A Cornucopia of Great FCPA Articles for Your Friday Consideration

It has been a great couple of weeks for article regarding the Foreign Corrupt Practices Act (FCPA). While I have resisted having a Friday Round Up of all things FCPA compliance related because both the FCPA Professor, on his site and Dawn Lomer on iSight.com have two of the best, some of the articles that I have read over the past are well worth a post about. So with a tip of the hat to both of these blogging colleagues, I submit for your Friday consideration the three following authors with their superior articles.

The FCPA Professor

The FCPA Professor has published two excellent articles over the past two weeks on the FCPA. The first was his 80 page tome, “The Story Of The Foreign Corrupt Practices Act”. In this article, published in the Ohio State Law Journal, the Professor explored the more than two years of investigation, deliberation, and consideration, which led to the passage of the FCPA in 1977. Noting that it was  “a pioneering statute and the first law in the world governing domestic business conduct with foreign government officials in foreign markets” the Professor wove together “information and events scattered in the FCPA’s voluminous legislative record to tell the FCPA’s story through original voices of actual participants who shaped the law.” In his article I learned who supported legislation aimed at stopped the bribing of foreign government official and how the final legislation came into being after a long and arduous process.

This week, the Professor published his review of the Department of Justice FCPA Guidance, which came out last month, entitled “Grading the Foreign Corrupt Practices Act Guidance“. It was published in Bloomberg / BNA’s White Collar Crime Report. As you have come to expect from the Professor, his review is proactive. His abstract details some of the items he discusses, such as “(i) the enforcement agencies’ motivations in issuing the Guidance and the fact that it should have been issued years ago; (ii) the utility of the Guidance from an access-of-information perspective and how the Guidance can be used as a measuring stick for future enforcement agency activity; (iii) how the Guidance is an advocacy piece and not a well-balanced portrayal of the FCPA as it is replete with selective information, half-truths, and, worse information that is demonstratively false; (iv) how, despite the Guidance, much about FCPA enforcement remains opaque; and (v) how, despite the Guidance, FCPA reform remains a viable issue.”

As I once said about Dick Cassin and his FCPA Blog, “If the FCPA Blog didn’t exist, someone would have to create it and fortunately for us Dick has done so.” To this list I now must add the FCPA Professor, so to paraphrase Paul Samuelson, when asked to comment about Milton Friedman winning the Nobel Prize in Economics, “if the FCPA Professor didn’t exist, we would have to invent him.” You can agree or disagree with the Professor but he stirs debate and puts out topics for dialogue, which as the son of Professor, is what I think that academicians should do.

 Alexandra Wrage

For the longest time, my This Week In FCPA colleague Howard Sklar crowed to me about Alexandra and how he was such a big fan. Of course I knew of her and her work as President of Trace. Like many of us, I bemoaned the fact she no longer blogs on a regular basis. She does speak on a regular basis and early this year I heard her speak at the Beacon Events Corruption and Compliance South and Southeast Asia Summit. Fortunately she spoke after I did because she is a very dynamic speaker. In addition to her numerous speaking engagements, she does publish articles from time-to-time and yesterday we were treated to a most timely article on gift giving and gift receiving. It was published on the Corporate Insider blog site of Corporate Counsel and was entitled, “‘Tis the Season When Gifts Become Bribes”. In her article, Wrage explored the receipt of gifts by employees in the context of corruption. The article is certainly worth your time to read but she listed the points that any company or compliance professional needs to consider in a gift giving or gift receiving policy:

• Gifts should be modest, tokens of esteem.
• Ideally, they should bear the corporate logo or reflect the company’s products and they should be provided openly and transparently.
• Delivering to an office is preferable to sending to a home address.
• One gift-giving holiday or event should be observed. It doesn’t matter if it’s Diwali, Eid, the Lunar New Year, July 4th, or Christmas, but pick (only) one.
• Perishable gifts of flowers or food are generally thought to be less risky, in part because they can’t be resold.
• Give consistently and without regard to pending or recent procurement or other official decisions.
• Follow corporate policy.
• Document everything.
• Give in good faith and without expectation of any quid pro quo.
• A moderate annual affirmation of both new and longstanding relationships is not a bribe.

Good ideas to follow any time of the year.

Jim McGrath

Jim is a former prosecutor and chief legal officer of a federally funded drug task force so he comes with a different perspective than my civil law background. Jim blogs on his own site, the Internal Investigations Blog and as you may discern from the name of his blog, he tends to look at the investigative side of things. He did so again in a post entitled, “Little Things Mean A Lot: The FCPA Guide on Internal Investigations”. McGrath looked at the DOJ FCPA Guidance from his investigative perspective and came up with the following nugget: “An effective compliance program should include a mechanism for an organization’s employees and others to report suspected or actual misconduct or violations of the company’s policies on a confidential basis and without fear of retaliation. Companies may employ, for example, anony­mous hotlines or ombudsmen. Moreover, once an allegation is made, companies should have in place an efficient, reliable, and properly funded process for investigating the allegation and documenting the company’s response, including any disciplinary or remediation measures taken.” From this he wrote that the “text mandates that companies not only have “in place an efficient [and] reliable . . . process for investigating [an] allegation”, but that it be “properly funded” as well.  [italics in original]

McGrath believes that this language should raise concerns for Chief Compliance Officer “across the land, since “properly funded internal investigation” has now been added to the pile of ill-defined terms such as “foreign official”, “instrumentality”, and “anything of value”. Further he raised the following questions:

• What happens if the unforeseeable occurs and the wheels come off in far greater severity than anticipated when the CCO stocked the internal probe war chest?
• Will that shortcoming be considered a hallmark of a less-than-effective compliance program and militate against a non-prosecution or deferred prosecution agreement or will it factor into a higher culpability score and greater penalties?
• And who – as if practitioners didn’t know – will decide these issues?

I recommend all of these articles and authors to you. Each brings a different perspective and each can help you build, create or enhance your compliance program to meet best standards. A good Friday to all and let us hope that the Texans can recover from their debacle in Boston.

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

Pharmaceutical Anti-Corruption Compliance Conference in Philadelphia Dec. 11-12

The pharmaceutical; medical device and medical supply industry have all been hit hard by Foreign Corrupt Practices Act (FCPA) enforcement actions. Just this summer, enforcement actions were announced against Pfizer which contained several obligations, beyond the 13 point minimum best practices compliance program, that were included in its ‘Enhanced Compliance Obligations’. What are some of the specific issues that make FCPA compliance in these industries so challenging? More importantly what are some of the responses and techniques that compliance professionals can recommend that their companies implement to help protect it from, and mitigate, FCPA compliance risk? If you want to explore these questions, and others, and help get some answers I hope that you can attend next week’s Pharmaceutical Anti-Corruption Compliance Conference in Philadelphia, hosted by Hanson Wade. Rarely has there been an event so targeted to answering the compliance challenges to several related industries.

Initially, I would note that there is a wealth of compliance talent that will speak at the event. Including, but not limited to: Gary Giampetruzzi, Vice President & Assistant General Counsel, Pfizer; Lauran S. D’Alessio, Vice President US Market Business Practices & Compliance, Merck & Company; Susan Barsky, Associate Director, Global Compliance, Teva Pharmaceuticals; Adriana Mosailov, Director of Corporate Compliance & Business Practices, Senior Compliance Officer, Endo Pharmaceuticals; Justin A. Dillon, Vice President, Chief Ethics & Compliance Officer, Ipsen Biopharmaceuticals; Edward Stueck, Senior Director of Monitoring and Assurance, AstraZeneca; Una Nash, Associate Director, Compliance and Ethics, Transparency and Disclosure, Boehringer Ingelheim Pharmaceuticals Inc.; Justin A. Dillon, Vice President, Chief Ethics & Compliance Officer, Ipsen Biopharmaceuticals; Adriana Mosailov, Director of Corporate Compliance & Business Practices, Senior Compliance Officer, Endo Pharmaceuticals; and Jim Dawson, Vice President, Chief Compliance Officer, United Therapeutics Corporation.

There will also be a bevy of top-notch compliance practitioners from outside industries and entities which will add a rich assortment to the speakers and panelists. These include Jeffery Spalding, Assistant General Counsel, Halliburton; Lynee H. Campos, Compliance Counsel, GE Aviation; Virginia Gibson, Partner, Hogan Lovells US LLP; Richard C. Smith, Partner, Fulbright & Jaworski LLP and Jay Mumford, Vice President, Ethisphere Institute.

Mike Koehler, the FCPA Professor, will lead an exploration of the implications of the FCPA’s “New Era” and how to make sure your compliance program will stand up to new, stricter enforcement. You will come to understand how global anti-corruption laws and regulations interplay with the FCPA and find out what steps are being taken to harmonize this language and how you can factor in global regulations. You will hear from compliance practitioners who have been through FCPA investigations and find out how they overhauled their compliance programs to prevent reoccurrence. Compliance professionals outside the pharmaceutical industry can pick up valuable cross-sector lessons from high risk industries. There will be a presentation on internal audit and using the audit process to mitigate risk. I will be speaking on understanding how to deal with tag-along FCPA civil litigation.

If you are on the East Coast, in the pharmaceutical, medical device, medical supply industry or other, and want to attend one of the top FCPA related events for compliance practitioners and hear from some of the top in-house compliance talent in this arena, then this is the one for you. But there is one other reason to attend. The FCPA Professor will be the second speaker on the first day of the event. I am sure he will have some thoughts on the recently released FCPA Guidance and this will be your first opportunity to hear the Professor share some of his opinions on the Guidance. That alone will be worth the price of admission. Also I am Chairing the first day of the event and I know I will have some questions for the Professor on the Guidance. I hope that you can join us next week.

For more details and event registration, 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

The Hound of the Baskervilles – Questions, Questions and More Questions for Wal-Mart

We continue our week of exploration of all things Sherlock Holmes in honor of his 125^th anniversary last week by taking a look at my favorite Holmes novel “The Hound of the Baskervilles”. It is the third of four crime novels by Sir Arthur Conan Doyle featuring the detective Sherlock Holmes. The book was originally serialized in The Strand Magazine from August 1901 to April 1902. In 2003 the book was listed on the BBC’s The Big Read poll of the UK’s best-loved novel. I have read the novel and seen almost all of the available movie and television adaptations. I love the Basil Rathbone version, in eerie black and white, but the Hammer version starring Peter Cushing is actually more faithful to the original text. The story is set largely on Dartmoor in Devon in England’s West Country and tells the story of an attempted murder inspired by the legend of a fearsome, diabolical hound. And for every stone that Holmes overturns to try and solve the mystery another question arises.

I thought about this novel in the context of the recent news comings and goings of Wal-Mart and its ongoing Foreign Corrupt Practices Act (FCPA) imbroglio. As reported by the FCPA Blog, in an article entitled “Wal-Mart’s latest FCPA disclosure (November 2012)”, the company disclosed in its Form 8-K filed with the Securities and Exchange Commission (SEC) on November 15, 2012 that its internal investigation of its foreign subsidiaries had expanded into “Brazil, China and India.” It was not clear from its 8-K filing whether this was the internal investigation initiated after the New York Times (NYT) April 22 story about allegations of corruption and bribery coming out of its Mexico subsidiary or if this was a part of the investigation began in spring 2011 as a relatively routine audit of how well its foreign subsidiaries were complying with its anti-corruption policies.

In a very interesting development, as reported by the FCPA Professor, in a blog, entitled “New Wal-Mart Details Emerge”, where he cited back to a NYT article that “Wal-Mart’s internal review began in Spring 2011 when Jeffrey Gearhart (Wal-Mart’s general counsel) learned of an FCPA enforcement action against Tyson Foods. According to the NYT article, “the audit began in Mexico, China and Brazil, the countries Wal-Mart executives considered the most likely source of problems” and Wal-Mart hired KPMG and Greenberg Traurig LLP to conduct the audit. The NYT article notes that “in July 2011” the firms “had identified significant weaknesses in all three subsidiaries.”

The NYT article went on to state that an un-named Wal-Mart official said that “It was clear that they were not executing” or following Wal-Mart’s internal protocols for performance of due diligence on third parties and FCPA compliance training. Further, the problems unearthed in this internal investigation were serious enough to merit an increase in scope “to expand the audit to all 26 of its foreign subsidiaries.” Then in the fall of 2011, Wal-Mart discovered that the NYT was investigating the company over allegations of bribery and corruption in its Mexico subsidiary and “Wal-Mart’s response in 2005 to serious and specific accusations of widespread bribery by Wal-Mart de Mexico, the company’s largest foreign subsidiary.” This new allegation led Wal-Mart to hire another law firm, Jones Day, “to investigate whether top executives had quashed the company’s investigation into the lawyer’s claims.” The company began to look into other specific accusations of wrongdoing, both in Mexico and it its other subsidiaries. This “effectively created two lines of inquiry — the first being the global compliance review begun by Greenberg Traurig and KPMG. The second was the internal inquiry into specific accusations of bribery and corruption.”

Last Friday, an article in the Chicago Tribune, entitled “Wal-Mart India unit suspends CFO, others pending probe”, reported that the company had “suspended its chief financial officer and other employees as it investigates alleged violations of U.S. anti-bribery laws”. In addition to the Chief Financial Officer (CFO), who doubled up as the firm’s acting legal counsel, those suspended included a senior manager, manager, assistant manager and retainer. “The five, whose job was to procure licenses required for stores and other real estate approvals, taxation and logistics, were told not to attend office until the FCPA-related investigations were over, said one of the persons asking not to be named.”

This investigation was being led by Greenberg Traurig. In the Tribune article, the FCPA Professor was quoted as saying, “Suspensions are common in situations like this. Companies that are under FCPA scrutiny want to demonstrate to enforcement agencies that upon learning of improper conduct, they took effective remedial measures,” said Koehler. “Part of doing that is to isolate current employees from their positions, so that any improper conduct does not continue.” Further, the Professor stated that “If any alleged improper conduct occurred, then the suspensions by Wal-Mart “will serve it well in the eyes of enforcement agencies” such as the Department of Justice and the Securities and Exchange Commission, in deciding how to resolve the broader case.”

An interesting perspective was presented by Sonia Jaspal in her blog RiskBoard, in a post entitled “Bharti Walmart India – Internal FCPA Investigation”. Jaspal posed some interesting and difficult questions relating to the difficulty of doing business in India without paying bribes. She stated, “The Retail Association of India lists 51 different approvals from 32 different agencies. Seeing the corruption index of India and the way government departments’ function, I would be very surprised if an organization manages to obtain all the relevant licenses without any grease payments. Hence, the question is how will the organizations manage to function without paying bribes?” She went on to ask “What happens in such a case to the license? Will the license be revoked, cancelled, or returned? If not, what is stopping the organizations from first taking the licenses by paying bribes and then doing a clean-up exercise to show their commitment to ethics?”

These are all serious and difficult questions for Wal-Mart, its Indian subsidiary and many others to answer. But as Holmes, through his dogged pursuit, was able to finally overcome the mystery of the Hound of the Baskervilles, perhaps someday these questions posed herein may become close to being resolved.

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

Did I Drink the Kool-Aid, Read the Pleadings or Hear it at a Conference?

Last week the FCPA Professor wrote, in a post entitled “Stop Drinking The Kool-Aid”, about the Declination to Prosecute that Morgan Stanley received from the Department of Justice (DOJ) in the affair involving the Morgan Stanley Managing Director Garth Peterson and his self-admitted Foreign Corrupt Practices Act (FCPA) violation. Once again showing that sometimes the Professor and I look at (or read or hear) the same thing and come to different conclusions, as I would posit that the Morgan Stanley Declination was the most significant FCPA enforcement (or perhaps non-enforcement) matter of 2012 to date.

One of the things that I learned in my years as a trial lawyer was that in the litigation realm, every time you open your mouth to the other side, file a pleading, say something in court or in any other way communicate you are providing information to the other side. Sometimes you do so by design and sometimes not. I was taught the art of advocacy for trial lawyers but I was also taught that the art is listening is equally important. This long ago training still forms the prism of how I view things up to this day, practicing law and compliance.

One of the frustrations for any compliance practitioner or indeed business executive trying to comply fully with the FCPA is the dearth of case law precedent to draw from in guiding a best practices compliance program going forward. There are, however, other types of information which compliance practitioners can draw upon such as Opinion Releases, enforcement actions involving Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs) and talks by DOJ and Securities and Exchange Commission (SEC) [more about the speeches later] and now we have a new source of information – Declinations to Prosecute.

In his post the Professor notes that Peterson engaged in the following conduct:

• “Peterson and Chinese Official 1 had a close personal relationship before Peterson joined Morgan Stanley.”
• A shell company used to facilitate the scheme was owned 47% by Chinese Official 1 and 53% by Peterson and a Canadian Attorney.
• “Without the knowledge or consent of his superiors at Morgan Stanley, Peterson sought to compensate Chinese Official 1”
• “Peterson concealed Chinese Official 1’s personal investment [in certain properties] from Morgan Stanley”
• “Peterson used Morgan Stanley’s past, extensive due diligence [as to certain of the investment properties] to benefit his own interests and to act contrary to Morgan Stanley’s interests.”

Penultimately, the Professor adds that in the DOJ Press Release regarding this prosecution, Assistant Attorney General Lanny Breuer said “Mr. Peterson admitted … that he actively sought to evade Morgan Stanley’s internal controls in an effort to enrich himself and a Chinese government official.” Finally, the Professor wrote “An experienced FCPA practitioner, who otherwise holds Breuer in high regard, recently told me that Breuer’s recent speeches on Morgan Stanley’s so-called declination are a “joke.” [Italics mine] I cannot opine on whether there were sufficient facts to support any enforcement action against Morgan Stanley. However, I can state what happened at the end of the day and that was that Morgan Stanley was not prosecuted.

Moreover after reading the Peterson Information (the Professor always embeds links to all relevant documents) it demonstrated the robust nature of Morgan Stanley’s compliance program. Most compliance practitioners are well aware of the factors set out in the DOJ/SEC Press Releases on the Declination to Prosecute, which are:

(1)    Morgan Stanley trained Peterson on anti-corruption policies and the FCPA at least seven times between 2002 and 2008.

(2)    Morgan Stanley distributed to Peterson written training materials specifically addressing the FCPA, which Peterson maintained in his office.

(3)    A Morgan Stanley compliance officer specifically informed Peterson in 2004 that employees of Yongye, a Chinese state-owned entity, were government officials for purposes of the FCPA.

(4)    Peterson received from Morgan Stanley at least thirty five FCPA-compliance reminders.

(5)    Morgan Stanley required Peterson on multiple occasions to certify his compliance with the FCPA. These written certifications were maintained in Peterson’s permanent employment record.

(6)    Morgan Stanley required each of its employees, including Peterson, annually to certify adherence to Morgan Stanley’s Code of Conduct.

(7)    Morgan Stanley required its employees, including Peterson, annually to disclose their outside business interests.

(8)    Morgan Stanley had policies to conduct due diligence on its foreign business partners, conducted due diligence on the Chinese Official and Yongye before initially conducting business with them, and generally imposed an approval process for payments made in the course of its real estate investments.

However, found in the Peterson Information is an entire treasure trove of detail. So from that Information we learn the following:

• Morgan Stanley’s Compliance Department had direct reporting lines up to its Board of Directors.
• Morgan Stanley worked with outside counsel to conduct due diligence into potential business partners.
• Morgan Stanley compliance personnel regularly surveilled and monitored client and employee transactions.
•  Morgan Stanley randomly audited selected personnel in high-risk areas; Morgan Stanley regularly audited and tested Morgan Stanley’s business units.
• Morgan Stanley completed additional anti-corruption initiatives by, for instance, aggregating and evaluating expense reports to attempt to detect potential illicit payments.
• The Morgan Stanley compliance team specialized in particular regions, including China, in order to evaluate region-specific risks.
• Morgan Stanley had a hotline, monitored 24 hours, 7 days per week and such hotline could field calls in every major language including Chinese.

Regarding transaction monitoring, Morgan Stanley engaged in controls to detect and prevent improper payments. These controls required multiple employees to be involved in the approval of any payments above the specific amounts that were mandated in various contracts between Morgan Stanley and outside companies or individuals. Payments above these amounts could not be made until the following procedures, among others, were completed: an asset manager or acquisition-team member familiar with the project activities drafted a contract for the payment; a junior asset manager or junior acquisition-team manager initiated the payment process and sought approval; and an officer-level asset manager or acquisition-team manager with the title of vice-president or above had approved the payment.

How about some words on risk assessments and updating the Morgan Stanley compliance program? Consider the following from the Peterson Information. Morgan Stanley continually evaluated and improved its compliance program and internal controls. For instance beginning in 2007, Morgan Stanley engaged in risk based FCPA auditing intended to detect transactions, payments, and partnerships that suggested increased risks for Morgan Stanley to violate the FCPA. Morgan Stanley checked the efficacy of its controls through various systems including internal audits and desk reviews that included meetings between employees and compliance personnel to discuss anti-corruption risks. Morgan Stanley compliance personnel regularly reviewed and updated the company’s compliance program and policies to reflect regulatory developments and changing risk. Morgan Stanley, in conjunction with outside legal counsel, also annually conducted a formal review of each of its anti-corruption policies.

Consider the specific due diligence performed on the transaction and Chinese government officials at issue in the Peterson FCPA violation by Morgan Stanley. Consistent with Morgan Stanley’s established diligence practices, this due diligence included reviewing Chinese government records concerning Yongye; speaking with sources familiar with the Shanghai real-estate market; checking Yongye’s payment records and credit references; reviewing litigation records concerning Yongye; conducting a site visit to Yongye’s offices; searching media sources concerning Yongye; making a pre textual phone call to Yongye’s  offices; and running a criminal background check on Yongye’s principals.

So when I look at Morgan Stanley’s Declination I see information. It is information that the compliance practitioner can use in his or her company’s compliance program. As for Lanny Breuer saying “”Because Morgan Stanley voluntarily disclosed Peterson’s misconduct, fully cooperated with our investigation, and showed us that it maintained a rigorous compliance program, including extensive training of bank employees on the FCPA and other anti-corruption measures, we declined to bring any enforcement action against the institution in connection with Peterson’s conduct.  That is smart, and responsible, enforcement.”; I say that he needs to keep providing this information because these are the facts on the ground.

FCPA Conference Circuit

Which brings me to my next topic, also recently considered by the FCPA Professor in a post entitled “It Ought To Stop”, of the FCPA conference circuit. For the record let me say that I detest paying $2000 to $4000 to attend anything other than a vacation with my wife. In his post the Professor posed four questions, which I will try and answer in turn.

1. Should public servants be allowed to speak at private conferences and events that charge thousands of dollars to attend? Of course the answer is yes. The conferences are the crème-de la crème of the FCPA knowledge across the country. It is of great value to hear what Lanny Breuer or any other DOJ/SEC official has to say. Do they have prepared remarks – you bet they do, but they always, and I mean always, will give you some additional information in a Q&A or other informal session. But the key is that you have to listen.
2. Should public servants be used as pawns by corporate conference organizers to boost attendance and thus revenue? Am I am pawn if I speak at such a conference, hmmm, or am I articulating a position or am I sharing information (or am I marketing)? Perhaps all four. Should conference organizers invite public officials to conferences to articulate DOJ/SEC positions and afford the attendees the opportunity to hear such remarks. I think that is smart marketing.
3. Should the enforcement agencies release all speeches, comments and remarks, including answers to questions posed by the audience? Yes
4. Do small to medium size enterprises have the resources to attend such events? Last June, during Compliance Week 2012, the local DC Bar held a lunch event on the Gun Sting case which had on the panel the FCPA Professor, Stanley Sporkin, DOJ and SEC representatives and defense lawyers from the case. Cost – $125. Even our local, provincial Houston Bar Association has had DOJ/SEC representatives speak at our events. But would Lanny Breuer come to Houston to speak at the Houston Bar Association Corporate Counsel monthly luncheon and talk to 35 lawyers or speak to 500 plus folks at ACI or Compliance Week or Dow Jones or Ethisphere? (Or go all out and speak to the 1000+ at the annual SCCE conference?) (I will leave that answer to you—which size audience do you think the Number 2 lawyer in the DOJ would speak in front of?)

The Professor raises another point that bears comment. That is sponsorship of events. These events are all pay-to-play and they are big bucks for everyone. Are they marketing? Absolutely. Do I hate it that sponsors can knock me off any chance of speaking because they perceive me as competition? You bet I do. For instance ACI has never even contacted me to speak at the ACI Boot Camp in Houston. You might think that for one of the top events on Houston they might at least even approach me to speak. But obviously some sponsor doesn’t want me anywhere near that podium. But here is the rub; it is one of the best FCPA events held in Houston. Is it in my personal self-interest to pay and attend, absolutely and I will do so again in 2013. After all ACI is in this field to make money.

So did I drink the Kool-Aid? That is up for you to decide. But I think that the DOJ provided solid information to the compliance practitioner in the Morgan Stanley Declination and the Peterson Information. As to whether any of the DOJ/SEC folks should attend ‘for pay’ conferences and provide additional information to the rest of us I can only quote Captain Jean-Luc Picard- ENGAGE.

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

Won’t Get Fooled Again: An Atypical Exploration under Opinion Release 12-01

As many readers of this blog know, I am an avid cyclist. I enjoy riding with rock and roll music blasting away in my ears. I even have lists on my iPod with such titles as 20 mile ride and 40 mile ride. Yesterday I decided to take pot luck and put it on ‘Shuffle’ and one of the songs selected for me was The Who classic “Won’t Get Fooled Again” from the timeless album Who’s Next. The ending line has stuck with me since I initially heard it back in the ’70s: “Meet the new boss, same as the old boss” which then follows with an ending crescendo of Keith Moon’s pounding drums, John Entwhisle’s sonic bass and Pete Townsend’s crashing electric guitar.

In a peculiar way that signature line crystalized my thinking about the latest Foreign Corrupt Practices Act (FCPA) Opinion Release from the Department of Justice (DOJ); that being Opinion Release 12-01 (12-01). As first noted by the FCPA Professor, in his post entitled “DOJ’s Recent Opinion Procedure Release Creates Additional “Foreign Official” Confusion”, 12-01 is dated September 18, 2012, but was apparently only publicly released last week. Pedaling away and listening to The Who it made me think of the evolving nature of not only best practices under the FCPA but also the DOJ’s thinking on the subject. So while the song’s ending line speaks of nothing changing, I realized the nature of FCPA analysis is and can be changing. So rather than being confused, I think that the DOJ has underlined again the fact intensive nature of the analysis required under the FCPA and how companies, if they used a reasoned approach for a specific FCPA issue or problem, can go a long way towards protecting themselves from potential FCPA liability or exposure.

I.                   The Underlying Representations

12-01 notes that a US lobbying firm, the Requestor desired to contract with a third party, the Consulting Company, which has, as one of its principals, a member of the Royal Family in a country where royalty exists. However, the country in question is not a monarchy and the Royal Family Member in question has only held one governmental position in the country’s government, in the late 1990’s. The work in question for which the Consulting Company would be hired is to lobby the country’s Foreign Embassy here in the US to represent the home country here in the US. The specific services that the Consulting Company would perform were stated as “strategic advice and counsel on public policy and business development issues of interest to the [Foreign Country Embassy], as well as make selected liaisons with U.S. and [Foreign Country] interlocutors on behalf of the [Foreign Country Embassy].”

1. Consulting Company Representations. 12-01 had three significant representations made by the Consulting Company. First, the Consulting Company represented that “none of its members, or principals are ‘foreign officials’ as that term is defined in the FCPA.” Second, the Consulting Company represented that it “principals and members are familiar with, and agree to abide by, the FCPA and all U.S. and [Foreign Country] anti-bribery and anticorruption laws.” Third, the Consulting Company has represented that it has “adopted the Good Practice Guidance on Internal Controls, Ethics and Compliance issued by the Organization for Economic Cooperation and Development (OECD) and have pledged that all partners and employees would be bound by the procedures covered in the Good Practices Guide.”

2.  Transparency. Here the Requestor represented that there would be full transparency in not only the home country of the Consulting Company but in the US as well. This would be accomplished through publishing not only the names of the parties to any contract, but the actual contract that the principals of the Consulting Company would sign individually.

3. Compensation. Here there were some interesting provisions listed in 12-01 which provided a level of detail not usually seen in previous Opinion Releases regarding the issue of compensation. First, the parties would agree “in advance on the scope of the Consulting Company’s work” for any set of services the Consulting Company provided. Additionally, any fee would be “at or below the amount charged by other entities…for such services.”

Thereafter, the Requestor anticipated “paying to the Consulting Company twenty percent of what it receives from the Foreign Country Embassy, so long as that percentage accurately reflects the amount of work provided.” The Requestor even went so far as to list the amount of money it is expecting to pay each principal of the Consulting Company on a monthly basis; that being $2,000 per month to each principal. Taking the 20% figure noted above the fee would work out to be $6,000 per month, to the Consulting Company, which equates to a fee of $30,000 per month for lobby services that the Requestor would bill the Foreign Embassy.

4. Contract Review. In a footnote, 12-01 states that “The proposed agreement also provides that “[b]oth [the Requestor] and [the Consulting Company] agree that [the Requestor] will submit this proposed contract to the United States Department of Justice (‘DOJ’) for review under its Foreign Corrupt Practices Act (‘FCPA’) Opinion Procedure and that this agreement will not become effective until such approval is received.””

II.                DOJ Analysis

After initially noting that “A person’s mere membership in the royal family of the Foreign Country, by itself, does not automatically qualify that person as a “foreign official” the DOJ goes on to reiterate its long held position that each question must turn on a “fact-intensive, case-by-case analysis” for resolution. The DOJ follows with a list of factors which should be considered. They include:

1. The structure and distribution of power within a country’s government;
2. A royal family’s current and historical legal status and powers;
3. The individual’s position within the royal family; an individual’s present and past positions within the government;
4. The mechanisms by which an individual could come to hold a position with governmental authority or responsibilities (such as, for example, royal succession);
5. The likelihood that an individual would come to hold such a position;
6. An individual’s ability, directly or indirectly, to affect governmental decision-making; and the (ubiquitous)
7. Numerous other factors.

In addition to the above, the DOJ also relied upon the factors from District Courts, such as those expressed in United States v. Carson:

• The foreign state’s characterization of the entity and its employees;
• The foreign state’s degree of control over the entity;
• The purpose of the entity’s activities;
• The entity’s obligations and privileges under the foreign state’s law, including whether the entity exercises exclusive or controlling power to administer its designated functions;
• The circumstances surrounding the entity’s creation; and
• The foreign state’s extent of ownership of the entity, including the level of financial support by the state (e.g., subsidies, special tax treatment, and loans).

Finally, the DOJ also reviewed the factors that it set forth in its prior Opinion Release 10-03 for the following factors of whether a Royal Family Member is a foreign governmental official. These 10-03 factors are: “(i) how much control or influence the individual has over the levers of governmental power, execution, administration, finances, and the like; (ii) whether a foreign government characterizes an individual or entity as having governmental power; and (iii) whether and under what circumstances an individual (or entity) may act on behalf of, or bind, a government.”

Based upon its analysis, the DOJ concluded, “The Department concludes that the Royal Family Member does not presently qualify as a foreign official” for the purposes of the FCPA.

III.             Discussion

So how does all of the above relate to The Who and “Won’t Get Fooled Again”? I believe that 12-01 emphasizes that there is no ‘one-size-fits-all’ analysis under the FCPA. While I probably never would have made the determination that a Royal Family Member is not a foreign governmental official under the FCPA, 12-01 makes clear that every analysis stands on its own facts and circumstances. The reason I would not have ever opined that a Royal Family Member was not a foreign governmental official, is that I have only used the “status analysis” that was used by the Carson court

The FCPA Professor correctly points out that the DOJ has introduced a “duties analysis” into the mix. Where I disagree with him, is that I do not believe that the duties analysis is elevated above the status analysis from the Carson case, which focuses on the status of the entity within the foreign country itself. I think that both analyses were used by the DOJ in 12-01 and both analyses can be used going forward. So under the status analysis, the DOJ stated that “The Royal Family Member also cannot, by virtue of his membership in the royal family, ascend to a governmental position and has no benefits or privileges because of his status as a Royal Family Member.” But 12-01 goes onto incorporate a duties analysis as well when it stated “the Royal Family Member has no power to affect the Foreign Country government’s award of the engagement the Requestor seeks.”

One of the primary jobs of a lawyer is to take precedent from case law and apply them to the facts of a specific situation. In the FCPA arena there is a dearth of case law precedent but in most cases the DOJ has used two types of analysis of who is a foreign governmental official. It is not clear from 12-01 if the Requestor or the DOJ analyzed the facts as presented using both of these tests but, whether they were lawyers representing the Requestor or DOJ lawyers, kudos for coming up with a new legal argument to make by combining both the status analysis and the duties analysis.

But equally importantly to the novel argument made, is the use of the Opinion Release procedure itself. Recognizing that it took some seven months to obtain the formal Opinion Release does not take away from the power of the procedure. A lawyer was faced with what I would have termed an intractable problem; that being a Royal Family Member and the issue of a foreign governmental official. With some creativity in the legal argument and the use of the Opinion Release procedure, the Requestor was able to obtain a way forward which accomplished both its business goals and the goals of doing business in compliance with the FCPA.

I believe the ultimate takeaway from 12-01 is that the DOJ not only listens but it considers all the facts. In other words, not only does the analysis change as facts evolve but the final answer may change as well and it does not necessarily mean that the new boss will be the same as the old boss or you ‘won’t get fooled again’ into thinking there is absolutely, positively no way to manage a potential FCPA issue. One of your jobs as a lawyer is to be creative and Opinion Release 12-01 shows you that there is a way to do so.

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For a You Tube playing of the classic Who’s Next album cut of “Won’t Get Fooled Again” click here.

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

© Thomas R. Fox, 2012

Antietam Led to the Emancipation Proclamation – Where Will Wal-Mart Lead?

September 17 was the 150^th anniversary of the single bloodiest day in American history. On that day the Army of Northern Virginia, led by Robert E. Lee met the Army of the Potomac, led by George McClellan. The battle was fought near a railway junction called Sharpsburg on Antietam Creek. On this day more than 23,000 Americans from both the North and South were casualties. As a Texan, I must note that John Hood’s Texas Division had casualties reported at over 90%, the highest ever for any US Division in any war at any time. When asked by a fellow officer where his division was, Hood replied, “Dead on the field.”

While the battle was a tactical draw, it ended the first Southern threat of invasion of the North. More importantly it provided Lincoln the political cover to issue the Emancipation Document, which changed the nature and course of the Civil War. I thought about how the horrific battle of Antietam led to something very different, the Emancipation Proclamation, when I read the latest output by the FCPA Professor, in an article entitled “Foreign Corrupt Practices Act Enforcement As Seen Through Wal-Mart’s Potential Exposure”. The Professor used the lens of the allegations of Foreign Corrupt Practices Act (FCPA) violations brought forward against Wal-Mart, as set out in the New York Times (NYT) article of April 21, 2012. The Professor explored five questions:

• whether Congress intended in passing the FCPA to capture the type of payments at issue in Wal-Mart;
• what FCPA case law instructs as to the payments;
• whether what Congress intended or what courts have concluded even matters; and
• the politicization of Wal-Mart’s scrutiny and its impact on FCPA reform.

I.                   Congressional Intent

Here the Professor notes that “The first question, and the easiest, is whether, given the SEC’s and DOJ’s current enforcement theories, the Mexican payments in connection with permitting, licensing, and inspection issues can expose Wal-Mart to an FCPA enforcement action?” and that the answer to this question is most likely yes; the Professor believes that the “second, and more important question, is whether Congress in passing the FCPA intended to capture pay payments occurring outside the context of foreign government procurement and involving ministerial and clerical acts by foreign governmental officials.” After reviewing the Congressional record to try and determine some legislative intent the Professor quoted Rep. Robert C. Eckhardt (D-Texas) – a congressional leader on the foreign payments issue, for the following:

Payments to a [foreign official with ministerial or clerical duties] for instance, to complete a form that ought, in equity, to be completed, to give everybody equal treatment, to move the goods off a dock which he will not move without a tip, a mordida, I think, as they call it in the Spanish language, a facilitating payment, or a grease payment would not constitute a bribe.

Based upon his review, the Professor concludes that “answer from the FCPA’s legislative history is no” and Congress did not intend to make facilitation payments illegal under the FCPA.

II.                Case Law

The Professor reviews four cases which he believes touch on the allegations. US v. Durham; US v. Kay (District Court); SEC v. Mattson; and US v. Kay (5^th Circuit) in asking the question of whether even if the payments made by Wal-Mart payment do not meet the FCPA’s facilitation payments exception, “in order for there to be a violation of the FCPA’s anti-bribery provisions, the ‘‘obtain or retain business’’ element, among others, must also be met.”

After noting that the Department of Justice (DOJ) lost 3 of the 4 cases, he opines that the fourth, US. v. Kay in the 5^th Circuit was equivocal at best. Therefore, any inquiry must be “a highly fact-dependent question whether a payment to a foreign official outside the context of foreign government procurement is subject to the FCPA. A key portion from the Kayruling logically implicated by Wal-Mart’s alleged payments is the following: ‘‘there are bound to be circumstances in which payments outside the context of foreign government procurement merely increase the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business.’’

III.             Do These Issues Even Matter?

In this section, the Professor notes that the negotiations between Wal-Mart and the DOJ will most likely be “behind closed doors in Washington DC.” In the air of negotiated Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs), the DOJ will assert its claims of jurisdiction and will not, because it cannot test the DOJ’s theories of liability at a trial. The Professor stated, “It will not matter if Wal-Mart’s payments are the type Congress intended to capture in passing the FCPA, nor will it matter what relevant case law instructs as to the payments.”

IV.              The Impact of Wal-Mart’s FCPA Scrutiny

Here the Professor raises fours issues: (1) the loss of stock price; (2) the investigative cost; (3) follow on shareholder derivative civil lawsuits; and (4) the effect this matter will have in others in the retail industry.

While Wal-Mart stock initially dropped 4.7 percent and continued a downward trend with an approximately $20 billion dip in shareholder value, it did rebound. However, the cost for the now worldwide investigation was already up to $51MM by the end of July. The Professor reports that  “at least 12 shareholder lawsuits have been filed against Wal-Mart and/or its officers and directors in the wake of the Times article.” Lastly, regarding a retail industry sweep, the Professor noted that “According to a recent Reuters report, other retail companies have also since reported to U.S. agencies suspicions of their own potential violations, which in turn has the Justice Department and SEC considering a sweep of the entire industry.”

V.                 FCPA Reform

Here the Professor continues his consistent argument that the Wal-Mart matter should encourage, rather than discourage, substantive debate on whether the FCPA should be reformed. However, he does not believe that opponents of FCPA reform “pounced” in heralding that the Wal-Mart matter ended the debate on FCPA reform (including this commentator). He does admit that this case may well have ended Congress’ collective stomach to take FCPA reform head on. He also notes that some Congressmen opened their own separate investigations of Wal-Mart but no person wanted to use the matter to inform the FCPA debate before Congress because as stated by the Chief Counsel of the House Judiciary Committee at a Hanson Wade FCPA conference in Houston, Texas in June of this year, ‘‘practical matter, public opinion matters, what happens in the real world matters,’’ and the atmosphere surrounding FCPA reform after the Times article has made it ‘‘harder for different groups to advocate’’ for FCPA reform.

With all articles published by the FCPA Professor, they are well researched and well written. I have found them to be provocative but in a way that fosters debate. Sort of the role that I think a Professor should have. We know where the bloodiest day in American history led but we do not know at this point, where this Wal-Mart matter will end.

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

Who is that Masked Man-an Interview with the FCPA Professor

Ed. Note-today’s post inaugurates a series that I have wanted to do for sometime. It is a series of interviews with prominent members of the FCPA commentariat. Today I begin with an interview with the FCPA Professor. I hope to publish interviews with other notable commentators this fall. ====================================================================================

1.      Where did you grow up and where did you go to college and law school? Can you tell us about anything from those experiences that led you to your current position?

I grew up, as did my high-school sweetheart wife, in Elkhart Lake, WI, a village of approximately 1,000.  Life was good in Elkhart Lake, it is a picturesque resort community, and the Kettle Moraine State Forest is nearby.  Both my Dad (a painter) and my mom (a nurse) instilled in me a good work ethic and for many years I awoke at 4:30 a.m. to deliver newspapers.  Basketball defined much of my youth.  I remain the third-leading scorer in the history of Wisconsin high school basketball (2,685 points) and the leading scorer in state history who did not play for their dad!  I played college basketball at the University of South Dakota (USD) and while at USD I had the good fortune to fall under the wings of the legendary Professor William “Doc” Farber and became a “Farber Boy,” a collection of USD Political Science students mentored by Doc, including Tom Brokaw, various Senators and Governors, and countless lawyers, business leaders and the like.  Being exposed to these successful individuals as a student was extremely beneficial and opened many doors to me.  Doc also literally showed me the world as we traveled to approximately 35 countries together.  Although we would visit the typical tourist sites, these trips were also educational missions as Doc would set up meetings with government officials, lawyers, business leaders and the like.  Doc passed away in 2007 (at the age of 97) before I began my academic career, but I like to think that he would be proud of me and the things I do.

After USD, I attended the University of Wisconsin Law School.  Becoming a professor was not on my radar screen while in law school, but looking back at my law school days the signs were there as I was keenly interested in development of the law, the intersection of law and policy, and Wisconsin’s law in action approach to education.

2.      Can you tell me about your professional career before you went into academia?

After law school I began at Foley & Lardner, a large national law firm based in Milwaukee.  As typical for a young associate at a big firm, my first few years were a hodgepodge of various assignments.  However, I soon began to take ownership of my career by focusing on the Foreign Corrupt Practices Act which intrigued me from the first time I heard of the law as a young associate.  Being a young associate in a large law firm, based in Milwaukee, circa 2000 and wanting to focus on the FCPA sounds ridiculous, but I was ever persistent and before I knew it I was flying around the world conducting FCPA investigations.  The work was fascinating and the trips were fun.  I was like an FCPA sponge.  During those long trips to Indonesia, India, China and other far-off places I took with me everything I could possibly read related to the FCPA.  I attended nearly every FCPA conference that my schedule allowed.  I sat around the negotiation tables at SEC and DOJ headquarters.  I soon began to realize that many in the industry were all singing from the same sheet of music and it appeared to me that little actual lawyering was involved in the FCPA practice.  Few of the pressing why questions were being asked because the FCPA bar was so small and fear of rocking the boat with the enforcement agencies seemed more important than advocating for a client.  I was intellectually curious and motivated to ask the why questions, but knew that my position at a big law firm did not provide the best opportunity to do so.  As many attorneys do after spending several years at a big law firm, I began to re-evaluate my career and asked myself what about the law I enjoyed the most.  For me, that was research and writing and asking the why questions, why is the law the way it is, and how can it be improved.  That, along with the fact that the vibe of college campus never left my bones, motivated me to pursue a path towards academia.  It was a long path, as tenure track positions in academia are very difficult to get.  Here again I was persistent and after a few years of being unsuccessful, I was grateful when Butler University gave me a chance in 2009 to become a professor.  After three successful years as a law professor in a business school, I was grateful again when Southern Illinois University gave me a chance recently to become a law professor in a law school.

3.      I have always wondered where you came up with the phrase “the façade of FCPA enforcement”? Can you tell us a bit about it.

I wish I could claim original ownership to the concept, but I borrowed the “façade of enforcement” part from U.S. District Court Judge Jed Rakoff in his SEC v. Bank of America decision concerning the SEC’s neither admit nor deny settlement policy.  The issues he raised in that case concerning the dynamics of resolving an SEC enforcement action have clear parallels to FCPA enforcement.  Just to be clear, and as noted on the very first page of the article published in the Georgetown Journal of International Law, I am not arguing or suggesting that every FCPA enforcement action is unwarranted or that no company or individual has never violated the FCPA.  Rather, what I aimed to demonstrate in the article was that a significant majority of recent FCPA enforcement actions are a façade – including those that allege clear instance of corporate bribery – yet are resolved without FCPA anti-bribery charges.  I was honored to have the opportunity to discuss my article and the “façade of enforcement” during my 2010 Senate testimony.  I conclude the article by encouraging more FCPA defendants to challenge the enforcement agencies and further expose the façade of FCPA enforcement.  I will leave it to others to decide whether the article has made a difference, but the article (as evidenced by download statistics) is the most read FCPA article out there and since its publication there have been several challenges to various enforcement agency theories.

4.      What is the reason you started the site FCPA Professor and what do you hope to achieve with it?

When I launched FCPA Professor in July 2009 my mission statement was to inject a much needed scholarly voice into FCPA issues. In addition to covering the “who, what, and where” of FCPA enforcement actions and related issues, I wanted to also explore the more analytical “why” questions increasingly present in this current era of aggressive FCPA enforcement. The goal was to foster a forum for critical analysis and discussion of the FCPA and related topics among FCPA practitioners, business and compliance professionals, scholars and students, and other interested persons.

The mission remains the same today.

5.      You recently completed your second Ironman, can you tell what it is like to prepare for and compete in such an event?

Ironman is obviously a physical test, but a mental test and emotional journey just the same.  The mind often tells the body to quit before the body is ready, competing in an Ironman proves that point.  After a 2.4 mile swim, and a 112 bike ride, your mind is telling you that you can’t run 26.2 miles.  After 6-8 miles of the run, your mind is telling you that you can’t run an additional 18 miles.  But you just do it because your body can.

Having the flexibility of an academic position makes training doable without sacrificing other aspects of my life.  My family continues to call Elkhart Lake, WI home during the non-academic portions of the year and it is an ideal triathlon training area with an active athletic scene.  There are some Ironman who allow the pursuit to dominate their life and religiously follow a training regime.  I am not one of those people, rather I train when I feel like training, not because a schedule says I am supposed to do x,y, and z on a particular day.  I think such an approach takes the fun out of the disciplines.

Being physically active is part of my DNA and sharpens my thinking.  In fact, many ideas for my FCPA Professor posts, articles and scholarship have been formed or sharpened while training.

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For those of you who do not know him. the FCPA Professor is in fact Mike Koehler, who is an Assistant Professor, Southern Illinois Univ. School of Law. He writes daily on his own blog site, the FCPA Professor.

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

© Thomas R. Fox, 2012

Oracle India Parks Monies While the Astros Move on Down to AAA

The Houston Astros announced today that are now officially a Triple-A (AAA) ball club. How do we know this? Because last night they fired their major league Manager Brad Mills and replaced him with their current (and apparently still) AAA Manager, Tony DeFrancesco. When reached for comment, Astros owner Jim Crane, fresh from his redesign of the Astros jerseys, said “We are either (a) playing AAA players or (b) playing like AAA players so I thought it would make the guys more comfortable.” [OK, I confess I made up the quote.] However, I did not make up the letter that General Manager Jeff Luhnow sent to season ticket holders last week apologizing for the terrible play of the team this year but he hopes we will all continue to buy tickets this year and next to “support the team”. No word on whether refunds will be given with all the money the Astros are saving as a AAA club playing in the National League or even that the Astros will reduce their prices to AAA rates.

As reported by the FCPA Professor last week, the Securities and Exchange Commission (SEC) announced the settlement of an action against Oracle for violations of the books and records provisions of the Foreign Corrupt Practices Act (FCPA). Unlike the Astros, who publicly announced their move to AAA status, Oracle got into FCPA hot water because its Indian subsidiary directed its distributor to set up a separate slush fund of monies which could be and were used to pay monies to persons unknown. According to the SEC Complaint, the scheme worked as follows: Oracle India would identify and work with the end user customers in selling products and services to them and negotiating the final price. However, the purchase order would be placed by the customer with Oracle India’s distributor. This distributor would then purchase the licenses and services directly from Oracle, and resell them to the customer at the higher price than had been negotiated by Oracle India. The difference between what the government end user paid the distributor and what the distributor paid Oracle typically is referred to as “margin” which the distributor generally retains as payment for its services. That description sounds like most distributor relationships but this was not what got Oracle into trouble.

The Scheme

As further specified in the Compliant, “certain Oracle India employees created extra margins between the end user and distributor price and directed the distributors to hold the extra margin in side funds. Oracle India’s employees made these margins large enough to ensure a side fund existed to pay third parties. “At the direction of the Oracle India employees, the distributor then made payments out of the side funds to third parties, purportedly for marketing and development expenses.” The SEC Compliant noted that “about $2.2 million in funds were improperly “parked” with the Company’s distributors.” To compound this problem, employees of Oracle India concealed the existence of this side fund from Oracle in the US and hence there was an incorrect accounting in Oracle’s books and records.

The Complaint further noted that “Oracle India’s parked funds created a risk that they potentially could be used for illicit means, such as bribery or embezzlement” and then went on to highlight such an instance which occurred in May 2006, where Oracle India secured a $3.9 million deal with India’s Ministry of Information Technology and Communications. Oracle’s distributor accepted payment from the end user for the full $3.9 million. Under the direction of Oracle India’s then Sales Director, the distributor sent approximately $2.1 million to Oracle, which Oracle booked as revenue on the transaction. Oracle India employees then directed the distributor to keep approximately $151,000 as payment for the distributor’s services. The Oracle India employees further instructed the distributor to “park” the remaining approximately $1.7 million to be used for disbursement towards “marketing development purposes.” Some two months later, an Oracle India employee provided the distributor with eight invoices for payments to third party vendors, in amounts ranging from approximately $110,000 to $396,000. These invoices were later determined to be false. Further none of these third parties, which were just storefronts and provided no services on the deal, were on Oracle’s approved vendor list.

Failure of Internal Audit

All of the above were in violation of Oracle’s internal policies, however the Compliant specified that “Oracle lacked the proper controls to prevent its employees at Oracle India from creating and misusing the parked funds” and prior to 2009 “the Company failed to audit and compare the distributor’s margin against the end user price to ensure excess margins were not being built into the pricing structure.” Oracle failed to either (1) seek transparency in its dealing with the distributor and (2) audit third party payments made by the distributors on Oracle’s behalf” both of which would have enabled the Company to check that payments were made to appropriate recipients. Indeed the scheme only came to Oracle’s attention during an unrelated “local tax inquiry to Oracle’s India distributor”. This sounds reminiscent of HP Germany where a routine Bavarian Provincial tax audit picked up the suspicious payments which lead to a FCPA investigation.

What Did They Do To Remedy It?

However, even with the above listed failures of Oracle’s compliance program, the Company did take Maxim Three of McNulty’s Maxim’s to heart: What did you do to remedy it? The Complaint indicated that the person in charge of Oracle’s Supply Chain at its Indian subsidiary resigned and left the company. An internal investigation was undertaken and four employees of the Indian subsidiary who had actual knowledge of the scheme were terminated. Additionally, “Oracle took other remedial measures to address the risk and controls related to parked funds, including: conducting additional due diligence in its partner transactions in India so that Oracle had greater transparency into end user pricing in government contracts; terminating its relationship with the distributor involved in the transactions at issue; directing its distributors not to allow the creation of side funds; requiring additional representations and warranties from distributors to include the fact that no side funds exist; and enhancing training for its partners and employees to address anti-corruption policies.”

So what does this mean for the compliance practitioner? This is the second matter, the first being the Smith and Nephew enforcement action, which focused on distributors. If your company uses this model to handle or supplement its sales channels, you should immediately review the entire process, from business purpose, to due diligence, to contract terms and post-contract management, to make sure that your company is following minimum best practices with regards to this sales mechanism. You should also put selective distributors on your company’s internal audit schedule for the next cycle.

And if you are an Astros fan…You think the Astros will reduce prices to AAA rates?

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

The Pfizer DPA: The New Minimum Best Practices for a FCPA Compliance Program? Part I

It’s Friday and once again it was a wild week in the Foreign Corrupt Practices Act (FCPA) and wider compliance world. In the FCPA arena, as most compliance practitioners are aware, Pfizer settled is FCPA enforcement action this week. In its settlement Pfizer paid $15 million in criminal penalties to the Department of Justice (DOJ) and $45.2 million in disgorgement and pre-judgment interest to the Securities and Exchange Commission (SEC). While the total settlement did not put Pfizer on the coveted ‘Top 10 FCPA Settlements of All-Time’ list, Pfizer did land on the FCPA Blog’s ‘Top Ten Disgorgement’ list. A special kudos goes to the FCPA Professor for his exhaustive review, over two separate blog postings, of the Criminal Information, Deferred Prosecution Agreement (DPA), SEC Civil Complaint and the DOJ and SEC Press Releases.

The DPA had some very interesting new wrinkles regarding the compliance regime that Pfizer agreed to institute. They were all called “enhanced compliance obligations” and were included in three supplemental attachments to the standard Attachment C, of the DPA. They were monikered Attachments C.1, C.2 and C.3. I have set out below the obligations that Pfizer agreed to in Attachment C.1.

Attachment C.1 – Corporate Compliance Program

This is the attachment that has traditionally set out the standard 13 point minimum best practices compliance program that has been in each DPA since at least the Panalpina settlement of November, 2010. The Pfizer corporate compliance program is as follows:

1.         A clearly articulated corporate policy against violations of the FCPA, including its anti-bribery, books and records, and internal controls provisions, and other applicable counterparts (collectively, the “anti-corruption laws”);

2.         Promulgation of compliance standards and procedures designed to reduce the prospect of violations of the anti-corruption laws and Pfizer’s compliance code. These standards and procedures shall apply to all directors, officers, and employees and, where necessary and appropriate, outside parties while acting on behalf of Pfizer in a foreign jurisdiction, including but not limited to, agents, consultants, representatives, distributors, teaming partners, and joint venture partners (collectively, “agents and business partners”).

3.         The assignment of responsibility to one or more senior corporate executives of Pfizer for the implementation and oversight of compliance with policies, standards, and procedures regarding the anti-corruption laws. Such corporate officials) shall have the authority to report matters directly to Pfizer’s Board of Directors or any appropriate committee of the Board of Directors.

4.         Mechanisms designed to ensure that the policies, standards, and procedures of Pfizer regarding the anti-corruption laws are effectively communicated to all directors, officers, employees, and, where appropriate, agents and business partners. These mechanisms shall include: (a) periodic training for all directors, officers, and employees, and, where necessary and appropriate, agents and business partners; and (b) accompanying certifications by all such directors, officers, and employees, and, where necessary and appropriate, agents, and business partners, certifying compliance with the training requirements.

5.         An effective system for reporting suspected criminal conduct and/or violations of the compliance policies, standards, and procedures regarding the anti-corruption laws for directors, officers, employees, and, where necessary and appropriate, agents and business partners.

6.         Appropriate disciplinary procedures to address, among other things, violations of the anti-corruption laws and Pfizer’s compliance code by Pfizer’s directors, officers, and employees.

7.         Appropriate due diligence requirements pertaining to the retention and oversight of agents and business partners.

8.         Standard provisions in agreements, contracts, and renewals thereof with all agents and business partners that are reasonably calculated to prevent violations of the anti-corruption laws, which may, depending upon the circumstances, include: (a) anti-corruption representations and undertakings relating to compliance with the anti-corruption laws; (b) rights to conduct audits of the books and records of the agent or business partner to ensure compliance with the foregoing; and (c) rights to terminate an agent or business partner as a result of ally breach of anti-corruption laws, and regulations or representations and undertakings related to such matters.

9.         Periodic testing of the compliance code, standards, and procedures designed to evaluate their effectiveness in detecting and reducing violations of anti-corruption laws and Pfizer’s compliance code.

In a subsequent posting I will dive more deeply into the Enhanced Compliance Obligations and the Corporate Reporting Obligations and what these new requirements might portend for your compliance program.

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In honor of the Astros attempting to break the nearly 100 year old record for the worst 40 game stretch in the history, we will keep you posted as they close in on the mark. Now 3-36. Also 1 for August. Stay tuned. It’s the most exciting thing to happen to the Astros this year, unless you include the new owner breathlessly informing us that the Astros will have new uniforms next year.

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

© Thomas R. Fox, 2012

NFL Training Camps Open: Is The FCPA Political Football Season Upon Us?

I have often wondered who Mike Volkov refers to when he derisively uses the term “FCPA Paparazzi”. I would have to assume he uses it for folks who comment upon the Foreign Corrupt Practices Act (FCPA) in a public manner but do not know what they are talking about. However, I could not figure who on earth Mike might be talking about, at least until now. On Monday, the FCPA Professor, who assuredly does know what he is talking about, had a guest blog by Rajat Soni, where he asked the question “Politically Speaking-Is the FCPA Doomed in the Next Five to Seven Years?” Perhaps Soni was simply inspired by the US Presidential race to make claims which have no basis in fact. Whatever the reason, I found his piece to be so far from reality as to be worse than laughable.

While I do agree with his proposition that the current Congress cannot and will not pass anything, let alone a piece of anti-corruption legislation, to say that the first thing that Mitt Romney would do as President is to suspend enforcement of the FCPA is simply ludicrous. As we all know, because he has said so over and over again, his first act will be repeal RomneyCare, oops ObamaCare. How about those pesky Brothers Koch, the bane of all progressive thinking peoples across the globe? Has anyone, and I mean anyone, heard them say US companies need to bribe more? Even with the injection of unlimited money into the Presidential race wrought by Citizens United, there has been nothing said in any state or federal election race, that I am aware of, about the need for US companies to pay more bribes as a sure fire way of getting us out of the economic doldrums. Maybe Soni has confused the First Amendment right of Free Speech with the First Amendment right of the Freedom of the Press, which the Wall Street Journal (WSJ) opined to in an editorial last year as a defense to News Corp’s alleged bribery of UK officials.

How about this whopper: Barry Goldwater as a “lover of corporations”? He must be rolling in his libertarian grave with that one. This is the person who in the 1980s said gays had the right to be left alone to live their own lifestyles. Does that sound like anything you have heard a GOP’er say in the current political debate? I doubt Brother Goldwater could even win a primary in the Tea Party dominated Arizona these days.

Indeed, if you even want some on the record evidence in the other direction, recall the question posed by House Judiciary Committee Chair, Representative James Sensenbrenner (R-Wis), in the June 2011 hearing on FCPA enforcement to the Department of Justice (DOJ) representative, Greg Andres. Representative Sensenbrenner’s first question was whether the DOJ would support amending the FCPA to make all commercial bribery illegal; not simply that involving foreign governmental officials. I suppose that Soni has not heard about the New York Times (NYT) article of April 21, 2012 about Wal-Mart and allegations of bribery of Mexican government officials. If not, perhaps he might want to read Dick Cassin’s blog post entitled “How Wal-Mart Torched FCPA Reform”.

How about the professionalism and independence of the DOJ to enforce laws? While I wanted to write something about Henry Peterson, the career DOJ attorney who said No to President Nixon’s direct order to stop his Watergate investigation, Soni does not seem to think “Watergate Era” precedents have any relevance today. So instead I will simply quote from the comment by Howard Sklar to the blog piece, which reads:

“First, President Romney will just shut down the vigorous FCPA enforcement regime in the DOJ and SEC”? No, he won’t. In fact, I’ll bet all the money in my pockets against all the money in your pockets that that won’t happen.

“Let’s count the ways: first, the President doesn’t “order” the SEC to do anything. It’s a quasi-independent agency, and there would be tremendous political ramifications if the President called up the Chairman (and at least the two other Republican Commissioners, since it takes a majority vote to do anything) and ordered him or her to do anything.

Second, President Romney would have the same problem with the DOJ. It’s not like Reagan, where Romney can just say, “drop the case.” Any attempt to undermine FCPA enforcement would be a political redball. It would be painted as soft on bribery. It’s the same reason the legislature can’t eviscerate the statute.

Where the President could influence enforcement is in the appointment of the AAG of the Criminal Division and the SEC Commissioners. Even then, Presidents are pretty wary of screwing around in that arena. Even then, remember, most DOJ prosecutors are career people. They don’t care about and don’t consider politics.

Finally, most DOJ and SEC actions come from self-disclosure. Disclosure is recommended by counsel, whose financial interest is best served by disclosure, not by suggesting a risky, don’t-disclose-because-Republicans-are-in-office attitude.”

I guess Soni thinks that the FCPA debate in this country has sunk to the level of the current Presidential election season. However, I would suggest that he read any of the FCPA commentaratti out there to see that there is reasoned debate going on between reasonable people with different points of view. And even though National Football League training camps opened last week, I see no evidence that the FCPA is or will become a political football.

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