FCPA Compliance and Ethics Blog

November 6, 2013

Hardball Negotiation with the SEC and DOJ?

Ed. Note-in light of Avon’s recent disclosures regarding its negotiations to resolve its outstanding FCPA issues, I thought about what a shareholder might say to the Board. Today’s post are those musings…

Memo: The Board of Directors of Avon      

From: An Interested Shareholder

Re: Negotiating with the SEC and DOJ in Public    

Last June I wanted to thank you for communicating so fully with myself and the rest of our shareholding group about your negotiations with the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) over your ongoing Foreign Corrupt Practices Act (FCPA) investigation and what, about now, appears to be leaning towards an enforcement action. I was pleased when it was reported in the FCPA Blog that you low-balled the SEC with your opening offer of $12MM, particularly since our legal and related expenses for the investigation to-date are reported to be in the range of $300MM. You really showed those regulators that you mean to play hard ball and not take anything from them. I had thought that your public posturing would force the SEC and DOJ to come down to your way of thinking.

However, I was a tad dismayed last week when it was reported in another post in the FCPA Blog that you said in an SEC filing this past Thursday that the “Securities and Exchange Commission offered an FCPA settlement last month with monetary penalties that were ‘significantly greater’ than the $12 million the company had offered.” Nevertheless, there was no information as to what the SEC may have offered in a counter proposal to your low ball offer? Do you think it is possible that if you started with such a low ball offer and tried to embarrass the government by making your low ball offer public, this might have caused the regulators to counter-propose a correspondingly high demand in negotiations? Well, I know you have some very good lawyers so I am sure that you considered all of this but did it work out like you planned? I and other inquiring shareholders would like to know.

I understand that this investigation has gone on since 2008 and the company is tired of the legal fees piling up and up. As a shareholder I am certainly tired of this as well, particularly in light of the reported cost of the investigation and related costs in the range of $300MM. Of course I was equally disappointed when the FCPA Blog also noted that “The Wall Street Journal reported in February 2012 that the DOJ had gone to a grand jury with evidence of FCPA violations against U.S. executives at Avon.” As I understand FCPA enforcement, it is the DOJ which enforces the criminal aspects of the FCPA while the SEC enforces things on the civil side. However, I was heartened when you publicly announced in the filing that “Monetary penalties at the level proposed by the SEC staff are not warranted.” That certainly was great information to put out to the public enforcing that you are taking a hardball approach with the SEC and telling them their fines and penalties are not deserved for a company which has gone through all Avon has during this FCPA journey.

But, I have to admit, I have wondered what you hoped to achieve by publicly chastising the SEC and perhaps the DOJ as well. I am sure that you are aware, as was reported in Barrons’ Stocks to Watch blog that “Avon’s (AVP) shares have plunged 20% since the multi-level marketer announced that the government was seeking a much larger-than-expected fine for violating the Foreign Corrupt Practices Act.” If the stock has many more of these 20% drops, how much shareholder value will be left?

The FCPA Blog reported that in the filing last week, you reported, “The DOJ may also seek higher penalties, Avon said, in which case its earnings, cash flow, and ongoing business could be ‘materially adversely impacted.’” Is this adverse impact above and beyond the $300MM in costs, depressed stock price and institutional reputation deflation? Or are we looking at more bad news?

I was somewhat buoyed when the Stocks to Watch piece reported that Morgan Stanley’s Dara Mohsenian, and team, said “For short-term oriented clients, we believe FCPA concerns are over-blown, as our estimated ~$750M market cap impact stemming from FCPA concerns, implies Avon would receive the second largest FCPA fine in history. We view this as unlikely given Avon is a direct seller, and not directly involved in government contract bids, which was the case at each of the top ten historical FCPA fines. In addition, AVP FCPA risk is more pronounced in China around the granting of direct selling licensees; however, Avon’s low China profitability limits the risk of China profit disgorgement.” I guess Mohsenian may not understand that bribing Chinese government officials is bad even if Avon is not a ‘direct seller’ but I will leave that to them. It also gave me pause to wonder if there were other countries where Avon engaged in conduct which violated the FCPA. If so, you certainly have not advised us shareholders of that fact. It might have been relevant to my decision to buy, sell or hold Avon stock, don’t you think?

Since it is not clear from your filings, how did you come up with this $750MM figure? Does that include fines and penalties from both the SEC and DOJ? Do you really think that Avon will set the US company standard for FCPA fines and penalties? If so, the company’s conduct must be much worse than you have disclosed to us shareholders over the past 5 years the investigation has been ongoing. I had thought the US Sentencing Guidelines suggested that companies which engaged in substantive and ongoing remediation would receive credit for those actions. Surely you have created the ‘best in class’ compliance program with the $300MM you have spent?

But don’t worry; if one thing has been made clear since 2008, you sure know what you are doing. Keep up the good work and you don’t have to worry about me joining any shareholder lawsuit against the company for engaging in bribery and corruption…

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

© Thomas R. Fox, 2013

April 6, 2012

Opening Day is Here – Hope and Melancholy for the Astros and Avon

It is finally here, Opening Day for the Houston Astros. Although Major League Baseball (MLB) opened its 2012 season last week in Japan, I will have to go with my hometown team’s home opener as my official day for the new season. So will the Astros improve on their 106-loss season from 2011? We can certainly hope so. On a somewhat melancholy note, it is the Astros final season in the National League (NL) as new owner Jim Crane threw away our 50 year tradition by agreeing to move the Astros to the American League (AL) West next year. Thanks Jim. But hey, we can still lose games to Albert Pujols, when we are up in the 9th by two runs as he left the St. Louis Cardinals for the mega-zillions of Anaheim’s Angels, when he hits yet another 3 run homer with a 0-2 count.

This week in the compliance world we saw a different type of opening or perhaps the beginning of the end, depending on your perspective, involving Avon. The news this week was not specifically focused on its ongoing Foreign Corrupt Practices Act (FCPA) travails but the takeover bid by a much smaller rival, Coty, Inc. As reported in the April 3, edition of both the Wall Street Journal (WSJ), “Scarred Avon is Takeover Target”, and the New York Times (NYT), “Avon Rebuffs Coty, but Its Weakness Shows”, the German-based cosmetics concern, which is “less than half Avon’s size”, publicly announced a $10 billion takeover bid for Avon.

FCPA Costs for Avon

The FCPA travails of Avon have been well reported. In October 2008, Avon publicly announced it was conducting an investigation for possible FCPA violations related to its China operations. This investigation expanded into a world-wide internal investigation, which at this time is still ongoing with no indication of when an enforcement action, if any, will be concluded. Recently the FCPA Professor, in a post entitled “Business Effects”, reported that the “professional fees and expenses incurred by Avon in connection with its internal FCPA review have approached $250 million – and there hasn’t even yet been an enforcement action.  Over the past three years and doing the math, Avon has spent approximately $225,000 per day on its FCPA inquiry.” As reported by the FCPA Blog, in a post entitled “Suit Alleges Avon Execs Knew About China Bribes”, a recent article by Chris Matthews of the WSJ “reported yesterday that an amended shareholder lawsuit accuses Avon Products of paying a big severance to a former head of internal audit in 2006 to buy his silence about bribes in China.”

In addition to this civil shareholder lawsuit, the FCPA Blog noted that “Joe Palazzolo and Emily Glazer at the Wall Street Journal said in February that the DOJ [Department of Justice] had gone to a grand jury with evidence of FCPA violations against U.S. executives at Avon Products. The WSJ story, based on at least three unnamed sources, said the focus of the grand jury was a 2005 internal audit report by the company that concluded Avon employees in China may have been bribing officials.”

In addition to its FCPA issues, Avon has suffered financial setbacks as well since the original FCPA disclosure. The NYT reported that Avon’s “net income has declined every year since 2008.” It has lost significant stock value during this FCPA investigation and has had its credit downgraded. The WSJ article reported that “Prior to Coty’s offer, Avon’s stock had lost about 30% of its value over the past year, and Standard & Poor’s Corp. cut its credit rating on Avon last month to triple-B, two steps above junk, warning it could fall further as the search for a CEO keeps longer-term planning on hold.” This final reference is to Avon’s move to replace it chief executive Andrea Jung, as reported in the NYT article, “has been criticized by analysts recently.”

Successor Liability Issues under the FCPA

As noted by reporter Sam Rubenfeld, in a WSJ article entitled “Buying Avon Could Bring Coty A Hefty Bribery Risk”, the purchasing entity Coty “could be buying a massive foreign bribery liability if a deal to purchase Avon Products Inc. were to close, experts said.” He wrote that “Successor liability in the FCPA context, known by the shorthand of “buying an FCPA violation,” was the subject of six enforcement actions in 2011.” He went on to quote Rita Glavin, a partner at Seward & Kissel LLP who formerly served as head of the Justice Department’s Criminal Division, who said “You buy a company, you buy their problems.”

So what is Coty up to here? I think that they may have come upon an interesting new wrinkle for companies in a FCPA investigation. Not only do companies face what Avon has gone through in terms of the business effects of a huge cost for an internal investigation, drop in stock value and drop in credit rating but now such an all-encompassing investigation could put a company in play for a takeover – hostile or friendly. While the doctrine of successor liability is alive and well, there are potential protections for any purchaser. First and foremost is the fact that it is Avon which has borne these tremendous costs for the investigation. I have no doubt that as a part of the investigation Avon has identified compliance policies and procedures which should be (ahem) enhanced to prevent any violations of the FCPA going forward. Once again it is Avon which is doing this work and not any acquiring company. In addition to these costs which the acquiring company does not have to incur, the value of Avon is well down, although just how much due to the FCPA investigation may not be quantified at this point, it does not change the fact that its value is significantly lower. Hence any purchase price will be at a reduced amount perhaps even a greatly reduced amount.

Coty Options on Successor Liability Issue

As to the issue of successor liability, I think that Coty can look to different DOJ pronouncements for some comfort. The first is Opinion Release 08-02 (the “Halliburton Opinion Release”) in which the DOJ blessed a go-forward plan proposed by Halliburton, to accomplish due diligence in a post-acquisition mode. The second is found in the Johnson and Johnson (J&J) Deferred Prosecution Agreement (DPA), in Attachment D, “Enhanced Compliance Obligations.” With regard to the acquisition context, it agreed to:

7. J&J will ensure that new business entities are only acquired after thorough FCPA and anticorruption due diligence by legal, accounting, and compliance personnel. Where such anticorruption due diligence is not practicable prior to acquisition of a new business for reasons beyond J&J’s control, or due to any applicable law, rule, or regulation, J&J will conduct FCPA and anticorruption due diligence subsequent to the acquisition and report to the Department any corrupt payments, falsified books and records, or inadequate internal controls as required by … the Deferred Prosecution Agreement.

8. J&J will ensure that J&J’s policies and procedures regarding the anticorruption laws and regulations apply as quickly as is practicable, but in any event no less than one year post-closing, to newly-acquired businesses, and will promptly: For those operating companies that are determined not to pose corruption risk, J&J will conduct periodic FCPA Audits, or will incorporate FCPA components into financial audits.

a. Train directors, officers, employees, agents, consultants, representatives, distributors, joint venture partners, and relevant employees thereof, who present corruption risk to J&J, on the anticorruption laws and regulations and J&J’s related policies and procedures; and

b. Conduct an FCPA-specific audit of all newly-acquired businesses within 18 months of acquisition.

Mike Volkov, writing in his blog, Corruption, Crime and Compliance, in a post entitled “Buying an FCPA Violation: Successor Liability is Alive and Well”, provided the following advice for companies to steer clear of successor liability under the FCPA in an acquisition context:

1.  A pre-closing risk assessment needs to be updated for post-closing risks.

2.  Compliance triage teams need to be assembled and tasks prioritized.  If more resources are needed, this needs to be arranged at or near the time of closing.  Compliance triage teams must have authority and resources to bring an acquired company into the fold.

3.  Compliance triage teams need to work post-acquisition to ensure proper controls and compliance programs are adequately implemented in those high-risk areas and businesses.

4.  Compliance training of new employees and agents has to be a high priority.  It is surprising how many companies fail to even conduct basic training, updating of codes of conduct and basic steps to integrate new employees and agents.

From Opinion Release 08-02, the J&J DPA and Mike Volkov’s thoughts, I believe that Coty could well put together a plan to deal with Avon’s FCPA issues and the DOJ based upon precedent, a strong commitment towards compliance going forward and Coty’s extraordinary cooperation with the DOJ to make all of this work. Although the NYT and WSJ both reported that Avon’s management rejected the Coty offer, if Coty can convince enough Avon shareholders to accept the offer the Avon shareholders might be inclined to consider such an offer at this point.

But it’s Opening Day and my bride and I are off to Minute Maid Park to watch the hometown heroes play the Colorado Rockies tonight. Is the start of this 2012 a harbinger of good things to come for the Astros? Only time will tell. As for Avon, its FCPA travails may have helped to put it in play and Coty may have figured out how to use one company’s FCPA issues as a springboard to a major acquisition. Maybe the new normal for companies in large FCPA investigations/enforcement actions is that they find themselves as take-over candidates. Only time will tell.

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

© Thomas R. Fox, 2012

June 27, 2011

Silver Lining to the FCPA or How to Create Jobs by Following the Law

As most baseball fans know, the Houston Astros, after being tied with the Boston Red Sox through the first six games of the season with joint 0-6 records, the teams have gone their separate ways. The Red Sox have gone 44-25 and now lead the American League East. The Astros have gone 27-43 and now have the worst record in baseball. I mention this for two reasons; the first is that the Red Sox come to Houston for a 3 game set of Interleague Play, beginning July 1, so please wish us some luck as we will need it; and the second is the stunning triumvirate of articles which appeared Friday and Saturday in the Wall Street Journal (WSJ) and New York Times (NYT) pointing out the positives of the Foreign Corrupt Practices Act (FCPA). For those of you keeping score at home; it was two in the WSJ and one in the NYT.

Even at this point I cannot pronounce which of the three articles was more stunning for they all had aspects which have not been previously seen in print; that is, at least not in print in America’s top two newspapers.

I.                WSJ-Defense of the FCPA

One thing I had not expected to see in the WSJ was any type of defense of the FCPA. On Friday, June 24, reporter John Bussey wrote an article entitled, “The Rule of Law Finds Its Way Abroad-However Painfully.” He began his article by noting the internal investigation that Avon is currently conducting regarding possible violations of the FCPA and that Avon has spent over $100 million on this internal investigation to-date.

However, Bussey, quite quickly, moved into one of the positive aspects of the FCPA. He stated:

The silver lining? The FCPA—passed in 1977 and still controversial with many U.S. companies—may be proving more effective than any other U.S. initiative in extending the rule of law into developing markets. For all its warts, the rules are changing the often lawless marketplace abroad.

He went on to report  that while the US was initially a leader in enacting anti-bribery and anti-corruption legislation, many other countries have now passed similar legislation. Many US companies operate  internationally and “now heavily vet their potential suppliers, partners and acquisitions abroad and have extensive training and compliance programs on the FCPA. U.S. business groups from Egypt to Singapore to China run briefings on the law.” Further many US companies are now the “greatest proselytizers” of rules and regulations against corruption and bribery across the globe.

He also reported that the FCPA is having an effect on the world-wide fight against corruption and bribery. Jeffrey Eglash, a lawyer for GE was quoted as stating, “It’s having an impact, and vendors and suppliers increasingly adopt our policies and embrace our training.” Alexandra Wrage stated that what may have been acceptable conduct in the past, regarding bribery to obtain business, was no longer acceptable, “If a Wal-Mart or General Electric or Pfizer can convey to tens of thousands of partners, suppliers, distributors and other intermediaries world-wide that antibribery compliance is valued, the norms would change.”

II.             WSJ-Alcoa Speaks

In a second article on Friday, June 24, in the WSJ online edition, entitled “Alcoa Exec Says Business Leaders Should Stick Up For The FCPA”. Alcoa Vice President for Sustainability and Environment, Health and Safety, Bill O’Rourke, was quoted in remarks he made to the Carnegie Council roundtable earlier this month, on a question about the importance of having these anti-corruption rules, such as in the FCPA, in place and the interest of America in having anti-corruption and anti-bribery laws in place globally. O’Rourke stated in part:

It’s myopic for the business leaders not to take a stance. Business is in a position now to make more of an influence on how the world is run than we have taken. Business needs to stand up and take positions, and not be afraid to. They should be standing up and taking these positions. It’s even in their own self-interest to have those rules in place to protect us when we are in certain jurisdictions and we can point to them. That could be self-interest.

But it’s the right thing to do. It’s myopia that is going on in an awful lot of corporate practices—that this might hurt me or my image might get distorted because of that. It’s just the opposite. Your image might get raised a little bit if you start speaking out on the right issues.

O’Rourke provided a concrete example of how the FCPA had helped Alcoa in Russia when faced with numerous solicitations for bribes from towns Alcoa was transporting equipment through. Alcoa simply said they would not pay. It told the Russian federal government that if it wanted Alcoa’s business, which included its modern equipment to refurbish aging Russian factories, that Alcoa would not pay bribes to transport Alcoa equipment on trucks through Russia. He said the Alcoa approach worked because the company was “sticking to our guns.” The people in Russia realized that it was a benefit to do business with Alcoa and that they would make money the old fashioned way-by earning it.

III.           NY Times – Tyson Foods – Why No Prosecution of Individuals?

Taking a somewhat different approach, and certainly a different view, was James Stewart, writing in the Saturday, June 25 edition of the NYT in an article entitled, “Bribery, but Nobody Was Charged”. In this article, Stewart detailed conduct not only violative of the FCPA in Tyson Food’s Mexican food processing facility but also detailed discussions internal to Tyson about ways to shift the illegal payments after they were initially discovered.

Stewart reported that Tyson Foods’ Mexican food processing facility was paying the wives of the Mexican food inspector as if they were employees while they did no work at the facility. After this was discovered, a “group of executives ‘were tasked with investigating how to shift the payroll payments to the veterinarians’ wives directly to the veterinarians,’ according to a subsequent statement of facts negotiated by Tyson’s lawyers and the Department of Justice (DOJ). Stewart then wrote that a subsequent memo written by Tyson’s audit department concluded that the “doctors [the wives] will submit one invoice which will include the special payments formally [sic] being made to their spouses along with there [sic] normal consulting services fee.” The invoices would be identified as “professional honoraria.” Stewart found this conduct by Tyson to be one of “only finding a new way” to make the same payments which violated the FCPA. Stewart did name some of the Tyson Foods’ executives involved in the meetings detailed in the above events:

  1. President of Tyson International Operation – Gregg Huett
  2. Vice President for Operations
  3. Vice President for Internal Audit
  4. Chief Administrative Officer – Greg Lee

Stewart reported that when he contacted Tyson Foods’, a company spokesman told him that all company officials involved with this matter were “either no longer with the company or were disciplined.” I certainly hope those folks who engaged in or approved any bribery scheme were terminated.

IV.            The Upshot

What is the upshot of these three articles and how do they relate to the Astros and Red Sox? Just as the Red Sox have clearly turned their season around by getting back to their strengths, the FCPA has many strong, positive aspects which were not discussed in the recent House Judiciary Committee hearings on FCPA enforcement. In contrast to last year’s Senate hearings, neither Chairman Sensenbrenner nor any of the other House panel members seemed concerned about the lack of individual prosecutions under the FCPA. Stewart’s article clearly names some of the Tyson Foods’ executives who were involved in the decisions around the company’s conduct which was found to violate the FCPA but none of the named individuals were charged.

However, it was the two WSJ articles which seemed to most directly contradict the thesis that the House Republicans were trying to articulate; that somehow the DOJ’s enforcement of the FCPA is costing US companies jobs. It is not the FCPA which costs US companies jobs, but the failure of other countries to adopt and enforce the Rule of Law which allows companies from other foreign countries to engage in bribery and corruption which causes US companies to lose business. Both Bill O’Rourke of Alcoa and several persons interviewed by John Bussey for his article pointed out the positive benefits of the FCPA and how it allows US companies to lead the world into a stance of greater rejection of corruption and bribery to successfully secure and transact business.

Indeed, the Alcoa example is one precisely anticipated by the legislators who enacted the FCPA. In the Preamble to the FCPA, one of the reasons listed for its enactment is that by having such robust anti-corruption legislation in place, US companies could more easily resist the demand for payment of bribes by corrupt foreign officials. One of the guiding principles of a robust FCPA compliance and ethics business program for a US company is to have a Code of Business Ethics which prohibits bribery and other forms of corruption of foreign governmental officials and most US companies doing business internationally have such a Code in place. These Codes uniformly cite FCPA inspired language which prohibits such conduct. This enables a US company employee transacting business overseas to correctly and accurately state that his or her employer specifically prohibits the payment of bribes and engaging in corruption. Such a strong statement of US policy, when delivered by an individual employee, may be the strongest manifestation of the goal of this final prong listed in the Preamble to the FCPA; a tangible business reason, why a US company must not, cannot, and will not engage in corruption of a foreign official.

The House Committee also focused the alleged loss of jobs by US companies due to the FCPA. Just imagine how many jobs that Avon could have created if it had not engaged in “possible” FCPA violations and did not have to spend north of $100 MM to internally investigate these “possible” FCPA violations. Even Tyson Foods, with a scorecard of no individual prosecutions for self-admitted violations, could have used some of its reported $5.2MM in fines and penalties paid to the DOJ and Securities and Exchange Commission (SEC) to create jobs. So maybe the answer to job creation is not to amend the FCPA but that US companies should do as DOJ witness Greg Andres stated at the House hearing and not engage in bribery.

Alas the Astros have now become the first team to reach the 50 loss mark in the Major Leagues this year. Unfortunately it does not appear that the Astros have such strong basics to a fall back on this year so the only way the Astros may relate to this discussion of the FCPA is to conclude that we may only be able to enjoy the show the rest of the year.

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

© Thomas R. Fox, 2011

December 28, 2010

Top FCPA Investigations of 2010, Part I

Last week, we reviewed our Top 10 Enforcement actions of 2010. In the next two posts we will review our Top 10 investigations of 2010. While enforcement actions can provide the some of the DOJ/SEC most current thinking on FCPA compliance best practices the public information made available during investigations can provide to the FCPA, Bribery Act or other compliance professional many opportunities for teaching points and lessons learned by others. So with the opportunity for many educational occasions in mind we present our favorite investigations of 2010, Part I. 

1. Avon-What is the cost of non-compliance?

As noted by the FCPA Professor, one of the significant pieces of information to come out of the Avon matter is the reported costs as reported in the 2009 Annual Report the following costs have been incurred and are anticipated to be incurred in 2010: 

Investigate Cost, Revenue or Earnings Loss
Investigative Cost (2009) $35 Million
Investigative Cost (anticipated-2010) $95 Million
Drop in Q1 Earnings $74.8 Million
Loss in Revenue from China Operations $10 Million
Total $214.8 Million

 2. Gun Sting Case-Organized Crime Fighting Techniques Come to FCPA Enforcement 

On January 18, 2010, on the floor of the largest annual national gun industry trade show in Las Vegas, 21 people from military and law-enforcement supply companies were arrested, with an additional defendant being later arrested in Miami. The breadth and scope was unprecedented. Assistant Attorney General for the Criminal Division of the US Department of Justice (DOJ), Lanny Breuer, who led the arrest team, described the undercover operation as a “two-and-a-half-year operation”. The arrests represented the largest single investigation and prosecution against individuals in the history of the DOJ’s enforcement of the FCPA. 

As explained in the indictments, one FBI special agent posed “as a representative of the Minister of Defense of a country in Africa (Country A), [later identified as Gabon] and another FBI special agent posed “as a procurement officer for Country A’s Ministry of Defense who purportedly reported directly to the Minister of Defense”. Undercover criminal enforcement techniques such as wire taps, video tapes of the defendants and a cooperating defendant were all used in the lengthy enforcement action. In a later indictment, and seemingly unrelated to the “Africa” part of this undercover sting operation, allegations were included that corrupt payments were made to the Republic of Georgia to induce its government to purchase arms. 

3. HP-Questions, Questions and More Questions 

How does one begin to discuss HP’s compliance year? From FCPA to Mark Hurd’s very public departure for (alleged) sexual harassment to the recent announcement, reported in the WSJ, that the SEC is investigating Hurd in, ‘a broad inquiry that includes an examination of a claim the former chief executive officer shared inside information.” However we will focus on the FCPA matter which involves the alleged payment of an approximately $10.9 bribe to obtain a $47.3 million computer hardware contract with the Moscow Prosecutor’s Office. 

In an April 15, 2010, WSJ article, Mr. Dieter Brunner, a bookkeeper who is a witness in the probe, said in an interview that he was surprised when, as a temporary employee of HP, he first saw an invoice from an agent in 2004. “It didn’t make sense,” because there was no apparent reason for HP to pay such big sums to accounts controlled by small-businesses such as ProSoft Krippner, Mr. Brunner said. Mr. Brunner then proceeded to say he processed the transactions anyway because he was the most junior employee handling the file, “I assumed the deal was OK, because senior officials also signed off on the paperwork”.

Why didn’t HP self report? 

The WSJ article reported that by December 2009, German authorities traced funds to accounts in Delaware and Britain. In early 2010, German prosecutors filed a round of legal-assistance requests in Wyoming, New Zealand and the British Virgin Islands, hoping to trace the flow of funds to new sets of accounts. Further, HP knew of the German investigation by at least December 2009, when police in Germany and Switzerland presented search warrants detailing allegations against 10 suspects. The New York Times, in an article dated April 16, 2010, reported that three former HP employees were arrested back in December 2009 by German prosecutors. Although it was unclear from the WSJ article as to the time frame, HP had retained counsel work with prosecutors in their investigation. Apparently, since the SEC only announced it had joined the German and Russian investigation last week, HP had not self-disclosed the investigation or its allegations to the US Department of Justice (DOJ) or SEC. 

Where were the SEC and DOJ? 

On April 16, 2010, the FCPA Professor wondered in his blog if it was merely coincidence that a few weeks ago the US concluded a Foreign Corrupt Practices Act (FCPA) enforcement action against the Daimler Corporation, an unrelated German company, for bribery and corruption in Russia and now it is German and Russian authorities investigating a US company for such improper conduct in Russia. The Professor put forward the following query: is such an investigation “Tit for tat or merely a coincidence?” And much like Socrates, he answered his own question with the musing “likely the later”. The WSJ LawBlog noted in its entry of April 16, 2010, that it would be somewhat unusual for the DOJ or SEC to stand by and watch European regulators conduct a sizable bribery investigation of a high-profile US company; phrasing it as “It’s like asking a child to stand still after a piñata’s been smashed open”.

In September, the WSJ reported that the HP bribery probe has widened and HP, itself, has announced that investigators have “now expanded their investigations beyond that particular transaction.” This original investigation pertained to an investigation of allegations that HP, through a German subsidiary, paid bribes to certain Russian officials to secure a contract to deliver hardware into Russia. The contract was estimated to be worth approximately $44.5 million and the alleged bribes paid were approximately $10.9 million. In a 10-Q filing made with the SEC, HP stated that the investigation has now expanded into transactions “in Russia and in the Commonwealth of Independent States sub region dating back to 2000.” The WSJ noted that US public companies, such as HP, are only required to report FCPA investigations in SEC filings if they “are material for investors.” 

4. Team Inc.- no de minimis exception in FCPA.  

As reported by the FCPA Professor, in August 2009, Team disclosed that an internal investigation conducted by FCPA counsel “found evidence suggesting that payments, which may violate the Foreign Corrupt Practices Act (FCPA), were made to employees of foreign government owned enterprises.” The release further noted that “[b]ased upon the evidence obtained to date, we believe that the total of these improper payments over the past five years did not exceed $50,000. The total annual revenues from the impacted Trinidad branch represent approximately one-half of one percent of our annual consolidated revenues. Team voluntary disclosed information relating to the initial allegations, the investigation and the initial findings to the U.S. Department of Justice and to the Securities and Exchange Commission, and we will cooperate with the DOJ and SEC in connection with their review of this matter.” 

There is no de minimis exception found in the FCPA there are books and records and internal control provisions applicable to issuers like Team. Thus, even if the payments were not material in terms of the company’s overall financial condition, there still could be FCPA books and records and internal control exposure if they were misrecorded in the company’s books and records or made in the absence of any internal controls. 

In its 8K, filed on January 8, 2010, Team reported “As previously reported, the Audit Committee is conducting an independent investigation regarding possible violations of the Foreign Corrupt Practices Act (“FCPA”) in cooperation with the U.S. Department of Justice and the Securities and Exchange Commission. While the investigation is ongoing, management continues to believe that any possible violations of the FCPA are limited in size and scope. The investigation is now expected to be completed during the first calendar quarter of 2010. The total professional costs associated with the investigation are now projected to be about $3.0 million.” 

So the FCPA Professor posed the question: 

A $3 million dollar internal investigation concerning non-material payments made by a branch office that represents less than one-half of one percent of the company’s annual consolidated revenues?” 

And his answer: “Wow!” 

In August, 2010, when disclosing its interim financial results for this year, Team reported, “The results of the FCPA investigation were communicated to the SEC and Department of Justice in May 2010 and the Company is awaiting their response. The results of the independent investigation support management’s belief that any possible violations of the FCPA were limited in size and scope. The total professional costs associated with the investigation were approximately $3.2 million.” 

So $50,000 in (possibly) illegal payments equate to over $6 million investigative costs, so far. 

5. ALSTOM-Arrests in the Board Room. 

As reported by the FCPA Blog, the UK Serious Fraud Office reported in dramatic fashion the arrest of three top executives of French industrial giant ALSTOM ‘s British unit. The three ALSTOM Board members were suspected of paying bribes overseas to win contracts. The SFO Press Release stated that “[t]hree members of the Board of ALSTOM in the UK have been arrested on suspicion of bribery and corruption, conspiracy to pay bribes, money laundering and false accounting, and have been taken to police stations to be interviewed by the Serious Fraud Office.” 

According to the release, search warrants were executed at five ALSTOM businesses premises and four residential addresses. The operation, involving “109 SFO staff and 44 police officers” is code-named “Operation Ruthenium” and centers on “suspected payment of bribes by companies within the ALSTOM group in the U.K.” According to the release, “[i]t is suspected that bribes have been paid in order to win contracts overseas.” 

ALSTOM released a statement which said: 

Several Alstom offices in the United Kingdom have been raided on Wednesday 24 March by police officers and some of its local managers are being questioned. The police apparently executed search warrants upon the request of the Swiss Federal justice. Alstom has been investigated by the Swiss justice for more than 3 years on the motive of alleged bribery issues. Within this frame, Alstom’s offices in Switzerland and France have already been searched in the past years. Alstom is cooperating with the British authorities. 

While not an FCPA investigation, this is one of the first cases where arrests were made of Board members. With the April 1 implementation date for the UK Bribery Act, we would anticipate a much more robust and aggressive enforcement by the UK SFO. 

We are indebted to our fellow bloggers, the FCPA Blog and the FCPA Professor for providing up to date and excellent reviews of many of the Top 10 investigations of 2010. If you did not review their sites daily in 2010, you should do so in 2011. 

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, 2010

July 14, 2010

TOP 3 FCPA CASES OF 2010 PART II-(DING DONG) AVON CALLING

This is the second installment of our three part series on the Top 3 Foreign Corrupt Practices Act (FCPA) matters of 2010 to date and their significance for the FCPA compliance professional. In Part I we focused on the Gun Sting matter. Now we turn our attention to the Avon bribery scandal in China. 

As early as October 2008, Avon reported, in a Statement of Voluntary Disclosure, that it was investigating an internally reported allegation by an undisclosed whistleblower that corrupt payments had been made in its China operations. These allegations claimed that certain travel, entertainment and other expenses may have been improperly incurred. Although the details of the Avon case have not been disclosed, direct selling was not allowed in China under a law passed in 1998. The National Law Review reported that Avon was able to secure permission in late 2005 to begin direct selling on a limited basis. Later the Chinese government issued direct-selling regulations and granted Avon a broader license in February 2006 to make such sales.

In its 2009 Annual Report, Avon noted that the internal investigation and compliance reviews, which started in China, had now expanded to its operations in at least 12 other countries and was focusing on reviewing “certain expenses and books and records processes, including, but not limited to, travel, entertainment, gifts, and payments to third-party agents and others, in connection with our business dealings, directly or indirectly, with foreign governments and their employees”. The FCPA Professor, citing the Wall Street Journal, reported that Avon suspended four employees, including the

President, Chief Financial Officer and top government affairs executive of Avon’s China unit as well as a senior executive in New York who was Avon’s head of Internal Audit.

 One of the significant pieces of information to come out of the Avon matter is the reported costs as reported in the 2009 Annual Report the following costs have been incurred and are anticipated to be incurred in 2010:

Investigate Cost, Revenue or Earnings Loss
Investigative Cost (2009) $35 Million
Investigative Cost (anticipated-2010) $95 Million
Drop in Q1 Earnings $74.8 Million
Loss in Revenue from China Operations $10 Million
Total $214.8 Million

Marketwatch also reported that after these additional investigations were made public Avon’s stock prices fell by 8%. Lastly, in addition to the above direct and anticipated costs and drop in stock value, the ratings agency Fitch has speculated about the possibility of a drop in Avon’s credit ratings. In a June 1 Press Release, Fitch noted that not only could the above listed investigative costs come out of Avon’s ordinary cash flow, thereby putting a strain on the company, but that Fitch would expect companies such as Avon to make every effort to comply during an agreed upon deferred prosecution period with the Department Of Justice (DOJ) given the severity of an indictment. 

An indictment for FCPA violation(s) would be viewed as ‘Event Risk’, a term used by Fitch to describe the risk of a typically unforeseen event to the analyst which, until the event is explicit and defined, is excluded from existing ratings. An indictment would be an externally triggered event that would generate a rating review based on materiality and impact. 

But what does all of this mean for the Chief Compliance Officer sitting in his office in the US? It should mean quite a bit. There are several lessons from which you can learn and immediately implement in your FCPA compliance program if you have not previously done so. 

But what does all of this mean for the Chief Compliance Officer sitting in his office in the US? It should mean quite a bit. There are several lessons from which you can learn and immediately implement in your FCPA compliance program if you have not previously done so. 

1.     Who is a “foreign governmental official”? China poses a major challenge for US companies trying to comply with the law. The DOJ has consistently interpreted the FCPA as extending to any employee working for a state-owned business. Further, in a communist country, the DOJ has taken this interpretation a step further by opining that all employees are state employees and therefore a foreign governmental official. This means that from top to bottom, all persons in China are covered by the proscriptions of the FCPA. This interpretation has never been tested in a US court but it puts the broad swaths of the Chinese economy directly under the FCPA. Couple this with the pressure felt by foreign companies to sponsor trips by Chinese regulators, who do not seem to be shy in asking for perquisites, and you have a situation which is ripe for a FCPA violation. 

2.     Travel, Gifts and Entertainment under the FCPA. The FCPA includes an affirmative defense for payments to officials related directly to “the promotion, demonstration, or explanation of products or services” that are “reasonable and bona fide” 15 U.S.C. §§ 78dd-1(c)(2)(A) and 78dd-2(c)(2)(A). That defense is loaded with uncertainty and very difficult for companies to safely use. It may well be that Avon provided trips to the US for the Chinese Regulators with regulatory oversight for Avon’s China operations, or gifts and entertainment which did not fall under the FCPA exemption. If so, the FCPA compliance professional should review the company policy on such matters.  

3.     Internal Enforcement of Company FCPA Compliance Policy. One of the employees suspended was the (former) head of Internal Audit. In addition to a strong FCPA compliance policy, a company should continually monitor its compliance program, through a strong internal audit program, to use  as a first line of defense to not only prevent FCPA violations before they occur but also detect FCPA compliance violations.  

A key ‘best practices’ FCPA compliance program component is to utilize internal audit to monitor for FCPA compliance issues on a regular basis to not only assess compliance but to also identify anything which warrants further investigation. Taken a step further, a continuous controls monitoring program can assist a company to identify unusual expenses, budgeted items, or any other event which is outside an established norm and Red Flag such expense, item or event for further investigation.

All of the facts of the Avon matter should be carefully studied by the Chief Compliance Officer of any company doing business in China. The case stands for the proposition that a company should not only have a robust FCPA compliance policy in place but that it must continually monitor the policy to ensure compliance.

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, 2010

May 3, 2010

What is the Cost of FCPA Compliance? Or what is the cost of non-compliance?

How do you measure the cost of poor performance? In the baseball world how do you measure the cost of the Houston Astros abysmal April and equally poor start in May, which is projected to lead to a 50-108 season record? One measure is the number of people who pay to come out to the ballpark. As reported in the May 2nd edition of the Houston Chronicle, the Astros home attendance is down 2,640 which translates into a per game revenue loss of up to $660,000. That works out to a full season loss of revenue of up to $5,436,000. This, of course, assumes that the drop in attendance is based directly on poor performance and not other factors such as the drop in disposable income due to the economy or some other factor. But is this the sole measure of the Astros loss?

In the Foreign Corrupt Practices Act (FCPA) world, there can be a more direct relationship of the costs to a violation or even an investigation. For instance, a former investigation into a Nigerian bribery case involving bribe payments of up to $132 million could lead to fines and disgorgement penalties of more than $1.2 billion. (For a more complete discussion, see blog posting here.) These fines and penalties do not include any costs for investigations, legal or accounting fees, other professional fees or drop in stock value associated with an investigation.

All of this brings us to ‘Ding Dong Avon Calling’ and the bribery probe of its China operations. As reported by Aruna Viswanatha, in MainJustice, on April 30 and Ellen Byron, in the Wall Street Journal, on May 1, Avon has reported its costs for the alleged scandal which has engulfed the company. The investigation has now expanded from China to four other (unidentified) business units. CEO Andrea Jung is reported as saying, in an April 30 conference call with investors, “No conclusions can be drawn at this time,” regarding the investigations. However, what Avon did report is some of its FCPA investigative costs to date, anticipated FCPA investigative costs, loss of revenue in China and loss in first-quarter earnings.

The expenses, both anticipated and occurred to date, and their earnings loss box score is as follows (to-date): 

Investigate Cost, Revenue  or Earnings Loss  
Investigative Cost (2009) $35 Million
Investigative Cost (anticipated-2010) $95 Million
Drop in Q1 Earnings $74.8 Million
Loss in Revenue from China Operations $10 Million
Total $214.8 Million

While the amount of the alleged bribery, or other corruption, has not yet been reported, MainJustice reported that the investigation is looking into “travel, entertainment, and gift expenses”. It is difficult to believe that the $$ value of the bribes are anywhere close to the above mentioned investigation cost, revenue or earnings loss. The WSJ reported that Avon will overhaul its approach to sales in China, moving towards a direct selling approach, over the next 18 months. This certainly sounds like Avon is moving away from agents and distributors, the bane of many other US companies doing business abroad.

The WSJ also reported that the Avon investigation has expanded into its business practices in countries “selected to represent” each of its overseas regions. With slightly less than three-quarters of Avon’s overall company revenue coming from outside the US, it may well be that the Department of Justice (DOJ) will want a more comprehensive review of the company’s business practices worldwide, rather than simply “selected” business practices in “selected” countries. If I were Avon, I know I would want to do so, if not for the DOJ, but for my company.

How do you measure the cost of FCPA compliance? Put another way, can your company afford not to be FCPA compliant? What will the costs be if there are allegations of bribery and corruption in your company? Will the investigative costs exceed $100 million as they may well do in Avon’s case? Will your fine, penalty and any profit disgorgement exceed $550 million as happened with Halliburton or simply be in the $330-$340 million range as with its former Joint Venture partners? If you agree to a Corporate Monitor what will be that cost? As reported by Chris Matthews, in MainJustice on March 18, 2010, US District Judge Ellen Segal Huvelle raised the following spectre regarding Corporate Monitors during the Innospec Deferred Prosecution Agreement (DPA) and guilty plea hearing:

It’s an outrage, that people get $50 million to be a monitor,” Huvelle said during a hearing in Washington, D.C., to approve a guilty plea for Innospec Inc., an international specialty chemicals company with nearly 1,000 employees. “I’m not comfortable, frankly, signing off on something that becomes a vehicle for someone to make lots of money.”

This could lead to an Avon Box Score of costs which could read:

Cost Amount
Pre-DPA Investigative Costs $95 million???
Pre-DPA Revenue and Earnings Loss $84 million???
Penalty and Profit Disgorgement $100 million???
Monitor Cost $50 million???
Total How Many Hundreds of $$$ Millions?

So will the Astros lose 108 this year or is there something they can do about it. Equally important, what will be the cost to your company for FCPA (non) compliance and are you willing to risk it…or are you willing to do something to prevent it.

For a clip of a classic “Ding Dong, Avon Calling” TV commercial, 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, 2010

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