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

 

 

 

 

King Arthur Week – The Quest for the Holy Grail and Compliance Defense – Part V

We conclude our Arthurian themed week with the Holy Grail, which has fired the imagination of artists for millennia. What was the Holy Grail? According to Professor Dorsey Armstrong in her Teaching Company lecture series, entitled “King Arthur: History and Legend”, the Holy Grail has taken various forms over the years. For Chrétien de Troyes, it was a fancy serving dish; for Wolfram von Eschenbach, it is a magical stone; for Robert de Boron, it is the cup that Christ drank from at the Last Supper; for the comedy troupe Monty Python, it is a cartoon sketch that no one ever finds; and for the modern day author Dan Brown, it is both a person, who is a descendant of Mary Magdalene, and a bloodline which leads to the Merovingian kings of France. In other words, it means many things to many people.

One of the articulated reasons for the creation of King Arthur’s Round Table was tied to the Holy Grail, since it was allegedly used at the Last Supper, it seems only natural that Arthur would seek it from his table as well. Indeed in Robert de Boron’s account of Arthur, the wizard Merlin tells Arthur the Round Table was established to identify the one Knight, who was pure of heart, who could find the Holy Grail. Only after the great quest for and locating of the Holy Grail was achieved could Arthur’s other ambitions come to pass.

Another interesting twist on the Grail legend is that it was in Britain. Curiously it was first ‘discovered’ by some enterprising Monks in Glastonbury, England in the late 12^th century. They just happened to come across a well that ‘bled’ water around the time of an annual pilgrimage. Going viral in the Middle Ages was tough but the Monks built upon their initial find by claiming that both King Arthur and his Queen Guinevere were also buried at their abbey. Do you believe any of the above? Are you on your own Grail Quest, however dreamy that quest might be?

I thought about the quest for the Holy Grail in the context of the renewed call for a compliance defense addition to the Foreign Corrupt Practices Act (FCPA), which would give companies a pass if they had sustained a FCPA violation. In a recent blog post, entitled “Wal-Mart’s Recent Disclosures”, the FCPA Professor renewed his clarion call for a compliance defense for FCPA violators, using Wal-Mart’s last three-year spend on compliance resources as a starting point. He wrote, “Wal-Mart disclosed spending approximately $220 million over the past three years in global compliance program and organizational enhancements.” He went on to note, “The key policy issue is this. Wal-Mart has engaged in FCPA compliance enhancements in reaction to its high-profile FCPA scrutiny. Perhaps if there was a compliance defense more companies would be incentivized to engage in compliance enhancements pro-actively. A compliance defense is thus not a “race to the bottom” it is a “race to the top” (see here for the prior post) and it is surprising how compliance defense detractors are unable or incapable of grasping this point.”

Leaving aside the issue of whether I am “unable or incapable” to grasp these issues I raised, I see this quest for (or ‘race’ as the FCPA Professor calls it) for a compliance defense for companies that violate the FCPA to be as quixotic as the quest for the Holy Grail. As there were two requirements for the Knight who was destined to find the Grail, we will begin pureness of heart. Recognizing that it might be difficult to find a corporation that is ‘pure of heart’, the appropriate analogy might be more than simply spending what may appear to be a large dollar amount on a compliance program. This is because it is not the amount of money you spend that informs the effectiveness of your compliance program. In three years Wal-Mart has reported it spent $220MM. The FCPA was enacted into existence in 1977. What do you get if you divide $220MM total spend into 38 years? My (recovering) trial lawyer math shows that to be approximately $5.78MM per year. How many billions of dollars per year was the annual revenue of Wal-Mart during that time? (Hint – a lot)

Moving our quest time frame to the modern era of FCPA enforcement, to say 2005. That would give an annual compliance spend of $20MM per year. If one looks at the company’s revenue from the middle of the last 10 years, for the fiscal year ending January 31, 2011, Wal-Mart reported net income of $15.4 billion on $422 billion in gross sales. Now what do you think about Wal-Mart’s quest for an effective compliance program based upon three year’s spending of $220 being significant? Indeed what is the percent of its revenues over the past three years that Wal-Mart spent creating its compliance program? Alas my trial lawyer math skills do not allow me to calculate a number so small.

How about the second part of the Grail quest that requires a ‘chaste’ Knight? Once again it is somewhat difficult to understand how a corporation could be chaste but I think the appropriate analogy is the doing of compliance. Put another way, it is not having a compliance program in place but having an effective compliance program. So not only does the amount of money a company spends become immaterial to our quest but also the same can be said to the claim that having a written program should entitle you some type of defense to any FCPA violations. Just as questing for the Holy Grail is seeking something that does not exist, affording companies a defense from their own FCPA violations by having a written program in place is not a temporal reality.

Under the FCPA Ten Hallmarks of an Effective Compliance Program, that it is an interplay of the right compliance message, tools in place to communicate and enforce the compliance message and then oversight to ensure compliance with the entire compliance regime. Such things as monitoring are recognized as a key element so your company should establish a regular monitoring system to spot issues and address them. Effective monitoring means applying a consistent set of protocols, checks and controls tailored to your company’s risks to detect and remediate compliance problems on an ongoing basis. To address this, your compliance team should be checking in routinely with the finance departments in your foreign offices to ask if they have noticed recent accounting irregularities. Regional directors should be required to keep tabs on potential improper activity in the countries they manage. Additionally, the global compliance committee should meet or communicate as often as every month to discuss issues as they arise. These ongoing efforts demonstrate your company is serious about compliance.

In addition to monitoring, structural controls are recognized as an important element. It has been said that large companies “must use structural means to maintain control.” One of the best explanations of the use of internal controls as a structural component of any best practices compliance program comes from Aaron Murphy, a partner at Foley and Lardner in San Francisco, in his book entitled “Foreign Corrupt Practices Act”, where he said, “Internal controls are policies, procedures, monitoring and training that are designed to ensure that company assets are used properly, with proper approval and that transactions are properly recorded in the books and records. While it is theoretically possible to have good controls but bad books and records (and vice versa), the two generally go hand in hand – where there are record-keeping violations, an internal controls failure is almost presumed because the records would have been accurate had the controls been adequate.” These two parts are but a sampling but it is in the doing of compliance that any anti-corruption compliance program becomes effective; it is not simply having one in place.

Finally, as with all quests, what will it bring you if you actually achieve it? As with the Holy Grail, it is a good story but that is about it. I find this view best articulated by Matthew Stephenson, in a blog post entitled “The Irrelevance of an FCPA Compliance Defense”, where he gave three reasons why a compliance defense is not warranted. First (and perhaps almost too obvious to state) is that if your company is invoking a compliance defense, there has been a FCPA violation. The second is “The U.S. Department of Justice (DOJ) already takes into account a corporation’s good-faith efforts to implement a meaningful compliance program when the DOJ decides whether to pursue an FCPA action against the corporation, and what penalties or other remedies to impose. Indeed, the adequacy of the corporation’s compliance program is a standard subject of negotiation between the DOJ and corporate defendants.” Third is that “An FCPA compliance defense would only alter the DOJ’s bargaining position if a corporation unhappy with the DOJ’s position could either (1) convince the DOJ lawyers that the DOJ’s position is unreasonable in light of the corporation’s compliance program, or (2) credibly threaten to go to court and defeat the DOJ’s enforcement action altogether by successfully invoking the compliance defense before a federal judge.” Stephenson discounts subpart 1 because DOJ lawyers already take a company’s compliance program into account. But his second subpart is even more important because no company will go to trial against the government using a compliance defense to a demonstrable FCPA violation. Leaving aside the Arthur Anderson effect, no company is going to risk losing at trial when they can control their own fate through settlement. The modern day Knights seeking the Holy Grail of a compliance defense will never find it because of this last fact. Moreover, just as there were no real Knights who could meet the requirements to actually find the Holy Grail after their quest, there are no companies which can meet the same criteria; that being that a compliance defense could or even should trump a FCPA violation.

So we leave our King Arthur themed week with our quest intact, bringing message I hope that you have ascertained in these five posts about some of the things you need to do around the ‘nuts and bolts’ of anti-corruption compliance. I also hope that you might be able to look at the tales surrounding the King Arthur myth for your own inspiration.

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 Tone at the Top Matters and Join the FCPA Professor in Houston

Over this week I have looked at some issues related to compensation and methods from other disciplines that a compliance practitioner might use to test and then improve a company’s third party management regime. Today, I want to go back to the starting point for any compliance program; that is the Tone at the Top. I was reminded of the absolute necessity of having a management not only committed to following the law but the actual doing of compliance when I read about the guilty verdicts in the Atlanta schools cheating scandal.

In an article in the New York Times (NYT), entitled “Atlanta Educators Are Convicted of Racketeering”, reporter Alan Blinder detailed the guilty verdicts handed down in an Atlanta state Superior Court this week where 11 of 12 defendants were convicted in a lengthy trial. Blinder wrote, “On their eighth day of deliberations, the jurors convicted 11 of the 12 defendants of racketeering, a felony that carries up to 20 years in prison. Many of the defendants — a mixture of Atlanta public school teachers, testing coordinators and administrators — were also convicted of other charges, such as making false statements, that could add years to their sentences.” Most stunningly, the trial judge “ordered most of the educators jailed immediately, and they were led from the courtroom in handcuffs.”

The school district’s top administrator Dr. Beverly Hall, channeling her inner Ken Lay, had the temerity to pass away during the trial so there was no finding as to her conduct. Unrepentant to end she said “she had done nothing wrong and that her approach to education, which emphasized data, was not to blame.” When interviewed back in 2011, Dr. Hall had said, “I can’t accept that there’s a culture of cheating. What these 178 are accused of is horrific, but we have over 3,000 teachers.”

Think about those two statements for a moment. They mimic the same tired excuses used by apologizers in the anti-corruption world. First it was only a small subset of those involved who actually broke the law. In other words, the oldie but goodie rogue employee(s) defense. It did have the notable exception that there were 178 roguies out there lying and cheating. But more than the rogue employee defense, she emphasized that she obtained results, the scores on the State of Georgia’s standardized tests for public schools improved dramatically under her watch. In the Foreign Corrupt Practices Act (FCPA) anti-corruption world that is the same as “we had to do it to compete” argument. It is equally as inane as the rogue employee defense.

Moreover, a State of Georgia investigation “completed in 2011, led to findings that were startling and unsparing: Investigators concluded that cheating had occurred in at least 44 schools and that the district had been troubled by “organized and systemic misconduct.” Nearly 180 employees, including 38 principals, were accused of wrongdoing as part of an effort to inflate test scores and misrepresent the achievement of Atlanta’s students and schools. Investigators wrote in the report that Dr. Hall and her aides had “created a culture of fear, intimidation and retaliation” that had permitted “cheating — at all levels — to go unchecked for years.” How is that for tone from the very top?

I bring you another example from a company I once worked at whose management locked themselves behind bolted doors on a floor in the building not accessible by any employees. And just in case someone did make onto this executive floor, there was an armed police presence as a last ditch security measure. The locked down top floor was after the following security measures were already in place: (1) you had to badge in to get into the parking garage, (2) building access was by card entry, (3) elevator access was by card entry, and (4) floor access was by card entry.

Why would senior executives barricade themselves behind such massive physical protection? Did they do this because crazed competitors were sending in assassins, because the company was so profitable and hence unassailable as a competitor? How about something more nefarious such as international hit squads roaming through international businesses in Houston, picking off key executives? Alas the explanation was not anything so exotic. With all of these security measures in place the reason was to keep mere mortal employees away from senior management. What type of message that does send to employee? Much like the one I had growing up, speak only when spoken to.

The point of all this is that tone does matter. Senior management must be committed and communicate its commitment to not only obeying laws but also complying with laws. In the FCPA world, that means you must have a compliance program in place that meets the Ten Hallmarks of an Effective Compliance Program as set out in the FCPA Guidance.

On a completely different note as a compliance practitioner, if you want to have a shot at some serious professional growth and you are in the Houston area, somewhere else in Texas or anywhere else in the South, I suggest you consider attending the FCPA Professor’s FCPA Institute, which will be held in Houston on Monday, May 4 and Tuesday, May 5. The Professor’s goal in leading this first Texas FCPA Institute is “to develop and enhance fundamental skills relevant to the FCPA and FCPA compliance in a stimulating and professional environment with a focus on learning. Information at the FCPA Institute is presented in an integrated and cohesive way by an expert instructor with FCPA practice and teaching experience.” Some of the topics, which will be covered, include the following:

• An informed understanding of why the FCPA became a law and what it seeks to accomplish;
• A comprehensive understanding of the FCPA’s anti-bribery and books and records and internal controls provisions and related enforcement theories;
• Various realties of the global marketplace which often give rise to FCPA scrutiny;
• The typical origins of FCPA enforcement actions including the prominence of corporate voluntary disclosures;
• The “three buckets” of FCPA financial exposure and how settlement amounts in an actual FCPA enforcement action are typically not the most expensive aspect of FCPA scrutiny and enforcement;
• Facts and figures relevant to corporate and individual FCPA enforcement actions including how corporate settlement amounts are calculated;
• How FCPA scrutiny and enforcement can result in related foreign law enforcement investigations as well as other negative business effects from market capitalization issues, to merger and acquisition activity, to FCPA related civil suits; and
• Practical and provocative reasons for the general increase in FCPA enforcement.

In other words, it is what you have come to expect from the FCPA Professor; well-thought out reasoned analysis, practical knowledge and learning, and provocative thinking and assessment. But this is also your chance to attend a two-day Institute with one of the most original thinkers in the FCPA space. The FCPA Institute will provide insights into the topics more near and dear to my heart as a ‘nuts and bolts guy’. In addition to the above substantive knowledge, FCPA Institute participants will gain in-demand, practical skills to best manage and minimize FCPA risk by:

• Practicing FCPA issue-spotting through video exercises;
• Conducting a FCPA risk assessment;
• Learning FCPA compliance best practices, including as to third parties;
• Learning how to effectively communicate FCPA compliance expectations; and
• Grading a FCPA code of conduct.

In addition, attorneys who complete the FCPA Institute may be eligible to receive those all-important Continuing Legal Education (CLE) credits. The sponsors, King & Spalding, will be seeking CLE credit in CA, GA, NY, TX and if needed in NC and VA. Actual CLE credit will be determined at the end of the program based on actual program time. Attorneys may be eligible to receive CLE credit through reciprocity or attorney self-submission in other states as well.

I hope that you can join the FCPA Professor for this FCPA Institute. I have previously said, “if the FCPA Professor writes about it you need to read it. While you may disagree with him, your FCPA perspective and experience will be enriched by the exercise.” I would now add to this statement that if the FCPA Professor puts on his FCPA Institute you should attend. Not only will you garner a better understanding of the theoretical underpinnings of the law and the plain words of its text; you will also be able to articulate many of the issues which befall companies caught up in a FCPA investigation to your senior management in a way that will help them understand the need for a robust compliance program.

To register for the FCPA Institute, or for more information, click here.

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

© Thomas R. Fox, 2015

Miss Marple Short Stories and SEC Enforcement of the FCPA, Part V – Final Thoughts

I conclude my week of exploration of Agatha Christie’s Miss Marple short stories and the Securities and Exchange Commission’s (SEC) enforcement of the Foreign Corrupt Practices Act (FCPA) by reviewing some of the new things I’ve learnt during this week of research. I learned that Christie made several social observations and revealed much about herself through these stories. She is very much constrained by the roles given to women in the early to mid-1920s, including the lack of a proper education. She also writes about some of the disdainful attitudes of people to an older woman. I found a number of inside jokes that Christie placed into the stories, even referring to the prevalence of detective fiction in print and on the stage at the time the stories were written. Finally is the fact that people make the mistake of not noticing her but that she is watching them and listening and that they will remain unaware of her presence for not too much longer.

In his recent blog post, entitled “Are You An FCPA Contender Or Pretender?”, the FCPA Professor suggested that if you want to practice in the area of FCPA compliance, you really should take the time to read some of the very few underlying sources and documents relating to the subject. After my week exploration of the SEC enforcement of the FCPA, I would note that you can learn quite a bit by heeding his advice.

Internal Controls

There was a trend, beginning in the fall of 2014 of SEC FCPA enforcement actions, where the Department of Justice (DOJ) either declined to prosecute the company or settled with the company via a Non-Prosecution Agreement (NPA). This led me to conclude that the SEC was ramping up its review and enforcement of the accounting provisions under the FCPA separate and apart from criminal side enforcement of the FCPA by the DOJ. Earlier this month, when Andrew Ceresney, the SEC Director, Division of Enforcement, spoke at CBI’s Pharmaceutical Compliance Congress in Washington DC he discussed the importance of internal controls in SEC enforcement. While his remarks were primarily directed “in the context of financial reporting” I believe they could be equally applicable in the FCPA compliance context.

Ceresney said, “What kinds of practice pointers for how to avoid these issues? Well, in cases we have brought, we see controls that were not carefully designed to match the business, or that were not updated as the business changed and grew. And we see that senior leadership was not asking the tough questions – and sometimes not even asking the easy questions. Senior management in some cases was just not engaged in any real discussion about the controls. As a result, employees did not properly focus on them and the firm and its shareholders are put at risk.” I think these statements, particularly taken in the context of his overall remarks, portend a greater focus on internal controls review and enforcement in the FCPA context.

Finally, in the area of internal controls, is the interplay of Sarbanes-Oxley (SOX) with FCPA enforcement and several sections of the Act that have FCPA implications. These include SOX §302 that requires the principle officers of a company to “take responsibility for and certify the integrity of these company’s financial reports on a quarterly basis.” Under SOX §404 companies must present annually their conclusion “regarding the effectiveness of the company’s internal controls over accounting.” Finally, SOX §802 prohibits “altering, destroying, mutilating, concealing or falsifying records, documents or tangible objects” with the intent to obstruct or influence a federal investigation, such as the FCPA.

Every public company is required to report on its internal controls. The SEC may well start mining those required, annual public disclosures for information on compliance internal controls. If the SEC finds a company’s report lacking and then after requesting further information, still finds a company’s response lacking, a company may be looking at strict liability and a financial penalty based on profit disgorgement as I lay out next.

Strict Liability

I have written about the coming of strict liability to the SEC enforcement of the FCPA’s accounting provisions, including books and records and internal controls. However, after having read, re-read and reviewed the FCPA and commentary, I now believe that a strict liability interpretation for enforcement of the FPCA is fully supported by the plain language of the Act itself. I come to this conclusion because there is no language in the text of the Act that ties the accounting provision requirements to any other operative violation of the statute. In other words, there is no language that says that an accounting provisions violation must be tied to an offer or payment of a bribe to obtain or retain business. While the FCPA does not specifically say that a company will be strictly liable for a violation of the accounting provisions, it is certainly not prohibited. Since violations of the accounting provisions as enforced by the SEC are civil violations only, I now believe that such a position is not prohibited by the Act.

Profit Disgorgement 

Similar to my views on strict liability for accounting violations, I have also come to believe that profit disgorgement is a remedy fully supported and available to the SEC in FCPA enforcement actions. This change was made by an un-related law, entitled The Penny Stock Reform Act of 1990, which amended the Securities Exchange Act of 1934 to: allow the SEC to (1) impose tiered civil money penalties pursuant to administrative findings of violations of the Act; (2) enter an order requiring an accounting and disgorgement; (3) issue cease and desist orders; and (4) issue temporary restraining orders. Profit disgorgement has generally been considered an equitable remedy. Sasah Kalb and Marc Alain Bohn, in their article “Disgorgement: The Devil You Don’t Know”, wrote “As an equitable remedy, disgorgement is not intended as tool to punish, but as a vehicle for preventing unjust enrichment. The SEC is therefore only permitted to recover the approximate amount earned from the alleged illicit activities. Disgorging anything more would be considered punitive.”

In conjunction with this equitable nature for profit disgorgement, is the concept of proportionality. In the article by David C. Weiss, entitled “The Foreign Corrupt Practices Act, SEC Disgorgement of Profits and the Evolving International Bribery Regime: Weighing Proportionality, Retribution and Deterrence”, he wrote that regarding proportionality “punishment schemes fail a utilitarian test when the punishment exceeds, or threatens to exceed, the offense. Put another way, deterrence requires that a punishment be proportionate to the harm—allowing for some multiplier based on the likelihood of being caught. Punishments that are not proportionate are not justified under this utilitarian theory.”

Profit Disgorgement as a Remedy for Strict Liability

In this final section, I give my opinion as to where I think the next step of SEC enforcement may be headed. I think it will be a combination of the enforcement of the accounting provisions of the FCPA through a strict liability reading of them by the SEC to the remedy of profit disgorgement. Admittedly this opinion seems contrary to the equitable nature of the remedy of profit disgorgement. However the greater focus of SEC scrutiny and enforcement of the accounting provisions point me in that direction. While it is also true that profit disgorgement has traditionally required some specific ill-gotten gains; with the statutory authority provided by the Penny Stock Act to the SEC allows for disgorgement with no language around its equitable beginning, this may be enough for the SEC to make such an intellectual leap. Further, as noted by Kalb and Bohn, “Because calculations like these often prove difficult, courts tend to give the SEC considerable discretion in determining what constitutes an ill-gotten gain by requiring only a reasonable approximation of the profits which are causally connected to the violation.”

The final component is the lack of judicial review in FCPA enforcement actions. Every practitioner is aware of the absolute dearth of cases in this area. With the SEC moving towards more administrative actions, through the 2010 Dodd-Frank amendment that enables the SEC to collect civil penalties through administrative proceedings, there may not be many federal district court reviews going forward. Of course to have a federal district court review of a remedy, it generally takes the defendant to make some objection and companies seemingly do not wish to take on the SEC in any FCPA enforcement matter (or the DOJ for that matter). But even if there was a federal district review of a Cease and Desist Order filed before it, you almost never hear the court reject an agreed Order on the grounds that the remedy was too harsh or unwarranted.

I hope you have enjoyed and learned something this week unique to the SEC enforcement of the FCPA. I know I have both enjoyed reading many of the excellent commentators I have reviewed during my research. David Weiss, Marc Alain Bohn, Sasha Kalb, Russ Ryan and the FCPA Professor have all contributed significant legal work and thought leadership in this area that I have built some of my theories on so I thank them for their contributions. Another joy was reading Agatha Christie’s Miss Marple short stories. If you have a few evenings or some down time for spring break or summer vacation, I suggest you pick up the volume. It is just like visiting with an old friend on a dark and stormy night…

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 Blue Geranium – SEC Enforcement of the FCPA – Part III

In Christie’s The Blue Geranium a difficult and cantankerous semi-invalid wife is looked after by a succession of nurses. They changed regularly, unable to cope with their patient, with one exception Nurse Copling who somehow managed the tantrums and complaints better than others of her calling. The wife had a predilection for fortunetellers and one announced that the wallpaper in the wife’s room was evil; pronouncing she should “Beware of the Full Moon. The Blue Primrose means warning; the Blue Hollyhock means danger; the Blue Geranium means death.” Four days later, one of the primroses in the pattern of the wallpaper in the wife’s room changed color to blue in the middle of the night, when there had been a full moon.

On the morning after the next full moon, the wife was found dead in her bed with only her smelling salts beside her. Once again Miss Marple has the solution remembering that potassium cyanide resembled smelling salts in odor. The wife took what she thought were smelling salts but was in reality potassium cyanide. The flowers on the wallpaper had been treated with litmus paper which the turned the geranium in question blue, which unmasked the killer.

I found this story to be an interesting way to introduce the topic of the Securities and Exchange Commission’s (SEC’s) damage remedies. While some are obvious, such as the fines and penalties which are listed in the text of the Foreign Corrupt Practices Act (FCPA), another one, that being profit disgorgement must be seen through the lens of multiple legislations.

Monetary Fines

The damages that are available to the SEC differ in some significant aspects from those available to the Department of Justice (DOJ) in its enforcement of the criminal side of the FCPA. According to the FCPA Guidance, “For violations of the anti-bribery provisions, cor­porations and other business entities are subject to a civil penalty of up to $16,000 per violation. Individuals, including officers, directors, stockholders, and agents of companies, are similarly subject to a civil penalty of up to $16,000 per violation, which may not be paid by their employer or principal. For violations of the accounting provisions, SEC may obtain a civil penalty not to exceed the greater of (a) the gross amount of the pecuniary gain to the defendant as a result of the violations or (b) a specified dollar limitation. The specified dollar limitations are based on the egregious­ness of the violation, ranging from $7,500 to $150,000 for an individual and $75,000 to $725,000 for a company.”

As straightforward as these monetary amounts may seem, the totals can become very large very quickly. As noted by Russ Ryan in a guest post on the FCPA Professor’s blog, entitled “Former SEC Enforcement Official Throws The Red Challenge Flag”, the SEC significantly multiplied those amounts in a default judgment context against former Siemens executives by claiming that “four alleged bribes should be triple-counted as three separate securities law violations – once as a bribe, again as a books-and-records violation, and yet again as an internal-controls violation – thus artificially multiplying four violations to create twelve.” Further, under the specific books-and-records and internal-controls allegations “the SEC was super aggressive, taking the position that these classically non-fraud violations involved “reckless disregard” of a regulatory requirement, thus allowing the SEC to demand the maximum $60,000 per violation in “second-tier” penalties rather than the $6,000 per violation in the “first-tier” penalties ordinarily associated with non-fraud violations.”

Profit Disgorgement

In addition to the above statutory fines and penalties, “SEC can obtain the equitable relief of disgorgement of ill-gotten gains and pre-judgment interest and can also obtain civil money penalties pursuant to Sections 21(d)(3) and 32(c) of the Exchange Act. SEC may also seek ancillary relief (such as an accounting from a defendant). Pursuant to Section 21(d)(5), SEC also may seek, and any federal court may grant, any other equitable relief that may be appropriate or necessary for the benefit of investors, such as enhanced remedial measures or the retention of an independent compliance consultant or monitor.” These remedies can be sought in a federal district court of through the SEC administrative process.

As explained by Marc Alain Bohn, in a blog post on the FCPA Blog entitled “What Exactly is Disgorgement?” profit “Disgorgement is an equitable remedy authorized by the Securities Exchange Act of 1934 that is used to deprive wrong-doers of their ill-gotten gains and deter violations of federal securities law. The Act gives the SEC the authority to enter an order “requiring accounting and disgorgement,” including reasonable interest, as part of administrative or cease and desist proceedings”. In another article Bohn co-authored with Sasha Kalb, entitled “Disgorgement – the Devil You Don’t Know” published in Corporate Compliance Insights (CCI), they set out how such damages are calculated. They said, “In calculating disgorgement, the SEC is required to distinguish between legally and illegally obtained profits. The first step in such calculations is to identify the causal link between the unlawful activity and the profit to be disgorged. Once this causal link is established, the SEC may assert its right to disgorge illicit profits that stem from this wrong-doing. Because calculations like these often prove difficult, courts tend to give the SEC considerable discretion in determining what constitutes an ill-gotten gain by requiring only a reasonable approximation of the profits which are causally connected to the violation.”

However if you read the FCPA quite closely you will not find any language regarding profit disgorgement as a remedy. Nevertheless a simple reading of the statute does not limit our inquiry as to this remedy. In a Note, published in the University of Michigan Journal of International Law, entitled “The Foreign Corrupt Practices Act, SEC Disgorgement of Profits and the Evolving International Bribery Regime: Weighing Proportionality, Retribution and Deterrence”, author David C. Weiss explained the development of the remedy of profit disgorgement. As noted by Bohn, profit disgorgement was always available to the SEC from the very beginning of its existence, through the enabling legislation of 1934. But as explained by Weiss, in the completely unrelated legislation entitled The Penny Stock Reform Act of 1990, profit disgorgement was “authorized by statute [as a remedy to the SEC] without a limitation to the FCPA.”

Finally, and what many compliance practitioners do not focus on for SEC enforcement of the FCPA, was the enactment of Sarbanes-Oxley Act of 2002 (SOX). Weiss said, “The most recent change to the way in which the SEC enforces the FCPA—and a critical development to consider—is SOX, which affects virtually all of the SEC’s prosecutions, including those under the FCPA. When assessing penalties, the SEC draws on SOX to provide great latitude in determining the types of penalties it enforces. While SOX did not amend the FCPA itself, it did amend both civil and criminal securities laws relating to compliance, internal controls, and penalties for violations of the Exchange Act. Since the enactment of SOX, the SEC has possessed the power to designate how a particular penalty that it assesses will be classified.” [citations omitted]

There has been criticism of the SEC using profit disgorgement as a remedy. As far back as 2010, the FCPA Professor criticized this development in his article “The Façade of FCPA Enforcement” where he found fault with the remedy of profit disgorgement for books and records violations or internal controls violations only, where there is no corresponding “enforcement action charging violations of the anti-bribery provisions.” He wrote “It is difficult to see how a disgorgement remedy premised solely on an FCPA books and records and internal controls case is not punitive. It is further difficult to see how the mis-recording of a payment (a payment that the SEC does not allege violated the FCPA’s anti-bribery provisions) can properly give rise to a disgorgement remedy.”

Bohn and Kalb said, “Over the last six years, disgorgement has served to significantly increase the financial loss that companies are exposed to in FCPA enforcement matters. In addition to the considerable civil penalties often imposed by the SEC as part of FCPA settlements, the SEC has made clear that it will not hesitate to seek recovery of large sums through disgorgement provided they are reasonably related to the alleged misconduct. Yet the methodology used by the SEC to support the amounts it seeks to disgorge has not been much discussed.  In the absence of adequate guidance as to how these sums are calculated, disgorgement poses an even greater risk in the current aggressive FCPA enforcement climate.” I would only add to their conclusion that profit disgorgement is here to stay.

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

Responsibility, Accountability and the FCPA Institute in Houston

What is accountability in your compliance program? How does it relate to responsibility for a company to prevent, detect and remediate any issues that might arise under a Foreign Corrupt Practices (FCPA) compliance program? What if a company is so big that it cannot provide meaningful oversight of its FCPA compliance program? Robert Jenkins explored these issues, in the context of the ongoing HSBC scandal in the UK, in a recent Financial Times (FT) article entitled “How the HSBC chairman can restore accountability at his bank”. Jenkins chastised the current bank Chairman, Douglas Flint, who claimed that he was not “responsible and therefore accountable” for the bank’s ongoing woes because of the bank’s unwieldy corporate structure.

In a public statement Flint said, “We deeply regret and apologise for the conduct and compliance failures highlighted which were in contravention to our own policies as well as our expectations of us.” Jenkins commended the sentiment but correctly pointed out “management and chairmanship involves more than setting out policies. It involves ensuring that they are carried out and that the culture is conductive to doing so.” Simply put, “the notion of being responsible but not accountable does not wash.”

If I have one colleague who is both responsible and accountable it is the FCPA Professor. As clearly denominated by his moniker, the FCPA Professor, he teaches law with a specialization in the arena of the FCPA. While he teaches classes at a law school, through his blog postings and other writings he also puts on classes around the FCPA for the rest of us through his FCPA Institute, which I am pleased to report is coming to Houston this May. The event will be held over two days, May 4 and 5, and is hosted by the law firm of King and Spalding LLP.

The Professor’s stated goal in leading this first Institute is “to develop and enhance fundamental skills relevant to the FCPA and FCPA compliance in a stimulating and professional environment with a focus on learning. Information at the FCPA Institute is presented in an integrated and cohesive way by an expert instructor with FCPA practice and teaching experience.” Some of the topics, which will be covered, include the following:

• An informed understanding of why the FCPA became a law and what it seeks to accomplish;
• A comprehensive understanding of the FCPA’s anti-bribery and books and records and internal controls provisions and related enforcement theories;
• Various realties of the global marketplace which often give rise to FCPA scrutiny;
• The typical origins of FCPA enforcement actions including the prominence of corporate voluntary disclosures;
• The “three buckets” of FCPA financial exposure and how settlement amounts in an actual FCPA enforcement action are typically not the most expensive aspect of FCPA scrutiny and enforcement;
• Facts and figures relevant to corporate and individual FCPA enforcement actions including how corporate settlement amounts are calculated;
• How FCPA scrutiny and enforcement can result in related foreign law enforcement investigations as well as other negative business effects from market capitalization issues, to merger and acquisition activity, to FCPA related civil suits; and
• Practical and provocative reasons for the general increase in FCPA enforcement.

In other words, it is what you have come to expect from the FCPA Professor; well-thought out reasoned analysis, practical knowledge and learning, and provocative thinking and assessment. But this is also your chance to attend a two-day Institute with one of the most original thinkers in the FCPA space. The FCPA Institute will provide insights into the topics more near and dear to my heart as a ‘nuts and bolts guy’. In addition to the above substantive knowledge, FCPA Institute participants will gain in-demand, practical skills to best manage and minimize FCPA risk by:

• Practicing FCPA issue-spotting through video exercises;
• Conducting an FCPA risk assessment;
• Learning FCPA compliance best practices, including as to third parties;
• Learning how to effectively communicate FCPA compliance expectations; and
• Grading an FCPA code of conduct.

To facilitate learning some of these practical skills, the FCPA Professor has offered me a guest slot to provide a hypothetical for discussion on Day 2 of the Institute.

At the end of the FCPA Institute, participants can elect to have their knowledge assessed and can earn a certificate of completion upon passing a written assessment tool. In this way, successful completion of the FCPA Institute represents a value-added credential for professional development.

In addition, attorneys who complete the FCPA Institute may be eligible to receive those all-important Continuing Legal Education (“CLE”) credits. The sponsors, King & Spalding, will be seeking CLE credit in CA, GA, NY, TX and if needed in NC and VA. Actual CLE credit will be determined at the end of the program based on actual program time. Attorneys may be eligible to receive CLE credit through reciprocity or attorney self-submission in other states as well.

I hope that you can join the FCPA Professor for this FCPA Institute. I have previously said, “if the FCPA Professor writes about it you need to read it. While you may disagree with him, your FCPA perspective and experience will be enriched by the exercise.” I would now add to this statement that if the FCPA Professor puts on his FCPA Institute you should attend. Not only will you garner a better understanding of the theoretical underpinnings of the law and the plain words of its text; you will also be able to articulate many of the issues which befall companies caught up in a FCPA investigation to your senior management in a way that will help them understand the need for a robust compliance program.

After attending the sessions I am also certain that you will be to explain to a Board, Chief Executive Officer (CEO) or senior management member the need for both accountability and responsibility in your FCPA compliance program. The FCPA Professor holds himself accountable for the opinions he takes and the positions he stakes out. By attending his FCPA Institute, I am certain you will be able to take those concepts to your senior management and prevent bunkum from coming out of your company if it has to remedy any FPCA compliance issues going forward.

To register for the FCPA Institute, or for more information, click here.

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

© Thomas R. Fox, 2015

The Alstom FCPA Enforcement Action – Part I

As the first blog post of 2015, I thought it appropriate to highlight two outstanding confluences. The first is that this year is the centenary of the birth of Orson Welles. While not occurring in 2015, near the end of 2014 we had the settlement of the long-standing Alstom Foreign Corrupt Practices Act (FCPA) enforcement action announced. Both are worthy on note this second day of our mid-decade mark. First Welles. Many consider him one of the most talented directors ever to come through the American film industry. Almost any cinema-goer will recognize the names of Citizen Kane and The Magnificent Ambersons as two of greatest films of all-time. But I found The Lady from Shanghai, Macbeth and most particularly Touch of Evil all to be excellent films for their respective genres. And do not forget his acting; not only in the aforementioned Citizen Kane and Touch of Evil but also as Harry Lime in The Third Man. Welles could also be a philosopher. Kristin M. Jones, writing in the Wall Street Journal (WSJ), in an article entitled “Welles at 100”, quoted him for the following, “Art is the lie that makes us realize the truth.” She ended her piece with the observations that “Searching for the truth beyond Welles’s beautiful lies is still a journey worth taking.”

All of which brings us to Alstom and the resolution of its FCPA enforcement action. Over the next couple of posts, I will be looking the enforcement action for it is certainly ‘a journey worth taking’ to try and glean nuggets for the compliance practitioner. Today I will review the amounts of money involved and some of the larger concepts that I see at play in this matter. Next I will review the specifics of the Deferred Prosecution Agreements (DPAs) and see what lessons we may draw from them. Beyond that, we will have to see where the journey takes us.

First, and foremost, is how did Alstom find itself in the position that it now occupies as Number 2 on the all-time hit parade of FCPA enforcement actions? Particularly, as noted by the FCPA Professor in his post, entitled “All About the Alstom Enforcement Action”, that “Alstom employed approximately 110,000 employees in over 70 countries. The information contains specific allegations as to 9 individuals associated with Alstom and 9 consultants associated with Alstom.”

Usually when someone comes in at Number 2, the ranking comes with some ignominy. Though for Alstom it is not because they did not win but because they now have the second highest total FCPA monetary fine in the history of the world at a stunning $772,290,000. I say total because the current Number 1, Siemens, is at $800MM and included both a Department of Justice (DOJ) component of $450MM and Securities and Exchange Commission (SEC) component of $350MM. However with the Alstom fine, the entire amount was paid to DOJ as a fine and no monies were paid to the SEC because at the time of the resolution, Alstom was not an ‘issuer’ under the FCPA and the SEC had no jurisdiction. This makes Alstom the largest criminal FCPA fine of all-time. One interesting note is that two other French companies, Total SA and Technip SA, join Alstom on the all-time Top 10 list. Somewhere I am sure Mr. French is shaking his very well coiffured head in shame in the great TV Land in the sky.

I would say the amounts paid out and benefits received by Alstom were stunning but it might do a disservice to the word stunning. So below I have laid out information below.

Alstom Bribery Box Score

Country	Bribe Amount Paid	Benefit Received
Indonesia	(not listed)	$378MM
Saudi Arabia	$51.2MM	$3bn
Egypt	‘Millions and millions’	$175MM
Bahamas	$1MM	(not listed)
Taiwan	(not listed)	$15MM
Total	$75MM	$4bn in contracts with $296MM in profits

The FCPA Professor also noted, “at its core, the Alstom enforcement action involved inadequate controls concerning the engagement, monitoring and supervision of the consultants.” However it is most difficult to believe that Alstom suffered from a corporate culture which was at best make your numbers or at worst something much more nefarious. The amounts paid were simply so large and the bribery schemes so pervasive that there had to be much more than simply 9 persons lying, cheating and stealing all while merrily skipping home to Grandmother’s house in the woods. Indeed, as noted by WSJ reporters Joel Schechtman and Brent Kendall, in their article entitled “Alstom to Pay $772 Million to Settle Bribery Charges”, “The record criminal bribery penalty comes after more than six years of investigations into Alstom from law enforcement in 10 countries. The company and its subsidiaries’ schemes lasted for more than a decade, into at least 2011”.

Also of note is that the Alstom enforcement action was the first in 2014 where the fine was not at either the low range or even lower than calculations the Sentencing Guidelines would have suggested. The range for the fine was calculated to be between $592MM and $1.184bn. This range was a direct result of the failure of Alstom to take the investigation seriously, to cooperate with the DOJ or to even put anything like a positive step forward in the way of remedial actions during a large part of the investigative process. The DOJ Press Release quoted Assistant Attorney General Leslie R. Caldwell that “This case is emblematic of how the Department of Justice will investigate and prosecute FCPA cases – and other corporate crimes. We encourage companies to maintain robust compliance programs, to voluntarily disclose and eradicate misconduct when it is detected, and to cooperate in the government’s investigation. But we will not wait for companies to act responsibly. With cooperation or without it, the department will identify criminal activity at corporations and investigate the conduct ourselves, using all of our resources, employing every law enforcement tool, and considering all possible actions, including charges against both corporations and individuals.”

Finally, from a big picture perspective was the international scope of the investigation. In the DOJ Press Release, FBI Executive Assistant Director Robert Anderson Jr. said that “This investigation spanned years and crossed continents, as agents from the FBI Washington and New Haven field offices conducted interviews and collected evidence in every corner of the globe.” Further, the DOJ acknowledged significant cooperation from “the law enforcement colleagues in Indonesia at the Komisi Pemberantasan Korupsi (Corruption Eradication Commission), the Office of the Attorney General in Switzerland, the Serious Fraud Office in the United Kingdom, as well as authorities in Germany, Italy, Singapore, Saudi Arabia, Cyprus and Taiwan.” Truly worldwide in scope.

Next, I will look at some of the specifics in the various Alstom DPAs to determine where best practices compliance program may be headed.

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 Avon FCPA Settlement – Part III

Today I conclude my 2014 blog posts with a final look at the Avon Foreign Corrupt Practices Act (FCPA) enforcement action. Before getting to the key lessons that a compliance practitioner may draw from this enforcement action, allow me to thank you for letting me be a part of your FCPA and greater compliance and ethics experience. This has been a memorable year in social media for me, both in blogging, publishing and podcasting. (If you have not listened to one of my podcasts please head over to the FCPA Compliance and Ethics Report on the web or on iTunes and check it out.) I have learned quite a bit this year, in writing, podcasting and listening. I hope that you will continue to follow me in 2015 through my blogs, podcasts and via some of the other sites and magazines that I write for. I plan to publish more books, in both print and electronic format, and pen more long form articles that will provide a deeper dive into various topics that I think will be of interest to the FCPA compliance and ethics practitioners out there. But I am getting a bit ahead of myself so back to today’s topic and where we are on the Avon FCPA enforcement action, and the big question of what does it all mean for the compliance practitioner and companies worldwide?

And The Money Kept Rolling Out

Unlike Eva Peron and the Foundacion Eva Peron, Avon had the opposite problem; the money never seemed to stop rolling out for Avon. As the FCPA Professor said in his blog post, entitled “Issues to Consider from the Avon Enforcement Action”, “Avon’s FCPA scrutiny was also very expensive. For years, the whisper in the FCPA community was how expensive – and dragged out – FCPA’s internal investigation and pre-enforcement professional fees and expenses were. Not all companies disclose pre-enforcement action professional fees and expenses, but Avon did and those figures were approximately $500 million”. Even the Department of Justice (DOJ) questioned why the company’s investigative costs were so high.

In an article in Bloomberg News, entitled “Avon Bribe-Probe Clean-Up Neared $500 Million as Sales Cratered”, Tom Schoenberg and David Voreacos reported, “In a 2010 meeting, government officials took the unusual step of questioning why Avon’s legal costs were so high at that point, according to two people familiar with the meeting who weren’t authorized to discuss it publicly. Avon said its legal bills had ballooned in part because the company operated in more than 100 countries without consolidated transaction records, according to one of the people.” The article quoted Matthew Axelrod, former senior Justice Department official, who said, “Though unusual, DOJ may call in company counsel to discuss when an outside law firm is going too far afield from what is necessary.” He added the “DOJ doesn’t want a company to have to spend unnecessary millions of dollars on an internal investigation any more than the company itself does”.

If there is one over-riding lesson for all companies to take away from this enforcement action it is that the cost can quickly spiral far out of control and beyond anything you might budget for. While the events at issue took place in 2003-08, the clear import is that it is much cheaper to spend the money to have a compliance program in place now rather than roll the dice and wait. This may mean you need to look at your internal financial accounting systems to determine if they can be monitored adequately and efficiently, yet in a cost-effective manner. While I have not reviewed the internal controls component of this FCPA enforcement action, it is also clear that internal controls need to be in place to detect, in a timely manner, when something goes askance. Of course, if it is in your corporate culture to lie, cheat and steal, it really does not matter what the standard of your internal controls is because the powers that be will find a way around them.

Will No One Rid Me of This Meddlesome Priest?

Henry II and his famous dictum surely seemed to exist at Avon corporate headquarters. If management wants sales accomplished in any way possible then that is the message that is communicated down the line to the troops in the field. Avon had a Code of Conduct that prohibited bribery and corruption, yet the company’s own internal investigation revealed that most company employees were not even aware such a document existed. There was no such thing as FCPA training at the time of the events in question. But more than simply the message of ‘Make Your Numbers; Make Your Numbers; (and then) Make Your Numbers’, Avon had a culture that actively hid criminal acts. For when credible information came to light that Avon China was violating the FCPA, the company went into full cover-up mode, even ordering the destruction of soft and hard copies of the Draft Audit Report. The cover-up was accomplished at the highest levels of the company, with the settlement documents noting the involvement of Avon Executive 1, Avon Executive 2 (believed to be the head of Avon’s Internal Audit function when he left the company), Avon Executive 3, another senior executive in Avon’s Internal Audit function, and two lawyers, Avon Attorney 1, who was identified as “a senior executive in the Office of the General Counsel at AVON” and Avon Attorney 2 who was identified as “an executive in the Office of the General Counsel at AVON”.

High Reward = High Risk

In their Bloomberg News article, Schoenberg and Voreacos reported that Avon was “among the first companies to obtain a license to sell products directly to consumers – the cornerstone of its business model – after Chinese authorities ended a ban on direct sales in 2006.” Further, “By July 2006, Avon had hired more than 114,000 door-to-door salespeople in China. [Then Avon CEO Andrea] Jung said at the time the company viewed the country as a potential $1 billion market. Sales in China surged 28 percent to $67.2 million in the company’s fourth quarter that year.” This means that in less than one year after receiving its license to do business in China, Avon China had one quarter of sales in excess of $60MM. That is quite a lot of Ding Dong, Avon Calling plus following up that doorbell ringing with some serious sales.

Here the lesson is that if there is a new business opportunity that results in an explosion of sales it is probably because of some high risk involved. That may be financial risk, it may be political instability risk, it may be weather-related risk, it may be currency fluctuations risk or it may be some other type of risk. When a business is regulated down from the national to the provincial to the municipality level, it probably means multiples of government interactions for permits and licenses to do business. The compliance function must be integrated into the business operations of a company well enough to be put on notice when such an opportunity presents itself, perform some type of risk assessment and then plan out and implement a strategy to manage those risks going forward. If the first time the compliance function hears about something askance from a FCPA perspective is when it is brought up by internal audit, it is already too late.

The Compliance Committee and Geronimo’s Cadillac

Just as Michael Murphy’s song Geronimo’s Cadillac was intended to show every irony he could ever think of about American culture in two words, the Avon Compliance Committee was about as ironic; although and admitted it is three words. For a corporate Compliance Committee is not simply a vehicle to bring and show off when someone might be around to take pictures. A corporate Compliance Committee has to function and be involved, actively, in an appropriate level of oversight. If a Compliance Committee is informed of credible allegations of a FCPA violation, it simply cannot accept information that it is ‘unsubstantiated’ at a later date. A Compliance Committee must be actively involved in the investigation, it must review the investigation protocol, review information and findings as they become known, direct outside counsel in the investigation and, finally, take charge to remediate the issues involved. It has to have real authority, real power and be taken seriously, not simply have a meaningless title of “Compliance Committee”.

As 2014 draws to a close, I for one am glad that the long Avon FCPA saga has at least come to this stage. For bribe payments totaling over $8MM, Avon has or will pay upwards of $750MM to get through the FCPA Professor’s “three buckets” of FCPA enforcement action costs. This staggering cost should be a clear lesson that now is the time to implement or enhance a compliance program. The number of persons effected by the fallout from this case start with the former head of the company, Andrea Jung, several high ranking executives, the company’s balance sheet and perhaps even some of the lawyers involved in the investigation of this matter. One of the first things that Jung’s replacement did was bring in new counsel to advise the company. After all, someone had to come up with the low-ball opening bid to the DOJ and Securities and Exchange Commission (SEC) of $11MM and then advise Avon to negotiate in public with them using that figure.

On that note, I wish everyone a safe New Year’s Eve and prosperous New Year.

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

© Thomas R. Fox, 2014

The Avon FCPA Settlement, Part I

It is finally done. The long awaited Avon Foreign Corrupt Practices Act (FCPA) enforcement action is on the books. I would say what a long, strange trip it has been but that does not really seem to capture everything that went on in this case. Before we only knew such things as a whistleblower contacting the Chief Executive Officer (CEO) of the company with allegations of bribery in the company’s China business unit, to the Head of Internal Audit being caught up directly in the scandal, put on administrative leave and then terminated; to a professional fee burn rate on the case which would rival the Gross National Product (GNP) of many countries; to Grand Jury subpoenas being issued (or threatened to be issued) to corporate executives to secure their testimony in criminal proceedings; to publicly negotiating with the Department of Justice (DOJ) and Securities and Exchange Commission (SEC); we all thought this FCPA matter had it all. But it turns out just how little we knew about the company’s conduct and just how bad it was which led to this settlement because to say it was bad would demean and belittle the word bad. So over the next few blog posts, I will be exploring Avon, its conduct and the FCPA enforcement action.

For the Record

The amount of the total fines and penalties was $135 million. As noted by the FCPA Professor, “the settlement is the third-largest ever against a U.S. company.” The enforcement action included several resolution vehicles, including a Criminal Information against Avon China resolved via a Plea Agreement; a Criminal Information against Avon Products resolved via a Deferred Prosecution Agreement (DPA) with an aggregate fine amount of $67.6MM. There was a separate SEC resolution through a Civil Complaint against Avon Products, which it agreed to resolve without admitting or denying the allegations through payment. The amount of the SEC settlement was $67.4MM. While the company’s internal investigation began in China, it quickly expanded so that it went far beyond China, including Japan, Argentina, Brazil, India and Mexico.

How Did We Get Here?

It all began back in May 2008, when an employee from Avon’s China business unit sent a letter to the head of the company alleging the China entity had engaged in bribery and corruption. In October 2008, Avon reported, in a Statement of Voluntary Disclosure, that it was investigating an internally reported allegation by an undisclosed whistleblower that corrupt payments had been made in its China operations. These allegations claimed that certain travel, entertainment and other expenses might have been improperly incurred. Although the details of the Avon case have not been disclosed, direct selling was not allowed in China under a law passed in 1998. The National Review reported that Avon was able to secure permission in late 2005 to begin direct selling on a limited basis. Later the Chinese government issued direct-selling regulations and granted Avon a broader license in February 2006 to make such sales.

In its 2009 Annual Report, Avon noted that the internal investigation and compliance reviews, which started in China, had now expanded to its operations in at least 12 other countries and was focusing on reviewing “certain expenses and books and records processes, including, but not limited to, travel, entertainment, gifts, and payments to third-party agents and others, in connection with our business dealings, directly or indirectly, with foreign governments and their employees”. The FCPA Professor, citing the Wall Street Journal (WSJ), reported that Avon suspended four employees, including the President, Chief Financial Officer (CFO) and top government affairs executive of Avon’s China unit as well as a senior executive in New York who was Avon’s head of Internal Audit.

One of the significant pieces of information to come out of the Avon matter is the related costs. As reported in the 2009 Annual Report the following costs were incurred and were anticipated to be incurred in 2010:

Investigate Cost, Revenue or Earnings Loss
Investigative Cost (2009)	$35 Million
Investigative Cost (anticipated-2010)	$95 Million
Drop in Q1 Earnings	$74.8 Million
Loss in Revenue from China Operations	$10 Million
Total	$214.8 Million

Marketwatch also reported that after these investigations were made public Avon’s stock prices fell by 8%. Lastly, in addition to the above direct and anticipated costs and drop in stock value, the ratings agency Fitch speculated about the possibility of a drop in Avon’s credit ratings. But as bad as these numbers appear they only got worse for Avon as by 2012 its spend on professional fees was estimated to be over $247MM. As of this date, the total professional fees are closer to $300MM.

Grand Jury Investigation and Terminations

The WSJ reported in February 2012 that the DOJ had gone to a grand jury with evidence of FCPA violations against US executives at Avon. Joe Palazzolo and Emily Glazer reported that several company employees were terminated for their role in the scandal. They wrote, “The company said it fired Vice Chairman Charles Cramb on Jan. 29 [2012] in connection with the overseas corruption probe and another investigation into allegedly improper disclosure of financial information to analysts. Mr. Cramb couldn’t be reached for comment. In May [2011], Avon said it fired Ian Rossetter, its former head of global internal audit and security and previously Avon’s head of finance in Asia. Mr. Rossetter didn’t respond to requests for comment and his attorney declined to comment. Bennett Gallina, a senior vice president responsible for the company’s operations outside the U.S. and Latin America, left Avon in February 2011, two days after being put on leave in connection with the internal corruption investigation, the company said at the time.”

Negotiating in Public

I do not know who was advising Avon but the decision to try and force the government’s hand by making public its negotiating position was one of the most bone-headed moves I have seen a similarly situated company make. Avon initially announced that it had opened negotiations with the US government over the terms of a resolution in August 2012. In mid 2013, the FCPA Blog reported that Avon low-balled the SEC with an opening offer of $12MM. Later, in 2013, the company reported in an SEC filing that the “Securities and Exchange Commission offered an FCPA settlement last month with monetary penalties that were ‘significantly greater’ than the $12 million the company had offered.” But not to take such government tactics sitting down, Avon publicly announced in the filing that “Monetary penalties at the level proposed by the SEC staff are not warranted.” That certainly was great information to put out to the public enforcing that you are taking a hardball approach with the SEC and telling them their fines and penalties are not deserved for a company that has gone through all Avon has during this FCPA journey.

As I said, this matter was a long strange journey but as strange as things were that we knew about before last week, they became much stranger. Tomorrow we take a look at the facts that came out through the settlement documents to see the nefariousness of Avon’s conduct.

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

© Thomas R. Fox, 2014

 

Winter Begins in Valley Forge and the FCPA Professor Teaches in Miami

Today we celebrate one of the seminal turnarounds in US history for on this day in 1777, George Washington lead his beleaguered troops into winter quarters at Valley Forge, Pennsylvania. At that point in time, things could hardly have looked bleaker for Washington and the Continental Army as 1777 came to a close. The British had successfully occupied Philadelphia, leading some members of Congress to question Washington’s leadership abilities. No one knew better than Washington that the army was on the brink of collapse. Though he had hoped to provide his weary men with more nutritious food and badly needed winter clothing, Congress had been unable to provide money for fresh supplies.

The winter at Valley Forge might have signaled the end of the American Revolution. Fortunately for the Continentals though, Washington did not give up. During this time Washington made several key additions to his officer corps, such as the Prussian General Friedrich von Steuben, who was tasked with implementing a new training regime, and appointed Nathanael Greene as Quartermaster General, relieving Washington of the duty of supply procurement. Washington, supported by a loyal officer corps, was now free to focus on strategies to beat the British. He was further buoyed by France’s agreement to join the revolutionaries in February 1778.

Once Washington’s detractors in Congress realized they could not sway his troops’ loyalty, they gave up on any secret plans to replace him. In March 1778, Washington led his troops, their bodies and supplies replenished and their confidence restored, out of Valley Forge to face the British again.

While you are considering the cold and starving Continental Army troops, you might think to warmer climes to consider attending one of the premier Foreign Corrupt Practices Act (FCPA) educational events of 2015 as the FPCA Professor will put on his well-renowned FCPA Institute over two days, January 12 and 13. The event will be held in Miami and is hosted by the law firm of Carlton Fields Jorden Burt. While myself and others bemoan to him that he needs to get out on the speaking circuit so that we can hear more of his critique and analysis of FCPA enforcement and to learn from him, I was interested to see he is correcting this by leading his first Southern based FCPA Institute next month.

As clearly denominated by his moniker, the FCPA Professor, he teaches law with a specialization in the arena of the FCPA. The Professor’s stated goal in leading this Institute is “to develop and enhance fundamental skills relevant to the FCPA and FCPA compliance in a stimulating and professional environment with a focus on learning. Information at the FCPA Institute is presented in an integrated and cohesive way by an expert instructor with FCPA practice and teaching experience.”

Some of the topics to be covered, include the following:

• An informed understanding of why the FCPA became a law and what it seeks to accomplish;
• A comprehensive understanding of the FCPA’s anti-bribery and books and records and internal controls provisions and related enforcement theories;
• Various realties of the global marketplace which often give rise to FCPA scrutiny;
• The typical origins of FCPA enforcement actions including the prominence of corporate voluntary disclosures;
• The “three buckets” of FCPA financial exposure and how settlement amounts in an actual FCPA enforcement action are typically not the most expensive aspect of FCPA scrutiny and enforcement;
• Facts and figures relevant to corporate and individual FCPA enforcement actions including how corporate settlement amounts are calculated;
• How FCPA scrutiny and enforcement can result in related foreign law enforcement investigations as well as other negative business effects from market capitalization issues, to merger and acquisition activity, to FCPA related civil suits; and
• Practical and provocative reasons for the general increase in FCPA enforcement.

The Professor has said, “The FCPA Institute is different than a typical FCPA conference.  At the FCPA Institute, information is presented in an integrated and cohesive manner by an expert instructor with FCPA practice and teaching experience. Moreover, the FCPA Institute promotes active learning by participants through issue-spotting video exercises, skills exercises, small-group discussions and the sharing of real-world practices and experiences. To best facilitate the unique learning experience that the FCPA Institute represents, attendance at each FCPA Institute is capped at 30 participants. In short, the FCPA Institute elevates the FCPA learning experience for a diverse group of professionals and is offered as a refreshing and cost-effective alternative to a typical FCPA conference. The goal of the FCPA Institute is simple: to develop and enhance fundamental skills relevant to the FCPA, FCPA enforcement, and FCPA compliance best practices in a stimulating and professional environment with a focus on learning.”

In other words, it is what you have come to expect from the FCPA Professor; well-thought out reasoned analysis, practical knowledge and learning, and provocative thinking and assessment.

For information on the event, click here.

 

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

© Thomas R. Fox, 2014