Why Should Americans Care About the FIFA Indictments? Part III – Corruption and US Companies

Today, I continue my four-part series on the above question posed to me recently by a colleague. In Part I, I wrote that only the US government had the wherewithal, tools and will to do so. Yesterday, I focused on corruption on the pitch and how bribery and corruption ‘changes the game’ of soccer (AKA Football). Today is the third of my of my four reasons on why Americans should care about the Department of Justice (DOJ) bringing their indictments against the 14 named defendants who were all associated with the governing body of international soccer, the Fédération Internationale de Football Association (FIFA). Up today is the corruption and US companies.

While there were no US companies specifically identified in the indictments, there were allegations that bribes were paid and pocketed in connection with the sponsorship of the Brazilian national soccer team by “a major U.S. sportswear company.” This company was later determined to be Nike. In an initial statement Nike denied any involvement in the payment of bribes and said they were cooperating with the relevant authorities. However, they later changed this original statement to say, “Like fans everywhere we care passionately about the game and are concerned by the very serious allegations. Nike believes in ethical and fair play in both business and sport and strongly opposes any form of manipulation or bribery. We have been cooperating, and will continue to cooperate, with the authorities.”

Nike is not alone in its World Cup sponsorship as there are numerous other American companies involved, both sportswear manufacturers and other retailers, such as those from the beverage industry. The involvement of US companies and companies subject to the Foreign Corrupt Practices Act (FCPA) brings up the specter of the FCPA for companies involved in FIFA sponsorship and marketing partnerships. I do not see this as an issue so much about level playing fields for business or even the greater benefits that US companies can bring even when they are required to pay bribes. (The latter argument was used by Wal-Mart apologists around the company’s payments of bribes to do business in Mexico as benefiting the people of Mexico. Let us be quite clear-the bribes paid by Wal-Mart benefitted Wal-Mart and its income from its Mexican operations.)

Information in the indictments was quite damning about the involvement of a company identified as ‘sportswear company A or E’. In a Financial Times (FT) article, entitled “Fifa corruption scandal threatens to engulf Nike as sponsors raise pressure”, Joe Leahy and Mark Odell reported one of the cooperating defendants Jose Hawilla, owner of Traffic Group and who has pled guilty, acted as a third party agent for Nike’s landmark 1996 agreement to allow Nike to fit out the Brazilian national soccer team. Moreover, the article noted, “The prosecutors said that additional financial terms between Traffic and the unnamed sportswear company were not reflected in the CBF agreement. Under these terms, the company agreed to pay a Traffic affiliate with a Swiss bank account an additional $30m in ‘base compensation’ on top of the $160m it paid to the CBF. Three days later, the company and Traffic signed a one-page contract saying the CBF had authorized Traffic to invoice Nike directly “for marketing fees earned upon successful negotiation and performance of the agreement”. Anyone see any Red Flags in that scenario?

Beyond the criminal side of the FCPA, there is the civil side enforced by the Securities and Exchange Commission (SEC) through the Accounting Provisions, which consist of the books and records provisions and the internal controls provisions. According to the FCPA Guidance, “The FCPA’s accounting provisions operate in tandem with the anti-bribery provisions and prohibit off-the-books accounting. Company management and investors rely on a company’s financial statements and internal accounting controls to ensure transparency in the financial health of the business, the risks undertaken, and the transactions between the company and its customers and business partners. The accounting provisions are designed to “strengthen the accuracy of the corporate books and records and the reliability of the audit process which constitute the foundations of our system of corporate disclosure.””

As was made clear with the recent BHP Billiton FCPA enforcement action, violations of the accounting provisions do not apply only to brib­ery-related violations of the FCPA. The FCPA Guidance states these provisions “stand alone to help investors have assurance that all public companies account for all of their assets and liabilities accurately and in reasonable detail.” For the books and records provisions this means that US public companies must “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.” For the internal controls provisions, US public companies must provide a system of internal controls that “provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements.” In other words, the accounting provisions are designed to protect investors in addition to working towards preventing, detecting and remediating bribery and corruption.

In addition to these basic legal requirements, which are all set out in the FCPA and violation thereof could lead to criminal or civil exposure; there will be the costs. The FCPA Professor has identified “three buckets” of costs relating to an alleged FCPA violation. The first is the pre-resolution investigative and remediation costs, the second is the fine and penalty assessment and the third is the post-resolution implementation costs. It is generally recognized that buckets one and three can be up to two to six times the amount of the fine and penalty.

But with the FIFA scandal, there will be another huge factor for companies to consider and that is the negative publicity. This scandal is the largest worldwide corruption case ever brought. It is also the highest profile corruption case ever brought. It will command attention for years to come. If any US companies are linked to bribery and corruption at FIFA, their name will be dragged through the international press ad nauseum. If there are leaks about information on companies before they investigate or get out ahead of any allegations, which may spill into the press, it will certainly not look good.

For a taste of this you can look to the accounting firm KPMG, who is the auditor for FIFA. In a story originally reported by Francine McKenna at the Wall Street Journal (WSJ) and later reported by the New York Times (NYT), KPMG has blessed FIFA’s books since at least 1999. In the NYT piece, entitled “As FIFA case grows, focus turns to its auditors”, Lynnley Browning wrote that the KPMG audits “only heightens the puzzling disconnect between the different pictures that are emerging of FIFA as an organization: riddled with bribes and kickbacks in the view of prosecutors yet spotless according to the outsider most privy to its internal financial dealings.” How well do you think KPMG will come out of this?

The bottom line is that any US company or any other entity subject to the FCPA had better take a close look at its dealings with FIFA, regional soccer federations such as CONCACAF and national soccer federations. A full review is in order starting with who you did business with and how you did business with them. As Mike Brown would say, “follow the money” and see where it went, if you can account for it and if it was properly recorded on your company’s books and records. Finally, now would be a very propitious time to review your internal controls; for even if you had a robust paper system of internal controls like BHP Billiton did, if it is simply a check-the-box exercise or even worse you do not follow the internal compliance controls you have in place, you should begin remediation now.

As to why Americans should care about US companies engaging in corruption, that answer would seem to be straightforward. Companies which engage in bribery and corruption mislead investors and diminish the marketplace of information to base investments upon. If a company is engaging in bribery and corruption, they never report it in their books and records; they always try to hide it so that it cannot be detected. Usually poor internal controls exist, which can allow bribery and corruption to exist or even the possibility of it, once again demeaning the value of a company if that company cannot assure its investors that funds will be paid out with the approval of management. Further, contracts or other business obtained through bribery and corruption presents a false picture of the true financial health of a company as it allows profits obtained through illegal means to be booked as legitimate. Finally, if a company is engaging in bribery and corruption, the financial cost to the company can be astronomic. There is only one Wal-Mart that can sustain hundreds of millions dollars spent to investigate allegations of bribery and corruption and remediate any issues. Avon spent north of $500MM on its pre-resolution investigation and remediation. All of this does not even get to the issue of inflated stock values and the inevitable shareholder derivative litigation. Lastly, there is reputational damage. If a company is willing to engage in bribery and corruption as a part of a business strategy do you want to invest in the organization?

As an American should I care about US companies involved in the FIFA corruption scandal? If the facts reported in the FT are close to correct, I would certainly think so. If monies were paid by a ‘sportswear’ company in the form of marketing fees to Traffic or even a flat $40MM payment to a Traffic affiliates Swiss bank account, this is something which should not be tolerated.

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

© Thomas R. Fox, 2015

 

 

 

 

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

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

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

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

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

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

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

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

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

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

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

© Thomas R. Fox, 2014

GSK and Missed Red Flags in China

One of the questions that GlaxoSmithKline PLC (GSK) will have to face during the next few years of bribery and corruption investigations is how an allegedly massive bribery and corruption scheme occur in its Chinese operations? The numbers thrown around have been upwards of $USD500MM. It is not as if the Chinese medical market is not well known for its propensity towards corruption, as prosecutions of the Foreign Corrupt Practices Act (FCPA) are littered with the names of US companies which came to corruption grief in China. GSK itself seemed to be aware of the corruption risks in China. In a Reuters article, entitled “How GlaxoSmithKline missed red flags in China”, Ben Hirschler reported that the company had “more compliance officers in China than in any country bar the United States”. Further, the company conducted “up to 20 internal audits in China a year, including an extensive 4-month probe earlier in 2013.” GSK even had PricewaterhouseCoopers LLP (PwC) as its outside auditor in China. Nevertheless, he noted that “GSK bosses were blindsided by police allegations of massive corruption involving travel agencies used to funnel bribes to doctors and officials.”

Types of Bribery Schemes

The types of bribery schemes in China are also well known. In a Financial Times (FT) article, entitled “Bribery built into the fabric of Chinese healthcare system”, reporters Jamil Anderlini and Tom Mitchell wrote about the ‘nuts and bolts’ of how bribery occurs in the health care industry in China. They open their article by noting that the practice of bribing “doctors, hospital administrators and health officials is rampant.” They quoted an un-named senior health official in Beijing for the following, “All foreign and domestic pharmaceuticals operating in China are equally corrupt”. The authors also quoted Shaun Rein, a Shanghai-based consultant and author of “The End of Cheap China” for the following, “This is a systemic problem and foreign pharmaceutical companies are in a conundrum. If they want to grow in China they have to give bribes. It’s not a choice because officials in health ministry, hospital administrators and doctors demand it.”

Their article included a diagram which visually represented two methods used to pay bribes in China, which were designated the Direct incentives and Indirect incentives methods. Whichever method is used, the goal is the same – to boost sales.

In the Direct incentives method, a third party representative of a company would provide cash to the department head of a clinic or hospital. The department head would in turn pay it to the physicians to encourage them to prescribe the company’s medical products. But a third party representative could also contact a physician directly and reward them with “gifts such as storecards, vouchers and travel” expenses. Other direct methods might include the opening of bank accounts or charge accounts at luxury goods store and then the company would hand “the debit card or VIP card directly to the recipient.”

The FT noted that the Indirect incentives method tended to be “used by larger pharmaceutical groups with stricter governance procedures.” Under this bribery scheme there were two recognized manners to get benefits into the hands of prescribing physicians. The first is to have cash incentives paid to a third party representative, such as a travel agency, which would then “pass on some of these rewards to the physician directly.” Another method was for the company itself to make a “lump sum sponsorship paid to hospitals”. The hospitals would then distribute perks “to the doctors as a monthly or annual bonus.” Another indirect method noted was that companies might organize overseas conferences and site visits, which might “include free first class travel and five-star accommodation.”

Anderlini and Mitchell reported that “The 2012 annual reports of half a dozen listed Chinese pharmaceutical companies reveal the companies paid out enormous sums in “sales expenses”, including travel costs and fees for sales meetings, marketing “business development” and “other expenses”. Most of the largest expenses were “travel costs or meeting fees and the expenses of the companies’ sales teams were, in every case, several multiples of the net profits each company earned last year.” They cited the example of Guizhou Yibai Pharmaceutical Co Ltd which earned a net profit last year of Rmb333.3m. However its “sales expenses came to a total of Rmb1.25bn, including meetings expenses of more than Rmb295m and wages of just Rmb88m.” Indeed the “largest expense for the company’s sales team of 2,318 people was Rmb404m spent on travel, for an average of more than Rmb174,000 per sales representative for the year. That is roughly what it would cost every single sales representative to fly 10 times a month between Beijing and Guiyang, where the company is based.”

Auditing Responses – Missed Red Flags?

But what should GSK have done if such expenses were kept ‘off the books’? Hirschler, in his Reuters article, quoted one un-named source for the following, ““You’d look at invoices and expenses, and it would all look legitimate,” said a senior executive at one top accountancy firm. The problem with fraud – if it is good fraud – is it is well hidden, and when there is collusion high up then it is very difficult to detect.” However, Jeremy Gordon, director of China Business Services was quoted as saying “There is a disconnect between the global decision makers and the guys running things on the ground. It’s about initially identifying red flags and then searching for specifics.”

There are legitimate reasons to hold Continuing Medical Conferences (CME), such as to make physicians aware of the latest products and advances in medicine. However, this legitimate purpose can easily be corrupted. Hirschler quoted Paul Gillis, author of the China Accounting Blog, for the following “Travel agencies are used like ATMs in China to distribute out illegal payments. Any company that does not have their internal audit department all over travel agency spending is negligent.” Based on this, GSK should have looked more closely on marketing expenses and more particularly, the monies spent on travel agencies. Hirschler wrote, “They [un-named auditing experts] say that one red flag was the number of checks being written to travel agencies for sending doctors to medical conferences, although this may have been blurred by the fact that CME accounts for a huge part of drug industry marketing.”

One other issue might be materiality. If GSK’s internal auditors had not been trained that there is no materiality standard under the FCPA, they may have simply skipped past a large number of payments made that were under a company’s governance procedure for elevated review of expenses. Further, if more than one auditor was involved with more than one travel agency, they may not have been able to connect the dots regarding the totality of payments made to one travel agency.

What about the external auditors, PwC? Francine McKenna, who writes and speaks extensively on all things related to Big 4 auditing, wrote last year, in blog entitled “What The SEC And PCAOB Fail To Acknowledge About Chinese Fraud”, that Pam Chepiga, of Allen & Overy LLP, in 2012, “told the audience that FCPA investigations in China are difficult because, “you can’t take the documents out of the country.”” After her panel, Chepiga, told McKenna “that not only does China restrict the dissemination of documents outside of China, but internal investigations by multinationals must be done by Chinese lawyers with support from the Chinese accounting firms. Given the experience that the SEC is having with Deloitte, it seems, “previous cooperation agreements are not in force”. The SEC would have a hard time going over and investigating a fraud or FCPA violation by the Chinese arm of a US based company”. So things may not have been any easier for PwC. However, the recent agreement between the Securities and Exchange Commission (SEC) and the Chinese Securities Regulatory Commission will allow the SEC some access to audit the work papers of Chinese companies listed in the US may influence this issue.

Ongoing Monitoring

Another response that GSK could have implemented was to engage in greater ongoing monitoring. In the Texas Law, Out of Order column, entitled “5Tips for Avoiding Email Compliance Traps”, Alexandra Wrage, President of TRACE International, reported that “Internal Glaxo documents and emails reviewed by The Wall Street Journal show Glaxo’s China sales staff was apparently instructed by local managers to use their personal email addresses to discuss marketing strategies related to Botox. In the personal emails, sales staff discuss rewarding doctors for prescribing Botox with cash payments, credits that could be used to meet medical education requirements and other rewards.”

Wrage uses the GSK matter as a jumping off point “For companies wanting to get a handle on the compliance risks they face through email (mis)uses and other forms of technology”. She gives five tips to avoid email compliance traps: (1) Encourage communication between compliance and IT departments. (2) Map out your universe of data. (3) Know your obligations, then develop an established set of policies and procedures around them. (4) Train employees to speak up about the new uses in technology. (5) Stress-test your program.

Remember with the technology available to companies today it is possible that companies have the ability to determine if employees are accessing personal email accounts business computers. Also to Wrage’s list, I would add one other point and that is call Eddie Cogan at Catelas Software. Relationship monitoring is what they do and they can help you out immediately.

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

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

Why Perform Due Diligence?: “That’s PR Speak for fraud”

Yesterday brought some very interesting news from both ‘across the pond’ and here in the US. From the UK, there was the news of the arrests of former News Corp head honchos Rebekah Brooks, who ran Murdoch’s newspaper holdings in Britain, Andy Coulson, former editor of the now defunct News of the World. Dominic Rushe, writing in the Guardian, quoted the FCPA Professor who said it “would be hard for the Department of Justice [DOJ] and the Securities and Exchange Commission [SEC] to ignore. We have been hearing allegations for a year and a half now, now we clearly have charges against high ranking officials at a foreign subsidiary.” More ominously, Rushe cited to a report from The Daily Beast that the “Daily Beast alleged that the Murdoch tabloids the Sun and the New York Post may have made payments to a US official on American soil in order to obtain a photo of a captive Saddam Hussein, the deposed Iraqi leader, in his underwear.” Rushe did note that “News Corporation has denied the claims.” But we will leave a more detailed discussion of the events for a later post.

The second piece of news was almost as breath-taking. As reported in the Wall Street Journal (WSJ), Hewlett-Packard (HP) wrote down $8.8bn of its $11bn purchase value of the UK Company Autonomy. HP said “that an internal investigation had revealed “serious accounting improprieties” and “outright misrepresentations” in connection with U.K. software maker Autonomy.” Further, according to HP Chief Executive Officer (CEO) Meg Whitman, “”There appears to have been a willful sustained effort” to inflate Autonomy’s revenue and profitability. This was designed to be hidden.” Speaking more bluntly (as always) Francine McKenna, in her post entitled “Hewlett-Packard’s Autonomy Allegations: A Material Writedown Puts All Four Audit Firms On The Spot”, in forbes.com said “That’s PR-speak for fraud.”

Not to be outdone, the WSJ reported that “Michael Lynch, Autonomy’s founder and former CEO, fired back hours later, denying improper accounting and accusing H-P of trying to hide its mismanagement. “We completely reject the allegations,” said Mr. Lynch, who left H-P earlier this year. “As soon as there is some flesh put on the bones we will show they are not true.”” In other words, Lynch accused HP of mismanaging his former company and destroying its value in less than 12 months. It should also be noted that the Autonomy acquisition was pushed through by the former CEO of HP, Leo Apotheker; not the current CEO.

I thought about the HP story in the context of the section in the recently released DOJ/SEC A resource Guide to the U.S. Foreign Corrupt Practices Act (FCPA) on successor liability and why a company needs to perform pre-acquisition due diligence:

First, due diligence helps an acquiring company to accurately value the target company. Contracts obtained through bribes may be legally unenforceable, business obtained illegally may be lost when bribe payments are stopped, there may be liability for prior illegal conduct, and the prior corrupt acts may harm the acquiring company’s reputation and future business prospects. Identifying these issues before an acquisition allows companies to better evaluate any potential post-acquisition liability and thus properly assess the target’s value.

 It should be noted that Autonomy’s outside auditor before the deal, Deloitte UK, gave the company a clean bill of health. Further, HP had its own outside auditor, KPMG, brought in at the pre-acquisition stage to conduct due diligence work, which was essentially to check Deloitte’s audit work of Autonomy. In other words, two of the world’s top auditing firms passed muster over Autonomy’s books and records and gave the entity’s financial statements a passing grade.

Once, when asked why men play football, Jet coach Herm Edwards emphatically said “You play to win the game.” I think people need to realize that compliance due diligence under the FCPA can also be used to help company’s do more than uncover potential FCPA issues but also help correctly assess the value of target companies. It might help prevent multi-billion dollar write downs. Unless of course the target company has engaged in an on-running, long term fraud…

Happy Thanksgiving to all…

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I will be discussing the recently released FCPA Guidance next Tuesday afternoon in a webinar, hosted by World Compliance. The event will be held at 2 PM CST. Details and registration can be found here. I hope that you can attend.

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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, 2012

Olympus Trifecta

Richard Cassin author of the FCPA Blog, among others, consistently writes about corruption as ripping apart the fabric of many countries. This makes anti-corruption and anti-bribery legislation not only appropriate but mandatory. Over the past few weeks, I believe that we have seen another reason and that is that shareholders may have some comfort that the companies in which they invest are valued fairly and will not implode. In the US, we had the last decade brought us the trifecta of Enron, World Com and Adelphia, where accounting frauds destroyed these companies. But Japan is experiencing something different with the still unfolding Olympus matter.

On Monday, the Wall Street Journal (WSJ), in an article entitled “Olympus Admits to Hiding Losses” reporters Kana Inagaki and Phred Dvorak, wrote about the scheme by which the Olympus Corp. hid years of investment losses by making wildly overpriced acquisitions and then writing off the investments losses by writing down the value of the acquisitions. Such a business strategy  is so well known in Japan that it even has a name, “tobashi.”

To recap this story, on October 14, 2011 the now-resigned Olympus Chairman, Tsuyoshi Kikukawa, dismissed the former head of the company, the Briton Michael C. Woodford, citing cultural differences in management styles. Mr. Woodford contended that he had been fired after raising questions about a series of acquisitions made by Olympus, that, he said, were inexplicably high prices paid for the acquired companies or involved exorbitant advisory fees paid to tiny entities which acted as agents of Olympus for the transactions in question. Indeed one of these commissions was a payment of $687 million, almost one-third of the amount of a transaction of just less than $2 billion. Of course the company claimed he was fired for the catch-all usual suspect reason, that being he was ‘not a team player.’

Later the WSJ reported that the three companies purchased by Olympus, whose purchases led to the unusually high commissions, had the following characteristics: “two of the acquired companies, medical-waste disposal company Altis Co. and food-container maker News Chef Inc., were founded in the early 1990s under different names, public company records show. The companies conducted no business for years.” The third company was founded “less than a year before Olympus bought a stake”. Olympus eventually acquired control of all three companies.  Within a year of acquiring control of these three companies, “Olympus wrote off three-fourths of its investments in the companies.”

In an article in Wednesday’s New York Times, entitled “Shares Dive as Olympus Scrambles for Answers”, Christine Hauer reported that “The developments cast a harsh light on Olympus’s auditors, KPMG until 2009, which have signed off on financial statements that may now be suspect.” While auditor negligence may well have been a factor, I will leave this area of comment to Francine McKenna and her blog site, retheauditors.com. If you do not read Francine of a regular basis, you should take this opportunity to begin doing so.

So what makes this new revelation so stunning? First, much like Harry Markopolis, who could not have predicted that Bernie Madoff was running a decades long Ponzi scheme, I could not have predicted that Olympus was defrauding its shareholders by hiding investment losses through acquisitions. And while fraud may well be a part of this story, I will leave that discussion to Tracy Coenen and her blog site, sequenceinc.com. As with Francine, if you do not read Tracy’s site on a regular basis now might be a propitious to start.

Remember the $687 million commission paid to an agent of Olympus? It is this part of the story that relates to Richard Cassin and all the others who tirelessly campaign against bribery and corruption in the corporate world. One of the bases for jurisdiction of the Foreign Corrupt Practices Act (FCPA) applies if a company with a US presence engages in bribery or corruption and the US banking system is involved. While at this point it is unknown if any of the monies paid for the companies acquired by Olympus to hide its investment losses came through the US banking system, if it did, the FCPA might well be invoked. To this end the New York Times reported that the US Securities and Exchange Commission (SEC) and FBI are investigating the matter.

Admittedly the FCPA is a supplier side law, which only punishes the bribe-payer. However, the same is not true of the UK Bribery Act, which makes illegal the payment or receipt of bribes. Clearly Olympus does business in the UK so the Bribery Act may also be invoked. Further, while the FCPA applies to ‘foreign governmental officials’, the UK Bribery Act applies to bribery between foreign officials and private citizens. If any of the monies paid as commissions was made to purchase the silence of the putative agents, then jurisdiction may lie. Lastly, the Board of Olympus should also note that the Bribery Act has a strict liability component for those who are actively involved in conduct which violates the Bribery Act.

So just who on Olympus could have been involved in any untoward conduct? Perhaps any person involved in properly not recording the company’s transactions so as to provide a fair and accurate representation of the financial health of the company? Any person involved in the transactions of purchasing the companies bought for the purposes of writing down their values? Maybe the agents who received the high commissions and, by the way, where did those exorbitant commissions go after they went into those Cayman Island bank accounts? How about any persons from the company’s purchased? Was this conduct systemic, as it engaged in for 15-20 years?

In my last post on Olympus (Olympus Redux) I wrote about the need to perform due diligence on transactional agents. While this need still exists, the use of transactions and transactional agents to hide investment losses may explain why it does not appear that such due diligence was done on the agents. Moreover, if such transactional agents are going to be used for fraudulent purposes, it really doesn’t matter what quality of due diligence is performed. Further, if the amount of the commission is exorbitant, as in one-third the value of a multi-billion dollar transaction, this in and of itself may be a Red Flag. This is the initial Red Flag that the now fired UK whistle blowing President reported to UK authorities. So now we have hit the trifecta for Olympus in the arena of corruption: (1) termination of the UK subsidiary President for reporting Red Flag conduct; (2) use of small agents who were paid huge commissions which were not deserved; and (3) failure to actively report years of investment losses by fraudulent transactions. I can only wonder what might be the next bombshell. I guess it will have to be called the quadruple.

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, 2011

Is Your Business Toxic-in the FCPA Compliance Context

Is your business toxic? I do not mean that it had holds the type of sub-prime Collateral Debt Obligation assets which were so prominently mentioned in the press just a few years ago. I mean is your business so devoid of anything close to a best practices compliance program that you are not able to obtain loans, manage risk through insurance or other equally traditional business practices? Yesterday I wrote about the new types of insurance available for investigation of, and claims based upon, alleged violations of the Foreign Corrupt Practices Act (FCPA). This also included Directors and Officers liability coverage if such persons are made parties in a stock holder derivative action based upon violations of the FCPA. I also wrote about banks and other financial institutions which are now reviewing compliance programs to determine if they meet some type of minimum best practices. However, now the failure to have a minimum best practices compliance program in place may have a more drastic effect; it may deny you the ability to access your company’s value in the capital markets.

Reverse Mergers

There has been much written about Chinese companies engaging in reverse mergers to obtain access to US capital markets. Writing in forbes.com, in an article entitled “Chinese Reverse Merger Companies: The Auditor Angle”, Francine McKenna defined a reverse merger as “through such a transaction the private company becomes a SEC [Securities and Exchange Commission] reporting company with registered securities without filing a registration statement with the US SEC.” One of the cornerstones to the FCPA is that if a company is publicly listed it has a books and records requirement, which is enforced by the SEC. Any company which does not have a minimum best practices compliance program, including books and records which accurately reflect all transactions, have made themselves immediately liable under the FCPA if they become a US publicly listed company through a reverse merger.

Re-financing

If your company is going through traditional corporate refinancing in the next 18 months, you had better start to audit, or at a minimum assess your compliance program. Why? Because any bank or other financial institution that you go to will want to not only review your compliance program but may well want to review where that compliance program may be in terms of an overall assessment of the compliance risks that your company faces. Are you in the telecom business; pharmaceutical business; energy business or any other area that the Department of Justice (DOJ) or SEC has targeted for a FCPA review? You better have all your compliance ducks in a row and ready to turn over to the financing institution for review.

 Selling Your Business

Here is where your company may have risen (or sunk) to the level of toxic. If a company comes along and wants to purchase some or all of your business and they look under the FCPA compliance hood, what will they see? If there is no best practices compliance program in place they may well not take a second look. If you are a Private Equity company with a number of Portfolio Companies, what is the state of the compliance program in each Portfolio Company? If you have one of ten with a best practices compliance program, does that not “set the bar” for the minimum standard in all the other Portfolio Companies? While the DOJ has provided guidance in Opinion Release 08-02 and the Johnson & Johnson Deferred Prosecution Agreement (DPA) as to the steps an acquiring company can take to try and protect itself from successor liability under the FCPA, no lawyer can assure a client of complete absolution.

If you are simply a small business with a superior product or service and thereby well positioned to sell, what would be the price carve-out and/or indemnity which you would have to sign if you have less than a best practices compliance program? What if your compliance program cannot be assessed in the time available for pre-acquisition due diligence, would or should a company consider purchasing your business?

Yesterday I focused on some of the market developments which may drive implementation and enhancements of compliance program. Compliance programs may now be driven by the ultimate market factor of access to the value of your company. So we ask again is your company toxic because it has a less than best practices compliance program?

Ed. Note-to the Braves fans, you really could not have thought the 106-loss Astros would beat the Cards with the playoffs on the line. And congratulations to my wife’s favorite and Astros’ MVP, Hunter Pence (who just happens to play for the Phillies) for the game winning hit over the Braves. As to the Red Sox fans, I don’t know what to say, it is not as bad as Bill Buckner but it has to be up there with Buck (F-ing) Dent. I am glad you had a couple of titles last decade so salve the pain of this one.

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Please join Mike Volkov, Stephen Martin, Jim Feltman and myself on Oct. 6 in NYC for a presentation on ” The Gathering Storm: Anti-Corruption Compliance for Private Equity and Hedge Funds”. The presentation is hosted by World Check and Ethisphere and the event is complimentary. More information and registration details can be found at http://ethisphere.site-ym.com/events/event_details.asp?id=179863. If you are in the NYC area I hope you can attend.

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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, 2011