FCPA Compliance and Ethics Blog

February 15, 2012

The Mercury 7, Chuck Duross and Continuous Improvement to Your Compliance Program

Next Monday, February 20, 2012 is the 50th anniversary of the first American manned orbital space flight. It made John Glenn a national hero and heralded America’s move into direct competition with the (then) Soviet Union for the race to put the first man on the moon. In an article in the New York Times, entitled, “At 90, John Glenn Looks Back” reporter John Noble Wilford wrote about this flight, the Mercury program and Glenn based upon two interviews with the ex-astronaut and former Senator from Ohio. This coming Saturday, Glenn will be honored at Cape Canaveral at a celebration of the remaining members of the Mercury space team.

These original seven astronauts, known as the “Mercury 7” were true American heroes. Anyone interested in science in the slightest bit in the 60s knew who these men were. They were featured in Life Magazine with their families and each of their space flights were covered on live television by all three networks. Glenn is one of two of the original Mercury astronauts still alive, the other being Scott Carpenter, who will also be honored on Saturday. The remaining astronauts of the Mercury 7 were Deke Slayton, Gus Grissom, Alan Sheppard, Gordon Cooper and Wally Schirra. They were immortalized for a later generation by Tom Wolfe, in his book, “The Right Stuff”.

So what is the compliance angle here? It is that NASA created an entire system, consisting of processes and procedures to put a man on the moon. Were there setbacks? Yes, the Apollo 1 tragedy still resonates at NASA today. However NASA moved forward and fulfilled President Kennedy’s vow to put a man on the moon by the end of the decade. NASA did this largely by continuous improvement of its system.

I thought about this article while reading the tweets coming from my “This Week in FCPA” co-host Howard Sklar last night. Howard is in Hong Kong, chairing the Anti-Corruption Asia Congress this week. Yesterday, Chuck Duross, Deputy Chief, Foreign Corrupt Practices Act (FCPA) Unit, United States Department of Justice (DOJ) spoke to the event and Howard tweeted some of the highlights of Chuck’s remarks. They included:

  • To combat anti-corruption, there needs to be political will, as it requires prosecution of bribe takers as well as bribe payers.
  • Do not assume that your company is immune from FCPA liability just because you are not a US company. Here you should note that 9 out of the 10 FCPA settlements of all-time are with non-US based companies.
  • Charging individuals leading to more trials. Last year the DOJ tried 3,000 cases last year and there were 4 FCPA trials. In Chuck’s words, (as tweeted by Howard) “Let’s all take a breath”.
  • There was a FCPA trial first: a Foreign official, charged with money laundering, testified against the business bribe-payer. Here it is important to note that the DOJ can and will be charge foreign government offices.
  • Turning to some specifics of compliance programs, Duross remarked that companies using half-measures to prevent bribery are at risk.
  • Companies will receive a significant benefit for having robust compliance programs: lower fines, DPA/NPA, even not having a monitor. He gave some examples; Noble got an NPA, paid $2.6 MM, no monitor. Pride which sustained substantial cooperation with the DOJ, received below-the-guideline range penalty of 55%.
  • Turning to the facilitation payment exception, Duross said that it is a narrow one: it’s usually illegal locally where it is paid, discouraged in US, illegal internationally.
  • He emphasized that third party agents need to be properly vetted.
  • He noted that other violations of US law often accompany FCPA violations, such as anti-competitive behavior, trade violations, embezzlement, and money laundering.
  • He emphasized that your company should do what it can do regarding your compliance program. If necessary, at first, change the tone at the top. Make it clear that illegal acts will not be tolerated. But you must mean it. Vocal support is necessary, but management’s commitment cannot end there. Compliance is a cost center: management must back up vocal support of compliance with budget and resources.
  • Next Duross suggested that companies reevaluate internal controls. They should take the time to review and test, think critically about risk.
  • The DOJ looks at proactive compliance efforts when deciding how and whether to prosecute. He also suggested that your company might consider joining an integrity pact.
  • Howard’s tweets ended with this suggestion; that it is important to TEST your compliance program. You can run a fake invoice through your system which has information which should raise has red flags. You can run information through the hotline and see what happens. That impresses the DOJ.

The last few points raised by Duross emphasized to me the process of compliance. But as important as putting the program in place is testing the program and using the lessons learned to upgrade and update your compliance program. While we celebrate John Glenn, the Mercury 7 and NASA for what they achieved, we should remember that NASA used continuous improvement in its space program. These same techniques can be brought to bear in your compliance program. Based upon the remarks of Chuck Duross, such monitoring, improvement and upgrades will be counted in a positive light by the DOJ if you are involved in a FCPA enforcement action.

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, 2012

February 14, 2012

Smith & Nephew DPA: Lessons Learned in Using Distributors

A distributor can be generally defined as a company or individual who purchases a product from an original equipment manufacturer (OEM) and then independently sells that product to an end user. A distributor takes title, physical possession and owns the products. The distributor then sells the product again to an end-using purchaser. The distributor usually receives the product at some discount from the OEM and then is free to set the resell price at any amount above what was originally paid for the product. A distributor is often used by the US manufacturing industry to act as a sales force outside of the US.

The landscape of the Foreign Corrupt Practices Act (FCPA) is littered with cases involving both agents and resellers, who are most clearly acting as representatives of the companies whose goods or services they sell for in foreign countries. However, many US businesses believe that the legal differences between agents/resellers and distributors insulate them from FCPA liability should the conduct of the distributor violate the Act. They believe that as the distributor takes title and physical possession of the product, the legal risk of ownership has shifted to the distributor. If the goods are damaged or destroyed, the loss will be the distributor’s not the US business which manufactured the product. Under this same analysis, many US companies believe that the FCPA risk has also shifted from the US company to the foreign distributor. However, such belief is sorely miss-placed.

As reported by the FCPA Professor and FCPA Blog, on February 1, 2012, the Department of Justice (DOJ) announced that it entered into a Deferred Prosecution Agreement (DPA) with Smith & Nephew, Inc., a medical equipment manufacturer, for violations of the FCPA.  Smith & Nephew paid a monetary penalty of $16.8MM to the DOJ and $5.4MM to the Securities and Exchange Commission (SEC) as a civil penalty, all for a total of $22.2MM in fines and penalties. The violations revolved around a Greek distributor of Smith & Nephew who paid bribes to Greek doctors so that they would purchase and use Smith & Nephew products. According to the FCPA Professor, in a post entitled “Next Up – Smith & Nephew”, Smith and Nephew and its German subsidiary, would sell products to the entities “at a discount to the ‘list’ price and the Greek Distributor would re-sell to Greek HCPs and government hospitals at a profit.”

Further, as noted by the Professor, the purpose in setting up these entities “was to secure lucrative business with hospitals in the Greek public health care system by making and promising to make corrupt payments of money and things of value to publicly-employed Greek HCPs.”  According to the information, “S&N, certain of its executives, employees, and affiliates agreed to sell to [the] Greek Distributor at full list price, then pay the amount of the distributor discount – between 25 and 40 percent of the sales made by [the] Greek Distributor – to an off-shore shell company controlled by [the] Greek Distributor, in order to provide off-the-books funds for [the] Greek Distributor to pay cash incentives and other things of value to publicly-employed Greek HCPs to induce the purchase of S&N products, while concealing the payments.”  According to the information, S&N “falsely recorded or otherwise accounted for the payments to the shell companies on its books and records as ‘marketing services’ in order to conceal the true nature of the payments in the consolidated books and records of S&N and GmbH.”

In honor of the commencement of Spring Training next week, I put together a handy Box Score of the entities which Smith & Nephew set up for this FCPA conspiracy.

Entity Designation Domicile of Entity Commission Rate Services Provided Actual Services
Shell Company A UK 40% of sales of Greek distributor Marketing Did not perform any services
Shell Company B UK 26% of sales of Greek distributor Marketing None listed
Shell Company C UK 35% of sales of Greek distributor Marketing Did not perform any true services

Indicia of Bribery and Corruption

What are some of the factors that demonstrate the distributors used by Smith & Nephew were fraudulent and did not have a legitimate business purpose? Initially I would note that the distributor was domiciled in a location separate, the UK, and apart from the sole location it was designed to deliver products or services into, Greece. This clearly demonstrated that the entities were used for a purpose that the company wished to hide from Greek authorities. While it is true that a distributor might sell products into a country different than its domicile, if the products are going into a single country, this should raise a Red Flag.

However, the biggest indicium of corruption was the amount of the commission paid. The traditional sales model for a distributor has been to purchase a product, take the title, and therefore the risk, and then resell it to an end user. Based upon this sales model, there has been a commission structure more generous than those usually accorded a reseller or sales agent, who is usually only a negotiator between the OEM and the end user. This difference in taking title, and risk of loss, have led to a cost structure which has provided a deeper discount of pricing for distributors than commission rates paid to resellers or sales agents. The sales structure used by Smith & Nephew had pricing discounts of between 26-40% off the list price. Further, this money was used precisely to pay bribes to Greek doctors to use Smith & Nephew products. If your company uses a distributor model, I would suggest that you review and reassess your pricing structure in light of this enforcement action.

Monitorship

A very interesting feature of the Smith & Nephew DPA is that the company agreed to an external Monitor. This is not something we saw in most DPAs from 2011. The Monitor’s primary purpose is to “assess and monitor Smith & Nephews compliance with the terms of this Agreement so as to specifically address and reduce the risk of any recurrence of Smith & Nephew’s conduct.” The Monitor is to be retained by Smith & Nephew “for a period of not less than eighteen (18) months.” The DPA specifies that the Monitor is to perform at a minimum two reviews and corresponding reports. The Monitor shall provide to Smith & Nephew a written work plan no less than 60 days before commencing either review. The Monitor is to formulate conclusions based upon “among other things (a) inspection of relevant documents, including Smith & Nephew’s current anti-corruption policies and procedures; (b) onsite observation of selected systems and procedures of Smith & Nephew at sample sites, including internal controls and record-keeping and internal audit procedures; (c) meetings with, and interviews of, relevant employees officers, directors and other persons at mutually convenient times and places; and (d) analyses, studies and testing of Smith & Nephew’s compliance program with respect to the anticorruption laws.”

The Smith & Nephew DPA provides the compliance practitioner with specific guidance regarding how not to use a distributor. While this post did not focus on the conduct of Smith & Nephew during the pendency of the investigation, suffice to say that its conduct after self-disclosure led to a fine which was 20% below the minimum suggested by the Sentencing Guidelines. This fact clearly points to the value of self-disclosure and cooperation with the DOJ, as a key, if not THE key component during any enforcement action.

Lessons Learned on Compliance and Ethics is available for purchase on amazon.com by clicking 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.

February 13, 2012

Lessons Learned on Compliance and Ethics

Lessons Learned on Compliance and Ethics: The Best from the FCPA Compliance and Ethics BlogWhen my daughter was 7 she wrote and published her first book. When I asked her how she did it, she replied “Dad, it’s easy to write a book, you just sit down and do it.” I thought about that sage wisdom for many years before I sat down and started writing this blog. While I did not set out to write a book about compliance when I began blogging, I did hope  to bring some of the things I have learned about the nuts and bolts of compliance to other practitioners. After several years of writing this blog, one of my mentors in this field, Dick Cassin, who writes the FCPA Blog, suggested I collate some of my pieces and publish a book. So there are now two published authors in the Fox family.

In this volume I have collected some of my posts which I think will help guide you in your own journey through the world of anti-corruption and anti-bribery compliance. I have broken the book down into the following chapters:

Some Thoughts on Best Practices – This chapter charts some of the evolving standards of a best practices compliance program, with articles on the thoughts of Department of Justice (DOJ) representatives; guidelines from the US Sentencing Commission; standards from the OECD; and comments on the UK Bribery Act.

The Nuts and Bolts of Compliance – This chapter includes articles regarding the ‘How To’ of compliance inside a corporation. As any in-house practitioner knows, the practice of law inside of a corporation is very different from private practice. I try to bring an in-house perspective and provide guidance on how to perform the day-to-day work of implementing, assessing and enhancing a compliance program, inside a corporation.

Investigations, Enforcement Actions and Legal Issues – In this chapter I discuss ongoing investigations, enforcement actions which resulted in Deferred or Non-Prosecution Agreements and legal issues. From this discussion you, the reader, should be able to understand the Department of Justice’s most current thinking on compliance issues.

Summing It All Up – This chapter highlights some of the top enforcement actions and compliance issues which companies have faced. These articles provide more than just ‘tea leaf’ readings of where enforcement is going across the globe and will provide to you solid guidance in your compliance program going forward.

I have included the full text of the Foreign Corrupt Practices Act (FCPA) as well as the Department of Justice’s “Lay Person’s Guide to the FCPA“.

I know that you will find this book useful in your compliance practice and I hope that you will purchase it. It is available for the very reasonable price of $19.99 and you can order it on Amazon.com by clicking here.

February 10, 2012

Two Great Upcoming Webinars

There are two upcoming FCPA and compliance webinars that I want to tell you about. They will provide to you some excellent information on the FCPA and compliance in general.

First is myself and Patrick Kelkar, partner at The Mintz Group. We will present a webinar, hosted by Ethics Point on Tuesday, February 14 at 1 PM EST. We will discuss altering areas of FCPA enforcement that present higher or different risk as evidenced by recent legal actions. Patrick will use the incredibly fabulous resource of the The Mintz Group’s new “Where the Bribes Are” FCPA heat map to lead a discussion of new trends in the marketplace, specifically around new areas that present greater or different FCPA risks. We will use it to explore examples of industry-specific FCPA cases in Energy/Defense/Aero and geographically specific cases, such as Brazil. Lastly we will discuss specific cases associated with new minimum best practices moving forward (specifically Johnson & Johnson and Aon). For information, click here.

Second, my “This Week in FCPA” colleague Howard Sklar squares off in a battle royal with the FCPA Professor, Mike Koehler, in a discussion/debate on the merits of a compliance defense under the FCPA. The event is hosted by Bruce Carton at Securities Docket and is scheduled for Tuesday, February 21 at 12 noon, EST.

Drawing upon his just-released paper on the topic (“Revisiting a Foreign Corrupt Practices Act Compliance Defense”), Professor Koehler will argue in favor of Congress creating an FCPA compliance defense. He will explain why the unique aspects and challenges of complying with the FCPA in the global marketplace warrant a specific FCPA compliance defense and how the DOJ already recognizes a de facto FCPA compliance defense, albeit in opaque, inconsistent and unpredictable ways. Howard Sklar contends that there are two overriding reasons why Congress should not include a compliance defense to violations of the FCPA. Sklar contends that corporations will not see any incremental benefit from making effective compliance a defense, and, moreover, that taking discretion out of the hands of the prosecutors will create unintended and adverse consequences that will more than offset any slight benefit corporations may obtain. For information, click here.

I hope that you can attend both of these great events.

Creating Sustainable (Compliance) Performance

Compliance practitioners are continually tasked with moving a company’s culture of compliance forward. However, the day-to-day work is sometimes too granular to see results. In an article in the January-February issue of the Harvard Business Review, entitled “Creating Sustainable Performance”, authors Gretchen Spreitzer and Christine Porath explore some different techniques that managers can use to “help employees thrive at work.” They note that even in a down economy, thriving employees out produce non-thriving employees. The authors defined ‘thriving’ as employees who are not only “satisfied and productive but also engaged in creating the future” for their organization. I thought about these concepts within the context of promoting a culture of compliance within your organization.

The authors posit that there are two components to such thriving employees. They are vitality: “the sense of being alive, passionate and excited” and learning: that being the “growth that comes from gaining new knowledge and skills.” These two concepts work in concert and lead to employees who “deliver results and find ways to grow” on the job. Just think about the power of these concepts if you could apply them to advancing your company’s compliance program. The authors list four steps that managers can take to help employees thrive, which I have adapted for the goal of promoting compliance within your company.

Provide decision making discretion. Here the authors believe that employees will be energized if they can make decisions which affect their work. For your compliance program, it means listening to and working with your local employees to come up with better ways to implement and enhance compliance. But you must take care not to cut back on empowerment simply if a person makes a mistake. Such an eventuality can and should be used as teaching opportunity.

Share information. People will contribute to an organization more effectively when they understand how their specific work fits within the company’s overall mission and strategy. It is difficult to look for innovative solutions if the impact cannot be seen. Compliance should be open and transparent to allow employees to see the fruits of their ideas and efforts as systems which make information widely available should build trust and confidence.

Minimize incivility. This one should be held close by the lawyers in compliance and legal departments. I do not mean yelling and screaming but taking the time to listen and explain. As a lawyer, I sometimes revert to my legal training that all I need to do is explain the rules and that should be enough for everyone to understand. If employees face incivility the authors believe they are “likely to narrow their focus to avoid risks and lose opportunities to learn in the process.”

Offer performance feedback. The authors believe that feedback is the mechanism by which opportunities for learning are presented. Further, the more direct and the quicker the feedback is presented to an employee, the more useful it is as it resolves feelings of uncertainty and provides focus. This can help an employee get back on track or provide the impetus to match a culture of compliance.

One of the significant factors for each of these four mechanisms is that they do not require a substantial investment or enormous efforts. It does require leadership to be open to empowering employees. The authors conclude that these four mechanisms must be used in conjunction as each one reinforces the other. But the results can be very helpful in moving your company forward. In the 2012 economic climate putting such building blocks in place can be a powerful tool for your compliance efforts going forward.

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, 2012

February 9, 2012

IP Rights under the FCPA

For many US companies conducting business internationally, Intellectual Property (IP) is a key business component. Not only is the development of new IP critical to many businesses, for continued growth strategies, but IP protection is now a central business interest. This significance was recognized as far back as 2002 by the US Congress in the passage of the Sarbanes-Oxley Act (SOX), which required, among other things, that companies must incorporate systematic programs for protecting and monitoring IP assets as a part of an overall SOX compliance program.

IP in relation to anti-bribery and anti-corruption programs under the Foreign Corrupt Practices Act (FCPA) were recently explored in an article by authors Doug Sawyer and T. Markus Funk, in an article entitled “The IP Practitioner’s ‘Cheat Sheet’ to the FCPA and Travel Act: Introducing the IP FCPA Decision Tree” published in the BNA Bloomberg Patent, Trademark & Copyright Journal (January 27, 2012). The thesis, as presented by the authors, is that with so many companies going global, IP is routinely and simultaneously “owned and litigated in multiple jurisdictions.” As such it poses significant risk for anti-bribery and anti-corruption program scrutiny as “the tactics used to register, challenge or enforce those IP rights in foreign jurisdictions must be carefully viewed” under the FCPA.

IP Anti-Corruption Red Flags

IP rights by their nature are created by a government. Within this context, the authors note that there are several IP Red Flags which should be noted and followed up on if they appear. IP Red Flags include some of the following: a patent being allowed unusually quickly; an opposition to a trademark being granted before the entire process has been completed; and a foreign customs official robustly enforcing company A’s anti-counterfeiting agenda, while ignoring company B’s agenda. Compounding these Red Flags is the knowledge of the company, whether it is a US public or a private equity owner. Under the FCPA, both the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) interpret a principal’s ‘‘knowledge’’ constructively to include circumstances where the company fails to exercise due diligence by, for example, following up on Red Flags. More ominously, the UK Serious Fraud Office (SFO), in its Press Release announcing the Mabey and Johnson enforcement resolution under the Proceeds of Crime Act, said the following:

The second, broader point is that shareholders and investors in companies are obliged to satisfy themselves with the business practices of the companies they invest in. This is very important and we cannot emphasise it enough. It is particularly so for institutional investors who have the knowledge and expertise to do it. The SFO intends to use the civil recovery process to pursue investors who have benefitted from illegal activity. Where issues arise, we will be much less sympathetic to institutional investors whose due diligence has clearly been lax in this respect.”

Anti-corruption Pitfalls in the IP Context

The authors detail some of the specific pitfalls a company may face in registering or in otherwise protecting their IP rights in the international context. While noting that the FCPA prohibits payments of ‘anything of value’ such as “gifts, cash, unreasonably high commissions,” paid directly a company or through foreign business partners, “to foreign officials in order to ensure IP registration, or to oppose registration or enforcement of other companies’ IP.”; the authors caution that often times IP investments which are made abroad “frequently go through foreign transaction partners who ‘know the local system’.” Compounding this problem is the fact that many foreign countries “require the retention of one or more foreign associates, facilitators, and intermediaries to effectively register and enforce a robust IP program.” Lastly, the authors write that even when “accommodating seemingly simple requests from a customs official to pay for costs, such as transportation required in sending officers on an anti-counterfeiting operation, requires a determination of whether the payment is a legal facilitating payment under the FCPA.” Of course facilitation payments are not legal under the Bribery Act so the issue is even more problematic.

Prevention

The authors correctly note that having an anti-bribery and anti-corruption program which meets both the DOJ’s 13 point minimum best practices is critical. The pitfalls listed out above, which certainly point towards training of your own employees on what is and is not permissible, is key for protection. Under the FCPA, the question of who is a foreign governmental official can be vexing. However, in the IP context, such an analysis should be straightforward as such rights are only granted by a government, any dealing around IP rights creation and enforcement should be assumed to involve a foreign governmental official. Clearly the FCPA requires training on what actions are not permissible.

In addition to a thorough vetting, contracting with and management of any foreign business partners your company might utilize in the IP context, companies “must be ever vigilant when hiring third parties or local counsel to help to register, or oppose the registration of, their IP.” Likewise, IP owners should be equally aware that any actions in relation to government officials or third parties to aid the granting process, or ‘‘motivating police and prosecutors, must do so in a manner that does not violate the FCPA” or local laws.

As companies move towards IP as much of the basis of their business values, increasing pressure will build for registration and protection of these rights. Anti-corruption laws such as the FCPA make clear that there can be no corruption when obtaining or enforcing these rights. Your company would do well to perform an anti-corruption risk assessment on your IP program to ensure it is not caught with any of the problems detailed by the authors.

Decision Tree

I would also commend you to this article for another reason. They have included a most excellent, decision making tree which you can use in analyzing anti-corruption issues in the IP context. I could not cut and paste it into this article and post on the WordPress.com site so you will have to download the article to review and use it. However I would suggest that you take the time to do so as it presents a visual manner to think through and analyze the issues raised in their article.

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, 2012

February 8, 2012

Haas School Training for Compliance and Ethics Leadership

There are a myriad of compliance and ethics conferences across the country each year. I regularly attend and speak at some of these. There are also more regular webinar and local events which may focus on specific topics or themes. However, there are relatively few educational programs, put on by universities or business schools which focus on the ‘how to’ of compliance leadership. This situation will soon change.

A recent article in the European Business Review, entitled “Leading with Ethics and Compliance”, author Mark Meaney discussed the Occupy Wall Street movement and similar protests in the context of the requirement for “business schools to address the need for greater accountability and transparency in business decision-making.” He pointed towards Dean Rich Lyons of the Haas School of Business at the University of California, Berkeley, who has argued for the “importance of creating a culture within the business school that encourages students to go beyond themselves as future business leaders in learning to accept responsibility for the impact on society of their actions.” In addition to its traditional business school curriculum the Haas School also has “training and education for individuals who will have as their function to change the ethical climate of corporations from the inside in their role as Chief Ethics and Compliance Officers (CECOs).”

This outreach program is based upon research done at the Haas School which concluded that compliance programs usually adopt one of two approaches to corporate ethics and compliance training: a rules-based approach or a values-based approach. The Haas School has taken the belief that neither approach is entirely effective at corporate compliance and ethics. In a rules-based approach, compliance programs use “deterrence as a means of enforcing employee compliance with corporate policies, ethical standards, and government rules and regulations.” This emphasis on the rules and the investigation and punishment of employees creates a ‘culture of fear’ that stifles open communication. In a values-based approach, compliance programs will “emphasize creating a corporate culture that encourages employees to speak up about potential issues without the fear of retaliation. While a vast improvement over the rules-based approach, the values-based approach to corporate compliance and ethics still does not go far enough.”

The Haas School’s approach is that an ethics and compliance program only becomes truly effective when an organization fully integrates compliance into the company’s overall strategic planning process. Once senior executives make the connection between brand reputation and success in an “idea economy” they will realize the return on investment (ROI) of an ethics and compliance program. Companies can then learn how best to leverage their ethics and compliance programs in strategic planning to maximize innovation and performance with integrity in gaining a competitive edge.

The focus has led to the creation of an executive learning program, entitled  “Leading with Ethics and Compliance”, which is designed to provide compliance practitioners with the necessary tools that will empower them to achieve strategic relevance by partnering with key decision makers to cultivate influence, earning a reputation as a creative thinker intent on progress and not obstruction, and by measuring how ethics and compliance improves the organization’s ability to meet its corporate objectives.

This intensive three day intensive course will be taught at the UC Berkeley, Center for Executive Education from February 13 to 15. I had the opportunity to review the agenda and its faculty and speakers recently and it appears to have an impressive array of notables in the compliance and ethics field. The faculty includes the aforementioned Mark Meaney and others from the Haas School, melded with speakers from a wide range of compliance practices, both in-house and third party service providers.

The curriculum includes the following broad categories: (1) Ethics and Compliance 3.0, which includes topics such as From Check Box to Culture to Strategy; Ethics, Compliance, and Organizational Strategy; and Leading Change, Leveraging Culture. (2) The E&C Officer as Strategic Partner, including topics such as Power and Influence with Integrity; Transformational Leadership and Building Your Base. (3) Tools of the Successful E&C Officer; including such topics as Data Privacy and Security in Information Management; Managing Hotlines and Conducting Internal Investigations; Global Compliance Risk Mitigation; and Sector Regulatory Update.

If you hold a leadership position in compliance, or aspire to, this Haas School program would appear to be an excellent place for you to hear about some of the most current best practices in compliance leadership. For more information on the program, 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, 2012

February 7, 2012

Unofficial Messages-Creating a Culture of Compliance

An article in the January/February issue of the SCCE magazine, entitled “An ethical corporate culture goes beyond the code”, author Dawn Lomer argues that the unofficial message which a company sends to its employees “is just as powerful-if not more powerful-than any messages carried in the code of conduct.” Lomer goes on to set out five different “unofficial channels” by which your company can convey and communicate its message regarding doing business in an ethical manner and “influence employee behavior across the board.

Reward for Integrity

Many compensation systems are based upon rewards for top sales. Lomer believes that such systems can lead to “hubris” which she believes is one of the main sources for unethical behavior in the workplace. Such hubris allows a high-producer to believe that the rules of ethical behavior do not apply to them. Lomer writes that the key is to reward employees for doing business in an ethical manner and that such an action “sends a powerful message without saying a word.”

The three-second ethics rule

It is important that senior management not only consistently drives home the message of doing business ethically but should communicate that message in a short, clear values statement. Lomer cites to Chris Bauer for the proposition that “If you have to think about it for more than three seconds to really know what it means, it fails the test.” However, if the message does meet the three second test, it can drive down to become a part of the company’s DNA.

Environmental cues

Environmental cues can cause employees to think, and work, in an unconscious manner ethically. Here Lomer discusses the concept that “the non-conscious part of the brain has a much bigger influence on day-to-day decisions than most people think.” This can allow a company to put cues up that emphasize doing business in an ethical manner. Simply the idea that a company is providing oversight on doing business ethically can be enough to modify employee behavior.

Control the images

A visual image is still a powerful tool for management. Just as pictures of competitive sports, combat or dollar signs suggest that winning is important, pictures suggesting cleanliness can lead to more ethical behavior. Lomer writes that a picture of a hand sanitizer at the office can provide employees “a better mindset about ethical and moral values.” This can also be achieved by having pictures of children. It is not all about winning but conducting business as it should be done.

Align messages

Many companies focus on the formal parts of a compliance program; the policies and procedures, committees to implement and enhance compliance and formal training. However, Lomer notes that if the unofficial messages are not aligned with the formal messages, there may well be a disconnect. Lomer concludes that you should think about the totality of the messages that your company is sending out to its employees regarding doing business ethically, “a proportionate amount of time should be spent examining the unofficial messages that your company is sending, and making sure that all these messages are aligned in a way that makes clear your ethical corporate culture clear.”

 

For all of us who have had or currently have teenaged children, we know that how we conduct ourselves sends as strong a message as what we say our message is. Lomer’s article takes this proposition and puts it in the context of doing business ethically and conveying that message to your employees. To drive compliance into your company’s DNA, you need to continually work to make sure that all the messages you are sending out as an institution are consistent, do business ethically and without corruption and bribery.

============================================================================================

This Week in FCPA, Episode 30 is up. In this Episode, Howard and I discuss the acquittals and mis-trial in the second Gun Sting trial and more.

============================================================================================

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, 2012

February 6, 2012

A Triumvirate of FCPA Resources

One of the great things about blogging about the Foreign Corrupt Practices Act (FCPA), UK Bribery Act and ethics and compliance in general, is that practitioners will forward materials to me to review. Not only does this assist me in my legal practice (yes, I do practice law for a living) but it also provides me with a wealth of materials to write about and share with other compliance practitioners. This week I was the lucky recipient of one email with three such resources from Markus Funk, partner at the law firm of Perkins Coie. I would also note that Markus was the author, co-author or otherwise involved in publishing of all three articles.

The three articles are: (1) “Complying With the Foreign Corrupt Practices Act: A Practical Primer”, authored by the University of Chicago Law School’s Corporate Lab, co-sponsored by Microsoft, and published by the ABA Global Anti-Corruption Task Force; (2) “The IP Practitioner’s ‘Cheat Sheet’ to the FCPA and Travel Act:  Introducing the IP FCPA Decision Tree, authored by Doug Sawyer and T. Markus Funk and published in the BNA Bloomberg Patent, Trademark & Copyright Journal; and (3) “Breaking Down the FCPA, Travel Act, and UK Bribery Act”, by T. Markus Funk, published in BNA Bloomberg White Collar Crime Report.

Complying with the FCPA: A Practical Primer

Whether you are new to the field of compliance or a long time practitioner, this 52 page guide is an excellent one-stop shop for any person who may need guidance under the FCPA. This is the result of the collaboration of several authors, law firms, companies and organizations and the stated purpose of the Primer for this report is to provide: (1) an overview of the FCPA; (2) an analysis of how the federal government – particularly the Department of Justice (the “DOJ”) – enforces the FCPA; and (3) a framework for developing effective compliance programs. It certainly fulfills these goals. The Primer used, as sources, the following materials: (1) the United States Attorney’s guidelines; (2) the United States Federal Sentencing Guidelines; and (3) the Organization for Economic Co-operation and Development’s (the “OECD”) Good Practice Guidance.

The Primer takes as its starting point the DOJ’s 13-point minimum best practices compliance program that is now routinely set forth in each Deferred Prosecution Agreement (DPA) and Non-Prosecution Agreement (NPA) entered into by the Department. A compliance practitioner is also provided with the legal underpinnings of the FCPA, the fundamental components of a best practices compliance program from the DOJ’s perspective and various metrics by which a company can measure and assess the effectiveness of a compliance program. To have all of this in a 52 page Primer is a much needed resource that can be used by all.

 

FCPA and Intellectual Property

In “The IP Practitioner’s ‘Cheat Sheet’ to the FCPA and Travel Act:  Introducing the IP FCPA Decision Tree” co-authors Doug Sawyer and T. Markus Funk discuss the FCPA and its “private bribery twin, the Travel Act” in the context of intellectual property (IP) protection. They note that the reality of 21st century business is that companies are valued largely on the basis of their intellectual property, transforming intellectual property protection into an increasingly central business interest. And with so many US and US-based companies ‘‘going global’’ IP is routinely, and simultaneously, owned and litigated in multiple jurisdictions. IP is, therefore, far from immune from FCPA or Travel Act issues and enforcement.

The authors list FCPA Red Flags in the IP context, which can be such actions (a) a patent being granted unusually quickly; (b) an opposition to a trademark being granted before the entire process has been completed; (c) “a foreign customs official robustly enforcing company A’s anti-counterfeiting agenda, while ignoring company B’s agenda.” To assist the IP practitioner, who may be new to FCPA compliance, or for the compliance practitioner, who may be new to IP issues, the authors conclude their article with a useful decision making tree as a guide to FCPA and Travel Act anti-bribery provisions which “graphically illustrates each analytical step at issue, explains how the Travel Act’s prohibition on ‘‘private’’ bribery fits into the overall anti-bribery puzzle, and seeks to provide a bird’s eye view of this often confusing legal framework.”

Breaking Down the FCPA and Travel Act

In “Breaking Down the FCPA, Travel Act, and UK Bribery Act”, sole author T. Markus Funk, provides the FCPA and Bribery Act compliance practitioner with three handy charts which illustrates the particular steps one must go through to analyze a claim for public corruption under the FCPA and how the Travel Act’s prohibition on private bribery fits into the overall anti-bribery puzzle; a chart explaining how the UK Bribery Act relates to organizations; and a chart which sets out the differences between the FCPA and the Bribery Act. Taken together, these three charts provide to the compliance practitioner with the ‘‘big picture’’ view of these three anti-corruption and anti-bribery laws. It is a very useful short guide to these three laws.

All of these articles fill a valuable niche for the compliance practitioner. I hope that you will review and use them in your practice going forward. I also hope that you will join me in thanking T. Markus Funk for not only authoring or assisting in authoring the above three resources but also for sending them along to me to pass along to you.

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, 2012

February 3, 2012

The Gun Sting Case Defeats and What it means For FCPA Enforcement? Absolutely Nothing!

In a stunning rebuke of the Department of Justice’s (DOJ) trial strategy, all defendants in the second group of Gun Sting defendants walked out of the federal courthouse, still free. Two defendants were acquitted and the remaining three defendants were granted a mistrial. One defendant was dismissed at the close of the prosecution’s case in December as was the DOJ’s Foreign Corrupt Practices Act (FCPA) conspiracy count against all defendants. So, as the FCPA Professor noted, the DOJ is 0-10 in trial prosecutions in its Gun Sting case. However, that stark number does not tell the full picture of what is going on in enforcement of the FCPA.

First and foremost, not all of the Gun Sting defendants have been acquitted or even been granted mistrials, three defendants, Haim Geri, Daniel Alvarez and Jonathan Spiller all pled guilty. A fourth defendant, Richard Bistrong, reported by the FCPA Blog to be “the key intermediary between the FBI and the shot-show defendants”, pled guilty to one count of conspiracy to violate the FCPA and other statutes in 2010. So to imply the DOJ is zero in obtaining guilty verdicts and pleas for all defendants in its Gun Sting case is not precisely correct.

The defeats in the Gun Sting trials, coupled with the overturning of the guilty verdict in the Lindsey Manufacturing case and the O’Shea acquittal, have lead many commentators to make one of two arguments: (1) the DOJ is getting is comeuppance for ‘aggressive’ prosecution of the FCPA; and (2) coupled with the claim that the FCPA hurts US competitiveness overseas, it is the end of FCPA enforcement as we know it. Both positions are far wide of the mark. So what does the DOJ record for the two Gun Sting trials mean for FCPA enforcement? Absolutely nothing! As reported by the FCPA Blog, in 2011 15 companies settled FCPA enforcement actions by paying a total of $508.6 million in fines and penalties. Although this is a drop from both the number of companies which resolved FCPA enforcement actions and aggregate amount of fines and penalties paid over the previous year, this number is still significant. One need only take a look at the reported ongoing FCPA investigations to see that there is still significant enforcement occurring. As to the ‘aggressive’ DOJ enforcement, remember these enforcement actions against companies are made largely through self-disclosure. If the DOJ does not believe that there is a sufficient basis to bring an enforcement action, it will decline to prosecute the company.

What can be portended by the defeats at trial? First the whole notion that the Lindsey Manufacturing company defendants were somehow acquitted or over-zealously prosecuted is just plain wrong. They were found guilty and this guilty verdict was thrown out due to prosecutorial misconduct. As to O’Shea, it appears that the trial judge concluded that the government simply did not have enough evidence to get it to a jury. While it appears that the O’Shea case should not have gone to trial, the government at least put enough evidence forward to get to trial.

Such was not the case in the Gun Sting trials, where it appears the jury both (a) did not think the defendants were guilty, or (b) leaned so heavily towards acquittal that no unanimous decision could be made. It is still not clear why the government failed so miserably with the juries in the Gun Sting trials. It may be that people do not understand why the government would set up an apparently legitimate business transaction and then overlay a corruption case on it. After all, everyone understands that any business dealing involving illegal narcotics is illegal from the get-go. It does not matter if bribery and corruption are involved, the entire transaction is illegal. It may be the jurors did not feel the same about an underlying transaction which was clearly legal; here the sale of armaments to a foreign government, something the US government does on a routine basis.

It may also be the jury simply did not believe or even like the government’s star co-operating witness, Richard Bistrong. As reported by the FCPA Professor, Bistrong pled guilty long before any of the 2010 arrests in the Gun Sting case. He pled guilty back in 2009 which means that at least some of the time he was working undercover for the government, he had already pled guilty. This fact may have persuaded the jury in the Gun Sting trials that his testimony did not support the illegal conduct that the government claimed it supported. Or as asked by the FCPA Professor, in a post entitled “Will Bistrong’s Plea Impact The Africa Sting Cases?”, “What impact will Bistrong’s plea have in the Africa [Gun] Sting case – particularly the defendants’ expected entrapment defense?” It may have been quite a bit.

As your company’s compliance officer, what should you make of all this? My take is that you had better double down on your compliance program because I believe that the DOJ will refocus its efforts where it will have the most success, with enforcement actions against corporations. Why do I say this? First of all, there is the self-disclosure issue noted above which is now compounded by the Dodd-Frank Whistleblower provision. Second is the new norm of industry sweeps, and remember these started long before Johnson & Johnson who agreed, as part of its DPA, to turn in its competitors for alleged FCPA violations. Also name one company which will go to trial? The answer is easy because it’s none, nada, zilch and zero. After Arthur Anderson, no public US Company will go to trial in a FCPA case and risk a guilty verdict. Lindsey Manufacturing and the individual defendants went to trial because they were the company and the company was them.

So what is my take on the effect on ongoing FCPA enforcement of the failure of the DOJ to convict any of the Gun Sting defendants at trial? Once again, Absolutely nothing!

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, 2012

« Previous PageNext Page »

Blog at WordPress.com.