FCPA Compliance and Ethics Blog

November 21, 2014

The Strategic Use of Compliance

StrategyWhat is your company’s compliance strategy? By this I do not mean what is your company doing to put in a place a best practices anti-corruption compliance program that meets the requirement of the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act. My inquiry goes both further and deeper. Has your company moved beyond the view that compliance with the FCPA is simply enough by incorporating compliance into your business strategy to secure a competitive advantage going forward? I thought about this issue when I read a recent article in the MIT Sloan Management Review, entitled “Finding the Right Corporate Legal Strategy”, by Robert C. Bird and David Orozco. While the authors posed the questions from the legal perspective, I found their insights equally valid from the compliance perspective.

While I am fairly certain that Chief Compliance Officers (CCOs) and compliance practitioners understand the need for the integration of compliance into the day-to-day business operations of a company, many business types still view compliance “as a constraint on managerial decisions, primarily perceiving” compliance as simply a cost. The authors believe that the more enlightened approach is for companies to use functions such as compliance “in order to secure long-term competitive advantage.” To do so the authors detailed five different legal strategies, which they call pathways, that companies might use that I will translate into compliance strategies. They are in ascending order of importance: (1) avoidance; (2) compliance; (3) prevention; (4) value and (5) transformation. The right strategy for your company will depend on a variety of factors such as maturity of your compliance function, commitment by senior management to compliance, your business model and the compliance function’s ability to collaborate with business managers.

Avoidance

This is the idiot response where a company either disregards anti-corruption laws such as the FCPA or UK Bribery Act or engages in willful blindness. Unfortunately, there are many major US and foreign corporations that have come to grief under the FCPA because they did not take some of the most basic steps to comply with these laws. It is largely because senior management believes that compliance provides “little concrete value, so they make no effort to” even acquiring knowledge in the area. Worse yet are companies who gain a modicum of knowledge about such anti-corruption laws “only so that they can circumvent it to achieve a desired objective.” The authors note that while “An avoidance strategy can sometimes be effective…it can also lead to disaster.” This lead to the compliance function and the CCO only being called in an emergency, after the conduct has occurred so that compliance is always in a reactionary mode.

Compliance

This pathway means complying with laws, not the compliance function itself. Under this pathway, “companies recognize that the law is an unwelcome but mandatory constraint on their activities.” So while following this strategy would allow a company to have subject matter expert (SME) practitioners in the field of compliance, it would exist only “so the business could operate within its legal bounds.” Under this pathway, companies still view compliance as a cost to be minimized. Moreover, anti-corruption laws such as the FCPA or UK Bribery Act are “viewed as primarily inflexible—externally imposed rules that cannot be changed or adapted to suit a particular corporate strategy.” This means that business managers will simply not understand that compliance can be used to further business goals. It also leads most business unit folks to believe that compliance is the Land of No and the CCO is in reality ‘Dr. No’ who is there “primarily as a watchdog that polices corporate conduct for illegal activity.”

Prevention 

Under the prevention pathway, senior management acknowledges that anti-corruption laws can be used as competitive advantage “to further well-defined business roles.” This means that the compliance is proactive rather than reactive. Senior managers understand how the law relates to their business areas “and they appreciate how it can be used to minimize particular business risks.” The compliance function “seeks partnerships with managers to help them achieve their risk-management goals.” This pathway has the added benefit that allows compliance practitioners to recognize the importance of measuring and quantifying compliance issues and data “as a part of a broader effort to support a business oriented strategy.” It also means that the compliance function is available to the business unit when the competitive landscape is “strategically assessed” by the business unit. This is more than simply having a seat at the table; it is being a part of and contributing to the commercial strategy.

Value

Companies operating in this pathway use compliance to “create tangible and identifiable value.” But to do so requires a true corporate commitment because business unit managers will need to have a strong understanding of anti-corruption compliance and how it can be tailored to generate value for the company. The CCO, and indeed the entire compliance function, must see itself “as a key stakeholder in helping the company to increase its return on investment” and should see itself in helping to create value for the company. Usually this comes about in two ways. The first is by using compliance to lower costs of doing business, particularly through third parties. Here you can think of reducing the number of vendors who perform the same services or provide the same products to you by appropriate management of your third party compliance program. The second way is by using compliance to increase revenues.

Transformation

In this final pathway, a company will incorporate compliance directly into its business model. While the authors note that few companies have been able to move this far in the legal arena, those who have done so possess a rare and valuable “capability that can provide a competitive advantage that is difficult for a business rival to imitate.” One of the keys to making this transformation is that not only is compliance integrated within “the company’s various value-chain activities; it is also linked with the value chains of important external partners as part of the larger business ecosystem.” This pathway is only available to companies with the most mature compliance function and most usually when compliance is combined with “the business model and core competencies of the company.”

Clearly there is no ‘one size fits all’ approach to compliance strategies. However if your compliance program has maturity and senior management can operate with their eyes open, they will see that while the first three strategies focus on managing risk, the final two are targeted towards generating business opportunities or least have compliance as a part of the team doing so. As compliance practitioners move into the CCO 2.0 role that I have advocated, these pathways can provide you with a tangible starting point to educate senior management on what compliance can bring to the (business) table.

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

November 19, 2014

Chamber of Commerce: Corporations Form the Cornerstone of FCPA Compliance

CornerstoneRecently one of the most unlikely sources for praise of the Foreign Corrupt Practices Act (FCPA) came out to inform us all that corporations are the cornerstone of FCPA compliance and enforcement. You may be surprised to find out that it came from the US Chamber of Commerce. It did not come in the form of Congressional testimony in praise of the FCPA but in the Chamber’s Amicus Curie filing in a case currently being considered by the Texas Supreme Court. Regardless of the forum, the praise was just as strong and hopefully just as lasting.

The Texas Supreme Court recently held oral arguments in the appeal of Shell v. Writt. Unusually for a state supreme court case, it touches on the FCPA. The issue before the Court is whether Shell’s internal FCPA investigation is absolutely privileged from a defamation claim by persons named in the report as having violated the FCPA. Being as this is Texas, with a state supreme court just to the right of Attila the Hun, it is easy to determine what the outcome of the case will be, the company will win.

Procedurally, Writt, the plaintiff claiming defamation from Shell’s report of its internal investigation that it provided to the Department of Justice (DOJ), lost at the trial court on summary judgment. The trial court found that Shell had an absolute privilege because the report was turned over to a government agency investigating the matter. The court of appeals reversed this decision holding that because the internal investigation was voluntary, not mandatory, that only a conditional privilege existed and sent the matter back to the trial court for further proceedings. Shell appealed this court of appeals decision to the Texas Supreme Court.

Interestingly, the US Chamber of Commerce filed an amicus brief in the appeal to the Texas Supreme Court, supporting Shell. In its brief, the Chamber came out with full guns blazing in support of the FCPA and for full internal investigations and self-disclosure by companies. At the start of its brief, the Chamber comes out four square in support of the FCPA stating, “Since 1977, and especially over the last decade, the Foreign Corrupt Practices Act (“FCPA”) has played a very significant role in the federal regulation of multinational corporations. By punishing bribery and other illicit influence of foreign officials by U.S. companies, the statute seeks to improve the integrity of American businesses, promote market efficiency, and maintain the reputation of American democracy abroad.”

The Chamber noted the importance of the FCPA to both the US government and to US businesses. It stated, “Over the past decade, the FCPA has taken on renewed importance for both the U.S. government and American businesses.” As to the importance that the US government places on FCPA enforcement, the Chamber cited to the following, “DOJ officials have publicly stated that “enforcement of the FCPA is second only to fighting terrorism in terms of priority.”” Lastly, because of this focus, “FCPA compliance is now a main focus of concern for U.S. businesses.” Moreover, US companies are now ““light years ahead of where [they were] circa the mid-to-late 1990s,” with companies “implementing more rigorous and sophisticated compliance protocols,” including thorough internal investigations and candid self reporting.”

The Chamber did not stop there with its high praise of the FCPA and the importance of the FCPA and its enforcement for US businesses. The Chamber next turned to US businesses role in FCPA enforcement and compliance when it said, “the government has always relied upon businesses to cooperate with investigations and self-report any potential violations by corporate employees. “Federal enforcement authorities have consistently encouraged, if not as a practical matter demanded, that as to the FCPA companies voluntarily conduct internal investigations, disclose potential violations and cooperate with government investigations.” With their vast resources, individualized focus, and access to documents and witnesses, “companies are actually much better positioned to gather more information more quickly overseas than the Justice Department or the SEC.”” Perhaps channeling some of the criticisms of the recent General Motors (GM) and FIFA investigations, the Chamber recognizes that more than simply results must be shared with the DOJ when it stated, “The government requires that corporations provide not just information on violations that they are certain of, but rather any “relevant information and evidence,” as well as identification of “relevant actors inside and outside the company.””

The money line from the Chamber’s brief is the following, “Corporate cooperation, internal investigation, and self-reporting thus form the cornerstone of FCPA compliance and enforcement.” It could not be clearer from this statement the importance that a robust internal investigation protocol, coupled with self-disclosure bring to FCPA compliance. The FCPA Guidance states, “once an allegation is made, companies should have in place an efficient, reliable, and properly funded process for investigating the allegation and documenting the company’s response, including any disciplinary or remediation measures taken. Companies will want to consider taking “lessons learned” from any reported violations and the outcome of any resulting investigation to update their internal controls and compliance program and focus future training on such issues, as appropriate.”

Thus internal investigations coupled with self-reporting provide both companies and the US government towards the same goal; greater compliance with the FCPA because the Chamber recognizes that the FPCA plays a vital role in international business and corruption prevention and prosecution. The Chamber even cites, favorably, the Congressional logic for the enactment of the FCPA by stating, “Congress determined that such practices tarnish the image of American democracy abroad, impair confidence in American businesses, hamper the efficiency of the market, anger the citizens of otherwise friendly foreign nations, and, put simply, are “morally repugnant” and “bad business.”” Finally, the Chamber acknowledges the importance of the FCPA for both US and international investors; both in the US and for companies abroad by concluding, “The FCPA is a valuable statute that helps to reduce corruption and to reinforce public and investor confidence in the markets here and abroad.”

This brief lays out one of the strongest articulations of the power of the FCPA. I did not expect the Chamber to come out so forcefully in favor of what that many business types continually bemoan. The Chamber’s recognition that FCPA compliance and enforcement are cornerstones of the protection of US businesses; US business interests and investor confidence across the globe is a welcome addition to the FCPA dialogue.

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

November 18, 2014

FIFA and Good-Faith Investigations

CautionYou know things are getting bad when the Wall Street Journal (WSJ) questions a business’ moral authority. Things certainly cannot be much better when the regulators begin nosing around your own self-indulgence. What happens when you realize all of a sudden that all those actions you have taken may actually fall under the jurisdiction of both the United Kingdom and the United States and their respective anti-corruption laws, the UK Bribery Act and the US Foreign Corrupt Practices Act (FCPA)? It turns out all of this may have come through for our friends at Fédération Internationale de Football Association (FIFA).

Last week FIFA announced that it had considered the investigation into allegations of corruption into the awarding of the 2018 World Cup tournament to Russia and the 2022 World Cup tournament to Qatar and found, as reported in the Financial Times (FT) by Roger Blitz in an article entitled “Fifa thrown into fresh turmoil over Qatar World Cup corruption claims”, that “any improper behaviour in the bidding process for the tournament was “of very limited scope.”” This conclusion was made by a FIFA appointed former judge, “Hans-Joachim Eckert, who is chairman of the adjudicatory chamber of Fifa’s ethics committee.” Eckert had reviewed a 350-page report by investigator Michael J. Garcia, who is a former US prosecutor now practicing law in New York. Eckert released a 42 page “summary study” of the Garcia report, which he claimed supported his decision.

Unfortunately for FIFA and Eckert, Blitz reported in another FT article, entitled “Garcia and Eckert set for showdown over Fifa report”, that “Mr Eckert’s summary was disowned within hours of its publication by Mr Garcia, who claimed it misrepresented his findings. He has protested to Fifa’s appeals committee.” Garcia’s statement “has blown apart Fifa’s attempt to bring to a close nearly three years of allegations of unethical behaviour and has left Mr Eckert under increasing pressure to publish the Garcia investigation.” This action by FIFA led Reinhard Rauball, president of the German football league (DFL), to say, “Europe would have to consider breaking away from Fifa unless the Garcia investigation was published in full.”

All of this came after the summary itself noted that documents and evidence surrounding the Russian bid were lost because the computers on which they were stored had been destroyed. Garcia was not even able to speak with all the relevant witness in the Qatar bid as well. Even with this lack of full investigation, Garcia issues a statement which said that Eckert’s summary contained “numerous and materially incomplete and erroneous representations of the facts and conclusions detailed in the investigatory chamber’s report.”

What does all of this mean for FIFA? Certainly if the head of the German football league says that the European soccer federations may have to pull out of the organization because it is so corrupt that portends poorly. In another article in the FT, entitled “Brussels launches sliding tackle against Fifa”, Alex Barker reported “The EU’s top sports official is urging Fifa to come clean with findings from its corruption investigation, in a warning that signals a Brussels rethink over the commercial freedoms enjoyed by football’s scandal-tarnished governing body. In a direct swipe at Fifa’s attempt to clear Russia and Qatar to run the next two World Cups, Tibor Navracsics, the EU commissioner for sports, has called for full publication of a graft report into the 2010 bidding process to “remove doubts” about its findings. While Sepp Blatter’s Fifa is an unregulated Swiss body independent from government, its lucrative business activities in the European market are subject to rules overseen by EU regulators, including sales of television rights.”

What about any criminal issues? A quick Google search reveals that FIFA has offices in both the US and the UK. Given the very broad jurisdiction of the FCPA and perhaps the UK Bribery Act, it does not seem too far a stretch for either the Department of Justice (DOJ), the FBI, the UK Serious Fraud Office (SFO) or even the Overseas anti-corruption unit of the London police might want to open an investigation. Indeed CNN reported that the FBI is investigating FIFA at this time, saying “Investigators are moving ahead with their probe, which could result in charges against senior FIFA officials, the U.S. law enforcement officials said.”

For the compliance practitioner there are a couple of important lesson in all of this. First and foremost, in your internal investigations, you need to provide access of both documents and witnesses to your counsel. If you do not that alone may certainly compromise your investigation. This point was recently re-emphasized in the ongoing General Motors (GM) scandal over its ignition switch problems. It turns out that over two months prior to the public announcement the company had ordered over 500,000 new switches from its supplier. According to Hilary Stout and Bill Vlasic, writing in the New York Times (NYT) in an article entitled “G.M. Ordered a Half-Million Replacement Switches 2 Months Before Recall”, the order was placed after an internal company committee met. But no records of the meeting were provided to company’s outside counsel investigating this matter, Anton R. Valukas. Interestingly Valukas released a statement which the article quoted, ““To my knowledge, G.M. provided me access to all information in its possession related to G.M. inquiries regarding various repair options and part availability as G.M. considered potential fixes for the ignition switch in the event that a recall would occur,” the statement said.” That is lawyer-speak for I looked at what they showed me.

Hiding or not providing access to internal or outside counsel can be a recipe for disaster with the DOJ. The reason is the same as it is a disaster for FIFA in Europe. There is no trust left for the organization. Ask any ex-DOJer and they will tell you that it is all about credibility when you self-disclose to the DOJ or when you are in negotiations with the DOJ over a potential FCPA penalty. I regularly hear Stephen Martin and Mike Volkov say precisely that when they talk about their experiences from working for the US government. If you do not allow your investigators access to all relevant documents and those witnesses under your control, the DOJ will most probably not consider the results of your investigation valid. The DOJ may not even consider your exertions worthy of a good-faith effort.

One thing is also very relevant for the compliance practitioner. If your outside counsel disavows him or herself from the company’s interpretation of it going forward, you are in big trouble. Even the WSJ, in its Op-Ed piece said, “FIFA’s moral failure stands out.”

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

November 17, 2014

Opinion Release 14-02: Dis-Linking The Illegal Conduct Going Forward

Dis-linkOne of my favorite words in the context of Foreign Corrupt Practices Act (FCPA) enforcement is dis-link. I find it a useful adjective in explaining how certain conduct by a company must be separated from the winning of business. But it works on so many different levels when discussing the FCPA. Last week I thought about this concept of dis-linking when I read the second Opinion Release of 2014, that being 14-02. One of the clearest ways that the Department of Justice (DOJ) communicates is through the Opinion Release procedure. This procedure provides to the compliance practitioner solid and specific information about what steps a company needs to take in the pre-acquisition phase of due diligence. However, 14-02 directly answers many FCPA naysayers long incorrect claim about how companies step into FCPA liability through mergers and acquisitions (M&A) activity.

From the Opinion Release it was noted that the Requestor is a multinational company headquartered in the United States. Requestor desired to acquire a foreign consumer products company and it’s wholly owned subsidiary (collectively, the “Target”), both of which are incorporated and operate in a foreign country, never issuing securities in the United States. The Target had negligible business contacts in the US, including no direct sale or distribution of their products. In the course of its pre-acquisition due diligence of the Target, Requestor identified a number of likely improper payments by the Target to government officials of Foreign Country, as well as substantial weaknesses in accounting and recordkeeping. In light of the bribery and other concerns identified in the due diligence process, Requestor also detailed a plan for remedial pre-acquisition measures and post-acquisition integration steps. Requestor sought from the DOJ an Opinion as to whether the Department would then bring an FCPA enforcement action against Requestor for the Target’s pre-acquisition conduct. It was specifically noted that the Requestor did not seek an Opinion from the Department as to Requestor’s criminal liability for any post-acquisition conduct by the Target.

Improper Payments and Compliance Program Weaknesses

In preparing for the acquisition, Requestor undertook due diligence aimed at identifying, among other things, potential legal and compliance concerns at the Target. Requestor retained an experienced forensic accounting firm (“the Accounting Firm”) to carry out the due diligence review. This review brought to light evidence of apparent improper payments, as well as substantial accounting weaknesses and poor recordkeeping. The Accounting Firm reviewed approximately 1,300 transactions with a total value of approximately $12.9 million with over $100,000 in transactions that raised compliance issues. The vast majority of these transactions involved payments to government officials related to obtaining permits and licenses. Other transactions involved gifts and cash donations to government officials, charitable contributions and sponsorships, and payments to members of the state-controlled media to minimize negative publicity. None of the payments, gifts, donations, contributions, or sponsorships occurred in the US, none were made by or through a US person or issuer and apparently none went through a US bank.

The due diligence showed that the Target had significant recordkeeping deficiencies. Nonetheless, documentary records did not support the vast majority of the cash payments and gifts to government officials and the charitable contributions. There were expenses that were improperly and inaccurately classified. It was specifically noted that the accounting records were so disorganized that the Accounting Firm was unable to physically locate or identify many of the underlying records for the tested transactions. Finally, the Target had not developed or implemented a written code of conduct or other compliance policies and procedures, nor did the Target’s employees show an adequate understanding or awareness of anti-bribery laws and regulations.

Post-Acquisition Remediation

The Requestor presented several pre-closing steps to begin to remediate the Target’s weaknesses prior to the planned closing in 2015. Requestor aimed to complete the full integration of the Target into Requestor’s compliance and reporting structure within one year of the closing. Requestor has set forth an integration schedule of the Target that included various risk mitigation steps, dissemination and training with regard to compliance procedures and policies, standardization of business relationships with third parties, and formalization of the Target’s accounting and record-keeping in accordance with Requestor’s policies and applicable law.

DOJ Analysis

The DOJ noted black-letter letter when it stated, ““It is a basic principle of corporate law that a company assumes certain liabilities when merging with or acquiring another company. In a situation such as this, where a purchaser acquires the stock of a seller and integrates the target into its operations, successor liability may be conferred upon the purchaser for the acquired entity’s pre-existing criminal and civil liabilities, including, for example, for FCPA violations of the target. However this is tempered by the following from the 2012 FCPA Guidance, “Successor liability does not, however, create liability where none existed before. For example, if an issuer were to acquire a foreign company that was not previously subject to the FCPA’s jurisdiction, the mere acquisition of that foreign company would not retroactively create FCPA liability for the acquiring issuer.””

This means that because none of the payments were made in the US, none went through the US banking system and none involved a US person or entity that this would not lead to a creation of liability for the acquiring company. Moreover, there would be no continuing or ongoing illegal conduct going forward because “no contracts or other assets were determined to have been acquired through bribery that would remain in operation and from which Requestor would derive financial benefit following the acquisition.” Therefore there would be no jurisdiction under the FCPA to prosecute any person or entity involved after the acquisition.

The DOJ also provided this additional information, “To be sure, the Department encourages companies engaging in mergers and acquisitions to (1) conduct thorough risk-based FCPA and anti-corruption due diligence; (2) implement the acquiring company’s code of conduct and anti-corruption policies as quickly as practicable; (3) conduct FCPA and other relevant training for the acquired entity’s directors and employees, as well as third-party agents and partners; (4) conduct an FCPA-specific audit of the acquired entity as quickly as practicable; and (5) disclose to the Department any corrupt payments discovered during the due diligence process. See FCPA Guide at 29. Adherence to these elements by Requestor may, among several other factors, determine whether and how the Department would seek to impose post-acquisition successor liability in case of a putative violation.”

Discussion

Mike Volkov calls it ‘reading the tea leaves’ when it comes to what information the DOJ is communicating. However, sometimes I think it is far simpler. First, and foremost, 14-02 communicates that there is no such thing as ‘springing liability’ to an acquiring company in the FCPA context nor such a thing as simply buying a FCPA violation, simply through an acquisition only, there must be continuing conduct for FCPA liability to arise. Most clearly beginning with the FCPA Guidance, the DOJ and Securities and Exchange Commission (SEC) have communicated what companies need to do in any M&A environment. While many compliance practitioners had only focused on the post-acquisition integration and remediation; the clear import of 14-02 is to re-emphasize importance of the pre-acquisition phase.

Your due diligence must being in the pre-acquisition phase. The steps taken by the Requestor in this Opinion Release demonstrate some of the concrete steps that you can take. Some of the techniques you can use in the pre-acquisition phase include (1) having your internal or external legal, accounting, and compliance departments review a target’s sales and financial data, its customer contracts, and its third-party and distributor agreements; (2) performing a risk-based analysis of a target’s customer base; (3) performing an audit of selected transactions engaged in by the target; and (4) engaging in discussions with the target’s general counsel, vice president of sales, and head of internal audit regarding all corruption risks, compliance efforts, and any other major corruption-related issues that have surfaced at the target over the past ten years.

Whether you can make these inquiries or not, you will also need to engage in post-acquisition integration and remediation. 14-02 provides you with some of the steps you need to perform after the transaction is closed. If you cannot perform any or even an adequate pre-acquisition due diligence, the time frames you put in place after the acquisition closes may need to be compressed to make sure that you are not continuing any nefarious FCPA conduct going forward. But it all goes back to dis-linking. If a target is engaging in conduct that violates the FCPA but the target itself is not subject to the jurisdiction of the FCPA, you simply cannot afford to allow that conduct to continue. If you do allow such conduct to continue you will have bought a FCPA violation and your company will be actively engaging and participating in an ongoing FCPA violation. That is the final takeaway I derive from this Opinion Release; it is allowing corruption and bribery to continue which brings companies into FCPA grief. Opinion Release 14-02 provides you a roadmap of the steps you and your company can take to prevent such FCPA exposure.

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

November 14, 2014

Trial Lawyering and FCPA Compliance

Filed under: Best Practices,compliance programs,Department of Justice,FCPA — tfoxlaw @ 12:01 am

Single KnightAs most readers of this blog know, I am a recovering trial lawyer. To this day, some of my best friends are still out there, still teeing it up as trial lawyers. They have an important place in our country’s legal system, including defending corporations, which was my primary client base in those long ago days of yore. To be a trial lawyer requires a certain cache; as you really are a hired gun, king’s champion, free lance fighter, single combat warrior for your client. If not exactly a knight in shining armor, certainly one ready to take on all comers with something as blunt as a mace, as the company’s single combat champion. Frankly there is nothing much better than standing up in front of an antagonistic jury and announcing that I am proud to represent XXXX (name the corporation). It may not be the same as standing up and saying you represent the People of the United States, the People of the Great State of Texas or the People of Houston, but it is still very cool.

But just as it takes a certain skill set and mentality to be able to pull that off that trial lawyer hutzpah, such skills and mentality do not necessarily translate into the skills necessary to be good counselors. As Donna Boehme continually reminds us that is even truer when it comes to the compliance function in a Foreign Corrupt Practices Act (FCPA) compliance program. That point was driven home to me yet again in a recent article in the Texas Lawyer, entitled “FCPA Practices: Right-to-Audit Clauses”. In this article the authors, have a section denominated as ‘Defending An Audit’. I would suggest that if you are in a commercial contract relationship and your attitude starts with ‘defending an audit’ you are getting seriously low-value compliance counseling for your lawyer-dollars.

Contract negotiations which begin with such an adversarial attitude are apt to go nowhere on a slow boat to China. The right to audit was enshrined in every commercial contract that I ever negotiated, whether my client was paying money out or receiving money back for services or products delivered. If you are going to start fighting about the audit clause out of the box, frankly you probably have engaged outside counsel who is charging by the word. Worse, everyone from the Department of Justice (DOJ) down the chain of compliance understands the absolute need for audit rights. If your company comes out of the box fighting about audit terms so that you can defend an audit it certainly marks you as outside of the mainstream of entities around the best practices of compliance. Moreover, it would immediately set off huge Red Flags, if not cannonades of ringing church bells saying that my company has something to hide. Your corporate counter-party could very easily say that your client is not someone they could or even should do business with, if they want to fight over such a basic component in a best practices compliance program as audit rights.

It is that type of trial lawyer mentality which also seems to seep into the debate about a compliance defense under the FCPA. Leaving aside the Arthur Andersen effect of 63,000 people losing there livelihoods because one corporation made an idiotic decision to go to trial; the trial lawyer mentality that wants to tee it up with the DOJ does not serve the counseling function which corporations require. What does a trial lawyer tell a client about its chances at trial? You have a 10% chance; 20% chance; 50% chance; 75% chance of winning? What is that based on? Knowing what 12 (or perhaps 6) citizens will say? If there is a potential $500MM fine for a guilty verdict and there is a 10% chance of losing, is settling for $50MM reasonable? What if your illegal conduct was over five years ago, are you really going to trial on statute of limitations defense, where your own conduct hid the FCPA violations? Want to try and use that fact issue to persuade a jury that the government waited too long to indict?

Further, what are the true costs of litigating a criminal charge against your company? Attorney fees, defense costs for all those individuals the company has to defend, zero to no productivity for some period of time? What about all the negative stuff that will come out at trial about the company’s conduct, think there might be any negative effect on your corporate reputation, if not what about tanking of the stock price? How about all those plaintiff’s lawyers circling in the water with their shareholder derivative actions lawsuits firmly planted in their teeth, think they might be interested in what the Board knew, when it knew it or conversely that it did not know anything? Do you really want to put your Chief Executive Officer (CEO) up on the stand and have him or her cross-examined by the DOJ on what he/she allowed the compliance function to do at the company? Remember the great performance by Ken Lay at his company’s trial? (It’s my company – I do what I want.)

Yesterday, Mike Volkov wrote a blog post, entitled “Working in the Compliance Field – The Need for Practical Solutions”, where he said “compliance professionals need support with practical solutions to real problems. In some cases, compliance support professionals can help to define a strategy to solve a problem.” That seems to me to be the clearest articulation of why a compliance defense appended to the FCPA would not mean anything in the practice of compliance inside a corporation. If no corporation is going to trial, standing up and saying we have a compliance defense is not going to help the compliance practitioner do compliance inside a company. So as much as trial lawyers want to create something so that they can take on the DOJ over some FCPA issues at trial, such a defense will not move forward the doing of compliance.

Near the end of his piece Volkov said, “In the end, compliance professionals need less theoretical mumbo jumbo and more practical, real-world solutions.” Here, here Mike. Fighting your customer over audit rights is not a real world solution that a compliance practitioner needs.

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

November 13, 2014

Atlanta Burns – the Bio-Rad FCPA Enforcement Action – Part III

Atlanta BurningOn this date in 1864, the Union Army phase of the destruction of Atlanta began. While most Southerners credit Union General William T. Sherman with the burning of Atlanta, it was, in reality, Confederate General John Bell Hood who ordered the burning of the armament works that started the destruction. Sherman merely finished it. But whoever started or finished it, the result was horrific for the city. By one estimate, nearly 40 percent of the city was ruined, leaving, as one commentator noted, “little but a smoking shell.” Unfortunately for the Confederacy, this is not the last we will hear about either General Sherman or General Hood.

The Bio-Rad Laboratories Inc. (Bio-Rad) Foreign Corrupt Practices Act (FCPA) enforcement action has provided a wealth of information and lessons to be learned by the compliance practitioner. In Parts I and II I reviewed the facts of the Bio-Rad enforcement action and the specified remedial steps that the company has agreed to take. Today, I want to mine the Deferred Prosecution Agreement (DPA), the company received from the Department of Justice (DOJ) and the Securities and Exchange Commission’s (SEC) Order Instituting Cease-and-Desist Proceedings (Order) and detail the specific internal controls that I think might have helped the company. (I will really try not to get carried away and have a Bio-Rad, Part IV but there is tons of great stuff in this one so there is no telling as I begin to write this post where I might end up.)

For many managers the default mode is to stay within silos and, as noted by Andrew Hill in his article in the Financial Times (FT) entitled “The default mode for managers needs a reset”, that such persons are “suspicious of ideas that are “not invented here.” This may lead them to becoming “detached from the purpose, and even values, of the company.” This can be particularly true of changes required by an anti-corruption compliance program which many business development types fear will change the status quo in a manner, which “puts at risk predictable, comfortable routines.”

Even with the three different bribery schemes used by Bio-Rad in three different countries, some general statements can be made. Obviously the use of a third party representative in Russia was fraudulent. However a robust system of internal controls might not have only detected such conduct but also prevented it if the Emerging Markets Regional Manager and/or any of the team under him knew that they would be checked by a second set of eyes on what they were doing.

I will focus on four areas of internal controls that were sorely missing from the company during its bribery scheme heyday:

  • Delegation of Authority (DOA)
  • Maintenance of the vendor master file
  • Contracts with agents
  • Movement of cash / currency.

Delegation of Authority 

Your DOA should reflect the impact of FCPA risk (transactions and geographic locations) to result in higher levels of approval for matters involving agents and for funds transfers and invoice payments to countries outside the US. If properly prepared and enforced, the DOA can be a powerful preventive tool for FCPA compliance, unfortunately this is not often the case as very often the DOA is prepared without much thought given to FCPA risks.

Properly utilized in a FCPA risk based process, the DOA takes into account the increased risk posed by certain types of transactions and by certain geographic locations. The DOA then provides for a higher level of scrutiny for higher risk transactions. This means that the DOA should specify who must give the final approval for engaging agents. Yet the DOA might distinguish between approval of vendor invoices for “routine” third party representatives and those from high-risk third party representatives, such as agents. Finally, the DOA should be integrated into the accounts payable processing system in a manner that ensures all high-risk vendor invoices receive the proper visibility. Identifying high-risk third party representatives can often be done within the vendor master file so payments to them are identified for appropriate approval BEFORE they are paid.

Vendor Master File

The vendor master file can be one of the most powerful PREVENTIVE control tools. This file should be structured so that each vendor can be identified not only by risk level but also by the date on which the vetting was completed and the vendor received final approval. Electronic controls should be in place to block payments to any vendor for which vetting has not been approved. Manual controls are needed over the submission, approval, and input of changes to the vendor master file. These controls include verification that all third party representatives have been approved before their information (and the vendor approval date) are input into the vendor master. Manual controls are also needed when “one time” third party representatives are submitted, when vendor name and/or vendor payment information changes are submitted.

Contracts with Third Party Representatives 

As demonstrated with the Bio-Rad enforcement action, contracts with agents are typically not integrated into an internal control system. They are left to operate on their own. Indeed in the case of Bio-Rad it is not clear if the compliance function had visibility into this process at all. However, to provide effective control, relevant terms of those contracts should be extracted and be made available to those who process and approve vendor invoices. This would also include a review of the commission rate for sales agents and the discount rate for distributors. To accomplish this, once the third party representatives are flagged as high-risk, and before any payments are made, the invoices are pulled for review and approval in accordance with the DOA. Such review would require that nonconforming service descriptions, commission rates, etc., must be approved not only by the original approver but also by the person so delegated in the DOA. This provides the necessary PREVENTIVE control to intercept questionable amounts before they are paid.

Disbursements of funds

All situations in which funds can be sent outside the US (accounts payable computer checks, manual checks, wire transfers, replenishment of petty cash, loans, advances, etc.,) should be reviewed from a FCPA risk standpoint. The goal is to identify the ways in which a country manager could cause funds to be transferred to their control and to conceal the true nature of the use of the funds within the accounting system. Controls need to be in place to prevent such activities. This would require that wire transfers outside the US have defined approvals in the DOA, and the persons who execute the wire transfers should be required to evidence agreement of the approvals to the DOA. Moreover, wire transfer requests going out of the US should always require dual approvals. Finally, wire transfer requests going outside the US should be required to include a description of proper business purpose and over certain level, there should be an additional review (yet another ‘second set of eyes’).

What about Hill and his default mode for managers to stay in their silos and never come out or allow change in their regions, such as was the case with the Bio-Rad Emerging Markets leadership team? This can occur in the compliance arena when the compliance function receives push back and is told the controls are too burdensome and also make operations less efficient. One of the areas available to a compliance professional is benchmarking from other company’s compliance experiences. However this can be expanded into solid presentations about why it is important to assess and mitigate FCPA risks using your corporate peers that have been the subject of a FCPA enforcement action. This is some of the best sources of information a compliance practitioner can avail his or herself of to provide good insight into why it was never expected that the company would be subject to FCPA enforcement and insight into the extreme disruption, cost, and anxiety which accompanied the enforcement actions.

Another key factor, as with all FCPA compliance initiatives, is ‘Tone at the Top’. This means that you should meet with and present the case for FCPA-focused internal controls to your company’s Executive Leadership Team (ELT), Audit Committee of the Board or other appropriate group of senior executives. The presentation should include, with examples, the importance of identifying and mitigating the FCPA and fraud risks. Some of these might include the following:

  • Illustrating the examples of how the controls can prevent bribery as well as many other types of occupational fraud;
  • Illustrating that the controls needed are all sound business controls, nothing exotic or out of the ordinary;
  • With proper control design, it may be possible to eliminate some existing detect controls in favor of more useful preventive controls or even prescriptive controls;
  • As a result of your business changes and resulting changes in assessed risks, it may be that some procedures now being performed are no longer needed and the resources can be shifted to more necessary controls; and
  • It may be possible to build in more electronic controls, which can replace existing manual controls.

As we end today’s post with Atlanta burning, Andrew Hill tearing down silos so that a company like Bio-Rad can put appropriate FPCA internal controls in place and arm the compliance practitioner with a wealth of information and lessons which can be applied to your own compliance program, all courtesy of Bio-Rad, I find that there is one more significant lesson to be taking away from this enforcement action, however I will save that for another day.

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

November 12, 2014

John Doar and the Bio-Rad FCPA Enforcement Action – Part II

John DoarJohn Doar died yesterday. He was perhaps most famously known for his role as the House Judiciary Committee Chief Counsel during the investigation of and impeachment proceedings against then President Nixon. However, it was his role in the civil rights movement in the South that in large part inspired me to become a lawyer. He rode with the Freedom Riders in Alabama; walked with James Meredith so that he could register to attend the University of Mississippi, then stayed in the same dorm room with Meredith while the campus rioted; prosecuted the KKK in Mississippi after the murder of three civil rights workers in 1964; and marched for voting rights with Dr. King in Selma. My favorite John Doar story was retold in his obituary in the New York Times (NYT), where he stopped a riot in its tracks with the following ““My name is John Doar — D-O-A-R,” he shouted to the crowd. “I’m from the Justice Department, and anybody here knows what I stand for is right.” That qualified as a full-length speech from the laconic Mr. Doar. At his continued urging, the crowd slowly melted away.”” In my book, he is right up there with Atticus Finch.

In an earlier post, I reviewed the Bio-Rad Laboratories, Inc. (Bio-Rad) Foreign Corrupt Practices Act (FCPA) enforcement action from the perspective of the Non-Prosecution Agreement (NPA) the company was able to secure with the Department of Justice (DOJ). Today I want to review the bribery schemes that the company used to either internally fund the bribes or attempt to evade internal detection. Both the NPA and the Securities and Exchange Commission’s (SEC) Order Instituting Cease-and-Desist Proceedings (Order). The compliance practitioner can use these bribery schemes not only for FCPA training but also to see if any such schemes or their indicia may be present in your company.

Initially I need to discuss the corporate structure. It was apparently quite decentralized. According to the Order, “Bio-Rad’s international sales organization (“ISO”) oversees the company’s international sales operations; this includes all locations outside the United States and Canada. In 2009, the ISO consisted of four sub-divisions: (1) Western Europe; (2) Asia Pacific; (3) Japan; and (4) Emerging Markets. Each sub-division had a general manager, reporting to the vice-president of ISO. The Asia Pacific sub-division included Vietnam and Thailand. The Emerging Markets sub-division included Russia and other eastern European countries. Some countries within the sub-divisions had a country manager who reported to the ISO sub-division general manager.” Emerging markets is clearly a high-risk area for pharmaceutical companies. If your business development or sales organization has such a designation, I would suggest that you check and see if there are sufficient protections in place to at least raise any red flags, which might need further investigation.

However, it was more than the management structure of the business operations that was decentralized, the compliance function was similarly structured. The NPA stated, “BIO-RAD also decentralized its compliance program such that its international offices were responsible for ensuring adequate compliance with its business ethics policy and code of conduct.” This decentralization so defanged the company’s compliance program that it could not perform even the most basic functions of a compliance organization; no due diligence on third parties, indeed no management of third parties at all from the compliance perspective; no risk assessments were performed and, finally, the most damning was that the compliance function could not even ensure compliance with the company’s own business ethics policy.

The Russia Scheme

However the company used third party representatives to facilitate the bribery scheme. In addition to the lack of due diligence or usual steps that a compliance practitioner might put in place to manage third parties under the FCPA there were several other items of note which constitute lessons learned by the compliance practitioner. First and foremost was the commission rate paid to these third parties, that being between 15%-30%. This alone may well have been enough to demonstrate “a conscious disregard for the high probability that the Russian Agents were passing along at least a portion of their commissions to Russian government officials to obtain profitable public contracts for the sale of medical diagnostic equipment.” Further, the payments made to these agents were sent to countries outside Russia, where neither the alleged services were delivered nor where the agents were legally domiciled. Moreover, not only did these agents have no offices in Russia, they had no employees in Russia either.

Apparently there were contracts in place with these agents. The services these agents were specified to deliver included, “acquiring new business, creating and disseminating promotional materials to prospective customers, distributing and installing products and related equipment, and training customers.” But it really is hard to deliver services if you have no employees. Apparently there were times these agents did deliver something identified as “distribution services” for the commission rates between 15%-30%. However the estimated value of these services for the company was between 2%-2.5% of the total sales.

Another area of obvious concern should have been the pre-payment of commissions to these agents. Any time you pre-pay before a service is delivered (other than a retainer into a lawyer’s trust account) you can potentially run into trouble. But Bio-Rad took it a step further by making pre-payments before contracts with the ultimate buyer were negotiated. Any ideas where those pre-paid commissions might have gone? Another area was the amount of the commissions. They were just less than $200,000, which happened to be the authority level of the head of Bio-Rad’s Emerging Markets business unit. So there was no oversight or second set of eyes on these pre-payments because it was within the manager’s authority level. Finally, these pre-payments were actually forbidden under the contracts but they were made anyway.

The Vietnam Scheme 

The Vietnam Country Manager had contracting authority up to $100,000 and sales commissions up to $20,000. From 2005-2009 Bio-Rad apparently paid bribes directly to health care workers so they would purchase the company’s products. When it was pointed out to the Country Manager this was illegal, he simply moved to a distributor “at a deep discount, which the distributor would then resell to government customers at full price, and pass through a portion of it as bribes…Between 2005 and the end of 2009, the Vietnam office made improper payments of $2.2 million to agents or distributors, which was funneled to Vietnamese government officials. These bribes, recorded as “commissions,” “advertising fees,” and “training fees,” generated gross sales revenues of $23.7 million to Bio-Rad Singapore.” 

The Thailand Scheme

In Thailand, it was an almost mundane bribery scheme involved compared to Russia and Vietnam. Bio-Rad acquired an interest in a Thai Joint Venture (JV) through an acquisition where it performed “very little due diligence” on the JV. Bio-Rad acquired a minority interest in the JV and it did not communicate directly with the JV’s distributors but only through the majority owners of the JV. The bribery scheme was funded through “an inflated 13% commission, of which it retained 4%, and paid 9% to Thai government officials in exchange for profitable business contracts.” The due diligence was so poor that Bio-Rad did not know that the prime third party sales representative for the JV were the same majority owners of the JV.

Tomorrow, I will discuss some of the internal controls that a company might employ to help prevent such a compliance failure as occurred at Bio-Rad.

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

November 10, 2014

Gordon Lightfoot, the Edmund Fitzgerald and the Bio-Rad FCPA Settlement, Part I

Wreck of the Edmund FitzgeraldThis month there are two dates that are forever tied together in the annuals of maritime tragedies and great songwriters. November 10 is the 39th anniversary of the sinking of the Great Lakes freighter the SS Edmund Fitzgerald, who sank 17 miles from the entrance to Whitefish Bay on Lake Superior taking all 29 crewmembers to the bottom with her. Next Monday, November 17, is the 76th birthday of the Canadian singer-songwriter Gordon Lightfoot, who memorialized the tragedy in the song The Wreck of the Edmund Fitzgerald, which he released on the album Summertime Dream in 1976. The song went all the way to Number 2 on the charts. I can still hear Lightfoot’s haunting tale in my head to this day and for me, it was his greatest single.

Earlier this month, Bio-Rad Laboratories Inc. (Bio-Rad) concluded a multi-year Foreign Corrupt Practices Act (FCPA) investigation and enforcement action. It was notable for many reasons. First and foremost was the stunning bribery and corruption scheme that the company engaged in; multiple bribery schemes in multiple countries. Also notable were the results that the company achieved. While we do not yet know if there will be any individual prosecutions of this matter, the company received a Non-Prosecution Agreement (NPA) from the Department of Justice (DOJ) and a relatively small fine of $14.35MM for what clearly would appear to be criminal violations of the FCPA. Perhaps equally stunning is the amount of profit disgorgement that the company agreed to with the Securities and Exchange Commission (SEC), that amount being $40.7MM.

As with the Layne Christensen FCPA enforcement action from October, both settlement documents provide a wealth of very useful information for the compliance practitioner to use to not only help create a best practices compliance program, but also review your company’s compliance program to see if there might be areas of risk which need to be assessed or have greater compliance scrutiny. Over the next couple of blog posts I want to explore the Bio-Rad FCPA settlement, discuss some of the lessons learned for the compliance practitioner and explore what this settlement may unveil for future FCPA enforcement actions.

With his usual thoroughness, the FCPA Professor went into deep dive mode to lay out the underlying facts involved in this matter, in a post entitled “Bio-Rad Laboratories Agrees To Pay $55 Million To Resolve FCPA Enforcement Action”. According to the NPA, Bio-Rad had bribery schemes running in the following countries: Russia, Vietnam and Thailand. In Russia, persons identified as ‘Manager-1’ who was a high-level manager of the company’s Emerging Markets sales region and ‘Manager-2’ who worked for Manager-1 and was described as a high-level accounting manager of the company’s Emerging Markets sales region, engaged with ‘Agent-1’ paying him “a commission of 15-30% purportedly in exchange for various services outlined in the agency contracts, including acquiring new business by creating and disseminating promotional materials to prospective customers, installing Bio-Rad products and related equipment, training customers on the installation and the use of Bio-Rad products, and delivering Bio-Rad products.”

The commission rates were approved by Manager 1 and 2 even though they were both aware that Agent 1 did not and indeed could not perform the contracted services. Payments were made to a level of $200,000 or less because that was the spending authority of the managers, which did not require a higher level of company review. Both managers communicated with Agent 1 through multiple fraudulent email addresses to avoid detection by the company. Finally, Agent 1 had a 100% success rate in obtaining sales into Russia.

In Vietnam, the system was much simpler and even more directly corrupt. The Bio-Rad country manager was authorized to approve contracts up the amount of $100,000 and to pay sales commissions up to $20,000 without further review. This un-named country manager simply authorized cash payments to officials at state-owned hospitals to obtain or retain business for the company. When the country manager was finally challenged on this direct bribery scheme, he simply “proposed a solution that entailed employing a middleman to pay the bribes to the Vietnamese government officials as a means of insulating Bio-Rad from liability.” The bribery funds were created by giving these middlemen, named distributors, deep discounts “which the distributor would then resell to government customers at full price, and pass through a portion of it as bribes.” These bribes were recorded on the company’s books and records as “commissions”, “advertising fees” and “training fees”.

In Thailand, the company acquired a 49% interest in a joint venture (JV) through acquisition. Initially I would note that there is no record that Bio-Rad either performed pre-acquisition due diligence or engaged in any post acquisition integration or remediation so that an ongoing bribery scheme which began under a previous company’s ownership continued after Bio-Rad took control of the Thailand JV. The bribery scheme involved paying an agent “an inflated 13% commission, of which it retained 4%, and paid 9% to Thai government officials in exchange for profitable business contracts.” Just to top it all off, the agent involved in the bribery scheme was Bio-Rad’s JV partner.

I would say that all of the above is very bad conduct. Yet, Bio-Rad was able to garner a NPA from the DOJ and a civil Cease and Desist Order from the SEC. How did they accomplish this? In the DOJ Press Release, it stated, “The department entered into a non-prosecution agreement with the company due, in large part, to Bio-Rad’s self-disclosure of the misconduct and full cooperation with the department’s investigation…In addition, Bio-Rad has engaged in significant remedial actions, including enhancing its anti-corruption compliance programs globally, improving internal controls and compliance functions, developing and implementing additional due diligence and contracting procedures for intermediaries, and conducting extensive anti-corruption training throughout the organization.”

For the compliance practitioner, yet once again the DOJ and SEC are sounding a LOUD and CLEAR message that even with very bad conduct, the systemic failure of internal controls and having a culture that turned a very blind eye at best to what was going on; you can make a comeback. Moreover, you can make such a spectacular comeback that does not even sustain a Deferred Prosecution Agreement (DPA) let alone have to accept a guilty plea. It all starts with putting a best practices compliance program in place and the DPA lists the steps that any company should consider in its compliance regime.

  1. High level commitment by providing visible support by senior management.
  2. An appropriate corporate policy around anti-corruption.
  3. Specific policies and procedures in the following areas: (a) gifts, (b) hospitality, entertainment and travel, (c) customer travel, (d) political contributions, (e) charitable donations and sponsorship, (f) facilitation payments and (g) solicitation and extortion.
  4. Appropriate internal controls to ensure transactions are authorized and properly recorded.
  5. A periodic risk-based review. In other words, a risk assessment. Policies and procedures need to be reviewed no less than annually and updated as appropriate.
  6. The compliance function should have proper Board oversight, independence to act and support within the organization.
  7. Compliance shall provide training on and guidance to the business units on its anti-corruption compliance program.
  8. There should be mechanisms for employees to report internally compliance issues of concern with no fear of retaliation.
  9. A company must maintain and provide “effective and reliable” processes and resources to responding to any raised issues.
  10. A company must use both incentives to encourage behavior and discipline of those employees who violate its compliance program.
  11. Third parties must be subjected to an appropriate due diligence based vetting process, have an appropriate contract and thereafter be managed going forward after the contract is signed.
  12. There should be a protocol for evaluation of any potential acquisitions or merger candidates and then appropriate review and remediation after any acquisition is complete.
  13. There should be ongoing monitoring and testing of the compliance program going forward.

At the conclusion of its NPA, Bio-Rad agreed to ongoing compliance reporting, at annual anniversaries of the date of the NPA by reporting to the DOJ the results of its remediation efforts over the past year. This is one of the most significantly overlooked positive aspects of any FCPA resolution. This allows the DOJ to have a continued view into the company’s compliance function. It is not an ongoing monitor but it does give the DOJ a transparent view into the company’s work towards the overall goal of putting a best practices compliance program in place and not simply stopping work when the settlement is signed. It keeps the company on its toes and allows the DOJ to continue to assess the company’s actions around anti-corruption compliance.

In the next blog post on Bio-Rad, I will review some of the specific bribery schemes that the company used and discuss how a compliance practitioner might use them for some lessons learned.

For a YouTube version of Gordon Lightfoot signing The Wreck of the Edmund Fitzgerald, 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

November 7, 2014

Don’t Collapse in the Wind – Knowledge is Power

Tacoma Narrows BridgeOn November 7, 1940, high winds buffeted the Tacoma Narrows Bridge leading to its collapse. The first failure came at about 11 a.m., when concrete dropped from the road surface. Just minutes later, a 600-foot section of the bridge broke free. Subsequent investigations and testing revealed that when the bridge experienced strong winds from a certain direction, the frequency oscillations built up to such an extent that collapse was inevitable. For posterity, the collapse of the Bridge was captured on film.

I thought about this spectacular engineering failure when I read, yet again, commentary about representatives from the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) appearing at for-profit conferences to give presentations to attendees. Personally, I was shocked, simply shocked to find out that one has to pay to attend these events. Further, it appears that one or more of the companies running these events, ACI, Momentum, IQPC, HansonWade, among others, might actually be for-profit companies. It was intimated that one of the ways the conference providers enticed registrants to pay their fees was to provide a forum of lawyers practicing in the Foreign Corrupt Practices Act (FCPA) space, to whom representatives from the DOJ and SEC could speak. Now I am really, really really shocked to find that people actually pay to obtain knowledge.

Armed with the new piece of information that there is a marketplace where people actually pay to obtain information, I have decided to practice what I preach and perform a self-assessment to determine if I am part of this commerce in ideas. Unfortunately I have come to the understanding that not only do I participate in that marketplace but also I actually use information provided by representatives of the US government in my very own marketing and commerce. So with a nod to Adam Smith’s Invisible Hand of the Marketplace; I now fully self-disclose that I digest to what US government regulators say about the FCPA, repackage it and then (try) and make money from it. (I know you are probably as shocked, shocked as I was to discover this.)

Where can one go to find out information about the FCPA, its enforcement and how the DOJ and SEC view compliance programs? First and foremost is the FCPA Guidance, jointly issued by the DOJ and SEC back in 2012. It is still the best one volume resource on the government’s thinking on a wide range of issues relating to the FCPA. For a ‘Nuts and Bolts’ guy like me, it even has some suggested building blocks of FCPA compliance called the Ten Hallmarks of an Effective Compliance Program. Of course, such a treatise must cost thousands of dollars so that it is only available to a very select few. Oops, it is available for FREE on the DOJ website. Darn, as I planned to buy up all of the copies and then put on for pay seminars across the world as the only source of such knowledge.

Since the FCPA Guidance is available for free, perhaps I can corner the market on all known enforcement actions and Opinion Releases. I am sure that they will provide lots of good information such as what might constitute an effective compliance program, what are some of the actions that got companies into FCPA hot water and suggestions by the DOJ and SEC as to what might have constituted compliance failures. I have even heard that in Opinion Releases, the DOJ will pass upon fact patterns and indicate if they believe such facts might be prosecuted for FCPA violations. Double oops, as all of those are publicly available as well and for FREE. Double Darn.

OK, well if the FCPA Guidance is free and all the enforcement actions and Opinion Releases are available for free; maybe I can corner the market on court opinions, which discuss the FCPA. I am a lawyer and I bet all the other lawyers would pay me if I were the only person in the world who had access to them (or even better yet we were in China where the trials are held in secret-imagine that market!). I know there are only a handful of such cases but imagine the power I would have if only I knew about them. Why I could I put on seminars and pay people to attend. Triple oops, as I just found out that the court decisions are public record and available for FREE. Drat.

Well if all this information about the FCPA is available for free what can I do to make money? Hmm, maybe, just maybe, if I put information together from all of the above sources in a book people might be interested in buying it. What if I wrote multiple books? Do you think there might be a market for such written texts? I certainly hope so and to further entice you to join in this nefarious act of for-profit commerce, I invite you to check out my latest book, Doing Compliance: Design, Create, and Implement an Effective Anti-Corruption Compliance Program, available at Compliance Week. Or perhaps you might want to purchase either of the other three printed or five eBooks I have written on FCPA compliance. But wait a minute, wouldn’t that mean I am making money off free government information? I guess I better self-disclose those facts and let the chips fall where they may. Hopefully Adam Smith will give me a declination of the Invisible Hand.

If no one will buy any of the books I have written, maybe they would attend training that I might put on. I could talk about all this free government information, put it in power points slides and other written materials and then charge people to get trained. I could even call it ‘FCPA Training’. Maybe I could go to other parts of the country and put on training, maybe in places where they might not have heard about all the free DOJ and SEC information. Of course, I would have to find such a place. But wait a minute, wouldn’t that mean I am making money off of free government information. I guess I better self-disclose that as well.

If no one will buy any books I write or go to training seminars that I might put on, I could always write a blog. Do you think anyone would pay to read a blog? Nah 

How about the following as a business strategy? I will tell people I am lawyer and I will give them legal advice on the FCPA. Of course to do so, I will have to use all of these free resources listed above and then charge clients for my legal services. Think there might be a market for that legal advice? I am not really sure so perhaps I should make a provisional self-disclosure that if any clients came to me for legal advice, I would charge them and hence engage in commerce. It would also allow me to apply to join that hallowed group, FCPA INC. whose members (1) practice law around the FCPA, (2) put on FCPA training, (3) write books on the FCPA and (4) generally pontificate on all things FCPA. Sounds like a great group to belong to, you think they will take me? If so I can’t wait to learn the secret handshake so I can proudly commune, in secret, with its members. Hopefully they will not haze pledges too badly, as I am way too old to survive another Pledge Week.

If you have not quite ascertained the point of today’s post, please consider the following – knowledge is power. If you want knowledge about the FCPA there are plenty of places you can look for free to obtain that knowledge. If you want to hear the DOJ or SEC’s most current thinking on FCPA related issues, you can also attend a (for-pay) FCPA conference. If so, I am sure I will see you there because I certainly value what they have to communicate to us. I also plan to continue to communicate it to you; sometimes even for profit. Long Live Adam Smith and his Invisible Hand! 

Always remember, a little knowledge can go a long way, even if you have to pay to garner it.

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To further emphasize some of these articulations, I am pleased to announce that I will present some of my thoughts on the issue of internal controls in an effective compliance program, in a webinar hosted by The Network, next Tuesday, November 11 at 1 PM EST. For details and registration, click here.

On December 4, I will be making a live presentation on the recent trend for the DOJ and SEC to target internal controls in FCPA enforcement actions and the interplay with the COSO 2013 Update at a live event, hosted by The Network, in Houston. Baker and McKenzie partner Stephen Martin will be joining me and will discuss risk assessments in a best practices compliance program. For details and registration, click here.

And best of all both events are FREE, just like this video of the Tacoma Narrow Bridge collapsing.

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

November 6, 2014

Supplier Risk Management – Interconnected Processes

The Last EmpireI recently read a book review in the Times Literary Supplement (TLS) by Archie Brown, entitled “One into fifteen”, where he reviewed the book “The Last Empire” by author Serhii Plokhy. Plokhy’s book is about the dissolution and final days of the Soviet Union. One of the more interesting precepts from the book is end of the Soviet Union as announced on Christmas Day, 1991, by then Communist Party Secretary Mikhail Gorbachev. Brown wrote, “All too often the dissolution of the Soviet Union is conflated with the end of Communism and with the end of the Cold War. But the book points out that the Politiburo had ceased to be the ruling body of the USSR in March of 1990 and thus it was “entirely fallacious to speak of either Communism or the Cold War as having ended in December 1991. The transformation of the system was a precondition for the demise of the state, with the latter being an unintended consequence of the former. But these were distinctive, albeit interconnected processes.””

I considered ‘interconnected processes’ when I saw the Compliance Insider, Illustrative Case Study Series, entitled “Supplier Risk Management”, in which The Red Flag Group laid out in a visual format how a company can effectively identify and manage risks in its supply chain. The process is dubbed ‘Report, Review and Improve’ and consists of six steps.

Step 1 – Collect information on the suppliers. This step begins with a review and assessment of your own Vendor Master files to make an initial determination if a new or indeed other supplier is needed. If there is a business justification for bringing the supplier into a commercial relationship with your company, then you should gather performance data on the proposed vendor. The article suggests that a technological solution can help to provide risk-rated questionnaires to facilitate the process by building workflows and approvals directly into your questionnaires.

Step 2 – Validate the collected information. This is the investigative step. You should take the information provided to you by the proposed supplier and test it. You can check on references. You should also engage the supplier directly by interviewing the internal staff of the proposed supplier and review documents and records as appropriate. When necessary, you may also wish to consider the use of outside experts or internal consultants for recommendations or validations. This step should end with the creation of a risk score of the data you have gathered. Here a technological solution can assist by automating your analysis of completed questionnaire with a risk-based scoring of the answers to facilitate the validation process.

Step 3 – Rate the risk of the supplier. This is the analysis step where you should “compare the risks against your complete knowledge of the proposed supplier.” You should also compare your assessed risks against industry data and the risk-rank the proposed supplier or suppliers. A technological solution can also help to crunch large amounts of numbers or other data to give a first pass on your risk-ranking which can be further refined if required.

Step 4 – Implement risk management controls. The article posits that this step should include the conducting of background due diligence and integrity analysis by screening against known watch lists, sanctions lists and those of politically-exposed-persons (PEPs). A technological solution can help this step by managing the request and delivery of due diligence reports, aid in the reviewing, approving and tracking of completed reports and ensure ongoing compliance with automated daily reviews of such lists. Another suggested component of this step is to meet with your internal and external stakeholders to convey expectations. From this point you should be ready to enter the contracting phase, with appropriate compliance terms and conditions. To the extent required, you should also create and manage your compliance policy for the supplier at this stage as well.

Step 5 – Assess and monitor the supplier. In any relationship with a third party in the compliance world, this step is where the rubber hits the road and you have to manage the relationship. The article discusses custom eLearning that can allow you to quickly and efficiently create training programs for your suppliers based upon your compliance regime and not hypothetical training based on legal standards. A technological solution can also assist you in obtaining online certifications to certify that your supplier is in compliance with your company’s business requirements and internal controls. Finally such a solution can help to automate the process going forward to ensure that certification updates are provided, executed and tracked. But more than the ongoing certifications and training, you will need to monitor the transactions you engage in with a supplier. This may entail reviewing a large amount of data through transaction monitoring but it may also entail going to visit a supplier and going through the deep dive of an audit.

Step 6 – Continuous reporting, review and monitoring. All of this information you obtained must be fully documented. Of course, it must be documented to produce to a regulator if the government comes calling. However, this information can also be used to improve the supplier relationship and perhaps even your vendor system. One of the most interesting suggestions was to create a ‘Virtual Data Room’ dedicated to your suppliers. Not only would the creation of such a stored environment enable you to call up information requested by a regulator on short notice, you would also have it in an accessible format for supply chain process improvements. The article suggests trying such techniques as implementing performance incentive programs which can push compliance culture and behavior changes based upon the data you collect. Interesting the clothing company Levi Strauss instituted just such a policy for suppliers in the area of corporate social responsibility, it announcing it earlier this week.

If you do not subscribe to The Red Flag Group’s Compliance Insider publication, I suggest that you do so. It is one of the very best periodicals around on the building blocks of compliance. The six steps it has laid out for process of identifying and managing your supplier compliance risks under the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act demonstrates the thesis of Plokhy’s book reviewed in the TLS; that it is interconnected processes which usually mark change and management. In the case of the former Soviet Union, it may be been drawn by more human factors but there are now a variety of technological tools available to assist your facilitation of this process under any anti-bribery or anti-corruption compliance regime.

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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