An Inspired Choice – Ethical Leadership Under Difficult Circumstances

I am attending Compliance Week 2013 through Wednesday. As usual Matt Kelly and the Compliance Week team have put together a first rate program for the event. There have been, and will be over the next couple of days, some very informative panels, speakers, roundtables and conversations. The conference began today with a talk by Retired Major General Lewis MacKenzie, the former head of the United Nations peacekeeping forces. Although General MacKenzie’s choice as the initial keynote speaker of the conference might not seem self-obvious, I found Matt Kelly’s invitation to the General to speak and his position as the first speaker on the first day of the conference, were both inspired decisions.

The theme of his talk was how to maintain ethical leadership under difficult circumstances. Matt Kelly posed the question to the General of “how do you speak the truth to power?” The General began his remarks by giving his definition of leadership, which as he said was “getting people to do what they don’t want to do and having them enjoy it while they are doing it.” Based on that definition and his remarks below, I came to see why Matt wanted the General to speak to a gathering of compliance professionals on ethical leadership under difficult circumstances.

The General said that it all starts with a leader being him or herself, after they take the reins of leadership. He believes that people usually rise to a high level in an organization because of technical competence, coupled with the relationships they developed along the way. He believes that a leader must strive to maintain those relationships because that is the key to information flow both upwards to the top and down through the organization. A leader must take all pains not to become isolated.

The General believes that relationships work in several critical areas. The first is that a leader can utilize the talents of his subordinates to not only understand but to overcome obstacles. But equally important is that by having a relationship with someone, it may provide an avenue to resolve a matter before it blows up into a full financial reporting issue or even criminal issue. He said that he would try to find out the one thing that his troops were passionate about and he could use that information “as a window into what they think about the organization.”

He designated his next point with the acronym, LWWA, or ‘leading while walking around’. He said that to get people to do things, a leader must get out of the office and talk to people. But he cautioned that it is more than simply talking to people, as he believes a critical skill of a leader is to listen as well. To this skill, he said that rather than hear someone and think about what your response might be, you should actually listen to what they have to say. He found that by listening good ideas could come up to him and then he could implement them and get the credit.

The General talked about courage. By this he did not mean the courage to lead a charge up a hill, but rather, he meant the courage to say no and to hear someone who says no to you. He believes it is the job of a leader to set the tone for an organization. A leader must teach his subordinates to have the courage to disagree with him or as he said “disagree without being disagreeable”. If one of the first things you do in a leadership position is belittle or defame publicly someone who disagrees with you, no one will do so in the future.  For a leader to succeed, the General believes that a speak up culture must exist. To do so, a leader must make it acceptable and safe for subordinates to say no.

It is the job of a leader to accept responsibility. In an interesting exercise, the General asked the entire audience of over 500 conference participants to raise their hand if they had ever been criticized for being ‘too responsible’. He then asked anyone in the audience to raise their hand if they had criticized someone else for being ‘too responsible’. No one person raised their hand in response to either query. It is clear that the General believes a leader must take responsibility. Further, there is no ‘but’ which follows the line “I am responsible”. In other words, no ifs, ands, or buts are allowed when it comes to a leader taking responsibility.

The General said that one of the best ways he found to motivate people was to give them a job which had difficult but not impossible objectives to success. This has two benefits. The first was that most people would be motivated to try and achieve the difficult objective. However the second was more long term. By achieving the results, the person or team had something to brag about and it gave them greater confidence going forward. This is particularly true if there is a metric which can be used to demonstrate the overcoming of the obstacle. However, a leader must not set a high or unreasonable objective that it can only be achieved by “breaking the back of the organization.”

The General took some questions from the audience. One that I found applicable to the compliance arena was about resources. Specifically he was asked how to carry out missions with limited resources. He tied his answer back into his thoughts on relationship. He said that people want to contribute their ideas. If you give them a means to do so, in a speak up culture, they can be your best resource. An army has often times to do more with less and must do so on the fly. But this same concept translates to civilian employees who want their company to succeed and can stand ready with ideas to assist you moving forward toward your objective.

If you are a Chief Compliance Officer (CCO) or in a senior leadership position, you should think about the General’s remarks in the context of what you and how you do it, within your organization. Do you have relationships with other key members of senior management so that you can go to them, not only when things are going well, but more importantly when they are not going well or a crisis has arisen? Do you have a speak up culture at your company? If not why not, as that certainly is a part of any best practices compliance program under the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act.

Lastly, think about the General’s remarks on resources. One never has all the resources you need or even think that you want. But use the talent that is available to you. There are other professionals in your company who do not work in the compliance department but are equally dedicated to doing business ethically and in compliance. Human Resources and Internal Audit are but two prime examples. Seek them out and ask their assistance. I think you may be well surprised at the solutions they can provide or suggest to you.

As I said, by the end of General MacKenzie’s talk, I had come to believe that Matt Kelly made an inspired decision not only to invite him to speak to the conference but to be the first speaker out of the box. It has set a great tone for the event.

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

What is Your Compliance Strategy?

Do you have a strategy? The Houston Astros claim to have a strategy that involves being the worst team in baseball for up to the next five years and then magically they will become a winner. I suppose that having the worst record in baseball demonstrates that they are on the right path. Another three game series, another three game sweep by the visiting team, thus ending three games of some of the most pathetic baseball I have ever seen. However, even the ever-optimistic Astros manager, Bo Porter, admitted in an interview to the Houston Chronicle last week that “He has no idea if the Astros’ rebuilding plan will work.”

Now suppose you are in management, though not in the Houston Astros where you are implementing a strategy to set the all-time season record for losses, but a successful compliance program. How can you go about it? While most companies have compliance programs, they do not have a compliance strategy. To endure, a compliance strategy must address the interests of all stakeholders: investors, employees, customers, governments, NGOs, and society at large. A compliance strategy should increase shareholder value while at the same time improve the firm’s performance on environmental, social, and governance (ESG) dimensions. These concepts were recently explored in an article on sustainability in the May issue of the Harvard Business Review (HBR), article entitled “The Performance Frontier”. I found the concepts that the authors Robert G. Eccles and George Serafeim put forth, translate into the compliance arena as well.

The basic posit is that corporate investments in compliance do not necessarily require trade-offs in financial performance. Instead, if a company will focus on the issues that are the most relevant to both risk and shareholder value, a company should be able to boost both financial value and compliance performance. The authors believe that to do so, companies should focus on four areas.

1.      Identify Material Compliance Issues

While the overall list of compliance issues may be long and broad, the key is to determine the material issues to your company. In the context of sustainability, the authors suggest you can use a “Which Issues Matter Most” data map. They also phrased it in another manner by stating, “Evidence of economic impact is determined by evaluating both anecdotal reports and quantitative studies to gauge whether management (or mismanagement) of the issue will affect traditional corporate valuation parameters: revenue growth, return on capital, risk management, and management quality.” In the compliance arena, this would correspond to a risk assessment.

2.      Quantify the Relationship Between Financial and Compliance Performance

After you understand your company’s material compliance issues, assess the impact that improvements in each would have on financial performance. Compliance performance has many dimensions and depending on the company’s compliance strategy and the issue being considered, the most important dimension could be cost reduction, revenue growth, or gross margin defense. In the sustainability area, the authors state that a “host of factors complicate evaluations of the relationship between ESG and financial performance. Not the least of them are limitations on the ability to precisely measure ESG performance—a challenge that SASB and others are working to address.” However, even with this difficulty, I believe that a company can make an informed estimate of the slope of the performance-frontier curve for any pair of compliance and financial variables by determining whether each incremental improvement in compliance performance causes a corresponding positive or negative change in financial results – or has no impact.

3.      Innovate Products, Processes and Business Models

As with any strategy, it should be informed by your analysis. Once you determine the compliance issues to focus on, you should benchmark your industry peers on these issues. If your company’s performance falls short of industry benchmarks in a particular risk parameter, getting it up above par is the first priority. Within the sustainability context, the authors state that “At the very least it will mitigate your risks, since stakeholders tend to focus on industry laggards in campaigns aimed at increasing corporate ESG performance. Many improvements, such as reducing manufacturing waste, involve minor or moderate innovations that can enhance efficiency and, therefore, financial performance. Those sorts of innovations are increasingly necessary (but not sufficient) to ensure competitiveness.”

In the compliance arena, there are many resources available to you for benchmarking. The first place to start is the Department of Justice (DOJ)/Securities and Exchange Commission (SEC) Foreign Corrupt Practices Act (FCPA) Guidance released last November. The “Hallmarks of Effective Compliance Programs” set forth in the Guidance 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 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.

4.      Communicate the Company’s Innovations to Stakeholders

This may be one area of a typical compliance strategy that a company does not normally take into account. A company’s compliance function cannot assume that shareholders and other stakeholders will understand how its innovations have improved both compliance and financial performance – and how the two interrelate – unless such information is communicated effectively. As the authors state in the framework of sustainability “This is more than a matter of public relations; major innovations often require substantial investments whose benefits will not be seen for years to come. If a company expects shareholders to commit for the long term in order to receive those benefits, it needs to provide them with information that justifies their investments.” The authors call this “integrated reporting” and I believe that this is also true in the area of compliance.

As a communications tool, integrated reporting involves more than posting a PDF version of the Code of Conduct on a company’s website. As with almost all reporting, the most effective reporting is as much about listening as talking, and it serves as a key platform for stakeholder engagement. The authors believe that integrated reporting is a “way to establish a conversation that considers a company’s performance in a holistic way, identifies the tough trade-offs, and builds a case for innovation and the benefits it can generate. This engagement is also central to eliciting feedback on how well the company is meeting expectations, the quality of its communications, and what it can do to improve them.”

On the final point, the authors state something that I believe is often overlooked as a part of any compliance strategy. It is that “integrated reporting enhances discipline. It forces management and employees to think about both the financial and the ESG implications of their decisions and helps spur innovation as they seek to improve both kinds of performance.” The FCPA Guidance speaks to Incentives and Disciplinary Measures, which is generally considered to be both the carrot and the stick. The stick to demonstrate that there should be appropriate discipline in place and administered for any violation of the FCPA or a company’s compliance program. The carrot as the DOJ and SEC recognize that positive incentives can also drive compliant behavior. This would dovetail with the authors’ observation that integrated reporting enhances discipline.

Eccles and Serafeim discuss in their article the corporate benefits of having a sustainability strategy. I think their ideas are applicable to the compliance field and give you new ways to think about old problems. As for the Astros, maybe they could develop a winning strategy.

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

Use Planes, Trains and Automobiles to get to Compliance Week 2013

To say I am excited would be putting it mildly. Yes that most premier of compliance related conferences is on the short horizon; Compliance Week 2013 is nearly upon us. It will be from May 20-22 at the Mayflower Hotel in Washington DC. As usual, Matt Kelly and his outstanding team have put together a first rate program for the General Counsel (GC), compliance practitioner (in-house or outside counsel), FCPA Bar/FCPA Inc. or even Mike Volkov’s good friends, the FCPA Paparazzi. If there is one national compliance conference that you can attend each year, for my money, this is the event.

As Matt Kelly has said, the theme of Compliance Week 2013 is “Seeing All the Data” and is designed as “a testament to how vital it is that compliance executives have visibility into all the information and operations at their enterprises. That could be anything from tracking all your third parties, or monitoring all the data your business collects about customers, or seeing all the regulatory risks you face as you build a risk-management program.” This theme is certainly appropriate as I believe that 2013 will be the year that the use of data in transaction;  third party; relationship and all other forms of ongoing monitoring will make any compliance program more robust. There are several sessions where these topics will be explored, including the following: Continuous Transaction Monitoring That Works, the Kroll Benchmarking Report, Mapping Data on Information Governance, Automating Third Party Risk, and Financial Reporting. This plethora of sessions speaks to the emergence of technology as a tool to support compliance.

Another key theme of Compliance Week 2013 is leadership. The first day of the conference is the subject of leadership. The first keynote speaker on Day One is Ed Breen, the chairman and former Chief Executive Officer (CEO) of Tyco International Ltd, who had to pick up the tatters of that company in 2002, as his predecessor went off to prison, and then rebuild the entire operation. The second keynote speaker on Day One is retired Major General Lewis MacKenzie, former head of U.N. peacekeeping forces in Yugoslavia, Central America, Middle East and Vietnam. Some of the sessions on Day One regarding leadership will focus on the practical; how to position the compliance department as an asset rather than an obstacle; how to craft a Code of Conduct that fits your business and culture; how to do business in India, Latin America, and elsewhere.

For the FCPA consigliori amongst you, I will once again be leading a conversation on the most recent Foreign Corrupt Practices Act (FCPA) developments. With the recent Parker Drilling Company and Ralph Lauren Corporation resolutions and the various individuals who have been indicted or have pled out, it promises to be an interesting and informative time for anyone interested in all things FCPA. If it turns out that after my session you are still craving more insight about effective compliance with the FCPA there will be a session entitled “FCPA Guidance, Right From the Source”. This session will address any lingering questions you may have about the FCPA guidance published last fall by the Department of Justice (DOJ) and Securities and Exchange Commission (SEC). The panel will include the top FCPA enforcers from both the DOJ and SEC, who will offer their latest thinking on anti-bribery enforcement and answer questions from the audience about best practices and putting agency guidance to good use.

If your compliance challenges reach beyond the FCPA, there will be sessions which deal with broader compliance themes. In the area of export control, one conversation will have regulators who will discuss issues related to sponsoring a foreign-born worker here in the United States; some of the implications of the export control reform effort on investigations and prosecutions; and the absolute requirement to know your customer. There will also be a session which showcases the Boeing Co.’s approach to trade compliance, from monitoring regulatory changes to developing processes that simplify compliance and examples of how the Boeing program was implemented in its business units.

If internal controls are more to your taste or needs, then check out the panel discussion regarding FMC Corp. You will hear from the company’s internal control team that implemented an automated system to collect and monitor financial data: the software they used; the controls they streamlined; the high-level components of internal controls they did not automate, and the results so far. More focused on training? One session will discuss how to align business and compliance objectives with training, how to ensure you get the data you need to demonstrate progress, and what tools you can use to deliver training to a diverse workforce cost effectively. If you want to move beyond training and into embedding compliance into your company’s DNA, check out this session “Beyond Training: Articulating & Embedding Company Values”. This session will discuss how organizations with the most ethical rigor want to embed their cultural values in everything they do, so employees know how to conduct themselves in any circumstance, not just in moments of obvious crisis.

So whether it’s by plane, train or automobile, I hope that you can get to Compliance Week 2013. To help you do so, I have been authorized to offer a discount to readers of my blog. For registration and information, 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, 2013

DPAs and NPAs – Useful Tools to Achieve Compliance

The debate on whether the use of Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs) has become lively again over the past couple of weeks. Last week, there was a panel hosted by the Corporate Crime Reporter conference at the National Press Club. The panel was moderated by Steven Fagell, a partner at Covington & Burling LLP, and the panelists included Denis McInerney, the Criminal Division’s Deputy Assistant Attorney General, David Uhlmann, the former chief of the Environmental Crimes Section at the Department of Justice (DOJ), and currently a Professor of Law at the University of Michigan, the FCPA Professor, Michael Koehler, Kathleen Harris, a partner at Arnold & Porter LLP in London, and Anthony Barkow, a partner at Jenner & Block in New York.

The FCPA Professor wrote about the conference in two posts this week. The second post, entitled “Seeing the Light from the ‘Dark Ages’”, reported on the panel discussion. In this post, the Professor flatly says that DPAs and NPAs should be abolished in the context of Foreign Corrupt Practices Act (FCPA) enforcement and that a compliance defense should be added to the FCPA. In the other corner stands Mike Volkov, who said in a recent post, entitled “The Continuing Controversy Over DPAs and NPAs”, that DPAs and NPAs are part of the growing arsenal of prosecutorial tools that can be brought to bear by the DOJ and now the Securities and Exchange Commission (SEC).

The Professor previously articulated his views against DPAs and NPAs last fall in a post entitled “Assistant Attorney General Breuer’s Unconvincing Defense Of DPAs / NPAs”. In that post he said that the “use of NPAs or DPAs allow “under-prosecution” of egregious instance of corporate conduct while at the same time facilitate the “over-prosecution” of business conduct.” The ‘under-prosecution’ comes “because they [DPAs and NPAs] do not result in any actual charges filed against a company, and thus do not require the company to plead to any charges, allow egregious instances of corporate conduct to be resolved too lightly without adequate sanctions and without achieving maximum deterrence.” The ‘over-prosecution’ comes “because of the “carrots” and “sticks’ relevant to resolving a DOJ enforcement action often nudge companies to agree to these vehicles for reasons of risk-aversion and efficiency and not necessarily because the conduct at issue actually violates the law.” Volkov, being a former prosecutor, says that “Prosecutors like to have a variety of tools. An up or down decision system – indict or decline to indict – does not give prosecutors any ability to address the hard cases, where they are more inclined to decline prosecution rather than indict.”

However, I am neither a former prosecutor, like Volkov, nor a former white collar defense lawyer, like the Professor. I am a recovering trial lawyer who then went in-house. From this background I think that there is another line of reasoning as to why DPAs and NPAs are useful FCPA compliance enforcement tools and that line of reasoning is certainty. The primary reason for the prosecution and a company entering into a DPA/NPA is certainty. The one thing I learned in almost 20 years of trying cases is that nothing is certain when you leave the final decision to an ultimate trier of fact who is not yourself, whether that trier of fact be a jury, judge or arbitrator. The most important thing for a company is certainty and that is even more paramount when a potential criminal conviction looms over its corporate head. Certainty is equally critical for the prosecution. No matter how ‘slam dunk’ the facts are, or appear to be, once a prosecutor turns over the final decision in a case to another trier of fact; the prosecution has lost certainty in the final decision. Every corporate defendant who goes to trial can and should raise all procedural and factual defenses available to it. No prosecutor can ever be 100% certain that it will win every court ruling or that a guilty conviction will be upheld on appeal. However, a DPA/NPA can bring certainty. For a company, certainty in its rights and obligations, for the prosecution the same is true.

There was another article which considered the panel discussion held at the Corporate Crime Reporter conference entitled “McInerney Defends Deferred and Non Prosecution Agreements”. This article included quotes from David Uhlmann, who said that he believes, “This is about a profound ambivalence in parts of the Department about the very notion of corporate criminality.” Uhlmann believes that it this ambivalence which has driven the use of DPAs. He believes that the DOJ should make an “up or down” decision on whether a corporation should be prosecuted or not. He was quoted as saying “There is no more important role that the Justice Department plays than its role investigating and prosecuting crime. And if the Justice Department believes that a particular case warrants criminal prosecution, it should bring criminal charges. It should not sacrifice criminal prosecution to a private agreement never entered in court, never overseen by a judge in any meaningful way that doesn’t involve any public hearing, that doesn’t involve any corporate officials coming into the courtroom admitting guilt. On the other hand, if the Justice Department doesn’t believe that a criminal prosecution is necessary or warranted, then they should decline. They should decline prosecution in favor of — in most cases they have the option of civil or administrative enforcement.”

The Professor had a slightly different take on the use of DPAs in the context of criminal prosecutions of corporations. He was quoted as saying, “The Department has become so uncomfortable with the traditional notions of corporate criminal liability that they have constructed and indeed championed this alternative reality that is equally problematic.” Further, “These resolutions have had a troubling, distortive and toxic effect on this one area of law,” Koehler concluded. “There is no judicial scrutiny of most fcpa enforcement theories.” And, lastly, “Of course, the Justice Department is in favor of these because it makes their job easier. Of course, the FCPA bar and FCPA Inc. is in favor of these it expands the market for legal services.”

Criminal Division Deputy Assistant Attorney General McInerney made clear that he is not ambivalent at all about corporate criminal liability and specifically stated this. So let me speak from the perspective of a lawyer from Houston, who has represented companies in the energy space for quite some time. The frustration that boiled over from the lack of prosecutions regarding the financial troubles of the recent years should not obscure the fact that the DOJ has and will continue to pursue criminal cases against corporations.

But to paraphrase Joe Jackson, something else is going on ‘round here with prosecutions of corporate criminal conduct and the use of DPAs/NPAs. While one role of the DOJ is to prosecute law breakers; I believe that another role of the DOJ is to increase and encourage compliance with laws. The DPA/NPA debate does not stand in a vacuum. I believe that by offering incentives for companies to self-disclose and cooperate, the DOJ is increasing compliance with the FCPA. If there is no incentive to cooperate, there will be none. Period. If a company will face a criminal indictment or charge if it investigates a matter and self-discloses to the DOJ, how many companies will do so? McInerney was quoted as saying, “You are disincentivizing companies in terms of doing the right thing. You are not crediting companies for doing the right thing.”

Now let me take the flip side; Arthur Anderson. For all the howls that there is no empirical evidence that indicting and convicting companies puts them out of business; I am certainly not persuaded. I saw it happen, here in Houston. Was it in the interest of the US government to put Arthur Anderson out of business? Did it further the policies of this country to go from the Big Four to the Big Three? What about all the Arthur Anderson employees who did not work on the Enron account, what policy did it further to have them lose everything they invested in their professional life? If DPAs/NPAs are less draconian in their effect than destruction of a corporation’s existence, does that make them somehow less useful? If the DOJ wants to put such a factor into their decision making, I find that to be an appropriate calculus.

As to the charge that the FCPA Bar/FCPA Inc. used DPAs/NPAs to expand their market for work? [Full disclosure - I am a member of the FCPA Bar and ergo, FCPA Inc.] I think that it is the job of a lawyer to advise his or her clients on their legal obligations and to assist in fulfilling those obligations. Is it in my own myopic self-interest to advocate compliance with the FCPA? Or am I a part of the FCPA Bar and Inc. which assists companies to comply with a now 35 year old law? Whichever answer you prefer, I believe that there is more compliance now and that the use of DPAs/NPAs is a contributing factor to this increased compliance.

Another panelist, Anthony Barkow posited yet another angle. He said “one the primary policy justifications — or certainly a significant policy justification — is — getting DPAs and NPAs is easy. “It’s a lot easier than charging a company,”” Barkow said. “And it’s a lot easier than charging it and to try to get a plea.” While I do not pretend to know the intricacies of obtaining an indictment or going before a grand jury, it is always easier to settle something rather than try a case. But that does not mean any less work goes on, either from the corporate side or especially from the government side. FCPA enforcement actions are huge, document intensive cases and from what little I know of the process, the DOJ works quite hard to craft an appropriate resolution for each case. Further, there are multiple levels of review in the DOJ so many sets of eyes look at these matters. So while it may be easier to reach a resolution rather than charging and criminally trying a corporation, that does not mean in any way, shape or form that this work is easy. The work is hard, time intensive and takes literally thousands of man-hours by all parties involved to reach any resolution. Simply because a new enforcement tool is available, which is short of a criminal indictment and trial, does not mean that it is not a useful tool and should not be used.

Mike Volkov ended his post with the following, “The debate will continue – I have no doubt of that.” I would certainly second that notion. But from where I sit the use of DPAs/NPAs has improved compliance with the FCPA because their use has given corporations a real incentive to thoroughly investigate allegations of bribery and corruption and then work with the government to appropriately remediate the situation.

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

Do Law Firms Have an In-House Privilege?

There is often a discussion about the retention of outside counsel to lead an investigation of alleged violations of the US Foreign Corrupt Practices Act (FCPA) so that the company may maintain the attorney-client privilege. But is there some other privilege which might be lurking in this relationship? This question was discussed in an article in the May issue of the ABA Journal, entitled “Inside Story”, by Mark Curriden, which details a discovery dispute before the Georgia Supreme Court where a law firm has claimed that it enjoys an attorney-client privilege in a malpractice claim brought by a former client. The case involves allegations that communications between a law firm and its in-house counsel are privileged in favor of the law firm and poses the following query: “whether communications between lawyers and in-house counsel are protected by the attorney-client privilege and the work product doctrine when a dispute arises between the firm and a client.”

The case involves three lawyers from the Savannah, GA law firm of Hunter, Maclean, Exley & Dunn PC (Hunter Mclean). The law firm had prepared certain real estate sales contracts, which were used by the firm’s client, St. Simons Waterfront LLC. After buyers began to opt out of these contracts to purchase certain properties, the law firm suggested that the company negotiate with the purchasers.

The company demanded that the law firm work to enforce the agreements. Curriden wrote that “The lawyers for Hunter Maclean took the scolding as a sign that St. Simons Waterfront was planning a malpractice claim against them and contacted the firm’s in-house counsel immediately after the call.” He quoted the lawyer for St. Simons Waterfront who said that “Within minutes of the conference call, Hunter Maclean lawyers were already taking legal steps to defend themselves for litigation, even though they were still representing the client and would continue to represent the client for another three months.”

The law firm understood that the company was threatening litigation against the law firm and claimed they told the client that it needed new counsel. The company said at no time did it suggest that it was preparing to sue its own lawyers and denies that the law firm told them after the phone call in question that a conflict existed and that the company should retain new counsel.

Indeed later, the client sued the law firm for malpractice in the drafting of the real estate contracts, in a case styled, St. Simons Waterfront v. Hunter, Maclean, Exley & Dunn. The dispute currently before the Georgia Supreme Court is over certain documents that the law firm claims is its internal attorney-client privileged communications , specifically including a 33-page memo from the firm’s own in-house lawyer describing the Feb. 18, 2008, conference call referenced above, that lawyers at the firm wrote the day after the telephone conversation occurred.

Susan W. Cox, counsel representing Hunter Mclean, said that “The documents and communications sought involve efforts by the firm to investigate, evaluate and consider how to respond to the client’s asserted claim.” Curriden further quoted her as stating that “Under the plaintiff’s argument, Cox says, “a law firm would have to immediately withdraw from any further client representation, regardless of the harm to the client and regardless of whether the client consented to the additional temporary and necessary representation, in order to protect its in-house information from disclosure in the malpractice claim. It was impossible for Hunter Maclean to immediately withdraw without causing great harm to the client. Under Georgia and federal law, the attorney-client privilege is interpreted to protect against disclosure of information obtained or shared in a confidential relationship, and that applies equally to communications with in-house and outside counsel.””

However, the trial court disagreed with the law firm’s position and ordered production of the documents “ruling that the privilege didn’t apply because Hunter Maclean failed to inform the client about its conflicts. The judge ordered Hunter Maclean to turn over the internal documents that St. Simons Waterfront was seeking.” Then “The Georgia Court of Appeals reversed, ruling that the firm’s communications with in-house counsel remained privileged because the in-house counsel was completely isolated from the St. Simons Waterfront legal work and thus did not have a conflict. St. Simons Waterfront appealed to the state supreme court. Oral arguments were held in March.”

The article posited the two schools of thought on this question. Attorney John G. Nelson, counsel for the St. Simons Waterfront, was quoted as saying “The appellate court’s reasoning “makes it too easy for law firms to conceal unethical conduct from clients…If the client’s attorneys consult with the in-house attorney—not for the purpose of meeting their ethical obligations to the client but to cover up their own malpractice, and the in-house attorney assists them in doing so—the firm could withhold that information simply because the in-house attorney was ‘segregated’ from directly representing the client.”” Nelson further said that “The reason is simple: When a law firm represents a current client, the entire law firm’s fiduciary and ethical duties are to that client.”

However at least 13 law firms which are not parties to this dispute, signed an amicus brief in support of the law firm in the discovery dispute. Interestingly, the American Bar Association (ABA) filed an amicus brief which stated the ABA “takes no position on whether the privilege and work product claims in this case should be sustained.” After quoting this statement, Curriden goes on to quote from the ABA’s amicus brief that ““the ABA urges that lawyers’ communications when seeking legal advice from their in-house counsel should be broadly protected because of the benefits to their clients and the legal system, and to lawyers and their firms,” states the association’s brief. “Lawyers face an increasing array of legal and ethics duties, and the availability of in-house advice, without the cost or inconvenience of seeking an outside lawyer, encourages lawyers to pursue internal investigations where questions of misconduct or malpractice arise.”” Therefore, the attorney-client ““privilege should not be abrogated or limited except for compelling reasons.” But this analysis changes “if it is concluded that the client may have a malpractice claim against the lawyer,” states the brief. “Whether the privilege as to further in-house consultations is abrogated or limited during a continuing representation might become a question of fact for the trial court as to whether the client were promptly and adequately informed of the potential claim.””

As a former in-house counsel I certainly find it troubling if, at the slightest spat between a law firm and a client, the law firm then ‘lawyers-up’ and girds for a lawsuit. One of the greatest things about the legal profession is that it holds the highest duty possible to its clients. If a law firm is taking a position contrary to its client’s interest, it cannot no longer ethically represent the client. Curriden ends his article with a short discussion on this point when he said, “many corporate GCs privately express concerns about what their law firms may be doing behind their backs.” He quoted Randy Johnston, who focuses his practice at JohnstonTobey PC in Dallas on professional malpractice cases, who said “Corporate general counsel have every right to be concerned that their law firm is secretly plotting against them and their best interests, and are doing so without notifying them,”. Johnston goes on further to say “In the end, I think there’s only one solution: Law firms should have the right to internal defense and to work product, but the law firm must immediately inform the client when there is a conflict. Failure to tell the client eviscerates the privilege. Period.”

This is a case which certainly bears watching as it may go quite a long way towards fundamentally altering the attorney-client relationship.

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

And Then There Was One – Willbros Related FCPA Enforcement Continues

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

The sentencing continues the long running saga of the company over efforts by Willbros, Novak, certain employees and others to make a series of corrupt payments totaling more than $6 million to various Nigerian government officials and officials from a Nigerian political party to assist Willbros and its joint venture partner, a construction company based in Mannheim, Germany, in obtaining and retaining the Eastern Gas Gathering System (EGGS) Project, which was valued at approximately $387 million. The EGGS project was a natural gas pipeline system in the Niger Delta designed to relieve existing pipeline capacity constraints.

The company itself paid $32.3 million and entered into a Deferred Prosecution Agreement (DPA) to settle civil and criminal FCPA charges with the DOJ and Securities and Exchange Commission (SEC). According to the FCPA Blog, in a post entitled “Willbros Resolves FCPA Offenses”, “the FCPA violations involved former operations in Bolivia, Ecuador and Nigeria.” The DOJ’s “information included substantive violations of the FCPA’s antibribery provisions and violations of the books and records provisions. All twelve counts relate to operations in Nigeria, Ecuador and Bolivia during the period from 1996 to 2005. The SEC’s complaint alleged civil violations of the antifraud provisions of the Securities Exchange Act, the antibribery provisions, and the reporting, books and records and internal controls provisions.” The company paid $22 million to settle the DOJ’s criminal case and $10.3 million relating to the SEC’s civil enforcement action. The company agreed to a three-year DPA with the DOJ and had a corporate monitor.  The company successfully completed its DPA, which was discharged in 2012.

In addition to the charges against the company and Novak, three former Willbros employees were also indicted over the FCPA violations. According another post by the FCPA Blog, entitled “Prison for Ex-Willbros Execs”, two of these former Willbros executives received and successfully served prison time. “Jim Bob Brown, 48, was sentenced in federal court in Houston to one year and one day in prison and fined $17,500; Jason Edward Steph, 40, was sentenced to 15 months and fined $2,000. Steph, who once served as general manager of on-shore operations for Willbros International, pleaded guilty in November 2007. He said in his plea that in 2005 he, Brown, and others arranged to pay about $1.8 million in cash to Nigerian officials. Brown pleaded guilty in September 2006 to conspiracy to violate the FCPA.” This brings the sentencing for Willbros related FCPA violations up to date as the following:

Sentencing Box Score

Entity or Person	Fine	DPA Time and Resolution	Jail Time
Willbros Group, Inc. and Willbros International Inc.	$22MM to DOJ$10.30MM to SEC	3 year DPA with Monitor. Successfully completed.
Jim Bob Brown	$17,500.00		12 months and one day in prison, 2 years supervised release.
Jason Steph	$2,000.00		15 months in prison, 2 years supervised release
Paul Novak	$1MM		15 months in prison, 2 years of supervised release

A third former company executive, James Tillery, had been previously charged with conspiring to bribe Nigerian and Ecuadorian government officials to obtain and retain gas pipeline construction and rehabilitation business from state-owned oil companies in those countries. Tillery was indicted for one count of conspiracy to violate the FCPA, two counts of violating the FCPA in connection with the authorization of specific corrupt payments to officials in Nigeria and Ecuador. Tillery was alleged to be a Willbros International employee and executive from the 1980s through January 2005. From 2002 until January 2005, he served as executive vice president and later as president of the company. Novak was an employee in the mid-1990s and later worked as an oil and gas consultant in Nigeria, purporting to provide consulting services to companies in that field.

Interestingly, in 2010, Tillery was arrested in Lagos, Nigeria. As reported by the FCPA Blog, in a post entitled “Tillery’s Extraction”, he was “seized by the Federal Bureau of Investigation (FBI) in Lagos and is being held by American authorities.” However, at some point later, the process was ceased due to intervention by the “Nigerian high court had halted the extradition at least until the end of the month because due process wasn’t followed.” In yet another twist to the saga, Tillery had apparently renounced his US citizenship and “had since naturalized as a Nigerian.” The FCPA Blog quoted a report from a Nigerian press source who said “normal extradition procedures weren’t followed and characterized Tillery’s arrest as an “extraction” and a “forceful extradition.””

So, now there is one left from the Willbros FCPA enforcement action, that being James Tillery. The Willbros bribery scheme was one of the most comprehensive and certainly one of the early cases in the post-2004 increase in growth regarding enforcement actions. It will be interesting to see if Tillery ever has to answer the charges brought against him in connection with this matter.

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

© Thomas R. Fox, 2013

From the Compact Model to the Luxury Model – Managing Your Third Party Risk

I am currently attending the Hanson Wade Oil and Gas Supply Chain Compliance conference in Houston. The event is excellent and the presentations have been ‘spot on’ for the nuts and bolts of how to do compliance. As the conference is in Houston, a number of the speakers and attendees are from energy companies but the concepts that are being discussed apply to all companies which have an anti-corruption or anti-bribery compliance program. One of the things that came through each of the presentations was that as compliance programs mature, many companies are developing programs which are more tailored towards the risks that companies face, which are ascertained through more sophisticated risk assessments and management of those risks.

This pattern is certainly consistent with the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) FCPA Guidance which says that a company should assess its risks and manage its risks. From this starting position, a company can then put together a well thought out and reasoned approach to Foreign Corrupt Practices Act (FCPA) compliance. Many of the presentations dealt with third parties and the differing responses and approaches companies have developed for the specific risks that they have uncovered.

Clearly third party risk mitigation through due diligence is key. How much due diligence is enough? One speaker said that it is a balancing call to determine the right amount. There were several presentations which spoke about the increasing use of technology to assist companies in this process. One speaker, a former federal prosecutor, said that one of the things that she looked for when a prosecutor was the ‘thoughtful analysis’ that the FCPA Guidance speaks about. To this end she believes that the human element will always be important because prosecutors want to see the thought process of not only how your program is designed but how you have crafted your risk mitigation based upon the information that you have assessed.

One of the speakers listed some of the factors to begin the review of your third parties. Recognizing that there is no one all-encompassing list, she suggested the following:

1. How many third parties do you have?
2. Where are these third parties located?
3. Industry or sector do you conduct business?
4. What is the relationship of the third party to a foreign government or state owned enterprise?
5. Are the owners of the third party related at all to government employees?
6. Is the use of the third party a business necessity or not? Why do you need to use sales representatives?
7. What are the reputations and qualifications of the third parties? Can they do what you need them to do from a commercial perspective?
8. How much control will you have over the third parties? Contrast the control that you have over sales agents with the lesser amount of control that you have over distributors and joint ventures.

From the answers to some of these questions you can begin to craft your third party due diligence inquiries. I was intrigued by one speaker who speech contrasted the steps that you might take with a lower risk third party with that of a higher risk third party. She likened the lower risk approach to that of a compact car and set out the following suggestions:

• Rank each third party by the risk you have assessed;
• Perform an Internet search on the third party;
• Perform reference checks on the third party;
• Interview control persons involved with the third party;
• Agreement to abide by anti-bribery and anti-corruption laws;
• Insert appropriate compliance terms and conditions in your third party contracts.

She contrasted the Compact model with what she termed the ‘Luxury model’ requirements of a third party program:

• Prioritize your third parties by risk;
• Appoint a Business Unit sponsor for each third party;
• Develop a detailed third party application;
• Perform an electronic records search on each third party;
• Also perform independent screening of each third party;
• Perform reference checks on each third party;
• Perform site visits and interviews of each third party;
• Have each third party acknowledgement your company’s Code of Conduct;
• Require each third party  to go through ethics training;
• Create a company committee, consisting of internal business, legal and compliance representatives to review your high risk third parties;
• Insert compliance terms and conditions into each third party contract;
• Require both internal and external audits of each third party;
• Perform annual updates on your third parties; and
• Perform quarterly electronic database rescreening.

There was also a discussion of some common Red Flags that you should be on the outlook for. They included:

• Excessive commissions paid to third parties;
• Unreasonable discounts given to third parties such as distributors;
• Vaguely described services in a third party contract or invoice back to your company;
• A third party which is in a different line of business than the one you want to hire to assist your company;
• Close association by the third party with a Foreign Official;
• Retention of the third party is required by a Foreign Official;
• The third party is a shell company located offshore; and
• Payments made to the third party are in a country different from the location where the third party’s services are delivered.

The concepts I derived from this presentation is that you should assess and manage your risks. If you determine them to be low, the Compact Model may work for you. If your third party risks are high, then the Luxury Model may be more appropriate. If you use a thoughtful and reasoned approach, you can navigate this area. But always Document, Document and then Document what you have done and why.

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

FCPA Prosecutions Against Individuals? Check Out April

One of the oft-heard criticisms of the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) is the lack of individual prosecutions under the Foreign Corrupt Practices Act (FCPA). That may well be on its way to changing as April 2013 may become known as “FCPA Individuals Month” for the charges and enforcement actions brought against various individuals for FCPA violations. The DOJ and SEC used several different types of enforcement actions, both criminal and civil, against a variety of individuals over the past month.

I.                   BizJet

One group of charges was the four enforcement actions involving individuals concerning BizJet. The lineup of those three BizJet executives and one employee involved in these enforcement actions is as follows:

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

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

II.                Alstom

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

In a post by the FCPA Professor, entitled “Current And Former Alstom Employees Charged In Connection With Payments In Indonesia”, he stated the two were involved with the following: “The conduct at issue concerned the Tarahan coal-fired steam power plant project in Indonesia.” Both were charged around the same set of facts. Pierucci and Rothschild, together with others, paid bribes to officials in Indonesia, including a member of Indonesian Parliament and high-ranking members of Perusahaan Listrik Negara (PLN), the state-owned and state-controlled electricity company, in exchange for those officials’ assistance in securing a contract for the company to provide power-related services for the citizens of Indonesia, known as the Tarahan project. The charges allege that, in order to conceal the bribes, the defendants retained two consultants purportedly to provide legitimate consulting services on behalf of the power company and its subsidiaries in connection with the Tarahan project. In reality, however, the primary purpose for hiring the consultants was allegedly to use the consultants to pay bribes to Indonesian officials.

The Pierucci Indictment specified the following Counts for violations of the FCPA involving the first consultant.

Count	Date	Means and Instrumentalities of Interstate and International Commerce
Two	11/16/2005	Wire transfer in the amount of $200,064 from Power Company’s Connecticut bank account to Consultant A’s bank account in Maryland for the purpose of bribing Official 1.
Three	1/4/2006	Wire transfer in the amount of $200,064 from Power Company’s Connecticut bank account to Consultant A’s bank account in Maryland for the purpose of bribing Official 1.
Four	3/7/2007	Wire transfer in the amount of $200,064 from Power Company’s Connecticut bank account to Consultant A’s bank account in Maryland for the purpose of bribing Official 1.
Five	10/5/2009	Wire transfer in the amount of $66,688 from Power Company’s Connecticut bank account to Consultant A’s bank account in Maryland for the purpose of bribing Official 1.

III.             Frederic Cilnis

In a blog post, entitled “The Danger of FCPA “Proactive” Investigations”, Mike Volkov stated “At the recent Dow Jones Compliance Symposium in Washington, D.C., an FBI official warned the attendees that the Shot Show debacle would not deter law enforcement from using proactive investigations techniques. It was a stark warning because it was realized in less than thirty days.” This was dramatically demonstrated with the arrest of Frederic Cilnis.

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

IV.              Uriel Sharef

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

The FCPA Professor, in his April 19 Friday Roundup, posed the following “The burning question of course is whether the SEC would have prevailed against Sharef if he put the SEC to its burden of proof. As highlighted in this previous post, Sharef’s co-defendant, Herbert Steffen, did just that and in February Judge Shira Scheindlin dismissed the SEC’s complaint against Steffen finding that personal jurisdiction over Steffen exceeded the limits of due process.” However, the SEC Press Release seemed to anticipate this query by stating that “Sharef met with payment intermediaries in the United States and agreed to pay $27 million in bribes to Argentine officials. Sharef also enlisted subordinates to conceal the payments by circumventing Siemens’ internal accounting controls.”

In the month of April, the US enforcement agencies certainly seemed to be answering the questions about bringing FCPA criminal charges and civil complaints against individuals. You may quibble about the sentences handed out in the BizJet case but that is another discussion for another day. For those who may have thought that the use of wire taps, cooperating witness and other proactive federal law enforcement techniques may not be used in FCPA cases after the Gun Sting cases dismissals, such techniques were used in both the BizJet matters and the action against Cilnis. Lastly, one phone call to the US may not create in personam jurisdiction but if you come to the US and engage in conduct which violates the FCPA, personal jurisdiction will attach.

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

My FCPA and Bribery Act Musings Continue

This past week, my second book, “Best Practices Under the FCPA and Bribery Act” was released. Over the past few years I have tried to provide the compliance practitioner with solid information that can be used to implement, review and enhance a US Foreign Corrupt Practices Act (FCPA) or UK Bribery Act based compliance program. I am often asked to collect my blog posting regarding what are the current best practices for an anti-corruption/anti-bribery compliance program. In other words, what are the specifics of a compliance program. This volume will provide the compliance practitioner with information that can be used for the ‘nuts and bolts’ of compliance.

Using the format of the most recent US Department of Justice (DOJ) and Securities and Exchange Commission (SEC) “A Resource Guide to the U.S. Foreign Corrupt Practices Act. The Foreign Corrupt Practices Act (FCPA)” [the “FCPA Guidance”]; I have included some of my thoughts on what you can do to create and maintain a best practices compliance program. I have also included some thoughts on how to create and maintain such a compliance program using the Six Principles of an Adequate Procedures compliance regime under the UK Bribery Act.

I was honored to have the FCPA Professor, Mike Koehler, pen the forward and he said, in part, “In the current global marketplace, Foreign Corrupt Practices Act (“FCPA”) risk needs to be on the radar screen of most companies – large and small, public and private, and across industry sectors. Given the current enforcement theories of the Department of Justice and Securities and Exchange Commission, FCPA risk is not always apparent from reading the statute. There is no way for business organizations to truly eliminate FCPA risk, but such risk can be effectively managed and minimized through pro-active policies and procedures and other means of risk assessment.”

I hope that you can use this volume, in conjunction with the FCPA Guidance and the Ministry of Justice’s Six Principles of an Adequate Procedures compliance program, to implement or enhance your compliance regime. Both the FCPA Guidance and Six Principles make clear that there is no ‘one size fits all’ compliance program. The key is to assess your company’s risks and to manage those risks appropriately. This volume will help you to determine the type and scope of program that is appropriate for your company and will assist your compliance efforts going forward.

Best Practices Under the FCPA and Bribery Act is available exclusively on amazon.com. For a copy, click here.

Remedies of FCPA Violations – Lessons Learned from the Boeing 787 Lithium-ion Battery Issue

Over the past three months, the aircraft manufacturer Boeing has gone through a public relations nightmare and financial disaster over the failure of lithium-ion batteries in its new flagship aircraft, the 787. This Boeing case study can provide some interesting lessons for the compliance professional who is working under a Foreign Corrupt Practices Act (FCPA) or Bribery Act compliance program.

One of the issues raised over this matter was the use of third party supplier and subcontractors to third party suppliers for the design and manufacturing of the batteries. As reported in a New York Times (NYT) article by James B. Stewart, entitled Japan’s Role in Making Batteries for Boeing, the construction of the batteries at issue was outsourced by Boeing to a Japanese company called GS Yuasa. Stewart’s article points out the need for close review of suppliers and what can happen if the quality does not meet the standards required for the project. In an article entitled, “Boeing and the Conduct of Due Diligence on Sub-Suppliers”, I considered the use of sub-suppliers from the anti-corruption/anti-bribery compliance program perspective. In this post, I will consider Boeing’s response to the problem of the failure of the lithium-ion batteries.

In a Wall Street Journal (WSJ) article, entitled “How Boeing Rescued the 787”, reporter Andy Pasztor discussed the background to Boeing’s problems and the company’s response. The planes, which have been grounded since mid-January due to “The images of the burned batteries—one of which prompted an emergency landing and passenger evacuation of a Dreamliner in Japan—tarnished a plane that Boeing executives have said is key to its future.” While the company has not “disclosed the cost of the 787′s grounding, but analysts say the company could have to pay penalties to customers. The grounding also halted new Dreamliner deliveries, delaying hundreds of millions of dollars in revenue.” Further, the public relations disaster was palatable.

Somewhat naively, after the initial grounding, Boeing executives “told FAA officials that a few easy changes in cockpit checklists, some enhanced battery inspections, and stepped-up surveillance of battery health during flights would be enough to solve the problem.” But that was not good enough for Transportation Secretary Ray LaHood who said at “a news conference the planes wouldn’t resume flying until regulators were “1,000% sure” they were safe.” Based on this statement, it became clear to Boeing that “the FAA would insist on more extensive and time-consuming changes.”

Yet, even in the face of Secretary LaHood’s pronouncement, Boeing’s engineers were frustrated in all their attempts to determine the cause of the batteries’ failures. As reported by Pasztor, “By the end of the first week on the ground, Boeing “had 500 engineers dedicated to understanding” the complex technical issues, Mike Sinnett, the 787′s chief engineer, said last month. Their next focus was to try to pinpoint the specific cause of internal battery short circuits, and develop a targeted engineering solution. Boeing teamed up with government investigators from the U.S. and Japan, but the goal remained elusive.”

From these initial frustrations, Boeing engineers turned to the concept of a “containment box.” The containment “box serves several purposes: withstanding higher temperatures than the old design, and keeping dangerous chemicals from leaking. It also vents smoke outside the plane, and in the event of overheating automatically sucks oxygen from the battery. That is intended to snuff out any fire in a fraction of a second.”

I think that Secretary LaHood was on to something when he said that the 787 would not fly again until “regulators were “1000% sure” they were safe.” It is not simply a fix on a specific issue, although that is a part of any solution. But the solution must be reviewed with a holistic approach in mind. There must be additional protections in place so that if there is another failure, that failure will be contained. For Boeing this would prevent a replay of the scene on the Japan Airlines 787 where a fire in the lithium-ion batteries spread outside the battery itself.

From the anti-corruption/anti-bribery compliance program perspective what I found interesting was the final solution which Boeing hit upon, even if forced to by Secretary LaHood. Since Boeing was not able to determine the specific cause of the lithium-ion batteries failures, it took a more systemic approach to the remedy. The company “shifted to wide-ranging internal battery fixes aimed at combating a variety of potential causes.” This is the type of response which we saw highlighted in the Department of Justice (DOJ)/Securities and Exchange Commission (SEC) FCPA Guidance released last year. In the section on ‘Declinations’ the Guidance had information on six declinations to prosecute companies who self-disclosed FCPA violations. Two of the common factors to each declination were that (1) each company remedied the specific matter which gave rise to the FCPA violation but equally importantly (2) each company made their overall compliance program more robust.

In other words, do not simply remedy the conduct at issue; make sure you catch it quickly before it spreads. This would also equate to McNutly Maxim’s One and Two. 1-What did you do to prevent it?and 2-What did you do to detect it? Or as my process oriented wife might say, ‘you need a second set of eyes on it’ to validate the process and prevent failure in the process.

Perhaps the most interesting thing about this entire Boeing 787 episode is to show the intersection of anti-corruption/anti-bribery compliance and safety. I have often pondered how closely these disciplines seem to interact and overlap. I think that this Boeing situation shows that we in compliance can learn quite a bit from our colleagues in safety.

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