2012 First Half FCPA Enforcement Round-Up: Part I

The first half of 2012 is reaching to a close and we have had several significant enforcement actions so far this year. So to commemorate all those June Bride and Bride-Grooms out there, including my parents who celebrate their 56^th wedding anniversary on June 30, I have put together a couple of posts reviewing my top 6 Foreign Corrupt Practices Act (FCPA) enforcement actions for the first 6 months of 2012. At this point I cannot see any clear trends but there are some key points that provide solid advice for the compliance practitioner going forward. In today’s blog, we take up the first three, in chronological order.

I.                   Aon

We begin with a Non-Prosecution Agreement (NPA) issued in the last week of 2011 where the insurance giant Aon received a NPA from the Department of Justice (DOJ) in settling enforcement actions against it by the DOJ and Securities and Exchange Commission (SEC). Aon agreed to total fines and penalties in an amount of $16.3 MM. This is in addition to a fine previously paid to the UK Financial Services Authority (FSA) in January, 2009, of £5.25 MM (approximately $8.2 MM at today’s exchange rate).

A.     Aon’s Remedial Actions Which Led to the NPA

The DOJ stated that it entered into the NPA based “in part, on the following factors: (a) Aon’s extraordinary cooperation with the Department and the U.S. Securities and Exchange Commission (“SEC”); (b) Aon’s timely and complete disclosure of the facts described in Appendix A as well as facts relating to Aon’s improper payments in Bangladesh, Bulgaria, Egypt, Indonesia, Myanmar, Panama, the United Arab Emirates and Vietnam that it discovered during its thorough investigation of its global operations; (c) the early and extensive remedial efforts undertaken by Aon, including the substantial improvements the company has made to its anti-corruption compliance procedures; (d) the prior financial penalty of £5.25 million paid to the United Kingdom’s Financial Services Authority (“FSA”) by Aon Limited, a U.K. subsidiary of Aon, in 2009, covering the conduct in, Bangladesh, Bulgaria, Indonesia, Myanmar, the United Arab Emirates and Vietnam; and (e) the FSA’s close and continuous supervisory oversight over Aon Limited.”

B.     Non-Bona Fide Travel and Educational Expenses

The primary activity for which Aon was sanctioned was a travel and education fund, initially designed to provide funds for foreign government employees involved with insurance to travel to educational conferences. However, the funds evolved into personal use for entertainment of the officials, their wives and families. In one instance, involving a fund in Costa Rica, travel was booked through a travel agency which was owned or managed by the Costa Rican officials who were entertained with monies from the educational and training funds.

C.     Books and Records

The largest portion of the Aon fine involved violations of the FCPA’s books and records requirements. The NPA noted, “With respect to the Costa Rican training funds, although Aon Limited maintained accounting records for the payments that it made from both the Brokerage Fund and the 3% Fund, these records did not accurately and fairly reflect, in reasonable detail, the purpose for which the expenses were incurred. A significant portion of the records associated with payments made through tourist agencies gave the name of the tourist agency with only generic descriptions such as “various airfares and hotel.” Additionally, to the extent that the accounting records did provide the location or purported educational seminar associated with travel expenses, in many instances they did not disclose or itemize the disproportionate amount of leisure and non-business related activities that were also included in the costs. In short, there was either no bona fide educational expense or not one which could be documented from Aon’s internal records.

Key Takeaway: You must completely document, document and document the basis of your expenditures. If there is no explanation, the assumption will be the payments are made for corrupt purposes.

II.                Smith & Nephew

The landscape of the FCPA world is littered with cases involving both agents and resellers, who are most clearly acting as representatives of the companies whose goods or services they sell in foreign countries. Many US businesses believe that the legal differences between agents/resellers and distributors insulate them from FCPA liability should the conduct of the distributor violate the Act. Under this same analysis, many US companies believe that the FCPA risk has also shifted from the US company to the foreign distributor. However, such belief is sorely miss-placed as was shown in the Smith & Nephew (SNN) enforcement action.

The FCPA violations revolved around a Greek distributor of SNN who paid bribes to Greek doctors so that they would purchase and use SNN products. SNN paid a monetary penalty of $16.8MM to the DOJ and $5.4MM to the SEC as a civil penalty, all for a total of $22.2MM in fines and penalties.

Entity Designation	Domicile of Entity	Commission Rate	Services Provided	Actual Services
Shell Company A	UK	40% of sales of Greek distributor	Marketing	Did not perform any services
Shell Company B	UK	26% of sales of Greek distributor	Marketing	None listed
Shell Company C	UK	35% of sales of Greek distributor	Marketing	Did not perform any true services

A quick review of the above chart shows the FCPA problems; very high commissions were paid with no actual services provided. Or as stated by the FCPA Professor, SNN “falsely recorded or otherwise accounted for the payments to the shell companies on its books and records as ‘marketing services’ in order to conceal the true nature of the payments in the consolidated books and records of S&N.”

Key Takeaway: If your company uses a distributor model in its sales chain, I would suggest that you review and reassess your pricing structure in light of this enforcement action.

III.             BizJet

In the bribery and corruption world, the facts of this enforcement action are about as bad as it can get. It was reported the senior company personnel had actual knowledge or approved of the payment of cash to bribe foreign governmental officials to obtain or retain business. There was also a deliberate attempt to hide the true nature of the payments. But even with these damaging facts, the company was able to receive a significant reduction on the low end of the fine range as suggested under the US Sentencing Guidelines. So how did the company achieve this?

A.     Bribery Scheme

In this case, the company made a number of corrupt payments which were characterized as “commission payments” and “referral fees” on their books and records. Payments were made from both international and 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 their books and records.

BizJet Bribery Box Score

BizJet Executive or Employee Named	Payment Made To	Amount of Payment	Others Involved
Sales Manager  A	Official 6	Cell Phone and $10K	Executive B and C
Sales Manager A	Official 3	$2K	Executive  B
Executive B, C and Sales Manager A	Official 2	$20K
Executive C	Official 2	$30K	Sales Manager A
Executive B	Mexican Federal Police Chief	$10K	Executive C and Sales Manager. A
Executive C	Official 5	$18K	Sales Manager A
Sales Manager A	Official 4	$50K
Sales Manager A	Mexican Federal Police	$176	Executive C
Sales Manager A	Official 4	$40K
Sales Manager A	Mexican Federal Police	$210K	Executive C
Sales Manager A	Official 5	$6K	Executive C
Executive C	Official 5	$22K

B. Reduction in Monetary Fine

I set out these facts in some detail to show the serious nature of enforcement action. However, the clear import is that a company can make a comeback in the face of very bad facts. 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 is obviously 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.”

How did BizJet achieve this reduction and avoid an external monitor? As reported by the FCPA Professor, the following were factors:

(a) following discovery of the FCPA violations during the course of an internal audit of the implementation of enhanced compliance related to third-party consultants, BizJet initiated an internal investigation and voluntarily disclosed to the DOJ the misconduct …;

(b) BizJet’s cooperation has been extraordinary, including conducting an extensive internal investigation, voluntarily making US and foreign employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the DOJ;

(c) BizJet has engaged in extensive remediation, including terminating the officers and employees responsible for the corrupt payments, enhancing its due diligence protocol for third-party agents and consultants, and instituting heightened review of proposals and other transactional documents for all BizJet contracts;

(d) BizJet has committed to continue to enhance its compliance program and internal controls, including ensuring that its compliance program satisfies the minimum elements set forth in the” corporate compliance program set forth in an attachment to the DPA; and

(e) “BizJet has agreed to continue to cooperate with the DOJ in any ongoing investigation of the conduct of BizJet and its officers, directors, employees, agents, and consultants relating to violations of the FCPA.

C.        Reports to the DOJ

The company avoided an external monitor. However, it agreed that it would report “at no less that twelve-month intervals during the three year term” [of the DPA] to the DOJ on “remediation and implementation of the compliance program and internal controls, policies and procedures” which were listed in Attachment C to the DPA (the DOJ guidelines for a minimum best practices compliance program). The initial report was required to be delivered one year from the date of the DPA and would also include BizJet’s proposals “reasonably designed to improve BizJet’s internal controls, policies and procedures for ensuring compliance with the FCPA and other applicable anti-corruption laws.”

Key Takeaway: What you do after you discover the bribery and corruption will go a long way towards determining your penalty. No matter how bad the facts are, if you provide ‘extraordinary cooperation’ to the enforcement agencies, you can significantly reduce your final monetary penalty.

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

How to Influence FPCA Compliance as a Minority JV Partner

How does a company work towards achieving compliance with the Foreign Corrupt Practices Act (FCPA) in a Joint Venture (JV) or other business relationship where it holds less that 50% of the control? That question is often faced by US companies when they enter into a JV in many countries which require a majority of local ownership or even a 50-50 split in ownership. Some tactics that the compliance practitioner might employ were discussed in an article in the June issue of the Harvard Business Review, entitled, “The Perils of Partnering in Developing Markets”, in which Johns Hopkins (Hopkins) Medicine International Chief Executive Officer (CEO) Steven J. Thompson wrote about his company’s experience in partnering with a charity in Turkey to build and operate a “state-of-the-art medical facility.”

While not directly discussed in the article it is certainly worth noting that in partnering to create hospitals overseas, Hopkins is always dealing with the FCPA as health care services generally and hospitals particularly are run by the foreign government in which the hospital is located. However, the problems Hopkins encountered and some of the solutions provide excellent insight into compliance challenges that a company might well face when it moves into a developing market. Thompson began by noting that as a non-profit Hopkins always takes a minority interest or none at all. This requires Hopkins to operate not as typical JV or other type of partner but “more like consultants with a broad range of responsibility and high level of authority.” The other thing that I found quite interesting was that as a non-profit, the most important thing to Hopkins is its good name; in other words it is far more concerned about reputational damage than financial loss. Some of the key lessons learned were as follows.

Filling the Local Talent Gap

Even if the country’s laws do not require that local persons be the entity’s managers, most local partners insist upon it. Thompson has learned that fighting this “rarely pays out.” Instead Hopkins seeks to team its advisors with the local executives, so that the advisors will have the ability to influence both “process and culture.” Overtime, Hopkins has found that the top local managers cannot push as hard or as strongly for innovation and culture change so that the Hopkins team can begin to take over the top management functions.

A key component for long term success is training. This includes local training in all aspects of hospital management and financial operations. Additionally, Hopkins establishes a strong recruiting pipeline for bringing back to Baltimore, the home of Hopkins, so that they can be trained at and see how the facilities are run in the US.

When Best Practices Collide with Culture

In most medical treatment outside the US, the culture is such that a Doctors judgment is never questioned. This is quite different from the Hopkins experience in the US, where other providers of health care are empowered to challenge the decisions of senior physicians where a patient’s health may be at risk. The Hopkins approach when “confronted with a culture clash is to determine whether we really need to challenge the culture.” With this approach, Hopkins found that it could accomplish its goals, “within the cultural constraints” in which it operated. When it could not do so, it “seeded the staff with professionals who could lead by example” so that in the case of the culture of deference to Doctors whose authority was not challenged, senior nurses were brought in from countries where such a tradition did not exist. Once others saw that patient outcomes were steadily improved, “they began to come around and the culture of deference receded.”

Mitigating Risk

In many ways, I found the Hopkins experience in mitigating risk to be the most interesting. Here Thompson said that the pre-agreement due diligence process, which he termed “choosing the right partner and learning to read the signs from up-front negotiations are critical”, were two of the most critical factors. He identified factors such as foreign institutions which only desired short-term profit or were trying to capitalize on the Hopkins name as “anathema to success.” He wrote that these factors can be ascertained through long conversations with potential partners about goals such as sustainable quality and commitment rather than on financial returns alone. Mimicking the requirements under the US Department of Justice’s (DOJ’s) minimum best practices compliance program, Hopkins requires strong contract language regarding the commitments made by any foreign partner. Lastly, if a relationship begins to sour or otherwise have problems, Hopkins is not afraid to rethink its position or even end the relationship after appropriate consideration. To help facilitate this from the legal perspective, Hopkins requires a “termination for convenience clause” in its contracts.

Project Checklist

Another interesting aspect of the Hopkins approach was in the implicit use of risk assessment. Thompson included the below chart to illustrate “How Johns Hopkins Sizes Up International Risk”. I found that these concepts speak to an on-going approach to risk assessment so that the process is continuous and therefore allows for continuous improvement.

Evaluating the Opportunity	Getting up to Speed	Operating Over Time
Assess the potential partner’s willingness to commit resources.	Engage experts to hire key personnel and to design processes.	Stabilize processes and create feedback loops.
Assess regional constraints.	Establish training and mentoring programs for local managers and professionals.	Transfer more responsibilities to local managers.
Work with your local partner on a project plan and a business plan.	Set up clinical, operations and financial performance metrics.	Establish local education and recruitment pipelines.
Ensure that your local partner has a clear understanding of, and realistic expectations for the project.	Establish quality, safety and efficiency processes.	Establish regional marketing programs.
	Set up a time for accreditation.	Consider new initiatives and expansion.

If Trouble Arises

Thompson concluded is article with a list of action items that you can perform if there are signs of trouble. So, following McNulty’s Maxim No. 3 of “What did you do to remedy it?”, I list the following actions steps your company can take at three different stages of a JV relationship.

1. In the Evaluation Phase

• If your concerns are modest, propose a smaller, several months-long pilot consulting project.
• If your concerns are serious, you would walk away from the deal.

2. In the Start-Up Phase

• Engage experts to hire the Key JV personnel and to design the appropriate processes.
• Increase the number of ex-pat professionals involved in the JV.
• Expand your support to local managers.
• If warranted, revise strategic plans and consider replacing the onsite management.
• If severe problems arise, consider scaling back or terminating the JV

3. As the Relationship Matures

• Strengthen your training and mentorship.
• Bring in subject matter experts (SMEs) to help solve defined problems.
• Retool processes that may be falling short.
• If required, reinstate key managers from your corporate headquarters or home office.
• Freeze or reduce the scope of the JV’s activities until problems are solved.
• Set up problems solving forums with partners in other countries.

Many US companies have struggled with how influence partners to comply with the FCPA in JV relationships. The Hopkins experience has some excellent steps that your company can take in the pre-formation stage, during contract negotiation, in post-execution contract management and then as the relationship matures. The process that Hopkins follows is one that clearly allows you to use influence, rather than the brute force of the majority right of control. It is a very good road map for you to consider and one that management should take a close look at when managing any overseas relationship.

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

JGC Deferred Prosecution Agreement: Cooperation with DOJ Still Key

I had not, at least in recent years, thought I would be able to say that the Houston Astros have a better record this late in the season than the Boston Red Sox. But at least as of yesterday, now 1-5 Astros no longer share the worst record in baseball, which now belongs to the Red Sox and Tampa Bay Rays, both with a 0-6 starts. So baseball fans, you had best put on your seat belt for it could well be a bumpy ride this season.

All of which brings us to the JGC settlement this week with the Department of Justice (DOJ) regarding the Nigerian Bribery Scandal. JGC agreed to enter into a Deferred Prosecution Agreement (DPA) and agreed to pay a fine of $218 million. This settlement closes out the FCPA chapter (corporate division) on the Scandal where the DOJ obtained fines and penalties in the range of $1.5 Billion. The DPA itself had a couple of interesting features.

The first is that JGC (apparently) did not cooperate with the DOJ as well or as thoroughly as other companies have done in the FCPA investigation. JGC received a -1 credit for reduction in its overall Culpability Score for “clearly demonstrated recognition and affirmative acceptance of responsibility for criminal conduct”. Readers will note that this is the same score received by Alcatel-Lucent in its DPA and the estimated costs to Alcatel-Lucent for this perceived lack of recognition and acceptance ranged between $20MM to $10MM, which ‘only’ paid a monetary penalty of $92MM. Contrast this score with that received by Maxwell Technologies, -5 reduction in its overall Culpability Score for its “Voluntary Disclosure, Cooperation and Acceptance. The clear message here is that full cooperation will bring down a company’s fine and in a very significant amount.

 The next items of interest are that JGC agreed to implement (1) a system of internal controls and (2) a rigorous anti-corruption compliance code consistent with the FCPA, Japanese anti-corruption laws and other applicable anti-corruption laws. This language sounds like the company needs to start at the beginning to create such an anti-corruption program. Attachment C of the DPA fleshes out the specifics of the compliance program the DOJ recommends for JGC.

Last is that instead of a Corporate Monitor, JGC agreed to an “Independent Compliance Consultant, who is to “evaluate JGC’s corporate compliance program with respect to the FCPA, Japanese laws implementing the OECD convention…and other relevant anti-corruption laws. The interesting thing here is that while this position is termed “Independent Compliance Consultant” it really sounds like a Corporate Monitor as the DOJ has the right to choose the candidate, from those proposed by JGC.

 Once again the DOJ has clearly informed the compliance community that cooperation in the investigation and enforcement process can pay dividends in terms of a lower fine. I hope companies are getting the message.

For a copy of the JGC Deferred Prosecution Agreement, click here.

For a copy of the JGC Criminal Information, 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, 2011