FCPA Compliance and Ethics Blog

February 4, 2014

Who Had the Worse Day – Peyton Manning or Banks and Investment Funds?

Rue the DayThe Seattle Seahawks gave the Denver Broncos an old-fashioned tail-whoopin’ in Super Bowl history on Sunday. I admit that I was pulling for the old guy, Peyton Manning to pull out another one but I did like Seattle, particularly getting +2.5 points. Not that they needed them and I certainly did not see such a beat down coming. Manning’s reaction was about what you might assume from a professional at this stage of his career, measured yet clearly disappointed. Yes he had a very bad day and one that he will probably rue the day for some time down the road.

But there was some other news on Monday that may cause other groups to do more than ‘rue the day’. You know when you are on the front page of the Wall Street Journal (WSJ) in an article about the Foreign Corrupt Practices Act (FCPA) it has the distinct possibility to be unpleasant. The said WSJ, entitled “Probe Widens Into Dealings Between Financial Firms, Libya” by Joe Palazzolo, Michael Rothfield and Justin Baer, reported that the Justice Department has joined an ongoing Securities and Exchange Commission (SEC) probe into “banks, private equity funds and hedge funds that may have violated anti-bribery laws (IE. FCPA) in their dealings with Libya’s government-run investment fund.” Ominously the WSJ noted that the Department of Justice’s (DOJ) participation had not been previously reported. As the DOJ generally investigates potential criminal violations of the FCPA and the SEC generally investigates the civil side of things this could be quite ominous indeed.

The firms named in the WSJ article included the following: Credit Suisse Group AG, J.P. Morgan Chase & Co., Société Générale SA, the private-equity firm Blackstone Group LP and hedge-fund operator Och-Ziff Capital Management Group. This is in addition to the previous announcement that Goldman-Sachs was being investigated. All of the claims relate to “investment deals made around the time of the financial crisis and afterward, these people said. In the years leading up to Libya’s 2011 revolution, Western firms—encouraged by the U.S. government—raced to attract investment money from the North African nation, which was benefiting from oil sales and recently had opened to foreign investment.”

The WSJ reported that the investigation is centering on certain third parties involved in the transactions, “At the center of the probe is a group of middlemen, known as “fixers,” operating in the Middle East, London and elsewhere, people familiar with the matter said. The fixers established connections between investment firms and individuals with ties to leaders in developing markets, including those in the Gadhafi regime.” The government is looking into these third party’s “roles in arranging deals between financial firms and Libyan officials, people familiar with the matter said. The fixers acted as placement agents, similar to those in the U.S. who have come under scrutiny for steering investments to large public retirement funds. In some cases, the sovereign-wealth-fund fixers collected a “finder’s fee”.”  It was reported that “Some of the fixers had connections to at least two of Gadhafi’s sons—primarily his second son, Seif al-Islam Gadhafi, who was most involved with the sovereign-investment fund, according to people familiar with the matter. Seif al-Islam Gadhafi was captured by rebels.” Interestingly, many of the underlying facts now being investigated came to light only after the overthrow of the Gadhafi Regime.

Further north, another group may have an occasion to rue the day. As reported in the FCPA Blog, in a post entitled “More SNC-Lavaline execs face charges in ongoing corruption probe”, two former SNC-Lavalin officials were charged by the Royal Canadian Mounted Police (RCMP) last Friday. The two men charged were Stephane Roy, a former vice-president at SNC-Lavalin, who was charged with fraud, bribing a foreign public official, and contravening a United Nations economic measures act related to Libya. Also charged was former executive vice-president Sami Abdallah Bebawi with fraud, two counts of laundering the proceeds of a crime, four counts of possession of property obtained by crime, and one count of bribing a foreign public official. These charge, added to prior charges bring the number of former SNC-Lavalin executives to four for their conduct regarding allegations of bribery and corruption in Libya. This is in addition to another two company executives who were charged for bribery and corruption regarding a company project in Bangladesh.

And finally are our friendly bankers and their continuing anti-money laundering (AML) woes. Just last week, UBS Chief Executive Officer (CEO), Sergio Ermotti, said at the World Economic Forum in Davos that it was not right to criticize bankers for criminal acts “most of the bad behavior that has landed UBS and others in hot water was caused by small groups of rogue employees and doesn’t reflect broader cultural problems in the industry.” Criticism could not come from interested stakeholders, such as stockholders, or those who had money in his bank. Indeed criticism could not even come from regulators.

Apparently some regulators take their jobs a bit more seriously than Ermotti might like. 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.”

But more than compliance officers may rue the day. Jordan’s reported that the Board of Directors at financial institutions are also concerned. In article entitled “Money laundering tops boardroom concerns amid threat of criminal prosecution” it reported “concerns in boardrooms are now at an all-time high” and corporate boardrooms in some of the country’s leading banks are now sitting up and taking notice of money laundering as a concern, after the threat of criminal prosecution became something of a reality. The recently released KPMG Global Anti-Money Laundering Survey noted that 88 per cent of executives have now placed money laundering back at the head of a list of concerns addressed in their boardrooms. Brian Dilley, global head of the AML Practice at KPMG, was quoted as saying “Anti-money laundering has never been higher on senior management’s agenda, with regulatory fines now running into billions, regulatory action becoming genuinely license threatening, and criminal prosecutions of firms and individuals becoming a reality.”

So who do you think had the worse day or even couple of days?

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

December 27, 2013

My Favorite Blog Posts from 2013

One of the best things about the Foreign Corrupt Practices Act (FCPA), UK Bribery Act and other anti-corruption practice areas is the top notch quality of commentators. While Mike Volkov regularly derides the FCPA paparazzi for being scare mongers and the FCPA Professor chastises FCPA Inc. for attempts to paint FCPA enforcement in the worst possible light so as to draw clients to their collective resources; there is also a great set of bloggers, writers and pundits who put out solid, useful and well-reasoned pieces on FCPA and Bribery Act issues. In this blog post, I would like to highlight some of my favorite posts from some of my favorite commentators over the past year.

From the Dean

If you do not know who the Dean of FCPA bloggers is you have not been looking too long or too hard. It’s Dick Cassin, who is the Founder, Editor and Publisher of the FCPA Blog, which consistently reports on all things compliance around the globe. But for me, it is when Dick writes from the heart, he is able to articulate what many of us are feeling but cannot seem to put into words. My favorite post from Dick this year was his tribute to President Kennedy on the occasion of the 50th anniversary of the President’s assassination, entitled “And So The Legend of Camelot Was Born”. Dick ended his post with the following quote from Teddy White, “He advanced the cause of America at home and abroad. But he also posed for the first time the great question of the sixties and seventies: What kind of people are we Americans? What do we want to become?” The question still stands.

From the FCPA Professor

If you have never debated the FCPA Professor, live or via email, you should. But be prepared to bring your A-Game and your authority. He posts daily and has become a great resource for guest posts over the years which challenge the status quo on a variety of legal and compliance issues. Each morning I cannot wait to see what the Professor has to say that day. However, what I have really come to appreciate is his Friday Round-Ups. Each Friday, the Professor gives us a round-up of recent FCPA and related news, articles and developments not otherwise covered by him in his Monday – Thursday posts. I should also say he saves some of his best witticism for these posts. My favorite post from the Professor this year was the milestone of his 100th Friday Round Up, appropriately entitled “The 100th Edition of the Friday Round-Up”. Tune in each Friday for another edition of this great resource.

From Jim McGrath

I continually bemoan to Jim McGrath that he needs to post blogs more often than his twice or thrice weekly output. The reason being they are so good and I want to see more of his stuff. As you might guess from the title of his blog, Internal Investigations Blog, he tends to focus on investigations; some criminal, some civil, some internal and some external. McGrath is an ex-prosecutor and tends to view things through that prism and give us a different perspective of law enforcement. He writes about investigations inside and outside the realm of anti-corruption but his insights are certainly applicable to any FCPA or Bribery Act investigation.

My favorite post from McGrath this year was his piece on 7-Eleven, entitled “Human Trafficking Concerns for 7-Eleven in Wake of Payroll Scam”. In this article he detailed the federal investigation into allegations that 7-Eleven franchisees in New York and Virginia had engaged in human trafficking and possible involvement by the franchisor through its payroll system. His piece was a cautionary tale for the compliance practitioner about the need for internal controls, internal monitoring and internal investigations. McGrath ended his post with the following, “Further, its future due diligence efforts as regards suppliers and franchisees should include a review for human rights abuses such as those suggested here. Otherwise, it will have to sell a helluva lot of Slurpees to pay the fines, costs, and disgorgements that a failure to do so will no doubt entail.” In other words, trust but verify.

From Mike Volkov

Mike Volkov has worked at the Department of Justice (DOJ) on Capitol Hill and for Big Law. He now has founded his own firm, the Volkov Law Group and writes the Corruption, Crime & Compliance blog. Mike primarily writes about anti-corruption but he also writes about health care fraud, anti-trust compliance and enforcement and many other topics. While I cannot determine if he set out to have a theme this year, Volkov has written many articles this year which focus on the role and position of the Chief Compliance Officer (CCO), the need for independence and resources required for the position.

My favorite post from Volkov was entitled “The Only Thing [In-House Counsel and CCOs] Have to Fear, Is Fear Itself”. His title is a play-off of what I believe to be the most inspiring FDR speech so that alone is worth the price of admission. He also tells one of the great stories about his days from Big Law. Volkov related that he wrote his views on the UK Bribery Act and the length of time it would take for any meaningful enforcement to take place, “I received a call from the firm’s London partners and was chastised for undermining their entire “marketing” program. (In stark contrast, many clients wrote me and thanked me for my “honesty.)” As my 16 year old daughter might say, ‘Sometimes you just have to keep it real’.

From Across the Pond

If you do not subscribe to thebriberyact.com, you are missing out on the best site for all things UK Bribery. thebriberyact.com guys, Barry Vitou and Richard Kovalevsky QC, consistently give their readers both practical insight and in-depth analysis. Their interviews of the relevant players allow all compliance practitioners to develop insight into what the top UK regulatory officials are thinking about on the Bribery Act. They also write from the very British perspective of understatement and skewering satire, which is more than a ton of fun for us Americans to read.

My favorite post which illustrated all of the above traits was from March and is entitled “Parliament report calls for Bribery Act review: Our opinion – Junk in. Junk Out.” In this post, they took on the call for the urgent scrutiny of the UK Bribery Act by a parliamentary select committee claiming that the Act has met with “confusion and uncertainty.” To this rather inane claim, the guys responded “We cannot think of a piece of legislation which has sparked much more commentary, advisory, much of it on line and completely free, including our own eponymous website.” But my favorite line was their dénouement to the British MP who brought up the need for clarification of the UK Bribery Act, “And, Tony from Alderly PLC, if you’re reading feel free to give us a call.  We can help you.”

My Favorite from 2013 (Think Big)

My favorite blog post of the year was actually posted on December 28, 2012 by Matt Ellis, Founder and Editor of the FCPAméricas blog, which was entitled “Wal-Mart, Go Big on FCPA Compliance”. The reason that it is my favorite of 2013 is because it is the one post that I have thought the most about, talked the most about, read the most about and it even inspired me to write on the issue myself. In his post Ellis challenged Wal-Mart to “go big” on compliance in the wake of its world-wide FCPA investigation and policy implementation. He wrote, “Wal-Mart should instead use the FCPA investigation, and the attention it has generated, as an opportunity. It is an opportunity to go big on compliance.” Ellis went on to detail some specific suggestions that Wal-Mart could implement to help the fight against bribery and corruption that, due to its size and market share, would be in a unique opportunity to put in place.

Within the anti-corruption compliance community there was a noted buzz about Ellis’ piece and his suggestions. I was inspired to write a blog post, entitled “Wal-Mart-Be a Leader in Compliance”, due to the ideas articulated by Ellis. Seemingly inspired by Ellis’ example, Michael Scher, writing in the FCPA Blog, in a piece entitled “Michael Scher talks to the feds”, used the Wal-Mart investigation as a jumping off point to ask the DOJ to resolve several open issues on compliance as he saw them. In others words, Ellis piece (hopefully) got not only Wal-Mart to thinking but several others of us. That is why it is my favorite blog post of 2013.

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

November 6, 2013

Hardball Negotiation with the SEC and DOJ?

Ed. Note-in light of Avon’s recent disclosures regarding its negotiations to resolve its outstanding FCPA issues, I thought about what a shareholder might say to the Board. Today’s post are those musings…

Memo: The Board of Directors of Avon      

From: An Interested Shareholder

Re: Negotiating with the SEC and DOJ in Public    

Last June I wanted to thank you for communicating so fully with myself and the rest of our shareholding group about your negotiations with the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) over your ongoing Foreign Corrupt Practices Act (FCPA) investigation and what, about now, appears to be leaning towards an enforcement action. I was pleased when it was reported in the FCPA Blog that you low-balled the SEC with your opening offer of $12MM, particularly since our legal and related expenses for the investigation to-date are reported to be in the range of $300MM. You really showed those regulators that you mean to play hard ball and not take anything from them. I had thought that your public posturing would force the SEC and DOJ to come down to your way of thinking.

However, I was a tad dismayed last week when it was reported in another post in the FCPA Blog that you said in an SEC filing this past Thursday that the “Securities and Exchange Commission offered an FCPA settlement last month with monetary penalties that were ‘significantly greater’ than the $12 million the company had offered.” Nevertheless, there was no information as to what the SEC may have offered in a counter proposal to your low ball offer? Do you think it is possible that if you started with such a low ball offer and tried to embarrass the government by making your low ball offer public, this might have caused the regulators to counter-propose a correspondingly high demand in negotiations? Well, I know you have some very good lawyers so I am sure that you considered all of this but did it work out like you planned? I and other inquiring shareholders would like to know.

I understand that this investigation has gone on since 2008 and the company is tired of the legal fees piling up and up. As a shareholder I am certainly tired of this as well, particularly in light of the reported cost of the investigation and related costs in the range of $300MM. Of course I was equally disappointed when the FCPA Blog also noted that “The Wall Street Journal reported in February 2012 that the DOJ had gone to a grand jury with evidence of FCPA violations against U.S. executives at Avon.” As I understand FCPA enforcement, it is the DOJ which enforces the criminal aspects of the FCPA while the SEC enforces things on the civil side. However, I was heartened when you publicly announced in the filing that “Monetary penalties at the level proposed by the SEC staff are not warranted.” That certainly was great information to put out to the public enforcing that you are taking a hardball approach with the SEC and telling them their fines and penalties are not deserved for a company which has gone through all Avon has during this FCPA journey.

But, I have to admit, I have wondered what you hoped to achieve by publicly chastising the SEC and perhaps the DOJ as well. I am sure that you are aware, as was reported in Barrons’ Stocks to Watch blog that “Avon’s (AVP) shares have plunged 20% since the multi-level marketer announced that the government was seeking a much larger-than-expected fine for violating the Foreign Corrupt Practices Act.” If the stock has many more of these 20% drops, how much shareholder value will be left?

The FCPA Blog reported that in the filing last week, you reported, “The DOJ may also seek higher penalties, Avon said, in which case its earnings, cash flow, and ongoing business could be ‘materially adversely impacted.’” Is this adverse impact above and beyond the $300MM in costs, depressed stock price and institutional reputation deflation? Or are we looking at more bad news?

I was somewhat buoyed when the Stocks to Watch piece reported that Morgan Stanley’s Dara Mohsenian, and team, said “For short-term oriented clients, we believe FCPA concerns are over-blown, as our estimated ~$750M market cap impact stemming from FCPA concerns, implies Avon would receive the second largest FCPA fine in history. We view this as unlikely given Avon is a direct seller, and not directly involved in government contract bids, which was the case at each of the top ten historical FCPA fines. In addition, AVP FCPA risk is more pronounced in China around the granting of direct selling licensees; however, Avon’s low China profitability limits the risk of China profit disgorgement.” I guess Mohsenian may not understand that bribing Chinese government officials is bad even if Avon is not a ‘direct seller’ but I will leave that to them. It also gave me pause to wonder if there were other countries where Avon engaged in conduct which violated the FCPA. If so, you certainly have not advised us shareholders of that fact. It might have been relevant to my decision to buy, sell or hold Avon stock, don’t you think?

Since it is not clear from your filings, how did you come up with this $750MM figure? Does that include fines and penalties from both the SEC and DOJ? Do you really think that Avon will set the US company standard for FCPA fines and penalties? If so, the company’s conduct must be much worse than you have disclosed to us shareholders over the past 5 years the investigation has been ongoing. I had thought the US Sentencing Guidelines suggested that companies which engaged in substantive and ongoing remediation would receive credit for those actions. Surely you have created the ‘best in class’ compliance program with the $300MM you have spent?

But don’t worry; if one thing has been made clear since 2008, you sure know what you are doing. Keep up the good work and you don’t have to worry about me joining any shareholder lawsuit against the company for engaging in bribery and corruption…

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

© Thomas R. Fox, 2013

October 28, 2013

Wal-Mart: Be a Leader in Compliance

Lou Reed died yesterday. He was one of the most influential figures in rock and roll history and pop culture over the past 50 years. Starting with his band, the Velvet Underground, Rolling Stone magazine said that the group’s “debut [album] The Velvet Underground & Nico stands as a landmark on par with the Beatles’ Sgt. Pepper’s Lonely Hearts Club Band and Bob Dylan’s Blonde On Blonde.” Moreover, his work was “embraced by future generations, cementing the Velvet Underground’s status as the most influential American rock band of all time.” But his influence went simply beyond rock and roll, including all things hip and cool from fashion to even introducing Dion at his induction into the Rock and Roll Hall of Fame. Reed could even be fashionable while advertising in a TV commercial for Nissan Xterra. Lou Reed was a true leader, in many areas.

In a post last week, entitled “Wal-Mart’s latest FCPA disclosure (October 2013)”, the FCPA Blog reported that Wal-Mart has spent over $155 MM in “costs incurred for the ongoing inquiries and investigations” and costs which “relate to global compliance programs and organizational enhancement.” This is in addition to the reported $157MM in costs for these matters in 2012. So for those of you keeping score at home, that is $312MM in costs related to the company’s Foreign Corrupt Practices Act (FCPA) investigation so far. Wal-Mart is well on its way to becoming the leader in the all-time costs for a FCPA investigation.

Also in the FCPA Blog last week, Michael Scher wrote an impassioned piece entitled “Wal-Mart and the FCPA: An open letter to the DOJ and SEC”. In this post Scher said, “We considered in a prior post the new spirit of tough enforcement at the DOJ and SEC and the need to seize the opportunity for more advocacy by the compliance profession, in particular to head off a resolution of the Wal-Mart investigation harmful to compliance officers and the public.” He urged the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) to thoroughly investigate and bring severe sanctions against the company, if warranted by the company’s actions. His tack differed from that of Matt Ellis, who last December, in a blog post on FCPAméricas entitled “Wal-Mart, Go Big on FCPA Compliance”, urged the company to “innovate by playing to its strengths.” These strengths include both physical size and financial resources which would allow it to “use its enormous leverage in international markets to educate foreign audiences on compliance.” Further, he wrote that “Maybe it could use the high visibility placement of its stores throughout Mexico to begin to teach communities how to identify and avoid risks of petty corruption? It could partner with local municipalities to launch reporting centers in its Supercenters.”

Both of these articles stake out positions with much merit. I would like to suggest another approach; which can be summarized as follows: Wal-Mart – Be a Leader in Compliance. The conduct in which Wal-Mart has engaged in is all in the past. The company cannot change those actions, whatever they may have been, but what the company can control is its actions going forward. So here are my suggestions on how Wal-Mart can be a leader in compliance.

Lead in the Retail Industry

The first thing that I recommend Wal-Mart do is call an executive meeting of the largest retail industry trade group that the company belongs to. I would say that Wal-Mart wants to lead the retail industry in its fight against bribery and corruption on a world-wide basis. Wal-Mart could certainly take some of Matt Ellis’ suggestions to the group about ‘going big’ on compliance. But Wal-Mart, as a leader, could say that we need to agree amongst ourselves that we will not engage in bribery and corruption, nor will we tolerate members that do so. We will urge that our members engage in “Ethical Capitalism” along the lines as laid out by Dov Seidman. We will ask that our retail industry trade group institute an industry wide Code of Practice, similar to that instituted by the International Federation of Pharmaceutical Manufacturers and Associations (IFPMA), which is designed “to stamp out bribery and corruption, particularly in emerging markets.”

Lead at the Chamber of Commerce

In the past, Wal-Mart has supported the US Chamber of Commerce’s efforts to amend the FCPA to add a compliance defense. Some argue this would level the playing field with the US government, while others claim that such a defense would help companies to understand their obligations under the FCPA. Wal-Mart can make clear that it understands quite simply that they, and other US companies, should not do business through bribery and corruption. Wal-Mart should aver that it will take the responsibility upon themselves to lead by example and put a best practices compliance program in place, not only to do business within the parameters of the FCPA but also because it makes good business sense to do so. Wal-Mart should demonstrate they now understand a compliance program is not a set of burdensome rules and procedures, which are designed to constrain how a person does business, but they are essential to the long term success of any organization. The company should embrace that concept and the belief that it should lie at the heart of the way a company does business.

Lead at the Board

While there is some debate as to how the allegations of corruption came up to the corporate headquarters or the initial company response about them; the FCPA Professor has made clear that he believes this scandal is largely a failure of corporate governance. As corporate governance starts at the Board, Wal-Mart should commit to having the most active and knowledgeable Board on anti-corruption matters there is in the US. Wal-Mart should bring in Jeff Kaplan (or some equally notable practitioner, such as the FCPA Professor) to lead Board training on the roles and responsibilities of a Board in overseeing compliance. While the Board does not have to, nor should it, delve down into the weeds of the company’s compliance program, it must understand the parameters and actions of the company’s compliance program going forward and be ready to act if allegations of bribery and corruption are brought forward.

Lead at the CCO Position

One thing that Donna Boehme consistently discusses in talks, articles, tweets, in person and just about everywhere else is that the Chief Compliance Officer (CCO) must be separate from and not report to the General Counsel (GC). The CCO cannot be in any merged unit of the company’s overall legal group. Further, the CCO should report directly to the Audit or other appropriate committee of the Board and not to the GC. The reason for this is clear; it is so that the CCO can have the true independence to make the determinations of what the company can do ethically and in compliance with all relevant national and international anti-corruption legislations. If you keep your CCO buried under the GC on the organization chart, it is clear that legal is more important than compliance.

Lead by Working with the DOJ

Lastly, I would suggest that Wal-Mart call Chuck Duross and Kara Brockmeyer and ask for a meeting. In that meeting the company should lay out all the steps it takes to be a leader in compliance. Its lawyers can certainly make clear that they will defend the company, consistent with the ethical duties and Wal-Mart’s rights as a corporate citizen. Further, the FCPA Guidance suggests that the three goals of a compliance program should be to prevent, detect and then remediate. The conduct that did or did not occur from 2000-2006 is in the past. Wal-Mart is committed to working to remediate what it can do so now. Will such conduct aid it with the DOJ and SEC? Perhaps, but more importantly, Wal-Mart should desire to show that a company can work with the DOJ and SEC, consistent with both their obligations as the enforcement agencies, all towards the goal of greater compliance.

The one thing that I disagree with Michael Scher on is that the DOJ has to hammer Wal-Mart with fines, penalties or criminal prosecutions to support the compliance profession, compliance with the FCPA and doing business ethically. There are business solutions to business problems. If Wal-Mart decides to be a leader in compliance and does so in a public manner, that can do as much for moving forward the compliance profession, FCPA and other anti-corruption law compliance and the general proposition of doing business ethically as well as severe sanctions. Further, if Wal-Mart takes these steps, it can control its future rather than simply reacting going forward.

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

© Thomas R. Fox, 2013

September 24, 2013

Don’t Butt-Slide into Second Base: Be a Better Company

Most fortunately, the final week of the baseball season is here. This means that I no longer have to contend with living in the same city as the joke of an alleged major league team – the Houston Astros, at least when the regular season ends next week, the Astros stop playing and the play-offs begin. To say that the Astros season has been ridiculous for masquerading as a Major League Baseball (MLB) team would be a compliment but it moved to the absurd last week as one play summed it up better than anything that I could have made up – the butt-slide play. In this play, Astros shortstop, Jonathan Villar, slid face first into the butt-cheek of Reds second baseman Brandon Phillips. (For a video clip of the play, click here.)

The butt-slide play sums up the Astros 2013 season of futility. From the start of the season, with a team made up of largely AAA players, to the end of a season made up mostly of A-AA players. In between we’ve been treated to the Astros ending a 23 year relationship with the Astros wives charity, via a terse one-line email (i.e. you’re fired); to the interview of owner Jim Crane who informed us that he had made $100MM in the trucking business so he must be the smartest guy in the room; to a current 105 losses while on their way to yet another record-loss season; let’s not forget their TV contract with Comcast and the fabulous viewing figures recorded on Sunday by the Nielsen rating service, which racked up a fantastic score of 0.00, with an average audience of zero households viewing the game and, finally, all of this while being the most profitable team in the history of MLB. But, still, the ‘butt-slide’ says it all. When your slide into second base becomes not only a metaphor for the team’s entire season but fodder for an entire nation’s laughingstock, it really is time to cash it in.

Yesterday in the FCPA Blog, in a post entitled “Who Speaks for the Compliance Officers?”, Michael Scher said “The [International] Chamber [of Commerce] apparently will not be satisfied until there is little or no enforcement.” Scher’s statement was based on the letter that the International Chamber of Commerce (ICC) sent to the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) complaining about the FCPA Guidance, issued last year, which as Scher stated, “The letter has been correctly criticized for off-target “belly-aching.”” Scher’s criticism follows that of Michael Volkov,  see his blog post “FCPA “Reform”: Another Shot in the Dark” in Corruption,  Crime and Compliance and Jessica Tillipman’s blog post “Let’s Just Be Honest for a Moment” also in the FCPA Blog.

Instead of whining and belly-aching there might be another way for corporate America, and indeed the ICC, to approach the Foreign Corrupt Practices Act (FCPA) compliance. That path was laid about by Leslie Dach, in an article in the October issue of the Harvard Business Review (HBR), entitled “Don’t Spin a Better, Story. Be a Better Company”. The article was quite interesting for the following information which appeared with the author’s credentials, “Leslie Dach wrote this column shortly before stepping down as the executive vice president of corporate affairs at Walmart. He previously served as vice chairman of Edelman, a global communications firm.” While this statement certainly does not make clear why Dach left Wal-Mart, (i.e. did he ‘resign to pursue other opportunities’?) it does give one pause for some reflection.

Nevertheless, I found Dach’s thesis quite interesting. Dach’s bottom line is that he believes “it is a huge mistake to assume that once you’ve explained your perspective, the public will embrace you…I know what doesn’t work: thinking you can tell a better story without actually becoming a better company.” Ultimately Dach advises, “If a drumbeat of criticism starts up against your company, don’t rush to raise your voice above it. Stop to listen. And commit to getting better.” Dach detailed several areas inside the company where goals such as sustainability, women’s economic empowerment and more-healthful food were “compatible with building a stronger business.” He cited Wal-Mart’s increased efficiency of its trucking fleet and turning its waste stream into recycling income as examples of sustainability. He said that buying from local, women-owned businesses strengthened the company’s ties with local communities. He said that offering more healthful food meant more relevant products for the company’s consumers.

I thought about Dach’s ideas in the context of Wal-Mart and other companies which are going through very public FCPA-based or other corruption investigations. Publicly released information indicates that Wal-Mart may be spending over $1MM per day on their ongoing internal investigation and getting their compliance program up to speed. But what if the company took it a step further and applied Dach’s ideas to compliance. In his article he wrote about the company’s efforts to source $20bn of products from women-owned businesses. This took a concerted effort to identify which merchandising areas had the potential to produce such an amount of product, which the company could sell in its stores. This was coupled with incentives for the company’s buyers to show progress in purchasing goods from women-owned enterprises. But even more the company “took a 360-degree approach to the work, engaging our entire supply chain and our customers, communities, and employees.” Here is the part I liked best about Dach’s piece,  while the tone was set by Chief Executive Officer (CEO) Mike Duke “ultimately, the challenge isn’t the CEO’s job, or one person’s job; it is everyone’s job.”

Last December Matt Ellis wrote a great piece on his blog site, FCPAméricas, entitled “Wal-Mart, Go Big on FCPA Compliance”, where he challenged the company to innovate in compliance “by playing to its strengths.”  He cited examples of work in the company’s supply chain; its opportunities to “educate foreign audiences on [anti-corruption] compliance” through teaching persons in the communities where it has locations on “how to identify and avoid risks of petty corruption.” Ellis ended his piece with the following, “Wal-Mart has the spotlight. Time will tell if it chooses to use it.”

I think that Dach’s challenge to create a better company, coupled with Ellis’ specific challenge for Wal-Mart to go big for compliance, present an excellent juxtaposition to the whining and belly-aching of the ICC. Rather than claim that the FCPA is (1) too difficult to understand; (2) too hard to follow; and (3) unfair, they could advocate Dach’s approach to use the law as a basis to become better businesses. I cannot think of any non-criminal enterprises which aver that they want to do business unethically and corruptly. Companies faced with intense FCPA or other anti-corruption law scrutiny, such as GlaxoSmithKline PLC (GSK), might well take this opportunity to move outside the ordinary and become better companies by doing compliance right and better. Such actions would not only put them in better stead with the regulators but make them better companies. In other words, don’t simply whine like the ICC and butt-slide into second base.

Also, as it appears Leslie Dach is no longer working for Wal-Mart, they may want to give him a call to help them figure out how to do so.

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Episode 6 of the FCPA Compliance and Ethics Report is up. In this episode, I talk about the role of senior management in a compliance program. To watch or listen, click here.

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

© Thomas R. Fox, 2013

August 6, 2013

Scalping Tickets and the Use of Fake Invoices in China

I long ago learned that there is no such thing as a ‘sold out event’; as the scalping of and for tickets to sports events is a long and time honored tradition. However with the advent of such websites as StubHub.com, it certainly has never been easier to purchase tickets to any concern or sporting event. Please note that I did not say cheaper, just easier. In many ways the scalpers have adjusted by setting up computer programs to gobble up all the tickets to an event within minutes of them going on sale so that your only choice is now the equivalent of online scalping. But if you are willing to pay, there is a well-developed market that will sell tickets to you.

This long honored tradition of scalping has come to impact companies under the jurisdiction of the Foreign Corrupt Practices Act (FCPA) in China. In an article in the Sunday New York Times (NYT), entitled “Coin of Realm in China Graft: Phony Receipts”, reporter David Barboza writes about the buying and selling on the black market of business and tax receipts. One way this Chinese scalping business does differ from the American business of scalping is that many of the receipts sold in China are fakes. Hopefully if you buy tickets to a concert of sporting event here in the US, the tickets are genuine.

However, Barboza writes that “To begin to comprehend China’s vast underground economy, one need only visit this city’s major transportation depots and watch as peddlers openly hawk fake receipts. A scalper mumbles, “Fapiao, fapiao,” or receipts, at the Shanghai Railway Station. The trade in receipts is more or less open. “Receipts! Receipts!” calls out a woman in her 30s to passers-by as her two children play near the city’s south train station. “We sell all types of receipts.” While many buyers use them to defraud employers and evade taxes, they have recently come under FCPA and UK Bribery Act scrutiny due to the ongoing investigation of GlaxoSmithKline PLC (GSK) which apparently is “still trying to figure out how four senior executives at its China operation were able to submit fake receipts to embezzle millions of dollars over the last six years. Police officials say that some of the cash was used to create a slush fund to bribe doctors, hospitals and government officials.”

In many cases it is not the paper that the receipts are printed on that is fake, only the information contained therein which is fraudulent. For instance, the unused receipts from a hotel may be pilfered and “then resold to dealers and enter the black market. In Shanghai, companies actually advertise by fax that they buy unused receipts. One such advertisement sent by fax read “Due to our diverse accounting service for other companies, we now need invoices from various industries (13% or 17% VAT),” one ad sent out last week by the Shanghai Fangyuan Accounting Agency reads, referring to the value-added tax receipts. “If your company has leftovers of 13% or 17% VAT invoices, we can offer good rates to buy them.”

Further, “Signs posted throughout this city advertise all kinds of fake receipts: travel receipts, lease receipts, waste material receipts and value-added tax receipts. Promotions for counterfeit “fapiao” (the Chinese word for an official invoice) are sent by fax and through mobile phone text messages. On China’s popular e-commerce Web site, Taobao.com, sellers even promise special discounts and same-day delivery of forged receipts.”

As bad as this system of selling fraudulent invoices is, it pales beside the damage created by the sale of invoices by government officials themselves. Barboza notes that “state employees, whether they work for government agencies or state-owned enterprises, seem as eager as anyone else to bolster their compensation by filing fake invoices.” He quoted Wang Yuhua, an assistant professor of political science at the University of Pennsylvania and the author of a study on bribery and corruption in China, for the following “Their salaries are relatively low, so they supplement a lot of it with reimbursements. This is hard to monitor.”

Barboza reported that “In the Glaxo case, Chinese investigators say the drugmaker’s top Chinese executives worked closely in recent years with a Shanghai travel agency to falsify documents. For instance, airline ticket receipts were filed for trips that never took place and when executives listed 100 guests at a conference, perhaps only 80 showed up, making it possible to file false inflated receipts and thus embezzle from Glaxo’s London headquarters.” Six other international pharmaceutical companies have also acknowledged that they have used this travel agency in the past three years.

Barboza detailed that such corruption schemes were not unknown to FCPA enforcement. He cited to Securities and Exchange Commission (SEC) complaints against IBM where its “employees in China created “slush funds” with its travel agencies and business partners, partly to “provide cash payments and imported gifts, such as cameras and laptop computers to Chinese government officials.” In another SEC Complaint, it found that “between 2005 and 2010, Wyeth, a division of the drug company Pfizer, had “submitted false or inflated invoices for organizing large-scale consumer education events.””

Even yesterday, the FCPA Blog reported, in a post entitled “Baxter confirms China payment offenses”, that the company in question paid for an event which never occurred. It paid a travel agency identified as the Beijing Youth Travel Service Co. approximately $15,100 for a conference at the Crowne Plaza Shenyang Parkview. The article quoted the Wall Street Journal (WSJ) which had written, “But an employee in the banquet and meeting department of the Crowne Plaza Shenyang Parkview said no event was organized for that date involving Baxter or medicines. She also said the hotel had no record of a meeting on that date organized by the Beijing Youth Travel Agency.”

Barboza refers to some un-named analysts who “say the cost of monitoring is high and would involve the tedious work of verifying millions of receipts by calling hotels, airlines and office supply stores and scrutinizing countless transactions for signs of fraud.” My response to these analysts is to say that if your compliance risks are known for a certain profile, then you should devote the necessary resources to making sure you are in compliance in that area. Eric Carlson pointed out in his three post series in the FCPA Blog, entitled “Corruption Risk—China Travel Edition”, that there have been a plethora of FCPA enforcement actions related to travel in China. With regard to the abuse through travel agencies, Carlson wrote about four different corruption scenarios, including (1) event abuse planning; (2) mixture of legitimate and illegitimate travel; (3) other collusion with travel agencies; and (4) parallel itineraries. So those risks are well known and have been documented.

So while scalping tickets may be a time honored tradition here in the US; the buying and selling of real or fake invoices can lead to some serious trouble in China. While there has not yet been any employees of non-Chinese companies who went to jail for the fraudulent use of a real or fake invoice, that may be just around the corner. And I can assure you, wherever you may not wish to be, there cannot be many places you do not want to be more than a Chinese prison.

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

© Thomas R. Fox, 2013

July 16, 2013

Travel and Corruption Issues in China

Ed. Note-last month Eric Carlson had a three blog post in the FCPA Blog where he discussed travel risks and corruption in China. I asked Eric if I could combine his posts and repost them as one blog post on this site, which he graciously allowed me to do.

In any country, paying for travel for government officials, customers at state-owned enterprises, or customers at purely private enterprises can present corruption risks. Many worthy publications have addressed travel risks generally and how to minimize those risks, including establishing a true business purpose for the trip, ensuring transparency with the recipient’s organization, pre-approving a detailed itinerary to ensure that sightseeing/leisure does not predominate, paying expenses directly to vendors where possible, avoiding unnecessary stopovers or family members or friends accompanying, etc.

In my experience counseling clients operating in China and conducting numerous internal investigations in China, there are several travel-related risk areas that occur uniquely, differently, or more frequently in China: (1) abuse of travel agencies; (2) “training” trips, factory “inspections,” “study trips,” and other euphemisms for disguised leisure travel; (3) contractual travel; and (4) travel “required” by PRC law.

This series will address each area in turn, with the backdrop of other China-related enforcement actions based in whole or in part on improper travel benefits: Lucent (2007), Siemens (2008), Control Components (2009), Avery Dennison (2009), UTStarcom (2009), Daimler (2010), Alliance One (2010), IBM (2011), Biomet (2012), and Pfizer/Wyeth (2012).

Abuse of Travel Agencies

While many travel agencies in China provide legitimate services, some travel agencies — regardless of their size and reputation — are a common way for employees to circumvent company procedures.  This can occur in a variety of ways, some of which are interrelated:

Event planning abuses. In addition to arranging air and train tickets and hotel bookings, many travel agencies in China also serve as meeting and event organizers. Company employees may collude with travel agencies or their employees to submit inflated fapiaos (tax-valid receipts) or fapiaos for events that never actually occurred. The fapiaos are submitted to the company for reimbursement, and the (excess) funds are either pocketed or used for other purposes (bribes, employee bonuses, slush funds, off-book accounts, etc.).

Mixture of legitimate and illegitimate travel. Sometimes money paid from the company to a travel agency for legitimate travel is, with the complicity of company employees, siphoned off for use in unapproved travel for government officials or company customers arranged by the travel agency.

Other collusion with travel agencies. Another practice is to have a company employee book a plane ticket through a travel agency and pay for the ticket, which then issues a fapiao.  The employee then cancels the trip, gets the money refunded from the colluding travel agency (minus a “service fee” withheld by the travel agency — a common amount is 15%), and takes the fapiao to the company to get reimbursed. As above, the funds are then either pocketed or used for other (often improper) purposes. The website Travel Sky) can be used to check whether a domestic plane ticket has actually be used.

Parallel itineraries. A company employee requests the travel agency to prepare two itineraries: one for internal company approval that shows little or no sightseeing, no per diems, etc., and a second “real” itinerary with extensive sightseeing, per diems (often handed out in an envelope at the airport), lavish or inappropriate hospitality, etc. (These parallel contracts are sometimes referred to in China as “yin-yang contracts”.)

Variation: the travel agency prepares, and the company approves, an itinerary that reflects a modest class of travel for government officials or customers (economy-class flights, business hotels), but the actual travel benefits provided by the travel agency are luxury (first-class flights, five-star/resort hotels, money for shopping, etc.). The company (via its employees who collude with the travel agency) then reimburse the travel agency for these extra “upgrades” through other means.

“Package deals.” A company employee requests a travel agency to organize flights, hotels, local transportation, etc. (This is particularly common for travel outside of China, where logistics could be difficult for someone who does not have strong English abilities.) The travel agency then submits an itinerary (and later, a fapiao) with the description of package deal, which can easily conceal cash per diems, sightseeing, etc.

Companies can mitigate risks related to travel agencies by (1) ensuring that invoices, receipts, and fapiaos contain details; (2) comparing final itineraries to draft itineraries for approval; (3) providing training (in Chinese) to local employees on this topic; (4) ensuring that thorough due diligence is undertaken on travel agencies; (5) assigning the responsibility of contacting travel agencies and arranging details with them to personnel in the organization who have compliance training and are not themselves involved in the planned travel; (6) flagging this area as a specific topic for a compliance audit; (7) changing travel agency vendors from time to time, and (8) for companies with sufficiently large operations in China, bringing travel and event planning in-house.

Companies in China often pay for training trips for their customers.  While many of these are legitimate, many are abused for improper purposes. Some of the common fact patterns include one or more of the following:

  • the training trip involves a small portion of training time and a large portion of recreation time;
  • the trainings are actually not technical in nature, but are sales promotions for the company’s products or services (often with a healthy helping of leisure/recreation);
  • the training is held frequently (quarterly, annually) when the subject matter has not changed since the previous training;
  • the training is not reflected in any underlying sales or services agreement;
  • the training is held at a resort or tourist location that lends itself to recreation;
  • the training is held internationally when the meetings could have been held as effectively (or more effectively) in China; and/or
  • the number or rank of people is not appropriate to the purported training.

A variation of the “training” trip risk area above are euphemisms for paid travel that purport to have a business purpose but may be predominantly or exclusively leisure travel. Euphemisms that could be used for either legitimate purposes or to disguise improper travel include “factory tours” or “factory inspections”, “product demonstrations”. “study trips”, “experience exchange seminars” , “technical liaison meeting”, “academic promotion activities”.  In addition to the risk areas listed immediately above for training trips, common fact patterns that could indicate abuses in these additional scenarios include:

  • the customer already has an adequate knowledge of the technology and does not require a training session;
  • the individuals attending are not people with a technical background (e.g., engineers) who would be well-positioned to do a meaningful inspection or to contribute to or benefit from a technical meeting;
  • the attendees are selected by the seller paying for the trip rather than the buyer;
  • the inspection or demonstration is held on a Friday or Monday or immediately before or after a holiday to ensure a long weekend of recreation before or after the event;
  • the company employee pays for shopping trips or other “extra” expenses for the delegation that are reimbursed by the company as something else; and
  • a relative (or mistress) of the government official/customer also travels with the group as a temporary company “employee.”

We have worked with clients to structure and modify compliance programs for travel that involve ensuring a true business purpose for all such trainings, robust internal pre-approval, full transparency with the customer’s legal/compliance department, and developing “gray lists” and “black lists” of locations where trainings should not take place.

Contractual Travel

In some cases, the training trips and factory inspections referenced in Part II are included in a sales contract. The cost of the training is often included as “cost of goods sold” and simply added to the cost of the sales contract. (Various reasons are given for wanting to include the travel in the contract, including that the purchaser would not be able to get the travel approved internally otherwise, which may signal a red flag.)

While inclusion in the contract provides a small measure of transparency, in many cases the contractual clause desired by the purchases contains only a very high-level description of travel, often without important details such as what costs will/will not be covered, when the travel will occur, who will select the attendees, the number of attendees, duration of the trip, and when travel must be concluded.

In addition, we have handled many cases where the lack of specificity in the agreement has led to commercial disagreements: the purchaser comes back to the seller many months (even years) after the contract has been signed, asserting that the seller “owes” them certain travel benefits under the contract, even though the product/service has long since been delivered, undercutting any business purpose for the “training” or “factory inspection.”

Companies increasingly are seeking to ensure that sales contracts that include provisions for sponsored travel include more granular details about travel (often included in an annex or appendix to the contract), and that the travel benefits are fully transparent with the counterparty. Moreover, in many cases companies are now declining to pay the costs for customer visits, preferring for those costs to be borne by the customer directly (even if the ultimate contract price is reduced by a proportionate amount).

Travel Required Under PRC Law

Several PRC laws/regulations, particularly in the customs and quality inspection area, specify that PRC government officials are to travel to a foreign location to inspect products to ensure that the products are fit for import into China.  Most of these statutes, however, are silent on who is to pay for the travel.  In many cases, PRC government officials assert that the foreign company importing the product should pay for the travel.

To demonstrate lack of corrupt intent, some companies obtain legal advice from a law firm located in China on the precise requirements of and interpretation of the regulations.  (We have handled several cases where local employees translated regulations into English in a manner that supports their own interpretation.)

Further, companies can work with the government entity to create additional transparency, such as a letter from the entity specifically authorizing a certain official(s) to travel on certain dates to certain locations and specifying what costs will and will not be covered.

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Eric Carlson, a contributing editor of the FCPA Blog, is a Beijing-based partner at Covington & Burling LLP. He specializes in anti-corruption compliance and internal investigations, with a particular focus on China and other regions of Asia. He speaks Mandarin and Cantonese and can be contacted at ecarlson@cov.com.

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

July 11, 2013

What is ‘Acceptance of Responsibility’ Under the US Sentencing Guidelines?

One of the things that I am often asked is how are fines and penalties calculated for Foreign Corrupt Practices Act (FCPA) violations? The Department of Justice (DOJ)/Securities and Exchange Commission (SEC) FCPA Guidance has the following explanation. First, the offense level is calculated pursuant to the US Sentencing Guidelines (USSG) §§2C1.1 or 2B1.1, by starting with the base offense level and increasing it as warranted by any applicable specific offense characteristics. The next reference is made to the organizational guidelines found in Chapter 8, which lay out the structure for determining the final advisory guideline fine range for organizations. The base fine itself consists “of the greater of the amount corresponding to the total offense level, calculated pursuant to the guidelines, or the pecuniary gain or loss from the offense.”

The base fine is then multiplied by “a culpability score that can either reduce the fine to as little as five percent of the base fine or increase the recommended fine to up to four times the amount of the base fine.” As described in USSG §8C2.5, this culpability score is determined by taking into account numerous factors “such as the size of the organization committing the criminal acts; the involvement in or tolerance of criminal activity by high-level personnel within the organization; and prior misconduct or obstructive behavior.” The culpability score can be reduced if the “organization had an effective preexisting compliance program to prevent violations and if the organization voluntarily disclosed the offense, cooperated in the investigation, and accepted responsibility for the criminal conduct.”

I thought about some of the basis for the calculations in the context of the ongoing reports about News Corp’s chairman, Rupert Murdoch, and his remarks which were recorded in March of this year when he spoke to a group of journalists from The Sun, a News Corp entity. The FCPA Blog, in a post entitled “On secret tape, Murdoch reportedly acknowledges Fleet Street’s ‘corrupt culture, reported that “A covert recording from March seems to capture News Corporation chairman Rupert Murdoch suggesting that bribery is part of the Fleet Street culture.” The Guardian, in an article entitled “Rupert Murdoch revealed – tape exposes the media mogul’s real opinions”, detailed further excerpts from the recording by noting he was annoyed with the police who he believes are “incompetent”, additionally he was not sure that setting up the Management and Standards Committee (MSC) which performed the company’s internal investigation was a good idea and, finally, Murdoch “lays into lawyers, accusing them of getting rich by trawling through millions of emails.” Just when you think it cannot get any worse (or better – depending on your perspective) The Guardian states, “He talks of the News of the World in personal terms: “We got caught with dirty hands, I guess” before launching into a further attack on the police: “The cops are totally incompetent … It’s just disgraceful what they’re doing … It’s the biggest inquiry ever, over next-to-nothing.””

How is that for ‘tone-at-the-top’? Even the News Corp owned Wall Street Journal (WSJ), in an article entitled “Murdoch Recording Piques Interest of Police, Lawmakers”, said “Mr. Murdoch’s remarks in the meeting sharply contrast with his public contrition over the newspapers’ alleged use of illegal reporting tactics.” But more than just this general statement how would Murdoch’s statements be analyzed under the culpability score used in FCPA cases? Would an admission by Murdoch that there was a culture of bribery and corruption on Fleet Street weigh under the factor of “tolerance of criminal activity by high-level personnel within the organization”? How about the potential reduction for accepting responsibility for the criminal conduct?

Murdoch’s remarks are in stark contrast to other reports of the actions taken by News Corp. In an article in the July issue of Corporate Counsel magazine, entitled “Doubling Down”, reporter Sue Reisinger profiled News Corp General Counsel (GC) and Chief Compliance Officer (CCO) Gerson Zweifach. In her article, Reisinger discussed the MSC, which led the company’s internal investigation of not only the bribery allegations but also the phone hacking scandal. It was information discovered in the course of the MSC’s internal investigation, and later turned over to the relevant government authorities, which led to many of the arrests of News Corp employees. The MSC and its work have clearly been one of the aggressive approaches taken by News Corp during the investigation. But The Guardian reported Murdoch may feel differently about such cooperation now when it stated, “He admits to a measure of panic as the reason for setting up the MSC to provide information to the police: “The police were about to invade this building … it was done to protect the business.””

Reisinger also reported that the FBI has opened its own investigation of News Corp. She also reported that the DOJ “has said that it’s examining whether the company accessed voicemails of 9/11 victims, as well as whether it violated the Foreign Corrupt Practices Act”. So it is probably very helpful to News Corp that it instituted a new compliance program, based in part on the settlement of a shareholder derivative lawsuit. Reisinger said “A commitment to the program is included in the settlement document. The program seeks a more centralized approach to managing risk while still allowing for local autonomy.” Putting together a best practices compliance program during the pendency of a FCPA investigation is certainly one of the most powerful steps a company can take to help to ameliorate a potential FCPA penalty, the Parker Drilling enforcement action has certainly made that clear.

I would normally say that actions speak louder than words. But what is the DOJ to make over the taped remarks of Murdoch? The Guardian article ends with the following “But the real significance of the tape is that it reveals the true, unexpurgated Rupert Murdoch. As I have said often since the hacking scandal first broke, as the man at the top I believe he has been responsible for the journalistic culture at Wapping. This tape appears to prove my point.” I no longer think it is a question in the News Corp investigation “What did the President know and when did he know it?” If such a culture existed and the person who knew about it and tolerated it is still at the helm, does this impact the DOJ’s analysis under either the USSG or the culpability score? Further, does it matter if you belittle your own internal investigation, even up to the point where you suggest it should have never been done?

We do know that the DOJ takes quite a dim view of any company which settles and then claims that, you know we really didn’t do anything wrong. Standard Chartered shows us what the DOJ’s response was when its chairman claimed that the bank had engaged in “no wilful act to avoid sanctions; you know, mistakes are made – clerical errors” related to its myriad of conduct in doing business with Iran, in violation of US trade sanctions. The response was that two weeks later, he was required to eat those words when he “said those comments were “both legally and factually incorrect”” and retracted them. “Standard Chartered Bank unequivocally acknowledges and accepts responsibility . . . for past knowing and wilful criminal conduct in violating US economic sanctions laws and regulations”.

But that was after all a Bank which had admitted to its violations, agreed to a Deferred Prosecution Agreement (DPA) and to pay a large fine. Here News Corp has made no such admission or agreement. And since acceptance of responsibility is only one factor under the culpability score, perhaps News Corp can garner more credit for its cooperation and creation of a best practices compliance program. Then again perhaps it is all simply a misunderstanding. The Guardian also reported that “A statement released by Murdoch’s spokesman said: “Mr Murdoch welcomes the opportunity to return to the Select Committee and answer their questions. He looks forward to clearing up any misconceptions as soon as possible.”

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

© Thomas R. Fox, 2013

July 9, 2013

Significant FCPA Enforcement Actions in 2013 – Individuals

77 years – that is how long Great Britain went without a native son winning the Men’s Singles title at Wimbledon. This past Sunday that drought ended when Andy Murray won the coveted trophy in a straight set win over Novak Djokovic. This year’s championship was a wild ride, with the incredible upsets in the early rounds and the decimation of the women’s favorites by the semi-finals. But it was Murray’s year and his hoisting the Wimbledon Cup on Sunday was certainly one for the ages. Well done, Andy.

As singles tennis is that most individual of sports, it seems proper that in today’s post, I will discuss the individual Foreign Corrupt Practices Act (FCPA) enforcement actions in the year to-date. Both the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) made clear in the first half of this year that they will aggressively enforce the FCPA against individuals. Mike Volkov has gone so far as to predict that “It is clear that FCPA enforcement for 2013 will go down as the year of criminal prosecutions of individuals.”

A.     BizJet Executives

The lineup of those three BizJet executives and one employee involved in these enforcement actions is as follows:

  1. Bernd Kowalewski – President and Chief Executive Officer (CEO);
  2. Peter DuBois – Vice President of Sales and Marketing;
  3. Neal Uhl – Vice President of Finance; and
  4. Jald Jensen – Regional Sales Manager

Defendants DuBois and Uhl pled guilty in January, 2012 and had their pleas unsealed on April 5, 2013. Defendants Kowalewski and Jensen were charged by Criminal Indictment, also in January, 2012, but are still at large today. The DOJ Press Release states that “The two remaining defendants are believed to remain abroad.” The bribes were characterized as “commission payments” and “referral fees” on the company’s books and records. Payments were made from both international and company bank accounts here in the US. In other words, this was as clear a case of a pattern and practice of bribery, authorized by the highest levels of the company, paid through US banks and attempts to hide all of the above by mis-characterizing them in the company’s books and records.

B.     Alstom Executives

In April, Two individuals from a company later identified as Alstom were charged or had their charges made public in April. According to a DOJ Press Release dated April 16, 2013, “Frederic Pierucci, 45, a current company executive [of Alstom] who previously held the position of vice president of global sales for the Connecticut-based U.S. subsidiary, was charged in an indictment unsealed yesterday in the District of Connecticut with conspiring to violate the FCPA and to launder money, as well as substantive charges of violating the FCPA and money laundering.” Pierucci was arrested. Additionally, former Alstom executive “David Rothschild, 67, of Massachusetts, a former vice president of sales for the Connecticut-based U.S. subsidiary, pleaded guilty on Nov. 2, 2012, to a criminal information charging one count of conspiracy to violate the FCPA.” In May, the FCPA Blog reported that a third Alstom executive was charged. William Pomponi, a former Vice President of Sales for Alstom’s US subsidiary was indicted for conspiring to violate the FCPA and to launder money, as well as substantive FCPA and money laundering offenses.

All three were charged around the same set of facts, that being the payment of bribes to officials in Indonesia, including a member of Indonesian Parliament and high-ranking members of Perusahaan Listrik Negara (PLN), the state-owned and state-controlled electricity company, in exchange for assistance in securing a contract for the company to provide power-related services for the citizens of Indonesia, known as the Tarahan project. The charges allege that, in order to conceal the bribes, the defendants retained two consultants purportedly to provide legitimate consulting services on behalf of the power company and its subsidiaries in connection with the Tarahan project.

C.     Frederic Cilins

In a blog post, entitled “The Danger of FCPA “Proactive” Investigations”, Mike Volkov stated “At the recent Dow Jones Compliance Symposium in Washington, D.C., an FBI official warned the attendees that the Shot Show debacle would not deter law enforcement from using proactive investigations techniques. It was a stark warning because it was realized in less than thirty days.” This was dramatically demonstrated with the arrest of Frederic Cilins, in April.

An article in the Financial Times (FT), entitled “FBI sting says that ‘agent’ sought to have mining contracts destroyed”, reported that “Frederic Cilins held the last of a series of meetings with the widow of an African dictator to discuss what she was going to do with some sensitive documents.” What were these ‘sensitive documents’? The FT reported that it had seen “some of the documents” and “According to one copy of a contract seen by the FT” it appeared to agree to pay $4m the wife of the then President of the country to help to secure rights to a mining concession in Guinea. Unfortunately for Cilins he “did not realise that the woman he was talking to was wearing a wire and that FBI agents were watching. As he left the meeting, the agents arrested him carrying envelopes filled with $20,000 in cash, the indictment says. That was a pittance compared with the $5m he was taped offering the dictator’s widow during what US authorities say was a two-month campaign to tamper with a witness and destroy records.”

Cilins has been charged with obstruction of justice and was remanded to Manhattan for trial. After bail was initially set at $15MM, Cilins requested that it be reduced. The trial judge, William H. Pauley III threw the $15MM bail out, and set a trial date for Dec. 2, 2013.

D.    Uriel Sharef – Siemens

Uriel Sharef was a former officer and board member of Siemens. According to the SEC Press Release announcing resolution of his matter, “The settlement resolves the Commission’s civil action against Sharef for his role in Siemens’ decade-long bribery scheme to retain a $1 billion government contract to produce national identity cards for Argentine citizens. The final judgment, to which Sharef consented, enjoins him from violating the anti-bribery and related internal controls provisions of the FCPA and orders him to pay a $275,000 civil penalty, the second highest penalty assessed against an individual in an FCPA case.”

The SEC Press Release stated that “Sharef met with payment intermediaries in the United States and agreed to pay $27 million in bribes to Argentine officials. Sharef also enlisted subordinates to conceal the payments by circumventing Siemens’ internal accounting controls.”

E.     Paul Novak – Willbros

In April, the DOJ announced the sentencing of Paul G. Novak, a former consultant of Willbros International, Inc., a subsidiary of the Houston based Willbros Group, for his role in a conspiracy to pay more than $6 million in bribes to government officials of the Federal Republic of Nigeria and officials from a Nigerian political party. According to the DOJ Press Release announcing the sentencing, “Novak pleaded guilty to one count of conspiracy to violate the FCPA and one substantive count of violating the FCPA. Novak admitted that from approximately late-2003 to March 2005, he conspired with others to make a series of corrupt payments”. Novak was sentenced to serve 15 months in a federal prison.

The sentencing continues the long running saga of the company over efforts by Willbros, Novak, certain employees and others to make a series of corrupt payments totaling more than $6 million to various Nigerian government officials and officials from a Nigerian political party to assist Willbros and its joint venture partner, a construction company based in Mannheim, Germany, in obtaining and retaining the Eastern Gas Gathering System (EGGS) Project, which was valued at approximately $387 million. The EGGS project was a natural gas pipeline system in the Niger Delta designed to relieve existing pipeline capacity constraints.

F.     Direct Access Partners

In May, the FCPA Blog, in a post entitled “Two traders and a bank official charged for Venezuela bribes”, reported that two brokers, Tomas Alberto Clarke Bethancourt and Jose Alejandro Hurtado, affiliated with the New York brokerage firm Direct Access Partners, LLC (DAP) were charged in federal court with paying at least $5 million in bribes to María de los Ángeles González de Hernandez, an official at a state-owned Venezuelan bank, Banco de Desarrollo Económico y Social de Venezuela (BANDES) to win bond trading work. After receiving the bribes, she authorized fraudulent trades, which generated more than $66 million in revenue on trades in Venezuelan sovereign or state-sponsored bonds for DAP. The DOJ also charged her with Travel Act conspiracy and substantive offenses, and two money laundering-related counts.

In June, the FCPA Blog reported, in a post entitled “Brokerage boss charged in Venezuela kick back scheme”, that Ernesto Lujan, the former head of the Miami office of DAP, was arrested for conspiracy to bribe an officer at a state-owned Venezuela bank in exchange for bond trading business. He was charged with substantive FCPA and Travel Act offenses and conspiracy counts. He was also charged with two money laundering-related counts.

Both the DOJ and SEC have made clear it that they will prosecute individuals for FCPA violations. As noted by Mike Volkov, the DOJ is going to prosecute individuals when they have strong evidence of criminal conduct and will pick those individual cases where prosecutions are warranted. Further, the BizJet prosecutions demonstrate that the DOJ will continue to use all investigative techniques to build criminal cases including wiring cooperating witnesses and recording telephone calls to make their criminal cases. Finally, the DOJ will prosecute officials when they have evidence of obstruction or witness tampering and will also use the Travel Act to bring enforcement actions.

It has been quite a first half of the year.

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

© Thomas R. Fox, 2013

July 8, 2013

Significant FCPA Enforcement Actions in 2013 – Corporate

Last week I used the 150th anniversary of the Battle of Gettysburg as a prism to look at present day compliance issues. Today I want to go in a different direction to introduce today’s topic. Jim Hudson died last week. Hudson was perhaps the lesser known of three football players whose lives intersected in an unusual arc. Hudson played professional football for the New York Jets and is best remembered for intercepting a pass by Earl Morral near the end of the first half of Super Bowl III, where the Jets upset the heavily favored Baltimore Colts. But here in Texas, Hudson is remembered for two things. The first is as a starting defensive back on the first NCAA national football championship team for the Texas Longhorns in 1963. The second is that he came off the bench to throw the winning touchdown pass to receiver George Sauer, when the Longhorns beat the Number 1 ranked, and previously undefeated, University of Alabama, on January 1, 1965 in the Orange Bowl. The quarterback of the Crimson Tide was Joe Namath. Hudson joined Namath and Sauer on the Super Bowl winning Jets team against the Colts.

So today I want to begin looking at some of the lessons learned from the Foreign Corrupt Practices Act (FCPA) enforcement actions through the first half of 2013, I will start with reviewing the significant corporate enforcement actions and tomorrow I will  review individual prosecutions and arrests to date in 2013.

I.                   Corporate

A.     Total

As reported by both the FCPA Blog and the FCPA Professor, Total SA engaged in a nearly decade long, breathtaking bribery scheme. In this scheme, Total paid approximately $60MM to an un-named Iranian Official of the National Iranian Oil Company (NIOC), who steered two major projects Total’s way. According to the FCPA Professor, in a post entitled “Total Agrees To Pay $398 Million To Resolve Its FCPA Scrutiny”, the Iranian Official in question was described in the Information as “the Chairman of an Iranian engineering company that was more than 90% owned by the Government of Iran and substantially controlled by the Government of Iran.” The projects for which Total paid the bribes were the Sirri A and E oil and gas fields and South Pars gas field.

In a blog post entitled “Total SA pays $398 million to settle U.S. bribe charges” the FCPA Blog reported that “In the fourth biggest FCPA case ever, French oil giant Total S.A. agreed Wednesday to pay $398 million in penalties and disgorgement for bribing an Iran official to gain access to oil and gas fields. Total will pay a criminal penalty to the Department of Justice (DOJ) of $245.2 million. In its settlement with the Securities and Exchange Commission (SEC), Total will disgorge profits of $153 million.” For those of you keeping score at home that is Number 4 on the list of greatest FCPA fines in the history of the world and Number 2 on the list of the biggest profit disgorgements in FCPA history. Total also received a three-year Deferred Prosecution Agreement (DPA) that requires appointment of an independent compliance monitor. A separate requirement for a monitor was set out in Total’s settlement with the SEC.

B.     Parker Drilling

The company was involved in a bribery scheme to pay-off judges in a Nigerian Tax Court to allow Parker Drilling to pay lower than warranted tax assessments for its drilling rigs in the country. This bribery scheme was alleged to have involved the following persons employed at or associated with Parker Drilling: (1) a U.S. citizen based in Nigeria who, during the relevant time period, was the General Manager of Parker Drilling’s operations in Nigeria; (b) a U.S. citizen based in Nigeria who also was a General Manager of Parker Drilling’s Operations in Nigeria; (c) a Houston based executive of the company, who performed financial and compliance functions for Parker Drilling between 2002 through 2005; (d) another Houston based executive of the company who performed a legal function for Parker Drilling; and (e) the company’s outside counsel.

Due to its efforts to create a gold standard compliance program all the while undergoing its own internal investigation, Parker Drilling’s conduct earned it an “approximately 20 percent reduction off the bottom of the fine range” which suggested a fine of between $14.7MM to $29.4MM. The final DOJ fine was $11,760,000. The company also agreed to pay disgorgement of $3,050MM plus pre-judgment interest of $1,040,818, to the SEC. According to its DPA, “the Company has engaged in extensive remediation, including ending its business relationships with officers, employees, or agents primarily responsible for the corrupt payments, enhancing its due diligence protocol for third-party agents and consultants, increasing training and testing requirements, and instituting heightened review of proposals and other transactional documents for all the Company’s contracts.” Parker Drilling also hired “a fulltime Chief Compliance Officer and Counsel who reports to the Chief Executive Officer and Audit Committee, as well as staff to assist the Chief Compliance Officer and Counsel.” Lastly, the Company worked to strengthen its internal controls.

The underlying facts of Parker Drilling are about as bad as it can get. The company had corporate head office involvement in the bribery scheme. Further, the company did not self-disclose to the DOJ, yet, they were able to obtain a significant reduction in the overall fine and penalties from the sentencing range. Additionally the company was not required to have an external monitor. The message here is that a strong effort during the pendency of an investigation does pay off with the final result.

C.     Ralph Lauren

The Ralph Lauren Company received Non-Prosecution Agreements (NPA) granted by the SEC and DOJ. The illegal conduct at issue related to its Argentinian subsidiary and efforts by the General Manager of that operation, who conspired with a customs clearance agency to make payments “to assist in improperly obtaining paperwork necessary for goods to clear customs, to permit clearance of items without the necessary paperwork, to permit the clearance of prohibited items, and to avoid inspection.” For its conduct, Ralph Lauren agreed to pay $882K to the DOJ and $593K in disgorgement and $141K in pre-judgment interest to the SEC.

The DOJ detailed the company’s conduct by stating that “the Company’s extensive, thorough, and real-time cooperation with the Department, including conducting an internal investigation, voluntarily making employees available for interviews, making voluntary document disclosures, conducting a world-wide risk assessment, and making multiple presentations to the Department on the status and findings of the internal investigation and the risk assessment”.

This past spring I was on a panel with representatives from both the DOJ and SEC who discussed the Ralph Lauren enforcement action. They indicated that the company uncovered the bribery scheme during its first round of training, after the company’s initial implementation of its FCPA compliance program. This fact points out two key lessons to be learned. The first is that a company can discover many things about its compliance with the FCPA during live training. The second is that early detection and remediation can lead to a significant reduction in fines and penalties.

I believe that these corporate enforcement actions make clear that a company’s actions during the pendency of the investigation, in addition to the underlying FCPA violations, will be evaluated and assessed to determine the final penalty. The DOJ and SEC continue to communicate not only what they believe constitutes a best practices compliance program but equally importantly what actions a company can engage in which will significantly reduce a company’s overall fine and penalty. Both the DOJ and SEC continue to communicate, through their enforcement actions, to the compliance practitioner what they expect from companies in the way of a best practices compliance program and what a company should do if they discover a potential FCPA violation. These communications, through enforcement actions, DPAs, NPAs and Declinations, are consistent with the information provided by the DOJ/SEC in the FCPA Guidance. These enforcement actions demonstrate that if a company gets ahead of the curve, it can significantly lessen its overall penalty and pain.

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

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