FCPA Compliance and Ethics Blog

April 14, 2014

The HP FCPA Settlement

FCPA SettlementLast week the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) jointly announced the conclusion of a Foreign Corrupt Practices Act (FCPA) enforcement action against Hewlett-Packard Company (HP). In the settlement, HP agreed to pay $108MM in fines, penalties and disgorgements for criminal and civil acts. To say that it was one of the more perplexing FCPA settlements would seem to be an understatement. While some will read the settlement documents and see conduct which did not merit such a high total amount of fines and penalties, I am not from that camp.

The tale of this sordid affair of bribery and corruption occurred over 3 continents with multiple countries involved, evidencing an entire breakdown in company internal controls and a complete lack of a culture of compliance. Yet the settlement documents make great pains to emphasize that few employees were actually involved in the nefarious conduct. How bad was the conduct? Think right up there with BizJet because we had bags of cash delivered to a Polish government official. (But unlike BizJet, the Board of Directors did not approve the bribery scheme and it was not taken across the border.) For the Russian deal, it was shopped through several countries with multiple levels of company review, which did not seem to work or care much about anything except getting the deal done. For Mexico, they just seemed to get a free pass where the contract description for the agent who paid the bribe was “influencer fee”.

Finally, as most readers might remember, HP did not self-report this misconduct to the DOJ or SEC. Apparently, the story of HP’s bribery by its German subsidiary to gain a contract in Russia was broken by the Wall Street Journal (WSJ) article in April 15, 2010. The next day, the DOJ and SEC announced they were investigating the allegations of bribery. However, HP was made aware of the allegations by its German subsidiary in December 2009, when German authorities raided HP’s offices in Munich and arrested one HP Germany executive and two former employees. Yet HP never self-reported. Not exactly the poster child for self-disclosure for any company going forward.

Of course HP’s public response at the time indicated its attitude, when a HP spokesperson was quoted in the WSJ article as saying “This is an investigation of alleged conduct that occurred almost seven years ago, largely by employees no longer with HP. We are cooperating fully with the German and Russian authorities and will continue to conduct our own internal investigation.”

More befuddlement comes from the reported facts around HP Germany. As noted by the WSJ report, one, then current, HP executive was arrested and two former employees were arrested in connection with the investigation by German authorities. There is no mention of them in any of the settlement documents. The WSJ article also reported that investigation-related documents submitted to a German court showed that German prosecutors were “looking into whether H-P executives funneled the suspected bribes through a network of shell companies and accounts in places including Britain, Austria, Switzerland, the British Virgin Islands, Belize, New Zealand, the Baltic nations of Latvia and Lithuania, and the states of Delaware and Wyoming”. While some of these countries were mentioned in the settlement documents there was no mentions of DOJ or SEC investigations into Wyoming, Belize, the British Virgin Islands or New Zealand.

What are we to make of the criminal fines levied against the Russian and Polish subsidiaries of HP? The Polish subsidiary pled guilty to a two count Criminal Information consisting of (1) violating the FCPA’s internal control provisions; (2) violating the FCPA’s books and records provisions. The US Sentencing Guidelines suggested a fine range of $19MM to $38MM, the final fine was $15,450,244.

For the Russia deal, the Russian subsidiary pled guilty to a four count Criminal Information consisting of (1) conspiracy to violate the books and records provisions of the FCPA; (2) violating the FCPA’s anti-bribery provisions; (3) violating the FCPA’s internal control provisions; (4) violating the FCPA’s books and records provisions. The US Sentencing Guidelines suggested a fine range of $87MM to $174MM, yet the final fine was $58,772,250.

Finally, in Mexico HP’s subsidiary, according the to the SEC Press Release, “paid a consultant to help the company win a public IT contract worth approximately $6 million. At least $125,000 was funneled to a government official at the state-owned petroleum company with whom the consultant had connections. Although the consultant was not an approved deal partner and had not been subjected to the due diligence required under company policy, HP Mexico sales managers used a pass-through entity to pay inflated commissions to the consultant.” This was internally referred to by HP as an “influencer fee.” Pretty clear evidence of what it was to be used for, wouldn’t you say? Yet the DOJ did not to criminally prosecute the company’s Mexican subsidiary and entered into a Non-Prosecution Agreement (NPA), HP agreed to pay forfeiture in the amount of $2,527,750.

How did HP accomplish all of this? In a Press Release HP Executive Vice President and General Counsel John Schultz said, “The misconduct described in the settlement was limited to a small number of people who are no longer employed by the company. HP fully cooperated with both the Department of Justice and the Securities and Exchange Commission in the investigation of these matters and will continue to provide customers around the world with top quality products and services without interruption.”

As reported by the FCPA Professor, in his blog post entitled “HP And Related Entities Resolve $108 Million FCPA Enforcement Action”, the HP Russian subsidiary Plea Agreement gave the following factors for the reduction in the fine from the Sentencing Guideline range:

“(a) monetary assessments that HP has agreed to pay to the SEC and is expected to pay to law enforcement authorities in Germany relating to the same conduct at issue …; (b) HP Russia’s and HP’s cooperation has been, on the whole, extraordinary, including conducting an extensive internal investigation, voluntarily making U.S. and foreign employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the Department; (c) HP Russia and HP have engaged in extensive remediation, including by taking appropriate disciplinary action against culpable employees of HP and enhancing their internal accounting, reporting, and compliance functions; (d) HP has committed to continue enhancing its compliance program and internal accounting controls … (e) the misconduct identified … was largely undertaken by employees associated with HP Russia, which employed a small fraction of HP global workforce during the relevant period; (f) neither HP nor HP Russia has previously been subject of any criminal enforcement action by the Department or law enforcement authority in Russia or elsewhere; (g) HP Russia and HP have agreed to continue to cooperate with the Department and other U.S. and foreign law enforcement authorities, if requested by the Department …”

In the same blog post, the Professor reported the following reasons were stated for reduction in the final fine by HP’s Polish subsidiary’s:

“(a) HP Poland’s cooperation with the Department’s investigation; (b) HP Poland’s ultimate parent corporation, HP, has committed to maintain and continue enhancing its compliance program and internal accounting controls …; and (c) HP Poland and HP have agreed to continue with the Department and other U.S. and foreign law enforcement authorities in any ongoing investigation …”

We have witnessed companies, which have engaged in ‘extraordinary cooperation’ with the DOJ during the pendency of their FCPA investigations. BizJet is certainly one that comes to mind. Further, there are clear examples of companies, which extensively remediated during the pendancies of their FCPA investigations, from which they clearly benefited. Two prime examples are Parker Drilling, which not only received a financial penalty below the suggested range but also was not required to have a corporate monitor, while they had C-Suite involvement in its bribery scheme. Weatherford seeming came back from the brink during mid-investigation when they hired Billy Jacobson and turned around not only their attitude towards cooperation with the DOJ but also their efforts toward remediation.

Both of these companies are headquartered in Houston and both have been quite active on the conference circuit talking about their compliance programs so most compliance practitioners are aware that these companies are on the forefront of best practices. Perhaps HP is on some circuit doing that, somewhere. If so, kudos to them. If their remediation work led to a best practices compliance program for the company and their extraordinary cooperation led to the astonishing reduction in penalties to their entities, I certainly tip my cap to them. If their lawyers were great negotiators and made great presentations to the DOJ and SEC, all of which led to or contributed to the final results, a tip of the cap to them as well.

So what is the lesson to be learned for the compliance practitioner? Other than befuddlement, I am not sure. Congratulating HP and its counsel is not a lesson it is an action. If HP now has a best practices compliance program, I hope they will provide the compliance community with the lessons that they learned and incorporated into their compliance program, which allowed them to obtain the fines below the minimum suggested range. If they have incorporated some enhanced compliance components into their program I hope they will share those enhancements too.

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

© Thomas R. Fox, 2014

April 7, 2014

The Battle of Shiloh, Corruption in Ukraine and Things to Come

Things to ComeOn this day 126 years ago the two-day battle of Shiloh ended. On the second day, the Union troops under General Grant largely recovered the ground that the Confederate troops had taken on the first day. Grant was severely criticized for allegedly being taken by surprise by the Confederate attack but he managed to survive the firestorm. The Confederates lost their most senior commander, General Albert Sydney Johnson, on the first day of the fighting.

With the successful Union counter-attack on the second day the battle is generally viewed as a tactical victory for the North. However, for me the thing that is most significant about this battle is that it was the first horrific slaughter of the Civil War. There were over 23,000 casualties on both sides. Unfortunately it presaged more to come. I will never forget Shelby Foote’s comments in Ken Burn’s documentary The Civil War. Shiloh was not an aberration but there were 25 more Shiloh’s to come. It truly was a sign of things to come.

The recent events in Ukraine have had a variety of interpretations, results and predictions. But one thing is clear, the government of Ukraine allowed systemic corruption to occur. One can look to the Archer-Daniels-Midland Corp. (ADM) Foreign Corrupt Practices Act (FPCA) enforcement action to see the effects in play. In that matter, ADM paid bribes to obtain tax rebates to which it was legally entitled. Unfortunately for ADM it developed opaque schemes to fund bribery payments and then hid them on its books and records. Not good for FPCA compliance.

Or consider the case of Ikea. In an article in Bloomberg, entitled “Dashed Ikea Dreams Show Decades Lost to Bribery in Ukraine”, Agnes Lovasz wrote that Ikea has tried for over a decade to open a store in the country but has been unable to do so because it refuses to pay bribes to do so. She wrote that according to Transparency International’s (TI’s) Corruptions Perceptions Index (CPI), “Stuck between the European Union and its former imperial master Russia, Ukraine has emerged as the most corrupt country on the continent.” She quoted Erik Nielsen, chief global economist at UniCredit SpA in London, for the following, “Even before this latest crisis, Ukraine was a mess beyond description”. How about this recommendation from Lennart Dahlgren, a retired Ikea executive who led the company’s entry into Russia, who said in an interview with Russkiy Reporter magazine in 2010, that compared with Ukraine, Russia, the most corrupt major economy, “is whiter than snow”. Faint praise indeed.

While a US, UK, EU or other western government response is certainly appropriate, I thought about a business led response to such a situation when I read a recent article in the April issue of the Harvard Business Review (HBR), entitled “The Collaboration Imperative”, by authors Ram Nidumolu, Jib Ellison, John Whalen and Erin Billman. In this article they discussed business collaborations in the context of sustainability. I found their concepts should be considered by companies or industry groups when trying to develop strategies to fight corruption. As Jason Poblete continually reminds us, the marketplace is one important place to look for solutions to problems and this article certainly provides some starting points for such an analysis.

The authors posit that collaboration models should be divided into two categories: (1) coordinated processes and (2) coordinated outcomes. Adapting these to anti-corruption/anti-bribery programs, this means that under the ‘coordinated processes’ prong businesses should identify and share industry-wide operational processes that prevent and detect bribery and corruption. Under the ‘coordinated outcomes’ prong, the authors work translates into developing industry benchmarks and standardized systems for measuring anti-corruption/anti-bribery performance across the value chain.

The authors had some specific steps in their article which I thought also provided insightful for implementing their ideas in the anti-corruption/anti-bribery context. First you should being this journey “with a small, committed group.” The reason to do so is “to prevent the logjams that can occur when many stakeholders with conflicting goals try to work together, start by convening a small “founding circle” of participants. The members must have a common motivation and have mutual trust at the outset. This group develops the project vision and selectively invites subsequent tiers of participants into the project as it develops.” Next you should try to “link self-interest to shared interest.” This is because to help facilitate success, “collaboration initiatives must ensure that each participant recognize at the outset the compelling business value that it stands to gain when shared interests are met.” The participants need to then try to monetize the system value by “linking self-interest and shared interest is to quantify how the collaboration reduces costs or generates revenue for each participant.” It helps to build a direct path to some early successes because it is important “to generate momentum and commitment, the action plan must also emphasize quick wins. Business thrives on visible and immediate results, and sustainability collaborations are no exception. Even if these wins are small initially, the cost savings or incremental revenues provide proof to other executives inside participants’ organizations that the investment is worthwhile.”

As many in such a collaborative group will have conflicting priorities, the authors believe it is important to have “independent project-management specialists with demonstrated competence in trust building among diverse stakeholders. Additionally, the project management function must be seen by all participants as neutral and committed to the success of the project, rather than to any individual stakeholder.” Interestingly, the authors note that there should be built in competition which should be “structured to support shared goals.” Finally, and perhaps most obviously, any such group must have a culture of trust. Fortunately, in the anti-corruption/anti-bribery world there are very few trade secrets but beyond this, the “building and maintaining trust is an ongoing practice foundational to every other practice during the collaboration project.”

Perhaps the people or the leadership of Ukraine may at some point realize that the perceived endemic nature of corruption in their economic system, helped lead in part to its current problems. Maybe the citizens in Crimea thought the Russian government less corrupt. While I do not pretend to know the answers to these questions, the collaboration model that the authors have detailed for sustainability initiatives is certainly one that US companies might wish to consider on some type of industry wide basis.

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

© Thomas R. Fox, 2014

February 20, 2014

C’Mon Man Or the End of the World?

Prepare End of the WorldIt’s the end of the world as we know it,

It’s the end of the world as we know it

It’s the end of the world as we know it, and I feel fine

 The above lyrics came from REM and they reflect how I generally feel about law firm and lawyer pronouncements about the Foreign Corrupt Practices Act (FCPA) enforcement because [SPOILER ALERT] I am a lawyer, I do practice law and I do work for a law firm, the venerable TomFoxLaw. The FCPA Professor regularly chides FCPA Inc. for their scaremongering tactics, usually monikered as ‘Client Alerts’. Mike Volkov is even more derisive when he calls them the FCPA Paparazzi and cites examples from his days in Big Law, where law firm marketing campaigns are centered around doomsday scenarios about soon-to-occur FCPA; UK Bribery Act; or [fill in the anti-corruption law here] prosecutions and enforcement actions. I usually take such law firm scaremonger and blathering’s to be about worth as much as the paper they are printed on. Indeed I chide the FCPA Professor and Monsieur Volkov for their protestations. In other words, I feel fine.

I am a proud card-carry member of FCPA Inc. because not only can I spell FCPA (and UKBA for that matter), I also make FCPA related pronouncements from time-to-time and practice law in the FCPA space. I think we generally do a pretty good job of getting information out there. But last week one missive occurred that not only met the above impugning adjectives but created a veritable tsunami of mis-information as it made its way from China to Europe and to the US that even I thought was beyond the pale. How absurd was it? So absurd that not only did the FCPA Professor and I agree about it, but we decided to post blogs about it today.

On February 5 a law firm client alert stated, “While the number of enforcement actions may decrease or hold steady, we can expect some “blockbuster” settlements in 2014 of matters that have long been under investigation.” Blockbuster…really? Do you think this law firm was implying that the Siemens record FCPA fine of $800MM, plus its equivalent $800MM fine in Germany, that’s a total of $1.6 bn for those of you keeping score at home, is seriously in danger of falling by the wayside in 2014? How about Halliburton’s comparatively paltry $579MM penalty? To be slapped aside like a green-skinned witch yelling, “I’m melting!” BAE coming in at No. 3 with a measly $400MM must be quaking it is British Wellington boots about now.

As inane as this comment was, the thing that attracted my attention was the tidal force wave by which this quote rode its way all the way to the US. By February 10th, this quote had morphed into the following, written in the South China Morning Post, “The United States is expected to impose “blockbuster” fines on companies bribing foreign officials this year, with China a likely target of US investigations, lawyers say. A report by US law firm WilmerHale predicts “blockbuster” settlements under the Foreign Corrupt Practices Act (FCPA). “US enforcement authorities have stated there are a number of very large settlements in the pipeline,” said Jay Holtmeier, a partner at WilmerHale. “Given the attention paid to China in recent years, it is a safe bet some of those large settlements will involve conduct in China.”” Two days later the full storm reached the shores of the US when this article was referenced in the Wall Street Journal’s (WSJ’s) Corruption Currents.

So now not only do we have ‘blockbuster’ FCPA settlements coming; we will have them coming out of China. Various marketing departments will use these statements as ‘authoritative’, yet another reason to purchase their company’s products or services.

There are plenty of great FCPA resources out there, which inform the compliance practitioner, or indeed the non-compliance specialist, about the costs of a FCPA enforcement action. But more importantly there is more than a wealth of free, at no cost, information about how to craft a compliance program with any anti-corruption law, which currently exists. There is the same amount of information about how to ‘do compliance’, once again free and available at no charge. Is it marketing? My answer is either yes or better yet; who cares? Good solid information is good solid information no matter what the motives behind putting it out there are.

But here is the problem with making such statements which newspapers then follow them up by brandishing them as even more dire predictions. Someone might actually believe it. Next Congress will want to investigate these ‘blockbuster’ settlements or, perhaps, why after it was reported that they were coming, the Department of Justice (DOJ) did not have any ‘blockbuster’ settlements in 2014?

I thought about writing this blog post around the tale of the Boy Who Cried Wolf but I realized there is always another law firm or lawyer out there will to say the end of the world is coming “this year”. But perhaps the better analogy is the ESPN segment entitled “C’Mon Man!” during which each color commentator will describe a play or series of plays that made them scratch their heads and say “C’Mon Man!” So while I generally feel fine about the information disseminated by and from FCPA Inc., my suggestion is that everyone just take a deep breath and consider such information for what it is worth.

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

© Thomas R. Fox, 2014

February 13, 2014

What is the Role of An Apology In Anti-Corruption Enforcement?

ApologyWhat is the most famous apology in literature? Plato’s Apology for Socrates certainly is in the conversation. In addition to presenting Plato’s views on his teacher, it is believed to be the most authentic account that has been preserved of Socrates’ defense of himself as it was presented before the Athenian Council. I thought about the change in the meaning of an apology in modern times whilst reading an article in the New York Times (NYT) DealBook column over the past few weeks on the subject of apologies.

This exploration of apologies began with two DealBook articles earlier this month. One was a guest article, entitled “Calling for an Apology Cease-Fire”, by Dov Seidman, founder of LRN, who has been tracking apology trends for many years. The second was by Andrew Ross Sorkin and was entitled “Too Many Sorry Excuses for Apology”. Seidman laid out the problem as follows, “I am also offended because there are some authentic, legitimate apologies that are sent forth into the world. But bad apologies drive out good, so that those who take their apologies seriously, and work tirelessly to live up to them, are dismissed along with the drivel. Apologies can and should be hugely important actions and mechanisms, blessed with enormous power and lasting impact. But they must be two-way exchanges of trust and healing that are open and transparent. It is because I mourn the loss of the genuine apology that I propose an apology cease-fire.”

Sorkin viewed the problem from a slightly different angle when he wrote, “But what should you do when you don’t think you should apologize but everyone else does? You know the situation: Leaders “apologize” but clearly don’t mean it because they don’t think they should be apologizing in the first place. They apologize to gain some good will from the public rather than defend the behavior that is being criticized.”

Seidman finds that most apologies today do not provide any substance behind them. He said “our values have been so distorted that most people – and I’m considering both prominent apologizers and the rest of us – operate as though the purpose of an apology is to get out of something with the minimum pain and suffering possible. So you tell the aggrieved party you’re sorry – that you regret stepping on their foot, stepping on their self-confidence or stepping on their insurance policy. They accept mechanically, and we all move on.”

Seidman believes there are five essential characteristics of an authentic apology and they are: 

  • They must be painful. If an apology doesn’t create vulnerability and isn’t therapeutically painful, it’s not an apology at all.
  • They must be authentic and not an excuse. An apology can’t have ulterior motives or be a means to an end.
  • They must probe deep into the personal or organizational values that permitted the offense. Apologizers need to conduct a “moral audit” by looking themselves in the mirror and asking, “How did I get here and how did I drift from the person I aspire to be?”
  • They must encourage feedback from the aggrieved. This includes truly opening up to input and two-way conversation during and after an apology, and embracing ideas as to how to improve.
  • They must turn regret into a real change in behavior. The new behaviors they elicit must be continuing, reinforced by a sustained investment in avoiding the same mistakes in the future.

I often use what I characterize as McNulty’s Maxims on questions that would be asked by a regulator in any Foreign Corrupt Practices Act (FCPA) enforcement action: (1) What did you do to prevent it?; (2) What did you do to detect it?; and (3) What did you do when you found out about it? I find that Seidman’s prescriptions for an authentic apology resonate with McNulty Maxim Number 3, which in many ways is the most important maxim. Did your company move forward to remediate the issue that caused the FCPA violation? What steps did you take? Did you terminate those responsible? Were there any internal penalties against senior management or the Board that oversaw the conduct in question? Was your company accountable?

Seidman ends his piece by suggesting that there be a new “apology metric” to determine how authentic and how effective an apology is over time. He states, “Let’s commit to demanding more from business and public figures — and from ourselves — when contrition is being pursued. It will not be easy. But by returning to a search for redemption that accepts its difficultly, we can rediscover its real possibility. I invite you to join me in continuing both a personal and public exploration of the authentic apology. Let’s hold ourselves accountable for restoring the value of a precious and noble commodity.”

Sorkin, coming at his piece from his reporter hat, proposes a complimentary approach. He has started an ““Apology Watch” on the DealBook website  and on Twitter using the hashtag #ApologyWatch. It is his hope that DealBook “readers will participate by helping us track new apologies and, more important, follow up on what companies, institutions and individuals have done post-apology.”

Should an apology be a part of any settlement of a FCPA enforcement action? If not, when is an apology appropriate for a corporate leader when his or her company admits to violations of the FCPA, UK Bribery Act, Chinese domestic anti-bribery laws or another other similar anti-corruption regimes? Indeed are there simply too many insincere apologies being made by corporate executives? I think that the answer falls within McNulty’s Maxim No. 3. For if your actions belie your words, it probably means that your words have no meaning and indeed are simply empty words. If that is true you may well end up with what Seidman portends, “For those caught in an empty apology, the results could be expensive and embarrassing.”

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

© Thomas R. Fox, 2014

January 29, 2014

The Sussex Vampyre and the ADM FCPA Settlement

Sussex VampyreToday I want to use the story of The Sussex Vampyre as the starting point for an inquiry into the recent Archer-Daniels-Midland Corp (ADM) Foreign Corrupt Practices Act (FCPA) enforcement action. In the story, Holmes receives a letter from Robert Ferguson, who has become convinced that his second wife has been sucking their baby son’s blood and is a vampire. He has a crippled son from his first marriage who is terribly jealous of the new baby in their home. It turns out that this lame son, Jack, has been shooting poisoned darts at his baby brother and his stepmother’s behavior is actually sucking the poison out of the baby’s neck. The baby’s wounds were caused by Jack sending the darts, not by the mother biting her baby. In other words, what might be seen as something very scary is easily explained.

Once again demonstrating that the FCPA Professor and myself look at the same thing and come to different conclusions are reflected by those he states in his article “Why You Should Be Alarmed By the ADM FCPA Enforcement Action”. I see the ADM enforcement action as a continuation of the available case law favoring interpretations of the business nexus requirement to be applied broadly, where it is clear that bribery and corruption have occurred.

When I look at the facts laid out in the ADM settlement documents, I see the following: four separate bribery schemes hidden in the companies books and records clearly designed to influence the decision of a foreign government official. From 2002 to 2010, the company’s Ukrainian subsidiary rolled up VAT receivables of up to $46MM. What I see is a company, which over several years of slow and no response to its application for VAT tax refunds for goods purchased in Ukraine, responded to this problem by engaging in bribery and corruption to help them get the money that they were believed they were owed.

So what were these bribery schemes? There was the Charitable Donation Scheme, which according to the SEC Complaint, “an ADM executive in the tax department sent an e-mail to the head of an international tax organization and stated, “One of our affiliates operates in the Ukraine. In order to recover 100% of their input VAT they have to pay 30% of the amount to local charities.”” Next was the Stevedoring Company Scheme where two ADM subsidiaries made “payments to a stevedoring company in the port of Odessa so that it could pass on nearly all of those payments to Ukrainian officials in order to obtain VAT refunds on behalf of ACTI Ukraine.” Next was the Mischaracterization of Write-offs Scheme where ADM’s German subsidiary reported to the US parent that they had to write off 18% of the tax refund due back to the company. However upon payment of the VAT refund it would be at 100% of the total due. As the German subsidiary had taken a write off of 18% of the total, the corresponding amount of money would be funneled to “third-party vendors so that nearly all of those monies could be provided to Ukrainian government officials.” Finally, and most ingenuously, was the Fake Insurance Premiums Scheme. In this scheme, ADM’s Ukrainian subsidiary, arranged for an insurance company to falsely bill it for crop insurance, which said “Insurance Company never intended to honor, adjusting the premiums to be roughly 20% of the VAT refund.” This inflated amount was then paid to Ukrainian officials.

The FCPA itself says:

(a) Prohibition

It shall be unlawful for any issuer which has a class of securities registered pursuant to section 781 of this title or which is required to file reports under section 780d of this title, or for any officer, director, employee, or agent of such issuer or any stockholder thereof acting on behalf of such issuer, to make use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to—

(1) any foreign official for purposes of—

(A)

(i) influencing any act or decision of such foreign official in his official capacity,

(ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or

(iii) securing any improper advantage; or

(B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality,

 in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person;

In the case of US v. Kay, the Fifth Circuit Court of Appeals exhaustively reviewed the legislative history of the FCPA, from its passage in 1977 through the two amendments in 1988 and 1998. The Kay decision stands for the proposition that the defendant intend the paying of bribes to be a quid pro quo, which would assist (or is meant to assist) the payor in obtaining or retaining business. Further, it specifically stated that the “business nexus is not to be interpreted narrowly.” The facts in Kay were different than those presented in the ADM matter. However, with the admonition that the business nexus requirement is not to be interpreted narrowly, I believe the holding in Kay is such that it is not a stretch to see the conduct engaged in by ADM did assist, or was meant to assist, it in doing business in Ukraine. Indeed, the Kay decision stated, “In addition, the concern of Congress with the immorality, inefficiency, and unethical character of bribery presumably does not vanish simply because the tainted payments are intended to secure a favorable decision less significant than winning a contract bid.” Thus I look at Kay and see the conduct of ADM as falling within the broad outlines of the Kay decision.

How about the facilitation payment exception and that somehow the ADM subsidiaries were making payments exempted out of the FCPA because they were for routine services?

The FCPA itself states:

(b) Exception for routine governmental action

Subsections (a) and (g) of this section 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 by a foreign official, political party, or party official.

Further, the term “routine governmental action” is defined as one of the following:

  1.  Obtaining Permits;
  2. Processing visas and work orders;
  3. Providing police protection, mail pick-up and delivery;
  4. Providing phone services and utilities;
  5. Actions of a similar nature.

There is nothing in the statute about processing multi-million dollar tax refunds as a routine governmental action. Once again the Kay decision spoke to the issue of facilitation payments, similar to those made in the context of the ADM settlement, when it said “This observation is not diminished by Congress’s understanding and accepting that relatively small facilitating payments were, at the time, among the accepted costs of doing business in many foreign countries.” One key there is that facilitating payments be “relatively small”. Whatever 18% of $46MM might be, it certainly is not “relatively small”.

All of this leads me to see the ADM settlement as a continuation of the very limited case law interpretation that exists around the FCPA. So just as Holmes looked at the facts in The Sussex Vampyre and did not see something which could not be explained or need be feared; I look at the ADM enforcement action and see a company which engaged in bribery and corruption, knew it was doing so and actively tried to hide the corrupt payments in its books and records.

And once again, I would cite that the easiest response to all of this might be the advice given by Department of Justice (DOJ) representative Greg Anders, in his testimony to the House Judiciary Committee regarding amending the FCPA, that being that companies should not engage in bribery.

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

© Thomas R. Fox, 2014

January 3, 2014

The FCPA Year in Reivew-the eBook

I am pleased to announce the release of my eBook, “2013-the FCPA Year in Review” available through amazon.com. The past year saw the highest number of U.S. prosecutions of corporate bribery overseas since the banner year of 2010.  Some of the key corporate cases were Parker Drilling, Total and Weatherford. 2013 also saw 13 individuals prosecuted for FCPA or related criminal or civil violations. This jump in prosecutions illustrates the government’s commitment to aggressively pursuing these cases.

In this book, I review the underlying facts which led to the FCPA enforcement actions and the key lessons to be learned by the compliance practitioner going forward. I am certain that you will find this book useful in assessing your compliance program for 2014 and beyond.

It is a great value at $4.99. You can purchase a copy of the eBook, “2013-the FCPA Year in Review” by clicking here.

January 2, 2014

The 2013 FCPA Year in Review-Corporate Enforcement Actions

In my final post of 2013, I reviewed all of the individual Foreign Corrupt Practices Act enforcement actions which occurred in the past year. In this first post of 2014, I review all the corporate enforcement actions in 2013. If you would like to have a handy reference on all of the 2013 FCPA enforcement actions, I am pleased to announce the publication of my latest book, entitled, “2013-the FCPA Year in Review”. It is available in an eBook format on Amazon.com.

A.     Total

Total SA engaged in a nearly decade long, breathtaking bribery scheme. In this scheme, Total paid approximately $60MM to an un-named Iranian Official of the National Iranian Oil Company (NIOC), who steered two major projects Total’s way. The projects for which Total paid the bribes were the Sirri A and E oil and gas fields and South Pars gas field. Total paid a criminal penalty to the DOJ of $245.2 million and civil penalty of $153 to the SEC.” Total’s agreed monetary penalty of $398MM was the fourth biggest FCPA resolution.

B.     Parker Drilling

The company was involved in a bribery scheme to pay-off judges in a Nigerian Tax Court to allow Parker Drilling to pay lower than warranted tax assessments for its drilling rigs in the country. Due to its efforts to create a gold standard compliance program all the while undergoing its own internal investigation, Parker Drilling’s conduct earned it an “approximately 20 percent reduction off the bottom of the fine range” which suggested a fine of between $14.7MM to $29.4MM. The final DOJ fine was $11,760,000. The company also agreed to pay disgorgement of $3,050MM plus pre-judgment interest of $1,040,818, to the SEC.

C.     Ralph Lauren

The Ralph Lauren Company received Non-Prosecution Agreements (NPA) granted by the SEC and DOJ. The illegal conduct at issue related to its Argentinian subsidiary and efforts by the General Manager of that operation, who conspired with a customs clearance agency to make payments “to assist in improperly obtaining paperwork necessary for goods to clear customs, to permit clearance of items without the necessary paperwork, to permit the clearance of prohibited items, and to avoid inspection.” For its conduct, Ralph Lauren agreed to pay $882K to the DOJ and $593K in disgorgement and $141K in pre-judgment interest to the SEC.

D.    Weatherford

In late November, Weatherford International Limited (Weatherford) concluded one of the longest running open FCPA investigations when it agreed to the ninth largest FCPA fine of all-time and one of its subsidiaries, Weatherford Services Limited (WSL), agreed to plead guilty to violating the anti-bribery provisions of the FCPA. The total amount of fines and penalties for the FCPA violations was $152.6 million. The company was also hit with another $100 million in fines and penalties for trade sanctions bringing its total amount paid to $252.6 million. The bribery schemes that Weatherford used were varied but stunning in their brazen nature. But in spite of how things began, Weatherford was able to make a turnaround and substantially improve its position by reversing this initial nose-thumbing at US regulators.

E.     Stryker

In an interesting FCPA enforcement action resolved in October, the Stryker Corporation agreed to settle with the SEC via an Administrative Order, not a criminal action filed by the DOJ. According to the FCPA Blog, “The SEC said Stryker Corporation will pay $13.2 million to resolve FCPA violations. The bribes totaled about $2 million and were ‘incorrectly described as legitimate expenses in the company’s books and records,’ according to the SEC. Stryker will disgorge to the SEC $7.5 million and prejudgment interest of $2.28 million. It is also paying a penalty of $3.5 million.” SEC Complaint. There was not even a civil Complaint filed by the SEC and Stryker is not required to have a Corporate Monitor to assess its ongoing compliance efforts or its commitment to having a compliance program.

F.     Diebold

In late October, Diebold, an Ohio company which makes ATM machines, agreed to pay a criminal fine of $25.2 million to the DOJ and $23 million in disgorgement and prejudgment interest to the SEC to resolve allegations it violated the FCPA by covering up bribes to bank officials in China, Indonesia and Russia. The total fine of just over $48MM. The DOJ charged it in a two-count information with conspiring to violate the FCPA’s anti-bribery and books and records provisions and a substantive books and records offense. There were no charges under the anti-bribery provisions, which apply only to corrupt payments to foreign officials. The Diebold resolution took the form of a DPA with the DOJ, along with a fines and a Corporate Monitor. From its resolution with the SEC in addition to the profit disgorgement and prejudgment interest paid the company agreed to an agreed injunction to stop, once again, violating the FCPA.

G.    Bilfinger SE

In early December, DOJ announced it had resolved an ongoing FCPA with German entity Bilfinger SE (Bilfinger). This case involved the same background facts and events as the Willbros corporate FCPA enforcement action and the related individual enforcement actions with some of its former employees. The facts in this case were bad, bad, bad. The Bilfinger enforcement action moves towards the ending of one of the sorriest examples of corporate malfeasance in the FCPA world. While it took a long time, justice has certainly been a long time coming. With the continued flight from justice of former Willbros employee James Tillery who renounce his US citizenship to try and escape prosecution by taking refuge in Nigeria; perhaps things are coming to an end. But with the conclusion of this corporate enforcement action against Bilfinger, perhaps there may be additional individual enforcement actions.

H.    Archer-Daniels-Midland

In late December, it was announced by the DOJ and SEC that they had settled both a criminal and civil enforcement action with Archer-Daniels-Midland Company. The DOJ resolved the criminal action when a subsidiary of ADM pled guilty and agreed to pay more than $17 million in criminal fines to resolve charges that it paid bribes through vendors to Ukrainian government officials to obtain value-added tax (VAT) refunds, in violation of the FCPA. In a parallel civil FCPA action settled with the SEC and the SEC Press Release noted that “The payments were then concealed by improperly recording the transactions in accounting records as insurance premiums and other purported business expenses. ADM had insufficient anti-bribery compliance controls and made approximately $33 million in illegal profits as a result of the bribery by its subsidiaries.” In addition to the DOJ fine of $17.8MM, ADM agreed to pay “disgorgement of $33,342,012 plus prejudgment interest of $3,125,354.”

What Did It All Mean?

The clear message from these corporate enforcement actions is that early detection and remediation can lead to a significant reduction in fines and penalties. I believe that these corporate enforcement actions make clear that a company’s actions during the pendency of the investigation, in addition to the underlying FCPA violations, will be evaluated and assessed to determine the final penalty. The DOJ and SEC continue to communicate not only what they believe constitutes a best practices compliance program but equally importantly what actions a company can engage in which will significantly reduce a company’s overall fine and penalty. Both the DOJ and SEC continue to communicate, through their enforcement actions, to the compliance practitioner what they expect from companies in the way of a best practices compliance program and what a company should do if they discover a potential FCPA violation. These communications, through enforcement actions, DPAs, NPAs and Declinations, are consistent with the information provided by the DOJ/SEC in the FCPA Guidance. These enforcement actions demonstrate that if a company gets ahead of the curve, it can significantly lessen its overall penalty and pain.

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

© Thomas R. Fox, 2014

December 31, 2013

Individual FCPA Enforcement Actions in 2013

As 2013 draws to a close, I am reminded about Mike Volkov’s spring prediction that “It is clear that FCPA enforcement for 2013 will go down as the year of criminal prosecutions of individuals.” He was right when he said it and it is still correct. This year had the largest number of individual Foreign Corrupt Practices Act (FCPA) enforcement actions since 2010, the year of the Gun Sting case. Here are the highlights of FCPA related enforcement actions against individuals in 2013.

A.     BizJet Executives

The lineup of those three BizJet executives and one employee involved in these enforcement actions is as follows:

  1. Bernd Kowalewski – President and Chief Executive Officer (CEO);
  2. Peter DuBois – Vice President of Sales and Marketing;
  3. Neal Uhl – Vice President of Finance; and
  4. Jald Jensen – Regional Sales Manager

Defendants DuBois and Uhl pled guilty in January, 2012 and had their pleas unsealed on April 5, 2013. Defendants Kowalewski and Jensen were charged by Criminal Indictment, also in January, 2012, but are still at large today. The Department of Justice (DOJ) Press Release stated that “The two remaining defendants are believed to remain abroad.” The bribes were characterized as “commission payments” and “referral fees” on the company’s books and records. Payments were made from both international and company bank accounts here in the US. In other words, this was as clear a case of a pattern and practice of bribery, authorized by the highest levels of the company, paid through US banks and attempts to hide all of the above by mis-characterizing them in the company’s books and records.

B.     Alstom Executives

In April, two individuals from a company, later identified as Alstom Power, Inc., were charged or had their charges made public in April. According to a DOJ Press Release dated April 16, 2013, “Frederic Pierucci, 45, a current company executive [of Alstom] who previously held the position of vice president of global sales for the Connecticut-based U.S. subsidiary, was charged in an indictment unsealed yesterday in the District of Connecticut with conspiring to violate the FCPA and to launder money, as well as substantive charges of violating the FCPA and money laundering.” Pierucci was arrested. Additionally, former Alstom executive “David Rothschild, 67, of Massachusetts, a former vice president of sales for the Connecticut-based U.S. subsidiary, pleaded guilty on Nov. 2, 2012, to a criminal information charging one count of conspiracy to violate the FCPA.”

In May, a third Alstom executive was charged when William Pomponi, a former vice president of sales for Alstom’s US subsidiary, was indicted for conspiring to violate the FCPA and to launder money, as well as substantive FCPA and money laundering offenses. In August, a fourth executive, Lawrence Hoskins, who was the Asia Region Vice President for the company, was also charged. In the prior charging documents, Hoskins was generically referred to as “Executive A.”

All four were charged around the same set of facts, that being the payment of bribes to officials in Indonesia, including a member of Indonesian Parliament and high-ranking members of Perusahaan Listrik Negara (PLN), the state-owned and state-controlled electricity company, in exchange for assistance in securing a contract for the company to provide power-related services for the citizens of Indonesia, known as the Tarahan project. The charges allege that, in order to conceal the bribes, the defendants retained two consultants purportedly to provide legitimate consulting services on behalf of the power company and its subsidiaries in connection with the Tarahan project.

C.     Frederic Cilins

At the 2013 Dow Jones Compliance Symposium in Washington, D.C., a FBI official warned the attendees that the Shot Show debacle would not deter law enforcement from using proactive investigations techniques. It was a stark warning because it was realized in less than thirty days. This was dramatically demonstrated with the arrest of Frederic Cilins, in April.

An article in the Financial Times (FT), entitled “FBI sting says that ‘agent’ sought to have mining contracts destroyed”, reported that “Frederic Cilins held the last of a series of meetings with the widow of an African dictator to discuss what she was going to do with some sensitive documents.” What were these ‘sensitive documents’? The FT reported that it had seen “some of the documents” and “According to one copy of a contract seen by the FT” it appeared to agree to pay $4m to the wife of the then President of the country to help to secure rights to a mining concession in Guinea. Unfortunately for Cilins he “did not realise that the woman he was talking to was wearing a wire and that FBI agents were watching. As he left the meeting, the agents arrested him carrying envelopes filled with $20,000 in cash, the indictment says. That was a pittance compared with the $5m he was taped offering the dictator’s widow during what US authorities say was a two-month campaign to tamper with a witness and destroy records.”

Cilins has been charged with obstruction of justice and was remanded to Manhattan for trial. After bail was initially set at $15MM, Cilins requested that it be reduced. The trial judge, William H. Pauley III threw the $15MM bail out and set a trial date for March 2014.

D.    Uriel Sharef – Siemens

Uriel Sharef was a former officer and board member of Siemens. According to the Securities and Exchange Commission (SEC) Press Release announcing resolution of his matter, “The settlement resolves the Commission’s civil action against Sharef for his role in Siemens’ decade-long bribery scheme to retain a $1 billion government contract to produce national identity cards for Argentine citizens. The final judgment, to which Sharef consented, enjoins him from violating the anti-bribery and related internal controls provisions of the FCPA and orders him to pay a $275,000 civil penalty, the second highest penalty assessed against an individual in an FCPA case.”

The SEC Press Release further stated that “Sharef met with payment intermediaries in the United States and agreed to pay $27 million in bribes to Argentine officials. Sharef also enlisted subordinates to conceal the payments by circumventing Siemens’ internal accounting controls.”

E.     Paul Novak – Willbros

In April, the DOJ announced the sentencing of Paul G. Novak, a former consultant of Willbros International, Inc., a subsidiary of the Houston based Willbros Group, for his role in a conspiracy to pay more than $6 million in bribes to government officials of the Federal Republic of Nigeria and officials from a Nigerian political party. According to the DOJ Press Release announcing the sentencing, “Novak pleaded guilty to one count of conspiracy to violate the FCPA and one substantive count of violating the FCPA. Novak admitted that from approximately late-2003 to March 2005, he conspired with others to make a series of corrupt payments”. Novak was sentenced to serve 15 months in a federal prison.

The sentencing continues the long running saga of the company over efforts by Willbros, Novak, certain employees and others to make a series of corrupt payments to assist Willbros and its joint venture partner, a construction company based in Mannheim, Germany, in obtaining and retaining the Eastern Gas Gathering System (EGGS) Project, which was valued at approximately $387 million. The EGGS project was a natural gas pipeline system in the Niger Delta designed to relieve existing pipeline capacity constraints.

F.     Alain Riedo

In October, an indictment was unsealed in the Southern District of California deriving from the Maxwell Technologies, Inc. FCPA enforcement action. This indictment was brought through the Grand Jury against Alain Riedo, who was described as a Swiss citizen, General Manager of Maxwell Technologies SA, (the Swiss company – Maxwell SA) a wholly owned subsidiary of Maxwell Technologies, Inc. (the US parent – Maxwell). Riedo was later promoted to Senior Vice President and officer of the US parent.

The Riedo Indictment gave further detailed specifics about the bribery scheme. The Swiss company used a Chinese Agent (Agent 1) to market its products. The bribes were funded through an overbilling to the end user of 20% above the company’s actual cost. After the end-user paid the fraudulent amount, Agent 1 would then bill the Swiss company separately for the additional 20% and characterize the mark up as “extra amount”, “special arrangement” or “consulting” fee. Riedo would then either pay or request direct payment, from the US, of this extra 20% to Agent 1, who would then in turn distribute this money as bribes for the securing of the contracts.

G.    Direct Access Partners

In the first action against investment brokers, two brokers Tomas Alberto Clarke Bethancourt and Jose Alejandro Hurtado, affiliated with the New York brokerage firm Direct Access Partners, LLC (DAP) were charged in federal court with paying at least $5 million in bribes to María de los Ángeles González de Hernandez, an official at a state-owned Venezuelan bank, Banco de Desarrollo Económico y Social de Venezuela (BANDES) to win bond trading work. After receiving the bribes, she authorized fraudulent trades, which generated more than $66 million in revenue on trades in Venezuelan sovereign or state-sponsored bonds for DAP.

In June, Ernesto Lujan, the former head of the Miami office of DAP, was arrested for conspiracy to bribe an officer at a state-owned Venezuela bank in exchange for bond trading business. He was charged with substantive FCPA and Travel Act offenses and conspiracy counts. He was also charged with two money laundering-related counts.

In August all three pled guilty in New York federal court to conspiring to violate the FCPA, the Travel Act and to commit money laundering, as well as substantive counts of these offenses related to the scheme to bribe a foreign official employed at BANDES. Lujan, Hurtado and Clarke each also pled guilty to an additional charge of conspiring to violate the FCPA in connection with a similar scheme to bribe a foreign official employed by Banfoandes (the “Banfoandes Foreign Official”), another state economic development bank in Venezuela, and to conspiring to obstruct an examination by the SEC of the New York-based Broker-Dealer where all three defendants had worked, to conceal the true facts of the Broker-Dealer’s relationship with BANDES.

The DOJ also charged Hernandez with Travel Act conspiracy and substantive offenses, and two money laundering-related counts. In November, she pled guilty to taking $5 million in kickbacks from DAP in exchange for bond-trading business from her employer. She agreed to cooperate with prosecutors investigating a massive bribery and fraud scheme by a US broker.

A Happy, Joyous and Safe 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, 2013

December 12, 2013

What a Long Strange Trip It’s Been – The Bilfinger FCPA Settlement

Earlier this week the Department of Justice (DOJ) announced it had resolved an ongoing Foreign Corrupt Practices Act (FCPA) with German entity Bilfinger SE (Bilfinger). This case involved the same background facts and events as the Willbros corporate FCPA enforcement action and the related individual enforcement actions with some of its former employees. The facts in this case were bad, bad, bad. The FCPA Professor went into a deep dive on the case in a blog post, entitled “German Company Resolves FCPA Enforcement Action Based On Conduct From “The Distant Past””. In another blog post, entitled “Of Note From The Bilfinger Enforcement Action”, he questioned why this particular enforcement action took so long to resolve.  Whatever the answer to that question might be, there are several interesting aspects to the matter which are of significance to the compliance practitioner, which I will highlight in this post.

I.                    DOJ Fine Calculation

To resolve the criminal aspects of this case, Bilfinger agreed to pay a $32 million criminal penalty as part of a Deferred Prosecution Agreement (DPA) with the DOJ. The thing that I found interesting about the fine calculation, as set out in the DPA, was the large increase in the amount due to the size of the bribery paid which increased the point calculation under the US Sentencing Guidelines by +18 and the increase for the payment of multiple bribes by +2.. The company only received a -2 for its cooperation in the investigation, clearly demonstrating recognition and affirmative acceptance of responsibility for its criminal conduct. The company did not self-disclose so it did not receive any credit under the US Sentencing Guidelines for that affirmative conduct. The calculated fine range was between $28MM to $56MM so the company received a fine at the lower end of the range. But not less than the lower end or event at the end.

II.                Landscaping Account to Pay Bribes

One of the interesting techniques that the company used to physically pay the bribes was through a petty cash account in the Joint Venture’s (JV) office in Nigeria. The DOJ has long cautioned companies about maintaining significant amounts of petty cash in offices or the undocumented use of petty cash accounts as a mechanism to funnel bribes. In this case, Bilfinger ingeniously said the cash was going to the Nigeria operation to pay “landscaping expenses”. With $6MM in bribes paid out, one might think the company was landscaping the Gardens at Versailles but the lesson learned for the compliance practitioner is that accounts which might appear to be legitimate business expenses need to be scrutinized though monitoring and auditing.

III.             Political Parties

Most compliance practitioners are well aware that the FCPA applies to government officials, their family members and similarly situated officers, directors and employees of state owned enterprises. However, in the Bilfinger enforcement action, the company paid bribes to “the dominant political party in Nigeria” which was not named in the Information of the DPA. The Anti-Bribery Provisions of the FCPA states:

§ 78dd-1. Prohibited foreign trade practices by issuers

(a)    Prohibition (b)

It shall be unlawful for any issuer which has a class of securities registered pursuant to section 78l of this title or which is required to file reports under section 78o(d) of this title, or for any officer, director, employee, or agent of such issuer or any stockholder thereof acting on behalf of such issuer, to make use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to–

(2) any foreign political party or official thereof or any candidate for foreign political office for purposes of–

(A) (i) influencing any act or decision of such party, official, or candidate in its or his official capacity, (ii) inducing such party, official, or candidate to do or omit to do an act in violation of the lawful duty of such party, official, or candidate, or (iii) securing any improper advantage; or

(B) inducing such party, official, or candidate to use its or his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person; or.

IV.              Best in Class Compliance Program

During the pendency of the investigation, Bilfinger moved to create a best practices compliance program. They appear to have done so and agreed in the DPA to continue to maintain such a compliance program. Under Schedule C to the DPA, it set out the compliance program which the company had implemented and continued to keep in place, at least during the length of the DPA. It included the following components.

  1. High level commitment from company officials and senior management to do business in compliance with the FCPA.
  2. A substantive written anti-corruption compliance code of conduct.
  3. Written policies and procedures to implement this code of conduct.
  4. A robust system of internal controls, including accounting and financial controls.
  5. Risk assessments and risk reviews of its ongoing business.
  6. No less than annual assessments of its overall compliance program.
  7. Appropriate oversight and responsibility of a Chief Compliance Officer.
  8. Effective training for all employees and relevant third parties.
  9. An effective compliance function which can provide guidance to company employees.
  10. A robust internal reporting system.
  11. Effective investigations of any reported compliance issue.
  12. Appropriate incentives for employees to do business ethically and in compliance.
  13. Enforced discipline for any employee who violates the company’s compliance program.
  14. Suitable due diligence and management of third parties and business partners.
  15. A correct level of pre-acquisition due diligence for any merger or acquisition candidate, including a risk assessment and reporting to the DOJ if the company uncovers any FCPA-violative conduct during this pre-acquisition phase.
  16. As soon as practicable, Bilfinger will integrate any newly acquired entity into its compliance regime, including training of all relevant new employees, a FCPA forensic audit and reporting of any ongoing violations.
  17. Ongoing monitoring, testing and auditing of the company’s compliance function, taking into account any “relevant developments in the field and the evolving international and industry standards.”

V.                 Monitor

Bilfinger also agreed to an external monitor. However, the term of the monitor is not the entire length of the three-year DPA; the term of the monitor is only 18 months. The monitor’s primary function is to assess the company’s compliance with the terms of the DPA and report the results to the DOJ at least twice during the terms of the monitorship. After this 18 month term the DOJ will allow the company to self-report to the regulators. It should be noted that the term of the external monitor can be extended by the DOJ.

VI.              Who Pays the Cost of Bribery

The final point that I wish to raise is about the insidiousness of bribery and corruption and the true cost. To facilitate its illegal conduct Bilfinger (and Willbros) increased their charges to the various Nigerian entities which were paying for the project in question by 3%. So it was not Bilfinger and Willbros paying the bribes out of their collective corporate pocket but it was the people of Nigeria who were funding the western companies’ bribes. It does not get much worse or arrogant than that in the corporate world.

The Bilfinger enforcement action moves towards the ending of one of the sorriest examples of corporate malfeasance in the FCPA world. While it took a long time, justice has certainly been a long time coming. With the continued flight from justice of former Willbros employee James Tillery who renounce his US citizenship to try and escape prosecution by taking refuge in Nigeria; perhaps things are coming to an end. But with the conclusion of this corporate enforcement action against Bilfinger, perhaps there may be additional individual enforcement actions.

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 4, 2013

The Weatherford FCPA Settlement, Part III

Yesterday, I reviewed the conduct which Weatherford International Limited (Weatherford) engaged in over a period from 2002-2011 in connection with its Foreign Corrupt Practices Act (FCPA) investigation, noted the deficiencies in its compliance program and its internal controls and even how the company intentionally impeded the investigations of both the Department of Justice (DOJ) and Securities and Exchange Commission (SEC). Today, I want to look at how the company changed course in mid-stream during the investigation, brought in a top-notch and well respected lawyer as its Chief Compliance Officer (CCO), created a best-in-class compliance program; all of which saved the company millions of dollars in potential fines and penalties.

  1. I.                    DOJ Fine Calculation

To resolve the criminal aspects of this case, Weatherford agreed to pay an $87.2 million criminal penalty as part of a Deferred Prosecution Agreement (DPA) with the DOJ. There was also another $65.6 million paid to the SEC. However the figure paid to the DOJ was at the very bottom range of a potential criminal penalty. The range listed in the DPA was from $87.2 to $174.3 million. In coming up with this range under the Federal Sentencing Guidelines, it is significant for the actions that Weatherford did not receive credit for during the pendency of the investigation. The company did not receive a credit for self-reporting. The company only received a -2 for its cooperation because prior to 2008 the company engaged in activities to impede the regulators’ investigation.

So the fine range could have been more favorable to the company. But the key is that Weatherford received the low end of the range. How did they do this?

A.     New Sheriff in Town

One of the key things Weatherford did was bring in Billy Jacobson as its CCO and give him a seat at the table of the company’s Executive Board. He was a Federal Prosecutor in the Fraud Section, Criminal Division, US Department of Justice. He also served as an Assistant Chief for FCPA Enforcement Department so we can assume he understood the FCPA and how prosecutors think through issues. (Jacobson also worked as a State Prosecutor in New York City, with my former This Week in FCPA co-host Howard Sklar, so shout out to Howard.) Jacobson was not hired directly from the DOJ but after he had left the DOJ and had gone into private practice. There is nothing that shows credibility like bringing in a respected subject matter expert and giving that person the tools and resources to turn things around.

But more than simply bringing in a new sheriff, Weatherford turned this talk into action by substantially increasing its cooperation with the government, thoroughly investigating all issues, turning over the results to the DOJ and SEC and providing literally millions of pages of documents to the regulators. The company also cleaned house by terminating officers and employees who were responsible for the illegal conduct.

B.     Increase in Compliance Function

In addition to establishing Jacobson in the high level CCO position, the company significantly increased the size of its compliance department by hiring 38 compliance professionals and conducted 30 anti-corruption compliance reviews in the countries in which Weatherford operates. This included the hiring of outside consultants to assess and review the company’s compliance program and beefing up due diligence on all third parties, including those in the sales and supply chain, joint venture (JV) partners and merger or acquisition (M&A) candidates. The company also agreed to continue to enhance its internal controls and books and records to prevent and/or detect future suspect conduct.

If you have ever heard any of the current Weatherford compliance professionals speak at FCPA conferences, you can appreciate that they are first rate; that they know their stuff and the company supports their efforts on an ongoing basis.

C.     Best in Class Compliance Program

During the pendency of the investigation, Weatherford moved to create a best practices compliance program. They appear to have done so and agreed in the DPA to continue to maintain such a compliance program. Under Schedule C to the DPA, it set out the compliance program which the company had implemented and continued to keep in place, at least during the length of the DPA. It included the following components.

  1. High level commitment from company officials and senior management to do business in compliance with the FCPA.
  2. A substantive written anti-corruption compliance code of conduct.
  3. Written policies and procedures to implement this code of conduct.
  4. A robust system of internal controls, including accounting and financial controls.
  5. Risk assessments and risk reviews of its ongoing business.
  6. No less than annual assessments of its overall compliance program.
  7. Appropriate oversight and responsibility of a Chief Compliance Officer.
  8. Effective training for all employees and relevant third parties.
  9. An effective compliance function which can provide guidance to company employees.
  10. A robust internal reporting system.
  11. Effective investigations of any reported compliance issue.
  12. Appropriate incentives for employees to do business ethically and in compliance.
  13. Enforced discipline for any employee who violates the company’s compliance program.
  14. Suitable due diligence and management of third parties and business partners.
  15. A correct level of pre-acquisition due diligence for any merger or acquisition candidate, including a risk assessment and reporting to the DOJ if the company uncovers and FCPA-violative conduct during this pre-acquisition phase.
  16. As soon as practicable, Weatherford will integrate any newly acquired entity into its compliance regime, including training of all relevant new employees, a FCPA forensic audit and reporting of any ongoing violations.
  17. Ongoing monitoring, testing and auditing of the company’s compliance function, taking into account any “relevant developments in the field and the evolving international and industry standards.”

D.    Monitor

Weatherford also agreed to an external monitor. However, the term of the monitor is not the entire length of the three-year DPA; the term of the monitor is only 18 months. The monitor’s primary function is to assess the company’s compliance with the terms of the DPA and report the results to the DOJ at least twice during the terms of the monitorship. After this 18 month term the DOJ will allow the company to self-report to the regulators. It should be noted that the term of the external monitor can be extended by the DOJ.

II.                Conclusion

It certainly has been a long, strange journey for Weatherford. I should note that I have not discussed at all the Oil-For-Food aspect of this settlement, which was an additional $100MM penalty to the company. However, with regard to the FCPA aspects of the matter, there are some very solid and telling lessons to be drawn from this case. First and foremost is that cooperation is always the key. But more than simply cooperating in the investigation is that a company should take a pro-active approach to putting a best-in-class compliance program in place during, rather than after the investigation concludes. Also, a company cannot simply ‘talk-the-talk’ but must come through and do the work to gain the credit. The bribery schemes that the company had engaged in and the systemic failures of its compliance program and internal controls, should serve as a good set of examples for the compliance practitioner to use in assessing a compliance program.

The settlement also sends a clear message from both the DOJ and SEC on not only what type of conduct will be rewarded under the US Sentencing Guidelines, but what they expect as a compliance program. One does not have read tea leaves or attempt to divine what might be an appropriate commitment to compliance to see what the regulators expect these day.

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

© Thomas R. Fox, 2013

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