FCPA Compliance and Ethics Blog

April 27, 2015

King Arthur Week, King Arthur and Leadership – Part I

King ArthurI have been studying the legend of King Arthur and thought it would be good idea to have a week of blog posts around the legend of King Arthur, the Roundtable and his knights. Today I begin with King Arthur and some leadership lessons that might apply to a Chief Compliance Officer (CCO), compliance practitioner or others who might be responsible for an anti-corruption compliance program based on the Foreign Corrupt Practices Act (FCPA), UK Bribery Act or similar anti-bribery law.

According to the legends, King Arthur achieved quite a bit in one lifetime. He, established a kingdom, ruled his castle, Camelot and brought peace and order to the land based on law, justice, and morality. He founded an order known as the Knights of the Round Table where in all knights are seated as equals around the table, symbolizing equality, unity, and oneness. Nicole Lastimado, in a blog post entitled “Characteristics of a Good Leader :), identified five characteristics that she believed made Arthur a good leader.

Adapting Lastimado King Arthur was (1) Honest, in that he displayed sincerity, integrity, and candor in his actions. (2) Intelligent, because he read and studied. (3) Courageous, because he had the perseverance to accomplish a goal, regardless of the seemingly insurmountable obstacles. (4) Imaginative because he adapted by making timely and appropriate changes in his thinking, plans, and methods. Finally, (5) Inspiring, because through demonstrating confidence, he inspired his knights and those in his Kingdom to reach for new heights. I would add as a separate category that Arthur led from the front.

I thought about those qualities when I read a couple of recent articles in the Houston Chronicle. The first was by the Chronicle Business Columnist, L. M. Sixel, entitled “Leaders possess the keys to safety”, and the second was an Op-Ed entitled “Trust Shaken”. Both articles discussed corporate issues that have led to catastrophic injuries or even deaths and more importantly how the entities involved reacted. The first article discussed safety at the workplace and the second health issues in the processing of food products.

In her article Sixel, wrote, “A company truly interesting in making sure its workers are safe has to come up with ways to make it easy and risk-free to bring up potential safety problems.” Moreover, the corporate attitude which fosters this “starts with leadership.” She cited to Frank Reiner, the president of the Chlorine Institute, who recently said in a speech to the group’s annual conference in Houston “You have to eliminate the fear.” Additionally, “Once the cause is identified, similar accidents can be prevented, he said. The message that people are free to come forward to talk about what went wrong and why has to come from the top down. Identifying problems not only is everyone’s responsibility but also a companywide expectation.”

Equally important is for a company to learn from its mistakes. Obviously there should be a root cause analysis after a disaster. At the same conference, the Keynote Speaker, John E. Michel, a retired U.S. Air Force brigadier general and author of The Art of Positive Leadership: Becoming a Person Worth Following, said “After a disaster, there is a big investigation to find out why it happened and fix the problem before it can happen again. Sometimes, whole fleets are grounded after an airline crash.” However Michel noted that it is important to keep learning even if there is no disaster. Michel “likes to pay attention to “near misses” and learn from the times things could have gone horribly wrong but didn’t” and that “There are debriefing sessions even when things go well on a flight mission and there are always tweaks to be made.”

Another speaker at the conference Mark Briggs, area director of the Houston South office for OSHA, noted it was important for employees to feel their suggestions and comments around safety are considered by management, saying “You have to show you care and that’s its not just a one-month project.” If management shows that it takes employee recommendations around safety seriously, it will help employees down the chain feel more secure about bringing them to management’s attention.

The Chronicle Op-Ed piece focused on one of the most beloved institutions in the great state of Texas – Blue Bell Ice Cream. Unfortunately for Blue Bell, in March there were five cases of listeria in Kansas, linked to a Blue Bell plant. Three of those persons died, “although a Kansas health official stated that the listeriosis was not the cause of death.” The Chronicle piece noted that after that initial discovery, “multiple strains of listeria have been found in its Brenham and Oklahoma plants, almost 500 miles apart, according to the CDC [Center for Disease Control and Prevention]. Possible explanations include lax safety standards, extremely bad luck striking twice or some undisclosed manufacturing issue.”

A The Texas Tribune article by Terri Langford, entitled “State Health Tests Prodded Blue Bell Recall, said, “The crisis for Blue Bell began on March 13, when Kansas officials determined that Listeria-tainted portions of the company’s ice cream made it into products served to five hospital patients between January 2014 and January 2015. Of the five who became ill, three died. By March 24, Kansas officials traced the source of the listeria to Blue Bell’s plant in Broken Arrow, Okla., built by the Texas company in 1992. On April 3, the Centers for Disease Control had traced Blue Bell’s Listeria strain to six other patients going back to 2010. Four had been hospitalized in Texas for unrelated problems when they became sick from listeria. Five days later, on April 8, the CDC had identified two clusters of Blue Bell listeria victims. The strains were traced to the plants in Oklahoma and Texas.”

Yet it was not until Blue Bell was notified by a representative from the Texas Department of State Health Services, that “lab tests on two Blue Bell ice cream flavors — Mint Chocolate Chip and Chocolate Chip Cookie Dough — came back “presumptive positive” for the deadly bacteria Listeria monocytogenes” that the company announced it was pulling product from its shelves for testing.

What are the lessons from for the CCO or compliance practitioner? You should channel your inner King Arthur and lead. You have to lead management to understand that one of the best sources of information on your own business is your employees. There is a reason the FCPA Guidance lists internal reporting as one of the Ten Hallmarks of an Effective Compliance Program. You must give employees a way to report misconduct and then you must use that information to investigate and communicate to employees going forward. If there are lessons to be learned use those lessons for in-house compliance training. If a true catastrophe or disaster befalls the company, do not wait to remediate. Do so as soon as is practicable, not when the government calls.

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, 2015

April 24, 2015

The Easter Rebellion and Petrobras’ $17 Billion Write Down

Filed under: Brazil,Corruption in Brazil,Petrobras — tfoxlaw @ 12:01 am

Easter REbellion DamageOn this day, 99 years ago the Easter Rebellion began. If there is one event that is seared into history as a turning point for Irish independence from Britain, it was the Easter Rebellion. England had finally granted Home Rule to Ireland in 1914 but suspended implementation due to World War I. This did not appease the Irish nationals in the Irish Republican Brotherhood, who led the Easter Rebellion. On this day in 1916, on Easter Monday in Dublin, the Irish Republican Brotherhood, led by Patrick Pearse, launched their armed uprising against British rule. Assisted by militant Irish socialists under James Connolly, Pearse and his fellow Republicans rioted and attacked British provincial government headquarters across Dublin and seized the Irish capital’s General Post Office. Following these successes, they proclaimed the independence of Ireland, which had been under the repressive thumb of the United Kingdom for centuries, and by the next morning were in control of much of the city. Later that day, however, British authorities launched a counteroffensive, and by April 29 the uprising had been crushed. After the Rebellion, the English commander decreed the execution of its leaders creating martyrs in Ireland who are honored to this day.

In what may turn out to be a date almost as significant for the Brazilian energy giant Petrobras, yesterday the company announced the results of its audit to determine how much money it lost through the systemic bribery and corruption which is alleged to have pervaded the company. In an article in the Wall Street Journal (WSJ), entitled “Brazil’s Petrobras Reports Nearly $17 Billion in Asset and Corruption Charges”, Paul Kiernan reported that the State-run oil company wrote off “$2.1 billion of alleged bribe payments”. The remaining losses came from “graft and overvalued assets”.

Unfortunately for the company, “Petrobras Chief Executive Aldemir Bendine said in a news conference that additional revisions to the corruption-related write-downs are possible if prosecutors uncover more wrongdoing. But he also said an outside auditor approved Petrobras’s earnings “without any reservations.” That could ease investor concerns about the likelihood of major impairment charges in the future. “We were conservative with this number. We might not reach it, but it was a way to give credibility,” Mr. Bendine said. “We have made our best efforts to turn the page on this sad chapter that the company has passed through.””

Further, and perhaps more ominous for the country as a whole, “The events surrounding Petrobras have slowed both the construction sector and the oil industry, leading to reduced spending, thousands of layoffs and several bankruptcies.” However the article quoted the UK-based economic research group, Oxford Economics, as saying “Petrobras’s need to slash investments could “tip the Brazilian economy into a deeper-than-expected recession.””

Petrobras is the world’s most indebted major energy company. This audited statement was made due to “an April 30 deadline in Petrobras’s bond covenants that could have allowed the holders of billions of dollars of Petrobras debt to demand early repayment, a possibility that prompted Moody’s to yank the company’s investment-grade rating in February. Petrobras has been locked out of capital markets since late 2014 due to repeated delays in its financial statements.”

Petrobras of course claims that it is the victim here. While it cannot claim the tired and tested rogue employee defense, it can draw some support from another source. As reported in another WSJ article, entitled “Brazil’s Alleged Petrobras Corruption Not Widespread, Witness Testifies”, reporters Rogerio Jelmayer and Jeffrey T. Lewis wrote that in testimony before Brazil’s Congress, Augusto Mendonça Neto, president of Setal Engenharia, an engineering company that is a supplier to Petrobras, said that “The alleged corruption scheme at Brazil’s Petroleo Brasileiro SA grew out of an agreement among some of the country’s biggest construction companies to divvy up contracts from the state-owned oil company.”

They reported that “Mr. Mendonça Neto has acknowledged being part of the alleged scheme, and is cooperating with investigators. Mr. Mendonça Neto outlined the history of the conspiracy, saying it started in 1997 when a group of Brazilian construction companies got together informally to try to increase their bargaining power against Petrobras. Mr. Mendonça didn’t name the other companies involved. “The objective of these companies was to have a way to protect themselves, and they arranged things among themselves, so they would each have an opportunity” to win contracts from the oil company, he said. “They competed with the rest of the market. What they wanted was to not compete among themselves, because they were the most important [companies].” The group of companies initially had no control over who was able to bid on Petrobras contracts, but that changed after Petrobras executives joined the scheme in 2003 or 2004, Mr. Mendonça Neto alleged. Once they were on board, the group of suppliers grew to include more companies and together they were able to control which businesses got invited to bid on contracts, he said.”

He went on to testify that “The corruption at Petrobras was limited to three top executives and not spread throughout the company” naming three former Petrobras executives, Paulo Roberto Costa, Renato Duque and Pedro Barusco, as also being involved, and said that the rest of the company isn’t corrupt. “The only contact I had with corruption was with those three people I named, apart from that there was never anything,” Mr. Mendonça Neto told the committee. Petrobras “is a highly competent company, composed of people who are extremely prepared and competent.””

Whether the case is as Mr. Mendonça Neto has alleged, three people trying to extort the entire universe of Petrobras contractors or a broader scheme within the company to shake down those doing business with it or companies paying to play with Petrobras, it hardly matters for investors. Petrobras has already announced that it will not pay dividends for 2015. However that may not be enough for investors, as Keirnan reported, “More broadly, investors say the company needs to improve its governance. The Brazilian government, which is Petrobras’s largest shareholder, now nominates most of the company’s board, including its chairman. Brasília has ordered Petrobras to subsidize fuel prices in recent years while the company was simultaneously executing a massive investment plan, leading it to burn billions of dollars in cash.”

As important as the Easter Rebellion was for Irish independence, it was but one step which led to the creation of the Irish Free State in 1922. While this release of information regarding the cost of bribery to Petrobras and its shareholders will be but one in a long number of steps down (hopefully) the path of doing business legally and not corruptly.

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, 2015

April 23, 2015

Interview with James Koukios

KoukiosEd. Note-today I continue my series of interviews with people prominent in the FCPA space. Today is James Koukios, formerly a Manager in the DOJ’s FCPA unit, who recently went into private practice at Morrison & Foerster 

Where did you grow up?

I was born and raised in Grand Rapids, Michigan.

Where did you go to college, what did you study and how did it influence your career going forward?

I graduated from the University of Michigan in 1996.  Like a lot of people who end up at law school, I was a political science major.  Studying poli sci influenced my career in at least two ways.  First, my interest in the political process is what initially brought me to Washington, as a summer intern in 1995.  That was my first time living outside the state of Michigan, and, although I later went to law school in Boston and spent my law school summers in New York and Chicago, my positive experience that summer eventually led me back to Washington, where I have spent the majority of my legal career.  Second, during my summer internship, at the Atlantic Council of the United States, I was assigned a project researching corruption in Asia.  One of the questions I was asked to address was why corruption in Asia should matter to the United States, and it was in answering that question that I first encountered the U.S. Foreign Corrupt Practices Act.  I found the topic fascinating, but little did I know how important it would eventually become to my career.

What were the highlights of your clerkship with Judge Clement?

During law school, I realized that I wanted to be a trial lawyer.  So, when I started looking for clerkships, I applied only to federal district court judges (Judge Clement was later elevated to the Fifth Circuit, but at the time, she sat on the U.S. District Court for the Eastern District of Louisiana).  My clerkship did not disappoint.  Among the many trials that I worked on, the highlight was the criminal prosecution of Edwin Edwards, the former four-term governor of Louisiana, and Jim Brown, Louisiana’s then-sitting Insurance Commissioner, for an allegedly corrupt scheme to bail out a failed insurance company.  The trial was full of colorful characters, complex legal issues, and superb lawyering.

Two other highlights were Judge Clement herself and the city of New Orleans.  Judge Clement has been a mentor to me throughout my legal career, and I attribute much of my success not only to what I learned while clerking for her but also to the continuous support she has always given me.  As for New Orleans, what a terrific city.  Food, music, and culture unlike any other in the United States.  It is a special place.

What was your early DOJ career like in Miami and how did you get to Main Justice?

Being an AUSA in Miami was a dream come true for an aspiring trial lawyer.  Miami has one of, if not the, heaviest criminal dockets in the country, and a large portion of those cases go to trial, often very quickly after indictment.  I tried over 15 felony jury cases in my first three years alone and was in court every day.  Early on, I focused on all manner of reactive crimes, violent crimes, and arms trafficking cases.  During my last two years, I started focusing on more complex and time-consuming cases – including a narcotics wiretap case that revealed police corruption and a high-profile defense procurement fraud case, United States v. AEY, Inc., that garnered national attention.

Around the end of 2008, I was thinking of transitioning full time to prosecuting economic crimes, and my wife and I also started talking about moving back to Washington.  Out of the blue, Chuck Duross, who had moved from the Miami U.S. Attorney’s Office to the Fraud Section in 2007 (and who would later become Deputy Chief of the FCPA Unit), called to tell me that the Fraud Section was looking to bring in experienced AUSAs to prosecute FCPA cases and asked whether I would be interested.  Needless to say, I was, and about six months later, I was fortunate enough to transfer to the Fraud Section.

What were some of your highlights from your time in the FCPA Unit?

Definitely the Esquenazi and Duperval trials.  Both came at a time when the Fraud Section’s ability to win an FCPA case at trial was being heavily questioned, and, going back to that first conversation I had with Chuck Duross in 2008, I felt I had been brought to the Fraud Section for precisely this reason.  As an added bonus, I was able to return to Miami, where I learned how to be a prosecutor, to try these cases.  I joined the Esquenazi trial team one month before trial (I had been on detail as Special Counsel to FBI Director Robert Mueller for the previous year and came back to Fraud to try the case) and was immediately impressed by the thorough investigation that my colleagues had done—the evidence was truly overwhelming.  Over the next month, we focused on how best to present that evidence, and I was extremely proud of the finished product.  It was also rewarding when the Eleventh Circuit agreed with our position that the Haitian state-owned telecommunications company, Haiti Teleco, was an “instrumentality” of the Haitian government and, therefore, that its officers and employees were “foreign officials” under the FCPA.  Much like our trial victories, the appellate ruling helped validate a crucial aspect of our enforcement program.

Becoming a manager in the FCPA Unit was also a highlight.  In a bit of a surprise, I discovered that I enjoyed supervising cases as much as I enjoyed trying them.  Given my experience, I was able to mentor new prosecutors and help them improve their investigations and cases.  But the learning was not a one-way street.  Several of the attorneys I supervised had recently left large law firms and brought with them insights into corporate governance, internal investigations, data privacy, and a host of other issues that are critically important to the work of the FCPA Unit but do not necessarily come into play in other types of criminal prosecutions.  By combining experienced AUSAs with experienced corporate litigators, we assembled a tremendously talented and well-rounded team in the FCPA Unit, from which we all benefitted.

Finally, becoming more involved in the policy process as a manager was also very rewarding.  Because the Fraud Section has the exclusive mandate for FCPA prosecutions, we were able to formulate—and execute—policy decisions in a manner that, I believe, had a significant impact on corporate compliance programs and the global anti-corruption movement.   

You recently moved over to Morrison & Foerster. In which areas do you intend to focus and what are you looking forward to in private practice?

I am a partner in MoFo’s Securities Litigation, Enforcement and White-Collar Defense practice group.  Generally speaking, I intend to focus on all aspects of that group’s work, from compliance counseling, to internal investigations, to representing corporations and individuals before government regulators and at trial.  Given my extensive FCPA background, much of my work will be focused in the anti-corruption sphere.  In that regard, I am particularly excited about being reunited with two of my former FCPA Unit colleagues and friends, Chuck Duross and Amanda Aikman, at MoFo.  But I also intend to work in other areas in which I have experience, including health care fraud, defense procurement fraud, and export violations, in both the civil and criminal contexts.  And, as someone who still enjoys trial work, I intend to work on any type of trial when there is a need, whether that trial falls within my practice group or another practice area.

Overall, I am looking forward to bringing to bear the experiences and insights I gained during my decade as a federal prosecutor, including my six years as an FCPA prosecutor and supervisor, to help our clients navigate complex issues and to mitigate and avoid problems.  And I’m looking forward to doing all this with my new team.  MoFo has a well-earned reputation for collegiality and for working as one team across all of our offices worldwide to best serve our clients’ needs.  The sense of collegiality and of working together for a common purpose were two of the aspects of government service that I most enjoyed, and I am fortunate to have found a law firm that shares those values.

James Koukios can be reached at JKoukios@mofo.com

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, 2015

April 22, 2015

Austin City Limits and Asking Questions to Boost Your Compliance Program

AustinBill Arhos died recently. While his name is not a household word across the country, his progeny certainly is for he was the founder of the longest running live musical show on PBS television Austin City Limits. As was noted in his obituary in the New York Times (NYT) this show “introduced much of America to the sound of redneck rock and progressive country and prompted Austin, Tex., to proclaim itself the “Live Music Capital of the World.”” Indeed one can draw a straight line from Austin City Limits to Sixth Street to SXSW. Arhos began this journey by focusing on one question, “What was the most visible cultural product of Austin?” and to him the answer was Music.

Arhos’ question introduces today’s theme because it is often said that one of the key skills a person needs to be good leader is the skill of listening. However, in a recent article in Fast Company magazine, entitled “The man of many questions”. Brian Grazer and Charles Fishman wrote about a different skill they believe is a critical element to effective leadership. They believe “the right query is the key to success.” The article is a short piece about their upcoming book From a Curious Mind: The Secret to a Bigger Life. I found their article to have some interesting insights for the Chief Compliance Officer (CCO) or compliance practitioner.

Grazer is a well-known and successful Hollywood producer, involved with such movies as Splash, A Beautiful Mind and Cinderella Man. He believes that much of the success he has achieved is because he asks lots of questions. Indeed the authors write, “Questions are a great management tool.” This is because “Asking questions elicits information” and it also “creates the space for people to raise issues they are worried about that a boss, or colleagues, may not know about.” Further, by asking questions, you allow “people to tell a different story than the one you’re expecting.” Finally, and perhaps most significantly, they said, “Most important from my perspective, asking questions means people have to make their case for the way they want a decision to go.”

Getting your employees to not simply talk to you but tell you the truth about how they feel or what they may be thinking is a key skill for any leader. As a CCO, you may find this particularly difficult in far-flung reaches of an international company, which is subject to the Foreign Corrupt Practices Act (FCPA), UK Bribery Act or other anti-bribery/anti-corruption law. Whether you are performing a risk assessment or simply getting out of the corporate home office, you need to be able to engage employees across the globe and from a variety of cultures.

The authors suggest asking open-ended questions so you will not simply get a Yes/No answer. While the questions they discussed using related to Grazer’s work in the movie business, I found them a good starting point for any CCO or compliance practitioner, “What are you focused on? Why are you focused on that? What are you worried about? What is your plan?” By asking these or other questions, such as “What are you hoping for? What are you expecting? What’s the most important part of this for you?” as a leader, you can get much more engagement from the people with whom you work.

Say you are pursuing a high profit deal in a high-risk geographic area. You might want to sit down with the business unit person in charge of the project and ask him/her, what is your plan to sign this contract and execute it, consistent with your obligations within the company’s FCPA compliance program? As the authors’ note, “You’re doing two things just by asking the questions: You’re making it clear that she should have a plan, and you’re making it clear that she is in charge of that plan. The question itself implies both the responsibility for the problem and the authority to come up with the solution.” This type of approach allows those who so desire to step up, as “It’s a simple quality of human nature that people prefer to choose to do things rather than be ordered to do them.”

Equally important are the values you can transmit by asking questions. If you do have to fly to China or some other local office, you do not want to be seen as the US corporate executive coming to deliver some bad news or that costs need to be cut. By asking questions you can solicit ideas to help solve problems. The authors state, “Questions create both the authority in people to come up with ideas and take action and the responsibility for moving things forward. Questions create space for all kinds of ideas and the sparks to come up with those ideas. Most important, questions send a very clear message: We’re willing to listen, even to ideas or suggestions or problems we weren’t expecting.” The authors dispel the notion this is some Hollywood ‘touchy-feely’ management style by stating “This isn’t about being “warm’ or “friendly”.” Further showing curiosity by asking questions is not simply a “matter of style.”

Near the end of their articles the authors make clear that the need to ask questions goes both up and down. They state, “As valuable as questions are when you’re the boss, I think they are just as important in every other direction in the workplace. People should ask their bosses questions. I appreciate it when people ask me the same kind of open-ended questions that I so often ask.” If employees feel comfortable enough to ask these questions, it can “allow a boss to be clear about things that the boss might think are clear, but which often aren’t clear at all.” They also rather interestingly observed that if a person asks a question, “then they almost always listen to the answer. People are more likely to consider a piece of advice, or a flat-out instruction, if they’ve asked for it in the first place.”

Just as Arhos’ question asked over 40 years ago led to a cultural phenomenon; you too can use Grazer’s techniques to improve not only your leadership qualities in the compliance function but your organization’s compliance function as well. The reason that asking questions is so much better than simply giving orders is that you have a vast talented workforce you can tap into to help you do business in compliance. But the how of doing a business process that is, or should be, burned into your company can be facilitated by possibilities that are out there in your employees’ minds. To get at them you have to ask questions. The authors end their Fast Times article with the following two lines which sums up what you need to create as a leader, “But nobody is afraid to ask a question. Nobody is afraid to answer a question.”

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, 2015

April 21, 2015

The Petrobras Scandal and Corruption of Political Parties Under the FCPA

7K0A0075When does bribery and corruption move from a business issue to a political issue to a national issue? Why should US companies be held to the gold standard of anti-corruption laws? Should the US government even care if US companies engage in bribery of politicians and political parties outside the US? I pose these questions as we see some of these issues now being played out in real time in Brazil.

Earlier this month, a Wall Street Journal (WSJ) article by Rogerio Jelmayer and Jeffrey T. Lewis, entitled “Brazil Graft Probe Reaches Higher Up” said that “A widening investigation into alleged corruption at Brazil’s state-controlled oil company edged closer to President Dilma Rousseff on Wednesday when police arrested her ruling political party’s treasurer. The official, João Vaccari Neto, was charged with receiving “irregular donations” for the Workers’ Party from some suppliers to the oil company” [Petrobras]. Moreover, one cooperating witness, Pedro Barusco, “told a congressional hearing in March that he amassed nearly $100 million in bribes as a part of the alleged bribery schemes and the Workers’ Party may have received twice as much.”

But the corruption scandal appears to be much broader than simply one politician. Another WSJ article, by reporters Paulo Trevisani and Paul Kiernan, entitled “Brazil Attorney General Seeks Corruption Probe Approval”, said that the Brazilian Attorney General “has asked the Supreme Court for permission to proceed with investigations against an undisclosed number of politicians”. He asked for “28 probes involving 54 persons”. Interestingly, this part of the Brazilian corruption probe is separate and apart from the “team of prosecutors who have been working on the case from the southern Brazilian city of Curitba”. The reason is that under Brazilian law “special treatment is afforded to high-ranking authorities, whose cases my be heard by the Supreme Court.” This anomaly required “any evidence pointing to government officials or lawmakers had to be sent to” the Brazilian Attorney General.

As the corruption scandal continues to morph, allegations have reached the level of last year’s Brazilian Presidential election. Mary Anastasia O’Grady, also writing in the WSJ, in an article entitled “An Escalating Corruption Scandal Rocks Brazil”, said that interviewed defeated Presidential candidate Aécio Neves, head of the Social Democracy Party of Brazil, told her that he lost the election because of “organized crime”. This was not some dark mafia plot but came about from “alleged skimming operations at the government-owned oil company.” She went on to note, “Prosecutors allege that Petrobras contractors were permitted to pad their contracts and remit the excess as kickbacks to the oil company, which passed hundreds of millions of dollars to politician and, more importantly the PT.” The PT is the ruling party currently led by Brazilian President Rousseff.

It has not yet been reported that any US companies are under investigation by the Brazilian Attorney General for the bribing of politicians or a political party such as the President’s Workers’ Party. However, for any US companies that have been engaged in trying to influence elections in Brazil through campaign contributions, the Foreign Corrupt Practices Act (FCPA) specifically incorporates politicians, political parties and candidates for political offices as foreign government officials for purposes of the Act. In the 2012 FCPA Guidance it states, “The FCPA’s anti-bribery provisions apply to corrupt payments made to (1) “any foreign official”; (2) “any foreign political party or official thereof ”; (3) “any candidate for foreign political office”; or (4) any person, while knowing that all or a portion of the payment will be offered, given, or promised to an individual falling within one of these three categories. Although the statute distinguishes between a “foreign official,” “foreign political party or official thereof,” and “candidate for foreign political office,” the term “foreign official” in this guide generally refers to an individual falling within any of these three categories.”

Additionally, politicians and political parties are incorporated into the FCPA through the accounting provisions of the FCPA. As further stated in the FCPA Guidance, “Additionally, individuals and entities can be held directly civilly liable for falsifying an issuer’s books and records or for circumventing internal controls. Exchange Act Rule 13b2-1 provides: “No person shall, directly or indirectly, falsify or cause to be falsified, any book, record or account subject to [the books and records provision] of the Securities Exchange Act.” And Section 13(b)(5) of the Exchange Act (15 U.S.C. § 78m(b)(5)) provides that “[n]o person shall knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record, or account ….”. The Exchange Act defines “person” to include a “natural person, company, government, or political subdivision, agency, or instrumentality of a government.”

The most well known FCPA enforcement action involving bribes paid to politicians was the Halliburton/KBR enforcement action. For those of you who may have forgotten this case, which has the third highest FCPA fine of all-time, Halliburton subsidiary KBR admitted that a consortium which it led 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 TSKJ and consisted of subsidiaries of the following entities: KBR; Technip, a French company; ENI, an Italian company; and JGC, a Japanese company. There was also a corrupt agent involved in paying the bribes, Jeffrey Tesler and another Japanese company Marubeni Corporation.

BONNEY ISLAND SETTLEMENT BOX SCORE

Entity Fine, Penalty and Disgorgement of Profits (in $ millions)
Halliburton (KBR) $579
ENI $365
Technip $338
JGC $218
Marubeni Corp $50
Jeffery Tesler (the Bag Man) $149
Total $1,699

 

So for those of you keeping score at home, there has been, and could be fines, penalties and profit disgorgement of over $1.699 billion. This figure does not include the amount paid out by these corporations for attorneys’ fees, forensic costs and other professional fees, which can be only speculated about.

 The Petrobras scandal continues to morph and to grow way beyond the bounds of simple commercial bribery. One of the goals in the passage of the Act was to prevent US companies from illegally influencing foreign officials and foreign elections through the payments of bribes. The Petrobras scandal may well demonstrate to the world community how important it is to remember that now is certainly not the time to try and weaken either the FCPA or its enforcement going forward. If there is ever to be a truly level playing field in commerce across the globe, it will be by enforcement of anti-corruption laws such as the FCPA that makes it safe for US businesses to compete on the global stage and compete on the basis of quality, not bribe paid.

But the morphing of the Petrobras bribery scandal into the Brazilian political scene may also demonstrate how commercial bribery can work to corrupt a democratic political system. If the money paid from bribes for commercial contracts worked its way into the Brazilian election, this would be perversion of the democratic process. It is this commercial issue that demonstrates why businesses, particularly US businesses, have a role in the international fight against bribery and corruption. It also seems to me to be a straight line from commercial bribery to political corruption to the explosion of terrorism against such corruption. While the FCPA may not have been passed with this connection to terrorism in mind, it is certainly an important US government tool in that fight as well.

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, 2015

April 20, 2015

The Intersection of the FCPA, TI-CPI and Tax Appeals in Brazil

Three Way IntersectionThe Transparency International-Corruptions Perceptions Index (TI-CPI) is released each year in November. The TI-CPI rates Brazil as 69th out of 175 countries on its index, coming in with a score of 43 out of 100. I wonder if TI might consider an interim report this year on Brazil? As things keep going, more and more corruption is alleged to be a part of the everyday fabric of the country. While the Petrobras and related scandals have been well chronicled, the overall stench of corruption just keeps spreading and spreading.

Recently it was announced yet another set of investigations around corruption has begun. This time it involves the Brazilian Finance Ministry’s Administrative Council for Tax Appeal. In an article in the Wall Street Journal (WSJ), entitled “Brazil Probes New Bribery Allegations”, Paulo Trevisani reported that this is an “arbitration board that hears appeals from taxpayers who dispute how much they owe the [Brazilian] government.” The investigation would appear to be widespread as “Prosecutors said 74 companies and 24 individuals are under investigation.”

Interestingly not only is the Finance Ministry investigating the allegations but also the Brazilian internal revenue service, the Brazilian federal police and the Brazilian federal prosecutors office. In what would seem to indicate the inherent conflict of interest in the Finance Ministry investigating itself, Trevisani reported the “Finance Ministry said the alleged scheme wasn’t systematic but rather, involved “isolated acts” carried out by a small group of government tax officials. When prosecutors announced the investigation on March 26 they said that losses to the nation’s treasury totaled $6.1 billion over 15 years.” Oops.

While the entities and individuals under investigation have not been named, “a leading investigator on the case said companies under investigation include Ford Motor Brazil, a unit of Ford Motor Co.; JBS, the world’s largest meatpacker, the Brazilian unit of the Spanish bank Banco Santander SA; and Brazil’s second largest private-sector bank, Bradesco SA.” You may recall from an earlier blog post I noted that Brazil’s third largest state-owned bank Caixa Econômica Federal (Caixa) is also under investigation for corruption.

However, this new corruption scandal is the first time that non-Brazilian companies have come under investigation outside of the Petrobras scandal. The WSJ article noted, “Brazil’s tax system is among the most onerous and complex in the world. Penalties can be steep. That has fostered an environment where corruption can flourish, [un-named] experts say. “Taxes in Brazil are so high and complicated that it is easy for companies to get in trouble with the taxman,” the leading investigator told The Wall Street Journal. The investigator said frequent tax disputes created opportunities for ill-intentioned public servants to profit by helping firms circumvent red tape. Prosecutors say the probe began in 2013 after they received an anonymous letter describing details of the alleged scheme.”

An article in forbes.com, entitled “Ford On List Of Companies Suspected Of Brazilian Tax Fraud” by Kenneth Rapoza, went further than the WSJ article when it laid out the list of “companies are under investigation for taking part in various tax bribery schemes” and then listed the amounts they allegedly avoided paying. The Top Ten list is:

  • Santander: R$3.3 billion
  • Bradesco: R$2.7 billion
  • Ford: R$1.7 billion
  • Gerdau: R$1.2 billion
  • Light: R$929 million
  • Banco Safra: R$767 million
  • RBS: R$672 million
  • Camargo Correa: R$668 million
  • Mitsubishi: R$505 million
  • Banco Industrial: R$436 million

An article in businessinsider.com, entitled “Brazil uncovers multibillion-dollar tax fraud”, reported that this investigation, dubbed Operation Zeal, had uncovered that “the [tax] body managed to obtain tax appeals board rulings in the companies’ favor by either cutting penalties or waiving them altogether. In return, officials allegedly received bribes from some 70 companies believed to have benefited from the scheme. A written statement issued by Brazilian federal police stated “The investigations, begun in 2013, showed the organization acted within the body sponsoring private interests, seeking to influence and corrupt advisors with a view either to securing the cancellation or reduction of penalties from tax authorities”. Moreover, “Police said the scam could have netted the companies as much as 19 billion reais ($5.9 billion) but evidence uncovered so far amounts to around a third of that amount.” Finally, and perhaps most ominously, the article said, “Federal police organized crime chief Oslain Campos Santan said the total sums could end up being “as much” as that involved in the Petrobras scam”.

This new Brazilian corruption scandal recalls the Foreign Corrupt Practices Act (FCPA) enforcement action against the Houston-based Parker Drilling Company. According to the Department of Justice (DOJ) Press Release issued at the time of the announcement of the conclusion of the matter, the company was issued a tax assessment on its drilling rigs. The Press Release went on to state, “According to court documents, rather than pay the assessed fine, Parker Drilling contracted indirectly with an intermediary agent to resolve its customs issues. From January to May 2004, Parker Drilling transferred $1.25 million to the agent, who reported spending a portion of the money on various things including entertaining government officials. Emails in which the agent requested additional money from Parker Drilling referenced the agent’s interactions with Nigeria’s Ministry of Finance, State Security Service, and a delegation from the president’s office. Two senior executives within Parker Drilling at the time reviewed and approved the agent’s invoices, knowing that the invoices arbitrarily attributed portions of the money that Parker Drilling transferred to the agent to various fees and expenses. The agent succeeded in reducing Parker Drilling’s TI Panel fines from $3.8 million to just $750,000.”

So with all of the above that has been written about in the past few weeks, where do you think Brazil should be on the TI-CPI? While its rating of 43 out of 100 may not seem too low or perhaps more accurately too much perceived corruption, it may be time for a mid-year reassessment. Certainly if you are a Chief Compliance Officer (CCO) or compliance practitioner you may wish to perform your own reassessment. If you have any dealings with the Brazilian Finance Ministry’s Administrative Council for Tax Appeal, you need to perform an internal investigation starting today on all information you can find about the process and results. For if the results were extremely favorable the reason for the achievement may have violated both Brazilian law and 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, 2015

April 17, 2015

The Passing of Günter Grass and Compliance Week 2015 Is Near

Filed under: Compliance Week — tfoxlaw @ 12:01 am
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Gunter GrassGünter Grass died this week. The contradictions that made up post-war Germany were wrapped up in him as well as any other single person I know anything about. He was a Nobel Prize winner for literature, who, it was revealed late in his life, had been a member of the Waffen-SS during World War II. He was an anti-militarist, anti-nationalist and against German reunification, yet a big fan of Castro’s Cuba. Contractions indeed. Like most Americans, I was introduced to Grass through his seminal work The Tin Drum. It was as haunting a work as I had read up to that point in my life and one I can still remember reading to this day.

In the area of conference excellence around all things compliance, there is the upcoming Compliance Week 2015. While the conference has not had as many appearances as Gehrig’s long streak, this is the 10th annual event. As usual, Matt Kelly and his team over at Compliance Week have put together a star-studded and first-rate program for a wide variety of compliance practitioners. From the US government there is Margaret McGuire, Vice Chair of the Securities and Exchange Commission (SEC) Financial Reporting and Task Force, and Assistant Attorney General Leslie Caldwell. For export controls there will be representatives from the Department of Treasury and Department of Justice (DOJ) to bring you the latest on export control enforcement issues. Finally, both Laura Perkins from the DOJ and Kara Brockmeyer from the SEC will be there to discuss Foreign Corrupt Practices Act (FCPA) enforcement from the perspectives of their agencies.

As usual there will be many sessions aimed at the compliance practitioner. Are you interested in developing a strong corporate culture? If so there will be sessions to discuss how to do so from working with your management to have the right culture to building ethics and compliance programs that amplify those values rather than undermine them. Another often-discussed topic is compliance leadership. There are several sessions focusing on this topics as well as moving compliance officers into the new era of corporate compliance, CCO 2.0.

If there are specific geographic areas that you are concerned about there will be conversations about Russia, Central Asia, the Middle East, Africa, China and Latin America. In these sessions, held in smaller groups to facilitate conversations and questions, there will be discussions that focus on ethics and compliance risks in geographic hotspots around the world. Wondering which regulators matter most in a specific area? What training tactics work best for local workforces? Which cultural differences can cause the biggest risks or mis-steps? All those questions and more are prime fodder for these sessions.

Cyber security is becoming more prominent. In addition to the sessions where government speakers will talk from their perspectives, there will also be sessions aimed at the corporate response. Sarbanes-Oxley (SOX) reporting and money laundering issues will be discussed. Finally, although it may not seem intuitive for compliance professionals but I would urge you to attend the session on the new revenue recognition standards. Even I could understand the prior standards and lawyers and compliance professionals need to have handle on what the business folks need to do to have their sales properly recognized in books and records.

There will be several sessions dealing with training. An interesting one is entitled “Game On: 4th Generation Ethics and Compliance Education” and will provide you with information on best practices and how to align roles, risks, training priorities strategically and to make the most efficient use of limited training time while protecting the organization. The discussion will be framed around statistics that you can use to drive training decisions and true program effectiveness. Another interesting angle will be through the prism of social media in a session which will consider the new risks social media brings, and the best ways to square its advances in communications and IT with your existing compliance program, whether that’s through new policies, new technology, or a mix of both.

There will be several of sessions dealing with investigations. One I am looking forward to attending is entitled “Compliance Officer’s Role in Investigations and Discipline”, where we will focus on how you can run an effective investigation in some of the most difficult spots in the world, where local law may conflict with what you need to do. The distinguished panel will explore local stumbling blocks to your investigation, and offer ideas on how to complete the job nonetheless. In the era of ­pre-taliation claims by the SEC, discipline is becoming a trickier subject for Chief Compliance Officers (CCOs).

The FCPA is always at the forefront of this conference and this year’s event is no different. You can learn from Leslie Caldwell about overall enforcement trends and from other government representatives on some of the issues specific to their agencies and departments. Lastly, I will be leading a conversation on the FCPA enforcement trends we have seen in 2015 to date.

As usual, Matt Kelly and his team have put together a fantastic event. But the greatest value might be for you to mingle and meet with some of the top compliance practitioners and thought leaders in the country over three days in May. There will be plenty of time for socializing and meeting in the spacious breakfast area, on refreshment breaks or in the always-great Tuesday evening cocktail party.

I have been authorized to offer readers of this blog, who register for Compliance Week, a discount off of the standard rate. To register, please use this link and enter discount code CW15_FCPAFOX (case sensitive) to receive the special pricing. You can read more on the event by going to the following website: http://conference.complianceweek.com.

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, 2015

April 16, 2015

Consumer Protection and Your Business

Filed under: Compliance,compliance programs,KYC — tfoxlaw @ 12:01 am

IMG_1145Ed. Note-today we have a guest post from Karen Schirmer, a Senior Advisor at Chartwell.

You’ve been hearing for a while now that the regulatory environment has been changing, and you follow the Consumer Financial Protection Bureau (“CFPB”) alerts to see if this new regulator will be looking at your type of business sometime in the near future. But you haven’t done anything new to prepare for greater consumer protection scrutiny because you’re too busy preparing for the upcoming state or bank examination. If this describes your organization, we understand that being proactive with limited funds and resources can be difficult. Nonetheless, consumer protection laws exist on the state and federal level, and states, banks, and other regulators are all taking a broader approach to their reviews. In this article, we will provide you with simple best business recommendations on how to get started with your consumer protection program.

Examine your collateral and marketing for consumer transparency

The most frequently cited violations of consumer protections have been unfair, deceptive, or abusive acts or practices (“UDAAP”) due to the lack of transparency of fees, unclear terms and conditions, and misleading statements deemed harmful to consumers. It is important that the consumer understands what the product or service is and the costs and terms of the products or services being purchased.   This includes all fees and fee limits, including inactivity, dormancy or service fees. Marketing, Packaging, Terms and Conditions, and overall Website language are places that have high risk of creating confusion for the consumer. These are good places to start your project review. Focus on the wording of your marketing and other collateral: is it in an active voice, using strong verbs and the simplest tense possible? Are explanations in everyday words, rather than excessive acronyms, abbreviations, or multiple negatives? Are several qualifiers used in explanations? If so, see if those explanations may be made more direct. Short, concise sentences are best. Look for consistency in terminology – if a transaction fee is the same as an activity fee, pick one term (this may be guided by regulation), define it, and use it throughout.

When evaluating either new or existing financial services products for consumer transparency, your standard of proof should be low, such as “likelihood” of being misled. A reasonable consumer’s overall or “net” impression counts, and omissions of key facts can lead a consumer to the wrong overall impression.

The format and proximity of material information is very important. Consumer disclosures and other key information, such as product function, terms and conditions, privacy and complaint notices should be in at least 8pt font (your product may need to follow a particular font requirement, per regulation) and whenever possible, clearly described on the first or second page, and linked in multiple places. It is prudent to identify any structural aspects of a product or terms and conditions that a consumer might not understand or would find surprising and add highlights or clarifications as appropriate.

Engage your privacy and data security teams 

With several high-profile data security breaches occurring in 2014, consumer confidence and trust in many financial products has eroded, and spending habits have changed accordingly.

The message is that companies offering financial products and services should look into strengthening their security infrastructure with data loss prevention, network security, encryption, and strong authentication and defensive measures. Other internal best practices include having a detailed data security policy that is communicated through training to employees and 3rd party stakeholders, and assigning controls and control owners to test security measures on a regular basis.

Privacy and transparency are interrelated. Companies must provide users with clear and complete information regarding any collection, use and disclosure of the collected data. Further, internal departments that have access to or may want to use the data must receive training on the limited uses for and protection of the data.

Enhance the consumer experience 

The consumer experience starts with the presentation of a product choice or choices, and the consumer is able to select options in an informed manner. Lack of understanding on the part of the consumer of the risks, costs or conditions of the product or service often leads to complaints.

Once the consumer has signed up for a product or service, it is important that the consumer may access his/her account information easily. The consumer should have ample free access to account information.

A consumer’s experience with a product is directly impacted by the quality of a company’s customer service function. The telephone number(s) for complaints of various types should displayed in multiple places (i.e. websites, receipts, postings, Terms and Conditions).

Effective and timely resolutions of complaints is critical in an environment where consumer protection gets strong attention from state Attorney General’s offices and Federal Agencies. Companies should have policies and procedures that include the following:

  1. A policy statement in support of consumer protection;
  2. An ongoing process of identifying consumer protection laws;
  3. A compliance management system to track the applicable requirements of the laws on a per business or per product basis;
  4. A written process specifically for complaints that raise compliance issues;
  5. A written process for using complaint data to fix practices and take corrective action; and
  6. A records-management process that includes the maintenance of complaint records, litigation, investigation, policies, procedures and reports of complaints resulting in operational changes. Responses and timeframes are tracked

Consumer protection is more than just providing disclosures. Your consumer protection review can be done in layers. Seek a commitment from senior management and/or Board of Directors, implement strategic projects such as the ones described above, add in training and on-going monitoring and you will be well on your way to having strong consumer protection compliance program.

Karen Schirmer has 12 years of experience directing Compliance teams, and drafting programs that identify requirements, risks, controls and methods of control validations. During her work as Compliance Director for Western Union, Inc. and Integrated Payments Systems Inc., she conducted independent reviews, and coordinated regulatory examinations.  As part of the First Data leadership team for 10 years, she drafted and directed the operations of the 2012-2013 Global Corporate Compliance Program.  For more information, please contact Karen at karenschirmer@chartwellcompliance.com.

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, her affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication.

April 15, 2015

Five Step Process for Transaction and Continuous Controls Monitoring

Five Step ProcessMost Chief Compliance Officers (CCOs) and compliance practitioners understand the need for transaction monitoring. Whether it be as a part of your overall monitoring of third parties, employees, or to test the overall effectiveness of internal controls and compliance, transaction monitoring is clearly a part of a best practices compliance program. Further, while most compliance practitioners are aware of the tools which can be applied to transaction monitoring, they may not be as aware of how to actually engage in the process. Put another way, how do you develop a methodology for building a transactional monitoring process that yields sustainable, repeatable results?

I recently put that question to one of the leaders in the field, Joe Oringel, co-founder and principal at Visual Risk IQ. He explained to me that their firm has dissected data analytics and transaction monitoring into a five-step process they call QuickStart, which facilitates applying the process iteratively across a two to four month time frame. These iterations allow for, and reinforce the methodology’s repeated and practical application and reapplication. The five steps are (1) Brainstorm, (2) Acquire and Map Data, (3) Write Queries, (4) Analyze and Report, and (5) Refine and Sustain.

Brainstorm

Under this step, the transactional monitoring specialist, subject matter expert (SME), such as one on the Foreign Corrupt Practices Act (FCPA) or other anti-corruption law, and the compliance team members sit down and go through a multi-item list to better understand the objectives and set the process going forward. The brainstorming session will include planning the monitoring objectives and understanding the data sources available to the team. Understanding relationships between the monitoring objectives and data sources is essential to the monitoring process. During brainstorming, the company’s risk profile and its existing internal controls should be reviewed and discussed. Finally, there should be a selection of the transaction monitoring queries and a prioritization thereon. This initial meeting should include company representatives from a variety of disciplines including compliance, audit, IT, legal and finance departments, sales and business development may also need to be considered for this initial brainstorming session.

While the rest of the steps may seem self-evident in any transaction monitoring process, it is the brainstorming step which sets the Visual Risk IQ approach apart. This is because business knowledge is critical to sustaining and improving the transaction monitoring process. And because the process is iterative, periodic meetings to further understand the business pulse allow the most useful data to be monitored through the system. 

Acquire and Map Data

The second step is to obtain the data. There may be a need to discuss security considerations, whether or how to redact or mask sensitive data, and ensure files are viewable only by team members with a “need to know”. Balancing, which consists of comparing the number of records, checksums, and controls totals between the source file (as computed by the file export) and then re-calculated number of records, checksums, and control totals (as computed by a file import utility). Balancing is performed to make sure that no records are dropped or somehow altered, and that the files have integrity. Somewhat related is making sure that the version of the files used is the “right” one. For example if you are required to obtain year-end data year-end close could be weeks after the closing entries have been actually recorded, depending on the departments engaged in the year end processes.

Types of systems of record could include Enterprise Resource Planning (ERP) data from multiple transaction processing systems, including statistics on numbers and locations of vendors, brokers and agents. You may also want to consider watch lists from organizations such as the Office of Foreign Asset Control (OFAC), the Transparency International – Corruption Perceptions Index (TI-CPI), lists of Politically Exposed Persons (PEPs) or other public data source information. Some of the data sources include information from your vendor master file, general ledger journals, payment data from accounts payable, P-cards or your travel and entertainment system(s). You should also consider sales data and contract awards, as correlation between spending and sales as these may be significant. Finally, do not forget external data sources such as your third party transactional data. All data should initially be secured and then transmitted to the transaction monitoring tool. Of course you need to take care that your transaction monitoring tool understands and properly maps this data in the form that is submitted.

Write Queries

This is where the FCPA SME brings expertise and competence to assist in designing the specific queries to include in the transaction monitoring process. It could be that you wish to focus on the billing of your third parties; your employee spends on gifts, travel and entertainment or even petty cash outlays. From the initial results that you receive back you can then refine your queries and filter your criteria going forward. Some of the queries could include the following:

  • Business courtesies to foreign officials;
  • Payments to brokers or consultants;
  • Payments to service intermediaries;
  • Payments to vendors in high risk markets;
  • Round dollar disbursements;
  • Political contributions or charitable donations; and
  • Facilitation payments.

Analyze and Report

In this process step, you are now ready to begin substantive review and any needed research of potential exceptions and reporting results. Evaluating the number of potential exceptions and modifying queries to yield a meaningful yet manageable number of potential exceptions going forward is critical to long-term success. You should prioritize your initial results by size, age and source of potential exception. Next you should perform a root cause analysis of what you might have uncovered. Finally at this step you can prioritize the data for further review through a forensic review. An example might be if you look at duplicate payments or vendor to employee conflicts. Through such an analysis you determine if there were incomplete vendor records, whether duplicate payments were made and were such payments within your contracts terms and conditions.

Refine and Sustain

This is the all-important remediation step. You should use your root cause analysis and any audit information to recalibrate your compliance regime as required. At this step you should also apply the lessons you have learned for your next steps going forward. You should refine, through addition or deletion of your input files, thresholds for specific queries, or other query refinements. For example, if you have set your dollar limits so low that too many potential exceptions resulted for a thoughtful review, you might raise your dollar threshold for monitoring. Conversely if your selected amount was so low that it did not generate sufficient transactions, you could lower your parameter limits. Finally, you can use this step to determine the frequency of your ongoing monitoring.

Oringel concluded by emphasizing the iterative nature of this process. If you can establish your extraction and mapping rules, using common data models within your organization, you can use them to generate risk and performance checks going forward. Finally, through thoughtful use of transaction monitoring parameters, you can create metrics that you can internally benchmark your compliance regime against over time to show any regulators who might come knocking.

For further information on this process, contact Joe Oringel at Joe.Oringel@VisualRiskIQ.com

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, 2015

April 14, 2015

Lincoln Assassinated and HSBC’s Continued Self-Inflicted Woes

Filed under: Anti-Money Laundering,Compliance,compliance programs,HSBC — tfoxlaw @ 12:01 am

Lincoln AssassinationToday is the 150th anniversary of the first successful Presidential assassination attempt. It was on this day in 1865 that John Wilkes Booth shot President Abraham Lincoln at Ford’s Theater in Washington DC. Booth was not a lone gunman but led a group of Confederate sympathizers who attacked or planned to attack leading US government officials. Co-conspirator Lewis T. Powell burst into Secretary of State Seward’s home, repeatedly stabbing him and seriously wounding him and three others, while George A. Atzerodt, assigned to kill Vice President Johnson, lost his nerve and fled.

HSBC continues to stay in the news, unfortunately largely for the wrong reasons in the realm of anti-corruption, facilitating tax evasion and money laundering. In an article in the New York Times (NYT), entitled “HSBC Is Deemed Slow To Carry Out Changes”, reporters Jessica Silver-Greenberg and Ben Protess noted that earlier this month, federal prosecutors made a quarterly count filing as a part of their report on the bank’s Deferred Prosecution Agreement (DPA) “faulting the bank for weaknesses in spotting suspicious transactions and for enabling a corporate culture resistant to change.”

The filing itself was based upon the corporate monitor’s Michael Cherkasky’s “confidential 1000 page report submitted to prosecutors in January. That report, people briefed on the matter said, offered a more scathing assessment of the bank’s progress.” The monitor has been “evaluating HSBC’s global operations for cracks in its money-laundering controls. As such, he has reviewed the bank’s various business lines, including its sprawling operations in China.”

In the technology area, the filing noted the “bank’s technology systems, despite some improvement, still suffer from “fragmentation” and “lack of connectivity” the Justice Department filing said. With its creaky framework, the filing said, “the collection and analysis” of data could suffer.” This lack of technology to both check on customers or potential customers and then review the transactions they might engage in were a prime deficiency noted in the original 2012 enforcement action where “prosecutors found that HSBC facilitated money laundering on behalf of Mexican drug cartels, allowing at least $881 million in tainted money to course through its United States branches.”

But perhaps the more troubling finding in the prosecutors filing was around the culture at the bank. There was not specific criticism of the tone at the top of the bank or with senior management but with the employees’ attitudes towards meeting the obligations under the DPA. The filing said that “Change at the bank was met with resistance” providing at least one example; “When presented with negative findings from auditors, the filing said, managers at the bank’s United States unit for global banking and markets “inappropriately pushed back.” Ultimately, the resistance caused an internal audit report “to be more favorable to the business than it would have been otherwise.”

Interestingly HSBC itself pushed back against the government’s filing, at least in the press. The article noted that “In response to the filing, Stuart Levey, the bank’s chief legal officer said, “The Justice Department recognized in its letter that HSBC has made material progress toward meeting the most stringent compliance standards imposed to date upon a global financial institution.” Levey also said that “the bank was continuing to meet all its obligations under the deferred-prosecution-agreement and that its leaders “are making progress toward that objective and appreciate the monitor’s ongoing work.””

Monitor Cherkasky’s report and the Department of Justice (DOJ) filing bring up a couple of interesting points for speculation. The first is the continuing dialogue and debate on the effectiveness of DPAs and whether they actually do achieve their stated goals of changing corporate culture and behavior. The NYT article said that the DOJ filing, which came under the name of the President’s Attorney General-designee, as head of the US Prosecutor’s office, comes “at a time when prosecutors are grappling with repeat offenders on Wall Street”. Moreover, “the filing underscores the Justice Department’s efforts to stem the pattern of corporate recidivism.” Just how hard should the DOJ come down on HSBC? There are other more aggressive steps the DOJ could take, even at this point. These include “extending the five-year deferred-prosecution agreement or singling out culpable employees by name.” Indeed the article cited to a recent speech by the head of the DOJ’s criminal division, Deputy Assistant Attorney General Leslie Caldwell, where she said, “the government has “a range of tools” to deal with corporate recidivism, including extending the term of a deferred-prosecution agreement while prosecutors investigate accusations of new criminal conduct.”

How about tearing up the DPA and simply criminally prosecuting the bank on the facts it admitted to in the DPA? Caldwell also spoke to that possibility when she said in the same speech, “Make no mistake: The criminal division will not hesitate to tear up a D.P.A. or N.P.A and file criminal charges where such action is appropriate and proportional to the breach.” Since parties are required to agree to facts in any DPA or Non-Prosecution Agreement (NPA) it would seem that tearing up those settlement documents and then prosecuting those companies on the underlying facts would be a relatively straightforward matter.

The other party in this debate is the Attorney General-nominee herself. While at this point it is not clear if the GOP majority will ever let her nomination come up for a vote before the full Senate, what if the Senate Judiciary Committee decides to reopen the hearings on this issue and then shoehorn it into the larger ongoing academic and FCPA Inc. debate on DPAs (and NPAs and other settlement tools). What if the FCPA testified on the “Façade of FCPA Enforcement”? What if Ted Cruz came in to ask why the DOJ is even bothering to prosecute the British banking giant?

At the time of its settlement in 2012, the HSBC fine was the largest for any bank involving money laundering. The monitor’s report and DOJ court filing demonstrate that the settlement is still controversial and the conduct engaged in by the bank many years ago may well continue to resonate up to this day and well into the future.

But the negative news for HSBC did not end with the filing of the DOJ report. As reported in the Financial Times (FT), in an article entitled “French magistrates open formal criminal probe into HSBC”, Emma Dunkley wrote that the parent entity of the bank, HSBC Holdings, “has been placed under criminal investigation by French authorities and made to post €1bn bail over allegations that its Swiss private banking arm helped clients avoid taxes.” This is separate and apart from the investigations into the company’s Swiss banking unit, which has been indicted or is under investigation “over tax evasion allegations in several other countries, including the US, Belgium and Argentina.”

In another article in the NYT, entitled “HSBC Facing Criminal Investigation in French Tax Case, Chad Bray reported that the bank apologized after released documents “showed that its employees had reassured clients that the lender would not disclose details of their accounts to the tax authorities of their home countries and discussed options to avoid paying taxes on those assets. The bank has acknowledged previous “conduct and compliance failures” in its Swiss business and has said that it has overhauled its private banking business and reduced its client base in Switzerland by 70 percent since its peak.”

The woes of HSBC continue and indeed seem to be increasing. With the fallout from the monitor’s report and other ongoing investigations the bank may be in danger of having its DPA revoked. While HSBC is not the only poster child for Banks Behaving Badly it may find itself as the first bank to have its DPA torn up and either the entity or responsible individuals criminally prosecuted for recidivist behavior.

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, 2015

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