Alstom Joins Santa’s Naughty List – In a Very Big Way

The North Pole for Foreign Corrupt Practices Act (FCPA) enforcement action announcements seems to have temporarily moved south for the month of December. Last week there was the final announcement of the long-standing Avon FCPA enforcement action. On December 22, 2014, the Department of Justice (DOJ) announced settlement of the Alstom enforcement action. Certainly the DOJ is giving out presents to companies that have been very, very naughty. I am currently exploring the Avon enforcement action over several days of blog posts but I had to interrupt those posts to write something about the Alstom resolution for it was extremely significant gift for the Chief Compliance Officer (CCO), compliance practitioner and companies going forward.

The Fine

First and foremost was the fine amount. At $772MM it is the highest criminal fine for FCPA violations in the history of the world. Siemens’ prior of a reported $800MM was a combination of DOJ and Securities and Exchange Commission (SEC) fines and penalties. Alstom was not subject to the jurisdiction of the SEC so there was no component of this amount for either civil books and records or internal controls violations. But for those few remaining dunderheads out there who think their private company status insulates them from FCPA liability; wake up and smell the mistletoe, as the DOJ will be looking for you to smack a big one on. The fine brings the 2014 fine totals up to around $1.5bn, which comes a close second to the record-setting year of 2010, where the total amount of fines was $1.8bn.

Disclosure, Cooperation and Conduct

While I am in the middle of lambasting Avon for its conduct that led to its FCPA violations, one really has to step aside and give some credit to Alstom for some of the worst actions a company can engage in when dealing with bribery and corruption. If there was anyone on the naughty list, it certainly was Alstom. First is the company’s failure to self-disclose its obvious criminal conduct. The second was the clear foot-dragging in dealing the DOJ, during the pendency of the investigation. Finally, to complete this triumvirate of idiocy was the company’s refusal to timely engage in remediation. Dick Cassin, writing in the FCPA Blog, pointed out that Alstom’s conduct included the following:

• Alstom’s refusal to fully cooperate with the department’s investigation for several years
• The breadth of the companies’ misconduct, which spanned many years, occurred in countries around the globe and in several business lines, and involved sophisticated schemes to bribe high-level government officials
• Alstom’s lack of an effective compliance and ethics program at the time of the conduct, and
• Alstom’s prior criminal misconduct, including conduct that led to resolutions with various other governments and the World Bank.

Individual Prosecutions

Alstom’s conduct was so bad during the investigation that the DOJ obtained indictments against four company executives during the pendency of the investigation. Three of these executives have pled guilty and are awaiting sentencing. Cassin wrote, “Alstom began cooperating only after the DOJ publicly charged several Alstom executives, the government said.” The UK Serious Fraud Office (SFO) has also brought charges against individuals.

Post Acquisition FCPA Liability

I promised a Christmas present for companies out there and neither Santa nor I want to disappoint those not on the naughty list, for the Alstom enforcement action makes clear that the company which is acquiring them, GE, is not responsible for the fine going forward. This enforcement action reinforces the message the DOJ presented in Opinion Release 14-02; that a company which engages in pre-acquisition due diligence, discloses and then remediates the issues after they acquire the entity, can rest easier about purchasing a FCPA violation. For if GE can purchase a company with the clear attitude about doing business in compliance with anti-corruption laws, such as Alstom, with confidence that it will not be subject to a FCPA enforcement action, it means that any other company can do so as well.

Cassin reported, “Alstom SA pleaded guilty to a two-count criminal information in federal court in Connecticut. The DOJ charged the company with violating the Foreign Corrupt Practices Act by falsifying its books and records and failing to implement adequate internal controls. Alstom admitted its criminal conduct…In addition, Alstom Network Schweiz AG, a Swiss subsidiary, pleaded guilty to a criminal information charging it with conspiracy to violate the antibribery provisions of the FCPA.” Finally, “Two U.S. subsidiaries — Alstom Power Inc. and Alstom Grid Inc. — both entered into deferred prosecution agreement with the DOJ. They admitted that they conspired to violate the antibribery provisions of the FCPA.” The settlement documents have not been released as yet but hopefully they will be by the time of the final sentencing hearing before US District Judge Janet B. Arterton in June 2015.

The significance of this enforcement action will reverberate for a long time to come.

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 Avon FCPA Settlement, Part I

It is finally done. The long awaited Avon Foreign Corrupt Practices Act (FCPA) enforcement action is on the books. I would say what a long, strange trip it has been but that does not really seem to capture everything that went on in this case. Before we only knew such things as a whistleblower contacting the Chief Executive Officer (CEO) of the company with allegations of bribery in the company’s China business unit, to the Head of Internal Audit being caught up directly in the scandal, put on administrative leave and then terminated; to a professional fee burn rate on the case which would rival the Gross National Product (GNP) of many countries; to Grand Jury subpoenas being issued (or threatened to be issued) to corporate executives to secure their testimony in criminal proceedings; to publicly negotiating with the Department of Justice (DOJ) and Securities and Exchange Commission (SEC); we all thought this FCPA matter had it all. But it turns out just how little we knew about the company’s conduct and just how bad it was which led to this settlement because to say it was bad would demean and belittle the word bad. So over the next few blog posts, I will be exploring Avon, its conduct and the FCPA enforcement action.

For the Record

The amount of the total fines and penalties was $135 million. As noted by the FCPA Professor, “the settlement is the third-largest ever against a U.S. company.” The enforcement action included several resolution vehicles, including a Criminal Information against Avon China resolved via a Plea Agreement; a Criminal Information against Avon Products resolved via a Deferred Prosecution Agreement (DPA) with an aggregate fine amount of $67.6MM. There was a separate SEC resolution through a Civil Complaint against Avon Products, which it agreed to resolve without admitting or denying the allegations through payment. The amount of the SEC settlement was $67.4MM. While the company’s internal investigation began in China, it quickly expanded so that it went far beyond China, including Japan, Argentina, Brazil, India and Mexico.

How Did We Get Here?

It all began back in May 2008, when an employee from Avon’s China business unit sent a letter to the head of the company alleging the China entity had engaged in bribery and corruption. In October 2008, Avon reported, in a Statement of Voluntary Disclosure, that it was investigating an internally reported allegation by an undisclosed whistleblower that corrupt payments had been made in its China operations. These allegations claimed that certain travel, entertainment and other expenses might have been improperly incurred. Although the details of the Avon case have not been disclosed, direct selling was not allowed in China under a law passed in 1998. The National Review reported that Avon was able to secure permission in late 2005 to begin direct selling on a limited basis. Later the Chinese government issued direct-selling regulations and granted Avon a broader license in February 2006 to make such sales.

In its 2009 Annual Report, Avon noted that the internal investigation and compliance reviews, which started in China, had now expanded to its operations in at least 12 other countries and was focusing on reviewing “certain expenses and books and records processes, including, but not limited to, travel, entertainment, gifts, and payments to third-party agents and others, in connection with our business dealings, directly or indirectly, with foreign governments and their employees”. The FCPA Professor, citing the Wall Street Journal (WSJ), reported that Avon suspended four employees, including the President, Chief Financial Officer (CFO) and top government affairs executive of Avon’s China unit as well as a senior executive in New York who was Avon’s head of Internal Audit.

One of the significant pieces of information to come out of the Avon matter is the related costs. As reported in the 2009 Annual Report the following costs were incurred and were anticipated to be incurred in 2010:

Investigate Cost, Revenue or Earnings Loss
Investigative Cost (2009)	$35 Million
Investigative Cost (anticipated-2010)	$95 Million
Drop in Q1 Earnings	$74.8 Million
Loss in Revenue from China Operations	$10 Million
Total	$214.8 Million

Marketwatch also reported that after these investigations were made public Avon’s stock prices fell by 8%. Lastly, in addition to the above direct and anticipated costs and drop in stock value, the ratings agency Fitch speculated about the possibility of a drop in Avon’s credit ratings. But as bad as these numbers appear they only got worse for Avon as by 2012 its spend on professional fees was estimated to be over $247MM. As of this date, the total professional fees are closer to $300MM.

Grand Jury Investigation and Terminations

The WSJ reported in February 2012 that the DOJ had gone to a grand jury with evidence of FCPA violations against US executives at Avon. Joe Palazzolo and Emily Glazer reported that several company employees were terminated for their role in the scandal. They wrote, “The company said it fired Vice Chairman Charles Cramb on Jan. 29 [2012] in connection with the overseas corruption probe and another investigation into allegedly improper disclosure of financial information to analysts. Mr. Cramb couldn’t be reached for comment. In May [2011], Avon said it fired Ian Rossetter, its former head of global internal audit and security and previously Avon’s head of finance in Asia. Mr. Rossetter didn’t respond to requests for comment and his attorney declined to comment. Bennett Gallina, a senior vice president responsible for the company’s operations outside the U.S. and Latin America, left Avon in February 2011, two days after being put on leave in connection with the internal corruption investigation, the company said at the time.”

Negotiating in Public

I do not know who was advising Avon but the decision to try and force the government’s hand by making public its negotiating position was one of the most bone-headed moves I have seen a similarly situated company make. Avon initially announced that it had opened negotiations with the US government over the terms of a resolution in August 2012. In mid 2013, the FCPA Blog reported that Avon low-balled the SEC with an opening offer of $12MM. Later, in 2013, the company reported in an SEC filing that the “Securities and Exchange Commission offered an FCPA settlement last month with monetary penalties that were ‘significantly greater’ than the $12 million the company had offered.” But not to take such government tactics sitting down, Avon publicly announced in the filing that “Monetary penalties at the level proposed by the SEC staff are not warranted.” That certainly was great information to put out to the public enforcing that you are taking a hardball approach with the SEC and telling them their fines and penalties are not deserved for a company that has gone through all Avon has during this FCPA journey.

As I said, this matter was a long strange journey but as strange as things were that we knew about before last week, they became much stranger. Tomorrow we take a look at the facts that came out through the settlement documents to see the nefariousness of Avon’s conduct.

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