FCPA Compliance and Ethics Blog

November 24, 2009

RISK-BASED DUE DILIGENCE FOR SUPPLY CHAIN VENDORS UNDER THE FCPA

Quick, as the Compliance Professional within your organization, which department or group of your company spends the most money annually? Did Supply Chain immediately come to mind? Probably not. Now just as quickly, how much of your compliance efforts are focused on the Supply Chain within your organization? Other than perhaps financial due diligence, such as through Dun & Bradstreet or quality control through your QHSE group, the Supply Chain probably does not command your Compliance Department attention as do other types of third party business partners such as agents, distributors and joint venture partners. This may be coming to an end as most Compliance Professionals recognize that third parties which supply goods or services to a company should be scrutinized similarly to other third party business partners.
There are several methods that could be used to assess risk in the area of supply chain and vendors. The approach suggested by the UK’s Financial Services Authority (FSA) in its settlement of the enforcement action against the insurance giant AON would refer “to an internationally accepted corruption perceptions index” such as is available through Transparency International or other recognized authority. The approach suggested by the Department of Justice, in Release Opinion 08-02 would provide categories of “High Risk, Medium Risk and Low Risk”. Finally, writing in the FCPABlog, Scott Moritz of Daylight Forensic & Advisory LLC has suggested an approach that incorporates a variety of risk-assessment tools, including, “the strategic use of information technology, tracking and sorting the critical elements”.
This commentary proposes an approach which would incorporate all three of the above cited analogous compliance areas into one risk-based assessment program for supply chain vendors. Based upon the assessed risk, an appropriate level of due diligence would then be required. The categories suggested are as follows:
1. High Risk Suppliers;
2. Low Risk Suppliers;
3. Nominal Risk Suppliers; and
4. Suppliers of General Goods and Products.
A. High-Risk Suppliers
A High-Risk Supplier is defined as a supplier which presents a higher level of compliance risk because of the presence of one or more of the following factors:
1. It is based in or supplies goods/services from a high risk country;
2. It has a reputation in the business community for questionable business practices or ethics; or
3. It has been convicted of, or is alleged to have been involved in, illegal conduct and has failed to undertake effective remedial actions.
B. Low-Risk Suppliers
A Low-Risk Supplier is defined as an individual or private entity located in a Low-Risk Country which:
1. Supplies goods or services in a Low-Risk Country;
2. Is based in a low risk country where the goods or services are delivered, it has no involvement with any foreign government, government entity, or Government Official; or
3. Is subject to the US FCPA and/or Sarbanes-Oxley compliance.
C. Minimal-Risk Suppliers
A Minimal-Risk Supplier is an individual or entity which provides goods or services that are non-specific to a particular job or assignment and the value of each transaction is USD $10,000 or less. These types of vendors include office and industrial suppliers, equipment leasing companies and such entities which supply such routinely used services.
D. Suppliers of General Goods and Products
A Supplier of General Goods and Products is an individual or entity which provides goods or services that are widely available to the general public and do not fall under the definition of Minimal-Risk Supplier. These types of vendors include transportation, food services and educational services providers.

November 9, 2009

When You Do Know What You Don’t (Want to) Know-Frederick Bourke and Conscious Avoidance

Filed under: FCPA — tfoxlaw @ 9:23 pm
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The Legislative History of the Foreign Corrupt Practices Act (FCPA) makes clear that Congress intended that the so-called “head-in-the-sand” defense – also described as “conscious disregard”, “willful blindness” or “deliberate ignorance” – should be covered so that company officials could not take refuge from the Act’s prohibitions by their unwarranted obliviousness to any action (or inaction), language or other “signaling device” that should reasonably alert them of the “high probability” of an FCPA violation.

In his recently denied Motion for New Trial, Frederick Bourke argued, among other things, that the jury instructions were wrong in a number of ways, including the mens rea element, the local law defense, a good-faith defense, and his possible conviction based on negligent acts.

As reported in the FCPA Blog, the prosecutors at trial contended that Bourke had “stuck his head in the sand”. Even if Bourke did not affirmatively know that bribes were being paid, he was aware of a high probability such action was occurring and he consciously and intentionally avoided confirming this fact. In the jury charge, the Court explained this “conscious avoidance” could be equated to actual knowledge under the FCPA.

In his post-trial motion, Bourke argued that the trial judge, US District Judge Shira Scheindlin, had erred simply because he had “not tried hard enough to learn the truth”. However, test was not Bourke’s actual knowledge of the payment of bribes, but Bourke’s efforts to avoid acquiring that actual knowledge. “The conscious avoidance doctrine provides that a defendant’s knowledge of a fact required to prove the defendant’s guilt may be found when the jury is persuaded that the defendant consciously avoided learning that fact while aware of high probability of its existence”, she said, quoting United States v. Svoboda, 347 F.3d 471, 477 (2d Cir. 2003).

The trial judge went on to state “In addition, the FCPA explicitly permits a finding of knowledge on a conscious avoidance theory. It provides that ‘[w]hen knowledge of the existence of a particular circumstance is required for an offense, such knowledge is established if a person is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist.’ 15 U.S.C. § 78dd-2(h)(3)(B). Because the defendant must be found to possess the same intent as that required for the substantive offense, the conscious avoidance instruction was particularly appropriate in this case”.

The successful prosecution of Frederick Bourke is a significant expansion of theories of prosecution under the FCPA. While the Bourke case involved an individual and his investment in one transaction, the red-flags that were (or should have been) raised are similar to those which a US company doing business overseas must investigate and evaluate in any transaction. All transactions must be thoroughly investigated, evaluated and reviewed on an ongoing basis to try and ensure full FCPA compliance.

November 2, 2009

When the Going Gets Tough

Filed under: FCPA — tfoxlaw @ 3:47 pm
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For those who grew up playing high school football in Texas, one phrase was drilled into our heads, “When the going gets tough…the tough get going”. How valid is this truism for your company and its internal investigations? Put another way, when an ethics and compliance incident occurs does your company not only allow but encourage a thorough investigation, wherever that might lead OR does the CEO, who says all the right things push back by allowing the recalcitrant employee to walk away from misconduct with a package or even a promotion.

The goal of an ethics and compliance internal investigations should not lose sight of the fundamental goals of both detecting and preventing misconduct AND supporting a culture of integrity and accountability that is fundamental to the success of any compliance and ethics program. The true test of an effective ethics program will when such a situation arises and a CEO must have the political will to make the difficult decisions. Internal investigations are where “the tough get going” in ethics and compliance. This is the area in which a company demonstrates what it really thinks about accountability because all employees are watching. An ethics and compliance investigation must look objectively at all facts in the case and follow them where they lead. The role of such an investigation is to detect and prevent wrongdoing and to drive and support a culture of integrity/accountability.

In this current economic climate there is enhanced sensitivity to cost of investigations in dollars and time. But for any successful ethics and compliance program to be meaningful, it must gain and hold the support of the company’s business operation. There must be clearly delineated goals and methods of such an investigation. The company must then follow-up on the results wherever they may lead. If termination is required, then this is the time when the “tough must get going”…

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