FCPA Compliance and Ethics Blog

November 5, 2014

A Royal Fan Responds: Russ Berland on the SEC Financial Report for FY 2014

Russ Berland

Ed. Note-today we have a guest post from KC Royals fan and Stinson Leonard Street partner Russ Berland. 

As a Kansas City Royals fan, I would like to use this opportunity to congratulate the Royals on a great season and say to them, “Ya done good.”  Despite losing an extremely close seventh World Series game to a very able and talented San Francisco Giants team, which included a pitcher whose name and face will one day be memorialized in Cooperstown, this year has been a banner, or should I say, a pennant year for the boys in blue.

The SEC likewise would like to take a moment to be congratulated on their banner year in their annual enforcement preview of their Agency Financial Report.  So here goes … The SEC wants us to know that they are using creative means to find misconduct on their own and go after it, to hold people and corporations accountable,  and to pay and protect whistleblowers.  On October 16, the SEC put out its official preview of its upcoming Agency Financial Report for FY 2014.  The SEC’s fiscal year ends September 30, so this spans every enforcement action the SEC has taken since October 1, 2013.  The report has four major themes:

  1. The SEC is enforcing the law against people, not just companies. It takes people to commit misconduct on behalf of companies so those same people should be held accountable.  And if the SEC is counting on you to watch over companies and transactions you better take it seriously.  The SEC does and they will hold you accountable.  The preview made this point in showcasing its major enforcement actions against Fifth Third Bancorp and its former CFO, Diamond Foods Inc. and its former CEO and CFO, World Capital Market and its founder, and many, many others.  The most poignant example was the enforcement action against the Chairman of the Audit Committee of AgFeed Industries, Inc.  The SEC alleges that Ivan Gothner, the chairman of AgFeed’s audit committee received information that AgFeed’s Chinese operations were conducting accounting fraud and instead of taking a fellow director’s advice to “hire professional investigators guided by outside legal counsel,” he directed internal resources to assess the situation.  When that resulted in late and inadequate information, the SEC charged him “with violating or aiding and abetting violations of the anti-fraud, reporting, books and records, and internal controls provisions of the federal securities laws” and ” with making false statements to AgFeed’s outside auditors.”  Andrew Ceresney, Director of the SEC’s Division of Enforcement, called this “a cautionary tale of what happens when an audit committee chair fails to perform his gatekeeper function in the face of massive red flags.”
  2. Corporations must admit their actions. Last year, the SEC Chairman, Mary Jo White, announced that more companies must admit their wrongdoing in settlements.  The SEC’s Admissions Policy states that the companies may be required to admit their wrongdoing when there is “(1) misconduct that harmed large numbers of investors, or placed investors or the market at risk of potentially serious harm, (2) egregious intentional misconduct, or (3) when the defendant engaged in unlawful obstruction of the commission’s investigative processes.”  Now, the Preview adds two more categories to those required to make admissions: “[4] where an admission can send a particularly important message to the markets, or [5] where the wrongdoer poses a particular future threat to investors or the markets.”  For example, in the settlement with ConvergEx for misrepresenting its commissions to brokerage customers, ConvergEx was required to admit the facts stated by the SEC and admit that it had violated Securities Laws.  In one interesting twist, Wells Fargo Advisors LLC was forced to admit its wrongdoing when one of its brokers traded on non-public information about the sale of Burger King to a private equity firm. The “wrongdoing” that Wells Fargo Advisors admitted encompassed inadequate policies, inadequate coordination among internal groups tasked with policing insider trading and the compliance officer who should have spotted the insider trading missing it. This is an interesting view of what constitutes “egregious intentional misconduct.” The message seems to be that in order to settle a matter with the SEC without admitting or denying facts or legal conclusions, the defendant will need to prove they do not fit in one of the five listed categories.  It’s possible that the SEC forced Wells Fargo Advisors to admit it’s wrongdoing because it delayed production of relevant documents or because one of the documents that they turned over had been altered by the compliance officer herself.  Or perhaps they are sending “a particularly important message” to compliance officers that they need to be vigilant in doing their jobs.
  3. Whistleblowing Pays.  In FY2014, the SEC paid $35 million to 9 whistleblowers.  One of them received $30 million by him or herself.   Because the SEC rules protect the identity of whistleblowers, we don’t know who got paid.  But the SEC whistleblowing process has multiple stages, which include bringing original information or an original analysis of existing information to the SEC, having the SEC pursue that information leading to a prosecution, and successfully prosecuting or settling that matter with a recovery of over $1 million.  This takes  a long time from beginning to end.  Dodd Frank was passed in 2010.  The first REAL money ($14 million) was paid last year.  And now someone is getting $30 million.  The pipeline took a while to fill, but it is reaching a full state and we can probably expect to see a lot more whistleblower payments in the next few years.
  4. If you don’t come to us, we’ll find you. The SEC is using more and more data analytics on financial and trading activity to find wrongdoers.   According to the SEC, ” innovative use of data and analytical tools contributed to a very strong year for enforcement marked by cases that spanned the securities industry.”   Right now, they are telling us that they are using those techniques to look at filing deficiencies, hedge fund returns, and insider trading.  But we can anticipate they are looking at more than just those categories and we should expect to see more and more use of these techniques over broader areas in the coming years.  And, the SEC is telling us that they are also currently implementing and developing “next generation tools” to review market and other data for suspicious activity.

So, this Preview of the FY2014 Agency Financial Report suggests that the SEC should not be seen as sitting back and waiting for cases to come to them.  And when companies and people violate Securities Laws, the SEC will work hard to make sure that they each take accountability, either personally through fines and penalties or corporately, through admissions.   Like the Royals, the SEC would like us to know that they have had a banner year.

Berland can be reached at russ.berland@stinsonleonard.com. He was lead investigative counsel for Layne Christensen in its recently concluded FCPA enforcement action by the SEC. In my podcast, the FCPA Compliance and Ethics Report, Episode 104, I interview Berland on how the company was able to receive a declination from the DOJ. The Episode will post Thursday, Nov. 7.

April 4, 2013

Three Compliance Interviews on April 3

I attended the Dow Jones Global Compliance Symposium over the past couple of days. It was a great conference and kudos to the entire Dow Jones team for putting on a truly memorable event. Day 2 had some interesting speakers and I thought that I might highlight some of the note-worthy things that they said. I should initially note that they did not present prepared remarks but were interviewed by Wall Street Journal (WSJ) reporters. Frustratingly, all three were very good at not answering some of the more pointed questions they were posed but they did have some thought-provoking answers to some of the questions posed to them.

Jeff Benjamin

Benjamin was retired and living in Cape Cod, when he was lured out of retirement to take over as the Senior Vice President (SVP) and General Counsel (GC) for Avon Products, Inc., in September of last year. He used this late entry into the company as a way not to answer questions about the ongoing investigation or the company’s amount of legal and investigative fees incurred to-date. He did answer a question generally around the company using two law firms which I found fascinating. He said that more law firms do not necessarily mean more lawyers working on an assignment or project. He said that by using two law firms, he can use “the best people in the best roles” rather than simply the best people. For all you Chief Compliance Officers (CCO’s) or GC’s out there you might want to think about that concept.

I was a bit frustrated that he was cut off when answering the question of his thoughts on what differentiated an elite compliance program from merely a functional one. The first point was that the compliance program seeks continual improvement. The second is that each of a company’s employees takes personal responsibility for establishing and retaining a culture of compliance and ethics in a company. I wish he had been able to give us the final two but he got side-tracked on another point.

I asked Benjamin the role that compliance plays in reconstituting employee morale after a catastrophic compliance failure that (apparently) occurred at Avon. Benjamin initially noted that he believes that the compliance function has a large role to play in rebuilding employee morale. He said a key for Avon was to look at the compliance failures and to use those as teaching moments for the work force. He coupled this with a very intensive construction of the compliance architecture for the company, communicated thoroughly to all employees. He ended with some out of the box thinking like bringing in Cynthia Cooper, the employee who blew the whistle at WorldCom, to speak to company employees on the need to ‘Speak Up and Speak Out’.

Gerson Zweifach

Zweifach is the General Counsel and Chief Compliance Officer for News Corp. He is former federal prosecutor and holds himself very much with that bearing and demeanor. He was asked about his dual roles as GC and CCO and he said that given where the company is, in the middle of a multi-jurisdiction, multi-law investigation, he believed that combining both roles was appropriate, at least for the next couple of years. He also noted that he was told by the News Corp’s Chief Executive Officer (CEO) that “I don’t want this to happen again” and he took that as another reason that the roles should be combined, at least for the foreseeable future.

Zweifach said the biggest change that he had to effect on the company was to elevate problems to the corporate headquarters, if they involved “the core integrity” of the company. News Corp is a very decentralized business with assets all over the world. Prior to their current legal imbroglio, they did not handle such problems in the US but Zweifach has learned that this must be done to help ensure that the company gets a full picture of the facts as soon as possible. Further, any core integrity issue can become global very quickly so there needs to be central management of this issue as soon as possible.

As a former prosecutor and white collar defense lawyer, he was not too familiar with the concept of risk assessments as a corporate tool, so he had a fair amount to learn on the subject. But he learned something very interesting and that was simply because a business is located in a high-risk country it may not be high risk. Conversely, simply because a business is in a perceived low risk country, such as the UK, the business may be high risk. I found this to be a very interesting insight and  something that Foreign Corrupt Practices Act (FCPA) compliance practitioners could consider when doing their overall risk assessments.

Alberto Gonzales

Gonzales is the former Attorney General of the United States and is currently Of Counsel to the law firm of Waller Lansden Dortch & Davis LLP. Gonzales spoke about the FCPA and potential change of the law. Initially he noted that reform of the FCPA in Congress is dead, although he tried to blame it on the Democratic administration, forgetting perhaps that the greatest increase in FCPA enforcement occurred while he was Attorney General (oops!). But he did say that perhaps there could be some different interpretations by regulators, such as the Department of Justice (DOJ) and Securities and Exchange Commission (SEC). Leaving aside the subtle distinction that the DOJ are prosecutors and not regulators (oops again!) he said that he believed business groups were right to continue to clamor for additional FCPA guidance, as he clearly demeaned the November-released FCPA Guidance as “so-called guidance”.

He also said that greater transparency would be of assistance to the compliance practitioner and here he talked about further information on declinations. He said that he believed the DOJ could strip out the indemnity markers but the key information would be for the DOJ to itemize the information which went into their decision making calculus as to why a declination was granted as opposed to an enforcement action. This is certainly something that I do agree with Gonzales on.

The Dow Jones Global Compliance Symposium continues to be one of the premier compliance events annually. If you did not attend this year and can do so next year, I urge you to try and get yourself up to DC for the conference.

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

March 11, 2013

Wrestling as an Olympic Sport and Declinations under the FCPA

What do the US, Russia and the Islamic Republic of Iran have in common? Answer: Precious little. However one thing that they do have in common is their vehement opposition to the absolutely idiotic, boneheaded and stupid decision by the International Olympic Committee (IOC) to drop wrestling from the Olympic Games. Wrestling dates back to the ancient Greek Olympic Games and it is just inconceivable that the IOC would drop one of the very few sporting events that has endured for 2,500 years. If these three countries can agree on something, do you think that the IOC should listen?

What do the FCPA Professor, the US Chamber of Commerce and Tom Fox have in common when it comes to the Foreign Corrupt Practices Act (FCPA)? Answer: Not much. But one thing we do have in common is a belief that the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) should release information regarding FCPA matters that it declines to prosecute. For my part, the reason that the DOJ/SEC should release this information is that it is a solid base of information that a compliance practitioner can use to help improve a FCPA based compliance program.

What is a Declination?

First, continuing the good faith debate as to what is a ‘declination’, I first need to provide my definition. Last week, the FCPA Professor wrote, in a post entitled “The Need For An FCPA Lingua Franca”, of his belief in the need for a clarification of precisely what is a declination. He wrote, “I am guided by my definition of a declination as being an instance in which an enforcement agency has concluded that it could bring a case, consistent with its burden of proof as to all necessary elements, yet decides not to pursue the action.” The Professor further states that “anything less ought not be termed a “declination” and noted that it is really no different that saying a police officer “declined” to issue a speeding ticket in an instance in which the driver was not speeding. This is not a declination, it is what the law commands, and such reasoning applies in the FCPA context as well.” The Professor also cited to a WilmerHale client release which discussed the DOJ/SEC FCPA Guidance and had the following line which relates to the definition of a declination, “It is also disappointing that some of the examples do not make clear that the conduct met each of the elements of a statutory violation, since the concept of a declination is supposed to be reserved for instances in which the offense is chargeable but the government declines in its own discretion to bring a case.”

I believe that a broader term approach, as I think that the term ‘declination’ should encompass all the situations where the DOJ or SEC turns down the opportunity to bring a FCPA case; whether that be a criminal matter enforced by the DOJ or a civil action brought by the SEC. I do not find the lack of a speeding ticket analogy to be appropriate in the FCPA/declination discussion. The reason is that the DOJ/SEC usually relies on either a self-disclosure or outside source of information before it begins an investigation. If there is a self-disclosure that means that competent white collar counsel, who probably are ex-DOJ/SEC prosecutors, think that there is a reasonable basis for an actionable FCPA issue to lie. To use the speeding ticket analogy, regarding FCPA matters, if I saw a police officer with a radar gun checking speeds and I thought that I had gone over the speeding limit, I could self-report what I believed to be a violation. He or she might say something along the lines of “Mr. Fox, you may have a good-faith belief that you traveled over the speed limit but I did not have my radar gun on your car so I will not write you up.” Or the police officer might say, “Mr. Fox, you may have a good-faith belief that you traveled over the speed limit but I had my radar gun on your car and you were not going over the speed limit so I am not going to write you up.” Lastly, the officer might say, “Mr. Fox, you may have a good-faith belief that you traveled over the speed limit and I had my radar gun on you and I clocked you as going over the speed limit but because you were going 66 in a 65 and you came over here and told me about it I am not going to write you up.” So even if I had engaged in a speeding violation, there may be several reasons why I did not get a ticket.

What about situations other than self-disclosure, such those involving a whistle-blower, information which came from other companies in the same industry, such as those companies involved with  the freight forwarder Panalpina, or other situations where information comes to the DOJ/SEC and they eventually decide not prosecute. Marc Alain Bohn, writing a piece in the FCPA Blog entitled “Revisiting the Definition of ‘Declinations’”, said that “there are likely many considerations that inform an agency decision not to pursue a case. Given the agencies’ aggressive interpretations of the jurisdiction and knowledge elements of the FCPA—something the FCPA Professor has frequently drawn attention to it is likely rare that an agency’s decision not to pursue an enforcement action is based on its determination that there were insufficient facts to do so. This is particularly true in the case of issuers, against whom the agencies can more easily build FCPA-cases by focusing upon violations of the statute’s accounting provisions.” Because of these facts and other, Bohn urged a broader form of definition of declination than the FCPA Professor. Bohn gives the following definition, “I think it is appropriate to apply the short-hand label “declination” more broadly to each instance where the DOJ or SEC has notified a company that it does not intend to bring an enforcement action.”

Publicizing of Declinations

The concept that the US Chamber of Commerce, the FCPA Professor and myself do agree on, is the need for the DOJ/SEC to publicize declinations. I have argued for some time that by publicizing declinations, it would provide great value to the compliance practitioner. I believe this to be particularly true in the situation where a company has self-disclosed what it believes to be evidence of a FCPA violation. I believed this before the Morgan Stanley declination was released last year and I believed this before the FCPA Guidance had a section discussing six matters that the DOJ/SEC had declined to prosecute. The two releases of declinations have only made my belief stronger regarding the usefulness of declinations to the compliance practitioners.

I outlined some of the reason I think that declinations can be such a useful tool, in an article for the Washington Legal Foundation, entitled “DOJ Should Release FCPA Declinations Opinions”. I wrote that this is because “The substantive portions of declinations, excised of company-specific information, would greatly increase FCPA enforcement transparency. This, in turn, would inspire greater FCPA compliance through a better understanding of how DOJ interprets the law with the specific facts presented to it.” Further, “In the declination process, DOJ is handling a much broader and more significant amount of information. A self-disclosing company has investigated or will investigate a matter, most likely with the aid of specialized outside FCPA investigative counsel. DOJ has the opportunity to review the investigation and suggest further or other lines of inquiry. Company personnel are made available for DOJ interviews, if appropriate. In short one would have actual facts and detailed oversight by DOJ, which in the case of a declination to prosecute, would provide substantive guidance on why it did not believe a FCPA violation had occurred in the face of a company’s good faith belief that it had violated the FCPA.”

From the Morgan Stanley declination we learned the importance of (1) annual FCPA training; (2) annual certification; (3) transaction monitoring; (4) compliance reminders; and (5) documentation of all of these factors. From the FCPA Guidance, we learned that the companies which received declinations had the following six factors:

  1. The company was alerted to possible corruption via its own internal controls or compliance program.
  2. The company self-disclosed to the DOJ/SEC.
  3. The Company conducted a thorough investigation and shared the results with the DOJ/SEC.
  4. The illegal conduct was not pervasive throughout the company, no systemic failure/over-riding of internal controls and the amount of money paid as bribe was relatively small.
  5. The Company immediately took corrective action against the bad actors.
  6. The extent the compliance program was expanded.

We learned some very specific, useful pieces of information from the declinations that have been issued. I hope that more will be issued by the DOJ/SEC in the future. It appears that the sport of Olympic wrestling, the FCPA and politics can indeed make for some strange bedfellows.

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

© Thomas R. Fox, 2013

December 9, 2012

The FCPA Guidance and Declinations

I have previously written about my belief that the US Department of Justice (DOJ) should go further in releasing information about Declinations to Prosecute Foreign Corrupt Practices Act (FCPA) cases self-reported to both it and the Securities and Exchange Commission (SEC). The FCPA Professor, Mike Volkov and others have also written and advocated that the DOJ should release information about Declinations because they are an excellent source of information for the compliance practitioner about the DOJ’s thinking on FCPA enforcement issues.

In a piece I wrote for the Washington Legal Foundation, entitled “DOJ Should Release FCPA Declination Opinions”, I stated that “In an area like Foreign Corrupt Practice Act (FCPA) enforcement, where guiding case law is largely non-existent, compliance practitioners must rely on the actions and decisions of federal enforcement agencies for information. Such information is available in the form of enforcement actions, the release of Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs), and hypothetical fact patterns presented to the Department of Justice (DOJ) through its Opinion Release procedure. But one highly valuable source of guidance has been kept from regulated entities and their counsels: DOJ and Securities and Exchange Commission (SEC) “declination” decisions, opinions which are drafted when the agencies decline to prosecute an individual or organization. A change is needed in this counterproductive policy. The release of substantive information on declinations would help foster greater compliance with the FCPA by providing practitioners with specific facts of circumstances where investigations did not result in an enforcement action.”

This request for such information was provided in the recently released document “A Resource Guide to the US Foreign Corrupt Practices Act” by the DOJ and SEC. In it presented six recent matters that the “DOJ and SEC declined to pursue.” I have set them out in full because I believe that they provide solid information for the compliance practitioner.

Example 1: Public Company Declination

DOJ and SEC declined to take enforcement action against a public U.S. company. Factors taken into consideration included:

  • The company discovered that its employees had received competitor bid information from a third party with connections to the foreign government.
  • The company began an internal investigation, withdrew its contract bid, terminated the employees involved, severed ties to the third-party agent, and voluntarily disclosed the conduct to DOJ’s Antitrust Division, which also declined prosecution.
  • During the internal investigation, the company uncovered various FCPA red flags, including prior concerns about the third-party agent, all of which the company voluntarily disclosed to DOJ and SEC.
  • The company immediately took substantial steps to improve its compliance program.

Example 2: Public Company Declination

DOJ and SEC declined to take enforcement action against a public U.S. company. Factors taken into consideration included:

  • With knowledge of employees of the company’s subsidiary, a retained construction company paid relatively small bribes, which were wrongly approved by the company’s local law firm, to foreign building code inspectors.
  • When the company’s compliance department learned of the bribes, it immediately ended the conduct, terminated its relationship with the construction company and law firm, and terminated or disciplined the employees involved.
  • The company completed a thorough internal investigation and voluntarily disclosed to DOJ and SEC.
  • The company reorganized its compliance department, appointed a new compliance officer dedicated to anti-corruption, improved the training and compliance program, and undertook a review of all of the company’s international third party relationships.

Example 3: Public Company Declination

DOJ and SEC declined to take enforcement action against a U.S. publicly held industrial services company for bribes paid by a small foreign subsidiary. Factors taken into consideration included:

  • The company self-reported the conduct to DOJ and SEC.
  • The total amount of the improper payments was relatively small, and the activity appeared to be an isolated incident by a single employee at the subsidiary.
  • The profits potentially obtained from the improper payments were very small.
  • The payments were detected by the company’s existing internal controls. The company’s audit committee conducted a thorough independent internal investigation. The results of the investigation were provided to the government.
  • The company cooperated fully with investigations by DOJ and SEC.
  • The company implemented significant remedial actions and enhanced its internal control structure.

Example 4: Public Company Declination

DOJ and SEC declined to take enforcement action against a U.S. publicly held oil-and-gas services company for small bribes paid by a foreign subsidiary’s customs agent. Factors taken into consideration included:

  • The company’s internal controls timely detected a potential bribe before a payment was made.
  • When company management learned of the potential bribe, management immediately reported the issue to the company’s General Counsel and Audit Committee and prevented the payment from occurring.
  • Within weeks of learning of the attempted bribe, the company provided in-person FCPA training to employees of the subsidiary and undertook an extensive internal investigation to determine whether any of the company’s subsidiaries in the same region had engaged in misconduct.
  • The company self-reported the misconduct and the results of its internal investigation to DOJ and SEC.
  • The company cooperated fully with investigations by DOJ and SEC.
  • In addition to the immediate training at the relevant subsidiary, the company provided comprehensive FCPA training to all of its employees and conducted an extensive review of its anti-corruption compliance program.
  • The company enhanced its internal controls and record-keeping policies and procedures, including requiring periodic internal audits of customs payments.
  • As part of its remediation, the company directed that local lawyers rather than customs agents be used to handle its permits, with instructions that “no matter what, we don’t pay bribes”—a policy that resulted in a longer and costlier permit procedure.

Example 5: Public Company Declination

DOJ and SEC declined to take enforcement action against a U.S. publicly held consumer products company in connection with its acquisition of a foreign company. Factors taken into consideration included:

  • The company identified the potential improper payments to local government officials as part of its pre-acquisition due diligence.
  • The company promptly developed a comprehensive plan to investigate, correct, and remediate any FCPA issues after acquisition.
  • The company promptly self-reported the issues prior to acquisition and provided the results of its investigation to the government on a real-time basis.
  • The acquiring company’s existing internal controls and compliance program were robust.
  • After the acquisition closed, the company implemented a comprehensive remedial plan, ensured that all improper payments stopped, provided extensive FCPA training to employees of the new subsidiary, and promptly incorporated the new subsidiary into the company’s existing internal controls and compliance environment.

Example 6: Private Company Declination

In 2011, DOJ declined to take prosecutorial action against a privately held U.S. company and its foreign subsidiary. Factors taken into consideration included:

  • The company voluntarily disclosed bribes paid to social security officials in a foreign country.
  • The total amount of the bribes was small.
  • When discovered, the corrupt practices were immediately terminated.
  • The conduct was thoroughly investigated, and the results of the investigation were promptly provided to DOJ.
  • All individuals involved were either terminated or disciplined. The company also terminated its relationship with its foreign law firm.
  • The company instituted improved training and compliance programs commensurate with its size and risk exposure.

From these six examples, I believe that there are some common elements that the compliance practitioner can draw upon, which I expand on below:

  1. The company was alerted to possible corrupt conduct via its compliance program or internal controls. This clearly follows Paul McNulty’s Maxim No. 2, “What did you do to detect it?” If a company has a robust internal reporting system, including anonymous whistleblower line and strong internal reporting lines that are not only respected but taken seriously, this clearly is a plus. But more than internal reporting is both monitoring and auditing to determine not only the effectiveness of your compliance program, but to pick up potential violations.
  2. Possible FCPA violations were self-reported or otherwise voluntarily disclosed to the DOJ/SEC. These declinations make clear that self-disclosure pays off in positive benefits by creating credibility in the eyes of the DOJ.
  3. The entities in question conducted a thorough internal investigation and shared the results with the DOJ/SEC. I would view this as mandatory if a company is to have any hope of receiving a declination.
  4. The conduct violative of the FCPA was not pervasive and consisted of relatively small bribes or other corrupt payments.
  5. The company took immediate corrective action against the person engaging in the conduct.
  6. Each company’s compliance program was expanded or enhanced and these enhancements were reflected in compliance training, internal process improvements and additional enhanced internal controls.

So I applaud the DOJ for releasing this information on Declinations. I have written that I believe the DOJ Declination given to Morgan Stanley was the most important FCPA (non) enforcement action of 2012. While the Guidance may be a more significant overall FCPA event because of its wider focus and reach, the inclusion of these six declinations continues to provide solid information to compliance practitioners to use in creating or evaluating their compliance programs. I ended my piece for the Washington Legal Foundation with the following, “In the declination process, DOJ is handling a much broader and more significant amount of information. A self-disclosing company has investigated or will investigate a matter, most likely with the aid of specialized outside FCPA investigative counsel. DOJ has the opportunity to review the investigation and suggest further or other lines of inquiry. Company personnel are made available for DOJ interviews, if appropriate. In short one would have actual facts and detailed oversight by DOJ, which in the case of a declination to prosecute, would provide substantive guidance on why it did not believe a FCPA violation had occurred in the face of a company’s good faith belief that it had violated the FCPA.”

I believe that this is still true.

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The US Supreme Court today, denied the Petition for Writ filed by ICE that I wrote about last week. It now appears that ICE’s efforts to intervene under the Crime Victims’ Rights Act in the DOJ settlement with Alcatel-Lucent are at an end.

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

© Thomas R. Fox, 2012

May 2, 2012

Morgan Stanley Goes One for One with a Best Practices Compliance Program

On Monday night, Houston Astros manager Brad Mills went to the mound five times to change pitchers against five straight New York Mets batters. This set the Astros twitter community literally ‘a-twitter’ as it was noted that, according to the Elias Sports Bureau, the  “Astros became the 1st team in MLB history to use 5 different pitchers against 5 consecutive hitters.” Why did he do so? Mills has not made public his reasons yet it seemed to work out as only one of the five hitters was able to get a hit against the normally abysmal Astro relief corp. And the Astros actually won the game, which is an increasing rare occurrence this season since having a winning record of 2-1 after three games.

I thought about the Mills treks to the mound last night when reading the recent Foreign Corrupt Practices Act (FCPA) enforcement action against former Morgan Stanley Managing Director Garth Peterson. According to the US Department of Justice (DOJ) Press Release, Peterson pled guilty to one count of criminal information charging him with “conspiring to evade internal accounting controls that Morgan Stanley was required to maintain under the FCPA.” Assistant Attorney General Lanny Breuer was quoted as saying, “Mr. Peterson admitted today that he actively sought to evade Morgan Stanley’s internal controls in an effort to enrich himself and a Chinese government official. As a Managing Director for Morgan Stanley, he had an obligation to adhere to the company’s internal controls; instead, he lied and cheated his way to personal profit.  Because of his corrupt conduct, he now faces the prospect of prison time.” Peterson will be sentenced in June.

The Allegations

According to the DOJ Press Release, Peterson conspired with others to circumvent Morgan Stanley’s internal controls in order to transfer a multi-million dollar ownership interest in a Shanghai building to himself and a Chinese public official with whom he had a personal friendship. Peterson encouraged Morgan Stanley to sell an interest in a Chinese real-estate deal to Shanghai Yongye Enterprise (Yongye) a state-owned and state-controlled entity through which Shanghai’s Luwan District managed its own property and facilitated outside investment.  Peterson falsely represented to others within Morgan Stanley that Yongye was purchasing the real-estate interest, when in fact Peterson knew the interest would be conveyed to a shell company controlled by him, a Chinese public official associated with Yongye and an un-named Canadian attorney. After Peterson and his co-conspirators falsely represented to Morgan Stanley that Yongye owned the shell company, Morgan Stanley sold the real-estate interest in 2006 to the shell company at a discount to the interest’s actual 2006 market value. As a result, the conspirators realized an immediate paper profit of more than $2.5 million. Even after the sale, Peterson and his co-conspirators continued to claim falsely that Yongye owned the shell company. In the years since Peterson and his co-conspirators gained control of the real-estate interest, they have periodically accepted equity distributions and the real-estate interest has appreciated in value.

Declination to Prosecute

However, the greater import of this enforcement action for my money was what did NOT happen to Morgan Stanley. They were not indicted. In fact both the DOJ, in its Press Release, and Securities and Exchange Commission (SEC), in its civil Compliant, went out of their way to praise the Morgan Stanley compliance program. This written praise demonstrated that not only do company’s receive credit from the DOJ for having a compliance program in place but also gave solid information as to why the DOJ declined to prosecute Morgan Stanley. In other words, it was a very public pronouncement of a declination to prosecute.

The SEC Complaint detailed the compliance program it had in place and how it directly related to Peterson. The Compliant specified:

(1) Morgan Stanley trained Peterson on anti-corruption policies and the FCPA at least seven times between 2002 and 2008. In addition to other live and web based training, Peterson participated in a teleconference training conducted by Morgan Stanley’s Global Head of Litigation and Global Head of Morgan Stanley’s Anti-Corruption Group in June 2006.

(2) Morgan Stanley distributed to Peterson written training materials specifically addressing the FCPA, which Peterson maintained in his office.

(3) A Morgan Stanley compliance officer specifically informed Peterson in 2004 that employees of Yongye, a Chinese state-owned entity, were government officials for purposes of the FCPA.

(4) Peterson received from Morgan Stanley at least thirty five FCPA-compliance reminders. These reminders included FCPA-specific distributions; circulations and reminders of Morgan Stanley’s Code of Conduct, which included policies that directly addressed the FCPA; various reminders concerning Morgan Stanley’s policies on gift-giving and entertainment; the circulation of Morgan Stanley’s Global Anti-Bribery Policy; guidance on the engagement of consultants; and policies addressing specific high-risk events, including the Beijing Olympics.

(5) Morgan Stanley required Peterson on multiple occasions to certify his compliance with the FCPA. These written certifications were maintained in Peterson’s permanent employment record.

(6) Morgan Stanley required each of its employees, including Peterson, annually to certify adherence to Morgan Stanley’s Code of Conduct, which included a portion specifically addressing corruption risks and activities that would violate the FCPA.

(7) Morgan Stanley required its employees, including Peterson, annually to disclose their outside business interests.

(8) Morgan Stanley had policies to conduct due diligence on its foreign business partners, conducted due diligence on the Chinese Official and Yongye before initially conducting business with them, and generally imposed an approval process for payments made in the course of its real estate investments. Both were meant to ensure, among other things, that transactions were conducted in accordance with management’s authorization and to prevent improper payments, including the transfer of things of value to officials of foreign governments.

Based on the foregoing, the DOJ declined to prosecute Morgan Stanley and noted in its Press Release, “After considering all the available facts and circumstances, including that Morgan Stanley constructed and maintained a system of internal controls, which provided reasonable assurances that its employees were not bribing government officials, the Department of Justice declined to bring any enforcement action against Morgan Stanley related to Peterson’s conduct.  The company voluntarily disclosed this matter and has cooperated throughout the department’s investigation.”

Compliance Program as Compliance Defense

The second point of note in this enforcement action is that if it was not clear that a company receives credit for having a best practices compliance program it is now. Recognizing that a compliance program is not available as a formal affirmative defense, it is clear that Morgan Stanley was able to use not only their written compliance program, but its ongoing maintenance, communication and due diligence aspects to shield the employer from liability. Remember that Peterson was a Managing Director for Morgan Stanley. This is not a low level functionary but a person far up the food chain. Neither the DOJ nor the SEC invoked the doctrine of Respondeat Superior in any enforcement action against Morgan Stanley. The bottom line is what the DOJ and SEC representatives have been saying all along and that is that companies with best practices compliance programs receive credit in negotiating with the government. Here the DOJ spelled it out in their Press Release so kudos to the DOJ and SEC for doing so in such a public manner.

What Can You Do?

So what can you as a compliance officer do with the lessons learned from this enforcement action? Borrowing from my This Week in FCPA Colleague Howard Sklar’s recent blog post, entitled “The Most Marketable Compliance Officer In The World” I suggest the following:

(1) Regularly update your policies and procedures. The DOJ has said over and over, and has included in Schedule C – its description of an effective anti-corruption compliance program – that companies must update programs, and have several areas of compliance mentioned. Morgan Stanley took that lesson and did exactly what the DOJ expected.

(2) Increase the frequency of your training. Peterson was trained on the FCPA seven times and over a 7-year period Morgan Stanley trained its Asia-based employees 54 times on anti-corruption. This clearly shows that training is important and the documentation of training is critical. How else was Morgan Stanley able to demonstrate the DOJ just how many training sessions Peterson had sat through?

(3) Send out compliance reminders. Peterson received reminders about FCPA compliance 35 times. This is an easy and quick action that you can take often. You can send them out by email, use your internal messaging system or a myriad of other media. Better yet, you could write an email for your company President pointing out that Morgan Stanley was NOT indicted because it had such a robust compliance program.

(4) Engage in ongoing Due Diligence, including transaction monitoring. As Howard noted, “Morgan Stanley had a robust due diligence program. The program included transaction monitoring – a sure sign that a company really cares about diligence is the extent it realizes diligence is ongoing – and included random audits of people and partners.” Ongoing due diligence and monitoring is becoming the new normal so I suggest that you get ahead of the curve, as in now.

I believe that the Peterson enforcement action is one of the most significant in 2012 to date. It provides solid guidance to the compliance practitioner on what the DOJ and SEC think is important and gives you actions that you can engage in now to increase the visibility of your compliance program within your company. Kudos to Morgan Stanley for their compliance victory. You do not have to parade in five pitchers to pitch to five different batters as Brad Mills did, but I think the import should be to take action now.

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

February 16, 2012

Regulation v. Enforcement of the FCPA – A Renewed Call for Release of Declinations

In his blog post of February 16, 2012, entitled “The Justice Department’s Slippery Slope — Enforcement Versus Regulation”, Mike Volkov takes the Department of Justice (DOJ) to task for “hubris and insensitivity to the business community” in their enforcement of the Foreign Corrupt Practices Act (FCPA). I believe that he correctly notes that companies do want to comply with the FCPA but want more guidance so that they do not have to “read the tea leaves” on what the DOJ may believe is conduct violative of the FCPA.

However, I do not believe the “hubris or insensitivity” of the DOJ is the genesis of this perceived problem. Rather, I would argue that it is the nature of system in place. I need to credit my colleague Doug Jacobson for this next insight. For those of you who do not know him, Doug is a well-experienced international trade lawyer, who blogs at International Trade Law News. Doug’s observation was that the FCPA is similar to a regulatory system which, in this case, is being administered by DOJ lawyers. He contrasted this with his international trade law practice, in which he frequently interfaces with regulators from the Departments of Commerce and Treasury on issues related to trade control. Of course if a legal violation occurs, trade control issues can and do go to the DOJ for enforcement, but as counsel representing companies, he can interact with regulators to develop best practices programs, policies and procedures.

In the FCPA arena, there are no regulators to call upon. If one has a query, one is required to ask the group that enforces the FCPA. Of course the DOJ does have its Opinion Release procedure, which has been sometimes used and is of value to those in the compliance field. In addition to Opinion Releases, the only other DOJ comments on best practices are those which are to be found in Deferred Prosecution Agreements (DPA) and Non-Prosecution Agreements (NPA). We are also now beginning to see a body of case law develop, particularly on the definition of who is a foreign governmental official.

In his post, Volkov cites back to a case from the 1970s for some guidance. He wrote that in the aftermath of the breakup of AT&T, District Court Judge Harold H. Greene, who presided over the implementation of the antitrust decree in the case, and Justice Department lawyers played a critical role in setting telecommunications policy. However, he wrote that “The Bell Operating companies argued that they needed to be regulated by the FCC, not the Justice Department and a federal judge. Moreover, the industry accused the judge, and the Justice Department of slowing the telecommunications industry, and eventually the judge and the Justice Department were removed from the issue when Congress enacted the Telecommunications Act of 1996.”

In his dénouement, Volkov urges the DOJ to “respond to the business community, adopt some prosecutorial policies and make them public, so that companies can implement meaningful and effective compliance programs without fear of unfair prosecutions.” However, as lawyers are charged with enforcement, not regulation, I would urge another tack. I have previously argued that another viable source of information is found in DOJ declinations to prosecute companies which self-report potential FCPA violations. A decision to prosecute, or not to prosecute, is precisely what prosecutors do. In the declination process, the DOJ is handling a much broader and more significant amount of information than is found in an Opinion Release. A self-disclosing company has investigated or will investigate a matter, most likely with the aid of specialized outside FCPA investigative counsel. The DOJ has the opportunity to review the investigation and suggest further or other lines of inquiry. Company personnel are made available for DOJ interviews, if appropriate. In short one would have actual facts and detailed oversight by DOJ, which in the case of a declination to prosecute, would provide substantive guidance on why it did not believe a FCPA violation had occurred in the face of a company’s good faith belief that it had violated the FCPA.

Declinations to prosecute are a part of the enforcement process. By releasing declinations to prosecute, the DOJ can maintain its role in enforcement and not become the regulators of the FCPA. I believe that release of this information, redacted in such a manner as to protect the names of the parties involved, would be some of the highest value of compliance information that a practitioner could use to determine what the best practices are and what actions might well constitute a FCPA violation in the eyes of the DOJ. Further, for those who wish to simply water down the statute, in the name of US competitiveness, such information should put to rest the arguments that companies are being unfairly prosecuted for the actions of ‘rogue’ employees.

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

January 13, 2012

DOJ Should Release FCPA Declination Opinions

Welcome to the Washington Legal FoundationEd. Note-I was asked by the Washington Legal Foundation if I would pen an article expressing my views on why the DOJ/SEC should release Declination Opinions. The following is the article and can be downloaded from their website by clicking here. Please note as I wrote it for the Washington Legal Foundation, they, not I, hold the copy-write. 

In an area like Foreign Compliance Practice Act (FCPA) enforcement, where guiding caselaw is largely non-existent, compliance practitioners must rely on the actions and decisions of federal enforcement agencies for information. Such information is available in the form of enforcement actions, the release of Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs), and hypothetical fact patterns presented to the Department of Justice (DOJ) through its Opinion Release procedure. But one highly valuable source of guidance has been kept from regulated entities and their counsels: DOJ and Securities and Exchange Commission (SEC) “declination” decisions, opinions which are drafted when the agencies decline to prosecute an individual or organization.  A change is needed in this counterproductive policy.  The release of substantive information on declinations would help foster greater compliance with the FCPA by providing practitioners with specific facts of circumstances where investigations did not result in an enforcement action.

The Issue Regarding Declinations.  In an article by Miller & Chevalier attorneys James G. Tillen and Marc Alain Bohn, “Declinations During FCPA Boom” the authors reported that since 2008, there have been “at least twenty‐five formal declinations by the DOJ and/or SEC involving twenty companies, nearly all of them publicly‐listed. We also identified several additional cases that might represent declinations, but for which we could find no explicit confirmation of a decision to decline prosecution.” However, these raw numbers do not provide information as to the reasons for the declinations as “it is often unclear why a government investigation has closed without enforcement. It could be that no violations were found to have occurred, that no basis for jurisdiction existed, that enforcement authorities elected to do nothing in deference to a foreign investigation, or that the declination itself represents a benefit in recognition of a company’s voluntary self‐disclosure, remediation and/or cooperation.”

Tillman and Bohn believe that the majority of cases where DOJ or SEC issued declinations were matters in which a company self-reported a potential FCPA violation. Such information would seem to add credence to the oft-stated DOJ position that a company should always self-report. The authors also noted that were such information made publicly available, it could be better quantified and then corporations would understand that self-disclosure can provide a measurable benefit. Others, including Professor Mike Koehler, have called for the public release of the facts and circumstances around the DOJ/SEC decisions not to prosecute companies that self-disclose what they believe are FCPA violations.

DOJ Response.  Why would DOJ not provide substantive information regarding declinations? One possible answer, Tillen and Bohn wrote, came from a June 2011 House Judiciary Committee on the FCPA, where DOJ representative Greg Andres explained that the government does not disclose this information “in large part because we don’t want to penalize a company or an individual that’s been investigated and not prosecuted”

suggesting “[t]here may be some prejudice from that.” Interestingly, soon after the conclusion of the House Judiciary Committee hearing, Chairman James Sensenbrenner and Representative Sandy Adams sent Andres a letter and requested information on DOJ declinations.  The letter stated, “Please provide to us information on cases that been brought to the attention of DOJ, but your agency decided, for one reason or another, not to investigate or pursue prosecution within in the last year along with the rationale for those decisions.”

As reported in The FCPA Professor blog in a post entitled DOJ Declines to Get Specific in Declination Responses, DOJ responded to the request. Assistant Attorney General Ronald Weich wrote that “the Department has declined to prosecute corporate entities in several cases based on particular facts and circumstances presented in those matters, and taking into account the available evidence.”  He also provided several examples of matters DOJ has declined to prosecute where “some or all of the following circumstances existed”:

1. A corporation voluntarily and fully self-disclosed potential misconduct;

2. Principals of a corporation voluntarily engaged in interviews with DOJ and provided truthful and complete information about their conduct;

3. A parent corporation voluntarily and fully self-disclosed information to DOJ regarding alleged conduct by     subsidiaries;

4. A parent company conducted extensive pre-acquisition due diligence of potentially liable subsidiaries, and engaged in significant remediation efforts in acquiring the relevant subsidiaries;

5. A company provided information to DOJ about the parent’s extensive compliance policies, procedures, and internal controls, which the parent had implemented at the relevant subsidiaries; and

6. A company agreed to a civil resolution with the SEC, while also demonstrating that a declination was appropriate for additional reasons; a single employee, and no other employee, was involved in the provision of improper payments; and the improper payments involved minimal funds compared to the overall business revenues.

Proposal.  Imagine the guidance which DOJ could have provided if any or all of the above six instances cited in Weich’s letter was made available to companies and compliance practitioners. A model to follow for doing this already exists at DOJ. Its Opinion Release procedure offers a specific opinion on whether a certain set of hypothetical facts, based upon a written submission, would lead to a FCPA enforcement action.

In the declination process, DOJ is handling a much broader and more significant amount of information. A self-disclosing company has investigated or will investigate a matter, most likely with the aid of specialized outside FCPA investigative counsel. DOJ has the opportunity to review the investigation and suggest further or other lines of inquiry. Company personnel are made available for DOJ interviews, if appropriate. In short one would have actual facts and detailed oversight by DOJ, which in the case of a declination to prosecute, would provide substantive guidance on why it did not believe a FCPA violation had occurred in the face of a company’s good faith belief that it had violated the FCPA.

DOJ’s reasoning for refusing to release declination opinions is misplaced. While DOJ is appropriately concerned with the release of names or other substantive identifiers of any company which receives a declination, such information can be easily removed or scrubbed. In Opinion Releases, DOJ identifies the industry, geographic location, and other specific facts which are of great benefit to compliance practitioners. DOJ could easily do the same with declinations while still providing its reasoning for declining to prosecute.

The substantive portions of declinations, excised of company-specific information, would greatly increase FCPA enforcement transparency. This, in turn, would inspire greater FCPA compliance through a better understanding of how DOJ interprets the law with the specific facts presented to it.

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.

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