FCPA Compliance and Ethics Blog

April 4, 2014

Life Cycle Management of Third Parties – Step 5 – Management of the Relationship

Five stepsToday ends my review of what I believe to be the five steps in the management of a third party under an anti-bribery regime such as the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act. On Monday, I reviewed Step 1 – the Business Justification, which should kick off your process with any third party relationship. On Tuesday, I looked at Step 2 – the questionnaire that you should send and third party and what information you should elicit. On Wednesday, I discussed Step 3 – the due diligence that you should perform based upon the information that you have received from and ascertained on the third party. On Thursday, I examined Step 4 – how you should use the information you obtain in the due diligence process and the compliance terms and conditions which you should place in any commercial agreement with a third party. Today, I will conclude this series by reviewing how you should manage the relationship after the contract is signed.

I often say that after you complete Steps 1-4 in the life cycle management of a third party, the real work begins and that work is found in Step 5– the Management of the Relationship. While the work done in Steps 1-4 are absolutely critical, if you do not manage the relationship it can all go down hill very quickly and you might find yourself with a potential FCPA or UK Bribery Act violation. There are several different ways that you should manage your post-contract relationship. This post will explore some of the tools which you can use to help make sure that all the work you have done in Steps 1-4 will not be for naught and that you will have a compliant anti-corruption relationship with your third party going forward.

Managing third party relationships is an area that continues to give companies trouble and heartburn. The “2013 Anti-Bribery and Corruption Benchmarking Report – A joint effort between Kroll and Compliance Week” found that many companies are still struggling with ongoing anti-corruption monitoring and training for their third parties. Regarding training, 47% of the respondents said that they conduct no anti-corruption training with their third parties at all. The efforts companies do take to educate and monitor third parties are somewhat pro forma. More than 70% require certification from their third parties that they have completed anti-corruption training; 43% require in-person training and another 40% require online training. Large companies require training considerably more often than smaller ones, although when looking at all the common training methods, 100% of respondents say their company uses at least one method, if not more.

While the FCPA Guidance itself only provides that “companies should undertake some form of ongoing monitoring of third-party relationships”. Diana Lutz, writing in the White Paper by The Steele Foundation entitled “Global anti-corruption and anti-bribery program best practices”, said, “As an additional means of prevention and detection of wrongdoing, an experienced compliance and audit team must be actively engaged in home office and field activities to ensure that financial controls and policy provisions are routinely complied with and that remedial measures for violations or gaps are tracked, implemented and rechecked.”

One noted commentator has discussed techniques to provide this management and oversight any third party relationship. Carol Switzer, President of the Open Compliance and Ethics Group (OCEG), writing in the Compliance Week magazine set out a five-step process for managing corruption risks, which I have adapted for third parties.

  1. Screen - Monitor third party records against trusted data sources for red flags.
  2. Identify – Establish helplines and other open channels for reporting of issues and asking compliance related questions by third parties.
  3. Investigate - Use appropriately qualified investigative teams to obtain and assess information about suspected violations.
  4. Analyze - Evaluate data to determine “concerns and potential problems” by using data analytics, tools and reporting.
  5. Audit - Finally, your company should have regular internal audit reviews and inspections of the third party’s anti-corruption program; including testing and assessment of internal controls to determine if enhancement or modification is necessary.

Based upon the foregoing and other commentators, I believe there are several different roles in a company that play a function in the ongoing monitoring of the third party. While there is overlap, I believe that each role fulfills a critical function in any best practices compliance program.

Relationship Manager

There should be a Relationship Manager for every third party which the company does business with through the sales chain. The Relationship Manager should be a business unit employee who is responsible for monitoring, maintaining and continuously evaluating the relationship between your company and the third party. Some of the duties of the Relationship Manager may include:

  • Point of contact with the Third Party for all compliance issues;
  • Maintaining periodic contact with the Third Party;
  • Meeting annually with the Third Party to review its satisfaction of all company compliance obligations;
  • Submitting annual reports to the company’s Oversight Committee summarizing services provided by the Third Party;
  • Assisting the company’s Oversight Committee with any issues with respect to the Third Party.

Compliance Professional

Just as a company needs a subject matter expert (SME) in anti-bribery compliance to be able to work with the business folks and answer the usual questions that come up in the day-to-day routine of doing business internationally, third parties also need such access. A third party may not be large enough to have its own compliance staff so I advocate a company providing such a dedicated resource to third parties. I do not believe that this will create a conflict of interest or that there are other legal impediments to providing such services. They can also include anti-corruption training for the third party, either through onsite or remote mechanisms. The compliance practitioner should work closely with the relationship manager to provide advice, training and communications to the third party.

Oversight Committee

I advocate that a company should have an Oversight Committee review all documents relating the full panoply of a third party’s relationship with the company. It can be a formal structure or some other type of group but the key is to have the senior management put a ‘second set of eyes’ on any third parties who might represent a company in the sales side. In addition to the basic concept of process validation of your management of third parties, as third parties are recognized as the highest risk in FCPA or Bribery Act compliance, this is a manner to deliver additional management of that risk.

After the commercial relationship has begun the Oversight Committee should monitor the third party relationship on no less than an annual basis. This annual audit should include a review of remedial due diligence investigations and evaluation of any new or supplement risk associated with any negative information discovered from a review of financial audit reports on the third party. The Oversight Committee should review any reports of any material breach of contract including any breach of the requirements of the Company Code of Ethics and Compliance. In addition to the above remedial review, the Oversight Committee should review all payments requested by the third party to assure such payment is within the company guidelines and is warranted by the contractual relationship with the third party. Lastly, the Oversight Committee should review any request to provide the third party any type of non-monetary compensation and, as appropriate, approve such requests.


A key tool in managing the relationship with a third party post-contract is auditing the relationship. I hope that you will have secured audit rights, as that is an important clause in any compliance terms and conditions. Your audit should be a systematic, independent and documented process for obtaining evidence and evaluating it objectively to determine the extent to which your compliance terms and conditions are followed. Noted fraud examiner expert Tracy Coenen described the process as one to (1) capture the data; (2) analyze the data; and (3) report on the data, which is also appropriate for a compliance audit. As a base line I would suggest that any audit of a third party include, at a minimum, a review of the following:

  1. the effectiveness of existing compliance programs and codes of conduct;
  2. the origin and legitimacy of any funds paid to Company;
  3. books, records and accounts, or those of any of its subsidiaries, joint ventures or affiliates, related to work performed for, or services or equipment provided to, Company;
  4. all disbursements made for or on behalf of Company; and
  5. all funds received from Company in connection with work performed for, or services or equipment provided to, Company.

If you want to engage in a deeper dive you might consider evaluation of some of the following areas:

  • Review of contracts with third parties to confirm that the appropriate FCPA compliance terms and conditions are in place.
  • Determine that actual due diligence took place on the third party.
  • Review FCPA compliance training program; both the substance of the program and attendance records.
  • Does the third party have a hotline or any other reporting mechanism for allegations of compliance violations? If so how are such reports maintained? Review any reports of compliance violations or issues that arose through anonymous reporting, hotline or any other reporting mechanism.
  • Does the third party have written employee discipline procedures? If so have any employees been disciplined for any compliance violations? If yes review all relevant files relating to any such violations to determine the process used and the outcome reached.
  • Review employee expense reports for employees in high-risk positions or high-risk countries.
  • Testing for gifts, travel and entertainment that were provided to, or for, foreign governmental officials.
  • Review the overall structure of the third party’s compliance program. If the company has a designated compliance officer to whom, and how, does that compliance officer report? How is the third party’s compliance program designed to identify risks and what has been the result of any so identified?
  • Review a sample of employee commission payments and determine if they follow the internal policy and procedure of the third party.
  • With regard to any petty cash activity in foreign locations, review a sample of activity and apply analytical procedures and testing. Analyze the general ledger for high-risk transactions and cash advances and apply analytical procedures and testing.

In addition to monitoring and oversight of your third parties, you should periodically review the health of your third party management program. Once again I turn to Diana Lutz and her colleague Marjorie Doyle, and their White Paper entitled “Third Party Essentials: A Reputation/Liability Checkup When Using Third Parties Globally”, where they gave a checklist to test companies on their relationships with their third parties.

  1. Do you have a list or database of all your third parties and their information?
  2. Have you done a risk assessment of your third parties and prioritized them by level of risk?
  3. Do you have a due diligence process for the selection of third parties, based on the risk assessment?
  4. Once the risk categories have been determined, create a written due diligence process.
  5. Once the third party has been selected based on the due diligence process, do you have a contract with the third party stating all the expectations?
  6. Is there someone in your organization who is responsible for the management of each of your third parties?
  7. What are “red flags” regarding a third party?

Perhaps now you will understand why I say that after you prepare the Business Justification; send out, receive back and evaluate the Questionnaire; set the appropriate level of Due Diligence; evaluate the due diligence and execute a contract with appropriate Compliance Terms and Conditions; now the real work begins, as you have to manage the third party relationship.

I hope that you have found this review of the life cycle management of third parties helpful for your compliance program.

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

© Thomas R. Fox, 2014

March 4, 2014

How Does the 20th Amendment Inform Your Compliance Program Incentives?

FDR InagurationOn this date in 1933, FDR held his first inauguration. It was also the final inauguration held in March before the passage of the 20th Amendment to the US Constitution that moved the inauguration date to January 20th. What was the reason the Constitution originally set an inauguration date in March, some six months after the November election? It is because a Roman Tribune’s annual term of office began in March, rather than in January. During this six month period, the old administration did not have much incentive to do anything, which could benefit the incoming Presidential administration, if they were from different parties. That was the driving force for the 20th Amendment.

I thought about this dis-incentive when considering the question of how could you incentivize your senior management team so that they will integrate compliance into their business routine? Put another way, how can you measure compliance in senior management or evaluate it for the purposes of a bonus calculation? This issue has often been difficult to sustain in a company because the compliance evaluation of whether a senior manager or company leader is often viewed as too subjective. However, in a recent article in the Compliance Insider magazine, put out by the Red Flag Group, I came across an article that directly addresses these issues and concerns.

The article was entitled, “Integrating Your Compliance Programme Into the Variable Compensation of Executives”. The article was built around a case study of the Sorin Group, which is a healthcare multinational and the company’s incentive program for its compliance regime. Interestingly, the reason the company created such an incentive program in the first place was to “influence actual behaviors, and not merely the consequences of any wrong doing that may occur.” With this premise, at the Sorin Group, compliance has been made an integral part of each manager’s performance objectives. Members on the company’s Executive Leadership Team (ELT) and the other leaders of all of its corporate functions and “business units are directly responsible for the culture, understanding, observance and adoption of the Sorin Code of Conduct, the Sorin United States and international compliance policies and procedures” and their respective health industry codes of practice.

Further, each of the different functions within the Sorin Group has adopted individual performance objectives specifically regarding compliance. The individualized “compliance objectives are agreed and documented every year for each function and senior manager, and form part of the process of continuous performance review (written reviews twice yearly) managed by Sorin’s human resources team. The responsible executive of each function or group is required to cascade each of the compliance obligations to those employees under them. This ensures that the whole company has compliance integrated into their variable remuneration.”

The company’s evaluation process includes the staff that report to each senior executive who are interviewed by the General Counsel (GC) or other member of the compliance function “to determine their adherence to the compliance objectives.” Additionally, “An assessment is performed alongside line managers and a member of the human resources team to determine whether the obligations have been met, and to what extent.” Lastly, this same system applies to the company’s Board of Directors and Chief Executive Officer (CEO).

The variable compensation awarded at the end of each year can be affected in two ways by his or her compliance evaluation. The first is for an entire group and “If a group fails to meet expectations for the specific objectives the executive and their whole team will miss out on the entire variable pay for that year.” But “If a group meets some expectations for the compliance objectives they will receive payment of the variable, with the amount dependant on the amount of objectives that have been met.” The same holds true for the individual within the group so that “if an employee fails to meet his or her compliance objectives, the whole bonus for that employee will remain unpaid.”

The article also gave some specific examples of compliance obligations that are measured and evaluated. This is an excellent list for the compliance practitioner to use in benchmarking a company’s compliance program in this area or instituting such an incentive compensation system for your company. They include the following.

For the ELT

  • Lead from the top – in your own conduct (lead by example) and in the decisions you take, to the resources and time you commit to compliance
  • Facilitate and proactively practice in day-to-day activities the key compliance competencies, both internally and externally
  • Support specific initiatives from the CEO, legal and compliance functions. 

For Department Heads

  • Demonstrate, facilitate and proactively practice in day-to-day activities the key compliance competencies, both internally and externally
  • Support specific initiatives from the legal and compliance functions
  • Ensure that all employees, agents and contractors directly or indirectly reporting to you fully complete all required training and communications in a timely manner
  • Provide full cooperation with investigations conducted by the compliance or legal functions of any alleged violation of compliance policies
  • Include the Chief Compliance Officer or another legal or compliance function representative in your management meetings at least twice per year, per geography
  • Identify instances of non-compliance and support compliance monitoring and reporting systems
    • Partner with compliance in resolving compliance issues.

For Country Heads of Sales

  • Certify that all employees, agents and contractors directly or indirectly reporting to you have fully reported all sales and marketing interactions with all HCPs (Health Care Professional) in a timely manner
  • Certify that all employees, agents and contractors directly or indirectly reporting to you have fully, promptly and accurately reported all expenses with HCPs on Concur. 

The article also speaks of five things to consider when developing such a compliance incentive program.  (1) The program needs to be cascaded down the organization so that it applies to all levels in the company. (2) Include both a 360 degree review and mid-year review. (3) To truly incentive senior management, the compliance objectives should be at least 25% of the overall discretionary bonus program. (4) Do not have simply ‘tick-the-box’ incentives but include subject incentives.

As the final item to consider, the article says that you need to have SMART compliance objectives, which are defined as:

  • Specific: A specific objective has a much greater chance of being accomplished than a general objective (e.g don’t just say “ensure training has been completed by your team”, say;
    • Who: who needs to be trained?
    • What: what training objectives do you want to accomplish?
    • Where: identify a location for the training
    • When: establish a time frame for the training to be completed
    • Which: identify requirements and constraints for any training
    • Why: provide specific reasons, purpose or benefits of accomplishing the training objective.
  • Measurable: Establish concrete criteria for measuring progress toward the attainment of each objective you set.
  • Aggressive but attainable: When you identify objectives that are most important to the compliance function and the relevant business, employees are more likely to see the value in making them come true.
  • Realistic: To be realistic, an objective must represent something which you are both willing and able to work toward.
  • Timely: An objective should be grounded within a timeframe. 

The article ends with some insights into lessons learned by the Sorin Group in its role of the compliance incentive program. These lessons included the following:

  • Top down: If your ELT is truly on board you can make big leaps and not limit your compliance ambitions to incremental steps.
  • Personalize: The objectives should be more personal to each function and more granular.
  • Balance: Have qualitative judgments but couple them with concrete and – most importantly – objective and measurable key performance indicators.
  • Publicize: Talking about the real company examples of its people make the difference.
  • Be positive: Focus your company’s efforts on positive incentive behaviors. In other words, use both the stick and carrot.
  • Just do it: Stop talking the talk and start walking the walk.

The FCPA Guidance made clear that the Department of Justice and Securities and Exchange Commission expect that incentives to be built into your best practices compliance program. The Sorin Group case study in Compliance Insider provides solid tips for the compliance practitioner on steps to take for his or her company’s compliance program. Is some of this subjective? Yes it is but that does not mean financial incentives cannot be written into the evaluation of any senior management to help guide ethical business practices.

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

© Thomas R. Fox, 2014

February 18, 2014

Board Investigations and the Curse of the Mummy’s Tomb – Part II

Board of DirectorsYesterday I began an exploration of a recent article in the Corporate Board magazine, entitled “Successful Board Investigations” by David Bayless and Tammy Albarrán, partners in the law firm of Covington & Burling LLP. In Part I, I reviewed the authors’ five key objectives, which they believe a board must pursue to ensure a successful investigation. Today, I will look at the authors’ seven considerations to facilitate a successful board investigation.

1.             Consider whether you need independent outside counsel

The authors consider that the appearance of partiality “undermines the objectivity and credibility of an investigation.” That means you should not use your regular counsel. The authors cite to the Securities and Exchange Commission (SEC) analysis of how independent board members truly are to explain the need for independent counsel. They state, “the SEC considers the following criteria when determining whether (and how much) to credit self-policing, self-reporting, remediation and cooperation” which will consist of the following factors:

  • Did management, the board or committees consisting solely of outside directors oversee the review?
  • Did company employees or outside persons perform the review?
  • If outside persons, have they done other work for the company?
  • If the review was conducted by outside counsel, had management previously engaged such counsel?
  • How long ago was the firm’s last representation of the company?
  • How often has the law firm represented the company?
  • How much in legal fees has the company paid the firm?

As Andre Agassi might say, ‘perception is reality’.

2.             Consider hiring an experienced “investigator” to lead the internal investigation

Noted internal investigation expert Jim McGrath has written and spoken about the need to utilize specialized counsel in any serious investigation. If a board is leading an investigation, I would submit by definition it is serious. The authors say that your investigation needs to lead by a lawyer with significant experience in conducting internal investigations; a strong background in criminal or SEC enforcement; and has substantive experience in the particular area of law at issue. The traits are needed so that your designated counsel will think like an investigator, not like an in-house lawyer or civil litigator.

3.             Consider the need to retain outside experts

In any Foreign Corrupt Practices Act (FCPA) or other anti-corruption investigation, there will be the need for a wider variety of subject matter experts (SME’s) than a compliance professional. The authors correctly recognize that “ if there are accounting issues, forensic accountants might be needed. In this day and age, an electronic discovery consultant is often required, and can be a cost effective option for gathering and processing electronic data for review.” These types of investigations will most probably be cross-border as well and this will require other varieties of expertise. The authors caution that, “The lowest bid may not necessar­ily be the best for a particular investigation. While cost is important, understand the limitations of each consultant and, with input from your investigator, determine which consultant best meets your goals.”

4.             Analyze potential conflicts of interest at the outside and during the investigation

The authors see two types of conflicts of interest that may come to light during an investigation. First is the one which comes up when the law firm or lawyers conducting the inves­tigation are those whose prior legal advice has some bearing on the matters being investigated because a company’s regular outside lawyers represent the company. During an internal investigation, however, the lawyers may be hired by, and represent, the board or its committee. The second occurs when a lawyer or law firm jointly represents the board and employees at the company as regulators have become increasingly concerned with joint representations. Moreover, “The trickier question is what to do when there simply is a risk that representing one client could limit the lawyers’ duties to the other.” So in these situations, joint representation may not be appropriate.

5.             Carefully evaluate Whistleblower allegations

With the advent of Sarbanes-Oxley (SOX) and Dodd-Frank, whistleblowers have become more important and taking their allegations seriously is paramount. This does not mean trying to find out who the whistleblowers might be to punish or stifle them, even if they are located outside the United States and therefore do not have protections under these laws. They can still get hefty bounties. The authors recognize that companies can come to grief when “companies run into problems when whistleblower allegations are discounted, if not outright dismissed, especially if the whistleblower has a history of causing trouble or is perceived as incompetent. When this type of whistleblower makes a claim, it is easy to presume ulterior motives.” While such motives might exist, it does not matter one iota when it comes to the investigation, as “Regulators are very wary of boards that do not satisfactorily evaluate a whistleblower’s complaint based on a perception of the whistleblower himself, as opposed to the substance of the complaint.”

6.             Request regular updates from outside counsel, without limiting the investigation

These types of investigations are long and very costly. They can easily spin out of cost control. But, by trying to manage these costs, a board might be perceived as placing improper limits on the investigation. The “goal is to strike the right balance between the cost of the investigation and its thoroughness and credibility.” To do so, the authors advise that flexibility is an important ingredient. A board can begin the project with an agreed upon initial scope of work and then “revisit the scope of work as the investigation progresses. If conduct is discovered that legitimately calls for expanding the scope of the investigation, then the board can revisit the issue at that point. Put another way, the scope of what to investigate is not a static, one-time decision. It can, and usually does, evolve.” By seeking regular updates and questioning counsel on what they are doing and why, directors can manage costs, while at the same time ensuring that the investigation is sufficiently thorough and credible.

7.             Consider whether an oral report at the conclusion of the investigation is sufficient

While there may be instances in which, due to complexity and the nature of allegations involved, a written report is necessary, the authors believe that there may be times when an oral report delivered to a board is better than a written report for “a written report may be easier to follow and appear to be the logical conclusion to an investigation, it is an expensive and time-consuming endeavor, and it comes with great risk.” The authors indicate three reasons for this position.

First, it is much easier to inadvertently waive the attorney-client privilege if a written report is created and in the wrong hands, such a written report may well create “a road map to a plaintiff” in any shareholder action. Second, once those findings and conclusions are written they may become “set in stone. If later information comes to light that impacts the report’s conclusions, altering the conclusions may undermine the credibility of the entire investigation. So, retaining flexibility to change the findings if further information is later learned is a real advantage of an oral report.” Third, and finally, “it takes time to prepare a well-written and thorough report. When an internal investigation must be conducted quickly, spending time to prepare a written report may not be an efficient use of time.” For all of these reasons, and perhaps others, an oral report presented to the board and documented in the Board of Director meeting minutes may be sufficient.

The authors conclude their piece by stating, “By keeping in mind the issues addressed above, the board will be better prepared for the investigation and readily able to exercise good judgment throughout the review. A well-conducted investigation by the board may spare the company further disruption and costs associated with follow-on investigations by the regulators, or at the very least minimize the company’s exposure.” I would only add that by following some of the prescriptions set out by Bayless and Albarrán your Board might also avoid the fate that befell Lord Carnarvon and the Curse of the Mummy’s Tomb.

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

© Thomas R. Fox, 2014

February 6, 2014

The FCPA and Fight Against Terrorism

Bag of CashI admit it took me awhile to finally get it. I have long wondered what could have caused the explosion in Department of Justice (DOJ) and Securities and Exchange Commission (SEC) enforcement of the Foreign Corrupt Practices Act (FCPA). Starting in about 2004, FCPA enforcement has not only been on the increase from the previous 25 years of its previous existence but literally exploded. Of course, I had heard Dick Cassin and Dan Chapman, most prominently among others, talk and write about FCPA enforcement as an anti-terrorism security issue post 9/11, but I never quite bought into it because I did not understand the theoretical underpinnings of such an analysis.

I recently finished listening to the Teaching Company’s “Masters of War: History’s Greatest Strategic Thinkers” by Professor Andrew Wilson of the Naval War College. It is a 24 lecture series on the content and historical context of the world’s greatest war strategists. In his lecture on ‘Terrorism as Strategy” Professor Wilson explained that corruption is both a part of the strategy of terrorism and a cause of terrorism. After listening to his lecture and reflecting on some of the world events which invoked both parts of his explanation, it became clear to me why FCPA enforcement exploded and, more importantly, why the US government needs to continue aggressive enforcement of the FCPA and encourage other countries across the globe to enact and enforce strong international and domestic anti-corruption and anti-bribery laws.

Corruption as a Terrorist Strategy

One need look no further than last fall’s massacre of civilians in Kenya at the Westgate Mall to see how terrorists use bribery and corruption. Dick Cassin, who has consistently written about the connection between bribery-corruption and security did so again after the attack, in a post entitled “The Price for Impunity is Higher Than Ever”, where he pointed to the continued corruption in Kenya and how this corruption led to guns and terrorists being able to cross the border and carry out the attack. Cassin said that the border controls are so porous due to corruption in Kenya that in a prior episode involving the UK Serious Fraud Office (SFO), the UK government had banned certain Kenyan government officials from traveling to the UK, in large part because the country failed to take action against obvious cases of bribery and corruption. He said, “The visa ban followed a criminal investigation by the U.K. Serious Fraud Office into contracts between the Kenyan government and U.K. shell businesses. The contracts for passport controls and border security systems went to phantom overseas companies at prices about ten times the actual cost. Kenya refused to cooperate and in early 2009 the SFO was forced to end its investigation.”

Giles Foden, in an article in The Guardian, entitled “Kenya: behind the terror is rampant corruption”, was even more specific about the culture of crime and corruption in Kenya, when he that corruption was one of the signature factors, which led to the massacre. He wrote, “In Kenya crime and terrorism are deeply linked, not least by the failure of successive Kenyan governments to control either. These attacks are part of a spectrum of banditry, with corruption at one end, terrorism at the other, and regular robbery in the middle. Money that should have been spent on security and other aspects of national infrastructure has been disappearing for generations.”

He concluded his piece with this warning, “You can gesture at the transnational problem of Islamist terrorism all you like, but it’s just hot air unless you invest in proper security on the ground in your own country, with the right safeguards to civil liberties. For now Kenya must mourn its dead. But unless the corruption stops, and real investment is made in the social fabric, Kenya will once again be faced with systemic shocks it is hardly able to deal with.”

Professor Wilson made it clear that terrorists incorporate these concepts into their overall strategy. If a country has strong border controls and government officials, which I believe is the situation here in the US and UK, then the terrorist will seek out a country friendly to the US or UK, where the government officials can be bribed or corrupted and use those as ports of entry. Similarly, they can directly attack civilians in a country like Kenya where the border is so porous that both terrorist and arms can flow through with impunity.

 Corruption as a Precursor to Terrorism

But, not only can corruption be used by terrorists, ironically, it can also be the cause of terrorism. One only need look at the Arab Spring and what started it. It was a lone fruit and vegetable seller, Mohammed Bourazizi, who doused himself in paint thinner and set himself on fire in front of a local municipal office because of the corruption of Tunisian government officials and police officers. Yuri Fedotov, head of the United Nations Office of Drugs and Crimes (UNODC) has said that the Arab Spring’s call for greater democracy was “an emphatic rejection of corruption and a cry for integrity” and that the international community must listen to the millions of people involved. At the center of the Arab Spring movement was a deep-seated anger at the poverty and injustice suffered by entire societies due to systemic corruption. Do you think there was any terrorism associated with the Arab Spring?

If one wants to look back a little further in history, I would submit that China is the most prime example of the 20th century. For all the hand wringing about “Who Lost China”, I think a clear key was the endemic corruption of the Nationalist and their allies. Their corruption helped remove the moral authority of their government and allowed the Communists to take up that mantle in the 1940s. The Nationalists were certainly defeated on the battlefield but the groundwork was laid in large part due to the corruption of their government. It really did not matter how much money, foreign aid and material that the US government provided to Chaing Kai-Shek; his cronies and his government simply stole it, sold it or gave it away for other favors.

Moving to today’s news, the government of Thailand is currently under siege by its own citizens. While economic issues are certainly a part of the problem, so is the corruption of the government. The corruption is so bad that even China has scrapped a deal to purchase some 1.2MM tons of rice from Thailand. Michael Peel, writing in the Financial Times (FT), in an article entitled “China ditches Thai rice deal over concern on corruption”, pointed out that this “is about 14 percent of [Thailand’s] annual exports.” He said “Beijing was spooked by the Thai national anti-graft agency’s probe into the rice support programme.” One Thai government official said that the Chinese pulled out of the deal because they “lacked confidence to do business with us”. Peel also wrote that this program is “soaking up $4bn a year officially and much more by other estimates.” What does it say about a country’s government that the Chinese will not do business with because they are too corrupt?

Now I understand how terrorists use corruption both as a strategy and a tool.  Moreover, when you begin to understand these inter-related theoretical underpinnings of corruption and terrorism, you can see why aggressive enforcement of anti-corruption laws such as the FCPA and UK Bribery Act is so important and is here to stay. In another blog post entitled 9/11 and the FCPA” Cassin said, “What happened that day a decade ago changed the way the world looks at corruption. The tracks of the 9/11 perpetrators and those who helped them led back to corrupt third-world countries — Afghanistan, Sudan, Somalia, Yemen, and others. Those regimes had leaky borders, weak passport control, unreliable law enforcement agencies, poor anti-money laundering programs — just what the bad guys needed.”

I do not have any insight into the discussions of the Bush Administration after 9/11 about ways to fight terrorism. But just as governments have a role to play by being part of the solution, so do private businesses. Fedotov said that preventive action was needed by Chief Executive Officers (CEOs) in their boardrooms as much as by police on the streets or civil servants in their departments: “All of us must contribute to a culture of integrity. The eyes previously closed to corruption must become the open eyes of justice and equality.” For the DOJ and the SEC this means continued enforcement of the FCPA so that companies subject to the Act will move forward to do business in a way that does not start down the slippery slope to terrorism. Simply because the FCPA was passed in the post-Watergate era does not mean that it cannot be used for today’s problem.

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

© Thomas R. Fox, 2014

February 4, 2014

Who Had the Worse Day – Peyton Manning or Banks and Investment Funds?

Rue the DayThe Seattle Seahawks gave the Denver Broncos an old-fashioned tail-whoopin’ in Super Bowl history on Sunday. I admit that I was pulling for the old guy, Peyton Manning to pull out another one but I did like Seattle, particularly getting +2.5 points. Not that they needed them and I certainly did not see such a beat down coming. Manning’s reaction was about what you might assume from a professional at this stage of his career, measured yet clearly disappointed. Yes he had a very bad day and one that he will probably rue the day for some time down the road.

But there was some other news on Monday that may cause other groups to do more than ‘rue the day’. You know when you are on the front page of the Wall Street Journal (WSJ) in an article about the Foreign Corrupt Practices Act (FCPA) it has the distinct possibility to be unpleasant. The said WSJ, entitled “Probe Widens Into Dealings Between Financial Firms, Libya” by Joe Palazzolo, Michael Rothfield and Justin Baer, reported that the Justice Department has joined an ongoing Securities and Exchange Commission (SEC) probe into “banks, private equity funds and hedge funds that may have violated anti-bribery laws (IE. FCPA) in their dealings with Libya’s government-run investment fund.” Ominously the WSJ noted that the Department of Justice’s (DOJ) participation had not been previously reported. As the DOJ generally investigates potential criminal violations of the FCPA and the SEC generally investigates the civil side of things this could be quite ominous indeed.

The firms named in the WSJ article included the following: Credit Suisse Group AG, J.P. Morgan Chase & Co., Société Générale SA, the private-equity firm Blackstone Group LP and hedge-fund operator Och-Ziff Capital Management Group. This is in addition to the previous announcement that Goldman-Sachs was being investigated. All of the claims relate to “investment deals made around the time of the financial crisis and afterward, these people said. In the years leading up to Libya’s 2011 revolution, Western firms—encouraged by the U.S. government—raced to attract investment money from the North African nation, which was benefiting from oil sales and recently had opened to foreign investment.”

The WSJ reported that the investigation is centering on certain third parties involved in the transactions, “At the center of the probe is a group of middlemen, known as “fixers,” operating in the Middle East, London and elsewhere, people familiar with the matter said. The fixers established connections between investment firms and individuals with ties to leaders in developing markets, including those in the Gadhafi regime.” The government is looking into these third party’s “roles in arranging deals between financial firms and Libyan officials, people familiar with the matter said. The fixers acted as placement agents, similar to those in the U.S. who have come under scrutiny for steering investments to large public retirement funds. In some cases, the sovereign-wealth-fund fixers collected a “finder’s fee”.”  It was reported that “Some of the fixers had connections to at least two of Gadhafi’s sons—primarily his second son, Seif al-Islam Gadhafi, who was most involved with the sovereign-investment fund, according to people familiar with the matter. Seif al-Islam Gadhafi was captured by rebels.” Interestingly, many of the underlying facts now being investigated came to light only after the overthrow of the Gadhafi Regime.

Further north, another group may have an occasion to rue the day. As reported in the FCPA Blog, in a post entitled “More SNC-Lavaline execs face charges in ongoing corruption probe”, two former SNC-Lavalin officials were charged by the Royal Canadian Mounted Police (RCMP) last Friday. The two men charged were Stephane Roy, a former vice-president at SNC-Lavalin, who was charged with fraud, bribing a foreign public official, and contravening a United Nations economic measures act related to Libya. Also charged was former executive vice-president Sami Abdallah Bebawi with fraud, two counts of laundering the proceeds of a crime, four counts of possession of property obtained by crime, and one count of bribing a foreign public official. These charge, added to prior charges bring the number of former SNC-Lavalin executives to four for their conduct regarding allegations of bribery and corruption in Libya. This is in addition to another two company executives who were charged for bribery and corruption regarding a company project in Bangladesh.

And finally are our friendly bankers and their continuing anti-money laundering (AML) woes. Just last week, UBS Chief Executive Officer (CEO), Sergio Ermotti, said at the World Economic Forum in Davos that it was not right to criticize bankers for criminal acts “most of the bad behavior that has landed UBS and others in hot water was caused by small groups of rogue employees and doesn’t reflect broader cultural problems in the industry.” Criticism could not come from interested stakeholders, such as stockholders, or those who had money in his bank. Indeed criticism could not even come from regulators.

Apparently some regulators take their jobs a bit more seriously than Ermotti might like. Reuters reported, in an article entitled “Bankers anxious over anti-money-laundering push to go after individuals”, that at the Securities Industry Financial Markets Association conference, John Davidson, E*Trade Financial’s global head of AML, said that the “new push by regulators and lawmakers to hold individuals, rather than just institutions, accountable for regulatory violations involving money laundering is spooking members of the U.S. financial industry.” He further said that this aggressive trend and a new vigorous AML bill, introduced in Congress by Representative Maxine Waters, entitled “Holding Individuals Accountable and Deterring Money Laundering Act”, were all “a little scary.” He found the trend towards more AML enforcement against individuals “an incredibly disturbing trend.” The reason it is so scary, an un-named top level compliance officer said, is “that compliance officers at the largest Wall Street institutions were feeling especially nervous because the power structures in those institutions sometimes did not give compliance officers enough authority to act.”

But more than compliance officers may rue the day. Jordan’s reported that the Board of Directors at financial institutions are also concerned. In article entitled “Money laundering tops boardroom concerns amid threat of criminal prosecution” it reported “concerns in boardrooms are now at an all-time high” and corporate boardrooms in some of the country’s leading banks are now sitting up and taking notice of money laundering as a concern, after the threat of criminal prosecution became something of a reality. The recently released KPMG Global Anti-Money Laundering Survey noted that 88 per cent of executives have now placed money laundering back at the head of a list of concerns addressed in their boardrooms. Brian Dilley, global head of the AML Practice at KPMG, was quoted as saying “Anti-money laundering has never been higher on senior management’s agenda, with regulatory fines now running into billions, regulatory action becoming genuinely license threatening, and criminal prosecutions of firms and individuals becoming a reality.”

So who do you think had the worse day or even couple of days?

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

© Thomas R. Fox, 2014

January 29, 2014

The Sussex Vampyre and the ADM FCPA Settlement

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

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

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

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

The FCPA itself says:

(a) Prohibition

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

(1) any foreign official for purposes of—


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

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

(iii) securing any improper advantage; or

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

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

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

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

The FCPA itself states:

(b) Exception for routine governmental action

Subsections (a) and (g) of this section shall not apply to any facilitating or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official, political party, or party official.

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

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

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

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

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

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

© Thomas R. Fox, 2014

January 3, 2014

The FCPA Year in Reivew-the eBook

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

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

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

January 2, 2014

The 2013 FCPA Year in Review-Corporate Enforcement Actions

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

A.     Total

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

B.     Parker Drilling

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

C.     Ralph Lauren

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

D.    Weatherford

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

E.     Stryker

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

F.     Diebold

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

G.    Bilfinger SE

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

H.    Archer-Daniels-Midland

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

What Did It All Mean?

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

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

© Thomas R. Fox, 2014

December 31, 2013

Individual FCPA Enforcement Actions in 2013

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

A.     BizJet Executives

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

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

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

B.     Alstom Executives

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

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

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

C.     Frederic Cilins

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

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

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

D.    Uriel Sharef – Siemens

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

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

E.     Paul Novak – Willbros

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

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

F.     Alain Riedo

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

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

G.    Direct Access Partners

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

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

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

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

A Happy, Joyous and Safe New Year to all…

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

© Thomas R. Fox, 2013

December 30, 2013

New Book Available on Anti-Bribery Leadership

I am pleased to announce the release of a new book entitled, “Anti-Bribery Leadership” which I have authored with Jon Rydberg, the CEO of Orchid Advisors. In this book, Jon and I provide practical lessons pertaining to the FCPA, U.K. Bribery Act and broader Anti-Corruption / Anti-Bribery standards for Board Members, Chief Executive Officers, General Counsel and other corporate executives who seek to lower their enterprise risk profile by learning simple strategies from tested compliance veterans.

I am certain that you will find it useful to reinforce the our belief that compliance – both in general and as it pertains to the anti-corruption/anti-compliance – should be viewed, like quality and safety, as an equal business metric. Although compliance should not be designed to impede efficient business operations, it should be part of the decision-making process. In fact, best-in-class compliance programs are enablers of planned and measured risk-taking. This book is a handy guide on how to make such compliance programs work for you and your company.

You can order a hard bound copy through Amazon.com by clicking here or an eBook version for Kindle by clicking here.

« Previous PageNext Page »

The Rubric Theme. Blog at WordPress.com.


Get every new post delivered to your Inbox.

Join 4,601 other followers