Mifune Gets a Star on the Walk of Fame-the Petrobras Scandal Only Gets Worse

It was announced last week that actor Toshirō Mifune (1920-1997) will be honored with a star bearing his name on the Hollywood Walk of Fame. The Hollywood Chamber of Commerce will add the star in 2016, together with new stars in the motion picture category for Quentin Tarantino, Michael Keaton, Steve Carell, Bradley Cooper, Ashley Judd and Kurt Russell. For those of you who may not have heard of Mifune, he was a veteran of sixteen films directed by Akira Kurosawa as well as many other Japanese and international classics. His films with Kurosawa are considered cinema classics. They include Drunken Angel, Stray Dog, Rashomon, Seven Samurai, The Hidden Fortress, High and Low, Throne of Blood, Sanjuro, and Yojimbo. While there are many great, great performances in these films, my personal favorite is Yojimbo where Mifune plays an un-named Ronin, who cleans out a village infested by two warring clans. The film was the basis for the great first Sergio Leone/Clint Eastwood Spaghetti western, A Fistful of Dollars. 

I had always thought that the Hollywood Walk of Fame honors actors but it turns out that it honors a great many more performers. For instance, next year will also see names like LL Cool J, Cyndi Lauper, Shirley Caesar, Joseph B. “Joe” Smith, Itzhak Perlman, Adam Levine, and Bruno Mars added in the music category. I considered this category of entertainers wider than simply actors when I recently read more about the burgeoning scandal in Brazil around the state owned energy company Petrobras and its ever-growing fallout.

The fallout has extended far beyond Petrobras, Brazil and even the direct parties who may have been involved. In an article in the Financial Times (FT), entitled “Petrobras woes loom large in Shell deal for BG”, Joe Leahy, Jamie Smyth and Christopher Adams reported on how the ongoing matter is affecting the world of super sized mergers and acquisitions. The rather amazing thing about this issue is not that British Gas (BG) has been caught up in the scandal or even has been alleged to paying bribes to Petrobras.

Rather it is because of assets that BG has in its portfolio. The article said, “Brazil has the potential to become the location of the most troubled assets in BG’s portfolio because the UK company is partner to Petrobras in some of the vast pre-salt oilfields off the country’s east coast in the Santos Basin.” This has led to speculation that “There is a risk that Petrobras will struggle to fulfill its mandate as sole operator for all new pre-salt oilfields because of the corruption scandal, and that this leads to delays in developing the deepwater discoveries, including those involving BG.”

This development arising out of the Petrobras scandal is so significant that BG mentioned it in their annual report, saying “In Brazil, we are closely monitoring how the current corruption allegations affecting Petrobras may impact the cost and schedule of the Santos Basin [pre-salt] development because of supply chain disruption and/or capital and liquidity constraints placed on Petrobras.” Think about that statement for a moment. It is only in the annual report because it could have a ‘material’ effect on BG and BG is a company being acquired by Shell to the tune of £55 million. However, as noted in the FT article, “many analysts say that Petrobras, partly because of the magnitude of the scandal, does not have the capital or management bandwidth to be the sole operator of all new pre-salt fields.”

What if Petrobras becomes unable to develop enough resources to feed South America’s largest democracy’s need for energy? In 2014 alone, the company posted a new loss of $7.4 billion, of which $2.5 billion was attributable to the ongoing bribery and corruption scandal. How much will it cost the country of Brazil to bring in outsiders to develop its own natural resources? This is a real possibility and it was further driven home by another FT article by Joe Leahy, entitled “Petrobras plans 37% cut in investment”. Petrobras currently is required by Brazilian “government policy forcing it to import petrol at international prices and sell it in the domestic market at a subsidized rate.”

Things can only get worse as Leahy reported that the company announced it “was cutting its projection for investment in 2015-2019 to $130.3bn or by 37 percent in relation to its previous plan.” This would lead to a reduction in “domestic production to 2.8m barrels per day of oil equivalent by 2020 from the previous target of 4.2m.” The article ended by noting that Petrobras would “divest $15.1bn in assets and undertake additional restructuring and sales of assets totaling $42.6bn in 2017-18.”

All of this certainly bodes poorly for the citizens of Brazil. For those who claim that bribery is a victim-less crime; I would point to this as Contra-Example A. But this information is also of significance to any Chief Compliance Officer (CCO) or compliance practitioner for a US, UK or other western country. Not only must you review any contracts you had with Petrobras and any of its suppliers; now you must digger several levels deeper. If you are in an acquisition mode, you not only need to look at the contracts of your target to see if they may have been obtained through bribery and corruption, the simple fact of having a contract with Petrobras may put your potential portfolio asset base at risk. For if Petrobras has to cut back 37% on investments at this point, chances are it will only get much worse. This 37% reduction is based on only the first round of estimates of the cost to the company of the bribery scandal.

But more than simply contracts directly with Petrobras, if you are evaluating a target who has contracts with Petrobras suppliers, you may be at equal risk. Not only could those suppliers obtain their contracts with Petrobras through bribery and corruption, those same contracts, even if valid, may not be worth their estimated value if Petrobras cannot fulfill them or even worse, pay for the goods and services delivered thereunder. How about payment terms? Do think for one minute, Petrobras would not unilaterally extend payment dates out 30, 60, 90 even 180 days when it finds itself in more bribery and corruption hot water?

Finally, I think there is a very good chance the US Department of Justice (DOJ) or Securities and Exchange Commission (SEC) could come knocking, unannounced, for any US company doing business with Petrobras or even with significant operations in Brazil. The SEC could do something as simple as send a letter requesting clarification of your internal controls or books and records regarding subcontractors or other third parties in Brazil. If you received such a letter, would you be in position to respond from the requirements for a public company under the Foreign Corrupt Practices Act?

Toshirō Mifune had a long and distinguished acting career. While it is not clear how long, how far and how deep the Petrobras corruption scandal will reach, it is clear that its repercussions will extend far past the energy industry or even Brazil. You need to review and be prepared to respond now.

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

Never Tick Off a Redbird

At a Press Conference today, Satan officially announced that Hell has frozen over. He made this stunning announcement after the New York Times (NYT) reported that the baseball team with the most World Series wins in the history of the National League (NL), the St. Louis Cardinals, had hacked those paragons of virtue, enormity and the very symbol of baseball greatness, the Houston Astros, to view confidential information. The Cardinals have managed to win 5 World Series in the past 50 years; how many World Series have the Astros won? That would be a big fat nada, ZERO, none, zilch. The NL team with the most World Series wins in the past 50 years was caught hacking into the inner most secrets of one of the worst teams in that same time period. Where are Tom Brady’s deflated balls when you need them?

As reported by Michael Schmidt, in a piece entitled “Cardinals Face F.B.I. Inquiry in Hacking of Astros’ Network”, Major League Baseball (MLB) asked the FBI and Department of Justice (DOJ) to investigate the hacking of the Astros “Last year, some of the information was posted anonymously online, according to an article on Deadspin. Among the details that were exposed were trade discussions that the Astros had with other teams. No doubt expecting that nefarious rogue agents of the Chinese government (or worse-the Chinese military) were seeking to wreck havoc on the game once known as ‘America’s pastime’ or “Believing that the Astros’ network had been compromised by a rogue hacker, Major League Baseball notified the F.B.I., and the authorities in Houston opened an investigation. Agents soon found that the Astros’ network had been entered from a computer at a home that some Cardinals officials had lived in. The agents then turned their attention to the team’s front office.” Oops, those darn Chinese; they are never around to blame when you need them.

So move aside New England Patriots, with your petty attempts to manipulate footballs in a championship game. Stop allowing your quarterback to dictate how he uses the tools of his trade, footballs. Do not cheat and call it getting an edge; all of this makes you look like rank amateurs next to the St. Louis Cardinals. Act like a real team and enlist your front office executives to steal information from the worst team in football. For long term pathetic-ness, you might try the Oakland Raiders or just go with the current joke of a team, the Tampa Bay Buccaneers whose No. One draft pick, and now face of the franchise, was one of the most ‘ethically challenged’ college players in recent years. If you really want great information about poor football, steal it from the Jacksonville Jaguars. Bill Belichek, you are only limited by your imagination!

As to the Cardinals, what on earth could the Astros have that they could possibly want? Take the Astros record over the past five years; it’s the worst in baseball. You want a piece of that? How about secret information on the leadership savoir fare of the Astros owner ‘Mr. I am smarter than everyone in the room because I made a $100mm in business’ Jim Crane. Why be one of the best-run sports franchises, when you can mimic the Astros? First you can tell everyone how stupid they are because they do not understand how it is in your interest to try and lose; next why you should cut off over 70% of your fan base from even watching games on television so they will not see your joke of a team play and, finally, how to sue the prior owner who sold you the team for mis-representing the quality of the assets.

But do not stop with the owner. The apparent ire of St. Louis (never under-estimate a pissed off Redbird) was directed at a former Cardinal employee who left to become the General Manager of the Astros, Jeff Luhnow. Apparently the Cardinals were upset that the baseball knowledge in Luhnow’s head was now being used by the Astros. (Did I mention the Astros had baseball’s worst record for the past 5 years?) Of course, perhaps the Cardinals could learn how make an offer to the top draft pick in the annual amateur draft and then withdraw the offer so they could make a lower one, thereby losing two top draft picks. That certainly was a brilliant move by the Astros that you would want to use going forward.

The Cardinals action brings up one of the greatest areas of corporate angst; when a business gets its feelings hurt. Heaven forbid. No doubt having recently seen a recent late night showing of the movie Animal House the Cardinals decided not to get mad; they decided to get even. So with this newfound information gleaned from the Astros, it now clear how the Cardinals have been so successful. Not simply being content to cheat, they broke the law to hack into the confidential information of another baseball team to learn that other team’s secret. Now I know why the Astros have been so bad over the years; they had all their confidential information sucked out of their organization by the evil Cardinals. So that giant sucking sound you hear from south Texas is not American jobs going to Mexico because of NAFTA but all the confidential information being sucked out of the Houston Astros.

What are the lessons for a Chief Compliance Officer (CCO) or compliance practitioner? One lesson is it points to the myriad of reasons that companies and individuals engage in bribery and corruption. It is laughable to think that the St. Louis Cardinals, one of the best-run franchises’ in all of sports (or so we thought); could learn anything from the idiots who run the Astros. Yet here we are; out of spite, vindictiveness or just plain old malevolence, front office executives of the Cardinals engaged in conduct that has drawn the scrutiny of the FBI and DOJ. This points to other motivations than fidelity to monetary gain as a reason for bribery and corruption.

Also, cybersecurity is a compliance concern. What protocols to you have in place to protect your data? How will you respond to a breach? What happens if another member of the cartel your business is in engages in criminal activity against you? Will you demand that they are kicked out of the cartel?

I think it also points up how actually Doing Compliance differs from having a paper compliance program in place. Whether you use the McNulty’s Maxims formulations (What did you do to prevent? What did you do to detect it? What did you do after you found out about it?) or the FCPA Guidance formulation that a best practices compliance program should prevent, detect and remedy violations. I am relatively certain the St. Louis Cardinals had a policy against breaking the law by hacking into the database of another baseball team. With equal certainty, I am sure the Cardinals had no program to prevent or detect such illegal conduct for if they did, it would certainly appear they conveniently looked the other way.

Finally, American businesses need to wise up. Stop all the whining, moaning and complaining about data breaches from Chinese/Russian/Bulgarian/the Galactic Empire/the Borg/(name your Evil Empire); you are most at risk from other US companies. For if the best team in the history of the NL will break the law to steal the trade secrets and confidential information of one of the worst teams, is anyone safe? Further, what are the chances that the Cardinals have been trying to steal trade secrets from winning teams? That would be a number way too high for me to even imagine. Quit crying to Congress that it is unfair for you to be required to protect your own data or that it would cost you money or jobs; secure your data now.

Now for a free tip from my consulting company, Advanced Compliance Solutions-if you have super-secret confidential information, make sure it password protected. But more than simply password protected, change you password every 90 days. That is a good first step in case the St. Louis Cardinals come hacking your company.

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

Why Should Americans Care About the FIFA Indictments? Part IV – Corruption is a Global Scourge

Today, I conclude my four-part series on the above question posed to me recently by a colleague. In Part I, I responded that only the US government had the wherewithal and will to do so and that it continued the administration’s fight against the scourge of corruption. For Part II I focused on corruption on the pitch and how bribery and corruption ‘changes the truth of the game’ of soccer (AKA Football). In Part III, I reviewed why American citizens should care that US companies are not engaged in bribery and corruption. Today we look at reason number four of why Americans should care about the Department of Justice (DOJ) bringing indictments against the 14 named defendants who were all associated with the governing body of international soccer, the Fédération Internationale de Football Association (FIFA). Up today is the invidiousness of corruption, that it is not a victimless crime and how its scourge hurts countries.

Jack Warner, the former FIFA Executive Committee member and head of the North American regional soccer federation CONCACAF, is alleged to have received a $10MM bribe to swing votes to South Africa so that it could land the hosting of the 2010 World Cup. However Warner had (allegedly) been previously paid by Morocco for his votes. The Sunday Times, in an article entitled “‘Please, this is very secret’ –the explosive claims of bribery and vote-rigging that Fifa decided to kick into the long grass”, reported that two former FIFA officials, Ismail Bhamjee and Michel Bacchini told the paper that Warner had been paid $1MM by Morocco to secure his vote but Warner double-crossed the country by selling out to South Africa for $10MM. Where is a little honor among crooks? The answer may be in the character of Jack Warner, who is a Minister of Parliament in Trinidad and was once a government minister, but resigned because of fraud allegations. Is that the type of character you really want in your government? What do you thing that type of politician will do when faced with an ethical dilemma? (Hint-take the money)

What about South Africa and its role as an alleged bribe payor? South Africa originally denied any payment was made. However, in an article in the Sunday Times, entitled “Trinidad’s ‘Robin Hood’ plots escape from sheriff”, Tony Allen-Mills reported that the country later changed its story to say that the payment was made to Warner “to fund football development.” Even assuming it was a charitable donation, one can only conclude there were zero protections around the payment.

For we next were told that South Africa did not actually make the payment but FIFA did directly. Amazingly, and pulling a full 180 degree Bat-Turn from his previous positions, the Secretary General of FIFA, Jérôme Valcke said on Wednesday said that he had authorized a $10 million payment to Warner after a full 13 days of denying it. The Sunday Times also reported that US authorities were investigating former FIFA President Sepp Blatter about a meeting, where he was present, and this payment was discussed.

Whoever made the payments, Ed Thomas, in a BBC online article entitled “Fifa corruption: Documents show details of Jack Warner ‘bribes’”, reported that this $10MM was not used for any soccer development in Trinidad but was used by Warner himself. Thomas reported that three payments were made into CONCACAF accounts controlled by Warner, one on January 4, 2008, one on February 1, 2008 and a final payment on March 10, 2008; all adding up to $10MM. Thomas also reviewed documents to show how the money was either laundered and then paid back to Warner or simply used to pay Warner’s personal expenses such as personal loans and credit card bills.

To those who maintain that bribery is a victimless crime, simply imagine what a country like Trinidad could do with $10MM to invest in its soccer programs and infrastructure? How many youth academies could be funded with that amount of money? How many soccer fields could be built? The answers is lots and lots but when corruption is so endemic that a $10MM bribe can be paid with such ease, with no oversight or even questions being raised, it is the citizens of Trinidad who are the victims.

But more than simply Jack Warner and his corruption in Trinidad are at play here. Even world soccer power Brazil has welcomed the investigation into FIFA, as one of those arrested was José Maria Martin, the former head of Brazil’s soccer federation, the CBF. Writing in the Financial Times, (FT) Joe Leahy, in an article entitled “Arrests sparks hope of cleaner Brazilian game”, wrote, “For Brazil, his arrest prompted hopes that finally one of the dirtiest institutions, football, might be held to account.” He quoted Flávio de Leão Bastos Pereira, a professor of criminal law at Mackenzie University in Sao Paulo for the following, “This could stimulate the necessary changes in Brazilian football in terms of greater professionalism, ethics and transparency.”

Apparently endemic corruption reigned in the country that has won five World Cup championships for many years with multiple persons involved in the corruption. Unfortunately for some (at this point unknown) US company or companies, payments were made through a third party agent, “Jose Hawilla – the head of Brazilian based marketing company Traffic and one of the main paymasters behind the corruption at Fifa”. So much money went through Hawilla that in his guilty plea agreement he agreed to forfeit $151MM in his profits.

Interestingly, and probably for an entirely different set of reasons, Brazilian President Dilma Rousseff announced that she welcomed the investigation. In another FT article, entitled “Fifa corruption scandal threatens to engulf Nike as sponsors raise pressure”, Joe Leahy and Mark Odell reported that the President wanted an outside agency to investigation corruption around the CBF because soccer was run by private organizations and the public prosecutors had been unable to crack it. She was quoted as saying “I say that if it needs to be investigated, investigate it – all the world cups, everything.” This is certainly a refreshing change from her attitude towards the investigation into corruption at Petrobras.

The point to all this is that corruption is a global scourge. I, and many others, believe it is a component of political instability and terrorism. But the FIFA scandal shows how corruption, which may appear to be victimless and not appear to hurt anyone, can, does and has destroyed the fabric if not the soul of some of the world’s greatest institutions. Even if you simply think it is much to-do about a game, we all should have some expectation that games will be played fairly with the best team on any given day. Unfortunately the FIFA scandal shows that ‘fixing’ has been there for a long time. The world’s most popular game deserves better. As Americans we should all want to fight the scourge of corruption wherever it might appear and we certainly believe that there should be a level playing field for all who want to compete.

So to my friend who started me on this four-part journey of why Americans should care about the FIFA scandal, I hope that I have persuaded you why you should care. For the rest of you, I hope you have enjoyed this series. One of the joys of blogging and podcasting is engaging with readers and listeners. So keep those questions coming and you too can help me engage in the fight against the global scourge of bribery and corruption.

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

Why Should Americans Care About the FIFA Indictments? Part III – Corruption and US Companies

Today, I continue my four-part series on the above question posed to me recently by a colleague. In Part I, I wrote that only the US government had the wherewithal, tools and will to do so. Yesterday, I focused on corruption on the pitch and how bribery and corruption ‘changes the game’ of soccer (AKA Football). Today is the third of my of my four reasons on why Americans should care about the Department of Justice (DOJ) bringing their indictments against the 14 named defendants who were all associated with the governing body of international soccer, the Fédération Internationale de Football Association (FIFA). Up today is the corruption and US companies.

While there were no US companies specifically identified in the indictments, there were allegations that bribes were paid and pocketed in connection with the sponsorship of the Brazilian national soccer team by “a major U.S. sportswear company.” This company was later determined to be Nike. In an initial statement Nike denied any involvement in the payment of bribes and said they were cooperating with the relevant authorities. However, they later changed this original statement to say, “Like fans everywhere we care passionately about the game and are concerned by the very serious allegations. Nike believes in ethical and fair play in both business and sport and strongly opposes any form of manipulation or bribery. We have been cooperating, and will continue to cooperate, with the authorities.”

Nike is not alone in its World Cup sponsorship as there are numerous other American companies involved, both sportswear manufacturers and other retailers, such as those from the beverage industry. The involvement of US companies and companies subject to the Foreign Corrupt Practices Act (FCPA) brings up the specter of the FCPA for companies involved in FIFA sponsorship and marketing partnerships. I do not see this as an issue so much about level playing fields for business or even the greater benefits that US companies can bring even when they are required to pay bribes. (The latter argument was used by Wal-Mart apologists around the company’s payments of bribes to do business in Mexico as benefiting the people of Mexico. Let us be quite clear-the bribes paid by Wal-Mart benefitted Wal-Mart and its income from its Mexican operations.)

Information in the indictments was quite damning about the involvement of a company identified as ‘sportswear company A or E’. In a Financial Times (FT) article, entitled “Fifa corruption scandal threatens to engulf Nike as sponsors raise pressure”, Joe Leahy and Mark Odell reported one of the cooperating defendants Jose Hawilla, owner of Traffic Group and who has pled guilty, acted as a third party agent for Nike’s landmark 1996 agreement to allow Nike to fit out the Brazilian national soccer team. Moreover, the article noted, “The prosecutors said that additional financial terms between Traffic and the unnamed sportswear company were not reflected in the CBF agreement. Under these terms, the company agreed to pay a Traffic affiliate with a Swiss bank account an additional $30m in ‘base compensation’ on top of the $160m it paid to the CBF. Three days later, the company and Traffic signed a one-page contract saying the CBF had authorized Traffic to invoice Nike directly “for marketing fees earned upon successful negotiation and performance of the agreement”. Anyone see any Red Flags in that scenario?

Beyond the criminal side of the FCPA, there is the civil side enforced by the Securities and Exchange Commission (SEC) through the Accounting Provisions, which consist of the books and records provisions and the internal controls provisions. According to the FCPA Guidance, “The FCPA’s accounting provisions operate in tandem with the anti-bribery provisions and prohibit off-the-books accounting. Company management and investors rely on a company’s financial statements and internal accounting controls to ensure transparency in the financial health of the business, the risks undertaken, and the transactions between the company and its customers and business partners. The accounting provisions are designed to “strengthen the accuracy of the corporate books and records and the reliability of the audit process which constitute the foundations of our system of corporate disclosure.””

As was made clear with the recent BHP Billiton FCPA enforcement action, violations of the accounting provisions do not apply only to brib­ery-related violations of the FCPA. The FCPA Guidance states these provisions “stand alone to help investors have assurance that all public companies account for all of their assets and liabilities accurately and in reasonable detail.” For the books and records provisions this means that US public companies must “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.” For the internal controls provisions, US public companies must provide a system of internal controls that “provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements.” In other words, the accounting provisions are designed to protect investors in addition to working towards preventing, detecting and remediating bribery and corruption.

In addition to these basic legal requirements, which are all set out in the FCPA and violation thereof could lead to criminal or civil exposure; there will be the costs. The FCPA Professor has identified “three buckets” of costs relating to an alleged FCPA violation. The first is the pre-resolution investigative and remediation costs, the second is the fine and penalty assessment and the third is the post-resolution implementation costs. It is generally recognized that buckets one and three can be up to two to six times the amount of the fine and penalty.

But with the FIFA scandal, there will be another huge factor for companies to consider and that is the negative publicity. This scandal is the largest worldwide corruption case ever brought. It is also the highest profile corruption case ever brought. It will command attention for years to come. If any US companies are linked to bribery and corruption at FIFA, their name will be dragged through the international press ad nauseum. If there are leaks about information on companies before they investigate or get out ahead of any allegations, which may spill into the press, it will certainly not look good.

For a taste of this you can look to the accounting firm KPMG, who is the auditor for FIFA. In a story originally reported by Francine McKenna at the Wall Street Journal (WSJ) and later reported by the New York Times (NYT), KPMG has blessed FIFA’s books since at least 1999. In the NYT piece, entitled “As FIFA case grows, focus turns to its auditors”, Lynnley Browning wrote that the KPMG audits “only heightens the puzzling disconnect between the different pictures that are emerging of FIFA as an organization: riddled with bribes and kickbacks in the view of prosecutors yet spotless according to the outsider most privy to its internal financial dealings.” How well do you think KPMG will come out of this?

The bottom line is that any US company or any other entity subject to the FCPA had better take a close look at its dealings with FIFA, regional soccer federations such as CONCACAF and national soccer federations. A full review is in order starting with who you did business with and how you did business with them. As Mike Brown would say, “follow the money” and see where it went, if you can account for it and if it was properly recorded on your company’s books and records. Finally, now would be a very propitious time to review your internal controls; for even if you had a robust paper system of internal controls like BHP Billiton did, if it is simply a check-the-box exercise or even worse you do not follow the internal compliance controls you have in place, you should begin remediation now.

As to why Americans should care about US companies engaging in corruption, that answer would seem to be straightforward. Companies which engage in bribery and corruption mislead investors and diminish the marketplace of information to base investments upon. If a company is engaging in bribery and corruption, they never report it in their books and records; they always try to hide it so that it cannot be detected. Usually poor internal controls exist, which can allow bribery and corruption to exist or even the possibility of it, once again demeaning the value of a company if that company cannot assure its investors that funds will be paid out with the approval of management. Further, contracts or other business obtained through bribery and corruption presents a false picture of the true financial health of a company as it allows profits obtained through illegal means to be booked as legitimate. Finally, if a company is engaging in bribery and corruption, the financial cost to the company can be astronomic. There is only one Wal-Mart that can sustain hundreds of millions dollars spent to investigate allegations of bribery and corruption and remediate any issues. Avon spent north of $500MM on its pre-resolution investigation and remediation. All of this does not even get to the issue of inflated stock values and the inevitable shareholder derivative litigation. Lastly, there is reputational damage. If a company is willing to engage in bribery and corruption as a part of a business strategy do you want to invest in the organization?

As an American should I care about US companies involved in the FIFA corruption scandal? If the facts reported in the FT are close to correct, I would certainly think so. If monies were paid by a ‘sportswear’ company in the form of marketing fees to Traffic or even a flat $40MM payment to a Traffic affiliates Swiss bank account, this is something which should not be tolerated.

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

 

 

 

 

Why Should Americans Care About the FIFA Indictments? Part II – Corruption Changes the Truth of the Game

Today, I continue my (now) four-part series on the above question posed to me recently by a colleague. (I know I wrote that it would be a three-part series but as usual I got carried away when I started writing.) Yesterday, I wrote that only the US government had the wherewithal, tools and will to do so. Today, I focus on the second of my four reasons on why Americans should care about the Department of Justice (DOJ) bringing their indictments against the 14 named defendants who were all associated with the governing body of international soccer, the Fédération Internationale de Football Association (FIFA). Up today is the corruption in the game of international soccer (AKA Football).

Corruption never stands alone because once bribes are paid for one thing, a business, entity or person opens themselves up to other situations involving bribery and corruption. So if a company hires someone with a propensity to pay bribes, such a person would have no compunction in defrauding the company in other ways. Put another way, a tiger doesn’t change its stripes very often. Take South Africa, the country which is alleged to have paid Jack Warner a $10MM bribe to secure his vote and the votes of those in the regional soccer federation he controlled, CONCACAF, to be awarded the right to host the 2010 World Cup.

Last year the New York Times (NYT) reported that the entire FIFA referee system came under great concern because of match-fixing allegations that swirled around the South African soccer federation. Given what we know now about how that organization operated is it any wonder other parts would be corrupt? And it turned out that FIFA knew about it all along.

In a NYT 2014 ‘Rigged’ two part series, entitled “Fixed Soccer Matches Cast Shadow Over World Cup” and “Inside the Fixing: How a Gang Battered Soccer’s Frail Integrity”, reporters Declan Hill and Jeré Longman wrote about a NYT investigation of match fixing ahead of the 2010 World Cup in South Africa. The articles provided an unusually detailed look at the ease with which professional gamblers can fix matches. The article reviewed an “internal, confidential report by FIFA, soccer’s world governing body. FIFA’s investigative report and related documents, which were obtained by The New York Times and have not been publicly released, raise serious questions about the vulnerability of the World Cup to match fixing.” The reporters noted that the FIFA “report found that the match-rigging syndicate and its referees infiltrated the upper reaches of global soccer in order to fix exhibition matches and exploit them for betting purposes. It provided extensive details of the clever and brazen ways that fixers apparently manipulated “at least five matches and possibly more” in South Africa ahead of the World Cup. As many as 15 matches were targets, including a game between the United States and Australia, according to interviews and emails printed in the FIFA report.”

These NYT articles detailed how betting syndicates would target the national football associations that are charged with selecting and supplying the referees in international matches. The articles pointed out how the betting syndicates would find the weakest link in any security or compliance system and then exploit it. In the 2010 World Cup it was both the South African football association that signed contracts and its allowing the betting syndicates to select the referees for games to actually bribery of referees themselves which were the root causes of the corruption.

Imagine the difference if the South African soccer federation was not corrupt and had won the rights to host the 2010 World Cup on the strength of their bid, not their payment of bribes. Think the tone down through organization about corruption and bribery would have been any different if down the line, they knew the top of the organization was committed to winning the bid (and did so) through legal means?

Yet the corruption of individual soccer matches at the international level continued into the 2014 World Cup. In a The Telegraph article, entitled “Football match-fixing: Ghana deal casts cloud over World Cup finals in Brazil”, reporters Claire Newell, Holly Watt and Ben Bryant detailed that the “Ghana Football Association calls in police after undercover investigation by The Telegraph and Channel Four’s Dispatches programme finds that the President of Ghana’s FA agreed for the team to play in international matches that others were prepared to rig.”

They wrote, “The president of the country’s football association then met the undercover reporter and investigator, along with Mr Forsythe and Mr Nketiah, and agreed a contract which would see the team play in the rigged matches, in return for payment. The contract stated that it would cost $170,000 (£100,000) for each match organised by the fixers involving the Ghanaian team, and would allow a bogus investment firm to appoint match officials, in breach of Fifa rules. “You [the company] will always have to come to us and say how you want it to go…the result,” said Mr Forsythe. “That’s why we will get the officials that we have greased their palms, so they will do it. If we bring in our own officials to do the match… You’re making your money. You have to give them [the referees] something… they are going to do a lot of work for you, so you have to give them something,” said Mr Nketiah, who is also the chief executive of the Ghanaian football club Berekum Chelsea and sits on the management committee of the Ghana U20 national team.”

In a meeting prior to the 2014 World Cup, when Ghana was playing warm-up matches in the US, Forsythe and Nketiah introduced the undercover team to Kwesi Nyantakyi, the president of the Ghana FA. In a meeting in “Florida, the president agreed to a contract that stated each match would cost the investment company $170,000 and that they could appoint the match officials for each game. A contract was drawn up that specified that “The Company will appoint and pay for the cost of the referees/match officials in consultation with an agreed Fifa Member association(s),” in direct breach of the rules that prohibit third parties from appointing officials, in order to protect their impartiality. During the meeting, the president suggested that the fictional investment company put on two matches after the World Cup to prove that they were able to organise games.”

But even more troubling is that FIFA itself has directly affected the integrity of international soccer. In an article in The Sunday Times, entitled “Special One appalled by €5m Fifa payment”, reporter Jonathan Northcraft wrote about the reaction of Chelsea manager Jose Mourinho (AKA the ‘Special One’) to the revelations that the FIFA Executive Committee paid the Football Association of Ireland, €5 million in bribe money “to drop legal action after a controversial goal gave France victory over Ireland in a playoff for the 2010 World Cup.” The issue revolved around the on-field illegal handball played by French striker Thierry Henry that “went unsanctioned in the second leg of their playoff in 2009. The FAI launched a legal appeal to become the ‘33^rd team’ at the World Cup but stopped proceedings after receiving the payment from Fifa.”

So now the FIFA scandal has gone from paying bribes to fixing game venues to corrupting contracts to changing how games are decided. Mourinho was quoted, “This one, for me, is the end of the world. You change the truth of the game for €5m? What next? Because more stories will come for sure.”

Why should Americans care about the about FIFA indictments? I realize that most Americans do not hold the game of international soccer with the same passion as the rest of the world. But for anyone who loves sports, to have the worlds most premier sporting championship tinged with corruption and evidence of match fixing, as the Special One said, changes the truth of the game. That would seem to me to be reason enough to care.

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© Thomas R. Fox, 2015