DPAs and NPAs – Useful Tools to Achieve Compliance

The debate on whether the use of Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs) has become lively again over the past couple of weeks. Last week, there was a panel hosted by the Corporate Crime Reporter conference at the National Press Club. The panel was moderated by Steven Fagell, a partner at Covington & Burling LLP, and the panelists included Denis McInerney, the Criminal Division’s Deputy Assistant Attorney General, David Uhlmann, the former chief of the Environmental Crimes Section at the Department of Justice (DOJ), and currently a Professor of Law at the University of Michigan, the FCPA Professor, Michael Koehler, Kathleen Harris, a partner at Arnold & Porter LLP in London, and Anthony Barkow, a partner at Jenner & Block in New York.

The FCPA Professor wrote about the conference in two posts this week. The second post, entitled “Seeing the Light from the ‘Dark Ages’”, reported on the panel discussion. In this post, the Professor flatly says that DPAs and NPAs should be abolished in the context of Foreign Corrupt Practices Act (FCPA) enforcement and that a compliance defense should be added to the FCPA. In the other corner stands Mike Volkov, who said in a recent post, entitled “The Continuing Controversy Over DPAs and NPAs”, that DPAs and NPAs are part of the growing arsenal of prosecutorial tools that can be brought to bear by the DOJ and now the Securities and Exchange Commission (SEC).

The Professor previously articulated his views against DPAs and NPAs last fall in a post entitled “Assistant Attorney General Breuer’s Unconvincing Defense Of DPAs / NPAs”. In that post he said that the “use of NPAs or DPAs allow “under-prosecution” of egregious instance of corporate conduct while at the same time facilitate the “over-prosecution” of business conduct.” The ‘under-prosecution’ comes “because they [DPAs and NPAs] do not result in any actual charges filed against a company, and thus do not require the company to plead to any charges, allow egregious instances of corporate conduct to be resolved too lightly without adequate sanctions and without achieving maximum deterrence.” The ‘over-prosecution’ comes “because of the “carrots” and “sticks’ relevant to resolving a DOJ enforcement action often nudge companies to agree to these vehicles for reasons of risk-aversion and efficiency and not necessarily because the conduct at issue actually violates the law.” Volkov, being a former prosecutor, says that “Prosecutors like to have a variety of tools. An up or down decision system – indict or decline to indict – does not give prosecutors any ability to address the hard cases, where they are more inclined to decline prosecution rather than indict.”

However, I am neither a former prosecutor, like Volkov, nor a former white collar defense lawyer, like the Professor. I am a recovering trial lawyer who then went in-house. From this background I think that there is another line of reasoning as to why DPAs and NPAs are useful FCPA compliance enforcement tools and that line of reasoning is certainty. The primary reason for the prosecution and a company entering into a DPA/NPA is certainty. The one thing I learned in almost 20 years of trying cases is that nothing is certain when you leave the final decision to an ultimate trier of fact who is not yourself, whether that trier of fact be a jury, judge or arbitrator. The most important thing for a company is certainty and that is even more paramount when a potential criminal conviction looms over its corporate head. Certainty is equally critical for the prosecution. No matter how ‘slam dunk’ the facts are, or appear to be, once a prosecutor turns over the final decision in a case to another trier of fact; the prosecution has lost certainty in the final decision. Every corporate defendant who goes to trial can and should raise all procedural and factual defenses available to it. No prosecutor can ever be 100% certain that it will win every court ruling or that a guilty conviction will be upheld on appeal. However, a DPA/NPA can bring certainty. For a company, certainty in its rights and obligations, for the prosecution the same is true.

There was another article which considered the panel discussion held at the Corporate Crime Reporter conference entitled “McInerney Defends Deferred and Non Prosecution Agreements”. This article included quotes from David Uhlmann, who said that he believes, “This is about a profound ambivalence in parts of the Department about the very notion of corporate criminality.” Uhlmann believes that it this ambivalence which has driven the use of DPAs. He believes that the DOJ should make an “up or down” decision on whether a corporation should be prosecuted or not. He was quoted as saying “There is no more important role that the Justice Department plays than its role investigating and prosecuting crime. And if the Justice Department believes that a particular case warrants criminal prosecution, it should bring criminal charges. It should not sacrifice criminal prosecution to a private agreement never entered in court, never overseen by a judge in any meaningful way that doesn’t involve any public hearing, that doesn’t involve any corporate officials coming into the courtroom admitting guilt. On the other hand, if the Justice Department doesn’t believe that a criminal prosecution is necessary or warranted, then they should decline. They should decline prosecution in favor of — in most cases they have the option of civil or administrative enforcement.”

The Professor had a slightly different take on the use of DPAs in the context of criminal prosecutions of corporations. He was quoted as saying, “The Department has become so uncomfortable with the traditional notions of corporate criminal liability that they have constructed and indeed championed this alternative reality that is equally problematic.” Further, “These resolutions have had a troubling, distortive and toxic effect on this one area of law,” Koehler concluded. “There is no judicial scrutiny of most fcpa enforcement theories.” And, lastly, “Of course, the Justice Department is in favor of these because it makes their job easier. Of course, the FCPA bar and FCPA Inc. is in favor of these it expands the market for legal services.”

Criminal Division Deputy Assistant Attorney General McInerney made clear that he is not ambivalent at all about corporate criminal liability and specifically stated this. So let me speak from the perspective of a lawyer from Houston, who has represented companies in the energy space for quite some time. The frustration that boiled over from the lack of prosecutions regarding the financial troubles of the recent years should not obscure the fact that the DOJ has and will continue to pursue criminal cases against corporations.

But to paraphrase Joe Jackson, something else is going on ‘round here with prosecutions of corporate criminal conduct and the use of DPAs/NPAs. While one role of the DOJ is to prosecute law breakers; I believe that another role of the DOJ is to increase and encourage compliance with laws. The DPA/NPA debate does not stand in a vacuum. I believe that by offering incentives for companies to self-disclose and cooperate, the DOJ is increasing compliance with the FCPA. If there is no incentive to cooperate, there will be none. Period. If a company will face a criminal indictment or charge if it investigates a matter and self-discloses to the DOJ, how many companies will do so? McInerney was quoted as saying, “You are disincentivizing companies in terms of doing the right thing. You are not crediting companies for doing the right thing.”

Now let me take the flip side; Arthur Anderson. For all the howls that there is no empirical evidence that indicting and convicting companies puts them out of business; I am certainly not persuaded. I saw it happen, here in Houston. Was it in the interest of the US government to put Arthur Anderson out of business? Did it further the policies of this country to go from the Big Four to the Big Three? What about all the Arthur Anderson employees who did not work on the Enron account, what policy did it further to have them lose everything they invested in their professional life? If DPAs/NPAs are less draconian in their effect than destruction of a corporation’s existence, does that make them somehow less useful? If the DOJ wants to put such a factor into their decision making, I find that to be an appropriate calculus.

As to the charge that the FCPA Bar/FCPA Inc. used DPAs/NPAs to expand their market for work? [Full disclosure - I am a member of the FCPA Bar and ergo, FCPA Inc.] I think that it is the job of a lawyer to advise his or her clients on their legal obligations and to assist in fulfilling those obligations. Is it in my own myopic self-interest to advocate compliance with the FCPA? Or am I a part of the FCPA Bar and Inc. which assists companies to comply with a now 35 year old law? Whichever answer you prefer, I believe that there is more compliance now and that the use of DPAs/NPAs is a contributing factor to this increased compliance.

Another panelist, Anthony Barkow posited yet another angle. He said “one the primary policy justifications — or certainly a significant policy justification — is — getting DPAs and NPAs is easy. “It’s a lot easier than charging a company,”” Barkow said. “And it’s a lot easier than charging it and to try to get a plea.” While I do not pretend to know the intricacies of obtaining an indictment or going before a grand jury, it is always easier to settle something rather than try a case. But that does not mean any less work goes on, either from the corporate side or especially from the government side. FCPA enforcement actions are huge, document intensive cases and from what little I know of the process, the DOJ works quite hard to craft an appropriate resolution for each case. Further, there are multiple levels of review in the DOJ so many sets of eyes look at these matters. So while it may be easier to reach a resolution rather than charging and criminally trying a corporation, that does not mean in any way, shape or form that this work is easy. The work is hard, time intensive and takes literally thousands of man-hours by all parties involved to reach any resolution. Simply because a new enforcement tool is available, which is short of a criminal indictment and trial, does not mean that it is not a useful tool and should not be used.

Mike Volkov ended his post with the following, “The debate will continue – I have no doubt of that.” I would certainly second that notion. But from where I sit the use of DPAs/NPAs has improved compliance with the FCPA because their use has given corporations a real incentive to thoroughly investigate allegations of bribery and corruption and then work with the government to appropriately remediate the situation.

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, 2013

FCPA Prosecutions Against Individuals? Check Out April

One of the oft-heard criticisms of the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) is the lack of individual prosecutions under the Foreign Corrupt Practices Act (FCPA). That may well be on its way to changing as April 2013 may become known as “FCPA Individuals Month” for the charges and enforcement actions brought against various individuals for FCPA violations. The DOJ and SEC used several different types of enforcement actions, both criminal and civil, against a variety of individuals over the past month.

I.                   BizJet

One group of charges was the four enforcement actions involving individuals concerning BizJet. The lineup of those three BizJet executives and one employee involved in these enforcement actions is as follows:

1. Bernd Kowalewski – President and Chief Executive Officer (CEO);
2. Peter DuBois – Vice President of Sales and Marketing;
3. Neal Uhl – Vice President of Finance; and
4. Jald Jensen – Regional Sales Manager

Defendants DuBois and Uhl pled guilty in January, 2012 and had their pleas unsealed on April 5, 2013. Defendants Kowalewski and Jensen were charged by Criminal Indictment, also in January, 2012, but are still at large today. The DOJ Press Release states that “The two remaining defendants are believed to remain abroad.” The bribes were characterized as “commission payments” and “referral fees” on the company’s books and records. Payments were made from both international and company bank accounts here in the United States. In other words, this was as clear a case of a pattern and practice of bribery, authorized by the highest levels of the company, paid through US banks and attempts to hide all of the above by mis-characterizing them in the company’s books and records.

II.                Alstom

Two individuals from the company later identified as Alstom were charged or had their charges made public in April. According to a DOJ Press Release dated April 16, 2013, “Frederic Pierucci, 45, a current company executive [of Alstom] who previously held the position of vice president of global sales for the Connecticut-based U.S. subsidiary, was charged in an indictment unsealed yesterday in the District of Connecticut with conspiring to violate the Foreign Corrupt Practices Act (FCPA) and to launder money, as well as substantive charges of violating the FCPA and money laundering.” Pierucci was arrested. A former Alstom executive, “David Rothschild, 67, of Massachusetts, a former vice president of sales for the Connecticut-based U.S. subsidiary, pleaded guilty on Nov. 2, 2012, to a criminal information charging one count of conspiracy to violate the FCPA.”

In a post by the FCPA Professor, entitled “Current And Former Alstom Employees Charged In Connection With Payments In Indonesia”, he stated the two were involved with the following: “The conduct at issue concerned the Tarahan coal-fired steam power plant project in Indonesia.” Both were charged around the same set of facts. Pierucci and Rothschild, together with others, paid bribes to officials in Indonesia, including a member of Indonesian Parliament and high-ranking members of Perusahaan Listrik Negara (PLN), the state-owned and state-controlled electricity company, in exchange for those officials’ assistance in securing a contract for the company to provide power-related services for the citizens of Indonesia, known as the Tarahan project. The charges allege that, in order to conceal the bribes, the defendants retained two consultants purportedly to provide legitimate consulting services on behalf of the power company and its subsidiaries in connection with the Tarahan project. In reality, however, the primary purpose for hiring the consultants was allegedly to use the consultants to pay bribes to Indonesian officials.

The Pierucci Indictment specified the following Counts for violations of the FCPA involving the first consultant.

Count	Date	Means and Instrumentalities of Interstate and International Commerce
Two	11/16/2005	Wire transfer in the amount of $200,064 from Power Company’s Connecticut bank account to Consultant A’s bank account in Maryland for the purpose of bribing Official 1.
Three	1/4/2006	Wire transfer in the amount of $200,064 from Power Company’s Connecticut bank account to Consultant A’s bank account in Maryland for the purpose of bribing Official 1.
Four	3/7/2007	Wire transfer in the amount of $200,064 from Power Company’s Connecticut bank account to Consultant A’s bank account in Maryland for the purpose of bribing Official 1.
Five	10/5/2009	Wire transfer in the amount of $66,688 from Power Company’s Connecticut bank account to Consultant A’s bank account in Maryland for the purpose of bribing Official 1.

III.             Frederic Cilnis

In a blog post, entitled “The Danger of FCPA “Proactive” Investigations”, Mike Volkov stated “At the recent Dow Jones Compliance Symposium in Washington, D.C., an FBI official warned the attendees that the Shot Show debacle would not deter law enforcement from using proactive investigations techniques. It was a stark warning because it was realized in less than thirty days.” This was dramatically demonstrated with the arrest of Frederic Cilnis.

An article in the Financial Times (FT), entitled “FBI sting says that ‘agent’ sought to have mining contracts destroyed”, it was reported that “Frederic Cilins held the last of a series of meetings with the widow of an African dictator to discuss what she was going to do with some sensitive documents.” What were these ‘sensitive documents’? The FT reported that it had seen “some of the documents” and “According to one copy of a contract seen by the FT” it appeared to agree to pay $4m the wife of the then President of the country to help to secure rights to a mining concession in Guinea. Unfortunately for Cilins he “did not realise that the woman he was talking to was wearing a wire and that FBI agents were watching. As he left the meeting, the agents arrested him carrying envelopes filled with $20,000 in cash, the indictment says. That was a pittance compared with the $5m he was taped offering the dictator’s widow during what US authorities say was a two-month campaign to tamper with a witness and destroy records.”

IV.              Uriel Sharef

Uriel Sharef was a former officer and board member of Siemens. According to the SEC Press Release announcing resolution of his matter, “The settlement resolves the Commission’s civil action against Sharef for his role in Siemens’ decade-long bribery scheme to retain a $1 billion government contract to produce national identity cards for Argentine citizens. The final judgment, to which Sharef consented, enjoins him from violating the anti-bribery and related internal controls provisions of the FCPA and orders him to pay a $275,000 civil penalty, the second highest penalty assessed against an individual in an FCPA case.”

The FCPA Professor, in his April 19 Friday Roundup, posed the following “The burning question of course is whether the SEC would have prevailed against Sharef if he put the SEC to its burden of proof. As highlighted in this previous post, Sharef’s co-defendant, Herbert Steffen, did just that and in February Judge Shira Scheindlin dismissed the SEC’s complaint against Steffen finding that personal jurisdiction over Steffen exceeded the limits of due process.” However, the SEC Press Release seemed to anticipate this query by stating that “Sharef met with payment intermediaries in the United States and agreed to pay $27 million in bribes to Argentine officials. Sharef also enlisted subordinates to conceal the payments by circumventing Siemens’ internal accounting controls.”

In the month of April, the US enforcement agencies certainly seemed to be answering the questions about bringing FCPA criminal charges and civil complaints against individuals. You may quibble about the sentences handed out in the BizJet case but that is another discussion for another day. For those who may have thought that the use of wire taps, cooperating witness and other proactive federal law enforcement techniques may not be used in FCPA cases after the Gun Sting cases dismissals, such techniques were used in both the BizJet matters and the action against Cilnis. Lastly, one phone call to the US may not create in personam jurisdiction but if you come to the US and engage in conduct which violates the FCPA, personal jurisdiction will attach.

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, 2013

My FCPA and Bribery Act Musings Continue

This past week, my second book, “Best Practices Under the FCPA and Bribery Act” was released. Over the past few years I have tried to provide the compliance practitioner with solid information that can be used to implement, review and enhance a US Foreign Corrupt Practices Act (FCPA) or UK Bribery Act based compliance program. I am often asked to collect my blog posting regarding what are the current best practices for an anti-corruption/anti-bribery compliance program. In other words, what are the specifics of a compliance program. This volume will provide the compliance practitioner with information that can be used for the ‘nuts and bolts’ of compliance.

Using the format of the most recent US Department of Justice (DOJ) and Securities and Exchange Commission (SEC) “A Resource Guide to the U.S. Foreign Corrupt Practices Act. The Foreign Corrupt Practices Act (FCPA)” [the “FCPA Guidance”]; I have included some of my thoughts on what you can do to create and maintain a best practices compliance program. I have also included some thoughts on how to create and maintain such a compliance program using the Six Principles of an Adequate Procedures compliance regime under the UK Bribery Act.

I was honored to have the FCPA Professor, Mike Koehler, pen the forward and he said, in part, “In the current global marketplace, Foreign Corrupt Practices Act (“FCPA”) risk needs to be on the radar screen of most companies – large and small, public and private, and across industry sectors. Given the current enforcement theories of the Department of Justice and Securities and Exchange Commission, FCPA risk is not always apparent from reading the statute. There is no way for business organizations to truly eliminate FCPA risk, but such risk can be effectively managed and minimized through pro-active policies and procedures and other means of risk assessment.”

I hope that you can use this volume, in conjunction with the FCPA Guidance and the Ministry of Justice’s Six Principles of an Adequate Procedures compliance program, to implement or enhance your compliance regime. Both the FCPA Guidance and Six Principles make clear that there is no ‘one size fits all’ compliance program. The key is to assess your company’s risks and to manage those risks appropriately. This volume will help you to determine the type and scope of program that is appropriate for your company and will assist your compliance efforts going forward.

Best Practices Under the FCPA and Bribery Act is available exclusively on amazon.com. For a copy, click here.

What’s the Message from BizJet? Self-Disclose and Cooperate

Over the past week there has been a plethora of Foreign Corrupt Practices Act (FCPA) enforcement actions released. One group was the four enforcement actions involving individuals concerning BizJet. While I cannot say that the enforcement actions against the individuals were stunning, perhaps what was surprising were the penalties that two of the individual received. The lineup of those three BizJet executives and one employee involved in these enforcement actions is as follows:

1. Bernd Kowalewski – President and Chief Executive Officer (CEO);
2. Peter DuBois – Vice President of Sales and Marketing;
3. Neal Uhl – Vice President of Finance; and
4. Jald Jensen – Regional Sales Manager

Defendants DuBois and Uhl pled guilty in January, 2012 and had their pleas unsealed on April 5, 2013. Defendants Kowalewski and Jensen were charged by Criminal Indictment, also in January, 2012 but are still at large today. The Department of Justice (DOJ) Press Release states that “The two remaining defendants are believed to remain abroad.”

BizJet Bribery Box Score

From the previously released Bizjet Deferred Prosecution Agreement (DPA) and the recently released documents, I have updated the “BizJet Bribery Box Score”.

BizJet Executive or Employee Named	Payment Made To	Amount of Payment	Others Involved
Jald Jensen	Official 6	Cell Phone and $10K	Peter DuBois and Neal Uhl
Jald Jensen	Official 3	$2K	Peter DuBois
Peter DuBois, Neal Uhl and Jald Jensen	Official 2	$20K
Neal Uhl	Official 2	$30K	Jald Jensen
Peter DuBois	Mexican Federal Police Chief	$10K	Neal Uhl and Jald Jensen
Neal Uhl	Official 5	$18K	Jald Jensen
Jald Jensen	Official 4	$50K
Jald Jensen	Mexican Federal Police	$176	Neal Uhl
Jald Jensen	Official 4	$40K
Jald Jensen	Mexican Federal Police	$210K	Neal Uhl
Jald Jensen	Official 5	$6K	Neal Uhl
Neal Uhl	Official 5	$22K

The above bribes were characterized as “commission payments” and “referral fees” on the company’s books and records. Payments were made from both international and company bank accounts here in the United States. In other words, this was as clear a case of a pattern and practice of bribery, authorized by the highest levels of the company, paid through US banks and attempts to hide all of the above by mis-characterizing them in the company’s books and records.

Penalty Box Score

As bad as the conduct of the BizJet executives and sales manager was – and it was very bad – the thing that stood out in the enforcement actions announced last week was the sentences. So without further ado here is the “Penalty Box Score” for defendants DuBois and Uhl.

Individual	Fine or Disgorgement	Potential Incarceration	Actual Incarceration
Peter DuBois	$159,950	108 to 120 months in jail	8 months home incarceration, 60 month’s probation
Neal Uhl	$10,000	60 months in jail	60 month’s probation

The clear import of the BizJet DPA was that a company can make a comeback in the face of very bad facts. In the BizJet DPA, the calculation of the fine, based upon the factors set out in the US Sentencing Guidelines, ranged between a low of $17.1MM to a high of $34.2MM. The final agreed upon monetary penalty was $11.8MM. This was a significant reduction from the suggested low or high end, or as was noted by the FCPA Blog “BizJet’s reduction was 30% off the bottom of the fine range, and a whopping 65% off the top of the fine range.” Finally, BizJet was able to avoid having an external monitor put in place.

Cooperation is the Key

What led to these sentence reductions? Quite simply the answer is full cooperation with the DOJ. The FCPA Professor stated, in a post entitled “Unsealed Documents In Enforcement Acton Against Former BizJet Executives Reveal A Trove Of Information”, that “As part of his plea agreement, DuBois worked in an undercover capacity for the government. The motion specifically states as follows. “As part of his work in an undercover capacity, Mr. DuBois has recorded conversations with former BizJet executives and other subjects of the government’s ongoing investigation.” Later, the motion to seal states that “public identification of Mr. DuBois as a defendant who likely is cooperating with the government may jeopardize the undercover aspect of the government’s investigation.”

In addition to his work as an undercover operative, the Professor quoted from the DOJ Sentencing Memorandum that “assisted in the investigation from the outset and cooperated fully with the government throughout its investigation. DuBois submitted to multiple interviews by the government and has assisted in every way that the government has asked. DuBois told the truth to the government from the outset and continued to do so up until this very day. DuBois’ cooperation not only assisted the government in connection with its investigation into BizJet, but also led to the investigation of another maintenance, repair, and overhaul company engaged in a similar scheme to pay bribes to government officials overseas.”

With regarding to UHL, the Professor quoted from the DOJ Motion for a Downward Departure as follows, “Uhl “agreed to a voluntary proffer session and, when confronted by the government, admitted to the illegal conduct. Throughout the course of the investigation, Uhl was cooperative and provided truthful information that substantially assisted the government in confronting other co-conspirators and witnesses. Uhl offered to assist in any way that he could.”

In another post, entitled “Where Was the BizJet Board?”, the FCPA Professor noted that the conduct engaged in by BizJet was “egregious” and I would certainly second that, perhaps adding that it was about as bad as it could get in the FCPA world. He goes on to state that “Yet, BizJet was allowed to resolve the enforcement action via a deferred prosecution agreement, meaning that should it abide by the terms and conditions of the agreement, BizJet will never be required to plead guilty to anything.” He went on to pose the question, “If that is the DOJ position, then it must be asked – does corporate criminal liability actually mean anything if a company like BizJet – given the DOJ’s allegations – is not actually criminally prosecuted or required to plead guilty?” He ended his post with the following, “In short, the resolution vehicles the DOJ has created and championed has again lead to a “facade of enforcement” – albeit an instance on the opposite end of the spectrum that I normally highlight.”

I think that there is another way to look at the BizJet enforcement action and the individual enforcement actions against DuBois and Uhl. BizJet self-disclosed to the DOJ, engaged in what the DOJ termed “extraordinary cooperation” and remediated the people and conduct in question. Further, DuBois and Uhl not only offered themselves up but actively worked with and assisted the DOJ in its investigation going forward. If one of the goals of the DOJ is to achieve greater compliance with the FCPA, I think that the BizJet cases is a clear demonstration that if a company has FCPA violations they can self-disclose and be given credit for working very diligently in conjunction with the DOJ to remedy the conduct at issue and move the investigation forward.

I believe the same is true for individuals who have engaged in FCPA violations. If a person provides the same level of cooperation as DuBois and Uhl and the DOJ then prosecutes them to the full extent of the US Sentencing Guidelines, how much cooperation do you think the DOJ will engender going forward once the word gets out in the white collar defense bar?

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, 2013

Why Eat Your Words When You Can Eat a Peach?

Taken to the woodshed or when should a company have to eat its own words? Remember when President Reagan’s Director of the Office of Management and Budget, David Stockman, was ‘taken to the woodshed’ by White House Chief of Staff James Baker after public comments that Stockman made for an Atlantic Monthly article that questioned the monetary policy which underpinned the entire Reagan Revolution? Stockman was most contrite thereafter.

We had a recent example of this in the context of US federal enforcement actions in the Standard Chartered (StanChart) matter. For those who might not remember, our friends at StanChart agreed to pay approximately $667MM in fines to several US regulators for the bank’s conduct around its breach of US sanctions on Iran. The bank agreed to voluntarily enter into a Deferred Prosecution Agreement (DPA) and as part of that DPA it agreed not to publicly contest the agreement or generally make any public statements contradicting the acceptance of responsibility. There are usually similar clauses in Foreign Corrupt Practices Act (FCPA) DPAs as well.

In an article in the Financial Times (FT), entitled “StanChart trio are called before US regulators”, by Kara Scannell, Patrick Jenkins and Lina Saigol, they reported that Sir John Peace, StanChart chairman said at a March 5 Press Conference that the Bank had engaged in “no wilful act to avoid sanctions; you know, mistakes are made – clerical errors” related to its myriad of conduct in doing business with Iran, in violation of US trade sanctions. This language directly contradicted the terms of the StanChart’s various settlement agreements with US regulators. On March 21, he was required to eat those words when he “said those comments were “both legally and factually incorrect”” and retracted them. “Standard Chartered Bank unequivocally acknowledges and accepts responsibility . . . for past knowing and wilful criminal conduct in violating US economic sanctions laws and regulations”.

According to the article this retraction was the result of a meeting he, Chief Executive Peter Sands and Finance Director Richard Meddings were called to with the Department of Justice (DOJ) and New York district attorney Cy Vance, “Standard Chartered was required to retract the statement or be subject to prosecution,” the DOJ said. The article also reported that “US officials at the meeting emphasised the importance of the terms of a settlement over sanction violations, including the bank’s ongoing co-operation. DoJ officials were concerned because the comments came from the top of the bank and had pushed for a public retraction and email to the entire staff. Sir John told them it was a humiliating day for him personally and for the bank, the person said.” This is the ‘going to the woodshed part’.

But what about these clauses prohibiting such contradictions? The FCPA Professor lets you know where he stands on the issue with his post on StanChart, entitled “The “Muzzle” Clause”, where he poses the question, “Is this an effective system of justice?” when the following exists:

First, the DOJ can use its leverage and its ability to bring criminal charges against a company. Second, the DOJ will can then use an NPA or DPA to insulate its version of the facts and enforcement theories from judicial scrutiny which the risk averse company will more often that not accept. Third, in the resolution agreement, the DOJ can include a “muzzle” clause prohibiting anyone associated with the company from making any statement inconsistent with the DOJ’s version of the facts or its enforcement theories.  Fourth, if the DOJ believes, in its sole discretion, that a public statement has been made contradicting its version of the facts or its enforcement theories, the DOJ can “pounce” and threaten to bring criminal charges.

As to the first point, I think that the DOJ would respond that it brings enforcement actions that are appropriate under the facts and circumstances of the case. But as to the second point, I believe that DPAs and Non-Prosecution Agreements (NPAs) are equally preferred, if not more so by companies. The reason is that they bring closure with certainty, which is what company’s desire in any legal proceeding. If there are company’s which want to go to trial and test the Arthur Anderson result, they should go ahead and do so but I certainly do not want to be the first General Counsel (GC) or Chief Compliance Officer (CCO) who makes the wrong call and have my company go poof because I turned down an offer to settle.

As to point three, I am somewhat more concerned with this issue in the context of the First Amendment. Here the Professor cites to Professor Ellen Podgor who asked “whether the government can include such clauses in resolution agreements without infringing on First Amendment rights.” Clearly if a person or company is convicted of a crime they have the right to contest that finding, vocally or otherwise. However, in the DPA context, a company has admitted to conduct and findings so perhaps there is a difference than a person convicted at trial who wants to scream from the highest mountaintop “I didn’t do it”.

On point four, I have to disagree with the Professor. In another FT article, entitled “StanChart chairman forced to eat his words over Iran”, the reports quoted Simon Maughan, an analyst at Olivetree Securities, who with perhaps less delicacy and also with greater English irony, said “StanChart had tried to play hardball with the US regulators and lost.”

I have worked in a company under a DPA for its FCPA violations. I did not find it hard to not contradict the facts and findings in the DPA. In fact, the company used those facts and findings to make itself into a stronger and more financially viable entity. It seems to me, if one cannot even accept the fact that it was your company which engaged in legal violations and not simply some ‘clerical errors’ which caused your company to pay $667MM in fines, you really have not learned very much. Perhaps that is what the DOJ really wants companies to understand.

Eat A Peach is the final studio Allman Brothers album on which both Duane and Greg Allman played before the untimely death of Duane.

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, 2013

The Death of Pennoyer v. Neff and the Requirements for Minimum Contacts under the FCPA

The bane of every first year law student, at least in Civil Procedure, is Pennoyer v. Neff. This is because (1) it is usually studied very early in the semester; (2) is viewed as the first true introduction to how strikingly convoluted legal issues can be; and (3) has the most turgid legal writing from the 19^th century imaginable to attempt to read and understand. Fortunately for all of us, in a case called International Shoe v. Washington, the US Supreme Court overturned Pennoyer and held that if a person is not present with in the forum, then he (or she) must have such minimum contacts with the forum that the maintenance of the action must not offend traditional notions of fair play and substantial justice. Courts have named these two tests (1) the minimum contact analysis and (2) the reasonableness inquiry. Last month there were two cases involving the Foreign Corrupt Practices Act (FCPA), which discussed just how far enforcement of the FCPA can go, using the minimum contacts and reasonableness tests.

The first case was SEC v. Schraub, where the Securities and Exchange Commission (SEC) brought an enforcement action against three executives of Magyar Telekom, Plc. As set out in an article in the D&O Diary, entitled “Foreign-Domiciled Individuals and the FCPA’s Reach”, this case followed on after the Magyar Telekom FCPA enforcement action. It involved an enforcement proceeding against three Magyar executives. The SEC alleged that the three authorized payments to an intermediary, knowing the payments would be forwarded to government officials. The SEC also alleged that the individuals made false statements to the company’s auditors by signing representations that the company’s books and records were accurate. All three executives are Hungarian citizens and residents. The three moved to dismiss the SEC’s complaint, arguing that the US lacked personal jurisdiction over them. This case was before Judge Richard Sullivan.

The second case was SEC v. Sharef, a case following out the Siemens FCPA matter. In this case the SEC filed an enforcement action against several Siemens executives in connection with alleged bribery activities in Argentina. One of the defendants, Herbert Steffen, moved to dismiss contending that the court lacked personal jurisdiction over him. Steffen, a German citizen, had been Chief Executive Officer (CEO) of Siemens Argentina twice before his retirement in 2003. This case was before Judge Shira Scheindlin, the same judge who presided over the Frederick Bourke case.

The cases came to different results based upon different underlying facts. But the key to remember is the International Shoe test, minimum contacts and reasonableness.

I.                   Straub

1. Minimum Contacts

As cited by the FCPA Professor in his post, entitled “Motion To Dismiss Denied In Former Magyar Telekom Exec’s Case”, Judge Sullivan said:

“[T]he Defendants here allegedly engaged in conduct that was designed to violate United States securities regulations and was thus necessarily directed toward the United States, even if not principally directed there.  [...] [D]uring and before the time of the alleged violations, both Magyar’s and Deutsche Telekom’s securities were publicly traded through ADRs listed on the NYSE and were registered with the SEC [...] Because these companies made regular quarterly and annual consolidated filings during that time, Defendants knew or had reason to know that any false or misleading financial reports would be given to prospective American purchasers of those securities.”

Therefore, it is not only that Magyar traded securities through ADRs listed on the NYSE that satisfies the minimum contacts standard but also that Defendants allegedly engaged in a cover-up through their statements to Magyar’s auditors knowing that the company traded ADRs on an American exchange, and that prospective purchasers would likely be influenced by any false financial statements and filings. The court thus has little trouble inferring from the SEC’s detailed allegations that, even if Defendants’ alleged primary intent was not to cause a tangible injury in the United States, it was nonetheless their intent, which is sufficient to confer jurisdiction.

2.     Reasonableness

Judge Sullivan stated that while it might not be convenient for Defendants to defend this action in the United States, Defendants have not made a particular showing that the burden on them would be “severe” or “gravely difficult.” The SEC noted that there was no alternative forum available for the US government and this required that the US bring a FCPA action against Defendants in federal courts in the US or the  Defendants could potentially evade liability altogether. Additionally, because this case was brought under federal law, the judicial system has a strong federal interest in resolving this issue here. The Court found that the exercise of personal jurisdiction over Defendants was “not unreasonable.”

II.                Sharef

1. Minimum Contacts

In a post, entitled ““Far Too Attenuated” – Judge Grants Herbert Steffen’s Motion To Dismiss In SEC FCPA Enforcement Action”, the FCPA Professor cited to Judge Scheindlin regarding this prong of the jurisdictional test. Judge Scheindlin said that the defendants must have “followed a course of conduct directed at … the jurisdiction of a given sovereign, so that the sovereign has the power to subject the defendant to judgment concerning the conduct.  The effects in the United States must ‘occur as a direct and foreseeable result of the conduct outside the territory’ and defendant ‘must know, or have good reason to know, that his conduct will have effects in the [forum] seeking to assert jurisdiction over him.”

The SEC allegations against Steffen were premised on Steffen’s role in encouraging another defendant to authorize bribes to Argentine officials that ultimately resulted in falsified filings. Thereafter his only actions were “limited to participation in a phone call initiated by Sharef from the United States in connection with the bribery scheme, and that in the first half of 2003, defendants including Steffen ‘urged Sharef to meet the demands [of Argentine officials] and make the additional payments.’”

She found that Steffen’s actions were “far too attenuated from the resulting harm to establish minimum contacts. Steffen was brought into the alleged scheme based solely on his connections with Argentine officials.” There was no allegation Steffen authorized the bribes nor was there any allegation that he directed, ordered or even had awareness of the cover ups that occurred at SBS much less that he had any involvement in the falsification of SEC filings in furtherance of those cover ups.

The FCPA Professor quoted Judge Scheindlin for the following “If this Court were to hold that Steffen’s support for the bribery scheme satisfied the minimum contacts analysis, even though he neither authorized the bribe, nor directed the cover up, much less played any role in the falsified filings, minimum contacts would be boundless. Illegal corporate action almost always requires cover ups, which to be successful must be reflected in financial statements. Thus, under the SEC’s theory, every participant in illegal action taken by a foreign company subject to U.S. securities laws would be subject to the jurisdiction of U.S. courts no matter how attenuated their connection with the falsified financial statements. This would be akin to a tort-like foreseeability requirement, which has long been held to be insufficient. The allegations against Steffen fall far short of the requirement that he ‘follow a course of conduct directed … the jurisdiction of a given sovereign, so that the sovereign has the power to subject the defendant to judgment concerning that conduct. Absent any alleged role in the cover ups themselves, let alone any role in preparing false financial statements the exercise of jurisdiction here exceeds the limits of due process, as articulated by the Supreme Court and the Second Circuit.’”

1. Reasonableness

Judge Scheindlin took a different tact on the reasonableness prong. She found that Steffen’s lack of geographic ties to the US, his age, his poor proficiency in English, and the forum’s diminished interest in adjudicating the matter, all weigh against personal jurisdiction. This would place a heavy burden on this seventy-four year old defendant to journey to the US to defend against this suit. As the SEC and the Department of Justice (DOJ) have already obtained comprehensive remedies against Siemens and Germany has resolved an action against Steffen individually, she believed that the “SEC’s interest in ensuring that this type of conduct does not go unpublished will not be furthered by continuing the suit against Steffen, in light of his age, the burden to defend this suit, and the previous adjudications.”

III.             Jurisdictional Box Score

Case	SEC v. Straub, et al	SEC v. Sharef, et al
Defendants	Elek Straub, Andras Balogh and Tamas Morvai	Herbert Steffens
Judge	Richard Sullivan	Shira Schendlin
Underlying FCPA Case	Magyar Telekom, Plc	Siemens AG
Analysis – Minimum Contacts	Made false statements to company auditors. Knowing that company securities traded on American exchange Prospective purchasers would likely be influenced by false financial filings.	No evidence proffered defendant had directed, ordered or had awareness of bribes. No evidence that he was involved in falsification of financial records
Analysis – Reasonableness	SEC could not seek redress outside US US government has strong interest in hearing matter	Defendant had lack of geographic ties to US Age of Steffens – 76 Country of his domicile has resolved action against him individually

These two cases are very fact specific. However, they also set some clear parameters as to whether and how a FCPA enforcement action can be brought against individual foreign defendants. The difference between the two cases would appear to be affirmative actions by the three Magyar Telekom employees in providing false information in the reporting of financial information which is made public to companies listed in the US. This may well set a bar to future actions against foreign nationals under the FCPA.

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, 2013

An Oscar Winner for Compliance

Ben Affleck has certainly had his share of ups and downs in his professional career. He shared an Oscar for Best Original Screenplay for Good Will Hunting with his fellow Bostonian buddy Matt Damon at age 25. Thereafter things were not always at that same height for him professionally. He had a very public affair and engagement to Jennifer Lopez, in which there were jointly knows as ‘Bennifer’ which ended when the engagement was broken off. He appeared in some movies that, how can one best put it, were somewhat less than Oscar worthy, Gigli and Surviving Christmas come to mind. But once again proving that F. Scott Fitzgerald’s adage that “There are no second acts in American lives” is not, and perhaps never was, true Affleck was awarded this year’s Oscar award for Best Picture for his work as the Director on Argo.

In a recent article in the Houston Business Journal (HBJ), entitled “Business lessons from an Academy Award winner”, Harvey Mackay wrote about some of the lessons that he drew from Affleck’s professional journey. Affleck’s lessons provide some interesting perspectives for the compliance practitioner. When accepting the Oscar, Affleck said “I never thought I would be back here, but I am because of so many wonderful people who extended themselves to me, who had nothing to benefit from it.” From this statement Mackay drew the lesson of the importance of networking and mentoring. Mackay wrote that “Over the years he has reached out to a lot of people in Hollywood who helped him learn the movie business and advance his career. Members of the Academy were able and willing to help him, even though he wasn’t necessarily in a position to reciprocate.”

As a compliance practitioner, the importance of networking and mentoring cannot be overstated. Not only is it important in assisting to advance your own career but also your professional grown. In my own blogging and social media career I have been fortunate to have several mentors; Dick Cassin, the FCPA Professor and Francine McKenna being three prominent ones. But more than simply having such personal mentors, compliance professionals need to turn to others in our profession for professional guidance and support. Almost everyone I have approached for help, guidance or advice has given it to me freely, without even a hint of any desire for reciprocation.

One of the ways you can do so is to set up an informal compliance roundtable in your city or community. By this I mean an informal group, without dues or fees that can get together and discuss matters of mutual interest. Together with Mike Snyder, of Donovan Watkins, and Dan Chapman we have recently started one here in Houston. Last week I spoke at one such group for compliance professionals in Singapore. But the key to making such a group work is that everything said is off the record and stays within the four walls of the room. In these events, compliance practitioners can ask very detailed, fact specific questions and draw upon a wide variety of sources for guidance. All one really needs is a facilitator to throw out one question and see where it goes from there. So if you do not have such a group in your city, town or community my suggestion would be for you to send an email around and see who might be interested. I think that you will find it can be a great way to network and either find or be a mentor to other compliance practitioners.

The second business lesson that Affleck gave during his Oscar acceptance speech was that “You have to work harder than you think you possibly can.” I was in private practice for 20 years. One of the boneheaded things I always thought was that lawyers went in-house so they would not have to work so much. Boy did I get that wrong. If you work for an international company you know that time zones are basically meaningless. Five PM in China is Five AM in the US. I also heard several in-house lawyers tell me that they went to work for a company for lifestyle reasons. While that may have been true, they found out what I found out, that in-house lawyers work very long and very hard.

In almost every compliance group I have ever known, there are never enough resources. If that is the situation you face, try and find a way to do more with less. There are several other departments in your company which may be able to help in the goal for your company to do business in a manner compliant with your Code of Conduct and the Foreign Corrupt Practices Act (FCPA) and UK Bribery Act. One department which you can work with is Human Resources (HR). HR can also be used to ‘connect the dots’ in many divergent elements in a company’s FCPA compliance and ethics program. The roles include training, employee evaluation and succession planning, hotlines and investigations and background screenings. By asking HR to expand their traditional function to include the FCPA compliance and ethics function, you can move towards a goal of a more complete compliance program, while not significantly increasing costs. Additionally, by asking HR to include these roles, it will drive home the message of compliance to all levels and functions within a company and help to make such behavior will become a part of a company’s DNA.

The third business lesson is one that Affleck closed his Oscar acceptance speech with and as Mackay noted “possibly the most important”. He quoted that Affleck said, “It doesn’t matter how you get knocked down in life because that’s going to happen. All that matters is that you gotta get up.” For the compliance practitioner, I would say this means that even with a robust compliance program in place, you will still have issues arises because there is no compliance which can assure 100% compliance, 100% of the time. Just as Affleck said that “you gotta get up”; in many ways if you do have a compliance issue arise, what matters is how you handle it.

In the context of Paul McNutly’s three maxims regarding any compliance issue; he said there were three questions he would ask when he was Deputy Attorney General. They were: (1) What did you do to prevent it?; (2) What did you find when you looked into it?; and (3) What did you do when you found out about it? But in large part, he focused on Maxim 3. So, in addition to a thorough investigation and reporting, the key is what did your company do to remedy the issue in question? Did you discipline those employees or third parties involved in the conduct at issue? Did you remedy any defect in your compliance program which may have allowed the issue to arise? Did you expand your compliance program to handle future issues? Did you train employees based on the issue or other high risk factors? The point follows Affleck’s last statement, “you gotta up”. How you respond as your company’s compliance representative may well be a significant factor in determining your final result with the Department of Justice (DOJ) or Securities and Exchange Commission (SEC).

Ben Affleck’s Oscar win was certainly a validation for someone who fell from great heights early in his career. While most of us may not scale to such heights early in our career, or perhaps ever, the tools, techniques and work ethic that Affleck used so that he once again could give an Oscar acceptance speech are some of the same tools that you can use as a compliance practitioner for your own career, to better and advance yourself professionally and to help your company through any compliance issues that may arise during your tenure in a compliance group. They are good words for you to think about going forward.

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

© Thomas R. Fox, 2013

Wrestling as an Olympic Sport and Declinations under the FCPA

What do the US, Russia and the Islamic Republic of Iran have in common? Answer: Precious little. However one thing that they do have in common is their vehement opposition to the absolutely idiotic, boneheaded and stupid decision by the International Olympic Committee (IOC) to drop wrestling from the Olympic Games. Wrestling dates back to the ancient Greek Olympic Games and it is just inconceivable that the IOC would drop one of the very few sporting events that has endured for 2,500 years. If these three countries can agree on something, do you think that the IOC should listen?

What do the FCPA Professor, the US Chamber of Commerce and Tom Fox have in common when it comes to the Foreign Corrupt Practices Act (FCPA)? Answer: Not much. But one thing we do have in common is a belief that the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) should release information regarding FCPA matters that it declines to prosecute. For my part, the reason that the DOJ/SEC should release this information is that it is a solid base of information that a compliance practitioner can use to help improve a FCPA based compliance program.

What is a Declination?

First, continuing the good faith debate as to what is a ‘declination’, I first need to provide my definition. Last week, the FCPA Professor wrote, in a post entitled “The Need For An FCPA Lingua Franca”, of his belief in the need for a clarification of precisely what is a declination. He wrote, “I am guided by my definition of a declination as being an instance in which an enforcement agency has concluded that it could bring a case, consistent with its burden of proof as to all necessary elements, yet decides not to pursue the action.” The Professor further states that “anything less ought not be termed a “declination” and noted that it is really no different that saying a police officer “declined” to issue a speeding ticket in an instance in which the driver was not speeding. This is not a declination, it is what the law commands, and such reasoning applies in the FCPA context as well.” The Professor also cited to a WilmerHale client release which discussed the DOJ/SEC FCPA Guidance and had the following line which relates to the definition of a declination, “It is also disappointing that some of the examples do not make clear that the conduct met each of the elements of a statutory violation, since the concept of a declination is supposed to be reserved for instances in which the offense is chargeable but the government declines in its own discretion to bring a case.”

I believe that a broader term approach, as I think that the term ‘declination’ should encompass all the situations where the DOJ or SEC turns down the opportunity to bring a FCPA case; whether that be a criminal matter enforced by the DOJ or a civil action brought by the SEC. I do not find the lack of a speeding ticket analogy to be appropriate in the FCPA/declination discussion. The reason is that the DOJ/SEC usually relies on either a self-disclosure or outside source of information before it begins an investigation. If there is a self-disclosure that means that competent white collar counsel, who probably are ex-DOJ/SEC prosecutors, think that there is a reasonable basis for an actionable FCPA issue to lie. To use the speeding ticket analogy, regarding FCPA matters, if I saw a police officer with a radar gun checking speeds and I thought that I had gone over the speeding limit, I could self-report what I believed to be a violation. He or she might say something along the lines of “Mr. Fox, you may have a good-faith belief that you traveled over the speed limit but I did not have my radar gun on your car so I will not write you up.” Or the police officer might say, “Mr. Fox, you may have a good-faith belief that you traveled over the speed limit but I had my radar gun on your car and you were not going over the speed limit so I am not going to write you up.” Lastly, the officer might say, “Mr. Fox, you may have a good-faith belief that you traveled over the speed limit and I had my radar gun on you and I clocked you as going over the speed limit but because you were going 66 in a 65 and you came over here and told me about it I am not going to write you up.” So even if I had engaged in a speeding violation, there may be several reasons why I did not get a ticket.

What about situations other than self-disclosure, such those involving a whistle-blower, information which came from other companies in the same industry, such as those companies involved with  the freight forwarder Panalpina, or other situations where information comes to the DOJ/SEC and they eventually decide not prosecute. Marc Alain Bohn, writing a piece in the FCPA Blog entitled “Revisiting the Definition of ‘Declinations’”, said that “there are likely many considerations that inform an agency decision not to pursue a case. Given the agencies’ aggressive interpretations of the jurisdiction and knowledge elements of the FCPA—something the FCPA Professor has frequently drawn attention to it is likely rare that an agency’s decision not to pursue an enforcement action is based on its determination that there were insufficient facts to do so. This is particularly true in the case of issuers, against whom the agencies can more easily build FCPA-cases by focusing upon violations of the statute’s accounting provisions.” Because of these facts and other, Bohn urged a broader form of definition of declination than the FCPA Professor. Bohn gives the following definition, “I think it is appropriate to apply the short-hand label “declination” more broadly to each instance where the DOJ or SEC has notified a company that it does not intend to bring an enforcement action.”

Publicizing of Declinations

The concept that the US Chamber of Commerce, the FCPA Professor and myself do agree on, is the need for the DOJ/SEC to publicize declinations. I have argued for some time that by publicizing declinations, it would provide great value to the compliance practitioner. I believe this to be particularly true in the situation where a company has self-disclosed what it believes to be evidence of a FCPA violation. I believed this before the Morgan Stanley declination was released last year and I believed this before the FCPA Guidance had a section discussing six matters that the DOJ/SEC had declined to prosecute. The two releases of declinations have only made my belief stronger regarding the usefulness of declinations to the compliance practitioners.

I outlined some of the reason I think that declinations can be such a useful tool, in an article for the Washington Legal Foundation, entitled “DOJ Should Release FCPA Declinations Opinions”. I wrote that this is because “The substantive portions of declinations, excised of company-specific information, would greatly increase FCPA enforcement transparency. This, in turn, would inspire greater FCPA compliance through a better understanding of how DOJ interprets the law with the specific facts presented to it.” Further, “In the declination process, DOJ is handling a much broader and more significant amount of information. A self-disclosing company has investigated or will investigate a matter, most likely with the aid of specialized outside FCPA investigative counsel. DOJ has the opportunity to review the investigation and suggest further or other lines of inquiry. Company personnel are made available for DOJ interviews, if appropriate. In short one would have actual facts and detailed oversight by DOJ, which in the case of a declination to prosecute, would provide substantive guidance on why it did not believe a FCPA violation had occurred in the face of a company’s good faith belief that it had violated the FCPA.”

From the Morgan Stanley declination we learned the importance of (1) annual FCPA training; (2) annual certification; (3) transaction monitoring; (4) compliance reminders; and (5) documentation of all of these factors. From the FCPA Guidance, we learned that the companies which received declinations had the following six factors:

1. The company was alerted to possible corruption via its own internal controls or compliance program.
2. The company self-disclosed to the DOJ/SEC.
3. The Company conducted a thorough investigation and shared the results with the DOJ/SEC.
4. The illegal conduct was not pervasive throughout the company, no systemic failure/over-riding of internal controls and the amount of money paid as bribe was relatively small.
5. The Company immediately took corrective action against the bad actors.
6. The extent the compliance program was expanded.

We learned some very specific, useful pieces of information from the declinations that have been issued. I hope that more will be issued by the DOJ/SEC in the future. It appears that the sport of Olympic wrestling, the FCPA and politics can indeed make for some strange bedfellows.

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, 2013

Race to the Bottom: Wal-Mart’s FCPA Investigation and the Houston Astros

So who do you think had the better day – the Houston Astros Monday or Wal-Mart Tuesday? Yesterday, the Astros announced the signing of Carlos Pena to be their Designated Hitter (DH) for the 2013 season. Pena’s 2012 average – a whopping ‘buck ‘97’; Yes sports fans the Astros have signed a DH who hit below the dreaded Mendoza Line for the past season. How is that for a strong opening move as the Astros move to the most talented Division in baseball? Anyone out there have the smallest inking that the Astros are ‘racing to the bottom’?

Nevertheless the Astros DH move probably pales with the PR debacle that Wal-Mart is facing today as the New York Times (NYT) once again, with superior reporting, had a story, entitled “The Bribery Aisle How Wal-Mart Used Payoffs To Get Its Way in Mexico”, above the fold on its front page on alleged bribery and corruption engaged in by Wal-Mart’s Mexico subsidiary. Reporters David Barstow and Alejandra Xanic von Bertrab did extensive research to find out not only the alleged amounts of bribes paid but also to whom, and the benefits that Wal-Mart allegedly received back in return.

Wal-Mart Bribery Box Score – (alleged) all scores courtesy of NYT

Store Type and Site	Number of Alleged Bribe Payments Made	Amount of Alleged Bribes USD
Sam’s Club in Mexico City	19	$341,000
Refrigeration Distribution Center north of Mexico City	9	$765,000
Wal-Mart in Teotihuάcan	4	$221,000

Teotihuάcan Store Bribery Box Score – (alleged) all scores courtesy of NYT

Purposed of Bribe	Person(s) Bribed	Amount USD
Obtain altered Zoning Map	Director of Urban Planning	$52,000
Obtain waiver of approved traffic plan.	In State Agency that regulates roads	$25,900
Town approval for store construction, where permits not in place.	Mayor and Town Council	$114,000
Obtain waiver to build at cultural heritage site, where no investigation performed.	In National Institute of Anthropology and History (NIAH)	(up to) $81,000

So reviewing the types of activity that fall under the Facilitation Payment exception to the US Foreign Corrupt Practices Act (FCPA) we find the following:

… “shall not apply to any facilitating or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action . . .”

The recent Department of Justice (DOJ) Guidance on the FCPA included a list of actions which are ordinarily and commonly performed by a foreign official and would fall within the definition of a facilitation payment. Also remember that the facilitation payment only applies for a “non-discretionary governmental action”.

• obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country;
• processing governmental papers, such as visas and work orders;
• providing police protection, mail pickup and delivery, or scheduling inspections associated with contract performance or inspections related to transit of goods across country;
• providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products or commodities from deterioration; or
• actions of a similar nature.

Of course all proper facilitation payments must be recorded as facilitation payments. Further, as stated in the Guidance, “Whether a payment falls within the exception is not dependent on the size of the payment, though size can be telling, as a large payment is more suggestive of corrupt intent to influence a non-routine governmental action. But, like the FCPA’s anti-bribery provisions more generally, the facilitating payments exception focuses on the purpose of the payment rather than its value.” Based upon the facts set forth in the NYT article, it does not appear that the payments made were ‘non-discretionary’ or were not made without corrupt intent.

Are there any examples, either in Opinion Releases, enforcement actions, DOJ pronouncements or anything else that the payments by Wal-Mart were legal under the FCPA? I would have to give a resounding NO to my own question. The FCPA Professor did cite to three Opinion Releases in his post yesterday, entitled “Wal-Mart Again On The Front Page Of The New York Times”. They dealt with charitable donations under the FCPA and one of the alleged payments made in the Teotihuάcan Store Bribery, the payment to the National Institute of Anthropology and History (INAH) was alleged, in part, to be a charitable donation. However, in each one of the three Opinion Releases cited there were donations made with post-donation auditing of the use of the cash to ensure the money was used as specified and other protections to ensure compliance with the FCPA. The donations were also made with transparency and not, as reported by the NYT, “Sergio Raúl Arroyo, the director general of INAH, recalled in an interview that Ms. Miró had told him about Wal-Mart’s offer. He could not recall any other instance of a company offering a donation while it was seeking a permit. “That would have been totally irregular,” he said.”

So, as the FCPA Professor also noted in his piece, “from an FCPA perspective, the issues largely remain the same.” From the factual perspective, he may well correct. However, what may have changed is the conversation. The NYT piece shows just how invidious a culture of bribery and corruption can be and how such a culture can subvert local governments and even national cultural heritage protections.

Another interesting issue raised by the NYT article is the investigation of the underlying facts. As reported by the FCPA Blog, in a piece entitled “Wal-Mart’s latest FCPA disclosure (December 2012)”, in its Form 10-Q filed with the Securities and Exchange Commission (SEC) by Wal-Mart Stores, Inc. on December 4, Wal-Mart state the following,
“The Company has incurred expenses of approximately $48 million and $99 million during the three and nine months ended October 31, 2012, respectively, related to these matters.” In other words Wal-Mart has spent a pretty penny since the original NYT article in April. Recognizing that not all of these monies were dedicated solely the Mexico investigation, I would still pose the following question, “How is it that two intrepid reporters from the NYT were able to piece together this story and Wal-Mart was not able to do so when confronted with allegations of bribery and corruption in its Mexican subsidiary?” Lastly is the effect that this story may have on the DOJ. Given the criticism that the DOJ sustained in the wake of the HSBC Deferred Prosecution Agreement (DPA) for its money-laundering conduct, will the Department feel compelled to attempt to prosecute individuals in this case? How about the fine? What does the DOJ try and communicate when the world’s largest retailer is alleged to have engaged in such conduct? What about those licenses, if they were indeed obtained by bribery and corruption, should they still be valid?

So who will win this race to the bottom? I can say that it appears Wal-Mart is trying to get its house in order. It has hired a new Chief Compliance Officer (CCO), created new compliance positions around the globe and put on extensive FCPA compliance training. It may take other steps to help to remedy the predicament it now finds itself in. As for the Astros, I had always thought that DH stood for Designated Hitter…

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, 2012

Days of Future Passed: The Moody Blues and the End of Facilitation Payments?

Nights in White Satin, never reaching the end,

Letters I’ve Written, never meaning to send

This past weekend I caught the Moody Blues’ tour celebrating the 45^th anniversary of their seminal classic album, “Days of Future Passed”. This was the second album released by the band and while I had always thought of it as the first rock concept album, it is seen by many rock critics as a precursor to progressive rock music. Bill Holdship, Yahoo! Music, said that the band “created an entire genre here.” Robert Christgau noted that it was “closer to high-art pomp than psychedelia.” And finally, Allmusic editor Bruce Eder calls the album “one of the defining documents of the blossoming psychedelic era, and one of the most enduringly popular albums of its era.” The band had its core members of Justin Hayward, John Lodge and Graeme Edge playing at the concert and I can assure you that even in their 70s, they can still rock.

I thought about this album and its title while reading the Memorandum and Order from District Judge Keith Ellison in the Security and Exchange Commission (SEC) civil action filed against current and former officers of Noble Corporation, Mark A. Jackson and James R. Ruehlen. The Foreign Corrupt Practices Act (FCPA) commentariat has gone both ways on interpreting the Court’s Order; witness the headline by the FCPA Professor, “Judge Grants Jackson And Ruehlen’s Motion To Dismiss SEC’s Monetary Claims – Finds That SEC Was Not Diligent In Bringing Case And That SEC Failed To Negate Facilitation Payments Exception – However Judge Allows SEC To File An Amended Complaint”, in contrast with Dick Cassin on the FCPA Blog, whose headline read “Great guidance from the bench: ‘The FCPA casts a wide net”. However, I found one other part of the Court’s ruling by far the most interesting. It was the section which discussed whether the defendant’s claims that their actions met the facilitation payment exception under the FCPA. The Court granted the SEC leave to amend to proffer facts which would overcome the facilitation payment exception.

The allegations of facilitation payment exception as a defense in this lawsuit turn on permits called Temporary Import Permits (TIPs) in Nigeria. As set out in the Court’s ruling, “TIPs allow drilling rigs to operate in Nigerian waters without payment of permanent import duties. Under Nigerian law, the Nigeria Customs Service (“NCS”) grants TIPs for rigs that will be in the country for only one year. NCS may, in its discretion, grant up to three six-month extensions to a TIP. Upon the expiration of a TIP and any TIP extensions, NCS requires the rig to be exported from Nigeria. If the owner of the rig wishes to continue using the rig after the expiration of a TIP and any applicable extensions, he can either convert the rig to permanent import status and pay the appropriate permanent import duties, or he can export the rig and seek a new rig TIP to re-import the rig. In order to obtain a TIP or an extension, the rig owner must submit an application thought a licensed customs agent as the NCS does not deal directly with rig owners such as Noble. The SEC alleged that the defendants authorized customer agents to submit false paperwork and pay bribes to NCS officials to obtain these TIPs. In other words, the SEC alleged that the Nobel officials knew that the company was not entitled to obtain the TIPs as they did not meet the basic requirements for the granting of such licenses.”

Judge Ellison, in his ruling, noted that the “SEC alleges that Defendants authorized payments to foreign officials in order to obtain TIPs based on false paperwork, in contravention of what Defendants knew was the proper process for obtaining TIPs. As discussed supra in Part III.A.1, the SEC pled sufficient facts to support the allegation that Defendants knew these payments would be going to Nigerian government officials to obtain TIPs in a manner that violated Nigerian law. The grant of permits by government officials that have no authority to grant permits on the basis sought is in no way a ministerial act nor can it be characterized as “speeding the proper performance of a foreign official’s duties.” Similarly, if payments were made to induce officials to validate the paperwork while knowing it to be false, that too would not qualify as simply expediting a ministerial act.” [all citations by Court omitted]

The FCPA states that it “shall not apply to any facilitating or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action . . .” Further, the FCPA has a list of examples of facilitation payments in the definition of routine governmental actions, which include the following:

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

The key has always been whether the function in question was a “routine governmental action” because a facilitation payment is clearly a bribe. From the Court’s discussion, it is clear that it is thinking that if the end goal of a facilitation payment is to obtain something that the person or entity making the facilitation knows that they are not entitled to, then it cannot be a facilitation payment because it is not a “routine governmental action”.  However, the Court also focused on “corruptly” and cited to the legislative history of the statute for the following:

The word “corruptly” is used in order to make clear that the offer, payment, promise, or gift, must be intended to induce the recipient to misuse his official position; for example, . . . to induce a foreign official to fail to perform an official function. The word “corruptly” connotes an evil motive or purpose such as that required under 18 U.S.C. 201(b) which prohibits domestic bribery. As in 18 U.S.C. 201(b), the word “corruptly” indicates an intent or desire to wrongfully influence the recipient.

As part of its instructions to the SEC to re-plead the Court said that it should plead Nigerian law to show this corrupt intent. If the SEC does this and the illegal nature of the defendants’ actions under Nigerian law forms a basis of a successful action, how long do you think it will be before the entire concept of the facilitation payment comes in an enforcement action as there is no country in the world which allows bribery of its own government officials?

If the Court continues down this path, we may see the United States move towards a de facto end of the facilitation payment exception. The OECD, among others, has urged the United States to ban these types of bribes. The UK Bribery Act has no such exception under it. Numerous commentators, including Jon Jordan, have argued eloquently for the facilitation payment exception to end.

So what about the Moody Blues and Days of Future Passed? Just as many people remember only the song “Nights In White Satin” from the album and do not recall its greater importance as the either the first concept album or as a precursor to progressive rock, analysts and commentators may miss the significance of Judge Ellison’s ruling as it may signal the first step on the judicial journey to end facilitation payments.

For a copy of the Court’s ruling, click 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, 2012