FCPA Compliance and Ethics Blog

October 2, 2012

Tyco NPA and Chris Economaki – Details from the Pits

“This is Chris Economaki in the pits.”

That was the signature line of race car announcer Chris Economaki, who died last week at the age of 91. For a generation of us who grew up watching ABC’s Wide World of Sports, Chris Economaki was the voice of the Indy 500, the Dayton 500, the Summer and Winter Nationals of the National Hot Rod Association (NHRA) and a host of other auto races. In addition to having one of the most unique names this Southerner had ever heard of, Economaki had a staccato vocal delivery that, as noted in his obituary in the New York Times (NYT) by writer Douglas Martin, “reminded some of a rumbling racing engine.”

The Bribery Schemes

I thought about Chris Economaki and the detail he brought as a track-side commentator to a generation of Wide World of Sports’ aficionados when considering the various documents released last week in connection with the Tyco International Ltd (Tyco) Foreign Corrupt Practices Act (FCPA) enforcement action. For the most comprehensive summary of the Department of Justice’s (DOJ) criminal enforcement action and the Securities and Exchange Commission’s (SEC) civil action, I recommend either of the FCPA Professor’s excellent posts on Tyco. In addition to the points raised by the Professor I believe that there are significant lessons learned for the FCPA compliance practitioner. With a tip of our collective caps to the baseball pennant races which are down to the final few days, I present the Tyco Bribery Box Score.

Tyco

Subsidiary

Bribe Amount Paid

Profits Earned by Conduct

M/A Com Not reported $71,770
TTC Huzhou and TTC Shanghai $196,267 $3,470,180
TWW Germany and Erhard $2,371,094 $4,684,966
TFC HK and Keystone $137,000 $378,088
TFCT Shanghai $24,000 $59,412
ET Thailand $292,268 $879,258
TFIS France $363,839 $1,256,389
THC China $250,000 $353,800
TVC ME $488,479 $1,153,500
ADT Thailand $78,000 $473,262
Tatra $96,000 $226,863
Eurapipe $358,000 $1,298,453
THC Saudi Arabia Not reported $1,900,600
Dulmison $68,426 $109,249

I set out the full Box Score of bribes paid by Tyco in this detail to emphasize how bad the conduct of the company is and this is in the VERY BAD CONDUCT realm, coupled with the facts that (a) Tyco is now a two-time loser under the FCPA and (b) most of the illegal conduct occurred after Tyco agreed to an initial FCPA based Deferred Prosecution Agreement (DPA) in 2006 for prior FCPA sins. Yet even with all of this Tyco was able to obtain a Non Prosecution Agreement (NPA). Such a result is fairly stunning if you think about it in a superficial basis. However, if you consider what Paul McNulty continually says, and which I continually write about, the most important question will be What did you do when you found out about it?

As noted in the letter from the DOJ to counsel for Tyco, the DOJ entered into the NPA with Tyco based upon the following factors: (1) timely and voluntary self-disclosure; (2) a full and complete global investigation by Tyco; (3) extensive remediation including implementation of an enhanced compliance program, termination of employees responsible for the conduct at issue, severing contracts with third party agents who were parties to the frauds, closing subsidiaries involved in the illegal conduct; and (4) provide annual written reports to the DOJ on progress of the company’s enhanced compliance program.

Corporate Compliance Program

Tyco agreed to a robust corporate compliance program that either currently exists or will be implemented in the future. This Corporate Compliance Program is somewhat different than most of the 13 minimum best practices compliance regimes reported in DPAs and NPAs since the Panalpina DPA of November, 2010. Tyco agreed to a point compliance regime, which consists of the following.

1. High level commitment. The Company will ensure that its senior management provides strong, explicit, and visible support and commitment to its corporate policy against violations of the anti-corruption laws and its compliance code.

2. Policies and Procedures. Tyco will promulgate compliance standards and procedures designed to reduce the prospect of violations of the anti-corruption laws and the Company’s compliance code, and the Company should take appropriate measures to encourage and support the observance of ethics and compliance standards and procedures against foreign bribery by personnel at all levels of the company. These anti-corruption standards and procedures shall apply to all directors, officers, and employees and, where necessary and appropriate, outside parties acting on behalf of the Company in a foreign jurisdiction, including but not limited to, agents and intermediaries, consultants, representatives, distributors, teaming partners, contractors and suppliers, consortia, and joint venture partners (collectively, “agents and business partners”), to the extent that agents and business partners may be employed under the Company’s corporate policy. The Company shall notify all employees that compliance with the standards and procedures is the duty of individuals at all levels of the company. Such standards and procedures shall include policies governing:

  1. gifts;
  2. hospitality, entertainment, and expenses;
  3. customer travel;
  4. political contributions;
  5. charitable donations and sponsorships;
  6. facilitation payments; and
  7. solicitation and extortion.

3. Internal Controls. Tyco will ensure that it has a system of financial and accounting procedures, including a system of internal controls, reasonably designed to ensure the maintenance of fair and accurate books, records, and accounts to ensure that they cannot be used for the purpose of foreign bribery or concealing such bribery. This system should be designed to provide reasonable assurance that:

  1. Transactions are executed in accordance with management’s general or specific authorization;
  2. Transactions are recorded to permit preparation of financial statements in accordance with GAAP;
  3. Access to assets is permitted only in accordance with management’s general or specific authorization; and
  4. Recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken if discrepancies are found.

4. Periodic Risk-Based Reviews. Tyco agreed to develop these compliance standards and procedures, on the basis of a risk assessment addressing the individual circumstances of Tyco, in particular the foreign bribery risks it faces including, its geographical organization, interactions with various types and levels of government officials, industrial sectors of operation, involvement in joint venture arrangements, importance of licenses and permits in the company’s operations, degree of governmental oversight and inspection, and volume and importance of goods and personnel clearing through customs and immigration.

5. Proper Oversight and Independence. Tyco will (or once again has) assign responsibility to one or more senior corporate executives of the Company for the implementation and oversight of the Company’s anti-corruption policies, standards, and procedures. Such corporate official(s) shall have direct reporting obligations to the Tyco’s independent monitoring bodies, including internal audit, the Board of Directors, or any appropriate committee of the Board of Directors, and shall have an adequate level of autonomy from management as well as sufficient resources and authority to maintain such autonomy.

6. Training and Guidance.

  1. Training. Tyco will implement mechanisms designed to ensure that its anti-corruption policies, standards, and procedures are communicated effectively to all directors, officers, employees, and where appropriate, agents and business partners. These mechanisms shall include periodic training for all directors and officers, and, all employees in positions of leadership or trust or positions which might otherwise pose a risk of corruption to the company. The training shall also be provided to agents and business partners. Lastly there shall be biannual certifications by all such directors and officers, and, where necessary and appropriate, employees, agents, and business partners, certifying compliance with the training requirements.
  2. Guidance. Tyco is required to maintain an effective system for providing guidance and advice to directors, officers, employees, and, where necessary and appropriate, agents and business partners, on complying with Tyco’s anti-corruption compliance policies, standards, and procedures, including when they need advice on an urgent basis or in any foreign jurisdiction in which Tyco operates.

7. Internal Reporting and Investigation. Tyco will provide an effective system for internal and where possible, confidential reporting by, and protection of, directors, officers, employees, and, where necessary and appropriate, agents and business partners, concerning violations of the Company’s compliance program. Tyco also agreed to dedicate sufficient resources to respond to such requests and undertaking necessary and appropriate action in response to such reports.

8. Enforcement and Discipline. Tyco will institute appropriate disciplinary procedures to address, violations of the anti-corruption laws and the Company’s anti-corruption compliance code, policies, and procedures by the Company’s directors, officers, and employees. This shall include disciplining of those within the company no matter how the position of the person or their perceived authority. In addition to discipline, Tyco agrees to add appropriate mechanisms to incentivize compliant behavior.

9. Third Party Relationships. Tyco agreed to institute appropriate due diligence and compliance requirements pertaining to the retention and oversight of all agents and business partners, including: (a) properly documented risk-based due diligence pertaining to the hiring and appropriate and regular oversight of agents and business partners; (b) informing agents and business partners of the Company’s commitment to abiding by laws on the prohibitions against foreign bribery, and of the Company’s ethics and compliance standards and procedures and other measures for preventing and detecting such bribery; (c) seeking a reciprocal commitment from agents and business partners and (d) including appropriate compliance terms and conditions in the contract.

10. Mergers and Acquisitions. Tyco agreed to develop and implement appropriate compliance policies and procedures for any acquisition based upon an appropriate risk-analysis which would be completed as soon as practicable. Further such changes would be implemented as soon as practicable. Directors, officers and employees of newly acquired entities would be trained as soon as practicable.

11. Monitoring and Testing. Tyco agreed to conduct periodic review and testing of its anti-corruption compliance code, standards, and procedures designed to evaluate and improve their effectiveness in preventing and detecting violations of anti-corruption laws and the Company’s anti-corruption code, standards and procedures, taking into account relevant developments in the field and evolving international and industry standards.

So the prior 13 point best practices program is now folded down to 11 for Tyco. Nevertheless, the general concepts are still the same for a company seeking to implement or enhance its compliance solution. Much like Chris Economaki reporting from the Pits at the Indy 500, the level of detail provided in the Tyco NPA should allow the compliance practitioner to evaluate their company’s compliance program.

============================================================================================

The Wall Street Journal has a series of articles today on the FCPA. In conjunction with these articles I will join Joe Palazzolo, Law Blog lead writer, for a conversation on the FCPA at 2:30 PM EDT. We will take your questions. To join us, click here.

===========================================================================================

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

© Thomas R. Fox, 2012

June 13, 2012

Factors for a NPA for an Individual in a SEC Enforcement Action

I have previously written about what conduct can help your company if it is under an investigation by the Department of Justice (DOJ) for Foreign Corrupt Practices Act (FCPA) violations. The key seems to be “extra-ordinary cooperation.” Today we will take a look at a recent Securities and Exchange Commission (SEC) matter where an individual received a Non-Prosecution Agreement (NPA). In an article in the June issue of the Compliance Week Magazine, entitled “How Individuals Win Non-Prosecution Agreements”, author Jaclyn Jaeger wrote about the recent NPA reached with an individual, as opposed to a corporate defendant. Jaeger called this a “first-of-a-kind case” due to the fact that it is the first time an individual has been given a NPA by the SEC. The case referenced by Jaeger involved an “un-named former senior executive of the institutional money management firm AXA Rosenberg.” Although the matter did not involve any alleged violations of the FCPA, the NPA is certainly instructive for considering how to resolve a SEC action under the FCPA if you are caught up in an individual enforcement action.

In January 2010, the SEC released its Enforcement Cooperation Initiative. Under this Initiative, the SEC established a series of incentives for individuals and companies to assist the SEC in ongoing investigations and during the pendency of enforcement actions. As a part of this Initiative, the SEC released a Cooperation Policy Statement which described four factors that the SEC would consider to “determine whether, how much, and in what manner to credit cooperation.” The four factors were: (1) how much assistance the individual provides; (2) the importance of the underlying matter; (3) the SEC’s interest in holding the individual accountable; and (4) the prior background of the cooperating individual.” The SEC provided the following commentary on each of the four factors.

Assistance provided. Under this factor, Jaeger noted that the individual in question had offered his voluntary cooperation to the SEC at the outset of the investigation. She noted that his “intimate knowledge” of certain quantitative measures the firm used was important to the SEC’s investigation. This voluntary cooperation was provided by the individual to the SEC “without conditions” which the SEC believed enhanced his credibility.

Importance of the underlying matter. The SEC viewed the investigation and enforcement matter as significant because “it was the first ever arising from errors in a computer-based, quantitative investment model”. His cooperation led to the recovery of “big dollars for victims” due to two separate enforcement actions the SEC brought.

Interest in holding the individual accountable. The SEC believed that the individual played a limited role in the events surrounding the violation but also noted that while still an employee, he had advocated that the error which led to the enforcement action be disclosed to the company President. The SEC noted that the individual’s cooperation “maximized the SEC’s law enforcement interests by facilitating the quick and successful resolution of its enforcement action”.

The Executive’s profile. The individual was not “an associated person of a regulated entity, a fiduciary for other individuals or entities regarding financial matters, or an officer or director of any company.” Further, he did not have any black marks in the way of prior disciplinary actions on his record. Lastly, after the investigation was concluded, he resigned from AXA Rosenberg.

In her article, Jaeger spoke to some industry experts regarding the effect of this NPA. All people interviewed emphasized the fact specific nature of the resolution. The two key factors which may differentiate this resolution from others, the first being the role this person had in the violation. Jaeger quoted Tom Gorman who said that “Whether you get no prosecution or just diminished sanctions will really be a function of the individual’s role in the underlying conduct”. The second factor, I believe, is that the individual in question is no longer working in the industry and therefore he is no longer in a position to commit future violations of federal securities laws.

Jaeger contracted the AXA Rosenberg matter with another case involving John Cinderey, which showed “a good look at each end of the spectrum” of enforcement. In the Cinderery matter, he received credit for his “substantial assistance” in a SEC investigation but, at the end of the day, Cinderery was named as a defendant in the SEC’s enforcement action against United Commercial Bank. Although the SEC extracted no fine against Cinderey for his role in misleading the bank’s auditors regarding the risks the bank faced in certain outstanding loans, it was noted that he did pay a fine related to action brought by the Federal Deposit Insurance Corporation (FDIC). Cinderery did agree to a permanent injunction proffered by the SEC.

Jaeger quoted Keith Miller for the proposition that the key takeaway for companies and individuals in SEC enforcement actions should be “setting the tone with the staff at the onset of any investigation is very important, because the foundation for how the SEC is going to view and treat you later. However, Tom Gorman emphasized that it is the individual’s involvement in the underlying wrongful conduct which will be very important. While credit and a diminished penalty are possible, he does not believe that the SEC will “give them a pass if they’re one of the major players” in the fraud or violation.

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

January 5, 2012

Aon Nets an NPA

In December, 2011, the insurance giant Aon received a Non-Prosecution Agreement (NPA) from the Department of Justice (DOJ) in settling enforcement actions against it by the DOJ and Securities and Exchange Commission (SEC). Aon agreed to total fines and penalties in an amount of $16.3 MM. This is in addition to a fine previously paid to the UK Financial Services Authority (FSA) in January, 2009 of £5.25 MM (approximately $8.2 MM at today’s exchange rate). The Aon resolution has several factors which are of interest and should be noted by the compliance practitioner.

Aon’s Remedial Actions Which Led to the NPA

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

Non-Bona Fide Travel and Educational Expenses

The primary activity for which Aon was sanctioned was a travel and education fund which was initially designed to provide funds for foreign government employees involved with insurance to travel to educational conferences. However, the funds were also used for personal entertainment of such officials, their wives and families. In one instance, involving a fund in Costa Rica, travel was booked through a travel agency which was owned or managed by the Costa Rican officials who were entertained with monies from the educational and training funds. This was not, as former UCLA student Kyle Sheahen said in his paper, entitled “I’m Not Going to Disneyland: Illusory Affirmative Defenses under the Foreign Corrupt Practices Act”, an instance of the bona fide travel and promotional defense being disregarded. In the Aon enforcement matter, there was either no bona fide educational expense or not one which could be documented from Aon’s internal records.

Books and Records

The largest portion of the Aon fine involved violations of the Foreign Corrupt Practices Act’s (FCPA) books and records requirements. The NPA noted, “With respect to the Costa Rican training funds, although Aon Limited maintained accounting records for the payments that it made from both the Brokerage Fund and the 3% Fund, these records did not accurately and fairly reflect, in reasonable detail, the purpose for which the expenses were incurred. A significant portion of the records associated with payments made through tourist agencies gave the name of the tourist agency with only generic descriptions such as “various airfares and hotel.” Additionally, to the extent that the accounting records did provide the location or purported educational seminar associated with travel expenses, in many instances they did not disclose or itemize the disproportionate amount of leisure and non-business related activities that were also included in the costs.

International Cooperation

This enforcement action was one of the earliest which revealed the level of cooperation on anti-corruption issues by the US and UK governments. In the NPA there was a discussion about how the insurance and reinsurance industry work, particularly with regards to brokers, who are agents. However, there did not appear to be a penalty assessed for Aon’s actions regarding its agent. Nevertheless, this agent issue was the focus of the FSA action, which at the time, was the largest penalty levied by the FSA for overseas corruption. In its Final Notice, dated January 9, 2009, the FSA stated, in part:

(3) The systems and controls failings existed in a number of Aon Ltd.’s major business units and for a period of years. In particular, the failure to monitor payments to Overseas Third Parties allowed a number of suspicious payments to continue to be made for a number of years. Over the course of the Relevant Period, 66 suspicious payments amounting to approximately US$2.5 million and €3.4 million were paid to nine Overseas Third Parties. In addition, a number of other suspicious payments to those Overseas Third Parties were made prior to the Relevant Period (before Aon Ltd became regulated by the FSA).

(4) In failing to have properly assessed the risks involved in its dealings with Overseas Third Parties and to implement effective controls to mitigate those risks, Aon Ltd may have profited from its breach. The commission or brokerage earned by Aon Ltd over the course of the Relevant Period from business that may have been secured or retained as a result of suspicious payments amounted to approximately US$7.2 million and €1 million.

FSA Enforcement Action

It is noteworthy that the DOJ did not bring heavier sanctions against Aon for such conduct but noted in the NPA “(d) the prior financial penalty of £5.25 million paid to the United Kingdom’s Financial Services Authority (“FSA”) by Aon Limited, a U.K. subsidiary of Aon, in 2009, covering the conduct in, Bangladesh, Bulgaria, Indonesia, Myanmar, the United Arab Emirates, and Vietnam; and the FSA’s close and continuous supervisory oversight over Aon Limited.”

There are several key takeaways from the Aon enforcement action. Travel and entertainment are fields for the unwary. There must be a clear and DOCUMENTED business purpose in travel and payment of educational expenses. Remember the three most important things are DOCUMENT, DOCUMENT and DOCUMENT. Beyond that your books and records need to reflect accurate payments for travel, as in who, what, when, where and how; not “various airfare and hotels.” Next, if a government official directs you to use a service provider such as a travel agency, you must perform due diligence on the service provider to ensure that it is not controlled by the government official you are dealing with in your business.

Lastly we offer recognition to the DOJ for taking into account not only the work done by the FSA but also the fine assessed and continuing oversight of Aon by the FSA. This could be an important portent of things to come in ever increasing internationalization of anti-corruption enforcement actions.

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

January 3, 2012

Ten Compliance Issues from 2011

I have seen several lists of the Top Foreign Corrupt Practices Act (FCPA) issues of 2011. Sam Rubenfeld and Chris Matthews at the Wall Street Journal’s Corruption Currents have been interviewing several of the top legal practitioners on their thoughts. The ever-present Mike Volkov has weighed in with his list and his “Person of the Year”, the Chief Compliance Officer. Howard Sklar and I even got into the video act by discussing our most significant issues in “This Week in FCPA”. So as part of the compliance commentariati, I submit, for your consideration, my Top Ten anti-corruption and anti-bribery issues over the past 12 months.

1.         Amendments to the FCPA? The Senate ended 2010 with hearings focusing on why there were not more individual prosecutions under the FCPA. In June, the House Judiciary Committee focused on ways to ease up on or gut the anti-corruption provisions of the FCPA in the name of US “competitiveness” overseas. Then in a stunning turnaround, the House Judiciary Chair asked the Department of Justice (DOJ) representative if the DOJ would support a ban on all commercial bribery, not just a ban on bribing foreign governmental officials. Then again he did say was drafting amendments to the FCPA which we haven’t heard about since the great theater in June.

2.         UK Bribery Act goes live. For many in the anglophile world, the event of the year was the marriage of Prince William to Kate Middleton. However, for us in the anti-corruption and anti-bribery world, it was effective date of the UK Bribery Act, July 1. While some had opined that the Bribery Act was “the FCPA on steroids” the initial prosecution under the Bribery Act was for a £500 bribe paid to a UK court clerk. Perhaps it just takes awhile for UK steroids to kick in.

 3.         Crystal Ball Reading. One does not have to read a crystal ball or tea leaves to know what should constitute a best practices compliance program. The DOJ continues to respond to calls for information by practitioners and the commentarati by providing solid information through which you can implement or enhance your compliance program. In addition to continuing to list the 12 points in a minimum best practices compliance program in each Deferred Prosecution Agreement (DPA)/Non-Prosecution Agreement (NPA) released; the DOJ has provided ‘enhanced compliance obligations’ in DPAs which provide information on evolving standards. Back in January, the DOJ provided information on areas of risk which should be assessed to inform your compliance program.

4.         Chief Compliance Officer Upgrade. With the effective changes in the federal sentencing guidelines from November, 2010 and the DOJ comments this year, it has become clear that companies must give a more prominent role to the Chief Compliance Officer and separate that function from that of the General Counsel.

5.         Investigating Private Equity. Both the DOJ and Serious Fraud Office (SFO) announced that they would be looking at private equity, in conjunction with anti-bribery and anti-corruption. Well known for cost reductions through cutting corporate budgets, they may become a prime and profitable set of targets for enforcement agencies.  Additionally, their unique structure of separately operating portfolio companies may greatly increase ownerships control and person risks. If you are in private equity and are reading this and have no clue what I am talking about, get on the phone to one of Howard Sklar’s recommended FCPA counsel ASAP.

6.         It Just Can’t Get any Weirder. Just when you think you have seen it all in the FCPA world, News Corp., is accused of bribing Scotland Yard to further its newspaper business and it is also alleged that a lawyer representing a US company in Mexican litigation attempts to bribe a court official to obtain a favorable ruling. Then, of course there is Olympus, which not only fires its whistle-blowing Chief Executive Officer (CEO) for questioning Red Flag payments to agents, which reveals that it has been engaged in a decade long corporate fraud. But here’s the topper in my book, someone posted a comment to my blog post about Tyson’s Foods paying bribes to the wives of Mexican food inspectors to obtain ‘favorable treatment’. She said the following “The meat being TIF-certified for export was not meat distributed to U.S. The meat was being exported to countries such as Japan and other Asian destinations.” I am sure that is of great comfort to the folks in “Japan and other Asian destinations”. Memo to Tyson: Call Gini Dietrich at Spin Sucks for some serious PR help.

7.         Plaintiff’s Bar gets that old time (FCPA) religion. The FCPA was used, in a somewhat novel manner, in three civil actions which may portend an entire new wave of private and civil FCPA litigations. In SciClone a shareholder derivative action was filed after the announcement of a FCPA investigation. During the pendency of a FCPA investigation, this civil action was settled with the company agreeing to implement a best practices compliance program. In Alba v. Alcoa a company whose employees were allegedly paid bribes (Alba) sued the alleged bribe-payor (Alcoa) for damages in driving up the costs for products sold because of the corrupt acts of Alcoa. In ICE, the Costa Rican telecom company sought to use the victim restitution component to allow it to participate in the DOJ’s FCPA settlement with Alcatel-Lucent.

8.         Rule of Law. Several DOJ prosecutions of individuals under the FCPA have brought a plethora of legal rulings to flesh out legal standards under the FCPA. In the spring, there were district court rulings on whether a state owned enterprise is covered by the FCPA and an analysis of what constitutes a state owned enterprise. These cases will probably be appealed so we may have the first US court of appeals’ interpretation of the FCPA in quite some time.

9.         Wide World of Enforcement. More countries are implementing new anti-corruption laws and more resources are being dedicated to enforcement. The US has had significant cooperation with the UK SFO and Financial Services Association (FSA) and this will increase with the go live date of the Bribery Act. However, the BRIC countries have passed, or are considering, significant anti-corruption laws. The US is starting to coordinate and share more information with these countries — China being the most significant.  For global companies, this increase will portend greater numbers of fines and penalties and will complicate international settlement efforts.

10.       Year of the FCPA Trial. This was the year that the DOJ brought out the big trial guns for three very high profile FCPA trials: the Gun Sting cases; Lindsey Manufacturing; and Haitian Telecom. The resolution results have been mixed, with convictions in Lindsey and Haitian Telecom; mistrial in the first of four Gun Sting trials and some dismissals in the second Gun Sting trial. However, the government has taken a black eye for some procedural missteps, particularly the judge throwing out the entire guilty verdict for prosecutorial misconduct in the Lindsey Mfg. case.

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

September 15, 2011

Preparing for the End of Facilitation Payments

In an article published in the July issue of the Compliance Week magazine, entitled  “The UK Bribery Act: How to Mitigate the Risks or Prosecution for Making Facilitation Payments, authors Jonathan Feig and Richard Thomas discuss how companies can mitigate their risks of prosecution for making facilitation payments under the Bribery Act. This is an area that many US companies may have exposure to as the Foreign Corrupt Practices Act (FCPA) has an exception for facilitation payments but there is no corresponding exception or exemption under the Bribery Act.

Richard Alderman, Director of the Serious Fraud Office (SFO), was recently quoted in thebriberyact.com regarding facilitation payments as saying:

“…I do not expect facilitation payments to end the moment the Bribery Act comes into force. What I do expect though is for corporates who do not yet have a zero tolerance approach to these payments, to commit themselves to such an approach and to work on how to eliminate these payments over a period of time. I have also said that these corporates should come and talk to the SFO about these issues so that we can understand that their commitment is real. This also gives the corporate the opportunity to talk to us about the problems that they face in carrying on business in the areas in which they trade. It is important for us to know this in order to discuss with the corporate what is a sensible process.” [emphasis mine]

As a lawyer, you might well seek from further clarification on what the “sensible approach” might be and how one could advise a client on such a term. Fortunately that is exactly what my colleagues who run the site, thebriberyact.com, did. Richard Kovalevsky Q.C. and Barry Vitou, sought further guidance from the SFO and reported that the SFO will be “looking to see” the following:

1. Whether the company has a clear issued policy regarding such payments;

2. Whether written guidance is available to relevant employees as to the procedure they should follow when asked to make such payments;

3. Whether such procedures are being followed by employees;

4. If there is evidence that all such payments are being recorded by the company;

5. If there is evidence that proper action (collective or otherwise) is being taken to inform the appropriate authorities in the countries concerned that such payments are being demanded;

6. Whether the company is taking what practical steps it can to curtail the making of such payments.

If the answers to these questions are satisfactory then the corporate should be shielded from prosecution. The Feig and Thomas article would seem to speak to this final Point 6, what practical steps is your company taking “to curtail the making of such [facilitation] payments”? They lay out a 5 step process to help curtail the making of facilitation payments.

I.                   Revisit the Anti-Corruption Policy

Your company should have a plan to phase out facilitation payments made by both company employees and those working on your behalf such as agents, resellers, distributor and other foreign business partners.

II.                Understand How Operations Have Changed Since the Ban on Facilitation Payments

Your company should consider key areas where facilitation payments occur to make certain that they are not being paid in another form. For instance, do employees wait in line like everyone else to go through customs or do they now use an agent to shuffle them through in groups. If your company has engaged in such a customs representative, has this agent been vetted through your due diligence program and if so has this agent been audited.

III.             Understand How Employees Manage Situations Where They are Pressured to Make Facilitation Payments

The key here is listening. Your company needs to listen to key employees who travel overseas to high risk areas about situations that they face where a bribe is solicited. Your company also needs an understanding of areas where what employees face is not solicitation of bribes but really extortion because their life, liberty or health and safety is in immediate peril. Your company will back them up if they are required to pay monies to extricate themselves from such a situation.

IV.              Update Training and Internal Communications for Facilitation Payments

Your company must update your training to make clear that facilitation payments will no longer be allowed under your compliance program. The information that your company obtains from listening to your employee, as set out above will enable your company to develop information that they will need for situations where a bribe is demanded. Incorporating the likely scenarios that employees will face into your training is important so that your company can present responses which can be used by employees. This way an employee is not left out in the cold or in the dark about what might happen and what he or she can do about it.

V.                 Update Your Anti-Corruption Monitoring Program

Your company should update its anti-corruption monitoring program to ensure that it captures the identification of facilitation payments. If any such payments are identified, they should be elevated to the compliance department. These controls need to be tested to ascertain their effectiveness. Lastly such controls need to be extended to your foreign business partners.

As I have previously written, the end of facilitation payments in coming. The OECD recommends that they be done away with and the Bribery Act provides no exemption for them. Perhaps a Republican Congress would feel that by removing the facilitation payment exemption it would somehow hurt US businesses overseas. But this feeling would not last for long. So if your company does business in the UK or has a UK subsidiary, you need to start preparing for the end of facilitation payments. You would do well to regularly read thebriberyact.com and to follow the steps laid out by Feig and Thomas in the Compliance Week magazine.

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

July 14, 2011

Best Practices During an FCPA Enforcement Action: The Armor Holdings NPA

As reported by the FCPA Blog, Corruption Currents in the Wall Street Journal and numerous others, on July 13, 2011, Armor Holdings Inc., entered into a Non-Prosecution Agreement (NPA) with the Department of Justice (DOJ) to pay a $10.29 million penalty to resolve violations of the Foreign Corrupt Practices Act (FCPA). Contemporaneously, Armor Holdings settled a civil enforcement action brought against the company by the Securities and Exchange Commission (SEC) and agreed to pay a total of $5,690,744 in disgorgement, prejudgment interest and civil penalties in order to resolve the SEC action. These fines and penalties were in conjunction with Armor Holdings series of contracts with the United Nations (UN) for supply of body armor for use in Iraq.

An interesting side note is that the British company BAE Systems, Inc., acquired Armor Holdings but we note that it was in 2007, after the conduct in question took place. Nevertheless, this case has significant implications for the compliance practitioner. We will give some detail to the books and records scheme used by the company to disguise its bribes and then detail some of the factors listed by the DOJ in its Press Release (the NPA is not available as of the posting of this blog). These factors listed by the DOJ clearly show that a sustained, committed effort to cooperate with the DOJ and SEC in the investigation, coupled with a robust remediation program going forward can significantly help a company overcome what may appear to be clear facts which would seem to warrant a criminal penalty, in addition to a civil action.

Distributor Net Accounting

The Scheme

Armor Holdings made sales through certain unnamed third party intermediaries. The contracts were awarded from 2001 through 2006. The accounting basis of the scheme was an accounting system described as “Distributor Net” which was worked by the company to disguise more than $4.3 MM in commissions paid to these third party intermediaries. These third party intermediaries never received title to the goods in question. Under such a sales system, according to US Generally Accepted Accounting Principles (GAAP), Armor Holdings should have recorded the sale to the UN at the full or “gross” sales price – with a separate display of any commission expense for amounts paid to an intermediary.

However, Armor Holdings would send the customer a “gross” invoice, including the sales price of goods sold, plus commission, while internally recording sales at a “net” amount that did not include the commission due to the third party sales intermediary. Thus, amounts received from the customer would be greater than the amount booked internally for a sale, resulting in a credit balance in the customer’s account receivable. Armor Holdings would then transfer the “overpayment” through a series of non-commission accounts before ultimately disbursing it to the third party sales intermediary. These payments to sales intermediaries under the scheme were never recorded as a commission expense on the books and records of the company.

Notice to the Company

As early as March 2001, the company’s outside auditor “emailed comments to certain senior officers, indicating that the “distributor net” practice understated accrued liabilities and accounts receivable; and that the company should record a receivable for the gross amount due, together with an accrual for commissions.” In September, 2005, the comptroller of  “another Armor Holdings subsidiary who had refused to implement “distributor net” at his division advised senior officials at AHP and Armor Holdings of his concern that such accounting was “blown out of the water” by GAAP.” The SEC Complaint noted that even with the admonitions Armor Holdings engaged in “at least 92 transactions from 2001 through June 2007 – resulting in approximately $4,371,278 of undisclosed commissions on the books and records of Armor Holdings, and rendering those books and records inaccurate.”

Non-Prosecution Agreement

As noted above, Armor Holdings was able to negotiate an NPA for these accounting sins. Although the NPA is not currently available, the DOJ did list several factors, in its Press Release announcing the settlement, which led to the NPA. These factors included:

  • Armor Holdings complete voluntary disclosure of the conduct.
  • Armor Holdings internal investigation and cooperation with the DOJ and the SEC.
  • That the conduct took place prior to the acquisition of Armor by BAE.
  • Armor Holdings extensive remedial efforts undertaken before and after its acquisition by BAE.
  • Armor Holdings implemented BAE’s due diligence protocols and review processes.
  • Armor Holdings applied all of BAE’s compliance policies and internal controls to each of its businesses.
  • Armor Holdings had engaged in extensive remediation and improvement of its compliance systems and internal controls.

Armor Holdings also agreed to “enhanced compliance undertakings” in the NPA but we will have to wait until the NPA is released to see what those may be. While the DOJ Press Release noted that Armor Holdings would not be required to retain a corporate monitor, the company had agreed to report to the department on implementation of its remediation and enhanced compliance efforts every six months for the duration of the agreement. Lastly the NPA requires that Armor Holdings continue to implement rigorous internal controls and that it cooperate fully with the department.

The clear import of this NPA is that a company can come back from the edge of the abyss through thorough and sustained cooperation with the DOJ. Armor Holdings had 92 separate instances of disguising bribes yet was able to obtain a NPA. The lesson learned is clear: self-disclose, clean house, remediate and implement a best practices compliance program and your company may well be able to extricate itself without landing on the “Top Ten of All Time FCPA Settlement List”.

View the DOJ’s July 13, 2011 Press Release here.

View the SEC’s Litigation Press Release here.

Download the SEC’s civil complaint against Armor Holdings here.

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

© Thomas R. Fox, 2011

Blog at WordPress.com.