FCPA Compliance and Ethics Blog

August 22, 2014

The Whole World Is Watching Mexico In the Fight Against Corruption

Don PardoDon Pardo died this week. While perhaps not of the public stature of Robin Williams or Lauren Bacall, whom we lost last week, his passing nonetheless was well noted in the national media. Pardo lived to the ripe old age of 96 and got his start in the public eye through the medium of radio. While perhaps not quite the Voice of God (John Facenda of NFL Films) he nevertheless had a booming voice, which was all the more recognizable from his incredible modulation. Most folks will recognize him from the following, “Live from New York – it’s Saturday Night Live!” I remember Pardo from an earlier era where he introduced the game shows Jeopardy and The Price is Right! But, wherever you might remember Pardo from, he was a true original.

All of which brings me to today’s topic of business solutions to legal issues such as the Foreign Corrupt Practices Act (FCPA) and other anti-corruption statues such as the UK Bribery Act. I have written about business solutions to legal problems, such as the FCPA, in the energy industry here in Houston. Noted compliance practitioner Scott Killingsworth made similar observations on compliance covenants in commercial transactions, which he labeled private-to-private or “P2P” solutions.

However, now we may be seeing a business solution to bribery and corruption played out on the national stage in Mexico. In an article in midstreambusiness.com, by Deon Daugherty, entitled “Corrupción”, which she led with the sentence, “Leave it to the free market to solve a legal conundrum.” She went on to explain that it was the Mexican national energy company Pemex that had initially detected the fraud allegedly perpetrated by the entity Oceanografía and which has led to an investigation of the US banking giant Citigroup. She wrote, “Petróleos Mexicanos, the state-owned entity known as Pemex, had questioned the billing practices of the contractor, which has performed offshore work for Pemex for several years. Mexican officials subsequently placed Oceanografía executive Amado Yáñez under house arrest while they investigate. Pemex was quick to react. The company suspended all new contracts with Oceanografía pending its own investigation and the Mexican government has taken control of Oceanografía, Attorney General Jesús Murillo Karam said in a statement in Mexico City. An unidentified Pemex official told Bloomberg that Oceanografía’s assets have been impounded and the investigation will cover more than contracts with Pemex.”

Now, in Mexico, these stakes have been raised even higher by the country’s need for energy reform of and around Pemex. The Financial Times (FT), in an article entitled “Mexico’s historic reform drive”, noted the current Mexico President, Enrique Peña Nieto, has led a wide-ranging group of government reforms including a new energy law to make Pemex more efficient and to bring foreign investment into Pemex for the first time in its history. It all started with revising the Mexican constitution and has led to the enactment of nine implementing laws.

In an article in the Houston Chronicle, entitled “One key to Mexico’s energy reforms: corporate responsibility”, Chris Tomlinson wrote that President Nieto “wants to accelerate the timeline for allowing foreign companies into Mexico, clearly hoping their investment will invigorate Mexico’s economy and help his political standing.” Clearly it is designed to increase production from Mexico’s oil fields, which had dropped from 3.4 million barrels per day in 2004 to only 2.4 million barrels per day in the last reported year. Additionally, Tomlinson noted, “Mexico’s offshore Perdido oil field and the shale gas formations along the Texas border represent a huge opportunity to boost North American energy production.”

All of the above represents a huge opportunity for US companies to do more business in Mexico. Daugherty cited to Jose Valera, a partner in the law firm of MayerBrown, who said, “just laying the pipeline and other midstream infrastructure needed to deliver and store the hydrocarbons that Mexico stands to produce will be worth tens of billions of dollars’ worth of investment. And FCPA concerns exist globally.” Valera added that “We need to keep in mind how little infrastructure there is in Mexico today—how little midstream infrastructure there is—by some accounts, Mexico has a total of about 12,000 miles of pipelines,” Valera explained. “Whereas if you look only at the state of Texas, we have more than 250,000 miles of pipelines. That gives you an idea of the scale in what Texas has, what Mexico has and what Mexico could have.”

Clearly companies in the energy space should be well aware of the FCPA. Indeed Houston is recognized as the city that is the world’s epicenter of FCPA enforcement because so many Houston based companies have been involved in FCPA investigations or enforcement actions. Indeed Daugherty cited to former US ambassador to Mexico and now counsel in the Mexico City office of White & Case LLP, Antonio Garza, for the following, “U.S. companies that operate abroad know the rules, and they will likely work to ensure they don’t put themselves in a position of exposure to FCPA sanctions.”

This is where Pemex is part of the business solution. Daugherty wrote, “Pemex has said corruption has no place in its business.” Indeed “newest director general of Pemex, Emilio Lozoya Austin, has “emphasized that there will be zero tolerance for any act of corruption in the business and general disregard for the law, so that in this, as in other cases, there will be no impunity.”” Former Ambassador Garza added, ““I’ll tell you another reason why I think you won’t be hearing too many corruption-related horror stories. That’s because this government knows the whole world is going to be watching this transition play out,” he said. “And it better look, smell and be transparent and competitive or the bloom will be off this rose pretty quick.” Indeed, Mexico has made inroads toward luring foreign investment to its markets. The nation’s public-private partnership (PPP) law was designed specifically to attract investors and give contractors a more certain environment.””

There has generally been much applause for Mexico amending its constitution and reforming its laws to allow foreign entities to invest in the Mexican energy industry for the first time since 1938. There are many questions that are still left to be answered but if Pemex can help to become part of the solution in the international fight against bribery and corruption, think what an example that might set for other countries across the globe. All I can say that this point (and in the most booming Don Pardo voice I could ever muster) The Whole World is Watching!

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

August 21, 2014

What Can You Do When Risk Changes in a Third Party Relationship?

RiskThe GlaxoSmithKline PLC (GSK) corruption matter in China continues to reverberate throughout the international business community, inside and outside China. The more I think about the related trial of Peter Humphrey and his wife, Yu Yingzeng for violating China’s privacy laws regarding their investigation of who filmed the head of GSK’s China unit head in flagrante delicto with his Chinese girlfriend, the more I ponder the issue of risk in the management of third parties under the Foreign Corrupt Practices Act (FCPA). In an article in the Wall Street Journal (WSJ), entitled “Chinese Case Lays Business Tripwires”, reporters James T. Areddy and Laurie Burkitt explored some of the problems brought about by the investigators convictions.

They quoted Manuel Maisog, chief China representative for the law firm Hunton & Williams LLP, who summed up the problem regarding background due diligence investigations as “How can I do that in China?” Maisog went on to say, “The verdict created new uncertainties for doing business in China since the case hinged on the couple’s admissions that they purchased personal information about Chinese citizens on behalf of clients. Companies in China may need to adjust how they assess future merger partners, supplier proposals or whether employees are involved in bribery.”

I had pondered what that meant for a company that wanted to do business in China, through some type of third party relationship, from a sales representative to distributor to a joint venture (JV). What if you cannot get such information? How can you still have a best practices compliance program around third parties representatives if you cannot get information such as ultimate beneficial ownership? At a recent SCCE event, I put that question to a Department of Justice (DOJ) representative. Paraphrasing his response, he said that companies still need to ask the question in a due diligence questionnaire or other format. What if a third party refuses to answer, citing some national law against disclosure? His response was that a company needs to very closely weigh the risk of doing business with a party that refuses to identify its ownership.

The more that I thought about that answer the more I became convinced that it was not only the right answer under any type of FCPA compliance program but also the right response from a business perspective. A company must know who it is doing business with, for a wide variety of reasons. The current situation in China and even the convictions of Humphrey and Yu do not change this basic premise. You can ask the question. If a party does not want to disclose its ownership, you should consider this in any business relationship going forward.

The Humphrey and Yu conviction do not prevent you from asking the question about ownership. Their convictions mean that you may not be able to verify that information through what many people thought was publicly available information, at least publicly available in the west. I was struck by one line in the Areddy and Burkitt article, “It’s not just that the tactical business practices need to change; it’s the mind set” quoting again from Maisog.

I breakdown the management of third parties under the FCPA into five steps, which are:

  1. Business Justification and Business Sponsor;
  2. Questionnaire to Third Party;
  3. Due Diligence on Third Party;
  4. Compliance Terms and Conditions, including payment terms; and
  5. Management and Oversight of Third Parties After Contract Signing.

The due diligence step is but one of these five. Further due diligence is performed in large part to verify the information that you receive back from a proposed third party. So what if you can longer use avenues previously open to you in markets such as China? Perhaps there are other ways to manage this issue. Areddy and Burkitt also interviewed Jerry Ling, a partner at Jones Day, for the following “companies will need to analyze Chinese accounting documents themselves and conduct more in-person interviews with anyone they want to know more about in China.”

Ling’s point dovetails directly into what I heard from the DOJ representative. There is nothing about the Chinese law, or any other country’s law, which prevents you from asking some basic questions that are found in the Step 2 Questionnaire cited above. You can always ask who the owners of a company are, whether they are direct or beneficial. You can always ask if a company, its owners or its senior management have been involved in any incidents involving bribery and corruption and you can always ask if the company has a Code of Conduct and/or compliance program and whether its owners or senior management are aware of the FCPA and have had training on it.

Assuming the company will answer your questionnaire, the difficulty you may find yourself in now is verifying the information that you receive. In Ronald Reagan parlance, you may trust but you may not be able to verify it. Ling said in the WSJ article that “The challenge now for clients is that it’s hard to get good information.”

However, due diligence is but one step in the management of any third party in a FCPA compliance program. Just as when risk goes up and you increase your management around that risk, the situation is similar in here. Putting it another way, if you cannot obtain private information such as personal identification numbers during the due diligence process, you can put greater management around the other steps that you can take. Further, there has been nothing reported which would suggest that publicly filed corporate licenses or other information that might show ownership can no longer be accessed. Court records and public media searches also seem to still be available.

But what if you simply cannot determine if the information you are provided regarding ownership is accurate or even truthful? You can still work to manage the relationship through your commercial terms by setting your commission or other pay rates at a reasonable amount of scale. If you are dealing with a commissioned sales representative, you can probably manage this area of the relationship by setting the commission in the range of 5%. You can also manage the relationship by reviewing invoices to make sure there is an adequate description of the services provided so that they justify whatever compensation the third party is entitled to receive under the contract. You may also want to schedule such a third party for an audit ahead of other parties to help ensure adherence to your compliance terms and conditions.

There may be times when you cannot verify the true or ultimate beneficial owner of a third party. That does not have to be the end of the analysis. If that situation arises, you may want to see if there are other risk mitigation tools at your disposal. Put another way, if such a red flag arises, can it be cleared? Can it be managed? If your company is looking a major deal for multi-millions and your agent will receive a six or seven figure commission, the risk of not knowing with certainty may be too great because in such a case, an unknown owner could be a government official who has awarded the contract. But if your agent receives a considerably smaller commission and hence there is a considerably small amount of money to constitute a bribe, you may be able to manage that risk through a close and effective relationship management process.

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

August 20, 2014

Voyager II Launches and The FCPA Professor’s New Book

The Foreign Corrupt Practices Act In A New EraMany readers of this blog will recall that the Foreign Corrupt Practices Act (FCPA) is 37 years old this year. Perhaps less might remember that also 37 years ago, NASA launched Voyager II, which was an unmanned spacecraft. It was the first of two such crafts to be launched that year on a “Grand Tour” of the outer planets, organized to coincide with a rare alignment of Jupiter, Saturn, Uranus and Neptune. Aboard Voyager II was a 12-inch copper phonograph record called “Sounds of Earth.” Intended as a kind of introductory time capsule, the record included greetings in 60 languages and scientific information about Earth and the human race, along with classical, jazz and rock ‘n’ roll music, nature sounds like thunder and surf, and recorded messages from then President Jimmy Carter and other world leaders. Being good engineers, NASA conveniently included instructions on how to play the record, with a cartridge and needle provided.

In light of the age of the FCPA and our celebration of reaching for the stars, today I wanted to celebrate a volume from one of the FCPA’s most prolific commentators, Mike Koehler, the FCPA Professor. The author of numerous legal and scholarly articles and his eponymous daily blog, The FCPA Professor, he joined the thin ranks of those authors with hard bound volumes concerning the FCPA with his edition, The Foreign Corrupt Practices Act In A New Era.

As you would expect from the FCPA Professor he has lengthy sections on the genesis of the FCPA and its legislative history; general legal principals as they relate to FCPA enforcement and interpretation as well as the specifics of the text of the FCPA itself; and a review of enforcement actions. He also gives his insights as to why there was such an explosion of FCPA enforcements, beginning in 2004 and continuing right up until the present. He provides some pointers on FCPA compliance programs and ends the book with a discussion of FCPA reform. Of course, as you would expect from the FCPA Professor, the entire work is chocked full of quotations, citations and endnotes.

I would like to highlight some of my favorite discussions in the book. In Chapter 5 entitled FCPA Enforcement, he identifies “Three Buckets” of FCPA financial exposure. They are “(i) pre-enforcement actions professional fees and expenses; (ii) fine, penalty and disgorgement amounts in an actual FCPA enforcement action; and (iii) post-enforcement action professional fees and expenses.” With this tripartite description he lays out what a company might reasonably expect if it finds itself embroiled in an FCPA investigation and enforcement action. The message I got from this Chapter was that you had better have a strong compliance program in place because it is going to be a long hard and costly slog going forward if you don’t.

In Chapter 6, entitled Reasons for the increase in FCPA enforcement, The Professor sets out his thoughts on why there has been such an explosion of growth in FCPA enforcement. While both the use of Non-Prosecution Agreements (NPAs) and Deferred Prosecution Agreements (DPAs) are noted along with the passage and implementation of Sarbanes-Oxley (SOX); there are other reasons cited in the section entitled (appropriately enough) ‘Provocative Reasons’. These include that FCPA enforcement is “lucrative for the US government”; “the emergence and rapid rise of a lucrative industry called FCPA Inc.” (full disclosure – I am a card carrying member of FCPA Inc.); and the revolving door of lawyers who go into government service, enforce the FCPA and then leave government service to defend clients under government scrutiny for FCPA issue.

As the ‘Nuts and Bolts’ guy, I was very interested in Chapter 8, entitled FCPA Compliance and best practice. Fortunately he left some room for folks like me to go into the weeds of a compliance program but he did state, “While FCPA risk cannot be eliminated, it can be effectively managed and minimized when doing business in the global marketplace, and one positive result of the increase in FCPA enforcement in this new era has been the related increase in ‘soft’ enforcement of the FCPA through compliance policies and procedures.” He went on to define ‘soft enforcement’ as “a law’s ability to facilitate self-policing and compliance to a greater degree than can be accomplished through ‘hard’ enforcement alone. This was music to my ears. He also gave some practical approaches to implementing or enhancing your compliance program that I found to be quite useful for the compliance practitioner.

The Professor ends his book with a renewed call for FCPA reform. While he recognizes that, post Walmart, the impetus in Washington for amending the FCPA has all but died out; he does lay out all his reasons for the creation of a compliance defense amendment to the FCPA. Another cornerstone of his call for reform is to abolish NPAs and DPAs from the Department of Justice’s (DOJs) prosecutorial arsenal. Both of these issues bear serious weight and scrutiny and the FCPA Professor lays out his thoughts on each. Whatever your position on these issues is, you need to read up on what the Professor has to say to fully form your own internal debate.

As I have often remarked about the FCPA Professor, you may disagree with him but your FCPA knowledge and experience will be enriched by reading anything he puts out there for the rest of us to consume. However, after the publication of this book, I will have to add that it should become one of the standard texts for any FCPA compliance practitioner, law student studying the FCPA or anyone else interested in anti-bribery and anti-corruption. It should be on your FCPA library bookshelf. It certainly now sits proudly on mine.

You can purchase a copy of The Foreign Corrupt Practices Act In A New Era by clicking here.

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

© Thomas R. Fox, 2014

August 18, 2014

How Can Global Corporations Afford (or Afford Not) To Employ Professional Language Solution Providers

Jay RosenEd Note-I recently asked Jay Rosen, Vice President, Language Solutions at Merrill Brink International, if he could help me understand how to think through the the hiring of a language service provider. He graciously wrote the following post.

It seems like a daily occurrence that news organizations and blogs (this one included) report that global corporation XYZ, Inc. has run afoul of FCPA statutes somewhere in the world. The next few paragraphs will recount the jurisdiction where the alleged infraction has occurred and if known at this juncture, the details of the bribery scheme. At this point, if you are well read on this subject, the rest of the article plays out by rote.

Let’s hit the pause button and rewind this story to the beginning. How did XYZ, Inc. get into this position and what steps could have been taken to better communicate the Company’s ethics and compliance policies and procedures to its global employee base? While this would certainly not prevent a rogue employee(s) from committing these alleged infractions, professionally translated and localized ethics and compliance communications provide a proactive solution to insulate global companies from similar situations.

The question of whether or not to engage a professional Language Solutions Provider (LSP), read translation company, usually is driven by the following factors:

  • Cost/Quality
  • Confidentially
  • Change
  1. If I can afford an LSP, how do I choose among the ones out there for quality?

The first thing to cover here is how are translations priced?

Translations are completed on an outsourced basis by professionally educated, qualified, and selected linguistic resources. It is important to note that the industry standard is to bill on a per word basis (e.g. X number of words at Y cents per word). This pricing model will become glaringly apparent when Corporations look at alternative methods to translate documents in-house with an eye to saving money.

Proposed Internal Translation Solutions

Here are several ideas that are usually considered in lieu of engaging professional translation resources:

  • Becky down the hall speaks French
  • We can use someone in our Paris Office
  • The Forensic accountant working with us in Beijing

On first blush the three suggestions above all seem like good ideas that will potentially save money and lead to quality results. Unfortunately these three courses of action fall short by:

  • Not providing the necessary quality ensured by professional translation resources
  • End up costing the client both opportunity costs and greater total translation costs and
  • Do nothing to mitigate the risk of not having an independent outsourced LSP translating (and certifying) your documents (if necessary).

Becky down the hall speaks French

Although Becky does speak French, she has other duties in the organization that must be put aside for her to work on translating documents. Should this project take 3 – 4 hours and if Becky has a bill rate of $400/hour, this solution ends up wasting precious time and costing the end client ~ $1,600 instead of the a few hundred dollars to professionally produce an accurate translation.

We can use someone in our Paris office

As in the example above, this option also creates lost opportunity cost and further taxes billable resources in another time zone. This would require the company to utilize internal resources and having to deal with colleagues not under their direct local control and working in various global markets.

The forensic accountant working with us in Beijing

In this case, we have someone working far out of their core expertise and comfort zone – forensics – and having to wear the hat of a professional translator. Price also comes into play as these forensic resources start billing around $250/hour and could be higher.

Bottom line, what initially appears to be a viable and cost effective solution, ends up sacrificing quality, escalating costs and potentially increasing risk by internally generating substandard translations.

  1. If I use an LSP, how do I ensure confidentiality of the information contained in my documents? 

Confidentiality, especially in the FCPA arena, is a valid concern and must be considered when engaging a qualified LSP. Professional LSPs will require their linguists to sign a Confidentiality or Non-Disclosure Agreement. This agreement will be on file with the LSP and a copy of the agreement can easily be shared.

In terms of global data privacy restrictions, it is good to discuss this in advance with the LSP and depending on what jurisdiction your matter is based in, evaluate the LSP’s experience and comfort level in handling data privacy concerns.

In terms of looking at the individual linguists, a professional LSP will hire translators with the following credentials:

  • Minimum 4 year college degree
  • Subject Matter Expertise (SME)
  • Additional testing by the LSP

These three areas serve to validate the choice of an independent LSP as the translators employed will meet the minimum of a 4 year degree and quite often will have post-graduate or professional degrees such as JD’s or PhD’s. Furthermore, LSPs can provide Subject Matter Experts (SMEs) with specific sector knowledge such as IP/patents, cross-border litigation or FCPA, ethics and compliance experience. Finally the additional testing required by LSPs ensures that clients are receiving top-notch and best of breed translation solutions.

  1. How do I risk disrupting the status quo to change my current translation/localization workflow?

So far we have covered two out of three issues to consider in the choice of whether or not to engage an outsourced LSP.

  • Cost/Quality
  • Confidentiality

And finally we will look at another “C” – Change. While this may not initially be perceived as an important factor, this often affects whether an organization decides to employ an outsourced LSP. From a global perspective it is imperative that a Code of Business Conduct and a Company’s policies and procedures are accurately translated from the English source document to the multiple localized versions for global employees.

If in the past this decision has been left to local in-country resources, it may have unintentionally altered or subverted the meaning of the source English language policies and could have potentially created confusion as to the meaning and global reach of a Company’s business policies.

Additional pushback may emanate from current in-country LSPs who have provided these services in the past.   While it makes sense to encourage local buy-in to your Company’s policies and procedures, this can be ensured by asking local ethics and compliance leaders to participate in the translation review process.

By carefully considering cost/quality, confidentiality and change, a global organization can properly assess the impact that hiring a qualified LSP will have on their risk exposure and better position such organizations to quickly react to a changing global investigative and regulatory environment.

Jay Rosen (jay.rosen@merrillcorp.com) is a Vice President, Language Solutions at Merrill Brink International, based in Los Angeles. For further information, please see his article on Translation considerations for global internal investigations, ethics and compliance matters.

August 15, 2014

Lauren Bacall Whistling or How to Structure Customer Due Diligence

BacallYesterday we honored Robin Williams whom we lost earlier this week. Today we honor Lauren Bacall. She will always be a part of that great team of Bogey and Bacall. Most of us were introduced to her in the movie To Have and Have Not. I thought she was one of the most sultry and sexy icons of the 40s screen sirens. As Manohla Dargis wrote in her article for the New York Times (NYT) entitled, “That Voice and the Woman Attached,” that “When she opened her mouth in “To Have and Have Not” — taking a long drag on a cigarette while locking Humphrey Bogart in her gaze — she staked a claim on the screen and made an immortal Hollywood debut. But in 1944 at the exquisitely tender age of 19, she was also projecting an indelible screen persona: that of the tough, quick-witted American woman who could fight the good fight alongside her man.” She later married Bogart and together they were certainly Hollywood, if not American royalty, going forward. And she probably did more for the art of whistling than any person on Earth.

Yesterday I wrote about the Foreign Corrupt Practices Act (FCPA) investigation into certain transactions in Venezuela by Derwick Associates (Derwick) and a US company ProEnergy Services (ProEnergy). ProEnergy supplied turbines that Derwick resold to the Venezuelan government and then installed in that country. I wondered if US companies now need to become more concerned with not only who they do business with but how their customers might be doing business. In the parlance, you may now need to ramp up your ‘Know Your Customer’ information to continue throughout a seller-purchaser relationship.

Doug Cornelius, in a post on his Compliance Building blog, entitled “Proposed Regulations on Customer Due Diligence”, discussed “The U.S. Treasury Department’s Financial Crimes Enforcement Network has proposed revisions to its customer due diligence rules. Of course, the proposed rule would affect financial institutions that are currently subject to FinCEN’s customer identification program requirement: banks, brokers-dealers, and mutual funds.” While, investment advisers and private fund managers are not specifically mentioned in the proposed new regulation, Cornelius noted, “FinCEN suggested that it may be considering expanding these customer due diligence requirements to other types of financial institutions.” In other words, this new proposed regulation would not be directly applicable to a large number of US commercial enterprises doing business outside the United States.

However, the proposed regulation did provide some insight into how US companies, not otherwise subject to it, might think about ways to approach such an inquiry. Referencing an inquiry into anti-money laundering issues (AML) Cornelius wrote that AML programs should have four elements:

  1. Identify and verify the identity of customers;
  2. Identify and verify the identity of beneficial owners of legal entity customers;
  3. Understand the nature and purpose of customer relationships; and
  4. Conduct ongoing monitoring to maintain and update customer information and to identify and report suspicious transactions.

Clearly any FCPA based due diligence would focus on point 2. Cornelius zeroed in on it when he wrote “The definition of “beneficial owner” is proposed as have two prongs”:

  • Ownership Prong: each individual who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, owns 25% or more of the equity interests of a legal entity customer, and
  • Control Prong: An individual with significant responsibility to control, manage, or direct a legal entity customer, including an executive officer or senior manager (g., a Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Managing Member, General Partner, President, Vice President, or Treasurer); or (ii) any other individual who regularly performs similar functions.

He also noted, “For identifying ownership of an entity, FinCEN has proposed a form of certification.” But he found such a “certification to be overly simplistic. It only asks for individuals with ownership in the entity. This would clearly miss ownership of the account holder by other entities who could be “bad guys.” The certification also only requires one senior officer.  That makes it too easy to appoint a straw man as executive officer to hide the underlying control by a “bad guy.”” But the FinCen proposed notice itself states “these existing core requirements are already laid out in the BSA [Bank Secrecy Act] as minimum requirements”.

I was equally interested in points 3 and 4. Under point 3, an entity subject to the regulation needs to “Understand the nature and purpose of customer relationships”. The proposed regulation further explained “to gain an understanding of a customer in order to assess the risk associated with that customer to help inform when the customer’s activity might be considered “suspicious.”” Such an inquiry could help a business to “understand the relationship for purposes of identifying transactions in which the customer would not normally be expected to engage. Identifying such transactions is a critical and necessary aspect of complying with the existing requirement to report suspicious activity and maintain an effective AML (or anti-corruption compliance) program.”

The final point 4 relates to ongoing monitoring. Once again consider the position of the US Company, ProEnergy, in the referenced FCPA investigation. What can or should it have done in the way of ongoing monitoring of its customer. The proposed regulation states “industry practice generally involves using activity data to inform what types of transactions might be considered “normal” or “suspicious.”

Furthermore, FinCEN understands that information that might result from monitoring could be relevant to the assessment of risk posed by a particular customer. The proposed requirement to update a customer’s profile as a result of ongoing monitoring (including obtaining beneficial ownership information for existing customers on a risk basis), is different and distinct from a categorical requirement to update or refresh the information received from the customer at the outset of the account relationship at prescribed periods”. Lastly the proposed regulation states, “Finally, as noted above with respect to the obligation to understand the nature and purpose of customer relationships, monitoring is also a necessary element of detecting and reporting suspicious activities”.

There does not have to be a direct bribe or other corrupt payment made by a US company to have liability under the FCPA. FCPA enforcement is littered with companies that have paid bribes through third parties. However, as the Fifth Circuit said in Kay v. US, “[W]e hold that Congress intended for the FCPA to apply broadly to payments intended to assist the payor, either directly or indirectly,” [emphasis mine]. ProEnergy would seem to be at the far edge of potential FCPA liability but if it knew, had reason to know, or even perhaps should have known about some nefarious conduct by its customer, it does not take too many steps to get to some FCPA exposure. The proposed FinCEN rules on customer due diligence for financial institutions might be a good starting point for other commercial entities to consider.

If all of the above is a bit too heavy for a Friday, well view this clip on how to whistle by clicking here.

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

© Thomas R. Fox, 2014

August 14, 2014

Na-Nu Na-Nu – Final Report to Ork From Mork – Information from FCPA Inquiries

Mork from OrkEd. Note: Na-Nu Na-Nu. We interrupt our daily blog post to provide this final report to the Planet Ork. Na-Nu Na-Nu 

To say that the American culture lost two prime cultural champions this week would be an understatement. The effect that Robin Williams and Lauren Bacall had on a variety of areas in this country probably cannot be measured. Over the next two blogs I will honor each of these larger than life personas and try to examine how they may impact your Foreign Corrupt Practices Act (FCPA), UK Bribery Act or other anti-corruption program. Today Robin Williams; tomorrow Lauren Bacall.

Where does one begin or even end with Robin Williams? His early work in standup comedy; his sitcom television performances; to his many guest appearances on TV variety shows; his incredible movie career – both live and animated; or even his well-known and very public struggles with substance abuse and depression. He was one incredible body of work. For almost any American who grew up in the 70s, we were introduced to Williams in the sitcom Mork and Mindy. His role as an alien allowed him to rift and comment on many human foibles. This was most thoroughly on display at the end of every episode when, in character as Mork, he would report back to his home planet of Ork on some aspect of terran culture. (Na-Nu Na-Nu)

This weekly communication informed both his home planet and us here on Planet Earth about ‘social norms’. I considered this form of communication when I read a recent article in the Wall Street Journal (WSJ), entitled “Venezuelan Firm Is Probed In U.S.”, by José De Córdoba and Christopher M. Matthews. They reported on a Venezuelan company, Derwick Associates (Derwick), who are under investigation by the Department of Justice (DOJ) and Manhattan District Attorney’s office. Derwick was reported to have been “awarded hundreds of millions of dollars in contracts in little more than a year to build power plants in Venezuela, shortly before the country’s power grid began to sputter in 2009”. Also under investigation is a Missouri based engineering, procurement and construction company, ProEnergy Services (ProEnergy), “that sold dozens of turbines to Derwick and helped build the plants”. The article reported that the DOJ’s “criminal fraud section are reviewing actions of Derwick and ProEnergy for possible violations of the Foreign Corrupt Practices Act”.

The article noted that this issue might have come to the attention of the DOJ and Manhattan DA through a lawyer at Derwick who voluntarily contacted federal prosecutors last year. Although it was not clear from the WSJ article if it was related to or even played a part in instigating the FCPA investigation, was information that Otto Reich, “the top State Department official for Latin America during the Administration of President George W. Bush, had filed a federal court lawsuit in 2013, alleging among other things that “Derwick and the company’s owners, among others, obtained contracts to build power stations in return for paying multimillion dollar bribes to senior Venezuelan officials.””

At least one of the basis of regulatory scrutiny was funding of a bribery scheme through overcharging for goods and services. The article reported “Federal prosecutors are scrutinizing the difference been prices ProEnergy charged Derwick for its equipment and the prices Derwick charged the Venezuelan government, a person familiar with the matter said. The person said that in some past FCPA cases, excessive margins were used to conceal bribes to pay foreign officials.”

Derwick, in a statement from its President Alejandro Betancourt, which was provided by its lawyer Adam Kaufmann, said, “Neither Derwick nor its principals have been contacted by any U.S. law enforcement agency.” Clearly this begs the question of whether the company has been contacted by any representatives of the US government who are not from a “law enforcement agency”. In a statement from ProEnergy, it declined to comment on any investigation.

Consider some of the information from this WSJ article. First is how did this case come to the attention of the DOJ? About all that can be said from the article is that Derwick did not self-disclose to the DOJ. However, given the relationship between the government of Venezuela and the US, is it really a surprise that large commercial transactions by US entities into Venezuela are scrutinized by the US government? Did the investigation come about from a whistleblower, i.e. the lawyer for Derwick? If yes, what is the legal obligation of lawyer to his or her client? What if the lawyer sees, observes or even inadvertently stumbles upon criminal activity? What if the lawyer removes documentation, which the lawyer believes demonstrates evidence of a crime?

I was also very intrigued by the information about investigators looking into pricing margins as indicia of corruption. One of the more increasing areas of FCPA scrutiny has been that of commission rates. This is because under circumstances, a high or unusual commission rate can be indicia of monies which are available by a third party, paid via commission, to use as a pot of money to pay bribes to foreign officials. If your typical commission is 5% or you have a range of 5% to 10%, but provide one third party a commission rate of 15%, this may be evidence that the unusual amount is being used as a mechanism to fund bribes.

However, simply focusing on the commission rate alone is too facile an inquiry. Even a commission rate below 5% can create quite an amount of money if the sales price is sufficiently high. In the energy industry, large service contracts or construction contracts can be huge, i.e. in excess of $1bn, and five percent of such an amount is a very large sum of money. It is, therefore, not unusual that in some contracts, the percentage commission will decrease with an increased contract price. The point is there is no one right or wrong commission rate. It will be a fact intensive inquiry.

Borrowing from a noted compliance practitioner, William Athanas, who has suggested an appropriate inquiry along the lines of the following: Where the third party requests a commission above the standard range, the policy should require a legitimate justification. Evaluating and endorsing such a justification requires three steps: (1) relevant information about the contemplated increased commission must be captured and memorialized; (2) requests for increased commissions should be evaluated in a streamlined fashion, with tiered levels of approval (higher commissions require higher ranking official approval); and (3) increased commissions are then tracked, along with the requests and authorizations, in order to facilitate auditing, testing and benchmarking. The point is there needs to be a well thought-out protocol, which is followed and well documented through the entire process.

Another insight that I gleaned from the WSJ article comes from the seller/customer relationship between Derwick and ProEnergy. ProEnergy is reported to have sold turbines to Derwick and have assisted in constructing the power plants. When your company sells a product to a customer, a compliance practitioner typically does not become involved in the negotiations over final pricing between your company’s customer and the end-user. ProEnergy may not have been concerned with the final pricing that Derwick charged their customer, the Venezuelan government. Indeed, the compliance function may not be involved with the commercial pricing between your company and its direct purchaser. This article may require you to change this posture. Was ProEnergy asked to reduce its price to Derwick so that Derwick could mark the price up enough to the Venezuelan government to create a pool of money that could be used to pay bribes? What if ProEnergy received its full listed price book rate but then Derwick charged a premium to the Venezuelan government?

Finally, what about risk? The WSJ article reported that Derwick’s President said “the company’s margins [with the Venezuelan government] were consistent with general industry practice and reflected the high financial risk taken on during a difficult time to do business in Venezuela.” If your company has a business opportunity that presents a high financial reward, is it necessarily because there is some high risk involved? That risk can be risk of getting paid, bringing the project in on time and within budget, political risk, weather-related risk or almost any other type of risk, but that risk might also be a corruption risk. While the WSJ article does not report on the size of the US Company involved in the inquiry, ProEnergy, it would seem that its commercial relationship with Derwick generated a large amount of income for the company. If your company has one of its largest contracts for work overseas, should there be compliance function review and scrutiny of the risks involved?

Are these inquiries that a compliance practitioner now needs to make? If so, how does a Chief Compliance Officer (CCO) make such an inquiries? I think Donna Boehme would say that it all begins with the compliance function ‘having a seat at the senior management table’ so that the CCO or compliance practitioner can be aware when some unusual business opportunity arises. Questions, questions, and more questions.

Na-Nu Na-Nu – this is the final report to Ork from Planet Earth. Na-Nu Na-Nu 

For a viewing of one of Mork’s reports to his home planet Ork, 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, 2014

August 13, 2014

Thinking Through Risk Rankings of Third Parties

7K0A0014-2One question often posed to me is how to think through some of the relationships a company has with its various third parties in order to reasonably risk rank them. Initially I would break this down into sales and supply chain to begin any such analysis. Anecdotally, it is said that over 95% of all Foreign Corrupt Practices Act (FCPA) enforcement actions involve third parties so this is one area where companies need to put some thoughtful consideration. However, the key is that if you employ a “check-the-box” approach it may not only be inefficient but more importantly, ineffective. The reason for this is because each compliance program should be tailored to an organization’s specific needs, risks and challenges. The information provided below should not be considered a substitute for a company’s own assessment of the corporate compliance program most appropriate for that particular business organization. In the end, if designed carefully, implemented earnestly, and enforced fairly, a company’s compliance program—no matter how large or small the organization—will allow the company, generally, to prevent violations, detect those that do occur, and remediate them promptly and appropriately.

Sales Side

I tend to view things in a straightforward manner when it comes to representatives on the sales side of your business. I believe that third party representatives you might have, whatever you might call them, i.e. sales reps, sales agents, sales agents, commissioned sales agents, or anything else, are high risk and therefore they should receive your highest level of scrutiny. This is also true with any party that might be called, charitably or not, ‘a partner’ whether that is a joint venture (JV) partner, plain old partner, Teaming Partner or another monickered ‘partner’. However, under this approach you should also consider the perception of corruption in the geographic area that you will use the third party. I recognize that you can overlay a financial threshold but the reality is that if a sales representative generates such a small amount of money for your business you probably do not need them as representative.

At least with distributors, I have seen merit in more sophisticated approaches such as that set out by David Simon, a partner at Foley & Lardner LLP, who advocates a risk analysis should more appropriately based on the nature of a company’s relationships with their distributors. The goal should be to determine which distributors are the most likely to qualify as agents; for whose acts the company would likely to be held responsible.  He argues that it is a continuum of risk; that is, on the low-risk end are distributors that are really nothing more than re-sellers with little actual affiliation with the supplier company. On the high-risk end are distributors who are very closely tied to the supplier company, who effectively represent the company in the market and end up looking more like a quasi-subsidiary than a customer.

Simon looks at agency principles to guide his analysis of whether a distributor qualifies as an agent for FCPA purposes. He argues that factors to consider include:

  • The volume of sales made to the distributor;
  • The percentage of total sales of the distributor’s total business the principal’s product represents;
  • Whether the distributor represents the principal in the market, including whether it can (and does) use the company trademarks and logos in its business; and

Whether the principal company is involved in the running of the distributor’s business (such as by training the distributor’s sales agents, imposing performance goals and objectives, or providing reimbursement for sales activity).

Once a company segregates out the high-risk distributors that likely qualify as agents and potentially subject the company to FCPA liability from those that are mere re-sellers and pose less FCPA risk, FCPA compliance procedures can be tailored appropriately. For those distributors that qualify as “agents” and also pose FCPA risk, full FCPA due diligence, certifications, training and contract language are imperative. For those that do not, more limited compliance measures that reflect the risk-adjusted potential liability are perfectly appropriate.

Supply Chain

This determination of the level of due diligence and categorization of a supplier should depend on a variety of factors, including, but not limited to, whether the supplier is (1) located, or will operate, in a high risk country; (2) associated with, or recommended or required by, a government official or his or her representative; (3) currently under investigation, the subject of criminal charges, or was recently convicted of criminal violations, including any form of corruption; (4) a multinational publicly traded corporation with a recognized exemplary system of compliance and internal controls, that has not been recently investigated or convicted of any corruption offense or that has taken appropriate corrective action to remedy such conduct; or (5) a provider of widely available services and products that are not industry specific, are offered to the public at large and do not fall under the definition of Minimal-Risk Supplier detailed below.

A High-Risk Supplier is an individual or an entity that is engaged to provide non-project specific goods or services to a company. It presents a higher level of compliance risk because of the presence of one or more of the following factors: (a) It is based or operates in a country (including the supply of goods or services to a company) that poses a high risk for corruption, money laundering, or commercial bribery; (b) It supplies goods or services to a company from a high-risk country; (c) It has a reputation in the business community for questionable business practices or ethics; or (d) It has been convicted of, or is alleged to have been involved in, illegal conduct and has failed to undertake effective remedial actions. Finally, it presents one or more of the following factors,: (1) It is located in a country that has inadequate regulatory oversight of its activities; (2) it is in an unregulated business; (3) its ultimate or beneficial ownership is difficult to determine; (4) the company has an annual spend of more than $100,000 with the supplier; (5) it was established or registered in a jurisdiction where ownership is not transparent or that permits ownership in the form of bearer shares; (6) it is registered or conducts business in a jurisdiction that does not have anti-corruption, anti-money laundering and anti-terrorism laws comparable to those of the United States and the United Kingdom; or (7) it lacks a discernable and substantial business history.

A Low-Risk Supplier is an individual or a non-publicly held entity that conducts business such as a sole proprietorship, partnership or privately held corporation, located in a Low-Risk Country. Some indicia include that it (1) supplies goods, equipment or services directly to a company in a Low-Risk Country; (2) a company has an annual spend of less than $100,000 with the supplier; and (3) the supplier has no involvement with any foreign government, government entity, or Government Official. However, if the supplier has other indicia of lower risk such that it is a publicly-held company, it may be considered a Low-Risk Supplier because it is subject to the highest disclosure and auditing and reporting standards such as those under the US Securities Exchange Act of 1934, including those publicly traded on a reputable and highly regulated stock exchange, such as the New York or London exchanges, and are, therefore, subject to oversight by highly regarded regulatory agencies.

Below the high and low risk categories I would add the category of ‘Minimal-Risk Suppliers’ who generally provide to a company goods and services that are non-specific to a particular project and the value of the transaction is $25,000 or less. Some examples might be for the routine purchase of fungible items and services, including, among others: Office supplies, such as paper, furniture, computers, copiers, and printers; Industrial or factory supplies, including cleaning materials, solvents, safety clothing and off-the-shelf equipment and parts; Crating and other standard materials for packing products for shipping; Leasing and rental of company cars and other equipment; and Airline or other travel tickets or services. This category would also include those third parties that provide widely available services and products that are not industry specific, are offered to the public at large. Here you might think of periodicals, florists, daily limousine and taxi, airline and food delivery (including coffee shops, pizza parlors and take out) services.

Last, but certainly not least, is the category of Government Service Providers, which includes entities that generally come into a company through the supply chain, who interact with a foreign government on behalf of your company. Examples might be customs brokers, providers who obtain and process business permits, licenses, visas, work permits and necessary clearances or waivers from government agencies; perform lobbying services; obtain regulatory approvals; negotiate with government agencies regarding the payment of taxes, tax claims, and tax audits. These third parties present some of your highest risks so they need to have not only the highest level of scrutiny but post contract-signing management as well.

The risk ranking of third parties is one of the areas that seems to continue to cause confusion, if not outright bewilderment. The manner in which the articulated risk rankings presented herein is not to be the ‘be-all and end-all’. As the FCPA Guidance reminds us, “An effective compliance program promotes “an orga­nizational culture that encourages ethical conduct and a commitment to compliance with the law.”…A well-constructed, thought­fully implemented, and consistently enforced compliance and ethics program helps prevent, detect, remediate, and report misconduct, including FCPA violations.” If you think through your risk rankings and can articulate a reasonable basis for doing so followed by documentation, I think your own risk ranking system will survive regulatory scrutiny.

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

August 12, 2014

Does Your Company Still Allow Facilitation Payments?

IMG_3289One of the more confusing areas of the US Foreign Corrupt Practices Act (FCPA) is in that of facilitation payments. Facilitation payments are small bribes but make no mistake about it, they are bribes. For that reason many companies feel they are inconsistent with a company culture of doing business ethically and in compliance with laws prohibiting corruption and bribery. Further, the FCPA Guidance specifies, “while the payment may qualify as an exception to the FCPA’s anti-bribery provisions, it may violate other laws, both in Foreign Country and elsewhere. In addition, if the payment is not accurately recorded, it could violate the FCPA’s books and records provision.” Finally, further the FCPA Guidance states, “Whether a payment falls within the exception is not dependent on the size of the payment, though size can be telling, as a large payment is more suggestive of corrupt intent to influence a non-routine governmental action. But, like the FCPA’s anti-bribery provisions more generally, the facilitating payments exception focuses on the purpose of the payment rather than its value.” [emphasis in original text]

In recent remarks, Thomas C. Baxter, Executive Vice President and General Counsel at the Federal Reserve Bank of New York indicated a general unease with facilitation payments. Baxter was quoted in the FCPA Blog for the following, “Baxter said an organizational policy that allows some types of official corruption — including facilitating payments – “diminishes the efficacy of compliance rules that are directed toward stopping official corruption.”” Further, “While I understand that the exception is grounded in a practical reality, I feel that zero tolerance for official corruption would have been a better choice. To any public servant with an extended hand, I would say in a loud and clear voice, “pull it back and do your job.” And, let me note the OECD Working Group on Bribery recommends that all countries encourage companies to prohibit or discourage facilitating payments.”

In addition to these clear statements about whether the FCPA should continue to allow said bribes; you should also consider the administrative nightmare for any international company. The UK Bribery Act does not have any such exception, exemption or defense along the lines of the FCPA facilitation payment exception. This means that even if your company allows facilitation payments, it must exempt out every UK Company or subsidiary from the policy. Further, if your company employs any UK citizens, they are subject to the UK Bribery Act no matter who they work for and where they may work in the world so they must also be exempted. Finally, if your US Company does business with a UK or other company subject to the UK Bribery Act, you may be prevented contractually from making facilitation payments while working under that customer’s contract. As I said, an administrative nightmare.

  1. The Statute

When the FCPA was initially passed in 1977, the facilitating payment exception was found under the definition of foreign official. However, with the 1988 Amendments, a more explicit exception was written into the statute making it clear that the anti-bribery provisions “shall not apply to any facilitating or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action . . .” The statute itself provided a list of examples of facilitation payments in the definition of routine governmental actions. It included the following:

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

It is important to note that the language of the FCPA makes it clear that a facilitation payment is not an affirmative defense but an exception to the general FCPA proscription against bribery and corruption. Unfortunately for the FCPA Practitioner there is no dollar limit articulated in the FCPA regarding facilitation payments. Even this limited exception has come under increasing criticism. As far back as 2009, the OECD studied the issue and recommended that member countries encourage their corporations to not allow the making of facilitating payments, “in view of the corrosive effect of small facilitation payments, particularly on sustainable economic development and the rule of law.”

Interestingly, one of the clearest statements about facilitation payments comes not from a FCPA case about facilitation payments but the case of Kay v. US, 359 F.3d 738, 750-51 (5th Cir. 2004). This case dealt with whether payment of bribes to obtain a favorable tax ruling was prohibited under the FCPA. In its opinion the Fifth Circuit commented on the limited nature of the facilitating payments exception when it said:

A brief review of the types of routine governmental actions enumerated by Congress shows how limited Congress wanted to make the grease exceptions. Routine governmental action, for instance, includes “obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country,” and “scheduling inspections associated with contract performance or inspections related to transit of goods across country.” Therefore, routine governmental action does not include the issuance of every official document or every inspection, but only (1) documentation that qualifies a party to do business and (2) scheduling an inspection—very narrow categories of largely non-discretionary, ministerial activities performed by mid- or low-level foreign functionaries.

2. Enforcement Actions

Con-way

The FCPA landscape is littered with companies who sustained FCPA violations due to payments which did not fall into the facilitation payment exception. In 2008, Con-way Inc., a global freight forwarder, paid a $300,000 penalty for making hundreds of relatively small payments to Customs Officials in the Philippines. The value of the payments Con-way was fined for making totaled $244,000 and were made to induce the officials to violate customs regulations, settle customs disputes, and reduce or not enforce otherwise legitimate fines for administrative violations.

Helmerich and Payne

In 2009, Helmerich and Payne, Inc., paid a penalty and disgorgement fee of $1.3 million for payments which were made to secure customs clearances in Argentina and Venezuela. The payments ranged from $2,000 to $5,000 but were not properly recorded and were made to import/export goods that were not within the respective country’s regulations; to import goods that could not lawfully be imported; and to evade higher duties and taxes on the goods.

Panalpina

Finally, there is the Panalpina enforcement action. As reported in the FCPA Blog, this matter was partly resolved last year with the payment by Panalpina and six of its customers of over $257 million in fines and penalties. Panalpina, acting as freight forwarder for its customers, made payments to circumvent import laws, reduce customs duties and tax assessments and to obtain preferential treatment for importing certain equipment into various countries but primarily in West Africa.

DynCorp

Then there is the DynCorp International investigation matter. As reported in various sources the matter relates to approx. $300,000 in payments made by subcontractors who wished to speed up their visa processing and expedite receipt of certain licenses on behalf of DynCorp. This investigation has been going on for several years and there is no anticipated conclusion date at this time.

3.      Some Guidance

So what does the Department of Justice (DOJ) look at when it reviews a company’s FCPA compliance program with regards to facilitation payments? Initially, if there is a pattern of such small payments, it would raise a Red Flag and cause additional investigations, but this would not be the end of the inquiry. There are several other factors which the DOJ could look towards in making a final determination on this issue. The line of inquiry the DOJ would take is as follows:

  1. Size of payment – Is there an outer limit? No, there is no outer limit but there is some line where the perception shifts. If a facilitating payment is over $100 you are arguing from a point of weakness. The presumption of good faith is against you. You might be able to persuade the government at an amount under $100. But anything over this amount and the government may well make further inquiries. So, for instance, the DOJ might say that all facilitation payments should be accumulated together and this would be a pattern and practice of bribery.
  2. What is a routine governmental action? Are we entitled to this action, have we met all of our actions or are we asking the government official to look the other way on some requirement? Are we asking the government official to give us a break? The key question here is whether you are entitled to the action otherwise.
  3. Does the seniority of the governmental official matter? This is significant because it changes the presumption of whether something is truly discretionary. The higher the level of the governmental official involved, the greater chance his decision is discretionary.
  4. Does the action have to be non-discretionary? Yes, because if it is discretionary, then a payment made will appear to be obtaining some advantage that is not available to others.
  5. What approvals should be required? A facilitation payment is something that must be done with an appropriate process. The process should have thought and the decision made by people who are the experts within the company on such matters.
  6. Risk of facilitation payments and third parties? Whatever policy you have, it must be carried over to third parties acting on your behalf or at your direction. If a third party cannot control this issue, the better compliance practice would be to end the business relationship.
  7. How should facilitation payments be recorded? Facilitation payments must be recorded accurately. You should have a category entitled “Facilitation Payments” in your company’s internal accounting system. The labeling should be quite clear and they are critical to any audit trail so recording them is quite significant.
  8. Monitoring programs? There must always be ongoing monitoring programs to review your company’s internal controls, policies and procedures regarding facilitation payments.

So we return to the question of when does a grease payment become a bribe? There is no clear line of demarcation. The test seems to turn on the amount of money involved, to whom it is paid and the frequency of the payments. Additionally, accurate books and records are a must. Finally, remember that the defense of facilitation payments is an exception to the FCPA prohibition against bribery. Any defendant which wishes to avail itself of this exception at trial would have to proffer credible evidence to support its position, but at the end of the day, it would be the trier of fact which would decide. So, much like any compliance defense, the exception is only available if you use it at trial and it would be difficult to imagine that any company will want to use the facilitation payment exception.

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

August 10, 2014

Where to Now St. Peter? – Due Diligence Going Forward in China

Tumbleweed ConnectionWhatever you might think of where his career went, Elton John had some great early stuff. I still rank Tumbleweed Connection right up there as one of my favorite albums of all-time. And while it was packed with some great tracks, one of my most favorite was Where to Now St. Peter? It was the opening track on Side 2 and dealt with whether a dying soldier would end up in heaven or hell. While perhaps having quite the spiritual overtones, I did think about this song when I read about the convictions on Saturday of Peter William Humphrey, a 58-year-old British national, and his wife, Yu Yingzeng, a 61-year-old naturalized American, on charges of illegally purchasing personal information about Chinese nationals.

In a one day trial the couple was convicted of illegally purchasing information on Chinese citizens. In an article in the Financial Times (FT), entitled “China court hands GSK investigator jail term and orders deportation”, Gabriel Wildau and Andrew Ward reported that husband Humphreys received a two and a half year jail term which was “just short of the three-year maximum”. In an article in the Wall Street Journal (WSJ), entitled “China Convicts Two Corporate Investigators”, James T. Areddy and Laurie Burkitt reported that he was also ordered to pay a fine of approximately $32,500 and will be deported from the country when his jail term is completed. Wife Yingzeng received a two year jail term and was ordered to pay a fine of approximately $23,000 but will be allowed to remain in the country after her sentence is completed.

In a New York Times (NYT) article, entitled “In China, British Investigator Hired by Glaxo, and Wife, Sentenced to Prison”, David Barboza reported that the couple “acknowledged that from 2009 to 2013, they obtained about 250 pieces of private information about individuals, including government-issued identity documents, entry and exit travel records and mobile phone records, all apparently in violation of China’s privacy laws.” According to the NYT article, wife Yu claimed that she did not know her actions where illegal and was quoted as saying, “We did not know obtaining these pieces of information was illegal in China. If I had known I would have destroyed the evidence.” According to the WSJ, the privacy law which was the basis of the conviction, was enacted in 2009 “to make it illegal to handle certain personal medical records and telephone records” but that the law itself “remains vague” on what precisely might constitute violation.

From the court statements, however, it did appear that the couple had trafficked in personal information. As reported by the WSJ, “In separate responses over more than 10 hours, My Humphreys and Ms. Yu denied that their firm trafficked in personal information, saying they had hired others to obtain personal data when clients requested it.” From the documents presented by the prosecution, it would seem clear that the couple had obtained my items which were more personal in nature. They were alleged by prosecutors to have “used hidden cameras to gather information as well as government records on identification numbers, family members, real-estate holdings, vehicle owner, telephone logs and travel records.”

Recognizing the verdicts under Chinese laws are usually predetermined and the entire trials are scripted affairs, there is, nonetheless, important information communicated to the outside world by this trial. First and foremost is, as reported in the NYT article is a “chilling effect on companies that engage in due diligence work for global companies, many of whom believe the couple may have been unfairly targeted.” The WSJ article went further quoting Geoffrey Sant for the following, “It impacts all attempts to do business between the U.S. and China because it will be very challenging to verify the accuracy of company or personal financial information.” In other words, things just got a lot tougher to perform, what most companies would expect to be a minimum level of due diligence.

Second is the time frame noted in the court statements as to the time of the violations, from 2009 to 2013. Many had assumed that Humphreys and Yingzeng’s arrests related to their investigation work on behalf of the British pharmaceutical giant GlaxoSmithKline PLC (GSK) which was trying to determine who had filmed a sex tape of the company’s head of Chinese operations, which was then provided to the company via an anonymous whistleblower. This would seem to beg the question of whether the couple would have been prosecuted if they not engaged in or accepted the GSK assignment.

But as Elton John asked, “Where to now St. Peter?” You should always remember that performing due diligence is but one of five steps in the management of the third party life cycle. If you cannot perform due diligence at a level that you do in other countries or that you could even have done in China before the Humphreys and Yu trial, you can beef up the other steps to help proactively manage your third parties. I often say that your real work with third parties begins when the contract is executed because then you have to manage the relationship going forward. So, if you cannot perform the level of due diligence you might like, you can put more resources into monitoring the relationship, particularly in the area of invoice review and payments going forward.

In a timely article found in this month’s issue of the SCCE magazine, Compliance and Ethics Professional, Dennis Haist and Caroline Lee published an article, entitled “China clamps down on bribery and corruption: Why third-party due diligence is a necessity” where they discussed a more robust response to the issue as well. They note that the retention of third party’s to do business in China is an established mechanism through which to conduct business. They advise “For multinationals with a Chinese presence, or plans to enter the market in the near future, now is the time to pay close attention to the changing nature of the business landscape as it relates to bribery and corruption.” Further, they suggest that “In order to ensure compliance with ABAC [anti-bribery/anti-corruption] regulatory scrutiny, multinationals must demonstrate a consistent, intentional and systematic approach to third-party compliance.” But in addition to the traditional background due diligence, they believe that companies should consider an approach that moves to proactively managing and monitoring third parties for compliance. Lastly, at the end of the day if a regulator comes knocking from the Department of Justice (DOJ) or Serious Fraud Office (SFO), you will need to demonstrate the steps you have put in place and your active management of the process.

In the FT, WSJ and NYT articles it was clearly pointed out that the invisible elephant in the room was GSK. Also it is not clear what the personal tragedy that Humphreys and Yu have endured will mean for GSK or the individuals caught up in that bribery scandal going forward. Humphreys had previously said that he would not have taken on the GSK sex tape assignment if it had been disclosed to him that the company had sustained allegations of corruption by an internal whistleblower. Perhaps one lesson may be that in the future companies will have to disclosure more to those they approach to perform such investigative services.

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

August 8, 2014

Nixon Announces Resignation; GSK Just Resigns

Nixon Resignation SpeechOn this day, 40 years ago, President Richard Nixon announced that he would resign the Office of the President, effective the next day on August 9 at noon. I can still remember my father instructing us to watch the resignation speech on television because, as he put it, it was history in the making. Before a nationally televised address to the country, Nixon said, “By taking this action,” he said in a solemn address from the Oval Office, “I hope that I will have hastened the start of the process of healing which is so desperately needed in America.” His action was hastened along by the Articles of Impeachment voted by the House of Representatives relating to his involvement with the Watergate Affair. With his resignation, Nixon was finally bowing to pressure from the public and Congress to leave the White House.

Yet, even before this truly historic speech and spectacle the next day of Nixon helicoptering off the South Lawn of the White House, Nixon had transformed the America we all lived in. One area that resonates up to this day is his opening with China. If it had not been for Nixon and his Secretary of State Henry Kissinger’s efforts, we might have waited a long time for an opening with China. But Nixon went there and opened China up to do business with the US and indeed the rest of the western world.

Unfortunately one of the much later fallouts from this visit and opening of China has been the corruption investigation by Chinese authorizes against western companies but most publicly the British pharmaceutical giant, GlaxoSmithKline PLC (GSK). And, more unfortunately, the bad news for GSK continues to trickle out into the press.

Next week, Shanghai’s No. 1 Intermediate People’s Court is scheduled to open a trial against Peter William Humphrey, a 58-year-old British national, and his wife, Yu Yingzeng, a 61-year-old American, on charges of illegally purchasing personal information about Chinese nationals. While the trial had originally been planned to be closed to the public, last month Chinese officials announced that the trial would be ‘open’ although the degree of openness is not completely clear.

Not only will the trial be open but the couple’s son, Harvey Humphrey, was allowed visited his parents in their detention center in Pudong, Shanghai, for the first time since their arrest. The visit came after some fierce lobbying by the US and UK consulates. As reported in the online publication FiercePharma, in an article entitled “GSK private eyes’ son allowed first visit to parents in China jail as trial nears”, their son said, “They didn’t quite believe I was coming. They were quite overwhelmed. My mum was shocked. My dad held himself together,” the younger Humphrey told the paper. “It’s a bit unusual for the Chinese to do this. I feel something has changed in the Chinese approach to my parents.” Son Harvey had written to the GSK’s Chief Executive Officer (CEO) Sir Andrew Witte last December to “take a few minutes to raise my father’s case” during a visit to the country, he told the Financial Times (FT), “I understand everything is complicated in China but it seems my parents are paying a big price”. But at this point there is no word on what if any involvement GSK might have in his parent’s defense.

It may be that GSK is way too busy right now worrying about all the other issues surrounding bribery and corruption. In an article in the Wall Street Journal (WSJ), entitled “FBI, SEC Start Glaxo Inquiries Over China”, Christopher M. Matthews and Hester Plumridge reported that in late July “Glaxo received an anonymous email claiming its employees in Syria bribed doctors and pharmacists over the past five years to promote products including painkiller Panadol and toothpaste Sensodyne. The bribes took the form of cash payments, speaking fees, trips, free dinners and free samples, said the email, which was reviewed by The Wall Street Journal. The email cited names and dates. Syrian health officials allegedly received bribes from Glaxo employees to fast-track registration of its Sensodyne dental products, including cash payments and a trip to a 2011 conference in Rome, the email maintains. Glaxo employees also were involved in smuggling a narcotic product from Syria into Iran, the email alleges. The product in question, pseudoephedrine, is a raw ingredient of Glaxo’s congestion medicine Actifed.”

GSK once again reiterated its previously announced position that it was firmly against the payments of bribes by its employees. In response to the allegations of bribes paid in Syria the WSJ article said, “Glaxo said it would thoroughly investigate all claims made in the Syria email, and said it has asked the sender for more information. The company said it has zero tolerance for unethical behavior, adding, “We welcome people speaking up if they have concerns about alleged misconduct.”” Too bad GSK didn’t seek more information about its Chinese operations when the company’s internal investigation came up with no evidence of bribery and corruption.

Much more problematic for GSK is the fact that both the SEC and DOJ have opened formal investigations into allegations of bribery and corruption by the company. The WSJ piece notes, “Federal Bureau of Investigation agents have been interviewing current and former GlaxoSmithKline employees in connection with bribery allegations in China, according to a person familiar with the matter, as fresh claims of corruption surfaced against Glaxo’s operations in Syria. The interviews have taken place in Washington, D.C., in the past few months and are part of a Justice Department investigation into Glaxo’s activities in China, the person added. The U.S. Securities and Exchange Commission also is investigating the company’s business in China, according to people familiar with the matter.”

As readers of this blog will recall from previous posts, in 2012 GSK pled guilty and paid $3 billion to resolve fraud allegations and failure to report safety. The press release noted that the resolution was the largest health care fraud settlement in US history and the largest payment ever by a drug company for legal violations. The criminal plea agreement also included certain non-monetary compliance commitments and certifications by GSK’s US president and Board of Directors, which specifically included an executed five-year Corporate Integrity Agreement (CIA) with the Department of Health and Human Services, Office of Inspector General. The plea agreement and CIA included provisions which required that GSK implement and/or maintain major changes to the way it does business, including changing the way its sales force is compensated to remove compensation based on sales goals for territories, one of the driving forces behind much of the conduct at issue in the prior enforcement action. Under the CIA, GSK is required to change its executive compensation program to permit the company to recoup annual bonuses and long-term incentives from covered executives if they or their subordinates, engaged in significant misconduct. GSK may recoup monies from executives who are current employees and those who have left the company. Additionally, the CIA also required GSK to implement and maintain transparency in its research practices and publication policies and to follow specified policies in its contracts with various health care payors.

The importance of the CIA for this anti-corruption investigation is that it not only applied to the specific pharmaceutical regulations that GSK violated but all of the GSK compliance obligations, including the Foreign Corrupt Practices Act (FCPA). In addition to requiring a full and complete compliance program, the CIA specified that the company would have a Compliance Committee, to include the Compliance Officer and other members of senior management necessary to meet the requirements of the CIA; the Compliance Committee’s job was to oversee full implementation of the CIA and all compliance functions at the company. These additional functions required a Deputy Compliance Officer for each commercial business unit, Integrity Champions within each business unit and management accountability and certifications from each business unit. Training of GSK employees was specified as a key component. Further, the CIA specifically state that all compliance obligations applied to “contractors, subcontractors, agents and other persons (including, but not limited to, third party vendors)”.

GSK is now under investigation, either internally or by anti-corruption regulators across the globe in at least four countries. Unlike other companies that have found systemic issues of bribery and corruption or systemic failures in internal controls, the allegations of bribery and corruption are not 10-15 years old. So today we commemorate Nixon’s resignation; and for GSK it may simply mean just resignation.

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

© Thomas R. Fox, 2014

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