The Thrill is Gone: On the Intersection of CSR and the FCPA

Yes indeed the thrill is gone as BB King died last week. While I cannot aver he was the bluesman ever as Keith Richards would say that was Robert Johnson, or he was even the greatest bluesman during my lifetime as Muddy Waters lived until 1965, he was certainly the most well-known and prolific bluesman I ever heard and therefore he had the greatest influence on my passion for the blues than perhaps any other. My favorite BB King song is Mannish Boy and album is “Live in Cook County Jail” which I was introduced to in law school by a law school buddy and his wife who hailed from Chi-town. So even though BB King is dead, his music and name will live on forever.

Somehow it seems fitting that the legacy of BB King inform today’s blog post which is about the intersection of Corporate Social Responsibility (CSR) and anti-corruption laws such as the US Foreign Corrupt Practices Act (FCPA) and UK Bribery Act. Last week I had the opportunity to visit with Alison Taylor, who is the Director of Energy and Extractives for BSR, for a podcast on the FCPA Compliance and Ethics Report. BSR is a global non-profit business network and consultancy dedicated entirely to sustainability that works through its 275 member companies and assists with sustainability and CSR issues. BSR does one on one consulting, grant funded research and collaborative initiatives, all to aid in bringing people together to solve problems that no single company can solve on their own.

Taylor has spent quite a lot of time studying organizational psychology looking at the organizational dynamics of corruptions and looking at what are the organizational culture characteristics of corrupt organizations. So before we got to her specific expertise in CSR, I asked her about some of her observations regarding the organizational issues that can lead to a high risk of corruption. We began with how excessive local autonomy can lead to corruption issues, where Taylor believes that a high corruption risk can derive from a “lack of oversight from headquarters leaving local leadership with a very, very heavy position with authority and ability to control and limit the information coming out of that team. You have an archetypal corrupt team in a remote location, very far from head office, with an autocratic command and control leader, very high pressure, unrealistic incentives, and then strong information boundaries, so a strong incentive not to share meaningful information with the rest of the company. Often very high performing, often getting very good results, but that is a melting pot of corruption risk, in essence.”

A second area where Taylor has seen corruption risks increase is where high pressure and high rewards can work to undermine business ethics and compliance. She said, “What you can end up with is, and this is something that hits sales people in remote environments in particular, is that these sales people are on the ground. They’re in Angola, they’re in China, they’re in a high-risk market. They’re being told simultaneously, “Whatever you do, don’t pay bribes. But whatever you do, grow your business by 20 or 30% this year, and we don’t really care how you do it.” Then what will happen is that that individual or that team will make a calculation about what the company considers more important. That’s where you see the [high] corruption risk. What I’m really saying is that companies are not aligning their strategies, their goals, their incentives, with their corruption checks and balances. It’s leaving employees with mixed messages.” While all of this might seem self-evident, I found her next observation quite interesting and one that is not always considered in an anti-corruption compliance program. It is that if you have a robust compliance program, and your internal messaging is not consistent, “Then you are, in parallel, incentivizing employees to have to meet sales targets that may not be realistic, given the characteristics of the external environment.”

Taylor tied these two concepts of strong local control and high pressure together in her next point. Where a company may have a very autocratic command and control structures and high pressure to meet sales goals, “The leadership is very demanding, very high pressure, telling the team “If you don’t meet these targets, your job is under threat.” There is a strong limit of bottom up information so people are discouraged from sharing their problems and sharing the pressures that they may be under, often so the leadership can maintain plausible deniability. That can play very heavily into oversight dynamics between the center and the region.”

We next turned to the intersection of CSR and anti-corruption programs such as those based on the FCPA’s Ten Hallmarks of an Effective Compliance Program and UK Bribery Act’s Six Principals of Adequate Procedures. I found Taylor’s initial comments telling as she stated, “if I were to say one thing about CSR and anti-corruption, it’s that those two conversations need to be brought together a lot more closely.” In other words, as in many areas of complimentary compliance issues Taylor has found that CSR programs and compliance practitioners tend to be siloed and do not interact enough. She went on to add that, “I think what we’ve got going on is that the anti-corruption department and the CSR department aren’t speaking the same language and aren’t talking about the same things. There needs to be a lot more thinking about what is appropriate from a community investment point of view and whether that violates anti-corruption standards.”

Taylor advocated companies stepping back and looking at CSR in conjunction with compliance in a more holistic approach. She stated, “There’s obviously a lot of, just the different language and the different thinking going on. Sometimes there will be some communication, but it most often takes the form of the compliance due diligence process and background checks slowing down the CSR team. What I think is really needed, is for companies to take a giant step back and look at their entire strategy.”

She also observed that “CSR programs, particularly in terms of community investment, community development, particularly for extractive companies, and particularly in high risk markets, they’re not exclusively in high risk markets, are an absolutely key part of the company managing its non-technical risk and maintaining a social license to operate, which is absolutely critical. The cost of community processes to extract its companies absolutely astronomical.”

Taylor’s thoughts and ideas resonated strongly with me and I would recommend that any Chief Compliance Officer (CCO) or compliance practitioner’s out there go do some checking into your company’s CSR initiatives to see if any are outside the US and would have FCPA implications. You may well have written a charitable donation tract into your FCPA compliance policy and procedures but your CSR program or initiative may be implemented separate and apart from your department. If you do have functioning CSR initiatives, you should review them for FCPA implications. You should also review your oversees operations to see if they meet any of the high risk criteria that Taylor identified to see if there are Red Flags which you may need to clear or simply greater FCPA risk management tools you need to put in place. While you are at it, listen to BB King Live in Cook County Jail on YouTube or download it from iTunes, slap on your headphones and enjoy some of the greatest blues ever created.

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

The Wishbone, American Exceptionalism and the FCPA

It is Friday and this week’s college football began last night with the Texas Longhorns on television. The game reminded me about James Street who died this week. Street was as unlikely a football hero as there could have been for the “Horns”, he was the star quarterback who led the University of Texas to the 1969 National Championship and a win over Notre Dame in the Cotton Bowl. To do so, Texas had to beat the University of Arkansas, in the final game of the season. In that game, with the Longhorns down 14-8 and with 5 minutes 51 seconds left in the fourth quarter, Texas had the ball on the fourth down with 3 yards to go. Street went to the sideline to get the call from Head Coach Darrell Royal who called “Right 53 veer pass.” As reported in his obituary in the New York Times (NYT), “The play, a deep pass with only one receiver, the tight end, seemed to Street like the most improbable call in that situation. It had not worked the handful of times Texas had tried it. Street had expected a counter option to pick up a first down. He asked Royal if he was sure. “Damn right, I’m sure,” the coach growled. In the Texas huddle, Street, who was 5 feet 10 inches and weighed 168 pounds, said, “Boys, you ain’t gonna believe this,” then called the play. Bob McKay, a tackle, wisecracked, “Damn it, Street, you can’t throw the ball that far.” But he could, in this case resulting in a 44-yard completion to tight end Randy Peschel. Two plays later, Texas scored and won, 15-14.” A truly exceptional result for a quarterback who was the first great wishbone quarterback.

One of the things recently discussed in the House Judiciary Committee hearing on amending the Foreign Corrupt Practices Act (FCPA) to add a compliance defense was that companies from other countries were engaging in bribery and corruption to secure business in places like India and West Africa. While it is somewhat difficult to see how adding a compliance defense, which requires an effective compliance program to be in place, can be used to defeat non-US companies alleged to be paying bribes to obtain business requires a fairly vivid imagination. However, there is a way to beat the corrupt companies and that is through competition in the marketplace.

Obviously this means through delivery of better goods and services. But it may also mean having a Corporate Social Responsibility (CSR) component in a country. The CSR can take many forms. Some of these can include a US company acting as a funding angel for indigenous start-up businesses; training of locals to be more than simply employees and contractors to a US company but also training in how to set up and run a business. Clearly if a local workforce is to become skilled it will need specific training, particularly if the local workforce is doing more than simply digging ditches. The CSR can also include funding of local charities, organizations or projects such as buying computers for a local school.

I am talking about more than compelled giving as the use of CSR, which can be not only a powerful tool for a business to develop relationships in a country but it can foster US foreign policy as well. One of the blogs I follow is Jason Poblete’s DC Dispatches. While Poblete and I sit on the opposite ends of the political spectrum, I admire him for one thing he constantly discusses which is that there are market solutions to problems and issues. He points to business solutions for a variety of issues and US companies engaging in local CSR development in foreign countries sounds like one, to me, that benefits both the company involved and the US in general. In other words, such CSR activity can be a market solution the problem of bribes paid by non-US companies to garner business.

But some US companies fear that if they engage in such a construct effort, they will run afoul of the FCPA. For instance, particularly in the energy industry, skilled training is delivered at a much higher level here in the US than in, say, Africa. This means that officials, employees or others involved in national oil companies need to come to the US for training, with all the attendant expenses. Yet many companies are fearful such activity will run afoul of the FCPA and draw Department of Justice (DOJ) scrutiny. Yet such activity benefits not only the US Company that provides it but the US government in general and the overall positive perception of American business. This perception is not something to be discounted.

The DOJ has recognized that charitable giving does not necessarily violate the FCPA. There have been four Opinion Releases on this topic and in none of these matters did the DOJ seek enforcement against the requesting party.

Opinion Release 95-01

This request was from a US-based energy company that planned to operate a plant in South Asia, but there was no medical facility in the area. The energy company planned to donate $10 million for equipment and other costs to a medical complex that was under construction nearby. The donation would be made through a US charitable organization and a South Asian LLC.

Opinion Release 97-02

This request was from a US-based utility company that planned to operate a plant in Asia, but there was no primary-level school in the area. The utility company planned to donate $100,000 for construction and other costs to a government entity that proposed to build an elementary school nearby. Before releasing funds, the utility company said it would require certain guarantees from the government entity regarding the project, including that the funds would be used exclusively for the school. Because the donation was directly to the government entity and not any government official the FCPA does not apply and the DOJ took no enforcement action based on these facts.

Opinion Release 06-01

This request was from a Delaware company doing business in Africa. The company planned a pilot project in which it would contribute $25,000 to the Ministry of Finance in the country to improve local enforcement of anti-counterfeiting laws. The contribution would fund incentive awards to local customs officials, which is needed because this African country is a major transit point for illicit trade and the local customs officials have no incentive to prevent the contraband.

Opinion Release 10-02

This Opinion Release dealt with a US-based Micro Financial Institution (MFI) operating in an unnamed Eurasian country. The Release specified the three levels of due diligence that the US MFI had engaged in on the proposed locals MFIs which were listed as eligible to receive the funding. In addition to the specific discussion of the due diligence performed by the US MFI and noting the controls it had put in place after the funding was scheduled to be made the DOJ also listed several of the due diligence and/or controls that it had previously set forth in prior Opinion Releases relating to charitable donations.

Jason Poblete is right; there are market solutions out there which deal with US competitiveness in a world awash with bribery and corruption. These solutions sometimes involve creative assistance to localities to raise their standards of education, living and income. Such intentions are not corrupt as that term is defined by the FCPA. While they certainly can benefit the company which provides the financial or other assistance, there are other benefits for more than simply the players involved.

So please do not argue that US companies are at a disadvantage. James Street was an exceptional quarterback at the University of Texas running the wishbone option to perfection. American exceptionalism still exists and the tangible benefits of it are sought all over the globe. The FCPA was passed in part to aid American businesses and it should not be used as stumbling block to do so when it is properly followed.

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

2012 First Half FCPA Enforcement Round-Up: Part I

The first half of 2012 is reaching to a close and we have had several significant enforcement actions so far this year. So to commemorate all those June Bride and Bride-Grooms out there, including my parents who celebrate their 56^th wedding anniversary on June 30, I have put together a couple of posts reviewing my top 6 Foreign Corrupt Practices Act (FCPA) enforcement actions for the first 6 months of 2012. At this point I cannot see any clear trends but there are some key points that provide solid advice for the compliance practitioner going forward. In today’s blog, we take up the first three, in chronological order.

I.                   Aon

We begin with a Non-Prosecution Agreement (NPA) issued in the last week of 2011 where the insurance giant Aon received a NPA from the Department of Justice (DOJ) in settling enforcement actions against it by the DOJ and Securities and Exchange Commission (SEC). Aon agreed to total fines and penalties in an amount of $16.3 MM. This is in addition to a fine previously paid to the UK Financial Services Authority (FSA) in January, 2009, of £5.25 MM (approximately $8.2 MM at today’s exchange rate).

A.     Aon’s Remedial Actions Which Led to the NPA

The DOJ stated that it entered into the NPA based “in part, on the following factors: (a) Aon’s extraordinary cooperation with the Department and the U.S. Securities and Exchange Commission (“SEC”); (b) Aon’s timely and complete disclosure of the facts described in Appendix A as well as facts relating to Aon’s improper payments in Bangladesh, Bulgaria, Egypt, Indonesia, Myanmar, Panama, the United Arab Emirates and Vietnam that it discovered during its thorough investigation of its global operations; (c) the early and extensive remedial efforts undertaken by Aon, including the substantial improvements the company has made to its anti-corruption compliance procedures; (d) the prior financial penalty of £5.25 million paid to the United Kingdom’s Financial Services Authority (“FSA”) by Aon Limited, a U.K. subsidiary of Aon, in 2009, covering the conduct in, Bangladesh, Bulgaria, Indonesia, Myanmar, the United Arab Emirates and Vietnam; and (e) the FSA’s close and continuous supervisory oversight over Aon Limited.”

B.     Non-Bona Fide Travel and Educational Expenses

The primary activity for which Aon was sanctioned was a travel and education fund, initially designed to provide funds for foreign government employees involved with insurance to travel to educational conferences. However, the funds evolved into personal use for entertainment of the officials, their wives and families. In one instance, involving a fund in Costa Rica, travel was booked through a travel agency which was owned or managed by the Costa Rican officials who were entertained with monies from the educational and training funds.

C.     Books and Records

The largest portion of the Aon fine involved violations of the FCPA’s books and records requirements. The NPA noted, “With respect to the Costa Rican training funds, although Aon Limited maintained accounting records for the payments that it made from both the Brokerage Fund and the 3% Fund, these records did not accurately and fairly reflect, in reasonable detail, the purpose for which the expenses were incurred. A significant portion of the records associated with payments made through tourist agencies gave the name of the tourist agency with only generic descriptions such as “various airfares and hotel.” Additionally, to the extent that the accounting records did provide the location or purported educational seminar associated with travel expenses, in many instances they did not disclose or itemize the disproportionate amount of leisure and non-business related activities that were also included in the costs. In short, there was either no bona fide educational expense or not one which could be documented from Aon’s internal records.

Key Takeaway: You must completely document, document and document the basis of your expenditures. If there is no explanation, the assumption will be the payments are made for corrupt purposes.

II.                Smith & Nephew

The landscape of the FCPA world is littered with cases involving both agents and resellers, who are most clearly acting as representatives of the companies whose goods or services they sell in foreign countries. Many US businesses believe that the legal differences between agents/resellers and distributors insulate them from FCPA liability should the conduct of the distributor violate the Act. Under this same analysis, many US companies believe that the FCPA risk has also shifted from the US company to the foreign distributor. However, such belief is sorely miss-placed as was shown in the Smith & Nephew (SNN) enforcement action.

The FCPA violations revolved around a Greek distributor of SNN who paid bribes to Greek doctors so that they would purchase and use SNN products. SNN paid a monetary penalty of $16.8MM to the DOJ and $5.4MM to the SEC as a civil penalty, all for a total of $22.2MM in fines and penalties.

Entity Designation	Domicile of Entity	Commission Rate	Services Provided	Actual Services
Shell Company A	UK	40% of sales of Greek distributor	Marketing	Did not perform any services
Shell Company B	UK	26% of sales of Greek distributor	Marketing	None listed
Shell Company C	UK	35% of sales of Greek distributor	Marketing	Did not perform any true services

A quick review of the above chart shows the FCPA problems; very high commissions were paid with no actual services provided. Or as stated by the FCPA Professor, SNN “falsely recorded or otherwise accounted for the payments to the shell companies on its books and records as ‘marketing services’ in order to conceal the true nature of the payments in the consolidated books and records of S&N.”

Key Takeaway: If your company uses a distributor model in its sales chain, I would suggest that you review and reassess your pricing structure in light of this enforcement action.

III.             BizJet

In the bribery and corruption world, the facts of this enforcement action are about as bad as it can get. It was reported the senior company personnel had actual knowledge or approved of the payment of cash to bribe foreign governmental officials to obtain or retain business. There was also a deliberate attempt to hide the true nature of the payments. But even with these damaging facts, the company was able to receive a significant reduction on the low end of the fine range as suggested under the US Sentencing Guidelines. So how did the company achieve this?

A.     Bribery Scheme

In this case, the company made a number of corrupt payments which were characterized as “commission payments” and “referral fees” on their books and records. Payments were made from both international and bank accounts here in the United States. In other words, this was as clear a case of a pattern and practice of bribery, authorized by the highest levels of the company, paid through US banks and attempts to hide all of the above by mis-characterizing them in their books and records.

BizJet Bribery Box Score

BizJet Executive or Employee Named	Payment Made To	Amount of Payment	Others Involved
Sales Manager  A	Official 6	Cell Phone and $10K	Executive B and C
Sales Manager A	Official 3	$2K	Executive  B
Executive B, C and Sales Manager A	Official 2	$20K
Executive C	Official 2	$30K	Sales Manager A
Executive B	Mexican Federal Police Chief	$10K	Executive C and Sales Manager. A
Executive C	Official 5	$18K	Sales Manager A
Sales Manager A	Official 4	$50K
Sales Manager A	Mexican Federal Police	$176	Executive C
Sales Manager A	Official 4	$40K
Sales Manager A	Mexican Federal Police	$210K	Executive C
Sales Manager A	Official 5	$6K	Executive C
Executive C	Official 5	$22K

B. Reduction in Monetary Fine

I set out these facts in some detail to show the serious nature of enforcement action. However, the clear import is that a company can make a comeback in the face of very bad facts. The calculation of the fine, based upon the factors set out in the US Sentencing Guidelines, ranged between a low of $17.1MM to a high of $34.2MM. The final agreed upon monetary penalty was $11.8MM. This is obviously a significant reduction from the suggested low or high end, or as was noted by the FCPA Blog “BizJet’s reduction was 30% off the bottom of the fine range, and a whopping 65% off the top of the fine range.”

How did BizJet achieve this reduction and avoid an external monitor? As reported by the FCPA Professor, the following were factors:

(a) following discovery of the FCPA violations during the course of an internal audit of the implementation of enhanced compliance related to third-party consultants, BizJet initiated an internal investigation and voluntarily disclosed to the DOJ the misconduct …;

(b) BizJet’s cooperation has been extraordinary, including conducting an extensive internal investigation, voluntarily making US and foreign employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the DOJ;

(c) BizJet has engaged in extensive remediation, including terminating the officers and employees responsible for the corrupt payments, enhancing its due diligence protocol for third-party agents and consultants, and instituting heightened review of proposals and other transactional documents for all BizJet contracts;

(d) BizJet has committed to continue to enhance its compliance program and internal controls, including ensuring that its compliance program satisfies the minimum elements set forth in the” corporate compliance program set forth in an attachment to the DPA; and

(e) “BizJet has agreed to continue to cooperate with the DOJ in any ongoing investigation of the conduct of BizJet and its officers, directors, employees, agents, and consultants relating to violations of the FCPA.

C.        Reports to the DOJ

The company avoided an external monitor. However, it agreed that it would report “at no less that twelve-month intervals during the three year term” [of the DPA] to the DOJ on “remediation and implementation of the compliance program and internal controls, policies and procedures” which were listed in Attachment C to the DPA (the DOJ guidelines for a minimum best practices compliance program). The initial report was required to be delivered one year from the date of the DPA and would also include BizJet’s proposals “reasonably designed to improve BizJet’s internal controls, policies and procedures for ensuring compliance with the FCPA and other applicable anti-corruption laws.”

Key Takeaway: What you do after you discover the bribery and corruption will go a long way towards determining your penalty. No matter how bad the facts are, if you provide ‘extraordinary cooperation’ to the enforcement agencies, you can significantly reduce your final monetary penalty.

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

© Thomas R. Fox, 2012

Wynn Casinos and Charitable Donations under the FCPA

The recent events surrounding Wynn Casinos and its now former director, Kazuo Okada, have almost been breath-taking in their family feud nature. Indeed in an article in the March 2, 2012 edition of the Wall Street Journal (WSJ), entitled “The Family Feud That Could Cost Combatants Billions”, reporter John Bussey called it the “slug-it-out-divorce” by Steve Wynn from his former partner, Okada. Wynn provided the opening salvo in this battle of titans by summarily booting Okada off the Wynn Casino Board of Directors and “forcibly cashed out” his stake in the company, all for alleged violations of the Foreign Corrupt Practices Act (FCPA).

However, Okada appears to have fired back a FCPA-based salvo of his own. In the same edition of the WSJ, another article reported on Wynn Casinos and another potential FCPA violation. It involved a gift of $135 Million by Wynn Casinos to a foundation which supports the University of Macau. The article on this donation was entitled “Macau School Ties Roil Wynn Resorts” and was co-authored by Kate O’Keefe and Alexandra Berzon. They reported that Okada had gone to a Nevada state court to request an order that Wynn Casinos “give him access to documents tied to the donations.” One of the reasons Okada detailed in his court request was to determine if the gift by Wynn Casinos to the University of Macau was “an appropriate use of corporate funds.”

I would also ask whether the gift was proper under the FCPA. There is not much definitive guidance for charitable donations under the FCPA. I have summarized the available information as follows.

I.                   Opinion Releases

There have been four Opinion Releases in the area of charitable donations under the FCPA. In each Opinion Release, the Department of Justice (DOJ) indicated that it would not initiate prosecutions based upon the fact scenarios presented to it.

A. 95-01

This request was from a US based energy company that planned to operate a plant in

South Asia, in an area where was no medical facility. The energy company planned to donate $10 million for equipment and other costs to a medical complex that was under construction nearby. The donation would be made through a US charitable organization and a South Asian LLC.

The energy company stated it would do three things with respect to this donation.

1. Before releasing funds, the energy company said it would require certifications from the officers of all entities involved that none of the funds would be used in violation of the FCPA.
2. It would ensure that none of the persons employed by the charity or the LLC were affiliated with the foreign government.
3. The energy company would require audited financial reports detailing the disposition of the funds.

B.   97-02

This request was from a US based utility company that planned to operate a plant in

Asia, in an area where there was no primary-level school. The utility company planned to donate $100,000 for construction and other costs to a government entity that proposed to build an elementary school nearby. Before releasing funds, the utility company said it would require certain guarantees from the government entity regarding the project, including that the funds would be used exclusively for the school.

C.   06-01

This request was from a Delaware company doing business in Africa. The company desired to initiate a pilot project under which it would contribute $25,000 to the Ministry of Finance in the country to improve local enforcement of anti-counterfeiting laws. The contribution would fund incentive awards to local customs officials, which is needed because this African country is a major transit point for illicit trade and the local customs officials have no incentive to prevent the contraband.

The company said that along with the contribution, it would execute an agreement with the Ministry to encourage exchange of information and establish procedures and criteria for incentive awards. The company said that if the program is successful, the awards would continue to be funded as needed, and the company will seek the participation of its competitors in this program.

The company would implement at least five safeguards to ensure the funds would be used as intended, including:

1. Payments to a valid government account, subject to internal audits.
2. Payments only upon the confirmation that goods seized were in fact counterfeit.
3. The Ministry would identify award candidates without input from the company and would provide evidence that funds were used properly.
4. The company would monitor the program’s effectiveness.
5. Records will be required to be kept and be available for inspection for a period of time.

D.   10-02

A US Company desired to move from a charitable entity model to a for profit model in the area of micro-financing. To do so it was required to make a large cash donation to a charity in the country in question. The company engaged in three rounds of due diligence in which it determined that the most favorable candidate had a government official on its Board of Directors but that under the laws of the country in question, the government official could not receive compensation to sit as a Board member. After initially listing the 3 levels of due diligence in which the company had engaged prior to finalizing its choice of local entity to receive the donation in question; the DOJ noted that the donation ‘requested’ of the US Company would be subject to the following controls:

1. Payments of the donations would be staggered over a period of eight quarters rather than in one lump sum.
2. Ongoing monitoring and auditing of the funds use for a period of five years.
3. The donations would be specifically utilized for the building of infrastructure.
4. The funds could not be transferred to either the charities parent or any other affiliated entity.
5. The funds would not be paid to the parent of the organization receiving the grant and there was an absolute prohibition on compensating Board Members.
6. The proposed grant agreement under which the funds would be donated had significant anti-corruption provisions which included a requirement that the local organization receiving the funds adopt an anti-corruption policy and that company making the donation shall receive full access to the local organization’s books and records.
7. Right to terminate the agreement and recall the funds if evidence was found that “reasonably suggests” a breach of compliance provisions.

II.                Sole Enforcement Action

There appears to be only one FCPA enforcement action based entirely upon charitable giving. It is the case of Schering-Plough Poland which paid a $500,000 civil penalty assessed by the Securities and Exchange Commission (SEC) in 2008. (For a copy of the SEC Compliant, click here.) As reported in the FCPA Blog, the Company’s Polish subsidiary made improper payments to a charitable organization named the Chudow Castle Foundation, which was headed by an individual who was the Director of the Silesian Health Fund during the time period in question. Schering-Plough is a pharmaceutical company and the Director of the Health Fund provided money for the purchase of products manufactured by Schering-Plough as well as influencing medical institutions, such as hospitals, in their purchase of pharmaceutical products through the allocation of health fund resources. In addition to the above, the SEC found that Schering-Plough did not accurately record these charitable donations on the company’s books and records.

III.              Mendelsohn Guidance

The FCPA Blog reported, in a posting entitled “When is Charity a Bribe?”, that when asked about the guidelines regarding requests for charitable giving and the FCPA, then Deputy Chief of the Criminal Division’s Fraud Section at the DOJ Mark Mendelsohn, said that any such request must be evaluated on its own merits. He advocated a “common sense” approach in identifying and clearing Red Flags. Some of the areas of inquiry would include answers to the following questions.

1. Is there a nexus between the charity and any government entity from which the company is seeking a decision?
2. If the governmental decision-maker holds a position at the charity, that’s a red flag.
3. Is the donation consistent with the company’s overall pattern of charitable contributions?
4. If one donation or a series of them is more than the company has made to any other charity in the past five years, that’s a red flag too.
5. Who made the request for the donation and how was that request made?

So what of Wynn Casinos and its $135 Million donation? Did Wynn perform the types of analysis suggested by the Opinion Releases? The WSJ article reports that the Chairman of Wynn’s Committee “told analysts last month that the donation was vetted in advance by outside experts,” relative to the FCPA. The donation is apparently not for construction or other infrastructure projects but “the gift will support academic activities.” The WSJ article also reports that the Board of the University foundation includes “current and former government officials” and “a member of the committee to elect Macau’s chief executive”, who is the chancellor of the university. Lastly the article reports that the Securities and Exchange Commission (SEC) has “begun an inquiry into the donation.”

We may reasonably conclude from both of these WSJ articles that Wynn Casinos will be in for a long, long road of FCPA investigations.

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

© Thomas R. Fox, 2012

Corporate Social Responsibility and the FCPA

I was surprised to see the continuing the defense of the Foreign Corrupt Practices Act (FCPA) in publications normally thought of as pro-business. On July 1, authors Amol Mehra and Ajoke Agbool published an article in Forbes.com entitled, “The Corporate Responsibility to Prevent Corruption.” This article followed two articles in the Wall Street Journal (WSJ) from the previous week which discussed the positive effects of the FCPA. In the Forbes.com article, the authors focused on a company’s corporate social responsibility to refrain from engaging in bribery and corruption.

The authors began their piece on the recent Deferred Prosecution Agreement involving Johnson and Johnson (J&J). However, rather than concentrating on the specifics of the FCPA violative actions engaged in by J&J, the authors reviewed the J&J conduct in light of J&J’s own stated Corporate Social Responsibility (CSR) Policy, which the authors quoted as:

We must provide competent management and their actions must be ethical. We are responsible to the communities in which we live and work and to the world community as well.  We must be good citizens – support good works and charities and bear our fair share of taxes.

The authors noted that the actions of J&J which were found to violate the FCPA involved bribery in several countries in Eastern Europe. This corruption was disconnected from their stated company CSR Policy.

The authors went onto state that company compliance programs should not simply be seen as a means of reducing liability and risk; they are also critical components of a company’s CSR Policy. The reality is that corruption should and does have its costs, and not just in situations where companies get caught. Bribery distorts competition and rewards those who cannot compete in an open and fair market. In his prepared statement before the recent House Judiciary Committee hearing on the FCPA, Department of Justice (DOJ) representative Greg Andres stated:

“Corruption undermines the democratic process, distorts markets, and frustrates competition.  When government officials, whether at home or abroad, trade contracts for bribes, communities, businesses and governments lose; and when corporations and their executives bribe foreign officials in order to obtain or retain business, they perpetuate a culture of corruption that we are working hard to change.”

The authors cited to the FCPA Legislative History for the statement, “As Congress recognized, bribery “. . . rewards corruption instead of efficiency and puts pressure on ethical enterprises to lower their standards or risk losing business.” Returning to Greg Andres written testimony, he stated: As the FCPA’s legislative history makes clear, “Corporate bribery is bad business. In our free market system it is basic that the sale of products should take place on the basis of price, quality, and service.”

The authors also used examples of US businessmen who see value in the FCPA. After initially noting that if one bribe is given, it sets a negative precedent in which bribes may be expected in order for business to continue. The authors cited the example of Newmont Mining’s Director of Corporate and External Affairs for Africa, who publicly stated:

Newmont’s experience, particularly in Africa, has been that FCPA has been an enormously valuable protective device for us . . . when you have a government person saying . . . ‘we’ll give you that license if you buy us a car or something’ . . . it’s not about ‘look I’m a mean guy and I don’t have value our relationship, and therefore I’m not going to give it to you,’ you say ‘look, there’s a law out there that means I’m going to go to jail if I do that, I’m not going to go to jail for you or anybody else.’

The above example and the one previously reported in the WSJ of Alcoa may be one of the reasons why some business leaders have come out in defense of laws like the FCPA that both incentivize companies to develop compliance programs and punish violators.

Mehra and Agbool argue that a strong internal compliance program should be an integrated part of corporate social responsibility. They believe that businesses should be able to identify and mitigate against bribes and corruption, not only to ensure compliance with the law but additionally to keep markets competitive and to ensure that their activities are benefiting the societies in which they operate. Lastly they note that, “companies need to follow Newmont’s lead and understand that regulations like the FCPA have the potential to be used as a shield, enabling access to areas where corruption is rampant by providing a defensive measure against those seeking bribes.”

The key takeaway from this article and the previous articles in the WSJ is that review of the FCPA must be something more than what we saw in the House Judiciary Committee hearing. Not only did the Representatives who put forward questions fail to cite any examples of the loss of US jobs by US companies because of the FCPA, they completely failed to discuss any of the positive aspects of the FCPA and would barely allow DOJ Representative Greg Andres to respond to any questions on this point. As Mr. Andres said, if companies do not engage in bribery and corruption they do not have anything to worry about with regard to the FCPA. It would appear that some of the country’s more pro-business newspapers and journals are beginning to see the benefits of the FCPA.

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