The FCPA Guidance on the Ten Hallmarks of an Effective Compliance Program

Many commentators are still mining the Department of Justice (DOJ)/Securities and Exchange Commission (SEC) publication, A Resource Guide to the U.S. Foreign Corrupt Practices Act, (the “Guidance”), which was released last November. I continue to find nuggets to provide to the compliance practitioner, as do others. But as we are a Base 10 culture, today I want discuss the 10 points listed as the ‘Hallmarks of Effective Compliance Programs”. They are a change in style, but not content, from the prior 13 point minimum best practices that the DOJ has in the Deferred Prosecution Agreements (DPAs) since at least November, 2010 and, indeed, from prior information made available by the DOJ.

I.                   Where Have We Been

Beginning with at least the Metcalfe & Eddy Consent and Undertaking, filed in December, 1999, the DOJ has laid out its thoughts on what should go into a Foreign Corrupt Practices Act (FCPA) anti-corruption compliance program. In the Metcalfe & Eddy Consent and Undertaking, the DOJ laid out ten points of an effective FCPA anti-corruption compliance program. This was modified somewhat in Opinion Release 04-02, which laid out a best practices compliance program in 12 points, where the DOJ reviewed the proposal by an investment group who were acquiring certain companies and assets from ABB Ltd. ABB Vetco Gray Inc. and ABB Vetco Gray (UK) Ltd., two of the entities being acquired, had previously pled guilty to FCPA violations. The investment group desired to protect itself from further liability, to the extent possible, by proposing to the DOJ a comprehensive best practices compliance program. While the DOJ noted that this compliance program was not a shield against future violations, the DOJ would not “intend to take an enforcement action [against the investors] for violations of the FCPA prior to their acquisition from ABB.”

In the Panalpina DPA, issued in November, 2010, the DOJ laid out a 13 point minimum best practices compliance program. This number was changed this past summer when the Data Systems & Solutions LLC (DS&S) DPA was announced. In this enforcement action the DOJ listed 15 points on its minimum best practices FCPA anti-corruption compliance program. Then later in the summer, the DOJ moved to a 9 point compliance program in the Pfizer DPA. Even with all these changes in the number, the substance of each compliance program has remained the same.

II.                Where Are We Now? Hallmarks of Effective Compliance Programs

The Guidance cautions that there is no “one-size-fits-all” compliance program. It recognizes that depending on a variety of factors such as size, type of business, industry and risk profile that a company should determine what is appropriate for its own needs regarding a FCPA compliance program. But the Guidance makes clear that these ten points are “meant to provide insight into the aspects of compliance programs that DOJ and SEC assess”. In other words you should pay attention to these and use this information to assess your own compliance regime.

1. Commitment from Senior Management and a Clearly Articulated Policy Against Corruption. It all starts with tone at the top. But more than simply ‘talk-the-talk’ company leadership must ‘walk-the-walk’ and lead by example. Both the DOJ and SEC look to see if a company has a “culture of compliance”. More than a paper program is required, it must have real teeth and it must be put into action, all of which is led by senior management. The Guidance states that “A strong ethical culture directly supports a strong compliance program. By adhering to ethical standards, senior managers will inspire middle managers to reinforce those standards.” This prong ends by stating that the DOJ and SEC will “evaluate whether senior management has clearly articulated company standards, communicated them in unambiguous terms, adhered to them scrupulously, and disseminated them throughout the organization.”
2. Code of Conduct and Compliance Policies and Procedures. The Code of Conduct has long been seen as the foundation of a company’s overall compliance program and the Guidance acknowledges this fact. But a Code of Conduct and a company’s compliance policies need to be clear and concise. The Guidance makes clear that if a company has a large employee base that is not fluent in English such documents need to be translated into the native language of those employees. A company also needs to have appropriate internal controls based upon the risks that a company has assessed for its business model. Some of the risks a company should assess include “the nature and extent of transactions with foreign governments, including payments to foreign officials; use of third parties; gifts, travel, and entertainment expenses; charitable and political donations; and facilitating and expediting payments.”
3. Oversight, Autonomy, and Resources. This section starts with a discussion on whether a company has assigned a senior level executive to oversee and implement a company’s compliance program. Not only must a company assign such a person with appropriate authority but that person, and the overall compliance function, must have “sufficient resources to ensure that the company’s compliance program is implemented effectively.” Additionally, the compliance function should report to the company’s Board of Directors or an appropriate committee of the Board such as the Audit Committee. Overall the DOJ and SEC will “consider whether the company devoted adequate staffing and resources to the compliance program given the size, structure, and risk profile of the business.”
4. Risk Assessment. The Guidance states that “assessment of risk is fundamental to developing a strong compliance program”. Indeed, if there is one over-riding theme in the Guidance it is that a company should assess its risks in all areas of its business. The Guidance lists factors that a company should consider in any risk assessment. They are “the country and industry sector, the business opportunity, potential business partners, level of involvement with governments, amount of government regulation and oversight, and exposure to customs and immigration in conducting business affairs.” The Guidance is also quite clear that when the DOJ and SEC look at a company’s overall compliance program, they “take into account whether and to what degree a company analyzes and addresses the particular risks it faces.”
5. Training and Continuing Advice. Communication of a compliance program is a cornerstone of any anti-corruption compliance program. The Guidance specifies that both the “DOJ and SEC will evaluate whether a company has taken steps to ensure that relevant policies and procedures have been communicated throughout the organization, including through periodic training and certification for all directors, officers, relevant employees, and, where appropriate, agents and business partners.” The training should be risk based so that those high risk employees and third party business partners receive an appropriate level of training. A company should also devote appropriate resources to providing its employees with guidance and advice on how to comply with their own compliance program on an ongoing basis.
6. Incentives and Disciplinary Measures. This involves both the carrot and the stick. Initially the Guidance notes that a company’s compliance program should apply from “the board room to the supply room – no one should be beyond its reach.” There should be appropriate discipline in place and administered for any violation of the FCPA or a company’s compliance program. Additionally, the “DOJ and SEC recognize that positive incentives can also drive compliant behavior. These incentives can take many forms such as personnel evaluations and promotions, rewards for improving and developing a company’s compliance program, and rewards for ethics and compliance leadership.” These incentives can take the form of a part of senior management’s bonuses or simply recognition on the shop floor.
7. Third-Party Due Diligence and Payments. Here the Guidance focuses on the ongoing problem area of third parties. The Guidance says that companies must engage in risk based due diligence to understand the “qualifications and associations of its third-party partners, including its business reputation, and relationship, if any, with foreign officials.” Next a company should articulate a business rationale for the use of the third party. This would include an evaluation of the payment arrangement to ascertain that the compensation is reasonable and will not be used as a basis for corrupt payments. Lastly, there should be ongoing monitoring of third parties.
8. Confidential Reporting and Internal Investigation. This means more than simply a hotline. The Guidance suggests that anonymous reporting, and perhaps even a company ombudsman, might be appropriate to have in place for employees to report allegations of corruption or violations of the FCPA. Furthermore, it is just as important what a company does after an allegation is made. The 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.” The final message is what did you learn from the allegation and investigation and did you apply it in your company?
9. Continuous Improvement: Periodic Testing and Review. As noted in the Guidance, “compliance programs that do not just exist on paper but are followed in practice will inevitably uncover compliance weaknesses and require enhancements. Consequently, DOJ and SEC evaluate whether companies regularly review and improve their compliance programs and not allow them to become stale.” The DOJ/SEC expects that a company will review and test its compliance controls and “think critically” about its own weaknesses and risk areas. Internal controls should also be periodically tested through targeted audits.
10. Mergers and Acquisitions. Pre-Acquisition Due Diligence and Post-Acquisition Integration. Here the DOJ and SEC spell out what it expects in not only the post-acquisition integration phase but also in the pre-acquisition phase. This pre-acquisition information is not something that most companies had previously focused on. Basically, a company should attempt to perform as much substantive compliance due diligence that it can do before it purchases a company. After the deal is closed, an acquiring entity needs to perform a FCPA audit, train all senior management and risk employees in the purchased company and integrate the acquired entity into its compliance regime.

As I commented earlier in this article, the DOJ and SEC have communicated what they believe are the important parts of a risk based, anti-corruption compliance program for many years. I do not think that a compliance defense could be set out any more succinctly. However, I do like things set out in Base 10 and the “Hallmarks of Effective Compliance Programs” is an excellent compilation of where we are and what you need in place to go forward. I recommend this as a good a starting point for any compliance practitioner to implement a new compliance program or to evaluate the state of an ongoing compliance regime so assess your company’s risks and use these hallmarks as a basis to move forward.

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

© Thomas R. Fox, 2013

Internal Audit Review of Charitable Donations Under the FCPA

When is a rose not a rose? When it is a charitable donation not made for philanthropic purposes and it violates the Foreign Corrupt Practices Act (FCPA). I thought about that concept when reviewing the Eli Lilly and Company (Lilly) FCPA enforcement action brought by the Securities and Exchange Commission (SEC) late last month. The Lilly enforcement action discussed a bribery scheme utilized by Lilly in Poland. The scheme and FCPA violations mirrored an earlier FCPA enforcement action, also brought by the SEC as a civil matter, rather than by the Department of Justice (DOJ) as a criminal matter, against another US entity Schering-Plough, for making charitable donations in Poland which violated the FCPA. One of the remarkable things about both of these enforcement actions, brought almost eight years apart, was that they involved improper payments to the same Polish charitable foundation to wrongfully influence the same Polish government official to purchase products from both of these companies.

I.                   The Bribery Schemes

Both companies were involved in negotiations for the sale of products with the Director of the Silesian Health Fund (Health Fund). He had also established a charitable foundation, the Chudow Foundation to engage in restoration of ancient castles in Poland. Both companies made donations to the Chudow Foundation at or near the time decisions were made regarding the purchase of their respective products by the Health Fund. The FCPA books and records violations for the donations stated that they were all mischaracterized on the respective company’s books. The donations were made by each company with the description for the donations as follows:

LILLY BOX SCORE OF DONATIONS MADE TO CHUDOW FOUNDATION

	Date	Amount of Donation	Listed Reason for Donation
1	6/21/2000	$2,730	Purchase of computers
2	11/13/2000	$1,855	To support the foundation in its goal to develop activities in [Chudow Castle]. It was also noted that the ‘value of the request’ was indirect support of educational efforts of foundation settled by Silesian [Health Fund]
3	5/22/2001	$8,019	Rental of castle for conferences
4	11/05/2001	$2,438	Rental of castle for conferences
5	3/27/2002	$7,779	Rental of castle for conferences
6	6/14/2002	$7,434	Rental of castle for conferences
7	11/20/2002	$5,112	Rental of castle for conferences
8	1/29/2003	$2,622	Rental of castle for conferences
	Total	$37,989

Although all of these donations were approved by a team within Lilly, the “Medical Grant Committee [MGC]”, who reviewed the request for such donations, the MGC’s approval was “largely based on the justification and description in the submitted paperwork.” While Requests 1 & 2 may have had tangential value to the stated purpose of the Chudow Foundation to restore castles in Poland, even Request 3 was clearly a quid pro quo as an action to obtain business. Just as clearly, ‘rental of castle’ is not a charitable donation but an expenditure, even with that understanding, the SEC Complaint noted that Lilly held no conferences at any castles so it was an outright misrepresentation.

SCHERING-PLOUGH BOX SCORE OF DONATIONS MADE TO CHUDOW FOUNDATION

	Date	Amount of Donation	Listed Reason for Donation
1	2/23/1999	$777	Covering fight against viral hepatitis
2	3/17/2000	$4,909	Support of health campaign within county of Gliwice
3	7/19/2000	$8,065	Financing second stage of health prevention campaign in Gliwice
4	11/8/2000	$8,766	Financing for the Foundation
5	12/20/2000	$9,292	Financing second stage of research
6	3/19/2001	$4,340	Financing lung cancer prevention program
7	3/22/2001	$4,854	Financing screening examinations to detect skin cancer
8	4/25/2001	$4,958	Support of lung cancer prevention program
9	6/4/2001	$5,019	Support of lung cancer prevention program
10	10/29/2001	$4,878	Support of a coronary disease prevention program and promote the image of the company in the medical community
11	12/18/2001	$10,067	Support of an anti-chain smoking health program and promote the company as one that cares about the people of Silesia
12	12/19/2001	$5,067	Financing of Foundation
13	3/25/2002	$4,868	Support actions of Foundation in preventing infectious diseases of the liver
	Total	$75,860

The Schering-Plough SEC Complaint noted that the company Manager involved in the payment scheme, “provided false medical justifications for most of the payments on the documents that he submitted to the company’s finance department.” Additionally, he structured the payments so that they were at or below his approval limit so that he did not have to ask for permission to make the improper payments. The Manager in question viewed the donations as “dues that were required to be paid for assistance from the Director.”

II.                The Red Flags for Charitable Donation

 a.     Schering-Plough

What were the factors which should become red flags for the review of charitable donations under the FCPA? The Schering-Plough SEC Complaint listed several items which it deemed indicia of red flags.

1.      No due diligence. The first is that no due diligence was performed on the charity to identify the Director of the Silesian Health Fund as the founder or his role in the Chudow Foundation.

2.      Donations not related to health care. While the company permitted donations to healthcare related programs there was no follow up to determine the purposes or uses of the donated funds.

3.      Outside normal range of donation. The next red flag was that the donations made to this single charitable foundation approximately 40% of the company’s promotional budget in 2000 and 20% in 2001.

4.      Disproportionate sales. The company’s sales increased disproportionately compared with its own sales of the same products in other areas of Poland. Up to 53% of one product was sold in the region run by the Director of the Silesian Health Fund.

b.  Lilly

The Lilly SEC Complaint listed several items which it deemed indicia of red flags.

1.      No due diligence. Once again there was no due diligence performed on the charity to identify the Director of the Silesian Health Fund as the founder or his role in the Chudow Foundation.

2.      Donations not related to health care. Unlike Schering-Plough, the reasons listed for the charitable donations did not relate to health care. Moreover, they were approved by a Lilly committee specifically tasked with reviewing such requests failed to investigate beyond the submitted paperwork, which was apparently not correct.

3.      Outside normal range of donation. The SEC Complaint quoted an email from a Lilly manager who said that he had decided to commit 70-75% of the [charitable donation] budget and the Director of the Silesian Health Fund was given a “free hand to manage the Lilly investment, emphasizing the fact we only doing this for him…”

4.      Suspicious Timing. The donations were made at or near the time that decisions on the purchase of Lilly products were made by the Director of the Silesian Health Fund. One donation was made two days are the Director of the Silesian Health Fund agreed to make a purchase of Lilly products.

Here Lilly used charitable donations to a charitable foundation which was, as stated in the SEC Complaint, “founded and administered by the head of one of the regional government health authorities at the same time that the subsidiary was seeking the official’s support for placing Lilly drugs on the government reimbursement list.” There were a total of eight payments made to the charitable foundation. In addition to the charitable donations made, Lilly “falsely characterized the proposed payments”. Lilly had a group which reviewed the request for such donations called the “Medical Grant Committee [MGC]” which approved the payments “largely based on the justification and description in the submitted paperwork.”

III.       The Role of Internal Audit

Jon Rydberg, Principal of Orchid Advisors, has categorized the Lilly situation as one of a failure of internal controls. I would add that there was also a failure of internal audit. What does internal audit need to review in the context of charitable donations under the FCPA? Internal audit needs to start with the DOJ FCPA Guidance regarding charitable donations. Internal audit should begin by asking the following five initial questions:

(1)   What is the purpose of the payment?

(2)   Is the payment consistent with the company’s internal guidelines on charitable giving?

(3)   Is the payment at the request of a foreign official?

(4)   Is a foreign official associated with the charity and, if so, can the foreign official make decisions regarding your business in that country?

(5)   Is the payment conditioned upon receiving business or other benefits?

Next internal audit should make inquiries based upon the DOJ Opinion Releases issued regarding charitable donations. Some of the protections a company can do to comply with the FCPA regarding charitable donations are as follows:

1)      Have the donation recipients certified that they or the entity will comply with the requirements of the FCPA;

2)      Has the recipient provided audited financial statements; and

3)      Has the recipient restricted the use of the donated funds to humanitarian or charitable purposes only;

4)      Were the funds transferred to a valid bank account; and

5)      Ongoing auditing and monitoring of the efficacy of the charitable donation program.

Based upon the Schering-Plough and Lilly SEC enforcement actions, there are some additional inquiries that internal audit should make, they are as follows:

a.      What was the timing of the charitable donation or promise to make a donation in relation to the obtaining or retaining of business?

b.      Did the company follow its normal protocol for requesting, reviewing and making a charitable donation or is there a pattern of unusual donations outside the protocol?

c.       Did any one person make multiple donations just below their authority level so that it did not have to go up the line for review?

d.      Was the total amount donated to one charitable foundation out of proportion to the rest of the country or region’s charitable donation budget?

e.       Did the sales in one area, region or country spike after a pattern of charitable donations?

The information on the red flags from the prior Opinion Releases and the best practices, as set out in the FCPA Guidance, have been available for some time. I think that the information found in both the Schering-Plough and Lilly enforcement actions have a different focus for internal audit. In addition to looking at the timing of charitable donations to see if they are at or near the time of the awarding of new or continued business, I think that internal audit may now need to look at overall increases in sales to determine if they are tied to a pattern of charitable donations. I once heard my colleague Henry Mixon explain how the award of a contract may be the product of fraud or corruption. By looking at the timing and quantum of charitable donations, internal audit may be able to ascertain that a spike in sales is tied to corrupt conduct. This may not be something that is on the current radar of auditors when they review charitable donations, but may now be something they need to consider.

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

From China to Poland and Brazil-The Lilly FCPA Enforcement Action- Part II

In Parts II and III of my review of the Eli Lilly and Company (Lilly) Foreign Corrupt Practices Act (FCPA) enforcement action brought by the Securities and Exchange Commission (SEC), I will discuss some the processes and procedures which you can use in your Foreign Corrupt Practices Act (FCPA) or UK Bribery Act compliance program which should enable you to prevent or detect FPCA violations, similar to those Lilly sustained, as discussed in Part I of these blog posts on the Lilly enforcement action. Today, in Part II, I will discuss the FCPA issues that Lilly faced in China, Brazil and Poland.

As it is a New Year, I would like to start out with listing Paul McNulty’s Three Maxims regarding the effectiveness of a FCPA compliance program. I have been privileged to hear Paul speak many times for several years. These Maxims were the questions he posed to companies when he was in his role as the United States Deputy Attorney General. First, what did you do to prevent it? Second, what did you do to detect it? Third, what did you do to remedy it?

With the McNulty Maxims in mind, Lilly got into FCPA hot water for using four different styles of bribery schemes in four separate countries. In China, the corruption involved employees and bribery payments which were falsely labeled as reimbursement of expenses. In Brazil, the corruption involved a distributor which received a larger than normal discount for Lilly products. The additional revenues generated from this discount were used to pay a bribe. In Poland, the corruption involved charitable donations which were falsely labeled in Lilly’s books and records. These charitable donations were used to induce a Polish government official to approve the purchase of Lilly products; and, finally, Lilly’s subsidiary in Russia, paid bribes to Offshore Agents who were domiciled outside Russia and who performed no services for the compensation they received.

I.                   China

According to the SEC Complaint, in China the FCPA violations centered around various sales representatives who submitted false expense reports to cover bribes which were paid or their supervisors who instructed them to do so. The SEC Complaint noted that although the dollar amounts for the gifts provided to Chinese officials “generally small, the improper payments were wide-spread throughout the [Chinese] subsidiary.” To prevent such actions, a company must train its employees about the requirements of the FCPA, or any other relevant anti-corruption law, regarding what is and is not allowed under such laws. A company must then follow up to monitor and audit such activities. In a sales model which is employee based, internal audit must review the expense reports of its sales representatives as they represent the highest risk of corruption.

II.                Brazil

In Brazil, Lilly used the distributor model to market its drugs through third-party distributors who then resold these products to public and private entities. As noted by Matt Ellis, in his post entitled “Eli Lilly’s Distributor in Brazil: The Non-Obvious FCPA Risk”, the discounts that distributors typically receive from manufacturers such as Lilly can be problematic under the FCPA because “enforcement officials can see these discounts as potential “loose money” that can be used for bribe payments. This is especially the case when the distributor is engaging in other activities on behalf of the producer, like marketing, licensing, and customs clearance.” This was the situation that Lilly found itself in as the standard range of discounts given to distributors was “between 6.5% and 15%, with the majority of distributors in Brazil receiving a 10% discount” but in early 2007, at the request of a Lilly sales manager, the company awarded an unusually high discount of between 17% and 19% to a distributor for the sale of a Lilly drug to the government of one of the states of Brazil. The distributor used approximately 6% of this additional discount to create a fund to pay Brazilian government representatives to purchase the Lilly drugs from him.

a.      Prevent

In the area of prevent, the SEC Complaint noted the following “Lilly-Brazil’s pricing committee approved the discounts without further inquiry. The policies and procedures in place to flag unusual distributor discounts were deficient.” Lastly, as stated by Ellis, “It noted that the company relied on representations of the sales and marketing manager without adequate verification and analysis of the surrounding circumstances of the transactions.” Indeed Kara Brockmeyer, the SEC’s chief FCPA enforcer, stated in the SEC Press Release announcing the matter:

Eli Lilly and its subsidiaries possessed a “check the box” mentality when it came to third-party due diligence. Companies can’t simply rely on paper-thin assurances by employees, distributors, or customers. They need to look at the surrounding circumstances of any payment to adequately assess whether it could wind up in a government official’s pocket.

All of this means that if a discount is outside the normal range typically given to a distributor, a red flag is raised as to why the increased discount was allowed. Simply basing a management decision on the representations of a sales manager is not a sufficient mechanism to clear such a red flag.

b.         Detect

From the detect prong, internal audit needs to follow up with ongoing monitoring and auditing. Internal audit can be used to help determine the reasonableness of a commission rate outside the accepted corporate norm. Further, as noted by Jon Rydberg, of Orchid Advisors, in an article entitled “Eli Lilly’s Remedial Efforts for FCPA Compliance – After the Fact”, the company should be “implementing compliance monitoring and corporate auditing specifically tailored to anti-corruption” for the distributor sales model.

III.             Poland

Here Lilly used charitable donations to a charitable foundation which was, as stated in the SEC Complaint, “founded and administered by the head of one of the regional government health authorities at the same time that the subsidiary was seeking the official’s support for placing Lilly drugs on the government reimbursement list.” There were a total of eight payments made to the charitable foundation. In addition to the charitable donations made, Lilly “falsely characterized the proposed payments”. Lilly had a group which reviewed the request for such donations called the “Medical Grant Committee [MGC]” which approved the payments “largely based on the justification and description in the submitted paperwork.”

a.      Prevent

From the prevent prong, it is clear that if the MGC had adequately reviewed the donation request, it would have determined that the charitable foundation was administered by the same person making the decision over the sale of Lilly products. Indeed, the largest request was made just two days after the government decision maker authorized a large purchase of Lilly products. The SEC Complaint also noted that of there were different corporate justifications for the eight requests for the charitable donations made. So, as noted by Rydberg, there was a failure of corporate governance and financial controls. In its FCPA Guidance, the Department of Justice (DOJ) lists five questions which a company should ask when considering a charitable donation. They are: (1) What is the purpose of the payment? (2) Is the payment consistent with the company’s internal guidelines on charitable giving? (3) Is the payment at the request of a foreign official? (4) Is a foreign official associated with the charity and, if so, can the foreign official make decisions regarding your business in that country? (5) Is the payment conditioned upon receiving business or other benefits?

b.      Detect

From the detect prong, there are several things which can be incorporated into a FCPA compliance program regarding charitable donations. The DOJ has issued several Opinion Releases on charitable donations and based on Opinion Release 10-02, some of the protections a company can do to comply with the FCPA regarding charitable donations are as follows:

1)      Certifications by the recipient that it will comply with the requirements of the FCPA;

2)       Due diligence to confirm that none of the recipient’s officers or directors are affiliated with the foreign government at issue;

3)      A requirement that the recipient provide audited financial statements;

4)      A written agreement with the recipient restricting the use of funds to humanitarian or charitable purposes only;

5)      Steps to ensure that the funds were transferred to a valid bank account;

6)      Confirmation that contemplated activities had occurred before funds were disbursed; and

7)      Ongoing auditing and monitoring of the efficacy of the program.

These protections allow an audit trail which can be monitored or audited by the company’s audit team.

Tomorrow I will take a look at Lilly’s FCPA violations in Russia and use that information to set forth some minimum best practices which you can use in your compliance program to help you both prevent, detect and then FCPA compliance violations.

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

The Lilly FCPA Enforcement Action Part I – Key Lessons Learned on Sportsmanlike Conduct

As you see from today’s picture I am enthusiastically wearing a New England Patriots (classic) shirt. You may ask yourself why am I wearing this shirt? The reason is because of a rather rash wager I made with Jay Rosen, Vice President of Merrill Brink, earlier this month on the Patriots/Texans football game. (I also made the same wager with Matt Kelly, Editor of Compliance Week, who says he will use the photo for marketing Compliance Week 2013, good luck with that!) I can’t quite seem to remember the final score but I do recall that it was what we in Texas might call a full ‘butt-whoopin’. Up until that game, the Patriots were 19-1 at home in the month of December over the past ten years, after beating the Texans, they became 20-1. The key lesson I learned from this experience is to evaluate your risk and then manage that risk accordingly.

Earlier this month, the Securities and Exchange Commission (SEC) announced the settlement of the Eli Lilly and Company’s (Lilly) violations of the Foreign Corrupt Practices Act (FCPA). The enforcement action details a number of bribery schemes that Lilly had engaged in for many years in multiple countries. Indeed Lilly used four different styles of bribery schemes in four separate countries; all of which violated the FCPA. In China, corrupt payments were falsely called reimbursement of expenses; in Brazil, money that was characterized as a discount for distributor was used to pay a bribe; in Poland, charitable donations were falsely labeled and used to induce a Polish government official to approve the purchase of Lilly products; and, finally, Lilly’s subsidiary in Russia, paid bribes to Offshore Agents who were domiciled outside Russia and who performed no services for which they were compensated.

I think the most noteworthy information found in this enforcement action is that it provides significant guidance to the compliance practitioner on not only the different types of bribery schemes used, but more importantly, by reading into the types of conduct the DOJ and SEC finds violates the FCPA, it is valuable as a lesson on how to structure tools to manage FCPA risks going forward. In this post I will detail the bribery schemes that Lilly engaged in and in Part II, I will discuss how the Lilly enforcement action should inform your FCPA compliance program.

I.                   China – Use of False Expense Reports to Cover Improper Gifts and Cash Payments

In China, Lilly employees used the classic system of submitting inflated expense reports and using the excess reimbursements to pay bribes. More ominously, not only did the sales representatives engage in this tactic but their supervisors did and also instructed subordinates to do so as well. The list of gifts that were provided to Chinese government officials was as wide ranging as it was creative. There were gifts consisting of specialty foods, wines and a jade bracelet. There were paid trips to bath houses, karaoke bars and spas. There was money paid to purchase “door prizes and publication fees to government employed physicians.” It was even noted that bribes were paid consisting of cigarettes. In the SEC complaint it stated that “Although the dollar amount of each gift was generally small, the improper payments were wide-spread across the [China] subsidiary.”

II.                Brazil – Use of Distributor Discounts to Fund Bribes

In Brazil, Lilly sold drugs to distributors who then resold the products to both public and private entities. It was the classic distributor model where Lilly sold the drugs to the distributors at a discount and then the distributors would resell the products “at a higher price and then took their discount as compensation.” There was a fairly standard discount given to the distributors which generally ranged “between 6.5% and 15%, with the majority of distributors in Brazil receiving a 10% discount.”

However in early 2007, at the request of a Lilly sales manager, the company awarded an unusually high discount of between 17% and 19% to a distributor for the sale of a Lilly drug to the government of one of the states of Brazil. The distributor used approximately 6% of this additional discount to create a fund to pay Brazilian government representatives to purchase the Lilly drugs from him. Further, the Lilly sales manager who requested this unusual discount was aware of the bribery scheme. Moreover, this increase in the discount was approved by the company with no further inquiry as to the reason for the request or to substantiate the basis for such an unusually high discount. If there were any internal controls they were not followed.

III.             Poland – Use of Charitable Donations to Obtain Sales of Drugs

In Poland we see our old friend the Chudow Castle Foundation (Foundation). You may remember this charity as it was the subject of a prior SEC enforcement action involving Schering-Plough Corporation. The thing that got both Lilly and Schering-Plough into trouble was that the Foundation was controlled by the Director of the Silesian Health Fund (Director) and with this position he was able to exercise “considerable influence over the pharmaceutical products local hospitals and other health care providers in the region purchased.”

Just how did this bribery scheme camouflaged as a charitable donation work? Initially it started while Lilly was in negotiations with the Director for the purchase of one of Lilly’s cancer drugs for public hospitals and other health care providers in the region. The Director actually made a request for a donation directly to representatives of Lilly. Thereafter, the Foundation itself made “subsequent requests” for donations.

In addition to this obvious red flag, Lilly did no due diligence on the Foundation and falsely described the nature of the payments not once but three separate times with three separate descriptions. Lilly turned some of the monies over not to the Foundation, but to the Director for use at his “discretion”. Interestingly, the donations were not only made at or near the time of a contract execution, with one donation being made two days after the Director authorized the purchase of the drugs from Lilly.  Internally Lilly even discussed the size of a donation, calling it a “rebate” and said “it will depend on the purchases of medicines.”

IV.              Russia – Use of Offshore Agents Who Performed No Services

As with Brazil, Lilly used a distributor sales model in Russia. However, there was a further twist which got Lilly into FCPA hot water. Lilly would enter into an agreement with a third party other than the distributor who was selected by the government official making decisions on the purchase of Lilly products. The other third parties were usually not domiciled in Russia, nor did they have bank accounts in Russia. In other words, they were Offshore Agents who were paid a flat fee or percentage of the total sales with no discernible work or services performed.

There was little to no due diligence performed on these Offshore Agents. In one instance, detailed in the SEC Complaint, Lilly ran a Dun and Bradstreet report on a third party agent, coupled with an internet search on a third party domiciled in Cyprus. There was no determination of the beneficial ownership of this Offshore Agent nor was there any determination of the business services which this Offshore Agent would provide, subsequently this . This Offshore Agent was paid approximately $3.8MM. An additional  Offshore Agent, again in Cyprus, which Lilly conducted little to no due diligence on, received a $5.2MM commission. Under another such agreement, yet another Cypriot Offshore Agent received a commission rate of 30% of the total sale.

What about the services that these Offshore Agents provided to Lilly? First and foremost, they all had their own special “Marketing Agreement” which was actually a template contract prepared by Lilly. The services allegedly provided by these Offshore Agents included “immediate customs clearance” or “immediate delivery” of the product. There were other equally broad and vague descriptions such as “promotion of the products” and “marketing research”. But not only was there little if no actual evidence that these Offshore Agents provided such services; Lilly, or its regular in-country distributors, actually performed these services.

Unlike their experience in Poland, officials from Lilly simply inquired directly from government officials with whom it was negotiating if it could “donate or otherwise support various initiatives that were affiliated with public or private institutions headed by the government officials or otherwise important to the government officials.” As noted in the SEC Complaint, Lilly had neither the internal controls in place nor performed any vetting to determine whether it “was offering something of value to a government official for the purpose of influencing or inducing him or her to assist Lilly-Vostok in obtaining or retaining business.”

In my next post I will discuss how the compliance practitioner can use the information and facts presented in the Lilly enforcement action as teaching points to evaluate and enhance a company’s compliance program.

Although I rarely agree with Peggy Noone, I always read her Saturday column in the Wall Street Journal (WSJ) and would like to end my blogging year with the closing paragraph, which I quote in full, from her article entitled “About Those 2012 Political Predictions”:

Lesson? For writers it’s always the same. Do your best, call it as you see it, keep the past in mind but keep your eyes open for the new things of the future. And say what you’re saying with as much verve as you can. Life shouldn’t be tepid and dull. It’s interesting—try to reflect the aliveness in your work. If you’re right about something, good. If you’re wrong, try to see what you misjudged and figure out why. And, always, “Wait ’til next year.”

A safe and Happy New Year to all.

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

Race to the Bottom: Wal-Mart’s FCPA Investigation and the Houston Astros

So who do you think had the better day – the Houston Astros Monday or Wal-Mart Tuesday? Yesterday, the Astros announced the signing of Carlos Pena to be their Designated Hitter (DH) for the 2013 season. Pena’s 2012 average – a whopping ‘buck ‘97’; Yes sports fans the Astros have signed a DH who hit below the dreaded Mendoza Line for the past season. How is that for a strong opening move as the Astros move to the most talented Division in baseball? Anyone out there have the smallest inking that the Astros are ‘racing to the bottom’?

Nevertheless the Astros DH move probably pales with the PR debacle that Wal-Mart is facing today as the New York Times (NYT) once again, with superior reporting, had a story, entitled “The Bribery Aisle How Wal-Mart Used Payoffs To Get Its Way in Mexico”, above the fold on its front page on alleged bribery and corruption engaged in by Wal-Mart’s Mexico subsidiary. Reporters David Barstow and Alejandra Xanic von Bertrab did extensive research to find out not only the alleged amounts of bribes paid but also to whom, and the benefits that Wal-Mart allegedly received back in return.

Wal-Mart Bribery Box Score – (alleged) all scores courtesy of NYT

Store Type and Site	Number of Alleged Bribe Payments Made	Amount of Alleged Bribes USD
Sam’s Club in Mexico City	19	$341,000
Refrigeration Distribution Center north of Mexico City	9	$765,000
Wal-Mart in Teotihuάcan	4	$221,000

Teotihuάcan Store Bribery Box Score – (alleged) all scores courtesy of NYT

Purposed of Bribe	Person(s) Bribed	Amount USD
Obtain altered Zoning Map	Director of Urban Planning	$52,000
Obtain waiver of approved traffic plan.	In State Agency that regulates roads	$25,900
Town approval for store construction, where permits not in place.	Mayor and Town Council	$114,000
Obtain waiver to build at cultural heritage site, where no investigation performed.	In National Institute of Anthropology and History (NIAH)	(up to) $81,000

So reviewing the types of activity that fall under the Facilitation Payment exception to the US Foreign Corrupt Practices Act (FCPA) we find the following:

… “shall not apply to any facilitating or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action . . .”

The recent Department of Justice (DOJ) Guidance on the FCPA included a list of actions which are ordinarily and commonly performed by a foreign official and would fall within the definition of a facilitation payment. Also remember that the facilitation payment only applies for a “non-discretionary governmental action”.

• obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country;
• processing governmental papers, such as visas and work orders;
• providing police protection, mail pickup and delivery, or scheduling inspections associated with contract performance or inspections related to transit of goods across country;
• providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products or commodities from deterioration; or
• actions of a similar nature.

Of course all proper facilitation payments must be recorded as facilitation payments. Further, as stated in the Guidance, “Whether a payment falls within the exception is not dependent on the size of the payment, though size can be telling, as a large payment is more suggestive of corrupt intent to influence a non-routine governmental action. But, like the FCPA’s anti-bribery provisions more generally, the facilitating payments exception focuses on the purpose of the payment rather than its value.” Based upon the facts set forth in the NYT article, it does not appear that the payments made were ‘non-discretionary’ or were not made without corrupt intent.

Are there any examples, either in Opinion Releases, enforcement actions, DOJ pronouncements or anything else that the payments by Wal-Mart were legal under the FCPA? I would have to give a resounding NO to my own question. The FCPA Professor did cite to three Opinion Releases in his post yesterday, entitled “Wal-Mart Again On The Front Page Of The New York Times”. They dealt with charitable donations under the FCPA and one of the alleged payments made in the Teotihuάcan Store Bribery, the payment to the National Institute of Anthropology and History (INAH) was alleged, in part, to be a charitable donation. However, in each one of the three Opinion Releases cited there were donations made with post-donation auditing of the use of the cash to ensure the money was used as specified and other protections to ensure compliance with the FCPA. The donations were also made with transparency and not, as reported by the NYT, “Sergio Raúl Arroyo, the director general of INAH, recalled in an interview that Ms. Miró had told him about Wal-Mart’s offer. He could not recall any other instance of a company offering a donation while it was seeking a permit. “That would have been totally irregular,” he said.”

So, as the FCPA Professor also noted in his piece, “from an FCPA perspective, the issues largely remain the same.” From the factual perspective, he may well correct. However, what may have changed is the conversation. The NYT piece shows just how invidious a culture of bribery and corruption can be and how such a culture can subvert local governments and even national cultural heritage protections.

Another interesting issue raised by the NYT article is the investigation of the underlying facts. As reported by the FCPA Blog, in a piece entitled “Wal-Mart’s latest FCPA disclosure (December 2012)”, in its Form 10-Q filed with the Securities and Exchange Commission (SEC) by Wal-Mart Stores, Inc. on December 4, Wal-Mart state the following,
“The Company has incurred expenses of approximately $48 million and $99 million during the three and nine months ended October 31, 2012, respectively, related to these matters.” In other words Wal-Mart has spent a pretty penny since the original NYT article in April. Recognizing that not all of these monies were dedicated solely the Mexico investigation, I would still pose the following question, “How is it that two intrepid reporters from the NYT were able to piece together this story and Wal-Mart was not able to do so when confronted with allegations of bribery and corruption in its Mexican subsidiary?” Lastly is the effect that this story may have on the DOJ. Given the criticism that the DOJ sustained in the wake of the HSBC Deferred Prosecution Agreement (DPA) for its money-laundering conduct, will the Department feel compelled to attempt to prosecute individuals in this case? How about the fine? What does the DOJ try and communicate when the world’s largest retailer is alleged to have engaged in such conduct? What about those licenses, if they were indeed obtained by bribery and corruption, should they still be valid?

So who will win this race to the bottom? I can say that it appears Wal-Mart is trying to get its house in order. It has hired a new Chief Compliance Officer (CCO), created new compliance positions around the globe and put on extensive FCPA compliance training. It may take other steps to help to remedy the predicament it now finds itself in. As for the Astros, I had always thought that DH stood for Designated Hitter…

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

A Modern [Fractured] Fairy Tale – Challenges under the FCPA in Africa

For anyone growing up in the 1960s one of the best TV cartoon shows was Rocky and Bullwinkle. As I grew older I came to appreciate the reason for this which was that the show was written for adults so that most of the satire was timeless. It still holds up today, especially if you understand the cultural references. There were other short segments, in addition to the main characters, one of which was entitled “Fractured Fairy Tales” featuring a satirical look at classic fairy tales. So with that inspiration in mind, today we present a fractured fairy tale of some of the challenges which face US companies doing business in Africa in complying with the Foreign Corrupt Practices (FCPA) or UK Bribery Act. In a later post, I will provide some guidance to the issues raised in today’s post.

Ed. Note. The following is a fictional tale and any resemblance to a person or persons living or dead is purely coincidental.

Hello. I wanted to clear up some misconceptions that you might have regarding doing business in my country. We are a small country population wise but we are rich in resources. It should not surprise you then to find out that the educated business elites of our country often work with and for our government’s interests. What is wrong with that? I am a patriot and I always look out for my country’s interests. If I get rich along the way, what is the harm? Surely there is no corruption in that?

Of course I have heard about the FCPA and the Bribery Act. But after all, they are your laws, not ours, so really they are your problem aren’t they? There is no corruption when you pump some of your profits back into the local economy is there? If there is how will my people ever overcome the great poverty we have endured? Do you want to keep us down economically? If I ask you to make a donation to a charity, which my wife runs, that is good for my country, what is wrong with me asking you to do that? It is also proper that I can help guide my wife in her decisions about where to spend the money donated. Surely there is no corruption in that?

I see nothing wrong in having a Swiss bank account. Everyone knows that Switzerland has the safest banking system in the world. Do you really believe that it is my fault I have made lots of money and that I have a desire to protect it from the ravages of inflation? I recently read about the people of Greece who are taking money out of their banking system and moving it to a more safe location. Surely there is no corruption in that? And what about your US Presidential Candidate, didn’t I read that once he and his wife had Swiss bank accounts? Why do you claim that it raises a “Red Flag” with me but not so with him?

I think it only decent and appropriate that you have a local business partner when dealing with my country. We want to empower our locals and the best way to do that is if you partner with local companies. Simply because I may happen to own an interest in the local business partner, is no reason not to do business with it. I am very serious in the fight against poverty for my country and I cannot think of a better way to do so than to have a local partner. Surely there is no corruption in that?

Yes, you sent a form for the local partner to fill out listing all of its owners, but it is not their fault that they don’t know who owns them; frankly they do not need to know. You really can’t expect me to know all of the businesses in which I own an interest in? There are just too many. Surely there is no corruption in that?

All I am asking you to do is to help my people. Do you want them to go hungry for the whole world to see? I don’t think that you do. That is why you should keep giving power and money to our local citizens. It is you taking our wealth; I see no reason why we should not benefit, even if it is for me and my friends. Surely there is no corruption in that?

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

Wynn Casinos and Charitable Donations under the FCPA

The recent events surrounding Wynn Casinos and its now former director, Kazuo Okada, have almost been breath-taking in their family feud nature. Indeed in an article in the March 2, 2012 edition of the Wall Street Journal (WSJ), entitled “The Family Feud That Could Cost Combatants Billions”, reporter John Bussey called it the “slug-it-out-divorce” by Steve Wynn from his former partner, Okada. Wynn provided the opening salvo in this battle of titans by summarily booting Okada off the Wynn Casino Board of Directors and “forcibly cashed out” his stake in the company, all for alleged violations of the Foreign Corrupt Practices Act (FCPA).

However, Okada appears to have fired back a FCPA-based salvo of his own. In the same edition of the WSJ, another article reported on Wynn Casinos and another potential FCPA violation. It involved a gift of $135 Million by Wynn Casinos to a foundation which supports the University of Macau. The article on this donation was entitled “Macau School Ties Roil Wynn Resorts” and was co-authored by Kate O’Keefe and Alexandra Berzon. They reported that Okada had gone to a Nevada state court to request an order that Wynn Casinos “give him access to documents tied to the donations.” One of the reasons Okada detailed in his court request was to determine if the gift by Wynn Casinos to the University of Macau was “an appropriate use of corporate funds.”

I would also ask whether the gift was proper under the FCPA. There is not much definitive guidance for charitable donations under the FCPA. I have summarized the available information as follows.

I.                   Opinion Releases

There have been four Opinion Releases in the area of charitable donations under the FCPA. In each Opinion Release, the Department of Justice (DOJ) indicated that it would not initiate prosecutions based upon the fact scenarios presented to it.

A. 95-01

This request was from a US based energy company that planned to operate a plant in

South Asia, in an area where was no medical facility. The energy company planned to donate $10 million for equipment and other costs to a medical complex that was under construction nearby. The donation would be made through a US charitable organization and a South Asian LLC.

The energy company stated it would do three things with respect to this donation.

1. Before releasing funds, the energy company said it would require certifications from the officers of all entities involved that none of the funds would be used in violation of the FCPA.
2. It would ensure that none of the persons employed by the charity or the LLC were affiliated with the foreign government.
3. The energy company would require audited financial reports detailing the disposition of the funds.

B.   97-02

This request was from a US based utility company that planned to operate a plant in

Asia, in an area where there was no primary-level school. The utility company planned to donate $100,000 for construction and other costs to a government entity that proposed to build an elementary school nearby. Before releasing funds, the utility company said it would require certain guarantees from the government entity regarding the project, including that the funds would be used exclusively for the school.

C.   06-01

This request was from a Delaware company doing business in Africa. The company desired to initiate a pilot project under which it would contribute $25,000 to the Ministry of Finance in the country to improve local enforcement of anti-counterfeiting laws. The contribution would fund incentive awards to local customs officials, which is needed because this African country is a major transit point for illicit trade and the local customs officials have no incentive to prevent the contraband.

The company said that along with the contribution, it would execute an agreement with the Ministry to encourage exchange of information and establish procedures and criteria for incentive awards. The company said that if the program is successful, the awards would continue to be funded as needed, and the company will seek the participation of its competitors in this program.

The company would implement at least five safeguards to ensure the funds would be used as intended, including:

1. Payments to a valid government account, subject to internal audits.
2. Payments only upon the confirmation that goods seized were in fact counterfeit.
3. The Ministry would identify award candidates without input from the company and would provide evidence that funds were used properly.
4. The company would monitor the program’s effectiveness.
5. Records will be required to be kept and be available for inspection for a period of time.

D.   10-02

A US Company desired to move from a charitable entity model to a for profit model in the area of micro-financing. To do so it was required to make a large cash donation to a charity in the country in question. The company engaged in three rounds of due diligence in which it determined that the most favorable candidate had a government official on its Board of Directors but that under the laws of the country in question, the government official could not receive compensation to sit as a Board member. After initially listing the 3 levels of due diligence in which the company had engaged prior to finalizing its choice of local entity to receive the donation in question; the DOJ noted that the donation ‘requested’ of the US Company would be subject to the following controls:

1. Payments of the donations would be staggered over a period of eight quarters rather than in one lump sum.
2. Ongoing monitoring and auditing of the funds use for a period of five years.
3. The donations would be specifically utilized for the building of infrastructure.
4. The funds could not be transferred to either the charities parent or any other affiliated entity.
5. The funds would not be paid to the parent of the organization receiving the grant and there was an absolute prohibition on compensating Board Members.
6. The proposed grant agreement under which the funds would be donated had significant anti-corruption provisions which included a requirement that the local organization receiving the funds adopt an anti-corruption policy and that company making the donation shall receive full access to the local organization’s books and records.
7. Right to terminate the agreement and recall the funds if evidence was found that “reasonably suggests” a breach of compliance provisions.

II.                Sole Enforcement Action

There appears to be only one FCPA enforcement action based entirely upon charitable giving. It is the case of Schering-Plough Poland which paid a $500,000 civil penalty assessed by the Securities and Exchange Commission (SEC) in 2008. (For a copy of the SEC Compliant, click here.) As reported in the FCPA Blog, the Company’s Polish subsidiary made improper payments to a charitable organization named the Chudow Castle Foundation, which was headed by an individual who was the Director of the Silesian Health Fund during the time period in question. Schering-Plough is a pharmaceutical company and the Director of the Health Fund provided money for the purchase of products manufactured by Schering-Plough as well as influencing medical institutions, such as hospitals, in their purchase of pharmaceutical products through the allocation of health fund resources. In addition to the above, the SEC found that Schering-Plough did not accurately record these charitable donations on the company’s books and records.

III.              Mendelsohn Guidance

The FCPA Blog reported, in a posting entitled “When is Charity a Bribe?”, that when asked about the guidelines regarding requests for charitable giving and the FCPA, then Deputy Chief of the Criminal Division’s Fraud Section at the DOJ Mark Mendelsohn, said that any such request must be evaluated on its own merits. He advocated a “common sense” approach in identifying and clearing Red Flags. Some of the areas of inquiry would include answers to the following questions.

1. Is there a nexus between the charity and any government entity from which the company is seeking a decision?
2. If the governmental decision-maker holds a position at the charity, that’s a red flag.
3. Is the donation consistent with the company’s overall pattern of charitable contributions?
4. If one donation or a series of them is more than the company has made to any other charity in the past five years, that’s a red flag too.
5. Who made the request for the donation and how was that request made?

So what of Wynn Casinos and its $135 Million donation? Did Wynn perform the types of analysis suggested by the Opinion Releases? The WSJ article reports that the Chairman of Wynn’s Committee “told analysts last month that the donation was vetted in advance by outside experts,” relative to the FCPA. The donation is apparently not for construction or other infrastructure projects but “the gift will support academic activities.” The WSJ article also reports that the Board of the University foundation includes “current and former government officials” and “a member of the committee to elect Macau’s chief executive”, who is the chancellor of the university. Lastly the article reports that the Securities and Exchange Commission (SEC) has “begun an inquiry into the donation.”

We may reasonably conclude from both of these WSJ articles that Wynn Casinos will be in for a long, long road of FCPA investigations.

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

FIFA, the World Cup Selection and the FCPA

One of the interesting facts of life that I have learned being married to an English woman is that what I thought of as ‘Football’ is really ‘American Football’. The true game of ‘Football’ is played by the rest of the world. (She also decries the term ‘World Series’ but that’s another post). She had also assured me that when the UK won its bid to host the 2018 World Cup we would go to the home of ‘Football’ and watch a match or two, alas it was not meant to be. Who knows maybe we can catch a match in Russia about that time.

FIFA and Bribery Allegations against Executive Committee Members

However, the thought that the Motherland of Football would host a World Cup gave me more than a passing interest in the recent selection process of countries to host the 2018 and 2022 World Cup. I was very interested in the allegations of bribery and corruption leveled at FIFA during the selection process, known, these days, as the “world’s richest and most influential single-sport ruling body”. As has been reported extensively throughout the world, two members of FIFA’s 24 member executive committee were suspended for allegedly offering their votes to determine which countries would host the 2018 and 2022 World Cups. Both men were caught on videotape by the UK Sunday Times asking for specific sums of money, apparently in exchange for their votes. The New York Times, in an October 20, 2010 article, reported that Reynald Temarii, the Tahitian President of FIFA’s Oceanic regional confederation, reportedly said that he wanted “about $2.3 million to finance a sports academy” in New Zealand. Amos Adamu, the Nigerian representative, was alleged to have requested approximately $790,000 to fund the construction of soccer fields in Nigeria. Mr. Adamu reportedly asked for “cash to be paid into his personal account”. FIFA President Seth Blatter was quoted as saying that the two men’s actions had “created a very negative impact on FIFA and on the bidding process”. On November 17, 2010, the FIFA Executive Committee did take action as both men were suspended by FIFA for their actions; subsequently both men have recently had the appeals of their suspensions denied by the FIFA appeal committee. Reuter’s has reported that Adamu will appeal his upheld suspension by FIFA to the Court of Arbitration for Sport in Lausanne.

In yet another interesting development, the UK Telegraph reported that the countries of Spain and Qatar had colluded to trade their votes for their respective 2018 and 2022 bids. These allegations of collusion between the two bids were initially reported in September, 2010 but they were denied by both countries. A subsequent investigation by FIFA’s ethics committee said that there was insufficient evidence to take any action. On Monday, February 7, FIFA President Seth Blatter told the BBC that the two bids had colluded, though he insisted it had made no difference to the final outcome, which saw Russia and Qatar win the 2018 and 2022 tournaments respectively. “I’ll be honest, there was a bundle of votes between Spain and Qatar,” Blatter said. “But it was a nonsense. It was there but it didn’t work, not for one and not for the other side.”

The Wall Street Journal on Qatar’s Bid
I was also interested in the bid awarded to Qatar to host the 2022 World Cup. In a January 13, 2011 article in the Wall Street Journal, entitled “Qatar’s World Cup Spending Spree”, reporter Matthew Futterman detailed the “spending spree” of a reported one year amount of $43.3 million by Qatar, which led to its winning World Cup bid. Futterman’s article focused on information derived from the internal documents of Qatar’s bidding committee. Futterman reported that there was no evidence that Qatar violated the rules and regulations of FIFA to secure its winning bid. Rather he reported on how Qatar “worked within FIFA’s broad guidelines” to secure its winning bid.

From the internal bid documents, obtained by the WSJ, Futterman reported that some of the tactics used by Qatar included:
1. Charitable Donations. Commitments were made to establish, build or continue to fund soccer academies, in the home countries in which FIFA executives who would vote on the 2022 site selection, through a Qatar football training academy, Aspire Academy for Sports Excellence, controlled by the Qatar Royal Family. The WSJ article cited examples in Thailand and Nigeria. In Thailand, Futterman reported that Aspire would “build a football academy” and in Nigeria, it would “expand grass-roots training”. These internal documents also revealed that the Aspire Academy also continued to work with three African countries which were home to FIFA executive committee members, who all had a vote on the 2022 site selection.

2. Use of Marketing Agents. The Qatar bid included the hiring of certain well known celebrities to assist in the effort. In order to “talk up” the Qatar bid to host the 2022 World Cup, the WSJ reported that it hired several international personalities as “Bid Ambassadors” to endorse the Qatar bid. These endorsements were important because they assisted Qatar to “establish its legitimacy within FIFA and connections to executive committee members.” The only Bid Ambassador named in the WSJ article was the former French star Zidane. It was reported that Zidane received $3 million for his endorsements of the Qatar bid.

Review under the FCPA and Bribery Act
FIFA is generally recognized as a, non-US, Non-Governmental Organization (NGO) and therefore the US Foreign Corrupt Practices Act (FCPA) does not apply to it. But we thought that it might be of use to review some of the tactics, as reported in the WSJ, that Qatar used to secure the 2022 World Cup bid, in the context of what might be allowed under the FCPA. It should be noted that, although still waiting to be implemented, the UK Bribery Act would apply to UK companies and citizens involved in the matter because there is no public/private distinction under the Bribery Act and unlike the FCPA, the Bribery Act does not have require that a bribe be offer or paid to a foreign governmental official, only that a bribe or offer to bribe be made.

A. Charitable Donations-the Football Academies
Charitable donations are not banned by the FCPA. However any such donations must be made following the requirements of the Act. The FCPA Blog reported that when asked about the guidelines regarding requests for charitable giving, the FCPA then Deputy Chief of the Criminal Division’s Fraud Section at the DOJ Mark Mendelsohn, said that any such request must be evaluated on its own merits. He advocated a “common sense” approach in identifying and clearing Red Flags. This would include determining if a governmental decision maker held a position of authority at the charity to which the donation would be made; whether the donation was consistent with a company’s overall pattern of charitable giving; who made the request for the donation; and how was it made.

The series of Red Flags raised and cleared by the US Company was the subject of Opinion Release 10-02. After initially listing the 3 levels of due diligence in which the company had engaged prior to finalizing its choice of local entity to receive the donation in question; the DOJ noted that the donation ‘requested’ of the US Company would be subject to the following controls:
• Payments of the donations would be staggered over a period of eight quarters rather than in one lump sum.
• Ongoing monitoring and auditing of the funds use for a period of five years. The donations would be specifically utilized for the building of infrastructure.
• The funds would not be paid to the parent of the organization receiving the grant and there was an absolute prohibition on compensating Board Members.
• The proposed grant agreement under which the funds would be donated had significant anti-corruption provisions which included a requirement that the local organization receiving the funds adopt an anti-corruption policy and that US company making the donation receive full access to the local organization’s books and records.
In addition to the specific factors presented by the requesting US Company in Opinion Release 10-02, the DOJ also listed several of the due diligence and/or controls that it had previously set forth in prior Opinion Releases relating to charitable donations. These included:
• certifications by the recipient that it will comply with the requirements of the FCPA;
• due diligence to confirm that none of the recipient’s officers or directors are affiliated with the foreign government at issue;
• a requirement that the recipient provide audited financial statements;
• a written agreement with the recipient restricting the use of funds to humanitarian or charitable purposes only;
• steps to ensure that the funds were transferred to a valid bank account;
• confirmation that contemplated activities had occurred before funds were disbursed; and
• ongoing auditing and monitoring of the efficacy of the program.

B. Use of Marketing Agents-the Bid Ambassadors
Much has been written on the use of agents under the FCPA. The UK Ministry of Justice Consultative Guidance on the Six Principals for an “adequate procedures” or best practices anti-bribery and anti-corruption program also discuss agents. Recently, Michael Volkov, noted FCPA attorney from the firm of Mayer Brown, spoke on the topic of due diligence on third parties. Volkov believes the key for any compliance based issues is to document the evidence. If you ask questions and get answers, document the process. If you ask questions and do not receive answers, document that process too. But the key is to Document, Document, and Document.
Volkov gave his thoughts on some of the basic pieces of information to cover when a company might begin the due diligence process. This would include:
1. Existence of relationships with foreign governmental officials.
2. Prior history of bribery or other crimes.
3. What is the nature of services provided?
4. What is the compensation and what will be the payment method?
5. Have a written contract in place with appropriate terms and condition’s including:
a) Reps and Warranties on compliance;
b) Right to inspect and audit books and records; and
c) Right to terminate if you believe that a violation has occurred.

Howard Sklar, writing in the Open Air Blog, added the following inquiries should also be made:
1. Are any of the leaders of the company (beneficial owners, or senior management) government officials, or related to government officials?
2. Is this company going to interact with or sell products to government officials on your behalf?
3. Is the third party publicly traded, or subject to regulatory oversight?
4. How did you first become aware of this third party?
5. Is the company what you’d expect—in terms of size, resources, office space, etc.—to allow the third party to provide the services they’re providing to you?
6. How is this company going to get paid? Unusal payment arrangements are a red flag.
7. How much is this company going to get paid? Is it amount in line with what the market value is?
8. Will the company provide business references?
9. Is anyone from senior management, or are the beneficial owners, on the Special Designated Nationals (SDN) or debarred parties list?
10. Has this company been in the news for something negative? Do a Google news search.
11. Has the third party said or done anything that makes your people nervous?
12. Was the procurement/onboarding process run according to normal channels or was it a rush job?

The point of both of these lists of questions is that in order to secure an agent under the FCPA or Bribery Act, a significant investigation, in the form of background due diligence, must be employed. When a company does business with higher-risk third parties, you need to understand not just the parties involved, but the transactions that follow. This means that a company must also proceed with transactional due diligence. The most important thing to know is, will there be money left on the table? You need to know where that money is going. Under the FCPA if the end user is a Government, you need transaction-level diligence if you want to be safe. However, the Bribery Act does not make this governmental/non-governmental distinction.

Remember the former French star Zidane and his $3 million payment? The question is what was he, and the other Bid Ambassadors, paid to do? According to the WSJ, they “helped to establish Qatar its legitimacy within FIFA and connections to executive committee members”. Such a purpose might well require audit rights to determine where the money paid to the agent went and whether it can it be accounted for in a financial review. But there is one further analysis, which was alluded to by Howard Sklar in his list, that being the amount paid to the agent. A commission rate can be a percentage of a successful bid or it can be a flate rate, fixed fee payment. In this situation we do not know what the financial reward to Qatar will be for hosting the 2022 World Cup. Indeed, the reward may not be financial but rather the prestige of hosting the quadrennial championship of the world’s most popular sporting event. So there may be no such measure of the Zidane payment. But if the figures cited in the WSJ article are correct, Zidane received an amount of almost 10% of the Qatar one-year budget. That must have purchased some serious connections. Such a high figure, in an applicable situation, might well lead to significant FCPA and Bribery Act scrutiny.

Happily for the Qatar bid committee, it probably did not fall within the jurisdiction of the FCPA and thus there should be no FCPA implications for the bid committee. Since the Bribery Act is not yet implemented, there are no implications under this un-implemented law.

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

Opinion Release 10-02 and Charitable Donations under the FCPA

What is a company to do if, in order to obtain a contract with a foreign government, they must agree to invest a percentage of the proceeds of the transaction into the community in which it operates as a “charitable donation”? This is negotiated with the foreign government and can include cash or in-kind contributions of computers, equipment or appliances to schools, communities or organizations.

While not a payment to a governmental official, it is still a payment to a governmental entity for the purpose of securing a lucrative contract and requires careful consideration. This spectra is currently required in some countries by law and these payments have generated some questions with regard to compliance with the Foreign Corrupt Practices Act (FCPA) as such donations could be interpreted as corruptly giving or offering anything of value to any “foreign official” in order to assist “in obtaining or retaining business for or with, or directing any business to, any person . . . .” 15 U.S.C. § 78dd-2(a)(1).

As reported in Friday’s FCPA Blog, this past week the Department of Justice (DOJ) published its second FCPA Opinion Procedure Release of 2010, 10-02. The release dealt with a US based micro financial institution (MFI) operating in an unnamed Eurasian country. This MFI desired to convert its local operations from a “humanitarian status” to a commercial status. The relevant government licensing authority in the country in question required that as a condition precedent to obtaining this commercial license, the MFI would be required to make a substantial grant to some other local MFIs, providing a list of one or more that the US MFI could choose. The US MFI was concerned that by making such a donation a condition precedent and specifying the list of local MFIs to which the donation could be made, the US MFI could run afoul of the FCPA’s proscription of “corruptly giving or offering anything of value to any foreign official” in order to assist “in obtaining or retaining business for or with, or directing any business to, any person . . . .”

In stating that the DOJ “does not intend to take any enforcement action with regard to the proposed transaction” the Opinion Release specified the three levels of due diligence that the US MFI had engaged in on the proposed locals MFIs which were listed as eligible to receive the funding. The DOJ noted that [it] “is satisfied, however, that the Requestor has done appropriate due diligence and that the controls that it plans to institute are sufficient to prevent FCPA violations. As noted above, the Requestor [US MFI] conducted three rounds of due diligence. The controls that the Requestor proposes would ensure with reasonable certainty that the grant money from the Eurasian Subsidiary would not be transferred to officials of the Eurasian country.”

 In addition to the specific discussion of the due diligence performed by the US MFI and noting the controls it had put in place after the funding was scheduled to be made the DOJ also listed several of the due diligence and/or controls that it had previously set forth in prior Opinion Releases relating to charitable donations. These included:

• certifications by the recipient that it will comply with the requirements of the FCPA;

• due diligence to confirm that none of the recipient’s officers or directors are affiliated with

the foreign government at issue;

• a requirement that the recipient provide audited financial statements;

• a written agreement with the recipient restricting the use of funds to humanitarian or charitable purposes only;

• steps to ensure that the funds were transferred to a valid bank account;

• confirmation that contemplated activities had occurred before funds were

disbursed; and

• ongoing auditing and monitoring of the efficacy of the program.

Opinion Release 10-02 provides a wealth of information to the FCPA practitioner and  compliance counsel. It gives specific guidance on the levels of due diligence that a US company should go through when investigating a charitable institution selected, or suggested by a foreign governmental official, to be the recipient of a company’s charitable donations. Further it lists the controls that a US company can and should put in place, should it determine that a charitable donation is to be made. In short Opinion Release 10-02 gives significant guidance in pre-donation due diligence investigation, evaluation and post donation monitoring going forward to manage the process. Opinion Release 10-02 is a very large and helpful educational tool in the FCPA compliance arena. We welcome its release.

For a copy of Opinion Release 10-02, 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  

© Thomas R. Fox, 2010