FCPA Compliance and Ethics Blog

October 31, 2013

It’s the Great Pumpkin: Lessons in Process Validation and Oversight

Today is Halloween and we celebrate the greatest Halloween cartoon in the history of the world, ever, “It’s the Great Pumpkin, Charlie Brown”, which premiered in 1966. As usual, the story revolves around the Peanuts gang, who are preparing for Halloween, Linus writes his annual letter to the Great Pumpkin, despite Charlie Brown’s disbelief, Snoopy’s laughter, Patty’s assurance that the Great Pumpkin is a fake, and even his own sister Lucy’s violent threat to make her brother stop. On Halloween night, the gang goes trick-or-treating. On the way, they stop at the pumpkin patch to ridicule Linus missing the festivities, just as he has done every year. Undeterred, Linus is convinced that the Great Pumpkin will come, and even persuades Charlie Brown’s little sister, Sally, to remain with him to wait. At 4:00 AM the next morning, Lucy awakes up and notices that Linus is not in his bed. She finds her brother asleep in the pumpkin patch, shivering. She brings him home and puts him to bed. Later, Charlie Brown and Linus are at a rock wall, commiserating about the previous night’s disappointments. Although Charlie Brown attempts to console his friend, admitting that he himself has done stupid things in his life also, Linus angrily vows to him that the Great Pumpkin will come to the pumpkin patch next year.

The compliance lesson from Linus’ adventure; it is process validation. Unlike Santa Claus, who we have been repeatedly told “Yes, Virginia there is a Santa Claus”; there has been no process validation for the Great Pumpkin. Linus faints when he thinks he sees the Great Pumpkin rising from his pumpkin patch; unfortunately it is only Snoopy. In the compliance world, process validation comes through oversight. Two of the seven compliance elements in the US Sentencing Guidelines call for companies to monitor, audit and respond quickly to allegations of misconduct. These three highlighted activities are key components enforcement officials look for when determining whether companies maintain adequate oversight of their compliance programs.

Many companies fall short on effective monitoring. This can sometimes be attributed to confusion about the differences between monitoring and auditing. Monitoring is a commitment to reviewing and detecting compliance programs in real time and then reacting quickly to remediate them. A primary goal of monitoring is to identify and address gaps in your program on a regular and consistent basis. Auditing is a more limited review that targets a specific business component, region or market sector during a particular timeframe in order to uncover and/or evaluate certain risks, particularly as seen in financial records. However, you should not assume that because your company conducts audits that it is effectively monitoring. A robust program should include separate functions for auditing and monitoring. While unique in protocol, the two functions are related and can operate in tandem. Monitoring activities can sometimes lead to audits. For instance if you notice a trend of suspicious payments in recent monitoring reports from Indonesia, it may be time to conduct an audit of those operations to further investigate the issue.

Your company should establish a regular monitoring system to spot issues and address them. Effective monitoring means applying a consistent set of protocols, checks and controls tailored to your company’s risks to detect and remediate compliance problems on an ongoing basis. To address this, your compliance team should be checking in routinely with local finance departments in your foreign offices to ask if they’ve noticed recent accounting irregularities. Regional directors should be required to keep tabs on potential improper activity in the countries they manage. Additionally the global compliance committee should meet or communicate as often as every month to discuss issues as they arise. These ongoing efforts demonstrate your company is serious about compliance.

Finally, as was emphasized again with last year’s Pfizer Deferred Prosecution Agreement (DPA), your company should establish protocols for internal investigations and disciplinary action. The Pfizer “Enhanced Compliance Obligations” included the following on investigative protocols:

(a) On-site visits by an FCPA [Foreign Corrupt Practices Act] review team comprised of qualified personnel from the Compliance, Audit and Legal functions who have received FCPA and anti-corruption training;

(b) Review of a representative sample, appropriately adjusted for the risks of the market, of contracts with, and payments to, individual foreign government officials or health care providers, as well as other high-risk transactions in the market;

(c) Creation of action plans resulting from issues identified during the proactive reviews; these action plans will be shared with appropriate senior management and should contain mandatory remedial steps designed to enhance anti-corruption compliance, repair process weaknesses, and deter violations; and

(d) a review of the books and records of a sample of distributors which, in the view of the FCPA proactive review team, may present corruption risk.

Prior to such an investigation, however, the company should have procedures – including document preservation protocols, data privacy policies, and communication systems designed to manage and deliver information efficiently – in place to make sure every investigation is thorough and authentic.

I hope that you have the chance to watch It’s the Great Pumpkin, Charlie Brown again this year. I did. When you watch, think about the compliance implications. Will anyone ever set a ‘second set of eyes’ on the Great Pumpkin? If not, will it ever be validated? I hope that if you are trick-or-treating tonight, you will be safe and dry.

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

October 30, 2013

Reports Just In: Invasions from Mars and the UK Bribery Act

On this day 75 years ago Orson Welles caused a nationwide panic with his broadcast of “War of the Worlds” – a realistic radio dramatization of a Martian invasion of Earth. The show began on Sunday, October 30, at 8 pm. A voice announced: “The Columbia Broadcasting System and its affiliated stations present Orson Welles and the Mercury Theater on the air in ‘War of the Worlds’ by H.G. Wells.” Welles introduced his radio play with a spoken introduction, followed by an announcer reading a weather report. Then, seemingly abandoning the storyline, the announcer took listeners to “the Meridian Room in the Hotel Park Plaza in downtown New York, where you will be entertained by the music of Ramon Raquello and his orchestra.” Then the scare began when a very excited announcer broke in to report that “Professor Farrell of the Mount Jennings Observatory” had detected explosions on the planet Mars. Then the dance music came back on, followed by another interruption in which listeners were informed that a large meteor had crashed into a farmer’s field in Grover’s Mills, New Jersey. The panic was on when as many as a million radio listeners believed that a real Martian invasion was underway.

Fortunately for us Americans, Welles’ show was just that – a dramatized radio show. Just as fortunately for us Americans, and indeed the rest of the world, when it comes to the UK Bribery Act we have thebriberyact.com guys, Barry Vitou and Richard Kovalevsky QC, who continually communicate to us through the shroud of our common language to bring clarity and insight to the UK Bribery Act. Once again proving that they are a prolific duo, they have posted four articles over the past few days which merit discussion.

1.      What’s On Your Mind?

In the first post I want to bring your attention to, entitled “SFO to target UK PLC in corporate crackdown – it’s still all about the money”, the lads discuss some of the issues that the Serious Fraud Office (SFO) must deal with in the enforcement of the Bribery Act. First and foremost is the way in which corporate liability is determined in the UK. “Broadly speaking in the UK the prosecutor needs to finger someone very senior in the Company for criminal liability to be attributed to the corporate.” Further, “the UK position is the opposite of the Respondeat Superior principle in the US” as the “‘directing mind’ principle has to be satisfied.” They go on to note that “evidence to prove the directing mind principle is often hard to find. The SFO Director has (somewhat cynically!) feigned his ‘surprise’ on a number of occasions that the email chain runs out before you get to the main board.” For their recommendation you should read the rest of the article.

2.      Watch This Space

In another post entitled “Corporate prosecutions under the Bribery Act. Racing certainty or outsider? Watch this space” they cite to a talk that SFO Director David Green recently gave at the Pinsent Masons regulatory conference where he said:

“To those who are impatient for the first prosecution under the Bribery Act:-

We still have cases under the old legislation under investigation and awaiting trial.

 The new Act is not retrospective, and covers conduct after 1/7/2011.

Comparisons with the US are misleading. Prosecutions under the FCPA of 1977 did not hit their stride until well into this century.

The DoJ has only last November published detailed guidance on the act, based on the action taken under it thus far.

We have charged our first offences under our Bribery Act. There will be more. We have cases under development.

The SFO will bring the right cases at the time that is right for us.

More generally, the SFO currently has some 13 cases involving 34 defendants (2 of which are corporates) in the court system awaiting their trial. 8 of these trial are listed after April 2014.”

From this, the guys emphasize that now is the time to prepare and get your compliance program into shape as “it would be a mistake to do nothing.” And of course, “Watch this space.”

3.      To Self Report or Not Self Report, that is the Question

A further post, entitled “YES, YES, YES, YEEES, YEEEEES, YEEEEESSSSS. But. SFO Director repeats benefits of Self Reporting. Again”, has SFO Director Green once again extoling the virtues of self-disclosure but he emphasized, “The SFO’s message is carefully expressed and nuanced. Assume the evidential sufficiency test is passed. If a company made a genuine self-report to us (that is, told us something we did not already know and did so in an open- handed, unspun way), in circumstances where they were willing to cooperate in a full investigation and to take steps to prevent recurrence, then in those circumstances it is difficult to see that the public interest would require a prosecution of the corporate.” He then went on to list reasons why a company should self-report. They include:

  • A self-report at the very least mitigates the chances of a corporate being prosecuted.  It opens up the possibility of civil recovery or a DPA.
  • There is the moral and reputational imperative: it is the right thing to do and it demonstrates that the corporate is serious about behaving ethically.
  • If the corporate chooses to bury the misconduct rather than self-report, the risk of discovery is unquantifiable. There are so many potential channels leading to exposure: whistle-blowers; disgruntled counterparties; cheated competing companies; other Criminal Justice agencies in the UK; overseas agencies in communication with SFO; and the SFO’s own developing intelligence capability, to name but a few.
  • If criminality is buried and then discovered by any of the above routes, the penalty paid by the corporate in terms of shareholder outrage, counterparty and competitor distrust, reputational damage, regulatory action and possible prosecution, is surely disproportionate.
  • Last but not least, burying such information is likely to involve criminal offences related to money laundering under sections 327-9 of the Proceeds of Crime Act.

The guys made clear their thoughts on the matter when they wrote, “where a corporate comes in and tells the SFO about something that they do not know; where the disclosure of the issue to the SFO is not ‘spun’; where genuine and comprehensive action is taken to remedy the problem; and, where there is a serious commitment going forward to ensure no repeat *then* it is very *unlikely* that the Public Interest test would be satisfied and so it is *unlikely* that there would be a prosecution.”

4.      Do the Right Thing

And finally, in a post entitled “A purchaser worries about liabilities after buying a business with limited information up front”, the guys were asked a question by a reader which read, “Will my company and my Board of Directors likely be prosecuted if they buy another company which has problems after doing limited due diligence?” If you have ever met the guys or heard them speak, you know that practical advice is their raison d’etre. They said, “The key is that you do what you can and that you do the right thing post-closing. This means that in cases where you have had limited opportunity to do due diligence up front you should make sure that post-closing proper diligence is done. You should be doing this sort of thing anyway as you integrate the new Company into your own business. However, it will be important to specifically include anti-bribery in that process and an independent work stream post-closing to look at compliance (or lack of it) needs to be undertaken. If as part of this you uncover a problem it is important that this is dealt with in the appropriate way, namely properly investigated, fixed, cleaned up and remediated.” “You should ensure that if money laundering reporting obligations are triggered the appropriate reports are made to the authorities. They end by noting, “in our view the chances of the Purchaser itself being prosecuted for the sins of the target if the purchaser ‘does the right thing’ post-closing should be slim.”

Unlike Orson Welles, who gave America a fictitious report of an invasion from Mars, thebriberyact.com guys continue to shine a light on all things Bribery Act related. Their latest reports from the UK clearly indicate that the SFO is picking up steam and moving forward. You do not have to be afraid, but you do have to be very prepared.

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

October 29, 2013

Notes from the Diebold and Stryker FCPA Enforcement Actions

Last week was a heck of a week in the Foreign Corrupt Practices Act (FCPA) enforcement world. Both Diebold Incorporated (DBD) and the Stryker Corporation (SYK) agreed to resolutions of their outstanding FCPA violations.

A.     Diebold

The DBD resolution took the form of a Deferred Prosecution Agreement (DPA) with the Department of Justice (DOJ), along with a fine of $25.2MM, and a Corporate Monitor from the Securities and Exchange Commission (SEC) including $22.9MM in disgorgement and prejudgment interest to the SEC along with an agreed injunction to stop, once again, violating the FCPA. That’s a total fine of $48MM.

The conduct at issue was approved at the highest level of the company and involved multiple bribery schemes, in multiple countries for multiple years. The bribery box score is as follows:

DBD Bribery Box Score

List of DBD Executive, Employee or 3rd Party Involved in Bribery Schemes Illegal Conduct Around Type of Illegal Conduct Those Involved
Executive A Officials at Banks 1 & 2; both in China; Banking officials in Indonesia Approved payments of $1.75 MM over five years; improper trips, gifts and entertainment Executive A & B, Employee A & B
Executive B Officials at Banks 1 & 2; both in China; Banking officials in Indonesia Approved payments of $1.75 MM over five years; improper trips, gifts and entertainment
Executive C Banks in Russia Approved payments of at least $1.2MM
Employee A Banks in Russia Hid illegal payments in books and records
Employee B Hid illegal payments in books and records
Employee C Banks in Russia Distributor 1 & 2,  Executive A & C
Distributor 1 Banks in Russia Made illegal payments
Distributor 2 Banks in Russia Made illegal payments

B.     Stryker

SYK’s penalties were considerably less than those paid by DBD. According to the FCPA Blog, “The SEC said Stryker Corporation will pay $13.2 million to resolve FCPA violations. The bribes totaled about $2 million and were ‘incorrectly described as legitimate expenses in the company’s books and records,’ according to the SEC. Stryker will disgorge to the SEC $7.5 million and prejudgment interest of $2.28 million. It is also paying a penalty of $3.5 million.” SYK received only an Administrative Order, not even a SEC Complaint. Further, unlike DBD, SYK is not required to have a Corporate Monitor to assess its ongoing compliance efforts or its commitment to having a compliance program. The Stryker Bribery Box Score is as follows:

Stryker Entity Bribery Scheme Used Amount of Bribes Paid Illicit Profits
Stryker Mexico Cash payments $76,000 $2.1MM
Stryker Poland Cash payments, illegal travel, lodging, gifts and expenses; charitable donations $460,000 $2.4MM
Stryker Romania Illegal travel, lodging, gifts and expenses $500,000 $1.7MM
Stryker Argentina Commission Payments or Honoraria to Doctors $966,500 $1.04MM
Striker Greece Charitable Donations $197,055 $183,000

C.     Some Comments

1. DBD’s China Investigation

The FCPA Professor noted an interesting nugget from the DBD DPA, in a blog post entitled “Of Note From The Diebold Enforcement Action”, the “It is merely one paragraph in the SEC’s complaint, but it may be perhaps the most notable issue in the Diebold enforcement action (an action based primarily on excessive travel and entertainment payments by subsidiaries – the bulk of which occurred in China). Para. 28 of the SEC’s complaint states:

“Other executives at Diebold were on notice of potential corruption issues at Diebold China. In 2007, a regional government agency in China, the Chengdu Administration of Industry & Commerce (“CDAIC”), opened an investigation involving, among other issues, leisure trips and gifts Diebold China had provided to bank officials. Company executives in China and the U.S. learned of the investigation after a Diebold field office in Chengdu was raided by authorities. Executives A and B took the lead in responding to the investigation. Diebold was able to settle the matter with no corruption charges filed, by paying CDAIC an administrative penalty of 600,000 RMB (approximately $80,000) for business registration violations. Despite being on notice of potential corruption issues at Diebold China, Diebold failed to effectively investigate and remediate these problems.”

In short, the bulk of the conduct at issue in the $48 million Diebold enforcement action was previously investigated by a foreign law enforcement agency and was resolved without corruption charges.”

While I disagree that the bulk of DBD’s illegal conduct involved its Chinese operations, I do agree with the Professor that this is certainly interesting. Is this the mechanism by which the DOJ/SEC were informed about DBD’s conduct? DBD did receive a discount of -5 base points for self-disclosure, full cooperation and demonstrating responsibility for its conduct but it is not clear which, if any, of these three prongs were met. Or, indeed, all of them? Equally interesting is speculating on the level of cooperation between the Chengdu Administration of Industry and Commerce and the DOJ. Or perhaps did it go in a different direction, as the persons cited as taking the lead in responding to this Chinese investigation, Executives A & B, have something to do with resolving the matter at the relatively low cost of $80,000?

2.         Stryker Greece’s Donation to a Public University

From the SYK Cease and Desist Order, there is some interesting information regarding the bribery scheme the company used in Greece. Here the company made a “sizeable and atypical donation of $197,055 to a public university…” Normally I would say that donations to public, i.e. state-owned, universities would not be subject FCPA scrutiny because they are gifts directly to a foreign government. But here the Order specifies that “The donation was made pursuant to a quid pro quo arrangement with the foreign official, pursuant to which Stryker Greece understood it would obtain and retain business…in exchange for making the donation to the foreign official’s pet project. In addition to emails attesting to this quid pro quo nature of the donation, the Order specifies that the donation was “improperly booked as legitimate marketing expense in an account entitled “Donations and Grants.””

Readers will recall the gift of $135 Million by Wynn Resorts Ltd (WYNN) to a foundation which supports the University of Macau. A Wall Street Journal (WSJ) article on this donation, entitled “Macau School Ties Roil Wynn Resorts” and was co-authored by Kate O’Keefe and Alexandra Berzon, reported the Chairman of Wynn’s Board “told analysts last month that the donation was vetted in advance by outside experts,” relative to the FCPA. The donation is apparently not for construction or other infrastructure projects but “the gift will support academic activities.” The WSJ article also reports that the Board of the University foundation includes “current and former government officials” and “a member of the committee to elect Macau’s chief executive”, who is the chancellor of the university.” The SEC opened and closed an investigation into this matter with no enforcement action.

Perhaps it is the clear email trail showing the quid pro quo for the donation but I wish there was more information about the illegal nature of the Stryker Greece donation versus the apparent non-action in the Wynn donation.

For the compliance practitioner, I think there are several clear messages that the DOJ and SEC are communicating in these two enforcement actions. From the DBD enforcement action, if your company finds itself in an investigation which becomes an enforcement action, it must take serious remediation steps during the pendency of the enforcement action. If not you will probably have a Corporate Monitor appointed. So do not wait, remediate now. From the SYK enforcement action, the SEC once again emphasized the importance of internal controls and accurately recording your expenses in your books and records. Neither of these messages are new or earth-shattering but both bear repeating and perhaps providing to your management in a teaching moment.

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

October 28, 2013

Wal-Mart: Be a Leader in Compliance

Lou Reed died yesterday. He was one of the most influential figures in rock and roll history and pop culture over the past 50 years. Starting with his band, the Velvet Underground, Rolling Stone magazine said that the group’s “debut [album] The Velvet Underground & Nico stands as a landmark on par with the Beatles’ Sgt. Pepper’s Lonely Hearts Club Band and Bob Dylan’s Blonde On Blonde.” Moreover, his work was “embraced by future generations, cementing the Velvet Underground’s status as the most influential American rock band of all time.” But his influence went simply beyond rock and roll, including all things hip and cool from fashion to even introducing Dion at his induction into the Rock and Roll Hall of Fame. Reed could even be fashionable while advertising in a TV commercial for Nissan Xterra. Lou Reed was a true leader, in many areas.

In a post last week, entitled “Wal-Mart’s latest FCPA disclosure (October 2013)”, the FCPA Blog reported that Wal-Mart has spent over $155 MM in “costs incurred for the ongoing inquiries and investigations” and costs which “relate to global compliance programs and organizational enhancement.” This is in addition to the reported $157MM in costs for these matters in 2012. So for those of you keeping score at home, that is $312MM in costs related to the company’s Foreign Corrupt Practices Act (FCPA) investigation so far. Wal-Mart is well on its way to becoming the leader in the all-time costs for a FCPA investigation.

Also in the FCPA Blog last week, Michael Scher wrote an impassioned piece entitled “Wal-Mart and the FCPA: An open letter to the DOJ and SEC”. In this post Scher said, “We considered in a prior post the new spirit of tough enforcement at the DOJ and SEC and the need to seize the opportunity for more advocacy by the compliance profession, in particular to head off a resolution of the Wal-Mart investigation harmful to compliance officers and the public.” He urged the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) to thoroughly investigate and bring severe sanctions against the company, if warranted by the company’s actions. His tack differed from that of Matt Ellis, who last December, in a blog post on FCPAméricas entitled “Wal-Mart, Go Big on FCPA Compliance”, urged the company to “innovate by playing to its strengths.” These strengths include both physical size and financial resources which would allow it to “use its enormous leverage in international markets to educate foreign audiences on compliance.” Further, he wrote that “Maybe it could use the high visibility placement of its stores throughout Mexico to begin to teach communities how to identify and avoid risks of petty corruption? It could partner with local municipalities to launch reporting centers in its Supercenters.”

Both of these articles stake out positions with much merit. I would like to suggest another approach; which can be summarized as follows: Wal-Mart – Be a Leader in Compliance. The conduct in which Wal-Mart has engaged in is all in the past. The company cannot change those actions, whatever they may have been, but what the company can control is its actions going forward. So here are my suggestions on how Wal-Mart can be a leader in compliance.

Lead in the Retail Industry

The first thing that I recommend Wal-Mart do is call an executive meeting of the largest retail industry trade group that the company belongs to. I would say that Wal-Mart wants to lead the retail industry in its fight against bribery and corruption on a world-wide basis. Wal-Mart could certainly take some of Matt Ellis’ suggestions to the group about ‘going big’ on compliance. But Wal-Mart, as a leader, could say that we need to agree amongst ourselves that we will not engage in bribery and corruption, nor will we tolerate members that do so. We will urge that our members engage in “Ethical Capitalism” along the lines as laid out by Dov Seidman. We will ask that our retail industry trade group institute an industry wide Code of Practice, similar to that instituted by the International Federation of Pharmaceutical Manufacturers and Associations (IFPMA), which is designed “to stamp out bribery and corruption, particularly in emerging markets.”

Lead at the Chamber of Commerce

In the past, Wal-Mart has supported the US Chamber of Commerce’s efforts to amend the FCPA to add a compliance defense. Some argue this would level the playing field with the US government, while others claim that such a defense would help companies to understand their obligations under the FCPA. Wal-Mart can make clear that it understands quite simply that they, and other US companies, should not do business through bribery and corruption. Wal-Mart should aver that it will take the responsibility upon themselves to lead by example and put a best practices compliance program in place, not only to do business within the parameters of the FCPA but also because it makes good business sense to do so. Wal-Mart should demonstrate they now understand a compliance program is not a set of burdensome rules and procedures, which are designed to constrain how a person does business, but they are essential to the long term success of any organization. The company should embrace that concept and the belief that it should lie at the heart of the way a company does business.

Lead at the Board

While there is some debate as to how the allegations of corruption came up to the corporate headquarters or the initial company response about them; the FCPA Professor has made clear that he believes this scandal is largely a failure of corporate governance. As corporate governance starts at the Board, Wal-Mart should commit to having the most active and knowledgeable Board on anti-corruption matters there is in the US. Wal-Mart should bring in Jeff Kaplan (or some equally notable practitioner, such as the FCPA Professor) to lead Board training on the roles and responsibilities of a Board in overseeing compliance. While the Board does not have to, nor should it, delve down into the weeds of the company’s compliance program, it must understand the parameters and actions of the company’s compliance program going forward and be ready to act if allegations of bribery and corruption are brought forward.

Lead at the CCO Position

One thing that Donna Boehme consistently discusses in talks, articles, tweets, in person and just about everywhere else is that the Chief Compliance Officer (CCO) must be separate from and not report to the General Counsel (GC). The CCO cannot be in any merged unit of the company’s overall legal group. Further, the CCO should report directly to the Audit or other appropriate committee of the Board and not to the GC. The reason for this is clear; it is so that the CCO can have the true independence to make the determinations of what the company can do ethically and in compliance with all relevant national and international anti-corruption legislations. If you keep your CCO buried under the GC on the organization chart, it is clear that legal is more important than compliance.

Lead by Working with the DOJ

Lastly, I would suggest that Wal-Mart call Chuck Duross and Kara Brockmeyer and ask for a meeting. In that meeting the company should lay out all the steps it takes to be a leader in compliance. Its lawyers can certainly make clear that they will defend the company, consistent with the ethical duties and Wal-Mart’s rights as a corporate citizen. Further, the FCPA Guidance suggests that the three goals of a compliance program should be to prevent, detect and then remediate. The conduct that did or did not occur from 2000-2006 is in the past. Wal-Mart is committed to working to remediate what it can do so now. Will such conduct aid it with the DOJ and SEC? Perhaps, but more importantly, Wal-Mart should desire to show that a company can work with the DOJ and SEC, consistent with both their obligations as the enforcement agencies, all towards the goal of greater compliance.

The one thing that I disagree with Michael Scher on is that the DOJ has to hammer Wal-Mart with fines, penalties or criminal prosecutions to support the compliance profession, compliance with the FCPA and doing business ethically. There are business solutions to business problems. If Wal-Mart decides to be a leader in compliance and does so in a public manner, that can do as much for moving forward the compliance profession, FCPA and other anti-corruption law compliance and the general proposition of doing business ethically as well as severe sanctions. Further, if Wal-Mart takes these steps, it can control its future rather than simply reacting going forward.

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

© Thomas R. Fox, 2013

October 25, 2013

BREAKING: In the small print: Huge shake up in UK bribery enforcement, US style whistleblowing & UK False Claims Act

Ed. Note-there have been some recent developments in the UK regarding the Bribery Act. TheBriberyAct.com guys, Barry Vitou and Richard Kovalevsky QC recently wrote about them. I asked if I could re-post their blog post, which they graciously allowed me to do as they continue to ‘Shine A Light’ on all things Bribery Act related…

Buried in the small print and missed by many in the hullabaloo surrounding the launch of the new UKNational Crime Agency (a rebranded roll up of existing crime law enforcement in the UK) are proposals to significantly overhaul the UK approach to dealing with bribery and corruption announced by the UK Home Secretary Theresa May (pictured).

Buried in the press release issued by the UK Home Office was the throwaway line:

“New arrangements for reporting and investigating corruption”

Structure for investigating bribery

In the more detailed strategy paper there is more detail:

“…Bribery and corruption are tools of serious and organised crime. We intend to introduce new systems for reporting corruption and the NCA will lead and coordinate work to investigate corruption in the UK. The Home Office will now coordinate domestic policy in this area.

…Recent research suggests that one in twenty people from the UK have paid a bribe in the last twelve months. This is a higher recorded rate than before.

…The current response to bribery and corruption needs to be improved at both the policy and operational level. Policy on bribery and corruption is currently split across Whitehall and, while good areas of work exist, there is no single Department that is responsible. The Home Office will now take a new lead role in coordinating all domestic bribery and corruption policy, working with the Cabinet Office and DFID to align this with work on corruption overseas. This allocation of responsibilities is consistent with Home Office work on tackling corruption in the police in conjunction with the College of Policing, Her Majesty’s Inspectorate of Constabulary and the Independent Police Complaints Commission (IPCC).

…Blockages in routine intelligence sharing between agencies, fragmentation of the operational response and the lack of an effective reporting mechanism for suspicions of bribery and corruption have all hampered the fight against corruption.

 …The NCA will lead on the assessment of bribery and corruption by organised crime and produce regular reporting on this theme.

 …The NCA will also support investigations into corruption affecting law enforcement agencies and others, for example prisons, where staff are at higher risk of corruption given their proximity to criminals. They will do this through intelligence, threat assessments and, where required, operational support.

...The Economic Crime Command (ECC) in the NCA will oversee the law enforcement response to bribery and corruption more broadly. Where organised criminals are involved, the NCA may either take action itself or coordinate other agencies to ensure that a proportionate operational response is in place. The NCA will work closely with other law enforcement partners including:

• the Serious Fraud Office, which remains the lead agency for investigating large and complex cases of corporate bribery and corruption, and enforcing the Bribery Act in respect of overseas corruption by British businesses;

• the City of London Police, which investigates cases of domestic bribery and corruption and its Anti-Corruption Unit, funded by DFID, which investigates UK citizens and companies involved in bribery or corruption in DFID-funded developing countries; and

• the Proceeds of Corruption Unit in the Metropolitan Police Service, which investigates corrupt politically-exposed persons (individuals who have been entrusted with a prominent public position or are a close relative of such a person) who have laundered proceeds of corruption into the UK.”

A new reporting mechanism

“…We believe that there are strong benefits in creating a new single reporting mechanism and will examine the best way to do this and agree a way forward….”

“…BIS, the Ministry of Justice and the Home Office will consider the case for incentivising whistle blowing, including the provision of financial incentives to support whistle blowing in cases of fraud, bribery and corruption. As part of this work we will examine what lessons can be drawn from the successful ‘Qui Tam’provisions in the US where individuals who whistle-blow and work with prosecutors and law enforcement can receive a share of financial penalties levied against a company guilty of fraud against the government bribery or corruption in DFID-funded developing countries…” [our emphasis]


These are bold and ambitious plans among the small print of a new approach to attacking crime in the UK, lost in the blizzard of press on a Whitehall government shakeup which also took place on Monday and the launch of the third attempt to create an FBI in the UK.

Son of Dodd Frank whistle blowing, a UK version of the false claims act and increased focus on bribery and corruption.

You know where you heard it first.

Everything is up for grabs.  Some will continue to argue this is all jaw jaw and no war.

They may have to eat their words…

October 24, 2013

How Do You Develop a Compliance Practitioner?

The Morrill Act was a seminal moment in American education. This law, passed in 1862, provided that land-grant institutions of higher learning should be created “without excluding other scientific and classical studies and including military tactic, to teach such branches of learning as are related to agriculture and the mechanic arts, in such manner as the legislatures of the States may respectively prescribe, in order to promote the liberal and practical education of the industrial classes in the several pursuits and professions in life.”

Under the Act, each eligible state received a total of 30,000 acres of federal land, either within or contiguous to its boundaries, for each member of congress the state had as of the census of 1860. This land, or the proceeds from its sale, was to be used toward establishing and funding the educational institutions described above. The law had been introduced in the 1850s but the Southern land aristocracy, who most assuredly did not want universal education for the masses, prevented it from being enacted into law. With the South in rebellion, the measure passed in the first Congress elected after the Civil War had begun.

I was at Michigan State University (MSU) this past weekend and one of the school’s biggest points of pride is that it was an original land-grant college, originally named Michigan Agricultural College. I met with the Director of my old graduate program, which is now Human Resources-Labor Relations (HR-LR), Bill Cooke. One of the things that the school does is to train HR professionals. I talked with Director Cooke about my beliefs on how HR ties into a company’s compliance program. That led to a discussion about the training HR professionals receive on anti-corruption compliance programs such as those designed to comply with the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act.

My visit to MSU, and the discussions about training in graduate programs, got me to thinking about the training of a compliance profession. How do you do it? What should go into it? Most compliance practitioners’ experience is somewhat similar to mine; I am a lawyer and worked in a corporate legal department. I was thrown into a compliance role with not little training, but no training. It was simply go to a seminar and learn about FCPA compliance. And, of course, good luck. I had the same happy experience when I was appointed as world-wide export control director. At least I could spell FCPA when I started that role.

What is available out there if you want to learn how to become a compliance practitioner? If you are a law student and attending Southern Illinois University (SIU) School of Law, you could take the FCPA Professor’s upper-level elective course entitled “Current Developments in American Law: Foreign Corrupt Practices Act”. The Professor was interviewed about his class in the Chicago Daily Law Bulletin, in an article entitled “Students take bribe(ry class).” The article noted that through this study of the FCPA itself, its history, judicial decisions involving it, enforcement of it and resolved FCPA enforcement actions, the FCPA Professor believes that “Understanding how the law is enforced and critically analyzing it and developing FCPA compliance skills is really a skill set for any future lawyer to have.” The FCPA Professor also uses this course to expose his students to other areas, “including corporate criminal liability, U.S. Department of Justice and SEC enforcement policies and “a working knowledge of resolution vehicles that are used to resolve FCPA enforcement actions.””

But this is a law school class for (most probably) prospective lawyers. There are many compliance practitioners out there who are not lawyers. In my discussions with Director Cooke there are so many areas where a HR professional can help inculcate compliance into a company’s DNA. Think about some or all of the following areas that are in the core function of HR.

Training – A key role for HR in any company is training. This has traditionally been in areas such as discrimination, harassment and safety, to name just a few and based on this traditional role of HR in training it is a natural extension of HR’s function to expand to the area of FCPA compliance and ethics.

Employee Evaluation and Succession Planning – One of the very important functions of HR is assisting management in setting the criteria for employee bonuses and in the evaluation of employees for those bonuses. This is an equally important role in conveying the company message of adherence to a FCPA compliance and ethics policy. In addition to employee evaluation, HR can play a key role in assisting a company to identify early on in an employee’s career the propensity for compliance and ethics by focusing on leadership behaviors in addition to simply business excellence.

Hotlines and Investigations – One of the traditional roles of HR in the US is to maintain a hotline for reporting of harassment claims, whether based on EEOC violations or other types of harassment. It is a natural extension of HR’s traditional function to handle this role.

I believe that the compliance practitioner needs a multi-disciplinary training. The legal training is a good basis but if you went to a law school like mine, real world discussion were considered what ‘other’ law schools did. Further, there are non-legal areas such as review of financial data and financial controls which are a part of any compliance practitioners remit which also need to be considered. Most of these areas are a part of separate disciplines which need to be tied together for the compliance practitioner.

One resource for such training is the SCCE, which provides a compliance certification through its Compliance Certification Board (CCB) which has developed criteria to determine competence in the practice of compliance and ethics across various industries and specialty areas, and recognizes individuals meeting these criteria through its compliance certification programs. But even these programs only provide a starting point as best practices in a compliance regime continue to evolve, particularly through the use of advanced analytics.

Just as the Morrill Act provided an initial basis for professional studies in agricultural and mechanical disciplines, land-grant colleges continue to evolve. MSU, for instance, wants to be a university to the world. The same evolution is true for compliance practitioners. As our field matures, the need for the development of compliance practitioners will increase. Courses like the FCPA Professor leads for lawyers and the SCCE puts on for compliance practitioners will help drive the next generation of compliance professionals.

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

October 23, 2013

Farewell to Bum and Bud: Trends in FCPA Compliance and Enforcement

Sometimes the universe converges in ways that are quite eerie. This past weekend was such an instance when the most beloved figure in Houston professional sports passed on to the great hereafter; only to be followed two days later by the most reviled figure in Houston professional sports history. The most beloved was Bum Phillips, head coach of the Houston Oilers during the Luv Ya Blue era, when the Oilers twice reached the AFC Championship game, losing both times to eventual Super Bowl Champion, the Pittsburg Steelers. The most reviled was the owner of the Houston Oilers, Bud Adams, who not only fired Phillips because he was too popular but also huffed and puffed and picked up his franchise and moved it to Nashville when the City of Houston refused his extortionate demands for a new stadium five years after upgrading the Astrodome at his behest. It sure ought to be a great get together to watch some football upstairs this weekend.

Although one was beloved and one was reviled, they both were innovators so today I will look at five trends in both Foreign Corrupt Practices Act (FCPA) compliance programs and Department of Justice (DOJ) and Securities and Exchange Commission (SEC) enforcements.

I.                   Transaction Monitoring

In April 2012, the DOJ announced that it was declining to prosecute Morgan Stanley for the FCPA violations of one of its Managing Directors, Garth Peterson, even though Peterson himself pled guilty to FCPA violations. This was the first publicly announced Declination to Prosecute by the DOJ. In announcing the Declination, the DOJ listed several factors including the firm’s extensive compliance policies and notifications thereof, internal controls and training meant to prevent FCPA violations, all of which had been acknowledged by Peterson. However, the one which struck me was that Morgan Stanley’s compliance personnel engaged in transaction monitoring, randomly auditing particular employees, transactions and business units, and testing to identify illicit payments. This was the first time that the DOJ had spelled out transaction monitoring as a key component of a FCPA compliance regime.

In December, 2012, the SEC released its FCPA enforcement action against Eli Lilly and Company (Lilly). Although this was a civil action and not a DOJ criminal enforcement action, I believe that transaction monitoring would have been a key to detecting and preventing the FCPA violations. In Brazil, there was one distributor which received a discounted rate outside the standard discount given. Transaction monitoring parameters could be set to notify internal audit or compliance if such situations occurred. In Poland, there was a clear relationship between the dates of the donations to the charitable entity administered by the Director General who was making the decisions on the sale of Lilly products. Once again transaction monitoring would have correlated this connection and flagged it for further investigation.

II.                International Corruption and Bribery Enforcement

The entry of the Chinese government into the international fight against corruption and bribery is truly a game-changer. While there may be many reasons for this very public move by the Chinese government, it is clear that foreign companies are now on notice. Doing business the old fashioned way will no longer be tolerated. I agree with Mike Volkov that the GlaxoSmithKline PLC (GSK) bribery and corruption investigation will be the Number 1 development for the year in anti-corruption compliance. This means that international (read: western) companies operating in China have a fresh and important risk to consider; that being that they could well be subject to prosecution under domestic Chinese law.

The international component of this investigation may well increase anti-corruption enforcement across the globe. First of all, when other countries notorious for their endemic corruptions, for example India, see that they can attack their domestic corruption by blaming it on international businesses operating in their country, what lesson do you think they will draw? Most probably that all politics are local and when the localities can blame the outsiders for their own problems they will do so. But, when that blame is coupled with violations of local law, whether that is anti-bribery or anti-price fixing, there is a potent opportunity for prosecutions.

III.             Document, Document and Document

The SEC is investigating JPMorgan Chase regarding its hiring practices in China. It appears that JP Morgan Chase hired children of Chinese government officials or heads of state owned enterprises. While such hirings do not violate the FCPA per se, they do raise red flags. The FCPA Professor was quoted in the New York Times (NYT) for the following, “While the hire of a son or daughter itself is not illegal, red flags would be raised if the person hired was not qualified for the position, or, for example, if a firm never received business before and then lo and behold, the hire brought in business.”

This entire episode emphasizes the continuing key concept of the three most important things in any FCPA compliance program; that being Document, Document and Document. If your compliance program does not document its successes there is simply no evidence that it has succeeded. In addition to providing to your company support to put forward to the DOJ, it is the only manner in which to gauge the overall effectiveness of your compliance program. Put another way, if you don’t document it, you cannot measure it and if you cannot measure it, you cannot refine it.

IV.              Risk Management is More Than Simply Risk Assessment

The implementation of an effective compliance program is more than simply following a set of accounting rules or providing effective training. Compliance issues can touch many areas of your business and you need to know not only what your highest risks are but where to marshal your efforts in moving forward. A risk assessment is designed to provide a big picture of your overall compliance obligations and then identify areas of high risk so that you can prioritize your resources to tackle these high risk areas first. Indeed the FCPA Guidance (the Guidance) listed risk assessments as one of the ten hallmarks of an effective compliance program, stating “Assessment of risk is fundamental to developing a strong compliance program, and is another factor DOJ and SEC evaluate when assessing a company’s compliance program.”

In addition to an initial risk assessment to either (1) inform your compliance program or (2) help you to identify high risks and prioritize their remediation, risk assessments should be a regular, systemic part of compliance efforts rather than an occasional, ad hoc exercise cobbled together when convenient or after a crisis. These should be conducted at the same time every year and deputize a consistent group, such as your internal audit department or enterprise risk management team, to conduct the annual review. Such annual risk assessments act as a strong preventive measure if they are performed before something goes wrong. In addition, enforcement trends and government priorities change rapidly so it is vital to stay up to date and conduct regular assessments. Lastly, it avoids a “wait and see” approach.

V.                 Enforcement Actions Against Individuals

Both the DOJ and SEC made clear in the first half of this year that they will aggressively enforce the FCPA against individuals. Mike Volkov has gone so far as to predict that “It is clear that FCPA enforcement for 2013 will go down as the year of criminal prosecutions of individuals.” It is not only significant that the DOJ and SEC are more aggressively prosecuting individuals but also that they continue to use the full panoply of law enforcement tools available to them for actions under the FCPA. These include undercover operations, cooperating witnesses, grand jury proceedings, civil enforcement actions and all other implements at their disposal. It is also clear that the DOJ will give significant credit for substantive cooperation by individuals. Finally, the DOJ will prosecute officials when they have evidence of obstruction or witness tampering and will also use the Travel Act and anti-money laundering (AML) laws to bring enforcement actions.

VI.              Summary

The DOJ and SEC continue to aggressively pursue violators of the FCPA near and far. However, the entry of China into the aggressive enforcement of its domestic anti-corruption legislation may signify a level of increased risk for any company doing business in any of the traditional high risk countries or geographic areas. Further, the individual prosecutions portend an increased risk for persons who engage in corruption and bribery across the globe. Finally, do not forget the basics of any anti-bribery and anti-corruption compliance program remains the same, Document, Document, and Document.

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

© Thomas R. Fox, 2013

October 22, 2013

The Tuck Rule, the Push Rule and Retaliation Against Whistleblowers

Filed under: FCPA,SEC,Whistleblower — tfoxlaw @ 1:01 am
Tags: , , , , ,

I cannot say the missed horse-collar on Johnny Football on the Texas A&M Aggies final series takes the worst officiating call of this past weekend award but the un-sportsman like call against the Patriots on the New York Jets first field goal attempt in overtime ranked as the worst pro-football officiating FUBAR of the weekend. For those of you who missed it, on an otherwise unsuccessful Jets field goal attempt, Patriot Chris Jones was flagged for pushing teammate Will Svitek from behind to violate a rule that says players cannot push teammates on the line of scrimmage into the offensive formation. To say that I am still confused by what happened because after watching about 20 different replays of the play would be an understatement; I still am not sure that actually happened or even if Jones pushed Svitek. I said to my wife that not only had I never heard of that rule, I had never seen a penalty called for such conduct; the TV announcers then said the same thing.

In thinking about that play and the Patriots loss to the Jets, I considered the following: is it now the beginning of the end of the Patriots dynasty which started on an equally obscure rule and penalty, aka “The Tuck Rule”? In the play during a 2001 playoff game, Raiders’ cornerback Charles Woodson sacked Patriots’ quarterback Tom Brady, which in turn, caused a fumble that was eventually recovered by Raiders’ linebacker Greg Biekert, and would have almost certainly sealed the game. Officials reviewed the play and eventually determined that Brady’s arm was moving forward, when it was actually moving backwards, thus making it an incomplete pass. Got it?

It was the first playoff game that Patriot coach Bill Belichick had won as head coach. If the Patriots do not win that game, they do not start a run of three Super Bowl victories in four years and Tom Brady probably never becomes the Golden Boy. Now I wonder if the Patriots 11 year run as one of the NFL’s all-time great franchises has ended with an equally obtuse and obscure rule as the Tuck Rule. I also wonder if the Patriots loss to the Jets portends the beginning of the end of their dynasty; all for the want of a rule no one had ever heard about or had seen enforced. Bookends indeed.

I thought about such obtuseness and obscureness when I ready the Memorandum and Order in Meng-Lin Liu v. Siemens AG, in the US District Court for the Southern District of New York. This case involved a whistleblower, Liu, who claimed that he was discharged by the defendant in retaliation for internally reporting violations of Siemens compliance program in North Korea and China. Liu had brought suit under the Dodd-Frank Act for retaliation against a whistleblower. The New York District Court followed the logic of the Fifth Circuit Court of Appeals in the Asadi decision that the Dodd-Frank Act itself does not explicitly provide for an extraterritorial application of the anti-retaliation provision even though a foreign employee may fall within the definition of a whistleblower for whistleblower award purposes. So even though Dodd-Frank and Sarbanes-Oxley (SOX) protect extraterritorial disclosures, they do not protect extraterritorial employees who make them. Got it, sort of like the Tuck Rule; was his arm moving forward, backwards or does it even matter?

All of this was based in part on the fact that “This is a case brought by a Taiwanese resident against a German corporation for acts concerning its Chinese subsidiary relating to alleged corruption in China and North Korea. The only connection to the United States is the fact that Siemens has ADRs [American Depository Receipts] that are traded on an American exchange.” I guess the Court was unaware of the fact that Siemens paid the largest fine for Foreign Corrupt Practices Act (FCPA) violations in the history of the world, ever. There must have been some US jurisdiction there somewhere.

Next the Court weighs into the “apparent incongruity” that while the Dodd-Frank explicitly incorporates SOX whistleblowing into the anti-retaliation protection provisions; for Dodd-Frank protections to apply there must be a disclosure to the Securities and Exchange Commission (SEC). However, for SOX protections to lie, certain internal disclosures are not only protected but required. The SEC itself promulgated a rule that an employee has anti-retaliation protections if (1) you have a ‘reasonable belief’ that securities has or will occur; (2) you provide that information to the SEC; and (3) report such conduct to “persons or governmental authorities other than the [SEC].”

To further confuse things, the Court accepts a Department of Labor (of all things) interpretation that reporting of FCPA violations does not fall within SOX protections because they are not violations of “any rule or regulation of the Securities and Exchange Commission” or “any provisions of Federal law relating to fraud against shareholders.” The Court then goes on to say that the plaintiff alleges that he reported violations of FCPA-relevant securities laws but the plaintiff’s Compliant does not specifically allege “that rule or specifically address recordkeeping violations.” The Court ends this section by stating that SOX does not “protect disclosures of FCPA violations.”

As the FCPA Professor might say “Say What”? To the plaintiff, they Court is saying that we are dismissing your compliant because you did not list with specificity either the Securities Exchange Act section a company violated in their conduct or address recordkeeping violations. But it really does not matter because even if you had listed them with sufficient specificity, SOX does not protect you, period.

In addition to being a little bit more than confusing, this Court ruling sets corporate compliance programs back on their collective backsides. 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.

Just as the push rule may be the point at which the Patriots begin to tip away from their 11 year run as the best franchise in pro football, the Liu decision may be the bookend with the Asadi decision which portends the end of foreign employee protection against retaliation for internal whistleblowing. It is hard to conceive that neither Congress nor the SEC understood that by its nature, FCPA violations would occur overseas since it is a law which prohibits bribery of foreign government officials, not US government officials. While both the Southern District of New York and the Fifth Circuit Court of Appeals may think they are doing corporations a favor by ruling against international employees who internally report, the reality is that both the Liu and the Asadi decision out of the Fifth Circuit will both hurt corporations in the long run as now employees are only protected if they run to the SEC without giving the companies a chance to investigate, remediate or self-disclose any alleged FCPA violations.

As for the Patriots, the King is dead; long live the [next] King. May your reign be as majestic as the Patriots has been.


Please join me Tuesday, Oct. 22 at noon CDT for a webinar on what I think are the Five Critical Trends in FCPA Compliance for 2014. It is hosted by The Network and you can attend at no charge. For details and registration, 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

October 21, 2013

FCPA Charges Relating to Gift-Giving in China

Ed. Note-today’s post is a chart prepared by Amy Sommers and Matt Morley, partners at K&L Gates. I found it to be a great resource to show FCPA enforcement actions involving gift-giving in China. 

Date Company/Individuals China-related allegations* Key elements of settlement
July 2004  InVision Technologies, Inc (‘In Vision’)Senior Vice President (SVP) for Sales and Marketing and member of InVision Board of Directors A $95,000 financial compensation to distributor in China for delay in shipment but company was allegedly aware of a high probability that some of the funds were to pay for foreign travel.Other misconduct was alleged to have occurred with regard to Thailand and the Philippines. Company2-year non-prosecution agreement (NPA) (DOJ)

$800,000 criminal fine  (DOJ)

$500,000 civil penalty (SEC)

$589,000 disgorgement plus prejudgment interest of $28,703.57 (SEC)

Independent consultant to evaluate the efficacy of GE’S integration of InVision into its compliance program
SVP for Sales and Marketing

$65,000 civil penalty, permanent civil injunction against future violations (SEC)

October 2006 (company)Late 2007
Schnitzer SteelSouth Korean subsidiary of Schnitzer Steel

Executive Vice President (EVP)

Chief Executive Officer (CEO)

$200,000 in cash bribes and other gifts (gift certificates and in at least one instance a $2400 watch) to win business in China.More than $1.8 million in bribes and for gifts and parties in both China and South Korea. CompanySouth Korean subsidiary

Guilty plea and $7.5 million criminal fine

Schnitzer Steel

3-year deferred prosecution agreement (DPA) (DOJ)

$7.5 million criminal fine (DOJ)

$7.7 million civil penalty (SEC)

Independent compliance consultant/monitor


$75,000 civil penalty (SEC)

$186,401 in disgorgement and interest


$25,000 civil penalty
$16,131.90 in disgorgement and interest


September 2007 Paradigm B.V. Unspecified “commission” payments; $100-$200 per person for “inspection” and “acceptance” fees; pay for travel and entertainment to Chinese officials.Other allegations re Indonesia, Kazakhstan, Mexico and Nigeria 18-month NPA (DOJ)$1 million penalty to DOJ

Implement rigorous internal controls

Retain outside compliance counsel

Continue cooperation with the DOJ

December 2007 Lucent Technologies Over $10 million spent on trips for around 1,000 Chinese officials 2-year NPA (DOJ)$1 million criminal fine (SEC)

$1.5 million civil penalty (SEC)

December 2008 Siemens AktiengesellschaftMultiple individuals More than $9 million worth of “study” trips by Chinese doctors to win business.Other allegations re Argentina, Bangladesh, Iraq, Israel, Nigeria, Vietnam, Russia, and Mexico. $450 million criminal fine (DOJ)$350 million disgorgement (SEC)

$770 million (Munich Prosecutor’s Office)

Various results regarding individuals, with jurisdictional issues in many cases

July 2009 Avery Dennison Kickbacks, sightseeing trips ($4,227 for 5 people in 2002) in addition to gifts with an alleged value of $30,000 including 4 pairs of shoes at $125/each – note the low value of this item, but the overall value of all gifts likely an unfavorable factor for the company.Other allegations re Indonesia and Pakistan $200,000 civil penalty (SEC)$318,470 in disgorgement and interest


July 2009 (company)February 2009 to April 2012 (executives) Control ComponentsNumerous senior executives of the company and its subsidiaries Making corrupt payments totaling approximately $6.85 million in thirty- six countries between 1998 and 2007. Benefits given include extensive paid- for vacations by Chinese state-owned enterprise employees to Disneyland, Las Vegas and Hawaii, first class airfare, 5-star hotel accommodations and chartered boats. Also paid for college tuition of children of at least two Chinese state-owned employees.Other allegations re 8 other countries Guilty plea and $18.2 million criminal fine3-year independent compliance monitor with periodic reports to DOJ

3-year organizational probation

Continued cooperation with DOJ in further investigation

*Numerous senior executives also pleaded guilty and sentenced to 4 months imprisonment to 36 months home confinement

December 2009 UTStarcom Inc. Travel & gifts. $7 million for hundreds of overseas trips.  Travel had little or no business component. Details regarding types of gifts in China were not specified; however, the facts disclosed in respect of Thailand included mention of a $600 bottle of wine$4 million in executive training “trips”+ cash allowances during the same. Also references to “lavish gifts” in this section, but without further detail.

Other allegations regarding expenditures and gifts in Thailand and Mongolia.

NPA (DOJ) because of internal investigation and self-reporting$1.5 million penalty (DOJ)

$1.5 million penalty (SEC). Additional compliance obligations


April – December 2010 Daimler AG More than $4 million of “commissions,” travel and gifts.Other allegations regarding 19 other countries DPA (DOJ)Compliance monitor (3-years)

$93.6 million criminal fines and penalties (DOJ)

$91.4 million civil penalties (SEC)


June 2010 Veraz Networks Gifts and improper payments totaling $40,000. At least one supervisor referenced the company’s “gift scheme,” which accounted for $4500 of the $40,000 total.There were additional allegations of bribing a Vietnamese official to win business during the same period. $300,000 civil penalty (SEC) 
August 2010 Alliance One International, Inc. (the predecessor to the companies that took the actions at issue).Four individuals were charged as well based on their roles in the respective companies. Gifts, travel & entertainment expenses. Specific gifts included watches, cameras and laptop computers among other items.There was also bribery in Asia and other regions of the world. $9.45 million criminal fine (DOJ)$10 million disgorgement (SEC)

The individuals paid fines/settlements ranging from $5,000-$40,000

November 2010 Tyco International Chinese subsidiaries paying cash to state owned corporation and paying approximately US$137,000 to third parties who used the funds to purchase gifts for and give cash to government officials. Employees also submitted expense claims for entertaining health care professionals and false travel itineraries and documentation for trips by government physicians. NPA (DOJ)$26 million fines and penalties (DOJ/SEC)

$10,564,992 disgorgement and US$2,566,517 prejudgment interest (SEC)


December 2010 RAE Systems $400,000 in improper payments, including gifts of: a laptop for an executive’s child, jade, fur coats, suits, expensive liquor, and kitchen appliances. NPA (DOJ)$1.7 million criminal penalty (DOJ)

$1,257,012 disgorgement and interest (SEC) SEC alleged violations of the anti-bribery and internal controls provisions

March 2011 IBM Allegations of bribes paid to Chinese and South Korean officials. The allegations relating to the Chinese officials included that they were given gifts such as cameras and laptop computers, in addition to travel. $5.3 million in disgorgement$2.7 million in prejudgment interest

$2 million civil penalty

May 2011 Rockwell Automation, Inc. Approximately $450,000 worth of leisure travel and non-work sightseeing trips (in addition to bribes of about $615,000). $400,000 civil penalty (SEC) (reflecting cooperation and self-reporting)$2.36 million disgorgement and prejudgment interest (SEC)


October 2011 Watts Water Technologies, IncVP of Sales Payments of up to 3% of the contract value to design companies, which resulted in approximately $2.7 million in profits for the Chinese subsidiary. It is unknown how the payments were presented to individuals at the Chinese-based design institutes, but the cease and desist order suggests that some were presented as “gifts” and entertainment. The payments were accounted for as a portion of the sales agents’ commissions, and the company recorded them inaccurately as such in its books and records. Company$200,000 civil money penalty*
$3.58 million disgorgement and interest (SEC)

VP of Sales

$25,000 civil penalty (SEC)

* The Commission explicitly stated the civil penalty was capped at this level as a result of the company’s cooperation.  This cooperation included: a world-wide anti-corruption audit, engaging an outside provider to conduct on-going global training, and hiring a Director of Legal Compliance.  For comparison, business from this subsidiary accounts for only 1% of Watts’ gross revenues

March 2012 Biomet, Inc. and four subsidiaries  Bribes paid to public physicians of hospitals located in Argentina, Brazil and China $17.28 million criminal penalty (DOJ)$5.4 million disgorgement (SEC)

Compliance monitor (18 months)

August 2012 Pfizer From 2003 until 2007, Pfizer China paid for international travel and hospitality for doctors of Chinese healthcare institutions in order to boost prescription of Pfizer products. Incentive programs would pay for doctors’ trips to international conferences if they achieved certain prescription targets. Cash and other gifts were also given.Multiple allegations relating to eight other countries.


DPA (2 years, DOJ)$15 million criminal penalty (DOJ)

$26,339,944 disgorgement and prejudgment interest (SEC)


December 2012 Eli Lilly and Company (“Eli Lilly”)Four of its subsidiaries Buy gifts, pay for entertainment, meals and cosmetics for government-employed physicians to induce doctors to prescribe Eli Lily’s product in China.Other allegations relating to Brazil, Poland and Russia Disgorgement, prejudgment interest and penalties totaling $ 29,298,734 (SEC)Required retention of independent consultant

DOJ investigation remains open

Additional cases of note:
November 2010 Allison Transmission This matter stems from gift-giving in China. The plaintiff was the Managing Director for operations in China, Korea and Japan. He refused to engage in or sanction violations of the FCPA and was fired. The plaintiff has alleged that the FCPA violations he witnessed or heard about included gifts of jewelry and individuals who deliberately lost at “high stakes” poker games. This is a private whistleblower suit because Allison is not a publicly traded company. The suit names the company and two other executives.The case was settled and dismissed in January 2011.
February/ October 2010Declination in
Q1 2011
CB Richard Ellis Unknown, but conduct appears to have related to small gifts. Exact nature of those is unknown. Internal investigation and self-reporting to DOJ and SEC. Ended with declinations by both agencies – very positive outcome for CBRE
April to August 2012 Garth R. PetersonMorgan Stanley Peterson, former head of Morgan Stanley’s Shanghai office, arranged to sell, at a discount, stakes in real estate investment to the chairman of a Chinese state-owned enterprise Garth R. PetersonPleaded guilty and sentenced to 9 months imprisonment

$254,589 disgorgement and relinquishment of improperly gained investment interests (estimated value of $3.4 million)

Morgan Stanley

The DOJ declined to prosecute (reflecting Morgan Stanley’s adequate internal controls and extensive compliance efforts)

October 18, 2013

Ethics, Compliance and School Drop-Off Etiquette

Ed. Note-today we have a guest post from Jay Rosen, Vice President, Language Solutions at Merrill Brink International. He shares with us how he stopped worrying about early morning road rage and learned to embrace his fellow compliant (and noncompliant) parents.

I recently returned from the Society of Corporate Compliance and Ethics 13th annual Compliance and Ethics Institute (CEI) in Washington, DC.  I would like to thank CEI Co-chairs Dan Roach and Odell Guyton, as well as SCCE CEO Roy Snell and his entire team for running and executing one of the premier ethics and compliance conferences in the world.

Last fall, I attended my first SCCE event — the 12th annual CEI.   Over the past year I have been moved by the passion, commitment and generosity of the SCCE and Compliance and Ethics community.  I have developed great virtual and over- the-phone friendships and it is an added bonus to meet in person with colleagues from all over the world and across the country.  I am already looking forward to the 14th CEI which will be held in Chicago from September 14 – 17th, 2014.

With much joy, I was settling back into my routine and taking my five year old twin daughters to kindergarten.  While I was away, one of the parents sent an email to the entire kindergarten class parents list serve which shared the following…

Exhibit 1

 “To the dear parent (mom) who drives a black Cadillac Escalade, when you get to school’s gate in the morning and realize other parents are waiting in front of the gate, please do not go to the other side of the street and make a left turn in front of everyone else who is waiting there before you. I am sure everyone else’s time is as valuable as yours. Thank you for your cooperation.

From: another mom who was waiting outside for ten minutes

Exhibit 2

Dear Mom who was Waiting Outside for Ten Minutes,

Thank you for posting!  Let’s provide a safe learning environment for our children and lead by our positive actions.
Exhibit 3

Dear Jay 

Thank you very much for your support. After two angry e mails from two parents about why I used their e mail to send them this posting, yours is very supporting. I hope at least this posting will help others realize what they do is wrong.

As this is a new experience for kindergartners, going to class with the “BIG” kids, being dropped off by Mommy or Daddy (mostly DaddyJ), the school has made special provisions for parents to drop their children off in front of the kindergarten class between 7:45 – 8:00 AM.  While this is a courtesy for the parents, it is most importantly intended to provide a safe introduction for kids into their new daily school routine.

If a parent arrives before 7:45 AM, they are supposed to simply pull to the curb and wait until the gate opens precisely at 7:45.  Over a five minute span, anywhere between 2 and 7 vehicles will get in line.  Without fail, there are two things that can happen –

  • One parent (usually driving a black SUV, this is LA after all), decides to cut the line, zoom up to the front and power through just as the gates are opening.  Either a case of too many Vente drips this morning, or maybe having recently completed watching all 7 episodes of The Fast and the Furious or
  • Another inventive parent, comes from the other side of the street and executes an illegal U-turn into three lanes of on-coming morning school/rush hour traffic

I have twin 5.5 year old daughters (who many of you know about and have been forced to see all of their pictures… especially “Sassy Girls Going to Disneyland”)and one of them is always concerned with the concept of being “Fair”.  So let’s look at this situation through the lens of being Fair and Safe.

This rule was designed with having our children’s safety in mind.  Let’s create a safe way, to help our children transition into loving their education and at the same time, create a convenient way for parents to drop off their kids.  So far, so good.  Sounds like a good idea.  Right

When one parent begins to feel that his or her time is more “Valuable” than another’s that is where the problems begin.  Hmmm… let’s see if we can paint this dilemma in a business context.  Perhaps there is an industry or global standard designed to ensure workplace safety, clean production of milk powder or even provide a level playing field for conducting global business and winning sales contracts.  Once one parent or Company feels that they are above the rest, we start down a slippery slope.

This hits at the crux of why people and companies should act in an ethical way.  Should we follow rules, laws and industry standards because it is the right thing to do, or should we follow these rules because they have been designed to safeguard certain situations?

Being the recovering screen writer that I am, the vision of Tom Hulce from Animal House pops into my head with a devil and angel hovering over his shoulders.

Obviously, in my potential Pre-School Road Rage Drop-off Scenario, there is only one acceptable way of behaving and it is precisely for both of these reasons.  Safely observe the drop-off to ensure our children’s safety and because it is the right thing to do.

Now when face with this decision in the business world, it should be an equally simple choice to make.  Do the right thing.  But once money, power, prestige, hitting monthly sales targets, and a slew of other factors come into play, it becomes a less clear cut and harder decision to make.

So Jay, umm, great story and all, but you said that you were going to impart something to us about Compliance and Ethics.  Yep, that’s right.  Just as Tom Hulce did in Animal House, we often have those two competitive forces within us – Right and Wrong, Good and Bad, Red Sox and Yankees… but at the end of the day, we need to make the right choice.

For most of us of us, this is an extremely hard thing to do.  But thanks to the vision of Dan Roach, Odell Guyton and the leadership of Roy Snell, over the past 13 years, the SCCE has created a kindergarten for business leaders and compliance and ethics practitioners to learn and develop the proper tools to help their colleagues make the right choices in difficult and challenging situations.

Robert Fulghum penned his famous book — All I Really Need to Know I Learned in Kindergarten.   And I would add, “All I Really Need to Know (about Ethics and Compliance) I Learned at the SCCE CEI.  Now if only I could find a way to deal with my morning drop-off rage.  Hey, how about cutting down on those 3 14 oz New England Patriot travel mugs of coffee each morning…

Jay Rosen is a Vice President, Language Solutions at Merrill Brink International, based in Los Angeles, where he advises businesses and law firms on translation solutions for FCPA, Ethics, Compliance, Code of Conduct and eLearning. He can be reached via email at jay.rosen@merrillcorp.com and via phone at 310-729-6746.


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. 

Next Page »

Blog at WordPress.com.