The BHP Case and Enforcement of The FCPA’s Internal Controls Provision

Ed. Note-today we have a guest post from Jean-Michel Ferat ,CPA, CFF is a Managing Director in the Washington D.C office of the Claro Group around his views on the BHP Billiton enforcement action. 

Much has been made in the last few months of the SEC’s seemingly aggressive stance in the BHP Billiton case. Many FCPA practitioners have taken the view that the SEC likely over-reached and set a wobbly precedent in extracting a $25 million civil settlement from BHP for its alleged internal control failure relating to the identification of hospitality payments to government officials that could potentially have been subject to some quid pro quo arrangement.

This appears to be a standout case for the SEC, even when compared to the 2012 Oracle case. In Oracle, the SEC had at least the existence of an off-the-books slush fund which on its surface appeared to have been set up for nefarious purposes. In most if not all SEC enforcement actions in the last 5 years, it would appear that internal controls violations were coupled with a books and records violation: in other words shady accounting. With BHP, the SEC had a company that identified a specific corruption risk, established a control to mitigate that risk but failed to execute it adequately. No off-the-books slush fund, no fake invoices, no fictitious vendors, no circuitous payments to government officials….. In other words: no shady accounting.

Accounting Controls vs. Compliance Controls

The BHP case is important for another reason. It helps to illustrate a thorn in the side of most organizations when it comes to establishing and documenting a comprehensive control structure: the distinction between accounting controls and compliance controls. I won’t argue here whether a literal interpretation of the law should restrict our regulators and law enforcement to violations of accounting controls or whether it extends to other operational controls – e.g. compliance controls – as well. What I will argue is that the distinction between accounting controls and compliance controls is not purely semantic but one with practical implementation, enforcement and reporting differences within most organizations.

When one of thinks of accounting controls in the context of corruption risk, one thinks of controls over accounts payable, petty cash, vendor set-up, disbursements and the like. In essence, these are controls that address whether cash out the door is going to its intended recipient and whether it is properly accounted for in the company’s books and records. These types of controls over financial reporting have received persistent scrutiny under SOX 404 and are typically “owned” by a company’s finance function (e.g. accounting manager, controller, CFO). Conversely, compliance controls are ones that do not necessarily impact a company’s financial reporting process but are meant to ensure compliance with laws and regulations. In the case of the FCPA, such controls might include mandatory FCPA training for employees, audit rights in third party contracts, and due diligence surrounding third party representatives. These controls are not usually “owned” by the finance function but are typically fall to the legal department or CCO. This division of labor makes sense for most organizations but it has the often-times negative effect of creating control “silos” where neither finance nor legal has a complete picture of FCPA risk mitigation.  The primary mechanism for countering this silo effect is (1) implementing an enterprise wide risk management process (2) mapping those risks to the detailed internal controls (both accounting and compliance) designed to mitigate and (3) disseminating this information to upper management across the entire organization.

The Risk Management Process and Linking Controls to Identified Risks

A company’s Enterprise Risk Management Process should be used to identify perceived risks to the organization and put in place a risk mitigation plan. In most company’s though, the mitigation plan is often kept at a very high level and rarely includes a deep dive into the detailed accounting and compliance controls currently in place or that must be implemented to adequately mitigate risk. In the case of FCPA risk, we often see companies undertaking corruption risk assessments and addressing internal controls at a very high level, but similarly, we rarely see such risk assessments taking a deep dive into the specific controls in place to manage corruption risk.

In the case of BHP, employees actively identified a new corruption risk and sought to mitigate it. Where it looks to have failed was by not integrating the newly identified risk into its overall risk management process and ensuring that the newly established control was adequate to mitigate the risk. Had BHP included the identified risk into its overall risk management process, it likely would have benefited from:

1. visibility of the perceived risk by various parts of the organization including Finance, Legal, Operations and members of the Risk Committee of the Board, if one existed;
2. A clear determination of who within the organization was responsible for mitigating the risk;
3. A chance for internal audit or another group within the organization to evaluate whether the established controls were sufficient and operating effectively.

Linking detailed internal controls to identified risks is a laborious task, in particular in decentralized organizations with varying types of internal controls in different geographic locations and/or business segments. The BHP case and newly established COSO guidelines would suggest however that organizations should seriously consider performing this task. FCPA scholars will wait to see whether the SEC’s position on BHP is part of an emerging pattern of internal controls enforcement or a one off anomaly. Regardless, public issuers should take heed and look to shoring up their risk management and internal control processes before the regulators come knocking.

Editors Note-a reader noted the line “Most notable in this case is the fact that the SEC did not charge BHP with either a books and records violation or an anti-bribery violation, but an internal controls violation alone,” is incorrect. BHP was charged with a Books and Records violation of the FCPA. This line has been removed.

Jean-Michel Ferat, CPA, CFF is a Managing Director in the Washington D.C office of the Claro Group and has over eighteen years of experience in the specialized fields of forensic accounting and fraud detection. He has applied his skills in a variety of cases involving financial statement fraud, high-level corruption, terrorist financing, collusive bidding rings, money laundering, embezzlement, asset misappropriation. HE has undertaken dozens of corruption investigations around the globe including a lead role in the United Nations Oil-for-Food Programme investigation. He can be reached at jmferat@theclarogroup.com.

What Would Dr. Seuss Say about an Allowance?

Earlier this month we had the release of a second book by Harper Lee, “Go Set a Watchman”, which was miraculously discovered having been written some 50+ years ago. This week, there was another release from a (now deceased) author from a newly discovered source. I of course refer to the release yesterday of the new Dr. Seuss book “What Pet Should I Get?”, published Random House, which informs today’s compliance lesson.

The book was discovered by Seuss’ widow, as noted in the Sunday New York Times (NYT) Book Review article, entitled “Dr. Seuss Book: Yes They Found it in a Box”, when she decided to “have the rest of his notes and sketches appraised, that they closely examined the contents of that box. They found a set of brightly colored alphabet flash cards, some rough sketches titled “The Horse Museum,” and a manila folder marked “Noble Failures,” with whimsical drawings that he had been unable to find a place for in his stories. But alongside the orphaned sketches was a more complete project labeled “The Pet Shop,” 16 black-and-white illustrations, with text that he had typed on paper and taped to the drawings. The pages were stained and yellowed, but the story was all there, in Dr. Seuss’ unmistakable rollicking rhymes.” This finding became the book, What Pet Should I Get?

Reading this discovery made me ponder about how a child would pay for the pet they wanted and of course my thoughts turned to that age-old parenting quandary – the allowance. It is always a question of great interest for both parents and children. As with many things involving parent/child relationships, my views have evolved. As a teenager, I certainly had the view that an allowance was a God-given right and the more the better. I would only note that my parents did not share those views. As the father of a teenaged daughter, my views reached the much fuller expression of spoiling my daughter as often as possible. Which one is correct? I still do not have a final answer.

I thought about the ongoing debate and dialogue over the allowance when I read the Foreign Corrupt Practices Act (FCPA) enforcement action brought by the Securities and Exchange Commission (SEC) against Mead Johnson Nutrition Company (Mead Johnson). The matter was resolved via SEC Administrative proceeding that concluded with a Cease and Desist Order being agreed to by the parties. Mead Johnson agreed to pay a fine of $12.3MM which consisted of profit disgorgement of $7.7MM, prejudgment interest of $1.26MM and a civil penalty of $3MM. Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit, said in a SEC Press Release, “Mead Johnson Nutrition’s lax internal control environment enabled its subsidiary to use off-the-books slush funds to pay doctors and other health care professionals in China to recommend its baby formula and give the company marketing access to mothers.”

The enforcement action turned on violations of the accounting provisions of the FCPA. This is where the ‘allowance’ issue comes into the discussion. According to the Cease and Desist Order, “certain employees of Mead Johnson China improperly compensated HCPs, who were foreign officials under the FCPA, to recommend Mead Johnson’s infant formula to, and to improperly provide contact information for, expectant and new mothers.” One of Mead Johnson’s sales channels in China was through distributors. To facilitate this illegal conduct, funding to the distributors, called the “Distributor Allowance”, was diverted to make illegal payments. The Cease and Desist Order stated, “Although the Distributor Allowance contractually belonged to the distributors, certain members of Mead Johnson China’s workforce exercised some control over how the money was spent, and certain Mead Johnson China employees provided specific guidance to distributors concerning the use of the funds. Mead Johnson China staff also maintained certain records related to Distributor Allowance expenditure by distributors. In addition, Mead Johnson China used some of the funds to reimburse Mead Johnson China’s sales personnel for a portion of their marketing and other expenditures on behalf of Mead Johnson China.”

This tactic was clearly a violation of the company’s books and records obligations under the FCPA. By doing so, Mead Johnson was able to hide its payments to doctors and health care providers (HCPs) from not only regulators but the company’s shareholders as well. As the Cease and Desist Order noted, the company’s “records were incomplete and did not reflect that a portion of Distributor Allowance was being used contrary to Mead Johnson’s policies.” Finally, the Cease and Desist Order concluded, “Up through 2013, certain Mead Johnson China employees made payments to HCPs using funds maintained by third parties. These funds and payments from the funds were not accurately reflected on Mead Johnson China’s books and records. The books and records of Mead Johnson China were consolidated into Mead Johnson’s books and records. As a result of the misconduct of Mead Johnson China, Mead Johnson failed to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflected its transactions as required by Section 13(b)(2)(A) of the Exchange Act.”

However Mead Johnson did not stop with books and records violations. The Distributor Allowance manipulation allowed the China business unit to “improperly compensate HCPs was contrary to management’s authorization and Mead Johnson’s internal policies. Mead Johnson failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that Mead Johnson China’s funding of marketing and sales expenditures through third-party distributors was done in accordance with management’s authorization.” Once again the Cease and Desist Order concluded, “Up through 2013, Mead Johnson failed to devise and maintain an adequate system of internal accounting controls to ensure that Mead Johnson China’s method of funding marketing and sales expenditures through third-party distributors was not used for unauthorized purposes, such as improperly compensating Chinese HCPs to recommend Mead Johnson’s products. As a result of such failure, the improper payments to HCPs occurred contrary to management’s authorizations, in violation of Section 13(b)(2)(B) of the Exchange Act.”

In an interesting twist Mead Johnson, based on an allegation of potential FCPA violations in China, performed an internal investigation on its China unit in 2011 and came up with no evidence. Somewhat dryly the SEC noted that the company did not make any self-disclosure around these allegations and “did not thereafter promptly disclose the existence of this allegation in response to the Commission’s inquiry into this matter.”

Yet after a second internal investigation in 2013 they turned up evidence of FCPA violations, the company “undertook significant remedial measures including: termination of senior staff at Mead Johnson China; updating and enhancing financial accounting controls; significantly revising its compliance program; enhancing Mead Johnson’s compliance division, adding positions including a second senior-level position; establishing new business conduct controls and third party due-diligence procedures and contracts; establishing a unit in China that monitors compliance and controls in China on an on-going basis; and providing employees with a method to have immediate access the company’s policies and requirements.”

While there was no statement regarding self-disclosure, the company did cooperate extensively with the SEC after the company was called to task. The Cease and Desist Order noted, “Mead Johnson subsequently provided extensive and thorough cooperation. Mead Johnson voluntarily provided reports of its investigative findings; shared its analysis of documents and summaries of witness interviews; and responded to the Commission’s requests for documents and information and provided translations of key documents. These actions assisted the Commission staff in efficiently collecting valuable evidence, including information that may not have been otherwise available to the staff.”

There are several lessons to be learned from the Mead Johnson enforcement action. If it was not clear from the GlaxoSmithKline PLC (GSK) imbroglio in China in 2013-14, your internal investigation must be thorough. Performing an investigation, finding no FCPA violations only to have a regulator sitting on your shoulder and later finding such evidence is never good. The SEC also reaffirmed its clear intention to continue to enforce the accounting provisions of the FCPA, with or without a parallel Department of Justice (DOJ) enforcement action. Companies must also take heed on their internal controls. Clearly certain China business unit employees had developed a work-around of the compliance internal controls by requiring the distributors to use their allowances to pay bribes. Internal controls must not only exist but they must be effective. That means you have to test their effectiveness, not simply tick the box that you have put them in place.

Finally, and I think Dr. Seuss’ compliance lesson is that when you give out an allowance, while you may restrict some of its uses, you certainly should not direct where the money is spent. Every kid knows that if you are told where to spend your allowance, it is really not your allowance. Perhaps Mead Johnson would do well to remember that long lost lesson from childhood.

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

© Thomas R. Fox, 2015

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

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

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

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

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

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

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

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

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

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

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

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

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

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

© Thomas R. Fox, 2015

 

 

 

 

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

 

 

Ingots of Gold & SEC FCPA Enforcement – Communication – Part IV

Today I want to use the Christie’s story Ingots of Gold as an introduction to some of the regular communications that the Securities and Exchange Commission (SEC) representatives frequently provide in public forums, regarding their views on Foreign Corrupt Practices Act (FCPA) enforcement and, more importantly for the compliance practitioner, FCPA compliance. In this story, told by Miss Marple’s friend, he was spending a holiday in Cornwall with an acquaintance called John Newman. It involved a shipwreck and, as the title foretold, valuable cargo. After a stormy night Newman was missing but was later found bound and gagged in a ditch. It is revealed that Newman used this as ruse to cover his tracks from a theft of gold, which, of course, Miss Marple resolves when no one else can do so.

It was the language of this story that struck me. For as famous as Agatha Christie is for her puzzles, she had a great facility for language. At one point Miss Marple said, “You wouldn’t like my opinion, dear. Young people never do, I notice.” Later she describes the antagonist with the following, “his mind might run in strange, unrecognized channels”. Fortunately for the compliance community, one of the significant ways that the SEC communicates with compliance practitioners is through public speeches. We were recently treated to another such example when Andrew Ceresney, the SEC Director, Division of Enforcement, spoke at CBI’s Pharmaceutical Compliance Congress in Washington DC. Ceresney provided some clear guidelines for the compliance practitioner about what the SEC expects from companies in the area of FCPA compliance. More specifically he talked about some specific bribery schemes the SEC has seen in FCPA enforcement actions involving the pharmaceutical industry. These examples provided scenarios that any compliance practitioner in the pharmaceutical space can investigate for their organization.

Pharmaceutical Industry Bribery Schemes

Ceresney discussed ‘Pay-to-Prescribe’ bribery schemes where physicians and hospitals are paid bribes in “exchange for prescribing certain medication, or other products such as medical devices.” These schemes can involve payments of cash or other forms of non-cash benefits such as gifts, travel and entertainment. He described an example where a company “invited “high-prescribing doctors” in the Chinese government to club-like meetings that included extensive recreational and entertainment activities to reward doctors’ past product sales or prescriptions.” Another such scheme involved a running total of points for doctors who prescribed a company’s products, which could later be cashed in for items of value. Another involved a rebate of part of a hospitals overall purchase to certain doctors or hospital administrators.

Another form of bribery was seen where a company would direct charitable donations to the decision-makers “pet” charity. In a couple of FCPA enforcement actions, the charity had nothing to do with the pharmaceutical industry but in one case there was “a purported donation of nearly $200,000 to a public university to fund a laboratory that was the pet project of a public hospital doctor. In return, the doctor agreed to provide business to” the company in question. The point of all of these examples is that “that bribes come in many shapes and sizes, and those made under the guise of charitable giving are of particular risk in the pharmaceutical industry. So it is critical that we carefully scrutinize a wide range of unfair benefits to foreign officials when assessing compliance with the FCPA – whether it is cash, gifts, travel, entertainment, or charitable contributions.”

Compliance Programs

I certainly agree with Ceresney, only adding that I do not think you can say it too loud or too often, when he stated, “The best way for a company to avoid some of the violations that I have just described is a robust FCPA compliance program.” It all begins with a risk assessment so that you will understand what your company’s risks are and you can manage them accordingly through your compliance program. From there Ceresney said, “The best companies have adopted strong FCPA compliance programs that include compliance personnel, extensive policies and procedures, training, vendor reviews, due diligence on third-party agents, expense controls, escalation of red flags, and internal audits to review compliance.” He also specifically mentioned third parties, as they are still perceived to be the highest risk in any FCPA risk matrix. He stated, “To properly combat against these abuses, a compliance program must thoroughly vet its third-party agents to include an understanding of the business rationale for contracting with the agent. Appropriate expense controls must also be in place to ensure that payments to third-parties are legitimate business expenses and not being used to funnel bribes to foreign officials.”

Self-Reporting and Cooperation

Next Ceresney turned to self-reporting and cooperation. After initially noting that the current enforcement environment is greatly aided by self-reporting, he went on to explain why it is in a company’s interest to do so. Beyond the simple credit a company receives for self-reporting, by doing so “parties are positioned to also help themselves by aggressively policing their own conduct”. The SEC will also “continue to find ways to enhance our cooperation program to encourage issuers, regulated entities, and individuals to promptly report suspected misconduct. The Division has a wide spectrum of tools to facilitate and reward meaningful cooperation, from reduced charges and penalties, to non-prosecution or deferred prosecution agreements in instances of outstanding cooperation.” He ended this section of his remarks with a couple of thoughts that I believe succinctly provided the SEC’s position on self-reporting and cooperation. First he said “When I was a defense lawyer, I would explain to clients that by the time you become aware of the misconduct, there are only two things that you can do to improve your plight – remediate the misconduct and cooperate in the investigation.” He then ended with the following, “Companies that choose not to self-report are thus taking a huge gamble because if we learn of the misconduct through other means, including through a whistleblower, the result will be far worse. “

Internal Controls 

Ceresney had some interesting remarks around internal controls. He said they were in the “context of financial reporting”; however I found that they might well have significant implications for the compliance practitioner. I thought his money line was “Internal control problems have been prominently featured in recent enforcement cases we have brought in the financial reporting area, even in cases without accompanying charges of fraud.  This reflects our view that adequate internal controls are the building blocks for accurate financial reporting and can prevent fraudulent activity.” While the specified area of these remarks was around SOX §§302 and 404, I think this portends directly to internal controls under the FCPA.

He went on to state, “my key takeaway is that senior leadership of companies should place strong emphasis on the importance of designing and implementing strong internal controls. Senior officers need to ask questions about what they are being told about their internal controls – but perhaps more importantly, ask questions about the things that are not being reported to them. Dropping those occasional inquiries into conversations where they won’t be expected sends a powerful message that you want these issues to be on your employees’ minds. And what is needed is not just involvement from senior leadership but also from the audit committee. Instead of a check-the-box mentality, it is important to use careful thought at the outset to how controls should be designed in light of a firm’s business operations. This entails an up-front assessment of financial reporting risks, designing controls that address those risks, and ensuring that the resulting controls are well documented and communicated. And, as the company’s business evolves and changes, management must consider whether the existing internal controls are appropriate, or need to be enhanced or changed. Appropriate resources and attention also need to be devoted to monitoring those controls for effectiveness and making changes as needed.” Every time you see the words ‘financial’ simply substitute compliance and I think you will see where the SEC is headed in its internal controls enforcement of the FCPA.

Just as Agatha Christie communicated with her audience in ways broader than simply puzzles, through her great facility for delicious language, the SEC communicates in substantive ways with the compliance community through its speeches. You really do not have to read the tea leaves when you have such a clear message as was delivered by Ceresney at the CBI conference. Moreover, with all the sites that reported on it, talked about it and even linked to the printed text, you did not have to pay to attend. It is all there for you to read and to read for free.

For a copy of the text of Ceresney’s remarks, 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 I

I am a huge Agatha Christie fan. I have read most of the Poriot novels and many of the Jane Marple novels as well. However, I was not aware of Christie’s work in the short story format until I recently read a volume entitled Miss Marple Short Stories. This volume included 13 short stories first published in 1932. In many ways reading them was like revisiting an old friend, who had new stories to tell me that I had not previously heard. So in honor of my love of Agatha Christie and her short stories, I will theme my blog posts this week around one of her original short stories, published as The Thirteen Problems.

The first story was called The Tuesday Night Club and introduced Miss Marple and her cast of characters around these stories. Each was asked to relate some mystery and the others would try and solve the mystery. As with most of Christie’s writing, there were the stories and the characters who were, in many ways, stories themselves so there was a double layer of intersection. In this story a wife died of poisoning and her husband was the prime suspect. However Miss Marple deduced that the couple’s longtime housekeeper who has gotten “into trouble” through a liaison with the husband had poisoned the wife in hope’s of marrying the now widow. The group around Miss Marple was astounded when her deduction was confirmed by the storyteller when he related the housekeeper’s own deathbed confession.

Just as many readers may not have focused on Agatha Christie’s work in the short story format, many Foreign Corrupt Practices Act (FCPA) practitioners tend to focus on Department of Justice (DOJ) FCPA enforcement actions. However, just as Christie aficionados who did not focus on her short stories, many FPCA compliance practitioners do not tend to focus on FCPA enforcement by the Securities and Exchange Commission (SEC). To help address this, over the next week I will discuss issues relating to SEC enforcements.

Today, I begin with reviewing some jurisdictional issues unique to the SEC; commonly referred to as the FCPA accounting provisions, they consist of the books and records provisions which, as set out in the FCPA Guidance, requires that “issuers must make and keep books, records, and accounts that, in reasonable detail, accurately and fairly reflect an issuer’s transactions and dispositions of an issuer’s assets and internal controls requirements.” Under the internal controls provisions, “issuers must devise and maintain a system of internal accounting controls sufficient to assure management’s control, authority, and responsibility over the firm’s assets.”

Perhaps the most interesting thing about the ‘accounting provisions’ under the FCPA as stated in the FCPA Guidance, is as follows: , “Although the accounting provisions were originally enacted as part of the FCPA, they do not apply only to bribery-related violations. Rather, the accounting provisions ensure that all public companies account for all of their assets and liabilities accurately and in reasonable detail”. [emphasis supplied] This means there can be strict liability for stand alone violations of these provisions, with no ties back to the corrupt intent or elements of a FCPA violation are present.

Who is covered under SEC enforcement of the FCPA? 

The SEC prosecutes ‘issuers’ who are defined as a company “that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file annual or other period reports pursuant to Section 15(d) of the Exchange Act.” The SEC also enforces the FCPA against companies “whose securities trade on a national securities exchange in the United States, including foreign issuers with exchange traded American Depository Receipts” and trade in over-the counter markets. While the SEC does not bring enforcement actions against private companies, private companies are also subject to the FCPA, just as public companies for bribing a foreign government official, in violation of the FCPA.

Accounting Provisions

Consistent with the concern that bribe payments are often disguised as other types of payments in a company’s books and records, “requires issuers to “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.”” The “in reasonable detail” qualification was adopted by Congress “in light of the concern that such a standard, if unqualified, might connote a degree of exactitude and precision which is unrealistic.” The addition of this phrase was intended to make clear “that the issuer’s records should reflect transactions in conformity with accepted methods of recording economic events and effectively prevent off-the-books slush funds and payments of bribes.”

The Guidance goes on to give several examples of SEC enforcement actions of the books and record provisions where bribes were mischaracterized in a company’s books and records. Such examples include bribes paid out in the guise of commissions, royalties or consulting fees. Another prominent example includes reimbursement for sales and marketing or miscellaneous expenses where no such activity occurred. A favorite has been mischaracterized travel and entertainment expenses. Finally, a large group of often over-looked expenses include free goods for demonstration products, intercompany accounts, vendor payments and customer write-offs.

A key distinction of FCPA enforcement by the SEC from other types of accounting fraud is that there is no materiality requirement under the FCPA. Typically, internal audit, external audit or even forensic accounting, only review material transactions. Obviously for a large multi-national company subject to the FCPA, materiality could be millions of dollars or multiplies thereof. However we have seen FCPA enforcement actions with corrupt payments made in the low thousands of dollars.

Internal Controls Provisions

The FCPA says that internal controls requires issuers to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that—

(i) transactions are executed in accordance with management’s general or specific authorization;

(ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets;

(iii) access to assets is permitted only in accordance with management’s general or specific authorization; and

(iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

As further explained in the FCPA Guidance, “the Act defines “reasonable assurances” as “such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.” Neither the FCPA nor the FCPA Guidance specifies a particular set of controls that companies are required to implement. However the FCPA Guidance does note, “the internal controls provision gives companies the flexibility to develop and maintain a system of controls that is appropriate to their particular needs and circumstances.”

Moreover, the FCPA Guidance recognizes that “An effective compliance program is a critical component of an issuer’s internal controls.” To do so, a company needs to access its risk and then design and implement a system of internal controls to “account the operational realities and risks attendant to the company’s business.” The FCPA Guidance suggests some of these areas should include “the nature of its products or services; how the products or services get to market; the nature of its work force; the degree of regulation; the extent of its government interaction; and the degree to which it has operations in countries with a high risk of corruption”. But the over-riding key is to assess your company’s FCPA compliance risks and set up a set of internal controls to help manage those risks effectively.

Other SEC Enforcement Areas Relating to FCPA Compliance 

In addition to the accounting provisions there are other laws and regulations that the SEC enforces and ties into FCPA enforcement. As noted in the FCPA Guidance, “Issuers have reporting obligations under Section 13(a) of the Exchange Act, which requires issuers to file an annual report that contains comprehensive information about the issuer. Failure to properly disclose material information about the issuer’s business, including material revenue, expenses, profits, assets, or liabilities related to bribery of foreign government officials, may give rise to anti-fraud and reporting violations under Sections 10(b) and 13(a) of the Exchange Act.”

There are also several sections under the Sarbanes-Oxley Act (SOX) that have FCPA implications. These include SOX §302 that requires the principle officers of a company “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.

The remainder of this week I will tie another Miss Marple short story to another SEC FCPA enforcement issue. I hope that you will tune in for the next installment.

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

Byzantium and the Alstom FCPA Settlement – Part III

Porphyry is a type of stone that was much favored in the Roman world. In a review of several books in the New York Review of Books, entitled “The Purple Stone of Emperors”, Peter Brown looked into the history of the lithic in the context of Byzantium as the true heir of the Roman Empire. He theorized that if “porphyry was the blood of ancient empire, then it must be to Constantinople that we should look (and not to Western Europe) if we wish to understand the heritage of Rome in the Middle Ages.” I found that an appropriate way to think about an apparent anomaly in the recent Alstom Foreign Corrupt Practices Act (FCPA) enforcement action. In Part III of my series on the Alstom natter I consider the accounting records violations that the French parent, Alstom SA, agreed to in this enforcement action.

The FCPA Professor noted in his second blog post on this matter, entitled “Issues to Consider from the Alstom Action”, “The charges against Alstom S.A. are a real head-scratcher. The conventional wisdom for why the Alstom action involved only a DOJ (and not SEC) component is that Alstom ceased being an issuer in 2004 (in other words 10 years prior to the enforcement action). Yet, the actual criminal charges Alstom pleaded guilty to – violations of the FCPA’s books and records and internal controls provisions – were based on Alstom’s status as an issuer (as only issuers are subject to these substantive provisions). In other words, Alstom pleaded guilty to substantive legal provisions in 2014 that last applied to the company in 2004.”

The Professor had also raised this issue in his first blog post on the resolution, entitled “All About the Alstom Enforcement Action”. After considering his thoughts on this issue, I decided to look into it a bit more deeply. Alstom SA was charged with several different FCPA violations including the following, 15 U.S.C. 78m(b)(2)(A), 15 USC §78m(b)(2)(B) and 78m(b)(5) which read in whole,

15 U.S.C. § 78m [Section 13 of the Securities Exchange Act of 1934] 

(b) Form of report; books, records, and internal accounting; directives…

(2) Every issuer which has a class of securities registered pursuant to section 78l of this title and every issuer which is required to file reports pursuant to section 78o(d) of this title shall—

(A) 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;

(B) devise and maintain a system of internal accounting controls sufficient

to provide reasonable assurances that—…

(5) No person shall knowingly circumvent or knowingly fail to imple­ment a system of internal accounting controls or knowingly falsify any book, record, or account described in paragraph (2).

These provisions are generally referred to as the ‘accounting provisions’ of the FCPA. As stated in the FCPA Guidance, “In addition to the anti-bribery provisions, the FCPA contains accounting provisions applicable to public companies. 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.””

Moreover, these accounting provisions, including both the books and records and internal control provisions, are defined to apply to “issuers”. As set out in the FCPA Guidance, “The FCPA’s accounting provisions apply to every issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file annual or other periodic reports pursuant to Section 15(d) of the Exchange Act.244 These provisions apply to any issuer whose securities trade on a national securities exchange in the United States, including foreign issuers with exchange traded American Depository Receipts. They also apply to companies whose stock trades in the over-the-counter market in the United States and which file periodic reports with the Commission, such as annual and quarterly reports. Unlike the FCPA’s anti-bribery provisions, the accounting provisions do not apply to private companies.”

Charging Box Score

Alstom Entity	Charges	Time of Criminal Conduct	Issuer Status
Alstom SA	15 USC §78m(b)(2)(A)15 USC §78m(b)(2)(B)15 USC §78m(b)(5) 15 USC §78ff(a) 18 USC §2	1998-2004	Issuer until 2004
Alstom Power Inc.	18 USC §371-conspiracy to violate the FCPA	2002-2009	Subsidiary of Issuer until 2004
Alstom Grid Inc.	18 USC §371-conspiracy to violate the FCPA	2000-2010	Subsidiary of Issuer until 2004
Alstom Network Schweiz AG	18 USC §371-conspiracy to violate the FCPA	2000-2011	Subsidiary of Issuer until 2004

While I agree with the above, I do disagree with the Professor’s final statement that “This free-for-all, anything goes, as long as the enforcement agencies collect the money nature of FCPA enforcement undermines the legitimacy and credibility of FCPA enforcement.” The reason I disagree is that this was a negotiated settlement, not a dictat or court proceeding. With no doubt excellent FCPA defense counsel involved, Alstom must have had its own reasons for agreeing to such a settlement. Without any further comment by the company, we will have to speculate as to some of the reasons for this component of the resolution.

First and foremost is that clearly Alstom did engage in conduct which substantially violated the FCPA. It would further appear that the conduct reached right up into the corporate home offices in France. By agreeing to the books and records and internal control violations, Alstom may have avoided any direct admission of guilt under French law, which we now know from the Total FCPA enforcement action is significant for a French company, because what is illegal bribery and corruption under US law is not necessarily illegal under French law.

Other than the anomalous French law issue, there may be another important consideration going on here. Alstom is under acquisition by General Electric (GE). Not only does GE pride itself and very publicly inform about its anti-corruption compliance program, GE has a large number of contracts with the US and other governments which might looks askance at doing business with a business unit that admitted to substantive FCPA violations of bribery and corruption. While I do not think that GE would be in danger of being debarred, it might well be that certain governments might not want to do business with a new subsidiary which made such a court admission. I find this to be more than simply a distinction without a difference. Consider the trouble that Hewlett-Packard (HP) is in north of the border in Canada regarding potential debarment by the Canadian government for its FCPA violations as set forth in its FCPA resolution of last April. So perhaps from Alstom’s perspective, the company believed it received benefits from settling based upon accounting violations.

But whatever the reason, it is clear that Alstom did engage in substantive FCPA violations. It’s settlement is that, a settlement of outstanding issues, which the company was a willing participant. It may not have been what the company wanted but I do not find that by charging Alstom for books and records and internal controls violations for the time frame it was clearly liable in any way demeans, degrades or lessens FCPA enforcement going forward. But just as we need to look to Byzantium to determine the heritage of Rome through the Middle Ages, by looking at the facts and circumstances around Alstom’s FCPA from the Alstom perspective and what it hoped to obtain in the settlement, we might be able to glean some insights.

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