The DOJ Listens: the Evolution of FCPA Compliance in M&A

Earlier this week the US Department of Justice (DOJ) released a Deferred Prosecution Agreement (DPA) with the company Data Systems & Solutions (DS&S). I explored the factual allegations against DS&S and the highlights of the DPA in yesterday’s post. Today I want to discuss the DS&S DPA in the context of the DOJ’s evolution in thinking regarding what a company can do to protect itself under the Foreign Corrupt Practices Act (FCPA) when it purchases another entity or otherwise engages in mergers and acquisitions (M&A) work. In other words, forces the evolution of best practices.

Previously many compliance practitioners had based decisions in the M&A context on DOJ Opinion Release 08-02 (08-02), which related to Halliburton’s proposed acquisition of the UK entity, Expro. In the spring of 2011, the Johnson & Johnson (J&J) DPA changed the perception of compliance practitioners regarding what is required of a company in the M&A setting related to FCPA due diligence, both pre and post-acquisition. On June 18, the DOJ released the DS&S DPA which brought additional information to the compliance practitioner on what a company can do to protect itself in the context of M&A activity.

Opinion Release 08-02 began as a request from Halliburton to the DOJ from issues that arose in the pre-acquisition due diligence of the target company Expro. Halliburton had submitted a request to the DOJ specifically posing these three questions: (1) whether the proposed acquisition transaction itself would violate the FCPA; (2) whether, through the proposed acquisition of Target, Halliburton would “inherit” any FCPA liabilities of Target for pre-acquisition unlawful conduct; and (3) whether Halliburton would be held criminally liable for any post-acquisition unlawful conduct by Target prior to Halliburton’s completion of its FCPA and anti-corruption due diligence, where such conduct is identified and disclosed to the Department within 180 days of closing.

I.                   08-02 Conditions

 

Halliburton committed to the following conditions, if it was the successful bidder in the acquisition:

Within ten business days of the closing, Halliburton would present to the DOJ a comprehensive, risk-based FCPA and anti-corruption due diligence work plan which would address, among other things, the use of agents and other third parties; commercial dealings with state-owned customers; any joint venture, teaming or consortium arrangements; customs and immigration matters; tax matters; and any government licenses and permits. The Halliburton work plan committed to organizing the due diligence effort into high risk, medium risk, and lowest risk elements.

a)      Within 90 days of Closing. Halliburton would report to the DOJ the results of its high risk due diligence.

b)      Within 120 days of Closing. Halliburton would report to the DOJ the results to date of its medium risk due diligence.

c)      Within 180 days of Closing. Halliburton would report to the DOJ the results to date of its lowest risk due diligence.

d)     Within One Year of Closing. Halliburton committed full remediation of any issues which it discovered within one year of the closing of the transaction.

Many lawyers were heard to exclaim, “What an order, we cannot go through with it.” However,  we advised our clients not to be discouraged because 08-02 laid out a clear road map for dealing with some of the difficulties inherent in conducting sufficient pre-acquisition due diligence in the FCPA context. Indeed the DOJ concluded 08-02 by noting, “Assuming that Halliburton, in the judgment of the Department, satisfactorily implements the post-closing plan and remediation detailed above… the Department does not presently intend to take any enforcement action against Halliburton.”

II.                Johnson & Johnson “Enhanced Compliance Obligations”

Attachment D of the J&J DPA, entitled “Enhanced Compliance Obligations”, is a list of compliance obligations in which J&J agreed to undertake certain enhanced compliance obligations for at least the duration of its DPA beyond the minimum best practices also set out in the J&J DPA. With regard to the M&A context, J&J agreed to the following:

 

7. J&J will ensure that new business entities are only acquired after thorough FCPA and anti-corruption due diligence by legal, accounting, and compliance personnel. Where such anti-corruption due diligence is not practicable prior to acquisition of a new business for reasons beyond J&J’s control, or due to any applicable law, rule, or regulation, J&J will conduct FCPA and anti-corruption due diligence subsequent to the acquisition and report to the Department any corrupt payments, falsified books and records, or inadequate internal controls as required by … the Deferred Prosecution Agreement.

8. J&J will ensure that J&J’s policies and procedures regarding the anti-corruption laws and regulations apply as quickly as is practicable, but in any event no less than one year post-closing, to newly-acquired businesses, and will promptly, for those operating companies that are determined not to pose corruption risk, J&J will conduct periodic FCPA Audits, or will incorporate FCPA components into financial audits.

a. Train directors, officers, employees, agents, consultants, representatives, distributors, joint venture partners, and relevant employees thereof, who present corruption risk to J&J, on the anticorruption laws and regulations and J&J’s related policies and procedures; and

b. Conduct an FCPA-specific audit of all newly-acquired businesses within 18 months of acquisition.

These enhanced obligations agreed to by J&J in the M&A context were less time sensitive than those agreed to by Halliburton in 08-02. In the J&J DPA, the company agreed to following time frames:

A.     18 Month – conduct a full FCPA audit of the acquired company.

B.     12 Month – introduce full anti-corruption compliance policies and procedures into the acquired company and train those persons and business representatives which “present corruption risk to J&J.”

So there is no longer a risk based approach as set out in 08-02 and the tight time frames are also relaxed. Once again we applaud the DOJ for setting out specific information for the compliance practitioner through the release of the J&J DPA. As many have decried 08-02 is a standard too difficult to satisfy in the real world of time constraints and budget cuts, the “Acquisition” component of the J&J DPA should provide those who have made this claim with some relief.

III.             DS&S

In the DS&S DPA there are two new items listed in the Corporate Compliance Program, attached as Schedule C to the DPA, rather than the standard 13 items we have seen in every DPA since at least November 2010. The new additions are found on items 13 & 14 on page C-6 of Schedule C and deal with mergers and acquisitions. They read in full:

13. DS&S will develop and implement policies and procedures for mergers and acquisitions requiring that DS&S conduct appropriate risk-based due diligence on potential new business entities, including appropriate FCPA and anti-corruption due diligence by legal, accounting, and compliance personnel. If DS&S discovers any corrupt payments or inadequate internal controls as part of its due diligence of newly acquired entities or entities merged with DS&S, it shall report such conduct to the Department as required in Appendix B of this Agreement.

 14. DS&S will ensure that DS&S’s policies and procedures regarding the anticorruption laws apply as quickly as is practicable to newly acquired businesses or entities merged with DS&S and will promptly:

a. Train directors, officers, employees, agents, consultants, representatives, distributors, joint venture partners, and relevant employees thereof, who present corruption risk to DS&S, on the anti-corruption laws and DS&S’s policies and procedures regarding anticorruption laws.

b. Conduct an FCPA-specific audit of all newly acquired or merged businesses as quickly as practicable.

 This language draws from and builds upon the prior Opinion Release 08-02 regarding Halliburton’s request for guidance and the J&J Enhanced Compliance Obligations incorporated into its DPA. While the DS&S DPA does note that it is specifically tailored as a solution to DS&S’s FCPA compliance issues, I believe that this is the type of guidance that a compliance practitioner can rely upon when advising his or her clients on what the DOJ expects during M&A activities.

FCPA M&A Box Score Summary

Time Frames	Halliburton 08-02	J&J	DS&S
FCPA Audit	High Risk Agents – 90 days Medium Risk Agents – 120 Days Low Risk Agents – 180 days	18 months to conduct full FCPA audit	As soon “as practicable”
Implement FCPA Compliance Program	Immediately upon closing	12 months	As soon “as practicable”
Training on FCPA Compliance Program	60 days to complete training for high risk employees, 90 days for all others	12 months to complete training	As soon “as practicable”

I believe that the DOJ does listen to the concerns of US companies about issues relating to FCPA enforcement, which is consistent with its duty to uphold that law. Last month we saw the issue of the Morgan Stanley declination in the context of the Garth Peterson FCPA prosecution. With the DS&S DPA, there is clearly more flexible language presented in the context of M&A work and potential liability for ‘buying a FCPA claim.’

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

DS&S DPA: Lessons Learned for the Compliance Practitioner

On Monday, June 18, the Department of Justice (DOJ) announced the resolution of a matter involving violations of the Foreign Corrupt Practices Act (FCPA) by Data Systems & Solutions LLC (DS&S), a US entity based in Virginia. The settlement resulted in the company agreeing to a two year and 7 day Deferred Prosecution Agreement (DPA). The case was interesting for a number of reasons and it has some significant lessons which the compliance practitioner can put into place in a corporate compliance program. The charges related to DS&S’s business included the design, installation and maintenance of instrumentation and controls systems at nuclear power plants, fossil fuel power plants and other critical infrastructure facilities. In reading the Criminal Information, I can only say that this was no one-off or rogue employee situation but this was a clear, sustained and well known bribery scheme that went on within the company.

I.                   The Criminal Information

The bribery scheme involved payments made to officials at a state-owned nuclear power facility in Lithuania, named Ignalina Nuclear Power Plant (INPP). The payments were made to allow DS&S to obtain and retain business with INPP. The Information listed contracts awarded to DS&S in the amount of over $30MM from 1999 to 2004. Significantly, DS&S did not self-disclose this matter to the DOJ but only began an investigation after receiving a DOJ Subpoena for records.

The Players Box Score

DS&S Officials	INPP Officials	Subcontractors
Exec A – VP of Marketing and Business Development (BD)	Official 1 – Deputy Head of Instrumentation and Controls Department	Subcontractor A – Simulation Technology Products and Services
	Official 2 – Head of Instrumentation and Controls Department	Subcontractor B – Beneficially owned by Official 1 and which employed INPP Officials
	Official 3 – Director General at INPP	Subcontractor C – Shell company used a funneling entity to pay bribes
	Official 4 – Head of International Projects at INPP
	Official 5 – Lead SW Engineer at INPP

The bribery scheme used by DS&S recycled about every known technique there is to pay bribes. The Information listed 51 instances of bribes paid or communications via email about the need to continue to pay bribes. The bribery scheme laid in the Information reflected the following techniques used by:

•       Payment of bribes by Subcontractors to Officials on behalf of DS&S;
•       Direct payment of bribes by DS&S into US bank accounts controlled by INPP Officials;
•       Creation of fictional invoices from the Subcontractors to fund the bribes;
•      Payment of above-market rates for services allegedly delivered by the Subcontractors so the excess monies could be used to fund bribes;
•      Payment of salaries to INPP Officials while they were ‘employed’ by Subcontractor B;
•       Providing travel and entertainment to Officials to Florida, where DS&S has no facilities and which travel and entertainment had no reasonable business purpose; and last but not least…
•      Purchase of a Cartier watch as a gift.

II.                The Deferred Prosecution Agreement

I set out these details with some specificity for two reasons. The first is that the Information is a must read for anyone in Internal Audit who reviews books and records. It gives you the precise types of Red Flags to look for. But secondly is the fact that DS&S received a discount of 30% off the low end of the penalty range as calculated under the US Sentencing Guidelines. The calculation as listed in the DPA is as follows:

Calculation of Fine Range:

Base Fine $10,500,000

Multipliers 1.20(min)/2.40(max)

Fine Range $12,600,000/$25,200,000

The ultimate fine paid by DS&S was only $8.82MM, which the DPA states is “an approximately thirty-percent reduction off the bottom of the fine range…” So for the compliance practitioner the question is what did DS&S do to get such a dramatic reduction? We know that one thing they did NOT do was self-report as the DPA notes that this case began as a DOJ investigation and DS&S received Subpoenas “in connection with the government’s investigation.” However, after this initial delivery of Subpoenas DS&S engaged a clear pattern of conduct which led directly to this 30% discount of the low end of the fine range. The DPA reports that DS&S took the following steps:

 

• Internal Investigation. DS&S initiated an internal investigation and provided real-time reports and updates of its investigation into the conduct described in the Information and Statement of Facts.
• Extraordinary Cooperation. DS&S’s cooperation has been extraordinary, including conducting an extensive, thorough, and swift internal investigation; providing to the Department searchable databases of documents downloaded from servers, computers, laptops, and other electronic devices; collecting, analyzing, and organizing voluminous evidence and information to provide to the DOJ in a comprehensive report; and responding promptly and fully to the DOJ’s requests.
• Extensive Remediation. The number of steps DS&S took in regard to remediation included the following:
  • Termination of company officials and employees who were engaged in the bribery scheme;
  • Dissolving the joint venture and then reorganizing and integrating the dissolved entity as a subsidiary of DS&S;
  • Instituting a rigorous compliance program in this newly constituted subsidiary;
  • Enhancing the company’s due diligence protocols for third-party agents and subcontractors;
  • Chief Executive Officer (CEO) review and approval of the selection and retention of any third-party agent or subcontractor;
  • Strengthening of company ethics and compliance policies;
  • Appointment of a company Ethics Representative who reports directly to the CEO;
  • The Ethics Representative provides regular reports to the Members Committee (the equivalent of a Board of Directors in a LLC); and
  • A heightened review of most foreign transactions.
  • Enhanced Compliance Program. More on this in the next section.
  • Continued Cooperation with DOJ. The company agreed to continue to cooperate with the Department in any ongoing investigation of the conduct of DS&S and its officers, directors, employees, agents, and subcontractors relating to violations of the FCPA and to fully cooperate with any other domestic or foreign law enforcement authority and investigations by Multilateral Development Banks.

III.             Enhanced Compliance Obligations

One of the interesting aspects of the DS&S DPA is that there are 15 points listed in the Corporate Compliance Program, attached as Schedule C to the DPA, rather than the standard 13 items we have seen in every DPA since at least November 2010. The new additions are found on items 13 & 14 on page C-6 of Schedule C and deal with mergers and acquisitions. They read in full:

13. DS&S will develop and implement policies and procedures for mergers and acquisitions requiring that DS&S conduct appropriate risk-based due diligence on potential new business entities, including appropriate FCPA and anti-corruption due diligence by legal, accounting, and compliance personnel. If DS&S discovers any corrupt payments or inadequate internal controls as part of its due diligence of newly acquired entities or entities merged with DS&S, it shall report such conduct to the Department as required in Appendix B of this Agreement.

14. DS&S will ensure that DS&S’s policies and procedures regarding the anticorruption laws apply as quickly as is practicable to newly acquired businesses or entities merged with DS&S and will promptly:

a. Train directors, officers, employees, agents, consultants, representatives, distributors, joint venture partners, and relevant employees thereof, who present corruption risk to DS&S, on the anti-corruption laws and DS&S’s policies and procedures regarding anticorruption laws.

b. Conduct an FCPA-specific audit of all newly acquired or merged businesses as quickly as practicable.

This language draws from and builds upon the prior Opinion Release 08-02 regarding Halliburton’s request for guidance during an attempted acquisition and the Johnson and Johnson (J&J) Enhanced Compliance Obligations which were incorporated into its DPA. While the DS&S DPA does note that it is specifically tailored as a solution to DS&S’s FCPA compliance issues, I believe that this is the type of guidance that a compliance practitioner can rely upon when advising his or her clients on what the DOJ expects during Mergers and Acquisitions (M&A). The five keys under these new items, 13 & 14 highlighted above, are: (1) develop policies and procedures for M&A work prior to engaging in such transactions; (2) full FCPA audit of any acquired entities “as quickly as practicable”; (3) report any corrupt payments or inadequate internal controls it discovers in this process to the DOJ; (4) apply DS&S anti-corruption policies and procedures to the newly acquired entities; and (5) train any persons who might “present a corruption risk to DS&S” on the company’s policies and procedures and the law.

IV.              Summary

The DS&S DPA provides some key points for the compliance practitioner. First and foremost, I believe that it demonstrates the reasonableness of the DOJ. The bribery scheme here was about as bad as it can get, short of suitcases of money carried by the CEO to pay bribes. The company did not self-report, yet received a significant reduction on the minimum level of fine. The specificity in the DPA allows a compliance practitioner to understand what type of conduct is required to not only avoid a much more significant monetary penalty but also a corporate monitor. Lastly, is the specific guidance on FCPA compliance in relation to M&A activities, to the extent that if anyone in the compliance arena did not understand what was required in the M&A context; this question would seem to be answered in the DS&S DPA.

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