Lindsey Convictions, Stevens Acquittal: Implications for the FCPA Compliance Officer

It has been quite a week in the white collar criminal defense world. It began with the convictions, on all counts, of all defendants in the Lindsey Manufacturing case involving the Foreign Corrupt Practices Act (FCPA) and yesterday with the conviction of Raj Rajaratnam on all counts in his insider-trading trial. Sandwiched in between these two huge victories for the Department of Justice was the acquittal of former GlaxoSmithKline in-house attorney Lauren Stevens by the presiding Federal District Judge. As reported by the FCPA Blog, Judge Roger Titus granted an acquittal during a hearing and said,

“I conclude on the basis of the record before me,” Judge Titus said, “that only with a jaundiced eye and with an inference of guilt that’s inconsistent with the presumption of innocence could a reasonable jury ever convict this defendant.”

This post will focus on the Stevens case and its implications for the compliance officer. One of the concerns I frequently hear expressed by compliance officers is their risk of personal criminal liability, particularly if they work at a company where a Deferred Prosecution Agreement is in place. I believe that the Stevens case, contrasted with the Lindsey Manufacturing case, demonstrates the parameters of the type of conduct which will result in a criminal sanctions.

Stevens had been indicted on four counts of making false statements, one count of obstruction of justice, and one count of falsifying and concealing documents related to the company’s promotion of the anti-depressant drug for weight loss, which hadn’t been approved by the Food and Drug Administration. The Lindsey defendants were charged with conspiracy to violate the FCPA and individual counts for violating the FCPA as well. One defendant was charged with a count of violation of money laundering laws.

However in the Stevens case, she was providing legal advice to her company and then was dealing with US government regulators in an ongoing investigation. It is this prong which concerns compliance officers. As noted in yesterday’s Wall Street Journal, “The government’s defeat points to the difficulty of prosecuting individuals over alleged wrongdoing at large corporations, where teams of people may be involved in a matter and it is hard to show that executives intended to break the law.” In the Lindsey Manufacturing case, it certainly appears that the government was able to demonstrate to the jury that the Lindsey Manufacturing defendants intended to violate the FCPA by the payment of bribes.

There is another obvious difference between the Lindsey Manufacturing defendants and Stevens. It is that she was an in-house lawyer (she left the company earlier this year) and the Lindsey Manufacturing defendants were from the business side of the company. Indeed as reported in the FCPA Blog, the trial judge said that the time of acquittal, “There is an enormous potential for abuse in allowing prosecution of an attorney for the giving of legal advice. I conclude that the defendant in this case should never have been prosecuted and she should be permitted to resume her career.”

So what does all of this mean for the compliance officer? I have heard my colleague; attorney Mike Volkov say that no one is prosecuted for engaging is something less that best practices, they are prosecuted for engaging in no practices in the compliance arena. In Lindsey, it seems clear that the company had no compliance program to fall back on as some type of defense that the defendants had not engaged in bribery or did not have the intent to engage in bribery. In the Stevens case, she was able to demonstrate that she had relied on the advice of outside counsel in her legal work and she was not a rogue agent going off the reservation. So if your company has a compliance program, you should follow it. While as the compliance officer, you may well have to make some close or difficult calls, do not do so in a vacuum, obtain some legal advice or other assistance. One mechanism I have advocated is a Compliance Oversight Committee, which can review compliance decision from the engagement and management of foreign business partners to all facets of a company’s compliance efforts. This puts more resources in the hands of the compliance officer.

The differences and messages from the outcomes of Lindsey Manufacturing and the Stevens case seem clear. Do not engage in intentional conduct which violates the FCPA.

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, 2011

FCPA Settlement Day

Today, in what the FCPA Blog called “making FCPA history”, the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) announced the agreement by the Global logistics firm Panalpina and the energy companies Shell, Transocean, Tidewater, Noble and Pride International to resolve various outstanding FCPA charges. The total amount of penalties is $156.565 million in criminal fines and about $73.9 million in civil disgorgement, interest and penalties.

  SETTLEMENT BOX SCORE

Entity	Criminal Fine	Profit Disgorgement	DPA or NPA	Outside Monitor
Panalpina	$70.56MM	$11.3MM	DPA	No
Shell	$30MM	$18.1MM	DPA	No
Transocean	$13.44MM	$7.2MM	DPA	No
Pride Int’l	$32.625MM	$23.5MM	DPA	No
Tidewater	$7.35MM	$8.3MM	DPA	No
Noble	$2.59MM	$5.5MM	NPA	No
Total	$156.565MM	$73.9

In addition to the total amount going to the US Treasury of approximately $229.5, the most interesting item noted is that none of the parties was required to have a corporate monitor as a part of its settlement. In future posts we will review the specific Deferred Prosecution Agreements (or Non-Prosecution Agreement) to see if we might glean some of the DOJ’s concepts of current FCPA compliance best practices.

Download the DPA for Panalpina here, Shell here, Tidewater here, Pride here, Transocean here, and the NPA for Noble 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, 2010

Miranda and the FCPA: Do You Have the Right to Remain Silent?

In a recent posting, the FCPA Blog posed the question of whether a company employee was warned “that concealing information from company lawyers conducting an internal FCPA investigation could be a federal crime?” The FCPA Blog raised this question in the context of a company’s internal investigation regarding an alleged violation of the Foreign Corrupt Practices Act (FCPA). Even if the company attorneys handling the investigation provided the now standard corporate attorney Upjohn warnings, how does a company attorney asking questions morph into a de facto federal agent during an internal company investigation regarding alleged FCPA violations and is the attorney thereby required to provide a Miranda warning to employees during a FCPA investigation? 

In a recently released paper entitled “Navigating Potential Pitfalls in Conducting Internal Investigations: Upjohn Warnings, “Corporate Miranda,” and Beyond” Craig Margolis and Lindsey Vaala, of the law firm Vinson & Elkins, explored the pitfalls faced by counsel, both in-house and outside investigative, and corporations when an employee admits to wrong doing during an internal investigation, where such conduct is reported to the US Government and the employee is thereafter prosecuted criminally under a law such as the FCPA. Margolis and Vaala also reviewed the case law regarding the Upjohn warnings which should be given to employees during an internal FCPA investigation. 

Employees who are subject to being interviewed or otherwise required to cooperate in an internal investigation may find themselves on the sharp horns of a dilemma requiring either (1) cooperating with the internal investigation or (2) losing their jobs for failure to cooperate by providing documents, testimony or other evidence. Many US businesses mandate full employee cooperation with internal investigations or those handled by outside counsel on behalf of a corporation. These requirements can exert a coercive force, “often inducing employees to act contrary to their personal legal interests in favor of candidly disclosing wrongdoing to corporate counsel.”  Moreover, such a corporate policy may permit a company to claim to the US government a spirit of cooperation in the hopes of avoiding prosecution in “addition to increasing the chances of learning meaningful information.” 

Where the US Government compels such testimony, through the mechanism of inducing a corporation to coerce its employees into cooperating with an internal investigation, by threatening job loss or other economic penalty, the in-house counsel’s actions may raise Fifth Amendment due process and voluntariness concerns because the underlying compulsion was brought on by a state actor, namely the US Government. Margolis and Vaala note that by utilizing corporate counsel and pressuring corporations to cooperate, the US Government is sometimes able to achieve indirectly what it would not be able to achieve on its own – inducing employees to waive their Fifth Amendment right against self-incrimination and minimizing the effectiveness of defense counsel’s assistance. 

So what are the pitfalls if private counsel compels such testimony and it is used against an employee in a criminal proceeding under the FCPA? Margolis and Vaala point out that the investigative counsel, whether corporate or outside counsel, could face state bar disciplinary proceedings. A corporation could face disqualification of its counsel and the disqualified counsel’s investigative results. For all of these reasons, we feel that the FCPA Blog summed it up best when it noted, “the moment a company launches an internal investigation, its key employees — whether they’re scheduled for an interview or not — should be warned about the “federal” consequences of destroying or hiding evidence. With up to 20 years in jail at stake, that seems like a small thing to do for the people in the company.” 

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, 2010

Board Members and Prudent Discharge of Duties under the FCPA

Monday’s FCPA Blog post wrote about what it called a “compliance donnybrook” inside the company China Northeast Petroleum. The facts of this melee are straight-forward, in July, the head of the Board of Director’s Audit Committee Robert Bruce, communicated to his fellow directors that he believed the company needed an investigation to make sure it had not violated the Foreign Corrupt Practices Act’s (FCPA) anti-bribery provisions and did so in a letter detailing his reasons for making this request. As reported by the FCPA Blog, Mr. Bruce stated, in part “I strongly believe that substantial additional investigation is required in order for the Company and/or the members of the board to be confident that . . . the Company has not made payments to government officials as proscribed by the U.S. Foreign Corrupt Practices Act.”

The Chairman of the Board of Directors of China Northeast Petroleum, Mr. Edward Rule, responded declining this request for a FCPA investigation, which Mr. Bruce had suggested be led by an outside law firm with a strong FCPA background. Mr. Rule noted that such an investigation “could last as long as a full year and cost the Company as much as several millions of dollars“ and could even lead to the delisting the company from the NYSE AMEX. Mr. Rule ended his letter by noting “the course of action you recommend that the Board pursue seems at odds with the prudent discharge of duties to the shareholders”.

This final sentence caught the attention of the FCPA Compliance and Ethics Blog. What are the obligations of a Board member regarding the FCPA? Are the obligations of the Audit Committee under the FCPA at odds with a director’s “prudent discharge of duties to shareholders”? Do the words prudent discharge even appear anywhere in the FCPA? My search into answers for the first two questions began with a recent ethics•point webinar, entitled “Reporting to the Board on Your Compliance Program: New Guidance and Good Practices”, where attorneys Rebecca Walker and Jeffery Kaplan, of the law firm of Kaplan and Walker, explored these and other issues.

Ms. Walker pointed to the US Sentencing Guidelines and Department of Justice (DOJ) Prosecution Standards for guidance as to the obligations of a company’s Board regarding FCPA compliance. Under the US Sentencing Guidelines, Ms. Walker said that the Board must exercise reasonable oversight on the effectiveness of a company’s compliance program. Ms. Walker said that the DOJ Prosecution Standards posed the following queries: (1) Do the Directors exercise independent review of a company’s compliance program? and (2) Are Directors provided information sufficient to enable the exercise of independent judgment?

As to the specific role of ‘Best Practices’ in the area of general compliance and ethics, Ms. Walker looked to Delaware corporate law for guidance. She cited to the case of Stone v. Ritter for the proposition that “a duty to attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate exists.” From the case of In re Walt Disney Company Derivative Litigation, she drew the principle that directors should follow the best practices in the area of ethics and compliance.

In a recent Compliance Week article, Melissa Aguilar examined the duties of Board members regarding FCPA compliance. The conclusions of several of the FCPA experts that Ms. Aguilar interviewed for the article were that companies which have not yet had any FCPA issues rise up to the Board level are usually the ones which are the most at risk. Albert Vondra, a partner with PricewaterhouseCoopers stated that such companies “don’t have the incentive to spend the resources or take the rigorous approach to their anti-compliance programs. Their attitude is, ‘We’ve got it covered,’ but they don’t”. Richard Cassin, managing partner of Cassin Law, stated that there must be written records demonstrating that the audit committee and that the board members asked questions and received answers regarding FCPA compliance issues. Such documentation demonstrates the Board members have “fulfilled their fiduciary obligations,” Cassin says.

Board failure to head this warning can lead to serious consequences. David Stuart, a senior attorney with Cravath Swaine & Moore, noted that FCPA compliance issues can lead to personal liability for directors, as both the Securities and Exchange Commission (SEC) and DOJ have been “very vocal about their interest in identifying the highest-level individuals within the organization who are responsible for the tone, culture, or weak internal controls that may contribute to, or at least fail to prevent, bribery and corruption”. He added that based upon the SEC’s enforcement action against two senior executives at Nature’s Sunshine, “Under certain circumstances, I could see the SEC invoking the same provisions against audit committee members—for instance, for failing to oversee implementation of a compliance program to mitigate risk of bribery”.

What does all of this mean for Messers Bruce, Rule and the rest of the Board members of China Northeast Petroleum? It should mean quite a bit. The DOJ has made it clear that it expects ‘best practices’ when it comes to FCPA compliance. In the case of China Northeast Petroleum, the head of the Board’s Audit Committee has requested an independent FCPA compliance investigation, to be effected by an outside firm. The Chairman of the Board of Directors has rejected this request because (1) it might take up to a year and (2) it might cost too much money AND fulfilling its FCPA obligation “seems at odds with the prudent discharge of duties to the shareholders”. The head of the Audit Committee resigned over this rejection.

Alas, there is no reference to prudent discharge in the FCPA itself. However, if I were a remaining member of the Board of China Northeast Petroleum, I might well think more than twice about my prudent discharge of duties to the shareholders as both the DOJ and SEC now might well wish to look into this matter under a Board’s prudent discharge of duties under the FCPA.

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, 2010

And Then There Was One-the Updated Box Score of FCPA Settlements from the Nigerian Bribery Scandal

Yesterday, both the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) announced the agreement by the Dutch company, Snamprogetti Netherlands BV, (Snamprogetti) to pay a $240 million criminal penalty to the DOJ to resolve charges related to the Foreign Corrupt Practices Act (FCPA) for its participation in a decade-long scheme to bribe Nigerian government. In addition to the DOJ resolution, Snamprogetti and ENI also reached a settlement of a related civil complaint filed by the SEC, which charged Snamprogetti with violating the FCPA’s anti-bribery provisions, falsifying books and records, and circumventing internal controls and charged ENI with violating the FCPA’s books and records and internal controls provisions. As part of that settlement, Snamprogetti and ENI agreed jointly to pay $125 million in disgorgement of profits relating to those violations. Both the DOJ and the SEC resolutions were discussed in both in yesterday’s FCPA Blog and today’s posting by the FCPA Professor.

Snamprogetti and ENI both also agreed to enter into Deferred Prosecution Agreements (DPA) and the filing of Criminal Information against each. Under the terms of each DPA, the DOJ agreed to defer prosecution of Technip for two years. It is noteworthy that neither Snamprogetti nor ENI was required to agree to retain an independent compliance monitor. If both Snamprogetti and ENI abide by the terms of the DPAs, the DOJ will dismiss the criminal charges when the term of the agreements expires. The Snamprogetti and ENI resolution leads to an update to the monetary count for the resolution of the Nigerian Bribery Scandal of the following:

SETTLEMENT BOX SCORE

Entity	Fine, Penalty and Disgorgement of Profits
Halliburton +KBR	$579 Million
Snamprogetti & ENI	$365 Million
Technip	$338 Million
JGC	None yet reported
Total	$1.28 Billion

So for those of you keeping score at home, there have fines, penalties and profit disgorgement of over $1.28 billion. All of this for bribes paid on by or on behalf of the four-company joint venture named TSJK, which totaled up to $180MM. This joint venture won four contracts from the Nigeria government between 1995 and 2004 to build LNG facilities on Bonny Island. The contracts were worth more than $6 billion.

This total settlement figure does not include any potential costs going forward such as reduction of credit ratings, the payment of legal fees and any forensic accounting fees during the pendency of the DPA. The costs listed above do not include the total cost paid by Snamprogetti and ENI for their internal company investigation into this matter. However based upon the reported fees to date paid by Snamprogetti and ENI, these investigation fees will surely be in the tens of millions of $.

As pointed out by the FCPA Professor in his blog today, the $1.28 BN figure amount is quite a pretty penny for the US Treasury. He poses the question as to whether FCPA enforcement has become a “cash cow” for the US Treasury. The FCPA Professor has explored this question more extensively in a prior blog posting. (See here) Additionally for those of you keeping score at home, could this case break the all time fine set by Siemens? All we know for certain at this time is and then there was one–JGC.

For a copy of the DOJ Press Release, click here.

For a copy of the SEC Press Release, 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, 2010

When a Rose is not a Rose but an FCPA Violation

 We recently wrote about gifts and entertainment under the Foreign Corrupt Practices Act (FCPA). To view the prior article, click here. This week the Securities and Exchange Commission (SEC) announced an enforcement action involving Veraz Networks. The enforcement action generally revolved around what one Veraz employee termed in an email as “the gift scheme”. Initially we would note that here in the US it is never a good idea to label any plan of action as a “scheme” and then to put it in an email as such labeling will always draw someone’s scrutiny. The gift scheme was made with the purpose to “improperly influence” foreign officials who were employees of Chinese and Vietnamese government-controlled telecommunications companies to award or continue to do business with Veraz.

Veraz, or its agents with the approval of Veraz, paid for the following amounts as gifts and entertainment: 

1. $4,500 for gifts to the officials of the Chinese telecom company.
2. An unreported amount for gifts and entertainment for the officials of the Vietnamese telecom company.
3. An unreported amount for flowers to the wife of the CEO of the Vietnamese telecom company.
4. Finally, Veraz failed to keep accurate books and records of all of the above.  

The penalty reportedly paid by Veraz was relatively small for current FCPA standards. The FCPA Blog reported that Veraz paid a penalty of only $300,000. The FCPA Professor noted in his posting on Veraz that in its Form 10Q filing for the period ending March 31, 2010, Veraz reported that it had shelled out $3.0 million to investigate and handle the FCPA compliance issues. So once again, the costs to investigate a matter are much larger than the final penalty. However, Veraz may still consider itself well off as there has been no report that Veraz agreed to a monitor or that a Department of Justice criminal action is in the offing. 

This enforcement action provides some additional guidance for what types of gifts and entertainment can be provided without one running afoul of the FCPA as this area is open to vagueness, and there are no clear guidelines in either the FCPA or its legislative history. While prohibiting payment of any money, or thing of value, to foreign officials to obtain or retain business, the FCPA arguably permits incurring certain expenses on behalf of these same officials. There is no de minimis provision set forth in the statute.

The presentation of a gift or business entertainment expense can constitute a violation of the FCPA if this is coupled with the corrupt intent to obtain or retain business. Under the FCPA, the following affirmative defense regarding the payment of gifts exists:

[it] shall be an affirmative defense [that] the payment, gift, offer or promise of anything of value that was made, was a reasonable and bona fide expenditure … and was directly related to…the promotion, demonstration, or explanation of products or services; or…the execution or performance of a contract with a foreign government or agency thereof. 15 U.S.C. § 78dd-1(c)(2)(A)-(B).

However, the Veraz case does provide direct and clear guidance in one area which has not been previously explored. It appears that a company should absolutely refrain from giving flowers to the wife of a company’s CEO. In other words, do not make the call to the florist and remember sometimes a rose is not just a rose especially when it comes to FCPA enforcement. 

For a copy of the SEC Complaint, 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, 2010

FCPA Reporting-To Whom Does Your CCO Report?

There is an ongoing debate in the compliance arena as to whom a Chief Compliance Officer (CCO) should report. Should the CCO report to the Board of Directors or appropriate Board committee such as an Audit Committee or Compliance Committee? Or can a CCO report to a company’s General Counsel (GC) but have access to the Board of Directors for periodic, but no less than annual, reporting? Is there any specific guidance from the Foreign Corrupt Practices Act (FCPA) or any of the US government interpretations such as the US Sentencing Guidelines, Deferred Prosecution Agreement to which the DOJ and recalcitrant companies have entered into or Opinion Releases? Is one approach more right or more wrong than the other? 

US companies are reported to take both approaches. A recent survey released by the Society of Corporate Compliance and Ethics, entitled “The Relationship Between the Board of Directors and the Compliance and Ethics Officer”, dated April 2010, reported that of the publicly traded companies reporting only 41% had their CCO report directly to the Board of Directors. If the CCO did not report to the Board of Directors, the survey found such position could report to not only the GC but also the Chief Financial Officer (CFO) and other senior level positions within a company. The report concluded with two perspectives from its findings. First that as the proposed change in the US Sentencing Guidelines would require “a direct” relationship between a CCO and a Board of Directors, most publicly traded companies do not meet this obligation. Second, many compliance reports are “heavily vetted” before they are delivered to the Board of Directors so that it may be hard to for a Board to garner a true picture of a company’s compliance program. 

I.                   US Sentencing Guidelines 

Under the 2010 Amendments to the US Sentencing Guidelines which are now proposed to Congress, §8B2.1 (b)(2)(C) requires: 

Specific individual(s) within the organization shall be delegated day-to-day operational responsibility for the compliance and ethics program. Individual(s) with operational responsibility shall report periodically to high-level personnel and, as appropriate, to the governing authority, or an appropriate subgroup of the governing authority, on the effectiveness of the compliance and ethics program. To carry out such operational responsibility, such individual(s) shall be given adequate resources, appropriate authority, and direct access to the governing authority or an appropriate subgroup of the governing authority. 

Commentators have weighed in on this amendment. In a recent White Paper entitled “U.S. Sentencing Commission Amends Requirements for an Effective Compliance and Ethics Program”, the law firm of Gibson, Dunn and Crutcher noted that this amendment “could be problematic for corporations that vest overall responsibility for compliance in a senior member of management” such as the GC, while having operational responsibility of the company’s compliance function detailed to a subordinate to the GC. They raised the concern that such a reporting structure might allow the GC to act as a “filter in deciding which conduct warrants reporting” to the Board of Directors, if the CCO reported. This would also imply there was a problem if a GC, rather than Board of Directors, performed an annual evaluation or in some other manner controlled the actions of the CCO. 

II.                Opinion Release 04-02

Through the mechanism of the Opinion Release 04-02 the Department of Justice (DOJ) may have provided prior guidance. The Opinion Release dealt with certain Requestors which were desired in order to acquire a business that had admitted to FCPA violations. As part of the proposed purchase of this “Newco”, the Requestors agreed that this Newco would adopt a rigorous anti-corruption compliance code which would include the following element: 

(B)      The assignment to one or more independent senior Newco corporate officials, who shall report directly to the Compliance Committee of the Audit Committee of the Board of Directors, of responsibility for the implementation and oversight of compliance with policies, standards, and procedures established in accordance with Newco’s Compliance Code; [emphasis supplied] 

III.             Industry Debates 

There has been debate in the FCPA compliance world as to what this requirement specifies. At the recent Compliance Week 2010 Annual Conference, a panel consisting of representatives from the US Sentencing Commission indicated that they believed that this section only required that CCOs have access to a company’s Board of Directors. Such a requirement could be fulfilled through a reporting structure whereby a CCO reported to a GC but had access to report to the Board of Directors, even if the CCO went to the Board of Directors with the GC present, such as reporting structure was in compliance with the proposed Sentencing Guidelines. 

However, at the same conference, Assistant Attorney General, Criminal Division for the Department of Justice, Lanny Breuer said that a CCO should have direct access to a company’s Board of Directors suggesting that the CCO not have to report through a GC but report directly to the Board. Breuer opined that the change in the Sentencing Guidelines implies that the CCO should now report directly to the Board of Directors and not through another person, whether the GC, CFO, Head of Internal Audit or any other person in an organization. 

For yet a third perspective at the same conference, the question was put to a panel of members who sit on various Boards of Directors on multi-national US corporations, they responded that, as Board members, they only wanted the information to come to them so they could fulfill their obligations as Board members, they were not too concerned how it was presented to them or who did so. Further they were not concerned who the CCO reported to or which company officer or employee in the corporate structure evaluated the CCO. 

A recent webcast by the firm of Ernst and Young further delineated this dichotomy. When posed the question of to whom should the CCO report to; either directly to the Board or the GC, panelists Brian Loughman and Jeff Taylor both indicated that it was important for the CCO to report directly to the Board. Such a reporting structure made a much more positive impression on the Board (Loughman) and that less filter of the CCO’s information gave a stronger message to the Board (Taylor) than if the CCO reported through the GC. Loughman added that the change in the Sentencing Guidelines mandated this reporting structure. However, panelist Amy Hawkes responded that she did not believe the issue of who the CCO reported to was as important if there the appropriate ‘tone at the top’ by the Board. By this she explained that if the Board was committed to a compliance culture, it did not matter whether the CCO reported directly to the Board or to the Board through the GC. 

This direct reporting approach is utilized by Halliburton, to which I posed the following question, “Who does the Chief Compliance Officer report to in your Company and why does your company utilize this approach?” Susan Ponce, Senior Vice President and Chief Ethics and Compliance Officer of Halliburton responded, “At Halliburton, the Chief Ethics and Compliance Officer reports directly to the company’s Board of Directors, advising both the Audit Committee and the full Board on all matters relating to legal compliance issues.  We structured the CEC Office that way in order to leave no doubt that the CECO has direct, independent and unfettered access to our Board and support from board members and our senior executives.”

 The answer to the initial question posed appears to have two correct responses. The guidelines and debate goes both ways. The key is in the actual reporting. As long as the CCO reports on a regular basis to the Board, both lines of authority are appear to be acceptable. 

So which approach does your company utilize? 

A shorter version of this post appeared in the FCPA Blog, to read 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, 2010

Nigerian Bribery Box Score

Opening Day of the Baseball season is fast approaching and perhaps it is time to give a baseball statistician’s view to the Nigerian bribery case. Yesterday, Rob Evans in The Guardian reported that a UK court ruled that UK citizen Jeffery Tesler should be extradited to the US to stand trial. District Judge Caroline Tubbs, sitting at Westminster magistrates’ court in London, rejected Tesler’s arguments to fight off the extradition attempt. Judge Tubbs found that American prosecutors had alleged the crimes had a “substantial connection” with the US. She said that the Americans had already convicted one of the companies in the consortium for its part in the decade-long bribery scheme and one of the key executives who organized the corrupt payments. The Guardian, furthermore, reported that Judge Tubbs also rejected Tesler’s argument that it would be “unjust and oppressive” to send him to America as prosecutors had taken a long time to charge him. Tesler had argued that he would no longer be able to get a fair trial in the US. However, the judge rejected this argument, pointing out that he was responsible for part of this delay, as he had hired lawyers to block prosecutors obtaining evidence from Switzerland.

One individual, former KBR CEO Jack Stanley has pleaded guilty to violation of the Foreign Corrupt Practices Act (FCPA) in connection with the matter. He was sentenced to 7 years in prison and is subject to ongoing cooperation with authorities on this issue.

KBR admitted that a consortium of which it was a member paid Nigerian officials at least $132 million in bribes for engineering, procurement and construction contracts awarded between 1995 and 2004 to build liquefied natural gas facilities on Bonny Island, Nigeria. The consortium was named TSJK and consisted of subsidiaries of the following entities: KBR (then owned by Halliburton); Technip, French company; ENI, an Italian company; and JGC, a Japanese company.

SETTLEMENT (or RESERVED FOR SETTLEMENT) BOX SCORE

Entity	Fine, Penalty and Disgorgement of Profits (in $ millions)	Amount Reserved for Resolution (app. in $ millions)
Halliburton (KBR)	$579
ENI		$340
Technip		$330
JGC		None reported
Total	$579	$670

 So for those of you keeping score at home, there has been and could be fines, penalties and profit disgorgement of over $1.2 billion. This figure does not include the amount paid out by these corporations for attorneys’ fees, forensic investigative costs and other professional fees which can be only speculated as priceless.

This amount will most probably be paid to the US government but not to the Nigerian government, the country which is alleged to be the focus of the bribery. The FCPABlog has posed the question that “Some in Nigeria will no doubt ask why the penalty money should end up in the U.S. Treasury and not their country?”. One reason could be that there is no current Nigerian investigation into the matter. In February, MainJustice reported that the Nigerian Senate subcommittee tasked with conducting the inquiry into the bribery scandal announced it was shutting itself down, saying that under the US-Nigeria Mutual Legal Assistance treaty, it could not obtain records from American investigators relevant to the investigation. While it does seem odd to this commentator that Nigeria would end its investigation of so public a scandal, we would only conclude that Nigeria must have its own reasons for doing so.

All of this and Opening Day is less than 10 days away. We can hardly wait.

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, 2010

The Only Defense: Adequate Procedures under the UK Bribery Bill

With wide cross-party support it is anticipated that the Bribery Bill will pass the House of Commons and become law by May, 2010. The Bribery Bill amends and repeals existing anti-bribery offences under the Public Bodies Corrupt Practices Act 1889, the Prevention of Corruption Act 1906 and the Prevention of Corruption Act 1916 and abolishes the UK common law offenses of bribery and embracery (bribery of jurors). This proposed legislation represents a long awaited simplification of the law on corruption and makes the UK compliant with its international obligations under the OECD. It will have a major impact on the way businesses connected to the UK manage their international business.

There is one affirmative defense listed in the Bribery Bill. The is the ‘adequate procedures’ defense. The Explanatory Notes to the Bribery Bill indicate that this narrow defense would allow a corporation to put forward credible evidence that it had adequate procedures in place to prevent persons associated from committing bribery offences. Although not explicit on the face of the Bill, in accordance with established case law, the standard of proof the defendant would need to discharge is the balance of probabilities. The legislation requires Secretary of State to publish guidance on procedures that relevant commercial organizations can put in place to prevent bribery by persons associated with their entity.

Other than this commentary, the Bill provides no further information on what might constitute ‘adequate procedures’ as a defense but the Government has signaled that it will work with the UK business community to provide appropriate guidance to this critical component of the Bribery Bill. The UK law firm KattenMuchin has indicated that they expect the Government will apply a test regarding the ‘adequate procedures’ defense “with regard to the size of the company, its business sector and the degree to which it operates in high risk markets.”

While it might only give general guidance, the United States Department of Justice has published its Sentencing Guidelines which provide a framework to construct an ethics and compliance program which will meet the strictures of the FCPA. Using the Sentencing Guidelines, Richard Cassin has written about an effective compliance program, in his excellent FCPABlog. He notes that the purpose of an “effective compliance program” is to prevent and detect criminal conduct. In his listing his suggestions for what constitutes an “effective compliance program” He suggested the following:

1. A Written Program. A company must have standards and procedures in place to prevent and detect criminal conduct.
2. Board Oversight. A public company’s Board of Directors must be knowledgeable about the content and operation of the compliance program and must exercise reasonable oversight of its implementation and effectiveness.
3. Responsible Persons. One or more individuals among a company’s high-level personnel must be assigned overall responsibility for the compliance program.
4. Operating and Reporting. One or more individuals must be delegated day-to-day operational responsibility for the compliance program. They must report periodically to high-level personnel on the effectiveness of the compliance program. The individuals must have adequate resources, appropriate authority, and direct access to the Board or Audit Committee.
5. Management’s Record of Compliance. A company must use reasonable efforts not to hire or retain personnel who have substantial authority and whom a company knows or should know through the exercise of due diligence have engaged in illegal activities or other conduct inconsistent with an effective compliance program.
6. Communicating and Training. A company must take reasonable steps to communicate periodically and in a practical manner its standards and procedures, and other aspects of the compliance program, to directors, officers, executives, managers, employees and agents — by conducting effective training programs and otherwise disseminating information appropriate to the individuals’ respective roles and responsibilities.
7. Monitoring and Evaluating; Anonymous Reporting. A company must take reasonable steps (a) to ensure that its compliance program is followed, including monitoring and auditing to detect criminal conduct, (b) to evaluate periodically the effectiveness of the compliance program and (c) to have and publicize a system, which may include mechanisms that allow for anonymity or confidentiality, whereby a company’s employees and agents may report or seek guidance regarding potential or actual criminal conduct without fear of retaliation.
8. Consistent Enforcement — Incentives and Discipline. A company’s compliance program must be promoted and enforced consistently throughout a company through appropriate (a) incentives to perform in accordance with the compliance program and (b) disciplinary measures for engaging in criminal conduct and for failing to take reasonable steps to prevent or detect criminal conduct.
9. The Right Response. After criminal conduct has been detected, a company must take reasonable steps to respond appropriately and to prevent further similar criminal conduct, including making any necessary modifications to a company’s compliance program.
10. Assessing the Risk. A company must periodically assess the risk of criminal conduct and take appropriate steps to design, implement, or modify its compliance program to reduce the risk of criminal conduct identified through this process.

Once again the British Government has not provided any guidance was to what might constitute “adequate procedures” under the Bribery Bill. However procedures based upon some of all of the elements above would certainly be a good starting point for any UK corporation to put in place.

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

© Thomas R. Fox, 2010

SO YOU WANT TO BUY A BUSINESS: THE ROLE OF THE FCPA IN INTERNATIONAL ACQUISITIONS

The recession has lessened and all that cash your Company has been hoarding for the rainy days of the Obama years is burning a whole in your CEO’s pocket. He has his powder dry and is ready to make a big bang by going on a buying spree, targeting overseas entities, to beat the competition in coming out of your industry’s downturn. The Legal Department is told to put together an acquisition squad and to be ready to go at a moment’s notice. The job assigned to you is to make sure that your acquisition does not run afoul of the Foreign Corrupt Practices Act (FCPA) and to prepare a list of FCPA based due diligence that the Law Department should focus on to perform on the Target Company. What should be on your list? In the recent article, “FCPA Due Diligence in Acquisitions,” Securities and Commodities Regulation, Vol. 43, No. 2, January 20, 2010, lawyers from Squire Sanders, thoroughly explored this topic, through a hypothetical case it was based upon a “real life scenario”. Some of their suggestions included the following suggestions.

I. Who is the Owner of the Target Company?

An initial inquiry should be made into the ownership structure of the target company. If any portion of the entity is owned or held by a government or governmental entity then such an entity is covered under the FCPA as a “foreign governmental instrumentality”. There are several factors to consider in making such a determination. Some of these factors include: percentage ownership of the target company; control exercised over the target company; and how are the employees of the target company described by their country’s government.

II. Are Agents involved in the Transaction?

Many times a “consultant” will be used in facilitating the purchase of a target company in a country outside the United States. If there is a clear and articulated business case for the Agent to be involved in the transaction, there should be due diligence on the Agent. It should include some a review of the Agent’s credentials, ownership structure and financial records going back 3 to 5 years. Lastly, it is also critical to know the reputation of the Agent in the country’s business community. If the Agent passes all these reviews, you establish a business relationship with a strong written contract.

III. Does the Target Company want you to pay for Travel?

What if the Target Company desires your business to pay for a representative to come to the US to visit your facilities? Such a trip falls under the FCPA and its proscription of “offering or promising anything of value”. However, if there are legitimate business expenses which can be paid by the US purchasing company under the FCPA. The key is to evaluate each travel and entertainment request. Generally, coach class travel and hotel expenses such as room charges, business center and telephone charges related to business can be reimbursed. Personal room expenses such as minibar, Pay-for-Movies and spa fees at the hotel should not be reimbursed. Receipts should be provided for any charges and if possible, the third party service provider should be paid directly rather than reimbursement of the Target Company’s representative. Entertainment and business dinners can be reimbursed if there is a legitimate business purpose but personal, including the family expenses of the Target Company’s Representative, cannot be reimbursed under the FCPA. Lastly, do not give a “per-diem” in cash.

IV. Did the Target Company make any “Red Flag” Payments?

In your company’s financial due diligence of the Target Company, did any evidence of “Red Flag” payments turn up which warrant further investigation? If such “Red Flags” arise, the US purchasing company must not turn a blind eye. If there is reason to believe that payments of the Target Company may violation the FCPA, further investigation is mandated. The recent conviction of Frederick Bourke for engaging in “conscious indifference” in that he knew, or should have known, that bribery and corruption was involved in the proposed acquisition, demonstrates the power of the FCPA in the acquisition arena. Red Flag areas would include the discovery of payments for gifts, entertainment, use of agents, facilitation payments or other payments which could not be adequately accounted for are discovered.

V. Are the Books and Records Reasonable?

In addition to its anti-bribery provisions, the FCPA also requires that a company keep such books and records which reasonably reflect the transactions of the entity and that there are proper internal controls. A key in this area is if the Target Company has any payments which are labeled as “miscellaneous” or there are payments which cannot be reasonably described. Gifts, entertainment and business expenses need to be recorded and documented. Internal controls are required to show that the Target Company has its statements in accordance with some form of accepted accounting principles.

VI. What Happens Afterwards?

Your Company has completed all the above steps but your due diligence has turned up items which cannot be resolved before your Company’s President wants to fire that dry powder. What can you do? In Opinion Procedure Release 08-02, the Department of Justice gave its opinion on the steps required by a US company contemplating a such a transaction. This opinion held that if Halliburton, in purchasing a Target Company, satisfactorily completed a rigorous, DOJ-mandated 180-day FCPA and anticorruption due diligence work plan after the closing, then the DOJ did not “presently intend” to take enforcement action against Halliburton for any disclosed unlawful pre-acquisition conduct by the Target Company within 180 days of the closing. Halliburton was not the successful bidder for the Target Company but the DOJ’s flexibility and Halliburton’s open dialogue with the DOJ indicates there will be increased involvement between companies and regulators during FCPA acquisition due diligence.

VII. The End or Is it?

The potential liabilities for failing to engage in pre-acquisition FCPA due diligence can be severe. Just how severe can be demonstrated by the eLandia acquisition of Latin Node. The FCPABlog reported that “eLandia also disclosed that its purchase price for Latin Node “was approximately $20.6 million”. After the acquisition, eLandia discovered that Latin Node had engaged in bribery and corruption. eLandia investigated, albeit after the purchase, and self-reported the violations to the DOJ. eLandia was assessed a $2 million fine, shut down Latin Node as an operating business and wrote off the entire purchase. For those of you keeping score at home, that is several years of pre-acquisition due diligence, plus legal fees for the FCPA investigation added to the fine, purchase price, business shut down and full financial write-off.

So what’s the moral of this story? You can keep your powder dry but you must engage in full FCPA due diligence in any overseas transaction before moving forward.

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This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication.

© Thomas R. Fox, 2010