FCPA Compliance and Ethics Blog

January 30, 2014

Inspector Lestrade – Does Leadership Matter?

Inspector LestradeContinuing our Sherlock Holmes homage, today we draw inspiration from the character of Inspector Lestrade as the theme of this blog post. In the original Doyle works, he appears in 13 of the stories and we are only introduced to him as Inspector G. Lestrade. In the current PBS series, we are informed his given name is Greg. Lestrade is not exactly the sharpest tack in the shed, as evidenced by Holmes comments that he is “an absolute imbecile” from the The Red-Headed League and the “best of a bad lot” from The Boscombe Valley Mystery.

I thought about Inspector Lestrade when I read some of the comments of UBS Chief Executive Officer (CEO), Sergio Ermotti, as reported in the Wall Street Journal (WSJ) article entitled “UBS Chief’s Plea: Stop ‘Lecturingto Bankers” by David Enrich and Francesco Guerrera. UBS has not exactly been a law abiding corporate citizen over the past few years. As you might recall this is from the company, which had a $2.3 billion trading loss from one individual. It is also from the company that assisted approximately 17,000 Americans clients with illegally hiding $20bn of assets to avoid paying taxes on this money. UBS paid a fine of $780MM for these actions. But there is much more, as UBS also agreed to pay another $1.5 billion fine for its criminal actions in manipulating the LIBOR. What would you say the ‘tone’ is at UBS about complying with the law?

With all of these fines, penalties and criminal pleas behind him, Ermotti does not seem to think there is any room for criticism of his company. Rather unbelievably, Ermotti was quoted as saying, “Life is hard enough, and I think this constant lecturing on ethics and on integrity by many stakeholders is probably the most frustrating part of the equation. Because I don’t think there are many people who are perfect.” For those of you who might want that translated to Texan, the equivalent phrase is a very nasal twang of “Glass houses dear”. For the more spiritual out there you could fall back on “Let he who is without sin cast the first stone.” Perhaps the most relevant question would simply be ‘How many angels dance on the head of a pin?’

Late last year, I engaged in a dialogue with other Foreign Corrupt Practices Act (FCPA) commentators about whether motives matter in anti-corruption enforcement actions. I opined, in a post, entitled “Does Motive Matter in Anti-Bribery and Anti-Corruption Enforcement?”, that it really does not matter what the motives are for the Chinese government officials in prosecuting western companies, which violate Chinese national anti-bribery laws, if a company breaks the law, it can be subject to prosecution. The FCPA Professor, in a post, entitled “Should Motivations Matter”, said that impure motives do matter in anti-corruption enforcement actions, whether in China or the US. Others have suggested that the FCPA enforcement itself is hypocritical because the US allows gifts, entertainment, charitable donations and a wide variety of other acts to be given as a quid pro quo to US government officials, usually without criminal prosecution.

But Ermotti takes this debate to an entire new level. Now you cannot even criticize his bank unless you are ‘perfect’. Further, showcasing the obvious knowledge of his 60,000 plus employee base, Ermotti “said in the interview that most of the bad behavior that has landed UBS and others in hot water was caused by small groups of rogue employees and doesn’t reflect broader cultural problems in the industry. “It’s not because you’re a banker that you’re a criminal”.” This was in the face of criticism at the World Economic Forum in Davos (where Ermotti was interviewed and made his remarks) that “In a private meeting held between bank CEOs and central bankers and regulators Friday, several participants pointed to banks’ “conduct” issues as undermining efforts to rebuild public and investor confidence in the industry, according to executives and central bankers who were there.” This can be contrasted with Bank of England Governor Mark Carney who said at the same conference, “Whether or not [the industry] thrives will rest on the efforts of individuals and organizations to re-establish the system’s reputation for integrity”.

Yet again Ermotti doubled down when he claimed that the group, which cannot criticize, includes regulators and enforcement officials. This statement is almost the equivalent of another equally enlightened (former) CEO, Bob Diamond, who once ran Barclays and “told British lawmakers in 2011 that “there was a period of remorse and apology for banks. That period needs to be over.” The next year, Mr. Diamond was forced to resign after Barclays admitted trying to rig interest rates.” Ooops.

What does all of this say about the top of this once august organization? First and foremost, how you would like to be the person who has to ‘speak truth to power’ if your CEO says that only the ‘perfect’ can bring forward criticism? Do the words ‘career suicide’ ring any bells here? But more importantly you have a company which entered into a Deferred Prosecution Agreement (DPA) regarding its tax evasion violations and then pled guilt to criminal conduct that as reported in another WSJ article “Regulators described the alleged illegality as “epic in scale,” with dozens of traders and managers in a UBS-led ring of banks and brokers conspiring to skew interest rates to make money on trades.” What would you say about its ‘tone-at-the-top’? Are they committed to following the law? How about complying with the terms of their multiple settlement agreements with US regulators? How about changing the culture in their organization, not simply to make compliance a goal but actually obey the law? What about instituting and then following a best practices program for compliance with anti-corruption laws such as the FCPA or Bribery Act; anti-tax evasion laws such as the Foreign Account Tax Compliance Act (FACTA); relevant anti-money laundering (AML) laws; or indeed others.

Without a hint of irony, the WSJ piece on Ermotti’s remarks ends with the following quote from him, “The banking industry is an easy target.” I wonder if Ermotti has the self-awareness of Inspector Lestrade to understand the wisdom of his words?

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

© Thomas R. Fox, 2014

January 29, 2014

The Sussex Vampyre and the ADM FCPA Settlement

Sussex VampyreToday I want to use the story of The Sussex Vampyre as the starting point for an inquiry into the recent Archer-Daniels-Midland Corp (ADM) Foreign Corrupt Practices Act (FCPA) enforcement action. In the story, Holmes receives a letter from Robert Ferguson, who has become convinced that his second wife has been sucking their baby son’s blood and is a vampire. He has a crippled son from his first marriage who is terribly jealous of the new baby in their home. It turns out that this lame son, Jack, has been shooting poisoned darts at his baby brother and his stepmother’s behavior is actually sucking the poison out of the baby’s neck. The baby’s wounds were caused by Jack sending the darts, not by the mother biting her baby. In other words, what might be seen as something very scary is easily explained.

Once again demonstrating that the FCPA Professor and myself look at the same thing and come to different conclusions are reflected by those he states in his article “Why You Should Be Alarmed By the ADM FCPA Enforcement Action”. I see the ADM enforcement action as a continuation of the available case law favoring interpretations of the business nexus requirement to be applied broadly, where it is clear that bribery and corruption have occurred.

When I look at the facts laid out in the ADM settlement documents, I see the following: four separate bribery schemes hidden in the companies books and records clearly designed to influence the decision of a foreign government official. From 2002 to 2010, the company’s Ukrainian subsidiary rolled up VAT receivables of up to $46MM. What I see is a company, which over several years of slow and no response to its application for VAT tax refunds for goods purchased in Ukraine, responded to this problem by engaging in bribery and corruption to help them get the money that they were believed they were owed.

So what were these bribery schemes? There was the Charitable Donation Scheme, which according to the SEC Complaint, “an ADM executive in the tax department sent an e-mail to the head of an international tax organization and stated, “One of our affiliates operates in the Ukraine. In order to recover 100% of their input VAT they have to pay 30% of the amount to local charities.”” Next was the Stevedoring Company Scheme where two ADM subsidiaries made “payments to a stevedoring company in the port of Odessa so that it could pass on nearly all of those payments to Ukrainian officials in order to obtain VAT refunds on behalf of ACTI Ukraine.” Next was the Mischaracterization of Write-offs Scheme where ADM’s German subsidiary reported to the US parent that they had to write off 18% of the tax refund due back to the company. However upon payment of the VAT refund it would be at 100% of the total due. As the German subsidiary had taken a write off of 18% of the total, the corresponding amount of money would be funneled to “third-party vendors so that nearly all of those monies could be provided to Ukrainian government officials.” Finally, and most ingenuously, was the Fake Insurance Premiums Scheme. In this scheme, ADM’s Ukrainian subsidiary, arranged for an insurance company to falsely bill it for crop insurance, which said “Insurance Company never intended to honor, adjusting the premiums to be roughly 20% of the VAT refund.” This inflated amount was then paid to Ukrainian officials.

The FCPA itself says:

(a) Prohibition

It shall be unlawful for any issuer which has a class of securities registered pursuant to section 781 of this title or which is required to file reports under section 780d 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—

(1) any foreign official for purposes of—

(A)

(i) influencing any act or decision of such foreign official in his official capacity,

(ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or

(iii) securing any improper advantage; or

(B) inducing such foreign official to use 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;

In the case of US v. Kay, the Fifth Circuit Court of Appeals exhaustively reviewed the legislative history of the FCPA, from its passage in 1977 through the two amendments in 1988 and 1998. The Kay decision stands for the proposition that the defendant intend the paying of bribes to be a quid pro quo, which would assist (or is meant to assist) the payor in obtaining or retaining business. Further, it specifically stated that the “business nexus is not to be interpreted narrowly.” The facts in Kay were different than those presented in the ADM matter. However, with the admonition that the business nexus requirement is not to be interpreted narrowly, I believe the holding in Kay is such that it is not a stretch to see the conduct engaged in by ADM did assist, or was meant to assist, it in doing business in Ukraine. Indeed, the Kay decision stated, “In addition, the concern of Congress with the immorality, inefficiency, and unethical character of bribery presumably does not vanish simply because the tainted payments are intended to secure a favorable decision less significant than winning a contract bid.” Thus I look at Kay and see the conduct of ADM as falling within the broad outlines of the Kay decision.

How about the facilitation payment exception and that somehow the ADM subsidiaries were making payments exempted out of the FCPA because they were for routine services?

The FCPA itself states:

(b) Exception for routine governmental action

Subsections (a) and (g) of this section shall not apply to any facilitating or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official, political party, or party official.

Further, the term “routine governmental action” is defined as one of the following:

  1.  Obtaining Permits;
  2. Processing visas and work orders;
  3. Providing police protection, mail pick-up and delivery;
  4. Providing phone services and utilities;
  5. Actions of a similar nature.

There is nothing in the statute about processing multi-million dollar tax refunds as a routine governmental action. Once again the Kay decision spoke to the issue of facilitation payments, similar to those made in the context of the ADM settlement, when it said “This observation is not diminished by Congress’s understanding and accepting that relatively small facilitating payments were, at the time, among the accepted costs of doing business in many foreign countries.” One key there is that facilitating payments be “relatively small”. Whatever 18% of $46MM might be, it certainly is not “relatively small”.

All of this leads me to see the ADM settlement as a continuation of the very limited case law interpretation that exists around the FCPA. So just as Holmes looked at the facts in The Sussex Vampyre and did not see something which could not be explained or need be feared; I look at the ADM enforcement action and see a company which engaged in bribery and corruption, knew it was doing so and actively tried to hide the corrupt payments in its books and records.

And once again, I would cite that the easiest response to all of this might be the advice given by Department of Justice (DOJ) representative Greg Anders, in his testimony to the House Judiciary Committee regarding amending the FCPA, that being that companies should not engage in bribery.

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

© Thomas R. Fox, 2014

December 27, 2013

My Favorite Blog Posts from 2013

One of the best things about the Foreign Corrupt Practices Act (FCPA), UK Bribery Act and other anti-corruption practice areas is the top notch quality of commentators. While Mike Volkov regularly derides the FCPA paparazzi for being scare mongers and the FCPA Professor chastises FCPA Inc. for attempts to paint FCPA enforcement in the worst possible light so as to draw clients to their collective resources; there is also a great set of bloggers, writers and pundits who put out solid, useful and well-reasoned pieces on FCPA and Bribery Act issues. In this blog post, I would like to highlight some of my favorite posts from some of my favorite commentators over the past year.

From the Dean

If you do not know who the Dean of FCPA bloggers is you have not been looking too long or too hard. It’s Dick Cassin, who is the Founder, Editor and Publisher of the FCPA Blog, which consistently reports on all things compliance around the globe. But for me, it is when Dick writes from the heart, he is able to articulate what many of us are feeling but cannot seem to put into words. My favorite post from Dick this year was his tribute to President Kennedy on the occasion of the 50th anniversary of the President’s assassination, entitled “And So The Legend of Camelot Was Born”. Dick ended his post with the following quote from Teddy White, “He advanced the cause of America at home and abroad. But he also posed for the first time the great question of the sixties and seventies: What kind of people are we Americans? What do we want to become?” The question still stands.

From the FCPA Professor

If you have never debated the FCPA Professor, live or via email, you should. But be prepared to bring your A-Game and your authority. He posts daily and has become a great resource for guest posts over the years which challenge the status quo on a variety of legal and compliance issues. Each morning I cannot wait to see what the Professor has to say that day. However, what I have really come to appreciate is his Friday Round-Ups. Each Friday, the Professor gives us a round-up of recent FCPA and related news, articles and developments not otherwise covered by him in his Monday – Thursday posts. I should also say he saves some of his best witticism for these posts. My favorite post from the Professor this year was the milestone of his 100th Friday Round Up, appropriately entitled “The 100th Edition of the Friday Round-Up”. Tune in each Friday for another edition of this great resource.

From Jim McGrath

I continually bemoan to Jim McGrath that he needs to post blogs more often than his twice or thrice weekly output. The reason being they are so good and I want to see more of his stuff. As you might guess from the title of his blog, Internal Investigations Blog, he tends to focus on investigations; some criminal, some civil, some internal and some external. McGrath is an ex-prosecutor and tends to view things through that prism and give us a different perspective of law enforcement. He writes about investigations inside and outside the realm of anti-corruption but his insights are certainly applicable to any FCPA or Bribery Act investigation.

My favorite post from McGrath this year was his piece on 7-Eleven, entitled “Human Trafficking Concerns for 7-Eleven in Wake of Payroll Scam”. In this article he detailed the federal investigation into allegations that 7-Eleven franchisees in New York and Virginia had engaged in human trafficking and possible involvement by the franchisor through its payroll system. His piece was a cautionary tale for the compliance practitioner about the need for internal controls, internal monitoring and internal investigations. McGrath ended his post with the following, “Further, its future due diligence efforts as regards suppliers and franchisees should include a review for human rights abuses such as those suggested here. Otherwise, it will have to sell a helluva lot of Slurpees to pay the fines, costs, and disgorgements that a failure to do so will no doubt entail.” In other words, trust but verify.

From Mike Volkov

Mike Volkov has worked at the Department of Justice (DOJ) on Capitol Hill and for Big Law. He now has founded his own firm, the Volkov Law Group and writes the Corruption, Crime & Compliance blog. Mike primarily writes about anti-corruption but he also writes about health care fraud, anti-trust compliance and enforcement and many other topics. While I cannot determine if he set out to have a theme this year, Volkov has written many articles this year which focus on the role and position of the Chief Compliance Officer (CCO), the need for independence and resources required for the position.

My favorite post from Volkov was entitled “The Only Thing [In-House Counsel and CCOs] Have to Fear, Is Fear Itself”. His title is a play-off of what I believe to be the most inspiring FDR speech so that alone is worth the price of admission. He also tells one of the great stories about his days from Big Law. Volkov related that he wrote his views on the UK Bribery Act and the length of time it would take for any meaningful enforcement to take place, “I received a call from the firm’s London partners and was chastised for undermining their entire “marketing” program. (In stark contrast, many clients wrote me and thanked me for my “honesty.)” As my 16 year old daughter might say, ‘Sometimes you just have to keep it real’.

From Across the Pond

If you do not subscribe to thebriberyact.com, you are missing out on the best site for all things UK Bribery. thebriberyact.com guys, Barry Vitou and Richard Kovalevsky QC, consistently give their readers both practical insight and in-depth analysis. Their interviews of the relevant players allow all compliance practitioners to develop insight into what the top UK regulatory officials are thinking about on the Bribery Act. They also write from the very British perspective of understatement and skewering satire, which is more than a ton of fun for us Americans to read.

My favorite post which illustrated all of the above traits was from March and is entitled “Parliament report calls for Bribery Act review: Our opinion – Junk in. Junk Out.” In this post, they took on the call for the urgent scrutiny of the UK Bribery Act by a parliamentary select committee claiming that the Act has met with “confusion and uncertainty.” To this rather inane claim, the guys responded “We cannot think of a piece of legislation which has sparked much more commentary, advisory, much of it on line and completely free, including our own eponymous website.” But my favorite line was their dénouement to the British MP who brought up the need for clarification of the UK Bribery Act, “And, Tony from Alderly PLC, if you’re reading feel free to give us a call.  We can help you.”

My Favorite from 2013 (Think Big)

My favorite blog post of the year was actually posted on December 28, 2012 by Matt Ellis, Founder and Editor of the FCPAméricas blog, which was entitled “Wal-Mart, Go Big on FCPA Compliance”. The reason that it is my favorite of 2013 is because it is the one post that I have thought the most about, talked the most about, read the most about and it even inspired me to write on the issue myself. In his post Ellis challenged Wal-Mart to “go big” on compliance in the wake of its world-wide FCPA investigation and policy implementation. He wrote, “Wal-Mart should instead use the FCPA investigation, and the attention it has generated, as an opportunity. It is an opportunity to go big on compliance.” Ellis went on to detail some specific suggestions that Wal-Mart could implement to help the fight against bribery and corruption that, due to its size and market share, would be in a unique opportunity to put in place.

Within the anti-corruption compliance community there was a noted buzz about Ellis’ piece and his suggestions. I was inspired to write a blog post, entitled “Wal-Mart-Be a Leader in Compliance”, due to the ideas articulated by Ellis. Seemingly inspired by Ellis’ example, Michael Scher, writing in the FCPA Blog, in a piece entitled “Michael Scher talks to the feds”, used the Wal-Mart investigation as a jumping off point to ask the DOJ to resolve several open issues on compliance as he saw them. In others words, Ellis piece (hopefully) got not only Wal-Mart to thinking but several others of us. That is why it is my favorite blog post of 2013.

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

December 13, 2013

More Compliance Lessons from the Asiana/SFO Crash Investigation

I have long been interested in the intersection in the changes in attitude regarding safety in the workplace by corporations and the changing attitudes on doing business through bribery and corruption. As a trial lawyer defending corporations in catastrophic accident lawsuits, I saw a sea change in the corporate attitude regarding safety, beginning in the 1980s through the 1990s. Many of the arguments used against safety during that era are used now. Some of my favorites are: (the financial excuse) it costs too much and doesn’t contribute to the bottom line; (the traditional excuse) we’ve always done it that way; and (my personal favorite) you can’t stop humans from screwing up and trying to injure themselves. But the reality is that safety at the work place did improve and now most companies not only say that safety is job No. 1 but they live and breathe that motto. Does this sea change mean that serious accidents do not happen at the workplace? Of course not, but it does not mean that companies have or even should give up the quest for zero accidents at work.

Part of the ongoing debate about compliance is whether the Department of Justice (DOJ) approach of corporate enforcement actions and the use of Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs) help or hurt compliance with the Foreign Corrupt Practices Act (FCPA). Some commentators remark that the simple fact that there are enforcement actions is indicia itself that the DOJ approach is not working. Mike Volkov took on this topic in his post, entitled “The Sky is the Limit: Escalating Fines, DPA/NPAs and Deterrence”, by asking if “it is important to ask the question whether the current enforcement scheme adequately punishes and deters corporations”? In his discussion he points to some who want more prosecution of individuals as a greater deterrent and others, notably the FCPA Professor, who want greater corporate protections against prosecution through the addition of a compliance defense as a mechanism to give corporations more incentive to do business in compliance with the law. Volkov ends by observing the DOJ’s current enforcement focus “will not change unless and until there is a good reason to do so – so far no one has pointed to any significant reason for the Department of Justice to change its practices.”

I thought about all of the above in the context of the hearings in Washington in front of the National Transportation Safety Board (NTSB) surrounding the crash of the Asiana jet at San Francisco’s airport last summer. Earlier this week I wrote about one of the lessons from the hearings which was the need for enhanced training by Asiana pilots on not only the specific planes they pilot but also training that they can speak up when they see something that they believe is not right.

This need for training was made even more acute when the story about the testimony given by the Captain on board the flight in question in a New York Times (NYT) article, entitled “Pilots in Crash Were Confused About Control Systems, Experts Say”, where Captain Lee said that he told investigators that any of the three pilots on the plane could have decided to break off the approach, but he said it was “very hard” for him to do so because he was a “low-level” person being supervised by an instructor pilot. But more than even the failure to raise his hand and speak up, Lee did not heed the warning of a junior officer. As reported in an article by the Associated Press, entitled “Pilot who crashed at SFO was worried about landing”, after the accident, Lee told NTSB investigators that neither he nor the instructor pilot onboard the flight said anything when the first officer raised concerns four times about the plane’s rapid descent. Further, he was very concerned about his ability to make a visual landing. So not only was Lee afraid to speak the truth to a superior, he didn’t listen when questioned by a junior. In the world of workplace or airline safety, this is a recipe for disaster.

I think the key to overcoming these problems is training, which has long been recognized as a cornerstone of any best practices ethics and compliance program. I thought it might be an appropriate time to review the training statements made regarding the FCPA. The US Sentencing Guidelines list “Conducting effective training programs” as one of the factors the DOJ will take into account when a company accused of a FCPA violation is being evaluated for a sentence reduction. The Sentencing Guidelines mandate:

(4) (A) The organization shall take reasonable steps to communicate periodically and in a practical manner its standards and procedures, and other aspects of the compliance and ethics program, to the individuals referred to in subdivision (B) by conducting effective training programs and otherwise disseminating information appropriate to such individuals’ respective roles and responsibilities. 

After the promulgation of the Sentencing Guidelines, the DOJ and Securities and Exchange Commission (SEC) gave their views on training in the 2012 FCPA Guidance. Their Ten Hallmarks of an Effective Compliance Program listed Training and Communication as one of the key elements. In this section they said that anti-corruption and anti-bribery compliance policies cannot work unless effectively communicated throughout a company. They advised that “a company has taken steps to ensure that relevant policies and procedures have been communicated throughout the organization, including through periodic training and certification for all directors, officers, relevant employees, and, where appropriate, agents and business partners.” But more than a simple dyadic promulgation of a rule, a company should tailor its training to its needs and its risks. This means that any “information should be presented in a manner appropriate for the targeted audience, including providing training and training materials in the local language.

In addition to the FCPA Guidance, the UK Ministry of Justice (MOJ) has stated that training is one of the Six Principles of an effective compliance program. Under Principle V, it states that “The business seeks to ensure that its bribery prevention policies and procedures are embedded and understood throughout the company through internal and external communication, including training, that is proportionate to the risks it faces.” The Guidance recognizes that communication and training deters bribery by companies, their employees and those persons associated with it, by enhancing awareness and understanding anti-corruption policies and procedures and the company’s commitment to their proper application. It therefore follows that making information available on legal requirements, obligations and policies and procedures for implementation of the same assists in more effective monitoring, evaluation and review of bribery prevention procedures. Anti-bribery training should provide, to company employees and those persons and entities associated with the company, the knowledge and skills needed to implement and utilize the anti-bribery procedures and handle in a satisfactory manner any bribery related problems or issues that may arise.

Fortunately violations of the FCPA rarely result in loss of life or limb. But that does not diminish the responsibility of companies to comply with the law. And just as corporate attitudes around safety changed dramatically, corporate attitudes about following the FCPA can change as well. Indeed they could even take the basic approach suggested by (the then) DOJ representative Greg Anders in testimony about attempts to amend the FCPA before the House Judiciary Committee, don’t pay bribes.

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

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

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