FCPA Compliance and Ethics Blog

October 29, 2010

Fraud Investigation and the UK Bribery Act

Filed under: Bribery Act,FCPA,Tracy Coenen — tfoxlaw @ 9:17 am
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We were recently introduced to Fraud Examiner Expert Tracy Coenen, in her book “Expert Fraud Investigation: A Step-By-Step Guide” she details the steps a company should go through in performing a fraud investigation. Coenen provides the ‘nuts and bolts’ on how conducting an investigation can be a powerful tool to help corporations ferret out fraudulent practices within their organization. Her book gives the examiner the specific steps to take when fraud is suspected and how to proceed forward throughout the investigation to conclusion. In addition to the book as a useful tool for the fraud examiner, Coenen also provides the lay person with a general discussion of the types of corruption schemes a company may face and how best to prevent them. Coenen lists bribery; kickbacks; extortion; conflict of interests; and related party transactions as examples of corruption which can involve a payment to obtain an advantage, receive preferential treatment, or force certain preferential actions.

Many compliance and ethics practitioners have long understood that these types of schemes are illegal under the Foreign Corrupt Practices Act (FCPA) in connection with foreign governments and foreign governmental officials, but many FCPA compliance practitioners in the US may not have focused on these types of schemes when they involve private, non-governmental actors, outside the US. However, with the upcoming April 1, 2011 effective date of the UK Bribery Act, such practitioners may well be served to revise their company policies to take into account that the UK Bribery Act prohibitions apply to private actors equally as well as governmental officials. Based upon this difference in the pubic actor v. private actor distinction between the FCPA and UK Bribery Act, this post will review the different types of corruption schemes that Coenen outlines in her book.

Bribery

While most FCPA practitioners understand that a payment to confer a benefit may be enough to be classified as a bribe, such practitioners may not focus on other, more subtle, forms of bribery than simply bags of cash. These can include bid-rigging where inside information is passed to a vendor to allow said vendor to unfairly win an allegedly open bid, or where the bid winner has been secretly pre-determined in what is advertised as an open and fair bidding process. Bid-rigging can extend to the collusion between certain employees of a purchaser-company and vendor, where such employees purchase more goods or services than the company would need. Bid-rigging can also be found where alleged non-winners, in an apparently open bidding process, later appear as subcontractors on a project.

Kickbacks

Kickbacks occur when a company overpays for goods or services and then remits all or part of the overpaid amount back to the perpetrator. This can be affected by the person in charge of the overall bidding process. However it can extend down into any other employees involved in the approval process such as employees in production, engineering or quality control. So, similar to bribery, there can be more subtle forms of kickbacks and such forms can include the substitution of inferior components into an overall product while charging the higher price to the end-user purchaser. Kickbacks can also include irregularities in pricing and quality throughout a project. Even if inferior quality goods are not substituted, an irregular price can inflate the cost of goods paid for by a company.

Extortion

Extortion is in many ways the mirror image of bribery. Whereas with a bribe, something of value is given to obtain a benefit, with extortion, a payment is demanded. While such demand can be made to obtain a benefit, such as to allow a company to go forward in a bidding process; extortion can also be made to prevent injuries to persons and damage to physical facilities. While not nearly as common as bribes, there are cases where extortions have been made and money paid based upon the threats.

Conflict of Interest

Many people do not think of conflicts-of-interest when considering a corruption scheme. Nevertheless if an employee, executive, or owner of a company has an undisclosed interest in an entity with which his company is doing business, the situation can present a conflict of interest. In the conflict of interest scheme, the employee, executive, or owner may be able to influence the company decision making process to send business to the other entity. This conflict of interest may be broader than simply directly involving an employee, executive or owner. It can extend to wives, children or other family members who stand to benefit from any such undisclosed interest.

Related Party Transactions

Coenen points out that many people do not consider transactions with third parties as part of an overall fraud scheme. However if the third party transactions are not conducted in an arms-length manner, this may well be indicia of an overall fraud scheme. Problems can arise when the related parties have a special advantage in doing business with a company and when that special advantage harms the company through increased costs, decreased revenue or other concessions. In addition to the types of schemes listed in the categories above, Coenen lists several different types of such transactions. They include:

• Extending credit to a company which would not otherwise be so entitled;
• Writing off accounts receivables with no legitimate business reason;
• Doing business with a small or one-man shop with no physical assets or simply a post office box for an office;
• Engaging in consulting agreements where no substantive work is done for payments received;
• A consultant who engages in extensive ‘market research’ in foreign countries with little to no tangible work product; and
• Concealing the existence of direct or indirect ownership in entities with which a company is doing business.

Although the focus of Coenen’s book is the investigation of fraud, in all of its forms and permutations, she does give several pointers to assist in the prevention of fraud. These will be familiar to the FCPA practitioner and include ongoing monitoring program of both accounts and transactions, through robust internal controls. Coenen recommends an anonymous reporting hotline through which employees can alert management of such activities without fear of supervisor retaliation. But Coenen ends by noting the most important form is that management set the correct ‘Tone at the Top” that such fraudulent activity within the company will not be tolerated.

Any US company operating internationally will be subject to the UK Bribery Act. Therefore the time has come to consider the changes required to its overall compliance program to meet the UK Bribery’s Act proscription against bribery and corruption of private actors. Tracy Coenen’s book is an excellent starting point for the FCPA practitioner to begin to enlarge a FCPA compliance based program to meet this challenge. We commend it to you for your consideration.

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

October 27, 2010

Proposed Amendments to the FCPA

Filed under: compliance programs,FCPA — tfoxlaw @ 8:29 pm
Tags: , , ,

  In a White Paper released today by the US Chamber Institute for Legal Reform, entitled “Restoring Balance-Proposed Amendments to the Foreign Corrupt Practices Act”, authors Andrew Wiessmann and Alixandra Smith argue that the time is ripe to amend the Foreign Corrupt Practices Act (FCPA) to make the statute more equitable and its requirements clearer. They propose five (5) amendments to the FCPA which they argue would serve to improve the Act. This post will discuss their White Paper and proposed amendments.

The authors begin their discussion by charting the increase in recent enforcement trends but note that judicial oversight and case interpretations of the FCPA are both still minimal. The authors argue that into this void the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) have aggressively engaged in an expansive reading of the FCPA in enforcing the Act. However, more importantly because of this dearth of case law interpretation “that the DOJ effectively serves as both prosecutor and judge in the FCPA context, because it both brings FCPA charges and effectively controls the disposition of the FCPA cases it initiates.” 

The authors note that businesses can spend millions of dollars for an FCPA investigation, even one which results in a no-prosecution result. They also opine that there “is also reason to believe that the FCPA has made US businesses less competitive than their foreign counterparts who do not have significant FCPA exposure” because the statute does not take into account the “realities which confront businesses that operate in countries with endemic corruption.” Lastly the authors speculate that implementation of the UK Bribery, in April 2011, will lead “US enforcement authorities will apply even more pressure to companies through the FCPA so as not to be outdone in this area of traditional US dominance.” 

The authors provide five suggested reforms to the FCPA which they argue will promote “efficiency and enhancing public confidence in the integrity of the free market system as well as the underlying principles of our criminal justice system.” They  are:

 I.                   Adding a Compliance Defense 

Under this suggestion the authors believe that companies will increase their compliance with the FCPA because they will now have a greater incentive to do so. They envision a defense similar to the “adequate procedures” defense available under the UK Bribery Act. Companies will be protected if a rogue employee engages in corruption and bribery despite a company’s diligence in pursuing a FCPA compliance program. Lastly “it will give corporations some measure of protection from aggressive or misinformed prosecutors, who can exploit the power imbalance inherent in the current FCPA statute—which permits indictment of a corporation even for the acts of a single, low-level rogue employee—to force corporations into deferred prosecution agreements.” 

II.                Limiting Successor Liability 

The authors believe that the current enforcement of FCPA liability on a successor corporation is “antithetical to the goals of criminal law” because it punishes a company which did not engage in a criminal act. The authors also believe that this legal concept has lead to a “chilling effect” on mergers and acquisitions. Therefore, if a company engages in sufficient due diligence, the DOJ should not be able to impute the criminal actions of others to it. Further the authors posit that the DOJ should create specific guidance as to what constitutes sufficient due diligence and make this guidance available to companies.

 III.             Adding a Willfulness Requirement 

The authors consider that as the FCPA is currently interpreted, there is tantamount to strict liability for improper payments. Further that this interpretation is not fair to corporations. Not only do corporations not have specific knowledge that any bribery or corruption has been engaged in on the corporation’s behalf but the corporation may unaware that its conduct, even if known, would have violated US law. The authors put forward that there must be some type of willfulness or knowledge of illegal acts but at the very least to the anti-bribery provisions. They end by asserting that the ‘violative’ conduct must be foreseeable under this proposed modification before the company can be charged under the FCPA. 

IV.              Limiting a Parent’s Liability for the Acts of a Subsidiary 

The authors point out that the SEC “routinely charges parent companies with civil violations of the anti-bribery provisions based on actions taken by foreign subsidiaries of which the parent is entirely ignorant.” They believe that this is not a correct interpretation of the FCPA which requires that a corporation can only be held liable for the acts of a subsidiary where the parent authorized, directed or controlled the illegal conduct in question. While noting that this interpretation has not been tested in any US courts, the scope of this potential liability is of significant concern to US companies because of the possibility of profit disgorgement. For all of these factors, the authors conclude that “a parent’s control of the corporate actions of a foreign subsidiary should not expose the company to liability under the anti-bribery provisions where it neither directed, authorized nor even knew about the improper payments in question.” 

V.                 Clarifying the Definition of Foreign Official 

The authors conclude their five proposed amendments by suggesting that the definition of who is a foreign official be further defined. They note that while the statute does speak to “instrumentality thereof” a foreign official there is no further definition. Into this imprecise definition the DOJ has, once again, imposed an expansive reading, which has not been tested in court. This expansive reading has led US companies to have “no way of knowing whether the FCPA applies” to a transaction because there is allegedly no way to know if a foreign governmental official is involved. For these reasons, the authors suggest that the definition of a foreign governmental official be more clearly defined to include such information as (1) “the percentage ownership by a foreign government that will qualify a corporation as an “instrumentality”; (2) whether ownership by a foreign official necessarily qualifies a company as an instrumentality and, if so, (3) whether the foreign official must be of a particular rank or the ownership must reach a certain percentage threshold; and (4) to what extent “control” by a foreign government or official will qualify a company as an “instrumentality.” 

The article is a good starting point for discussions on the FCPA. With the upcoming elections it will be interesting to see if any, or all, of these proposals gain traction. It may also lead to a revisiting of the issue of facilitation payments under the FCPA. After his speech to the Compliance Week Annual Conference last May, Assistant Attorney General for the Criminal Division of the US Department of Justice, Lanny 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, 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. This issue could also be a part of the debate that authors Weissmann and Smith have furthered. In other words, be careful what you ask for, you just might get it.

 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

October 25, 2010

Use of Specialized Counsel in a FCPA Investigation

In an article entitled, “Risks and Rewards of an Independent Investigation” in theOctober 2010 issue of the ACCDocket, authors James McGrath and David Hildebrandt discuss the use of specialized outside counsel to lead an independent internal investigation as compliance and ethics best practices. This is based upon the US Sentencing Guidelines, under which a scoring system is utilized to determine what a final sentence should be for a criminal act. Factors taken into account include the type of offense involved and the severity of the offense, as well as the harm produced. Additional points are either added or subtracted for mitigating factors. One of the mitigating factors can be whether an organization had an effective compliance and ethics program. McGrath and Hildebrandt argue that a company must have a robust internal investigation.

McGrath and Hildebrandt take this analysis a step further in urging that a company when faced with an issue such as an alleged Foreign Corrupt Practices Act (FCPA) violation. The authors suggest that in such a situation, a company should engage specialized counsel to perform the investigation. There were three reasons for this suggestion of the utilization of specialized counsel. The first is that the Department of Justice (DOJ) would look towards the independence and impartiality of such investigations as one of its factors in favor of declining or deferring enforcement. If in-house counsel were headed up the investigation, the DOJ might well deem the investigative results “less than trustworthy”.

A second reason came from the company perspective. Many companies have sought protection of investigations behind the shield of the attorney-client privilege and attorney work-product doctrine. If an in-house attorney is utilized, many courts are skeptical of a company asserting the privileges because of the mixed responsibilities of counsel in a corporation; that of legal and business work. As noted by Russ Berland, in his article entitled, “How to Protect Compliance Risk Assessments from an Unwanted Disclosure”, in the most recent issue of the Society of Corporate Compliance and Ethics Magazine (SCCE) (Vol. 7 / No. 5)(Oct. 2010), some courts “presume that in-house counsel engage in a substantial amount of non-legal work”. Additionally, obstructionist attempts by corporations to improperly assert the privilege have led courts to refuse to allow the privilege to be asserted. However a company will usually not face these arguments if outside counsel is utilized.

Even if the company is willing to waive its attorney-client privilege, McGrath and Hildebrandt offer a third reason for the use of specialized outside counsel to handle an investigation. If a company’s regular outside counsel were retained to conduct the investigation, the DOJ might feel the results had less than full credibility due to the fact that the law firm knew “who buttered its bread” and that the law firm would not want to bring bad news to client and endanger the ongoing business relationship between the law firm and the client. The authors end by concluding that by employing specialized counsel comports with the expectations under the US Sentencing Guidelines, gives a company the protections of the attorney-client privilege and the work-product doctrine and finally “assures the government of the integrity of the internal investigation.”

The article from authors McGrath and Hildebrand is a valuable resource for the FCPA compliance practitioner, when faced with an allegation which requires investigation. They raise both strategic and tactical considerations which a company should evaluate when allegations of a FCPA violation may occur and the response a company should take. The clear import of their article is that the use specialized outside counsel is a key component in any effective compliance program.

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

© Thomas R. Fox, 2010

October 21, 2010

Why Does It Appear Anti-Bribery Enforcement Is Lacking in Canada?

Filed under: Corruption for Foreign Public Officials Act,FCPA — tfoxlaw @ 7:27 pm
Tags: ,

Ed. Note-this post was originally published in Trade Lawyers Blog and comes courtesy of our colleague Cyndee Todgham Cherniak 

On October 2, 2010, I gave a presentation at the University of Windsor, Center for Transnational Law and Justice concerning Canada’s anti-bribery laws. The theme of my presentation was that Canada takes a balanced approach to anti-bribery enforcement. 

As part of my presentation, I discussed why it appears that Canada’s anti-bribery enforcement is lacking. Canada is often criticized by the United States because of enforcement of the Corruption of Foreign Public Officials Act (and for the record I would like the name of Canada’s law changed to “The Prevention of Corruption of Foreign Public Officials Act) (CFPOA). There is only one decided case under the CFPOA (Hydro Kleen Group) and currently one case may public by the Royal Canadian Mounted Police, International Anti-Corruption Unit (RCMP, IACU) (being the Nazir Karigan case). In addition, Niko Resources (a publicly listed company) announced issued a press release that they were being investigated under the CFPOA and a number of NGOs have posted a letter they sent to the RCMP-IACU asking that an investigation be commenced concerning Blackfire Exploration. 

However, this does not mean there isn’t work being done and other corruption investigations are not being conducted. On the contrary, the RCMP-IACU has two busy branches in Ottawa and Calgary. So, why is it that no one knows about Canada’s anti-bribery enforcement – because the Canadian way is different than the U.S. way of enforcement. 

Canada has signed 3 international anti-bribery treaties (the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, the OAS Inter-American Convention Against Corruption, and the U.N. Convention Against Corruption) and has incorporated the international obligations into Canadian law. 

That being said, Canada’s anti-bribery regime is different than the U.S. regime even though the U.S. is a signatory to the same international agreements. Canada has implemented its international obligations in a manner that is different and that is permitted. 

What are the differences? 

1. Canada’s CFPOA was enacted in 1999 and, therefore, is only 11 years old. The first 11 years of The U.S. Foreign Corrupt Practices Act (FCPA) saw a small number of prosecutions. 

2. Canada’s population is significantly less than the population in the United States. The volume of Canada’s business in foreign jurisdictions is significantly lower than the volume of U.S. business in foreign jurisdictions. As a result, the proportionate volume of cases would be significantly lower. 

3. Canada’s CFPOA does not contain the record-keeping/accounting requirements that are in the FCPA. As a result, cases do not arise from reportings to Canada’s equivalent of the Securities Exchange Commission (since there are not any equivalent FCPA reportings). A large number of U.S. cases commence under the FCPA accounting/reporting provisions. Since this mechanism does not exist in Canada’s law, the volume of cases is significantly reduced in Canada. 

4. Canada does not have any foreign whistle-blower incentives. Section 425.1 of Canada’s Criminal Code creates an offence if a company or company officials retaliates against an employee who provides information during the course of an investigation. However, there isn’t Canadian legislation that financially rewards a foreign whistle-blower. Since this mechanism does not exist in Canada’s law, the volume of cases is significantly reduced in Canada.

5. Canada does not have a voluntary disclosure program for companies and company officials to disclose their own wrong-doing or the wrong-doing of a predecessor entity. As previously mentioned, the RCMP-IACU is the enforcement authority in Canada (not the Department of Justice like in the United States). I have spoken with the RCMP-IACU and they have informed me that there is no administrative program that allows a company or company officials to make a voluntary disclosure to prevent or diffuse a potential prosecution. The role of the RCMP is to investigation crimes and hand to the Crown (Department of Justice) the facts (investigative report) so that the Crown can decide whether to pursue a criminal conviction. There isn’t a mechanism to negotiate the payment of a fine without the prosecution. 

6. When there is a Canadian investigation, the RCMP-IACU are not inclined to talk about it. When I spoke with the RCMP, they would not confirm any active investigation or the number of investigations underway. The RCMP do not undertake “perp walks” as is common in the United States. There is not significant publicity of active investigations. The Canadian authorities are less likely to commence “overzealous prosecutions” or undertake prosecutions as publicity stunts. Canadian prosecutors are not elected and do not have to “grand-stand” for the votes. 

7. Canada’s criminal justice system does not include grand juries. As a result, the job of the RCMP is to gather sufficient information to cause the Crown to lay charges. Canada does not use grand juries as an investigatory tool. 

8. Canadian law does not permit tax authorities to share information that they receive during the course of an income tax, sales tax or other tax audit. The information provided during the course of an audit to tax authorities is confidential under the law and cannot under Canadian law be used by tax authorities for purposes other than enforcement of tax laws. If the Canada Revenue Agency is involved in a criminal / special investigation, the information may be used CFPOA purposes. Most tax audits are not special investigations. As a result, if there is evidence of payment of bribes paid to foreign public officials discovered during a review of books and records during a tax audit, the information should not be conveyed by the Canada Revenue Agency to the RCMP-IACU and should not be used as evidence against the taxpayer. 

9. Canada does not have a robust advisory opinion mechanism similar to the administrative mechanism in the United States. The RCMP-IACU decide whether to investigate a crime and do not provide guidance on how to avoid prosecutions or get away with crimes. The RCMP-IACU do not make the law, they merely enforce existing laws. 

10. Canada’s CFPOA at the present time does not apply where the bribery activity does not have a “real and substantial connection” to Canada. In 2009, the Minister of Justice tabled legislation (Bill C-31) to incorporate a nationality principle in Canada’s CFPOA. However, that legislation did not proceed in the House of Commons when Parliament prorogued in December 2009. The legislation has not been re-introduced.

11. Canada does not have a mentorship program similar to the mechanism in the United States. Since Canada does not have a voluntary disclosure mechanism or a mechanism to improve compliance, Canada does not have a mechanism where a lawyer is appointed to assist Canadian companies comply better with Canada’s anti-bribery laws. 

The Canadian anti-bribery regime’s significant differences with the U.S regime makes Canada’s enforcement less visible. Less visible does not mean the Canadian enforcement regime does not exist or it is not active. You cannot look for evidence of enforcement activity in the same places that it is found in the U.S. 

Cyndee Todgham Cherniak  can be reached at 416-307-4168 or cyndee@langmichener.ca.

October 20, 2010

Provenance in the Supply Chain: Transparency and Accountability under the FCPA and Bribery Act

In the October 2010 issue of the Harvard Business Review there is a Spotlight article on “The Transparent Supply Chain”. In this article, author Stephen New discusses the evolution in Supply Chain from opaqueness to transparency and focuses on the “quality, safety, ethics and environmental impact” of the Supply Chain on the triumvirate of companies, customers and government. New terms this information as “Provenance” and this is relevant both up and down the Supply Chain.

New points out that customers are becoming increasingly concerned with not only the authenticity of the goods they purchased but also the ethics of how the goods were manufactured in the Supply Chain. Companies have long been concerned with the quality of goods and services they receive from their Supply Chain vendors and tracking this information can provide assurances of high quality control. Increasingly the third prong of the triumvirate, the government, is now requesting such information and such transparency in the area of anti-corruption and anti-bribery compliance.

Under both the US Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act, it is now critical that companies bring their Supply Chain vendors into their overall compliance programs. This message has been given renewed emphasis with the recent report in the FCPA Blog (and others) that the freight forwarder Panalpina may be close to a settlement with the Department of Justice (DOJ) over its FCPA violations. One of the major fallouts from the Panalpina case was the ripple effect through the energy industry, after the initial disclosure that Panalpina had paid bribes in Nigeria, while working as a freight forwarder to Vetco Grey. Other energy companies which had used Panalpina to bring goods and materials into Nigeria came under DOJ investigation for possible FCPA violations; these other companies were reported to include Transocean, GlobalSantaFe Corp., Noble Corp., Tidewater, Nabors Industries, Tidewater, Schlumberger, Shell and Global Industries.

In addition to the effect of the Panalpina matter, the new released UK Bribery Act Consultation Guidance specifically lists due diligence on Supply Chain vendors as a key component of its anti-bribery and anti-corruption best practices. Principle Six of the Guidance states, “The commercial organisation has due diligence polices and procedures which cover all parties to a business relationship, including the organisation’s supply chain, agents and intermediaries, all forms of joint venture and similar relationships and all markets in which the commercial organisation does business.” This means that due diligence should be engaged to establish whether individuals or other organizations involved in key decisions have a reputation for bribery and whether anyone associated with them is being investigated, prosecuted, or has been convicted or debarred for bribery or related offences. Consideration should be given to the risks associated with politically exposed persons where the proposed business relationship involves, or is linked to, a prominent public office holder. Lastly, a review of Supply Chain vendors own compliance programs should be effected.

All of this brings us back to New’s article and his terminology of “Provenance”. In the FCPA/UK Bribery Act context this should be defined as full transparency and accountability in all areas of due diligence and the relationship after the contract is signed with the supplier. A company should, on a periodic basis of not less than every three years, conduct rigorous compliance audits of its operations with its Supply Chain vendors. These audits would include, but not be limited to, detailed audits of the Supply Chain vendor’s books and records, with specific attention to payments and commissions to agents, consultants, contractors, and subcontractors with responsibilities that include interactions with foreign officials. This compliance audit should include interviews with employees, consultants, agents, contractors, subcontractors and joint venture partners. Lastly a review of the FCPA compliance training provided to the Supply Chain vendor should be included.

Just as Provenance is the new by-word in Supply Chain management in the Harvard Business Review; transparency and accountability in the area of anti-corruption and anti-bribery should have the same urgency to companies’ subject to the FCPA and/or UK Bribery Act. The Panalpina case is a stark reminder of the need for continued diligence, before and after the contract is signed, in the compliance arena.

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

October 19, 2010

Kroll Annual Global Fraud Report

One of the ways to increase market share is to build a mousetrap and it increasingly appears that one of the fastest ways to increase market share is to pilfer a company’s plans for a better mousetrap. As reported in the October 18, 2010 online edition of the Kansas City Star, according to the latest edition of the Kroll Annual Global Fraud Report, theft of information and electronic data at global companies has overtaken physical theft of property and goods for the first time. As noted by Kroll, “If fraud were a virus, almost everyone would be slightly ill” with its finding that of the respondents, 88% reported that they had been hit by at least one type of fraud in the past year, a figure broadly similar in every region and consistent with those of previous years. However we were struck by the finding that soft theft has overtaken hard theft as a key concern for companies in the area of fraud.   

This year’s study shows that the amount lost by businesses to fraud rose from $1.4m to $1.7m per billion dollars of sales in the past 12 months – an increase of more than 20%. While physical theft of cash, assets and inventory has been the most widespread fraud, by a considerable margin in previous Global Fraud Reports, this year’s findings reveal that theft of information or assets was reported by 27.3% of companies over the past 12 months, up from 18% in 2009. In contrast, reported incidences of theft of physical assets or stock declined slightly from 28% in 2009 to 27.2% in 2010. 

According to the 2010 survey, 88% of companies said they had been the victim of at least one type of fraud during the past year. Of the specific countries analyzed China is the top market in which companies suffered fraud with 98% of businesses operating there affected, Colombia ranked second with a 94% incidence of fraud, followed by Brazil with 90%. Information-based industries reported the highest incidence of theft of information and electronic data over the past 12 months; these include financial services (42% in 2010 versus 24% in 2009), professional services (40% in 2010 versus 27% in 2009) and technology, media and telecoms (37% in 2010 versus 29% in 2009). 

The Kroll annual survey came on the heels of a notice we recently received about the upcoming release of the Open Source Security Testing Methodology Manual (OSSTMM) v3, which is the first comprehensive security testing methodology manual to gain any ground. The OSSTMM is a peer-reviewed methodology for performing security tests and metrics; test cases are divided into five channels (sections) which collectively test  information and data controls, personnel security awareness levels, fraud and social engineering control levels, computer and telecommunications networks, wireless devices, mobile devices, physical security access controls, security processes, and physical locations such as buildings, perimeters and military bases. Anthony Freed, Managing Director of InfosecIsland called the OSSTMM “a strikingly authoritative outline of security best practices, and will most certainly have an effect on security standards and best practices.” 

The OSSTMM is made available at no cost through the Institute for Security and Open Methodologies (ISECOM) a non-profit collaborative community. It is dedicated to providing practical security awareness, research, certification and business integrity. ISECOM provides certification, training support and project support services for non-partisan and vendor-neutral funding of projects and infrastructure and assures you their training programs, standards, and best practices are truly neutral of national or commercial influence. 

The example of this theft of business information was made real today by a client who told me that an account had been opened in the company’s name, using fraudulent means, and someone was purchasing big screen televisions. The client only found about the fraud when the company received its first invoice for these fraudulent purchases. This reinforces the fact that compliance encompasses a wide range of areas in a company and the Kroll Annual Survey makes clear that information security should be included. 

For more information on the OSSTMM, visit the ISECOM website, 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

October 18, 2010

Risk Assessments: FCPA and UK Bribery Act Best Practices

We recently wrote about ongoing assessments as a key component of a best practices anti-corruption and anti-bribery program. One of our colleagues commented that such a tool is also one with which a company should begin to craft its compliance program. The simple reason is straightforward; one cannot define, plan for, or design an effective compliance program to prevent bribery and corruption unless you can measure the risks you face. Therefore this post will discuss the tool that an entity should utilize to build its anti-corruption and anti-bribery program around, the Risk Assessment.

We believe that for this reason both the Principles of Federal Prosecution of Business Organization (US Sentencing Guidelines) and its section on corporate compliance programs and the UK Bribery Act’s Consultative Guidance list Risk Assessment as the initial step in creating an effective anti-corruption and anti-bribery program. This posting will review the specifics of an effective Risk Assessment and how it will form the development, implementation and maintenance of any best practices compliance program.

US Sentencing Guidelines

The US Sentencing Guidelines state “compliance and ethics program shall be reasonably designed, implemented, and enforced so that the program is generally effective in preventing and detecting criminal conduct.” The Report of the Ad Hoc Advisory Group on the Organizational Sentencing Guidelines stated that “Each organization will need to scrutinize its operating circumstances, legal surroundings, and industry history to gain a practical understanding of the types of unlawful practices that may arise in future organizational activities.”

Writing in the most recent issue of the Society of Corporate Compliance and Ethics Magazine (SCCE) (Vol. 7 / No. 5)(Oct. 2010), Russ Berland suggested that a compliance risk assessment (1) catalogues the legal and compliance requirements facing the company; (2) uses information gathering tools such as interviews, surveys, benchmarking and document review to determine the company’s risks of failing to comply with legal and regulatory requirements; and (3) analyzes those risks to prioritize them according to likelihood, impact, and velocity.

Properly utilized, a Risk Assessment will identify risks/gaps and monitor/review performance against ongoing business requirement and compliance best practices. Such an assessment can also be used to guide a company on how to mitigate the most significant risks through implementation of a best practices compliance program and to make an organization’s effort less “reactive” and more “proactive”.

UK Bribery Act

Principle 1 of the UK Bribery Act’s Consultative Guidance states, “Risk Assessment-The commercial organisation regularly and comprehensively assesses the nature and extent of the risks relating to bribery to which it is exposed.” The Guidance points towards several key risks which should be evaluated in this process. These risk areas include:

1. Internal Risk – this could include deficiencies in
• employee knowledge of a company’s business profile and understanding of associated bribery and corruption risks;
• employee training or skills sets; and
• the company’s compensation structure or lack of clarity in the policy on gifts, entertaining and travel expenses.

2. Country Risk – this type of risk could include: (a) perceived high levels of corruption as highlighted by corruption league tables published by reputable Non-Governmental Organizations such as Transparency International; (b) factors such as absence of anti-bribery legislation and implementation and a perceived lack of capacity of the government, media, local business community and civil society to effectively promote transparent procurement and investment policies; and (c) a culture which does not punish those who seeks bribes or make other extortion attempts.

3. Transaction Risk – this could entail items such as transactions involving charitable or political contributions, the obtaining of licenses and permits, public procurement, high value or projects with many contractors or involvement of intermediaries or agents.

4. Partnership risks – this risk could include those involving foreign business partners located in higher-risk jurisdictions, associations with prominent public office holders, insufficient knowledge or transparency of third party processes and controls.

Risk Assessment as ‘Best Practices’

Both cornerstones of guidance available to the Foreign Corrupt Practices Act (FCPA) compliance practitioner include ongoing Risk Assessment as a key component of any best practices program. The text of each document and the remarks by commentators make clear the reasons for such an ongoing assessment. Not only do best practices evolve but companies and business evolve. A well-managed organization makes an assessment of the risks it faces now and in the future and then designs appropriate risk management and control mechanisms to control such risks.

Attention should also be paid to who and how the assessment is conducted. Berland, in his article cited above, has noted that unless the Risk Assessment is protected by some form of privilege, such as the attorney-client privilege or attorney work-product privilege, the Risk Assessment “May be disclosed outside the company in the event of criminal investigation or private litigation.” However, the key point is that a Risk Assessment is absolutely mandatory and must be used as a basis for design of an effective compliance policy, whether under the FCPA or the UK Bribery Act. If a Risk Assessment is not used, it might be well nigh impossible to argue that your compliance program meets even the basic standards of either law.

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

October 16, 2010

Ongoing Compliance Assessments: FCPA, UK Bribery Act and OCED Best Practices

One of the requirements consistent throughout the Principles of Federal Prosecution of Business Organization (US Sentencing Guidelines) and its section on corporate compliance programs; the Organization for Economic Co-operation and Development (OECD) Good Practice Guidance on Internal Controls, Ethics, and Compliance, and the UK Bribery Act’s Consultative Guidance is the need for continued assessment of an anti-corruption and anti-bribery compliance program. This posting will review the specifics of each of these documents and will provide to the compliance and ethics practitioner some ideas on how to implement what each of these protocols stress is key component of any best practices compliance program.

US Sentencing Guidelines

The US Sentencing Guidelines state that there should be periodic reviews of a company’s compliance program, utilizing internal resources, such as a company’s Internal Audit function, and outside professional consultants. The OECD Good Practice states that a compliance program should be periodically re-assessed and re-evaluated to take into account any new developments. The UK Bribery Act Consultative Guidance, recently released by the UK Ministry of Justice, requires ongoing monitoring and review by noting that a compliance program and procedures should be reviewed regularly and a company should consider whether an “external verification [of the compliance program] would help.”

Speaking at the Compliance Week 2010 Annual Conference, Assistant Attorney General for the Criminal Division of the US Department of Justice, Lanny Breuer, indicated that such an external verification or assurance of the effectiveness of a compliance program is a key component to assist a company in maintaining a ‘best practices’ FCPA compliance program. He noted that it is through a mechanism such as an ongoing assessment that a company could continue to evaluate its own compliance program with reference to compliance standards which are evolving on a world wide basis.

OECD

In this same speech, Breuer cited as a benchmark for a best practices compliance and ethics program the protocols set forth in the OECD Good Practice Guidance on Internal Controls, Ethics, and Compliance. In this protocol the OECD suggested that “periodic reviews of the ethics and compliance programs or measures, designed to evaluate and improve their effectiveness in preventing and detecting foreign bribery, taking into account relevant developments in the field, and evolving international and industry standards.” Writing in the Society of Corporate Compliance and Ethics Magazine (SCCE) (Vol. 7 / No. 3), Russ Berland explained that this guidance meant that companies should regularly reassess their anti-bribery and anti-corruption compliance program to evaluate and improve its overall effectiveness. Although he did not give a time frame for this regular assessment, Berland noted that any such assessment “should take into account new developments in the area and evolving standards.

UK Bribery Act

Principle Six of the UK Bribery Act’s Consultation Guidance discusses the need for ongoing monitoring and review. The Principle states “The commercial organization institutes monitoring and review mechanisms to ensure compliance with relevant policies and procedures and identifies any issues as they arise. The organization implements improvements where appropriate.” The reasons for this continued monitoring was to ensure that if, external events like government changes, corruption convictions, or negative press reports occur, an appropriate compliance response is triggered. The Guidance noted that it would be prudent for companies to consult the publications of relevant trade bodies or regulators that could highlight examples of good or bad practice. Organizations should also ensure that their procedures take account of external methods of issue identification and reporting as a result of the statutory requirements applying to their supporting institutions, for example money laundering regulations reporting by accountants and solicitors.

The Consultative Guidance provided advice for companies which covered several specific suggestions. The senior management of higher risk and larger organizations may wish to consider whether to commission external verification or assurance of the effectiveness of anti-bribery and anti-corruption policies. An independent review can provide to a company, which is undergoing structural change or entering new markets, with an insight into the strengths and weaknesses of its anti-bribery policies and procedures and in identifying areas for improvement. Such independent assessment would also enhance a company’s credibility with business partners or to restore market confidence following the discovery of a bribery incident, to help meet the requirements of both voluntary or industry initiatives and any future pre-qualification requirements.

Ongoing Assessment as ‘Best Practices’

All three cornerstones of guidance available to the Foreign Corrupt Practices Act (FCPA) compliance practitioner include ongoing assessments as a key component of any best practices program. The text of each document and the remarks by commentators make clear the reasons for such an ongoing assessment. Not only do best practices evolve but companies and business evolve. An assessment is key to measuring where your program currently stands to allow you to know where it needs to be updated.

Attention should be paid to who and how the assessment is conducted. The entity, be it a law firm; professional consultant or other, which designed the FCPA compliance program for your company should not be the assessor. Such assessment would obviously be a conflict of interest. Additionally a drafter usually has blind spots when assessing one’s own work. An outside FCPA compliance professional should be engaged to assess your compliance policy, at no less than every two years, to review and make recommendations to keep your program at the best practices standard.

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

October 10, 2010

Schlumberger and The Management Of a Foreign Business Partner Under The FCPA

I. Schlumberger and Agent in Yemen

On Friday the Wall Street Journal, (WSJ) reported that the US Department of Justice (DOJ) was investigating allegations of possible bribery in Yemen by Schlumberger Ltd., in connect with Schlumberger’s 2002 agreement with the Yemen government to create a national exploration data-bank for the country’s oil industry. The allegations involve a foreign business representative, Zonic Invest Ltd., which became involved in the 2002 Data Bank Development Project between Schlumberger and Yemen’s national oil company, the Petroleum Exploration and Production Authority. Zonic’s General Director is the nephew of the then and current President of Yemen, Ali Abdullah Saleh. From the WSJ article, it was not clear the precise business relationship between Schlumberger and Zonic, for instance: whether Zonic was an agent of Schlumberger, a joint venture partner or simply a contractor.

In the WSJ article there were several reported allegations which stand out as classic Red Flags in Foreign Corrupt Practices Act (FCPA) compliance policies. Initially, Petroleum Exploration and Production Authority had urged Schlumberger to hire Zonic as a go-between at or near the time the contractual negotiations were nearing conclusion. Second the data-bank project went forward after Schlumberger “agreed to hire and pay Zonic a $500,000 signing bonus” then the contract between Schlumberger and the Petroleum Exploration and Production Authority was concluded. Indeed the General Director of Zonic was quoted as saying, “If it wasn’t for Zonic, there would have been no data-bank project.” Lastly, the WSJ article does not reference that any written contract was executed between Schlumberger and Zonic for this $500,000 payment.

The many Red Flags that may be raised in the WSJ report of the actions and statements that transpired before the contract for the data-bank project was concluded between Schlumberger and the Petroleum Exploration and Production Authority, there were several raised thereafter. After the contract for was concluded, WSJ reported that internal Schlumberger documents revealed that “Zonic wanted a roughly 20% cut of Schlumberger’s profits from the project.” While Schlumberger did not agree to pay such percentage of profits outright, it was noted that Schlumberger documents stated that the Yemen country manager had “suggested that those amounts could be compensated [to Zonic] through services.” These services were said to include providing personnel to the project, networking, furniture and computer hardware. Payments for such services were made, even though there was no contract between Schlumberger and Zonic, from 2002 to 2004. A contractual relationship between the parties was established in 2004 and lasted until at least 2007. The total amount paid by Schlumberger to Zonic was reported to be $1.38 million from 2003 to 2007. However, with regards to the services and products supplied by Zonic to Schlumberger, the WSJ noted that some were “above market rate” and others were unnecessary; specifically noting that over $200,000 was paid for certain computer hardware, “although Schlumberger itself was among the leading providers of such hardware.” The Daily Finance Blog reported, in an October 8, 2010 posting, that Zonic did not provide some of the services for which it was paid.

In 2008, the parties had some type of falling out leading to a breach of contract lawsuit by Zonic against Schlumberger. The Schlumberger compliance function did not become aware of Zonic matter until 2008; thereafter the company performed an internal investigation. Interestingly, this internal Schlumberger investigation concluded that “no one had violated its [Schlumberger’s] anti-corruption policy. Apparently, based on this conclusion that no Schlumberger employee had violated the company’s anti-corruption policy, the internal investigation was closed, as noted by the WSJ , “without any significant disciplinary action” of Schlumberger employees.

While this scenario, as reported in the WSJ, has numerous facts which could be the subject of several different training sessions on the FCPA, this post will focus on the actions which occurred after the conclusion of the contract for the National Data-Bank Project and subsequent actions after the inking of a written contract between Schlumberger and Zonic.

II. Management of a Foreign Business Relationship

Most companies understand the obligations to perform due diligence on foreign business partners. However such a step is only one of several steps a company should take when managing such a relationship going forward.

A. DPA Guidance

1. Monsanto

In its Deferred Prosecution Agreement (DPA) with the Monsanto Company for their FCPA violations, the DOJ provided some guidance on the continuing obligation to monitor foreign business partners. In the DPA, the DOJ agreed, after the initial due diligence and appropriate review were completed on foreign business partners, for Monsanto to implement certain post contract procedures. These requirements to Monsanto can be used as guidelines as to what the DOJ will look for from other companies who have entered into relationships with foreign business partners; especially in the area of monitoring said partner.

A company should, on a periodic basis of not less than every three years, conduct rigorous compliance audits of its operations with the foreign business partners. This monitoring would include, but not be limited to, detailed audits of the unit’s books and records, with specific attention to payments and commissions to agents, consultants, contractors, and subcontractors with responsibilities that include interactions with foreign officials and contributions to joint ventures. The compliance audit should include interviews with employees, consultants, agents, contractors, subcontractors and joint venture partners. Lastly, a review of the FCPA compliance training provided to the foreign business partner should be included.

2. Universal

In August, 2010 the DOJ announced an enforcement action involving Universal Corporation. As reported by the FCPA Professor, Universal took specific remedial steps during the pendency of its FCPA investigation process which were incorporated into the company’s DPA as a best-practices going forward. As reported in its Non-Prosecution Agreement, one of the steps implemented by Universal involved the creation of a Compliance Committee comprised of the Chief Financial Officer; General Counsel; Head of Internal Audit; Treasurer; Controller and the Principle Sales Director, which meets on a monthly basis to review and evaluate Universal’s compliance programs and training. Universal also revised and enhanced its payment approval policy which now requires an ‘approving officer’ to review all supporting documentation for a payment and to understand the purpose of the payment prior to approval. The ‘approving officer’ must certify that he or she has reviewed the existing documentation and obtained an understanding of the legitimate business purpose of the payment. The policy also requires that employees investigate any questionable payments and determine that they are legal, legitimate, and appropriate prior to approving the payment. Lastly Universal, created the position of “Relationship Officer” who was specifically tasked with managing the foreign business partner relationship both pre and post contract signing.

B. Ongoing Oversight

In addition to the DOJ guidance provided in the Monsanto and Universal matters, it is recommended that there be substantial involvement not only by the business unit most closely involved with the foreign business partner, but also by Legal; Compliance and other departments which would assist in completing the functions as outlined by the both DPAs. The most significant reason for maintaining a post-contract relationship is to ensure the business units remain engaged in the process. This involvement can also include some of the following participation, the senior business Vice President for the region where the foreign business partner operates should annually call upon the partner, in-person, to review all of the prospective business proposals and concluded business transactions that the foreign business partner has engaged in. This annual VP review must not take the place of a legal or compliance review but should focus on the relationship from the business perspective.

Managing the risk of a relationship with a foreign business partner is one of the most critical aspects of a FCPA compliance program. The documented risk for the potential violation of the FCPA by a foreign business partner to a company is quite high. To engage a foreign business partner, in a manner that properly assesses and manages the risk to, and for, a company, requires a committee of time, money and substantial effort. However, with a compliance based risk management procedure in place, the risk can be properly managed and a foreign business relationship can be successful for all parties.

The facts reported to date in the matter of Schlumberger and its (now former) foreign business partner, Zonic, demonstrate how ongoing oversight of an agent after a contract is signed is a critical component of a robust, best-practices FCPA compliance program. Even a foreign business partner, which may have raised Red Flags, enters into a contractual relationship with a company, such a relationship can be managed going forward. A Foreign Business Relationship Oversight Committee and a Relationship Manager provide additional levels of review which can be utilized to demonstrate ongoing compliance. These concepts should be incorporated into any current FCPA compliance program to assist in fulfilling the overall goals of any company’s program.

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

© Thomas R. Fox, 2010

October 7, 2010

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

Filed under: FCPA,Investigations — tfoxlaw @ 7:58 pm
Tags: , , ,

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

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

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

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

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

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

 

© Thomas R. Fox, 2010

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