FCPA Compliance and Ethics Blog

October 29, 2014

Doing Compliance-The Book

Doing ComplianceI have consistently tried to bring a ‘Nuts and Bolts’ approach to my writing about compliance. Last year when describing some of my writing on the building blocks of a Foreign Corrupt Practices Act (FCPA) compliance program to my friend Mary Flood, she said “That’s great but what about actually doing compliance?” Fortunately for me, she did not ask how as there is no telling just how much hot water answering that question would have gotten me into! Her idea about writing a book which a compliance practitioner could use as a one-volume reference for the everyday work of anti-corruption compliance was the genesis of my most recent hardbound book, Doing Compliance: Design, Create, and Implement an Effective Anti-Corruption Compliance Program. I am pleased to announce that the book is hot off the presses and now available for purchase through Compliance Week in the US and Ark Publishing in the UK.

Just as the world becomes more flat for business and commercial operations, it is also becoming so for anti-corruption and anti-bribery enforcement. Any company that does business internationally must be ready to deal with a business environment with these new realities. My book is designed to be a one-volume work which will give to you some of the basics of creating and maintaining an anti-corruption and anti-bribery compliance program which will meet any business climate you face across the globe. I have based my discussion of a best practices compliance program on what the Criminal Division of the US Department of Justice (DOJ) and Enforcement Division of the Securities and Exchange Commission (SEC) set out in their jointly produced “FCPA - A Resource Guide to the U.S. Foreign Corrupt Practices Act”, the FCPA Guidance, the ‘Ten Hallmarks of an Effective Compliance Program.” The FCPA Guidance wisely made clear that there is no ‘one-size-fits-all’ approach when it stated, “Individual companies may have different compliance needs depending on their size and the particular risks associated with their businesses, among other factors.” Thus, the book is written to provide insight into the aspects of compliance programs that DOJ and SEC assesses, recognizing that companies may consider a variety of factors when making their own determination of what is appropriate for their specific business needs.

This book does not discuss the underlying basis of the FCPA, the UK Bribery Act or any other anti-corruption or anti-bribery legislation. I have assumed the reader will have a modicum of knowledge of these laws. If not, there are several excellent works, which can provide that framework. The book is about doing business in compliance with these laws. As with all Americans, I appreciate any list that is deca-based, so the format of 10 hallmarks resonates with me. I have used this basic ten-part organization in laying out what I think you should consider in your anti-corruption and anti-bribery compliance program. In addition to presenting my own views in these areas, I also set out the views of both FCPA practitioners and commentators from other areas of business study and review. The book includes the following:

Chapter 1 - Where It All Begins: Commitment from Senior Management and a Clearly Articulated Policy against Corruption  It all begins at the Top, what should management say and do? ‘Tone at the Top’ is a great buzz word but how does a company truly get the message of compliance down through the ranks? This chapter discusses the techniques management can use to move the message of compliance down through middle management and into the lower ranks of the company.

Chapter 2 - Some Written Controls: Code of Conduct and Compliance Policies and Procedures  The Cornerstone of your anti-bribery/anti-corruption compliance program is set out in your written standards and internal controls which consist of a Code of Conduct, Compliance Policy and implementing Procedures. This chapter discusses what should be in the written basics of your compliance program and how best to implement these controls.

Chapter 3 - For the CCO: Oversight, Autonomy, and Resources The role and function of a Chief Compliance Officer (CCO) in any compliant organization cannot be overstated. Simply naming a CCO is no longer enough to meet even the minimum requirements of best practices. One of the key areas that the DOJ will review is how is a CCO allowed to fulfill his role. Does the position have adequate resources? Does it have autonomy and support in the corporate environment? Does the Board of Directors exercise appropriate oversight? This chapter reviews the Compliance Function, Oversight, Autonomy and Resources and relates structuring the compliance function in an organization.

Chapter 4 - The Cornerstone of Your Compliance Program: Risk Assessment It all begins here, as a risk assessment is the road map to managing your compliance risk. The implementation of an effective compliance program is more than simply following a set of accounting rules or providing effective training. Compliance issues can touch many areas of your business and you need to know not only what your highest risks are, but where to marshal your efforts in moving forward. A risk assessment is designed to provide a big picture of your overall compliance obligations and then identify areas of high risk so that you can prioritize your resources to tackle these high-risk areas first. This chapter discusses what risks you should assess, the process for doing so and using that information going forward.

Chapter 5 - Getting Out on the Road: Training and Continuing Advice Once you have designed and implemented your compliance program, the real work begins and you must provide training on the compliance program and continuing advice to your company thereafter. This means that another pillar of a strong compliance program is properly training company officers, employees, and third parties on relevant laws, regulations, corporate policies, and prohibited conduct. However merely conducting training usually is not enough. Enforcement officials want to be certain the messages in the training actually get through to employees. The expectations for effectiveness are measured by who a company trains, how the training is conducted, and how often training occurs. This chapter discusses getting the message of compliance out to your employees.

Chapter 6 - Do As I Do & As I Say: Incentives and Disciplinary Measures Any effective compliance program will use a variety of tools to help ensure that it is followed. This means that you must employ both the carrot of incentives and the stick of disciplinary measures to further compliance. How can you burn compliance into the DNA of your company? Discipline has long been recognized as an important aspect of a compliance regime but more is now required. This chapter relates structuring compliance into the fabric of your company through hiring, promotion of personnel committed to compliance and how to reward them for doing business ethically and in compliance with the FCPA.

Chapter 7 – Your Greatest Source of FCPA Exposure: Third Parties and How to Manage the Risk Third Parties are universally recognized as the highest risk in any compliance program. Indeed it is estimated that well over 90% of all FCPA enforcement actions involve third parties. Therefore it is important how to manage this highest risk for an anti-corruption program. This chapter provides a five-step process for the investigation and management of any third party relationship; from agents in the sales chain to vendors in the supply chain.

Chapter 8 – How Do I Love Thee: Confidential Reporting and Internal Investigations In any company, your best source about not only the effectiveness of your compliance program but any violations are your own employees. This means that you must design and implement a system of confidential reporting to get your employees to identify issues and then have an effective internal investigation of any issues brought to your attention. Your own employees can be your best source of information to prevent a compliance issue from becoming a FCPA violation. This chapter provides the best practices for setting up internal reporting and investigating claims of compliance violations.

Chapter 9 - How to Get Better: Improvement: Periodic Testing and Review Once you have everything up and running you still need to not only periodically oil but also update the machinery of compliance. You do this through the step of continuous improvement, which is the use of monitoring and auditing to review and enhance your compliance regime going forward. A company should focus on whether employees are staying with the compliance program. Even after all the important ethical messages from management have been communicated to the appropriate audiences and key standards and controls are in place, there should still be a question of whether the company’s employees are adhering to the compliance program.

Chapter 10 - Should I or Shouldn’t I? Mergers and Acquisitions The last thing you want to bring in through an acquisition is another company’s FCPA violation for which your company must pay the piper; also known as buying a FCPA violation. Effectively managing your mergers and acquisitions (M&A) process can help you to identify risk areas in a potential acquisition and then remediate any issues in the post-acquisition integration phase. This chapter gives you the most recent pronouncements on how to avoid FCPA exposure in this key area of corporate growth and to use the M&A function to proactively manage compliance.

Chapter 11 – A Few Words about Facilitation Payments One of the key differences between the US FCPA and UK Bribery Act is that the US law allows facilitation payments. However, in today’s interconnected world, to allow one part of your company to make facilitation payments while UK subsidiaries or others covered by the UK Bribery Act are exempted out from your standard on facilitation payments has become an administrative nightmare. This chapter explores what is a facilitation payment, how the policing of your internal policy has become more difficult and some companies which have been investigated regarding their facilitation payments. It also provides guidelines for you to follow should your company decide to allow them going forward.

So with thanks to Mary Flood for the idea, Matt Kelly, the Editor of Compliance Week for the publishing platform and Helen Roche & Laura Slater and the rest of the team at Ark Publishing for getting me through the publishing process in a professional manner, I am published to announce that Doing Compliance: How to Design, Create, and Implement an Effective Anti-Corruption Compliance Program is now available for purchase.

You can purchase a copy of Doing Compliance: How to Design, Create, and Implement an Effective Anti-Corruption Compliance Program in the US by clicking here. You can purchase a copy of Doing Compliance: How to Design, Create, and Implement an Effective Anti-Corruption Compliance Program in the UK 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

October 27, 2014

Critiquing FCPA Enforcement and the GSK Domestic Corruption Conviction

Lady Scales of JusticeRecently the FCPA Professor posted a blog, entitled “Look in the Mirror Moments, in which he used written commentary by the US Secretary of the Treasury to the Chinese government about the Chinese governments anti-trust investigations as a mechanism to explore critiques of Foreign Corrupt Practices Act (FCPA) enforcement. In this post, he compared certain aspects of FCPA enforcement to the Chinese corruption enforcement action against GlaxoSmithKline PLC (GSK). Leaving aside the differences in anti-trust enforcement (price-fixing, monopolistic behavior and illegal collusion) and anti-corruption enforcement (bribery), I wanted to review his critiques through the prism of the known facts of the GSK enforcement action.

The FCPA Professor had the following comments about FCPA enforcement, in comparison with the Chinese corruption enforcement action against GSK. He said,

Without in any way trying to comprehensively compare the overall U.S. legal system to the overall Chinese legal system, the following attributes of FCPA enforcement must at least be acknowledged. 

The vast majority of corporate FCPA enforcement actions lack transparency and the resolution documents (whether a non-prosecution agreement, deferred prosecution agreement or civil administrative order) are the result of an opaque process ultimately controlled by the same office prosecuting or bringing the action. 

As to the swiftness of FCPA enforcement actions, one can only assume that the majority of general counsels and board of directors of companies under FCPA scrutiny would be jumping for joy if the scrutiny – from start to finish – would resolve itself in 15 months rather than the typical 3-5 years (and in some instances more) of FCPA scrutiny lingering.”

The difficulty I have with both of these points is that one cannot separate the Chinese enforcement action against GSK from the Chinese legal system that produced it. Let’s start with the ‘jumping for joy’ prong. The initial difference to note is that the Chinese enforcement action was a domestic prosecution based upon Chinese domestic law for bribery and corruption of Chinese. It was not a US (or UK) company violating US (or UK) laws. This means that the relevant documents and witness were in the locality where the investigation was performed. Even when a key witness, GSK China Country Manager Mark Reilly was in the UK, he voluntarily returned to China to give evidence but was prevented from leaving the country without being charged with a crime. So as far as is known, there were no government-to-government requests for information, no Letters Rogatory or use of any other international discovery mechanism to obtain evidence.

Moreover, the procedural protections in place under US (and UK) criminal procedure simply do not exist in China. There is no right to counsel, no right against self-incrimination, no right to confront witness and not even a right to know what the charges against you might be. These lack of rights were certainly borne out in the speed in which the Chinese investigative authorities were able to obtain evidence and public confessions from GSK principals involved in the bribery and corruption. The first 30-day timeline of the GSK investigation went as follows:

  • June 28, 2013 – Local Police announced they have place GSK officials under investigation for economic crimes.
  • July 11, 2013 – Public Security Ministry issued statement accusing GSK of bribery.
  • July 15 , 2013 – Four senior company execs ‘detained’. Finance chief barred from leaving country.
  • July 16, 2013 – GSK General Counsel (GC) placed under ‘house arrest’ along with 30 other employees. One of the four GSK China executives who were detained, admited to bribery allegations on Chinese state television.
  • July 22, 2013 – GSK formally apologized for breaking Chinese law regarding domestic bribery and corruption.
  • July 26, 2013 – Peter Humphrey, a UK citizen and his wife, a naturalized US citizen, both hired by GSK in an ancillary matter related to the GSK corruption scandal were arrested but not told of the charges against them.

A little over one year later, in July, 2014 the trial of Humphrey and his wife was announced. Orignially it was to be held in secret with both Humphrey and his wife still not told of the formal charges against them. However after diplomatic protests by both the US and UK governments, Humphrey and his wife were both convicted and sentenced in an open trial, albeit lasting only one day, on August 8, 2014. The charges against them were announced at trial. Thereafter, GSK pled guilty in a secret one-day trial GSK was fined approximately $491MM and China Country Manager Mark Reilly and four other GSK China business unit executives were found gulity. They were all sentenced to jail but given suspended sentences.

How did the Chinese government develop its evidence so quickly? One of the defendant’s, admitted, on state run televison, his involvement in the bribery scheme only 18 days after the investigation was announced by Chinese authorities. Indeed, GSK itself made a public apology only 24 days after the announcement by the Chinese authorities it was under investigation. We now know that GSK was informed by a whistleblower of allegations of bribery and corruption as early as January 2013 yet in June GSK announced it had not found anything to substantiate these allegations.

I believe the answer is found in the differences in the Chinese and US legal systems. It all starts with the following: in China you are presumed guilty while in the US (and the UK), you are presumed innocent until proven guilty. In an article in the New York Times (NYT), entitled “Presumed Guilty in China’s War on Corruption”, Andrew Jacobs and Chris Buckley wrote that the “war on corruption often operates beyond the law in a secret realm of party-run agencies”. The process “Known as Shuanggui, it is a secretive, extralegal process that leaves detainees cutoff from lawyers, associates and relatives.” Moreover, even as a case moves through the Chinese criminal justice system, defendants’ counsel “have limited access to evidence, witnesses, and their clients.” It does not get any better when a defendant actually goes to court because “Lawyers say Chinese courts rarely allow them to call defense witnesses, while prosecutors frequently withhold cruical evidence.” Finally, of the 8,110 officials charged with corruption “in the first half of this year, 99.8 percent were convicted”. To this rather amazing trial court conviction rate, I would add the the prosecution does even better on appeal, never losing to a convicted defendant.

Does that sound like a system in which you would jump for joy if you were caught up in, even knowing that the time from announcment of investigation until 99.8% chance of conviction awaited you? Even if the government investigation only took 14 months? In the US, corporations have the same rights as individuals at trial; to cross-examine witness, to be made aware of the charges against it, those charges must be brought with specficity, right to counsel, right to an open trial and right to appeal. These rights are all enshrined in the US Constitution. Those rights are not present for individuals or corporations under Chinese law or jurisprudence.

But the FCPA Professor also critiqued the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) in FCPA enforcements with the following observation: The vast majority of corporate FCPA enforcement actions lack transparency and the resolution documents (whether a non-prosecution agreement, deferred prosecution agreement or civil administrative order) are the result of an opaque process ultimately controlled by the same office prosecuting or bringing the action.When a company enters into negotiation with the DOJ and SEC it is with legal counsel in tow. Even if we in the general public are not privy to these negotiations over the terms and conditions of enforcement actions I am confident that there is some give and take. Further, while I only have personal knowledge of one negotiation for the specific terms of a Deferred Prosecution Agreement (DPA), the lawyer representing the company made clear it was a negotiation. It was not a Diktat with sentencing simply pronounced by the DOJ. Does the office which handles the investigation also handle the settlement negotiation? Yes but that is what prosecutors do each and every day in every city, county, town, hamlet, state and federal jurisdiction in this country.

Just as it takes two to tango, it takes two to negotiate. The DOJ does not negotiate with itself. Another party is sitting across the table and that other party is the company involved in the FCPA investigation. Why is that company there in the room negotiating? Because the company has assessed its interest and determined that it would be better off settling than going to trial. This is in the face of DOJ failures in the trial court in the Gun Sting cases, the O’Shea trial and the trial court overturning the verdict in the Lindsey Manufacturing conviction. Simply because there is a negotiation between the DOJ and a private party does not make it some nefarious process, even if the prosecutors hold the upper hand.

As far as the fines and penalites, there has been nothing to suggest the basis of the $491MM fine assessed against GSK. That amount is a bit less than the amounts initially reported that GSK China paid out as bribes, somewhere over $500MM. At least in the US, there are the Sentence Guidelines which form some basis of the calculation. Of course there is always some prosecutorial discretion to lessen a fine or penalty below the suggested amount. We have seen that occur this year with the HP enforcement action and recently Asst. Attorney General Leslie Caldwell suggested that Alcoa could have been fined over $1bn for its conduct, while the actual fine was $384MM. It is appropriate for prosecutors to have such discretion.

While the DOJ is also critiqued that DPAs (and Non-Prosecution Agreement [NPAs]) are essentially the same as going to trial with a near 100% success rate, I think this belies the number of declinations that the DOJs gives out. Unfortunately (and here the FCPA Professor and I do agree); there is not enough information given out about declinations; either regarding the raw numbers or the specific reasons for a declination. Only if a company agrees or is required to make such information public does it become known. Nevertheless, there is the recent example of Layne Christensen, which received a declination. In an article in Compliance Week, entitled “How Two Companies Got Regulators to Drop FCPA Charges”, Jaclyn Jaeger reported on the reasons the company sustained this result of receiving a declination through interviews with Christensen GC, Steve Crooke, its Chief Compliance Officer (CCO), Jennafer Watson and its outside counsel Russ Berland. Jaeger detailed the specific steps the company took and we can all see the effect it had upon the DOJ, through the declination to prosecute the company.

The debate about the costs of FCPA enforcement actions, the proper role of DPAs/NPAs and length of time of investigations is a healthy one and living in the open society that we have in the US, one that we will continue to have. Since I am not a prosecutor (or ex-prosecutor), I cannot look in the mirror at FCPA enforcement but I can review the facts of the DOJ and SEC’s FCPA enforcement, contrasted with the Chinese domestic bribery and corruption proseuction of GSK and believe that there is no basis for comparing the two systems, as they are so different in too many fundamental aspects.

I can however say one thing with absolute certainly; wherever you do want to be, a Chinese jail is not high on the list.

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

October 22, 2014

Right to Retire Or Termination: Remediation of Leadership To Foster Compliance

Fall of RomeMany historians have long given 476 AD as the date of the fall of the Roman Empire. Further, it was from this date forward that Europe began its long slide into the abyss, which came to be known as the Dark Age. However, this view was challenged in 1971 by Peter Brown, with the publication of his seminal work “The World of Late Antiquity”. One of the precepts of Brown’s work was to reinterpret the 3rd to 8th centuries not as simply a decline of the greatness that had been achieved in the heydays of the Roman Empire, but more on their own terms. It was in the year of 476 AD that the last Roman Emperor, Romulus Augustulus, left the capital of Rome in disgrace. However as Brown noted, he was not murdered or even thrown out but allowed to retire to his country estates, sent there by the conquers of the western half of the Roman Empire, the Goths. Not much conquering going on if a ruler is allowed to ‘retire’, it was certainly a replacement but not quite the picture of marauding barbarians at the gate.

I thought about this anomaly of retirement by a leader in the context where a company or other entity might be going through investigations for corruption and non-compliance with such laws as the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act. Yesterday I wrote about three recent articles and what they showed about a company’s oversight of its foreign subsidiaries. Today I want to use these same articles to explore what a company’s response and even responsibility should be to remediate leadership under which the corruption occurs. The first was an article in the New York Times (NYT), entitled, “Another Scandal Hits Citigroup’s Moneymaking Mexican Division” by Michael Corkery and Jessica Silver-Greenberg. Their article spoke about the continuing travails of Citigroup’s Mexican subsidiary Banamex. Back in February, the company reported “a $400 million fraud involving the politically connected, but financially troubled, oil services firm Oceanografía.”

This has led Citigroup to ever so delicately try to oust the leader of its Mexico operations, Mr. Medina-Mora, by encouraging him to retire. While Citigroup did terminate 12 individuals around the Oceanografía scandal earlier in the year, it has not changed the employment status of the head of the Mexico business unit. This may be changing as the article said, “In a delicate dance, Citigroup is encouraging its Mexico chairman, Manuel Medina-Mora, 64, to retire, according to four people briefed on the matter. The bank has been quietly laying the groundwork for his departure, which could come by early next year, the people said. Still, Mr. Medina-Mora’s business acumen and connections to the country’s ruling elite have made him critical to the bank’s success in Mexico. Citigroup and its chairman, Michael E. O’Neill, cannot afford to alienate Mr. Medina-Mora and risk jeopardizing those relationships, these people said.”

Should Mr. Medina-Mora be allowed to retire? Should he even be required to retire? What about the ‘mints money’ aspect of the Mexican operations for Citigroup? Was any of that money minted through violations of the FCPA or other laws? What will the Department of Justice (DOJ) think of Citigroup’s response or perhaps even its attitude towards this very profitable business unit and Citigroup’s oversight, lax or other?

Does a company have to terminate employees who engage in corruption? Or can it allow senior executives to gracefully retire into the night with full pension and other golden parachute benefits intact? What if a company official “purposely manipulated appointment data, covered up problems, retaliated against whistle-blowers or who was involved in malfeasance that harmed veterans must be fired, rather than allowed to slip out the back door with a pension.” Or engaged in the following conduct, “had steered business toward her lover and to a favored contractor, then tried to “assassinate” the character of a colleague who attempted to stop the practice.” Finally, what if yet another company official directed company employees to “delete hundreds of appointments from records” during the pendency of an investigation?

All of the above quotes came from a second NYT article about a very different subject. In the piece, entitled “After Hospital Scandal, V.A. Official Jump Ship”, Dave Phillips reported that two of the four VA Administration executives who engaged in the above conduct and were selected for termination, had resigned before they could be formally terminated. The article reported that the VA “had no legal authority to stop” the employees from resigning. Current VA Secretary Robert McDonald was quoted in the article as saying, “It’s also very common in the private sector. When I was head of Procter & Gamble, it happened all the time, and it’s not a bad thing — it saves us time and rules out the possibility that these people could win an appeal and stick around.” Plus, he said, their records reflect that they were targeted for termination. “They can’t just go get a job at another agency,” Mr. McDonald said. “There will be nowhere to hide.”

The third article was in the Wall Street Journal (WSJ) and entitled, “GM Says Top Lawyer to Step Down”. In this piece, reporters John D. Stroll and Joseph B. White, with contributions from Chris Matthews and Joann Lublin, reported that General Motors (GM) General Counsel (GC) Michael Millikin will retire early next year. Milliken is famously the GC who claimed not to know what was going on in his own legal department around the group’s settlements of product liability claims of faulty ignition switches. Milliken claimed he was kept “in the dark” by his own lieutenants about the safety issues involved with this group of litigation. Does Milliken have any responsibility for the failures of GM around this safety issue? What does his apparent graceful retirement say about the corporate culture of GM and its desire to actually change anything in the light of its ongoing travails? Of course one might cynically point to GM’s failure to even have a Chief Ethics and Compliance Officer as evidence of the company’s attitude towards compliance and ethics. (I wonder how that might look to the DOJ/Securities and Exchange Commission (SEC) if GM goes under any FCPA scrutiny?)

With Citigroup, the Department of Veterans Affairs and GM, we have three separate excuses for companies (and a Cabinet level department) not disciplining top employees for ethical and/or compliance failures. At Citigroup, the excuse is apparently that it does not want to rock the boat from a top producing foreign subsidiary by terminating the head of the subsidiary under investigation. At the Department of Veterans Affairs, the excuse seems to be they can go ahead and resign because we prefer to get rid of them that way. At GM, it is not clear why the GC who claimed not to know what was going on in even his own law department can ride off into the sunset with nary a contrary word in sight. Millikin’s conduct would seem to be the product of a larger cultural issue at GM.

I thought about how the DOJ might look at these situations for companies if a FCPA claim were involved. Even with McDonald’s observations about what happened when he was with Procter & Gamble; does a company show something less than commitment to having a culture of compliance if it allows an employee to retire? What does it say about Citigroup and its culture given the current dance it is having with its head of the Mexico unit? What about GM and its Sgt. Schultz of a GC and his ‘I was in the dark posture’? As stated by Mike Volkov, in his post entitled “Goodbye Mr. Millikin: GM’s Continuing Culture Challenges”, GM does under appear to understand the situation it finds itself in currently over its failures. He wrote, “GM still does not understand the significance of its governance failure…GM should have taken dramatic and affirmative steps to create a new culture – resources and new initiatives should be launched to rid GM of its current culture and replace it with a new speak up culture. It is a daunting task in such a large company but it has to be done. Until GM wakes up, missteps and failures will continue.” One might say the same for Citigroup and the Department of Veterans Affairs as well.

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

October 21, 2014

Carlton Fisk, The Homer and Oversight of a Profitable Subsidiary

Fisk HomerToday we celebrate one of the great moments in World Series history. At approximately at 12:34 AM on this date in 1975, Carlton Fisk came to bat at the bottom of the 12th, in Game 6 of the World Series between the Boston Red Sox and Cincinnati Reds. He hit a pitch down the left field line. He stood at the plate, bouncing up and down and flailing at the ball as though he was helping an airplane land on a dark runway. “I was just wishing and hoping,” he said at a ceremony some years later. “Maybe, by doing it, you know, you ask something of somebody with a higher power. I like to think that if I didn’t wave, it would have gone foul.” Whether or not the waving was responsible, the ball bounced off of the bright-yellow foul pole above the Green Monster for a home run. Fenway’s organist played the Hallelujah Chorus from Handel’s Messiah while Fisk rounded the bases. One for the ages indeed as it appeared the Baseball Gods might finally be smiling on the Red Sox nation. Alas, they lost the next game and it was not to be for another 30 years.

I thought about Fisk’s homer and the ultimate heartbreak of Red Sox nation once again in 1975 when I read about several recent issues involving corruption and corporate responsibility for oversight, or perhaps more appropriately, the lack thereof. The first was an article in the New York Times (NYT), entitled “Another Scandal Hits Citigroup’s Moneymaking Mexican Division”, by Michael Corkery and Jessica Silver-Greenberg. Their article spoke about the continuing travails of Citigroup’s Mexican subsidiary Banamex. Back in February, the company revealed “a $400 million fraud involving the politically connected, but financially troubled, oil services firm Oceanografía.”

However, company investigators have unearthed another problem at the Mexico unit. The article reported “An internal investigation, begun by Citigroup in July, found evidence that the security unit was overcharging vendors and may have been taking kickbacks, a person briefed on the investigation said. The internal inquiry also found shell companies that had been set up to look like vendors and receive payments from the Banamex unit.” In a statement reported in the piece, Citigroup’s Chief Executive Officer (CEO) Michael L. Corbat “called the conduct of the individuals in the security unit ‘appalling’”.

What I found most interesting in the article was the response of Citigroup and what its implications might mean for the compliance practitioner, particularly one whose company is under scrutiny for a Foreign Corrupt Practices Act (FCPA) violation by the Department of Justice (DOJ) and Securities and Exchange Commission (SEC). The NYT piece made clear that the Mexico unit is so profitable that it figuratively “mints money” for the company. Moreover, “despite the latest headline-grabbing turmoil at Banamex, Citigroup does not want to cede any ground in Mexico where it dominates a large portion of the retail market.”

What is the responsibility for a US corporate parent when a foreign subsidiary ‘mints money’ for the company? Should the corporate parent pay closer attention to make sure the subsidiary is doing business in compliance with the FCPA and other relevant laws? In the past few posts, I have discussed some of the specific internal controls a compliance practitioner might consider for a company’s international operations. One of the problems Citigroup is facing with the conduct of its Mexico subsidiary is the company’s concern of “lax controls and oversight”. Moreover, there is concern that some part of the ongoing troubles in the Mexico unit relates to its head, Manuel Medina-Mora. Citigroup Chairman Michael O’Neill, was said to have “privately expressed concerns to board members that Mr. Medina-Mora, who is also co-president of the parent company, has not always relayed problems in the region to executives at the bank’s headquarters on Park Avenue, according to the people briefed on the matter. Instead of looping in executives in New York, Mr. Medina-Mora has at times chosen to handle the issues himself.”

How much oversight should a parent corporation have over a subsidiary? At a basic level it would seem that oversight should be enough to prevent and detect illegal conduct. Clearly, a Chief Compliance Officer (CCO) should be considering the entity-wide internal controls for a company. Under the FCPA accounting provisions, issuers can be held liable for the conduct of their foreign subsidiaries, even though the improper conduct occurred outside of the US. The scope of liability is based on the issuer’s incorporation of the subsidiary’s financial statements in its own records and SEC filings.

While a CCO should expect (and the DOJ & SEC for that matter) that internal controls at locations outside the US are of the same effectiveness as internal controls in US business units and at the US corporate office; unfortunately, that might not always be the case. It is often the case that corporate level internal controls are stronger than those in foreign business units. The Citigroup situation with its Mexican subsidiary would seem to be a clear example of the oft-cited reason that many companies were built through acquisitions, resulting in many business units (both in and outside the US) having completely different accounting and internal control systems than US corporate office. There is often a tendency to leave acquired companies in the state in which they were acquired, rather than trying to integrate their controls and conform them to those of current business units. After all, the reason for the acquisition was the profitability of the acquired company and nobody wants to be accused of negatively impacting profitability, especially one that ‘mints money’.

The second example is one a bit closer to home and it is that of the General Motors (GM) legal department. In an article in the Wall Street Journal (WSJ) entitled “GM Says Top Lawyer to Step Down”, John D. Stroll and Joseph B. White, with contributions from Christopher Matthews and Joann S. Lublin, reported that GM General Counsel (GC) Michael Millikin will retire early next year. Millikin was criticized after the GM internal investigation found that he ran the GM legal department in such a hands off manner that he did not know about his legal department’s own settlements for product liability claims involving faulty ignition switches until February of this year. His defense was that his own lawyers “left him in the dark” even though there was evidence that he had been repeatedly warned, “GM could face punitive damage awards related to its failure to address the safety defect.” Missouri Senator Claire McCaskill summed up sentiment about Milliken with her statement “This is either gross negligence or gross incompetence.” In other words if you are a GC or CCO you had better know what is going on in your own department. What would it say about a CCO who did not know that compliance department members were dealing with violations of the FCPA without informing him or her? It would say that the CCO failed to exercise leadership and oversight.

And while you are watching things closely, you may want to check out a clip of Carlton Fisk’s famous homer 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

October 20, 2014

Internal Controls Outside the US – Part IV

NavigatingThis post will conclude a short series I have presented on the issue of internal controls outside the US. I want to conclude by raising some ways in which a compliance professional can work to implement internal controls in a multi-national organization. As with my entire series on internal controls, I rely on internal controls expert Henry Mixon for guidance on this topic. 

Mixon advises that the first step is to convert your company’s Foreign Corrupt Practices Act (FCPA) risks into internal control objectives. The internal control objectives are then given to each business unit with instructions to develop controls, which meet the objectives. This process should allow more of a fine tuning approach within existing systems than the development of specific controls by corporate which all business units must adopt and will give the business unit a sense of buy-in and participation in the process.

Mixon provided an example of how the process might work in the situation where the FCPA risk is that a third party representative may be paid for an invoiced amount before that third party representative has gone through your company’s full third party approval process. Mixon began by noting that your control objective is that internal controls should be in place to ensure that no vendors are added to the vendor master file until the vendor has been approved. If your company has a sophisticated ERP system such as SAP where checks are generated using the vendor master file and signed by the computer, this control objective may be met by adding a field to the vendor master file in which inserts the date the vendor is approved and by programming such a requirement the vendor information cannot be inserted into the check to pay the vendor unless the designated fields are populated. There would also be manual controls over the input of the date to ensure the data is not entered inappropriately. These internal controls would translate into form for changes to the vendor master file which is initiated by the person in charge of vendor due diligence and requires a ‘second set of eyes’ requiring sign off by a second person, such as the controller. Through this mechanism you have created a primary control through your third party approval process and validated that process if a change is made.

What if your location or business unit involved does not have a sophisticated ERP system such as SAP, for instance at another location QuickBooks is used? Mixon suggests that the control objective could be satisfied by using a similar form for changes to the vendor master file combined with the requirement that a report of all changes are printed and submitted to both check signers, along with the applicable approved vendor change request.

One of the banes of any compliance practitioner is the push back they inevitably receive when they attempt to institute something new or different. The same can be true of internal controls. What happens when the compliance function receives push back and will be told the controls are too burdensome and also make operations less efficient? I inquired from Mixon how he might suggest this situation be dealt with going forward. Fortunately for us, this is something that Mixon has observed many times and is very familiar with the issue as many employees see internal controls only as an added burden. Moreover, many business development types will raise the hue and cry that internal controls prevent them from effectively running the business. Finally, there are many groups in any company that may well say that a re-work of internal controls will cost too much money.

One of the areas available to a compliance professional is benchmarking from other company’s compliance experiences. However this can be expanded into solid presentations about why it is important to assess and mitigate FCPA risks using your corporate peers that have been the subject of an FCPA enforcement action. This is some of the best sources of information a compliance practitioner can avail his or herself of to provide good insight into why it was never expected that the company would be subject to FCPA enforcement and insight into the extreme disruption, cost, and anxiety which accompanied the enforcement actions.

Mixon also advises that the premise is that the cost of controls should not exceed the benefits to be obtained, so it really comes down to internally selling a cost benefit analysis. If the selling is done after at least a basic risk analysis, Mixon believes that it should be relatively easy to obtain concurrence that certain risks must be mitigated and that the benefits exceed the expected costs. Furthermore, there are occasions where there are no costs associated with improving controls. A good example is when re-alignment of duties using existing staff achieves an improved set of internal controls. Another example is when manual controls can be converted to electronic controls such that the only cost is the programming and re-training costs.

Another key factor, as with all FCPA compliance initiatives, is ‘Tone at the Top’. This means that you should meet with and present the case for FCPA-focused internal controls to your company’s Executive Leadership Team (ELT), Audit Committee of the Board or other appropriate group of senior executives. The presentation should include, with examples, the importance of identifying and mitigating the FCPA and fraud risks. Some of these might include the following:

  • Illustrating the examples of how the controls can prevent bribery as well as many other types of occupational fraud;
  • Illustrating that the controls needed are all sound business controls, nothing exotic or out of the ordinary;
  • With proper control design, it may be possible to eliminate some existing detect controls in favor of more useful preventive controls or even prescriptive controls;
  • As a result of your business changes and resulting changes in assessed risks, it may be that some procedures now being performed are no longer needed and the resources can be shifted to more necessary controls; and
  • It may be possible to build in more electronic controls, which can replace existing manual controls.

What if your company does an assessment of the internal controls over financial reporting as part of Sarbanes Oxley (SOX) compliance and that the Chief Financial Officer (CFO), or other appropriate corporate officer, annually certifies the internal controls are effective? How should such a situation be dealt with or conversely how might a compliance professional respond? 

Mixon believes that there are two primary reasons why the assessment under SOX is not sufficient for a Compliance Officer’s purposes. One is the scope of the SOX assessment and the second is the design of the SOX assessment. This means that the SOX process addresses only the internal controls over financial reporting, that is, the controls in place to prepare the financial statements for presentation to third parties. That process does not address the risks or the control needs with respect to FCPA. Mixon cited to the example of internal controls over disbursements, which may be evaluated as being effective if there is a three-way match of the approved purchase order, the vendor invoice, and the receiving report. Those controls do not address the risk that an agent may submit an invoice before the agent has been vetted and the invoice will be paid. It also does not address whether the agent’s invoice was reviewed for proper description of business purpose and for being consistent with the approved contract with the agent.

The second primary reason SOX certification of financial internal controls itself is not enough is the design criteria. SOX allows a materiality threshold. This means that operations outside the US may be excluded from scope due to materiality. It may also mean that some functions are operating below the financial internal controls level. Compliance professionals need to continually remind others that there is no materiality requirement in FCPA enforcement.

I hope that you have benefited from these posts on internal controls outside the US. I clearly believe that the price for noncompliance can easily be substantially greater than the cost to assess and implement good internal controls. But good FCPA internal controls are not some standalone protective measure. They can help to make a company run more efficiently as the internal controls that prevent FCPA violations are the same ones that prevent fraud in the workplace. So the presence of good internal controls saves money by preventing fraud. It is a business best practice to prevent fraud, which includes preventing corruption. I have long wondered about Ethisphere and its annual survey of the world’s most ethical companies because they seem to exceed the Standard & Poor’s (S&P) index of average profits and growth. What I have come to believe is that one of the keys ways such companies do seem to have better than average profitability is that they have better internal controls.

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

October 15, 2014

Tommy Lewis, Dicky Maegle and the DOJ Call for Individual Prosecutions

Lewis and off the bench tackleTommy Lewis died this week. For those of you uninitiated in college football, Lewis was an Alabama football player who jumped up off the Alabama bench to tackle Rice University halfback Dicky Maegle, who was scampering untouched down the sideline for a touchdown in the 1954 Cotton Bowl. Lewis’ off the bench tackle led to a flag and the referees’ awarding Maegle a 95-yard touchdown on the play. Why did Lewis do it? As reported in his obituary in the Houston Chronicle, Lewis always maintained he was “too full of Alabama”. Maegle, perhaps more charitably, said, “He was a good guy who got caught up in the moment and the excitement.”

I thought about Maegle and Lewis when I was re-reading and considering the recent remarks of Assistant Attorney General for the Criminal Division Leslie R. Caldwell at the recent Ethics and Compliance Officers Association (ECOA) Conference. As Mike Volkov said in his post on Tuesday, the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) communicate quite clearly what their enforcement priorities are; one does not have to read tea leaves, it is out there in black and white for all to see and hear. Caldwell’s remarks would seem to follow this observation of Volkov.

Caldwell made clear that the DOJ will prosecute individuals for violations of the Foreign Corrupt Practices Act (FCPA). In her remarks she said, “When criminal misconduct is discovered, a critical factor in the department’s prosecutorial decision making is the extent and nature of the company’s cooperation. The department’s Principles of Federal Prosecution of Business Organizations provides that prosecutors should consider “the corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents.””

Recognizing that “Corporations do not act, but for the actions of individuals” Caldwell then laid down some quite strong prescriptions which compliance practitioners need to be cognizant about. Caldwell stated, “Now let me flesh out the often discussed, but sometimes poorly understood, concept of cooperation. Most companies now understand the benefits of voluntarily disclosing the misconduct before we come asking, and the benefits of conducting an internal investigation and providing facts about the misconduct to the government. But companies all too often tout what they view as strong cooperation, while ignoring that prosecutors specifically consider “the company’s willingness to cooperate in the investigation of its agents.””

She went on to add, “In all but a few cases, an individual or group of individuals is responsible for the corporation’s criminal conduct. The prosecution of culpable individuals – including corporate executives – for their criminal wrongdoing continues to be a high priority for the department. For a company to receive full cooperation credit following a self-report, it must root out the misconduct and identify the individuals responsible, even if they are senior executives.”

Fortunately the DOJ is not asking for undercover corporate sting operations because, as Caldwell explained, “We are not asking that you become surrogate FBI agents or prosecutors, or that you use law enforcement tactics like body wires.  And we do not need to hear you say that executive A violated a particular criminal law. All we are saying is that we expect you to provide us with facts. We will take it from there. But a company that interviews its employees in an effort to whitewash the facts or spread the company’s narrative spin risks receiving any cooperation credit.”

This is about as clear a warning as you can expect to receive. But the difficulty it puts company’s in is in regard to their internal investigations. Last week Joel Schectman, writing in the Wall Street Journal (WSJ) article entitled, “Are Internal Bribery Probes Private?”, explored the issue of whether such investigations are privileged, in the context of a current individual FCPA prosecution. In the matter of Joseph Sigelman, the former Chief Executive Officer (CEO) PetroTiger Ltd. Co., Schectman reported that “Prosecutors say the payments of approximately $333,500 to the wife for “consulting services” was actually a bribe to her husband to win a contract for PetroTiger worth around $39.6 million.”

Some or all of the underlying facts were turned over to the DOJ by PetroTiger’s internal investigation. The Defendant Sigelman wants to obtain copies of whatever PetroTiger turned over to the DOJ, arguing that the company waived any claim of attorney/client privilege “when it divulged the investigation’s findings to third parties, including officials of the United States.” The company has refused to hand over its internal investigation to the defendant based on this claim of attorney/client privilege.

What happens if a company, or its law firm gets the investigation wrong and falsely accuses an individual? Should the company be protected? That is the issue currently before the Texas Supreme Court in a libel case styled, Shell v. Writt. It involves our old friend Panalpina Inc. and its customer Royal Dutch Shell. David Smyth, in a post entitled Texas Court of Appeals Has Put Some FCPA Internal Investigations in an Awkward Spot”, said the DOJ contacted Shell about its dealings with Panalpina. Sometime later, “Shell agreed to conduct an internal investigation into its dealings with Panalpina.” Smyth noted that, “Shell submitted an investigative report that pointed the finger at Writt.  Specifically, Shell said Writt had been involved in illegal conduct in a Shell Nigerian project by recommending that Shell reimburse contractor payments he knew to be bribes and failing to report illegal contractor conduct he was aware of.”

Writt sued Shell for libel and Shell defeated Writt at the trial court on the basis that it had an “absolute privilege to say what it did in its investigative report to the DOJ.”

However, a Texas Court of Appeals reversed the trial court ruling holding that absolute privilege does not apply where a party voluntarily turns over information to a prosecutor before a judicial proceeding is initiated or contemplated. As Smyth explained, “In the court’s view, DOJ was acting purely in a prosecutorial and non-judicial capacity.” Shell has appealed this matter to the Texas Supreme Court, which has accepted the case for review.

There are several difficult issues from the facts of this case. Smyth points to one when he ended his piece, “FCPA investigations these days are a different animal, and probably deserving of different treatment by the courts. As of now, a company conducting an internal FCPA investigation in Texas has to ask, what do we do if one of an investigation reveals one of our employees as a bad actor? Do we say as much in the report we turn over to the government, as the government surely expects? If we do, are we signing on for libel litigation by the employee?” But now Caldwell has made clear that the DOJ expects companies to “identify the individuals responsible, even if they are senior executives”. If you are one of the individuals so identified, are you entitled to know what the accusations against you might be? What if the company’s lawyers got it wrong? Should they have a duty?

Moreover, there are a plethora of procedural protections available to criminal defendants not available to civil defendants or even those who are the subject of internal corporate investigations. Should a Miranda warning now be given during internal corporate investigations? Is the right to remain silent and not self-incriminate oneself available in such an investigation? In paper entitled “Navigating Potential Pitfalls in Conducting Internal Investigations: Upjohn Warnings, “Corporate Miranda,” and Beyond” Craig Margolis and Lindsey Vaala, of the law firm Vinson & Elkins LLP, explored the pitfalls faced by counsel, both in-house and outside investigative, and corporations when an employee admits to wrong doing during an internal investigation, where such conduct is reported to the US Government and the employee is thereafter prosecuted criminally under a law such as the FCPA.

Employees who are subject to being interviewed or otherwise required to cooperate in an internal investigation may find themselves on the sharp horns of a dilemma requiring either (1) cooperating with the internal investigation or (2) losing their jobs for failure to cooperate by providing documents, testimony or other evidence. Many US businesses mandate full employee cooperation with internal investigations or those handled by outside counsel on behalf of a corporation. These requirements can exert a coercive force, “often inducing employees to act contrary to their personal legal interests in favor of candidly disclosing wrongdoing to corporate counsel.”  Moreover, such a corporate policy may permit a company to claim to the US government a spirit of cooperation in the hopes of avoiding prosecution in “addition to increasing the chances of learning meaningful information.”

Where the US Government compels such testimony, through the mechanism of inducing a corporation to coerce its employees into cooperating with an internal investigation, by threatening job loss or other economic penalty, the in-house counsel’s actions may raise Fifth Amendment due process and voluntariness concerns because the underlying compulsion was brought on by a state actor, namely the US Government. Margolis and Vaala note that by utilizing corporate counsel and pressuring corporations to cooperate, the US Government is sometimes able to achieve indirectly what it would not be able to achieve on its own – inducing employees to waive their Fifth Amendment right against self-incrimination and minimizing the effectiveness of defense counsel’s assistance.

All of the above would seem to make clear the need for company’s to get their internal investigations done right. If you are going to receive credit from the DOJ going forward, your investigations must be done thoroughly, in a timely manner and provide to the DOJ the information that Caldwell has laid out that they want. At least currently in Texas, a company has to get it right or risk being sued if they mis-identify a potential criminal actor.

Tommy Lewis and Dicky Maegle? Lewis made a mistake, probably carried away in the heat of the moment. What did Maegle have to say about him on the occasion of his death? “He was very remorseful, and I thought he was sincere. I liked him. We became friends.” Let’s hope your employees still like your company at the end of an internal investigation.

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

 

 

October 13, 2014

Ringo, Sir Paul and an Effective Compliance Program

Paul McCartneySometimes the universe converges in ways that are beyond my simple comprehension. This past weekend was one of them. It began a few months ago when I saw an advertisement from StubHub that showed Ringo Starr playing in Houston on October 10 and Sir Paul McCartney playing in New Orleans on October 11. I figured if the two surviving members of the greatest rock and roll band in the history of the world were going to play on two consecutive nights it was a sure sign from the Oracle of Rock ‘N Roll that I was intended to attend both, lest I tempt a fate worse than going against an entity nearly as powerful as the Oracle of Delphi. Moreover, the Friday concert coincided with the birthday of my little sister who happened to be in town and one of the planets biggest Beatles fans, it made the convergence complete. Ringo Starr

I also learned two completely new and unrelated facts this weekend. The first is that a native of Liverpool, England, is called a ‘Scouser’. That comes from my Liverpudlian friend Pam, who also introduced me to the Liverpool Football Club. The second is that my wife is a closet Mr. Mister uber fan, who rocked out as a teenager to this group in the early days of MTV. On reflection that is perhaps the more odder convergence.

While there is clearly a reason Ringo Starr tours with true musical all-stars and Sir Paul McCartney has been raised to the peerage for his musical prowess, in many ways the Ringo Starr concert was the bigger revelation. I had wondered how Ringo would fill out an entire concert. He did it by surrounding himself with musicians fabulous in their own right. They included: Steve Lukather, former lead singer from Toto on vocals, lead and rhythm guitar; Gregg Rolie, former keyboardist from Santana and Journey on vocals, organ, keyboards; Richard Page, former lead singer from Mr. Mister, on vocals and bass guitar; and finally, best and certainly not least, Todd Rundgren on vocals, lead and rhythm guitar, bass guitar, percussion, harmonica and, occasionally, even keyboards.

So in addition to Ringo singing his standards of Photograph, It Don’t Come Easy, Yellow Submarine and (of course) With a Little Help From My Friends. We also got to hear songs first released by Santana, Toto, Mr. Mister and some great Todd Rundgren hits. The group clearly loved playing and jamming with each other. Further, these other groups’ songs were great fun to hear and as they may never reform, I would not otherwise have the chance to hear them performed lived.

Sir Paul McCartney. You really do not have to say much more. His concert did not exceed my expectations because they were about as high as expectations could have been. He seriously rocked out for over three hours, playing everything from the earliest Beatles songs up to a ballad for his latest wife. I cannot remember ever attending a concert where everyone one in attendance knew the words to every song but we all did and we all sung them all the way through the entire show.

What is the compliance angle to all of this? Just as there is more than one way to put on a great concert, there is more than one way to have an effective compliance program. This continual message from the Department of Justice (DOJ) came again earlier this month through remarks by Assistant Attorney General for the Criminal Division, Leslie R. Caldwell, at the 22nd Annual Ethics and Compliance Conference, where she made clear that while the FCPA Ten Hallmarks of an Effective Compliance Program is one set of guidelines for an effective compliance program, there is no “one-size fits all” compliance program. She laid out another way to think through, review and analyze your compliance program. 

  1. High-level commitment. A company must ensure that its directors and senior management provide strong, explicit, and visible commitment to its corporate compliance policy. Stated differently, and again, “tone from the top.”
  1. Written Policies. A company should have a clearly articulated and visible corporate compliance policy memorialized in a written compliance code. Again, employees need to know what to do–or not do–when faced with a tough judgment call involving business ethics. Companies need to make that as easy as possible for their employees.
  1. Periodic Risk-Based Review. A company should periodically evaluate these compliance codes on the basis of a risk assessment addressing the individual circumstances of the company. Companies change over time through natural growth, mergers, and acquisitions.
  1. Proper Oversight and Independence. A company should assign responsibility to senior executives for the implementation and oversight of the compliance program. Those executives should have the authority to report directly to independent monitoring bodies, including internal audit and the Board of Directors, and should have autonomy from management. Compliance programs needed to be funded; they need to have resources. And they need to have teeth and respect within the company.
  1. Training and Guidance. A company should implement mechanisms designed to ensure that its compliance code is effectively communicated to all directors, officers, employees. This means repeated communication, frequent and effective training, and an ability to provide guidance when issues arise.
  1. Internal Reporting. A company should have an effective system for confidential, internal reporting of compliance violations. I know that many companies have multiple mechanisms, which is good.
  1. Investigation. A company should establish an effective process with sufficient resources for responding to, investigating, and documenting allegations of violations. What this means on the ground will depend on the company. A sophisticated multi-national corporation obviously will be expected to have more resources devoted to compliance than a small regional company.
  1. Enforcement and Discipline. A company should implement mechanisms designed to enforce its compliance code, including appropriately incentivizing compliance and disciplining violations. Further, the response to a violation must be even-handed. People watch what people do much more carefully than what they say. When it comes to compliance, you must both say and do.
  1. Third-Party Relationships. A company should institute compliance requirements pertaining to the oversight of all agents and business partners. This cannot be emphasized strongly enough.
  2. Monitoring and Testing. A company should conduct periodic reviews and testing of its compliance code to improve its effectiveness in preventing and detecting violations. Kick the tires regularly. As I said, compliance programs must evolve with changes in the law, business practices, technology and culture.

Caldwell also emphasized that as important as the compliance program itself; the implementation is also reviewed and evaluated by the DOJ. When the DOJ investigates a case, they look at the messages about compliance that are given to employees; they look at what employees are told in their day-to-day work. This means the DOJ will look at emails, chats, and recorded phone calls. They will interview witnesses about the messages they received from their supervisors and management to determine if they received messages about compliance, or about making money at all costs.

Another consideration for the DOJ is incentives. The DOJ will examine the incentives that a company provides to encourage compliant behavior – or not. This means that if a company is actually encouraging compliance, if its values are to be ethical and within the law, this message must be conveyed to employees in a meaningful way. If not, it is likely that the DOJ will not view the compliance program as credible. Interestingly, Caldwell said that sometimes the effective implementation of a compliance program means standing apart from the other companies in your industry.

Just as Ringo and Sir Paul ably demonstrated, there is more than one way to put on a great concert. They both assessed their strengths and weaknesses and used that information to put great bands around them illustrated their strengths. The same is true in the world of Foreign Corrupt Practices Act (FCPA) compliance. The key is to review and assess your compliance risks and then manage them. And, as always, Document, Document, and Document whatever you do so that if a regulator comes knocking, you can demonstrate evidence of the above.

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

 

 

 

October 10, 2014

The Horror of Dracula and Internal Controls in International Locations, Part I

Christopher Lee as DraculaThis Friday we celebrate the second in the Hammer Films horror series, which was actually its first offering, based on Count Dracula, entitled “Horror of Dracula”. It starred the famous Hammer Films horror movie two-some of Peter Cushing as Professor Van Helsing and Christopher Lee as Count Dracula. If you have grown up on the classic Universal monster films, the first thing that strikes you about the Hammer Films is the glorious technical color production. The second thing is the focus on gore. Horror of Dracula, with its emphasis on blood is particularly focused. Nevertheless, the productions are first rate and with Cushing and Lee bringing some gravitas to the cast, the movie certainly holds up. One of the biggest changes from Bram Stoker’s novel and the Universal movie version starring Bela Lugosi, is the location change from England to Transylvania for the confrontation between Professor Van Helsing and Dracula. In other words, they were on Dracula’s home turf; not in England on Professor Van Helsing’s home ground.

As the Foreign Corrupt Practices Act (FCPA) deals largely with conduct outside the US, today, I will begin a multi-part series on internal controls at locations outside the US. Part I will focus on how to think through the issues of internal controls outside the US and why your company’s internal controls might require changes for different countries across the globe. In Part II, I will review how to determine the risk in a geographic region outside the US, through a Location Risk Assessment and for Part III, I will close with how a compliance practitioner should use a Location Risk Assessment.

Clearly, a Chief Compliance Officer (CCO) should be considering the entity-wide internal controls for a company. Under the FCPA accounting provisions, issuers can be held liable for the conduct of their foreign subsidiaries, even though the improper conduct occurred outside of the US. The scope of liability is based on the issuer’s incorporation of the subsidiary’s financial statements in its own records and Securities and Exchange Commission (SEC) filings. So, as with the use of third party distributors to sell product, FCPA enforcement looks past the structure of the transaction and makes enforcement decisions based upon the substance. Once again I visited with internal controls expert Henry Mixon to discuss these issues.

While a CCO should expect (or at least hope) that internal controls at locations outside the US are of the same effectiveness as internal controls within US business units and at the US corporate office; unfortunately, that might not always be the case. It is often the case that corporate level internal controls are stronger than those in foreign business units. Mixon indicated that there may well be several reasons for this. First, the company’s Chief Financial Officer (CFO) may be paying closer attention to the corporate level internal controls, with the idea that the corporate level internal controls are the final “filter” to detect issues. This follows partly from the focus in most companies on the controls over financial reporting, which does not include all controls needed for FCPA compliance. A second reason is that many companies were built through acquisitions, resulting in many business units (both in and outside the US) having completely different accounting and internal control systems than the corporate office. There is often a tendency to leave acquired companies in the state in which they were acquired, rather than trying to integrate their controls and conform them to those of current business units. After all, the reason for the acquisition was the profitability of the acquired company and nobody wants to be accused of negatively impacting profitability.

A third situation may exist at locations outside the US that began simply as a sales office. Then the location gradually expanded its scope of operations to become a full scope business unit with its own accounting and data processing functions. Unfortunately, it is not often the situation in which there was a master plan for internal controls as the location’s scope grew. Often processes were added internally and were usually designed by the local personnel that in practice meant the Country Manager had total control over financial affairs and was not really accountable to the Corporate Office. This can be particularly true as long as a country business unit’s profits continue. In such situations, there will rarely be any focus on effective preventive internal controls for FCPA risk.

The next area for inquiry is where should a CCO begin in any of the above scenarios? Mixon believes that the initial first step is to determine the extent of centralization or decentralization of relevant processes or put another way, to what extent are relevant processes performed at the corporate offices? In some companies it is common, for example, to have all vendor invoices paid from the corporate office. In other companies, the corporate accounting function only aggregates information received from business unit accounting departments. This translates into a varying analysis of risk regarding locations outside the US, depending on the degree of accounting decentralization. A good starting point is to determine the extent to which the financial statements of business units outside the US are reviewed and analyzed by the corporate accounting function. This will give good insight into whether the corporate accounting function provides an element of internal control or merely serves as a data aggregator.

The first step for the CCO is to determine the possible universe of risks and to assess the risks to result in a priority of how attention will be focused. One useful approach advocated by Mixon is the Location Risk Assessment (LRA), whose purpose is to capture in one place each location outside the US where your company conducts business and to assess the compliance risks posed by the nature of operations at each location. Once the risks at each location have been properly categorized, you can then prioritize your approach to dealing with the risks.

For your weekend viewing, I would suggest you kick your feet up and look forward to some good, old-fashioned 1950s flavored gore found in the Horror of Dracula. If your temporal compliance matters need your attention, you can look forward to Part II next week, in which I will discuss how a compliance practitioner should perform a Local Risk Assessment.

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

October 8, 2014

GSK as a Watershed in the International Fight Against Bribery and Corruption

Lifting WeightsGlaxoSmithKline PLC (GSK) may well be a watershed in the global fight against bribery and corruption. Behavior and conduct, which was illegal under Chinese law but previously tolerated and even accepted by Chinese government officials, quickly became a quagmire that the company was caught in when charges of corruption were leveled against them last year. Many westerners were skeptical about the claims made against GSK and its head of China operations, Mark Reilly. That is one of the problems in paying bribes to government officials; it is always illegal under domestic law. David Pilling, writing an article in the Financial Times (FT) entitled “Why corruption is a messy business”, said “Multinationals are discovering that there is only one thing worse than operating in a country where corruption is rampant: operating in one where corruption was once rampant – but is no longer tolerated.”

When it began, it was not it clear why China’s Communist Party Chief Xi Jinping began his anti-corruption push. Some speculated that it was an attack on western companies for more political reasons that economic reasons. Others took the opposite tack that the storm, which broke with the bribery and corruption investigation of GSK, was China’s attack on western companies to either hide or help fix problems endemic to the Chinese economic system. My take is that his campaign has a different purpose but incorporates both political and economic reasons. That purpose is that Xi has recognized something that the US government officials and most particularly the Department of Justice (DOJ) have been preaching for some time. That is, the insidiousness of corruption and its negative effects on an economic system.

Xi and China have realized that corruption is a drain on the Chinese economic system. Publications as diverse as the Brookings Institute to the Wall Street Journal (WSJ) have noted that one of the reasons for the anti-corruption campaign is to restore the Chinese public’s faith in the ruling Communist Party. Bob Ward, writing in the WSJ article entitled “The Risks in China’s Push to Root Out Wrong”, said, “China’s anticorruption drive began in late 2012 as a way to cleanse the ruling Communist Party and convince ordinary Chinese that the system isn’t rigged against them. Investigators are targeting some of China’s most powerful officials and disciplining tens of thousands of lower-echelon officials who party investigators contend got used to padding their salaries.” Cheng Li and Ryan McElveen, writing online for Brookings, in an article entitled “Debunking Misconceptions About Xi Jinping’s Anti-Corruption Campaign”, wrote, “If there were ever any doubts that Xi could restore faith in a party that had lost trust among the Chinese public, many of those doubts have been dispelled by the steady drumbeat of dismissals of high-ranking officials since he took office.”

But the economic reasons behind the anti-corruption campaign are equally important. One of the more interesting articulations came from one disgraced former Chinese government official, who was one of the earliest senior officials to be charged with corruption. In a WSJ article by James T. Areddy, entitled “Chinese Ex-Official Admits to Corruption”, he wrote about the trial of Liu Tienan, the “former head of the National Energy Administration and senior director in the National Development Reform Commission” who had been arrested in May 2013. His trial finally came around in September 2014. At his trial he made some rather extraordinary statements. Areddy wrote that “Liu testified that reducing official power is key to curbing corruption: “The major point, which is based on my own experience, is to give the market a great deal of power to make decisions.”” But Liu did not end there, “as he explained his view that China’s state bureaucracies are too powerful and entrepreneurs are too weak. “Approvals should be developed in a system, rather by an individual’s actions. This would help prevent abuse of power for personal self-interest.””

Whether or not Liu thought those statements up on himself, a smart defense lawyer suggested he make them to reduce his sentence, or the Chinese government told him to say it as his role in the well-known show trials of the Chinese justice system; it really does not matter. That is one of the most incredible statements I have ever heard of coming out of anything close to an official Chinese statement or proceeding. Think about it; first Liu is saying that the Adam Smith’s ‘invisible hand’ of the market should be governing market decisions. Next, he speaks against the arbitrary nature in China for entrepreneurs in giving approval about how businesses can expand and grow in China. This arbitrary process should be replaced with objective criteria. It is almost if Lui is channeling his inner FCPA Professor when he speaks against artificial barriers to market entry. Finally, Liu attacks the small-mindedness of bureaucratic mentality in their use of power for self-interest.

There have already been demonstrated economic benefits to China’s anti-corruption campaign. In September, Bloomberg reported that China’s fight against bribery and corruption could boost economic growth, generating an additional $70 billion for the budget, in summarizing economists’ forecasts. An article in the online publication Position and Promotions, reported that the bribery “could trigger a 0.1-0.5 percent increase in the world’s second-biggest economy, equivalent to $70 billion dollars.” This crackdown should also be welcomed by western companies, as “it could also benefit foreign companies operating on the Chinese market, who have experienced the negative effects of the omnipresent palm-greasing, according to Joerg Wuttke, president of European Chamber of Commerce in China.” He was further quoted as saying, “It takes the stress away. You’re not afraid that somebody gets an order because he found a better champagne or something like that. It’s not Singapore yet, but it’s a very positive development”.

As we close this phase of GSK’s saga, I think some time for reflection is appropriate. For the compliance practitioner there have been many specific lessons to be learned from GSK’s missteps. However I think the clearest lesson is that the only real hope that a company has into today’s world is an effective, best practices anti-corruption compliance program. Whether it is designed to help a company comply with the Foreign Corrupt Practices Act (FCPA), UK Bribery Act or other anti-corruption legislation, it really does not matter. It is the only, and I mean only, chance your company will have when an issue in some far-flung part of the world splashes your company’s name across the world’s press.

But there may also be cause for celebration to those who have long preached against the evils of corruption, whether it is for economic reasons or for those who view the fight against anti-corruption as a part of the fight against terrorism. For if China is attacking domestic corruption, I believe that will lead other countries to do so as well. We are already seeing stirrings in India under new President Modi. So while GSK may well suffer going forward, the fight against global bribery and corruption may just have moved a few feet 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

October 7, 2014

The Positive Effects of DPAs and NPAs in FCPA Enforcement

JusticeOne of the oft-made criticisms regarding the Department of Justice (DOJ) around its enforcement of the Foreign Corrupt Practices Act (FCPA) is its the use of Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs) somehow pervert the course of justice. Some of the criticisms include: DPAs and NPAs are either too harsh or too lenient; DPAs and NPAs let corporations off too easily or they are too unfair to corporations; DPAs and NPAs are inherently unfair as they give the DOJ too much leverage in any negotiation or that the DOJ uses them as a way to simply seek bigger fines and to not go after the real culprits, i.e. rogue employees; the fines levied under DPAs and NPAs are too great or too small, but whichever it is, there is not appropriate judicial oversight; and my personal favorite, the DOJ needs to ‘trial-lawyer up’ and go to trial against big bad corporations which violate the FCPA to really show ‘em they mean business.

Speaking from the perspective of a former in-house type, I have argued that corporations desire DPAs and NPAs because they bring certainty. Not only in ending an enforcement action but also in knowing your obligations going forward; and they bring certainty in setting the fines and penalties to be paid for a FCPA violation. And, of course, if you enter into a DPA or NPA you bring your corporate client the certainty that you will not ‘Arthur Anderson’ your organization out of existence.

However there are other reasons why the use of DPAs and NPAs has been positive and that is the effect on companies. In a recent paper, entitled, “The Effect of Deferred and Non-Prosecution Agreements on Corporate Governance: Evidence from 1993-2013 ”, authors Wulf A. Kaal and Timothy Lacine looked precisely at that issue. In an exhaustive study they reviewed all publicly available DPAs and NPAs from 1993 to 2013. The authors found that in a wide variety of categories 97.41% of the publicly available DPAs and NPAs “mandated substantive governance improvements” in the corporations that entered into them. Any time you have 97% improvement in anything, I would say someone must have been doing something right, somewhere, somehow. From the thesis of their article, it would appear that what the DOJ is doing right is using DPAs and NPAs to positively impact corporate governance.

What were some of the changes brought about through the use of DPAs and NPAs? In the area of Board governance there were provisions including mandating changes requiring additional reporting obligations for the Board; required changes to existing Board committee structure of the entity, often creating new board committees. Other changes included increased Board monitoring obligations, the addition of independent director(s) and changes pertaining to management of the entity. In addition to more Board involvement, under a number of DPAs and NPAs, a settling company’s senior management was required to provide additional oversight and involvement with the compliance function. Similarly monitoring obligations have generally increased with many DPAs and NPAs containing specific provisions that related to ongoing monitoring requirements.

Both the Chief Compliance Officer (CCO) position and the compliance function were significantly impacted by many of the DPAs and NPAs. Many contained provisions relating to a new, improved or expanded compliance program. Additionally, many DPAs and NPAs contained provisions pertaining to improved compliance communications and training requirements in the compliance function. Internal controls and required improvements pertaining to books and records were also noted. Of course, if a company did not have a Code of Conduct or CCO, they were required.

The authors have also identified additional and continuing oversight factors. They note that DOJ “involvement suggest that prosecutors can promote an ethical corporate culture through enhanced compliance measures in N/DPAs. Under this theory, the DOJ’s expansionary tendencies in N/DPAs are a mere extension of legally mandated compliance requirements. In fact, corporate governance of the respective entity plays a major role in federal prosecutors’ charging decisions. The increased role of independent private sector oversight may help address the increased complexity of corporate crime and dwindling public funds. Given their education and experience as well as their ability to fill a void left by the system, prosecutors may be uniquely qualified to institute corporate governance changes.”

I think this ongoing DOJ oversight is not to be underestimated as a positive effect for compliance. Clearly if an external monitor is required there will be at least annual reporting to the DOJ on the company’s implementation of the terms and conditions of its settlement. But even if the DOJ does not require an external monitor there is always a requirement that the settling company report to the DOJ on the extent of its compliance efforts. The best practice would suggest that an independent third party make this assessment but even if it is not accomplished in such a manner, there is still DOJ oversight.

While the DOJ has pronounced that they are not involved in industry sweeps, the reality is that some industries have been hit with more FCPA enforcement actions than others. If there are a large number of FCPA settlements using DPAs and NPAs in one industry, it can have the effect of increasing both the knowledge of compliance and sophistication of compliance programs within that industry. I have personally witnessed this in the energy industry in Houston where compliance is now driven as a business solution to the legal problem of FCPA compliance. Scott Killingsworth calls this Private-to-Private compliance solutions. I call it business solutions to legal problems. Whatever you might wish to name it, these FCPA enforcement actions have increased the prevalence of compliance programs in the energy industry.

The authors also believe that through the use of DPAs and NPAs, the DOJ is better able to communicate its expectations of what it expects in the way of a best practices compliance program. They state that Boards, “management and corporate counsel may see these preexisting measures as a roadmap for preparing for future investigations and handling the eventual investigation.”

Finally, the authors provide a very interesting insight as to the power of DPAs and NPAs, which is not often discussed in the FCPA context. They contend that use of DPAs and NPAs, as corporate governance tools, “may be preferable to changes to federal law.” They explain, “Compared with more meaningful congressional governance reform, N/DPA-related governance reform is relatively “cheap” for corporations because comparatively few board and management positions are adversely affected. Furthermore, N/DPA-related governance reform is a measure supported by most corporate insiders as it is seen as beneficial for investors. Until regulators belatedly realize the threat posed by particular industry practices, as identified in N/DPAs, and consider acting upon it, N/DPA-related governance reform is entity specific and increases the availability of relevant, decentralized, and institution specific information for regulatory action. Preemptive remedial measures preceding the execution of N/DPAs and associated N/DPA feedback effects can create the framework for anticipatory dynamic regulation as a regulatory supplement.”

This last concept speaks to the transactional cost of changing not only laws surrounding corporate governance but the reform of a corporation for itself. The key stakeholder unit of investors certainly profits by having more and better corporate governance, as does the corporation itself. I found the authors’ work to be a welcome addition to the ongoing debate on DPAs and NPAs.

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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