FCPA Compliance and Ethics Blog

June 16, 2014

Watergate is Not Just a Hotel – Corporate Suitors for Alstom

Watergate ComplexToday is the anniversary of an event that can truly be said to have changed the world; although certainly not in the manner intended by its planners, sponsors or participants. Today is the anniversary of the 1972 Watergate Break-In. How much of the world has changed because of this event? We certainly would not have had Jimmy Carter as the US President and most probably would not have had the Foreign Corrupt Practices Act (FCPA) passed into law during his administration. Would Ronald Reagan have become President four years earlier in 1976 rather than 1980? Who knows, but, if yes, would the Soviet Union have collapsed sooner under the weight of his military buildup? What about the fall of the Shah and the taking of the US hostages, think Reagan would have had a more ‘robust’ response than Carter? All tantalizing questions for those interested in the great What Ifs of history.

Over the weekend, I read that the long shuttered Watergate complex is scheduled to be torn down to make way for a more modern office edifice in its most desirable of Washington DC locations. This reminded me of one of my favorite Watergate era slogans “And Watergate was not just a hotel!” Indeed it was not just a building, rather an entire mindset of a presidency that went seriously off the rails.

Interestingly I found a parallel to this slogan when reading about the overtures by General Electric (GE), then Siemens and also Mitsubishi Heavy Industries to purchase some or all of the French company Alstom. These offers are in spite of Alstom’s very public current anti-corruption issues, in several countries. Mike Volkov, in a blog post entitled “Alstom: The Next Poster Child for Anti-Corruption Enforcement”, said “In our FCPA world, we have a new poster child for blundering – Alstom. The handwriting is on the wall – as time goes on, the Justice Department is building a bigger and bigger FCPA case against Alstom. One of my favorite Dylan lyrics applies with full force – “You don’t need a weatherman to know which way the wind blows.” Further, “Clearly we have a case where the client company just does not understand what is going on, nor does senior leadership have the ability or desire to respond and fix the problems. Instead, Alstom’s failure to act and respond reflects the lack of any ethical culture. That in a nutshell is probably 90 percent of the reason that a culture of bribery took over the company.” Pretty strong stuff.

Four senior executives have been charged for FCPA violations around one project. The FCPA Professor reported, “The conduct at issue concerned the Tarahan coal-fired steam power plant project in Indonesia.” All were charged around the same set of facts. They are alleged to have paid bribes to officials in Indonesia, including a member of Indonesian Parliament and high-ranking members of Perusahaan Listrik Negara (PLN), the state-owned and state-controlled electricity company, in exchange for those officials’ assistance in securing a contract for the company to provide power-related services for the citizens of Indonesia, known as the Tarahan project.” Two of the four Alstom executives have pled guilty to FCPA violations.

Over the weekend, the Financial Times (FT) reported, in an article by Caroline Binham, entitled “UK prosecutors press on with Alstom probe”, that the Serious Fraud Office (SFO) has been given permission by the UK attorney-general to prosecute both the company and former employees for allegations of overseas bribery. The SFO “has also notified seven individuals but is considering whether to prosecute them after they were interviewed with the assistance of French authorities, people familiar with the investigation told the Financial Times…Among those who received letters from the SFO are the company’s former senior vice-president of ethics and compliance, Jean-Daniel Lainé, and three Britons who formerly held senior management positions: Graham Hall, Robert Hallett and Nicholas Reynolds.” All of the individuals identified in the FT article do not appear to have been a part of the Indonesia power project, which appears to form the basis of the FCPA charges here in the US.

So why such high level suitors for a company of which Volkov has opined, “It is an important reminder of how bad a company’s culture can become and the consequences of embracing a culture of lawlessness versus a culture of ethics and integrity.” What about all that ‘Springing Liability’ for which both Siemens and GE might be liable for if they are successful in purchasing some or all of Alstom that the US Chamber of Commerce and others rail about? I think that the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) answered these questions in the FCPA Guidance when they stated, “companies that conduct effective FCPA due diligence on their acquisition targets are able to evaluate more accurately each target’s value and negotiate for the costs of the bribery to be borne by the target. In addition, such actions demonstrate to DOJ and SEC a company’s commitment to compliance and are taken into account when evaluating any potential enforcement action.” But pre-acquisition work is only one part of the equation, as the FCPA Guidance goes on to state, “FCPA due diligence, however, is normally only a portion of the compliance process for mergers and acquisitions. DOJ and SEC evaluate whether the acquiring company promptly incorporated the acquired company into all of its internal controls, including its compliance program.Companies should consider training new employees, reevaluating third parties under company standards, and, where appropriate, conducting audits on new business units.”

One thing that GE and Siemens have in common are world-class compliance programs. Siemens was the subject of the highest FCPA fine ever at $800MM back in 2008. Since that time, it has successfully concluded a robust monitorship under the terms of its Deferred Prosecution Agreement (DPA). Siemens compliance representatives regularly speak at compliance related events and discuss not only the company’s commitment to anti-corruption compliance but they also detail how compliance is done at Siemens. GE is well known for having its compliance folks regularly speak at conferences about the details of its compliance regime. In other words, both companies’ have very public robust compliance regimes in place and most probably follow, at a minimum, the parameters set out in the FCPA Guidance.

Just as “And Watergate is not just a hotel!”; Springing Liability is not a warranted fear under the FCPA. The FCPA Guidance makes clear the steps a company should engage in under the FCPA to avoid liability in a mergers and acquisition (M&A) context. The steps are not only relatively straightforward; they are good business steps to take. If you do not know what you are looking to acquire, it is certainly hard to evaluate it properly and then to integrate it efficiently.

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

The Magna Carta and Scrutiny of Your Compliance Program

Magna CartaYesterday, June 15 was Father’s Day so for all us fathers out there, it was our day and I hope that you enjoyed and cherished it. It was also the anniversary of what I believe was one of the greatest achievements in Anglo jurisprudence, the signing of the Magna Carta, by King John and the Barons who opposed his tyranny. In 1215, the barons rose up in rebellion against the King’s abuse of feudal law and custom. The legal document drafted up for King John, required him to make specific guarantees of the rights and privileges of his barons and the freedom of the church.

On June 15, 1215, King John met the Barons at Runnymede on the Thames and set his seal to the Articles of the Barons, which after minor revision was formally issued as the Magna Carta. I have visited the field at Runnymeade where the Magna Carta was signed. Next year will be the 1100th anniversary of the signing of this document. For me, the Magna Carta is symbol of the sovereignty of the rule of law over the King. Its grant was of fundamental importance to the constitutional development of England and to the rest of the common law world such as the United States.

I thought about how King John was forced to sign the Magna Carta, clearly against his will, when I read an article in the May issue of the Harvard Business Review (HBR), entitled “How to Outsmart Activist Investors”, by Bill George and Jay W. Lorsch. While the article focuses on steps a company can take before an activist shareholder buys into a company and demands changes, I thought the process of preparation that the authors listed as something that a Chief Compliance Officer (CCO) should consider in his or her company’s compliance program.

The authors lay out the problem faced by company’s as follows, “Their game is simple: They buy stocks they view as undervalued and pressure management to do things they believe will raise the value, such as giving more cash back to shareholders or shedding divisions that they think are driving down the stock price. With increasing frequency they get deeply involved in governance—demanding board seats, replacing CEOs, and advocating specific business strategies.” They proposed a six-step process that allows a company to be ready for such an attack. However, I saw these six-steps as delineations a CCO could institute which would prepare a compliance program for a wide range of reviews, including audits, reviews by government regulators, queries by Board members or other high ranking company officials who may want to know more about a compliance program on a quick basis. So I have adapted the authors’ six steps to advise the CCO on how to be ready for such an event or perhaps a myriad of others.

Have a Clear Strategic Focus and Stick to It

In their article, the authors pointed to PepsiCo’s move to it’s “Performance with Purpose, a strategy targeting three growth areas: (1) “good for you” products, including Quaker Oats and Gatorade; (2) product innovations; and (3) emerging markets. Part of the idea was to fund the substantial investments—including acquisitions—required to build these categories with the cash flow from PepsiCo’s core business. PepsiCo did precisely that, acquiring a number of food and beverage companies in emerging economies such as Brazil, India, Russia, and Ukraine.” For the compliance practitioner, I think it means you need to stick to your guns and move your program forward. It does not mean that you will not hit road bumps along the way but if you have something like Stephen Martin’s suggestion for a 1 – 3 – 5 year program in writing and are following it, you can reject calls for major mid-course changes. 

Analyze Your Business as an Activist Would

In their article, the authors said, “CEOs need to ensure that their boards understand the tactics of activist investors and have a game plan for responding. That means analyzing both how the activists might try to increase short-term shareholder value—through spin-offs and divestitures or financial engineering such as stock buybacks and increased debt—and the company’s possible vulnerabilities in strategy and capital structure. Specific examples from other companies can help.” For the compliance practitioner, I believe this means you need to keep abreast of the most current information available on the Foreign Corrupt Practices Act (FCPA) or other types of anti-corruption compliance. While the 2012 FCPA Guidance still provides some of the best articulation of what the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) believe constitute an effective compliance program, you should still monitor enforcement actions and other information. So if your company is in the tech space, the March HP enforcement action is something you should review to determine if any of HP’s compliance failures might have implications for your company.

Have Your External Advisers Lined Up in Advance and Familiar with Your Company

The authors believe that to fight such proxy challenges “both management and the board must have external advisers whose guidance they can rely on.” However, for the compliance practitioner, it means that you have taken steps to assess and verify the efficacy of your compliance program. Certainly you can benchmark your program against others in your industry but also having third parties assess, benchmark and verify your compliance program can be an excellent way to show where your program stands if someone comes looking at it.

Build Board Chemistry

Obviously when fighting an activist investor, Board cohesion is paramount. The authors note, “Activist investors are often out to divide a target company’s board. To address the issues they raise in an objective and constructive manner, directors need the unity that comes from years of building board chemistry. That chemistry is enhanced through repeated engagement on important issues, weathering crises together, and candid dialogue with the CEO. The latter requires a high degree of transparency from the CEO and a willingness to share even the most sensitive information involved in decision making. To cope with an activist’s challenges, directors must be fully committed to the company and its long-term objectives.” But the same is true for a CCO. Having Board support is imperative to any long-term success for a compliance program. It is up to you to develop the relationships and provide timely information so that there are no surprises, or as few surprises as possible, in the area of compliance.

Perform in the Short Run Against Declared Goals

Just as “the best defense against an activist investor is consistent performance that realizes the company’s stated goals; anything else makes the company vulnerable”, I believe that a compliance program should also measure itself against stated goals. The FCPA Guidance makes clear that a compliance program begins with a risk assessment. The reason is not only to use the risk assessment to determine where your compliance program might stand but also to create a road map for future enhancements. It is also important to set realistic expectations. Overly ambitious compliance goals, which ultimately fall short can trip up a CCO and make a program vulnerable to criticisms.

Don’t Dismiss Activist Ideas Out of Hand

The authors note “Most activist investors are smart, motivated people who often notice things that boards and managers overlook. It is generally worth listening to their recommendations and implementing the ones that make sense.” For the CCO or compliance practitioner, I have long advocated listening to the business units to help see what works and what does not work. This does not mean a compliance program can only be followed when feasible, but it may require compliance program flexibility to allow it to not only measure and assess risk but to adequately manage compliance risk.

Doing What’s Best for All Your Shareholders

The authors believe “One of a board’s most important roles is to ensure that the company stays true to the mission and values that have made it successful. In recent years several activist fund managers with no industry experience have come to corporations with proposals for radical, unproven course changes. Sometimes major changes are needed, but companies that allow outside activists to implement them without full and careful consideration risk losing the commitment and engagement of their employees and customers.” Similarly, a CCO or compliance professional needs “to work to ensure the long-term viability of the company’s [compliance] mission and strategy.”

Whether you are a lawyer or not, I believe that the Magna Carta is one of the most significant legal documents in the history of Anglo jurisprudence. Even if King John signed it at the point of a knife to his throat, or not, it became one of the foundation documents for English and, later, American law. But another lesson one may draw from it was that King John was not prepared when his Barons revolted against him. The HBR article provides a clear path for the compliance practitioner to follow to prepare for excess, outside, unwanted or other scrutiny.



If you are interested in learning about mergers and acquisitions under the FCPA I am involved in to upcoming events designed to give you the most up-to-date advice on this area of compliance. Both events are sponsored by The Network. The first event is a webinar entitled appropriately enough, “Mergers and Acquisitions Under the FCPA” and is scheduled for  Tuesday, June 17th, 2014 TIME: 2:00 pm EDT. For registration and additional information click here. On Tuesday, June 24th the always popular Tom Fox/Stephen Martin roadshow travels to Denver where I will speak live on Merger and Acquisitions Under the FCPA and Stephen will talk about risk assessments under the FCPA. For information on the Denver event, click here


World Cup 2014I am putting on a four part podcast series on the World Cup, detailing issues of bribery and corruption, together with an ongoing discussion of Team USA and this year’s tournament. I am joined by Mike Brown, the Managing Director of Infortal. You can check out Part I by clicking here of the series where we discuss bribery of referees in the lead up to the 2010 World Cup held in South Africa and FIFA’s response. Mike and I then review Team USA and it’s draw in Group G-the Group of Death. I hope that you will check out this series and enjoy it as much as Mike and I enjoy recording the episodes. Also remember, my podcast, the FCPA Compliance and Ethics Report is available for download at no charge on iTunes so you can listen to Part I on your commute to work. So sign up for the podcast from WordPress or iTunes and enjoy our series.




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

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