FCPA Compliance and Ethics Blog

October 28, 2013

Wal-Mart: Be a Leader in Compliance

Lou Reed died yesterday. He was one of the most influential figures in rock and roll history and pop culture over the past 50 years. Starting with his band, the Velvet Underground, Rolling Stone magazine said that the group’s “debut [album] The Velvet Underground & Nico stands as a landmark on par with the Beatles’ Sgt. Pepper’s Lonely Hearts Club Band and Bob Dylan’s Blonde On Blonde.” Moreover, his work was “embraced by future generations, cementing the Velvet Underground’s status as the most influential American rock band of all time.” But his influence went simply beyond rock and roll, including all things hip and cool from fashion to even introducing Dion at his induction into the Rock and Roll Hall of Fame. Reed could even be fashionable while advertising in a TV commercial for Nissan Xterra. Lou Reed was a true leader, in many areas.

In a post last week, entitled “Wal-Mart’s latest FCPA disclosure (October 2013)”, the FCPA Blog reported that Wal-Mart has spent over $155 MM in “costs incurred for the ongoing inquiries and investigations” and costs which “relate to global compliance programs and organizational enhancement.” This is in addition to the reported $157MM in costs for these matters in 2012. So for those of you keeping score at home, that is $312MM in costs related to the company’s Foreign Corrupt Practices Act (FCPA) investigation so far. Wal-Mart is well on its way to becoming the leader in the all-time costs for a FCPA investigation.

Also in the FCPA Blog last week, Michael Scher wrote an impassioned piece entitled “Wal-Mart and the FCPA: An open letter to the DOJ and SEC”. In this post Scher said, “We considered in a prior post the new spirit of tough enforcement at the DOJ and SEC and the need to seize the opportunity for more advocacy by the compliance profession, in particular to head off a resolution of the Wal-Mart investigation harmful to compliance officers and the public.” He urged the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) to thoroughly investigate and bring severe sanctions against the company, if warranted by the company’s actions. His tack differed from that of Matt Ellis, who last December, in a blog post on FCPAméricas entitled “Wal-Mart, Go Big on FCPA Compliance”, urged the company to “innovate by playing to its strengths.” These strengths include both physical size and financial resources which would allow it to “use its enormous leverage in international markets to educate foreign audiences on compliance.” Further, he wrote that “Maybe it could use the high visibility placement of its stores throughout Mexico to begin to teach communities how to identify and avoid risks of petty corruption? It could partner with local municipalities to launch reporting centers in its Supercenters.”

Both of these articles stake out positions with much merit. I would like to suggest another approach; which can be summarized as follows: Wal-Mart – Be a Leader in Compliance. The conduct in which Wal-Mart has engaged in is all in the past. The company cannot change those actions, whatever they may have been, but what the company can control is its actions going forward. So here are my suggestions on how Wal-Mart can be a leader in compliance.

Lead in the Retail Industry

The first thing that I recommend Wal-Mart do is call an executive meeting of the largest retail industry trade group that the company belongs to. I would say that Wal-Mart wants to lead the retail industry in its fight against bribery and corruption on a world-wide basis. Wal-Mart could certainly take some of Matt Ellis’ suggestions to the group about ‘going big’ on compliance. But Wal-Mart, as a leader, could say that we need to agree amongst ourselves that we will not engage in bribery and corruption, nor will we tolerate members that do so. We will urge that our members engage in “Ethical Capitalism” along the lines as laid out by Dov Seidman. We will ask that our retail industry trade group institute an industry wide Code of Practice, similar to that instituted by the International Federation of Pharmaceutical Manufacturers and Associations (IFPMA), which is designed “to stamp out bribery and corruption, particularly in emerging markets.”

Lead at the Chamber of Commerce

In the past, Wal-Mart has supported the US Chamber of Commerce’s efforts to amend the FCPA to add a compliance defense. Some argue this would level the playing field with the US government, while others claim that such a defense would help companies to understand their obligations under the FCPA. Wal-Mart can make clear that it understands quite simply that they, and other US companies, should not do business through bribery and corruption. Wal-Mart should aver that it will take the responsibility upon themselves to lead by example and put a best practices compliance program in place, not only to do business within the parameters of the FCPA but also because it makes good business sense to do so. Wal-Mart should demonstrate they now understand a compliance program is not a set of burdensome rules and procedures, which are designed to constrain how a person does business, but they are essential to the long term success of any organization. The company should embrace that concept and the belief that it should lie at the heart of the way a company does business.

Lead at the Board

While there is some debate as to how the allegations of corruption came up to the corporate headquarters or the initial company response about them; the FCPA Professor has made clear that he believes this scandal is largely a failure of corporate governance. As corporate governance starts at the Board, Wal-Mart should commit to having the most active and knowledgeable Board on anti-corruption matters there is in the US. Wal-Mart should bring in Jeff Kaplan (or some equally notable practitioner, such as the FCPA Professor) to lead Board training on the roles and responsibilities of a Board in overseeing compliance. While the Board does not have to, nor should it, delve down into the weeds of the company’s compliance program, it must understand the parameters and actions of the company’s compliance program going forward and be ready to act if allegations of bribery and corruption are brought forward.

Lead at the CCO Position

One thing that Donna Boehme consistently discusses in talks, articles, tweets, in person and just about everywhere else is that the Chief Compliance Officer (CCO) must be separate from and not report to the General Counsel (GC). The CCO cannot be in any merged unit of the company’s overall legal group. Further, the CCO should report directly to the Audit or other appropriate committee of the Board and not to the GC. The reason for this is clear; it is so that the CCO can have the true independence to make the determinations of what the company can do ethically and in compliance with all relevant national and international anti-corruption legislations. If you keep your CCO buried under the GC on the organization chart, it is clear that legal is more important than compliance.

Lead by Working with the DOJ

Lastly, I would suggest that Wal-Mart call Chuck Duross and Kara Brockmeyer and ask for a meeting. In that meeting the company should lay out all the steps it takes to be a leader in compliance. Its lawyers can certainly make clear that they will defend the company, consistent with the ethical duties and Wal-Mart’s rights as a corporate citizen. Further, the FCPA Guidance suggests that the three goals of a compliance program should be to prevent, detect and then remediate. The conduct that did or did not occur from 2000-2006 is in the past. Wal-Mart is committed to working to remediate what it can do so now. Will such conduct aid it with the DOJ and SEC? Perhaps, but more importantly, Wal-Mart should desire to show that a company can work with the DOJ and SEC, consistent with both their obligations as the enforcement agencies, all towards the goal of greater compliance.

The one thing that I disagree with Michael Scher on is that the DOJ has to hammer Wal-Mart with fines, penalties or criminal prosecutions to support the compliance profession, compliance with the FCPA and doing business ethically. There are business solutions to business problems. If Wal-Mart decides to be a leader in compliance and does so in a public manner, that can do as much for moving forward the compliance profession, FCPA and other anti-corruption law compliance and the general proposition of doing business ethically as well as severe sanctions. Further, if Wal-Mart takes these steps, it can control its future rather than simply reacting going forward.

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

June 19, 2013

What is Board Responsibility For Compliance?

Ed. Note-this article was originally posted in the FCPA Professor.

The nightmare of every corporate director is to wake up to find out that the company of the Board he or she sits on is on the front page of the New York Times (NYT) for alleged illegal conduct. This nightmare came true for the Directors of Wal-Mart when the New York Times, in an article entitled “Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle”, alleged that Wal-Mart’s Mexican subsidiary had engaged in bribery of Mexican governmental officials and that the corporate headquarters in Bentonville, Arkansas, had covered up any investigations into these allegations.

Recently the NYT reported that shareholders were asking questions of the Wal-Mart Board regarding its response these allegations. In a story, entitled “More Dissent in a Store Over Wal-Mart Bribery Scandal”, Stephanie Clifford reported Wal-Mart shareholders are still asking questions of the Board regarding its role in the ongoing scandal. Some of these questions include “whether the company is holding current and former executives financially responsible for breaching company policies” and concerns about the company’s supply chain vendors. This shareholder dissatisfaction held several groups of large shareholders to indicate that they would vote against the company’s current Board of Directors at its annual shareholder meeting.

Clifford quoted from a report by Institutional Shareholder Services (ISS), a proxy advising firm, which said that investors have also complained about “being in the dark about the nature and extent of the alleged violations (and knowledge of them within the company)” and the company’s “timetable for completion of its investigation and disclosure of its results”. There were also questions raised about the remediation efforts of Wal-Mart. The ISS report went on to add that “Shareholders should vote against these directors to send a clear message to the board that such poor oversight does not come without repercussions.”

The publicity and costs to Wal-Mart have been well documented. The FCPA Professor has consistently stated that he views this scandal as largely a failure of corporate governance. In a post entitled, “Wal-Mart One Year Later” he said, “Corporate governance, or lack thereof, is what made the NY Times April 2012 remarkable.  This is the reason why Wal-Mart generated all the buzz it did a year ago this week and I’ve consistently held the view that the Wal-Mart story is a corporate governance sandwich with the FCPA as a mere condiment.” I thought about the Professor’s observations on this failure in light of Clifford’s article and wondered what the Board’s legal obligations might be.

I.                   Some Case Law

As to the specific role of ‘Best Practices’ in the area of general compliance and ethics, one can look to Delaware corporate law for guidance. The case of In Re Caremark International Inc. Derivative Litigation 698 A.2d 959 (Del.1996) was the first case to hold that a Board’s obligation “includes a duty to attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate, exists, and that failure to do so under some circumstances may, in theory at least, render a director liable for losses caused by non-compliance with applicable legal standards.” The Corporate Compliance Blog, in a post entitled “Caremark 101”, said that the Caremark case “addressed the board’s duty to oversee a corporation’s legal compliance efforts. As part of its duty to monitor, the Board must make good faith efforts to ensure that a corporation has adequate reporting and information systems. The opinion described this claim as “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment,” with liability attaching only for “a sustained or systematic failure to exercise oversight” or “[a]n utter failure to attempt to ensure a reporting and information system.”

In the case of Stone v. Ritter 911 A.2d 362, 370 (Del. 2006), the Supreme Court of Delaware expanded on the Caremark decision by establishing two important principles. First, the Court held that the Caremark standard is the appropriate standard for director duties with respect to corporate compliance issues. Second, the Court found that there is no duty of good faith that forms a basis, independent of the duties of care and loyalty, for director liability. Rather, Stone v. Ritter holds that the question of director liability turns on whether there is a “sustained or systematic failure of the board to exercise oversight – such as an utter failure to attempt to assure a reasonable information and reporting system exists.”

Andrew J. Demetriou and Jessica T. Olmon, writing in the ABA Health Esource blog, said that “This standard aims to protect shareholders by ensuring that corporations will adopt reasonable programs to deter, detect and address violations of law and corporate policy, while absolving the Board from liability for corporate conduct so long as it has exercised reasonable responsibility with respect to the adoption and maintenance of a compliance and reporting system. Although the standard protects the Board, consistent with most jurisprudence under the business judgment rule, it also requires that the Board follow through to address problems of which it has notice and this may include adopting modifications to its compliance program to address emerging risks.”

Lastly, I recently heard Jeff Kaplan discuss the oversight obligations of the Board regarding the compliance function. In addition to the above cases, he discussed the case of Louisiana Municipal Police Employees’ Retirement System et al. v. David Pyott, et al., 2012 WL 2087205 (Del. Ch. June 11, 2012) (rev’d on other grounds, No. 380, 2012, 2013 WL 1364695 (Del. Apr. 4, 2013), which was a shareholder action that went forward against a Board based upon a claim that the Board knew of compliance risk based on the company’s business plan. The Delaware Court pointed out the possibility that “The appearance of formal compliance cloaked the reality of noncompliance, and directors who understood the difference between legal off-label sales and illegal off-label marketing continued to approve and oversee business plans that depended on illegal activity.” Kaplan believes that this case more generally, supports the need for risk-based oversight by board.

II.                FCPA Guidance and US Sentencing Guidelines

A Board’s duty under the Foreign Corrupt Practices Act (FCPA) is well known. In the Department of Justice (DOJ)/Securities and Exchange Commission (SEC) FCPA Guidance, under the Ten Hallmarks of an Effective Compliance Program, there are two specific references to the obligations of a Board. The first in Hallmark No. 1, entitled “Commitment from Senior Management and a Clearly Articulated Policy Against Corruption”, states “Within a business organization, compliance begins with the board of directors and senior executives setting the proper tone for the rest of the company.” The second is found under Hallmark No. 3 entitled “Oversight, Autonomy and Resources”, where it discusses that the Chief Compliance Officer (CCO) should have “direct access to an organization’s governing authority, such as the board of directors and committees of the board of directors (e.g., the audit committee).” Further, under the US Sentencing Guidelines, the Board must exercise reasonable oversight on the effectiveness of a company’s compliance program. The DOJ’s Prosecution Standards posed the following queries: (1) Do the Directors exercise independent review of a company’s compliance program? and (2) Are Directors provided information sufficient to enable the exercise of independent judgment?

Board failure to head this warning can lead to serious consequences. David Stuart, a senior attorney with Cravath, Swaine & Moore LLP, noted that FCPA compliance issues can lead to personal liability for directors, as both the SEC and DOJ have been “very vocal about their interest in identifying the highest-level individuals within the organization who are responsible for the tone, culture, or weak internal controls that may contribute to, or at least fail to prevent, bribery and corruption”. He added that based upon the SEC’s enforcement action against two senior executives at Nature’s Sunshine Products, “Under certain circumstances, I could see the SEC invoking the same provisions against audit committee members—for instance, for failing to oversee implementation of a compliance program to mitigate risk of bribery”. I would not be a far next step for the SEC to invoke the same provisions against audit committee members who do not actively exercise oversight of an ongoing compliance program.

There is one other issue regarding the Board and risk management, including FCPA risk management, which should be noted. It appears that the SEC desires Boards to take a more active role in overseeing the management of risk within a company. The SEC has promulgated Regulation SK 407 under which each company must make a disclosure regarding the Board’s role in risk oversight which “may enable investors to better evaluate whether the board is exercising appropriate oversight of risk.” If this disclosure is not made, it could be a securities law violation and subject the company, which fails to make it, to fines, penalties or profit disgorgement.

From the Delaware cases, I believe that a Board must not only have a corporate compliance program in place but actively oversee that function. Further, if a company’s business plan includes a high-risk proposition, there should be additional oversight. In other words, there is an affirmative duty to ask the tough questions. The specific obligations set out regarding the FCPA drive home these general legal obligations down to the specific level of the statute.

The Wal-Mart case has driven home the need for focused Board of Directors oversight of a company’s compliance program.  But it is more than simply having a compliance program in place. The Board must exercise appropriate oversight of the compliance program and indeed the compliance function. The Board needs to ask the hard questions and be fully informed of the company’s overall compliance strategy going forward. If the Wal-Mart Board had fulfilled its legal obligations regarding compliance, the company might not have found itself on the front page of the New York Times.

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

January 15, 2013

Rolls-Royce Brings in Lord Gold – Is it Thinking Big Enough?

In December 2012 the BBC online service reported that Rolls-Royce Motor Cars Limited (Rolls-Royce) was in talks with the UK Serious Fraud Office (SFO) regarding potential allegations of bribery and corruption in Indonesia and China. It was reported that the investigation began in 2011 when the SFO requested information from Rolls-Royce about possible bribe-paying in those two countries. This prompted Rolls-Royce “to bring in a legal firm to conduct an internal investigation earlier this year, which uncovered potential misbehaviour in other countries as well as the two named by the SFO.” The investigation focused on certain intermediaries involved in the countries in question. The Guardian reported the initial bribery issue was reported by a whistleblower, former Roll-Royce employee Dick Taylor, and involved allegations of bribery and corruption in Indonesia and China. According to the Financial Times (FT), Taylor had made these allegations for at least six years that Rolls-Royce paid bribes to secure business for its civil aircraft engines in Indonesia. At least as long ago as 2006 Taylor took his concerns public by posting statements on local newspaper and industry news internet sites. The Guardian stated that Taylor “claimed that Tommy Suharto – a son of the late President Suharto – received $20 million and a Rolls-Royce car to persuade the national airline, Garuda, to order Rolls-Royce Trent 700 engines in 1990.”

The FCPA Blog reported earlier this month that a pseudonymous blogger, named by the FT as ‘Soaringdragon’, claimed that “Rolls-Royce propelled itself into the Asian market with the help of payments passed to an executive of Air China and China Eastern Airlines. Executive Chen Qin, who worked for both airlines, allegedly acted as Rolls-Royce’s intermediary in two pivotal deals inked in 2005 and 2010, worth $2 billion in all. Chen is thought to have been detained for corruption in April 2011.” All the allegations currently made against Rolls-Royce were for actions prior to the application of the UK Bribery Act, which became effective on July 1, 2011.

Rolls-Royce is reported to be co-operating with the SFO in the investigation. The company announced that it found concern regarding the markets of China, Indonesia and other markets as well. The company reportedly released its findings over to the SFO which has not yet announced whether it would open a separate investigation or if it had made any decisions on whether it would prosecute the company. Chief Executive John Rishton was quoted as stating, “I want to make it crystal clear that neither I nor the board will tolerate improper business conduct of any sort and will take all necessary action to ensure compliance. This is a company with exceptional prospects, and I will not accept any behaviour that undermines its future success.”

Last week Rolls-Royce announced that it had retained Lord Gold to review its overall compliance program. The FT reported “Having to bring in Lord Gold to examine the robustness of the company’s compliance efforts indicates just how much Rolls-Royce wants to avoid an SFO, or worse, a DoJ probe. He has been brought in to Rolls-Royce precisely to avoid the costs associated with BAE’s bribery investigation, and thus his role is much more similar to the one Lord Woolf played at BAE.” For a company known to have an opaque culture, bringing in Lord Gold “has the potential to upset the Derby-based company’s deep-seated culture more than anyone in its recent history.”

I thought about this move by Rolls-Royce when I re-read a posting, entitled, “Wal-Mart, Go Big on FCPA Compliance”, by my colleague Matt Ellis, in his blog, FCPAméricas. In this post he detailed some of the ways that he thought Wal-Mart could use the opportunity afforded by its bribery and corruption scandal in Mexico “as an opportunity. It is an opportunity to go big on compliance.” Matt talked about how Siemens changed its culture after having paid the highest fine for violations of the Foreign Corrupt Practices Act (FCPA) in the history of the world ever. Moreover, Matt listed several things that he thought Wal-Mart was uniquely positioned to accomplish because of its size and strength, which were as follows:

  • Wal-Mart could use these same tools to build a state-of-the-art corruption risk-tracking program to which its compliance practices could respond in real time.
  • Wal-Mart could use its enormous leverage in international markets to educate foreign audiences on compliance.
  • Wal-Mart could train these landlords of the stores they lease internationally on compliance.
  • Wal-Mart could require landlords to put a FCPA or other anti-corruption compliance programs in place themselves.
  • Wal-Mart could begin to teach communities how to identify and avoid risks of petty corruption.
  • Wal-Mart could partner with local municipalities to launch reporting centers in its Supercenters.

I am not certain Lord Gold could accomplish some of the things that Matt has suggested that Wal-Mart put in place as Wal-Mart is the world’s largest retailer and Rolls-Royce is, well the name says it all, Rolls-Royce. But after the black-eye the British defense and aerospace industry took in the BAE corruption and bribery scandal, Rolls-Royce may be able to use this opportunity to lead a culture change in this British market segment. According to the FT, “Lord Gold’s job at Rolls-Royce will be closer to that of Lord Woolf, who made wide recommendations at BAE after it became embroiled in a corruption and bribery scandal. If Lord Gold is similarly radical, he could completely change the way Rolls-Royce does business, forcing it to limit its use of intermediaries, or even prompt the resignation of senior executives, as happened at BAE.”

I think that the lessons for the compliance practitioner from Rolls-Royce are two-fold. First and foremost, get ahead of the curve. If you believe that you have found evidence of systemic bribery and corruption, your company has to self-disclose and work with the appropriate enforcement agency, whether that is the US Department of Justice (DOJ) or the SFO. But more than self-disclosure and extraordinary cooperation, be proactive in attacking the policies, processes and procedures which led to the allegations of corruption.

Bringing in a Lord Gold, who has dealt with “A multibillion-pound spat between oligarchs, investigating cronyism in British politics, and helping one of the world’s best-known brands respond to corruption allegations have been his bread-and-butter since the veteran litigator set up his own advisory boutique in 2011”, can certainly help give you credibility on either side of the Atlantic. On the US side, the first name that pops in my mind is Louis Freeh, former Director of the Federal Bureau of Investigation (FBI), whose work has ranged from the Penn State/Jerry Sandusky investigation to the Trustee in the MF Global bankruptcy to his appointment to the Ethics Committee of FIFA. If you want another name, I can certainly recommend John Hanson, aka “The Fraud Guy”. He is a retired FBI agent, has worked in the fraud investigations and forensic accounting practice of a large publicly traded international financial consulting firm and has been an independent monitor under Deferred Prosecution Agreements (DPAs). Both of these guys know their stuff and are very well respected in the compliance community.

I think the clear import of Matt Ellis’ article is to ‘think big’ and outside the box. If you proactively attack what went wrong that led to bribery and corruption, I think it will pay off dividends with the DOJ or the SFO.

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

January 11, 2013

Fu Manchu and the Wal-Mart FCPA Investigation Water Torture

Today we celebrate Fu Manchu. No not the facial accouterments but the fictional character who was introduced to the world in a series of novels by British author Sax Rohmer during the first half of the 20th century. He has become an archetype of the evil criminal genius while also lending his moniker to the Fu Manchu moustache. I thought of Fu Manchu and his infamous drip, drip, drip water torture when I read the latest news about the ongoing Wal-Mart Foreign Corrupt Practices Act (FCPA) investigation.

Yesterday, I read three articles about the most recent revelations in Wal-Mart’s ongoing PR nightmare. Renee Dudley, reporting in Bloomberg, in an article entitled “Wal-Mart CEO Knew of Mexico Bribery, Congressmen Say”, wrote that “Democratic Representatives Henry Waxman of California and Elijah Cummings of Maryland said today in a statement that documents obtained by their staffs show that Duke and senior Wal-Mart officials were informed about allegations of corruption regarding a store in Teotihuacan.” The documents referenced were emails, which Waxman and Cummings said contradicted “the company’s earlier statements that senior executives had no knowledge of the bribery allegations”.

I.                   The Emails

One of the emails, from the then General Counsel (GC) of Wal-Mart International, Maritza Munich, sent to the Chief Executive Officer (CEO) Michael Duke and other senior Wal-Mart officials in November 2005 was “about specific bribes paid for permits and accelerated openings for stores in Teotihuacan and other locations, according to the correspondence released by the congressmen.” Aruna Viswanatha and Jessica Wohl, reporting in Reuters, in an article entitled “Lawmakers: Wal-Mart CEO knew of Mexico bribe claim”, went even further writing that in one email from Wal-Mart GC Thomas Mars in October 2005, sent to CEO Duke, said “You’ll want to read this. I’m available to discuss next steps.” This email also allegedly attached an email which summarized the bribery allegations for the CEO.

If you look closely at the quoted emails, they provide some tantalizing information. In the Munich email, the information appears provocatively close to the analysis done set out by New York Times (NYT) in its second article on the Wal-Mart FCPA matter where the reporters matched up the specific bribe payments for permits and permit granting’s. Munich seems to have matched up the specific bribes and accelerated store openings. The Mars GC email is also quite interesting. If he indeed did summarize the bribery allegations as of the date listed in the story of October, 2005, either the CEO had actual knowledge or decided it would be better if he ignored the advice of his GC that you will “want to read this.”

II.                Comments of Waxman and Cummings

As you might guess, Democratic Representatives Waxman and Cummings did not have many complimentary things to say about these latest allegations regarding Wal-Mart. Shelly Banjo, reporting in the Wall Street Journal (WSJ), in an article entitled “Lawmakers Claim Wal-Mart Knew of Bribery Allegations in 2005”, quoted from a letter released by Waxman and Cummings which said, in part, “It would be a serious matter if the CEO of one of our nation’s largest companies failed to address allegations of a bribery scheme.” Quoting further from the letter, reporter Dudley wrote that the e-mails “cast a new and unfavorable light on Wal-Mart’s continued unwillingness to provide our investigators with access to Ms. Munich, who appears to be a key witness who would know about your knowledge of the Teotihuacan bribes.”

III.             Wal-Mart Response

Wal-Mart basically said that the hoo-ha was much ado about nothing. Dudley reported that Brooke Buchanan, a Wal-Mart spokesperson, emailed a statement regarding this information. Dudley quoted from the statement as follows, “This information has been part of the company’s ongoing investigation of potential violations of the U.S. Foreign Corrupt Practices Act for more than a year and has been the subject of two New York Times articles,” she said.” As to the charge that Wal-Mart had earlier wrongfully said that its CEO was not made aware of these allegations of bribery involving the company’s Mexico subsidiary, Banjo reported that “Wal-Mart quickly rebutted the claim, saying that the lawmakers misinterpreted its prior remarks.” Oops.

IV.              Between Scylla and Charybdis?

Representatives Waxman and Cummings complained that Wal-Mart was frustrating their investigation by not fully cooperating with them. They specifically pointed to Wal-Mart’s failure to make the former GC of Wal-Mart International, Maritza Munich, available to them for an interview. Dudley reported that “Wal-Mart attorneys told the members in June that they were “working through a protocol” that would allow Munich to speak to government investigators” but such interview has not yet been forthcoming. Dudley also quoted from the email by Wal-Mart spokesperson Buchanan who said, “We have provided extensive documentation to the Department of Justice and the Securities and Exchange Commission, including the documents released today, as part of our ongoing cooperation with the appropriate law enforcement agencies on this matter. We want to provide Members of Congress with whatever appropriate information we can to help them and we have already provided committee staff with multiple briefings.”

Wal-Mart seems to be stuck between a rock and a very hard place. Or perhaps, to mix fictional references they are trying to navigate between Scylla and Charybdis. The company certainly needs to perform a thorough investigation and share those results with the Department of Justice (DOJ) but I am also certain that it desires to cooperate with the Waxman and Cummings investigation. However, to do so, it may be quite difficult and it may not allow Wal-Mart the flexibility that it needs with the variety of legal obligations that it has in this matter.

One unusual aspect of this matter is the release of information during the ongoing internal investigation. It is not release of information from the internal investigation but from investigations running in parallel, the Times investigative reporting and the Waxman and Cummings investigation. Typically during the pendency of any US public company FCPA internal investigation the only information released appears in a 10K or other mandated release of information. However, in the Wal-Mart matter, there have been at least these two other sources to release information to the public. This is certainly requiring Wal-Mart to fight a protracted PR battle and it is providing lots of fodder for critics of the company. I think that Fu Manchu would be smiling for all the torture…

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

December 19, 2012

Race to the Bottom: Wal-Mart’s FCPA Investigation and the Houston Astros

So who do you think had the better day – the Houston Astros Monday or Wal-Mart Tuesday? Yesterday, the Astros announced the signing of Carlos Pena to be their Designated Hitter (DH) for the 2013 season. Pena’s 2012 average – a whopping ‘buck ‘97’; Yes sports fans the Astros have signed a DH who hit below the dreaded Mendoza Line for the past season. How is that for a strong opening move as the Astros move to the most talented Division in baseball? Anyone out there have the smallest inking that the Astros are ‘racing to the bottom’?

Nevertheless the Astros DH move probably pales with the PR debacle that Wal-Mart is facing today as the New York Times (NYT) once again, with superior reporting, had a story, entitled “The Bribery Aisle How Wal-Mart Used Payoffs To Get Its Way in Mexico”, above the fold on its front page on alleged bribery and corruption engaged in by Wal-Mart’s Mexico subsidiary. Reporters David Barstow and Alejandra Xanic von Bertrab did extensive research to find out not only the alleged amounts of bribes paid but also to whom, and the benefits that Wal-Mart allegedly received back in return.

Wal-Mart Bribery Box Score – (alleged) all scores courtesy of NYT

Store Type and Site

Number of Alleged Bribe Payments Made

Amount of Alleged Bribes USD

Sam’s Club in Mexico City

19

$341,000

Refrigeration Distribution Center north of Mexico City

9

$765,000

Wal-Mart in Teotihuάcan

4

$221,000

Teotihuάcan Store Bribery Box Score – (alleged) all scores courtesy of NYT

Purposed of Bribe

Person(s) Bribed

Amount USD

Obtain altered Zoning Map Director of Urban Planning

$52,000

Obtain waiver of approved traffic plan. In State Agency that regulates roads

$25,900

Town approval for store construction, where permits not in place. Mayor and Town Council

$114,000

Obtain waiver to build at cultural heritage site, where no investigation performed. In National Institute of Anthropology and History (NIAH)

(up to) $81,000

So reviewing the types of activity that fall under the Facilitation Payment exception to the US Foreign Corrupt Practices Act (FCPA) we find the following:

… “shall not apply to any facilitating or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action . . .”

The recent Department of Justice (DOJ) Guidance on the FCPA included a list of actions which are ordinarily and commonly performed by a foreign official and would fall within the definition of a facilitation payment. Also remember that the facilitation payment only applies for a “non-discretionary governmental action”.

  • obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country;
  • processing governmental papers, such as visas and work orders;
  • providing police protection, mail pickup and delivery, or scheduling inspections associated with contract performance or inspections related to transit of goods across country;
  • providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products or commodities from deterioration; or
  • actions of a similar nature.

Of course all proper facilitation payments must be recorded as facilitation payments. Further, as stated in the Guidance, “Whether a payment falls within the exception is not dependent on the size of the payment, though size can be telling, as a large payment is more suggestive of corrupt intent to influence a non-routine governmental action. But, like the FCPA’s anti-bribery provisions more generally, the facilitating payments exception focuses on the purpose of the payment rather than its value.” Based upon the facts set forth in the NYT article, it does not appear that the payments made were ‘non-discretionary’ or were not made without corrupt intent.

Are there any examples, either in Opinion Releases, enforcement actions, DOJ pronouncements or anything else that the payments by Wal-Mart were legal under the FCPA? I would have to give a resounding NO to my own question. The FCPA Professor did cite to three Opinion Releases in his post yesterday, entitled “Wal-Mart Again On The Front Page Of The New York Times”. They dealt with charitable donations under the FCPA and one of the alleged payments made in the Teotihuάcan Store Bribery, the payment to the National Institute of Anthropology and History (INAH) was alleged, in part, to be a charitable donation. However, in each one of the three Opinion Releases cited there were donations made with post-donation auditing of the use of the cash to ensure the money was used as specified and other protections to ensure compliance with the FCPA. The donations were also made with transparency and not, as reported by the NYT, “Sergio Raúl Arroyo, the director general of INAH, recalled in an interview that Ms. Miró had told him about Wal-Mart’s offer. He could not recall any other instance of a company offering a donation while it was seeking a permit. “That would have been totally irregular,” he said.”

So, as the FCPA Professor also noted in his piece, “from an FCPA perspective, the issues largely remain the same.” From the factual perspective, he may well correct. However, what may have changed is the conversation. The NYT piece shows just how invidious a culture of bribery and corruption can be and how such a culture can subvert local governments and even national cultural heritage protections.

Another interesting issue raised by the NYT article is the investigation of the underlying facts. As reported by the FCPA Blog, in a piece entitled “Wal-Mart’s latest FCPA disclosure (December 2012)”, in its Form 10-Q filed with the Securities and Exchange Commission (SEC) by Wal-Mart Stores, Inc. on December 4, Wal-Mart state the following,
“The Company has incurred expenses of approximately $48 million and $99 million during the three and nine months ended October 31, 2012, respectively, related to these matters.” In other words Wal-Mart has spent a pretty penny since the original NYT article in April. Recognizing that not all of these monies were dedicated solely the Mexico investigation, I would still pose the following question, “How is it that two intrepid reporters from the NYT were able to piece together this story and Wal-Mart was not able to do so when confronted with allegations of bribery and corruption in its Mexican subsidiary?” Lastly is the effect that this story may have on the DOJ. Given the criticism that the DOJ sustained in the wake of the HSBC Deferred Prosecution Agreement (DPA) for its money-laundering conduct, will the Department feel compelled to attempt to prosecute individuals in this case? How about the fine? What does the DOJ try and communicate when the world’s largest retailer is alleged to have engaged in such conduct? What about those licenses, if they were indeed obtained by bribery and corruption, should they still be valid?

So who will win this race to the bottom? I can say that it appears Wal-Mart is trying to get its house in order. It has hired a new Chief Compliance Officer (CCO), created new compliance positions around the globe and put on extensive FCPA compliance training. It may take other steps to help to remedy the predicament it now finds itself in. As for the Astros, I had always thought that DH stood for Designated Hitter

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

November 29, 2012

Sherlock Holmes as Teacher

We continue our exploration of all things Sherlock Holmes this week by considering Holmes as a teacher. In an article in Scientific American, entitled “Don’t Just See, Observe: What Sherlock Holmes Can Teach Us About Mindful Decisions”, author Maria Konnikova explored some of the ways that Holmes “insights into the human mind do more to teach us about how we do think and how we should think than many a more conventional source.” Her insights included that Holmes “teaches us to be constantly mindful of our surroundings”; he goes beyond seeing to actually observing; and teaches us to use our senses to increase our mindfulness.

I thought about Konnikova’s insights into Holmes while reading an article in the Corner Office Section of the New York Times (NYT), entitled “In Sports or Business, Always Be Prepared for the Next Play”, where Adam Bryant reported on an interview he did with LinkedIn Chief Executive Officer (CEO) Jeff Weiner. The article had many nuggets of wisdom from Weiner who talked about his journey to becoming the CEO of LinkedIn and some of the things he has learned along the way.

I.                   Be Prepared

The first thing is to be prepared; which Weiner expressed in the phrase “next play”. He came up with this from Duke University basketball coach Mike Krzyzewski who says it each time his Blue Devil team goes up and down the court “he doesn’t want the team lingering too long on what just took place. He doesn’t want them celebrating that incredible alley-oop dunk, and he doesn’t want them lamenting the fact that the opposing team just stole the ball and had a fast break that led to an easy layup. You can take a moment to reflect on what just happened, and you probably should, but you shouldn’t linger too long on it, and then move on to the next play.”

I thought about this statement in the context of something I touched on in yesterday’s post regarding Wal-Mart and this  was that the company started its initial Foreign Corrupt Practices Act (FCPA) investigation in a relatively routine audit of how well its foreign subsidiaries were complying with its anti-corruption policies. According to the NYT, “The review was initiated by Jeffrey J. Gearhart, Wal-Mart’s general counsel, who had seen news reports about how Tyson Foods had been charged with relatively minor violations of the Foreign Corrupt Practices Act. He decided it made sense to test Wal-Mart’s internal defenses against corruption.”

Indeed this was a similar scenario to the Watts Water Technology, Inc. (Watts) matter. In this enforcement action, the ball was put into motion when the Watts General Counsel (GC) became aware of an enforcement action against another company for unlawful payments to Chinese state-owned design institutes. This led to FCPA training for certain Watts Valve (Changsha) Co Ltd (CWV) management where allegations were disclosed. Subsequently, the company instituted an internal investigation and self-disclosed to the Securities and Exchange Commission (SEC). Watts paid a fine of $200,000, agreed to disgorge profits of $2,755,815 and paid prejudgment interest of $820,791.

In another context, I have previously written about Stephen Martin, of Baker & McKenzie, who urges compliance counsel to put together a 1, 3 and 5 year strategic plan which should be utilized as a road map for a compliance program in these time frames. Martin believes that such a strategic plan could well lead to the development of credibility for your company and your compliance program in the event of one of the aforementioned eventualities. In other words, “next play”.

II.                Culture and Values

Weiner spoke about LinkedIn’s culture and values. He defined culture as “who we are” while defining values as “the principles upon which we make day-to-day decisions.” He stated that the company’s culture has five dimensions: transformation, integrity, collaboration, humor and results. The company has six values which are “members first; relationships matter; be open, honest and constructive; demand excellence; take intelligent risks; and act like an owner. And by far the most important one is members first. We as a company are only as valuable as the value we create for our members.” Weiner recognizes that values are a subset of culture so that they are “inextricably linked”. He believes that the company’s culture and values help in several ways including recruiting, motivating, inspiring and productivity.

III.             Going Forward

Bryant ended his interview with Weiner by asking him “What career advice do you give to business school students?” While recognizing that Weiner’s answer was for a different target market than compliance professionals, nevertheless I found his advice highly practical for the compliance practitioner. First, you must have two things, passion and skill. In other words, to do compliance well you not only need the technical capacity but you should also be passionate about doing it. Second, you should endeavor “to surround yourself with amazing people.” Weiner believes that “in this more networked, interconnected world we live in, it’s just all about the people you work with.” This is not about having a mentor but it’s “about the people you work with and the people who report to you. It’s about everyone you’re associated with, day in and day out. Surround yourself with only the best you can find.” Lastly, Weiner said that you should always be learning. You should never lose your intellectual curiosity.

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

November 28, 2012

The Hound of the Baskervilles – Questions, Questions and More Questions for Wal-Mart

We continue our week of exploration of all things Sherlock Holmes in honor of his 125th anniversary last week by taking a look at my favorite Holmes novel “The Hound of the Baskervilles”. It is the third of four crime novels by Sir Arthur Conan Doyle featuring the detective Sherlock Holmes. The book was originally serialized in The Strand Magazine from August 1901 to April 1902. In 2003 the book was listed on the BBC’s The Big Read poll of the UK’s best-loved novel. I have read the novel and seen almost all of the available movie and television adaptations. I love the Basil Rathbone version, in eerie black and white, but the Hammer version starring Peter Cushing is actually more faithful to the original text. The story is set largely on Dartmoor in Devon in England’s West Country and tells the story of an attempted murder inspired by the legend of a fearsome, diabolical hound. And for every stone that Holmes overturns to try and solve the mystery another question arises.

I thought about this novel in the context of the recent news comings and goings of Wal-Mart and its ongoing Foreign Corrupt Practices Act (FCPA) imbroglio. As reported by the FCPA Blog, in an article entitled “Wal-Mart’s latest FCPA disclosure (November 2012)”, the company disclosed in its Form 8-K filed with the Securities and Exchange Commission (SEC) on November 15, 2012 that its internal investigation of its foreign subsidiaries had expanded into “Brazil, China and India.” It was not clear from its 8-K filing whether this was the internal investigation initiated after the New York Times (NYT) April 22 story about allegations of corruption and bribery coming out of its Mexico subsidiary or if this was a part of the investigation began in spring 2011 as a relatively routine audit of how well its foreign subsidiaries were complying with its anti-corruption policies.

In a very interesting development, as reported by the FCPA Professor, in a blog, entitled “New Wal-Mart Details Emerge”, where he cited back to a NYT article that “Wal-Mart’s internal review began in Spring 2011 when Jeffrey Gearhart (Wal-Mart’s general counsel) learned of an FCPA enforcement action against Tyson Foods. According to the NYT article, “the audit began in Mexico, China and Brazil, the countries Wal-Mart executives considered the most likely source of problems” and Wal-Mart hired KPMG and Greenberg Traurig LLP to conduct the audit. The NYT article notes that “in July 2011” the firms “had identified significant weaknesses in all three subsidiaries.”

The NYT article went on to state that an un-named Wal-Mart official said that “It was clear that they were not executing” or following Wal-Mart’s internal protocols for performance of due diligence on third parties and FCPA compliance training. Further, the problems unearthed in this internal investigation were serious enough to merit an increase in scope “to expand the audit to all 26 of its foreign subsidiaries.” Then in the fall of 2011, Wal-Mart discovered that the NYT was investigating the company over allegations of bribery and corruption in its Mexico subsidiary and “Wal-Mart’s response in 2005 to serious and specific accusations of widespread bribery by Wal-Mart de Mexico, the company’s largest foreign subsidiary.” This new allegation led Wal-Mart to hire another law firm, Jones Day, “to investigate whether top executives had quashed the company’s investigation into the lawyer’s claims.” The company began to look into other specific accusations of wrongdoing, both in Mexico and it its other subsidiaries. This “effectively created two lines of inquiry — the first being the global compliance review begun by Greenberg Traurig and KPMG. The second was the internal inquiry into specific accusations of bribery and corruption.”

Last Friday, an article in the Chicago Tribune, entitled “Wal-Mart India unit suspends CFO, others pending probe”, reported that the company had “suspended its chief financial officer and other employees as it investigates alleged violations of U.S. anti-bribery laws”. In addition to the Chief Financial Officer (CFO), who doubled up as the firm’s acting legal counsel, those suspended included a senior manager, manager, assistant manager and retainer. “The five, whose job was to procure licenses required for stores and other real estate approvals, taxation and logistics, were told not to attend office until the FCPA-related investigations were over, said one of the persons asking not to be named.”

This investigation was being led by Greenberg Traurig. In the Tribune article, the FCPA Professor was quoted as saying, “Suspensions are common in situations like this. Companies that are under FCPA scrutiny want to demonstrate to enforcement agencies that upon learning of improper conduct, they took effective remedial measures,” said Koehler. “Part of doing that is to isolate current employees from their positions, so that any improper conduct does not continue.” Further, the Professor stated that “If any alleged improper conduct occurred, then the suspensions by Wal-Mart “will serve it well in the eyes of enforcement agencies” such as the Department of Justice and the Securities and Exchange Commission, in deciding how to resolve the broader case.”

An interesting perspective was presented by Sonia Jaspal in her blog RiskBoard, in a post entitled “Bharti Walmart India – Internal FCPA Investigation”. Jaspal posed some interesting and difficult questions relating to the difficulty of doing business in India without paying bribes. She stated, “The Retail Association of India lists 51 different approvals from 32 different agencies. Seeing the corruption index of India and the way government departments’ function, I would be very surprised if an organization manages to obtain all the relevant licenses without any grease payments. Hence, the question is how will the organizations manage to function without paying bribes?” She went on to ask “What happens in such a case to the license? Will the license be revoked, cancelled, or returned? If not, what is stopping the organizations from first taking the licenses by paying bribes and then doing a clean-up exercise to show their commitment to ethics?”

These are all serious and difficult questions for Wal-Mart, its Indian subsidiary and many others to answer. But as Holmes, through his dogged pursuit, was able to finally overcome the mystery of the Hound of the Baskervilles, perhaps someday these questions posed herein may become close to being resolved.

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

November 13, 2012

The High Costs of Non-Compliance!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

November 8, 2012

Wal-Mart Cover Up- Would a Hot-Line Have Helped?

Ed. Note-we continue our series of guest posts from our colleague Mary Shaddock Jones, who today draws some lessons from the Wal-Mart matter.

On November 8, 2006 Wal-Mart entered the Canadian Market opening three supercenters in Ancaster, London and Stouffville in Ontario, Canada.  On April 21, 2012, the New York Times published an article which included the following statements:

“In September 2005, a senior Wal-Mart lawyer received an alarming e-mail from a former executive at the company’s largest foreign subsidiary, Wal-Mart de Mexico. In the e-mail and follow-up conversations, the former executive described how Wal-Mart de Mexico had orchestrated a campaign of bribery to win market dominance. In its rush to build stores, he said, the company had paid bribes to obtain permits in virtually every corner of the country.   The former executive gave names, dates and bribe amounts. He knew so much, he explained, because for years he had been the lawyer in charge of obtaining construction permits for Wal-Mart de Mexico.   Wal-Mart dispatched investigators to Mexico City, and within days they unearthed evidence of widespread bribery. They found a paper trail of hundreds of suspect payments totaling more than $24 million. They also found documents showing that Wal-Mart de Mexico’s top executives not only knew about the payments, but had taken steps to conceal them from Wal-Mart’s headquarters in Bentonville, Ark. In a confidential report to his superiors, Wal-Mart’s lead investigator, a former F.B.I. special agent, summed up their initial findings this way: “There is reasonable suspicion to believe that Mexican and USA laws have been violated.”   The lead investigator recommended that Wal-Mart expand the investigation.   Instead, an examination by The New York Times found, Wal-Mart’s leaders shut it down.”

This is not the type of news that the Board of Directors of U.S. public company wants to learn about through a newspaper headline. Section 301(4) of the Sarbanes-Oxley Act requires the audit committee of every United States based  publicly traded company to establish procedures for “the confidential, anonymous submission by employees….of concerns regarding questionable accounting or auditing matters” (emphasis supplied). To comply with § 301(4), many employers have designed whistle blowing systems, such as telephone “hotlines”, enabling employees to report potential violations anonymously.

I do not know if Wal-Mart had a “hotline” in 2005, but in order to give employees and/ or third parties the tools necessary to alert executives or members of the Board of Directors to potential illegal or questionable activity- the existence and promotion of an anonymous hotline system is invaluable.

The practical pointer for today’s blog is this- one essential element of a compliance program is an anonymous hotline. Companies do have to be careful when implementing a hotline to understand and abide by European data privacy laws.  However, in the United States,  under most of the recent “Schedule C’s” attached to Deferred Prosecution Agreements, the Department of Justice clearly outlines anonymous reporting systems as one of the required “best practices” for a compliance program: “The Company should establish or maintain an effective system for: a) Providing guidance to directors, officers, employees, and its agents and business partners, on complying with the Company’s anti-corruption compliance policies, including when they need advice on an urgent basis or in any country in which the Company operates; b) Internal and confidential reporting and protection of those reporting breaches of the law or professional standards or ethics concerning anticorruption occurring within the company, suspected criminal conduct, and/or violations of the compliance policies directors, officers, employees; and c) Responding to such requests and undertaking appropriate action in response to such reports.”

 Consider the following policy language on reporting questions and concerns, along with a clear statement regarding non-retaliation for such reporting:

 Reporting Obligations of Company Personnel, Agents, and Partners

All Company Personnel, Agents, and Partners are required to report any knowledge, awareness or suspicion of a potential violation of: (i) the FCPA, the UKBA, or any other anti-corruption and/or anti-bribery laws applicable to the Company; (ii) the Policy; or (iii) the Compliance Manual by the Company or any of its Personnel, Agents, or Partners.

  • Company Personnel are required to report such information to the Company Compliance Officer or his or her designee, or to the hotline described below.
  • Company Agents and Partners are required to report such information to a Company representative, the Company Compliance Officer or his or her designee, or to the hotline described below.  Any Company representative that receives such a report from an Agent or Partner must report that information to the Company Compliance Officer or his or her designee, or to the hotline described below.

Non-Retaliation Policy

The Company has zero tolerance for any retaliation of any kind against any individual who in good faith makes inquiries, reports concerns, or participates in external or internal investigations.  This policy extends to any whistleblower or individual who makes a report to government authorities outside of the procedures described in this Manual.  Any individual who is concerned about retaliation or feels he or she has been subjected to such retaliation should immediately contact your Human Resources representative, the Vice President of Human Resources, the Company Compliance Officer or his or her designee, or through XYZ Hotline .

Retaliation against any individual for making a report as described in this Section in good faith can result in serious disciplinary action up to and including termination.

On a final note, it is not sufficient to just have an anonymous reporting system/hotline number tucked away in a Code of Conduct or a company’s Anti-Corruption policy.  The existence of the hotline should be prominently displayed through the use of posters or wallet cards, preferably in the native language of the employees at each particular location.  Periodic reminders should also be sent out to employees and to third party business agents encouraging them to use the anonymous reporting system if they have questions or concerns that they want answered or reported.

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

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.

 

September 20, 2012

Antietam Led to the Emancipation Proclamation – Where Will Wal-Mart Lead?

Battle of Antietam.pngSeptember 17 was the 150th anniversary of the single bloodiest day in American history. On that day the Army of Northern Virginia, led by Robert E. Lee met the Army of the Potomac, led by George McClellan. The battle was fought near a railway junction called Sharpsburg on Antietam Creek. On this day more than 23,000 Americans from both the North and South were casualties. As a Texan, I must note that John Hood’s Texas Division had casualties reported at over 90%, the highest ever for any US Division in any war at any time. When asked by a fellow officer where his division was, Hood replied, “Dead on the field.”

While the battle was a tactical draw, it ended the first Southern threat of invasion of the North. More importantly it provided Lincoln the political cover to issue the Emancipation Document, which changed the nature and course of the Civil War. I thought about how the horrific battle of Antietam led to something very different, the Emancipation Proclamation, when I read the latest output by the FCPA Professor, in an article entitled “Foreign Corrupt Practices Act Enforcement As Seen Through Wal-Mart’s Potential Exposure”. The Professor used the lens of the allegations of Foreign Corrupt Practices Act (FCPA) violations brought forward against Wal-Mart, as set out in the New York Times (NYT) article of April 21, 2012. The Professor explored five questions:

  • whether Congress intended in passing the FCPA to capture the type of payments at issue in Wal-Mart;
  • what FCPA case law instructs as to the payments;
  • whether what Congress intended or what courts have concluded even matters; and
  • the politicization of Wal-Mart’s scrutiny and its impact on FCPA reform.

I.                   Congressional Intent

Here the Professor notes that “The first question, and the easiest, is whether, given the SEC’s and DOJ’s current enforcement theories, the Mexican payments in connection with permitting, licensing, and inspection issues can expose Wal-Mart to an FCPA enforcement action?” and that the answer to this question is most likely yes; the Professor believes that the “second, and more important question, is whether Congress in passing the FCPA intended to capture pay payments occurring outside the context of foreign government procurement and involving ministerial and clerical acts by foreign governmental officials.” After reviewing the Congressional record to try and determine some legislative intent the Professor quoted Rep. Robert C. Eckhardt (D-Texas) – a congressional leader on the foreign payments issue, for the following:

Payments to a [foreign official with ministerial or clerical duties] for instance, to complete a form that ought, in equity, to be completed, to give everybody equal treatment, to move the goods off a dock which he will not move without a tip, a mordida, I think, as they call it in the Spanish language, a facilitating payment, or a grease payment would not constitute a bribe.

Based upon his review, the Professor concludes that “answer from the FCPA’s legislative history is no” and Congress did not intend to make facilitation payments illegal under the FCPA.

II.                Case Law

The Professor reviews four cases which he believes touch on the allegations. US v. Durham; US v. Kay (District Court); SEC v. Mattson; and US v. Kay (5th Circuit) in asking the question of whether even if the payments made by Wal-Mart payment do not meet the FCPA’s facilitation payments exception, “in order for there to be a violation of the FCPA’s anti-bribery provisions, the ‘‘obtain or retain business’’ element, among others, must also be met.”

After noting that the Department of Justice (DOJ) lost 3 of the 4 cases, he opines that the fourth, US. v. Kay in the 5th Circuit was equivocal at best. Therefore, any inquiry must be “a highly fact-dependent question whether a payment to a foreign official outside the context of foreign government procurement is subject to the FCPA. A key portion from the Kayruling logically implicated by Wal-Mart’s alleged payments is the following: ‘‘there are bound to be circumstances in which payments outside the context of foreign government procurement merely increase the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business.’’

III.             Do These Issues Even Matter?

In this section, the Professor notes that the negotiations between Wal-Mart and the DOJ will most likely be “behind closed doors in Washington DC.” In the air of negotiated Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs), the DOJ will assert its claims of jurisdiction and will not, because it cannot test the DOJ’s theories of liability at a trial. The Professor stated, “It will not matter if Wal-Mart’s payments are the type Congress intended to capture in passing the FCPA, nor will it matter what relevant case law instructs as to the payments.”

IV.              The Impact of Wal-Mart’s FCPA Scrutiny

Here the Professor raises fours issues: (1) the loss of stock price; (2) the investigative cost; (3) follow on shareholder derivative civil lawsuits; and (4) the effect this matter will have in others in the retail industry.

While Wal-Mart stock initially dropped 4.7 percent and continued a downward trend with an approximately $20 billion dip in shareholder value, it did rebound. However, the cost for the now worldwide investigation was already up to $51MM by the end of July. The Professor reports that  “at least 12 shareholder lawsuits have been filed against Wal-Mart and/or its officers and directors in the wake of the Times article.” Lastly, regarding a retail industry sweep, the Professor noted that “According to a recent Reuters report, other retail companies have also since reported to U.S. agencies suspicions of their own potential violations, which in turn has the Justice Department and SEC considering a sweep of the entire industry.”

V.                 FCPA Reform

Here the Professor continues his consistent argument that the Wal-Mart matter should encourage, rather than discourage, substantive debate on whether the FCPA should be reformed. However, he does not believe that opponents of FCPA reform “pounced” in heralding that the Wal-Mart matter ended the debate on FCPA reform (including this commentator). He does admit that this case may well have ended Congress’ collective stomach to take FCPA reform head on. He also notes that some Congressmen opened their own separate investigations of Wal-Mart but no person wanted to use the matter to inform the FCPA debate before Congress because as stated by the Chief Counsel of the House Judiciary Committee at a Hanson Wade FCPA conference in Houston, Texas in June of this year, ‘‘practical matter, public opinion matters, what happens in the real world matters,’’ and the atmosphere surrounding FCPA reform after the Times article has made it ‘‘harder for different groups to advocate’’ for FCPA reform.

With all articles published by the FCPA Professor, they are well researched and well written. I have found them to be provocative but in a way that fosters debate. Sort of the role that I think a Professor should have. We know where the bloodiest day in American history led but we do not know at this point, where this Wal-Mart matter will end.

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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