Will TRACE Certify the World?

Aaron Hernandez, formerly of New England Patriots tight end, was indicted for murder this week, allegedly killing a man for spilling his drink at a bar. But fatal disputes originating in taverns are not anything new as on this day, 501 years ago, the English playwright Christopher Marlowe, 29, was killed in a brawl over a bar tab. Marlowe was two months older than William Shakespeare. A bright student, he won scholarships to prestigious schools and earned his BA from Cambridge in 1584. While still in school, Marlowe wrote his play Tamburlaine the Great, about a 14th century shepherd who became an emperor. The blank verse drama caught on with the public, and Marlowe wrote five more plays before his death in 1593, including The Jew of Malta, Dido, Queen of Carthage and Dr. Faustus. He also published a translation of Ovid’s Elegies.

How famous was Christopher Marlowe? Marlowe heavily influenced Shakespeare himself in his work, from his reworking of Marlovian themes in Antony and Cleopatra, The Merchant of Venice, Richard II and Macbeth. In Hamlet, after meeting with the travelling actors, Hamlet requests the Player perform a speech about the Trojan War, which has an echo of Marlowe’s Dido, Queen of Carthage. In Love’s Labour’s Lost, Shakespeare brings on a character “Marcade” (three syllables) in conscious acknowledgement of Marlowe’s character “Mercury” from the Massacre at Paris. The most famous tribute to Marlowe was paid by Shakespeare in As You Like It, where he not only quotes a line from Hero and Leander (“Dead Shepherd, now I find thy saw of might, ‘Who ever loved that loved not at first sight?’”) but also gives to the clown Touchstone the words “When a man’s verses cannot be understood, nor a man’s good wit seconded with the forward child, understanding, it strikes a man more dead than a great reckoning in a little room.” This appears to be a reference to Marlowe’s murder, which involved a fight over the “Reckoning” (the bill), as well as to a line in Marlowe’s The Jew of Malta – “Infinite riches in a little room”.

I thought about Marlowe and his status as a playwright, even up to this day, when I considered something I heard Alexandra Wrage say at one of her recent talks here in Houston. She said, “TRACE wants to certify the world.” When I asked her what she meant by this she told me about the TRACE certification process. I had some familiarity with it, having seen reports from companies who had gone through the process and were presenting their certification when applying to do business as third party representatives for US or UK companies. The TRACE certification process is a detailed review, analysis and approval process that allows third parties to own and share their verified due diligence information. The TRACE certificationdue diligence reports contain a wealth of anti-bribery compliance information establishing that the candidate has been thoroughly vetted, trained and certified by TRACE. The report is packaged for the purpose of sharing verified due diligence information with an unlimited number of business partners. The TRACE certification is suitable for medium-to-higher risk relationships and involves an annual renewal requirement and a mandatory anti-bribery training course. Some of the key information contained in a report is as follows:

• Red flags identified;
• Comprehensive anti-bribery questionnaire;
• Company literature collected and reviewed;
• Business registrations;
• Names and CVs for owners, directors, and key employees;
• Contact information for three business references;
• Financial reference; and
• A signed Anti-Bribery Code of Conduct

One of the interesting things about the certification report is that TRACE calls them portable. By this, it means that once a company has gone through the TRACE certification process and receives its report, this report can be presented to other companies, which might desire to engage that third party. While there is no substitute for a company obtaining and evaluating the due diligence it receives based upon its own risk profile, the TRACE certification can be a powerful and persuasive tool to present to a company. In other words, the burden of performing due diligence is shifted away from the company to the foreign company seeking to show that they do business in compliance with anti-corruption laws, such as the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act.

All of this means that going through a TRACE certification process can have benefits for both parties in the lifecycle management of third parties for a company that wants to hire a foreign company as a third party representative. First, and foremost, is the cost as it is the foreign party who pays for the TRACE certification so this shifts the cost away from the US or UK Company because it is the foreign company who seeks the certification. But more than simply the cost can be the elimination of a large part of the expense and delay associated with the vetting process. Further, the TRACE certification offers ongoing monitoring of third party relationships with daily screening of names against international sanctions and enforcement lists and can aid to simplify third party recertification process for all companies in the process, both the companies seeking third party representatives and the foreign entities seeking to represent or do business with US or UK companies on a commercial basis.

For the entity outside the US or UK that wants to demonstrate its commit to doing business in compliance with anti-bribery legislation, the TRACE certification can provide appropriately qualified intermediaries with a valuable business credential, widely recognized in the compliance community, for successfully completing the due diligence gold standard. And again it allows foreign third parties to share their verified due diligence information with all of their business partners from a company known across the globe for its commitment to anti-bribery and anti-corruption – TRACE.

So while Marlowe may not receive all of the kudos that Shakespeare does; he is certainly well thought of. For a foreign company who wants to do business with a US or UK company, you might want to head over to the TRACE website and check out their certification process. It could provide to you a true market differentiator from others that might desire to represent US or UK companies.

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, 2014

 

May Flowers for GSK? The Corruption Investigation Deepens

April showers bring May flowers, at least that is the old truism. One place it is decidedly correct is at the RHS Chelsea Flower Show, which began its run as one of the, if not the greatest, annual flower shows in the world in May 1862. The event draws some 157,000 people during its five-day run each May. The event has royal patronage and there is always a large contingent of royalty who visit the show.

Unfortunately one group of Englishmen and women who will not be stopping by to ‘smell the roses’ this year are those from the increasingly embattled UK company GlaxoSmithKline PLC (GSK). Yesterday the UK Serious Fraud Office (SFO) announced that it had “opened a criminal investigation into the commercial practices of GlaxoSmithKline plc and its subsidiaries.” To top off this bouquet of May flowers from the SFO, in the same Press Release the SFO said, “Whistleblowers are valuable sources of information to the SFO in its cases. We welcome approaches from anyone with inside information on all our cases including this one – we can be contacted through our secure and confidential reporting channel, which can be accessed via the SFO website.” It then proceeded to provide the SFO’s secure reporting website.

In an article in the New York Times (NYT), entitled “GlaxoSmithKline Under Investigation by Serious Fraud Office”, Chad Bray reported that the SFO “is investigating Glaxo’s business activities in “multiple jurisdictions,” according to a person familiar with the investigation who was not authorized to speak publicly.” As most readers will recall, “Chinese authorities have been investigating the drugmaker’s business practices related to payments to doctors and other health care professionals since last year and questions have been raised in recent months about the company’s practices in Iraq and Poland.”

James Titcomb, reporting in The Telegraph, in an article entitled “SFO opens criminal investigation into GlaxoSmithKline”, went further when he noted that GSK has been in contact with the SFO “in recent months in the wake of claims that it funnelled hundreds of millions of pounds to doctors and officials in countries around the globe to boost sales of its drugs.” Moreover, “Chinese police have accused the company of dispensing 3bn yuan (£285m) in bribes under the leadership Mark Reilly, the former head of its Chinese business. Authorities in the country say the bribes resulted in billions of pounds in “illegal revenue” for the company.”

On the Chinese side of the investigation, the NYT article reported that during the month of May, “Chinese authorities accused Mark Reilly, the former head of Glaxo’s operations in China, of ordering employees to bribe doctors and other hospital staff to use the drug maker’s products, resulting in more than $150 million in illegal revenue. Two other Chinese-born Glaxo executives were also charged in the matter.”

When news of the Chinese investigation broke last summer, GSK claimed that “Certain senior executives of GSK China who know our systems well, appear to have acted outside of our processes and controls which breaches Chinese law,” Glaxo said in July, after meeting with the Chinese authorities. “We have zero tolerance for any behavior of this nature.” [Read: Rogue Employees] However it appears the Chinese authorities have not fallen for this age-old attempt at corporate misdirection. But Andrew Ward, reporting in a Financial Times (FT) article entitled “SFO opens criminal inquiry into GSK”, said that the Chinese authorities had engaged in a “ten-month investigation” which had identified 46 current or former GSK employees as “suspects”. Rogue indeed.

Where might the US Department of Justice (DOJ) or Securities and Exchange Commission (SEC) be on these issues? Clearly, these would seem to be areas of at least inquiry under the US Foreign Corrupt Practices Act (FCPA), but consider the following about GSK, in July of 2012 GSK pled guilty and paid $3 billion to resolve fraud allegations and failure to report safety data in what the DOJ called the “largest health care fraud settlement in U.S. history” according to its press release. The DOJ press release went on to state “GSK agreed to plead guilty and to pay $3 billion to resolve its criminal and civil liability arising from the company’s unlawful promotion of certain prescription drugs, its failure to report certain safety data, and its civil liability for alleged false price reporting practices.” The press release noted that the resolution was the largest health care fraud settlement in US history and the largest payment ever by a drug company for legal violations.

You would think that any company that has paid $3 billion in fines and penalties for fraudulent actions would take all steps possible not to engage in bribery and corruption. Indeed as part of the settlement GSK agreed to a Corporate Integrity Agreement (CIA). This CIA not only applied to the specific pharmaceutical regulations that GSK violated but all of the GSK compliance obligations, including the FCPA.

In addition to requiring a full and complete compliance program, the CIA specified that the company would have a Compliance Committee, inclusive of the Compliance Officer and other members of senior management necessary to meet the requirements of this CIA, whose job was to oversee full implementation of the CIA and all compliance functions at the company. These additional functions required Deputy Compliance Officers for each commercial business unit, Integrity Champions within each business unit and management accountability and certifications from each business unit. Training of GSK employees was specified. Further, there was detail down to specifically state that all compliance obligations applied to “contractors, subcontractors, agents and other persons (including, but not limited to, third party vendors)”. So while GSK may have separate FCPA liability to be investigated by the DOJ; it may be more of an issue that the company could be in violation of its CIA.

GSK has of course averred that it is fully cooperating with all of the various investigations into its alleged bribery and corruption. Further, as reported in Ward’s FT article, “GSK said it was “committed to operating its business to the highest ethical standards”. The company had “previously denied any systemic problem with corruption and said the latest Chinese allegations were “deeply concerning to us and contrary to the values of GSK”.”

So I guess the GSK team probably missed the Chelsea Flower Show this year. ON the other hand, maybe they might be like former BP President Tony Hayward, who during the first few of weeks of the worst oil spill in the history of the world ever, went yachting…

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, 2014

What Does an Effective Compliance Program Look Like? – The Regulators Perspective

What does an effective compliance program look like? Is it one that follows the Ten Hallmarks of an Effective Compliance Program as set out in the 2012 FCPA Guidance? How about one that uses the Six Principals of Adequate Procedures relating to the UK Bribery Act as its guideposts? Or should a company follow the OECD Good Practice Guidance on Internal Controls, Ethics, and Compliance? More importantly, for anti-corruption enforcement under the Foreign Corrupt Practices Act (FCPA), what does the Department of Justice (DOJ) or Securities and Exchange Commission (SEC) look for when assessing a compliance program?

Over the years, we have heard various formulations of inquiries that regulators might use when reviewing a compliance program. While not exactly a review of a compliance protocol, one of my favorites is what I call McNulty’s Maxims or the three questions that former United States Deputy Attorney General, and  Baker & McKenzie LLP partner, Paul McNulty said were three general areas of inquiry the he would assess regarding an enforcement action when he was at the DOJ. They are: first: “What did you do to stay out of trouble?” second: “What did you do when you found out?” and third: “What remedial action did you take?”

Paul’s former partner at Baker & McKenzie, Stephen Martin, who still runs Baker & McKenzie Compliance Consulting LLC, said that an inquiry he might make was along the lines of the following. First he would ask someone who came in before the DOJ what the company’s annual compliance budget was for the past year. If the answer started with something like, “We did all we could with what we had ($100K, $200K, name the figure), he would then ask, “How much was the corporate budget for Post-It Notes last year?” The answer was always in the 7-figure range. His next question would then be, “Which is more business critical for your company; complying with the FCPA or Post-It Notes?” Unfortunately, it has been Martin’s experience that most companies spent far more on the Post-It Notes than they were willing to invest into their compliance program.

Last week at Compliance Week 2014, Andrew Ceresney, Director of the Division of Enforcement of the SEC, gave one of the Keynote Addresses. In his remarks he talked about the importance that the SEC is putting into compliance. He said “I start from the premise that the companies that have done well in avoiding significant regulatory issues typically have prioritized legal and compliance issues, and developed a strong culture of compliance across their business lines and throughout the management chain. This is something I observed firsthand while in private practice and have come to fully appreciate from my perch at the SEC.”

But, more importantly, he said that he has “found that you can predict a lot about the likelihood of an enforcement action by asking a few simple questions about the role of the company’s legal and compliance departments in the firm.” He then went on to detail some rather straightforward questions that he believes can show just how much a company is committed to having a robust compliance regime.

• Are legal and compliance personnel included in critical meetings?
• Are their views typically sought and followed?
• Do legal and compliance officers report to the CEO and have significant visibility with the board?
• Are the legal and compliance departments viewed as an important partner in the business and not simply as support functions or a cost center?

Beyond simply going into the DOJ or SEC and claiming that your company is very ethical and does business in compliance with the FCPA, how can a company demonstrate the above? This is where the Tom Fox Mantra of Document, Document and Document comes into play. No matter how much input the compliance function has into the above suggested inquiries if the inputs are not documented, it is if they did not exist. So for meetings, you should keep attendance sheets or notations. A compliance representative can put a short, three to four sentence memo into the file about the recommendations and the response thereto. If the compliance department advise was not followed, there should be a business reason documented for the decision. Moreover, if there is a rejection of the compliance function advise and the course of action leads to some type of FCPA issue, it may well be assumed the company knew or should have known that the course of action taken could reasonably lead to a FCPA issue if not full blown violation. As to the issues of compliance visibility at the Board level, once again the documentation of any presentation and their substance can provide evidence to answer the query in the affirmative. But the key to all of these questions is if there is documentation to prove the assertions that they actually occurred.

Near the end of his presentation, Cerensey said that “Far too often, the answer to these questions is no, and the absence of real legal and compliance involvement in company deliberations can lead to compliance lapses, which, in turn, result in enforcement issues. When I was in private practice, I always could detect a significant difference between companies that prioritized legal and compliance and those that did not. When legal and compliance were not equal partners in the business, and were not consulted as a matter of course, problems were inevitable.”

McNulty’s Maxims, Martin’s question on budget and now Cerensey’s questions all provide significant guideposts to how regulators think about FCPA compliance programs. For me, I think the point is that companies which actually Do Compliance are easy to spot. For all the gnashing of teeth about how hard it is to comply with what the DOJ and SEC want to see in FCPA compliance, when the true focus can be distilled into whether a company actually does compliance as opposed to saying how ethical they are, I think it simplifies the inquiry and the issues senior management and a Board of Directors really needs to pay attention to.

For a copy of the full text of Director Cerensey’s remarks, 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, 2014

Trip To Annapolis and Teaching Leadership

Monday is Memorial Day and is the day wherein the men and women who died while serving in the United States Armed Forces are remembered. The holiday is celebrated every year on the final Monday of May. The first recorded Memorial was held on May 1, 1865 in Charleston, South Carolina to commemorate the soldiers who died in the Civil War. By the 20th century, Memorial Day had been extended to honor all Americans who have died while in the military service.

I thought about Memorial Day when I toured the US Naval Academy this week. This is also Commissioning Week for graduating seniors who will become officers in the Navy or Marine Corps this coming Saturday. One of the buildings that I toured was the US Naval Academy Museum. The mission of the Naval Academy Museum is to collect, preserve, and exhibit the artifacts and art that are the physical heritage of the US Navy and the Naval Academy in order to instill in Midshipmen a knowledge of the history and heritage of the Navy and the Naval Academy and to supplement the instruction of all academic departments of the Academy, as well as to demonstrate to the public the contributions of Academy graduates to the military services and to the Nation. And to motivate in young people a desire to become part of the Brigade of Midshipmen and to begin a career of service to their Nation.

The Museum is many ways a teaching museum. One of the courses taught directly in classrooms in the building is on leadership. Of course, the curriculum teaches the overriding theme of the Naval Academy, which is Duty Honor Loyalty, but it goes beyond this to a moral and ethical dimension to its leadership classes. The firm belief at the Academy is that leadership can be taught through the modeling from prior leaders.

I thought about this concept of modeling leadership in the context of compliance. One area that is not focused on too often in company-sponsored training is that of leadership. Moreover, while many business leaders receive substantial training on the technical aspects of doing business, they rarely receive training or are even assessed on leadership attributes to do business ethically and in compliance with laws such as the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act. It occurred to me that if the US Naval Academy can teach leadership, this is something that US businesses could also teach.

While you are pondering this question, I hope that you might think about all the men and women who have gave their lives so that we might live in freedom and are honored this and every Memorial Day. While in Annapolis I had another reminder of their sacrifice. While having some lunch at Chick and Ruth’s, the owner came over the PA and asked us all to stand and say The Pledge of Allegiance. He said the reason that he made the request was “because we could stand and say it.” I realized that we are honoring those people who made ultimate sacrifice.

Happy Memorial Day to all but I would ask that you take a moment to thank all those we honor for this holiday and to honor the men and women of the US Naval Academy who will be commissioned this weekend and will serve us 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, 2014

On the Oregon Trail and Expectations in an Investigation Protocol

On this day in 1843, a massive wagon train, made up of 1,000 settlers and 1,000 head of cattle, set off down the Oregon Trail from Independence, Missouri. Known as the “Great Emigration,” the expedition came two years after the first modest party of settlers made the long, overland journey to Oregon. The Great Immigration followed the Sante Fe Trail for some 40 miles and then turned northwest to the Platte River, which it followed along its northern route to Fort Laramie, Wyoming. From there, it traveled on to the Rocky Mountains, which it passed through by way of the broad, level South Pass that led to the basin of the Colorado River. The travelers then went southwest to Fort Bridger, northwest across a divide to Fort Hall on the Snake River, and on to Fort Boise, where they gained supplies for the difficult journey over the Blue Mountains and into Oregon. The Great Emigration finally arrived in October of that year and the participants had completed the 2,000-mile journey from Independence in five months.

This week at Compliance Week 2014, I moderated a panel entitled Investigations Gone Global, Not Haywire. One of the panelists, Stephen Donovan, Chief Ethics and Compliance Officer, International Paper Company, said that one of his key reasons for setting out an investigation protocol was more than simply having a plan or guideline in place so that there would be consistency in investigations. The other key reason was to set expectations for all persons who might be involved in the investigation. The participants in the Great Emigration had a route to follow but that was about it. When it came to expectations, I think there were very little except hardship and the hope for a better future.

I think that one of the key lessons to be drawn from the ongoing Wal-Mart Foreign Corrupt Practices Act (FCPA) matter is that back in the 2006 time frame, when the corporate office was made aware of allegations of bribery and corruption regarding its Mexican subsidiary, the corporate office either did not have an investigation protocol in place, or perhaps even worse, it had one and disregarded it when the allegations bubbled up to Bentonville. But if the expectations had been set up beforehand, perhaps there would have been action taken to resolve the matter during that time frame and not later.

I have heard Jackie Trevino, Senior Manager, Corporate Compliance at Fluor Corporation, present the Fluor investigation protocol which consists of the following five steps (1) Opening and Categorizing the Case; (2) Planning the Investigation; (3) Executing the Investigation Plan; (4) Determining Appropriate Follow-Up; and (5) Closing the Case. I recognize that if a case of significant bribery or corruption is uncovered that there may be more or additional steps that you may need to take. However if you follow this basic protocol, you should be able to work through most investigations, in a clear, concise and cost effective manner. Furthermore, you should have a report at the end of the day which can stand up to later scrutiny if a regulator comes looking. Finally, you will be able to document, document, and document, not only the steps you took but why and the outcome obtained. But, as Donovan noted, it also sets the expectations of all involved.

Step 1: Opening and Categorizing the Case. Under this first step, you should categorize the ethics and compliance violation. You should notify the relevant individuals, including those on your investigation team and any senior management members under your notification protocols. After notification, you should assemble your investigation team for preliminary meetings and assessments. Step 1 should be accomplished in one to three days after the allegation comes into compliance, either through your reporting structure or other means.

Step 2: Planning the Investigation. After assembling your investigation team, you should determine the required investigation tasks. These would include document review and interviews. If hard drives need to be copied or documents put on hold or sequestered in any way, or relationships need to be analyzed through relationship software programs or key word search programs, this should also be planned out at this time. These tasks should be integrated into a written investigation or work plan so that the entire process going forward is documented. Also if there is a variation from the written investigation plan, such variation should be documented and an explanation provided as to why there was such a variation. Lastly, if international travel is involved this should also be considered and planned for as part of this step. Step 2 should be accomplished within another one to three days.

Step 3: Executing the Investigation Plan. During the course of this step the investigation should be completed. I would urge that the interviews not be effected until all documents are reviewed and ready for use in said interviews. Care should be taken to ensure that an appropriate Upjohn warning is issued and that the interviewee clearly understands that whoever is performing the interview represents the company and not the person being interviewed, whether they are the target of the investigation or not. The appropriate steps should also be taken to preserve the attorney-client privilege and attorney work product assertions. Step 3 should be accomplished within one to two weeks.

Step 4: Determining Appropriate Follow-Up. At this step the preliminary investigation should be completed and you are ready to move into the final phases. In some investigations, it is relatively easy to determine when the work is essentially complete. For example, if the allegation is both specific and narrow, and the investigation reveals a compelling and benign explanation for the conduct alleged, then the investigation typically is complete and you are ready to convene the investigation team and the relevant business unit representatives. This group would decide on the appropriate disciplinary steps or other actions to take. Step 4 should be completed in one day to one week.

It must be cautioned that at this step, if there are findings of specific or discrete allegations of corruption and bribery, a decision must be made as how to handle such findings going forward.

Step 5: Closing the Case. Under this final step, you should communicate the investigation results to the stakeholders and the case report should be completed. Everything done in the above steps should be documented and stored, either electronically or in hard copy form together. Step 5 should be completed in one day to one week.

With the growing number of reports to the Securities and Exchange Commission (SEC) Whistleblower program under Dodd-Frank, companies are under increasing pressure to get up and running quickly on any claim of bribery and corruption that is brought forward. By using an investigation protocol, you will have a ready-made process in place to start from. If your company does not have such a protocol I would suggest that you tailor this process to fit the needs of your company. It will help set the expectations of everyone involved.

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, 2014

 

Maybellene and the 2014 Anti-Bribery and Corruption Benchmarking Report

Today, we celebrate an event, which is not ‘the day the music died’ but one that might properly be called one of the seminal moments in the creation of Rock N’ Roll. On this date in 1955, Chuck Berry recorded his first song, Maybellene. John Lennon once said of Chuck Berry “if you tried to give rock and roll another name, you might call it ‘Chuck Berry.'” Chuck Berry created the do-it-yourself template that most rock-and-rollers still seek to follow. If there can be said to be a single day on which his profound influence on the sound and style of rock and roll began, it was this day in 1955, when the unknown Chuck Berry paid his first visit to a recording studio and cut the record that would make him famous.

I am attending Compliance Week 2014 for the 5^th consecutive year. Once again Matt Kelly and his team have put together one of the top compliance events of the year. The sessions have been first rate, the conversations highly informative and the sponsors are talking about their compliance solutions in an exciting and engaging manner. If you did not make Compliance Week 2014, I hope that you will make it next year for Compliance Week 2015.

One of the sessions I attended was a presentation of the joint Kroll/Compliance Week 2014 Anti-Bribery and Corruption Benchmarking Report. Compliance Week Editor, Matt Kelly, moderated the panel with Kroll Inc., representatives Alan Brill, Senior Managing Director, and Lonnie Keene, Managing Director, which discussed some of the reports key findings, the highlights of which are as follows.

Risks

For the second year in a row, large US Corporations were much more likely to say they expect bribery and corruption risks to increase than smaller or overseas

Corporations do. Some 51 percent of respondents said they expect more such risks in the next two to three years – as did 57 percent of US companies, and 57 percent of large companies, which was defined as having $5 billion or more in annual revenue. However, only 37 percent of overseas businesses, and 46 percent of smaller companies expect their corruption risks to keep rising. A question that Chief Compliance Officers (CCOs) may ask, then, is whether their assessment of bribery risks is accurate? The “risk perception gap” between large and small, or US and overseas, does exist, and an erroneous understanding of one’s risk profile can have dire consequences.

Third Part

The conundrum of third party risks continues to be a major weakness for anti-corruption programs and the problem may well be getting worse. The respondents this year reported an average of 3,868 third parties, yet 58 percent say they never train third parties on anti-corruption efforts. That number is higher than last year, when 47 percent said they do not educate third parties on anti-corruption policies. Significantly, the number of companies that conduct due diligence on third parties has increased, from 87 percent in 2013 to 97 percent this year – which suggests that companies do now grasp the importance of performing due diligence and have the processes in place to do so. That next step of training third parties (which can indeed be expensive) is where compliance programs start to falter.

Third party risks do hinge on several factors, such as the number of third parties one has or the corruption environments where they are. Another question that CCOs can ask themselves, then, is how the need for the services provided by their third parties matches up with the risk they pose to their companies.

Due Diligence

This was an area noted to be “a bright spot in the 2014 ABC Report.” In addition to the 97 percent of respondents who perform due diligence on third parties, 92 percent say they perform at least some due diligence on merger and acquisition (M&A) targets to identify possible corruption risks before a deal is done. What’s more, 74 percent say they start by investigating the target company’s management team – which is where the most serious corruption risks typically hide. Due diligence on a target company’s third parties fell off sharply: only 54 percent also performed due diligence on a target’s agents, 52 percent on its distributors, 50 percent on its consultants, and 46 percent on its suppliers. The report indicates that larger companies were much more likely than smaller ones to perform due diligence on a target’s third parties.

 

Overall Compliance Program Effectiveness

 

The Report revealed that seventy percent of respondents rated their policies for domestic employees as effective or very effective – and larger companies were more bullish about their domestic employees than smaller ones (77 percent to 61 percent, respectively). That statistic edged downward for confidence in training overseas employees, to 66 percent, driven by considerably fewer companies saying they were very confident in their training of overseas workers.

However, compliance practitioners were more confident in their ability to vet third parties at the start of a relationship, but less confident in monitoring third parties once that onboarding examination had passed. Fifty-seven percent of respondents rated their vetting procedures as effective or very effective. Then the numbers marched downward for monitoring compliance after a relationship starts, auditing compliance of third parties, and training third parties on anti-bribery and corruption procedures.

This led to the conclusion that effective compliance programs can help a company identify corruption risks when the CCO is not specifically hunting for them. That may come from strong training in a speak-up culture, or strong audits of third parties, or any number of other techniques. The key question here is to ask what metrics and corruption risk indicators match the risks you believe you have, and how your compliance can implement those solutions.

These trends stand against a background where large US Corporations report that they expect bribery and corruption risks to increase considerably more than smaller or overseas corporations do. Given the globalized nature of modern business, with more regulatory scrutiny from more regulators, and the “extended enterprise” extending to include even more third parties, the Report then asks “Do smaller or non-U.S. businesses truly have fewer corruption risks, or do they misunderstand the risk profile they have?”

While perhaps not as groundbreaking as Chuck Berry’s achievement in 1955, this 2014 Anti-Bribery and Corruption Benchmarking Report, captures important information about the current state of compliance and, more importantly, where it may need to go.

For a YouTube clip of Chuck Berry belting out Maybellene, 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, 2014

Esquenazi Part II – the Test for Determining an Instrumentality under the FCPA

In Part I of my review of the 11^th Circuit Court of Appeals decision in the Esquenazi case, I reviewed the Court of Appeals opinion. Today, in Part II, I want to drill down further and examine the test developed by the Court of Appeals to use in determining whether an entity is an instrumentality under the Foreign Corrupt Practices Act (FCPA) and compare it with the two prior formulations developed by District Courts in the Carson and Lindsey cases. The chart below consolidates the factors raised by the courts.

Key Inquiry	Lindsey	Carson	Esquenazi
Characterization of Services	Entity provides services to citizens, in many cases all in country	Foreign states characterization of the entity and its employees	Function Test – Does the entity provide services to the public at large in the foreign Country?Control Test – the foreign government’s formal designation of the entity.
Hiring and Firing	Are key officers/ directors government employees or appointed by government employees	Foreign State’s control over the entity	Control Test – the government’s ability to hire and fire the entity’s principals.
Financial Control/ Funding	Is entity financed, or in large measure, by government appropriations or through government mandates?	The foreign state’s extent of ownership of the entity, including the level of financial support by the state	Function Test – Does the foreign government subsidize the costs associated with the entity providing the services?Control Test – the extent to which the government funds the entity if it fails to break even.
Foreign Government Control of Administrative Functions	Is entity vested with or does it exercise exclusive/controlling power to administer its designated functions?	The Entity’s obligations and privileges under country’s laws, including whether it exercises exclusive/ controlling power to administer its designated functions
Perception as Governmental Entity	Is entity widely perceived and understood to be providing official functions?	Purpose of the entity’s activities	Function Test – Does the foreign government generally perceive the entity to be performing a governmental function?Control Test – Whether the foreign government has an interest in the entity
Creation		Circumstances around the entities creation
Length of Time			Control Test – the length of time the indicia have existed.
Monopoly over Market			Function Test – Does the entity have a monopoly over the function it exists to carry out?

 

The Esquenazi decision separates the analysis into two basic questions (a) does a foreign government control an entity and (b) does the entity perform a function the foreign government treats as its own? The Court of Appeals then breaks the analysis of these two questions into a series of inquiries. The prior District Court opinions in Lindsey and Carson did not have such an initial dichotomy; nevertheless the 11^th Circuit’s analysis has clear overlap with the prior District Court formulations. (Please note that I have not discussed the district court formulation at the Esquenazi trial level as that analysis has been superseded by the Court of Appeals decision.) Between the Lindsey, Carson and Esquenazi factors, we see the following:

Identical – does the government appoint the officers/directors and is the entity understood to be owned by or an agency of the government in the home country? In Lindsey and Esquenazi (Control Prong), the courts agree on Inquiry 2 above, the ‘Hiring and Firing’ inquiry, while Carson says the inquiry is simply over foreign government control of the entity. Inquiry 5 in both Lindsey and Esquenazi (Control and Function Prongs) is the ‘Perception’ inquiry, while the Carson court denominates this inquiry as the ‘Purpose’ inquiry. Finally, in Inquiry 3 all Courts consider the financial support provided to the entity by the foreign government, with the Esquenazi Court (Control and Function Prongs) adding the analysis around the “Extent of obligations and privileges under its country’s laws”.

Similar – Inquiry 1 – Are the services provided by the entity available to all citizens of the home country?; and Inquiry 4 – Does it exercise exclusive/controlling power to administer its designated functions and the extent of obligations and privileges under its country’s laws? In Lindsey and Carson, the similar factors are in Inquiry 1, the Characterization of the services provided. The Esquenazi opinion has this Inquiry 1 in both the Function and Control Prong analysis. Under the Function Prong analysis it asks “Does the entity provide services to the public at large in the foreign Country?” and under the Control Test it inquires into what is the foreign government’s formal designation of the entity. In Inquiry 4, both the Lindsey and Carson court said that a foreign government’s control over the administrative functions of the entity was a key inquiry but interestingly, this factor was not present in the Esquenazi analysis, under the analysis of either the Control or Function Prong. In Inquiry 6, the Carson Court looked into the creation of the entity and the Esquenazi opinion (Control Prong) inquired into the foreign government’s designation of the entity

Stand-alones – Interestingly, Esquenazi has two factors for analysis not found in either of the district court opinions. The first, Inquiry 7, is from the Control Prong and asks the question of the length of time the various factors listed have existed. The second, Inquiry 8, is from the Function Prong and is whether the entity has a monopoly in the foreign country. Carson also has a stand-alone inquiry, which is found at Inquiry 6 and inquires into the facts and circumstances surrounding the creation of the entity. While I believe this could well be the last factor in your analysis, it can be one, which most easily is ascertained. Most government entities will disclose how they were formed; this information can be found on their website or within their company history. If you cannot determine how a business was formed perhaps you need to think hard about doing business with them.

Comparison of Approaches

At first blush it may appear that the Esquenazi court took a slightly different approach by dividing the two initial prongs of inquiry into ‘Control’ and ‘Function’. If one examines the individual Esquenazi factors in detail they are not significantly different from Lindsey and Carson, with the exception noted above of the two stand-alone inquiries. One clear factor that Esquenazi has in common with Lindsey and Carson is the factor of the entity’s obligations and privileges under its country’s laws, including whether it exercises exclusive/controlling power to administer its designated functions. Carson combines two of the Esquenazi factor of the extent of government ownership and financial support by the foreign government. While Carson does not speak to financial ownership it does have the factor of government financing and government appointment of officers and directors. Carson speaks to the entity’s purpose while Lindsey and Esquenazi list the factor of providing services to the country’s citizens. Indeed the only factor included in Carson and not found in Lindsey and Esquenazi is the following: the circumstances around the entity’s creation. It is incumbent to note that both the Lindsey and Carson court opinions and the Esquenazi 11^th Circuit opinion all have language that indicates these factors are not exclusive, and no single factor will determine whether an entity is an instrumentality of a foreign government.

What to make of the two stand-alones found in Esquenazi; those being lengthy of time the entity has existed (Function Prong) and does it have monopoly power (Control Prong)? I would have to opine that these are the two least important factors listed. I say this because if there is clear indicia that an entity is controlled by, financed in whole or in part by a foreign government, perceived to be run by a foreign government and the entity provides services to the citizens of the foreign country; it really does not matter when it was created, i.e. yesterday or 50 years ago. It will be considered as an instrumentality under the FCPA. Similarly, even if there is no monopoly present, if these other factors are present, it will still be considered an instrumentality under the FCPA.

Lessons Learned

With all this information in mind what inferences can a compliance practitioner for guidance draw on whether a business is an instrumentality under the FCPA? Reviewing the foregoing, the factors can be distilled down to a manageable list, which I believe is as follows:

1. Ownership/Financial Control – There is no percentage amount listed but the inclusion of financial control would clearly indicate that anything over 50% would be a significant factor.
2. Actual control is key in all three court decisions. In Lindsey and Esquenazi, it is characterized as the government’s right to appoint key officers and directors. In Carson, it is called government control. But this means that if actual control is exercised by the government in question, it may trump the 50% guidance stated above.
3. Privileges and Obligations are also mentioned in all three. Does the entity have the right to control its own functions?
4. Financing – Is the entity a for-profit entity, financed through its own revenues or does it depend on financing by its government?
5. Perception is Reality – André Agassi’s immortal words appear again. If it is widely perceived to be providing an official function, then it is an instrumentality under the FCPA.

The Esquenazi Court of Appeals decision is a very welcome addition to the dearth of case law interpretation of the FCPA. The 11^th Circuit has seemingly put to rest the question of whether an instrumentality means only a government agency or something else. Clearly it means something else. The Esquenazi decision also provides significant guidance on what type of inquiry a company should use to determine if an entity is a part of a foreign government and, therefore, subject to FCPA scrutiny. Whatever specific facts or indicia that you are looking at, it now boils down to (1) does a foreign government control the entity?; and (2) does the entity function as part of the part of the foreign government?

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, 2014

Common Sense in the Definition of ‘Instrumentality’ Under the FCPA

In what can only be called a judicial decision based on common sense the 11^th Circuit Court of Appeals, in an opinion released on May 16, upheld the convictions of Joel Esquenazi and Carlos Rodriguez for violations of the Foreign Corrupt Practices Act (FCPA) and certain US anti-money laundering (AML) laws. The two had engaged in a long running bribery scheme with the Haitian telephone company, Telecommunications d’Haiti, S.A.M (Teleco). The pair were convicted and sentenced to lengthy jail terms, Esquenazi receiving 15 years and Rodriguez receiving 7 years. In this post, I will review the 11^th Circuit’s opinion and tomorrow I will try and articulate some of its lessons for the compliance practitioner.

This opinion was the first time that a Court of Appeals had reviewed the FCPA question of what is an ‘instrumentality’ under the Act. Both defendants had argued that instrumentality could only mean (1) “that only an actual part of the government would qualify as an instrumentality” or (2) the FCPA should be construed to encompass only foreign entities performing ‘core’ governmental functions similar to departments or agencies. The Court rejected both arguments.

As to the first argument, the Court said “that contention is too cramped and would impede the “wide net over foreign bribery” Congress sought to cast in enacting the FCPA.” The court rejected several points that the defense raised in the second argument. In addition to some rejections of technical statutory constructions, the Court went into detail about two separate Congressional actions regarding the FCPA.

Grease Payments

The Court noted that the facilitation payment exemption to the FCPA specifically excepted liability “to FCPA liability for “any facilitating or expediting payment to a foreign official . . . the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official.”” Further, a ““Routine governmental action” is defined as “an action . . . ordinarily and commonly performed by a foreign official in,”” among other things, “providing phone service.” If an entity involved in providing phone service could never be a foreign official so as to fall under the FCPA’s substantive prohibition, there would be no need to provide an express exclusion for payments to such an entity. In other words, if we read “instrumentality,” as the defendants urge, to categorically exclude government-controlled entities that provide telephone service, like Teleco, then we would render meaningless a portion of the definition of “routine governmental action” in section 78dd-2(b). [all citations omitted] In other words, to say that Teleco could not be an instrumentality would render meaningless the plain words of the statute.

US Treaty Obligations

Next the Court turned to the 1998 amendments to the FCPA, which Congress enacted, in part, to ensure that the US was in compliance with its treaty obligations, as a signatory to the Organization for Economic Cooperation and Development’s (OECD) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (the “Convention”). After noting that “In joining the OECD Convention, the United States agreed to “take such measures as may be necessary to establish that it is a criminal offence under [United States] law for any person intentionally to offer, promise or give . . . directly or through intermediaries, to a foreign public official . . . in order that the official act or refrain from acting in relation to the performance of official duties, in order to obtain or retain business or other improper advantage in the conduct of international business.””; the Court then said that under the OECD treaty, a ““Foreign public official” is defined to include “any person exercising a public function for a foreign country, including for a . . . public enterprise.”” Finally, the Court stated, “An official of a public enterprise shall be deemed to perform a public function unless the enterprise operates on a normal commercial basis in the relevant market, i.e., on a basis which is substantially equivalent to that of a private enterprise, without preferential subsidies or other privileges.”

With these definitions as a backdrop, the Court found that in making the 1988 changes to the FCPA, the law itself was changed to meet the OCED Convention. The Court stated that since Congress affirmatively changed the law to meet certain requirements in the Convention which the prior version of the FCPA did not cover; the fact that Congress did not see the need to change the definition of instrumentality to meet the treaty obligations was evidence that Congress believed that the FCPA definition of instrumentality met the language of the OECD Convention. To conclude otherwise “would put the United States out of compliance with its international obligations.”

The Test to Determine Instrumentality

Here the Court started with the premise that “Specifically, to decide in a given case whether a foreign entity to which a domestic concern makes a payment is an instrumentality of that foreign government, we ought to look to whether that foreign government considers the entity to be performing a governmental function.” From this starting point, the Court said that “An “instrumentality” under section 78dd-2(h)(2)(A) of the FCPA is an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.”

From this the Court developed two key analyses. First, does a foreign government ‘control’ an entity, what I call the “Control Test”? Second, is “deciding if the entity performs a function the (foreign) government treats as its own”; what I call the “Functions Test”?

1. Control Test

With the caution that “It would unwise and like impossible to exhaustively answer them in the abstract”; the Court said, “For today, we provide a list of some factors that may be relevant to deciding the issue” of the Control Test. These factors are:

• The foreign government’s formal designation of the entity;
• Whether the government has an interest in the entity;
• The government’s ability to hire and fire the entity’s principals;
• The extent to which the entity’s profits, if any, go directly into the governmental fisc;
• The extent to which the government funds the entity if it fails to break even; and
• The length of time these indicia have existed.

2. The Functions Test

As to this second analysis, the Court set out the following factors to determine if the entity performs a function the government treats as its own:

• Does the entity have a monopoly over the function it exists to carry out;
• Does the foreign government subsidize the costs associated with the entity providing the services;
• Does the entity provide services to the public at large in the foreign Country; and
• Does the foreign government generally perceive the entity to be performing a governmental function?

The Court then went on to analyze the trial court’s jury instructions in light of their two-part formulation, which was the following:

One, whether it provides services to the citizens and inhabitants of Haiti.

Two, whether its key officers and directors are government officials or are appointed by government officials.

Three, the extent of Haiti’s ownership of Teleco, including whether the Haitian government owns a majority of Teleco’s shares or provides financial support such as subsidies, special tax treatment, loans or revenue from government mandated fees.

Four, Teleco’s obligations and privileges under Haitian law, including whether Teleco exercises exclusive or controlling power to administer its designated functions.

And five, whether Teleco is widely perceived and understood to be performing official or governmental functions.

The Court of Appeals found that the trial court jury instructions met the formulation it had set out by stating, “Read in context, the district court’s instructions make plain that provision of a service by a government-owned or controlled entity is not by itself sufficient. The district court explained only that an entity that provides a public service “may” meet the definition of “instrumentality,” thus indicating that providing a service is not categorically excluded from “a function of the foreign government.” But the sentence just before explained with no equivocation that only “a means or agency [that performs] a function of the foreign government” would qualify as an “instrumentality.”

Tomorrow I will present the lesson that can be gleaned from this opinion, for the compliance practitioner in a FCPA 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, 2014

Compliance Hiring Practices under the FCPA

Hiring practices under the Foreign Corrupt Practices Act (FCPA) are not often given much thought or widely discussed. They have come up for discussion more recently because of the issues surrounding the hiring of sons and daughters of foreign government officials most publicized with JPMorgan Chase & Co. But numerous other company’s similar hiring practices are under regulator scrutiny. As far back as 2004, in Opinion Release 04-02, the Department of Justice (DOJ) realized this was an important part of an overall compliance program when it approved a proposed compliance program that had the following requirement:

Clearly articulated procedures which ensure that discretionary authority is not delegated to persons who the company knows have a propensity to engage in illegal or improper activities.

I thought about some of these issues when I read The Saturday Essay in the Wall Street Journal (WSJ), entitled “How to Trick the Guilty and Gullible into Revealing Themselves” by Steven Levitt and Stephen Dubner, which they adapted from their most recent book Think Like a Freak. In their essay they began by comparing two diverse tactics used by King Solomon and the band Van Halen to see who might be telling the truth, or not, in a specific situation. In the oft-told tale involving King Solomon he decreed that he would split a baby and give one-half each to two women who claimed to be the mother. The true mother told him to give the baby to the other woman. King Solomon used this fact to determine which was the real mother. In the case of rock band Van Halen, they had a 53-page rider giving “point-by-point instructions” in in their touring contract. This rider had technical and security specifications for each venue the band played. It also had language in ALL CAPS that stated “M&M’s (WARNING: ABSOLUTELY NO BROWN ONES).” Initially this language was derided as simply rock and roll excess to the hilt, but band member David Lee Roth explained that if he went into the dressing room and found no brown M&Ms, it signified to him that the local promoter had read the contract. If there were brown M&Ms, the band had to perform extra reviews of the stage electrical and lighting requirements.

Why is hiring so important under the FCPA? It is because hiring is important to any company’s health and reputation. At this point, until the US Supreme Court tells us that a corporation is the same as a human being, with both obligations and rights; a company is only as strong as its employees. Like most areas of FCPA compliance good hiring practices for those employees who will do business in compliance with anti-corruption laws such as the FCPA are simply good business practice. Levitt and Dubner cite the following statistic, “By one industry estimate, it costs an average of roughly $4,000 to replace a single employee, and one survey of 2,5000 companies found that a single bad hire can cost more than $25,000 in lost productivity, lower morale and the like.” For one of the energy Services Company where I worked this estimate went as high as $400,000 to hire and fully train a new employee. I would add that those costs could go up significantly if a bad hire violates the FCPA.

Brooke Denihan Barrett, Chief Executive Officer (CEO) of the Denihan Hospitality Group, interviewed in the New York Times (NYT) Corner Office column said that by the “time somebody meets me, you can assume that the skills are there. So what I interview for is fit. And I’m always very curious to know, what is it about our company that appeals to that person?” She asks specifically about culture, requesting the candidate define it and how do you think that culture is special. She also asks candidates to talk about a failure and what lessons that they learned from the experience and how they dealt with the experience. I would suggest that both of those lines of inquiries should be used when evaluating a candidate for hire.

In a completely different arena, Houston Dash General Manager (GM) Brian Ching talked about the expectations he and his club have for the female soccer players on the squad. In addition to the obvious requirement for a professional soccer player to be technically proficient in the game of soccer, the team expects each player to have significant community involvement to help develop a fan base for the club. In the player interview process, this is thoroughly explained and each prospective player is asked if they would be willing to take on this additional role. But more than simply using this Q&A as an evaluation technique, it allows the team to communicate its expectations to each potential team member.

This is something that Human Resources (HR) and others involved in the hiring process can take to heart. They should have a serious and frank discussion with all potential hires, particularly those going into senior management or FCPA-related high-risk areas. This not only allows an evaluation along the lines that Barrett uses to determine if a hire will be a cultural fit for her company but it permits a company to directly express its expectations surrounding FCPA compliance and doing business ethically if a person is hired.

Another area that is often overlooked is the reference check. Many practitioners feel that a reference is not of value because prospective candidates will only list references that they believe will provide glowing recommendations of character. This leads to a pro forma reference check. However, in an article in Harvard Business Review (HBR), entitled “Gilt Groupe’s CEO on Building a Team of A Players”, author Kevin Ryan explodes this misconception by detailing how he views the entire hiring process and specifically checking references. I would add that it could be a valuable and useful tool for you and your compliance program.

In the hiring of personnel, Ryan details the three steps his company takes: (1) Resume review; (2) In-Person interview; and (3) Reference checks. Ryan believes that resumes are good for establishing “basic qualifications for the job, but not for much else.” He believes that the primary problem with in-person interviews is that they are skewed in favor of “persons who are well spoken [or] present well.” For Ryan, the key check is through references and he says, “References are really the only way to learn these things?”

Ryan recognizes that many people believe that reference checks are not of great value because companies cannot or will not give out much more information than confirming dates of employment. However, he also believes that “the way around it is to dig up people who will speak candidly.” He also recognizes that if you only speak to the references listed on a resume or other application, you may not receive the most robust appraisal. Ryan responds that the answer is to put in the work to check out references properly. Ryan believes this is one of the key strengths of search firms and that companies should emulate this practice when it comes to reference checks.

He notes that anyone who has worked in an industry for any significant length of time will have made many connections. Invariably some of these connections will be acquainted with you or those in your current, and former, company. Ryan gave the following example: A longtime friend who was employed at another company called and said that he had been asked by his hiring partner to find out “the real story” on a hiring candidate by asking Ryan his candid opinion of the candidate. Ryan’s response was “Don’t hire him.” Lest you think that such refreshing honesty no longer exists when informal employment references are provided, you are mistaken. In my past corporate position, I was charged with performing compliance due diligence on senior executives and I spent time doing what Ryan suggested, calling acquaintances that I knew and asking such direct questions. More than 75% of the time, I got direct responses.

Ryan believes that you must invest your company in the hiring process to get the right people for your company. The same is true in compliance. You do not want people with a propensity for engaging in corrupt acts working for, or leading, your company.

The hiring of someone who will perform business activities in compliance with anti-corruption laws such as the FCPA or UK Bribery Act will continue to be as much art as science because the hiring of quality employees for senior management positions is similarly situated. But that does not mean a company cannot work to not hire those persons who might have a propensity to engage in bribery and corruption if the situation presented itself. The hiring process is just one more tool that can be utilized to build an effective 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, 2014

Nolan Ryan’s First No-Hitter and Checking In On the FCPA Professor

As the Houston Astros continue their journey into complete non-relevance, both to myself and the greater southeast Texas TV watching audience, today we celebrate one of the Astros greatest players, Nolan Ryan. On this day, 41 years ago, Ryan pitched the first of his seven No-Hitters. Ryan played with the Astros from 1980-1988. Of course the idiocy of current Astros management did not begin with the current owner, as the team basically cut Ryan in 1988, saying that he was “washed up” at the tender age of 41. He simply went on to play for the Texas Rangers for another six years, where he only went on to pitch No-Hitters six and seven and record another 1000 strikeouts.

While I cannot determine at this point if the FCPA Professor will have a similarly sterling 26 year career that Ryan accomplished, he recently has done a couple of things that I certainly believe continue to demonstrate his All-Star work in the fields of law and compliance. As clearly denominated by his moniker, the FCPA Professor, he teaches law with a specialization in the arena of the Foreign Corrupt Practices Act (FCPA). While myself and others bemoan to him that he needs to get out on the speaking circuit so that we can hear more of this critique and analysis of FCPA enforcement and to learn from him, I was interested to see he is correcting this by leading his first FCPA Institute this summer over two days, July 16 and 17. The event will be held in Milwaukee and hosted by the law firm of Foley and Lardner.

The Professor’s stated goal in leading this first Institute is “to develop and enhance fundamental skills relevant to the FCPA and FCPA compliance in a stimulating and professional environment with a focus on learning. Information at the FCPA Institute is presented in an integrated and cohesive way by an expert instructor with FCPA practice and teaching experience.” Some of the topics, which will be covered, include the following:

• An informed understanding of why the FCPA became a law and what it seeks to accomplish;
• A comprehensive understanding of the FCPA’s anti-bribery and books and records and internal controls provisions and related enforcement theories;
• Various realties of the global marketplace which often give rise to FCPA scrutiny;
• The typical origins of FCPA enforcement actions including the prominence of corporate voluntary disclosures;
• The “three buckets” of FCPA financial exposure and how settlement amounts in an actual FCPA enforcement action are typically not the most expensive aspect of FCPA scrutiny and enforcement;
• Facts and figures relevant to corporate and individual FCPA enforcement actions including how corporate settlement amounts are calculated;
• How FCPA scrutiny and enforcement can result in related foreign law enforcement investigations as well as other negative business effects from market capitalization issues, to merger and acquisition activity, to FCPA related civil suits; and
• Practical and provocative reasons for the general increase in FCPA enforcement.

In other words, it is what you have come to expect from the FCPA Professor; well-thought out reasoned analysis, practical knowledge and learning, and provocative thinking and assessment. For more information on the FCPA Institute, click here.

However, as I will not be able to attend the Professor’s FCPA Institute since I will be hosting my daughter’s annual summer trek to the heat and humidity of Houston, I was equally pleased to see another offering by the FCPA Professor which comes out this summer and indeed it appears in book stores next month. It is his long awaited volume, entitled The Foreign Corrupt Practices Act in a New Era, where the Professor takes a look at the FCPA’s new era of enforcement and confronts the FCPA statutory text, legislative history, judicial decisions, enforcement agency guidance, and resolved FCPA enforcement actions. The contents include the following: Prologue Introduction and Overview; Chapter 1. Before the New Era: The Story of the FCPA and Its Early Enforcement; Chapter 2. FCPA Foundational Knowledge; Chapter 3. The FCPA’s Anti-Bribery Provisions; Chapter 4. The FCPA’s Books and Records and Internal Controls Provisions; Chapter 5. FCPA Enforcement; Chapter 6. Reasons for the Increase in FCPA Enforcement; Chapter 7. The FCPA’s Long Tentacles; Chapter 8. FCPA Compliance and Best Practices; Chapter 9. FCPA Reform; and Conclusion. Of course there is a handy Index as well.

The Professor has some early high praise for his work including the following kudos:

From Michael Mukasey, Former U.S. Attorney General, says “Professor Mike Koehler has brought to this volume the clear-eyed perspective that has made his FCPA Professor website the most authoritative source for those seeking to understand and apply the FCPA. This is a uniquely useful book, laying out systematically the history and rationale of the FCPA, as well as its evolution into a structure governed as much by lore as by law. It will be valuable both to those who counsel international corporations, whether in connection with immediate crises or long-term strategies; and to those who contemplate what the FCPA has become, and how it can be improved.”

From Daniel Chow, Associate Dean for International and Graduate Programs, The Ohio State University Michael E. Moritz College of Law, USA, says of the book “This is the single most comprehensive academic treatment of the Foreign Corrupt Practices available. Professor Koehler’s book will become the authoritative standard for the field. The book not only treats the history of the FCPA, but analyzes the statute’s elements in detail, discusses current cases, and makes proposals for reforms where the current law is deficient. The book is written in a clear, accessible style and I will use it often as a resource for my own scholarly work.”

From Richard Alderman, Former Director of the UK Serious Fraud Office, states “An excellent and thought-provoking book by a great expert. Backed up by rigorous analysis of cases, Professor Koehler constantly challenges those involved in anti-corruption work by asking the question “why?” He puts forward many constructive and well-argued suggestions for improvements that need to be considered. I have learned a lot from Professor Koehler over the years and I can thoroughly recommend this book.”

And from Tom Fox – “if the FCPA Professor writes about it you need to read it. While you may disagree with him, your FCPA perspective and experience will be enriched by the exercise.”

So if you are like me and cannot make it up to Milwaukee in July, go to Amazon.com and pre-order a copy of the FCPA Professor’s book, which is scheduled to ship next month. To order 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, 2014