Who Had the Worse Day – Peyton Manning or Banks and Investment Funds?

The Seattle Seahawks gave the Denver Broncos an old-fashioned tail-whoopin’ in Super Bowl history on Sunday. I admit that I was pulling for the old guy, Peyton Manning to pull out another one but I did like Seattle, particularly getting +2.5 points. Not that they needed them and I certainly did not see such a beat down coming. Manning’s reaction was about what you might assume from a professional at this stage of his career, measured yet clearly disappointed. Yes he had a very bad day and one that he will probably rue the day for some time down the road.

But there was some other news on Monday that may cause other groups to do more than ‘rue the day’. You know when you are on the front page of the Wall Street Journal (WSJ) in an article about the Foreign Corrupt Practices Act (FCPA) it has the distinct possibility to be unpleasant. The said WSJ, entitled “Probe Widens Into Dealings Between Financial Firms, Libya” by Joe Palazzolo, Michael Rothfield and Justin Baer, reported that the Justice Department has joined an ongoing Securities and Exchange Commission (SEC) probe into “banks, private equity funds and hedge funds that may have violated anti-bribery laws (IE. FCPA) in their dealings with Libya’s government-run investment fund.” Ominously the WSJ noted that the Department of Justice’s (DOJ) participation had not been previously reported. As the DOJ generally investigates potential criminal violations of the FCPA and the SEC generally investigates the civil side of things this could be quite ominous indeed.

The firms named in the WSJ article included the following: Credit Suisse Group AG, J.P. Morgan Chase & Co., Société Générale SA, the private-equity firm Blackstone Group LP and hedge-fund operator Och-Ziff Capital Management Group. This is in addition to the previous announcement that Goldman-Sachs was being investigated. All of the claims relate to “investment deals made around the time of the financial crisis and afterward, these people said. In the years leading up to Libya’s 2011 revolution, Western firms—encouraged by the U.S. government—raced to attract investment money from the North African nation, which was benefiting from oil sales and recently had opened to foreign investment.”

The WSJ reported that the investigation is centering on certain third parties involved in the transactions, “At the center of the probe is a group of middlemen, known as “fixers,” operating in the Middle East, London and elsewhere, people familiar with the matter said. The fixers established connections between investment firms and individuals with ties to leaders in developing markets, including those in the Gadhafi regime.” The government is looking into these third party’s “roles in arranging deals between financial firms and Libyan officials, people familiar with the matter said. The fixers acted as placement agents, similar to those in the U.S. who have come under scrutiny for steering investments to large public retirement funds. In some cases, the sovereign-wealth-fund fixers collected a “finder’s fee”.”  It was reported that “Some of the fixers had connections to at least two of Gadhafi’s sons—primarily his second son, Seif al-Islam Gadhafi, who was most involved with the sovereign-investment fund, according to people familiar with the matter. Seif al-Islam Gadhafi was captured by rebels.” Interestingly, many of the underlying facts now being investigated came to light only after the overthrow of the Gadhafi Regime.

Further north, another group may have an occasion to rue the day. As reported in the FCPA Blog, in a post entitled “More SNC-Lavaline execs face charges in ongoing corruption probe”, two former SNC-Lavalin officials were charged by the Royal Canadian Mounted Police (RCMP) last Friday. The two men charged were Stephane Roy, a former vice-president at SNC-Lavalin, who was charged with fraud, bribing a foreign public official, and contravening a United Nations economic measures act related to Libya. Also charged was former executive vice-president Sami Abdallah Bebawi with fraud, two counts of laundering the proceeds of a crime, four counts of possession of property obtained by crime, and one count of bribing a foreign public official. These charge, added to prior charges bring the number of former SNC-Lavalin executives to four for their conduct regarding allegations of bribery and corruption in Libya. This is in addition to another two company executives who were charged for bribery and corruption regarding a company project in Bangladesh.

And finally are our friendly bankers and their continuing anti-money laundering (AML) woes. Just last week, UBS Chief Executive Officer (CEO), Sergio Ermotti, said at the World Economic Forum in Davos that it was not right to criticize bankers for criminal acts “most of the bad behavior that has landed UBS and others in hot water was caused by small groups of rogue employees and doesn’t reflect broader cultural problems in the industry.” Criticism could not come from interested stakeholders, such as stockholders, or those who had money in his bank. Indeed criticism could not even come from regulators.

Apparently some regulators take their jobs a bit more seriously than Ermotti might like. Reuters reported, in an article entitled “Bankers anxious over anti-money-laundering push to go after individuals”, that at the Securities Industry Financial Markets Association conference, John Davidson, E*Trade Financial’s global head of AML, said that the “new push by regulators and lawmakers to hold individuals, rather than just institutions, accountable for regulatory violations involving money laundering is spooking members of the U.S. financial industry.” He further said that this aggressive trend and a new vigorous AML bill, introduced in Congress by Representative Maxine Waters, entitled “Holding Individuals Accountable and Deterring Money Laundering Act”, were all “a little scary.” He found the trend towards more AML enforcement against individuals “an incredibly disturbing trend.” The reason it is so scary, an un-named top level compliance officer said, is “that compliance officers at the largest Wall Street institutions were feeling especially nervous because the power structures in those institutions sometimes did not give compliance officers enough authority to act.”

But more than compliance officers may rue the day. Jordan’s reported that the Board of Directors at financial institutions are also concerned. In article entitled “Money laundering tops boardroom concerns amid threat of criminal prosecution” it reported “concerns in boardrooms are now at an all-time high” and corporate boardrooms in some of the country’s leading banks are now sitting up and taking notice of money laundering as a concern, after the threat of criminal prosecution became something of a reality. The recently released KPMG Global Anti-Money Laundering Survey noted that 88 per cent of executives have now placed money laundering back at the head of a list of concerns addressed in their boardrooms. Brian Dilley, global head of the AML Practice at KPMG, was quoted as saying “Anti-money laundering has never been higher on senior management’s agenda, with regulatory fines now running into billions, regulatory action becoming genuinely license threatening, and criminal prosecutions of firms and individuals becoming a reality.”

So who do you think had the worse day or even couple of days?

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

McNulty’s Maxim No. 3 and Response to Allegations of Bribery

In a Wall Street Journal (WSJ) article by Chris Matthews, Joe Palazzolo and Shira Ovide, entitled “U.S. Probes Microsoft Bribery Allegations”, they reported that the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) were investigating “kickback allegations made by a former Microsoft representative in China, as well as the company’s relationship with certain resellers and consultants in Romania and Italy”. A whistleblower alleged that an executive of Microsoft’s China subsidiary had told the whistleblower “to offer kickbacks to Chinese officials in return for signing off on software contracts”. Additionally, they reported that “investigators are also reviewing whether Microsoft had a role in allegations that resellers offered bribes to secure software deals with Romania’s Ministry of Communications”.

Interestingly, as reported by Chris Matthews in a WSJ post in Corruption Currents, entitled “Microsoft Responds to FCPA Allegations”, Microsoft publicly responded to the reports. Matthews reported that Deputy General Counsel (GC) John Frank wrote in a blog post “As our company has grown and expanded around the world, one of the things that has been constant has been our commitment to the highest legal and ethical standards wherever we do business”. Frank also said that “The matters raised in the Wall Street Journal are important, and it is appropriate that both Microsoft and the government review them.”

Commenting on this situation with Microsoft, Alexandra Wrage, President of Trace International, wrote an article on Forbes.com, entitled “Microsoft And The Rising Federal Scrutiny Of Bribery”, where she said, “All of this should not be discouraging to companies worried about complying with anti-bribery laws. Strong compliance programs, even those that fail to prevent all forms of bribery, do provide protection from liability. “[A] company’s failure to prevent every single violation does not necessarily mean that a particular company’s compliance program was not generally effective,” write the DOJ and SEC in their recently published Resource Guide to the FCPA. “[The] DOJ and SEC…do not hold companies to a standard of perfection,” the Guide continues. This may not be enough to guarantee corporate compliance officers a full night’s rest, but it should provide some comfort.”

Wrage also noted that the Microsoft investigation underscores that fact that with any company that does business internationally you cannot watch all the people, or indeed all the third parties, all the time and that violations of anti-corruption laws such as the FCPA or anti-bribery laws, such as the UK Bribery Act, are a constant risk in worldwide business operations. She believes that Microsoft, by all accounts, would appear a robust anti-bribery compliance program. She understands that Microsoft’s Standards of  Business Conduct intones a strict policy against bribes, quoting it for the following:

“Microsoft prohibits corruption of government officials and the payments of bribes or kickbacks of any kind, whether in dealings with public officials or individuals in the private sector. Microsoft is committed to observing the standards of conduct set forth in the United States Foreign Corrupt Practices Act and the applicable anti-corruption and anti-money laundering laws of the countries in which we operate.”

The company also requires all outside vendors to read and comply with the Microsoft Vendor Code of Conduct, which also prohibits incentives such as kickbacks or bribes.

But, as she says, for a large multinational like Microsoft, which has offices in more than 100 countries, it does not always mean that thousands of business partners all across the globe will be compliant all of the time. Indeed, as admitted by Microsoft Deputy GC Frank in his blog post, “In a company of our size, allegations of this nature will be made from time to time. It is also possible there will sometimes be individual employees or business partners who violate our policies and break the law. In a community of 98,000 people and 640,000 partners, it isn’t possible to say there will never be wrongdoing.”

I think the final quote from Frank above, points to the specific usefulness of the Guidance, which states, “In the end, if designed carefully, implemented earnestly, and enforced fairly, a company’s compliance program—no matter how large or small the organization—will allow the company generally to prevent violations, detect those that do occur, and remediate them promptly and appropriately.” These three clauses point to Paul McNulty’s three maxims but the Microsoft response points to McNulty Maxim No. 3, “What did you do about it?

I have asked Paul what he meant by this which he broke down into two parts. The first part is did you investigate it thoroughly and did you remediate those factors which led to the underlying issue? As reported by Matthews, Palazzolo and Ovide “The allegations in China were also the subject of a 10-month internal investigation that Microsoft concluded in 2010, according to people briefed on the internal investigation. The probe, conducted by an outside law firm, found no evidence of wrongdoing, these people said.” As noted above, DOJ and SEC lawyers are now looking at these allegations, as well as those issues in Romania and Italy.

The second part is what remediation did you do? At this point it is not clear what remediation, if any, will be appropriate so we may have to leave that prong open at this time. However, there is one other matter brought up by the Guidance that is certainly raised in the context of this Microsoft matter that should be looked at. It is government involvement. One of the nine factors listed in the US Sentencing Guidelines state, “the corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents”. Further, the Guidance makes clear throughout that a company benefits from self-disclosing and cooperating with the government. While it is not clear if Microsoft self-disclosed anything back in 2010 when it conducted its internal investigation, it does appear that it is cooperating with the DOJ and SEC at this time.

While several commentators have pointed to this Microsoft matter as an example of how difficult it might be to do business in full compliance with the US Foreign Corrupt Practices Act (FCPA) all the time, I draw a different lesson from this matter. I believe that an aggressive approach to McNulty Maxim No. 3 shows that it is not about how hard it is to do business internationally, or that the FCPA is too difficult to follow; but it is the strength of your compliance program and your response to allegations which should be the determinative factor for compliance. I think McNulty’s advice was good when I initially heard and I think it is good now. Moreover, it is a part of the FCPA Guidance which shows it is not just how McNulty might think through these issues but how the DOJ and SEC do so as well.

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