FCPA Compliance and Ethics Blog

May 14, 2014

FCPA Compliance and the Convergence of US Security, Economic and Foreign Policy Interests

Robert Gates“In a private meeting, the king [King Abdullah of Saudi Arabia] committed to a $60 billion weapons deal including the purchase of eighty-four F-15’s, the upgrade of seventy-15s already in the Saudi air force, twenty-four Apache helicopters, and seventy-two Blackhawk helicopters. His ministers and generals had pressed him hard to buy either Russian or French fighters, but I think he suspected that was because some of the money would end up in their pockets. He wanted all the Saudi money to go toward military equipment, not into Swiss bank accounts, and thus he wanted to buy from us. The king explicitly told me saw the huge purchase as an investment in a long-term strategic relationship with the United States, linking our militaries for decades to come.”

The above quote comes from Robert Gates recent book, Duty: Memoirs of a Secretary at War. I would like you to identify how many interests of the US are contained in the above quotation. I can identify at least five interests of the US: (1) US security interests; (2) US foreign policy interests; (3) US military interests; (4) US economic interests; and (5) US legal interests as reflected in compliance with the Foreign Corrupt Practices Act (FCPA).

The above quote synthesizes succinctly concepts that I have tried to articulate for some time as to the worldwide effects of the FCPA. The fight against terrorism has many different tools and I certainly recognize the FCPA as one of them. But this citation from former Secretary of Defense Gates clearly shows the convergence of several interests of the US through the effectiveness of the FCPA. If it had not been for the effective compliance programs of the US aerospace and armament industry, the Saudi Arabian ministers, who advised the King to buy something other than American, might have held sway. But because bribing such ministers would violate US law and put the US companies under potential legal liability, the King had confidence that the US companies were not bribing his ministers to get the Saudi business.

Put another way, what is the cost of paying a bribe to a foreign governmental official? It means that said official’s judgment is clouded by his own self-interest in giving the business to a company, which has bribed him for his business. As Jeff Kaplan would say, there is a clear conflict of interest by the bribe receiver because they are being paid to make a decision to award the business to a company which lines their pockets. Or, in the case of the Saudi ministers that the Saudi King referred to, their collective Swiss bank accounts.

I recognize that the FCPA is a supply side focused law. It criminalizes the conduct of the bribe-giver and not the bribe-receiver. But because of this fact it means that US companies that comply with the law can help foster the US interests that I listed above and perhaps others that I have not identified. So just as I believe that the FCPA helps in the fight against terrorism, I also believe that the FCPA helps to foster US foreign policy, US economic interests and US legal interests.

I see this most clearly in Houston, Texas, generally recognized as the epi-center of FCPA enforcement. There have been more FCPA enforcement actions against companies based in Houston than in any other single city in the world. This is largely because Houston is the self-proclaimed energy capital of the world but this profusion of FCPA enforcement has also led to companies in Houston having some of the most mature compliance programs and it has also led to quite a bit of FCPA knowledge throughout businesses in the city. Nonetheless the key is the business response to the issue and not strictly a legal response.

In the energy industry, the exploration and production companies (E&P) are usually thought of as existing at the top of the food chain (i.e. Mega-Big). Below them are the service companies, which actually do the work of exploration (i.e. Very-Big). The next level down are companies which all work with the service companies, from the multi-billion chemical production firm down to the $15MM company which has a piece of software which does something useful. All of these companies down the chain are required to have a compliance program.

In practice it works something like this. A service company needs a product or service. As part of the regular contracting process, the service company will inquire into the contractor’s compliance function and policy. If the contractor provides a service which deals with a foreign government in any way or has foreign government touch points, the service company may well come and audit the contractor’s compliance program prior to executing the contract. Thereafter the contractor is subject to being audited for not only the execution of the contract but also the continued maintenance of its compliance program. All of this is done for business reasons. It is a business response to a legal issue, that being compliance with the FCPA.

FCPA compliance can be expressed through the formulation articulated by Paul McNulty and Stephen Martin, of Baker and McKenzie, which they call the “Five Elements of an Effective Compliance Program”, which are leadership, performing a risk assessment, instituting standards and controls, then providing training and communication on those standards and controls and, finally, oversight of your compliance program. While McNulty and Martin have written and spoken extensively on these five elements to flesh them out, these basic concepts are usually quickly and easily understood. Further, and perhaps not said as often as it should be said, companies which have a robust compliance program, are usually better run companies because of the controls that are put in place.

In other areas, anti-corruption compliance programs are becoming requirements to access cash to fund your business. If your company is going through traditional corporate refinancing in the next 18 months, any bank or other financial institution that you go to will want to not only review your compliance program but may well want to review where that compliance program may be in terms of an overall assessment of the compliance risks that your company faces. If you want to sell your business, enter into a joint venture (JV) or even receive some other type of funding, your compliance program will be assessed.

While the world is not free of US companies that run afoul of the FCPA, to paraphrase Dick Cassin, there is certainly more anti-corruption compliance going on in the world. But FCPA compliance serves many interests of the US. Robert Gates’ passage above makes clear that the FCPA is doing what it was intended to do and perhaps much more. But of even greater significance is that the King of Saudi Arabia recognized the effectiveness in a business context. Policy makers need to consider how powerful the FCPA is in a variety of US interests before they argue for a change in the law.

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 18, 2013

Joan Fontaine and the Evolution of Compensation Issues in a Compliance Program

Yesterday I noted the passing of Irish actor Peter O’Toole this past weekend. But we also lost one of the great female leads from the 1940s and 50s this weekend as well, Joan Fontaine. Ms. Fontaine was the younger sister of Olivia de Havilland. She won a Best Actress Oscar in 1941 for her role in Suspicion making her the only woman to win a Best Actress Oscar for acting in an Alfred Hitchcock film. It also made her a member of the only sisters’ duo to win Best Actress Oscars. Prior to winning her Oscar, Fontaine had been nominated in 1940 in the Best Actress category for her role in another Hitchcock film, Rebecca, in which she played the haunted second wife of Laurence Olivier. For my money, her role in Rebecca was by far the greater performance than Suspicion. While born of British parents, Fontaine never actually lived in England, being born in Japan and then coming to the United States as a teenager. Fontaine also had one of the greatest sibling rivalries of all-time with her equally famous sister, stating once that, “I married first, won the Oscar before Olivia did, and if I die first, she’ll undoubtedly be livid because I beat her to it!” She did.

So with the sisters, some things never changed. However in the compliance world, things do change. Compliance programs evolve just as the thinking on best practices has changed over the past few years. One of the areas that has not received as much attention in compliance programs is the amount of compensation paid to third party representatives. Clearly a great amount of attention has been paid to due diligence, knowing just who you are doing business with and the management of the relationship. However the area of the quantum of compensation is not something as explicitly considered. Another area which is now drawing greater scrutiny in the Foreign Corrupt Practices Act (FCPA), and other anti-corruption law arenas, is compensation which results in a conflict of interest.

Jeff Kaplan, editor of the Conflict of Interest Blog, wrote, in a post entitled “Conflicts of Interest and Industry Culture”, that “intersection of culture and C&E that is too often overlooked: industry culture.” He went on to say that “As a general matter industry culture is not as significant a cause of risk as organizational or geographical culture. But it can be potent, particularly in industries with a high degree of inter-company mobility, such as financial services.”

I thought about Kaplan’s insights when I read an article in today’s New York Times (NYT), entitled “Glaxo to Stop Paying Doctors To Boost Drugs”, by Katie Thomas. This is the same GlaxoSmithKline PLC (GSK) that is under investigation for bribery and corruption in China, in violation of Chinese domestic anti-corruption legislation. In her article Thomas wrote that “British drug maker GlaxoSmithKline will no longer pay doctors to promote its products and will stop tying compensation of sales representatives to the number of prescriptions doctors write, its chief executive said Monday, effectively ending two common industry practices that critics have long assailed as troublesome conflicts of interest.” While this practice has gone on “for decades” it had been prohibited in the United States through an “industry-imposed ethics code but still occurs in other countries, specifically in China. I found this quite interesting since the FCPA only applies to non-US (foreign) government officials, such as those in socialized medicine health care system.

In addition to this ban on paying doctors to speak favorably about its products at conferences, GSK will “also no longer compensate sales representatives based on the number of prescriptions doctors write, a standard practice that some have said pushed pharmaceutical sales officials to inappropriately promote drugs to doctors.” Instead GSK would pay its sales representatives “based on their technical knowledge, the quality of service they provided to clients to improve patient care, and the company’s business performance.” (What a novel idea, compensation based on quality!) There was nothing in Thomas’ article to suggest that GSK made these changes based upon the ongoing investigations in China. Indeed, a company spokesman interviewed for the NYT article “declined to comment on the investigation because he said it was still underway.” However the timing of such changes and the fact that it seemed to apply more fully to GSK operations outside the US, would make the timing of the changes certainly appear less than coincidental.

In addition to the obvious conflict of interest, which apparently is an industry wide conflict because multiple companies have engaged in these tactics, there is also clearly the opportunity for abuse leading to allegations of illegal bribery and corruption. Indeed one of the key bribery schemes alleged to have been used by GSK in China was to pay doctors, hospital administrators and other government officials, bonuses based upon the amount of GSK pharmaceutical products which they may have prescribed to patients. But with this new program in place, perhaps GSK may have “removed the incentive to do anything inappropriate.”

This new program by GSK demonstrates that companies can make substantive changes in compensation, which promote not only better compliance but also promote better business relationship. A company spokesman interviewed for Thomas’ piece noted that the changes which GSK will make abroad had already been made in the US and because of these changes, “the experience in the United states had been positive and had improved relationships with doctors and medical institutions.”

For the compliance practitioner, one of the lessons from the GSK scandal is to look not only at the amount of compensation paid but how it was paid. If there is a way to remove or even help to remove “the incentive to do anything appropriate” it certainly can be positive for the company and positive for your overall compliance efforts.

You might also fire up the DVD player over this holiday season for a Joan Fontaine double shot of Hitchcock.

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

December 13, 2011

The Worst Conflict of Interest Move of All-Time (at least since Enron)

Last week, I observed one of the worst actions by a major league sports commissioner in my lifetime. Not the worst, as I will give that “worst award  for a decision made by a sports commissioner in my lifetime”, to either of two Baseball Commissioners; Ford Frick, for the * next to Roger Maris 61 homer season or to Bowie Kuhn for his entire stewardship of major league baseball. This “one-of-the-worst” award goes to National Basketball Association (NBA) Commissioner David Stern for his voiding the 3-way trade last week which would have shipped Chris Paul from the woeful New Orleans Hornets to the LA Lakers in a three way trade also involving the Houston Rockets.

My hometown Houston Rockets would have received Paul Gasol and the Hornets would have received 4 players from the Rockets, plus a first round pick in the NBA draft, plus Lamar Odom from the Lakers. All of this for one player, Chris Paul, who is leaving New Orleans at the end of the season via free agency for which the Hornets will receive a big fat nothing. For the best basketball analysis of this debacle, check out the post by Bill Simmons (a/k/a “The Sports Guy”), entitled, “The Sixth Day of NBA Christmason his site, Grantland.com.

This blog post is not a substitute for a Howard-Sklar inspired rant on behalf of my hometown Rockets, so hang on as there really is a compliance angle here. (But clearly I am somewhat biased so be advised.) This conflict of interest is set up by the anomalous fact that the NBA itself owns the New Orleans Hornets. Commissioner Stern stated that he vetoed the trade because it “wasn’t in the interest of the league owned Hornets.” So what interest was Commissioner Stern referring to here; the interest of the Hornets, the interest of the three teams involved in the trade, the interest of the LA Clippers who have to share the LA market with the Lakers (apparently not as even the Clippers backed out of a trade for Paul on Monday), the interest of the ever-vindictive owner of the Cleveland Cavaliers, Dan Gilbert, still smarting over LeBron James leaving his team via free agency for Miami, or the interest of just the omnipotent ‘they’? After calming down and listening to and reading the sports commentariat, the one which the most struck me was Mike Wilbon on Pardon the Interruption, a talking heads sports show on ESPN. Wilbon said that as the NBA has a financial interest in the Hornets plus a NBA wide competitive interest, which equals a conflict of interest.

Often overlooked as the point number 1 on the Department of Justice’s (DOJ) suggested 13 points for a minimum best practices anti-corruption compliance program is

  1. Code of Conduct. A Company should develop and promulgate a clearly articulated and visible corporate policy against violations of the FCPA, including its anti-bribery, books and records, and internal controls provisions, and other applicable foreign law counterparts (collectively, the “anti-corruption laws”), which policy should be memorialized in a written compliance code.

In every Code of Conduct that I have seen there is a Conflict of Interest (COI) provision. Many people, including myself, have wondered why something so self-obvious as a written company Code of Conduct would be listed as the point number 1 in a best practices compliance program. The reason I believe that a written Code of Conduct should be the first is because, as stated by Jeffery Kaplan in introducing his Conflict of Interest Blog, conflicts of interest, “as a general matter, present the most common sort of C&E issues in business organizations. They can also be the most difficult to resolve, both because there is no overarching set of COI-related laws (unlike, for instance, competition law) and also because COI issues are frequently raised in an intensely personal circumstances.” If you work for a large publicly owned entity, the COI provision probably prevents ownership in another entity, other than some level of stock, without notice to and consent by your employer. The reason this notice and consent requirement exists is so that you will not be in the same position as Commissioner Stern; that is conflicted, leading you to making bad decisions.

So how does this relate to anti-corruption compliance you ask? (And I am glad you asked that question.) Anytime someone engages in bribery, they put the recipient in a conflicted position. The recipient agrees, overtly or tacitly, to favor the interests of the bribe-maker over that of his employer. Recognizing that the Foreign Corrupt Practices Act (FCPA) is a supply side focused law, it does have the benefit and that is if the law is followed, or not watered down, of reducing such conflicts of interests in foreign lands. A clear benefit for US companies is that they will not be sued as well, as evidenced by the ongoing Alba v. Alcoa matter in federal district court.

How does Enron work into all this? Recently, the tenth anniversary of the Enron self-implosion passed. One of the things I was reminded about in some of the articles discussing this anniversary is that the Enron Board of Directors actually voted on and approved a waiver of the Enron Code of Conduct to allow the Chief Financial Officer (CFO), Andy Fastow, to not only own entities which competed with Enron but to negotiate with others in the company, who worked under him, on behalf of the entities in competition with Enron. Sound like a conflict of interest to you? More to the point, what does such an action by a company’s Board of Directors say about the culture of a company. Perhaps it says that compliance is not too high on the agenda, ya think?

So have some respect for a Code of Conduct, it really is an important document. As strongly as I feel Commissioner Stern’s clear conflict of interest in voiding the Chris Paul trade it is, none the less, a great teaching moment that you can use in your compliance training. You should also sign up to receive Jeff Kaplan’s blog on conflicts of interest. Lastly, if you are on the Board of Directors of a company step up and have some backbone.

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

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