FCPA Compliance and Ethics Blog

December 12, 2013

What a Long Strange Trip It’s Been – The Bilfinger FCPA Settlement

Earlier this week the Department of Justice (DOJ) announced it had resolved an ongoing Foreign Corrupt Practices Act (FCPA) with German entity Bilfinger SE (Bilfinger). This case involved the same background facts and events as the Willbros corporate FCPA enforcement action and the related individual enforcement actions with some of its former employees. The facts in this case were bad, bad, bad. The FCPA Professor went into a deep dive on the case in a blog post, entitled “German Company Resolves FCPA Enforcement Action Based On Conduct From “The Distant Past””. In another blog post, entitled “Of Note From The Bilfinger Enforcement Action”, he questioned why this particular enforcement action took so long to resolve.  Whatever the answer to that question might be, there are several interesting aspects to the matter which are of significance to the compliance practitioner, which I will highlight in this post.

I.                    DOJ Fine Calculation

To resolve the criminal aspects of this case, Bilfinger agreed to pay a $32 million criminal penalty as part of a Deferred Prosecution Agreement (DPA) with the DOJ. The thing that I found interesting about the fine calculation, as set out in the DPA, was the large increase in the amount due to the size of the bribery paid which increased the point calculation under the US Sentencing Guidelines by +18 and the increase for the payment of multiple bribes by +2.. The company only received a -2 for its cooperation in the investigation, clearly demonstrating recognition and affirmative acceptance of responsibility for its criminal conduct. The company did not self-disclose so it did not receive any credit under the US Sentencing Guidelines for that affirmative conduct. The calculated fine range was between $28MM to $56MM so the company received a fine at the lower end of the range. But not less than the lower end or event at the end.

II.                Landscaping Account to Pay Bribes

One of the interesting techniques that the company used to physically pay the bribes was through a petty cash account in the Joint Venture’s (JV) office in Nigeria. The DOJ has long cautioned companies about maintaining significant amounts of petty cash in offices or the undocumented use of petty cash accounts as a mechanism to funnel bribes. In this case, Bilfinger ingeniously said the cash was going to the Nigeria operation to pay “landscaping expenses”. With $6MM in bribes paid out, one might think the company was landscaping the Gardens at Versailles but the lesson learned for the compliance practitioner is that accounts which might appear to be legitimate business expenses need to be scrutinized though monitoring and auditing.

III.             Political Parties

Most compliance practitioners are well aware that the FCPA applies to government officials, their family members and similarly situated officers, directors and employees of state owned enterprises. However, in the Bilfinger enforcement action, the company paid bribes to “the dominant political party in Nigeria” which was not named in the Information of the DPA. The Anti-Bribery Provisions of the FCPA states:

§ 78dd-1. Prohibited foreign trade practices by issuers

(a)    Prohibition (b)

It shall be unlawful for any issuer which has a class of securities registered pursuant to section 78l of this title or which is required to file reports under section 78o(d) of this title, or for any officer, director, employee, or agent of such issuer or any stockholder thereof acting on behalf of such issuer, to make use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to–

(2) any foreign political party or official thereof or any candidate for foreign political office for purposes of–

(A) (i) influencing any act or decision of such party, official, or candidate in its or his official capacity, (ii) inducing such party, official, or candidate to do or omit to do an act in violation of the lawful duty of such party, official, or candidate, or (iii) securing any improper advantage; or

(B) inducing such party, official, or candidate to use its or his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person; or.

IV.              Best in Class Compliance Program

During the pendency of the investigation, Bilfinger moved to create a best practices compliance program. They appear to have done so and agreed in the DPA to continue to maintain such a compliance program. Under Schedule C to the DPA, it set out the compliance program which the company had implemented and continued to keep in place, at least during the length of the DPA. It included the following components.

  1. High level commitment from company officials and senior management to do business in compliance with the FCPA.
  2. A substantive written anti-corruption compliance code of conduct.
  3. Written policies and procedures to implement this code of conduct.
  4. A robust system of internal controls, including accounting and financial controls.
  5. Risk assessments and risk reviews of its ongoing business.
  6. No less than annual assessments of its overall compliance program.
  7. Appropriate oversight and responsibility of a Chief Compliance Officer.
  8. Effective training for all employees and relevant third parties.
  9. An effective compliance function which can provide guidance to company employees.
  10. A robust internal reporting system.
  11. Effective investigations of any reported compliance issue.
  12. Appropriate incentives for employees to do business ethically and in compliance.
  13. Enforced discipline for any employee who violates the company’s compliance program.
  14. Suitable due diligence and management of third parties and business partners.
  15. A correct level of pre-acquisition due diligence for any merger or acquisition candidate, including a risk assessment and reporting to the DOJ if the company uncovers any FCPA-violative conduct during this pre-acquisition phase.
  16. As soon as practicable, Bilfinger will integrate any newly acquired entity into its compliance regime, including training of all relevant new employees, a FCPA forensic audit and reporting of any ongoing violations.
  17. Ongoing monitoring, testing and auditing of the company’s compliance function, taking into account any “relevant developments in the field and the evolving international and industry standards.”

V.                 Monitor

Bilfinger also agreed to an external monitor. However, the term of the monitor is not the entire length of the three-year DPA; the term of the monitor is only 18 months. The monitor’s primary function is to assess the company’s compliance with the terms of the DPA and report the results to the DOJ at least twice during the terms of the monitorship. After this 18 month term the DOJ will allow the company to self-report to the regulators. It should be noted that the term of the external monitor can be extended by the DOJ.

VI.              Who Pays the Cost of Bribery

The final point that I wish to raise is about the insidiousness of bribery and corruption and the true cost. To facilitate its illegal conduct Bilfinger (and Willbros) increased their charges to the various Nigerian entities which were paying for the project in question by 3%. So it was not Bilfinger and Willbros paying the bribes out of their collective corporate pocket but it was the people of Nigeria who were funding the western companies’ bribes. It does not get much worse or arrogant than that in the corporate world.

The Bilfinger enforcement action moves towards the ending of one of the sorriest examples of corporate malfeasance in the FCPA world. While it took a long time, justice has certainly been a long time coming. With the continued flight from justice of former Willbros employee James Tillery who renounce his US citizenship to try and escape prosecution by taking refuge in Nigeria; perhaps things are coming to an end. But with the conclusion of this corporate enforcement action against Bilfinger, perhaps there may be additional individual enforcement actions.

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

October 28, 2013

Wal-Mart: Be a Leader in Compliance

Lou Reed died yesterday. He was one of the most influential figures in rock and roll history and pop culture over the past 50 years. Starting with his band, the Velvet Underground, Rolling Stone magazine said that the group’s “debut [album] The Velvet Underground & Nico stands as a landmark on par with the Beatles’ Sgt. Pepper’s Lonely Hearts Club Band and Bob Dylan’s Blonde On Blonde.” Moreover, his work was “embraced by future generations, cementing the Velvet Underground’s status as the most influential American rock band of all time.” But his influence went simply beyond rock and roll, including all things hip and cool from fashion to even introducing Dion at his induction into the Rock and Roll Hall of Fame. Reed could even be fashionable while advertising in a TV commercial for Nissan Xterra. Lou Reed was a true leader, in many areas.

In a post last week, entitled “Wal-Mart’s latest FCPA disclosure (October 2013)”, the FCPA Blog reported that Wal-Mart has spent over $155 MM in “costs incurred for the ongoing inquiries and investigations” and costs which “relate to global compliance programs and organizational enhancement.” This is in addition to the reported $157MM in costs for these matters in 2012. So for those of you keeping score at home, that is $312MM in costs related to the company’s Foreign Corrupt Practices Act (FCPA) investigation so far. Wal-Mart is well on its way to becoming the leader in the all-time costs for a FCPA investigation.

Also in the FCPA Blog last week, Michael Scher wrote an impassioned piece entitled “Wal-Mart and the FCPA: An open letter to the DOJ and SEC”. In this post Scher said, “We considered in a prior post the new spirit of tough enforcement at the DOJ and SEC and the need to seize the opportunity for more advocacy by the compliance profession, in particular to head off a resolution of the Wal-Mart investigation harmful to compliance officers and the public.” He urged the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) to thoroughly investigate and bring severe sanctions against the company, if warranted by the company’s actions. His tack differed from that of Matt Ellis, who last December, in a blog post on FCPAméricas entitled “Wal-Mart, Go Big on FCPA Compliance”, urged the company to “innovate by playing to its strengths.” These strengths include both physical size and financial resources which would allow it to “use its enormous leverage in international markets to educate foreign audiences on compliance.” Further, he wrote that “Maybe it could use the high visibility placement of its stores throughout Mexico to begin to teach communities how to identify and avoid risks of petty corruption? It could partner with local municipalities to launch reporting centers in its Supercenters.”

Both of these articles stake out positions with much merit. I would like to suggest another approach; which can be summarized as follows: Wal-Mart – Be a Leader in Compliance. The conduct in which Wal-Mart has engaged in is all in the past. The company cannot change those actions, whatever they may have been, but what the company can control is its actions going forward. So here are my suggestions on how Wal-Mart can be a leader in compliance.

Lead in the Retail Industry

The first thing that I recommend Wal-Mart do is call an executive meeting of the largest retail industry trade group that the company belongs to. I would say that Wal-Mart wants to lead the retail industry in its fight against bribery and corruption on a world-wide basis. Wal-Mart could certainly take some of Matt Ellis’ suggestions to the group about ‘going big’ on compliance. But Wal-Mart, as a leader, could say that we need to agree amongst ourselves that we will not engage in bribery and corruption, nor will we tolerate members that do so. We will urge that our members engage in “Ethical Capitalism” along the lines as laid out by Dov Seidman. We will ask that our retail industry trade group institute an industry wide Code of Practice, similar to that instituted by the International Federation of Pharmaceutical Manufacturers and Associations (IFPMA), which is designed “to stamp out bribery and corruption, particularly in emerging markets.”

Lead at the Chamber of Commerce

In the past, Wal-Mart has supported the US Chamber of Commerce’s efforts to amend the FCPA to add a compliance defense. Some argue this would level the playing field with the US government, while others claim that such a defense would help companies to understand their obligations under the FCPA. Wal-Mart can make clear that it understands quite simply that they, and other US companies, should not do business through bribery and corruption. Wal-Mart should aver that it will take the responsibility upon themselves to lead by example and put a best practices compliance program in place, not only to do business within the parameters of the FCPA but also because it makes good business sense to do so. Wal-Mart should demonstrate they now understand a compliance program is not a set of burdensome rules and procedures, which are designed to constrain how a person does business, but they are essential to the long term success of any organization. The company should embrace that concept and the belief that it should lie at the heart of the way a company does business.

Lead at the Board

While there is some debate as to how the allegations of corruption came up to the corporate headquarters or the initial company response about them; the FCPA Professor has made clear that he believes this scandal is largely a failure of corporate governance. As corporate governance starts at the Board, Wal-Mart should commit to having the most active and knowledgeable Board on anti-corruption matters there is in the US. Wal-Mart should bring in Jeff Kaplan (or some equally notable practitioner, such as the FCPA Professor) to lead Board training on the roles and responsibilities of a Board in overseeing compliance. While the Board does not have to, nor should it, delve down into the weeds of the company’s compliance program, it must understand the parameters and actions of the company’s compliance program going forward and be ready to act if allegations of bribery and corruption are brought forward.

Lead at the CCO Position

One thing that Donna Boehme consistently discusses in talks, articles, tweets, in person and just about everywhere else is that the Chief Compliance Officer (CCO) must be separate from and not report to the General Counsel (GC). The CCO cannot be in any merged unit of the company’s overall legal group. Further, the CCO should report directly to the Audit or other appropriate committee of the Board and not to the GC. The reason for this is clear; it is so that the CCO can have the true independence to make the determinations of what the company can do ethically and in compliance with all relevant national and international anti-corruption legislations. If you keep your CCO buried under the GC on the organization chart, it is clear that legal is more important than compliance.

Lead by Working with the DOJ

Lastly, I would suggest that Wal-Mart call Chuck Duross and Kara Brockmeyer and ask for a meeting. In that meeting the company should lay out all the steps it takes to be a leader in compliance. Its lawyers can certainly make clear that they will defend the company, consistent with the ethical duties and Wal-Mart’s rights as a corporate citizen. Further, the FCPA Guidance suggests that the three goals of a compliance program should be to prevent, detect and then remediate. The conduct that did or did not occur from 2000-2006 is in the past. Wal-Mart is committed to working to remediate what it can do so now. Will such conduct aid it with the DOJ and SEC? Perhaps, but more importantly, Wal-Mart should desire to show that a company can work with the DOJ and SEC, consistent with both their obligations as the enforcement agencies, all towards the goal of greater compliance.

The one thing that I disagree with Michael Scher on is that the DOJ has to hammer Wal-Mart with fines, penalties or criminal prosecutions to support the compliance profession, compliance with the FCPA and doing business ethically. There are business solutions to business problems. If Wal-Mart decides to be a leader in compliance and does so in a public manner, that can do as much for moving forward the compliance profession, FCPA and other anti-corruption law compliance and the general proposition of doing business ethically as well as severe sanctions. Further, if Wal-Mart takes these steps, it can control its future rather than simply reacting 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

October 24, 2013

How Do You Develop a Compliance Practitioner?

The Morrill Act was a seminal moment in American education. This law, passed in 1862, provided that land-grant institutions of higher learning should be created “without excluding other scientific and classical studies and including military tactic, to teach such branches of learning as are related to agriculture and the mechanic arts, in such manner as the legislatures of the States may respectively prescribe, in order to promote the liberal and practical education of the industrial classes in the several pursuits and professions in life.”

Under the Act, each eligible state received a total of 30,000 acres of federal land, either within or contiguous to its boundaries, for each member of congress the state had as of the census of 1860. This land, or the proceeds from its sale, was to be used toward establishing and funding the educational institutions described above. The law had been introduced in the 1850s but the Southern land aristocracy, who most assuredly did not want universal education for the masses, prevented it from being enacted into law. With the South in rebellion, the measure passed in the first Congress elected after the Civil War had begun.

I was at Michigan State University (MSU) this past weekend and one of the school’s biggest points of pride is that it was an original land-grant college, originally named Michigan Agricultural College. I met with the Director of my old graduate program, which is now Human Resources-Labor Relations (HR-LR), Bill Cooke. One of the things that the school does is to train HR professionals. I talked with Director Cooke about my beliefs on how HR ties into a company’s compliance program. That led to a discussion about the training HR professionals receive on anti-corruption compliance programs such as those designed to comply with the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act.

My visit to MSU, and the discussions about training in graduate programs, got me to thinking about the training of a compliance profession. How do you do it? What should go into it? Most compliance practitioners’ experience is somewhat similar to mine; I am a lawyer and worked in a corporate legal department. I was thrown into a compliance role with not little training, but no training. It was simply go to a seminar and learn about FCPA compliance. And, of course, good luck. I had the same happy experience when I was appointed as world-wide export control director. At least I could spell FCPA when I started that role.

What is available out there if you want to learn how to become a compliance practitioner? If you are a law student and attending Southern Illinois University (SIU) School of Law, you could take the FCPA Professor’s upper-level elective course entitled “Current Developments in American Law: Foreign Corrupt Practices Act”. The Professor was interviewed about his class in the Chicago Daily Law Bulletin, in an article entitled “Students take bribe(ry class).” The article noted that through this study of the FCPA itself, its history, judicial decisions involving it, enforcement of it and resolved FCPA enforcement actions, the FCPA Professor believes that “Understanding how the law is enforced and critically analyzing it and developing FCPA compliance skills is really a skill set for any future lawyer to have.” The FCPA Professor also uses this course to expose his students to other areas, “including corporate criminal liability, U.S. Department of Justice and SEC enforcement policies and “a working knowledge of resolution vehicles that are used to resolve FCPA enforcement actions.””

But this is a law school class for (most probably) prospective lawyers. There are many compliance practitioners out there who are not lawyers. In my discussions with Director Cooke there are so many areas where a HR professional can help inculcate compliance into a company’s DNA. Think about some or all of the following areas that are in the core function of HR.

Training – A key role for HR in any company is training. This has traditionally been in areas such as discrimination, harassment and safety, to name just a few and based on this traditional role of HR in training it is a natural extension of HR’s function to expand to the area of FCPA compliance and ethics.

Employee Evaluation and Succession Planning - One of the very important functions of HR is assisting management in setting the criteria for employee bonuses and in the evaluation of employees for those bonuses. This is an equally important role in conveying the company message of adherence to a FCPA compliance and ethics policy. In addition to employee evaluation, HR can play a key role in assisting a company to identify early on in an employee’s career the propensity for compliance and ethics by focusing on leadership behaviors in addition to simply business excellence.

Hotlines and Investigations - One of the traditional roles of HR in the US is to maintain a hotline for reporting of harassment claims, whether based on EEOC violations or other types of harassment. It is a natural extension of HR’s traditional function to handle this role.

I believe that the compliance practitioner needs a multi-disciplinary training. The legal training is a good basis but if you went to a law school like mine, real world discussion were considered what ‘other’ law schools did. Further, there are non-legal areas such as review of financial data and financial controls which are a part of any compliance practitioners remit which also need to be considered. Most of these areas are a part of separate disciplines which need to be tied together for the compliance practitioner.

One resource for such training is the SCCE, which provides a compliance certification through its Compliance Certification Board (CCB) which has developed criteria to determine competence in the practice of compliance and ethics across various industries and specialty areas, and recognizes individuals meeting these criteria through its compliance certification programs. But even these programs only provide a starting point as best practices in a compliance regime continue to evolve, particularly through the use of advanced analytics.

Just as the Morrill Act provided an initial basis for professional studies in agricultural and mechanical disciplines, land-grant colleges continue to evolve. MSU, for instance, wants to be a university to the world. The same evolution is true for compliance practitioners. As our field matures, the need for the development of compliance practitioners will increase. Courses like the FCPA Professor leads for lawyers and the SCCE puts on for compliance practitioners will help drive the next generation of compliance professionals.

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

September 8, 2013

Star Trek Premiers and Hiring Practices under the FCPA

Today is the 46th anniversary of the premier episode of the most iconic science fiction related television show during my lifetime – Star Trek. I am a self-confessed uber-trekkie and I can still remember watching the first episode, The Man Trap. So here’s to you, all the crew members of the Starship Enterprise, you have had a great run and I can only hope it keeps going on yet another five year mission “Where no man has gone before.”

I.                   JP Morgan’s Hiring Practice Inquiry

Last month the New York Times (NYT) reported that JP Morgan Chase is under Foreign Corrupt Practices Act (FCPA) scrutiny in China for its hiring practices. In an article, entitled “Hiring in China By JPMorgan Under Scrutiny”, reporters Jessica Silver-Greenberg, Ben Protess and David Barboza broke the story that the Securities and Exchange Commission (SEC) is investigating JP Morgan Chase to determine “whether JPMorgan Chase hired the children of powerful Chinese officials to help the bank win lucrative business in the booming nation.” The article is based upon “a confidential United States government document”.

The article details several situations where JPMorgan hired the children of Chinese government officials and sometime thereafter the bank was able to secure work from the business or industry of a parent of a hired employee. The examples included the hiring of a “son of a former Chinese banking regulator who is now the chairman of the China Everbright Group, a state-controlled financial conglomerate, according to the document, which was reviewed by The New York Times, as well as public records. After the chairman’s son came on board, JPMorgan secured multiple coveted assignments from the Chinese conglomerate, including advising a subsidiary of the company on a stock offering, records show.” In another instance, the bank hired the daughter of a Chinese railway official. After hiring the daughter, JP Morgan was hired to assist the company to go public.

Things got worse when Dawn Kopecki, in a Bloomberg article entitled “JPMorgan Bribe Probe Said to Expand in Asia as Spreadsheet Is Found”, reported that there was “an internal spreadsheet that linked appointments to specific deals pursued by the bank”.  She noted that the original investigation, which began in Hong Kong, has now been expanded to other countries in Asia and that JP Morgan “has opened an internal investigation that has flagged more than 200 hires for review, said two people with knowledge of the examination, results of which JPMorgan is sharing with regulators.” Kopecki quoted Dan Hurson, a former US prosecutor and SEC lawyer who runs his own Washington practice, who said that the “SEC will hunt for evidence showing “these weren’t real jobs, that they were only there because their father or mother were important public officials”; and “If the public official requested the job for the child, that would be a strong indication to the company that the official was seeking and receiving something of value.” Perhaps more damaging was that the spreadsheet had information which apparently linked “some hiring decisions to specific transactions pursued by the bank.”

In a later NYT article, entitled “JPMorgan Hiring Put China’s Elite on an Easy Track”, Jessica Silver-Greenberg and Ben Protess further reported that the JP Morgan hiring program even had its own name, which was ‘Sons & Daughters’. Although the program was originally set up to provide transparency and visibility into the hiring process which might implicate FCPA issues, they reported that it went badly “off track”. Under the Sons & Daughters hiring program, a two-tiered track was created in the hiring process; one for regular applicants and one for children of Chinese officials. However, as time passed the program began to be used to allow for fewer job interviews and relaxed hiring standards for the candidates in the program. This allowed the company to hire some candidates who had “subpar academic records and lacked relevant expertise.”

II.                Steps for the Compliance Practitioner

For the compliance practitioner, the first thing to note is that there is no per se prohibition against hiring the son or daughter of a foreign government official. As noted by the FCPA Professor in the original NYT article, “While the hire of a son or daughter itself is not illegal, red flags would be raised if the person hired was not qualified for the position, or, for example, if a firm never received business before and then lo and behold, the hire brought in business.” In a blog post entitled “Regarding Princelings And Family Members” the FCPA Professor cited three Opinion Releases; 82-04, 84-01, and 95-03 where the Department of Justice (DOJ) looked at the hypothetical facts presented around the hiring of a family member of a foreign official as an agent or representative and found that the facts as presented, did not give rise to a FCPA violation.

Mike Volkov, writing his Corruption, Crime and Compliance blog, in a post entitled “All in the Family: Enforcement Focus on Hiring of Relatives of Foreign Officials”, said that “The issue boils down to corrupt intent – was the hiring made with the intent to improperly influence a government official?  That is not an easy question to answer since no one is a reader but the facts surrounding the hiring can certainly give some insight into what the company’s actor was intending when the relative was hired.” He cautioned that the task of the compliance practitioner is to (as I refer to it) ‘dis-link’ the hiring decision by the company from the obtaining or retaining of business from the foreign government official concerned. Volkov listed ten key questions which need to be addressed in the hiring process.

  1. Who, if anyone, at the company is sponsoring/supporting the applicant?
  2. How did this applicant come to the company’s attention?
  3. What is the applicant’s relationship to the foreign official?
  4. What involvement, if any, has the foreign official had with the company relating to the applicant’s interest?
  5. In which office/division does the foreign official serve?
  6. How important is this specific office/division to the company’s business relationship with the foreign government?
  7. Is the applicant qualified for the position that he/she has applied?
  8. Has the applicant (or will the applicant) be subject to the normal hiring process?
  9. Has the company completed a due diligence review of the applicant and the foreign official to identify any corruption risks?
  10. Has the company or any representative provided any assurance to the foreign official or the applicant that the applicant will be hired?

I would add that the follow up to Volkov’s points is that all decisions made must be documented. This means that all information regarding the hiring process needs to be kept in a repository which can be called up for review if called upon by a government regulator. I have often said that your company’s HR function needs to be a key component of your overall FCPA compliance program and the JP Morgan investigations reinforces that need. So if you need to provide more compliance training to your HR department on this issue, now would be an excellent time for you to do so.

How does all of the above tie into the premier of Star Trek? Easy – do not get caught in the trap of hiring in violation of the FCPA when some simple and frankly necessary steps can help keep you out of hot water. And while doing that click here for a YouTube video of the iconic opening theme from Star Trek.

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

August 19, 2013

Welcome Back My Friends To The Show That Never Ends

Welcome back my friends, to the show that never end;

We’re so glad you could attend, come inside, come inside;

There behind the glass stands a real blade of grass;

Be careful as you pass, move along, move along.

 

Those lines come from the Emerson, Lake & Palmer (ELP) song, Karn Evil No. 9: First Impression, Part 2. I was introduced to the progressive rock trio, through the album Welcome Back, My Friends, to the Show That Never Ends…Ladies and Gentlemen, Emerson, Lake & Palmer, which was released on this date 39 years ago. I still think that this is the greatest live 3 disc album release by a single group ever. To say that the album blew me away would be an understatement. I was not exposed to too much prog rock in my podunk little hometown and even the signals of decent FM radio stations were fleeting, so this album was a revelation. I had been a rocker for some time but the musicianship of Keith Emerson, Greg Lake and Carl Palmer was simply unbelievable. For me the centerpiece was the epic three song trilogy of Karn Evil No. 9. So here’s to you lads, and I hope that you will do a full US reunion tour one day.

“Welcome back my friends” would certainly seem to be an excellent way to introduce today’s topic; that being the stunning report in the Sunday New York Times (NYT), that JP Morgan is under Foreign Corrupt Practices Act (FCPA) scrutiny in China for its hiring practices. In an article, entitled “Hiring in China By JPMorgan Under Scrutiny”, reporters Jessica Silver-Greenberg, Ben Protess and David Barboza broke the story that the Securities and Exchange Commission (SEC) is investigating JP Morgan Chase to determine “whether JPMorgan Chase hired the children of powerful Chinese officials to help the bank win lucrative business in the booming nation.” The article is based upon “a confidential United States government document”.

The article details several situations where JPMorgan hired the children of Chinese government officials and sometime thereafter the bank was able to secure work from the business or industry of a parent of a hired employee. The examples included the hiring of a “son of a former Chinese banking regulator who is now the chairman of the China Everbright Group, a state-controlled financial conglomerate, according to the document, which was reviewed by The New York Times, as well as public records. After the chairman’s son came on board, JPMorgan secured multiple coveted assignments from the Chinese conglomerate, including advising a subsidiary of the company on a stock offering, records show.” In another instance, the bank hired the daughter of a Chinese railway official. After hiring the daughter, JP Morgan was hired to assist the company to go public.

The FCPA Professor was quoted in the NYT article for the following, “While the hire of a son or daughter itself is not illegal, red flags would be raised if the person hired was not qualified for the position, or, for example, if a firm never received business before and then lo and behold, the hire brought in business.” In blog post, entitled “JPMorgan’s Hiring Practices In China Under Scrutiny”, the FCPA Professor reviewed some enforcement actions “where the conduct at issue involved the hiring of children or spouses of alleged “foreign officials.”” He pointed to the “Tyson Foods enforcement action, part of the FCPA conspiracy alleged was “to place the wives of the [Mexican government] veterinarians on [a subsidiary company's] payroll, providing them with a salary and benefits, knowing that the wives did not actually perform any services…”. According to the Department of Justice (DOJ), approximately $260,000 “in improper payments were made to the … veterinarians, both indirectly and directly, including through payments to wives of [the] veterinarians.” Next, in the UTStarcom enforcement action, the FCPA Professor noted that the “SEC’s allegations included that the company provided foreign government customers or their family members with work visas and purportedly hired them to work for [the company] in the U.S., when in reality they did no work for the company.” Finally, the Houston-based company Paradigm, got into FCPA hot water “during the same time frame as [a business deal was being discussed with an alleged Mexican "foreign official"], the same [alleged "foreign official"] requested that Paradigm Mexico hire his brother.” The DOJ stated: “Paradigm Mexico acquiesced to that demand and hired the decision maker’s brother as a driver. While employed at Paradigm Mexico, the brother did perform some work as a driver.”

The NYT notes that “there is nothing inherently illicit about hiring well-connected people. To run afoul of the law, a company must act with “corrupt” intent, or with the expectation of offering a job in exchange for government business.” However a company needs to be very careful when hiring such a family member. Indeed, I advise clients that the following definition should be used for a government official”

A “Foreign Official” for purposes of the FCPA and UK Bribery Act mean any:

  • non-U.S. government official (includes municipal, provincial, central, federal or any other level of government);
  • officer or employee of a foreign government, or any department, agency, ministry or instrumentality thereof (includes executive, legislative, judicial or regulatory);
  • person acting in an official capacity on behalf of a foreign government or any department, agency, ministry or instrumentality thereof;
  • officer or employee of a company or business owned or controlled in whole or in part by a foreign (non-U.S.) government (“state owned enterprise”);
  • officer or employee of a public international organization such as the United Nations or World Bank;
  • member of a royal family;
  • foreign political party, member, or official thereof;
  • candidate for foreign political office; and
  • elected officials of foreign countries, civil servants and military personnel.

The term also includes the children, spouse or other close relatives of Foreign Officials. If a child, spouse or other close relative is hired there should be close scrutiny of how the request for the hire was made, who made the request and what are the qualifications of the child, spouse or other close relative for the job in question? There should also be a close look at the work of the proposed candidate to ascertain if anything they might do for the prospective employer would in any way touch upon the business relationship with the government official.

JP Morgan has come under quite a bit of regulatory scrutiny lately. The NYT notes that is the “focus of investigations in the United States by at least eight federal agencies, a state regulator and two foreign nations.” Most of these investigations revolve around the financial crisis and its aftermath or the London Whale incident. Even if one discount’s the ‘too big to manage’ moniker, the NYT does note that a FCPA investigation and any enforcement action can be quite different. “The agency’s bribery inquiry could pose an even steeper challenge to JPMorgan. Although banks are prone to the occasional trading blunder — JPMorgan produced record quarterly profits despite the losses in London last year — a corruption inquiry could leave a more lasting mark on its reputation. It might also spur the Justice Department to open a criminal investigation.”

So after the GlaxoSmithKline PLC (GSK) bribery and corruption investigation has quieted down and settled in for the long haul, the NYT breaks this story about yet another avenue for potential corruption in China. As ELP might say “Welcome back my friends, to the show that never ends.”

For a video clip of ELP playing Karn Evil No. 9, First Impression, Pt. 2 at the 1974 California Jam, 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, 2013

July 23, 2013

Astros Swept Again – Is a China Sweep Coming Next?

What is a sweep? It is certainly a well-known and relevant term in the sporting world. This past weekend, the utterly inept Houston Astros were swept by the Seattle Mariners in a three game series. This came about in the face of Astro pitching, tossing a one-hitter and the team still managing to lose 6-2. One for the records I would say. But what about industry sweeps under the Foreign Corrupt Practices Act (FCPA)? I thought about that question in connection with the ongoing revelations of bribery and corruption by GlaxoSmithKline PLC (GSK) in China.

What is a sweep under the FCPA?

The FCPA Professor, in a blog post entitled “Industry Sweeps”, posted an article from FCPA Dean Homer Moyer, entitled “The Big Broom of FCPA Industry Sweeps”. In his article, Moyer wrote  that an industry sweep is the situation where the Department of Justice (DOJ) and/or Securities and Exchange Commission (SEC) will focus “on particular industries – pharmaceuticals and medical devices come to mind — industry sweeps are investigations that grow out of perceived FCPA violations by one company that enforcement agencies believe may reflect an industry-wide pattern of wrongdoing.” Moyer further wrote, “Industry sweeps are often led by the Securities and Exchange Commission (“SEC”), which has broad subpoena power as a regulatory agency, arguably broader oversight authority than prosecutors. They are different from internal investigations or traditional government investigations, and present different challenges to companies. Because the catalyst may be wrongdoing in a single company, agencies may have no evidence or suspicion of specific violations in the companies subject to an industry sweep. A sweep may thus begin with possible cause, not probable cause. In sweeps, agencies broadly solicit information from companies about their past FCPA issues or present practices. And they may explicitly encourage companies to volunteer incriminating information about competitors.”

GSK and Others Used Suspected Third Party Travel Agency

The settlements for FCPA violations by US pharmaceutical companies are well known. Johnson & Johnson (J&J), Pfizer and Eli Lilly immediately spring to mind. But the GSK revelations may bring a new level of scrutiny and may introduce a new term “country sweep”. David Barboza, reporting in the New York Times (NYT) in an article entitled “Files Suggest a Graft Case in China May Expand”, said that “A few weeks ago, when Chinese investigators raided a small travel agency in this fast-growing city, they came upon something startling. The agency appeared to be using fake contracts and travel invoices to help executives at the British pharmaceutical giant GlaxoSmithKline bribe doctors, hospitals, foundations and government officials, Chinese authorities said.” The travel agency was identified as Shanghai Linjiang International Travel Agency. However, perhaps more interesting was the “documents obtained by The New York Times show that in the last three years at least six other global pharmaceutical companies, including Merck, Novartis, Roche and Sanofi, used the same travel agency to make arrangements for events and conferences. The records included invoices for hotel bookings, travel visas and airline tickets to Chinese cities, and to Australia, Italy, Japan, Korea and the United States. One of the drug companies appears to have used the travel agency to make a $2,500 grant to the Cancer Foundation of China.”

Barboza noted that both “Merck and Roche acknowledged using Shanghai Linjiang International Travel Agency.” Barboza wrote that there were several other travel agencies which GSK used but the others have not yet been identified. Barboza said that Chinese official that the travel agency “did very little booking on its own and mostly acted as a “money platform” that allowed Glaxo to create a huge slush fund. According to the government, the travel agency was handling about $16 million worth of Glaxo business a year, but seemed to be doing very little work.”  Barboza quoted Violet Ho, head of China operations for Kroll Advisory Solutions, who said “People don’t realize there’s an active market for fake receipts and that shell companies are used to make bribe payments.”

Just how did the Shanghai Linjiang International Travel Agency garner such work from GSK and others? Barboza said that “How the small agency secured business with many of the world’s biggest drug makers remains a mystery.” Barboza interviewed one of the founders of Shanghai Linjiang International Travel Agency, who said that he sold out to his partners some six years ago. However, this former owner said that his former partner Mr. Weng had come from a restaurant background, not a travel agency background.

In his article, Homer Moyer wrote that “Inevitably, industry sweeps become organic and evolve, with government investigators using information from one company as the basis for additional requests to others.” This may well be the case for pharmaceutical companies which have done business with Shanghai Linjiang International Travel Agency. However, the DOJ and SEC may now take a different tack than simply focusing on one industry. It may well be that there could be a China sweep coming.

Steps for the Compliance Professional

As a compliance professional, one of the key takeaways from the GSK matter should be for you to take a very hard and detailed look at your company’s spend for such organizations. Barboza points out that “using travel agencies, and marketing or consulting firms, to launder money, embezzle or create slush funds to bribe officials is common in China, even at multinational corporations operating in the country.” The first thing is to review the list of such third parties who might provide such services. You should begin by asking such questions as

  • What is the ownership of the third party? Is there a business justification for the relationship?
  • Is there anyone in the company who is responsible for maintaining the relationship? Is there ongoing accountability?
  • How is the relationship being managed?
  • Are you engaging in any transaction monitoring?
  • Are you engaging in any relationship monitoring?
  • What is the estimated or budgeted size of the spend with the third party?
  • What do the actual spends show going forward?

Just as the Wal-Mart FCPA investigation has reverberated throughout the US, I think that the GSK matter will be with us for some time. As bad as it seems about now, and it certainly appears bad, there are many lessons which the compliance practitioner can not only draw from but use for teaching moments within your company. So please do not be like the Astros, who pathetically wasted a one-hit pitching performance in the course of being swept this past weekend, use the GSK saga for your benefit going forward. For it may not be “if you are subjected to a FCPA sweep” but only “when”.

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A big congratulations to Will and Kate for the birth of their baby boy, the Prince of Cambridge.

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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, 2013

July 9, 2013

Significant FCPA Enforcement Actions in 2013 – Individuals

77 years – that is how long Great Britain went without a native son winning the Men’s Singles title at Wimbledon. This past Sunday that drought ended when Andy Murray won the coveted trophy in a straight set win over Novak Djokovic. This year’s championship was a wild ride, with the incredible upsets in the early rounds and the decimation of the women’s favorites by the semi-finals. But it was Murray’s year and his hoisting the Wimbledon Cup on Sunday was certainly one for the ages. Well done, Andy.

As singles tennis is that most individual of sports, it seems proper that in today’s post, I will discuss the individual Foreign Corrupt Practices Act (FCPA) enforcement actions in the year to-date. Both the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) made clear in the first half of this year that they will aggressively enforce the FCPA against individuals. Mike Volkov has gone so far as to predict that “It is clear that FCPA enforcement for 2013 will go down as the year of criminal prosecutions of individuals.”

A.     BizJet Executives

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 US. 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.

B.     Alstom Executives

In April, Two individuals from a 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 FCPA and to launder money, as well as substantive charges of violating the FCPA and money laundering.” Pierucci was arrested. Additionally, 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 May, the FCPA Blog reported that a third Alstom executive was charged. William Pomponi, a former Vice President of Sales for Alstom’s US subsidiary was indicted for conspiring to violate the FCPA and to launder money, as well as substantive FCPA and money laundering offenses.

All three were charged around the same set of facts, that being the payment of 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 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.

C.     Frederic Cilins

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 Cilins, in April.

An article in the Financial Times (FT), entitled “FBI sting says that ‘agent’ sought to have mining contracts destroyed”, 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.”

Cilins has been charged with obstruction of justice and was remanded to Manhattan for trial. After bail was initially set at $15MM, Cilins requested that it be reduced. The trial judge, William H. Pauley III threw the $15MM bail out, and set a trial date for Dec. 2, 2013.

D.    Uriel Sharef – Siemens

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 SEC Press Release stated 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.”

E.     Paul Novak – Willbros

In April, the DOJ announced the sentencing of Paul G. Novak, a former consultant of Willbros International, Inc., a subsidiary of the Houston based Willbros Group, for his role in a conspiracy to pay more than $6 million in bribes to government officials of the Federal Republic of Nigeria and officials from a Nigerian political party. According to the DOJ Press Release announcing the sentencing, “Novak pleaded guilty to one count of conspiracy to violate the FCPA and one substantive count of violating the FCPA. Novak admitted that from approximately late-2003 to March 2005, he conspired with others to make a series of corrupt payments”. Novak was sentenced to serve 15 months in a federal prison.

The sentencing continues the long running saga of the company over efforts by Willbros, Novak, certain employees and others to make a series of corrupt payments totaling more than $6 million to various Nigerian government officials and officials from a Nigerian political party to assist Willbros and its joint venture partner, a construction company based in Mannheim, Germany, in obtaining and retaining the Eastern Gas Gathering System (EGGS) Project, which was valued at approximately $387 million. The EGGS project was a natural gas pipeline system in the Niger Delta designed to relieve existing pipeline capacity constraints.

F.     Direct Access Partners

In May, the FCPA Blog, in a post entitled “Two traders and a bank official charged for Venezuela bribes”, reported that two brokers, Tomas Alberto Clarke Bethancourt and Jose Alejandro Hurtado, affiliated with the New York brokerage firm Direct Access Partners, LLC (DAP) were charged in federal court with paying at least $5 million in bribes to María de los Ángeles González de Hernandez, an official at a state-owned Venezuelan bank, Banco de Desarrollo Económico y Social de Venezuela (BANDES) to win bond trading work. After receiving the bribes, she authorized fraudulent trades, which generated more than $66 million in revenue on trades in Venezuelan sovereign or state-sponsored bonds for DAP. The DOJ also charged her with Travel Act conspiracy and substantive offenses, and two money laundering-related counts.

In June, the FCPA Blog reported, in a post entitled “Brokerage boss charged in Venezuela kick back scheme”, that Ernesto Lujan, the former head of the Miami office of DAP, was arrested for conspiracy to bribe an officer at a state-owned Venezuela bank in exchange for bond trading business. He was charged with substantive FCPA and Travel Act offenses and conspiracy counts. He was also charged with two money laundering-related counts.

Both the DOJ and SEC have made clear it that they will prosecute individuals for FCPA violations. As noted by Mike Volkov, the DOJ is going to prosecute individuals when they have strong evidence of criminal conduct and will pick those individual cases where prosecutions are warranted. Further, the BizJet prosecutions demonstrate that the DOJ will continue to use all investigative techniques to build criminal cases including wiring cooperating witnesses and recording telephone calls to make their criminal cases. Finally, the DOJ will prosecute officials when they have evidence of obstruction or witness tampering and will also use the Travel Act to bring enforcement actions.

It has been quite a first half of the year.

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

July 8, 2013

Significant FCPA Enforcement Actions in 2013 – Corporate

Last week I used the 150th anniversary of the Battle of Gettysburg as a prism to look at present day compliance issues. Today I want to go in a different direction to introduce today’s topic. Jim Hudson died last week. Hudson was perhaps the lesser known of three football players whose lives intersected in an unusual arc. Hudson played professional football for the New York Jets and is best remembered for intercepting a pass by Earl Morral near the end of the first half of Super Bowl III, where the Jets upset the heavily favored Baltimore Colts. But here in Texas, Hudson is remembered for two things. The first is as a starting defensive back on the first NCAA national football championship team for the Texas Longhorns in 1963. The second is that he came off the bench to throw the winning touchdown pass to receiver George Sauer, when the Longhorns beat the Number 1 ranked, and previously undefeated, University of Alabama, on January 1, 1965 in the Orange Bowl. The quarterback of the Crimson Tide was Joe Namath. Hudson joined Namath and Sauer on the Super Bowl winning Jets team against the Colts.

So today I want to begin looking at some of the lessons learned from the Foreign Corrupt Practices Act (FCPA) enforcement actions through the first half of 2013, I will start with reviewing the significant corporate enforcement actions and tomorrow I will  review individual prosecutions and arrests to date in 2013.

I.                   Corporate

A.     Total

As reported by both the FCPA Blog and the FCPA Professor, Total SA engaged in a nearly decade long, breathtaking bribery scheme. In this scheme, Total paid approximately $60MM to an un-named Iranian Official of the National Iranian Oil Company (NIOC), who steered two major projects Total’s way. According to the FCPA Professor, in a post entitled “Total Agrees To Pay $398 Million To Resolve Its FCPA Scrutiny”, the Iranian Official in question was described in the Information as “the Chairman of an Iranian engineering company that was more than 90% owned by the Government of Iran and substantially controlled by the Government of Iran.” The projects for which Total paid the bribes were the Sirri A and E oil and gas fields and South Pars gas field.

In a blog post entitled “Total SA pays $398 million to settle U.S. bribe charges” the FCPA Blog reported that “In the fourth biggest FCPA case ever, French oil giant Total S.A. agreed Wednesday to pay $398 million in penalties and disgorgement for bribing an Iran official to gain access to oil and gas fields. Total will pay a criminal penalty to the Department of Justice (DOJ) of $245.2 million. In its settlement with the Securities and Exchange Commission (SEC), Total will disgorge profits of $153 million.” For those of you keeping score at home that is Number 4 on the list of greatest FCPA fines in the history of the world and Number 2 on the list of the biggest profit disgorgements in FCPA history. Total also received a three-year Deferred Prosecution Agreement (DPA) that requires appointment of an independent compliance monitor. A separate requirement for a monitor was set out in Total’s settlement with the SEC.

B.     Parker Drilling

The company was involved in a bribery scheme to pay-off judges in a Nigerian Tax Court to allow Parker Drilling to pay lower than warranted tax assessments for its drilling rigs in the country. This bribery scheme was alleged to have involved the following persons employed at or associated with Parker Drilling: (1) a U.S. citizen based in Nigeria who, during the relevant time period, was the General Manager of Parker Drilling’s operations in Nigeria; (b) a U.S. citizen based in Nigeria who also was a General Manager of Parker Drilling’s Operations in Nigeria; (c) a Houston based executive of the company, who performed financial and compliance functions for Parker Drilling between 2002 through 2005; (d) another Houston based executive of the company who performed a legal function for Parker Drilling; and (e) the company’s outside counsel.

Due to its efforts to create a gold standard compliance program all the while undergoing its own internal investigation, Parker Drilling’s conduct earned it an “approximately 20 percent reduction off the bottom of the fine range” which suggested a fine of between $14.7MM to $29.4MM. The final DOJ fine was $11,760,000. The company also agreed to pay disgorgement of $3,050MM plus pre-judgment interest of $1,040,818, to the SEC. According to its DPA, “the Company has engaged in extensive remediation, including ending its business relationships with officers, employees, or agents primarily responsible for the corrupt payments, enhancing its due diligence protocol for third-party agents and consultants, increasing training and testing requirements, and instituting heightened review of proposals and other transactional documents for all the Company’s contracts.” Parker Drilling also hired “a fulltime Chief Compliance Officer and Counsel who reports to the Chief Executive Officer and Audit Committee, as well as staff to assist the Chief Compliance Officer and Counsel.” Lastly, the Company worked to strengthen its internal controls.

The underlying facts of Parker Drilling are about as bad as it can get. The company had corporate head office involvement in the bribery scheme. Further, the company did not self-disclose to the DOJ, yet, they were able to obtain a significant reduction in the overall fine and penalties from the sentencing range. Additionally the company was not required to have an external monitor. The message here is that a strong effort during the pendency of an investigation does pay off with the final result.

C.     Ralph Lauren

The Ralph Lauren Company received Non-Prosecution Agreements (NPA) granted by the SEC and DOJ. The illegal conduct at issue related to its Argentinian subsidiary and efforts by the General Manager of that operation, who conspired with a customs clearance agency to make payments “to assist in improperly obtaining paperwork necessary for goods to clear customs, to permit clearance of items without the necessary paperwork, to permit the clearance of prohibited items, and to avoid inspection.” For its conduct, Ralph Lauren agreed to pay $882K to the DOJ and $593K in disgorgement and $141K in pre-judgment interest to the SEC.

The DOJ detailed the company’s conduct by stating that “the Company’s extensive, thorough, and real-time cooperation with the Department, including conducting an internal investigation, voluntarily making employees available for interviews, making voluntary document disclosures, conducting a world-wide risk assessment, and making multiple presentations to the Department on the status and findings of the internal investigation and the risk assessment”.

This past spring I was on a panel with representatives from both the DOJ and SEC who discussed the Ralph Lauren enforcement action. They indicated that the company uncovered the bribery scheme during its first round of training, after the company’s initial implementation of its FCPA compliance program. This fact points out two key lessons to be learned. The first is that a company can discover many things about its compliance with the FCPA during live training. The second is that early detection and remediation can lead to a significant reduction in fines and penalties.

I believe that these corporate enforcement actions make clear that a company’s actions during the pendency of the investigation, in addition to the underlying FCPA violations, will be evaluated and assessed to determine the final penalty. The DOJ and SEC continue to communicate not only what they believe constitutes a best practices compliance program but equally importantly what actions a company can engage in which will significantly reduce a company’s overall fine and penalty. Both the DOJ and SEC continue to communicate, through their enforcement actions, to the compliance practitioner what they expect from companies in the way of a best practices compliance program and what a company should do if they discover a potential FCPA violation. These communications, through enforcement actions, DPAs, NPAs and Declinations, are consistent with the information provided by the DOJ/SEC in the FCPA Guidance. These enforcement actions demonstrate that if a company gets ahead of the curve, it can significantly lessen its overall penalty and pain.

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

June 19, 2013

What is Board Responsibility For Compliance?

Ed. Note-this article was originally posted in the FCPA Professor.

The nightmare of every corporate director is to wake up to find out that the company of the Board he or she sits on is on the front page of the New York Times (NYT) for alleged illegal conduct. This nightmare came true for the Directors of Wal-Mart when the New York Times, in an article entitled “Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle”, alleged that Wal-Mart’s Mexican subsidiary had engaged in bribery of Mexican governmental officials and that the corporate headquarters in Bentonville, Arkansas, had covered up any investigations into these allegations.

Recently the NYT reported that shareholders were asking questions of the Wal-Mart Board regarding its response these allegations. In a story, entitled “More Dissent in a Store Over Wal-Mart Bribery Scandal”, Stephanie Clifford reported Wal-Mart shareholders are still asking questions of the Board regarding its role in the ongoing scandal. Some of these questions include “whether the company is holding current and former executives financially responsible for breaching company policies” and concerns about the company’s supply chain vendors. This shareholder dissatisfaction held several groups of large shareholders to indicate that they would vote against the company’s current Board of Directors at its annual shareholder meeting.

Clifford quoted from a report by Institutional Shareholder Services (ISS), a proxy advising firm, which said that investors have also complained about “being in the dark about the nature and extent of the alleged violations (and knowledge of them within the company)” and the company’s “timetable for completion of its investigation and disclosure of its results”. There were also questions raised about the remediation efforts of Wal-Mart. The ISS report went on to add that “Shareholders should vote against these directors to send a clear message to the board that such poor oversight does not come without repercussions.”

The publicity and costs to Wal-Mart have been well documented. The FCPA Professor has consistently stated that he views this scandal as largely a failure of corporate governance. In a post entitled, “Wal-Mart One Year Later” he said, “Corporate governance, or lack thereof, is what made the NY Times April 2012 remarkable.  This is the reason why Wal-Mart generated all the buzz it did a year ago this week and I’ve consistently held the view that the Wal-Mart story is a corporate governance sandwich with the FCPA as a mere condiment.” I thought about the Professor’s observations on this failure in light of Clifford’s article and wondered what the Board’s legal obligations might be.

I.                   Some Case Law

As to the specific role of ‘Best Practices’ in the area of general compliance and ethics, one can look to Delaware corporate law for guidance. The case of In Re Caremark International Inc. Derivative Litigation 698 A.2d 959 (Del.1996) was the first case to hold that a Board’s obligation “includes a duty to attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate, exists, and that failure to do so under some circumstances may, in theory at least, render a director liable for losses caused by non-compliance with applicable legal standards.” The Corporate Compliance Blog, in a post entitled “Caremark 101”, said that the Caremark case “addressed the board’s duty to oversee a corporation’s legal compliance efforts. As part of its duty to monitor, the Board must make good faith efforts to ensure that a corporation has adequate reporting and information systems. The opinion described this claim as “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment,” with liability attaching only for “a sustained or systematic failure to exercise oversight” or “[a]n utter failure to attempt to ensure a reporting and information system.”

In the case of Stone v. Ritter 911 A.2d 362, 370 (Del. 2006), the Supreme Court of Delaware expanded on the Caremark decision by establishing two important principles. First, the Court held that the Caremark standard is the appropriate standard for director duties with respect to corporate compliance issues. Second, the Court found that there is no duty of good faith that forms a basis, independent of the duties of care and loyalty, for director liability. Rather, Stone v. Ritter holds that the question of director liability turns on whether there is a “sustained or systematic failure of the board to exercise oversight – such as an utter failure to attempt to assure a reasonable information and reporting system exists.”

Andrew J. Demetriou and Jessica T. Olmon, writing in the ABA Health Esource blog, said that “This standard aims to protect shareholders by ensuring that corporations will adopt reasonable programs to deter, detect and address violations of law and corporate policy, while absolving the Board from liability for corporate conduct so long as it has exercised reasonable responsibility with respect to the adoption and maintenance of a compliance and reporting system. Although the standard protects the Board, consistent with most jurisprudence under the business judgment rule, it also requires that the Board follow through to address problems of which it has notice and this may include adopting modifications to its compliance program to address emerging risks.”

Lastly, I recently heard Jeff Kaplan discuss the oversight obligations of the Board regarding the compliance function. In addition to the above cases, he discussed the case of Louisiana Municipal Police Employees’ Retirement System et al. v. David Pyott, et al., 2012 WL 2087205 (Del. Ch. June 11, 2012) (rev’d on other grounds, No. 380, 2012, 2013 WL 1364695 (Del. Apr. 4, 2013), which was a shareholder action that went forward against a Board based upon a claim that the Board knew of compliance risk based on the company’s business plan. The Delaware Court pointed out the possibility that “The appearance of formal compliance cloaked the reality of noncompliance, and directors who understood the difference between legal off-label sales and illegal off-label marketing continued to approve and oversee business plans that depended on illegal activity.” Kaplan believes that this case more generally, supports the need for risk-based oversight by board.

II.                FCPA Guidance and US Sentencing Guidelines

A Board’s duty under the Foreign Corrupt Practices Act (FCPA) is well known. In the Department of Justice (DOJ)/Securities and Exchange Commission (SEC) FCPA Guidance, under the Ten Hallmarks of an Effective Compliance Program, there are two specific references to the obligations of a Board. The first in Hallmark No. 1, entitled “Commitment from Senior Management and a Clearly Articulated Policy Against Corruption”, states “Within a business organization, compliance begins with the board of directors and senior executives setting the proper tone for the rest of the company.” The second is found under Hallmark No. 3 entitled “Oversight, Autonomy and Resources”, where it discusses that the Chief Compliance Officer (CCO) should have “direct access to an organization’s governing authority, such as the board of directors and committees of the board of directors (e.g., the audit committee).” Further, under the US Sentencing Guidelines, the Board must exercise reasonable oversight on the effectiveness of a company’s compliance program. The DOJ’s Prosecution Standards posed the following queries: (1) Do the Directors exercise independent review of a company’s compliance program? and (2) Are Directors provided information sufficient to enable the exercise of independent judgment?

Board failure to head this warning can lead to serious consequences. David Stuart, a senior attorney with Cravath, Swaine & Moore LLP, noted that FCPA compliance issues can lead to personal liability for directors, as both the SEC and DOJ have been “very vocal about their interest in identifying the highest-level individuals within the organization who are responsible for the tone, culture, or weak internal controls that may contribute to, or at least fail to prevent, bribery and corruption”. He added that based upon the SEC’s enforcement action against two senior executives at Nature’s Sunshine Products, “Under certain circumstances, I could see the SEC invoking the same provisions against audit committee members—for instance, for failing to oversee implementation of a compliance program to mitigate risk of bribery”. I would not be a far next step for the SEC to invoke the same provisions against audit committee members who do not actively exercise oversight of an ongoing compliance program.

There is one other issue regarding the Board and risk management, including FCPA risk management, which should be noted. It appears that the SEC desires Boards to take a more active role in overseeing the management of risk within a company. The SEC has promulgated Regulation SK 407 under which each company must make a disclosure regarding the Board’s role in risk oversight which “may enable investors to better evaluate whether the board is exercising appropriate oversight of risk.” If this disclosure is not made, it could be a securities law violation and subject the company, which fails to make it, to fines, penalties or profit disgorgement.

From the Delaware cases, I believe that a Board must not only have a corporate compliance program in place but actively oversee that function. Further, if a company’s business plan includes a high-risk proposition, there should be additional oversight. In other words, there is an affirmative duty to ask the tough questions. The specific obligations set out regarding the FCPA drive home these general legal obligations down to the specific level of the statute.

The Wal-Mart case has driven home the need for focused Board of Directors oversight of a company’s compliance program.  But it is more than simply having a compliance program in place. The Board must exercise appropriate oversight of the compliance program and indeed the compliance function. The Board needs to ask the hard questions and be fully informed of the company’s overall compliance strategy going forward. If the Wal-Mart Board had fulfilled its legal obligations regarding compliance, the company might not have found itself on the front page of the New York Times.

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

June 4, 2013

Total Switches to Settle Rather Than Fight

For anyone who grew up in the 1960s, I am sure that you remember the touchstone slogan for Tareyton cigarettes, “I’d rather fight than switch”. The television ad always showed someone with a black eye and a Tareyton cigarette in his or her fingers. I was reminded of that old advertising slogan last week when the US Department of Justice (DOJ) and Securities and Exchange (SEC) commission both announced their settlement with the French energy giant TOTAL SA (Total), over its violation of the Foreign Corrupt Practices Act (FCPA).

It was the slogan’s inverse which gave me pause in reading about Total for as recently as June 2012, the FCPA Blog asked, as the title of a blog post, “Will Total S.A. Fight Back?” In this post Dick Cassin, who reported that Total had been in discussion with the DOJ and SEC since 2010, said that the “French oil giant Total said it rejected ‘out-of-court settlement solutions’ with the DOJ and SEC that would end their longstanding FCPA investigations. And while Total said it is still talking with the agencies, it also said it’s free not to settle, ‘in which case it would be exposed to the risk of prosecution in the United States. ‘” Cassin explored some of the reasons that Total might rather fight than settle but at the end he noted, “What will happen now? A court battle would bring a deluge of scrutiny from the press and regulators around the world. At a minimum, that would imperil Total’s stock price and lead to years of litigation by aggrieved shareholders, customers, lenders, and other stakeholders. So settlement seems likely.”

So I guess Total decided that its interests mandated that it switch and settle rather than fight. What could have been the reasons for doing so? In this post, I will review some of the facts as set forth in the Criminal Information (Information)and the Deferred Prosecution Agreement (DPA), both of which were filed by the DOJ and the SEC’s Cease and Desist Order (the Order) which may have led Total to settle. In tomorrow’s posting, I will discuss the lessons learned for the compliance practitioner.

Who Was Involved

As reported by both the FCPA Blog and the FCPA Professor, Total engaged in a nearly decade long, breathtaking bribery scheme. In this scheme, Total paid approximately $60MM to an un-named Iranian Official of the National Iranian Oil Company (NIOC), who steered two major projects Total’s way. According to the FCPA Professor, in a post entitled “Total Agrees To Pay $398 Million To Resolve Its FCPA Scrutiny”, the Iranian Official in question was described in the Information as “the Chairman of an Iranian engineering company that was more than 90% owned by the Government of Iran and substantially controlled by the Government of Iran.”  The Information further states that “from at least early 2001, the Iranian Official was the head of an Iranian organization concerned with fuel consumption, which was a wholly owned subsidiary of NIOC, and was a government advisor to a high-ranking Iranian official.”

The Projects

The projects were the Sirri A and E oil and gas fields and South Pars gas field. Total was granted concessions to these fields within days or weeks of inking contracts with the Iranian Official’s sham entity for receipt of the bribes. The original contract was between Total and “Intermediary 1” and was entitled “Umbrella Agreement.” The specific terms for payment were set out in a document which hung off this Umbrella Agreement, which was entitled, “Consulting Services Request”. Under this Consulting Services Request, Intermediary 1 was paid approximately $26MM over 2 years.  Thereafter, another sham entity, “Intermediary 2” was set up and assigned the Umbrella Agreement by the parties. Intermediary 2 received its own “Consulting Services Request”, under which it received approximately $44MM in payments.

The Bribes

As I said, the bribe amounts were simply breathtaking. Below is the Bribery Box Score

Bribes Paid To

Contract(s) Under Which Bribes Were Paid

Date Bribe Paid

Bribe Amounts Paid (figures approx. based upon currency conversions)

Projects Awarded to Total Based Upon Bribes Paid

Intermediary 1 Umbrella Agreement.Consulting Services Request 1:(a) $6MM;(b) $500K for expenses;(c) $25MM as capital X reached specified levels;(d) Amount = to 5% above cap X, if exceeded; and(e) % of revenue from sale of O&G developed from site. July 13, 1997, Total awarded Sirri Fields A&E
7-10-95 $500K
10-03-95 $6.07MM
6-12-97 $10MM
7-11-97 $4.64MM
Intermediary 2 Umbrella Agreement transferred to Intermediary 2.Second Consulting Services Request 2:(a) $10MM;(b) $30MM as capital X reached specified levels;(c) payment of either (i) Amount = to 4% above cap X, if exceeded or (ii) $60MM; and(d) an additional $10MM. On Sept. 28, 1997 Total awarded Phases 2 & 3 of South Pars project
12-12-97 $6.15MM
8-28-98 $4.18MM
9-1-98 $4.18MM
6-9-99 $1.89MM
3-17-03 $9.3MM
11-29-04 $7MM
Additional Payments with no specified date $7MM
TOTAL AMOUNT OF BRIBES PAID     Approximately $60MM

The Charges

According to the FCPA Professor, the Information has the following about violations of the FCPA books and records provisions, “… Total knowingly falsified and caused to be falsified books, records, and accounts, required to, in reasonable detail, accurately and fairly reflect the transactions and dispositions of Total, to wit: Total (a) mischaracterized the unlawful payments under the various consulting agreements as ‘business development expenses’ and (b) improperly characterized the unlawful consulting agreements as legitimate consulting agreements.”

The Information also specifies the FCPA internal controls charges. They included:

“(a) failed to implement adequate anti-bribery compliance policies and procedures; (b) failed to maintain an adequate system for the selection and approval of consultants; (c) failed to conduct adequate audits of payments to purported consultants; (d) failed to establish a sufficiently empowered and competent corporate compliance office; (e) failed to take reasonable steps to ensure the company’s compliance and ethics program was followed; (f) failed to evaluate regularly the effectiveness of the company’s compliance and ethics program; (g) failed to provide appropriate incentives to perform in accordance with the compliance and ethics program; (h) concealed the consulting agreements’ true nature and true participants; (i) performed no due diligence concerning the named or unnamed parties to these agreements; and (j) lacked controls sufficient to provide reasonable assurances that the consulting agreements complied with applicable laws.”

The Penalties

In a blog post entitled “Total SA pays $398 million to settle U.S. bribe charges” the FCPA Blog reported that “In the fourth biggest FCPA case ever, French oil giant Total S.A. agreed Wednesday to pay $398 million in penalties and disgorgement for bribing an Iran official to gain access to oil and gas fields. Total will pay a criminal penalty to the DOJ of $245.2 million. It received a three-year deferred prosecution agreement that requires appointment of an independent compliance monitor. In its settlement with the SEC, Total will disgorge profits of $153 million.” For those of you keeping score at home that is Number 4 on the list of greatest FCPA fines in the history of the world AND Number 2 on the list of the biggest profit disgorgements in FCPA history. Something to be proud of, or perhaps not.

While the raw number of nearly $400MM does seem eye-catching, perhaps even more interesting is that the DOJ assessed a fine nearly at the bottom of the fine range. After the calculations were made under the US Sentencing Guidelines (USSG), there was a fine range of between a low end of $235.2MM up to $470.4MM. My curiosity here is based upon something NOT in the DPA, where the DOJ assessed Total’s conduct under the USSG ‘culpability score’. Under USSG §8C2.5 an organization can receive a reduction in its culpability score in three ways. First, a company’s overall score can be subtracted “three points from the organization’s culpability score if the organization had an effective compliance and ethics program as defined in §8B2.1 in place at the time of the offense.” Second, the culpability score can be reduced “by five points if the organization self-reported the offense to the appropriate governmental authorities, fully cooperated in the investigation, and clearly demonstrated recognition and affirmative acceptance of responsibility for its conduct.”  If the organization did not self-report, but fully cooperated in the investigation, and accepted responsibility for its conduct, the culpability score is reduced by two points. Third, and finally, “if the organization did not self-report or cooperate, but clearly demonstrated recognition and affirmative acceptance of responsibility for its conduct, the culpability score is reduced by one point.” [citations omitted]

It would appear that while Total fully cooperated and recognized the error of its ways, it did not have nor put in place an effective compliance program. Also it would appear that Total did not self-report its FCPA violations. So I guess the question is: what did Total do to warrant receiving a fine at near the bottom end of the possible range?

Jurisdiction

I find jurisdictional arguments to be similar to arguments about pregnancy. Just as one is not ‘a little bit pregnant’, there is not just ‘a smidgen of jurisdiction’. It either exists or it does not. From the Information, it states that “Total owned a number of subsidiaries that conducted business in the United States. Total’s American Depository Shares were registered with SEC and traded on the New York Stock Exchange as American Depository Receipts (“ADRs”). Accordingly at all relevant times, Total was an “issuer” within the meaning of the FCPA. Total also funded one of the bribe payments from “account at Banker’s Trust in New York, New York.” Maybe Total was more than just ‘a little pregnant’.

So what could have led Total to switch to settling rather than fighting? Perhaps it finally understood that if you list your shares in the US, your company will be subject to US laws. And of course, do not bribe foreign governmental officials using money wired from US banks.

Or maybe, just maybe, Total decided it was in their corporate interests to settle rather than go to trial.

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

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