranteeing him 20 percent of the first three years of client net revenues earned by the bank from each client he referred to the private bank.” In other words, Citibank was contracting to pay a finder’s fee for millions brought in from dubious sources. Citibank went on to open three accounts in Switzerland for Zardari, with Schlegelmilch as the signatory. In October 1994, Citibank records show that $10 million was deposited into Capricorn’s Dubai account by Razzak Yaqub’s company, A.R.Y. International Exchange. In December, Razzak Yaqub received an exclusive import license and proceeded over the next three years to ship more than $500 million in gold to Pakistan. Additional deposits flowed into the Dubai and Swiss Citibank accounts, and funds also were shifted to Citibank Channel Island subsidiaries. The original ceiling on the accounts of $40 million was reached quickly.

Related Links:

Haq's Musings

Microsoft Accused of Bribing Pakistani Punjab Minister

Inaction Against Corruption in South Asia

FCPA Blog

Avery Acknowledges Bribing Pakistani Officials

FCPA Violations Involving Indian Entities

The Story of Graft

Anti-Corruption Day, Blagojevich and Zardari

Bhutto Convicted in Switzerland

Corruption in Pakistan

Transparency International Survey 2007

Is Siemens Guilty?

Zardari Corruption Probe


4 comments:

Mayraj said...

2m? That's paltry. Meanwhile close to half million firearms given to Afghan forces have gone missing. i guess they ended up being put up for sale.

Aki Peritz, a former CIA counterterrorism analyst who co-authored a book on the US fight against Al Qaeda, says that anytime you inject tons of weapons into a impoverished area, they are guaranteed to disappear. "It's like telling someone in the United States, here's a $30,000 thing and if you lose it, we will give you another one," he says.
http://www.motherjones.com/politics/2014/07/sigar-afghanistan-us-weapons-wind-up-insurgents
The US Has Given Over 465,000 Small Arms to Afghanistan. Where the Hell Are They?

The Special Inspector General for Afghanistan Reconstruction reports that the US is doing a paltry job of tracking the weapons it provides to the Afghan security forces.

Riaz Haq said...

Last week former New Orleans Mayor Ray Nagin became the latest American politician to be sent to jail for abuse of power, following in the footsteps of former Detroit Mayor Kwame Kilpatrick and onetime Illinois Congressman Jesse Jackson Jr. Despite such high-profile convictions, most Americans see political corruption as a problem that plagues the developing world far more than the U.S. The truth is more complex: It’s certainly the case that paying bribes is a lot less common in the U.S. than in Nigeria or Bolivia, for example. But when citizens are asked if corruption is prevalent in their country, they’re thinking about a lot more than bribes. They’re more concerned about whether government and the political system is fair or stacked against them. And on those grounds, there are good reasons to think the difference between the U.S. and developing countries isn’t very big at all.
It doesn’t take a detailed look at Transparency International’s Corruption Perceptions Index to work out which types of countries are viewed to be particularly corrupt by the political risk analysts, aid agency economists, and think-tank staff whose opinions the index reflects. At the (virtuous) top of the ranking are rich countries: Sweden is No. 3, the U.K., 14; and the U.S., 19. At the (villainous) bottom are poor countries: Ivory Coast is No. 136, Vietnam, 116; and Tanzania, 111. It’s an unquestioned truth among Western politicians, businesspeople, and aid agency employees that corruption is rife in the developing world and that’s a big and, perhaps, even the main reason why poor countries are poor.
When surveys ask companies around the world about how often they make side payments for anything from avoiding taxes to winning a government contract, there’s a strong pattern: the poorer the country, the more likely companies are to make such payments. Ask individuals if they have ever paid a bribe and it’s the same story: According to Transparency International surveys, only 10 percent of Americans say they have ever been asked to pay a bribe, and 6 percent of people in the U.K. have. Compare that with 22 percent in Turkey, 33 percent in Pakistan, or more than half of the populations in countries such as Senegal, Ghana, or the Democratic Republic of the Congo.
Nagin wasn’t convicted of taking a bribe. His big crimes were related to steering business to his family’s kitchen countertop company. That underscores a vital truth: There are lots of different ways to be corrupt. And when you survey people around the world about the problem of corruption in their country, most have a definition of “corruption” that’s broader than bribery. Ask the same people, “Have you paid a bribe,” and then ask, “Is corruption a problem in this country?” and the relationship between the two answers is weak. Again, ask the same companies, “How much do you pay in bribes?” and “Is corruption a major constraint to doing business,” and many who say bribery in their industry is common also don’t see corruption as a problem—while many who don’t pay bribes are convinced corruption is holding them back.
People in poor countries are more likely to say the police and the judiciary are corrupt than respondents in rich countries. Less than a third of people in the U.K. and about two in five in the U.S. think police are corrupt, compared with 82 percent in Pakistan and 92 percent in Ghana. But there’s pretty much no relationship between national income and views of how corrupt business is. And people in richer countries are slightly more likely than are citizens of poorer countries to say political parties and the media are corrupt or very corrupt. In the U.S., 76 percent of the public thinks political parties are corrupt—the same proportion as in Romania, Ghana, Pakistan, or the Democratic Republic of the Congo.....

http://mobile.businessweek.com/articles/2014-07-14/corruption-is-perceived-as-greater-where-income-gaps-are-big

Riaz Haq said...

Grave financial irregularities, undue favouritism, misuse of official authority and corruption to the tune of billions of rupees have surfaced in the Punjab government’s laptop scheme launched in their previous term, Pakistan Today has learnt.

The Punjab government distributed 110,000 laptops to university students across the province allegedly to counter the rising popularity of Pakistan Tehreek-e-Insaf (PTI) Chairman Imran Khan among the youth just one year before the 2013 General Elections.

However, a special audit conducted by the government’s own wing – the Auditor General’s Office – pointed out serious corruption in the scheme.

The laptop distribution scheme was themed as, “Advancement of information technology amongst students through provision of laptop computers,” for the year 2011-12.

Documents available with Pakistan Today reveal that the price of one laptop was shown as Rs 20,000 as approved by the Provincial Development Working Party (PDWP) in October 2011 for a dual-core Dell machine. However, two months later, the PC-I of that scheme was revised and the laptop price was increased from Rs 20,000 to Rs 37,950 per piece without changing the original specifications.

Hence, the prices were jacked up without any justification, causing a direct loss of Rs 2 billion to the public exchequer.

Moreover, the project to enhance IT labs in Punjab schools – a project of the School Education Department – was rolled up and Rs 2 billion finances were diverted to the Higher Education Department (HED) for the laptop scheme without any provision under the rules.

http://www.pakistantoday.com.pk/2014/08/30/national/audit-exposes-mega-scam-in-pml-n-laptop-scheme/

Riaz Haq said...

The confessional statement of Senator Ishaq Dar was recorded before a district magistrate in Lahore. He was brought to the court from a jail by Basharat Shahzad, who was then serving as assistant director in the Federal Investigation Agency (FIA).

According to legal experts, the senator's deposition was an 'irrevocable statement' as had been recorded under section 164 of the Criminal Procedure Code (CrPC).

Senator Ishaq Dar has always been regarded as one of the closest aides of the Sharif family, and is now also a relative as his son is married to Nawaz Sharif's younger daughter.

However, the NAB record clearly shows that back in 2000 he had agreed to give a written statement against the Sharifs about their alleged involvement in money laundering.

The top PML-N leaders had hit a rough patch by then as some of their lieutenants were busy developing a new political system for Gen Pervez Musharraf after his Oct 1999 military coup.

In the statement, Ishaq Dar accused Nawaz and Shahbaz Sharif of money laundering in the Hudaibiya Paper Mills case. At one point in the 43-page statement, Mr Dar said that on the instructions of Mian Nawaz Sharif and Shahbaz Sharif, “I opened two foreign currency accounts in the name of Sikandara Masood Qazi and Talat Masood Qazi with the foreign currency funds provided by the Sharif family in the Bank of America by signing as Sikandara Masood Qazi and Talat Masood Qazi”.

He said that all instructions to the bank in the name of these two persons were signed by him under the orders of “original depositors”, namely Mian Nawaz Sharif and Mian Shahbaz Sharif.

“The foreign currency accounts of Nuzhat Gohar and Kashif Masood Qazi were opened in Bank of America by Naeem Mehmood under my instructions (based on instructions of Sharifs) by signing the same as Nuzhat Gohar and Kashif Masood Qazi.”

The document shows Dar stated that besides these foreign currency accounts, a previously opened foreign currency account of Saeed Ahmed, a former director of First Hajvari Modaraba Co and close friend of Dar, and of Mussa Ghani, the nephew of Dar's wife, were also used to deposit huge foreign currency funds provided by “the Sharif family” to offer them as collateral to obtain different direct and indirect credit lines.

Senator Dar had disclosed that the Bank of America, Citibank, Atlas Investment Bank, Al Barka Bank and Al Towfeeq Investment Bank were used under the instructions of the Sharif family.

Interestingly enough, Ishaq Dar also implicated himself by confessing in court that he — along with his friends Kamal Qureshi and Naeem Mehmood — had opened fake foreign currency accounts in different international banks.

Mr Dar said an amount of $3.725 million in Emirates Bank, $ 8.539 million in Al Faysal Bank and $2.622 million were later transferred in the accounts of the accounts Hudaibya Paper Mills.

He said that the entire amount in these banks finally landed in the accounts of the paper mills.

The Hudaibiya Paper Mills case is still pending in the National Accountability Bureau.

If it is opened again, the Sharif brothers may be in for a rude shock a confidant is to blame for the albatross around their necks.

http://www.dawn.com/news/848873/sharifs-used-paper-mill-to-whiten-money-dar-told-court-in-2000