FCPA Compliance and Ethics Blog

November 29, 2012

His Last Bow: Sherlock Holmes and Embracing Chaos To Build Compliance Programs

Fittingly, we end our tribute week of the 125th anniversary of the appearance of the world’s great consulting detective, Sherlock Holmes, with a look at the final Arthur Conan Doyle short story in the Holmes oeuvre, His Last Bow. The story, written in 1917 but set in August 1914, is a spy story rather than a detective story. In it we find that Holmes is retired from his detective consultancy and is now a beekeeper but is also writing the definitive treatise on investigation. In the story, Holmes and Watson, now much older than in their heyday, have not only caught several spies in their return from retirement, but fed the Germans some thoroughly untrustworthy intelligence. Holmes then identified the security leak through which British secrets were reaching the Germans. In reference to the impending war, which is about to begin, Doyle penned the following dialogue between Holmes and Watson.

“There’s an east wind coming, Watson.”

“I think not, Holmes. It is very warm.”

“Good old Watson! You are the one fixed point in a changing age. There’s an east wind coming all the same, such a wind as never blew on England yet. It will be cold and bitter, Watson, and a good many of us may wither before its blast. But it’s God’s own wind none the less, and a cleaner, better, stronger land will lie in the sunshine when the storm has cleared.”

I thought about this final Holmes short story when I read an article in the November edition of Fast Company, entitled “Secrets of the Flux Leader”, where author Robert Safian engaged in an interesting discussion how of brilliantly managed chaos can lead to success in a wide range of companies and enterprises. If there is one thing about Sherlock Holmes his mind brought clarity to the chaos of a crime scene and all the attendant evidence, both real and imaginary. Safian, who coined the term “Generation Flux” in a previous article, explained “how the dizzying velocity of change in our economy has made chaos the defining feature of modern business.” He described Generation Flux people as those who will thrive best in this environment of rapid change. “It is a psychographic, not a demographic–you can be any age and be GenFlux. Their characteristics are clear: an embrace of adaptability and flexibility; an openness to learning from anywhere.”

Safian recognized that sometimes companies need rules and hierarchy but “Where hierarchy clearly fails the modern organization is in fostering and encouraging the creative ideas needed to stay agile in today’s networked world. The challenge for the Generation Flux leader, then, is to encourage creativity and agility while retaining the advantages of hierarchy.” He pointed to the example of retired US Army General Stanley McChrystal who “experienced a reinvention challenge of his own when the threat of Al Qaeda emerged and the U.S. military had to rethink its assumptions.” He quoted McChrystal for the following, “We thought we knew the rules, that we knew what it took to be successful. But the sport we had been playing wasn’t good enough for the sport we were required to be effective at.” Further McChrystal stated that “Against Al Qaeda, we had to change our structure, to become a network. We were required to react quickly. Instead of decisions being made by people who were more senior–the assumption that senior meant wiser–we found that the wisest decisions were usually made by those closest to the problem.”

Safian wrote that “the smartest leaders recognize that a new kind of openness to ideas is required. This is where hierarchy fails us completely. How can a leader make sure that all the options and ideas from the trenches make their way to the top? If you rely on a traditional suggestion-box approach–“Please send me your ideas”–you’re doomed to limit your inputs, even in a digital, social age.” He believes that this is inherent in the system because “Self-censorship is endemic wherever there is a whiff of hierarchy. People assume that their opinions aren’t really valued. At the same time, leaders also need to be open to letting others make decisions for them. In a fast-changing world, the boots on the ground–be they soldiers or salespeople, engineers or intelligence officers–often need to react without going up the chain of command for approval. What’s more, they need to be empowered to act, to solve problems they encounter unexpectedly. This kind of openness requires not just free-flowing information but a new kind of collaborative trust.”

Safian cited the example of Mark Parker, Chief Executive Officer (CEO) at Nike, who regularly walks the halls of the company seeking ideas from employees, by asking about projects they are working on at their desks. Parker found “a young designer showed the CEO a side project he was working on, exploring shoes that would match a barefoot running experience; Free is now a billion-dollar Nike franchise.”

Interesting, Safian compared Generation Flux to the difference between Newtonian physics with the change wrought by Einstein and the quantum physics revolution. In Newtonian physics, there is no greater goal than stability. He wrote that “That scientific conclusion helped us to embrace hierarchy and one-size-fits-all models.” Yet in the world of quantum physics “We now know that cause and effect is not a given in the natural world. Creation comes not from stasis but from unpredictable movement. Chaos is everywhere.” This is state of the business world today.

So what does this mean for compliance? First, the hierarchical model of leadership will not work, but more importantly “There exists no single model that leads to success.” This means that compliance leadership must be ready to throw aside previous assumptions and “embrace hierarchical top-down leadership and bottom-up systems.” But this requires time for reflection both by the leadership teams and those below who are on the ground. Companies must recognize the diversity in their companies on a global basis. Not everything can be accomplished by the corporate office in the US nor can everything be run from the home office, wherever that may be. Safian ended his article by stating that “”Deciders find it really hard to accept failure, but tinkerers and engineers are undeterred by it. Failure is part of the process. We can’t run from it.” Nor should we.”

So this brings me to my final post in the tribute week to my favorite character in fiction, Sherlock Holmes. I hope that you have enjoyed reading this week’s post as much as I have writing them. I end this week with His Last Bow as a fitting tribute to Holmes use of chaos to help him solve mysteries. On a superficial level, it may appear that Holmes solved the chaos around him to solve the crimes he investigated but I would submit that he embraced it and used it to push the art of detecting to new levels. Perhaps he even presaged Einstein.

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

Sherlock Holmes as Teacher

We continue our exploration of all things Sherlock Holmes this week by considering Holmes as a teacher. In an article in Scientific American, entitled “Don’t Just See, Observe: What Sherlock Holmes Can Teach Us About Mindful Decisions”, author Maria Konnikova explored some of the ways that Holmes “insights into the human mind do more to teach us about how we do think and how we should think than many a more conventional source.” Her insights included that Holmes “teaches us to be constantly mindful of our surroundings”; he goes beyond seeing to actually observing; and teaches us to use our senses to increase our mindfulness.

I thought about Konnikova’s insights into Holmes while reading an article in the Corner Office Section of the New York Times (NYT), entitled “In Sports or Business, Always Be Prepared for the Next Play”, where Adam Bryant reported on an interview he did with LinkedIn Chief Executive Officer (CEO) Jeff Weiner. The article had many nuggets of wisdom from Weiner who talked about his journey to becoming the CEO of LinkedIn and some of the things he has learned along the way.

I.                   Be Prepared

The first thing is to be prepared; which Weiner expressed in the phrase “next play”. He came up with this from Duke University basketball coach Mike Krzyzewski who says it each time his Blue Devil team goes up and down the court “he doesn’t want the team lingering too long on what just took place. He doesn’t want them celebrating that incredible alley-oop dunk, and he doesn’t want them lamenting the fact that the opposing team just stole the ball and had a fast break that led to an easy layup. You can take a moment to reflect on what just happened, and you probably should, but you shouldn’t linger too long on it, and then move on to the next play.”

I thought about this statement in the context of something I touched on in yesterday’s post regarding Wal-Mart and this  was that the company started its initial Foreign Corrupt Practices Act (FCPA) investigation in a relatively routine audit of how well its foreign subsidiaries were complying with its anti-corruption policies. According to the NYT, “The review was initiated by Jeffrey J. Gearhart, Wal-Mart’s general counsel, who had seen news reports about how Tyson Foods had been charged with relatively minor violations of the Foreign Corrupt Practices Act. He decided it made sense to test Wal-Mart’s internal defenses against corruption.”

Indeed this was a similar scenario to the Watts Water Technology, Inc. (Watts) matter. In this enforcement action, the ball was put into motion when the Watts General Counsel (GC) became aware of an enforcement action against another company for unlawful payments to Chinese state-owned design institutes. This led to FCPA training for certain Watts Valve (Changsha) Co Ltd (CWV) management where allegations were disclosed. Subsequently, the company instituted an internal investigation and self-disclosed to the Securities and Exchange Commission (SEC). Watts paid a fine of $200,000, agreed to disgorge profits of $2,755,815 and paid prejudgment interest of $820,791.

In another context, I have previously written about Stephen Martin, of Baker & McKenzie, who urges compliance counsel to put together a 1, 3 and 5 year strategic plan which should be utilized as a road map for a compliance program in these time frames. Martin believes that such a strategic plan could well lead to the development of credibility for your company and your compliance program in the event of one of the aforementioned eventualities. In other words, “next play”.

II.                Culture and Values

Weiner spoke about LinkedIn’s culture and values. He defined culture as “who we are” while defining values as “the principles upon which we make day-to-day decisions.” He stated that the company’s culture has five dimensions: transformation, integrity, collaboration, humor and results. The company has six values which are “members first; relationships matter; be open, honest and constructive; demand excellence; take intelligent risks; and act like an owner. And by far the most important one is members first. We as a company are only as valuable as the value we create for our members.” Weiner recognizes that values are a subset of culture so that they are “inextricably linked”. He believes that the company’s culture and values help in several ways including recruiting, motivating, inspiring and productivity.

III.             Going Forward

Bryant ended his interview with Weiner by asking him “What career advice do you give to business school students?” While recognizing that Weiner’s answer was for a different target market than compliance professionals, nevertheless I found his advice highly practical for the compliance practitioner. First, you must have two things, passion and skill. In other words, to do compliance well you not only need the technical capacity but you should also be passionate about doing it. Second, you should endeavor “to surround yourself with amazing people.” Weiner believes that “in this more networked, interconnected world we live in, it’s just all about the people you work with.” This is not about having a mentor but it’s “about the people you work with and the people who report to you. It’s about everyone you’re associated with, day in and day out. Surround yourself with only the best you can find.” Lastly, Weiner said that you should always be learning. You should never lose your intellectual curiosity.

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

November 28, 2012

The Hound of the Baskervilles – Questions, Questions and More Questions for Wal-Mart

We continue our week of exploration of all things Sherlock Holmes in honor of his 125th anniversary last week by taking a look at my favorite Holmes novel “The Hound of the Baskervilles”. It is the third of four crime novels by Sir Arthur Conan Doyle featuring the detective Sherlock Holmes. The book was originally serialized in The Strand Magazine from August 1901 to April 1902. In 2003 the book was listed on the BBC’s The Big Read poll of the UK’s best-loved novel. I have read the novel and seen almost all of the available movie and television adaptations. I love the Basil Rathbone version, in eerie black and white, but the Hammer version starring Peter Cushing is actually more faithful to the original text. The story is set largely on Dartmoor in Devon in England’s West Country and tells the story of an attempted murder inspired by the legend of a fearsome, diabolical hound. And for every stone that Holmes overturns to try and solve the mystery another question arises.

I thought about this novel in the context of the recent news comings and goings of Wal-Mart and its ongoing Foreign Corrupt Practices Act (FCPA) imbroglio. As reported by the FCPA Blog, in an article entitled “Wal-Mart’s latest FCPA disclosure (November 2012)”, the company disclosed in its Form 8-K filed with the Securities and Exchange Commission (SEC) on November 15, 2012 that its internal investigation of its foreign subsidiaries had expanded into “Brazil, China and India.” It was not clear from its 8-K filing whether this was the internal investigation initiated after the New York Times (NYT) April 22 story about allegations of corruption and bribery coming out of its Mexico subsidiary or if this was a part of the investigation began in spring 2011 as a relatively routine audit of how well its foreign subsidiaries were complying with its anti-corruption policies.

In a very interesting development, as reported by the FCPA Professor, in a blog, entitled “New Wal-Mart Details Emerge”, where he cited back to a NYT article that “Wal-Mart’s internal review began in Spring 2011 when Jeffrey Gearhart (Wal-Mart’s general counsel) learned of an FCPA enforcement action against Tyson Foods. According to the NYT article, “the audit began in Mexico, China and Brazil, the countries Wal-Mart executives considered the most likely source of problems” and Wal-Mart hired KPMG and Greenberg Traurig LLP to conduct the audit. The NYT article notes that “in July 2011” the firms “had identified significant weaknesses in all three subsidiaries.”

The NYT article went on to state that an un-named Wal-Mart official said that “It was clear that they were not executing” or following Wal-Mart’s internal protocols for performance of due diligence on third parties and FCPA compliance training. Further, the problems unearthed in this internal investigation were serious enough to merit an increase in scope “to expand the audit to all 26 of its foreign subsidiaries.” Then in the fall of 2011, Wal-Mart discovered that the NYT was investigating the company over allegations of bribery and corruption in its Mexico subsidiary and “Wal-Mart’s response in 2005 to serious and specific accusations of widespread bribery by Wal-Mart de Mexico, the company’s largest foreign subsidiary.” This new allegation led Wal-Mart to hire another law firm, Jones Day, “to investigate whether top executives had quashed the company’s investigation into the lawyer’s claims.” The company began to look into other specific accusations of wrongdoing, both in Mexico and it its other subsidiaries. This “effectively created two lines of inquiry — the first being the global compliance review begun by Greenberg Traurig and KPMG. The second was the internal inquiry into specific accusations of bribery and corruption.”

Last Friday, an article in the Chicago Tribune, entitled “Wal-Mart India unit suspends CFO, others pending probe”, reported that the company had “suspended its chief financial officer and other employees as it investigates alleged violations of U.S. anti-bribery laws”. In addition to the Chief Financial Officer (CFO), who doubled up as the firm’s acting legal counsel, those suspended included a senior manager, manager, assistant manager and retainer. “The five, whose job was to procure licenses required for stores and other real estate approvals, taxation and logistics, were told not to attend office until the FCPA-related investigations were over, said one of the persons asking not to be named.”

This investigation was being led by Greenberg Traurig. In the Tribune article, the FCPA Professor was quoted as saying, “Suspensions are common in situations like this. Companies that are under FCPA scrutiny want to demonstrate to enforcement agencies that upon learning of improper conduct, they took effective remedial measures,” said Koehler. “Part of doing that is to isolate current employees from their positions, so that any improper conduct does not continue.” Further, the Professor stated that “If any alleged improper conduct occurred, then the suspensions by Wal-Mart “will serve it well in the eyes of enforcement agencies” such as the Department of Justice and the Securities and Exchange Commission, in deciding how to resolve the broader case.”

An interesting perspective was presented by Sonia Jaspal in her blog RiskBoard, in a post entitled “Bharti Walmart India – Internal FCPA Investigation”. Jaspal posed some interesting and difficult questions relating to the difficulty of doing business in India without paying bribes. She stated, “The Retail Association of India lists 51 different approvals from 32 different agencies. Seeing the corruption index of India and the way government departments’ function, I would be very surprised if an organization manages to obtain all the relevant licenses without any grease payments. Hence, the question is how will the organizations manage to function without paying bribes?” She went on to ask “What happens in such a case to the license? Will the license be revoked, cancelled, or returned? If not, what is stopping the organizations from first taking the licenses by paying bribes and then doing a clean-up exercise to show their commitment to ethics?”

These are all serious and difficult questions for Wal-Mart, its Indian subsidiary and many others to answer. But as Holmes, through his dogged pursuit, was able to finally overcome the mystery of the Hound of the Baskervilles, perhaps someday these questions posed herein may become close to being resolved.

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

November 26, 2012

Beacon Events Compliance Conference in Beijing – I Wish I Could Be There

In the Sherlock Holmes story “The Final Problem” Conan Doyle tried to kill off his fictional detective by having him go over Reichenbach Falls in Switzerland locked in mortal combat with his arch nemesis Dr. Moriarty. However, readers of the Holmes’ short stories protested so much that Doyle had to resurrect him a short story entitled “The Adventure of the Empty House”. What do these stories have to do with compliance? I had been scheduled to chair and participate in the Advanced Anti-Corruption Compliance Strategies Summit being held in Beijing from 4th to 6th December, however as I have not been cleared yet to travel after my recent surgery I cannot do so. So unlike Holmes, I will not disappear, just be land-locked here in Houston.

To say I am disappointed that I cannot attend would be putting it mildly as it will be one of the top compliance-related conferences in the Far East for 2012. If you have not had the opportunity to attend a compliance-related conference tailored to the challenges of working in the Far East this would be the conference for you. Even if you have attended such an event, this conference focuses on China and will give you more insight into how to do business under a plethora of anti-corruption and anti-bribery laws, from the US Foreign Corrupt Practices Act (FCPA) to the UK Bribery Act and the recently enacted PRC China anti-bribery legislation.

The person who will take my slot as conference Chairperson is certainly not unfamiliar to coming off the bench. Indeed he is one of the top compliance counsels in the region, Eric Carlson, of the law firm of Covington and Burling LLP. In addition to practicing law, Eric is also a Contributing Editor to the FCPA Blog. In other words, this guy knows his compliance stuff. In addition to presenting my review of 2012 FCPA enforcement and lessons learned, Eric is also on tap to speak about the specific lessons which impact foreign companies operations in China. As a partner in the firm’s Beijing office, he is uniquely placed to do so.

So what are some of the subjects that will be covered? Consider these: 2012 – The FCPA year in review – what we have learned about best practices from the year’s enforcement actions; Official View: Current PRC focus and trends – commercial bribery enforcement; UK Bribery Act – Update on the UK Bribery Act and enforcement a year after implementation; Expert View on the Implications of Recent FCPA-Related Developments – Analyses of Recent Cases and Insights into Future US Government Enforcement Priorities That May Impact China Operations; Managing the multi-jurisdictional aspects of compliance in Asia when multiple parties are interested, plus an update on the new provincial / local laws in China, which could increase risks of debarment; Live examples of strong internal controls and compliance programs – Case studies of changes implemented in the past year to meet or exceed changing global and local regulatory expectations; Sustainable Compliance: Making the Case for Less is More; How to personalize a policy for your company, taking into consideration the specific challenges your employees really face on a day to day basis; Creating robust agreements with Third parties – how to ensure integrity and compliance without losing important partners; Robust due diligence and monitoring of suppliers to ensure a culture of integrity in your supply chain; Supply chain issues and non-governmental bribery – how much oversight is required over downstream parties like agents, intermediaries, distributors, retailers to avoid prosecution and reputation risk?; and a Dodd-Frank Whistleblower Update.

In addition to the above the first day of the conference is Workshop Day with two great workshops, one will focus on ‘Step by Step Guidance on Best Practice for Investigations’ and the second on how to ‘Update Your Compliance Plan and Effectively Assess and Manage Risk’ The second workshop is further broken down into two subparts: Part I: Quickly get up to speed with the latest anti-corruption developments to make sure your programs are defendable and Part II: Effective risk assessment, risk management and risk mitigation for bribery and fraud risk in China. The conference will also have special in-depth tracks for a more detailed exploration of subjects such as internal investigations and managing compliance in the mergers and acquisitions (M&A) context and in joint ventures (JV’s).

The topics will be among the most relevant and informative that you could ask for. They include FCPA prosecutions and enforcement actions, risk assessments and risk intelligence, dealing with facilitation payments, FPCA compliance training, and FCPA risk assessment in M&A work and in dealing with JV’s, auditing and compliance convergence. Simply put, the scope of the Beacon Events conference is as broad and far-ranging as you might ask for; nevertheless the focus is on the compliance practitioner and the business of doing compliance inside a corporation.

Bottom Line: This is one of the very best FCPA conferences that has ever been staged in Beijing. It will offer some of the most cutting edge best practices on a wide variety of issues that bedevil compliance practitioners on a day-to-day basis. This list of speaker is the most ‘A-List’ that has ever been seen at such an event in Beijing. You owe it to yourself to attend. I am just sorry that I cannot do so.

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For information on the Conference, click here. For readers of this blog, a discount is offered by Beacon Events. You can receive the discount by entering the online discount code: AC678TFL15. You can also use this discount code if you register directly with Beacon Events.

 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

New Charges for News Corp: Are FCPA Charges Just Around the Corner?

When you have eliminated the impossible, whatever remains, however improbable, must be the truth.

~ Sherlock Holmes in The Sign of the Four by Arthur Conan Doyle

Last Wednesday was the 125th anniversary of the first appearance of the world’s greatest consulting detective – Sherlock Holmes when the first Holmes novel, A Study in Scarlet, appeared in Beeton’s Christmas Annual in 1887. This week we will celebrate one of my favorite works of fiction, while trying to draw some compliance parallels, under both the US Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act. We begin with The Sign of the Four because it is the one novel by Arthur Conan Doyle which has everything: swirling fog, a lost treasure, a chase, Holmes’ cocaine use and a damsel in distress. It is also the novel in which Holmes’ companion Dr. John Watson meets his bride Miss Mary Morstan. olhh

Much like The Sign of Four, the News Corp matter would seem to have everything. Last week charges were brought against Rebekah Brooks, who ran Murdoch’s newspaper holdings in Britain, Andy Coulson, former editor of the now defunct News of the World, and two other former News International employees. According to a Press Release from the Crown Prosecution Services (CPS), “We have concluded, following a careful review of the evidence, that Bettina Jordan-Barber, John Kay and Rebekah Brooks should be charged with a conspiracy to commit misconduct in public office between 1 January 2004 and 31 January 2012. This conspiracy relates to information allegedly provided by Bettina Jordan-Barber for payment, which formed the basis of a series of news stories published by The Sun. It is alleged that approximately £100,000 was paid to Bettina Jordan-Barber (a Ministry of Defence [MOD] employee) between 2004 and 2011.”

Dan Sabbagh, in a Guardian article entitled “Rebekah Brooks and Andy Coulson charges set new context for Leveson”, noted that “Significantly, the CPS said that the charges against the two for alleged misconduct in a public office cover the period between 2004 and as recently as 2011 – when payments to MoD official Bettina Jordan-Barber totalling about £100,000 are alleged to have been made.” This means that the payments lasted beyond the date that was alleged to have been for the phone-hacking scandal, “Hacking charges laid by the CPS against Brooks, Coulson and others range from October 2000 to August 2006, before the younger (James) Murdoch arrived at Wapping.” These payments to Jordan-Barbara were alleged to be in excess of ₤100,000.

These charges may mean significantly more international legal problems for News Corp, specifically regarding liability under the FCPA. Ed Pilkington and Dominic Rushe, also writing in the Guardian in an article entitled “News Corp exposed to growing legal threat following charges for tabloid duo”, quoted Professor Mike Koehler (the “FCPA Professor”) who said “the charges would be hard for the Department of Justice and the Securities and Exchange Commission to ignore [regarding a violation of the US FCPA]. We have been hearing allegations for a year and a half now, now we clearly have charges against high ranking officials at a foreign subsidiary.”

So how might Brooks and Coulson be liable under the FCPA? The recently released US Department of Justice (DOJ) and Securities and Exchange Commission (SEC) “A Resource Guide to the U.S. Foreign Corrupt Practices Act” explains that an individual may be liable for conspiracy to violate the FCPA without having committed a substantive FCPA violation.

Under US law, individuals or companies that aid or abet a crime, including a FCPA violation, are as guilty as if they had directly committed the offense themselves. The aiding and abetting statute provides that whoever “commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission,” or “will­fully causes an act to be done which if directly performed by him or another would be an offense against the United States,” is punishable as a principal. Aiding and abetting is not an independent crime, and the government must prove that an underlying FCPA violation was committed.

Both individuals, who are foreign nations and companies, may also be liable for conspiring to violate the FCPA, i.e., for agreeing to commit an FCPA violation, even if they are not, or could not be, indepen­dently charged with a substantive FCPA violation. So both a foreign national such as Brooks and Coulson could be convicted of conspiring with a domestic concern to violate the FCPA. Under certain circumstances, they could also be held liable for the domestic concern’s substantive FCPA violations under Pinkerton v. United States, which imposes liability on a defendant for reasonably foreseeable crimes committed by a co-conspirator in furtherance of a conspiracy that the defendant joined.

A foreign individual may be held liable for aiding and abetting a FCPA violation or for conspiring to violate the FCPA, even if the foreign company or indi­vidual did not take any act in furtherance of the corrupt payment while in the territory of the US. In con­spiracy cases, the US generally has jurisdiction over all the conspirators where at least one conspirator is an issuer, such as the US Corporation News Corp, who commits a reasonably fore­seeable overt act within the US. For example, if a foreign company or individual conspires to violate the FCPA with someone who commits an overt act within the US, the US can prosecute the foreign company or individual for the conspiracy. The same prin­ciple applies to aiding and abetting violations. For instance, even though they took no action in the US, Japanese and European companies were charged with con­spiring with and aiding and abetting a domestic concern’s FCPA violations.

Pilkington and Rushe predicted that “the new charges will increase pressure on the company. They cited a further quote from the FCPA Professor “This latest news is an escalation of the FCPA case.” Further, he told them that “US authorities would be looking to see how high up the chain of command the bribery scandal reached. The question will be what did James know and when did he know it.”

Even more ominously for News Corp, Pilkington and Rushe reported that “This week the Daily Beast alleged that the Murdoch tabloids the Sun and the New York Post may have made payments to a US official on American soil in order to obtain a photo of a captive Saddam Hussein, the deposed Iraqi leader, in his underwear. News Corporation has denied the claims.”

Where does this leave News Corp? It may be in quite a precarious position now. First there are the two high ranking former News Corp employees charged with conspiracy to commit bribery of a UK government official. Brooks was the former Sun editor and later ran the Murdoch’s holdings in the UK. Coulson was the former editor of the now defunct News of the World and later Director of Communications for UK Prime Minister David Cameron. As stated by the FCPA Professor in the article, what about the knowledge of James Murdoch? While the phone hacking charges may have occurred before he was involved in News Corp’s UK operations, the dates of the alleged payments may certainly impact him as well. All we can say with certainty is…watch this space.

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I will be discussing the recently released FCPA Guidance next Tuesday afternoon in a webinar, hosted by World Compliance. The event will be held at 2 PM CST. Details and registration can be found here. I hope that you can attend.

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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

November 21, 2012

Why Perform Due Diligence?: “That’s PR Speak for fraud”

Yesterday brought some very interesting news from both ‘across the pond’ and here in the US. From the UK, there was the news of the arrests of former News Corp head honchos Rebekah Brooks, who ran Murdoch’s newspaper holdings in Britain, Andy Coulson, former editor of the now defunct News of the World. Dominic Rushe, writing in the Guardian, quoted the FCPA Professor who said it “would be hard for the Department of Justice [DOJ] and the Securities and Exchange Commission [SEC] to ignore. We have been hearing allegations for a year and a half now, now we clearly have charges against high ranking officials at a foreign subsidiary.” More ominously, Rushe cited to a report from The Daily Beast that the “Daily Beast alleged that the Murdoch tabloids the Sun and the New York Post may have made payments to a US official on American soil in order to obtain a photo of a captive Saddam Hussein, the deposed Iraqi leader, in his underwear.” Rushe did note that “News Corporation has denied the claims.” But we will leave a more detailed discussion of the events for a later post.

The second piece of news was almost as breath-taking. As reported in the Wall Street Journal (WSJ), Hewlett-Packard (HP) wrote down $8.8bn of its $11bn purchase value of the UK Company Autonomy. HP said “that an internal investigation had revealed “serious accounting improprieties” and “outright misrepresentations” in connection with U.K. software maker Autonomy.” Further, according to HP Chief Executive Officer (CEO) Meg Whitman, “”There appears to have been a willful sustained effort” to inflate Autonomy’s revenue and profitability. This was designed to be hidden.” Speaking more bluntly (as always) Francine McKenna, in her post entitled “Hewlett-Packard’s Autonomy Allegations: A Material Writedown Puts All Four Audit Firms On The Spot”, in forbes.com said “That’s PR-speak for fraud.”

Not to be outdone, the WSJ reported that “Michael Lynch, Autonomy’s founder and former CEO, fired back hours later, denying improper accounting and accusing H-P of trying to hide its mismanagement. “We completely reject the allegations,” said Mr. Lynch, who left H-P earlier this year. “As soon as there is some flesh put on the bones we will show they are not true.”” In other words, Lynch accused HP of mismanaging his former company and destroying its value in less than 12 months. It should also be noted that the Autonomy acquisition was pushed through by the former CEO of HP, Leo Apotheker; not the current CEO.

I thought about the HP story in the context of the section in the recently released DOJ/SEC A resource Guide to the U.S. Foreign Corrupt Practices Act (FCPA) on successor liability and why a company needs to perform pre-acquisition due diligence:

First, due diligence helps an acquiring company to accurately value the target company. Contracts obtained through bribes may be legally unenforceable, business obtained illegally may be lost when bribe payments are stopped, there may be liability for prior illegal conduct, and the prior corrupt acts may harm the acquiring company’s reputation and future business prospects. Identifying these issues before an acquisition allows companies to better evaluate any potential post-acquisition liability and thus properly assess the target’s value.

 It should be noted that Autonomy’s outside auditor before the deal, Deloitte UK, gave the company a clean bill of health. Further, HP had its own outside auditor, KPMG, brought in at the pre-acquisition stage to conduct due diligence work, which was essentially to check Deloitte’s audit work of Autonomy. In other words, two of the world’s top auditing firms passed muster over Autonomy’s books and records and gave the entity’s financial statements a passing grade.

Once, when asked why men play football, Jet coach Herm Edwards emphatically said “You play to win the game.” I think people need to realize that compliance due diligence under the FCPA can also be used to help company’s do more than uncover potential FCPA issues but also help correctly assess the value of target companies. It might help prevent multi-billion dollar write downs. Unless of course the target company has engaged in an on-running, long term fraud…

Happy Thanksgiving to all…

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I will be discussing the recently released FCPA Guidance next Tuesday afternoon in a webinar, hosted by World Compliance. The event will be held at 2 PM CST. Details and registration can be found here. I hope that you can attend.

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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

November 20, 2012

Rachael Carson, Silent Spring and Compliance Leadership

One of the constant tensions in any corporate compliance department or legal department is when to exercise leadership. While many corporate executives fall into the “lawyers are better seen than heard from” camp there are times when we must say ‘No’. While Mike Volkov continually sounds the horn against compliance practitioners becoming ‘Dr. No’ to which I would add inhabiting ‘the Land of No’ it’s a component of the job. The question is twofold; when to say no and how to say no.

This year is the 50th anniversary of the publication of Rachael Carson’s seminal and transformative work “Silent Spring” which in many ways directly led to the modern environmental movement. Rachael Carson’s “life shows that individual agency, fueled by resolution and hard work, has the power to change the world.” The first Earth Day, on April 22, 1970; the creation of the Environmental Protection Agency (EPA), which began operations in 1972; the banning of the use of the pesticide DDT in the United States and the enactment of both the Clean Water Act in 1972 and the Endangered Species Act in 1973; all of which began with Carson’s book.

I thought about this question of when and how to say no when reading a recent article in the New York Times (NYT) by Nancy Cohen, entitled “From Calm Leadership, Last Change. In this piece Cohen looked at the life of Rachael Carson, her seminal work “Silent Spring” and leadership. Silent Spring was on the seminal works that I read during college. I was absolutely overwhelmed by the wealth of information and data that Carson packed into her book. While I had some sense of the importance of the book as one of the first on what we now call environmentalism, at that time I was not aware that the book and Carson played a central role in starting the environmental movement, by forcing government and businesses to confront the dangers of pesticides.

What are the compliance leadership lessons that Carson’s experience demonstrate? Cohen initially noted that “As a professor at Harvard Business School, I encountered the great depth of her work when I was creating a course on the history of leadership.”
Cohen learned that Carson wrote “Silent Spring” as she battled breast cancer and after her niece died cared for her young child. Additionally, while “Unmarried and living in Silver Spring, Md., she also cared for and financially supported her ailing mother.” More importantly, after the book was published, Carson “faced an outburst of public reaction and a backlash from chemical companies. Yet throughout her personal and public struggles, she was an informed spokeswoman for environmental responsibility.”

Cohen gave three topical examples of Carson’s leadership which I believe are important for the compliance practitioner which speak to the question of ‘how’ to say ‘No’ when required to do so. The first is the importance of persistence in pursuing an objective. Business executives are usually struck by the ability to stay focused on goals in the face of obstacles.

Second, Cohen wrote about “the importance of doing thorough research and taking the long view. This means more than simply knowing the facts but also an understanding of history and culture are essential to understanding what is at stake in difficult and uncertain situations.” Cohen believes that this has the advantage of conferring “a sense of authority on the person who has acquired this knowledge.” In the compliance arena, this means more than simply understanding the obligations under the relevant anti-corruption and anti-bribery laws which apply to your company, such as the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act, but applying them in jurisdictions across the globe.

The third lesson that Cohen writes about is that “the juggling of personal demands and professional ambitions in dealing with obligations to others while following professional drive. Carson’s story shows that times of great productivity can be followed by fallow periods when ambitions must be put aside for personal reasons.”

In addition to these three, others lessons can be drawn from Carson’s work. As noted by Cohen, Carson’s “life shows that individual agency, fueled by resolution and hard work, has the power to change the world.” For the compliance practitioner it is that leadership can come in all forms, in all shapes and sizes, even in an introvert. While most people assert leadership with traits such as charisma and aggressive, Cohen quoted Susan Cain, author of “Quiet: The Power of Introverts in a World That Can’t Stop Talking”, for the proposition that leadership can come in less obvious forms.

Leadership does not always come from the alphas of the world but sometimes from the introverts. The world might have been very different today if this most soft-spoken woman had not been so determined. As compliance practitioners we can not only draw inspiration from Rachael Carson’s work but leadership lessons 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

November 19, 2012

The FCPA Guidance: An Exploration of ‘Corruptly’ and ‘Willfully’

I am back from my surgery and convalescence and I wanted to thank everyone for the good wishes and thoughts. I would also like to give a very big special thanks to Mary Shaddock Jones for her entire series of timely and topical articles that she and her associate Miller Flynt wrote while I was out. I would also like to thank Candice Tal, Founder and CEO of Infortal Worldwide and Alexandra Wrage, Founder and President of Trace International, for their articles as well. I hope that you enjoyed the articles from all of these great compliance practitioners.

Today I wanted to begin to look at the Department of Justice (DOJ) “A Resource Guide to the U.S. Foreign Corrupt Practices Act” (the “Guidance”), which was released last week and available (at no cost) here. My review will be through the prism of Major League Baseball (MLB) and the events last week where the owner of the Florida Marlins completely and utterly neutered the team through the fire sale give away of all of the team’s talent. The giveaway of the Marlins talent was so devastating that I can only say that the Houston Astros are no longer the worst team, nor have the lowest payroll, in baseball. Jeffrey Loria, owner of the Marlins, promised all of the Marlin fans, politicians and voters of south Florida that if they publicly funded a new stadium for him to the tune of $400MM, he would commit to paying for and fielding a competitive baseball team. Not only did he not tell the truth to those folks, he apparently continued to ‘dissemble’ while assembling his now traded talent. According to Sports Illustrated, “Shortstop Jose Reyes and left-hander Mark Buehrle, two of the five Marlins headed to Toronto in a pending blockbuster, are upset that the team broke verbal promises to them regarding trades, according to major-league sources. The Marlins do not award no-trade clauses, but club officials, while recruiting Reyes and Buerhle as free agents last offseason, assured both players that they would not be moved, sources said. Buehrle knew the Marlins’ history of dumping high-priced players, and it concerned him, according to a friend. Team president David Samson, however, told both Buehrle and his wife, Jamie, that the team was committed to a long-term vision, sources said. A source close to Reyes, asked if the shortstop also received verbal assurances from the Marlins that he would not be traded, responded, “The answer is yes. A vehement yes.””

I thought about the above while reading the Guidance. Initially I would note that despite the protestations of numerous of the FCPA commentariatti, the Guidance is an excellent resource for the compliance professional. It collects, in one very usable volume, the DOJ and SEC enforcement actions, Opinion Releases, current compliance best practices, and relevant Prosecutorial and Sentencing Guidelines. The item which caught my eye with regard to the Marlins giveaway of their players was the section on “What Does “Corruptly” Mean”. Fortunately for Loria, he is not subject to the FCPA as the definition cited by the DOJ reads as follows:

In order for a corporation to be criminally liable under the FCPA, it must be found to have acted corruptly. The word “corruptly” is used in order to make clear that the offer, payment, promise, or gift, must be intended to induce the recipient to misuse his official position; for example, wrongfully to direct business to the payor or his client, to obtain preferential legislation or regulations, or to induce a foreign official to fail to perform an official function.

The Guidance goes on to relate that the FCPA focuses on intent, so that it does not require that a corrupt act succeed in its purpose. Further, a foreign official need not solicit, accept or indeed receive a bribe for the FCPA to be violated. The Guidance points to the Innospec enforcement action in which “a specialty chemical company promised Iraqi government officials approximately $850,000 in bribes for an upcoming contract. Although the company did not, in the end, make the payment (the scheme was thwarted by the U.S. government’s investigation), the company still violated the FCPA and was held accountable.” Further this is why “Regardless of size, for a gift or other payment to violate the statute, the payor must have corrupt intent—that is, the intent to improperly influence the government official. The corrupt intent requirement protects companies that engage in the ordinary and legitimate promotion of their businesses while targeting conduct that seeks to improperly induce officials into misusing their positions.”

But beyond corruptly, for an individual to be criminally liable under the FCPA, that person must act ‘willfully’. The Guidance notes that the FCPA does not define ‘willfully’ but the Guidance points to its construction by federal court decisions. Indeed in US v. Kay, the US Supreme Court upheld jury instructions stated that willfully is “knowledge that [a defendant] was doing a ‘bad’ act under the general rules of law” thereby connoting a willful act is one which is committed both voluntarily and purposefully, and with a bad pursose in mind. The Guidance went on to cite the US Supreme Court in Bryan v. United States, for the proposition that “[a]s a general matter, when used in the criminal context, a ‘willful’ act is one undertaken with a ‘bad purpose.’ In other words, in order to establish a ‘willful’ violation of a statute, ‘the Government must prove that the defendant acted with knowledge that his conduct was unlawful.’”

So what if we look at Jeffery Loria under these two requirements of the FCPA? First, under the corporate requirement of ‘corruptly’ do you think that he misled the voters of Florida when he told them that if they built it, they (top notch ballplayers) will come because Loria would pay for them. Remember its “offer, payment, promise, or gift, must be intended to induce the recipient” but that payment does not have to be made, or in Loria’s case withdrawn. What about under the individual requirement of ‘willfully’ regarding Loria’s and the Marlin’s statements to the players it signed? Here the standard is “knowledge that [a defendant] was doing a ‘bad’ act under the general rules of law”. Were they doing a bad act when they promised that they would not be traded and then they were unceremoniously traded? I guess the bottom line is that Mr. Loria had better be glad he is not subject to the UK Bribery Act where bribery of both public officials and regular citizens is a violation of that law.

Or here in Houston we could simply celebrate that there is a worse owner than Jim Crane because, you know, we got new Astros uniforms from him. I feel better 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

November 16, 2012

Share more. Spend less. Reduce Risk.

Alexandra Wrage, President of TRACEEd. Note-today we have a guest post from Alexandra Wrage, President of  Trace International.

Well over a thousand people with an interest in enhancing transparency worldwide met in Brasilia for the International Anti-Corruption Conference last week to share best practices, brainstorm, promote new ideas and, often, just to complain about the slow pace of change.

At this conference, as elsewhere, three themes have emerged.

1.The burden on companies will continue to grow.

Governments hoping to have an impact on transnational crime recognize that exerting pressure on multinational companies is the most expedient way to proceed. Governments are hampered by legal obstacles and political sensitivities and cannot easily reach across borders to solve significant social, economic and security challenges. They can, however, require their companies or companies listed on their exchanges to work to reduce bribery (the FCPA and similar laws in other jurisdictions), curb the use of forced or trafficked labor (California Transparency in Supply Chains Act of 2012), reduce violence associated with conflict minerals (Dodd-Frank Wall Street Reform and Consumer Protection Act), and prevent money laundering, (various new initiatives impacting the financial services industry).

2.The current pace of expenditure on compliance is unsustainable.

The numbers of employees companies are expected to train on compliance topics, using both on-line and in-person training, is increasing. Many companies have determined that it’s simpler to just train everyone rather than invest the resources to sort and track different categories of employees. Companies are searching denied parties lists with increasing frequency. Ten years ago, many companies searched only the entity name and only upon contract renewal. Many now prudently search the entity name and the names of all owners, — and they search weekly or daily. The world of due diligence has probably changed the most dramatically as companies are encouraged to seek certainty in all of their relationships. Certainty isn’t available at any price, and near-certainty is very expensive indeed. Companies spend breathtaking sums to try to prove that a media report is not true, that a rumor is unfounded or that a government official’s golf buddy is not likely to trade on the relationship.

And that’s just for compliance with the FCPA. Now companies are looking at setting up parallel due diligence systems to vet their suppliers with respect to their use of conflict minerals or for egregious labor practices. The former may be the purview of the procurement department and the latter the responsibility of the labor and employment group. Multiple processes, occasionally duplicative and often without visibility across departments, result in mounting expense, compliance fatigue and employee cynicism.

3.Companies will have to choose between a more collective, shared-cost approach to compliance, doing too little or paying too much.

Companies have, on the whole, not been able to overcome their queasiness about ill-defined anti-trust concerns or their natural instincts to avoiding sharing information with competitors. That needs to change for the business community to begin stemming the financial hemorrhage and increasing levels of risk.

Here are just three examples of how this could work. Spoiler alert: one is a TRACE project of which we’re very proud.

On-line training: Currently, companies choose either to create their online training in-house with some combination of video vignettes and PowerPoints or pay for generic or moderately tailorable off-the-shelf training that isn’t always relevant to their industry or the regions in which they operate. Instead, industry groups could get organized.  They could pool the resources of their members to create an on-line training module tailored to the specific needs of that industry, with carefully selected case studies relevant to their respective employees, pay a third party LMS to host the module and then share the product amongst the contributors. The benchmarking and exchange of expertise around the roll-out ensures a high-quality product. Everyone gets trained to the same high standard and the cost is shared.

Model policies: Most compliance experts agree that a purely off-the-shelf compliance program is inadequate and companies simply cut and paste their program at their peril. On the other hand, there are component parts of any compliance program that are largely duplicative and vary little. Companies can benefit from perusing the policies of other multinationals and highlighting the aspects relevant to their business. Once this benchmarking step is complete, in-house counsel or compliance experts are in an informed position and can speak to their outside counsel knowledgeably, making the process more meaningful and less expensive. Similarly, access to databases of policies can support on-going benchmarking efforts for companies keen to maintain their state-of-the-art policies. The United Nations Office on Drugs and Crime maintains such a database with the policies of the Global Fortune 500. Industry groups could also work to pool redacted policies for the benefit of all members.

Due diligence: Currently, companies – in-house or through vendors – collect baseline due diligence information about their third party representatives including ownership, ties to the government, past misconduct, denied party hits and compliance certifications. And then the next company does the same thing all over again. The collection of this first round of information is labor-intensive and requires attention to detail, but – apart from the fact of the relationships themselves – none of the information gives rise to either competitive or anti-trust concerns.  Intermediaries themselves will tell you that they are being bludgeoned with repetitive, near-identical requests for information from multiple companies. Instead, third parties could be invited to answer all questions and upload documentation once to a secure global platform, subject to rigorous verification and continuous watch list screening, and all companies could have access to this baseline due diligence with the third party’s approval. (As foreshadowed, TRACE has built this public tool – TRACnumber.com)  Companies pay nothing. Third party intermediaries pay a modest fee to fund the platform and the translation and verification process. The information is shared, saving both parties the cost and delay of duplicative efforts. (Click here to see a 90-second animated video on TRAC.

There are a lot of smart and creative people working in the field of compliance, including the intrepid but briefly incapacitated host of this blog. Accomplishing the more basic tasks through these and other collective approaches will free up time and budget, enabling companies to direct their more complex problems to these experts for carefully tailored solutions.

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.

November 15, 2012

Morgan Stanley: “With Thanksgiving”

Ed. Note-we conclude our two week guest series of posts from our colleague Mary Jones with today’s look at the Morgan Stanley declination to prosecute. I want to take this opportunity to thank Mary for her hard and great work and hope that you have found her posting useful for your compliance practice. I know I have found them useful for mine. 

It seems fitting that we end this series the week before Thanksgiving Day on a positive note.  (Well, perhaps not so positive for Garth Peterson, but certainly one for Morgan Stanley)  In an unusual move, the DOJ and SEC charged Garth Peterson with violations of the FCPA, but declined to bring any actions against Morgan Stanley. Both agencies specifically cited the following compliance practices as reasons not to bring an enforcement action against the company itself:

  • Maintaining strong internal controls: The Justice Department credited Morgan Stanley with maintaining a system of internal controls designed “to ensure accountability for its assets and to prevent employees from offering, promising, or paying anything of value to foreign government officials.” The company additionally took care to update such controls on a regular basis “to reflect regulatory developments and specific risks, prohibit bribery, and address corruption risks.”
  • Frequent training on internal policies: Morgan Stanley frequently trained its employees on its internal policies, the FCPA, and other anti-corruption laws.  Between 2002 and 2008, Morgan Stanley trained various groups of Asia-based personnel on anti-corruption policies on at least 54 occasions.  During the same period, Morgan Stanley trained Peterson on the FCPA at least seven times. In addition to live and Web-based training, Peterson participated in a teleconference training seminar in June 2006 conducted by Morgan Stanley’s global head of litigation and the global head of its anti-corruption group, according to the SEC.
  • Written compliance certifications: Morgan Stanley additionally required that each of its employees, including Peterson, provide annual written certifications that employees are adhering to Morgan Stanley’s code of conduct, which includes a portion that directly addresses corruption risks and activities in violation of the FCPA.
  • Frequent FCPA-related compliance reminders:  A Morgan Stanley compliance officer specifically informed Peterson in 2004 that employees of Yongye were government officials for purposes of the FCPA. Peterson also received at least 35 FCPA-related compliance reminders. These reminders included circulations of Morgan Stanley’s anti-corruption code of conduct; policies on gift-giving and entertainment; guidance on engagement with consultants; and policies addressing specific high-risk events, including the Beijing Olympics.
  • Continuous monitoring: The Justice Department further credited Morgan Stanley for its continuous monitoring practices: “Morgan Stanley’s compliance personnel regularly monitored transactions, randomly audited particular employees, transactions, and business units, and tested to identify illicit payments.”
  • Conducting extensive due diligence on all new foreign business partners and for imposing stringent controls on payments made to business partners. “Both were meant to ensure, among other things, that transactions were conducted in accordance with management’s authorization and to prevent improper payments, including the transfer of things of value to officials of foreign governments,” according to the SEC. Morgan Stanley additionally required its employees, including Peterson, annually to disclose their outside business interests.

There are other instances which we can cite to in which the DOJ and SEC declined to take any enforcement actions against companies which exhibited solid compliance programs. I happen to be personally familiar with one case in particular!  In March of 2010, Global Industries, Ltd.  (one of the companies involved in the industry wide investigation of Panalpina) announced that “representatives of the Securities and Exchange Commission and the Department of Justice informed the Company that each agency had concluded its FCPA investigation. Neither agency recommended any enforcement action or the imposition of any fines or penalties against the Company.” Both the General Counsel and I believed that the reason we received this result was due to the following reasons:

  • Historical evidence of a strong FCPA compliance program

–      FCPA policies since 2000

–      FCPA (in person) training since 2000

–      FCPA clauses in contracts with sales agents since 1995

–      FCPA due diligence on sales agents since 2001

–      Consistent “Tone at the Top” emphasizing FCPA compliance

  • Global’s internal controls identified the FCPA issues

–      Internal controls identified issues with a freight forwarder in 2006

–      For one issue identified through the Company’s internal controls, the Company stopped a payment before it was made; thereby preventing a potential FCPA violation

–      Prior to Vetco Gray, in 2006 Global identified issues and held up payment on certain of the freight forwarder’s invoices

–      Audits of other freight forwarding agents identified no similar issues in other geographic areas

  • Management took prompt and effective action

–      Immediate steps taken to preserve relevant documents

–      Immediately implemented temporary enhanced controls, which included Legal Department review of invoices from freight forwarding/customs clearance agents

–      Prompt internal investigation

–      Immediate additional FCPA training of employees

–      Sought advice from FCPA counsel

–      Disciplined several of the employees involved

–      Global senior management issued prompt reminders of FCPA policies and procedures

  • Implementation of an enhanced compliance program

–      Yearly in-person training in dual languages: English/native language

–      Web-based training

–      Training of sales agents and logistic service providers

–      Annual certification of employees, sales agents, and logistic service providers

–      Compliance audits of invoices and supporting documentation

–      Monthly compliance newsletter

  • Thorough investigation and cooperation with the enforcement authorities

–      Global’s audit committee decided to conduct a comprehensive investigation using independent outside counsel

–      Global management and employees cooperated fully with outside counsel conducting the investigation

–      Global cooperated fully with the SEC and DOJ in all respects

–      Global was one of four companies to self-report in the customs/freight forwarder investigation before the DOJ launched an industry-wide investigation

–      Global shared its findings from the comprehensive independent investigation with the SEC and DOJ.

Implementing a solid compliance program, and instilling a culture of compliance, can be done- at a cost which is proportionate to the size of your company.  While there is no “one size fits all” program, there are certain essential elements that should be included in any compliance program to demonstrate a company’s commitment to abide by FCPA mandates:

Board and Senior Management Oversight

Company Compliance Officer –direct reporting to the Board

Standards and Procedures

Code of Conduct

Detailed Policies and Procedures

Contractual Compliance (in terms and conditions of contracts)

Screening

Due Diligence of certain employees, agents, and third parties

Monitoring and Auditing

Anonymous Reporting System

Periodic Evaluation of Program

Promotion and Enforcement

Training

Enforcing through Disciplinary Action

Responding to Violations 

Thank you for listening the last two weeks.  I hope that you found this series beneficial in evaluating and/or improving your own Companies compliance program.

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Mary Shaddock Jones has practiced law for 25 years in Texas and Louisiana primarily in the international marine and oil service industries.  She was of the first individuals in the United States to earn TRACE Anti-bribery Specialist Accreditation (TASA).  She can be reached at msjones@msjllc.com or 337-513-0335. Her associate, Miller M. Flynt, assisted in the preparation of this series.  He can be reached at mmflynt@msjllc.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.

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