Life Cycle Management of Third Parties – Step 4 – The Contract

This post continues to outline what I believe are the five steps in the life cycle of third party management. Today I will look at Step 4, the contract. However, before we get to the contracting stage a word about what to do with Steps 1-3. You cannot simply obtain the information detailed in these first three steps; you must evaluate the information and show that you have used it in your process. If it is incomplete, it must be completed. If there are Red Flags, which have appeared, these Red Flags must be cleared or you must demonstrate how you will manage the risks identified. In others words you must Document, Document and Document that you have read, synthesized and evaluated the information garnered in Steps 1-3. As the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) continually remind us, a compliance program must be a living, evolving system and not simply a ‘Check-the-Box’ exercise.

After you have completed Steps 1-3 and then evaluated and documented your evaluation, you are ready to move onto to Step 4 – the contract. Obviously any commercial relationship should be governed by the terms and conditions of a written contract. Clearly your commercial terms should be set out in the contract. In the area of commercial terms the FCPA Guidance intones “Additional considerations include payment terms and how those payment terms compare to typical terms in that industry and country, as well as the timing of the third party’s introduction to the business.” This means that you need to understand what the rate of commission is and whether it is reasonable for the services delivered. If the rate is too high, this could be indicia of corruption as high commission rates can create a pool of money to be used to pay bribes. If your company uses a distributor model in its sales side, then it needs to review the discount rates it provides to its distributors to ascertain that the discount rate it warranted.

In addition to the above analysis from the compliance perspective, you should incorporate compliance terms and conditions into your contracts with third parties. I would suggest that you begin with some type of compliance terms and conditions template, which can be used as a starting point for your negotiations. The advantages of such a template are several; they include: (1) the contract language is tested against real events; (2) the contract language assists the company in managing its compliance risks; (3) the contract language fits into a series of related contracts; (4) the contract language is straight-forward to administer and (5) the contract language helps to manage the expectations of both contracting parties regarding anti-bribery and anti-corruption.

What are the compliance terms and conditions that you should include in your commercial contracts with third parties? In the Panalpina Deferred Prosecution Agreement (DPA), Attachment C, Section 12 is found the following language, “Where necessary and appropriate, Panalpina will include standard provisions in agreements, contracts, and renewals thereof with all agents and business partners that are reasonably calculated to prevent violations of the anticorruption laws, which may, depending upon the circumstances, include: (a) anticorruption representations and undertakings relating to compliance with the anticorruption laws; (b) rights to conduct audits of the books and records of the agent or business partner to ensure compliance with the foregoing; and (c) rights to terminate an agent or business partner as a result of any breach of anti-corruption laws, and regulations or representations and undertakings related to such matters.” In the Johnson & Johnson (J&J) DPA, the same language as used in the Panalpina DPA is found in Attachment C, entitled “Corporate Compliance Program”. However, in Attachment D, entitled “Enhanced Compliance Obligations”, the following language is found: “Contracts with such third parties are to include appropriate FCPA compliance terms and conditions including; (i) representatives and undertakings of the third party to compliance; (ii) right to audit; and (iii) right to terminate.”

Mary Jones, in an article in this blog entitled “Panalpina’s World Wide Web”, suggested the following language be present in your compliance terms and conditions:

• payment mechanisms that comply with this Manual, the FCPA [Foreign Corrupt Practices Act], the UKBA [UK Bribery Act] and other applicable anti-corruption and/or anti-bribery laws during the term of such contract;
• the counterparty’s obligation to maintain accurate books and records in compliance with the Company’s Policy and Compliance Manual;
• the counterparty’s obligation to certify on an annual basis that: (i) counterparty has not made, offered, or promised any payment or gift of money or anything of value, directly or indirectly, to any Government Official (or any other person or entity if UK Bribery Act applies) for the purpose of obtaining or retaining business or getting any improper business advantage; and (ii) counterparty has not engaged in any conduct or behavior prohibited by the Code of Conduct, Anti-Corruption Policy and Compliance Manual and other applicable anti-corruption and/or anti-bribery law;
• the Company’s right to audit the counterparty’s books and records, including, without limitation, any documentation relating to the counterparty’s interaction with any governmental entity (or any entity if UK Bribery Act applies) on behalf of the Company, and the counterparty’s obligation to cooperate fully with any such audit; and
• remedies (including termination rights) for the failure of the counterparty to comply with the terms of the contract, the Code of Conduct, the Anti-Corruption Policy and Compliance Manual and other applicable anti-corruption and/or anti-bribery law during the term of such contract.

Based on the foregoing experts and the research I have engaged in, I believe that compliance terms and conditions should be stated directly in the document, whether such document is a simple agency or consulting agreement or a joint venture (JV) with several formation documents. The compliance terms and conditions should include representations that in all undertakings the third party will make no payments of money, or anything of value, nor will such be offered, promised or paid, directly or indirectly, to any foreign officials, political parties, party officials, candidates for public or political party office, to influence the acts of such officials, political parties, party officials, or candidates in their official capacity, to induce them to use their influence with a government to obtain or retain business or gain an improper advantage in connection with any business venture or contract in which the company is a participant.

In addition to the above affirmative statements regarding conduct, a commercial contract with a third party should have the following compliance terms and conditions in it.

• Indemnification: Full indemnification for any FCPA violation, including all costs for the underlying investigation.
• Cooperation: Require full cooperation with any ethics and compliance investigation, specifically including the review of foreign business partner emails and bank accounts relating to your Company’s use of the foreign business partner.
• Material Breach of Contract: Any FCPA violation is made a material breach of contract, with no notice and opportunity to cure. Further, such a finding will be the grounds for immediate cessation of all payments.
• No Sub-Vendors (without approval): The foreign business partner must agree that it will not hire an agent, subcontractor or consultant without the Company’s prior written consent (to be based on adequate due diligence).
• Audit Rights: An additional key element of a contract between a US Company and a foreign business partner should include the retention of audit rights. These audit rights must exceed the simple audit rights associated with the financial relationship between the parties and must allow a full review of all FCPA related compliance procedures such as those for meeting with foreign governmental officials and compliance related training.
• Acknowledgment: The foreign business partner should specifically acknowledge the applicability of the FCPA to the business relationship as well as any country or regional anti-corruption or anti-bribery laws, which apply to either the foreign business partner or business relationship.
• On-going Training: Require that the top management of the foreign business partner and all persons performing services on your behalf shall receive FCPA compliance training.
• Annual Certification: Require an annual certification stating that the foreign business partner has not engaged in any conduct that violates the FCPA or any applicable laws, nor is it aware of any such conduct.
• Re-qualification: Require the foreign business partner re-qualify as a business partner at a regular interval of no greater than every three years.

Many will exclaim, “What an order, I can’t go through with it.” By this they mean that they do not believe that they will be able to get the third party to agree to such compliance terms and conditions. I have found that while it may not be easy, it is relatively simply to get a third party to agree to these, or similar, terms and conditions. One approach to take is that they are not negotiable. When faced with such a position on non-commercial terms many third parties will not fight such a position. There is some flexibility but the DOJ will require the minimum terms and conditions that it has suggested in the various Attachment Cs to the DPAs I have discussed. But the best position I have found is that if a third party agrees with these terms and conditions, they can then use that as a market differentiator from other third parties who have not gone through the life cycle management of a third party as this series has discussed.

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

Interview with Mary Jones-LSU Tiger Fan Extraordinare

Ed. Note-we continue our series of interviews with thought leaders in the compliance arena. Today we post an interview with frequent contributor and lifelong LSU Tiger fan, Mary Shaddock Jones

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1.         Where did you grow up and what were your interests as a youngster?

I grew up in Lake Charles, Louisiana.  My interests as a youngster have remained with me through adulthood.  I love photography, fishing, hunting and hanging out with my family.

2.         Where did you go to college and what experiences there led to your current profession?

I went to Louisiana State University for both my undergraduate and law degree.  I knew law was for me when I made a 100 out of 100 on one of two tests given by a business law professor as an undergraduate.  He had taught both my father and my brother.  He was a legend at LSU (not the law school).  I was the only person he ever taught who scored a perfect 100 on his midterm test.  I wasn’t a popular student in the class after that- as I totally blew the curve.  But from that moment on, I loved the law.  I graduated and went straight to law school.

3.         Can you tell us about your corporate, in-house career and how got into FCPA compliance? 

I have had an interesting career and one that I have thoroughly enjoyed.  I started out in private practice, but was hired within a few years to work at Hollywood Marine (Barge and Towing Company).  I worked with them as General Counsel for 6 years.  After we had our second child, I decided that I should try and spend more time at home with them.  I learned that I wasn’t cut out for the rigor of being a stay-at-home mom.  Anyone who says moms who stay home “don’t work”- have never tried it).  So I was recruited by one of my best friends to work with her at First Wave Marine (shipyard).   After a few years, I was given the opportunity to work at McDermott, International as the Director of Insurance overseeing their worldwide insurance program.  I first became really aware of FCPA while at McDermott.  In 2005 our children were entering middle school.  We decided it was the prime time to move back to my hometown of Lake Charles-before they entered high school.  So in 2005, my husband and I both resigned from our jobs and moved without jobs to Lake Charles.  We took a huge risk, but felt like this is where God really wanted us to be.  So we took the plunge.  I had planned on going back into private practice at that time with a focus on marine work.  I had worked for a barge and towing company, a shipyard and an oil and gas construction company.  I was ready to tackle maritime law on my own.   I knew that the one client I really needed to secure was Global Industries, since they were one of the largest marine construction companies in the Lake Charles area.  I met with the General Counsel, who ended up being my friend and mentor- Russ Robicheaux.  Instead of opening up my own law firm- Russ hired me as Assistant General Counsel and the rest is history.   Unfortunately, in 2010 the Executive Management wanted all to consolidate its management team back in Houston.  Our children were in high school and unwilling to move and I was unwilling to live apart from my family or commute- so in June 2011, I resigned from Global Industries and started my own law firm.   Starting from scratch at 52 was a challenge- but I have successfully completed a year and a half and have loved every minute of it.

4.         You were part of the in-house team that worked on the Global Industries FCPA investigation relating to the Panalpina case. Can you describe what you did and how Global was able to achieve the result that it did in that process?

My job was to run the day to day investigation and interface with the various law firms and accounting firms who were involved in the investigation.  I did a lot of leg work on a daily basis- collecting, organizing and analyzing documents, invoices, contracts, etc from many parts of the world.  One thing I learned with the investigation is that once an FCPA investigation is opened, it often morphs into much more than the one issue that initially sparked the investigation.  It was a full time job.  I interfaced daily with the General Counsel on various matters related to the investigation.  I believe that there are several reasons why the investigation resulted in no action from the DOJ and the SEC.  the General Counsel and I have given numerous seminars on this topic. To fully discuss the reasons would take up much more than my allotted space today! But to summarize- I think there were the following factors:  1) The immediate response that the executive management at Global took once it learned that there was a possible FCPA violation; 2) the comprehensive compliance program that existed at Global both prior to the investigation and improved upon during the investigation; 3) the thoroughness of the investigation by counsel for the Audit Committee; 4) the overall findings related to a very expansive investigation into the use of freight forwarders not only in Nigeria and Angola, but in many parts of West Africa; and 5) the facts that the Company self reported.

5.         While you are not the most rabid LSU fan I have ever met, you are right up there at the top. For those reading this post, who live outside the South, can you explain the intensity of attending a LSU home game in Tiger Pit?

First of all- I am not sure what Tiger Pit is- the correct name is –DEATH VALLEY!  The feeling of being in Tiger Stadium, aka Death Valley is hard to describe.  The stadium is huge so the sheer number of fans is overwhelming.  You have to walk up lots of ramps to get to the inside of the stadium.  When you finally make it to your seat- the view is breathtaking.  And when the Band walks out and plays the fight song! Tears come to my eyes.   Everyone should experience TIGER STADIUM once in their lifetime!

============================================================================================Mary Shaddock Jones has practiced law for 25 years in Texas and Louisiana primarily in the international marine and oil service industries. She was the first woman to earn TRACE Anti-bribery Specialist Accreditation. Mrs. Jones has extensive experience in creating and designing compliance programs to reduce the risks of such violations, including policies and procedures, educational and training materials and programs, contract provisions and due diligence protocols. She implements and works with in-house counsel and compliance vendors to execute compliance policies and training programs tailored to the client’s business structure and the market conditions in the client’s target countries.  She can be reached at 337-513-0897 or via e-mail at msjones@msjllc.com.

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Socio-Economic and Cultural Risk Factors That Drive Corruption: A Focus on the ‘Supply Side’ of the Equation

Ed. Note-today we conclude a three-part series by our colleague Mary Shaddock Jones on occupational fraud. 

This is the last installment of my three party series regarding Occupational Fraud.  One can never lose focus on what I consider the key question as they enter or play within the international arena:  What are the socio-economic and cultural risk factors that make companies and individuals conducting business in a particular location more vulnerable to possible corruption schemes?   We cannot adequately address corruption unless we address both the “supply side” and the “demand side”. Yesterday we considered the “Demand Side” of the equation.  Today we will focus on the “Supply Side”.  If your company has a clear policy against corruption- why would your employees risk losing their jobs or worse, going to jail by violating these laws?

A side benefit to being married to a CPA and a Certified Fraud Examiner is the ability to read not only legal and compliance magazines on a monthly basis- but also the Journal of Accountancy and the publications from the ACFE society.  I loved the August 2012 cover of the Journal of Accountancy- “Think Like a Thief”! There were three very pointed articles contained in this publication:  (1) Fraudsters Reveal Weaknesses They Exploited; (2) Detecting a Criminal Mind Before It Strikes; and (3) Antifraud Controls Can Benefit Small Businesses.   In addition to this publication, I will be examining some of the conclusions recently published in the “Report to the Nations on Occupational Fraud and Abuse- 2012 Global Fraud Study” which is recognized as the authoritative annual national report on fraud

Considering the “Supply Side” of the Equation:

The fraud triangle is a model for explaining the factors that cause someone to commit occupational fraud. It consists of three components which, together, lead to fraudulent behavior:  (1) Pressure; (2) Opportunity and (3) Rationalization.

Pressure- According to the ACFE, the first leg of the fraud triangle represents “pressure”. This is what motivates the crime in the first place.  The individual has some financial problem that he/she is unable to solve through legitimate means, so he or she begins to consider committing an illegal act, such as stealing cash or falsifying a financial problem, or entering into an improper payment (perhaps thinking of the bonus he or she will get if they land a lucrative contract for their employer) as a way to solve their problem.   The 2012 ACFE report concluded that “Most fraudsters exhibit behavioral traits that can serve as warning signs of their actions. These red flags — such as living beyond one’s means or exhibiting excessive control issues — generally will not be identified by traditional internal controls. Managers, employees and auditors should be educated on these common behavioral patterns and encouraged to consider them — particularly when noted in tandem with other anomalies — to help identify patterns that might indicate fraudulent activity.”  The report found that “More than three-quarters of the frauds in our study were committed by individuals in six departments: accounting, operations, sales, executive/upper management, customer service and purchasing.

Opportunity- The second leg in the fraud triangle is perceived as “opportunity”, which defines the method by which the crime can be committed.  The person must see some way the he or she can use (or abuse) their position of trust to solve their financial problem with a low perceived risk of getting caught.

Rationalization- The third leg of the fraud triangle is “rationalization”. According to the ACFE, the vast majority of fraudsters are first time offenders with no criminal past; they do not view themselves as criminals. They see themselves as ordinary honest people who are caught in a bad set of circumstances. Consequently, the fraudster must justify the crime to himself in a way that makes in an acceptable of justifiable act”.  Again, according to the ACFE, the most common rationalizations fraudsters use include a) I was only borrowing the money; b) I was entitled to the money; c) I had to steal to provide for my family; d) I was underpaid; my employer cheated me and e)  My employer is dishonest to others and deserved to be fleeced.

As discussed in the first part of this series, Occupational Fraud is broader than just anti-corruption as it relates to the Foreign Corrupt Practices Act or the U.K. Bribery Act.  However, the motivating factors and conclusions reached in the 2012 Global Fraud studies should be examined by companies when examining its overall anti-corruption risk profile.

I will end this series by listed two of the conclusions and recommendations contained within the 2012 Global Fraud Report which I believe are excellent advice:

“Targeted fraud awareness training for employees and managers is a critical component of a well-rounded program for preventing and detecting fraud. Not only are employee tips the most common way occupational fraud is detected, but our research shows organizations that have anti-fraud training programs for employees, managers and executives experience lower losses and shorter frauds than organizations without such programs in place. At a minimum, staff members should be educated regarding what actions constitute fraud, how fraud harms everyone in the organization and how to report questionable activity.”

“Our research continues to show that small businesses are particularly vulnerable to fraud. These organizations typically have fewer resources than their larger counterparts, which often translates to fewer and less-effective anti-fraud controls. In addition, because they have fewer resources, the losses experienced by small businesses tend to have a greater impact than they would in larger organizations. Managers and owners of small businesses should focus their anti-fraud efforts on the most cost-effective control mechanisms, such as hotlines, employee education and setting a proper ethical tone within the organization. Additionally, assessing the specific fraud schemes that pose the greatest threat to the business can help identify those areas that merit additional investment in targeted anti-fraud controls.”

What is your company’s risk for corruption?  When is the last time that you conducted a risk assessment for corruption? As yourself these questions:

1. Do you have a Code of Conduct?
2. Do you have a policy which clearly addresses the company’s position on anti-corruption? If so, is the policy easily accessible to your employees in their native language?
3. Do you have an anonymous reporting system or other method in which employees can elevate concerns relating to occupational fraud to the appropriate person within the company?
4. Do you provide any type of meaningful training on fraud and corruption to your employees?
5. Do you have internal controls to prevent and detect fraud or corruption within your organization?

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Mary Shaddock Jones has practiced law for 25 years in Texas and Louisiana primarily in the international marine and oil service industries. She was the first woman to earn TRACE Anti-bribery Specialist Accreditation. Mrs. Jones has extensive experience in creating and designing compliance programs to reduce the risks of such violations, including policies and procedures, educational and training materials and programs, contract provisions and due diligence protocols. She implements and works with in-house counsel and compliance vendors to execute compliance policies and training programs tailored to the client’s business structure and the market conditions in the client’s target countries.  She can be reached at 337-513-0897 or via e-mail at msjones@msjllc.com. Her associate, Miller M. Flynt, assisted in the preparation of this series.  He can be reached at mmflynt@msjllc.com.

Socio-Economic and Cultural Risk Factors That Drive Corruption”: A Focus on the ‘Demand Side’ of the Equation

Ed. Note- today we continue with Part II of our three part series by out colleague, Mary Shaddock Jones. 

Yesterday we discussed Occupational Fraud and how, according to the ACFE, survey participants estimated that the typical organization loses 5% of its revenues to fraud each year. Applied to the 2011 Gloss World Product, the ACFE estimates that this translates into a potential projected annual fraud loss of more than $3.5 trillion dollars.

One can never lose focus on what I consider the key question as they enter or play within the international arena:  What are the socio-economic and cultural risk factors that make companies and individuals conducting business in a particular location more vulnerable to possible corruption schemes?   We cannot adequately address corruption unless we address both the “supply side” and the “demand side”.

Considering the “Demand Side” of the Equation:

I recently ran across an article that was published in the 2010 World Policy Journal[i] entitled “THE BIG QUESTION: How Can Nations Break the Cycle of Crime and Corruption”? The World Policy Journal asked a panel of experts to weigh in on the challenges of crime and corruption.  Two of the quotes contained in the article are as follows:

“Corruption thrives where civil liberties, free press, transparency, and contestable politics are absent. A functioning rule of law matters for controlling both crime and corruption, but again differences emerge: an independent judiciary is crucial for combating political corruption; an effective police is important for fighting petty corruption as well as common crime. There are also differences between the determinants of common crime and organized crime, since the latter does relate to corruption.”  Daniel Kaufmann (at the time of the article was a senior fellow in the Global Economy and Development Program at the Brookings Institute)

“Corruption should not be approached as a moral problem, as too often happens, but as a symptom of serious political and economic problems that need correcting. Petty corruption, such as low-ranking civil servants demanding payment for services they should provide for free, is a problem that requires restructuring the civil service, reducing the number of public employees within a government, and providing those who remain with decent wages. Attempts to curb petty corruption are unlikely to have an impact when extracting payments from the public is the only way a government employee can feed his family. Grand corruption, such as large payments to high-ranking officials to secure lucrative public contracts, requires political solutions. If there is no renewal of the government and the political class, grand corruption inevitably becomes a problem. Frequent turnover of government officials make it more difficult for corrupt networks to consolidate power. Democracy is the best anti-corruption measure…Donor countries worried about corruption should focus on two tasks: putting in place good control mechanisms over the funds they provide; and promoting fundamental political, economic, and administrative reform.” Marina Ottaway (at the time of the article was director of the Middle East Program at the Carnegie Endowment for International Peace)

In March of 2012, Compliance Week 2012 had an online program entitled “Targeting the Demand for Facilitating Payment- Compliance Week (Online).  The Article discussed the efforts undertaken by a consortium of compliance executives primarily from the energy industry is taking aim at one of the most vexing headaches businesses face today: facilitation payments.  While “facilitating payments” are permitted under the U.S. Foreign Corrupt Practices Act, they are not allowed under the U.K. Bribery Act or the local laws of most foreign countries.  In addition, the line between a true “facilitating payment” and a “bribe” is indeed a fine one.  With this in mind, the group formed the new Committee to Address Facilitating Payments (“CAFP”).  According to the article, the committee’s strategy is to convince governments to crack down on requests for facilitation payments by their officials, thus reducing the demand. It wants governments to review the documentation that certain transactions require, how the required fees are paid (cash or wire transfer, for example), and whether the processes can be automated to reduce risk. CAFP is also working on a country-by-country basis to convince governments to provide more training to officials that facilitation payments are improper and to make sure that those officials are fairly compensated.

Multiple Kudos need to go out to this group of executives.   The fight against corruption must target both the “demand side” as well as the ‘supply side”.   Tomorrow we will discuss the “Supply Side”.

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Mary Shaddock Jones has practiced law for 25 years in Texas and Louisiana primarily in the international marine and oil service industries. She was the first woman to earn TRACE Anti-bribery Specialist Accreditation. Mrs. Jones has extensive experience in creating and designing compliance programs to reduce the risks of such violations, including policies and procedures, educational and training materials and programs, contract provisions and due diligence protocols. She implements and works with in-house counsel and compliance vendors to execute compliance policies and training programs tailored to the client’s business structure and the market conditions in the client’s target countries.  She can be reached at 337-513-0897 or via e-mail at msjones@msjllc.com. Her associate, Miller M. Flynt, assisted in the preparation of this series.  He can be reached at mmflynt@msjllc.com.

[i] The World Policy Journal is the property of MIT Press.  See www.worldpolicy.org

Occupational fraud involves a personal breach of trust

Ed. Note-today we are pleased to begin a three part guest series from our colleague Mary Shaddock Jones. 

My husband, Brian R. Jones, is a CPA, a Certified Fraud Examiner and a member of the Association of Certified Fraud Examiners. He recently received the annual publication entitled “Report to the Nations on Occupational Fraud and Abuse- 2012 Global Fraud Study” which is recognized as the authoritative annual national report on fraud.  One of the introductory statements contained in the report was as follows: “For businesses to operate and commerce to flow, companies must entrust their employees with resources and responsibilities, so when an employee defrauds his or her employer, the fallout is often especially harsh.” This statement rings true- whether the employer is a public or a private entity. Occupational fraud involves a personal breach of trust. The unfortunate fact is however, that organizations of all sizes invariably are losing some percentage of their annual revenues to occupational fraud conducted by employees.  So what can be done to minimize the risk of fraud occurring in the first place, then  detect the fraud once it has been perpetrated?

In order to answer this question, it is important for us first to discuss how occupational fraud is committed.  According to the ACFE, occupational fraud schemes fall into three primary categories:

• Asset Misappropriation – schemes in which an employee steals or misuses the organization’s resources, such as cash, inventory or other assets.

• Corruption- schemes in which an employee misuses his or her influence in a business transaction in a way that violates his or her duty to the employer in order to gain a direct or indirect benefit, such as through conflicts of interest, kickbacks, bribery, illegal gratuities or economic extortion.

• Financial Statement Fraud- schemes in which an employee intentionally causes a misstatement or omission of material information in the organization’s financial reports, such as through asset/revenue overstatements via recording fictitious revenues or asset/revenue understatements  by understating reported expenses.

Once a company understands the typical method of committing occupational fraud, it can then devise internal controls to minimize the risk of loss in the first place, and/or to detect the fraud early enough to minimize the loss.

The Association of Certified Fraud Examiners has broken down corruption into four schemes, namely: conflict of interest, bribery, illegal gratuities, and economic extortion.  Attorney’s and compliance professionals continue to write articles and blogs on a daily basis.  The reason for this is simple- according to the ACFE, survey participants estimated that the typical organization loses 5% of its revenues to fraud each year. Applied to the 2011 Gloss World Product, the ACFE estimates that this translates into a potential projected annual fraud loss of more than $3.5 trillion dollars.  Unfortunately, it does not appear that Occupational Fraud and Corruption are going away anytime soon.

One can never lose focus on what I consider the key question as they enter or play within the international arena:  What are the socio-economic and cultural risk factors that make companies and individuals conducting business in a particular location more vulnerable to possible corruption schemes? Tomorrow I will discuss how a company can examine the “big picture” to try and predict and minimize these risk factors.

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Mary Shaddock Jones has practiced law for 25 years in Texas and Louisiana primarily in the international marine and oil service industries. She was the first woman to earn TRACE Anti-bribery Specialist Accreditation. Mrs. Jones has extensive experience in creating and designing compliance programs to reduce the risks of such violations, including policies and procedures, educational and training materials and programs, contract provisions and due diligence protocols. She implements and works with in-house counsel and compliance vendors to execute compliance policies and training programs tailored to the client’s business structure and the market conditions in the client’s target countries.  She can be reached at 337-513-0897 or via e-mail at msjones@msjllc.com. Her associate, Miller M. Flynt, assisted in the preparation of this series.  He can be reached at mmflynt@msjllc.com.

The FCPA Guidance: An Exploration of ‘Corruptly’ and ‘Willfully’

I am back from my surgery and convalescence and I wanted to thank everyone for the good wishes and thoughts. I would also like to give a very big special thanks to Mary Shaddock Jones for her entire series of timely and topical articles that she and her associate Miller Flynt wrote while I was out. I would also like to thank Candice Tal, Founder and CEO of Infortal Worldwide and Alexandra Wrage, Founder and President of Trace International, for their articles as well. I hope that you enjoyed the articles from all of these great compliance practitioners.

Today I wanted to begin to look at the Department of Justice (DOJ) “A Resource Guide to the U.S. Foreign Corrupt Practices Act” (the “Guidance”), which was released last week and available (at no cost) here. My review will be through the prism of Major League Baseball (MLB) and the events last week where the owner of the Florida Marlins completely and utterly neutered the team through the fire sale give away of all of the team’s talent. The giveaway of the Marlins talent was so devastating that I can only say that the Houston Astros are no longer the worst team, nor have the lowest payroll, in baseball. Jeffrey Loria, owner of the Marlins, promised all of the Marlin fans, politicians and voters of south Florida that if they publicly funded a new stadium for him to the tune of $400MM, he would commit to paying for and fielding a competitive baseball team. Not only did he not tell the truth to those folks, he apparently continued to ‘dissemble’ while assembling his now traded talent. According to Sports Illustrated, “Shortstop Jose Reyes and left-hander Mark Buehrle, two of the five Marlins headed to Toronto in a pending blockbuster, are upset that the team broke verbal promises to them regarding trades, according to major-league sources. The Marlins do not award no-trade clauses, but club officials, while recruiting Reyes and Buerhle as free agents last offseason, assured both players that they would not be moved, sources said. Buehrle knew the Marlins’ history of dumping high-priced players, and it concerned him, according to a friend. Team president David Samson, however, told both Buehrle and his wife, Jamie, that the team was committed to a long-term vision, sources said. A source close to Reyes, asked if the shortstop also received verbal assurances from the Marlins that he would not be traded, responded, “The answer is yes. A vehement yes.””

I thought about the above while reading the Guidance. Initially I would note that despite the protestations of numerous of the FCPA commentariatti, the Guidance is an excellent resource for the compliance professional. It collects, in one very usable volume, the DOJ and SEC enforcement actions, Opinion Releases, current compliance best practices, and relevant Prosecutorial and Sentencing Guidelines. The item which caught my eye with regard to the Marlins giveaway of their players was the section on “What Does “Corruptly” Mean”. Fortunately for Loria, he is not subject to the FCPA as the definition cited by the DOJ reads as follows:

In order for a corporation to be criminally liable under the FCPA, it must be found to have acted corruptly. The word “corruptly” is used in order to make clear that the offer, payment, promise, or gift, must be intended to induce the recipient to misuse his official position; for example, wrongfully to direct business to the payor or his client, to obtain preferential legislation or regulations, or to induce a foreign official to fail to perform an official function.

The Guidance goes on to relate that the FCPA focuses on intent, so that it does not require that a corrupt act succeed in its purpose. Further, a foreign official need not solicit, accept or indeed receive a bribe for the FCPA to be violated. The Guidance points to the Innospec enforcement action in which “a specialty chemical company promised Iraqi government officials approximately $850,000 in bribes for an upcoming contract. Although the company did not, in the end, make the payment (the scheme was thwarted by the U.S. government’s investigation), the company still violated the FCPA and was held accountable.” Further this is why “Regardless of size, for a gift or other payment to violate the statute, the payor must have corrupt intent—that is, the intent to improperly influence the government official. The corrupt intent requirement protects companies that engage in the ordinary and legitimate promotion of their businesses while targeting conduct that seeks to improperly induce officials into misusing their positions.”

But beyond corruptly, for an individual to be criminally liable under the FCPA, that person must act ‘willfully’. The Guidance notes that the FCPA does not define ‘willfully’ but the Guidance points to its construction by federal court decisions. Indeed in US v. Kay, the US Supreme Court upheld jury instructions stated that willfully is “knowledge that [a defendant] was doing a ‘bad’ act under the general rules of law” thereby connoting a willful act is one which is committed both voluntarily and purposefully, and with a bad pursose in mind. The Guidance went on to cite the US Supreme Court in Bryan v. United States, for the proposition that “[a]s a general matter, when used in the criminal context, a ‘willful’ act is one undertaken with a ‘bad purpose.’ In other words, in order to establish a ‘willful’ violation of a statute, ‘the Government must prove that the defendant acted with knowledge that his conduct was unlawful.’”

So what if we look at Jeffery Loria under these two requirements of the FCPA? First, under the corporate requirement of ‘corruptly’ do you think that he misled the voters of Florida when he told them that if they built it, they (top notch ballplayers) will come because Loria would pay for them. Remember its “offer, payment, promise, or gift, must be intended to induce the recipient” but that payment does not have to be made, or in Loria’s case withdrawn. What about under the individual requirement of ‘willfully’ regarding Loria’s and the Marlin’s statements to the players it signed? Here the standard is “knowledge that [a defendant] was doing a ‘bad’ act under the general rules of law”. Were they doing a bad act when they promised that they would not be traded and then they were unceremoniously traded? I guess the bottom line is that Mr. Loria had better be glad he is not subject to the UK Bribery Act where bribery of both public officials and regular citizens is a violation of that law.

Or here in Houston we could simply celebrate that there is a worse owner than Jim Crane because, you know, we got new Astros uniforms from him. I feel better already.

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

Morgan Stanley: “With Thanksgiving”

Ed. Note-we conclude our two week guest series of posts from our colleague Mary Jones with today’s look at the Morgan Stanley declination to prosecute. I want to take this opportunity to thank Mary for her hard and great work and hope that you have found her posting useful for your compliance practice. I know I have found them useful for mine. 

It seems fitting that we end this series the week before Thanksgiving Day on a positive note.  (Well, perhaps not so positive for Garth Peterson, but certainly one for Morgan Stanley)  In an unusual move, the DOJ and SEC charged Garth Peterson with violations of the FCPA, but declined to bring any actions against Morgan Stanley. Both agencies specifically cited the following compliance practices as reasons not to bring an enforcement action against the company itself:

• Maintaining strong internal controls: The Justice Department credited Morgan Stanley with maintaining a system of internal controls designed “to ensure accountability for its assets and to prevent employees from offering, promising, or paying anything of value to foreign government officials.” The company additionally took care to update such controls on a regular basis “to reflect regulatory developments and specific risks, prohibit bribery, and address corruption risks.”

• Frequent training on internal policies: Morgan Stanley frequently trained its employees on its internal policies, the FCPA, and other anti-corruption laws.  Between 2002 and 2008, Morgan Stanley trained various groups of Asia-based personnel on anti-corruption policies on at least 54 occasions.  During the same period, Morgan Stanley trained Peterson on the FCPA at least seven times. In addition to live and Web-based training, Peterson participated in a teleconference training seminar in June 2006 conducted by Morgan Stanley’s global head of litigation and the global head of its anti-corruption group, according to the SEC.

• Written compliance certifications: Morgan Stanley additionally required that each of its employees, including Peterson, provide annual written certifications that employees are adhering to Morgan Stanley’s code of conduct, which includes a portion that directly addresses corruption risks and activities in violation of the FCPA.

• Frequent FCPA-related compliance reminders:  A Morgan Stanley compliance officer specifically informed Peterson in 2004 that employees of Yongye were government officials for purposes of the FCPA. Peterson also received at least 35 FCPA-related compliance reminders. These reminders included circulations of Morgan Stanley’s anti-corruption code of conduct; policies on gift-giving and entertainment; guidance on engagement with consultants; and policies addressing specific high-risk events, including the Beijing Olympics.

• Continuous monitoring: The Justice Department further credited Morgan Stanley for its continuous monitoring practices: “Morgan Stanley’s compliance personnel regularly monitored transactions, randomly audited particular employees, transactions, and business units, and tested to identify illicit payments.”

• Conducting extensive due diligence on all new foreign business partners and for imposing stringent controls on payments made to business partners. “Both were meant to ensure, among other things, that transactions were conducted in accordance with management’s authorization and to prevent improper payments, including the transfer of things of value to officials of foreign governments,” according to the SEC. Morgan Stanley additionally required its employees, including Peterson, annually to disclose their outside business interests.

There are other instances which we can cite to in which the DOJ and SEC declined to take any enforcement actions against companies which exhibited solid compliance programs. I happen to be personally familiar with one case in particular!  In March of 2010, Global Industries, Ltd.  (one of the companies involved in the industry wide investigation of Panalpina) announced that “representatives of the Securities and Exchange Commission and the Department of Justice informed the Company that each agency had concluded its FCPA investigation. Neither agency recommended any enforcement action or the imposition of any fines or penalties against the Company.” Both the General Counsel and I believed that the reason we received this result was due to the following reasons:

• Historical evidence of a strong FCPA compliance program

–      FCPA policies since 2000

–      FCPA (in person) training since 2000

–      FCPA clauses in contracts with sales agents since 1995

–      FCPA due diligence on sales agents since 2001

–      Consistent “Tone at the Top” emphasizing FCPA compliance

• Global’s internal controls identified the FCPA issues

–      Internal controls identified issues with a freight forwarder in 2006

–      For one issue identified through the Company’s internal controls, the Company stopped a payment before it was made; thereby preventing a potential FCPA violation

–      Prior to Vetco Gray, in 2006 Global identified issues and held up payment on certain of the freight forwarder’s invoices

–      Audits of other freight forwarding agents identified no similar issues in other geographic areas

• Management took prompt and effective action

–      Immediate steps taken to preserve relevant documents

–      Immediately implemented temporary enhanced controls, which included Legal Department review of invoices from freight forwarding/customs clearance agents

–      Prompt internal investigation

–      Immediate additional FCPA training of employees

–      Sought advice from FCPA counsel

–      Disciplined several of the employees involved

–      Global senior management issued prompt reminders of FCPA policies and procedures

• Implementation of an enhanced compliance program

–      Yearly in-person training in dual languages: English/native language

–      Web-based training

–      Training of sales agents and logistic service providers

–      Annual certification of employees, sales agents, and logistic service providers

–      Compliance audits of invoices and supporting documentation

–      Monthly compliance newsletter

• Thorough investigation and cooperation with the enforcement authorities

–      Global’s audit committee decided to conduct a comprehensive investigation using independent outside counsel

–      Global management and employees cooperated fully with outside counsel conducting the investigation

–      Global cooperated fully with the SEC and DOJ in all respects

–      Global was one of four companies to self-report in the customs/freight forwarder investigation before the DOJ launched an industry-wide investigation

–      Global shared its findings from the comprehensive independent investigation with the SEC and DOJ.

Implementing a solid compliance program, and instilling a culture of compliance, can be done- at a cost which is proportionate to the size of your company.  While there is no “one size fits all” program, there are certain essential elements that should be included in any compliance program to demonstrate a company’s commitment to abide by FCPA mandates:

Board and Senior Management Oversight

Company Compliance Officer –direct reporting to the Board

Standards and Procedures

Code of Conduct

Detailed Policies and Procedures

Contractual Compliance (in terms and conditions of contracts)

Screening

Due Diligence of certain employees, agents, and third parties

Monitoring and Auditing

Anonymous Reporting System

Periodic Evaluation of Program

Promotion and Enforcement

Training

Enforcing through Disciplinary Action

Responding to Violations 

Thank you for listening the last two weeks.  I hope that you found this series beneficial in evaluating and/or improving your own Companies compliance program.

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Mary Shaddock Jones has practiced law for 25 years in Texas and Louisiana primarily in the international marine and oil service industries.  She was of the first individuals in the United States to earn TRACE Anti-bribery Specialist Accreditation (TASA).  She can be reached at msjones@msjllc.com or 337-513-0335. Her associate, Miller M. Flynt, assisted in the preparation of this series.  He can be reached at mmflynt@msjllc.com.

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

Learning from Failure

Ed. Note-today we continue our series of guest posts from Mary Jones. Today she reviews some common compliance failures. 

On November 14, 2011 Tony Horwitz wrote an article titled “Tony Horwitz on the Failure of Textbook History”.  In the article Mr. Horwitz stated: “My complaint is that textbooks do a fine job of communicating the facts that students need to know to pass tests. But they don’t do enough to make history exciting and engaging to students”.  I can usually identify with this statement when it comes to law books, cases and deferred prosecution agreements. The fact of the matter is that it is awfully hard to make international bribery and corruption exciting…. Or is it?  Maybe we will write a novel…

Page 1….Recently federal agents searched the Capitol Hill office of a Louisiana congressman who was under investigation for bribery.  Furthermore, newly released court papers stated that agents discovered $90,000 in cash last year hidden in his Washington home.   This might not strike you as all that unusual given the sordid past of Louisiana politicians (and I know because La. is my home state)- but consider this- the money was concealed inside various frozen food containers located in the congressman’s freezer.

In all seriousness, so much of the information that compliance practitioners need to know can be gleaned from the law, the multitude of textbooks that have been published on compliance, and agency filings.  It doesn’t matter if they are exciting or engaging- they are required reading!

Practical Pointer for today’s blog.   We have spent the last two weeks dissecting cases and discussing some of lessons learned from various FCPA cases and settlements over the last several years.   Now is a good time to look at the various ways in which a company can fail to take the appropriate measures to insulate itself from FCPA liability, before we proceed to address “what went right” in tomorrow’s blog.  In his book, The Foreign Corrupt Practices Act Handbook “ A Practical Guide for Multinational General Counsel, Transactional Lawyers and White Collar Criminal Practitioners[i], Robert W. Tarun, a partner at Baker & McKenzie, LLP sums up Common FCPA Compliance Program Failures succinctly as follows:  

K.            Common FCPA Compliance Program Failures

Failures of FCPA compliance efforts can significantly damage a corporate program’s overall effectiveness and deprive the company of salutary benefits under the Organizational Sentencing Guidelines.  Multinational companies can:

• Fail to adopt and fully distribute a clear, written code of conduct or ethics policy, and more particularly, written FCPA policies prohibiting proscribed conduct and policies establishing a methodology for the identification, selection, approval, and retention of foreign agents, consultants, distributors, or other third party contractors in connection with foreign government procurement or other projects; and clear gift, travel, and entertainment policies for non-U.S. government officials.
• Fail to adequately undertake and document their due diligence efforts in evaluating and approving potential agents, consultants, distributors, joint venture partners, and other third parties.  Decisions to decline a potential agent or consultant relationship should be memorialized in some fashion, as they can establish the company takes both the FCPA and related due diligence seriously.
• Fail to appoint company or regional compliance officers.
• Overload a compliance officer with other responsibilities.
• Fail to vet officers or key employees who are to be assigned or promoted to key positions of interface with government officials in high-risk countries; vetting should include a thorough personnel file review, interviews by the legal department, and an overall health assessment of such candidates.
• Delegate compliance to officers or employees who have no real understanding or training in FCPA requirements and issues.  Similarly, companies mistakenly delegate compliance activities to persons who have an inherent conflict of interest, for example, having a marketing or project proponent undertake due diligence of proposed agents.
• Fail to make compliance a priority, with the result that, due to the press of other business matters, compliance efforts, training, and appropriate due diligence become a secondary priority.
• Fail to implement hotlines or other proper reporting mechanisms that offer no likelihood of retaliation.
• Take a “head in the sand” approach with agents, consultants, distributors, and partners and senior managers.  For example, sales personnel erroneously assume that if they do not conduct due diligence on agents, consultants, and partners or if they do not conduct due diligence on agents, consultants, and partners or if they disregard facts that should prompt them to make further inquiries, they will not face any liability.
• Take a laissez-faire attitude about FCPA-proscribed conduct, with senior managers or sales personnel rationalizing that other U.S. or foreign competitors engage in FCPA-proscribed conduct.
• Fail to require senior management or newly hired senior managers to undertake periodic ethics and FCPA training.
• Fail to conduct FCPA training using counsel or compliance experts experienced in such matters.
• Fail to rotate senior management financial and accounting personnel out of high-risk countries.
• Fail to work closely with their outside auditors to evaluate FCPA efforts annually and to modify audit work programs, policies, and training.
• Lack experienced internal auditors who understand, are trained in, and regularly focus on FCPA issues.
• Fail to implement internal administrative and financial controls that reduce risks of improperly payments (e.g., check issuance, wire transfers, petty cash controls).
• Not adequately monitor the activities of foreign subsidiaries, distributors, or joint venture partners.
• Ignore their own compliance rules and policies due to business deadlines and time constraints, permitting senior managers or sales personnel to engage in questionable practices without advance compliance clearance or legal advice.
• Fail to translate into appropriate foreign languages their compliance codes, FCPA and ethics policies, forms, and questionnaires.
• Hire or appoint foreign nationals to run overseas operations without thoroughly training them on the specific requirements and prohibitions of the FCPA.  Many foreign nationals erroneously assume they are not subject to FCPA liability.
• Fail to employ standard-form baseline contracts for foreign agents, joint ventures, sales representatives, consultants, and other contractors, or to enforce model uniform covenant, warranty, representation, and audit clauses.  Random departures from the company’s standard-form foreign agent consultant or representative agreements will raise questions about a company’s commitment to compliance and internal controls.
• Fail to conduct due diligence of agents, consultants, distributors, and third parties during the life of the contract.
• Fail in their due diligence efforts to address local law issues that may be relevant to agency or consultant agreements, partnerships, distributorships, joint venture agreements, or employment relationships.
• Fail to monitor the public disclosures of competitors that can reveal an industry-wide investigation.
• Fail to take appropriate or sufficient disciplinary actions in the wake of FCPA misconduct.
• Fail to apprise and involve boards of directors or audit committees in a timely manner in sensitive payment allegations oversight roles.
• Fail to design and undertake FCPA audit plans.
• Fail to periodically monitor and update their ethics and FCPA compliance programs.  In particular, in-house legal departments fail to regularly review, reevaluate, and modify compliance programs along with agent, consultant, third party, and joint venture agreements for FCPA-related issues, developments, and best practices.

Each of these common failures can be used to evaluate your current compliance program or to use as a guide when implementing a new program.  Learn from other companies failures! Tomorrow we will wrap up the series with our last post entitled “Morgan Stanley- With Thanksgiving” discussing what Morgan Stanley did right in its recent internal investigation. Stay Tuned. 

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Mary Shaddock Jones has practiced law for 25 years in Texas and Louisiana primarily in the international marine and oil service industries.  She was of the first individuals in the United States to earn TRACE Anti-bribery Specialist Accreditation (TASA).  She can be reached at msjones@msjllc.com or 337-513-0335. Her associate, Miller M. Flynt, assisted in the preparation of this series.  He can be reached at mmflynt@msjllc.com.

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

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[i] Reprinted with permission from The Foreign Corrupt Practices Act Handbook: The Practical Guide for Multinational General Counsel, Transactional Lawyers and White Collar Criminal Practitioners available for purchase from: http://apps.americanbar.org/abastore/index.cfm?pid=1620481&section=main&fm=Product.AddToCart

2012© by the American Bar Association.  All rights reserved.  This information or any or portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association

The High Costs of Non-Compliance!

Ed Note-we continue our series of guest posts by Mary Jones. Today, Mary explores the high cost of non-compliance.

On November 13, 1923 a special committee was formed to determine whether Germany would be required to pay for the substantial war debt incurred by Great Britain and its allies in the wake of the first Great War. The substantial monetary penalties imposed would only take Germany a mere 77 years to pay off, as the last 94 million dollar reparation payment was made on October 4, 2010.  Today, the substantial debt incurred by Germany, as a result of their transgressions during WWI, appears to be but a distant memory for most people.  However, for at least one German company, the imposition of substantial penalties as a result of past misconduct, albeit misconduct of a different nature from Germany in 1923, may be too severe to fade from their memory anytime soon.

On November 29, 2006 Siemens AG, a German conglomerate with over 475,000 employees, operations in 190 countries, and yearly revenue exceeding €87 billion euros, was raided by the Munich prosecutor following allegations that the Company had made various corrupt payments.  In response to this raid, the Siemens board of directors began an unprecedented internal investigation aimed at determining whether anti-corruption regulations had been violated. According to settlement documents, Siemens hired more than 300 lawyers, forensic accountants and support staff from law firm Debevoise & Plimpton LLP and accounting firm Deloitte LLP for a two-year internal probe.  The company estimated that the firms racked up 1.5 million billable hours. The investigation spanned 34 countries and included 1,750 interviews. Of the roughly 100 million documents collected in the investigation, Siemens produced about 24,000 documents for the Justice Department.

Together these two independent firms conducted the investigation, which included:

• 1,750 Interviews with Siemens employees and other individuals;
• 800 informational briefings with employees to obtain background information;
• 82 million documents electronically searched to identify potentially relevant material
• 14 million documents reviewed
• 38 million financial transactions analyzed; and
• 10 million bank accounts reviewed.

It has been reported that the internal investigation cost Siemens around €550 million euros, with €204 million going to Debevoise and €349 million going to Deloitte. What is even more shocking is that the €550 million euro investigation fee was in addition to the €1 billion euro fine and penalty subsequently imposed by the DOJ and German authorities, as a result of Siemens past corrupt practices.

Siemens is not alone in the high cost of internal investigations and/or fines and penalties.  We have recently read filings from other companies in the midst of internal investigations who have disclosed some of the internal investigation costs:

•  Avon: The internal investigation is in its fifth year.  The reported internal investigation costs are approximately $280 million dollars!
• Weatherford: The internal investigation is in its sixth year.  The reported internal investigation costs are approximately $125 million dollars!
• Wal-Mart:  The internal investigation for Wal-Mart has not yet reached the one year mark- but the reported internal investigation costs are already $51 million dollars!

These are only the internal investigation costs.  We don’t know if there will be any fines or penalties imposed upon these organizations.  But can you imagine if your company had to pay millions and millions of dollars for the investigation and then get hit with fines and penalties in the range that we have seen in the last few years?

• KBR/Halliburton- $579 million
• BAE- $400 million
• Snamprogetti/ENI- $365 million
• Technip-$137 million

A review of these cases brings us to the Practical Pointer for today:  We understand that you may be placed in a position to justify the cost of implementing and enforcing a compliance program.  “How much is it going to cost us”?  That question has to be addressed, and should be.  The implementation of a compliance program does not have to break the bank.  However, it is important to put the company’s money “where their mouth is”.  The message to your company is this- the cost of implementing and maintaining a compliance program is far less that the investigation costs, time, embarrassment, and potential fines and penalties (not to mention jail time) that the company will incur if it does not put in a solid compliance program.

Being proactive in terms implementing and enforcing a compliance program does have a cost. Each company should, without question, implement a compliance program tailored to their specific needs and means.  However, as reflected in the reported investigation costs and reported fines and penalties, and jail time, the disparity between the costs of implementing and enforcing a compliance program, in relation to the monetary magnitude of potential costs, fines, and/or jail time makes the implementation of a proper compliance program something of a no-brainer.  So if you or your company are thinking of starting to do business internationally make sure to do the smart thing and implement a compliance program, because explaining the paltry sum of a compliance program to your executive management, owners and/or Board of Directors will be a much easier task than trying to explain away your failure to do so in the face of a multi-million dollar investigation costs, fines, penalties or jail time.

At this point you might ask yourself:  “Well now that I know what happens if we don’t comply with the law- what exactly am I required to do in order to implement a solid compliance program?”  The answer to this question is simple.  You just have to look at the law, the guidance provided by the various governments, (DOJ, SEC, and UK Fraud office), read what other people failed to do AND you can read tomorrow’s blog!

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Mary Shaddock Jones has practiced law for 25 years in Texas and Louisiana primarily in the international marine and oil service industries.  She was of the first individuals in the United States to earn TRACE Anti-bribery Specialist Accreditation (TASA).  She can be reached at msjones@msjllc.com or 337-513-0335. Her associate, Miller M. Flynt, assisted in the preparation of this series.  He can be reached at mmflynt@msjllc.com.

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

Panalpina’ s “World Wide Web”

Ed. Note-we continue our guests posts from Mary Jones who today looks at the world wide web in the context of one of the most significant companies which have been involved in FCPA enforcement actions-Panalpina

On November 12, 1990, Sir. Tim Berners-Lee with help from Robert Cailiau published a formal proposal for the World Wide Web in Switzerland.   Today, twenty-two years later- we look at a different world wide web, one which ensnarled a Switzerland based company named “Panalpina”.

According to the Department of Justice, Basel, Switzerland based Panalpina World Transport “is one of the world’s leading suppliers of forwarding and logistics services, specializing in global supply chain management solutions and intercontinental air freight and ocean freight shipments and associated supply chain management solutions.” It operates “a close-knit network with some 500 branches in over 80 countries,” does business in a further 80 countries with partner companies, and employs approximately 15,000 individuals.  The criminal information focuses on a “network of local subsidiaries … each of which was responsible for providing the freight forwarding and logistics services to customers and for coordinating with other Panalpina-affiliated companies with respect to the transportation and shipment of cargo from abroad.” In addition, PWT and its subsidiaries “provided customers with importation, customs clearance and ground shipment services once the shipped goods reached their destination jurisdiction.”  The subsidiaries under investigation were from the U.S., Nigeria, Angola, Brazil, Azerbaijan, Kazakhstan, Russia and Turkmenistan (hence my reference to the “world wide web”!)

There have been many blogs, papers and articles written about the facts and settlement the DOJ and SEC entered into with Panalpina and many of the oil service companies utilizing its services.  There is no reason for me to recite the facts of that case again.   More importantly, I have seen first-hand the improvements made by Panalpina in its own compliance program since the investigation began in 2005. This is a company that should be lifted up as a model for others to follow.  I have always been taught that it isn’t the fact that you get knocked down that shows your strength and courage, but the fact that you get back up and learn from your mistakes.    All of us can learn improvements from each and every one of the FCPA reported settlement agreements, including that of Panalpina.

Practical Pointer for today’s blog- once a third party has passed the due diligence process, it is important to include contractual language specifically targeted to the FCPA (and in my opinion the UK Bribery Act). There are several well recognized concepts that should be included in the contractual language, including an overarching statement that the Agent or Partner will not authorize, offer, or pay anything of value to a foreign government official (or private entity if UK Bribery Act is encompassed) for the purpose of obtaining or retaining business or gaining any improper business advantage.  This concept is followed by the promise to submit itemized invoices, with accurate supporting documentation to allow for transparency in the processing of payments.  Along with these two requirements are the rights to audit, to terminate or suspend the contract, and perhaps, the right to recoup any losses and investigation costs for violation of the above.  The final agreements would include the obligation to undertake training, periodic due diligence requalification and annual certifications.

On Friday, we discussed the Due Diligence process and provided some language to assist in the identification of “Red Flags” when considering the use of a third party Agents or Partners.  Today, we provide you with additional language to consider utilizing once an Agent or Partner has been retained:

In addition, unless approved by the Company Compliance Officer or his or her designee, all contracts with Agents or Partners shall contain provisions addressing the following matters:

• payment mechanisms that comply with this Manual, the FCPA, the UKBA and other applicable anti-corruption and/or anti-bribery laws during the term of such contract;
• the counterparty’s obligation to maintain accurate books and records in compliance with the Company’s Policy and Compliance Manual;
• the counterparty’s obligation to certify on an annual basis that: (i) counterparty has not made, offered, or promised any payment or gift of money or anything of value, directly or indirectly, to any Government Official (or any other person or entity if UK Bribery Act applies) for the purpose of obtaining or retaining business or getting any improper business advantage; and (ii) counterparty has not engaged in any conduct or behavior prohibited by the Code of Conduct, Anti-Corruption Policy and Compliance Manual and other applicable anti-corruption and/or anti-bribery law;
• the Company’s right to audit the counterparty’s books and records, including, without limitation, any documentation relating to the counterparty’s interaction with any governmental entity  (or any entity if UK Bribery Act applies) on behalf of the Company, and the counterparty’s obligation to cooperate fully with any such audit; and
• remedies (including termination rights) for the failure of the counterparty to comply with the terms of the contract, the Code of Conduct, the Anti-Corruption Policy and Compliance Manual and other applicable anti-corruption and/or anti-bribery law during the term of such contract.

All contracts that provide for the disbursement of funds by the Company to a third party shall be in writing and shall require the other party to submit a written invoice for payment in compliance with the terms of its contract with the Company. All invoices shall be accompanied by accurate and sufficient supporting documentation for all outlays to third parties.  Contracts requiring the disbursement of funds by the Company for such services shall also require that, unless the Company Compliance Officer or his or her designee determines that payment in another jurisdiction does not violate local law and that a valid business reason for payment in another jurisdiction exists, funds shall be transferred only to a bank account owned by the designated recipient and that such account shall be located in the jurisdiction where the relevant business services are to be performed/occurs.

As we discussed last week, companies can be held liable for the acts of third parties acting on their behalf.  The use of the contracting strategies suggested above will clearly communicate to the Agent and/ or Partner the seriousness of your company’s commitment to abiding by the law and spirit of the FCPA and similar anti-corruption laws and regulations.

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Mary Shaddock Jones has practiced law for 25 years in Texas and Louisiana primarily in the international marine and oil service industries.  She was of the first individuals in the United States to earn TRACE Anti-bribery Specialist Accreditation (TASA).  She can be reached at msjones@msjllc.com or 337-513-0335. Her associate, Miller M. Flynt, assisted in the preparation of this series.  He can be reached at mmflynt@msjllc.com.

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