FCPA Compliance and Ethics Blog

October 22, 2014

Right to Retire Or Termination: Remediation of Leadership To Foster Compliance

Fall of RomeMany historians have long given 476 AD as the date of the fall of the Roman Empire. Further, it was from this date forward that Europe began its long slide into the abyss, which came to be known as the Dark Age. However, this view was challenged in 1971 by Peter Brown, with the publication of his seminal work “The World of Late Antiquity”. One of the precepts of Brown’s work was to reinterpret the 3rd to 8th centuries not as simply a decline of the greatness that had been achieved in the heydays of the Roman Empire, but more on their own terms. It was in the year of 476 AD that the last Roman Emperor, Romulus Augustulus, left the capital of Rome in disgrace. However as Brown noted, he was not murdered or even thrown out but allowed to retire to his country estates, sent there by the conquers of the western half of the Roman Empire, the Goths. Not much conquering going on if a ruler is allowed to ‘retire’, it was certainly a replacement but not quite the picture of marauding barbarians at the gate.

I thought about this anomaly of retirement by a leader in the context where a company or other entity might be going through investigations for corruption and non-compliance with such laws as the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act. Yesterday I wrote about three recent articles and what they showed about a company’s oversight of its foreign subsidiaries. Today I want to use these same articles to explore what a company’s response and even responsibility should be to remediate leadership under which the corruption occurs. The first was an article in the New York Times (NYT), entitled, “Another Scandal Hits Citigroup’s Moneymaking Mexican Division” by Michael Corkery and Jessica Silver-Greenberg. Their article spoke about the continuing travails of Citigroup’s Mexican subsidiary Banamex. Back in February, the company reported “a $400 million fraud involving the politically connected, but financially troubled, oil services firm Oceanografía.”

This has led Citigroup to ever so delicately try to oust the leader of its Mexico operations, Mr. Medina-Mora, by encouraging him to retire. While Citigroup did terminate 12 individuals around the Oceanografía scandal earlier in the year, it has not changed the employment status of the head of the Mexico business unit. This may be changing as the article said, “In a delicate dance, Citigroup is encouraging its Mexico chairman, Manuel Medina-Mora, 64, to retire, according to four people briefed on the matter. The bank has been quietly laying the groundwork for his departure, which could come by early next year, the people said. Still, Mr. Medina-Mora’s business acumen and connections to the country’s ruling elite have made him critical to the bank’s success in Mexico. Citigroup and its chairman, Michael E. O’Neill, cannot afford to alienate Mr. Medina-Mora and risk jeopardizing those relationships, these people said.”

Should Mr. Medina-Mora be allowed to retire? Should he even be required to retire? What about the ‘mints money’ aspect of the Mexican operations for Citigroup? Was any of that money minted through violations of the FCPA or other laws? What will the Department of Justice (DOJ) think of Citigroup’s response or perhaps even its attitude towards this very profitable business unit and Citigroup’s oversight, lax or other?

Does a company have to terminate employees who engage in corruption? Or can it allow senior executives to gracefully retire into the night with full pension and other golden parachute benefits intact? What if a company official “purposely manipulated appointment data, covered up problems, retaliated against whistle-blowers or who was involved in malfeasance that harmed veterans must be fired, rather than allowed to slip out the back door with a pension.” Or engaged in the following conduct, “had steered business toward her lover and to a favored contractor, then tried to “assassinate” the character of a colleague who attempted to stop the practice.” Finally, what if yet another company official directed company employees to “delete hundreds of appointments from records” during the pendency of an investigation?

All of the above quotes came from a second NYT article about a very different subject. In the piece, entitled “After Hospital Scandal, V.A. Official Jump Ship”, Dave Phillips reported that two of the four VA Administration executives who engaged in the above conduct and were selected for termination, had resigned before they could be formally terminated. The article reported that the VA “had no legal authority to stop” the employees from resigning. Current VA Secretary Robert McDonald was quoted in the article as saying, “It’s also very common in the private sector. When I was head of Procter & Gamble, it happened all the time, and it’s not a bad thing — it saves us time and rules out the possibility that these people could win an appeal and stick around.” Plus, he said, their records reflect that they were targeted for termination. “They can’t just go get a job at another agency,” Mr. McDonald said. “There will be nowhere to hide.”

The third article was in the Wall Street Journal (WSJ) and entitled, “GM Says Top Lawyer to Step Down”. In this piece, reporters John D. Stroll and Joseph B. White, with contributions from Chris Matthews and Joann Lublin, reported that General Motors (GM) General Counsel (GC) Michael Millikin will retire early next year. Milliken is famously the GC who claimed not to know what was going on in his own legal department around the group’s settlements of product liability claims of faulty ignition switches. Milliken claimed he was kept “in the dark” by his own lieutenants about the safety issues involved with this group of litigation. Does Milliken have any responsibility for the failures of GM around this safety issue? What does his apparent graceful retirement say about the corporate culture of GM and its desire to actually change anything in the light of its ongoing travails? Of course one might cynically point to GM’s failure to even have a Chief Ethics and Compliance Officer as evidence of the company’s attitude towards compliance and ethics. (I wonder how that might look to the DOJ/Securities and Exchange Commission (SEC) if GM goes under any FCPA scrutiny?)

With Citigroup, the Department of Veterans Affairs and GM, we have three separate excuses for companies (and a Cabinet level department) not disciplining top employees for ethical and/or compliance failures. At Citigroup, the excuse is apparently that it does not want to rock the boat from a top producing foreign subsidiary by terminating the head of the subsidiary under investigation. At the Department of Veterans Affairs, the excuse seems to be they can go ahead and resign because we prefer to get rid of them that way. At GM, it is not clear why the GC who claimed not to know what was going on in even his own law department can ride off into the sunset with nary a contrary word in sight. Millikin’s conduct would seem to be the product of a larger cultural issue at GM.

I thought about how the DOJ might look at these situations for companies if a FCPA claim were involved. Even with McDonald’s observations about what happened when he was with Procter & Gamble; does a company show something less than commitment to having a culture of compliance if it allows an employee to retire? What does it say about Citigroup and its culture given the current dance it is having with its head of the Mexico unit? What about GM and its Sgt. Schultz of a GC and his ‘I was in the dark posture’? As stated by Mike Volkov, in his post entitled “Goodbye Mr. Millikin: GM’s Continuing Culture Challenges”, GM does under appear to understand the situation it finds itself in currently over its failures. He wrote, “GM still does not understand the significance of its governance failure…GM should have taken dramatic and affirmative steps to create a new culture – resources and new initiatives should be launched to rid GM of its current culture and replace it with a new speak up culture. It is a daunting task in such a large company but it has to be done. Until GM wakes up, missteps and failures will continue.” One might say the same for Citigroup and the Department of Veterans Affairs 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, 2014

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

October 21, 2011

Around the World for Your Compliance Program

In the October issue of the Harvard Business Journal, in an article entitled “How ‘Mystery Shopping’ Helped Spark a Turnaround”, Office Depot’s President Kevin Miller wrote about his experiences as a ‘mystery shopper’. He began this tour to determine if the high customer satisfaction scores the Office Depot was achieving were correct. To do so Miller toured 70 Office Depot stores in over 15 states as a ‘mystery shopper’. It turned out that customers did have high satisfaction over the products and services that they were asked to rate, however, this high satisfaction did not drive sales. It turned out that Office Depot was measuring the wrong things. Miller then began to assess what customers needed and turned that information into sales.

The recent Watts Water Technologies settlement with the Securities and Exchange Commission (SEC) regarding internal controls violation of the Foreign Corrupt Practices Act (FCPA) of a subsidiary in China was a reaction to the background facts. One of the things that struck me was how the allegations of FCPA violations initially came to the attention of the General Counsel during the course of FCPA training for senior members of the Chinese subsidiary. Watts’ “corporate counsel became aware of potential FCPA violations at [the Chinese subsidiary] through conversations with…sales personnel who were participating in the training.” This point reinforced to me one of the most important things that a compliance practitioner can do, which is get out into the field.

I have often heard my colleague Mary Shaddock Jones, former Assistant General Counsel and Director of Compliance for Global Industries (GI), speak about her experiences in traveling across the world to train the third party business representatives of GI. She often talks about the personal relationships she was able to build with both the people and companies because she took the time, effort and money to come to their area of the world and put on training. But she also speaks of the questions, observations and ideas that these parties would give to her. It also allowed her to have an ‘ear on the ground’ as a front line member of GI’s compliance department.

The same holds true for employees who receive compliance training. When I was in the Halliburton Legal Department, one of my assignments was to travel overseas to put on contract training. At every training session, which was announced well in advance, employees would bring to me questions, comments or concerns that they had been saving up and did not ask over the phone or via email, for whatever reason. Such queries might be asked over lunch, dinner, or some other more relaxed social setting before or after the formal training. This taught, and continues to drive home to, me that lawyers and compliance department members need to get out of the office and out into the field.

While web-based compliance training certainly has its function in a multi-national corporation with thousands of employees, it cannot and does not take the place of live, in-person training. The Legal Department of Watts Water Technologies learned the value of this lesson first hand. If certain of the employees who received the compliance training had not spoken to the Legal representative of their concerns, the company might not have started down the path which led to a civil penalty only for FCPA violations.

Near the end of his article, the President of Office Depot stated, “I still try to visit stores as frequently as possible. It’s really the only way to know how your business is doing.” The same is true for the Compliance Department. You can take all the metrics you like, but you have to get out into the field to understand what is truly going on in your company. You need not traverse the world in 80 days but you do need to get out and meet folks. An additional point might be [with apologies to Tip O’Neill] “All compliance is (mostly) local.”

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I have been honored to be nominated as one of the Top 25 Business Blogs of 2011 by LexisNexis. If you would like to support my nomination, please comment on the announcement post on our Corporate & Securities Community

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

© Thomas R. Fox, 2011

October 20, 2011

Watts Water: Don’t Get Caught on the (FCPA) Slow Boat to China

Last week, the Securities and Exchange Commission (SEC) instituted a Cease and Desist Order again Watts Water Technologies, Inc. (WWT) and one of its employees, Leesen Chang (Chang). The Order was to obtain certain civil penalties and fines for conduct of WWT and Chang concerning violations of the books and records and internal control provisions of the Foreign Corrupt Practices Act (FCPA) for its China operations. As noted by the FCPA Professor, “The Watts enforcement action is yet another example of an FCPA enforcement action focused on Chinese Design Institutes.” WWT paid a fine of $200,000, agreed to disgorge profits of $2,755,815 and paid prejudgment interest of $820,791. Chang paid a fine of $25,000.

The violations revolved around the WWT China subsidiary, Watts Valve (Changsha) Co., Ltd. (CWV) which did business in China and purchased another Chinese company Changsha Valve in April 2006. This Chinese company was consolidated in CWV. In 2010, WWT sold CWV to a Hong Kong entity. Chang was the Vice President (VP) for sales of CWT from 2006-2009.

The Violations

There were two forms of bribery set forth in the Cease and Desist Order. First CWV made payments directly to employees of a Chinese Design Institute. According to the FCPA Professor, Chinese Design Institutes are “typically state-owned enterprises that provided design engineering and technical integration services that can influence contract awards by end-user state-owned customers.” These direct payments were made to influence design institutes to recommend CWV be awarded the sale of products for Chinese state enterprises. The second form of bribery was that CWV paid “sales-related expenses such as travel, meals, entertainment” of the Chinese Design Institute. Lastly, CWV employees made direct payments to Chinese Design Institute for sales made by CWV.

These payments for such sales-related expenses were made by CWV employees out of their sales commissions and hidden on the CWV books and records as employee expenses. The commissions paid directly to the Chinese Design Institute for sales made by CWV employees were also hidden on the books and records of CWV as its employees commissions. Chang knew about these payments and attempted to block the US Company, WWT, from discovering them or correcting the false entries into CWV books and records.

Discovery and Remedial Measures

The discovery of the above issues began with the WWT General Counsel (GC) becoming aware of an enforcement action against another company for unlawful payments to a Chinese Design Institute. This led to FCPA training for certain CWV management who disclosed some of the above information. WWT instituted an internal investigation and self-disclosed to the SEC.

The Cease and Desist Order listed several remedial measures taken by  WWT, one of which included changing the incentive based compensation. There was also the creation of an enhanced compliance program including policies and procedures, specifically including a Travel and Entertainment Expense Reimbursement Policy for the company’s Chinese subsidiaries. Additionally there were enhanced due diligence procedures for foreign business partners. WWT conducted a thorough world-wide FCPA anti-corruption audit. Lastly, it was noted that WWT hired a Director of Legal Compliance to head up the company’s compliance efforts going forward.

Lessons Learned

  • The primary lesson learned in this enforcement actions is that it does not matter how much of a company’s revenue a subsidiary may represent, a FCPA violation is a FCPA violation. Here it was specifically noted in the Cease and Desist Order that the Chinese subsidiary’s revenues were “approximately 1% of Watts gross revenues.” A very expensive lesson indeed.
  • The second lesson is that if a VP of Sales, in any region, resists translating company expense accounts into English, do not run but sprint to those areas, with all possible haste, to secure the records because that VP is most probably hiding something that can you get in big, big trouble.
  • Next is that a company must use several varied resources to continually assess and re-assess its risk profile. The actions which led to the WWT investigation began because the GC saw that another company was involved in an enforcement action involving a Chinese Design Institute. This is not something traditionally listed as an area to be assessed. However, if a competitor is involved in an enforcement action or a company that is using a sales model very similar to that used by your company, you should re-assess the risk to your company accordingly.
  • The final lesson I would suggest is the absolute necessity of in-person training for high risk employees or those company employees in high risk countries. It was through the in-person FCPA training that the WWT learned about the violative conduct. If this training had been video or web-based such disclosure may never have happened.

The Watts Water enforcement action provides concrete information for the compliance practitioner to review and re-assess your compliance program and risk profile to determine if your company has any risks which you are not currently seeing.

For a copy of the SEC Cease and Desist Order, click here.

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

© Thomas R. Fox, 2011

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