Archie Bunker, Batgirl and the International Fight Against Corruption

This week saw the death of two notables from the television industry, Bud Yorkin and Yvonne Craig. According to his Obituary in the New York Times (NYT), Yorkin rose up the television industry ranks to eventually team with Norman Lear to produce one of the true “pioneering, provocative and singularly successful satirical series” in the history of television, All In The Family, introducing one of the most recognizable characters in all of TV – Archie Bunker. When I say he began at the bottom end of the business: it literally was that, as he began repairing TVs in New York City bars. All In The Family not only broke ground by discussing taboo subjects it also became “the first TV series to top the Nielsen ratings for five consecutive years.”

Yvonne Craig was known, according to her Obituary in the NYT, as the girl “who kept Gotham safe as Batgirl” whom she played in the 1960s TV series Batman. Craig was a classically trained ballerina who brought athleticism and “a scrappy girl-power element” to the series in its third and final season. However, I remember Craig as the green skinned slave girl in the “Whom The Gods Destroy” episode from the original Star Trek series. Her Obituary noted, “She performed a seductive, loose-limbed dance that seemed to nearly overwhelm William Shatner’s red-blooded Captain Kirk, while Leonard Nimoy’s Mr. Spock pronounced it “mildly interesting.””

Interestingly both of these televisions stars inform today’s compliance issue. Yorkin for the way he and his partner Lear held up a mirror, through All In The Family, to address such issues as “racism, sexism, abortion, gay rights and the war in Vietnam, among other television taboos” and Craig, “who kept Gotham safe as Batgirl.” Of course I am referring to the devastating disaster that occurred last week in the Chinese city of Tianjin. A NYT article, entitled “Report Details Role of Political Connections in Tianjin Disaster”, reported that the death toll now stands at 114, with 674 injured and more than 17,000 homes damaged. An unknown number of persons are still missing.

Is anyone really surprised corruption was involved in the tragedy? Enforcement of anti-corruption laws, such as the Foreign Corrupt Practices Act (FCPA), the UK Bribery Act or even Chinese domestic anti-bribery laws, is not a game for corruption can kill. While most corruption leads to economic damage, there have been clear instances where corruption led to the loss of life. The 2013 massacre at the Narobi Westgate shopping mall was clearly a result of corruption in Kenya that allowed guns used in the attack to be illegally smuggled into the country through bribery.

Now it has been reported that corruption led to the disaster in Tianjin. The FCPA Blog, in a post entitled “Report: Tianjin warehouse owners used guanxi to land phony safety licenses”, wrote that “The owners of the warehouse in the port of Tianjin that exploded last week and killed more than 100 people obtained fraudulent safety licenses through their connections with fire and safety officials, China state media said.” The warehouse where the fire started and spread from was illegally holding certain lethal chemicals. The post also noted, “Ruihai International Logistics owned the warehouse. The main shareholders of the company are ex-Sinochem executive Yu Xuewei and Dong Shexuan, the son of a late police chief, VAO News reported.” The FCPA Blog went on to quote the VOA report for the following, “In an interview with the official Xinhua news agency, Dong and Yu admitted to using their connections, or guanxi, with local officials to obtain various fire safety, land, environmental and safety certifications.”

In addition to the illegally stored chemicals, it turns out there should not even have been a warehouse in that location in the first place. In another NYT article, entitled “Report Details Role of Political Connections in Tianjin Disaster”, Dan Levin reported the warehouse itself was not far enough back from the prescribed distance for residential housing. It seemed clear from the confession of the Mayor of Tianjin that he had been involved in the corruption when he stated, “I bear the unshirkable responsibility for this accident as head of the city.”

Another indicia of Chinese corruption had come into play as well. The executives of the company, which owned the warehouse and illegally stored chemicals, Ruihai, hid their ownership interest. The article reported they “had other people list their shares to avoid the appearance of a conflict of interest.”

In yet another NYT article, entitled “Fear of Toxic Air and Distrust of Government Follow Explosions in China” also by Dan Levin, it was noted “Later on Tuesday, China’s anticorruption agency announced on its website that Yang Dongliang, a former deputy mayor of Tianjin who became the head of the State Administration of Work Safety, was under investigation for “suspected violations of party discipline and the law,” a common euphemism for corruption. The Beijing Youth Daily reported, however, that Mr. Yang has been under investigation for a half-year, raising questions about why the case was announced now. Two other officials accused of taking bribes are also under investigation.”

The fallout from this tragedy continues. However, with such widespread corruption many Chinese feel they are not being told the truth and that their government is protecting corrupt officials. Levin said, “Public reflection on man-made tragedies is politically risky for the ruling Communist Party, according to David Bandurski, an editor of the China Media Project at the University of Hong Kong. “The party leadership is very aware that questions of responsibility in a disaster like this can very quickly move to fundamental issues of power and legitimacy,” he said, explaining that in an authoritarian system, “the buck stops with you.” Mr. Bandurski noted that censors had struggled to control the Tianjin narrative because some Chinese journalists had pushed ahead with their own reporting. “This is a very messy story, and for Chinese media, messy means opportunity,” he said.”

The Petrobras scandal in Brazil is bringing into question the government of President Dilma, it could forebode the same in China. Corruption in all its forms is no laughing matter and enforcing anti-corruption laws is no game. While prosecuting companies engaging in bribery and corruption through the hiring of sons and daughters of government officials to retain or garner new business may seem quite a long way from the Westgate Mall massacre or the massive loss of life in Tianjin; they are clearly on a unidimensional continuum.

Just as Archie Bunker put a light up to many of the social ills of his time, the more light you can shine on corruption, the more you can root it out of the shadows. But do not forget to send in Batgirl and those fighting for justice against corruption as well.

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

© Thomas R. Fox, 2015

FIFA, the DOJ and the Global Fight Against Corruption

The Department of Justice (DOJ) gave the global fight against anti-corruption a huge boost last week when it announced it was bringing charges against 14 members or persons associated with Fédération Internationale de Football Association (FIFA). To say that the scope and breadth of the charges were breathtaking really does not capture this moment in history for the anti-corruption advocates around the globe. FIFA had held itself above the law for so long, that it finally took the DOJ to start the process of rooting out the corruption that appears to have been endemic in the organization.

My FCPA Blog contributor colleagues Mike Scher and Alistair Craig, both writing in the FCPA Blog, respectively asked why we in the compliance community had not protested against FIFA corruption louder and what took the DOJ so long to prosecute? I have to disagree with both positions. The compliance community had worked to be a part of the solution at FIFA for some time. Both Transparency International and Alexandra Wrage at TRACE International worked to help bring transparency and accountability to FIFA. Both were summarily shown the door by FIFA and specifically Sepp Blatter. Just as an alcoholic cannot get sober until they become ready and willing, FIFA has not, until very recently, been willing or able to face its issues of corruption.

Moreover, even when FIFA gave the appearance about somehow even being remotely concerned about bribery and corruption, it was all for show. It asked former federal prosecutor Michael Garcia to internally investigate allegations of bribery and corruption around the awarding of the 2018 World Cup to Russia and the 2022 World Cup to Qatar, then summarily obstructed his investigation. Finally when Garcia did produce a report, FIFA shelved it and released a sham summary that Garcia promptly disavowed. Garcia resigned from FIFA due to the organization’s conduct over his report and its burial.

Even when national governments tried to do something about the bribery and corruption endemic in FIFA, they were stymied. Nigeria (of all places) tried to investigate allegations of match fixing around its national soccer federation. FIFA’s response? It decreed that Nigeria could face the ultimate sanction of being expelled from FIFA if the organization determined there had been unacceptable government interference. How’s that for playing ball?

Clearly FIFA demonstrated it was an organization that was unable to replace an institutional structure that fostered bribery and corruption when it re-elected Blatter last Friday for yet another five-year term as President. Yet Blatter resigned this week. Why did he do so? In an article in the BBC online it reported that Blatter said the mandate he was given at the time of his re-election (last Friday) no longer “seemed to be supported by everyone in the world of football.” He was reported to have said the organization need “profound restructuring.” Time was much blunter when it said, in an article entitled “FIFA’s Sepp Blatter Is Under Investigation for Corruption, Reports Say”, that “FIFA president Sepp Blatter is himself in the crosshairs of the corruption investigation that saw several of the organization’s top brass indicted over the past week, with U.S. officials reportedly saying that he was a target of their probe into world soccer’s governing body. The New York Times says that it was told by officials, speaking on condition of anonymity, that investigators hoped to work their way up to Blatter with the cooperation of the FIFA officials already taken into custody.”

On NPR’s All Things Considered, there was a report that senior FIFA officials were no longer gong to attend this month’s Women’s World Cup in Canada for fear of being arrested and extradited immediately to the US. Does that sound like a group of men who have nothing to hide? I am reminded of the 1960s magazine article and movie Suppose They Gave a War and Nobody Came? Truly the inmates are running the asylum.

What about the companies that sponsor FIFA, regional soccer federations and national soccer organizations and their role in all of this? In another BBC article, entitled “Fifa sponsors welcome Sepp Blatter’s resignation”, Emily Young reported that “both Visa and Coca-Cola repeated warnings that they expected a swift overhaul at Fifa. And McDonald’s said it hoped this would be the first step towards “gaining back trust from fans worldwide.”” I found this response by sponsors to be a key part in the international fight against bribery and corruption. Moreover, it demonstrated the role of all parties in fighting bribery and corruption.

Clearly it is not in the interest of any multi-national to be associated with a corrupt entity such as FIFA from a reputational perspective. But more than simply self-interest to protect their own brand name, companies have a role in the fight directly. This can be summed up by Scott Killingsworth in his writings on ‘private-to-private’ (P2P) solutions to the US Foreign Corrupt Practices Act (FCPA) or what I call a business solution to a legal problem. If you want to do business with a company, you should contractually mandate that company has an anti-corruption compliance program under the FCPA, UK Bribery Act or other recognized international standard.

The FIFA international bribery scandal and criminal enforcement action will be around for quite sometime to come. For the Chief Compliance Officer (CCO) or compliance practitioner in a US company there will be many lessons to be learned going forward, even if the initial criminal charges are against the bribe-takers for violations of Racketeer Influenced and Corrupt Organizations Act (RICO), money-laundering laws and tax evasion. Many of these lessons will be applicable to a FCPA or UK Bribery Act based best practices anti-corruption compliance program.

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

© Thomas R. Fox, 2015

 

King Arthur Week – The Round Table and Compliance Professionals and Lawyers as Whistleblowers – Part III

Today we use King Arthur’s Round Table as the entry into our topic. The Round Table is the famous table around which he and his Knights congregated. Its shape implies that everyone who sits there has equal status. Wace, who relied on previous depictions of Arthur’s fabulous retinue, first described the Round Table in 1155. The symbolism of the Round Table developed over time; by the close of the 12th century it had come to represent the chivalric order associated with Arthur’s court, the Knights of the Round Table.

As with all things Arthurian, the origins of the Round Table are a bit murky. One commentator claims Arthur created the Round Table to prevent quarrels among his barons, none of whom would accept a lower place than the others. Others believe it came to prominences as a symbol of the famed order of chivalry that flourished under Arthur. In Robert de Boron’s Merlin, written around the 1190s, the wizard Merlin creates the Round Table in imitation of the table of the Last Supper and of Joseph of Arimathea’s Holy Grail table. This table has twelve seats and one empty place to mark the betrayal of Judas. This seat must remain empty until the coming of the knight of purity and chastity who will achieve the Grail. When the Knight Percival comes to the court at Camelot, he sits in the seat and initiates the Grail quest. Whatever the origins of the Round Table, it may be the single most tangible item associated with King Arthur.

I thought about these concepts surrounding the legend of the Round Table in consideration of the announcement earlier this month of a whistleblower award paid out by the Securities and Exchange Commission (SEC) of between $1.4 to $1.6 MM to a compliance officer. Sam Rubenfeld reported in an article in the Wall Street Journal (WSJ), entitled “SEC Awards More than $1.4 Million to Whistleblower Compliance Officer”, that the award was paid “to a compliance officer who provided information that helped the SEC in an enforcement action against the tipster’s company, marking the second time a compliance professional received an award under the SEC’s whistleblower program.” As stated this was the second award paid out to a compliance officer, the first occurred in August 2014 and was in the amount of $300,000.

This un-named whistleblower took his (or her) concerns internally to management but was not successful in persuading management to cease the illegal practices. Moreover, “The compliance officer had a reasonable basis to believe disclosure to the SEC “was necessary to prevent imminent misconduct” from causing “substantial financial harm” to the company or investors, the SEC said.” The FCPA Blog, in a post entitled “Compliance officer awarded $1.5 million under SEC whistleblower program”, reported, “After that award, Sean McKessy, chief of the SEC’s whistleblower office, said employees who perform internal audit, compliance, and legal functions can be eligible for an SEC whistleblower award “if their companies fail to take appropriate, timely action on information they first reported internally.”” Adding to McKessy was Andrew Ceresney, chief of the SEC’s enforcement division, who said in a statement “This compliance officer reported misconduct after responsible management at the entity became aware of potentially impending harm to investors and failed to take steps to prevent it.”

This second award makes clear that the SEC will treat compliance professionals as all other whistleblowers when it comes to making an award based upon the fine or penalty. In a December 2014 article, entitled “When Should Internal Auditors And Compliance Officers Become SEC Whistleblowers”, Daniel Hurson wrote “while the amount of the [first] award [$300,000] was not particularly hefty, and was dwarfed by several multi-million dollar whistleblower awards given previously, it carried particular significance to astute observers in the corporate legal, internal audit, and compliance communities. Insiders know that compliance officers and internal auditors, beleaguered and sometimes frustrated as they may be, hold the “keys to the kingdom” when it comes to knowledge of corporate ethical and legal lapses within their companies. Prior to this award, it had generally been thought the SEC would continue to discourage such awards on the rationale that it would not want to encourage employees whose job it was to prevent corporate legal and ethical violations to profit from simply doing their jobs.”

Hurson wrote that this initial whistleblower payment to a compliance practitioner marked a change in SEC policy because “It has generally been understood that compliance officers and internal auditors are not permitted to receive whistleblower awards because information they reported to a superior constituting allegations of misconduct was not to be considered “original information” under the Dodd-Frank Act and SEC rules.” He ended his piece with the following, “In the final analysis, however, the real job of a compliance officer is not just training employees to know the FCPA or any of the myriad of laws and regulations that now govern corporate conduct, but doing his or her absolute best to help them comply with the law, and to identify the cases when they fail. An internal auditor is charged with making his or her investigations and reports, but not administering punishment. But the presumption in each case is that the company will take your work seriously and take action to correct and if necessary report the problem to regulatory authorities.

If this does not happen, or the company displays either a lack of good faith or competence in undertaking its end of the bargain, you may have to undertake corrective action, however unpleasant or personally risky. In truth, you owe this to the company, its vast majority of honest employees, and its investors. If certain people in the corporate structure are blind to the “bet the company” risk in ignoring or covering up wrongdoing, your job is to insure that philosophy does not prevail. I suggest with respect that that duty should remain foremost in the personal decision as to whether and when a compliance officer or internal auditor should, if the situation demands and the law allows, become a whistleblower.”

There was nothing in the SEC Press Release or any of the commentary on the 2015 whistleblower award to indicate that the compliance professional involved was a lawyer. However, an equally delicate issue is whether a lawyer can be a whistleblower. In an article entitled “Is the SEC encouraging unethical whistleblowing by counsel?” Nick Morgan explored this issue. Lawyers are also governed by their state bar associations on their ethical obligations, which include confidentiality and loyalty to a client. Morgan noted, “The Dodd-Frank bounty provisions further exacerbated the conflict between federal securities whistleblower law and state attorney ethics requirements by giving attorneys financial incentives to breach attorney-client confidentiality.”

Three state bar organizations, Washington, California and New York, have questioned if SEC regulations trump state bar ethical obligations regarding attorney whistleblowers. Indeed in New York, “the New York County Lawyers’ Association’s committee on professional ethics responded to the development by releasing a formal opinion. It concluded that New York lawyers, presumptively, may not ethically serve as whistleblowers for a bounty against their clients under Dodd-Frank, because doing so generally gives rise to a conflict between lawyers’ interests and those of their clients.”

What happens when federal law is in conflict with state regulations regarding lawyers’ ethical obligations? Morgan reported, “no court has yet found that SEC regulations preempt state ethics rules governing lawyers’ communications with their clients.  In cases in which conflicts of state and SEC law have appeared, federal courts have been receptive to arguments based on lawyers’ ethical obligations under state law and have balanced the state and federal interests. While the Dodd-Frank bounty provisions increase the incentives for attorneys to act as whistleblowers at their clients’ expense, it is unclear whether those incentives outweigh the risks and burdens associated with taking such actions. Aside from the ethical issues, whistleblowers more often than not go uncompensated and incur significant burdens for their trouble, decreasing whatever temptation some attorneys may feel.”

King Arthur’s Round Table may have been designed so that all Knights were treated as equals. As noted in some of the legends the Round Table is part of the Holy Grail quest storyline, requiring purity of heart and chastity to achieve the Grail. Both strands of the Round Table legend inform the debate on whistleblowers. Even if compliance practitioners may report on their own companies to the SEC, it is not clear about the answer when it comes to lawyers. Further, as lawyers have separate legal obligations they fail to meet the second purpose of the Round Table, to find someone to chase the Grail of whistleblowing.

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

© Thomas R. Fox, 2015

The Companion and SEC Enforcement of the FCPA – Part II

I will use Agatha Christie’s short story The Companion as the introduction to today’s blog post. This story, related by one of the Tuesday story-telling group of detective aficionados, Dr. Lloyd, and is about two people who are related yet take different paths. It involves the death of a woman while on vacation on the Island of Gran Canaria. The deceased was named Mary Barton and she died while trying to save her companion, one Amy Durrant, from drowning. Sometime later Miss Durrant was deemed missing and presumed drowned off the coast of Cornwall. However there was a double crime as Durrant had actually drowned Barton in Gran Canaria and then faked her own death in Cornwall, however she had returned home to Australia where she actually died within a month of returning. It turned out that Durrant was a cousin to Barton and her only living relation. Since both women were now dead, Barton’s not inconsiderable estate passed on to Durrant’s children, which was her plan all along.

All of which informs today’s topic that being the difference in Securities and Exchange Commission (SEC) Foreign Corrupt Practices Act (FCPA) enforcement resolution tools from those used by the Department of Justice (DOJ). While both the SEC and DOJ use Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs); there are other tools in the SEC arsenal, which the DOJ does not use. These revolve around the fact that in FCPA enforcement, the DOJ handles criminal prosecution and the SEC handles things on the civil side of FCPA enforcement.

Traditionally the SEC obtains a Cease and Desist order by going to a federal district court. The FCPA Guidance states, “In a civil injunctive action, SEC seeks a court order compelling the defendant to obey the law in the future. Violating such an order can result in civil or criminal contempt proceedings. Civil contempt sanctions, brought by SEC, are remedial rather than punitive in nature and serve one of two purposes: to compensate the party injured as a result of the violation of the injunction or force compliance with the terms of the injunction.”

In most cases the defendant does not contest these Orders and there are no admissions made by the defendant regarding conduct that may have violated the FCPA. While there has been significant criticism of ‘No Admission’ settlements entered into by the SEC, these types of settlements are not expected to change where there is no corresponding criminal action. In a 2013 speech, SEC Chair Mary Jo White announced an expansion of the “admit” policy, and explained that while “neither admit nor deny” settlements would remain the norm, the SEC would now require defendants to admit wrongdoing “in certain cases where heightened accountability or acceptance of responsibility through the defendant’s admission of misconduct may be appropriate”. SEC enforcement chief, Andrew Ceresney, has added that defendants may be required to admit violations in cases of “egregious misconduct,” such as cases involving obstruction of the SEC’s investigation or harm to large numbers of investors.

However the past year or so, the SEC has moved to handle FCPA enforcement actions through an administrative process. As explained in the FCPA Guidance, “SEC has the ability to institute various types of administrative proceedings against a person or an entity that it believes has violated the law. This type of enforcement action is brought by SEC’s Enforcement Division and is litigated before an SEC administrative law judge (ALJ). The ALJ’s decision is subject to appeal directly to the Securities and Exchange Commission itself, and the Commission’s decision is in turn subject to review by a U.S. Court of Appeals.”

In a post on the FCPA Blog, entitled “Are Administrative Proceedings the New Civil Complaints?” Marc Alain Bohn explored this expanded use of administrative law proceedings in SEC enforcement of the FCPA, by noting, “which was facilitated in part by a 2010 Dodd-Frank amendment to the Securities and Exchange Act of 1934 that enables the SEC to collect civil penalties through administrative proceedings.” Moreover, Bohn noted a couple of significant differences in going through a federal district court to obtain a Cease and Desist Order and going through the SEC administrative process. He said, “FCPA cases resolved via administrative proceeding require no judicial approval, as opposed to the settlement of formal civil complaints. This distinction is important because district court judges have complicated several SEC prosecutions in recent years by demanding changes to negotiated settlements or dismissing charges or otherwise limiting claims. In addition, the imposition of a cease-and-desist order under an administrative proceeding requires only that the SEC establish a likelihood that a defendant will violate federal securities law, in contrast with the “reasonable likelihood” required by a court-ordered injunction.” [citations omitted]

The FCPA Professor has been unremitting in his criticism of this administrative settlement process, citing a complete lack of transparency in the process, among other criticisms. Mike Volkov, perhaps more charitably, wrote, “The SEC’s “new” use of administrative proceedings for FCPA cases demonstrates its unwillingness to face judicial scrutiny and undermines the effectiveness of its enforcement program. The SEC likes to play on its home turf and for some reason feels that going to court is not as important.” Whatever your view on the use of the administrative process might be I would only say that it is here to stay so you had better be ready to participate in it if you find yourself in a SEC FCPA enforcement action.

Another criticism of this process is what might be called the home court advantage. In an article in the Wall Street Journal (WSJ), entitled “Firms oppose SEC’s internal enforcement process”, reporter Hazel Bradford quoted Terry Weiss, an attorney with Greenberg Traurig LLP in Atlanta, for the following “I have no problem with fairness when (a case) is brought in a federal District Court and when it is overseen by a federal District Court judge who is appointed by the president of the United States and approved by the U.S. Senate. I have a significant problem when you have (administrative law judges) who are picked by the SEC.” The problem with this argument is that ALJ’s have been a part of the federal enforcement process for a wide variety of agencies, department and issues since the 1930s. To say the SEC is using an approved administrative process that violates the Constitution seems to me to be a stretch.

Another area the SEC has in common with the DOJ in FCPA enforcement is that they both sometimes decline to bring enforcement actions. The FCPA Guidance cites back to the SEC Enforcement Manual for the “guiding principles” in determining whether the Commission will bring a FCPA enforcement action. The factors the SEC will determine, which are the same for enforcement actions against entities or individuals., are listed as follows:

• the seriousness of the conduct and potential violations;
• the resources available to SEC staff to pursue the investigation;
• the sufficiency and strength of the evidence;
• the extent of potential investor harm if an action is not commenced; and
• the age of the conduct underlying the potential violations.

It is important to understand these differences in resolution vehicles and tactics used by the SEC, separate and apart from the DOJ. The civil jurisdiction of FCPA enforcement entails some differences in approach by the SEC. It is important that any Chief Compliance Officer (CCO) or compliance practitioner understand these differences in the event their company goes through a FCPA investigation or enforcement action. We saw three significant FCPA enforcement actions last fall, Smith & Wesson, Layne Christensen and Bio-Rad, where there was no corresponding DOJ FPCA enforcement action brought jointly with the SEC enforcement action. As anti-corruption compliance programs mature, it may well be that this could portend the future. Just as with The Companion simply because it appears that two are together, they may have their own separate callings. Tomorrow I review some of the unique damages available to the SEC in a FCPA enforcement action.

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

© Thomas R. Fox, 2015

The End of an Era and the End of Facilitation Payments?

Two famous New Yorkers died this week. Both spoke to not only to the glamour of the Big Apple, but the city’s once undisputed crown as the cultural mecca of the US. They were Allie Sherman and Bess Myerson. 

Sherman was with the New York (Football) Giants as an Assistant Coach when they were the original America’s Team. He later became the Head Coach when the Giants were ending a phenomenal run as the greatest pro football team in America. Sherman coached some of the most memorable players from the last century including Sam Huff, Frank Gifford, Andy Robustelli, Charley Connerly and Y. A. Tittle. As an Assistant Coach, he was a part of a team that went to the National Football League (NFL) championship games in 1956 and 1958/9. As Head Coach, he took the Giants to the championship games from 1961-63. That is six championship games appearances in seven years, a record no other team in football has ever achieved.

The second death was that of Bess Myerson. In my little hometown in podunk Texas, Bess Myerson was about the highest epitomy of American high class and grace that one could imagine. (My parents hated the Kennedys so Jackie was not a candidate.) What I did not fully appreciate until I read her obituary in the New York Times (NYT), entitled “New Yorker of Beauty, Wit, Service and Scandal” by Enid Nemy and William McDonald, was that Myerson was the first Jewish Miss America and what her win of that crown meant in 1945 to Jews in America. The article quoted Barra Grant, Ms. Myerson’s daughter for the following; “When my mother walked down the runway, the Jews in the audience broke into a cheer. My mother looked out at them and saw them hug each other, and said to herself, ‘This victory is theirs.’” But in Bryan, Texas, she was not the Jewish Miss America; she was just Bess Myerson, the one and only Miss America we knew by name.

I thought about these two famous New Yorkers, where they came from and what New York once stood for as I considered the ongoing tragedy of AirAsia Flight 8501 and pondered facilitation payments. In another article in the NYT, entitled “AirAsia Jet That Crashed Had Lacked All Clearances to Fly, Regulators Say”, Tom McCawley reported that “AirAsia Flight 8501, which crashed in the Java Sea on Dec. 28, was allowed to take off from Surabaya, Indonesia, even though it did not have all the required clearances from regulators to fly that day, the Indonesian Transportation Ministry said on Monday.” While the article did not identify those Indonesian who allowed this to occur, McCawley did report “The [Indonesian Transportation] Ministry said it was suspending several officials for allowing the flight to take off.” Moreover, “other airlines and airports across the country will also be scrutinized to see if they have been cutting corners in similar ways.”

The article did not say or even suggest that bribes were paid to allow this flight to take off when it did not have the proper permits to do so, such actions did occur in Indonesia, which had a 2014 score on the Transparency International – Corruption Perceptions Index at 34 and came in at a ranking of 107 out of 157 countries ranked. Fresh on the minds of all anti-corruption, Foreign Corrupt Practices Act (FCPA), UK Bribery Act practitioners and others is the Alstom FCPA enforcement action where a large amount of the companies bribes were paid in Indonesia to secure winning contracts. Of course, Alstom is a French company and AirAsia is Malaysian entity.

FCPA enforcement actions involving US companies and the air industry are unfortunately very well known. Biz-Jet and its bribes to secure business are in a direct line to Dallas Airmotive, involved in a FCPA enforcement action in the past quarter. But in the AirAsia case, I wondered about something different, that continuing FCPA bug-a-boo around facilitation payments. Facilitation payments are exempted out of FCPA violations but the AirAsia case is a clear example of the slippery slope of how something that is not illegal can easily move into such a realm and the true cost of corruption. Two of the loudest responses by the business community to the Wal-Mart allegations of bribery and corruption were that they were simply payments to expedite the process of licensing in Mexico and what did you expect to get things moving in Mexico anyway?

What if AirAsia made small payments to move things along faster with the Indonesian Transportation Ministry? What if these payments might properly be characterized as facilitation payments under an anti-corruption law such as the FCPA? McCawley’s article reported, “Officials have said that AirAsia had permits to fly the popular Surabaya-Singapore route on Mondays, Tuesdays, Thursdays and Saturdays, but later changed its schedule to fly on other days of the week, The Associated Press reported. Flight 8501 took off on a Sunday. Mr. Murjatmodjo said that while Singapore officials had approved the Sunday flight, Indonesia had not, and the aviation agency used incorrect information in granting Flight 8501 a takeoff slot.”

So what if that ‘incorrect information’ used by the Indonesian aviation agency turned out to be ‘facilitated’ by a grease payment? Is the granting of such approval something that would be been granted eventually but AirAsia was just trying to speed up the process? What if there were safety reasons for not allowing AirAsia to operate on the Sunday when the plane went down? What if it was something safety related to the flight controllers or something other than the plane or crew? Make no mistake about it, facilitation payments are bribes, yet there are other gray areas around them that can create confusion and make it hard for companies to police them.

A similar view was recently articulated by Thomas C. Baxter, Executive Vice President and General Counsel at the Federal Reserve Bank of New York who indicated a general unease with facilitation payments. Baxter was quoted in the FCPA Blog for the following, “Baxter said an organizational policy that allows some types of official corruption — including facilitating payments – “diminishes the efficacy of compliance rules that are directed toward stopping official corruption.”” Further, “While I understand that the exception is grounded in a practical reality, I feel that zero tolerance for official corruption would have been a better choice. To any public servant with an extended hand, I would say in a loud and clear voice, “pull it back and do your job.” And, let me note the OECD Working Group on Bribery recommends that all countries encourage companies to prohibit or discourage facilitating payments.”

Allie Sherman and Bess Myerson reminded us of a New York that once existed. With the proliferation of the internet and social media, I doubt US culture will ever be so concentrated in one city again. The AirAsia crash may portend of things in the future, so if it comes to pass that bribery and corruption was involved to obtain a seemingly minor approval to allow the flight of an airplane on a day it was not licensed to fly; perhaps one thing that comes out of the tragedy is the removal of this seeming anomaly of allowing bribes under the FCPA by calling them facilitation payments.

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

© Thomas R. Fox, 2015

Alstom Joins Santa’s Naughty List – In a Very Big Way

The North Pole for Foreign Corrupt Practices Act (FCPA) enforcement action announcements seems to have temporarily moved south for the month of December. Last week there was the final announcement of the long-standing Avon FCPA enforcement action. On December 22, 2014, the Department of Justice (DOJ) announced settlement of the Alstom enforcement action. Certainly the DOJ is giving out presents to companies that have been very, very naughty. I am currently exploring the Avon enforcement action over several days of blog posts but I had to interrupt those posts to write something about the Alstom resolution for it was extremely significant gift for the Chief Compliance Officer (CCO), compliance practitioner and companies going forward.

The Fine

First and foremost was the fine amount. At $772MM it is the highest criminal fine for FCPA violations in the history of the world. Siemens’ prior of a reported $800MM was a combination of DOJ and Securities and Exchange Commission (SEC) fines and penalties. Alstom was not subject to the jurisdiction of the SEC so there was no component of this amount for either civil books and records or internal controls violations. But for those few remaining dunderheads out there who think their private company status insulates them from FCPA liability; wake up and smell the mistletoe, as the DOJ will be looking for you to smack a big one on. The fine brings the 2014 fine totals up to around $1.5bn, which comes a close second to the record-setting year of 2010, where the total amount of fines was $1.8bn.

Disclosure, Cooperation and Conduct

While I am in the middle of lambasting Avon for its conduct that led to its FCPA violations, one really has to step aside and give some credit to Alstom for some of the worst actions a company can engage in when dealing with bribery and corruption. If there was anyone on the naughty list, it certainly was Alstom. First is the company’s failure to self-disclose its obvious criminal conduct. The second was the clear foot-dragging in dealing the DOJ, during the pendency of the investigation. Finally, to complete this triumvirate of idiocy was the company’s refusal to timely engage in remediation. Dick Cassin, writing in the FCPA Blog, pointed out that Alstom’s conduct included the following:

• Alstom’s refusal to fully cooperate with the department’s investigation for several years
• The breadth of the companies’ misconduct, which spanned many years, occurred in countries around the globe and in several business lines, and involved sophisticated schemes to bribe high-level government officials
• Alstom’s lack of an effective compliance and ethics program at the time of the conduct, and
• Alstom’s prior criminal misconduct, including conduct that led to resolutions with various other governments and the World Bank.

Individual Prosecutions

Alstom’s conduct was so bad during the investigation that the DOJ obtained indictments against four company executives during the pendency of the investigation. Three of these executives have pled guilty and are awaiting sentencing. Cassin wrote, “Alstom began cooperating only after the DOJ publicly charged several Alstom executives, the government said.” The UK Serious Fraud Office (SFO) has also brought charges against individuals.

Post Acquisition FCPA Liability

I promised a Christmas present for companies out there and neither Santa nor I want to disappoint those not on the naughty list, for the Alstom enforcement action makes clear that the company which is acquiring them, GE, is not responsible for the fine going forward. This enforcement action reinforces the message the DOJ presented in Opinion Release 14-02; that a company which engages in pre-acquisition due diligence, discloses and then remediates the issues after they acquire the entity, can rest easier about purchasing a FCPA violation. For if GE can purchase a company with the clear attitude about doing business in compliance with anti-corruption laws, such as Alstom, with confidence that it will not be subject to a FCPA enforcement action, it means that any other company can do so as well.

Cassin reported, “Alstom SA pleaded guilty to a two-count criminal information in federal court in Connecticut. The DOJ charged the company with violating the Foreign Corrupt Practices Act by falsifying its books and records and failing to implement adequate internal controls. Alstom admitted its criminal conduct…In addition, Alstom Network Schweiz AG, a Swiss subsidiary, pleaded guilty to a criminal information charging it with conspiracy to violate the antibribery provisions of the FCPA.” Finally, “Two U.S. subsidiaries — Alstom Power Inc. and Alstom Grid Inc. — both entered into deferred prosecution agreement with the DOJ. They admitted that they conspired to violate the antibribery provisions of the FCPA.” The settlement documents have not been released as yet but hopefully they will be by the time of the final sentencing hearing before US District Judge Janet B. Arterton in June 2015.

The significance of this enforcement action will reverberate for a long time to come.

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

Does Your Company Still Allow Facilitation Payments?

One of the more confusing areas of the US Foreign Corrupt Practices Act (FCPA) is in that of facilitation payments. Facilitation payments are small bribes but make no mistake about it, they are bribes. For that reason many companies feel they are inconsistent with a company culture of doing business ethically and in compliance with laws prohibiting corruption and bribery. Further, the FCPA Guidance specifies, “while the payment may qualify as an exception to the FCPA’s anti-bribery provisions, it may violate other laws, both in Foreign Country and elsewhere. In addition, if the payment is not accurately recorded, it could violate the FCPA’s books and records provision.” Finally, further the FCPA Guidance states, “Whether a payment falls within the exception is not dependent on the size of the payment, though size can be telling, as a large payment is more suggestive of corrupt intent to influence a non-routine governmental action. But, like the FCPA’s anti-bribery provisions more generally, the facilitating payments exception focuses on the purpose of the payment rather than its value.” [emphasis in original text]

In recent remarks, Thomas C. Baxter, Executive Vice President and General Counsel at the Federal Reserve Bank of New York indicated a general unease with facilitation payments. Baxter was quoted in the FCPA Blog for the following, “Baxter said an organizational policy that allows some types of official corruption — including facilitating payments – “diminishes the efficacy of compliance rules that are directed toward stopping official corruption.”” Further, “While I understand that the exception is grounded in a practical reality, I feel that zero tolerance for official corruption would have been a better choice. To any public servant with an extended hand, I would say in a loud and clear voice, “pull it back and do your job.” And, let me note the OECD Working Group on Bribery recommends that all countries encourage companies to prohibit or discourage facilitating payments.”

In addition to these clear statements about whether the FCPA should continue to allow said bribes; you should also consider the administrative nightmare for any international company. The UK Bribery Act does not have any such exception, exemption or defense along the lines of the FCPA facilitation payment exception. This means that even if your company allows facilitation payments, it must exempt out every UK Company or subsidiary from the policy. Further, if your company employs any UK citizens, they are subject to the UK Bribery Act no matter who they work for and where they may work in the world so they must also be exempted. Finally, if your US Company does business with a UK or other company subject to the UK Bribery Act, you may be prevented contractually from making facilitation payments while working under that customer’s contract. As I said, an administrative nightmare.

1. The Statute

When the FCPA was initially passed in 1977, the facilitating payment exception was found under the definition of foreign official. However, with the 1988 Amendments, a more explicit exception was written into the statute making it clear that the anti-bribery provisions “shall not apply to any facilitating or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action . . .” The statute itself provided a list of examples of facilitation payments in the definition of routine governmental actions. It included the following:

• Obtaining permits, licenses, or other official documents;
• Processing governmental papers such as visas and work orders;
• Providing police protection, mail services, scheduling inspections;
• Providing utilities, cargo handling; or
• Actions of a similar nature.

It is important to note that the language of the FCPA makes it clear that a facilitation payment is not an affirmative defense but an exception to the general FCPA proscription against bribery and corruption. Unfortunately for the FCPA Practitioner there is no dollar limit articulated in the FCPA regarding facilitation payments. Even this limited exception has come under increasing criticism. As far back as 2009, the OECD studied the issue and recommended that member countries encourage their corporations to not allow the making of facilitating payments, “in view of the corrosive effect of small facilitation payments, particularly on sustainable economic development and the rule of law.”

Interestingly, one of the clearest statements about facilitation payments comes not from a FCPA case about facilitation payments but the case of Kay v. US, 359 F.3d 738, 750-51 (5th Cir. 2004). This case dealt with whether payment of bribes to obtain a favorable tax ruling was prohibited under the FCPA. In its opinion the Fifth Circuit commented on the limited nature of the facilitating payments exception when it said:

A brief review of the types of routine governmental actions enumerated by Congress shows how limited Congress wanted to make the grease exceptions. Routine governmental action, for instance, includes “obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country,” and “scheduling inspections associated with contract performance or inspections related to transit of goods across country.” Therefore, routine governmental action does not include the issuance of every official document or every inspection, but only (1) documentation that qualifies a party to do business and (2) scheduling an inspection—very narrow categories of largely non-discretionary, ministerial activities performed by mid- or low-level foreign functionaries.

2. Enforcement Actions

Con-way

The FCPA landscape is littered with companies who sustained FCPA violations due to payments which did not fall into the facilitation payment exception. In 2008, Con-way Inc., a global freight forwarder, paid a $300,000 penalty for making hundreds of relatively small payments to Customs Officials in the Philippines. The value of the payments Con-way was fined for making totaled $244,000 and were made to induce the officials to violate customs regulations, settle customs disputes, and reduce or not enforce otherwise legitimate fines for administrative violations.

Helmerich and Payne

In 2009, Helmerich and Payne, Inc., paid a penalty and disgorgement fee of $1.3 million for payments which were made to secure customs clearances in Argentina and Venezuela. The payments ranged from $2,000 to $5,000 but were not properly recorded and were made to import/export goods that were not within the respective country’s regulations; to import goods that could not lawfully be imported; and to evade higher duties and taxes on the goods.

Panalpina

Finally, there is the Panalpina enforcement action. As reported in the FCPA Blog, this matter was partly resolved last year with the payment by Panalpina and six of its customers of over $257 million in fines and penalties. Panalpina, acting as freight forwarder for its customers, made payments to circumvent import laws, reduce customs duties and tax assessments and to obtain preferential treatment for importing certain equipment into various countries but primarily in West Africa.

DynCorp

Then there is the DynCorp International investigation matter. As reported in various sources the matter relates to approx. $300,000 in payments made by subcontractors who wished to speed up their visa processing and expedite receipt of certain licenses on behalf of DynCorp. This investigation has been going on for several years and there is no anticipated conclusion date at this time.

3.      Some Guidance

So what does the Department of Justice (DOJ) look at when it reviews a company’s FCPA compliance program with regards to facilitation payments? Initially, if there is a pattern of such small payments, it would raise a Red Flag and cause additional investigations, but this would not be the end of the inquiry. There are several other factors which the DOJ could look towards in making a final determination on this issue. The line of inquiry the DOJ would take is as follows:

1. Size of payment – Is there an outer limit? No, there is no outer limit but there is some line where the perception shifts. If a facilitating payment is over $100 you are arguing from a point of weakness. The presumption of good faith is against you. You might be able to persuade the government at an amount under $100. But anything over this amount and the government may well make further inquiries. So, for instance, the DOJ might say that all facilitation payments should be accumulated together and this would be a pattern and practice of bribery.
2. What is a routine governmental action? Are we entitled to this action, have we met all of our actions or are we asking the government official to look the other way on some requirement? Are we asking the government official to give us a break? The key question here is whether you are entitled to the action otherwise.
3. Does the seniority of the governmental official matter? This is significant because it changes the presumption of whether something is truly discretionary. The higher the level of the governmental official involved, the greater chance his decision is discretionary.
4. Does the action have to be non-discretionary? Yes, because if it is discretionary, then a payment made will appear to be obtaining some advantage that is not available to others.
5. What approvals should be required? A facilitation payment is something that must be done with an appropriate process. The process should have thought and the decision made by people who are the experts within the company on such matters.
6. Risk of facilitation payments and third parties? Whatever policy you have, it must be carried over to third parties acting on your behalf or at your direction. If a third party cannot control this issue, the better compliance practice would be to end the business relationship.
7. How should facilitation payments be recorded? Facilitation payments must be recorded accurately. You should have a category entitled “Facilitation Payments” in your company’s internal accounting system. The labeling should be quite clear and they are critical to any audit trail so recording them is quite significant.
8. Monitoring programs? There must always be ongoing monitoring programs to review your company’s internal controls, policies and procedures regarding facilitation payments.

So we return to the question of when does a grease payment become a bribe? There is no clear line of demarcation. The test seems to turn on the amount of money involved, to whom it is paid and the frequency of the payments. Additionally, accurate books and records are a must. Finally, remember that the defense of facilitation payments is an exception to the FCPA prohibition against bribery. Any defendant which wishes to avail itself of this exception at trial would have to proffer credible evidence to support its position, but at the end of the day, it would be the trier of fact which would decide. So, much like any compliance defense, the exception is only available if you use it at trial and it would be difficult to imagine that any company will want to use the facilitation payment exception.

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

What a Long Strange Trip It’s Been – The First 1000 Blog Posts

Yes, indeed the Grateful Dead can and does inform your compliance regime as today is my 1000^th blog posting on the FCPA Compliance and Ethics Blog. To say that I ever thought I would see this day or this many blog posts, would portend a level of clairvoyance that even Carnac the Great could not conceive of pontificating upon. I had struggled with a theme for this momentous accomplishment but my sublimely-grounded English wife brought me down from the ethereal clouds with the following suggestion, “Even an old dog can learn new tricks.” Nothing like being married to a younger woman.

So today, I want to write about some of the things I have learned on this 4+ year journey, which began in late 2009/early 2010 after a serious automobile/bicycle event (Box Score: Hummer-1 Tom-0) where about the only thing I had on my hands was time while I was at home convalescing. I started to explore the world of social media, engaging on Twitter, webinaring from my home office and blogging. I was so un-savvy in this arena that about the only positive thing my teenaged daughter could say about me was “Dad, you are so unhip, you are retro. But that is cool too.” The first thing I learned was that even a complete computer misfit and social media idiot could set up a blog on WordPress. It is not only easy but free. I cannot say with any pride that some of my early blogs were very good but I can say that for a lawyer, whose only skill was to be able to perform word processing in Microsoft Word, I could type and then upload a blog post into WordPress. At that point in my blogging career, that was a major accomplishment.

Although it did take some time, I learned how to stop writing like a lawyer, with full citations in each blog, coupled with as much lawyerese as I could manage, by finally adjusting to a blogging format. I also relearned an old lesson, which says that if you really want to learn about a subject, write on it. I remember one of the first things I learned when researching the Travel Act was that this Kennedy era law, passed largely through the efforts of Bobby Kennedy, was designed to help in the fight against organized crime. So who would say a 60 year old law cannot be used for a 21^st century purpose? Or maybe even a Watergate-era like the Foreign Corrupt Practices Act (FCPA) could not have an expansive use, beyond that for which it was passed in 1977? I also learned that if you put out solid content people will read and listen to what you have to say.

I learned there are some great people out there blogging in the ethics and compliance space. I have met some fabulous colleagues through my blogging who have not only been incredibly supportive but whom I now cherish as good friends. Some of them include Mike Koehler, the FCPA Professor, for his scholarly rigor and continued intellectual challenges. Dick Cassin, the Dean of FCPA bloggers, for his unflinching support to myself and so many others. Mike Volkov, former prosecutor and DC-insider, who is always around to bounce a tough question off. Howard Sklar, who was my This Week in FCPA podcast partner, until we lost him to the corporate world. Francine McKenna, a great and generous mentor for myself and many others and the go-to person all issues in and around the accounting world. Jim McGrath, the internal investigations guy, who brings a former state prosecutor’s perspective to how investigations should be handled and critiqued. Matt Ellis, whose focus on and insights into South America (as in – it’s not a country) continue to shine a light on anti-corruption issues south of the border. Matt Kelly, Editor of Compliance Week, who saves some great witticisms for his weekly blog posts. These are but a very few of the folks I am now privileged to call friends because of my blogging.

I learned that there is way too much white noise in the FCPA space. The FCPA Professor calls them FCPA Inc. and Mike Volkov derides them as the FCPA paparazzi. Whatever you might call them, they put out reams and reams of information, sometimes useful but many times not. What I have tried to do is synthesize some of the most useful for the Chief Compliance Officer (CCO), compliance practitioner or anyone else who does the day-to-day work of anti-bribery/anti-corruption compliance. There are many, many things you can know but a far smaller subset of what you need to know. I try to bring to the compliance practitioner what they need to know. That is why the subtitle of my blog is ‘The Nuts and Bolts of FCPA Compliance’. I have tried to write about things which the compliance professional can use in the everyday practice of compliance.

I have learned that blog posts, which I thought were the most important, may turn out to be the least viewed blogs. Conversely, posts I did not think would be of great interest turned out to have the largest number of one-day hits. For instance, the largest single number of one-day hits I had was an article from two years ago about the SNC-Lavalin corruption investigation in Canada. [For a blog about FCPA compliance-go figure.] The second largest number was a recent blog post using the GM internal investigation as an exploration in the differences between a corporate legal function and its compliance function.

I have learned that by committing to something, you become much better at it. My first year of blogging, I tried to put out 2-3 blogs per week but beginning in 2011, I committed to a daily blog post. Once I made that commitment, blogging became a part of my workday. Once it became a part of my workday, it was like any other project or assignment. I had to set aside the time to work on it. It has made me a much more efficient and better writer to know that I need write something, during my workday. Yes there have been times I was up at 5 AM to write a post or stayed up way past my school-night bedtime trying to crank something out but those situations have become few and far between as I became more disciplined about my blogging.

But most of all I have learned that blogging is fun. It is fun because it is a challenge to write about something in an informative and engaging manner. It is fun to tie a Shakespeare play to a compliance and ethics theme. It is fun to read a week’s worth of Sherlock Holmes’ stories and tie a compliance topic to a story each day for one week. It is fun to find out what happened this day in history and use it as a hook to grab your readers’ attention. It is fun to engage in a debate with the FCPA Professor on a topic of mutual interest, where we look at the same thing, yet see it from different perspectives. And it is fun when you meet someone for the first time and after you introduce yourself, they say to you “When is a rose, not a rose? When it’s a FCPA violation”.

Where will the next 1000 blogs posts take me? I have no clue but if they are as much fun as the first 1000 posts have been I hope that you will continue to join my on This Long Strange Trip.

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

Remember the Alamo: Analogy for Compliance Officers?

Today is the anniversary of the most historic day of many in the history of the great state of Texas, the date of the fall of the Alamo. While March 2, Texas Independence Day, when Texas declared its independence from Mexico and April 21, San Jacinto Day, when Texas won its independence from Mexico, probably both have more long-lasting significance, if it is one word that Texas is known for around the world, it is the Alamo. The Alamo was a crumbling Catholic mission in San Antonio where 189 men, held out for 13 days from the Mexican Army of General Santa Anna, which numbered approximately 1,800. But on this date in 1836, Santa Anna unleashed his forces, which over-ran the mission and killed all the fighting men. Those who did not die in the attack were executed and all the deceased bodies were unceremoniously burned. Proving he was not without chivalry, Santa Anna spared the lives of the Alamo’s women, children and their slaves. But for Texans across the globe, this is our day to Remember the Alamo.

While Thermopylae will always go down as the greatest ‘Last Stand’ battle in history, the Alamo is right up there in contention for Number 2. Like all such battles sometimes the myth becomes the legend and the legend becomes the reality. In Thermopylae, the myth is that 300 Spartans stood against the entire 10,000 man Persian Army. However there was also a force of 700 Thespians (not actors; but citizens from the City-State of Thespi) and a contingent of 400 Thebans who fought and died alongside the 300 Spartans. Somehow, their sacrifice has been lost to history.

Likewise, the legend that lifts the battle of the Alamo to the land of myth is the line in the sand. The story goes that William Barrett Travis, on the day before the final attack, when it was clear that no reinforcements would arrive in time and everyone who stayed would perish; called all his men into the plaza of the compound. He then pulled out his saber and drew a line in the ground. He said that they were surrounded and would all likely die if they stayed. Any man who wanted to stay and die for Texas should cross the line and stand with him. Only one man, Moses Rose, declined to cross the line. The immediate survivors of the battle did not relate this story after they were rescued and this line in the sand tale did not appear until the 1880s.

But the thing about ‘last stand’ battles is they generally turn out badly for the losers.  Very badly. I thought about this when a former Department of Justice (DOJ) official said at Compliance Week last year that he viewed anti-corruption compliance officials as “The Alamo” in terms of the last line of defense in the context of preventing violations of the Foreign Corrupt Practices Act (FCPA). I gingerly raised my hand and acknowledged his tribute to the great state of Texas but pointed out that all the defenders were slaughtered, so perhaps another analogy was appropriate. Everyone had a good laugh back then at the conference. But in reflecting on the history of my state and what the Alamo means to us all; I have wondered if my initial response too facile?

What happens to a Chief Compliance Officer (CCO) or compliance practitioner when they have to make a stand? Do they make the ultimate corporate sacrifice? Will they receive the equivalent of a corporate execution as the defenders of the Alamo received? This worrisome issue has certainly occurred even if the person ‘resigned to pursue other opportunities.’ My fellow FCPA Blog Contributing Editor Michael Scher has been a leading voice for the protection of compliance officers, as have Donna Boehme and Michael Volkov. In a post entitled “Michael Scher Talks to the Feds” he quotes, “a compliance officer (CO) working in Asia asked for recognition and protection: “A CO will not stand up against the huge pressure to maintain compliance standards if he does not get sufficient protection under law. Most COs working in overseas operations of U.S. companies are not U.S. citizens, but they usually are first to find the violations. Since the FCPA deals with foreign corruption, how could the DOJ and SEC not protect these COs?”” In the same post, he asked of the DOJ “Wal-Mart’s compliance officers and professionals allegedly were intentionally obstructed by senior executives from conducting a compliance review and subjected to career-ending retaliation. If confirmed, will the DOJ and SEC’s settlement demonstrate that such harassment of compliance professionals is not condoned? Will the DOJ and SEC also make it clear that compliance officers working for multi-national companies like Wal-Mart in countries outside of America will receive the same protections as those working in America?”

Writing about the MF Global scandal in the New York Times (NYT) in an article entitled “Another View: MF Global’s Corporate Governance Lesson” Michael Peregrine stated that the “compliance officer is the equivalent of a “protected class” for governance purposes, and the sooner leadership gets that, the better.” Particularly in the post Sarbanes-Oxley (SOX) world, a company’s CCO is a “linchpin in organizational efforts to comply with applicable law.” When a company fires (or asks him/her to resign), it is a significant decision for all involved in corporate governance and should not be solely done at the discretion of the Chief Executive Officer (CEO). Jonathan Marks has long advocated that the departure of a CCO from a company is such a material event that it should be disclosed by public companies.

In the area of anti-money laundering (AML) compliance professionals, Reuters reported, in an article entitled “Bankers anxious over anti-money-laundering push to go after individuals”, that at the Securities Industry Financial Markets Association conference, John Davidson, E*Trade Financial’s global head of AML, said that the “new push by regulators and lawmakers to hold individuals, rather than just institutions, accountable for regulatory violations involving money laundering is spooking members of the U.S. financial industry.” He further said that this aggressive trend and a new vigorous AML bill, introduced in Congress by Representative Maxine Waters, entitled “Holding Individuals Accountable and Deterring Money Laundering Act”, were all “a little scary.” He found the trend towards more AML enforcement against individuals “an incredibly disturbing trend.” The reason it is so scary, an un-named top level compliance officer said, is “that compliance officers at the largest Wall Street institutions were feeling especially nervous because the power structures in those institutions sometimes did not give compliance officers enough authority to act.”

Upon further reflection I now believe the Alamo reference appropriate for compliance officers. It is because sometimes we have to draw a line in the sand to management. And when we do, we have to cross that line to get on the right side of the issue, the consequences be damned. Remember the Alamo!

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

© Thomas R. Fox, 2014

The FCPA and Fight Against Terrorism

I admit it took me awhile to finally get it. I have long wondered what could have caused the explosion in Department of Justice (DOJ) and Securities and Exchange Commission (SEC) enforcement of the Foreign Corrupt Practices Act (FCPA). Starting in about 2004, FCPA enforcement has not only been on the increase from the previous 25 years of its previous existence but literally exploded. Of course, I had heard Dick Cassin and Dan Chapman, most prominently among others, talk and write about FCPA enforcement as an anti-terrorism security issue post 9/11, but I never quite bought into it because I did not understand the theoretical underpinnings of such an analysis.

I recently finished listening to the Teaching Company’s “Masters of War: History’s Greatest Strategic Thinkers” by Professor Andrew Wilson of the Naval War College. It is a 24 lecture series on the content and historical context of the world’s greatest war strategists. In his lecture on ‘Terrorism as Strategy” Professor Wilson explained that corruption is both a part of the strategy of terrorism and a cause of terrorism. After listening to his lecture and reflecting on some of the world events which invoked both parts of his explanation, it became clear to me why FCPA enforcement exploded and, more importantly, why the US government needs to continue aggressive enforcement of the FCPA and encourage other countries across the globe to enact and enforce strong international and domestic anti-corruption and anti-bribery laws.

Corruption as a Terrorist Strategy

One need look no further than last fall’s massacre of civilians in Kenya at the Westgate Mall to see how terrorists use bribery and corruption. Dick Cassin, who has consistently written about the connection between bribery-corruption and security did so again after the attack, in a post entitled “The Price for Impunity is Higher Than Ever”, where he pointed to the continued corruption in Kenya and how this corruption led to guns and terrorists being able to cross the border and carry out the attack. Cassin said that the border controls are so porous due to corruption in Kenya that in a prior episode involving the UK Serious Fraud Office (SFO), the UK government had banned certain Kenyan government officials from traveling to the UK, in large part because the country failed to take action against obvious cases of bribery and corruption. He said, “The visa ban followed a criminal investigation by the U.K. Serious Fraud Office into contracts between the Kenyan government and U.K. shell businesses. The contracts for passport controls and border security systems went to phantom overseas companies at prices about ten times the actual cost. Kenya refused to cooperate and in early 2009 the SFO was forced to end its investigation.”

Giles Foden, in an article in The Guardian, entitled “Kenya: behind the terror is rampant corruption”, was even more specific about the culture of crime and corruption in Kenya, when he that corruption was one of the signature factors, which led to the massacre. He wrote, “In Kenya crime and terrorism are deeply linked, not least by the failure of successive Kenyan governments to control either. These attacks are part of a spectrum of banditry, with corruption at one end, terrorism at the other, and regular robbery in the middle. Money that should have been spent on security and other aspects of national infrastructure has been disappearing for generations.”

He concluded his piece with this warning, “You can gesture at the transnational problem of Islamist terrorism all you like, but it’s just hot air unless you invest in proper security on the ground in your own country, with the right safeguards to civil liberties. For now Kenya must mourn its dead. But unless the corruption stops, and real investment is made in the social fabric, Kenya will once again be faced with systemic shocks it is hardly able to deal with.”

Professor Wilson made it clear that terrorists incorporate these concepts into their overall strategy. If a country has strong border controls and government officials, which I believe is the situation here in the US and UK, then the terrorist will seek out a country friendly to the US or UK, where the government officials can be bribed or corrupted and use those as ports of entry. Similarly, they can directly attack civilians in a country like Kenya where the border is so porous that both terrorist and arms can flow through with impunity.

 Corruption as a Precursor to Terrorism

But, not only can corruption be used by terrorists, ironically, it can also be the cause of terrorism. One only need look at the Arab Spring and what started it. It was a lone fruit and vegetable seller, Mohammed Bourazizi, who doused himself in paint thinner and set himself on fire in front of a local municipal office because of the corruption of Tunisian government officials and police officers. Yuri Fedotov, head of the United Nations Office of Drugs and Crimes (UNODC) has said that the Arab Spring’s call for greater democracy was “an emphatic rejection of corruption and a cry for integrity” and that the international community must listen to the millions of people involved. At the center of the Arab Spring movement was a deep-seated anger at the poverty and injustice suffered by entire societies due to systemic corruption. Do you think there was any terrorism associated with the Arab Spring?

If one wants to look back a little further in history, I would submit that China is the most prime example of the 20^th century. For all the hand wringing about “Who Lost China”, I think a clear key was the endemic corruption of the Nationalist and their allies. Their corruption helped remove the moral authority of their government and allowed the Communists to take up that mantle in the 1940s. The Nationalists were certainly defeated on the battlefield but the groundwork was laid in large part due to the corruption of their government. It really did not matter how much money, foreign aid and material that the US government provided to Chaing Kai-Shek; his cronies and his government simply stole it, sold it or gave it away for other favors.

Moving to today’s news, the government of Thailand is currently under siege by its own citizens. While economic issues are certainly a part of the problem, so is the corruption of the government. The corruption is so bad that even China has scrapped a deal to purchase some 1.2MM tons of rice from Thailand. Michael Peel, writing in the Financial Times (FT), in an article entitled “China ditches Thai rice deal over concern on corruption”, pointed out that this “is about 14 percent of [Thailand’s] annual exports.” He said “Beijing was spooked by the Thai national anti-graft agency’s probe into the rice support programme.” One Thai government official said that the Chinese pulled out of the deal because they “lacked confidence to do business with us”. Peel also wrote that this program is “soaking up $4bn a year officially and much more by other estimates.” What does it say about a country’s government that the Chinese will not do business with because they are too corrupt?

Now I understand how terrorists use corruption both as a strategy and a tool.  Moreover, when you begin to understand these inter-related theoretical underpinnings of corruption and terrorism, you can see why aggressive enforcement of anti-corruption laws such as the FCPA and UK Bribery Act is so important and is here to stay. In another blog post entitled “9/11 and the FCPA” Cassin said, “What happened that day a decade ago changed the way the world looks at corruption. The tracks of the 9/11 perpetrators and those who helped them led back to corrupt third-world countries — Afghanistan, Sudan, Somalia, Yemen, and others. Those regimes had leaky borders, weak passport control, unreliable law enforcement agencies, poor anti-money laundering programs — just what the bad guys needed.”

I do not have any insight into the discussions of the Bush Administration after 9/11 about ways to fight terrorism. But just as governments have a role to play by being part of the solution, so do private businesses. Fedotov said that preventive action was needed by Chief Executive Officers (CEOs) in their boardrooms as much as by police on the streets or civil servants in their departments: “All of us must contribute to a culture of integrity. The eyes previously closed to corruption must become the open eyes of justice and equality.” For the DOJ and the SEC this means continued enforcement of the FCPA so that companies subject to the Act will move forward to do business in a way that does not start down the slippery slope to terrorism. Simply because the FCPA was passed in the post-Watergate era does not mean that it cannot be used for today’s problem.

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