Wal-Mart and the Strategic Transformation of a Compliance Culture

In every crisis there is an opportunity. This was presented, perhaps less starkly, in an article in the spring 2012 Issue of the MIT Sloan Management Review, entitled “Achieving Successful Strategic Transformation”, by authors Gerry Johnson, George S. Yip and Manual Hensmans, “Happy accidents are unanticipated circumstances or events that ultimately support [strategic] transformation”. While those in Bentonville, Arkansas are probably not thinking that their current situation is a ‘happy accident”; Wal-Mart is presented with a unique opportunity to create a world-class compliance program. It will most probably be required to do so to aid in its inevitable negotiations with the US Department of Justice (DOJ) over any fine and penalty for any violations of the Foreign Corrupt Practices Act (FCPA), however it may also do so to demonstrate its absolute commitment to doing business ethically to the US and world’s courts of public opinion.

The authors begin by noting that companies which radically alter entrenched ways of doing business are the “exception rather than the rule.” Further, most companies do not adopt such new strategies without being forced to do so by some type of financial trauma. The authors studied 215 companies to find out if there were any key lessons from companies which were able to affect such transformational change. Their article can provide guidance to Wal-Mart or any other company which may find itself in the position where it needs to make a major strategic change to a culture of ethics and compliance.

The authors start with the proposition that to make strategic transformations, companies must “foster alternative management coalitions and value constructive tension and challenges to the status quo.” They have developed eight recommendations for making such transformational changes.

1. Build on history. A company should recognize the “importance of valuing history and building on it.” This requires managers within the company to “reflect on the evolution of their organization and the legacy they can build on.” The authors end this section by noting in light of what the response might be, what steps could be taken?
2. Select and develop a new generation of leadership. If a company is serious about transformation, succession planning must involve looking at different capabilities in a new set of up and coming leaders within the company. There needs to be a new generation of leaders groomed who have alternative ways of looking at problems and doing business. The authors note that this will not be easy as it will require the current senior leadership to “nurture replacements who will question, modify or even be willing to reject the company’s heritage.”
3. Accept and encourage constructive mobility. A company must not select the “most predictable successors” but rather “adopt a deliberate policy of cultivating internal talent.”  To do so, a company must foster alternative coalitions within the company and “encourage divergent perspectives on the future of the business” by identifying up and coming leaders who respect the past but “have a distinctly different view on the future.”
4. Ensure that decision making allows room for dissent. The authors begin this section by noting “There is a fundamental difference between an organization built to maintain consensus around a dominant logic and one where managers naturally challenge it.” I know of Law Departments that are viewed as “the land of No” because the business folks think that is the only word the legal department can articulate. The authors believe that a transformational decision making process must allow for dissent and the company must not only live with such a process but welcome and embrace it.
5. Create enabling structures that encourage tension. Creative tension occurs when there are opposing views which can be “fostered structurally.” This means that alternative views should be sought out and heard. In the compliance arena, it means that you might listen to certain front line business unit personnel to better understand how something might be accomplished. The authors write that even by creating such a structure, a company can “make a difference in how people see ideas internally.”
6. Expect everyone to get behind decisions once they are made. As important as the above structures and procedures are to creating transformational change, “there needs to be some point when leadership makes a decision and the different parties fall into line.” This is the concept of “corporate maturity” and the authors emphasize that it is not a way to stifle dissent but a realization that at some point it is time to move on for the greater corporate good. The authors conclude this section by noting that most companies did not fail in their transformational efforts because they made the wrong decision but because they otherwise botched the internal debate.
7. Develop an arching rationale. A company needs to have a clear position on “what we are about”. There should be “emphasis on a clear rationale supported by strong values” that allows for the necessary diversity of views, ideas and debates. This should be the set piece to begin the transformational change within the organization.
8. Beware of market size and dominance. No matter whether a company has a small share of its industry’s market, or, as in the case of Wal-Mart, it is the industry leader, the authors note that “ongoing strategic transformation requires relatively focused businesses.” In the case of Wal-Mart that means retailing and all aspects around its business model.

The authors conclude by stating that this type of transformational change does not happen overnight and readily admit that the concepts “are the antithesis of short-term management.” This would fit precisely into the place that Wal-Mart finds itself in now. The FCPA investigation could well take between 2-4 years; the negotiations regarding any fines or penalties could add significant length to that time frame. Avon is over four years into its FCPA journey and there is no public end in sight. However, this means that the opportunity for a truly transformational change is available to Wal-Mart or any other company which finds itself similarly situated. The authors have laid out for Wal-Mart or any other company concrete steps on a path forward which could give them the title of not only the World’s Largest Retailer but also the World’s Most Ethical Company.

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

© Thomas R. Fox, 2012

Turning Compliance Beliefs Into Action-Impacting Tone at the Bottom

Tone at the Top has become almost a by-word in the compliance world these days. It is specifically mentioned in the US Department of Justice’s (DOJ) 13-point minimum best practices compliance program as well as the UK Ministry of Justice’s (MOJ) Six Principles of Adequate Procedures. How does a compliance practitioner tap into ethical beliefs of a company’s employee base? However, a company’s ‘tone’ is much more than that simply at the top of the organization. There is tone at both the middle and bottom. One of the greatest challenges of a compliance practitioner is how to affect the ‘tone at the bottom’. In a recent article in the Spring 2012 Issue of the MIT Sloan Management Review, entitled “Uncommon Sense: How to Turn Distinctive Beliefs Into Action”, authors Jules Goddard, Julian Birkinshaw and Tony Eccles looked at this issue when they explored the “often overlooked, critical source of differentiation is [a] company’s beliefs.”

One of the questions that the authors answer is: how to tap into this belief system? They posit a structured manner to obtain this information. By using these techniques, they believe that companies can rethink their “basic assumption and beliefs” and identify new directions for their organization. The authors listed seven approaches that they have used which I believe that the compliance practitioner can use to not only determine ‘Tone at the Bottom” but to impact that tone. They are as follows:

1. Assemble a group. You need to assemble a group of employees who are familiar with the challenges of doing business in a compliant manner in certain geographic regions. Include both long-time employees and those who are relatively new to the organization. The authors also suggest that if you have any employees who have worked for competitors or for other organizations in your industry you include them as well.
2. Ask questions. You should ask the members of this group to articulate their basic assumptions about your compliance model, about the management model, about your company’s business model and the future of the industry in general. Ask them to do this individually and not as a group.
3. Categorize the responses. Now comes the work by the compliance practitioner or compliance team. These assumptions will usually fall into two groups. The first is assumptions that everyone agrees upon-the common beliefs. The second is those assumptions that only a few of the participants will identify – this is what the authors call the “uncommon beliefs”.
4. Develop tests for common beliefs. For those beliefs that are labeled common – you should consider how you know these to be true? The authors caution that simply because the group may believe that the company operates a common industry or that we “do it because it has always been done this way” is necessarily a “hard fact.” Consider what test you could perform to verify the common belief that you desire to test. The authors note that the purpose here is to “identify the ‘common nonsense’ beliefs that everyone holds that are not actually hard laws of nature.”
5. Develop tests for uncommon beliefs. Here the authors suggest that you need to consider why some people think that these beliefs are true. What is the information or experience that they have drawn upon? Is there any way for you to test these uncommon beliefs?
6. Reassemble the original group. You should reassemble the original group and have them consider the beliefs that were articulated by them individually in the context of your compliance model and how both your company and your industry do business. Lead a discussion that attempts to identify any assumptions or beliefs that ‘are quite possibly wrong, but worth experimenting with anyway.”
7. List of Experiments to perform. The authors believe that the outcome of the first six steps will be “a list of possible experiments [tests] to conduct” to determine the validity of the common and uncommon beliefs. These tests can be accomplished in the regular course of business, through a special project with a special team and separate budget. You should agree on the testing process and review your testing assumptions throughout the process. This process can and should take some time so do not set yourself such a tight time frame that it cannot be fully matured.

I find this list to be a very interesting way for a compliance practitioner to get at ‘tone at the bottom’. By engaging employees at the level suggested by the authors I believe you can find out not only what the employees think about the company compliance program but use their collective experience to help design a better and more effective compliance program. It is my belief that employees want to do business in an ethical manner. Given the chance to engage in business the right way, as opposed to cheating; will win the hearts and minds of your employees almost all of the time. By using the protocol suggested by the authors you can not only find out the effect of your company’s compliance program on the employees at the bottom but you can affect it as well.

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

Neither snow, nor rain, nor heat…Communicating Your Compliance Story

The Persian Royal Road was built to facilitate rapid communication throughout the Persian Empire. Mounted couriers could travel across the Empire, approximately 1,677 miles; in seven days, the equivalent journey on foot took ninety days. The Greek historian Herodotus wrote of these messengers, “Neither snow, nor rain, nor heat, nor darkness of night prevents these couriers from completing their designated stages with utmost speed” this was later inscribed on the James Farley Post Office in New York and is sometimes thought of as the United States Postal Service Creed.

While communications certainly can be speedier these days, I thought about Herodotus’ quote when I read an article in the Corner Office Section of the Sunday New York Times, entitled “What’s Your Story” Tell It, and You May Win a Prize”. In the article reporter Adam Bryant interviewed Russell Goldsmith, the Chairman and Chief Executive Officer (CEO) of City National Bank in Los Angeles, CA. The article focused on how Goldsmith, who came out of an entertainment industry background, brought the art of storytelling and other techniques which could be used by the compliance practitioner to help employees learn how to do business in an ethical and compliance manner.

Story Idol

City National Bank has a program called ‘Story Idol’.  Each quarter the company puts on a competition among its 79 offices. It is designed to create a mechanism “to give colleagues a pat on the back and a moment in the sun for doing the right thing, and it democratizes and decentralizes positive reinforcement.” This is coupled with an annual Story Idol competition in a meeting with the top 300 employees of the company. Employees tell stories “about what they did that promoted teamwork or helped a client by going the extra mile. It’s like telling stories around a campfire, but they’re doing it around conference tables.”

The contest begins with an online submission, where all stories can be read and then voted on by all employees. The winner from each quarterly competition receives an iPad and for those employees who go the extra mile with assisting customers and clients; they are eligible to receive a cash award as well. The quarterly winners are then eligible for the annual prize.

Hiring

As the CEO, any prospective hire that makes it up to him for an interview has been vetted from a technical competency perspective so Goldsmith focuses on character. He does this by directly asking the prospective hires what their expectations are in coming to work at City National because if the person is not a good match for the company, both parties will be better off if he or she does not go to work there in the first place. Goldsmith also asks if a prospective hire has any questions for him. Goldsmith believes it is important for a candidate to not only have questions but to ask them as well. He stated, “Not because I want them to kind of butter me up or something. It tells me several things. Sometimes people don’t have a single question. And if you have any curiosity, here is your window. I mean, you are thinking of changing your entire career and you have 40 to 60 minutes with the C.E.O., and you don’t have a single question about the company?”

He wants employees who are not so intimidated that they are afraid to ask questions. Further, he thinks that if “you have no curiosity, then you are in the wrong company.” Additionally, Goldsmith believes that from the questions a candidate asks, he can get a feel for what their character is. He said, “I can tell a lot by the kind of question. Is it a fawning question or is it a real question?”

Fresh Approaches to Leadership

Goldsmith appreciates taking a “fresh look at the company” through the eyes of new hires. One of the ways he does this is in large meetings where he will “will reach out to some of the new people beforehand, and I’ll just say, “When the meeting’s over, shoot me an e-mail and tell me what worked at the meeting, what didn’t work, what did you like, what didn’t you like.”” He believes that this technique communicates that City National is trying to build a culture of speaking up so that ideas and concerns are communicated in the company and those communications are acknowledged as important.

There are several items from Bryant’s piece on Goldsmith and City National which you can use in your compliance program. His Story Idol is an excellent concept to get compliance victories across in a teaching method which demonstrates companywide commitment to compliance and ethics. Goldsmith’s use of questions during interviews is an important technique for hiring personnel to incorporate in any prospective employee interview. What does a candidate think about compliance and ethics? Are they committed to doing business in an ethical manner? Will they report violations of the company Code of Conduct? These are just some of the questions which should be asked. Lastly, when you have the CEO bring up compliance in large meetings, it certainly communicates a tone from the top which is important and must be the starting point for any successful compliance program.

We began with Herodotus and the importance of the Persian messenger system to the Persian Empire. The messenger is still important even if the medium is different than an ancient Pony Express Rider galloping at full tilt. Story Idol is a medium to use to communicate important victories inside City National. It is a medium that you can use in your compliance program as well.

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

Does Wal-Mart Have a Facilitation Payment Exception to the FCPA?

In an article entitled “Many Of The Bribery Allegations Against Wal-Mart May Not Be Illegal” Forbes reporter Nathan Vardi wrote that “many of the allegations reported in the New York Times could reasonably be interpreted as falling under the so-called “facilitating payments” exception.” I wondered what defense might be available to Wal-Mart where bribes of up to $244,000 could be construed as an exception to prosecution for bribery of foreign government official under the Foreign Corrupt Practices Act (FCPA). In this post we will visit the text of the FCPA and other Department of Justice (DOJ) commentary, look at some enforcement actions; one open investigation involving alleged facilitation payments and offer some guidance to the compliance practitioner on what may or may not constitute a facilitation payment under the FCPA.

I.                   The Statute and Other Guidance

 1. The Statute

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.

2. Lay Person’s Guide to the FCPA

In the Lay Person’s Guide to the FCPA is a brochure by the DOJ which is their “general explanation of the FCPA.” Within in this guidance the DOJ states:

FACILITATING PAYMENTS FOR ROUTINE GOVERNMENTAL ACTIONS

There is an exception to the anti-bribery prohibition for payments to facilitate or expedite performance of a “routine governmental action.” The statute lists the following examples: obtaining permits, licenses, or other official documents; processing governmental papers, such as visas and work orders; providing police protection, mail pick-up and delivery; providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products; and scheduling inspections associated with contract performance or transit of goods across country.

Actions “similar” to these are also covered by this exception. If you have a question about whether a payment falls within the exception, you should consult with counsel. You should also consider whether to utilize the Justice Department’s Foreign Corrupt Practices Opinion Procedure, described in the guide on p. 10 and below:

“Routine governmental action” does not include any decision by a foreign official to award new business or to continue business with a particular party.

II.                Enforcement Actions

a.     Con-way

The FCPA landscape is littered with companies who sustained FCPA violations due to payments which did not fall into the facilitation payment exception. In 2008, Con-way, a global freight forwarder, paid a $300,000 penalty for making hundreds of relatively small payments to Customs Officials in the Philippines. The value of the payments Con-way was fined for making 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.

b.     Helmerich and Payne

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.

c.     Panalpina

Finally, there is the Panalpina enforcement action. As reported in the FCPA Blog, 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.

d.     DynCorp

Then there is the DynCorp investigation matter. As reported in the FCPA Blog and others, it is related to some $300,000 in payments made by subcontractors who wished to speed up their visa processing and expedite receipt of certain licenses on behalf of DynCorp. This investigation has been going on for several years and there is no anticipated conclusion date at this time.

III.             Some Guidance

So what does the DOJ look at when it reviews a company’s FCPA compliance program with regards to facilitation payments? 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 under $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? 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 be quite clear and they are critical to any audit trail so recording them is quite significant.
8. Monitoring programs? There must always be ongoing monitoring programs to review your company’s internal controls, policies and procedures regarding facilitation payments.

 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. Do Wal-Mart’s alleged payments to speed up the process qualify as facilitation payments or does an aggregate of over $24 million paid constitute something else?

Additionally, accurate books and records are a must. At this point it is not apparent if Wal-Mart accurately recorded these payments. If Wal-Mart really believed they were facilitation payments, why didn’t they just record them as such?

Also remember that the defense of facilitation payments is an exception to the FCPA prohibition against bribery. Any defendant which wishes to avail itself of this exception at trial would have to proffer credible evidence to support its position, but at the end of the day, it would be the trier of fact which would decide. So much like any compliance defense, the exception is only available if you use it at trial and it would be difficult to imagine that Wal-Mart will want this matter to ever see the light of a courtroom.

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

Henry IV and Adequate Procedures

As a father, I have come to appreciate Shakespeare’s Henry IV more and more; particularly more than I did when I was only a son. Part of the play deals with how Henry IV got his crown, by deposing Richard II and the battles he had to fight to keep it. But a large part of the play deals with his riotous son, Hal, drinking and philandering with Falstaff before he grew into the great monarch Henry V. With that in mind, we continue our exploration of the Six Principles of an Adequate Procedures compliance defense with a look at Principle IV – Due Diligence.

I.                   Commentary

Principle IV of the Six Principles of an Adequate Procedures compliance program states, “The commercial organisation applies due diligence procedures, taking a proportionate and risk based approach, in respect of persons who perform or will perform services for or on behalf of the organisation, in order to mitigate identified bribery risks.” The purpose of Principle IV is to encourage businesses to put in place due diligence procedures that adequately inform the application of proportionate measures designed to prevent persons associated with a company, whether on the sales and distribution side or in the supply chain, from bribing on their behalf. The Guidance recognizes that Due Diligence procedures act both as a procedure for anti-bribery risk assessment and as a risk mitigation technique. The Guidance believes that Due Diligence is so important that “the role of due diligence in bribery risk mitigation justifies its inclusion here as a Principle in its own right.”

II.                Who is an Associated Person?

Who is an Associated Person? The Guidance intones that a company is liable if a person ‘associated’ with it bribes another person intending to obtain, retain or a gain an advantage for the business. The definition is quite broad and is applicable to basically anyone who ‘performs services’ for or on behalf of the business. This can be an individual, an incorporated entity or unincorporated body. The capacity in which the services are provided is not dispositive, so employees, agents and subsidiaries are included. This also means that a supplier can properly be said to be performing services for a company rather than simply acting as the seller of goods, it may also be an ‘associated’ person. Taken further, if a supply chain involves several entities, or a project is to be performed by a prime contractor with a series of sub-contractors, a business is likely to only exercise control over its relationship with its contractual counterpart and this means a company could have responsibility for those acting on its behalf in a wide range of arenas, with a wide range of titles. This could include all of the following: agent, sales agent, reseller, distributor, partner, joint ventures, consortium partner, contractor, subcontractor, vendor, supplier, affiliate, subsidiary or any other similar moniker.

III.             Joint Ventures

As for joint ventures (JV), these come in many different forms, sometimes operating through a separate legal entity, but at other times through contractual arrangements. In the case of a JV operating through a separate legal entity, a bribe paid by the JV may lead to liability for a member of the JV if the JV is performing services for the member and the bribe is paid with the intention of benefiting that member. However, the existence of a JV entity will not of itself mean that it is ‘associated’ with any of its members. A bribe paid on behalf of the JV entity by one of its employees or agents will therefore not trigger liability for members of the JV simply by virtue of them benefiting indirectly from the bribe through their investment in or ownership of the JV.

The situation will be different where the JV is conducted through a contractual arrangement. The degree of control that a participant has over that arrangement is likely to be one of the ‘relevant circumstances’ that would be taken into account in deciding whether a person who paid a bribe in the conduct of the JV business was ‘performing services for or on behalf of’ a participant in that arrangement. It may be, for example, that an employee of such a participant who has paid a bribe in order to benefit his employer is not to be regarded as a person ‘associated’ with all the other participants in the JV. Ordinarily, the employee of a participant will be presumed to be a person performing services for and on behalf of his employer. Likewise, an agent engaged by a participant in a contractual JV is likely to be regarded as a person associated with that participant in the absence of evidence that the agent is acting on behalf of the contractual JV as a whole.

IV.              Procedures

Maintaining a consistent theme throughout this Guidance on the Six Principles of an Adequate Procedures anti-bribery program, it is incumbent that a company’s Due Diligence procedures should be proportionate to the identified risk. Due diligence should be conducted using a risk-based approach. For example, in lower risk situations, companies may decide that there is no need to conduct much in the way of due diligence. In higher risk situations, due diligence may include conducting direct interrogative enquiries, indirect investigations, or general research on proposed associated persons.

However, the appropriate level of Due Diligence to prevent bribery will vary enormously depending on the risks arising from the particular relationship. So, for example, the appropriate level of due diligence required by a company when contracting for the performance of Information Technology (IT) services may be low, to reflect low risks of bribery on its behalf. Conversely, a business entering into the international energy market and selecting an intermediary to assist in establishing a business in such markets will typically require a much higher level of due diligence to mitigate the risks of bribery on its behalf.

One company I know, The Risk Advisory Group, has put together a handy chart of its Level One, Two and Three approaches to integrity and due diligence. I have found it useful in explaining the different scopes and focuses of the various levels of due diligence.

Level	Issues Addressed	Scope of Investigation
One	That the company exists Identities of directors and shareholders Whether such persons are on regulators’ watch lists Signs that such persons are government officials Obvious signs of financial difficulty Signs of involvement in litigation Media reports linking the company to corruption	Company Registration and Status Registration Address Regulators’ watch lists Credit Checks Bankruptcy/liquidation proceedings Review Accounts and Auditors comments Litigation Search Negative Media Search
Two	As above with the following additions: Public Profile integrity checks Signs of official investigations and/or sanctions from regulatory authorities Other anti-corruption Red Flags	As above with the following additions: Review and summary of all media and internet references Review and summary of relevant corporate records and litigation filings, including local archives Analysis and cross-referencing of all findings
Three	As above with the following additions: But seeking fuller answers to any questions raised by drawing on a wider range of intelligence sources and/or addressing specific issues of potential concern already identified	As above with the following additions: Enquiries via local sources Enquiries via industry experts Enquiries via western agencies such as embassies or trade promotion bodies Enquires via sources close to local regulatory agencies

The Guidance suggests that more information is likely to be required from companies than from individuals because on a basic level more individuals are likely to be involved in the performance of services by a company and the exact nature of the roles of such individuals or other connected bodies may not be immediately obvious. Therefore a business seeking to retain another company as a business partner should engage in greater Due Diligence such as through direct requests for details on the background, expertise and business experience, of relevant individuals. Continued monitoring is also suggested, rather than simply annually or bi-annually.

So what’s the message from Henry IV? It is to soldier on, keep the faith that your son will eventually grow up and the keep your head about you. Principle IV of Adequate Procedures would seem to call for the same patient work. You should identify those parties that you need to investigate from an anti-bribery perspective, risk rank them and then perform the appropriate level of due diligence. If you need help determining what the appropriate level of due diligence is, you can always give the folks at The Risk Advisory Group a call.

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Ed. Note-an earlier version of this post incorrectly identified its source of the chart as The Control Risk Group. The chart was provided to the author by The Risk Advisory, who consented to its inclusion in the is blog post.

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

© Thomas R. Fox, 2012

Wal-Mart and the Death Knell for Amending the FCPA

In a development that can only be called stunning, the New York Times (NYT) on Sunday, April 22, 2012, reported, in an article entitled “Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle”, on an alleged multi-year bribery and corruption scheme advanced by Wal-Mart in its Mexico operations. The alleged bribery scheme was truly breath-taking in its scope and operation. I am certain others will write about it extensively, beginning as soon as today, and I certainly will review the article in greater depth in upcoming blog posts, the first thing that struck me is that this case will sound the death knell for any efforts to amend the Foreign Corrupt Practices Act (FCPA). Whether you believe such efforts constitute badly needed reform because the Department of Justice (DOJ) has gone too far in enforcement; that any amendments would water down the FCPA and simply make bribery easier; or perhaps some minor clarification of certain terms and definitions is needed; I think you can kiss all of that good-bye.

Allegations

As reported in the NYT article, Wal-Mart executives at its Mexico subsidiary, Wal-Mart de Mexico, “had orchestrated a campaign of bribery to win market dominance. In its rush to build stores, he said, the company had paid bribes to obtain permits in virtually every corner of the country.” This alleged bribery scheme included routine payments to Mexican governmental officials for “every conceivable type of permit, license, piece of paper, or any other type of approval needed or required to plan, build and operate a Wal-Mart in Mexico. Literally, millions of peso was paid out for everything from routine approvals to extraordinary consents.”

To facilitate this alleged bribery scheme Wal-Mart de Mexico kept two sets of books on the illegal payments through third party agents, which were made to Mexican governmental officials. As reported, Wal-Mart de Mexico “targeted mayors and city council members, obscure urban planners, low-level bureaucrats who issued permits  – anyone with the power to thwart Wal-Mart’s growth. The bribes, he said, bought zoning approvals, reductions in environmental impact fees and the allegiance of neighborhood leaders.” These payments were coded in a manner which hid their true basis. Later, reporting sent to the home office, in Bentonville, AR, were scrubbed so that the illegal payments were moniked as “legal fees”.

The time frames of the events reported were from the 1990’s to 2006. It is unclear if any alleged bribes were paid after this time. The purpose of the alleged bribes “was to build hundreds of new stores so fast that competitors would not have time to react. Bribes, he explained, accelerated growth. They got zoning maps changed. They made environmental objections vanish. Permits that typically took months to process magically materialized in days. What we were buying was time”. The article also reported that “Wal-Mart de Mexico was the company’s brightest success story, pitched to investors as a model for future growth. (Today, one in five Wal-Mart stores is in Mexico.)”

The End of FCPA Amendment

So how does all of this portend the end of efforts to amend the FCPA? As reported, “Wal-Mart’s ethics policy offered clear direction. “Never cover up or ignore an ethics problem,” the policy states.” What do you think a compliance defense would do for Wal-Mart about now? Wal-Mart prided itself on its world-wide FCPA anti-corruption compliance program. The claim that companies would act more ethically and in compliance if they could rely on a compliance defense would seem to be negated by facts reported about Wal-Mart. Do these facts seem like a rogue employee or even junta of rogue Mexican employees going off on their own? Whatever your thoughts on that question may be, it certainly appears that having a best practices compliance program did not lead to Wal-Mart doing business more ethically. And what if Wal-Mart’s corporate headquarters in Bentonville AR was not involved in any illegal conduct or even kept in the dark by Wal-Mart de Mexico? What does that say about having a robust compliance program?

Amending the FCPA to protect corporate headquarters in the US from liability under the doctrine of Respondeat Superior? You can forget about that happening in a heartbeat. No one can argue with anything close to a straight face that this problem was exclusive to Mexico. The corporate parent received the benefits from any profits made due to the bribery so it is difficult to imagine why a corporation should not be a part of any enforcement action. And as the FCPA Professor recently noted in a blog post, entitled “A Q&A with Claudius Sokenu on Where Else?””, that question may be close to someone’s thoughts at the DOJ about now.

How about that grace period for those companies which have a compliance program and self-reporting violations? Wal-Mart corporate was made aware of the allegations set forth in the NYT article in 2004 and chose not to self-report. As noted in the article “Neither American nor Mexican law enforcement officials were notified. None of Wal-Mart de Mexico’s leaders were disciplined. Indeed, its chief executive, Eduardo Castro-Wright, identified by the former executive as the driving force behind years of bribery, was promoted to vice chairman of Wal-Mart in 2008.” Indeed Wal-Mart did not report (I cannot say self-disclose) any FCPA investigation to the DOJ and Securities and Exchange Commission (SEC) until after the NYT notified those agencies that it was investigating these allegations back in 2011. As stated in the article, “Until this article, the allegations and Wal-Mart’s investigation had never been publicly disclosed.” How’s that for transparency in a publicly held US company? If a company as ethical as Wal-Mart will not self-disclose, what does that say about the rest of corporate America and its thinking on self-disclosure?

How about those claims that US companies were being unfairly prosecuted because they did not know their counter-parties were employees of state owned enterprises or that the person they were lavishly entertaining was an official of a foreign government? You mean those “targeted mayors and city council members, obscure urban planners, low-level bureaucrats who issued permits – anyone with the power to thwart Wal-Mart’s growth”? Whatever the merits of those companies who said “it’s not fair – we didn’t know” they were a government official – waive that proposed amendment bye-bye, with both arms over your head.

So whether you were pro or anti-FCPA amendment, I think that you have Wal-Mart to thank for the fact that any such thoughts now will Rest in Peace as this new saga in FCPA enforcement moves 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

Monty Python, the Holy Grail & Principle II of Adequate Procedures-Top Level Commitment

We conclude our UK theme this week by attempting to answer a question that has long concerned me. Why was it that the Knights of the Roundtable were searching for the Holy Grail? I mean, what would a chalice, first used in the Last Supper and then used to drain the blood of Jesus after crucifixion, being doing in Britain? The story is a bit convoluted but this is what I have learned this week; that is it is a part of the legend of King Arthur and it goes something like this.

Joseph of Arimathea, the man who brought down the body of Jesus from the cross after he was crucified, later brought the Holy Grail to Britain with him when he became the first Christian Bishop of Britain. It was hidden and could only be found by a righteous Knight, who turned out to be Sir Perceval. What I did not know was the Sir Perceval was actually the son of Sir Lancelot from a witch, who came to Sir Lancelot in the form of Lady Guinevere, who, nine months later, gave birth to a boy who later became the Knight Sir Perceval.

As I said, all quite confusing as there are apparently variations upon variations of this myth. I think I will just stick with the Monty Python and the Holy Grail version. At least we know how to answer the three questions to safely cross the Bridge of Death: (1) What is your name? (fill in the blank); (2) What is your quest? (I seek the Holy Grail.); and (3) What is the air-speed velocity of an unladen swallow? (see below)

All of this brings me to the UK Bribery Act and the Six Principles of an Adequate Procedures compliance program and today’s topic, Principle II – Top-level Commitment. The purpose of Principle II is to encourage the involvement of top-level management in the determination of bribery prevention procedures. Under Principle II the top-level management of a business; whether a board of directors, the owners or any other equivalent body or person, must be committed to preventing bribery by persons associated with it. This top-level of management should foster a culture within the company in which bribery is never acceptable. The UK Ministry of Justice (MOJ) Guidance comments that those persons who are at the top of a business “are in the best position to foster a culture of integrity where bribery is unacceptable.” The Guidance provides that top-level management commitment to bribery prevention is likely to include (1) communication of a company’s anti-bribery stance, and (2) an appropriate degree of top-level involvement in developing bribery prevention procedures.

I.                   Internal and external communication of the commitment to zero tolerance of bribery

The Guidance lists several steps that a company can take to establish this tone of top-level commitment to zero tolerance of bribery. There could be a formal written statement communicating this commitment to establish an anti-bribery culture within an organization. The Guidance recognizes that there could be several forms of communication, which might be tailored to different audiences within the company and could be generally available, for example on a company’s intranet and internet site. This commitment should be emphasized so as to draw employees’ attention on a periodic basis to this commitment.

The Guidance provides some touchstones regarding the types of concepts that a formal statement should include to demonstrate that the top-level commitment is viewed as effective:

• A commitment to carry out business fairly, honestly and openly, with transparency;
• A commitment to zero tolerance towards bribery and corruption;
• The negative consequences of breaching the policy for employees and managers;
• to those business partners the company might engage, explaining the consequences of breaching contractual provisions relating to anti-bribery and anti-corruption prevention;
• A statement of the positive benefits for both the company and its employees of the business benefits of rejecting bribery. This would include the reputation of the company with customers and the confidence of its business partners and the incentives for employees to do business in such a compliant manner;
• There should be a reference to the range of anti-bribery prevention procedures the company has or is putting in place, including any protection and procedures for confidential reporting of bribery such as anonymous reporting through a helpline or hotline;
• A clear communication that key company individuals and departments are involved in the development and implementation of the company’s anti-bribery and anti-corruption prevention procedures; and
• Reference to the company’s public facing involvement in any collective action against bribery and corruption in its same business sector.

II.                Top-level involvement in bribery prevention

The Guidance intones that effective leadership in bribery prevention will take a variety of forms appropriate for and proportionate to a company’s “size, management structure and circumstances.” In smaller companies this could mean that top-level managers be personally involved in initiating, developing and implementing anti-bribery and anti-corruption prevention procedures and critical decision making. Conversely, in a large multi-national, the Board of Directors should be responsible for setting bribery prevention policies, tasking management to design, operate and monitor bribery prevention procedures, and keeping these policies and procedures under regular review. The Guidance sets forth several elements which it believes are symptomatic of top-level engagement in a company’s anti-bribery and anti-corruption compliance effort. They include:

•  There should be top-level involvement in the selection and training of senior managers to lead anti-bribery work where appropriate;
• Top-level leadership on key measures such as a code of conduct;
• There should be top-level endorsement of all bribery prevention related publications;
• Top-level management should lead the company in awareness raising and encouraging transparent dialogue to ensure effective dissemination of anti-bribery and anti-corruption policies and procedures to employees;
• Top-level management should be engaged or involved in oversight of appropriate third party business partners;
• Top management should demonstrate leadership through relevant external bodies, such as industry trade groups or other similar organizations and the media, to help articulate both the company’s overall compliance efforts and industry commitment in the fight against bribery and corruption;
• There should be specific top-level involvement in high profile and critical decision making where appropriate;
• Top-level management must assure that not only an appropriate risk assessment is conducted but that it informs the company’s anti-bribery and anti-corruption compliance program and not the other way around; and
• Top-level management should have general oversight of breaches of procedures and the provision of feedback to the company’s Board of Directors or equivalent, where appropriate, on levels of compliance.

The MOJ Guidance once again provides solid detail on the elements which should go into your anti-bribery and anti-corruption compliance program. It also provides the basis for several different metrics that you can set up to measure how well top-level management is involved and engaged in your compliance regime.

As to the answer to the final question from Monty Python, it depends, “What do you mean? An African or European swallow? To see a clip of the three questions, 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

London Calling: The Olympics and Corporate Hospitality under the UK Bribery Act

As The Clash sang, London Calling, and the London Olympics are now less than 100 days away. One of the areas which has generated the greatest amount of hyperbole is over corporate hospitality at the upcoming 2012 summer Games. There has been rampant speculation that under the UK Bribery Act, corporations may well be prosecuted for providing corporate hospitality events before or during the Games. Indeed some have speculated that even purchasing a ticket at the face price for a client or customer would draw the scrutiny of the UK Serious Fraud Office (SFO). As a lawyer, I certainly appreciate the ‘going down the slippery slope’ argument and I may have even engaged in that technique once or twice. However, neither the UK Bribery Act nor the US Foreign Corrupt Practices Act (FCPA) prohibits corporate hospitality. Further, I think the ‘slippery slope’ argument is one that fails to stand up to scrutiny.

However, recognizing that my interpretation of UK law is simply that and I am not licensed to practice law in the UK and hence cannot provide a legal opinion on the Bribery Act, I went to thebriberyact.com to see what thebriberyact.com guys (who are licensed to practice law in the UK) might have opined on this issue. They have a couple of interesting posts up on this specific issue. Recently they had the opportunity to put this question to the SFO and, in a blog entitled “The SFO’s view on corporate hospitality”, they have posted what they heard from the SFO, , which I quote in its entirety::

The SFO have told us that they will be looking at five factors when considering corporate hospitality in the context of the Bribery Act.

Where the SFO is considering whether any particular case of corporate expenditure appears to fall outside the bounds of reasonable and proportionate hospitality, it will be looking to see whether:

1.    the company has a clear issued policy regarding gifts and hospitality,

2.    the scale of the expenditure in question fell within the confines of such policy and if not, whether special permission for it had been sought at a high level within the organization,

3.    the expenditure was proportionate with regard to the recipient,

4.    there is evidence that such expenditure had been recorded by the Company,

5.    the recipient was entitled to receive the hospitality under the law of the recipient’s country.

The inference that the expenditure was intended as a bribe would be strengthened if it should transpire (a) that there had been any unjustifiable ‘add-ons’, for example with regard to travel or accommodation, or (b) that that the expenditure in question could be related in time to some actual or anticipated business with the recipient, particularly in a competitive context.

In another post, entitled “Jo Morgan CCO IMI PLC – Debunks Olympic corporate hospitality myths”, the guys questioned a compliance practitioner Jo Morgan, the Chief Compliance Officer (CCO) of IMI PLC, a global engineering group focused on the precise control and movement of fluids in critical applications.  The question posed to Jo and her answer are as follows:

Question: I’d like to entertain some clients at the Olympics in the summer. I’ve read lots in the press about lavish hospitality being outlawed by the Bribery Act. My concern is that some of the tickets for popular events run into thousands of pounds and so I’m concerned that the amount is too much. On the other hand, the Olympics is a once in a lifetime chance for us to entertain our best clients. Surely, I can’t be prevented from inviting clients along as a result of the Bribery Act? Help.

Answer: Here at IMI plc we have very clear guidelines on entertaining. We have monetary limits above which one needs Executive Director approval for the event. In reviewing such requests the Directors look at:

a) who the entertainment is being offered to (i.e. customer, supplier, public, private, what level in the organization the person receiving the entertainment is);
b) what circumstances exist at the time the offer of the entertainment, and at the time the entertainment will take place, (i.e. is there a live bid or other circumstance which would mean that the entertainment could improperly influence a decision or provide an improper advantage);
c) whether there are any other circumstances which might make the entertainment look inappropriate – essentially this is the “newspaper test” – how would we feel if the entertainment was reported in the newspaper? Would it look OK to the ordinary man? That will generally tell you how the law enforcers would view it too.

I do not believe that it was the intention behind the Bribery Act to prevent attendance at events such as the Olympics and therefore if you consider the points above and you are comfortable with answers then you should be OK.

So for those of you who need “English English” translated into “American English” (or Texan for that matter), I think what both thebriberyact.com guys and Jo are saying is that your company should have a written policy on corporate hospitality and procedures for following that policy. If you want to take a customer or client to the Olympics, follow your company’s written procedure so that if the amount you intend to spend is above the limit set forth in the policy, follow the procedures and fill out the required forms and obtain approval before you engage in the corporate hospitality. You need to make certain that the hospitality is proportional AND that it is allowed by both the laws of the home country of the recipient and his or her employer. Lastly, all corporate hospitality must be correctly recorded in your company’s books and records. But at the end of the day, I think Jo Morgan’s final test may be the most appropriate, what we might call the “Wall Street Journal” test. How would your company feel (and you too for that matter) if the corporate hospitality you engaged in at the Olympics was reported on the front page of the Wall Street Journal?

Sometimes common sense is a good rule of thumb. And document, document document.

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

The Ashes and Australian Anti-Bribery Enforcement Efforts, with an assist from ethiXbase

Today we celebrate my favorite English sport, cricket. As baseball is my first love, it is not too surprising to find that I enjoy cricket. I like the cerebral nature of the game, coupled with its meandering pace, which can lead to Test Matches of five days. We note that England currently holds the Ashes, which is a Test series that has been played between England and Australia since 1882. It is one of the most celebrated rivalries in international cricket and is currently played biennially, alternately in England and Australia. England is the current holder after winning the Ashes in 2009 and again in the 2010/11 series in Australia. The next series will be held in 2013 in England.

Transitioning from the Ashes, we expand our UK theme week to include the Commonwealth of Nations country of Australia, which has an anti-bribery law on the books, entitled “The Criminal Code Amendment (Bribery of Foreign Public Officials) Act 1999”, which was viewed by the Australian Federal Government as a major step in formalizing Australia’s commitment to stamping out international corruption. A Transparency International (TI) White Paper, entitled “Australian Laws Prohibiting Foreign Bribery”, said that the Australian legislation was a part of an international effort to ensure that contracts are won and awarded fairly, which was led by signatories to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

As reported by TI, in an article entitled “Steps taken to implement and enforce the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions”, this law was amended in 2010, when “the Australian Parliament passed the Crimes Legislation Amendment (Serious and Organised Crime) Act 2010.” This new law increased the financial penalties for bribery offences by creating a formula for fines and penalties based on existing penalties for restrictive trade practices and cartel behavior but it allowed a higher monetary fine if the serious criminal nature of bribery and the serious detrimental effects of bribery merited it.

From the looks of recent developments Down Under, it appears that the anti-bribery enforcement is alive and well. There have been several recent articles involving different industries in Australia, which have allegedly self-reported violations of the Australian Laws Prohibiting Foreign Bribery or are otherwise under investigation. In an article in The Age, entitled “Firms tell of possible bribes”, Richard Baker and Nick McKenzie reported that “companies involved in mining, exploration and other sectors in Africa and Asia have discovered possible evidence of overseas bribery during recent internal audits.” One company Leighton Holdings has publicly admitted “it had alerted the AFP to a possible breach of anti-bribery laws. The alleged breach involves its Singapore-based subsidiary Leighton Offshore Pvt and payments made to facilitate a wharf construction project in Iraq.” Further, The Age reported “Documents from a NSW Supreme Court case last year reveal Leighton conducted an internal inquiry into ”apparently corrupt conduct” involving allegations that a senior employee channelled half a million dollars worth of steel to a third-party project at the Bantam Shipyard in Indonesia.”

In another article by the same two reporters, this time in the Sydney Morning Herald, entitled “Defence firm faces bribery probe”, Baker and McKenzie reported “AUSTRALIA’s biggest military contractor, Tenix Defence, is under federal police investigation for allegedly bribing officials and politicians across Asia to win massive contracts.” The article reported that the Australian Federal Police (AFP) has stated the agency ”received a referral in 2009 for alleged improper payments made by multinational staff members to secure contracts in the Asia region”. The investigation involves five separate Tenix transactions in which the company “is suspected of channelling several million dollars in alleged kickbacks through agents to win defence contracts across Asian countries including Indonesia and the Philippines between 2001 and 2008.”

With this increase in Australian enforcement, you may wonder, if you are sitting in the UK or US, just how can you keep up with the plethora of new laws, codes and enforcement actions. One of the best answers appeared this week in the FCPA Blog with the announcement of the “rollout of ethiXbase, the world’s largest anti-corruption database. ethiXbase builds on the global success of the FCPA Database. It features 8,000 BRIIC and U.S. anti-corruption enforcement actions, live SEC and DOJ feeds, and the most extensive collection of local anti-corruption and gift-giving laws ever assembled.” In addition to providing the legal basis for anti-corruption and anti-bribery enforcement, the database has trending analytics tools that reveal emerging compliance trouble spots around the world. Additionally, users of the database can create alerts for countries, industries, and companies. Finally, close to my heart as a practicing lawyer, the database has a global law firm directory available to the public, which includes 9,000 listings. It also includes more than 1,200 searchable law firm memos by leading practitioners who cover the US Foreign Corrupt Practices Act (FCPA), UK Bribery Act, and other global enforcements.

So while thinking of England and the UK Bribery Act, it is well to remember that most of the world is moving towards a more robust enforcement regime to combat corruption and bribery. While the US has led the way, other countries are quickly catching up and the era of international enforcement cooperation is upon all compliance practitioners and companies. It is far better to learn what laws you may face, assess your risks and then manage or mitigate those risks now rather than later.

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The articles referenced in this post were provided by James Greenall, a Director with STEELE in Washington DC,  who has been closely following anti-corruption efforts in his native Australia, where his firm conducts a significant amount of investigative due diligence. James can be reached atjgreenall@steelecis.com.

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

Bonnie Prince Charlie, Charlie Chaplin and Proportionate Procedures

Continuing our UK theme this week, we note a birthday anniversary and the anniversary of an event involving two quite different Charlie’s. The first is the anniversary of the Battle of Culloden, where in 1746 the English forces, led by the Duke of Cumberland, defeated the Scottish Jacobites, who supported the last serious Stuart Pretender to the English throne, Bonnie Prince Charlie. This battle not only cemented the House of Hanover’s seat on the English throne but also led to the decimation of the Scottish Highland Clans. In a very different anniversary celebration, we also note the birthday of Charlie Chaplin, born in 1889. Yes, the Little Tramp was a Brit.

Whilst flying over to the UK I caught up on some reading, including the Saturday Wall Street Journal (WSJ). In an article, entitled “Why Airport Security is Broken-And How to Fix It”, Kip Hawley, the former head of the US Transport Security Administration (TSA) provides his prescription on how to fix what he calls “the national embarrassment that our airport security remains”. Pretty strong language by someone who has been “to the top of the mountain.” While I find the security checks we all now go through only mildly inconveniencing, Hawley writes that the US airport security remains “hopelessly bureaucratic and disconnected from the people whom it is meant to protect.”

Hawley believes that the TSA has an incorrect approach to proportionality of the risk faced. He says that by attempting to eliminate all risk, the system is not only a “nightmare for U.S. and visitors from overseas” but that this system is “brittle where it needs to be supple.” In the aftermath of the post 9-11 attacks the system was designed so every passenger could avoid harm while traveling. Hawley believes that some of the risk factors which led to the 9-11 attacks have been remedied, such as box cutters or a small knives that could breach a cockpit door; more Federal Air Marshalls traveling on flights and greater passenger awareness and willingness to respond to such an emergency. He believes that the risk, which is now paramount, to manage is to stop a catastrophic attack. In short the risks have changed but the TSA have not changed to manage new or other risks.

Hawley lays out five changes which he believes would go a long way towards allowing the TSA to properly manage this risk of catastrophic attack:

1. No more banned items. By listing every banned item, you make each X-Ray scan an “Easter-egg hunt” and provide terrorists with the list of items the TSA will look for.
2. Allow all liquids. Hawley believes that “simple checkpoint signage, a small software update and some traffic management are all that are standing between you and bringing all your liquids on a plane. Really.”
3. Give TSA officers more flexibility and rewards for initiative and hold them accountable. There must be more independence for TSA officers ‘on the ground.’ Currently if you initiate independence as a TSA officer, you are more likely to be disciplined rather than rewarded.
4. Eliminate baggage fees. The airlines bags fees cause more passengers to bring bags on planes, which requires more security, increases costs and slows down the process which in turn requires airlines to charge more for tickets because there are more delays.
5. Randomize security. If terrorists know what to expect at airport security, they have a greater chance to evade the system. Hawley’s answer is to randomize more security checks while not subjecting every passenger to the current full security compliment.

I have set out Hawley’s thoughts in some detail because they point to how the UK Ministry of Justice (MOJ) suggests that a company should begin its anti-bribery/anti-corruption compliance program. It discusses what constitutes the Six Principles of an Adequate Procedures compliance program in Principle 1, entitled Proportionate Procedures, the MOJ Guidance states, “A commercial organisation’s procedures to prevent bribery by persons associated with it are proportionate to the bribery risks it faces and to the nature, scale and complexity of the commercial organisation’s activities.” In other words, adequate anti-bribery prevention procedures should be proportionate to the bribery risks that a company faces. It all begins with a risk assessment, but the Guidance recognizes that “To a certain extent the level of risk will be linked to the size of the organisation and the nature and complexity of its business.” However, company size is not to be the only determining factor as certainly smaller entities may face quite significant risks and, therefore, need more extensive procedures than their counterparts facing limited risks. The Guidance does recognize that the majority of small organizations are unlikely to need procedures that are as extensive as those of a large multi-national organization.

The level of risk that a business may face will also vary with the type and nature of the persons with which it is has third party relationships. A company that properly assesses it has no risk of bribery on the part of one of its third party relationships will accordingly require nothing in the way of procedures to prevent bribery in the context of that relationship. By the same token the bribery risks associated with reliance on a third party agent representing a company in negotiations with foreign public officials may be assessed as significant and accordingly require much more in the way of procedures to mitigate those risks. This means that companies will be required to select procedures to cover a broad range of risks but any consideration by a “court in an individual case of the adequacy of procedures is likely necessarily to focus on those procedures designed to prevent bribery on the part of the associated person committing the offence in question.”

Near the end of this section of the Guidance it states, “the procedures should seek to ensure there is a practical and realistic means of achieving the organisation’s stated anti-bribery policy objectives across all of the organisation’s functions.” This sounds quite similar to Hawley’s plea that the TSA needs to change its risk management away from protecting every passenger from harm while traveling to preventing a catastrophic attack. But perhaps this final point from the Guidance points up to why the TSA cannot or will not make this change in risk management. They have not received firm guidance from the Executive Branch or from US Congress on what their primary mission is, and hence the primary risk the TSA must manage. In other words, if top management does not support the Compliance Department or forces it to focus on the wrong risks, a Compliance Department may well miss the mark and cause its clients, the business unit personnel to become fed up and just as irritated with the Compliance Department as Hawley believes the traveling public is with the TSA. In other words, tone at the top does matter. Not only must senior management support the compliance function but it should support it, with the appropriate financial resources and tools to manage the correct risks.

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