FCPA Compliance and Ethics Blog

November 25, 2013

Venice, the US Navy and Red Flags

Today’s post comes from Venice where I am spending a week. It is one of the most unique and beautiful cities on earth. It was a great maritime power for over 1000 years. At the height of its power, it was the richest city on earth, worth almost 10 times more than the entire country of France in 1300. Even today, it is still dominated by the sea in all aspects, from the transportation of its daily food stuffs, to the flooding which is regular occurrence due to the fact the city is sinking into the Adriatic.

Venice’s maritime heritage sets the scene for today’s post which is about the ongoing corruption scandal in the US Navy. The scandal has led the Navy to taking action against seven officers over a criminal investigation into ship supply contracts for the Navy in the Pacific. The supply contracts where all with a company named Glenn Defense Marine Asia. As reported by the New York Times (NYT), the allegations are that the company, led by a Malaysian named Leonard Glenn Francis, won over $200 MM in contracts “to provide fuel, food and other services to warships by submitting extremely low bids.” The company then used bribery and corruption of Navy officers to help inflate the company’s billing and to “cover his tracks.” Apparently complaints were raised by Navy contracting officials as early as 2009 about the company, yet it was awarded three new contracts in June 2011, giving Glenn Defense Marine Asia “control over supplies and dockside services for its [the US Navy’s] fleet across the Pacific.”

For the compliance professional, this scandal involving the US involves some clear and unfortunately stark lessons learned regarding the warning signs of corruption, i.e. Red Flags.

Background Investigation

For any Foreign Corrupt Practices Act (FCPA) compliance program, a mandatory staple is to know with whom you are doing business. This is referred to as due diligence. A variety of sources are reviewed during the due diligence process, including background checks on third parties who do business with a company through the sales chain and supply chain. It turns out that Mr. Francis had spent time in jail on handgun charges. More significantly, the Navy encountered problems with Glenn Defense Marine Asia in its initial contracts with the company.

Rates and Pricing

Most compliance practitioners review contract rates to make sure that the rates do not create such a large amount of money to facilitate the payment of bribes or to create the incentive to pay bribes to win contracts. However, contract pricing and rates can be a significant indicator that something may not be quite right with a third party. In the case of Glenn Defense Marine Asia, it was its low-ball bidding which should have raised a red flag. In the bidding for the 2011 Pacific-wide supply contract, another company, DaeKee Global Company bid $67.9MM, while Glenn Defense Marine Asia bid only $21.6MM. Another NYT article quoted Robert Burton, a former acting administrator for the Office of Federal Procurement who said, “That type of huge price discrepancy is certainly a red flag.” He was further quoted to say, “Contracting officers should have raised questions.” Glenn Defense Marine Asia’s business plan was then to overcharge the US Navy using inflated prices and submit billing for delivery of non-existent goods and services.

Lavish Gift-Giving

To take this next step, the company needed the active assistance of US Naval officers. Once Glenn Defense Marine Asia was able to secure the contract to supply the Pacific-wide stores, it went to work on the naval officers now caught up on the criminal investigation. In one email the company said that “We gotta get him hooked on something” when discussing how to corrupt one naval officer to help Glenn Defense Marine Asia get over-charges paid to make up for the low bid on the contract. The company used lavish gifts and entertainment to cultivate officers who could send additional work in the direction of the company and approve the payment of inflated billing or billing for non-existent work. The gifts ranged from tickets to concerts, first class travel across the globe and payments of up to $100,000 in cash.

While most companies have compliance programs in place to deal with the lavish gift-giving and perform background due diligence on entities with which they do business they do not often focus on pricing. This scandal involving Glenn Defense Marine Asia and the US Navy makes clear that if a potential third party representative using an extra-ordinary low rate to entice your company to do business with it, something may be amiss. As Burton was pointed out in the NYT article, a huge price discrepancy is itself a red flag. If pricing is so low, as not to make business sense, it means the price difference will be made up somewhere else. In the case of the US Navy it was through over-charging for goods and services and billing for non-existent bills and services. If the same happens with a foreign government or state owned enterprise subject to the FCPA, it could well be that your company would be in hot water for going with the lowest bidder to represent your company. This does not mean that your company cannot do business with the lowest bidder, but it does mean that if a bid is so low as to defy commercial expectations, there needs to be further analysis to determine why the bid is so low.

The Glenn Defense Marine Asia/US Navy scandal presents some tangible lessons for the anti-corruption compliance practitioner. Just as Venice grew wealthy through smart trading, it is incumbent to know who you are doing business with, watch out for red flags and manage your business relationships after the contract is signed.

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

October 29, 2013

Notes from the Diebold and Stryker FCPA Enforcement Actions

Last week was a heck of a week in the Foreign Corrupt Practices Act (FCPA) enforcement world. Both Diebold Incorporated (DBD) and the Stryker Corporation (SYK) agreed to resolutions of their outstanding FCPA violations.

A.     Diebold

The DBD resolution took the form of a Deferred Prosecution Agreement (DPA) with the Department of Justice (DOJ), along with a fine of $25.2MM, and a Corporate Monitor from the Securities and Exchange Commission (SEC) including $22.9MM in disgorgement and prejudgment interest to the SEC along with an agreed injunction to stop, once again, violating the FCPA. That’s a total fine of $48MM.

The conduct at issue was approved at the highest level of the company and involved multiple bribery schemes, in multiple countries for multiple years. The bribery box score is as follows:

DBD Bribery Box Score

List of DBD Executive, Employee or 3rd Party Involved in Bribery Schemes Illegal Conduct Around Type of Illegal Conduct Those Involved
Executive A Officials at Banks 1 & 2; both in China; Banking officials in Indonesia Approved payments of $1.75 MM over five years; improper trips, gifts and entertainment Executive A & B, Employee A & B
Executive B Officials at Banks 1 & 2; both in China; Banking officials in Indonesia Approved payments of $1.75 MM over five years; improper trips, gifts and entertainment
Executive C Banks in Russia Approved payments of at least $1.2MM
Employee A Banks in Russia Hid illegal payments in books and records
Employee B Hid illegal payments in books and records
Employee C Banks in Russia Distributor 1 & 2,  Executive A & C
Distributor 1 Banks in Russia Made illegal payments
Distributor 2 Banks in Russia Made illegal payments

B.     Stryker

SYK’s penalties were considerably less than those paid by DBD. According to the FCPA Blog, “The SEC said Stryker Corporation will pay $13.2 million to resolve FCPA violations. The bribes totaled about $2 million and were ‘incorrectly described as legitimate expenses in the company’s books and records,’ according to the SEC. Stryker will disgorge to the SEC $7.5 million and prejudgment interest of $2.28 million. It is also paying a penalty of $3.5 million.” SYK received only an Administrative Order, not even a SEC Complaint. Further, unlike DBD, SYK is not required to have a Corporate Monitor to assess its ongoing compliance efforts or its commitment to having a compliance program. The Stryker Bribery Box Score is as follows:

Stryker Entity Bribery Scheme Used Amount of Bribes Paid Illicit Profits
Stryker Mexico Cash payments $76,000 $2.1MM
Stryker Poland Cash payments, illegal travel, lodging, gifts and expenses; charitable donations $460,000 $2.4MM
Stryker Romania Illegal travel, lodging, gifts and expenses $500,000 $1.7MM
Stryker Argentina Commission Payments or Honoraria to Doctors $966,500 $1.04MM
Striker Greece Charitable Donations $197,055 $183,000

C.     Some Comments

1. DBD’s China Investigation

The FCPA Professor noted an interesting nugget from the DBD DPA, in a blog post entitled “Of Note From The Diebold Enforcement Action”, the “It is merely one paragraph in the SEC’s complaint, but it may be perhaps the most notable issue in the Diebold enforcement action (an action based primarily on excessive travel and entertainment payments by subsidiaries – the bulk of which occurred in China). Para. 28 of the SEC’s complaint states:

“Other executives at Diebold were on notice of potential corruption issues at Diebold China. In 2007, a regional government agency in China, the Chengdu Administration of Industry & Commerce (“CDAIC”), opened an investigation involving, among other issues, leisure trips and gifts Diebold China had provided to bank officials. Company executives in China and the U.S. learned of the investigation after a Diebold field office in Chengdu was raided by authorities. Executives A and B took the lead in responding to the investigation. Diebold was able to settle the matter with no corruption charges filed, by paying CDAIC an administrative penalty of 600,000 RMB (approximately $80,000) for business registration violations. Despite being on notice of potential corruption issues at Diebold China, Diebold failed to effectively investigate and remediate these problems.”

In short, the bulk of the conduct at issue in the $48 million Diebold enforcement action was previously investigated by a foreign law enforcement agency and was resolved without corruption charges.”

While I disagree that the bulk of DBD’s illegal conduct involved its Chinese operations, I do agree with the Professor that this is certainly interesting. Is this the mechanism by which the DOJ/SEC were informed about DBD’s conduct? DBD did receive a discount of -5 base points for self-disclosure, full cooperation and demonstrating responsibility for its conduct but it is not clear which, if any, of these three prongs were met. Or, indeed, all of them? Equally interesting is speculating on the level of cooperation between the Chengdu Administration of Industry and Commerce and the DOJ. Or perhaps did it go in a different direction, as the persons cited as taking the lead in responding to this Chinese investigation, Executives A & B, have something to do with resolving the matter at the relatively low cost of $80,000?

2.         Stryker Greece’s Donation to a Public University

From the SYK Cease and Desist Order, there is some interesting information regarding the bribery scheme the company used in Greece. Here the company made a “sizeable and atypical donation of $197,055 to a public university…” Normally I would say that donations to public, i.e. state-owned, universities would not be subject FCPA scrutiny because they are gifts directly to a foreign government. But here the Order specifies that “The donation was made pursuant to a quid pro quo arrangement with the foreign official, pursuant to which Stryker Greece understood it would obtain and retain business…in exchange for making the donation to the foreign official’s pet project. In addition to emails attesting to this quid pro quo nature of the donation, the Order specifies that the donation was “improperly booked as legitimate marketing expense in an account entitled “Donations and Grants.””

Readers will recall the gift of $135 Million by Wynn Resorts Ltd (WYNN) to a foundation which supports the University of Macau. A Wall Street Journal (WSJ) article on this donation, entitled “Macau School Ties Roil Wynn Resorts” and was co-authored by Kate O’Keefe and Alexandra Berzon, reported the Chairman of Wynn’s Board “told analysts last month that the donation was vetted in advance by outside experts,” relative to the FCPA. The donation is apparently not for construction or other infrastructure projects but “the gift will support academic activities.” The WSJ article also reports that the Board of the University foundation includes “current and former government officials” and “a member of the committee to elect Macau’s chief executive”, who is the chancellor of the university.” The SEC opened and closed an investigation into this matter with no enforcement action.

Perhaps it is the clear email trail showing the quid pro quo for the donation but I wish there was more information about the illegal nature of the Stryker Greece donation versus the apparent non-action in the Wynn donation.

For the compliance practitioner, I think there are several clear messages that the DOJ and SEC are communicating in these two enforcement actions. From the DBD enforcement action, if your company finds itself in an investigation which becomes an enforcement action, it must take serious remediation steps during the pendency of the enforcement action. If not you will probably have a Corporate Monitor appointed. So do not wait, remediate now. From the SYK enforcement action, the SEC once again emphasized the importance of internal controls and accurately recording your expenses in your books and records. Neither of these messages are new or earth-shattering but both bear repeating and perhaps providing to your management in a teaching moment.

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

July 19, 2013

Not Draconian – Gift, Travel and Entertainment Under the FCPA

The Greek ruler Draco has received some very bad PR advice over the centuries. After all, it is his name which is the root for our word draconian. Draco is credited with committing to writing the first Athenian Code of Laws. The laws of Athens previously had been passed along through oral tradition and administered in a quite arbitrary manner. Under Draco’s Code, the prior oral laws, which were known to a special class of aristocrats and were arbitrarily applied and interpreted, were recorded and made known to all literate citizens. The laws also distinguished between murder and involuntary homicide. As it was a codification of existing laws, they remained harsh, with death penalty remaining as the punishment for even minor offences. Today, Draco is remembered for the harshness of his Code, not his innovation in recording it.

I thought about Draco and his legacy when considering the events in China surrounding GlaxoSmithKline (GSK) over the past couple of weeks. Assuming your company does not want to use its travel budget to fund a multi-year, multi-million dollar bribery scheme and further assuming that your company wants to follow not only its own Code of Conduct pronouncement in addition to the strictures of the Foreign Corrupt Practices Act (FCPA); I thought it might be a good time to review how to provide travel and entertainment in compliance with this law. The Draco angle is that if you are intent in following anti-bribery laws such as the FCPA, the procedure is certainly not Draconian.

A.    FCPA Guidance

The Department of Justice (DOJ)/Securities and Exchange Commission (SEC) Guidance clearly specifies that the FCPA does not ban gifts and entertainment. Indeed the Guidance specifies the following:

“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. 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.”

B.     Opinion Releases

Prior to the FCPA Guidance, in 2007, the DOJ issued two FCPA Opinion Releases which offered guidance to companies considering whether, and if so how, to incur travel and lodging expenses for government officials. Both Opinion Releases laid out the specific representations made to the DOJ, which led to the Department approving the travel to the US by the foreign governmental officials. These facts provided strong guidance to any company which 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 official;
  • 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.

The response from the DOJ stated: “Based upon all of the facts and circumstances, as represented by the requestor, the Department does not presently intend to take any enforcement action with respect to the proposal described in this request. This is because, based on the requestor’s representations, consistent with the FCPA’s promotional expenses affirmative defense, the expenses contemplated are reasonable under the circumstances and directly relate to “the promotion, demonstration, or explanation of [the requestor’s] products or services.””

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.

As with Opinion Release 07-01, the DOJ ended this Opinion Release by stating, “Based upon all of the facts and circumstances, as represented by the Requestor, the Department does not presently intend to take any enforcement action with respect to the planned educational program and proposed payments described in this request. This is because, based on the Requestor’s representations, consistent with the FCPA’s promotional expenses affirmative defense, the expenses contemplated are reasonable under the circumstances and directly relate to “the promotion, demonstration, or explanation of [the Requestor’s] products or services.” 15 U.S.C. § 78dd-2(c)(2)(A).”

C.    Travel and Lodging for Governmental Officials

What can one glean from these 2007 Opinion Releases? Based upon them, it would seem that a US company can 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.
  • 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.

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 ongoing GSK investigation will no doubt provide additional lessons for the compliance practitioner. However, you can use the matter as a good reason to review not only your company’s procedures but to test it to determine if they are being followed or if there are issues which you might need to take a closer look at. When a Wal-Mart, News Corp or GSK is in the news for alleged FCPA violations, it provides you with a good reminder to review your compliance program.

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

July 15, 2013

Don’t Claim it is Legal to Bribe Another Government’s Representatives – Especially in China

Last week a guest blog post in the FCPA Blog by Ernesto Sanchez, entitled “What’s good for reciprocity may be bad for FCPA prosecutions”, implied that the US District Court’s ruling when it “vacated an SEC Dodd-Frank rule mandating that certain companies publicly disclose payments made to foreign governments in connection with the commercial development of oil, natural gas, or minerals” would have some effect on the enforcement of the Foreign Corrupt Practices Act (FCPA). In his penultimate paragraph Sanchez said, “The SEC may have wanted to mandate certain corporate disclosures to, among other things, ensure greater FCPA compliance in the U.S. energy sector. But what happens when other countries have no FCPA equivalent and view the matter of disclosure quite differently?”

Let me put the answer to that question as succinctly as I can do so. THERE IS NO COUNTRY IN THE WORLD WHICH LEGALLY ALLOWS BRIBERY OF ITS GOVERNMENT OFFICIALS. None, period, end of statement, and end of discussion. Even if countries appear to tolerate it informally, there is no country which has a law which says that it is OK to bribe our government officials.

This message was driven home even more strongly last week with the news from China that the Chinese government had found evidence that the UK pharmaceutical giant GlaxoSmithKline PLC (GSK) was involved in bribery and corruption of Chinese doctors. An article in the Financial Times (FT), entitled “China accuses GSK of bribery” by Kathrin Hille and John Aglionby, reported that “China has accused GlaxoSmithKline of being at the centre of a “huge” scheme to raise drug prices in three of the country’s biggest cities and said the UK-based drugmaker’s staff had confessed to bribing government officials and doctors. China’s Ministry of Public Security said a probe in Changsha, Shanghai and Zhengzhou found that GSK had tried to generate sales and raise drug prices by bribing government officials, pharmaceutical industry associations and foundations, hospitals and doctors.” They reported that some of the techniques used included the issuance of “fake VAT receipts and used travel agents to issue fake documents to gain cash, according to the ministry. Some executives had also taken advantage of their positions to take kickbacks from organising conferences and projects.” Further, ““There are many suspects, the illegal behaviour continued over a long time and its scale is huge,” the ministry said.”

These findings flew in the face of the company’s own internal investigation into allegations of bribery and corruption brought by a whistleblower. Hille and Aglionby reported that “GSK said it had conducted an internal four-month investigation after a tip-off that staff had bribed doctors to issue prescriptions for its drugs. The internal inquiry found no evidence of wrongdoing, it said.” Indeed after the release of information from the Chinese government, which GSK said was the first it had heard of the investigation, it released a statement quoted in the FT article, which stated ““We continuously monitor our businesses to ensure they meet our strict compliance procedures – we have done this in China and found no evidence of bribery or corruption of doctors or government officials. However, if evidence of such activity is provided we will act swiftly on it,” the company said.”

Unfortunately for GSK, it appears that not only did the Chinese government uncover evidence of bribery and corruption, such information was also reported by the Wall Street Journal (WSJ). Laurie Burkitt, in an article entitled “China Accuses Glaxco of Bribes”, wrote that “Emails and documents reviewed by the Journal discuss a marketing strategy for Botox that targeted 48 doctors and planned to reward them with either a percentage of the cash value of the prescription or educational credits, based on the number of prescriptions the doctors made. The strategy was called “Vasily,” borrowing its name from Vasily Zaytsev, a noted Russian sniper during World War II, according to a 2013 PowerPoint presentation reviewed by the Journal.”

Burkitt reported in her article that “A Glaxo spokesman has said the company probed the Vasily program and “[the] investigation has found that while the proposal didn’t contain anything untoward, the program was never implemented.”” But from my experience, if you have a bribery scheme that has its own code name, even if you never implemented that scheme, it probably means that the propensity for such is pervasive throughout the system. Indeed, we may now need to add the term “Vasily” to the code words for bribery that I discussed last week.

Burkitt also reported that the Chinese crackdown may be a part of a larger crackdown on bribery and corruption. While noting that it was not clear at this point, she went on to state that “scrutiny of foreign corporations operating in China has been heightened in recent months, as the government has launched a campaign to clean up its commercial sector, cracking down on practices authorities view as abusive or anticompetitive.” In another FT article, entitled, “GSK claims show frailty of Chinese system” Andrew Jack said that “The Chinese government has been clamping down on such practices [bribery and corruption] and attempting to keep a lid on drug costs, with an increasing focus on multinational companies. The National Development and Reform Commission in Beijing last week signaled that it was examining pricing by 60 companies.”

Under the FCPA there is a ‘Local Law” defense to an allegation of bribery. However, it is incumbent to note that any company which tries to avail itself of the “Local Law” defense under the FCPA must put forward evidence that the payment was lawful under the written laws of the foreign country. As the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) stated in their FCPA Guidance, “For the local law defense to apply, a defendant must establish that “the payment, gift, offer, or promise of anything of value that was made, was lawful under the written laws and regulations of the foreign official’s, political party’s, party official’s, or candidate’s country.” The defendant must establish that the payment was lawful under the foreign country’s written laws and regulations at the time of the offense.” Further, as stated in the FCPA Guidance, one of the “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.”

The FCPA Guidance makes clear the answer to Sanchez’s query that “what happens when other countries have no FCPA equivalent and view the matter of disclosure quite differently?” Even if there is no FCPA equivalent, there is no country which says that you can bribe our government officials. So please do not think that the District Court’s ruling on the SEC conflict mineral disclosure has any effect on the FCPA or FCPA enforcement. It has the same effect as the number of countries which say it is acceptable to bribe our government officials – NONE.

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

January 23, 2013

The FCPA Guidance on the Ten Hallmarks of an Effective Compliance Program

Many commentators are still mining the Department of Justice (DOJ)/Securities and Exchange Commission (SEC) publication, A Resource Guide to the U.S. Foreign Corrupt Practices Act, (the “Guidance”), which was released last November. I continue to find nuggets to provide to the compliance practitioner, as do others. But as we are a Base 10 culture, today I want discuss the 10 points listed as the ‘Hallmarks of Effective Compliance Programs”. They are a change in style, but not content, from the prior 13 point minimum best practices that the DOJ has in the Deferred Prosecution Agreements (DPAs) since at least November, 2010 and, indeed, from prior information made available by the DOJ.

I.                   Where Have We Been

Beginning with at least the Metcalfe & Eddy Consent and Undertaking, filed in December, 1999, the DOJ has laid out its thoughts on what should go into a Foreign Corrupt Practices Act (FCPA) anti-corruption compliance program. In the Metcalfe & Eddy Consent and Undertaking, the DOJ laid out ten points of an effective FCPA anti-corruption compliance program. This was modified somewhat in Opinion Release 04-02, which laid out a best practices compliance program in 12 points, where the DOJ reviewed the proposal by an investment group who were acquiring certain companies and assets from ABB Ltd. ABB Vetco Gray Inc. and ABB Vetco Gray (UK) Ltd., two of the entities being acquired, had previously pled guilty to FCPA violations. The investment group desired to protect itself from further liability, to the extent possible, by proposing to the DOJ a comprehensive best practices compliance program. While the DOJ noted that this compliance program was not a shield against future violations, the DOJ would not “intend to take an enforcement action [against the investors] for violations of the FCPA prior to their acquisition from ABB.”

In the Panalpina DPA, issued in November, 2010, the DOJ laid out a 13 point minimum best practices compliance program. This number was changed this past summer when the Data Systems & Solutions LLC (DS&S) DPA was announced. In this enforcement action the DOJ listed 15 points on its minimum best practices FCPA anti-corruption compliance program. Then later in the summer, the DOJ moved to a 9 point compliance program in the Pfizer DPA. Even with all these changes in the number, the substance of each compliance program has remained the same.

II.                Where Are We Now? Hallmarks of Effective Compliance Programs

The Guidance cautions that there is no “one-size-fits-all” compliance program. It recognizes that depending on a variety of factors such as size, type of business, industry and risk profile that a company should determine what is appropriate for its own needs regarding a FCPA compliance program. But the Guidance makes clear that these ten points are “meant to provide insight into the aspects of compliance programs that DOJ and SEC assess”. In other words you should pay attention to these and use this information to assess your own compliance regime.

  1. Commitment from Senior Management and a Clearly Articulated Policy Against Corruption. It all starts with tone at the top. But more than simply ‘talk-the-talk’ company leadership must ‘walk-the-walk’ and lead by example. Both the DOJ and SEC look to see if a company has a “culture of compliance”. More than a paper program is required, it must have real teeth and it must be put into action, all of which is led by senior management. The Guidance states that “A strong ethical culture directly supports a strong compliance program. By adhering to ethical standards, senior managers will inspire middle managers to reinforce those standards.” This prong ends by stating that the DOJ and SEC will “evaluate whether senior management has clearly articulated company standards, communicated them in unambiguous terms, adhered to them scrupulously, and disseminated them throughout the organization.”
  2. Code of Conduct and Compliance Policies and Procedures. The Code of Conduct has long been seen as the foundation of a company’s overall compliance program and the Guidance acknowledges this fact. But a Code of Conduct and a company’s compliance policies need to be clear and concise. The Guidance makes clear that if a company has a large employee base that is not fluent in English such documents need to be translated into the native language of those employees. A company also needs to have appropriate internal controls based upon the risks that a company has assessed for its business model. Some of the risks a company should assess include “the nature and extent of transactions with foreign governments, including payments to foreign officials; use of third parties; gifts, travel, and entertainment expenses; charitable and political donations; and facilitating and expediting payments.”
  3. Oversight, Autonomy, and Resources. This section starts with a discussion on whether a company has assigned a senior level executive to oversee and implement a company’s compliance program. Not only must a company assign such a person with appropriate authority but that person, and the overall compliance function, must have “sufficient resources to ensure that the company’s compliance program is implemented effectively.” Additionally, the compliance function should report to the company’s Board of Directors or an appropriate committee of the Board such as the Audit Committee. Overall the DOJ and SEC will “consider whether the company devoted adequate staffing and resources to the compliance program given the size, structure, and risk profile of the business.”
  4. Risk Assessment. The Guidance states that “assessment of risk is fundamental to developing a strong compliance program”. Indeed, if there is one over-riding theme in the Guidance it is that a company should assess its risks in all areas of its business. The Guidance lists factors that a company should consider in any risk assessment. They are “the country and industry sector, the business opportunity, potential business partners, level of involvement with governments, amount of government regulation and oversight, and exposure to customs and immigration in conducting business affairs.” The Guidance is also quite clear that when the DOJ and SEC look at a company’s overall compliance program, they “take into account whether and to what degree a company analyzes and addresses the particular risks it faces.”
  5. Training and Continuing Advice. Communication of a compliance program is a cornerstone of any anti-corruption compliance program. The Guidance specifies that both the “DOJ and SEC will evaluate whether a company has taken steps to ensure that relevant policies and procedures have been communicated throughout the organization, including through periodic training and certification for all directors, officers, relevant employees, and, where appropriate, agents and business partners.” The training should be risk based so that those high risk employees and third party business partners receive an appropriate level of training. A company should also devote appropriate resources to providing its employees with guidance and advice on how to comply with their own compliance program on an ongoing basis.
  6. Incentives and Disciplinary Measures. This involves both the carrot and the stick. Initially the Guidance notes that a company’s compliance program should apply from “the board room to the supply room – no one should be beyond its reach.” There should be appropriate discipline in place and administered for any violation of the FCPA or a company’s compliance program. Additionally, the “DOJ and SEC recognize that positive incentives can also drive compliant behavior. These incentives can take many forms such as personnel evaluations and promotions, rewards for improving and developing a company’s compliance program, and rewards for ethics and compliance leadership.” These incentives can take the form of a part of senior management’s bonuses or simply recognition on the shop floor.
  7. Third-Party Due Diligence and Payments. Here the Guidance focuses on the ongoing problem area of third parties. The Guidance says that companies must engage in risk based due diligence to understand the “qualifications and associations of its third-party partners, including its business reputation, and relationship, if any, with foreign officials.” Next a company should articulate a business rationale for the use of the third party. This would include an evaluation of the payment arrangement to ascertain that the compensation is reasonable and will not be used as a basis for corrupt payments. Lastly, there should be ongoing monitoring of third parties.
  8. Confidential Reporting and Internal Investigation. This means more than simply a hotline. The Guidance suggests that anonymous reporting, and perhaps even a company ombudsman, might be appropriate to have in place for employees to report allegations of corruption or violations of the FCPA. Furthermore, it is just as important what a company does after an allegation is made. The Guidance states, “once an allegation is made, companies should have in place an efficient, reliable, and properly funded process for investigating the allegation and documenting the company’s response, including any disciplinary or remediation measures taken.” The final message is what did you learn from the allegation and investigation and did you apply it in your company?
  9. Continuous Improvement: Periodic Testing and Review. As noted in the Guidance, “compliance programs that do not just exist on paper but are followed in practice will inevitably uncover compliance weaknesses and require enhancements. Consequently, DOJ and SEC evaluate whether companies regularly review and improve their compliance programs and not allow them to become stale.” The DOJ/SEC expects that a company will review and test its compliance controls and “think critically” about its own weaknesses and risk areas. Internal controls should also be periodically tested through targeted audits.
  10. Mergers and Acquisitions. Pre-Acquisition Due Diligence and Post-Acquisition Integration. Here the DOJ and SEC spell out what it expects in not only the post-acquisition integration phase but also in the pre-acquisition phase. This pre-acquisition information is not something that most companies had previously focused on. Basically, a company should attempt to perform as much substantive compliance due diligence that it can do before it purchases a company. After the deal is closed, an acquiring entity needs to perform a FCPA audit, train all senior management and risk employees in the purchased company and integrate the acquired entity into its compliance regime.

As I commented earlier in this article, the DOJ and SEC have communicated what they believe are the important parts of a risk based, anti-corruption compliance program for many years. I do not think that a compliance defense could be set out any more succinctly. However, I do like things set out in Base 10 and the “Hallmarks of Effective Compliance Programs” is an excellent compilation of where we are and what you need in place to go forward. I recommend this as a good a starting point for any compliance practitioner to implement a new compliance program or to evaluate the state of an ongoing compliance regime so assess your company’s risks and use these hallmarks as a basis to move forward.

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

December 14, 2012

A Cornucopia of Great FCPA Articles for Your Friday Consideration

It has been a great couple of weeks for article regarding the Foreign Corrupt Practices Act (FCPA). While I have resisted having a Friday Round Up of all things FCPA compliance related because both the FCPA Professor, on his site and Dawn Lomer on iSight.com have two of the best, some of the articles that I have read over the past are well worth a post about. So with a tip of the hat to both of these blogging colleagues, I submit for your Friday consideration the three following authors with their superior articles.

The FCPA Professor

The FCPA Professor has published two excellent articles over the past two weeks on the FCPA. The first was his 80 page tome, “The Story Of The Foreign Corrupt Practices Act”. In this article, published in the Ohio State Law Journal, the Professor explored the more than two years of investigation, deliberation, and consideration, which led to the passage of the FCPA in 1977. Noting that it was  “a pioneering statute and the first law in the world governing domestic business conduct with foreign government officials in foreign markets” the Professor wove together “information and events scattered in the FCPA’s voluminous legislative record to tell the FCPA’s story through original voices of actual participants who shaped the law.” In his article I learned who supported legislation aimed at stopped the bribing of foreign government official and how the final legislation came into being after a long and arduous process.

This week, the Professor published his review of the Department of Justice FCPA Guidance, which came out last month, entitled “Grading the Foreign Corrupt Practices Act Guidance“. It was published in Bloomberg / BNA’s White Collar Crime Report. As you have come to expect from the Professor, his review is proactive. His abstract details some of the items he discusses, such as “(i) the enforcement agencies’ motivations in issuing the Guidance and the fact that it should have been issued years ago; (ii) the utility of the Guidance from an access-of-information perspective and how the Guidance can be used as a measuring stick for future enforcement agency activity; (iii) how the Guidance is an advocacy piece and not a well-balanced portrayal of the FCPA as it is replete with selective information, half-truths, and, worse information that is demonstratively false; (iv) how, despite the Guidance, much about FCPA enforcement remains opaque; and (v) how, despite the Guidance, FCPA reform remains a viable issue.”

As I once said about Dick Cassin and his FCPA Blog, “If the FCPA Blog didn’t exist, someone would have to create it and fortunately for us Dick has done so.” To this list I now must add the FCPA Professor, so to paraphrase Paul Samuelson, when asked to comment about Milton Friedman winning the Nobel Prize in Economics, “if the FCPA Professor didn’t exist, we would have to invent him.” You can agree or disagree with the Professor but he stirs debate and puts out topics for dialogue, which as the son of Professor, is what I think that academicians should do.

 Alexandra Wrage

For the longest time, my This Week In FCPA colleague Howard Sklar crowed to me about Alexandra and how he was such a big fan. Of course I knew of her and her work as President of Trace. Like many of us, I bemoaned the fact she no longer blogs on a regular basis. She does speak on a regular basis and early this year I heard her speak at the Beacon Events Corruption and Compliance South and Southeast Asia Summit. Fortunately she spoke after I did because she is a very dynamic speaker. In addition to her numerous speaking engagements, she does publish articles from time-to-time and yesterday we were treated to a most timely article on gift giving and gift receiving. It was published on the Corporate Insider blog site of Corporate Counsel and was entitled, “‘Tis the Season When Gifts Become Bribes”. In her article, Wrage explored the receipt of gifts by employees in the context of corruption. The article is certainly worth your time to read but she listed the points that any company or compliance professional needs to consider in a gift giving or gift receiving policy:

  • Gifts should be modest, tokens of esteem.
  • Ideally, they should bear the corporate logo or reflect the company’s products and they should be provided openly and transparently.
  • Delivering to an office is preferable to sending to a home address.
  • One gift-giving holiday or event should be observed. It doesn’t matter if it’s Diwali, Eid, the Lunar New Year, July 4th, or Christmas, but pick (only) one.
  • Perishable gifts of flowers or food are generally thought to be less risky, in part because they can’t be resold.
  • Give consistently and without regard to pending or recent procurement or other official decisions.
  • Follow corporate policy.
  • Document everything.
  • Give in good faith and without expectation of any quid pro quo.
  • A moderate annual affirmation of both new and longstanding relationships is not a bribe.

Good ideas to follow any time of the year.

Jim McGrath

Jim is a former prosecutor and chief legal officer of a federally funded drug task force so he comes with a different perspective than my civil law background. Jim blogs on his own site, the Internal Investigations Blog and as you may discern from the name of his blog, he tends to look at the investigative side of things. He did so again in a post entitled, “Little Things Mean A Lot: The FCPA Guide on Internal Investigations”. McGrath looked at the DOJ FCPA Guidance from his investigative perspective and came up with the following nugget: “An effective compliance program should include a mechanism for an organization’s employees and others to report suspected or actual misconduct or violations of the company’s policies on a confidential basis and without fear of retaliation. Companies may employ, for example, anony­mous hotlines or ombudsmen. Moreover, once an allegation is made, companies should have in place an efficient, reliable, and properly funded process for investigating the allegation and documenting the company’s response, including any disciplinary or remediation measures taken.” From this he wrote that the “text mandates that companies not only have “in place an efficient [and] reliable . . . process for investigating [an] allegation”, but that it be “properly funded” as well.  [italics in original]

McGrath believes that this language should raise concerns for Chief Compliance Officer “across the land, since “properly funded internal investigation” has now been added to the pile of ill-defined terms such as “foreign official”, “instrumentality”, and “anything of value”. Further he raised the following questions:

  • What happens if the unforeseeable occurs and the wheels come off in far greater severity than anticipated when the CCO stocked the internal probe war chest?
  • Will that shortcoming be considered a hallmark of a less-than-effective compliance program and militate against a non-prosecution or deferred prosecution agreement or will it factor into a higher culpability score and greater penalties?
  • And who – as if practitioners didn’t know – will decide these issues?

I recommend all of these articles and authors to you. Each brings a different perspective and each can help you build, create or enhance your compliance program to meet best standards. A good Friday to all and let us hope that the Texans can recover from their debacle in Boston.

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

© Thomas R. Fox, 2012

October 31, 2012

From Trick or Treat through Thanksgiving: Examining the Past to Prepare for the Future

Ed. Note- For those of you who do not know her, Mary Shaddock Jones is one of the compliance professions I regularly rely on for advice. I continually ask her to send over some guest posts as they are always topical, top notch and provide practical advice for the compliance practitioner. I will be out of pocket over the next two weeks and Mary has agreed to take over the lion’s share of posts for my blog. Today she begins her series with a topical post on chocolates and the pre-holiday season from Halloween to Thanksgiving. I know you will not only enjoy her series but get quite a bit out of them.

This summer, the Securities and Exchange commission charged Texas-based medical device company Orthofix International with violating the Foreign Corrupt Practices Act (“FCPA”) through improper payments of bribes (code named “chocolate”) to officials at Mexico’s government-owned health care and social services institution, Instituto Mexicana del Seguro Social (“ IMSS”), in order to obtain or retain business.  Sure, for those of you who regularly read Tom Fox’s blog, this is old news.  However, since he is off and today is Halloween, I thought I would start a series for the next two weeks re-examining some of the more recent, and perhaps not so recent cases with a fresh set of eyes.

The practical pointer for today’s blog is straightforward – it is imperative that companies which have FCPA exposure audit both their petty cash accounts, and all expenses coded to training and promotion. This is apparently where the improper expenditures were “hidden” by employees of Orthofix.  In my experience, companies need to be closely reviewing what little case law or factual allegations exist with regard to the FCPA so that they too know where to find any potential problems that may exist within their own company.  There are only so many ways to hide the dollar.  If you find yourself sitting in front of the DOJ and/or SEC in the future on allegations related to a violation of the FCPA…you will not gain any “chocolate points” if you haven’t implemented a robust compliance program.  But as FCPA practitioners have said over and over again – simply having a Code of Business Conduct, an Anti-Corruption Policy Manual and even person to person training is not enough.  You have to be proactive in trying to find what others don’t want to be found.  That is why the Orthofix employees didn’t book the improper payments as “bribes”.  They aren’t stupid.  They know this is one red flag that will stop the energizer bunny in its tracks.  So instead, they disguise the improper payments in a way that they think is clever.

According to the SEC, in order to obtain cash for the bribes, the Promeca executives wrote checks to themselves, which they justified as “cash advances”.  A smart person in the accounting department would ask – what was the cash advance for?  What was bought?  Are their valid receipts which state what was bought, when was it bought, who was taken to dinner or lunch, what was discussed, etc?  In order to continue the deception, the executives submitted false receipts for imaginary expenses including meals and new car tires.   Practical Pointer:  It may be a boring and tedious task, and one which hopefully never uncovers questionable payments – but companies must have someone in charge of reviewing expense reports – for everyone – from the top dog on down to the dog walker.  Do you have a process in place for reviewing expense accounts?  If not, put one in place.

Unfortunately for Orthofix, the improper payments became too large to hide in expense reports; therefore, a new hiding place had to be located.  The next best thing to expense reports is training and promotional expenses.   Remember that the FCPA includes three affirmative defenses under its anti-bribery provisions – the first of which is “reasonable and bona fide expenditures related to certain promotional activities”.  If the FCPA allows the payment for “promotional expenses”, what better place to hide improper payments than in plain sight?   Just because someone calls an expense a promotional expense, does not mean that the Company does not have to trust, but verify.

Specifically, the FCPA permits payments if the payment to a foreign official was a “reasonable and bona fide expenditure, such as travel or accommodation expense, that was directly related to the demonstration of a product or service, or performance of a contract with a governmental agency.”  Unfortunately, I was unable to determine from the public filings how the training or promotional payments were characterized so as to allow them to remain undetected by the accounting department at Orthofix until hundreds of thousands of dollars in improper payments had been made.  However, the practical pointer for you is this – do you have a process in place which places controls over when expenditures can be made for travel and lodging/training and/or promotional/marketing expenses?

Consider the following policy language:

The FCPA permits the payment of reasonable and bona fide expenditures on behalf of a Government Official and directly related to (1) the promotion, demonstration, or explanation of products or services; or (2) the execution or performance of a contract with a non-U.S. government or agency thereof.

Travel and Lodging: No travel or lodging may be offered or given to a Government Official without the prior written consent of the Company Compliance Officer or his or her designee and must meet the following guidelines: (1) it serves a legitimate Company business purpose; (2) invitations to a Government Official are transparent, in writing, and clearly state the business purpose of the trip; (3) no payment is made directly to a Government Official either through an advance or reimbursement for expenses (the Company should directly purchase travel or lodging from those who provide them, utilizing a travel agent or other third party if possible); (4) providing “per diem” fees or expenses is avoided, particularly where meals are already being provided; (5) no cash payments to a Government Official are made whatsoever; (6) travel and lodging expenses are only provided for the identified Government Official and not for spouses, family, or friends of the Government Official; (7) travel arrangements are directly between the place of residence or employment of the Government Official and the intended destination of the business travel, with no non-business side trips; (8) no reimbursements are paid without presentation of appropriate receipts; (9) providing the travel or lodging is permitted under local law and regulations and guidelines of the recipient’s governmental entity (note that some customers have strict policies against receiving gifts); and  (10) other than the travel or lodging identified above, the Government Official is not compensated for his or her participation in the planned trip.

Guidelines for Entertainment: Unless prior written approval from the Company Compliance Officer or his or her designee is obtained, entertainment provided to a Government Official must meet the following guidelines: (1) it serves a legitimate Company business purpose; (2) providing the entertainment is permitted under local law and regulations and guidelines of the recipient’s governmental entity (note that some customers have strict policies against receiving gifts); (3) it is of the type and value that is reasonable (not lavish, excessive, or frequent); (4) it is in line with the local customs of the country where provided; (5) it is of a type that is appropriate (e.g. no strip clubs); and (6) it is accurately recorded in the Company’s books and records.

Guidelines for Marketing Expenses: Unless prior written approval from the Company Compliance Officer or his or her designee is obtained, marketing materials (such as pens, caps, or mugs) provided to a Government Official must meet the following guidelines: (1) they serve a legitimate Company business purpose; (2) they are of nominal value; (3) they are of the type and value that are customary and appropriate for the occasion;(4) they are branded with the Company’s name and/or logo; (5) they are permitted under local law and regulations and guidelines of the recipient’s governmental entity (note that some customers have strict policies against receiving gifts); and (6) they are fully and accurately recorded in the Company’s books and records.

Remember, it is not enough to simply have a policy in place; you must also conduct trainings (have the training in both English and the predominant local language of your employees) and audits to ensure compliance.

No more chocolates for today… tomorrow is All Saints Day.  Stay tuned to see who didn’t perhaps make the list of saints.

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Mary Shaddock Jones has practiced law for 25 years in Texas and Louisiana primarily in the international marine and oil service industries.  She was of the first individuals in the United States to earn TRACE Anti-bribery Specialist Accreditation (TASA).  She can be reached at msjones@msjllc.com or 337-513-0335. Her associate, Miller M. Flynt, assisted in the preparation of this series.  He can be reached at mmflynt@msjllc.com.

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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.

October 25, 2012

The Mummy and Using Challenges to Improve Compliance Cultures

We continue our celebration of the Universal Pictures monster movie films by looking at the classic The Mummy, which was released in 1932 and starred Boris Karloff. In many ways I found this to be the most hauntingly filmed of the classic monster movies. Perhaps this was due to the director Karl Freund, who was in his directorial debut for this film. He is probably best known as Universal’s top cameraman and the person who set up some of the great shots for the gamut of Universal pictures in the 1930s. His use of shadings in the black and white era added an aura of mystery that is not present in today’s films. This movie is probably the best visual feast of all the classic Universal Picture horror films.

One cannot see the movie, or indeed write about it, without talking about the makeup artist, Jack Pierce, one of the truly greatest makeup artists of any era. He headed Universal’s Makeup Department until 1948 and personally created the makeup for all of the classic Universal Pictures monsters. While most people think of Frankenstein’s monster as Pierce’s greatest creation, he saw the Mummy as his true masterwork. The application of the makeup was arduous, taking up to eight hours of work on Karloff to complete the 3000 year old look for the Mummy.

For me, most haunting scene is one which occurs quite early in the movie. After a spell is read aloud, bringing Karloff as the Mummy to life, the casket which houses the Mummy is left open allowing the Mummy to escape into the present day world. One of the young archeologists sees the Mummy walk out of the room and immediately goes insane. I can hear his haunting scream in my head to this day. But here is the key to making this scene so powerful, we never see the Mummy; the only thing we see is some of the rags trailing from his body as he walks out of the room. Too bad today’s gore-fest directors have forgotten what real terror can be.

The basic story line is that Imhotep, the High Priest of Egypt, was mummified after the Pharaoh found out he had fallen in love with the Pharaoh’s wife Princess Anck-es-en-Amonand. As a Mummy, Imhotep was condemned to eternal damnation and his soul would never to go the afterlife. After he is released from this curse in the 20th Century with the reading of the spell, Imhotep searches for the reincarnation of the Princess. He finds her in modern day London, as Helen Grosvenor, played by the alluring Zita Johann; the Mummy tries to convince her she is the reincarnated Princess Anck-es-en-Amonand and to join him in an eternal love affair. Grosvenor prays to the goddess Isis who sends a ray into Imhotep which turns him into dust.

So the compliance angle here? It’s the difference between two companies in their responses to compliance challenges. Exhibit A is Goldman Sachs and their continuing PR nightmare named Greg Smith. Smith exploded onto the ethics scene with his very public resignation from Goldman Sachs and Op-Ed piece in the New York Times (NYT) in March. The NYT piece castigated Goldman Sachs both internally for their drive towards the all mighty dollar (horror) and their external relationships with their clients, for basically the same reason (horror, horror). This week Smith has made the rounds of several shows including a prominent feature on 60 Minutes to plug his recently released book entitled, “Why I Left Goldman Sachs.”

I had wondered what Goldman Sachs public response would be to Smith’s allegations. Would the firm go “Swift Boat” on him? Would they take any credence to his allegations, investigate them and remediate any issues they found open? Some of these questions were answered in an online post by Kevin Roose, entitled “Goldman Sachs Reveals its Greg Smith Battle Plans”, where Roose attached a Memo that Goldman Sachs sent out to its employees with the talking points that they should use when responding to Smith’s allegations.

Goldman Sachs did not go full ‘Swift Boat’ but only attacked Smith as (1) opportunistic because he was not doing that well on the Goldman Sachs promotion ladder and (2) he really was not in a position to know about the things he was talking about anyway. What I found the interesting part of the Goldman Sachs Memo was that it focused on some of the positive actions the firm had taken regarding ethics and compliance with its Code of Conduct. While I had hoped that Goldman Sachs had performed a deep dive and investigated the allegations made by Smith; it did not announce that it had done so as a part of the talking points in its Memo.

Contrast the Goldman Sachs approach with the ongoing story about NCR and the Foreign Corrupt Practices Act (FCPA) allegations. As reported by Chris Matthews and Sam Rubenfeld in Wall Street Journal (WSJ) article entitled “NCR Investigates Alleged FCPA Violations”, NCR had a lawyer, Daan Thorig, removed and transferred because its business folks in China had the view that Thorig “doesn’t understand China at all”. The issue, which brought all this to a head, was when Thorig would not approve a client entertainment event for Chinese government officials. This same business person, Gary Miao, later requested that Thorig be removed from his position and be replaced with a lawyer who “understands our business”. Lo and behold, Thorig was not only replaced but shipped out half way across the globe. Ominously, the WSJ article reported that “Thorig is no longer with the company.” The above article came about through an interview by the authors with an anonymous tipster who had whistle blown on NCR about L’affair Thorig. NCR’s initial response was to actually attack this anonymous person as not knowing what he was talking about.

So what did this anonymous tipster do? He sat down with two folks who are in Ethisphere’s Top 100 most influential people in the FCPA and wider compliance world and laid out emails for them about NCR’s conduct. In addition to the emails about L’affair Thorig this tipster also had emails about NCR’s business conduct in several other parts of the world which also may raise FCPA implications. In a September, 2012 8K filing NCR then attacked the whistleblower with the following language, “We have certain concerns about the motivation of the purported whistleblower and the accuracy of the allegations we received, some of which appear to be untrue.” I guess they did not learn too much from their first attack.

So what lessons can we draw from these very disparate responses? One would have to say that NCR’s response has been about as wrong-headed as a company’s can be. By basically challenging the anonymous whistleblower to come forward, he (or she) did so with two very well known and well respected journalists in the compliance world. I am sure that the Department of Justice (DOJ) will be very interested in the results of these internal investigations by NCR. But more importantly what kind of message does the reported facts and the public responses of NCR  send to its employee base? Is it keep your mouth shut or else? Do the business guys dictate what compliance approves? How about if you want to bring a problem up the line internally at NCR? Will you be shipped out on the next boat across the globe or even have to leave the company? Unlike the Mummy, Isis will probably not point a death-ray at NCR and turn it to dust but it sure may be in for quite a (FCPA) ride.

Since there are only questions at this point, I would suggest that you sit back and pop in the original version of The Mummy. Just as Helen Grosvenor remembered who she was when she prayed to Isis perhaps NCR will remember that it is a US based company subject to the FCPA and will embrace whistleblowers as a useful tool of the modern compliance program.

One thing I forgot to mention is that as it is a 1932 production, it is pre-Code. So be on the look for some interesting ladies garments. As I said, a visual feast for all.

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

© Thomas R. Fox, 2012

October 15, 2012

How Casanova Informs Your FCPA Compliance Program

One cannot use ‘sex’ in the title of a blog or company email filters will pick it up as spam. So while our title today focuses on Casanova and lust, this post will focus on sex. Yesterday, an article in the Sunday New York Times (NYT) entitled “Strauss-Kahn Say Sex Parties Went Too Far, But Lust Is No Crime” caught my eye. In the article reporters Doreen Carvajal and Maia de la Baume detailed the libertine sex life of the former Managing Director of the International Monetary Fund (IMF) Dominique Strauss-Kahn (DSK).

I.                   The Times Article

It turns out that DSK’s little tryst with the maid in the hotel in New York was but a small sampling of his escapades. According to the NYT article, “The exclusive orgies called “parties fines” — lavish Champagne affairs costing around $13,000 each — were organized as a roving international circuit from Paris to Washington by businessmen seeking to ingratiate themselves with Mr. Strauss-Kahn. Some of that money, according to a lawyer for the main host, ultimately paid for prostitutes because of a shortage of women at the mixed soirees orchestrated largely for the benefit of Mr. Strauss-Kahn, who sometimes sought sex with three or four women.” Apparently such events had a long and treasured history in France where “Libertinage” goes back to the 16th Century.

According to DSK he said, “I long thought that I could lead my life as I wanted,” in an interview with the French magazine Le Point. “And that includes free behavior between consenting adults.” Ah those French. Where is Casanova when you need him to explain how a Frenchman needs a little liaison with 3 or 4 women now and again?

However, it turns out that our Libertine DSK was not exactly paying for ‘services rendered’. These sex romps cost a lot of money, as stated in the NYT article, over $13,000 per event. The events started out with lavish dinners and then couples would pair off and pair off and pair off. (Cue the Viagra pop-up ad now.) More ominously, DSK did not pay for these events himself. The NYT article quoted Karl Vandamme, a defense lawyer who represents Fabrice Paszkowski, the owner of a medical supply company who played a crucial role in organizing the sex parties. “Libertines are people like you and me: people who have a normal life,” said Mr. Vandamme, who said his client invested around $65,000 in party expenses, betting on the political rise of Mr. Strauss-Kahn.” (Emphasis mine)

So what is the Foreign Corrupt Practices Act (FCPA) compliance angle here? I think that everyone would agree that providing prostitutes to foreign governmental officials to obtain or retain business would be a violation of the FCPA. But here there are a couple of points that I found of interest far beyond simply providing hookers.

II.                FCPA Application

A.       Covered Recipient

The first is who precisely does the FCPA cover? Certainly it covers foreign governmental officials and I would certainly argue that it covers employees of state owned enterprises and it does cover other persons as well. Under the FCPA officers or employees of public international organizations are covered. The definition reads as follows:

For purposes of this section:

(1)   A) The term “foreign official” means any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization. (emphasis supplied)

The IMF is a public international organization. Prior to becoming the Managing Director of the IMF in 2007, DSK was active in French politics, holding several government offices and even unsuccessfully running for the Socialist Party candidate for President in 2007. He was the Managing Director of the IMF from 2007 until he resigned after having been accused of sexual assault by a hotel maid in New York City in 2012.

B.        Obtain or Retain Business

So our Libertine friend DSK could be covered by the FCPA if a US company was participating in conduct which would violate the FCPA. One person was quoted in the NYT article that his client, both personally and through his company, invested money to pay for the sex romps “betting on the political rise” of DSK. The FCPA makes illegal “use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value” which are intended to do any of the following:

(A) (i) influencing any act or decision of such foreign official in his official capacity, (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage; or

(B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality, in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person

Here we have clients paying for lavish gift parties, which I would argue are per se unreasonable under the Gifts and Entertain affirmative defense under the FCPA. (No snickers here please as I am not arguing that a $100 for hooker is reasonable.) Further, the clear intent of at least the client of the above quoted Mr. Vandamme was “betting on the political rise of” DSK. Think the client, Fabrice Paszkowski, the owner of a medical supply company, was just shelling out that kind of money so DSK could ‘enjoy himself’ or is it more probable that Paszkowski, would expect to “obtain or retain” some business or other benefit from his now sated buddy DSK?

There are several learning moments from the fall of DSK and FCPA compliance. The first is to remember that the FCPA covers more than simply foreign government officials and employees of state owned enterprises. As stated it also covers officers and employees of public international organizations. It is even broader as it also covers political parties and those seeking political office in foreign countries. The DSK Libertine Sex Party lifestyle also reminds us that the FCPA not only prohibits bribes paid in cash but the ubiquitous “anything of value”. (And no I am not going to debate whether having sex with four partners a night is “anything of value” particularly if Viagra is included in the cost.)

It could certainly be interesting if the names of any companies subject to the FCPA come up in the ongoing investigation into DSK.

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

© Thomas R. Fox, 2012

October 2, 2012

Tyco NPA and Chris Economaki – Details from the Pits

“This is Chris Economaki in the pits.”

That was the signature line of race car announcer Chris Economaki, who died last week at the age of 91. For a generation of us who grew up watching ABC’s Wide World of Sports, Chris Economaki was the voice of the Indy 500, the Dayton 500, the Summer and Winter Nationals of the National Hot Rod Association (NHRA) and a host of other auto races. In addition to having one of the most unique names this Southerner had ever heard of, Economaki had a staccato vocal delivery that, as noted in his obituary in the New York Times (NYT) by writer Douglas Martin, “reminded some of a rumbling racing engine.”

The Bribery Schemes

I thought about Chris Economaki and the detail he brought as a track-side commentator to a generation of Wide World of Sports’ aficionados when considering the various documents released last week in connection with the Tyco International Ltd (Tyco) Foreign Corrupt Practices Act (FCPA) enforcement action. For the most comprehensive summary of the Department of Justice’s (DOJ) criminal enforcement action and the Securities and Exchange Commission’s (SEC) civil action, I recommend either of the FCPA Professor’s excellent posts on Tyco. In addition to the points raised by the Professor I believe that there are significant lessons learned for the FCPA compliance practitioner. With a tip of our collective caps to the baseball pennant races which are down to the final few days, I present the Tyco Bribery Box Score.

Tyco

Subsidiary

Bribe Amount Paid

Profits Earned by Conduct

M/A Com Not reported $71,770
TTC Huzhou and TTC Shanghai $196,267 $3,470,180
TWW Germany and Erhard $2,371,094 $4,684,966
TFC HK and Keystone $137,000 $378,088
TFCT Shanghai $24,000 $59,412
ET Thailand $292,268 $879,258
TFIS France $363,839 $1,256,389
THC China $250,000 $353,800
TVC ME $488,479 $1,153,500
ADT Thailand $78,000 $473,262
Tatra $96,000 $226,863
Eurapipe $358,000 $1,298,453
THC Saudi Arabia Not reported $1,900,600
Dulmison $68,426 $109,249

I set out the full Box Score of bribes paid by Tyco in this detail to emphasize how bad the conduct of the company is and this is in the VERY BAD CONDUCT realm, coupled with the facts that (a) Tyco is now a two-time loser under the FCPA and (b) most of the illegal conduct occurred after Tyco agreed to an initial FCPA based Deferred Prosecution Agreement (DPA) in 2006 for prior FCPA sins. Yet even with all of this Tyco was able to obtain a Non Prosecution Agreement (NPA). Such a result is fairly stunning if you think about it in a superficial basis. However, if you consider what Paul McNulty continually says, and which I continually write about, the most important question will be What did you do when you found out about it?

As noted in the letter from the DOJ to counsel for Tyco, the DOJ entered into the NPA with Tyco based upon the following factors: (1) timely and voluntary self-disclosure; (2) a full and complete global investigation by Tyco; (3) extensive remediation including implementation of an enhanced compliance program, termination of employees responsible for the conduct at issue, severing contracts with third party agents who were parties to the frauds, closing subsidiaries involved in the illegal conduct; and (4) provide annual written reports to the DOJ on progress of the company’s enhanced compliance program.

Corporate Compliance Program

Tyco agreed to a robust corporate compliance program that either currently exists or will be implemented in the future. This Corporate Compliance Program is somewhat different than most of the 13 minimum best practices compliance regimes reported in DPAs and NPAs since the Panalpina DPA of November, 2010. Tyco agreed to a point compliance regime, which consists of the following.

1. High level commitment. The Company will ensure that its senior management provides strong, explicit, and visible support and commitment to its corporate policy against violations of the anti-corruption laws and its compliance code.

2. Policies and Procedures. Tyco will promulgate compliance standards and procedures designed to reduce the prospect of violations of the anti-corruption laws and the Company’s compliance code, and the Company should take appropriate measures to encourage and support the observance of ethics and compliance standards and procedures against foreign bribery by personnel at all levels of the company. These anti-corruption standards and procedures shall apply to all directors, officers, and employees and, where necessary and appropriate, outside parties acting on behalf of the Company in a foreign jurisdiction, including but not limited to, agents and intermediaries, consultants, representatives, distributors, teaming partners, contractors and suppliers, consortia, and joint venture partners (collectively, “agents and business partners”), to the extent that agents and business partners may be employed under the Company’s corporate policy. The Company shall notify all employees that compliance with the standards and procedures is the duty of individuals at all levels of the company. Such standards and procedures shall include policies governing:

  1. gifts;
  2. hospitality, entertainment, and expenses;
  3. customer travel;
  4. political contributions;
  5. charitable donations and sponsorships;
  6. facilitation payments; and
  7. solicitation and extortion.

3. Internal Controls. Tyco will ensure that it has a system of financial and accounting procedures, including a system of internal controls, reasonably designed to ensure the maintenance of fair and accurate books, records, and accounts to ensure that they cannot be used for the purpose of foreign bribery or concealing such bribery. This system should be designed to provide reasonable assurance that:

  1. Transactions are executed in accordance with management’s general or specific authorization;
  2. Transactions are recorded to permit preparation of financial statements in accordance with GAAP;
  3. Access to assets is permitted only in accordance with management’s general or specific authorization; and
  4. Recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken if discrepancies are found.

4. Periodic Risk-Based Reviews. Tyco agreed to develop these compliance standards and procedures, on the basis of a risk assessment addressing the individual circumstances of Tyco, in particular the foreign bribery risks it faces including, its geographical organization, interactions with various types and levels of government officials, industrial sectors of operation, involvement in joint venture arrangements, importance of licenses and permits in the company’s operations, degree of governmental oversight and inspection, and volume and importance of goods and personnel clearing through customs and immigration.

5. Proper Oversight and Independence. Tyco will (or once again has) assign responsibility to one or more senior corporate executives of the Company for the implementation and oversight of the Company’s anti-corruption policies, standards, and procedures. Such corporate official(s) shall have direct reporting obligations to the Tyco’s independent monitoring bodies, including internal audit, the Board of Directors, or any appropriate committee of the Board of Directors, and shall have an adequate level of autonomy from management as well as sufficient resources and authority to maintain such autonomy.

6. Training and Guidance.

  1. Training. Tyco will implement mechanisms designed to ensure that its anti-corruption policies, standards, and procedures are communicated effectively to all directors, officers, employees, and where appropriate, agents and business partners. These mechanisms shall include periodic training for all directors and officers, and, all employees in positions of leadership or trust or positions which might otherwise pose a risk of corruption to the company. The training shall also be provided to agents and business partners. Lastly there shall be biannual certifications by all such directors and officers, and, where necessary and appropriate, employees, agents, and business partners, certifying compliance with the training requirements.
  2. Guidance. Tyco is required to maintain an effective system for providing guidance and advice to directors, officers, employees, and, where necessary and appropriate, agents and business partners, on complying with Tyco’s anti-corruption compliance policies, standards, and procedures, including when they need advice on an urgent basis or in any foreign jurisdiction in which Tyco operates.

7. Internal Reporting and Investigation. Tyco will provide an effective system for internal and where possible, confidential reporting by, and protection of, directors, officers, employees, and, where necessary and appropriate, agents and business partners, concerning violations of the Company’s compliance program. Tyco also agreed to dedicate sufficient resources to respond to such requests and undertaking necessary and appropriate action in response to such reports.

8. Enforcement and Discipline. Tyco will institute appropriate disciplinary procedures to address, violations of the anti-corruption laws and the Company’s anti-corruption compliance code, policies, and procedures by the Company’s directors, officers, and employees. This shall include disciplining of those within the company no matter how the position of the person or their perceived authority. In addition to discipline, Tyco agrees to add appropriate mechanisms to incentivize compliant behavior.

9. Third Party Relationships. Tyco agreed to institute appropriate due diligence and compliance requirements pertaining to the retention and oversight of all agents and business partners, including: (a) properly documented risk-based due diligence pertaining to the hiring and appropriate and regular oversight of agents and business partners; (b) informing agents and business partners of the Company’s commitment to abiding by laws on the prohibitions against foreign bribery, and of the Company’s ethics and compliance standards and procedures and other measures for preventing and detecting such bribery; (c) seeking a reciprocal commitment from agents and business partners and (d) including appropriate compliance terms and conditions in the contract.

10. Mergers and Acquisitions. Tyco agreed to develop and implement appropriate compliance policies and procedures for any acquisition based upon an appropriate risk-analysis which would be completed as soon as practicable. Further such changes would be implemented as soon as practicable. Directors, officers and employees of newly acquired entities would be trained as soon as practicable.

11. Monitoring and Testing. Tyco agreed to conduct periodic review and testing of its anti-corruption compliance code, standards, and procedures designed to evaluate and improve their effectiveness in preventing and detecting violations of anti-corruption laws and the Company’s anti-corruption code, standards and procedures, taking into account relevant developments in the field and evolving international and industry standards.

So the prior 13 point best practices program is now folded down to 11 for Tyco. Nevertheless, the general concepts are still the same for a company seeking to implement or enhance its compliance solution. Much like Chris Economaki reporting from the Pits at the Indy 500, the level of detail provided in the Tyco NPA should allow the compliance practitioner to evaluate their company’s compliance program.

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The Wall Street Journal has a series of articles today on the FCPA. In conjunction with these articles I will join Joe Palazzolo, Law Blog lead writer, for a conversation on the FCPA at 2:30 PM EDT. We will take your questions. To join us, click here.

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

© Thomas R. Fox, 2012

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