Popeye, Mike Tyson and the NFL Replacement Referees

Today I had thought about opening my post with the famous Popeye line “I’ve had all I can stand, I can’t stands no more!” or perhaps ask if Mike Tyson was at the Broncos v. Texans game last Sunday post but I thought that I would begin with something even more dramatic.

My Irish Mother-in-Law called from England to ask my wife what the heck is going on with the NFL and the replacement refs.

Yes folks, it’s that bad. So bad in fact that the final play of the Packers v. Seahawks game and replacement referee controversy is on the front page of today’s Financial Times (FT). So bad that both President Obama AND Mitt Romney have said the National Football League (NFL) needs to end its lockout of the real referees.

What is it that is so bad? It’s the continued use of replacement referees by the NFL. The NFL is literally killing its own franchise by continuing to use replacement refs. Monday night’s example was the first where the NLF’s idiotic use of replacement refs was encapsulated in one play. For the very few people (apparently) across the globe who do not know the story. Seattle threw a Hail Mary pass into the end zone on the last play of the game, which was intercepted by a Packer’s defensive back. The Seattle receiver, who did not catch the ball, somehow put his arm over the arms of defensive back, who had the ball cradled against his chest. As the two players fell to the ground, the Seattle receiver rolled over on top of the Packer defensive back. There were two out of position replacement refs who ran up. One (correctly) signaled interception and the ball to Green Bay and the other signaled a Seattle touchdown, apparently believing that a simultaneous catch had occurred. A touchdown was ruled on the field and upheld by the replay official. The catch and touchdown changed a Packer win into a Seattle win so now we have the poor quality of the replacement refs changing the outcome of a game.

As bad as this call was, and it was very bad, it was just one more drop in the value of the NFL, all caused by using replacement refs, who are so bad that they have created a safety issue for the players. On Sunday, in the Denver v. Houston game, on two consecutive plays, a Denver defender had a personal foul of roughing the passer. The second penalty was so horrific that the Denver defender not only knocked the helmet off Houston quarterback Matt Schaub but actually took off part of Schaub’s ear! Were any players ejected, even while Matt Schaub was being escorted off the field missing part of his ear? That would be a No.

In addition to blowing a call that cost the Packers the game; losing control of a game so badly that a player goes half-way Mike Tyson on single play; the games themselves have become unwatchable. They are basically meetings of referees trying to (1) figure out the rules and (2) apply them, punctuated around some folks occasionally playing football. There is no flow, no momentum and for the most part little action. What had been a 3 to 3.5 hour viewing experience is now much longer.

So what was the NFL response to all of the above? KISS MY GRITS

How do we know this? First the NFL released a statement that the call was correct. Second they said that they have full confidence in the replacement refs. Lastly, they saw no reason to go back to the bargaining table. Is it arrogance? Stupidity? Whatever it is, it’s wrong, wrong, wrong.

But thanks for hanging on this long into the post to hear about the compliance angle. So for a Compliance Department and/or a Compliance Practitioner – do not tell your internal clients to KISS MY GRITS, if you do they will stop listening to you because they will think that you are an idiot.

But what about the NFL? What can their customers do? First let me say that I am a fan. I grew up in a single high school town in Texas where football was king. I grew up watching the Dallas Cowboys of Dandy Don Meredith and Roger Staubach. I religiously follow the University of Texas Longhorns each Saturday. I played football into high school. I watch pro games all day Sunday, Monday, Thursday and whatever night they are on. I even have the NFL Red Zone package so I can watch all the games. Even more than being a fan, I have been a referee. I know the rules and I know what a simultaneous catch is and it certainly did not happen on Monday night. But like Popeye, I can’t take it anymore.

So here is what I can do. I am going to boycott all the NFL games until the League gets the replacement refs off the field. No television, no radio, no iPad, no iPhone. No nothing. Will I miss it, you bet I will. But as neither the quality of the product, the safety of the players nor even the integrity of the game seems to matter to the NFL owners, maybe not watching their games will get their attention. I hope so. I miss pro football already.

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

Tyco International – The Importance of the Books and Records under the FCPA

On Monday, the Securities and Exchange Commission (SEC) and Department of Justice (DOJ) announced settlement with Tyco International (Tyco) for books and records violation of the Foreign Corrupt Practices Act (FCPA). Tyco agreed to a fine of $26MM for “at least twelve different, post-injunction illicit payment schemes occurring at Tyco subsidiaries across the globe. The schemes frequently entailed illicit payments to foreign officials that were inaccurately recorded so as to conceal the nature of the payments” and failure “to devise and maintain internal controls sufficient to provide reasonable assurances that all transactions were properly recorded in the company’s books, records, and accounts”. $10,564,992 of the fine was paid in disgorgement and an additional $2,566,517 in prejudgment interest was paid to the SEC and the remainder of $13.68MM was paid as fine to the DOJ. All of this was discovered because Tyco was already a FCPA violator, having admitted to violations back in 2006 and these additional violations were discovered as a part of a companywide review required under its 2006 Deferred Prosecution Agreement (DPA). Tyco received a Non-Prosecution Agreement (NPA) from the DOJ for this post-DPA conduct and I will discuss the NPA in a subsequent post.

While a large portion of the FCPA commentaratti focused on the damning email which read “”Hell, everyone knows you have to bribe somebody to do business in Turkey. Nevertheless, I’ll play it dumb”; another portion of the commentaratti seemed somewhat amazed that hiding bribery and corruption in a company’s books and records is a stand-alone violation of the FCPA.   As part of the 2006 settlement Tyco agreed to engage in a companywide review of its operations to determine if there was “anything else”. Not only did it turn out there was something else “rotten in Denmark” but this bribery and corruption continued after the first enforcement action. This companywide review determined that Tyco had engaged in “illicit payment schemes”; that these bribery schemes “were inaccurately recorded so as to conceal the nature of the payments” and Tyco “failed to devise and maintain internal controls sufficient to provide reasonable assurances that all transactions were properly recorded in the company’s books, records, and accounts.”

So with a nod to the final week of the baseball season we present the Tyco Bribery Box Score

Subsidiary Location	Bribe Amount Paid	Inaccurate Books and Records Description
Turkey	Not reported	Equipment sold at a mark-up over invoice price
China	$3700	Commission to sales team
Germany	Not reported	Commission to sales team
France	Not reported	Commissions to agents for ‘business introductions’
China-different sub	$483K	Commissions to agent
Thailand	$50K	Renovation work
Malaysia	Not reported	Commissions to agents
Egypt	$282K	Disguised as inflated invoices from agent
Saudi Arabia	Not reported	Promotional expenses and sales development
Poland	Not reported	Bogus service contracts

What I find so interesting about all of this is that it occurred, in large part, after the 2006 DPA. As Bill Clinton might say, “It takes some brass” to initiate or continue a bribery scheme while you are under a DPA for FCPA violations. With the above in mind I was intrigued by an article in the Navigant Quarterly, 2012 Volume 1, Issue 13, entitled “If You Think You Are Done Looking…Keep Looking”, by Eileen Felson and Nicole Wrigley. In their article, the authors note that “every fraud has to be hidden somewhere on a company’s books. Most financial statement frauds grow in size, scope and duration.” The authors also talk about “collusive fraud” which is the situation where “fraudsters work together to manipulate the balance sheet and actually launder the fraud through various accounts.” It sounds like a description of the machinations folks must go through to hide corrupt payments while under a FCPA DPA. Although the authors specifically address frauds, their concepts are certainly broad enough to include bribery and corruption.

The authors detail several types of corrupt practices and end their article with some tips on investigation. They note that the “logical start-off point in conducting a forensic investigation of how a fraud was committed includes a detailed review of revenue and expense account activity.” But more importantly, a forensic examiner must keep looking. The reason for this is simply because if evidence of bribery or corruption is found in one area the entire scheme is revealed. Therefore a forensic examiner needs to review unrelated accounts to see if there are other indicia of corruption.

What does all of this mean for a compliance program? There is some very clear guidance for the role of Internal Audit in detecting bribery and corruption in a best practices FCPA compliance program. First and foremost, if there are any types of commission payments being made, Internal Audit needs to review the documentation supporting why such payments are being made. A review of contracts or other legal requirements which may obligate a company to make such payments should be a basic undertaking in any internal audit. After an internal auditor has determined if commission payments are legally authorized, the internal auditor should review evidence that such commission payments have been earned. In other words, is there any evidence in the company’s books and records that the person or entity performed the services which might have entitled them to such commission payments? And do not forget that another role for Internal Audit is to correctly classify payments so that the books and records of the company accurately reflect them as expenses.

The Tyco SEC Compliant is chocked full of information regarding what an internal auditor needs to look for in reviewing expenses charged by employees; commissions paid to employees; invoices by agents and other third party representatives and over-inflated sales contracts; all used to disguise corrupt payments. The sad fact, as noted by authors Felson and Wrigley, is that many corruption schemes are not “committed for personal gain (such as stealing cash) but for other incentives, such as continued employment/advancement, fear of delivering bad news to investors or an intimidating supervisor, or a desire to increase the value of performance-based bonuses.” While it is not clear why it took Tyco so long to uncover these ongoing acts of bribery and corruption or why Tyco employees continued to engage in conduct violative of the FCPA while under a DPA; I think that the Tyco example speaks to the need for an overall, comprehensive robust compliance program that focuses on all factors which led to the continued bribery and corruption in the company which was reported in the SEC Complaint.

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

After the White Whale – Enforcement of AML Laws Against Companies for Traded Goods

Whenever you look at the Top Ten Foreign Corrupt Practices Act (FCPA) settlements of all-time, the figures can look pretty high. However, this summer has seen some absolutely astronomical fines and penalties agreed to by financial institutions for violations of Anti-Money Laundering (AML) laws and regulations. Since May we have seen the following financial institutions agree to the resulting fines and penalties:

AML Penalty Box of Settlements

Bank	Amount (all in USD$ MM)	Date of Settlement
ING Bank	$619	June 2012
Royal Bank of Scotland	$500	May 2012
Standard Chartered	$340	August 2012
Barclays	$298	August 2012
Total	$1,757

So for all you sports fans keeping score at home that is $1.757 billion in fines and penalties. And this amount does not even include the grand-daddy of them all, HSBC, which has reserved $700MM for its own fine. Some commentators have speculated that the HSBC fine may exceed One Billion Dollars alone.

In an article in the Financial Times (FT), entitled “We all must clean up our act on money laundering”, reporter John Cassara noted International Monetary Fund (IMF) estimates that world-wide money laundering can be as high as $3.5 trillion annually. While traditional criminal enterprises had used banks to wash dirty money into clean money, after 9/11, the US government saw money-laundering as a security issue. One of key issues in the Standard Chartered enforcement action by the New York state Department of Financial Services was its financial dealings with banks in Iran.

But the problem is simply beyond financial institutions. Cassara writes that there are three generally recognized ways to launder money: (1) via financial institutions; (2) bulk cash smuggling across borders; and (3) via traded goods. The US approach to fighting money laundering in financial institutions is to demand transparency and require due diligence not only on customers but on transactions as well. But money launderers will move to where they see the least resistance in the financial system. So if banks ramp up their internal compliance systems, criminal enterprises and terrorists will move to the old fashioned method of smuggling money across borders to money laundering via traded goods.

Indeed in an article in the Wall Street Journal (WSJ) last week, entitled “U.S. Seeks to Patch Laundering Net”, Jeffery Sparshott reported that the US Treasury Department’s Financial Crimes Enforcement Network, known as FinCen, “are proposing to enlist companies across the financial sector – and possibly beyond – as a front-line defense against money laundering.” These new rules “may eventually extend the rules to mortgage lenders, casinos, gemstone dealers and others…in a bid to deter criminal activity and terrorist financing and stop firms from taking on shell companies without knowing ownership details.” If FinCen extends the most robust regulations beyond traditional financial institutions, it would seem to me that the next logical step would be to extend such regulations to non-financial commercial operations.

However, we have recently seen examples of criminals using method three (3) above to engage in money laundering; that being via traded goods. One recent example is a process whereby teams of money launderers working for cartels use dollars to purchase a commodity from the US and then export the commodity to Mexico or Colombia. A key is that “Paperwork is generated that gives a patina of propriety” which means that drug money is given the appearance of legitimate proceeds from a legitimate commercial transaction. One Immigration and Customs official interviewed said, “It’s such a great scheme. You could hide dirty money in so much legitimate business, and they do. You can audit their books all day long and all you see is goods being imported and exported.”

Another scheme involved even more sophisticated tactics such as “overvaluing and undervaluing invoices and customs declarations.” There is even a new term “trade-based money-laundering” which is being used to denominate the schemes. It was reported that in another recent operation, which was estimated to launder over $1MM every three weeks, money launderers were exporting from the US to Mexico polypropylene pellets that are used to make plastic. However, the money-launderers inflated the value declared on the high-volume shipments and this eventually attracted suspicion of US bank investigators, “who shut down the export operation by discontinuing letters of credit that the suspected launderers were using.” One official noted, “You generate all this paperwork on both sides of the border showing that the product you’re importing has this much value on it, when in reality you paid less for it. Now you’ve got paper earnings of a million dollars and the million dollars in my bank account – it’s legitimate. It came from this here, see?”

What can companies do to protect themselves from inadvertently running afoul of AML laws?  Just as transactional based due diligence and internal controls are mandatory components of a FCPA minimum best practices compliance program; they should be used in transactions with customers or other third parties. In addition to due diligence on agents, distributors or others in the sales distribution chain, companies need to perform due diligence on those to whom they sell. Know Your Customer (KYC) rings true not just for financial institutions but for companies engaged in other forms of commercial operations. If a new customer approaches your company, you should investigate them beyond simply running a Dun & Bradstreet Report to check their credit-worthiness. You need to investigate their background to see if they really are in a business which would use your products.

There is also the issue of how you will be paid for the sale of your widgets. If someone from Mexico suddenly comes to your business and wants to buy widgets with cash, this needs to send up a huge Red Flag. It would seem just as unlikely if a customer with a relatively low net worth would come to you and seek to purchase a high cost product with cash. If such an eventuality happened this should also raise a very large Red Flag.

Even if you are not being paid in cash, but are being paid via wire transfer, you should check the source of the wire funds. If the money comes from a bank or other financial institution which is on a sanctions list, you need to tread very carefully. In another article in the FT, entitled “Taken to the Cleaners”, the piece ended by comparing the problem of money laundering with a sucker fish which attaches itself to a whale. It may not be noticed as it is “submerged and discreet” but it is “hard to capture as it can just swim off elsewhere.”

So perhaps the white whale analogy may need to be reconsidered. Or perhaps, just as Captain Ahab kept searching for the white whale;  as criminals continue to probe for structural weakness to exploit in the area of money laundering; as regulators respond with more, greater and broader regulations; companies will need to increase and refine their own processes and procedures.

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

Steve Sabol, NFL Films and the Look and Feel of Compliance-Authenticity

Today we note the passing last week of Steve Sabol, who together with his father Ed Sabol and John (The Voice of God) Facenda, created the phenomenon known as NFL Films. In the late 60s and 70s, before HBO, before ESPN and certainly before the proliferation of all things NFL on television; we were treated to weekly NFL Highlights and the NFL Game of the Week, produced by Steve and Ed Sabol, narrated by The Voice of God. The production values were suberb, the action pounding and they even introduced someone from central Texas to Dvorak’s Ninth Symphony with their theme music. It hooked a generation of us and we continue to be fans today. So Steve, I can’t wait to see your next set of broadcasts from the great hereafter and a most heartfelt thanks.

I thought about the authenticity NFL Films brought to the viewing public in connection with a panel I moderated on translating legal risk into business reality, which included as panelists Rajinder Sharma, Director Corporate Affairs & General Counsel – South Asia at E.I DuPont  India Pvt and David Blanco, Senior Legal Counsel, Bayer CropScience K.K.  at the Corruption and Compliance, South and Southeast Asia Conference, hosted by Beacon Events. Both panelist are veterans of large multi-national compliance programs and they both knew their stuff. One of the questions that I posed to them was what does compliance look and feel like in an organization? One of the things that both panelists emphasized as being critical was the instilling of compliance into the DNA of the employee base. In other words, the authenticity of your company’s compliance regime is driven by how well your employees buy-in doing business in a compliance manner.

In thinking about their suggestions I saw in a recent article, entitled “Leadership Never Looks Prepackaged”, in the Corner Office section of the Sunday New York Times (NYT)  where reporter Adam Bryant wrote about his interview of James Hackett, President and Chief Executive Officer (CEO) of Steelcase Inc. In the interview, Hackett said that one of the key things that aided his development as the leader of his company was to recognize that you know who you are as a leader and what you stand for as a leader. Moreover, a leader must be authentic in who he or she is; one must never be “prepackaged”.

Authenticity

I thought about this concept of authenticity in the context of a compliance program and how you might inculcate the values of ethics and doing business in a compliant manner, into your employee base.  More than simply ‘tone-at-the-top’, authenticity means that your compliance program should be a part of how your company conducts its business. Employees have to see that not only is compliance accepted but it is embraced and celebrated in your company. Both panelists Rajinder Sharma and David Blanco said that their companies have a dedicated portion of their annual discretionary bonuses to a compliance review. They both believe that not only does this help shape and drive behavior but it emphasizes to employees how seriously the company wants to accentuate compliance.

Integrity

Within the context of leadership, if you want to have your employee’s trust, you must lead with integrity. Hackett, who played football at the University of Michigan under Bo Schembechler, said the coach taught his players not to win by cheating. Hackett uses this lesson when he talks to someone about integrity. You must practice it at all times so when the rubber meets the road and your integrity is tested, you won’t fail the test. Hackett said, “To say it another way, people tend to double down and do bad things under the most extreme pressure.”

He cited the example of a person who is “inches away” from losing his job. This person has experienced one bad quarter of numbers and is expecting another one coming down the pike. To overcome this second consecutive quarter of bad earnings they think “I have to do the right thing but no one will know if I don’t” and if I don’t do the right thing I will make my numbers. Hackett says that you have to “tell yourself right then, before you get there, that you can only do one thing.” Hackett believes that you should “practice that and it actually works because you have conditioned yourself when the stakes are altered.”

As a compliance professional, you can use such resources as the RESIST White Paper, “Resisting Extortion and Solicitation in International Transactions”, as the basis for training. It is a practical tool to help companies train employees to respond appropriately to a variety of solicitations. In addition to the 22 scenarios which discuss solicitation of bribes, in the context of project implementation and in day-to-day project operations, RESIST provides an Annex entitled “Guidance on Generic Good Practice Related to Extortion and Solicitation.” The Annex is designed to provide an overview of generic responses to demands for these types of payments, as well as addressing major aspects of these individual risks. The Annex sets out, for the compliance practitioner, a spectrum of practical actions to avoid or combat solicitation or extortion scenarios. Training on these scenarios would give employees an opportunity to practices doing business with the integrity that Hackett believes is important.

Strategic Plan

At the end of his interview, Hackett spoke of a target that he keeps in his head. It has three concentric circles going outward and getting larger. Each circle is named and it starts with ‘Now”, then ‘Near’ and, finally, ‘Far’. Hackett challenges himself to analyze his calendar to determine how much times he spends in each of these zones. He said, “What I’ve argued is that you have to train yourself to work in all three dimensions simultaneously. Its human nature to get pulled into the now, and the reward systems are built that way. You have to think of it in terms of making good on this notion that if you’re really a great leader, you’re going to be noted for it long after you’ve gone. That’s because you actually reached out and imagined things in the future.”

This sounded, to me, a lot like my colleague Stephen Martin’s 1-3-5 year strategic compliance plan you should have in place for moving forward. As a compliance practitioner, we often get tied up in doing the day-to-day slog work of compliance. However, just as Stephen Martin believes, it is important to have a 1-3-5 year plan in place as a road map for both internal resourcing and external regulators who may come knocking, James Hackett advocates spending time working on all areas of your business.

I found Hackett’s ideas on authenticity to be very useful in the compliance context. I especially liked his thoughts on doing business with integrity. Both of my panelists Rajinder Sharma and David Blanco believe that you must have employee buy-in of integrity to move your compliance program to level where it is a part of your company’s DNA. Hackett also believes that the more you practice something the better you get at it and doing business in a compliant manner is no different.

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

Antietam Led to the Emancipation Proclamation – Where Will Wal-Mart Lead?

September 17 was the 150^th anniversary of the single bloodiest day in American history. On that day the Army of Northern Virginia, led by Robert E. Lee met the Army of the Potomac, led by George McClellan. The battle was fought near a railway junction called Sharpsburg on Antietam Creek. On this day more than 23,000 Americans from both the North and South were casualties. As a Texan, I must note that John Hood’s Texas Division had casualties reported at over 90%, the highest ever for any US Division in any war at any time. When asked by a fellow officer where his division was, Hood replied, “Dead on the field.”

While the battle was a tactical draw, it ended the first Southern threat of invasion of the North. More importantly it provided Lincoln the political cover to issue the Emancipation Document, which changed the nature and course of the Civil War. I thought about how the horrific battle of Antietam led to something very different, the Emancipation Proclamation, when I read the latest output by the FCPA Professor, in an article entitled “Foreign Corrupt Practices Act Enforcement As Seen Through Wal-Mart’s Potential Exposure”. The Professor used the lens of the allegations of Foreign Corrupt Practices Act (FCPA) violations brought forward against Wal-Mart, as set out in the New York Times (NYT) article of April 21, 2012. The Professor explored five questions:

• whether Congress intended in passing the FCPA to capture the type of payments at issue in Wal-Mart;
• what FCPA case law instructs as to the payments;
• whether what Congress intended or what courts have concluded even matters; and
• the politicization of Wal-Mart’s scrutiny and its impact on FCPA reform.

I.                   Congressional Intent

Here the Professor notes that “The first question, and the easiest, is whether, given the SEC’s and DOJ’s current enforcement theories, the Mexican payments in connection with permitting, licensing, and inspection issues can expose Wal-Mart to an FCPA enforcement action?” and that the answer to this question is most likely yes; the Professor believes that the “second, and more important question, is whether Congress in passing the FCPA intended to capture pay payments occurring outside the context of foreign government procurement and involving ministerial and clerical acts by foreign governmental officials.” After reviewing the Congressional record to try and determine some legislative intent the Professor quoted Rep. Robert C. Eckhardt (D-Texas) – a congressional leader on the foreign payments issue, for the following:

Payments to a [foreign official with ministerial or clerical duties] for instance, to complete a form that ought, in equity, to be completed, to give everybody equal treatment, to move the goods off a dock which he will not move without a tip, a mordida, I think, as they call it in the Spanish language, a facilitating payment, or a grease payment would not constitute a bribe.

Based upon his review, the Professor concludes that “answer from the FCPA’s legislative history is no” and Congress did not intend to make facilitation payments illegal under the FCPA.

II.                Case Law

The Professor reviews four cases which he believes touch on the allegations. US v. Durham; US v. Kay (District Court); SEC v. Mattson; and US v. Kay (5^th Circuit) in asking the question of whether even if the payments made by Wal-Mart payment do not meet the FCPA’s facilitation payments exception, “in order for there to be a violation of the FCPA’s anti-bribery provisions, the ‘‘obtain or retain business’’ element, among others, must also be met.”

After noting that the Department of Justice (DOJ) lost 3 of the 4 cases, he opines that the fourth, US. v. Kay in the 5^th Circuit was equivocal at best. Therefore, any inquiry must be “a highly fact-dependent question whether a payment to a foreign official outside the context of foreign government procurement is subject to the FCPA. A key portion from the Kayruling logically implicated by Wal-Mart’s alleged payments is the following: ‘‘there are bound to be circumstances in which payments outside the context of foreign government procurement merely increase the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business.’’

III.             Do These Issues Even Matter?

In this section, the Professor notes that the negotiations between Wal-Mart and the DOJ will most likely be “behind closed doors in Washington DC.” In the air of negotiated Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs), the DOJ will assert its claims of jurisdiction and will not, because it cannot test the DOJ’s theories of liability at a trial. The Professor stated, “It will not matter if Wal-Mart’s payments are the type Congress intended to capture in passing the FCPA, nor will it matter what relevant case law instructs as to the payments.”

IV.              The Impact of Wal-Mart’s FCPA Scrutiny

Here the Professor raises fours issues: (1) the loss of stock price; (2) the investigative cost; (3) follow on shareholder derivative civil lawsuits; and (4) the effect this matter will have in others in the retail industry.

While Wal-Mart stock initially dropped 4.7 percent and continued a downward trend with an approximately $20 billion dip in shareholder value, it did rebound. However, the cost for the now worldwide investigation was already up to $51MM by the end of July. The Professor reports that  “at least 12 shareholder lawsuits have been filed against Wal-Mart and/or its officers and directors in the wake of the Times article.” Lastly, regarding a retail industry sweep, the Professor noted that “According to a recent Reuters report, other retail companies have also since reported to U.S. agencies suspicions of their own potential violations, which in turn has the Justice Department and SEC considering a sweep of the entire industry.”

V.                 FCPA Reform

Here the Professor continues his consistent argument that the Wal-Mart matter should encourage, rather than discourage, substantive debate on whether the FCPA should be reformed. However, he does not believe that opponents of FCPA reform “pounced” in heralding that the Wal-Mart matter ended the debate on FCPA reform (including this commentator). He does admit that this case may well have ended Congress’ collective stomach to take FCPA reform head on. He also notes that some Congressmen opened their own separate investigations of Wal-Mart but no person wanted to use the matter to inform the FCPA debate before Congress because as stated by the Chief Counsel of the House Judiciary Committee at a Hanson Wade FCPA conference in Houston, Texas in June of this year, ‘‘practical matter, public opinion matters, what happens in the real world matters,’’ and the atmosphere surrounding FCPA reform after the Times article has made it ‘‘harder for different groups to advocate’’ for FCPA reform.

With all articles published by the FCPA Professor, they are well researched and well written. I have found them to be provocative but in a way that fosters debate. Sort of the role that I think a Professor should have. We know where the bloodiest day in American history led but we do not know at this point, where this Wal-Mart matter will end.

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

CEO Hubris and Compliance Catastrophes

What is the common denominator of every corporate catastrophe that you have heard about? Reporter Lucy Kellaway, in a Financial Times (FT) article entitled “Road test CEO’s to avoid corporate car crashes”, says that it is the “hubristic CEO”. I thought about that line as I sat at Minute Maid Park last weekend and watched the Houston Astros all but knock out the Philadelphia Phillies from the National League (NL) Wild Card hunt by winning 3 of the 4 games. The Astros then, of course, began their next series with a more routine loss to the St. Louis Cardinals; thus allowing the Astros to reach the rarified triple digit ignominy of 100 losses for a second consecutive season. But do not be disheartened, there are still 14 games left so the Astros could blow through last season’s record of ‘only’ 106 losses. Think that might qualify as a ‘catastrophe’?

Apparently not according to Astros owner Jim Crane, who once again shows that I am unsophisticated because I measure the success of a baseball team by that outdated metric of wins and losses. But what I did not realize about Mr. Crane is that he fervently believes that baseball is not simply a game. He once again pointed out my lack of foresight in an Op-Ed piece for the Houston Chronicle, “Building a baseball team and a city-together”, where he said “Baseball is a singular life experience that brings communities together, develops youthful confidence and strong values, shapes destinies and builds city spirit. Important life lessons are learned on the baseball field.” He then went on to note that the team’s “ultimate goal is not only a better team, but a better city.” How is he going to accomplish this rather lofty goal? Believe it or not, it all starts with the public presentation of the Astros new uniforms that he has been secretly working on all year. He actually ended this Op-Ed piece with the following line, “The first big step is only a few weeks away, on Friday, Nov. 2, at 5 p.m. at Minute Maid Park, when we reveal our striking new logo and uniforms reflecting the fresh start we will all make together next season. We hope every Astros fan will be there, as excited and fired up as we are about the bold new experiences ahead.”

Be still my heart. He is actually planning to make the City of Houston a better place by introducing new uniforms. I am sure the Mayor of Houston is thrilled with this assistance. Unfortunately I cannot find a public comment she has made on the subject to report to you. I suppose any long suffering Red Sox (think Jay Rosen) or Cubs fan would tell me wait until your team has a bad century and then you have the right to sound off as, after all the Astros were in the World Series in 2005 but Mr. Crane, really new uniforms, how about some old fashioned wins?

Kellaway’s piece asks that even in this age of documenting, checking, measuring, stress testing and reassessing with remedial actions of every conceivable type of risk, what is the one which is never tested? She believes that the answer is “the chief executive gets so high on power that he or she losses the plot.” Kellaway’s idea to help remedy this situation is amazingly simply. She argues that the idea is “to force all top executives to take an annual hubris test modelled on the MOT (UK Ministry of Transportation) test for cars.” She acknowledges that she poached this idea, from Chris Wiscarson, the head of Equitable Life. Kellaway’s contribution is to have the test administered by a company’s Board of Directors. The test itself would consist of simple questions presented to a Chief Executive Officer (CEO) such as:

•           How would you rate your own arrogance? (Rate from one to five)

•           Has it increased recently?

•           Have you changed your mind on anything substantively in the past year?

•           Have you done anything “slightly dodgy”?

She believes that “In answering these questions, spineless non-executive directors would be discouraged from fudging answers by the promise of a prison sentence should they fail to be candid.” In addition to this annual test, Kellaway believes that if a CEO makes some type of extraordinary statement of “exceptional hubris” this would cause an “immediate MOT failure.” She gives the example of the now former head of Barclay’s Bob Diamond who told the UK Parliament “a year ago that the time for bankers to apologise was past” he would have been “instantly out”.

The British Press seems to be leading quite a bit of soul searching these days about the trouble City banks and other companies have gotten themselves into recently. I found Kellaway’s piece interesting because she appears to realize not only how important “tone-at-the-top” is to set an ethical standard for a company; but more importantly she is engaging in the conversation of how to address this issue. If your corporate culture is simply to either make your numbers every quarter or ‘resign to pursue other opportunities” this may speak of a hubris which leads to a compliance catastrophe like the one Wal-Mart faced on April 21, 2012 when the story broke on the front page of the New York Times (NYT). But the Board of Directors must be prepared to lead this effort, in other words, a Board must actually govern. So maybe when the FCPA Professor characterizes the Wal-Mart Foreign Corrupt Practices Act (FCPA) scandal failure of corporate governance, he is on to something.

On the other hand, if you are Jim Crane, apparently if you get some snazzy new uniforms, you not only make your baseball team better but the entire City of Houston.

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

Staying Connected and Engaged: What HR Professionals Didn’t Necessarily Learn in an MBA Program

Ed. Note-as readers of this blog know, I am a huge fan of HR as an integral part of a best practices compliance program. What many reader may not know is that I have a Master’s degree from Michigan State University from the School now named Human Resources and Labor Relations. With that background I was interested when I was contacted by Julianna Davies, who is a writer and researcher for MBA Online, a website that provides up-to-date information about MBA career opportunities and different college programs. I asked her if she could discuss the findings of the recent Kenexa study that outlines the ways in which human resource departments are out of touch with their employees and this will have a detrimental effect on companies until the problem can be corrected. The following is her guest post. 

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Managing an effective human resources department is usually a factor of two interrelated elements: professionals who understand the newest HR trends and regulations, and who know how to read and engage with the employees under their care. Too often, companies lean primarily on the first requirement, assuming that engagement and good communication will just come with time or, in some cases, will simply be intuitive.

However, as a new study from HR consulting and recruiting service Kenexa reveals, this strategy is not working. More HR professionals than ever before are out of touch with their company’s workforce, the study said. More and more HR teams are looking to bridge this growing gap, and a handful of startups have emerged devoted solely to HR improvement.

A Problem Around the Water Cooler

The Kenexa report, titled “Employee Attitudes and Engagement,” compiled results from surveys the consulting firm conducted in the first part of 2012. Researchers asked a fixed set of questions to employees, then posed those same queries to HR departments. The results, Kenexa said, were “disconcerting.”

For instance, only 34% of polled employees reported that they felt “engaged” with their jobs and companies. HR professionals anticipated much more generosity when they put that number at a nearly doubled 69 percent. Similarly, only 38 percent of employees said they would recommend their company to a friend, which was far lower than the whopping 81 percent HR executives projected. This pattern held true across the board, whether detailing benefits evaluation, feelings about pay grade fairness, or overall job satisfaction and anticipated job retention.

A Forbes magazine article summarizing the report called the findings “a damn shame,” and said that the disconnect may be emblematic of a larger problem in modern industry. “In an ideal world HR should be your team that is completely focused on maximizing talent,” the article said. “They can only maximize talent if they understand the current situation.”

Part of the problem may be related to the increasingly diverse workloads HR personnel handle. They process benefits paperwork and negotiate new hire packages; they watch market trends and handle personnel disputes. “To deliver more value, the human resources function needs to spend more time accelerating operational improvement and less time on its traditional administrative and compliance activities,” Brad Power, a veteran Human Resources consultant, wrote in a recent Harvard Business Review blog post. Revamping goals and focus can be somewhat daunting, however, which is where an emerging sector of next-generation HR consultants and start-up companies come in.

Opportunities & Solutions

Expensify, a San Francisco-based startup, is one example. It offers a computer platform for HR departments that streamlines employee expenses, receipts, and reports. The goal is to save personnel from sorting through stacks of paperwork—ideally so they can spend more time actually getting to know their employees and identifying more pressing personnel issues.

TribeHR also provides a template for financial tracking as a part of a much larger HR program “revamp package.” Enrolled companies can manage all HR functions from one common docket: tracking new hires and recruitment efforts, monitoring employee progress, and keeping track of calendars is all part of the deal.

When it comes specifically to improving company-employee communication and interaction, Rypple, also based in San Francisco, may offer a good solution. The Rypple program works something like an internal social network for companies. It gives managers, staff, and executive leaders a place to share and collaborate, as well as give feedback.

Effective HR management is as much about knowledge as it is about adaptability. Understanding the technical processes is an important piece, but the puzzle is incomplete without strong channels of communication and an accurate read of corporate culture and sentiment. With the right direction, technology, and advice, even the most out-of-touch organizations can come back on course—provided, of course, they first recognize the problem.

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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. 

Who is that Masked Man-an Interview with the FCPA Professor

Ed. Note-today’s post inaugurates a series that I have wanted to do for sometime. It is a series of interviews with prominent members of the FCPA commentariat. Today I begin with an interview with the FCPA Professor. I hope to publish interviews with other notable commentators this fall. ====================================================================================

1.      Where did you grow up and where did you go to college and law school? Can you tell us about anything from those experiences that led you to your current position?

I grew up, as did my high-school sweetheart wife, in Elkhart Lake, WI, a village of approximately 1,000.  Life was good in Elkhart Lake, it is a picturesque resort community, and the Kettle Moraine State Forest is nearby.  Both my Dad (a painter) and my mom (a nurse) instilled in me a good work ethic and for many years I awoke at 4:30 a.m. to deliver newspapers.  Basketball defined much of my youth.  I remain the third-leading scorer in the history of Wisconsin high school basketball (2,685 points) and the leading scorer in state history who did not play for their dad!  I played college basketball at the University of South Dakota (USD) and while at USD I had the good fortune to fall under the wings of the legendary Professor William “Doc” Farber and became a “Farber Boy,” a collection of USD Political Science students mentored by Doc, including Tom Brokaw, various Senators and Governors, and countless lawyers, business leaders and the like.  Being exposed to these successful individuals as a student was extremely beneficial and opened many doors to me.  Doc also literally showed me the world as we traveled to approximately 35 countries together.  Although we would visit the typical tourist sites, these trips were also educational missions as Doc would set up meetings with government officials, lawyers, business leaders and the like.  Doc passed away in 2007 (at the age of 97) before I began my academic career, but I like to think that he would be proud of me and the things I do.

After USD, I attended the University of Wisconsin Law School.  Becoming a professor was not on my radar screen while in law school, but looking back at my law school days the signs were there as I was keenly interested in development of the law, the intersection of law and policy, and Wisconsin’s law in action approach to education.

2.      Can you tell me about your professional career before you went into academia?

After law school I began at Foley & Lardner, a large national law firm based in Milwaukee.  As typical for a young associate at a big firm, my first few years were a hodgepodge of various assignments.  However, I soon began to take ownership of my career by focusing on the Foreign Corrupt Practices Act which intrigued me from the first time I heard of the law as a young associate.  Being a young associate in a large law firm, based in Milwaukee, circa 2000 and wanting to focus on the FCPA sounds ridiculous, but I was ever persistent and before I knew it I was flying around the world conducting FCPA investigations.  The work was fascinating and the trips were fun.  I was like an FCPA sponge.  During those long trips to Indonesia, India, China and other far-off places I took with me everything I could possibly read related to the FCPA.  I attended nearly every FCPA conference that my schedule allowed.  I sat around the negotiation tables at SEC and DOJ headquarters.  I soon began to realize that many in the industry were all singing from the same sheet of music and it appeared to me that little actual lawyering was involved in the FCPA practice.  Few of the pressing why questions were being asked because the FCPA bar was so small and fear of rocking the boat with the enforcement agencies seemed more important than advocating for a client.  I was intellectually curious and motivated to ask the why questions, but knew that my position at a big law firm did not provide the best opportunity to do so.  As many attorneys do after spending several years at a big law firm, I began to re-evaluate my career and asked myself what about the law I enjoyed the most.  For me, that was research and writing and asking the why questions, why is the law the way it is, and how can it be improved.  That, along with the fact that the vibe of college campus never left my bones, motivated me to pursue a path towards academia.  It was a long path, as tenure track positions in academia are very difficult to get.  Here again I was persistent and after a few years of being unsuccessful, I was grateful when Butler University gave me a chance in 2009 to become a professor.  After three successful years as a law professor in a business school, I was grateful again when Southern Illinois University gave me a chance recently to become a law professor in a law school.

3.      I have always wondered where you came up with the phrase “the façade of FCPA enforcement”? Can you tell us a bit about it.

I wish I could claim original ownership to the concept, but I borrowed the “façade of enforcement” part from U.S. District Court Judge Jed Rakoff in his SEC v. Bank of America decision concerning the SEC’s neither admit nor deny settlement policy.  The issues he raised in that case concerning the dynamics of resolving an SEC enforcement action have clear parallels to FCPA enforcement.  Just to be clear, and as noted on the very first page of the article published in the Georgetown Journal of International Law, I am not arguing or suggesting that every FCPA enforcement action is unwarranted or that no company or individual has never violated the FCPA.  Rather, what I aimed to demonstrate in the article was that a significant majority of recent FCPA enforcement actions are a façade – including those that allege clear instance of corporate bribery – yet are resolved without FCPA anti-bribery charges.  I was honored to have the opportunity to discuss my article and the “façade of enforcement” during my 2010 Senate testimony.  I conclude the article by encouraging more FCPA defendants to challenge the enforcement agencies and further expose the façade of FCPA enforcement.  I will leave it to others to decide whether the article has made a difference, but the article (as evidenced by download statistics) is the most read FCPA article out there and since its publication there have been several challenges to various enforcement agency theories.

4.      What is the reason you started the site FCPA Professor and what do you hope to achieve with it?

When I launched FCPA Professor in July 2009 my mission statement was to inject a much needed scholarly voice into FCPA issues. In addition to covering the “who, what, and where” of FCPA enforcement actions and related issues, I wanted to also explore the more analytical “why” questions increasingly present in this current era of aggressive FCPA enforcement. The goal was to foster a forum for critical analysis and discussion of the FCPA and related topics among FCPA practitioners, business and compliance professionals, scholars and students, and other interested persons.

The mission remains the same today.

5.      You recently completed your second Ironman, can you tell what it is like to prepare for and compete in such an event?

Ironman is obviously a physical test, but a mental test and emotional journey just the same.  The mind often tells the body to quit before the body is ready, competing in an Ironman proves that point.  After a 2.4 mile swim, and a 112 bike ride, your mind is telling you that you can’t run 26.2 miles.  After 6-8 miles of the run, your mind is telling you that you can’t run an additional 18 miles.  But you just do it because your body can.

Having the flexibility of an academic position makes training doable without sacrificing other aspects of my life.  My family continues to call Elkhart Lake, WI home during the non-academic portions of the year and it is an ideal triathlon training area with an active athletic scene.  There are some Ironman who allow the pursuit to dominate their life and religiously follow a training regime.  I am not one of those people, rather I train when I feel like training, not because a schedule says I am supposed to do x,y, and z on a particular day.  I think such an approach takes the fun out of the disciplines.

Being physically active is part of my DNA and sharpens my thinking.  In fact, many ideas for my FCPA Professor posts, articles and scholarship have been formed or sharpened while training.

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For those of you who do not know him. the FCPA Professor is in fact Mike Koehler, who is an Assistant Professor, Southern Illinois Univ. School of Law. He writes daily on his own blog site, the FCPA Professor.

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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

HP, the Failure to Listen to Employees or the Failure to Raise a Hand

The charging last week of three former Hewlett-Packard (HP) employees in Germany reminded me of some of the interesting underlying facts of the case. The Wall Street Journal (WSJ) has reported that at least one witness has said that the transactions in question were internally approved by HP through its then existing, contract approval process. Mr. Dieter Brunner, a contract employee who was working as an accountant on the group that approved the transaction, said in an interview that he was surprised when, as a temporary employee of HP, he first saw an invoice from an agent in 2004. “It didn’t make sense,” because there was no apparent reason for HP to pay such big sums to accounts controlled by small-businesses, Mr. Brunner said. He then proceeded to say he processed the transactions anyway because he was the most junior employee handling the file, “I assumed the deal was OK, because senior officials also signed off on the paperwork”.

The lesson learned here is not only must there be training to all employees but a company must listen to these employee-raised issues. In almost every circumstance where a significant compliance matter has arisen, if the issue had been reported or at least sent up the chain for consideration, there is a good chance that the incident would not have exploded into a full Foreign Corrupt Practices Act (FCPA) compliance violation. Matthew King, Group Head of Internal Audit at HSBC, calls this concept “escalation” and he believes that one of the more key features of any successful compliance program is to escalate compliance concerns up the chain for consideration and/or resolution.

This means that in almost every circumstance regarding a compliance issue he had been involved with, at some point a situation arose where an employee did not report a situation or event up to an appropriate level for additional review. This failure to escalate leads to the issue not reaching the right people in the company for review/action/resolution and the issue later becomes more difficult and more expensive to deal with in the company. A company needs to have a culture in place to not only allow escalation but to actively encourage elevation. This requires that both a structure and process, for the structure, exist. The company must then train, train and train all of its employees. Lastly, while a whistleblower process or hotlines are necessary these should not be viewed as the only systems which allow an employee to escalate a concern. The key would appear to be both having the systems in place to allow such escalation and to train all employees, including contract employees on how to escalate an issue.

Mike Volkov, on his Blogsite Corruption, Crime and Compliance, released a video last week where he talked about the need for a company to listen to employee complaints. He talked about this concept in terms of a whistleblower but it also holds true if an employee escalates a concern about an anti-corruption issue. In this day of eight substantive complaints coming into the Securities and Exchange Commission (SEC) whistleblower program on a daily basis, companies simply cannot afford to not listen. Think what position HP might be in today if this temporary employee had escalated his concern and the company had listened to him. Initially, HP would not have been under investigation by governmental authorities in Germany and Russian. In the US, both the Department of Justice (DOJ) and SEC are investigating the transaction. More ominously for HP, investigators from these jurisdictions are also now investigating other international operations, including those in Russia and the former CIS states to ascertain if other commissions paid involved similar allegations of bribery and corruption as those in the German subsidiary’s transaction.

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

Ex-HP Managers Charged in Germany with Bribery – Will Failure to Self-Disclose Hurt?

As reported by Karin Matussek of Bloomberg News yesterday three former Hewlett-Packard (HP) managers were charged in Germany in a corruption investigation over improper payments made to win a €35 million ($45 million) sale of computers to Russia about nine years ago. One of the ex-managers charged is a Finnish woman. The other two are men, one American and one German. The German authorities started their probe back in 2009, after provincial tax authorities found, in a routine audit of an unrelated company, evidence of payments for which “real use could be established for some payments found in the accounts. The owner of that company was charged.”

HP’s subsidiary in Munich was subsequently investigated by German authorities, with the company’s offices being raided in December, 2009 and the company’s Moscow’s offices were searched in 2010. Matussek reported that German “Prosecutors asked the court to make Hewlett-Packard an associated party to the case.” She quoted Wolfgang Klein, spokesman for Saxony’s Chief Prosecutor’s Office, who told her that “If the court grants that request and the allegations are proved, Hewlett-Packard’s profits from the transaction may be seized”. The company itself said that it was fully cooperating with the authorities and a company spokesperson, Anette Nachbar, said in an email that HP “stresses that the company expects from employees and partners strict compliance of its business principles.”

The Bloomberg article reminded me about the underlying facts of the HP case and just how bad they were. On April 15, 2010, the Wall Street Journal (WSJ) reported that three middlemen were alleged to have paid invoices, using funds provided by HP, for equipment never purchased, to shell companies with bank accounts in Latvia, Lithuania, Austria, Switzerland and Belize. In return, the suspected middlemen allegedly received commissions totaling US$700,000, according to court documents. German authorities reported the investigation, which started in 2007, when a German tax auditor discovered bank records showing that between 2004 and 2006, a HP subsidiary paid €22 million into the account of ProSoft Krippner GmbH, a small computer-hardware company in Leipzig. The records indicated the payment was made for services performed in Moscow. It was the size of the payment to ProSoft that caught the tax auditor’s attention and he red-flagged the matter for transfer to a special prosecution team in Dresden who handle major corruption cases.
To top it all off, at least one witness has said that the above transaction was internally approved by HP through its then existing contract approval process. In the same WSJ article, Mr. Dieter Brunner, a bookkeeper who is a witness in the probe, said in an interview that he was surprised when, as a temporary employee of HP, he first saw an invoice from an agent in 2004. “It didn’t make sense,” there was no apparent reason for HP to pay such big sums to accounts controlled by small-businesses such as ProSoft Krippner. Mr. Brunner then proceeded to say he processed the transactions anyway because he was the most junior employee handling the file, “I assumed the deal was OK, because senior officials also signed off on the paperwork”.

Additionally, the New York Times (NYT), on April 16, 2010, reported that three former HP employees were arrested by German prosecutors back in December 2009, the same month police in Germany and Switzerland presented search warrants detailing allegations against 10 suspects. Although it was unclear from a WSJ article, on April 16, 2010, as to the time frame, whether in December 2009 or later, HP had retained counsel to work with prosecutors in their investigation. Apparently, since the Securities and Exchange Commission (SEC) only announced it had joined the investigation on or about April 15, HP had not self-disclosed the investigation or its allegations to either the US Department of Justice (DOJ) or SEC.

However, as bad as the facts appear to be based upon these reports, the position taken by HP not to self-disclose to the DOJ would seem to be equally questionable. Amazingly, HP did not self-disclose any of the above facts before or even after the raid on its German offices to the DOJ. Maybe HP thought a $10MM bribe and a dawn raid in Europe were “not material” due to its size. Whatever the reason that HP failed to self-disclose, it will be interesting to see the effect, if any on its failure to self-disclose. Perhaps the NYU Law School professors might analyze that enforcement action.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.
© Thomas R. Fox, 2012