After the Contract is Signed: How Frequently Should You Perform (FCPA) Due Diligence

Yesterday we participated in a workshop at the 2011 SCCE Utilities & Energy Compliance and Ethics Conference with Scott Lane, President of the Red Flag Group. In his presentation, he discussed a White Paper that he and his colleague James Walton recently released entitled, “Best Practices in Conducting FCPA /Anti-bribery Due Diligence”. We went back and read the article and found it to be an excellent resource for many questions relating to due diligence as required by the Foreign Corrupt Practices Act (FCPA) or any best practices anti-bribery and anti-corruption program. Today we will focus on the question of how often should a company perform due diligence on its foreign business relationships.

Lane and Walton begin by noting that due diligence is very hard to keep consistent as no two are ever the same. They believe it is important to keep a close watch on information sources, to search for improved providers, and ensure that the information you are looking at is useful for the business needs. The specific time frame for ongoing due diligence depends on the risk profile of a company’s foreign business relationship. They provide three benchmarks: (1) annually; (2) biennially; or (3) at contract renewal.

In making this determination, the authors suggest several risk factors which a company should evaluate in making this determination regarding the frequency of due diligence. these include:

Physical allocation of the partner: The authors define this risk as whether the foreign business partner is located in, or providing services to your company in a geographic area recognized as a high risk country. Reference can be made to the Transparency International Corruption Perceptions Index or another recognized country risk rating such as Country-Check.

Findings of the original due diligence: The authors define this factor as one based upon prior due diligence investigation. The key issues here are (1) were any Red Flags identified and (2) how were these Red Flags cleared?  It is assumed that if a Red Flag was raised in prior due diligence, then the Red Flag was cleared to enable the business relationship to come into existence. This also brings up an important point about Red Flags that is often overlooked. A Red Flag should not automatically mean that a foreign company cannot become a foreign business partner of your company. It does mean that the Red Flag must be investigated and cleared before such a foreign business relationship is created.

Type of partner: There are a side variety of foreign business relationship which require due diligence under the FCPA. As noted in several recent Deferred Prosecution Agreements, Alcatel-Lucent, Maxwell Technologies and the Panalpina settlements,  these can include resellers, agents, intermediaries, consultants, representatives, distributors, teaming partners, contractors and suppliers, consortia and joint venture partners. Those foreign business partners which are actively promoting your company in the market place put your company at the greatest risk and should therefore require more due diligence.

Type of customers the partner sells to: Most companies understand the motto  “Know Your Customer” but under FPCA, and other anti-bribery best practices, your company must also know the customers that your foreign business partner sells to or, in any other manner, interacts with. The more interaction with foreign governmental officials that your foreign business partner engages in, the more due diligence scrutiny is appropriate.

Amount of business being transacted by the partner: The authors point to this risk factor by noting that a company should keep a close watch on the dollar volume of business that it may engage in with a foreign business representative. We would suggest that a company should also review the relevant percentages of services or goods sold or services rendered for each foreign business partner. A company should certainly desire to know if a certain vendor provided a very high percentage of raw materials or any services critical to the delivery of products. Additionally if most, or all, of a company’s products are sold by or through one foreign business partner, this may call for greater due diligence scrutiny.

The authors end by noting that they believe the ideal solution for renewal of due diligence is a mixed approach based on risk. In most cases, renewals should be done annually or at least every two years. However, best practice also requires regularly checking whether the partner, or its directors, shareholders or senior executives are listed on any watch lists. This should be completed periodically – at least monthly.

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

 

 

Jonathan Marks’ 13 Step FCPA Compliance Action Plan

Back in December 2010, we noticed a tweet by Jonathan Marks where he mentioned that he had developed a 13-step action plan for Foreign Corrupt Practices Act (FCPA) compliance programs. We were certainly intrigued by this information but, alas, there was no link to the document or information, so we took the direct approach and DM’d Jonathan to ask if he would be willing to share with us the 13-step action plan, which he was willing to do. So today’s blog will begin with a reminder of the incredible tools that are available to the FCPA compliance practitioner through today’s internet.

I met Jonathan (virtually) through LinkedIn and his hosting of the LinkedIn group ‘Fraud Pentagon.’ Through his profile I was able to discover Jonathan’s interesting professional journey, he is the Partner In-Charge of the Fraud, Ethics and Anti-Corruption practice at Crowe Horwath and has worked with the US Attorney’s office, the FBI, the IRS Criminal Investigation Division and US Customs officials during his career. Jonathan has also served as the Chief Audit Executive at several public companies and is a Certified Public Accountant, Certified Fraud Examiner and is certified in financial forensics.

I spoke to Jonathan to find out how he developed this plan and he told us that from his meetings with clients on the issue of compliance over the years, he wanted to develop a non-legalistic approach that he could easily convey to clients. So he studied the available literature, talked to others in the compliance arena and sought counsel from US government agencies tasked with enforcing the FCPA to come up with a framework by which a company could review its FCPA compliance program, assess where the program is in terms of best practices, and then use the same action plan as a guide for implementing some or all of the best practices.

Jonathan’s 13-step action plan includes the following:

1.    Assisting in obtaining top-level commitment from boards and senior executives, setting the “tone from the top”

2.    Executing a Corruption and Bribery Risk assessment that drives the compliance program and modifies it accordingly

3.    Improving/Strengthening Internal Controls

4.    Structuring and Defining Roles & Responsibilities

5.    Performing Risk-based Third Party Due Diligence

6.    Developing Clear, Practical, Current and Accessible Policies and Procedures

7.    Documenting a Detailed Multi-year Compliance Plan

8.    Defining Appropriate Disciplinary Procedures

9.    Ensuring Robust Monitoring and Review (Utilizing Internal Audit)

10. On-going Training

11. Violation Reporting System is in Place and Multi-lingual

12. Reviewing Ancillary Risk Mitigation Procedures

13. Performing Independent Compliance Program Testing Annually

During our phone conversation, Jonathan indicated that while his 13-step action plan was designed with the FCPA in mind, it is also a solid basis for any company to use when reviewing, creating or implementing an “adequate procedures” program under the UK Bribery Act. Jonathan also shared with us some of the literature and references he had used to put his 13-step action plan together. These included the US Sentencing Guidelines, the OECD Good Practices, blog postings and articles discussing best practices and information he had gleaned from attending seminars and conferences. We applaud Jonathan for developing his action plan and making it available for discussion in our blog. We hope that it can be of assistance to the FCPA compliance practitioner.

We also want to take this opportunity to emphasize the wealth of material which is available, at no charge, to the FCPA compliance practitioner. The genesis of this posting came through Twitter, which has an active group of FCPA compliance and ethics professions tweeting throughout the day. We have also been able to obtain a large amount of helpful material through joining only a portion of the  LinkedIn groups which discuss issues related to the FCPA compliance practitioner; which include: FCPA – Foreign Corrupt Practices Act – Anti-Corruption Compliance Group; Society of Corporate Compliance and Ethics (SCCE); Dow Jones Risk & Compliance;  Anti-Corruption Professionals; AML, FCPA, and Investigative Due Diligence Thought Leadership; The Forum for Chief Compliance Officers and Chief Risk Officers and Anti-Corruption Compliance Asia. This list is by no means complete but is a small sample of what is available to you and sometimes you are able to meet like-minded professionals such as Jonathan Marks.

Jonathan Marks can be reached via email at jonathantmarks@verizon.net and phone at 267-261-4947.

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

 

FCPA Sentencing Box Score

Tfoxlaw is an avid baseball fan. As a child, he was taught how to keep score at professional baseball games by his Grandfather. This had two effects. The first was immediate; it kept him quiet at ballgames. The second is more long term; he continues to keep score at baseball games up to the present. So he appreciates it when he reads (or hears) the words, “For those of you scoring at home” as was stated by the FCPA Professor in his December 31, 2009 posting on the UTStarcom matter. Judging from his posts, it appears the FCPA Professor is also a baseball fan.

In his post of January 18, entitled, “Four Awaiting Sentencing”; the FCPABlog discussed four persons, currently scheduled to be sentenced in January for pleas or convictions of FCPA violations. Two of the individuals are former Willbros employees who have pled guilty and are awaiting sentencing, Jim Bob Brown and Jason Edward Steph. The remaining two are the husband and wife team of Gerald and Patricia Green, who were convicted in a jury trial of FCPA violations related to their attempts to acquire lucrative film festival contracts in Thailand. The Greens were the third of three high profile FCPA trials which were concluded in 2009. See my prior post, “2009-Year of the Trial” at https://tfoxlaw.wordpress.com/2009/12/31/2009-the-year-of-the-trial/.

The convicted defendants from the first two trials, Frederick Bourke and William Jefferson have been sentenced and are out on bail during their respective appeals. As mentioned in its “Four Awaiting Sentencing”, the FCPA Blog stated that “Under the federal guidelines, Gerald Green, 77, is facing between 20 and 25 years in prison; the government wants him sentenced to life in prison.” While a 25 year sentence for a 77 year old man is tantamount to a life sentence, it is not clear how much weight the trial judge would give to the Prosecution’s proposed life sentence.

As pitchers and catchers are scheduled to report to Spring Training in only 30 days, the FCPABlog article and the FCPA Professor’s comment got Tfoxlaw’s baseball mind thinking about the FCPA sentencing boxscore for the two defendants in the other 2009 FCPA trials and how that might related to those upcoming in 2010.

FCPA SENTENCING BOXSCORE

Defendant	Sentencing Guidelines	Prosecution Recommended Sentence	Defense Recommended Sentence	Judge’s Sentence
William Jefferson	324 to 405 mos. =27 to 33 yrs.	27 to 33 years	“less than 10 years”	13 years
Frederick Bourke	57 to 71 mos. =4.75 to 6 yrs.	10 years	Probation	A year and a day
Gerald Green	235 to 293 mos. =20 to 24.4 yrs.	Life in Prison	Green does not pose risk to society	Sentencing now set for March 11

 In both the Bourke and Jefferson cases, the trial judge gave jail time considerably less than that suggested by the Sentencing Guidelines and that sought by the Prosecutors; albeit with longer sentences than requested by the defendant’s attorneys. So what does all this mean? Tfoxlaw comes from a civil law background so has no experience as a prosecutors. Perhaps a blogger with the prosecutorial background can help to explain these (apparently) wide discrepancies and what that might mean for Gerald Green.

Spanning the Globe to Bring You…22 FCPA Indictments

For those of you (and we know who we are) who came of age in the 1960s, you will remember ABC’s “Wide World of Sports” and its iconic opening of “Spanning the Globe to bring you the thrill of victory and the agony of defeat” (I still ache for that ski jumper). The scope of last week’s arrest of the Foreign Corrupt Practices Act (FCPA) sting of the gun industry was truly “spanning the globe.”

From the arrest of 22 defendants to the scale of the undercover operation, the breadth and scope is unprecedented. While many details have not been released some information is coming out, with the identity of at least one of the FCPA sting operators having been released last week. As reported by Main Justice Richard Birdsong, a former vice president for international sales at Florida-based Armor Holdings, assisted the FBI in building the cases. Justice Department Criminal Division chief Lanny Breuer described the undercover operation as a “two-and-a-half-year operation”.

Equally broad in scope is the geographic reach of both the operation and the number of countries involved. As reported in the London Evening Standard on January 21, 2010, five British executives have been arrested after an undercover FBI operation into alleged attempted bribery of foreign government officials. Three of the British executives were named: Pankesh Patel, 43; David Painter, 56 and Lee Wares, 43. The remaining two British citizens have yet to be named but it was reported the information on their citizenship came out during last week’s court appearances. The City of London Overseas Anti-Corruption Unit was involved in executing seven search warrants in the UK on the day of the arrests.

As reported in the Jerusalem Post on January 23, 2010, four of the indicted individuals are known to be Israeli nationals. They are Ofer Paz, president and chief executive officer of Paz Logistics; Haim Geri, president of a Florida-based company that also serves as a sales agency. The remaining two Israeli citizens were identified as Israel Wissler and Yochanan Cohen. The January 19, 2010 edition of the Miami Herald even reported that one of the indicted defendants is from Peru, who has yet to be identified.

In addition to the variety of nationalities involved as defendants in this sting operation, the countries where search warrants were executed included the United States, the United Kingdom, and most probably the home countries of the Israeli and Peruvian defendants. As the sting claimed the bribes were for an African official and UN officials located in The Netherlands, in all likelihood some part of the sting operation occurred in Africa and in the Netherlands. For those of you counting that’s five of the Globe’s seven continents (that we are aware of—maybe Australia and Antarctica can join in as well), truly “spanning the globe”. With the Department of Justice announcing that it has 140 open overseas investigations, it will surely portend a greater FCPA global reach.

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For a viewing of the opening to ABC’s Wide World of Sports go to YouTube at http://www.youtube.com/watch?v=wNqps7GN7CA&feature=related
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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.

© Thomas R. Fox, 2010

Conducting Effective Compliance Training-Part II

TYPES OF TRAINING

What type of training is most effective in the ethics and compliance arena. The consensus seems to be that there are three general approaches to ethics and compliance training which have been used successfully. The first is the most traditional and it is in-person classroom training. This gives employees an opportunity to see, meet and speak directly with a Compliance Officer, not an insignificant dynamic in the corporate environment. Such personal training also sends a strong message of commitment to compliance and ethics when training is held away from a corporation’s home office. It gives employees the opportunity to interact with the Compliance Officer by asking questions which are relevant to markets and locations outside the United States. Lastly it can also lead to confidential discussions after such in-person training.

An important part of in-person training is the opportunity to interact with the audience through Q&A. There are a couple different approaches to Q&A. The first is to solicit questions from the audience. However many employees are reluctant, for a variety of different reasons, to raise their hands and ask questions in front of others. This can be overcome by soliciting written questions on cards or note pads. A second technique is to lead the audience through hypothetical examples in which the audience is broken down into small (up to 5 person) discuss groups to discuss a situation and propose a response.

The second approach is on-line training. Rick Chapman, Assistant General Counsel for Halliburton in its Compliance & Ethics Practice Group, has said that online training is a one of several training approaches used by Halliburton in ethics and compliance training. On-line training can be a helpful adjunct to live training because it can permeate a globally distributed organization and lends itself to automatic recordkeeping, tickling, and expiration management. He discussed this approach and its use by Halliburton to enable it to “effectively reach every employee at Halliburton worldwide” in Ethisphere Magazine, June 7, 2007 “Expert Corner” Ethics and compliance courses are tailored to different categories of Halliburton employees and provided in multiple languages to ensure that all Halliburton employees will participate in ethics and compliance related learning activities at least once every two years by taking our general ethics and compliance training and/or issue-specific courses such as FCPA.

A third option has been suggested in Wrageblog. It is a combination of live in-person training followed by a live Q&A session filmed. Such a program can then be shown at other company offices around the world. Such a presentation should be lead in-person by a Compliance Officer who can follow up the filmed presentation by conducting a Q&A teleconference with the Compliance staff in the company’s home office. Wrageblog believes that this approach can be a “very robust and inexpensive way to reach a large number of employees with a clear, tailored and forceful compliance message.”

All three ethics and compliance training approaches should be coordinated and both the attendance and result recorded for the combined approach, online training and traditional training for all types of employees in all countries. Results can be tabulated through short questionnaires immediately following the training and bench-marked through more comprehensive interviewing of selected training participants to determine overall effectiveness.

Whatever approach is used, one of the critical factors is the length of time of the training session. While lawyers and ethics and compliance professionals can (sometimes) sit through 8 hours of such training, it is almost impossible to keep the attention of business and operations employees for such a length of time. The presentation must be kept to a manageable length and number of PowerPoint slides before eyes start to glaze over. My experience in all types of legal and compliance training has led me to believe that 3 hours is about the maximum length of in-person training which can hold the attention of business and operations employees for ethics and compliance training. For on-line training I would suggest a maximum length of one hour.

THE OPENING

As noted in Part I, a company’s ethics and compliance training may well comprise several different audiences and different cultures around the globe. Top notch training should be able to reach all of the learners at such training sessions. One way to do so is to grab the audience’s attention early by demonstrating the commitment of top management to ethics and compliance and make clear to each audience member how compliance laws such as the FCPA pertain directly to them. In his blog, the FCPA Professor has put forward a suggestion in his posting, “FCPA — The First Few Minutes” by proposing that an FCPA training session begin with an opening such as:

“Today, I will be talking about a U.S. law that applies to all of you – regardless of whether you are in the sales and marketing department, the executive office suite, the finance and audit department, or the logistics department. This law can cover a wide range of payments the company makes, or could make, either directly or indirectly, in doing business or seeking business in foreign markets. Your understanding of this law and how it may relate to your specific job function will best ensure that the company remains compliant with this law and is able to achieve its business objectives.”

Another technique to get the attention of the audience simply might be remind the them that hardly anyone looks good in a prison-orange jumpsuit and that you are here to present training to keep them out of such clothing.

THE END OF THE DAY

At the end of the day, an effective training program will incorporate all learning tools available to reach the widest target audience possible. An individual’s understanding of the rules is always important but it should be grounded in a company’s ethical corporate culture. Coupled together, these Approaches listed in Part I, together with types of training discussed in Part II, should embolden employees to make the right decision even if they cannot remember a specific rule governing a situation. More importantly, such effective training provides knowledge about what an employee can and cannot do when confronted those ‘grey areas’ that exist in the real world of international business.

This is the second of a two-part series on ethics and compliance training. Part I was posted on January 19, 2001

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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.

© Thomas R. Fox, 2010

EFFECTIVE COMPLIANCE TRAINING

Effective Compliance Training

“Conducting effective training programs” is listed in the 2005 Federal Sentencing Guidelines as one of the factors the Department of Justice will take into account when a company, accused of an FCPA violation, is being evaluated for a sentence reduction. The Sentencing Guidelines mandate states “(4) (A) The organization shall take reasonable steps to communicate periodically and in a practical manner its standards and procedures, and other aspects of the compliance and ethics program, to the individuals referred to in subdivision (B) by conducting effective training programs and otherwise disseminating information appropriate to such individuals’ respective roles and responsibilities.”

But what is an “effective training program”? Andrea Wrage has written in her blog Wragblog and Ethisphere Magazine that she believes there are two general approaches to ethics and compliance training. The first approach focuses on knowledge of the rules “as clear and sharp as barbed wire” so that the cowboys in the company will not run wild. This is the approach most US in-house lawyers feel is required for their company’s operations teams and is generally designed to help avoid criminal liability.

The second is to train on ethical values and is more prevalent in Europe where ethics and compliance are more designed to communicate a company’s underlying corporate values in its operations. This approach anticipates that most employees are decent and law-abiding and will not knowingly engage in bribery and corruption. Additionally, you can never create enough rules to govern every situation and train each employee on every rule so a company must hire trustworthy people and give them sufficient information to make the correct ethical and compliant decision. Ms. Wrage characterizes the two different approaches as “ethics” vs. “values”.

Both approaches have merit but both can catastrophically fail without the other components of an effective compliance program. Although it was not brought down by an FCPA violation, the Enron Code of Ethics was viewed (at least at one time) as one of the strongest in the energy industry. And not to focus on US companies only, Siemens had one of the most robust Codes of Ethics for a European company before its multi-billion dollar (or euro-take your pick) fine and profit disgorgement. So the training on both of these company’s “Gold Standard” codes of ethics did not turn out to be too helpful.

So what should a company’s training focus on to be “effective” under the Sentencing Guidelines? It appears that effective ethics and compliance training should emphasize both approaches. Americans are long taught what the rules are in whatever life they choose. They expect to be told what the rules will be so that they know where the line is drawn that they should not step over. Probably the single comment I have heard the most when putting on ethics and compliance training in the US is “Just tell me what I can and can’t do”. However, really effective training requires that employees be able to apply the rules to the incredibly wide and ever-changing situations which confront them in the real world. This is where communicating a company’s values are important. In other words, how would your conduct look if it was plastered on You Tube the next week?

This is the first of a two-part series on ethics and compliance training.

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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.

© Thomas R. Fox, 2010

Robert Kennedy, the Travel Act and the FCPA

Robert Kennedy, the Travel Act and the FCPA

What does Robert Kennedy have to do with the Foreign Corrupt Practices and how has a nearly 50 year old statute aimed at US based organized crime now impacted the FCPA? It turns out quite a bit and perhaps it will be quite a bit more in significantly widening the scope of the FCPA.

Robert Kennedy’s contribution is that while Attorney General, he urged Congress to enact the Travel Act in 1961 which was passed as part of the same series of bills as the Wire Act and was a part of his program to combat organized crime and racketeering. The Travel Act is aimed at prohibiting interstate travel or use of an interstate facility in aid of a racketeering or an unlawful business enterprise. It prohibits the use of communications and travel facilities to commit state or federal crimes, but until now was mostly known for its use in prosecutions for domestic crimes. Its impact to the FCPA is that the Travel Act applies to foreign as well as interstate commerce; it can be also used to prosecute those US companies and individuals which engage in bribery and corruption of foreign officials AND commercial bribery and corruption of private foreign citizens.

The Travel Act elements are: (1) use of a facility of foreign or interstate commerce (such as email, telephone, courier, personal travel); (2) with intent to promote, manage, establish, carry on, or distribute the proceeds of: (3) an activity that is a violation of state or federal bribery, extortion or arson laws, or a violation of the federal gambling, narcotics, money-laundering or RICO statutes. This means that, if in promoting or negotiating a private business deal in a foreign country, a sales agent in the United States or abroad offers and pays some substantial amount to his private foreign counterpart to influence his acceptance of the transaction, and such activity may a violation of the state law where the agent is doing business, the Justice Department may conclude that a violation of the Travel Act has occurred. For instance, in the state of Texas there is no minimum limit under its Commercial Bribery statute (Section 32.43, TX. Penal Code), which bans simply the agreement to confer a benefit which would influence the conduct of the individual in question to make a decision in favor of the party conferring the benefit. As noted below, the state of California bans payment of more than $1,000 between private parties for the purposes of influencing a business decision.

The Travel Act was most recently used when four executives of Control Components, Inc. (“CCI”) were indicted on April 8, 2009 for alleged violations of the FCPA’s anti-bribery provision and the Travel Act. According to the indictment, the defendants conspired to make hundreds of corrupt payments with the purpose of influencing the recipients to award contracts to CCI or skew technical specifications of competitive tenders in CCI’s favor. The Travel Act came into play as the DOJ alleged the CCI employees violated or conspired to violate California’s anti-bribery law (California Penal Code section 641.3), which bans corrupt payments anywhere of more than $1,000 between any two persons, including private commercial parties. In the indictments, the Travel Act charges relied on alleged violations of California’s anti-corruption law.

On July 31, 2009, CCI itself pleaded guilty to substantive FCPA anti-bribery charges and to conspiring to violate both the FCPA and the Travel Act. CCI admitted that, between 2003 and 2007, its employees made more than 150 corrupt payments, totaling approximately $4.9 million, to officials of state-owned enterprises in China, Korea, Malaysia, and the United Arab Emirates, and paid $1.95 million in bribes to officers and employees of foreign and domestic private companies in violation of the Travel Act. CCI agreed to pay a criminal fine of $18.2 million and to retain an independent compliance monitor for three years.

In July 31, 2009 Press Release announcing CCI’s guilty plea, the DOJ referenced the Company’s private overseas bribery. It said:

According to the information and plea agreement, from 1998 through 2007, CCI violated the FCPA and the Travel Act by making corrupt payments to numerous officers and employees of state-owned and privately-owned customers around the world, including in China, Korea, Malaysia and the United Arab Emirates, for the purpose of obtaining or retaining business for CCI. Specifically, from 2003 through 2007, CCI paid approximately $4.9 million in bribes, in violation of the FCPA, to officials of various foreign state-owned companies and approximately $1.95 million in bribes, in violation of the Travel Act, to officers and employees of foreign and domestic privately-owned companies. [DOJ Press Release: http://www.justice.gov/criminal/pr/press_releases/2009/07/07-31-09control-guilty.pdf

The CCI matter was not the first case to use the Travel Act in conjunction with the FCPA. As reported in the FCPABlog, is the mater of U.S. v. David H. Mead and Frerik Pluimers, (Cr. 98-240-01) D.N.J., Trenton Div. 1998. In this case defendant Mead was convicted following a jury trial of conspiracy to violate the FCPA and the Travel Act (incorporating New Jersey’s commercial bribery statute) and two counts each of substantive violations of the FCPA and the Travel Act. In its 2008 article entitled, “The Foreign Corrupt Practices Act: Walking the Fine Line of Compliance in China” the law firm of Jones, Day reported the case of United States v. Young & Rubicam, Inc., 741 F.Supp. 334 (D.Conn. 1990), where a Company and individual defendants pled guilty to FCPA and Travel Act violations and paid a $500,000 fine. In addition to the Mead and Young and Rubicam cases, the DOJ’s website on “A Lay Person’s Guide to the FCPA, specifically states that “other statutes such as the mail and wire fraud statutes, 18 U.S.C. § 1341, 1343, and the Travel Act, 18 U.S.C. § 1952, which provides for federal prosecution of violations of state commercial bribery statutes, may also apply…” to US companies doing business overseas. See: http://www.justice.gov/criminal/fraud/docs/dojdocb.html

What does this mean for US companies doing business overseas? The FCPA Professor and others have written extensively on the broadening of the definitions of who is a ‘foreign official’ and what is a ‘state owned entity’ under the FCPA. However with the incorporation of the Travel Act into FCPA prosecutions, these broad definitions may be completely blurred away if all foreign private citizens can be brought in under the FCPA by application of the Travel Act. US companies doing business overseas, which have a distinction in their FCPA compliance policies between gifts for and travel and entertainment of employees of private companies, and employees of state owned entities or foreign officials should immediately rethink this distinction in approach. The new decade is upon us the Kennedy-era statute of the Travel Act may become as relevant in overseas law enforcement in the 20-teens as it was in the domestic arena for the past 50 years.

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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.

© Thomas R. Fox, 2010

UTStarcom and Gifts and Entertainment Under the FCPA

To close out the FCPA year, on December 31 the telecom equipment maker UTStarcom Inc. agreed to pay the Justice Department $1.5 million in criminal fines and pay the SEC an additional $1.5 in penalties to resolve Foreign Corrupt Practices Act violations in China and Thailand. Other FCPA penalties were agreed to by the company.

As reported in the FCPABlog and the FCPA Professor last week, UTStarcom is alleged to have engaged in conduct which violated the FCPA which included:

1. Arranging and paying for travel to popular tourist destinations in the United States, including Hawaii, Las Vegas and New York City, when such trips were recorded as training expenses at UTStarcom facilities. However UTStarcom had no facilities in these areas. These trips included a cash allowance of between $800 and $3,000 per person.

2. Spending nearly $7 million lavish gifts and all-expenses paid executive training programs in the U.S. for existing and potential foreign government customers in China and Thailand.

3. Presenting expensive gifts to and engaging in entertainment with government agents such as nearly $10,000 on French wine, as a gift to agents of a government customer and spending $13,000 on entertainment expenses for the same customer in an attempt to secure business.

4. Providing foreign government customers or their family members with work visas and purportedly hiring them to work for UTStarcom in the U.S., when in reality they did no work for UTStarcom.

5. UTStarcom was also alleged to have made payments to sham consultants in China and Mongolia while knowing that they would pay bribes to foreign government officials.

Guidelines for Gifts and Entertainment under the FCPA

The UTStarcom matter provides an opportunity to review the application of the FCPA to gifts and business entertainment expenditures to foreign officials. While gift and business entertainment is an area open to vagueness under the FCPA as there are no clear guidelines in the FCPA itself or the legislative history, the conduct of UTStarcom goes far beyond anything that has been previously approved or discussed in any DOJ Release Opinions. While prohibiting payment of any money or thing of value to foreign officials to obtain or retain business, the FCPA arguably permits incurring certain expenses on behalf of these same officials. Under the FCPA, the following affirmative defense regarding the payment of expenses exists:

[it] shall be an affirmative defense [that] the payment, gift, offer or promise of anything of value that was made, was a reasonable and bona fide expenditure, such as travel and lodging expenses, incurred by or on behalf of a foreign official, party, party official, or candidate and was directly related to…the promotion, demonstration, or explanation of products or services; or…the execution or performance of a contract with a foreign government or agency thereof. 15 U.S.C. § 78dd-1(c)(2)(A)-(B).

There is no de minimis provision. The presentation of a gift or business entertainment expense can constitute a violation of the FCPA if this is coupled with the corrupt intent to obtain or retain business. With the above in mind and DOJ Release Opinions, the following are suggested guidelines for gifts and business entertainment.

A. Gifts to Governmental Officials

Based upon the FCPA language and relevant Release Opinions (Opinions 81-01, 81-02 and 82-01), a Company can provide gifts up to an amount of value of $250. Below are the guidelines which the Release Opinions would suggest that a Compliance Policy incorporate regarding gifts:

• The gift should be provided as a token of esteem, courtesy or in return for hospitality.
• The gift should be of nominal value but in no case greater than $250.
• No gifts in cash.
• The gift shall be permitted under both local law and the guidelines of the employer/governmental agency.
• The gift should be a value which is customary for country involved and appropriate for the occasion.
• The gift should be for official use rather than personal use.
• The gift should showcase the company’s products or contain the company logo.
• The gift should be presented openly with complete transparency.
• The expense for the gift should be correctly recorded on the company’s books and records.

B. Business Entertainment of Governmental Officials

Based upon the FCPA language (there are no Release Opinions on this point), there appears to be a threshold that a Company can establish a value for business entertainment of up to the amount of $250. However this must be tempered with clear guidelines incorporated into the business expenditure component of a Compliance Policy, which should include the following:

• A reasonable balance must exist for bona fide business entertainment during an official business trip.
• All business entertainment expenses must be reasonable.
• The business entertainment expenses must be permitted under (1) local law and (2) customer guidelines.
• The business entertainment expense must be commensurate with local custom and practice.
• The business entertainment expense must avoid the appearance of impropriety.
• The business entertainment expense must be supported by appropriate documentation and properly recorded on the company’s book and records.

C. Travel and Lodging for Governmental Officials

A Company should be able to bring foreign officials into the United States for legitimate business purposes. Once again, a key component is guidelines clearly articulated in a Compliance Policy. Based upon Releases Opinions 07-01 and 07-02, the following should be incorporated into a Compliance Policy regarding travel and lodging:

• Any reimburse for air fare will be for economy class.
• Do not select the particular officials who will travel. That decision will be made solely by the foreign government.
• Only host the designated officials and not their spouses or family members.
• Pay all costs directly to the service providers; in the event that an expense requires reimbursement, you may do so, up to a modest daily minimum (e.g., $35), upon presentation of a written receipt.
• Any souvenirs you provide the visiting officials should reflect its business and/or logo and would be of nominal value, e.g., shirts or tote bags.
• Apart from the expenses identified above, do not compensate the foreign government or the officials for their visit, do not fund, organize, or host any other entertainment, side trips, or leisure activities for the officials, or provide the officials with any stipend or spending money.
• The training costs and expenses will be only those necessary and reasonable to educate the visiting officials about the operation of your company.

The incorporation of these concepts into a Company’s Compliance Policy is a good first step towards preventing any FCPA violations from arising, but it must be emphasized that they are only a first step. These guidelines must be coupled with active training of all personnel, not only on a Company’s Compliance Policy, but also on the corporate and individual consequences that may arise if the FCPA is violated regarding gifts and entertainment. Lastly, it is imperative that all such gifts and entertainment by properly recorded, as required by the books and records component of the FCPA. One of the FCPA violations alleged against UTStarcom was that it falsely recorded these trips as ‘training’ expenses, while the true purpose for providing these trips was to obtain and retain lucrative telecommunications contracts. All business gifts, entertainment and expenses must be properly recorded.

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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.

© Thomas R. Fox, 2010

2009-The Year of the Trial

2009 FCPA-The Year of the Trial

At the end of this year, many commentators have weighed in on the changes in enforcement under the Foreign Corrupt Practices Act (FCPA) over the past decade or the catastrophic increase in fines and disgorgement of profits over the past year. I believe that in the FCPA world 2009 will be remembered as the Year of the Trial. Here is a summary of the three FCPA enforcement actions which went to a full jury verdict this year and their outcomes.

A. Frederick Bourke

The first of the convictions was delivered on July 10, 2009, when Frederic Bourke was convicted of conspiring to violate the Foreign Corrupt Practices Act; the Travel Act and lying to FBI agents. The jury found that he invested in Czech-born promoter Viktor Kozeny’s unsuccessful attempt in 1998 to gain control of Azerbaijan’s state oil company, State Oil Company of the Azerbaijan Republic (SOCAR), despite knowing Kozeny planned to bribe Azeri leaders.

In its Press Release, the Department of Justice (DOJ) stated that evidence was presented at trial established that Bourke was a knowing participant in a scheme to bribe senior government officials in Azerbaijan with several hundred million dollars in shares of stock, cash, and other gifts. These bribes were meant to ensure that those officials would privatize SOCAR in a rigged auction that only Bourke, fugitive Czech investor Viktor Kozeny and members of their investment consortium could win, to their massive profit. [DOJ Press Release can be found at http://www.justice.gov/opa/pr/2009/July/09-crm-677.html%5D

On November 12, Bourke was sentenced by the trial judge, Shira Scheindin to a sentence of ‘a year and a day’, followed by three years of probation and a $1,000,000 fine. The government had sought a sentence of 10 years as” a deterrence to others”. At the Sentencing Hearing Judge Scheindin is reported to have said: “After years of supervising this case, it’s still not entirely clear to me whether Mr. Bourke is a victim or a crook or a little bit of both.”

B. William Jefferson

On August 5, former nine-term congressman William Jefferson was convicted on 11 of 16 corruption charges. As reported in the FCPABlog, Jefferson was acquitted on Count 11 of the indictment — the only substantive FCPA charge he faced. But the jury convicted him on Count 1; which alleged three separate illegal conspiracies — to solicit bribes, deprive citizens of honest services and violate the FCPA. The jury’s verdict form did not require it to specify which of the three illegal conspiracies the panel believed he engaged in so Jefferson’s conviction on Count 1 may or may not have included a finding that he conspired to violate the FCPA. [DOJ Press release can be found at http://washingtondc.fbi.gov/dojpressrel/pressrel09/wfo111309b.htm ]

Jefferson was sentenced on November 14 to 13 years in prison by Judge T.S. Ellis. It is not clear if Judge Ellis used the FCPA-related conspiracy element to calculate Jefferson’s sentence as the jury acquitted Jefferson on the substantive FCPA charge but was convicted then on conspiracy to violate the FCPA. It may never be known. Jefferson is currently on bail pending his appeal. The DOJ had asked the trial judge for a sentence ranging from 27 to 33 years in prison.

C. Gerald and Patricia Green

The third FCPA related verdict was handed down on September 14, when Gerald Green and his wife Patricia were convicted of FCPA violations. According to the DOJ Press Release, during the period from 2002 through 2007, the Greens conspired with others to bribe the former governor of the Tourism Authority of Thailand (to the tune of $1.8MM) in order to acquire lucrative film festival contracts as well as other deals for the development of a Thai Privilege Card, a website, book, video, calendars and public relations services.

As reported in the FCPABlog on December 18, 2009, the Greens used different business entities, some with dummy addresses and telephone numbers, to hide how much they were receiving under the contracts. The jury found that Greens disguised the bribes as “sales commissions” and made the payments through foreign bank accounts of intermediaries in Singapore, the United Kingdom and Jersey, some in the name of the former governor’s daughter and a friend. [DOJ Press Release can be found at http://www.usdoj.gov/opa/pr/2009/September/09-crm-952.html.%5D

Sentencing was originally scheduled for December 17; however it has been rescheduled to January 21, 2010. The Pre-Sentencing Report was filed on December 14, 2009 and now the Justice Department now wants Gerald Green, aged 76, sentenced to life in prison. In a December 14 court filing, prosecutors said although the Pre-Sentence Report recommended a downward departure under the federal sentencing guidelines and a sentence of about 20 to 25 years, Green’s sentence should instead be enhanced. The DOJ alleged that Green was “the ring leader of the bribery plot” and said he “repeatedly and blatantly perjured himself” at his trial.

FCPA cases rarely go to trial. And even when they do, such trials rarely result in acquittals. There has not been an outright acquittal in an FCPA case since 1991. After this year, it may be that no individuals are willing to take their chances by putting their fate in front of a judge or jury for an FCPA charge. Why is it so difficult to win an FCPA case for an individual? I believe it comes down to two reasons.

The first reason relates to judges and the law. Trial judges and Courts of Appeal have not been friendly to technical legal arguments over the language of the FCPA. “What is a business nexus”; “who is a foreign official”; “what is obtaining or retaining business”, or the invocation of a “local law defense” have not received favorable rulings from courts. The second reason relates to juries and the facts. Juries do not take well to the payment of bribes. No matter how these payments are described, such as payments of over $1 million to intermediaries by the Greens, $90,000 in cash stuffed in a freezer in the Jefferson case, or, as in the Bourke case as related by the Jury Foreman, “we thought he knew” that bribery and corruption were involved in the business deal in which he was a participant, to the tune of an $8 million investment, but equally importantly “he definitely should have known”.

One of the first things one learns in law school is that “if the facts are against you argue the law” and “if the law is against you argue the facts”. However, in FCPA cases, it appears that individual defendants cannot seem to argue either way as there has been no favorable law (legal) ruling which may form the basis of legal defenses AND all FCPA cases involve large amounts of cash or money, so that the facts always look bad. So the lesson from 2009 is that a defendant should be very careful in weighing the benefits vs. the risk of an FCPA criminal trial.

Elements Of An Effective Compliance Program

Elements Of An Effective Compliance Program

In his excellent FCPA Blog, Richard Cassin has written about an effective compliance program. He notes that the purpose of an “effective compliance program” is to prevent and detect criminal conduct. In his listing his suggestions for what constitutes an “effective compliance program” Mr. Cassin based his guidance on the United States Federal Sentencing Guidelines. He suggested the following:

1. A Written Program. A company must have standards and procedures in place to prevent and detect criminal conduct.
2. Board Oversight. A public company’s Board of Directors must be knowledgeable about the content and operation of the compliance program and must exercise reasonable oversight of its implementation and effectiveness.
3. Responsible Persons. One or more individuals among a company’s high-level personnel must be assigned overall responsibility for the compliance program.
4. Operating and Reporting. One or more individuals must be delegated day-to-day operational responsibility for the compliance program. They must report periodically to high-level personnel on the effectiveness of the compliance program. The individuals must have adequate resources, appropriate authority, and direct access to the Board or Audit Committee.
5. Management’s Record of Compliance. A company must use reasonable efforts not to hire or retain personnel who have substantial authority and whom a company knows or should know through the exercise of due diligence have engaged in illegal activities or other conduct inconsistent with an effective compliance program.
6. Communicating and Training. A company must take reasonable steps to communicate periodically and in a practical manner its standards and procedures, and other aspects of the compliance program, to directors, officers, executives, managers, employees and agents — by conducting effective training programs and otherwise disseminating information appropriate to the individuals’ respective roles and responsibilities.
7. Monitoring and Evaluating; Anonymous Reporting. A company must take reasonable steps (a) to ensure that its compliance program is followed, including monitoring and auditing to detect criminal conduct, (b) to evaluate periodically the effectiveness of the compliance program and (c) to have and publicize a system, which may include mechanisms that allow for anonymity or confidentiality, whereby a company’s employees and agents may report or seek guidance regarding potential or actual criminal conduct without fear of retaliation.
8. Consistent Enforcement — Incentives and Discipline. A company’s compliance program must be promoted and enforced consistently throughout a company through appropriate (a) incentives to perform in accordance with the compliance program and (b) disciplinary measures for engaging in criminal conduct and for failing to take reasonable steps to prevent or detect criminal conduct.
9. The Right Response. After criminal conduct has been detected, a company must take reasonable steps to respond appropriately and to prevent further similar criminal conduct, including making any necessary modifications to a company’s compliance program.
10. Assessing the Risk. A company must periodically assess the risk of criminal conduct and take appropriate steps to design, implement, or modify its compliance program to reduce the risk of criminal conduct identified through this process.

In the coming weeks, we will review each of these suggested guidelines and provide nuts and bolts recommendations for you to use in crafting your own effective compliance program.