FCPA Compliance and Ethics Blog

February 13, 2014

What is the Role of An Apology In Anti-Corruption Enforcement?

ApologyWhat is the most famous apology in literature? Plato’s Apology for Socrates certainly is in the conversation. In addition to presenting Plato’s views on his teacher, it is believed to be the most authentic account that has been preserved of Socrates’ defense of himself as it was presented before the Athenian Council. I thought about the change in the meaning of an apology in modern times whilst reading an article in the New York Times (NYT) DealBook column over the past few weeks on the subject of apologies.

This exploration of apologies began with two DealBook articles earlier this month. One was a guest article, entitled “Calling for an Apology Cease-Fire”, by Dov Seidman, founder of LRN, who has been tracking apology trends for many years. The second was by Andrew Ross Sorkin and was entitled “Too Many Sorry Excuses for Apology”. Seidman laid out the problem as follows, “I am also offended because there are some authentic, legitimate apologies that are sent forth into the world. But bad apologies drive out good, so that those who take their apologies seriously, and work tirelessly to live up to them, are dismissed along with the drivel. Apologies can and should be hugely important actions and mechanisms, blessed with enormous power and lasting impact. But they must be two-way exchanges of trust and healing that are open and transparent. It is because I mourn the loss of the genuine apology that I propose an apology cease-fire.”

Sorkin viewed the problem from a slightly different angle when he wrote, “But what should you do when you don’t think you should apologize but everyone else does? You know the situation: Leaders “apologize” but clearly don’t mean it because they don’t think they should be apologizing in the first place. They apologize to gain some good will from the public rather than defend the behavior that is being criticized.”

Seidman finds that most apologies today do not provide any substance behind them. He said “our values have been so distorted that most people – and I’m considering both prominent apologizers and the rest of us – operate as though the purpose of an apology is to get out of something with the minimum pain and suffering possible. So you tell the aggrieved party you’re sorry – that you regret stepping on their foot, stepping on their self-confidence or stepping on their insurance policy. They accept mechanically, and we all move on.”

Seidman believes there are five essential characteristics of an authentic apology and they are: 

  • They must be painful. If an apology doesn’t create vulnerability and isn’t therapeutically painful, it’s not an apology at all.
  • They must be authentic and not an excuse. An apology can’t have ulterior motives or be a means to an end.
  • They must probe deep into the personal or organizational values that permitted the offense. Apologizers need to conduct a “moral audit” by looking themselves in the mirror and asking, “How did I get here and how did I drift from the person I aspire to be?”
  • They must encourage feedback from the aggrieved. This includes truly opening up to input and two-way conversation during and after an apology, and embracing ideas as to how to improve.
  • They must turn regret into a real change in behavior. The new behaviors they elicit must be continuing, reinforced by a sustained investment in avoiding the same mistakes in the future.

I often use what I characterize as McNulty’s Maxims on questions that would be asked by a regulator in any Foreign Corrupt Practices Act (FCPA) enforcement action: (1) What did you do to prevent it?; (2) What did you do to detect it?; and (3) What did you do when you found out about it? I find that Seidman’s prescriptions for an authentic apology resonate with McNulty Maxim Number 3, which in many ways is the most important maxim. Did your company move forward to remediate the issue that caused the FCPA violation? What steps did you take? Did you terminate those responsible? Were there any internal penalties against senior management or the Board that oversaw the conduct in question? Was your company accountable?

Seidman ends his piece by suggesting that there be a new “apology metric” to determine how authentic and how effective an apology is over time. He states, “Let’s commit to demanding more from business and public figures — and from ourselves — when contrition is being pursued. It will not be easy. But by returning to a search for redemption that accepts its difficultly, we can rediscover its real possibility. I invite you to join me in continuing both a personal and public exploration of the authentic apology. Let’s hold ourselves accountable for restoring the value of a precious and noble commodity.”

Sorkin, coming at his piece from his reporter hat, proposes a complimentary approach. He has started an ““Apology Watch” on the DealBook website  and on Twitter using the hashtag #ApologyWatch. It is his hope that DealBook “readers will participate by helping us track new apologies and, more important, follow up on what companies, institutions and individuals have done post-apology.”

Should an apology be a part of any settlement of a FCPA enforcement action? If not, when is an apology appropriate for a corporate leader when his or her company admits to violations of the FCPA, UK Bribery Act, Chinese domestic anti-bribery laws or another other similar anti-corruption regimes? Indeed are there simply too many insincere apologies being made by corporate executives? I think that the answer falls within McNulty’s Maxim No. 3. For if your actions belie your words, it probably means that your words have no meaning and indeed are simply empty words. If that is true you may well end up with what Seidman portends, “For those caught in an empty apology, the results could be expensive and embarrassing.”

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

December 16, 2013

Compliance Video Podcasts

Filed under: Uncategorized — tfoxlaw @ 12:01 am

I thought today I might see if some of the readers might want to head over to the FCPA Compliance and Ethics Report and check out some of the podcasts I have posted over the past couple of months. I try to present my own views on anti-corruption compliance as well as noted practitioners in the field. I also talk to folks that a niche product or service that can be of use to the compliance practitioner. So if learning about the nuts and bolts of anti-corruption compliance is something you would like to catch up on this holiday season, you might want to take a look or listen at the following podcasts.

  1. Getting Stakeholder Buy-In for Your Compliance Program
  2. Mergers and Acquisitions Under the FCPA
  3. Charitable Donations Under the FCPA
  4. Management Oversight of Your Compliance Program

If you want to learn about what’s going on across the pond and all things UK Bribery Act related, check out these interviews with Barry Vitou, co-founder of thebriberyact.com, click here  or here.

To see what has been on the mind of the FCPA Professor, check out these three interviews, here,here and here.

Matt Ellis tells all about the new Brazilian anti-corruption legislation and the Embraer investigation.

Stephen Martin explains how to do a risk assessment here and Mike Volkov tells all about his compliance practice and his new firm here.

I have just scratched the surface of what is available on the FCPA Compliance and Ethics Report. You can also download all the episodes on iTunes, audio only on the iTunes site.

Lastly if you would like a topic or question explored, please email me and let me know and I will put it into an upcoming episode.

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

© Thomas R. Fox, 2013

July 30, 2013

Two Cases from the Fifth Circuit Impacting Claims of Bribery and Corruption

Filed under: Uncategorized — tfoxlaw @ 1:01 am

Over the past two weeks there were two separate Fifth Circuit Court of Appeals cases dealing with allegations of bribery and corruption. In the first case, the Court of Appeals denied the right of a whistleblower under the Dodd-Frank Act, to receive anti-retaliation protection for internally reporting allegations of violations of federal securities laws, such as the Foreign Corrupt Practices Act (FCPA). In the second case, the Fifth Circuit Court of Appeals upheld the right of the US government to seek redress against a corporation, under the theory of vicarious liability, for its employees who accept kickbacks in the context of a government contract.

I.                   Asadi v. G.E. Energy

Last week, the Fifth Circuit Court of Appeals issued its decision in Asadi v. GE Energy (USA), No 12-20522. As noted in a Duane Morris LLP client alert on the decision, it was “hailed as a win for employers because it requires whistleblowers who bring retaliation claims under the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) to show that they suffered retaliation because they reported potential violations to the U.S. Securities and Exchange Commission (SEC). The Fifth Circuit expressly rejected the position adopted by the SEC in its regulations” that being that internally reporting concerns regarding FCPA violations was enough to invoke Dodd-Frank whistleblower protections.

However I believe that the decision was actually a loss for companies, their employees and anyone who believes that compliance with the FCPA is a laudable goal. Now there is no longer any incentive, nor indeed any protection, for employees who make reports of allegations relating to the FCPA internally. The only way to garner such protection for reporting any FCPA allegations is for an employee to run to the SEC and file a whistleblower report.

Corporate America fought long and hard to require that employees report allegations of corruption and bribery internally before they went to the government. The reason that companies made this request was that it was only fair to allow companies to fix problems of which they may not have been aware. While the SEC did not require internal reporting as a prerequisite for Dodd-Frank whistleblowing, it did incentivize such whistleblowers to report internally first before submitting information to the SEC.

But now that incentive is worthless if an employee who does so can be terminated at will for internally reporting concerns about bribery and corruption. The result will be that employees immediately turn to the SEC so that they can at least have the anti-retaliation protections offered under Dodd-Frank. The Asadi case could have had several outcomes but the one the Fifth Circuit left us with is the worst for FCPA compliance of all the possible outcomes.

Further, what about the costs that corporations will incur because of this decision? The cost on one employee’s retaliation lawsuit pales in comparison with the cost of a substantive FCPA or other securities law investigation. Since employees now are required to go to the SEC to invoke whistleblower status and, hence, anti-retaliation protection, they will certainly get the message. So while corporations may have a substantive defense against someone who internally reports allegations and is subsequently fired, the trade-off for the loss of the ability to address and then redress a securities law violation internally is now gone.

II. USA v. KBR

In the case of USA v. Kellogg Brown & Root, No. 12-40447, in a case involving the ‘Anti-Kickback Act’; the Court allowed the US government to intervene in a qui tam suit against Kellogg Brown & Root (KBR) where its employees “allegedly accepted kickbacks from two companies angling to win subcontracts on KBR’s prime contract to service American armed forces in military theaters across the globe.” The underlying facts involve a contract that KBR had with the government for the delivery of logistical services for the US Army under the Logistics Civil Augmentation Program III (LOGCAP III). Two subcontractors, EGL Inc. (EGL) and Panalpina Inc. (Panalpina), who were contracted to assist with the transportation of military equipment and supplies were alleged to have bribed certain KBR employees to “obtain favorable treatment on…subcontracts with KBR such as overlooking service failures and continuing to award new subcontracts despite such failures.” KBR employees were alleged to have accepted kickbacks from EGL on 93 separate occasions. The kickbacks were detailed to be “meals, drinks, golf outings, tickets to rodeo events, baseball games, football games, and other gifts and entertainment.” KBR employees were alleged to have accepted kickbacks from Panalpina on 55 separate occasions. These kickbacks were detailed to be in the forms of “meals, drinks, golf, outings, and other gifts and entertainment.” Both the EGL and Panalpina employees involved pled guilty to charges under the Act. Sometime later two private citizens brought a qui tam suit against KBR and the government intervened.

What is the ‘Anti-Kickback Act’?

The Act prohibits kickbacks, which is “a kind of economic crime”, for subcontracts under US government prime contracts. It was originally enacted during World War II and was most recently updated in 1986. Prior to these amendments, “the government could recover only the value of a kickback and could obtain relief only from the kickback’s recipient or the subcontractor who provided it. The 1986 amendments reshaped the civil damages remedies by permitting, in § 55(a)(1), recovery of double damages and per-occurrence penalties from knowing violators of the Act.” (citations omitted)

The definition of what is a ‘kickback’ is quite broad; broader than the definition of what is prohibited under the FCPA. The Act defines a kickback as “any money, fee, commission, credit, gift, gratuity, thing of value, or compensation of any kind that is provided to a prime contractor, prime contractor employee, subcontractor, or subcontractor employee to improperly obtain or reward favorable treatment in connection with a prime contract or a subcontract relating to a prime contract.” Under the Act “A person may not—(1) provide, attempt to provide, or offer to provide a kickback; (2) solicit, accept, or attempt to accept a kickback; or (3) include the amount of a kickback prohibited by paragraph (1) or (2) in the contract price—(A) a subcontractor charges a prime contractor or a higher tier subcontractor; or (B) a prime contractor charges the Federal Government.”

Court Holding

For the purposes of the appeal it is noted that “the benefits provided to Bennett and other KBR employees were kickbacks given to prime contractor employees by subcontractor employees.” The question for the Court of Appeals was whether the US government can ever bring a suit under the Act, alleging that a company can be vicariously liable for the acts of its employees. The Court noted that the Act allowed the government to “recover from a person” and that Congress had “defined ‘person’ broadly in the AKA [the Act], to include corporations and other business entities.” Further, “Since Section 55(a)(1) makes corporations liable for kickback activity, it requires attributing liability to corporate entities for that activity under a rule of vicarious liability.”

This KBR case is one that corporations should also pay heed to quite closely. The US government need only show that illegal payments, in the form of kickbacks, are received by a US government contractor’s employee for the company to be liable under the Anti-Kickback Statute. The representatives of EGL and Panalpina, who engaged in the bribery and corruption, have already pled guilty under the criminal provisions of the Act so it would appear that the government only needs to show that the KBR employees received the kickbacks. Further, considering the list of what constitutes a kickback is quite broad, including “any money, fee, commission, credit, gift, gratuity, thing of value, or compensation of any kind”, it may not be too hard for the government to prevail at trial.

However you look at it, corporate America did not fair too well in the Fifth Circuit in these two cases.

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

© Thomas R. Fox, 2013

July 9, 2013

Significant FCPA Enforcement Actions in 2013 – Individuals

77 years – that is how long Great Britain went without a native son winning the Men’s Singles title at Wimbledon. This past Sunday that drought ended when Andy Murray won the coveted trophy in a straight set win over Novak Djokovic. This year’s championship was a wild ride, with the incredible upsets in the early rounds and the decimation of the women’s favorites by the semi-finals. But it was Murray’s year and his hoisting the Wimbledon Cup on Sunday was certainly one for the ages. Well done, Andy.

As singles tennis is that most individual of sports, it seems proper that in today’s post, I will discuss the individual Foreign Corrupt Practices Act (FCPA) enforcement actions in the year to-date. Both the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) made clear in the first half of this year that they will aggressively enforce the FCPA against individuals. Mike Volkov has gone so far as to predict that “It is clear that FCPA enforcement for 2013 will go down as the year of criminal prosecutions of individuals.”

A.     BizJet Executives

The lineup of those three BizJet executives and one employee involved in these enforcement actions is as follows:

  1. Bernd Kowalewski – President and Chief Executive Officer (CEO);
  2. Peter DuBois – Vice President of Sales and Marketing;
  3. Neal Uhl – Vice President of Finance; and
  4. Jald Jensen – Regional Sales Manager

Defendants DuBois and Uhl pled guilty in January, 2012 and had their pleas unsealed on April 5, 2013. Defendants Kowalewski and Jensen were charged by Criminal Indictment, also in January, 2012, but are still at large today. The DOJ Press Release states that “The two remaining defendants are believed to remain abroad.” The bribes were characterized as “commission payments” and “referral fees” on the company’s books and records. Payments were made from both international and company bank accounts here in the US. In other words, this was as clear a case of a pattern and practice of bribery, authorized by the highest levels of the company, paid through US banks and attempts to hide all of the above by mis-characterizing them in the company’s books and records.

B.     Alstom Executives

In April, Two individuals from a company later identified as Alstom were charged or had their charges made public in April. According to a DOJ Press Release dated April 16, 2013, “Frederic Pierucci, 45, a current company executive [of Alstom] who previously held the position of vice president of global sales for the Connecticut-based U.S. subsidiary, was charged in an indictment unsealed yesterday in the District of Connecticut with conspiring to violate the FCPA and to launder money, as well as substantive charges of violating the FCPA and money laundering.” Pierucci was arrested. Additionally, former Alstom executive “David Rothschild, 67, of Massachusetts, a former vice president of sales for the Connecticut-based U.S. subsidiary, pleaded guilty on Nov. 2, 2012, to a criminal information charging one count of conspiracy to violate the FCPA.” In May, the FCPA Blog reported that a third Alstom executive was charged. William Pomponi, a former Vice President of Sales for Alstom’s US subsidiary was indicted for conspiring to violate the FCPA and to launder money, as well as substantive FCPA and money laundering offenses.

All three were charged around the same set of facts, that being the payment of bribes to officials in Indonesia, including a member of Indonesian Parliament and high-ranking members of Perusahaan Listrik Negara (PLN), the state-owned and state-controlled electricity company, in exchange for assistance in securing a contract for the company to provide power-related services for the citizens of Indonesia, known as the Tarahan project. The charges allege that, in order to conceal the bribes, the defendants retained two consultants purportedly to provide legitimate consulting services on behalf of the power company and its subsidiaries in connection with the Tarahan project.

C.     Frederic Cilins

In a blog post, entitled “The Danger of FCPA “Proactive” Investigations”, Mike Volkov stated “At the recent Dow Jones Compliance Symposium in Washington, D.C., an FBI official warned the attendees that the Shot Show debacle would not deter law enforcement from using proactive investigations techniques. It was a stark warning because it was realized in less than thirty days.” This was dramatically demonstrated with the arrest of Frederic Cilins, in April.

An article in the Financial Times (FT), entitled “FBI sting says that ‘agent’ sought to have mining contracts destroyed”, reported that “Frederic Cilins held the last of a series of meetings with the widow of an African dictator to discuss what she was going to do with some sensitive documents.” What were these ‘sensitive documents’? The FT reported that it had seen “some of the documents” and “According to one copy of a contract seen by the FT” it appeared to agree to pay $4m the wife of the then President of the country to help to secure rights to a mining concession in Guinea. Unfortunately for Cilins he “did not realise that the woman he was talking to was wearing a wire and that FBI agents were watching. As he left the meeting, the agents arrested him carrying envelopes filled with $20,000 in cash, the indictment says. That was a pittance compared with the $5m he was taped offering the dictator’s widow during what US authorities say was a two-month campaign to tamper with a witness and destroy records.”

Cilins has been charged with obstruction of justice and was remanded to Manhattan for trial. After bail was initially set at $15MM, Cilins requested that it be reduced. The trial judge, William H. Pauley III threw the $15MM bail out, and set a trial date for Dec. 2, 2013.

D.    Uriel Sharef – Siemens

Uriel Sharef was a former officer and board member of Siemens. According to the SEC Press Release announcing resolution of his matter, “The settlement resolves the Commission’s civil action against Sharef for his role in Siemens’ decade-long bribery scheme to retain a $1 billion government contract to produce national identity cards for Argentine citizens. The final judgment, to which Sharef consented, enjoins him from violating the anti-bribery and related internal controls provisions of the FCPA and orders him to pay a $275,000 civil penalty, the second highest penalty assessed against an individual in an FCPA case.”

The SEC Press Release stated that “Sharef met with payment intermediaries in the United States and agreed to pay $27 million in bribes to Argentine officials. Sharef also enlisted subordinates to conceal the payments by circumventing Siemens’ internal accounting controls.”

E.     Paul Novak – Willbros

In April, the DOJ announced the sentencing of Paul G. Novak, a former consultant of Willbros International, Inc., a subsidiary of the Houston based Willbros Group, for his role in a conspiracy to pay more than $6 million in bribes to government officials of the Federal Republic of Nigeria and officials from a Nigerian political party. According to the DOJ Press Release announcing the sentencing, “Novak pleaded guilty to one count of conspiracy to violate the FCPA and one substantive count of violating the FCPA. Novak admitted that from approximately late-2003 to March 2005, he conspired with others to make a series of corrupt payments”. Novak was sentenced to serve 15 months in a federal prison.

The sentencing continues the long running saga of the company over efforts by Willbros, Novak, certain employees and others to make a series of corrupt payments totaling more than $6 million to various Nigerian government officials and officials from a Nigerian political party to assist Willbros and its joint venture partner, a construction company based in Mannheim, Germany, in obtaining and retaining the Eastern Gas Gathering System (EGGS) Project, which was valued at approximately $387 million. The EGGS project was a natural gas pipeline system in the Niger Delta designed to relieve existing pipeline capacity constraints.

F.     Direct Access Partners

In May, the FCPA Blog, in a post entitled “Two traders and a bank official charged for Venezuela bribes”, reported that two brokers, Tomas Alberto Clarke Bethancourt and Jose Alejandro Hurtado, affiliated with the New York brokerage firm Direct Access Partners, LLC (DAP) were charged in federal court with paying at least $5 million in bribes to María de los Ángeles González de Hernandez, an official at a state-owned Venezuelan bank, Banco de Desarrollo Económico y Social de Venezuela (BANDES) to win bond trading work. After receiving the bribes, she authorized fraudulent trades, which generated more than $66 million in revenue on trades in Venezuelan sovereign or state-sponsored bonds for DAP. The DOJ also charged her with Travel Act conspiracy and substantive offenses, and two money laundering-related counts.

In June, the FCPA Blog reported, in a post entitled “Brokerage boss charged in Venezuela kick back scheme”, that Ernesto Lujan, the former head of the Miami office of DAP, was arrested for conspiracy to bribe an officer at a state-owned Venezuela bank in exchange for bond trading business. He was charged with substantive FCPA and Travel Act offenses and conspiracy counts. He was also charged with two money laundering-related counts.

Both the DOJ and SEC have made clear it that they will prosecute individuals for FCPA violations. As noted by Mike Volkov, the DOJ is going to prosecute individuals when they have strong evidence of criminal conduct and will pick those individual cases where prosecutions are warranted. Further, the BizJet prosecutions demonstrate that the DOJ will continue to use all investigative techniques to build criminal cases including wiring cooperating witnesses and recording telephone calls to make their criminal cases. Finally, the DOJ will prosecute officials when they have evidence of obstruction or witness tampering and will also use the Travel Act to bring enforcement actions.

It has been quite a first half of the year.

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

© Thomas R. Fox, 2013

July 4, 2013

The Gettysburg Address

Filed under: Uncategorized — tfoxlaw @ 9:31 am

I usually recommend reading the Declaration of Independence on July 4th. However, this year I post below the text of the Gettysburg Address for your consideration.

Four score and seven years ago our fathers brought forth on this continent a new nation, conceived in liberty, and dedicated to the proposition that all men are created equal.

Now we are engaged in a great civil war, testing whether that nation, or any nation so conceived and so dedicated, can long endure. We are met on a great battlefield of that war. We have come to dedicate a portion of that field, as a final resting place for those who here gave their lives that that nation might live. It is altogether fitting and proper that we should do this.

But, in a larger sense, we can not dedicate, we can not consecrate, we can not hallow this ground. The brave men, living and dead, who struggled here, have consecrated it, far above our poor power to add or detract. The world will little note, nor long remember what we say here, but it can never forget what they did here. It is for us the living, rather, to be dedicated here to the unfinished work which they who fought here have thus far so nobly advanced. It is rather for us to be here dedicated to the great task remaining before us—that from these honored dead we take increased devotion to that cause for which they gave the last full measure of devotion—that we here highly resolve that these dead shall not have died in vain—that this nation, under God, shall have a new birth of freedom—and that government of the people, by the people, for the people, shall not perish from the earth.

I hope that you have a safe and joyous Independence Day.

June 21, 2013

Oh Thank Heaven – The Saga of 7-Eleven and Franchising Under the FCPA

Filed under: Uncategorized — tfoxlaw @ 1:01 am

Earlier this week, Jim McGrath, writing in his Internal Investigations Blog, posted a blog entitled “Human Trafficking Concerns for 7-Eleven in Wake of Payroll Scam”. In this post McGrath reviewed the seizure of “fourteen 7-Eleven stores on Long Island and in Virginia while arresting nine owners and managers and seizing property – including five homes – after one of the largest criminal immigrant employment investigations ever conducted by the Justice and Homeland Security Departments.” He also reported that there is an ongoing investigation of “40 other 7-Eleven franchises in New York City.”

The allegations of human trafficking are bad enough. McGrath wrote that “the defendants found more than 50 illegal immigrants and gave them identities stolen from American citizens, including children and dead people. These employees then worked for as much as 100 hours a week, but were paid for a fraction of that time, and were forced to live in substandard housing owned by the operators of the convenience stores.” He also noted that while the stores may have been owned by franchisees, the parent company was also involved because it not only failed to detect the scheme but “processed the payroll and sent the wages to the employers for distribution.” I would also suspect the part of the franchisees’ fee back to the franchisor was based upon revenues so any reduction in cost could also inure back up the chain.

McGrath’s article got me to thinking about franchisor liability under the Foreign Corrupt Practices Act (FCPA). It has been a successful model in the US and now many corporations are looking at overseas expansion opportunities. Franchise law has become well developed across the US, with many states developing laws to protect the rights and obligations of both parties in a franchise agreement. According to an International Franchise Association survey of nearly 1,600 franchise systems in 2008 stated “nearly two-thirds (61 percent) of respondents currently franchise or operate in non-U.S. markets and three-fourths (74 percent) plan to begin international expansion efforts or accelerate their current ventures immediately.”

There are no reported FCPA enforcement actions regarding franchisors. However, the factors in a franchise relationship would appear to lead to clear FCPA responsibility of the franchisor for its overseas franchisee’s actions. Additionally, court interpretation of the FCPA has held that it is applicable where conduct, violative of the Act, is used “to obtain or retain business or secure an improper business advantage” which can cover almost any kind of advantage, including indirect monetary advantage even as nebulous as reputational advantage. As almost everyone knows, the FCPA prohibits payments to foreign officials to obtain or retain business or secure an improper business advantage. Nevertheless many US companies view franchisees as different from other types of more direct sales representatives, such as company sales representatives, agents, resellers or even joint venture partners, for the purposes of FCPA liability.

I believe that such an analysis is misguided as the Department of Justice (DOJ)  takes the position that a US company’s FCPA responsibilities extend to the conduct of a wide range of third parties, including the aforementioned company sales representatives, agents, resellers, joint venture partners and distributors. It does not take too great a leap of imagination to see that a franchise relationship could be contained within this interpretation. It does not take too many legal steps to see that a franchisee’s actions can impute FCPA liability to a US franchisor.

There are other factors, unique to the franchise relationship, which would point towards FCPA liability of the US franchisor. A US franchisor’s intent and the degree of control it exercises over its overseas franchisees’ operations are factors the DOJ/Securities and Exchange Commission (SEC) might consider in determining whether to pursue an FCPA case against a franchisor for bribes made by one of its foreign franchisees. It is always in the financial interest of a US franchisor for its franchisees to be successful businesses. Additionally, most US franchisors require its overseas franchisee’s to use the same company name for branding. Of course, not only the initial franchise fee but the franchisee’s monthly royalty payment roll up into the books and records of a franchisor so that might well catch the attention of the SEC if there is a FCPA books and records violation.

Victor Vital and Jessica Parker-Battle, writing in the Franchise Law Journal, Winter 2012 Issue, in an article entitled “Implications of the Foreign Corrupt Practices Act for International Franchising”, believe that a franchisor may not have direct involvement in conduct prohibited by the FCPA, there may not be the requisite corrupt intent required under the statute. However, I believe unless a franchisor has an adequate compliance program in place, a franchisor may well find itself in the shoes of Frederick Bourke and sustain a finding of conscious indifference.

How would all of this play out for a franchisor? As a franchisor moves into foreign markets there could well be the temptation to “grease the skids” and make payments or offer gifts to government officials, or their family members, to get the permits or permissions necessary to open and operate. In many countries, bribery is a common way of getting business done, and there can be tremendous pressure from local agents or franchisee candidates to follow regional customs and use bribes to become or remain competitive. Even if it is not the US franchisor’s own employees which engage in the FCPA violations, the US franchisor will still face the risk of an enforcement action if the franchisee’s employees engage in such conduct.

Most franchisors have thorough financial vetting requirements before allowing any person or business to become a franchisee. However, how many of these same businesses perform FCPA compliance due diligence on their prospective overseas franchises? How many US franchisors have FCPA compliance training programs? How many evaluate, on an ongoing basis, the FCPA compliance and program of their overseas franchisees? How many US franchisors have a compliance hotline or other reporting mechanism for any compliance violations made against their franchisees?

Vital and Parker-Battle suggest that franchisors conduct thorough research in both the foreign market they hope to enter and on their potential franchisees. The franchise agreement itself should have strong FCPA anti-corruption/anti-bribery language and any franchisee, and its key employees, should receive FCPA training. The franchisor also needs to have a compliance subject matter expert (SME) available for franchisees and they also suggest that the franchisor provide an anonymous reporting hotline for FCPA violations. They end some of their suggested practices for the franchisor with the following, “it would be prudent to pay particular attention and monitor those countries in areas where bribery or gifts are encouraged in business relations. In sum, franchisors must be diligent when entering a foreign market and make sure to use best practices routinely and consistently.”

This last point, about ongoing monitoring, ties into McGrath’s article on the problems which 7-Eleven may now face. It would appear that the franchisor/parent corporation did no ongoing monitoring of its franchisees on the employment status of the franchisees’ employees. One thing that the FCPA Guidance makes clear is that statements and hypothesis must be tested by reviewing the underlying data or transaction. As a compliance practitioner, you cannot take things at face value. Further, as the FCPA Guidance also made clear, everything starts with a risk assessment. So if you are a US franchisor, looking to expand overseas, one of the first things you should do is to perform a FCPA risk assessment and then use that risk assessment to implement a full FCPA compliance program within your company going forward. If you are a US franchisor which has international franchises but you have not previously reviewed your FCPA requirements, you should do so as soon as possible. If not, your FCPA exposure may be unlimited….

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

© Thomas R. Fox, 2013

May 17, 2013

Tell a Story to Drive Compliance

Sometimes a story will help you understand just what you did not understand. Did you know that the Federal Bureau of Investigation (FBI) launched a formal investigation in 1964 into the supposedly pornographic lyrics of the song “Louie, Louie.” That FBI investigation concluded that the lyrics of “Louie Louie” were officially “Unintelligible at any speed”. While this did not quite exonerate the song in the eyes of disapproving parent, it may have contributed to the song becoming one of the most-covered songs in rock-and-roll history. I thought about this oddity of history when reading an article in the most recent issue of In-House Texas, by Michael Maslanka, entitled “Tell Stories to Handle Client Frustration”. In his article he gives stories, as below, to use for 10 memorable scenarios of client frustration. They are certainly just as applicable to the Chief Compliance Officer (CCO) as they are a General Counsel (GC).

No. 1: “We’re in the right. Surely, that counts for something.” A California lawyer with whom I work tells clients, “I understand that you’re in the right. So is the pedestrian who always crosses on the green light and looks both ways. But he still can be flattened by an inattentive bus driver.”

Like stories, analogies can do the heavy lifting of delivering bad news, thus insulating the GC from being shot as the messenger.

No. 2: “We will fight this lawsuit, no matter the cost, for as long as it takes, whatever it takes.” Sometimes C-level executives imagine themselves as Winston Churchill, fighting on the beaches and the landing grounds, never surrendering.

But sooner or later it occurs to them that it’s only a lawsuit, not the fate of western civilization. They then start looking for a way out of the proverbial painted corner. At that point, an in-house counsel can paraphrase Voltaire, who said there were only two times in his life when he went broke: when he lost a lawsuit and when he won one. Stories help clients in many different ways. Allowing them to save face is one.

No. 3: “We can’t rush this decision. We need more time to make it. Issues of integrity and ethics are at stake.” A client seeks certainty, but the law provides only probabilities. This can lead clients to anguish over a decision. The wise counsel will listen for this phrase: “We could do X or Y, but isn’t that a slippery slope?” Sometimes clients say this when they don’t want to make a tough call.

The GC who needs to jostle a client toward a final answer can invoke Oscar Wilde, who famously remarked that morality, like art, requires drawing a line somewhere.

No. 4: Client at mediation: “Their opening offer is seven figures. We’re leaving.” Sometimes storming out is an effective tactic, and sometimes it’s not. To show internal clients that the GC is willing to fight, without getting mired down in pointless chest-thumping and other macho displays, this story from Texas history can help.

In October 1835, relations between Texan colonists and Mexico were tense. The Mexican army marched to Gonzales to ask for the return of a cannon the citizens had borrowed to fight off attacks by Native Americans. The response was a raised flag with a blue cannon on a white background, emblazoned with “Come and take it.”

No. 5: “We’ll look weak if we don’t fight on X issue. We can’t afford to cave in.” A year or so ago, I was working with a GC, deciding whether to risk forcing the EEOC to subpoena some documents. Our arguments for not turning them over voluntarily were weak, so we decided not to take the chance. But the GC’s internal clients wanted to fight. The GC asked them this question: “Is this the hill we want to die on?”

The GC attributed this story to a grizzled non-commissioned officer in Vietnam, who asked it of an inexperienced lieutenant before the start of a battle. Packaging stories in the form of questions is effective and engaging, and engagement leads to better decisions.

No. 6: “We fired the plaintiff in a knee-jerk reaction because he is a jerk. But, we need a reason that sounds better. I don’t want to sound dumb.” When in doubt, resort to the truth, counseled Mark Twain.

Why don’t people use the truth more frequently? Managers want to appear as if they always act wisely and deliberately, not emotionally and in haste. But jurors understand jerks, having certainly worked with one. Embrace truth; eschew elaboration.

No. 7: “But I was so close to the plaintiff. How could she do this to me?” I defended a case that involved a manager accused of sexual harassment. He was so upset by the allegations that he would get up in the middle of the night and re-read the complaint, trying to answer this anguished question.

Sometimes, there’s no answer to find beyond the truth of who the players are. My mother said that people never change; they only reveal themselves.

No. 8: “I can’t change my position. I’ll look like a fool.” Consistency is a virtue. But any virtue, taken to its extreme, becomes a millstone, not a life vest. According to U.S. Supreme Court Justice Felix Frankfurter, upon changing his mind on a legal issue, “Wisdom too often never comes, and so one ought not to reject it merely because it comes late.”

No. 9: “XYZ is wrong. I’ve got to blow the whistle right now.” No column about stories is complete without at least one reference to the Bible. Ecclesiastes 9:4 counsels, “For to him that is joined to all the living there is hope: for a living dog is better than a dead lion.”

Yes, something may be wrong, and a time comes when a person must stand up for what is right. But, all too often, a client only will get to do so one time before facing termination and possible ostracism. So, the client needs to make it count. Ecclesiastes delivers this message better than all the bloviated advice counsel can give.

No 10: “Just tell me what to do. You’re the general counsel.” The client, through the board and the C-suite team, makes decisions — not the legal department. As the Buddha told his disciples, people must be “lights unto themselves.” Counsel only can advise, never direct.

Maslanka ends his piece by stating that “even GCs in the biggest companies, possess zero organization-chart authority to direct those outside the legal department to do things. But, like all lawyers, they have something more powerful: moral authority. Stories help lawyers leverage that authority, because they are not lectures, which are ineffective, but reminders, which are effective.” I would hold that the same is true for the CCO. So, as Maslanka says, “Here’s to stories. Tell one.”

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

© Thomas R. Fox, 2013

May 9, 2013

DPAs and NPAs – Useful Tools to Achieve Compliance

The debate on whether the use of Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs) has become lively again over the past couple of weeks. Last week, there was a panel hosted by the Corporate Crime Reporter conference at the National Press Club. The panel was moderated by Steven Fagell, a partner at Covington & Burling LLP, and the panelists included Denis McInerney, the Criminal Division’s Deputy Assistant Attorney General, David Uhlmann, the former chief of the Environmental Crimes Section at the Department of Justice (DOJ), and currently a Professor of Law at the University of Michigan, the FCPA Professor, Michael Koehler, Kathleen Harris, a partner at Arnold & Porter LLP in London, and Anthony Barkow, a partner at Jenner & Block in New York.

The FCPA Professor wrote about the conference in two posts this week. The second post, entitled “Seeing the Light from the ‘Dark Ages’”, reported on the panel discussion. In this post, the Professor flatly says that DPAs and NPAs should be abolished in the context of Foreign Corrupt Practices Act (FCPA) enforcement and that a compliance defense should be added to the FCPA. In the other corner stands Mike Volkov, who said in a recent post, entitled “The Continuing Controversy Over DPAs and NPAs”, that DPAs and NPAs are part of the growing arsenal of prosecutorial tools that can be brought to bear by the DOJ and now the Securities and Exchange Commission (SEC).

The Professor previously articulated his views against DPAs and NPAs last fall in a post entitled “Assistant Attorney General Breuer’s Unconvincing Defense Of DPAs / NPAs”. In that post he said that the “use of NPAs or DPAs allow “under-prosecution” of egregious instance of corporate conduct while at the same time facilitate the “over-prosecution” of business conduct.” The ‘under-prosecution’ comes “because they [DPAs and NPAs] do not result in any actual charges filed against a company, and thus do not require the company to plead to any charges, allow egregious instances of corporate conduct to be resolved too lightly without adequate sanctions and without achieving maximum deterrence.” The ‘over-prosecution’ comes “because of the “carrots” and “sticks’ relevant to resolving a DOJ enforcement action often nudge companies to agree to these vehicles for reasons of risk-aversion and efficiency and not necessarily because the conduct at issue actually violates the law.” Volkov, being a former prosecutor, says that “Prosecutors like to have a variety of tools. An up or down decision system – indict or decline to indict – does not give prosecutors any ability to address the hard cases, where they are more inclined to decline prosecution rather than indict.”

However, I am neither a former prosecutor, like Volkov, nor a former white collar defense lawyer, like the Professor. I am a recovering trial lawyer who then went in-house. From this background I think that there is another line of reasoning as to why DPAs and NPAs are useful FCPA compliance enforcement tools and that line of reasoning is certainty. The primary reason for the prosecution and a company entering into a DPA/NPA is certainty. The one thing I learned in almost 20 years of trying cases is that nothing is certain when you leave the final decision to an ultimate trier of fact who is not yourself, whether that trier of fact be a jury, judge or arbitrator. The most important thing for a company is certainty and that is even more paramount when a potential criminal conviction looms over its corporate head. Certainty is equally critical for the prosecution. No matter how ‘slam dunk’ the facts are, or appear to be, once a prosecutor turns over the final decision in a case to another trier of fact; the prosecution has lost certainty in the final decision. Every corporate defendant who goes to trial can and should raise all procedural and factual defenses available to it. No prosecutor can ever be 100% certain that it will win every court ruling or that a guilty conviction will be upheld on appeal. However, a DPA/NPA can bring certainty. For a company, certainty in its rights and obligations, for the prosecution the same is true.

There was another article which considered the panel discussion held at the Corporate Crime Reporter conference entitled “McInerney Defends Deferred and Non Prosecution Agreements”. This article included quotes from David Uhlmann, who said that he believes, “This is about a profound ambivalence in parts of the Department about the very notion of corporate criminality.” Uhlmann believes that it this ambivalence which has driven the use of DPAs. He believes that the DOJ should make an “up or down” decision on whether a corporation should be prosecuted or not. He was quoted as saying “There is no more important role that the Justice Department plays than its role investigating and prosecuting crime. And if the Justice Department believes that a particular case warrants criminal prosecution, it should bring criminal charges. It should not sacrifice criminal prosecution to a private agreement never entered in court, never overseen by a judge in any meaningful way that doesn’t involve any public hearing, that doesn’t involve any corporate officials coming into the courtroom admitting guilt. On the other hand, if the Justice Department doesn’t believe that a criminal prosecution is necessary or warranted, then they should decline. They should decline prosecution in favor of — in most cases they have the option of civil or administrative enforcement.”

The Professor had a slightly different take on the use of DPAs in the context of criminal prosecutions of corporations. He was quoted as saying, “The Department has become so uncomfortable with the traditional notions of corporate criminal liability that they have constructed and indeed championed this alternative reality that is equally problematic.” Further, “These resolutions have had a troubling, distortive and toxic effect on this one area of law,” Koehler concluded. “There is no judicial scrutiny of most fcpa enforcement theories.” And, lastly, “Of course, the Justice Department is in favor of these because it makes their job easier. Of course, the FCPA bar and FCPA Inc. is in favor of these it expands the market for legal services.”

Criminal Division Deputy Assistant Attorney General McInerney made clear that he is not ambivalent at all about corporate criminal liability and specifically stated this. So let me speak from the perspective of a lawyer from Houston, who has represented companies in the energy space for quite some time. The frustration that boiled over from the lack of prosecutions regarding the financial troubles of the recent years should not obscure the fact that the DOJ has and will continue to pursue criminal cases against corporations.

But to paraphrase Joe Jackson, something else is going on ‘round here with prosecutions of corporate criminal conduct and the use of DPAs/NPAs. While one role of the DOJ is to prosecute law breakers; I believe that another role of the DOJ is to increase and encourage compliance with laws. The DPA/NPA debate does not stand in a vacuum. I believe that by offering incentives for companies to self-disclose and cooperate, the DOJ is increasing compliance with the FCPA. If there is no incentive to cooperate, there will be none. Period. If a company will face a criminal indictment or charge if it investigates a matter and self-discloses to the DOJ, how many companies will do so? McInerney was quoted as saying, “You are disincentivizing companies in terms of doing the right thing. You are not crediting companies for doing the right thing.”

Now let me take the flip side; Arthur Anderson. For all the howls that there is no empirical evidence that indicting and convicting companies puts them out of business; I am certainly not persuaded. I saw it happen, here in Houston. Was it in the interest of the US government to put Arthur Anderson out of business? Did it further the policies of this country to go from the Big Four to the Big Three? What about all the Arthur Anderson employees who did not work on the Enron account, what policy did it further to have them lose everything they invested in their professional life? If DPAs/NPAs are less draconian in their effect than destruction of a corporation’s existence, does that make them somehow less useful? If the DOJ wants to put such a factor into their decision making, I find that to be an appropriate calculus.

As to the charge that the FCPA Bar/FCPA Inc. used DPAs/NPAs to expand their market for work? [Full disclosure – I am a member of the FCPA Bar and ergo, FCPA Inc.] I think that it is the job of a lawyer to advise his or her clients on their legal obligations and to assist in fulfilling those obligations. Is it in my own myopic self-interest to advocate compliance with the FCPA? Or am I a part of the FCPA Bar and Inc. which assists companies to comply with a now 35 year old law? Whichever answer you prefer, I believe that there is more compliance now and that the use of DPAs/NPAs is a contributing factor to this increased compliance.

Another panelist, Anthony Barkow posited yet another angle. He said “one the primary policy justifications — or certainly a significant policy justification — is — getting DPAs and NPAs is easy. “It’s a lot easier than charging a company,”” Barkow said. “And it’s a lot easier than charging it and to try to get a plea.” While I do not pretend to know the intricacies of obtaining an indictment or going before a grand jury, it is always easier to settle something rather than try a case. But that does not mean any less work goes on, either from the corporate side or especially from the government side. FCPA enforcement actions are huge, document intensive cases and from what little I know of the process, the DOJ works quite hard to craft an appropriate resolution for each case. Further, there are multiple levels of review in the DOJ so many sets of eyes look at these matters. So while it may be easier to reach a resolution rather than charging and criminally trying a corporation, that does not mean in any way, shape or form that this work is easy. The work is hard, time intensive and takes literally thousands of man-hours by all parties involved to reach any resolution. Simply because a new enforcement tool is available, which is short of a criminal indictment and trial, does not mean that it is not a useful tool and should not be used.

Mike Volkov ended his post with the following, “The debate will continue – I have no doubt of that.” I would certainly second that notion. But from where I sit the use of DPAs/NPAs has improved compliance with the FCPA because their use has given corporations a real incentive to thoroughly investigate allegations of bribery and corruption and then work with the government to appropriately remediate the situation.

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

© Thomas R. Fox, 2013

May 6, 2013

And Then There Was One – Willbros Related FCPA Enforcement Continues

Last week, the US Department of Justice (DOJ) announced the sentencing of Paul G. Novak, a former consultant of Willbros International, Inc., a subsidiary of the Houston based Willbros Group, for his role in a conspiracy to pay more than $6 million in bribes to government officials of the Federal Republic of Nigeria and officials from a Nigerian political party. According to the DOJ Press Release announcing the sentencing, “Novak pleaded guilty to one count of conspiracy to violate the Foreign Corrupt Practices Act (FCPA) and one substantive count of violating the FCPA. Novak admitted that from approximately late-2003 to March 2005, he conspired with others to make a series of corrupt payments”. Novak was sentenced to serve 15 months in a federal prison.

The sentencing continues the long running saga of the company over efforts by Willbros, Novak, certain employees and others to make a series of corrupt payments totaling more than $6 million to various Nigerian government officials and officials from a Nigerian political party to assist Willbros and its joint venture partner, a construction company based in Mannheim, Germany, in obtaining and retaining the Eastern Gas Gathering System (EGGS) Project, which was valued at approximately $387 million. The EGGS project was a natural gas pipeline system in the Niger Delta designed to relieve existing pipeline capacity constraints.

The company itself paid $32.3 million and entered into a Deferred Prosecution Agreement (DPA) to settle civil and criminal FCPA charges with the DOJ and Securities and Exchange Commission (SEC). According to the FCPA Blog, in a post entitled “Willbros Resolves FCPA Offenses”, “the FCPA violations involved former operations in Bolivia, Ecuador and Nigeria.” The DOJ’s “information included substantive violations of the FCPA’s antibribery provisions and violations of the books and records provisions. All twelve counts relate to operations in Nigeria, Ecuador and Bolivia during the period from 1996 to 2005. The SEC’s complaint alleged civil violations of the antifraud provisions of the Securities Exchange Act, the antibribery provisions, and the reporting, books and records and internal controls provisions.” The company paid $22 million to settle the DOJ’s criminal case and $10.3 million relating to the SEC’s civil enforcement action. The company agreed to a three-year DPA with the DOJ and had a corporate monitor.  The company successfully completed its DPA, which was discharged in 2012.

In addition to the charges against the company and Novak, three former Willbros employees were also indicted over the FCPA violations. According another post by the FCPA Blog, entitled “Prison for Ex-Willbros Execs”, two of these former Willbros executives received and successfully served prison time. “Jim Bob Brown, 48, was sentenced in federal court in Houston to one year and one day in prison and fined $17,500; Jason Edward Steph, 40, was sentenced to 15 months and fined $2,000. Steph, who once served as general manager of on-shore operations for Willbros International, pleaded guilty in November 2007. He said in his plea that in 2005 he, Brown, and others arranged to pay about $1.8 million in cash to Nigerian officials. Brown pleaded guilty in September 2006 to conspiracy to violate the FCPA.” This brings the sentencing for Willbros related FCPA violations up to date as the following:

Sentencing Box Score

Entity or Person Fine DPA Time and Resolution Jail Time
Willbros Group, Inc. and Willbros International Inc. $22MM to DOJ$10.30MM to SEC 3 year DPA with Monitor. Successfully completed.
Jim Bob Brown $17,500.00 12 months and one day in prison, 2 years supervised release.
Jason Steph $2,000.00 15 months in prison, 2 years supervised release
Paul Novak $1MM 15 months in prison, 2 years of supervised release

A third former company executive, James Tillery, had been previously charged with conspiring to bribe Nigerian and Ecuadorian government officials to obtain and retain gas pipeline construction and rehabilitation business from state-owned oil companies in those countries. Tillery was indicted for one count of conspiracy to violate the FCPA, two counts of violating the FCPA in connection with the authorization of specific corrupt payments to officials in Nigeria and Ecuador. Tillery was alleged to be a Willbros International employee and executive from the 1980s through January 2005. From 2002 until January 2005, he served as executive vice president and later as president of the company. Novak was an employee in the mid-1990s and later worked as an oil and gas consultant in Nigeria, purporting to provide consulting services to companies in that field.

Interestingly, in 2010, Tillery was arrested in Lagos, Nigeria. As reported by the FCPA Blog, in a post entitled “Tillery’s Extraction”, he was “seized by the Federal Bureau of Investigation (FBI) in Lagos and is being held by American authorities.” However, at some point later, the process was ceased due to intervention by the “Nigerian high court had halted the extradition at least until the end of the month because due process wasn’t followed.” In yet another twist to the saga, Tillery had apparently renounced his US citizenship and “had since naturalized as a Nigerian.” The FCPA Blog quoted a report from a Nigerian press source who said “normal extradition procedures weren’t followed and characterized Tillery’s arrest as an “extraction” and a “forceful extradition.””

So, now there is one left from the Willbros FCPA enforcement action, that being James Tillery. The Willbros bribery scheme was one of the most comprehensive and certainly one of the early cases in the post-2004 increase in growth regarding enforcement actions. It will be interesting to see if Tillery ever has to answer the charges brought against him in connection with this matter.

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

© Thomas R. Fox, 2013

October 11, 2012

Send Lawyers, Guns and Money – Some Steps Law Firms Should Consider

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One of my favorite lawyer songs is the Warren Zevon classic “Lawyers, Guns and Money”. I was reminded of that song when I sat on a panel on Wednesday with Dan Chapman and Mike Volkov, where we discussed recent enforcement actions and due diligence under the Foreign Corrupt Practices Act (FCPA). Dan is the Chief Compliance Officer (CCO) at Parker Drilling here in Houston and one of the points he raised was the company’s need to put their outside counsel through FCPA due diligence similar to other vendors. He said that law firms would yell, scream, kick and whine vociferously that their collective honor was being questioned but Dan made clear that foreign (and sometimes US) outside counsel often deal with foreign governmental officials.

It’s been since the last millennium since I practiced law in a law firm, other than in my current incarnation as a solo practitioner. So to say things have changed for law firms in the 12+ years since I practiced with other lawyers might be saying that ‘water is wet’. I thought about how much things have changed as I was perusing this week’s edition of the Texas Lawyer and saw an article, entitled “Simple Steps to Prevent Fraud at a Firm”, by Jacob Harris, Assistant District Attorney for the Dallas County District Attorney’s Office, Specialized Crimes Division. Harris believes that when lawyers focus on the practicing of law and relegate everyday business responsibilities to non-lawyers, they expose the firm to theft and fraud. He writes that the best way for lawyers to reduce their law firm’s fraud risk “begins with the attorneys in charge getting more involved with their firm’s everyday business affairs.” To this end Harris proposes five “simple, routine tasks that significantly lower a firm’s fraud risk.”

  1. The lawyer in charge should receive and open mail. By personally receiving mail, an attorney can insure that no person in the firm has manipulated any items such as bank/credit card statements, vendor invoices or other types of mail which might involve or include accounts requiring payment. A common method used by fraudsters is “white out fraudulent transactions, making a copy of the statement and then replacing the statement into the envelope.” By reading all mail personally, a lawyer can assure this does not occur.
  2. That lawyer should also review statements and invoices. Embezzlers can often set up personal bank accounts with the same name as the firm accounts. Lawyers need to check for multiple payments on the same accounts, multiple payroll checks to the same person for the same payroll period and for checks to unknown persons and vendors. Invoices and payments should be matched up contracts for services or the purchase of goods.
  3. The attorney in charge should check online financial sources to review statements regularly and make sure that no one has changed passwords. With the increasing paperless world, banking is transacted online. More than one person at a law firm should know online and software passwords. This enables more and better monitoring.
  4. Owners and partners should understand who works for the firm and what everyone’s duties are at the firm. Just as with non-law firm businesses, there should be a segregation of duties as it reduces the chance of fraud and is a basic internal control technique of fraud prevention. Further knowing who works for a firm can prevent the “ghost-employee scam.”
  5. Lawyers should not assume others will detect fraud for them. Harris points out that “banks and certified public accountants normally do not catch thieves.” Simply because a check is made out to one party, does not mean that the same check cannot be deposited into a fraudster’s account. Further a fraudster may be operating with someone at a bank so lawyers need to verify that money sent to be deposited has actually been posted to the law firm’s back account.

Harris ends by noting that “by understanding how a [law] firm is vulnerable to fraud and making the proper adjustments to business practices, a firm can minimize its everyday fraud risk.” I found it useful to review some of these basic controls that my colleague Henry Mixon continually preaches on, many law firms neglect these basic controls. Dan Chapman’s comments on law firms as third party service providers who represent companies in front of government officials should also let lawyers know that companies may well begin anti-bribery due diligence on them. US law firms with international clients should also remember that if they represent a UK company in the US, it is the US law firm which is the international entity and that a UK company may be required under the UK Bribery Act to perform due diligence and require Bribery Act compliant anti-bribery terms and conditions included in the engagement letter.

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

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