SEC extra-territorial jurisdiction enables disposal of corruption case in South Africa

In a case that demonstrates the scope of US extra-territorial jurisdiction, the US Securities and Exchange Commission (SEC) charged Hitachi Ltd, a corporation based in Japan, with violating the Foreign Corrupt Practices Act (FCPA) (see Practical Law practice note, The Foreign Corrupt Practices Act: Overviewby inaccurately recording improper payments to the ruling political party in South Africa in connection with contracts to build power plants.

Hitachi agreed to pay $19m to settle the charges, but did not admit or deny the allegations.

The SEC alleged that Hitachi sold a 25% stake in a South African subsidiary to Chancellor House Holdings Ltd, a company that was controlled by the African National Congress (ANC). This arrangement meant that the profits from any contracts in South Africa secured by Hitachi could be shared with the ruling ANC party.

Hitachi subsequently secured two contracts to build power stations in South Africa and paid $5m in dividends to the front company. In a separate undisclosed agreement, a further $1m was paid in consulting fees without appropriate documentation.

The SEC’s complaint, filed in the US District Court in Columbia, revealed that:

  • Hitachi was aware that Chancellor was a funding vehicle for the ANC during the bidding process.
  • Hitachi nevertheless continued to partner with Chancellor and encouraged the company to use its political influence to help obtain government contracts from Eskom Holdings SOC Ltd., a public utility owned and operated by the South African government.
  • Hitachi paid “success fees” to Chancellor for its exertion of influence during the Eskom tender process pursuant to a separate, unsigned side-arrangement.

It is well known that both the FCPA and the UK’s Bribery Act enable certain corrupt payments made abroad to be prosecuted in their respective jurisdictions. The use of extra-territorial jurisdiction under the FCPA is well documented, although not previously in South Africa. The Bribery Act makes clear provision for such prosecution, and we await news of its actual use.

It is also notable that the authorities sought a financial settlement, rather than a criminal prosecution of Hitachi. Civil recovery orders, formally the usual course of action for the Serious Fraud Office (SFO) when disposing of corruption cases, fell out of favour under the Directorship of David Green QC. However, the one prominent example of their use under David Green, Oxford Publishing Ltd was justified by the following factors:

  • Key material obtained through the investigation was not in an evidentially admissible format for a criminal prosecution and witnesses in any such prosecution would be in overseas jurisdictions and were considered unlikely to assist or co-operate with a criminal investigation in the UK.
  • Difficulties in relation to obtaining evidence from the jurisdictions involved and potential risks to the personal welfare of affected persons.

The Oxford Publishing settlement addressed the concerns raised in the Innospec Judgement and was not subject to any adverse judicial or media criticism.

Coming to the end of David Green’s four year term of appointment, public opinion could be critical of the lack of successful prosecutions, or even disposals, of corruption matters and wonder whether some of the reported investigations could have been disposed of by following the pragmatic approach of the SEC in Hitachi?

To read more about civil recovery orders, see our Practical Law practice note, SFO approach to civil recovery orders

Practical Law David Bacon

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