Great Structures Week II – Structures from Ancient Egypt and Greece

I continue my Great Structures Week with a focus on great structures from the earliest times, ancient Egypt and Greece. I am drawing these posts from The Teaching Company course, entitled “Understanding the World’s Greatest Structures: Science and Innovation from Antiquity to Modernity”, taught by Professor Stephen Ressler. From Egypt there are of course the Pyramids, of which Ressler says, “They’re important, not just because they’re great structures, but also because they represent some of the earliest human achievements that can legitimately be called engineering. The Great Pyramid of Giza stands today as a testament to the strength and durability of Egyptian structural engineering skills.”

From Greece we derive what Vitruvius called the “Empirical Rules for Temple Design” which define a “single dimensional module equal to the radius of a column in the temple portico, then specify all other dimensions of the building in terms of that module.” These rules are best seen in Greek temples, largely consisting of columns, which are defined as “a structural element that carries load primarily in compression” and beams, which are “structural elements subject to transverse loading and carry load in bending.” My favorite example of the use of columns is seen in the Parthenon; the most famous of all Greek temples still standing.

In many ways these two very different structures stand as the basis of all structural engineering and Great Structures that come later throughout history. For any anti-corruption compliance regime based on the Foreign Corrupt Practices Act (FCPA), UK Bribery Act or other anti-bribery statutes, the same is true for a Code of Conduct and written policies and procedures. They are both the building blocks of everything that comes thereafter.

In an article in the Society for Corporate Compliance and Ethics (SCCE) Complete Compliance and Ethics Manual, 2^nd Ed., entitled “Essential Elements of an Effective Ethics and Compliance Program”, authors Debbie Troklus, Greg Warner and Emma Wollschlager Schwartz, state that your company’s Code of Conduct “should demonstrate a complete ethical attitude and your organization’s “system-wide” emphasis on compliance and ethics with all applicable laws and regulations.” Your Code of Conduct must be aimed at all employees and all representatives of the organization, not just those most actively involved in known compliance and ethics issues. From the board of directors to volunteers, the authors believe that “everyone must receive, read, understand, and agree to abide by the standards of the Code of Conduct.” This would also include all “management, vendors, suppliers, and independent contractors, which are frequently overlooked groups.”

There are several purposes identified by the authors that should be communicated in your Code of Conduct. Of course the overriding goal is for all employees to follow what is required of them under the Code of Conduct. You can do this by communicating what is required of them, to provide a process for proper decision-making and then to require that all persons subject to the Code of Conduct put these standards into everyday business practice. Such actions are some of your best evidence that your company “upholds and supports proper compliance conduct.”

The substance of your Code of Conduct should be tailored to the company’s culture, and to its industry and corporate identity. It should provide a mechanism by which employees who are trying to do the right thing in the compliance and business ethics arena can do so. The Code of Conduct can be used as a basis for employee review and evaluation. It should certainly be invoked if there is a violation. To that end, I suggest that your company’s disciplinary procedures be stated in the Code of Conduct. These would include all forms of disciplines, up to and including dismissal, for serious violations of the Code of Conduct. Further, your company’s Code of Conduct should emphasize it will comply with all applicable laws and regulations, wherever it does business. The Code needs to be written in plain English and translated into other languages as necessary so that all applicable persons can understand it.

The written policies and procedures required for a best practices compliance program are well known and long established. As stated in the FCPA Guidance, “Among the risks that a company may need to address include the nature and extent of transactions with foreign governments, including payments to foreign officials; use of third parties; gifts, travel, and entertainment expenses; charitable and political donations; and facilitating and expediting payments.” Policies help form the basis of expectation and conduct in your company and Procedures are the documents that implement these standards of conduct.

Another way to think of policies, procedures and controls was stated by Aaron Murphy, now a partner at Foley & Lardner, in his book “Foreign Corrupt Practices Act”, when he said that you should think of all three as “an interrelated set of compliance mechanisms.” Murphy went on to say that, “Internal controls are policies, procedures, monitoring and training that are designed to ensure that company assets are used properly, with proper approval and that transactions are properly recorded in the books and records. While it is theoretically possible to have good controls but bad books and records (and vice versa), the two generally go hand in hand – where there are record-keeping violations, an internal controls failure is almost presumed because the records would have been accurate had the controls been adequate.”

Borrowing from an article in the Houston Business Journal (HBJ) by John Allen, entitled “Company policies are source and structure of stability”, I found some interesting and important insights into the role of policies in any anti-corruption compliance program. Allen says that the role of policies is “to protect companies, their employees and consumers, and despite an occasional opposite outcome, that is typically what they do. A company’s policies provide a basic set of guidelines for their employees to follow. They can include general dos and don’ts or more specific safety procedures, work process flows, communication guidelines or dress codes. By establishing what is and isn’t acceptable workplace behavior, a company helps mitigate the risks posed by employees who, if left unchecked, might behave badly or make foolhardy decisions.”

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

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

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

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

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

For a review of what goes into the base structures of a best practices compliance program, I would suggest you check my book Doing Compliance: Design, Create, and Implement an Effective Anti-Corruption Compliance Program, which is available through Compliance Week. You can review the book and obtain a copy by clicking 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, 2015

Welcome to COSO and the World of Internal Controls – Part I

I have intentionally avoided a Top Five or Top Ten prediction list for Foreign Corrupt Practices Act (FCPA) enforcement going forward from 2014 into 2015. However there is one area of FCPA enforcement, which I think underwent a sea change in 2014 and has significant implications for the Chief Compliance Officer (CCO) and compliance practitioner in 2015 and far beyond. That change will be in the enforcement by the Securities and Exchange Commission (SEC) of the internal controls provisions of the FCPA. Last fall we saw three SEC enforcement actions, where there was no corresponding Department of Justice (DOJ) enforcement action yet there was a SEC enforcement action around either the lack or failure of internal controls. Those enforcement actions were Smith & Wesson, Layne Christensen and Bio-Rad.

Coupled with this new found robust enforcement strategy by the SEC, is the implementation of the COSO 2013 Framework, which became effective in December 2014. COSO stands for Committee of Sponsoring Organizations of the Treadway Commission, which originally adopted, in 1992, a framework for basis to design and then test the effectiveness of internal controls. It was deemed necessary to update this more than 20-year old COSO Framework, as modified in 2013, so that it provides a very supportable approach when adversarial third parties challenge whether a company has effective internal controls. While the COSO Framework is designed for financial controls, I believe that the SEC will use the 2013 Framework to review a company’s internal controls around compliance. This means that you need to understand what is required under the 2013 Framework and be able to show adherence to it or justify an exception if you receive a letter from the SEC asking for evidence of your company’s compliance with the internal controls provisions of the FCPA.

Because I believe this single area of FCPA enforcement is so important and will increase so much, I am going to dedicate several posts to an exploration of internal controls, focusing on the COSO 2013 Framework. In Part I, I begin with a review of internal controls under the FCPA.

What are internal controls?

What are internal controls in a FCPA compliance program? The starting point is the law itself. The FCPA itself requires the following:

Section 13(b)(2)(B) of the Exchange Act (15 U.S.C. § 78m(b)(2)(B)), commonly called the “internal controls” provision, requires issuers to:

devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that—

(i) transactions are executed in accordance with management’s general or specific authorization;

(ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets;

(iii) access to assets is permitted only in accordance with management’s general or specific authorization; and

(iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any

differences ….

The DOJ and SEC, in their jointly released FCPA Guidance, stated, “Internal controls over financial reporting are the processes used by companies to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements. They include various components, such as: a control environment that covers the tone set by the organization regarding integrity and ethics; risk assessments; control activities that cover policies and procedures designed to ensure that management directives are carried out (e.g., approvals, authorizations, reconciliations, and segregation of duties); information and communication; and monitoring.” Moreover, “the design of a company’s internal controls must take into account the operational realities and risks attendant to the company’s business, such as: the nature of its products or services; how the products or services get to market; the nature of its work force; the degree of regulation; the extent of its government interaction; and the degree to which it has operations in countries with a high risk of corruption.”

Aaron Murphy, a partner at Foley and Lardner in San Francisco and the author the most excellent resource entitled “Foreign Corrupt Practices Act”, has said, “Internal controls are policies, procedures, monitoring and training that are designed to ensure that company assets are used properly, with proper approval and that transactions are properly recorded in the books and records. While it is theoretically possible to have good controls but bad books and records (and vice versa), the two generally go hand in hand – where there are record-keeping violations, an internal controls failure is almost presumed because the records would have been accurate had the controls been adequate.”

Well-know internal controls expert Henry Mixon has said that internal controls are systematic measures such as reviews, checks and balances, methods and procedures instituted by an organization that performs several different functions. These functions include allowing a company to conduct its business in an orderly and efficient manner; to safeguard its assets and resources, to detect and deter errors, fraud, and theft; to assist an organization ensuring the accuracy and completeness of its accounting data; to enable a business to produce reliable and timely financial and management information; and to help an entity to ensure there is adherence to its policies and plans by its employees, applicable third parties and others. Mixon adds that internal controls are entity wide; that is, they are not just limited to the accountants and auditors. Mixon also notes that for compliance purposes, controls are those measures specifically to provide reasonable assurance any assets or resources of a company cannot be used to pay a bribe. This definition includes diversion of company assets, such as by unauthorized sales discounts or receivables write-offs as well as the distribution of assets.

The FCPA Guidance goes further to specify that internal controls are a “critical component” of a best practices anti-corruption compliance program. This is because the design of an entity’s “internal controls must take into account the operational realities and risks attendant to the company’s business, such as the nature of its products or services; how the products or services get to market; the nature of its work force; the degree of regulation; the extent of its government interaction; and the degree to which it has operations in countries with a high risk of corruption. A company’s compliance program should be tailored to these differences.” After a company analyzes its own risk, through a risk assessment, it should design its most robust internal controls around its highest risk.

COSO and Internal Controls

Larry Rittenberg, in his book COSO Internal Control-Integrated Framework said that the original COSO framework from 1992 has stood the test of time “because it was built as conceptual framework that could accommodate changes in (a) the environment, (b) globalization, (c) organizational relationship and dependencies, and (d) information processing and analysis.” Moreover, the updated 2013 Framework was based upon four general principles which including the following: (1) the updated Framework should be conceptual which allows for updating as internal controls (and compliance programs) evolve; (2) internal controls are a process which is designed to help businesses achieve their business goals; (3) internal controls applies to more than simply accounting controls, it applies to compliance controls and operational controls; and (4) while it all starts with Tone at the Top, “the responsibility for the implementation of effective internal controls resides with everyone in the organization.” For the compliance practitioner, this final statement is of significant importance because it directly speaks to the need for the compliance practitioner to be involved in the design and implementation of internal controls for compliance and not to simply rely upon a company’s accounting, finance or internal audit function to do so.

So why will all of the above be a sea change for FCPA enforcement since after all, the requirement for internal controls has been around since 1977. The Smith & Wesson case shows the reason. In its Administrative Order, the SEC stated, “Smith & Wesson failed to devise and maintain sufficient internal controls with respect to its international sales operations. While the company had a basic corporate policy prohibiting the payment of bribes, it failed to implement a reasonable system of controls to effectuate that policy.” Additionally, the company did not “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are executed in accordance with management’s general or specific authorization; transactions are recorded as necessary to maintain accountability for assets, and that access to assets is permitted only in accordance with management’s general or specific authorization.” All of this was laid out in the face of no evidence of the payment of bribes by Smith & Wesson to obtain or retain business. This means it was as close to strict liability as it can be without using those words. Kara Brockmeyer, chief of the SEC Enforcement Division’s FCPA Unit, was quoted in a SEC Press Release on the matter that “This is a wake-up call for small and medium-size businesses that want to enter into high-risk markets and expand their international sales.” When a company makes the strategic decision to sell its products overseas, it must ensure that the right internal controls are in place and operating.”

In Part II we will begin our exploration of the COSO 2013 Framework and what it requires in the way of internal controls for your 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, 2015

Franchising and Liability Under the FCPA

I am often asked about franchisor liability under the Foreign Corrupt Practices Act (FCPA). Franchising has been a successful model in the US and now many corporations are looking at overseas expansion opportunities. Franchise law has become well developed across the US, with many states developing laws to protect the rights and obligations of both parties in a franchise agreement. According to an International Franchise Association survey of nearly 1,600 franchise systems in 2008 it stated “nearly two-thirds (61 percent) of respondents currently franchise or operate in non-U.S. markets and three-fourths (74 percent) plan to begin international expansion efforts or accelerate their current ventures immediately.”

There are no reported FCPA enforcement actions regarding franchisors. However, the factors in a franchise relationship would appear to lead to clear FCPA responsibility of the franchisor for its overseas franchisee’s actions. Additionally, court interpretation of the FCPA has held that it is applicable where conduct, violative of the Act, is used “to obtain or retain business or secure an improper business advantage” which can cover almost any kind of advantage, including indirect monetary advantage even as nebulous as reputational advantage. As everyone knows, the FCPA prohibits payments to foreign officials to obtain or retain business or secure an improper business advantage. Nevertheless many US companies view franchisees as different from other types of more direct sales representatives, such as company sales representatives, agents, resellers or even joint venture (JV) partners, for the purposes of FCPA liability.

I believe that such an analysis is misguided as the Department of Justice (DOJ) takes the position that a US company’s FCPA responsibilities extend to the conduct of a wide range of third parties, including the aforementioned company sales representatives, agents, resellers, JV partners and distributors. It does not take too great a leap of imagination to see that a franchise relationship could be contained within this interpretation. It does not take too many legal steps to see that a franchisee’s actions can impute FCPA liability to a US franchisor.

There are other factors, unique to the franchise relationship, which would point towards FCPA liability of the US franchisor. A US franchisor’s intent and the degree of control it exercises over its overseas franchisees’ operations are factors the DOJ/Securities and Exchange Commission (SEC) might consider in determining whether to pursue a FCPA case against a franchisor for bribes made by one of its foreign franchisees. It is always in the financial interest of a US franchisor for its franchisees to be successful businesses. Additionally, most US franchisors require its overseas franchisee’s to use the same company name for branding. Of course, not only the initial franchise fee but the franchisee’s monthly royalty payment roll up into the books and records of a franchisor so that might well catch the attention of the SEC if there is a FCPA books and records violation.

Victor Vital and Jessica Parker-Battle, writing in the Franchise Law Journal, Winter 2012 Issue, in an article entitled “Implications of the Foreign Corrupt Practices Act for International Franchising”, believe that a franchisor may not have direct involvement in conduct prohibited by the FCPA, there may not be the requisite corrupt intent required under the statute. However, I believe unless a franchisor has an adequate compliance program in place, a franchisor may well find itself in the shoes of Frederick Bourke and sustain a finding of conscious indifference.

Most franchisors have thorough financial vetting requirements before allowing any person or business to become a franchisee. However, how many of these same businesses perform FCPA compliance due diligence on their prospective overseas franchises? How many US franchisors have FCPA compliance training programs? How many evaluate, on an ongoing basis, the FCPA compliance and program of their overseas franchisees? How many US franchisors have a compliance hotline or other reporting mechanism for any compliance violations made against their franchisees?

Vital and Parker-Battle suggest that franchisors conduct thorough research in both the foreign market they hope to enter and on their potential franchisees. The franchise agreement itself should have strong FCPA anti-corruption/anti-bribery language and any franchisee, and its key employees, should receive FCPA training. The franchisor also needs to have a compliance subject matter expert (SME) available for franchisees and they also suggest that the franchisor provide an anonymous reporting hotline for FCPA violations. They end some of their suggested practices for the franchisor with the following, “it would be prudent to pay particular attention and monitor those countries in areas where bribery or gifts are encouraged in business relations. In sum, franchisors must be diligent when entering a foreign market and make sure to use best practices routinely and consistently.”

Another way to look at this issue comes from Foley and Lardner attorney Aaron Murphy from his book, entitled “Foreign Corrupt Practices Act – A Practical Resource for Managers and Executives”. In a chapter entitled “You Do More With the Government Than You Think”, Murphy has several examples of how any US company doing business overseas will come into contact with a foreign governmental official and, thereby, create a possible FCPA liability. Many of these are areas which a US based franchisor would have to utilize to do business in a foreign country, including some or all of the following:

• Interactions with Customs Officials. Every time your company sends raw materials into, or brings them out of, a country there is an interaction with a foreign governmental official in the form of a customs official. Every customs transaction involves a payment to a foreign government and every transaction involves some form of a foreign governmental regulatory process. While the individual payment per transaction can be small, the amount of total transactions can be quite high, if a large volume of goods are being imported into a foreign country.
• Interaction with Tax Officials. While noting that interacting with international tax authorities can present problems similar to those with customs officials, Murphy observes that the stakes can often be much higher since tax transactions may be less in frequency but higher in financial risk. These types of risks include the valuation of raw materials for VAT purposes before such materials are incorporated into a final product, or the lack of segregation between goods to be sold on the foreign country’s domestic market as opposed to those which may be shipped through a free trade zone for sale outside that country’s domestic market.
• Licensing and Permits. Your company is a retail seller of clothes and cosmetics and you do not understand how the FCPA applies to your foreign sales operations? Every physical location that you sell your goods in will require some type of license to operate your business. It could require multiple licenses such as a national license, state license and local municipal license, additionally you will need a building permit if you intend to build out or modify your retail stores.
• Work Permits and Visas. If your company franchises overseas it will have to send someone from the home office to operate in-country at some point. In the post-9/11 world this probably means that, at a minimum, your company will have to obtain a visa for each employee who enters the foreign country and perhaps a work permit as well. The visa process can start in the United States with a trip to foreign government consulate or even the embassy and at that point you are dealing with a foreign governmental official. The work permit process can also begin in the United States but often may continue in the foreign country.
• Inspections and Certifications. Consider the Tex-Mex restaurant chain that desires to take this cuisine across the world. In any city in the world there will be some type of certification process to enable to the business to set up and start operating and then there will be the need for ongoing inspections for sanitary conditions. Such inspections may be rare but if there is “slime in the ice machine” it may be grounds to close the restaurant.

How would all of this play out for a franchisor? As a franchisor moves into foreign markets there could well be the temptation to “grease the skids” and make payments or offer gifts to government officials, or their family members, to get the permits or permissions necessary to open and operate. In many countries, bribery is a common way of getting business done, and there can be tremendous pressure from local agents or franchisee candidates to follow regional customs and use bribes to become or remain competitive. Even if it is not the US franchisor’s own employees that engage in the FCPA violations, the US franchisor will still face the risk of an enforcement action if the franchisee’s employees engage in such 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, 2015

 

 

 

How To Demonstrate Ethics and Compliance – Earn It, Re-Earn It and Re-Evaluate It

What should your company do if it finds itself in a situation where some of its senior leadership has engaged in conduct which violates its own ethical standards or external legal standard such as the Foreign Corrupt Practices Act (FCPA)? Assume your company is now in McNulty Maxim No. 3 of “What did you do about it?” as you have investigated the conduct and disciplined the senior management in question. However, you want to go further and try to take steps that will detect and prevent the conduct in the future.

A current example of this is going on in the US military. In reaction to recent scandals involving lapses of personal character, the US military has instituted a series of changes to help military commanders to focus on ethical standards. In an article in the New York Times (NYT), entitled “Conduct at Issue as Military Officers Face a New Review”, Thom Shanker discussed a range of responses that the military will pursue. He reported that “The new effort is being led by Gen. Martin E. Dempsey, the chairman of the Joint Chiefs of Staff, as part of a broad overhaul of training and development programs for generals and admirals. It will include new courses to train the security detail, executive staffs and even the spouses of senior officers.” The article quoted General Dempsey as saying, “Conversely, you can have someone who is intensely competent, who is steeped in the skills of the profession, but doesn’t live a life of character. And that doesn’t do me any good.”

The military has initiated three broad responses. The first is a “regularly scheduled professional reviews would be transformed from top-down assessments to the kind of “360-degree performance evaluation” often seen in corporate settings.” A 360-degree review is one which comes from members of an employee’s immediate work circle. Most often, 360-degree feedback will include direct feedback from an employee’s subordinates, peers, and supervisor(s), as well as a self-evaluation. It can also include, in some cases, feedback from external sources, such as customers and suppliers or other interested stakeholders. The results from a 360-degree evaluation are often used by the person receiving the feedback to plan and map specific paths in their development.

While acknowledging the challenges from that comes from a subordinate review in a top-down hierarchical structure, such as the military, General Dempsey stated that “we’ve developed some bad habits” and that “It’s those bad habits we are seeking to overcome.” The article quoted Richard H. Kohn, a professor emeritus at the University of North Carolina, Chapel Hill, who specializes in military culture who said “he thought the 360-degree evaluation would have a positive effect on the leadership styles of many officers. He also stated that “It will reduce what the military calls ‘toxic leadership,’ elevating those who are highly competent but also fair and less brusque and peremptory.”

The second response was increased training on values. “General Dempsey said the demands of combat deployments in the past decade had prevented officers from attending the academic programs that historically had been integrated into an officer’s career every few years, and he pledged to rebalance that.” I found this quote very fascinating as it showed the extent that the military uses outside resources, I.E. civilian academic programs to supplement training on military values. Due to the increased deployments since 9/11, these traditional academic rotations have been less ongoing. Dr. Kohn found that these new training programs are a good enhancement to military training as “most officers need to be reminded of the rules and regulations on a routine basis.” But this training will go past simply the senior officers as “new programs will be instituted to ensure that a commander’s staff, and a spouse, are fully aware of military regulations.”

The third component will be more internal audits. The articled noted that “Under General Dempsey’s plan teams of inspectors will observe and review the procedures of commanders and their staffs. The inspections will not be punitive, but will provide a “periodic opportunity for general officers and flag officers to understand whether, from an institutional perspective, we think they are inside or outside the white lines.”” I found this component to be similar to the ‘Mock Audit’ concept that is used in the power industry that I recently wrote about in the post “In Praise of the Mock Audit”. A ‘Mock Audit’ is a mechanism by which a compliance team can go into a facility and not only try to determine what might need remediation but, equally importantly, help the employees in that facility to move towards greater compliance.

For the FCPA compliance practitioner, this response by the US military has some very interesting parallels to what the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) say should be in your FCPA compliance program. The DOJ/SEC FCPA Guidance demonstrates that a company should strengthen and supplement its compliance program on causes underlying the compliance issues which arose. The Guidance states, “An effective compliance program promotes “an organizational culture that encourages ethical conduct and a commitment to compliance with the law.” Such a program protects a company’s reputation, ensures investor value and confidence, reduces uncertainty in business transactions, and secures a company’s assets. A well-constructed, thoughtfully implemented, and consistently enforced compliance and ethics program helps prevent, detect, remediate, and report misconduct, including FCPA violations. [emphasis supplied] Further, in its section on Declinations, one of the six common elements which companies that received declinations engaged in was to make their compliance program more robust around the FCPA violation which arose. Clearly the DOJ and SEC believe that a company with a strong compliance system and culture will not only be in better position to comply with the FCPA but will be a better company.

General Dempsey clearly believes that the military has high ethical values. Shanker wrote that “He said the issue of understanding the military as a profession, and not just an occupation, had fascinated him since his days as a junior officer; he would be subject to the same rules, regulations and assessments he now is championing.” Shanker ended his article with the following quote from General Dempsey, “In my 39 years in the military, I have learned that you are not a profession just because you say you are,” he said. “You have to earn it and re-earn it and re-evaluate it from time to time.”

To me that sounds something like the following-you are not an ethical company because you say you are but because you do compliance by putting in the policies and procedures to do so.

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

© Thomas R. Fox, 2013

Brother Can You Swop a Car? FCPA and Bribery Act Implications in the Barter Economy

While the economy has improved from the depths of the Bush Recession of 2008, things are not back where most businesses and governments would like them to be. One of the more interesting responses to the continuing economic doldrums that I have read about is the age old art of bartering. According to the International Reciprocal Trade Association (IRTA), the ongoing economic slump has encouraged companies to offset shrinking orders and ongoing skimpy credit from financial institutions to put excess products to use by bartering them. A recent article in the Financial Times (FT) by reporter Alicia Clegg, entitled “The art of good bartering”, further piqued my interest.

In her article, Clegg quoted Brian Petro, who has a blog entitled “Barterfanatic.com”, who said that bartering allows him continue operating his business through the exchange of goods. Additionally bartering is a way to overcome liquidity problems or by-pass currency restrictions. The IRTA says that bartering has increased substantially over the past four years or so in some of the following countries: the United States, Britain, the Netherlands, France, Italy, Spain, Portugal and “parts of Asia”.

The bartering system, as envisioned by the IRTA and others, has become quite a sophisticated system. Typically a smaller company will “barter their unsold goods and services through a barter exchange, selling to another exchange member in return for trade credits which can be used to buy something from another exchange member.” Larger businesses typically use a different model where they will barter slow moving stock with a trade barter company, who pays the company back in trade credits which the original entity will then use to purchase goods and services. Clegg reported that the barter exchange “typically charges buyer and seller a cash transaction fee of 5-6 percent.”

While the IRTA does have a Code of Ethics and Conduct for its members, it does not speak to anti-corruption or anti-bribery. While most people think that the biggest issue around bartering is tax,  because both buyers and sellers need to assign market values to what they buy and sell in the process, there is also a Foreign Corrupt Practices Act (FCPA) and UK Bribery Act compliance issue involved, which revolves around these exchanges or other intermediaries who facilitate barter deals by providing the credits for goods or services received.

What might the relationship of these intermediaries be under the FCPA or Bribery Act? Let’s take the Bribery Act since that law clearly bans all bribery and corruption between private entities not just with foreign government officials as set forth in the FCPA. Under the Bribery Act, a company can be liable  if someone who performs services on their behalf, like an employee or agent, pays a bribe specifically to get business, keep business, or gain a business advantage for the entity. It is not limited to agents, distributors, sales representatives and the like. The term in the Ministry of Justice’s Six Principles of Adequate Procedures is “associated persons” and an intermediary, such as a barter exchange or other similar entity, may well qualify as an associated person.

What if a barter exchange is based in a well-known money-laundering location? Think that might move up its risk profile? While the IRTA has on its website, that it is in “strategic partnership with the IRS Partnership Outreach” as a “collaborative effort to work with a major government group to educate business owners on reciprocal trade”, it does not take too much insight to see that other laws and regulations might be involved.

What are some of the questions you need to be asking from the compliance perspective if your business is going to engage in bartering? First, and foremost, is to know who you are doing business with and how you are doing business with them. If you are bartering through an exchange, you should perform due diligence on them as they may well be your agent under the FCPA and most probably an “associated person” under the Bribery Act. What compliance protocols do they have in place? Do you have any agreement with them that has FCPA or Bribery anti-corruption/anti-bribery terms and conditions? What rights do you have to protect your product after it has been exchanged?

Consider this “creatively structured” deal that Clegg wrote about. The automotive maker Kia struck an exchange with the UK bartering company Miroma, where Kia swopped some of its auto fleet with a publisher “in return for poster, cinema and press slots for Kia.” From the description in the FT article, it certainly sounded like Miroma acted as the agent for Kia in the series of transactions.

Just as my colleague Aaron Murphy wrote in his book “Foreign Corrupt Practices Act – a Practical Resource for Managers and Executives” about the FCPA issues that many retailers might face, the issues which companies engaging in bartering are in plain sight as well. However, just as those in retailing may not have looked closely and are now paying a high price to look, those companies which engage in bartering and who fail to look at the FCPA and Bribery Act as potential sources of liability should do so sooner rather than later.

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, 2012

The Shelby Mustang and Continued Development of a FCPA Compliance Program

Carroll Shelby died last week. For anyone who following racing or loved the Muscle Car Era, no light shone brighter that Shelby’s. In 1959 (a little before I started to follow racing) Shelby was the first Texan to win the 24 Hours of Le Mans. Forced to retire from racing due to a medical condition, Shelby became one of the top race car designers in the 1960’s with his Shelby-American teams winning the 24 Hours of Le Mans, driving Fords designed by Shelby, to victories in 1966 and 1967. But I remember Carroll Shelby for those souped-up, mean as heck Shelby Mustangs, which debuted in 1965 and lasted until the end of the Muscle Car Era in 1971.

So what’s the compliance angle here? Well, believe it or not, it involves Wal-Mart. In its obituary for Shelby, the New York Times (NYT) reported that “Early prototypes broke apart because of stress on the fragile frames. “When you try to put 300 horsepower in a car designed for 100, you learn what development means,” Shelby recalled in a 2002 interview with Sports Illustrated.” From this I took away that any program, whether it is designing a race car or an atin-corruption compliance program requires development until you get it right.

I thought about this idea in the context of franchising and the Foreign Corrupt Practices Act (FCPA). Many franchisors do business overseas themselves and therefore should have a robust FCPA program based upon directly doing business internationally. However, if they franchise their operations internationally, they may have as much FCPA-based risk exposure through their franchisees operations. What are some of the FCPA risks for a franchised business internationally? In his book entitled “Foreign Corrupt Practices Act – A Practical Resource for Managers and Executives” Aaron Murphy, a partner at the firm of Latham and Watkins, explored the question of what are “the most common problems areas where managers get themselves into FCPA trouble.” In a chapter entitled “You Do More With the Government Than You Think” Murphy gives several examples of how any US company doing business overseas will come into contact with a foreign governmental official and, thereby, create a risk for possible FCPA liability. The following interactions would certainly apply to a retailer:

Interactions with Customs Officials. Every time your company sends raw materials into, or brings them out of, a country there is an interaction with a foreign governmental official in the form of a Customs Official. Every customs transaction involves a payment to a foreign government and every transaction involves some form of a foreign governmental regulatory process. While the individual payment per transaction can be small, the amount of total transactions can be quite high if a large volume of goods are being imported into a foreign country.

Interaction with Tax Officials. While noting that interacting with international tax authorities can present problems similar to those with customs officials, Murphy observes that the stakes can often be much higher since tax transactions may be less in frequency but higher in financial risk. These types of risks include the valuation of raw materials for Value Added Tax (VAT) purposes before such materials are incorporated into a final product, or the lack of segregation between goods to be sold on the foreign country’s domestic market as opposed to those which may be shipped through a free trade zone for sale outside that country’s domestic market.

Licensing and Permits. If your company is a retail seller of clothes, cosmetics etc., every physical location that you sell your goods in will require some type of license to operate your business. It could require multiple licenses such as a national license, state license and local municipal license, additionally you will need a building permit if you intend to build out or modify your retail stores.

Work Permits and Visas. If your company does any business overseas it will have to send someone from the home office to operate in-country at some point. In the post-9/11 world this probably means that, at a minimum, your company will have to obtain a visa for each employee who enters the foreign country and perhaps a work permit as well. The visa process can start in the United States with a trip to foreign government consulate or even the embassy and at that point you are dealing with a foreign governmental official. The work permit process can also begin in the United States but often may continue in the foreign country.

Inspections and Certifications. Consider the Tex-Mex restaurant chain which desires to take its cuisine across the world. In any city in the world there will be some type of certification process to enable to the business to set up and start operating and then there will be the need for ongoing inspections for sanitary conditions. Such inspections may be rare but if there is “slime in the ice machine” it may be grounds to close the restaurant.

As Murphy points out, it is clear there are many different types of FCPA risk out there which your compliance program needs to assess and address. Most companies are aware of risks of third parties in commercials operations, such as sales agents, resellers or distributors. However, the recent Wal-Mart matter has raised the awareness of risks from non-commercial third parties, particularly those which interact with a foreign government on the behalf of a company. There are many lessons which can be drawn from the Wal-Mart case but I think that  two, (1) that you do more with the government than you think and (2) the risks in using non-commercial third party agents, are very large areas that you may need to factor into the development of your compliance program going forward.

Lastly, do not forget the example of Carroll Shelby, Not only did he move from race winning driver to race winning car developer but over 30 years after the last Shelby Mustang from the Muscle Car Era rolled off the Ford assembly, he teamed with Ford to design a new Shelby Mustang for the company’s centenary in 2003. Keep on truckin’ Carroll Shelby!

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, 2012

Does the FCPA Apply to Retailers? Ask Wal-Mart (or Aaron Murphy)

I am often asked the question by representatives of retailing companies of whether the Foreign Corrupt Practices Act (FCPA) applies to their businesses. While I have always answered in the affirmative, this question was succinctly answered this week with an announcement by Wal-Mart that it had initiated an internal investigation related to possible violations of the FCPA. Further, as reported by the FCPA Professor, Wal-Mart announced in a December 8, 2011 10K filing that “The Company has voluntarily disclosed its internal investigation to the U.S. Department of Justice [DOJ] and the Securities and Exchange Commission [SEC].”

So what risks can put a retailer under FCPA scrutiny? In a book entitled “Foreign Corrupt Practices Act – A Practical Resource for Managers and Executives” author Aaron Murphy, a partner at the firm of Latham and Watkins, explored the question of what are “the most common problems areas where managers get themselves into FCPA trouble.” In a chapter entitled “You Do More With the Government Than You Think” Murphy gives several examples of how any US company doing business overseas will come into contact with a foreign governmental official and, thereby, create a risk for possible FCPA liability. The following interactions would certainly apply to a retailer:

• Interactions with Customs Officials. Every time your company sends raw materials into, or brings them out of, a country there is an interaction with a foreign governmental official in the form of a Customs Official. Every customs transaction involves a payment to a foreign government and every transaction involves some form of a foreign governmental regulatory process. While the individual payment per transaction can be small, the amount of total transactions can be quite high, if a large volume of goods are being imported into a foreign country.
• Interaction with Tax Officials. While noting that interacting with international tax authorities can present problems similar to those with customs officials, Murphy observes that the stakes can often be much higher since tax transactions may be less in frequency but higher in financial risk. These types of risks include the valuation of raw materials for VAT purposes before such materials are incorporated into a final product, or the lack of segregation between goods to be sold on the foreign country’s domestic market as opposed to those which may be shipped through a free trade zone for sale outside that country’s domestic market.
• Licensing and Permits. If your company is a retail seller of clothes, cosmetics etc., every physical location that you sell your goods in will require some type of license to operate your business. It could require multiple licenses such as a national license, state license and local municipal license, additionally you will need a building permit if you intend to build out or modify your retail stores.
• Work Permits and Visas. If your company does any business overseas it will have to send someone from the home office to operate in-country at some point. In the post-9/11 world this probably means that, at a minimum, your company will have to obtain a visa for each employee who enters the foreign country and perhaps a work permit as well. The visa process can start in theUnited States with a trip to foreign government consulate or even the embassy and at that point you are dealing with a foreign governmental official. The work permit process can also begin in theUnited States but often may continue in the foreign country.
• Inspections and Certifications. We recently wrote about franchising overseas and the impact of the FCPA on such businesses. Consider the Tex-Mex restaurant chain which desires to take this cuisine across the world. In any city in the world there will be some type of certification process to enable to the business to set up and start operating and then there will be the need for ongoing inspections for sanitary conditions. Such inspections may be rare but if there is “slime in the ice machine” it may be grounds to close the restaurant.

Wal-Mart has not specified the FCPA violations it may have been involved in, or the countries which are currently the subject of its internal investigation, or notification to the DOJ and SEC. However, the New York Times (NYT) reported on December 10, 2011, that Wal-Mart did say that the internal investigation included several matters, including, “permitting, licensing, and inspection.” Wal-Mart’s inquiry makes Aaron Murphy sound like the Nostradamus of FCPA prognosticators about now. The NYT article reported that international business now makes up 30% of Wal-Mart’s overall sales in the most recent quarter and that the biggest sales jumps came in “China, Mexico and Argentina.” For those of you keeping score at home, those countries have 2011 Transparency International-Corruption Perceptions Index ratings of 3.6, 3.0 and 3.0 for rankings of 75 for China and 100 for both Mexico and Argentina. In other words, they are all countries where you keep your FCPA guard up.

The greater lesson for any US retailer doing business overseas is that the Wal-Mart matter is a stark reminder of the scope and application of the FCPA for any company operating overseas. Retailers which do not have a FCPA compliance program in place would be well served to put one in place sooner rather than later. For retailers which have a FCPA compliance program in place, they should use this public announcement to re-assess their risks and re-visit their FCPA compliance program to determine what, if any, additional steps they need to take. I would also suggest that you call Aaron Murphy, as in yesterday.

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, 2011

Foreign Business Representatives: Some Red Flags to Review

Most Foreign Corrupt Practices Act (FCPA) Practitioners are aware that the greater the contacts with a foreign governmental official and the greater amount of money involved, the greater the FCPA risk for a company if a third party is involved. This is more particularly so if the foreign business representative involved does nothing more than simply make an introduction or uses his (or her) connections to get your company in front of “right people.”

This posting will discuss three Red Flags which a company should review regarding a foreign business partner. Many businesses look to the value obtained in the use of a foreign business representative. This simple economic analysis is not sufficient in the FCPA context. There should be a separate analysis on whether the foreign business representative has the substantive skills to perform the services requested. Finally, if the services performed by the foreign business representative are too far out of line with those performed by competitors, this can also present a Red Flag requiring additional scrutiny.

In his recent book entitled, “Foreign Corrupt Practices Act – A Practical Resource for Managers and Executives” noted FCPA specialist Aaron Murphy discussed this issue. Murphy had been in situations where the decision to retain a foreign business representative was based solely upon an economic analysis, with no substantive discussion within the company of whether the proposed foreign business representative had the requisite skills to provide substantive services. He observed that such a decision making process is a “dangerous mentality to adopt when doing business with foreign governments or state owned entities.”

Why

He goes on to discuss the situation where a foreign business representative is recommended by the entity with which your company is attempting to secure a contract. As a threshold issue, Murphy makes the inquiry as to whether such a “recommendation” is really a “requirement”. If your company is informed that the retention of such a foreign business representative would make things go more smoothly, this is clear evidence of a Red Flag on the proposed foreign business representative. Murphy recommends several inquiries which include the following:

• With whom is the proposed foreign business representative related or affiliated?
• What services does the foreign business representative bring to the table which our company cannot provide?
• Was the need for the foreign business representative always contemplated as a part of the transaction?

Murphy focuses on the final question as particularly important. If the “recommendation” for the proposed foreign business representative appeared out of the blue and was not a part of any original bid requirement or tender package, a company should be particularly suspicious. Such a request has the indicia that the proposed foreign business partner is really just a sham and potential conduit for the transfer of money to a foreign governmental official.

What Happened?

A separate issue arises when the services of a foreign business representative is unexplained or vaguely understood. Usually a foreign business representative will perform some service(s) but just exactly what the service(s) are is unclear to your company. Murphy poses this situation as the “What Happened” scenario where a company may have a FCPA internal controls/books and records violation because it simply cannot explain what the service(s) foreign business representative provided. This situation can arise where a service was performed quickly, and apparently efficiently, by a foreign business representative but with little understanding by your company of just how such service(s) were delivered.

Too Good to be True?

Another Red Flag which should be evaluated is where the foreign business representative performs services which are far above that of any competitor or demonstrable success rate. James Min, Vice President, Int’l Trade Law & Corporate Compliance at DHL Americas – Legal Department, has developed a risk matrix model which evaluates the performance of companies in the freight forwarders/express delivery industry. In this matrix, Min analyzes risks by multiplying factors noted herein and thus scoring. The model shows that location should not be the sole criteria for risk. The factors in the Min Model are the performance of your company’s customers clearance brokers and how far that performance varies from the norm your company normally receives. In the below chart, +1.00 equals average clearance time. >1.0 equals faster than average and <1 means slower than average.

The Min Model

Country	TI CPI	Customs  Clearance Performance	Variance from  Average Performance	Risk Score	Risk Rank
A	55	.93	1.21	61.9	1
B	20	.76	0.89	13.5	3
C	54	.29	1.00	15.6	2
D	88	.12	0.7.	7.39	4

Min presented his model at the recent ACI FCPA Bootcamp. The key in this approach is how often the Customs Broker/Express Delivery Service varies above the average for customs clearance times. If the percentage of customs clearance performance is so great that your vendors variance is above 100% most of the time, this could be a Red Flag that bribery or corruption is involved. This should lead to further investigation, due diligence, or asking of questions of your vendor.

Most companies understand the need for and perform due diligence on foreign business partners. Many companies follow this up with a contract, with the foreign business partner, which requires FCPA compliance terms and conditions. However, there should be additional monitoring and review of the services provided to your company during the term of the agreement. The Red Flags listed in this article are not a complete list or dispositive, as each review will be determined by the facts involved in the transaction.

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, 2011

How Does the FCPA Apply to Your Business?

One question that I often hear about the application of the Foreign Corrupt Practices Act (FCPA) is something along the lines of the following: “I am not in the international energy business, I am in the restaurant, retail, banking, or (fill in the blank) business. And yes my company has international operations but we don’t transact business with foreign governments. Why do I need to worry about the FCPA?”

The answer to this oft-asked question is laid out in a new resource for the FCPA practitioner. It is a book entitled “Foreign Corrupt Practices Act – A Practical Resource for Managers and Executives” authored by Aaron Murphy. It is a welcome addition to the growing literature on the FCPA, which, as noted by Mr. Murphy’s title, is designed to be a practical resource. Aaron is a partner in the Los Angeles office of Latham & Watkins, who practices in the White Collar and Government Investigations Group and in his introduction states that this book is primarily for managers and “the most common problems areas where managers get themselves into FCPA trouble.”

One chapter is entitled “You Do More With the Government Than You Think”. In this chapter Aaron gives several examples of how any US company doing business overseas will come into contact with a foreign governmental official and, thereby, create a possible FCPA liability. These interactions include some of the following examples:

• Interactions with Customs Officials. Every time your company sends raw materials into, or brings them out of, a country there is an interaction with a foreign governmental official in the form of a Customs Official. Every customs transaction involves a payment to a foreign government and every transaction involves some form of a foreign governmental regulatory process. While the individual payment per transaction can be small, the amount of total transactions can be quite high, if a large volume of goods are being imported into a foreign country.
• Interaction with Tax Officials. While noting that interacting with international tax authorities can present problems similar to those with customs officials, Murphy observes that the stakes can often be much higher since tax transactions may be less in frequency but higher in financial risk. These types of risks include the valuation of raw materials for VAT purposes before such materials are incorporated into a final product, or the lack of segregation between goods to be sold on the foreign country’s domestic market as opposed to those which may be shipped through a free trade zone for sale outside that country’s domestic market.
• Licensing and Permits. Your company is a retail seller of clothes and cosmetics and you do not understand how the FCPA applies to your foreign sales operations? Every physical location that you sell your goods in will require some type of license to operate your business. It could require multiple license such as a national license, state license and local municipal license, additionally you will need a building permit if you intend to build out or modify your retail stores.
• Work Permits and Visas. If your company does any business overseas it will have to send someone from the home office to operate in-country at some point. In the post-9/11 world this probably means that, at a minimum, your company will have to obtain a visa for each employee who enters the foreign country and perhaps a work permit as well. The visa process can start in the United States with a trip to foreign government consulate or even the embassy and at that point you are dealing with a foreign governmental official. The work permit process can also begin in the United States but often may continue in the foreign country.
• Inspections and Certifications. We recently wrote about franchising overseas and the impact of the FCPA on such businesses. Consider the Tex-Mex restaurant chain which desires to take this cuisine across the world. In any city in the world there will be some type of certification process to enable to the business to set up and start operating and then there will be the need for ongoing inspections for sanitary conditions. Such inspections may be rare but if there is “slime in the ice machine” it may be grounds to close the restaurant.
• Bid and Tender Process. Your company is one of the worlds best at designing and constructing LNG facilities. You have assisted a foreign government to draft the specifications for the world’s largest, most technologically advanced LNG facility. During this specification development phase, your company has paid for all meals delivered during meetings and flown certain officials from the National Energy Company to the US to work on these specifications. Now the specifications go out to bid for the construction phase and your company is the successful bidder. Has your company violated the FCPA? According to Murphy, “Telling the difference is tough”.

These examples are not an exclusive list. Murphy also notes that in some foreign jurisdictions, the bribery of judges may be prevalent or even standard in both civil and criminal litigation. The clear message that Murphy brings is that anytime a US company conducts business outside the US it impacts the FCPA. But in addition to his warnings, Murphy lays the steps he believes can assist a company to keep it from running afoul of the FCPA. We welcome Aaron’s work as a new and valuable resource for the FCPA compliance practitioner. We applaud his work in this area.

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, 2011