FCPA Compliance and Ethics Blog

February 14, 2011

Tyson Food’s DPA-Part I: A Lesson in Criminal Penalty Reduction under the FCPA

On February 10, 2011, Tyson Foods announced a settlement of outstanding violations of the Foreign Corrupt Practices Act (FCPA) with the Department of Justice (DOJ) and Securities and Exchange Commission (SEC). As reported by the FCPA Blog, the Tyson Foods agreed to pay a $4 million criminal penalty and $1.2 million in disgorgement and pre-judgment interest to resolve charges related to illegal payments by company representatives to government-employed inspection veterinarians in Mexico and a cover-up of the payments. This settlement had several interesting elements which should be noted by the FCPA practitioner. We will explore these developments in our next two postings. Today’s post will focus on the detailed discussion of the reasons for the settlement and the specifics of the monetary penalty assessed against Tyson Foods.

Initially we would note that in this settlement, the DOJ continues its recent course of action in providing greater specificity in the basis upon which the final settlement was concluded. We applaud the DOJ for this course of action and hope they will continue to do so. By providing such transparency, the DOJ affords greater information on its procedures to the compliance community.

I. The Facts

The fact pattern would seem to be precisely the scenario that the FCPA was designed to prevent. Tyson Food’s Mexican subsidiary, Tyson de Mexico, between the years of 2004 and 2006, paid $90,000 to two publicly-employed veterinarians who inspected its Mexican plants, generating profits for Tyson of $880,000. The payments went directly to the veterinarians and to their wives who were listed on the payroll of Tyson de Mexico. The bribes were intended to keep the veterinarians from disrupting the operations of the meat-production facilities. When these payments were discovered by Tyson Food’s in the US in 2004 and thereafter terminated, Tyson representatives made the same amounts of payments through the creation of fictitious invoices for veterinarian services to the wives of the inspectors to match the amount previously paid to their spouses.

II.        Tyson’s Conduct after Self-Disclosure

As stated in the Deferred Prosecution Agreement (DPA), the DOJ entered into the DPA with Tyson based, in large part, because of the conduct of Tyson Foods after it self-disclosed the matter to the DOJ. The DOJ noted the following factors:

a. Tyson voluntarily disclosed the misconduct described in the Information and Statement of Facts;

b. Tyson conducted a thorough internal investigation of that misconduct;

c. Tyson reported all of its findings to the DOJ;

d. Tyson cooperated in the DOJ’s investigation of this matter;

e. Tyson undertook remedial measures as described in the DPA;

f. Tyson agreed to continue to cooperate with the DOJ in any investigation of the conduct of Tyson and its directors, officers, employees, agents, consultants, subsidiaries, contractors, and subcontractors relating to violations of the FCPA;

g. Tyson cooperated and agreed to continue to cooperate with the SEC in its investigation of the conduct of Tyson and its directors, officers, employees, agents, consultants, subsidiaries, contractors, and subcontractors relating to corrupt payments and related false accounting and internal controls issues.

All of these actions by Tyson make clear that after disclosure, the best course of action that a company can engage in during an enforcement action is full cooperation with the DOJ and SEC. Followed immediately behind this full cooperation, a company should pro-actively institute remedial measures regarding the conduct which led to the FCPA violation; and a full review, assessment and audit of its FCPA compliance program. Companies which wait to be told what the DOJ wants to see in terms of a best practices FCPA compliance program would not be as likely to receive such credit by the DOJ in settlement negotiations regarding the penalty assessment.

III. Assessment of Monetary Penalty

We were very impressed that the DOJ set out in detail the calculation on how the monetary penalty was assessed. We set it out in full below.

6. Payment of Monetary Penalty: The Department and Tyson agree that application of the United States Sentencing Guidelines (“USSG” or “Sentencing Guidelines”) to determine the applicable fine range yields the following analysis:

a. The 2006 USSG are applicable to this matter.

b. Base Offense. Based upon USSG 2Cl.1, the total offense level is 28, calculated as follows:

(a)(2) Base Offense Level— 12

(b)(1) More than one bribe— +2

(b)(2) Value of benefit received more than $400,000— + 14

TOTAL OFFENSE LEVEL— 28

c. Base Fine. Based upon USSG §8C2.4(a)(l) and (d), the base fine is $6,300,000 (the fine indicated in the Offense Level Fine Table ($6,300,000) is used where such number is greater than the pecuniary gain to the organization from the offense ($880,000).

d. Culpability Score. Based upon USSG §§8C2.5, the culpability score is 4, calculated as follows:

(a) Base Culpability Score—5

(b)(1) Organization had 1,000 or more employees and 311individuals within high-level personnel of the organization participated in, condoned, or was willfully ignorant of the offense— +4

(g)(1) The organization, prior to an imminent threat of disclosure or government investigation, within a reasonably prompt time after becoming aware of the offense, reported the offense, fully cooperated, and clearly demonstrated recognition and affirmative acceptance of responsibility for its criminal conduct.— (negative)-5

e. Calculation of Fine Range.

Base Fine— $6,300,000

Multipliers 0.8— (minimum)/1.6(maximum)

Fine Range— $5,040,000 to $10,080,000.

Tyson agreed to pay a monetary penalty in the amount of $4,000,000. The key for the overall reduction in the criminal penalty paid by Tyson is found in the following: The organization, prior to an imminent threat of disclosure or government investigation, within a reasonably prompt time after becoming aware of the offense, reported the offense, fully cooperated, and clearly demonstrated recognition and affirmative acceptance of responsibility for its criminal conduct. So the three key points to be derived from this language are:

  1. Self-disclosure;
  2. Full cooperation; and
  3. Recognition and affirmative acceptance of responsibility.

Once again, we applaud the DOJ for setting forth in such full detail these calculations and this information in  Tyson Foods DPA. In tomorrow’s post we will review the best practices in a FCPA compliance program, as suggested by the Tyson Food’s DPA and some additional issues. Until then, Happy Valentine’s Day to all….

For a copy of the Tyson Food’s DPA, 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

 

February 11, 2011

The Intersection of Security and the UK Bribery Act

Filed under: Bribery Act,compliance programs — tfoxlaw @ 5:30 am
Tags: ,

Ed. Note-recently Graham Clarke, Director of Group Security for Centrica, was interviewed by Harriet O’Brien about his experiences in leading Centrica’s response to implementation of the UK Bribery Act’s ‘adequate procedures’.

Could you give an example of how this relates to anti‐bribery and corruption?
One thing that it does is to show that the company is serious about meeting its professional and regulatory obligations in providing effective security. Making us a secure organization and helping us drive a security culture through the business then enables us to be more compliant and much more resilient to the risk of security incidents or fraud. It is also about showing that, because we have national critical infrastructure responsibilities, we are doing all we can to keep our sites and people secure and as a result keeping our customers lights on and making sure they are warm in bad weather. It is also an indication that we’re very keen to meet our corporate social responsibilities by ensuring our assets are secure and where we operate in communities; we understand the need to be a good neighbor.

How will the bribery act affect your business?
The energy industry, being so diverse, should have a lot of concerns about the effect that bribery risk can have on organization. Because of the type of work we do, whether that’s in the supply of gas/electricity to people’s homes or whether it’s the sourcing of gas, particularly in developing countries, where the regulations might not be at the same level as ours in the UK. However, the impact of the new UK Bribery Act will be worldwide and quite clearly states that companies operating in the UK, anywhere in the world could be affected by offences of bribery. As such, we have to make sure that our behavior is appropriate, whether we are operating in the UK or we’re operating internationally. One particular area that is of concern to me, is capital expenditure programs, particularly around new construction projects and when, for example, you think over the next few years the energy industry is going to be investing maybe billions of pounds in new nuclear plants. The risk in that amount of investment not being managed appropriately is significant, particularly when you think of the previous problems that have occurred in the construction industry in relation to the management and procurement of contracts. The government are talking about 50 billion in investment in new nuclear and that is clearly a significant amount of business.

We need to show that we are serious as a country in complying with these new requirements; obviously one of these is supply chain in relation where we need clear processes in place when purchasing and receiving goods and services to ensure, for example, that there’s a separation of duties in the approval and payment of invoices, and that you could track any odd or illegal payments. Procurement policies should be clearly communicated to all suppliers that there is a process in place to be able to apply sanctions and the right to audit if companies that you’re working with transgress. Including a clear statement on the fact that you conduct business with integrity these are the controls that need to be in place when looking at procurement and supply chain.

Ultimately, we should all be responding to the bribery act by ensuring that we have in place adequate procedures to prevent the risk of bribery before the legislation comes into place. Although I don’t believe that as an organization we’re doing anything wrong in the meantime we clearly want to make sure that we are resilient to risk in the future.

Once the bribery act comes into force, what things do you believe will affect your business?

The areas that there will undoubtedly be confusion around are gifts and hospitality and the responsibilities we all have in managing third party relationships. Gifts and hospitality is something that as long as its proportionate and appropriate encourages good business providing you stick clearly to the rules and the controls the company has in place. Importantly, gifts or hospitality, should not influence a business decision, but be part of building business relationships and certainly not part of signing an agreement.

In a company such as my own, we have a gift and hospitality policy in place that we are expected to follow at all times. Perhaps more importantly, going forward, there will be a need to make sure that you have a means to record any offers or acceptance of gifts or hospitality. That way you know that you are able to comply exactly with the policy that is set and therefore comply with the new legislation, which will confirm the requirement for gifts and hospitality to be appropriate and proportionate. Being able to be audited on your approach to the issue is important internally; we should want to know that our businesses are following the guidelines set within the legislation. Communication is also important, so that employees are aware of the limits and can comply. We are looking to introduce a piece of software that will enable us to manage and audit the process much more easily and transparently.

Another area of concern for energy companies is the use of agents and intermediaries. You need to make sure that fees paid to agents are appropriate and justifiable and are clearly recorded and agreed in advance. The industry does tend to use agents particularly when moving into new territories because they clearly need local knowledge and a grasp of the rules, regulations and culture in those countries. I think that it is absolutely essential that clear rules are in place and they do not try to exceed the expectations that are placed upon them. My view is that companies should resist payments for success as this may encourage individuals to step outside the guidelines to deliver above expectations. This would avoid rewarding or encouraging bad behavior.

The UK, US and Germany all have their own compliance regulations. Do you think that this will create competition between other countries?

I think that the work that Transparency International have been doing in this area, together with the European Union, in encouraging countries to go down this route, is admirable. It is important for everybody to acknowledge that bribery and corruption exists, because of the impact that it has on people further down the food chain, on poverty, etc. There is a swell of interest in putting whatever is wrong, right and for us all to take part in that. I think it will take a while for it to filter through but the UK has an opportunity to take the lead. We are going to have to comply with this strict legislation but I believe most countries are already behaving appropriately. The important thing in all this is transparency.

There also needs to be some consistency in the way these things are dealt with and that to a large extent will be down to the judiciary. If you take the UK, for example, there seems to be a move by the judiciary to say that cases should be dealt with through the courts and not handled by negotiated financial settlements. This view differs in the US, where the majority of cases are dealt with through out of court fines or settlements. Lord Justice Thomas said that recent fines would have been much higher if they’d have been dealt with by the UK courts.

Graham Clarke is a former senior detective and Head of Special Branch in the UK Police Service. In December, 2008 he joined Centrica as the Director of Group Security, having previously spent 8 years with TXU Europe in the role of Security Operations Manager and latterly E.ON UK where he became the Head of Business Resilience.

The comments contained Mr. Clarke are his own and not necessarily those of his employer.

Graham will be sharing his experiences in global security operations at the Compliance in the Global Supply Chain: Anti‐Bribery and Corruption Series taking place in Houston, Texas, USA, 26th – 27thApril 2011. For more information on the event, go to http://www.compliance-supplychain.com.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.
© Thomas R. Fox, 2011

February 10, 2011

FCPA Contractual Provisions in Alliance and Joint Venture Agreements

As was recently shown by the RAE Systems, Inc., enforcement action, foreign Joint Ventures are still the bane for many companies under the Foreign Corrupt Practices Act (FCPA). Similarly Alliance or Consortium Agreements can place a US company at risk for the actions of others which may violate the FCPA. This post will set forth some of the risk management techniques that companies can use to assist in controlling this FCPA exposure through the utilization of contractual clauses.

As a starting point, we believe that it is important to have compliance terms and conditions, these reasons can include some of the following: (1) To set expectations between the parties; (2) To demonstrate the seriousness of the issue to the non-US party; and (3) To provide a financial incentive to do business in compliant manner.

The ensuing provisions are those we believe that you should include in your Joint Venture, Alliance or Consortium Agreements, as a minimum. They include:

  1. Prohibit Bribery and all forms of corruption. Many foreign Joint Venture and Alliance Partners may not understand that the FCPA applies to them if they partner in a business relationship with a US company. Further, they do not understand that they may be governmental officials under the FCPA. This all must be spelled out for them so you should have language regarding the following:
  • Prohibition of all forms of bribery and corruption, but you should be careful to make note that FCPA is broader than simple bribery; it includes hospitality/gifts/entertainment/travel as well.
  • Affirmation of FCPA compliance, this should be in writing and it should also require that the non-US party understand or have familiarity with the FCPA, as well as that they will comply with the tenets of the FCPA.
  • Agreement to comply with local laws and customs regarding anti-bribery and anti-corruption in the jurisdiction where it is located and/or does business.

2.   Right to Cancel and Recoupment rights. These should include the following:

  • Right to cancel the contract if there is a compliance violation or breach of contract because that allows you maximum flexibility.
  • Withhold any payments due.
  • Allow for disgorgement of any monies previously paid under the agreement.
  • Take any other action you think necessary or appropriate.

3.   Duties

  • Spell out exact duties and deliverables of the Joint Venture, Alliance or Consortium.
  • Agent has continuing duty to adhere to training and due diligence
  • Duty to report changes in ownership structure of any non-US partner. This includes changes in corporate structure and/or corporate leadership. There must be immediate notification to the US company and it is particularly important when government changes.

4.  Audit Rights – recognizing that our colleague Howard Sklar is not a big fan of audit rights; we nevertheless believe that they are an important tool in your FCPA risk management profile. Therefore we would suggest that they be included in any Joint Venture, Alliance or Consortium Agreement that you may enter into. In addition to putting your non-US partner on notice that you are not simply willing to look the other way once the agreement is signed, it is an active acknowledgement that there will be ongoing transactional due diligence during the term of the relevant contract. If any illegal payments are made or discovered the US company should retain full access to the audit trail which it can then turn over to the proper authorities. Additionally, the Joint Venture, Alliance or Consortium should have the right to audit any agent it may hire for its own use.

At this point we should note that we are in absolute agreement with Howard Sklar on the following point; if you have audit rights you better exercise them. The same calculus is true for termination rights. If you have a good faith belief that your non-US partner has violated the FCPA, you better exercise your right to terminate. If you do not do so, your US company will probably be in more hot water with the Department of Justice (DOJ).

5.  Prohibited Parties – the Joint Venture, Alliance or Consortium will not deal with US designated Prohibited Countries or Prohibited Parties. At this point the list includes Cuba, North Korea, Iran, Sudan, Syria and Myanmar (formerly Burma).

Lastly one area which is continuing to be problematic is that of how to make payments. Some of the tools we would suggest are the following:

  • Always try to make payments via wire transfer.
  • No large upfront payments unless designated for legitimate start-up expenses.
  • Pay only to the named company, not unknown third parties.
  • Payment in local currency, however  you can pay in USD. The key is consistency in how you are paying and your documentation.
  • Pay where the agent’s country of residence or where the work is done.
  • Agent must be able to justify the payment requested.

All of the above steps should be taken only after extensive due diligence has been completed. After the contract is signed your company will have to work just as hard to keep the compliance program for any Joint Venture, Alliance or Consortium robust and meaningful. However, with these terms and conditions in place, you will have a chance to maintain your FCPA obligations and to manage the risk that is involved when working jointly with non-US companies.

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

February 9, 2011

FIFA, the World Cup Selection and the FCPA

One of the interesting facts of life that I have learned being married to an English woman is that what I thought of as ‘Football’ is really ‘American Football’. The true game of ‘Football’ is played by the rest of the world. (She also decries the term ‘World Series’ but that’s another post). She had also assured me that when the UK won its bid to host the 2018 World Cup we would go to the home of ‘Football’ and watch a match or two, alas it was not meant to be. Who knows maybe we can catch a match in Russia about that time.

FIFA and Bribery Allegations against Executive Committee Members

However, the thought that the Motherland of Football would host a World Cup gave me more than a passing interest in the recent selection process of countries to host the 2018 and 2022 World Cup. I was very interested in the allegations of bribery and corruption leveled at FIFA during the selection process, known, these days, as the “world’s richest and most influential single-sport ruling body”. As has been reported extensively throughout the world, two members of FIFA’s 24 member executive committee were suspended for allegedly offering their votes to determine which countries would host the 2018 and 2022 World Cups. Both men were caught on videotape by the UK Sunday Times asking for specific sums of money, apparently in exchange for their votes. The New York Times, in an October 20, 2010 article, reported that Reynald Temarii, the Tahitian President of FIFA’s Oceanic regional confederation, reportedly said that he wanted “about $2.3 million to finance a sports academy” in New Zealand. Amos Adamu, the Nigerian representative, was alleged to have requested approximately $790,000 to fund the construction of soccer fields in Nigeria. Mr. Adamu reportedly asked for “cash to be paid into his personal account”. FIFA President Seth Blatter was quoted as saying that the two men’s actions had “created a very negative impact on FIFA and on the bidding process”. On November 17, 2010, the FIFA Executive Committee did take action as both men were suspended by FIFA for their actions; subsequently both men have recently had the appeals of their suspensions denied by the FIFA appeal committee. Reuter’s has reported that Adamu will appeal his upheld suspension by FIFA to the Court of Arbitration for Sport in Lausanne.

In yet another interesting development, the UK Telegraph reported that the countries of Spain and Qatar had colluded to trade their votes for their respective 2018 and 2022 bids. These allegations of collusion between the two bids were initially reported in September, 2010 but they were denied by both countries. A subsequent investigation by FIFA’s ethics committee said that there was insufficient evidence to take any action. On Monday, February 7, FIFA President Seth Blatter told the BBC that the two bids had colluded, though he insisted it had made no difference to the final outcome, which saw Russia and Qatar win the 2018 and 2022 tournaments respectively. “I’ll be honest, there was a bundle of votes between Spain and Qatar,” Blatter said. “But it was a nonsense. It was there but it didn’t work, not for one and not for the other side.”

The Wall Street Journal on Qatar’s Bid
I was also interested in the bid awarded to Qatar to host the 2022 World Cup. In a January 13, 2011 article in the Wall Street Journal, entitled “Qatar’s World Cup Spending Spree”, reporter Matthew Futterman detailed the “spending spree” of a reported one year amount of $43.3 million by Qatar, which led to its winning World Cup bid. Futterman’s article focused on information derived from the internal documents of Qatar’s bidding committee. Futterman reported that there was no evidence that Qatar violated the rules and regulations of FIFA to secure its winning bid. Rather he reported on how Qatar “worked within FIFA’s broad guidelines” to secure its winning bid.

From the internal bid documents, obtained by the WSJ, Futterman reported that some of the tactics used by Qatar included:
1. Charitable Donations. Commitments were made to establish, build or continue to fund soccer academies, in the home countries in which FIFA executives who would vote on the 2022 site selection, through a Qatar football training academy, Aspire Academy for Sports Excellence, controlled by the Qatar Royal Family. The WSJ article cited examples in Thailand and Nigeria. In Thailand, Futterman reported that Aspire would “build a football academy” and in Nigeria, it would “expand grass-roots training”. These internal documents also revealed that the Aspire Academy also continued to work with three African countries which were home to FIFA executive committee members, who all had a vote on the 2022 site selection.

2. Use of Marketing Agents. The Qatar bid included the hiring of certain well known celebrities to assist in the effort. In order to “talk up” the Qatar bid to host the 2022 World Cup, the WSJ reported that it hired several international personalities as “Bid Ambassadors” to endorse the Qatar bid. These endorsements were important because they assisted Qatar to “establish its legitimacy within FIFA and connections to executive committee members.” The only Bid Ambassador named in the WSJ article was the former French star Zidane. It was reported that Zidane received $3 million for his endorsements of the Qatar bid.

Review under the FCPA and Bribery Act
FIFA is generally recognized as a, non-US, Non-Governmental Organization (NGO) and therefore the US Foreign Corrupt Practices Act (FCPA) does not apply to it. But we thought that it might be of use to review some of the tactics, as reported in the WSJ, that Qatar used to secure the 2022 World Cup bid, in the context of what might be allowed under the FCPA. It should be noted that, although still waiting to be implemented, the UK Bribery Act would apply to UK companies and citizens involved in the matter because there is no public/private distinction under the Bribery Act and unlike the FCPA, the Bribery Act does not have require that a bribe be offer or paid to a foreign governmental official, only that a bribe or offer to bribe be made.

A. Charitable Donations-the Football Academies
Charitable donations are not banned by the FCPA. However any such donations must be made following the requirements of the Act. The FCPA Blog reported that when asked about the guidelines regarding requests for charitable giving, the FCPA then Deputy Chief of the Criminal Division’s Fraud Section at the DOJ Mark Mendelsohn, said that any such request must be evaluated on its own merits. He advocated a “common sense” approach in identifying and clearing Red Flags. This would include determining if a governmental decision maker held a position of authority at the charity to which the donation would be made; whether the donation was consistent with a company’s overall pattern of charitable giving; who made the request for the donation; and how was it made.

The series of Red Flags raised and cleared by the US Company was the subject of Opinion Release 10-02. After initially listing the 3 levels of due diligence in which the company had engaged prior to finalizing its choice of local entity to receive the donation in question; the DOJ noted that the donation ‘requested’ of the US Company would be subject to the following controls:
• Payments of the donations would be staggered over a period of eight quarters rather than in one lump sum.
• Ongoing monitoring and auditing of the funds use for a period of five years. The donations would be specifically utilized for the building of infrastructure.
• The funds would not be paid to the parent of the organization receiving the grant and there was an absolute prohibition on compensating Board Members.
• The proposed grant agreement under which the funds would be donated had significant anti-corruption provisions which included a requirement that the local organization receiving the funds adopt an anti-corruption policy and that US company making the donation receive full access to the local organization’s books and records.
In addition to the specific factors presented by the requesting US Company in Opinion Release 10-02, the DOJ also listed several of the due diligence and/or controls that it had previously set forth in prior Opinion Releases relating to charitable donations. These included:
• certifications by the recipient that it will comply with the requirements of the FCPA;
• due diligence to confirm that none of the recipient’s officers or directors are affiliated with the foreign government at issue;
• a requirement that the recipient provide audited financial statements;
• a written agreement with the recipient restricting the use of funds to humanitarian or charitable purposes only;
• steps to ensure that the funds were transferred to a valid bank account;
• confirmation that contemplated activities had occurred before funds were disbursed; and
• ongoing auditing and monitoring of the efficacy of the program.

B. Use of Marketing Agents-the Bid Ambassadors
Much has been written on the use of agents under the FCPA. The UK Ministry of Justice Consultative Guidance on the Six Principals for an “adequate procedures” or best practices anti-bribery and anti-corruption program also discuss agents. Recently, Michael Volkov, noted FCPA attorney from the firm of Mayer Brown, spoke on the topic of due diligence on third parties. Volkov believes the key for any compliance based issues is to document the evidence. If you ask questions and get answers, document the process. If you ask questions and do not receive answers, document that process too. But the key is to Document, Document, and Document.
Volkov gave his thoughts on some of the basic pieces of information to cover when a company might begin the due diligence process. This would include:
1. Existence of relationships with foreign governmental officials.
2. Prior history of bribery or other crimes.
3. What is the nature of services provided?
4. What is the compensation and what will be the payment method?
5. Have a written contract in place with appropriate terms and condition’s including:
a) Reps and Warranties on compliance;
b) Right to inspect and audit books and records; and
c) Right to terminate if you believe that a violation has occurred.

Howard Sklar, writing in the Open Air Blog, added the following inquiries should also be made:
1. Are any of the leaders of the company (beneficial owners, or senior management) government officials, or related to government officials?
2. Is this company going to interact with or sell products to government officials on your behalf?
3. Is the third party publicly traded, or subject to regulatory oversight?
4. How did you first become aware of this third party?
5. Is the company what you’d expect—in terms of size, resources, office space, etc.—to allow the third party to provide the services they’re providing to you?
6. How is this company going to get paid? Unusal payment arrangements are a red flag.
7. How much is this company going to get paid? Is it amount in line with what the market value is?
8. Will the company provide business references?
9. Is anyone from senior management, or are the beneficial owners, on the Special Designated Nationals (SDN) or debarred parties list?
10. Has this company been in the news for something negative? Do a Google news search.
11. Has the third party said or done anything that makes your people nervous?
12. Was the procurement/onboarding process run according to normal channels or was it a rush job?

The point of both of these lists of questions is that in order to secure an agent under the FCPA or Bribery Act, a significant investigation, in the form of background due diligence, must be employed. When a company does business with higher-risk third parties, you need to understand not just the parties involved, but the transactions that follow. This means that a company must also proceed with transactional due diligence. The most important thing to know is, will there be money left on the table? You need to know where that money is going. Under the FCPA if the end user is a Government, you need transaction-level diligence if you want to be safe. However, the Bribery Act does not make this governmental/non-governmental distinction.

Remember the former French star Zidane and his $3 million payment? The question is what was he, and the other Bid Ambassadors, paid to do? According to the WSJ, they “helped to establish Qatar its legitimacy within FIFA and connections to executive committee members”. Such a purpose might well require audit rights to determine where the money paid to the agent went and whether it can it be accounted for in a financial review. But there is one further analysis, which was alluded to by Howard Sklar in his list, that being the amount paid to the agent. A commission rate can be a percentage of a successful bid or it can be a flate rate, fixed fee payment. In this situation we do not know what the financial reward to Qatar will be for hosting the 2022 World Cup. Indeed, the reward may not be financial but rather the prestige of hosting the quadrennial championship of the world’s most popular sporting event. So there may be no such measure of the Zidane payment. But if the figures cited in the WSJ article are correct, Zidane received an amount of almost 10% of the Qatar one-year budget. That must have purchased some serious connections. Such a high figure, in an applicable situation, might well lead to significant FCPA and Bribery Act scrutiny.

Happily for the Qatar bid committee, it probably did not fall within the jurisdiction of the FCPA and thus there should be no FCPA implications for the bid committee. Since the Bribery Act is not yet implemented, there are no implications under this un-implemented 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

February 8, 2011

Disclosure and Negotiating with the Government – A FCPA Conundrum?-Part II

In yesterday’s blog we explored the question of whether a company should self-report a potential FCPA violation to the pertinent US governmental authorities. Today, conclude our two-part series by exploring three issues: (1) What should you disclose; (2) How/When Should you Disclose; and (3) Negotiating the Final Settlement with the Government.

What should you disclose?

Once a company makes a decision to self-report, the next question is what to disclose. The clear weight of advice on this point is that a company should disclose all information about the problem because credibility of your company is on the line. If you underplay the facts it may do more damage in the long run. A company needs to be prepared to explain why the problem arose, what systems worked well or failed and what corrective actions were taken. In other words, what did your company do to prevent the violative conduct, and if such conduct occurred, how was it detected and what did your company do to deter a similar occurrence in the future?

In preparing your company’s self-disclosure, there will be several detailed issues which the DOJ and/or SEC will want some answers to. These include:

  • How was the conduct discovered?
  • How long have you known?
  • Who was or is involved? Are they still employed?
  • What was the bribe amount and intended benefit?
  • When did the conduct occur?
  • How were the payments made?
  • How has the relevant evidence been secured?
  • Have you looked for all related conduct?
  • Has the Board/Audit committee been notified?
    • Was corrective action taken or is it planned?
    • Are local prosecutors involved?

The DOJ and SEC will expect not only full cooperation during the investigation phase but also full communications. This will include briefings on interviews, updates on email findings/document review and presentation of forensic accounting findings. Also during this entire investigation phase, your company should be remediating the specific issue and implementing and updating their compliance program and internal controls. A company will also have to make a decision on how (and when) to deal with the employees involved in the conduct at issue. You should place any employees involved on paid-administrative leave and at some point, you will need to make the decision on whether to terminate the employees from employment with your company. This final step needs to be considered carefully as it may end all cooperation by those employees.

How/When to Disclose?

After your company has made the decision to self-report, you will need to consider how and when to report. Initially a company should simultaneously self-disclose to both the DOJ and SEC or other applicable agency. There is no advantage to disclosing to only one as both the DOJ and SEC share such information quite quickly. Perhaps a more difficult question is how much investigation to do before disclosure. Once again, Lanny Breuer has suggested that “[a] corporation should seriously consider seeking the government’s input on the front end of its internal investigation.”  This allows the DOJ to focus on issues it may see as more important than the company does. Such an example could be if the DOJ has an ongoing, unannounced investigation regarding a certain country and the self-disclosing company has agents in that country, the DOJ may want information on those agents. This could be even if the conduct at issue took place in different part of the world.

The final, and perhaps most difficult, question would appear to be the following: if and when to disclose to a foreign government. A foreign government may react quickly by arresting company officers in its country or take other actions which may seem inconsistent with US judicial proceedings. However, the DOJ has made it clear that it is increasingly cooperating with foreign governments in the fight against corruption so the DOJ itself may put the foreign government on notice.

Negotiating the Settlement

The initial starting point when negotiating a FCPA settlement is that you should retain a former federal prosecutor to lead your negotiating team. Do not have a civil litigation attorney lead this effort. This is because prosecutorial discretion governs the entire process and to understand the ins, outs and implications, your company needs someone who has been through the process from the government’s prospective. Some of this prosecutorial discretion includes whether to prosecute, who to prosecute and what conduct to prosecute.

After these decisions have been made an equally important set of decisions is up next for consideration. These involve the form of the Resolution; will it be a Deferred Prosecution Agreement (DPA); a Non-Prosecution Agreement (NPA), or best yet-a declination for the DOJ. In negotiating with the SEC there will be issues around whether the company will enter into Consent Decree or the SEC will seek and/or obtain a Permanent Injunction.

The next area for discussion will be that of penalties. The first decision will probably be whether or not individuals in the company are to receive any criminal sanctions and if this decision is in the affirmative, it will certainly have implications for the company. Next will be the penalties, both from the DOJ and SEC, these can be fines, monetary penalties and profit disgorgement; all of which can add up to hundreds of millions of dollars.

Finally will be the decisions regarding post-resolution obligations and the time line for resolution of said obligations. Will an external monitor be involved and if so what will be the terms and conditions of the monitorship? Will your company have to create, enhance or implement a best practices compliance policy or a portion thereof, to remediate the conduct at issue? Will there be an increase in your company’s compliance staff; will there be a Board mandate, with separate guaranteed funding for compliance issues and initiatives? Finally, how, and at what interval, will your company report its progress to the DOJ and SEC?

The FCPA investigation road can be a long and rocky one. Unfortunately there is no one path that a company can or should follow; each step must be considered, under the facts and circumstances of the company involved. There does appear to be one step that all agree upon and that is that your company must give the DOJ and SEC its full cooperation after an investigation commences, whether through self-disclosure, whistleblowing or other mechanisms.

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

February 7, 2011

Disclosure and Negotiating with the Government – A FCPA Conundrum?-Part I

All compliance programs are designed to prevent, detect and deter ethical violations. In the United States, they are also designed to bring companies into compliance with the Foreign Corrupt Practices Act (FCPA). However, as important as these programs are, it is equally important for a company to deal with any alleged FCPA violations which may arise. The disclosure to and negotiating with the appropriate US governmental agencies charged with enforcement of the FCPA is as critical task which a General Counsel or Chief Compliance Officer may face. Over the next two posting, we will discuss this topic and give some guidelines which a company may consider if such an eventuality occurs. This post will discuss the issue of whether or not a company should self-report a potential or actual FCPA violation. In our next post, we will continue this discussion by focusing the process after self-disclosure.

The question which sits at the forefront is whether to self-report to the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) thereafter. Unfortunately there is no easy answer to this question and to make this decision will require a thorough and thoughtful analysis and perhaps some deep soul searching by any company which uncovers or is made aware of a potential FCPA violation. This article will explore this issue.

The Issue

The initial question of whether or not to self-report came up in 2010 in two of the major FCPA investigations. The first was Avon, which self-reported some three months after initial notification via an internal company whistleblower, the second, in contrast, was HP, where both the DOJ and SEC announced investigations after a story appeared in the Wall Street Journal detailing the allegations and reported on an investigation by German authorities.

Moreover, many companies wonder if, at the end of the day, they will be better off in terms of potential fines and penalties by self- reporting. Lanny Breuer, Assistant Attorney General for the Criminal Division of the US Department of Justice, has made clear, in several speeches over then the past year, that the DOJ prefers a ‘call first’ approach and that such an approach will be taken into account under the US Sentencing Guidelines.

Conversely, then law student (and now graduate), Bruce Hinchey discussed this issue in an upcoming publication “Punishing the Penitent: Disproportionate Fines in Recent FCPA Enforcements and Suggested Improvements”, which analyzes differences between bribes paid and penalties levied against companies that do and do not self-disclose under the FCPA. Using a regression analysis, Hinchey concluded that those companies which did voluntarily self-disclose paid higher fines than companies which did not self-disclosure their FCPA violations to the DOJ. He concluded by noting that this evidence was contrary to the conventional wisdom that a company receives a benefit from self-disclosure and such evidence would ”raise questions about whether current FCPA enforcement is fundamentally fair”.

To Disclose or Not to Disclose

While initially noting that there is no legal requirement or obligation to self-report, a company has to answer several questions in making this initial decision. Lanny Breuer has articulated the DOJ’s ‘call first’ policy. The DOJ (and SEC) consistently tout the benefits to self-disclosure, even if Mr. Hinchey’s research does not bear this out. Further there may be tangible benefits such as credit available under the US Sentencing Guidelines. Other factors for consideration may be a company’s reporting obligations as a public company or obligations to other third parties such as disclosure during M&A due diligence, and lastly, and one which may become increasing problematic, is the risk of disclosure by a third party. Leaving the Wikileaks phenomena aside, the Dodd-Frank Act provides a financial incentive for persons who report securities violations to the SEC. Violations under the FCPA would fall within this provision so there may be a real risk that a company could be ‘outted’ by someone inside or outside the company.

As a part of a company’s decision making calculus on disclosure, there may be quite good reasons for not disclosing a potential FCPA violation to the DOJ or SEC. The initial threshold is that it may be unclear if the conduct violates the FCPA. Further, based upon the Hinchey article, or simply anecdotal information, some may feel that a company may be in the same position whether or not it discloses. Here they may cite to the Siemens example, where the company did not self-disclose but fully cooperated with the Government after its corruption and bribery issue became known. This also may be the situation with HP as noted above. Additional concerns include the possibility that self-disclosure may lengthen the investigation process; make it very costly and that the company may well lose control of the process.

From a legal perspective is the potential waiver of the attorney client privilege. Jim McGrath has written that if a company self-discloses and involves the government in the investigation process from the outset, its hand is tipped and there can be no assertion of attorney-client privilege and the work-product doctrine protection in subsequent reviews or in litigation. In addition, and once DOJ is involved, its knowledge of Company X’s alleged problem becomes part of the public domain and subject to disclosure to the investing public on a schedule of the government’s own making. This could also increase the possibility of civil litigation as was demonstrated in the SciClone matter from the summer of 2010. Along these same lines, some believe that even if the DOJ or SEC provides more lenient treatment, other investigating agencies, whether federal or state, may not.

Lastly and perhaps most sadly, is what I will call the Bunker mentality. It is more than just putting your head in the sand and engaging in conscious avoidance by hoping that the conduct at issue is never discovered. It is making a business decision that the cost of an investigation is so high and the risk of doing nothing is so much less costly, that some company’s believe they should ‘Bunker Down’ until they are caught to sort it all out then.

More tomorrow…

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

February 4, 2011

Agent Liability under the FCPA: Freight Forwarders and Express Delivery Services

Filed under: Agents,compliance programs,FCPA,Foeign Business Partner — tfoxlaw @ 6:39 am
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I. The Problem

The Foreign Corrupt Practices Act (FCPA) world is littered with cases involving freight forwarders, brokers and agents in the shipping and express delivery arena. Both the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) have aggressively pursued third party business relationships where bribery and corruption have been found. This is particularly true where companies are required to deliver goods into a foreign country through the assistance of a freight forwarder or express delivery service. There are several major risk points. These include:

• Location, location, location;
• Customs and other governmental agencies;
• Aviation and postal regulators;
• Business promotion expenditures for governmental officials;
• Agents and sub-agents; and
• Government accounts are a major part of express shipper customers so must analyze this as well.

Under the FCPA a company (or individual) can put itself at risk under three different knowledge standards:
• Knowing – The situation where a company or person authorizes an agent to make an improper payment or making a payment to an agent knowing some or all of the payment will go to a foreign governmental official.
• Knowledge of a high probability – Where the facts and circumstances surrounding a party, transaction or geographic location should put the reasonable person on notice to make further inquiries.
• Conscious indifference – As was the basis of the guilty verdict finding against Frederick Bourke.

The Panalpina enforcement action involved both the actions of the agent (Panalpina) and five of its energy customers. As noted by the FCPA Blog in “Making history today for the most companies to simultaneously settle FCPA-related violations”, this enforcement action levied fines and penalties of approximately $236.5 million. Additionally, all settling defendants agreed to Deferred Prosecution Agreements (DPA’s), with the exception of one which was given a Non-Prosecution Agreement (NPA).

The freight forwarded itself, Panalpina, paid over $80 million in fines and penalties. Panalpina admitted to three main illegal activities, these were: (1) customs clearance for its customers despite non-compliance or circumvention of customs formalities; (2) illegally obtaining a government contract for itself; and (3) obtaining unwarranted favorable tax treatment for its customers.

II. The Response

How can a company respond to protect itself or at least reduce its potential FCPA risk with regarding to a logistics company, freight forwarder or express delivery company? Obviously having a thorough risk assessment program and due diligence program are critical. After determining risk, move to perform due diligence based upon this risk. However, there are some general questions that you should ask, both internally and to your prospective vendor.
1. Relationship. What is your relationship with the third party? Is it purely arms-length? Is it sales agent making a solicitation? Is it a consortium, which may be a lower risk? Is it partnership of JV, if so what is your control? Is it subcontractor or supplier? All of these have different risk levels.
2. Business Formation. What is the character of the third party? Is it a US based company, is it subject to a robust national compliance law? Is it private/public? Who else do they represent? Length of time in business? Who are the principals and are they governmental officials?
3. Compensation. How do you compensate the third party? Is it bonus-based paid at the conclusion of a transaction? Will the representative have an expense account? If so how is it given to them, for instance will you pay on a lump sum v. verified expenditures? How will they be paid, local currency into a bank account, cash or check? What is the level of compensation? Are you over-compensating based upon the market; you are taking a chance that the third party could share it with others.
4. Location. What is the geographic location and is it one of the usual suspects on the TI Corruptions Index?
5. Industry. What is the industry or sector that you are engaged? This can be significant because certain industries/sectors such as infrastructure, medical industry, defense contractors are facing increased DOJ/SEC scrutiny.
6. Process. What is the process by which the business opportunity arose? What is the bidding process? Who invited you? Is it an open bid? Did you respond to an RFP? Did you compromise you own standards to bid? Is there a mandated partner assigned by the foreign government?

After you ask some of these questions, investigate your risks and evaluate them; you should incorporate these findings into a contract with appropriate FPCA compliance terms and conditions. This contract should announce to your to third party freight forwarder/express supplier of your expectations regarding their compliance program. Your contract should also allow for management of the compliance relationship. Your contract should require training and certification by verified provider or by your company. A new best practice has been to require a company funded Business Monitor whose job is to ensure compliance with your company’s compliance program.

III.  RISK MANAGEMENT: The Min Model
James Min, Vice President, Int’l Trade Affairs & Compliance at DHL Express (USA) Inc., developed a risk matrix for the freight forwarders/express delivery industry. In this Min analyzes risks by multiplying factors noted herein and thus scoring. This model shows that location should not be the sole criteria for risk. The factors in the Min Model are the performance of your company’s customers clearance brokers and how far that performance varies from the norm your company normally receives. In the below chart, +1.00 equals average clearance time. >1.0 equals faster than average and <1 means slower than average.

The Min Model

Country TI CPI Customs 

Clearance

Performance

Variance from 

Average Performance

Risk Score Risk Rank
A 55 .93 1.21 61.9 1
B 20 .76 0.89 13.5 3
C 54 .29 1.00 15.6 2
D 88 .12 0.7. 7.39 4

Min presented his model at the ACI FCPA Bootcamp, recently held in Houston, TX. He graciously allowed us to present this risk analysis model. The key in this approach is how often the Customs Broker/Express Delivery Service varies above the average for customs clearance times. If the percentage of customs clearance performance is so great that your vendors variance is above 100% most of the time, this could be a Red Flag that bribery or corruption is involved. This should lead to further investigation, due diligence, or asking of questions of your vendor.

Almost every business transaction engaged in by a freight forwarder, express delivery service or customs broker, outside the US involves a foreign governmental official. Every time your company sends raw materials into, or brings them out of, a country there is an interaction with a foreign governmental official in the form of a Customs Official. Every customs transaction involves a payment to a foreign government and every transaction involves some form of a foreign governmental regulatory process. While the individual payment per transaction can be small, the amount of total transactions can be quite high, if a large volume of goods are being imported into a foreign country.

Conversely interacting with international tax authorities can present problems similar to those with customs officials, but the stakes can often be much higher since tax transactions may be less in frequency but higher in financial risk. These types of risks include the valuation of raw materials for VAT purposes before such materials are incorporated into a final product, or the lack of segregation between goods to be sold on the foreign country’s domestic market as opposed to those which may be shipped through a free trade zone for sale outside that country’s domestic market.

If you utilize the services of a third party for any of the transactions listed above, that company’s actions will go a long way in determining your company’s FCPA liability.  You must have a thoughtful process and document that process.

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

February 3, 2011

The ERC on Whistle Blowing Workplace Misconduct: Attitude Matters

In December 2010, the Ethics Resource Center (ERC) released a White Paper entitled, “Blowing the Whistle on Workplace Misconduct.” This White Paper report detailed several findings that the ERC had determined through surveys, interviews and dialogues. Although the article reviewed types of misconduct broader than the compliance and ethics sphere, we believe that the ERC’s findings can be of particular use to the Foreign Corrupt Practices Act (FCPA) compliance practitioner in designing, assessing and revising a company’s whistle-blower program.

Need to Report Misconduct?
The ERC began by discussing some of the results of its own 2009 survey entitled, “Reporting: Who’s Telling You What You Need to Know, Who Isn’t and What Can You Do About It”. This report determined that over 60% had observed and reported misconduct within their respective companies, most usually to an internal authority. This led the ERC to conclude that almost 40% of employees who had observed misconduct did not step forward to report it and noted that convincing employees to step forward when they do observe misconduct is a challenge for any compliance practitioner. ERC opined that to remedy this situation, some companies have linked ethical conduct to performance reviews to make clear that good behavior is a job expectation. Other companies, believing that some workers do not report violations because they fear retaliation, have set up hotlines that assure reporting can be done in private with less risk of being seen by a co-worker. Even Congress have gotten into the whistle blower’s action, with the inclusion of legal protections for whistleblowers and the establishment monetary rewards for tipsters to encourage insiders to come forward with information that could send wrongdoers to jail for US securities violations in the 2010 Dodd-Frank Act.

Retaliation and Methods of Reporting
The ERC 2009 Survey also found that up to 15% of employees who had reported misconduct felt that they had been retaliated against. The retaliation conduct had ranged from receiving the cold should from fellow employees to job loss or even felt threatened by physical retaliation. This finding was contrasted with the discovery that almost all who reported misconduct did not use an anonymous reporting hotline but directly to another person in the company. The reason for this was that most employees felt that their reports would be taken more seriously if there were shared face-to-face with someone else in the company. This reporting was to both immediate supervisors and upper management.

The ERC believes that understanding the method by which employees choose to report misconduct can assist a company to understand the motivation involved in reporting and how to encourage that motivation. ERC has confidence that informs the compliance practitioner that the decision by an employee to report to one’s direct supervisor versus higher management is related to the ethical culture and climate of the workplace. In strong ethical cultures, with a tone at the top that makes it clear that ethics do matter; where supervisors aggressively reinforce the ethics message; and where both employees and managers alike are held to high ethical standards, more employees report to their direct supervisor. Conversely, reporting to higher management increases in weaker cultures and among employees who feel pressure not to report such misconduct or for those employees who are not confident that that their direct managers are fully committed to strong ethics. These concerns may also include the fear of retaliation for reporting misconduct. However, it may be that employees simply lack confidence that their direct supervisor will pursue their reports. In those instances, turning to senior management can provide the safety of the organizational structure and a belief that higher management has the resources to address the issue effectively.

A Culture of Ethics Matters
The ERC notes in its White Paper report that the key take-away from all of the data is that a culture of ethics within a company does matter. Such a culture should start with a strong commitment to ethics at the top, however it is also clear that this message must be reinforced throughout all levels of management, and that employees must understand that their company has the expectation that ethical standards are vital in the business’ day-to-day operations. If employees have this understanding, they are more likely to conduct themselves with integrity and report misconduct by others when they believe senior management has a genuine and long-term commitment to ethical behavior. Additionally those employees who report misconduct are often motivated by the belief that their reports will be properly investigated. Conversely, most employees are less concerned with the particular outcome than in knowing that their report was seriously considered.

For the FCPA compliance practitioner the message would seem clear. It is not just “Tone at the Top” but also in the middle and below. If all employees have a reasonable belief in an ethical culture, these same employees can be your best resource to prevent, deter and detect any compliance violations going forward. The ERC ends its White Paper by noting that when a company succeeds at building an ethical culture, with strong training programs and committed management, reporting of misconduct goes up and wrongdoing goes down. Attitude matters. If you wish to boost the odds of ethical conduct in your company, attitude and culture are places for focus.

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


February 2, 2011

When Does a Grease Payment Become a Bribe Under the FCPA?

One of the more vexing questions under the Foreign Corrupt Practices Act (FCPA) is when does a facilitation payment become a bribe? It is not uncommon to hear stories about demand for payments in some of the following areas:

  • Customs clearance
  • Immigration services
  • Border crossings
  • Work permits
  • Security/police protection
  • Vehicle registration

But the question still remains for the FCPA Practitioner who must provide concrete guidance to the field personnel, when does a facilitation payment become something illegal under the FCPA?

  1. I. The Cases

The FCPA landscape is littered with companies which sustained FCPA violations due to payments which did not fall into the facilitation payment exception. In 2008, the global freight forwarder Con-way paid a $300,000 penalty for making hundreds of relatively small payments to Customs Official in the Philippines. Unfortunately these payments totaled $244,000 and were made to induce the officials to violate customs regulations, settle customs disputes, and reduce or not enforce otherwise legitimate fines for administrative violations.

In 2009, Helmerich and Payne paid a penalty and disgorgement fee of $1.3 million for payments which were made to secure customs clearances in Argentina and Venezuela. The payments ranged from $2,000 to $5,000 but were not properly recorded and were made to import/export goods that were not within the respective country’s regulations; to import goods that could not lawfully be imported; and to evade higher duties and taxes on the goods.

Then there is the DynCorp investigation matter. As reported in the FCPA Blog, it is related to some $300,000 in payments allegedly made by subcontractors who wished to speed up their visa processing and expedite receipt of certain license on behalf of DynCorp.

Finally, there is the Panalpina enforcement action. As reported by the FCPA Blog and others, this matter was partly resolved last year with the payment by Panalpina and six of its customers of over $257 million in fines and penalties. Panalpina, acting as freight forwarder for its customers, made payments to circumvent import laws, reduce customs duties and tax assessments and to obtain preferential treatment for importing certain equipment into various countries but primarily in West Africa.

II. The Statute and Other Responses

Interestingly, when the FCPA was initially passed in 1977, the facilitating payment exception was found under the definition of foreign official. However, with the 1988 Amendments, a more explicit exception was written into the statute making it clear that the anti-bribery provisions “shall not apply to any facilitating or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action . . .” The statute itself provided a list of examples of facilitation payments in the definition of routine governmental actions. It included the following:

  • Obtaining permits, licenses, or other official documents;
  • Processing governmental papers such as visas and work orders;
  • Providing police protection, mail services, scheduling inspections;
  • Providing utilities, cargo handling; or
  • Actions of a similar nature.

It is important to note that the language of the FCPA makes it clear that a facilitation payment is not an affirmative defense but an exception to the general FCPA proscription against bribery and corruption. Unfortunately for the FCPA Practitioner there is no dollar limit articulated in the FCPA regarding facilitation payments. Even this limited exception has come under increasing criticism. The Organization for Economic Cooperation and Development (OECD) studied the issue and, in November 2009, recommended that member countries encourage their corporations to not allow the making of facilitating payments. Additionally the recently enacted, but not yet implemented, UK Bribery Act does not contain an exception for facilitating payments and the Director of the UK Serious Fraud (its Fraud not Frauds) Office (SFO) has warned companies about making a practice of making such payments.

III. Some Guidance

So what does Department of Justice (DOJ) look at when it reviews a company’s FCPA compliance program with regards to facilitation payment? Initially if there is a pattern of such small payments, it would raise a Red Flag and cause additional investigation, but this would not be the end of the inquiry. There are several other factors which the DOJ could look towards in making a final determination on this issue. The line of inquiry the DOJ would take is as follows:

  1. Size of payment – Is there an outer limit? No there is no outer limit but there is some line where the perception shifts. If a facilitating payment is over $100 you are arguing from a point of weakness. The presumption of good faith is against you. You might be able to persuade the government at an amount over $100. But anything over this amount and the government may well make further inquiries. So for instance, the DOJ might say that all facilitation payments should be accumulated together and this would be a pattern and practice of bribery.
  2. What is a routine governmental action? Are we entitled to this action, have we met all of our actions or are we asking the government official to look the other way on some requirement. Are we asking the government official to give us a break? So the key question here is whether you are entitled to the action otherwise.
  3. Does the seniority of the governmental official matter? This is significant because it changes the presumption of whether something is truly discretionary. The higher the level of the governmental official involved, the greater chance his decision is discretionary.
  4. Does the action have to be non-discretionary? Yes, because if it is discretionary, then a payment made will appear to obtaining some advantage that is not available to others.
  5. What approvals should be required? A facilitation payment is something that must be done with an appropriate process. The process should have thought and the decision made by people who are the experts within the company on such matters.
  6. Risk of facilitation payments and third parties? Whatever policy you have, it must be carried over to third parties acting on your behalf or at your direction. If a third party cannot control this issue, the better compliance practice would be to end the business relationship.
  7. How should facilitation payments be recorded? Facilitation payments must be recorded accurately. You should have a category entitled, “Facilitation Payments” in your company’s internal accounting system. The labeling should quite clear.  It is critical to any audit trail so recording them is quite significant.
  8. 8. Monitoring programs? There must always be ongoing monitoring programs to review your company’s internal controls, policies and procedures regarding facilitation payments.

IV. Extortion

How does one deal with the issue of whether something is an extortion payment or facilitation payment? There is no personal safety exception written into the FCPA, however, most compliance programs do recognize an exception if an employee’s personal health, safety or freedom are at immediate issue. In a prior job, this author was confronted with the situation where an employee, upon exiting a West African country, was told that “his shot card was not in order” and that he would have to immediately be administered a yellow fever shot. However, his shot card could be put in order for the payment of $100. He was then taken in a room; a syringe with an unknown liquid pulled out filled and put in front of him. He was told to roll up his sleeve immediately for the shot. He decided to pay the $100. The key to this situation was that the employee’s personal health was at immediate risk. Moreover, he reported the incident to the Chief Compliance Officer upon his return to the home office. The employee provided a full written description of the event and it was properly recorded and filed with the facilitation payment records. It should also be noted that Richard Alderman, head of the UK SFO, has publicly stated that payments made for personal safety will not be prosecuted under the UK Bribery Act.

In the FCPA enforcement arena is the NATCO enforcement matter. In this case, the company claimed that certain foreign governmental officials extorted payment from the company. Probably the first thing to note about his case is that it was filed by the Securities and Exchange Commission (SEC). This means that it was a civil matter as it was not prosecuted criminally by the DOJ. Nevertheless, even the SEC admitted it was extortion as it acknowledged that the company’s employees were threatened with fines, jail or deportation and that they believed these threats to be genuine. Nevertheless, the SEC found that the company had not properly recorded these payments and this led to a fine for NATCO of $65,000 for books and records and internal controls violation. The key here would appear to be the lack of proper recording by the Company.

So we return to the question of when does a grease payment become a bribe? There is no clear line of demarcation. The test seems to turn on the amount of money involved, to whom it is paid and the frequency of the payments. Additionally, accurate books and records are a must. And for the person in the audience who wonders what the payments should be recorded as, the answer is “Facilitation Payments”.

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

 

 

February 1, 2011

Welcome to the FCPA: Chinese Companies and Reverse Mergers

Filed under: FCPA — tfoxlaw @ 5:52 am
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In a Wall Street Journal article on January 27, 2011 entitled “What’s Behind China’s Reverse IPOs?”, reporter Joseph Sternberg wrote that several Chinese companies were under investigation by the Securities and Exchange Commission (SEC) for “accounting irregularities”. The basis for this SEC jurisdiction over these Chinese companies is their reverse merger into a publicly traded US company. The article notes that while the goal in a traditional IPO is to extract cash, a reverse merger requires the expending of cash to purchase a shell company. From their new position in the US market, a Chinese company may then turn to the US securities market for cash through secondary offerings. The article notes that the key element of these reverse mergers is the desire by Chinese companies to obtain capital.

However when entering into such a financing arrangement if a Chinese company purchases a US listed company to utilize as a shell, it will fall under the jurisdiction of the SEC. The Chinese company will now also be subject to the Foreign Corrupt Practices Act (FCPA). In addition to investigating “accounting irregularities” the SEC also has jurisdiction of the books and records component of the FCPA. This article stirred our thinking about some of the ways a Chinese company might find itself under a FCPA investigation. Fortunately, our colleague, Mike Koehler, the FCPA Professor, had previously not only thought about this same question, but had written about it. In an article entitled, “Why Compliance with the US Foreign Corrupt Practices Act Matters in China” published in China Law & Practice, in February 2008, he laid out some of the reasons why Chinese companies should consider their FCPA risk. We cite the next three sections based upon Professor Koehler’s work.

A. Chinese Company with US Presence
Chinese companies are increasingly listing shares on US stock exchanges. However, with the upside of access to US capital comes risk and one of the consequences of a Chinese company listing shares on a US exchange (and thus becoming an “issuer”) is that it becomes subject to a variety of US laws, including the FCPA. It is clear that the SEC, the primary enforcer of US securities laws, will hold Chinese issuers accountable under US securities laws. For instance, Rino International Corp., a Dalian China-based issuer (here), disclosed in an SEC filing as follows:
“The Company has been notified by the Staff of the Securities and Exchange Commission (the “SEC”) that it is conducting a formal investigation relating to the Company’s financial reporting and compliance with the Foreign Corrupt Practices Act for the period January 1, 2008 through the present. The Company is cooperating with the SEC’s investigation. It is not possible to predict the outcome of the investigation, including whether or when any proceedings might be initiated, when these matters may be resolved or what if any penalties or other remedies may be imposed.”

While Rino International is an “issuer” it is only a matter of time before a Chinese non-issuer becomes entangled by the broad reach of the FCPA given the following FCPA enforcement trends: (i) an increase in overall FCPA enforcement activity; (ii) an increase in FCPA enforcement activity against foreign companies and foreign nationals subject to the FCPA; and (iii) an increase in FCPA enforcement activity concerning business activity in China. The nexus will be that some or part of the business transaction went through the US. This could include money flowing through the US banking system, work on a contract by the US subsidiary of a Chinese company or even the use of US citizens, always subject to the FCPA, in all or part of a transaction which takes place through the body of Chinese corporation.

The fact that US enforcement agencies will not draw a distinction between US FCPA violators and foreign FCPA violators was made clear by the 2006 prosecution of Statoil ASA (Statoil), an international oil company headquartered in Norway with shares listed on the New York Stock Exchange. In announcing the resolution of a FCPA enforcement action against Statoil (in which the company agreed to pay approximately $21 million in combined penalties and fines for making improper payments to Iranian government officials in connection with oil and gas field projects in Iran), a high-ranking Department of Justice ( DOJ) official stated: “Although Statoil is a foreign issuer, the Foreign Corrupt Practices Act applies to foreign and domestic public companies alike, where the company’s stock trades on American exchanges. This prosecution demonstrates the Justice Department’s commitment vigorously to enforce the FCPA against all international businesses whose conduct falls within its scope.”

US government enforcement agencies were able to prosecute Statoil for payments made to Iranian officials because the improper payments were made to a consultant through a US bank. The Statoil enforcement action was the first criminal FCPA enforcement action against a foreign issuer for FCPA anti-bribery violations, but will surely not be the last. In fact, the largest FCPA enforcement action to date involved the German issuer Siemens, which has already disclosed numerous payments in various countries that may have violated the FCPA. Siemens paid over $1.6 billion in fines and penalties.

Statoil was not only prosecuted for violations of the anti-bribery provisions, but also charged with violations of the books and records and internal control provisions. Unlike anti-bribery violations, there is no US nexus required for a foreign issuer to be charged with violating the books and records and internal control provisions, other than the fact that, as an issuer, the company must file reports with the SEC in the US. In the Statoil matter, the books and records and internal control violations were charged because the payments were improperly characterized on the company’s books and records as “consulting fees” and because the company’s internal controls did not detect and stop the payments.

The Statoil enforcement action should alert Chinese issuers that if a bribery scheme has any nexus to the US, such as use of a US bank; use of US computer servers, etc., the company could be subject to US prosecution. Such prosecutions could be based not only on a situation in which a Chinese issuer makes an improper payment to a high-ranking government official in order to secure a government contract, but also, because of the broad scope of the anti-bribery provisions, a situation in which a Chinese issuer provides things of value to SOE (what is SOE?) employees in order to obtain or retain business. The Statoil enforcement action should also alert Chinese issuers that books and records and internal control violations will also likely be charged any time the company makes an improper payment.

Chinese issuers are not the only China-based companies that can directly be subject to US prosecution for violating the FCPA. Under certain circumstances, a Chinese subsidiary of a US company can also be prosecuted for FCPA violations.

B.  Chinese Subsidiary Company Acting as an Agent of a US Company
A Chinese subsidiary may be directly subject to FCPA prosecution if the DOJ and/or SEC conclude that the subsidiary acted as an agent of the US Company and took action, or failed to take action, in the US in furtherance of an improper payment. This theory of FCPA prosecution is best demonstrated by the DOJ’s prosecution of DPC (Tianjin) Co. Ltd. (DPC (Tianjin)), the Chinese wholly-owned subsidiary of US issuer Diagnostic Products Corporation (DPC). In 2005, DPC (Tianjin) pled guilty to violating the FCPA for making improper payments to physicians and laboratory personnel employed by Chinese government-owned hospitals, individuals deemed “foreign officials” under the anti-bribery provisions. The prosecution was based on the theory that DPC (Tianjin) acted as an “agent” of DPC in making the improper payments and because DPC (Tianjin’s) General Manager and Deputy General Manager regularly sent proposed budgets and financial statements which contained the improper payments to DPC’s offices in the US.

More recently was the enforcement action against RAE Systems, Inc., a California based global provider of rapidly deployable connected intelligent gas detection systems that enable real-time safety and security threat detection. RAE agreed to a fine, penalty and profit disgorgement of $2.9 million, for actions by its Chinese subsidiaries which were deemed violative of the FCPA regarding certain conduct in China. RAE has two subsidiaries in China, KHL and Fushun which were found to have made improper payment to Chinese governmental officials for the purposes of furtherance of business. RAE was found to have known about the bribery schemes engaged in by KHL prior to the time RAE became the majority interest holder in the KHL and did not take steps to end the illegal acts. RAE was found not to have performed any due diligence prior to its takeover of Fushun but thereafter was made aware of illegal bribery schemes.

The RAE prosecution demonstrates that the theory of prosecution used by the DOJ in the DPC matter will subject any Chinese subsidiary of a US company to direct US prosecution any time it is found to have participated in a payment prohibited by the anti-bribery provisions.

C.  Chinese Business Executive Acts in the US in Furtherance of a Bribe Payment
The anti-bribery provisions can reach not only Chinese issuers and Chinese subsidiaries of US companies, but also Chinese business executives, individually, if the executive acts in the US in furtherance of an improper payment.

That US government enforcement agencies will aggressively pursue individual FCPA violators, regardless of the individual’s nationality, is demonstrated by the 2007 prosecution of Christian Sapsizian, a French citizen and former executive of French issuer Alcatel CIT, who pled guilty to violating the FCPA in connection with improper payments to Costa Rican government officials. US enforcement agencies were able to prosecute the French citizen for making improper payments to Costa Rican foreign officials because Sapsizian processed various payment requests from a consultant, which were used to fund the improper payments, through his employer’s account at a US bank.

By engaging in payment schemes prohibited by the FCPA, Chinese business executives employed by Chinese issuers also risk SEC charges for violating and/or aiding and abetting violations of the books and records and internal control provisions. For instance, in September 2007, the SEC filed a settled civil action against Chandramowli Srinivasan, an Indian resident who was the president of a unit of a subsidiary of US issuer Electronic Data Systems Corporation (EDS). According to the SEC’s complaint, Srinivasan made improper payments, either directly or indirectly, to Indian officials in order to obtain business. The payments were funded through fabricated invoices that were ultimately incorrectly recorded on EDS’s books and records. Based on this conduct, the SEC charged Srinivasan with knowingly falsifying EDS’s books and records and knowingly circumventing or knowingly failing to implement a system of internal controls – all in violation of the books and records and internal control provisions.

The WSJ article concludes by noting that it is the inefficiency of the Chinese capital markets which is the major driver behind these reverse mergers. In time it may also become clear that this inefficiency may lead to a new wave of FCPA enforcement actions against Chinese companies. Whatever the reason, as noted by Professor Koehler back  in 2008 and equally valid today, Chinese companies should evaluate their FCPA compliance policies and procedures before they subject themselves to exposure in the US market.

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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