FCPA Compliance and Ethics Blog

August 28, 2014

Risk Assessments-the Cornerstone of Your Compliance Program, Part III

7K0A0129Today, I conclude a three-part series on risk assessments in your Foreign Corrupt Practices Act (FCPA) or UK Bribery Act anti-corruption compliance program. I previously reviewed some of the risks that you need to assess and how you might go about assessing them. Today I want to consider some thoughts on how to use your risk assessment going forward.

Mike Volkov has advised that you should prepare a risk matrix detailing the specific risks you have identified and relevant mitigating controls. From this you can create a new control or prepare an enhanced control to remediate the gap between specific risk and control. Finally, through this risk matrix you should be able to assess relative remediation requirements.

A manner in which to put into practice some of Volkov’s suggestions was explored by Tammy Whitehouse, in an article entitled “Improving Risk Assessments and Audit Operations”. Her article focused on the how Timken Company, assesses and then evaluates the risks the company has assessed. Once risks are identified, they are then rated according to their significance and likelihood of occurring, and then plotted on a heat map to determine their priority. The most significant risks with the greatest likelihood of occurring are deemed the priority risks, which become the focus of the audit/monitoring plan, she said. A variety of solutions and tools can be used to manage these risks going forward but the key step is to evaluate and rate these risks. 

LIKELIHOOD 

Likelihood Rating Assessment Evaluation Criteria
1 Almost Certain High likely, this event is expected to occur
2 Likely Strong possibility that an event will occur and there is sufficient historical incidence to support it
3 Possible Event may occur at some point, typically there is a history to support it
4 Unlikely Not expected but there’s a slight possibility that it may occur
5 Rare Highly unlikely, but may occur in unique circumstances

‘Likelihood’ factors to consider: The existence of controls, written policies and procedures designed to mitigate risk capable of leadership to recognize and prevent a compliance breakdown; Compliance failures or near misses; Training and awareness programs.

PRIORITY 

Priority Rating Assessment Evaluation Criteria
1-2 Severe Immediate action is required to address the risk, in addition to inclusion in training and education and audit and monitoring plans
3-4 High Should be proactively monitored and mitigated through inclusion in training and education and audit and monitoring plans
5-7 Significant
8-14 Moderate
15-1920-25 LowTrivial Risks at this level should be monitored but do not necessarily pose any serious threat to the organization at the present time.

Priority Rating: Product of ‘likelihood’ and significance ratings reflects the significance of particular risk universe. It is not a measure of compliance effectiveness or to compare efforts, controls or programs against peer groups.

At Timken, the most significant risks with the greatest likelihood of occurring are deemed to be the priority risks. These “Severe” risks become the focus of the audit monitoring plan going forward. A variety of tools can be used, such as continuous controls monitoring with tools like those provided by Visual RiskIQ, a relationship-analysis based software such as Catelas or other analytical based tools. But you should not forget the human factor. At Timken, one of the methods used by the compliance group to manage such risk is by providing employees with substantive training to guard against the most significant risks coming to pass and to keep the key messages fresh and top of mind. The company also produces a risk control summary that succinctly documents the nature of the risk and the actions taken to mitigate it.

The key to the Timken approach is the action steps prescribed by their analysis. This is another way of saying that the risk assessment informs the compliance program, not vice versa. This is the method set forth by the DOJ in its FCPA Guidance and in the UK Bribery Act’s Adequate Procedures. I believe that the DOJ wants to see a reasoned approach with regards to the actions a company takes in the compliance arena. The model set forth by Timken certainly is a reasoned approach and can provide the articulation needed to explain which steps were taken.

In an article in Compliance Week Magazine, entitled, “Lessons on Risk Assessments from Winnie The Pooh” Jason Medford articulated that a key use of a risk assessment is to assist the internal audit function in developing their internal audit plan. He cited to the Institute of Internal Auditors (IIA) standard 2010.A1, which states “The internal audit activity’s plan of engagements must be based on a documented risk assessment, undertaken at least annually.” He went on to note that “In order to have a truly integrated GRC capability it is necessary for internal auditors to work with other GRC professionals in their organization. They must align their annual audit plan with the organization’s objectives, strategies, and initiatives of the other GRC professionals. They must collaborate, coordinate, and align their audit activities with other GRC professionals to increase visibility, improve efficiency, accountability and collaboration.

Carol Saint, Vice President of Internal Audit for 7-Eleven, who was interview by OCEG President Carol Switzer for the same article said that “We start with a risk assessment, beginning with business units because this is how the organization has designed accountability.  We decompose business units into the processes and sub-processes they own and execute. We evaluate how sub-processes align to achievement of strategic objectives: How do they affect the company’s value drivers? Next, we map financial statement lines to the sub-processes to help prioritize from that lens. Finally, for each sub-process we consider specific risks that could hinder achievement of strategic objectives, as well as fraud risks, significant accounting estimates, benchmarking/ hot topics, and ERM risks. We created an “intensity rating” that measures how often a process/sub-process was mentioned in our stakeholder interviews as a risk to the company. And we also considered how cross-functional a process is so that the element of complexity—a risk accelerator—could help determine audit plan priorities. This year’s plan development process was quite intense, but I think we did a good job of creating a baseline so that future risk assessments are more efficient.”

I hope that you have found this series on risk assessments useful. If you have any questions or better yet would like me to work on a risk assessment for your organization, please contact me.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

August 27, 2014

Risk Assessments-the Cornerstone of Your Compliance Program, Part II

7K0A0501Ed. Note-Today, I continue my three-part posts on risk assessments. Today I take a look at some different ideas on how you might go about assessing your risks.

One of the questions that I hear most often is how does one actually perform a risk assessment? Mike Volkov has suggested a couple of different approaches in his article “Practical Suggestions for Conducting Risk Assessments.” In it Volkov differentiates between smaller companies which might use some basic tools such as “personal or telephone interviews of key employees; surveys and questionnaires of employees; and review of historical compliance information such as due diligence files for third parties and mergers and acquisitions, as well as internal audits of key offices” from larger companies. Such larger companies may use these basic techniques but may also include a deeper dive into high risk countries or high risk business areas. If your company’s sales model uses third party representatives, you may also wish to visit with those parties or persons to help evaluate their risks for bribery and corruption that might well be attributed to your company.

Another noted compliance practitioner, William Athanas, in an article entitled “Rethinking FCPA Compliance Strategies in a New Era of Enforcement”, took a different look at risk assessments when he posited that companies assume that FCPA violations follow a “bell-curve distribution, where the majority of employees are responsible for the majority of violations.” However Athanas believed that the distribution pattern more closely follows a “hockey-stick distribution, where a select few…commit virtually all violations.” Athanas suggests assessing those individuals with the opportunity to interact with foreign officials have the greatest chance to commit FCPA violations. Diving down from that group, certain individuals also possess the necessary inclination, whether a personal financial incentive linked to the transaction or the inability to recognize the significant risks attendant to bribery.

To assess these risks, Athanas suggested an initial determination of the touch-points where the operations of manufacturing companies “intersect with foreign officials vested with discretionary authority.” This will lead to an understanding of the individuals who hold these roles within a company. This means that a simple geographic analysis is but a first step in a risk analysis. Thereafter companies should also focus on “those who authorize and record disbursements, as well as those who represent the company in situations where they may be solicited for payments.” The next step is to determine those company employees who may have the incentive “to pay bribes on the Company’s behalf.” This incentive can come from a variety of forms; such as a company compensation plan, which rewards high producers; employees who do not understand the risk they place the company (and themselves) in by engaging in tactics which violate the FCPA; and, finally, those employees who seek to place their individual interests above those of the company.

Athanas concludes by noting that this limited group of employees, or what he terms the “shaft of the hockey-stick”, is where a company should devote the majority of its compliance resources. With a proper risk assessment, a company can then focus its compliance efforts on “intensive training sessions or focused analysis of key financial transactions — on those individuals with the opportunity and potential inclination to violate the statute.” This focus will provide companies the greatest “financial value and practical worth of compliance efforts.”

Lawler suggests that you combine the scores or analysis you obtain from the corruption markers you review; whether it is the DOJ list or those markers under the UK Bribery Act. From there, create a “rudimentary risk-scoring system that ranks the things to review using risk indicators of potential bribery.” This ensures that high-risk exposures are done first and/or given more time. As with all populations of this type, there is likely to be a normal or ‘bell curve’ distribution of risks around the mean. So 10-15% of exposure falls into the relative low-risk category; the vast majority (70-80%) into the moderate-risk category; and the final 10-15% would be high risk.

Earlier this week I wrote a piece about the Desktop Risk Assessment. I will not repeat the entire blog post here but only use some of the areas you could assess as a starting point for discussion. If you do not have the time, resources or support to conduct a worldwide risk assessment annually, you can take a different approach. You might try assessing other areas annually through a more limited focused risk assessment, which a colleague of mine calls the Desktop Risk Assessment. Some of the areas that such a Desktop Risk Assessment could inquire into might be the following:

  • Are resources adequate to sustain a culture of compliance?
  • How are the risks in the C-Suite and the Boardroom being addressed?
  • What are the FCPA risks related to the supply chain?
  • How is risk being examined and due diligence performed at the vendor/agent level? How is such risk being managed?
  • Is the documentation adequate to support the program for regulatory purposes?
  • Is culture, attitude (tone from the top), and knowledge measured? If yes, can we use the information enhance the program?
  • Disciplinary guidelines – Do they exist and has anyone been terminated or disciplined for a violating policy?
  • Communication of information and findings – Are escalation protocols appropriate?
  • What are the opportunities to improve compliance?

There are a variety of materials that you can review from or at a company that can facilitate such a Desktop Risk Assessment. You can review your company’s policies and written guidelines by reviewing anti-corruption compliance policies, guidelines, and procedures to ensure that compliance programs are tailored to address specific risks such as gifts, hospitality and entertainment, travel, political and charitable donations, and promotional activities.

This list is not intended to be a complete list of items, you can pick and choose to form some type of Desktop Risk Assessment but hopefully you can see some of the things areas you can assess and deliver any remedial action which may be warranted. Further, if you aim to perform an annual Desktop Risk Assessment with a full worldwide risk assessment every two years or so, you should be in a good position to keep abreast of compliance issues that may change and need more or greater risk management. And do not forget the that the FCPA Guidance ends its section on risk with, “When assessing a company’s compliance program, DOJ and SEC take into account whether and to what degree a company analyzes and addresses the particular risks it faces.”

A completely different approach was articulated by Leonard Shen, Vice President (VP) and Chief Compliance Officer (CCO) at PayPal, in a presentation to Compliance Week. His approach is not the right approach for every company but for those initiating their compliance journey, or a company considering a significant upgrade due to some systemic issue; this approach may be a more effective approach than the traditional risk assessment where a team of lawyers, CPAs and internal auditors assess a company’s compliance environment.

In a company which is initiating its compliance program, it can be perceived as a sea change of culture. However, Shen indicated that he had used an approach which worked to alleviate those types of concerns which also provided enough information to perform a robust assessment which could be used to form the basis of an effective compliance program. He termed this type of approach as one to “engage and educate.” While the approach had a two word name, it actually had three purposes; (1) to engage the employees in what would form the basis for an enhanced compliance program; (2) to educate the employees generally in compliance and ethical behavior; and (3) through the engagement of employees, to gather information which could be used to form the basis of a risk assessment.

Shen and his compliance team traveled to multiple company locations, across the globe, to meet with as many employees as possible. A large number these meetings were town hall settings, and key employee leaders, key stakeholders and employees identified as high risk, due to interaction with foreign governmental official touch-points, were met with individually or in smaller groups. Shen and his team listened to their compliance concerns and more importantly took their compliance ideas back to the home office.

From this engagement, the team received several thousand-employee suggestions regarding enhancements to the company’s compliance program. After returning to the US, Shen and his team winnowed down this large number to a more manageable number, somewhere in the range of a couple of hundred. These formed the basis of a large core of the enhancements to the existing company compliance program. After the enhanced compliance program was rolled out formal training began. During the training, the team was able to give specific examples of how employee input led to the changes in the enhanced program. This engaged the employees and made them feel like they were a part of, and had a vested interest in, the company’s compliance program. This employee engagement led to employee buy-in.

During the town hall meetings, and the smaller more informal group meetings, Shen and his team were doing more than simply listening, they were also training. However, the training was not on specific compliance provisions; it was more generally on overall ethics and how the employees could use compliance as a business tool. Most ethical standards of a company are not found in an existing compliance program, they are found in the general anti-discrimination guidelines and ethical business practices such anti-competitiveness and use of customer confidential information prohibitions. Often these general concepts can be found in a company’s overall Code of Conduct or similar statement of business ethics; workplace anti-discrimination and anti-harassment guidelines can be found in Human Resource policies and procedures.

Concepts such as anti-competitiveness and use of customer and competitor’s illegally obtained confidential information may be found in anti-trust or other business practice focused guidelines.

Shen and his team’s aim on the education component of “engage and educate” was to have the company employee’s start thinking about doing business the ethical way. It was ethical concept based training designed to be in contrast to a rules based approach, where employees believe they are taught the rules, and then try to see how close they can get to the line of violating the compliance rule without actually stepping over the line. Moreover, by having this general ethical business training, it laid the groundwork for the enhancement of the company’s compliance program and the training that would occur when the enhancement was rolled out.

A third key component of the “engage and educate” program is the risk assessment component. Shen’s approach here was not the traditional control-testing model, where documents are pulled and tested against a standard. Shen and his team listened, listened and listened. They listened to their employees concerns and they listened to the compliance issues they raised. As they were listening they began to ask questions about what was done and why. The questioning was not in an adversarial, interrogation mode but ferreting out the employees concerns while having the employees educate the team on the actual procedures that were used in several areas identified as key high risk areas.

Shen emphasized that this was an assessment and not an audit so no detailed forensic work was needed or used. However, by listening, and gently questioning, Shen and his team were able to garner enough information to create a risk assessment profile which informed and became the basis of their compliance program enhancement. Shen and his team did not identify to the company employees that they were engaged in a formal risk assessment. He believed that in many ways, he and his team were able to garner more useful information with which to inform their compliance program enhancement.

Shen’s “engage and educate” approach worked for his company at that point in time. It may not work for other companies as a traditional risk assessment but it does provide a different model if your company is beginning to create their compliance program, or is looking into a major enhancement.

Tomorrow, I will look at how you might use a risk assessment going forward.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

 

August 26, 2014

Risk Assessments-the Cornerstone of Your Compliance Program, Part I

7K0A0079Yesterday, I blogged about the Desktop Risk Assessment. I received so many comments and views about the post, I was inspired to put together a longer post on the topic of risk assessments more generally. Of course I got carried away so today, I will begin a three-part series on risk assessments. In today’s post I will review the legal and conceptual underpinnings of a risk assessment. Over the next couple of days, I will review the techniques you can use to perform a risk assessment and end with a discussion of what to do with the information that you have gleaned in a risk assessment for your compliance program going forward.

One cannot really say enough about risk assessments in the context of anti-corruption programs. Since at least 1999, in the Metcalf & Eddy enforcement action, the US Department of Justice (DOJ) has said that risk assessments that measure the likelihood and severity of possible Foreign Corrupt Practices Act (FCPA) violations identifies how you should direct your resources to manage these risks. The FCPA Guidance stated it succinctly when it said, “Assessment of risk is fundamental to developing a strong compliance program, and is another factor DOJ and SEC evaluate when assessing a company’s compliance program.” The UK Bribery Act has a similar view. In Principal I of the Six Principals of an Adequate Compliance program, it states, “The commercial organisation regularly and comprehensively assesses the nature and extent of the risks relating to bribery to which it is exposed.” In other words, risk assessments have been around and even mandated for a long time and their use has not lessened in importance. The British have a way with words, even when discussing compliance, and Principal I of the Six Principals of an Adequate Compliance program says that your risk assessment should inform your compliance program.

Jonathan Marks, a partner in the firm of Crowe Horwath LLP, said the following about risk assessments in his 13-step FCPA Compliance Action Plan, “A comprehensive assessment of the potential bribery and corruption risks – both existing and emerging risks – associated with a company’s products and services, customers, third-party business partners, and geographic locations can serve as the basis for the compliance program. The risk assessment determines the areas at greatest risk for FCPA violations among all types of international business transactions and operations, the business culture of each country in which these activities occur, and the integrity and reputation of third parties engaged on behalf of the company.”

The simple reason is straightforward; one cannot define, plan for, or design an effective compliance program to prevent bribery and corruption unless you can measure the risks you face. Both the both the US Sentencing Guidelines, the UK Bribery Act’s Consultative Guidance list Risk Assessment as the initial step in creating an effective anti-corruption and anti-bribery program.

What Should You Assess?

In 2011, the DOJ concluded three FCPA enforcement actions which specified factors which a company should review when making a Risk Assessment. The three enforcement actions, involving the companies Alcatel-Lucent SA, Maxwell Technologies Inc. and Tyson Foods Inc. all had common areas that the DOJ indicated were FCPA compliance risk areas which should be evaluated for a minimum best practices FCPA compliance program. Both the Alcatel-Lucent and Maxwell Technologies Deferred Prosecution Agreements (DPAs) listed the seven following areas of risk to be assessed.

  1. Geography-where does your Company do business.
  2. Interaction with types and levels of Governments.
  3. Industrial Sector of Operations.
  4. Involvement with Joint Ventures.
  5. Licenses and Permits in Operations.
  6. Degree of Government Oversight.
  7. Volume and Importance of Goods and Personnel Going Through Customs and Immigration.

All of these factors were reiterated in the FCPA Guidance which stated, “Factors to consider, for instance, include risks presented by: the country and industry sector, the business opportunity, potential business partners, level of involvement with governments, amount of government regulation and oversight, and exposure to customs and immigration in conducting business affairs.”

These factors provide guidance into some of the key areas that the DOJ apparently believes can put a company at higher FCPA risk. These factors supplement those listed in the UK Bribery Consultative Guidance states, “Risk Assessment – The commercial organization regularly and comprehensively assesses the nature and extent of the risks relating to bribery to which it is exposed.” The Guidance points towards several key risks which should be evaluated in this process. These risk areas include:

  1. Internal Risk – this could include deficiencies in
  • employee knowledge of a company’s business profile and understanding of associated bribery and corruption risks;
  • employee training or skills sets; and
  • the company’s compensation structure or lack of clarity in the policy on gifts, entertaining and travel expenses.
  1. Country risk – this type of risk could include:

(a) perceived high levels of corruption as highlighted by corruption league tables published by reputable Non-Governmental Organizations such as Transparency International;

(b) factors such as absence of anti-bribery legislation and implementation and a perceived lack of capacity of the government, media, local business community and civil society to effectively promote transparent procurement and investment policies; and

(c) a culture which does not punish those who seeks bribes or make other extortion attempts.

  1. Transaction Risk – this could entail items such as transactions involving charitable or political contributions, the obtaining of licenses and permits, public procurement, high value or projects with many contractors or involvement of intermediaries or agents.
  2. Partnership risks – this risk could include those involving foreign business partners located in higher-risk jurisdictions, associations with prominent public office holders, insufficient knowledge or transparency of third party processes and controls.

Another approach was detailed by David Lawler, in his book “Frequently Asked Questions in Anti-Bribery and Corruption”. He broke the risk areas to evaluate down into the following categories: (1) Company Risk, (2) Country Risk, (3) Sector Risk, (4) Transaction Risk and (5) Business Partnership Risk. He further detailed these categories as follows:

  1. Company Risk-Lawyer believes this is “only to be likely to be relevant when assessing a number of different companies – either when managing a portfolio of companies from the perspective of a head office of a conglomerate or private equity house.” High risk companies involve, some of the following characteristics:
  • Private companies with a close shareholder group;
  • Large, diverse and complex groups with a decentralized management structure;
  • An autocratic top management;
  • A previous history of compliance issues; and/or
  • Poor marketplace perception.
  1. Country Risk-this area involves countries which have a high reported level or perception of corruption, have failed to enact effective anti-corruption legislation and have a failure to be transparent in procurement and investment policies. Obviously the most recent, annual Transparency International Corruption Perceptions Index can be a good starting point. Other indices you might consider are the Worldwide Governance Indicators and the Global Integrity index.
  2. Sector Risk-these involve areas which require a significant amount of government licensing or permitting to do business in a country. It includes the usual suspects of:
  • Extractive industries;
  • Oil and gas services;
  • Large scale infrastructure areas;
  • Telecoms;
  • Pharmaceutical, medical device and health care;
  • Financial services.
  1. Transaction Risk-Lawyer says that this risk “first and foremost identifies and analyses the financial aspects of a payment or deal. This means that it is necessary to think about where your money is ending up”. Indicia of transaction risk include:
  • High reward projects;
  • Involve many contractor or other third party intermediaries; and/or
  • Do not appear to have a clear legitimate object.
  1. Business Partnership Risk-this prong recognizes that certain manners of doing business present more corruption risk than others. It may include:
  • Use of third party representatives in transactions with foreign government officials;
  • A number of consortium partners or joint ventures partners; and/or
  • Relationships with politically exposed persons (PEPs).

There are a number of ways you can slice and dice your basic inquiry. As with almost all FCPA compliance, it is important that your protocol be well thought out. If you use one, some or all of the above as your basic inquiries into your risk analysis, it should be acceptable for your starting point.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

August 25, 2014

Trying Something Different – the Desktop Risk Assessment

IMG_0774How many among you out there are sushi fans? Conversely, how many out there consider the idea of eating raw fish right up there with going into to the dentist’s office for some long overdue remedial work? One’s love or distaste for sushi was used as an interesting metaphor for leadership in this week’s Corner Office section of the New York Times (NYT) by Adam Bryant, in an article entitled “Eat Your Sushi, and Expand Your Horizon”, where he profiled Julie Myers Wood, the Chief Executive Officer (CEO) of Guidepost Solutions, a security, compliance and risk management firm. Wood said her sushi experience relates to advice she gives college students now, “One thing I always say is “eat the sushi.” When I had just graduated from college, I went with my mom to Japan. We had a wonderful time, but I refused to eat the sushi. Later, when I moved to New York, I tried some sushi and loved it. The point is to be willing to try things that are unfamiliar.”

I thought about sushi and trying something different in the context of risk assessments recently. I think that most compliance practitioners understand the need for risk assessments. The FCPA Guidance could not have been clearer when it stated, “Assessment of risk is fundamental to developing a strong compliance program, and is another factor DOJ and SEC evaluate when assessing a company’s compliance program.” Many compliance practitioners have difficulty getting their collective arms about what is required for a risk assessment and then how precisely to use it. The FCPA Guidance makes clear there is no ‘one size fits all’ for about anything in an effective compliance program.

One type of risk assessment can consist of a full-blown, worldwide exercise, where teams of lawyers and fiscal consultants travel around the globe, interviewing and auditing. However if there is one thing that I learned as a lawyer, which also applies to the compliance field, is that you are only limited by your imagination. So using the FCPA Guidance that ‘on one size fits all’ proscription, I would submit that is also true for risk assessments.

As with Wood’s admonition that you might want to try sushi even if you think you may not like it. I think that there are several different types of risk assessments that can be used to help to advance your compliance regime going forward. This means that if you do not have the time, resources or support to conduct a worldwide risk assessment annually, you can take a different approach. You might try assessing other areas annually through a more limited focused risk assessment, which a colleague of mine calls the Desktop Risk Assessment.

Some of the areas that such a Desktop Risk Assessment could inquire into might be the following:

  • Are resources adequate to sustain a culture of compliance?
  • How are the risks in the C-Suite and the Boardroom being addressed?
  • What are the FCPA risks related to the supply chain?
  • How is risk being examined and due diligence performed at the vendor/agent level? How is such risk being managed?
  • Is the documentation adequate to support the program for regulatory purposes?
  • Is culture, attitude (tone from the top), and knowledge measured? If yes, can we use the information enhance the program?
  • Disciplinary guidelines – Do they exist and has anyone been terminated or disciplined for a violating policy?
  • Communication of information and findings – Are escalation protocols appropriate?
  • What are the opportunities to improve compliance?

There are a variety of materials that you can review from or at a company that can facilitate such a Desktop Risk Assessment. You can review your company’s policies and written guidelines by reviewing anti-corruption compliance policies, guidelines, and procedures to ensure that compliance programs are tailored to address specific risks such as gifts, hospitality and entertainment, travel, political and charitable donations, and promotional activities.

You could assess your company’s senior management support for your compliance efforts through interviews of high-level personnel such as the Chief Compliance Officer (CCO), Chief Financial Officer (CFO), General Counsel (GC), Head of Sales, CEO and Board Audit or Compliance Committee members to assess “tone from the top”. You can examine resources dedicated to compliance and also seek to understand the compliance expectations that top management is communicating to its employee base. Finally, you can gauge operational responsibilities for compliance.

Such a review would lead to the next level of assessment, which would be generally labeled communications within an organization regarding compliance. You can do this by assessing compliance policy communication to company personnel but even more so by reviewing such materials as compliance training and certifications that employees might have in their files. If you did not yet do so, you should also take a look at statements by senior management regarding compliance, such as actions relating to terminating employees who do business in compliance but do not make their quarterly, semi-annual or annual numbers set in budget projections.

A key element of any best practices compliance program is internal and anonymous reporting. This means that you need to review mechanisms on reporting suspected compliance violations and then actions taken on any internal reports, including follow-ups to the reporting employees. You should also assess whether those employees who are seeking guidance on compliance for their day-to-day business dealings are receiving not only adequate but timely responses.

I do not think there is any dispute that third parties represent the highest risk to most companies under the FCPA, so a review of your due diligence program is certainly something that should be a part of any risk assessment. But more than simply a review of procedures for due diligence on third party intermediaries, you should also consider the compliance procedures in place for your company’s mergers and acquisitions (M&A) team; focusing on the pre-acquisition phase.

One area that I do not think gets enough play, whether in the FCPA Inc. commentary or in day-to-day practice is looking at what might be called employee commitment to your company’s compliance regime. So here you may want to review your compliance policies regarding employee incentives for compliance. But just as you look at the carrots to achieve compliance with your program, you should also look at the stick, in the form of disciplinary procedures for violations. This means you should see if there have been any disciplinary actions for employee compliance violations and then determine if such discipline has been applied uniformly. If you discipline top sales people in Brazil, you have to discipline your top sales folks in the US for the same or similar violations.

This list is not intended to be a complete list of items, you can pick and choose to form some type of Desktop Risk Assessment but hopefully you can see some of the things areas you can assess. In his article on Ms. Woods, Bryant quoted her for the following key trait she observed from successful leaders, “They were able to identify and focus on core things. When you go into an agency or a company, there are a million things you could fix. But you can’t fix everything, so you make a decision about your priorities, and then you act on them.” A Desktop Risk Assessment may well help you to do so.

If you aim to perform an annual Desktop Risk Assessment with a full worldwide risk assessment every two years or so, you should be in a good position to keep abreast of compliance issues that may change and need more or greater risk management. And do not forget the that the FCPA Guidance ends its section on risk with, “When assessing a company’s compliance program, DOJ and SEC take into account whether and to what degree a company analyzes and addresses the particular risks it faces.” Finally, if you never have tried sushi, I urge you to do so as it not only tastes good but its good for you as well.

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On Tuesday, August 26th I will be co-presenting with Marie Patterson VP Marketing for Hiperos on a webinar focusing on GSK in China-One Year Later. I will review the continued saga of the GSK corruption investigation in China, the Humphreys’ and Wu convictions and what it means for your compliance program going forward. The event is free and begins at 1 PM EDT. I hope that you can join us. For details and Registration, click here.

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This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

August 21, 2014

What Can You Do When Risk Changes in a Third Party Relationship?

RiskThe GlaxoSmithKline PLC (GSK) corruption matter in China continues to reverberate throughout the international business community, inside and outside China. The more I think about the related trial of Peter Humphrey and his wife, Yu Yingzeng for violating China’s privacy laws regarding their investigation of who filmed the head of GSK’s China unit head in flagrante delicto with his Chinese girlfriend, the more I ponder the issue of risk in the management of third parties under the Foreign Corrupt Practices Act (FCPA). In an article in the Wall Street Journal (WSJ), entitled “Chinese Case Lays Business Tripwires”, reporters James T. Areddy and Laurie Burkitt explored some of the problems brought about by the investigators convictions.

They quoted Manuel Maisog, chief China representative for the law firm Hunton & Williams LLP, who summed up the problem regarding background due diligence investigations as “How can I do that in China?” Maisog went on to say, “The verdict created new uncertainties for doing business in China since the case hinged on the couple’s admissions that they purchased personal information about Chinese citizens on behalf of clients. Companies in China may need to adjust how they assess future merger partners, supplier proposals or whether employees are involved in bribery.”

I had pondered what that meant for a company that wanted to do business in China, through some type of third party relationship, from a sales representative to distributor to a joint venture (JV). What if you cannot get such information? How can you still have a best practices compliance program around third parties representatives if you cannot get information such as ultimate beneficial ownership? At a recent SCCE event, I put that question to a Department of Justice (DOJ) representative. Paraphrasing his response, he said that companies still need to ask the question in a due diligence questionnaire or other format. What if a third party refuses to answer, citing some national law against disclosure? His response was that a company needs to very closely weigh the risk of doing business with a party that refuses to identify its ownership.

The more that I thought about that answer the more I became convinced that it was not only the right answer under any type of FCPA compliance program but also the right response from a business perspective. A company must know who it is doing business with, for a wide variety of reasons. The current situation in China and even the convictions of Humphrey and Yu do not change this basic premise. You can ask the question. If a party does not want to disclose its ownership, you should consider this in any business relationship going forward.

The Humphrey and Yu conviction do not prevent you from asking the question about ownership. Their convictions mean that you may not be able to verify that information through what many people thought was publicly available information, at least publicly available in the west. I was struck by one line in the Areddy and Burkitt article, “It’s not just that the tactical business practices need to change; it’s the mind set” quoting again from Maisog.

I breakdown the management of third parties under the FCPA into five steps, which are:

  1. Business Justification and Business Sponsor;
  2. Questionnaire to Third Party;
  3. Due Diligence on Third Party;
  4. Compliance Terms and Conditions, including payment terms; and
  5. Management and Oversight of Third Parties After Contract Signing.

The due diligence step is but one of these five. Further due diligence is performed in large part to verify the information that you receive back from a proposed third party. So what if you can longer use avenues previously open to you in markets such as China? Perhaps there are other ways to manage this issue. Areddy and Burkitt also interviewed Jerry Ling, a partner at Jones Day, for the following “companies will need to analyze Chinese accounting documents themselves and conduct more in-person interviews with anyone they want to know more about in China.”

Ling’s point dovetails directly into what I heard from the DOJ representative. There is nothing about the Chinese law, or any other country’s law, which prevents you from asking some basic questions that are found in the Step 2 Questionnaire cited above. You can always ask who the owners of a company are, whether they are direct or beneficial. You can always ask if a company, its owners or its senior management have been involved in any incidents involving bribery and corruption and you can always ask if the company has a Code of Conduct and/or compliance program and whether its owners or senior management are aware of the FCPA and have had training on it.

Assuming the company will answer your questionnaire, the difficulty you may find yourself in now is verifying the information that you receive. In Ronald Reagan parlance, you may trust but you may not be able to verify it. Ling said in the WSJ article that “The challenge now for clients is that it’s hard to get good information.”

However, due diligence is but one step in the management of any third party in a FCPA compliance program. Just as when risk goes up and you increase your management around that risk, the situation is similar in here. Putting it another way, if you cannot obtain private information such as personal identification numbers during the due diligence process, you can put greater management around the other steps that you can take. Further, there has been nothing reported which would suggest that publicly filed corporate licenses or other information that might show ownership can no longer be accessed. Court records and public media searches also seem to still be available.

But what if you simply cannot determine if the information you are provided regarding ownership is accurate or even truthful? You can still work to manage the relationship through your commercial terms by setting your commission or other pay rates at a reasonable amount of scale. If you are dealing with a commissioned sales representative, you can probably manage this area of the relationship by setting the commission in the range of 5%. You can also manage the relationship by reviewing invoices to make sure there is an adequate description of the services provided so that they justify whatever compensation the third party is entitled to receive under the contract. You may also want to schedule such a third party for an audit ahead of other parties to help ensure adherence to your compliance terms and conditions.

There may be times when you cannot verify the true or ultimate beneficial owner of a third party. That does not have to be the end of the analysis. If that situation arises, you may want to see if there are other risk mitigation tools at your disposal. Put another way, if such a red flag arises, can it be cleared? Can it be managed? If your company is looking a major deal for multi-millions and your agent will receive a six or seven figure commission, the risk of not knowing with certainty may be too great because in such a case, an unknown owner could be a government official who has awarded the contract. But if your agent receives a considerably smaller commission and hence there is a considerably small amount of money to constitute a bribe, you may be able to manage that risk through a close and effective relationship management process.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

August 13, 2014

Thinking Through Risk Rankings of Third Parties

7K0A0014-2One question often posed to me is how to think through some of the relationships a company has with its various third parties in order to reasonably risk rank them. Initially I would break this down into sales and supply chain to begin any such analysis. Anecdotally, it is said that over 95% of all Foreign Corrupt Practices Act (FCPA) enforcement actions involve third parties so this is one area where companies need to put some thoughtful consideration. However, the key is that if you employ a “check-the-box” approach it may not only be inefficient but more importantly, ineffective. The reason for this is because each compliance program should be tailored to an organization’s specific needs, risks and challenges. The information provided below should not be considered a substitute for a company’s own assessment of the corporate compliance program most appropriate for that particular business organization. In the end, if designed carefully, implemented earnestly, and enforced fairly, a company’s compliance program—no matter how large or small the organization—will allow the company, generally, to prevent violations, detect those that do occur, and remediate them promptly and appropriately.

Sales Side

I tend to view things in a straightforward manner when it comes to representatives on the sales side of your business. I believe that third party representatives you might have, whatever you might call them, i.e. sales reps, sales agents, sales agents, commissioned sales agents, or anything else, are high risk and therefore they should receive your highest level of scrutiny. This is also true with any party that might be called, charitably or not, ‘a partner’ whether that is a joint venture (JV) partner, plain old partner, Teaming Partner or another monickered ‘partner’. However, under this approach you should also consider the perception of corruption in the geographic area that you will use the third party. I recognize that you can overlay a financial threshold but the reality is that if a sales representative generates such a small amount of money for your business you probably do not need them as representative.

At least with distributors, I have seen merit in more sophisticated approaches such as that set out by David Simon, a partner at Foley & Lardner LLP, who advocates a risk analysis should more appropriately based on the nature of a company’s relationships with their distributors. The goal should be to determine which distributors are the most likely to qualify as agents; for whose acts the company would likely to be held responsible.  He argues that it is a continuum of risk; that is, on the low-risk end are distributors that are really nothing more than re-sellers with little actual affiliation with the supplier company. On the high-risk end are distributors who are very closely tied to the supplier company, who effectively represent the company in the market and end up looking more like a quasi-subsidiary than a customer.

Simon looks at agency principles to guide his analysis of whether a distributor qualifies as an agent for FCPA purposes. He argues that factors to consider include:

  • The volume of sales made to the distributor;
  • The percentage of total sales of the distributor’s total business the principal’s product represents;
  • Whether the distributor represents the principal in the market, including whether it can (and does) use the company trademarks and logos in its business; and

Whether the principal company is involved in the running of the distributor’s business (such as by training the distributor’s sales agents, imposing performance goals and objectives, or providing reimbursement for sales activity).

Once a company segregates out the high-risk distributors that likely qualify as agents and potentially subject the company to FCPA liability from those that are mere re-sellers and pose less FCPA risk, FCPA compliance procedures can be tailored appropriately. For those distributors that qualify as “agents” and also pose FCPA risk, full FCPA due diligence, certifications, training and contract language are imperative. For those that do not, more limited compliance measures that reflect the risk-adjusted potential liability are perfectly appropriate.

Supply Chain

This determination of the level of due diligence and categorization of a supplier should depend on a variety of factors, including, but not limited to, whether the supplier is (1) located, or will operate, in a high risk country; (2) associated with, or recommended or required by, a government official or his or her representative; (3) currently under investigation, the subject of criminal charges, or was recently convicted of criminal violations, including any form of corruption; (4) a multinational publicly traded corporation with a recognized exemplary system of compliance and internal controls, that has not been recently investigated or convicted of any corruption offense or that has taken appropriate corrective action to remedy such conduct; or (5) a provider of widely available services and products that are not industry specific, are offered to the public at large and do not fall under the definition of Minimal-Risk Supplier detailed below.

A High-Risk Supplier is an individual or an entity that is engaged to provide non-project specific goods or services to a company. It presents a higher level of compliance risk because of the presence of one or more of the following factors: (a) It is based or operates in a country (including the supply of goods or services to a company) that poses a high risk for corruption, money laundering, or commercial bribery; (b) It supplies goods or services to a company from a high-risk country; (c) It has a reputation in the business community for questionable business practices or ethics; or (d) It has been convicted of, or is alleged to have been involved in, illegal conduct and has failed to undertake effective remedial actions. Finally, it presents one or more of the following factors,: (1) It is located in a country that has inadequate regulatory oversight of its activities; (2) it is in an unregulated business; (3) its ultimate or beneficial ownership is difficult to determine; (4) the company has an annual spend of more than $100,000 with the supplier; (5) it was established or registered in a jurisdiction where ownership is not transparent or that permits ownership in the form of bearer shares; (6) it is registered or conducts business in a jurisdiction that does not have anti-corruption, anti-money laundering and anti-terrorism laws comparable to those of the United States and the United Kingdom; or (7) it lacks a discernable and substantial business history.

A Low-Risk Supplier is an individual or a non-publicly held entity that conducts business such as a sole proprietorship, partnership or privately held corporation, located in a Low-Risk Country. Some indicia include that it (1) supplies goods, equipment or services directly to a company in a Low-Risk Country; (2) a company has an annual spend of less than $100,000 with the supplier; and (3) the supplier has no involvement with any foreign government, government entity, or Government Official. However, if the supplier has other indicia of lower risk such that it is a publicly-held company, it may be considered a Low-Risk Supplier because it is subject to the highest disclosure and auditing and reporting standards such as those under the US Securities Exchange Act of 1934, including those publicly traded on a reputable and highly regulated stock exchange, such as the New York or London exchanges, and are, therefore, subject to oversight by highly regarded regulatory agencies.

Below the high and low risk categories I would add the category of ‘Minimal-Risk Suppliers’ who generally provide to a company goods and services that are non-specific to a particular project and the value of the transaction is $25,000 or less. Some examples might be for the routine purchase of fungible items and services, including, among others: Office supplies, such as paper, furniture, computers, copiers, and printers; Industrial or factory supplies, including cleaning materials, solvents, safety clothing and off-the-shelf equipment and parts; Crating and other standard materials for packing products for shipping; Leasing and rental of company cars and other equipment; and Airline or other travel tickets or services. This category would also include those third parties that provide widely available services and products that are not industry specific, are offered to the public at large. Here you might think of periodicals, florists, daily limousine and taxi, airline and food delivery (including coffee shops, pizza parlors and take out) services.

Last, but certainly not least, is the category of Government Service Providers, which includes entities that generally come into a company through the supply chain, who interact with a foreign government on behalf of your company. Examples might be customs brokers, providers who obtain and process business permits, licenses, visas, work permits and necessary clearances or waivers from government agencies; perform lobbying services; obtain regulatory approvals; negotiate with government agencies regarding the payment of taxes, tax claims, and tax audits. These third parties present some of your highest risks so they need to have not only the highest level of scrutiny but post contract-signing management as well.

The risk ranking of third parties is one of the areas that seems to continue to cause confusion, if not outright bewilderment. The manner in which the articulated risk rankings presented herein is not to be the ‘be-all and end-all’. As the FCPA Guidance reminds us, “An effective compliance program promotes “an orga­nizational culture that encourages ethical conduct and a commitment to compliance with the law.”…A well-constructed, thought­fully implemented, and consistently enforced compliance and ethics program helps prevent, detect, remediate, and report misconduct, including FCPA violations.” If you think through your risk rankings and can articulate a reasonable basis for doing so followed by documentation, I think your own risk ranking system will survive regulatory scrutiny.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

August 12, 2014

Does Your Company Still Allow Facilitation Payments?

IMG_3289One of the more confusing areas of the US Foreign Corrupt Practices Act (FCPA) is in that of facilitation payments. Facilitation payments are small bribes but make no mistake about it, they are bribes. For that reason many companies feel they are inconsistent with a company culture of doing business ethically and in compliance with laws prohibiting corruption and bribery. Further, the FCPA Guidance specifies, “while the payment may qualify as an exception to the FCPA’s anti-bribery provisions, it may violate other laws, both in Foreign Country and elsewhere. In addition, if the payment is not accurately recorded, it could violate the FCPA’s books and records provision.” Finally, further the FCPA Guidance states, “Whether a payment falls within the exception is not dependent on the size of the payment, though size can be telling, as a large payment is more suggestive of corrupt intent to influence a non-routine governmental action. But, like the FCPA’s anti-bribery provisions more generally, the facilitating payments exception focuses on the purpose of the payment rather than its value.” [emphasis in original text]

In recent remarks, Thomas C. Baxter, Executive Vice President and General Counsel at the Federal Reserve Bank of New York indicated a general unease with facilitation payments. Baxter was quoted in the FCPA Blog for the following, “Baxter said an organizational policy that allows some types of official corruption — including facilitating payments – “diminishes the efficacy of compliance rules that are directed toward stopping official corruption.”” Further, “While I understand that the exception is grounded in a practical reality, I feel that zero tolerance for official corruption would have been a better choice. To any public servant with an extended hand, I would say in a loud and clear voice, “pull it back and do your job.” And, let me note the OECD Working Group on Bribery recommends that all countries encourage companies to prohibit or discourage facilitating payments.”

In addition to these clear statements about whether the FCPA should continue to allow said bribes; you should also consider the administrative nightmare for any international company. The UK Bribery Act does not have any such exception, exemption or defense along the lines of the FCPA facilitation payment exception. This means that even if your company allows facilitation payments, it must exempt out every UK Company or subsidiary from the policy. Further, if your company employs any UK citizens, they are subject to the UK Bribery Act no matter who they work for and where they may work in the world so they must also be exempted. Finally, if your US Company does business with a UK or other company subject to the UK Bribery Act, you may be prevented contractually from making facilitation payments while working under that customer’s contract. As I said, an administrative nightmare.

  1. The Statute

When the FCPA was initially passed in 1977, the facilitating payment exception was found under the definition of foreign official. However, with the 1988 Amendments, a more explicit exception was written into the statute making it clear that the anti-bribery provisions “shall not apply to any facilitating or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action . . .” The statute itself provided a list of examples of facilitation payments in the definition of routine governmental actions. It included the following:

  • Obtaining permits, licenses, or other official documents;
  • Processing governmental papers such as visas and work orders;
  • Providing police protection, mail services, scheduling inspections;
  • Providing utilities, cargo handling; or
  • Actions of a similar nature.

It is important to note that the language of the FCPA makes it clear that a facilitation payment is not an affirmative defense but an exception to the general FCPA proscription against bribery and corruption. Unfortunately for the FCPA Practitioner there is no dollar limit articulated in the FCPA regarding facilitation payments. Even this limited exception has come under increasing criticism. As far back as 2009, the OECD studied the issue and recommended that member countries encourage their corporations to not allow the making of facilitating payments, “in view of the corrosive effect of small facilitation payments, particularly on sustainable economic development and the rule of law.”

Interestingly, one of the clearest statements about facilitation payments comes not from a FCPA case about facilitation payments but the case of Kay v. US, 359 F.3d 738, 750-51 (5th Cir. 2004). This case dealt with whether payment of bribes to obtain a favorable tax ruling was prohibited under the FCPA. In its opinion the Fifth Circuit commented on the limited nature of the facilitating payments exception when it said:

A brief review of the types of routine governmental actions enumerated by Congress shows how limited Congress wanted to make the grease exceptions. Routine governmental action, for instance, includes “obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country,” and “scheduling inspections associated with contract performance or inspections related to transit of goods across country.” Therefore, routine governmental action does not include the issuance of every official document or every inspection, but only (1) documentation that qualifies a party to do business and (2) scheduling an inspection—very narrow categories of largely non-discretionary, ministerial activities performed by mid- or low-level foreign functionaries.

2. Enforcement Actions

Con-way

The FCPA landscape is littered with companies who sustained FCPA violations due to payments which did not fall into the facilitation payment exception. In 2008, Con-way Inc., a global freight forwarder, paid a $300,000 penalty for making hundreds of relatively small payments to Customs Officials in the Philippines. The value of the payments Con-way was fined for making totaled $244,000 and were made to induce the officials to violate customs regulations, settle customs disputes, and reduce or not enforce otherwise legitimate fines for administrative violations.

Helmerich and Payne

In 2009, Helmerich and Payne, Inc., paid a penalty and disgorgement fee of $1.3 million for payments which were made to secure customs clearances in Argentina and Venezuela. The payments ranged from $2,000 to $5,000 but were not properly recorded and were made to import/export goods that were not within the respective country’s regulations; to import goods that could not lawfully be imported; and to evade higher duties and taxes on the goods.

Panalpina

Finally, there is the Panalpina enforcement action. As reported in the FCPA Blog, this matter was partly resolved last year with the payment by Panalpina and six of its customers of over $257 million in fines and penalties. Panalpina, acting as freight forwarder for its customers, made payments to circumvent import laws, reduce customs duties and tax assessments and to obtain preferential treatment for importing certain equipment into various countries but primarily in West Africa.

DynCorp

Then there is the DynCorp International investigation matter. As reported in various sources the matter relates to approx. $300,000 in payments made by subcontractors who wished to speed up their visa processing and expedite receipt of certain licenses on behalf of DynCorp. This investigation has been going on for several years and there is no anticipated conclusion date at this time.

3.      Some Guidance

So what does the Department of Justice (DOJ) look at when it reviews a company’s FCPA compliance program with regards to facilitation payments? Initially, if there is a pattern of such small payments, it would raise a Red Flag and cause additional investigations, but this would not be the end of the inquiry. There are several other factors which the DOJ could look towards in making a final determination on this issue. The line of inquiry the DOJ would take is as follows:

  1. Size of payment – Is there an outer limit? No, there is no outer limit but there is some line where the perception shifts. If a facilitating payment is over $100 you are arguing from a point of weakness. The presumption of good faith is against you. You might be able to persuade the government at an amount under $100. But anything over this amount and the government may well make further inquiries. So, for instance, the DOJ might say that all facilitation payments should be accumulated together and this would be a pattern and practice of bribery.
  2. What is a routine governmental action? Are we entitled to this action, have we met all of our actions or are we asking the government official to look the other way on some requirement? Are we asking the government official to give us a break? The key question here is whether you are entitled to the action otherwise.
  3. Does the seniority of the governmental official matter? This is significant because it changes the presumption of whether something is truly discretionary. The higher the level of the governmental official involved, the greater chance his decision is discretionary.
  4. Does the action have to be non-discretionary? Yes, because if it is discretionary, then a payment made will appear to be obtaining some advantage that is not available to others.
  5. What approvals should be required? A facilitation payment is something that must be done with an appropriate process. The process should have thought and the decision made by people who are the experts within the company on such matters.
  6. Risk of facilitation payments and third parties? Whatever policy you have, it must be carried over to third parties acting on your behalf or at your direction. If a third party cannot control this issue, the better compliance practice would be to end the business relationship.
  7. How should facilitation payments be recorded? Facilitation payments must be recorded accurately. You should have a category entitled “Facilitation Payments” in your company’s internal accounting system. The labeling should be quite clear and they are critical to any audit trail so recording them is quite significant.
  8. Monitoring programs? There must always be ongoing monitoring programs to review your company’s internal controls, policies and procedures regarding facilitation payments.

So we return to the question of when does a grease payment become a bribe? There is no clear line of demarcation. The test seems to turn on the amount of money involved, to whom it is paid and the frequency of the payments. Additionally, accurate books and records are a must. Finally, remember that the defense of facilitation payments is an exception to the FCPA prohibition against bribery. Any defendant which wishes to avail itself of this exception at trial would have to proffer credible evidence to support its position, but at the end of the day, it would be the trier of fact which would decide. So, much like any compliance defense, the exception is only available if you use it at trial and it would be difficult to imagine that any company will want to use the facilitation payment exception.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

August 10, 2014

Where to Now St. Peter? – Due Diligence Going Forward in China

Tumbleweed ConnectionWhatever you might think of where his career went, Elton John had some great early stuff. I still rank Tumbleweed Connection right up there as one of my favorite albums of all-time. And while it was packed with some great tracks, one of my most favorite was Where to Now St. Peter? It was the opening track on Side 2 and dealt with whether a dying soldier would end up in heaven or hell. While perhaps having quite the spiritual overtones, I did think about this song when I read about the convictions on Saturday of Peter William Humphrey, a 58-year-old British national, and his wife, Yu Yingzeng, a 61-year-old naturalized American, on charges of illegally purchasing personal information about Chinese nationals.

In a one day trial the couple was convicted of illegally purchasing information on Chinese citizens. In an article in the Financial Times (FT), entitled “China court hands GSK investigator jail term and orders deportation”, Gabriel Wildau and Andrew Ward reported that husband Humphreys received a two and a half year jail term which was “just short of the three-year maximum”. In an article in the Wall Street Journal (WSJ), entitled “China Convicts Two Corporate Investigators”, James T. Areddy and Laurie Burkitt reported that he was also ordered to pay a fine of approximately $32,500 and will be deported from the country when his jail term is completed. Wife Yingzeng received a two year jail term and was ordered to pay a fine of approximately $23,000 but will be allowed to remain in the country after her sentence is completed.

In a New York Times (NYT) article, entitled “In China, British Investigator Hired by Glaxo, and Wife, Sentenced to Prison”, David Barboza reported that the couple “acknowledged that from 2009 to 2013, they obtained about 250 pieces of private information about individuals, including government-issued identity documents, entry and exit travel records and mobile phone records, all apparently in violation of China’s privacy laws.” According to the NYT article, wife Yu claimed that she did not know her actions where illegal and was quoted as saying, “We did not know obtaining these pieces of information was illegal in China. If I had known I would have destroyed the evidence.” According to the WSJ, the privacy law which was the basis of the conviction, was enacted in 2009 “to make it illegal to handle certain personal medical records and telephone records” but that the law itself “remains vague” on what precisely might constitute violation.

From the court statements, however, it did appear that the couple had trafficked in personal information. As reported by the WSJ, “In separate responses over more than 10 hours, My Humphreys and Ms. Yu denied that their firm trafficked in personal information, saying they had hired others to obtain personal data when clients requested it.” From the documents presented by the prosecution, it would seem clear that the couple had obtained my items which were more personal in nature. They were alleged by prosecutors to have “used hidden cameras to gather information as well as government records on identification numbers, family members, real-estate holdings, vehicle owner, telephone logs and travel records.”

Recognizing the verdicts under Chinese laws are usually predetermined and the entire trials are scripted affairs, there is, nonetheless, important information communicated to the outside world by this trial. First and foremost is, as reported in the NYT article is a “chilling effect on companies that engage in due diligence work for global companies, many of whom believe the couple may have been unfairly targeted.” The WSJ article went further quoting Geoffrey Sant for the following, “It impacts all attempts to do business between the U.S. and China because it will be very challenging to verify the accuracy of company or personal financial information.” In other words, things just got a lot tougher to perform, what most companies would expect to be a minimum level of due diligence.

Second is the time frame noted in the court statements as to the time of the violations, from 2009 to 2013. Many had assumed that Humphreys and Yingzeng’s arrests related to their investigation work on behalf of the British pharmaceutical giant GlaxoSmithKline PLC (GSK) which was trying to determine who had filmed a sex tape of the company’s head of Chinese operations, which was then provided to the company via an anonymous whistleblower. This would seem to beg the question of whether the couple would have been prosecuted if they not engaged in or accepted the GSK assignment.

But as Elton John asked, “Where to now St. Peter?” You should always remember that performing due diligence is but one of five steps in the management of the third party life cycle. If you cannot perform due diligence at a level that you do in other countries or that you could even have done in China before the Humphreys and Yu trial, you can beef up the other steps to help proactively manage your third parties. I often say that your real work with third parties begins when the contract is executed because then you have to manage the relationship going forward. So, if you cannot perform the level of due diligence you might like, you can put more resources into monitoring the relationship, particularly in the area of invoice review and payments going forward.

In a timely article found in this month’s issue of the SCCE magazine, Compliance and Ethics Professional, Dennis Haist and Caroline Lee published an article, entitled “China clamps down on bribery and corruption: Why third-party due diligence is a necessity” where they discussed a more robust response to the issue as well. They note that the retention of third party’s to do business in China is an established mechanism through which to conduct business. They advise “For multinationals with a Chinese presence, or plans to enter the market in the near future, now is the time to pay close attention to the changing nature of the business landscape as it relates to bribery and corruption.” Further, they suggest that “In order to ensure compliance with ABAC [anti-bribery/anti-corruption] regulatory scrutiny, multinationals must demonstrate a consistent, intentional and systematic approach to third-party compliance.” But in addition to the traditional background due diligence, they believe that companies should consider an approach that moves to proactively managing and monitoring third parties for compliance. Lastly, at the end of the day if a regulator comes knocking from the Department of Justice (DOJ) or Serious Fraud Office (SFO), you will need to demonstrate the steps you have put in place and your active management of the process.

In the FT, WSJ and NYT articles it was clearly pointed out that the invisible elephant in the room was GSK. Also it is not clear what the personal tragedy that Humphreys and Yu have endured will mean for GSK or the individuals caught up in that bribery scandal going forward. Humphreys had previously said that he would not have taken on the GSK sex tape assignment if it had been disclosed to him that the company had sustained allegations of corruption by an internal whistleblower. Perhaps one lesson may be that in the future companies will have to disclosure more to those they approach to perform such investigative services.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

August 6, 2014

Theme from Shaft and Continuous Improvement of Your Compliance Program, Part I

Isaac HayesThe composer of what I believe to be the absolute coolest movie theme ever was born on this date in 1942, Isaac Hayes. Hayes continually succeeded in many areas. In the 1960s it was with soul music on the great label Stax. In the 90s it was as the voice of Chef on the animated TV series South Park. But for my generation it was for the theme song, and indeed entire soundtrack, to the movie Shaft that I will always remember Hayes for. The success of that soundtrack led not only to nearly four more decades in the public eye, but as I will never forget sight of Isaac Hayes, playing shirtless in heavy chains and sunglasses as he performed the #1 pop single “Theme from ‘Shaft'” on national television the night he was awarded the Academy Award for Best Score.

How Hayes continued to reinvent of himself as a performer informs my blog posts over the next two days as I look at continuous improvement in your Foreign Corrupt Practices Act (FCPA) compliance program. Today, I will review the regulators view on continuous improvement and tomorrow I will provide some specific techniques that you can engage in to help satisfy this prong of the Ten Hallmarks of an Effective Compliance Program.

You should keep track of external and internal events that may cause change to business process, policies and procedures. Some examples are new laws applicable to your business organization and internal events driving changes within a company. Such internal changes could be a company reorganization or major acquisition. This type of review appears to be similar to the Department of Justice (DOJ) advocacy of ongoing risk assessments. The FCPA Guidance (Guidance) specifies, “a good compliance program should constantly evolve. A company’s business changes over time, as do the environments in which it operates, the nature of its customers, the laws that govern its actions, and the standards of its industry. In addition, compliance programs that do not just exist on paper but are followed in practice will inevitably uncover compliance weaknesses and require enhancements. Consequently, DOJ and SEC evaluate whether companies regularly review and improve their compliance programs and not allow them to become stale.”

Continuous improvement requires that you not only audit but also monitor whether employees are staying with the compliance program. In addition to the language set out in the FCPA Guidance, two of the seven compliance elements in the Federal Sentencing Guidelines (FSG) call for companies to monitor, audit, and respond quickly to allegations of misconduct. These three activities are key components enforcement officials look for when determining whether companies maintain adequate oversight of their compliance programs.

A review plan is an excellent tool for the compliance practitioner because it provides a method for the ongoing evaluation of policies and sets forth a manner to communicate and train on any changes that are implemented. More than simply staying current, this approach will help provide the dynamics that the DOJ continually talks about in keeping your program fresh. Lastly, such a review plan can also guide the compliance practitioner in creating an ongoing game plan for compliance program upgrades and updates that Stephen Martin advocates.

The Guidance makes clear that each company should assess and manage its risks and specifically notes that small and medium-size enterprises likely will have different risk profiles and therefore different attendant compliance programs than large multi-national corporations. Moreover, this is something that the DOJ and Securities and Exchange Commission (SEC) take into account when evaluating a company’s compliance program in any FCPA investigation. This is why a “Check-the-Box” approach is not only disfavored by the DOJ, but, at the end of the day, it is also ineffectual. It is because each compliance program should be tailored to the enterprise’s own specific needs, risks, and challenges.

One tool that is extremely useful in the continuous improvement cycle, yet is often misused or misunderstood, is ongoing monitoring. This can come from the confusion about the differences between monitoring and auditing. Monitoring is a commitment to reviewing and detecting compliance variances in real time and then reacting quickly to remediate them. A primary goal of monitoring is to identify and address gaps in your program on a regular and consistent basis across a wide spectrum of data and information.

Auditing is a more limited review that targets a specific business component, region, or market sector during a particular timeframe in order to uncover and/or evaluate certain risks, particularly as seen in financial records. However, you should not assume that because your company conducts audits that it is effectively monitoring. A robust program should include separate functions for auditing and monitoring. Although unique in protocol, the two functions are related and can operate in tandem. Monitoring activities can sometimes lead to audits. For instance, if you notice a trend of suspicious payments in recent monitoring reports from AsiaPac, it may be time to conduct an audit of those operations to further investigate the issue.

Your company should establish a regular monitoring system to spot issues and address them. Effective monitoring means applying a consistent set of protocols, checks, and controls tailored to your company’s risks to detect and remediate compliance problems on an ongoing basis. To address this, your compliance team should be checking in routinely with local Finance departments in your foreign offices to ask if they’ve noticed any accounting irregularities. Regional directors should be required to keep tabs on potential improper activity in the countries in which they manage. These ongoing efforts demonstrate that your company is serious about compliance.

The DOJ emphasized again with the 2011 Pfizer Deferred Prosecution Agreement (DPA), the need for a company to establish protocols for auditing. It included the following detail on auditing protocols:

  • On-site visits by an FCPA review team comprised of qualified personnel from the Compliance, Audit and Legal functions who have received FCPA and anti-corruption training.
  • Review of a representative sample (appropriately adjusted for the risks of the market) of contracts with and payments to individual foreign government officials as well as other high-risk transactions in the market.
  • Creation of action plans resulting from issues identified during the proactive reviews; these action plans will be shared with appropriate senior management and should contain mandatory remedial steps designed to enhance anti-corruption compliance, repair process weaknesses, and deter violations.
  • A review of the books and records of a sample of third party representatives that, in the view of the FCPA proactive review team, may present corruption risk. Prior to such an investigation, however, the company should have procedures in place to make sure every investigation is thorough and authentic, including document preservation protocols, data privacy policies, and communication systems designed to manage and deliver information efficiently.

Tomorrow, I will review some specific steps you can take to meet these goals.

For your listening pleasure, close your eyes and listen to the Theme From Shaft, by clicking here.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

August 4, 2014

The Houston Astros and a Compliance Defense in the FCPA

IMG_3289It is not as if I have tried not to write about the Houston Astros this year or that I am consciously ignoring them, it is simply that they are so not relevant they rarely seem to exist or at least raise their pathetic head for a compliance lesson or two. Not only are they on track to have the worst record in baseball for the fourth consecutive year but last week they had yet another 0.00 television rating. For those of you keeping score at home, this is the third time in less than one calendar year that no persons, registered through the Nielsen TV-rating system, indicated they watched an Astros game on television. Nevertheless in July the Astros managed to yet outdo themselves again in the field of idiotic statements and actions that were so profound they once again inform your compliance program and indeed those advocating the appending of a compliance defense to the Foreign Corrupt Practices Act (FCPA).

For the privilege of having the worst record in baseball over the past 3+ seasons, the Astros had the right to the No. 1 selection in this year’s baseball draft. With this year’s selection they took a high school pitcher, Brady Aiken. But for reasons only known to the Astros, they managed not to sign this year’s first round pick, for only the third time since the amateur draft began back in 1968. The sordid tale was laid out in a Grantland article entitled “Houston You Have a Problem by Michael Baunmann.

After drafting Aikens, he and the Astros reached a handshake deal for a contract worth $6.9MM. Shortly thereafter, a medical examination “revealed that his left UCL (the ligament that gets replaced during Tommy John surgery) is unusually small.” Note this examination did not reveal any damage to the nerve or any injury, simply that Aikens’ UCL was small. So what did the Astros do? They reneged on their agreement (as in our word is really not our word) and then offered Aikens $3.5MM. Why would the Astros go back on their word? As explained by Baunmann “Tiny UCL Affair of 2014 was actually a smoke screen to cut Aiken’s bonus and use the savings to help sign other players. MLB regulates how much teams can spend on draft picks, and the Astros entered post-draft negotiations with an overall signing budget just north of $13 million. The league places a dollar amount on each draft pick in the first 10 rounds, so if you add up the numbers for each pick, you get the total salary cap each team is allowed to spend on its draftees. If one player signs for less than the recommended slot, the team can use the savings to sign other picks to richer bonuses, including players in the last 30 rounds, who’d ordinarily only be able to sign for $100,000. If a team goes over its spending limit, the league taxes the overage. If a team goes over by enough, it loses draft picks in coming years.” But it all backfired on the Astros who ended up with a big Nada.

In other words, the Astros were trying to game the system by underpaying its first round pick so they could use the saved money to pay to other picks. However, when they did not sign their No. 1 pick, under MLB rules they could not use any of the saved money on other picks. The Astros were accused by the Players Union of illegal action under the Collective Bargaining Agreement and a formal grievance has been filed against the Astros. But perhaps the most damning was this statement by Buanmann, “This isn’t about sabermetrics or how the Astros chose to rebuild. This is distinctly about the human element. If your word is not your bond, if you’re willing to brazenly exploit teenagers to gain an edge, endangering their educational and professional futures out of spite, you might lack an appreciation for the human element. I’d say you lack humanity altogether.”

I know you have all been waiting for the compliance angle to all of this so here it is. The Astros act like a corporation and like almost all corporations they look to pay the absolute cheapest that they can to get something. Those who advocate that there be a compliance defense added to the FCPA miss this fundamental tenet of the corporate world. Corporations that are unwilling to spend money to put a best practices or even adequate compliance program in place now, will not do so simply because an amended FCPA says they will have a defense if they do so. It is not a matter of having a compliance program in place, but doing compliance because doing compliance costs money. Since the Supreme Court has told us that corporations have the same rights as people, it makes sense that cheap corporations will not put in effective compliance programs, simply because they are cheap. If your business model for the past 35+ years has been that you are too cheap to follow the law and put in an effective compliance program, as required by the existing law, simply by amending the FCPA to add a compliance defense will not change your basic nature.

It costs time, money, effort and commitment to put a compliance program in place. By simply having language that says you will get credit for having a defense in place, corporations who are not committed to compliance will not magically get committed. These companies who are too cheap to follow the law now will simply throw a paper excuse up and then crow to the world that they have an adequate compliance program. The Astros, reported last year to be the most profitable baseball team of all-time and “a multimillion-dollar corporation that could find $3.4 million in the change jar on the nightstand, tried to nickel and dime a kid who’s trying to break into an industry that’s stacked the deck against him, and then they tattled on him to the NCAA once they failed to get their way.” If a compliance defense was amended to the FCPA, corporations will give even less money to the compliance function because they will sit smugly behind their paper compliance program and not devote the time, money or commitment required to having an adequate compliance program.

The Department of Justice (DOJ) has continually made clear that company’s will receive credit for having a compliance program in place even where a potential FCPA violation occurs. The Morgan Stanley declination is but the most prominent publicly announced statement on the matter. Additionally, there are the six examples cited in the FCPA Guidance where declinations were issued, with the company identifying information scrubbed from the facts presented. Moreover, the US Sentencing Guidelines also touches directly on this point. So the importance of not only complying with a 35+ year old law but how to do so is easily apparent to any company which might be researching the issue.

It is not the lack of knowledge of how to comply with the FCPA which keeps a company from putting an effective compliance program in place but what might charitably be called a cost-aversion ethos. Just as with the Astros, cost-aversion exists in a wide number of areas outside FCPA compliance. In an article in the New York Times (NYT), entitled “Valeant’s Cost-Cutting Ethos May Yet Give Wall Street Indigestion”, Jesse Eisinger reported on the company’s attempt to rebrand the drug Sculptra for use as a “cosmetic touch-up” treatment when it had been approved for use by HIV patients with “facial wasting”. Valeant had purchased the drug from another pharmaceutical company, Sanofi, and also the “inherited the responsibility for conducting the study when it purchased the drug”

However, Valeant did not want to go through the time and expense of conducting the required clinical trials to have the drug approved for this new use. Eisinger wrote, “From the start, Valeant executives were concerned the study would cost too much, according to three current and former executives who spoke on condition of anonymity. The five-year safety study could cost $25 million to $40 million, according to Tage Ramakrishna, Valeant’s chief medical officer. According to the executives, the message was clear and emanated from Mr. Pearson: The company should try to avoid having to perform the study. Ryan Weldon, who until recently was the head of Valeant’s aesthetics business, said to one executive that “we’re not going to spend money on that,” referring to the study.” Eisinger also reported that even though the company never completed the required study, “the company sold the treatment.”

Beyond putting a compliance program in place, a company must actually do compliance. This means putting in a compliance function commensurate to the size and risk a company has with its business model. Not only must money be spent but compliance professionals hired and given real authority to help the company prevent, detect and remediate FCPA violations that may arise. Once again, if a company is not incentivized to follow a 35 year old law with as much enforcement publicity as the FCPA, saying they will be given credit for something they could already receive credit for, in the form of a compliance defense, is not going to change conduct or even attitudes.

I cannot think of a better way to sum this up than to pass along the Astros gift to their fan base, which they announced on Friday. They are raising ticket prices in 2015.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

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