FCPA Compliance and Ethics Blog

December 18, 2012

Banks Behaving Badly or Brother Can You Spare A Billion (or Two)?

Remember when a billion dollars was real money? Over the past couple of weeks there have been some mammoth fines paid by financial institutions for conduct, which would appear to fall under the category of “Banks Behaving Badly”. Last week HSBC agreed to pay a fine of $1.92 billion for its transgressions involving money laundering. UBS is in the final stages of negotiations to pay $1.5 billion to resolve allegations that it tried to rig interest rate benchmark (i.e. ‘Libor’) to boost trading profits. Finally, on December 10, coming in at a paltry $327 million are our old friends Standard Chartered, which admitted processing thousands of transactions for Iranian and Sudanese clients through its American subsidiaries; subsequently to avoid having Iranian transactions detected by the US Treasury Department computer filters, Standard Chartered deliberately removed names and other identifying information, according to the authorities. All in all, it’s not been a bad couple of weeks for the US Treasury, given the current stalemate over the ‘fiscal cliff’ and the need to reduce the US deficit.

For those of you keeping score at home, we present our updated Banks Behaving Badly Box Score of Settlements

Banks Behaving Badly – Box Score of AML Settlements

Bank Amount Date of Settlement
Lloyds TSB Bank $567MM December 2009
Credit Suisse $536MM December 2009
ING Bank $619MM June 2012
Royal Bank of Scotland $500MM May 2012
Barclays $298MM August 2012
Standard Chartered – NY state $340MM August 2012
Standard Chartered – Federal $327MM December 2012
HSBC $1.92 BN December 2012
Total $4.004BN

Banks Behaving Badly – Box Score of Libor Manipulation Settlements

Bank Amount Date of Settlement
Barclays $450MM June 2012
UBS $1.5BN (proposed) December 2012?
Total $1.95BN (proposed)

If you do not have a calculator handy, for the 2012 banking season alone, that is $4,004,000,000 all going to the US Treasury thanks to our friends at Banks Behaving Badly. If you want to sneak-a-peak at what it might look like if the UBS settlement comes through just add on an additional $1.5 bn so that is over $6 billion in fines, penalties and disgorged profits from one industry sector in one year. And people have the temerity to complain about the energy industry being corrupt.

So what is the cause of ‘Banks Behaving Badly’? Back in June, at the time of the Barclays Libor manipulation settlement, the Financial Times (FT) wrote on its Op-Ed page in the piece entitled “Shaming banks into better ways” that “few have shone such an unsparing light on the rotten heart of the financial system” and then went on to say “nothing less than a long-running confidence trick played on the public for personal and institutional advantage” and even pointed out the “rotten culture at Barclays”. The FT editorial clearly focused on ethics when it said “But beyond the questions about legality there is a bigger worry about the wayward behavior of the financial sector.” The FT editorial concluded by telling banks that if “banker-bashing is to stop, the banks themselves must change.” Typical British understatement at its finest wouldn’t you say?

The HSBC settlement was announced by Lanny A. Breuer, Assistant Attorney General of the Justice Department’s Criminal Division. In the Department of Justice (DOJ) Press Release it was reported that HSBC received a Deferred Prosecution Agreement (DPA) which required, among other things, that it “committed to undertake enhanced AML and other compliance obligations and structural changes within its entire global operations to prevent a repeat of the conduct that led to this prosecution.  HSBC has replaced almost all of its senior management, “clawed back” deferred compensation bonuses given to its most senior AML and compliance officers, and has agreed to partially defer bonus compensation for its most senior executives – its group general managers and group managing directors – during the period of the five-year DPA.  In addition to these measures, HSBC has made significant changes in its management structure and AML compliance functions that increase the accountability of its most senior executives for AML compliance failures.” There will also be an independent outside monitor appointed to oversee the bank’s compliance efforts and report periodically to the DOJ.

Even with all the above and the fines, penalty and profit disgorgement, the DOJ has come under withering criticism for its failure to both let HSBC off so lightly, with a DPA, where “HSBC Bank USA failed to monitor over $670 billion in wire transfers and over $9.4 billion in purchases of physical U.S. dollars from HSBC Mexico” and no individuals were indicted. CNN reported that Sen. Charles Grassley, R-Iowa, sent a stinging letter to Attorney General Eric Holder, calling it “inexcusable” for the department [DOJ] not to prosecute criminal behavior by HSBC. Senator Grassley’s letter was quoted as saying, “What I have seen from the department is an inexplicable unwillingness to prosecute and convict those responsible for aiding and abetting drug lords and terrorists.” Further, “By allowing these individuals to walk away without any real punishment, the department is declaring that crime actually does pay,” Grassley asserted.

Halah Touryalai, in an article entitled “Final Thought On HSBC Settlement: How Much Bad Behavior Will We Tolerate?” in forbes.com, put it another way. Touryalai asked “What’s a bank got to do to get into some real trouble around here?” She went on to say, “So, let’s get this straight. A major global bank failed to catch activity that put our country’s security at risk and now it is sorry… The HSBC case brings to the forefront a big question for the U.S.: How much are we willing to tolerate from financial services companies? If we’re looking at the HSBC case then a lot, apparently.” Finally, Touryalai spoke for many when she said, “The scary part about the HSBC settlement is that U.S. authorities are essentially saying they couldn’t act on criminal charges because it would harm the larger financial system. That’s got many calling HSBC (and potentially others) too-big-to-jail.”

However, the DOJ had many data points to factor into its calculus on settlement. First, and foremost, (apparently) remains Arthur Anderson. If the DOJ had pushed for a criminal settlement, would it have debarred HSBC from doing business with the US government or its monies going through the US banking system? What would be the effect of such a remedy? What if the DOJ had pushed too far and HSBC felt it had no choice but to go to trial, would they have been Arthur Andersen’d out of business? Perhaps this is a variant of the “too big to fail” argument, called the ‘too-big-to-put-out of business’ argument.

But there is another reason for the specific terms of the HBSC settlement, which was discussed by Lanny Breuer during the news conference. He stressed the extraordinary cooperation by HSBC during the investigation in addition to the structural changes the bank put in place as noted above. If the DOJ wants to obtain the highest level of cooperation from a defendant during an investigation, turning around after such cooperation and indicting either the entity or a bunch of its employees will most probably end such a level of cooperation. My guess is that the DOJ wants to encourage as much cooperation as it can from parties under investigation. That would include greater compliance after the resolution in addition to extraordinary cooperation during the investigation. However this may not be enough to quell the critics. So the DOJ may be stuck in the position of damned if they do (indict) and damned if they don’t (indict).

But whatever your take on the DOJ’s position as to HSBC, it certainly has been a year of reckoning for “Banks Behaving Badly”.

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

January 12, 2012

When the FCPA Professor Writes, You Should Read It

As many compliance practitioners are aware, the FCPA Professor (in real life, Professor and Ironman Triathlete Mike Koehler) writes a daily blog on all things relating to the Foreign Corrupt Practice Act (FCPA) from the legal perspective. It is a great resource and one that you should put on your daily reading list. However, as a professor he also writes lengthier, law review articles, with his in-depth analysis and commentary. This month we are treated to an excellent law review article entitled “Big, Bold and Bizarre: The Foreign Corrupt Practices Act Enters a New Era”. Coming in at a hefty 50 pages, it is his analysis and commentary of “using 2010 FPCA enforcement actions, related developments and how big FCPA enforcement has become.” It is an excellent and most welcomed resource for the compliance practitioner who needs a solid review of where the FCPA enforcement year has been and what it may portend for the future.

The Professor divides his article into four parts. In Part I, he reviews the specifics of FCPA enforcement in 2010, what he terms the “big, bold and bizarre.” In Part II, he reviews the increased scrutiny of the FCPA, by courts who faced increased legal challenges due to increased individual prosecutions, Congressional scrutiny and business and legal commentary. In Part III, he reviews some legal developments related to the FCPA, such as Dodd-Frank and debarment legislation. In Part IV, he takes a look at the FCPA road ahead.

Big, Bold and Bizarre

A. Big. The Professor lists some of the raw numbers generated through FCPA enforcement actions. The Department of Justice (DOJ) and Securities and Exchange Commission (SEC) garnered almost $1.8 billion in fines, penalties and profit disgorgement through FCPA enforcement actions.
B. Bold. Here the Professor recounts that the DOJ “continued to push the envelope as to enforcement theories in two specific areas.” The first is regarding the definition of who is a ‘foreign official’ under the FCPA and the second revolves around the interpretation of “obtain or retain business” and facilitation payments under the FCPA.
C. Bizarre. Here the Professor looks at both general fact patterns and some specific enforcement actions. Generally, he notes that in the majority of DOJ enforcement actions, the eventual DOJ fine or penalty was at an “amount below the minimum range suggested by the [US] Sentencing Guidelines.” He also discussed some of the specific matters he believed had “bizarre patterns” such as Innospec, BAE, Digi International and the Giffen prosecution.

Increased Scrutiny

While noting that the increased scrutiny actually began in Q3, 2009 with the release of the Chamber of Commerce Whitepaper and Senate Judiciary Committee hearing, 2010 brought a more thorough debate in both Congress and the private sector. This included the House Judiciary Committee hearing in June as to whether the FCPA should be made less robust to facilitate job creation, judicial scrutiny in the form of some high profile individual prosecutions, where federal district courts had to directly confront challenges to the FCPA on what are ‘instrumentalities’ under the Act and who is a foreign governmental official. In the private sector, the Chamber of Commerce kept up its attack on the FCPA as anti-competitive and there was also bar and NGO commentary on the FCPA.

FCPA Related Developments

Obviously the passage of Dodd-Frank had a very large impact on the 2010 FCPA discussion. The Professor noted that “Many predict that Dodd-Frank’s whistleblower provisions will greatly increase the number of FCPA enforcement actions.” In addition to his Dodd-Frank discussion, he reports on the passage of the ‘Overseas Contractor Reform Act’ by the House, which would have debarred any company from doing business with the US government if it sustained a final judgment of a FCPA violation. However, the legislation was not passed by the Senate so it died in the last session.

The Road Ahead

The Professor concludes his article by noting that “the years ahead will likely see more of the same big, bold and bizarre developments as 2010.” One development he believes should continue is the increase in the scrutiny of the FCPA, both by Congress and continuing review and commentary by others, such as the Professor (and I). While noting that some have viewed discussion about FCPA reform as akin to “paving the way for business to go on a bribery binge”; the Professor clearly believes in the value of continued discussion and debate on how to achieve the goals of the FCPA is appropriate and necessary.

The article is well worth your time to read and see where we have been and where we might be going. If you needed one article to give you the information to provide to management on FCPA enforcement, trends and commentary from last year; this is it. While you may, or may not, disagree with the Professor’s conclusions, you cannot have a better resource from which to review the facts.

The FCPA Professor’s website has several nifty features, one of which is a Jobs Board
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

April 19, 2011

Is Debarment a Viable FCPA Enforcement Option?

In a provocative law review article entitled “FCPA Sanctions: Too Big to Debar?” South Texas College of Law student Nicholas Wagoner and Professor Drury Stevenson, posit the question: “Are certain private contractors too big to debar?” Their conclusion is “It appears so.” In the article’s abstract it goes on to state:

The federal government is too dependent on a particular set of large, private-sector corporations for equipment and services. In addition to the virtual immunity from debarment enjoyed by these firms when they violate the FCPA, the fines imposed for engaging in foreign corrupt practices comprise a tiny fraction of the potential revenue generated by lucrative contracts with the U.S. and foreign states. When discounted by the low probability of detection, these sanctions are far too low to deter unlawful activity.

Pretty strong stuff.

The article goes on to further  opine that under the current Department of Justice (DOJ) and Securities and Exchange Commission (SEC) policy of corporate sanctions via fines and penalties it actually offers “little deterrence value in the corporate setting” because corporation’s are legal fictions with “no soul to damn and no body to kick.”  The authors argue that corporations view fines and penalties as simply “a cost of doing business” because the risk of losing profitable business outweighs “the cost of getting caught.” Even if a corporation pays a large fine and penalty for a Foreign Corrupt Practices Act (FCPA) violation the fact that the US government would continue to do business with it sends a message that such conduct is “excusable” as long as the company that is caught “can buy its way out of the criminal liability.” The authors’ end this section by noting that they believe the prosecutorial levying of fines and penalties is an invitation for “prosecutorial abuse” due to the large amounts of money involved.

One solution raised by the authors for the issues regarding fines and penalties for companies which violate the FCPA, is debarment and suspension. They urge that debarment would be a significant deterrent for US government contractors and would “increase compliance with the FCPA.”  The authors also suggest that the threat of debarment as a penalty would increase self-disclosure without any increased enforcement efforts if company’s received the “meaningful reward” of a lesser penalty through self-disclosure.

However, just as quickly as the authors suggest the solution, they list several reasons that debarment has not worked in the past. These include issues raised in the abstract cited above, that certain contractors have simply too large a business relationship with the US government to be debarred and that due to the loss of governmental revenues debarment would be “a virtual death knell for the contractor-company.” (Cue the Arthur Andersen theme here.) They also raise other issues including something they entitle “Prosecutorial Finger Pointing” which they seem to define as the DOJ having some reluctance to debar companies and that the DOJ’s testimony at last fall’s Senate hearing that debarments would have low deterrent effect but it might well decrease voluntary disclosures.

The authors also list what they call “Collateral Consequences” of debarment. These include the aforementioned Arthur Andersen, loss of US government flexibility in its contracting process by the removal of contractors through debarment, injured diplomatic relations with foreign allies, threats to national security from the removal of key contractors, risks that debarred companies would miss out on economic opportunities, disproportionate harm to shareholders and other political risks.

The authors conclude by noting that fines and penalties are but one method of FCPA enforcement. They argue that debarment can be a “potent deterrence” and end their article by proposing that a two year debarment for firms caught bribing foreign governmental official in violation of the FCPA would present “remarkable opportunity costs” and would help to foster overall FCPA compliance.

We began this posting by stating this article is “provocative” and we hope that you gleaned some flavor of it. We urge you to read the entire article to fully explore the author’s views. Certainly the article is useful in continuing the FCPA debate on both the appropriate incentives for enforcement, coupled with the appropriate fines and penalties for those companies which violate the Act. We believe the increase in enforcement over the past five years, for both companies and individuals, provides proper incentive for US companies to comply with US law. While we disagree with some of the points set out by the authors in their article, we do believe that debarment as a possible remedy or sanction is one which should be considered as a tool which the DOJ can use in its overall FCPA enforcement efforts. We applaud the authors for their valuable contribution.

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.

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