FCPA Compliance and Ethics Blog

June 20, 2012

DS&S DPA: Lessons Learned for the Compliance Practitioner

On Monday, June 18, the Department of Justice (DOJ) announced the resolution of a matter involving violations of the Foreign Corrupt Practices Act (FCPA) by Data Systems & Solutions LLC (DS&S), a US entity based in Virginia. The settlement resulted in the company agreeing to a two year and 7 day Deferred Prosecution Agreement (DPA). The case was interesting for a number of reasons and it has some significant lessons which the compliance practitioner can put into place in a corporate compliance program. The charges related to DS&S’s business included the design, installation and maintenance of instrumentation and controls systems at nuclear power plants, fossil fuel power plants and other critical infrastructure facilities. In reading the Criminal Information, I can only say that this was no one-off or rogue employee situation but this was a clear, sustained and well known bribery scheme that went on within the company.

I.                   The Criminal Information

The bribery scheme involved payments made to officials at a state-owned nuclear power facility in Lithuania, named Ignalina Nuclear Power Plant (INPP). The payments were made to allow DS&S to obtain and retain business with INPP. The Information listed contracts awarded to DS&S in the amount of over $30MM from 1999 to 2004. Significantly, DS&S did not self-disclose this matter to the DOJ but only began an investigation after receiving a DOJ Subpoena for records.

The Players Box Score

DS&S Officials INPP Officials Subcontractors
Exec A – VP of Marketing and Business Development (BD) Official 1 – Deputy Head of Instrumentation and Controls Department Subcontractor A – Simulation Technology Products and Services
Official 2 – Head of Instrumentation and Controls Department Subcontractor B – Beneficially owned by Official 1 and which employed INPP Officials
Official 3 – Director General at INPP Subcontractor C – Shell company used a funneling entity to pay bribes
Official 4 – Head of International Projects at INPP
Official 5 – Lead SW Engineer at INPP

The bribery scheme used by DS&S recycled about every known technique there is to pay bribes. The Information listed 51 instances of bribes paid or communications via email about the need to continue to pay bribes. The bribery scheme laid in the Information reflected the following techniques used by:

  •       Payment of bribes by Subcontractors to Officials on behalf of DS&S;
  •       Direct payment of bribes by DS&S into US bank accounts controlled by INPP Officials;
  •       Creation of fictional invoices from the Subcontractors to fund the bribes;
  •      Payment of above-market rates for services allegedly delivered by the Subcontractors so the excess monies could be used to fund bribes;
  •      Payment of salaries to INPP Officials while they were ‘employed’ by Subcontractor B;
  •       Providing travel and entertainment to Officials to Florida, where DS&S has no facilities and which travel and entertainment had no reasonable business purpose; and last but not least…
  •      Purchase of a Cartier watch as a gift.

II.                The Deferred Prosecution Agreement

I set out these details with some specificity for two reasons. The first is that the Information is a must read for anyone in Internal Audit who reviews books and records. It gives you the precise types of Red Flags to look for. But secondly is the fact that DS&S received a discount of 30% off the low end of the penalty range as calculated under the US Sentencing Guidelines. The calculation as listed in the DPA is as follows:

Calculation of Fine Range:

Base Fine $10,500,000

Multipliers 1.20(min)/2.40(max)

Fine Range $12,600,000/$25,200,000

The ultimate fine paid by DS&S was only $8.82MM, which the DPA states is “an approximately thirty-percent reduction off the bottom of the fine range…” So for the compliance practitioner the question is what did DS&S do to get such a dramatic reduction? We know that one thing they did NOT do was self-report as the DPA notes that this case began as a DOJ investigation and DS&S received Subpoenas “in connection with the government’s investigation.” However, after this initial delivery of Subpoenas DS&S engaged a clear pattern of conduct which led directly to this 30% discount of the low end of the fine range. The DPA reports that DS&S took the following steps:

 

  • Internal Investigation. DS&S initiated an internal investigation and provided real-time reports and updates of its investigation into the conduct described in the Information and Statement of Facts.
  • Extraordinary Cooperation. DS&S’s cooperation has been extraordinary, including conducting an extensive, thorough, and swift internal investigation; providing to the Department searchable databases of documents downloaded from servers, computers, laptops, and other electronic devices; collecting, analyzing, and organizing voluminous evidence and information to provide to the DOJ in a comprehensive report; and responding promptly and fully to the DOJ’s requests.
  • Extensive Remediation. The number of steps DS&S took in regard to remediation included the following:
    • Termination of company officials and employees who were engaged in the bribery scheme;
    • Dissolving the joint venture and then reorganizing and integrating the dissolved entity as a subsidiary of DS&S;
    • Instituting a rigorous compliance program in this newly constituted subsidiary;
    • Enhancing the company’s due diligence protocols for third-party agents and subcontractors;
    • Chief Executive Officer (CEO) review and approval of the selection and retention of any third-party agent or subcontractor;
    • Strengthening of company ethics and compliance policies;
    • Appointment of a company Ethics Representative who reports directly to the CEO;
    • The Ethics Representative provides regular reports to the Members Committee (the equivalent of a Board of Directors in a LLC); and
    • A heightened review of most foreign transactions.
    • Enhanced Compliance Program. More on this in the next section.
    • Continued Cooperation with DOJ. The company agreed to continue to cooperate with the Department in any ongoing investigation of the conduct of DS&S and its officers, directors, employees, agents, and subcontractors relating to violations of the FCPA and to fully cooperate with any other domestic or foreign law enforcement authority and investigations by Multilateral Development Banks.

III.             Enhanced Compliance Obligations

One of the interesting aspects of the DS&S DPA is that there are 15 points listed in the Corporate Compliance Program, attached as Schedule C to the DPA, rather than the standard 13 items we have seen in every DPA since at least November 2010. The new additions are found on items 13 & 14 on page C-6 of Schedule C and deal with mergers and acquisitions. They read in full:

13. DS&S will develop and implement policies and procedures for mergers and acquisitions requiring that DS&S conduct appropriate risk-based due diligence on potential new business entities, including appropriate FCPA and anti-corruption due diligence by legal, accounting, and compliance personnel. If DS&S discovers any corrupt payments or inadequate internal controls as part of its due diligence of newly acquired entities or entities merged with DS&S, it shall report such conduct to the Department as required in Appendix B of this Agreement.

14. DS&S will ensure that DS&S’s policies and procedures regarding the anticorruption laws apply as quickly as is practicable to newly acquired businesses or entities merged with DS&S and will promptly:

a. Train directors, officers, employees, agents, consultants, representatives, distributors, joint venture partners, and relevant employees thereof, who present corruption risk to DS&S, on the anti-corruption laws and DS&S’s policies and procedures regarding anticorruption laws.

b. Conduct an FCPA-specific audit of all newly acquired or merged businesses as quickly as practicable.

This language draws from and builds upon the prior Opinion Release 08-02 regarding Halliburton’s request for guidance during an attempted acquisition and the Johnson and Johnson (J&J) Enhanced Compliance Obligations which were incorporated into its DPA. While the DS&S DPA does note that it is specifically tailored as a solution to DS&S’s FCPA compliance issues, I believe that this is the type of guidance that a compliance practitioner can rely upon when advising his or her clients on what the DOJ expects during Mergers and Acquisitions (M&A). The five keys under these new items, 13 & 14 highlighted above, are: (1) develop policies and procedures for M&A work prior to engaging in such transactions; (2) full FCPA audit of any acquired entities “as quickly as practicable”; (3) report any corrupt payments or inadequate internal controls it discovers in this process to the DOJ; (4) apply DS&S anti-corruption policies and procedures to the newly acquired entities; and (5) train any persons who might “present a corruption risk to DS&S” on the company’s policies and procedures and the law.

IV.              Summary

The DS&S DPA provides some key points for the compliance practitioner. First and foremost, I believe that it demonstrates the reasonableness of the DOJ. The bribery scheme here was about as bad as it can get, short of suitcases of money carried by the CEO to pay bribes. The company did not self-report, yet received a significant reduction on the minimum level of fine. The specificity in the DPA allows a compliance practitioner to understand what type of conduct is required to not only avoid a much more significant monetary penalty but also a corporate monitor. Lastly, is the specific guidance on FCPA compliance in relation to M&A activities, to the extent that if anyone in the compliance arena did not understand what was required in the M&A context; this question would seem to be answered in the DS&S DPA.

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

© Thomas R. Fox, 2012

January 16, 2012

The SFO Speaks in the Mabey & Johnson Case: Private Equity – Are You Listening?

As reported by thebriberyact.com, on January 13, 2012, the UK Serious Fraud Office (SFO) announced the final piece of the Mabey & Johnson (M&J) case, in which the company’s sole shareholder Mabey Engineering (Holdings) Limited agreed to pay back dividends gained as a result of corruption of  M&J obtain Iraqi bridge-building contracts. SFO Director Richard Alderman lauded it as “the final act in an exemplary model of corporate self-reporting and co-operative resolution”. I hope that every compliance officer of a private equity company read the report by the Bribery Act guys because this is a remedy which may soon be aimed directly at your company.

To recap this case, as reported in the SFO Press Release, entitled “Shareholder agrees civil recovery by SFO in Mabey & Johnson”, said that M&J has worked with the SFO since the beginning of 2008 when M&J self-reported certain instances of corruption it had identified as a result of an internal investigation. Following the self-disclosure and subsequent co-operation with the SFO’s investigations, the company pled guilty to charges of corruption and breaches of United Nations sanctions and was convicted at Southwark Crown Court in September 2009. Since the self-disclosure, the company has introduced new management, implemented anti-bribery and corruption procedures and appointed an independent monitor. The SFO noted that “the company is viewed by the SFO as having conducted itself in an exemplary way through its self-referral, extensive co-operation with the authorities and the transformation of the company.”

However, there is now one additional remedy that the SFO used against M&J. The sole shareholder of M&J, Mabey Engineering, agreed to pay a penalty of £131,201 under the Proceeds of Crime Act. The sum represents the dividends which the parent company collected from the contracts at the center of the UN Sanctions prosecutions. The company will also pay costs in the amount of £2,440.

Director Alderman is quoted as saying:

“There are two key messages I would like to highlight.  First, shareholders who receive the proceeds of crime can expect civil action against them to recover the money.  The SFO will pursue this approach vigorously.  In this particular case, however, the shareholder was totally unaware of any inappropriate behaviour.  The company and the various stakeholders across the group have worked very constructively with the SFO to resolve the situation, and we are very happy to acknowledge this.

The second, broader point is that shareholders and investors in companies are obliged to satisfy themselves with the business practices of the companies they invest in.  This is very important and we cannot emphasise it enough.  It is particularly so for institutional investors who have the knowledge and expertise to do it. The SFO intends to use the civil recovery process to pursue investors who have benefitted from illegal activity.  Where issues arise, we will be much less sympathetic to institutional investors whose due diligence has clearly been lax in this respect.”

Commenting on these statements, thebriberyact.com said, that with these remarks, Director Alderman “took the opportunity to fire a warning a shot across the bows of institutional shareholders and the higher standards the SFO will expect of them”. I usually do not disagree with thebriberyact.com guys. However, here I think they were way too subtle, because even if a shareholder did not know about illegal conduct, the SFO will go after the proceeds of the criminal activity. This is not the situation where a recalcitrant company agrees to disgorge profits, which is a standard Securities and Exchange Commission (SEC) remedy. This is a situation where a shareholder who received dividends was required to return its money.

Director Alderman goes on to imply that institutional shareholders will be held to a higher standard. The “broader point is that shareholders and investors in companies are obliged to satisfy themselves with the business practices of the companies they invest in. This is very important and we cannot emphasise it enough.” Think about that statement for a minute. If you are a private US equity company, with a UK portfolio company which sustains a Bribery Act violation and prosecution, you may well have to return profits, even where you did not have knowledge of the violative conduct.

More importantly for private US equity companies, how long do you think it will take for the Department of Justice (DOJ) to incorporate this form of remedy into a Foreign Corrupt Practices Act (FCPA) enforcement action? I can give you the answer; NOT LONG. The SEC enforces the books and records component of the FCPA against publicly listed companies. Most equity companies are privately held so profit disgorgement may not be available in an enforcement action against a portfolio company. Nevertheless, based on the Mabey case, the DOJ may well seek return of dividends, profits or other monies which went from a portfolio company to its private equity owner.

Over the past week, there has been intense media discussion regarding private equity due to the GOP primary. These discussions have even reached the FCPA compliance commentariati with an article by Matt Ellis, writing in his blog FCPAméricas, entitled “Mitt Romney, Private Equity, and the FCPA.” The lawyers at the DOJ read the papers like everyone else and they see this increased scrutiny and this scrutiny, coupled with this new development by the SFO, will put this type of enforcement remedy squarely in front of US regulators. If you are a private equity company, you need to heed Director Alderman’s warning that “This is very important and we cannot emphasise it enough”; you will be “obligated to satisfy [yourself] with the business practices of the companies [you] invest in.” It does not get any more straight forward than that.

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

© Thomas R. Fox, 2012

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