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

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

I.                   Where Have We Been

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

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

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

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

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

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

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

© Thomas R. Fox, 2013

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

© Thomas R. Fox, 2012

Days of Future Passed: The Moody Blues and the End of Facilitation Payments?

Nights in White Satin, never reaching the end,

Letters I’ve Written, never meaning to send

This past weekend I caught the Moody Blues’ tour celebrating the 45^th anniversary of their seminal classic album, “Days of Future Passed”. This was the second album released by the band and while I had always thought of it as the first rock concept album, it is seen by many rock critics as a precursor to progressive rock music. Bill Holdship, Yahoo! Music, said that the band “created an entire genre here.” Robert Christgau noted that it was “closer to high-art pomp than psychedelia.” And finally, Allmusic editor Bruce Eder calls the album “one of the defining documents of the blossoming psychedelic era, and one of the most enduringly popular albums of its era.” The band had its core members of Justin Hayward, John Lodge and Graeme Edge playing at the concert and I can assure you that even in their 70s, they can still rock.

I thought about this album and its title while reading the Memorandum and Order from District Judge Keith Ellison in the Security and Exchange Commission (SEC) civil action filed against current and former officers of Noble Corporation, Mark A. Jackson and James R. Ruehlen. The Foreign Corrupt Practices Act (FCPA) commentariat has gone both ways on interpreting the Court’s Order; witness the headline by the FCPA Professor, “Judge Grants Jackson And Ruehlen’s Motion To Dismiss SEC’s Monetary Claims – Finds That SEC Was Not Diligent In Bringing Case And That SEC Failed To Negate Facilitation Payments Exception – However Judge Allows SEC To File An Amended Complaint”, in contrast with Dick Cassin on the FCPA Blog, whose headline read “Great guidance from the bench: ‘The FCPA casts a wide net”. However, I found one other part of the Court’s ruling by far the most interesting. It was the section which discussed whether the defendant’s claims that their actions met the facilitation payment exception under the FCPA. The Court granted the SEC leave to amend to proffer facts which would overcome the facilitation payment exception.

The allegations of facilitation payment exception as a defense in this lawsuit turn on permits called Temporary Import Permits (TIPs) in Nigeria. As set out in the Court’s ruling, “TIPs allow drilling rigs to operate in Nigerian waters without payment of permanent import duties. Under Nigerian law, the Nigeria Customs Service (“NCS”) grants TIPs for rigs that will be in the country for only one year. NCS may, in its discretion, grant up to three six-month extensions to a TIP. Upon the expiration of a TIP and any TIP extensions, NCS requires the rig to be exported from Nigeria. If the owner of the rig wishes to continue using the rig after the expiration of a TIP and any applicable extensions, he can either convert the rig to permanent import status and pay the appropriate permanent import duties, or he can export the rig and seek a new rig TIP to re-import the rig. In order to obtain a TIP or an extension, the rig owner must submit an application thought a licensed customs agent as the NCS does not deal directly with rig owners such as Noble. The SEC alleged that the defendants authorized customer agents to submit false paperwork and pay bribes to NCS officials to obtain these TIPs. In other words, the SEC alleged that the Nobel officials knew that the company was not entitled to obtain the TIPs as they did not meet the basic requirements for the granting of such licenses.”

Judge Ellison, in his ruling, noted that the “SEC alleges that Defendants authorized payments to foreign officials in order to obtain TIPs based on false paperwork, in contravention of what Defendants knew was the proper process for obtaining TIPs. As discussed supra in Part III.A.1, the SEC pled sufficient facts to support the allegation that Defendants knew these payments would be going to Nigerian government officials to obtain TIPs in a manner that violated Nigerian law. The grant of permits by government officials that have no authority to grant permits on the basis sought is in no way a ministerial act nor can it be characterized as “speeding the proper performance of a foreign official’s duties.” Similarly, if payments were made to induce officials to validate the paperwork while knowing it to be false, that too would not qualify as simply expediting a ministerial act.” [all citations by Court omitted]

The FCPA states that it “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 . . .” Further, the FCPA has a list of examples of facilitation payments in the definition of routine governmental actions, which include the following:

• Obtaining permits, licenses, or other official documents;
• Processing governmental papers such as visas and work orders;
• Providing police protection, mail services, scheduling inspections;
• Providing utilities, cargo handling; or
• Actions of a similar nature.

The key has always been whether the function in question was a “routine governmental action” because a facilitation payment is clearly a bribe. From the Court’s discussion, it is clear that it is thinking that if the end goal of a facilitation payment is to obtain something that the person or entity making the facilitation knows that they are not entitled to, then it cannot be a facilitation payment because it is not a “routine governmental action”.  However, the Court also focused on “corruptly” and cited to the legislative history of the statute for the following:

The word “corruptly” is used in order to make clear that the offer, payment, promise, or gift, must be intended to induce the recipient to misuse his official position; for example, . . . to induce a foreign official to fail to perform an official function. The word “corruptly” connotes an evil motive or purpose such as that required under 18 U.S.C. 201(b) which prohibits domestic bribery. As in 18 U.S.C. 201(b), the word “corruptly” indicates an intent or desire to wrongfully influence the recipient.

As part of its instructions to the SEC to re-plead the Court said that it should plead Nigerian law to show this corrupt intent. If the SEC does this and the illegal nature of the defendants’ actions under Nigerian law forms a basis of a successful action, how long do you think it will be before the entire concept of the facilitation payment comes in an enforcement action as there is no country in the world which allows bribery of its own government officials?

If the Court continues down this path, we may see the United States move towards a de facto end of the facilitation payment exception. The OECD, among others, has urged the United States to ban these types of bribes. The UK Bribery Act has no such exception under it. Numerous commentators, including Jon Jordan, have argued eloquently for the facilitation payment exception to end.

So what about the Moody Blues and Days of Future Passed? Just as many people remember only the song “Nights In White Satin” from the album and do not recall its greater importance as the either the first concept album or as a precursor to progressive rock, analysts and commentators may miss the significance of Judge Ellison’s ruling as it may signal the first step on the judicial journey to end facilitation payments.

For a copy of the Court’s ruling, click here.

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

© Thomas R. Fox, 2012

Ladies and Gentlemen – The Rolling Stones

July 12, 2012 was the 50^th anniversary of the first gig of the Rolling Stones. The two mainstays of the group, Mick Jagger and Keith Richards, are notorious for the conflicts within the group. However, not only has the partnership lasted but it gave us some of the greatest Rock and Roll music of all-time. While we have not been in partnership quite as long, Howard Sklar and I enjoy debating each other on our (more or less) weekly podcast This Week in FCPA.

Recently, Mike Volkov took issue with some of the pronouncements of my colleague Howard Sklar had made in a blog post entitled “Who is it OK to bribe?” Mike even managed to pay me compliment by saying “let’s face it, I am no FCPA Professor, or Tom Fox, who both enjoy taking Howard on” and to demonstrate that we debate in print as well as on air, I am going to respond to Howard’s blog posting in his Open Air Blog, “Why I Hate the Case Against WalMart”.

In this blog posting, Howard begins with the following proposition, “In my humble opinion, Walmart should get a nominal fine via an NPA. Maybe $2 million. Something like that. I’d prefer less—maybe a declination with undertakings?” He then channels the FCPA Professor by stating “Walmart’s real problems, in my opinion, were in the corporate governance area rather than the bribery arena. The way the information was handled by Bentonville when it was presented to them is less than satisfactory.” Howard has three main arguments for these points. First, that Wal-Mart’s bribes were arguably facilitation payments. Second, that Wal-Mart “didn’t bring corruption to Mexico. Third he asks “where’s the harm?”

I.                    Facilitation Payments

In the first point that the payments were arguably facilitation payments, Howard notes that “obtaining permits” is one of the items which is listed in the Foreign Corrupt Practices Act (FCPA) as a basis for a facilitation payment and one that would fall under “routine governmental action”. The reason that I disagree with Howard on his assessment is that from the facts that were made public by the Sunday New York Times (NTY), back on April 22, 2012, in an article entitled “Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle”, there were two components to this bribery scheme. First there was an alleged multi-year bribery and corruption perpetrated by the Wal-Mart Mexican subsidiary. Wal-Mart de Mexico “targeted mayors and city council members, obscure urban planners, low-level bureaucrats who issued permits – anyone with the power to thwart Wal-Mart’s growth. The bribes, he said, bought zoning approvals, reductions in environmental impact fees and the allegiance of neighborhood leaders.” One other thing required under the FCPA is that they be properly listed as facilitation payments on the company’s books and records. In Wal-Mart’s case, these payments were coded in a manner which hid their true basis. Later, reports sent to the home office, in Bentonville, AR, were scrubbed so that the illegal payments were moniked as “legal fees”.

Although he makes the argument later in his piece, I will also add that under the FCPA, facilitation payments are an exception, not an affirmative defense. This means that the Department of Justice (DOJ) has the burden to prove the payments were corrupt. However, I think it is much easier than Howard may believe. Why? Because Wal-Mart deliberately hid the nature of the payments. If they were not for illegal purposes why not just list them as ‘facilitation payments’ in the company’s books and records?

II.                 Wal-Mart Didn’t Bring Corruption to Mexico

Howard’s next argument is that there is a reason Mexico is No. 100 on the Transparency International Corruptions Perceptions Index. And that reason is that government officials are prone to corruption. I appreciate and agree that Howard is not excusing bribery because he is rightly is a self-proclaimed “anti-bribery advocate”. But I think that saying a country is corrupt misses the reason for even having the FCPA. The FCPA is US based legislation, enacted to deal with US based problems. The purposes for the FCPA were written into the Preamble to the original 1977 FCPA legislation. In this Preamble, Congress set out three clear policy goals for the enactment of the FCPA. First, was the public revelation that over 400 US companies had paid over $300 million to bribe foreign governments, public officials and political parties. Such payments were not only “unethical” but also “counter to the moral expectations and values of the American public”. Second was that the revelation of bribery, tended “to embarrass friendly governments, lower the esteem for the United States among the citizens of foreign nations, and lend credence to the suspicions sown by foreign opponents of the United States that American enterprises exert a corrupting influence on the political processes of their nations”. Third was by enacting such resolute legislation, US companies would be in a better position to resist demands to pay bribes made by corrupt foreign governments, their agents and representatives.

In short I argue that the FCPA is a US based response to a US problem. It is not a US based response to a Mexico problem.

III.               Where’s the Harm?

Here Howard focuses on the harm that may have occurred in Mexico by Wal-Mart engaging in bribery and corruption. While I believe that it is always harmful to engage in bribery and corruption if it violates the law, I think there is another point in this argument. As this is a US law, maybe we should consider a couple of other potential stakeholders here. The first is US shareholders, who should be entitled to know if the companies they invest in are making money from illegal sources, thereby devaluing their very investments, while purporting to make more quarterly profits. The next group could be called ‘competition’ but I will just call it Wal-Mart’s competitors. The NYT article made clear that one of the driving forces behind Wal-Mart’s actions in Mexico was to get stores up and running before the US competition.

So not only was Wal-Mart the sole major US retailer which had such stores in Mexico, it was the only one reaping those huge profits.

I hope that you have enjoyed this written dialogue between Howard and myself. I wrote this so Howard could have my thoughts in print and respond on This Week in FCPA. So check out our Episode 46 and I hope that you will hearing us debate these issues as well.

Now sit back and put on one or several of your favorite Stones CD’s and listen to how great rock and roll can be.

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

The Shelby Mustang and Continued Development of a FCPA Compliance Program

Carroll Shelby died last week. For anyone who following racing or loved the Muscle Car Era, no light shone brighter that Shelby’s. In 1959 (a little before I started to follow racing) Shelby was the first Texan to win the 24 Hours of Le Mans. Forced to retire from racing due to a medical condition, Shelby became one of the top race car designers in the 1960’s with his Shelby-American teams winning the 24 Hours of Le Mans, driving Fords designed by Shelby, to victories in 1966 and 1967. But I remember Carroll Shelby for those souped-up, mean as heck Shelby Mustangs, which debuted in 1965 and lasted until the end of the Muscle Car Era in 1971.

So what’s the compliance angle here? Well, believe it or not, it involves Wal-Mart. In its obituary for Shelby, the New York Times (NYT) reported that “Early prototypes broke apart because of stress on the fragile frames. “When you try to put 300 horsepower in a car designed for 100, you learn what development means,” Shelby recalled in a 2002 interview with Sports Illustrated.” From this I took away that any program, whether it is designing a race car or an atin-corruption compliance program requires development until you get it right.

I thought about this idea in the context of franchising and the Foreign Corrupt Practices Act (FCPA). Many franchisors do business overseas themselves and therefore should have a robust FCPA program based upon directly doing business internationally. However, if they franchise their operations internationally, they may have as much FCPA-based risk exposure through their franchisees operations. What are some of the FCPA risks for a franchised business internationally? In his book entitled “Foreign Corrupt Practices Act – A Practical Resource for Managers and Executives” Aaron Murphy, a partner at the firm of Latham and Watkins, explored the question of what are “the most common problems areas where managers get themselves into FCPA trouble.” In a chapter entitled “You Do More With the Government Than You Think” Murphy gives several examples of how any US company doing business overseas will come into contact with a foreign governmental official and, thereby, create a risk for possible FCPA liability. The following interactions would certainly apply to a retailer:

Interactions with Customs Officials. Every time your company sends raw materials into, or brings them out of, a country there is an interaction with a foreign governmental official in the form of a Customs Official. Every customs transaction involves a payment to a foreign government and every transaction involves some form of a foreign governmental regulatory process. While the individual payment per transaction can be small, the amount of total transactions can be quite high if a large volume of goods are being imported into a foreign country.

Interaction with Tax Officials. While noting that interacting with international tax authorities can present problems similar to those with customs officials, Murphy observes that the stakes can often be much higher since tax transactions may be less in frequency but higher in financial risk. These types of risks include the valuation of raw materials for Value Added Tax (VAT) purposes before such materials are incorporated into a final product, or the lack of segregation between goods to be sold on the foreign country’s domestic market as opposed to those which may be shipped through a free trade zone for sale outside that country’s domestic market.

Licensing and Permits. If your company is a retail seller of clothes, cosmetics etc., every physical location that you sell your goods in will require some type of license to operate your business. It could require multiple licenses such as a national license, state license and local municipal license, additionally you will need a building permit if you intend to build out or modify your retail stores.

Work Permits and Visas. If your company does any business overseas it will have to send someone from the home office to operate in-country at some point. In the post-9/11 world this probably means that, at a minimum, your company will have to obtain a visa for each employee who enters the foreign country and perhaps a work permit as well. The visa process can start in the United States with a trip to foreign government consulate or even the embassy and at that point you are dealing with a foreign governmental official. The work permit process can also begin in the United States but often may continue in the foreign country.

Inspections and Certifications. Consider the Tex-Mex restaurant chain which desires to take its cuisine across the world. In any city in the world there will be some type of certification process to enable to the business to set up and start operating and then there will be the need for ongoing inspections for sanitary conditions. Such inspections may be rare but if there is “slime in the ice machine” it may be grounds to close the restaurant.

As Murphy points out, it is clear there are many different types of FCPA risk out there which your compliance program needs to assess and address. Most companies are aware of risks of third parties in commercials operations, such as sales agents, resellers or distributors. However, the recent Wal-Mart matter has raised the awareness of risks from non-commercial third parties, particularly those which interact with a foreign government on the behalf of a company. There are many lessons which can be drawn from the Wal-Mart case but I think that  two, (1) that you do more with the government than you think and (2) the risks in using non-commercial third party agents, are very large areas that you may need to factor into the development of your compliance program going forward.

Lastly, do not forget the example of Carroll Shelby, Not only did he move from race winning driver to race winning car developer but over 30 years after the last Shelby Mustang from the Muscle Car Era rolled off the Ford assembly, he teamed with Ford to design a new Shelby Mustang for the company’s centenary in 2003. Keep on truckin’ Carroll Shelby!

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

Does Wal-Mart Have a Facilitation Payment Exception to the FCPA?

In an article entitled “Many Of The Bribery Allegations Against Wal-Mart May Not Be Illegal” Forbes reporter Nathan Vardi wrote that “many of the allegations reported in the New York Times could reasonably be interpreted as falling under the so-called “facilitating payments” exception.” I wondered what defense might be available to Wal-Mart where bribes of up to $244,000 could be construed as an exception to prosecution for bribery of foreign government official under the Foreign Corrupt Practices Act (FCPA). In this post we will visit the text of the FCPA and other Department of Justice (DOJ) commentary, look at some enforcement actions; one open investigation involving alleged facilitation payments and offer some guidance to the compliance practitioner on what may or may not constitute a facilitation payment under the FCPA.

I.                   The Statute and Other Guidance

 1. The Statute

Interestingly, when the FCPA was initially passed in 1977, the facilitating payment exception was found under the definition of foreign official. However, with the 1988 Amendments, a more explicit exception was written into the statute making it clear that the anti-bribery provisions “shall not apply to any facilitating or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action . . .” The statute itself provided a list of examples of facilitation payments in the definition of routine governmental actions. It included the following:

• Obtaining permits, licenses, or other official documents;
• Processing governmental papers such as visas and work orders;
• Providing police protection, mail services, scheduling inspections;
• Providing utilities, cargo handling; or
• Actions of a similar nature.

It is important to note that the language of the FCPA makes it clear that a facilitation payment is not an affirmative defense but an exception to the general FCPA proscription against bribery and corruption. Unfortunately for the FCPA Practitioner there is no dollar limit articulated in the FCPA regarding facilitation payments. Even this limited exception has come under increasing criticism. The Organization for Economic Cooperation and Development (OECD) studied the issue and, in November 2009, recommended that member countries encourage their corporations to not allow the making of facilitating payments.

2. Lay Person’s Guide to the FCPA

In the Lay Person’s Guide to the FCPA is a brochure by the DOJ which is their “general explanation of the FCPA.” Within in this guidance the DOJ states:

FACILITATING PAYMENTS FOR ROUTINE GOVERNMENTAL ACTIONS

There is an exception to the anti-bribery prohibition for payments to facilitate or expedite performance of a “routine governmental action.” The statute lists the following examples: obtaining permits, licenses, or other official documents; processing governmental papers, such as visas and work orders; providing police protection, mail pick-up and delivery; providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products; and scheduling inspections associated with contract performance or transit of goods across country.

Actions “similar” to these are also covered by this exception. If you have a question about whether a payment falls within the exception, you should consult with counsel. You should also consider whether to utilize the Justice Department’s Foreign Corrupt Practices Opinion Procedure, described in the guide on p. 10 and below:

“Routine governmental action” does not include any decision by a foreign official to award new business or to continue business with a particular party.

II.                Enforcement Actions

a.     Con-way

The FCPA landscape is littered with companies who sustained FCPA violations due to payments which did not fall into the facilitation payment exception. In 2008, Con-way, a global freight forwarder, paid a $300,000 penalty for making hundreds of relatively small payments to Customs Officials in the Philippines. The value of the payments Con-way was fined for making totaled $244,000 and were made to induce the officials to violate customs regulations, settle customs disputes, and reduce or not enforce otherwise legitimate fines for administrative violations.

b.     Helmerich and Payne

In 2009, Helmerich and Payne paid a penalty and disgorgement fee of $1.3 million for payments which were made to secure customs clearances in Argentina and Venezuela. The payments ranged from $2,000 to $5,000 but were not properly recorded and were made to import/export goods that were not within the respective country’s regulations; to import goods that could not lawfully be imported; and to evade higher duties and taxes on the goods.

c.     Panalpina

Finally, there is the Panalpina enforcement action. As reported in the FCPA Blog, this matter was partly resolved last year with the payment by Panalpina and six of its customers of over $257 million in fines and penalties. Panalpina, acting as freight forwarder for its customers, made payments to circumvent import laws, reduce customs duties and tax assessments and to obtain preferential treatment for importing certain equipment into various countries but primarily in West Africa.

d.     DynCorp

Then there is the DynCorp investigation matter. As reported in the FCPA Blog and others, it is related to some $300,000 in payments made by subcontractors who wished to speed up their visa processing and expedite receipt of certain licenses on behalf of DynCorp. This investigation has been going on for several years and there is no anticipated conclusion date at this time.

III.             Some Guidance

So what does the DOJ look at when it reviews a company’s FCPA compliance program with regards to facilitation payments? Initially, if there is a pattern of such small payments, it would raise a Red Flag and cause additional investigation, but this would not be the end of the inquiry. There are several other factors which the DOJ could look towards in making a final determination on this issue. The line of inquiry the DOJ would take is as follows:

1. Size of payment - Is there an outer limit? No, there is no outer limit but there is some line where the perception shifts. If a facilitating payment is over $100 you are arguing from a point of weakness. The presumption of good faith is against you. You might be able to persuade the government at an amount under $100. But anything over this amount and the government may well make further inquiries. So, for instance, the DOJ might say that all facilitation payments should be accumulated together and this would be a pattern and practice of bribery.
2. What is a routine governmental action? Are we entitled to this action, have we met all of our actions or are we asking the government official to look the other way on some requirement? Are we asking the government official to give us a break? The key question here is whether you are entitled to the action otherwise.
3. Does the seniority of the governmental official matter? This is significant because it changes the presumption of whether something is truly discretionary. The higher the level of the governmental official involved, the greater chance his decision is discretionary.
4. Does the action have to be non-discretionary? Yes, because if it is discretionary, then a payment made will appear to obtaining some advantage that is not available to others.
5. What approvals should be required? A facilitation payment is something that must be done with an appropriate process. The process should have thought and the decision made by people who are the experts within the company on such matters.
6. Risk of facilitation payments and third parties? Whatever policy you have, it must be carried over to third parties acting on your behalf or at your direction. If a third party cannot control this issue, the better compliance practice would be to end the business relationship.
7. How should facilitation payments be recorded? Facilitation payments must be recorded accurately. You should have a category entitled “Facilitation Payments” in your company’s internal accounting system. The labeling should be quite clear and they are critical to any audit trail so recording them is quite significant.
8. Monitoring programs? There must always be ongoing monitoring programs to review your company’s internal controls, policies and procedures regarding facilitation payments.

 So we return to the question of when does a grease payment become a bribe? There is no clear line of demarcation. The test seems to turn on the amount of money involved, to whom it is paid and the frequency of the payments. Do Wal-Mart’s alleged payments to speed up the process qualify as facilitation payments or does an aggregate of over $24 million paid constitute something else?

Additionally, accurate books and records are a must. At this point it is not apparent if Wal-Mart accurately recorded these payments. If Wal-Mart really believed they were facilitation payments, why didn’t they just record them as such?

Also remember that the defense of facilitation payments is an exception to the FCPA prohibition against bribery. Any defendant which wishes to avail itself of this exception at trial would have to proffer credible evidence to support its position, but at the end of the day, it would be the trier of fact which would decide. So much like any compliance defense, the exception is only available if you use it at trial and it would be difficult to imagine that Wal-Mart will want this matter to ever see the light of a courtroom.

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

Wal-Mart and the Death Knell for Amending the FCPA

In a development that can only be called stunning, the New York Times (NYT) on Sunday, April 22, 2012, reported, in an article entitled “Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle”, on an alleged multi-year bribery and corruption scheme advanced by Wal-Mart in its Mexico operations. The alleged bribery scheme was truly breath-taking in its scope and operation. I am certain others will write about it extensively, beginning as soon as today, and I certainly will review the article in greater depth in upcoming blog posts, the first thing that struck me is that this case will sound the death knell for any efforts to amend the Foreign Corrupt Practices Act (FCPA). Whether you believe such efforts constitute badly needed reform because the Department of Justice (DOJ) has gone too far in enforcement; that any amendments would water down the FCPA and simply make bribery easier; or perhaps some minor clarification of certain terms and definitions is needed; I think you can kiss all of that good-bye.

Allegations

As reported in the NYT article, Wal-Mart executives at its Mexico subsidiary, Wal-Mart de Mexico, “had orchestrated a campaign of bribery to win market dominance. In its rush to build stores, he said, the company had paid bribes to obtain permits in virtually every corner of the country.” This alleged bribery scheme included routine payments to Mexican governmental officials for “every conceivable type of permit, license, piece of paper, or any other type of approval needed or required to plan, build and operate a Wal-Mart in Mexico. Literally, millions of peso was paid out for everything from routine approvals to extraordinary consents.”

To facilitate this alleged bribery scheme Wal-Mart de Mexico kept two sets of books on the illegal payments through third party agents, which were made to Mexican governmental officials. As reported, Wal-Mart de Mexico “targeted mayors and city council members, obscure urban planners, low-level bureaucrats who issued permits  - anyone with the power to thwart Wal-Mart’s growth. The bribes, he said, bought zoning approvals, reductions in environmental impact fees and the allegiance of neighborhood leaders.” These payments were coded in a manner which hid their true basis. Later, reporting sent to the home office, in Bentonville, AR, were scrubbed so that the illegal payments were moniked as “legal fees”.

The time frames of the events reported were from the 1990’s to 2006. It is unclear if any alleged bribes were paid after this time. The purpose of the alleged bribes “was to build hundreds of new stores so fast that competitors would not have time to react. Bribes, he explained, accelerated growth. They got zoning maps changed. They made environmental objections vanish. Permits that typically took months to process magically materialized in days. What we were buying was time”. The article also reported that “Wal-Mart de Mexico was the company’s brightest success story, pitched to investors as a model for future growth. (Today, one in five Wal-Mart stores is in Mexico.)”

The End of FCPA Amendment

So how does all of this portend the end of efforts to amend the FCPA? As reported, “Wal-Mart’s ethics policy offered clear direction. “Never cover up or ignore an ethics problem,” the policy states.” What do you think a compliance defense would do for Wal-Mart about now? Wal-Mart prided itself on its world-wide FCPA anti-corruption compliance program. The claim that companies would act more ethically and in compliance if they could rely on a compliance defense would seem to be negated by facts reported about Wal-Mart. Do these facts seem like a rogue employee or even junta of rogue Mexican employees going off on their own? Whatever your thoughts on that question may be, it certainly appears that having a best practices compliance program did not lead to Wal-Mart doing business more ethically. And what if Wal-Mart’s corporate headquarters in Bentonville AR was not involved in any illegal conduct or even kept in the dark by Wal-Mart de Mexico? What does that say about having a robust compliance program?

Amending the FCPA to protect corporate headquarters in the US from liability under the doctrine of Respondeat Superior? You can forget about that happening in a heartbeat. No one can argue with anything close to a straight face that this problem was exclusive to Mexico. The corporate parent received the benefits from any profits made due to the bribery so it is difficult to imagine why a corporation should not be a part of any enforcement action. And as the FCPA Professor recently noted in a blog post, entitled “A Q&A with Claudius Sokenu on Where Else?””, that question may be close to someone’s thoughts at the DOJ about now.

How about that grace period for those companies which have a compliance program and self-reporting violations? Wal-Mart corporate was made aware of the allegations set forth in the NYT article in 2004 and chose not to self-report. As noted in the article “Neither American nor Mexican law enforcement officials were notified. None of Wal-Mart de Mexico’s leaders were disciplined. Indeed, its chief executive, Eduardo Castro-Wright, identified by the former executive as the driving force behind years of bribery, was promoted to vice chairman of Wal-Mart in 2008.” Indeed Wal-Mart did not report (I cannot say self-disclose) any FCPA investigation to the DOJ and Securities and Exchange Commission (SEC) until after the NYT notified those agencies that it was investigating these allegations back in 2011. As stated in the article, “Until this article, the allegations and Wal-Mart’s investigation had never been publicly disclosed.” How’s that for transparency in a publicly held US company? If a company as ethical as Wal-Mart will not self-disclose, what does that say about the rest of corporate America and its thinking on self-disclosure?

How about those claims that US companies were being unfairly prosecuted because they did not know their counter-parties were employees of state owned enterprises or that the person they were lavishly entertaining was an official of a foreign government? You mean those “targeted mayors and city council members, obscure urban planners, low-level bureaucrats who issued permits – anyone with the power to thwart Wal-Mart’s growth”? Whatever the merits of those companies who said “it’s not fair – we didn’t know” they were a government official – waive that proposed amendment bye-bye, with both arms over your head.

So whether you were pro or anti-FCPA amendment, I think that you have Wal-Mart to thank for the fact that any such thoughts now will Rest in Peace as this new saga in FCPA enforcement moves forward.

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

© Thomas R. Fox, 2012

How the DOJ Looks at Compliance Programs in an Enforcement Action – Part II

Today’s post is Part II in our two-part series of how the Department of Justice (DOJ) looks at compliance programs during the pendency of an enforcement action. Today we will review how a prosecutor may review the existence and effectiveness of a Foreign Corrupt Practices Act (FCPA) compliance program based upon the Principles of Federal Prosecution of Business Organizations (“the Principles) and an analysis of what is an effective compliance program under the US Sentencing Guidelines (“the Guidelines). Both yesterday and today’s post are based upon the tract “Complying with the Foreign Corrupt Practices Act: A Practical Primer” (herein “the Primer”), published by the ABA Criminal Justice Section, Global Anti-Corruption Task Force.

Independent Evaluation of Compliance Programs

The Primer reports that under this analysis, prosecutors look into three broad categories to make a determination if a compliance program was in existence and effective “at the time of the FCPA violation.” These categories and their specific inquiries are as follows:

1. The Existence and Design of the Compliance Program

(a)    Whether a compliance program is adequately designed for maximum effectiveness in preventing and detecting wrong doing by employees;

(b)   Whether the compliance program is designed to detect the particular types of misconduct most likely to occur in a particular corporation’s line of business;

(c)    The comprehensiveness of a compliance program; and

(d)   Whether the compliance program has established corporate governance mechanisms that can effectively detect and prevent misconduct.

2.   The Administration of the Program

(a)    Whether the company’s management is enforcing the program or is tacitly encouraging or pressuring employees to engage in misconduct to achieve business objectives;

(b)   Whether a compliance program is being applied earnestly and in good faith;

(c)    Whether a compliance program ‘works’;

(d)   Whether a compliance program is merely a ‘paper program’ or whether it was designed, implemented, reviewed and revised, as appropriate, in an effective manner;

(e)    Whether the company has provided for a staff sufficient to audit, document, analyze, and utilize the results of the company’s compliance efforts; and

(f)    Whether the company’s employees are adequately informed about the compliance program and are convinced of the corporation’s commitment to it.

3.   The Misconduct in Question

(a)    The extent and pervasiveness of the misconduct in question;

(b)   The nature and level of the corporate employees involved in the misconduct;

(c)    The seriousness, duration and frequency of the misconduct;

(d)   Whether a corporation has taken remedial actions including discipline against past violators and revisions to the company’s compliance program in light of lessons learned; and

(e)    The promptness of any disclosure of wrongdoing to the government.

As the Primer points out, these factors are “not exhaustive and are often overlapping but they do provide insight into how DOJ prosecutors conduct investigations and determine whether to bring charges under the FCPA.”

I find this final section on how the DOJ analyzes compliance programs the most helpful for the compliance practitioner, particularly when they must explain to management what is required and why the resources need to be expended. Remember, this analysis is performed based upon your company’s compliance program at the time the FCPA violation arose, not after program remediation. So just think about some of the questions posed above:

• Have we trained the appropriate employees?
• If so, how do we prove it?
• Has anyone ever been disciplined for a Code of Conduct violation or more appropriately a compliance program violation?
• If so, is it documented?
• Prior to our FCPA violation, had the company ever audited or even reviewed the state of its compliance policy?
• If so, were any changes made to the compliance program? What changes were made and why?
• Our Chief Executive Officer (CEO) signed a cover letter, written by the Legal/Compliance Department, which introduced our compliance program when we rolled it out (fill in the blank) years ago. What evidence is there of the CEO’s continued commitment to the company’s compliance program since roll-out that can be documented?
• Have we opened any new business lines or gone into any new geographic areas since the compliance program roll-out? Did we assess these new business initiatives?
• When was the last time we did a comprehensive compliance risk assessment?
• Do we have effective internal controls?
• If we believe so, how do we know?
• When was the last time a compliance audit was conducted?
• What were the results or lessons learned?
• Did the company incorporate any of these lessons learned into an enhanced or modified compliance program?
• What criteria is the sales team evaluated upon?
• Is there a compliance component to their annual review/evaluation?
• What is the budget for the Compliance Department?
• Is a senior person assigned to lead the company’s compliance efforts or is it everyone’s responsibility? (i.e.: if everyone is in charge then no one is in charge.)

These are just some of the questions that come to my mind in looking at how a prosecutor might review a compliance program. There are obviously many, many others. I highly recommend that you consider some of these questions plus any that you can develop. I would also urge you to download, read and then keep handy the Primer. It is free and one of the best FCPA compliance resources around.

US Sentencing Guidelines

The Primer notes that the Principles are not the only source of authority which a prosecutor might refer to in evaluating a company’s compliance program during an enforcement action. The US Sentencing Guidelines note that one of the two factors which can mitigate downwards in determing the amount of a fine and penalty is “the existence of an effective compliance and ethics program”. Further under the Amended November 2010 Guidelines, the Primer says that the “government may now significantly reduce fines and other sanctions if an organization takes reasonable steps to achieve compliance with its standards, e.g., by utilizing monitoring and auditing systems reasonably designed to detect criminal conduct by its employees and other agents.”

The Guidelines provide in broad parameters how a prosecutor will evaluate compliance programs during the pendency of a FCPA enforcement action. As such they also provide guidance to the compliance practitioner on DOJ thinking. While there is not a specific program listed, the Guidelines place “an emphasis on the results of a program—that is, whether it is reasonably designed, implemented and enforced so that [it] is generally effective in preventing and deterring criminal conduct.” The Primer goes on to note that an effective compliance program consists of documentation that an organization “exercise[s] due diligence to prevent and detect criminal conduct; and otherwise promote[s] an organizational culture that encourages ethical conduct and a commitment to compliance with the law.”

One of the key factors is that the Guidelines do rely on the existence of a written compliance program. This means that a prosecutor’s primary focus is on the effectiveness of a company’s compliance program. The Primer lists out the following parameters, which the Guidelines suggest that a compliance program should minimally include and I cite from the Primer in its entirety:

• The organization to “establish standards and procedures to prevent and detect criminal conduct.
• The “organization’s governing authority . . . be knowledgeable about the content and operation of the compliance and ethics program and . . . exercise reasonable oversight . . .
• High-level personnel of the organization . . . ensure that the organization has an effective . . . program . . . .
• Specific individual(s) within the organization . . . be delegated day-to-day operational responsibility for the . . . program . . . [and] shall report periodically . . . on the effectiveness of the . . . program.
• To carry out such operational responsibility, such individual(s) shall be given adequate resources, appropriate authority, and direct access to the governing authority.
• The “organization . . . use reasonable efforts not to include within the substantial authority personnel of the organization any individual whom the organization knew, or should have known . . . has engaged in illegal activities or other conduct inconsistent with an effective . . . program.
• The “organization . . . take reasonable steps to communicate periodically and in a practical manner its standards and procedures, and other aspects of the . . .program . . . by conducting effective training programs and otherwise disseminating information appropriate to such individuals’ respective roles and responsibilities, to “members of the governing authority, high-level personnel, substantial authority personnel, the organization’s employees, and, as appropriate, the organization’s agents.
• The organization . . . take reasonable steps . . . to ensure that the organization’s . . . program is followed, including monitoring and auditing to detect criminal conduct.
• The organization . . . take reasonable steps . . . to evaluate periodically the effectiveness of the organization’s . . . program.
• The organization shall take reasonable steps . . . to have and publicize a system, which may include mechanisms that allow for anonymity or confidentiality, whereby the organization’s employees and agents may report or seek guidance regarding potential or actual criminal conduct without fear of retaliation.
• The organization’s . . . program . . . be promoted and enforced consistently throughout the organization through appropriate incentives to perform in accordance with the . . . program; and appropriate disciplinary measures for engaging in criminal conduct and for failing to take reasonable steps to prevent or detect criminal conduct
• After criminal conduct has been detected, the organization . . . take reasonable steps to respond appropriately to the criminal conduct and to prevent further similar criminal conduct, including making any necessary modifications to the organization’s . . . program
• And in doing all of the above, “the organization . . . periodically assess the risk of criminal conduct and . . . take appropriate steps to design, implement, or modify each [above] requirement . . . to reduce the risk of criminal conduct identified through this process.

I believe that the DOJ has presented significant information to the compliance practitioner about not only it’s most current thinking on what may constitute a minimum best practices compliance program in recent Deferred Prosecution Agreements (DPAs) and Non Prosecution Agreements (NPAs) but with through the Principles and the Guidelines, the DOJ provides guidance of how a prosecutor will look at and analyze a company’s compliance program.

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

Mendelsohn and Denniston: A Compliance Dialogue

Last week I attended the 2012 Global Ethics Summit hosted by Ethisphere. The first event was a conversation between Mark Mendelsohn and Brackett Denniston, Senior Vice President and General Counsel of General Electric (GE). They both had some interesting observations on the current state of Foreign Corrupt Practices Act (FCPA) compliance. Dennison believes that the conversation on FCPA compliance has evolved to “What can organizations do to create a culture of compliance on a world-wide basis?” To answer this question he gave three overarching themes.

First it all starts with the ubiquitous “tone-at-the-top” but it means more than simply saying the right things on a regular basis. Denniston believes that senior management must “speak often and be sincere” in communicating this tone. If they are not sincere, he believes that employees will pick up on this immediately and any efforts to instill such a culture of compliance will be doomed to fail. Second, senior management must “walk the talk” through both discipline and a system of rewards. The discipline must be clear and delivered decisively. The rewards must be not only direct financial remuneration but also the internal promotion of persons who do business in an ethical manner, under the Company’s Code of Conduct. Lastly, a company as a whole must have the willingness to listen. He directed these remarks to helplines and other mechanisms where employees can report compliance violations or even raise concerns. He was clear that there must be be directly stated and enforced, that there is a no retaliation policy for all reports made in good faith. This also requires a company to keep accurate measurements of such reports and to design and refine its processes around these metrics.

Mendelsohn asked Denniston what were his three biggest challenges at GE regarding compliance and ethics. Denniston responded that the biggest challenge was in integrating acquisitions into the GE compliance culture. This is challenging in remote sites around the globe particularly in locations which do not have a senior management presence nor are visited by senior management on a regular basis. The second area is improper payments on a global basis. While noting that GE bans facilitation payments, these are still a challenge as are payments made through gifts, entertainment and travel. Lastly, he expanded his answer on the top three challenges to add regulatory compliance in general.

Denniston believes that the key for any company is how they will respond when a compliance issue arises. Within the GE world he said that the thing he worries about is that an issue will arise and the local business team will try to clean the matter and will not disclose it to the home office. From afar, such a response would appear as a cover-up of a reportable FCPA violation, even if no one in the US was involved. It could lead to a conclusion by the Department of Justice (DOJ) or Securities and Exchange Commission (SEC) of an entire failure of a company’s compliance program. Recognizing that the cover-up is always worse than the original event, this would seem to echo Number 3 of Paul McNulty’s Maxims of “What did you do when you found about it [a compliance violation]?”

Picking up on his point about one of the things a company must do is listen to its employees, Denniston re-emphasized that communication is important but that a company must also measure the effect that these communications have. Metrics are an important aspect to creating and maintaining a culture of compliance at GE because it allows the company to base its compliance program enhancements on quantifiable data. He added that this helps dissipate the confusion between quality in the overall company compliance regime and simple regulatory compliance.

In a very interesting response to a Mendelsohn question along the lines of “is there too much FCPA enforcement?” Denniston responded that he did not think so as he believes that the DOJ has “got it right.” However, he does not believe this is the case with the SEC. He said that the problem, in his opinion, is around how much “fuzziness” there is from the SEC on the credit a company will receive for a self-disclosure. This is true even if the SEC has a principle which is consistent; Denniston believes that it does not always play out so clearly in practice.

Dennison ended his remarks in responding to a Mendelsohn question on “the single best compliance innovation at GE, during his tenure?” Being a good lawyer, Denniston had three single best compliance innovations. They were (1) every year GE tried to introduce a substantive improvement to its compliance program. These improvements are generated from a variety of sources, from local business unit employees to his aforementioned metrics to lead to an enhancement. (2) The continued efforts in the company to increase reporting of any compliance issues so that they might be evaluated by an appropriate compliance professional. He gave an example of a geographic region which had an inordinately low number of reports of compliance issues, which Dennison viewed as a negative. He sought to have this number increased by a minimum of 20% annually, which was achieved. In other words, if there are no reports, GE wants to know why there are no reports. (3) He said that there is now the creation of an unanticipated risk list. This has turned into an early warning system of issues that might pop up on the compliance radar, however it also forces all employees engaged in the exercise to come up with compliance issues the company is not currently thinking about in any detail.

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

The Mercury 7, Chuck Duross and Continuous Improvement to Your Compliance Program

Next Monday, February 20, 2012 is the 50^th anniversary of the first American manned orbital space flight. It made John Glenn a national hero and heralded America’s move into direct competition with the (then) Soviet Union for the race to put the first man on the moon. In an article in the New York Times, entitled, “At 90, John Glenn Looks Back” reporter John Noble Wilford wrote about this flight, the Mercury program and Glenn based upon two interviews with the ex-astronaut and former Senator from Ohio. This coming Saturday, Glenn will be honored at Cape Canaveral at a celebration of the remaining members of the Mercury space team.

These original seven astronauts, known as the “Mercury 7” were true American heroes. Anyone interested in science in the slightest bit in the 60s knew who these men were. They were featured in Life Magazine with their families and each of their space flights were covered on live television by all three networks. Glenn is one of two of the original Mercury astronauts still alive, the other being Scott Carpenter, who will also be honored on Saturday. The remaining astronauts of the Mercury 7 were Deke Slayton, Gus Grissom, Alan Sheppard, Gordon Cooper and Wally Schirra. They were immortalized for a later generation by Tom Wolfe, in his book, “The Right Stuff”.

So what is the compliance angle here? It is that NASA created an entire system, consisting of processes and procedures to put a man on the moon. Were there setbacks? Yes, the Apollo 1 tragedy still resonates at NASA today. However NASA moved forward and fulfilled President Kennedy’s vow to put a man on the moon by the end of the decade. NASA did this largely by continuous improvement of its system.

I thought about this article while reading the tweets coming from my “This Week in FCPA” co-host Howard Sklar last night. Howard is in Hong Kong, chairing the Anti-Corruption Asia Congress this week. Yesterday, Chuck Duross, Deputy Chief, Foreign Corrupt Practices Act (FCPA) Unit, United States Department of Justice (DOJ) spoke to the event and Howard tweeted some of the highlights of Chuck’s remarks. They included:

• To combat anti-corruption, there needs to be political will, as it requires prosecution of bribe takers as well as bribe payers.
• Do not assume that your company is immune from FCPA liability just because you are not a US company. Here you should note that 9 out of the 10 FCPA settlements of all-time are with non-US based companies.
• Charging individuals leading to more trials. Last year the DOJ tried 3,000 cases last year and there were 4 FCPA trials. In Chuck’s words, (as tweeted by Howard) “Let’s all take a breath”.
• There was a FCPA trial first: a Foreign official, charged with money laundering, testified against the business bribe-payer. Here it is important to note that the DOJ can and will be charge foreign government offices.
• Turning to some specifics of compliance programs, Duross remarked that companies using half-measures to prevent bribery are at risk.
• Companies will receive a significant benefit for having robust compliance programs: lower fines, DPA/NPA, even not having a monitor. He gave some examples; Noble got an NPA, paid $2.6 MM, no monitor. Pride which sustained substantial cooperation with the DOJ, received below-the-guideline range penalty of 55%.
• Turning to the facilitation payment exception, Duross said that it is a narrow one: it’s usually illegal locally where it is paid, discouraged in US, illegal internationally.
• He emphasized that third party agents need to be properly vetted.
• He noted that other violations of US law often accompany FCPA violations, such as anti-competitive behavior, trade violations, embezzlement, and money laundering.
• He emphasized that your company should do what it can do regarding your compliance program. If necessary, at first, change the tone at the top. Make it clear that illegal acts will not be tolerated. But you must mean it. Vocal support is necessary, but management’s commitment cannot end there. Compliance is a cost center: management must back up vocal support of compliance with budget and resources.
• Next Duross suggested that companies reevaluate internal controls. They should take the time to review and test, think critically about risk.
• The DOJ looks at proactive compliance efforts when deciding how and whether to prosecute. He also suggested that your company might consider joining an integrity pact.
• Howard’s tweets ended with this suggestion; that it is important to TEST your compliance program. You can run a fake invoice through your system which has information which should raise has red flags. You can run information through the hotline and see what happens. That impresses the DOJ.

The last few points raised by Duross emphasized to me the process of compliance. But as important as putting the program in place is testing the program and using the lessons learned to upgrade and update your compliance program. While we celebrate John Glenn, the Mercury 7 and NASA for what they achieved, we should remember that NASA used continuous improvement in its space program. These same techniques can be brought to bear in your compliance program. Based upon the remarks of Chuck Duross, such monitoring, improvement and upgrades will be counted in a positive light by the DOJ if you are involved in a FCPA enforcement action.

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