In the pre-dawn hours of a Saturday in late June 2009, military troops bearing automatic weapons and arrest warrants rousted Honduran President Manuel Zelaya from his bed. Hours later, the troops escorted Zelaya, still clad in his pajamas, from the country. The head of congress and man next in line for the presidency, Robert Micheletti, settled into the tile-roofed presidential palace in downtown Tegucigalpa. As this dispute simmered over the summer, some called the events a coup, resulting from Zelaya’s push for a referendum on his ability to seek re-election. Others branded the events an illegal seizure of power from a democratically elected president. But few realized the role in these dramatic events of a powerful U.S. anti-corruption law that has drastically changed the nature of international business.
This law, the Foreign Corrupt Practices Act (FCPA), prohibits businesses and persons with U.S. ties from making payments to foreign officials to obtain or retain business. The law has played a growing role in U.S. efforts to bring transparency to developing nations by penalizing those who try to open doors for business with illicit payments. The law’s reach is broad, touching many business practices – like payments to pass goods through customs or reserve precious airplane cargo space – that some had come to see as standard procedure in foreign markets. U.S. law enforcement increasingly stresses the importance of an ethical business culture, and enforces these lessons with multi-million dollar fines and jail time for those who stray. The events in Honduras demonstrate this effort.
The ‘Prize’ of Doing Business in Honduras
In a federal courtroom in Miami, two months prior to Zelaya’s ouster, the new owners of a Florida company, Latin Node Inc. (Latinode), stood ready to face a judge and answer for making corrupt payments that reached into the highest levels of the Honduran government. A few years earlier, Latinode had sought to open a relationship with Hondutel, the state-owned telephone company in Honduras, to provide wholesale telephone services. Despite "financial weaknesses" in its bid for an access agreement, Latinode hoped that a "prize" it offered to a senior Hondutel official might nonetheless make the difference. The prize took the form of $300,000 passed by Latinode through sham consulting firms to Honduran officials considering the proposal.
After securing the deal, Latinode sought concessions from Hondutel. Honduran officials said it would be necessary to "give something" to them to obtain the preferred rate and capacity sought by Latinode. The officials made the giving easy, providing their own bank account information, where ultimately over $1 million was passed. The officials concealed the rate change from the public, and instead told Latinode to inflate its monthly statements of minutes purchased. Latinode paid two Hondutel employees to make official records correspond to the inflated bills. Latinode even hired a former Hondutel official to lead its Latin American operations.
After gaining these concessions, Latinode sold its operations in 2007 to eLandia International Inc., a publicly traded company. The new owners soon discovered they had inherited a tremendous mess, and took important steps under U.S. law to limit the damage. After conducting an internal review, eLandia reported the misconduct in Honduras to U.S. prosecutors. This type of self-disclosure is an important function for companies that uncover misconduct, and prosecutors ultimately lauded these "commendable" and "authentic" efforts as "exemplary" cooperation. The disclosures, however, were costly to eLandia, which later reported that it had overpaid roughly $20 million for Latinode, given the resulting criminal exposure and loss of business. Indeed, eLandia cancelled the Honduran contracts and placed Latinode into a dormant state in order to avoid further problems.
Prosecutors soon brought charges, alleging that Latinode had bribed its way into the Honduras business through payments to several Honduran officials, identified by prosecutors only by initials and their functions in Hondutel. The charges stated that Latinode paid more than $1 million to "Official A, Official B, Official C, and other Honduran officials" to obtain the telephone contract and reduce the per-minute rate.
Honduras Does Not Stand Alone
The Latinode case is not the first corruption touching Latin American telephone networks. In September 2008, a federal judge in Miami sentenced a former Alcatel CIT executive to 30 months of imprisonment for engaging in an elaborate bribery scheme to obtain mobile telephone contracts from the Costa Rican state-owned telecommunications authority. The official, Christian Sapsizian, promised to pay officials up to 2 percent of the contract’s value. Before being fired in 2004, Sapsizian caused Alcatel to wire $14 million in "commission" payments to a consultant, who then transferred
$2.5 million to Costa Rican officials.
Charges of corruption in Costa Rica debilitated the local civic culture. In late 2004, an international watchdog group found Costa Ricans to be the second most pessimistic nation when it came to corruption. A year later, a local newspaper poll found 32 percent of the population planned to abstain from elections, a rate the newspaper said demonstrated "a weakening of democracy, particularly because of misuse of powers and the inefficiency of politicians."
Costa Rican authorities have sought to investigate the role of political powers in the bribery, and the chief prosecutor of Costa Rica, Francisco Dall’Anese, is seeking to interrogate Sapsizian. U.S. officials denied Dall’Anese entry into the country on his first visit, resulting in a diplomatic protest and claims that the United States was intentionally placing many obstacles in the way of Costa Rica’s review. But a subsequent trip gave Dall’Anese access to information, ultimately leading to charges against former Costa Rican President Miguel Angel Rodríguez for accepting bribes in connection with the telephone contracts. In a late August 2009 interview, Dall’Anese said the case against former President Rodríguez has passed the preliminary process stage and has been ordered to trial by a judge.
The Hondutel Bribes Touch Zelaya’s Inner Circle
While the American papers largely overlooked the Alcatel and Latinode cases, the Honduran press quickly noticed. Some Honduran newspapers had been reporting on irregularities at Hondutel since 2007, focusing primarily on the role of Marcelo Chimirri, Hondutel’s manager and President Zelaya’s nephew. The story took a macabre turn in February 2008, when a truck rigged with a false compartment for smuggling was found burned underneath a bridge in Comayagua, Honduras, with four men inside. One of the men is reported to have been providing information – including a 49-minute recorded conversation with a person believed to be Official C – about efforts by Hondutel officials to extort money from his business.
The new allegations from the Latinode case magnified the interest. Speculation ran concerning the identities of the unnamed officials, and the press soon identified candidates for each pseudonym. Most spectacular was the identification of "Official B" as Chimirri. Chimirri has maintained that he did not sign contracts or lower tariffs for Latinode, asserting that his accusers are seeing "pink elephants" and using "who knows what kind of psychotropic substances." Chimirri also denied claims that his fortune, including luxury cars, thoroughbred horses and a mansion, had an "obscure origin."
President Zelaya had denied that there was evidence of any tariff reduction or of any wrongdoing in his government, but was forced to change his opinion following Latinode’s guilty plea. As auditors from Chile came in to help unravel Hondutel’s finances, the new Hondutel manager Jorge Rosa guaranteed the investigation would result in the punishment of those responsible. In the days before Zelaya’s ouster, Rosa promised that Hondutel was giving investigators all the information they sought. "Here, nothing will be forgotten," Rosa said. The investigation "will be what all Hondurans want – a transparent answer and solution."
Since Zelaya’s removal, Honduran officials have arrested and detained Chimirri and others from the Latinode affair. Honduran prosecutors continue to investigate, including against President Zelaya. More disclosures surely will follow.
The High Cost of Corruption
Did the Hondutel events lead to President Zelaya’s ouster? They certainly seem to have been a contributing factor, as the Honduran press has noted since his removal. In any event, corruption presents a significant challenge to developing nations, impeding economic growth, distorting competition, diverting important public resources and corroding the institutions of a civil society. The impact on poorer communities is particularly acute. As the World Bank recognized some years ago, "corruption and poor governance worsen poverty directly – by diverting resources away from the needy – and indirectly – by harming the climate for private investment, key to growth and poverty reduction." In short, the misuse of power holds nations back from reaching their social and economic potential.
Enactment and enforcement of anti-corruption efforts worldwide, like the FCPA and the Organization for Economic Co-operation and Development Convention of Combating Bribery of Foreign Public Officials, not only is prompting businesses to adopt measures to protect their reputations and shareholders, but also is reshaping the concept of good business practices for an ethical company. The Hondutel case provides a great reminder of these important concepts.
Gregory A. Paw
Written by
Latinode Lessons for Responsible Companies
The Latinode case exemplifies many important points for companies addressing issues under the Foreign Corrupt Practices Act, including the importance of conducting pre-acquisition due diligence of target companies to ensure that FCPA enforcement problems are not coming along in the deal and that the target’s foreign business will remain valuable and profitable.
In June 2007, eLandia bought Latinode for $26.8 million. Within months, the company reported Latinode’s FCPA violations to the Justice Department, and began to realize that this purchase was overvalued by $20.6 million. While pre-acquisition due diligence will not catch all FCPA problems, it is a necessary part of every acquisition to make sure that the buyer is getting what is expected. The due diligence also protects a company from purchasing an asset that will come along with its own FCPA investigation, as the Justice Department takes the view that an acquiring company, bank or investor may face liability for past acts of an acquired company that would have violated the FCPA had the acquired company been subject to the FCPA at the time. The best defenses against these liability issues is to conduct probing and effective pre-acquisition FCPA due diligence, and to maintain a strong compliance program to avoid ongoing FCPA issues.
Quickly addressing FCPA issues when they arise is another important lesson from the Latinode case. When eLandia uncovered the misconduct after the Latinode purchase, it immediately began an internal review of the facts and provided timely and thorough reports on these facts to the prosecutors. Senior Latinode officials responsible for the problem were dismissed, and eLandia took steps to strengthen its own FCPA compliance efforts. These efforts resulted in substantial benefits, as prosecutors declined to charge eLandia itself, did not require eLandia to enter a deferred prosecution agreement or retain a corporate monitor, and recommended a fine that was less than half of what the minimum sentencing guidelines would ordinarily have required.
Finally, the case demonstrates the potential negative impact from condoning improper conduct in foreign markets. The Hondutel bribes facilitated a culture of secret deals and vast wealth to a few well-connected persons. The debris left behind includes contracts hidden from public view, bogus accountings of the scarce public resource of telephone service, physical harm to an extortion victim who tried to clear the air, and possibly even the downfall of a president. Being associated with these elements is a disaster for any responsible company seeking to engage in ethical and proper business.
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.
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