Lanny Breuer at Compliance Week

Assistant Attorney General for the Criminal Division of the U.S. Department of Justice (DOJ), Lanny Breuer gave the final day’s keynote speech at the Compliance Week 2010 Conference. Many of his remarks were directed at the ethics and compliance professionals who attended the event. He confirmed that the Obama Administration is committed to combating financial fraud, particularly in the area of overseas bribery and corruption as prohibited by the Foreign Corrupt Practices Act (FCPA). He used a quote from Attorney General Holder in emphasizing this point, that bribery “is a scourge on civil society.”

He stated that tools which had been previously used to combat organized crime would now be employed in the fight against white collar crime, including both wiretaps and sting operations as were used against the gun manufacturing industry in the operations which culminated in the arrests of 22 individuals in Las Vegas in January of this year. He also discussed that many foreign governments had entered into collaboration agreements to facilitate cross-border investigations and enforcement actions.

Breuer stated that one of the goals of the DOJ is to “charge individuals” as a strategy to deter corporate conduct. Further, holding individuals accountable is essential and will also deter illegal corporate conduct which results in violations of the FCPA. One of the more startling statistics cited by Breuer was the number of individual prosecutions pursued by the DOJ in the years 2004-2009. Since 2004, 84 individuals have been charged with FCPA violations. However 46 of those individuals were charged in 2009 so over ½ were charged in the last year. Indeed there have been 22 individuals charged already this year in the gun industry sting case so the facts would seem to bear out his statements. (For prior post on gun industry sting case, see here).

After emphasizing that the DOJ will continue to hold individuals accountable under the FCPA, Breuer turned to some of the things that he considered key elements of a compliance program. He began by listing a couple of references as benchmarks and they were the US Sentencing Guidelines and the OECD Good Practice Guidance for Anti-Bribery Compliance Programs. He then delineated the following elements: Tone at the Top; a compliance program which not only punishes compliance violations but also rewards good ethical behavior in a corporation; a strong whistle-blower program (and protection) through a hotline or other appropriate mechanism; and significant and direct reporting by the compliance officer to the Board. He also stated that the DOJ wants to know about not only your company, but also the companies which your may be doing business with; both in the form of third party foreign business partners and customers. He concluded by emphasizing that an effective compliance program is not static but dynamic, adapting to meet new and additional compliance challenges and subject to periodic reviews and appraisals by outside experts.

Breuer stressed the importance of coming to the DOJ rather than the DOJ coming to you, when a potential FCPA violation was discovered. The benefits to a company can be significant if a company comes forward AND fully cooperates with the DOJ. Breuer stated that if a company does so it will receive meaningful credit. He cited two examples where the penalty assessed was significantly less than the range suggested under the US Sentencing Guidelines. Breuer cited two examples. First in the Siemens’ case, the fine which could have been levied, based upon the conduct was between $1.35BN to $2.75BN and final fine levied by the DOJ was $450MM (the total fine paid to the US and German governments was $1.6BN). The second example was the fine paid by Helmerich and Payne, that of $1MM. This was 1/3 of the total fine which could have been levied based upon the US Sentencing Guidelines.

Lastly Breuer noted that it is his position that a company should come to the DOJ when it initially makes the discovery of a potential FCPA violation, rather than doing so after it conducts its investigation. This should be done for a couple of reasons. Initially Breuer remarked that the DOJ can provide guidance on the issues that it wants investigated by the company. This may prevent the company from investigating an issue that the DOJ does not deem necessary. Conversely the DOJ may suggest areas which it wants investigated that the company may not have considered. More importantly, such early notification allows the company involved to have a constructive dialogue with the DOJ and allows the DOJ to become a partner with the company in the investigative and remediation process.

Breuer took several questions from the audience. One of his more interesting responses was regarding facilitation payments and whether the US was moving towards the OECD/UK Bribery Act model of not allowing such payments. He responded that it was a question which needed consideration as compliance standards are evolving on a world wide basis. However as of this date, Breuer was not aware of any proposed change in the FCPA on this issue but that it may be visited in the not too distant future. (For a comparison of the FCPA and Bribery Act, see here).

The talk and Q&A by Breuer was well received by the audience and provided concrete guidance in several areas relating to FCPA compliance policies and issues.

For a copy of the text of Breuer’s remarks, click here.

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

© Thomas R. Fox, 2010

FCPA Red Flags, Hewlett-Packard and Big Papi

As most readers of this blog know, the author is an avid baseball fan. So it was not without some small interest when a term most often associated with the Foreign Corrupt Practices Act (FCPA) compliance world was used on ESPN’s Baseball Tonight to describe a hitter’s batting characteristics. Recently, commentator and former big league manager, Buck Showalter discussed the current batting slump of Big Papi, David Ortiz, by noting that his inability to hit the off-speed was a Red Flag for what is really ailing him, decreased bat speed. Showalter explained that the reason Big Papi’s failure to hit a curve ball was a Red Flag which indicates a bigger problem; Ortiz has to amp up to hit a fastball so much now that he is susceptible to being quite easily fooled by an off-speed pitch.

In the FCPA compliance world a Red Flag can also be equally indicative of a larger problem. As reported in The Russia Monitor on May 4, 2010, high-level executives at a Hewlett-Packard (HP) subsidiary made payments, through agents, to the Russian Prosecutor General’s office in order to obtain the contract to supply computers to that office. There was a complicated financing scheme used to route payments to offshore accounts beneficially owned or controlled by unnamed Russian officials; funneling the suspected bribes through a network of shell companies and accounts in places including Britain, Austria, Switzerland, the British Virgin Islands, Belize, New Zealand, Latvia, Lithuania, and the US states of Delaware and Wyoming. The bribes were paid through three German agents, who submitted fake invoices for non-existent sales and then paid the money on as bribes to unnamed Russian governmental officials.

On April 15, 2010, the WSJ reported that three middlemen are alleged to have paid invoices; using funds provided by HP for equipment never purchased, to shell companies with bank accounts in Latvia, Lithuania, Austria, Switzerland and Belize. In return, the suspected middlemen allegedly received commissions totaling US$700,000, according to court documents. German authorities reported the investigation, which started in 2007, when a German tax auditor discovered bank records showing that between 2004 and 2006, a HP subsidiary paid €22 million into the account of ProSoft Krippner GmbH, a small computer-hardware company in Leipzig. The records indicated the payment was made for services performed in Moscow. It was the size of the payment to ProSoft that caught the tax auditor’s attention and he red-flagged the matter for transfer to a special prosecution team in Dresden who handle major corruption cases.

To top it all off, at least one witness has said that the above transaction was internally approved by HP through its then existing contract approval process. In the April 15, 2010, WSJ article, Mr. Dieter Brunner, a bookkeeper who is a witness in the probe, said in an interview that he was surprised when, as a temporary employee of HP, he first saw an invoice from an agent in 2004. “It didn’t make sense,” because there was no apparent reason for HP to pay such big sums to accounts controlled by small-businesses such as ProSoft Krippner, Mr. Brunner said. Mr. Brunner then proceeded to say he processed the transactions anyway because he was the most junior employee handling the file, “I assumed the deal was OK, because senior officials also signed off on the paperwork”.

Just how many Red Flags are raised by the above?

• Offshore Companies

In a white paper entitled “Grey Practices in the Russian Business Environment” Control Risks reviewed what it viewed as some of the more routine “day-to-day schemes that erode the integrity of transactions” in Russia. One of the main tactics utilized to disguise the principal who receives a bribe is through the use of offshore companies, usually located in ‘exotic’ locations as per the countries listed in the diagram above, to take advantage of weak disclosure requirements to conceal beneficial ownership. Any monies paid by HP to an agent, which were then sent to an offshore company, should have been flagged for further inquiry.

• Small Sized Agents

As noted, by the temporary HP employee Dieter Brunner, one of the facts that “didn’t make sense” was a large payment to a small-sized business. One of the Red Flags that arises during due diligence on business partners is the size of the company in relationship to the work or services it performs. If a one-man company is receiving a multi-million dollar (or Euro) payment, it should be flagged for further inquiry.

• Faked Invoices for Goods/Services

One of the tests of revenue recognition for hardware and software is whether the goods and services relating thereto are actually delivered. If the middlemen above did not receive the equipment they allegedly purchased, this should have been picked up by an internal company audit or even simple inventory control and flagged for further inquiry.

The above presented Red Flags may not be the only ones found in this series of transactions engaged in by HP. Indeed the overall body of Red Flags is significantly larger than only the three discussed herein. The point in all of this discussion is that the FCPA mandates due diligence before a transaction in a high risk country occurs, due diligence before agents are engaged and then more due diligence thereafter to continue to monitor such transactions. If facts or circumstances arise which cannot be immediately explained, then the matter should be referred to Legal or Compliance for additional investigation. How many additional Red Flags can you spot in this HP transaction? More importantly, if a commentator Baseball Tonight can spot a Red Flag I hope that any US company, subject to the FCPA, has a compliance program in place to spot them as well.

For prior posts on HP and its current FCPA issues, see here and here.

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

© Thomas R. Fox, 2010

The Role of Human Resources in FCPA Compliance-Part II

In our most recent post, we discussed that one sign of a mature Foreign Corrupt Practices Act (FCPA) compliance and ethics program is the extent to which a company’s Human Resources (HR) Department is involved in implementing a compliance solution. In the prior posting we discussed training, employee evaluation, succession planning and hotlines and investigations. In this post, we will discuss background screening, doing ‘more with less’ and, finally, what to do when the government comes calling.

Background Screening

A key role for HR in any company is the background screening of not only employees at the time of hire, but also of employees who may be promoted to senior leadership positions. HR is usually on the front lines of such activities, although it may in conjunction with the Legal Department or Compliance Department. This requirement is discussed in the Federal Sentencing Guidelines for Organizations (FSGO) as follows “The organization shall use reasonable efforts not to include within the substantial authority personnel of the organization any individual whom the organization knew, or should have known through the exercise of due diligence, has engaged in illegal activities or other conduct inconsistent with an effective compliance and ethics program.”

What type of background checks should HR utilize in the FCPA compliance and ethics arena? The consensus seems to be that HR should perform at least routine civil, criminal and credit background checks. Care should be noted in any such request made in countries outside the United States as such information may be protected by privacy laws or where the quality of such information is different in substance from that of the United States. For instance in the United Kingdom, the request of a credit check can negatively impact a prospective employee’s credit score so such a background check may not provide useful information to a prospective employer.

Additionally, although it may be difficult in the United States to do so, a thorough check of references should be made. I say that it may be difficult because many companies will only confirm that the employee worked at the company and only give out the additional information of dates of employment. In this situation, it may be that a prospective employer should utilize a current employee to contact former associates at other companies to get a sense of the prospective employee’s business ethics. However, it should be noted that such contacts should only be made after a thorough briefing by HR of the current employee who might be asked to perform such duty.

A company can also use HR to perform internal background checks on employees who may be targeted for promotions. These types of internal background checks can include a detailed review of employee performance; disciplinary actions, if any; internal and external achievements, while employed by the company and confirmation of both ethics and compliance training and that the employee has completed the required annual compliance certification. An key internal function where HR can be an important lead is to emphasize that an employee, who has been investigated but cleared of any alleged ethics and compliance violations, should not be penalized.

When the Government Comes Calling

While it is true that a company’s Legal and/or Compliance Department will lead the response to a government investigation, HR can fulfill an important support role due to the fact that HR should maintain, as part of its routine function, a hard copy of many of the records which may need to be produced in such an investigation. This would include all pre-employment screening documents, including background investigations, all post-employment documents, including any additional screening documents, compliance training and testing thereon and annual compliance certifications. HR can be critical in identifying and tracking down former employees. HR will work with Legal and/or Compliance to establish protocols for the conduct of investigations and who should be involved.

Lastly, another role for HR can be in the establishment and management of (1) an Amnesty Program or (2) a Leniency Program for both current, and former, employees. Such programs were implemented by Siemens during its internal bribery and corruption investigation. The Amnesty Program allowed appropriate current or former employees, who fully cooperated and provided truthful information, to be relieved from the prospect of civil damage claims or termination. The Leniency Program allowed Siemens employees who had provided untrue information in the investigation to correct this information for certain specific discipline. Whichever of these programs, or any variations that are implemented, HR can perform a valuable support role to Legal and/or Compliance.

Doing More with Less

While many practitioners do not immediately consider HR as a key component of a FCPA compliance solution, it can be one of the lynch-pins in spreading a company’s commitment to compliance throughout the employee base. HR can also be used to ‘connect the dots’ in many divergent elements in a company’s FCPA compliance and ethics program. The roles listed for HR in this series are functions that HR currently performs for almost any US company with international operations. By asking HR to expand their traditional function to include the FCPA compliance and ethics function, a US company can move towards a goal of a more complete compliance program, while not significantly increasing costs. Additionally, by asking HR to include these roles, it will drive home the message of compliance to all levels and functions within a company; from senior to middle management and to those on the shop floor. Just as safety is usually message Number 1, compliance can be message 1A. HR focuses on behaviors, and by asking this department to include a compliance and ethics message, such behavior will become a part of a company’s DNA.

The author will discuss this topic in greater depth in an upcoming webinar on the role of HR in FCPA compliance, Tuesday, May 18th at 2 PM CDT. For information and registration details go to https://secure.confertel.net/tsregister.asp?course=509107.

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

© Thomas R. Fox, 2010

The Role of Human Resources in FCPA Compliance-Part I

One sign of a mature Foreign Corrupt Practices Act (FCPA) compliance and ethics program is the extent to which a company’s Human Resources (HR) Department is involved in implementing a solution. While many practitioners do not immediately consider HR as a key component of a FCPA compliance solution, it can be one of the lynch-pins in spreading a company’s commitment to compliance throughout the employee base. HR can also be used to ‘connect the dots’ in many divergent elements of a FCPA compliance and ethics program. My next couple of postings will discuss the role of HR in such a program. The first installment will discuss training, employee evaluation, succession planning and hotlines and investigations. In the next posting, we will discuss background screening, doing ‘more with less’ and finally, what to do when the government comes calling. 

Training 

A key role for HR in any company is training. This has traditionally been in areas such as discrimination, harassment and safety, to name just a few, and based on this traditional role of HR in training this commentator would submit that it is a natural extension of HR’s function to the area of FCPA compliance and ethics. There is a training requirement set forth in the US Sentencing Guidelines. Companies are mandated to “take reasonable steps to communicate periodically and in a practical manner its standards and procedures, and other aspects of the compliance and ethics program, to the individuals referred to in subdivision (B) by conducting effective training programs and otherwise disseminating information appropriate to such individuals’ respective roles and responsibilities.” 

What type of training should HR utilize in the FCPA compliance and ethics arena? The consensus seems to be that there are three general approaches to ethics and compliance training which have been used successfully. The first is the most traditional and that is in-person classroom training. This gives employees an opportunity to see, meet and interact directly with the trainer, not an insignificant dynamic in the corporate environment. It can also lead to confidential discussions after such in-person training. All FCPA compliance and ethics training should be coordinated and both the attendance and result recorded. Results can be tabulated through short questionnaires immediately following the training and bench-marked through more comprehensive interviewing of selected training participants to determine overall effectiveness. 

Employee Evaluation and Succession Planning

What policy does a company take to punish those employees who may engage in unethical and non-compliant behavior in order to meet company revenue targets? Conversely what rewards are handed out to those employees who integrate such ethical and compliant behavior into their individual work practices going forward? One of the very important functions of HR is assisting management in setting the criteria for employee bonuses and in the evaluation of employees for the bonuses. This is an equally important role in conveying the company message of adherence to a FCPA compliance and ethics policy. This requirement is codified in the Sentencing Guidelines with the following language, “The organization’s compliance and ethics program shall be promoted and enforced consistently throughout the organization through (A) appropriate incentives to perform in accordance with the compliance and ethics program; and (B) appropriate disciplinary measures for engaging in criminal conduct and for failing to take reasonable steps to prevent or detect criminal conduct.” 

Does a company have, as a component of its bonus compensation plan, a part dedicated to FCPA compliance and ethics? If so, how is this component measured and then administered? There is very little in the corporate world that an employee notices more than what goes into the calculation of their bonuses. HR can, and should, facilitate this process by setting expectations early in the year and then following through when annual bonuses are released. With the assistance of HR, such a bonus can send a powerful message to employees regarding the seriousness with which compliance is taken at the company. There is nothing like putting your money where your mouth is for people to stand up and take notice. 

In addition to employee evaluation, HR can play a key role in assisting a company to identify early on in an employee’s career the propensity for compliance and ethics by focusing on leadership behaviors in addition to simply business excellence. If a company has an employee who meets, or exceeds, all his sales targets, but does so in a manner which is opposite to the company’s stated FCPA compliance and ethics values, other employees will watch and see how that employee is treated. Is that employee rewarded with a large bonus? Is that employee promoted or are the employee’s violations of the company’s compliance and ethics policies swept under the carpet? If the employee is rewarded, both monetarily and through promotions, or in any way not sanctioned for unethical or non-compliant behavior, it will be noticed and other employees will act accordingly. One of the functions of HR is to help ensure consistent application of company values throughout the organization, including those identified as ‘rising stars’. An important role of HR in any organization is to help in building trust throughout the company and recognizing the benefits which result from that trust. 

Hotlines and Investigations 

One of the requirements under the Sentencing Guidelines is that a company “… have and publicize a system, which may include mechanisms that allow for anonymity or confidentiality, whereby the organization’s employees and agents may report or seek guidance regarding potential or actual criminal conduct without fear of retaliation.” This requirement is met by having a hotline. One of the traditional roles of HR in the US is to maintain a hotline for reporting of harassment claims, whether based on EEOC violations or other types of harassment. It is a natural extension of HR’s traditional function to handle this role. HR can assist in formulating an initial response to a hotline report to claims that may be (1) unfounded, (2) require immediate action, or (3) require a consistent workflow towards resolution. In addition to this initial assessment function, HR can assist in understanding if a report incident is localized in nature or system and in providing a consistent application of response. Lastly, HR is tasked with not only reporting, but tracking such incidents, and this recordation of data is critical to maintain the integrity of a FCPA compliance and ethics program in a company. 

Regarding investigations, HR can bring broad benefits to any FCPA compliance and ethics program through an efficient investigation process. It is recognized that a Legal or Compliance Department may wish to take over and complete an investigation process. However, HR can bring a consistency in both the process and any discipline which is imposed. Such consistency reinforces the senior management’s message of commitment by the company to FCPA compliance and ethics. Such a function by HR can lead to an understanding of emerging risks. Lastly, it may be that employees are more willing to speak up to HR and the building of trust can be utilized to assist in overall risk mitigation. 

The Human Resources Department in any multi-national company has a significant role in not only managing the employee base but in assisting to set the correct expectations. Consistent applications of these core beliefs and values will assist any company in remaining compliant and driving home the message that the company takes FCPA compliance seriously.

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The author will discuss this topic in greater depth in an upcoming webinar on the role of HR in FCPA compliance, Tuesday, May 18^th at 2 PM CDT. For information and registration details go to https://secure.confertel.net/tsregister.asp?course=509107.

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

© Thomas R. Fox, 2010

Watergate, Hewlett-Packard and the FCPA

It has been many years since Watergate and the many lasting legacies which occurred from that break-in of the Democratic National Committee. Indeed one of those legacies is the Foreign Corrupt Practices Act (FCPA) itself. This article will focus on one of the more mundane legacies, that of the “Watergate deposition”, which was, for those of us who were riveted by the hearings of the Erwin Committee in the summer of 1973, one of the most memorable episodes when Committee Co-Chair Howard Baker asked the question “What did the President know and when did he know it?”. This question would appear to be quite relevant today in relation to the current FCPA investigation of Hewlett-Packard (HP) and German and Russian investigations all involving alleged bribes paid by HP for the sale of computer hardware that were to be used by the office of the prosecutor general of the Russian Federation. 

As reported in The Russia Monitor on May 4, 2010, the substantive aspects of the HP case are not remarkable. High-level executives at the HP subsidiary made payments, through agents, to the Russian Prosecutor General’s office in order to obtain the contract to supply computers to that office. There was a complicated financing scheme used to route payments to offshore accounts beneficially owned or controlled by unnamed Russian officials; funneling the suspected bribes through a network of shell companies and accounts in places including Britain, Austria, Switzerland, the British Virgin Islands, Belize, New Zealand, Latvia, Lithuania, and the US states of Delaware and Wyoming. The bribes were paid through three German agents, who submitted fake invoices for non-existent sales and then paid the money on as bribes to unnamed Russian governmental officials. 

However, there are several unusual aspects to this HP investigation. The first is that this scheme was initially discovered during the audit of HP’s office in Saxony, Germany, where German authorities first discovered evidence of bribery. The second unusual aspect, as reported in the Wall Street Journal, April 15, 2010, is that the investigation was being led by German and Russian governmental agencies. The third was that neither the US Department of Justice (DOJ) nor Securities and Exchange Commission (SEC) were involved in these investigations until after the WSJ reported the German and Russian investigation were on-going as, the next day, on April 16, the WSJ reported that both US agencies had joined the investigation. 

What did HP know and when did they know it?

 HP has claimed that the events in question occurred in 2003. Prosecutors have alleged the incidents in question were more recent, in the years 2004-2006. But, whenever they occurred, at least one witness is reported to have said that the sham payments were internally approved by HP. In the WSJ, April 15 article, Dieter Brunner, a bookkeeper, who is a witness in the probe, said in an interview that he was surprised when, as a temporary employee of HP, he first saw an invoice from an agent in 2004. “It didn’t make sense,” because there was no apparent reason for HP to pay such big sums to accounts controlled by small-business men (the agents through which the bribes were funneled), Mr. Brunner said. Mr. Brunner then proceeded to say he processed the transactions anyway because he was the most junior employee handling the file, “I assumed the deal was OK, because senior officials also signed off on the paperwork”. While we don’t know who these senior officials were, it would appear that they were senior officials of HP and that would mean actual knowledge.

The New York Times, on April 16, 2010, reported that three former HP employees were arrested by German prosecutors back in December 2009, the same month when police in Germany and Switzerland presented search warrants detailing allegations against 10 suspects. Although it was unclear from the WSJ April 16 article as to the time frame, whether in December 2009 or later, HP had retained counsel to work with prosecutors in their investigation. Apparently, since the SEC only announced it had joined the investigation on or about April 15, HP had not self-disclosed the investigation or its allegations to either the US DOJ or SEC.

There are two other curious notes regarding what HP did know and when did they know it. The first is the following statement found in both of HP’s 2008 and 2009 Annual Reports, “In many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by laws and regulations applicable to us, such as the Foreign Corrupt Practices Act. Although we implement policies and procedures designed to facilitate compliance with these laws, our employees, contractors and agents, as well as those companies to which we outsource certain of our business operations, may take actions in violation of our policies. Any such violation, even if prohibited by our policies, could have a material adverse effect on our business.”

This statement is open to many interpretations. Is it an admission of knowledge of some general practices which violated the FCPA? If HP has employees, contractors and agents who violated the FCPA why are they still employed by HP or why is HP still using them? Could it be that the SEC required an admission of an on-going FCPA investigation? It just seems rather curious.

The second curiosity was the compliance training course requirement that HP ordered its channel partners to take in October 2009. As reported by the FCPA Professor, HP apparently determined it necessary, and appropriate, for its global network of approximately 155,000 channel partners to complete HP’s regulatory compliance training program or risk losing their partner status. The FCPA Professor noted that a HP spokesperson confirmed “HP is, in fact, working to have all of its global channel partners undergo training regarding government legal and regulatory compliance [including the FCPA] as part of establishing or renewing their Business Development Agreement”. Just as interesting is how HP made this request, when, without any notice HP faxed out the demand to its channel partners and instructed them to pay for this training, to a previously unknown third party, via credit card. All-in-all it seems very odd. But is it possible that this effort by HP was because they knew that an investigation was ongoing regarding its FCPA compliance efforts?

There is a requirement to report any material matters in the appropriate SEC filing statements and this leads to the question of “What did HP know and when did they know it? Perhaps HP could claim that the enigmatic statement cited above that some employees, contractors and agents would violate the FCPA is evidence that not only did HP know of such conduct but that this statement is all HP was required to report to its shareholders. Alternatively HP could claim that its first knowledge of this matter was in December, 2009, and there has been no SEC reporting requirement since that time.  However, the SEC may take a different view and any shareholders, who might be unhappy just about now, may be considering some type of derivative action against the company. On the other hand, perhaps the costs of an FCPA investigation, fines, penalties, corporate monitor and Deferred Prosecution Agreement are not “material” under HP’s definition of material for SEC reporting purposes.

Just when HP thought it could not get any worse, Businessweek reported, in a May 6, 2010 online edition, that the Indian government has claimed that HP evaded payments of approximately US$323 million in duties to the Indian Directorate of Revenue for the import of computer products and spares from offices overseas into India by undervaluing these goods to custom officials. Regarding these allegations, which HP disputes, The Russia Monitor stated “keep in mind that “customs violations” in one country are “bribery violations” in another country (i.e., FCPA in the United States).”

Senator Baker’s Watergate inquiry is still relevant today in this HP matter. What did HP know about the allegations of bribery and when did they know it? 

For a viewing of Senator Howard Baker’s questioning of Bob Halderman in the Senate Watergate hearings, click here.

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

 

© Thomas R. Fox, 2010

Real Estate, Trial Lawyers and FCPA Compliance

What do real estate, trial lawyers and Foreign Corrupt Practice Act (FCPA) compliance have in common? One of the maxims you hear about the real estate business, even in the depressed market over the past 18 months, is that the three most important things are: (1) location, (2) location and (3) location. This commentator was a trial lawyer, on the civil side, for about 18 years of his legal career and it was drilled into him that the three most important things a trial lawyer brings to a lawsuit are: (1) venue, (2) venue and (3) venue. 

It was then with some interest that this commentator saw a video on the Project Counsel website (a great resource—they not only blog with summaries of speakers at significant legal conferences but also present interviews with conference speakers on its website), where Project Counsel Managing Director Greg Bufithis, interviewed Tim Parkman, Managing Director of Lessons Learned Ltd, a UK entity which assists companies in implementing compliance and ethics programs. In response to a query by Mr. Bufithis on what was the single most important item for a business which is implementing a compliance and ethics program, Mr. Parkman responded that there were three: “(1) senior management, (2) senior management and (3) senior management.” 

Parkman explained his logic behind this statement of triumviratism because employees will pick up on the differences between what senior management says versus the actions that they might take with regard to compliance and ethics. He cited that a prime example of this is what policy does a company take to punish those employees who may engage in unethical and non-compliant behavior in order to meet company revenue targets versus what rewards are handed out to those employees who integrate such ethical and compliant behavior into their individual work practices going forward? 

A clear example of this is in the area of annual bonuses. Does your company have, as a component of its bonus compensation plan, a part dedicated to compliance and ethics? If so, how is this component measured and then administered? There is very little in the corporate world that an employee notices more than what goes into the calculation of their bonuses. If a company sets expectations early in the year and then follows through when annual bonuses are released, it can send a powerful message to employees regarding the seriousness with which compliance is taken at the company. There is nothing like putting your money where your mouth is for people to stand up and take notice. 

Parkman goes on to say that if you have an employee who meets, or exceeds all his sales targets, but does so in a manner which is opposite to the company’s stated compliance and ethics values, employees will watch and see how that employee is treated. Is that employee rewarded with a large bonus? Is that employee promoted or are the employee’s violations of the company’s compliance and ethics policies swept under the carpet? If the employee is rewarded, or in any way not sanctioned for unethical or non-compliant behavior, it will be noticed and other employees will act accordingly.

In the energy industry, (and probably lots of other industries) there is the following archetypal story. It usually is told about a Regional Manager in the Far East or the Middle East who is alleged to have said some along the following lines, “If I violate the Code of Conduct I may or may not get caught. If I get caught I may or may not be disciplined. But if don’t make my revenue numbers for two quarters I will be fired”. If such a story is allowed to percolate throughout the company, employees will feel that all that matters is hitting their revenue targets, not acting in an ethical and compliant manner. Only senior management can directly speak to this issue and senior management must make clear that “hitting the numbers” in a manner which is antithetical to the company’s compliance and ethics program is not acceptable. But this must be done in both words and actions.

So does your company only “talk the talk” or does it also “walk the walk?”

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

  

© Thomas R. Fox, 2010

What is the Cost of FCPA Compliance? Or what is the cost of non-compliance?

How do you measure the cost of poor performance? In the baseball world how do you measure the cost of the Houston Astros abysmal April and equally poor start in May, which is projected to lead to a 50-108 season record? One measure is the number of people who pay to come out to the ballpark. As reported in the May 2nd edition of the Houston Chronicle, the Astros home attendance is down 2,640 which translates into a per game revenue loss of up to $660,000. That works out to a full season loss of revenue of up to $5,436,000. This, of course, assumes that the drop in attendance is based directly on poor performance and not other factors such as the drop in disposable income due to the economy or some other factor. But is this the sole measure of the Astros loss?

In the Foreign Corrupt Practices Act (FCPA) world, there can be a more direct relationship of the costs to a violation or even an investigation. For instance, a former investigation into a Nigerian bribery case involving bribe payments of up to $132 million could lead to fines and disgorgement penalties of more than $1.2 billion. (For a more complete discussion, see blog posting here.) These fines and penalties do not include any costs for investigations, legal or accounting fees, other professional fees or drop in stock value associated with an investigation.

All of this brings us to ‘Ding Dong Avon Calling’ and the bribery probe of its China operations. As reported by Aruna Viswanatha, in MainJustice, on April 30 and Ellen Byron, in the Wall Street Journal, on May 1, Avon has reported its costs for the alleged scandal which has engulfed the company. The investigation has now expanded from China to four other (unidentified) business units. CEO Andrea Jung is reported as saying, in an April 30 conference call with investors, “No conclusions can be drawn at this time,” regarding the investigations. However, what Avon did report is some of its FCPA investigative costs to date, anticipated FCPA investigative costs, loss of revenue in China and loss in first-quarter earnings.

The expenses, both anticipated and occurred to date, and their earnings loss box score is as follows (to-date): 

Investigate Cost, Revenue  or Earnings Loss
Investigative Cost (2009)	$35 Million
Investigative Cost (anticipated-2010)	$95 Million
Drop in Q1 Earnings	$74.8 Million
Loss in Revenue from China Operations	$10 Million
Total	$214.8 Million

While the amount of the alleged bribery, or other corruption, has not yet been reported, MainJustice reported that the investigation is looking into “travel, entertainment, and gift expenses”. It is difficult to believe that the $$ value of the bribes are anywhere close to the above mentioned investigation cost, revenue or earnings loss. The WSJ reported that Avon will overhaul its approach to sales in China, moving towards a direct selling approach, over the next 18 months. This certainly sounds like Avon is moving away from agents and distributors, the bane of many other US companies doing business abroad.

The WSJ also reported that the Avon investigation has expanded into its business practices in countries “selected to represent” each of its overseas regions. With slightly less than three-quarters of Avon’s overall company revenue coming from outside the US, it may well be that the Department of Justice (DOJ) will want a more comprehensive review of the company’s business practices worldwide, rather than simply “selected” business practices in “selected” countries. If I were Avon, I know I would want to do so, if not for the DOJ, but for my company.

How do you measure the cost of FCPA compliance? Put another way, can your company afford not to be FCPA compliant? What will the costs be if there are allegations of bribery and corruption in your company? Will the investigative costs exceed $100 million as they may well do in Avon’s case? Will your fine, penalty and any profit disgorgement exceed $550 million as happened with Halliburton or simply be in the $330-$340 million range as with its former Joint Venture partners? If you agree to a Corporate Monitor what will be that cost? As reported by Chris Matthews, in MainJustice on March 18, 2010, US District Judge Ellen Segal Huvelle raised the following spectre regarding Corporate Monitors during the Innospec Deferred Prosecution Agreement (DPA) and guilty plea hearing:

It’s an outrage, that people get $50 million to be a monitor,” Huvelle said during a hearing in Washington, D.C., to approve a guilty plea for Innospec Inc., an international specialty chemicals company with nearly 1,000 employees. “I’m not comfortable, frankly, signing off on something that becomes a vehicle for someone to make lots of money.”

This could lead to an Avon Box Score of costs which could read:

Cost	Amount
Pre-DPA Investigative Costs	$95 million???
Pre-DPA Revenue and Earnings Loss	$84 million???
Penalty and Profit Disgorgement	$100 million???
Monitor Cost	$50 million???
Total	How Many Hundreds of $$$ Millions?

So will the Astros lose 108 this year or is there something they can do about it. Equally important, what will be the cost to your company for FCPA (non) compliance and are you willing to risk it…or are you willing to do something to prevent it.

For a clip of a classic “Ding Dong, Avon Calling” TV commercial, click here.

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

© Thomas R. Fox, 2010