FCPA Compliance and Ethics Blog

December 8, 2014

DPAs and NPAs – Powerful Tools in the Fight Against Corruption

ToolAs readers of this blog know the FCPA Professor and I usually look at the same Foreign Corrupt Practices Act (FCPA) enforcement action, item or remark and see different things. Sometimes we even hear the same thing and come away with different interpretations. Last week, we experienced yet another instance of the former where we both looked at the same article, that being one in Global Investigations Review entitled “Caldwell: settlement a “more powerful tool” than convictions” by Rahul Rose, yet came away with different interpretations. After some to-ing and fro-ing, we decided that we would both post our interpretations on the same day. So with a nod to Dan Fogelberg and Tim Weisberg, today we have the first twin posts from different bloggers dual- blog posts. Since we agreed to write our respective posts without seeing the other’s post and hence could not comment on each other’s post, I urge that after you finish reading my blog today, you click on over to the FCPA Professor’s site and see what his thoughts on Caldwell’s remarks might be.

The specific remarks we want to focus on were apparently made by during the Q&A session of Assistant Attorney General Leslie R. Caldwell who spoke at the Launch of the Organization for Economic Co-operation and Development Foreign Bribery Report, note these remarks were not found in the printed remarks of the speech on the Department of Justice (DOJ) website. In her Q&A, Rose reported the following, “Caldwell told the audience in Paris: “Companies cannot be sent to jail, so all a court can do is say you will pay ‘x’. We can say: ‘you will also have a monitor and will do all sorts of other things for the next five years, and if you don’t do them for the next five years then you can still be prosecuted’.” [And for the money shot] “In the United States system at least it is a more powerful tool than actually going to trial,” she said.”

It turns out that I have been thinking along these lines as well. The debate over the usefulness of Deferred Prosecution Agreement (DPAs) and Non-Prosecution Agreements (NPAs) has been long attended. Yet there are a couple of key reasons that DPAs and NPAs are such powerful tools in the fight against anti-corruption and anti-bribery which I do not believe have been fully articulated or explored. The first is that by settling, the DOJ (and Securities and Exchange Commission [SEC]) will have the ability to monitor the company going forward. This process began under the practice of formally appointing a corporate monitor nominated by the company in the throes of the enforcement action and who would be agreed to by the DOJ. This practice is generally referred to as a company having mandatory monitor.

While this specific practice received a fair amount of criticism from a variety of sources, the basic concept was sound. That concept was that a neutral third party would review a company’s compliance with the terms and conditions of a DPA or NPA and report to the DOJ at intervals generally no shorter than annually. This would give the DOJ eyes and ears into a company to oversee its adherence to the terms of the settlement. But what information did Caldwell convey in her statement as to why she thinks settlements are such a powerful tool? I read three pieces of information her statement about why FCPA settlements are such powerful tools.

‘Do All Sorts of Other Things’

Under this prong a settling defendant is required to do “all sorts of other things.” We know from the DPAs and NPAs relating to FCPA enforcement over the past several years, the minimum that a company will be required to institute is a best practices anti-corruption compliance program. While the FCPA Guidance specifies ten hallmarks of an effective compliance program, the DPAs and NPAs have had between 9 to 16 items listed in the best practices anti-corruption compliance programs that settling companies’ have agreed to institute. If the DOJ went to trial and secured a conviction the company would not have to put such a compliance program in place but only pay a fine or some other monetary penalty. Further, by requiring such a best practices anti-corruption compliance program in such a public manner, through a publicly filed DPA or NPA, the DOJ can communicate its current thinking on what it believes constitutes such a program. This provides valuable information to the compliance practitioner going forward and I believe completely disabuses the argument that companies cannot know what their obligations might be to comply with the FCPA or that companies do not know what the DOJ expects from them in the area of a FCPA compliance regime.

‘You will also have a monitor’

David E. Matyas and Lynn Shapiro Snyder
from the law firm of Epstein Becker & Green P.C., described the duties of a corporate monitor in their article entitled, “Monitoring the Monitor? The Need for Further Guidance Governing Corporate Monitors Under Pre-Trial Diversion Agreements”. The monitor would meet with “the company’s board and employees. A monitor then develops a work plan which defines the scope, access, and power the monitor will have over the company. The monitor’s work involves frequent visits to the company (including possible on-site accommodations) and broad access to company documents and meetings. The monitor should be knowledgeable about the regulatory aspects of the company’s operations, but that is not necessarily a criterion for selection of the monitor. Indeed, a monitor can hire others to assist in his or her responsibilities at the company’s expense. The monitor files periodic reports with the U.S. Attorney’s Office and makes visits with that office as well as with the company. At the conclusion of a monitor’s term – often 24-36 months – the monitor files a final report that details the activities accomplished and whether the company complied with all the terms of the agreement.”

So the monitor provides the DOJ with continued insight into what the company is doing to satisfy its settlement obligations around the implementation of its compliance program. If the DOJ has high confidence that the company has and will continue to put significant resources and efforts into its compliance program, it may agree to a voluntary monitor, as we have seen with the Parker Drilling and Hewlett-Packard (HP) DPAs. If the DOJ does not have such confidence, it may require a monitor for the length of the DPA, such as we saw in the Total DPA, which was three years. The DOJ may also take an interim position on the mandatory or voluntary nature of the monitor by allowing a company to end a mandatory monitorship half-way through the pendency of a DPA as it did with the Weatherford DPA, which allowed the mandatory monitorship to end at the 18 month mark of a three year DPA, if certain criteria were met.

‘You can still be prosecuted’ 

This final point is not to be underestimated. Once again if a company is found guilty at trial, a fine and/or penalty will be assessed and payment is the end of it. While it still may be under enhanced scrutiny, it will not have the affirmative obligation to report any FCPA violations going forward, nor will it bear potential liability and prosecution for failure to implement the terms and conditions of the DPA or NPA. Indeed, the company will agree to be prosecuted if there is another violation or it fails to implement as agreed to.

So by using DPAs and NPAs as settlement tools, I believe that the DOJ is able to impact on an ongoing basis, for two to three years, the compliance program of a settling company. This continued oversight usually translates into greater enthusiasm by a settling company to get compliance right so that it does not have to go through the full FCPA investigation and enforcement process. Of course there will always be recalcitrant companies such as Marubeni Corporation, which do not take the agreed to compliance obligations seriously going forward. When they get into trouble as recidivists, the second penalty is usually much higher. But there is also benefit to the compliance practitioner and greater compliance community because the DOJ communicates its expectations in these DPAs and NPAs. So they also work as powerful communication tools. Finally, by requiring a third party to act as the monitor, whether voluntary or mandatory, the DOJ can get some independent insight into what a company is doing compliance-wise.

Not knowing what the Professor has said, I have not tried to anticipate his arguments or rebut them directly. Nonetheless, I have tried to articulate why I agree with Ms. Caldwell’s remarks and why I continue to find the DOJ’s use of DPAs and NPAs as settlement tools a powerful weapon in the fight against bribery and corruption. I also hope that you will find favor with this exercise that the FCPA Professor and I have engaged in because we both believe that ongoing debate over FCPA enforcement is worthwhile for the compliance practitioner and necessary for the long-term success of compliance moving 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, 2014

August 2, 2012

Compliance Lessons from Macbeth: Listen to Your Gut

I have always found Macbeth to be one of Shakespeare’s most terrifying plays. Every time I see the production and hear Lady Macbeth say that she would “have plucked from my nipple his boneless gums and dashed his brains out” of her baby or see her ghost after her suicide, it sends chills up my spine. But there are other lessons which can be drawn from the play that could be applicable to the compliance practitioner and a Foreign Corrupt Practices (FCPA) or UK Bribery Act compliance program. In an article in the July 16 edition of the Texas Lawyer, entitled “Shakespeare’s ‘Macbeth’ Teaches Lawyers Life Lessons”, author Michael Maslanka said that one of the plays lessons for him was to “listen to your gut” when faced with a dubious proposition.

Maslanka cites to the dialogue between two characters, Macduff and Malcolm, when Malcolm is when deciding whether Macduff is a friend or an enemy. Malcolm falsely tells Macduff that he is unfit to succeed his father because of his unbridled sexual appetites. “The cistern of my lust, and my desire all continent impediments would o’erbear that did oppose my will,” Malcolm says. After more back and forth, Macduff concludes Malcolm is not fit to be king. Malcolm has found an honest man who will stand up for what is right, not what is expedient. Maslanka goes on to cite these two characters for the suggestion that “When in doubt on a dubious proposition, go with your gut-level reaction.” At first, Macduff tries to negotiate his conscience, because he so desperately wants an honest leader for Scotland. He acknowledges Malcolm’s weaknesses, telling him, “All these are [bearable] with other graces weighed.” But, when Malcolm says there are no other graces, Macduff declares, “Fare thee well, lord.” The lesson: ethics are not negotiable.

This type of choice can also play out in the compliance world. The starkest example of which I am aware of is the HP matter involving its German subsidiary and allegation of bribery to receive a contract for the sale of hardware into Russia. At least one witness has said that the transactions in question were internally approved by HP through its, then existing, contract approval process. This employee, Mr. Dieter Brunner, a contract employee who was working as an accountant on the group that approved the transaction, said in an interview in the Wall Street Journal (WSJ) that he was surprised when, as a temporary employee of HP, he first saw an invoice from an agent in 2004. “It didn’t make sense,” because there was no apparent reason for HP to pay such big sums to accounts controlled by small-businesses, Mr. Brunner said. He then proceeded to say he processed the transactions anyway because he was the most junior employee handling the file, “I assumed the deal was OK, because senior officials also signed off on the paperwork”.

In almost every circumstance where a significant compliance matter has arisen, if the issue had been reported, or at least sent up the chain for consideration, there is a good chance that the incident would not have exploded into a full FCPA compliance violation. This is the concept of escalation and it is a key feature of any successful compliance program; to escalate compliance concerns up the chain for consideration and/or resolution.

This failure to escalate leads to the issue not reaching the right people in the company for review/action/resolution and the issue later becomes more difficult and more expensive to deal with. A company needs to have a culture in place to not only allow elevation but to actively encourage elevation and this requires that both a structure and process exist. The company must then train, train and train, all of its employees. Lastly, while a whistleblower process or hotlines are necessary these should not be viewed as the only systems which allow an employee to escalate a concern.

As Shakespeare might opine, Mr. Brunner did not “listen to his gut” when it told him that the transaction in question did not make sense. Think what position HP might be in today if this temporary employee had been trained by HP that he could escalate his concern if something “didn’t make sense” to a higher level within the company for review. The key is to have the systems in place to allow such escalation and to train all employees, including contract employees, on how to escalate an issue. In FCPA training sessions, one of the things that I try to emphasize is that employees to not have to know the ins and outs of the FCPA, but if something does not feel right, smell right or look right; please raise your hand and say “it doesn’t make sense” to me.

Maslanka then draws to what he believes is the play’s over-arching eternal lesson: “Bet on concrete values like ethics, not ephemeral desires. The witches who predicted that Macbeth would become Cawdor (King) disappear as Macbeth and Banquo are speaking with them. “Banquo remarks they are like “bubbles” in the water and wonders where they have gone. Macbeth’s penetrating insight: “Into the air, and what seemed corporal melted, as breath into the wind.” This insight should compel him to embrace the concrete: the ethical behavior in honor, loyalty, friendship. But his insight fades and instead Macbeth he embraces the ephemeral: title, power, castles.”

So as July has now passed into August and the summer moves towards a close, think about how you might use Shakespeare to illustrate some of the key concepts of your compliance program. It might be time to talk about your hotline or reporting lines with employees to “listen to your gut” or “just raise your hand” if something does not seem right in a transaction. You can also use Shakespeare to show the timeliness and universality of the ethical values that you wish to inculcate into your company’s DNA. For as the author of this most interesting article also observes, “Once an ethical boundary is crossed there is no going back to ethical behavior.” Maslanka again quotes Macbeth who says, “I am in blood stepped in so far that, should I wade no more, returning were as tedious as go o’er.” There always is a window of opportunity to step back from the ethical precipice. Fail to take it and, like Macbeth, the downward spiral is triggered with no incentive to return to an ethical state.”

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

December 28, 2010

Top FCPA Investigations of 2010, Part I

Last week, we reviewed our Top 10 Enforcement actions of 2010. In the next two posts we will review our Top 10 investigations of 2010. While enforcement actions can provide the some of the DOJ/SEC most current thinking on FCPA compliance best practices the public information made available during investigations can provide to the FCPA, Bribery Act or other compliance professional many opportunities for teaching points and lessons learned by others. So with the opportunity for many educational occasions in mind we present our favorite investigations of 2010, Part I. 

1. Avon-What is the cost of non-compliance?

As noted by the FCPA Professor, one of the significant pieces of information to come out of the Avon matter is the reported costs as reported in the 2009 Annual Report the following costs have been incurred and are anticipated to be incurred in 2010: 

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

 2. Gun Sting Case-Organized Crime Fighting Techniques Come to FCPA Enforcement 

On January 18, 2010, on the floor of the largest annual national gun industry trade show in Las Vegas, 21 people from military and law-enforcement supply companies were arrested, with an additional defendant being later arrested in Miami. The breadth and scope was unprecedented. Assistant Attorney General for the Criminal Division of the US Department of Justice (DOJ), Lanny Breuer, who led the arrest team, described the undercover operation as a “two-and-a-half-year operation”. The arrests represented the largest single investigation and prosecution against individuals in the history of the DOJ’s enforcement of the FCPA. 

As explained in the indictments, one FBI special agent posed “as a representative of the Minister of Defense of a country in Africa (Country A), [later identified as Gabon] and another FBI special agent posed “as a procurement officer for Country A’s Ministry of Defense who purportedly reported directly to the Minister of Defense”. Undercover criminal enforcement techniques such as wire taps, video tapes of the defendants and a cooperating defendant were all used in the lengthy enforcement action. In a later indictment, and seemingly unrelated to the “Africa” part of this undercover sting operation, allegations were included that corrupt payments were made to the Republic of Georgia to induce its government to purchase arms. 

3. HP-Questions, Questions and More Questions 

How does one begin to discuss HP’s compliance year? From FCPA to Mark Hurd’s very public departure for (alleged) sexual harassment to the recent announcement, reported in the WSJ, that the SEC is investigating Hurd in, ‘a broad inquiry that includes an examination of a claim the former chief executive officer shared inside information.” However we will focus on the FCPA matter which involves the alleged payment of an approximately $10.9 bribe to obtain a $47.3 million computer hardware contract with the Moscow Prosecutor’s Office. 

In an April 15, 2010, WSJ article, Mr. Dieter Brunner, a bookkeeper who is a witness in the probe, said in an interview that he was surprised when, as a temporary employee of HP, he first saw an invoice from an agent in 2004. “It didn’t make sense,” because there was no apparent reason for HP to pay such big sums to accounts controlled by small-businesses such as ProSoft Krippner, Mr. Brunner said. Mr. Brunner then proceeded to say he processed the transactions anyway because he was the most junior employee handling the file, “I assumed the deal was OK, because senior officials also signed off on the paperwork”.

Why didn’t HP self report? 

The WSJ article reported that by December 2009, German authorities traced funds to accounts in Delaware and Britain. In early 2010, German prosecutors filed a round of legal-assistance requests in Wyoming, New Zealand and the British Virgin Islands, hoping to trace the flow of funds to new sets of accounts. Further, HP knew of the German investigation by at least December 2009, when police in Germany and Switzerland presented search warrants detailing allegations against 10 suspects. The New York Times, in an article dated April 16, 2010, reported that three former HP employees were arrested back in December 2009 by German prosecutors. Although it was unclear from the WSJ article as to the time frame, HP had retained counsel work with prosecutors in their investigation. Apparently, since the SEC only announced it had joined the German and Russian investigation last week, HP had not self-disclosed the investigation or its allegations to the US Department of Justice (DOJ) or SEC. 

Where were the SEC and DOJ? 

On April 16, 2010, the FCPA Professor wondered in his blog if it was merely coincidence that a few weeks ago the US concluded a Foreign Corrupt Practices Act (FCPA) enforcement action against the Daimler Corporation, an unrelated German company, for bribery and corruption in Russia and now it is German and Russian authorities investigating a US company for such improper conduct in Russia. The Professor put forward the following query: is such an investigation “Tit for tat or merely a coincidence?” And much like Socrates, he answered his own question with the musing “likely the later”. The WSJ LawBlog noted in its entry of April 16, 2010, that it would be somewhat unusual for the DOJ or SEC to stand by and watch European regulators conduct a sizable bribery investigation of a high-profile US company; phrasing it as “It’s like asking a child to stand still after a piñata’s been smashed open”.

In September, the WSJ reported that the HP bribery probe has widened and HP, itself, has announced that investigators have “now expanded their investigations beyond that particular transaction.” This original investigation pertained to an investigation of allegations that HP, through a German subsidiary, paid bribes to certain Russian officials to secure a contract to deliver hardware into Russia. The contract was estimated to be worth approximately $44.5 million and the alleged bribes paid were approximately $10.9 million. In a 10-Q filing made with the SEC, HP stated that the investigation has now expanded into transactions “in Russia and in the Commonwealth of Independent States sub region dating back to 2000.” The WSJ noted that US public companies, such as HP, are only required to report FCPA investigations in SEC filings if they “are material for investors.” 

4. Team Inc.- no de minimis exception in FCPA.  

As reported by the FCPA Professor, in August 2009, Team disclosed that an internal investigation conducted by FCPA counsel “found evidence suggesting that payments, which may violate the Foreign Corrupt Practices Act (FCPA), were made to employees of foreign government owned enterprises.” The release further noted that “[b]ased upon the evidence obtained to date, we believe that the total of these improper payments over the past five years did not exceed $50,000. The total annual revenues from the impacted Trinidad branch represent approximately one-half of one percent of our annual consolidated revenues. Team voluntary disclosed information relating to the initial allegations, the investigation and the initial findings to the U.S. Department of Justice and to the Securities and Exchange Commission, and we will cooperate with the DOJ and SEC in connection with their review of this matter.” 

There is no de minimis exception found in the FCPA there are books and records and internal control provisions applicable to issuers like Team. Thus, even if the payments were not material in terms of the company’s overall financial condition, there still could be FCPA books and records and internal control exposure if they were misrecorded in the company’s books and records or made in the absence of any internal controls. 

In its 8K, filed on January 8, 2010, Team reported “As previously reported, the Audit Committee is conducting an independent investigation regarding possible violations of the Foreign Corrupt Practices Act (“FCPA”) in cooperation with the U.S. Department of Justice and the Securities and Exchange Commission. While the investigation is ongoing, management continues to believe that any possible violations of the FCPA are limited in size and scope. The investigation is now expected to be completed during the first calendar quarter of 2010. The total professional costs associated with the investigation are now projected to be about $3.0 million.” 

So the FCPA Professor posed the question: 

A $3 million dollar internal investigation concerning non-material payments made by a branch office that represents less than one-half of one percent of the company’s annual consolidated revenues?” 

And his answer: “Wow!” 

In August, 2010, when disclosing its interim financial results for this year, Team reported, “The results of the FCPA investigation were communicated to the SEC and Department of Justice in May 2010 and the Company is awaiting their response. The results of the independent investigation support management’s belief that any possible violations of the FCPA were limited in size and scope. The total professional costs associated with the investigation were approximately $3.2 million.” 

So $50,000 in (possibly) illegal payments equate to over $6 million investigative costs, so far. 

5. ALSTOMArrests in the Board Room. 

As reported by the FCPA Blog, the UK Serious Fraud Office reported in dramatic fashion the arrest of three top executives of French industrial giant ALSTOM ‘s British unit. The three ALSTOM Board members were suspected of paying bribes overseas to win contracts. The SFO Press Release stated that “[t]hree members of the Board of ALSTOM in the UK have been arrested on suspicion of bribery and corruption, conspiracy to pay bribes, money laundering and false accounting, and have been taken to police stations to be interviewed by the Serious Fraud Office.” 

According to the release, search warrants were executed at five ALSTOM businesses premises and four residential addresses. The operation, involving “109 SFO staff and 44 police officers” is code-named “Operation Ruthenium” and centers on “suspected payment of bribes by companies within the ALSTOM group in the U.K.” According to the release, “[i]t is suspected that bribes have been paid in order to win contracts overseas.” 

ALSTOM released a statement which said: 

Several Alstom offices in the United Kingdom have been raided on Wednesday 24 March by police officers and some of its local managers are being questioned. The police apparently executed search warrants upon the request of the Swiss Federal justice. Alstom has been investigated by the Swiss justice for more than 3 years on the motive of alleged bribery issues. Within this frame, Alstom’s offices in Switzerland and France have already been searched in the past years. Alstom is cooperating with the British authorities. 

While not an FCPA investigation, this is one of the first cases where arrests were made of Board members. With the April 1 implementation date for the UK Bribery Act, we would anticipate a much more robust and aggressive enforcement by the UK SFO. 

We are indebted to our fellow bloggers, the FCPA Blog and the FCPA Professor for providing up to date and excellent reviews of many of the Top 10 investigations of 2010. If you did not review their sites daily in 2010, you should do so in 2011. 

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, 2010

September 13, 2010

How to Turn a Season Around

 One of the more enjoyable aspects of a baseball season is its length. The fortunes of a team can ebb and flow over the course of a 162 games season. So even if a team starts out abysmally, it can pick things up over the course of the spring and summer and give some hope to the team in September and perhaps even into the next year. With this in mind, we posted the question in an April post as to who would have the better season, the Houston Astros, who started the season at 0-8, or Hewlett-Packard (HP) which, at that time, had announced that it was under an investigation for alleged Foreign Corrupt Practices Act (FCPA) violations regarding the sale of computer hardware in Russia. I’m happy to report that after an anemic start the Astros have played .500 ball, going 71-71 and even have one of the better records in the National League since the All-Star Game. However, the season may not be going along in such an upbeat manner for HP. 

As reported on Friday in the Wall Street Journal (WSJ), the HP bribery probe has widened and HP, itself, has announced that investigators have “now expanded their investigations beyond that particular transaction.” This original investigation pertained to an investigation of allegations that HP, through a German subsidiary, paid bribes to certain Russian officials to secure a contract to deliver hardware into Russia. The contract was estimated to be worth approximately $44.5 million and the alleged bribes paid were approximately $10.9 million. In a 10-Q filing made with the Securities and Exchange Commission (SEC) last week, HP stated that the investigation has now expanded into transactions “in Russia and in the Commonwealth of Independent States sub region dating back to 2000.” The WSJ noted that US public companies, such as HP, are only required to report FCPA investigations in SEC filings if they “are material for investors.”

The announcement of an expanded FCPA investigation comes on the heels of HP’s much publicized ouster of (former) CEO Mark Hurd over issues relating to an allegation of sexual harassment and expense report issues. This public spectacle has become even messier as HP has now brought suit against Hurd to prevent him from violating a Non-Compete Agreement by going to work for his new employer Oracle and to prevent Hurd from releasing any confidential information to Oracle in his new position as President and a member of the Board of Directors at Oracle.

 However, just as the Astros appear to have changed the momentum of their season by making striking changes in their line-up and by trading two of their older veterans, Roy Oswald and Lance Berkman, for younger players, HP might use all of their recent events to improve its FCPA compliance and ethics outlook and we have previously opined that the departure of Mark Hurd might present HP with an opportunity to re-emphasize its “Tone at the Top”. The 10-Q filing might now present HP with an opportunity to evaluate its overall FCPA compliance and ethics policies, procedures and training programs. As reported by the WSJ in April,  the transaction which led to these FCPA investigations was discovered through an external audit by German tax authorities who noted its suspicious nature. Indeed, one of the witnesses in the investigation of the underlying transaction stated of the deal “It didn’t make sense…” HP may now wish to thoroughly investigate internally, and with the assistance of outside experts, the effectiveness of its internal monitoring and reporting procedures.

Just as mid-course corrections during a baseball season can show positive benefits later in the season, such actions can also show positive benefits throughout the course of an FCPA investigation and enforcement action. As we recently noted in the recent Department of Justice (DOJ) and SEC announcement of the settlement of the Alliance One and Universal Corporation FCPA enforcement actions, company’s can take specific steps during the course of an investigation to reduce their overall liability for FCPA violations by taking specific steps.

 So simply because a team starts out at 0-8 there may be a way to turn things around. If the Astros go 13-6 the rest of September they will finish the season over .500. The question we have for HP is whether it will make any mid-course corrections in its FCPA compliance and ethics program to help it during this most challenging of seasons?

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, 2010

August 8, 2010

The FCPA – Tone at the Top and in the Middle

Just how important is “Tone at the Top”? Conversely, what does it say to middle management when upper management practices the age old parental line of “Don’t do as I act; Do as I say”?  We wondered about this age old question as we read the Saturday’s edition of the New York Times and its piece entitled “H.P. Ousts Chief for Hiding Payments to Friend” It the story, the Times reported that (now former) Hewlett-Packard Chairman and Chief Executive Mark Hurd was “ousted by the Company’s Board of Directors for the lowliest of corporate offenses — fudging his expenses.”

The saga apparently began when a contractor who was assisting with Hewlett-Packard’s marketing contacted the Company in June and through her lawyer charged sexual harassment against Hurd. The Times reported that while the Board was investigating the sexual harassement charge, they found inaccurate expense reports that covered payments made to the woman. These payments were “said to range from $1,000 to $20,000.” After being confronted with the information, Hurd offered to pay back these monies but the Board refused and demanded his resignation, which he tendered. Hurd received $12,224,693 in severance, according to a Hewlett-Packard filing with the Securities and Exchange Commission (SEC) on Friday. The Company also “extended the deadline for Hurd to purchase up to 775,000 shares of H.P. common stock, which were vested as of Friday, and 330,117 performance-based stock units that will also vest.”

We have previously discussed the importance of “Tone at the Top” and our colleague Lindsay Walker has guest blogged on the subject of “Integrating Ethics and Compliance into the Entire Organization”. We both believe that a Company’s ethics and compliance culture are set by the very top levels of management. The US government would also appear to believe that a Company’s ethics and compliance culture are set by the very top levels of management because the US Sentencing Guidelines read, in part, “High-level personnel and substantial authority personnel of the organization shall be knowledgeable about the content and operation of the compliance and ethics program … and shall promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.”

However if top management is not fully committed to such an ethical and compliance culture, such lack of commitment will be clearly understood by middle managers of a company. This is particularly true of the Foreign Corrupt Practices Act (FCPA). As noted above, the US Sentencing Guidelines mandate that the highest levels of management promote and encourage not only ethical conduct but a commitment to comply with the FCPA itself. In his article entitled, Ethics and the Middle Manager: Creating “Tone in The MiddleKirk Hanson, listed eight specific actions that top executives could engage in which demonstrate a company’s and their personal commitment to ethics and compliance. The actions he listed were:

1. Top executives must themselves exhibit all the “tone at the top” behaviors, including acting ethically, talking frequently about the organization’s values and ethics, and supporting the organization’s and individual employee’s adherence to the values.
2. Top executives must explicitly ask middle managers what dilemmas arise in implementing the ethical commitments of the organization in the work of that group.
3. Top executives must give general guidance about how values apply to those specific dilemmas.
4. Top executives must explicitly delegate resolution of those dilemmas to the middle managers.
5. Top executives must make it clear to middle managers that their ethical performance is being watched as closely as their financial performance.
6. Top executives must make ethical competence and commitment of middle managers a part of their performance evaluation.
7. The organization must provide opportunities for middle managers to work with peers on resolving the hard cases.
8. Top executives must be available to the middle managers to discuss/coach/resolve the hardest cases.

We have previously noted that Hewlett-Packard is under investigation for allegations of paying bribes to obtain commercial sales contracts in Russia. (See here and here) Given the current situation with the former Chairman and Chief Executive and the ongoing bribery investigation by not only German and Russian governmental authorities but also the SEC and Department of Justice for possible FCPA violations, it might be a propitious time for Hewlett-Packard’s top management to implement some or all of Hanson suggestions regarding the communication of Hewlett-Packard’s commitment to FCPA compliance and ethics to its middle management and indeed throughout its organization.

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, 2010

July 16, 2010

Top 3 FCPA Cases OF 2010-Part III HP and (Lots of) Red Flags

This article concludes our series on what we believe to be the Top 3 Foreign Corrupt Practices Act (FCPA) cases in the first half of 2010. We have reviewed the facts surrounding each matter to come up with lessons that the FCPA compliance professional might use to assist putting forward a FCPA compliance ‘best practices’ program based upon the most recent information available. We previously explored the Gun Sting matter and (Ding Dong) Avon Calling and its China operations. Finally, we will review HP and its reported investigation for the alleged payments of bribes to secure a contract to sell computer hardware into Russia.

In April 2010 the Wall Street Journal (WSJ) reported that HP’s Germany subsidiary made payments, through agents, which eventually ended up in the hands of some unknown Russians, in order to obtain the contract to supply computers to the Russian Prosecutor’s Office. There was a complicated financing scheme used to route payments to offshore accounts which were beneficially owned or controlled by unnamed Russian officials. Suspected bribes were funneled through a network of shell companies and accounts in places including Britain, Austria, Switzerland, the British Virgin Islands, Belize, New Zealand, Latvia, Lithuania and the US states of Delaware and Wyoming. The bribes were paid through three German agents, who submitted fake invoices for fictional sales and then paid the money on as bribes to unnamed Russian governmental officials. In return, the suspected middlemen acting as agents, according to court documents allegedly received commissions totaling US$700,000,

German authorities reported the investigation, which started in 2007, when a German tax auditor discovered bank records showing that between 2004 and 2006, a HP subsidiary paid €22 million into the account of a small computer-hardware company in Leipzig. The records indicated the payments were made for services performed in Moscow. It was the size of the payment that caught the tax auditor’s attention and he red-flagged the matter for transfer to a special prosecution team, in Dresden, who handle major corruption cases.

The WSJ reported that at least one witness has said that the above transactions were internally approved by HP through its, then existing, contract approval process. In the April 15, 2010, WSJ article, Mr. Dieter Brunner, a bookkeeper who is a witness in the probe, said in an interview that he was surprised when, as a temporary employee of HP, he first saw an invoice from an agent in 2004. “It didn’t make sense,” because there was no apparent reason for HP to pay such big sums to accounts controlled by small-businesses, Mr. Brunner said. He then proceeded to say he processed the transactions anyway because he was the most junior employee handling the file, “I assumed the deal was OK, because senior officials also signed off on the paperwork”.

Just how many Red Flags are raised by the above?

  • Offshore Companies

One of the main tactics utilized to disguise a principal who receives a bribe is to send the money through offshore companies, usually located in ‘exotic’ locations, not related to the situs of the transaction to conceal beneficial ownership and/or to take advantage of weak disclosure requirements. Any monies paid by HP to an agent, which were then sent to an offshore company or banks in a location completely unrelated to the transaction, should have been Red-Flagged for further inquiry.

  • Small Sized Agents

As noted, by the temporary HP employee Dieter Brunner, one of the facts that “didn’t make sense” was a large payment to a small-sized business, indeed even a one-man business. One of the Red Flags that arises during due diligence on business partners is the size of the company in relationship to the work or services it performs. If a one-man company is receiving a multi-million dollar (or Euro) payment, it should be Red-Flagged for further inquiry.

  • Faked Invoices for Goods/Services

One of the tests of revenue recognition for hardware and software is whether the goods and services relating thereto are actually delivered. If the middlemen did not receive the equipment they allegedly purchased, this should have been picked up by an accounting or financial department employee reviewing end of quarter results for revenue booking, a routine internal company audit or even simple inventory control and Red-Flagged for further inquiry.

In addition to the Red-Flags above, there are several important lessons learned that the Chief Compliance Officer (CCO) can take away from the HP matter and put into immediate practice in a US company’s compliance program.

  1. What is the “Tone at the Top”? Even though he was a temporary employee for HP, bookkeeper Dieter Brunner immediately realized that the commission payment of such a large value to small or one-person companies “didn’t make sense”. However he went along because everyone else had approved the transaction. As the CCO you should immediately have your Chief Executive Officer (CEO) put out message that your company is committed to compliance and that if an employee sees something that “does not make sense” to elevate the issue.
  2. Escalate the Issue. After the CEO makes the clear message that neither he nor the Board will tolerate anything less than full compliance, follow up to make certain that all employees know the avenues open to them to escalate an issue if something cannot be explained or easily answered. If the answer they receive from local management still does not make sense, an employee (even a temporary employee) can, and should, make use of a company hotline to escalate the issue for review, investigation and resolution. Emphasize that there is no negative consequence associated with making a good faith report through the Company hotline. Above and beyond a hotline, the Compliance Department should be available to answer any compliance questions which arise.
  3. Training. After the CEO re-emphasizes your Company’s commitment to compliance and a Company-wide reminder on the hotline has been issued, use this opportunity to train, train and then train some more. All employees, permanent and temporary, who come to work at your Company should receive, at a minimum, computer based training on your compliance program. Take the opportunity to drive home the message that compliance is No. 1A, right behind safety, at your Company.

The HP case presents several opportunities for the CCO to put in place significant compliance assets to prevent and detect compliance issues before they become a payment of a multi-million dollar bribe. In addition to reviewing, auditing and listening to your employees for Red Flags you should use the facts to have your entire management make clear the seriousness of compliance to employees across the globe.

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, 2010

May 18, 2010

FCPA Red Flags, Hewlett-Packard and Big Papi

As most readers of this blog know, the author is an avid baseball fan. So it was not without some small interest when a term most often associated with the Foreign Corrupt Practices Act (FCPA) compliance world was used on ESPN’s Baseball Tonight to describe a hitter’s batting characteristics. Recently, commentator and former big league manager, Buck Showalter discussed the current batting slump of Big Papi, David Ortiz, by noting that his inability to hit the off-speed was a Red Flag for what is really ailing him, decreased bat speed. Showalter explained that the reason Big Papi’s failure to hit a curve ball was a Red Flag which indicates a bigger problem; Ortiz has to amp up to hit a fastball so much now that he is susceptible to being quite easily fooled by an off-speed pitch.

In the FCPA compliance world a Red Flag can also be equally indicative of a larger problem. As reported in The Russia Monitor on May 4, 2010, high-level executives at a Hewlett-Packard (HP) subsidiary made payments, through agents, to the Russian Prosecutor General’s office in order to obtain the contract to supply computers to that office. There was a complicated financing scheme used to route payments to offshore accounts beneficially owned or controlled by unnamed Russian officials; funneling the suspected bribes through a network of shell companies and accounts in places including Britain, Austria, Switzerland, the British Virgin Islands, Belize, New Zealand, Latvia, Lithuania, and the US states of Delaware and Wyoming. The bribes were paid through three German agents, who submitted fake invoices for non-existent sales and then paid the money on as bribes to unnamed Russian governmental officials.

On April 15, 2010, the WSJ reported that three middlemen are alleged to have paid invoices; using funds provided by HP for equipment never purchased, to shell companies with bank accounts in Latvia, Lithuania, Austria, Switzerland and Belize. In return, the suspected middlemen allegedly received commissions totaling US$700,000, according to court documents. German authorities reported the investigation, which started in 2007, when a German tax auditor discovered bank records showing that between 2004 and 2006, a HP subsidiary paid €22 million into the account of ProSoft Krippner GmbH, a small computer-hardware company in Leipzig. The records indicated the payment was made for services performed in Moscow. It was the size of the payment to ProSoft that caught the tax auditor’s attention and he red-flagged the matter for transfer to a special prosecution team in Dresden who handle major corruption cases.

To top it all off, at least one witness has said that the above transaction was internally approved by HP through its then existing contract approval process. In the April 15, 2010, WSJ article, Mr. Dieter Brunner, a bookkeeper who is a witness in the probe, said in an interview that he was surprised when, as a temporary employee of HP, he first saw an invoice from an agent in 2004. “It didn’t make sense,” because there was no apparent reason for HP to pay such big sums to accounts controlled by small-businesses such as ProSoft Krippner, Mr. Brunner said. Mr. Brunner then proceeded to say he processed the transactions anyway because he was the most junior employee handling the file, “I assumed the deal was OK, because senior officials also signed off on the paperwork”.

Just how many Red Flags are raised by the above?

  • Offshore Companies

In a white paper entitled “Grey Practices in the Russian Business EnvironmentControl Risks reviewed what it viewed as some of the more routine “day-to-day schemes that erode the integrity of transactions” in Russia. One of the main tactics utilized to disguise the principal who receives a bribe is through the use of offshore companies, usually located in ‘exotic’ locations as per the countries listed in the diagram above, to take advantage of weak disclosure requirements to conceal beneficial ownership. Any monies paid by HP to an agent, which were then sent to an offshore company, should have been flagged for further inquiry.

  • Small Sized Agents

As noted, by the temporary HP employee Dieter Brunner, one of the facts that “didn’t make sense” was a large payment to a small-sized business. One of the Red Flags that arises during due diligence on business partners is the size of the company in relationship to the work or services it performs. If a one-man company is receiving a multi-million dollar (or Euro) payment, it should be flagged for further inquiry.

  • Faked Invoices for Goods/Services

One of the tests of revenue recognition for hardware and software is whether the goods and services relating thereto are actually delivered. If the middlemen above did not receive the equipment they allegedly purchased, this should have been picked up by an internal company audit or even simple inventory control and flagged for further inquiry.

The above presented Red Flags may not be the only ones found in this series of transactions engaged in by HP. Indeed the overall body of Red Flags is significantly larger than only the three discussed herein. The point in all of this discussion is that the FCPA mandates due diligence before a transaction in a high risk country occurs, due diligence before agents are engaged and then more due diligence thereafter to continue to monitor such transactions. If facts or circumstances arise which cannot be immediately explained, then the matter should be referred to Legal or Compliance for additional investigation. How many additional Red Flags can you spot in this HP transaction? More importantly, if a commentator Baseball Tonight can spot a Red Flag I hope that any US company, subject to the FCPA, has a compliance program in place to spot them as well.

For prior posts on HP and its current FCPA issues, see here and here.

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

© Thomas R. Fox, 2010

May 10, 2010

Watergate, Hewlett-Packard and the FCPA

It has been many years since Watergate and the many lasting legacies which occurred from that break-in of the Democratic National Committee. Indeed one of those legacies is the Foreign Corrupt Practices Act (FCPA) itself. This article will focus on one of the more mundane legacies, that of the “Watergate deposition”, which was, for those of us who were riveted by the hearings of the Erwin Committee in the summer of 1973, one of the most memorable episodes when Committee Co-Chair Howard Baker asked the question “What did the President know and when did he know it?”. This question would appear to be quite relevant today in relation to the current FCPA investigation of Hewlett-Packard (HP) and German and Russian investigations all involving alleged bribes paid by HP for the sale of computer hardware that were to be used by the office of the prosecutor general of the Russian Federation. 

As reported in The Russia Monitor on May 4, 2010, the substantive aspects of the HP case are not remarkable. High-level executives at the HP subsidiary made payments, through agents, to the Russian Prosecutor General’s office in order to obtain the contract to supply computers to that office. There was a complicated financing scheme used to route payments to offshore accounts beneficially owned or controlled by unnamed Russian officials; funneling the suspected bribes through a network of shell companies and accounts in places including Britain, Austria, Switzerland, the British Virgin Islands, Belize, New Zealand, Latvia, Lithuania, and the US states of Delaware and Wyoming. The bribes were paid through three German agents, who submitted fake invoices for non-existent sales and then paid the money on as bribes to unnamed Russian governmental officials. 

However, there are several unusual aspects to this HP investigation. The first is that this scheme was initially discovered during the audit of HP’s office in Saxony, Germany, where German authorities first discovered evidence of bribery. The second unusual aspect, as reported in the Wall Street Journal, April 15, 2010, is that the investigation was being led by German and Russian governmental agencies. The third was that neither the US Department of Justice (DOJ) nor Securities and Exchange Commission (SEC) were involved in these investigations until after the WSJ reported the German and Russian investigation were on-going as, the next day, on April 16, the WSJ reported that both US agencies had joined the investigation. 

What did HP know and when did they know it?

 HP has claimed that the events in question occurred in 2003. Prosecutors have alleged the incidents in question were more recent, in the years 2004-2006. But, whenever they occurred, at least one witness is reported to have said that the sham payments were internally approved by HP. In the WSJ, April 15 article, Dieter Brunner, a bookkeeper, who is a witness in the probe, said in an interview that he was surprised when, as a temporary employee of HP, he first saw an invoice from an agent in 2004. “It didn’t make sense,” because there was no apparent reason for HP to pay such big sums to accounts controlled by small-business men (the agents through which the bribes were funneled), Mr. Brunner said. Mr. Brunner then proceeded to say he processed the transactions anyway because he was the most junior employee handling the file, “I assumed the deal was OK, because senior officials also signed off on the paperwork”. While we don’t know who these senior officials were, it would appear that they were senior officials of HP and that would mean actual knowledge.

The New York Times, on April 16, 2010, reported that three former HP employees were arrested by German prosecutors back in December 2009, the same month when police in Germany and Switzerland presented search warrants detailing allegations against 10 suspects. Although it was unclear from the WSJ April 16 article as to the time frame, whether in December 2009 or later, HP had retained counsel to work with prosecutors in their investigation. Apparently, since the SEC only announced it had joined the investigation on or about April 15, HP had not self-disclosed the investigation or its allegations to either the US DOJ or SEC.

There are two other curious notes regarding what HP did know and when did they know it. The first is the following statement found in both of HP’s 2008 and 2009 Annual Reports, “In many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by laws and regulations applicable to us, such as the Foreign Corrupt Practices Act. Although we implement policies and procedures designed to facilitate compliance with these laws, our employees, contractors and agents, as well as those companies to which we outsource certain of our business operations, may take actions in violation of our policies. Any such violation, even if prohibited by our policies, could have a material adverse effect on our business.

This statement is open to many interpretations. Is it an admission of knowledge of some general practices which violated the FCPA? If HP has employees, contractors and agents who violated the FCPA why are they still employed by HP or why is HP still using them? Could it be that the SEC required an admission of an on-going FCPA investigation? It just seems rather curious.

The second curiosity was the compliance training course requirement that HP ordered its channel partners to take in October 2009. As reported by the FCPA Professor, HP apparently determined it necessary, and appropriate, for its global network of approximately 155,000 channel partners to complete HP’s regulatory compliance training program or risk losing their partner status. The FCPA Professor noted that a HP spokesperson confirmed “HP is, in fact, working to have all of its global channel partners undergo training regarding government legal and regulatory compliance [including the FCPA] as part of establishing or renewing their Business Development Agreement”. Just as interesting is how HP made this request, when, without any notice HP faxed out the demand to its channel partners and instructed them to pay for this training, to a previously unknown third party, via credit card. All-in-all it seems very odd. But is it possible that this effort by HP was because they knew that an investigation was ongoing regarding its FCPA compliance efforts?

There is a requirement to report any material matters in the appropriate SEC filing statements and this leads to the question of “What did HP know and when did they know it? Perhaps HP could claim that the enigmatic statement cited above that some employees, contractors and agents would violate the FCPA is evidence that not only did HP know of such conduct but that this statement is all HP was required to report to its shareholders. Alternatively HP could claim that its first knowledge of this matter was in December, 2009, and there has been no SEC reporting requirement since that time.  However, the SEC may take a different view and any shareholders, who might be unhappy just about now, may be considering some type of derivative action against the company. On the other hand, perhaps the costs of an FCPA investigation, fines, penalties, corporate monitor and Deferred Prosecution Agreement are not “material” under HP’s definition of material for SEC reporting purposes.

Just when HP thought it could not get any worse, Businessweek reported, in a May 6, 2010 online edition, that the Indian government has claimed that HP evaded payments of approximately US$323 million in duties to the Indian Directorate of Revenue for the import of computer products and spares from offices overseas into India by undervaluing these goods to custom officials. Regarding these allegations, which HP disputes, The Russia Monitor stated “keep in mind that “customs violations” in one country are “bribery violations” in another country (i.e., FCPA in the United States).”

Senator Baker’s Watergate inquiry is still relevant today in this HP matter. What did HP know about the allegations of bribery and when did they know it? 

For a viewing of Senator Howard Baker’s questioning of Bob Halderman in the Senate Watergate hearings, click here.

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

 

© Thomas R. Fox, 2010

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