FCPA Compliance and Ethics Blog

June 4, 2013

Total Switches to Settle Rather Than Fight

For anyone who grew up in the 1960s, I am sure that you remember the touchstone slogan for Tareyton cigarettes, “I’d rather fight than switch”. The television ad always showed someone with a black eye and a Tareyton cigarette in his or her fingers. I was reminded of that old advertising slogan last week when the US Department of Justice (DOJ) and Securities and Exchange (SEC) commission both announced their settlement with the French energy giant TOTAL SA (Total), over its violation of the Foreign Corrupt Practices Act (FCPA).

It was the slogan’s inverse which gave me pause in reading about Total for as recently as June 2012, the FCPA Blog asked, as the title of a blog post, “Will Total S.A. Fight Back?” In this post Dick Cassin, who reported that Total had been in discussion with the DOJ and SEC since 2010, said that the “French oil giant Total said it rejected ‘out-of-court settlement solutions’ with the DOJ and SEC that would end their longstanding FCPA investigations. And while Total said it is still talking with the agencies, it also said it’s free not to settle, ‘in which case it would be exposed to the risk of prosecution in the United States. ‘” Cassin explored some of the reasons that Total might rather fight than settle but at the end he noted, “What will happen now? A court battle would bring a deluge of scrutiny from the press and regulators around the world. At a minimum, that would imperil Total’s stock price and lead to years of litigation by aggrieved shareholders, customers, lenders, and other stakeholders. So settlement seems likely.”

So I guess Total decided that its interests mandated that it switch and settle rather than fight. What could have been the reasons for doing so? In this post, I will review some of the facts as set forth in the Criminal Information (Information)and the Deferred Prosecution Agreement (DPA), both of which were filed by the DOJ and the SEC’s Cease and Desist Order (the Order) which may have led Total to settle. In tomorrow’s posting, I will discuss the lessons learned for the compliance practitioner.

Who Was Involved

As reported by both the FCPA Blog and the FCPA Professor, Total 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 Information further states that “from at least early 2001, the Iranian Official was the head of an Iranian organization concerned with fuel consumption, which was a wholly owned subsidiary of NIOC, and was a government advisor to a high-ranking Iranian official.”

The Projects

The projects were the Sirri A and E oil and gas fields and South Pars gas field. Total was granted concessions to these fields within days or weeks of inking contracts with the Iranian Official’s sham entity for receipt of the bribes. The original contract was between Total and “Intermediary 1” and was entitled “Umbrella Agreement.” The specific terms for payment were set out in a document which hung off this Umbrella Agreement, which was entitled, “Consulting Services Request”. Under this Consulting Services Request, Intermediary 1 was paid approximately $26MM over 2 years.  Thereafter, another sham entity, “Intermediary 2” was set up and assigned the Umbrella Agreement by the parties. Intermediary 2 received its own “Consulting Services Request”, under which it received approximately $44MM in payments.

The Bribes

As I said, the bribe amounts were simply breathtaking. Below is the Bribery Box Score

Bribes Paid To

Contract(s) Under Which Bribes Were Paid

Date Bribe Paid

Bribe Amounts Paid (figures approx. based upon currency conversions)

Projects Awarded to Total Based Upon Bribes Paid

Intermediary 1 Umbrella Agreement.Consulting Services Request 1:(a) $6MM;(b) $500K for expenses;(c) $25MM as capital X reached specified levels;(d) Amount = to 5% above cap X, if exceeded; and(e) % of revenue from sale of O&G developed from site. July 13, 1997, Total awarded Sirri Fields A&E
7-10-95 $500K
10-03-95 $6.07MM
6-12-97 $10MM
7-11-97 $4.64MM
Intermediary 2 Umbrella Agreement transferred to Intermediary 2.Second Consulting Services Request 2:(a) $10MM;(b) $30MM as capital X reached specified levels;(c) payment of either (i) Amount = to 4% above cap X, if exceeded or (ii) $60MM; and(d) an additional $10MM. On Sept. 28, 1997 Total awarded Phases 2 & 3 of South Pars project
12-12-97 $6.15MM
8-28-98 $4.18MM
9-1-98 $4.18MM
6-9-99 $1.89MM
3-17-03 $9.3MM
11-29-04 $7MM
Additional Payments with no specified date $7MM
TOTAL AMOUNT OF BRIBES PAID     Approximately $60MM

The Charges

According to the FCPA Professor, the Information has the following about violations of the FCPA books and records provisions, “… Total knowingly falsified and caused to be falsified books, records, and accounts, required to, in reasonable detail, accurately and fairly reflect the transactions and dispositions of Total, to wit: Total (a) mischaracterized the unlawful payments under the various consulting agreements as ‘business development expenses’ and (b) improperly characterized the unlawful consulting agreements as legitimate consulting agreements.”

The Information also specifies the FCPA internal controls charges. They included:

“(a) failed to implement adequate anti-bribery compliance policies and procedures; (b) failed to maintain an adequate system for the selection and approval of consultants; (c) failed to conduct adequate audits of payments to purported consultants; (d) failed to establish a sufficiently empowered and competent corporate compliance office; (e) failed to take reasonable steps to ensure the company’s compliance and ethics program was followed; (f) failed to evaluate regularly the effectiveness of the company’s compliance and ethics program; (g) failed to provide appropriate incentives to perform in accordance with the compliance and ethics program; (h) concealed the consulting agreements’ true nature and true participants; (i) performed no due diligence concerning the named or unnamed parties to these agreements; and (j) lacked controls sufficient to provide reasonable assurances that the consulting agreements complied with applicable laws.”

The Penalties

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 DOJ of $245.2 million. It received a three-year deferred prosecution agreement that requires appointment of an independent compliance monitor. In its settlement with the 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. Something to be proud of, or perhaps not.

While the raw number of nearly $400MM does seem eye-catching, perhaps even more interesting is that the DOJ assessed a fine nearly at the bottom of the fine range. After the calculations were made under the US Sentencing Guidelines (USSG), there was a fine range of between a low end of $235.2MM up to $470.4MM. My curiosity here is based upon something NOT in the DPA, where the DOJ assessed Total’s conduct under the USSG ‘culpability score’. Under USSG §8C2.5 an organization can receive a reduction in its culpability score in three ways. First, a company’s overall score can be subtracted “three points from the organization’s culpability score if the organization had an effective compliance and ethics program as defined in §8B2.1 in place at the time of the offense.” Second, the culpability score can be reduced “by five points if the organization self-reported the offense to the appropriate governmental authorities, fully cooperated in the investigation, and clearly demonstrated recognition and affirmative acceptance of responsibility for its conduct.”  If the organization did not self-report, but fully cooperated in the investigation, and accepted responsibility for its conduct, the culpability score is reduced by two points. Third, and finally, “if the organization did not self-report or cooperate, but clearly demonstrated recognition and affirmative acceptance of responsibility for its conduct, the culpability score is reduced by one point.” [citations omitted]

It would appear that while Total fully cooperated and recognized the error of its ways, it did not have nor put in place an effective compliance program. Also it would appear that Total did not self-report its FCPA violations. So I guess the question is: what did Total do to warrant receiving a fine at near the bottom end of the possible range?

Jurisdiction

I find jurisdictional arguments to be similar to arguments about pregnancy. Just as one is not ‘a little bit pregnant’, there is not just ‘a smidgen of jurisdiction’. It either exists or it does not. From the Information, it states that “Total owned a number of subsidiaries that conducted business in the United States. Total’s American Depository Shares were registered with SEC and traded on the New York Stock Exchange as American Depository Receipts (“ADRs”). Accordingly at all relevant times, Total was an “issuer” within the meaning of the FCPA. Total also funded one of the bribe payments from “account at Banker’s Trust in New York, New York.” Maybe Total was more than just ‘a little pregnant’.

So what could have led Total to switch to settling rather than fighting? Perhaps it finally understood that if you list your shares in the US, your company will be subject to US laws. And of course, do not bribe foreign governmental officials using money wired from US banks.

Or maybe, just maybe, Total decided it was in their corporate interests to settle rather than go to trial.

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

May 6, 2013

And Then There Was One – Willbros Related FCPA Enforcement Continues

Last week, the US Department of Justice (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 Foreign Corrupt Practices Act (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.

The company itself paid $32.3 million and entered into a Deferred Prosecution Agreement (DPA) to settle civil and criminal FCPA charges with the DOJ and Securities and Exchange Commission (SEC). According to the FCPA Blog, in a post entitled “Willbros Resolves FCPA Offenses”, “the FCPA violations involved former operations in Bolivia, Ecuador and Nigeria.” The DOJ’s “information included substantive violations of the FCPA’s antibribery provisions and violations of the books and records provisions. All twelve counts relate to operations in Nigeria, Ecuador and Bolivia during the period from 1996 to 2005. The SEC’s complaint alleged civil violations of the antifraud provisions of the Securities Exchange Act, the antibribery provisions, and the reporting, books and records and internal controls provisions.” The company paid $22 million to settle the DOJ’s criminal case and $10.3 million relating to the SEC’s civil enforcement action. The company agreed to a three-year DPA with the DOJ and had a corporate monitor.  The company successfully completed its DPA, which was discharged in 2012.

In addition to the charges against the company and Novak, three former Willbros employees were also indicted over the FCPA violations. According another post by the FCPA Blog, entitled “Prison for Ex-Willbros Execs”, two of these former Willbros executives received and successfully served prison time. “Jim Bob Brown, 48, was sentenced in federal court in Houston to one year and one day in prison and fined $17,500; Jason Edward Steph, 40, was sentenced to 15 months and fined $2,000. Steph, who once served as general manager of on-shore operations for Willbros International, pleaded guilty in November 2007. He said in his plea that in 2005 he, Brown, and others arranged to pay about $1.8 million in cash to Nigerian officials. Brown pleaded guilty in September 2006 to conspiracy to violate the FCPA.” This brings the sentencing for Willbros related FCPA violations up to date as the following:

Sentencing Box Score

Entity or Person Fine DPA Time and Resolution Jail Time
Willbros Group, Inc. and Willbros International Inc. $22MM to DOJ$10.30MM to SEC 3 year DPA with Monitor. Successfully completed.
Jim Bob Brown $17,500.00 12 months and one day in prison, 2 years supervised release.
Jason Steph $2,000.00 15 months in prison, 2 years supervised release
Paul Novak $1MM 15 months in prison, 2 years of supervised release

A third former company executive, James Tillery, had been previously charged with conspiring to bribe Nigerian and Ecuadorian government officials to obtain and retain gas pipeline construction and rehabilitation business from state-owned oil companies in those countries. Tillery was indicted for one count of conspiracy to violate the FCPA, two counts of violating the FCPA in connection with the authorization of specific corrupt payments to officials in Nigeria and Ecuador. Tillery was alleged to be a Willbros International employee and executive from the 1980s through January 2005. From 2002 until January 2005, he served as executive vice president and later as president of the company. Novak was an employee in the mid-1990s and later worked as an oil and gas consultant in Nigeria, purporting to provide consulting services to companies in that field.

Interestingly, in 2010, Tillery was arrested in Lagos, Nigeria. As reported by the FCPA Blog, in a post entitled “Tillery’s Extraction”, he was “seized by the Federal Bureau of Investigation (FBI) in Lagos and is being held by American authorities.” However, at some point later, the process was ceased due to intervention by the “Nigerian high court had halted the extradition at least until the end of the month because due process wasn’t followed.” In yet another twist to the saga, Tillery had apparently renounced his US citizenship and “had since naturalized as a Nigerian.” The FCPA Blog quoted a report from a Nigerian press source who said “normal extradition procedures weren’t followed and characterized Tillery’s arrest as an “extraction” and a “forceful extradition.””

So, now there is one left from the Willbros FCPA enforcement action, that being James Tillery. The Willbros bribery scheme was one of the most comprehensive and certainly one of the early cases in the post-2004 increase in growth regarding enforcement actions. It will be interesting to see if Tillery ever has to answer the charges brought against him in connection with this matter.

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

April 18, 2013

What’s the Message from BizJet? Self-Disclose and Cooperate

Over the past week there has been a plethora of Foreign Corrupt Practices Act (FCPA) enforcement actions released. One group was the four enforcement actions involving individuals concerning BizJet. While I cannot say that the enforcement actions against the individuals were stunning, perhaps what was surprising were the penalties that two of the individual received. 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 Department of Justice (DOJ) Press Release states that “The two remaining defendants are believed to remain abroad.”

BizJet Bribery Box Score

From the previously released Bizjet Deferred Prosecution Agreement (DPA) and the recently released documents, I have updated the “BizJet Bribery Box Score”.

BizJet Executive or Employee Named Payment Made To Amount of Payment Others Involved
Jald Jensen Official 6 Cell Phone and $10K Peter DuBois and Neal Uhl
Jald Jensen Official 3 $2K Peter DuBois
Peter DuBois, Neal Uhl and Jald Jensen Official 2 $20K
Neal Uhl Official 2 $30K Jald Jensen
Peter DuBois Mexican Federal Police Chief $10K Neal Uhl and Jald Jensen
Neal Uhl Official 5 $18K Jald Jensen
Jald Jensen Official 4 $50K
Jald Jensen Mexican Federal Police $176 Neal Uhl
Jald Jensen Official 4 $40K
Jald Jensen Mexican Federal Police $210K Neal Uhl
Jald Jensen Official 5 $6K Neal Uhl
Neal Uhl Official 5 $22K

The above 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 United States. 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.

Penalty Box Score

As bad as the conduct of the BizJet executives and sales manager was – and it was very bad – the thing that stood out in the enforcement actions announced last week was the sentences. So without further ado here is the “Penalty Box Score” for defendants DuBois and Uhl.

Individual Fine or Disgorgement Potential Incarceration Actual Incarceration
Peter DuBois $159,950 108 to 120 months in jail 8 months home incarceration, 60 month’s probation
Neal Uhl $10,000 60 months in jail 60 month’s probation

The clear import of the BizJet DPA was that a company can make a comeback in the face of very bad facts. In the BizJet DPA, the calculation of the fine, based upon the factors set out in the US Sentencing Guidelines, ranged between a low of $17.1MM to a high of $34.2MM. The final agreed upon monetary penalty was $11.8MM. This was a significant reduction from the suggested low or high end, or as was noted by the FCPA Blog “BizJet’s reduction was 30% off the bottom of the fine range, and a whopping 65% off the top of the fine range.” Finally, BizJet was able to avoid having an external monitor put in place.

Cooperation is the Key

What led to these sentence reductions? Quite simply the answer is full cooperation with the DOJ. The FCPA Professor stated, in a post entitled “Unsealed Documents In Enforcement Acton Against Former BizJet Executives Reveal A Trove Of Information”, that “As part of his plea agreement, DuBois worked in an undercover capacity for the government. The motion specifically states as follows. “As part of his work in an undercover capacity, Mr. DuBois has recorded conversations with former BizJet executives and other subjects of the government’s ongoing investigation.” Later, the motion to seal states that “public identification of Mr. DuBois as a defendant who likely is cooperating with the government may jeopardize the undercover aspect of the government’s investigation.”

In addition to his work as an undercover operative, the Professor quoted from the DOJ Sentencing Memorandum that “assisted in the investigation from the outset and cooperated fully with the government throughout its investigation. DuBois submitted to multiple interviews by the government and has assisted in every way that the government has asked. DuBois told the truth to the government from the outset and continued to do so up until this very day. DuBois’ cooperation not only assisted the government in connection with its investigation into BizJet, but also led to the investigation of another maintenance, repair, and overhaul company engaged in a similar scheme to pay bribes to government officials overseas.”

With regarding to UHL, the Professor quoted from the DOJ Motion for a Downward Departure as follows, “Uhl “agreed to a voluntary proffer session and, when confronted by the government, admitted to the illegal conduct. Throughout the course of the investigation, Uhl was cooperative and provided truthful information that substantially assisted the government in confronting other co-conspirators and witnesses. Uhl offered to assist in any way that he could.”

In another post, entitled “Where Was the BizJet Board?”, the FCPA Professor noted that the conduct engaged in by BizJet was “egregious” and I would certainly second that, perhaps adding that it was about as bad as it could get in the FCPA world. He goes on to state that “Yet, BizJet was allowed to resolve the enforcement action via a deferred prosecution agreement, meaning that should it abide by the terms and conditions of the agreement, BizJet will never be required to plead guilty to anything.” He went on to pose the question, “If that is the DOJ position, then it must be asked – does corporate criminal liability actually mean anything if a company like BizJet – given the DOJ’s allegations – is not actually criminally prosecuted or required to plead guilty?” He ended his post with the following, “In short, the resolution vehicles the DOJ has created and championed has again lead to a “facade of enforcement” – albeit an instance on the opposite end of the spectrum that I normally highlight.”

I think that there is another way to look at the BizJet enforcement action and the individual enforcement actions against DuBois and Uhl. BizJet self-disclosed to the DOJ, engaged in what the DOJ termed “extraordinary cooperation” and remediated the people and conduct in question. Further, DuBois and Uhl not only offered themselves up but actively worked with and assisted the DOJ in its investigation going forward. If one of the goals of the DOJ is to achieve greater compliance with the FCPA, I think that the BizJet cases is a clear demonstration that if a company has FCPA violations they can self-disclose and be given credit for working very diligently in conjunction with the DOJ to remedy the conduct at issue and move the investigation forward.

I believe the same is true for individuals who have engaged in FCPA violations. If a person provides the same level of cooperation as DuBois and Uhl and the DOJ then prosecutes them to the full extent of the US Sentencing Guidelines, how much cooperation do you think the DOJ will engender going forward once the word gets out in the white collar defense bar?

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

March 18, 2013

An Oscar Winner for Compliance

Ben Affleck has certainly had his share of ups and downs in his professional career. He shared an Oscar for Best Original Screenplay for Good Will Hunting with his fellow Bostonian buddy Matt Damon at age 25. Thereafter things were not always at that same height for him professionally. He had a very public affair and engagement to Jennifer Lopez, in which there were jointly knows as ‘Bennifer’ which ended when the engagement was broken off. He appeared in some movies that, how can one best put it, were somewhat less than Oscar worthy, Gigli and Surviving Christmas come to mind. But once again proving that F. Scott Fitzgerald’s adage that “There are no second acts in American lives” is not, and perhaps never was, true Affleck was awarded this year’s Oscar award for Best Picture for his work as the Director on Argo.

In a recent article in the Houston Business Journal (HBJ), entitled “Business lessons from an Academy Award winner”, Harvey Mackay wrote about some of the lessons that he drew from Affleck’s professional journey. Affleck’s lessons provide some interesting perspectives for the compliance practitioner. When accepting the Oscar, Affleck said “I never thought I would be back here, but I am because of so many wonderful people who extended themselves to me, who had nothing to benefit from it.” From this statement Mackay drew the lesson of the importance of networking and mentoring. Mackay wrote that “Over the years he has reached out to a lot of people in Hollywood who helped him learn the movie business and advance his career. Members of the Academy were able and willing to help him, even though he wasn’t necessarily in a position to reciprocate.

As a compliance practitioner, the importance of networking and mentoring cannot be overstated. Not only is it important in assisting to advance your own career but also your professional grown. In my own blogging and social media career I have been fortunate to have several mentors; Dick Cassin, the FCPA Professor and Francine McKenna being three prominent ones. But more than simply having such personal mentors, compliance professionals need to turn to others in our profession for professional guidance and support. Almost everyone I have approached for help, guidance or advice has given it to me freely, without even a hint of any desire for reciprocation.

One of the ways you can do so is to set up an informal compliance roundtable in your city or community. By this I mean an informal group, without dues or fees that can get together and discuss matters of mutual interest. Together with Mike Snyder, of Donovan Watkins, and Dan Chapman we have recently started one here in Houston. Last week I spoke at one such group for compliance professionals in Singapore. But the key to making such a group work is that everything said is off the record and stays within the four walls of the room. In these events, compliance practitioners can ask very detailed, fact specific questions and draw upon a wide variety of sources for guidance. All one really needs is a facilitator to throw out one question and see where it goes from there. So if you do not have such a group in your city, town or community my suggestion would be for you to send an email around and see who might be interested. I think that you will find it can be a great way to network and either find or be a mentor to other compliance practitioners.

The second business lesson that Affleck gave during his Oscar acceptance speech was that “You have to work harder than you think you possibly can.” I was in private practice for 20 years. One of the boneheaded things I always thought was that lawyers went in-house so they would not have to work so much. Boy did I get that wrong. If you work for an international company you know that time zones are basically meaningless. Five PM in China is Five AM in the US. I also heard several in-house lawyers tell me that they went to work for a company for lifestyle reasons. While that may have been true, they found out what I found out, that in-house lawyers work very long and very hard.

In almost every compliance group I have ever known, there are never enough resources. If that is the situation you face, try and find a way to do more with less. There are several other departments in your company which may be able to help in the goal for your company to do business in a manner compliant with your Code of Conduct and the Foreign Corrupt Practices Act (FCPA) and UK Bribery Act. One department which you can work with is Human Resources (HR). HR can also be used to ‘connect the dots’ in many divergent elements in a company’s FCPA compliance and ethics program. The roles include training, employee evaluation and succession planning, hotlines and investigations and background screenings. By asking HR to expand their traditional function to include the FCPA compliance and ethics function, you can move towards a goal of a more complete compliance program, while not significantly increasing costs. Additionally, by asking HR to include these roles, it will drive home the message of compliance to all levels and functions within a company and help to make such behavior will become a part of a company’s DNA.

The third business lesson is one that Affleck closed his Oscar acceptance speech with and as Mackay noted “possibly the most important”. He quoted that Affleck said, “It doesn’t matter how you get knocked down in life because that’s going to happen. All that matters is that you gotta get up.” For the compliance practitioner, I would say this means that even with a robust compliance program in place, you will still have issues arises because there is no compliance which can assure 100% compliance, 100% of the time. Just as Affleck said that “you gotta get up”; in many ways if you do have a compliance issue arise, what matters is how you handle it.

In the context of Paul McNutly’s three maxims regarding any compliance issue; he said there were three questions he would ask when he was Deputy Attorney General. They were: (1) What did you do to prevent it?; (2) What did you find when you looked into it?; and (3) What did you do when you found out about it? But in large part, he focused on Maxim 3. So, in addition to a thorough investigation and reporting, the key is what did your company do to remedy the issue in question? Did you discipline those employees or third parties involved in the conduct at issue? Did you remedy any defect in your compliance program which may have allowed the issue to arise? Did you expand your compliance program to handle future issues? Did you train employees based on the issue or other high risk factors? The point follows Affleck’s last statement, “you gotta up”. How you respond as your company’s compliance representative may well be a significant factor in determining your final result with the Department of Justice (DOJ) or Securities and Exchange Commission (SEC).

Ben Affleck’s Oscar win was certainly a validation for someone who fell from great heights early in his career. While most of us may not scale to such heights early in our career, or perhaps ever, the tools, techniques and work ethic that Affleck used so that he once again could give an Oscar acceptance speech are some of the same tools that you can use as a compliance practitioner for your own career, to better and advance yourself professionally and to help your company through any compliance issues that may arise during your tenure in a compliance group. They are good words for you to think about 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

March 14, 2013

How Do You Determine the Gold Standard For Compliance Programs?

What is the gold standard for scientific minds? You might not do better than Albert Einstein who was born on this date in 1879. While most lay persons remember Einstein for his theory on special relativity, and his attendant mathematical calculation that mass and energy were equivalent and could be calculated with an equation, E=mc²; Einstein actually won his 1921 Nobel Prize for an earlier paper which theorized that light is made up of individual quanta (photons) that demonstrate particle-like properties while collectively behaving like a wave. The theory was an important step in the development of quantum theory.

Many compliance practitioners often wonder about how their Foreign Corrupt Practices Act (FCPA) compliance program might compare with companies which are believed to have gold-standard compliance programs. Yesterday, in an article in the FCPA Blog entitled “Is This The World’s Best Compliance Disclosure?”, Dick Cassin wrote about the recent disclosure by Baker Hughes Incorporated in its 2012 10K filing, relating to FCPA compliance. Once upon a time, way back in 2007, Baker Hughes had the largest FCPA fine in the history of the world ever, that being $44MM. It was also under a three-year Deferred Prosecution Agreement (DPA) and a corporate monitor. Baker Hughes not only made it out from under the DPA and monitor but it is now recognized as having a gold standard compliance program.

Baker Hughes bases its compliance program on three core concepts. The first is its “Core Values of Integrity, Performance, Teamwork and Learning”. The second is the standards contained in the company’s Business Code of Conduct. The third concept is the laws of the countries where it operates. The Baker Hughes compliance program is referred to within the company as “C2” or “Completely Compliant.” The “Completely Compliant” theme is intended to establish the proper Tone-at-the-Top throughout the company. Based upon this, company employees “are consistently reminded that they play a crucial role in ensuring that the Company always conducts its business ethically, legally and safely.”

The 10K went on to list some of the highlights of the Baker Hughes compliance program. They included:

  • Comprehensive internal policies over such areas as facilitating payments; travel, entertainment, gifts and charitable donations connected to non-U.S. government officials; payments to non-U.S. commercial sales representatives; and the use of non-U.S. police or military organizations for security purposes.
  • Comprehensive employee compliance training program covering substantially all employees.
  • Due diligence procedure for commercial sales, processing and professional agents, an enhanced process for classifying distributors and are creating a formal policy to guide business personnel in determining when subcontractors should be subjected to compliance due diligence.
  • A special compliance committee, which is made up of senior officers, that meets no less than once a year to review the oversight reports for all active commercial sales representatives.
  • Continued reduction of the use of commercial sales representatives and processing agents, including the reduction of customs agents.
  • Use of technology to monitor and report on compliance matters.
  • A program designed to encourage reporting of any ethics or compliance matter without fear of retaliation including a worldwide Business Helpline operated by a third party and currently available toll-free in 150 languages to ensure that our helpline is easily accessible to employees in their own language.
  • Expansion in the use and scope of our centralized finance organization including further implementation of our enterprise-wide accounting system and company-wide policies.
  • The corporate audit function has incorporated additional anti-corruption procedures in audits of certain countries.
  • Continued refinement and enhancement of procedures for FCPA risk assessments and legal audit procedures.
  • Ensuring that the company has adequate legal compliance coverage around the world, including the coordination of compliance advice and training across all regions and countries where we do business.
  • Centralization of the company’s human resources function, including creating consistent standards for pre-hire screening of employees, the screening of existing employees prior to promoting them to positions where they may be exposed to corruption-related risks, and creating a uniform policy for new hire training.

There are three areas from the Baker Hughes disclosure which I wish to highlight as components that a small to medium sized company should be able to implement at a relatively low cost. The first is the compliance oversight committee. The oversight committee puts a ‘second set of eyes’ on the compliance issues it reviews, whether it is third parties or additional compliance issues. The second is more involvement from the HR function regarding screening of potential hires and screening of employees for promotion to positions which might expose them to additional corruption related to risks. I would add that you should also use such screening to help make selections for moving employees into senior management positions, where their tone and attitudes towards compliance can grow in importance.

The third area is the company’s embracing of compliance as a key corporate culture. You can call your program “C2” or “Completely Compliant”, like Baker Hughes does, or give another name to the program. However the key is to remind employees of the crucial role that they play ensuring that your entity always conducts its business in an ethical manner. Much like reminding employees that safety is everyone’s responsibility; you can and should remind employees that doing business within the parameters of your Code of Conduct and your compliance program is something they should recognize as their responsibility as well.

If you are a small to medium size company your FCPA risk profile may not warrant the gold standard compliance program that Baker Hughes has put in place. However you should endeavor to put a program in place based upon the risks that you assess as applicable to your company. The Baker Hughes program gives you some guidance as to what the gold standard is and some solid ideas of components that you might implement.

One last thing, the Chief Compliance Officer (CCO) of Baker Hughes is Jay Martin. Jay regularly speaks at compliance conferences across the country. He has been quite generous to give his experiences in going through the compliance process at Baker Hughes. I am sure that he would be willing to speak to you as well.

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

© Thomas R. Fox, 2013

March 11, 2013

Wrestling as an Olympic Sport and Declinations under the FCPA

What do the US, Russia and the Islamic Republic of Iran have in common? Answer: Precious little. However one thing that they do have in common is their vehement opposition to the absolutely idiotic, boneheaded and stupid decision by the International Olympic Committee (IOC) to drop wrestling from the Olympic Games. Wrestling dates back to the ancient Greek Olympic Games and it is just inconceivable that the IOC would drop one of the very few sporting events that has endured for 2,500 years. If these three countries can agree on something, do you think that the IOC should listen?

What do the FCPA Professor, the US Chamber of Commerce and Tom Fox have in common when it comes to the Foreign Corrupt Practices Act (FCPA)? Answer: Not much. But one thing we do have in common is a belief that the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) should release information regarding FCPA matters that it declines to prosecute. For my part, the reason that the DOJ/SEC should release this information is that it is a solid base of information that a compliance practitioner can use to help improve a FCPA based compliance program.

What is a Declination?

First, continuing the good faith debate as to what is a ‘declination’, I first need to provide my definition. Last week, the FCPA Professor wrote, in a post entitled “The Need For An FCPA Lingua Franca”, of his belief in the need for a clarification of precisely what is a declination. He wrote, “I am guided by my definition of a declination as being an instance in which an enforcement agency has concluded that it could bring a case, consistent with its burden of proof as to all necessary elements, yet decides not to pursue the action.” The Professor further states that “anything less ought not be termed a “declination” and noted that it is really no different that saying a police officer “declined” to issue a speeding ticket in an instance in which the driver was not speeding. This is not a declination, it is what the law commands, and such reasoning applies in the FCPA context as well.” The Professor also cited to a WilmerHale client release which discussed the DOJ/SEC FCPA Guidance and had the following line which relates to the definition of a declination, “It is also disappointing that some of the examples do not make clear that the conduct met each of the elements of a statutory violation, since the concept of a declination is supposed to be reserved for instances in which the offense is chargeable but the government declines in its own discretion to bring a case.”

I believe that a broader term approach, as I think that the term ‘declination’ should encompass all the situations where the DOJ or SEC turns down the opportunity to bring a FCPA case; whether that be a criminal matter enforced by the DOJ or a civil action brought by the SEC. I do not find the lack of a speeding ticket analogy to be appropriate in the FCPA/declination discussion. The reason is that the DOJ/SEC usually relies on either a self-disclosure or outside source of information before it begins an investigation. If there is a self-disclosure that means that competent white collar counsel, who probably are ex-DOJ/SEC prosecutors, think that there is a reasonable basis for an actionable FCPA issue to lie. To use the speeding ticket analogy, regarding FCPA matters, if I saw a police officer with a radar gun checking speeds and I thought that I had gone over the speeding limit, I could self-report what I believed to be a violation. He or she might say something along the lines of “Mr. Fox, you may have a good-faith belief that you traveled over the speed limit but I did not have my radar gun on your car so I will not write you up.” Or the police officer might say, “Mr. Fox, you may have a good-faith belief that you traveled over the speed limit but I had my radar gun on your car and you were not going over the speed limit so I am not going to write you up.” Lastly, the officer might say, “Mr. Fox, you may have a good-faith belief that you traveled over the speed limit and I had my radar gun on you and I clocked you as going over the speed limit but because you were going 66 in a 65 and you came over here and told me about it I am not going to write you up.” So even if I had engaged in a speeding violation, there may be several reasons why I did not get a ticket.

What about situations other than self-disclosure, such those involving a whistle-blower, information which came from other companies in the same industry, such as those companies involved with  the freight forwarder Panalpina, or other situations where information comes to the DOJ/SEC and they eventually decide not prosecute. Marc Alain Bohn, writing a piece in the FCPA Blog entitled “Revisiting the Definition of ‘Declinations’”, said that “there are likely many considerations that inform an agency decision not to pursue a case. Given the agencies’ aggressive interpretations of the jurisdiction and knowledge elements of the FCPA—something the FCPA Professor has frequently drawn attention to it is likely rare that an agency’s decision not to pursue an enforcement action is based on its determination that there were insufficient facts to do so. This is particularly true in the case of issuers, against whom the agencies can more easily build FCPA-cases by focusing upon violations of the statute’s accounting provisions.” Because of these facts and other, Bohn urged a broader form of definition of declination than the FCPA Professor. Bohn gives the following definition, “I think it is appropriate to apply the short-hand label “declination” more broadly to each instance where the DOJ or SEC has notified a company that it does not intend to bring an enforcement action.”

Publicizing of Declinations

The concept that the US Chamber of Commerce, the FCPA Professor and myself do agree on, is the need for the DOJ/SEC to publicize declinations. I have argued for some time that by publicizing declinations, it would provide great value to the compliance practitioner. I believe this to be particularly true in the situation where a company has self-disclosed what it believes to be evidence of a FCPA violation. I believed this before the Morgan Stanley declination was released last year and I believed this before the FCPA Guidance had a section discussing six matters that the DOJ/SEC had declined to prosecute. The two releases of declinations have only made my belief stronger regarding the usefulness of declinations to the compliance practitioners.

I outlined some of the reason I think that declinations can be such a useful tool, in an article for the Washington Legal Foundation, entitled “DOJ Should Release FCPA Declinations Opinions”. I wrote that this is because “The substantive portions of declinations, excised of company-specific information, would greatly increase FCPA enforcement transparency. This, in turn, would inspire greater FCPA compliance through a better understanding of how DOJ interprets the law with the specific facts presented to it.” Further, “In the declination process, DOJ is handling a much broader and more significant amount of information. A self-disclosing company has investigated or will investigate a matter, most likely with the aid of specialized outside FCPA investigative counsel. DOJ has the opportunity to review the investigation and suggest further or other lines of inquiry. Company personnel are made available for DOJ interviews, if appropriate. In short one would have actual facts and detailed oversight by DOJ, which in the case of a declination to prosecute, would provide substantive guidance on why it did not believe a FCPA violation had occurred in the face of a company’s good faith belief that it had violated the FCPA.”

From the Morgan Stanley declination we learned the importance of (1) annual FCPA training; (2) annual certification; (3) transaction monitoring; (4) compliance reminders; and (5) documentation of all of these factors. From the FCPA Guidance, we learned that the companies which received declinations had the following six factors:

  1. The company was alerted to possible corruption via its own internal controls or compliance program.
  2. The company self-disclosed to the DOJ/SEC.
  3. The Company conducted a thorough investigation and shared the results with the DOJ/SEC.
  4. The illegal conduct was not pervasive throughout the company, no systemic failure/over-riding of internal controls and the amount of money paid as bribe was relatively small.
  5. The Company immediately took corrective action against the bad actors.
  6. The extent the compliance program was expanded.

We learned some very specific, useful pieces of information from the declinations that have been issued. I hope that more will be issued by the DOJ/SEC in the future. It appears that the sport of Olympic wrestling, the FCPA and politics can indeed make for some strange bedfellows.

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

March 1, 2013

Interview with Dick Cassin

Ed. Note-we continue our interview series with thought leaders in the compliance and ethics field. Today we post an interview with the person I consider to be the Godfather of compliance and ethics bloggers-Dick Cassin, Editor of the FCPA Blog.

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1.      Where did you grow up and where did you go to college and law school? Can you tell us about anything from those experiences that led you into the field of compliance?

I was fortunate to grow up in a small town in the heart of New England. Keene, New Hampshire was (and still is) a beautiful place — with four seasons and nearby lakes, rivers, and mountains. It was also just a couple of hours from Fenway Park and the Boston Red Sox. I have wonderful memories of those years.

My dream from early on was to be a lawyer. I worked in Keene during my early teens for a very generous attorney, Ernest L. Bell, III. He had a small firm with all sorts and sizes of clients. I swept floors, delivered mail, bought pantry supplies, shoveled snow — and in between, I read case files and transcripts and watched Mr. Bell work. To me, it was the best job in the world.
I stayed in New England for my schooling.

After law school, I started out in a big firm, practicing antitrust law. That experience eventually led to a job in the the oil industry, a big part of which was under investigation by the antitrust unit of the U.S. Justice Department. The antitrust issues went away but I stayed close to the industry.

That was during the early years of the FCPA. There were no real anti-corruption compliance programs then, and few professionals skilled in the field. It was all brand new.

I was fascinated by the FCPA — the idea that a U.S. law was meant to apply to behavior outside the United States, and even potentially to non-U.S. people and companies. It was amazing. And I thought corruption was always harmful. I was seeing a lot of it and the damage it was doing. So I admired the FCPA and its aims. From the beginning I wanted to help companies find practical ways to comply.
2.      You spent several years living and working overseas. Can you tell us what those positions were and how this work informed your ideas about compliance?

I worked in a lot of countries ruled by corrupt regimes — places with long histories and cultures of corruption. I know how hard it can be for expat and local employees to function in that environment. My sympathy is with them.

At the same time, corruption is really toxic. It distorts markets. It robs people of their tax money and strips them of their rights as citizens. People mired in red tape and corruption become depressed and hopeless, and for good reason. They can’t get medical care without bribing someone. Educating the kids requires bribes. Police will only protect bribe payers. It’s all bad.

I was a partner in a big law firm and I did a couple of stints in house for oil-industry related companies. Most of my time was spent overseas — in the Middle East, Russia, and Asia. I’ve enjoyed all of it.
3.      What is the reason you started the FCPA Blog and what do you hope to achieve with it?

My main professional interest is the FCPA — what it means, how to comply with it, how it’s enforced. That’s what I wanted to read about and talk about. But six years ago, there was no daily source of FCPA-related news and information. I started posting some ideas to share with clients and friends. And that eventually became the FCPA Blog.

My aim then was to deliver practical information accessible to anyone. That’s why the posts are written in plain English, and most are fairly short. That’s still the objective. But the scope has broadened. Posts now deal with any aspect of corruption, enforcement, and compliance. And the FCPA Blog is now a team project. I work with dozens of great people to produce the blog. It’s a wonderful job and there’s nothing else I would rather do.

4.      You have developed a group of compliance related resources such as ethixbase, FCPA Jobs, and others. Can you tell us how you came up with these resources and what they can provide for the compliance practitioner?

ethiXbase is the biggest anti-corruption compliance database in the world. The indexed materials in it — global gift-giving regulations, anti-corruption legislation, enforcement actions, and so on — are absolutely essential for any compliance professional. These are the primary resources I and my clients always needed most. So I wanted them to be widely available to anyone who wants them.

ethiXbase has also developed the first fully automated, cloud-based compliance-related communication platforms for use with employees and third-parties, such as vendors, agents, partners, and so on.

We’ve known for quite a while now what’s required by the DOJ and SEC for an effective compliance program. A lot of it depends on frequent, targeted communications to deliver policies, reminders, updates, alerts, and the like. But unless this can be done automatically and very cost effectively, it won’t be done at all. And that increases the risk of a compliance problem. The ethiXbase platforms exist to solve these problems.

The FCPA Jobs site is there to help companies find compliance professionals. And it’s a great place to look for a compliance-related position.

5.      You have worked in the compliance field for some time. What are the biggest changes that you have seen over this time period?

The biggest change is that there is now something we all recognize as the anti-corruption compliance field. It didn’t exist just ten years ago. Now thousands of people worldwide think of themselves as compliance professionals. And the field is exploding. So there’s truly a compliance community, which is a new development.

There are more compliance resources available today than ever before. ethiXbase is an example of practical tools to help companies of any size comply with the FCPA and related laws. Tom Fox’s writings and talks are wonderful resources where anyone can learn more about compliance. The press and media now regularly report FCPA-related stories. People from the DOJ, SEC, U.K. Serious Fraud Office, OECD, U.N., World Bank, the NGOs, and so on are talking about anti-corruption compliance and enforcement. That rarely happened just a five years ago.

All these changes have been driven by stepped up U.S. and global enforcement since around 2008. More enforcement has led to much more awareness of corruption and compliance.

There’s a clearer concept today that graft is bad, no matter where it occurs. Not long ago, serious people were still debating whether overseas bribery should be against the law. The argument advanced was often that bribery is a victimless crime. Now we know that’s never true and there is no good bribery. Its victims can be counted in the millions or billions. Grand or systematic corruption is even seen now in many places as a human rights violation. So the world’s attitude toward corruption has changed dramatically. And that attitude is the essential ingredient for changing how business is done.

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

February 1, 2013

Amnesty for Armstrong? Lessons for the Compliance Practitioner

The Lance Armstrong saga continues to provide many lessons for the compliance practitioner. A recent article on ESPN.com, entitled “Lance calls for amnesty program”, reported that Armstrong has come out in favor of those who openly speak about the doping culture of cycling, of course most notably him. The article stated “Now that doping has become such a big problem, Armstrong said a truth and reconciliation program is the “only way” to rid cycling of performance-enhancing drugs, and the sport’s governing body should have no role in the process.” In an interview given to Cyclingnews, it was reported that Armstrong said that the “best way forward is a truth and reconciliation process offering amnesty to riders and officials who detail doping in the sport.”

When asked which anti-doping agency should give this amnesty and which one should take such testimony Armstrong answered that “the program should be run by the World Anti-Doping Agency and not the U.S. Anti-Doping Agency (USADA), the body that produced a scathing report detailing systematic doping by Armstrong and his teams. The USADA report led to Armstrong being stripped of his seven Tour titles and banned from elite sport for life.” Not too surprising that Armstrong does not want to get anywhere near USADA given the report they released on him last summer. Armstrong stated that complete amnesty must be given “otherwise no one will show up.” Any chance that ‘no one’ he refers to would be himself?

While Armstrong’s idea of a ‘Truth and Reconciliation’ program may seem, well shall we say, a tad self-serving, the use of a suspended or lessened sentence has been successfully used to elicit testimony in the cycling world.According to the New York Times, USADA had “the ability to offer other cyclists reduced suspensions if they provided information about Armstrong’s doping. Similar to how prosecutors try to persuade lower-level drug dealers to share information about their superiors, the anti-doping agency sat down one by one with cyclists from Armstrong’s teams. Ultimately, 11 agreed to cooperate.” So I guess people will show up if you offer them some type of amnesty, just not the top banana.

What is the compliance angle to amnesty programs? Siemens used an amnesty program to help it investigate its worldwide bribery scheme. In November 2007, Siemens began an amnesty program relating to possible violations of anti-public-corruption laws in order to expedite the independent investigation and facilitate clarification. According to an article in the FCPA Blog, entitled “Siemens’ Employees Come In From The Cold”, Siemens began this amnesty program because its “internal investigation reportedly had stalled because of stonewalling by managers in various countries.”

In the first three months 66 employees came forward in connection with the amnesty program. In addition, a large number of employees received information about the program. “The amnesty program has been very successful” Peter Y. Solmssen, member of the Managing Board and General Counsel of Siemens AG said. He went on to say “We’re pleased that so many employees have made use of the program and are thereby expediting clarification.” By mid-January, 2008, Siemens’ counsel, Debevoise & Plimpton, said that “[s]ince November 28, 2007, we have obtained significant new information and developed very substantial leads from participants in Siemens’ amnesty program, as well as other sources, regarding topics relevant to our investigation.” Siemens itself said that information provided by the employees who ‘came in from the cold’ through this amnesty program gave it new leads to pursue in its internal investigation. At the end of the day, the Department of Justice (DOJ) lauded Siemens amnesty program, which it characterized as “innovative” in helping to further Siemens internal investigation.

Further, The Wall Street Journal (WSJ) reported in March 2008, in an article entitled “Siemens Amnesty Plan Assists Bribery Probe”, that the amnesty program “was offered to all employees except 300 of Siemens’s top executives and expired at the end of February [2008], prompted about 110 employees to offer information about alleged wrongdoing.” Under the amnesty program, the company did not make claims for damages or unilaterally terminate employee relationships. However, Siemens reserved the right to impose lesser disciplinary measures.

So what about Armstrong and his ‘Truth and Reconciliation’ idea? In the ESPN.com article, he intones that he is really the victim here. First of all, he feels that he is really the fall guy for the sport of cycling, because you know, everybody was doing it. He just did it better. He also said it was unfair that those who testified against him had received “minor off-seasons sanctions versus the death penalty” for himself. He was quoted as saying, “What is relevant is that everyone is treated equally and fairly. We all made the mess, let’s all fix the mess, and let’s all be punished equally.” That certainly sounds like someone who is repentant, doesn’t it?

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

© Thomas R. Fox, 2013

December 19, 2012

Race to the Bottom: Wal-Mart’s FCPA Investigation and the Houston Astros

So who do you think had the better day – the Houston Astros Monday or Wal-Mart Tuesday? Yesterday, the Astros announced the signing of Carlos Pena to be their Designated Hitter (DH) for the 2013 season. Pena’s 2012 average – a whopping ‘buck ‘97’; Yes sports fans the Astros have signed a DH who hit below the dreaded Mendoza Line for the past season. How is that for a strong opening move as the Astros move to the most talented Division in baseball? Anyone out there have the smallest inking that the Astros are ‘racing to the bottom’?

Nevertheless the Astros DH move probably pales with the PR debacle that Wal-Mart is facing today as the New York Times (NYT) once again, with superior reporting, had a story, entitled “The Bribery Aisle How Wal-Mart Used Payoffs To Get Its Way in Mexico”, above the fold on its front page on alleged bribery and corruption engaged in by Wal-Mart’s Mexico subsidiary. Reporters David Barstow and Alejandra Xanic von Bertrab did extensive research to find out not only the alleged amounts of bribes paid but also to whom, and the benefits that Wal-Mart allegedly received back in return.

Wal-Mart Bribery Box Score – (alleged) all scores courtesy of NYT

Store Type and Site

Number of Alleged Bribe Payments Made

Amount of Alleged Bribes USD

Sam’s Club in Mexico City

19

$341,000

Refrigeration Distribution Center north of Mexico City

9

$765,000

Wal-Mart in Teotihuάcan

4

$221,000

Teotihuάcan Store Bribery Box Score – (alleged) all scores courtesy of NYT

Purposed of Bribe

Person(s) Bribed

Amount USD

Obtain altered Zoning Map Director of Urban Planning

$52,000

Obtain waiver of approved traffic plan. In State Agency that regulates roads

$25,900

Town approval for store construction, where permits not in place. Mayor and Town Council

$114,000

Obtain waiver to build at cultural heritage site, where no investigation performed. In National Institute of Anthropology and History (NIAH)

(up to) $81,000

So reviewing the types of activity that fall under the Facilitation Payment exception to the US Foreign Corrupt Practices Act (FCPA) we find the following:

… “shall not apply to any facilitating or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action . . .”

The recent Department of Justice (DOJ) Guidance on the FCPA included a list of actions which are ordinarily and commonly performed by a foreign official and would fall within the definition of a facilitation payment. Also remember that the facilitation payment only applies for a “non-discretionary governmental action”.

  • obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country;
  • processing governmental papers, such as visas and work orders;
  • providing police protection, mail pickup and delivery, or scheduling inspections associated with contract performance or inspections related to transit of goods across country;
  • providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products or commodities from deterioration; or
  • actions of a similar nature.

Of course all proper facilitation payments must be recorded as facilitation payments. Further, as stated in the Guidance, “Whether a payment falls within the exception is not dependent on the size of the payment, though size can be telling, as a large payment is more suggestive of corrupt intent to influence a non-routine governmental action. But, like the FCPA’s anti-bribery provisions more generally, the facilitating payments exception focuses on the purpose of the payment rather than its value.” Based upon the facts set forth in the NYT article, it does not appear that the payments made were ‘non-discretionary’ or were not made without corrupt intent.

Are there any examples, either in Opinion Releases, enforcement actions, DOJ pronouncements or anything else that the payments by Wal-Mart were legal under the FCPA? I would have to give a resounding NO to my own question. The FCPA Professor did cite to three Opinion Releases in his post yesterday, entitled “Wal-Mart Again On The Front Page Of The New York Times”. They dealt with charitable donations under the FCPA and one of the alleged payments made in the Teotihuάcan Store Bribery, the payment to the National Institute of Anthropology and History (INAH) was alleged, in part, to be a charitable donation. However, in each one of the three Opinion Releases cited there were donations made with post-donation auditing of the use of the cash to ensure the money was used as specified and other protections to ensure compliance with the FCPA. The donations were also made with transparency and not, as reported by the NYT, “Sergio Raúl Arroyo, the director general of INAH, recalled in an interview that Ms. Miró had told him about Wal-Mart’s offer. He could not recall any other instance of a company offering a donation while it was seeking a permit. “That would have been totally irregular,” he said.”

So, as the FCPA Professor also noted in his piece, “from an FCPA perspective, the issues largely remain the same.” From the factual perspective, he may well correct. However, what may have changed is the conversation. The NYT piece shows just how invidious a culture of bribery and corruption can be and how such a culture can subvert local governments and even national cultural heritage protections.

Another interesting issue raised by the NYT article is the investigation of the underlying facts. As reported by the FCPA Blog, in a piece entitled “Wal-Mart’s latest FCPA disclosure (December 2012)”, in its Form 10-Q filed with the Securities and Exchange Commission (SEC) by Wal-Mart Stores, Inc. on December 4, Wal-Mart state the following,
“The Company has incurred expenses of approximately $48 million and $99 million during the three and nine months ended October 31, 2012, respectively, related to these matters.” In other words Wal-Mart has spent a pretty penny since the original NYT article in April. Recognizing that not all of these monies were dedicated solely the Mexico investigation, I would still pose the following question, “How is it that two intrepid reporters from the NYT were able to piece together this story and Wal-Mart was not able to do so when confronted with allegations of bribery and corruption in its Mexican subsidiary?” Lastly is the effect that this story may have on the DOJ. Given the criticism that the DOJ sustained in the wake of the HSBC Deferred Prosecution Agreement (DPA) for its money-laundering conduct, will the Department feel compelled to attempt to prosecute individuals in this case? How about the fine? What does the DOJ try and communicate when the world’s largest retailer is alleged to have engaged in such conduct? What about those licenses, if they were indeed obtained by bribery and corruption, should they still be valid?

So who will win this race to the bottom? I can say that it appears Wal-Mart is trying to get its house in order. It has hired a new Chief Compliance Officer (CCO), created new compliance positions around the globe and put on extensive FCPA compliance training. It may take other steps to help to remedy the predicament it now finds itself in. As for the Astros, I had always thought that DH stood for Designated Hitter

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

© Thomas R. Fox, 2012

December 17, 2012

Days of Future Passed: The Moody Blues and the End of Facilitation Payments?

Nights in White Satin, never reaching the end,

Letters I’ve Written, never meaning to send

This past weekend I caught the Moody Blues’ tour celebrating the 45th anniversary of their seminal classic album, “Days of Future Passed”. This was the second album released by the band and while I had always thought of it as the first rock concept album, it is seen by many rock critics as a precursor to progressive rock music. Bill Holdship, Yahoo! Music, said that the band “created an entire genre here.” Robert Christgau noted that it was “closer to high-art pomp than psychedelia.” And finally, Allmusic editor Bruce Eder calls the album “one of the defining documents of the blossoming psychedelic era, and one of the most enduringly popular albums of its era.” The band had its core members of Justin Hayward, John Lodge and Graeme Edge playing at the concert and I can assure you that even in their 70s, they can still rock.

I thought about this album and its title while reading the Memorandum and Order from District Judge Keith Ellison in the Security and Exchange Commission (SEC) civil action filed against current and former officers of Noble Corporation, Mark A. Jackson and James R. Ruehlen. The Foreign Corrupt Practices Act (FCPA) commentariat has gone both ways on interpreting the Court’s Order; witness the headline by the FCPA Professor, “Judge Grants Jackson And Ruehlen’s Motion To Dismiss SEC’s Monetary Claims – Finds That SEC Was Not Diligent In Bringing Case And That SEC Failed To Negate Facilitation Payments Exception – However Judge Allows SEC To File An Amended Complaint”, in contrast with Dick Cassin on the FCPA Blog, whose headline read “Great guidance from the bench: ‘The FCPA casts a wide net”. However, I found one other part of the Court’s ruling by far the most interesting. It was the section which discussed whether the defendant’s claims that their actions met the facilitation payment exception under the FCPA. The Court granted the SEC leave to amend to proffer facts which would overcome the facilitation payment exception.

The allegations of facilitation payment exception as a defense in this lawsuit turn on permits called Temporary Import Permits (TIPs) in Nigeria. As set out in the Court’s ruling, “TIPs allow drilling rigs to operate in Nigerian waters without payment of permanent import duties. Under Nigerian law, the Nigeria Customs Service (“NCS”) grants TIPs for rigs that will be in the country for only one year. NCS may, in its discretion, grant up to three six-month extensions to a TIP. Upon the expiration of a TIP and any TIP extensions, NCS requires the rig to be exported from Nigeria. If the owner of the rig wishes to continue using the rig after the expiration of a TIP and any applicable extensions, he can either convert the rig to permanent import status and pay the appropriate permanent import duties, or he can export the rig and seek a new rig TIP to re-import the rig. In order to obtain a TIP or an extension, the rig owner must submit an application thought a licensed customs agent as the NCS does not deal directly with rig owners such as Noble. The SEC alleged that the defendants authorized customer agents to submit false paperwork and pay bribes to NCS officials to obtain these TIPs. In other words, the SEC alleged that the Nobel officials knew that the company was not entitled to obtain the TIPs as they did not meet the basic requirements for the granting of such licenses.”

Judge Ellison, in his ruling, noted that the “SEC alleges that Defendants authorized payments to foreign officials in order to obtain TIPs based on false paperwork, in contravention of what Defendants knew was the proper process for obtaining TIPs. As discussed supra in Part III.A.1, the SEC pled sufficient facts to support the allegation that Defendants knew these payments would be going to Nigerian government officials to obtain TIPs in a manner that violated Nigerian law. The grant of permits by government officials that have no authority to grant permits on the basis sought is in no way a ministerial act nor can it be characterized as “speeding the proper performance of a foreign official’s duties.” Similarly, if payments were made to induce officials to validate the paperwork while knowing it to be false, that too would not qualify as simply expediting a ministerial act.” [all citations by Court omitted]

The FCPA states that it “shall not apply to any facilitating or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action . . .” Further, the FCPA has a list of examples of facilitation payments in the definition of routine governmental actions, which include the following:

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

The key has always been whether the function in question was a “routine governmental action” because a facilitation payment is clearly a bribe. From the Court’s discussion, it is clear that it is thinking that if the end goal of a facilitation payment is to obtain something that the person or entity making the facilitation knows that they are not entitled to, then it cannot be a facilitation payment because it is not a “routine governmental action”.  However, the Court also focused on “corruptly” and cited to the legislative history of the statute for the following:

The word “corruptly” is used in order to make clear that the offer, payment, promise, or gift, must be intended to induce the recipient to misuse his official position; for example, . . . to induce a foreign official to fail to perform an official function. The word “corruptly” connotes an evil motive or purpose such as that required under 18 U.S.C. 201(b) which prohibits domestic bribery. As in 18 U.S.C. 201(b), the word “corruptly” indicates an intent or desire to wrongfully influence the recipient.

As part of its instructions to the SEC to re-plead the Court said that it should plead Nigerian law to show this corrupt intent. If the SEC does this and the illegal nature of the defendants’ actions under Nigerian law forms a basis of a successful action, how long do you think it will be before the entire concept of the facilitation payment comes in an enforcement action as there is no country in the world which allows bribery of its own government officials?

If the Court continues down this path, we may see the United States move towards a de facto end of the facilitation payment exception. The OECD, among others, has urged the United States to ban these types of bribes. The UK Bribery Act has no such exception under it. Numerous commentators, including Jon Jordan, have argued eloquently for the facilitation payment exception to end.

So what about the Moody Blues and Days of Future Passed? Just as many people remember only the song “Nights In White Satin” from the album and do not recall its greater importance as the either the first concept album or as a precursor to progressive rock, analysts and commentators may miss the significance of Judge Ellison’s ruling as it may signal the first step on the judicial journey to end facilitation payments.

For a copy of the Court’s ruling, click here.

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

© Thomas R. Fox, 2012

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