In Due Diligence and World Cup Bids: Follow the Money

For those watching the 2104 World Cup, this year’s tournament has certainly been spectacular, from the US reaching the round of 16, the incredible goals scored by Robbie Van Persie and Tim Cahill, to yesterday’s heartbreak for Mexico, who led until the 88^th minute, only to be tied and then loose in stoppage time to the Netherlands, this year’s event has been one for the ages. However one very large shadow hangs over the sport’s governing body, Fédération Internationale de Football Association (Fifa) and allegations of corruption in its award of the 2022 World Cup to Qatar.

There were reports as far back as 2011 that Mohamed bin Hammam, offered bribes to members of the Caribbean Football Union (CFU) at a meeting organized by the Fifa vice-president, Jack Warner. As reported by The Guardian, in a 2011 article, entitled “Fifa in crisis after claims against Jack Warner and Mohamed bin Hammam”, Owen Gibson reported, “nine of Fifa’s 24 executive committee members have been accused of corruption in recent months.” But these 2011 reports have paled in comparison to the reports detailed in the past few months regarding allegations of corruptions concerning the award of the 2022 tournament to Qatar.

Earlier this month, The Sunday Times rocked the sporting world with its article “Plot to Buy the World Cup” by Jonathan Calvert and Heidi Blake. In the article, they reported that a number of football officials took £3m in return for support of the Qatari bid. The BBC, in an article entitled “Qatar World Cup 2022: Investigator nears probe conclusion”, said “The Sunday Times claims to have obtained secret documents that implicate the former AFC president in corrupting members of football’s governing body to win the right to stage the 2022 World Cup. The newspaper alleges the documents, seen by BBC sports editor David Bond, show that Qatari Bin Hammam, 65, was lobbying on his country’s behalf at least a year before the decision to award the country hosting rights. They also allegedly show he had made payments into accounts controlled by the presidents of 30 African football associations and accounts controlled by Trinidadian Jack Warner, a former vice-president of Fifa.”

This initial account has been supplemented by additional reports detailing these allegations. In another article in The Guardian, entitled “Mohamed bin Hammam accused of payments to help Qatar World Cup bid”, Agence France-Presse wrote that “Bin Hammam also paid $1.6m into bank accounts controlled by the Trinidadian Jack Warner, also a former vice-president of Fifa, $450,000 of which was before the vote for the World Cup”, citing the report in The Sunday Times. Both Qatar and bin Hammam have denied any improprieties in the award of the bid to Qatar.

But there were more reports of payments to those voting on the Qatar bid beyond Jack Warner. In a June 16^th report in the online publication, República, entitled “ANFA chief admits receiving money from Hammam” it reported that Nepal Football Association (ANFA) President Ganesh Thapa had been promised $800,000 from bin Hammam and had been paid $115,000. It also reported that Thapa’s son received $100,000 from bin Hamman. Thapa was quoted as saying that the money was for a business deal, “It is right that I received $115,000 but it was in connection with the business I have partnered with Hammam.”

There have been other issues raised regarding Qatar’s bid to host the World Cup. One is its treatment of the workers who are building the stadiums for the event and the appalling conditions that the workers building the stadiums to host the event are facing. In an article in the online magazine Slate, entitled “The Qatar World Cup Is a Human Rights Catastrophe. It’s Time to Do Something About It” Jeremy Stahl reported that the Nepali embassy has said 400 citizens of its country had died during construction in Qatar and India has reported that 500 of its citizens have died. The article quoted Sharan Burrow, the general secretary of the International Trade Union Confederation (ITUC), who said in an ESPN documentary “that at current rates, 4,000 people will die to make the 2022 World Cup a reality.” The ITUC itself had reported in March that there had been 1200 deaths in the construction of the facilities for the World Cup.

Another significant issue is the heat. Qatar can reach between 40-50C during the summer months, and for those of you who don’t read Celsius temperatures that translates to between 104 to 122 degrees Fahrenheit. I have been in such temperatures and I can assure you that is hot weather. However, although Fifa awarded the 2022 World Cup tournament to Qatar back in 2011, it has only now become aware of the fact that there is hot weather in the summer months in Qatar. If you have watched any games in this year’s tournament, you have seen European players wilt in 80+ degree, which for a Texan is rather pleasant. But no matter how much conditioned air you can pump into a stadium in Qatar, the fact is that it will be 120+ outside.

Even if the stadiums are air conditioned, how are you going to walk to them in that heat? To say that Fifa was unaware that it gets hot in the summer in Qatar seems disingenuous at best. As reported by Roger Blitz, in a Financial Times (FT) article entitled “Fifa faces quandary over World Cup in Qatar”, Sepp Blatter, Fifa President, has gone on record to say that awarding the 2022 World Cup to Qatar was “a mistake”.

But as my friend Mike Brown might say that when you are performing due diligence, ‘follow the money’. This is not only important in thinking about allegations of corruption in the award of the bid to Qatar but also in the overall context of Fifa and the World Cup. It has been estimated that over one-tenth of the world’s population is watching this year’s World Cup. In the US alone, the interest is so high its game against Portugal had more viewers than Game 5 (the final game) of the recent NBA championship. This could well lead to billions for the television rights in 2022 alone. That means that advertisers and sponsors will be paying a pretty penny to be associated with World Cup 2022. Do you think some of the current sponsors, such as Adidas, Coca-Cola, Sony or Visa will want to be associated with such allegations of corruption or deaths of workers from such appalling working conditions?

There is a chorus growing to move the 2022 World Cup from Qatar to another country. Speaking with its usual grownup voice, the FT editorial board has called for a re-vote on the location of the 2022 World Cup tournament venue, in an article entitled “Blow the whistle on Fifa, please”, they said, “The case for rerunning the bid for the 2022 competition looks unassailable. Final judgment should await a pending report into the Qatar bid by Fifa’s top internal investigator. But a string of controversies – among them the health concerns over staging the competition in Qatar’s furnace-like climate – means a new venue is now needed.” But more than simply re-voting on the 2022 bid, the FT said, “Western governments and lawmakers should therefore bring their influence to bear. The US Congress could consider holding hearings to examine the relations between American multinationals and Fifa. US companies have to abide by stringent anti-corruption laws. Congress would be right to examine the implications of US companies doing business with a major international body that has such weak governance. Such public hearings might make corporate sponsors reconsider their stance.”

What are the lesson for the compliance practitioner? Sometimes you need to step back and look at the big overall picture. If a deal has come into your company that is particularly high reward, it generally means that it was high risk. You may want to do a more in-depth look at all aspects of the deal, from the business partners involved, to your internal gifts, travel and entertainment for your employees involved in securing the contract. Putting a second or even third set of eyes on something might well protect your company if something does not seem right, feel right or look right.

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

GSK and Missed Red Flags in China

One of the questions that GlaxoSmithKline PLC (GSK) will have to face during the next few years of bribery and corruption investigations is how an allegedly massive bribery and corruption scheme occur in its Chinese operations? The numbers thrown around have been upwards of $USD500MM. It is not as if the Chinese medical market is not well known for its propensity towards corruption, as prosecutions of the Foreign Corrupt Practices Act (FCPA) are littered with the names of US companies which came to corruption grief in China. GSK itself seemed to be aware of the corruption risks in China. In a Reuters article, entitled “How GlaxoSmithKline missed red flags in China”, Ben Hirschler reported that the company had “more compliance officers in China than in any country bar the United States”. Further, the company conducted “up to 20 internal audits in China a year, including an extensive 4-month probe earlier in 2013.” GSK even had PricewaterhouseCoopers LLP (PwC) as its outside auditor in China. Nevertheless, he noted that “GSK bosses were blindsided by police allegations of massive corruption involving travel agencies used to funnel bribes to doctors and officials.”

Types of Bribery Schemes

The types of bribery schemes in China are also well known. In a Financial Times (FT) article, entitled “Bribery built into the fabric of Chinese healthcare system”, reporters Jamil Anderlini and Tom Mitchell wrote about the ‘nuts and bolts’ of how bribery occurs in the health care industry in China. They open their article by noting that the practice of bribing “doctors, hospital administrators and health officials is rampant.” They quoted an un-named senior health official in Beijing for the following, “All foreign and domestic pharmaceuticals operating in China are equally corrupt”. The authors also quoted Shaun Rein, a Shanghai-based consultant and author of “The End of Cheap China” for the following, “This is a systemic problem and foreign pharmaceutical companies are in a conundrum. If they want to grow in China they have to give bribes. It’s not a choice because officials in health ministry, hospital administrators and doctors demand it.”

Their article included a diagram which visually represented two methods used to pay bribes in China, which were designated the Direct incentives and Indirect incentives methods. Whichever method is used, the goal is the same – to boost sales.

In the Direct incentives method, a third party representative of a company would provide cash to the department head of a clinic or hospital. The department head would in turn pay it to the physicians to encourage them to prescribe the company’s medical products. But a third party representative could also contact a physician directly and reward them with “gifts such as storecards, vouchers and travel” expenses. Other direct methods might include the opening of bank accounts or charge accounts at luxury goods store and then the company would hand “the debit card or VIP card directly to the recipient.”

The FT noted that the Indirect incentives method tended to be “used by larger pharmaceutical groups with stricter governance procedures.” Under this bribery scheme there were two recognized manners to get benefits into the hands of prescribing physicians. The first is to have cash incentives paid to a third party representative, such as a travel agency, which would then “pass on some of these rewards to the physician directly.” Another method was for the company itself to make a “lump sum sponsorship paid to hospitals”. The hospitals would then distribute perks “to the doctors as a monthly or annual bonus.” Another indirect method noted was that companies might organize overseas conferences and site visits, which might “include free first class travel and five-star accommodation.”

Anderlini and Mitchell reported that “The 2012 annual reports of half a dozen listed Chinese pharmaceutical companies reveal the companies paid out enormous sums in “sales expenses”, including travel costs and fees for sales meetings, marketing “business development” and “other expenses”. Most of the largest expenses were “travel costs or meeting fees and the expenses of the companies’ sales teams were, in every case, several multiples of the net profits each company earned last year.” They cited the example of Guizhou Yibai Pharmaceutical Co Ltd which earned a net profit last year of Rmb333.3m. However its “sales expenses came to a total of Rmb1.25bn, including meetings expenses of more than Rmb295m and wages of just Rmb88m.” Indeed the “largest expense for the company’s sales team of 2,318 people was Rmb404m spent on travel, for an average of more than Rmb174,000 per sales representative for the year. That is roughly what it would cost every single sales representative to fly 10 times a month between Beijing and Guiyang, where the company is based.”

Auditing Responses – Missed Red Flags?

But what should GSK have done if such expenses were kept ‘off the books’? Hirschler, in his Reuters article, quoted one un-named source for the following, ““You’d look at invoices and expenses, and it would all look legitimate,” said a senior executive at one top accountancy firm. The problem with fraud – if it is good fraud – is it is well hidden, and when there is collusion high up then it is very difficult to detect.” However, Jeremy Gordon, director of China Business Services was quoted as saying “There is a disconnect between the global decision makers and the guys running things on the ground. It’s about initially identifying red flags and then searching for specifics.”

There are legitimate reasons to hold Continuing Medical Conferences (CME), such as to make physicians aware of the latest products and advances in medicine. However, this legitimate purpose can easily be corrupted. Hirschler quoted Paul Gillis, author of the China Accounting Blog, for the following “Travel agencies are used like ATMs in China to distribute out illegal payments. Any company that does not have their internal audit department all over travel agency spending is negligent.” Based on this, GSK should have looked more closely on marketing expenses and more particularly, the monies spent on travel agencies. Hirschler wrote, “They [un-named auditing experts] say that one red flag was the number of checks being written to travel agencies for sending doctors to medical conferences, although this may have been blurred by the fact that CME accounts for a huge part of drug industry marketing.”

One other issue might be materiality. If GSK’s internal auditors had not been trained that there is no materiality standard under the FCPA, they may have simply skipped past a large number of payments made that were under a company’s governance procedure for elevated review of expenses. Further, if more than one auditor was involved with more than one travel agency, they may not have been able to connect the dots regarding the totality of payments made to one travel agency.

What about the external auditors, PwC? Francine McKenna, who writes and speaks extensively on all things related to Big 4 auditing, wrote last year, in blog entitled “What The SEC And PCAOB Fail To Acknowledge About Chinese Fraud”, that Pam Chepiga, of Allen & Overy LLP, in 2012, “told the audience that FCPA investigations in China are difficult because, “you can’t take the documents out of the country.”” After her panel, Chepiga, told McKenna “that not only does China restrict the dissemination of documents outside of China, but internal investigations by multinationals must be done by Chinese lawyers with support from the Chinese accounting firms. Given the experience that the SEC is having with Deloitte, it seems, “previous cooperation agreements are not in force”. The SEC would have a hard time going over and investigating a fraud or FCPA violation by the Chinese arm of a US based company”. So things may not have been any easier for PwC. However, the recent agreement between the Securities and Exchange Commission (SEC) and the Chinese Securities Regulatory Commission will allow the SEC some access to audit the work papers of Chinese companies listed in the US may influence this issue.

Ongoing Monitoring

Another response that GSK could have implemented was to engage in greater ongoing monitoring. In the Texas Law, Out of Order column, entitled “5Tips for Avoiding Email Compliance Traps”, Alexandra Wrage, President of TRACE International, reported that “Internal Glaxo documents and emails reviewed by The Wall Street Journal show Glaxo’s China sales staff was apparently instructed by local managers to use their personal email addresses to discuss marketing strategies related to Botox. In the personal emails, sales staff discuss rewarding doctors for prescribing Botox with cash payments, credits that could be used to meet medical education requirements and other rewards.”

Wrage uses the GSK matter as a jumping off point “For companies wanting to get a handle on the compliance risks they face through email (mis)uses and other forms of technology”. She gives five tips to avoid email compliance traps: (1) Encourage communication between compliance and IT departments. (2) Map out your universe of data. (3) Know your obligations, then develop an established set of policies and procedures around them. (4) Train employees to speak up about the new uses in technology. (5) Stress-test your program.

Remember with the technology available to companies today it is possible that companies have the ability to determine if employees are accessing personal email accounts business computers. Also to Wrage’s list, I would add one other point and that is call Eddie Cogan at Catelas Software. Relationship monitoring is what they do and they can help you out immediately.

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

Code Words for Bribery and Corruption Across the Globe

Life sometimes imitates art. Remember the Orthofix enforcement action, where the company used the used the code word chocolates to identify the bribes it paid? This lead to the memorable quote from Kara Brockmeyer, chief of the Securities and Exchange Commission (SEC) Enforcement Division’s Foreign Corrupt Practices Act (FCPA) unit, who said “Once bribery has been likened to a box of chocolates, you know a corruptive culture has permeated your business”. It turns out this ‘Gumpism’ is not limited to US companies in the wide-world of bribery and corruption. David Henig, from the University of Kent, and Nicolette Makovicky, from the University of Oxford, who both jointly run the Languages of Informality Project, posted an article in the online BBC Magazine, entitled “Stinking fish and coffee: The language of corruption”, where they detailed some creative euphemisms for bribes used across the globe. I cite their list below.

1.      Cash for soup (Turkish)

If you are stopped by traffic police in North Africa the officer may well ask you to sponsor his next cup of “kahwe”, or coffee. In Kenya you might be stopped by traffic policemen and asked to contribute to “tea for the elders”. But in Turkey, the police would rather you give them “cash for soup” – soup is traditionally eaten at the end of a night of heavy drinking.

2.      Respect (Azeri)

Whether it happens on the street, or in the boardroom, corruption rests on the abuse of power and privilege. But popular euphemisms often deny this reality and present corrupt behaviour as altruistic “favours” for friends. In Azeri, the word commonly used for bribe – “hurmat” – is interchangeable with the word for respect. An official requesting a bribe will therefore ask you to “do him a favour”.

3.      A fish starts to stink at the head (Turkish)

The phrase “a fish starts to stink at the head” comes from Turkey, reminding us that petty bribes at street-level are often matched by greater corruption at the top of organisations and institutions. Mexican officials looking to earn a kickback for arranging a business deal will demand they are given “a bite”, while their Columbian counterparts are said to “saw” off a part of a government contract for themselves.

4.      Gratitude (Hungarian/Mandarin)

The term corruption implies both illegal and immoral behaviour. But in some regions, what is technically illegal may in fact be seen as acceptable or even moral behaviour. In Hungary, doctors and nurses can expect a “gratuity” from their patients in the form of an envelope containing money. In Poland, gifts in kind turn a faceless bureaucrat into an “acquaintance” who may be able to “arrange things” for you in the future. In China, healthcare workers and government officials also expect a “little token of gratitude” for their services. As it is said in Russia, you cannot “put ‘thank you’ into your pocket”.

5.      Under the table (English/ French/ Farsi/ Swedish)

Popular phrases used for speaking about corruption are often metaphorical. The well-known English phrase describing money being passed “under the table”, for example, also exists in French, Farsi  and Swedish. Other expressions emphasise movement. In Hungary, “oiling money” is paid to officials to grease the wheels of bureaucracy, while the Russians know it is sometimes necessary to put something on the palm of an official’s hand in order to move things along.

6.      Something small (Swahili)

Many euphemisms of corruption and bribery work to deflect attention from the action or minimise its importance. The Swahili expression for something small is a good example of this. In Ivory Coast the police used to ask for the cost of a drink, comparing the size of the bribe to that of a small tip. The Brazilian term for a bribe – a little coffee – also doubles as the term for a tip in the conventional sense.

7.      Money for tea (Pashto/Farsi)

The universal popularity of tea and coffee as metaphors for bribes points to another way euphemisms function to conceal the true nature of a corrupt transaction. In Afghanistan and Iran the expression for a bribe is “money for tea”. In both countries, tea-drinking is an essential part of social life. Asking for “money for tea” carries the suggestion that the bribe will be shared with others. Some expressions – such as “beans for the kids” – appeal to a sense of charity by claiming a bribe benefits someone more deserving.

8.      Cash for questions (English)

Large-scale corruption has its own vocabulary, often created by the media. The “cash for questions” scandal involving British politicians comes to mind, as well as the Italian “bribesville” scandal in the early 1990s. Combining “tangente” meaning kickback, and “-poli” meaning city, the term referred to kickbacks given to politicians for awarding public works contracts.

9.      Nokia box (Hungarian)

In Hungary, the term “Nokia box” became a symbol of corruption in 2010 after the head of the Budapest Public Transport Company, Zsolt Balogh, was caught handing over cash to the deputy mayor of Budapest, Miklos Hagyo, in a Nokia box. Since then, “Nokia box” has also become a sort of unit of measurement – meaning 15m forints ($65,000) – the size of Balogh’s original bribe.

10.  Little carp (Czech)

In the Czech Republic, the terms “little carp”, or “fish”, were used as a coded language during a large corruption scandal in Czech football. In the communication between the managers, referees and players, a “little carp” also operated as a unit of measurement, meaning 1,000 Czech koruna ($50) a “fish”. The euphemism “little carp” has become a Czech synonym for corruption.

Perhaps hot having seen the movie Forrest Gump or heard of the Orthofix FCPA enforcement action, the authors did not include the Orthofix code word in their list. Then again they were not focusing on how companies hide their illegal actions. But the point, as laid out by Kara Brockmeyer, is that if you use common words or phrases to hide bribes in your books and records, corruption has permeated your organization.

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

Wal-Mart and the Death Knell for Amending the FCPA

In a development that can only be called stunning, the New York Times (NYT) on Sunday, April 22, 2012, reported, in an article entitled “Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle”, on an alleged multi-year bribery and corruption scheme advanced by Wal-Mart in its Mexico operations. The alleged bribery scheme was truly breath-taking in its scope and operation. I am certain others will write about it extensively, beginning as soon as today, and I certainly will review the article in greater depth in upcoming blog posts, the first thing that struck me is that this case will sound the death knell for any efforts to amend the Foreign Corrupt Practices Act (FCPA). Whether you believe such efforts constitute badly needed reform because the Department of Justice (DOJ) has gone too far in enforcement; that any amendments would water down the FCPA and simply make bribery easier; or perhaps some minor clarification of certain terms and definitions is needed; I think you can kiss all of that good-bye.

Allegations

As reported in the NYT article, Wal-Mart executives at its Mexico subsidiary, 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.” This alleged bribery scheme included routine payments to Mexican governmental officials for “every conceivable type of permit, license, piece of paper, or any other type of approval needed or required to plan, build and operate a Wal-Mart in Mexico. Literally, millions of peso was paid out for everything from routine approvals to extraordinary consents.”

To facilitate this alleged bribery scheme Wal-Mart de Mexico kept two sets of books on the illegal payments through third party agents, which were made to Mexican governmental officials. As reported, Wal-Mart de Mexico “targeted mayors and city council members, obscure urban planners, low-level bureaucrats who issued permits  – anyone with the power to thwart Wal-Mart’s growth. The bribes, he said, bought zoning approvals, reductions in environmental impact fees and the allegiance of neighborhood leaders.” These payments were coded in a manner which hid their true basis. Later, reporting sent to the home office, in Bentonville, AR, were scrubbed so that the illegal payments were moniked as “legal fees”.

The time frames of the events reported were from the 1990’s to 2006. It is unclear if any alleged bribes were paid after this time. The purpose of the alleged bribes “was to build hundreds of new stores so fast that competitors would not have time to react. Bribes, he explained, accelerated growth. They got zoning maps changed. They made environmental objections vanish. Permits that typically took months to process magically materialized in days. What we were buying was time”. The article also reported that “Wal-Mart de Mexico was the company’s brightest success story, pitched to investors as a model for future growth. (Today, one in five Wal-Mart stores is in Mexico.)”

The End of FCPA Amendment

So how does all of this portend the end of efforts to amend the FCPA? As reported, “Wal-Mart’s ethics policy offered clear direction. “Never cover up or ignore an ethics problem,” the policy states.” What do you think a compliance defense would do for Wal-Mart about now? Wal-Mart prided itself on its world-wide FCPA anti-corruption compliance program. The claim that companies would act more ethically and in compliance if they could rely on a compliance defense would seem to be negated by facts reported about Wal-Mart. Do these facts seem like a rogue employee or even junta of rogue Mexican employees going off on their own? Whatever your thoughts on that question may be, it certainly appears that having a best practices compliance program did not lead to Wal-Mart doing business more ethically. And what if Wal-Mart’s corporate headquarters in Bentonville AR was not involved in any illegal conduct or even kept in the dark by Wal-Mart de Mexico? What does that say about having a robust compliance program?

Amending the FCPA to protect corporate headquarters in the US from liability under the doctrine of Respondeat Superior? You can forget about that happening in a heartbeat. No one can argue with anything close to a straight face that this problem was exclusive to Mexico. The corporate parent received the benefits from any profits made due to the bribery so it is difficult to imagine why a corporation should not be a part of any enforcement action. And as the FCPA Professor recently noted in a blog post, entitled “A Q&A with Claudius Sokenu on Where Else?””, that question may be close to someone’s thoughts at the DOJ about now.

How about that grace period for those companies which have a compliance program and self-reporting violations? Wal-Mart corporate was made aware of the allegations set forth in the NYT article in 2004 and chose not to self-report. As noted in the article “Neither American nor Mexican law enforcement officials were notified. None of Wal-Mart de Mexico’s leaders were disciplined. Indeed, its chief executive, Eduardo Castro-Wright, identified by the former executive as the driving force behind years of bribery, was promoted to vice chairman of Wal-Mart in 2008.” Indeed Wal-Mart did not report (I cannot say self-disclose) any FCPA investigation to the DOJ and Securities and Exchange Commission (SEC) until after the NYT notified those agencies that it was investigating these allegations back in 2011. As stated in the article, “Until this article, the allegations and Wal-Mart’s investigation had never been publicly disclosed.” How’s that for transparency in a publicly held US company? If a company as ethical as Wal-Mart will not self-disclose, what does that say about the rest of corporate America and its thinking on self-disclosure?

How about those claims that US companies were being unfairly prosecuted because they did not know their counter-parties were employees of state owned enterprises or that the person they were lavishly entertaining was an official of a foreign government? You mean those “targeted mayors and city council members, obscure urban planners, low-level bureaucrats who issued permits – anyone with the power to thwart Wal-Mart’s growth”? Whatever the merits of those companies who said “it’s not fair – we didn’t know” they were a government official – waive that proposed amendment bye-bye, with both arms over your head.

So whether you were pro or anti-FCPA amendment, I think that you have Wal-Mart to thank for the fact that any such thoughts now will Rest in Peace as this new saga in FCPA enforcement moves 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, 2012

Is a Major Bribery Prosecution Coming in Canada Under the CFPOA?

“What did the President know and when did he know it?” That is the iconic question from the Watergate Hearings asked by Senator Howard Baker of various witnesses. In the case of the Canadian engineering company SNC-Lavalin Group Inc. (SNC), it appears that its chief executive knew something was amiss and had known so for quite some time.

In an article in the March 27, 2012 edition of the Wall Street Journal (WSJ), entitled “Big Builder’s Chief Resigns”, reporters Caroline Van Hasselt and Satish Sarangarajan detailed the ongoing turmoil at SNC. In an article in the New York Times (NYT), entitled “Chief of Canadian Firm Steps Down After the Inquiry”, reporter Ian Austen reported that the chief executive of the firm, Pierre Dunhaime, resigned on Monday, March 26, after the “release of a report indicating that he had authorized that $56 million in improperly documented payments to unidentified agents.” The WSJ reported that the company “still had unanswered questions about the payments and had referred the matter to the Royal Canadian Mounted Police [RCMP]…”

Both newspaper articles reported on the release Monday of a copy of the company’s internal investigation, although the NYT article stated that it “appeared to raise more questions than it answered.” It appeared from the WSJ articles that Dunhamie had personally approved these payments to unknown agents to secure work for SNC projects. Apparently these agents were hired without any formal vetting process. Further the company reported that it was taking a charge to earnings for separate amounts of $33.5 million and $22.5 million, which had been incorrectly recorded on the company’s books and records. These payments had been made from 2009 until 2011.

Interestingly the company’s Chief Financial Officer (CFO) had objected to these payments because, as reported by the WSJ, “the agents identities weren’t properly disclosed and their fees would be charged to other projects.” The NYT reported that the payments to “agents who broker and manage contracts with foreign governments.”

So what does all this mean under relevant Canadian law? It could mean quite a bit. Canada has its own law prohibiting bribery and corruption of foreign governmental officials, the Canadian Corruption of Foreign Public Officials Act (CFPOA) which was enacted in 1999. The criminal provisions of the CFPOA are almost identical to those found in the US Foreign Corrupt Practices Act (FCPA) but it has no equivalent to the books and records component and there is no civil component which is enforced by the US Securities and Exchange Commission (SEC). The CFPOA only contains a criminal component, similar to that which is enforced by the US Department of Justice (DOJ). The FCPA has a longer jurisdictional reach than the CFPOA, where the test for jurisdiction requires that the cases involved have a “real and substantial” link to Canada. This means that a portion of the illegal activities must have been committed in Canada or have a real impact on Canadians.

Under CFPOA, there are clearly questions raised that would be similar to those raised under a FCPA analysis. What due diligence, if any, was done on the agents? What services, once again if any, were performed by the agents? The fact that the agents are still not known to the company or what the $56 million payment was for, or where it went, are problematic as well? Why did the company executive approve these payments over the objections of the CFO? While there is no books and records equivalent under CFPOA, mis-characterizing payments and expenses would seem to indicate a desire to hide the true nature of the payments.

SNC had strong relationships with members of the former ruling family in Libya, the Qaddafi’s, and had done ongoing work for the country before the regime fell. A consultant for the company was reported by the NYT to have traveled to Libya during the allied forces bombing and “produced a five-page report that was critical of the NATO-led bombing campaign in support of Libyan rebels.” In view of these relationships, could some of this $56 million have been paid as bribes in Libya?

As noted, the matter has been turned over to the RCMP for further action. In a guest post on this blog, entitled “Why Does It Appear Anti-Bribery Enforcement Is Lacking in Canada?” our colleague Cyndee Todgham Cherniak wrote that Canada’s criminal justice system does not include grand juries. As a result, the job of the RCMP is to gather sufficient information to cause the Crown to lay charges. Canada does not use grand juries as an investigatory tool. When there is a Canadian investigation, the RCMP is not inclined to talk about it. Appropriately, they declined comment for both articles.

Many questions are left unanswered by the company report. But as we might say down here south of the border, it is time for several people to “lawyer up”.

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

More than Just the FCPA and Bribery Act – The Local Battle against Corruption

Many Foreign Corrupt Practices Act (FPCA) and UK Bribery Act practitioners are well aware of the oratory of the US and UK governments on the evils of bribery and corruption. However, such a fight is not just being made by the US Department of Justice and the UK Serious Fraud Office, there are local entities which engage in this battle in countries all over world.

 We recently came across a most interesting website, ipaidabribe.com, set up by a non-profit entity, Janaagraha in Bangalore, India. This organization works with citizens and the government to change the quality of life in India’s cities and towns. The website itself is Janaagraha’s initiative to tackle corruption by harnessing the collective energy of citizens. The site encourages people and organizations to report on the nature, number, pattern, types, location, frequency and values of corrupt acts. These reports are designed to provide a snapshot of bribes occurring across India. Janaagraha’s stated purpose is to use this information to argue for improving governance systems and procedures, tightening law enforcement and regulation, and thereby reduce the scope for corruption in obtaining services from the government. 

One of the items on the site which caught our attention was a worksheet, available for download at no charge, which provides the website 10 Commandments of How to Say No to Corruption. While some of the suggestions are specific to India and Indian culture, we viewed several of them to be excellent training tools for how to say No to a bribe. These include: 

1. Be Confident – Act firmly and assertively that you do not have to pay a bribe.
2. Do your Homework – Understand what your rights are and the obligations of the service provider.
3. Do it Yourself – If you can avoid a middleman, do so.
4. Get Receipts – Insist on receipts for all payments made.
5. Seek Reasons – If you have a written form rejected, demand the basis for the rejection in writing.
6. Just Say No – Firmly and openly say that you will not pay a bribe.
7. File Complaints – Report any demands for a bribe to senior officials and to site like ipaidabribe.com
8. Record the Evidence – To the extent possible, record any evidence of a demand for a bribe. However, if you cannot do, takes notes of the event as soon as you can do so thereafter.  

The website also has a wealth of other materials which would be of use to any company, foreign to India, which seeks to do business in India. For instance, there is, available for download – once again at no charge, a comprehensive report of the motor vehicle licensing procedures for Bangalore and where corruption may come into play. There is also access to reports of bribes demanded throughout the country which can be a useful resource. On the whole we find this grass roots effort to identify, report on and assist others in combating corruption as highly laudable. Any company doing business in India could benefit from using the resources provided by this website. 

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