FCPA Compliance and Ethics Blog

February 19, 2014

Welcome to the Hotel California: FCPA Enforcement

Hotel CaliforniaThis past weekend I saw The Eagles on their ‘History of The Eagles Tour. It truly was that, a complete musical history of the group, from the beginning in 1971 up until now. They played for well over 3 hours and it was fantastic. The Eagles were at their peak in the 70’s when I was at my peak as a rock and roller, both in high school and college, so the concert was a very memorable experience. In one interesting twist they did not allow videos to be taken of the concert with cell phones or any other types of recordings. Of course the concert ended with song Hotel California and its iconic line “You can check out but you can never leave.”

I thought about that final line and how true it was in the late 70s and how true it is now in the world of international anti-corruption enforcement when I read a front page article in Sunday’s New York Times (NYT), entitled “Eavesdropping Ensnared American Law Firm”, and an blog post by the FCPA Professor, entitled “FCPA Lawyers Would Be Wise to Review Recent Third Circuit Decision”.

We know from the American Spectator article, “Rise of the Surveillance State”, by James Bovard about the National Security Agency (NSA) program ‘Echelon’, which he described as “a spy satellite system run by the National Security Agency along with the United Kingdom, Australia, New Zealand, and Canada. Echelon reportedly scans millions of phone calls, e-mail messages, and faxes each hour, searching for key words.” Further, Bovard stated, “A February report by the European Union alleged that Echelon has been used for economic espionage. Former CIA Director James Woolsey told a German newspaper in early March that Echelon collects “economic intelligence.”” One example Woolsey gave was espionage aimed at discovering when foreign companies are paying bribes to obtain contracts that might otherwise go to American companies. Woolsey elaborated on his views in a March 17, 2001 Wall Street Journal (WSJ) Op-Ed piece, justifying Echelon spying on foreign companies because some foreigners do not obey the Foreign Corrupt Practices Act (FCPA).

After the NYT article, we know that US law firms can also fall under surveillance. The firm of Mayer Brown was monitored by the NSA’s Australian counterpart, the Australian Signals Directorate (ASD), regarding work the law firm was doing for the government of Indonesia in trade disputes with the US. It is of no consequence that it was the Australians doing the spying as under the “Five Eyes Alliance”, Australia is one of five countries the US shares intel with and agrees not to spy on. While most Americans would understand the need to place those dealing with terrorists under surveillance, the need to monitor US law firms giving legal advice in a legal trade dispute seems one or two steps past the safety of the US homeland. While only mentioned in the article, I also wonder about the effect of this surveillance on the attorney-client privilege, the basic reason that clients come to lawyers, for confidential legal advice. If you know that you are susceptible to espionage, why would a client ever trust the confidentiality of your communications or even that they are confidential to start with. Moreover, if you know you are subject to surveillance, is the privilege destroyed if a country does so and passes the information along to the US?

Equally unsettling as the revelations in the NYT article is the FCPA Professor’s report on a Third Circuit, Court of Appeals decision, entitled “In Re: Grand Jury Subpoena”. In this matter, an attorney was consulted on an international transaction, which was described as follows: “In April 2008, Client approached Attorney to discuss issues he was having with the project. Client explained that he planned on paying Banker in order to ensure that the project progressed swiftly, as Banker was threatening to slow down the approval process. Attorney did some preliminary research, found the FCPA, and asked Client whether the Bank was a government entity and whether Banker was a government official. Although Attorney could not ascertain given his limited research whether the planned action was legal or illegal, he advised Client not to make the payment. Despite this advice, Client insisted that his proposed payment did not violate the FCPA, and informed Attorney that he would go ahead with the payment. Attorney gave Client a copy of the FCPA. After this communication, Attorney and Client ended their relationship.” The opinion stated that the Client made a payment to the banker’s sister.

In other words, the client came for legal advice regarding an international transaction, the attorney advised against the transaction in question but the client did so against the advice of his attorney and the attorney thereafter terminated the relationship. There was no evidence the lawyer advised the client how to violate the FCPA or in any way helped the client ‘get around’ the law.

The attorney-client privilege is not sacrosanct. There are some limited exceptions to it and one of those is the ‘crime-fraud exception’ which the Court of Appeals explained is, “To circumvent [the attorney-client] privilege under the crime-fraud exception, the party seeking to overcome the privilege . . . must make a prima facie showing that (1) the client was committing or intending to commit a fraud or crime, and (2) the attorney-client communications were in furtherance of that alleged crime or fraud.” (All citations omitted) But, in this case, there was no evidence presented that the attorney involved gave advice that was in the furtherance of a crime but only that “The communication between Attorney and Client was brief, and consisted mainly of informing Client on the applicable law and advising that he not make the payment. However, we believe that the questions posed by Attorney to Client and the information that Client could gain from those questions are sufficient for us to conclude that the District Court did not abuse its discretion in determining that the advice was used in furtherance of a crime or fraud.”

What were the questions posed by the client or put another way, what was the legal advice sought by the client? The Court stated, the “questions about whether or not the Bank was a governmental entity and whether Banker was a government official would have informed Client that the governmental connection was key to violating the FCPA. This would lead logically to the idea of routing the payment through Banker’s sister, who was not connected to the Bank, in order to avoid the reaches of the FCPA or detection of the violation. Of course, it is impossible to know what Client thought or how he processed the information gained from Attorney. But the District Court did not abuse its discretion in determining that Client “could easily have used [the advice] to shape the contours of conduct intended to escape the reaches of the law.””

What does the spying on a US law firm and this court decision invalidating the attorney-client privilege mean for FCPA enforcement? I think that it means if you find yourself in the position of having violated the FCPA; your company now has an even greater incentive to self-disclose. If you are a non-US based company subject to the FCPA, the NSA is watching you. Further, if you are a non-US company, which seeks legal advice, you are now on notice that US laws firm are being spied on. Lastly, if you have violated the FCPA and seek legal advice; it may well come to pass that the lawyer whose advice you sought, can be compelled to testify about those conversations. So in the words of The Eagles, if you engage in conduct that arguably violated the FCPA, you can check out but you can never leave.

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If you will be in Dallas this coming Thursday, February 20, I hope that you will join myself and fellow FCPA Blog Contributor Marc Bohn at the Corporate Compliance Summit on 2014 FCPA Concerns You Cannot Afford to Ignore. The event is complimentary and is sponsored by The Network. You can check it out and register by clicking 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, 2014

February 16, 2012

Attorney-Client Privilege for In-House Counsel

The question of attorney-client privilege (herein “the privilege”) for in-house counsel can be a vexing one, yet one that has significant implications for investigations and enforcement actions under the Foreign Corrupt Practices Act (FCPA) or other anti-corruption legislation. There is a split decision between the US and countries in the European Union (EU) on whether in-house counsel may engage in privileged communications with corporate employers. In a recent article, entitled “In-House Counsel and Corporate Client Communications: Can EU Law after Akzo Noble and U.S. Law after Gucci be Harmonized? Critiques and a Proposal”; published in Volume 45, Number 3 of the International Lawyer, author John Gergacz explored this dichotomy and proposed a simple, yet clear rule to put in place to foster ease of determination of the privilege and promote the goals behind the existence of the privilege.

This question of whether the privilege exists for communications will certainly increase due to the increase in international enforcement actions in the area of anti-corruption and anti-bribery under laws such as the FCPA and UK Bribery Act. It will also arise in investigations involving any other activities which might be subject to both EU and US laws, such as EU competition law and US anti-trust law.

European Union Countries – Status of counsel test

In EU countries, the primary test involves what is the status of the lawyer making the communication. Following a 1982 decision, styled “AM&S Europe v. Commission of European Communities”, the privilege is limited to communications conducted with independent lawyers. Initially, a determination must be made if an attorney is independent, this being defined as to whether or not an attorney was “bound to his client by reason of employment” for example an employee. However, the court decision did not use the term “in-house” counsel but broader formulation of “independent counsel.” While recognizing that this may have left room for interpretation the practice seems to be to deny the privilege when the advice emanates from in-house counsel. Gergacz says that to apply the privilege in the EU is determined by following a two-step process. If this initial threshold of independence is met the analysis turns to the substance of the communication. That is, whether the “communications concerned legal advice and related to the client’s right of defense.”

United States – Type of communication

In all reported jurisdictions in the United States, both in-house counsel and outside counsel communications are eligible for privilege protection. However, within certain states in the US, the analysis is largely centered on the substance of the communication, whether it involves legal advice or more general business advice. This analysis recognizes that in-house counsel may have several “corporate capacities” all of which do not necessarily involve providing legal advice. Gergacz notes that “in practice, in-house counsel may communicate about a number of activities, even though his formal corporate position is to provide legal advice.” He believes that such sentiment has led to a greater scrutiny of in-house counsel communications than those made by outside counsel to a client. This has led courts to be “wary of inadvertently extending privilege confidentiality too far,” when business advice is provided or there are mixed business-legal services delivered.

EU/US Harmonization

Gergacz concludes his article with a proposal to harmonize these two rules for privilege. He believes that both views have merit, with the US recognizing the “equivalence of in-house and outside counsel” and the EU “the concept of counsel independence is noteworthy.” Gergacz’s proposal is that communications with in-house counsel would be privileged if the attorney involved is (1) admitted to a relevant Bar; and (2) has Bar membership status intact that allows him to practice law at the time of the relevant communication.

Gergacz listed three general reasons for his proposal. First, he believes that the proposal is easy to administer as there should not be either court intervention to determine privilege or court review of the communications involved. Simply put, does the lawyer have a license and is it up to date to allow him or her to practice law? Second, he believes that the privilege should be broad enough to encourage candor in communications between attorney and client in the corporate setting, but not so broad as to expand the cloak of confidentiality to “thwart just decisions from being rendered.” Third, and finally, Gergacz writes that in-house counsel often has two roles to fulfill. One is certainly as a lawyer providing legal services, however, it may be that a person who has graduated from a law school or holds a law degree may not be licensed to practice law and may have other roles inside of a corporation. As a practicing lawyer is held to ethical and disciplinary standards whether they are in-house or in private practice, the requirement for Bar membership should satisfy the AM&S line of cases which speak toward ‘independence’ as the key concept for privilege.

I would commend Gergacz’s article to you for a more complete review of the US case law and other issues related to attorney-client privilege. His proposal is certainly an intriguing one and one which deserves rich consideration to simplify this knotty area. In this era of multi-jurisdictional enforcement of laws such as the FCPA and UK Bribery Act, the certainty of whether a communication is privileged or not is an important point for businesses.

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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