After the Contract is Signed: How Frequently Should You Perform (FCPA) Due Diligence

Yesterday we participated in a workshop at the 2011 SCCE Utilities & Energy Compliance and Ethics Conference with Scott Lane, President of the Red Flag Group. In his presentation, he discussed a White Paper that he and his colleague James Walton recently released entitled, “Best Practices in Conducting FCPA /Anti-bribery Due Diligence”. We went back and read the article and found it to be an excellent resource for many questions relating to due diligence as required by the Foreign Corrupt Practices Act (FCPA) or any best practices anti-bribery and anti-corruption program. Today we will focus on the question of how often should a company perform due diligence on its foreign business relationships.

Lane and Walton begin by noting that due diligence is very hard to keep consistent as no two are ever the same. They believe it is important to keep a close watch on information sources, to search for improved providers, and ensure that the information you are looking at is useful for the business needs. The specific time frame for ongoing due diligence depends on the risk profile of a company’s foreign business relationship. They provide three benchmarks: (1) annually; (2) biennially; or (3) at contract renewal.

In making this determination, the authors suggest several risk factors which a company should evaluate in making this determination regarding the frequency of due diligence. these include:

Physical allocation of the partner: The authors define this risk as whether the foreign business partner is located in, or providing services to your company in a geographic area recognized as a high risk country. Reference can be made to the Transparency International Corruption Perceptions Index or another recognized country risk rating such as Country-Check.

Findings of the original due diligence: The authors define this factor as one based upon prior due diligence investigation. The key issues here are (1) were any Red Flags identified and (2) how were these Red Flags cleared?  It is assumed that if a Red Flag was raised in prior due diligence, then the Red Flag was cleared to enable the business relationship to come into existence. This also brings up an important point about Red Flags that is often overlooked. A Red Flag should not automatically mean that a foreign company cannot become a foreign business partner of your company. It does mean that the Red Flag must be investigated and cleared before such a foreign business relationship is created.

Type of partner: There are a side variety of foreign business relationship which require due diligence under the FCPA. As noted in several recent Deferred Prosecution Agreements, Alcatel-Lucent, Maxwell Technologies and the Panalpina settlements,  these can include resellers, agents, intermediaries, consultants, representatives, distributors, teaming partners, contractors and suppliers, consortia and joint venture partners. Those foreign business partners which are actively promoting your company in the market place put your company at the greatest risk and should therefore require more due diligence.

Type of customers the partner sells to: Most companies understand the motto  “Know Your Customer” but under FPCA, and other anti-bribery best practices, your company must also know the customers that your foreign business partner sells to or, in any other manner, interacts with. The more interaction with foreign governmental officials that your foreign business partner engages in, the more due diligence scrutiny is appropriate.

Amount of business being transacted by the partner: The authors point to this risk factor by noting that a company should keep a close watch on the dollar volume of business that it may engage in with a foreign business representative. We would suggest that a company should also review the relevant percentages of services or goods sold or services rendered for each foreign business partner. A company should certainly desire to know if a certain vendor provided a very high percentage of raw materials or any services critical to the delivery of products. Additionally if most, or all, of a company’s products are sold by or through one foreign business partner, this may call for greater due diligence scrutiny.

The authors end by noting that they believe the ideal solution for renewal of due diligence is a mixed approach based on risk. In most cases, renewals should be done annually or at least every two years. However, best practice also requires regularly checking whether the partner, or its directors, shareholders or senior executives are listed on any watch lists. This should be completed periodically – at least monthly.

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, 2011

 

 

Instrumentality thereof Under the FCPA: An Absurd Result?

The prognosticators have now spoken (yet again) and decreed that the Houston Astros will be this year’s worst team in baseball. We are well into the first week of Spring Training and the Houston Chronicle has reported that Baseball Prospectus has predicted only 67 wins for the hometown heroes this year; one less than the American League worst Kansas City Royals. Is such a result at this point in the (pre) season absurd or is it justified as defined by Baseball Prospectus’ “sobering piece of analysis for Astros fans with sobering statistics”?  You will have to prognosticate that one for yourself.

All of which brings us to one of the points the defense has used in its Motion to Dismiss in the US v. Carson matter. The FCPA and compliance world has literally been “a-twitter” over the filing of this brief which puts squarely before a federal district court the questions of just what is an “instrumentality” of a foreign government and who is a foreign government official. One of the five major points the defense argues is that Government’s interpretation that a foreign government commercial investment in an otherwise private company  leads  to the “absurd” result that such an entity becomes an instrumentality of the foreign government which made the investment.  The defense extrapolates that such an interpretation “would transform persons no one would consider to be foreign government employees into foreign officials.”

The defense provides the current example of the company CITGO which since 1990 has been a wholly-owned subsidiary of a Venezuelan-state-owned oil corporation, PDVSA. CITGO is headquartered in Houston and traces its corporate roots in the United States to 1910. Under the current thinking of the Department of Justice, the defense argues that CITGO is an “instrumentality” of the Venezuelan government and all of its Houston-based officers and employees are therefore “foreign officials” of Venezuela.

We viewed this portion of the defendant’s brief with an eye towards two recent energy related transactions. As reported in the Wall Street Journal on February 10, 2011, the Canadian company Encana will “split costs and profits” for energy development in North America with the Chinese state owned enterprise PetroChina. They will “jointly develop” shale properties and actively seek foreign investors to assist in such developments. Under the current DOJ thinking, such an entity to “split the costs and profits” might well become an instrumentality of the foreign government owned Chinese oil company. Absurd?

Back in January, BP announced it had reached an agreement with the Russian government owned energy company Rosneft, to develop energy production in the Artic. As reported in the Wall Street Journal, the two companies will jointly explore for oil and gas in the Russian Arctic, one of the world’s last remaining unexplored hydrocarbon basins. Rosneft will be issued new BP shares equivalent to a 5% stake, valued at $7.8 billion, while BP will receive a 9.5% stake in Rosneft, in addition to the 1.3% it already holds. The deal makes Rosneft the single largest BP shareholder. Could BP now become an “instrumentality” of Rosneft and thereby subject to the FCPA from that perspective? Absurd?

So at one week into Spring Training, which do you think is the more absurd result; that the Astros will be the worst team in baseball OR that when a foreign government owned entity, invests in an otherwise private company, such investment becomes an “instrumentality” of the foreign government which makes the investment?

For a copy of the defendants brief, click here.

For a copy of the Declaration of Michael Koehler (the FCPA Professor) in support of the defendant’s brief, 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, 2011

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FCPA Compliance and Ethics Blog on the Road

Next week, together with Stephen Martin, General Counsel of Corpedia, we will be having an FCPA ‘road trip’ touringn Miami on Tuesday, Atlanta on Wednesday and Cleveland in Thursday.  We will present the most current best practices for an FCPA and Bribery Act compliance program. If you reside in or near one of the venues, I hope you can join us. I would love to meet you.

All events are complimentary and both CLE and breakfast are provided. Our presentation is hosted by World Check.

Tuesday, March 1 in Miami–http://members.ethisphere.com/events/event_details.asp?id=143046

Tuesday, March 2 in Atlanta–http://members.ethisphere.com/events/event_details.asp?id=143049

Wednesday, March 3 in Cleveland–http://members.ethisphere.com/events/event_details.asp?id=143052

Five Myths About Fraud

Ed. Note-today we host a Guest Post from our Fraud Examiner Expert colleague – Tracy Coenen

We’ve all heard so much in the news about fraud over the last several years. Not a day goes by that we don’t hear about an executive caught with his hand in the cookie jar, a company that failed to follow proper accounting rules, or a compensation structure that led someone to cheat with the numbers.

In some ways, I think people are becoming immune to fraud. The cases don’t seem as significant as they would have been five years ago. They’re not as shocking as they used to be. It is sad that fraud is becoming more commonplace. And the more we hear about fraud, the more I think companies run the risk of not taking it seriously.

Most importantly, I think people are running around with some big misconceptions about employee fraud. If they mistakenly believe their company is not at risk, they are probably not actively preventing fraud. Companies must know the truth about fraud and its perpetrators in order to actively protect themselves.

The following are five of the fraud myths that I regularly run into in my fraud investigation practice. Whether owners and executives actually utter these out loud or not, merely buying into these myths mentally can be a recipe for disaster.

1. Our company does not have an internal fraud problem.

While companies would like to believe they have good employees and adequate controls to prevent fraud, the fact of the matter is that 45 percent of companies will be significantly affected by fraud, according to one international study. A separate study estimates that the average internal fraud will cost $159,000, and that almost one-fourth of fraud cases will cost companies over $1 million each.

Companies cannot afford to ignore the risk of fraud and the likelihood that fraud is occurring internally. It is too expensive, particularly when one considers the fact that there are many indirect costs of fraud, including investigation and legal costs, employee attrition, and decreased employee morale.

Actively fighting fraud means implementing policies and procedures that prevent and detect fraud. Anti-fraud professionals who are experienced with the common methods of fraud can be invaluable to this process. Whether a company gets there with employees or outside consultants, it is important to secure company information and assets to prevent internal fraud.

2. Most people are honest and won’t commit fraud.

This is a dangerous approach to take to the business of fraud. It is true that most people are generally honest. But to rely on this instead of putting controls in place to prevent fraud is a big mistake.

While it’s wise to hire those with a track record of honesty, past behavior doesn’t necessarily predict future behavior. Almost 88 percent of employees and executives who commit fraud against their employer have never before been charged or convicted of a fraud-related offense. This means it’s nearly impossible for companies to predict who is going to commit fraud and when they are going to do it.

It is a fact that honest people can and do commit fraud. Outside pressures can cause people to behave in ways they normally would not. Things that could push someone toward fraud include addictions, divorce, overwhelming debt, and gambling problems. When pressures like this are present, it’s difficult to predict who will commit fraud.

In the end, those who commit fraud come from all walks and ways of life. From clerks to executives, no one is immune. Thieves come from all social classes and all economic backgrounds. If given a strong motivation and ample opportunity, anyone can commit fraud against her or his employer.

3. If our company follows government regulations, we will be protected against fraud.

Unfortunately, the current accounting rules and regulations do not really provide protection against fraud. Sarbanes-Oxley is probably the most widely-recognized regulation dealing with fraud. It has had some positive effects because it has forced companies to review and document their policies and procedures.

Companies have spent enormous amounts of money on implementing Sarbanes-Oxley, and it’s probably discouraging to admit that even such an extensive project isn’t really preventing fraud. The regulation forces management and the board of directors to accept responsibility for issuing accurate financial statements, however, it doesn’t really ensure that companies have fraud prevention procedures in place.

In order to effectively prevent fraud, companies must create and implement policies and procedures specifically designed to deter and detect fraud. Again, this should be accomplished with the help of an anti-fraud professional who is experienced in the methods used by corporate fraudsters. A good fraud prevention program will actively prevent and detect fraud while still complying with the applicable regulations.

4. Small frauds aren’t important enough for management to worry about.

Virtually every big fraud started out as a small fraud at one point. Whether it is a minor theft of cash or a financial statement manipulation intended to cover up a substandard quarter, what starts out as a small fraud can quickly grow into a major fraud scheme. A theft of $500 may not seem significant enough for management to devote time and effort to the problem. But what if an employee was stealing $500 a week for three years? Suddenly, there is a theft of over $75,000, which could be very material to the company.

It’s important for companies to take small frauds and ethical lapses seriously. Not only does management want to cut off frauds while they are in their early stages, they also should be sending a message to employees that dishonesty is not tolerated. A zero tolerance policy is a necessary part of any good fraud prevention program.

It may be expensive to monitor and investigate smaller thefts from the company. However, in the long run, the cost will be worthwhile because the company will have stopped frauds from growing into the hundreds of thousands and millions of dollars. Therefore, an effective fraud prevention program will contain components that help the company discover fraud early.

5. Fraud will be detected by our auditors.

History has shown us that a company’s independent auditors cannot be relied upon to find fraud. This is true primarily because audits are not designed to detect fraud. They are designed to give “reasonable assurance” that the numbers shown on the financial statements are materially accurate.

Because fraud involves the active concealment of the truth, it makes it difficult for auditors to discover. Further, auditors have a tendency to become complacent with their clients. They see the same things year after year in the audit, and they may stop paying close attention. Employees who are concealing a fraud may also be comfortable with the auditors and know what procedures are coming. If that’s the case, count on the employees to be very careful with the fraud as it relates to those expected procedures.

Auditing rules have attempted to address how auditors approach the potential for fraud within companies. While the current rules are somewhat better than those of several years ago, a traditional independent audit still cannot be relied upon to detect fraud. Executives who believe differently are setting their companies up for disaster.

The Solution
Preventing fraud in companies all comes back to active prevention techniques and educating employees about fraud. First, owners and executives must be aware that they are very much at risk of experiencing internal fraud, and that the statistics show that the losses can be expensive. Then they need to take decisive action in formulating a fraud prevention program.

Education of everyone is still a very important part of fraud prevention. No company is immune to the problem, and no employee is completely free from the possibility of committing a fraud one day. After owners and executives appreciate the true magnitude of the problem, it will be through action that fraud will be prevented at their companies.

Tracy L. Coenen, CPA, CFF is a forensic accountant and fraud investigator with Sequence Inc. in Milwaukee and Chicago. She has conducted hundreds of high-stakes investigations involving financial statement fraud, securities fraud, investment fraud, bankruptcy and receivership, and criminal defense. Tracy is the author of Expert Fraud Investigation: A Step-by-Step Guide and Essentials of Corporate Fraud, and has been qualified as an expert witness in both state and federal courts. She can be reached at tracy@sequenceinc.com or 312.498.3661.

Ed.Note-this article initially appeared in the Fraud Files Blog.

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FCPA Compliance and Ethics Blog on the Road

Next week, together with Stephen Martin, General Counsel of Corpedia, we will be having an FCPA ‘road trip’ next week in Miami on Tuesday, Atlanta on Wednesday and Cleveland in Thursday.  We will present the most current best practices for an FCPA and Bribery Act compliance program. If you reside in or near one of the venues, I hope you can join us. I would love to meet you.

All events are complimentary and both CLE and breakfast are provided. Our presentation is hosted by World Check.

Tuesday, March 1 in Miami-http://members.ethisphere.com/events/event_details.asp?id=143046

Tuesday, March 2 inAtlanta-http://members.ethisphere.com/events/event_details.asp?id=143049

Wednesday, March 3 inCleveland-http://members.ethisphere.com/events/event_details.asp?id=143052

Who is a Foreign Governmental Official Under the FCPA: The Defense Attacks

As was initially reported by the FCPA Professor, lawyers for four of the individual defendants who are former executives of the Orange County, California-based valve company, Control Components Inc. have filed a Motion to Dismiss the DOJ’s case. The basis of this defense, that their actions of participating in a scheme to bribe employees of several state-owned companies in China, Malaysia and the United Arab Emirates to secure contracts, does not fall within the FCPA. This argument is based the definition of foreign official under the FCPA. The DOJ has long taken the position that any employee of a foreign government owned or back enterprise falls within the definition of a foreign governmental official under the omnibus “instrumentality thereof” clause. However, as reported by Joe Palazzolo, in the Wall Street Journal, Federal courts have never squarely considered this issue previously. The defense lawyer have winnowed the case to a single legal question: Are state-owned companies instrumentalities of foreign governments?

The defense has five points, which we set out directly from the defendant’s brief below:

First, in the absence of an express definition, the Court must give the term its ordinary meaning as used in the statute. As used in the FCPA, the term “instrumentality” refers to a governmental unit or subdivision that is akin to a “department” or an “agency,” the two terms that precede it in the statute. Thus, the term covers governmental boards, bureaus, commissions, and other department-like and agency-like governmental entities. The definition does not extend, however, to entities in which a government merely has a monetary investment (i.e., state-owned business enterprises), because such a definition would make the term fundamentally different than the terms that precede it. This conclusion is bolstered by the statute’s use of the term “foreign official,” which suggests a traditional government employee, as well as by language in other portions of the FCPA.

Second, the Government’s proposed interpretation would lead to absurd results. Among other things, if it were adopted, the Government’s definition would transform persons no one would consider to be foreign government employees – including but not limited to U.S. citizens working in the United States for companies that have some component of foreign ownership – into “foreign officials.” Additionally, in certain countries where state-owned businesses are the norm, the majority of employed individuals would be “foreign officials.”

Third, the extensive legislative history of the FCPA makes clear that Congress did not intend the statute to cover payments made to employees of state-owned business enterprises. Rather, the FCPA was aimed at preventing the special harm posed by the bribery of foreign government officials.

Fourth, as other statutes and proposed legislation make clear, Congress knows how to define the term “instrumentality” in terms of government ownership of a commercial enterprise where it desires to do so. But it did not do so in the FCPA.

Fifth, in construing statutes, courts should avoid interpretations resulting in unconstitutional vagueness. Adopting the Government’s amorphous and expansive interpretation of “instrumentality” here would result in exactly the type of unconstitutional vagueness that must be avoided. The reason is simple: The Government has never explained with any clarity what constitutes a “state-owned” business in the context of the FCPA. Is a minority investment by a foreign government enough? Is a majority investment required? Must the state direct the majority of voting rights? Is there a required element of control? Does the purpose or type of commercial enterprise matter? Could a subsidiary of a state-owned business qualify? Without a clear demarcation, especially in an era of large-scale government investments and bailouts of traditional private enterprises, the FCPA’s reach, under the Government’s theory, would be whatever the prosecution says it is in any given case. Accordingly, the Court must construe the CPA’s instrumentality provision narrowly to mean traditional government officials, and not employees of a state-owned (whatever that means) commercial business.

Oral argument on the defendant’s Motion to Dismiss is set for March 21 and as our colleague Howard Sklar has stated, “I wish I could go.”

For a copy of the defendant’s brief, 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, 2011

Handling an Overseas FCPA Investigation

We recently came across an article entitled, “Coordinating Investigations Between US Companies and their Subsidiaries or Suppliers Overseas”, by two Jones Day attorneys, John Edwards and Gillian Garrett. While not strictly focused on investigations of FCPA matters, we nevertheless found the article to be very instructive for either the in-house counsel who may perform a front line FPCA or other compliance investigation or a private practice lawyer.

The authors initially note that investigations into overseas operations present challenges different from those involved in domestic investigations. First, there are obvious cultural and linguistic barriers to completing a thorough investigation. Second, because of the time and expense involved, investigations in other countries often are done on a compressed schedule, usually on a “one-shot” basis, with no opportunity for follow-up interviews. Finally, many people outside the U.S. view the American legal system with a particularly jaundiced eye. While they know little about U.S. litigation, they have heard enough to know they do not want to be involved. In some cases, this reluctance leads to recalcitrance. These factors may hinder an investigation and the authors give advice on techniques in the investigate process which manage these issues.

1. Obtain Corporate and Departmental Organization Charts
One of the first steps that an investigator should take is to obtain organizational charts of the operations which may be the subject of the investigation. The investigator should have a good grasp on the reporting relationship between the foreign subsidiary or entity and the US company. One must also understand the roles, responsibilities and reporting relationships of the relevant employees. This should include the company leadership which may be under investigation and the departments involved.

2. Review the Company’s Relevant Public Statements
The authors believe that it is important to review the U.S. company’s public statements relevant to the investigation and to its overseas operations. One important focus of the investigation will be to assess the accuracy of these statements. The investigators should also establish a liaison with the company’s public-relations department to ensure that its future statements are consistent with the results of the investigation and the overall strategy for handling the situation.

3. Identify Key Witnesses and Records Custodians; Preserve Documents
The authors believe that the investigators should interview US personnel before they head overseas. These US interviews should be aimed at identifying key witnesses and records custodians outside the US. The investigators also need to immediately establish communications with the company’s IT department to preserve as many documents as may be possible. However the authors caution that before collecting documents and data, counsel should review both the company’s internal policy and the laws of the relevant jurisdiction(s). Lastly another key liaison should be with the company HR department, specifically to determine if any relevant employees have been disciplined and/or terminated and to coordinate any such actions on a go-forward basis.

4. Prepare for the Witness Interviews
The authors suggest four specific areas of preparation for the interviews.
a. Learn as much as possible about the foreign business or subsidiary.
b. Review any audits, testing reports or other company material on the performance of the foreign business or subsidiary.
c. Review all applicable contracts.
d. Prepare interview outlines.

5. Secure the Required Visas
The authors suggest that after the investigator completes the preparation phase, they should you should plan your trip abroad. I would digress here and urge that the visa process being as soon as you might reasonably believe that you may be required to go overseas as obtaining a visa can sometimes take weeks. Whenever an investigator starts the process, your initial step should be to obtain the appropriate visas for all the countries you wish to visit. To build flexibility into your schedule, request more time in the host countries than you think you will need.

6. Schedule Witness Interview
The authors suggest that you should schedule your interviews before you leave the US. The interviews should be during working hours. I would add that you should try and have the interviews offsite but at a minimum in a closed conference room. There should be two persons present for the investigative team to record as much of the interview as possible on paper. You should also arrange a translator, whether or not the witness speaks English as second language. While it may be appropriate to have a forensic accountant or other technical specialist present, I would not have a company representative present because it may inhibit the witness even more than simply being questioned by a US lawyer.

7. During the Interview
An attorney should explain the interview process and even in a foreign jurisdiction, give an Upjohn warning. After introducing yourself, begin with general background questions. After establishing some rapport with the witness go through the facts that you need to investigate. The authors caution that an investigator should not be wedded to his outline, but should listen to the witness’s responses and question therefrom. The investigator and the note-taker should also watch the body language of the witness and assess the witness’s demeanor. Before closing, the investigator should review their notes and follow up on any open points.

8. Prepare a Witness Interview Memoranda

The authors conclude their paper by noting that the investigator should prepare an interview memoranda as soon as possible. This memorandum should include a recitation of the facts elicited and the lawyer’s thoughts and impressions. All memoranda should clearly be marked as attorney/work product and attorney/client privileged. Lastly, the investigator should maintain a file of his interview process, procedure, notes and memoranda.

The article is a good review of how to prepare for an interview overseas. We recommend that you follow these general guidelines as you prepare for any FCPA or compliance investigation outside the US.
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, 2011

Haist on Foreign Joint Ventures and the FCPA – Part II

In our most recent post, we wrote about an article by Dennis Haist, General Counsel of the Steele Foundation, which recently appeared in the ACC Docket. The article was entitled, “Guilt by Association: Transnational Joint Ventures and the FCPA”. In our first post we discussed Haist’s list of risk characteristics of a foreign joint venture for a US company. In our concluding post on Haist’s article, we will discuss some of the tactics that Haist suggests a US company engage in, to identify these risks in the due diligence phase and to manage these risks in the contract negotiation stage and thereafter.

Due Diligence
The starting point for any company is to engage in a due diligence investigation on any prospective foreign joint venture partners. Such a foreign entity or persons must provide enough basic information that a reasonable investigation can be performed. Haist breaks down his suggested due diligence inquires as follows:
1. Entity information
• Entity name, DBA, previous names, physical address and contact information, website address.
• Legal structure, jurisdiction of organization, date organized and whether the entity is publicly traded.
• Entity registration number(s), and dates and places of registration; number of years in business.
• Entity tax licenses, business licenses, or certificates or commercial registrations.
• Description of business, customers, industry sectors.
• Names, addresses and jurisdictions of formation for all companies or other affiliated entities, and ownership interest in each.
• Names and contact information for main point of contact.
• Names and contact information for entity’s outside accountants/auditors and primary legal counsel.
2. Ownership information
• Name, address, nationality, percentage of ownership and date of acquisition for each parent company up to ultimate parent.
• Name, nationality, ID type/number, percent ownership and date of acquisition for all shareholders and owners (5 percent threshold more for publicly-listed entity).
• Identity of any other persons having a direct or indirect interest in the entity’s equity, revenues or profits.
• Identity of any other person able to exercise control over the entity through any arrangement or relationship.
• Information on any direct or indirect ownership interest by any government, government employee or official; or political party, party official or candidate.
3. Management information
• Name, address, nationality, ID type/number and title for each member of the entity’s governing board.
• Name, address, nationality, ID type/number and title for each officer of the entity.
• Information on any other business affiliations of principals, owners, partners, directors, officers or key employees who will manage the business relationship.
• Information on whether any principals, owners, partners, directors, officers or employees, currently or in the past, have been officials or candidates of a political party or been elected to any political office.
4. Government relationships
• Information on whether any principals, owners, partners, directors, officers or employees hold any official office or have any duties for any government agency or public international organization.
• Information on whether any owners, directors, officers or key employees have an immediate family member who is an employee, contractor or official of the foreign government, or a public international organization.
• Information on whether any employee of, or contractor or consultant to, any government entity or public international organization will benefit from the joint venture.
• Approximate percentage of entity’s overall annual sales revenue derived from government sales.
5. Business conduct
• Information on whether the entity has ever been barred or suspended from doing business with a government entity Information on whether any principals, owners, partners, directors, officers or employees are identified on any government designated nationals, blocked persons, sanction, embargo or denied persons lists.
• Information on whether the entity, its principals, owners, partners, directors, officers or employees have ever been charged with, convicted of, or alleged to have been engaged in fraud, bribery, misrepresentation and/or any other criminal act.
• Information on whether the entity, its principals, owners, partners, directors, officers or employees have been investigated for violating the US Foreign Corrupt Practices Act or any anti-corruption law.
• Information on whether the entity has a compliance program which includes the prevention of bribery and information on the training of employees.
6. References
• Three or more unrelated business references, including a bank and existing client.
7. Certification/authorization/declaration
• Certification of accuracy.
• Authorization to conduct due diligence, authorization for third parties to release data and consent to collection of data.
• Anti-corruption compliance declaration.

Haist emphasized that an over-riding key is to document the entire process that your company goes through in investigated and creating a foreign joint venture. Additionally, it is important to remember, that obtaining this information is only one step. A company must evaluate the information and follow up if responses to such inquiries warrant such action. A paper program is simply not good enough and can lead to serious consequences if Red Flags are not reviewed and cleared.

Contract Issues
Haist believes that any Joint Venture Agreement with a foreign business partner should include FCPA anti-bribery and corruption representations, warranties and covenants. Theses representations, warranties and covenants not to violate the FCPA should also include reference to the national and local anti-corruption laws of the foreign country, including laws enacted to comply with the OECD anti-bribery Convention and the UK Bribery Act. If the Joint Venture will operate in any other countries, the anti-corruption laws of those jurisdictions should be referenced as well.

Additional clauses that Haist suggests including in the Joint Venture Agreement are the following:
• A right of immediate termination for breach of the warranties or covenants relating to FCPA-anti-bribery and anti-corruption.
• A requirement for annual certification of compliance with such provisions by joint venture partners and joint venture officers, managers and employees.
• Require that the joint venture follow generally accepted accounting principles (GAAP), and conduct an annual audit by an agreed upon independent accounting firm.
• The right to conduct ongoing audits of the joint venture books.
• Prohibit the creation of any funds without the approval of the joint venture’s governing body (supermajority approval in the case of minority interest by the multinational).
• If the foreign joint venture partner has day-to-day management responsibilities, require dual signatures for checks or electronic funds transfers drawn on joint venture bank accounts.
• Require that the joint venture conduct investigative due diligence on agents, consultants and other third parties retained by the joint venture.
• Require the implementation of a code of business conduct by the joint venture and implement an anonymous reporting mechanism for joint venture employees.

Navigating the waters involving a foreign joint venture partner are tricky at best. In addition to all the business issues, the added requirements of the FCPA and the UK Bribery Act for foreign joint ventures make such a category of business relationship a potentially risky step. His article provides to the FCPA practitioner solid advice with which to provide counsel, whether you are in-house counsel or a lawyer in private practice, to your client who may be new to the foreign joint venture arena. Once again, we applaud him for putting together such an article to use as a guidepost when reviewing the creation of foreign joint ventures, from an FCPA perspective.
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, 2011

Foreign Joint Ventures: Dennis Haist and Some Characteristics of FCPA Risk

In an article in the January/February issue of the ACC Docket, entitled “Guilt by Association: Transnational Joint Ventures and the FCPA”; Dennis Haist, General Counsel of The Steele Foundation (Steele) discussed some of the risks US companies can encounter under the Foreign Corrupt Practices Act (FCPA) when doing business overseas through the vehicle of a Joint Venture. After an introduction of the increasing risks to US companies for FCPA enforcement by reviewing some recent Department of Justice (DOJ) enforcement actions, Haist reviews some of the characteristics which may increase FCPA risk. We found his list to be a useful resource in thinking through FCPA compliance. The listed included the following:

1. Sharing of Risk/Reward. The commingling of risk and reward by the joint venture participants. Most generally, a transnational joint venture will involve the cooperative pooling of resources by the participants, and the sharing of the rewards of the joint venture. The multinational will therefore benefit from any business obtained or retained, or any permits, licenses, permissions or other advantages granted to the joint venture through improper payments to foreign officials.
2. Local Content Requirement. A joint venture with a local company may be a jurisdictional requirement to participate in that foreign government’s tendering process. Many times a foreign public tender process will restrict bidders to local companies or joint ventures that include a local company for content. The local company will likely use this requirement to negotiate an equal or majority equity interest and management control over the joint venture, adversely impacting the multinational’s ability to control compliance.
3. Joint Venture Partner Selection Process. The foreign joint venture partner is usually selected based upon its knowledge of the local playing field and its connections to those players. Typically a business unit will attempt to nominate a strong local partner who is well connected within the country, with knowledge of how things are done to enhance the likelihood of business success. In many such situations, a company’s law department will be brought into the discussions only after the preliminary negotiations have taken place, and perhaps even after the development of a term sheet, letter of intent or heads of agreement with the prospective partner. If compliance terms and conditions have not been a discussion in these preliminary negotiations, it may well be difficult to introduce them thereafter.
4. The dreaded “Recommendation”. A governmental official may recommend the foreign joint venture partner. Unless the prospective partner was only one entity on a formal list of re-qualified local partners, such a recommendation should raise always red flag.
5. Foreign Law Requirement. It is often the case that when a foreign joint venture entity is formed, it is the local legal requirements that it must be formed under the laws of the foreign country. Such laws will usually dictate a certain percentage equity interest by the foreign partner and the appointment of local personnel to officer and management positions.
6. Locals Dealing with Locals. The foreign joint venture partner often has the designated responsibility for day-to-day interface with local government officials. These joint venture representatives will blanch at the seconding of expensive US or Western European expatriates to the joint venture and may well thwart any such action if the foreign partner has an equal or controlling equity interest in the joint venture.
7. Management Fee. The foreign joint venture partner may receive a “management” fee, which may be used for improper purposes. Such fees may simply be based upon a percentage of joint venture revenue or profit, and often are not required to correspond to defined tasks, or specific efforts or hours. Typically there are no substantive billings associated with such fees, they simply become due. Under this type of arrangement, it is almost impossible to justify this fee if requested by the Department Of Justice.
8. Books and Records. The books and records of the joint venture, or portions of them, may be kept in the local language, complicating auditing. The problem becomes more difficult if the foreign joint venture partner is receiving the sponsor or management fees discussed above, and keeps its books of account only in the local language. Even if the books and records are maintained in English they usually are not kept up to a US public company, SOX or other standard. This in and of itself, is a violation of the FCPA.
9. Can you talk the talk? The multinational may not have financial oversight personnel with requisite language skills in the foreign country. Some companies have a policy that English will be used throughout the world in its business dealings. However, even with such an English only policy in place, the risks represented by such lack of effective oversight by the multinational extend not only to potential FCPA violations, but to other corrupt acts, including kickbacks, fraud and theft.
10. Lack of Controls. The joint venture may have local bank accounts or funds that do not require dual signatures, precluding a reasonable level of control over the use of joint venture funds. Once again, such a lack of controls may be a per se FCPA books and records violation.

Haist goes on in his article to list several protections which the FCPA compliance practitioner can put in place to attempt to deal with or manage these risks. We will discuss some of these risk management strategies in a subsequent posting. We recommend Haist’s article for your review and applaud him for putting together such a list to use as a guidepost when reviewing the creation of foreign joint ventures, from an FCPA perspective.

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, 2011

 

Supply Chain Compliance Audit: The Apple 2011 Supplier Responsibility Report

We believe that a key component of managing foreign business partners, including vendors in the Supply Chain under the Foreign Corrupt Practices Act (FCPA), is the right to audit. While others have indicated that they feel such a right is not a key component, one thing we all agree on is that if you have that right, you must exercise it. We were therefore interested this week when Apple released its 2011 Supplier Responsibility Report. Apple looked at a variety of issues that affect its business relationships with its suppliers, these areas included training, protecting of workers, use of underage labor and social responsibility. The area which Apple audited that caught its attention was compliance.

In this Supplier Responsibility Report Apple set forth its audit protocols. We felt the Report provided a good outline of such an audit program and is useful for the compliance practitioner; whether following the FCPA, Bribery Act or some other similar legislation. Initially, Apple stated that it has a rigorous monitoring program to ensure its products meet the appropriate compliance conditions. Of the suppliers Apple audited in 2010, more than 40 percent stated that Apple was the first company ever to have audited their facility for compliance.

Audit Site Selection
Each year, Apple audits more factories across its supply chain base and audits all final assembly manufacturers every year. Apple also selects other suppliers based on risk factors, such as conditions in the country where a facility is located and the facility’s past audit performance, enabling Apple to focus its efforts where it believes it can have the greatest impact. As of December 2010, Apple reported that is has audited 288 facilities located in China, the Czech Republic, Malaysia, the Philippines, Singapore, South Korea, Taiwan, Thailand and the United States.

Audit process
An Apple supplier responsibility auditor leads every audit, supported by local third-party auditors trained to use Apple’s detailed audit protocol and to assess the requirements as specified in Apple’s compliance program. The audited supply chain vendors included final assembly manufacturers, component suppliers which manufacture parts, peripherals and components. Apple also audits non-production suppliers, such as office supply vendors and call centers which provide products and services, that are not part of the Apple manufacturing process.

Apple audits cross-reference data from multiple sites. It conducts interviews with employees, contract workers and senior management in relevant functional areas. Apple also conducts a physical inspection of manufacturing facilities and factory-managed dormitories and dining areas, as well as a review of records and relevant policies and procedures. Apple also believes that there may be cases where its audit reveals compliance in actual practice, but the underlying management system may not be strong enough to prevent violations. For this reason, the Apple audits include examination of the management systems, such as policies and procedures, roles and responsibilities and training programs, underlying every category in its compliance program.

Audit Review
After the audit is complete, Apple reviews all audit findings with the facility’s senior management team. When a violation is found, Apple requires that the facility implement a corrective action plan that addresses the specific violation, as well as the underlying management system. The company expects that all corrective and preventive action plans will be closed within 90 days after the audit. The goal is to drive each facility toward compliance with Apple’s compliance program, as Apple believes that this provides the best path to positive change over the long term. Apple also performs a follow up verification audit to confirm that actions have been executed, and collaborate with the supplier until issues are fully addressed.

If a facility’s actions do not meet its demands, Apple may have no choice but to terminate the business relationship. This final point was driven home by an incident which occurred during the audit process. Apple found one of its suppliers had engaged in an offer to bribe Apple’s audit team and Apple reported that it terminated its business relationship with that supplier. We certainly applaud Apple’s response to that incident.

While we congratulate Apple for having a compliance audit program as part of its compliance best practice, we further applaud Apple for actually performing the compliance audit AND making the final report available. This is very useful guidance to the compliance practitioner and demonstrates that a thoughtful and thorough program can be an integral part of any anti-corruption 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, 2011

FCPA Risk Assessments: New Input into Current Best Practices

We believe that Risk Assessment is a tool and is one with which a company should begin to craft its Foreign Corrupt Practices (FCPA) or UK Bribery Act 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. Both the 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. So far, in 2011 the US Department of Justice (DOJ) has concluded three FCPA enforcement actions which specify some factors which a company should review when making a Risk Assessment.

The three enforcement actions, involving the companies Alcatel-Lucent, Maxwell Technologies and Tyson Foods all had common areas that the DOJ indicated were FCPA compliance risk areas which should be evaluated for a minimum best practices FCPA compliance program. In both Alcatel-Lucent and Maxwell Technologies, the Deferred Prosecution Agreements (DPAs) listed the seven following areas of risk to be assessed.

1.         Geography-where does your Company do business.

2.         Interaction with types and levels of Governments.

3.         Industrial Sector of Operations.

4.         Involvement with Joint Ventures.

5.         Licenses and Permits in Operations.

6.         Degree of Government Oversight.

7.         Volume and Importance of Goods and Personnel Going Through Customs and Immigration.

In the Tyson Foods DPA, this list was reduced to the following (1) Geography, (2) Interaction with Governments, and (3) Industrial Sector of Operations. It would seem that the DOJ did not believe that Tyson Foods had the same compliance risks as Alcatel-Lucent and Maxwell Technologies because (a) there limited internal sales market and (b) the fact it only has 6 food processing plants outside the United States.

These factors provide guidance into some of the key areas that the DOJ apparently believes can put a company at higher FCPA risk. These factors supplement those listed in the UK Bribery, Consultative Guidance which states, “Risk Assessment – The commercial organization 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 the Consultative Guidance and the recent DPAs provide guidance to the FCPA compliance practitioner and include ongoing Risk Assessment as a key component of any best practices program. 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. However, the key point is that a Risk Assessment is absolutely mandatory and must be used as a basis for the 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, 2011

Tyson Foods DPA-Part II: Compliance Program Best Practices under the FCPA

In this post we are concluding our review of the Tyson Foods settlement, which both the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) announced last week, of its violations of the Foreign Corrupt Practices Act (FCPA). In yesterday’s posting we discussed the reasons for the settlement and the specifics of the monetary penalty assessed against Tyson Foods. In today’s posting we will discuss the requirements set forth in the Corporate Compliance Program, which is found as Attachment C to the Tyson Foods Deferred Prosecution Agreement (DPA) and our thoughts on why the Tyson Foods matter falls directly into conduct which the FCPA is designed to prevent.

I. Corporate Compliance Program
As indicated the Corporate Compliance Program is set forth in Attachment C of the DPA. Although made specific to the facts and circumstances surrounding the Tyson Foods enforcement action, it nevertheless gives a full picture of the DOJ’s current thoughts on the minimum compliance policies and procedures for a best practices FCPA compliance program. Interestingly, the DOJ set out the basis for the Corporate Compliance reporting which Tyson Foods is required to make under its DPA. The five bases are:
1. Tyson Foods has “already engaged in significant remediation related to the misconduct” at issue and “implemented and enhanced compliance program”.
2. Approximately 85-90% of Tyson Foods sales are domestic.
3. Tyson Foods operates 6 production facilities outside the US; 3 in Brazil and 3 in Mexico. All 6 have had “rigorous FCPA reviews”.
4. Tyson Foods only direct government customers are domestic US. and
5. The problematic operations in Tyson Foods’ Mexican entity, which led to the underlying FCPA violations, comprise less than 1% of Tyson Foods global net sales.

In addition to more well-known factors that the DOJ/SEC utilizes in assessing a company’s conduct during a FCPA enforcement action are a couple of factors not previously discussed. Those are factors 3, 4 and 5 above. Recognizing that there is no de minimus requirement or defense in the FCPA, nevertheless these factors may set a precedent for examples a company may use in negotiations with the DOJ/SEC on a go-forward basis. They are:
1. FCPA Compliance Policy and Tone at the Top. The Company should develop and promulgate a clearly articulated and visible corporate policy against violations of the FCPA and a strong commitment from senior management.
2. Anti-Corruption Policies and Procedures. The Company should develop and promulgate compliance standards and procedures which shall include policies governing:
a. gifts;
b. hospitality, entertainment, and expenses;
c. customer travel;
d. political contributions;
e. charitable donations and sponsorships;
f. facilitation payments; and
g. solicitation and extortion.
3. Use of Risk Assessment. The Company should develop these compliance standards and procedures using a risk assessment.
4. Annual Review. The Company should review its anti-corruption compliance standards and procedures, on no less than an annual basis.
5. Senior Management Oversight and Reporting. The Company should assign responsibility to one or more senior corporate executives of the Company for the implementation and oversight of its Company’s anti-corruption policies.
6. Internal Controls. The Company should ensure that it has a system of internal controls for the purpose of foreign bribery or concealing bribery.
7. Training. FCPA training which shall include: (a) training for all directors and officers, and, where necessary and appropriate, employees, agents, and business partners; and (b) annual certifications, certifying compliance with the training requirements.
8. Ongoing Advice and Internal Reporting. The Company should establish or maintain an effective system for (a) Providing Guidance; (b) Internal Reporting; and (c) Response to such internal reporting.
9. Discipline. The Company should have appropriate disciplinary procedures to address, violations of the anti-corruption laws and the Company’s anti-corruption compliance code, policies, and procedures.
10. Foreign Business Representatives. The Company shall (1) Perform appropriate due diligence on foreign business representatives; (2) Inform foreign business partners on its FCPA compliance program; (3) Seek reciprocal anti-corruption and anti-bribery commitments from its foreign business partners.
11. Compliance Terms and Conditions. The Company should include FCPA terms and conditions in its contracts with foreign business partners.

12. Ongoing Assessment. The Company should conduct ongoing assessments of its FCPA compliance program.In the evolving best practices for a FCPA compliance program, as set forth in the Tyson Foods DPA, we would note a relatively new factor to be considered in a company’s risk assessment. That is found in Section 3 of Attachment C; wherein the risk assessment shall take into account the following factors when assessing the risks of foreign bribery: (1) the company’s geographic organization; (2) interaction with foreign governments; and (3) industrial sector of operation.

This final factor would appear to require a risk assessment to include the industry to which the company operation is embedded. Presumably this would include foreign government licenses, permits or other approvals which a US company would be required to obtain in operations overseas. As Tyson Foods required a veterinarian’s inspection of its Mexican food products, this requirement may focus directly on Tyson Foods. Noted FCPA specialist Michael Volkov, has opined he believes “that the DOJ is trying to refine its compliance program expectations and baseline requirements.” The addition of language reflects DOJ’s “experience with industry-wide investigations through which it learns basic practices in the industry and wants to ensure that compliance programs address specific risks arising from the industry practice.” Whatever the correct answer may be, this new factor is something which all US companies should now include in their overall FCPA risk assessment.

We would also note that will Tyson Foods is required to make three reports to the DOJ, which shall incorporate “the Department’s views and comments on Tyson’s prior reviews and reports, to further monitor and assess whether the policies and procedures of Tyson are reasonably designed to detect and prevent violations of the FCPA and other applicable anticorruption laws.” The reader will note that the most significant part of this obligation is that it does NOT include an external corporate monitor.

II. Applicability of FCPA
In his post entitled, “Tyson Foods Settles FCPA Enforcement Action Involving Mexican Veterinarians and Their No-Show Wives” our colleague the FCPA Professor stated:

Yet another FCPA enforcement action raises the issue of whether the FCPA’s “obtain or retain business” element means anything anymore or whether the FCPA, contrary to Congressional intent, has morphed into an all-purpose corporate ethics statute and – in a game of chicken – companies opt to settle rather than mount a legal defense.

We believe that the Tyson Foods enforcement action is precisely the type of matter that Congress intended to outlaw by passing the FCPA. In the DPA Attachment A, entitled “Statement of Facts”; it relates that fictitious and fraudulent payments were made to wives of federal meat inspectors who had regulatory supervision over the Tyson Foods Mexican food processing operation. Paragraph 19 of the “Statement of Facts” related that a Tyson Foods official noted that the payments to the wives were to keep the TIF [Mexican federal inspectors] veterinarians “from making trouble at the plant…” For a food processing plant, there does not sound like a much more solid basis for “keeping or retaining business” than by paying off, through their wives, the federal inspectors.

Although this “Statement of Facts” did not detail precisely just what the inspectors were paid to overlook, I think it is reasonable to assume that there was a quid pro quo for payments that were made. Even if there was no overt action, or commission by affirmatively approving food products which should have been destroyed because they did not meet code; the simple of fact of omission in failing to timely inspect can be equally troubling and illegal. I think it is also fair to assume that if Tyson Foods had adequate records of inspections, it would have produced them in this enforcement action.

The FCPA was passed in 1977 to deal with a US problem; that being US companies were paying bribes to foreign governmental officials to obtain or retain business. It is a supply side solution to a supply side problem. While the US government cannot control the fact that a federal food product inspector in Mexico may ask for or accept a bribe in exchange for not banning or quarantining an unsafe food product, the DOJ/SEC can and should prosecute companies which pay food inspectors to do so.

In an article, dated February 12, 2011 in the New York Times, entitled “Tyson Settles U.S. Charges of Bribery” Richard Cassin, author of the FCPA Blog, is quoted. He stated “It raises the question whether there were food safety issues in the plants that were overlooked because of the bribery.” He also stated that this information made him consider the safety of some of the food products which may have come out of this facility. These observations drive home one of the points which the FCPA Blog posts upon regularly, and did so again on Friday in a post entitled “Playing Chicken With The Rule Of Law”. It is that public graft is simply not a victimless crime. The posting quoted Elizabeth Spahn, on the issue of petty bribery, “Like it or not, we are all in this together. Everybody gets hurt.”

Here the actions of Tyson Foods executives may have put the American public at a health risk, by allowing us to eat food that was not been properly inspected, based upon simple bribery to keep the Mexican federal inspectors “from making trouble at the plant”. This certainly sounds like Tyson Foods was using this illegal scheme to obtain or retain the business of the American food eating public.

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, 2011