The Weatherford FCPA Settlement, Part III

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

1. I.                    DOJ Fine Calculation

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

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

A.     New Sheriff in Town

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

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

B.     Increase in Compliance Function

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

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

C.     Best in Class Compliance Program

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

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

D.    Monitor

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

II.                Conclusion

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

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

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

© Thomas R. Fox, 2013

Proposed Reforms to the FCPA: the Compliance Defense and Respondeat Superior

In a Whitepaper entitled “Restoring Balance-Proposed Amendments to the Foreign Corrupt Practices Act”, authors Andrew Wiessmann and Alixandra Smith, writing on behalf of the US Chamber Institute for Legal Reform who recently proposed amending the Foreign Corrupt Practices Act (FCPA), argue that the time is ripe to amend the FCPA to make the statute more equitable and its requirements clearer. They propose five (5) amendments to the FCPA which they argue would serve to improve the Act. This post will discuss, in greater specificity, their first proposal: to create a compliance defense available to a company if it has an adequate compliance program, similar to the “adequate procedures” defense available under the UK Bribery Act. 

Under this suggestion the authors believe that companies will increase their compliance with the FCPA because they will now have a greater incentive to do so. They envision a defense similar to the “adequate procedures” defense available under the UK Bribery Act where companies will be protected if a rogue employee engages in corruption and bribery despite a company’s diligence in pursuing a FCPA compliance program; and lastly “it will give corporations some measure of protection from aggressive or misinformed prosecutors, who can exploit the power imbalance inherent in the current FCPA statute—which permits indictment of a corporation even for the acts of a single, low-level rogue employee—to force corporations into deferred prosecution agreements.” 

The authors set out the recently released UK Bribery Act Consultative Guidance as one basis of this proposed compliance defense. This Guidance listed 6 Principles of an effective anti-bribery and anti-corruption program which are: 

1.         Risk Assessment – knowing and keeping up to date with the bribery risks you face in your sector and market.

2.         Top Level Commitment – this concerns establishing a culture across the organization in which bribery is unacceptable.

3.         Due Diligence – knowing who you do business with; knowing why, when and to whom you are releasing funds; seeking reciprocal anti-bribery agreements; and being in a position to feel confident that business relationships are transparent and ethical.

4.         Clear, Practical and Accessible Policies and Procedures – this concerns applying them to everyone you employ and business partners under your effective control.

5.         Effective Implementation – going beyond ‘paper compliance’ to embedding anti-bribery in your organization’s internal controls, recruitment and remuneration policies, operations, communications and training on practical business issues.

6.         Monitoring and Review – auditing and financial controls that are sensitive to bribery and are transparent, considering how regularly you need to review your policies and procedures, and whether external verification would help. 

The authors also discuss the Italian Anti-Bribery Bill, which was enacted in 2001. The statute provides a defense under which a business may avoid liability if it can demonstrate that, before employees of the company engaged in a bribery or corruption, the company had (1) adopted and implemented a model of organization, management and control designed to prevent that crime, (2) engaged an autonomous body to supervise and approve the model, and (3) the autonomous body adequately exercised its duties. Further, to determine whether the compliance program was effectively designed, the Italian law required consideration of the following factors: 

1.         Management of Resources – whether financial resources were managed in a way that discouraged the prohibited conduct.

2.         Provision of Information to Management – whether the compliance program required officers and employees to supply the persons responsible for monitoring the compliance program with the necessary information to ensure their compliance with it.

3.         Disciplinary Measures – where there measures in the compliance program which punished those employees who violated the program. 

The authors note that while concepts from both of the above laws are embedded within the US Sentencing Guidelines, they are considered at a very different phase of the criminal process than in the US. Under both the UK and Italian laws, these factors are considered during the liability phase of an anti-bribery or anti-corruption proceeding. In the US, the factors of the adequacy of a compliance program are considered by the Department of Justice (DOJ) in deciding if a corporation “should have a slight reduction in its culpability score when sentencing it for FCPA or other violations.” The authors believe that the adoption of such a compliance defense will not only increase compliance with the FCPA by providing businesses with an incentive to deter, identify and self-report potential and existing violations, but will also protect corporations from employees who commit crimes despite a corporation’s diligence. 

The authors go on to state that the institution of a compliance defense will bring enforcement of the FCPA in line with US Supreme Court precedent, which has recognized that it is appropriate and fair to limit the legal doctrine of respondeat superior liability where a company can demonstrate that it took specific steps to prevent the offending employee’s actions. In the employment context involving punitive damages, the authors cite to the case of Kolstad v. American Dental Ass’n, 527 U.S. 526 (1999) for the proposition that, “an employer may not be vicariously liable for the discriminatory employment decisions of managerial agents where these decisions are contrary to the employer’s ‘good-faith efforts to comply with Title VII.’” The authors believe that this holding was motivated by a concern that the existing standard was “dissuading employers from implementing programs or policies to” comply with Title VII for fear that such programs would bring to light violations for which a company would ultimately be liable, no matter what steps it had undertaken to prevent such violations. From this Title VII case involving punitive damages, the authors extrapolate that businesses may similarly be dissuaded from instituting a rigorous FCPA compliance program for fear that the return on such an investment will be only to expose the company to increased liability and will do little to actually protect the company. A FCPA compliance defense will help blunt this. 

Other commentators have noted that the doctrine of respondeat superior puts a company a great disadvantage in any FCPA enforcement proceeding. In a blog post entitled, “Quiz Time Answer”, the FCPA Professor explained: 

“Individual FCPA defendants tend to work for companies. Under respondeat superior theories of liability, the company is going to have a very difficult time “distancing” itself from its employees conduct.” 

The FCPA Blog went further, opining that the doctrine of respondeat superior “does more harm than good” and that corporations are “defenseless once employees are found to have committed [FCPA] violations” in an enforcement action because of the doctrine of respondeat superior. In a blog post entitled, “Naked Corporate Defendants”, the FCPA Blog said: 

“Sure, it produces a 100% corporate “conviction” rate in FCPA cases, which must go down well at the Justice Department. But, it probably doesn’t deter illegal behavior or encourage better compliance programs. And it puts overwhelming pressure on organizations to resolve threatened criminal cases. Because of the catastrophic effects of any potential conviction, companies have to settle with the government. So they rush into agreements that may require them to waive the attorney–client privilege, hand over employees’ private documents and data, cut off support for their legal defense, and fire those who don’t cooperate with government investigations. ”

This pressure to settle and avoid the fate of Arthur Anderson is often on the minds of many corporate General Counsel’s and other corporate officers. The FCPA Professor, in the same blog post cited above, noted that “corporate FCPA enforcement actions tend to be resolved through a non-prosecution agreement, a deferred prosecution agreement, or a plea. Entering into one of these resolution vehicles is often easier, more cost efficient, and more certain than actually mounting a legal defense based on the FCPA’s statutory elements. Further, because these resolution vehicles are subject to little or no judicial scrutiny and are entered into the context of the DOJ possessing certain “carrots” and “sticks” they do not necessarily reflect the triumph of one party’s legal position over the other.” 

Many corporations are faced with a true Hobson’s Choice during a FCPA enforcement action. Simply put, they do not believe that they can face the prospect of a guilty verdict after trial to a judge or jury. While there is the example of Aibel Group Ltd., which pled guilty to a FCPA charge during the pendency of its Deferred Prosecution Agreement and survived; the example of Arthur Anderson is the one which is foremost in the minds of all corporate officers. The provision of a compliance defense as suggested by authors Wiessmann and Smith may provide companies with a mechanism to actually defend themselves from a FCPA enforcement action. However, it is not clear at all what the DOJ position will be on this issue.

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

Mickey, Donald and the FCPA

The Foreign Corrupt Practices Act (FCPA) enforcement arena is scattered with US companies which have gone many miles past the extra mile in providing travel and entertainment. Most practitioners will recall the Lucent Technologies 2007 enforcement action. Between 2001 and 2003 Lucent provided trips consisting primarily or entirely of sightseeing to locations such as Disneyland, Universal Studios, the Grand Canyon and in cities such as Los Angeles, San Francisco, Las Vegas, Washington, DC, and New York City, and typically lasted 14 days each and cost between $25,000 and $55,000 per trip. These trips were provided to Chinese governmental representatives. To close out 2009, the Department of Justice (DOJ) announced a resolution of an enforcement action against UTStarcom which had arranged and paid for travel by Chinese governmental representatives to tourist destinations in the United States, including Hawaii, Las Vegas and New York City, when such trips were recorded as training expenses at UTStarcom facilities. These trips included a cash allowance of between $800 and $3,000 per person. The thing about these trips was that UTStarcom had no facilities in these areas.

A. The FCPA

So what is the problem with paying for travel to the US for foreign governmental officials? Is it a Chinese issue? Should US companies only allow travel to places where the actually have a facility (well, that’s a good start). The FCPA does not prohibit all payments to foreign officials, it is not that broad. What it does prohibit are corrupt payments (or promises of them) made to obtain or retain business. The FCPA allows payments to foreign officials for expenses related directly to “the promotion, demonstration, or explanation of products or services” that are “reasonable and bona fide” 15 U.S.C. §§ 78dd-1(c)(2)(A) and 78dd-2(c)(2)(A). This affirmative defense, however, is notoriously hard to use (and easy to abuse), mainly because no one is quite sure what reasonable and bona fide really mean.

B. Opinion Releases

In 2007, the DOJ issued two FCPA Opinion Releases which offered guidance to companies considering whether to and, if so how to, incur travel and lodging expenses for government officials. In Opinion Release 07-01, the Company was desired to cover the domestic expenses for a trip to the United States by 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.

Both Opinion Releases laid out the specific representations made to the DOJ which led to the DOJ approving the travel to the US by the foreign governmental officials. These facts can provide good guidance to any company which seeks to bring such officials to the US for a legitimate business purpose. In Opinion Release 07-01 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.

Based upon these representations, the DOJ noted, “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 United States 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 Opinion Release 07-02 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 sight seeing 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 two Opinion Releases? Based upon them, it would seem that a US Company should be able to bring foreign officials into the United States for legitimate business purposes. A key component is that the guidelines are clearly articulated in a Compliance Policy. Based upon Releases Opinions 07-01 and 07-02, 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 Policy 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. One of the FCPA violations alleged against UTStarcom was that it falsely recorded these trips as ‘training’ expenses, while the true purpose for providing these trips was to obtain and retain lucrative telecommunications contracts. All business gifts, entertainment and expenses must be properly recorded.

So the visit with Mickey and Donald will just have to wait until the foreign governmental official comes back with his family on his own nickel and not that of your Company.

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

  

© Thomas R. Fox, 2010

An Effective FCPA Compliance Program-thoughts of Lanny Breuer

At the recent Compliance Week 2010 Annual Conference one of the issues discussed by Assistant Attorney General, for the Criminal Division of the US Department of Justice, Lanny Breuer, was what the Department of Justice (DOJ) might consider as an “effective compliance and ethics program” under the Foreign Corrupt Practices Act (FCPA), if a FCPA violation occurs and a company’s compliance program comes under scrutiny from the Criminal Division of the DOJ. We believe that Breuer gave the conference attendees quite a bit of information that can be utilized by companies in crafting and evaluating their compliance policies.

Breuer noted that the most effective type of compliance program is one that “prevents fraud and corruption in the first place but when such compliance program has not done so, there are defined policies in place to “quickly detect, fix and report the [FCPA] violations.” Additionally, an effective compliance program should not be static but dynamic to meet changing business circumstances, such as when a company might move to doing business in a high risk country. Effective compliance programs should also be ever-evolving through continued assessments, as the compliance world grows and matures. Breuer cited two source material references as benchmarks; he listed (1) the Principles of Federal Prosecution of Business Organization and its full section on corporate compliance programs and (2) the OECD Good Practice Guidance on Internal Controls, Ethics, and Compliance.

Breuer then delineated several elements that the Criminal Division would evaluate in assessing a company’s compliance program, should a FCPA violation occur.

• Does your company have an effective compliance “Tone at the Top”; so that the Board and CEO are demonstrated to be fully committed to an effective compliance program?
• A company’s compliance program should not only punish compliance violations, through termination, other disciplinary actions or reduction in or denial of bonus but should also reward good ethical behavior in a corporation by promotion of ethical employees or other rewards such as a significant component of an overall bonus program. Regarding employee discipline, Breuer emphasized the DOJ would review all circumstances surrounding a company’s decision regarding discipline but that any “superficial steps” would not impress the DOJ.
• A company should have a strong whistle-blower program through a hotline or other appropriate mechanism and protection for any employee who reports such conduct through anonymous reporting and a clear no-retaliation policy.
• The compliance function led by a person with senior level management authority, the overall compliance function should have clear reporting lines to such senior level employee and such person should have a direct reporting by a company’s compliance officer to the company’s Board of Directors.
• There should be periodic reviews of a company’s compliance program, utilizing internal resources such as a company’s Internal Audit function and outside professional consultants.
• A company’s effective compliance program should be extended directly into foreign business partners, such as agents, distributors, reseller and joint venture partners.

Breuer ended this portion of his talk by re-emphasizing that the DOJ was not only interested in your company’s compliance program but also other companies with whom you might be doing business with and the effectiveness (or lack thereof) of their compliance program. This would not only extend to foreign business partners but also those companies in your Supply Chain and conceivably down to your customer base.

So do you have an “effective compliance program” as outlined by Lanny Breuer?

For a copy of the  full text of Breuer’s remarks, click here.

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

© Thomas R. Fox, 2010

Changes Coming: US Sentencing Guidelines, UK Bribery Billand the OECD on Facilitation Payment-Part II

At its April 7, 2010 meeting the United States Sentencing Commission approved amendments to its Sentencing Guidelines. The next day on April 8, 2010, the UK Bribery Bill received Royal Assent. These two events follow the December 9, 2009 release by the Organization for Economic Co-Operation and Development’s (OECD) Recommendation for Further Combating Bribery of Foreign Public Officials, when the OECD marked the tenth anniversary of the entry into force of the OECD Anti-Bribery Convention.

These three releases, which comprise of two changes in the legal schemes by two of the world’s largest economic players and the proposal of one of the largest Non-Governmental Organizations (NGO) dedicated to ending corruption across the globe portend significant changes in how companies will be structured and transact business going forward in the new decade. This is the second of three postings in which will discuss the changes that companies, with any US or UK presence, will be required to implement. The initial post will was on the changes to the US Sentencing Guidelines; in this post, we will consider the changes required by the UK Bribery Bill; and in the third and final post we will consider the recommendations as found in the OECD’s Recommendation for Further Combating Bribery of Foreign Public Officials regarding ending of facilitation payments.

 

There are several differences between the Foreign Corrupt Practices Act (FPCA) and the UK Bribery Bill which all companies should understand. These include:

• The Bribery Bill
  • has no exception for facilitation payments.
  • creates strict liability of corporate offense for the failure of a corporate official to prevent bribery.
  • specifically prohibits the bribery or attempted bribery of private citizens, not just governmental officials.
  • not only bans the actual or attempted bribery of private citizens and public officials but all the receipt of such bribes.
  • has criminal penalties of up to 10 years per offense not 5 years as under the FCPA.

 

There is one affirmative defense listed in the Bribery Bill and it is listed as the “adequate procedures” defense. The Explanatory Notes to the Bribery Bill indicate that this narrow defense would allow a corporation to put forward credible evidence that it had adequate procedures in place to prevent persons associated from committing bribery offences. The legislation requires the Secretary of State for Justice to publish guidance on procedures that relevant commercial organizations can put in place to prevent bribery by persons associated with their entity.

Other than this commentary, the Bill provides no further information on what might constitute “adequate procedures” as a defense but the Government has signaled that it will work with the UK business community to provide appropriate guidance to this critical component of the Bribery Bill. The UK law firm KattenMuchin has indicated that they expect the Government will apply a test regarding the “adequate procedures” defense “with regard to the size of the company, its business sector and the degree to which it operates in high risk markets”. The law firm of Covington and Burling, in a client advisory dated March 31, 2010, has opined that the Bribery Bill will not come into force until late 2010 because it will take the UK government until then to issue guidance on what may constitute ”adequate procedures”.

The Bribery Bill is a significant departure for the UK in the area of foreign anti-corruption. It cannot be emphasized too strongly that the Bribery Bill is significantly stronger than the US FCPA. The Bribery Bill provides for two general types of offence: bribing and being bribed, and for two further specific offences of bribing a foreign public official and corporate failure to prevent bribery. All the offences apply to behavior taking place either inside the UK, or outside it provided the person has a “close connection” with the UK. A person has a “close connection” if they were at the relevant time, among other things, a British citizen, an individual ordinarily resident in the UK, or a body incorporated under the law of any part of the UK. Many internationally focused US companies have offices in the UK or employ UK citizens in their world-wide operations. This legislation could open them to prosecution in the UK under a law similar to, but stronger than, the relevant US legislation.

These changes include the outright banning of facilitation payments and the outright banning of all bribery and corrupt payments by US companies to not only foreign governmental officials but all private citizens. The Bribery Bill certainly does away with any legal question of “who is a foreign governmental official” under the FCPA and the use of other legislation, such as the Travel Act, which bans bribery generally, to back corrupt actions made to a foreign person who is not a governmental official, into an FCPA violation. All US companies with UK subsidiaries or UK citizens as employees, should ban such acts as part of their overall compliance and ethics policies sooner rather than later.

 

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 can be reached at tfox@tfoxlaw.com.

 

© Thomas R. Fox, 2010

Change in the Wind for FCPA Ethics and Compliance Programs?

On January 21, 2010, the United States Sentencing Commission (USSC) proposed amendments to the Federal Sentencing Guidelines. These proposed changes included several which are used as the basis for the consideration of penalties for companies which violate the Foreign Corrupt Practices Act (FCPA). The proposed amendments can be found at http://www.ussc.gov/2010guid/20100121_Reader_Friendly_Proposed_Amendments.pdf
These changes could require serious re-evaluations by companies of their FCPA ethics and compliance policies, the proposed changes which would apply are as follows:

1. Effective Compliance and Ethics Program. The proposed amendment would change the Commentary to clarify the remediation efforts required to satisfy the requirement for an effective compliance and ethics program. These changes would add a new requirement which sets the reasonable steps to respond appropriately after criminal conduct is detected, including remedying the harm caused to identifiable victims and payment of restitution to any harmed victims.

2. Recommended Conditions of Probation for Organizations. This proposed amendment changes the recommended conditions of probation for organizations. Under the proposal, the current distinction between conditions of probation imposed solely to enforce a monetary penalty and conditions of probation imposed for any other reason are consolidated into one subsection. This will allow a supervising Court, which makes a determination that there is a need for organizational probation, to have at its disposal, all conditional probation terms available for consideration.

3. Engagement of Independent Monitor. This proposed amendment inserts specific language regarding the engagement of an independent, properly qualified, corporate monitor. This language reflects discussions and complaints regarding the use of monitors which have been ongoing over the past years, including incorporating changes from the House bill entitled, “Accountability in Deferred Prosecution Act of 2009”, introduced in April, 2009 by House Democrats. The proposed changes clarify that the monitor shall make period reports to the supervising Court on the organization and the disposition of funds received. Finally, the proposed amendment inserts specific language requiring the company to submit to a reasonable number of regular or unannounced examinations of books and records by experts engaged by the Court or the monitor.

4. Board and High Level Management Involvement. This proposed amendment makes three requirements aimed at the highest levels within a company. First the Board “shall be knowledgeable…about the compliance and ethics program and shall exercise reasonable oversight”…Second, a “High-level” person within a company is required to ensure the organization has an effective ethics and compliance program. Third, specific individuals may have day-to-day responsibility for the ethics and compliance program but they must have access to “high-level personnel…or the governing authority” AND must be given “adequate resources” and “appropriate authority” to complete their charge.

Interestingly the USSC requested comments from the public on whether an organization should receive certain credits towards a reduced sentence when high-level personnel (think Jack Stanley?) are involved in a violation of the FCPA or other offense covered by the Sentencing Guidelines. The Sentencing Commission posed three queries for comment as to this possible mitigation:

(A) Did the persons with the “operational responsibility” for the company’s ethics and compliance program have direct reporting authority to the Board of Directors or a Board Committee?
(B) Was the ethics and compliance program successful in “detecting the offense prior to discovery” or when it was reasonable likely to be discovered by a person outside the company?
(C) Did the company promptly report the violation to the appropriate authority?

The public has 60 days, or until March 12, 2010, to submit written comments regarding the proposed amendments. The USSC will hold its public hearing to discuss the proposed amendments on Thursday, March 18, 2010, in Washington, DC.

These changes to the Sentencing Guidelines should be monitored closely by companies as they represent significant amendments to the Sentencing Guidelines. It appears that the Department of Justice is moving to force companies to place compliance and ethics in a higher profile within their organizations and not simply to pay lip service, along the lines of “we have a code of ethics and act responsibly”.

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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 can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2010