FCPA Compliance and Ethics Blog

June 16, 2014

Watergate is Not Just a Hotel – Corporate Suitors for Alstom

Watergate ComplexToday is the anniversary of an event that can truly be said to have changed the world; although certainly not in the manner intended by its planners, sponsors or participants. Today is the anniversary of the 1972 Watergate Break-In. How much of the world has changed because of this event? We certainly would not have had Jimmy Carter as the US President and most probably would not have had the Foreign Corrupt Practices Act (FCPA) passed into law during his administration. Would Ronald Reagan have become President four years earlier in 1976 rather than 1980? Who knows, but, if yes, would the Soviet Union have collapsed sooner under the weight of his military buildup? What about the fall of the Shah and the taking of the US hostages, think Reagan would have had a more ‘robust’ response than Carter? All tantalizing questions for those interested in the great What Ifs of history.

Over the weekend, I read that the long shuttered Watergate complex is scheduled to be torn down to make way for a more modern office edifice in its most desirable of Washington DC locations. This reminded me of one of my favorite Watergate era slogans “And Watergate was not just a hotel!” Indeed it was not just a building, rather an entire mindset of a presidency that went seriously off the rails.

Interestingly I found a parallel to this slogan when reading about the overtures by General Electric (GE), then Siemens and also Mitsubishi Heavy Industries to purchase some or all of the French company Alstom. These offers are in spite of Alstom’s very public current anti-corruption issues, in several countries. Mike Volkov, in a blog post entitled “Alstom: The Next Poster Child for Anti-Corruption Enforcement”, said “In our FCPA world, we have a new poster child for blundering – Alstom. The handwriting is on the wall – as time goes on, the Justice Department is building a bigger and bigger FCPA case against Alstom. One of my favorite Dylan lyrics applies with full force – “You don’t need a weatherman to know which way the wind blows.” Further, “Clearly we have a case where the client company just does not understand what is going on, nor does senior leadership have the ability or desire to respond and fix the problems. Instead, Alstom’s failure to act and respond reflects the lack of any ethical culture. That in a nutshell is probably 90 percent of the reason that a culture of bribery took over the company.” Pretty strong stuff.

Four senior executives have been charged for FCPA violations around one project. The FCPA Professor reported, “The conduct at issue concerned the Tarahan coal-fired steam power plant project in Indonesia.” All were charged around the same set of facts. They are alleged to have paid bribes to officials in Indonesia, including a member of Indonesian Parliament and high-ranking members of Perusahaan Listrik Negara (PLN), the state-owned and state-controlled electricity company, in exchange for those officials’ assistance in securing a contract for the company to provide power-related services for the citizens of Indonesia, known as the Tarahan project.” Two of the four Alstom executives have pled guilty to FCPA violations.

Over the weekend, the Financial Times (FT) reported, in an article by Caroline Binham, entitled “UK prosecutors press on with Alstom probe”, that the Serious Fraud Office (SFO) has been given permission by the UK attorney-general to prosecute both the company and former employees for allegations of overseas bribery. The SFO “has also notified seven individuals but is considering whether to prosecute them after they were interviewed with the assistance of French authorities, people familiar with the investigation told the Financial Times…Among those who received letters from the SFO are the company’s former senior vice-president of ethics and compliance, Jean-Daniel Lainé, and three Britons who formerly held senior management positions: Graham Hall, Robert Hallett and Nicholas Reynolds.” All of the individuals identified in the FT article do not appear to have been a part of the Indonesia power project, which appears to form the basis of the FCPA charges here in the US.

So why such high level suitors for a company of which Volkov has opined, “It is an important reminder of how bad a company’s culture can become and the consequences of embracing a culture of lawlessness versus a culture of ethics and integrity.” What about all that ‘Springing Liability’ for which both Siemens and GE might be liable for if they are successful in purchasing some or all of Alstom that the US Chamber of Commerce and others rail about? I think that the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) answered these questions in the FCPA Guidance when they stated, “companies that conduct effective FCPA due diligence on their acquisition targets are able to evaluate more accurately each target’s value and negotiate for the costs of the bribery to be borne by the target. In addition, such actions demonstrate to DOJ and SEC a company’s commitment to compliance and are taken into account when evaluating any potential enforcement action.” But pre-acquisition work is only one part of the equation, as the FCPA Guidance goes on to state, “FCPA due diligence, however, is normally only a portion of the compliance process for mergers and acquisitions. DOJ and SEC evaluate whether the acquiring company promptly incorporated the acquired company into all of its internal controls, including its compliance program.Companies should consider training new employees, reevaluating third parties under company standards, and, where appropriate, conducting audits on new business units.”

One thing that GE and Siemens have in common are world-class compliance programs. Siemens was the subject of the highest FCPA fine ever at $800MM back in 2008. Since that time, it has successfully concluded a robust monitorship under the terms of its Deferred Prosecution Agreement (DPA). Siemens compliance representatives regularly speak at compliance related events and discuss not only the company’s commitment to anti-corruption compliance but they also detail how compliance is done at Siemens. GE is well known for having its compliance folks regularly speak at conferences about the details of its compliance regime. In other words, both companies’ have very public robust compliance regimes in place and most probably follow, at a minimum, the parameters set out in the FCPA Guidance.

Just as “And Watergate is not just a hotel!”; Springing Liability is not a warranted fear under the FCPA. The FCPA Guidance makes clear the steps a company should engage in under the FCPA to avoid liability in a mergers and acquisition (M&A) context. The steps are not only relatively straightforward; they are good business steps to take. If you do not know what you are looking to acquire, it is certainly hard to evaluate it properly and then to integrate it efficiently.

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

May 15, 2014

Nolan Ryan’s First No-Hitter and Checking In On the FCPA Professor

LearnAs the Houston Astros continue their journey into complete non-relevance, both to myself and the greater southeast Texas TV watching audience, today we celebrate one of the Astros greatest players, Nolan Ryan. On this day, 41 years ago, Ryan pitched the first of his seven No-Hitters. Ryan played with the Astros from 1980-1988. Of course the idiocy of current Astros management did not begin with the current owner, as the team basically cut Ryan in 1988, saying that he was “washed up” at the tender age of 41. He simply went on to play for the Texas Rangers for another six years, where he only went on to pitch No-Hitters six and seven and record another 1000 strikeouts.

While I cannot determine at this point if the FCPA Professor will have a similarly sterling 26 year career that Ryan accomplished, he recently has done a couple of things that I certainly believe continue to demonstrate his All-Star work in the fields of law and compliance. As clearly denominated by his moniker, the FCPA Professor, he teaches law with a specialization in the arena of the Foreign Corrupt Practices Act (FCPA). While myself and others bemoan to him that he needs to get out on the speaking circuit so that we can hear more of this critique and analysis of FCPA enforcement and to learn from him, I was interested to see he is correcting this by leading his first FCPA Institute this summer over two days, July 16 and 17. The event will be held in Milwaukee and hosted by the law firm of Foley and Lardner.

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. For more information on the FCPA Institute, click here.

However, as I will not be able to attend the Professor’s FCPA Institute since I will be hosting my daughter’s annual summer trek to the heat and humidity of Houston, I was equally pleased to see another offering by the FCPA Professor which comes out this summer and indeed it appears in book stores next month. It is his long awaited volume, entitled The Foreign Corrupt Practices Act in a New Era, where the Professor takes a look at the FCPA’s new era of enforcement and confronts the FCPA statutory text, legislative history, judicial decisions, enforcement agency guidance, and resolved FCPA enforcement actions. The contents include the following: Prologue Introduction and Overview; Chapter 1. Before the New Era: The Story of the FCPA and Its Early Enforcement; Chapter 2. FCPA Foundational Knowledge; Chapter 3. The FCPA’s Anti-Bribery Provisions; Chapter 4. The FCPA’s Books and Records and Internal Controls Provisions; Chapter 5. FCPA Enforcement; Chapter 6. Reasons for the Increase in FCPA Enforcement; Chapter 7. The FCPA’s Long Tentacles; Chapter 8. FCPA Compliance and Best Practices; Chapter 9. FCPA Reform; and Conclusion. Of course there is a handy Index as well.

The Professor has some early high praise for his work including the following kudos:

From Michael Mukasey, Former U.S. Attorney General, says “Professor Mike Koehler has brought to this volume the clear-eyed perspective that has made his FCPA Professor website the most authoritative source for those seeking to understand and apply the FCPA. This is a uniquely useful book, laying out systematically the history and rationale of the FCPA, as well as its evolution into a structure governed as much by lore as by law. It will be valuable both to those who counsel international corporations, whether in connection with immediate crises or long-term strategies; and to those who contemplate what the FCPA has become, and how it can be improved.”

From Daniel Chow, Associate Dean for International and Graduate Programs, The Ohio State University Michael E. Moritz College of Law, USA, says of the book “This is the single most comprehensive academic treatment of the Foreign Corrupt Practices available. Professor Koehler’s book will become the authoritative standard for the field. The book not only treats the history of the FCPA, but analyzes the statute’s elements in detail, discusses current cases, and makes proposals for reforms where the current law is deficient. The book is written in a clear, accessible style and I will use it often as a resource for my own scholarly work.”

From Richard Alderman, Former Director of the UK Serious Fraud Office, states “An excellent and thought-provoking book by a great expert. Backed up by rigorous analysis of cases, Professor Koehler constantly challenges those involved in anti-corruption work by asking the question “why?” He puts forward many constructive and well-argued suggestions for improvements that need to be considered. I have learned a lot from Professor Koehler over the years and I can thoroughly recommend this book.”

And from Tom Fox – “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.”

So if you are like me and cannot make it up to Milwaukee in July, go to Amazon.com and pre-order a copy of the FCPA Professor’s book, which is scheduled to ship next month. To order 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

April 21, 2014

Nursery Rhymes, a Chinese Proverb, the HP FCPA Enforcement and the Myth of the Rogue Employee

Cow Jumping Over the MoonHey diddle diddle,

The Cat and the fiddle,

The Cow jumped over the moon.

As my friend and colleague Jay Rosen is want to remind us, he continually learns much about compliance and ethics from his Kindergarten-aged daughters. I submit that you need only look to children’s nursery rhymes in the context of the recent Hewlett-Packard (HP) Foreign Corrupt Practices Act Enforcement (FCPA) to fully appreciate the inanity of the myth of the ‘rogue employee.’ HP has been cited as the prime example of the case where a small group of evil or ‘rogue employees’ purposely mislead their ultimate US corporate parent (HP Co) by engaging in bribery and corruption for which their US corporate parent, who did not engage in the corrupt action, were forced to pay the fines and penalties (and attendant investigative costs, remediation costs and negative publicity). For the purposes of this discussion we will leave out the millions of dollars that HP potentially benefited from via the illegal actions of its alleged ‘rogue employees’; or if there has ever been a case involving ‘rogue employees’ who, intentionally or otherwise, took a company down into FCPA grief.

I. HP-Poland – the Tale of Little Jack Horner – what a good boy I am

Little Jack Horner

Sat in the corner,

Eating a Christmas pie;

He put in his thumb,

And pulled out a plum,

And said ‘What a good boy am I!’

This is the one where commentators are having a Eureka moment. After all, the settlement documents point to one man, HP’s Poland Country Manager, and his John Le Carré-esque meetings. In this bribery scheme, the Country Manager engaged in a multi-year bribery scheme to pay bribes to one Polish government official to secure a large number of contracts. These bribes were paid surreptitiously, using a variety of techniques to evade detection but they all had one thing in common which I will ask you to figure out from the Bribery Box presented below.

HP-Poland Bribery Box Score

Bribe Amount Method of Payment Year Paid Business Received
$150,000 Bag of cash, delivered to home of Polish gov official 2007 Contract valued at $15.7MM
$100,000 Bag of cash, delivered in parking lot to Polish gov official 2007
$130,000 to $140,000 Bag of cash delivered to Polish gov official 2008 Contract executed January 2008
$110,000 Bag of cash 2008 Contract executed in April 2008
$90,000 Bag of cash delivered to Polish gov official 2008 Contract executed May 2008
$30,000 Bag of cash delivered to Polish gov official 2008 Final 3 contracts totaled $32MM in value
$6,000 (offer) 2010 For contract signed in 2010 valued at $4MM
$30,000 Delivered as gifts 2007-2010 Total contracts valued at $60MM

For those of you not so quick on the draw the common element, at least until the end of the Box Score, is that all the bribes were paid in cash. For part of my in-house legal career, I did legal work for the energy industry and I have some familiarity in the amount of money that Country Manager’s made, at least the range of their salary and bonus, and it certainly was not enough to fund bribes in the amount of $600,000 in cash over a couple of years.

So let me get this straight, no one else at HP-Poland aided the Country Manager while he helped himself to the kitty? Didn’t anyone even notice, say in 2007, one of our $250,000 was missing? If not, the Country Manager had to have help in siphoning off funds from HP itself to fund these bribes? So my first question is where was HP internal audit? At the country level? At the region level? At the corporate level? Where was HP Co, when HP-Poland landed $60MM in contracts, in determining how these contracts were procured? Where were HP internal controls?

Was the Country Manager like Little Jack Horner? What a good boy I am?

II.   HP-Russia – Yes Sir, Yes Sir, Three Bags Full

Baa, baa, black sheep,

Have you any wool?

Yes, sir, yes, sir,

Three bags full.

HP-Russia seems to confuse commentators the most about the myth of the ‘rogue employee’. Here they point to the coded spreadsheets (the “Encrypted Spreadsheet”), which could only be unlocked and read by the conspirators themselves. And after all, they lied, lied, when they were asked about some of the details of the transaction in questions. I am sure Inspector Renoir is still shocked, shocked, to discover that gambling is still occurring on the premises of Rick’s Café American in Casablanca.

So why three bags full? Well, first of all, if you are from a certain university in central Texas you’ll immediately know what it means. For the less delicate among you, it would mean a large load of Col. Sherman Potter’s horse-hockey; three bags full in fact. This deal had been floating around HP for years, was well-known enough to raise multiple Red Flags inside the company and was simply internally shopped until it slid through by hook, nook or crook; or in this case, three bags full.

The initial deal was inked with the Russian government in June 2001 but as the Russian government could not fund it, they sought another foreign government to fund and that government was the US. However, to do so, it required that at least 85% of all goods and services were of US origin. To meet this requirement, the initial deal was changed to substitute a US intermediary (Intermediary 2) who replaced the Swiss intermediary on the deal (Intermediary 1). HP Co conducted due diligence on Intermediary 2 and then met with Intermediary 2 in the US to conduct additional due diligence. However, Intermediary 2 balked at answering more “pointed questions” about its expertise and financial wherewithal to handle the transaction. HP Co then told HP-Russia that they would not approve the transaction.

Not to be deterred from a good deal, the foreign government financing was switched from the US to Germany. In addition, Intermediary 2 was ditched for a one-man shop, Burwell Consulting Ltd (Burwell). Burwell and others were eventually paid nearly $21MM in bribes for the Russia government contract. There has been much discussion about how HP-Russia tricked HP-Germany’s employees through the use of “encrypted, password protected spreadsheets that tracked the deal’s financial inflows and outflows”. However, what I found more interesting was the discussion about how not only had HP-Russia shopped the deal internally and been told a resounding NO by HP Co for obvious Red Flags present but also the discussion of how HP-Russia internally funded the bribery scheme.

They did so by the classic ‘stuffing the channel’ that every software lawyer, accountant, bookkeeper, auditor, sales rep and anyone else subject to GAAP or IFSR learns on their first day of training on their first job. It goes like this: HP-Russia sold products to a channel partner; who then sold them to Intermediary 3; who then sold them back to HP with a mark-up and voila, you have a big pile of cash with which to bribe.

So what does the HP-Russia deal tell us about HP as a company? As with HP-Poland, you would have to question where was internal controls while this was playing out, at the country level, at the region level, at the anywhere level? But there is far more than simply internal controls going on here. Based on what was publicly announced in the settlement documents, HP Co had actual knowledge that the deal was rife with Red Flags as it was presented. It was so bad they shut it down. Of course, the business guys simply resurrected it in another place, in another guise. What does that say about the overall effectiveness of the compliance function at the time if HP-Russia could bring a Red Flagged deal to HP Co only to have it stopped, then to shove it through HP-Germany due to weak controls? What about the internal controls on how HP-Russia was able to generate $21MM in scammed money to pay the bribes in the first place? Think anyone else might have thought about running that scam through those robust internal controls? After all, its only three bags full…

III.   HP-Mexico – Fool Me Once…

Fool Me Once,

Shame on You;

Fool me twice,

Shame on Me.

The above did not come from George Bush (The Younger) but is purported to be an old Chinese proverb. I like that thought anyway and it certainly informs our look the claim of ‘rogue employee’ in Mexico. Here, for reasons far beyond my comprehension, HP was able to secure a Non-Prosecution Agreement (NPA) from the Department of Justice (DOJ) for the actions of its subsidiary in Mexico in paying a bribe of $1.6MM to facilitate the winning of a contract worth $6MM. But the lesson learned from the ancient Chinese proverb certainly informs our look at the allegation of the ‘rogue employee’ down Mexico way.

HP-Mexico wanted to use a certain agent involving a deal with Pemex because he had a very close relationship with the Pemex official who would be making the decision on the contract. HP-Mexico even signed a contract with this agent where his description of services was an “influencer fee” for which he would receive a 25% commission. This agent could apparently neither meet HP Co’s due diligence requirements, accept HP Co’s mandatory commission rate or both but whatever the reason, they were not approved as an agent on the Pemex deal. But like all good HP business folks (beginning to see a pattern here?) HP-Mexico simply subcontracted this agent to an existing, approved HP channel partner. HP-Mexico then amazingly (or perhaps not) said that they needed to raise the commission rate of this channel partner from 1.5% to 26.5% because this channel partner was now “managing discounts with Pemex” which coincidentally, this channel partner had never done. Because this channel partner was previously approved by compliance, the request for increase in commission rate was never submitted to compliance for approval. Think an internal control or two might have been appropriate in this situation?

What do the nursery rhymes and Chinese proverb tell us about HP and the Myth of the Rogue Employee? All three of the bribery schemes involved showed that there were multiple failures of numerous systems that allowed the schemes to run rampant. But perhaps the thing that they speak to the most is the culture that existed at the company during the time frames in question. While the FCPA Professor and others have noted that some of the conduct in question began in Russia as long ago as 1999, the settlement documents speak to conduct in Poland as recently as 2010. Certainly, the NPA for HP-Mexico’s conduct was for actions in 2009. What was the tone set that not only allowed employees to think that they could get away with subverting the law but that they had to do so. That, perhaps, is the most troubling questions unanswered by the Myth of the Rogue Employee.

Whatever the answer to HP’s culture of compliance may have been at the time of the conduct which led to the enforcement action, the claim that the company does not bear responsibility for either setting that tone, facilitating the conduct by looking the other way when convenient or not having appropriate internal prevention and detection controls in place to prevent massive fraud by its own employees; the reality is that when a employees of a company can evade controls to generate multi-millions of dollars to generate pools of money to pay bribes, there is no ‘rogue employee’ or even small group of rogue employees. Or there is about as much chance as a cow jumping over the moon.

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

April 14, 2014

The HP FCPA Settlement

FCPA SettlementLast week the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) jointly announced the conclusion of a Foreign Corrupt Practices Act (FCPA) enforcement action against Hewlett-Packard Company (HP). In the settlement, HP agreed to pay $108MM in fines, penalties and disgorgements for criminal and civil acts. To say that it was one of the more perplexing FCPA settlements would seem to be an understatement. While some will read the settlement documents and see conduct which did not merit such a high total amount of fines and penalties, I am not from that camp.

The tale of this sordid affair of bribery and corruption occurred over 3 continents with multiple countries involved, evidencing an entire breakdown in company internal controls and a complete lack of a culture of compliance. Yet the settlement documents make great pains to emphasize that few employees were actually involved in the nefarious conduct. How bad was the conduct? Think right up there with BizJet because we had bags of cash delivered to a Polish government official. (But unlike BizJet, the Board of Directors did not approve the bribery scheme and it was not taken across the border.) For the Russian deal, it was shopped through several countries with multiple levels of company review, which did not seem to work or care much about anything except getting the deal done. For Mexico, they just seemed to get a free pass where the contract description for the agent who paid the bribe was “influencer fee”.

Finally, as most readers might remember, HP did not self-report this misconduct to the DOJ or SEC. Apparently, the story of HP’s bribery by its German subsidiary to gain a contract in Russia was broken by the Wall Street Journal (WSJ) article in April 15, 2010. The next day, the DOJ and SEC announced they were investigating the allegations of bribery. However, HP was made aware of the allegations by its German subsidiary in December 2009, when German authorities raided HP’s offices in Munich and arrested one HP Germany executive and two former employees. Yet HP never self-reported. Not exactly the poster child for self-disclosure for any company going forward.

Of course HP’s public response at the time indicated its attitude, when a HP spokesperson was quoted in the WSJ article as saying “This is an investigation of alleged conduct that occurred almost seven years ago, largely by employees no longer with HP. We are cooperating fully with the German and Russian authorities and will continue to conduct our own internal investigation.”

More befuddlement comes from the reported facts around HP Germany. As noted by the WSJ report, one, then current, HP executive was arrested and two former employees were arrested in connection with the investigation by German authorities. There is no mention of them in any of the settlement documents. The WSJ article also reported that investigation-related documents submitted to a German court showed that German prosecutors were “looking into whether H-P executives funneled the suspected bribes through a network of shell companies and accounts in places including Britain, Austria, Switzerland, the British Virgin Islands, Belize, New Zealand, the Baltic nations of Latvia and Lithuania, and the states of Delaware and Wyoming”. While some of these countries were mentioned in the settlement documents there was no mentions of DOJ or SEC investigations into Wyoming, Belize, the British Virgin Islands or New Zealand.

What are we to make of the criminal fines levied against the Russian and Polish subsidiaries of HP? The Polish subsidiary pled guilty to a two count Criminal Information consisting of (1) violating the FCPA’s internal control provisions; (2) violating the FCPA’s books and records provisions. The US Sentencing Guidelines suggested a fine range of $19MM to $38MM, the final fine was $15,450,244.

For the Russia deal, the Russian subsidiary pled guilty to a four count Criminal Information consisting of (1) conspiracy to violate the books and records provisions of the FCPA; (2) violating the FCPA’s anti-bribery provisions; (3) violating the FCPA’s internal control provisions; (4) violating the FCPA’s books and records provisions. The US Sentencing Guidelines suggested a fine range of $87MM to $174MM, yet the final fine was $58,772,250.

Finally, in Mexico HP’s subsidiary, according the to the SEC Press Release, “paid a consultant to help the company win a public IT contract worth approximately $6 million. At least $125,000 was funneled to a government official at the state-owned petroleum company with whom the consultant had connections. Although the consultant was not an approved deal partner and had not been subjected to the due diligence required under company policy, HP Mexico sales managers used a pass-through entity to pay inflated commissions to the consultant.” This was internally referred to by HP as an “influencer fee.” Pretty clear evidence of what it was to be used for, wouldn’t you say? Yet the DOJ did not to criminally prosecute the company’s Mexican subsidiary and entered into a Non-Prosecution Agreement (NPA), HP agreed to pay forfeiture in the amount of $2,527,750.

How did HP accomplish all of this? In a Press Release HP Executive Vice President and General Counsel John Schultz said, “The misconduct described in the settlement was limited to a small number of people who are no longer employed by the company. HP fully cooperated with both the Department of Justice and the Securities and Exchange Commission in the investigation of these matters and will continue to provide customers around the world with top quality products and services without interruption.”

As reported by the FCPA Professor, in his blog post entitled “HP And Related Entities Resolve $108 Million FCPA Enforcement Action”, the HP Russian subsidiary Plea Agreement gave the following factors for the reduction in the fine from the Sentencing Guideline range:

“(a) monetary assessments that HP has agreed to pay to the SEC and is expected to pay to law enforcement authorities in Germany relating to the same conduct at issue …; (b) HP Russia’s and HP’s cooperation has been, on the whole, extraordinary, including conducting an extensive internal investigation, voluntarily making U.S. and foreign employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the Department; (c) HP Russia and HP have engaged in extensive remediation, including by taking appropriate disciplinary action against culpable employees of HP and enhancing their internal accounting, reporting, and compliance functions; (d) HP has committed to continue enhancing its compliance program and internal accounting controls … (e) the misconduct identified … was largely undertaken by employees associated with HP Russia, which employed a small fraction of HP global workforce during the relevant period; (f) neither HP nor HP Russia has previously been subject of any criminal enforcement action by the Department or law enforcement authority in Russia or elsewhere; (g) HP Russia and HP have agreed to continue to cooperate with the Department and other U.S. and foreign law enforcement authorities, if requested by the Department …”

In the same blog post, the Professor reported the following reasons were stated for reduction in the final fine by HP’s Polish subsidiary’s:

“(a) HP Poland’s cooperation with the Department’s investigation; (b) HP Poland’s ultimate parent corporation, HP, has committed to maintain and continue enhancing its compliance program and internal accounting controls …; and (c) HP Poland and HP have agreed to continue with the Department and other U.S. and foreign law enforcement authorities in any ongoing investigation …”

We have witnessed companies, which have engaged in ‘extraordinary cooperation’ with the DOJ during the pendency of their FCPA investigations. BizJet is certainly one that comes to mind. Further, there are clear examples of companies, which extensively remediated during the pendancies of their FCPA investigations, from which they clearly benefited. Two prime examples are Parker Drilling, which not only received a financial penalty below the suggested range but also was not required to have a corporate monitor, while they had C-Suite involvement in its bribery scheme. Weatherford seeming came back from the brink during mid-investigation when they hired Billy Jacobson and turned around not only their attitude towards cooperation with the DOJ but also their efforts toward remediation.

Both of these companies are headquartered in Houston and both have been quite active on the conference circuit talking about their compliance programs so most compliance practitioners are aware that these companies are on the forefront of best practices. Perhaps HP is on some circuit doing that, somewhere. If so, kudos to them. If their remediation work led to a best practices compliance program for the company and their extraordinary cooperation led to the astonishing reduction in penalties to their entities, I certainly tip my cap to them. If their lawyers were great negotiators and made great presentations to the DOJ and SEC, all of which led to or contributed to the final results, a tip of the cap to them as well.

So what is the lesson to be learned for the compliance practitioner? Other than befuddlement, I am not sure. Congratulating HP and its counsel is not a lesson it is an action. If HP now has a best practices compliance program, I hope they will provide the compliance community with the lessons that they learned and incorporated into their compliance program, which allowed them to obtain the fines below the minimum suggested range. If they have incorporated some enhanced compliance components into their program I hope they will share those enhancements too.

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

February 20, 2014

C’Mon Man Or the End of the World?

Prepare End of the WorldIt’s the end of the world as we know it,

It’s the end of the world as we know it

It’s the end of the world as we know it, and I feel fine

 The above lyrics came from REM and they reflect how I generally feel about law firm and lawyer pronouncements about the Foreign Corrupt Practices Act (FCPA) enforcement because [SPOILER ALERT] I am a lawyer, I do practice law and I do work for a law firm, the venerable TomFoxLaw. The FCPA Professor regularly chides FCPA Inc. for their scaremongering tactics, usually monikered as ‘Client Alerts’. Mike Volkov is even more derisive when he calls them the FCPA Paparazzi and cites examples from his days in Big Law, where law firm marketing campaigns are centered around doomsday scenarios about soon-to-occur FCPA; UK Bribery Act; or [fill in the anti-corruption law here] prosecutions and enforcement actions. I usually take such law firm scaremonger and blathering’s to be about worth as much as the paper they are printed on. Indeed I chide the FCPA Professor and Monsieur Volkov for their protestations. In other words, I feel fine.

I am a proud card-carry member of FCPA Inc. because not only can I spell FCPA (and UKBA for that matter), I also make FCPA related pronouncements from time-to-time and practice law in the FCPA space. I think we generally do a pretty good job of getting information out there. But last week one missive occurred that not only met the above impugning adjectives but created a veritable tsunami of mis-information as it made its way from China to Europe and to the US that even I thought was beyond the pale. How absurd was it? So absurd that not only did the FCPA Professor and I agree about it, but we decided to post blogs about it today.

On February 5 a law firm client alert stated, “While the number of enforcement actions may decrease or hold steady, we can expect some “blockbuster” settlements in 2014 of matters that have long been under investigation.” Blockbuster…really? Do you think this law firm was implying that the Siemens record FCPA fine of $800MM, plus its equivalent $800MM fine in Germany, that’s a total of $1.6 bn for those of you keeping score at home, is seriously in danger of falling by the wayside in 2014? How about Halliburton’s comparatively paltry $579MM penalty? To be slapped aside like a green-skinned witch yelling, “I’m melting!” BAE coming in at No. 3 with a measly $400MM must be quaking it is British Wellington boots about now.

As inane as this comment was, the thing that attracted my attention was the tidal force wave by which this quote rode its way all the way to the US. By February 10th, this quote had morphed into the following, written in the South China Morning Post, “The United States is expected to impose “blockbuster” fines on companies bribing foreign officials this year, with China a likely target of US investigations, lawyers say. A report by US law firm WilmerHale predicts “blockbuster” settlements under the Foreign Corrupt Practices Act (FCPA). “US enforcement authorities have stated there are a number of very large settlements in the pipeline,” said Jay Holtmeier, a partner at WilmerHale. “Given the attention paid to China in recent years, it is a safe bet some of those large settlements will involve conduct in China.”” Two days later the full storm reached the shores of the US when this article was referenced in the Wall Street Journal’s (WSJ’s) Corruption Currents.

So now not only do we have ‘blockbuster’ FCPA settlements coming; we will have them coming out of China. Various marketing departments will use these statements as ‘authoritative’, yet another reason to purchase their company’s products or services.

There are plenty of great FCPA resources out there, which inform the compliance practitioner, or indeed the non-compliance specialist, about the costs of a FCPA enforcement action. But more importantly there is more than a wealth of free, at no cost, information about how to craft a compliance program with any anti-corruption law, which currently exists. There is the same amount of information about how to ‘do compliance’, once again free and available at no charge. Is it marketing? My answer is either yes or better yet; who cares? Good solid information is good solid information no matter what the motives behind putting it out there are.

But here is the problem with making such statements which newspapers then follow them up by brandishing them as even more dire predictions. Someone might actually believe it. Next Congress will want to investigate these ‘blockbuster’ settlements or, perhaps, why after it was reported that they were coming, the Department of Justice (DOJ) did not have any ‘blockbuster’ settlements in 2014?

I thought about writing this blog post around the tale of the Boy Who Cried Wolf but I realized there is always another law firm or lawyer out there will to say the end of the world is coming “this year”. But perhaps the better analogy is the ESPN segment entitled “C’Mon Man!” during which each color commentator will describe a play or series of plays that made them scratch their heads and say “C’Mon Man!” So while I generally feel fine about the information disseminated by and from FCPA Inc., my suggestion is that everyone just take a deep breath and consider such information for what it is worth.

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

February 19, 2014

Welcome to the Hotel California: FCPA Enforcement

Hotel CaliforniaThis past weekend I saw The Eagles on their ‘History of The Eagles Tour. It truly was that, a complete musical history of the group, from the beginning in 1971 up until now. They played for well over 3 hours and it was fantastic. The Eagles were at their peak in the 70’s when I was at my peak as a rock and roller, both in high school and college, so the concert was a very memorable experience. In one interesting twist they did not allow videos to be taken of the concert with cell phones or any other types of recordings. Of course the concert ended with song Hotel California and its iconic line “You can check out but you can never leave.”

I thought about that final line and how true it was in the late 70s and how true it is now in the world of international anti-corruption enforcement when I read a front page article in Sunday’s New York Times (NYT), entitled “Eavesdropping Ensnared American Law Firm”, and an blog post by the FCPA Professor, entitled “FCPA Lawyers Would Be Wise to Review Recent Third Circuit Decision”.

We know from the American Spectator article, “Rise of the Surveillance State”, by James Bovard about the National Security Agency (NSA) program ‘Echelon’, which he described as “a spy satellite system run by the National Security Agency along with the United Kingdom, Australia, New Zealand, and Canada. Echelon reportedly scans millions of phone calls, e-mail messages, and faxes each hour, searching for key words.” Further, Bovard stated, “A February report by the European Union alleged that Echelon has been used for economic espionage. Former CIA Director James Woolsey told a German newspaper in early March that Echelon collects “economic intelligence.”” One example Woolsey gave was espionage aimed at discovering when foreign companies are paying bribes to obtain contracts that might otherwise go to American companies. Woolsey elaborated on his views in a March 17, 2001 Wall Street Journal (WSJ) Op-Ed piece, justifying Echelon spying on foreign companies because some foreigners do not obey the Foreign Corrupt Practices Act (FCPA).

After the NYT article, we know that US law firms can also fall under surveillance. The firm of Mayer Brown was monitored by the NSA’s Australian counterpart, the Australian Signals Directorate (ASD), regarding work the law firm was doing for the government of Indonesia in trade disputes with the US. It is of no consequence that it was the Australians doing the spying as under the “Five Eyes Alliance”, Australia is one of five countries the US shares intel with and agrees not to spy on. While most Americans would understand the need to place those dealing with terrorists under surveillance, the need to monitor US law firms giving legal advice in a legal trade dispute seems one or two steps past the safety of the US homeland. While only mentioned in the article, I also wonder about the effect of this surveillance on the attorney-client privilege, the basic reason that clients come to lawyers, for confidential legal advice. If you know that you are susceptible to espionage, why would a client ever trust the confidentiality of your communications or even that they are confidential to start with. Moreover, if you know you are subject to surveillance, is the privilege destroyed if a country does so and passes the information along to the US?

Equally unsettling as the revelations in the NYT article is the FCPA Professor’s report on a Third Circuit, Court of Appeals decision, entitled “In Re: Grand Jury Subpoena”. In this matter, an attorney was consulted on an international transaction, which was described as follows: “In April 2008, Client approached Attorney to discuss issues he was having with the project. Client explained that he planned on paying Banker in order to ensure that the project progressed swiftly, as Banker was threatening to slow down the approval process. Attorney did some preliminary research, found the FCPA, and asked Client whether the Bank was a government entity and whether Banker was a government official. Although Attorney could not ascertain given his limited research whether the planned action was legal or illegal, he advised Client not to make the payment. Despite this advice, Client insisted that his proposed payment did not violate the FCPA, and informed Attorney that he would go ahead with the payment. Attorney gave Client a copy of the FCPA. After this communication, Attorney and Client ended their relationship.” The opinion stated that the Client made a payment to the banker’s sister.

In other words, the client came for legal advice regarding an international transaction, the attorney advised against the transaction in question but the client did so against the advice of his attorney and the attorney thereafter terminated the relationship. There was no evidence the lawyer advised the client how to violate the FCPA or in any way helped the client ‘get around’ the law.

The attorney-client privilege is not sacrosanct. There are some limited exceptions to it and one of those is the ‘crime-fraud exception’ which the Court of Appeals explained is, “To circumvent [the attorney-client] privilege under the crime-fraud exception, the party seeking to overcome the privilege . . . must make a prima facie showing that (1) the client was committing or intending to commit a fraud or crime, and (2) the attorney-client communications were in furtherance of that alleged crime or fraud.” (All citations omitted) But, in this case, there was no evidence presented that the attorney involved gave advice that was in the furtherance of a crime but only that “The communication between Attorney and Client was brief, and consisted mainly of informing Client on the applicable law and advising that he not make the payment. However, we believe that the questions posed by Attorney to Client and the information that Client could gain from those questions are sufficient for us to conclude that the District Court did not abuse its discretion in determining that the advice was used in furtherance of a crime or fraud.”

What were the questions posed by the client or put another way, what was the legal advice sought by the client? The Court stated, the “questions about whether or not the Bank was a governmental entity and whether Banker was a government official would have informed Client that the governmental connection was key to violating the FCPA. This would lead logically to the idea of routing the payment through Banker’s sister, who was not connected to the Bank, in order to avoid the reaches of the FCPA or detection of the violation. Of course, it is impossible to know what Client thought or how he processed the information gained from Attorney. But the District Court did not abuse its discretion in determining that Client “could easily have used [the advice] to shape the contours of conduct intended to escape the reaches of the law.””

What does the spying on a US law firm and this court decision invalidating the attorney-client privilege mean for FCPA enforcement? I think that it means if you find yourself in the position of having violated the FCPA; your company now has an even greater incentive to self-disclose. If you are a non-US based company subject to the FCPA, the NSA is watching you. Further, if you are a non-US company, which seeks legal advice, you are now on notice that US laws firm are being spied on. Lastly, if you have violated the FCPA and seek legal advice; it may well come to pass that the lawyer whose advice you sought, can be compelled to testify about those conversations. So in the words of The Eagles, if you engage in conduct that arguably violated the FCPA, you can check out but you can never leave.

———————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————–

If you will be in Dallas this coming Thursday, February 20, I hope that you will join myself and fellow FCPA Blog Contributor Marc Bohn at the Corporate Compliance Summit on 2014 FCPA Concerns You Cannot Afford to Ignore. The event is complimentary and is sponsored by The Network. You can check it out and register by clicking 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

February 12, 2014

Shirley Temple and Excellence in FCPA Training Video

Lead and LearnToday we honor one of the most interesting personalities of the 20th century, Shirley Temple, who died yesterday. She was probably the greatest child actress of all-time, being the lead grossing star for five straight years during the 1930s. But the thing I found most remarkable about this woman was her third career, after marriage and motherhood, in the US Diplomatic Corp. President Richard Nixon appointed her as a Representative UN. Nixon later appointed her as Ambassador to Ghana. President Ford named her to be the first female Chief of Protocol of the US. Finally, the first President Bush appointed her as Ambassador to Czechoslovakia. But whatever role Shirley Temple chose she did it with excellence.

Just as Ms. Temple had a commitment to excellence, so does my colleague, Mike Koehler, the FCPA Professor. Recently the FCPA Professor announced that he had partnered with Emtrain to create a best in class Foreign Corrupt Practices Act (FCPA) compliance training video. I had the opportunity to view the video and I can agree that it is certainly an excellent training video, which you should consider for use in your company’s ongoing compliance training and communication. As you would expect from the FCPA Professor, each slide is well documented and provides the basis for the training. However, the thing that I thought made the training stand out was the variety of techniques used throughout the video.

There are separate chapters on the following subjects: an Introduction to the FCPA, the social and business case for the FCPA, the definition of bribery under the Act, a definition of what constitutes “Anything of Value” under the Act, who is a Foreign Official under the Act and who else might be covered by the FCPA, what does it mean to “Obtain or Retain Business”, the high nature of Third Parties under the FCPA and how to manage that risk, what might be available as an exception to the Act and defenses under the FCPA, Books and Internal Controls, a discussion of the UK Bribery Act, Red Flags that you should be aware, creation of a FCPA compliance policy and self-reporting of violations to the DOJ/SEC and a summary section. After completion of the course you should be able to describe how corruption impedes global economic development and how it undermines the ability to compete fairly in business; outline three fundamental elements of a bribery offense that can lead to prosecution of companies as well as individuals; identify various red flags that can be indicators of bribery and outline how, and to whom, you should report concerns about possible bribery and corruption.

The video training includes the following:

  • Executive and non-executive versions
  • The ability to configure the course with company-specific policies, videos, graphics, text, and employee hotline or reporting information
  • 20+ video clips to illustrate real-world business scenarios that present risk
  • An Enforcement Risk Spectrum that helps learners “issue spot” bribery and corruption risk
  • The ability to use video scenes outside the e-Learning experience in live training, discussion groups, or company emails and reminders
  • A compliance Learning Management System (LMS), enabling an administrator to launch and track training efforts and generate audit-ready training reports showing time spent on each video, screen, policy, etc.
  • There will be productions available in Mandarin Chinese, Russian, Arabic, Portuguese, French, and other languages upon request.

But the video is more than simply a recitation of what is required under the FCPA. The thing that makes it stand out for me is the different types of training it employs to hold the listener’s attention. First is the length of 60 minutes for an executive/high risk trainee and a shorter length for those who do not fall into those categories. Next, for those who may desire to devolve deeply into the subject matter, are short concise descriptions of the legal and compliance concept involved in the discussions. For instance, in the section on the definition of bribery there is a discussion of the Organization for Economic Cooperation and Development (OECD) established standards to combat bribery and the United Nations Convention Against Corruption (UNCAC), which established guidelines for codes of conduct for public officials, transparent and objective procurement systems, and increased accounting and auditing standards for the private sector. Added to this is a short piece on the UK Bribery Act. All of these non-US laws are then tied into the FCPA so the listener will have a broad understanding of what they may be facing in any multi-national business from the anti-corruption compliance perspective. Significantly, and most soberingly, the video points out that according to the World Bank Institute, more than $1 trillion is paid globally in bribes each year. Some of the worst affected countries are the poorest ones in the world.

What I think makes the video unique and frankly enjoyable to watch, is that it  has several interactive features. The first is that it opens with an interactive pre-assessment that is designed to determine how much you already know about global bribery and corruption. From there, each section has a short interactive questionnaire at the conclusion of the video on the section’s topic. These features allow the participants to examine their own expertise and then self-assess the lessons that they have learned throughout the presentation. By making each session interactive, you not only hold the attention of the listener but also garner their participation in the training. Any time you can get participation in training, you are a long way towards having an effective training program.

There are a couple of other cool features. It allows your company to customize the training by attaching some of your key anti-corruption policies and procedures for review during the Policies section of the training. Additionally, and following my mantra of Document, Document and Document, after completion of the training, your participation is electronically noted for record keeping, along with a copy of the training materials. So when the regulators want to see not only who was trained but also the materials they were trained on, you have easily assessable records to document the event.

So when the FPCA Professor says he has created a best in class FCPA training program, I heartily agree. You can check out a demo version of the training video by clicking here.

=======================================================================================================================================================================================================================

As many of you know, Jon Rydberg and I wrote and published a book at the end of last year, entitled “Global Anti-Corruption & Anti-Bribery Leadership Practical FCPA and U.K. Bribery Act Compliance Concepts for the Corporate Board Member, C-Suite Executive and General Counsel”. On Thursday, February 13, we will discuss our book in a webinar hosted by Hiperos LLC. Hiperos President, Greg Dickinson, will be interviewing Jon and myself about the book, its genesis and our thoughts on ‘doing compliance’ as opposed to simply having a compliance program. The event is free and you can find details and register by clicking 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

February 5, 2014

Compliance Defense– The Movie

OscarsIn honor of The Movie Channel’s annual 28 days of Oscar, the upcoming Academy Awards and inspired by Jay Rosen’s prior career and the FCPA Professors hypothetical discussion between a Chief Compliance Officer (CCO) and his Chief Executive Officer (CEO) last week, in a post entitled “It’s More Like Bronze Dust”; I thought I might write about Compliance Defense- The Movie. So starting with the Professor’s fictional Scenario B

Compliance Officer: Boss, I need more money and resources to devote to FCPA compliance.

Executive: Why?

Compliance Officer: Well, boss, an effective FCPA compliance program can reduce our legal exposure as a matter of law.

Executive: What do you mean?

Compliance Officer: Well, the money we spend on investing in FCPA best practices will be relevant as a matter of law.  In other words, if we make good faith efforts to comply with the FCPA when doing business in the international marketplace, we will not face any legal exposure when a non-executive employee or agent acts contrary to our compliance policies and/or circumvents our policies.

SIX MONTHS LATER…

 FADE IN

INTERIOR-OFFICE OF EXECUTIVE

In the heart of the energy capital of the world, in a darkened office, CEO reads a letter from the US Department of Justice (DOJ), which informs him that his company is under investigation for payments to third parties that may have violated the Foreign Corrupt Practices Act (FCPA).

CEO

(screaming) Ms. Pepper – what is this letter about?

MS. PEPPER – the long time admin for the CEO comes hurriedly comes into CEO’s massive office.

MS. PEPPER

It is a letter from the DOJ saying we’re under investigation for allegedly paying some bribes.

CEO

Well get me that Compliance Officer, what’s his name?

MS. PEPPER

Don’t you remember you let him go 3 months ago, after he installed that compliance program software you saw advertised at Office Depot?

CEO

Well then take a letter to the DOJ and tell them that we have a compliance program and that should be an absolute defense to any claims against us. They obviously don’t know how seriously we take compliance around here.

MS. PEPPER

I am not sure that is enough sir, I think that the program has to be effective.

CEO

What do you mean effective? After the CCO installed the compliance program on our computer server, everyone knew they had to follow it. The people who work here follow the law and I won the “Mr. Ethical Award” from the Chamber of Commerce last year. Everyone around here knows to follow the law.

MS. PEPPER

Sir, I think that the CCO said that it is more than having a compliance program in place; you actually have to do compliance. He might even have said you need to put some resources into it to show you were serious.

CEO

I spent $5,000 on that software program, which is pretty serious. Do you mean to say I have to do something else?

MS. PEPPER

Yes sir, I think that he said that not only does the program have to be effective, you have to be able to show it is effective.

CEO

Well that is about the stupidest thing I have ever heard, how are we supposed to compete if we can’t help out our friends so they stay our friends? And besides if any bribes were paid it’s because those greedy foreigners have their hands out. Surely we can’t be responsible for that?

The above dialogue is (hopefully) fictional. Unfortunately it may well be more close to the truth than we like to think. Those who have worked in the corporate world will know any costs which are indirect costs, such as compliance, are viewed as something to be avoided. This means spending money and providing personnel for compliance will be kept to the barest minimum. This is the major problem I see with thinking that a compliance defense is or should be a magic bullet for any corporation to use in a FCPA matter. Every compliance professional I have spoken with on this subject understands that your company will receive a free pass by having a written compliance program, then many companies will install such a paper program. For it is not having a program that is the critical factor but it is the doing of compliance, which makes a program effective.

Equally important is that for a compliance program to be effective, it has to evolve because both the sophistication of compliance and the risks in business evolve. Ten years ago, having a paper program was in the running to make your company an industry leader. Today, having only a paper program is a recipe for disaster. Just as risks evolve, so does the management of those risks. Continuous monitoring was not even considered 10 years ago. It has gone from an enhanced compliance solution, to a best practice, to a standard practice. Five years ago, most lawyers thought that distributors would not be subject to the FCPA because in a distributor sales model, they took title and risk of loss for the products they purchased. But it turns out that bribery and corruption can occur through a distributor sales model, just as it can through a sales agent model.

The clear model for all of this is the dramatic change that companies made in how they viewed safety on the job. Many point to the Exxon Valdez shipwreck as the seminal moment to see the shift in how safety was viewed by corporate America. Certainly after this event, Exxon made safety priority Number 1 in its corporate culture. As a trial lawyer defending corporations, I saw the shift to make safety ingrained into corporate culture in the energy industry, driven in large part by massive jury awards and high insurance premiums paid by corporations to cover those costs. The business solution was not only to put safety programs in place but also to run the business safely. This was drilled down even to those of us in corporate legal departments, not just the guys out on the drilling rigs or in the petrochemical plants.

In the corporate world there existed no magic bullet in the form of safety programs as an absolute defense to a company that violated its own or federal safety laws. Companies invested more money in safety because the costs of not doing so were greater. Under the FCPA, there currently is credit given for companies who have an effective compliance program. It is set out in the US Federal Sentencing Guidelines and discussed at some length in the FCPA Guidance. Such credit is given in the form of declinations to prosecute. While I wish that there was more public information made available on why the DOJ gives declinations, this lack of public information does not diminish the fact that they exist or that companies are clearly given credit for having an effective compliance program in place or simply doing compliance.

I began this post with a (hopefully) fictional dialogue. One thing I am not certain about though is what category it should sit in, comedy; drama or perhaps even tragedy. Enjoy the Oscar season.

==============================================================================================================================================================================================================================

Although I do disagree with the FCPA Professor on the need for a compliance defense under the FCPA, one thing I do agree with him about is his creation of a best in class compliance training video, which he announced Monday. I have had the opportunity to view the full version and it is excellent recap of the FCPA and the obligations under the law. It has an interactive aspect that allows learning and practice with situations that is both instructive and enjoyable. As you would expect from the FCPA Professor, it has the text to drive greater understanding for those who might wish to do so. So if your company needs a first-rate FCPA training module, you should check this one out. You can do so by clicking 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

January 30, 2014

Inspector Lestrade – Does Leadership Matter?

Inspector LestradeContinuing our Sherlock Holmes homage, today we draw inspiration from the character of Inspector Lestrade as the theme of this blog post. In the original Doyle works, he appears in 13 of the stories and we are only introduced to him as Inspector G. Lestrade. In the current PBS series, we are informed his given name is Greg. Lestrade is not exactly the sharpest tack in the shed, as evidenced by Holmes comments that he is “an absolute imbecile” from the The Red-Headed League and the “best of a bad lot” from The Boscombe Valley Mystery.

I thought about Inspector Lestrade when I read some of the comments of UBS Chief Executive Officer (CEO), Sergio Ermotti, as reported in the Wall Street Journal (WSJ) article entitled “UBS Chief’s Plea: Stop ‘Lecturingto Bankers” by David Enrich and Francesco Guerrera. UBS has not exactly been a law abiding corporate citizen over the past few years. As you might recall this is from the company, which had a $2.3 billion trading loss from one individual. It is also from the company that assisted approximately 17,000 Americans clients with illegally hiding $20bn of assets to avoid paying taxes on this money. UBS paid a fine of $780MM for these actions. But there is much more, as UBS also agreed to pay another $1.5 billion fine for its criminal actions in manipulating the LIBOR. What would you say the ‘tone’ is at UBS about complying with the law?

With all of these fines, penalties and criminal pleas behind him, Ermotti does not seem to think there is any room for criticism of his company. Rather unbelievably, Ermotti was quoted as saying, “Life is hard enough, and I think this constant lecturing on ethics and on integrity by many stakeholders is probably the most frustrating part of the equation. Because I don’t think there are many people who are perfect.” For those of you who might want that translated to Texan, the equivalent phrase is a very nasal twang of “Glass houses dear”. For the more spiritual out there you could fall back on “Let he who is without sin cast the first stone.” Perhaps the most relevant question would simply be ‘How many angels dance on the head of a pin?’

Late last year, I engaged in a dialogue with other Foreign Corrupt Practices Act (FCPA) commentators about whether motives matter in anti-corruption enforcement actions. I opined, in a post, entitled “Does Motive Matter in Anti-Bribery and Anti-Corruption Enforcement?”, that it really does not matter what the motives are for the Chinese government officials in prosecuting western companies, which violate Chinese national anti-bribery laws, if a company breaks the law, it can be subject to prosecution. The FCPA Professor, in a post, entitled “Should Motivations Matter”, said that impure motives do matter in anti-corruption enforcement actions, whether in China or the US. Others have suggested that the FCPA enforcement itself is hypocritical because the US allows gifts, entertainment, charitable donations and a wide variety of other acts to be given as a quid pro quo to US government officials, usually without criminal prosecution.

But Ermotti takes this debate to an entire new level. Now you cannot even criticize his bank unless you are ‘perfect’. Further, showcasing the obvious knowledge of his 60,000 plus employee base, Ermotti “said in the interview that most of the bad behavior that has landed UBS and others in hot water was caused by small groups of rogue employees and doesn’t reflect broader cultural problems in the industry. “It’s not because you’re a banker that you’re a criminal”.” This was in the face of criticism at the World Economic Forum in Davos (where Ermotti was interviewed and made his remarks) that “In a private meeting held between bank CEOs and central bankers and regulators Friday, several participants pointed to banks’ “conduct” issues as undermining efforts to rebuild public and investor confidence in the industry, according to executives and central bankers who were there.” This can be contrasted with Bank of England Governor Mark Carney who said at the same conference, “Whether or not [the industry] thrives will rest on the efforts of individuals and organizations to re-establish the system’s reputation for integrity”.

Yet again Ermotti doubled down when he claimed that the group, which cannot criticize, includes regulators and enforcement officials. This statement is almost the equivalent of another equally enlightened (former) CEO, Bob Diamond, who once ran Barclays and “told British lawmakers in 2011 that “there was a period of remorse and apology for banks. That period needs to be over.” The next year, Mr. Diamond was forced to resign after Barclays admitted trying to rig interest rates.” Ooops.

What does all of this say about the top of this once august organization? First and foremost, how you would like to be the person who has to ‘speak truth to power’ if your CEO says that only the ‘perfect’ can bring forward criticism? Do the words ‘career suicide’ ring any bells here? But more importantly you have a company which entered into a Deferred Prosecution Agreement (DPA) regarding its tax evasion violations and then pled guilt to criminal conduct that as reported in another WSJ article “Regulators described the alleged illegality as “epic in scale,” with dozens of traders and managers in a UBS-led ring of banks and brokers conspiring to skew interest rates to make money on trades.” What would you say about its ‘tone-at-the-top’? Are they committed to following the law? How about complying with the terms of their multiple settlement agreements with US regulators? How about changing the culture in their organization, not simply to make compliance a goal but actually obey the law? What about instituting and then following a best practices program for compliance with anti-corruption laws such as the FCPA or Bribery Act; anti-tax evasion laws such as the Foreign Account Tax Compliance Act (FACTA); relevant anti-money laundering (AML) laws; or indeed others.

Without a hint of irony, the WSJ piece on Ermotti’s remarks ends with the following quote from him, “The banking industry is an easy target.” I wonder if Ermotti has the self-awareness of Inspector Lestrade to understand the wisdom of his words?

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

January 29, 2014

The Sussex Vampyre and the ADM FCPA Settlement

Sussex VampyreToday I want to use the story of The Sussex Vampyre as the starting point for an inquiry into the recent Archer-Daniels-Midland Corp (ADM) Foreign Corrupt Practices Act (FCPA) enforcement action. In the story, Holmes receives a letter from Robert Ferguson, who has become convinced that his second wife has been sucking their baby son’s blood and is a vampire. He has a crippled son from his first marriage who is terribly jealous of the new baby in their home. It turns out that this lame son, Jack, has been shooting poisoned darts at his baby brother and his stepmother’s behavior is actually sucking the poison out of the baby’s neck. The baby’s wounds were caused by Jack sending the darts, not by the mother biting her baby. In other words, what might be seen as something very scary is easily explained.

Once again demonstrating that the FCPA Professor and myself look at the same thing and come to different conclusions are reflected by those he states in his article “Why You Should Be Alarmed By the ADM FCPA Enforcement Action”. I see the ADM enforcement action as a continuation of the available case law favoring interpretations of the business nexus requirement to be applied broadly, where it is clear that bribery and corruption have occurred.

When I look at the facts laid out in the ADM settlement documents, I see the following: four separate bribery schemes hidden in the companies books and records clearly designed to influence the decision of a foreign government official. From 2002 to 2010, the company’s Ukrainian subsidiary rolled up VAT receivables of up to $46MM. What I see is a company, which over several years of slow and no response to its application for VAT tax refunds for goods purchased in Ukraine, responded to this problem by engaging in bribery and corruption to help them get the money that they were believed they were owed.

So what were these bribery schemes? There was the Charitable Donation Scheme, which according to the SEC Complaint, “an ADM executive in the tax department sent an e-mail to the head of an international tax organization and stated, “One of our affiliates operates in the Ukraine. In order to recover 100% of their input VAT they have to pay 30% of the amount to local charities.”” Next was the Stevedoring Company Scheme where two ADM subsidiaries made “payments to a stevedoring company in the port of Odessa so that it could pass on nearly all of those payments to Ukrainian officials in order to obtain VAT refunds on behalf of ACTI Ukraine.” Next was the Mischaracterization of Write-offs Scheme where ADM’s German subsidiary reported to the US parent that they had to write off 18% of the tax refund due back to the company. However upon payment of the VAT refund it would be at 100% of the total due. As the German subsidiary had taken a write off of 18% of the total, the corresponding amount of money would be funneled to “third-party vendors so that nearly all of those monies could be provided to Ukrainian government officials.” Finally, and most ingenuously, was the Fake Insurance Premiums Scheme. In this scheme, ADM’s Ukrainian subsidiary, arranged for an insurance company to falsely bill it for crop insurance, which said “Insurance Company never intended to honor, adjusting the premiums to be roughly 20% of the VAT refund.” This inflated amount was then paid to Ukrainian officials.

The FCPA itself says:

(a) Prohibition

It shall be unlawful for any issuer which has a class of securities registered pursuant to section 781 of this title or which is required to file reports under section 780d of this title, or for any officer, director, employee, or agent of such issuer or any stockholder thereof acting on behalf of such issuer, to make use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to—

(1) any foreign official for purposes of—

(A)

(i) influencing any act or decision of such foreign official in his official capacity,

(ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or

(iii) securing any improper advantage; or

(B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality,

 in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person;

In the case of US v. Kay, the Fifth Circuit Court of Appeals exhaustively reviewed the legislative history of the FCPA, from its passage in 1977 through the two amendments in 1988 and 1998. The Kay decision stands for the proposition that the defendant intend the paying of bribes to be a quid pro quo, which would assist (or is meant to assist) the payor in obtaining or retaining business. Further, it specifically stated that the “business nexus is not to be interpreted narrowly.” The facts in Kay were different than those presented in the ADM matter. However, with the admonition that the business nexus requirement is not to be interpreted narrowly, I believe the holding in Kay is such that it is not a stretch to see the conduct engaged in by ADM did assist, or was meant to assist, it in doing business in Ukraine. Indeed, the Kay decision stated, “In addition, the concern of Congress with the immorality, inefficiency, and unethical character of bribery presumably does not vanish simply because the tainted payments are intended to secure a favorable decision less significant than winning a contract bid.” Thus I look at Kay and see the conduct of ADM as falling within the broad outlines of the Kay decision.

How about the facilitation payment exception and that somehow the ADM subsidiaries were making payments exempted out of the FCPA because they were for routine services?

The FCPA itself states:

(b) Exception for routine governmental action

Subsections (a) and (g) of this section shall not apply to any facilitating or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official, political party, or party official.

Further, the term “routine governmental action” is defined as one of the following:

  1.  Obtaining Permits;
  2. Processing visas and work orders;
  3. Providing police protection, mail pick-up and delivery;
  4. Providing phone services and utilities;
  5. Actions of a similar nature.

There is nothing in the statute about processing multi-million dollar tax refunds as a routine governmental action. Once again the Kay decision spoke to the issue of facilitation payments, similar to those made in the context of the ADM settlement, when it said “This observation is not diminished by Congress’s understanding and accepting that relatively small facilitating payments were, at the time, among the accepted costs of doing business in many foreign countries.” One key there is that facilitating payments be “relatively small”. Whatever 18% of $46MM might be, it certainly is not “relatively small”.

All of this leads me to see the ADM settlement as a continuation of the very limited case law interpretation that exists around the FCPA. So just as Holmes looked at the facts in The Sussex Vampyre and did not see something which could not be explained or need be feared; I look at the ADM enforcement action and see a company which engaged in bribery and corruption, knew it was doing so and actively tried to hide the corrupt payments in its books and records.

And once again, I would cite that the easiest response to all of this might be the advice given by Department of Justice (DOJ) representative Greg Anders, in his testimony to the House Judiciary Committee regarding amending the FCPA, that being that companies should not engage in bribery.

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

« Previous PageNext Page »

The Rubric Theme. Blog at WordPress.com.

Follow

Get every new post delivered to your Inbox.

Join 5,079 other followers