FCPA Compliance and Ethics Blog

January 14, 2015

Marx Brothers Compliance Week Continues – The Stateroom Scene and High-Risk

Stateroom SceneI continue my exploration of the Marx Brothers’ movies by looking at the famous Stateroom scene from the MGM release A Night at the Opera. In researching this I was somewhat stunned to find that the scene was written and developed with the Brothers by that silent comedy great Buster Keaton, who was at the time a gag writer for MGM. Talk about provenance for a scene, one of the greatest purveyors of gags (Keaton) writing for three of the greatest screen comedians, the Brothers Marx.

The scene starts with Driftwood discovering that Fiorello, Tomasso, and Baroni snuck onto the boat by stowing away in his steamer trunk. Fiorello and Tomasso have to hide out in the room while parades of people walk in to use the cabin or to carry out their duties. Crammed into this little space at the end of the scene are Driftwood, Fiorello, Tomasso, Baroni, two cleaning ladies who make up the bed, a manicurist, a ship’s engineer and his assistant, a girl looking for her aunt, a maid (“I come to mop up.” “You’ll have to start on the ceiling.”), and four waiters with trays of food (prompting Driftwood’s classic line: “Is it my imagination, or is it getting crowded in here?”). Eventually there are 15 people in Driftwood’s tiny cabin. The mass of humanity tumble out into the hallway when Mrs. Claypool opens the door. I particularly like the way they sped up the film for the dénouement.

I thought about the Stateroom scene in the context of an article in the New York Times Magazine, entitled “The Wreck of the Kulluk”, and an article in the New York Times (NYT) by Joe Nocera, entitled “The Moral of the Kulluk.” The Magazine piece was an except from Of Ice and Men to be published later this month by Deca, authored by McKenzie Funk. In his longform piece he detailed the miss-steps that led to the grounding and sinking of the Shell Oil Company drill rig Kulluk after an unsuccessful attempt to drill for oil in the Artic Ocean. It was a tale of greed, high-risk drilling for oil and the attendant potential for a high reward and, at the end of the day, safety and engineering shortcuts that cost Shell the loss of the drill rig and the end of the potential of Artic drilling for the foreseeable future. The tale itself if riveting but for the Chief Compliance Officer (CCO) or compliance practitioner it had many key elements which should be considered for an anti-corruption compliance program under the Foreign Corrupt Practices Act (FCPA), UK Bribery Act or other anti-bribery laws.

The US Geological Service had estimated that the Artic held “nearly a quarter of the world’s undiscovered petroleum.” Moreover, when Shell put its plan in place, it was reeling from an accounting scandal. Funk said that the purchase of the Kulluk and drilling for oil in the Artic “was important not because Shell needed oil in 2005. The company had plenty of oil. It was important because Shell had spent the previous year engulfed in a scandal involving what are known as proved reserves”. This meant that “Shell still had to show to investors that it’s long-term future was as bright as it once looked”, i.e. before the accounting scandal.

For an energy production company such as Shell, drilling in the Artic Ocean is about the most difficult place left on earth in which to try and drill. In 2012, Shell was the world’s largest corporation and clearly thought it was up to the task. Funk wrote, “It was on track to spend $6 billion preparing for Arctic Alaska, and that March the Obama administration approved exploratory drilling. The task that remained was not to tame the frontier so much as to bring it within reach, to bind Arctic Alaska to the rest of the world. Shell imagined a future of new ports, new airports and permanent rigs.”

The journey of the Kulluk up to the Artic Sea was delayed and had several problems that would later haunt the drill rig. However, Shell was able to claim a victory as it actually began drilling in October 2012, but then shortly had to depart due to unanticipated ice floes threatening the drill rig. The Kulluk began the long tow out from the Artic Sea to its homeport in Seattle. However the boat towing it was so badly damaged it had to break off the tow. Shell then made the fateful decision not to leave the Kulluk in port in Dutch Harbor, because as Funk noted “If the Kulluk was in an Alaskan port on New Year’s Day, [Shell] executives believed, it would be subject to a state oil-facilities tax of as much as $6 million. In late December, a spokesman confirmed Shell’s fears in an email to a longtime reporter at a local newspaper, The Dutch Harbor Fisherman, writing, “It’s fair to say the current tax structure related to vessels of this type influenced the timing of our departure.””

This fateful decision, not to spend the winter in Dutch Harbor, Alaska, led to the beaching of the drill rig after it had broken free from its tow cables in stormy weather and hit the Alaskan coast. Funk concluded, “In the early hours of New Year’s Day [2013], the Coast Guard flew over the wreck. In aerial photos published around the world, the rig was dwarfed by the auburn, grass-covered hills of the uninhabited island where it had finally come to a rest.”

In his article Nocera wrote of some of the highlights he took away from Funk’s piece. He said, “Despite spending $6 billion preparing to explore for oil in this remote part of the world, it didn’t plan adequately, and it cut too many corners. According to the Coast Guard, which investigated the Kulluk disaster, not only had Shell’s risk management been “inadequate,” but there also had been a significant number of “potential violations of law and regulations.”” Nocera identified three key risk factors that were not managed. First was the weather. The second is the US government’s (or any government’s) ability to regulate such a high-risk venture.

Just as there were too many people in the Marx Brothers’ Stateroom, sometimes the risk is so high that a company cannot operate safely. The same is true in compliance. Sometimes a company cannot do business within the parameters of the FCPA. In such a case, a CCO needs to speak up and say so. Mike Volkov, the Two Tough Cookies and Donna Boehme oft-times tell us that part of the job of a compliance practitioner is to say No when it needs to be said. Joe Nocera certainly is not against oil companies drilling in inhospitable locations or their making money. Yet he concluded the lesson in the story of the Kulluk disaster is oil companies are not in position to drill for oil in the Artic safely. It is simply too risky. If a deal is so high-risk, the chances of completing it without engaging in conduct which violates the FCPA cannot be reasonably assured, it is time for compliance to step up and say No. If Shell had understood and managed its risk more prudently, it would not be out $6bn in losses from the Kulluk disaster.

For a YouTube clip of the Stateroom scene, click here.

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

January 13, 2015

What’s the Password for Compliance? Swordfish and Lessons for the CCO

SwordfishI continue my exploration of the Marx Brothers this week by looking at their most successful commercial film made for Paramount, Horse Feathers. While Duck Soup is and always will be my favorite film due to its overall and complete anarchy, Horse Feathers comes in a close second. The movie takes place on a college campus and generally revolves around Huxley College’s attempt to win ‘the big game’ against Darwin College and payments to college football players (does that sound familiar?). I remember after the first time I saw it and told my father about it, he was still able, some 40 years after he first viewed it, to quote the famous password scene involving all manners of puns on the word ‘swordfish’. I quote the entire scene, where Professor Wagstaff (Groucho) attempts to gain access to a Speakeasy guarded by Baravelli (Chico).

Baravelli: …you can’t come in unless you give the password.

Professor Wagstaff: Well, what is the password?

Baravelli: Aw, no. You gotta tell me. Hey, I tell what I do. I give you three guesses. It’s the name of a fish.

Professor Wagstaff: Is it “Mary?”

Baravelli: [laughing] ‘At’s-a no fish!

Professor Wagstaff: She isn’t? Well, she drinks like one! …Let me see… Is it “Sturgeon”?

Baravelli: Aw, you-a craze. A “sturgeon”, he’s a doctor cuts you open when-a you sick. Now I give you one more chance.

Wagstaff: I got it! “Haddock”.

Baravelli: ‘At’s a-funny, I got a “haddock” too.

Wagstaff: What do you take for a “haddock”?

Baravelli: Sometimes I take an aspirin, sometimes I take a calomel.

Wagstaff: Y’know, I’d walk a mile for a calomel.

Baravelli: You mean chocolate calomel? I like-a that too, but you no guess it. [Slams door. Wagstaff knocks again. Baravelli opens peephole again.] Hey, what’s-a matter, you no understand English? You can’t come in here unless you say, “Swordfish.” Now I’ll give you one more guess.

Professor Wagstaff: …swordfish, swordfish… I think I got it. Is it “swordfish”?

Baravelli: Hah. That’s-a it. You guess it.

Professor Wagstaff: Pretty good, eh?

Harpo (“Pinky”) takes the perhaps more direct approach. When Baravelli challenges him for the password, he gets into the speakeasy by pulling a sword and a fish out of his trench coat, putting the sword down the throat of the dead fish and presenting the combined sword and fish the doorman. While I still guffaw when reading all of this, I would urge you to click through to the YouTube video I have linked to at the end of this blog post.

I do find some lessons for the Chief Compliance Officer (CCO) or compliance practitioner in this scene. I have adapted the lessons from an article in the Financial Times (FT) by Michael Skapinker, entitled “Seven lessons in management I learnt over the last decade”.

  1. Do not rush. It takes Groucho a while but he does not rush and he gets in. We all arrive with a new plan. Your plan may be right or wrong but unless the barbarians are at the gate (i.e. banks or creditors) you will have time to listen, refine and build alliances and to identify those folks who were actually waiting for what you may want to propose. Skapinker believes the most important promise you will make in an interview is to talk to everyone first and then work towards your implementation.
  2. A good deputy helps you sleep at night. This one may seem to be a counter-intuitive lesson from the above skit but not in reality, as it is in the interest of the establishment for Groucho to actually enter the Speakeasy. However, Skapinker believes you should have someone who not only understands what you want but also “a deputy with different skills from yours. You want someone who will alert you to problems. But you also want someone who sees the business the way you do”.
  3. Decide what your business stands for and tell everyone until you can no longer stand the sound of your voice. The Marx Brothers did this every time they opened their collective mouths; insanity prevailed. Skapinker wrote, “You need to decide what yours is, and you need to keep telling people, both inside and outside. Whether they believe you depends on how true it is”. I cannot think of anything more important for the CCO or compliance practitioner to follow.
  4. Hire people on probation. This would seem to be the entire point of the swordfish exercise. You need to find a way to determine if folks are going to do and say the right thing before you let them in. In the corporate world this should take place in the form of employees being evaluated for doing business the right way and in compliance with anti-corruption laws such as the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act. Whenever someone is promoted to senior management or into a position where there is a high risk of corruption, such as to a region with a propensity for corruption, such an evaluation should be made by the compliance function in conjunction with the Human Resources (HR) function of an organization.
  5. Treat your team like adults. If the Marx Brothers were anything it certainly was adults. By this I mean their humor worked on multiple and a multitude of levels. It worked for me as a teenager in the 1970s just as it worked for my father who was then in his late 40s. Skapinker relates what might seem self-obvious that “Most people want to do a good job. They do not come to work to rip you off. So trust them. Judge them by their results and do not hover over them.” However, coming from the energy industry in Houston, I have certainly seen companies that treated employees like they were in the third grade. It simply does not work in the compliance arena because if you are big enough to be international, you will not have the ability to lord over all your employees, all the time. You have to try and hire the right folks, train them and give them the tools to succeed.
  6. Tell people what they have just told you. This technique simply shows you are listening, which is how Groucho finally figured out the password and got into the Speakeasy. In a company, Skapinker believes that “There is no more powerful management tool than showing people that you have listened to them. The best way not only to show you have listened, but really to do so, is to repeat their views in good faith back to them. That way, even if you decide something different, they feel they have had a good hearing.” At the close of meetings you can use this strategy to help rally your team around your decision including those who might have disagreed with you.
  7. Make your numbers. I think Harpo’s example here is paramount. Let folks see what you are doing. Since he was the mute one, he gave a visual representation of a swordfish but it communicated the message. For the CCO or compliance practitioner, you need to come up with some metrics to demonstrate the value you are adding. I would suggest that it comes in the area of accounting controls because at the end of the day, internal controls under the FCPA are accounting controls. You need to communicate your mission and that you are achieving it to the Board of Directors or senior management. 

I still grin when I think about the swordfish scene. For a clip of the scene on YouTube, click here.

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

© Thomas R. Fox, 2015

January 8, 2015

Craig Biggio to the Hall of Fame and Your Compliance Team

Biggio HOFFor those of you who do not believe that global warming is upon us, let me assure you that it is real and unfortunately caused by humans. How do I know this for a certainty? It is because there was an event back in 2005 that caused Hell itself to freeze over. I am of course referring to the first and only appearance of the Houston Astros in the World Series. While it was certainly a positive event for long-suffering Astros fans everywhere, with ownership dedicated to coming in last each year now, I do not think climate change aficionados will have the Astros to blame again anytime soon.

This does not mean that tremors are prevented from occurring in the earth’s fabric from time-to-time. On Monday we had one of those such minor earthquakes in Texas, not attributable to frac-ing, when the earth shook as the first Astro was named to enter the Baseball Hall of Fame (HOF); second baseman, Craig Biggio. Biggio’s statistics were truly Hall-worthy coming in with 3060 hits, 668 doubles (5th on the all-time list) and my personal favorite, he is the all-time leader in Major League Baseball (MLB) for being hit by pitches with 286 bonkings.

While Biggio’s c HOF greatness is singular to him, he was part of greater Astros teams which had sustained success from the late 1990s to the middle of the last decade, culminating in the above climate-changing event of 2005 when the Astros appeared in the World Series, losing to the longer suffering Chicago White Soxs, who had not appeared in the World Series since 1959 (the Astros forerunner, Houston Colt-45s came into existence in 1962.) I thought about the team aspect of Biggio and his Astros teammates when I read an article in the New York Times (NYT) Corner Office column by Adam Bryant, entitled “Even the Best Team Can Be Better”, where Bryant featured an interview with Maynard Webb, a veteran technology executive who is currently serving as the chairman of Yahoo.

One of the things that many Chief Compliance Officers (CCOs) do not often consider is the team aspect to a compliance function. As the compliance function moves to CCO 2.0 and compliance becomes more of an ongoing business process, one of the things a CCO or compliance practitioner needs to be cognizant about is the team function. This means a team within the compliance function itself and for the greater company. Bryant wrote that one of the lessons Webb has learnt as a leader is that “You have to get voted onto the team every day as an employee, and you have to be the employer of choice every day. I would often ask team leaders: “You have seven people working for you. How many of those would you rehire if all the positions were open again?” The point is that you can’t let mediocre performance impede where you can go. Most managers are good-hearted people, and it’s really hard to tell somebody they’re not performing well. I would just encourage people to get after that more quickly because the rest of your team is watching you and waiting for you to do something.”

One of the things that I have heard successful CCO’s talk about is humility. Webb seconded that notion as a leader when he said, “We treat people well. We stay humble. We don’t get ahead of ourselves. We work hard, and we take ownership of what we do. And if you act out or you do anything out of line, you will hear about it. I remember when I made the all-star team in the Babe Ruth League. We had just come together recently as a team. I was playing third base, and when it was my time to hit, I struck out. I went back to third base, and we were doing a bit of practice before the other team’s turn to bat. I was really mad and I was firing the ball as hard as I could over to first base, and my mother yelled out, “Hey, Webb, too bad you can’t hit as hard as you throw.”” Nothing like a mom to bring you back down to earth when needed but still an important lesson to bring forward into the compliance realm.

Webb also had some insights for hiring in the compliance function, which I thought were important to consider. He said, “I’ll probably start by asking you about your first job and what you’ve done outside of school and work. I’ve found that there is a high correlation between work ethic and people’s extracurricular activities that weren’t driven by mom and dad. Then I would ask about other things to look for truth and self-awareness, like: “Six months from now, we’re going to know each other very well. What will your team and what will I say that you do really, really well? And then what will they say that we all wish you did better?” You’d be surprised at the number of times I’ve heard people say: “Oh, nothing. You’ll just love everything about me.” And I’ll say: “Dude, that’s not true. It’s not true for me. Let me give you some examples of the things you’ll wish that I did better.””

The reason he does so is that Webb is “looking for self-awareness and openness. And then I try to probe on value systems and how they work in teams. Tell me about situations that were really tough, and how you got out of them. I like to hear how they tell stories.” I think this is a critical skill for a compliance practitioner because you are required to have the authority and backbone to say No when the situation calls for it. Chuck Duross said we have to be the Alamo at times. I originally thought that meant we had be ready to be slaughtered but it means stand tall for what you believe in and more importantly what your company should believe in, and do business ethically and in compliance with anti-corruption/ anti-bribery laws such as the Foreign Corrupt Practices Act (FCPA) and UK Bribery Act.

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

January 7, 2015

The End of an Era and the End of Facilitation Payments?

Bess MyersonTwo famous New Yorkers died this week. Both spoke to not only to the glamour of the Big Apple, but the city’s once undisputed crown as the cultural mecca of the US. They were Allie Sherman and Bess Myerson. Allie Sherman

Sherman was with the New York (Football) Giants as an Assistant Coach when they were the original America’s Team. He later became the Head Coach when the Giants were ending a phenomenal run as the greatest pro football team in America. Sherman coached some of the most memorable players from the last century including Sam Huff, Frank Gifford, Andy Robustelli, Charley Connerly and Y. A. Tittle. As an Assistant Coach, he was a part of a team that went to the National Football League (NFL) championship games in 1956 and 1958/9. As Head Coach, he took the Giants to the championship games from 1961-63. That is six championship games appearances in seven years, a record no other team in football has ever achieved.

The second death was that of Bess Myerson. In my little hometown in podunk Texas, Bess Myerson was about the highest epitomy of American high class and grace that one could imagine. (My parents hated the Kennedys so Jackie was not a candidate.) What I did not fully appreciate until I read her obituary in the New York Times (NYT), entitled “New Yorker of Beauty, Wit, Service and Scandal by Enid Nemy and William McDonald, was that Myerson was the first Jewish Miss America and what her win of that crown meant in 1945 to Jews in America. The article quoted Barra Grant, Ms. Myerson’s daughter for the following; “When my mother walked down the runway, the Jews in the audience broke into a cheer. My mother looked out at them and saw them hug each other, and said to herself, ‘This victory is theirs.’” But in Bryan, Texas, she was not the Jewish Miss America; she was just Bess Myerson, the one and only Miss America we knew by name.

I thought about these two famous New Yorkers, where they came from and what New York once stood for as I considered the ongoing tragedy of AirAsia Flight 8501 and pondered facilitation payments. In another article in the NYT, entitled “AirAsia Jet That Crashed Had Lacked All Clearances to Fly, Regulators Say, Tom McCawley reported that “AirAsia Flight 8501, which crashed in the Java Sea on Dec. 28, was allowed to take off from Surabaya, Indonesia, even though it did not have all the required clearances from regulators to fly that day, the Indonesian Transportation Ministry said on Monday.” While the article did not identify those Indonesian who allowed this to occur, McCawley did report “The [Indonesian Transportation] Ministry said it was suspending several officials for allowing the flight to take off.” Moreover, “other airlines and airports across the country will also be scrutinized to see if they have been cutting corners in similar ways.”

The article did not say or even suggest that bribes were paid to allow this flight to take off when it did not have the proper permits to do so, such actions did occur in Indonesia, which had a 2014 score on the Transparency International – Corruption Perceptions Index at 34 and came in at a ranking of 107 out of 157 countries ranked. Fresh on the minds of all anti-corruption, Foreign Corrupt Practices Act (FCPA), UK Bribery Act practitioners and others is the Alstom FCPA enforcement action where a large amount of the companies bribes were paid in Indonesia to secure winning contracts. Of course, Alstom is a French company and AirAsia is Malaysian entity.

FCPA enforcement actions involving US companies and the air industry are unfortunately very well known. Biz-Jet and its bribes to secure business are in a direct line to Dallas Airmotive, involved in a FCPA enforcement action in the past quarter. But in the AirAsia case, I wondered about something different, that continuing FCPA bug-a-boo around facilitation payments. Facilitation payments are exempted out of FCPA violations but the AirAsia case is a clear example of the slippery slope of how something that is not illegal can easily move into such a realm and the true cost of corruption. Two of the loudest responses by the business community to the Wal-Mart allegations of bribery and corruption were that they were simply payments to expedite the process of licensing in Mexico and what did you expect to get things moving in Mexico anyway?

What if AirAsia made small payments to move things along faster with the Indonesian Transportation Ministry? What if these payments might properly be characterized as facilitation payments under an anti-corruption law such as the FCPA? McCawley’s article reported, “Officials have said that AirAsia had permits to fly the popular Surabaya-Singapore route on Mondays, Tuesdays, Thursdays and Saturdays, but later changed its schedule to fly on other days of the week, The Associated Press reported. Flight 8501 took off on a Sunday. Mr. Murjatmodjo said that while Singapore officials had approved the Sunday flight, Indonesia had not, and the aviation agency used incorrect information in granting Flight 8501 a takeoff slot.”

So what if that ‘incorrect information’ used by the Indonesian aviation agency turned out to be ‘facilitated’ by a grease payment? Is the granting of such approval something that would be been granted eventually but AirAsia was just trying to speed up the process? What if there were safety reasons for not allowing AirAsia to operate on the Sunday when the plane went down? What if it was something safety related to the flight controllers or something other than the plane or crew? Make no mistake about it, facilitation payments are bribes, yet there are other gray areas around them that can create confusion and make it hard for companies to police them.

A similar view was recently articulated by Thomas C. Baxter, Executive Vice President and General Counsel at the Federal Reserve Bank of New York who indicated a general unease with facilitation payments. Baxter was quoted in the FCPA Blog for the following, “Baxter said an organizational policy that allows some types of official corruption — including facilitating payments – “diminishes the efficacy of compliance rules that are directed toward stopping official corruption.”” Further, “While I understand that the exception is grounded in a practical reality, I feel that zero tolerance for official corruption would have been a better choice. To any public servant with an extended hand, I would say in a loud and clear voice, “pull it back and do your job.” And, let me note the OECD Working Group on Bribery recommends that all countries encourage companies to prohibit or discourage facilitating payments.”

Allie Sherman and Bess Myerson reminded us of a New York that once existed. With the proliferation of the internet and social media, I doubt US culture will ever be so concentrated in one city again. The AirAsia crash may portend of things in the future, so if it comes to pass that bribery and corruption was involved to obtain a seemingly minor approval to allow the flight of an airplane on a day it was not licensed to fly; perhaps one thing that comes out of the tragedy is the removal of this seeming anomaly of allowing bribes under the FCPA by calling them facilitation payments.

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

December 18, 2014

Ty Cobb and the Compliance Performance Appraisal Review

Ty CobbToday we celebrate greatness, in the form of one of the greatest baseball players ever, with the anniversary of the birthday of Ty Cobb. Coming up to the majors as a center fielder for the Detroit Tigers in 1905, he emerged in 1907 to hit .350 and win the first of nine consecutive league batting titles. He also led the league that year with 212 hits, 49 steals and 116 RBIs. In 1909 he won the league’s Triple Crown for the most home runs (9), most runs batted in (107), and best batting average (.377). In 1911, he led the league in eight offensive categories, including batting (.420), slugging percentage (.621), hits (248), doubles (47), triples (24), runs (147), RBI (144) and steals (83), and won the first American League MVP award. He batted .410 the following season, becoming the first player in the history of baseball to bat better than .400 in two consecutive seasons.

Cobb set a record for stolen bases (96) and won his ninth straight batting title in the 1915 season. He faltered the next year, but came back to win another three straight titles from 1917 to 1919. He left the team in 1926 and signed with the Oakland Athletics, hitting .357 and becoming the first-ever player to reach 4,000 total career hits before retiring after the 1928 season. His record of nine consecutive batting titles as well as his overall number of 12 will never be succeeded.

While Cobb certainly had quite a bit of natural ability, he was also a very dedicated baseball player, forever working to improve his craft. He might not have taken well to criticism but he did work to improve all aspects of his game. One of the modern ways to improve employee performance is through an annual employee performance review. Recently I read an article in the Houston Business Journal entitled “6 Ways To Make Performance Reviews More Productive” by Janet Flewelling. I found her article provided some interesting perspectives on some of the ‘nuts and bolts’ work that you can put into your Foreign Corrupt Practices Act (FCPA) or UK Bribery Act anti-corruption program that can be relatively low-cost but can add potentially high benefits.

One of the ways to drive compliance into the DNA of an organization is through incentives such as making it a component of a year-end discretionary bonus payment. Indeed the FCPA Guidance states, “DOJ and SEC recognize that positive incentives can also drive compliant behavior. These incentives can take many forms such as personnel evaluations and promotions, rewards for improving and developing a company’s compliance pro­gram, and rewards for ethics and compliance leadership. Some organizations, for example, have made adherence to compliance a significant metric for management’s bonuses so that compliance becomes an integral part of management’s everyday concern.”

Most Human Resources (HR) experts will opine that properly executed performance appraisals are crucial to organizational productivity as well as the development of employee skills and employee morale. Moreover, they can serve a couple of different functions for a best practices compliance program. First, and foremost, they communicate to each employee their job performance from a compliance perspective. However, one key is not to approach the performance appraisal review as an isolated event but rather a continual process. This means that instead of trying to play catch-up at the last minute, supervisors should provide feedback and assess job performance throughout the year so annual reviews are grounded in a year’s worth of experience. This includes the compliance component of each job. The second area performance appraisals impact is compensation. As noted above, the DOJ and SEC expect that your compliance program will have both discipline and incentives. But those incentives need to be based upon something. The score or other performance appraisal metrics will provide to you a standard which you can measure and use to evaluate for other purposes such as employee promotion or advancement to senior management going forward.

In her article Flewelling provides six points you should consider which I have adapted for the compliance component of an annual employee performance appraisal. 

  1. Prioritize reviews in your schedule – You should schedule the employee performance appraisal at least several days in advance, rather than when a time slot suddenly opens up. You would make sure that you allot sufficient time for unhurried give and take between the reviewer and the employee.
  2. Review the entire year’s performance – You should resist the attempt to focus the discussion on the latest compliance experience. This is called recency bias. If a compliance issue arose in the past month or so, you need to keep it in perspective for the entire review period. Moreover, by focusing a review on a recent problem you may obscure prior accomplishments and make an employee feel demoralized. Take care not to go too much in the opposite direction as recency bias can work both ways, and one should not let a favorable recent compliance event overshadow the full review period.
  3. Do not hesitate to critique – Be generous with praise where it is warranted, but do not hesitate to discuss improvements needed in the compliance arena. Many supervisors are reluctant to confront and indeed desire to avoid confrontation. However remaining silent about an employee’s compliance shortcomings is a disservice to both the company and the employee.
  4. Do not dominate the conversation – Remember that you must give the employee time for self-appraisal and to ask questions or to comment about the feedback received from the compliance perspective. If there are specific questions or concerns raised by the employee you need to be prepared to address them as appropriate.
  5. Understand the employee’s role – You need to understand and appreciate that if the recent economy has resulted in many employees assuming the responsibilities of more than one position. If relevant to the employee, acknowledge that fact and take it into account in the review. This is certainly true from the compliance perspective as many non-Compliance Department employees have cross-functional responsibilities. If they claim not to have the time to handle their compliance responsibilities you will need to address this with the employee and perhaps structurally as well.
  6. Anticipate reprisal – Although it is rare, you can face the situation where an employee who is very dissatisfied with a review may refuse to sign it. The employee may be offered the opportunity to add a statement to the review. Also point out that the employee signature is an acknowledgement of receiving the review and does not signify agreement. If the employee still refuses to sign, have a second supervisor come in to witness the refusal. This may be particularly important from the compliance perspective.

Flewelling ends her piece by noting, “A proper annual review requires considerable effort from employee supervisors. It should be a full-year process involving regular guidance and feedback and perhaps several mini-reviews along the way. But rather than viewing it as onerous, supervisors should keep in mind that it is a tool for making their departments work more efficiently and yields better results for everyone involved.” I would add this is doubled from the compliance perspective. Nonetheless the potential upside can be significant from your overall compliance program perspective.

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

December 16, 2014

The Eve of Destruction and Tone at the Top – You Are Who Say You Are

Barry McGuireIn 1965 the single Eve of Destruction was released. It was written by an 18 year old named Phil Sloan and was sung by former member of the New Christie Minstrels named Barry McGuire. To top it off, it was produced by Lou Adler. These facts, the story of the song, its recording and release were related in a recent Wall Street Journal (WSJ) article by Steve Dougherty entitled “Still on the ‘Eve of Destruction’. There are some singles that got under my skin when they were released and have remained there. This song was one of them. For me, the single most powerful line in the song was following:

Think of all the hate there is in Red China; And take a look around to Selma Alabama. 

Even as an eight year old I pondered the import that line. While we were taught that the Soviet Union might have wanted to defeat, conquer, and then enslave us; it was Red China that hated us so much they wanted to wipe us out of existence As we were taught back then that it was the Red Chinese who hated us; I wondered if there was that much hate in Selma Alabama. For if there was as much hate in Selma Alabama as there was in Red China, it had to be quite a lot of it.

I thought about Eve of Destruction and those lyrics about the hate in Selma, Alabama when I read about the conduct of a couple of senior managers recently. While they have both apologized for their conduct and comments that were clearly beyond the pale, I wondered that if you do say and act a certain way, if it really translates into who you really are. For the compliance practitioner, I wondered what such comments or actions might mean about a Chief Executive Officer (CEO) or other senior management’s commitment to doing business in an ethical manner and in compliance with anti-corruption laws such as the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act.

The first has been nicknamed Nut-Rage and involved the (now former) Korean Air executive Cho Hyun-ah (Heather Cho), who threw one of the greatest diva-worthy (or perhaps five year-old worthy) public temper tantrums of all-time. An article in the BBC Online, entitled “Former Korean Air executive apologises for ‘nut rage” ,reported that “Ms Cho was onboard a Korean Airlines plane departing from New York for Incheon last week when she demanded a crew member to be removed, after she was served nuts in a bag, instead of on a plate.” Also according an article in Slate, entitled “Flight Attendant Forced to Kneel for Serving Nuts in a Bag (Instead of a Dish) to Korean Air Executive” by Daniel Politi, Ms. Cho was not simply content to disrupt the plane’s service, air traffic control and airport scheduling, he wrote “Just when you thought the whole story about the Korean Air executive who went nuts over some nuts couldn’t get more ridiculous, the head of the cabin crew said he was forced to kneel to apologize about how a flight attendant served some macadamia nuts. Just in case you haven’t been following the case, Heather Cho, the daughter of the airline’s chairman and the executive in charge of in-flight service, forced a plane to return back to the gate at New York’s JFK airport last week after a flight attendant dared to bring her macadamia nuts in a bag and not a dish. Cho forced the head of the cabin crew to get off the plane.”

But the story did not end there. In another BBC article, entitled “Korean Air executive ‘made steward kneel over nut rage, the head of the cabin crew also reported that “Once home, officials from the airline came to his home to ask him to say that Ms Cho did not use abusive language and that he had voluntarily got off the plane.” Not to be outdone in this attempt to obstruct the truth and intimidate the witness, the BBC article also reported “Korean Air initially defended Ms Cho, noting that she was responsible for overseeing flight service in her role as vice-president, but the company later apologised.”

Unfortunately the second event is much closer to home here in the US and involves the Sony hacking scandal, which has been an unmitigated disaster for the company. In addition to all of the salary information, personal social security numbers and corporate intellectual properties that have been released, Sony’s Entertainment Chairman Amy Pascal sent some emails that can only at best be characterized as racially insensitive in nature. Jason L. Riley, in a WSJ entitled article “What Do You Call A Black President”, wrote that Pascal and Producer Scott Rudin engaged in the following email colloquy “Last year, Ms. Pascal and Mr. Rudin were invited to a fundraiser for Mr. Obama by Jeffrey Katzenberg, a DreamWorks Animation bigwig and major Democratic donor. Before the event, Ms. Pascal and Mr. Rubin joked about having to attend and what to say to the president. “What should I ask the president at this stupid Jeffrey breakfast,” wrote Ms. Pascal. “Should I ask him if he liked Django”, a 2012 film about slavery. Mr. Rudin responds with his own suggestion, “12 Years a Slave.” The two go back and forth naming movies they imagine the president enjoying—“The Butler,” “Think Like a Man,” “Ride Along”—all of which feature black actors or racial themes.” While Riley opines that this ­tete-a-tete is political in nature, my Southern upbringing reminds me of the line from Eve of Destruction to Think of all the hate there is in Red China; And take a look around to Selma Alabama. Maybe if McGuire were singing the song today, he would expand his geographic horizons.

While both Ms. Cho and Ms. Pascal have apologized for their actions and as noted, Korean Airlines has terminated Ms. Cho from her position. If you are what you say and show to others; what does all that mean when such people get into senior management positions? What does it say about Korean Airlines that it (1) fostered such a culture where the daughter of the President is given a job she clearly knows nothing about, (2) the same person humiliates an employee in public, (3) the Company tries to cover-up the incident by intimidating the employee, and (4) defends the actions of the daughter? Think that company has a culture of compliance? How about if a compliance incident is reported – would the company try to cover it up or thoroughly investigate it? Would the company try to intimidate witnesses to get them to change their recollections of events? How would you answer these questions if the incident in question were not over some nuts being served but over a safety issue?

As to Sony, how do you imagine minority employees might feel, given Pascal’s comments about the President of the United States? What about employees that might complain about discrimination in employment practices? If the head of the studio communicates in the manner about the President, what can a regular employee expect; similar sensitivity? Maybe the lesson for Sony and Pascal is simpler and much more direct, Don’t put stupid stuff in email. For even if your company is not hacked like Sony; in today’s world such emails uncovered in the context of a FCPA investigation might indicate a tone at the top which is not something you wish a regulator to see. But at the end of the day, you are you claim you are.

For a YouTube video clip of Barry McGuire singing Eve of Destruction, click here.

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

© Thomas R. Fox, 2014

December 1, 2014

Sherlock Holmes and Innovation in the Compliance Function, Part I – A Study In Scarlet

A Study in ScarletToday begins a week of double themed blog-posts. First I am back with an homage to Sherlock Holmes, for it was in the magazine Beeton’s Christmas Annual that the characters Sherlock Holmes and Watson were introduced to the world in 1887, in the short story A Study in Scarlet. The second theme will be innovation in the compliance department. I will take some recent concepts explored in the December issue of the Harvard Business Review (HBR) and apply them to innovation and development of your compliance function. I hope that you will both enjoy my dual themed week and find it helpful.

Today I begin with the first novel, A Study in Scarlet. There are two items of note that I learnt in researching this work. The first is that it was written in 1886 and even Conan Doyle had trouble finding a publisher for what went on to become the most famous detective character of all-time. The second was the title. I had always thought it referred to the color of blood but it turns out that it comes from a speech given by Holmes to Dr. Watson on the nature of his work, in which he describes the story’s murder investigation as his “study in scarlet”: “There’s the scarlet thread of murder running through the colourless skein of life, and our duty is to unravel it, and isolate it, and expose every inch of it.” Furthermore, a ‘study’ is a preliminary drawing, sketch or painting done in preparation for a finished piece.

I thought Doyle’s first work would provide an excellent entrée into today’s topic, that being leadership in the compliance function. While many compliance departments may have begun more as a command and control function, set up by lawyers to comply with anti-bribery laws such as the Foreign Corrupt Practices Act (FCPA), UK Bribery Act or others; this type of leadership model is now becoming outmoded in today’s world. It is not that employees are interested in the ‘why’ they should do business ethically and in compliance with such laws but it is more that power is shifting inside corporations. In a HBR article, entitled “Understanding “New Power””, authors Jeremy Heimans and Henry Timms explore how leadership dynamics are changing and what companies might be able to do to harness them. I found them to have some excellent insights, which a Chief Compliance Officer (CCO) moving to CCO 2.0 or compliance practitioner might be able to garner for a compliance function.

The authors begin by noting that ‘new power’ differs from ‘old power’ in a bi-lateral dimension of intersection. This intersection is between the models used to exercise power and the values which are now embraced. It is the understanding of this shift in power, which will facilitate the compliance function moving more to the forefront of a business integration role. The new power models are fourfold. Under sharing and shaping a company is much more integrated with its customers and supply chain. Second is funding which continues this integration by adding a vertical component of funding, whether equity positions or some other type of funding. Third is producing in which “participants go beyond supporting or sharing other people’s efforts and contribute their own.” Finally, there is co-ownership, which is the most decentralized, pushing participation down to the lowest or most basic levels.

But beyond these new power systems, the authors believe that “a new set of values and beliefs is being forged. Power is not just flowing differently; people are feeling and thinking differently about it.” The authors call them “feedback loops” which “make visible the payoffs of peer-based collective action and endow people with a sense of power. In doing so, they strengthen norms around collaboration”.

The authors lay out five new values. They include the area of governance where the authors note, “new power favors informal, networked approaches to governance and decision making.” Next is in the area of collaboration where the authors believe that this new power value rewards “those who share their own ideas, spread those of others, or build on existing ideas to make them even better.” The next new value is DIO or do it ourselves. Under this value, there is a “belief in amateur culture in arenas that used to be characterized by specialization and professionalization.” Next is transparency which, while not a new concept, says that more permanent transparency between business and social lives will lead to a “response in kind from our institutions and leaders who are challenged to rethink the way they engage with their constituencies” specifically including their employee base. The final new value identified by the authors is affiliation, which means that new and younger employees are less like to “forge decades-long relationships with institutions.”

The authors have three prescriptions that I found could be useful for the CCO or compliance practitioner to incorporate into a mature and evolving compliance program moving forward. Compliance functions need to “engage in three essential tasks: (1) assess their place in a shifting power environment, (2) channel their harshest critic, and (3) develop a mobilization capacity.

Assess where you are

This prong is quite close to something compliance practitioners are comfortable with in their role, a risk assessment. However the authors suggest that the assessment be turned inward so you should assess the compliance function on this “new power compass—both where you are today and where you want to be in five years.” You can benchmark from other companies in responding to this query. Internally, you can begin this process with a conversation about new realities and how the compliance function should perform. More importantly such an assessment can help you identify the aspects of their core models and values that should not be changed.

Incorporate business unit interests

The authors note, “Today, the wisest organizations will be those engaging in the most painfully honest conversations, inside and outside, about their impact.” However, I think this question should be asked first by the CCO or compliance practitioner. For it is not only what you are doing to work with your business units but more importantly what are you doing to incorporate their concerns and suggestions into your compliance regime. If you are going to ask the business unit to be a significant partner or better yet be your business partner, you will need to have a mechanism in place to engage your business unit so there can be an inflow of input before the compliance function has an output of requirements. As the authors write, “This level of introspection has to precede any investment in any new power mechanisms” to which I would add any successful compliance function.

Mobilize your capacity

Here I suggest you consider contracted third parties and other third parties such as joint venture (JV) partners as an avenue through which the compliance function can bring greater benefits to an organization. I have often heard compliance expert Mary Jones talk about her training of her company’s third parties and how thankful they were that when she, Global Industries Director of Compliance, would personally travel to their locations and put on in-person training. Her efforts to travel to their locations, spend the money required to do so not only directly strengthened Global Industries’ compliance function but created allies for her efforts by giving these suppliers the information and training they needed to comply with their customers requirements. By reaching out in this manner, Global Industries used its contracted third party suppliers to create a stronger company compliance program.

As the anti-corruption compliance profession matures, it will become more a component of a company’s business function. This means less of a lawyer’s top down mentality of do it because I said to do it, to more collaboration. It also means, as with the premier of Sherlock Holmes in A Study in Scarlet that something new is on the horizon and it could be here for quite sometime 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

 

November 26, 2014

Doing Business in India – Corruption Risks and Responses

IndiaRecently the US law firm of Foley and Lardner LLP and MZM Legal, Advocates & Legal Consultants in India jointly released a white paper, entitled “Anti-Bribery and Foreign Corrupt Practices Act Compliance Guide for U.S. Companies Doing Business in India”. For any compliance practitioner it is a welcome addition to country specific literature on the Foreign Corrupt Practices Act (FCPA), UK Bribery Act and other anti-corruption legislation and includes a section on India’s anti-corruption laws and regulations.

FCPA Enforcement Actions for Conduct Centered in India

Under the FCPA, several notable US companies have been through enforcement actions related to conduct in India. Although not monikered as a ‘Box Score’ the authors do provide a handy chart which lists the companies involved, a description of the conduct and fine/penalty involved.

Company Description Disposition (in USD)
Pride International Payment made for favorable administrative judicial decision regarding customs issues $56.1 million
Tyco International German subsidiary paid third parties to secure contracts; payments recorded as commissions $26 million
Diageo Subsidiary made payments to government official responsible for purchase/authorization of Diageo’s products in India $16.4 million
Textron Subsidiaries paid foreign officials to secure contracts; characterized as commission and consulting fees $5.05 million
Oracle Corporation Oracle distributor allegedly created “slush” fund to pay third parties $2 million
Dow Chemical Company Payments made to India Central Insecticides Board to expedite registration of products $325,000

India Anti-Bribery/Anti-Corruption Laws 

The authors identify the principal anti-corruption legislation in India as the Prevention of Corruption Act, 1988 (PCA), which focuses on bribery of public servants. They go on to state, “Bribery under the PCA includes any “gratification” that a public servant receives other than his/her legal remuneration. Gratification constituting a bribe would include anything intended to motivate, influence, or reward a public servant for performing (or forbearing performance of) an official act, or for showing “favour or disfavour” to any person, or for rendering any service or disservice to a public servant.” However, there are other laws, in addition to the PCA, which govern such issues. These include “specific public servants’ Conduct Rules, which set specific guidelines on the value of gifts that may be accepted in furtherance of local or religious customs (where no reciprocal action is expected and where the public servant has no current or expected future official dealings with the gift giver). The guidelines for permissible gifts are based on the public servant’s rank and service classification and broadly range between 500 – 7,500 Rupees (approximately $8 – $120 U.S. dollars).”

Corruption Risks in India

Corruption risks in India are generally perceived to be high due to its “complex administrative and bureaucratic environment”. Similarly the FCPA Professor would say there are a high number of barriers to trade. Coming at it from a different direction, the Department of Justice (DOJ) would say the risk is high because of the number of licenses and permits required. More pruriently, I would say this leads to more folks having their collective hand out looking to speed things up. Indeed, in the recently released TRACE Matrix India comes in at 185th out of 197 countries listed, with a corruption score of 80, based largely on its score of 92 in the highest weighted category of “Interactions with Governments”.

a. Licenses and Permits

The authors identify that “a host of regulatory hurdles exists in India, including the need to obtain permits, licenses, and other regulatory approvals and to pay various application and registration fees. These types of low-level transactions provide opportunities for bribery. Payments made in such transactions — whether in cash or gifts — may appear minimal (by U.S. standards) and may seem harmless, but they can nonetheless result in violations of U.S. and/or India law.” They go on to list some “Examples of Problematic Conduct” around this issue they identify the following:

  • Paying (or providing some other benefit to) a customs official to bypass inspection or overlook incorrect or incomplete paperwork;
  • Paying a local tax regulator to overlook errors or inconsistencies in filings;
  • Paying an official to expedite the processing of a permit or license;
  • Paying a utilities provider to reduce billings; and
  • Paying a local health and safety regulator to overlook code violations.

b. Gifts, Travel and Entertainment

In the area of gifts, travel and entertainment, the authors state that “companies run the risk of triggering the FCPA and other anti-corruption laws if their marketing and entertainment expenditures cross a line into conduct that could be characterized as bribery or lends to the appearance of attempting to induce a breach of trust or impartiality on the part of the recipient…the various conduct rules for public servants in India establish specific guidelines for accepting gifts and hospitality, and, for some public servants, the maximum permissible gift value may be as low as 500 rupees ($8 U.S. dollars). Companies operating in India should thus familiarize themselves with these guidelines before providing even what may seem to be a modest gift or hospitality.” Some examples of problematic conduct identified is these areas are as follows:

  • Paying for extravagant meals, drinks, and entertainment in connection with a visit by a foreign official;
  • Paying for “side trips” so that foreign officials can visit tourist attractions (e.g., Walt Disney World, Las Vegas) while in the United States;
  • Providing per-diems or “pocket money” for foreign officials to use during a visit;
  • Paying for a foreign official’s spouse or family to accompany the foreign official on a trip; and
  • Providing foreign officials with excessive gifts for birthdays, weddings, holidays, or other events.

c. Third Parties

This is always recognized as the highest FCPA risk and in India it is no different. More importantly, it may be even greater in this country because “Navigating India’s extensive regulations and bureaucracy often requires U.S. companies to rely on third parties, such as agents, brokers, consultants, sales representatives, distributors, and other business partners…The PCA similarly criminalizes bribery through third parties as a direct violation by the third party and as an abetment violation by the company on whose behalf the bribe is being made.” The key is subject any third party to rigorous due diligence and closely manage the relationship after the contract is signed. If a Red Flag appears at any point in the third party lifecycle it should be evaluated and cleared. The authors provide a handy list of some examples of Red Flags regarding third parties when doing business in India. They include:

  • A third party is listed in databases reporting known corruption risks (e.g., World Bank List of Debarred Firms) or has been previously investigated for, charged with, or convicted of corruption or other ethics violations;
  • A foreign official has specifically requested that a certain third party be involved in the company’s transaction or business;
  • An agent or consultant holds himself out as someone with close connections to an important minister or minister’s aide;
  • A third party does not appear to have sufficient resources, real estate/infrastructure, or experience to perform the requested tasks;
  • A third party asks the company to provide it with unreasonably large discounts, excessive commissions, reimbursements, or contingency fees; and
  • A third party requests payment in an irregular or convoluted manner (e.g., cash, offshore bank account, payments to another company, over/under invoicing).

Managing Corruption Risk in India

In their concluding section, the authors relate solid risk management tools tailored to the Indian market. It all starts with robust standards and procedures. From there you should train not only your employees on what may be illegal conduct and how to resist requests for bribes but also your third parties. Annual certifications are an important tool for not only risk management but also communication about anti-corruption expectations. Your compliance program should devote the appropriate level of personnel and resources for your operations in India. Finally, a robust reporting mechanism is key but equally critical is your response after any information comes to light. It must be thoroughly investigated, quickly remedied and reported as appropriate.

The Foley & Lardner/MZM Legal white paper is a welcome addition to literature about country specific risks, remedies and responses. A copy of the full white paper can be obtained 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, 2014

November 18, 2014

FIFA and Good-Faith Investigations

CautionYou know things are getting bad when the Wall Street Journal (WSJ) questions a business’ moral authority. Things certainly cannot be much better when the regulators begin nosing around your own self-indulgence. What happens when you realize all of a sudden that all those actions you have taken may actually fall under the jurisdiction of both the United Kingdom and the United States and their respective anti-corruption laws, the UK Bribery Act and the US Foreign Corrupt Practices Act (FCPA)? It turns out all of this may have come through for our friends at Fédération Internationale de Football Association (FIFA).

Last week FIFA announced that it had considered the investigation into allegations of corruption into the awarding of the 2018 World Cup tournament to Russia and the 2022 World Cup tournament to Qatar and found, as reported in the Financial Times (FT) by Roger Blitz in an article entitled “Fifa thrown into fresh turmoil over Qatar World Cup corruption claims”, that “any improper behaviour in the bidding process for the tournament was “of very limited scope.”” This conclusion was made by a FIFA appointed former judge, “Hans-Joachim Eckert, who is chairman of the adjudicatory chamber of Fifa’s ethics committee.” Eckert had reviewed a 350-page report by investigator Michael J. Garcia, who is a former US prosecutor now practicing law in New York. Eckert released a 42 page “summary study” of the Garcia report, which he claimed supported his decision.

Unfortunately for FIFA and Eckert, Blitz reported in another FT article, entitled “Garcia and Eckert set for showdown over Fifa report”, that “Mr Eckert’s summary was disowned within hours of its publication by Mr Garcia, who claimed it misrepresented his findings. He has protested to Fifa’s appeals committee.” Garcia’s statement “has blown apart Fifa’s attempt to bring to a close nearly three years of allegations of unethical behaviour and has left Mr Eckert under increasing pressure to publish the Garcia investigation.” This action by FIFA led Reinhard Rauball, president of the German football league (DFL), to say, “Europe would have to consider breaking away from Fifa unless the Garcia investigation was published in full.”

All of this came after the summary itself noted that documents and evidence surrounding the Russian bid were lost because the computers on which they were stored had been destroyed. Garcia was not even able to speak with all the relevant witness in the Qatar bid as well. Even with this lack of full investigation, Garcia issues a statement which said that Eckert’s summary contained “numerous and materially incomplete and erroneous representations of the facts and conclusions detailed in the investigatory chamber’s report.”

What does all of this mean for FIFA? Certainly if the head of the German football league says that the European soccer federations may have to pull out of the organization because it is so corrupt that portends poorly. In another article in the FT, entitled “Brussels launches sliding tackle against Fifa”, Alex Barker reported “The EU’s top sports official is urging Fifa to come clean with findings from its corruption investigation, in a warning that signals a Brussels rethink over the commercial freedoms enjoyed by football’s scandal-tarnished governing body. In a direct swipe at Fifa’s attempt to clear Russia and Qatar to run the next two World Cups, Tibor Navracsics, the EU commissioner for sports, has called for full publication of a graft report into the 2010 bidding process to “remove doubts” about its findings. While Sepp Blatter’s Fifa is an unregulated Swiss body independent from government, its lucrative business activities in the European market are subject to rules overseen by EU regulators, including sales of television rights.”

What about any criminal issues? A quick Google search reveals that FIFA has offices in both the US and the UK. Given the very broad jurisdiction of the FCPA and perhaps the UK Bribery Act, it does not seem too far a stretch for either the Department of Justice (DOJ), the FBI, the UK Serious Fraud Office (SFO) or even the Overseas anti-corruption unit of the London police might want to open an investigation. Indeed CNN reported that the FBI is investigating FIFA at this time, saying “Investigators are moving ahead with their probe, which could result in charges against senior FIFA officials, the U.S. law enforcement officials said.”

For the compliance practitioner there are a couple of important lesson in all of this. First and foremost, in your internal investigations, you need to provide access of both documents and witnesses to your counsel. If you do not that alone may certainly compromise your investigation. This point was recently re-emphasized in the ongoing General Motors (GM) scandal over its ignition switch problems. It turns out that over two months prior to the public announcement the company had ordered over 500,000 new switches from its supplier. According to Hilary Stout and Bill Vlasic, writing in the New York Times (NYT) in an article entitled “G.M. Ordered a Half-Million Replacement Switches 2 Months Before Recall”, the order was placed after an internal company committee met. But no records of the meeting were provided to company’s outside counsel investigating this matter, Anton R. Valukas. Interestingly Valukas released a statement which the article quoted, ““To my knowledge, G.M. provided me access to all information in its possession related to G.M. inquiries regarding various repair options and part availability as G.M. considered potential fixes for the ignition switch in the event that a recall would occur,” the statement said.” That is lawyer-speak for I looked at what they showed me.

Hiding or not providing access to internal or outside counsel can be a recipe for disaster with the DOJ. The reason is the same as it is a disaster for FIFA in Europe. There is no trust left for the organization. Ask any ex-DOJer and they will tell you that it is all about credibility when you self-disclose to the DOJ or when you are in negotiations with the DOJ over a potential FCPA penalty. I regularly hear Stephen Martin and Mike Volkov say precisely that when they talk about their experiences from working for the US government. If you do not allow your investigators access to all relevant documents and those witnesses under your control, the DOJ will most probably not consider the results of your investigation valid. The DOJ may not even consider your exertions worthy of a good-faith effort.

One thing is also very relevant for the compliance practitioner. If your outside counsel disavows him or herself from the company’s interpretation of it going forward, you are in big trouble. Even the WSJ, in its Op-Ed piece said, “FIFA’s moral failure stands out.”

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

November 11, 2014

The definitive guide to Corporate Self Reporting

Ed. Note-today is the now know as Veteran’s Day. It was previously known as Armistice Day. In the UK it is known as Remembrance Day. Whatever moniker it might take, I thought today we should honor all the fallen from World War I. Below is a photo courtesy of Mike Brown of over 800,000 poppy’s around the Tower of London in honor the British war dead from that conflict. Continuing today’s British theme, today’s post is a report of an article found on thebriberyact.com website on issues related to self-disclosure under the UK Bribery Act. I asked the Bribery Act.com guys, Barry Vitou and Richard Kovalevsky Q.C. if I  could repost it in its entirety, which they graciously allowed me to do. The podcast of my recent interview with Barry Vitou on the current state of the Serious Fraud Office and Bribery Act enforcement actions and related issues on the FCPA Compliance and Ethics Report, is available by clicking here

Poppy's at tower.3

 

We have aggregated below the SFO guidance on Self Reporting (available on its website on a number of pages) and importantly recent comments from the Director about it.  If you are considering Self Reporting as an option we strongly advise you consider the following and obtain independent legal counsel.  We would be delighted to talk to you if you have any questions.  Self Reporting is a big step and should not, in our view, be undertaken without advice.

Will my company be prosecuted if it Self Reports?

Whether or not the SFO will prosecute a corporate body in a given case will be governed by the Full Code Test in the Code for Crown Prosecutors, the joint prosecution Guidance on Corporate Prosecutions and, where relevant, the Joint Prosecution Guidance of the Director of the SFO and the Director of Public Prosecutions on the Bribery Act 2010.

If on the evidence there is a realistic prospect of conviction, the SFO will prosecute if it is in the public interest to do so. The fact that a corporate body has reported itself will be a relevant consideration to the extent set out in the Guidance on Corporate Prosecutions. That Guidance explains that, for a self-report to be taken into consideration as a public interest factor tending against prosecution, it must form part of a “genuinely proactive approach adopted by the corporate management team when the offending is brought to their notice”. Self-reporting is no guarantee that a prosecution will not follow. Each case will turn on its own facts.

In appropriate cases the SFO may use its powers under proceeds of crime legislation as an alternative (or in addition) to prosecution; see the Attorney General’s guidance to prosecuting bodies on their asset recovery powers under the Proceeds of Crime Act 2002. If the SFO uses its powers under proceeds of crime legislation, it will publish its reasons, the details of the illegal conduct and the details of the disposal.

In cases where the SFO does not prosecute a self-reporting corporate body, the SFO reserves the right (i) to prosecute it for any unreported violations of the law; and (ii) lawfully to provide information on the reported violation to other bodies (such as foreign police forces).

This statement of policy has immediate effect. It supersedes any statement of policy or practice on self-reporting previously made by or on behalf of the SFO.

Self-reporting process. How does a corporate Self Report?

The SFO’s restatement of policy on corporate self reporting explains that, in determining whether or not to prosecute, the fact that a corporate body has reported itself will be a relevant consideration to the extent set out in the Guidance on Corporate Prosecutions.

According to the guidance, for a self-report to be taken into account as a public interest factor tending against prosecution it must form part of a genuinely proactive approach adopted by the corporate management team when the offending is brought to their notice, involving self-reporting and remedial actions, including the compensation of victims. The guidance also explains that, in considering whether a self-reporting corporate body has been genuinely proactive, prosecutors will consider whether it has provided sufficient information, including making witnesses available and disclosing the details of any internal investigation, about the operation of the corporate body in its entirety.

Prosecutors will also be mindful that a failure to report the wrongdoing within a reasonable time of the offending coming to light is a public interest factor in favour of a prosecution. It should be borne in mind that the SFO may have information about wrongdoing from sources other than the corporate body’s own self-report. The timing of any self-report is therefore very important. A failure to report properly and fully the true extent of the wrongdoing a further public interest factor in favour of a prosecution.

The following is an outline of the process to be adopted by corporate bodies and/or their advisers when self-reporting to the Serious Fraud Office.

Initial contact, and all subsequent communication, must be made through the SFO’s Intelligence Unit (confidential@sfo.gsi.gov.uk). The Intelligence Unit is the only business area within the SFO authorised to handle self-reports.

Hard copy reports setting out the nature and scope of any internal investigation must be provided to the SFO’s Intelligence Unit as part of the self-reporting process.

All supporting evidence including, but not limited to emails, banking evidence and witness accounts, must be provided to the SFO’s Intelligence Unit as part of the self-reporting process.

Further supporting evidence may be provided during the course of any ongoing internal investigation.

As stated within the SFO’s revised policy, self-reporting is no guarantee that a prosecution will not follow. Each case will turn on its own facts.

Apart from the information provided above, the SFO will not advise companies or their advisers on the format required for self-reports. Nor will the SFO give any advice on the likely outcome of a self-report until the completion of that process.  For further information visit our Q&A section.

FAQ

The Serious Fraud Office has reviewed its policy on…corporate self-reporting.

  1. Why are revisions being published?
  2. Following his appointment, the Director of the SFO decided to review SFO policies and take forward recommendations made by the OECD Working Group on Bribery. The revisions have been published to:

restate the SFO’s primary role as an investigator and prosecutor of serious and/or complex fraud, including corruption;

ensure there is consistency with the approach of other prosecuting bodies; and

take forward certain OECD recommendations.

The SFO’s primary role is to investigate and prosecute. The revised policies make it clear that there will be no presumption in favour of civil settlements in any circumstances.

  1. Is this a shift in the SFO’s position?
  2. The new approach restates the SFO’s primary purpose.

Around the time when the Bribery Act 2010 came into force, joint guidance was issued by the Director of Public Prosecutions and the Director of the SFO, and separate guidance was published by the Ministry of Justice. Save for one change, that guidance continues to apply. The only change is that the reference in the joint prosecution guidance to the SFO’s former policy on self-reporting has been removed.

Any decision to prosecute unlawful activity will be governed by the Full Code Test in the Code for Crown Prosecutors and the applicable joint prosecution guidance.

  1. What about companies that have already acted on the old guidance?
  2. Each case will be reviewed and assessed according to its own circumstances. If there has been reliance on a previous statement of policy or practice the SFO will consider such reliance in the context of the Full Code Test. If before the publication of the revised policy statements the SFO entered into an agreement with a corporate body based on an earlier SFO statement of policy or practice, and the corporate body has fully complied with the terms of that agreement, then the previous statement of policy or practice will continue to apply
  3. Why is there a revised approach to self-reporting?
  4. As explained above, the revisions have been made to:
  • restate the SFO’s primary role as an investigator and prosecutor of serious and/or complex fraud, including corruption;
  • ensure there is consistency with the approach of other prosecuting bodies; and
  • take forward certain OECD recommendations.

The revised statement of policy explains in clear terms that that any decision to prosecute unlawful activity will be governed by the Full Code Test in the Code for Crown Prosecutors and the applicable joint prosecution guidance.

The revised statement of policy is not limited to allegations involving overseas bribery and corruption.

If the requirements of the Full Code Test are not established, the SFO may consider civil recovery as an alternative to a prosecution.

  1. Will the SFO communicate with corporate bodies about their past or future conduct?
  2. The SFO encourages corporate self-reporting, and will always listen to what a corporate body has to say about its past conduct; but the SFO offers no guarantee that a prosecution will not follow any such report.

The SFO is primarily an investigator and prosecutor of serious and/or complex fraud, including corruption. It is not the role of the SFO to provide corporate bodies with advice on their future conduct.

What the Director of the SFO says

Director of the SFO, David Green QC CB Quoted at Pinsent Masons annual regulatory conference on Self Reporting on 24 October 2013. He said:

“I recently attended a private gathering of general counsel from a number of major multi-national corporations. I spoke on the subject of corporate self-reporting of instances of suspected criminality, including bribery and corruption.

There was then a Q&A session, during which 2 attendees indicated that the advice they were receiving from their external lawyers was that such matters should NOT be reported to the SFO, because “the SFO was not as helpful as it used to be”. There followed a vote on the issue, which was firmly in favour of self-reporting. Well they would, wouldn’t they.

I became DSFO in April 2012.

It is now a year since I changed the published SFO guidance on self-reporting by corporates.

The guidance I inherited contained an implied presumption that self-reported misconduct would be dealt with by civil settlement rather than prosecution.

I took the view that no prosecutor should appear to offer such a guarantee in advance. As a prosecutor, you can never anticipate what set of facts and conduct might be next in through the door.

I took the guidance back to the historic position agreed with the Director of Public Prosecutions: that we would apply the full code test for crown prosecutors to self-reported criminality. In other words, we ask (after our own investigation): is there sufficient evidence to prosecute, and if so, is a prosecution in the public interest?

The SFO’s message is carefully expressed and nuanced. Assume the evidential sufficiency test is passed. If a company made a genuine self-report to us (that is, told us something we did not already know and did so in an open- handed, unspun way), in circumstances where they were willing to cooperate in a full investigation and to take steps to prevent recurrence, then in those circumstances it is difficult to see that the public interest would require a prosecution of the corporate.

Some parts of the blogosphere seem to have difficulty with this, writing that it means self-reporters will be prosecuted. It means no such thing.

Some corporate lawyers complain that the new approach (actually, the principled, established approach) creates “uncertainty”. I disagree: and I think that when they say “certainty” it is code for “guarantee”.

For the avoidance of doubt, the SFO continues to receive self-reports, and I anticipate the numbers will only rise as Deferred Prosecution Agreements (DPAs) bed in next year.

So why should a company self-report instances of suspected criminal misconduct to the SFO?

(i)                A self-report at the very least mitigates the chances of a corporate being prosecuted.  It opens up the possibility of civil recovery or a DPA.

(ii)             There is the moral and reputational imperative: it is the right thing to do and it demonstrates that the corporate is serious about behaving ethically.

(iii)           If the corporate chooses to bury the misconduct rather than self-report, the risk of discovery is unquantifiable. There are so many potential channels leading to exposure: whistle-blowers; disgruntled counterparties; cheated competing companies; other Criminal Justice agencies in the UK; overseas agencies in communication with SFO; and the SFO’s own developing intelligence capability, to name but a few.

(iv)           If criminality is buried and then discovered by any of the above routes, the penalty paid by the corporate in terms of shareholder outrage, counterparty and competitor distrust, reputational damage, regulatory action and possible prosecution, is surely disproportionate.

(v)             Last but not least, burying such information is likely to involve criminal offences related to money laundering under sections 327-9 of the Proceeds of Crime Act.

There are, I suggest, very powerful arguments in favour of self-reporting.

Once the decision to self-report has been made by the corporate, then the question of timing arises. Common sense suggests that an initial report of suspected criminality should be made to the SFO as soon as it is discovered. This surely protects the company against the SFO finding out by other means whilst the company investigates further. The corporate can then investigate in depth and report back to the SFO. The SFO will   carry out its own assessment with possible use of S2A powers (in the case of bribery), and, if justified, the opening of a criminal investigation and the exercise of S2 powers.”

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