The job of corporate counsel is never easy, but sometimes the difficulties approach nightmarish proportions.
This article examines the interplay of moral and legal ethics revealed in the recent federal prosecution of Chiquita Brands International, Inc. (Chiquita) for authorizing payments to a paramilitary organization known as the “Autodefensas Unidas de Columbia” (United Self-Defense Forces of Columbia).
This organization, commonly known as the AUC, was formed in 1997 to organize loosely-affiliated illegal paramilitary groups that had emerged in Columbia to retaliate against left-wing guerillas fighting the Columbian government.
At that same time, Chiquita’s wholly-owned subsidiary, C.I. Bananos de ExportaciÓn (Banadex), was operating in a region of Columbia controlled by the AUC. Chiquita sold Banadex in June 2004.
The events occurring between 1997 and 2004 created the perfect storm of ethical dilemmas for both in-house and outside counsel for Chiquita.
The primary role of in-house counsel is to advise a corporation’s personnel on the conduct of the corporation’s business operations. The ABA Model Rules of Professional Conduct (Model Rules), adopted in some form in every New England state but Maine, state that when rendering such advice, “a lawyer may refer not only to the law but to other considerations such as moral, economic, social and political factors, that may be relevant to the client’s situation.” Model Rule 2.1 (emphasis added).
However, Model Rule 1.2 mandates that a lawyer “shall not” counsel a client in “conduct that the lawyer knows is criminal. . . .” (Emphasis added.)
The rub comes when a lawyer advising a corporation is faced with a Hobson’s choice in which moral considerations arguably militate in favor of illegal conduct. It appears that counsel for Chiquita was presented with just such a choice.
In the beginning
The story begins in 1997, when the then-leader of the AUC met with the general manager of Banadex. During this meeting, the AUC leader made an unspoken but clear threat that Banadex’s failure to make regular and substantial payments to the AUC could result in physical harm to Banadex employees and property. In response to this threat, Banadex began making such payments in 1997.
In 1997, and for several years subsequent, the payments by Banadex to AUC do not appear to have violated U.S. law. Court records establish that in September 2000 the Audit Committee of Chiquita’s Board of Directors received the results of an internal investigation of the Banadex payments conducted by an in-house attorney for Chiquita. Apparently concluding that the payments were both legal and necessary to protect Banadex’s employees and property, the Audit Committee took no steps to stop the payments.
However, things changed on Sept. 10, 2001, just one day before the World Trade Center attack, when U.S. Secretary of State Colin Powell designated the AUC as a “Foreign Terrorist Organization” (FTO), arguably bringing Chiquita’s conduct within the scope of a federal statute criminalizing the provision of material support or resources to any FTO.
On the heels of the World Trade Center attack, President Bush signed Executive Order 13224 which, among other things, authorizes the Secretary of State to designate any foreign organization falling within certain specified criteria as a “Specially Designated Global Terrorist” (SDGT).
The Executive Order further directed that all SDGTs be identified as such on the “Specially Designated Nationals List” maintained by the Treasury Department’s Office of Foreign Assets Control (OFAC).
Secretary of State Powell designated AUC as a SDGT on Oct. 31, 2001. AUC’s inclusion on OFAC’s Specially Designated Nationals List “blocked” AUC’s property and interests in property under OFAC regulations.
OFAC regulations prohibit any U.S. person from contributing any funds to or for the benefit of any entity whose assets are blocked.
The question of who knew what when at Chiquita was a matter of dispute in its federal prosecution. However, Chiquita conceded that, in February 2003, a high-ranking Chiquita officer learned that AUC had been designated a FTO by the U.S. Government. Thereafter, outside counsel was retained to advise Chiquita as to the legality of the Banadex payments to the AUC. On April 3, 2003, the full Chiquita Board of Directors was informed that Banadex was making regular payments to a designated FTO.
At this point, the company’s dilemma was starkly presented. Should Chiquita make the arguably “moral” decision to protect the Banadex’s employees by continuing to make what it now knew were illegal payments to a terrorist organization, or should it immediately stop the payments?
The constraints placed on Chiquita’s counsel under Model Rule 1.2 seem clear, even if it would result in advice which, if followed, could mean death or serious injury to Banadex’s employees.
In the end, Chiquita’s Board chose to disclose its quandary to the U.S. Department of Justice and seek its guidance.
On April 24, 2003, a Chiquita director, a high-ranking officer, and the company’s outside counsel met with DOJ officials and voluntarily disclosed the entire history of the Banadex payments.
What happened at that meeting remains a bone of contention between the company and the DOJ. Apparently, the Chiquita representatives felt they had obtained at least the DOJ’s tacit approval to continue making the payments while DOJ representatives pondered over the appropriate resolution to the problem. Banadex continued making the payments until February 2004.
The DOJ took a different view of the meeting. Prior to Chiquita’s sentencing in September 2007 (following a plea bargain pursuant to which it admitted engaging in transactions with a SDGT in violation of the Federal Emergency Economic Powers Act), the DOJ filed a sentencing memorandum.
While conceding in that memorandum that DOJ officials had described Chiquita’s decision whether to continue authorizing payments to the AUC as “complicated,” the DOJ denied it had authorized any further payments to the AUC.
The DOJ asserted it “is not in the business of providing outside parties with advice about how best to comply with the law.”
This engendered a scathing response from Chiquita, characterizing the DOJ’s “simplistic position” as a “post hoc rationalization that ignores reality.”
According to Chiquita’s outside counsel, the company “voluntarily disclosed its intolerable dilemma to the [DOJ] and sought its guidance – guidance that, despite the government’s acknowledgement of the ‘complicated’ nature of the life-and-death situation facing Chiquita, was never provided.”
All’s well that ends well?
In the end, it can be said that Chiquita obtained a favorable result through its plea agreement with the government. While it had to pay a $25 million dollar fine and serve five years probation, under applicable federal law the fine could have been $99 million (twice the amount of the profit Chiquita admitted earning from its Columbian operations during the period relevant to the charge to which it pled guilty).
Moreover, none of Chiquita’s directors, officers or employees was individually charged with any crime.
Chiquita’s experience reflects the dangers inherent when a corporation waives its attorney/client privilege, as both the results of Chiquita’s internal investigation, and the legal advice given to Chiquita by its original outside counsel (who withdrew from his representation of Chiquita when required to testify for the government) constituted much of the evidence used by the government to build its case against Chiquita.
There was good reason to waive the privilege in 2003 when Chiquita began to cooperate with the government. Under DOJ policy at the time, a corporation’s waiver of its attorney/client privilege while cooperating in the government’s investigation was a critical factor considered by the DOJ in determining whether or not to prosecute the corporation.
That policy has since been modified somewhat in light of outrage expressed by the defense bar and other legal interest groups. But that is a long story, and perhaps good fodder for a future article.
Denis King is a director in Goulston & Storrs’ professional liability group. The group defends large law firms in malpractice, disciplinary and partnership disputes, and provides ethics advice to both law firms and in-house counsel. Denis can be reached at 617.574.6432 or at firstname.lastname@example.org.