On the Oregon Trail: the BHP Enforcement Action and High-Risk Hospitality

Today we celebrate American exceptionalism. As noted in ‘This Date in History’, on this date in 1834 the first wagon train, made up of 1,000 settlers and 1,000 head of cattle, set off down the Oregon Trail from Independence, Missouri, on the Great Emigration. After leaving Independence, the giant wagon train followed the Santa Fe Trail for some 40 miles and then turned to its northern route to Fort Laramie, Wyoming. From there, it traveled on to the Rocky Mountains, which it passed through by way of the broad, level South Pass that led to the basin of the Colorado River. The travelers then went southwest to Fort Bridger and on to Fort Boise, where they gained supplies for the difficult journey over the Blue Mountains and into Oregon. The Great Emigration finally arrived in October, completing the 2,000-mile journey from Independence in five months.

The settlers who took off on this Great Emigration on the Oregon Trail did not have anything in the way of a road map. Fortunately for the modern day anti-corruption compliance practitioner, you do have road maps that can guide your compliance with the Foreign Corrupt Practices Act (FCPA) going forward. Over the past few years the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) have put out significant and detailed information on compliance failures, which have led to FCPA enforcement actions. For any Chief Compliance Officer (CCO) or compliance practitioner, these enforcement actions provide solid information of lessons learned which can be used as teaching points for companies. Further, these lessons can be used as road maps to review compliance programs to see what gaps, if any, may exist and how to implement solutions.

This trend continued with the release of the SEC FCPA enforcement action involving BHP Billiton Ltd. (BHP) this week. First and foremost to note is that it was a SEC enforcement action involving violations of the internal controls provision of the FCPA. There was no evidence of bribery leading to any DOJ enforcement action. Yet as I have been writing and saying for almost one year, SEC enforcement of the internal controls provision of the FCPA is increasing and companies need to pay more attention to this part of the FCPA. A bribe or offer to bribe does not have to exist for an internal controls violation to occur. CCOs and compliance practitioners need to be cognizant of compliance internal controls and put effective compliance internal controls in place that can be audited against to test their effectiveness.

The BHP enforcement action revolved around the company’s hospitality program for the Beijing 2008 Olympics. Every CCO and compliance practitioner should study this enforcement action in detail so that they can craft appropriate compliance internal controls for high dollar entertaining for big time sporting events. For any company that may be planning for high dollar hospitality spends for the 2016 Brazil Olympics, this enforcement action lays out what you should and should not do in your compliance program. But this holds true for any major sporting event such as the Super Bowl, World Cup or you name the event.

BHP had a paper program that appeared robust. As laid out in the Cease and Desist Order, “BHPB developed a hospitality application which business managers were required to complete for any individuals, including government officials, whom they wished to invite.” The application included these questions to be fully answered:

• “What business obligation exists or is expected to develop between the proposed invitee and BHP Billiton?”,
• “Is BHP Billiton negotiating or considering any contract, license agreement or seeking access rights with a third party where the proposed invitee is in a position to influence the outcome of that negotiation?”
• “Do you believe that the offer of the proposed hospitality would be likely to create an impression that there is an improper connection between the provision of the hospitality and the business that is being negotiated, considered or conducted, or in any way might be perceived as breaching the Company’s Guide to Business Conduct? If yes, please provide details.”; and
• “Are there other matters relating to the relationship between BHP Billiton and the proposed invitee that you believe should be considered in relation to the provision of hospitality having regard to BHP Billiton’s Guide to Business Conduct?”

So the right forms were in place and some of them were fully filled out. However, as the Cease and Desist Order made clear, an effective compliance program does not end at that point. Now would be an appropriate time to recall that high risk does not mean you cannot engage in certain conduct. High risk means that to have an effective compliance program, you have to manage that risk. A basic key to any effective compliance program is oversight or a second set of eyes baked in to your process. BHP formally had this oversight or second set of eyes in the form of an Olympic Sponsorship Steering Committee (OSSC) and Global Ethics Panel Sub-Committee.

Where BHP failed was that “other than reviewing approximately 10 hospitality applications for government officials in mid-2007 in order to assess the invitation process, the OSSC and the Ethics Panel subcommittee did not review the appropriateness of individual hospitality applications or airfare requests. The Ethics Panel’s charter stated that its role simply was to provide advice on ethical and compliance matters, and that “accountability rest[ed] with business leaders.” Members of the Ethics Panel understood that, consistent with their charter, their role with respect to implementation of the hospitality program was purely advisory. As a result, business managers had sole responsibility for reconciling the competing goals of inviting guests – including government officials – who would ““maximize [BHPB’s] commercial investment made in the Olympic Games” without violating anti-bribery laws.”

But there was more than simply a failure of oversight by BHP. The Cease and Desist Order noted that not all of the forms were filled out with the critical information around a whether a proposed recipient might have been a government official. Even more critically missing was information on whether the proposed recipient was in a position to exert influence over BHP business. Moreover, BHP did not provide training to the business unit employees who ended up making the call as to whether or not to provide the hospitality on payment of travel and hospitality for spouses. The Cease and Desist Order stated that BHP “did not provide any guidance to its senior managers on how they should apply this portion of the Guide when determining whether to approve invitations and airfares for government officials’ spouses.” Finally, there were no controls in place to update or provide ongoing monitoring of the critical information in the forms.

All of this led the SEC to state the following, “As a result of its failure to design and maintain sufficient internal controls over the Olympic global hospitality program, BHPB invited a number of government officials who were directly involved with, or in a position to influence, pending negotiations, efforts by BHPB to obtain access rights, or other pending matters.” This led to the following, “BHPB violated Section 13(b)(2)(B) because it did not devise and maintain internal accounting controls over the Olympic hospitality program that were sufficient to provide reasonable assurances that access to assets and transactions were in executed in accordance with management’s authorization.” Perhaps it was stated most succinctly by Antonia Chion, Associate Director of the SEC’s Division of Enforcement, in the SEC Press Release announcing the enforcement action when he said, “A ‘check the box’ compliance approach of forms over substance is not enough to comply with the FCPA.”

There is also clear guidance from the SEC about how BHP was able to obtain the reduced settlement it received. BHP “provided significant cooperation with the Commission’s investigation”. Moreover, the Cease and Desist Order laid out the remedial steps the company took. These steps included: (1) creation of compliance group independent of the business units; (2) review of its anti-corruption program and implementation of certain upgrades; (3) embedding of anti-corruption managers into the business units; (4) enhancements of “its policies and procedures concerning hospitality, gift giving, use of third party agents, business partners, and other high-risk compliance areas”; (5) enhancement of “financial and auditing controls, including policies to specifically address conducting business in high-risk markets”; and (6) enhanced anti-corruption compliance training.

FCPA compliance is a relatively simply exercise. That does not mean it is easy. For travels on the Great Emigration on the Oregon Trail, travel was neither simple nor easy. If you want to send government officials to high profile sporting events or provide other high dollar hospitality, the FCPA does not prevent you from doing so. But it is a high risk and to be in compliance you must to manage those high risks appropriately, all the way through the process. The BHP enforcement action provides you a detailed road map of what to do and what not to do.

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

© Thomas R. Fox, 2015

The Avon FCPA Settlement, Part II

I am back from my holiday break and am looking forward to many good ideas for blogs in the coming year. However before we get to 2015, I have to finish out some matters from 2014. Today I continue my look at the Avon Foreign Corrupt Practices Act (FCPA) enforcement action, which was announced earlier this month. In today’s post I will look at the bribery scheme and cover-up that Avon employed. Tomorrow I will conclude with some final lessons to be gleaned from the Avon enforcement action for both the compliance practitioner and greater corporate world. Avon Products (China) Co. Ltd. is referred to as ‘Avon China’ and Avon Products, Inc. (the US parent) is referred to as ‘Avon’.

With a sustained plan that one can only say was well thought out, Avon set out to conquer the Chinese market for door-to-door sales. To do so, Avon had to navigate a bureaucratic maze. This maze began with a Test License obtained in 2005 and later a national direct selling license together with approvals from each province and municipality where the company wanted to sell its products. To obtain the required licenses, the company set a bribery scheme which worked at all levels of the company’s China subsidiary, Avon China, and reached back to the home office in the US, Avon Products. Both of these entities were the subject of the FCPA enforcement action concluded earlier this month. The bribery scheme itself paid out over $8MM in bribes before it was concluded.

To facilitate this process Avon China set up a business unit entitled the Corporate Affairs Group and later a more focused sub-group as part of the scheme called the Direct Selling Special Task Force. These two groups led the company’s efforts to bribe its way into the China market. They did so through a variety of means, as set out in the settlement documents. Unless cited otherwise, the quotes below are from the Avon China Criminal Information.

Gifts

Avon was fond of giving very high priced gifts to various Chinese government officials. Inevitably, Avon China employees would falsely describe the gift itself in the company’s books and record. To add to this deception, Avon China would omit from the books and records not only who the gift was provided to but also the purpose of the gift. This part of the bribery scheme allowed the gifts of Louis Vuitton products to be described as a “public relations expense” and “Public Relations Business Entertainment”; while the gift of a Gucci bag was described as “business entertainment”.

Meals and Entertainment

This part of the bribery scheme was a clear favorite of Avon China. The aforementioned Direct Selling Special Task Force was ubiquitous in the meals and entertainment arena where its members simply used the term “relations” to refer to “things of value provided to government officials or goodwill that had been obtained by giving such things, including non-business meals and entertainment.” Specifically noted in this part of the bribery scheme were payments of approximately $8,100 described as “sales-business entertainment” provided to a government official so he would approve a product that did not meet Chinese government standards. Other false excuses provided were describing such payments as “business entertainment” and “employee ‘accommodation’ expenses”.

Non-Business Travel

Avon China doled out a huge amount of bribes through the mechanism of phony travel for alleged business purposes. Avon China would claim they were bringing various Chinese government officials (also Wives, Girlfriends and other family members) to locations for business-related travel but in reality the trips were mostly sight-seeing excursions, gambling junkets, a beach vacation and other entertainment which had nothing to do with business purposes. So a trip alleged to be a “site visit/study visit” to the corporate headquarters in New York City and the company’s research and development (R&D) facility in upstate New York became a $90,000, 18-day travel extravaganza to “Vancouver, Montreal, Ottawa, Toronto, Philadelphia, Seattle, Las Vegas, Los Angeles and Washington DC.” (Oh, and one half-day at the company’s upstate New York R&D facility.) Other favorite venues for Chinese government officials and their families were the gambling mecca of Macau, Hong Kong, Hainan Island, Guangzhou, Shenzhen and Sanya. Needless to say, none of these locations had any Avon corporate offices, manufacturing or R&D facilities.

Cash

Always a favorite of bribers everywhere, Avon did not neglect to lay out large amounts of cash. Avon China used a variety of orchestrations to hide these payments including simply stealing it from a (apparently) huge petty cash fund, directing Avon China employees to charge for non-existent expenses and keep the reimbursements from corporate, lying in the books and records by calling such bribe payments as “management expenses-government relations expenses” and even submitting “a handwritten certificate, purportedly from a Chinese government agency, falsely stating that the official would give the funds to the government bureau.”

Payment Through Third Parties

Using an entity identified as “Consulting Company A”, Avon China paid a large number of bribes throughout the period in question. Initially it should be noted that this entity raised numerous red flags that were never investigated or cleared. These began with the fact that it was a Chinese government official who recommended the retention of Consulting Company A to perform ‘lobbying’ services for Avon China. Thereafter the company performed no background investigation into the ownership structure of the company, did not include any compliance terms and conditions in the contract, did not even communicate to this third party of Avon’s Code of Conduct prohibition against bribery of government officials. Beyond these issues, in large part Consulting Company A never performed any legitimate services for Avon China. What Consulting Company A did provide to Avon China was a way to funnel bribe payments to Chinese government officials.

Corporate Connivance in Scheme (AKA The Cover-Up)

While all of the above was bad, one thing which catapulted the Avon FCPA bribery scandal into the realm of seriously bad was the company’s discovery of the bribery scheme and resulting cover-up. According to the Criminal Information for Avon Products, in 2005 a senior auditor in Avon’s internal audit group, “reported to Avon’s Compliance Committee, which was comprised of several senior Avon executives, that Avon China executives and employees were not maintaining proper records of entertainment for government officials” and that an Avon China executive had explained the practice “was intentional because information regarding that entertainment was ‘quite sensitive.’” This led to a Draft Audit Report, reviewed at the highest levels of Avon China and Avon in the US, which concluded that Avon China’s Corporate Affairs Group’s expenses included: “(1) high value gifts and meals that were offered to Chinese government officials; (2) the majority of expenses relating to gifts, meals, sponsorship and travel of substantial monetary value was to maintain relationships with government officials; (3) a third party was paid large amounts of money to interact with Chinese government officials but was not contractually required to follow the FCPA, was not monitored by Avon China, and was paid for vague and unknown services; and (4) the payments, and the lack of accurate, detailed records may violate the FCPA or other anti-corruption laws.”

So what was the company’s response to this information? The internal auditors who prepared the report were required to remove the above language and whitewash the report. Evidence of reviewed misconduct was reduced to two hand-written pages, which were then taken out of China and hand-carried to Avon’s corporate headquarters. All copies of the Draft Audit Report were ordered to be retrieved and destroyed. Finally, as noted in the Criminal Information of Avon China, in January 2007, an Avon executive reported to the Avon Compliance Committee “that the matter reported in 2005 regarding the potential FCPA violations by AVON CHINA executives and employees had been closed as “unsubstantiated” which terminated Avon’s investigation into AVON CHINA’s corrupt conduct.”

Tomorrow we take a look at some of the key lessons to be learned from Avon FCPA enforcement action.

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, 2014The v

Doing Business in India – Corruption Risks and Responses

Recently the US law firm of Foley and Lardner LLP and MZM Legal, Advocates & Legal Consultants in India jointly released a white paper, entitled “Anti-Bribery and Foreign Corrupt Practices Act Compliance Guide for U.S. Companies Doing Business in India”. For any compliance practitioner it is a welcome addition to country specific literature on the Foreign Corrupt Practices Act (FCPA), UK Bribery Act and other anti-corruption legislation and includes a section on India’s anti-corruption laws and regulations.

FCPA Enforcement Actions for Conduct Centered in India

Under the FCPA, several notable US companies have been through enforcement actions related to conduct in India. Although not monikered as a ‘Box Score’ the authors do provide a handy chart which lists the companies involved, a description of the conduct and fine/penalty involved.

Company	Description	Disposition (in USD)
Pride International	Payment made for favorable administrative judicial decision regarding customs issues	$56.1 million
Tyco International	German subsidiary paid third parties to secure contracts; payments recorded as commissions	$26 million
Diageo	Subsidiary made payments to government official responsible for purchase/authorization of Diageo’s products in India	$16.4 million
Textron	Subsidiaries paid foreign officials to secure contracts; characterized as commission and consulting fees	$5.05 million
Oracle Corporation	Oracle distributor allegedly created “slush” fund to pay third parties	$2 million
Dow Chemical Company	Payments made to India Central Insecticides Board to expedite registration of products	$325,000

India Anti-Bribery/Anti-Corruption Laws 

The authors identify the principal anti-corruption legislation in India as the Prevention of Corruption Act, 1988 (PCA), which focuses on bribery of public servants. They go on to state, “Bribery under the PCA includes any “gratification” that a public servant receives other than his/her legal remuneration. Gratification constituting a bribe would include anything intended to motivate, influence, or reward a public servant for performing (or forbearing performance of) an official act, or for showing “favour or disfavour” to any person, or for rendering any service or disservice to a public servant.” However, there are other laws, in addition to the PCA, which govern such issues. These include “specific public servants’ Conduct Rules, which set specific guidelines on the value of gifts that may be accepted in furtherance of local or religious customs (where no reciprocal action is expected and where the public servant has no current or expected future official dealings with the gift giver). The guidelines for permissible gifts are based on the public servant’s rank and service classification and broadly range between 500 – 7,500 Rupees (approximately $8 – $120 U.S. dollars).”

Corruption Risks in India

Corruption risks in India are generally perceived to be high due to its “complex administrative and bureaucratic environment”. Similarly the FCPA Professor would say there are a high number of barriers to trade. Coming at it from a different direction, the Department of Justice (DOJ) would say the risk is high because of the number of licenses and permits required. More pruriently, I would say this leads to more folks having their collective hand out looking to speed things up. Indeed, in the recently released TRACE Matrix India comes in at 185^th out of 197 countries listed, with a corruption score of 80, based largely on its score of 92 in the highest weighted category of “Interactions with Governments”.

a. Licenses and Permits

The authors identify that “a host of regulatory hurdles exists in India, including the need to obtain permits, licenses, and other regulatory approvals and to pay various application and registration fees. These types of low-level transactions provide opportunities for bribery. Payments made in such transactions — whether in cash or gifts — may appear minimal (by U.S. standards) and may seem harmless, but they can nonetheless result in violations of U.S. and/or India law.” They go on to list some “Examples of Problematic Conduct” around this issue they identify the following:

• Paying (or providing some other benefit to) a customs official to bypass inspection or overlook incorrect or incomplete paperwork;
• Paying a local tax regulator to overlook errors or inconsistencies in filings;
• Paying an official to expedite the processing of a permit or license;
• Paying a utilities provider to reduce billings; and
• Paying a local health and safety regulator to overlook code violations.

b. Gifts, Travel and Entertainment

In the area of gifts, travel and entertainment, the authors state that “companies run the risk of triggering the FCPA and other anti-corruption laws if their marketing and entertainment expenditures cross a line into conduct that could be characterized as bribery or lends to the appearance of attempting to induce a breach of trust or impartiality on the part of the recipient…the various conduct rules for public servants in India establish specific guidelines for accepting gifts and hospitality, and, for some public servants, the maximum permissible gift value may be as low as 500 rupees ($8 U.S. dollars). Companies operating in India should thus familiarize themselves with these guidelines before providing even what may seem to be a modest gift or hospitality.” Some examples of problematic conduct identified is these areas are as follows:

• Paying for extravagant meals, drinks, and entertainment in connection with a visit by a foreign official;
• Paying for “side trips” so that foreign officials can visit tourist attractions (e.g., Walt Disney World, Las Vegas) while in the United States;
• Providing per-diems or “pocket money” for foreign officials to use during a visit;
• Paying for a foreign official’s spouse or family to accompany the foreign official on a trip; and
• Providing foreign officials with excessive gifts for birthdays, weddings, holidays, or other events.

c. Third Parties

This is always recognized as the highest FCPA risk and in India it is no different. More importantly, it may be even greater in this country because “Navigating India’s extensive regulations and bureaucracy often requires U.S. companies to rely on third parties, such as agents, brokers, consultants, sales representatives, distributors, and other business partners…The PCA similarly criminalizes bribery through third parties as a direct violation by the third party and as an abetment violation by the company on whose behalf the bribe is being made.” The key is subject any third party to rigorous due diligence and closely manage the relationship after the contract is signed. If a Red Flag appears at any point in the third party lifecycle it should be evaluated and cleared. The authors provide a handy list of some examples of Red Flags regarding third parties when doing business in India. They include:

• A third party is listed in databases reporting known corruption risks (e.g., World Bank List of Debarred Firms) or has been previously investigated for, charged with, or convicted of corruption or other ethics violations;

• A foreign official has specifically requested that a certain third party be involved in the company’s transaction or business;
• An agent or consultant holds himself out as someone with close connections to an important minister or minister’s aide;
• A third party does not appear to have sufficient resources, real estate/infrastructure, or experience to perform the requested tasks;
• A third party asks the company to provide it with unreasonably large discounts, excessive commissions, reimbursements, or contingency fees; and
• A third party requests payment in an irregular or convoluted manner (e.g., cash, offshore bank account, payments to another company, over/under invoicing).

Managing Corruption Risk in India

In their concluding section, the authors relate solid risk management tools tailored to the Indian market. It all starts with robust standards and procedures. From there you should train not only your employees on what may be illegal conduct and how to resist requests for bribes but also your third parties. Annual certifications are an important tool for not only risk management but also communication about anti-corruption expectations. Your compliance program should devote the appropriate level of personnel and resources for your operations in India. Finally, a robust reporting mechanism is key but equally critical is your response after any information comes to light. It must be thoroughly investigated, quickly remedied and reported as appropriate.

The Foley & Lardner/MZM Legal white paper is a welcome addition to literature about country specific risks, remedies and responses. A copy of the full white paper can be obtained 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

TNG Premiers and Internal Controls for Gifts in a Best Practices Compliance Program

This week, 27 years ago, Star Trek – The Next Generation (TNG) made its television debut. Rarely has there a follow up to a beloved original series (Star Trek – The Original Series (TOS)) that is equally treasured by fans. They say that your favorite Star Trek is the one you grew up with, so for me that is TOS and that will always be my most beloved Star Trek series, but for the younger generations TNG fills that bill. The series occurred some 70 years in the time after TOS so things were a bit different. One of the differences was on following the Prime Directive more rigorously. While Captain Kirk, who actually had a hand in drafting the Prime Directive, seemed to view it with situational ethics, Captain Picard was much more concerned about not violating it.

I thought about this evolution of the Prime Directive from TOS to TNG when considering what types of internal controls a compliance practitioner might consider in the area of gifts in a Foreign Corrupt Practices Act (FCPA) best practices compliance program. I have been continuing my exploration of internal controls with well-known expert Henry Mixon, Principal of Mixon-Consulting. Mixon believes that it would be reasonable to expect that internal controls over gifts would be designed to ensure that all gifts satisfy the criteria as defined and interpreted in Company policies. Generally speaking, these are fairly narrow, including a definition of the dollar limit, which must not be exceeded in order for gifts to be permissible, coupled with some subjective criteria such as the legality of the gifts for the recipient and whether the practice is customary within the country where the gift is delivered. The question I focus on is how to enforce the policies so that employees are not free to disregard them at will?

The Department of Justice (DOJ), in several enforcement actions and the FCPA Guidance has emphasized the importance of risk assessment and effective controls and building a program tailored to those risks. Many companies effectively minimize the risk of inappropriate gifts through stringent pre-approval requirements because a sufficiently robust and enforced pre-approval policy can reduce the number of gifts simply because of the headache of getting the pre-approval. This has the added benefit of ensuring enforcement of internal controls, largely because of the reduced volume of gifts being included in expense reports. Mixon cautions that in considering the effectiveness of controls, you must always keep in mind the most frequently used method for defeating an internal control, which is driven by a dollar amount criteria, is splitting the item into multiple parts in order to appear to stay under the limit and to avoid the defined approval authority based on the amount of the gift.

Mixon believes that the key analysis is whether there are controls in place to enforce the policies and whether those controls are documented. To help to answer this query, he posited that there are four issues to evaluate.

• Is the correct level of person approving the payment / reimbursement for the gift?
• Are there specific controls, including signoffs, to demonstrate that the gift had a proper business purpose?
• Are the controls regarding gifts sufficiently preventative, rather than relying on detect controls?
• If controls are not followed, is that failure detected by other internal controls or the compliance protocols?

While many compliance practitioners believe that employee expense reports are a sufficient internal control regarding gifts, because there are other ways in which a gift can be presented, there need to be other controls. Mixon believes that once your company policy on gifts has been finalized, the internal controls over expense reports fall into three basic areas: (1) The expense report format, including what information it requires; (2) Controls over the submitting employee and the preparation of the expense report; and (3) Controls to ensure the approvers do their review process properly.

Mixon believes the format itself of an expense report can go a long way toward prevention of violations of company policy. First it is important to have preprinted representations and certifications within the form because these can lead to “stop and think” type of controls, meaning the person submitting the expense report has to at least consider the information being submitted. The form can be signed without reading the preprinted representations, but if the employee and reviewers have been trained on how to review the expense report, it can be difficult to say later that the submitting employee did not understand what they were signing.

Mixon suggested two forms of representation, the Preparer’s representations and the Approver’s representations. The Preparer’s representations include ensuring that all items representing a proper business purpose comply with the company’s code of conduct, comply with local law and custom, and comply with all applicable company policies regarding FCPA compliance. The Approver’s representations ensure that all supporting documentation has been examined and that all documentation complies with applicable company policies, including the submission of original receipts. Further, the approver should certify that they have complied with all company policies regarding the review and approval of the expense report.

Mixon noted that some companies have two basic forms of expense reports. One is for situations in which all items pertain to US locations and do not involve any expenses incurred outside the US or for benefit of persons outside the US. The second is for items involving locations or persons outside the US. The international reporting form might have more stringent requirements and should provide for more detailed disclosures. It could require reporting, in a separate section of the expense report, all items that involve government officials, so that these items are not “buried” elsewhere in the expense report. Just as an added measure, the expense report includes a column where other expenses are reported which requires the submitter to check “Government Official YN?” this type of format should require sufficient disclosure of information regarding each item involving government officials. The next step in such an enhanced protocol would require a senior officer from the business unit to approve any reimbursements that meet certain criteria, for example, certain geographical areas or countries. Finally, such an enhanced representation could also include separate sections for each item requiring a description of the business purpose of meals, entertainment, names and business affiliation of all attendees, description of gifts and their business purpose, etc. A typical expense report requires this information to be on the receipt. Mixon believes that moving beyond simply requiring receipts and requiring such detail to be incorporated directly onto the expense reimbursement forms highlights the presence or absence of proper documentation much more readily. Mixon ended by noting it was incumbent to ensure reviewers sign off that each such item has documentation that required pre-approvals were obtained, if necessary.

While following the Prime Directive does not always lead to the result that the crew of TNG Enterprise desired; it did have the greater effect of allowing cultures and peoples to develop without interference. Internal controls around gifts can be used in a variety of ways in your best practices compliance program. They can certainly be used to detect an issue and perhaps even prevent an issue from becoming a full-blown FCPA violation, however, by using some of the techniques that Mixon has suggested you can move your compliance program to a proscriptive phase where you not only stop an issue from becoming a violation but through identification, you can move towards remediation as a part of your ongoing compliance efforts. Just as Star Trek’s Prime Directive had an ultimate purpose, if you can move your compliance program’s internal controls forward, you can help make them a part of your financial controls and thereby have a better run company.

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

© Thomas R. Fox, 2014

Gifts, Travel and Entertainment under the FCPA – Part III

Now that we have reviewed all of the public record pronouncements from the Department of Justice (DOJ) and Securities and Exchange Commission (SEC), this post will try and suggest what you might need in your Foreign Corrupt Practices Act (FCPA) compliance policy and attendant procedures regarding gifts, travel and entertainment. Most generally, every company has three levels of written standards and controls around its compliance function. The first is its Code of Conduct, which every company should have to express its ethical principles. I assume your company has a Code of Conduct but if you are reading this blog post and you do not have a Code of Conduct, call me. The second is its standards and policies, which every company should use to build upon the foundation of the Code of Conduct and articulate Code-based policies, which should cover such issues as bribery, corruption and accounting practices. The third, and final component, is procedures, which every company should have to ensure that enabling procedures are implemented to confirm those policies are implemented, followed and enforced.

Rebecca Walker, writing in the Society for Corporate Compliance and Ethics Complete Compliance Manual [Second Edition], in an article entitled “Gifts and Entertainment Compliance”,said written policies around gifts, travel and entertainment typically contain the following elements:

• An introduction explaining why gifts and entertainment are acceptable and why it is important to place limits on them;
• A discussion of the types of gifts and entertainment that are acceptable (e.g., commonly accepted business courtesies);
• A discussion of the types of gifts and entertainment that are unacceptable (e.g., cash);
• Dollar limits and approval requirements;
• More stringent rules applicable to employees in particular functions, as appropriate;
• A mention or discussion of different rules applicable to government officials; and
• References to other policies.

Mike Volkov, in a blog post entitled “Safe Harbors and Gifts, Meals, Travel, and Entertainment Expenses”, gave these general guidelines about gifts:

1. Given openly and transparently;
2. Properly recorded in the company’s books and records;
3. Motivated to express esteem or gratitude (and not corrupt intent); and
4. Permitted under local law.

About travel he had the following insights:

1. Do not select the foreign officials to participate in the event, or use a systematic evaluation to identify appropriate officials to attend;
2. Pay all costs directly to vendors and do not put “cash” in the pockets of any foreign officials attending an event (as an advance or for reimbursement);
3. Ensure that stipends are reasonable estimates of expected costs and do not provide any additional compensation or money to foreign officials;
4. Ensure that payments are transparent and accurately reflected in company books and records;
5. Do not condition payments on any specific action by foreign official; and
6. Obtain written confirmation payments do not violate local law.

Below are some of my thoughts about what should go into your gifts, travel and entertainment policy.

A.     Gifts

• The gift should be provided as a token of esteem, courtesy or in return for hospitality.
• The gift should be of nominal value but in no case greater than $500.
• No gifts in cash.
• The gift shall be permitted under both local law and the guidelines of the employer/governmental agency.
• The gift should be a value which is customary for the country involved and appropriate for the occasion.
• The gift should be for official use rather than personal use.
• The gift should showcase the company’s products or contain the company logo.
• The gift should be presented openly with complete transparency.
• The expense for the gift should be correctly recorded on the company’s books and records.

B.     Entertainment

There are no Opinion Releases on the threshold that a Company can establish as a value for entertainment. I am comfortable that such a value can go up to $500 in an appropriate circumstance. However this must be tempered with clear guidelines incorporated into the business expenditure component of a FCPA compliance policy, which should include the following:

• A reasonable balance must exist for bona fide business entertainment during an official business trip.
• All business entertainment expenses must be reasonable.
• The business entertainment expenses must be permitted under (1) local law and (2) customer guidelines.
• The business entertainment expense must be commensurate with local custom and practice.
• The business entertainment expense must avoid the appearance of impropriety.
• The business entertainment expense must be supported by appropriate documentation and properly recorded on the company’s book and records.

C.     Travel

• Any reimbursement for air fare will be for economy class. However, you may be able to make exceptions for senior government officials, extremely long haul flights, or where you are contractually mandated to pay for business class travel.
• Do not select the particular officials who will travel. That decision will be made solely by the foreign government.
• Only host the designated officials and not their spouses or family members.
• Pay all costs directly to the service providers; in the event that an expense requires reimbursement, you may do so, up to a modest daily minimum (e.g., $35), upon presentation of a written receipt.
• Any souvenirs you provide the visiting officials should reflect the business and/or logo and would be of nominal value, e.g., shirts or tote bags.
• Apart from the expenses identified above, do not compensate the foreign government or the officials for their visit, do not fund, organize, or host any other entertainment, side trips, or leisure activities for the officials, or provide the officials with any stipend or spending money.
• The training costs and expenses will be only those necessary and reasonable to educate the visiting officials about the operation of your company.

The incorporation of these concepts into a FCPA compliance policy is a good first step towards preventing potential FCPA violations from arising, but it must be emphasized that they are only a first step. They must be coupled with active training of all personnel, not only on the policy and procedures, but also on the corporate and individual consequences that may arise if the FCPA is violated regarding gifts, travel and entertainment. Lastly, it is imperative that all such gifts, travel and entertainment be properly recorded, as required by the books and records component of the FCPA.

I view one of the key reasons for the attendant procedure of implanting the company policy around gifts, travel and entertainment is to allow oversight by a second set of eyes. Process validation requires oversight of compliance with gifts and entertainment policies is important to ensuring consistency in policy enforcement. This helps to ensure that there is the perception of fairness in this area, particularly if there must be discipline administered. Nothing is worse for an organization if, say, a salesman from the US is disciplined via a warning letter for cheating on his expense account whereas salesmen in Brazil are fired for the same offense.

Mike Volkov, in another blog post entitled “Creating a Framework for Reviewing Gifts, Meals, Travel and Entertainment Expenses”, said that he believes “There are three basic requirements for making the review process more efficient.” They include:

1. Prospective standards – Companies need to adopt and enforce a prospective policy which carves out standards for the review and approval of such expenditures. The policy has to be clear on the standards and the procedures to be followed.
2. Documentation – Companies have to document the process, maintain records, and audit the process. Without documentation, the policy is doomed to fail, and provides no protection when government prosecutors conduct an investigation.
3. Advice of Counsel – Outside counsel should be used to review and approve any close calls. The run-of-the-mill situations can be handled by the policy. In close cases, outside counsel should review the matter, provide a short memo analyzing and approving the expenditure. The memo should be added to the file and available to auditors and the government if needed.

The final point from Walker, Volkov and myself is that whatever policy and procedures you set up and utilize, they should be designed for your company. The FCPA Guidance speaks to a well-thought out and designed system for any compliance risk and gifts, travel and entertainment is no different. Further, you must not only train but monitor and audit on your gifts, travel and entertainment. As this is one of the top areas that employees generate monies from their employers it is one of the top areas for fraud and hence corruption. And finally, Document, Document and Document.

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

Gifts, Travel and Entertainment Under the FCPA – Part II

Ed. Note – I know yesterday I said this would be a two-part series but as usual I got carried away so it has become a three part series. Today I review the Opinion Releases and Enforcement Actions dealing with gifts, travel and entertainment.

A. Opinion Releases

1. Gifts

In the early 1980s the Department of Justice (DOJ) issued three Opinion Releases related to gifts under the Foreign Corrupt Practices Act (FCPA). While these Opinion Releases are clearly dated, they do remain instructive. In Opinion Release 82-01, the DOJ approved the gift of cheese samples made to Mexican governmental officials, made by the Department of Agriculture of the State of Missouri to promote the state of Missouri’s agricultural products. However the value of the cheese to be presented was not included. In Opinion Release 81-02, the DOJ approved a gift from the Iowa Beef Packers, Inc. to officials of the Soviet Ministry of Foreign Trade of its packaged beef products. The total value of all the samples presented was estimated to be less than $2,000 and the Iowa Beef Packers, Inc. averred that the individual sample packages would not exceed $250 in value. In Opinion Release 81-01, Bechtel sought approval to use the SGV Group to solicit business on behalf of Bechtel and Bechtel had proposed to reimburse the SGV Group for gift expenses incurred in this business solicitation. The DOJ approved gifts to be given by SGV in the amount of $500.00.

2. Travel and Lodging for Governmental Officials

 Prior to the FCPA Guidance, the DOJ issued three Opinion Releases which offered guidance to companies considering whether, and if so how, to incur travel and lodging expenses for government officials. These facts provided strong guidance for any company that seeks to bring such governmental officials to the US for a legitimate business purpose. In Opinion Release 07-01, the Company was desired to cover the domestic expenses for a trip to the US for a six-person delegation of the government of an Asian country for an educational and promotional tour of one of the requestor’s US operations sites. In the Release the representations made to the DOJ were as follows:

• A legal opinion from an established US law firm, with offices in the foreign country, stating that the payment of expenses by the US Company for the travel of the foreign governmental representatives did not violate the laws of the country involved;
• The US Company did not select the foreign governmental officials who would come to the US for the training program;
• The delegates who came to the US did not have direct authority over the decisions relating to the US Company’s products or services;
• The US Company would not pay the expenses of anyone other than the selected officials;
• The officials would not receive any entertainment, other than room and board from the US Company;
• All expenses incurred by the US Company would be accurately reflected in this Company’s books and records.

In Opinion Release 07-02 the Company desired to pay certain domestic expenses for a trip within the US by approximately six junior to mid-level officials of a foreign government for an educational program at the Requestor’s US headquarters prior to the delegates attendance at an annual six-week long internship program for foreign insurance regulators sponsored by the National Association of Insurance Commissioners (NAIC). In the Release the representations made to the DOJ were as follows:

• The US Company would not pay the travel expenses or fees for participation in the NAIC program.
• The US Company had no “non-routine” business in front of the foreign governmental agency.
• The routine business it did have before the foreign governmental agency was guided by administrative rules with identified standards.
• The US Company would not select the delegates for the training program.
• The US Company would only host the delegates and not their families.
• The US Company would pay all costs incurred directly to the US service providers and only a modest daily minimum to the foreign governmental officials based upon a properly presented receipt.
• Any souvenirs presented would be of modest value, with the US Company’s logo.
• There would be one four-hour sightseeing trip in the city where the US Company is located.
• The total expenses of the trip are reasonable for such a trip and the training which would be provided at the home offices of the US Company.

Lastly, is Opinion Release 12-02, in which the Requestors, 19 non-profit adoption agencies located in the US, asked the DOJ about bringing certain foreign governmental officials involved in the foreign country’s adoption process to the US. All the foreign governmental officials were involved in the process of allowing children from their country go through the adoption process with the US non-profits involved. The trips to the US would be for two days of meetings. The purpose of the visit would be to demonstrate the Requestors’ work to the government officials so that the officials can see how adopted children from the foreign country had adjusted to life in the US and to help the Requestors learn how they can provide that information to the foreign country’s government with appropriate information during the adoption process. The Requestors would allow the government officials to meet with the Requestors’ employees and to inspect the Requestors’ offices and case files from previous adoptions. The foreign country’s government officials would also meet with families who had adopted children from their country and learn more about the Requestors’ work.

The Requestors stated that they would pay for the following:

• Business class airfare on international portions of flights for ministers, members of the legislature, and the director of the Orphanage Agency; coach airfare for international portions of flights for all other government officials; and coach airfare for domestic portions of flights for all government officials;
• Two or three nights hotel stay at a business-class hotel;
• Meals during the officials’ stays; and
• Transportation between agencies and local transportation.

What can one glean from these three Opinion Releases? Based upon them, it would seem that a US company could bring foreign officials into the US for legitimate business purposes. A key component is that the guidelines are clearly articulated in a compliance policy. Based upon these Releases the following should be incorporated into a compliance policy regarding travel and lodging:

• Any reimbursement for air fare will be for economy class, unless it is a long haul international flight, high ranking foreign officials or those entitled to travel business class by contract.
• Do not select the particular officials who will travel. That decision will be made solely by the foreign government.
• Only host the designated officials and not their spouses or family members.
• Pay all costs directly to the service providers; in the event that an expense requires reimbursement, you may do so, up to a modest daily minimum (e.g., $35), upon presentation of a written receipt.
• Any souvenirs you provide the visiting officials should reflect the business and/or logo and would be of nominal value, e.g., shirts or tote bags.
• Apart from the expenses identified above, do not compensate the foreign government or the officials for their visit, do not fund, organize, or host any other entertainment, side trips, or leisure activities for the officials, or provide the officials with any stipend or spending money.
• The training costs and expenses will be only those necessary and reasonable to educate the visiting officials about the operation of your company.

Incorporation of these concepts into a compliance program is a good first step towards preventing any FCPA violations from arising, but it must be emphasized that they are only a first step. These guidelines must be coupled with active training of all personnel, not only on the compliance policy, but also on the corporate and individual consequences that may arise if the FCPA is violated regarding gifts and entertainment. Lastly, it is imperative that all such gifts and entertainment are properly recorded, as required by the books and records component of the FCPA.

B. Enforcement Actions

Mike Volkov refers to the FCPA Paparazzi when he talks about those FCPA practitioners who confuse FCPA information with FCPA scare tactics and manipulate legal reasoning and practical advice with “marketing” using fear as opposed to reliable and accurate information. In a recent blog post, entitled “The So-Called Re-Emergence of Gifts, Meals and Entertainment as a Compliance Problem” Volkov bemoaned recent FCPA Paparazzi client alerts which said that the DOJ was now gunning after companies for FCPA transgressions in this area.

But one point Volkov raised for consideration by the compliance practitioner was the overall management of these risks. He asked the following questions: “Who is responsible for approving expenditures? What controls are in place for ensuring that money is used for proper purposes? How are these expenditures monitored? Who watches the person responsible for controlling the money and what controls are in place to monitor their behavior?” All good questions, and all questions that the compliance function should be able to answer going forward.

While there were three of enforcement actions in 2013 and one in 2014 where gifts, travel and entertainment were discussed. In only one of the four such enforcement actions were gifts, travel and entertainment discussed, where over a period of 15 months these actions were the primary cause of the violation. That matter was the Diebold enforcement action. In all others, HP, Weatherford and Stryker, the gifts, travel and entertainment matters were all ancillary to the primary illegal conduct at issue. This is consistent with DOJ enforcement of the FCPA so Volkov rights notes, the FCPA Paparazzi are howling at the moon once again.

Travel and Entertainment Enforcement Expense Box Score

Company	Trip Locations	Trip Costs & Perks	Company Facilities Present
Lucent Technologies	DisneyWorld, Hawaii, Las Vegas, Grand Canyon, Niagara Falls, Universal Studios, NYC	$10 million in trips for 1000 Chinese governmental officials, including $34,000 for five days of sightseeing	None of the travel destinations
Ingersoll-Rand	Trip to Florence after trip to company facility in Vignate, Italy	$1000 ‘pocket money’ per attendee	Facilities in Vignate but not in Florence
Metcaf & Eddy	First trip – Boston, Washington, D.C., Chicago and Orlando. Second trip – Paris, Boston and San Diego.	First Class Travel and trip expenses for Egyptian governmental official and his family. Cash payments prior to trips of 150% of estimated daily expenses.	Wakefield Mass., not in Washington DC, Chicago, Paris or DisneyWorld
Titan Corporation		Reference in company books and records of $20,000 for promotional travel expenses. Not clear if ever funded (Remember a promise to pay equals making a payment under the FCPA)
UTStarcom	Hawaii, Las Vegas and NYC	Up to $7 million on gifts and all expense paid trips to US	No company offices present in any of the travel destinations
Diebold	Europe, with stays in: Paris, Amsterdam, Florence, Rome In the US with visits to: Disneyland, Grand Canyon, Napa Valley, Las Vegas	$1.6MM to employees of Chinese state-owned banks; $175K to employees of Indonesian state-owned banks	No company offices present in any of the travel destinations
Weatherford	Trip to Germany for the World Cup Honeymoon for Sonatrach official’s daughter Trip to Saudi Arabia for religious holiday	Payment of $24,000 in cash advance for Algerian government officials visiting Houston	No legitimate business purpose for any of the business travel
Stryker	NYC and Aruba	$7000 for Polish gov official and wife	No company offices present in any of the travel destinations
HP	Las Vegas	$35,000 in travel expenses paid for Polish gov official	No company offices present in any of the travel destinations

Tomorrow we will tie it all together for you.

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

Gifts, Travel and Entertainment under the FCPA – Part I

Ed. Note-Today’s blog post will begin a two-part review of gifts, travel and entertainment under the FCPA.

One of the first thing that many companies will try to put in place is a gifts, entertainment and travel policy when looking at an overall compliance program. I find the reality to be that not only is this one of the more easier things to implement because one of the most consistent things taught at any organization, of one person or more, is to record the even and keep receipts. The base reason is not corporate or even Foreign Corrupt Practices Act (FCPA) record keeping. It is IRS Regulations. Even lawyers know you have to keep receipts. This means getting employees to document, document and document, who they may have taken to dinner or entertained, the amount, the business purpose and if they were a foreign government official, their title, this does not seem like too much of a stretch to ask.

The part that does seem different, or new, to employees is the limit. By this I mean the amount of money which can be spent on a dinner, gift or entertainment without prior approval from the compliance function. For any expenditure above those predefined limits an employee must seek pre-approval from the compliance function prior to exceeding or incurring the expense.

An on-going debate is whether to take a hard and fast line over which all employees must come to the compliance function for pre-approval regarding any gifts and entertainment. Many sales people like this approach because they want to know precisely what the line is that they can go up to. Companies may take a more values-based approach, which looks at the overall value an employee may spend over a one year or other time period but the monitoring is at the backend of the transactions.

A rules based approach is one which generally sets a dollar threshold for gifts and entertainment in two general categories; they are gifts and entertainment for foreign governmental officials and gifts and entertainment for non-foreign governmental officials. Below the threshold, employees can provide gifts and entertainment without the need for pre-approval, above the threshold; employees have to seek pre-approval from the compliance function. Limits are typically lower for foreign governmental officials than non-governmental officials. The gift or entertainment request from the employee requires a reasonably detailed business purpose and the monetary request involved should not appear to be unreasonable.

The second approach is a more values based approach. It allowed the regions to set their own top end values to gifts and entertainment, based upon the nuances and risks of the geographic area. The responsibility of the compliance department in such a values based approach would be two-fold. The first would be to engage in more training for employees on gifts and entertainment issues. The second would be greater monitoring of employee gifts and entertainment.

Values based monitoring is more extensive than for rules based monitoring. If an employee goes above the overall company limit, the matter must be investigated through an independent review of the amount spent; who it was spent on and the business purpose. This must then be written up and the independent investigator must make a determination of whether a compliance issue violation has occurred. While this post-event work seems costly and disruptive to the business, company representatives say this works for them.

One of the interesting tangents in the area of gifts and entertainment is the issue of proportionality. Proportionality in the context of gifts and entertainment in anti-corruption compliance programs generally relates to the appropriate types of gifts or entertainment to be provided to a high-level company official. One rule of thumb is if the entertainment provided was typical for a company executive and that executive could routinely pay for it, this was indicia that it was reasonable if provided from one senior level executive to another. But you must remember about how such information will be viewed in the context of a FCPA investigation, as to what is reasonable or even ‘modest’ is usually very different than the view of a sales person.

A. The Statute

Under the FCPA, the following affirmative defense regarding the payment of expenses exists:

[it] shall be an affirmative defense [that] the payment, gift, offer or promise of anything of value that was made, was a reasonable and bona fide expenditure, such as travel and lodging expenses, incurred by or on behalf of a foreign official, party, party official, or candidate and was directly related to…the promotion, demonstration, or explanation of products or services; or…the execution or performance of a contract with a foreign government or agency thereof. 15 U.S.C. § 78dd-1(c)(2)(A)-(B).

There is no de minimis provision. The presentation of a gift or business entertainment expense can constitute a violation of the FCPA if this is coupled with the corrupt intent to obtain or retain business.

B. FCPA Guidance

There was a good discussion of gifts and entertainment in the FCPA Guidance. In it the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) made clear that “A small gift or token of esteem or gratitude is often an appropriate way for business people to display respect for each other. Some hallmarks of appropriate gift-giving are when the gift is given openly and transparently, properly recorded in the giver’s books and records, provided only to reflect esteem or gratitude, and permitted under local law…”

Just as reasonably priced gifts are appropriate to give out, the FCPA Guidance specifies that “… Items of nominal value, such as cab fare, reasonable meals and entertainment expenses, or company promotional items, are unlikely to improperly influence an official, and, as a result, are not, without more, items that have resulted in enforcement action by DOJ or SEC.” However, as the costs and value begin to rise, so does the potential FCPA risk. The FCPA Guidance states, “The larger or more extravagant the gift, however, the more likely it was given with an improper purpose. DOJ and SEC enforcement cases thus have involved single instances of large, extravagant gift-giving (such as sports cars, fur coats, and other luxury items) as well as widespread gifts of smaller items as part of a pattern of bribes. For example, in one case brought by DOJ and SEC, a defendant gave a government official a country club membership fee and a generator, as well as household maintenance expenses, payment of cell phone bills, an automobile worth $20,000, and limousine services. The same official also received $250,000 through a third-party agent.”

The FCPA Guidance does specify some types of examples of improper travel and entertainment as follows:

• $12,000 birthday trip for a government decision maker from Mexico that included visits to wineries and dinners;
• $10,000 spent on dinners, drinks, and entertainment for a government official;
• A trip to Italy for eight Iraqi government officials that consisted primarily of sightseeing and included $1,000 in “pocket money” for each official;
• A trip to Paris for a government official and his wife that consisted primarily of touring activities via a chauffeur-driven vehicle.

The FCPA Guidance points out something that is rather obvious. If a company has a culture of compliance in the area of gifts, travel and entertainment that allows violations of the FCPA, it probably is lax in other areas. We recently saw this played out in the Hewlett-Packard (HP) FCPA enforcement actions where lax internal controls allowed HP-Poland to pay over $600,000 in cash to a Polish government official; pay for his travel to Las Vegas at full HP expense and also purchase him gifts valued at over $30,000. The gifts, travel and entertainment on their own could have been stand-alone FCPA violations but they were certainly symptomatic of an entire culture at HP-Poland, which allowed such conduct to occur.

Tomorrow we will review some enforcement actions and Opinion Releases.

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

© Thomas R. Fox, 2014

The Weatherford FCPA Settlement, Part III

Yesterday, I reviewed the conduct which Weatherford International Limited (Weatherford) engaged in over a period from 2002-2011 in connection with its Foreign Corrupt Practices Act (FCPA) investigation, noted the deficiencies in its compliance program and its internal controls and even how the company intentionally impeded the investigations of both the Department of Justice (DOJ) and Securities and Exchange Commission (SEC). Today, I want to look at how the company changed course in mid-stream during the investigation, brought in a top-notch and well respected lawyer as its Chief Compliance Officer (CCO), created a best-in-class compliance program; all of which saved the company millions of dollars in potential fines and penalties.

1. I.                    DOJ Fine Calculation

To resolve the criminal aspects of this case, Weatherford agreed to pay an $87.2 million criminal penalty as part of a Deferred Prosecution Agreement (DPA) with the DOJ. There was also another $65.6 million paid to the SEC. However the figure paid to the DOJ was at the very bottom range of a potential criminal penalty. The range listed in the DPA was from $87.2 to $174.3 million. In coming up with this range under the Federal Sentencing Guidelines, it is significant for the actions that Weatherford did not receive credit for during the pendency of the investigation. The company did not receive a credit for self-reporting. The company only received a -2 for its cooperation because prior to 2008 the company engaged in activities to impede the regulators’ investigation.

So the fine range could have been more favorable to the company. But the key is that Weatherford received the low end of the range. How did they do this?

A.     New Sheriff in Town

One of the key things Weatherford did was bring in Billy Jacobson as its CCO and give him a seat at the table of the company’s Executive Board. He was a Federal Prosecutor in the Fraud Section, Criminal Division, US Department of Justice. He also served as an Assistant Chief for FCPA Enforcement Department so we can assume he understood the FCPA and how prosecutors think through issues. (Jacobson also worked as a State Prosecutor in New York City, with my former This Week in FCPA co-host Howard Sklar, so shout out to Howard.) Jacobson was not hired directly from the DOJ but after he had left the DOJ and had gone into private practice. There is nothing that shows credibility like bringing in a respected subject matter expert and giving that person the tools and resources to turn things around.

But more than simply bringing in a new sheriff, Weatherford turned this talk into action by substantially increasing its cooperation with the government, thoroughly investigating all issues, turning over the results to the DOJ and SEC and providing literally millions of pages of documents to the regulators. The company also cleaned house by terminating officers and employees who were responsible for the illegal conduct.

B.     Increase in Compliance Function

In addition to establishing Jacobson in the high level CCO position, the company significantly increased the size of its compliance department by hiring 38 compliance professionals and conducted 30 anti-corruption compliance reviews in the countries in which Weatherford operates. This included the hiring of outside consultants to assess and review the company’s compliance program and beefing up due diligence on all third parties, including those in the sales and supply chain, joint venture (JV) partners and merger or acquisition (M&A) candidates. The company also agreed to continue to enhance its internal controls and books and records to prevent and/or detect future suspect conduct.

If you have ever heard any of the current Weatherford compliance professionals speak at FCPA conferences, you can appreciate that they are first rate; that they know their stuff and the company supports their efforts on an ongoing basis.

C.     Best in Class Compliance Program

During the pendency of the investigation, Weatherford moved to create a best practices compliance program. They appear to have done so and agreed in the DPA to continue to maintain such a compliance program. Under Schedule C to the DPA, it set out the compliance program which the company had implemented and continued to keep in place, at least during the length of the DPA. It included the following components.

1. High level commitment from company officials and senior management to do business in compliance with the FCPA.
2. A substantive written anti-corruption compliance code of conduct.
3. Written policies and procedures to implement this code of conduct.
4. A robust system of internal controls, including accounting and financial controls.
5. Risk assessments and risk reviews of its ongoing business.
6. No less than annual assessments of its overall compliance program.
7. Appropriate oversight and responsibility of a Chief Compliance Officer.
8. Effective training for all employees and relevant third parties.
9. An effective compliance function which can provide guidance to company employees.
10. A robust internal reporting system.
11. Effective investigations of any reported compliance issue.
12. Appropriate incentives for employees to do business ethically and in compliance.
13. Enforced discipline for any employee who violates the company’s compliance program.
14. Suitable due diligence and management of third parties and business partners.
15. A correct level of pre-acquisition due diligence for any merger or acquisition candidate, including a risk assessment and reporting to the DOJ if the company uncovers and FCPA-violative conduct during this pre-acquisition phase.
16. As soon as practicable, Weatherford will integrate any newly acquired entity into its compliance regime, including training of all relevant new employees, a FCPA forensic audit and reporting of any ongoing violations.
17. Ongoing monitoring, testing and auditing of the company’s compliance function, taking into account any “relevant developments in the field and the evolving international and industry standards.”

D.    Monitor

Weatherford also agreed to an external monitor. However, the term of the monitor is not the entire length of the three-year DPA; the term of the monitor is only 18 months. The monitor’s primary function is to assess the company’s compliance with the terms of the DPA and report the results to the DOJ at least twice during the terms of the monitorship. After this 18 month term the DOJ will allow the company to self-report to the regulators. It should be noted that the term of the external monitor can be extended by the DOJ.

II.                Conclusion

It certainly has been a long, strange journey for Weatherford. I should note that I have not discussed at all the Oil-For-Food aspect of this settlement, which was an additional $100MM penalty to the company. However, with regard to the FCPA aspects of the matter, there are some very solid and telling lessons to be drawn from this case. First and foremost is that cooperation is always the key. But more than simply cooperating in the investigation is that a company should take a pro-active approach to putting a best-in-class compliance program in place during, rather than after the investigation concludes. Also, a company cannot simply ‘talk-the-talk’ but must come through and do the work to gain the credit. The bribery schemes that the company had engaged in and the systemic failures of its compliance program and internal controls, should serve as a good set of examples for the compliance practitioner to use in assessing a compliance program.

The settlement also sends a clear message from both the DOJ and SEC on not only what type of conduct will be rewarded under the US Sentencing Guidelines, but what they expect as a compliance program. One does not have read tea leaves or attempt to divine what might be an appropriate commitment to compliance to see what the regulators expect these day.

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, 2013

The Weatherford FCPA Settlement, Part II

Yesterday, I reviewed the Weatherford International Limited (Weatherford) Foreign Corrupt Practices Act (FCPA) settlement. Today I will take a more focused look at the bribery schemes involved and the failure of the company to bring internal controls up to standard or even follow its own compliance program. Weatherford’s compliance program was a joke but worse was its conduct, which many in the company knew was illegal and reported internally but the company did not stop the conduct. The company also, early on in the investigation, actively impeded regulators access to personnel and documents. However, and this is one of the key messages from the Weatherford FCPA enforcement action, the company truly ‘turned it around’. Tomorrow we will explore how the company made this dramatic turnaround.

The bribery schemes had four basic scenarios and, for those of you keeping score at home, I have summarized them below.

I.                   Corrupt Conduct

Weatherford Bribery Box Score

Country	Bribery Scheme	Government or SOE Official Involved	Amount of Bribe Paid
Angola	Payments through 3rd parties	Sonagol Drilling Manager	$250K
Angola	JV Partners	Government Ministers, wives and other relatives	$810K
Congo	Payments thru 3rd parties	SOE officials	$500K
Middle East Countries	Unauthorized distributor discounts	SOE officials	$11.8MM
Algeria	Improper travel and entertainment	SOE officials	$35K
Albania	Misappropriation of company funds	Tax Auditors	$41K

Angola

In Angola two separate bribery schemes were used. The first involved payment of a $250,000 bribe to the Sonagol Drilling Manager. To funnel the bribe the company retained a Swiss agent who paid the money. This Swiss agent billed Weatherford for non-existent and fraudulent services. He would retain a percentage of the total he billed as a commission and would pass the remainder to the Sonagol Drilling Manager. The bribery of the Drilling Manager also included a week long, all-expenses paid trip to Italy and Portugal, where only one of the days was business related.

The company continued this further creativity when it set up a joint venture (JV) which had two local JV partners, JV Partner A and JV Partner B. Partner A consisted of Sonagol government officials, their wives and other relatives and held a 45% stake in the overall JV. JV Partner B’s principals included the relative of an Angolan Minister, the relative’s spouse, and another Angolan official. It held 10% of the overall JV interest. Neither of these JV Partners contributed capital, expertise or labor to the JV. In addition to the straight quid pro quo of awarding Weatherford 100% of the Angolan well screens market, these JV Partners had contracts which were awarded to Weatherford competitors, revoked after the initial award and then awarded them to Weatherford.

Congo

In the Congo, Weatherford made over $500,000 in commercial bribe payments through the same Swiss Agent they had utilized in the initial Angolan bribery scheme to employees of a commercial customer, a wholly-owned subsidiary of an Italian energy company, between March 2002 and December 2008. The Swiss Agent’s role in the scheme included submitting false invoices and sending payments to individuals as directed by Weatherford Services Limited (WSL) employees and others. WSL employees created and sent false work orders to the Swiss Agent. The Swiss Agent, WSL employees and others knew the services would not be performed and that the work orders were a pretext to funnel money to the Swiss Agent. The Swiss Agent forwarded the money, less a commission, once again based on fraudulent invoices for non-existent services.

The Middle East

In certain un-named Middle Eastern countries between the years of 2005 and 2011 another Weatherford subsidiary employed another bribery scheme to funnel payments to officials of state owned National Oil Company (NOC). This bribery scheme entailed the awarding of improper “volume discounts” to a company that served as an agent, distributor and reseller which supplied Weatherford products to a state-owned and controlled NOC, believing that those discounts were being used to create a slush fund with which to make bribe payments to decision makers at the NOC.

The Securities and Exchange Commission (SEC) Complaint noted that as early as 2001, officials at the un-named national oil company directed Weatherford to sell goods to the company through a particular distributor. Prior to entering into the contract with the distributor, Weatherford did not conduct any due diligence on the distributor, despite: (a) the fact that the distributor would be furnishing Weatherford goods directly to an instrumentality of a foreign government; (b) the fact that a foreign official had specifically directed the company to contract with that particular distributor; and (c) the fact that Weatherford executives knew that a member of the country’s royal family had an ownership interest in the distributor. In late 2001, the company entered into a representation agreement with the distributor to sell its Completion and Production Systems products to the NOC.

Thereafter, the distributor created a slush fund by providing the distributor with unauthorized volume and pricing discounts, in addition to the agent’s 5% commission. Company employees intended that the slush fund would be used to pay officials at the un-named NOC. The “volume discounts” to the distributor were typically between 5-l0% of the contact price. The discounts allowed the distributor to accumulate funds which were used to pay bribes to the NOC officials.

Algeria

Weatherford also provided improper travel and entertainment to officials of the Algerian NOC, Sonatrach, which did not have any legitimate business purpose. The SEC Complaint detailed the following improper travel and entertainment provided to Sonatrach officials:

• June 2006 trip by two Sonatrach officials to the FIFA World Cup soccer tournament in Hanover, Germany;
• July 2006 honeymoon trip of the daughter of a Sonatrach official; and
• October 2005 trip by a Sonatrach employee and his family to Jeddah, Saudi Arabia, for religious reasons that were improperly booked as a donation.

In addition, on at least two other occasions, Weatherford provided Sonatrach officials with cash sums while they were visiting Houston. For example, in May 2007, Weatherford paid for four Sonatrach officials, including a tender committee official, to attend a conference in Houston. Further, the company provided an approximate $24,000 cash advance for the trip where there was no evidence of any legitimate business purpose or promotional expenses.

Albania

In Albania, Weatherford had a tax evaluation problem. To deal with this issue the general manager and financial manager of the company’s Italian subsidiary misappropriated over $200,000 of company funds, to fund a bribery scheme involving Albanian tax auditors. The general manager, financial manager and the Albania country manager made $41,000 in payments to Albanian tax auditors who questioned details of the company’s accounts and demanded payment to close out the audit or speed up the certification process in 2001, 2002 and 2004.

The general manager and financial manager misappropriated the funds by taking advantage of Weatherford’s inadequate system of internal accounting controls. They misreported cash advances, diverted payments on previously paid invoices, misappropriated government rebate checks and received reimbursement of expenses that did not relate to business activities. A memo drafted by the general manager and financial manager in the months after their co-worker confronted them discussed the misappropriated funds and indicated that funds were paid to tax auditors in Albania and others for the benefit of Weatherford. This was the bribery scheme which was reported to the company and the internal whistle-blower employee was terminated.

II.                Program Deficiencies Lack of Cooperation

The DPA laid out in equally stark terms the complete and utter disregard, non-existence of and/or complete failure of any systemic compliance program, prior to 2008. These deficiencies included:

• Failure to establish internal accounting controls to prevent bribery and corruption;
• Failure to perform due diligence on any prospective third parties, including who they were, ultimate beneficial ownership and business justifications;
• Failure to perform due diligence or in any meaningful manage joint venture partners;
• Failure to have any meaningful internal controls for gifts, travel and entertainment;
• No effective internal reporting system for FCPA violations or issues; and
• (Most amazingly) No Chief Compliance Officer or even compliance professionals in a multi-billion dollar, multi-national company in the energy industry.

In addition to all of the above, Weatherford engaged in active conduct to impede the investigations of both the SEC and DOJ. In one instance, the company told investigators that a key witness was dead when he was not only still alive and well but working for Weatherford. In other instances, the company, emails were deleted by employees prior to the imaging of their computers. It was also noted that Weatherford failed to secure important computers and documents and allowed potentially complicit employees to collect documents subpoenaed by the staff.

Tomorrow, the Weatherford compliance comeback.

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, 2013

The Weatherford FCPA Settlement, Part I

Last week Weatherford International Limited (Weatherford) concluded one of the longest running open Foreign Corrupt Practices Act (FCPA) investigations when it agreed to the ninth largest FCPA fine of all-time and one of its subsidiaries, Weatherford Services Limited (WSL), agreed to plead guilty to violating the anti-bribery provisions of the FCPA. The total amount of fines and penalties for the FCPA violations was $152.6 million. The company was also hit with another $100 million in fines and penalties for trade sanctions bringing its total amount paid to $252.6 million.

The bribery schemes that Weatherford used were varied but stunning in their brazen nature. Further, early on in the investigation, the company thumbed its nose at the Department of Justice (DOJ) by refusing to cooperate in any meaningful way and actually destroying documents and computer hard drives rather than turn over relevant documents. There were also examples of internal company whistleblowers, who were either ignored or, worse, terminated when they internally reported illegal conduct which violated the FCPA. Lastly, the company did not self-disclose their conduct so things started out badly, badly, did I say badly, for the company. But in spite of how things began, Weatherford was able to make a turnaround and substantially improve its position by reversing this initial nose-thumbing at US regulators. Over the next three blog posts I will explore the bribery schemes involved, how the company’s new-found attitude led to lower fines that might otherwise have been expected and what the lessons are for the compliance practitioner going forward.

DOJ Criminal Information and Deferred Prosecution Agreement

To resolve the criminal aspects of this case, Weatherford agreed to pay an $87.2 million criminal penalty as part of a Deferred Prosecution Agreement (DPA) with the DOJ.

In the Information filed as a part of the resolution reveals that company employees established and operated a joint venture (JV) in Africa with two local entities controlled by foreign officials and their relatives from 2004 through at least 2008. These foreign officials selected the entities with which WSL would partner and the company knew that the members of the local entities included foreign officials’ relatives and associates. The sole purpose of those local entities was to serve as conduits through which WSL pay bribes to the foreign officials controlling them as neither of the JV partners contributed capital, expertise or labor to the JV. In exchange for the illegal payments they received, through the JV, lucrative contracts, gave WSL inside information about competitors’ pricing, and took contracts away from WSL’s competitors and awarded them to the JV.

The Information also noted that Weatherford knowingly failed to establish an effective system of internal accounting controls designed to detect and prevent corruption, including FCPA violations. The company failed to implement these internal controls despite operating in an industry with a substantial corruption risk profile and despite growing its global footprint in large part by purchasing existing companies, often themselves in countries with high corruption risks.   As a result, a permissive and uncontrolled environment existed within which employees of certain Weatherford’s wholly owned subsidiaries in Africa and the Middle East were able to engage in corrupt conduct over the course of many years, including the bribery of foreign officials.

In yet another scheme detailed in the Information, a Weatherford employee in the Middle East, gave improper “volume discounts” to a distributor who supplied company products to a government-owned National  Oil Company (NOC), believing that those discounts were being used to create a slush fund with which to make bribe payments to decision-makers at the NOC. Between 2005 and 2011, Weatherford Oil Tools Middle East Limited (WOTME) paid approximately $15 million in “volume discounts” to the distributor.

In its Press Release the DOJ also spoke to the nefarious conduct of the company. Acting Assistant Attorney General Raman was quoted as saying “This case demonstrates how loose controls and an anemic compliance environment can foster foreign bribery and fraud by a company’s subsidiaries around the globe. Although Weatherford’s extensive remediation and its efforts to improve its compliance functions are positive signs, the corrupt conduct of Weatherford International’s subsidiaries allowed it to earn millions of dollars in illicit profits, for which it is now paying a significant price.” He also said that “Effective internal accounting controls are not only good policy, they are required by law for publicly traded companies – and for good reason.” The Federal Bureau of Investigation (FBI) chimed in when Assistant Director in Charge Parlave said that “The FBI is committed to investigating corrupt backroom deals that influence contract procurement and threaten our global commerce.”

SEC Compliant

In its civil Complaint, the Securities and Exchange Commission (SEC) alleged that Weatherford and its subsidiaries falsified its books and records to conceal not only these illicit payments, but also commercial transactions with Cuba, Iran, Syria, and Sudan that violated US sanctions and export control laws. Further, the company failed to establish an effective system of internal accounting controls to monitor risks of improper payments and prevent or detect misconduct. The company obtained more than $59.3 million in profits from business obtained through improper payments, and more than $30 million in profits from its improper sales to sanctioned countries. This conduct lasted from 2002 up until 2011 and included the lack of internal controls plus the affirmative falsification of its books and records to facilitate the bribe payments. The payment of disgorgement, prejudgment interest, and civil penalties to the SEC was in the amount of $65,612,360.34.

As you would expect, the SEC focused on the company’s books and records violations. Andrew Ceresney, co-director of the SEC’s Enforcement Division, was quoted in the SEC’s Press Release that “The nonexistence of internal controls at Weatherford fostered an environment where employees across the globe engaged in bribery and failed to maintain accurate books and records,” said  “They used code names like ‘Dubai across the water’ to conceal references to Iran in internal correspondence, placed key transaction documents in mislabeled binders, and created whatever bogus accounting and inventory records were necessary to hide illegal transactions.” Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit, said, “Whether the money went to tax auditors in Albania or officials at the state-owned oil company in Angola, bribes and improper payments were an accustomed way for Weatherford to conduct business. While the profits may have seemed bountiful at the time, the costs far outweigh the benefits in the end as coordinated law enforcement efforts have unraveled the widespread schemes and heavily sanctioned the misconduct.”

All of the settlement documents are chocked full of information about bribery schemes Weatherford engaged in for many years. For the compliance practitioner, they provide a list that can be used a check and balance to see if your company may be engaging in any of these practices. Additionally, both the DOJ and SEC listed out the internal controls and books and records failures of the company. Tomorrow, I will review the specific bribery scheme and failures of the Weatherford compliance program.

For a copy of the DOJ Information, click here.

For a copy of the DOJ Deferred Prosecution Agreement, click here.

For a copy of the SEC Civil Compliant, click here.

For a copy of the Plea Agreement, click here.

For a copy of the DOJ Press Release, click here.

For a copy of the SEC Press Release, 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, 2013