FCPA Compliance and Ethics Blog

July 31, 2013

Dylan Goes Electric and Innovation in Your Compliance Strategy

This past weekend was the 48th anniversary of the Newport Folk Festival where Bob Dylan went electric. At this event, Dylan played an electric guitar for the first time publicly. Many of his folk music aficionados were horrified, with some even calling him ‘Judas’. But Dylan changed the face and style of not only his own music and basically created the folk rock genre with that innovation. And of course, he has been electric since that time. Rock on, Bob.

Dylan’s change of style introduces the topic of innovation in your compliance program. Mike Volkov, Donne Boehme, Jeff Kaplan and others often write about creating strategic advantage through your compliance and ethics program. But how can you maintain that strategic advantage? Rita Gunther McGrath, in an article in the June issue of the Harvard Business Review, entitled “Transient Advantage”, says that the “dominant idea in the field of strategy—that success consists of establishing a unique competitive position sustained for long periods of time—is no longer relevant for most businesses.” She believes that businesses need to learn how to launch strategic initiatives “again and again” and that to do so will require a new set of corporate operational capabilities.

I thought about her concept in the context of a compliance program. Certainly innovation is not an alien concept to the compliance practitioner. I have long heard the following quote attributed to former Assistant Attorney General, for the Criminal Division of the US Department of Justice (DOJ), Lanny Breuer, “Your compliance program is a living entity; it should be constantly evolving.” This concept is enshrined in the FCPA Guidance as one of the Ten Hallmarks of an Effective Compliance Program, No. 10 entitled “Continuous Improvement: Periodic Testing and Review”. The Guidance states that “a good compliance program should constantly evolve. A company’s business changes over time, as do the environments in which it operates, the nature of its customers, the laws that govern its actions, and the standards of its industry. In addition, compliance programs that do not just exist on paper but are followed in practice will inevitably uncover compliance weaknesses and require enhancements. Consequently, DOJ and SEC evaluate whether companies regularly review and improve their compliance programs and not allow them to become stale.”

McGrath believes that the life cycle of competitive strategy is outdated and needs to be viewed through the lens of a more fast-moving world which requires more corporate dexterity. She provides “a portfolio of transient advantages” that companies need to use in the way they operate around strategies. Using her eight major shifts, I will tie them to the requirements for a constantly evolving compliance strategy.

  1. Think about arenas, not industries. In the compliance world, this means you need to look outside your industry for opportunities or issues which might impact your company. Remember the Watts Water Foreign Corrupt Practices Act (FCPA) enforcement action? That came about because the company’s General Counsel (GC) read about another company in another industry which used a similar sales model as Watts Water in China. He wondered if his company might have some FCPA exposure and it turned out that the company did. Similarly, if you are doing business in China today and use travel agencies for travel, entertainment, business courtesies, or any other reasons, I would suggest that you take a close look at those practices as soon as possible, based on what has happened to GlaxoSmithKline PLC (GSK) over the past couple of weeks.
  2. Set broad themes, and then let people experiment. Here McGrath talks about ways for a company to “rethink their business model, reinvent their workforces, and rewire their operations.” This is precisely true for the compliance function as well. Most generally, employees want to do business in the right way and ethically. Give them the tools and opportunities to do so through training and support. Two examples might be that if your company still allows facilitation payments, use your employee base to come up with alternative methods of dealing with this issue. You can use smaller employee groups to drive home the message of compliance through less formal training mechanisms which provide more support for them. And here you are only limited by your imagination.
  3. Adopt metrics that support entrepreneurial growth. For the compliance practitioner, I think that increased metrics should mean more monitoring on the back end of transactions. This is because it not only makes good compliance sense, it makes good business sense. So if you have a significant sales spike in a new international region or area, what happened and how do you know? In answering these questions, it is clearly important that management understands the business cause of significant sales increases and that there could be other issues involved in the situation that may require consideration by the compliance practitioner.
  4. Focus on experiences and solutions to problems. Under this prong, I believe the key is to listen to what your employees have to say. Travel to multiple company locations across the globe and meet with as many employees as possible. You can do this through town hall settings with key employee leaders, meetings with key stakeholders and employees identified as high risk, or in smaller groups. Listen to their  concerns and then use their ideas as suggested enhancements to your compliance program; those ideas can often form the basis of a large core of the enhancements to your existing compliance program. After rolling out your enhanced compliance program, during training, you can then give specific examples of how employee input led to the changes in the enhanced program. This engages the employees and made them feel like they were a part of, and had a vested interest in, the company’s compliance program; which in turn can lead to greater employee buy-in.
  5. Build strong relationships and networks. McGrath relates that the most valuable company employees are those with strong internal networks and relationships. This should be music to the ears of a compliance practitioner. Once again the key is engagement but I would also say that it can also be considered internal marketing. For this point I would suggest that you might consider the path taken by Peter Löscher who was hired as the Chief Executive Officer (CEO) of Siemens in 2007, in the depths of the largest bribery and corruption scandal of any company ever (at least to-date). In his first 100 days as CEO, Löscher went on a round the world tour of the company’s facilities, including meetings with customers, local governmental officials and Siemens employees. He accomplished this final component through meetings with local leadership teams, town hall-style meetings with all employees and dinners with top leadership teams in specific locations. He basically learned that Siemens employees were “shocked and ashamed, because they were very proud to be a part of Siemens.” He used these forums as a basis to begin to change the culture of the company which was then enmeshed in what became the world’s largest and most costly bribery and corruption scandal to date.
  6. Avoid brutal restructuring; learn healthy disengagement. While McGrath speaks in terms of restructuring, downsizing or mass firings, I believe that this point also has significance for the compliance practitioner. It may be that some of the ‘old ways’ of doing business need to change. Think about facilitation payments and how thinking has evolved on that topic, even in the past couple of years. Whatever you might think of small bribes they can act as an entry level into the wider world of actual bribery and corruption, remember that facilitation payments are not authorized under the UK Bribery Act. If your company has a UK subsidiary or UK citizens working for it you are required to maintain a ‘carve out’ for the UK subsidiary and UK citizens from your exemption of facilitation payments. This is an administrative nightmare for your books and records and one that many companies do not maintain all that well. But a key is your communication on this point.
  7. Get systemic about early-age innovation. McGrath believes that you must have a process for filling your innovation pipeline with new initiatives. Similarly, in the FCPA world resting on your laurels will not suffice. Here I think that the advice that my colleague, Stephen Martin, partner at the law firm of Baker and McKenzie, is certainly applicable. Martin suggests that each compliance department have a 1-3-5 year plan for upgrading of your compliance program. Such a plan can be reviewed on regular intervals and updated as new information, ideas or techniques become available. Such a plan can be used as your roadmap for moving forward and can be further supplemented by an annual risk assessment which may look more at the business to determine what or how its changes may have modified its compliance risks.
  8. Experiment, iterate, learn. McGrath advises that companies should “focus on experimentation and learning, and be prepared to make a shift or change as new discoveries happen.” In the compliance world, this can mean as new techniques for doing business in compliance become available, as new business models initiate new compliance risks, or as laws change. Witness the recent troubles of GSK in China. I think a clear sign from these events will be the increased anti-corruption enforcement of the Chinese government. It is fair or even right? I do not think that is the question for a compliance practitioner to ask. I think the question should be how can I use this information to help create a more effective compliance program going forward for my company? This might also be a good time to think about the advice I adapted from Michael Maslanka, that being that “all news is good news”. What does this mean for your compliance program? If you make an observation, see if it opens up or closes off other options for you. But the key is to pick an option and then act. And always, as Maslanka suggests, “Repeat until resolution.”

McGrath ends her piece by noting that one thing about strategy that has not changed and that is “it still requires making tough choices”. But by defining how you are going to do business in compliance and then how you will move forward from each new situation that presents itself until the next one will be a critical advantage to keep you from hot water or to help you navigate moving forward with regulators if you find yourself in such a situation.

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, 2013

July 30, 2013

Two Cases from the Fifth Circuit Impacting Claims of Bribery and Corruption

Filed under: Uncategorized — tfoxlaw @ 1:01 am

Over the past two weeks there were two separate Fifth Circuit Court of Appeals cases dealing with allegations of bribery and corruption. In the first case, the Court of Appeals denied the right of a whistleblower under the Dodd-Frank Act, to receive anti-retaliation protection for internally reporting allegations of violations of federal securities laws, such as the Foreign Corrupt Practices Act (FCPA). In the second case, the Fifth Circuit Court of Appeals upheld the right of the US government to seek redress against a corporation, under the theory of vicarious liability, for its employees who accept kickbacks in the context of a government contract.

I.                   Asadi v. G.E. Energy

Last week, the Fifth Circuit Court of Appeals issued its decision in Asadi v. GE Energy (USA), No 12-20522. As noted in a Duane Morris LLP client alert on the decision, it was “hailed as a win for employers because it requires whistleblowers who bring retaliation claims under the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) to show that they suffered retaliation because they reported potential violations to the U.S. Securities and Exchange Commission (SEC). The Fifth Circuit expressly rejected the position adopted by the SEC in its regulations” that being that internally reporting concerns regarding FCPA violations was enough to invoke Dodd-Frank whistleblower protections.

However I believe that the decision was actually a loss for companies, their employees and anyone who believes that compliance with the FCPA is a laudable goal. Now there is no longer any incentive, nor indeed any protection, for employees who make reports of allegations relating to the FCPA internally. The only way to garner such protection for reporting any FCPA allegations is for an employee to run to the SEC and file a whistleblower report.

Corporate America fought long and hard to require that employees report allegations of corruption and bribery internally before they went to the government. The reason that companies made this request was that it was only fair to allow companies to fix problems of which they may not have been aware. While the SEC did not require internal reporting as a prerequisite for Dodd-Frank whistleblowing, it did incentivize such whistleblowers to report internally first before submitting information to the SEC.

But now that incentive is worthless if an employee who does so can be terminated at will for internally reporting concerns about bribery and corruption. The result will be that employees immediately turn to the SEC so that they can at least have the anti-retaliation protections offered under Dodd-Frank. The Asadi case could have had several outcomes but the one the Fifth Circuit left us with is the worst for FCPA compliance of all the possible outcomes.

Further, what about the costs that corporations will incur because of this decision? The cost on one employee’s retaliation lawsuit pales in comparison with the cost of a substantive FCPA or other securities law investigation. Since employees now are required to go to the SEC to invoke whistleblower status and, hence, anti-retaliation protection, they will certainly get the message. So while corporations may have a substantive defense against someone who internally reports allegations and is subsequently fired, the trade-off for the loss of the ability to address and then redress a securities law violation internally is now gone.

II. USA v. KBR

In the case of USA v. Kellogg Brown & Root, No. 12-40447, in a case involving the ‘Anti-Kickback Act’; the Court allowed the US government to intervene in a qui tam suit against Kellogg Brown & Root (KBR) where its employees “allegedly accepted kickbacks from two companies angling to win subcontracts on KBR’s prime contract to service American armed forces in military theaters across the globe.” The underlying facts involve a contract that KBR had with the government for the delivery of logistical services for the US Army under the Logistics Civil Augmentation Program III (LOGCAP III). Two subcontractors, EGL Inc. (EGL) and Panalpina Inc. (Panalpina), who were contracted to assist with the transportation of military equipment and supplies were alleged to have bribed certain KBR employees to “obtain favorable treatment on…subcontracts with KBR such as overlooking service failures and continuing to award new subcontracts despite such failures.” KBR employees were alleged to have accepted kickbacks from EGL on 93 separate occasions. The kickbacks were detailed to be “meals, drinks, golf outings, tickets to rodeo events, baseball games, football games, and other gifts and entertainment.” KBR employees were alleged to have accepted kickbacks from Panalpina on 55 separate occasions. These kickbacks were detailed to be in the forms of “meals, drinks, golf, outings, and other gifts and entertainment.” Both the EGL and Panalpina employees involved pled guilty to charges under the Act. Sometime later two private citizens brought a qui tam suit against KBR and the government intervened.

What is the ‘Anti-Kickback Act’?

The Act prohibits kickbacks, which is “a kind of economic crime”, for subcontracts under US government prime contracts. It was originally enacted during World War II and was most recently updated in 1986. Prior to these amendments, “the government could recover only the value of a kickback and could obtain relief only from the kickback’s recipient or the subcontractor who provided it. The 1986 amendments reshaped the civil damages remedies by permitting, in § 55(a)(1), recovery of double damages and per-occurrence penalties from knowing violators of the Act.” (citations omitted)

The definition of what is a ‘kickback’ is quite broad; broader than the definition of what is prohibited under the FCPA. The Act defines a kickback as “any money, fee, commission, credit, gift, gratuity, thing of value, or compensation of any kind that is provided to a prime contractor, prime contractor employee, subcontractor, or subcontractor employee to improperly obtain or reward favorable treatment in connection with a prime contract or a subcontract relating to a prime contract.” Under the Act “A person may not—(1) provide, attempt to provide, or offer to provide a kickback; (2) solicit, accept, or attempt to accept a kickback; or (3) include the amount of a kickback prohibited by paragraph (1) or (2) in the contract price—(A) a subcontractor charges a prime contractor or a higher tier subcontractor; or (B) a prime contractor charges the Federal Government.”

Court Holding

For the purposes of the appeal it is noted that “the benefits provided to Bennett and other KBR employees were kickbacks given to prime contractor employees by subcontractor employees.” The question for the Court of Appeals was whether the US government can ever bring a suit under the Act, alleging that a company can be vicariously liable for the acts of its employees. The Court noted that the Act allowed the government to “recover from a person” and that Congress had “defined ‘person’ broadly in the AKA [the Act], to include corporations and other business entities.” Further, “Since Section 55(a)(1) makes corporations liable for kickback activity, it requires attributing liability to corporate entities for that activity under a rule of vicarious liability.”

This KBR case is one that corporations should also pay heed to quite closely. The US government need only show that illegal payments, in the form of kickbacks, are received by a US government contractor’s employee for the company to be liable under the Anti-Kickback Statute. The representatives of EGL and Panalpina, who engaged in the bribery and corruption, have already pled guilty under the criminal provisions of the Act so it would appear that the government only needs to show that the KBR employees received the kickbacks. Further, considering the list of what constitutes a kickback is quite broad, including “any money, fee, commission, credit, gift, gratuity, thing of value, or compensation of any kind”, it may not be too hard for the government to prevail at trial.

However you look at it, corporate America did not fair too well in the Fifth Circuit in these two cases.

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, 2013

July 29, 2013

What Is Due Diligence?

What is due diligence? When did due diligence begin? What does it really mean to perform due diligence? Further, how do you tie the information that you obtain in the due diligence process into your ongoing compliance program? I thought about those questions in the context of two very different types of information that I recently came across.

The first is Professor Donald Kagan’s 24 lecture series on Ancient Greece. Kagan, a professor at Yale, is considered to be one of the pre-eminent American scholars on Ancient Greece. I downloaded this lecture series on iTunes U, from the selection of Open Yale courses. For a non-Eli, such as myself, to have access to the lectures of Professor Kagan is a treat beyond words.

The Athenian democracy had many interesting features. The entire citizenship of Athens elected its leaders annually. One of the interesting features of the Athenian democracy was that before each election there would an exhaustive background investigation into each candidate, including their financial dealings, legal proceedings, military service and other relevant factors which might provide information on their character and fitness to hold office. After their one year tenure, there would be an audit of the former office holders’ finances to determine if anything was askance or if there was evidence of bribery and corruption. All of that sounds like a fairly robust program to determine the qualifications of a leader beforehand and then a backend determination if there was any indicia of bribery and corruption which could be further investigated if required.

Lest you think that there was no management of politicians during their term, there were 10 votes annually on whether a leader was doing his job. If there was a majority vote against the politician, he would have to go court to defend himself by proving that he was performing his job correctly and going to court in ancient Athens, meant a trial before the entire body of eligible voters. If the politician lost, he was thrown out before the end of his one year term. If he won, he reassumed his elected duties.

So the ancient Athenians had pre-election due diligence, management of the relationship during their annual term and then a post-relationship audit. Not too bad a system, particularly when you consider that it was developed over 2500 years ago.

The second item of interest was an article in the New York Times (NYT), High & Low Finance column of Floyd Norris, entitled “Intersection of Fraud and Traffic Violations”. The article was quite fascinating. It reported on a study by Robert Davidson, who teaches accounting at Georgetown University, along with Aiyesha Dey, of the University of Minnesota, and Abbie Smith, of the University of Chicago. Norris reported that “Their results are reported in a paper, “Executives’ ‘Off-the-Job’ Behavior, Corporate Culture and Financial Reporting Risk,” which is to appear in the Journal of Financial Economics.”

The bottom line is that if your company’s Chief Executive Officer (CEO) “likes to drive too fast, watch out. He may be more likely to commit fraud.” However, (and perhaps counter-intuitively) “If he lives too high on the hog, worry about whether he is paying enough attention to work to catch fraud being committed by his subordinates. And there may be a greater chance that the company is making mistakes in its accounting, though not fraudulently.”

The authors used some interesting investigative techniques for their paper. First they examined “fraud cases that the Securities and Exchange Commission [SEC] filed over the years — covering frauds that began between 1992 and 2004.” Next, the “researchers looked for other companies that were as similar as possible to the companies that were caught. Those companies were of similar size, had similar balance sheets and similar prefraud stock market performance as the fraudulent companies and were in the same industries.” This netted them “109 companies where fraud was detected and 109 similar ones where it was not.” The next step was the one that I found the most interesting, “The academics then hired private investigators to check out the bosses. They looked for past criminal records, including traffic violations, and they searched public records to see which cars, homes and boats the chief executives owned.”

Norris reported that while “The statistics are far from conclusive — 109 is not a large number — but they may take on a little more weight from the decision of the researchers to investigate an additional 164 chief executives. They came from 94 companies that were forced to restate their financial statements but were not accused of fraud by the S.E.C., and from 70 others chosen at random from the universe of companies that did not have fraud or accounting errors.” Norris believes what the report “could indicate is that people who are willing to violate one set of social norms are more likely to be willing to violate far more serious ones.”

I do not think that his last statement would be too controversial. However, the research went further. The authors of the report “also set out to if what they called unfrugal chief executives run companies that are fundamentally different from those run by bosses who spend less on themselves. To determine that required decisions on just what constituted unfrugal behavior. They settled on a definition involving ownership of homes, boats and cars, which is available from public records. Chief executives were deemed to be unfrugal if they owned a car that listed for more than $75,000, a boat that was more than 25 feet long or a house worth more than twice the average cost of a home near the company’s headquarters.”

Once again, the report findings seemed interesting. The researchers found that “Unfrugal chief executives are no more likely to commit fraud than their colleagues, but they are more likely to run companies where others commit fraud, and they are more likely to run companies that are forced to restate their financial statements.” In other words, they were playing with their expensive toys and not watching the shop.

Norris concludes his piece with the following, “I don’t think any of this proves that a traffic ticket should disqualify someone from running a public company. And it appears that most fraud is committed by chief executives who have no previous record of criminal behavior, so that is hardly the only thing a board should monitor. But the evidence may indicate that boards should routinely run background checks on top officers and on those being considered for such positions. If someone does have a bunch of traffic tickets, or worse, that could be an indication that deeper consideration is needed before that person is given control of a public company.”

I think that Norris has correctly articulated one of the key issues for any compliance practitioner in the due diligence process. What is the analysis that you should use? The FCPA Guidance provides a list of red flags which should be very large warning signs for a company in creating a business relationship with a third party. But beyond this well-known list of red flags, which information is relevant in assessing a third party, corporate CEO or other executive or simply a new hire. Does the fact that someone had a business failure and filed bankruptcy or has a low credit score mean they are prone to corruption? Or does that mean they have an entrepreneurial bend that would be an asset in a company? How about if they went through a major health issue and their health care provider and insurance carrier got into such a dispute over payment it affected the person’s credit score? What about multiple marriages, does that demonstrate a lack of stability?

So while Norris’ article does raise perhaps more questions than it has answers, you can take some solace in knowing that the due diligence process you have in your company is not new. The ancient Greeks used in 500 BCE.

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, 2013

July 26, 2013

Sam Houston and the Modern Day Office

Filed under: Best Practices,compliance programs — tfoxlaw @ 1:01 am
Tags:

Sam Houston is one of my heroes and today is the 150th anniversary of the death of Sam Houston. While he cannot claim the title as the “Father of Texas”, as that moniker goes to Stephen F. Austin, he is certainly can claim to be the ‘George Washington’ of Texas. He was the General of the Texican Army, which defeated Santa Ana in 1836 at the Battle of San Jacinto, after which the Mexican dictator granted Texas its independence. He was the first President of the Republic of Texas before Texas was granted statehood and, finally, he was the first Governor of the Lone Star State after admission into the United States. And, unlike our present governor (Governor Goodhair), he argued against secession when the rest of the Deep South seceded in 1861.

Sam Houston had also been a protégée of Andrew Jackson and the Governor of Tennessee. Houston served with Jackson in the War of 1812. He was interviewed by Alexis de Tocqueville for his seminal work “Democracy in America”. But he was also a man with many faults. He once caned a US Representative who he felt had insulted him, his arrest was ordered by Congress for the beating and he was eventually found guilty. While Governor of Tennessee, he was married but separated from his wife who claimed he had been emasculated during the Creek War of 1814. He left the Governorship and went to live among the Cherokee Indians who formerly adopted him as a member of their nation, giving him the nickname ‘The Raven’. Lastly, he had a nasty drinking problem.

In the Financial Times (FT) this past week, in its Weekend Edition, had an article entitled “The office almanac. An insider’s guide to what’s new and what’s not”, by Lucy Kellaway who about her review of the history of the workplace office and what had and had not changed over the past 250 years.

Six new fads that aren’t new

  1. Working from Starbucks. The English invented coffeehouses so that they could conduct business in them.
  2. Working from home. People have always worked from home because there weren’t any offices. Wait a minute – isn’t that the definition of a virtual office?
  3. Paying for internships. 200 years ago, a clerk had to post a bond and work for no pay for an internship with the East India Company. Last year, a week’s internship a Vogue was auctioned off for $42,000. Seems like things may have actually improved.
  4. Eating breakfast at your desk. John Stuart Mill had breakfast at his desk every day. The only difference with today is that Mill had it served and was waited on by a servant.
  5. Twitter. Remember it was Samuel F. B. Morse, who in his first telegram said, “What hath God Wrought?”
  6. Email destroying piece of mind. In 1913, people complained about having to answer one phone call a day. Imagine that.

Six things that really are new

  1. Managers. A truly new phenomenon. But if there were no managers, Kellaway wrote, there would be no meetings, memos and no need for “leveraging” or “delivering solutions.” Think about it.
  2. Liking your job. This was “unheard of”. On the other hand, this may not apply to associates at any law firm.
  3. Women. Women were introduced into the workplace in the late 19th century but were an instant hit.
  4. Competence. It was not until the 1870’s that “to get a job you needed not only to refrain from drooling but also to know some mathematics and Latin too.”
  5. Jargon. When management was command and control, there was no need for jargon, only orders.
  6. Casual clothes. Thank you Apple.

Six things that are eternal

  1. Lust. Office affairs have been going on since…there have been offices.
  2. Badmouthing Colleagues. The need to ridicule colleagues is constant, but now it is done on social media.
  3. Beauty Premium. “Tall, low-voiced and easy on the eye” people tend to do better, except in Iowa where that is the basis for employment termination.
  4. Petty Policies. Companies who cancel the annual Christmas party to ‘save money’ in the face of the best year they’ve ever had. Don’t forget those companies who won’t let people work from home any longer.
  5. Motivational Slogans. At Facebook there are slogans plastered on the wall “What would you do if you weren’t afraid?” After revelations on NSA spying perhaps the better statement would be “Be afraid, be very afraid.”
  6. Paper. In 1975, BusinessWeek predicted a paperless office by the end of the century. Kellaway wrote, “I still predict that the paperless office will arrive no sooner than the paperless toilet.”

Six things that will never come back

  1. Ledgers. The end of the ledger meant that the system of entering things chronologically to be never found again was to be no more.
  2. A graveyard of equipment. Gone are quill pens, blotting paper, typewriters and all other forms of outdated equipment.
  3. Noise. Office noise and yapping on the phone has been replaced by emails and texts, the irony is that now that people wear headphones.
  4. Tobacco. It was once snuff, then cigarettes. “Those people” are now seen on the pavement outside.
  5. Privacy. When was the last time you had an office or one with real walls?
  6. The Tea Lady. One of the greatest gifts to the civilized world by the English, now gone to cost-cutting. Neither Starbucks, nor the water cooler, does the job as well. And besides, the Tea Lady always brews a better cup of tea.

What does this mean for the compliance practitioner? I think it means that are some options for you to communicate. Take the coffee shop, why not have a meeting in a local coffee shop. If one can do business there, why not some compliance and ethics discussions? Moreover, it goes to show that everything old can be new again.

Why is Sam Houston one of my true heroes? Consider his words after being forced from the Governorship because he opposed secession.

Let me tell you what is coming. After the sacrifice of countless millions of treasure and hundreds of thousands of lives, you may win Southern independence if God be not against you, but I doubt it. I tell you that, while I believe with you in the doctrine of states rights, the North is determined to preserve this Union. They are not a fiery, impulsive people as you are, for they live in colder climates. But when they begin to move in a given direction, they move with the steady momentum and perseverance of a mighty avalanche; and what I fear is, they will overwhelm the South.

A good weekend to all.

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, 2013

July 25, 2013

Show Me the Money – Employee Compensation to Prevent Bribery and Corruption

The GlaxoSmithKline PLC (GSK) matter continues to resonate across the compliance world. Ongoing news releases by the company and announcements from named and un-named sources on the underlying facts continue to generate press worldwide. But there are also several important lessons to be learned from this matter. As a compliance practitioner, after you have reviewed or retained someone to review your Chinese operations for you, there are some other interesting points that you might consider for your ongoing compliance efforts.

An article in the Financial Times (FT), entitled “GSK reviews commission policy for sales staff in China”, by reporters Andrew Jack and Lina Saigol, reported that GSK “is considering cutting prescription-linked commissions paid to its sales staff and reducing drug prices in China amid the fall-out from a growing corruption probe.” Such changes in have been made to the GSK compensation model “in other countries, including the UK and the US, where it has overhauled its operations in response to past accusations of aggressive marketing.”

Most compliance practitioners recognize the risk of retaining third parties in their sales chain. But what about the risk of your own employees in the sales chain for bribery and corruption. This was the situation outlined in the Eli Lilly Foreign Corrupt Practices Act (FCPA) enforcement action regarding its bribery scheme in China. According to the Securities and Exchange Commission (SEC) Complaint the FCPA violations centered around various sales representatives in China who submitted false expense reports to cover bribes which were paid or their supervisors who instructed them to do so. The SEC Complaint noted that although the dollar amounts for the gifts provided to Chinese officials were “generally small, the improper payments were wide-spread throughout the [Chinese] subsidiary.” To prevent such actions, a company must train its employees about the requirements of the FCPA, or any other relevant anti-corruption law, regarding what is and is not allowed under such laws.

One of the ten hallmarks of an effective compliance program, found in the Department of Justice (DOJ)/Securities and Exchange Commission (SEC) FCPA Guidance is incentive and disciplinary measures. However the ‘incentives’ discussed most often by the DOJ, SEC and FCPA commentariat involves discretionary bonuses for employees who do business and perform their tasks ‘the right way’. But what if your internal compensation program for your own employees incentivizes bribery and corruption? It is well recognized paying a large discretionary bonus to a third party may well raise a red flag. Why should the same not be true for employee compensation?

One of the keys to such a strategy is the clarity under which it is presented. Jed Yueh, Chief Executive Officer (CEO) of Delphix, interviewed by Adam Bryant in the Corner Office section of the New York Times (NYT), said that it is important to maximize the performance of an entire team, but more importantly “managers can either increase or decrease motivation for their teams.” Yueh believes that motivation comes through clarity. Yueh was quoted as saying, “When you’re building a business, there are so many things you can do, so many avenues you can chase, that you have to very quickly find the optimal path. If you can’t separate the signal from the noise, if you can’t find clarity, it’s going to be very hard for you to manage a group. It’s also going to be easy for you to spend time in all the wrong places. So it’s very difficult to become efficient if you don’t have clarity.” I would emphasize this for employee compensation. If you cannot provide clarity that you will only do business ethically and in compliance with such laws as the FCPA, you will have problems with your employee base.

Yueh had thoughts on the hiring process which I think are quite relevant to the compliance practitioner. He said that “Hiring is the moment when your biggest lever exists for defining the culture. If you don’t know the traits you’re looking for and you haven’t hired around those traits, then you are effectively hiring a wishy-washy culture.” While I have long advocated for the role of Human Resources (HF) in FCPA compliance, Yueh makes clear that it is at that time, during the hiring process, that you can communicate your company values the most forcefully and use that time to weed out those you might cause you grief later.

In another interview in the NYT Corner Office section, Bryant spoke with Helene D. Gayle, President and CEO of CARE USA. Regarding the hiring process, Gayle said she wanted to know the motivation of those who want to work with and for her organization. But more than asking about motivation, Gayle believes “I think the willingness to be candid and open is critical, so I try to probe for people to get beyond the niceties and tell me something that they might not tell somebody else, or to tell me something that might be a little bit shocking and feeling that that’s O.K. to do that. I’ll ask people, “What was the biggest risk that you took, and what did you learn from it?”

By starting those conversations in the hiring process, as suggested by Gayle and Yueh, I think that a company can help to stop hiring employees who may be more problematic for them later. Moreover, by starting the conversation during the hiring process, a company can engage a new employee on how and why the compensation issue is wrapped around its efforts to prevent bribery and corruption.

Large sales driven bonuses may need to be reviewed by both HR and the compliance function. As noted by Jack and Saigol in the FT article, GSK had already changed its sales model for employees in the US and the UK. So we know not only that it can be done, but that it has been done. This may be another lesson for you to consider as the fallout from the GSK bribery scandal in China continues to unfold.

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, 2013

July 24, 2013

Honoring Helen Thomas and Praising FCPA Compliance Policies

This past weekend Helen Thomas passed away. She truly was a one-of-a-kind. The Dean of the White House Press Corp when she died, having covered every president from John F. Kennedy to Barack Obama for United Press International (UPI) and later for Hearst Newspapers. According to her obituary in the New York Times (NYT), entitled “50 Years of Tough Questions andThank You, Mr. President’”, by David Stout “She covered John F. Kennedy’s presidential campaign in 1960, and when he won she became the first woman assigned to the White House full time by a news service.” I remember her for the Hearst syndicated bi-weekly column she wrote on national issues, she would mix in tales of her long reporting career with current events for some great pieces.

I thought about Helen Thomas, her reporting and her columns when I read a recent piece in the Houston Business Journal (HBJ) by John Allen, entitled “Company policies are source and structure of stability”. This article has some interesting and important insights into the role of policies in any Foreign Corrupt Practices Act (FCPA) or UK Bribery Act compliance program. Allen says that the role of policies is “to protect companies, their employees and consumers, and despite an occasional opposite outcome, that is typically what they do. A company’s policies provide a basic set of guidelines for their employees to follow. They can include general dos and don’ts or more specific safety procedures, work process flows, communication guidelines or dress codes. By establishing what is and isn’t acceptable workplace behavior, a company helps mitigate the risks posed by employees who, if left unchecked, might behave badly or make foolhardy decisions.”

Indeed in the Department of Justice (DOJ)/Securities and Exchange Commission (SEC) FCPA Guidance, compliance policies are one of the ten hallmarks of an effective compliance program. The FCPA Guidance states that the DOJ and SEC will consider “Whether a company has policies and procedures that outline responsibilities for compliance within the company, detail proper internal controls, auditing practices, and documentation policies, and set forth disciplinary procedures” in making any assessment of whether to prosecute a company.”

Allen notes that policies “are not a surefire guarantee that things won’t go wrong, they are the first line of defense if things do.” The effective implementation and enforcement of policies demonstrate to regulators and the government that a “company is operating professionally and proactively for the benefit of its stakeholders, its employees and the community it serves.” If it is a company subject to the FCPA, by definition it is an international company so that can be quite a wide community.

Allen believes that there are five key elements to any “well-constructed policy”. They are:

  • identify to whom the policy applies;
  • establish the objective of the policy;
  • explain why the policy is necessary;
  • outline examples of acceptable and unacceptable behavior under the policy; and
  • warn of the consequences if an employee fails to comply with the policy.

The FCPA Guidance list several components of what should be considered in compliance policies and states “Among the risks that a company may need to address include the nature and extent of transactions with foreign governments, including payments to foreign officials; use of third parties; gifts, travel, and entertainment expenses; charitable and political donations; and facilitating and expediting payments.”

Allen notes that for polices to be effective there must be communication. He believes that training is only one type of communication. I think that this is a key element for compliance practitioners because if you have a 30,000+ world-wide work force, simply the logistics of training can appear daunting. Small groups where questions about compliance policies can be discussed and detailed questions raised can be a powerful teaching tool. Allen even suggests posting FAQ’s in common areas as another technique. And please do not forget that one of the reasons Morgan Stanley received a declination to prosecute by the DOJ was that it sent out bi-monthly compliance reminder emails to its employee Garth Peterson for the seven years he was employed by the company.

Interesting, Allen emphasizes “having policies written out and signed by employees provides what some consider the most vital layer of communication. A signed acknowledgement can serve as evidentiary support if a future issue arises.” I also like it when others recognize my ‘Document, Document and Document’ mantra for FCPA compliance.

The FCPA Guidance ends its section on compliance policies with the following, “Regardless of the specific policies and procedures implemented, these standards should apply to personnel at all levels of the company.” Allen puts a bit differently in that “it is important that policies are applied fairly and consistently across the organization.” He notes that the issue can be that “If policies are applied inconsistently, there is a greater chance that an employee dismissed for breaching a policy could successfully claim he or she was unfairly terminated.” This last point cannot be over-emphasized. If an employee is going to be terminated for fudging their expense accounts in Brazil, you had best make sure that same conduct lands your top producer in the US with the same quality of discipline.

One of the things that I think made Helen Thomas great as a reporter was that she did her homework, she researched the issues, sought out knowledgeable sources and then asked direct questions when she was in front of the most powerful person in the world, the President of the United States. In her NYT obit, it stated, “In an interview with The New York Times in May 2006, Ms. Thomas was characteristically uncompromising and unapologetic. “How would you define the difference between a probing question and a rude one?” she was asked. “I don’t think there are any rude questions,” she said.”

I think that the same concept can be brought across to compliance policies. The work may not seem glamorous but it is essential to creating a viable component to any effective compliance program. Allen ended his article with the following “When policies take into account the interests of employees, partners and external stakeholders, and not merely the company’s self-preservation, they can be an excellent source of stability and strength.” This closely mirrors the FCPA Guidance which says that anti-corruption compliance policies, “can be a good way to conserve corporate resources while, if properly implemented, preventing and detecting potential FCPA violations.”

So thank you Helen Thomas and I can’t wait for your first Press Conference in the great hereafter.

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, 2013

July 23, 2013

Astros Swept Again – Is a China Sweep Coming Next?

What is a sweep? It is certainly a well-known and relevant term in the sporting world. This past weekend, the utterly inept Houston Astros were swept by the Seattle Mariners in a three game series. This came about in the face of Astro pitching, tossing a one-hitter and the team still managing to lose 6-2. One for the records I would say. But what about industry sweeps under the Foreign Corrupt Practices Act (FCPA)? I thought about that question in connection with the ongoing revelations of bribery and corruption by GlaxoSmithKline PLC (GSK) in China.

What is a sweep under the FCPA?

The FCPA Professor, in a blog post entitled “Industry Sweeps”, posted an article from FCPA Dean Homer Moyer, entitled “The Big Broom of FCPA Industry Sweeps”. In his article, Moyer wrote  that an industry sweep is the situation where the Department of Justice (DOJ) and/or Securities and Exchange Commission (SEC) will focus “on particular industries – pharmaceuticals and medical devices come to mind — industry sweeps are investigations that grow out of perceived FCPA violations by one company that enforcement agencies believe may reflect an industry-wide pattern of wrongdoing.” Moyer further wrote, “Industry sweeps are often led by the Securities and Exchange Commission (“SEC”), which has broad subpoena power as a regulatory agency, arguably broader oversight authority than prosecutors. They are different from internal investigations or traditional government investigations, and present different challenges to companies. Because the catalyst may be wrongdoing in a single company, agencies may have no evidence or suspicion of specific violations in the companies subject to an industry sweep. A sweep may thus begin with possible cause, not probable cause. In sweeps, agencies broadly solicit information from companies about their past FCPA issues or present practices. And they may explicitly encourage companies to volunteer incriminating information about competitors.”

GSK and Others Used Suspected Third Party Travel Agency

The settlements for FCPA violations by US pharmaceutical companies are well known. Johnson & Johnson (J&J), Pfizer and Eli Lilly immediately spring to mind. But the GSK revelations may bring a new level of scrutiny and may introduce a new term “country sweep”. David Barboza, reporting in the New York Times (NYT) in an article entitled “Files Suggest a Graft Case in China May Expand”, said that “A few weeks ago, when Chinese investigators raided a small travel agency in this fast-growing city, they came upon something startling. The agency appeared to be using fake contracts and travel invoices to help executives at the British pharmaceutical giant GlaxoSmithKline bribe doctors, hospitals, foundations and government officials, Chinese authorities said.” The travel agency was identified as Shanghai Linjiang International Travel Agency. However, perhaps more interesting was the “documents obtained by The New York Times show that in the last three years at least six other global pharmaceutical companies, including Merck, Novartis, Roche and Sanofi, used the same travel agency to make arrangements for events and conferences. The records included invoices for hotel bookings, travel visas and airline tickets to Chinese cities, and to Australia, Italy, Japan, Korea and the United States. One of the drug companies appears to have used the travel agency to make a $2,500 grant to the Cancer Foundation of China.”

Barboza noted that both “Merck and Roche acknowledged using Shanghai Linjiang International Travel Agency.” Barboza wrote that there were several other travel agencies which GSK used but the others have not yet been identified. Barboza said that Chinese official that the travel agency “did very little booking on its own and mostly acted as a “money platform” that allowed Glaxo to create a huge slush fund. According to the government, the travel agency was handling about $16 million worth of Glaxo business a year, but seemed to be doing very little work.”  Barboza quoted Violet Ho, head of China operations for Kroll Advisory Solutions, who said “People don’t realize there’s an active market for fake receipts and that shell companies are used to make bribe payments.”

Just how did the Shanghai Linjiang International Travel Agency garner such work from GSK and others? Barboza said that “How the small agency secured business with many of the world’s biggest drug makers remains a mystery.” Barboza interviewed one of the founders of Shanghai Linjiang International Travel Agency, who said that he sold out to his partners some six years ago. However, this former owner said that his former partner Mr. Weng had come from a restaurant background, not a travel agency background.

In his article, Homer Moyer wrote that “Inevitably, industry sweeps become organic and evolve, with government investigators using information from one company as the basis for additional requests to others.” This may well be the case for pharmaceutical companies which have done business with Shanghai Linjiang International Travel Agency. However, the DOJ and SEC may now take a different tack than simply focusing on one industry. It may well be that there could be a China sweep coming.

Steps for the Compliance Professional

As a compliance professional, one of the key takeaways from the GSK matter should be for you to take a very hard and detailed look at your company’s spend for such organizations. Barboza points out that “using travel agencies, and marketing or consulting firms, to launder money, embezzle or create slush funds to bribe officials is common in China, even at multinational corporations operating in the country.” The first thing is to review the list of such third parties who might provide such services. You should begin by asking such questions as

  • What is the ownership of the third party? Is there a business justification for the relationship?
  • Is there anyone in the company who is responsible for maintaining the relationship? Is there ongoing accountability?
  • How is the relationship being managed?
  • Are you engaging in any transaction monitoring?
  • Are you engaging in any relationship monitoring?
  • What is the estimated or budgeted size of the spend with the third party?
  • What do the actual spends show going forward?

Just as the Wal-Mart FCPA investigation has reverberated throughout the US, I think that the GSK matter will be with us for some time. As bad as it seems about now, and it certainly appears bad, there are many lessons which the compliance practitioner can not only draw from but use for teaching moments within your company. So please do not be like the Astros, who pathetically wasted a one-hit pitching performance in the course of being swept this past weekend, use the GSK saga for your benefit going forward. For it may not be “if you are subjected to a FCPA sweep” but only “when”.

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A big congratulations to Will and Kate for the birth of their baby boy, the Prince of Cambridge.

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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, 2013

July 22, 2013

Froome Wins the Tour and a Victory for Law Firms on Their Privilege

Yesterday Chris Froome won the 100th incarnation of the Tour de France. He held the leader’s position, as signified by wearing the Yellow Jersey, since Day 8 of the Tour. Froome is the second Englishman to win the race in the last 100 years, the first being Bradley Wiggins last year. Perhaps even Cubs fans can take heart from waiting 99 years to win and then having two Brits win it back-to-back. It was a great Tour this year and a big tip of the racing helmet to Chris Froome and Team Sky. (One programing request to the Tour officials – please do not begin next year’s race during the final week of Wimbledon, as my wife has control of the television during that two week event.)

This past week there was a decision by the Georgia Supreme court in the case of St. Simons Waterfront LLC v. Hunter, MacLean, Exley & Dunn, PC (No. S12G1924, decided July 11, 2013). This was a much awaited decision on the extent that a law firm could claim attorney-client privilege for its internal legal consultations in the face of a malpractice claim. The law firm had prepared certain real estate sales contracts, which were used by the firm’s client, St. Simons Waterfront LLC (SSW). After buyers began to opt out of these contracts to purchase certain properties, the law firm suggested that the company negotiate with the purchasers.

I. Background

The company demanded that the law firm work to enforce the agreements. Curriden wrote that “The lawyers for Hunter Maclean took the scolding as a sign that St. Simons Waterfront was planning a malpractice claim against them and contacted the firm’s in-house counsel immediately after the call.” He quoted the lawyer for St. Simons Waterfront who said that “Within minutes of the conference call, Hunter Maclean lawyers were already taking legal steps to defend themselves for litigation, even though they were still representing the client and would continue to represent the client for another three months.”

The law firm understood that their client was threatening litigation and claimed they told the client that it needed new counsel. The client said at no time did it suggest that it was preparing to sue its own lawyers and denies that the law firm told them after the phone call in question that a conflict existed and that they should retain new counsel. Indeed later, the client sued the law firm for malpractice in the drafting of the real estate contracts. The dispute before the Georgia Supreme Court was over certain documents that the law firm claims is its internal attorney-client privileged communications, specifically including a 33-page memo from the firm’s own in-house lawyer describing the Feb. 18, 2008, conference call, referenced above, that lawyers at the firm wrote the day after the telephone conversation occurred.

II. Positions of the Parties

Susan W. Cox, counsel representing Hunter Mclean, said that “The documents and communications sought involve efforts by the firm to investigate, evaluate and consider how to respond to the client’s asserted claim.” Therefore, all communications with the firm’s own in-house counsel should be privileged. However, Attorney John G. Nelson, counsel for SSW, said that this reasoning “makes it too easy for law firms to conceal unethical conduct from clients…If the client’s attorneys consult with the in-house attorney—not for the purpose of meeting their ethical obligations to the client but to cover up their own malpractice, and the in-house attorney assists them in doing so—the firm could withhold that information simply because the in-house attorney was ‘segregated’ from directly representing the client.” Nelson further said that “The reason is simple: When a law firm represents a current client, the entire law firm’s fiduciary and ethical duties are to that client.”

III. Georgia Supreme Court Holding

The Georgia Supreme Court held that the attorney/client privilege was available for the law firm to protect its communications with its in-house counsel. After initially noting that it had not addressed the issue before it, the Georgia Supreme Court specifically stated that it the question before it had no bearing on the ethical obligations of lawyers in Georgia under the state’s Rules of Professional Conduct. Hence, the Court said, “we conclude that the potential existence of an imputed conflict of interest between in-house counsel and the firm’s client is not a persuasive basis for abrogating the attorney-client privilege between in-house counsel and the firm’s attorneys.”

After having said that it would analyze the question before it “as we would in any other lawsuit in which the attorney/client privilege is asserted”, the Court said that a determination is based upon a four-part test.

(1)   There is an attorney/client relationship. Under this prong, there must be a determination “that the attorney purporting to act as the firm’s in-house counsel was actually acting in that capacity with regard to anticipated legal action against the firm or other matters related to the firm’s compliance with its legal and ethical obligations. The firm should be clearly established as the client before or in the course of the in-firm communication for the attorney-client privilege to attach. Whether the firm has attained the status of its in-house counsel’s “client” in a given situation is a fact-based determination, which may depend in part on the procedures undertaken to establish the potential or actual malpractice claim against the firm as a matter distinct from the firm’s underlying representation of the client asserting the claim.”

(2)   The communications in question relate to the matters on which legal advice was sought. The attorney/client privilege attaches only to communications that have been made in the course of an attorney client relationship. Further, the communication must have been made for the purposes of receiving or giving legal advice. The Court stated that “In the law firm in-house counsel context, these principles require that the communications be made between the in-house counsel in its capacity as firm counsel and the firm’s attorneys in their capacity as representatives of the client, the law firm, regarding matters within the scope of the attorneys’ employment with the firm.”

(3)   The communications have been maintained in confidence. The Court emphasized that any such communications must be of a confidential nature to maintain the attorney/client privilege. So “As applied within law firms, this principle means that, in order to maintain privileged status, intra-firm communications regarding the client’s claims against the firm should generally involve only in-house counsel, firm management, firm attorneys, and other firm personnel with knowledge about the representation that is the basis for the client’s claims against the firm.”

(4)   There are no exceptions to the attorney/client privilege that are applicable. Most jurisdictions, including Georgia, recognize exceptions to the attorney/client privilege for communications in the furtherance of “crime, fraud or other unlawful end. So, “to the extent there is an allegation that in-house counsel has been employed by firm attorneys in an effort to defraud rather than merely defend against a client, the privilege may be waived.” However, the Georgia Supreme Court refused to graft on a fiduciary or fiduciary duty exception that “one who is acting in a fiduciary capacity cannot assert privilege to shield its communications with counsel from the beneficiary of the fiduciary relationship.”

IV. Conclusion

The Court’s decision is note-worthy not only for what it says but also for what it doesn’t say. The Court held that an analysis of the attorney/client privilege for a law firm is no different than any other commercial enterprises. But the Georgia Supreme Court holds that any analysis of the duties that a Georgia lawyer or law firm have towards its clients are governed by the Georgia Rules of Professional Conduct and require a separate analysis. As a former in-house counsel I certainly find it troubling if, at the slightest spat between a law firm and a client, the law firm then ‘lawyers-up’ and girds for a lawsuit. One of the greatest things about the legal profession is that it holds the highest duty possible to its clients. If a law firm is taking a position contrary to its client’s interest, it can no longer ethically represent the client.

In an article in the May issue of the ABA Journal, entitled “Inside Story”, author Mark Curriden reported that, “many corporate GCs privately express concerns about what their law firms may be doing behind their backs.” He quoted Randy Johnston, who focuses his practice at JohnstonTobey PC in Dallas on professional malpractice cases, who said “Corporate general counsel have every right to be concerned that their law firm is secretly plotting against them and their best interests, and are doing so without notifying them”. Johnston goes on further to say “In the end, I think there’s only one solution: Law firms should have the right to internal defense and to work product, but the law firm must immediately inform the client when there is a conflict. Failure to tell the client eviscerates the privilege. Period.”

So, while the law firm won this battle over its own attorney/client privilege, it still may be liable at the end of the day. I would suspect that the matter will be resolved and we will never know the full story. But while we wait, let us all remember the spectacular light show the Tour put on during the awards ceremony yesterday and Chris Froome’s historic win.

For a copy of the Georgia Supreme Court’s decision, click here.

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

© Thomas R. Fox, 2013

July 19, 2013

Not Draconian – Gift, Travel and Entertainment Under the FCPA

The Greek ruler Draco has received some very bad PR advice over the centuries. After all, it is his name which is the root for our word draconian. Draco is credited with committing to writing the first Athenian Code of Laws. The laws of Athens previously had been passed along through oral tradition and administered in a quite arbitrary manner. Under Draco’s Code, the prior oral laws, which were known to a special class of aristocrats and were arbitrarily applied and interpreted, were recorded and made known to all literate citizens. The laws also distinguished between murder and involuntary homicide. As it was a codification of existing laws, they remained harsh, with death penalty remaining as the punishment for even minor offences. Today, Draco is remembered for the harshness of his Code, not his innovation in recording it.

I thought about Draco and his legacy when considering the events in China surrounding GlaxoSmithKline (GSK) over the past couple of weeks. Assuming your company does not want to use its travel budget to fund a multi-year, multi-million dollar bribery scheme and further assuming that your company wants to follow not only its own Code of Conduct pronouncement in addition to the strictures of the Foreign Corrupt Practices Act (FCPA); I thought it might be a good time to review how to provide travel and entertainment in compliance with this law. The Draco angle is that if you are intent in following anti-bribery laws such as the FCPA, the procedure is certainly not Draconian.

A.    FCPA Guidance

The Department of Justice (DOJ)/Securities and Exchange Commission (SEC) Guidance clearly specifies that the FCPA does not ban gifts and entertainment. Indeed the Guidance specifies the following:

“A small gift or token of esteem or gratitude is often an appropriate way for business people to display respect for each other. Some hallmarks of appropriate gift-giving are when the gift is given openly and transparently, properly recorded in the giver’s books and records, provided only to reflect esteem or gratitude, and permitted under local law. Items of nominal value, such as cab fare, reasonable meals and entertainment expenses, or company promotional items, are unlikely to improperly influence an official, and, as a result, are not, without more, items that have resulted in enforcement action by DOJ or SEC.”

B.     Opinion Releases

Prior to the FCPA Guidance, in 2007, the DOJ issued two FCPA Opinion Releases which offered guidance to companies considering whether, and if so how, to incur travel and lodging expenses for government officials. Both Opinion Releases laid out the specific representations made to the DOJ, which led to the Department approving the travel to the US by the foreign governmental officials. These facts provided strong guidance to any company which seeks to bring such governmental officials to the US for a legitimate business purpose. In Opinion Release 07-01, the Company was desired to cover the domestic expenses for a trip to the US for a six-person delegation of the government of an Asian country for an educational and promotional tour of one of the requestor’s US operations sites. In the Release the representations made to the DOJ were as follows:

  • A legal opinion from an established US law firm, with offices in the foreign country, stating that the payment of expenses by the US Company for the travel of the foreign governmental representatives did not violate the laws of the country involved;
  • The US Company did not select the foreign governmental officials who would come to the US for the training program;
  • The delegates who came to the US did not have direct authority over the decisions relating to the US Company’s products or services;
  • The US Company would not pay the expenses of anyone other than the selected official;
  • The officials would not receive any entertainment, other than room and board from the US Company;
  • All expenses incurred by the US Company would be accurately reflected in this Company’s books and records.

The response from the DOJ stated: “Based upon all of the facts and circumstances, as represented by the requestor, the Department does not presently intend to take any enforcement action with respect to the proposal described in this request. This is because, based on the requestor’s representations, consistent with the FCPA’s promotional expenses affirmative defense, the expenses contemplated are reasonable under the circumstances and directly relate to “the promotion, demonstration, or explanation of [the requestor’s] products or services.””

In Opinion Release 07-02 the Company desired to pay certain domestic expenses for a trip within the US by approximately six junior to mid-level officials of a foreign government for an educational program at the Requestor’s US headquarters prior to the delegates attendance at an annual six-week long internship program for foreign insurance regulators sponsored by the National Association of Insurance Commissioners (NAIC). In the Release the representations made to the DOJ were as follows:

  • The US Company would not pay the travel expenses or fees for participation in the NAIC program.
  • The US Company had no “non-routine” business in front of the foreign governmental agency.
  • The routine business it did have before the foreign governmental agency was guided by administrative rules with identified standards.
  • The US Company would not select the delegates for the training program.
  • The US Company would only host the delegates and not their families.
  • The US Company would pay all costs incurred directly to the US service providers and only a modest daily minimum to the foreign governmental officials based upon a properly presented receipt.
  • Any souvenirs presented would be of modest value, with the US Company’s logo.
  • There would be one four-hour sightseeing trip in the city where the US Company is located.
  • The total expenses of the trip are reasonable for such a trip and the training which would be provided at the home offices of the US Company.

As with Opinion Release 07-01, the DOJ ended this Opinion Release by stating, “Based upon all of the facts and circumstances, as represented by the Requestor, the Department does not presently intend to take any enforcement action with respect to the planned educational program and proposed payments described in this request. This is because, based on the Requestor’s representations, consistent with the FCPA’s promotional expenses affirmative defense, the expenses contemplated are reasonable under the circumstances and directly relate to “the promotion, demonstration, or explanation of [the Requestor’s] products or services.” 15 U.S.C. § 78dd-2(c)(2)(A).”

C.    Travel and Lodging for Governmental Officials

What can one glean from these 2007 Opinion Releases? Based upon them, it would seem that a US company can bring foreign officials into the US for legitimate business purposes. A key component is that the guidelines are clearly articulated in a Compliance Policy. Based upon these Releases the following should be incorporated into a Compliance Policy regarding travel and lodging:

  • Any reimbursement for air fare will be for economy class.
  • Do not select the particular officials who will travel. That decision will be made solely by the foreign government.
  • Only host the designated officials and not their spouses or family members.
  • Pay all costs directly to the service providers; in the event that an expense requires reimbursement, you may do so, up to a modest daily minimum (e.g., $35), upon presentation of a written receipt.
  • Any souvenirs you provide the visiting officials should reflect the business and/or logo and would be of nominal value, e.g., shirts or tote bags.
  • Apart from the expenses identified above, do not compensate the foreign government or the officials for their visit, do not fund, organize, or host any other entertainment, side trips, or leisure activities for the officials, or provide the officials with any stipend or spending money.
  • The training costs and expenses will be only those necessary and reasonable to educate the visiting officials about the operation of your company.

Incorporation of these concepts into a compliance program is a good first step towards preventing any FCPA violations from arising, but it must be emphasized that they are only a first step. These guidelines must be coupled with active training of all personnel, not only on the Compliance Policy, but also on the corporate and individual consequences that may arise if the FCPA is violated regarding gifts and entertainment. Lastly, it is imperative that all such gifts and entertainment are properly recorded, as required by the books and records component of the FCPA.

The FCPA Guidance does specify some types of examples of improper travel and entertainment as follows:

  • $12,000 birthday trip for a government decision maker from Mexico that included visits to wineries and dinners;
  • $10,000 spent on dinners, drinks, and entertainment for a government official;
  • A trip to Italy for eight Iraqi government officials that consisted primarily of sightseeing and included $1,000 in “pocket money” for each official;
  • A trip to Paris for a government official and his wife that consisted primarily of touring activities via a chauffeur-driven vehicle.

The ongoing GSK investigation will no doubt provide additional lessons for the compliance practitioner. However, you can use the matter as a good reason to review not only your company’s procedures but to test it to determine if they are being followed or if there are issues which you might need to take a closer look at. When a Wal-Mart, News Corp or GSK is in the news for alleged FCPA violations, it provides you with a good reminder to review your compliance program.

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, 2013

July 18, 2013

Is Your Compliance Program Real?

The GSK attitude towards corruption in all its forms is simple: it is one of zero tolerance, whether committed by GSK employees, officers, complementary workforce or third parties acting for or on behalf of the company.

Source: GlaxoSmithKline – Code of Conduct

At the recent Corruption and Compliance Congress, Asia 2013, Seth Berman, Executive Managing Director, Stroz Friedberg LLC, said that ‘Is Your Compliance Program Real?’ is the question that would be asked of a company’s counsel who came in to discuss a potential violation of the Foreign Corrupt Practices Act (FCPA) with the Department of Justice. This question would seem to be apt, in light of the events now transpiring in China with GlaxoSmithKline (GSK) and the ongoing allegations of bribery and corruption that the company now finds itself in the middle of in China.

For those who may not know the story, GSK finds itself in serious bribery and corruption hot water in China over allegations that it funded a bribery scheme to get doctors to prescribe its drugs. According to a story in the Financial Times (FT), entitled “China steps up GSK bribery probe”, Andrew Jack and Leslie Hook reported that “The Chinese authorities have stepped up their investigation into GlaxoSmithKline accusing it of being the ringleader of a half-a-billion-dollar bribery scandal involving 700 companies.” They reported on a briefing given by “Gao Feng, the lead Chinese investigator on a probe into the UK drugs group, said police were examining Rmb3bn ($488m) in deals from as far back as 2007. Chinese police believe that GSK used travel agencies and consultancies as a conduit to bribe doctors and lawyers in order to boost sales and profits.”

In an article in the Wall Street Journal (WSJ), entitled “China Drops Hammer on Glaxo”, Laurie Burkitt and Chris Matthews reported on a televised interview of Liang Hong, the GSK China Vice President and Operations Manager, where he “described for viewers of China Central Television how staffers would allegedly organize conferences that never happened and divert the money to bribe government officials, hospitals and medical personnel to get them to use Glaxo’s products.” He was quoted as saying, “Dealing with some government departments requires some money that couldn’t be claimed normally under company expenses.” Burkitt and Matthews said that “The broadcast follows detailed allegations by China’s Ministry of Public Security on Monday accusing Glaxo of using travel agencies as vehicles to bribe hospitals, officials and medical personnel to sell more drugs at inflated prices. Officials also alleged the travel agencies offered what the officials called sexual bribes to Glaxo executives to keep company business.”

How strong do you think the GSK commitment to anti-corruption is? They certainly seem to say the correct things when confronted with such public allegations. In the FT article, it was reported that GSK said in a company released statement that “These allegations are shameful and we regret this has occurred. We are deeply concerned and disappointed by these serious allegations of fraudulent behaviour and ethical misconduct by certain individuals at the company and third-party agencies.”

But what about their actions? In another article in the FT, by Hook and Jack entitled “GSK is test case in China’s rules laboratory”, they listed a timeline in this matter. They noted that GSK had investigated claims of bribery and corruption and publicly announced that the company had found no such evidence of “bribery or corruption in relation to our sales and marketing…in China”. Further, the company claimed it was unaware of any allegations of bribery of doctors to prescribe its drugs until there was a public announcement by China’s Public Security Ministry on July 11.

We started with Seth Berman’s question and adapting it to GSK, just how real is the company’s compliance program? While I am sure they GSK management, much like Captain Renault in Casablanca is SHOCKED, SHOCKED, to discover that anyone in the company is engaged in corruption, the question remains just how real is the company’s compliance program. One of my FCPA mantras is the following: Document, Document and, Document. The reason being is that if you do not document what you have done, it never existed. So if you have performed the steps necessary to qualify third parties as sales or supply chain partners, it really only counts if you have documented each step in the process.

If your company has Chinese operations, what should you do about now? In another WSJ article by Chris Matthews, entitled “Western Companies Sweat as Glaxo Probe Unfolds”, he warns that “The rapidly unfolding bribery probe by Chinese authorities into the U.K. drug maker has alarmed Western companies with business there that are accustomed to highly-publicized corruption crackdowns on Chinese officials, but who see the Glaxo matter as new territory, China watchers said. The push against Glaxo could signal that a new anticorruption push in China could now also include foreign companies.” I would suggest that a review of your sales operations is in order, as in immediately. Matthews quoted Joe Warin, a partner at Gibson Dunn & Crutcher LLP, who said, “In particular, companies should examine relationships with travel agencies and event-planning companies, which have long been an “Achilles heel” in China”. The first thing that you should check on is to see the spend that you have with any Chinese travel agencies. You should then match up all receipts and other documentation with all costs to see if there is anything out of line.

However, you should also look at your own employee base. Regarding a company’s own employees, Matthew quoted Jerome Cohen, co-director of New York University School of Law’s U.S.-Asia Law Institute, for the following, “This is a fairly obvious warning that companies need to conscientiously scrutinize the activities of their employees there”. Remember the Eli Lilly FCPA enforcement action brought by the Securities and Exchange Commission (SEC) late last year? The bribery scheme which got Lilly into trouble in China involved its own employees, who inflated their expense accounts and used the extra money to pay bribes to secure sales.

It is clear that companies should follow Matthews’ advice that “multinationals need to scour their operations in China to limit their vulnerability to future investigations.” Now is the time to begin your own investigations because you certainly do not want to be like GSK and find out about allegations that your employees engaged in a multi-year, multi-million dollar bribery and corruption scheme through a public pronouncement from the Chinese Public Security Ministry.

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, 2013

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